Farmers State Bank v. Neese

• Decision Date: 09 May 1996
• Docket Number: No. 4-95-0509,4-95-0509
• Parties: , 216 Ill.Dec. 474 FARMERS STATE BANK, Pittsfield, Illinois, a State Chartered Corporation, Plaintiff-Appellant, v. Thomas D. NEESE, Susan C. Neese, State of Illinois, and United States of America, Department of the Treasury, Internal Revenue Service, Defendants-Appellees, and Walter V. Wade, Wilma F. Wade, Inez Neese Trust, Dean Neese, Trustee, First Bank, Pittsfield, Illinois, Unknown Owners and Nonrecord Claimants, Defendants.
• Court: United States Appellate Court of Illinois

Page 534

665 N.E.2d 534

281 Ill.App.3d 98, 216 Ill.Dec. 474

FARMERS STATE BANK, Pittsfield, Illinois, a State Chartered

Corporation, Plaintiff-Appellant, v. Thomas D. NEESE, Susan C. Neese, State of Illinois, and United States of America, Department of the

Treasury, Internal Revenue Service,

Defendants-Appellees,

and

Walter V. Wade, Wilma F. Wade, Inez Neese Trust, Dean Neese,

Trustee, First Bank, Pittsfield, Illinois, Unknown

Owners and Nonrecord Claimants, Defendants.

No. 4-95-0509.

Appellate Court of Illinois,

Fourth District.

Argued Jan. 23, 1996.

Decided May 9, 1996.

John H. Germeraad, argued, Sturm and Germeraad, Springfield, for Farmers State Bank.

Elizabeth L. Collins, John Duncan, argued, Assistant U.S. Attorneys, Office of U.S. Attorney, Springfield, for United States Of America.

John M. Myers, Rabin, Myers & Hanken, P.C., Springfield, for Thomas Neese and Susan Neese.

Justice GARMAN delivered the opinion of the court:

This appeal involves the relative priority of the rights of the Internal Revenue Service of the United States (IRS) and Farmers State Bank (bank) to the proceeds from a foreclosure sale of property which a debtor was purchasing under a real estate installment contract. The trial court gave the IRS lien for unpaid tax priority over the bank's interest as assignee of the buyer's rights as security for a loan. We affirm.

I. BACKGROUND

In July 1989, Thomas and Susan Neese contracted to buy real estate in Pike County, Illinois, from Walter and Wilma Wade on installments, for a total purchase price of $55,000. After an initial payment of $5,000, 13 monthly payments of $375 were to be made, after which the amount increased to $650 per month. The payments thus were planned to extend for over five years.

In November 1989, the Neeses obtained a $210,000 loan from the bank. They assigned the bank their interest in the contract as part of the security for the loan. However, neither the assignment nor the contract was recorded until June 1992, when the bank recorded both with the Pike County recorder of deeds. Murray Martin, first vice president of the bank, testified the reason the bank finally recorded the assignment was to "perfect[ ] that document." In July 1991, before the assignment was recorded, the IRS filed a notice of tax lien with respect to the Neeses in Pike County. The lien was for a deficiency assessed in March 1991.

The Neeses defaulted on their loan payments to the bank after the IRS filed notice, and in July 1994 the bank initiated proceedings under the Illinois Mortgage Foreclosure Law (Foreclosure Law) (735 ILCS 5/15-1101 et seq. (West 1992)). When the suit was filed, 58.6% of the purchase price was still owed.

The Neeses also defaulted on their contract payments to the Wades, and the Wades sent a notice of default to the Neeses and the bank. In November 1994, the bank paid the Wades the remaining amount owed on the contract and took an assignment of all the Wades' rights under the contract. In March 1995, the court entered its judgment of foreclosure. After paying the reasonable expenses involved with the foreclosure, the proceeds of the sale went first to repay the bank the amount it paid the Wades to buy out the contract, second to the IRS to satisfy the tax lien, and third to pay the remaining amount owed to the bank on its loan. The property was foreclosed and sold for $60,000, which was exhausted by payment of $47,881.26 to the bank and $10,448.81 to the IRS (the remaining $1,669.93 went to the buyers at the foreclosure sale as a credit for real estate taxes).

II. ANALYSIS

The bank complains on appeal first, the Neeses had no interest to which the IRS lien could attach, and second, even if the IRS lien did attach, that as assignee the bank should have had priority over the IRS and, thus, should have received the money which went to the IRS. Our review on both issues is de novo, as the dispute concerns solely the application of law to undisputed facts. Fitzpatrick v. Human Rights Comm'n, 267 Ill.App.3d 386, 392, 204 Ill.Dec. 785, 790, 642 N.E.2d 486, 491 (1994).

A. The Neeses Had an Interest to Which the IRS Lien Could Attach

Under the Federal Tax Lien Act (Lien Act) (26 U.S.C. § 6322 (1988)), IRS liens attach at the time an assessment for unpaid tax is made. Jersey State Bank v. United States, 926 F.2d 621, 622-23 (7th Cir.1991). At that time a lien in the amount of the assessment arises on all "property and rights to property, whether real or personal, belonging to such person." (Emphasis added.) 26 U.S.C. § 6321 (1988). Even if Illinois law differs on the timing of the evaluation of the taxpayer's interest (see Baker v. Salzenstein, 314 Ill. 226, 233-34, 145 N.E. 355, 358 (1924)), state law cannot prevent attachment of liens created by federal statutes in favor of the United States. United States v. Bess, 357 U.S. 51, 56-57, 78 S.Ct. 1054, 1058, 2 L.Ed.2d 1135, 1141 (1958).

Illinois law determines the nature of the interest the taxpayer has in the property. Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365, 1368 (1960); Hoornstra v. United States, 969 F.2d 530, 532 (7th Cir.1992). In real estate installment contracts, Illinois follows the doctrine of equitable conversion. Shay v. Penrose, 25 Ill.2d 447, 450, 185 N.E.2d 218, 220 (1962); Miller v. Wines, 197 Ill.App.3d 447, 451, 143 Ill.Dec. 849, 852, 554 N.E.2d 784, 787 (1990). Equitable conversion "takes place at the instant a valid and enforceable contract is entered into and * * * the buyer at that time acquires an equitable title." Shay, 25 Ill.2d at 450, 185 N.E.2d at 220. The owner "continues to hold the legal title, but in trust for the buyer; and the buyer becomes the equitable owner and holds the purchase money in trust for the seller." Shay, 25 Ill.2d at 449, 185 N.E.2d at 219-20. At the time of the assessment in this case the Neeses had not yet defaulted on the contract. They thus held title via equitable conversion when the IRS lien attached.

This court has held the buyer under a real estate installment contract is the owner for real estate tax purposes. Immanuel Evangelical Lutheran Church v. Department of Revenue, 267 Ill.App.3d 678, 682, 205 Ill.Dec. 227, 230, 642 N.E.2d 1344, 1347 (1994). The contract here differs from the Immanuel contract in that here the contract states if the buyers default, amounts already paid shall be forfeited, whereas in Immanuel the buyer was contractually granted reimbursement for equity (Immanuel, 267 Ill.App.3d at 682, 205 Ill.Dec. at 230, 642 N.E.2d at 1347), but they are the same in that the buyer had the option at any time of prepaying the principal and receiving title and was required to maintain insurance on the property, keep it in good repair and pay real estate taxes on it. Christian Action Ministry v. Department of Local Government Affairs, 74 Ill.2d 51, 23 Ill.Dec. 87, 383 N.E.2d 958 (1978), relied upon in Immanuel, held a real estate contract purchaser an owner for tax purposes despite a contract provision that the sellers would retain legal and equitable title until the last payment was made. Christian Action Ministry, 74 Ill.2d at 61, 23 Ill.Dec. at 92, 383 N.E.2d at 963. It stated it could not " 'perceive any difference in kind between the conventional purchase money mortgage arrangement * * * and the contract for warranty deed used here, which would justify disparate treatment for tax purposes.' " Christian Action Ministry, 74 Ill.2d at 61, 23 Ill.Dec. at 92, 383 N.E.2d at 963, quoting Christian Action Ministry v. Department of Local Government Affairs, 56 Ill.App.3d 102, 105, 14 Ill.Dec. 31, 33, 371 N.E.2d 1084, 1086 (1977).

At the time the tax lien was filed, the Neeses had equitable title to the property in question. There was thus an interest to which the IRS lien could attach. See Cipriano v. Tocco, 757 F.Supp. 1484, 1488-89 (E.D.Mich.1991).

Nor did the Neeses' assignment of their interest to the bank somehow vitiate it. The assignment was nonabsolute, intended solely as security for the loan, and thus the Neeses retained an equitable interest in the property. See Cipriano, 757 F.Supp. at 1489. Also, the fact that the bank did not record the assignment makes it ineffective against the IRS.

B. The IRS Had Priority Over the Bank

Federal law controls in determining the priority of IRS liens. Aquilino, 363 U.S. at 513-14, 80 S.Ct. at 1280, 4 L.Ed.2d at 1368-69; Hoornstra, 969 F.2d at 532. The Lien Act is the applicable statute. As noted above, an IRS lien attaches at the time the assessment for unpaid tax is made. However, the lien will not be valid against an entity which achieves the status of "purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor" before the IRS files notice of its lien. 26 U.S.C. § 6323(a) (1988); see also Jersey State Bank, 926 F.2d at 623. The bank is neither a mechanic's lienor nor a judgment lien creditor, but claims it should have priority over the IRS as a purchaser or holder of a security interest.

"Purchaser" and "security interest" are both specifically defined in the Lien Act. See 26 U.S.C. §§ 6323(h)(6), (h)(1) (1988). The bank's interest must be perfected for it to fit into either category. See 26 U.S.C. § 6323(h)(6) (1988) (a purchaser's interest must be "valid under local law against subsequent purchasers without actual notice"); 26 U.S.C. § 6323(h)(1) (1988) (for an interest to be a security interest it must have "become protected under local law against a subsequent judgment lien arising out of an unsecured obligation"); Slodov v. United States, 436 U.S. 238, 256-57, 98 S.Ct. 1778, 1790, 56 L.Ed.2d 251, 267 (1978) ("the [Internal Revenue] 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"); United States by & through Internal Revenue Service v. McDermott, 507 U.S. 447, 454 n. 8, 113 S.Ct. 1526, 1530-31 n. 8...