No. 96-1613

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1996

UNITED STATES OF AMERICA, PETITIONER

v.

ESTATE OF FRANCIS J. ROMANI

ON WRIT OF CERTIORARI TO
THE SUPREME COURT OF PENNSYLVANIA

BRIEF FOR THE UNITED STATES

WALTER DELLINGER
Acting Solicitor General

LORETTA G. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor
General

WILLIAM S. ESTABROOK
JOAN I. OPPENHEIMER
Attorneys

Department of Justice
Washington, D.C. 20530
(202)514-2217-0001

---------------------------------------- Page Break ----------------------------------------                     

QUESTION PRESENTED

    Since 1797, Congress has provided that any claim of
the United States against an insolvent estate "shall
be paid first" (31 U.S.C. 3713(a)).  Since 1913, Con-
gress has provided that a federal tax lien is not valid
against a judgment lien creditor until notice of the
tax lien has been filed (26 U.S.C. 6323(a)).
The question presented in this case is whether a
federal tax claim against an insolvent estate is to "be
paid first" when a judgment lien arose before the
notice of tax lien was filed.

(I)

---------------------------------------- Page Break ----------------------------------------                     

TABLE OF CONTENTS

Opinions below  . . . . 1
Jurisdiction  . . . . 1
Statutes involved  . . . . 2
Statement . . . . 3
Summary of argument  . . . . 8
Argument  . . . . 11

The absolute priority that Congress established
for claims of the United States against insolvent
estates was not impliedly repealed for tax claims
by  26  U.S.C.  6323(a)  . . . . 11
A. Under the absolute priority statute, all claims
     of the United States against an insolvent
     estate are to be paid before claims of other
     creditors are paid . . . . 11
B. The Federal Tax Lien Act does not repeal
     the absolute priority of tax claims of the
     United States against insolvent estates  . . . . 16
Conclusion  . . . . 33

TABLE OF AUTHORITIES

Cases:

Beaston v. Farmers Bank of Delaware, 37 U.S.
(12 Pet.) 102(1838) . . . . 12, 17
Carter v. Carter, 681 F.Supp. 323 (E.D. Va.
1988) . . . . 23
Conard v. Atlantic Insurance Co., 26 U.S. (l Pet.)
386 (1828) . . . . 15
Estate of Berretta, In re, 426 A.2d 1098 (Pa.
1981) . . . . 5
Estate of Silverman, 39 Cal. App. 447, 46 Cal.
Rptr.  610  (Ct. App. 1995) . . . . 28, 32
Illinois  v. United   S tates, 328 U.S. 8 (1946) . . . . 13

(III)

---------------------------------------- Page Break ----------------------------------------

IV

Cases-Continued:               Page

Illinois ex rel. Gordon  v. Campbell, 329 U.S. 362
(1946) . . . . 15
James  v. United   States, 366  U.S.  213 (1961)  . . . .  21
Jonathans Landing, Inc. v. Townsend, 960 F.2d
1538 (llth Cir. 1992) . . . .  23
Kentucky v. United States, 383 F.2d 13 (6th Cir.
1967)  . . . . 5,  20
Kimbell Foods, Inc. v. Republic  Nat'l Bank of
Dallas,  557   F.2d  491 (5th  Cir. 1977)  . . . .  31
Massachusetts v. United States, 333 U.S. 611
(1948) . . . . 13 ,15 , 18
Miner v. Atlas, 363 U.S. 641 (1960) . . . . 28
Nesbitt v. United States:
622 F.2d 433 (9th  Cir. 1980), aff `g  445  F.  Supp. 824
  (N.D. Cal. 1978), cert. denied, 451 U.S. 984
  (1981) . . . . 5, 7, 8, 20,  27, 28, 32
445 F. Supp. 824 (N.D. Cal. 1978), cert. denied,
451 U.S. 984 (1981) . . . .  20, 27,  28, 32
New York v. Maclay, 288  U. S. 290 (1933) . . . . 15
Price v. United States, 269 U. S. 492(1926) . . . . 13
Spokane County v. United States, 279 U.S. 80
(1929) . . . . 15
Thelusson v. Smith, 15 U.S. (2Wheat.) 396
(1817) . . . . 9, 10, 14, 24
United States v. City of New Britain, 347 U.S. 81
(1954) . . . . 19, 21, 22, 24
United States v. Emory, 314 U.S. 423
(1941)  . . . . 6, 11, 13, 17-18, 29, 33
United States v. Fish, 6 U.S. (2 Crunch) 358
(1805) . . . . 11, 12, 13,  16 ,17, 20, 23,  32
United States v. Gilbert Associates, Inc., 345 U.S.
361 (1953) . . . . 15
United  States  v. Key, 397  U.S. 322 (1970) . . . . passim

---------------------------------------- Page Break ----------------------------------------

V

Cases-Continued:               Page

United States  v. Kimbell  Foods,  Inc., 440 U. S. 715
(1979) . . . . 7, 8, 10, 29, 30, 31
United States v. Marxen, 307 U. S. 200(1939) . . . .  12
United States v. Moore, 423 U.S. 77 (1975) . . . .  18
United States v. Oklahoma, 261 U.S. 253 (1923). . . . 23
United  States    v. Pioneer American  Insurance Co.,
374 U.S. 84 (1963) . . . . 24
United States v. Snyder, 149 U. S. 210 (1893) . . . . 24
United States v. State Bank of North Carolina,
31 U.S. (6 Pet.) 29(1832)  . . . .  11
United States v. Texas, 314 U.S. 480(1941)  . . . . 15, 16
United States v. Vermont, 377 U.S. 351
(1964) . . . . 9, 15, 16, 17, 19, 22, 24
United States v. Waddill, Holland & Flinn, Inc.,
323 U.S. 353(1945) . . . . 15,17,29

Statutes:

Act of  Ju1y 31, 1789,  ch. 5, 21, 1 Stat. 42 . . . .  12
Act of  March  3, 1797,  ch. 20, 5,1 Stat. 515 . . . . 4, 12
Act of  March 2,1799, ch.22, 65, Stat. 676 . . . .  12
Act  of  July 13; 1866, ch. 184, 9, 14 Stat. 98 . . . .  24
Act of  March  4,1913, ch.166, 37 Stat. 1016 . . . . 4,25
Act of  September 13, 1982, Pub. L. No. 97-258,
Subtit.  111,  1, 96 Stat. 972 . . . . 12, 28
Bankruptcy Act of 1898, ch. 541, 64, 30 Stat.
544 . . . . 18
33(a) (5),  30 Stat. 546 . . . . 23
Bankruptcy Act, 11 U.S.C. 101 et seq.:
l l U.S.C. 21(a) (l) (1976). . . . 23
ll U.S.C. 21(a) (2)(1976). . . . 23
11 U. S. C . 21(a)(5) (1976) . . . . 23
11 U. S. C. 104(1976) . . . . 12
ll U.S.C. 507. . . . 12

---------------------------------------- Page Break ----------------------------------------

VI

Statutes-Continued:              Page

Federal Tax Lien Act of 1966, Pub. L. No. 89-719,
101,80 Stat. 1125 . . . . 25, 28
Internal Revenue Code (26 U.S.C.):
  6321 . . . . 3, 16, 24
  6323 . . . . 21, 22, 24
  6323(a) . . . . 4, 5, 6, 7, 9, 16, 19, 25, 26
  6323(f) . . . . 3
Revenue  Act  of  1939,  ch. 247,  401, 53 Stat. 862 . . . .  26
Rev. Stat. 3466(1878) . . . . 4
31 U. S. C. 3713. . . . 5
31U.S.C. 3713(a) . . . . 4, 5, 6, 11, 22, 33
31 U.S.C. 3713(a)(l)  . . . . 4, 8, 12, 13, 14,23
31 U.S.C. 3713(a) (l)(a)(iii) . . . .  23
31 U.S.C. 3713(a)(l)(B) . . . . 4, 13
31 U.S.C. 3713(a)(2) . . . . 4, 10, 12, 19, 28

Miscellaneous:

American Bar Association, Final Report of the
Committee on Federal Liens (1959)  . . . . 25-26
105 Cong. Rec. (1959):
p. 1030  . . . . 26
p. 1258  . . . . 26
Index  . . . . 26
1966-2 C.B. 815  . . . . 25 
1966-2 C.B. 876  . . . . 25
Hearings on the Priority of Federal Tax Liens and
Levies Before the House Comm. on Ways and
Means, 89th Cong., 2d Sess. (1966)  . . . . 26 
H.R. Rep. No. 1884, 89th Cong., 2d Sess. (1966)  . . . . 25 
H.R. Rep. No. 651, 97th Cong., 2d Sess. (1982)  . . . .  29
Note, Nesbitt v. United States: Denying an
Implied Tax Lien Exception to the Federal Priority
in Insolvency, 33 Cath. U. L. Rev. 741 (1984)  . . . . 5 
William T. Plumb, The Federal Priority in Insol-
vency: Proposals for Reform, 70 Mich. L. Rev. 1
(1971)  . . . . 27

---------------------------------------- Page Break ----------------------------------------

VII

Miscellaneous-Continued:            Page
S. 2197,  92d  Cong.,  1st Sess. (1970)  . . . .  27
S. Rep. No. 1708,  89th  Cong.,  2d Sess. (1966)  . . . .  25
S. Rep. No. 989, 95th Cong., 2d Sess. (1978)  . . . .  23

---------------------------------------- Page Break ----------------------------------------

In the Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-1613

UNITED STATES OF AMERICA, PETITIONER

v.

ESTATE OF FRANCIS J. ROMANI

  ON WRIT OF CERTIORARI TO
THE SUPREME COURT OF PENNSYLVANIA

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

    The opinion of the Supreme Court of Pennsylvania
(Pet. App. la-13a) is reported at 688 A.2d 703. The
opinions of the Superior Court (Pet. App. 15a-20a) and
the Court of Common Pleas (Pet. App. 21a-25a) are
not officially reported.

JURISDICTION

    The judgment of the Supreme Court of Pennsylva-
nia was entered on January 17, 1997. The petition for
a writ of certiorari was filed on April 10, 1997, and was
granted on June 27, 1997. The jurisdiction of this
Court rests upon 28 U.S.C. 1257(a).

(1)

---------------------------------------- Page Break ----------------------------------------

2

STATUTES INVOLVED

1. 26 U.S.C. 6321 provides:

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

2. 26 U.S.C. 6323(a) provides, in relevant part:

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

3. 31 U.S.C. 3713(a) provides, in relevant part:

(1) A claim of the United States Government shall
be paid first when-

(A) a person indebted to the Government. is
insolvent and-

(i) the debtor without enough property to
pay all debts makes a voluntary assignment of
property;
(ii) property of the debtor, if absent, is
attached; or

(iii) an act of bankruptcy is committed; or

---------------------------------------- Page Break ----------------------------------------

3

(B) the estate of a deceased debtor, in the
custody of the executor or administrator, is not
enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under
title 11.

STATEMENT

    1. On January 25, 1985, a judgment for $400,000 was
entered in favor of Romani Industries, Inc., against
Francis J. Romani in the Court of Common Pleas
of the Commonwealth of Pennsylvania. Romani Indus-
tries did not obtain a writ of execution, or otherwise
seize any property of the debtor, in satisfaction of the
judgment. The judgment remains unpaid (Pet. App.
22a). After the date `of that judgment, the Internal
Revenue Service filed notices of federal tax liens on
the property of Francis J. Romani. A federal tax lien
arises by operation of law in the property of any
taxpayer who "neglects or refuses to pay the [tax]
after demand" (26 U.S.C. 6321). A notice of the federal
tax lien is to be filed in the office "designated by the
laws of [the] State, in which the property subject to
the lien is situated" (26 U.S.C. 6323(f)). The liens for
which notices were filed in this case were for unpaid
taxes and penalties totalling approximately $400,000
for the years 1982,1985,1987,1988 and 1989 (Pet. App.
2a). Mr. Romani died on January 13, 1992.  The
administrator of his estate sought to transfer the
only asset of the estate-real estate having a value of
approximately $53,000-to Romani Industries in sat-
isfaction of its outstanding judgment claim.  The
United States objected to that transfer and filed a
proof of claim for federal taxes and interest totalling

---------------------------------------- Page Break ----------------------------------------

4

approximately $489,000 (Pet. App. 2a), Because the
debts of the estate greatly exceed its assets, and the
estate is thus insolvent (ibid.), the United States
claimed first priority for payment of its claim from
the assets of the estate under what is known as the
"absolute priority" statute. This statute, which was
first enacted in 1797 (Act of March 3, 1797, ch. 20, 5,
1 Stat. 515), was long designated as Section 3466 of
the Revised Statutes and is now codified at 31 U.S.C.
3713(a). It provides, in relevant part, that "[a] claim of
the United States Government shall be paid first
when * * * the estate of a deceased debtor, in the
custody of the executor or administrator, is not
enough to pay all debts of the debtor." 31 U. S. Cl.
3713(a) (l)(B).'
    Romani Industries contended, however, that the
"absolute priority" that Congress has long estab-
lished for claims of the United States against insol-
vent estates was impliedly repealed in 1966, for tax
claims, by 26 U.S.C. 6323(a). That provision, which
was first enacted in 1913 (Act of March 4, 1913, ch.
166, 37 Stat. 1016), provides that the federal tax lien
"shall not be valid as against any purchaser, holder of
a security interest, mechanic's lienor, or judgment
lien creditor until notice there of $ * * has been filed
by the Secretary." 26 U.S.C. 6323(a). Romani Indus-
tries claimed that, because it became a "judgment lien

___________________(footnotes)

    1 Under this "absolute priority" statute, the claims of the
United States are also to be paid first when an insolvent debtor
"makes a voluntary assignment of property," when property
of an absent insolvent debtor is attached, or when "an act of
bankruptcy is committed" (31 U.S.C. 3713(a)(l)). In 1978,
however, Congress amended the statute to make it inapplicable
to bankruptcy cases brought "under title 11" of the United
States Code. 31 U.S.C. 3713(a)(2); `see note 4, infra.

---------------------------------------- Page Break ----------------------------------------


creditor" before notice of the federal tax lien was
filed, it is entitled to priority under 26 U.S.C. 6323(a)
and that the "absolute priority" rule of 31 U.S.C. 3713
is therefore inapplicable to this case.
    2. a. The Court of Common Pleas agreed with
Romani Industries that 26 U.S.C. 6323(a) impliedly
repealed-for federal tax debts-the absolute priority
rule of 31 U.S.C. 3713(a) (Pet. App. 21a-25a). The
court did not discuss or cite the several federal deci-
sions that had rejected this interpretation of these
federal statutes. See, e.g., Nesbitt v. United States,
622 F.2d 433 (9th Cir. 1980), aff'g 445 F. Supp. 824
(N.D. Cal 1978), cert. denied, 451 U.S. 984 (1981);
Kentucky v. United States, 383 F.2d 13, 14 (6th Cir.
1967). Instead, the court adopted the reasoning of one
of the conflicting opinions of the equally-divided court
in In re Estate of Berretta, 426 A.2d 1098 (Pa. 1981),
which concluded that the provisions of 26 U.S.C.
6323(a) evidence a congressional intent to limit the
absolute priority otherwise established for the collec-
tion of federal claims (Pet. App. 24a).2 The court
stated that this conclusion was supported by the
policy concern that application of the "absolute prior-

___________________(footnotes)

    2 The Pennsylvania courts have long taken a narrow view
of the "absolute priority" statute, in a series of cases that are
collected and criticized in Note, Nesbitt v. United States:
Denying an Implied Tax Lien Exception to the Federal Priority
in Insolvency, 33 Cath. U. L. Rev. 741, 753-759 (1984). The
opinion from Estate of Berretta on which the court chose to
rely in this case was criticized by the opposing opinion from the
equally-divided court in Estate of Berretta because it "trans-
formed its view of what Congress should do into the pre-
sumption that Congress has in fact impliedly repealed the
Insolvency Statute as to tax liens." In re Estate of Berretta,
426 A.2d at 1108 (Roberts, J.).

---------------------------------------- Page Break ----------------------------------------

6

ity" statute to federal tax claims could "frustrate
legitimate commercial expectations" (id. at 23a).
    b. The Superior Court affirmed (Pet. App. 15a-20a).
The court concluded that the governing principle of
statutory construction is that an inconsistency be-
tween conflicting provisions is to be resolved by
allowing the more specific provision to prevail over
the more general one (id. at 20a). The court stated
that 26 U.S.C. 6323(a) is the more specific provision
and should therefore prevail over "the general pro-
visions of Section 3713" in any conflict between them
(Pet. App. 20a).
    The Superior Court acknowledged that this Court
has held that "[o]nly the plainest inconsistency would
warrant * * * finding an implied exception to the
operation of so clear a command as that of" the
absolute priority statute (Pet. App. 18a, quoting
United States v. Emory, 314 U.S. 423, 433 (1941)).
The Superior Court concluded, however, that this
exacting standard is met-and that the two statutes
are "most certainly, conflicting" because "[i]n the
present context * * *   the government's relative
priority as a creditor differs depending upon which
section is applied" (Pet. App. 19a).
    c. The Supreme Court of Pennsylvania affirmed
(Pet. App. la-13a). The court acknowledged that the
test applied by this Court in United States v. Key, 397
U.S. 322 (1970), governs in determining whether
26 U.S.C. 6323(a) impliedly repealed the absolute
priority rule of 31 U.S.C. 3713(a) for the collection
of tax debts (Pet. App. 5a-6a). In Key, the Court
stated that an implied repeal of that statute cannot
befound unless (i) there is a facial or "logical[] in-
consistency]" between the two statutes, (ii) the al-
legedly conflicting statute would "be rendered

---------------------------------------- Page Break ----------------------------------------

7

redundant" if the "absolute priority" statute applied
or (iii) the "language or legislative history" of the
allegedly repealing provision reveals "a purpose
incongruous with * * * application" of the absolute
priority rule (397 U.S. at 326).
    The Pennsylvania Supreme Court determined that
the two statutes are facially inconsistent because,
"with respect to tax liens, section 6323 provides for
a `first in time' priority while section 3713 gives
absolute priority to the United States" (Pet. App. 6a-
7a). The court concluded that the history and purpose
of Section 6323(a) evidence "a congressional intent
that federal priorities be limited in the tax area,
regardless of whether the debtor is insolvent" (Pet.
App. 13a). 3
    The Pennsylvania Supreme Court stated that
its conclusions were reinforced by the rationale of
this Court's decision in United States v. Kimbell
Foods, Inc., 440 U.S. 715 (1979). In Kimbell Foods,
this Court held that, in the absence of any federal
statutory directive, the relative priority of private
liens and consensual liens that arise from govern-
ment lending programs is to be determined under

___________________(footnotes)

    3 In reaching that conclusion, the Pennsylvania court did
not address the fact that, in enacting the Federal Tax Lien Act
(and on one later occasion as well), Congress declined to enact a
companion bill that would have repealed application of the
"absolute priority" statute to federal tax claims. By contrast,
in Nesbitt v. United States, 445 F. Supp. at 829, the court
stated:
    This Court cannot lightly disregard the fact that Congress
has been requested on at least two occasions to amend [the
absolute priority statute] in a manner which would achieve
the result sought here by plaintiff, but it has not yet so
amended that section.

---------------------------------------- Page Break ----------------------------------------

8

nondiscriminatory state laws (440 U.S. at 740). This
Court noted in Kimbell Foods that commercial trans-
actions are ordinarily formed in reliance upon state
commercial law and that a different rule for commer-
cial transactions involving the federal government
could upset ordinary business expectations (id. at
739). The Pennsylvania Supreme Court recognized
that "Kimbell Foods involves the priority to be ac-
corded a federal consensual loan where the debtor is
solvent, and the case at bar involves the question of
the priority to be accorded a federal tax lien where
the debtor is insolvent" (Pet. App. ha). The court,
nonetheless concluded that the same concerns apply
to both cases, for "the grant of absolute federal prior-
ity in insolvency cases, as in solvency cases, would
be destructive of commercial stability and would
frustrate legitimate commercial expectations" (id. at
13a).
    The Pennsylvania Supreme Court acknowledged
that its holding conflicts with the decisions of the
"federal courts that have held that section 3713
provides for absolute priority in tax lien cases" (Pet.
App. 12a n.17, citing, e.g., Nesbitt v. United States,
supra). The court stated, however, that it was "not
persuaded by the reasoning of" those decisions (ibid.).

SUMMARY OF ARGUMENT

    The absolute priority statute has been in force
since "the earliest days of the Republic" and gives
the United States "priority over all other claimants
in collecting debts due it from insolvent debtors"
(United States v. Key, 397 U.S. 322, 324 (1970)).
Under this venerable statute, debts owed to the
United States by an insolvent estate are to "be -paid
first" (31 U.S.C. 3713(a)(l)), even when, as in the pre-

---------------------------------------- Page Break ----------------------------------------

9

sent case, a competing creditor has a valid and en-
forceable judgment lien against the property of the
estate (Thelusson  v. Smith, 15 U.S. (2 Wheat.) 396,  425
(1817)).
    The Federal Tax Lien Act (26 U.S.C. 6323(a)) did
not impliedly repeal application of the absolute
priority statute to tax claims of the United States.
From its first enactment, the central purpose of
the absolute priority statute has been to ensure
the collection of taxes from insolvent debtors. The
statute contains a "clear * * *  command" and
"[o]nly the plainest inconsistency would warrant
* * * finding an implied exception to [its] operation"
(United States  v. Key, 397 U.S. at 324-325).
    No such "plain[] inconsistency" exists between the
absolute priority statute and 26 U.S.C. 6323(a). The
two statutes are logically consistent and address
separate concerns. 26 U.S.C. 6323(a) addresses the
rights of conflicting lienholders in competition with
the federal tax lien. The absolute priority statute,
by contrast, applies only to the debts owed by an
insolvent to the government, applies "whether or not
[those debts are] secured by a lien" and specifies that
all such debts must be paid in preference to the claims
of others (United States v. Vermont, 377 U.S. 351, 357
(1964)). An unconditional application of the absolute
priority statute would not deprive Section 6323(a) of
meaning, for the two statutes operate in different
contexts and to different subjects.
    The history of Section 6323(a) shows that, in enact-
ing the tax lien provisions, Congress did not intend
impliedly to repeal the absolute priority statute.
Congress enacted Section 6323(a) in 1966 to expand
the classes of private liens that, since 1913, had been
protected against unfiled federal tax liens. In doing

---------------------------------------- Page Break ----------------------------------------

10

so, Congress declined to enact a related proposal
that would have repealed application of the absolute
priority statute to federal tax claims. Four years
later, Congress again declined to enact the same
legislative proposal, And, in 1978, when Congress
did amend the absolute priority statute to make
it inapplicable to bankruptcy cases (31 U.S.C.
3713(a)(2)), Congress did not further revise it to
make it inapplicable to tax claims.  The provisions
of the statute thus still contain as "clear a command"
as ever (United States v. Keg, 397 U.S. at 325). The
statute provides an absolute priority to the United
States for tax claims against insolvent estates
and "makes no exception in favour of prior judgment-
creditors" (Thelusson v. Smith 15 U.S. (2 Wheat.) at
425).
    The Pennsylvania Supreme Court erred in reason-
ing that United States v. Kimbell Foods, Inc., 440
U.S. 715 (1979), supports a contrary conclusion. Kim-
bell Foods involved "the priority to be accorded a
federal consensual loan where the debtor is solvent"
and where no federal statutory priority scheme
existed (Pet. App. ha). In that context, this Court
adopted state law priority rules to avoid undue
disruption of private credit markets (4.40 U.S. at 734).
The Court emphasized in Kimbell Foods, however,
that federal tax claims implicate a different and
specific set of statutory rules and policy concerns and
that "the importance of securing adequate revenues
* * * justifies the extraordinary priority accorded
federal tax liens" (ibid.).
    The Court has long held, in rejecting similar chal-
lenges to application of the absolute priority statute,
that any assertion that the statute is "inconvenient"
to commercial creditors must be addressed to Con-

---------------------------------------- Page Break ----------------------------------------

11

gress, not to this Court. United States v. Fisher, 6
U.S. (2 Cranch) 358, 390 (1805). Any objection to the
application of the statute based upon its "incon-
venience" to other creditors "proves too much" for,
"[i]f [that objection] is sound as applied to this kind of
a claim of the United States, it is equally sound as
applied to all claims as to which the United States"
has an absolute priority under 31 U.S.C. 3713(a).
United  States  v. Emory, 314 U.S. 423,431 (1941).

ARGUMENT

THE ABSOLUTE PRIORITY THAT CONGRESS ESTAB-
LISHED FOR CLAIMS OF THE UNITED STATES
AGAINST  INSOLVENT   ESTATES  WAS   NOT   IMPLIEDLY
REPEALED  FOR  TAX  CLAIMS  BY  26  U.S.C. 6323(A)

    A. Under The Absolute Priority Statute, All Claims Of
The United States Against An Insolvent Estate Are
To Be Paid Before Claims Of Other Creditors Are
Paid

    1. For two hundred years, Congress has provided
"an absolute priority for payment of debts due [the
United States] from insolvent" debtors (United
States v. Key, 397 U.S. 322, 329 (1970)). "Since the
earliest days of the Republic, [31 U.S.C. 3713(a)] and
its predecessors have given the Government priority
over all other claimants in collecting debts due it
from insolvent debtors.  The present statute has
existed almost unchanged since 1797, and its histori-
cal roots reach back to the similar priority of
the Crown in England, an aspect of the royal pre-
rogative, founded upon a policy of protecting the
public revenues.  The same policy underlies the
federal statute, United States v. State Bank of North
Carolina, 6 Pet. 29, 35 (1832), and it is established

---------------------------------------- Page Break ----------------------------------------

12

that the terms of [the statute] are to be liberally
construed to achieve this broad purpose."  United
Slates v. Key, 397 U.S. at 324 (footnotes omitted). See
also Beaston v. Farmers' Bank  of  Delaware, 37  U.S.
(12 Pet.) 102, 134 (1838).
    When first enacted in 1789, the absolute priority
statute applied only to customs duties and debts clue
to the United States on bonds. See Act of July 31,
1789, ch. 5, 21, 1 Stat. 42. By 1797, however, the
absolute priority of the United States was extended
to encompass all debts due the government from the
estate of an insolvent debtor. See Act of March 3,
1797, ch. 20, 5, 1 Stat. 515 United States v. Fisher, 6
U.S. (2 Cranch) at 385. The language of the statute
has remained substantially unchanged since that
time. See, e.g., Act of March 2, 1799, ch. 22, 65, 1
Stat. 676; Act of September 13, 1982, Pub. L. No. 97-
258, Subtit. III, 1, 96 Stat. 972. In its current for-
mulation, the statute provides that "[a] claim of the
United States Government shall be paid first" when
"a person indebted to the Government is insolvent" or
when "the estate of a deceased debtor, in the custody
of the executor or administrator, is not enough to pay
all debts of the debtor."  31 U.S.C. 3713(a) (l).4

___________________(footnotes)

    4 Since 1978, the absolute priority statute has expressly
been made inapplicable to cases brought under the Bankruptcy
Code (31 U.S.C. 3713(a)(2)), which contains a detailed and com-
prehensive set of priorities applicable to claims of the United
States and other parties (11 U.S.C. 507). Prior to enactment of
the Bankruptcy Code, the absolute priority statute had been
treated separately within the priority provisions applicable to
bankruptcy cases under Section 64 of the Bankruptcy Act, 11
U.S.C. 104 (1976).  See United States  V.  Marxen  307  U.S. 200,
202-203 (1939).

---------------------------------------- Page Break ----------------------------------------

13

    2. The claim of the United States in the present
case for taxes owed by the insolvent estate is entitled
to "be paid first" under the plain language of the
absolute priority statute.
    a. A tax debt owed to the United States is unques-
tionably a "claim of the United States Government"
(31 U.S.C. 3713(a)(l)) within the scope of the broad
language of the absolute priority statute.  See
Massachusetts v. United States, 333 U.S. 611,625-626
(1948); Illinois v. United States, 328 U.S. 8, 9 (1946);
Price v. United States, 269 U.S. 492, 499 (1926).
Indeed, from the date of its first enactment to its
present form, the most basic function of the statute
has been to aid the government in the collection of
public revenues. See, e.g., United States v. Keg, 397
U.S. at  324 United States v. Fisher, 6 U.S. (2 Cranch)
at 388. As the Court stated in United States v.
Emory, 314 U.S. 423,426 (1941):

  The purpose of [the absolute priority statute] is
  "to secure adequate public revenues to sustain the
  public burden" (United States v. State Bank of
  North Carolina, 6 Pet. 29, 35), and it is to be
  construed liberally in order to effectuate that
  purpose (Bramwell v. U.S. Fidelity & Guaranty
  Co., 269 U.S. 483, 487).

    b. It is undisputed that the estate involved in this
case is insolvent within the meaning of the statute.
The estate's debts exceed $489,000, and its sole asset
is real estate worth approximately $53,000 (Pet. App.
2a, 22a). Since the estate "in the custody of the ex-
ecutor or administrator, is not enough to pay all debts
of the debtor" (31 U.S.C. 3713(a)(l)(B)), the absolute
priority statute applies to this case by its plain terms.
Under the plain command of the statute, the federal

---------------------------------------- Page Break ----------------------------------------

14

tax claim is therefore entitled to "be paid first" (31
U.S.C. 3713(a)(l)).
    c. It is also well established that the claim of the
United States against the insolvent estate is to be
paid ahead of the claim of any judgment lienor-such
as the private creditor in this case-who has not
obtained possession of the disputed property by execu-
tion upon its lien. One hundred and eighty years ago,
this Court held that the absolute priority statute
requires debts owed to the United States to be paid
first even when a competing creditor possesses a
valid and enforceable judgment lien. In Thelusson v.
Smith, 15 U.S. (2 Wheat.) 396, 425 (1817), as in the
present case, the facts fell "precisely within" the
scope of the absolute priority statute.  The Court
stated that (ibid.) (emphasis supplied):
  the question still remains * * * whether this
  right of preference [under the absolute priority
  statute] can cut out a prior judgment creditor?
  The law declares, "that in all cases of insolvency,
  &c, the debts due to the United States shall be
  first satisfied * * *." These expressions are as
  general as any which could have been used, and
  exclude all debts due to individuals, whatever
  may be their dignity. * * * The law makes no
  exception in  favour of   prior  judgment-creditors;
  and no reason has been, or, we think, can be,
  shown to warrant this court in making one.

    The Court concluded in Thelusson that, whenever
title and possession remain in "the debtor's estate,"
the claim of the United States is to "be first satis-
fied" under the statute. Id. at 426. As Justice
Cardozo explained for the Court more than a century
later, "[t]he ruling [in Thelusson] was that the

---------------------------------------- Page Break ----------------------------------------

15

general lien of a judgment upon the lands of an
insolvent debtor is subordinate to the preference
established by the [absolute priority] statute unless
seizure by a marshed or some other equivalent act has
made the lien specific and brought about a change of
title or possession." New York v. Maclay, 288 U.S.
290,293-294(1933). Accord, United States v. Gilbert
Associates, Inc., 345 U.S. 361, 366 (1953); United
States v. Texas, 314 U.S. 480,485-486 (1941); Conard v.
Atlantic Insurance Co., 26 U.S. (1 Pet.) 386, 441-443
(1828). 5

___________________(footnotes)

    5 This Court has "repeatedly reserved the question
whether the priority given the United States by [Revised
Statutes] 3466 can be overcome even by a prior specific and
perfected lien." United  States  v. Vermont,  377 U.S. 351, 358
n.8 (1964). The Court has never decided the issue because it
has found, in each case, that the competing lien had not di-
vested the debtor of title or possession and that the lien was
therefore not sufficiently specific to raise the issue squarely.
See, e.g., i bid.; United States v. Gilbert Associates, Inc., 345
U.S. 361,365-366 (1953); Illinois ex rel. Gordon v. Campbell, 329
U.S. 362, 370 (1946); United States v. Waddill, Holland &
Flinn, Inc., 323 U.S. 353, 355-356 (1945); United States v.
Texas, 314 U.S. 480, 484-486 (1941); New York v. Maclay, 288
U.S. 290, 294 (1933); Spokane County v. United States, 279
U.S. 80,95 (1929).
    The Court has concluded that a mortgage may effect a
transfer of title, taking the property outside the estate of the
debtor and therefore beyond the reach of the absolute priority
statute. See Conard v. Atlantic Insurance CO., 26 U.S. at 445-
446. In so ruling, the Court did "not contemplate that excep-
tions were being made" from the absolute priority statute;
instead, it "conceived that the funds or property affected,
being covered by mortgage, belonged in fact to third persons,
not to the insolvent debtor" (Massachusetts v. United States,
333 U.S. at 634 n.38). The Court "has been loath to expand"
such an exception "to include other types of lien" (ibid.). The

---------------------------------------- Page Break ----------------------------------------

16

    The judgment creditor took no such action to obtain
possession of the disputed property before the
government's claim arose in this case (Pet. App. 2a).
The "words' [of the absolute priority statute], taken in
their natural and usual sense, * * * embrace the
case before the court" and thus "plainly give the
United States the preference they claim" (United
States v. Fisher, 6 U.S. (2 Cranch) at 385-386).

B. The Federal Tax Lien Act Does Not Repeal The
Absolute Priority Of Tax Claims Of The United
States Against Insolvent Estates

    The Supreme Court of Pennsylvania acknowledged
that the plain language of the absolute priority
statute applies directly to this case (Pet. App. 6a).
The court concluded, however, that the absolute
priority created for claims of the United States by
that statute had been impliedly repealed-for tax
claims-by the enactment of the Federal Tax Lien
Act of 1966, 26 U.S.C. 6323(a). The latter statute
provides that the federal tax lien that arises by
operation of law when a taxpayer neglects to pay
an assessment (26 U.S.C. 6321) is not valid against
private lien holders (including judgment lien credi-
tors) until notice of the tax lien has been filed.
    In concluding that Congress impliedly repealed
application of the absolute priority statute to federal
tax claims, the Pennsylvania Supreme Court failed
to follow this Court's admonition that "[o]nly the
plainest inconsistency would warrant * * * finding

___________________(footnotes)

Court has emphasized that none `of its decisions  lends "support
to the assumption that the doctrine of the mortgage cases,
whatever its current vitality, would require the subordination
of unsecured claims of the United States to a specific and
perfected lien" (United States v.Texas, 314 U.S. at 486).

---------------------------------------- Page Break ----------------------------------------

17

an implied exception to the operation" of the absolute
priority statute (United States v. Key, 397 U.S. at
324-325).
    1. During the long history of the absolute priority
statute, this Court has frequently addressed claims of
the type presented by respondent in this case. As
long ago as 1805, in the earliest of these cases, the
Court rejected the claim of a creditor who, while
acknowledging (as respondent does in this case) that
the absolute priority statute, by its terms, confers
priority on the United States, nonetheless argued
that Congress had, in some manner apart from the
text of the statute, evidenced "an intent varying
from that which the words import." United States v.
Fisher, 6 U.S. (2 Cranch) at 386. Chief Justice
Marshall made clear in his opinion for the Court in
that case that, because the statute is "explicit" in
providing priority to the United States (id. at 389),
any creditor who seeks to establish an implied excep-
tion from the absolute priority statute bears a heavy
burden. Id. at 386. See also Beaston v. The Farmers'
Bank of Delaware, 37 U.S. (12 Pet.) at 134.
    Applying that same reasoning, the Court has con-
sistently emphasized in numerous subsequent cases
that the absolute priority statute "on its face permits
no exception whatsoever" (United States v. Vermont,
377 U.S. 351,357 (1964); see also, e.g., United States v.
Waddill, Holland & Flinn, Inc., 323 U.S. 353, 355
(1945)) and that "[o]nly the plainest inconsistency
would warrant * * * finding an implied exception to
the operation of so clear a command as that of [the
absolute priority statute.]" United States v. Emmy,

---------------------------------------- Page Break ----------------------------------------

18

314 U.S. at 433. 6  See also United States v. Moore, 423
U.S. 77,82-83 (1975).
    Most recently, the Court held in United States v.
Key, 397 U.S. at 332, that the absolute priority
statute "must apply according to its terms except
where expressly superseded, or where excluded by a
later enactment `plainly inconsistent' with it." The
Court concluded in Key that such a "plain[] inconsis-
tency" could be said to exist only if (i) the competing
statute is logically inconsistent with the absolute
priority statute; (ii) an unconditional application of
the absolute priority statute would deprive the
competing statute of any meaning or (iii) the history
and text of the competing statute reflect an actual
intent by Congress to modify the absolute priority
statute (397 U.S. at  324-326 see also id, at 321-332).7

___________________(footnotes)

    6 In United States v. Emory, 314 U.S. at 433, the Court
rejected the contention that Section 64 of the Bankruptcy Act
of 1898, ch. 541, 30 Stat. 544, which gave certain wage claim-
ants priority over claims of the United States in bankruptcy
cases, impliedly repealed application of the absolute priority
statute to nonbankruptcy cases.  The Court held that the
express alteration of the priority applicable in bankruptcy cases
did not implicitly repeal application of the absolute priority
statute to insolvencies outside of bankruptcy court (314 U.S. at
427):
    Neither the language of 64(a) nor the Congressional
    history of the legislation here involved supports the pro-
    position that 64(a) was intended to eliminate, either
    partially or wholly, the priority of claims of the United
    States in non-bankruptcy proceedings.

See also Massachusetts  v. United States,  333  U.S.  611 (1948).

    7 In United States v. Key, 397 U.S. at 332, the Court con-
cluded that the provisions of what was then Chapter X of the
Bankruptcy Act-which required "fair and equitable" treat-
ment of creditors in a reorganization-were not "plainly

---------------------------------------- Page Break ----------------------------------------

19

    2. The standard adopted by the Court in Key to
evaluate claims of an implied repeal of the absolute
priority statute is not satisfied in this case.
    a. There is no logical inconsistency between the
Federal Tax Lien Act and the absolute priority
statute. The two statutes differ in their scope and
address different concerns.  The absolute priority
statute governs the priority of claims of the United
States only in insolvencies outside of bankruptcy
court (see 31 U.S.C. 3713(a)(2)). By contrast, 26
U.S.C. 6323(a) governs the validity of the federal tax
lien against specific types of security interests in
cases involving solvent debtors and also in the many
insolvency situations to which the absolute priority
statute is inapplicable. This Court has long noted
that Congress has intentionally chosen to establish
greater protection for the United States in cases
involving insolvent debtors than in cases "[w]here the
debtor is not insolvent." United States v. Vermont,
377 U.S. at 358. See also United States v. Key, 397
U.S. at 329; United States v. City of New Britain, 347
U.S. 81,85 (1954).
    26 U.S.C. 6323(a) is concerned with the rights of
conflicting lienholders in competition with the federal
tax lien. The absolute priority statute, by contrast,
applies only to the debts owed by an insolvent and
applies "whether or not [those debts are] secured by a
lien" ( United States v. Vermont, 377 U.S. at 357). In
the first case arising in this Court under the absolute
priority statute, the Court explained that "no lien is

___________________(footnotes)

inconsistent" with the absolute priority statute and did not
impliedly repeal its application in such proceedings. The Court
stated that "the statute literally applies, and no plain inconsis-
tency with the scheme of Chapter X appears." Ibid.

---------------------------------------- Page Break ----------------------------------------

20

created by this law. * * * It is only a priority in
payment * * * and this priority is limited to a par-
ticular state of things" (United States v. Fisher, 6
U.S. (2 Cranch) at 390).
    As the Sixth Circuit has explained, the two stat-
utes focus on different concerns, operate in different
contexts, and are not logical] y inconsistent (Ken-
tucky v. United States, 383 F.2d 13,14-15 (1967)):

    We at once emphasize that of the statutes
involved, one * * * is a priority statute, and the
other-26 U.S.C.  6323-is a lien statute. If we
employ a literal reading of [the absolute priority
statute], its language provides the answer to the
question before us. We requote it for emphasis:
    "Whenever * * *  the estate of any
deceased debtor, in the hands of the executors
or administrators, is insufficient to pay all
the  debts due  from  the  deceased,  the  debts  clue
to the United States shall be first satisfied.

    The essentials for application of the statute are
    here present-the taxpayer is deceased; he was
    a debtor of the United States; his estate is in-
    sufficient to pay all his debts.  Present these
    essentials, the debts owing the United States
    "shall be first satisfied."

    The Ninth Circuit reached the same conclusion in
Nesbitt  v. United States, 622 F.2d  433 (1980),  aff'g   445
F.Supp. 824 (N.D. Cal. 1978), cert. denied, 451 U.S.
984 (1981), The court noted that the absolute priority
statute (445 F.Supp. at 829-830, adopted by reference,
622 F.2d at 433):

    grants a first priority to the Government as a
    creditor [Section 6321] creates a Iien on `all the

---------------------------------------- Page Break ----------------------------------------

21

  property' of a delinquent taxpayer. The [absolute]
  priority is not a lien; it covers all debts to the
  Government it is available only in the ease of an
  insolvent debtor whose property has passed to a
  third person-other than a trustee in bankruptcy
  -for the benefit of creditors; and it arises at the
  time of this transfer. The [Section 6321] tax lien
  covers only tax debts; it arises regardless of the
  solvency of the taxpayer and it attaches at the
  time the assessment list is received by the collec-
  tor.

    Justice Whittaker expressed the same views in
his concurring opinion in James v. United States, 366
U.S. 213 (1961), in which he concluded that the
absolute priority statute remains applicable to tax
claims notwithstanding the restrictions imposed on
enforcement of the federal tax lien. He stated that,
"even though the tax claim of the Government may be
only a general lien, with notice thereof not yet filed in
the proper local office pursuant to 26 U.S.C. 6323,
we have held that it must be accorded priority over
the claims of all prior general lienholders" and it
therefore has priority in insolvency cases "over the
claims of others, including `judgment creditors.'" 366
U.S. at 252 & n.4.
    b. An unconditional application of the absolute
priority statute would not deprive 26 U.S.C. 6323 of
meaning. Section 6323 determines the effectiveness
of federal tax liens against other types of liens and, as
this Court has noted, does "not attempt to give
priority in all cases" to the federal lien. United
States v. City of New Britain, 347 U.S. at 84. As this
Court explained in City of New Britain, however,
Congress has determined to give first priority to the

---------------------------------------- Page Break ----------------------------------------

22

tax claims of the United States against insolvent
estates in the absolute priority statute (id. at 85):

      When the debtor is insolvent, Congress has ex-
  pressly given priority to the payment of indebted-
  ness owing the United States, whether secured
  by liens or otherwise, by [what is now 31 U.S.C.
  3713(a)]. In that circumstance, where all the
  property of the debtor is involved, Congress has
  protected the federal revenues by imposing an
  absolute priority.

    As this Court noted in City of New Britain, the
provisions of Section 6323 do not govern the relative
rights of lien creditors in cases involving insolvents.
The rights of creditors in cases involving insolvents
are governed instead by the absolute priority statute.
347 U.S. at 85. The Court expressed the same con-
clusion in United States v. Vermont, 377 U.S. at 358,
in which it explained that whether the government
has a tax lien, and whether that lien would have
priority under Section 6323, is irrelevant in cases to
which the absolute priority statute applies the
government's priority in insolveneies is based merely
on whether the government has a "claim" (37 U.S.C.
3713(a)) and applies "whether or not [that claim is]
secured by a lien" (United States v. Vermont, 377
U.S. at 357).
    The two statutes thus have different areas of
concern and different objectives. Section 6323 applies
to situations involving solvent debtors and also to the
insolvency situations to which the absolute priority
statute is inapplicable. The absolute priority statute
applies only to insolvencies manifested in one of
the modes specified in 31 U.S.C. 3713(a)-to eases in
which the estate of a debtor is insolvent, eases in

---------------------------------------- Page Break ----------------------------------------

23

which the debtor makes a voluntary assignment of his
property or commits an act of bankruptcy and cases in
which the property of an absent debtor is attached.8
31 U.S.C. 3713(a)(l). See United States v. Fisher, 6
U.S. (2 Crunch) at 390; note l, supra. As this Court
stated in United States v. Oklahoma, 261 U.S. 253,
260 (1923):
    Mere inability of the debtor to pay all his debts
    in ordinary course of business is not insolvency
    within the meaning of the act, but it must be
    manifested in one of the modes pointed out in the
    latter part of the statute which defines or explains
    the meaning of insolvency referred to in the
    earlier part. United States v. State Bank of North
   Carolina, 6 Pet. 29, 35; United States v. Fisher, 2
   Cranch, 358, 390 United States v. Hooe, 3 Cranch,
   73, 90; Prince v. Bartlett, 8 Cranch, 431, 433
   Conard v. Atlantic Insurance Co., 1 Pet. 386, 439;

___________________(footnotes)

    8 The term "act of bankruptcy" is not defined in the abso-
lute priority statute but has been held to incorporate the
definition of that term contained in the Bankruptcy Act of
1898, ch. 541,  3(a)(5), 30 Stat. 546 (11 U.S.C. 21(a)(5) (1976)).
See Jonathan's Landing, Inc. v. Townsend, 960 F.2d 1538, 1540
(11th Cir. 1992); Carter v. Carter, 681 F. Supp. 323, 326 n.13
(E.D. Va. 1988). Under the Bankruptcy Act of 1898, the term
"act of bankruptcy" includes such actions by a debtor as fraud-
ulent conveyances and preferential transfers.  11 U.S.C. 21
(a)(1) and (2) (1976).
    The current Bankruptcy Code abolished the concept of "acts
of bankruptcy" and does not contain a definition of that term.
Jonathan's Landing, Inc. v. Townsend, 960 F.2d at 1543 n.20;
S. Rep. No. 989, 95th Cong., 2d Sess. 34 (1978). Although the
concept of an act of bankruptcy is no longer applied in bank-
ruptcy law, it remains a part of the absolute priority statute.
31 U.S.C. 3713( a)(l) (a)(iii); see Carter v. Carter, 681 F. Supp.
at 326 n.13.

---------------------------------------- Page Break ----------------------------------------

24

Brent v. Bank of Washington, 10 Pet. 596, 611;
Field v. United States, 9 Pet. 182,201.

    The two statutes also operate with different force
in the contexts to which they apply. In order to defeat
an unfiled federal tax lien under Section 6323, the
competing lien must be "choate''-the identity of the
lienor, the property subject to the lien, and the
amount of the lien must be established. United States
v. Pioneer American Insurance Co., 374 U.S. 84, 89
(1963); United States v. City of New Britain, 347 U.S.
at 84. Different standards apply under the absolute
priority statute. Under the latter statute, a com-
peting claimant can defeat the federal claim, if at ail,
only by obtaining title to or possession of the debtor's
property before the right of preference accrued
to the United States. United States v. Vermont, 377
U.S. at 357-358; Thelusson v. Smith, 15 U.S. (2
Wheat.) at 425. See note 5, supa. An unconditional
application of the absolute priority statute does not
disturb application of Section 6323 in the contexts to
which the latter applies and thus does not render that
statute meaningless.
    c. The history of 26 U.S.C. 6323 shows that, in
enacting the tax lien provisions, Congress did not
intend impliedly to repeal the absolute priority
statute. Beginning in 1866, Congress established a
federal tax lien upon all property owned by a de-
linquent taxpayer. See 26 U.S.C. 6321; Act of July 13,
1866, ch. 184$9, 14 Stat. 98. In response to a decision
of this Court holding that an unrecorded tax lien had
priority in a delinquent taxpayer's property even over
a purchaser for value without notice (United States v.
Snyder, 149 U.S. 210 (1893)), the statute was amended
in 1913 to make the tax lien ineffective against a

---------------------------------------- Page Break ----------------------------------------

25

mortgagee, purchaser or judgment creditor whose
interests arose before notice of the tax lien was filed.
Act of March 4, 1913, ch. 166, 37 Stat. 1016. The
language of the 1913 statute has been carried forward
in numerous revenue acts and now appears as Section
6323(a) of the Internal Revenue Code, 26 U.S.C.
6323(a). The protection established for a judgment
lien creditor (such as the private creditor in this
case) from an unfiled federal tax lien has thus existed
since 1913.
    In 1966, Congress determined to give similar pro-
tection to additional types of secured transactions.
The Federal Tax Lien Act of 1966, Pub. L. No. 89-719,
80 Stat. 1125, amended the statute to protect holders
of various commercial security interests from an
unfiled tax lien. See H.R. Rep. No. 1884, 89th Cong.,
2d Sess. 1-2 (1966) (1966-2 C.B. 815, 815-816); S. Rep.
No. 1708, 89th Cong., 2d Sess. 1-2 (1966) (1966-2 C.B.
876, 876-877).9 The legislative history of that Act
reflects that these amendments to the tax lien statute
were not intended to repeal or modify the absolute
priority statute. Indeed, Congress declined to enact
proposals that were made at that very time for that
very purpose.
    In proposing the legislation that resulted in the
Federal Tax Lien Act, the American Bar Association
also proposed that the absolute priority statute
be amended to subject that statute to the priorities
established under the Bankruptcy Act and the
Internal Revenue Code. See American Bar Associa-

___________________(footnotes)

    9 In 1939, the successor of the 1913 statute had been amend-
ed similarly to include protection from the unfiled federal tax
lien for the holders of a pledge. Revenue `Act of 1939, ch. 247,
401, 53 Stat. 882.

---------------------------------------- Page Break ----------------------------------------

26

tion, Final Report of the Committee on Federal
Liens 7, 124 (1953) (Final Report), contained in
Hearings on the Priority of Federal Tax Liens and
Levies Before the House Comm. on Ways and
Means, 89th Cong., 2d Sess. at 85, 199 (1966) (House
Hearings).:  The ABA proposal and report were
submitted to Congress, and three bills were intro-
duced containing this proposed revision of the abso-
lute priority statute. House Hearings, supra, at 75-
88, 196-201. When the Federal Tax Lien Act was
enacted, however, the bills proposing amendments to
the absolute priority statute died in committee. See
105 Cong. Rec. 1030, 1258 (1959) (Index). This history
is plainly inconsistent with the conclusion of the
Pennsylvania Supreme Court in this case that "the
Tax Lien Act of 1966 evidences a congressional intent
that federal priorities be limited in the tax area,
regardless of whether the debtor is insolvent" (Pet.
App. 13a).

___________________(footnotes)

    10 The ABA's proposed amendment would have specified
that nothing in the absolute priority statute "shall impair
* * * any other valid lien Or security interest which would
have been entitled to priority over the claim of the United
States immediately preceding such divestment." Final Report,
.supra, at 122. The purpose of the proposed amendment, which
Congress declined to enact, was to "preserve, ahead of the
priority of non-lien federal claims, any non-federal lien or
security that would have been entitled to priority over the
claim of the United States immediately prior to the divestment
of the debtor's property" and to "assure, contrary to the
suggestions made in some decisions, that any lien which would
qualify for priority in the absence of insolvency would continue
to enjoy such priority." Final Report, supra, at 124. Under
the ABA's proposal, the order of priorities specified in 26
U.S.C. 6323(a) would have been applicable in all insolvency
situations.

---------------------------------------- Page Break ----------------------------------------

27

    The subsequent history of related legislation con-
firms that Congress did not intend impliedly to repeal
the absolute priority statute. In 1970, the ABA again
submitted to the Senate Judiciary Committee a pro-
posed amendment to the absolute priority statute that
would have repealed its application to tax claims.
S. 2197, 92d Cong., 1st Sess. (1971); see William T.
Plumb, The Federal Priority in Insolvency: Pro-
posals for Reform, 70 Mich. L. Rev. 1, 9-10 (1971).
This bill also died in committee.
    In enacting the Federal Tax Lien Act and again
four years later, Congress thus declined to adopt
proposed legislation that would have made the abso-
lute priority statute inapplicable to tax claims. In
view of this history of congressional rejection of such
proposals, respondent cannot satisfy its burden of de-
monstrating a "manifestation of congressional in-
tent" that "implies such an exception" was intended
(United States v. Key, 397 U.S. at 324). As the Ninth
Circuit correctly concluded in Nesbitt v. United
States, 445 F. Supp. at 828, adopted by reference 622
F.2d at 433:

    There is nothing in either the language or the
    legislative history of [26 U.S.C. 6323] to indicate
    that Congress intended to make tax liens the
    federal government's sole remedy for the collec-
    tion of unpaid taxes. To the contrary, Congress
    intended tax liens to supplement existing means
    for the collection of taxes, including [the absolute
    priority statute]. There is, therefore, no basis for
    saying that Congress, by creating federal tax
    liens, intended to modify [the absolute priority
    statute] in any way.

---------------------------------------- Page Break ----------------------------------------

28

    The fact that Congress twice declined-proposals to
remove tax claims from the absolute priority statute,
while enacting related legislation, demonstrates
that Congress did not intend to modify that statute.
Nesbitt v. United States, 622 F.2d at 433, aff'g 445 F.
Supp. at 829:

    This Court cannot lightly disregard the fact that
    Congress has been requested on at least two
    occasions to amend [the absolute priority statute]
    in a manner which would achieve the result sought
    here by plaintiff, but it has not yet so amended that
    section.
Accord, Estate of Silberman, 46 Cal. Rptr. 610, 615
(Ct. App. 1995) ("The fact that [C]ongress was twice
presented with proposals to accomplish this end, and
did not adopt them strongly supports the inference
that it was informed of the policy considerations in
favor of such legislation and nevertheless declined to
amend the [absolute priority statute]."). Cf. Miner v.
Atlass, 363 U.S. 641,651 (1960) ('We do not think this
failure to enact the proposed amendments can be
explained away by suggesting that * * * amendment
of the General Rules [was thought] unnecessary.").
    Over the last two hundred years, Congress has fre-
quently amended, codified and recodified the absolute
priority statute. Indeed, it has done so twice since
the Federal Tax Lien Act of 1966 was enacted. In
1978, Congress amended the absolute priority statute
to make it inapplicable to bankruptcy cases. 31 U.S.C.
3713(a)(2); note 4, supra. And, in 1982, Congress re-
modified the absolute priority statute to make minor
revisions in its terminology. See Act of September
13, 1982, Pub. L. No. 97-258, Subtit. III, 1, 96 Stat.
972. In doing so, however, Congress emphasized that

---------------------------------------- Page Break ----------------------------------------

29

no substantive change in the law was intended. H.R.
Rep. No. 651, 97th Cong., 2d Sess. 2-3 (1982).
    Congress has never modified the absolute priority
statute to eliminate its application to federal tax
claims. By remodifying the absolute priority statute
in 1978 and 1982 without making the twice-proposed
change in its application to tax claims, Congress
reaffirmed the broad and "clear * * * command" of
the statute (United States v. Key, 397 U.S. at 325).
The words that Congress has employed in the abso-
lute priority statute remain "broad and sweeping and,
on their face, admit of no exception to the priority
of claims of the United States" (United States v.
Waddill, Holland & Flinn, Inc., 323 U.S. at 355).
    d. Under the standards applied by this Court in
United States v. Key, 397 U.S. at 324-326, (i) Section
6323 of the Internal Revenue Code is not inconsistent
with the absolute priority statute; (ii) an uncondi-
tional application of the absolute priority statute
would not make Section 6323 meaningless; and, (iii)
the history and text of Section 6323 and the absolute
priority statute do not reflect an intent by Congress
to modify the latter statute. The "plainest inconsis-
tency" that would be required for this Court to find
an implied exception to the operation of the absolute
priority statute thus does not exist (United States v.
Key, 397 U.S. at 325). Instead, as this Court has
observed on several occasions, the statute contains
as "clear a command" now as ever (ibid.) and the as-
serted "inconsistency is wholly wanting here"
(United States v. Emory, 314 U.S. at 433).
    3. a. The Pennsylvania Supreme Court erred in
relying on United States v. Kimbell Foods, Inc., 440
U.S. 715 (1979), as guidance "on the policy considera-
tions that underlie the question of whether the

---------------------------------------- Page Break ----------------------------------------

30

government in the tax arena is to be treated as
an ordinary creditor or as a creditor with super-
priority" (Pet. App. 7a). The Kimbell Foods case did
not involve federal tax claims; nor did it involve
insolvent debtors. Instead, it involved "the priority to
be accorded a federal consensual loan where the
debtor is solvent" and where no federal statutory
priority scheme existed (Id. at ha). In Kimbell
Foods, in the absence of any applicable federal statu-
tory scheme, the Court adopted the state law priority
rules "on which private creditors base their daily
commercial transactions" in order to avoid undue
disruption of private credit markets. 440 U.S. at 729.
The Court concluded, in the absence of any "congres-
sional directive," that the relative priority of private
liens and consensual liens arising from government
lending programs should be determined under non-
discriminatory state laws. Id. at 740.
    In Kimbell Foods, however, the Court expressly
noted that an entirely different set of statutory rules
and policy concerns becomes applicable when the
government is collecting taxes as an involuntary
creditor of a taxpayer (440 U.S. at 734):

   That collection of taxes is vital to the function-
   ing, indeed existence, of government cannot be
   denied. * * * The importance of securing ade-
   quate revenues to discharge national obligations
   justifies the extraordinary priority accorded
   federal tax liens through the choateness and first-
   in-time doctrines. By contrast, when the United
   States operates as a moneylending institution 
   under carefully circumscribed programs, its in-
   terest in recouping the limited sums advanced is
   of a different order. Thus, there is less need here

---------------------------------------- Page Break ----------------------------------------

31

    than in the tax lien area to invoke protective
    measures against defaulting debtors in a manner
    disruptive of existing credit markets.

    As an involuntary creditor of delinquent taxpayers,
the government cannot "control the factors that make
tax collection likely." Id. at 736. As a consensual
lender, however, the government acts "voluntarily,
with detailed knowledge of the borrower's financial
status" and "[b]y carefully selecting loan recipients
and tailoring each transaction with state law in
mind," it can "establish] terms that will secure re-
payment" (ibid.).
    Recognizing the significant difference between
federal tax liens and the consensual liens created by
government loan programs, the Court stated that
" `[a]s a quasi-commercial lender, [the government]
does not require * * * the special priority which it
compels as sovereign' in its tax-collecting capacity."
440 U.S. at 737-738, quoting Kimbell Foods, Inc. v.
Republic Nat'l Bank of Dallas, 557 F.2d 491, 500
(5th Cir. 1977). The Pennsylvania Supreme Court
thus plainly erred in relying on Kimbell Foods in
determining the scope of the priority created by
statute for the collection of non-consensual debts
owed by insolvent debtors to the United States "in its
tax collecting capacity" (440 U.S. at 738).
    The Pennsylvania Supreme Court also erred in
concluding that the court should fashion an implied
exception from the absolute priotity statute for tax
claims in order to protect the "legitimate commercial
expectations" of other creditors (Pet. App. 13a). The
absolute priority statute has been in force for two
hundred years, and the proper balance to be achieved
between the interests of the United States and other

---------------------------------------- Page Break ----------------------------------------

32

creditors is a matter for Congress, not the courts, to
determine (Nesbitt v. United States, 445 F. Supp. at
830, adopted by reference, 622 F.2d at 433 (footnotes
omitted)):
    The Court is not unmindful of the many policy
    reasons why the government should not be en-
    titled to priority under [the absolute priority
    statute] when it is not entitled to priority under
    the [Federal Tax Lien Act]. However persuasive
    these policy reasons may be, they do not convince
    the Court that the [Federal Tax Lien Act.] is
    plainly inconsistent with [the absolute priority
    statute]. Plaintiff's remedy, if there is to be a
    remedy, must come from Congress and not the
    courts.
See also Estate of Silberman, 46 Cal. Rptr. 2d at 615.
    From its earliest decision under this statute, the
Court has consistently held that any assertion that
the statute is "inconvenient" to commercial creditors
must be addressed to Congress, rather than to the
courts.  As Chief Justice Marshall explained for the
Court in United States v. Fisher, 6 U.S. (2 Cranch) at
390

    [I]t would be going a great way to say that a
    constrained interpretation must be put [on the
    absolute priority statute], to avoid an incon-
    venience which ought to have been contemplated in
    the legislature -when the act was passed, and
    which, in their opinion, was probably overbalanced
    by the particular advantages it was calculated to
    produce.
    *** It is for the legislature to appreciate
    [such inconveniences]. They are not of such mag-

---------------------------------------- Page Break ----------------------------------------

33

    nitude as to induce an opinion that the legislature
    could not intend to expose the citizens of the
    United States to them, when words are used
    which manifest that intent.

    Moreover, as the Court emphasized in United States
v. Emory, 314 U.S. at 431, any objection to the applica-
tion of the statute based upon its "inconvenience" to
other creditors simply "proves too much." "If [that
objection] is sound as applied to this kind of a claim of
the United States, it is equally sound as applied to all
claims as to which the United States" has been given
an absolute priority under 31 U.S.C. 3713(a). 314 U.S.
at 431. "[Whatever may be the merits of the conten-
tion, it should be addressed to Congress and not to
this Court." Ibid.

CONCLUSION

    The judgment of the Supreme Court of Pennsylva-
nia should be reversed.

Respectfully submitted.

WALTER DELLINGER
Acting Solicitor General

LORETTA G. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor
General

WILLIAM S. ESTABROOK
JOAN I. OPPENHEIMER
Attorneys

AUGUST 1997