UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
AMERICAN INVESTMENT
FINANCIAL, A Utah Industrial Loan
corporation,
Plaintiff-Appellant,
Case No. 05-4217
v. (D.C. No. 2:03-CV-844-PGC)
(D. Utah)
UNITED STATES OF AMERICA,
Defendant-Appellee.
ORDER
Filed February 2, 2007
Before HENRY, and MURPHY, Circuit Judges, and FIGA,* District Judge.
Appellee’s motion to publish the decision entered on December 14, 2006, is
granted. The Clerk is directed to reissue the Order & Judgment as a published decision.
The published opinion is attached to this order.
Entered for the Court
Elisabeth A. Shumaker, Clerk
By:
Deputy Clerk
*
The Honorable Phillip S. Figa, United States District Judge for the District of
Colorado, sitting by designation.
F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
December 14, 2006
UNITED STATES COURT OF APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
AMERICAN INVESTMENT
FINANCIAL, A Utah Industrial Loan
corporation,
Plaintiff-Appellant,
Case No. 05-4217
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
(D.C. No. 2:03-CV-844-PGC)
Before HENRY, and MURPHY, Circuit Judges, and FIGA,** District Judge.
FIGA, District Judge.
American Investment Financial (“AIF”) appeals from the district court’s ruling
granting the United States partial summary judgment in a lien priority dispute. In
competing motions for summary judgment, AIF and the United States each claimed
**
The Honorable Phillip S. Figa, United States District Judge for the District of
Colorado, sitting by designation.
priority to cash collected for medical services provided after June 28, 2002. The district
court rejected AIF’s claims and granted partial summary judgment to the government.
We affirm.
I. BACKGROUND
Nightime Pediatrics Clinics, Inc. (“Nightime”), a Utah corporation also doing
business as Nightime Urgent Care, provided after-hours medical care to patients. AIF, a
Utah industrial loan corporation, loaned Nightime $803,000 in 2000, to be secured by all
of Nightime’s existing and after-acquired accounts, inventory and general intangibles.
The loan terms required Nightime to make monthly payments, but it defaulted on its
obligation on November 6, 2002. AIF then demanded that Nightime cure its default, and
later filed a complaint in Utah state court. A default judgment was entered against
Nightime on January 20, 2004, in the amount of $621,766.77 plus interest and attorney’s
fees.
Nightime also defaulted on tax obligations to the federal government, beginning in
1999. The IRS filed the first of four tax liens on May 14, 2002. As of October 11, 2003,
Nightime owed $599,739.41 to the IRS.
Nightime ceased operations on August 31, 2003. At that time, its assets included
inventory, accounts receivable and general intangibles. The accounts receivable consisted
of amounts owned to Nightime from healthcare insurance companies. Some of these
insurance payments were made pursuant to contracts between Nightime and various
insurance companies (“Provider Contracts”), which were entered into before the filing of
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the first federal tax lien. Each of the Provider Contracts included, among other things,
provisions for compensation to Nightime according to a set payment schedule for covered
services rendered to insured patients. The Provider Contracts gave Nightime preferred-
provider status, meaning that Nightime would receive a higher percentage of
reimbursement from the insurance company than it would receive if no Provider Contract
was in place.
After Nightime’s liquidation, at least $315,863.37 remained in cash receipts from
liquidation of accounts receivable, and $28,761.92 from the liquidation of its inventory.
A large portion of the cash receipts from the liquidation of the accounts receivable
consisted of payments made for services to patients after June 28, 2002, which is the end
of the 45-day “safe harbor” period following the filing of the first notice of the federal tax
lien under the relevant statutory provision. Some of these payments were from insurance
companies for services provided to covered patients (“disputed cash”), and the remaining
payments came from patients or entities that did not have a Provider Contract with
Nightime.1
AIF commenced a wrongful levy action against the United States on September
23, 2003. AIF and the Government filed cross-motions for summary judgment, each
claiming entitlement to the disputed cash that resulted from payments for services after
June 28, 2002. The district court denied AIF’s motion and granted the government’s
1
AIF made no claim to these remaining payments, unless they stemmed from
services provided within the 45-day safe harbor period. Such payments are not at issue in
this appeal.
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motion, holding that the disputed cash did not constitute proceeds of contract rights and
that the federal lien had priority. The court concluded that even if AIF’s security interest
extended to contract rights, the disputed cash was the proceeds of accounts receivable and
belonged to the Government. This court heard oral argument following AIF’s appeal.
II. STANDARD OF REVIEW
The decision of a district court to grant or deny a motion for summary judgment is
reviewed de novo. Adamson v. Unum Life Ins. Co. of Am., 455 F.3d 1209, 1212 (10th
Cir. 2006). Summary judgment is appropriate if there is no genuine issue of material fact
and a party is entitled to judgment as a matter of law. Id.; Fed. R. Civ. P. 56(c).
III. DISCUSSION
The Federal Tax Lien Act (“FTLA”) grants the United States a lien upon all
property and rights to property, both real and personal, of a taxpayer who has failed to
pay taxes after demand has been made. See 26 U.S.C. § 6321; Plymouth Sav. Bank v.
I.R.S., 187 F.3d 203, 206 (1st Cir. 1999). The FTLA gives certain commercial liens
priority over federal tax liens. See 26 U.S.C. § 6323. Congress enacted this legislation to
help improve the status of private secured creditors, and modernize the “relationship of
Federal tax liens to the interests of other creditors.” United States v. Kimball Foods, Inc.,
440 U.S. 715, 738 (1979) (quoting S. R EP. N O. 1708 at 1-2 (1966), as reprinted in 1966
U.S.C.C.A.N. 3722, and citing H.R. R EP. N O. 1884 at 35 (1966)).
Section 6323(c) gives a commercial lien (i.e. a security interest) priority over a
federal tax lien if certain conditions are met. First, the security interest must be in
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qualified property. Second, this qualified property must be covered by the terms of a
written agreement entered into before the federal tax lien filing. Third, this written
agreement must constitute either a commercial transactions financing agreement
(“CTFA”), which is at issue in the instant case, or one of two other specified agreements.
Finally, the security interest must be protected under state law against a judgment arising
out of an unsecured obligation.
A CTFA is an agreement entered into by a person in the course of trade or
business, in order “to make loans to a taxpayer to be secured by commercial financing
security acquired by the taxpayer in the ordinary course of his trade or business.” 26
U.S.C § 6323(c)(2)(A)(i). The loan must be made prior to or within 45 days of the
federal tax lien filing or before the lender had actual knowledge of the tax lien filing (if
this is earlier than 45 days) in order to qualify under this subsection. See §
6323(c)(2)(A)(ii). “Commercial financing security” is defined as inventory, mortgages
on real property, accounts receivable, and “paper of a kind ordinarily arising in
commercial transactions,” which includes contract rights. § 6323(c)(2)(C); 26 C.F.R. §
301.6323(c)-1(c). With respect to a CTFA, qualified property includes only commercial
financing security (e.g. contract rights or accounts receivable) acquired by the taxpayer
within 45 days of the federal tax lien filing. § 6323(c)(2)(B).
When analyzing a priority dispute under FTLA, courts first look to state law to
determine the “nature of the legal interest which the taxpayer had in the property sought
to be reached by the statute.” Aquilino v. United States, 363 U.S. 509, 512-13 (1960)
5
(ellipsis and footnote omitted); United States v. Cache Valley Bank, 866 F.2d 1242, 1244
(10th Cir. 1989). Federal law creates no property rights, but does attach federally defined
consequences to rights created under state law. See Aquilino, 363 U.S. at 513-14.
Once a court has determined that a property interest exists under state law, the
relative priority of the liens is determined under federal law. See Cache Valley Bank, 866
F.2d at 1244. As noted above, for a private security interest to take priority over a federal
tax lien, the interest must be in qualified property, meaning the property must be a type of
commercial financing security acquired prior to, or within 45 days after, the federal tax
lien filing. See 26 U.S.C. § 6323(c)(1) and (2).
Relevant Treasury regulations contain definitions to aid in determining whether
property is “qualified” under the statute. These regulations define commercial financing
security such as contract rights and accounts receivable, and outline when such property
is acquired. A contract right is defined as “any right to payment under a contract not yet
earned by performance and not evidenced by an instrument or chattel paper.” 26 C.F.R. §
301.6323(c)-1(c)(2)(i). An account receivable is “any right to payment for goods sold or
leased or for services rendered which is not evidenced by an instrument or chattel paper.”
Id. § 301.6323(c)-1(c)(2)(ii). Contract rights are acquired when a contract is made, while
an account receivable is acquired when a right to payment is earned by performance. Id.
§ 301.6323(c)-1(d). Identifiable proceeds arising from the collection or disposition of
qualified property are considered to be acquired at the time qualified property is acquired.
Id. Thus, proceeds of a contract right are considered to be acquired when the contract is
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made, while the proceeds from accounts receivable are acquired when the service is
performed.
One difficulty encountered by courts in determining whether property is an
account receivable or a contract right is that often the property can arguably be classified
as both. See Bremen Bank & Trust Co. v. United States, 131 F.3d 1259, 1264 (8th Cir.
1997). Cases dealing with § 6323 often involve some sort of contract, and in some cases
the payments made pursuant to these contracts are considered the proceeds of contract
rights. See Plymouth, 187 F.3d at 207; Pine Builders, Inc. v. United States, 413 F. Supp.
77, 84 (E.D. Va. 1976). However, money paid pursuant to a contract sometimes is
classified solely as an account receivable. See Bremen Bank, 131 F.3d at 1266 (holding
that “exclusive shipping” contract did not grant any right to payment prior to
performance).
Here, the district court held that the disputed cash resulted from health care
insurance receivables under the Utah Uniform Commercial Code. Such receivables are
classified as accounts under Utah’s applicable statute. See U TAH C ODE A NN. § 70A-9a-
102(2)(b). The court then determined that the disputed cash stemmed from accounts
receivable under federal law. On appeal, AIF does not contest this classification under
Utah state law. It argues instead that the district court incorrectly classified the disputed
cash under the federal statute. Because qualified property is commercial financing
security (e.g. accounts receivable or contract rights) acquired prior to 45 days of the
federal tax lien filing, the district court held that AIF did not meet this requirement with
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regard to the disputed cash. Rather, the cash was the proceeds of accounts receivable that
stemmed from services provided after the statutory “safe harbor” had passed, and the
federal government’s lien was given priority. We agree and affirm the district court’s
decision.
It is undisputed that AIF perfected its security interest, that a written agreement
was entered into prior to the tax lien filing, and that this agreement constituted a CTFA.
Thus only one of the four elements required for a commercial security interest to prevail
over a federal tax lien is at issue here: whether AIF had an interest in qualified property
as defined within the federal statute.
AIF argues that the district court erred in holding that the disputed cash stemmed
from accounts receivable, rather than contract rights, contending that the Provider
Contracts did grant a right to payment prior to performance. AIF also analogizes the facts
here to cases such as Plymouth and Pine Builders, in which the respective courts held that
the disputed cash constituted the proceeds of contract rights.
AIF’s argument that the disputed cash constituted the second-generation proceeds
of contract rights fails in several ways. First of all, the Provider Contracts did not
guarantee a definite right to payment prior to the performance of service. Rather, the
contracts ensured a certain rate of reimbursement that the insurance company would pay
to Nightime if certain conditions were met. Specifically, Nightime would receive
payment if 1) a patient covered by an insurance company that had a provider contract
with Nightime came to Nightime and received services; 2) such services were covered
8
both under the patient’s contract and the Provider Contract with Nightime; 3) the patient
requested that the insurance provider be billed; and 4) Nightime submitted bill to provider
in a timely fashion. Nowhere did the Provider Contracts guarantee that Nightime would
receive any payment pursuant to the contracts, for it was not certain that any qualifying
patients would come to Nightime for services in a manner that would entitle Nightime to
payment. And no capitation contracts were in place that would guarantee a certain level
of payment regardless of whether any covered patients came into Nightime.
A crucial element of the Provider Contracts at issue here is that a right to payment
hinged on the actions of third parties; in other words, a right to payment arose by
Nightime’s performance of services for patients. When a patient came to Nightime and
received care, an account receivable was created. These accounts receivable were
between the patient and Nightime, even with respect to patients who were covered by
insurance companies that had Provider Contracts with Nightime. The only difference
between covered and noncovered patients is that a portion of the payment due by covered
patients presumably could come from the insurance company rather than the patients
themselves.
Nightime had no enforceable payment rights under the Provider Contracts until a
covered patient came into Nightime, created an account receivable and the insurance
company was billed. While AIF argues that there was a contract right to payment
because Nightime had the right to collect payments, this argument fails because it had no
right to payment prior to performing services. Nightime also had a right to collect
9
copayments from patients, but AIF conceded at oral argument that there was no right to
collect a copayment prior to a patient coming in to receive medical care.
AIF also argues that the Provider Contracts were executed prior to filing the tax
lien, and thus guaranteed payment to Nightime well before the filing of the tax lien.
Again, the third-party factor leads this argument to fail. The Provider Contracts do not
list specific services that Nightime was required to complete at some point in the future,
nor do the contracts specify payments that the insurance companies were required to
make at some point. It is possible that Nightime would not be called upon to do anything
and thus would not be entitled to any payment. Any right to payment, and likewise any
responsibility to pay, hinged on a covered patient coming to Nightime; yet such a patient
may never have walked through Nightime’s doors.
AIF further contends it is immaterial that payment obligations under the Provider
Contracts were enforceable only after the performance of services, and that there is
always a risk in contracts that the performance contemplated under the contract will not
occur. Although it is true in executory contracts there is a risk that the performance that
is the subject of the contract will not occur, such circumstances would give rise to a claim
for breach of contract. Under the Provider Contracts here, if performance never occurs
(i.e. a patient never comes to Nightime and thus does not receive care), there would be no
contract claim.
The district court illustrated this concept in its opinion, using as an example a
contract between a builder and a homeowner. If the homeowner contracted with a builder
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to construct a house and promised to pay $100,000 upon completion, the builder had an
enforceable right to payment that arose at the time the contract was signed. If the builder
refuses to build the home, the homeowner has a breach of contract claim. If the
homeowner refuses to pay once the home is completed, the builder likewise has a claim
for breach of contract. In contrast, under the Provider Contracts, neither party could bring
an action to require performance until a third party under the right circumstances sought
medical services from Nightime. Nightime could not bring a breach of contract claim
against an insurance company until it provided medical services to a covered patient, and
an insurance company could not bring a claim unless one of their insureds came to
Nightime and was refused medical attention.
Furthermore, the caselaw on which AIF relies does not lend much support to its
arguments. It cites cases involving contracts between a taxpayer and another party, where
the taxpayer was to perform a specified service for that party in exchange for a specified
payment. See Plymouth, 187 F.3d at 205-09; Pine Builders, 413 F. Supp. at 79-84.
Plymouth, for example, involved a contract between a taxpayer and a hospital. The
taxpayer was to help the hospital to obtain a license, and in return the hospital was to pay
the taxpayer $300,000 in several installments. At the time the IRS filed a lien in that
case, the taxpayer had not yet obtained the license for the hospital, and she did not
procure the license within the 45-day safe harbor. See Plymouth, 187 F.3d at 206.
However, she had been paid two installments, and was awaiting the final balance. The
Plymouth court held that the taxpayer obtained a contract right to be paid for the work she
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agreed to do, and that the money paid to her resulted from that contract right. Thus,
because the contract had been entered into before the expiration of the safe harbor, the
private security interest in that case prevailed over the federal tax lien.
In Pine Builders, a carpet company entered into contracts with two parties,
requiring the company to install carpeting in 1,000 apartments. See Pine Builders, 413 F.
Supp. at 79. The pricing in the contract was calculated per apartment. Id. The court
rejected the argument that the contract was unilateral, or requiring acceptance by
performance with no right to payment until performance. See id. at 83-84. Rather, the
court determined that carpet company had acquired a right to the contract proceeds when
the contract was made. See id. at 84. The contracts in Plymouth and Pine Builders are
readily distinguishable from the Provider Contracts here, as those contracts established a
set price to be paid for specified goods and services, and the right to payment was not
dependent upon the actions of third parties.
AIF also cites a case involving a contract that does not include a specified payment
amount. See In re Dorrough, Parks & Co., 185 B.R. 46, 47-49 (E.D. Tenn. 1995). In that
case, the taxpayer—an accounting firm—had an employment contract with a customer.
While the contract did not specify an hourly or monthly rate, it did provide a monthly cap
and a provision for a reasonable fee. The court noted evidence that such transactional
work contracts typically do not contain a final price, and held that this contract did not
fail for lack of price term. See id. at 49. Thus, because the contract had been entered into
prior to the filing of the tax lien by the IRS, the private security interest took priority.
12
However, the contract in Dorrough, Parks & Co. is also distinguishable from the AIF
Provider Contracts. The Dorrough, Parks & Co. contract was between the taxpayer and
another party for certain services that would be provided for that party in exchange for
payment. While the payment amount was not specified, a range was given, the contract
contemplated the “customary practice” of determining fees and rates, and payment
pursuant to the contract did not depend in any way upon the actions of third parties. Such
factors differ from those in the case at bar, where third party action is required and no
relevant custom has been presented.
The government, on the other hand, makes a compelling analogy to Bremen Bank,
in which the Eighth Circuit held that an exclusive-shipping contract did not generate a
choate right to payment, because there was no right to ship a specific amount of goods
under the contract. See 131 F.3d at 1266. This meant that payments made pursuant to
this contract past the 45-day “safe-harbor” were not superior to the federal tax lien
because they were not considered to have been acquired at the time the contract was
made. In reaching this conclusion, the court examined the “circumstances under which a
debtor has a ‘right to payment under a contract not yet earned by performance,’ within the
meaning of the [Treasury] regulation.” Id. The court looked to Missouri state law to
determine if the taxpayer had a right to payment under the contract, and if so whether
those rights were “sufficiently choate to be recognized under the federal tax code.” Id.
The court held that, while the contract gave rise to certain rights, there was no choate
right to payment because the taxpayer could not require its customer to ship a “specific
13
amount of goods.”
As in Bremen Bank, the Provider Contracts here gave rise to some rights, but a
choate right to payment prior to performance was not among them. Under Utah law, “a
contract can be enforced by the courts only if the obligations of the parties are set forth
with sufficient definiteness that it can be performed.” Brown’s Shoe Fit Co. v. Olch, 955
P.2d 357, 363 (Utah Ct. App. 1998). The Provider Contracts guaranteed that Nightime
would receive a certain payment for services to covered patients if all required conditions
were met. These contracts required among other things that a third party utilize
Nightime’s services in order for Nightime to have a right to payment. It could claim no
enforceable right to payment prior to such third party action. Nightime’s right to payment
arose when it performed services, not when it entered the Provider Contracts.
IV. CONCLUSION
Nightime had no right to payment prior to performance under the Provider
Contracts. Rather, a right to payment arose only when identifiable care was rendered to a
patient, and a specific account receivable was thus created. Under the FTLA, the
disputed cash is properly classified as the proceeds of accounts receivable, not contract
rights. As a result, the government’s tax lien takes priority over’s AIF’s security interest,
as the district court correctly determined.
AFFIRMED.
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