Opinion
Nos. CIV 05-1119-PHX-DGC, BK 99-104519-PHX-RTB, Adv. Nos. 2:04-ap-099 and 2:99-ap-868 (consolidated proceedings).
November 9, 2005
ORDER
National Dealer Financial Services ("NDFS") appeals from the Bankruptcy Court's denial of its summary judgment motion and grant of summary judgment in favor of the Internal Revenue Service ("IRS") in the amount of approximat ely $36,295. Doc. #2. For the reasons stated below, the Court will affirm the decision of the Bankruptcy Court.
Background
On November 10, 1995, Steven Rogers and Joanne Kliensmith purchased real property in Scottsdale, Arizona, as joint tenants. Prior to the purchase of the property the IRS had assessed certain unpaid tax obligations against Rogers for tax years 1986, 1987, 1989, 1991, 1992, 1994, and 1995. Doc. #2. On November 20, 1996, Rogers executed a guarantee to NDFS for $151,900 in satisfaction of a business debt. On August 9, 2000, the Scottsdale property was sold. In dispute are the respective rights of NDFS and the IRS to excess proceeds from the sale.
A federal tax lien attaches to a taxpayer's property when unpaid taxes are assessed. W. Nat'l Bank v. United States, 8 F.3d 253, 256 (5th Cir. 1993). In general, a tax lien "does not require a filing of public notice, and once created, the tax lien is effective as against the taxpayer" until paid. TKB Int'l, Inc. v. United States., 995 F.2d 1460, 1463 (9th Cir. 1993). Both part ies agree that the IRS had assessed income tax liabilities before 1996 well in excess of the $36,295 at issue. Doc. #2. NDFS asserts, however, that the 1996 guarantee given to NDFS by Rogers is protected from, and has priority over, the IRS's tax liens pursuant to NDFS's "holder of a security interest" status under 26 U.S.C. § 6323(a).
Section 6323 operates to protect holders of perfected security interests from unfiled tax liens. See Rice Inv. Co. v. United States, 625 F.2d 565, 568 (5th Cir. 1980). Section 6323(f) provides that notice of the taxing authority's lien "shall be filed" in the public records before the lien is effective against the holder of a security interest. 26 U.S.C. § 6323(f). Here, the IRS did not file its first tax lien notice until March 22, 1999. Doc. #2.
Bankruptcy Judge Baum granted the IRS's motion for summary judgment. Judge Baum held that NDFS's lien was not "summarily enforceable," as required for priority, because (1) the lien did not comply with state law requirements, (2) Roger's lien purported to transfer the entire property interest to NDFS without the consent of the other co-tenant, and (3) NDFS was a sophisticated lender and the application of equitable principles would be inappropriate under the facts. Doc. #3. Judge Baum also expressed "serious concern" as to whether NDFS's lien even qualifies as a "security interest" as defined by § 6323(h). Id.
Discussion
I. Standard of Review."In reviewing the decision of a bankruptcy court, the district court acts as an appellate court and is authorized to affirm, modify or reverse a bankruptcy court's order, or to remand to the bankruptcy court. The standard of review differs for questions of law and questions of fact. The bankruptcy court's conclusions of law are reviewed de novo. The bankruptcy court's findings of facts should not be set aside unless they are clearly erroneous." In re Diversified Contract Servs. Inc., 158 B.R. 169, 171 (N.D. Cal. 1993) (citing Federal Rule of Bankruptcy Procedure 8013 and In re Alcala, 918 F.2d 99, 103 (9th Cir. 1990)). "A finding is clearly erroneous only if `based on the entire evidence,' a court `is left with a definite and firm conviction that a mist ake has been committed.'" Id. (citing Anderson v. Bessemer City, 470 U.S. 564, 565 (1985)). "Where there are two permissible views of the evidence, the fact finder's choice between them cannot be clearly erroneous." In re Smith, 242 B.R. 694, 700 (9th Cir. 1999).
II. Analysis.
Priority for purposes of federal law is governed by the common law principle that "first in time is the first in right." United States v. City of New Britain, 347 U.S. 81, 85 (1954). The first in time, first in right principle requires that the state lien be both choate and summarily enforceable. See Monica Fuel v. I.R.S., 56 F.3d 508, 512-13 (3rd Cir. 1994). See also In re Terwillinger's Catering Plus, Inc., 911 F.2d 1168, 1176 (6th Cir. 1990) (state lien holder must show that he or she had the right to enforce the lien prior to the attachment of the federal lien); Monica Fuel, 56 F.3d at 512 (in addition to satisfying the New Britain test, state liens must also be summarily enforceable to prime a competing federal lien); United States v. Utah State Tax Comm'n, 642 F.Supp 8,10 (D. Utah, 1983) (non-federal lien must be summarily enforceable and not have condit ions that affect its viability). To be summarily enforceable, the lien must be enforceable wit hout a judicial proceeding. Id.
Here, NDFS's lien was not summarily enforceable.
First, Rogers placed a security lien on the entire property without the consent of Kliensmith, the co-tenant. In Arizona, the undivided interest of a joint tenant may be made subject to a lien without the consent of the co-tenant, A.R.S. § 33-701(A), but the ent ire estate cannot be subjected to the lien unless the co-tenant agrees. See Cooley v. Veiling, 505 P.2d 1381 (Ariz. 1973). Kliensmith never consented to the NDFS lien. Doc. #3, Doc. #46, ¶ 12. She "would not agree to NDFS's demands [and refused to] sign any additional agreements." Id. Therefore, the bankruptcy court was correct in finding that NDFS's lien was unenforceable because Rogers could not convey more interest than he owned.
Second, "[a] mortgage may be created, renewed or extended only by a writing executed with the formalities required of a grant of real property." A.R.S. § 33-701(B). NDFS's lien failed to comply with A.R.S. § 33-701. No deed of trust was given to NDFS as security for the debt; there was no transfer of property to secure the debt against subsequent creditors. Doc. #3.
NDFS argues that even although it failed to comply with the legal formalities, it "intended to . . . create a mortgage/consensual lien, [and only] through inadvertence [failed to] technically achieve [its] purpose. . . . [Therefore,] equity must come to [its] rescue by imposing an equitable lien" upon the property. Doc. # 2. NDFS reasons that if it is granted a lien in equity, then the formal obligations under state law are relieved. Doc. #2. Based on the facts, however, the Court does not find that the bankruptcy court erred in holding that NDFS was not entitled to an equitable lien.
Equitable liens arise "[w]here property of one person can by a proceeding in equity be reached by another as security for a claim on the ground that otherwise the former would be unjustly enriched." Restatement of Law on Restitution § 161 (quoting Byers v. Wik, 818 P.2d 200, 209 (Ariz.App. 1991)). A court may consider the sophistication of the parties when deciding if the principle of equitable mortgages applies. Shelton v. Cunningham, 508 P.2d 55, 58 (Ariz. 1973). NDFS, by its own admission, was in the business of "providing financing to automobile dealers for the purpose of financing their inventory of approved Vehicles." Bnkr. Doc. #48, Stipulated Statement of Facts, Ex. B (Terms and Conditions of Master Loan Agreement). Any entity in such a financing business can reasonably be expected to know the formalities for securing a loan. The bankruptcy court did not commit clear error when it found that NDFS was a sophisticated lender not entitled to an equitable lien.
NDFS cannot circumvent state laws and gain priority over the IRS tax liens merely by stating its intent ion to create a valid lien. The Bankruptcy Court did not err in concluding that the NDFS lien was not summarily enforceable and was not entitled to priority status over the IRS liens. Nor did the court err in concluding that NDFS was not entitled to equitable relief.
IT IS ORDERED that the decision of the bankruptcy court is affirmed. IT IS FURTHER ORDERED that Appellee's Motion to Strike (in part) Appellant's Reply Brief (Doc. #9) is denied as moot.