General Elec. Credit Corp. v. Isaacs

• Decision Date: 22 June 1978
• Docket Number: No. 44853,44853
• Citation: 581 P.2d 1032,90 Wn.2d 234
• Parties: , 24 UCC Rep.Serv. 1001 GENERAL ELECTRIC CREDIT CORPORATION, Respondent, v. Donald W. ISAACS and Jane Doe Isaacs, his wife, Defendants, Robert Welcome and Jane Doe Welcome, his wife, Appellants, and United States of America, Respondent.
• Court: Washington Supreme Court

Page 234

90 Wn.2d 234

581 P.2d 1032, 24 UCC Rep.Serv. 1001

GENERAL ELECTRIC CREDIT CORPORATION, Respondent, v. Donald W. ISAACS and Jane Doe Isaacs, his wife, Defendants Robert Welcome and Jane Doe Welcome, his wife, Appellants and United States of America, Respondent.

No. 44853.

Supreme Court of Washington,En Banc.

June 22, 1978.

Montgomery, Purdue, Blankinship & Austin, M. Wayne Blair, Seattle, Myron C. Baum, Gilbert E. Andrews, Crombie J. D. Garrett, Wynette J. Hewett, J. Ronald Sims, Thomas B. Russell, App. Section, Tax Div., Dept. of Justice, Washington, D. C., for appellants.

Harry McCarthy, Asst. U. S. Atty., Seattle, Patrick W. Crowley, Seattle, for respondent.

HAMILTON, Justice.

This appeal involves a question of federal law. We are asked to decide whether a federal tax lien has priority over a state-created security interest which was perfected at the time notice of the tax lien was filed, but which later became unperfected. General Electric Credit Corporation (GE) is a mere stakeholder; the real parties in interest are the United States and Robert Welcome and his wife. The debtor, Donald W. Isaacs, has not appeared and claims no interest. The trial court, upon stipulated facts and cross-motions for summary judgment, gave priority to the tax liens of the United States. We affirm.

The debtor, Isaacs, was engaged in the business of buying and selling mobile homes. In order to finance his business, he entered into an agreement with GE whereby GE purchased his installment sales contracts. As part of this financing arrangement, a reserve fund was created as security for losses on the installment contracts. When GE liquidated the account, the reserve fund contained $6,717. GE subsequently received notices of competing claims to the fund from the United States and Welcome. The interest of the United States arose by reason of certain tax liens in the amount of $16,804.77. The conflicting interest of Welcome arose from an assignment of the fund dated October 10, 1968, as security for loans of $8,569 and future advances. The dates pertinent to this case are as follows:

On February 19, 1968, after assessment and demand, the Internal Revenue Service filed notice of the first tax lien. On October 10, 1968, the debtor, Isaacs, executed an assignment for security purposes to Welcome of all sums then or thereafter placed in the GE reserve account. This assignment was expressly subject to the February 19, 1968 tax lien, and Welcome does not challenge the priority of the initial tax lien. Welcome perfected his interest by filing a standard form Uniform Commercial Code financing statement on October 28, 1968. On January 8 and August 19, 1969, and on February 28 and July 7, 1972, again after assessment and demand, notices of additional tax liens were filed. Welcome failed to file a continuation financing statement on or before the expiration of the period of perfection. RCW 62A.9-403(2) and (3). ¹ Thus, under Washington State law, his interest became unperfected. On January 4, 1974, Welcome again perfected his interest by duly filing a new financing statement.

In asserting priority respondent United States relies on federal law and claims that upon the lapse of the effectiveness of the financing statement, the tax liens acquired priority over the competing security interest of appellant Welcome.

Appellant argues that the order of priorities is fixed as of the date of filing notice of a tax lien and not subject to change by later events such as lapse. He further asserts that, even if priorities are not fixed, the question of priorities is governed by RCW 62A.9-201 and RCW 62A.9-301. ² Welcome claims the United States should be denied priority because it fails to meet the tests of RCW 62A.9-301.

The question of priority between a federal tax lien and a state-created security interest must be answered with reference to federal law. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); Johnson Serv. Co. v. Roush, 57 Wash.2d 80, 355 P.2d 815 (1960). The applicable federal law is contained in the Internal Revenue Code, which 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 taxes after demand. Internal Revenue Code of 1954, 26 U.S.C. §§ 6321 and 6322 (1970). This tax lien continues in full force and effect until the tax liability is extinguished, 26 U.S.C. § 6322, and it attaches to all after- acquired property of the delinquent taxpayer. Seaboard Surety Co. v. United States, 306 F.2d 855 (9th Cir. 1962). However, the Federal Tax Lien Act of 1966, 26 U.S.C. § 6323(a) (1970), limits the effect of the lien granted by 26 U.S.C. §§ 6321 and 6322. That section states that the tax lien "shall not be valid as against any . . . holder of a security interest . . . until notice thereof . . . has been filed . . . ." 26 U.S.C. § 6323(a).

The code also provides the definition of security interest, which, according to federal law, we must utilize for purposes of this discussion. ³

The term "security interest" means 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.

26 U.S.C. § 6323(h)(1).

Under the local law referred to by section 6323(h)(1), Welcome's interest became protected against a subsequent judgment lien by the filing of a valid Uniform Commercial Code financing statement. RCW 62A.9-301, RCW 62A.9-302. ⁴ The security interest remained protected so long as the filing was effective. RCW 62A.9-403(2). When the effectiveness of the financing statement involved here lapsed, Welcome was no longer protected against a subsequent judgment lien, hence he no longer had a federally defined security interest.

Welcome argues, however, that priorities are irrevocably fixed on the date when notice of the tax lien is filed, and a later lapse in effectiveness of the financing statement does not alter the priority granted by federal law to holders of a security interest. This result, he argues, can be reached by a literal reading of 26 U.S.C. § 6323(a) set out previously. Under that section a federally defined security interest coming into existence before the filing of notice of a tax lien has priority over the later filed tax lien. We do not believe, however, that the Federal Tax Lien Act affords continued priority to an interest which, because of a lapsed financing statement, has ceased to exist as a federally defined security interest. 26 U.S.C. § 6323(a) states the date upon which the tax lien has validity against a security interest; however, it does not dictate that priorities are fixed as of that date.

We hold therefore the priority granted to a federally defined security interest may be lost by subsequent acts which render it unperfected under local law. Once a security interest becomes unperfected, it is vulnerable to the federal tax liens which were subordinate during perfection. The order of priorities is not irrevocably fixed on the date when notice of a tax lien is filed. This holding is supported by the Federal Tax Lien Act and principles of commercial law.

We note that prior to the Federal Tax Lien Act of 1966, 26 U.S.C. § 6323 provided no protection for the security interest. Congress, in passing the act, sought to "conform the lien provisions of the internal revenue laws to the concepts developed in this (sic ) Uniform Commercial Code." 3 U.S.Code Cong. & Admin.News, p. 3722 (1966). See also Coogan, The Effect of the Federal Tax Lien Act of 1966 upon Security Interests Created under the Uniform Commercial Code, 81 Harv.L.Rev. 1369 (1968). In so doing, limited protection was afforded to the holder of a security interest. Significantly, Congress extended protection only to holders of a security interest which had achieved such dignity that under local law the interest would be protected against a subsequent judgment lien. 26 U.S.C. § 6323(h)(1); United States v. Trigg, 465 F.2d 1264 (8th Cir. 1972). Thus, for federal tax purposes, a security interest does not even exist unless section 6323(h)(1) is met and unperfected security interests are subordinate to the federal tax lien. 3 U.S.Code Cong. & Admin.News, supra. United States v. Trigg, supra.

Because Congress extended protection only to security interests of a special status and subordinated the unperfected security interest, we think it is clear that Congress intended to give a secured creditor an opportunity to maintain priority by maintaining perfection under local law. Failure to maintain perfection should result in loss of the preferred status which holders of a security interest are granted. When that status is lost, we believe it is clear that the tax lien gains priority over competing interests which lack the necessary status.

In United States v. Administrator of Estate of McCall, 313 F.Supp. 1399 (M.D.Pa.1969), the court accepted without discussion the argument that priority may be lost by operation of events occurring subsequent to filing notice of the tax lien. In that case the government argued that the lienor lost its priority by failing to revive the judgment within 5 years as required by local law. The lienor admitted it had failed to revive its lien, but asserted the government lulled it into permitting its perfection to lapse. The court found insufficient evidence of government misrepresentation and held, at page 1403: "Therefore, the Government is not equitably estopped from asserting its acquired priority of lien to the real estate." Thus, the acquisition of...