Haas, In re

• Decision Date: 13 September 1994
• Docket Number: No. 93-6381,93-6381
• Citation: 31 F.3d 1081
• Parties: -6280, 94-2 USTC P 50,496 In re Bernice Elizabeth HAAS; Thomas Milton Haas, Debtors. Thomas Milton HAAS; Bernice Elizabeth Haas, Plaintiffs-Appellees, v. INTERNAL REVENUE SERVICE, Defendant-Appellant, United States Small Business Administration, Defendant, Secor Bank, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1081

31 F.3d 1081

74 A.F.T.R.2d 94-6280, 94-2 USTC P 50,496

In re Bernice Elizabeth HAAS; Thomas Milton Haas, Debtors Thomas Milton HAAS; Bernice Elizabeth Haas, Plaintiffs-Appellees, v. INTERNAL REVENUE SERVICE, Defendant-Appellant United States Small Business Administration, Defendant Secor Bank, Defendant-Appellee.

No. 93-6381.

United States Court of Appeals Eleventh Circuit.

Sept. 13, 1994.

Gary R. Allen, Linda E. Mosakowski, Michael L. Paup, Edward T. Perelmuter, David English Carmack, Tax Div., Dept. of Justice, Washington, DC, for appellant.

Lawrence B. Voit, Silver & Voit, Mobile, AL, for B.E. & T.M. Haas.

Thomas P. Ollinger, Jr., Fernandez, Ollinger & Combs, Mobile, AL, for Secor Bank.

Appeal from the United States District Court for the Southern District of Alabama.

Before ANDERSON and BIRCH, Circuit Judges, and ATKINS ^*, Senior District Judge.

ANDERSON, Circuit Judge:

I. INTRODUCTION

At issue in this case are the relative priorities to be accorded a reinstated mortgage lien and a competing federal tax lien where the federal tax lien arose prior to the reinstatement of the mortgage lien. The bankruptcy court, applying Alabama law, held that the reinstated mortgage lien had priority over the federal tax lien. The district court, following the reasoning of the bankruptcy court, affirmed. For the reasons set forth below, we reverse.

II. FACTS

On January 4, 1979, Thomas M. Haas and Bernice E. Haas ("Debtors") executed a mortgage on their homestead in favor of Home Savings & Loan Association (a predecessor in interest to Secor Bank ("Secor")) as security for a loan of $140,994.57. The homestead was valued at $225,000. On March 31, 1986, Alabama Federal Savings & Loan Association recorded a release of the mortgage, stating that the bank was discharging its lien on the homestead because the underlying indebtedness had been satisfied in full. The parties agree that the mortgage lien was released in error. Debtors had not in fact satisfied the underlying indebtedness.

Subsequent to the recordation of the release, the Internal Revenue Service ("IRS") filed notices of federal tax liens on the homestead totalling $506,523.24. ¹ Debtors became aware of the erroneous release at least by April 1990. Debtors filed a petition for Chapter 11 on October 7, 1991. In a later filed adversary proceeding, Debtors sought a ruling on the extent and validity of the liens on the homestead.

The bankruptcy court, exercising its equitable powers, reinstated the erroneously discharged mortgage on May 27, 1992. Applying Alabama law, the court concluded that, absent reliance by a subsequent creditor, a mortgage that has been satisfied by mistake may be expunged from the record by a court of equity and reinstated where such relief will not prejudice the rights of third or innocent persons. The court determined that the IRS had not detrimentally relied upon the erroneous release. Thus, the court concluded that the reinstated lien of Secor had priority over the federal tax lien.

The district court affirmed the bankruptcy court with respect to this issue, following its analysis. The district court specifically relied upon the bankruptcy court's finding of fact that the IRS, Secor, and the Debtors had continued to behave as if the mortgage still existed even after the erroneous satisfaction was entered. For the reasons that follow, we reverse.

III. STANDARD OF REVIEW

Because the district court in reviewing the decision of a bankruptcy court functions as an appellate court, we are the second appellate court to consider this case. Capital Factors, Inc. v. Empire for Him, Inc., 1 F.3d 1156, 1159 (11th Cir.1993). Thus, this Court's review with regard to determinations of law, whether made by the bankruptcy court or by the district court, is de novo. Equitable Life Assurance Soc. v. Sublett, 895 F.2d 1381, 1383 (11th Cir.1990). The district court makes no independent factual findings; accordingly, we review solely the bankruptcy court's findings of fact under the "clearly erroneous" standard. Rush v. JLJ Inc., 988 F.2d 1112, 1116 (11th Cir.1993); Bankr.Rule 8013; Bankr.Rule 7052.

IV. DISCUSSION

The IRS mounts two attacks on the judgment below which represent independent and alternative bases for reversing the judgment of the district court. First, the IRS argues that 26 U.S.C. Sec. 6323 accords the government the status of a hypothetical lien creditor, thus making actual notice of the erroneously released mortgage irrelevant. Second, the IRS asserts that the regulations accompanying section 6323 forbid application of Alabama's relation back principle to award a mortgage lien priority over the federal tax lien. For the reasons that follow, we conclude that each of these theories is sufficient to cause us to remand this case to the district court with instructions to enter judgment for the IRS.

A. Hypothetical judgment lien creditor

Section 6321 directs that a tax lien shall arise upon "all property and rights to property" of a taxpayer neglecting to pay taxes owed. ² Moreover, the tax lien attaches to property acquired after the tax lien arises. Pursuant to section 6322, this lien arises "at the time the assessment is made." "The overriding purpose of the tax lien statute obviously is to ensure prompt revenue collection." United States v. Kimbell Foods, Inc., 440 U.S. 715, 734-35, 99 S.Ct. 1448, 1462, 59 L.Ed.2d 711 (1979). Thus, "[i]t has long been recognized that liens to guarantee payment of taxes are an important element of the sovereign's taxing power." United States v. Second National Bank of North Miami, 502 F.2d 535, 545 (5th Cir.1974), cert. denied, 421 U.S. 912, 95 S.Ct. 1567, 43 L.Ed.2d 777 (1975). ³ Despite this overriding objective, section 6323 nevertheless operates to protect holders of perfected security interests from unfiled tax liens or so-called "secret liens." See Rice Investment Co. v. United States, 625 F.2d 565, 568 (5th Cir.1980). ⁴ Thus, section 6323 mandates that notice of the taxing authority's lien "shall be filed" in the public records before it operates as notice effective against any holder of a security interest as that term is defined by section 6323. 26 U.S.C. Sec. 6323(f). The filing requirement is critical: even a holder of a security interest who has actual knowledge of an unfiled tax lien will prevail over the government. 26 U.S.C. 6323(a). See United States v. McDermott, --- U.S. ----, ----, ----, 113 S.Ct. 1526, 1528, 1530, 123 L.Ed.2d 128 (1993) ("under the language of Sec. 6323(a) ('shall not be valid as against any ... judgment lien creditor until notice ... has been filed'), the filing of notice renders the federal tax lien extant for 'first in time' priority purposes....").

As a starting point, state law governs the inquiry of Haas' interest in "property or rights to property." Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Brosnan, 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960); United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958). "This follows from the fact that the federal statute 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' " United States v. National Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (quoting United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958)). Alabama classifies itself as a "title" state with regard to mortgages. Thus, "[e]xecution of a mortgage passes legal title to the mortgagee. The mortgagor is left with an equity of redemption, but upon payment of the debt, legal title revests in the mortgagor." Trauner v. Lowrey, 369 So.2d 531, 534 (Ala.1979) (citations omitted). A mortgage, though not recorded, is valid and passes title as between the parties. See Murphree v. Smith, 291 Ala. 20, 277 So.2d 327, 329 (1973); Alexander v. Fountain, 195 Ala. 3, 70 So. 669 (1916); Simon v. Sewell, 64 Ala. 241 (1879). Thus, under Alabama law, the property interest held by Haas is an equitable right of redemption. This is a valuable property interest for it may be conveyed by the mortgagor, and it allows a mortgagor, who has retained possession of the subject property, to be possessed of legal title against all of the world except the mortgagee or its assignee. See Trauner v. Lowrey, 369 So.2d 531, 534 (Ala.1979); Jones v. Butler, 286 Ala. 69, 237 So.2d 460, 462 (1970). We therefore conclude that Haas had "property" and "rights to property" under 26 U.S.C. Sec. 6321 to which the tax lien could attach. See Southern Bank of Lauderdale County v. IRS, 770 F.2d 1001, 1009-10 (11th Cir.1985), cert. denied, 476 U.S. 1169, 106 S.Ct. 2890, 90 L.Ed.2d 977 (1986).

Having ascertained that Haas had "property" and "rights to property" sufficient for attachment of the tax lien, federal law governs the priority to be accorded the competing liens. ⁵ Aquilino v. United States, 363 U.S. 509, 513-15, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960) (Attachment of federal lien depends on whether "property" or "rights to property" exist under state law; however, priority of the federal lien depends on federal law). Two basic principles govern the adjudication of priority of competing liens: (i) "the first in time is the first in right"; and (ii) a federal tax lien is superior to a nonfederal lien that is inchoate. ⁶ Atlantic States Construction, Inc. v. Hand, Arendall, Bedsole, Greaves and Johnston, 892 F.2d 1530, 1534 (11th Cir.1990). The Federal Tax Lien Act identifies several distinct situations in which a security interest may have priority over a federal tax lien, only one of which is relevant to this case: where the security interest exists prior to the IRS's filing of notice of the tax lien. 26 U.S.C. Sec. 6323(a). We discuss below the process of perfection in the federal sense which is controlled by section 6323(h)(1).

Secor argues that its security interest is a prior...