unperfected state court judgment against Ronald Hubbard. Lastly, Hubbard Bowling holds an
insurance policy from General Star providing coverage for business property loss and income.

1. Broeck

Broeck’s attorney’s lien arose after the IRS recorded its tax lien. Generally, the priority of a
federal tax lien as against a “choate” state-created lien is determined under a first-in-time-is-first-in-
tight rule. United States v. McDermott, 507 U.S. 477, 488 (1993). However, an exception to this rule
with respect to certain attorneys’ liens is found in 26 U.S.C. § 6323(b) (8). Under this section, an
attorney’s lien is given priority over a previously filed federal tax lien, if the attorney’s fees were
incurred in obtaining a judgment or procuring a settlement. Id.; see also Park City Leasing v. V.I.P.
Mobile Phone Centers, 763 F.Supp. 140, 142 (E.D. Pa. 1991). As Broeck’s fees were incurred in
procuring the Settlement Agreement, under section 6323(b) (8) his lien is given priority over the
previously recorded tax lien. All parties agree that Broeck should receive $50,000 of the
interpleaded funds under the law set forth above. As there is no dispute of material fact regarding
this allocation, the Court grants the parties’ request.

2. Brunswick

Brunswick’s perfected security interest in the insurance proceeds also takes priority over the
federal tax lien because Brunswick's interest was perfected before the tax lien filing. Under 26
U.S.C. § 6323(a) and (h)(1), if the taxpayer receives “money or money's worth” before a tax lien
filing, the lender’s security interests primes a federal tax lien. Here, Brunswick’s interest in the
insurance proceeds arose in 1987 when Deutsche Credit perfected a security interest in all Hubbard
Bowling’s equipment and proceeds therefrom in order to secute its loan. The tax liens were not
recorded against Hubbard Bowling until 1995. Since Brunswick's secured interest was perfected

before the tax liens were recorded, Brunswick takes priority over the United States. The parties

4



Ill. Conclusion

The United States’ motion for summary judgment is granted. James C. Ten Broeck’s cross-
motion for summary judgment is also granted. Judgement is entered against Hubbard Bowling and in
favor the United States for the amount of the total assessments against Hubbard Bowling resulting
from unpaid employment taxes for the quarters in suit, including accrued penalties and interest. The
United States shall submit a proposed judgment amount within 10 days of this Order. The
interpleaded funds shall be disbursed as follows: $70,000 to Brunswick Corporation; $50,000 to
Broeck; and $40,000 to the United States.
IT IS SO ORDERED.

August 18, 2003 Vf GCL

William J4ibbler
United States District Court



action, the United States seeks to reduce Hubbard Bowling’s tax liabilities to judgment and foreclose
its tax liens on the interpleaded funds in the amount of $40,000, claiming priority over the
competing interests of Hubbard Bowling, B &W Financial, and Robert Hubbard. Hubbard Bowling,
Brunswick Corporation and Broeck do not object to the United States’ request. B & W Financial
Group has not responded. Regarding the remaining $120,000 in interpleaded funds addressed in the
Settlement Agreement, defendant Broeck seeks $50,000 for himself and $70,000 for Brunswick. No
party opposes Broeck’s proposed distribution.

Il. Discussion

To restate, the Settlement Agreement allocated the insurance proceeds as follows:
$70,000 to Broeck and Hubbard Bowling; $70,000 to Brunswick; and $20,000 to the Internal
Revenue Service (IRS) and Robert Hubbard. Broeck later agreed to accept $50,000 of the $70,000
jointly allotted to him and Hubbard Bowling. The United States argues that Hubbard Bowling is not
entitled to any of the remaining insurance proceeds, as the United States’ tax liens trump any
interest that Hubbard Bowling may have in the proceeds. The United States also argues that the
liens are superior to any interest that Robert Hubbard, as owner of Hubbard Bowling, may have in
the $20,000 jointly allocated to the IRS and Robert Hubbard. The United States therefore requests
the Court to modify the Settlement Agreement so that it may collect $40,000 of the interpleaded
funds.

To determine the rights of the competing claimants it is first necessary to define each party’s
purported interest. Broeck holds an attorney’s lien on the proceeds arising from his efforts
negotiating the Settlement Agreement. Brunswick, as a secured lender, holds a perfected security
interest in Hubbard Bowling’s property and proceeds therefrom. The United States holds tax liens

also encumbering Hubbard Bowling’s property and proceeds therefrom. B & W Financial holds an

3



agree that Brunswick’s share of the $160,000 settlement should be $70,000. As there is no dispute of
material fact regarding this issue, the Court will allow the parties’ proposed distribution.

3. Federal Tax Liens

As an initial matter, the Court must address the United States’ request to reduce to judgment
Hubbard Bowling’s outstanding employment tax liabilities. The United States reports that
assessments totaling $80,988.30 were made against Hubbard Bowling for unpaid employment taxes
from 1989 through 1992. Federal tax assessments are presumptively correct. Welch v. Helvering, 290
U.S. 11 (1954). Once the United States has shown evidence of tax assessments the burden shifts to
the taxpayer to refute the presumptively correct assessments. Id. In this case, the United States has
submitted transcripts detailing the assessments, penalties and interest for the years at issue. Hubbard
Bowling has not produced any evidence to dispute these submissions. Accordingly, the assessments
made by the United States against Hubbard Bowling are presumed correct and the United States is
entitled to judgment in its favor for the amount of the total assessments, including accrued penalties
and interest."

The United States argues that the tax liens encumber $40,000 of interpleaded funds. As this
requested distribution will exhaust the funds, the United States must establish priority over the
remaining parties’ competing interests. It is therefore necessary to briefly discuss the nature of the
United States’ federal tax liens.

Federal tax liens are created and governed by federal law. United States v. Brosnan, 363 US.

'The United States claims that this total is $145,569.96 consisting of the assessed amount
of $80,988.30, accrued penalties of $3,883.26 and accrued interest of $75,710.92 computed as of
January 31, 2003. It appears the United States has made a mathematical error in their
computations as these three amounts to do not add up to $145,569.96. Thus, the Court will
refrain from entering a monetary judgement until the United States corrects or explains their
proposed figure.



‘I . rN
Minute Order Forra (06/97) 7TM~
: United States District Court, Northern District of Illinois
Namco AnienedJudse | William]. Hibbler _| Sie oder it oxter
CASE NUMBER 02 C 2440 DATE 8/18/03
CASE GENERAL STAR INDEMNITY COMPANY V. HUBBARD BOWLING
TITLE LANES, INC. et al.

{in the following box (a) indicate the party filing the motion, e.g, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the
nature of the motion being presented,]

MOTION:

United States’ Motion for Summary Judgment (doc. #31) and James Ten Broeck’s Cross Motion for
Summary Judgment (doc. #35)

DOCKET ENTRY:

(1) ia Filed motion of { use listing in “Motion” box above.]

() Qo Brief in support of motion due

(3) a Answer brief to motion due___. Reply to answer brief due

() © — Ruling/Hearingon__setfor____at

6) Qa Status hearing [held/continued to] [set for/re-setfor]on___setfor at

© Qa Pretrial conference [held/continued to] [set for/re-set for]on___—sset for at.
(04) a Trial (set for/re-setfor]Jon_ at.

(8) a [Bench/Jury trial] [Hearing] held/continuedto____at

(0) Oo This case is dismissed [with/without] prejudice and without costs [by/agreement/pursuant to]

OOFRCP4(m) OGeneral Rule 21 OFRCP41(a)(1) OO FRCP41(a)(2).

(10) Ml [Other docket entry]. United States’ Motion for Summary Judgment (doc. #3}) is granted. James Ten
Broeck’s Cross Motion for Summary Judgment (doc. #35) is granted. Judgment is entered against
Hubbard Bowling Lanes, Inc. a/k/a Hubbard’s Bowling Lanes, Inc. a/k/a Hubbard Bowling Lanes,
for the amount of the total assessments against Hubbard Bowling for unpaid employment taxes for the
quarters in suit, including accrued penalties and interest. The United shall submit a Proposed

judgment amount by August 28, 2003. Enter memorandum and opinion. All other pending
motions and dates are terminated as moot.

(11) soil [For further detail see order catkached to. the’,” original minute order.]

No notices required, advised in open court.

No notices required.

number of notices

Notices mailed by judge's staff. AUG 19 2003

Notified counsel by telephone.

v¥_ | Docketing to mail notices. ayngd 1aisisia sf
em

Mail AO 450 form.

Copy to judge/magistrare judge.

ansh Hd 81 SANE
jail

date mailed notice
courtroom

si wo MGs
JHC deputy’s Oni L ke
initials 1-03

Date/time received in
central Clerk’s Office mailing deputy initials



237, 240 (1960). A federal tax lien arises in favor of the United States at the time the tax is assessed
and notice and demand for payment is made, and continues until the liability “is satisfied or become
unenforceable by reason of lapse of time.” 26 U.S.C. § 6322. The lien encumbers “all property and
tights to property, whether real or personal, belonging to such person,” 26 U.S.C. § 6231, including
property acquired after the lien arises. Glass City Bank v. United States, 326 U.S. 265 (1945).
Moreover, a lien follows any property substituted for what the taxpayer owned. Municipal Trust and
Savings Bank v. United States, 114 F.3d 99, 101 (7" Cir. 1997).

Here, the tax liens against Hubbard Bowling arose in 1993 and were recorded in 1995. Under
the above law, the liens attached to all of Hubbard Bowling’s then existing and after acquired assets,
including the insurance proceeds. Thus, unless one of the remaining parties to this action can show a
superior interest to the United States in the proceeds, the United States is entitled to its requested
$40,000 allotment. The dissolved Hubbard Bowling cannot claim priority over the United States
because all of its property, which appears limited to insurance proceeds, is encumbered by the federal
tax liens. B & W similarly cannot claim priority over the United States, as B & W merely holds an
unperfected, 1998 state court judgment against Robert Hubbard. This interest does not take priority
over a prior perfected federal tax lien. Lastly, Robert Hubbard cannot claim priority over the United
States as he is not a party to this action and has therefore failed to state a cognizable interest in the
insurance proceedings. As no party can assert a superior interest, the United States is entitled to the
remaining $40,000 of interpleaded funds. This allocation alters the terms of the Settlement
Agreement to direct an additional $20,000 to the United States over and above the original $20,000
allocated to the Internal Revenue Service. Because all parties are in agreement with this proposed
distribution, the Court finds that no dispute of material of fact exists to delay the United States’

request.



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

GENERAL STAR INDEMNITY COMPANY,
a Connecticut Corporation,
Plaintiff,

v.

HUBBARD BOWLING LANES, INC., a/k/a
HUBBARD’S BOWLING LANES, INC., a/k/a
HUBBARD BOWLING LANES, an Illinois
Corporation, JAMES C. TEN BROECK,

B& W FINANCIAL GROUP, INC.,
DEPARTMENT OF TREASURY-INTERNAL
REVENUE SERVICE, BRUNSWICK
CORPORATION,

DocxETE

AUG 1 9 2093

Defendants.

No. 02 C 2440

UNITED STATE OF AMERICA,
Cross/Counterclaim Plaintiff, The Honorable William J. Hibbler

v.

HUBBARD BOWLING LANES, INC., a/k/a
HUBBARD’S BOWLING LANES, INC., a/k/a
HUBBARD BOWLING LANES, an Illinois
Corporation, JAMES C. TEN BROECK,
B & W FINANCIAL GROUP, INC.,
DEPARTMENT OF TREASURY-INTERNAL
REVENUE SERVICE, BRUNSWICK
CORPORATION,

Cross/Counterclaim Defedants.

MEMORANDUM OPINION AND ORDER
Plaintiff, General Star Indemnity Company, brought this interpleader action to determine the
rights of competing claimants to $160,000 in insurance proceeds arising from the settlement of a

prior lawsuit with Hubbard Bowling Lanes. The United States subsequently entered the lawsuit

\



asserting its interest in the interpleaded funds. The United States now files for summary judgment.
Defendant James C. Ten Broeck also files for summary judgment. Both motions are unopposed. For
the reasons below, the motions are granted.

I. Background

Hubbard Bowling operated a bowling alley until it was destroyed by fire in 1997. After the
fire, Hubbard Bowling made claim for property loss under an insurance policy issued by General Star
Indemnity Company (the Policy). The Policy’s loss payable provisions identified Deutsche Credit
Corporation and Brunswick Bowling & Billiard as loss payees with respect to Hubbard Bowling’s
personal property. Deutsche Credit had held a 1987 promissory note from Hubbard Bowling that
was later assigned to Brunswick Bowling & Billiards and then to its successor, defendant Brunswick
Corporation.

Hubbard Bowling’s claim under the policy led to litigation in this Court. Defendant James
Ten Broeck represented Hubbard Bowling. The parties reached a settlement whereby General Star
agreed to split $160,000 in insurance proceeds among the following parties: $70,000 to Brunswick
Corporation (as loss payee); $70,000 to Broeck and Hubbard Bowling jointly; and $20,000 to the
Internal Revenue Service and Robert Hubbard jointly (the Settlement Agreement). Broeck later
agreed to accept $50,000 of the $70,000 awarded to him and Hubbard Bowling.

Defendant B &W Financial Group, Hubbard Bowling’s former landlord, was not a party to
the Settlement Agreement, but is named in the present interpleader action because it seeks a share
of the interpleaded funds to satisfy a 1998 Illinois state court judgment against Robert Hubbard for
unpaid rent.

The United States’ interest in the insurance proceeds derives from federal tax liens against

Hubbard Bowling for unpaid federal employment taxes for the period 1989 to 1992. Through this

2