620 B.R. 61
Bankr. D. Vt.2020Background
- Fire destroyed the debtors' residence (Oneida Property); insurance/settlement proceeds of $72,871.87 were deposited with the Court.
- CNB held the first mortgage; Vermont Community Loan Fund (VCLF) and Northern Community Investment Corporation (NCIC) held junior mortgages and required insurance in the mortgage covenants.
- The debtors' policy (Jan. 2014) named only CNB as mortgagee/loss payee; VCLF/NCIC were not named.
- The IRS held federal tax liens against the debtors (assessed as early as 2004) in amounts exceeding the proceeds; the IRS had earlier agreed to subordinate its liens to the bank lienholders with respect to real estate in exchange for consideration.
- Dispute: priority between the IRS (asserting federal tax liens attach to insurance proceeds) and VCLF/NCIC (asserting an equitable lien or choate mortgage-derived interest giving them priority). The Court granted summary judgment to the IRS.
Issues
| Issue | Plaintiff's Argument (IRS) | Defendant's Argument (VCLF/NCIC) | Held |
|---|---|---|---|
| Which party has priority in the insurance proceeds? | IRS: its federal tax liens attached to the debtors' interest in the insurance proceeds and have priority because the bank lienholders only have an equitable lien that was not choate before the tax liens (or is not entitled to statutory protection). | Bank lienholders: they have an equitable lien that is effectively ownership of proceeds (same priority as their mortgage), was choate upon mortgage recordation (or is protected under 26 U.S.C. § 6323(c)). | The IRS: federal tax liens attached to the proceeds and, as a matter of law, have priority over the bank lienholders' equitable lien; bank lienholders' interest was not choate or statutorily exempt. |
Key Cases Cited
- Don King Prods. v. Thomas, 945 F.2d 529 (2d Cir. 1991) (defines choateness: identity of lienor, property, and amount must be established to defeat federal tax lien)
- United States v. 110-118 Riverside Tenants Corp., 886 F.2d 514 (2d Cir. 1989) (priority analysis requires chronology and choateness)
- V.J. Processors, Inc. v. Fireman’s Fund Ins. Cos., 679 F. Supp. 399 (D. Vt. 1987) (simultaneous attachment rule: tax lien prevails when interests attach simultaneously)
- PPG Indus., Inc. v. Hartford Fire Ins. Co., 531 F.2d 58 (2d Cir. 1976) (Article 9 security can continue to proceeds of collateral; distinguished where real property, not Article 9, is at issue)
- United States v. Colby Academy, 524 F. Supp. 931 (E.D.N.Y. 1981) (federal tax liens attach to a taxpayer's interest in future insurance proceeds)
- MDC Leasing Corp. v. N.Y. Prop. Ins. Underwriting Ass’n, 450 F. Supp. 179 (S.D.N.Y. 1978) (equitable assignment of unfixed insurance proceeds becomes choate when proceeds are appropriated or a claim is fixed)
- Lakeshore Bank & Trust Co. v. United Farm Bureau Mut. Ins. Co., 474 N.E.2d 1024 (Ind. Ct. App. 1985) (insurer must account to mortgagee with equitable lien when given notice)
- United States v. Ripa, 323 F.3d 73 (2d Cir. 2003) (recognizes that federal priority rules can produce inequitable results, but courts must apply federal law)