CITIZENS STATE BANK & TRUST v. MOTOR SERVICE CO.

• Decision Date: 20 October 1995
• Docket Number: No. 94-4118-SAC.,94-4118-SAC.
• Citation: 902 F. Supp. 1435
• Court: U.S. District Court — District of Kansas
• Parties: CITIZENS STATE BANK & TRUST CO., Plaintiff, v. MOTOR SERVICE CO., INC., aka The Motor Service Company, aka The Motor Service Company, Inc., aka Motor Service Company, aka Motor Service Co.; L & M Automotive, Inc.; First National Bank and Trust Company of Salina, Kansas, aka Sunflower Bank; Diversified Automotive Distributors, Inc.; United States of America, acting By and Through the Internal Revenue Service; and Saline County, Kansas, Defendants.

902 F. Supp. 1435

CITIZENS STATE BANK & TRUST CO., Plaintiff, v. MOTOR SERVICE CO., INC., aka The Motor Service Company, aka The Motor Service Company, Inc., aka Motor Service Company, aka Motor Service Co.; L & M Automotive, Inc.; First National Bank and Trust Company of Salina, Kansas, aka Sunflower Bank; Diversified Automotive Distributors, Inc.; United States of America, acting By and Through the Internal Revenue Service; and Saline County, Kansas, Defendants.

No. 94-4118-SAC.

United States District Court, D. Kansas.

October 20, 1995.

John Sherman, Svaty, Sherman & Hoffman, Ellsworth, KS, for plaintiff.

Norman R. Kelly, Norton, Wasserman, Jones & Kelly, Salina, KS, Howard S. Levitan, Howard S. Levitan P.A., Prairie Village, KS, Steven D. Horak, Overland Park, KS, Tanya S. Wilson, Office of United States Attorney, Topeka, KS, and Kathy M. Davis, Kansas Department of Revenue, Topeka, KS, for defendants.

MEMORANDUM AND ORDER

CROW, District Judge.

This is a foreclosure action brought by the plaintiff, Citizens State Bank & Trust, seeking to foreclose its mortgage on real estate and its security interest in personal property of the defendants, Motor Service Co., Inc., and L & M Automotive, Inc. The United States of America, acting by and through the Internal Revenue Service claims a lien for unpaid taxes on the real and personal property of the Motor Service Co. and L & M Automotive. Diversified Automotive Distributors, Inc. claims a lien on the inventory the Motor Service Co. and L & M Automotive.

In the pretrial order, the parties appear to stipulate to most of the essential facts of this case. Apparently the remaining dispute pits the United States against Diversified Automotive Distributors¹ in a contest for priority in the inventory of the Motor Service Co. and L & M Automotive.

This case comes before the court upon the United States' motion for summary judgment (Dk. 25). The United States argues under the 45-day rule, see 26 U.S.C. § 6323(c),² it has a first lien priority on all inventory acquired by Motor Service Co. and L & M Automotive since the 46th day after the filing of the tax liens against those entities. Diversified Automotive Distributors filed a four page response, noting that it has continued to supply Motor Service Co. with inventory, thereby enabling Motor Service Co. to remain in business. Diversified Automotive Distributors apparently contends that because it has a perfected purchase money security interest in inventory, see K.S.A. 84-9-312, and because all of the parties, including the United States, understood that it was an ongoing supplier keeping Motor Service Co. in business, it would be unfair to give the United States priority. Diversified Automotive Distributors' brief states that "to rule other than to give DIVERSIFIED/GPI its priority would destroy the reality of the relationship understood by all parties including the United States."

Uncontroverted Facts

Diversified Automotive Distributors claims first priority to the inventory of Motor Service Co. and L & M Automotive based upon a subordination agreement between itself and Citizens State Bank & Trust Co. and a security agreement dated August 11, 1989. Pursuant to the subordination agreement between Diversified Automotive Distributors and Citizens State Bank, Diversified Automotive Distributors was granted a priority position ahead of Citizens on the first $75,000.00 of inventory belonging to Motor Service Co. and L & M Automotive. Diversified Automotive Distributors perfected its security agreement against Motor Service Co. and L & M Automotive by the filing of financing statements with the Kansas Secretary of State on November 17, 1989, UCC Nos. 1504709 and 1504710, respectively. Diversified Automotive Distributors is, and has been since 1989, a supplier of inventory for sale in the ordinary course of business to Motor Service Co. and L & M on a monthly billing basis. Diversified Automotive Distributors required Motor Service Co. and L & M Automotive to pay for the inventory purchased from it in each calendar month by the 10th of the following month. Diversified Automotive Distributors apparently claims that it has a purchase money security interest in the inventory.

The United States claims lien priority based upon the filing dates of its tax liens against Motor Service Co. and L & M Automotive, Inc. The United States' tax liens against Motor Service Co. were perfected as follows:

Lien No. XXXXXXXXX is the Office of the Register of Deeds in Saline county, Salina, Kansas, in Book 153, Page 322 in the amount of $29,433.04 on September 16, 1992. Lien No. XXXXXXXXX in the Office of the Secretary of State for the State of Kansas, Topeka, Kansas UCC No. 1835876 in the amount of $29,433.04 on September 22, 1992.

The United States' tax liens against L & M Automotive, Inc. were perfected as follows:

Lien No. XXXXXXXXX in the Office of the Register of Deeds in Saline County, Salina, Kansas, in Book 151, Page 744 in the amount of $27,499.78 on January 9, 1992. Lien No. XXXXXXXXX in the Office of the Secretary of State for the States of Kansas, Topeka, Kansas UCC No. 1755268 in the amount of $27,499.78 on January 14, 1992.

The federal liens are valid and existing liens of the United States. The balance due and owing the United States on the federal tax liens from Motor Service Co. as of February 15, 1995, was $53,836.18. Interest and penalties accrue at approximately $12.40 per day. The balance due and owing the United States on the federal tax liens from L & M Automotive as of February 15, 1995, was $39,749.50. The interest and penalties accrue at approximately $8.91 per day.

The United States, Internal Revenue Service, claims it is entitled to a first and prior lien on all inventory and accounts receivable acquired by Motor Service Co. and L & M Automotive after the 45th day after the filing of the federal tax liens pursuant to 26 U.S.C. §§ 6321, 6322 and 6323.

Analysis

Because neither party cited the authority relevant for determining the priority of the competing creditors, the court believes that the United States' motion is not ripe for consideration. By implication, Diversified Automotive Distributors contends that its purchase money security interest in inventory has priority over the United States' tax lien. The United States' memorandum in support of its motion for summary judgment does not address the impact, if any, of such a possibility. The United States' motion rests solely on the conclusion that under the 45-day rule, it has priority.

In Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978) the Supreme Court stated:

The Code specifically subordinates tax liens to the interests of certain others in the property, generally including those with a perfected security interest in the property. For example, the Code and established decisional principles subordinate the tax lien to perfected security interests arising before the filing of the tax lien, to certain perfected security interests in certain collateral, including inventory, arising after the tax lien filing when pursuant to a security agreement entered into before the filing, and to collateral which is the subject of a purchase-money mortgage regardless of whether the agreement was entered into before or after filing of the tax lien. FN23

23. Decisional law has long established that a purchase-money mortgagee's

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