Bremen Bank and Trust Co. v. U.S., 96-2433

• Citation: 131 F.3d 1259
• Decision Date: 19 December 1997
• Docket Number: No. 96-2433,96-2433
• Parties: -8389, 98-1 USTC P 50,116 BREMEN BANK AND TRUST COMPANY, Plaintiff--Appellant, v. UNITED STATES of America, Defendant--Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1259

131 F.3d 1259

80 A.F.T.R.2d 97-8389, 98-1 USTC P 50,116

BREMEN BANK AND TRUST COMPANY, Plaintiff--Appellant, v. UNITED STATES of America, Defendant--Appellee.

No. 96-2433.

United States Court of Appeals Eighth Circuit.

Submitted Jan. 16, 1997.

Decided Dec. 19, 1997.

Michael J. McKitrick, St. Louis, MO, argued (Lawrence P. Beilenson, St. Louis, MO, on the brief), for appellant.

Thomas J. Sawyer, Dept. of Justice, Washington, DC, argued (Bruce R. Ellisen, Theodore M. Doolittle, Washington, DC, on the brief), for appellee.

Before WOLLMAN, FLOYD R. GIBSON and HANSEN, Circuit Judges.

HANSEN, Circuit Judge.

This is a lien priority dispute between a perfected security interest held by Bremen Bank and Trust Company (the Bank) and a federal tax lien. The Bank filed this action, seeking the return of funds levied and collected by the Internal Revenue Service (IRS) pursuant to a federal tax lien against Ingredient Transportation Company (Ingredient). The Bank claims the IRS's levies against Ingredient's contractual customers were wrongful because the tax lien was junior to the Bank's prior perfected security interest in the proceeds of Ingredient's contract rights. In addition, the Bank claims the IRS wrongfully levied money in Ingredient's checking account at the Bank, because that money was subject to the Bank's automatic right of setoff under Missouri law. The district court rejected the Bank's claims and granted summary judgment to the government. We affirm in part and reverse and remand in part.

I.

Ingredient, the debtor-taxpayer in this case, was a trucking company that transported general commodities. Ingredient had entered into written contracts with three of its customers. These contracts contained terms concerning shipping, risk of loss, price, and payment. In all three contracts, the price of shipping was to be determined by Ingredient's attached schedule of rates, subject to reasonable adjustments for Ingredient's increased costs, and payment was due upon the completion of Ingredient's performance. Two of the contracts were minimum requirements contracts under which Ingredient's customers, Interstate Brands Corp. and Mederer Corp., were required to tender to Ingredient a minimum quantity of goods to be shipped during the contract period. These contracts were effective for a term of one year and were automatically renewed after that from year to year, subject to a termination by either party upon 30 days' prior notice. The third shipping contract was a three-year, exclusive rights agreement, under which the customer, Cargill, Inc., promised Ingredient the exclusive right to transport all of the bulk flour produced at one of Cargill's flour mills. Ingredient entered into all three of these agreements prior to July 6, 1993.

Ingredient had loan obligations to the Bank based upon several transactions. In September 1991, the Bank loaned Ingredient $30,000, represented by a promissory note. The Bank also loaned over $600,000 to American Lease Technology, Inc. (ALT), a Missouri Corporation related to Ingredient, in the fall of 1992. Soon thereafter, the Bank extended another loan to ALT for $12,027. Ingredient signed guarantees on the loans to ALT.

The Bank and Ingredient entered into security agreements on Ingredient's obligations to the Bank, including both Ingredient's direct obligation on the 1991 loan and the obligations under Ingredient's guarantee on the loans to ALT. The security agreements listed as pledged collateral Ingredient's accounts, contract rights, and other rights to payment. The Bank perfected the security agreements by properly filing financing statements on September 23, 1991; June 8, 1992; and June 10, 1992. All three financing statements give notice of the Bank's security interest in "all present and future accounts receivable, proceeds arising therefrom, chattel paper, contract rights, and general intangibles, however evidenced or acquired." (Appellant's App. at 19, 20, 28.) Thus, the Bank had a properly perfected security interest in Ingredient's contract rights and the proceeds arising therefrom, as well as Ingredient's present and future accounts receivable.

On July 6, 1993, the Internal Revenue Service (IRS) filed notice of a federal tax lien against Ingredient for unpaid federal employment taxes for the fourth quarter of 1992. In March 1994, IRS served notices of levy on the Bank, with whom Ingredient maintained a checking account, and on Ingredient's customers, including the three contractual customers discussed above. The levies required the Bank and the customers to turn over any property owned by or owed to Ingredient. On May 2, 1994, the IRS filed a second notice of federal tax lien for unpaid employment taxes for the tax periods after 1992, and proceeded to make additional levies. The IRS allocated the funds it obtained from the various levied sources either to the July 1993 lien or to the May 1994 lien. (See chart, Appellant's Br. at 10.)

The IRS collected $180,762 from all of its levies. Most of the money collected--including $89,450 from Interstate Brands Corp., $9,865 from Mederer Corp., and $6,374 from Cargill, Inc.--was collected from invoices for services rendered by Ingredient and billed more than 45 days after the filing of the July 6, 1993, tax lien. A sum of $31,630.08, representing money Ingredient had actually received for services rendered and billed during that same period of time, was on deposit in Ingredient's checking account at the Bank when it was levied upon. The Bank surrendered the money in the account under protest.

The IRS eventually returned $100,696 out of the $180,762 to the Bank, because the Bank had a superior right under its perfected security interest to the levy proceeds which the IRS had allocated to the May 1994 tax lien. The IRS retained $80,067 pursuant to the July 1993 lien in satisfaction of Ingredient's outstanding employment tax balance for the fourth quarter of 1992. The Bank requested return of the $31,630.08 from Ingredient's checking account, which had been levied upon pursuant to the July 1993 lien. The Bank contended that Ingredient had no property rights in the checking account because of the Bank's automatic right of setoff. The IRS refused to return the money, contending that it had returned all but the amount to which it had a superior interest under its July 1993 lien.

The Bank filed suit against the United States for wrongful levy, seeking return of the amounts levied from Ingredient's contractual customers and the amount levied directly from Ingredient's checking account at the Bank. The Bank argued that the amounts collected from Ingredient's contractual customers stemmed from contract rights acquired by Ingredient before the July 1993 tax lien filing. Thus, the Bank argued, its security interest in Ingredient's contract rights, as well as in the identifiable proceeds from those contract rights, i.e., the amounts owed by Ingredient's customers to Ingredient for trucking services rendered, was superior to the government's tax lien. The Bank also argued that the levy against Ingredient's checking account was wrongful. The Bank further contended that the IRS could not justify its retention of money the IRS allocated to the July 1993 lien on the basis that it could have allocated the levies differently and then could have retained the entire amount owed pursuant to the July 1993 tax lien after returning the amount levied pursuant to the May 1994 lien. The Bank also asserted, under Missouri law regarding setoffs, that Ingredient had no cognizable property interest in the checking account funds, because the Bank had an automatic right of setoff upon Ingredient's default on its loan obligations to the Bank.

The district court granted summary judgment to the IRS. The court concluded that amounts due to Ingredient from its customers were accounts receivable, not proceeds of contract rights. Categorized as such, the collateral was subject to levy by the IRS. The district court further held that the dispute over the $31,630 in Ingredient's checking account was moot, because other valid levies independently generated enough money to satisfy Ingredient's $80,067 tax liability on the July 1993 lien. The Bank appeals.

II.

An innocent third party whose property has been confiscated by the IRS to satisfy another party's tax liability may sue for wrongful levy. See 26 U.S.C. § 7426(a)(1) (1994). To prevail, the third party must establish that there was an actual levy on the property, that the party has an interest or lien superior to the United States' interest in the property, and that the levy was wrongful. Id.

The Internal Revenue Code provides for a federal tax lien in favor of the government against any person who fails to pay federal taxes. 26 U.S.C. § 6321. This lien attaches to "all property and rights to property, whether real or personal, belonging to such person." Id. The tax lien arises automatically at the time of the IRS's assessment and continues until the liability is satisfied or becomes unenforceable due to a lapse of time. Id. § 6322. To be effective as against third parties, notice of the lien must be publicly filed pursuant to state recordation law.

When addressing disputes involving federal tax liens, the Supreme Court has held that the questions of whether a property interest exists and the precise nature of that interest are state-law issues, but the question of priority between conflicting interests is governed by federal law. See, e.g., Aquilino v. United States 363 U.S. 509, 513-14, 80 S.Ct. 1277, 1279-80, 4 L.Ed.2d 1365 (1960). Before 1966, the Internal Revenue Code itself did not specify any rules for priority contests between federal tax liens and state-created liens. United States v. Kimbell Foods, Inc., 440 U.S. 715, 720 n. 6, 99 S.Ct. 1448, 1454 n. 6, 59 L.Ed.2d 711 (1979). Therefore, the Supreme Court applied the common-law "principles that first in time is first in right...