Donald v. Madison Industries, Inc., 72-1879.

• Decision Date: 28 August 1973
• Docket Number: No. 72-1879.,72-1879.
• Citation: 483 F.2d 837
• Parties: Paul DONALD, Plaintiff-Appellant, v. MADISON INDUSTRIES, INC., a corporation, et al., Defendants, and The United States of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

483 F.2d 837 (1973)

Paul DONALD, Plaintiff-Appellant, v. MADISON INDUSTRIES, INC., a corporation, et al., Defendants, and The United States of America, Defendant-Appellee.

No. 72-1879.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted May 21, 1973.

Decided August 28, 1973.

COPYRIGHT MATERIAL OMITTED

Russ B. Anderson, Emporia, Kan., for plaintiff-appellant.

Roger K. Weatherby, Scott P. Crampton, Robert J. Roth, Meyer Rothwacks, Crombie J. D. Garrett, and Wesley J. Filer, Washington, D. C., for defendant-appellee.

Before LEWIS, Chief Judge, HOLLOWAY, Circuit Judge, and LARAMORE,^* Senior Judge.

LARAMORE, Senior Judge.

The question presented by this appeal involves the relative priority of a Federal tax lien and a private security interest to the proceeds from the sale of certain property of a taxpayer-debtor, Madison Industries. Resolution of this question devolves to an interpretation and application of section 6323(c) of the Internal Revenue Code of 1954, as amended.

To the extent relevant herein, the facts disclose that in 1966, Madison Industries (taxpayer) borrowed $40,000 from First National Bank of Madison, Kansas (First National). As collateral for the loan, taxpayer executed a "security interest" in

all inventory, accounts, machinery, equipment, finished products and products being manufactured. Also everything connected with said business in any way.

In November 1968, the 1966 First National note was transferred to Alliance Capital Corporation of Fort Worth, Texas (Alliance Capital). Because Alliance Capital extended additional credit to the taxpayer, a replacement promissory note and security agreement were executed granting Alliance Capital a security interest in the following items:

All items of personal property, wherever situated, including, but not limited to: cars, trucks, inventory, accounts receivable, equipment used in connection with manufacturing, tools, finished products, work in process, now owned or purchased as a replacement, or purchased as new equipment in the future. This is intended to cover everything owned by this business in any fashion.

Thereafter, these security agreements were assigned to Paul Donald, plaintiff-appellant. On December 12, 1969, the Internal Revenue Service filed its first notice of tax liens against the taxpayer in the appropriate state and local offices. In July, August and September of 1970, First National made additional loans to the taxpayer based on new security agreements, which were ultimately assigned to Donald in September, 1971. The government seized all of the taxpayer's property on September 9, 1970, but three days later released all of it back to the taxpayer, except for six trailers (five manufactured by taxpayer and one trade-in) and one pick-up truck.¹

In November 1970, Donald initiated the present action in the District Court of Lyons County, Kansas, seeking to enjoin the United States from disposing of the taxpayer's assets then in possession of the Internal Revenue Service. The United States removed the action to the United States District Court and filed a cross-complaint asking for an adjudication of the relative priorities of the various liens on taxpayer's property. By agreement between the parties, the assets in issue were sold at a private sale and the $11,000 proceeds deposited in the Court Registry. From a decision in favor of the United States, Donald has prosecuted the present appeal.

The lower court found the basic issue herein to be whether the appellant's security interest was "choate" at the time the Federal tax liens were filed. Pursuant to a thesis tendered by the government, resolution of this "choateness" issue was seen as being dependent on whether the property subject to the security agreements was described with sufficient "specificity," i. e., was it "identifiable." Based in part on an interpretation of Illinois v. Campbell, 329 U.S. 362, 67 S.Ct. 340, 91 L.Ed. 348 (1946), the District Court concluded that the security agreement's coverage of "finished goods" was not sufficiently specific, since that description encompassed a class of goods which was constantly changing and only identifiable at some particular point in time. As a result, the security interest was found to be "inchoate," and thus inferior to the Federal tax lien in priority.

A review of the pertinent Federal law in this area convinces us that we must reject as inappropriate and out-of-date the legal criteria advanced by the government and adopted by the lower court for resolution of the lien priority issue presented herein. While we do not find the "choateness doctrine" totally obsolete, it appears that the government would have us revitalize the doctrine to its pristine form by completely ignoring the Federal Lien Act of 1966, and emasculating significant elements of section 6323 which were specifically designed to alter the effects of said doctrine.² We cannot concur in such a scheme.

Moreover, even if this case had arisen prior to the Federal Lien Act, we would harbor grave doubts as to whether the choateness doctrine would have dictated the degree of specificity which the government would have us find. Our dubiousness stems from the government's reliance on the "specificity" criteria in Illinois v. Campbell, supra, a case arising under the Federal insolvency priority statute, R.S. § 3466, which was later construed as giving virtually absolute priority to Federal liens in insolvency situations, unless the secured party had already gained either possession or title to the property. United States v. Gilbert Associates, 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953). Appellee correctly points out that United States v. Security Trust and Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53 (1950), also applied the general choateness doctrine to a case involving the predecessor tax lien priority statute, and in United States v. R.F. Ball Construction Co., 355 U.S. 587, 78 S.Ct. 442, 2 L.Ed.2d 510 (1958), it was established that the doctrine is also applicable to a consensual lien created by contract between the parties.

However, the government fails to note that in United States v. Vermont, 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964), the Supreme Court explicitly held that the degree of "specificity" required under the Federal tax lien provisions is not as great as that which is necessary in cases involving insolvent debtors under R.S. § 3466 — such as Illinois v. Campbell, supra. In fact, it was held in Vermont that to be choate a state lien need not attach to specifically identified portions of a taxpayer's property, as it must in the case of a lien on an insolvent debtor, but instead may cover "all property and rights to property, whether real or personal, belonging to such taxpayer." 377 U.S., at 352, 84 S.Ct., at 1267. Since this all-encompassing description was found sufficient to establish the identity of the property subject to the lien for purposes of the choateness doctrine in Vermont, we fail to see how the descriptions herein, "finished goods" (among others), could be faulted as being too broad or unspecific.

In any event, we no longer need rely solely on Vermont and its predecessors to light the way, for Congress provided us with new guide posts in the Federal Lien Act of 1966. Section 6323 deals generally with the "validity and priority of Federal tax liens against certain persons," while subsection (c) specifically addresses itself to "protection for certain commercial transactions financing agreements." Section 6323(c)(1) provides, in pertinent part, that:

* * * even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which — (A) is in qualified property defined in (c)(2)(B) covered by the terms of a written agreement entered into before tax lien filing and constituting — (i) a commercial transactions financing agreement defined in (c)(2)(A) * * * and * * * (B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

For purposes of sections 6323 and 6324, section 6323(h)(1) defines a "security interest" as meaning:

* * * any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money\'s worth.

Subsection 6323(c)(2)(B) states, that the "term `qualified property,' when used with respect to a commercial transactions financing agreement, includes only commercial financing security collateral acquired by the taxpayer before the 46th day after the date of tax lien filing," (emphasis added). "Commercial financing security" (collateral) is defined by subsection 6323(c)(2)(C) as including "inventory," which the committee reports state "include raw materials and goods in process as well as property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." H.R. Rep.No.1884, 89th Cong., 2d Sess. 41 (1966), reprinted at 1966-2 Cum.Bull. 844.

Subsection 6323(c)(2)(A) defines a "commercial transaction financing agreement," as relevant herein, as "an agreement (entered into by a person in the course of his trade or business) — (i) to make loans to the taxpayer to be secured by commercial financing security here, inventory acquired by the taxpayer in the ordinary course of his trade or business, * * * but such an agreement shall be treated as coming within the term only to the extent that such a loan or purchase made pursuant to the agreement which was entered into before tax...