Rice Inv. Co. v. U.S.

• Decision Date: 04 September 1980
• Docket Number: No. 77-2275,77-2275
• Citation: 625 F.2d 565
• Parties: 80-2 USTC P 9654 RICE INVESTMENT COMPANY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 565

625 F.2d 565

80-2 USTC P 9654

RICE INVESTMENT COMPANY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 77-2275.

United States Court of Appeals Fifth Circuit.

Sept. 4, 1980.

M. Carr Ferguson, Asst. Atty. Gen., Washington, D. C., Gilbert E. Andrews, Chief, App. Section, Crombie J. D. Garrett, Karl Schmeidler, Attys., Tax Div., Dept. of Justice, for defendant-appellant.

William T. Green, III, Houston, Tex., for plaintiff-appellee.

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

Before GODBOLD, GARZA and RANDALL, Circuit Judges.

RANDALL, Circuit Judge:

In October, 1973, Rice Investment Company ("Rice") loaned Handy Stop, Inc. (the "Debtor") $67,583.20. In connection with the loan, the Debtor executed and delivered to Rice a security agreement pursuant to which the Debtor granted to Rice a security interest in all of the Debtor's inventory then owned or thereafter acquired. A financing statement was filed in the office of the Secretary of State of the State of Texas on October 29, 1973. The Debtor made payments on its indebtedness to Rice from time to time. In March, 1975, $46,317.54 remained owing from the Debtor to Rice.

The Debtor incurred liabilities for withholding and FICA taxes for the third and fourth quarters of 1973 and the first quarter of 1974 in the total amount of $11,853.19. Assessments of the taxes were made during March, 1974. Thereafter, a notice of a federal tax lien in the amount of $8,521.51 was filed on April 26, 1974, for the third and fourth quarters of 1973, and a further notice of a federal tax lien in the amount of $4,587.59 was filed on August 5, 1974, for the first quarter of 1974. The Internal Revenue Service levied upon the Debtor's inventory on August 18, 1974. The outstanding tax liability of the Debtor, including interest, at that time was $13,514.18. The perishable inventory was sold by the United States on August 28, 1974 for $750, and the nonperishable items were sold on November 14, 1974 for $3,500.

In September, 1974, Rice brought suit against the United States under 26 U.S.C. § 7426 (1976) seeking recovery from the United States of the proceeds ($4,250) received by the United States from the sale of the Debtor's inventory. Rice's second amended complaint asserts that the lien of the United States under 26 U.S.C. § 6321 (1976) in the inventory of the Debtor was junior to the lien of Rice under 26 U.S.C. § 6323 (1976) (amended 1978; amendment not relevant to this appeal) and that the levy of the United States was therefore unlawful. During the proceedings, in response to interrogatories propounded by the United States, Rice acknowledged that it did not have any information in its possession by which it could determine the exact date on which the Debtor acquired the inventory which was seized by the Internal Revenue Service. ¹ Further, Rice admitted, in its motion for summary judgment, that none of the actual inventory on hand in October, 1973, when the security agreement was entered into, was part of the inventory seized and sold on August 28, 1974, and November 14, 1974.

On motions for summary judgment by both parties, the district court, without opinion, issued an order granting Rice's motion and denying the motion of the United States.

The question presented by this appeal is whether the federal tax lien filed by the United States on April 26, 1974, ² pursuant to 26 U.S.C. § 6321, primes the security interest held by Rice in the inventory which was seized by the United States on August 18, 1974. We hold that the lien of the United States does prime the security interest of Rice in such inventory, and accordingly, we reverse the summary judgment granted by the district court and remand with instructions to enter summary judgment for the United States.

Some History on the Problem

The opinion of this court in Texas Oil & Gas Corp. v. United States, 466 F.2d 1040 (5th Cir. 1972), cert. denied, 410 U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973), contains a description of the history of the competition between federal tax liens and private liens. ³ We will repeat here only so much of that history as is necessary for an understanding of the problem before the court.

Under 26 U.S.C. § 6321, every federal tax which is not paid on demand becomes a lien "upon all property and rights to property, whether real or personal, belonging to" the taxpayer. After-acquired property, such as the Debtor's property in this case, is reached by the lien. ⁴ The lien is effective from the date of assessment of the tax ⁵ and has aptly been described as a secret lien. ⁶ When the lien was first created in 1866, ⁷ it prevailed, even though secret, against a bona fide purchaser for value. ⁸ In 1913, however, Congress extended protection to purchasers, mortgagees and judgment creditors, ⁹ and in 1939, to pledgees, ¹⁰ against federal tax liens of which notice had not been filed in a designated office. Further, recognizing the impracticability of searching for tax liens in some cases, Congress in 1939 provided priority over filed tax liens under certain conditions for purchasers of, and lenders secured by "securities" ¹¹ and in 1964, for purchasers of motor vehicles. ¹² However, as against the rest of the world, including the taxpayer himself, the federal tax lien was effective upon assessment without any need for public notice.

The most basic principle employed in the adjudication of the priority of competing liens is "the first in time is the first in right." ¹³ When a federal tax lien is one of the liens involved, however, the Supreme Court added a gloss on that principle by requiring that in order to be "first in time," the nonfederal lien must first have become "choate," i. e., the identity of the lienor, the property subject to the lien and the amount of the lien must be established beyond any possibility of change or dispute. ¹⁴ Further, the determination of whether "a lien has acquired sufficient substance and has become so perfected as to defeat a later-arising or later-filed federal tax lien" is a matter of federal law. ¹⁵

As the federal law on "choateness" developed, few liens prevailed in the battle against federal tax liens. Even mortgages and other contractual security interests, despite their specially favored position under the federal statute, were vulnerable before 1966 to subsequently filed federal tax liens to the extent that the security embraced after-acquired property or involved disbursements (whether optional or obligatory) yet to be made, including foreclosure expenses and other outlays for which a mortgagee normally is entitled to a lien with the same priority as the principal debt.

Plumb, Federal Liens and Priorities Agenda for the Next Decade, 77 Yale L.J. 228, 231 (1967) (footnotes omitted).

Federal Tax Lien Act of 1966

Congress enacted the Federal Tax Lien Act of 1966 in an effort to conform the lien provisions of the Internal Revenue Code to the concepts developed in the Uniform Commercial Code. ¹⁶ Another primary objective was to provide some limited but specific relief from the harshness of the choateness rule for, among others, commercial lenders whose loans and collateral may change daily. ¹⁷

Section 6323 of the Internal Revenue Code, as amended by the Federal Tax Lien Act of 1966, sets forth certain limitations on the validity and priority of federal tax liens imposed by § 6321 of the Internal Revenue Code as against certain persons, including the holder of a security interest in property which is the subject of such a lien. Subsection (c) of § 6323 is the provision designed to provide a safe haven for the holders of security interests arising in certain commercial financing arrangements. Subsection (c) provides, in relevant part, that even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which

(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting

(i) a commercial transactions financing agreement, . . . and

(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

The balance of subsection (c) and subsection (h) define the terms used in subsection (c). Four of those definitions are relevant for our purposes the definitions of "commercial transactions financing agreement," "qualified property," "commercial financing security" and "security interest." The term "commercial transactions financing agreement" is defined as

an agreement (entered into by a person in the course of his trade or business)

(i) to make loans to the taxpayer to be secured by commercial financial security acquired by the taxpayer in the ordinary course of his trade or business, . . .

but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

The term "qualified property," when used with respect to a commercial transactions financing agreement, is defined to include "only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing." ¹⁸ The term "commercial financing security" is defined to mean "(i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory." Finally, subsection (h)(1) of § 6323 defines the term "security interest" as follows:

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 at any time (A) if, at such...