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[97-2 USTC ¶50,635] Nelda Huebner Leggett, In the Matter of the Estate of Nelda Huebner Leggett, Deceased, et al., Plaintiffs v. United States of America, Defendant- -Appellee v. Patricia Huebner Schuette, Defendant-Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, 96-41103, 9/4/97 , 120 F3d 592, 120 F3d 592. Reversing a District Court decision, 96-2 USTC ¶50,698 ; 96-2 USTC ¶60,249

[Code Secs. 6321 and 6323 ]

Lien for taxes: Property subject to: Inherited property: Beneficiaries: Disclaimer: Application of state law.--A federal tax lien on property held by a decedent's estate that was imposed with respect to a beneficiary's tax liabilities was extinguished when the beneficiary executed a timely disclaimer of her interest in the property. Since state ( Texas ) law recognizes no property interest in the right to accept a bequest, the beneficiary lacked a property interest to which the tax lien could attach. Thus, the provision under state law that disclaiming beneficiaries are to be treated as having predeceased the decedent was applicable.

Before: POLITZ, Chief Judge, and HIGGINBOTHAM and SMITH, Circuit Judges.

SMITH, Circuit Judge:

In this tax case, we review a judgment that Patricia Huebner Schuette had a state property interest in property bequeathed to her by her aunt, despite the fact that she had filed a timely disclaimer and never took possession of, or exercised control over, the property. The district court held that a federal tax lien had attached to the property and the disclaimer was ineffective. We reverse.

I.

The relevant facts are not in dispute. In 1995, Schuette owed the Internal Revenue Service ("IRS") nearly $20,000. In May 1995, Schuette's aunt, Nelda Leggett, died testate, leaving one-twentieth of her estate, or $19,500, to Schuette. In June 1995, executors were appointed for Leggett's estate. The executors have distributed all of the estate's assets to the beneficiaries, except for Schuette's share. ¹

In August 1995, Schuette filed a disclaimer of all rights and interests in Leggett's estate. She believes that her disclaimed share should go to her children, Melissa Ann Oakes and Donald Van Schuette II. In September 1995, the estate filed in county court a petition to quiet title and for declaratory judgment. Specifically, the estate requested that the court declare that the IRS has no lien against the estate's property.

The IRS removed the case to federal court. ² Because the facts were uncontested, all parties moved for summary judgment. The IRS asked the court to rule that its lien is valid, and Schuette asked the court to hold that the United States has no interest in the property. The estate expressed disinterest in this question but requested attorney's fees and costs under Tex. Civ. Prac. & Rem.Code Ann. §37.009 ( Vernon 1986) (authorizing the award of fees and costs in a declaratory action case when "equitable and just").

In August 1996, the district court held in favor of the IRS. Instead of deciding the fees issue, the court sua sponte remanded it to the state court. This had the effect of disposing of all claims in the federal case.

II.

A.

The only issue before us is whether the district court correctly interpreted federal and state law in determining whether a federal lien attached to Schuette's share of Leggett's estate. Questions of law resolved on summary judgment are reviewed de novo. See BellSouth Telecomms., Inc. v. Johnson Bros. Corp., 106 F.3d 119, 122 (5th Cir.1997).

When a person fails to pay his taxes, all property rights that he has or acquires thereafter immediately and automatically are subject to a federal tax lien, see 26 U.S.C. §6321, that is not subject to any state laws that govern ordinary liens or to any perfection requirements, see United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S. 47, 51, 71 S.Ct. 111, 113-14, 95 L.Ed. 53 (1950). Section 6321 is intended to be broad in scope and applies to every interest the taxpayer has in property. See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20, 105 S.Ct. 2919, 2923-24, 86 L.Ed.2d 565 (1985). The section does not, however, create or define what constitutes a property interest. Instead, state law determines whether a taxpayer has a property interest to which a federal lien may attach. See id. at 722-23, [85-2 USTC ¶9482], 105 S.Ct. at 2925-26; United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Therefore, we must decide whether, under Texas law, Schuette ever had a property interest in Leggett's estate.

B.

1.

Texas probate law contains two provisions that bear on our determination. The Texas Probate Code provides that "when a person dies, leaving a lawful will, all of his estate devised or bequeathed by such will, and all powers of appointment granted in such will, shall vest immediately in the devisees or legatees of such estate and the donees of such powers. . . ." Tex. Prob.Code Ann. §37 ( Vernon Supp.1997). This rule prevents any lapse in title, insures that someone always is responsible for property taxes, allows family settlements agreements, see In re Estate of Hodges, 725 S.W.2d 265, 267 (Tex.App.--Amarillo 1986, writ ref'd n.r.e.), guarantees that the beneficiaries will receive any income generated by the estate, see Hurt v. Smith, 744 S.W.2d 1, 6 (Tex.1987), and prevents a beneficiary from criminal prosecution for using estate property, see Palmer v. Texas, 764 S.W.2d 332, 334 (Tex.App.--Houston [1st Dist.] 1988, no pet.).

Texas law also provides for the possibility of a disclaimer or renunciation of an inheritance:

Any person . . . who may be entitled to receive any property as a beneficiary and who intends to effect disclaimer irrevocably . . . shall evidence same as herein provided. A disclaimer evidenced as provided herein shall be effective as of the death of decedent and shall relate back for all purposes to the death of the decedent and is not subject to the claims of any creditor of the disclaimant. Unless the decedent's will provides otherwise, the property subject to the disclaimer shall pass as if the person disclaiming . . . had predeceased the decedent. . . .

Tex. Prob.Code Ann. §37A(flush) (Vernon Supp.1997). A disclaimer must follow a certain form, see id. §37A(a), and is irrevocable, see id. §37A(d). It must be made within nine months of death, see id. §37A(a), and cannot be made if the disclaimant has used the property, see id. §37A(g). A disclaimer is distinct from an assignment, which is a gift from an assignor to an assignee of inherited property. See id. §37B(d).

These provisions are somewhat contradictory. Section 37 states that the intended beneficiary had a vested property right from the moment of death, while section 37A teaches that the intended beneficiary never had a property interest at all. Determining which provision is real and which is the fiction decides this issue.

2.

There are two plausible ways to view the statutory scheme. We could regard §37 as the reality and §37A as a legal fiction. Under this view, the intended beneficiaries own the estate's property at the moment of death. If one of them files a valid disclaimer, the property is transferred to other beneficiaries. The legislature, cognizant of the tax consequences of such a transfer, adopted the legal fiction that the intended beneficiary never owned the property. The IRS urges this view, which we will call the "Transfer Theory."

The second possibility is that §37A is the reality and §37 is the legal fiction. Under this theory, property at death goes to the estate of the decedent. The intended beneficiaries may accept or reject their inheritances. If one accepts, the law engages in the legal fiction that he owned the property from the moment of death, thus ensuring the continuity of title and responsibility to pay taxes. Schuette urges this theory, which we will call the "Acceptance-Rejection Theory."

The difference is vital to the outcome of the case. Under the Transfer Theory, Schuette had a property right in Leggett's estate, so the federal lien attached and prevented her from making a disclaimer. Under the Acceptance-Rejection Theory, Schuette never had a property right, as she never accepted the inheritance, so there was nothing to which a federal lien could attach.

C.

At common law, a beneficiary of a will had the power to accept or reject a legacy or devise. The reason was that no person could be made an owner against his consent. An heir at law, on the other hand, became the owner of the property, irrespective of whether he wanted it. Presumably, a contrary rule would allow an heir to defeat an entail.

This distinction had two negative effects. First, it forced heirs to take possession of property they did not want. ³ Second, it had unintended tax consequences. A disclaiming beneficiary of a will was not subject to gift tax liability, see, e.g., Brown v. Routzahn [1933 CCH ¶9231], 63 F.2d 914, 917 (6th Cir.1933), while a disclaiming heir was subject to tax liability, see, e.g., Hardenbergh v. Commissioner [52-2 USTC ¶10,859], 198 F.2d 63, 66 (8th Cir.1952), aff'g [CCH Dec. 18,456], 17 T.C. 166, 1951 WL 326 (1951).

The purpose of the disclaimer law is to rectify this common-law anomaly by putting an heir in the same position as a beneficiary of a will. That is, the purpose is to state that no person, whether heir at law or intended beneficiary of a will, can be forced to take inherited property against his will. See Unif. Disclaimer Of Transfer By Will, Intestacy Or Appointment Act §1 comment, 8A U.L.A. 166, 166-68 (1993). This, of course, is the Acceptance-Rejection Theory.

The Texas courts have adopted this view of §37A: "This "relation back' doctrine is based on the principle that a bequest or gift is nothing more than an offer which can be accepted or rejected." Dyer v. Eckols, 808 S.W.2d 531, 533 (Tex.App.--Houston [14th Dist.] 1991, writ dism'd by agr.). In fact, "acceptance of the inheritance occurs "only if the person making such disclaimer has previously taken possession or exercised dominion and control of such property in the capacity of beneficiary.' " Id. at 534 (quoting Tex. Prob.Code Ann. §37A(f) (Vernon Supp.1991)).

Because the Dyer court adopted the Acceptance-Rejection Theory, it discarded the notion that a disclaimer could be a fraudulent transfer, reasoning that a transfer is impossible unless the "transferor" had rights in the thing "transferred." Because a disclaimant "never possesses the property," he cannot transfer it. Id. ; accord Simpson v. Penner (In re Simpson), 36 F.3d 450, 452-53 (5th Cir.1994) (per curiam) (stating that this is the law in Texas ).

This settles the instant dispute. Under Texas law, Schuette had the right to accept Leggett's intended gift by taking possession of it, by exercising control and dominion over it, or by taking no action within the set time. She also had the right to reject Leggett's intended gift by filing a valid disclaimer within nine months. This right of decision was not, itself, a property right under Texas law. Because Schuette rejected the intended gift, she never had a property right. Therefore, the federal lien had nothing to which to attach.

III.

A.

Texas 's disclaimer statute is based on a uniform act and, therefore, is similar to acts in other states. We recognize that the Second and Ninth Circuits have come to different conclusions from each other, interpreting New York and Arizona law, respectively. Compare United States v. Comparato [94-2 USTC ¶50,354], 22 F.3d 455, 458 (2d Cir.1994) (holding that a disclaimer was rendered ineffective by a federal tax lien) with Mapes v. United States , 15 F.3d 138, 141 (9th Cir.1994) (holding that, because of a timely disclaimer, the federal tax lien did not attach). Because New York law is substantially different from Arizona 's or Texas 's, these cases are reconcilable.

The Second Circuit, citing In re Estate of Scrivani, 116 Misc.2d 204, 455 N.Y.S.2d 505 (N.Y.Sup.Ct.1982), stated that the New York statute "creates a legal fiction that allows distributees to avoid attachment by creditors or the payment of taxes." Comparato [94-2 USTC ¶50,354], 22 F.3d at 457. The view that the disclaimer is a legal fiction is the Transfer Theory and supports the holding that a property right existed before the disclaimer.

In Scrivani, the conservator of Julia Molinelli, an incompetent person, sought to renounce Molinelli's inheritance. See 116 Misc.2d at 204-05, 455 N.Y.S.2d 505. The problem was that a transfer of a "resource considered available" would have made Molinelli ineligible for Medicaid benefits. N.Y. Soc. Serv. Law §366(5)(a) (McKinney 1992 & Supp.1997). The court, therefore, was forced to determine whether a renunciation of an inheritance constitutes the transfer of a resource.

At first, the court appeared to follow the Texas view that "[t]he law forces no one to accept a gift." Scrivani, 116 Misc.2d at 208, 455 N.Y.S.2d 505. The court, however, then held that the Molinelli had "an inchoate property interest" in the right to accept the inheritance. Id. at 209, 455 N.Y.S.2d 505; cf. Adam J. Hirsch, The Problem of the Insolvent Heir, 74 Cornell L.Rev. 587, 601-03 (1989) (arguing that Scrivani is internally contradictory). Therefore, the court reasoned, renouncing the inheritance would constitute the transfer, or rather the waste, of an available resource. ⁴

Because the Comparatos had a property interest in their right to accept the inheritance, the federal tax lien attached to it. Therefore, the Comparatos could not destroy that asset by disclaiming the underlying inheritance. It should be evident, however, that this conclusion derives from the manner in which the New York courts have interpreted that state's disclaimer statute.

As we have explained, Texas law follows the Acceptance-Rejection Theory and does not recognize a property interest in the right to accept a bequest. Our decision today, therefore, is not in conflict with Comparato.

B.

Similarly, the Ninth Circuit's decision in Mapes does not actually conflict with Comparato. There, the court was construing an Arizona statute that had not (and still has not) been interpreted by its courts. Thus, the Ninth Circuit assumed that Arizona 's view of its statutory scheme would follow the majority rule that Texas follows. ⁵ Thus, it may be presumed that Arizona , unlike New York , follows the Acceptance-Rejection Theory and does not recognize a property interest in the right to accept a bequest.

The fact that three states have adopted similar statutory schemes does not necessarily mean that the law functions the same way in each state. New York law creates a property interest in an intended beneficiary's right to accept a gift and may follow the Transfer Theory. Arizona and Texas do not. It is one of the complexities (and, ultimately, one of the strengths) of the federal system that different states may interpret similar statutes in very different ways.

IV.

A.

We pause to address two of the IRS's arguments for ignoring the plain import of Texas law in determining the existence of a state property right. In United States v. Irvine [94-1 USTC ¶60,163], 511 U.S. 224, 114 S.Ct. 1473, 128 L.Ed.2d 168 (1994), the Court held that the disclaimer of a remainder interest in a trust after a reasonable time had passed was a taxable gift, even though the interest was created before the passage of the gift tax. See id. at 226, [94-1 USTC ¶60,163], 114 S.Ct. at 1475. The Court's interpretation of the gift tax does not dictate this court's interpretation of §6321.

Section 6321 adopts the state's definition of property interest. Title 26 U.S.C. §2511(a), which defines "transfer" and "property" for purposes of the gift tax, does not adopt state law. Instead, it aims to reach "every species of right or interest protected by law and having an exchangeable value." Jewett v. Commissioner [82-1 USTC ¶13,453], 455 U.S. 305, 309, 102 S.Ct. 1082, 1086, 71 L.Ed.2d 170 (1982) (quoting S.REP. NO. 72-665, at 39 (1932); H.R.REP. NO. 72-708, at 27 (1932)).

In dictum, the Court recognized the conundrum that we face today and the Second and Ninth Circuits have faced in the past:

Although a state-law right to disclaim with such consequences might be thought to follow from the common-law principle that a gift is a bilateral transaction, requiring not only a donor's intent to give, but also a donee's acceptance, state-law tolerance for delay in disclaiming reflects a less theoretical concern. An important consequence of treating a disclaimer as an ab initio defeasance is that the disclaimant's creditors are barred from reaching the disclaimed property. The ab initio disclaimer thus operates as a legal fiction obviating a more straightforward rule defeating the claims of a disclaimant's creditors in the property disclaimed.

Irvine [94-1 USTC ¶60,163], 511 U.S. at 239-40, 114 S.Ct. at 1481-82 (citations omitted). The Court recognized that the right to disclaim might, under state law, be based on the Acceptance-Rejection Theory and, therefore, not be a legal fiction. The Court then pointed out that allowing a late disclaimer, ⁶ on the other hand, can be explained only as a rule aimed at frustrating creditors.

Because the Texas statute does not allow late disclaimers, it is based solely on the Acceptance-Rejection Theory. Thus, treating this rule as a non-fiction, as Texas caselaw requires, is fully consistent with the principles laid down in Irvine .

B.

In United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 191, 91 S.Ct. 1763, 1765, 29 L.Ed.2d 406 (1971), Anne Goyne Mitchell, upon divorce, renounced her right to the proceeds of the marital community (and the corresponding obligation to pay the debts of that community). ⁷ Mitchell argued that, because she had renounced the community income, she was not responsible for the corresponding tax liability. See id. at 192, [71-1 USTC ¶9451], 91 S.Ct. at 1765-66.

The Court noted that tax liability follows ownership and, therefore, if Mitchell ever had ownership of the income, she was liable for the tax. See id. at 196-97, [71-1 USTC ¶9451], 91 S.Ct. at 1767-68. The Court proceeded as we do today, examining the state law in great detail. See id. at 197-203, [71-1 USTC ¶9451], 91 S.Ct. at 1768-71. The Court determined that, under Louisiana law, the wife had a property interest in the community's income from the moment of inception, rather than "a mere expectancy." Id. at 199, [71-1 USTC ¶9451], 91 S.Ct. at 1769 (quoting Phillips v. Phillips, 160 La. 813, 107 So. 584, 588 (1926), overruled by Creech v. Capitol Mack, Inc., 287 So.2d 497, 510 (La.1973)).

It should be evident that we have followed the same methodology as did the Mitchell Court . Like that Court, we have examined state law to determine whether it creates a property interest. Unlike the statutory scheme considered in Mitchell , Texas law did not create a property interest for Schuette in Leggett's estate. Although the IRS correctly argues that Mitchell "underscored the supremacy of federal law with respect to the taxation of state created property interests," Mitchell does not disturb the principle that a federal tax lien cannot attach in the absence of a state-created property interest.

V.

In closing, we note that Congress easily can expand the IRS's lien power, if it so desires. For example, Congress can follow what it did with §2511(a), and define property more broadly than state law does. Alternatively, Congress simply can prohibit persons subject to §6321 from filing disclaimers. We decline the IRS's invitation to rewrite the law ourselves, as that power lies exclusively in the legislative branch. See Rodriguez v. INS, 9 F.3d 408, 414 (5th Cir.1993).

REVERSED.

¹ In August 1995, the estate sold certain property. In exchange for the IRS's release of its lien against that property, the estate paid the IRS 1/20 of the proceeds, or $2,515.95. The IRS credited this money against Schuette's debt and rejected the estate's request for a refund. Although our opinion makes it evident that the IRS's position was incorrect, neither party challenges these actions on appeal. We leave the proper resolution of this issue to whatever further proceedings there may be among the parties.

² Under 28 U.S.C. §2410(a)(1), federal district courts have jurisdiction over actions to quiet title to land on which the United States claims to have a lien. Under 28 U.S.C. §1444, such actions are removable.

³ There are many situations, in addition to Schuette's, in which a person rationally might prefer not to accept an inheritance. For example, a person might be offered a plot of real property with several troublesome tenants. The cost in time and aggravation of dealing with the tenants easily might outweigh the value of the property.

⁴ See Scrivani, 116 Misc.2d at 209, 455 N.Y.S.2d 505; see also In re Molloy v. Bane, 214 A.D.2d 171, 175, 631 N.Y.S.2d 910 (N.Y.App.Div.1995) (stating, under similar facts, that "petitioner's renunciation of a potentially available asset was the functional equivalent of a transfer of an asset").

⁵ See Mapes, 15 F.3d at 141; see also Rob ert M. Hoffman & Aaron L. Mitchell, Deceptive Trade Practices and Commercial Torts, 45 SW. L.J. 1667, 1710 (stating that Texas follows the majority rule); cf. Frances Slocum Bank & Trust Co. v. Matter of Estate of Martin, 666 N.E.2d 411, 415 (Ind.Ct.App.1996) (adopting Dyer).

⁶ In Irvine , the disclamation occurred 62 years after the trust's creation. See [94-1 USTC ¶60,163], 511 U.S. at 226-27, 114 S.Ct. at 1475. Texas law, by contrast, prohibits a disclaimer filed more than nine months after death. See TEX. PROB.CODE. ANN. §37A(a) ( Vernon Supp.1997). It is worth noting that the disclaimer in Comparato was filed over seven years after the devisor's death. See [94-2 USTC ¶50,354], 22 F.3d at 456.

⁷ See La. Civ.Code art. 2410 (1870) ("Both the wife and her heirs or assigns have the privilege of being able to exonerate themselves from the debts contracted during the marriage, by renouncing the partnership or community of gains.").

 

 

[98-1 USTC ¶50,212] Ibraham E. Hanafy, Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Tex., Dallas Div., Civ. 3:96-CV-2957-X, 1/12/98, 991 FSupp 794, 991 FSupp 794

[Code Sec. 1 ]

Constitutionality: Due process: Recording of tax liens.--Federal tax liens filed against a delinquent taxpayer's real property, and not indexed by the county clerk prior to the property's conveyance to a third party, were "recorded" under state (Texas) law. Failure to implement the indexing requirement did not violate the purchaser's due process rights. The notices could have been discovered if a search of yet-to-be indexed liens had been made. Although the purchaser might have a claim against the title company that failed to discover the liens, he had no claim against the IRS.

[Code Secs. 6323 and 7426 ]

Suits by nontaxpayers: Property owner: Tax liens: Proper recording: Validity of: State law: Texas : Summary judgment.--No genuine issues of material fact remained to be resolved regarding whether notices of federal tax liens filed against delinquent taxpayer's real property, and not indexed by the county clerk, were "recorded" under state ( Texas ) law. Thus, the government's motion for summary judgment was granted. The property, which was conveyed by the taxpayer to a third party, was transferred subject to the tax liens; consequently, the liens had priority over the subsequently filed deed. Once the IRS filed its notices, it had done all that it could do to record and index the liens. Failure by the county clerk to index the instruments did not affect their validity. The additional requirements of Code Sec. 6323(f)(4) regarding indexing with respect to realty were inapplicable in this case.

G. Ronald Love, Donohoe, Jameson & Carroll, P.C., 1201 Elm St., Dallas, Tex. 75270-2014, Jeffrey L. Crouch, Strasburger & Price, P.C., 901 Main St., Dallas, Tex. 75202, for plaintiff. Ramona S. Notinger, Department of Justice, Dallas , Tex. 75201 , for defendant.

MEMORANDUM OPINION AND ORDER

KENDALL, District Judge:

Pending before the Court are Plaintiff's Motion for Summary Judgment and Defendant's Cross-Motion for Summary Judgment. After careful consideration of the summary judgment motion, the filed materials and the applicable law, the Court determines that the Defendant's motion should be, and is hereby GRANTED and the Plaintiff's motion should be, and is hereby DENIED.

I.

FACTS

On August 30, 1996 , Jerry Bob Rose and his wife Ja Nell Gentry Rose executed and delivered a Warranty Deed with Vendor's Lien conveying title to real property and certain improvements located at 1178 N Main Street , Cleburne , Texas ("the Property") to Ibraham Hanafy in exchange for $180,000.00. In June 1996, the IRS made employment and unemployment tax assessment against Jerry Bob Rose for the tax years 1992-1995 resulting in the IRS filing two separate Notices of Federal Tax Lien ("Notices") against Rose on August 20, 1996 based on these assessments. One Notice was filed in the personal property records of Johnson County . The other Notice was filed for record with the clerk of Johnson County in the real property records. Johnson County maintains a computerized recording and indexing system. Unlike the Notice filed in the personal property records, the Notice filed in the real property records was not actually scanned into the computer and indexed at the time of filing on August 20, 1996 . Indeed, the parties have not presented any evidence defining the exact date and time that the Johnson County clerk's office scanned and indexed the real property Notice.

The filing, recording, and indexing of these two Notices is the focal point of the two motions for summary judgment pending before this Court.

Hanafy asserts the following: Some time around July 31, 1996 , Old Republic Title Company of Cleburne commissioned a search of the Johnson County property records in conjunction with Hanafy's pending agreement to purchase the Property. The search revealed no federal tax lien relating to the Property. On August 29, 1996 , another search of the Johnson County property record was performed that also revealed no federal tax liens against Rose. Hanafy closed on the purchase of the Property on August 30, 1996 , and the deed and deed of trust were filed with the Johnson County Clerk's office on September 4, 1990 . At the time of filing, Burt Powell, an agent of Old Republic Title Company of Cleburne , requested the clerk to perform another search of the Official Records of Johnson County for any federal tax lien notices related to Rose. That search also failed to reveal any such liens against Rose. Indeed, Hanafy asserts that the first indication of the Notices filed by the IRS on August 20 1996 , was in the form of telephone call from the IRS received by Powell and Ann Cochran, Vice-President of Operation at Old Republic Title Cleburne. Hanafy's contends that it was impossible to discover the Notices prior to the closing.

The IRS disputes Hanafy's assertion that the Johnson County records were searched after July 31,1996 . The IRS asserts that a reasonable search of the daily filings of the real property liens would have revealed the Notice filed in the real property records. Furthermore, the IRS argues that the Notice filed in the personal property records was indexed on August 20, 1996 , and a reasonable search of the public records would have revealed the federal tax liens against Rose's property. The IRS contends that the mere filing of the Notices provided Hanafy with the requisite notice to validate its liens against the Property.

To prevent foreclosure of the Property, Hanafy paid Rose's tax liability, interest and penalties in the amount of $39,291.95. Subsequently, the IRS released its liens against the Property.

Now before the Court is plaintiff's motion for summary judgment and defendant's cross-motion for summary judgment as to all counts.

II.

SUMMARY JUDGMENT STANDARDS

Summary judgment is appropriate when, viewing the evidence in the light most favorable to the nonmoving party, the summary judgment record demonstrates that no genuine issue of material fact exists, and therefore, the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986). Once the movant has meet its burden, the nonmovant may not rest upon the pleadings but most identify specific facts that establish a genuine issue exists for trial. Little v. Liquid Air Corp., 37 F.3d 1069. 1075 (5th Cir. 1994).

Here, the parties agree that the present motion and cross-motion for summary judgment present an issue of law, which is appropriate for resolution on summary judgment. The resolution of these motions for summary judgment turns on the answer to the issue of whether the more filing, and thus recording, of a deed of real property with the county clerk is sufficient to constitute notice to purchasers under Texas law or whether, as the plaintiff urges, Texas law requires indexing of a deed before it is valid against a purchaser of property without notice or knowledge of the existence of the deed. There is no dispute that the IRS did file their lien with the Johnson County Clerk on August 20, 1996 .

III.

HANAFY'S WRONGFUL LEVY CLAIM

Pursuant to 26 U.S.C. §6321, a general federal tax lien arises under the following circumstances:

If any person liable to pay any tax neglects or refuses to pay same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The federal tax lien attaches to the taxpayer's property upon assessment of the tax liability. 26 U.S.C. §6322 (1989).

Section 6323(f) of the Internal Revenue Code sets forth the requirements for a valid federal tax lien. 26 U.S.C. §6323(f) (1989). The federal tax lien created under §6321 is therefore contingent upon a properly filed notice of lien such that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor or judgment creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. §6323(a). In general, subsection (f) designated the place for filing notice. However, subsection (f)(4) establishes an additional requirement for the notice when real property falling within the following parameters is concerned:

(4) Indexing required with respect to certain real property.

--In the case of real property, if--

(A) under the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed, and

(B) there is maintained (at the applicable office under paragraph (1)) an adequate system for the public indexing of Federal tax liens, then the notice of lien referred to in Subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

Hanafy disputes the validity of the Notices filed by the IRS against Rose's real property on the basis that the notice fails to comply with the requirements of §6323(f)(4). According to Hanafy, subsection (f)(4) applies because Texas law requires indexing of deeds before they are valid against a purchaser without notice. ¹ The IRS argues that subsection (f)(4) does not apply to this case because Texas law does not require public indexing for a deed to be valid against a purchaser of real property who does not have notice. Instead, the IRS urges that under Texas law the filing of a deed, not the indexing, constitutes sufficient notice to all persons of the deed's existence.

Hanafy's position is premised on Harriman v. U.S., a district court decision out of the Southern District of Texas. Civ. A. No. H-91-3283, 1992 WL 193678 (S. D. Tex. July 7, 1992). In Harriman, the court found that the requirements of §6323(f)(4)(A) are satisfied by Texas Property Code §13.001(a). id. at 3. Texas Property Code §13.001 addresses the validity of an unrecorded instrument affecting real property. Section 13.001(a) states:

(a) A conveyance of real property or an interest in real property or a mortgage or deed of trust is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the instrument has been acknowledged or proved and filed for record as required by law.

(Emphasis added). The court cited no authority to support the position that Texas law mandates indexing to validate a deed or otherwise give notice to the world of its existence. Although perhaps required in some states, a review of Texas law governing the recording of instruments proves that such a requirement simply does not exist.

Determining the import of the phrase "filed for record" is pivotal to a resolution of the parties' dispute. While the IRS urges a literal interpretation of the phrase, Hanafy argues that "filed for record" encompasses more than the mere filing of a deed with the county clerk, which the IRS did prior to Hanafy's purchase of the Property. To meet the criteria of §6323(f)(4)(A), "filed for record" necessarily must include both recording and indexing of a deed before a purchaser is deemed to have notice. However, Texas Property Code §13.002 expressly states that "[a]n instrument that is properly recorded in the proper county is notice to all persons of the existence of the instrument." (emphasis added). Unless "properly recorded" can be construed to mean "properly indexed" it appears that Hanafy's position must fall under the express language of §13.002.

The scope of "properly recorded" is addressed in Local Government Code §193.001, which delineates the manner of recording instruments:

(a) The county clerk shall record instrument filed for recording in the order that they are filed. The clerk shall record each instrument with any acknowledgment, proof, affidavit, or certificate that is attached to it.

(b) The clerk shall note at the foot of the record the date and time that the instrument was filed for recording.

(c) If an instrument that is filed for recording is acknowledged or proved in the manner prescribed by law for record, the clerk shall make a record of the names of the parties to the instrument, and the time that the instrument was filed. If required, the clerk shall give the person who files the instrument a receipt stating this information.

(d) The clerk shall certify under the clerk's signature and seal of office the date and time that the instrument is recorded and the specific location in the records at which the instrument is recorded. After recording the instrument, the clerk shall deliver the instrument to the person who is entitled to it.

Section 193.001 describes in detail the requisite steps for recording instruments such as deeds. The Court notes that nowhere is the word "index," or any form thereof, mentioned in §193.001. Instead, the indexing requirements for recorded deeds have been segregated from the recording requirements of §193.001 and are found in Local Gov't Code §193.003, which prescribes the manner of indexing of real property records. It is apparent from those code sections and demonstrated throughout the recording statutes that indexing is a concept separate from recording. The two words are not used interchangeably, and each has its own set of criteria to achieve its status.

Beyond this separate treatment, the position that indexing validates a deed or other instrument against a purchaser without notice finds no support in Texas case law. Like most questions in the area of real property, the law is so well settled and static one usually has to go back in time to find cases on point. The rule has long been that the filing of a deed with the county clerk charges the purchaser with notice of the existence of the deed, notwithstanding the clerk's failure to record the deed. Throckmorton v. Price, 28 Tex. 606 ( Tex. 1866); William Carlisle & Co. v. King, 103 Tex. 620, 627, 133 S.W. 241,243 ( Tex. 1910). The Texas Supreme Court enunciated this rule in Throckmorton, a case based on circumstances' virtually identical to this case. In Throckmorton, Charles Lacy executed a deed of trust to Throckmorton to secure a debt. The deed of trust was filed for record with the county clerk on December 20, 1858 . On February 21, 1859 , Lacy conveyed the same land covered by Throckmorton's deed of trust to the appellees. Appellees instituted a lawsuit seeking an injunction to restrain Throckmorton from selling the subject land.

At trial, the county clerk testified that sometime in February 1959, the guardian of appellees came to his office to inquire whether any deed or incumbrance on the land in question existed. The clerk informed the guardian that none existed. The clerk then accepted for filing Lacy's deed to the appellees. Afterwards, the clerk discovered the deed of trust filed on December 20, 1858 , a date on which a voluminous amount of deed had been filed. At the time of filing, the clerk indorsed the deed of trust with "Filed for record this 20th day of December, 1858, at 3 o'clock ." The clerk took no other step toward recording the deed, but instead placed it away to be recorded at a later time. The trial court submitted a jury instruction that mimics the position urged by Hanafy:

The filing of deed of trust with the clerk of the county, without recording the same or entering it in a book for record, is no constructive notice as against subsequent purchasers, for a valuable consideration, in good faith, without actual notice. The simple delivery to the clerk of the county court and the indorsement thereon of the time of such delivery of a deed in trust is not constructive notice as against subsequent purchasers for a valuable consideration without actual notice.

On appeal, the Texas Supreme Court held that the jury instruction was inaccurate and reversed the judgment and remanded the case. The Supreme Court held that the purchaser was charged with notice of the existence of the deed by virtue of the filing of the deed of trust with the county clerk. The court based its decision on a statute stating that "any instrument required to be recorded shall be considered as recorded from the time it was deposited for record with the clerk." The court noted that Texas law requires the clerk to enter the names of the parties to instruments filed for record in alphabetical order, the date and nature thereof, and the time of its delivery, in a book provided for that purpose. The court further held that the clerk's failure to comply with the statutory requirements does not affect the notice created by the filing of an instrument.

The Supreme Court's decision in Throckmorton is reinforced by Local Gov't Code §101.003 which states that "[a]n instrument filed with a county clerk for recording is considered recorded from the time that the instrument is filed." (emphasis added). The decision rendered in Throckmorton (as does the statute) arrives at a logical conclusion. A clerk's failure to comply with recording and indexing requirements should not affect the validity of the instrument filed, nor should it prejudice the rights of the instrument holder. Once a party files its instrument and obtains its file marked copy to prove it was filed. It has done all it could do. The party is not to blame if the clerk is derelict in his or her duty to index. The policy issue is who bears the burden to check for instruments yet to be indexed. Apparently, Texas has adopted a caveat emptor philosophy. In this case, Johnson County provided title searchers a means of locating yet-to-be-indexed recorded liens and other encumbrances against real property. However, the fact that Hanafy could have discovered the IRS' notice against Rose's real property by manually looking through the hard copy daily filings is really beside the point. The IRS achieved the requisite notice to validate its liens against the Property when its filed its notices of federal tax lien in the real and personal property records of Johnson County , ten days prior to Hanafy's purchase of the Property.

Thus, the phrase "filed for record" means what it literally says. ² To interpret the Texas statutory and case law as urged by Hanafy potentially could place valid lienholders such as the IRS up the proverbial creek without a paddle. Assume the clerk responsible for recording and indexing documents after they were filed hated the federal government or the IRS, and therefore, simply chose to never record the properly filed tax liens or list them in the index. Is the federal government simply deprived of its rights because of the clerk's contempt for the IRS? Such a result is illogical, inherently inequitable, and not advocated by Texas law.

Section 6323(f)(4) does not apply to this case. Accordingly, the IRS was not required to comply with the additional requirements found therein. Under §6323, the IRS's Notices are valid against Hanafy if they were filed in the proper location according to the situs of the real property and the residence of Rose. The Property is located in Johnson County where, the IRS filed its Notices. Hanafy does not dispute the time of or location of the filing or the situs of the Property. Because the IRS has complied with the requirements of 26 U.S.C. §6323, the IRS has a valid lien against the Property.

Federal law governs the determination of whether an attached tax lien has priority over competing interests in a taxpayer's property. Metropolitan Nat'l Bank v. United States [90-1 USTC ¶50,331], 901 F.2d 1297, 1300 (5th Cir. 1994). To determine whether the IRS's federal tax liens enjoy priority over the interests of Hanafy, the Court must apply the common law principle of "the first in time is the first in right." I.R.S. v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447 (1993). The uncontroverted evidence demonstrates that the IRS filed its Notices on August 20, 1996 , which constitutes recording under Texas law. Hanafy did not file his deed until September 4, 1996 . Thus, the federal tax liens have priority over Hanafy's subsequently filed deed. See Prewitt v. United States [86-2 USTC ¶9513], 792 F.2d 1353, 1359 (5th Cir. 1986) (tax lien filed before divorce decree filed had priority over intervening purchaser). Consequently, Hanafy's claim of wrongful levy fails. The federal tax liens attached to Rose's property, both real and personal on or before August 20, 1996 . Therefore, Hanafy purchased the Property subject to the federal tax liens. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) (transfer of property after attachment of tax lien has no affect on lien). He may have a claim against the Old Republic Title Company of Cleburne , but he does not against the IRS.

Hanafy argues that even assuming subsection (f)(4) does not apply, the IRS's liens still would not be valid against Hanafy because the liens do not comply with Texas Property Code §14.004. However, the same logic applied by the Texas Supreme Court in Throckmorton once again necessarily applied to the present argument. Section 14.004 is entitled "Duties of Filing Officer" and describes the filing officer's responsibilities upon receipt of a notice of federal lien. What is immediately evident from §14.004 is that the recording and indexing requirements found therein are the burden of the filing officer, not the IRS. As this Court previously pointed out, once the IRS filed its Notices, it had done all that it could do to record and index the Notices. Indeed. §14.002 simply mandates that notices of liens upon real property be "filed in the office of the county clerk in the county where the real property subject to the liens is situated." Texas Prop. Code §14.002. Hanafy does not dispute that the IRS complied with this filing requirement. Thus, applying the rule of law set forth in Throckmorton and Local Government Code §191.003, the Notices became valid against Hanafy's subsequently recorded deed upon the IRS's filing of the Notices.

IV.

HANAFY'S DUE PROCESS CLAIM

Hanafy attempts to persuade this Court that his due process rights have been violated unless an indexing requirement is implemented. Although Hanafy failed to cite any authority for this proposition, the Court independently finds that this argument has no merit. The relevant portion of the Fourteenth Amendment provides that "[n]o state shall . . . deprive any person of life, liberty, or property, without due process of law." Hanafy urges that his present situation amounts to a taking or property without due process of law. Hanafy asserts that an indexing requirement is essential to prevent such an unconstitutional result.

Hanafy's argument fails to recognize that Texas recording statutes provide adequate procedures to place purchasers such as himself on notice of preexisting liens on real and personal property. "Historically, this guarantee of due process has been applied to deliberate decisions of government officials to deprive a person of life, liberty, or property." Daniels v. Williams, 474 U.S. 327 (1986). "[T]he Due Process Clause . . . is not implicated by the lack of due care of an official causing unintended injury to life, liberty or property." Davidson v. Cannon, 474 U.S. 344, 347 (1986).

Texas law, when complied with, provides the requisite notice to survive a constitutional challenge under the Fifth Amendment to the United States Constitution and the Texas Constitution as well as prevent individuals from ending up in Hanafy's shoes. In addition to the statutory safeguards, Johnson County provides the daily filings to prevent the exact situation in which Hanafy now finds himself. Thus, Hanafy incorrectly argues that an indexing requirement is the only means of preventing unconstitutional takings of property from purchasers without notice. The statutory filing requirements presently in force do not violate Hanafy's due process rights.

V.

CONCLUSION

Based on the foregoing reasons, this Court concludes that plaintiff's Motion for Summary Judgment must fail. Accordingly, defendant is entitled to summary judgment as a matter of law.

SO ORDERED.

¹ Because the situs of the Property is Johnson County , Texas law guides this inquiry.

² Hanafy notes that Johnson County uses computerized document imaging and indexing as allowed by Local Gov't Code §205.001 et seq. instead of physical alphabetical filing. While electronic storage of records differs from the traditional method of recording, the same reasoning applied in Throckmorton applies to electronic storage. Regardless of the manner of storage, the IRS was required to present its Notices to the county clerk for filing. Once the IRS performed its duties, under Texas law, the liens became valid against a subsequent purchaser notwithstanding the clerk's failure to enter the notices into a physical alphabetical index or scan them into a computer.

 

 

[94-1 USTC ¶50,165] In re John Mills Hawn, Debtor. American National Bank, Plaintiff v. United States of America , Defendant

U.S. Bankruptcy Court, So. Dist. Tex. , Corpus Christi Div., 90-01973-C-11, 1/14/93 , 149 BR 450, 149 BR 450

[Code Sec. 6323 ]

Lien for taxes: Security interest: Oil and gas properties.--

A creditor's properly filed security agreements gave it a perfected security interest in a debtor's oil and gas properties that had priority over the IRS's subsequently filed notice of tax lien, even for oil and gas produced after the tax lien was filed. Under state ( Texas ) law, the creditor's security agreements created a single continuous and uninterrupted lien that attached to the minerals under the ground and persisted after extraction.

[Code Secs. 6331 and 6332 ]

Levy and distraint: Surrender of property: Future payments: Property in possession of third party.--

A bank that held a debtor's property as a secured creditor was not required to honor an IRS notice of levy by surrendering funds that, at the time the levy was served, represented the debtor's right to receive revenues from future production of oil and gas from the debtor's property. The IRS's levy did not reach the debtor's claim to receive income payments in the future because the income stream represented a purely contingent right to receive certain amounts and the debtor did not, at the time of levy, have a fixed and determinable right to those payments.

David V. Herin, 710 Buffalo , Corpus Christi , Tex. , for debtor. Farley P. Katz, Matthews & Branscomb, P.C., 106 S. St. Mary's St., San Antonio, Tex. 78205, Margaret Knodell Hoffman, Wood, Boykin & Wolter, P.C., Corpus Christi, Tex. 78477, for plaintiff. Charles Wendlandt, Corpus Christi , Tex. , Gregory S. Garland, Dallas , Tex. , for defendant. Michael B. Schmidt, 3210 S. Alameda, Corpus Christi , Tex. , for Chapter 11 Trustee.

OPINION AND ORDER GRANTING AMERICAN NATIONAL BANK'S MOTION FOR SUMMARY JUDGMENT ON ALL SUBSTANTIVE ISSUES

SCHMIDT, Bankruptcy Judge:

Before the Court is the Motion for Summary Judgment on all Substantive Issues filed by American National Bank (the "Bank"). After hearing and argument the Court finds as follows:

FACTS

In June 1983, Debtor John Mills Hawn ("Hawn") obtained a loan in the principal amount of $1,250,000 from Independence Bank, a California banking corporation. Hawn granted Independence Bank a security interest on certain of his oil and gas properties located in Refugio County , Texas . A single document creating this security interest was executed between Hawn and Independence Bank, and was entitled "Mortgage, Deed of Trust, Security Agreement, Assignment and Financing Statement" (hereinafter referred to as the "Security Agreement") and perfected as both a real property mortgage and a Uniform Commercial Code Article 9 security interest. Pursuant to Article III of the Security Agreement, Hawn also assigned his monthly oil and gas production to Independence Bank to be credited against the amount then due and owing on the loan, with any balance to be returned to Hawn. The assignment was effective immediately upon execution of the Security Agreement and was not conditioned upon Hawn's default. The assignment was recorded in Refugio County , Texas , on June 24, 1983 .

In December 1985, American National Bank South (the "Bank") acquired Hawn's indebtedness from Independence Bank for $684,687, the then outstanding balance of the indebtedness. Independence Bank transferred to the Bank all of its rights arising under the 1983 Security Agreement. The transfer was properly recorded in Refugio County , Texas , on December 18, 1985 .

In conjunction with its acquisition of Hawn's indebtedness, the Bank advanced Hawn an additional $100,000 and received a security interest on additional oil and gas properties owned by Hawn in Refugio County which were not covered by the original Security Agreement. Hawn granted the Bank a security interest in the minerals, which the Bank perfected both as a real property deed of trust and a UCC security interest, plus a present assignment of monthly production to offset against the debt. (The first and second Security Agreements will be referred to collectively as the "Security Agreements.")

On March 20, 1986 , Hawn and the Bank executed a Transfer Order directing Hewit & Dougherty, the operator of Hawn's oil and gas properties, to remit all proceeds from the sale of Hawn's production to the Bank until further notice.

On September 2, 1987 , the Internal Revenue Service ("IRS") filed a Notice of Federal Tax Lien in Nueces County , Texas , with respect to a 100 percent penalty for 1983 and personal income tax for 1984 allegedly owed by John Mills Hawn.

On September 2, 1987 , the IRS served a Notice of Levy on Hewit & Dougherty. Hewit & Dougherty responded to the IRS that all funds due Hawn were being remitted to the Bank. During the three-year period following the issuance of that levy, Hewit & Dougherty continued to remit the proceeds from Hawn's oil and gas production to the Bank pursuant to the assignment of production clauses in the Security Agreements and the Transfer Order.

On September 18, 1987 , the IRS served a Notice of Levy (Form 668-A) on the Bank. The Notice of Levy demanded the Bank pay to the IRS "all property, rights to property, money, credits, and bank deposits now in your possession and belonging to [Hawn] (or for which you are obligated) and all money or other obligations you owe this taxpayer . . ." The Notice of Levy referred to the two tax liabilities for which the IRS had previously filed a Notice of Tax Lien, plus additional interest and penalties as follows:

                                       Assessment  Additions    Total

Civil Penalty (1983) ................. $117,468.33 $7,560.51 $125,028.84

Personal Income Tax (1984) ...........   23,844.02  3,340.46   27,184.48

                                                             -----------

  TOTAL ..............................                       $152,213.32

At the time of receipt of the levy the Bank held no funds belonging to Hawn.

The IRS served additional Notices of Levy on Hewit & Dougherty and the Bank in September 1990. On October 31, 1990 , Hawn filed bankruptcy. An agreement was reached with the IRS under which all proceeds from Hawn's oil and gas production since his bankruptcy filing have been paid into this Court.

From September 18, 1987 , the date the Bank received the first Notice of Levy, through October 31, 1990 , the date of Hawn's bankruptcy filing, the Bank received a total of $708,567.62 from Hewit & Dougherty on account of Hawn's oil and gas production. Of this amount, $576,888.71 was applied by the Bank against principal and interest on Hawn's outstanding loan indebtedness, $109,057.92 was remitted to Sheila Roach (Hawn's ex-wife) in accordance with a Subordination Agreement pre-existing the Notice of Tax Lien filing, $8,275.00 was applied against a debt due a third party, $8,906.14 was applied against legal fees, $55.18 was applied against miscellaneous charges, and $5,384.72 was paid to John Mills Hawn.

Shortly after it issued the 1990 Notices of Levy, the IRS first raised the argument that it was entitled to receive, under the Notices of Levy issued to the Bank and Hewit & Dougherty in 1987, all of Hawn's oil and gas production, beginning at least 45 days after the filing of the Notice of Tax Lien (i.e., October 18, 1987), and continuing to October 31, 1990, the date of Hawn's bankruptcy filing.

After being advised by the IRS that it intended to bring actions against the Bank with respect to the oil and gas production, the Bank initiated this adversary proceeding. In its Complaint, the Bank requested inter alia that the Court determine the relative priorities of the Bank and the IRS to the oil and gas production.

The IRS filed a Counterclaim against the Bank in which it sought to enforce the September 18, 1987 levy issued against the Bank. The IRS asserted that from January 1, 1988 through September 30, 1990 , the Bank received oil and gas production payments totalling $650,549.05. The IRS requested that the Court order the Bank to turn over the amount of Hawn's production payments which passed through the hands of the Bank, up to the amount levied upon.

DISCUSSION

The dispute between the Bank and the IRS consists of two contentions. First, the IRS contends that, despite the Bank's perfected security interests in Hawn's mineral property and production, its subsequently filed IRS lien has a superior claim to the mineral production. Second, the IRS contends that after it issued Notices of Levy to the Bank, the Bank was obligated to turn over to the IRS all payments for subsequently generated mineral production from Hawn's property.

The IRS's contention that its subsequently filed lien is entitled to priority over the Bank's security interest, if accepted, would undermine the long established practices of lending based on mineral interests as security, would undermine the specific expectations of all the parties to the transactions, and would grant the IRS a windfall. The IRS's Counterclaim to enforce the levy on the Bank likewise violates long established legal principles, including the IRS's own regulations.

Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment is proper when the pleadings, discovery and summary judgment affidavits or declarations establish that there is not a genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. In ruling on a motion for summary judgment, the Court will draw all reasonable inferences of fact against the moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970).

I.

The priority of competitive liens on property over which there is a federal tax lien is determined by federal law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). In order for a state lien to prime a federal tax lien, it must be perfected first under state law, and it must be choate as determined by federal law as of the date of the filing of the notice of the federal tax lien. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963); United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954).

In Texas , oil and gas, while in the ground, is real property, but when produced becomes personal property. Here, long before any Notice of IRS Lien was filed, Hawn gave the Bank a security interest in the oil and gas both in the ground and as it is produced. The document creating the security interest was entitled "Mortgage, Deed of Trust, Security Agreement, Assignment and Financing Statement", and gave Independence Bank both a mortgage and deed of trust lien on the oil and gas while in the ground and a security interest, protected under the UCC, in the oil and gas when produced. That Security Agreement was duly filed in Refugio County on June 24, 1983 . Independence Bank transferred its security interest to American Bank by a document captioned "Transfer of Lien", which was also filed in the Deed Records of Refugio County on December 18, 1985. A similar Security Agreement was executed and filed with respect to the additional $100,000.00 lent to John Mills Hawn.

The Security Agreements gave the Bank a perfected, first priority security interest in the oil and gas while in the ground. Those documents also gave the Bank a perfected first priority security interest in any oil and gas produced from that property. See UCC §9.401(a)(2), providing that a security interest in minerals, including oil and gas, is to be perfected by filing the security agreement in the office of the County Clerk in the county where a mortgage on the real estate would be filed or recorded.

The IRS concedes that the Bank held a first priority security interest in the oil and gas while it was in the ground. The IRS, however, contends that by virtue of its subsequently filed Notice of Tax Lien, it had a first priority security interest in the oil and gas as produced.

Internal Revenue Code Section 6323(a) provides that a federal tax lien is not valid against a previously existing "security interest." Under Texas law a mineral owner has absolute title to the oil and gas in place beneath his land. Elliff v. Texon Drilling Co., 146 Tex. 575, 210 S.W.2d 558 (1948). As the Texas Supreme Court stated in Elliff, "Each owner of land owns separately, distinctly and exclusively all the oil and gas under his land. . . ." 210 S.W.2d at 561. See also 55 Tex.Jur.3d, Oil and Gas (1987) §9 at 32. Oil and gas in the ground thus is precisely the same property as oil and gas after extraction. The property is merely in a different location. The oil and gas underlying Hawn's property was therefore in existence and was owned by Hawn as of the dates the Security Agreements were executed, and before the IRS's Notice of Tax Lien was filed. The rule of capture in no way undermines this conclusion. Under the rule of capture, an adjoining landowner may appropriate the oil and gas which flows from underneath a neighbor's land without incurring liability. Until appropriation by drainage occurs, however, the landowner remains the absolute owner of the oil and gas under his property. See Stephens County v. Mid-Kansas Oil & Gas Co., 113 Tex. 160, 254 S.W. 290, 292 (Tex.1923), expressly rejecting the contention that the possibility of capture negates ownership of oil and gas in place.

Hawn thus had full vested title to the oil and gas in the ground. The fact that Hawn's title to that oil and gas might possibly be divested by capture in no way changes that fact. Indeed, it is true that one could be divested of title to many types of property one owns. For example, cash could be stolen from someone and title passed to an innocent holder, property could be condemned by the state or lost by adverse possession, personal property entrusted to a dealer in such property could be sold to innocent purchasers (see UCC §2.403(b)), or land may be lost to an adjacent land owner by erosion. The fact that Hawn might conceivably lose title to some of the oil and gas in the ground under the rule of capture in no way alters the fact that he had a vested ownership interest in that oil and gas in place. Stephens County v. Mid-Kansas Oil & Gas Co., supra.

Under I.R.C. §6323(a) a holder of a "security interest" takes priority over a federal tax lien if the security interest is in existence prior to the time that the tax lien is perfected by a Notice of Tax Lien filing. Section 6323(h) defines a security interest as "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation . . ." Section 6323(h) contains no reference whatsoever to the word "attachment", and does not make the existence or validity of a security interest dependent on "attachment". Rather, that section imposes the following requirements for a security interest to exist:

a. The property must be in existence;

b. The interest must be protected under local law against a subsequent judgment lien arising out of an unsecured obligation; and

c. The holder of the security interest must have parted with money or money's worth.

All of the requirements of §6323(h) were met in this case prior to the IRS's Notice of Tax Lien filing. The Bank accordingly has priority to the proceeds of the production under §6323(a) .

Under Texas law where a creditor has a security interest which is perfected both as a deed of trust on the minerals in the ground and perfected under Article 9 after extraction, as here, the resulting interest is a single continuous security interest that attaches while the minerals are in the ground and continues after extraction. See In re Hess, 61 B.R. 977 (Bankr. N.D.Tex. 1986). Accordingly, the Bank's Security Agreements, which were properly filed and which cover the oil wherever it may be, each created a single, continuous lien which attached while the minerals were in the ground and persisted through their production. The Bank's security interest consequently is superior to the IRS' tax lien.

The principle set forth in In re Hess is well established. See Vagts, "The Uniform Commercial Code and the Oil and Gas Mortgage", in 1C Matthew Bender's Uniform Commercial Code , Ch. 16B. There, the author notes that in jurisdictions such as Texas , which treat oil and gas in place as real property, "there is a real estate lien on the oil and gas up to the moment when it is extracted--then it is converted into a Code security interest." Id. , §16.15[8] at page 1746, emphasis added.

Moreover, the Texas Legislature has confirmed this in an amendment to UCC §9.203(c). As revised, that section provides that "[i]f a secured party holds a security interest which applies under this chapter to minerals (including oil and gas) upon their extraction and the security interest also qualifies under applicable law as a lien on such minerals before their extraction, the security interest before and after production shall constitute a single continuous and uninterrupted lien on the property." UCC §9.203(c). Although this provision was enacted in 1991, the statute expressly provides that it "[i]s declaratory of the law of the state as it has heretofore existed and shall apply with respect to oil, gas and other minerals heretofore and hereafter produced." Id.

Several federal courts, including the Fifth Circuit, have rejected the security interest interruption theory in cases involving insurance proceeds. In PPG Industries, Inc. v. Hartford Fire Ins. Co. [76-1 USTC ¶9257 ], 531 F.2d 58 (2d Cir.1976), the Second Circuit held that a security interest in insured property, which under state law also attached to insurance proceeds on that property, was valid over a federal tax lien filed after the security interest, but before the proceeds were generated. The IRS conceded, as here, that the creditor's lien would be good against other private claimants, but contended that the lien could not attach until those proceeds came into existence, at which time the IRS had already on file a prior tax lien. The court, however, rejected this "attachment" argument. Looking to state law, the Second Circuit concluded that "the proceeds of the insurance are merely the collateral in another form", and consequently held that the creditor's security interest was superior to the federal tax lien. Id. at 62.

The Fifth Circuit, in Paskow v. Calvert Fire Ins. Co. [78-2 USTC ¶9697 ], 579 F.2d 949 (5th Cir.1978), has adopted the Second Circuit's holding in PPG Industries, Inc. Accord, Aetna Ins. Co. v. Thermal Industries, Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035 (5th Cir.1979). In Paskow the government argued that the creditor's lien could not "attach" until the proceeds came into existence. Following the Second Circuit's opinion in PPG Industries, however, the Fifth Circuit held "we regard the insurance fund and the original collateral as one and the same property for the purpose of determining when the property came into existence." [78-2 USTC ¶9697 ] 579 F.2d at 954. Accordingly, the Fifth Circuit held that the creditor's security interest on the insured property and the proceeds of that property was superior to the federal tax lien.

The Bank's position here is even stronger than the creditor's position was in Paskow. Paskow involved insurance proceeds, which differ from the underlying insured collateral, yet the Fifth Circuit held they would be treated as one and the same property for purposes of determining the priority of the creditor's lien. In the subject case, while the character of the property may change from real to personal, the minerals are the same minerals. Oil in the ground and oil produced is one and the same property. In re Hess and Elliff v. Texon Drilling Co., supra.

II.

In its Counterclaim against the Bank, the IRS asserts that the Bank failed to honor the levy served on it on September 18, 1987 in an amount of $152,213.32. The IRS asserts that from January 1, 1988 through September 30, 1990 , $650,549.05 of royalty payments were received by the Bank representing mineral production on Hawn's property. The IRS contends, therefore, that under Section 6332(d)(1) of the Internal Revenue Code, the Bank should have paid over to the Government all royalties received from Hawn's property following the notice of levy in 1987 up to the amount of that levy.

Under Section 6331(a) of the Internal Revenue Code, the IRS is authorized to levy upon all property and rights to property (except property exempt by statute) belonging to a delinquent taxpayer. The notice of levy served on the Bank directed the Bank to turn over to the IRS "all property, rights to property, money, credits and bank deposits now in your possession and belonging to [Hawn] (or for which you are obligated) and all money or other obligations you owe this taxpayer)."

An IRS levy, however, reaches only property which exists on the date of the levy. Thus, the Treasury Regulations provide that, except with respect to levies on salary or wages (as to which the Internal Revenue Code specifically authorizes a continuing levy), "[a] levy extends only to property possessed or obligations which exist at the time of the levy." Reg. §301.6331(a)(1) , emphasis added.

Under the Regulations, an IRS levy also will reach a vested, accrued right to receive money in the future. The Regulations then provide that an IRS levy will reach property "when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date." Id. , emphasis added. This would cover, for example, a note providing for specific payments on fixed future dates.

In contrast, an IRS levy will not reach a taxpayer's claim to receive payments in the future where the taxpayer does not, at the time of the levy, have a fixed and determinable right to those payments. For example, the IRS has ruled that a levy will not reach unvested, contingent rights to future payments. See Rev. Rul. 75-554 , 1975-2 C.B. 478. There, the IRS considered a levy served on a corporation after it had declared a dividend, but before the record date for payment of that dividend. The IRS noted that, although the stockholder as of the dividend declaration date "may become a creditor of the corporation", he does "not acquire a vested property right to the dividend" until the record date. Accordingly, the IRS ruled that a levy served on the corporation on the dividend declaration date and prior to the record date would not reach the dividend, since the stockholder did not have a vested right to the dividend.

Similarly, the example in the Regulations stating that an IRS levy will reach future payments due under completed sales of personal property implies that an IRS levy will not reach amounts to be received in the future for sales of personal property that have not yet occurred.

Finally, prior to a statutory amendment expressly authorizing a continuing levy on wages (now I.R.C. §6331(e) ), the courts had uniformly held that a levy will not reach a taxpayer's right to payment for services to be rendered after service of the levy, since the taxpayer had no presently vested right to such payments. See United States v. Long Island Drug Co. [41-1 USTC ¶9140 ], 115 F.2d 983, 986 (2d Cir.1940) (IRS levy cannot reach taxpayers' future earnings, since they "are contingent upon performance of a contract of service and represent no existing rights of property."); United States v. Penn [67-1 ustc ¶9402 ], 266 F.Supp. 655 (Ariz.1967) (same); United States v. Newhard [55-1 ustc ¶9234 ], 128 F.Supp. 805 (W.D.Pa.1955) (same). See also Wagner v. United States [78-1 ustc ¶9340 ], 573 F.2d 447, 454 (7th Cir.1978) ("Haughton's future wages and commissions were contingent on his continued employment and thus did not represent an existing property right to which a lien could attach. Haughton had no present right to the wages and commissions.")

Here, Hawn, by means of the Transfer Order, had directed the operating company to pay any future revenues that might be generated from mineral production to the Bank. The right to receive revenues that might be generated from future production from Hawn's property was not a vested, fixed or determinable right to future income existing at the time of the levy. Rather, that income stream represented a purely contingent right to receive certain income in the future. That right was contingent, among other things, on (1) whether minerals were produced, (2) the amount of such production, (3) whether and when the minerals were sold, (4) the sale price for the minerals, and (5) the expenses incurred in generating such production.

Since the right to receive future income from production and sale of oil thus was a contingent, non-vested and nondeterminable right, the IRS levy could not reach it. See United States v. Long Island Drug Co., supra.; Rev. Rul. 77-554, supra. ¹

CONCLUSION

There are no genuine issues of material fact and the Bank is entitled to summary judgment as a matter of law on the substantive issues presented in this case. The IRS's Counterclaim against the Bank should be dismissed.

Accordingly, IT IS HEREBY ORDERED that the Motion for Summary Judgment of the American National Bank is hereby GRANTED.

It is FURTHER ORDERED that the Motion of the United States is DENIED.

¹ The IRS contends that it is inconsistent to argue that the lien is choate but the right to income from production is contingent. The lien is not contingent because it does not depend upon any further action. The Bank's right to receive income is, however, contingent in that it depends upon production and sale of the minerals. Obviously the lien is not the same as the right to income.

 

 

[75-2 USTC ¶9684]Capital National Bank In Austin v. United States of America , et al.

U. S. District Court, West. Dist. Tex. , Austin Div., civil action No. A-74-CA-64, 5/30/75

[Code Sec. 6323]

Liens for taxes: Priority of claims: Judgment lien: Creditor status: Choateness lacking.--After a creditor garnished the bank account of his debtor and was awarded damages by a state court, the debtor filed a counter-claim. Before the court disposed of the debtor's claim by granting the creditor's motion to sever, federal tax liens were filed by the IRS against the debtor. The District Court held that the state court creditor did not have priority over the tax liens because he did not become a final judgment lien creditor until the cross action was severed.

Guy C. Fisher, Clark , Thomas, Denius, Winters & Shapiro, P. O. Box 1148 , Austin , Tex. , for plaintiff. David Stephenson, Assistant United States Attorney, Austin , Tex. , for defendants.

Memorandum Opinion and Order

ROBERTS; District Judge:

This case involves the priority of competing claims under 26 U. S. C. §6323(a) of Defendants United States of America and James M. Nixon for $7179.59 originally held by Plaintiff, Capital National Bank. Both Nixon and the United States have filed motions for summary judgment and have submitted briefs and documents in support of their motions. After carefully considering these motions the Court enters this Memorandum Opinion and Order which shall constitute findings of fact and conclusions of law.

Nixon filed suit in state court against Christian Mobile Homes on May 23, 1973 , and on the same day Nixon caused the bank account of Christian Mobile Homes at Capital National Bank to be garnished. Nixon's motion for summary judgment against Christian Mobile Homes was granted by the state court on September 5, 1973 , and in its order the state court awarded Nixon damages of $9068.77. On September 4, 1973 , Christian Mobile Homes had filed a cross-action [apparently a counter-claim] against Nixon, and in its order granting summary judgment for Nixon the court did not dispose of this cross-action. Subsequently federal tax liens were filed under 26 U. S. C. §6321 against Christian Mobile Homes by the Internal Revenue Service. Notice of these liens was properly filed pursuant to 26 U. S. C. §6323(f)(1)(A)(ii), with notice of the first lien for $15,334.43 filed on October 4, 1973 and notice of the second lien for $1381.69 filed on December 6, 1973. On September 19, 1973 , Nixon moved to sever the cross-action, and on November 29, 1973 , the state court granted the motion and also ordered the garnished funds to be paid to Nixon. Capital National Bank, holding the garnished funds, then filed an interpleader petition and tendered $7179.59 to the clerk of the state court. The petition of the United States for removal of this action to this Court was granted on March 29, 1974 .

The question presented in this case is whether the September order granting Nixon's motion for summary judgment was sufficient to make Nixon a judgment lien creditor under 26 U. S. C. §6323(a), thus having priority over the subsequent federal tax liens. Nixon correctly states that under federal law a lien becomes choate and is perfected when the identity of the lienor, the property subject to the lien, and the amount of the lien are established. United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954); United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1962). Also, the common law rule "first in time is the first in right" is applicable in determining the priority of the competing liens of Nixon and the United States . See United States v. New Britain , supra. Therefore, if the order granting Nixon's motion for summary judgment gave him the status of a judgment lien creditor, his lien would be superior to the tax lien of the United States .

Although Nixon properly argues the principles of choateness, he fails to emphasize the underlying presumption upon which these principles are based--i.e., he must be a judgment lien creditor before considering choateness. Under Texas law Nixon did not obtain a final judgment until November 29, 1973 , the date the cross-action of Christian Mobile Homes was severed. Although the motion for summary judgment was granted on September 4, 1973 , the cross-action remained pending until the severance. "A judgment which does not dispose, expressly or by implication, of a pending cross action is not a final judgment." Browning v. Gomez, 315 S. W. 2d 79 (Tex. Civ. App.--Austin 1958, writ dism'd). The state court's order granting Nixon's motion for summary judgment made no express mention of the pending cross-action of Christian Mobile Homes, nor is the Court aware of any implication that the cross-action was denied or disposed of by the order granting summary judgment. Since the order granting Nixon's motion for summary judgment did not become a final judgment until November 29, 1973 , Nixon was not a judgment lien creditor before that date. Therefore, the Court finds that the October 4, 1973 federal tax lien has priority over the November 29, 1973 judgment lien of Nixon and that Nixon's lien has priority over the December 6, 1973 federal tax lien.

The Court finds that there is no genuine issue of material fact in this case and that the motion of the United States for summary judgment should be granted. Since the fund held by the Clerk of the Court is much less than the amount of the outstanding liens, the Court finds that the request of Capital National Bank for attorney's fees should be denied. Accordingly, it is

ORDERED, ADJUDGED, and DECREED that the motion of the United States for summary judgment be, and hereby is, GRANTED; that the motion of James M. Nixon for summary judgment be, and hereby is, DENIED; that the request of Capital National Bank for attorney's fees be, and hereby is DENIED; and that the Clerk of the Court pay $7179.59 to the United States.

 

 

60-2 USTC ¶9479]United States of America , Appellant v. George F. Miller et al., Appellees

Court of Civil Appeals, Third Supreme Judicial District, Texas, at Austin, No. 10,721, 331 SW2d 436, 1/20/60

[1954 Code Secs. 6321-6323]

Lien for taxes: Priority over unforeclosed laborers' liens: Receivership.--Liens for unpaid federal taxes, filed after liens for unpaid wages had been filed against the taxpayer and after its property had been placed in receivership and sold, were entitled to priority over the laborers' liens, where applicable state (Texas) law required institution of suit to foreclose the liens for wages.

Charles K. Rice, Assistant Attorney General, Meyer Rothwacks, I. Henry Kutz, and Fred E. Youngman, Department of Justice, Washington, D. C., and Russell B. Wine, United States Attorney, and Arthur L. Leuthcke, Assistant United States Attorney, San Antonio, Tex., for appellant. Douglass D. Hearne, of Cofer & Cofer, 1408 Capital National Bank Bldg., Austin, Tex., for appellees.

HUGHES, Associate Justice:

This suit involves the relative priority of labor liens fixed under the provisions of Art. 5486, V. A. C. S. ¹ and claims (based on liens and priorities) of the United States for withholding and unemployment taxes as against the assets of an insolvent taxpayer-employer.

[Liens for Unpaid Wages]

The material facts are undisputed. They are:

Appellees are George F. Miller and nine other persons who were employees of Capitol Coach Manufacturing Company, Inc., during most of 1958. These employees were not paid their earned wages, aggregating $1130.29 for the months of July and August, 1958. On August 30 and September 2, 1958 , these employees filed liens for their unpaid wages in accordance with the provisions of Art. 5486, V. A. C. S.

On September 19, 1958 , Capitol Coach was placed in receivership by the Court below. On November 4, 1958 , all assets of the insolvent corporation were, by order of the Court, sold for $2650.00. On January 12, 1959 , appellees intervened in the receivership proceedings and prayed that their liens be foreclosed and their claims paid out of the money received from the sale of the corporate assets.

[Later Notice of Tax Liens]

The Commissioner of Internal Revenue having assessed certain withholding and unemployment taxes against Capitol Coach, on January 22, 1959, filed notice of a Federal Tax Lien with the County Clerk of Travis County on January 27, 1959, in the amount of the assessed taxes.

On February 16, 1959 , the Court established and foreclosed appellees' liens and ordered that the funds held by the receiver after paying costs of Court and receivership, $1,000.00, be applied toward the satisfaction of appellees' claims. Nothing, of course, remained for the Government.

The Trial Court filed these conclusions of law:

"1. The employees perfected and fixed their liens upon the specific property of the corporation prior to the commencement of the Receivership action and prior to the filing by the United States Government of its Federal Tax Liens.

"2. The employees' liens have priority over all other claims filed with the Receiver, including the Federal Tax Liens."

[Internal Revenue Code Provisions]

Appellant has two points the first of which is that the Court erred in not recognizing as paramount the lien of the United States under Secs. 6321, 6322 and 6323 of the Internal Revenue Code of 1954. (26 U. S. C. A., Secs. 6321, 6322, 6323, respectively.)

Sections 6321, 6322 and the pertinent portion of 6323 read:

"Sec. 6321. Lien for Taxes.

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

"Sec. 6322. Period of Lien.

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time.

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

"(a) Invalidity of Lien Without Notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or

"(2) With clerk of district court--In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law designated an office within the State or Territory for the filing of such notice; or

"(3) With clerk of district court for District of Columbia--In the office of the clerk of the United States District Court for the District of Columbia, if the property subject to the lien is situated in the District of Columbia." ²

[Controlling Court Decisions]

It is well settled that the effect of a lien in relation to a provision of Federal law for the collection of debts owing the United States is always a Federal question. United States v. Security Trust & Savings Bank of San Diego, 340 U. S. 47, 95 L. ed. 53 (1950) [50-2 USTC ¶9492].

It is our opinion that the question here presented has been decided many times by the Supreme Court of the United States adversely to appellees.

In United States v. Colotta, 79 So. 2d 474 [55-2 USTC ¶9584], by the Supreme Court of Mississippi, the question was stated to be:

"The question presented on this appeal is whether a tax lien of the United States for delinquent income taxes is prior in right to a mechanic's lien asserted under Section 356 et seq., of the Mississippi Code of 1942, where the Federal tax lien attached subsequent to the effective date of the mechanic's lien."

In the course of the opinion the Court stated:

"It is the contention of the appellant, however, that the mechanic's lien granted by the Mississippi statute, until perfected by judgment, is contingent or inchoate and that it amounts to no more than a lis pendens notice that the right to perfect a lien exists. To this we do not agree. The contention of the appellant is based upon the provision of the statute requiring that any person entitled to and desiring the benefit of the lien shall commence his suit in the circuit court within twelve months next after the time when the money became due and payable. This provision of the State statute merely provides a limitation upon the period within which suit may be begun to enforce the lien. In other words, the statute preserves the lien in effect for a period of twelve months but not longer. The existence of the lien during this twelve months period is not disturbed."

Federal cases aside, the Mississippi Supreme Court in Colotta wrote a strong and well reasoned opinion sustaining the priority of the mechanic's lien over the Federal Tax Lien.

This case was carried to the United States Supreme Court which in a memorandum opinion found in 350 U. S. 807, 100 L. ed. 725, held, and we quote the opinion in full:

"Per Curiam: The petition for writ of certiorari in this case is granted and the judgment is reversed. Mr. Justice Douglas dissents."

In United States v. White Bear Brewing Co., Inc., 227 F. 2d 359 [55-2 USTC ¶9776], a case very similar to Colotta, the Circuit Court of Appeals for the Seventh Circuit held a recorded mechanic's lien superior to a subsequent Federal Tax Lien. In the course of the opinion it was stated:

"We think both the government and Deutsch [mechanic's lien holder] had liens and by force of the applicable statutes were, respectively required, to bring suit 'to enforce (their) liens.' Clearly, these two liens simply had different periods of gestation."

The Court, one Justice dissenting, concluded:

"Since we do not find ourselves barred legislatively from adherence to the principle of time priority enunciated in the New Britain case, still unreversed, we will follow it. Of course the most serious deference is to be accorded Security Trust & Savings Bank, Acri Liverpool & London Ins. Co., and Scovil opinions, yet we think in the factual setting presented by the current appeal, the issue of relative priority must yield to the rule reported by Chief Justice Marshall, quoted in New Britain and adumbrated by Mr. Justice Story. We are unable to view §3670 as a citadel for the federal tax lien invulnerable to the time when Deutsch's lien attached to the taxpayer's property."

This case was carried to the United States Supreme Court whose memorandum opinion, 350 U. S. 1010, 100 L. ed. 871 [56-1 USTC ¶9440], we quote in full:

"The petition for writ of certiorari is granted and the judgment is reversed."

Mr. Justice Douglas, joined by Mr. Justice Harlan, dissented and we quote from his opinion:

"The Court apparently holds that under 26 USC §3670 a lien that is specific and choate under state law, no matter how diligently enforced, can never prevail against a subsequent federal tax lien, short of reducing the lien to final judgment. That is new doctrine, not warranted by our decisions, and supportable only if the New Britain Case were overruled."

In United States v. Vorreiter, by the Supreme Court of Colorado, 307 P. 2d 475, (1957) [57-1 USTC ¶9415], the Court considered the relative priority of mechanic's and laborer's liens over Federal tax liens. The Government contended that such liens "being inchoate, imperfected liens, are inferior to the tax liens of the United States which arose and were recorded before Vorreiter's liens were reduced to judgment." In overruling this contention the Court said:

"It must be remembered that when the federal lien attached, the improvements giving rise to the plaintiff's liens were not in existence. To permit the federal government to have the benefit of the value of these improvements would be to present it with a windfall. If the government were to succeed, it would in effect be collecting the taxes owing by Price, by appropriating the labor and materials of the lien claimants integrated into his property in Colorado ; would be unjustly enriched at the expense of third parties, these lien claimants, and would be receiving more than the property to which the lien attached. We believe and so hold that upon the record before us the government's position cannot be sustained."

We also quote from the concurring opinion of Chief Justice Moore:

"The federal statute provides that the lien claimed by the government 'shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed * * *' as provided by state law. Justice clearly requires an interpretation that the mechanics' lienholders in this case, who had no notice actual or constructive, are included within these exemptions. If this cannot be done the statute does violence to the constitution in that it deprives the workmen of the fruits of their labor without due process of law."

This case was carried to the United States Supreme Court whose memorandum opinion appears in 355 U. S. 15, 2 L. ed. 2d 23 [57-2 USTC ¶9956], which opinion we quote in full:

"The petition for writ of certiorari is granted. The judgment of the Supreme Court of Colorado is reversed. United States v. Security Trust & Sav. Bank, 340 U. S. 47, 95 L. ed. 53, 71 S. Ct. 111 [50-2 USTC ¶9492]."

[ U. S. Supreme Court Decisions]

We will review the case cited in this opinion and which we have previously cited. The question there, as stated by the Court was:

"The question presented here is whether a tax lien of the United States is prior in right to an attachment lien where the federal tax lien was recorded subsequent to the date of the attachment lien but prior to the date the attaching creditor obtained judgment."

We quote further from that opinion:

"Hence, although a state court's classification of a lien as specific and perfected is entitled to weight, it is subject to reexamination by this Court. On the other hand, if the state court itself describes the lien as inchoate, this classification is 'practically conclusive.' Illinois ex rel. Gordon v. Campbell, 329 U. S. 362, 371, 91 L. ed. 348, 355, 67 S. Ct. 340. The Supreme Court of California has so described its attachment lien in the case of Puissegur v. Yarbrough, 29 Cal. 2d 409, 412, 175 P. 2d 830, by stating that, 'The attaching creditor obtains only a potential right or a contingent lien . . .' Examination of the California statute shows that the above is an apt description. The attachment lien gives the attachment creditor no right to proceed against the property unless he gets a judgment within three years or within such extension as the statute provides. Numerous contingencies might arise that would prevent the attachment lien from even becoming perfected by a judgment awarded and recorded. Thus the attachment lien is contingent or inchoate--merely a lis pendens notice that a right to perfect a lien exists.

"Nor can the doctrine of relation back--which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment--operate to destroy the realities of the situation. When the tax liens of the United States were recorded Morrison did not have a judgment lien. He had a mere 'caveat of a more perfect lien to come.' New York v. Maclay, 288 U. S. 290, 294, 77 L. ed. 754, 757, 53 S. Ct. 323.

". . .

"In cases involving a kindred matter, i.e., the federal priority under Rev. Stat. §3466, it has never been held sufficient to defeat the federal priority merely to show a lien effective to protect the lienor against others than the Government, but contingent upon taking subsequent steps for enforcing it. Illinois ex rel. Gordon v. Campbell , supra, (329 U. S. 374, 91 L. ed. 357, 67 S. Ct. 340). If the purpose of the federal tax lien statute to insure prompt and certain collection of taxes due the United States from tax delinquents is to be fulfilled, a similar rule must prevail here. Accordingly, we hold that the tax liens of the United States are superior to the inchoate attachment lien of Morrison, and the judgment of the District Court of Appeal for the Fourth Appellate District is reversed."

Other United States Supreme Court cases of similar import are: United States v. Gilbert Associates Inc., 345 U. S. 361, 97 L. ed. 1071 [53-1 USTC ¶9291], United States v. Acri, 348 U. S. 211, 99 L. ed. 264 [55-1 USTC ¶9138] and United States v. Scovil, 348 U. S. 218, 99 L. ed. 271 [55-1 USTC ¶9137], United States v. Liverpool & London Globe Ins. Co., 348 U. S. 215, L. ed. 268 [55-1 USTC ¶9136].

We quote the following from Acri:

"In argument it was pointed out that the statute of California involved in the Security Trust case was different because California courts had held an attachment lien to be inchoate and a mere notice of a more perfect lien to come, while Ohio courts had held it to be an execution in advance and a lien perfected as of the time of attachment. This distinction is immaterial for purposes of federal law. This case is not to be distinguished from United States v. Security Trust & Sav. Bank, 340 U. S. 47, 95 L. ed. 53, 71 S. Ct. 111 [50-2 USTC ¶9492], and the judgment is Reversed."

In Liverpool the Court reversed the Circuit Court of Appeals for the Fifth Circuit which had held that a lien obtained under our garnishment statutes (Title 68, V. A. C. S.) was superior to federal tax liens. We quote from the opinion of the Circuit Court:

"The important question here is whether at the time the Government's income tax lien arose appellee's garnishment lien possessed 'the characteristics of a specific perfected lien which alone bars the priority of the United States .' See United States v. Knott, 298 U. S. 544, 56 S. Ct. 902, 905, 80 L. Ed. 1321. The issue thus concerns the effect of a lien in relation to a provision of federal law for the collection of debts owing the United States , which has always been considered a federal question. Hence the Supreme Court has consistently held that while a state court's characterization of a lien as specific and perfected is entitled to weight, it is subject to reexamination by the federal courts. On the other hand, if the state court itself describes the lien as inchoate, this classification is 'practically conclusive.' Illinois ex rel. Gordon v. Campbell , 329 U. S. 362, 371, 67 S. Ct. 340, 91 L. Ed. 348.

"In this case the United States first argues that under the law of Texas the lien of the appellee furniture company was inchoate and that therefore we may reverse the judgment on this basis. More specifically it argues that in Texas a garnishing creditor's rights in the property are purely potential and contingent until judgment is entered establishing the garnishment lien. We do not at all agree.

"Under the law of Texas, as expressed by statute and the decisions of its highest court, a garnishment is virtually a process of attachment and the service or levy of the writ of garnishment or attachment upon personal property creates a lien from the date of the levy, giving to the creditor a paramount right to such property itself as a security for the satisfaction of his demand. Focke v. Blum, 82 Tex. 436, 17 S. W. 770; Buerger v. Wells, 110 Tex. 566, 222 S. W. 151; Kanaman v. Hubbard, 110 Tex. 560, 222 S. W. 151; United States v. Yates, Tex. Civ. App., 204 S. W. 2d 399, writ refused. See also, In re Jones, D. C., 42 F. 2d 269; Vol. 27 Texas Jur., Sec. 37, page 500, where the rule is announced as follows: 'The levy under a valid writ of attachment or execution places the property levied on within the custody of the law. It has, generally speaking, the effect of segregating that portion of the debtor's property which is necessary, to satisfy a money judgment against him.' The United States does not claim that the appellee failed to take any step to validate its writ of garnishment in conformity with the laws of Texas . In United States v. Yates, supra, it was held that an attachment lien filed according to law was specific, perfected and fixed upon the date of its levy and took priority, as of the date the writ was served, over a lien filed by the government for withholding and social security taxes filed subsequently thereto, but before the judgment of the court established and foreclosed the attachment lien. We think this decision correctly sets forth the law of Texas , regardless of what might be the law in other jurisdictions. The authorities cited by the government are clearly distinguishable on their facts and do not at all support its contention that in Texas , a garnishing creditor's rights in the property at the time of garnishment are 'purely potential and contingent.' On this phase of the question the appellee furniture company must prevail."

We quote the following from the opinion of the United States Supreme Court reversing the Circuit Court:

"The question of priorities is identical with that of Acri, No. 33, this day decided, and United States v. Security Trust & Sav. Bank, 340 U. S. 47, 95 L. ed. 53, 71 S. Ct. 111 [50-2 USTC ¶9492]. On the authority of those cases we hold the tax liens of the United States superior to the lien of the garnisher."

[Foreclosure Suit Required]

With respect to our statute involved here (Art. 5486) which requires institution of a suit to foreclose the lien we call attention to the case of Higginbotham-Bailey Logan Co. v. Bellah, 79 S. W. 2d 907, by the Fort Worth Court of Civil Appeals, which holds that a laborer's lien under this statute conferred no possessory rights on the lien-holder. This but illustrates the restrictive character of the lien and the need for judicial process to render it beneficial.

Unless our decision is to suffer the same fate as that suffered by decisions of the Supreme Courts of Mississippi and Colorado , the Circuit Court of Appeals for the Fifth Circuit and other courts, we must decree superiority of the Federal tax liens.

It is our opinion that in the above cases every conceivable reason has been pressed upon the Supreme Court to change the course of law in regard to the question before us, all to no avail. Further discussion, if not impossible, is certainly futile.

[Receivership]

Appellees specifically and additionally contended that since the property of the Capitol Coach was placed in receivership and sold before the Government filed its tax liens there was no property or rights to property under Art. 6321, 26 U. S. C. A., supra, to which the liens could attach.

It is true that the property of Capitol Coach altered its form from chattels to cash by the receiver's sale. Assuming the legality of the sale, the proceeds constitute property and is subject to proper disposition by the receivership court. Sec. 112, Receivers, Vol. 36 Tex. Jur. ³

Besides if appellees are correct then since the property was sold before they sued to, as they say, "foreclose their liens upon the property of the corporation" there would be no property to foreclose upon. Appellees, however, prayed that their claims be satisfied from the cash the receiver had realized from the sale of the corporation property. The United States asks no more.

Appellees also contend that since the United States had no lien when the corporation was placed in receivership it could not subsequently obtain a lien on the property in the receiver's hands. The Texas authorities cited to support this point are 11-A Tex. Jur., Corporations, Sec. 641, p. 71 and the cases it cites. We quote from Sec. 641:

"Liens upon corporate property are not destroyed by the appointment; but after a liquidating receivership has been ordered a creditor may not acquire a lien on corporate assets by legal process."

The liens of the Government were acquired by operation of law, paramount Federal law. They were not acquired through any legal process. Even so no State law could deny them effectiveness.

If there remains any doubt about our decision then consideration should be given to the following portion of Sec. 191, Title 31, U. S. C. A.

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; . . ."

We are satisfied that our decision is correct independently of this statute and for this reason we will not prolong this opinion by reviewing the many cases construing it.

The judgment of the Trial Court is reversed and this cause is remanded with instructions to accord appellant priority over appellees in the payment of their respective claims.

¹ The only provision of this article of significance here is the requirement ". . . that all persons claiming the benefit of this law shall have six months within which to bring suit to foreclose the aforesaid . . ." If suit is not so brought the lien is lost. Security Trust Co. of Houston v. Rob erts, 208 S. W. 892 ( Tex. Comm. of App.)

² These provisions are in all material respects similar to those contained in Secs. 3670, 3671, 3672(a), (b), (1), and (2) of the 1939 Internal Revenue Code and the decisions construing the earlier statutes are deemed applicable here.

³ "The form into which property changes is not material, for equity will follow the property into whatever form it may assume in order to secure it for the person entitled to it." 18 C. J. S. p. 46.