Opinion ID: 34660
Heading Depth: 2
Heading Rank: 2

Heading: validity and priority of the liens

Text: The priority between a validly filed federal tax lien and a competing judgment lien is governed by the principle that the first in time is the first in right.3 Before a competing state lien is entitled to temporal priority over a tax lien, however, the former must meet the federal standard of perfection, or choateness.4 A state lien is choate when the identities of the lienor, the property subject to the lien, and the amount of the lien are established.5 The bankruptcy court held that the Bank's 1986 abstract of judgment did not create a valid lien because it failed to comply 2 In re Midland Indus. Serv. Corp., 35 F.3d 164, 165 (5th Cir. 1994), cert. denied, __ U.S. __, 115 S. Ct. 1359, 131 L.Ed.2d 216 (1995). 3 United States v. McDermott, __ U.S. __, 113 S. Ct. 1526, 1528, 123 L.E.2d 128 (1993) (citations and internal quotation marks omitted). See 26 U.S.C. § 6323(a). 4 Rice Inv. Co. v. United States, 625 F.2d 565, 568 (5th Cir. 1980). 5 Id. (citing United States v. City of New Britain, 347 U.S. 81 (1954)). 4 with the Texas judgment lien statute.6 Accordingly, the bankruptcy court concluded that, as this purported lien was never legally in existence, much less choate, the tax lien was first in time and thus carried the day. The Bank contends on appeal that this conclusion is in error because Texas law requires only substantial compliance with the elements of the statute.7 The Bank insists that, as the 1986 abstract of judgment should have charged third parties with notice of the lien notwithstanding the omission of certain statutory requirements, the lien should have attached. We disagree. At the time that the Bank filed its 1986 abstract of judgment, Texas Property Code section 52.003 provided: An abstract of judgment must show: (4) the defendant's address, or if the address is not shown in the suit, the nature of citation and place of service of citation; .... (7) the rate of interest specified in the judgment.8 None dispute that these required items were not shown on the Bank's 1986 abstract of judgment. Under Texas law, the mere rendition of a judgment does not create 6 See TEX. PROP. CODE ANN. § 52.003 (Vernon 1984). 7 See Citizens State Bank v. Del-Tex. Inv. Co., 123 S.W.2d 450, 452 (Tex.Civ.App.SQSan Antonio 1938, writ dism'd judgm't cor.). 8 TEX. PROP. CODE ANN. § 52.003(a) (Vernon 1984). 5 a lien.9 To acquire a lien on real property owned by a judgment debtor, the judgment creditor must take the specified steps necessary to comply with the judgment lien statute.10 In addition, the judgment creditor bears the responsibility of ensuring that the clerk of court correctly abstracts the judgment.11 Moreover, substantial compliance with the statutory requirements is essential and mandatory to the creation of the lien itself and is not required solely to ensure that subsequent purchasers are provided notice.12 Although substantial compliance with the statute is sufficient to create a valid judgment lien, the Texas courts have construed substantial compliance to allow only a minor deficiency in an element of the abstract.13 An abstract that completely omits a required statutory element, on the other hand, does not substantially comply with the statute.14 Furthermore, the Texas courts have specifically held that the omission of the defendant's address and citation information on the abstract of judgment 9 Burton Lingo Co. v. Warren, 45 S.W.2d 750, 751-52 (Tex.Civ.App.SQEastland 1931, writ ref'd). 10 Citicorp Real Estate, Inc. v. Banque Arabe Int'l D'Investissement, 747 S.W.2d 926, 929 (Tex. App.SQDallas 1988, writ denied). 11 Texas Am. Bank v. Southern Union Exploration Co., 714 S.W.2d 105, 107 (Tex. App.SQEastland 1986, writ ref'd n.r.e.). 12 Citicorp Real Estate, Inc., 747 S.W.2d at 931 (second emphasis added). 13 Id. at 930. 14 Id. 6 prevents the creation of a valid judgment lien.15 Therefore, no valid lien was created by the 1986 abstract of judgment. Accordingly, the IRS lien was first in time and thus first in right. As the omission of the § 52.003(a)(4) element renders the 1986 abstract of judgment ineffectual, we need not consider whether the amount of daily interest accruing listed in the abstract substantially satisfies the statutory requirement regarding interest. C. VALIDITY OF IRS LIEN WITH RESPECT TO REAL PROPERTY One of the blanks to be completed on a Notice of Federal Tax Lien is entitled Place of Filing. Although that blank on the Notice of Federal Tax Lien in the instant case reflected that the place of filing was County Clerk - Personal Property, that Notice was actually filed in both the real property and personal property records of Sterling County. The Bank nevertheless contends that a federal tax lien must be strictly correct and that the description, County Clerk - Personal Property, as the place of filing prevents the IRS from having a lien on the proceeds from a sale of real property. In support of its position, the Bank cites cases invalidating federal tax liens on the basis of misspelling or error in the taxpayer's name.16 15 Id.; Texas Am. Bank v. Southern Union Exploration Co., 714 S.W.2d 105, 107 (Tex. App.SQEastland 1986, writ ref'd n.r.e.); Allied First Nat'l Bank v. Jones, 766 S.W.2d 800, 802 (Tex. App.SQDallas 1988, no writ). 16 E.g., Haye v. United States, 461 F.Supp. 1168 (C.D. Cal. 1978). 7 As an initial matter, the IRS responds that, inasmuch as this argument was not raised in either the bankruptcy court or the district court, we should refuse to consider it on appeal.17 The record is unclear as to whether this particular argument was raised below; yet the record does reflect that an argument was made concerning the place-of-filing designation. Giving the Debtor the benefit of the doubt, we address this argument, but ultimately find it unpersuasive. Again, a federal tax lien shall not be valid as against any ... judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.18 Section 6323(f) provides that [t]he form and content referred to in subsection (a) shall be prescribed by the Secretary. The applicable regulations state that the notice must be filed on a Form 668 and that it must identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose.19 The sufficiency of a notice of federal tax lien is a question of federal law.20 Contrary to the Debtor's assertion, to be valid this notice need not be flawless.21 For, as many courts have stated, 17 See C.F. Dahlberg & Co., Inc. v. Chevron U.S.A., Inc., 836 F.2d 915, 920 (5th Cir. 1988). 18 26 U.S.C. § 6323(a). 19 Treas. Reg. § 301.6323(f)-1(d). 20 United States v. Brosnan, 363 U.S. 237, 240 (1960). 21 See Richter's Loan Co. v. United States, 235 F.2d 753, 75455 (5th Cir. 1956) (holding that a notice of federal tax lien was valid even though the taxpayer's name was erroneously spelled Freidlander instead of Friedlander). 8 [t]he essential purpose of the filing of the [federal tax] lien is to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one to the government's claim.22 The Notice of Federal Tax Lien here at issue was filed in the proper place and on the proper form. All information concerning the identity of the taxpayer and the tax liability was correct. The only defect alleged by the Debtor is in the description of the place of filing, an item that the regulations do not even require to be stated on a Form 668. Thus, we conclude that the instant notice was filed in substantial, if not full, compliance with the statute and that it was more than sufficient to alert one to the government's claim. Moreover, the Bank's contention that the description of the place of filing on a Notice of Federal Tax Lien trumps the actual place of filing is pure sophistry. We are satisfied that the IRS had a valid lien against the Debtor's real property in Sterling County. D. RELATION BACK Not to be deterred, the Bank insists that its formally valid 1992 abstract of judgment cured any defects in the 1986 abstract and relates back to 1986, thereby giving the Bank priority. The Bank 22 E.g., Tony Thorton Auction Serv., Inc. v. United States, 791 F.2d 635, 639 (8th Cir. 1986) (quoting United States v. Sirico, 247 F.Supp. 421, 422 (S.D. N.Y. 1965)); Du-Mar Marine Serv., Inc. v. State Bank & Trust Co., 697 F.Supp. 929, 935 (E.D. La. 1988). 9 cites no relevant authority for this assertion, however. In rejecting this argument by the Debtor, the bankruptcy court held that because noncompliance with the statute kept the Bank's lien from coming into existence in 1986, there can be no relation back to this putative lien. Finding no authority on our own for the Debtor's contention and agreeing with the reasoning of the bankruptcy court, we conclude that the relation back doctrine is inapplicable in this circumstance. Thus, the Bank's 1992 abstract of judgment did not relate back to 1986.23 E. COLLATERAL ESTOPPEL The Bank and the Debtor were parties in a previous bankruptcy case in which Southern States Energy, Inc. was the debtor.24 The same 1986 abstract of judgment involved in the instant case was also implicated in the Southern States Energy bankruptcy case. The Bank contends that the Debtor could have challenged the validity of the Bank's lien in that earlier case, but elected instead to recognize its efficacy by accepting a particular conveyance pursuant to Southern States Energy's Chapter 11 plan. The Bank argues that the Debtor and the IRS are thus collaterally estopped from claiming now that the 1986 abstract of judgment did not create a valid lien. Federal law determines the res judicata or collateral estoppel 23 We note that even if Texas law did provide that this abstract of judgment relates back to 1986, this relation back would be ineffective with respect to a validly filed federal tax lien. United States v. Allen, 328 F.2d 377, 379 (5th Cir. 1974). 24 In re Southern States Energy, Inc., No. 687-060046-JCA-11 (Bankr. N.D. Tex. 1988). 10 effect of prior federal court proceedings, regardless of the basis of federal jurisdiction in either the prior or the present action.25 The doctrine of collateral estoppel, or issue preclusion, provides that when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot be again litigated by the same parties in any future lawsuit.26 The three elements of collateral estoppel are (1) the issue at stake must be identical to the one involved in the prior action; (2) the issue must have been actually litigated in the prior action; and (3) the determination of the issue must have been a necessary part of the judgment in the prior action.27 In addition to the fact that the IRS was not a party to that previous action, the second element of collateral estoppel is not satisfied because the validity of the Bank's 1986 abstract of judgment was not actually litigated. Under these circumstances, we agree with the bankruptcy court that neither the Debtor nor the IRS is collaterally estopped from challenging the validity of the 1986 abstract of judgment. For the foregoing reasons, the judgment of the bankruptcy court is AFFIRMED. 25 Avondale Shipyards, Inc. v. Insured Lloyd's, 786 F.2d 1265, 1269 n.4 (5th Cir. 1986). 26 RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1290 (5th Cir. 1995) (quoting Ashe v. Swenson, 397 U.S. 436, 443, 90 S. Ct. 1189, 1194, 25 L.E.2d 469 (1970)). 27 Id. 11