In re HLW Enterprises of Texas, Inc.
| Decision Date | 05 August 1993 |
| Docket Number | Adv. No. 92-5210-LMC.,Bankruptcy No. 91-54681-LMC |
| Citation | 157 BR 592 |
| Parties | In re HLW ENTERPRISES OF TEXAS, INC., Debtor. VULCAN MATERIALS COMPANY, Plaintiff, v. JACK RAUS, INC., United States (IRS) and HLW Enterprises of Texas, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Texas |
COPYRIGHT MATERIAL OMITTED
Stephanie O'Rourke, Douglas & Elms, Inc., San Antonio, TX, for Vulcan Materials.
Manuel P. Lena, Jr., U.S. Dept. of Justice, Tax Div., Dallas, TX, for U.S.
Nancy Hamren, Coats, Rose, Vale, Holm, Ryman & Lee, Houston, TX, for Jack Raus, Inc.
DECISION AND ORDER
CAME ON for trial the foregoing cause. Upon consideration thereof, the court finds and concludes as follows.
This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and (d). This is a core matter as set forth in 28 U.S.C. § 157(b)(2)(K).
PMSI-Wurzbach, Inc. ("PMSI") is the owner of a parcel of real property located in Bexar County, Texas. PMSI contracted with Jack Raus, Inc. ("Raus") to construct a mini-storage warehouse on its real property (the "Project"). Raus subcontracted with HLW Enterprises of Texas, Inc. ("HLW"), the debtor in this chapter 7 case, for HLW to supply all the labor and material necessary to complete certain concrete work on the Project. Between April and June 1991, Vulcan Materials Company ("Vulcan") supplied $27,932.64 worth of materials to the project at the request of HLW.
PMSI paid Raus; Raus paid HLW, less monies retained under their contract, but HLW failed to pay Vulcan the $27,932.64 due and owing for the materials supplied on the Project. On August 16, 1991, Vulcan filed a Mechanic's and Materialmen's Lien against HLW for $9,113.31. On October 11, 1991, Vulcan filed a Supplemental Affidavit for Mechanic's and Materialmen's Lien against HLW for the same amount. On November 20, 1991, Vulcan filed its Application for Writ of Garnishment against Raus for any funds Raus held on the project for HLW. At the time, Raus was holding $23,871.94 in funds it had retained on the contract with HLW to ensure that all subcontractors on the Project were compensated for their labors and materials.
HLW also had its difficulties with the Internal Revenue Service (the "IRS"). Over a two year period, HLW failed to pay its federal unemployment taxes. The IRS made tax assessment against HLW on March 4, March 11, and June 11, 1991 (the "Tax Assessments"). HLW failed to satisfy any of these assessments. Eventually, on July 19, 1991, the IRS filed federal tax liens totalling $39,693.27 against HLW. The IRS made an additional Tax Assessment against HLW on September 9, 1991, and filed another federal tax lien for $36,268.25 against HLW on September 20, 1991 and October 1, 1991. On September 10, 1991, the IRS served upon Raus its Notice of Levy against HLW for $66,737.11, seeking to satisfy the Tax Assessments through any funds held by Raus due and owing to HLW.
On December 6, 1991, HLW filed for chapter 7 bankruptcy. On May 7, 1992, Vulcan and HLW entered into an Agreed Order in the bankruptcy proceeding, acknowledging and stipulating to Vulcan's $66,955.76 claim against HLW; the court later entered a default judgment against HLW in favor of Vulcan.
On June 2, 1992, Raus interpleaded into the registry of the court $23,871.84 (the "Interpleaded Funds") which it was then holding for HLW, its subcontractor. Vulcan, HLW's supplier, claims a superior right to this fund over the IRS, arguing that Raus held the funds in trust for the benefit of material suppliers such as itself, so the IRS' lien could not attach to the fund (because the fund did not "belong" to HLW). The IRS, on the other hand, claims that it has superior rights to the monies pursuant to its Tax Assessments and Notice of Levy. Raus, as an innocent stakeholder, claims it is entitled to attorneys' fees incurred due to the litigation.
The IRS asserts that it has a valid tax lien on the Interpleaded Funds due to the Tax Assessments and the Notice of Levy served upon Raus. Under 26 U.S.C. §§ 6321 and 6322, a federal tax lien arises upon the date that the IRS assesses unpaid taxes and continues until the debt is fully satisfied. Texas Commerce Bank-Fort Worth, N.A. v. United States, 896 F.2d 152, 161 (5th Cir.1990). Federal tax liens are effective against all property and rights to property, whether real or personal, including after acquired property belonging to the taxpayer. 26 U.S.C. § 6321. If the tax debt remains unpaid post-assessment, the United States is entitled to enforce the assessment lien by levy. 26 U.S.C. § 7403.
For purposes of determining priority between a federal tax lien and a competing lien, "absent provision to the contrary, priority for purposes of federal law is governed by the common law principle `first in time is the first in right.'" United States v. McDermott, ___ U.S. ___, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993); United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954). However, a federal tax lien "shall not be valid as against any . . . mechanic's lienor . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. § 6323(a). A competing lien, to be in existence for "first in time" purposes, must have been perfected in the sense that the identity of the lienor, the property subject to the lien, and the amount of the lien are established. McDermott, ___ U.S. at ___, 113 S.Ct. at 1527; New Britain, 347 U.S. at 85, 74 S.Ct. at 370.
Here, the IRS made its assessment against HLW on March 4, 1991, March 11, 1991, and June 11, 1991, and HLW failed to pay these debts. As the IRS federal tax lien arose on the dates of the assessments, the IRS lien encumbered all of HLW's property and rights to property, including the rights HLW had under the Raus-HLW subcontract and any funds HLW earned under that subcontract. Glass City Bank v. United States, 326 U.S. 265, 66 S.Ct. 108, 90 L.Ed. 56 (1945) (); Randall v. Nakashima, 542 F.2d 270, 274 (5th Cir.1976) ().
While Vulcan did perfect a mechanic's and materialmen's lien for $9,113.31 on August 16, 1991, pursuant to Tex.Prop.Code Ann. § 53.001 et seq., Vulcan is not asserting its rights as a mechanic's lienor. If it were, the mechanic's lien would not be satisfied by the Interpleaded Funds since the majority of the federal tax liens attached before the mechanic's lien was perfected, and the sum of the federal tax liens exceeds the amount of the Interpleaded Funds. Vulcan rather asserts that the Interpleaded Funds are held in trust for Vulcan by Raus pursuant to section 162.001 of the Texas Property Code. TEX. PROP.CODE ANN., § 162.001 (Vernon Supp. 1993). Vulcan correctly notes that a federal tax lien may only attach to property in which a taxpayer has an interest. 26 U.S.C. § 6321; Transmix Concrete of Rockdale v. United States, 142 F.Supp. 306, 310 (W.D.Tex.1956). A taxpayer's interest in property is determined by state law. United States v. Durham Lumber Company, 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960). If, under state law, the fund held by Raus are impressed with a trust such that HLW has no interest in the fund, then the tax lien would not attach to the fund. Further, if the trust arises in favor of materialmen such as Vulcan, then Vulcan could lay a superior claim in the fund. We turn, then, to a determination of the parties rights in the Interpleaded Funds under Texas state law.
In Texas, funds paid to a contractor or subcontractor are held in trust for those mechanics, materialmen, artisans and other laborers which have worked on a given construction project. Section 162.001 of the Texas Property Code provides:
Construction payments are trust funds under this chapter if the payments are made to a contractor or subcontractor, under a construction contract for the improvement of specific real property in this state.
TEX.PROP.CODE ANN., § 162.001 (Vernon Supp.1993). At the time of the IRS Notice of Levy, PMSI had paid Raus for construction on the Project. Raus held back retainage, including $23,871.84 retained under its construction subcontract with HLW for the benefit of HLW's subcontractors and suppliers. Vulcan claims that HLW has no ownership rights or claim on this retained amount, because it serves as a trust fund for the benefit of unpaid subcontractors and suppliers of HLW, such as Vulcan.
The IRS reads section 162.001 to mean that no trust arises for a materialman until the party with whom that materialman directly contracted receives payment on the project. For example, no trust could arise for HLW until Raus received payment from PMSI. And no trust could arise in favor of Vulcan until HLW is paid by Raus. The IRS contends that funds are held in trust only by the contractor for the benefit only of those subcontractors and materialmen with which the contractor is in direct privity. Then a new trust would arise when that contractor pays a subcontractor, running in favor of that subcontractor's own subs and suppliers. Therefore, under the IRS construction, because payment in this case never got down the chain to HLW, no trust in favor of HLW's supplier, Vulcan, could arise. The funds, it claims, while in the possession of Raus are held in trust only for Raus' subs and suppliers (including HLW), not for anyone one step or more removed from Raus.
The IRS relies heavily on In re Southwestern Fabricators, Inc., 40 B.R. 790 (Bankr.W.D.Tex.1984), a case factually similar to the one at bar. In Southwestern...
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