Opinion ID: 583422
Heading Depth: 2
Heading Rank: 4

Heading: the security interest in proceeds

Text: 39 The taxpayers argue for affirmance on a basis not specifically addressed by the district court's order. It is unclear from the record whether or not the taxpayers raised this argument in the court below. However, [w]e may affirm a judgment on any ground supported by the record even if not relied upon by the district court. Lane v. Peterson, 899 F.2d 737, 742 (8th Cir.) (citations omitted), cert. denied, --- U.S. ----, 111 S.Ct. 74, 112 L.Ed.2d 48 (1990). We also note that appellant has not argued that review of this contention is precluded by any failure to previously raise this issue. 40 On August 28, 1985, Phoenix obtained a loan in the amount of $90,390.41 from the Merchants & Planters Bank & Trust Company (Merchants). Merchants took a security interest in all of Phoenix's inventory, as well as any proceeds from the sale of such inventory. Honey and Meador argue that all of the funds deposited to Phoenix's account were proceeds from the sale of inventory and were encumbered by Merchants' security interest. As previously discussed, Honey and Meador bear the burden of proving that the funds were encumbered. Charles White, the Phoenix accountant, testified that there were monies received during October, November, and December of 1985, that could have been diverted to payroll taxes, but White could not say that the entire payroll tax liability could have been paid. He also testified that he had no knowledge that the funds were encumbered but could not definitely say they were not encumbered. Meador testified that he did not know if these funds were encumbered. 41 Honey and Meador have not specifically pointed to any evidence in the record proving that any of the money deposited in Phoenix's account was proceeds from the sale of inventory. The only evidence of record suggesting that some of the money deposited was from the sale of inventory is Meador's testimony that Phoenix continued to manufacture and sell houses. The only specific evidence of record as to the source of deposits is that $20,000 deposited on December 20, 1985, was money personally borrowed by Meador from the Bank of Yellville and loaned by Meador to Phoenix. 4 Meador also testified that he put other personal funds into Phoenix, but he did not testify as to when he gave or loaned the corporation those funds or as to the amount of any such funds. Thus, Honey and Meador have not met their burden of proof with respect to the actual amount of funds deposited to Phoenix's account which represented proceeds from the sale of inventory. We find, however, that the evidence permits a reasonable inference that some funds deposited were proceeds from the sale of inventory. 42 Under our test for unencumbered funds, we are required to ascertain whether Merchants' security interest in proceeds is superior to the interest claimed by the IRS in the funds deposited in Phoenix's account. To do so, we must determine the nature of the IRS's interest in those funds. 43 Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States. 44 26 U.S.C. § 7501(a). The trust established by § 7501 is created when wages to the employees are paid. Begier v. Internal Revenue Serv., 496 U.S. 53, 60-61, 110 S.Ct. 2258, 2264, 110 L.Ed.2d 46 (1990). Generally, funds held in trust under § 7501 are not required to be segregated or specifically identified. Id. 496 U.S. at 61, 110 S.Ct. at 2264. Under some circumstances, the IRS may require that collected employment taxes be segregated in a separate bank account until paid over to the IRS. See 26 U.S.C. § 7512. The IRS did not invoke the provisions of § 7512 in this case. Thus, the funds in Phoenix's general corporation account were not specifically identified as trust fund amounts. 45 Neither did the IRS place a lien on the assets of Phoenix prior to the termination of the corporation's existence, as is provided for in 26 U.S.C. § 6321. The lien under § 6321 generally arises only after the United States makes an assessment for the taxes. See 26 U.S.C. § 6322. There is no evidence that an assessment for the unremitted employment taxes was made prior to the termination of the corporation's existence. Even if the IRS had obtained a tax lien under § 6321, a tax lien is subordinate to certain perfected security interests in certain collateral, including inventory, arising after the tax lien filing when pursuant to a security agreement entered into before the filing. Slodov, 436 U.S. at 257, 98 S.Ct. at 1790; 26 U.S.C. § 6323(c). The IRS never filed a tax lien, and no argument is made that Merchants' security interest was not perfected. We find that Merchants' security interest in proceeds was superior to the interest of the IRS in the funds in Phoenix's corporate account to the extent that those funds actually were proceeds from the sale of inventory. 46 We must next consider whether Merchants' security interest would have prevented the use of the funds in Phoenix's account for the payment of the tax obligation. Paragraph 6 of the security agreement between Merchants and Phoenix provides that upon Merchants' demand, Phoenix would be required to deposit all payments for inventory sold in a special bank account maintained with Bank, over which Bank alone has power of withdrawal. Inventory security agreement, para. 6. Except for paragraph 6, the security agreement contains no restrictions on Phoenix's use of the proceeds from the sale of inventory. There is no evidence that Merchants ever invoked paragraph 6. We also note that Doyle Brewer, assistant vice-president for the First National Bank of Hope, testified that he did not know of any restrictions on Phoenix's account which would have prevented the use of funds in that account for payment of the employment tax liabilities. Thus, applying our definition of unencumbered funds, the security agreement, except for the uninvoked paragraph 6, did not place any restrictions on Phoenix's use of the funds in Phoenix's account that would have precluded payment of the tax liability. 47 We also note that once funds were disbursed from Phoenix's account to pay other creditors, Merchants' security interest in those funds would have been extinguished. A security interest in proceeds from inventory is continuously perfected if the security interest in the inventory was perfected, but ceases to be perfected twenty-one days after receipt of the proceeds by the debtor unless a filed financing statement covers the original collateral and the proceeds are identifiable cash proceeds. Ark.Code.Ann. 4-9-306(3) (1987). 5 However, a security interest in proceeds remain[ing] in a bank account continues until the funds are actually transferred in the ordinary course of business. Anderson, Clayton & Co. v. First Am. Bank of Erick, 614 P.2d 1091, 1094 (Okla.1980). See also Citizens Nat'l Bank of Whitley County v. Mid-States Dev. Co., Inc., 177 Ind.App. 548, 380 N.E.2d 1243, 1250 (1978); U.C.C. § 9-306 cmt. 2(c)., 3 U.L.A. 441 (1981). 48 We find as a matter of law that while Merchants' security interest in Phoenix's account, to the extent that that account contained proceeds from the sale of inventory, was superior to the interest of the IRS in those funds, there is no evidence that Merchants restricted Phoenix's ability to use those funds to satisfy the preexisting tax obligation. 49 There is also evidence in the record that some proceeds from the sale of homes were made payable jointly to Phoenix and B & R Builders Supply, who was Phoenix's main supplier, and delivered to B & R to cover their materials, with the remainder paid to Phoenix. No argument or evidence has been presented that B & R Builders Supply had any interest in the funds on deposit in Phoenix's corporate account.