Metropolitan Nat. Bank v. U.S.

• Decision Date: 30 May 1990
• Docket Number: No. 89-4710,89-4710
• Parties: -5058, 90-1 USTC P 50,331 METROPOLITAN NATIONAL BANK, James M. Oberlies and Robert E. Ryan, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1297

901 F.2d 1297

66 A.F.T.R.2d 90-5058, 90-1 USTC P 50,331

METROPOLITAN NATIONAL BANK, James M. Oberlies and Robert E.

Ryan, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 89-4710

Summary Calendar.

United States Court of Appeals, Fifth Circuit.

May 30, 1990.

Gary R. Allen, Chief, Appellate Sec., Tax Div., Dept. of Justice, Kimberly Stanley, William S. Estabrook, George Phillips, U.S. Atty., U.S. Dept. of Justice, Washington, D.C., for defendant-appellant.

Woodrow W. Pringle, III, Gulfport, Miss., for plaintiffs-appellees.

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

Before POLITZ, GARWOOD, and JOLLY, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

The United States appeals from the district court's judgment holding that the United States' perfected tax lien, filed against three parcels of real property owned by the taxpayer, Weaver & Sons, Inc., was not entitled to priority over the interests claimed in the property by the appellees, Metropolitan National Bank (the "Bank"), James M. Oberlies, and Robert E. Ryan. 716 F.Supp. 946. We hold that the appellees were not entitled to priority under section 6323(a) of the Internal Revenue Code, and we therefore reverse the judgment of the district court and remand the case for further proceedings.

I

The facts were stipulated by the parties. On February 23, 1978, Weaver & Sons, Inc. (the "taxpayer"), by its president, S. Albert Weaver, executed a deed of trust in favor of First State Bank and Trust, the predecessor of appellee Metropolitan National Bank. The deed of trust recited that the taxpayer was indebted to the Bank in the amount of $400,000, and listed certain real property owned by the taxpayer located in Gulfport, Mississippi, as security for the indebtedness. The deed of trust designated Robert L. Taylor as trustee for the lender, and Robert L. Taylor, in his capacity as a notary public, acknowledged the signature of the grantor's president. The deed of trust was filed and recorded by the Chancery Clerk's office in Harrison County, Mississippi on February 24, 1978.

On February 23, March 2, March 9, March 16, and June 2, 1987, assessments were made against the taxpayer for unpaid federal withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes. Notices of the federal tax liens resulting from these assessments were enrolled with the Harrison County Chancery Clerk's office on May 7 and August 27, 1987. The unpaid balance of these assessments totaled $195,621.61, plus interest and statutory additions to tax.

The taxpayer defaulted in payment of its obligation to the Bank, and subsequently filed a Chapter 7 bankruptcy petition. Although none of the papers relating to the taxpayer's bankruptcy are contained in the record before us, the appellees' brief states that the taxpayer's bankruptcy petition was filed on August 19, 1987 and that the Internal Revenue Service ("IRS") filed a proof of claim dated November 24, 1987. At the time the taxpayer defaulted, it owed $268,833.55 on the loan secured by the deed of trust.

On March 8, 1988, the taxpayer executed a corrected deed of trust in favor of the Bank's predecessor institution in the amount of $400,000, secured by the subject property. The corrected deed of trust was properly acknowledged and recorded in the Harrison County Chancery Clerk's office on March 9, 1988.

The bankruptcy court lifted the automatic stay, authorizing the Bank to repossess and foreclose upon the subject property. Notices of foreclosure were posted in the county courthouse, published in the local newspaper, and sent to the IRS by certified mail. A nonjudicial foreclosure sale was held on April 19, 1988, at which the Bank, for $103,600, and appellee Robert E. Ryan, for $31,000, each purchased a portion of the subject property. Thereafter, the Bank conveyed a portion of the property it had purchased in the foreclosure sale to appellee James M. Oberlies. The IRS took no action to stop the foreclosure, or to prevent the sale of the property to the Bank or to Ryan and Oberlies.

II

The appellees brought this action against the United States under 28 U.S.C. Sec. 2410, seeking to quiet title to the property. The United States counterclaimed, joining the taxpayer as an additional defendant, seeking to foreclose its federal tax liens against the subject property and to collect $195,621.65, the outstanding tax liability of the taxpayer. On cross motions for summary judgment, the district court granted summary judgment in favor of the appellees. The district court held that the original deed of trust was improperly acknowledged and that, even though the deed of trust was recorded, because the defect in the acknowledgment was apparent on the face of the deed, the recordation of the deed did not provide constructive notice to subsequent creditors that the property was encumbered. Nevertheless, the court held that, even though the deed was improperly acknowledged and should not have been recorded, the deed "provided actual notice to anyone who cared to review the records of the Chancery Clerk." The district court did not hold, however, that agents of the United States had in fact reviewed the county records prior to filing the notices of federal tax liens against the taxpayer, or that the United States possessed any information sufficient to place it on "inquiry notice" of the deed. Finally, the district court concluded that the United States' tax lien was not entitled to priority over the Bank's interest because, under state law, the Bank held equitable title to the property by virtue of the original defective deed of trust, and the United States had actual notice of such equitable title. Thus, when the Bank foreclosed upon the property in the non-judicial sale, the district court held that the United States' junior tax lien was extinguished under the provisions of Internal Revenue Code section 7425(b). The United States appeals.

III

A

Under 26 U.S.C. Sec. 6321, the amount of a delinquent taxpayer's liability constitutes a lien in favor of the United States upon all of the taxpayer's property and rights to property, whether real or personal. The lien imposed by Sec. 6321 is effective from the date of assessment of the tax, and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. Sec. 6322. The question whether and to what extent a taxpayer has "property" or "rights to property" to which the tax lien attaches is determined under the applicable state law. United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983). It is undisputed in this case that the taxpayer owned, or had rights to, the subject property to which the federal tax liens attached.

Once it has been determined under state law that the taxpayer owns property or rights to property, federal law controls for the purpose of determining whether an attached tax lien has priority over competing liens asserted against the taxpayer's property. Rodgers, 461 U.S. at 683, 103 S.Ct. at 2137. "When a third party also claims a lien interest in the taxpayer's property, the basic priority rule of 'first in time, first in right' controls, unless Congress has created a different priority rule to govern the particular situation." Texas Commerce Bank-Fort Worth, N.A. v. United States, 896 F.2d 152 (5th Cir.1990). Section 6323 of the Internal Revenue Code, as amended by the Federal Tax Lien Act of 1966, governs the validity and priority of federal tax liens imposed by Sec. 6321 against "certain persons." The appellees rely on the special priority rules of subsection (a) of Sec. 6323, which provides, in pertinent part, that a federal tax lien shall not be valid against any "holder of a security interest" until notice of the tax lien has been filed. Thus, the respective priorities with respect to federal tax liens and competing claims that are protected under Sec. 6323(a) are dependent upon which claim is perfected "first in time." Both parties agree that, if the Bank was a "holder of a security interest" at the time the United States filed its federal tax liens, the appellees' interests are entitled to priority over the federal tax liens and that the tax liens were thus extinguished in the foreclosure sale.

The definition of "security interest" is found in 26 U.S.C. Sec. 6323(h)(1):

The term "security interest" means 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 only when the lienholder satisfies two requirements:

(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.

Because the subject property is in existence and the Bank parted with money in return for the deed of trust, the Bank's interest in the subject property by virtue of the original deed of trust is entitled to priority over the subsequently filed federal tax lien under Sec. 6323(a) if, as a result of filing the original deed of trust, the Bank is "protected under local law against a subsequent judgment lien arising out of an unsecured obligation." 26 U.S.C. Sec. 6323(h)(1). The United States argues that the district court erred in holding that the Bank is a "holder of a security interest" within the meaning of Sec. 6323(a) because the Bank's interest was not protected under Mississippi law against a subsequent judgment lien arising out of an unsecured obligation, and thus, there was no security interest in existence, within the meaning of Sec. 6323(h)(1) at the time of the filing of the federal tax liens.

B

Because the corrected deed of trust was not filed until after the federal...