Court Opinion

ID: 9480813
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:59:13.040888+00
Date Added: 2024-06-11T17:47:55.560546
License: Public Domain

BRIGHT, Circuit Judge,
dissenting.
The majority today decides that a state court decree can divest a federal bankruptcy court of jurisdiction even though the bankruptcy court acquired jurisdiction at the commencement of the case. This ruling elevates state law over federal law in contravention of well settled principles and leads to an incorrect result. Accordingly, I dissent.
Mrs. Gardner brought this action against Mr. Gardner’s bankruptcy trustee and the Government seeking property of the estate held by the trustee. The Government objected on the grounds that it had a federal tax lien with priority over Mrs. Gardner’s claim to the property.
The majority concedes that at the start of the action the bankruptcy court had jurisdiction to determine whether to decide the controversy between Mr. Gardner and his divorced wife. Nevertheless, the majority decides that the state court decree awarding Mr. Gardner’s property to Mrs. Gardner divested the bankruptcy court of jurisdiction to consider the Government’s objection. Thus, under the majority’s analysis, the court had jurisdiction over the action brought by Mrs. Gardner and could award her the property held by the trustee, but could not consider whether the Government had a superior claim to the property.
The Internal Revenue Code “creates no property rights but merely attaches consequences, federally defined, to rights created under state law....” United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). The bankruptcy court and the district court misapplied this principle in deciding that Mr. Gardner had no interest in the property of the estate and that the federal tax lien, which had previously attached to the property held by the trustee, somehow evaporated when the state court awarded the property to Mrs. Gardner. The majority recasts this analysis in jurisdictional terms, by deciding that *1520the bankruptcy court no longer had jurisdiction over the property once it determined, based on the state decree, that Mr. Gardner no longer possessed ownership rights in the property.
The analysis is flawed in my view. Once the bankruptcy court acquired jurisdiction over the debtor’s property, that jurisdiction continued to determine all controversies relating to claims of any and all parties to that property. Thus, the bankruptcy court could determine the priorities between the parties. In this case, the bankruptcy court proceeded to decide the priority between the Government and Mrs. Gardner but erred in its determination.
The bankruptcy court and the district court fail to recognize a line of Supreme Court cases directly governing this situation. In United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53 (1950), and its progeny,1 the Supreme Court developed a set of principles to govern issues of priority between federal tax liens and security interests created by state law. This line of cases applies to the situation at hand because Mrs. Gardner’s interest in the property at the time the federal tax lien attached upon examination represents nothing more than a type of security interest, regardless of the state law characterization of the interest as “a species of common or co-ownership _” Smith v. AIFAM Enters., Inc., 241 Kan. 249, 737 P.2d 469, 474 (1987).
The effect of Mrs. Gardner’s interest in relation to the federal tax lien presents a question of federal law. Security Trust, 340 U.S. at 50, 71 S.Ct. at 113. Upon the filing of a divorce, Kansas law creates an interest in one spouse in all the property owned jointly by both spouses or owned individually by the other spouse. See Smith, 737 P.2d at 474; Kan.Stat.Ann. § 23 — 201(b).2 The extent of the interest created, however, is subject to determination by the divorce court.
In other words, at the filing of the action one spouse gets an interest in the other spouse’s property, but the extent of that interest, if any, depends upon the outcome of the divorce proceedings. Thus, there exists no significant distinction for federal tax lien purposes between the interest created under Kansas law and a traditional attachment lien filed at the beginning of a lawsuit.
In Security Trust, the Supreme Court considered whether a federal tax lien takes priority over an attachment lien, where the federal tax lien was recorded subsequent to the date of the attachment lien, but prior to the date the attaching creditor obtained judgment. The Court held that the federal tax lien took priority in that case, despite having been filed later, because “[njumerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded. Thus the attachment lien is contingent or inchoate — merely a lis pen-dens notice that a right to perfect a lien exists.” Security Trust, 340 U.S. at 50, 71 S.Ct. at 113.
Under the federal law of tax liens then, a competing lien must not only become effective first, it must be choate — “the identity of the lienor, the property subject to the lien, and the amount of the lien [must be] established” — in order to take precedence over a competing federal tax lien. United States v. New Britain, 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954); see also United States v. Kimbell Foods, Inc., 440 U.S. 715, 721, 99 S.Ct. 1448, 1454-55, 59 *1521L.Ed.2d 711 (1979). In the case at hand, the amount of Mrs. Gardner’s interest in Mr. Gardner’s property had not yet been established and thus remained inchoate at the time the federal tax lien became effective. Accordingly, the federal tax lien was entitled to priority and the Government’s position in this appeal should be sustained.3
The district court’s and bankruptcy court’s error in this case resulted from viewing the facts of the case in hindsight. Both courts recognized that the federal tax lien attached only to Mr. Gardner’s interest in the property. But the courts then asked what interest of Mr. Gardner’s remained after the state court issued its divorce decree. The proper time frame for determining the extent of property to which a federal tax lien attaches, however, is the date on which the tax lien becomes effective. This is implicit in the Court’s discussion in Security Trust of the doctrine of relation back:
Nor can the doctrine of relation back— which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment — operate to destroy the realities of the situation. When the tax liens of the United States were recorded, [the creditor] did not have a judgment lien. He had a mere “caveat of a more perfect lien to come.”
340 U.S. at 50, 71 S.Ct. at 113 (citation omitted). On the date that the tax lien in this case became effective, the date the Government recorded the tax lien, Mr. Gardner still had ownership rights in the property and the tax lien attached to those rights.
The majority commits a similar error. As discussed above, the proper time frame for determining whether the Government’s tax lien or Mrs. Gardner’s interest takes priority is the date the Government recorded the tax lien. But the majority examines the case from a point later in time, after the state court awarded Mrs. Gardner virtually all of Mr. Gardner’s property. This represents nothing more than a jurisdictional variant of the doctrine of relation back, which the Supreme Court specifically rejected in Security Trust.
Moreover, it would be a waste of time for a bankruptcy court to bifurcate the proceedings in the unusual manner prescribed by the majority. Bankruptcy courts have jurisdiction to decide priority disputes between creditors claiming rights in property of the estate held by the trustee. At the time Mrs. Gardner brought this action seeking to be awarded the property held by the trustee, the court had jurisdiction over the property.4 The majority decides that the court could decide that Mrs. Gardner was entitled to the property but could not consider the Government’s competing claim. In summary, my view is that once jurisdiction attached, that jurisdiction continued for the full resolution of the rights to the property.
I would reverse the judgment of the district court and remand this case for entry of an appropriate judgment consistent with this dissenting opinion.

. See, e.g., United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979); United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963); United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954).

. The Kansas Legislature adopted section 23-201 to avoid the result of the Supreme Court's decision in United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962), holding that inchoate rights granted to a wife in the separate property of her husband do not reach the dignity of eo-ownership, and thus, the transfer to the wife pursuant to a property settlement agreement of appreciated stock owned solely by the husband was a taxable event. See Wachholz v. Wachholz, 4 Kan.App.2d 161, 603 P.2d 647 (1979). Under the majority’s jurisdictional analysis and the lower courts' analysis of the merits, section 23-201 now provides a loophole around federal tax liens also.

. Moreover, under the analysis applied by the bankruptcy and district courts, a dishonest taxpayer could defeat a federal tax lien with the help of an equally dishonest spouse.

. I agree with the district court that Mrs. Gardner’s suit and its disposition relates only to the nonexempt property held by the trustee.