Western National Bank v. United States

                 IN THE UNITED STATES COURT OF APPEALS

                           FOR THE FIFTH CIRCUIT



                                No. 93-8074



WESTERN NATIONAL BANK,
                                              Plaintiff,

                                  versus

UNITED STATES, ET AL.,
                                              Defendants,

UNITED STATES,
                                              Defendant-Appellee,

                                  versus

COMPTROLLER OF PUBLIC ACCOUNTS
FOR THE STATE OF TEXAS,
                                              Defendant-Appellant.




          Appeal from the United States District Court
                for the Western District of Texas


                       (     November 19, 1993     )

Before WISDOM, HIGGINBOTHAM, and SMITH, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

     The United States and the State of Texas both claim the same

bank account to satisfy tax liabilities.         We affirm the district

court's grant of summary judgment for the federal government,

persuaded that the federal lien attached to the account before the

state's claim arose.
                                             I.

       This     case      stems   from   a       secured   transaction    among   oil

companies. In August 1991, 3-B Rattlesnake Refining Limited and 3-

B Rattlesnake Refining Corporation executed a UCC-1 financing

statement in favor of Enron Oil Trading and Transportation Company,

which was filed with the state on August 12, 1991. 1                     The parties

then renegotiated the agreement on November 21, 1991, to create a

"lockbox" deposit account arrangement with Western National Bank.

       Under the lockbox arrangement, 3B opened a demand deposit

account in its name at Western, for which the only signatories were

two Enron employees. 3B's invoices told its customers to make their

checks payable to 3B and to mail payment, addressed to 3B, to a

post       office   box     maintained    by       Western.     Western    forwarded

undepositable checks, such as checks without signatures or checks

with incorrect endorsements, to 3B for disposition.                  Additionally,

3B forwarded checks mistakenly sent to 3B's offices to Western for

deposit in the account.            Neither 3B nor Enron could unilaterally

terminate the agreement.             If a customer was late in making a

payment to the lockbox, 3B could take it to court.

       In late 1991, creditors began vying for 3B's assets.                  The IRS

assessed federal excise taxes against 3B on September 16 and

December 23, 1991, and March 23 and May 21, 1992.                 The IRS recorded

       1
      It covered: "All furniture, supplies, machinery, inventory
and nonfixture equipment and personal property now or hereafter
located on any of the land described in Exhibit A, attached
hereto and made a part thereof for all purposes, and/or used in
connection with any present or future building(s) or other
improvement(s) upon any of the said lands, excluding the platinum
catalyst in the reformer."

                                             2
a notice of federal tax lien on 3B's property in the appropriate

county property records on April 22 and 23, 1992, and then filed

with the Texas Secretary of State on May 8, 1992.           The IRS filed

notice of later assessments with the county on June 22 and with the

Secretary of State on June 25. Meanwhile, the Texas Comptroller of

Public Accounts filed notices of motor fuels taxes on May 11, 1992.

It served "freeze" notices on Western on May 22 for a total of

$205,011.59, the balance of fuels taxes then due the state.                On

that day the account had about $1.7 million on deposit.

     Later that month, 3B and Enron settled litigation arising out

of their business dealings.         As part of the settlement, Enron

waived any lien it had on the lockbox account, and 3B became

immediately entitled to collect all the money in the account.

Enron then released the account leaving only the $205,011.59

claimed by the state on deposit on May 26, 1992.

     On June 4, the IRS served a notice of levy on Western stating

it had assessed a total of $1,932,221.13 against 3B.              Faced with

conflicting   claims    to   the   same   account,   the   bank    filed   an

interpleader action in July 1992 in state court and the IRS removed

to federal court.      Both sides moved for summary judgment and in

January of 1993 the district court ruled for the IRS.

                                    II.

     The accounts receivable generated by 3B's sales to customers

created rights under state law that constituted "property" under

the Internal Revenue Code.         See, e.g., United States v. Bank of

Celina, 721 F.2d 163, 167 (6th Cir. 1983).           A federal tax lien


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attached to this property on September 16, 1991, when the IRS made

its first assessment against 3B.2     See 26 U.S.C. § 6322.    That

property remained subject to the IRS lien after the negotiation of

the lockbox arrangement with Enron.   See United States v. Bess, 357

U.S. 51, 57 (1958) ("[I]t is of the very nature and essence of a

lien, that no matter into whose hands the property goes, it passes

cum onere.").

     Once a tax lien attaches, the question of its priority against

other liens is determined by the rule that "the first in time is

the first in right."       To defeat the federal lien under these

circumstances, the competing state lien must have been "perfected"

before the federal lien was assessed on September 16, which means

that the identity of the lienor, the property subject to the lien,

and the amount of the lien must have been established before

September 16.   United States v. McDermott, 113 S.Ct. 1526, 1528

(1993); United States v. New Britain, 347 U.S. 81, 86 (1954).

Since no evidence in the record shows the existence of a state

claim prior to the notices filed on May 11, 1992, the federal lien

has priority.

     The state contends that Enron had a prior-perfected security

interest in those accounts receivable.      As a result, the state

argues, the IRS lien was "not . . . valid" since the IRS did not

file public notice about its lien until almost a year after Enron

entered the arrangement.    See 26 U.S.C. § 6323(a). This contention

     2
      As the first lien involved an assessment of $235,145.91,
more money than the account held when the levy was served, we do
not analyze the strength of the other liens.

                                  4
fails for   two     reasons.      First,      section     6323(a)     governs   lien

priority in a dispute with a secured creditor; it does not address

the creation or elements of a lien.            The lien existed even if Enron

had priority over the IRS for a period of time.                 Second, Enron had

no such priority when the IRS levied, as Enron released all of its

interest in the account in favor of 3B on June 1, three days before

the levy.

      The   state    next      contends       that    its     claim    enjoys   the

"superpriority" status of 26 U.S.C. § 6323.                 Section 6323 provides

that a lien is not valid against the purchaser of a security who

lacked actual knowledge of the lien at the time of purchase.                     26

U.S.C. § 6323(b)(1)(A).         The state contends that since "money" is

a security, it qualified as a purchaser of a security by serving a

freeze notice on the bank.            See 26 U.S.C. § 6323(h)(4).

      This argument, inventive as it is, has two flaws.                     First,

Texas is not a purchaser.         A "purchaser" is one who for adequate

and full consideration acquires an interest in property. 26 U.S.C.

§   6323(h)(6).      We   see    no    exchange      of   consideration    in   the

collection of tax revenue.            Further, Congress has established a

superpriority for real property tax and special assessment liens.

26 U.S.C. § 6323(b)(6).         The decision to go further and establish

another superpriority for state fuel taxes is a decision for

Congress rather than this court.                See William T. Plumb, Jr.,

Federal Liens and Priorities—Agenda for the Next Decade III, 77

Yale L.J. 1104, 1108 (1968) (noting that "[f]urther study might

lead to the conclusion that additional superpriorities may deserve


                                          5
federal recognition" in the area of "sales, gasoline, and other

taxes collected from the consumer").

     Lacking a foundation for a superpriority in federal law, the

state next seeks one in Texas law.      It cites a Texas statute

requiring the collectors of fuels taxes to hold them in trust for

the state.   Tex. Tax Code Ann. § 111.016 (Vernon 1992).   See also

Dixon v. State, 808 S.W.2d 721, 723 (Tex. App.-Austin 1991, writ

dism'd w.o.j.).   It argues that the IRS lien could not attach to

funds in the lockbox account collected to pay fuel taxes, as those

funds were being held in trust for the state.      See Aquilino v.

United States, 363 U.S. 509, 515 (1960).

     Congress has not given state sales taxes the superpriority

under the Internal Revenue Code enjoyed by state property taxes,

and we are not persuaded that the Texas legislature has either.

However the state characterizes its claim for sales taxes, the

first-in-time rule determines the priority of conflicting state and

federal claims for taxes when a section 6323 provision does not

apply.   See United States v. Vermont, 377 U.S. 351, 358-59 (1964);

In re Thriftway Auto Rental Corp. v. Herzog, 457 F.2d 409, 413 (2d

Cir. 1972) (both looking to the New Britain test to determine

priority of conflicting liens rather than state or local lien

characterization).   See also Michael I. Saltzman, IRS Practice and

Procedure ¶ 16.04[2][f], at 16-35 (2d ed. 1991) ("Obviously,

significant state and local taxes, such as state and local . . .

sales taxes, are not covered by the [§ 6323(b)(6)] superpriority.

Liens for these taxes, even if the lien has arisen before the


                                 6
federal tax lien, must qualify as `choate' liens . . . .").

Assuming that Enron acted as a collector of fuels taxes, triggering

the Texas statute, the federal claim has priority because Texas's

equitable interest did not arise until after the IRS asserted its

interest by assessing 3B on September 16, 1991.     See State v. Bar

Coat Blacktop, Inc., 640 F.Supp. 407, 411-12, 415-16 (W.D. Wisc.

1986) (federal tax lien had priority over later-arising state's

equitable lien for tax liability).

     The state directs us to bankruptcy law to support its trust

fund argument.    The cases it cites address various threshold

questions under bankruptcy law, such as the dischargeability of a

state claim for fuel taxes or whether money collected for payment

of fuel taxes falls within the debtor's estate.   See, e.g., Matter

of Al Copeland Enterprises, 991 F.2d 233, 235 (5th Cir. 1993); In

re Avant, 110 B.R. 264, 265 (Bankr. W.D. Tex. 1989).    The inquiry

in this case takes place a step later, after the court has

identified the nature of the state's claim, and asks about the

priority of that claim relative to a federal one.    The state cites

no bankruptcy cases speaking to that separate issue.

     AFFIRMED.




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