In re Nerland Oil, Inc.

• Decision Date: 12 September 2002
• Docket Number: No. 01-2962.,01-2962.
• Citation: 303 F.3d 911
• Parties: In re NERLAND OIL, INC. Superpumper, Inc., Claimant-Appellant, v. Nerland Oil, Inc., Debtor-Appellee. United States of America through The Internal Revenue Service, Creditor-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

303 F.3d 911

In re NERLAND OIL, INC.

Superpumper, Inc., Claimant-Appellant, v. Nerland Oil, Inc., Debtor-Appellee.

United States of America through The Internal Revenue Service, Creditor-Appellee.

No. 01-2962.

United States Court of Appeals, Eighth Circuit.

Submitted: April 16, 2002.

Filed: September 12, 2002.

COPYRIGHT MATERIAL OMITTED

Herbert L. Meschke, argued, Minot, ND (Brent M. Olson, on the brief), for appellant.

Anthony T. Sheehan, argued, Tax Div., Dept. of Justice, Washington, DC (Bruce R. Ellisen, Tax Div., Dept. of Justice, on the brief), for appellee.

Before McMILLIAN, BOWMAN and MURPHY, Circuit Judges.

McMILLIAN, Circuit Judge.

In this Chapter 7 bankruptcy matter filed by the debtor Nerland Oil, Inc. ("Nerland Oil"), Superpumper, Inc. ("Superpumper") appeals from a final order entered in United States District Court for the District of North Dakota¹ affirming the bankruptcy court's² grant of summary judgment in favor of the United States, through the Internal Revenue Service ("IRS"), on the ground that federal tax liens previously assessed by the IRS against Nerland Oil took priority over a North Dakota state court judgment affirming an arbitration award enabling Superpumper to setoff its debt to Nerland Oil. See In re Nerland Oil, Inc., 2001 WL 1203386, No. A3-01-05 (D.N.D. June 13, 2001) (memorandum and order). For reversal, Superpumper argues that the district court erred in determining that (1) Superpumper did not complete a valid setoff under state law in 1996, (2) unfiled federal tax liens prevented Superpumper's setoff of debt, and (3) Superpumper could not assert the same defenses against the IRS as it could against Nerland Oil. For the reasons discussed below, we affirm the order of the district court.

Jurisdiction

Jurisdiction in the bankruptcy court was proper based upon 28 U.S.C. § 157(b) (transferring jurisdiction of cases arising in or related to Title 11 from district court to bankruptcy court), pursuant to 28 U.S.C. § 1334 (providing original federal jurisdiction for Title 11 bankruptcy cases). Jurisdiction in district court was proper based upon 28 U.S.C. § 158(a)(3) (enabling district court to consider interlocutory orders of bankruptcy courts). Jurisdiction in this court is proper based upon 28 U.S.C. § 158(d) (authorizing appeals from final district court judgments reviewing bankruptcy court appeals). The notice of appeal was timely filed pursuant to Fed. R.App. P. 4(a).

Background

The parties stipulated to the following facts in the bankruptcy court's record. In the mid-1970s, Brent Nerland founded Nerland Oil, a petroleum products wholesale marketing business. Nerland Oil established a "jobber" relationship with Conoco, in which it contracted with Conoco to distribute Conoco products to Conoco retail stations and to forward credit card receivables to Conoco retail stations after Conoco processed the credit card transactions. Over time, Nerland Oil acquired several convenience stores, including a Conoco retail station and convenience store called the Dakota Fuel Stop in Jamestown, North Dakota.

In June 1995, Superpumper, an owner and operator of convenience stores, bought the Dakota Fuel Stop from Nerland Oil. To partially finance the purchase, Superpumper executed a promissory note payable to Nerland Oil in the amount of $350,000 and secured by a second mortgage on the Dakota Fuel Stop. The note required Superpumper to make quarterly payments of $7,545 to Nerland Oil at an annual interest rate of nine percent. The balance of the note was to be paid on September 30, 2000, or earlier if Superpumper sold the Dakota Fuel Stop.

As a condition of the purchase, Superpumper agreed to arrange future fuel supply and freight in a form acceptable to Nerland Oil, and therefore entered into two contracts with West Fargo Truck Stop, Inc. ("WFTS"), another company owned by Brent Nerland. Together the contracts credited Superpumper with $579,332 toward the purchase price of the Dakota Fuel Stop. The first agreement designated WFTS as the exclusive supplier of the Dakota Fuel Stop's Conoco brand fuel requirements. The second contract required WFTS to haul fuel products to various Superpumper locations in the Red River Valley.³ Both contracts contained clauses requiring disputes to be submitted to binding arbitration. Although neither contract established Nerland Oil as the Conoco jobber to service the Dakota Fuel Stop, Nerland Oil acted in that capacity. Consequently, Nerland Oil was responsible for forwarding from Conoco to Superpumper the credit card receivables generated by the Dakota Fuel Stop. Superpumper and Nerland Oil did not have a contract governing this relationship, but it is a well-known industry practice which is generally not recognized in writing.

By the spring of 1996, Nerland Oil began failing to remit the Dakota Fuel Stop credit card receivables from Conoco to Superpumper, and the amount of the arrearage grew over the course of the year. As of October 31, 1996, Nerland Oil owed Superpumper $348,856.26 in credit card receivables, and Superpumper owed Nerland Oil $359,790.18 under the promissory note and mortgage. On October 28, 1996, Superpumper terminated its jobber relationship with Nerland Oil. At that time, Superpumper desired to apply the outstanding balance of credit card receivables against the amount due under the promissory note and mortgage held by Nerland Oil. Nerland Oil refused the proposed debt setoff.

On January 28, 1997, Superpumper commenced a lawsuit against Nerland Oil in North Dakota state court seeking to setoff the debts. Because the contracts at issue contained arbitration clauses, the state court ordered that the dispute be submitted to arbitration. After Superpumper unsuccessfully appealed the arbitration order to the state supreme court, the dispute went to arbitration before a three-member panel of attorneys. On August 18, 1999, the arbitration panel granted Superpumper's request for setoff.

On November 5, 1999, before judgment confirming the arbitration award was entered in state court, Nerland Oil filed a Chapter 7 bankruptcy petition. As a result, Nerland Oil's bankruptcy estate was subject to an automatic stay which barred issuance or enforcement of any state court judgment affecting the estate. See 11 U.S.C. § 362(a)(1), (2). Therefore, on November 18, 1999, Nerland Oil and WFTS resisted confirmation of the arbitration decision in state court and WFTS moved to vacate the arbitration award. Although the state trial court originally adopted the arbitration award, the state supreme court reversed the trial court's decision, holding that, due to the automatic stay triggered by the bankruptcy filing, the arbitration award was not final or enforceable. Superpumper, Inc. v. Nerland Oil, Inc., 620 N.W.2d 159 (N.D.2000).

Superpumper then initiated this adversary proceeding on April 19, 2000, seeking summary judgment to adopt the arbitration award in the United States Bankruptcy Court for the District of North Dakota. See 28 U.S.C. §§ 157, 1334; 11 U.S.C. § 553 (enabling creditor of bankruptcy estate to offset a mutual debt arising before commencement of bankruptcy filing). Nerland Oil counterclaimed, seeking reversal of the arbitration award and monetary damages resulting from Superpumper's breach of the long-term supply and freight agreements with WFTS.

Additionally, the United States, through the IRS, cross-moved for summary judgment against Nerland Oil, arguing that it possessed a superior interest in the promissory note payments on the basis of several prior federal tax liens against Nerland Oil. The federal tax liens originated in the early 1990s, when the IRS assessed unpaid federal excise and employment taxes against Nerland Oil for the following dates: August 9, 1993, August 30, 1993, September 20, 1993, December 27, 1993, January 3, 1994, December 9, 1996, December 31, 1996, November 3, 1997, December 22, 1997, and September 20, 1999. Nerland Oil did not pay these tax assessments, and the IRS filed proper notice of its federal tax liens against Nerland Oil on September 21 and 22, 1998. At the time Nerland Oil filed its bankruptcy petition, it owed the IRS $1,693,979.57 for federal tax liens covering the 1993 and 1994 time period, which occurred prior to the sale of the Dakota Fuel Stop to Superpumper. The IRS argued that it should not be bound by the arbitration award since it was not a party to the arbitration.

On September 19, 2000, the bankruptcy court conducted a hearing to consider the cross-motions for summary judgment. At the hearing, the parties agreed to rely on the record established during the arbitration proceeding, supplemented by evidence regarding the federal tax liens. The bankruptcy court addressed for the first time the impact of the federal tax liens on Superpumper's right of setoff. On October 20, 2000, the bankruptcy court denied Superpumper's motion for summary judgment and granted summary judgment in favor of the IRS, concluding that (1) the federal tax liens became choate when the federal taxes were assessed against Nerland Oil in 1993 and 1994, thus giving the IRS priority over Superpumper in collecting its debt from Nerland Oil, and (2) because Superpumper did not qualify as a holder of an implied security interest, the IRS's lien collection right was not invalid under 26 U.S.C. § 6323(a). See Superpumper, Inc. v. Nerland Oil, Inc., 284 B.R. 272 (Bankr.D.N.D. 2000).

Superpumper appealed the bankruptcy court decision to the district court. The district court affirmed, agreeing with the bankruptcy court that the federal tax liens took priority over Superpumper's setoff. The district court also clarified that, because a setoff does not introduce any new money into the estate, it is treated as a lien, not a payment, for purposes of determining priority, and therefore must be treated as a lien inferior to the federal tax liens. Further, the district court concluded that because Superpumper was...