Jun 25, 2005
In This Issue
One issue facing secured lenders in performing lien searches is the danger of missing federal tax liens, which do not need to perfectly identify the taxpayer. See, e.g., Hudgins v. IRS(In re Hudgins), 967 F.2d 973, 976 (4th Cir. 1992); Tony Thornton Auction Serv., Inc. v. United States, 791 F.2d 635, 639 (8th Cir. 1986). In a recent decision, United States v. Crestmark Bank(In re Spearing Tool & Mfg. Co.), 2005 U.S. App. LEXIS 11808 (6th Cir. June 21, 2005), the Sixth Circuit reaffirmed this principle, finding that on the facts presented, the use of the abbreviations “Mfg.” and “&” in the taxpayer’s name and the spelling out of “Company” rather than using the abbreviation “Co.” on the federal tax lien were sufficient. Further, the Court rejected the lender’s argument that IRS liens should meet the same precise-identification requirement other lien notices must meet under Uniform Commercial Code (“UCC”) Article 9.
In Crestmark Bank, debtor Spearing Tool and Manufacturing Co. (“Spearing”) entered into a lending agreement in 1998 with lender Crestmark, under which Spearing granted Crestmark a security interest in all of Spearing’s assets. Spearing subsequently fell behind in its federal employment-tax payments, and in 2001 the IRS filed two notices of federal tax lien against Spearing with the Michigan Secretary of State. However, the name on the IRS lien notices identified Spearing as “Spearing Tool & Mfg. Company Inc.,” which varied from debtor’s precise name as registered with the Michigan Secretary of State – “Spearing Tool and Manufacturing Co.” Spearing had previously used this name variation on some of its federal tax filings.
Crestmark periodically ran lien searches with the Michigan Secretary of State using Spearing’s exact registered name. But because Michigan’s electronic search technology generally discloses only liens matching the precise name searched, the IRS liens were never disclosed. However, the Secretary of State did include with one of the search results a note stating that Crestmark should search using “Spearing Tool & Mfg. Company Inc.,” which Crestmark failed to do. Crestmark, unaware of the federal tax liens, continued to advance more funds to Spearing. In 2002 Spearing filed a Chapter 11 bankruptcy petition, at which point Crestmark ran a lien search for “Spearing Tool & Mfg. Company Inc.” and discovered the tax lien notices. Crestmark then commenced suit to determine lien priority.
The bankruptcy court granted summary judgment for the government. The district court reversed, and on appeal the Court of Appeals reversed the district court and affirmed the bankruptcy court, holding that (1) federal law controls in determining whether the IRS’s lien notice sufficed, and (2) on the facts presented, the IRS notice was sufficient to give the IRS priority.
In determining whether the lien notice sufficed under federal law, “the critical issue in determining whether an abbreviated or erroneous name sufficiently identifies a taxpayer is whether a reasonable and diligent search would have revealed the existence of the notices of the federal tax liens under these names.” While the Court declined to express any opinion about whether creditors have a general obligation to search name variations, the Court did hold that on the facts presented, a reasonable, diligent search by Crestmark of the Michigan lien filings would have disclosed Spearing’s IRS tax liens, and thus the IRS notices sufficed to give the IRS liens priority: (1) Crestmark had notice that Spearing sometimes used the abbreviations “Mfg.” and “&,” (2) these abbreviations are so common that they are used as a rule in the Court’s own case citations, and (3) the Secretary of State actually recommended that Crestmark search using these abbreviations. The Court also noted that as a policy consideration, the federal government’s interest in prompt, effective tax collection trumps the convenience of banks in performing multiple lien searches.
Of note, the Court rejected Crestmark’s argument that IRS liens should meet the same precise-identification requirement required under UCC Article 9, noting that because the UCC applies to transactions “that create a security interest in personal property or fixtures by contract,” the IRS is exempt from UCC requirements even without the strong federal policy favoring unfettered tax collection.
Allen M. Lee Mr. Lee’s practice focuses on general business transactions and intellectual property matters.
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