Construction Alternatives, Inc., In re

• Decision Date: 17 September 1993
• Docket Number: No. 92-3961,92-3961
• Citation: 2 F.3d 670
• Parties: -5833, 93-2 USTC P 50,569 In re CONSTRUCTION ALTERNATIVES, INC., Debtor. INDIANA LUMBERMENS MUTUAL INSURANCE COMPANY, INC., Plaintiff-Appellant, v. CONSTRUCTION ALTERNATIVES, INC.; United States of America, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 670

2 F.3d 670

72 A.F.T.R.2d 93-5833, 93-2 USTC P 50,569

In re CONSTRUCTION ALTERNATIVES, INC., Debtor INDIANA LUMBERMENS MUTUAL INSURANCE COMPANY, INC., Plaintiff-Appellant, v. CONSTRUCTION ALTERNATIVES, INC.; United States of America Defendants-Appellees.

No. 92-3961.

United States Court of Appeals Sixth Circuit.

Argued June 17, 1993.

Decided Aug. 10, 1993.

Rehearing and Suggestion for Rehearing

En Banc Denied Sept. 17, 1993.

David C. Olson (briefed), Vincent E. Mauer, Mark H. Klusmeier (argued), Frost & Jacobs, Cincinnati, OH, for Indiana Lumbermens Mut. Ins. Co.

Gregory R. Wilson (argued and briefed), Cincinnati, OH, for Construction Alternatives, Inc.

Tamara S. Heckman, U.S. Dept. of Justice, Tax Div., Gary R. Allen, Acting Chief (briefed), William S. Estabrook, Robert L. Baker (argued), U.S. Dept. of Justice, Appellate Section, Tax Div., Washington, DC, Terry Serena, Cincinnati, OH, for U.S.

Before: KEITH and JONES, Circuit Judges, and BROWN, Senior Circuit Judge.

BAILEY BROWN, Senior Circuit Judge.

Appellant Indiana Lumbermens Mutual Insurance Company ("Lumbermens") appeals the judgment of the district court affirming the decision of the bankruptcy court. Lumbermens contends that the bankruptcy court and district court erred in concluding that the Internal Revenue Service ("IRS") had a lien and that this lien gave it priority to the proceeds of a construction contract that the debtor-taxpayer, Construction Alternatives, Inc. ("CA"), received from a project on which Lumbermens paid as C.A.'s surety. For the reasons stated below, we AFFIRM the district court.

I

On May 16, 1990, the debtor, CA, an Ohio corporation, entered into a contract with the Forest Hills, Ohio School District ("School District") to remove asbestos from four of its schools. To obtain the contract, CA was required, under Ohio law, to supply a surety bond to assure performance of its obligations under the contract and to assure that it would pay the subcontractors, suppliers, and laborers that provided material and labor to the project. Lumbermens had issued a surety bond on April 6, 1990, and the bond was submitted to the School District along with CA's bid.

Pursuant to tax assessments made against CA for unpaid taxes, the IRS filed a notice of tax lien against CA on May 14, 1990 in the amount of $13,146.61, and, on August 20, 1990, the IRS filed a second notice of tax lien against CA for the additional amount of $30,194.90. ¹ The next day, August 21, 1990, CA filed a petition for relief under Chapter 11 of the Bankruptcy Code.

On August 21, CA had completed all of its work on the asbestos removal project and was due to receive its final progress payment; however, CA had not paid all of its bills arising from the project. Pursuant to its obligation on the surety bond, Lumbermens paid at least two of the unpaid subcontractors or suppliers on the project, but the record does not reflect when or how much it paid them. ²

At the time that CA filed its bankruptcy petition, CA and the School District had not yet agreed on the final amount due on the contract, although, as stated, the work was completed. On September 4, 1990, however, two weeks after CA filed its bankruptcy petition, CA and the School District agreed that $39,705 was the correct amount due. On September 6, 1990, CA filed a turnover complaint in bankruptcy court, seeking to have the $39,705 turned over to CA as the debtor-in-possession, and to have the validity and extent of any claims to the funds adjudicated. The bankruptcy court entered a turnover order on September 27, 1990, and the School District paid over the $39,705 to a cash collateral account established for the purpose of holding this final payment on the contract (referred to hereinafter as the "Fund"). The order provided that any party that wished to assert a claim to the Fund would be required to file an answer or the claim would be lost. Lumbermens and the IRS then filed answers.

Thereafter, CA filed a motion for partial summary judgment, alleging that no claimant to the Fund had a lien superior to the IRS' lien, that the amounts owed to the IRS exceeded the balance of the Fund, and, therefore, the IRS was entitled to the whole Fund. Lumbermens also filed a motion for partial summary judgment, asserting that CA holds the Fund in trust for Lumbermens' benefit; therefore, it argued, CA only has a legal interest in the Fund while Lumbermens has the equitable interest; thus, it contended, its equitable interest had never become part of the bankruptcy estate and had never been subject to the federal tax liens. Lumbermens also argued that it has an equitable lien on the Fund, through subrogation to the rights of the School District and the suppliers and subcontractors that it paid, that is superior to the IRS' lien. Last, Lumbermens contended that it has a lien superior to any that the IRS might have pursuant to 26 U.S.C. Sec. 6323(c) (1988).

On September 30, 1991, the bankruptcy court entered an order granting CA's motion for partial summary judgment and denying Lumbermens' motion. The court rejected Lumbermens' contention that CA held the Fund in trust for Lumbermens, reasoning that no express trust had been created in the suretyship agreement and that no constructive trust arose by operation of law or fact; therefore, it held, the Fund was property of CA's bankruptcy estate to which the tax lien had attached. It also held that Lumbermens had no equitable lien or interest in the Fund. The district court affirmed the bankruptcy court, and Lumbermens then appealed to this court.

Before this court, it is the position of the IRS that it has a lien on the Fund and that Lumbermens has no interest in the Fund. It is the position of Lumbermens that it has an equitable lien or beneficial interest in the Fund and that the IRS has no lien. It is Lumbermens' alternative position that, even if the IRS has a lien, Lumbermens' lien or interest has priority over the lien of the IRS.

II

This court reviews de novo the decision of the district court reviewing a grant of summary judgment by the bankruptcy court. Stephens Indus., Inc. v. McClung, 789 F.2d 386, 391 (6th Cir.1988).

III

Lumbermens first contends on appeal that the bankruptcy court erred in granting summary judgment to CA on the theory that the IRS has a valid lien because, it contends, CA has no interest in the Fund to which a tax lien could attach. This is so, Lumbermens contends, because CA had not, when it filed its Chapter 11 petition, satisfied all of the requirements of the contract inasmuch as it had not complied with certain provisions of Ohio law governing contracts with the state and with certain provisions in the contract between CA and the School District requiring CA to pay its subcontractors and materials suppliers. It also contends that, though CA had completed the work when it filed the Chapter 11 petition, CA has no interest in the Fund because CA and the School District had not agreed on the final amount due on the contract at the time the bankruptcy petition was filed. Thus, Lumbermens argues, since CA did not have the right, at the time CA filed its bankruptcy petition, to receive the final payment, CA has no property interest in the final payment to which a tax lien could have attached.

The issue we must initially decide, therefore, is whether CA has an interest in the Fund to which a tax lien could attach. A tax lien arises "upon assessment and attaches to 'all property and rights to property, whether real or personal, belonging to [the taxpayer]' including property which the taxpayer subsequently acquires." United States v. Safeco Ins. Co. of Am., 870 F.2d 338, 340 (6th Cir.1989) (quoting 26 U.S.C. Sec. 6321 (1988)) (alteration in original). State law determines what rights a taxpayer possesses in property; however, federal law determines whether those state-created rights are "property" or "rights to property" under Sec. 6321. Id. It is settled that a tax lien can attach to "a taxpayer's interest in property regardless of whether that interest is less than full ownership or is only one among several claims of ownership." Id. at 341. "Unresolved questions concerning the ultimate ownership of the property will not prevent provisional attachment of a federal tax lien." Id.

In the case at bar, it is undisputed that the work on the project was complete at the time that CA petitioned for bankruptcy. There were several bookkeeping and administrative matters, pursuant to state law and CA's contract with the School District, to be completed and several subcontractors to be paid, but CA owed nothing to the School District, ³ and therefore, no payments to the School District were required or other expenses incurred to perfect CA's claim to the final progress payment. Thus, we conclude that CA had earned the right to receive its final progress payment, and, under the principles stated above, we hold that the government has two valid tax liens on the Fund. See J.A. Wynne Co. v. R.D. Phillips Constr. Co., 641 F.2d 205, 208-09 (5th Cir.1981). The question to which we now turn is whether Lumbermens also has a lien on the Fund, and if so, whether that lien is superior to the tax liens.

IV

Lumbermens contends that as a surety obligated to pay any unpaid contractors, laborers, or suppliers on the project, it has an equitable lien on the Fund, to the extent of its losses, through subrogation to the rights of the suppliers, laborers, and contractors that it paid in CA's stead, and also through subrogation to the rights of the School District. Citing Western Casualty & Surety Co. v. Brooks, 362 F.2d 486 (4th Cir.1966), a Fourth Circuit case applying Ohio law, it contends that its equitable lien relates back to the date the surety bond was issued.

The nature of the surety's interest is ascertained by reference to state law. Western Casualty & Surety Co. v. Brooks, 362 F.2d 486, 490 (4th Cir.1966); see Safeco, 870 F.2d at 341. All part...