In the United States District Court For the Central District of Illinois, Danville, Division. No. 80 C 2043 -- Harold A. Baker, Judge.
Cummings, Chief Judge, Coffey, Circuit Judge, and Moran, District Judge.*fn*
This appeal involves a determination of the respective priority between a federal tax lien on a taxpayer's accounts receivable and a private individual's security interest in the same accounts receivable. The district court granted summary judgment in favor of the government finding that the federal tax lien was entitled to priority in all of the taxpayer's accounts receivable arising more than 45 days after the Internal Revenue Service first filed notice of its tax lien. We affirm.
On June 20, 1977, the Director of the Illinois Department of Public Aid certified the taxpayer, Eventide Homes, Inc., to participate in the Title XIX Medicaid Program as a skilled and intermediate nursing care facility.*fn1 Eventide Homes' initial certification for participation in the Medicaid Program was effective from March 1977 through March 1978, and was later extended through 1980. Under the certification agreement between Eventide Homes and the Illinois Department of Public Aid, Eventide Homes was under no obligation to provide medical and health care services to public aid recipients of the State of Illinois, but if they decided to provide such care, the Department agreed to reimburse Eventide Homes.
On May 10, 1979, Eventide Homes gave a $75,000 promissory note for value to Mervin Beil and executed a security agreement granting Beil a security interest in the taxpayer's "accounts receivable, and all goods, equipment, fixtures or inventory now or hereafter existing" to secure payment of the promissory note. Beil perfected his security interest pursuant to Ill. Rev. Stat. ch. 26, § 9-401(1)(c) by filing a financing statement with the Illinois Secretary of State's office on May 17, 1979. Beil later sold his security interest in Eventide Homes' accounts to the plaintiff J. D. Court. The assignment of that security interest was recorded with the Illinois Secretary of State on December 21, 1979.*fn2
During 1979 and 1980, the taxpayer Eventide Homes provided medical and health care services to Illinois public aid recipients entitling Eventide Homes to receive approximately $33,000 from the Illinois Department of Public Aid. Of this amount, $907.38 was for services rendered to Illinois public aid recipients by Eventide Homes prior to December 1, 1979, with the remainder representing amounts due for the services rendered after December 1, 1979.*fn3
Because of Eventide Homes' failure to pay its federal income taxes, the Internal Revenue Service assessed delinquent taxes against Eventide Homes and imposed a federal tax lien on Eventide Homes' property sometime prior to September 1979.*fn4 On September 17, 1979, the Internal Revenue Service filed in the Kankakee County, Illinois Recorder's Office the first of four notices of tax liens against Eventide Homes' property, in the amount of $3,802.00. The three other notices of tax liens against Eventide Homes were filed in the Kankakee Recorder's Office on the following dates and for the following amounts: (1) October 10, 1979 for $11,084; (2) October 16, 1979 for $10,484; and (3) January 30, 1980 for $43,555.
On January 23, 1980, the Internal Revenue Service levied*fn5 on the funds then due and owing to Eventide Homes from the Illinois Department of Public Aid for services rendered to public aid recipients. Approximately two weeks later, on February 15, 1980, Eventide Homes (the taxpayer) was placed in receivership. The plaintiff J. D. Court filed this action to enjoin the government from levying on the funds of the Illinois Department of Public Aid owed to Eventide Homes alleging that it is entitled to priority to all of the levied funds by virtue of its position as assignee of the security interest in Eventide Homes' "accounts receivable." The levied funds are presently being held in escrow pending resolution of this lawsuit.
In its summary judgment order, the trial court found that the plaintiff J. D. Court's security interest took priority in the taxpayer's accounts receivable which came into existence within forty-five days of the IRS's first filing of a notice of tax lien. The court further determined that the government had priority in the accounts receivable that came into existence after the forty-five days had expired from the filing of the first tax lien pursuant to 26 U.S.C. § 6323(c). The plaintiff J. D. Court appeals from the decision of the district court.
Since one of the parties in this case is the United States holding a lien for unpaid taxes, federal law governs the priority of the conflicting liens on Eventide Homes' accounts receivable. United States v. Pioneer American Insurance Co., 374 U.S. 84, 10 L. Ed. 2d 770, 83 S. Ct. 1651 (1963). Specifically, the Federal Tax Lien Act of 1966, 26 U.S.C. §§ 6321-6326 sets forth the rights of private creditors with respect to a federal tax lien.
The Tax Lien Act follows the general rule that a "lien first in time is first in right." In general, a federal tax lien arises (i.e., "attaches")*fn6 "at the time the [tax] assessment is made," 26 U.S.C. § 6322, and therefore a tax lien normally takes priority over other liens arising subsequent to assessment of the delinquent tax.*fn7 Section 6323(a)*fn8 of the Act creates an exception to § 6322's rule that a federal tax lien generally attaches at the time the delinquent tax is assessed; under § 6323(a), when the "holder of a security interest" also claims an interest in property subject to a federal tax lien, the federal tax lien is deemed to have attached when the IRS files a notice of tax lien, rather than when the delinquent tax was first assessed. Thus, the holder of a security interest in a taxpayer's property will prevail against a government tax lien on the same property if the security interest ...