U.S. v. Dishman Independent Oil, Inc.

• Decision Date: 31 January 1995
• Docket Number: No. 93-6246,93-6246
• Citation: 46 F.3d 523
• Parties: -690 UNITED STATES of America, Plaintiff-Appellant, v. DISHMAN INDEPENDENT OIL, INC.; Penny Oil Corporation; Ronnie Messer; Kings Construction Company; Corbin Chemical Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 523

46 F.3d 523

75 A.F.T.R.2d 95-690

UNITED STATES of America, Plaintiff-Appellant, v. DISHMAN INDEPENDENT OIL, INC.; Penny Oil Corporation Ronnie Messer; Kings Construction Company Corbin Chemical Company, Defendants-Appellees.

No. 93-6246.

United States Court of Appeals Sixth Circuit.

Argued Nov. 15, 1994.

Decided Jan. 31, 1995.

David Middleton, Asst. U.S. Atty., Office of the U.S. Atty., Lexington, KY, Stuart M. Fischbein, Trial Atty., U.S. Dept. of Justice, Tax Div.; William S. Estabrook, Robert L. Baker (argued), and Gary R. Allen, Acting Chief (briefed), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, DC, for plaintiff-appellant.

L. Lee Tobbe (argued and briefed), Monticello, KY and Julius Rather, Lexington, KY, for defendants-appellees.

Before: RYAN and BATCHELDER, Circuit Judges; and EDGAR, District Judge ^*

BATCHELDER, Circuit Judge.

Plaintiff-Appellant, United States of America, appeals the ruling by the bankruptcy court, as affirmed by the United States District Court for the Eastern District of Kentucky, granting Defendant-Appellee, Dishman Independent Oil, Inc., its motion for summary judgment. The bankruptcy court order held that appellee Dishman's prejudgment attachment lien was entitled to priority over the federal tax lien filed by the Internal Revenue Service (IRS). For the reasons stated below, we reverse the decision of the bankruptcy court, as affirmed by the district court.

I.

The facts in this case are not in dispute. Defendant-Appellee Dishman Independent Oil, Inc. (Dishman) initiated suit in Kentucky state court by suing Penny Oil Corporation, Ron Messer, Edna Messer, Corbin Chemical Company, and Kings Construction Company (hereafter the "debtors") in the sum of $365,522.25 for amounts allegedly due on the sale of petroleum products from Dishman to the debtors. In pursuit of its suit against the debtors, Dishman secured a prejudgment attachment against the property of Penny Oil Corporation and Ron and Edna Messer on January 11, 1991. On January 14, 1991, the prejudgment attachments were served and personal property of the debtors was seized by Dishman. Since January 14, 1991, Dishman has been in possession of the debtors' property which consists of diesel fuel, gasoline, cash, checks, semi-tractors and trailers, bulk petroleum storage tanks, and fuel blending pumps.

As a result of its own indebtedness to its creditors, Dishman subsequently filed a petition for relief under Chapter 11 of the Bankruptcy Code. Dishman's suit against the debtors was therefore moved to the bankruptcy court as an adversary hearing. A trial was held on February 27, 1992, which resulted in an April 27, 1992 judgment in favor of Dishman for $365,522.25 with service charges.

During the time period between Dishman's attachment and seizure of the debtors' property (January 14, 1991) and the judgment in favor of Dishman (April 27, 1992), a series of events took place which gave rise to the issue in this appeal. The first significant event during that period was the postponement of the trial in Dishman's case against the debtors, which was originally scheduled to go to trial on November 22, 1991. ¹ However, immediately prior to that date, the defendants Ron and Edna Messer assigned all of their right, title, and interest in the attached property to the IRS. As a result, the IRS was granted a continuance, over the objection of Dishman, specifically to prepare for trial in its new role as defendant and owner of the attached property.

The second significant event occurred on January 1, 1992, nearly one year after Dishman's attachment of the debtors' property, at which time the IRS assessed the debtors for unpaid excise taxes, interest, and penalties. The IRS consequently filed a tax lien against the debtors on January 29, 1992, approximately three months before Dishman was granted judgment by the bankruptcy court on April 27, 1992. The IRS tax lien seeks to collect $2,851,910.09 which is owed to the United States by the debtors for unpaid taxes from the third quarter of 1987 through the third quarter of 1988.

On May 29, 1992, the IRS was permitted to intervene in the proceeding to seek a determination by the court that its federal tax lien was valid and prior to any interest held by Dishman in the debtors' property. The IRS eventually filed a motion for summary judgment which the bankruptcy court denied.

Dishman then filed its own motion for summary judgment against the IRS. The bankruptcy court granted Dishman's motion for summary judgment, after finding that Dishman's attachment lien was perfected by the judgment entered in its favor on April 27, 1992, and was therefore prior to the federal tax lien against the debtors. In re Dishman Indep. Oil Corp., Nos. 91-00057, Adv. No. 91-0078, 1993 WL 110032 (Bankr.E.D.Ky. Jan. 8, 1993). The district court affirmed the bankruptcy court's order granting Dishman's motion for summary judgment.

This timely appeal followed.

II.

Under the Internal Revenue Code ("Code"), the IRS obtains a lien on the property of a taxpayer ² when that taxpayer fails or refuses to pay his taxes after assessment, notice, and demand. I.R.C. Secs. 6321 & 6322. The lien attaches to all property and rights to a taxpayer's property, including property subsequently acquired by the taxpayer. See Glass City Bank v. United States, 326 U.S. 265, 267, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945); United States v. Safeco Ins. Co., 870 F.2d 338, 340 (6th Cir.1989). The broad language of the Code "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce, 472 U.S. 713, 720, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985). In turn, Sec. 6323(a) of the Code gives priority to these federal tax liens over most other creditors of the taxpayer-debtor. The priority allotted to IRS tax liens by Sec. 6323(a) only allows such federal tax liens to be defeated by a narrow category of creditors:

(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

I.R.C. Sec. 6323(a) (emphasis added).

The IRS asserts that its tax lien against the debtors has priority over Dishman's attachment lien on debtors' property because Dishman does not fall within the category of creditors protected by Sec. 6323(a). According to the IRS, its tax lien was filed before Dishman obtained a final judgment, therefore, Dishman was not a judgment lien creditor until after the tax lien was filed. The IRS further argues that Dishman did not hold a perfected security interest in the attached property because a prejudgment attachment lien is merely an unperfected, inchoate interest in the property.

A.

The issue before this court is whether a state attachment lien has priority over a federal tax lien if the property subject to the liens was attached prior to the time the federal tax lien was filed, although final judgment on the attachment lien was not handed down until after the federal tax lien was filed. It is undisputed that when a federal lien is involved, the relative priority between competing liens is a question of federal law determined by the principle "the first in time is the first in right." United States v. City of New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954); State Bank of Fraser v. United States, 861 F.2d 954, 963 (6th Cir.1988). Nonetheless, the task of determining what constitutes a perfected lien is usually governed by state law. United States v. Bess, 357 U.S. 51, 55-56, 78 S.Ct. 1054, 1057-58, 2 L.Ed.2d 1135 (1958); see also United States v. Brosnan, 363 U.S. 237, 240, 80 S.Ct. 1108, 1110-11, 4 L.Ed.2d 1192 (1960); United States v. Waddill, Holland & Flinn, Inc., 323 U.S. 353, 356, 65 S.Ct. 304, 306, 89 L.Ed. 294 (1945). This usual rule is altered, however, when one of the competing liens is a federal tax lien. National Bank of Commerce, 472 U.S. at 727, 105 S.Ct. at 2927-28; see also In re Construction Alternatives, Inc., 2 F.3d 670, 674 (6th Cir.1993); In re Terwilliger's Catering Plus, Inc., 911 F.2d 1168, 1176 (6th Cir.1990), cert. denied sub nom., Ohio, Dep't of Taxation v. IRS, 501 U.S. 1212, 111 S.Ct. 2815, 115 L.Ed.2d 987 (1991). According to the Supreme Court, "it is a matter of federal law when such a [state] lien has acquired sufficient substance and has become so perfected as to defeat a later-arising or later-filed federal tax lien." United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88, 83 S.Ct. 1651, 1655, 10 L.Ed.2d 770 (1963) (footnote omitted). "Consequently, state-law limitations upon the ability of general creditors to reach a taxpayer's property do not affect the attachment of federal tax liens because the state-law consequences flowing from a property interest properly defined under state law 'are of no concern to the operation of the federal tax law.' " Safeco Ins. Co., 870 F.2d at 340-41 (quoting National Bank of Commerce, 472 U.S. at 723, 105 S.Ct. at 2926).

Accordingly, the Supreme Court has determined a state lien to be "perfected" only when " 'the identity of the lienor, the property subject to the lien, and the amount of the lien are established.' " United States v. McDermott, --- U.S. ----, ----, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993) (quoting City of New Britain, 347 U.S. at 84, 74 S.Ct. at 369); see also Treas. Reg. Sec. 301.6323(h)-1(g) (1976). The IRS contends, therefore, that Dishman's lien was not perfected until April 27, 1992, when the bankruptcy court judgment determined the amount of the lien and the property subject to the lien--nearly three months after the federal tax lien was filed. Consequently, the IRS argues that regardless of whether Dishman's...