Estate of Romani, In re

• Decision Date: 17 January 1997
• Citation: 547 Pa. 41,688 A.2d 703
• Parties: , 65 USLW 2501, 97-1 USTC P 50,327 In re: Estate of Francis J. ROMANI. Appeal of: The UNITED STATES of America.
• Court: Pennsylvania Supreme Court

Page 703

688 A.2d 703

547 Pa. 41, 65 USLW 2501, 97-1 USTC

P 50,327

In re: Estate of Francis J. ROMANI Appeal of: The UNITED STATES of America.

Supreme Court of Pennsylvania.

Argued Sept. 17, 1996.

Decided Jan. 17, 1997.

[547 Pa. 42] Robert L. Eberhardt, Pittsburgh, Jon Oppenheimer, for U.S.

Lawrence L. Davis, Ebensburg, for Francis Romani.

Before FLAHERTY, C.J., and ZAPPALA, CAPPY, CASTILLE, NIGRO and NEWMAN, JJ.

OPINION OF THE COURT

FLAHERTY, Chief Justice.

The United States appeals a judgment of the Superior Court which affirmed an order of the Court of Common Pleas of Cambria County granting a petition filed by the Estate of Francis J. Romani to transfer real estate in lieu of execution. We affirm. ¹

Francis J. Romani, who died on January 13, 1992, left an insolvent estate with debts greatly exceeding the value of the sole asset, a piece of real estate valued at $53,001.00. This real estate is burdened by a judgment lien and a federal tax lien. On January 25, 1985, a judgment lien was entered and properly revived against Mr. Romani in favor of Romani Industries, Inc. in the amount of $400,000. ² Subsequent to the entry of judgment against decedent, the Internal Revenue Service filed notice of a federal tax lien against the decedent for unpaid taxes and an unpaid civil penalty that, with interest, totaled $489,720.04.

The administrator of the Estate of Francis J. Romani filed a petition in the Court of Common Pleas of Cambria County to transfer the real estate in lieu of execution on behalf of the judgment creditor, Romani Industries, Inc., and the United States opposed the petition. Both parties claimed priority to the property. The lower court granted the administrator's request for relief, holding that the status of Romani Industries, Inc. as a first-in-time judgment lien creditor gave it priority over the government's subsequently filed tax lien. Order dated July 7, 1994, Court of Common Pleas of Cambria County, G.D. No. 11-94-14. The Superior Court affirmed per curiam. In re Estate of Francis Romani, 445 Pa.Super. 637, 664 A.2d 1064 (1995). This appeal followed.

The question presented is whether section 6323(a) of the Tax Lien Act, ³ 26 U.S.C. § 6323(a), ("section 6323"), limits the operation of section 3713(a)(1) of the federal insolvency statute, 31 U.S.C. § 3713(a)(1), ("section 3713"), as to tax debts. ⁴ Romani Industries, Inc. argues that its judgment lien has priority over a tax claim of the United States because, under section 6323, the holder of a properly entered judgment lien has priority over subsequently filed tax lien debts. The United States disagrees, arguing that it has an absolute priority under section 3713 to all proceeds remaining in an insolvent estate, regardless of the time of filing of the tax liens.

Section 6323 provides for a "first in time" priority to the rival lien in federal tax lien matters as follows:

Validity And Priority Against Certain Persons

(a) Purchasers, Holders of Security Interests, Mechanic's Lienors and Judgment Lien Creditors.--The lien imposed by section 6321 [a federal tax lien] 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.... ⁵

Tax liens have been authorized by predecessor tax lien statutes. See, Act of July 13, 1866, ch. 184, § 9, 14 Stat. 107. It was not until 1966 with the amendment of section 6323, however, that the statute specified priority rules to resolve conflicts between federal tax liens and rival liens. ⁶

Section 3713 provides for an absolute priority for federal tax claims in insolvency as follows:

Priority Of Government Claims

(a)(1) A claim of the United States shall be paid first when-

(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all the debts of the debtor.

The predecessor to section 3713 was Revised Statute § 3466, 31 U.S.C. § 191, which has been substantially unchanged since 1797. ("section 3466"). See, Act of March of March 3, 1797 ch. 20, § 5, 1 Stat. 515.

The Court has not decided the question presented. It has cautioned, however, that in considering whether other provisions of the tax lien act operated as implied exceptions to the insolvency statute, "[o]nly the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of section 3466." United States v. Emory, 314 U.S. 423, 433, 62 S.Ct. 317, 322-23, 86 L.Ed. 315, 325 (1941); ⁷ United States v. Key, 397 U.S. 322, 90 S.Ct. 1049, 25 L.Ed.2d 340 (1970). ⁸ In Key, the Court said that a reviewing court is to determine whether the statutes are facially inconsistent and, if so, whether the legislative history of the competing statute reflects a congressional intent to modify the effect of the insolvency statute. Id. at 324, 90 S.Ct. at 1051, 25 L.Ed.2d at 344 (1970). ⁹

The first issue is whether there is a plain inconsistency between the priority of section 6323 and the absolute priority granted the United States by section 3713. Here, the government's relative priority as a creditor differs depending on which section is applied. Section 6323 states that nonfederal claims that have been duly filed prior to the filing of the federal tax claim are valid as against federal tax claims. On the other hand, section 3713 gives an absolute priority to the United States against other creditors of insolvent debtors for tax liens regardless of when the tax lien was filed. We are constrained to find a facial inconsistency because, with respect to tax liens, section 6323 provides for a "first in time" priority while section 3713 gives absolute priority to the United States. ¹⁰

Since we have determined that the statutes are plainly inconsistent, we next address whether the Tax Lien Act of 1966 evidences a congressional intent that federal priorities in insolvency be limited in the tax area. We look to United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979) as the most recent expression of the Court on the policy considerations that underlie the question of whether the government in the tax arena is to be treated as an ordinary creditor or as a creditor with super-priority. In Kimbell Foods, the Court held that Congress intended that the "first in time is first in right" principle of section 6323 applied in federal government lending cases involving solvent debtors. ¹¹ The Court ruled that government lending agencies, such as the Small Business Administration, are to be afforded the same priority as private lenders under non-discriminatory state laws, absent a congressional directive to the contrary. 440 U.S. at 740, 99 S.Ct. at 1465, 59 L.Ed.2d at 731.

The Court articulated two reasons for its holding. First, Congress, by the passage of the Tax Lien Act of 1966, expressed its disapproval of "unrestricted federal priority" in tax matters. 440 U.S. at 738, 99 S.Ct. at 1463, 59 L.Ed.2d at 730. See, 26 U.S.C. §§ 6323(b), (c), (d), and (e). The Court explained that, prior to the 1966 law, it had formulated the "choate lien" test which modified the "first in time is first in right" idea by requiring that the nonfederal lien be sufficiently specific and perfected to overcome the priority of the United States in insolvency cases. 440 U.S. at 720, 99 S.Ct. at 1454, 59 L.Ed.2d at 719. ¹² The practical effect of the choateness test, the Court said, was that rival liens were defeated because they failed to pass its strict test. Id. ¹³ The Court concluded that the Tax Law of 1966 reflected congressional intent to disapprove unrestricted federal priority in tax matters ¹⁴ and to displace the "choateness" doctrine. 440 U.S. at 720 n. 6, 99 S.Ct. at 1454 n. 6, 59 L.Ed.2d at 719 n. 6. ¹⁵

Second, the Court explained that restrictions on federal tax lien priority are necessary to facilitate commercial stability and to avoid the frustration of expectations of superior lien holders. The Court recognized that federal lien priority undercuts the reliability of the notice filing system, which plays a crucial role in commercial dealings. 440 U.S. at 739 n. 42, 99 S.Ct. at 1464 n. 42, 59 L.Ed.2d at 731 n. 42. Prior creditors either have no trustworthy means of discovering the undisclosed security interest or, if they are aware of the federal lien, have to adjust their lending arrangements to protect against the stringent choateness requirements. Id. ¹⁶ Further, the Court said, considerable uncertainty would also result from the choateness approach because the development of priority rules on a case-by-case basis, depending on the types of competing liens involved, leaves creditors without a definite body of law they require in structuring sound business transactions. Id. For these reasons, the Court concluded, Congress intended that restrictions on federal tax lien priority exist.

Although Kimbell Foods involves the priority to be accorded a federal consensual loan where the debtor is solvent, and the case at bar involves the question of the priority to be accorded a federal tax lien where the debtor is insolvent, we believe that Kimbell Foods and other cases ¹⁷ provide guidance as to how the federal courts would resolve the case at bar. ¹⁸ Here, there is a plain inconsistency between the competing statutes. Also, the Tax Lien Act of 1966 evidences a congressional intent that federal priorities be limited in the tax area, regardless of whether the debtor is insolvent. Further, to hold otherwise would frustrate the congressional purpose by defeating in insolvency the very interests that were specifically protected against federal priority in non-insolvency situations. Finally, the grant of absolute federal priority in insolvency cases, as in solvency cases, would be destructive of commercial stability and would frustrate legitimate commercial expectations. We hold,...