Dragstrem v. Obermeyer
| Decision Date | 14 February 1977 |
| Docket Number | No. 75-1531,75-1531 |
| Citation | 549 F.2d 20 |
| Parties | 77-1 USTC P 9301, 21 UCC Rep.Serv. 311 Howard DRAGSTREM, Plaintiff-Appellee, v. Richard E. OBERMEYER et al., Defendants, United States of America, Intervenor-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Scott P. Crampton, Asst. Atty. Gen., Wynette J. Hewett, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., for intervenor-appellant.
Albert Bonner Brown, P. Martin Lake, Marion, Ind., for plaintiff-appellee.
Before FAIRCHILD, Chief Circuit Judge, BAUER, Circuit Judge, and PARSONS, Chief District Judge. *
In this case we must determine whether a federal tax lien has priority over an unperfected security interest in proceeds deposited as an interpleaded fund. The notice of the tax lien was filed after the holder of the fund petitioned the court for authority to deposit the fund, but before the court authorized its deposit. The district court gave priority to the security interest. We reverse.
Plaintiff Dragstrem's claim to the fund is founded upon a loan to defendant Obermeyer of $11,400 plus interest. To secure the loan, Obermeyer executed a security agreement designating as collateral 500 acres of Indiana-grown popcorn and the proceeds from its sale. The security interest in the crops was never perfected because Dragstrem failed to file a financing statement in the county of the debtor's residence, as required by the Uniform Commercial Code (UCC). 1
Dragstrem initially brought this suit against Obermeyer in an Indiana court for the amount of the debt, plus interest and attorney's fees for enforcing the obligation, and joined the Weaver Popcorn Company as a defendant in order to recover the proceeds of Obermeyer's sale of the popcorn crop to Weaver. Though it admitted owing Obermeyer $30,116.20 for the crop, Weaver refused to pay the money over to Dragstrem because it had received notice of conflicting claims to the proceeds that totaled more than the debt it owed. In order to protect itself from multiple liability, Weaver filed a motion requesting the court to join the United States and other claimants to the proceeds as parties to the action, so that it might deposit the proceeds as an interpleaded fund with the court and be dismissed from the action. After the court granted Weaver's motion to have all claimants joined as parties, 2 Weaver filed a petition on July 14, 1971 seeking authority to deposit the disputed fund with the court and asking to be dismissed as a party. Six days later, the United States filed a tax lien on the proceeds in the amount of $25,103.62. 3 About three months later, Weaver deposited the proceeds with the state court without waiting for an order responding to its petition for authority to deposit and for dismissal. Thereupon, pursuant to petition of the United States, which had earlier been dismissed as a party defendant and then granted leave to intervene, the case was removed to the United States District Court for the Northern District of Indiana. The federal court subsequently dismissed Weaver from the suit, and the case proceeded to trial.
Before discussing the district court proceedings on the merits, it will aid understanding to outline the applicable law.
The question of when a federal tax lien has priority over a security interest created under state law must be answered by reference to federal law. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); Bjork v. United States, 486 F.2d 934, 937 (7th Cir. 1973). The Internal Revenue Code, 26 U.S.C. §§ 6321-22, provides that a tax lien in favor of the United States arises at the time assessment is made on all property and rights to property belonging to a taxpayer who neglects or refuses to pay his taxes after demand. The Code also provides that the tax lien imposed
"shall not be valid as against any . . . holder of a security interest . . . until notice thereof . . . has been filed . . . ." 26 U.S.C. § 6323(a).
Thus, any "security interest" coming into existence prior to the filing of notice of a federal tax lien takes priority over the tax lien. The Code defines a "security interest" as arising
"at such time (as) 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. . . ." 26 U.S.C. § 6323(h)(1).
The relevant local law in this instance is Section 9-301(1)(b) of the Uniform Commercial Code, as adopted in Indiana, which states that
"an unperfected security interest is subordinate to the rights of . . . (b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected." Burns Ind.Stat.Ann. § 26-1-9-301(1)(b).
Dragstrem argued two theories to the district court. First, looking to Section 9-301(1)(b) of the Indiana UCC, he contended that his security interest took priority over the federal tax lien because the government had obtained actual knowledge of the security interest before the filing of its tax lien, when his pleadings were served on the government in the instant case.
Alternatively, Dragstrem contended that his security interest took priority because it was protected from a subsequent judgment lien under state law because it came into the exclusive control of the court before the tax lien was filed. He reasoned that, under Indiana law, no party could become a lien creditor against property in custodia legis except through the court holding the property. Thus no party could become a lien creditor against the interpleaded fund without obtaining knowledge of his outstanding security interest because the party seeking the lien would invariably obtain knowledge of the litigation involving the security interest pending before the court holding the fund.
The district court rejected Dragstrem's first theory on the ground that Section 6323(h)(1) of the Internal Revenue Code sets forth a "hypothetical judgment lien creditor test" that requires a security interest to have priority over all hypothetical subsequent judgment lien creditors in order to prime a federal tax lien. United States v. Sterling Nat'l Bank & Trust Co., 360 F.Supp. 917, 925 (S.D.N.Y.1973), modified on other grounds, 494 F.2d 919 (2d Cir. 1974). Under this test, the government's actual knowledge of a security interest is irrelevant because the pertinent consideration is the priority of the secured creditor vis-a-vis other possible creditors, rather than vis-a-vis the government.
Applying the same test to Dragstrem's alternative argument, the district court determined that Dragstrem's security interest in the property held in custodia legis primed the federal tax lien because no hypothetical judgment lien creditor subsequently could have obtained a lien against the interpleaded fund without knowledge of Dragstrem's security interest.
On appeal, the government contends that the district court erred (1) in holding that a security interest unperfected under the UCC could ever take priority over a federal tax lien, (2) in finding that a competing creditor could not have obtained a subsequent judgment lien against the interpleaded fund without learning of Dragstrem's security interest, and (3) in finding that the instant fund was in fact in custodia legis prior to the filing of the tax lien, at a time when the fund had not actually been deposited in the court. Because we find merit in the government's second contention, we reverse.
The government first argues that the language of Section 6323(h)(1) defining a security interest for purposes of the Federal Tax Lien Act as a security interest that "has become protected under local law against a subsequent judgment lien" means that a holder of such an interest must have perfected it pursuant to the UCC. 26 U.S.C. § 6323(h)(1).
This interpretation, of course, does not follow from the language of the statute, which on its face allows creditors' interests to prime federal tax liens if they are protected against subsequent judgment liens "under local law" generally, not just under the UCC.
Yet the government purports to find support for its position in the legislative history of the current version of Section 6323, passed as part of the Federal Tax Lien Act of 1966, Pub.L. No. 89-719, 80 Stat. 1125 (Nov. 2, 1966). We are referred to two excerpts from the history. First, the Senate Committee Report states generally:
"This bill is an attempt to conform the lien provisions of the internal revenue laws to the concepts developed in (the) Uniform Commercial Code." S.Rep.No.1708, 89th Cong., 2d Sess. 2 (1966), U.S.Code Cong. & Admin.News 1966, p. 3722.
Second, the House Committee Report states with reference to Section 6323(h)(1) that
"a security interest becomes protected against a subsequent judgment lien on the date on which all actions required under local law to establish the priority of the security interest against such a judgment lien have been taken, or, if later, the date on which all such actions are deemed effective, under local law, to establish such priority." H.R.Rep.No.1884, 89th Cong., 2d Sess. 49 (1966) (emphasis added).
Neither of these excerpts, however, goes so far as to say that a creditor's interest primes a federal tax lien only if it is protected against a subsequent judgment lien by perfection under the UCC. They both are consistent with the facial meaning of the statutory text. The former excerpt suggests only that the UCC was taken into account in the drafting; it says nothing about perfection being the sole means of protecting security interests. The latter excerpt, though it speaks in terms of taking steps to protect an interest, does not specifically mention perfection under the UCC. References such as these are certainly insufficient to overcome the clear meaning of the statutory text, see Gemsco v. Walling, 324 U.S. 244, 260, 65 S.Ct. 605, 89 L.Ed. 921 (1945), and...
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