McDermott v. Zions First Nat. Bank, N.A.

• Decision Date: 02 October 1991
• Docket Number: No. 90-4023,90-4023
• Citation: 945 F.2d 1475
• Parties: -5767, 91-2 USTC P 50,491 Bruce J. McDERMOTT and Betty McDermott, Plaintiffs, v. ZIONS FIRST NATIONAL BANK, N.A., Defendant-Appellee, United States of America, By and Through Internal Revenue Service, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1475

945 F.2d 1475

68 A.F.T.R.2d 91-5767, 91-2 USTC P 50,491

Bruce J. McDERMOTT and Betty McDermott, Plaintiffs, v. ZIONS FIRST NATIONAL BANK, N.A., Defendant-Appellee United States of America, By and Through Internal Revenue Service, Defendant-Appellant.

No. 90-4023.

United States Court of Appeals Tenth Circuit.

Oct. 2, 1991.

William S. Estabrook, Atty., Tax Div., Dept. of Justice, Washington D.C. (Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen and James H. Love, Attys., Tax Div., Dept. of Justice, Washington, D.C., with him on the brief, Dee V. Benson, U.S. Atty., Salt Lake City, Utah, of counsel), for defendant-appellant.

T. Richard Davis of Callister, Duncan & Nebeker, Salt Lake City, Utah, for defendant-appellee.

Before TACHA and SETH, Circuit Judges, and BRATTON, Senior District Judge. ^*

BRATTON, Senior District Judge.

Plaintiffs, Bruce and Betty McDermott, brought this interpleader action to determine priority in the proceeds of a sale of real property. Zions First National Bank (Zions) claims a lien arising out of a judgment by a Utah state court against the McDermotts. The competing lien of the United States is a federal tax lien claimed by the Internal Revenue Service on behalf of the United States (IRS). Both parties moved for summary judgment, and the district court granted summary judgment in favor of Zions. The IRS has appealed; we affirm.

I.

Zions obtained its judgment for $67,977.67 against the McDermotts on June 22, 1987, and properly docketed the judgment in Salt Lake County on July 6, 1987. The lien attached to all of the McDermotts' real property and after-acquired property located in the county. ¹ The IRS filed its Notice of Federal Tax Lien on September 9, 1987. Its lien attached to all of the McDermotts' owned and after-acquired real and personal property. ² On September 23, 1987, the McDermotts acquired title to certain real property in Salt Lake County to which they already had a buyer, Bob Hansen. There is no evidence in the record that either Zions or the IRS attempted to execute on its lien prior to this time. However, in order to obtain title insurance for the property and complete the sale to Mr. Hansen, the title insurance company required the McDermotts to obtain releases from Zions and the IRS.

Accordingly, the parties entered into an escrow agreement in which Zions and the IRS released their claims to the real property itself but reserved their rights to the cash proceeds of the sale. In the agreement, the parties addressed the issue of priority by providing:

The respective priorities of the parties to the cash proceeds shall be identical to the priorities of the respective liens of the parties as they existed against the real property as of September 23, 1987, after Bruce J. McDermott successfully bid and purchased the property at the Trustee's Sale, notwithstanding the change in form of the collateral.

The agreement also required the McDermotts to institute this interpleader action so that a court could determine who was entitled to priority in the net proceeds. ³

The McDermotts were not strangers to the property they acquired. In 1981 they had entered into a Uniform Real Estate Contract (UREC) to sell this property to Ron Christensen and Gary Carter (C & C). Pursuant to the terms of the UREC, C & C paid $191,000.00 cash to the McDermotts and agreed to pay the balance of the purchase price monthly. The McDermotts accepted from C & C a Trust Deed Note in the amount of $146,000.00 and a Trust Deed securing the Note with C & C's interest in the property and C & C's interest was conveyed to the Trustee. Legal title to the property, however, remained with the McDermotts. ⁴

C & C defaulted on their obligations under the Trust Deed Note in early 1986. Before the Trustee could hold a sale of the property, C & C assigned their interest in the UREC to C & C Investments. C & C Investments subsequently filed a petition for bankruptcy, and a pending sale was stayed. During the bankruptcy proceedings, the McDermotts gave C & C time to find a buyer for the property and, as consideration, released their interest in the UREC. C & C did not find a buyer, and by August 1987 the McDermotts succeeded in getting the property released from the bankruptcy estate and the Trustee noticed the sale. The McDermotts repurchased the property at the sale by submitting a credit bid and assuming an underlying mortgage.

II.

The district court held that Zions had priority because its lien was filed "first in time." The court applied the "first in time, first in right" rule after finding that the liens simultaneously attached to the real property on September 23, 1987. In addition, the court found that in the Escrow Agreement the IRS waived any interest it might have had in the UREC as personalty and the proceeds of that personalty. The court assumed, but did not decide, that the IRS lien had attached to the McDermotts' interest in the real estate contract and that Zions' lien did not.

We review a grant of summary judgment by examining the record to determine whether there are any remaining genuine issues of material fact and whether the district court correctly applied the substantive law. We will affirm if any proper ground exists to support the district court's decision. United States v. State of Colo., 872 F.2d 338, 339 (10th Cir.1989); Setliff v. Memorial Hosp. of Sheridan County, 850 F.2d 1384, 1391-92 (10th Cir.1988). Our review is de novo. Croft v. Harder, 927 F.2d 1163, 1164 (10th Cir.1991). In this case there are no facts in dispute and we find that the district court was correct that Zions' lien had priority over the IRS lien. However, as we explain in Part IIIB of this opinion, we differ from the district court in that we apply Congressional and regulatory directive, rather than the common law rule of "first in time, first in right."

III.

In this appeal, the IRS argues it did not waive its claim to the McDermotts' interest in the UREC and therefore it should have priority because its lien attached to the UREC before Zions' lien attached to the real property. In the alternative, the IRS argues it has priority because Zions' lien was not "choate" at the time the IRS filed its Notice of Tax Lien as the McDermotts did not yet own the real property at issue. Finally, the IRS claims that, if nothing else, it should share pro-rata in the fund. We will address each argument in turn.

A.

The Escrow Agreement provided that

"[t]he monies placed in escrow shall be in lieu of all legal and equitable rights of the IRS and Zions to the real property releases [sic] by them as part of this agreement. Neither party hereto waives any rights, defenses and claims that they may have had or any of them may have had in any interest in and to the real property, such rights being reserved and shall apply to the cash proceeds being held in escrow in substitution of the subject real property."

The construction of a contract is a question of law for the court. Resort Car Rental System, Inc. v. Chuck Ruwart Chevrolet, Inc., 519 F.2d 317, 320 (10th Cir.1975). We agree with the district court that the plain language of the agreement shows that both Zions and the IRS intended to attach their liens to a particular piece of real property, the subject of the sale to Mr. Hanson. ⁵

B.

Often, the first question to be addressed in a case involving priority of a federal tax lien is whether or not the taxpayer has rights in particular property to which the federal lien could attach. That question is resolved by state law. See, e.g., Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960); Bigheart Pipeline Corp. v. United States, 835 F.2d 766, 767 (10th Cir.1987). However, in this case the parties removed the state law issue of property rights by implicitly agreeing in the Escrow Agreement that their lien would attach to certain real property owned by the McDermotts. Accordingly, the only issue remaining is the priority of the two competing liens.

Federal law determines priority between federal tax liens and state-created liens. United States v. Equitable Life Assurance Soc'y of the U.S., 384 U.S. 323, 328, 86 S.Ct. 1561, 1564, 16 L.Ed.2d 593 (1966); Allan v. Diamond T. Motor Car Co., 291 F.2d 115, 116 (10th Cir.1961). Under federal law, judgment lien creditors are among certain creditors who have priority over federal tax liens when their liens are fully perfected and "choate" prior to the filing of the federal government's Notice of Tax Lien. 26 U.S.C. § 6323(a); 26 C.F.R. § 301.6323(h)-1(g); see also United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 89, 83 S.Ct. 1651, 1655, 10 L.Ed.2d 770 (1963). All other creditors have priority over federal tax liens if their liens were fully perfected and choate before the federal tax lien arose at the time of assessment. United States v. City of New Britain, 347 U.S. 81, 85-86, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954); 28 U.S.C. § 6322. ⁶

Whether or not a lien is choate is a federal question. United States v. Security Trust & Sav. Bank, Executor, 340 U.S. 47, 49-50, 71 S.Ct. 111, 113, 95 L.Ed. 53 (1950). For a prior lien on all of a person's real or personal property to take priority over a federal tax lien, the lien must be "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." City of New Britain, 347 U.S. at 84, 74 S.Ct. at 369; see also United States v. Vermont, 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964).

The Treasury Department has incorporated the judicially-created "choateness" doctrine into its definition of "judgment lien creditor" for purposes of 26 U.S.C. § 6323(a).

The term "judgment lien creditor" means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a...