Opinion ID: 71451
Heading Depth: 2
Heading Rank: 2

Heading: District Court Opinion and Contentions of the Parties

Text: 11 It is undisputed in this appeal that a tax lien arose upon all Nationwide's property on June 9, 1986, the first date of the tax penalty assessments against Nationwide. It is also undisputed that the IRS properly filed a notice of this tax lien in Nationwide's county of residence, as required by 26 U.S.C. § 6323(f)(2)(B), on July 3, 1986. Therefore, for Highlander's interest to take priority over the tax lien, Highlander must have been the holder of a security interest, as that term is defined in the FTLA, on July 3, 1986. To do so, Highlander must establish that its interest satisfies four conditions: 12 (1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth. 13 Haas v. Internal Revenue Serv. (In re Haas), 31 F.3d 1081, 1085 (11th Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 2578, 132 L.Ed.2d 828 (1995). As in Haas, the only issue on appeal in this case is whether the third condition is satisfied. In other words, this case turns on whether Highlander's interest was protected under Florida law--the applicable local law--against a judgment lien arising out of an unsecured obligation on July 3, 1986. 14 Relying on the hypothetical judgment lien creditor test adopted by this court in Haas, the district court held that Highlander's interest was not protected under Florida law against a judgment lien. 15 [T]he hypothetical judgment lien creditor test operates to put the IRS in the shoes of any subsequent judgment creditor, including the most favorable shoes. Thus, if any subsequent judgment creditor could prevail over [Highlander], then the IRS prevails. 16 Haas, 31 F.3d at 1089 (footnote omitted). The district court reasoned that a class of judgment creditors, those who qualify as lien creditors as defined in U.C.C. § 9-301(3) and who have no notice of Highlander's previous unperfected interest, could have prevailed over Highlander's interest under Florida law. The court concluded that the Government prevails here. 17 Highlander contends, however, that under Florida law a judgment lien does not attach to intangible assets, such as the funds at issue in this case, until the judgment creditor has taken further judicial action--by way of garnishment or an independent suit to enforce the debt. See Peninsula State Bank v. United States, 211 So.2d 3, 5 (Fla.1968). Highlander concludes that the holder of a simple judgment lien on intangibles does not qualify as a UCC lien creditor under Florida law. Thus, Highlander's security interest, though unperfected, prevails over the judgment lien because Highlander's interest was the first to attach. See Fla. Stat. ch. 679.312(5)(b) (1995). 18 Highlander argues that Haas is distinguishable. The priority contest in Haas was between a mortgagee who had mistakenly released its mortgage on the contested real property and a federal tax lien. The applicable local law was Alabama law, which provided that the mortgagee's interest is subordinate to that of a judgment creditor without notice. Haas, 31 F.3d at 1086. The issue decided in that case was whether knowledge on the part of the IRS of the mistakenly released mortgage affected the hypothetical priority contest--we decided that it did not--, not whether the IRS should be treated as a UCC lien creditor. In other words, the IRS would have won the priority contest in Haas, whether it was a UCC lien creditor or not, because it was the hypothetical holder of a judgment lien and thus a judgment creditor entitled to priority under Alabama law. Highlander acknowledges that, in Haas, we noted: In interpreting the phrase 'protected under local law against a subsequent judgment lien,' courts and commentators have determined the phrase is equivalent to being protected against a 'lien creditor' as defined in U.C.C. § 9-301(3). Haas, 31 F.3d at 1087. Highlander contends, however, that this statement is dictum, in light of the discussion of the specific type of interest and applicable local law at issue in Haas. 19 Highlander also distinguishes Dragstrem v. Obermeyer, 549 F.2d 20 (7th Cir.1977), which is the first decision of a United States Court of Appeals to adopt the hypothetical judgment creditor test and upon which we relied heavily in Haas. Dragstrem involved facts analogous to those we face here. The priority contest in Dragstrem was between an unperfected security interest and a subsequent tax lien over an interpleaded fund. Id. at 22. The difference between Dragstrem and this case lies, however, in the applicable local law. The relevant local law in Dragstrem was U.C.C. § 9-301(1)(b), which, as adopted in Indiana at the time, provided that an unperfected security interest is subordinate to the rights of ... (b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected. Id. at 23 (omission in original) (emphasis added). The equivalent provision of Florida law is a newer version of section 9-301(1)(b) that omits the knowledge requirement. See Fla. Stat. ch. 679.301(1)(b). Therefore, the central issue decided in Haas and Dragstrem, whether knowledge on the part of the IRS affects the priority of the tax lien, is not relevant in this case. 20 More importantly, a judgment lien attaches to intangible property in Indiana upon docketing of a judgment and the delivery of a writ of execution to the sheriff, Dragstrem, 549 F.2d at 27, without any additional judicial proceeding as required in Florida. Highlander argues that the holder of a simple judgment lien is therefore a UCC lien creditor under Indiana law but not under Florida law. Compare id. (Upon delivery [of the writ to the sheriff], the lien would attach to the debtor's property and the creditor would become a 'lien creditor' under the UCC.) with Peninsula State Bank, 211 So.2d at 5 (The only way a simple judgment creditor can reach [intangible property] owed to his debtor is by way of a separate and independent judicial proceeding ....). According to Highlander, that such holder of a simple judgment lien prevailed under Indiana law does not mean that it should prevail under Florida law. 21 The Government contends, however, that the additional procedural steps that a Florida judgment creditor must take for its judgment lien to attach to intangible property are no different from the lack of knowledge requirement that was at issue in Haas. In order to be in the most favorable shoes, Haas, 31 F.3d at 1089, the hypothetical judgment creditor must be assumed to have completed whatever additional steps are required under local law for the judgment lien to attach. Highlander responds that there is an important distinction between the knowledge requirement in Haas and the additional steps necessary under Florida law for a judgment lien to attach to intangible property. The underpinning of the hypothetical judgment creditor test is that the FTLA 22 does not put the government in the position of a competing holder of a security interest or judgment lien, but rather describes the legal status which security interests must obtain under state law in order to have priority over later filed or unfiled federal tax liens. 23 Haas, 31 F.3d at 1087 (quoting Dragstrem, 549 F.2d at 26). Therefore, whether the IRS had knowledge of the security interest is irrelevant to the inquiry of whether that security interest achieved a given legal status. Under Haas, we do not engage in a case-by-case inquiry into whether the IRS had 'notice.'  Haas, 31 F.3d at 1088. Instead, we compare the security interest at issue to a given legal construct, namely a hypothetical judgment lien. Just what the phrase judgment lien means was not an issue in Haas, although it was addressed in dicta. See id. at 1087 (noting that courts and commentators have determined the phrase is equivalent to ... a 'lien creditor' as defined in the U.C.C. § 9-301(3)). Highlander argues that the plain meaning of the phrase judgment lien is a simple judgment lien that arises, but not necessarily attaches to intangible property, upon the entry of a judgment. Highlander argues further that whether such judgment lien should be considered to have attached to the property in dispute is a matter of state law. If state law requires separate judicial action for the lien to attach to the property, then a judgment lien in that state, even a hypothetical judgment lien, has not attached and its holder is not a UCC lien creditor. Cf. Peninsula State Bank, 211 So.2d at 5. Highlander adds that defining a judgment lien in this fashion does not defeat the congressional purpose, implemented in the hypothetical judgment creditor test, of avoiding a case-by-case inquiry into whether the IRS actually complied with certain state law requirements--i.e., had no notice (as in Haas ) or performed the actions necessary under state law for the judgment lien to attach to the property in question.