IN RE SPEARING TOOL AND MFG. CO., (Bankr.E.D.Mich. 2003)

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Docket Number

Case No. 02-49144-R, Adv. No. 02-5201

Attorney(S)

Stephen M. Gross, Bingham Farms, MI, for debtor. David W. Allard, Detroit, MI, for trustee. Kevin C. Calhoun, Lathrup Village, MI, David K. Foust, Detroit, MI, Anissa C. Hudy, Bloomfield Hills, MI, Michael J. thomas, Detrit, MI, Kimberly Webb, Detroit, MI, Donna K. Welch, Detroit, MI, for creditors.

Acts

Internal Revenue Code — Procedure And Administration — Collection — Lien For Taxes — Liens — Lien For Taxes
Internal Revenue Code — Procedure And Administration — Collection — Lien For Taxes — Liens — Validity And Priority Against Certain Persons

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Smart Summary

Factual and Procedural Background

In April 1998, the debtor, Spearing Tool and Manufacturing Co., entered into a lending agreement with Crestmark Bank, granting Crestmark a security interest in all assets, including accounts receivable, perfected by a UCC financing statement. In April 2001, Crestmark Financial Corp. ("CFC") entered a secured factoring agreement with the debtor, purchasing accounts receivables and perfecting its security interest by filing a UCC financing statement. By the petition date, the debtor owed CFC $278,505.85.

On October 15, 2001, the IRS filed two federal tax liens totaling $202,770.11 with the Michigan Secretary of State under the name "Spearing Tool MFG Company, Inc.," which differed slightly from the debtor's registered name. CFC, conducting due diligence using the debtor’s exact registered name, found no liens and advanced funds to the debtor secured by its assets.

The debtor filed for Chapter 11 bankruptcy relief on April 16, 2002. A consent order approved factoring of accounts receivable and established a $200,000 reserve account managed by Crestmark, funded by pre-petition collections. The reserve account balance, $153,058.33, was the amount in controversy. Crestmark filed suit on September 20, 2002, to determine lien priority between Crestmark and the IRS.

Legal Issues Presented

Whether the IRS’s federal tax liens, filed under a name variant of the debtor’s registered name, are valid and have priority over Crestmark’s perfected security interests.
Whether state law requirements for exact debtor name on financing statements apply to federal tax liens, or whether federal law controls the form and content of federal tax lien notices.
Whether Crestmark’s reliance on the absence of liens in name-based searches negates the validity or priority of the IRS’s liens.

Arguments of the Parties

Crestmark's Arguments

The IRS’s liens are invalid because they did not use the debtor’s exact registered name on the financing statements, violating Michigan law.
Michigan law requires financing statements to show the exact registered name of the debtor; failure to do so renders the lien statutorily defective.
Crestmark’s lien searches using the debtor’s exact registered name did not reveal the IRS liens, supporting invalidity.

IRS's Arguments

Federal law controls the form and content of federal tax lien filings, even though state law controls the place of filing.
The IRS’s lien notices complied with federal law requirements and thus are valid despite not using the debtor’s exact registered name.
Crestmark should have searched under name variants used by the debtor, which would have revealed the IRS liens.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
K.E. Res., Ltd. v. BMO Fin. Inc. (In re Century Offshore Mgmt Corp.), 119 F.3d 409 (6th Cir. 1997)	Standard for granting summary judgment with caution to nonmoving party.	Supported the court’s cautious approach in granting summary judgment to the IRS, the nonmoving party.
Celotex Corp. v. Catrett, 477 U.S. 317 (1986)	Summary judgment appropriate when no genuine issue of material fact exists, even if nonmoving party did not file a cross-motion.	Justified granting summary judgment to the IRS despite Crestmark not filing a summary judgment motion.
United States v. Correll, 389 U.S. 299 (1967)	Federal tax lien regulations have the force and effect of law.	Supported the court’s reliance on Treasury regulations governing notice form and content.
Aquilino v. United States, 363 U.S. 509 (1960)	Federal law governs priority of federal tax liens over other interests.	Confirmed that federal law, not state law, determines lien priority between IRS and Crestmark.
United States v. Bank of Celina, 721 F.2d 163 (6th Cir. 1983)	Federal law applies to priority disputes involving federal tax liens.	Reinforced the application of federal law in this lien priority dispute.
United States v. Union Cent. Life Ins. Co., 368 U.S. 291 (1961)	State may designate filing office for federal tax liens, but may not impose form or content requirements.	Key precedent rejecting Crestmark’s argument that state law on debtor name applies to federal tax liens.
United States v. Herman, 310 F.2d 846 (2d Cir. 1962)	State may designate place of filing but cannot add validity requirements on form/content of federal tax liens.	Supported the principle that federal law preempts state law on lien notice content.
Bertelt v. United States (In re Bertelt), 206 B.R. 579 (Bankr. M.D. Fla. 1996)	Federal law governing notice of federal tax liens supersedes state law on content.	Used to reinforce federal preemption over state law in lien notice validity.
Hudgins v. IRS (In re Hudgins), 967 F.2d 973 (4th Cir. 1992)	Insufficient identification of taxpayer on lien notice can invalidate lien.	Distinguished from current case where IRS properly identified the taxpayer.
Richter's Loan Co. v. United States, 235 F.2d 753 (5th Cir. 1956)	Minor misspellings do not necessarily invalidate lien if taxpayer is sufficiently identified.	Supported the court’s conclusion that "MFG" abbreviation sufficiently identified the taxpayer.
Whiting-Turner/A.L. Johnson v. P.D.H. Dev., Inc., 184 F. Supp. 2d 1368 (M.D. Ga. 2000)	Substantially identical names on lien notices satisfy federal identification requirements.	Supported the court’s finding that IRS’s lien name was substantially identical to debtor’s name.
Brightwell v. United States, 805 F. Supp. 1464 (S.D. Ind. 1992)	Lien notices with minor inaccuracies still provide constructive notice.	Reinforced that minor deviations in name do not invalidate IRS liens.
Haye v. United States, 461 F. Supp. 1168 (C.D. Cal. 1978)	Significant misspellings can render lien notice invalid if reasonable search would not reveal lien.	Distinguished from current case where abbreviation was accepted and commonly used.
Reid v. IRS (In re Reid), 182 B.R. 443 (Bankr. E.D. Va. 1995)	Incorrect taxpayer name on lien notice invalidates lien if reasonable search would not reveal it.	Distinguished as current case involved no such error in identification.

Court's Reasoning and Analysis

The court began by acknowledging that summary judgment is appropriate where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. It carefully considered Crestmark’s contention that Michigan state law requires exact debtor names on financing statements, which Crestmark argued the IRS failed to comply with, rendering the liens invalid.

The court analyzed federal statutes and regulations governing federal tax liens, particularly 26 U.S.C. §§ 6321, 6323(a), and 6323(f), and Treasury regulations prescribing the form and content of notices of federal tax liens. It emphasized that while state law designates the place for filing such liens, federal law exclusively governs their form and content to maintain uniformity.

The court relied heavily on United States v. Union Central Life Insurance Co., which held that states cannot impose form or content requirements on federal tax lien notices beyond designating the filing office. It also cited other cases affirming federal preemption over state law in this context.

Applying these principles, the court found that the IRS’s use of the abbreviation “MFG” for “Manufacturing” was acceptable, noting that the debtor itself frequently used this abbreviation and Crestmark had also referred to the debtor by this shortened name in its own records. Thus, the IRS sufficiently identified the taxpayer as required by federal regulations.

The court distinguished this case from precedents where liens were invalidated due to misidentification of the taxpayer, concluding that no such error occurred here. Consequently, the IRS’s liens were valid and had priority over Crestmark’s interests.

Holding and Implications

The plaintiffs' motion for summary judgment is denied, and summary judgment is granted in favor of the Internal Revenue Service.

The court’s decision directly resolves the lien priority dispute in favor of the IRS, confirming the validity and priority of the IRS’s federal tax liens despite minor deviations in the debtor’s name on the lien filings. No new precedent was established beyond affirming the established principle that federal law governs the form and content of federal tax lien notices, preempting conflicting state law requirements.

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In re: Spearing Tool and Manufacturing Co., Chapter 11, Debtor. Crestmark Bank and Crestmark Financial Corp., Plaintiff, v. United States of America, Department of Treasury, Internal Re

Opinion Regarding Plaintiffs' Motion for Summary Judgment

STEVEN W. RHODES, Chief Judge

The plaintiffs, Crestmark Bank and Crestmark Financial Corp., filed a motion for summary judgment to determine lien priority. The defendant, the Internal Revenue Service, filed an objection. Following a hearing on March 31, 2003, the Court took the matter under advisement. The Court now concludes that there are no genuine issues of material fact and that as a matter of law, the plaintiffs' motion for summary judgment should be denied and that the IRS is entitled to summary judgment.

In April of 1998, the debtor and Crestmark Bank entered into a lending agreement and the debtor granted Crestmark a security interest in all of its assets, including accounts receivables. Crestmark perfected its security interest by filing a UCC financing statement. (Pls.' Ex. 3.)

On April 6, 2001, Crestmark Financial Corp. ("CFC") entered into a secured factoring arrangement with the debtor under which CFC agreed to purchase accounts receivables from the debtor.

The debtor granted CFC a security agreement in all of its assets, including accounts receivables. On April 21, 2001, CFC perfected its security interest by filing a UCC financing statement. (Pls.' Ex. 4.) As of the petition date, the debtor owed CFC $278,505.85.

On October 15, 2001, the IRS filed two notices of federal tax lien with the Michigan Secretary of State in the total amount of $202,770.11. (Pls.' Ex. 5.) The tax liens were filed under the name "Spearing Tool MFG Company, Inc." However, the debtor's exact registered name is "Spearing Tool and Manufacturing Co." (See Pls.' Ex. 2.)

As part of its due diligence, CFC submitted periodic lien search requests for the debtor to the State of Michigan, using the debtor's exact registered name. The results indicated no liens for the period which included October 15, 2001. (Pls.' Ex. 7.) Relying on the absence of liens in the search results, CFC made funding advances to the debtor between October 15, 2001, and April 6, 2002, the repayment of which was secured by the debtor's assets.

On April 16, 2002, the debtor filed for chapter 11 relief. On April 18, 2002, the Court entered a Consent Order Approving Factoring of Accounts Receivable Under Factoring Agreement, Use of Cash Collateral, and Granting Adequate Protection. This order provided for a $200,000 reserve account to be managed by Crestmark and funded by pre-petition accounts receivable collections. The amount in the reserve account is currently $153,058.33, which is the amount in controversy. The order reserved for future determination the respective rights of Crestmark and the IRS in the account balance. On September 20, 2002, Crestmark filed this complaint to determine lien priority.

II.

Crestmark contends that the IRS's liens were not properly filed with the State of Michigan and are therefore invalid. Crestmark contends that under Michigan law a financing statement must show the exact registered name of the debtor or else it is statutorily defective.

The IRS asserts that although state law controls the place for filing a federal tax lien, federal law controls the form and content of the filing. The IRS contends that because the lien satisfied the requirements of federal law, the lien is valid. The IRS also contends that Crestmark should have conducted a search under the various derivations of the debtor's name used by the debtor, and that such a search would have revealed the IRS's lien.

III.

Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56. A trial court should only grant summary judgment to the nonmoving party with great caution. K.E. Res., Ltd. v. BMO Fin. Inc. (In re Century Offshore Mgmt Corp.), 119 F.3d 409, 412 (6th Cir. 1997). However, the fact that the nonmoving party has not filed its own summary judgment motion does not preclude the entry of summary judgment if otherwise appropriate. See Celotex Corp. v. Catrett, 477 U.S. 317, 326, 106 S.Ct. 2548, 2554 (1986); Ledford v. Tiedge (In re Sams), 106 B.R. 485, 491 (Bankr.S.D.Ohio 1989) ("Federal Courts have long recognized that if there is no genuine issue as to any material fact the court may enter summary judgment, sua sponte."); Dickeson v. Quarberg, 844 F.2d 1435, 1444 n. 8 (10th Cir. 1988) (A court may grant summary judgment to a nonmoving party "`if the facts were fully developed at the summary judgment hearing so that the court . . . can determine that the nonmoving party clearly was entitled to a judgment as a matter of law . . . [and] there is no procedural prejudice to the moving party.'") (quoting 10A Wright, Miller Kane, Federal Practice Procedure § 2720, at 28-9 (1983)).

IV.

26 U.S.C. § 6321 provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. § 6323(a) provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

26 U.S.C. § 6323(f) provides, in relevant part, that the notice referred to in subsection (a) shall be filed —

(ii) Personal property. — In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated, except that State law merely conforming to or reenacting Federal law establishing a national filing system does not constitute a second office for filing as designated by the laws of such State[.]

26 U.S.C. § 6323(f)(1)(A)(ii).

The statute further provides:

(3) Form. — The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

26 U.S.C. § 6323(f)(3).

The regulations on Procedure and Administration provide that the notice shall be filed on Form 668, entitled "Notice of Federal Tax Lien Under Internal Revenue Laws." Treas. Reg. § 301. 6323(f)-1(d)(1). Further, a Notice of Federal Tax Lien "must identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose." Treas. Reg. § 301.6323(f)-1(d)(2). These regulations have the force and effect of law. United States v. Correll, 389 U.S. 299, 306, 88 S.Ct. 445, 449 (1967).

In determining the priority of the tax liens as against Crestmark's interest, federal law applies. See Aquilino v. United States, 363 U.S. 509, 513-14, 80 S.Ct. 1277, 1280-81 (1960); United States v. Bank of Celina, 721 F.2d 163, 166 (6th Cir. 1983).

Crestmark asserts that the liens are not valid because they did not comply with the following provisions of state law:

M.C.L.A. § 440.9503. Name of debtor and secured party Sec. 9503. (1) A financing statement sufficiently provides the name of the debtor if it meets all of the following that apply to the debtor:

(a) If the debtor is a registered organization, only if the financing statement provides the name of the debtor indicated on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized.

M.C.L.A. § 440.9503(1)(a).

M.C.L.A. § 440.9506. Effect of errors or omissions Sec. 9506. (1) A financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.

(2) Except as otherwise provided in subsection (3), a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1) is seriously misleading.

(3) If a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1), the name provided does not make the financing statement seriously misleading.

M.C.L.A. § 440.9506(1).

Thus, it is Crestmark's position that because the IRS did not use the debtor's registered name on the financing statements and a search of the records under the standard search logic did not reveal the IRS's liens, the financing statements are not valid.

The Court concludes that Crestmark's argument must be rejected. In United States v. Union Cent. Life Ins. Co., 368 U.S. 291, 82 So. Ct. 349 (1961), the Supreme Court held:

While § 3672(a)(1) [the precursor to § 6323] unquestionably requires notice of a federal lien to be filed in a state office when the State authoritatively designates an office for that purpose, the section does not purport to permit the State to prescribe the form or the contents of that notice. Since such an authorization might well result in radically differing forms of federal tax notices for the various States, it would run counter to the principle of uniformity which has long been the accepted practice in the field of federal taxation.

Id. at 294, 82 S.Ct. at 351. See also United States v. Herman, 310 F.2d 846, 848 (2d Cir. 1962) ("The state is permitted to designate the place of filing . . . but the state may not add further requirements for validity."); Bertelt v. United States (In re Bertelt), 206 B.R. 579, 583 (Bankr.M.D.Fla. 1996) ("[F]ederal law governing the form of a notice of federal tax lien supersedes any other law, including state law, relating to the content of such a notice.").

As noted above, federal law requires that the notice of tax lien "identify the taxpayer." Treas. Reg. § 301.6323(f)-1(d)(2). The Court must conclude that the notices filed by the IRS do identify the taxpayer. This case is distinguishable from cases in which the IRS made an error in identifying the taxpayer and the courts were left to determine whether the IRS sufficiently identified the taxpayer such that a reasonable search would reveal the existence of the lien. See e.g., Hudgins v. IRS (In re Hudgins), 967 F.2d 973 (4th Cir. 1992) (Lien filed against "Hudgins Masonry, Inc." did not sufficiently identify the taxpayer, Michael Hudgins.); Richter's Loan Co. v. United States, 235 F.2d 753 (5th Cir. 1956) ("Friedlander" misspelled "Freidlander" did sufficiently identify the taxpayer.); Whiting-Turner/A.L. Johnson v. P.D.H. Dev., Inc., 184 F. Supp.2d 1368 (M.D.Ga. 2000) (Federal tax lien in the name of "PD HILL DEVELOPMENT INC" sufficiently identified the taxpayer "PDH DEVELOPMENT INC"; the names were substantially identical and a reasonable search would have revealed the existence of the lien.); Brightwell v. United States, 805 F. Supp. 1464 (S.D.Ind. 1992) (Notice of federal tax lien substantially complied with requirements for constructive notice, even though it listed incorrect middle initial for taxpayer and inserted extra space in his last name.); Haye v. United States, 461 F. Supp. 1168 (C.D. Cal. 1978) (Castillo misspelled Castello, resulting in lien being recorded nine pages from the appropriate place, would not give notice to a reasonable and diligent searcher and thus did not sufficiently identify the taxpayer.); Reid v. IRS (In re Reid), 182 B.R. 443 (Bankr.E.D.Va. 1995) (Lien filed under the name Gary A. Reid, when debtor's name was actually Cary A. Reid, was invalid because a reasonable and diligent search would not reveal the notice.).

Here, there was no error in identifying the taxpayer. The IRS used the accepted abbreviation for the word "Manufacturing." See Webster's New Collegiate Dictionary 512 (1986); THE BLUEBOOK: A UNIFORM SYSTEM OF CITATION 303 tbl. T.6 (Columbia Law Review Ass'n et al. eds., 17th ed. 2000). Further, the debtor frequently used the "Mfg." and "MFG." abbreviations in identifying itself. (See Ex. 4 to Decl. of Thomas P. Cole.) Moreover, Crestmark itself referred to the debtor as "Spearing Tool and Mfg." in credit narratives prepared by a Crestmark employee. (See. Ex. 3 to Cole Decl.) Accordingly, the Court concludes that the IRS identified the taxpayer as required by Treas. Reg. § 301.6323(f)-1(d)(2) and therefore its lien is valid and has priority over that of Crestmark.

The plaintiffs' motion for summary judgment is therefore denied and summary judgment is granted in favor of the IRS. The Court will enter an appropriate order.