Source: https://law.justia.com/cases/federal/appellate-courts/F2/712/258/415338/
Timestamp: 2020-08-12 16:37:13
Document Index: 213440189

Matched Legal Cases: ['§ 9', '§ 6321', '§ 6322', '§ 6322', '§ 6323', '§ 6323', '§ 6323', '§ 6323', '§ 6323', '§ 6323', '§ 6323']

J.d. Court, Inc., a Corporation, Plaintiff-appellant, v. United States of America, Acting Through the Department Oftreasury, Internal Revenue Service, Defendants-appellees, 712 F.2d 258 (7th Cir. 1983) :: Justia
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J.d. Court, Inc., a Corporation, Plaintiff-appellant, v. United States of America, Acting Through the Department Oftreasury, Internal Revenue Service, Defendants-appellees, 712 F.2d 258 (7th Cir. 1983)
US Court of Appeals for the Seventh Circuit - 712 F.2d 258 (7th Cir. 1983) Argued Jan. 12, 1983. Decided July 5, 1983
On May 10, 1979, Eventide Homes gave a $75,000 promissory note for value to Mervin Beil and executed a security agreement granting Beil a security interest in the taxpayer's "accounts receivable, and all goods, equipment, fixtures or inventory now or hereafter existing" to secure payment of the promissory note. Beil perfected his security interest pursuant to Ill.Rev.Stat. ch. 26, § 9-401(1) (c) by filing a financing statement with the Illinois Secretary of State's office on May 17, 1979. Beil later sold his security interest in Eventide Homes' accounts to the plaintiff J.D. Court. The assignment of that security interest was recorded with the Illinois Secretary of State on December 21, 1979.2
Since one of the parties in this case is the United States holding a lien for unpaid taxes, federal law governs the priority of the conflicting liens on Eventide Homes' accounts receivable. United States v. Pioneer American Insurance Co., 374 U.S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963). Specifically, the Federal Tax Lien Act of 1966, 26 U.S.C. §§ 6321-6326 sets forth the rights of private creditors with respect to a federal tax lien.
The Tax Lien Act follows the general rule that a "lien first in time is first in right." In general, a federal tax lien arises (i.e., "attaches")6 "at the time the [tax] assessment is made," 26 U.S.C. § 6322, and therefore a tax lien normally takes priority over other liens arising subsequent to assessment of the delinquent tax.7 Section 6323(a)8 of the Act creates an exception to § 6322's rule that a federal tax lien generally attaches at the time the delinquent tax is assessed; under § 6323(a), when the "holder of a security interest" also claims an interest in property subject to a federal tax lien, the federal tax lien is deemed to have attached when the IRS files a notice of tax lien, rather than when the delinquent tax was first assessed. Thus, the holder of a security interest in a taxpayer's property will prevail against a government tax lien on the same property if the security interest "attaches" and is perfected before the government files its notice of tax lien, see Coogan, The Effect of the Federal Tax Lien Act of 1966 Upon Security Interests Created Under the Uniform Commercial Code, 81 Harv. L. Rev. 1369 (1968).
Therefore, to determine the priority between a federal tax lien and a security interest in the same property, it is necessary to determine (1) when the federal tax lien "attaches"; and (2) when the state law security interest "attaches." As we have noted above, § 6323(a) provides that a federal tax lien "attaches" in these circumstances when the notice of tax lien is filed in the appropriate place. However, the Act fails to expressly state when the competing state law security interest is deemed to have "attached." In answering this question, courts have long relied on the judicially created "choateness doctrine." Under the "choateness doctrine," where a security interest arising under state law (such as the plaintiff's) comes into conflict with a federal tax lien, the state law security interest "attaches" only when it becomes "choate." A state law security interest is deemed to be "choate" when all three of the following elements are satisfied: "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." Pioneer American Insurance Co., 374 U.S. at 89, 83 S. Ct. at 1655, quoting United States v. New Britain, 347 U.S. 81, 84, 74 S. Ct. 367, 369, 98 L. Ed. 520; W. Plumb, Federal Tax Liens 149-50 (3d Ed.1972 and Supp.1974). If this three-part "choateness" test is satisfied at the time the IRS files its notice of tax lien, or within 45 days thereafter, the state law security interest takes priority over the competing tax lien. 26 U.S.C. § 6323(c).9
" [A] common way to secure a line of credit is to use one's accounts receivable as collateral. Such a loan may be secured by the outstanding balances in the debtor's accounts receivable at the time the loan is made and by further balances as they become due.... Since a subsequently arising balance is not in existence at the time the loan is made, the resulting lien remains inchoate until the underlying debt becomes due.... [T]he resulting lien remains unprotected by [§ 6323(a)] until it becomes choate and therefore would be subject to a tax lien filed in the interim."
" [B]efore determining that a state lien has priority over a federal tax lien under the first in time, first in right rule of § 6323, two questions must be answered in the affirmative: whether a valid lien existed under state law when the federal lien was recorded; and, if so, whether that lien is 'choate' under federal law."
Asher v. United States, 570 F.2d 682, 683 (7th Cir. 1978) (emphasis added). The Sgro and Asher cases clearly establish that, in determining priority between state law liens and federal tax liens under the Tax Lien Act of 1966, the "choateness doctrine" is recognized in this circuit as a valid legal principle, not abrogated by the Tax Lien Act.10
Our conclusion that the "choateness doctrine" has continued validity under the Tax Lien Act is buttressed by the Supreme Court's opinion in United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). In Kimbell Foods, the Court held that the "choateness doctrine" did not apply in determining priority between the government's contractual liens arising from federal loan programs and private liens. Although the holding of Kimbell Foods does not directly affect our resolution of this case, the Court emphasized the critical distinction between a contractual lien arising from a government loan program and a government tax lien:
Id. at 734, 99 S. Ct. at 1461 (emphasis added) (citations omitted).
We conclude that the "choateness doctrine" is a valid legal principle in determining the priority between the government's tax lien in Eventide Homes' accounts receivable and the plaintiff's security interest in the same accounts receivable. Having reached this conclusion, we consider only briefly the plaintiff's additional arguments. The plaintiff argues that its security interest in Eventide Homes' accounts receivable was in fact "choate" prior to September 17, 1979 when the government filed its first notice of tax lien. However, as we indicated in Sgro, a security interest in accounts receivable does not become "choate" until the accounts receivable actually come into existence, that is, at the time the services giving rise to the accounts receivable are performed. 609 F.2d at 1261. Thus, the district court correctly determined that the plaintiff had priority only to those accounts receivable arising prior to the government's filing of its notice of tax lien, or within 45 days thereafter. Section 6323(c) (2).11
1979--October 6 through 24 $ 42.40 6 through 31 204.22 November 1 through 14 81.52 1 through 30 579.24 December 1 through 11 42.18 1 through 31 643.45 1980--January 1 through 31 23,468.21 8 through 21 162.32 15 through 31 456.29 February 1 through 14 7,192.89
There is some discrepancy regarding the exact total amount owed Eventide Homes by the Illinois Department of Public Aid. The district court stated that the amount owed Eventide totaled $30,593, while the parties stipulated that the amount equaled $32,872.72. The $32,872.72 figure is also arrived at by totalling the court's chronological breakdown of the amounts owed. This discrepancy, however, does not affect our resolution of this appeal since it is undisputed that both the government's tax lien and J.D. Court's security interest exceed the amount owed the taxpayer by the Illinois Department of Public Aid.
A lien or security interest is said to "attach" at the moment the interest comes into existence. Although the Federal Tax Lien Act of 1966 does not specifically use the term "attach," the term "arise" as used in the Act is considered synonymous with "attach." See Coogan, The Effect of the Federal Tax Lien Act of 1966 Upon Security Interests Created Under the Uniform Commercial Code, 81 Harv. L. Rev. 1369, 1373 (1968). In the lexicon of the UCC, a security interest "attaches" when the security interest becomes enforceable against the debtor and third parties. See White & Summer, The Law Under the Uniform Commercial Code 901-02 (1980)
The plaintiff argues that Sgro is no longer good law since the court in Sgro relied upon Texas Oil and Gas Corp. v. United States, 466 F.2d 1040 (5th Cir. 1972), cert. denied, 410 U.S. 929, 93 S. Ct. 1367, 35 L. Ed. 2d 591 (1973), a case which the plaintiff contends has been subsequently overruled by the Fifth Circuit. We disagree since it is unclear whether the Fifth Circuit has in fact overruled the Texas Oil case and abandoned the "choateness" doctrine. In Aetna Ins. Co. v. Texas Thermal Industries, Inc., 591 F.2d 1035, 1038 (5th Cir. 1979), the Fifth Circuit stated: "We therefore conclude, and hold, that whatever role the 'choateness' rule of federal common law may play in other contexts, it has been supplanted by the provisions of § 6323 with respect to tax lien priority questions as to which that statute provides an unambiguous federal law answer." (footnote omitted). However, the Aetna Ins. court did not even cite the Texas Oil case, much less expressly overrule it. Moreover, a year after Aetna Ins. was decided, the Fifth Circuit in Rice Inv. Co. v. United States, 625 F.2d 565 (5th Cir. 1980) extensively relied on Texas Oil, referring to it as an example of "federal standards of choateness employed as a tool for statutory interpretation of § 6323 where the collateral was an account receivable." Id. at 571 n. 19