Bloomfield State Bank v. United States
2011 U.S. App. LEXIS 9557
| 7th Cir. | 2011Background
- Bloomfield State Bank sought priority over an IRS tax lien on rents secured by a mortgage on real estate and improvements.
- Mortgage granted in 2004 gave the bank a lien on real estate and all rents derived from it, to secure the loan.
- IRS filed a tax lien in 2007; a receiver was appointed to manage the property and collect rents.
- Receiver collected $82,675 in rents for the bank after the tax lien attached.
- District court held the tax lien trumped the bank’s lien on post-lien rents; bank appealed.
- The Seventh Circuit reversed, holding the bank’s lien on the real estate (not the rents themselves) could preexist and trump the tax lien if the property securing the loan existed when the lien attached.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the rentals assignment creates priority over the tax lien | Bank argued property securing the lien existed; rents are proceeds of that property. | IRS argued only the rents (not the underlying real estate) were secured, hence no priority. | Reversed: property securing the loan existed; bank’s lien trumped the tax lien. |
| What constitutes ‘existence’/choateness for priority | Choateness requires existence of the secured property when the lien attached. | Priority turns on the specific asset the lien encumbers at attachment. | Existence is of the property securing the lien, not the subsequent proceeds; lien on real estate preexisted the tax lien. |
| Relation between rental-income lien and real-estate lien | Rental-income provision creates a separate perfected lien. | Rental income is just proceeds; the real estate lien governs priority. | Rental-income provision is not the controlling lien; the real estate lien governs priority. |
Key Cases Cited
- Plymouth Savings Bank v. IRS, 187 F.3d 203 (1st Cir. 1999) (priority when property exists at tax lien attachment; proceeds treated as property of the asset)
- PPG Industries, Inc. v. Hartford Fire Ins. Co., 531 F.2d 58 (2d Cir. 1976) (choateness concept and security interest priority over tax liens)
- United States ex rel. IRS v. McDermott, 507 U.S. 447 (U.S. 1993) (existence/perfection standards for competing liens; not requiring Knowable amount of recovery)
- In re Whyte, 164 B.R. 976 (Bankr. N.D. Ind. 1993) (district decisions on rental income and liens under similar frameworks)
- J.D. Court, Inc. v. United States, 712 F.2d 258 (7th Cir. 1983) (accounts receivable priority analogies in tax lien context)
- Sgro v. United States, 609 F.2d 1259 (7th Cir. 1979) (priority of tax liens over certain preexisting security interests)
- United States v. City of New Britain, 347 U.S. 81 (1954) (choateness doctrine in federal tax lien priority)