Litton Indus. Automation Systems, Inc. v. Nationwide Power Corp.

• Citation: 106 F.3d 366
• Decision Date: 24 February 1997
• Docket Number: No. 95-2725,95-2725
• Parties: -1356, 65 USLW 2582, 97-1 USTC P 50,236, 31 UCC Rep.Serv.2d 1175, 10 Fla. L. Weekly Fed. C 719 LITTON INDUSTRIAL AUTOMATION SYSTEMS, INC., Plaintiff, v. NATIONWIDE POWER CORPORATION; Fitzgerald, Peters, Dakmak & Miller, P.C., Defendants-Cross-Defendants, United States of America, Defendant-Cross-Defendant-Appellee, Magna Card, Inc., d.b.a. Highlander International Corp.; John F. Roscow, III, Defendants-Cross-Defendants-Appellants, Brooks Satellite, f.k.a. Nationwide Power Corporation, Defendant-Cross-Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 366

106 F.3d 366

79 A.F.T.R.2d 97-1356, 65 USLW 2582,

97-1 USTC P 50,236,

31 UCC Rep.Serv.2d 1175,

10 Fla. L. Weekly Fed. C 719

LITTON INDUSTRIAL AUTOMATION SYSTEMS, INC., Plaintiff, v. NATIONWIDE POWER CORPORATION; Fitzgerald, Peters, Dakmak &

Miller, P.C., Defendants-Cross-Defendants,

United States of America, Defendant-Cross-Defendant-Appellee,

Magna Card, Inc., d.b.a. Highlander International Corp.;

John F. Roscow, III, Defendants-Cross-Defendants-Appellants,

Brooks Satellite, f.k.a. Nationwide Power Corporation,

Defendant-Cross-Defendant.

No. 95-2725.

United States Court of Appeals, Eleventh Circuit.

Feb. 24, 1997.

John F. Roscoe, III, Steven M. Chamberlain, Scruggs & Carmichael, P.A., Gainesville, FL, for appellants.

Gary R. Allen, Murray S. Horwitz, Tax Division, Dept. of Justice, Paula K. Speck, Loretta C. Argrett, William S. Estabrook, Dept. of Justice, Washington, DC, for appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before BIRCH, Circuit Judge, KRAVITCH ^*, Senior Circuit Judge, and SCHWARZER ^**, Senior District Judge.

BIRCH, Circuit Judge:

The issue in this appeal is whether an unperfected security interest in interpleaded funds is entitled to priority over a competing federal tax lien. The district court held that the federal tax lien is entitled to priority. We affirm.

I. BACKGROUND

The facts in this appeal are essentially undisputed. Plaintiff Litton Industrial Automation Systems, Inc. ("Litton") filed this interpleader action in the United States District Court for the Eastern District of Michigan, from which it was transferred to the United States District Court for the Middle District of Florida. Litton deposited in the registry of the court $572,627.46, which it owed to Nationwide Power Corporation ("Nationwide") pursuant to a judgment obtained by Nationwide on August 15, 1989. The real parties in interest are Highlander International Corporation ("Highlander") and the United States. ¹

Highlander's interest in the interpleaded funds stems from an agreement between Nationwide and Highlander, pursuant to which Nationwide sought to secure a debt it owed to Highlander. ² In this agreement, Nationwide granted to Highlander a security interest in certain "cash collateral," including Nationwide's cause of action against Litton, which eventually resulted in the money judgment here in dispute. This interest arose on the date of the agreement, April 15, 1986. Highlander did not file a UCC-1 statement until August 1989, however. The Government's interest in the interpleaded funds arose from a tax assessment on June 9, 1986 of tax penalties exceeding $700,000 against Nationwide. On July 3, 1986, the Internal Revenue Service ("IRS") filed a notice of federal tax lien in Broward County, Florida, in which Nationwide had its principal executive office.

On July 27, 1989, the IRS served a notice of levy on Litton's attorney, directing him to deliver to the IRS any monies owed to Nationwide. After judgment was entered in favor of Nationwide in its suit against Litton, Litton initiated the instant interpleader action to determine which party is entitled to the funds. The district court granted summary judgment to the Government, holding that the federal tax lien was entitled to priority over Highlander's security interest. This appeal followed.

II. DISCUSSION

We have jurisdiction to review the district court's order under 28 U.S.C. § 1291. Because at least two of the defendants named in this interpleader action are of diverse citizenship, the district court's jurisdiction was founded on 28 U.S.C. § 1335. The Government has waived its sovereign immunity for interpleader actions involving tax liens in 28 U.S.C. § 2410.

We review the district court's grant of summary judgment de novo and apply the same legal standards as the district court. Sultenfuss v. Snow, 35 F.3d 1494, 1499 (11th Cir.1994) (en banc), cert. denied, --- U.S. ----, 115 S.Ct. 1254, 131 L.Ed.2d 134 (1995). This case involves a pure question of law: Is Highlander the "holder of a security interest" which is entitled to priority over the Government's federal tax lien under the Federal Tax Lien Act of 1966 ("FTLA"), 26 U.S.C. § 6323?

A. Applicable Law

Before we address the contentions of the parties, we briefly outline the applicable law. Under the Internal Revenue Code, a tax lien arises at the time of assessment, 26 U.S.C. § 6322, on "all property and rights of property, whether real or personal, belonging to" a delinquent taxpayer, id. § 6321. The FTLA provides, however, that the tax lien "shall not be valid as against any ... holder of a security interest ... until notice thereof which meets the requirements of subsection (f) has been filed." Id. § 6323(a). Therefore, any "security interest" which arises prior to the proper filing of a federal tax lien takes priority over the tax lien. See United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993). The FTLA defines a "security interest" as

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). The dispute in this case is whether Highlander's interest qualifies as a security interest as defined by the FTLA.

B. District Court Opinion and Contentions of the Parties

It is undisputed in this appeal that a tax lien arose upon all Nationwide's property on June 9, 1986, the first date of the tax penalty assessments against Nationwide. It is also undisputed that the IRS properly filed a notice of this tax lien in Nationwide's county of residence, as required by 26 U.S.C. § 6323(f)(2)(B), on July 3, 1986. Therefore, for Highlander's interest to take priority over the tax lien, Highlander must have been the holder of a "security interest," as that term is defined in the FTLA, on July 3, 1986. To do so, Highlander must establish that its interest satisfies four conditions:

(1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth.

Haas v. Internal Revenue Serv. (In re Haas), 31 F.3d 1081, 1085 (11th Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 2578, 132 L.Ed.2d 828 (1995). As in Haas, the only issue on appeal in this case is whether the third condition is satisfied. In other words, this case turns on whether Highlander's interest was protected under Florida law--the applicable local law--against a judgment lien arising out of an unsecured obligation on July 3, 1986.

Relying on the "hypothetical judgment lien creditor test" adopted by this court in Haas, the district court held that Highlander's interest was not protected under Florida law against a judgment lien.

[T]he hypothetical judgment lien creditor test operates to put the IRS in the shoes of any subsequent judgment creditor, including the most favorable shoes. Thus, if any subsequent judgment creditor could prevail over [Highlander], then the IRS prevails.

Haas, 31 F.3d at 1089 (footnote omitted). The district court reasoned that a class of judgment creditors, those who qualify as "lien creditors" as defined in U.C.C. § 9-301(3) and who have no notice of Highlander's previous unperfected interest, could have prevailed over Highlander's interest under Florida law. The court concluded that the Government prevails here.

Highlander contends, however, that under Florida law a "judgment lien" does not attach to intangible assets, such as the funds at issue in this case, until the judgment creditor has taken further judicial action--by way of garnishment or an independent suit to enforce the debt. See Peninsula State Bank v. United States, 211 So.2d 3, 5 (Fla.1968). Highlander concludes that the holder of a simple "judgment lien" on intangibles does not qualify as a UCC "lien creditor" under Florida law. Thus, Highlander's security interest, though unperfected, prevails over the judgment lien because Highlander's interest was the first to attach. See Fla. Stat. ch. 679.312(5)(b) (1995).

Highlander argues that Haas is distinguishable. The priority contest in Haas was between a mortgagee who had mistakenly released its mortgage on the contested real property and a federal tax lien. The applicable local law was Alabama law, which provided that the mortgagee's interest is subordinate to that of a "judgment creditor without notice." Haas, 31 F.3d at 1086. The issue decided in that case was whether knowledge on the part of the IRS of the mistakenly released mortgage affected the hypothetical priority contest--we decided that it did not--, not whether the IRS should be treated as a UCC lien creditor. In other words, the IRS would have won the priority contest in Haas, whether it was a UCC lien creditor or not, because it was the hypothetical holder of a "judgment lien" and thus a judgment creditor entitled to priority under Alabama law. Highlander acknowledges that, in Haas, we noted: "In interpreting the phrase 'protected under local law against a subsequent judgment lien,' courts and commentators have determined the phrase is equivalent to being protected against a 'lien creditor' as defined in U.C.C. § 9-301(3)." Haas, 31 F.3d at 1087. Highlander contends, however,...