Opinion ID: 498403
Heading Depth: 2
Heading Rank: 2

Heading: Application of Secs. 724(b) and (c)

Text: 12 The District of Columbia Circuit has dealt with a tangential issue involving priority between a Small Business Administration lien and a District lien for unpaid sales taxes. Pearlstein v. U.S. Small Business Admin., 719 F.2d 1169 (D.C.Cir.1983). The court ruled that the later-perfected tax lien was senior to the SBA lien under applicable law, which it determined to be the non-bankruptcy law of the District of Columbia. Admittedly, this case did not involve competing liens of the same class but rather determination of whether a nontax lien would be considered senior to the tax lien under Sec. 724(b)(1). However, the court engaged in an exhaustive analysis of the history of bankruptcy law, particularly as it involved the evolution of Sec. 724 in general. The court noted that: 13 The statute does not define whether a lien is senior to such tax lien (subsection (1)) or is junior to such tax lien (subsection (4)), or state upon what basis the determination of those priorities shall be made. There is no indication that when Congress in section 724(b) restructured and restated the provisions covering the distribution of property in the estate that was subject to tax liens, it intended to change the prior settled law and practice that the relative priorities of liens in bankruptcy (including tax liens subordinated by section 67(c)(3) of the Chandler Act ) were to be determined according to the non-bankruptcy lien law, or to create a new federal rule governing relative priority between tax and other liens. If Congress had intended to make such a drastic change in existing bankruptcy law, presumably it would clearly and explicity have so stated or indicated. It did neither. 14 Id. at 1175-76 (emphasis added). 15 Therefore, it is clear, and the Commonwealth does not dispute, that as between two or more competing nontax liens, non-bankruptcy law governs their priority. We can see no justifiable reason for treating competing tax liens differently. The Commonwealth points to legislative history stating that, [i]n effect, a tax claim secured by a lien is treated as a claim between the fifth [now sixth] and sixth [now seventh] priority in a case under Chapter 7 rather than as a secured claim  as support for their position. 124 Cong.Rec. H11,098 (Sept. 28, 1978); S17,415 (Oct. 6, 1978). We cannot glean from this language a Congressional intent to extinguish a tax lien's secured status in favor of a simple priority claim, identical in status to those priorities set forth in Sec. 507. Such an intent is nowhere stated, and tax liens are repeatedly referred to as liens, implying the continuation of their secured status. Moreover, the problem inherent in the Commonwealth's proffered explanation becomes apparent when considering a situation involving an intervening junior lien between two competing tax liens. In such a situation, treating both tax liens as priorities under Sec. 724(b)(2) and (3) would result in elevating the concededly junior tax lien above the lien occupying the superior position under Sec. 724(b)(4). 10 This result cannot be squared with the stated Congressional intent that the status of senior and junior lienors remains intact under the current Code. 16 We also find support for our result in the fact that Sec. 724, titled Treatment of certain liens, deals explicitly with priority and distribution problems involving property encumbered by liens. Section 726, titled Distribution of property of the estate, by its terms mandates pro rata payment only of claims specified in Sec. 507 and subsections (2) through (5) of Sec. 726(a). Under Sec. 724, property is not distributed to the estate (Sec. 724(b)(6)) until all liens, both tax and nontax, are satisfied. Therefore, we construe Sec. 726 to govern only distributions from property which has become part of the debtor's estate. Under this reading, the distribution scheme specified for multiple claims in a priority class which is set forth in Sec. 726 (pro rata) has no application to distribution under Sec. 724 since, by its terms, property distributed under that section does not become part of the estate unless or until all secured claims have been satisfied. 11 17 Admittedly, resort to nonbankruptcy law to determine the status of competing tax liens may, in certain instances, require a complex and sophisticated distribution analysis. 12 However, this result is inescapable where the intent of Congress is manifested by both the express language of Sec. 724(b) of the Code as well as the stated purpose to continue prior practice without substantial modification. 18 Thus, as under prior law, we hold that the priority of all competing liens, both tax and nontax, is to be determined by reference to nonbankruptcy law. In the case at bar, since the competing liens involve a federal tax, federal law controls. Aquilino v. United States, 363 U.S. 509, 513-14, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960). Since the IRS lien was the first to be perfected, the entire balance of debtor's property is ordered distributed to the United States in satisfaction of its lien.