Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-01119/USCOURTS-azd-2_05-cv-01119-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re:

Steven and Joanne Rogers, 

Debtor, 

______________________________

National Dealer Financial Services, LLC.,

Appellant,

v.

Steven and Joanne Rogers, 

Appellee. 

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No. CIV 05-1119-PHX-DGC

No. BK 99-104519-PHX-RTB

Adv. Nos. 2:04-ap-099 and 2:99-ap-868

(consolidated proceedings)

ORDER

National Dealer Financial Services (“NDFS”) appeals from the Bankruptcy Court’s

denial of it s summary judgment motion and grant of summary judgment in favor of the

Internal Revenue Service (“IRS”) in the amount of approximat ely $36,295. Doc. #2. For the

reasons stated below, the Court will affirm the decision of the Bankruptcy Court. 

Background

On November 10, 1995, Steven Rogers and Joanne Kliensmith purchased real

property in Scottsdale, Arizona, as joint tenants. Prior to the purchase of the property the

IRS had assessed certain unpaid tax obligations against Rogers for tax years 1986, 1987,

1989, 1991,1992, 1994, and 1995. Doc. #2. On November 20, 1996, Rogers executed a

Case 2:05-cv-01119-DGC Document 12 Filed 11/10/05 Page 1 of 5
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guarantee t o NDFS for $151,900 in satisfaction of a business debt. On August 9, 2000, the

Scottsdale property was sold. In dispute are the respective rights of NDFS and the IRS to

excess proceeds from the sale.

A federal t ax lien attaches to a taxpayer’s property when unpaid taxes are assessed.

W. Nat’l Bank v . United States, 8 F.3d 253, 256 (5th Cir. 1993). In general, a tax lien “does

not require a filing of public notice, and once created, the tax lien is effective as against the

taxpayer” until paid. TKB Int’l, Inc. v. United States., 995 F.2d 1460, 1463 (9th Cir. 1993).

Both part ies agree that the IRS had assessed income tax liabilities before 1996 well in

excess of the $36,295 at issue. Doc. #2. NDFS asserts, however, that the 1996 guarantee

given to NDFS by Rogers is protected from, and has priority over, t he IRS’s tax liens

pursuant to NDFS’s “holder of a security interest” status under 26 U.S.C. § 6323(a). 

Section 6323 operates to prot ect holders of perfected security interests from unfiled

tax liens. See Rice Inv. Co. v. United States, 625 F.2d 565, 568 (5th Cir. 1980). Section 6323(f)

provides that notice of the taxing authority’s lien “shall be filed” in the public records

before the lien is effective against the holder of a securit y interest. 26 U.S.C. § 6323(f).

Here, the IRS did not file its first tax lien notice until March 22, 1999. Doc. #2. 

Bankruptcy Judge Baum granted the IRS’s motion for summary judgment. Judge

Baum held that NDFS’s lien was not “summarily enforceable,” as required for priority,

because (1) the lien did not comply with state law requirements, (2) Roger’s lien purported

to transfer the entire property interest to NDFS without the consent of the other co-tenant,

and (3) NDFS was a sophisticated lender and t he ap plication of equitable principles would

be inappropriate under the facts. Doc. #3. Judge Baum also expressed “serious concern”

as t o whether NDFS’s lien even qualifies as a “security interest” as defined by § 6323(h).

Id. 

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Discussion

I. Standard of Review.

“ In reviewing the decision of a bankruptcy court, the district court acts as an

appellate court and is authorized to affirm, modify or reverse a bankruptcy court ’s order,

or to remand to t he bankruptcy court. The standard of review differs for questions of law

and questions of fact. The bankruptcy court’s conclusions of law are reviewed de novo.

The bankruptcy court’s findings of facts should not be set aside unless t hey are clearly

erroneous.” In re Diversified Contract Servs. Inc., 158 B.R. 169, 171 (N.D. Cal. 1993) (citing

Federal Rule of Bankruptcy Procedure 8013 and In re Alcala, 918 F.2d 99, 103 (9th

Cir.1990)). “A finding is clearly erroneous only if ‘based on the entire evidence,’ a court

‘is left with a definite and firm conviction that a mist ake has been committed.’” Id. (citing

Anderson v. Bessemer City, 470 U.S. 564, 565 (1985)). “Where there are two permissible

views of the evidence, the fact finder’s choice between them cannot be clearly erroneous.”

In re Smith, 242 B.R. 694, 700 (9th Cir. 1999).

II. Analysis.

Priority for purposes of federal law is governed by the common law p rinciple that

“first in time is t he first in right.” United States v. City of New Britain, 347 U.S. 81, 85

(1954). The first in time, first in right principle requires that the state lien be both choate

and summarily enforceable. See Monica Fuel v. I.R.S., 56 F.3d 508, 512-13 (3rd Cir. 1994).

See also In re Terwillinger’s Catering Plus, Inc., 911 F.2d 1168, 1176 (6th Cir. 1990) (state

lien holder must show that he or she had the right to enforce the lien prior to the

attachment of the federal lien); Monica Fuel, 56 F.3d at 512 (in addition to satisfying the

New Britain test, state liens must also be summarily enforceable to prime a competing

federal lien); United States v. Utah State Tax Comm’n, 642 F.Supp 8,10 (D. Utah, 1983)

(non-federal lien must be summarily enforceable and not have condit ions that affect its

viability). To be summarily enforceable, the lien must be enforceable wit hout a judicial

proceeding. Id. 

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Here, NDFS’s lien was not summarily enforceable. 

First, Rogers placed a security lien on the entire p roperty without the consent of

Kliensmith, the co-tenant. In Arizona, the undivided interest of a joint tenant may be made

subject to a lien without the consent of the co-tenant, A.R.S. §33-701(A), but the ent ire

estate cannot be subjected to the lien unless the co-tenant agrees. See Cooley v. Veiling,

505 P.2d 1381 (Ariz. 1973). Kliensmith never consented to the NDFS lien. Doc. #3, Doc.

#46, ¶ 12. She “would not agree to NDFS’s demands [and refused to] sign any additional

agreements.” Id. Therefore, the bankruptcy court was correct in finding that NDFS’s lien

was unenforceable because Rogers could not convey more interest than he owned.

Second, “[a] mortgage may be created, renewed or extended only by a writing

executed with the formalities required of a grant of real property.” A.R.S. §33-701(B).

NDFS’s lien failed to comply with A.R.S. § 33-701. No deed of trust was given to NDFS as

security for the debt; there was no transfer of property to secure t he debt against

subsequent creditors. Doc. #3. 

NDFS argues that even although it failed t o comp ly with the legal formalities, it

“ intended to . . . create a mortgage/consensual lien, [and only] through inadvertence [failed

to] t echnically achieve [its] purpose . . . . [Therefore,] equity must come to [its] rescue by

imposing an equitable lien” upon the p rop ert y. Doc. # 2. NDFS reasons that if it is granted

a lien in equity, then the formal obligations under state law are relieved. Doc. #2. Based

on the facts, however, t he Court does not find that the bankruptcy court erred in holding

that NDFS was not entitled to an equitable lien. 

 Equitable liens arise “[w]here property of one person can by a proceeding in equity

be reached by another as security for a claim on the ground that otherwise the former

would be unjustly enriched.” Restatement of Law on Restitution § 161 (quoting Byers v.

Wik, 818 P.2d 200, 209 (Ariz. App. 1991)). A court may consider the sophistication of the

parties when deciding if the principle of equitable mortgages applies. Shelton v.

Cunningham, 508 P.2d 55, 58 (Ariz. 1973). NDFS, by its own admission, was in the

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business of “ p roviding financing to automobile dealers for the purpose of financing their

inventory of approved Vehicles.” Bnkr. Doc. #48, Stipulated Statement of Facts, Ex. B

(Terms and Conditions of Master Loan Agreement). Any entity in such a financing

business can reasonably be expected to know the formalities for securing a loan. The

bankruptcy court did not commit clear error when it found that NDFS was a sophisticated

lender not entitled to an equitable lien. 

NDFS cannot circumvent state laws and gain priority over the IRS tax liens merely

by stating its intent ion to create a valid lien. The Bankruptcy Court did not err in

concluding that the NDFS lien was not summarily enforceable and was not entitled to

priority status over the IRS liens. Nor did t he court err in concluding that NDFS was not

entitled to equitable relief.

IT IS ORDERED that the decision of the bankruptcy court is affirmed.

IT IS FURTHER ORDERED t hat Appellee’s Motion to Strike (in part) Appellant’s

Reply Brief (Doc. #9) is denied as moot. 

DATED this 9th day of November, 2005.

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