# Wolinsky v. Frye

> United States Bankruptcy Court, D. Vermont · August 31, 2020

URL: https://www.frixlaw.com/law-library/cases/10463207

## Case

- **Court:** United States Bankruptcy Court, D. Vermont
- **Decided:** August 31, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

Formatted for Electronic Distribution For Publication
UNITED STATES BANKRUPTCY COURT
DISTRICT OF VERMONT

Filed. & Entered
On.Docket
August 31,2020

In re:
Berton R. Frye and Chapter 7
Virginia R. Frye, Case # 15-10242
Debtors.

Douglas J. Wolinsky, Trustee,
Plaintiff, Adversary Proceeding
V. # 19-01009
Berton R. Frye, Virginia Frye,
Northeastern Vermont
Development Association, Inc.,
Internal Revenue Service,
Vermont Community Loan Fund,
Inc., and Northern Community
Investment Corporation,
Defendants.

MEMORANDUM OF DECISION
GRANTING INTERNAL REVENUE SERVICE’S MOTION FOR SUMMARY JUDGMENT
AND DENYING JOINT CROSS-MOTION FOR SUMMARY JUDGMENT OF
VERMONT COMMUNITY LOAN FUND AND NORTHERN COMMUNITY INVESTMENT CORPORATION
The three remaining parties to this adversary proceeding — the Internal Revenue Service (the
Vermont Community Loan Fund, Inc. (“WCLF”), and Northern Community Investment
Corporation (“NCIC”) (collectively, the “Remaining Parties”) — each claim an interest in certain
insurance proceeds (the “Insurance Proceeds”). The IRS asserts it 1s entitled to all of these proceeds
based on the priority of its federal tax liens, and VCLF and NCIC contest the priority of the IRS’s
interest, asserting they have a superior right to the Insurance Proceeds because the IRS expressly
subordinated its liens to the VCLF and NCIC mortgage liens.
For the reasons set forth below, the Court concludes summary judgment is proper, and the IRS
has a superior right to the Insurance Proceeds as a matter of law. Therefore, the Court grants the IRS’s
motion for summary judgment and denies VCLF and NCIC’s joint cross-motion for summary judgment.

This Court has jurisdiction over this adversary proceeding, and each of the motions for summary
judgment, pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered on June
22, 2012. This a core proceeding arising under Title 11 of the United States Code as defined in 28
U.S.C. § 157(b)(2)(K). The Remaining Parties have consented to this Court’s authority to enter a final
judgment determining their respective rights in the Insurance Proceeds in this interpleader action (see
doc. # 41).
PROCEDURAL HISTORY
The Chapter 7 case trustee (the “Trustee”) commenced the instant adversary proceeding on
September 12, 2019 and filed an amended complaint on October 11, 2019 (doc. # 4, the “Amended
Complaint”). The Trustee obtained a Clerk’s Entry of Default against Defendants Berton R. Frye,
Virginia Frye, and Northeastern Vermont Developmental Association, Inc. (collectively, the “Default
Defendants”), on February 4, 2020 (doc. # 30).1 On April 8, 2020, the Court granted the Trustee’s
motion for a default judgment against the Default Defendants (doc. # 38, the “Default Judgment”). In
the Default Judgment, the Court determined the Default Defendants had no claim or interest in the
Insurance Proceeds and barred them from asserting any claim against the Trustee relating to, or arising
out of, the Insurance Proceeds or this proceeding.
On May 12, 2020, the Court entered a judgment and order granting judgment in favor of the
Trustee on five of the six prayers for relief in the Amended Complaint, dismissing the Trustee from the
proceeding with prejudice, and directing the Trustee to deposit the Insurance Proceeds into the Court’s
registry pending adjudication of the Remaining Parties’ claims to the Insurance Proceeds (doc. # 47).
The Trustee subsequently deposited the Insurance Proceeds in the amount of $72,871.87 into the Court's
registry (doc. # 50).
Pursuant to the Court’s scheduling order (doc. # 41), the Remaining Parties timely filed a
stipulation of facts (doc. # 49), the IRS filed a motion for summary judgment (doc. # 51), NCIC and
VCLF (together, the “Bank Lienholders”) filed a joint cross-motion for summary judgment (doc. # 52),
and the IRS and Joint Bank Lienholders both filed objections and replies to the pending motions (doc.
## 53–56). The cross-motions for summary judgment were fully submitted as of June 20, 2020.
ISSUE PRESENTED
The sole issue presented in these interpleader cross-motions for summary judgment is whether
the IRS or the Joint Bank Lienholders holds a superior interest in the Insurance Proceeds.

1
Summary judgment is proper “if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also
Jackson v. Fed. Express, 766 F.3d 189, 193–94 (2d Cir. 2014). “A genuine issue exists – and summary
judgment is therefore improper – where the evidence is such that a reasonable jury could decide in the
non-movant’s favor.” Brandon v. Kinter, 938 F.3d 21, 31 (2d Cir. 2019) (citation and quotation marks
omitted). “[T]he substantive law will identify which facts are material. Only disputes over facts that
might affect the outcome of the suit under the governing law will properly preclude the entry of
summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.” Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1985) (citation omitted). “The court construes all evidence in
the light most favorable to the non-moving party, drawing all inferences and resolving all ambiguities in
[that party’s] favor.” Amore v. Novarro, 624 F.3d 522, 529 (2d Cir. 2010) (citing LaSalle Bank Nat’l
Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195, 205 (2d Cir. 2005)); see also Burns v. Martuscello,
890 F.3d 77, 83 (2d Cir. 2018). However, “conclusory statements, conjecture, or speculation by the
party resisting the motion will not defeat summary judgment[.]” Flores v. United States, 885 F.3d 119
(2d Cir. 2018) (quoting Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996)).
UNDISPUTED MATERIAL FACTS
The Court finds the following facts to be undisputed and material to the outcome of these cross-
motions for summary judgment (each, a “UMF”):
1. This dispute involves a priority determination of the Remaining Parties’ interests in the
Insurance Proceeds in the amount of $72,871.87,2 which resulted from a fire that occurred on or
around May 20, 2014, at the Debtors’ former residence, 1076 Oneida Road, Danville, VT (the
“Oneida Property”). (Doc. # 49, ¶ 1; doc. # 50; doc. # 51, p. 2, ¶ 1; doc. # 54.)
2. Community National Bank (“CNB”) held a first mortgage on the Oneida Property. Pursuant to
the mortgage document with CNB, the Debtors were required to maintain insurance on the
Oneida Property. (Doc. # 49, ¶ 2(a); case # 15-10242, claim # 14-1.)
3. The Joint Bank Lienholders held second mortgages on the Oneida Property and on commercial
parcels owned by the Debtors. Pursuant to the mortgage documents with the Joint Bank
Lienholders, the Debtors were required to maintain insurance on the Oneida Property. (Doc. #
49, ¶ 2(b); case # 15-10242, claim ## 19-1, 20-1.)
4. The IRS had numerous federal tax liens against the Debtors for various outstanding federal tax
liabilities. The Debtors’ tax liability exceeds the amount of the Insurance Proceeds; their joint
2004 federal income tax liability as of the petition date was $92,976.58. The IRS filed a secured
claim in the amount of $124,050, based on some of those liabilities, an unsecured priority claim
in the amount of $92,340.30, and a general unsecured claim in the amount of $238,005.76. (Doc.
# 49, ¶ 3; doc. # 51, p. 2, ¶¶ 1–3; doc. # 54; case # 15-10242, claim # 5-3.)

2
of their liens, the IRS agreed to subordinate its federal tax liens to that of the Joint Bank
Lienholders on all of the Debtors’ real estate and on certain commercial equipment, in exchange
for $120,000. The Joint Bank Lienholders each filed a secured claim in the amount of $81,000.
(Doc. # 49, ¶¶ 2(c), (f); doc. # 49-1; case # 15-10242, claim ## 19-1, 20-1.)
6. With respect to the buildings and real estate,3 the Joint Bank Lienholders and the IRS had
perfected liens against the Oneida Property prior to the fire, with outstanding balances in excess
of the amount of the Insurance Proceeds, in the following order of priority: VCLF, NCIC, and
the IRS federal tax liens. (Doc. # 49, ¶ 4; doc. # 51, p. 2, ¶ 1; doc. # 54.)
7. In or around January 2014, the Debtors took out a homeowner’s insurance policy on the Oneida
Property, issued by Certain Underwriters at Lloyd’s London Subscribing Severally to Policy No.
WSH108007 (“Underwriters”). The insurance policy provided for coverage of up to $225,000
for the dwelling, $112,500 for personal property, and $45,000 for loss of use. The insurance
policy listed one mortgagee, CNB. (Doc. # 49, ¶¶ 7–9, 11.)
8. On or about May 20, 2014, the Oneida Property was destroyed in a fire, and this Court approved
an application for a public adjuster in connection with the fire. (Doc. # 49, ¶ 10.)
9. On October 24, 2014, Underwriters brought a declaratory judgment action against the Debtors
and CNB in the United States District Court for the District of Vermont (5:14-cv-227) in relation
to an insurance coverage dispute regarding the Debtors’ insurance policy. That litigation was
resolved through a settlement in December 2015, resulting in a payment of $80,000 to the
Debtors. (Doc. # 49, ¶¶ 11–12, 14; case # 15-10242, doc. # 107.)
10. On May 20, 2015, the Debtors filed a Chapter 13 bankruptcy petition in this Court, within which
this adversary proceeding was brought; the case was converted to Chapter 7 on February 11,
2016, and the Trustee was appointed. The Court then directed that the $80,000 in settlement
proceeds be delivered to the Trustee. (Doc. # 49, ¶¶ 13, 15; case # 15-10242, doc. ## 1, 135, 146;
see also case # 15-10242, doc. # 156.)
11. On June 17, 2015, this Court entered an order granting relief from stay to CNB and to all junior
lienholders, including the Joint Bank Lienholders, to permit them to pursue pending foreclosure
actions against the Debtors’ properties, including the Oneida Property, in state court. The
Debtors and the Joint Bank Lienholders entered into a settlement agreement in the state court
foreclosure actions in November 2017, whereby they stipulated, inter alia, that the Joint Bank
Lienholders would preserve, and could pursue, their claims against the Insurance Proceeds. (Doc.
# 49, ¶¶ 2(d), (e); case # 15-10242, doc. # 34.)
12. On October 12, 2015, an attorney for the Joint Bank Lienholders confirmed in writing his earlier
notification to an attorney for Underwriters that the Joint Bank Lienholders claimed an equitable
lien on the insurance proceeds arising from their respective mortgages. (Doc. # 52, p. 2, ¶ 1; doc.
# 52-1; doc. # 53.)
DISCUSSION
The IRS seeks summary judgment that it has valid federal tax liens that attach to the Insurance
Proceeds and those federal tax liens are superior to any interest the Joint Bank Lienholders may have in
the Insurance Proceeds. The Joint Bank Lienholders seek summary judgment that they have a perfected

3 The Remaining Parties modified this stipulated fact with the caveat that it is “not intended to address whether the liens on
A. The IRS’ federal tax liens attached to the Insurance Proceeds.
In its summary judgment motion, the IRS first argues the federal tax liens attached to the
Insurance Proceeds (doc. # 51, pp. 3–5). The Joint Bank Lienholders do not dispute this assertion in
their opposition papers (see doc. # 54).
Federal tax liens arise and attach “upon all property and rights to property, whether real or
personal[.]” 26 U.S.C. § 6321. This includes the taxpayer’s “interest in future proceeds of an insurance
policy.” United States v. Colby Academy, 524 F. Supp. 931, 933 (E.D.N.Y. 1981). A federal tax lien is
“effective upon assessment against all persons, even in the absence of recordation of the lien.” Don King
Prods. v. Thomas, 945 F.2d 529, 533 (2d Cir. 1991).
Here, there is no dispute the Debtors were jointly liable for federal taxes in excess of the
Insurance Proceeds (UMF ¶ 4). Their joint 2004 federal income tax liability was $92,976.58 as of the
petition date, and the Insurance Proceeds total $72,871.87 (UMF ¶¶ 1, 4). Accordingly, on this issue the
Court finds there are no material facts in dispute and summary judgment is proper. The Court concludes
that, as a matter of law, a federal tax lien arose and attached upon all of the Debtors’ property and rights
to property, including their interest in the Insurance Proceeds, as of the date of each assessment.
B. The IRS has priority over the Joint Bank Lienholders’ claim to the Insurance Proceeds.
The IRS argues in its summary judgment motion that its federal tax liens have priority over the
Joint Bank Lienholders’ claim to the Insurance Proceeds for two reasons: (i) the Joint Bank Lienholders
have only an equitable lien and equitable liens cannot have priority over federal tax liens; and (ii) the
Joint Bank Lienholders’ claim become choate no earlier than the same time as the federal tax liens.
The Joint Bank Lienholders reject the IRS’ position and assert their claim has priority over the
federal tax liens on two grounds: First, they allege they hold an equitable lien that gives them a direct
legal ownership interest in the Insurance Proceeds, notwithstanding that they were not named as loss
payees in the insurance policy. Second, they argue their equitable lien was choate prior to the attachment
of the IRS lien or, alternatively, their lien is statutorily excepted from the choateness requirement.
i. What is the nature of the Joint Bank Lienholders’ claim to the Insurance Proceeds?
There is no dispute the Joint Bank Lienholders have an equitable lien against the Insurance
Proceeds as proceeds of the real estate to which their liens had attached.
It is a well-established rule that if the mortgagor is bound by covenant or otherwise
to insure the mortgaged premises for the better security of the mortgagee, the latter
will have an equitable lien upon the money due on a policy taken out by the
mortgagor, to the extent of the mortgagee's interest in the property destroyed, even
though the policy contains no mortgage clause. This equitable lien arises solely
covenanted, fails to make the insurance payable to the mortgagee or to assign it, the
fund arising therefrom is within the operation of the maxim.
54A AM JUR 2D MORTGAGES § 233.
It is also undisputed that the Joint Bank Lienholders each had a validly perfected mortgage, each
of the mortgages required the Debtors to maintain an insurance policy that protected the Joint Bank
Lienholders’ interests, and the insurance policy the Debtors obtained did not name or protect either of
the Joint Bank Lienholders as a mortgagee or loss payee (UMF ¶¶ 3, 6, 7). Based on these undisputed
facts, the Court finds summary judgment is proper on this issue and concludes, as a matter of law, that
the Joint Bank Lienholders have an equitable lien against the Insurance Proceeds.
The salient dispute in this case centers on the reach and priority of the Joint Bank Lienholders’
equitable lien. The Joint Bank Lienholders assert their equitable lien amounts to a direct ownership
interest in the Insurance Proceeds that affords them the same priority with respect to the Insurance
Proceeds that they had with respect to the Oneida Property. They argue their interest in the Debtors’
insurance policy was identical to CNB’s interest, even though CNB was a named loss payee, and the
Joint Bank Lienholders were not. Citing Lakeshore Bank & Trust Co. v. United Farm Bureau Mut. Ins.
Co., 474 N.E.2d 1024 (Ct. App. In. 1985), in support of their position, the Joint Bank Lienholders
contend that since the Debtors were contractually bound to name them on the insurance policy, as soon
as the Joint Bank Lienholders put Underwriters on notice of their interest in the policy (see UMF ¶ 12),
Underwriters was obligated to treat them as parties entitled to payment of the Insurance Proceeds.
The IRS contends Lakeshore is inapplicable because it did not involve a priority dispute
between creditors, did not address the ownership of the mortgagee and, most importantly, did not result
in a determination that the mortgagee had any ownership interest in the funds beyond an equitable lien.
Rather, the matter before that court was whether an insurance company wrongfully transferred insurance
proceeds to a mortgagor despite having notice of the mortgagee’s equitable lien interest. The Lakeshore
court held the insurer had a duty to account to the mortgagee for the funds by not transferring them until
the rights of the parties had been settled. To the extent Lakeshore applies here, the IRS posits that
Underwriters fulfilled the duty articulated in that case by turning over the proceeds to the Trustee (see
UMF ¶ 10; see also case # 15-10242, doc. # 156).
The Court finds the IRS’ reading of this case to be sound. Lakeshore does not provide legal
support for the Joint Bank Lienholders’ contention that they have more than an equitable lien in the
Insurance Proceeds. This does not end the Court’s inquiry, however, as this Court must also determine
which criteria control in discerning the priority of the competing liens.
The Remaining Parties disagree about when the Joint Bank Lienholders’ claim to the Insurance
Proceeds became choate. The IRS’ position is that the Joint Bank Lienholders’ claim became choate no
earlier than the same time as when the federal tax liens became choate, so the federal tax liens have
priority under the simultaneous attachment rule. The Joint Bank Lienholders’ position is their claim
became choate as of the mortgage recordation date. In the alternative, the Joint Bank Lienholders argue
their claim is statutorily excepted from the choateness requirement, pursuant to 26 U.S.C. § 6323(c). If
either of those arguments prevail, the Joint Bank Lienholders’ claims would have priority over the
federal tax liens.
“The priority of a federal tax lien is a matter of federal law … [i]n determining whether the tax
lien has priority over a competing lien or claim, it is necessary to look at two factors: (1) chronological
priority and (2) compliance with the doctrine of choateness.” United States v. 110-118 Riverside
Tenants Corp., 886 F.2d 514, 518 (2d Cir. 1989) (citations omitted).
[P]riority as a lienor is determined by the common law rule of “first in time is the
first in right.” Under that rule, a federal tax lien takes priority over competing liens
unless the competing lien was choate, or fully established, prior to the attachment
of the federal lien. Not only does a lienor’s interest have to be first chronologically,
but the interest must be choate to defeat the federal tax lien. A choate lien is one in
which the identity of the lienor, the property subject to the lien and the
amount of the lien are established. A lien that is “choate” has been described as a
lien that is “specific and perfected” and for which “nothing more [need] be done.”
Don King Prods. v. Thomas, 945 F.2d 529, 533–34 (2d Cir. 1991) (citations omitted, and emphasis
added). In the event of simultaneous attachment, the federal tax lien is accorded priority. V.J.
Processors, Inc. v. Fireman’s Fund Ins. Cos., 679 F. Supp. 399, 401 (D. Vt. 1987) (citations omitted).
There is no dispute that (1) the IRS subordinated its federal tax liens to the liens of the Joint
Bank Lienholders on all of the Debtors’ real estate, including the Oneida Property; (2) prior to the
destruction of the Oneida Property in a fire on May 20, 2014, the Joint Bank Lienholders and the IRS
had perfected liens against the Oneida Property in the following priority: VCLF, then NCIC, and then
the IRS federal tax liens; and (3) the Debtors took out their insurance policy in January 2014,
Underwriters commenced its insurance coverage dispute action on October 24, 2014, and that litigation
was settled in December 2015, resulting in the $80,000 in settlement proceeds (UMF ¶¶ 5–10). Since the
res at issue here is not the Oneida Property, but rather the Insurance Proceeds, the Court turns to the
question of when the Joint Bank Lienholders’ equitable lien became choate as to the Insurance Proceeds.
The IRS argues the Joint Bank Lienholders’ claim did not become choate until December 2015,
when the insurance coverage dispute litigation was settled, because that was when the property subject
deemed to have come into existence as early as May 20, 2014, when the Oneida Property was destroyed
by fire, and before which there was no insurance claim that could have possibly been encumbered by an
equitable lien of the Joint Bank Lienholders, the federal tax liens had either (i) already attached to the
Debtors’ interest in the insurance policy or (ii) attached simultaneously with the Joint Bank Lienholders’
equitable lien on that date. See MDC Leasing Corp. v. New York Prop. Ins. Underwriting Ass’n, 450 F.
Supp. 179, 181 (S.D.N.Y. 1978) (assignment of unfixed insurance proceeds was equitable interest that
became legal and choate once there was a judgment or appropriation of proceeds in favor of assignor or
no earlier than when proof of loss was filed and proceeds came into existence, and federal tax liens
attached before proceeds came into existence or no later than when proceeds came into existence); see
also United States v. Colby Acad., 524 F. Supp. 931, 934 (E.D.N.Y. 1981) (assignment of unfixed
insurance proceeds was equitable interest that became legal and choate once there was a judgment or
appropriation of proceeds in favor of assignor, and ripening of equitable lien into legal lien did not relate
back to date of execution of the original assignment).
Citing PPG Industries, Inc. v. Hartford Fire Ins. Co., 531 F.2d 58 (2d Cir. 1976) to refute the
IRS’ position, the Joint Bank Lienholders argue the Insurance Proceeds are merely their real estate
collateral in another form, and they have the same priority perfected lien against the Insurance Proceeds
that recompenses the loss of that collateral. Since they properly recorded their mortgage and the IRS
executed a subordination agreement in their favor, the Joint Bank Lienholders declare there was nothing
else they were required to do in order to have priority over the IRS, in either the Oneida Property or its
proceeds, i.e., the Insurance Proceeds. Thus, since a lien is choate when “there is nothing more that
needs to be done to perfect it[,]” V.J. Processors, Inc., 679 F. Supp. at 401, and since mortgage liens in
Vermont are perfected by recordation with the land records, 27 V.S.A. § 342, the Joint Bank
Lienholders maintain their lien on the Insurance Proceeds was choate as of the mortgage recordation
date.
The Joint Bank Lienholders’ reliance on PPG Industries is unavailing, however, because the
facts of that case are markedly distinct from those before this Court. In PPG Industries, the creditor had
a security interest in the debtor’s inventory and equipment that was governed by Article 9 of the
Uniform Commercial Code. The Second Circuit construed the version of U.C.C. § 9-306 then in effect
to grant the creditor a security interest in the proceeds of the insurance policy at issue. PPG Industries,
531 F.3d at 61. The court found that, although the proceeds did not come into existence until a judgment
was obtained against the insurance company, since the creditor’s original security interest was in the
debtor’s inventory and equipment and, when that property was destroyed, the security interest continued
creditor’s security interest had priority over the federal tax lien that would have clearly been subordinate
to the creditor’s security interest in the original collateral. Id. at 62–63. Here, unlike in PPG Industries,
the original collateral at issue is real property, not personal property, and Article 9 of the Uniform
Commercial Code does not apply. See 9A V.S.A. § 9-109. As this Court found above, the Joint Bank
Lienholders have established no legal basis for their contention that they have more than an equitable
lien in the Insurance Proceeds (see § B.i, supra).4
This Court need not determine the exact date when the Joint Bank Lienholders’ equitable lien
against the Insurance Proceeds became choate. The Court has already found the federal tax liens arose as
of the date of each assessment and attached upon the creation of the Debtors’ interest in the Insurance
Proceeds (see § A, supra), and the taxes were assessed as early as 2004, in an amount exceeding the
Insurance Proceeds (UMF ¶ 4). The Debtors’ interest in the Insurance Proceeds could not have been
established any later than the date the property subject to the Joint Bank Lienholders’ equitable lien, i.e.,
the Insurance Proceeds, was established in 2015. Even if the Court found this date to be as early as
January 2014, when the Debtors purchased the insurance policy (UMF ¶ 7), the IRS’ federal tax liens
would have attached to those proceeds no later than simultaneously with the Joint Bank Lienholders’
equitable lien. Hence, unless the Joint Bank Lienholders are statutorily exempted from the choateness
requirement, the federal tax liens have priority. See V.J. Processors, 679 F. Supp. at 401.
The Joint Bank Lienholders’ alternative argument is that the nature of their claim against the
Insurance Proceeds exempts it from the choateness requirement, pursuant to 26 U.S.C. § 6323(c). That
statute provides, in relevant part
(c) Protection for certain commercial transactions financing agreements, etc.
(1) In general. To the extent provided in this subsection, even though notice of
a lien imposed by section 6321 has been filed, such lien shall not be valid with
respect to a security interest which came into existence after tax lien filing but
which—
(A) is in qualified property covered by the terms of a written agreement
entered into before tax lien filing and constituting—
(i) a commercial transactions financing agreement,
…
(2) Commercial transactions financing agreement. For purposes of this
subsection—

4 To the extent the Joint Bank Lienholders argue the IRS subordinated its federal tax liens on future insurance claims under
agreement” means an agreement (entered into by a person in the course
of his trade or business)—
(i) to make loans to the taxpayer to be secured by commercial
financing security acquired by the taxpayer in the ordinary
course of his trade or business, or
…
but such an agreement shall be treated as coming within the
term only to the extent that such loan or purchase is made
before the 46th day after the date of tax lien filing or (if earlier)
before the lender or purchaser had actual notice or knowledge
of such tax lien filing.
(B) Limitation on Qualified Property. The term “qualified property”,
when used with respect to a commercial transactions financing
agreement, includes only commercial financing security acquired by
the taxpayer before the 46th day after the date of tax lien filing.
(C) Commercial Financing Security Defined. The term “commercial
financing security” means (i) paper of a kind ordinarily arising in
commercial transactions, (ii) accounts receivable, (iii) mortgages on
real property, and (iv) inventory.
…
26 U.S.C. § 6323(c).
The Joint Bank Lienholders argue that because “commercial financing security” includes
“mortgages under real property” pursuant to 26 U.S.C. § 6323(c)(2)(C)(iii), their security interest in the
Oneida Property is a “commercial transactions financing agreement” under 26 U.S.C. § 6323(c)(2)(A),
and is thus excepted from the “first in time” priority accorded to federal tax liens. However, as the IRS
correctly observes, mortgages on residential real property are not themselves “commercial transactions
financing agreements” under 26 U.S.C. § 6323(c). Rather, mortgages on real estate are a type of security
a taxpayer may own that may be used to secure a loan to that taxpayer under a commercial transactions
financing agreement, under 26 U.S.C. § 6323(c)(2)(A)(i) and (C)(iii). The term “commercial financing
security” applies to a mortgage on real estate “if the taxpayer has an interest in the mortgage as a
mortgagee or assignee” but does not include “a mortgage where the taxpayer is the mortgagor or realty
owned by him.” 26 C.F.R. § 301.6323(c)-1. Here, the Joint Bank Lienholders made the loans to the
Debtors and held the mortgages on the Oneida Property (UMF ¶¶ 3, 5). Their argument fails as the
Debtors were the mortgagors and 26 U.S.C. § 6323(c) does not apply.
While the statute does not offer relief to the non-governmental creditors in this case, from an
equitable perspective there is something troubling about this commercial transaction, in which the facts
indicate (i) the IRS subordinated its interest in the real property to induce the Joint Bank Lienholders to
consideration of that subordination, (iii) the Joint Bank Lienholders each then made a mortgage loan,
apparently in reliance on the subordination agreement, and (iv) when the property that was collateral for
their loans was destroyed, the IRS declared its subordination agreement did not apply to the proceeds of
the collateral and proclaimed its lien usurped the Joint Bank Lienholders’ interest in those proceeds.
This seems inconsistent with the Remaining Parties’ expectations and intentions, and creates a result
dependent on whether the Oneida Property was reduced to proceeds or was in existence at the time the
Remaining Parties sought to enforce their respective rights against it, and whether the Debtors fulfilled
their contractual duties to the Joint Bank Lienholders. The Joint Bank Lienholders ask this Court to do
equity by turning over the Insurance Proceeds to them. The IRS responds that federal law controls and
establishes very clear criteria, which the Joint Bank Lienholders simply have not met, in order to have
priority over the IRS’ federal tax liens.
The material facts with respect to the choateness dimension of the issue are not in dispute, and
therefore summary judgment is proper. Since the Joint Bank Lienholders have not demonstrated they
hold a direct ownership interest in the Insurance Proceeds, they had a choate interest in the Insurance
Proceeds prior to the IRS, or they are statutorily exempted from the choateness requirement, the Court
concludes that, as a matter of law, the IRS’ federal tax liens have priority over the Joint Bank
Lienholders’ claim to the Insurance Proceeds.
CONCLUSION
As a threshold matter, the Court finds none of the material facts are in dispute and therefore it
determines summary judgment is proper.
On the merits, the foregoing analysis and conclusions lead this Court to two conflicting
determinations. First, the equities decidedly favor the Joint Bank Lienholders because the undisputed
facts affirm they (a) took all necessary steps to perfect their security interests in the Oneida Property, (b)
paid the IRS for a subordination of its lien on the Oneida Property so the Joint Bank Lienholders would
have priority over the IRS in the real estate that served as their collateral, (c) required in the mortgage
agreement that the Debtors name them as loss payees on the insurance policy protecting the value of
their real property collateral, and (d) would have had priority over the IRS if the Oneida Property
collateral had not been destroyed. Second, the controlling federal law is clear, and since the collateral
was destroyed by fire and the Debtors failed to name the Joint Bank Lienholders as loss payees on their
insurance policy, the Joint Bank Lienholders’ interest in the proceeds was not choate prior to the IRS’
interest therein, and they are not exempt from the choateness criterion. Hence, the Court concludes IRS’
federal tax liens have priority over the Joint Bank Lienholders’ equitable lien in the Insurance Proceeds.
Although this seems an inequitable outcome, it is the one required by the law.”
Accordingly, the Court grants the IRS’ motion for summary judgment and denies the Joint Bank
Lienholders’ cross-motion for summary judgment.®
This memorandum of decision constitutes the Court’s findings of fact and conclusions of law.
(ee. Ctra
August 31, 2020 Colleen A. Brown
Burlington, Vermont United States Bankruptcy Judge

5 This Court is not the only one to find the application of this statute can lead to inequitable results. See United States v. Ripa,
323 F.3d 73, 86 (2d Cir. 2003) (“With our conclusion that the government’s claim to the fund prevails, our task is complete.
We do not doubt that the question of whether it is right and just for the government to obtain the money is an
important one. It is, however, a question for the IRS, the Tax Court, and Congress. It is not before us on this appeal.”)
(emphasis added); see also Sanchez v. United States, 696 F.2d 213, 214 (2d Cir. 1982) (“The law of New York clearly
provides the government with a priority that, leaving sympathy aside, we are obliged to effectuate.”) (emphasis added).
6 The Court has considered all of the Remaining Parties’ arguments and, to the extent any arguments are not specifically
addressed in this memorandum it is because the Court found them superfluous, in light of the ruling herein, or without merit.
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10463207. Public record. Not legal advice.