Court Opinion

ID: 9477312
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:19:50.742969+00
Date Added: 2024-06-11T17:45:48.473326
License: Public Domain

COFFEY, Circuit Judge,
concurring.
Because I agree that the Supreme Court’s 111-year-old decision in Hyde v. Woods, 94 U.S. (4 Otto) 523, 24 L.Ed. 264 (1887) — holding that the owner of a seat on an exchange does not have a “property interest” in proceeds from the sale of the seat to which a federal tax lien may attach —controls the outcome of this case, I reluctantly join in the majority’s conclusion. Nevertheless, I am convinced that because the majority’s opinion uncritically accepts the proposition that the rules of a private organization (the Chicago Mercantile Exchange) operate to define a taxpayer’s “property interest” in a seat on the Exchange in such a way as to defeat a federal tax lien, the opinion will serve to encourage abuses of the federal tax lien priority system set forth in § 6323. The potential for litigants to attempt an “end run” around the federal tax lien laws is encouraged by the majority’s implicit conclusion that state property law (or even private contractors) have the ultimate authority to determine the nature of the legal interest which the taxpayer has in the property sought to be reached by a federal tax lien. I therefore write separately in an attempt to delineate the limits of today’s decision.
Yermack, the delinquent taxpayer, is the holder of a seat on the Chicago Mercantile Exchange (“CME”) and owes money to the federal government for unpaid taxes, as well as to GNP Commodities, Inc. (the individual “clearing member” of the exchange responsible for Yermack’s trades). The government’s lien — filed prior to GNP’s perfection of its interest — is asserted against Yermack’s “property interest” in *1359the proceeds from the seat’s sale. Since GNP admittedly failed to take the steps necessary to perfect a security interest in the proceeds prior to the government’s filing of its notice of tax lien on October 9, 1985, there is no question that if GNP were considered a secured creditor of Yermack, the government’s lien would prevail.
As the majority explains, however, “[t]he initial question in this case is not whether an unperfected security interest prevails over a properly filed tax lien [it would not]; rather the issue is whether Yermack, the taxpayer, had any [property] interest in the proceeds” to which the federal tax lien might attach. Answering this question, the majority broadly asserts that the “nature and extent of the taxpayer’s property interest is a matter of state law,” (citing Avco Delta Corp. Canada Ltd. v. United States, 459 F.2d 436, 440 (7th Cir.1972)) (emphasis added) and that “§ 6321 ‘[creates no property rights but] merely attaches consequences, federally defined, to rights created under state law.’ ” (Quoting U.S. v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958)). From this premise, the majority, relying on Hyde, but without a thorough analysis, concludes that: (1) CME priority rules (the rules of a private organization) determine the attributes of Yermack’s property rights in the proceeds from the sale of his seat on the exchange; and that (2) under those rules, the property interests of a holder of an exchange seat are limited to an interest in those proceeds remaining after satisfaction of clearinghouse member claims. Thus, it is said that Yermack has no “property interest” in such proceeds to which a federal tax lien could attach.
Initially, I am disturbed by the majority’s somewhat freewheeling leap in logic from the questionable premise that for federal tax purposes, state property law “determine[s] the nature of the legal interest which the taxpayer had in the property sought to be reached,” Avco, 459 F.2d at 440, to the conclusion that a private organization such as the CME has the power to promulgate rules that essentially redefine the attributes of “property” so as to defeat a federal tax lien. This is the result of the court’s holding today. Under Illinois judgment lien law, a membership on the CME has many of the attributes of a traditional “property interest” and is considered “intangible personal property” of the seat-holder. See In re: Rockford, 91 Ill.App.3d 769, 777, 46 Ill.Dec. 943, 949-50, 414 N.E.2d 1096, 1102-03 (1980); Nelson v. Board of Trade, 58 Ill.App. 399, 414 (1895) (membership on the Chicago Board of Trade is “property” with a “regular pecuniary market value.”). But nothing in either federal or Illinois law authorizes the CME to alter or redefine that interest in order to avoid a federal tax lien. Nevertheless, the holding today is that a private exchange may set rules that define the extent of a seatholder’s property interest so as to avoid the attachment of a federal tax lien. Although the majority downplays the impact of its ruling, the logical extension of this reasoning is that secured parties could legitimately defeat the federal priority scheme merely by privately contracting to enact rules, bylaws, and/or procedures that redefine an ordinary security interest as an “incident of ownership.” Furthermore, even if the majority opinion is strictly limited to allowing only state property law to determine the attributes of a creditor's legal interest in the taxpayer’s property, see Avco, 459 F.2d at 440, a serious danger to the authority of the federal tax lien system still exists: state legislators might conceivably attempt, with the urging of private interest groups, a formalistic redefinition of state law to divest the taxpayer of “property rights” in order to give preference to a particular creditor. Other courts, recognizing this precise danger, have pointed out that the Supremacy Clause of the United States Constitution very properly enters the picture when state law (or private contracts) purport to so redefine the attributes of property in derogation of the federal priority scheme. See, e.g., Crocker National Bank v. Trical Manufacturing Company, 523 F.2d 1037, 1039 n. 2 (9th Cir.1975) (“[t]he state definition of property interests ... is simply the definition of the relationship of conflicting parties with regard to the same piece of property. The *1360tax lien law does the same thing. So long as the state recognizes some rights in relation to the property in the taxpayer, the Supremacy Clause enters to give the government whatever priorities Congress has deemed proper.”). Thus, while a state statute (or an exchange’s rules) may say the taxpayer has “no interest,” I believe a federal question remains as to whether or not merely saying so operates to defeat a federal tax lien. Justice Harlan, dissenting in Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960), and U.S. v. Durham Lumber Co., 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960), makes this point most cogently in a case where a state law, in an effort to give preference to subcontractors when a claim is made against the owner of a project, purported to redefine the property rights of a general contractor in claims against the owner. Justice Harlan stated:
“I cannot see how it makes any difference, for purposes of the federal tax-lien statute, whether state law purports to prefer subcontractors over the general contractor and parties claiming through him by giving the subcontractors a lien on the general contractor’s right of action against the owner or by giving them a prior right to collect the debt itself In both instances, the owner is under a contractual duty to pay the general contractor and the latter is under a contractual duty to pay the subcontractors. In both instances, the subcontractors are attempting to satisfy their claims against the general contractor. And in both instances, they are seeking to satisfy themselves by claiming precisely the same thing — a prior right in the proceeds of the debt which arises by virtue of the contractual relationship between the owner and the general contractor. In neither instance can the subcontractors collect more than that to which the subcontract entitles them, and in neither can the owner be required to pay more than that to which the main contract obligates him. If federal law requires that subordination of the general contractor’s interest be ignored in the one instance, it does so equally in the other.
The Bess case does not require a contrary conclusion. That case held only that while a federal tax lien attached to the cash surrender value of a life insurance policy owned by the taxpayer, it did not attach to the proceeds paid on his death, because under state law he had no right to such proceeds during his life. There was no reason under those circumstances why state property concepts should not control. To read that case as standing for the proposition that such concepts must also be controlling in cases such as these defeats the rule that ‘[t]he relative priority of the lien of the United States for unpaid taxes is ... always a federal question to be determined finally by the federal courts.’ United States v. Acri, 348 U.S. 211, 213, 75 S.Ct. 239, 241, 99 L.Ed. 264 [1955], It is one thing to say, as the Court did in Bess, that the federal interest in uniform application of federal tax liens does not require, as a general rule, that state property concepts be disregarded. It is quite another to permit such concepts to control the extent of a federal lien’s application in situations indistinguishable from those where the Court has in fact, rightly or wrongly, enforced a uniform federal rule. Given federal supremacy in this field, it surely cannot be that the federal courts may not appraise for themselves the true impact of state-created rights upon the priority of federal tax liens within the criteria established by this Court. Cf. Carpenter v. Shaw, 280 U.S. 363, 367, 50 S.Ct. 121, 122, 74 L.Ed. 478 [1930]; City of Detroit v. Murray Corporation, 355 U.S. 489, 492, 78 S.Ct. 458, 460, 2 L.Ed.2d 441 [1958]. To recognize the substantial equivalence of the situations is not to create a new rule of federal property law but to require an evenhanded application of an already established one.”
363 U.S. at 517-21, 80 S.Ct. at 1286-87 (emphasis added) (footnotes omitted).
In this era of fiscal responsibility due to a national debt that is beyond comprehension, the public’s interest in collecting over*1361due taxes is greater than ever before. The federal tax lien laws were passed with this goal in mind, and with the assumption that the general tax lien outranks all competing interests in the taxpayer’s property. See Young, Priority of the Federal Tax Lien, 34 U.Chi.L.Rev. 723 (1967). Hence, while state property concepts should not be disregarded, we must be extremely vigilant not to allow either state law or private parties to circumvent these important federal policies by attempting to formalistically redefine and codify through rules, regulations, and/or bylaws an ordinary security interest as an incident of property ownership, thereby defeating a valid tax lien that would otherwise take priority. Not only does the Supremacy Clause prohibit such a result, but to allow state law (or private parties) to provide for varying definitions of a taxpayer’s ownership interests would mean that subsequent cases must turn on the elusive distinction between diminishing a greater property interest (by way of a “lien” or security interest) and initially conferring a lesser one (by limiting the taxpayer’s “property interest”). Dubious distinctions of this nature should never be allowed to emasculate the priorities embodied in the federal tax lien statute. Therefore, in light of the strong federal policies implicated by this decision, I believe that it may well be time for the Supreme Court to reexamine its decision in Hyde — holding that the priority rules of an exchange constitute incidents of the seatholder’s property rights. In any event, I am convinced that the majority’s opinion must not be read to extend beyond the specific facts of this case.