Petition for Writ of Certiorari — United States v. Estate of Romani

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In the Supreme Court of the Giuted States

OCTOBER TERM, 1997

UNITED STATES OF AMERICA, PETITIONER

ESTATE OF FRANCIS J. ROMANI

ON PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF PENNSYLVANIA

PETITION FOR A WRIT OF CERTIORARI

WALTER DELLINGER

Acting Solicitor General

LORETTA G. ARGRETT

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor

General

WILLIAM S. ESTABROOK

JOAN I. OPPENHEIMER

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTION PRESENTED

Since 1797, Congress has provided that any claim of

the United States against an insolvent estate “shall

be paid first” (31 U.S.C. 3713(a)). Since 1913, Con-

gress has provided that a federal tax lien is not valid

against a judgment lien creditor until notice of the

tax lien has been filed (26 U.S.C. 6323(a)).

The question presented in this case is whether a

federal tax claim against an insolvent estate is to “be

paid first” when a judgment lien arose before the

notice of tax lien was filed.

TABLE OF CONTENTS

EES ELE Te

Reasons for granting the petition .............ccccccccccceeeeeeeees

EE EN a eee

TABLE OF AUTHORITIES

Cases:

Back v. IRS, 445 A.2d 1057 (Md. 1982) 0.0.0.0...

Carter v. Carter, 681 F. Supp. 323 (E.D. Va.

TEE sieitensletelinteiodtntnntinmandsentninidndetqueteuseusebsecnetnstnesocsocs

City of Vermillion v. Stan Houston Equipment Co.,

341 FP. Supp. 707 (D.S.D. 1972) .........c.ccoscccsrsessocceeees

Conard vy. Atlantic Insurance Co., 26 U.S. (1 Pet.)

ST ITT endnnctidiintinetnedapnimniemeaiemannanidadenthiedeespabesstonies

Durham vy. United States, 545 F. Supp. 1093

(D.N.J. 1982), aff'd without opinion, 720 F.2d 661

LEASE NA ey

Estate of Berretta, In re, 426 A.2d 1098 (Pa. 1981) ...

Estate of Frazier v. District Director, Internal

Revenue Service, 92-2 U.S. Tax Cas. (CCH) 4 60,120

ES TS en ea

EE ee

Exchange Bank & Trust Co. v. Tubbs Mfg. Co.,

246 F.2d 141 (5th Cir.), cert. denied, 355 U.S. 868

ET co a

H.B. Agsten & Sons, Inc. v. Huntington Trust &

Savings Bank, 388 F.2d 156 (4th Cir. 1967), cert.

denied, 390 U.S. 1025 (1968) .............cccceceeseseseeeeeeeees

(III)

Cases—Continued: Page Cases—Continued: Page

Illinois ex rel. Gordon v. Campbell, 329 U.S. 362 United States v. Texas, 314 U.S. 480 (1941) ......... 10, 11

COBB cccccccecensencessnsescnasansencerecsevenincssnqnenssconnestnetnantes 10 United States v. Vermont, 377 U.S. 351 (1964) ..... 10, 13

James v. United States, 366 U.S. 213 (1961) ........... 14 United States v. Waddill, Holland & Flinn, Inc.,

Kentucky v. United States, 383 F.2d 13 (6th Cir. ee Be dichiisehchiiitliaieitininceipciiciateuniiaas, 10, 19

SITE PRS PEIN eS Se OE 5, 8, 12, 19

Massachusetts v. United States, 333 U.S. 611 Statutes:

CUD ssiisccsceihseseiintaleinisicittapitsiaiiadeiaiiibaiaiae 10, 12 Act of July 31, 1789, ch. 5, § 21, 1 Stat. 29.0... 16

Nesbitt v. United States, 622 F.2d 433 (9th Cir. << . March ~ as = — : x gy <0 7 esonsvssesoese 4, .

Cir. 1980), aff’g 445 F. Supp. 824 (N.D. Cal. 1978), het of hn 1866, ch. 184, $9 1 4 . orm 17

cert. denied, 451 U.S. 984 (1981) .......ccccccceceeees 5, 7, . ~ Act of March 4, 1913, ch. 166, 37 ange menos 4,17

Act of November 6, 1 b. L. No. 95-598, Tit. ITI,

New York v. Maclay, 288 U.S. 290 (1983) ......+..++-.. 10 § mame SSS ih a at 16

Spira v. United States, 76-2 U.S. Tax Cas. (CCH) Act of September 13, 1982, Pub. L. No. 97-258, Subtit.

cf. | Sa 19 8 ES Eee! Se 16

Spokane County v. United States, 279 U.S. 80 Bankruptey Act of 1898, ch. 541, § 64, 30 Stat. 544... 12

REMEBER ETOP NAR P= AS. La 10 Federal Tax Lien Act of 1966, Pub. L. No. 89-719,

Succession of Nobles, 684 So.2d 973 (La. Ct. App. ENS vere 17

BED cocecceeccccccsuscosenbenaususteeabeniuecnamssemeneiiammeanttnteusainn 20 Internal Revenue Core (26 U.S.C.):

Talcott, Inc. v. Roto American Corp., 302 A.2d 147 9 GERI ccnintcversncenconenssssvennepecennnetionsenssaetencsemannnsarnatitie 3,17

DR Snap assole a he RO 20 a EE ARCS TSR ea ara CP 13, 14, 17

Thelusson Vv. Smith, 15 US. (2 Wheat.) 396 pom eaconcososocsonsesesssesoosnseuesoebescoooceosoosesesnceoss ans

(NBER) anoseveoseseressnseenssetnorensetnecomeenornsstetioens 9, 11 nee ,

Thor Power Tool Co. v. Commissioner, 439 U.S. , I a 2, 4, 6, 10

Rats ein Pe a ett EEE Po gaa amamapmcines ees amen teea teas 4

United States v. Emory, 314 U.S. 423 (1941) .......... 6, 8, iS IE eka eee 4, 11, 13, 16

| 11, 12 oN BO ene 16

United States v. Gilbert Associates, Inc., 345 US. ST OCR SAR es ica ae A ER oot Se 16

OU I i ccccivcininibhishisaticieedt nae 10 :

United States v. Key, 397 U.S. 322 (1970) ......... 6.8 11. paper a

13, 17, 19 merican ition, Fina om-

. Kimbell Foods, Inc., 440 U.S. 715 mittee on Federal Liens (1959) .........0c-ccceeceseceeeceeees 18

rpg » om - 7.8. 14. 15. 16 105 Cong. Rec. (1959) (Index):

ae pecan Ne: ee ee eee (Re ee a RP ee

United States v. New Britain, 347 U.S. 81 (1954)... 18 P od r

United States v. Randall, 401 U.S. 513 (1971) ........ ll DP. TERED cccccececcccsesscssesnsvecnsssnnesessvesscncsooscsscensescooascosece

United States v. Snyder, 149 U.S. 210 (1898) .......... 17

Miscellaneous—Continued:

Hearings Before the House Committee on Ways and

Means on the Priority of Federal Tax Liens and

Levies, 89th Cong., 2d Sess. (1959) ...........cccscccereeevees

H.R. Rep. No. 1884, 89th Cong., 2d Sess. (1966) ........

H.R. Rep. No. 651, 97th Cong., 2d Sess. (1982) ..........

Note, Nesbitt v. United States: Denying an Implied

Tax Lien Exception to the Federal Priority in Insol-

vency, 33 Cath. U.L. Rev. 741 (1984) ..............c00e00+

Plumb, The Federal Priority in Insolvency: Proposals

for Reform, 70 Mich. L. Rev. 1 (1971) .........cccccceeeees

S. 2197, 92d Cong., Ist Sess. (1971) ..........cccccseceeeeneeeees

S. Rep. No. 1708, 89th Cong., 2d Sess. (1966) .............

In the Supreme Court of the United States

OCTOBER TERM, 1997

No.

UNITED STATES OF AMERICA, PETITIONER

ESTATE OF FRANCIS J. ROMANI

ON PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF PENNSYLVANIA

PETITION FOR A WRIT OF CERTIORARI

The Acting Solicitor General, on behalf of the

United States of America, petitions for a writ of

certiorari to review the judgment of the Supreme

Court of Pennsylvania in this case.

OPINIONS BELOW

The opinion of the Supreme Court of Pennsylvania

(App., infra, la-13a) is reported at 688 A.2d 703. The

opinions of the Superior Court (App., infra, 15a-20a)

and the Court of Common Pleas (App., infra, 21a-25a)

are not reported.

JURISDICTION

The judgment of the Supreme Court of Pennsylva-

nia was entered on January 17, 1997. The jurisdiction

of this Court is invoked under 28 U.S.C. 1257(a).

(1)

STATUTES INVOLVED

1. 26 U.S.C. 6323(a) provides, in relevant part:

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 * * * has been

filed by the Secretary.

2. 31 U.S.C. 3713(a) provides, in relevant part:

(1) Aclaim of the United States Government

shall be paid first when—

(A) a person indebted to the Government is

insolvent and—

(i) the debtor without enough property

to pay all debts makes a_ voluntary

assignment of property;

(ii) property of the debtor, if absent, is

attached; or

(iii) an act of bankruptcy is committed;

(B) the estate of a deceased debtor, in the

custody of the executor or administrator, is not

enough to pay all debts of the debtor.

(2) This subsection does not apply to a case

under title 11.

STATEMENT

1. On January 25, 1985, a judgment for $400,000 was

entered in favor of Romani Industries, Inc., against

Francis J. Romani in the Court of Common Pleas of

the Commonwealth of Pennsylvania. Romani Indus-

tries did not obtain a writ of execution, or otherwise

seize any property of the debtor, in satisfaction of the

judgment. The judgment remains unpaid (App., infra,

22a).

After the date of that judgment, the Internal Reve-

nue Service filed notices of federal tax liens on the

property of Francis J. Romani. A federal tax lien

arises by operation of law in the property of any tax-

payer who “neglects or refuses to pay the [tax] after

demand” (26 U.S.C. 6321). A notice of the federal tax

lien is filed in the office “designated by the laws of

[the] State, in which the property subject to the lien

is situated” (26 U.S.C. 6323(f)). The liens for which

notices were filed in this case were for unpaid taxes

and penalties totaling approximately $400,000 for the

years 1982, 1985, 1987, 1988 and 1989 (App., infra, 2a).

Mr. Romani died on January 13, 1992. The admin-

istrator of his estate sought to transfer the only

asset of the estate—real estate having a value of ap-

proximately $53,000—to Romani Industries in satis-

faction of its outstanding judgment claim. The

United States objected to that transfer and filed a

proof of claim for federal taxes and interest totalling

approximately $489,000 (App., infra, 2a). Because the

debts of the estate greatly exceed its assets, and the

estate is thus insolvent (ibid.), the United States

claimed first priority for payment of its claim from

the assets of the estate under what is known as the

“absolute priority” statute. That statute was first

enacted in 1797 (Act of March 3, 1797, ch. 20, § 5, 1

Stat. 515) and is now codified at 31 U.S.C. 3713(a). It

provides, in relevant part, that “[a] claim of the

United States Government shall be paid first when

* * * the estate of a deceased debtor, in the custody

of the executor or administrator, is not enough to pay

all debts of the debtor.” /bid.'

Romani Industries contended, however, that the

“absolute priority” that Congress established in 31

U.S.C, 3713(a) for claims of the United States against

insolvent estates has been impliedly repealed, for tax

claims, by 26 U.S.C. 6323(a). That statute, which was

first enacted in 1913 (Act of March 4, 1913, ch. 166, 37

Stat. 1016), provides that the federal tax lien “shall

not be valid as against any purchaser, holder of a

security interest, mechanic’s lienor, or judgment lien

creditor until notice thereof * * * has been filed by

the Secretary.” 26 U.S.C. 6323(a). Romani Indus-

tries claimed that, because it became a “judgment lien

creditor” before notice of the federal tax lien was

filed, it is entitled to priority under 26 U.S.C. 6323(a)

and that the “absolute priority” rule of 31 U.S.C. 3713

is therefore inapplicable to this case.

2. a. The Court of Common Pleas agreed with Ro-

mani Industries that 26 U.S.C. 6323(a) impliedly

repealed—for federal tax debts—the “absolute prior-

ity” rule of 31 U.S.C. 3713(a) (App., infra, 21a-25a).

! Under this “absolute priority” statute, the claims of the

United States are also to be paid first when an insolvent debtor

“makes a voluntary assignment of property,” when property of

an absent debtor is attached, or when “an act of bankruptcy is

committed” (31 U.S.C. 3713(a)(1)). In 1978, however, Congress

amended the statute to make it inapplicable to bankruptcy

cases brought “under title 11” of the United States Code (31

U.S.C, 3713(a)(2)). See note 6, infra.

The court did not discuss or cite the several federal

decisions that have rejected this interpretation of

these federal statutes. See, e.g., Nesbitt v. United

States, 622 F.2d 433 (9th Cir. 1980), aff’g 445 F. Supp.

824 (N.D. Cal. 1978), cert. denied, 451 U.S. 984 (1981);

Kentucky v. United States, 383 F.2d 13, 14 (6th Cir.

1967). Instead, the court adopted the reasoning of one

of the conflicting opinions of the equally-divided court

in In re Estate of Berretta, 426 A.2d 1098 (Pa. 1981),

which concluded that the provisions of 26 U.S.C.

6323(a) evidence a congressional intent to limit the

“absolute priority” otherwise established for the

collection of federal claims (App., infra, 24a).? The

court stated that this conclusion is supported by the

policy concern that application of the “absolute

priority” statute to federal tax claims could “frus-

trate legitimate commercial expectations” (id. at

23a).

b. The Superior Court affirmed (App., infra, 15a-

20a). The court concluded that the governing princi-

ple of statutory construction is that an inconsistency

between conflicting provisions is to be resolved by

allowing the more specific provision to prevail over

* The Pennsylvania courts have long taken a narrow view

of the “absolute priority” statute, in a series of cases that are

collected and criticized in Note, Nesbitt v. United States:

Denying an Implied Tax Lien Exception to the Federal Priority

in Insolvency, 33 Cath. U. L. Rev. 741, 753-759 (1984). The

opinion from Estate of Berretta on which the court chose to

rely in this case was criticized by the opposing opinion from the

equally-divided court in Estate of Berretta because it “trans-

formed its view of what Congress should do into the presump-

tion that Congress has in fact impliedly repealed the Insolvency

Statute as to tax liens.” Jn re Estate of Berretta, 426 A.2d at

1108 (Roberts, J.).

the more general one (id. at 20a). The court stated

that 26 U.S.C. 6323(a) is the more specific provision

and should therefore prevail over “the general prcvi-

sions of Section 3713” in any conflict between them

(App., infra, 20a).

The Superior Court acknowledged that this Court

has held that “[oJnly the plainest inconsistency would

warrant * * * finding an implied exception to the

operation of so clear a command as that of” the abso-

lute priority statute (App., infra, 18a, quoting United

States v. Emory, 314 U.S. 423, 433 (1941)). The Supe-

rior Court concluded, however, that this exacting

standard is met—and that the two statutes are “most

certainly, conflicting’—because “[iJn the present

context * * * the government’s relative priority as a

creditor differs depending upon which section is

applied” (App., infra, 19a).

ec. The Supreme Court of Pennsylvania affirmed

(App., infra, la-13a). The court acknowledged that

the test applied by this Court in United States v. Key,

397 U.S. 322 (1970), governs in determining whether

26 U.S.C. 6323(a) impliedly repealed the “absolute

priority” rule of 31 U.S.C. 3713(a) for the collection of

tax debts (App., infra, 5a-6a). In Key, the Court

stated that an implied repeal of the “absolute prior-

ity” statute cannot be found unless (i) there is a facial

or “logical{] inconsisten[cy]” between the two stat-

utes, (ii) the allegedly conflicting statute would “be

rendered redundant” if the “absolute priority” statute

applied or (iii) the “language or legislative history” of

the allegedly repealing provision reveals “a purpose

incongruous with * * * application” of the absolute

priority rule. 397 U.S. at 326.

The Pennsylvania Supreme Court determined that

the two statutes are facially inconsistent because,

“with respect to tax liens, section 6323 provides for a

‘first in time’ priority while section 3713 gives abso-

lute priority to the United States” (App., infra, 6a-7a;

footnote omitted). The court concluded that the his-

tory and purpose of Section 6323(a) evidence “a con-

gressional intent that federal priorities be limited in

the tax area, regardless of whether the debtor is in-

solvent” (App., infra, 13a).°

The Pennsylvania Supreme Court stated that its

conclusions were reinforced by the rationale of this

Court’s decision in United States v. Kimbell Foods,

Inc., 440 U.S. 715 (1979). In Kimbell Foods, this

Court held that, in the absence of any federal statu-

tory directive, the relative priority of private liens

and consensual liens that arise from government

lending programs is to be determined under nondis-

criminatory state laws. 440 U.S. at 740.4 This Court

noted in Kimbell Foods that commercial transactions

3 Although the court sought generally to rely on the

legislative policies reflected in the Federal Tax Lien Act,

nothing in the history of that Act addresses the specific issues

presented in this case. See Nesbitt v. United States, 445 F.

Supp. at 829. To the contrary, in enacting the Federal Tax

Lien Act (and on one later occasion as well) Congress declined

to enact a proposal to repeal the “absolute priority” statute as

applied to federal tax claims (ibid.):

This Court cannot lightly disregard the fact that Con-

gress has been requested on at least two occasions to

amend § 3466 in a manner which would achieve the

result sought here by plaintiff, but it has not yet so

amended that section.

4 The Pennsylvania Supreme Court recognized that

“Kimbell Foods involves the priority to be accorded a federal

consensual loan where the debtor is solvent, and the case at bar

involves the question of the priority to be accorded a federal

tax lien where the debtor is insolvent” (App., infra, 11a).

are ordinarily formed in reliance upon state com-

mercial law and that a different rule for commercial

transactions involving the federal government could

upset ordinary business expectations. Jd. at 739. The

Pennsylvania Supreme Court reasoned that this same

concern applies to the present case, for “the grant of

absolute federal priority in insolvency cases, as in

solvency cases, would be destructive of commercial

stability and would frustrate legitimate commercial

expectations” (App., infra, 13a).

The Pennsylvania Supreme Court noted that its

holding conflicts with the decisions of the “federal

courts that have held that section 3713 provides for

absolute priority in tax lien cases” (App., infra, 12a

n.17, citing, e.g., Nesbitt v. United States, supra). The

court stated, however, that it was “not persuaded by

the reasoning of” those decisions (ibid.).

REASONS FOR GRANTING THE PETITION

The decision of the Pennsylvania Supreme Court

fails to honor this Court’s repeated admonition that

“fojnly the plainest inconsistency would warrant our

finding an implied exception to the operation of so

clear a command as that of [31 U.S.C. 3713]” (United

States v. Key, 397 U.S. at 324-325, quoting United

States v. Emory, 314 U.S. 423, 433 (1941)). The deci-

sion in this case directly conflicts with the decisions

of two federal courts of appeals and numerous other

federal courts. E.g., Nesbitt v. United States, 622 F.2d

433 (9th Cir. 1980), aff’g 445 F. Supp. 824 (N.D. Cal.

1978), cert. denied, 451 U.S. 984 (1981); Kentucky v.

United States, 383 F.2d 13, 14 (6th Cir. 1967); App.,

infra, 12an. 17. The question presented is one of re-

curring importance to the administration of the tax

laws. Resolution of the conflict on this recurring

question is needed to assure uniform treatment of

taxpayers and to “ensure as far as possible that

similarly situated taxpayers pay the same tax.” Thor

Power Tool Co. v. Commissioner, 439 U.S. 522, 544

(1979).

1. a. One hundred and eighty years ago, this Court

held that the “absolute priority” statute requires

that debts owed to the United States be paid first

from insolvent estates even if a competing creditor

had previously obtained a valid and enforceable

judgment lien. In Thelusson v. Smith, 15 U.S. (2

Wheat.) 396, 425 (1817), as in the present case, the

facts fell “precisely within” the scope of the absolute

priority statute. The Court stated that (ibid.)

(emphasis supplied):

the question still remains * * * whether this

right of preference [vnder the absolute priority

statute] can cut out a prior judgment creditor?

The law declares “that in all cases of insol-

vency, &c., the debts due to the United States

shall be first satisfied * * *. These expressions

are as general as any which could have been

used, and exclude all debts due to individuals,

whatever may be their dignity. * * * The law

makes no exception in favour of prior judg-

ment creditors; and no reason has been, or we

think can be, shown to warrant this court in

making one.

The Court concluded in Thelusson that, whenever

title and possession remain in “the debtor’s estate,”

the claim of the United States is to “be first satis-

fied” under the statute. /d. at 426. As Justice Car-

dozo explained for the Court more than a century

later, “[t}he ruling [in Thelusson] was that the

general lien of a judgment upon the iands of an

insolvent debtor is subordinate to the preference

established by the [absolute priority] statute unless

seizure by a marshal or some other equivalent act has

made the lien specific and brought about a change of

title or possession.” New York v. Maclay, 288 U.S.

290, 293 (1933). Accord, United States v. Gilbert

Associates, Inc., 345 U.S. 361, 366 (1953); United

States v. Texas, 314 U.S. 480, 485-486 (1941).°

5 This Court has “repeatedly reserved the question

whether the priority given the United States by [31 U.S.C.

3713(a)] can be overcome even by a prior specific and perfected

lien.” United States v. Vermont, 377 U.S. 351, 358 n.8 (1964).

The Court has never decided the issue because it has found, in

each case, that the competing lien had not divested the debtor

of title or possession and that the lien was therefore not

sufficiently specific for the question to be squarely raised. See,

e.g., ibid.; United States v. Gilbert Associates, Inc., 345 U.S.

361, 365-366 (1953); Illinois ex rel. Gordon v. Campbell, 329 U.S.

362, 370 (1946); United States v. Waddill, Holland & Flinn,

Inc., 323 U.S. 353, 355-356 (1945); United States v. Texas, 314

U.S. 480, 484-486 (1941); New York v. Maclay, 288 U.S. 290, 294

(1933); Spokane County v. United States, 279 U.S. 80, 95

(1929).

The Court has concluded that a mortgage may effect a

transfer of title, taking the property outside the estate of the

debtor and therefore beyond the reach of the absolute priority

statute. See Conard vy. Atlantic Insurance Co., 26 U.S. (1 Pet.)

386, 445-446 (1828). In so ruling, the Court did “not contem-

plate that exceptions were being made” from the absolute

priority statute; instead, it “conceived that the funds or

property affected, being covered by mortgage, belonged in fact

to third persons, not to the insolvent debtor.” Massachusetts

v. United States, 333 U.S. 611, 634 n.38 (1948). The Court “has

been loath to expand” such an exception “to include other

types of lien.” Jbid. The Court has emphasized that none of its

decisions lend “support to the assumption that the doctrine of

the mortgage cases, whatever its current vitality, would re-

Recognizing that “(t]he law makes no exception in

favour of prior judgment creditors” (Thelusson v.

Smith, 15 U.S. (2 Wheat.) at 425), the Court has con-

sistently held that “[o]nly the plainest inconsistency

would warrant * * * finding an implied exception

to the operation” of the absolute priority statute

(United States v. Emory, 314 U.S. at 433). Under the

analysis applied by the Court in United States v. Key,

397 U.S. at 324-325, such a “plain{] inconsistency”

could be said to exist only if (i) the competing statute

is logically inconsistent with the absolute priority

statute; (ii) an unconditional application of the abso-

lute priority statute would deprive the competing

statute of any meaning; or (iii) the history and text of

the competing statute reflect an actual intent by

Congress to modify the absolute priority statute. See

also id. at 326-332."

quire the subordination of unsecured claims of the United

States to a specific and perfected lien.” United States v.

Texas, 314 U.S. at 486.

® Outside of bankruptcy proceedings, which are now

expressly excepted from the coverage of the statute (31 U.S.C.

3713(a)X(2)), this Court has never upheld a claim that Congress

has impliedly repealed any aspect of the absolute priority

statute. In United States v. Randal!, 401 U.S. 513, 517 (1971),

the Court noted thai the absolute priority statute had been

superseded, for bankruptcy cases, by “the specific priorities

granted by Congress [to claims of the United States] in the

Bankruptcy Act” (401 U.S. at 517). In United States v. Key,

397 U.S. at 326-330, however, the Court emphasized that the

absolute priority statute “must apply according to its terms

except where expressly superseded, or where excluded by a

later enactment ‘plainly inconsistent’ with it” (397 U.S. at 332).

Applying this standard, the Court concluded in Key that

bankruptcy provisions requiring “fair and equitable” treat-

ment of creditors did not justify a departure from the absolute

The test applied by this Court in determining

whether an implied exception from the statute exists

is not satisfied in this case. As the Sixth Circuit

explained in Kentucky v. United States, 383 F.2d at

14-15, the plain language of the “absolute priority”

statute refutes the contention that it has been

impliedly repealed for tax claims by 2t U.S.C. 6323(a):

We at once emphasize that, of the statutes

involved, one * * * is a priority statute, and the

other—26 U.S.C. § 6323—is a lien statute. If we

employ a literal reading of [the absolute priority

statute], its language provides the answer to the

question before us. We requote it for emphasis:

“Whenever * * * the estate of any deceased

debtor, in the hands of the executors or

administrators, is insufficient to pay all the

debts due from the deceased, the debts due to

the United States shall be first satisfied.

priority Congress established for the claims of the United

States. Similarly, in United States v. Emory, the Court

rejected the contention that Section 64 of the Bankruptcy Act

of 1898, ch. 541, 30 Stat. 544, which gave certain wage claim-

ants priority over tax and non-tax claims of the United States,

impliedly repealed the absolute priority statute in non-

bankruptcy cases. In a holding equally applicable to the pre-

sent case, the Court stated in Emory (314 U.S. at 427):

Neither the language of § 64a nor the Congressional

history of the legislation here involved supports the

proposition that § 64a was intended to eliminate, either

partially or wholly, the priority of claims of the United

States in non-bankruptcy proceedings.

See also Massachusetts v. United States, 333 U.S. 611 (1948).

The essentials for application of the statute are

here present—the taxpayer is deceased; he was a

debtor of the United States; his estate is insuf-

ficient to pay all his debts. Present these essen-

tials, the debts owing the United States “shall be

first satisfied.”

The Ninth Circuit reached the same conclusion in

Nesbitt v. United States, 445 F. Supp. at 828, adopted

by reference, 622 F.2d at 433:'

There is nothing in either the language or the

legislative history of [26 U.S.C. 6323] to indi-

cate that Congress intended to make tax liens

the federal government’s sole remedy for the

collection of unpaid taxes. To the contrary,

Congress intended tax liens to supplement

existing means for the collection of taxes, in-

cluding [the absolute priority statute]. There is

therefore no basis for saying that Congress, by

7 The Pennsylvania Supreme Court did not suggest that 26

U.S.C. 6323(a) would have no meaning if it did not impliedly

repeal the absolute priority statute. The two statutes obviously

differ in their scope and are not logically inconsistent: the

absolute priority statute governs the priority of claims of the

United States only in insolvencies outside of bankruptcy court

(see 31 U.S.C. 3713(a)(2)); by contrast, 26 U.S.C. 6323(a) gov-

erns the validity of the federal tax lien against specific types of

security interests in cases involving solvent debtors and also in

the many insolvency situations to which the absolute priority

statute is inapplicable. This Court has often noted that Con-

gress has intentionally chosen to establish greater protection

for the United States in cases involving insolvent debtors than

in cases “[wjhere the debtor is not insolvent.” United States v.

Vermont, 377 U.S. at 358. See also United States v. Key, 397

U.S. at 329; United States v. New Britain, 347 U.S. 81, 85

(1954).

creating federal tax liens, intended to modify

[the absolute priority statute] in any way.

Justice Whittaker expressed the same views in his

concurring opinion in James v. United States, 366

U.S. 213, 252 & n.4 (1961), in which he concluded that

the absolute priority statute remains applicable to tax

claims notwithstanding the enactment of 26 U.S.C.

6323. He stated that, “even though the tax claim of

the Government may be only a general lien, with

notice thereof not yet filed in the proper local office

pursuant to 26 U.S.C. § 6323, we have held that it

must be accorded priority over the claims of all prior

general lienholders” and it therefore has priority in

insolvency cases “over the claims of others, including

‘judgment creditors.’” 366 U.S. at 252 & n.4.

The Pennsylvania Supreme Court acknowledged

(App., infra, 12a n.17) that its decision in this case

directly conflicts with numerous federal decisions.

Because of these conflicting decisions, taxpayers,

creditors and the United States will receive different

treatment of identical claims solely as a result of

geographical happenstance.

b. The Pennsylvania Supreme Court erred in

relying on United States v. Kimbell Foods, Inc., 440

U.S. 715 (1979), as guidance “on the policy considera-

tions that underlie the question of whether the gov-

ernment in the tax arena is to be treated as an ordi-

nary creditor or as a creditor with super-priority”

(App., infra, 7a). The Kimbell Foods case did not in-

volve federal tax claims; nor did it involve insolvent

debtors. Instead, it involved “the priority to be ac-

corded a federal consensual loan where the debtor is

solvent” (App., infra, lla). The Court expressly

noted in Kimbell Foods that, when the government is

an involuntary creditor of an insolvent taxpayer, an

entirely different set of statutory rules and policy

concerns becomes applicable (440 U.S. at 734):

That collection of taxes is vital to the function-

ing, indeed existence, of government cannot be

denied * * * . The importance of securing ade-

quate revenues to discharge national obligations

justifies the extraordinary priority accorded fed-

eral tax liens through the choateness and first-in-

time doctrines. By contrast, when the United

States operates as a moneylending institution

under carefully circumscribed programs, its

interest in recouping the limited sums advanced is

of a different order. Thus, there is less need here

than in the tax lien area to provoke protective

measures against defaulting debtors in a manner

disruptive of existing credit markets.

As an involuntary creditor of delinquent taxpayers,

the government cannot “control the factors that make

tax collection likely.” Jd. at 736. As a consensual len-

der, however, the government acts “voluntarily, with

erg knowledge of the borrower’s financial status”

ibid.).

Recognizing the significant difference between

federal tax liens and the consensual liens created

under government loan programs, the Court stated in

Kimbell Foods that “‘{aJs a quasi-commercial lender,

[the government] does not require . . . the special

priority which it compels as sovereign’ in its tax

collecting capacity.” 440 U.S. at 737-738, quoting 557

F.2d at 500. The Pennsylvania Supreme Court thus

plainly erred in relying on Kimbell Foods in deter-

mining the scope of the priority created by statute for

the collection of non-consensual debts owed by insol-

vent debtors to the United States “in its tax col-

lecting capacity” (440 U.S. at 738).

ce. The Pennsylvania Supreme Court also erred in

concluding that the legislative history of 26 U.S.C.

6323(a) reflects an intent by Congress impliedly to

repeal the absolute priority statute.

(i) The absolute priority statute is derived from

ancient English practice, under which the Crown

asserted for itself a priority over all other creditors

of an insolvent debtor.” In the United States, this

priority of the sovereign initially applied only to debts

due on bonds and for customs duties. See Act of July

31, 1789, ch. 5, § 21, 1 Stat. 29. By 1797, however, it

was made applicable to all debts due the United States

from the estate of an insolvent debtor, under a statute

whose language has since remained substantially

unchanged. See Act of March 3, 1797, supra; Act of

March 2, 1799, ch. 22, § 65, 1 Stat. 627.

Congress has frequently amended, codified and

recodified the absolute priority statute. Indeed, it has

done so twice within the past twenty years. In 1978,

Congress amended the absolute priority statute to

make it inapplicable to bankruptcy cases. See 31

U.S.C. 3713(a)(2); Act of November 6, 1978, Pub. L. No.

95-598, Tit. III, § 322(a), 92 Stat. 2562. In 1982, Con-

gress recodified the absolute priority statute to make

minor revisions in its terminology. See Act of Sep-

tember 13, 1982, Pub. L. No. 97-258, Subtit. III, § 1, 96

Stat. 972. In doing so, however, Congress noted that

no substantive change in the law was intended. H.R.

Rep. No. 651, 97th Cong., 2d Sess. 2-3 (1982).

Congress has never modified the absolute priority

statute to eliminate its application to federal tax

8 See 33 Hen. VIII, ch. 39, § 74; 13 Eliz. I, ch. 4.

claims. Indeed, the two most recent amendments

reflect that Congress, having repeatedly revisited the

statute, has determined to make no changes to its

scope other than those expressly enacted. As this

Court has often observed, the statute contains as

“clear a command” now as ever. United States v. Key,

397 U.S. at 325.

(ii) The legislative history of 26 U.S.C. 6323 does

not support any conclusion to the contrary. Begin-

ning in 1866, Congress established a federal tax lien

upon all property owned by a delinquent taxpayer.

See 26 U.S.C. 6321; Act of July 13, 1866, ch. 184, § 9, 14

Stat. 101. In response to a decision of this Court hold-

ing that an unrecorded tax lien had priority in a

delinquent taxpayer’s property even over a purchaser

for value without notice (United States v. Snyder, 149

U.S. 210 (1893)), the statute was amended in 1913 to

make the tax lien ineffective against a mortgagee,

purchaser, or judgment creditor whose interests

arose before notice of the tax lien was filed. Act of

March 4, 1913, ch. 166, 37 Stat. 1016.

In 1966, Congress determined to give similar pro-

tection to additional types of secured transactions.

The Federal Tax Lien Act of 1966, Pub. L. No. 89-719,

80 Stat. 1125, amended the statute to protect holders

of various additional types of commercial security

interests from an unfiled tax lien. See H.R. Rep. No.

1884, 89th Cong., 2d Sess. 1-2 (1966); S. Rep. No. 1708,

89th Cong., 2d Sess. 1-2 (1966). The legislative his-

tory of that Act, however, reflects that these amend-

ments to the tax lien statute did not intend to repeal

or modify the absolute priority statute—for Congress

declined to enact proposals that had been made at that

time for that very purpose. The American Bar Asso-

ciation, which proposed the legislation that resulted

in the Federal Tax Lien Act, had also proposed that

the absolute priority statute be amended to subject

that statute to the priorities established under the

Bankruptcy Act and the Internal Revenue Code. See

American Bar Association, Final Report of the

Committee on Federal Liens 7, 124 (1959) (Final

Report), contained in Hearings Before the House

Committee on Ways and Means on the Priority of

Federal Tax Liens and Levies, 89th Cong., 2d Sess.

85, 199 (1959).” The ABA proposal and report were

submitted to Congress, and three bills were intro-

duced containing this proposed revision of the abso-

lute priority statute. House Hearings, supra, at 75-

88, 196-201. These bills, along with the ABA proposal,

died in committee. 105 Cong. Rec. 1030, 1258 (1959)

(Index).

In 1970, the ABA submitted to the Senate Judiciary

Committee a similar proposed amendment to the abso-

lute priority statute. S. 2197, 92d Cong., Ist Sess.

(1971); see Plumb, The Federal Priority in Insol-

vency: Proposals for Reform, 70 Mich. L. Rev. 1, 9-10

(1971). This bill also died in committee.

Congress has thus—on at least two occasions—

declined to enact legislation to limit the application of

9 The ABA proposed to amend the absolute priority statute

to “preserve, ahead of the priority of non-lien federal claims,

any non-federal lien or security that would have been entitled

to priority over the claim of the United States immediately

prior to the divestment of the debtor’s property” and to

“assure, contrary to the suggestions made in some decisions,

that any lien which would qualify for priority in the absence of

insolvency would continue to enjoy such priority.” Final

Report, supra, at 124. Under the ABA’s proposal, the order of

priorities specified in 26 U.S.C. 6323(a) would thus have been

applicable in insolvency.

the absolute priority statute to tax claims. As the

Ninth Circuit concluded in Nesbitt v. United States,

622 F.2d at 433, aff’g 445 F. Supp. at 829, this history

reflects that Congress did not intend to change that

statute. To the contrary, by recodifying the absolute

priority statute in 1982 without making any change in

its application to tax claims, Congress reaffirmed the

broad and “clear * * * command” of the statute

(United States v. Key, 397 U.S. at 325). The words

that Congress has employed in the absolute priority

statute remain “broad and sweeping and, on their face,

admit of no exception to the priority of claims of the

United States” (United States v. Waddill Co., 323

U.S. 353, 355 (1945)).

3. Whether 26 U.S.C. 6323(a) impliedly repealed

application of the absolute priority statute to federal

tax claims is a question of substantial, recurring im-

portance. The question is frequently raised, fre-

quently litigated and often placed in doubt. See App.,

infra, 12an.17. Many decisions have agreed that the

absolute priority statute remains applicable to tax

claims. E.g., Nesbitt v. United States, supra; Ken-

tucky v. United States, supra; H.B. Agsten & Sons,

Inc. v. Huntington Trust & Savings Bank, 388 F.2d

156, 160 (4th Cir. 1967) (Haynsworth, J., concurring),

cert. denied, 392 U.S. 1025 (1968); Durham v. United

States, 545 F. Supp. 10938, 1096 (D.N.J. 1982), aff'd

without opinion, 720 F.2d 661 (8d Cir. 1983); Carter v.

Carter, 681 F. Supp. 323, 328 (E.D. Va. 1988); Estate of

Frazier vy. District Director, Internal Revenue

Service, 92-2 U.S. Tax Cas. (CCH) $ 60,120 (N.D. Ga.

1992); Spira v. United States, 76-2 U.S. Tax Cas.

(CCH) 4 9600 (1976); Estate of Silberman 46 Cal.

Rptr. 2d 610 (Ct. App. 1995); Back v. IRS, 445 A.2d

1057 (Md. Ct. Apec. App. 1982).

20 21

Other decisions, however, have agreed with the con- CONCLUSION

trary view adopted by the Pennsylvania Supreme

Court in this case. E.g., City of Vermillion v. Stan The petition for a writ of certiorari should be

Houston Equipment Co., 341 F.Supp. 707 (D.S.D. granted.

1972); Talcott, Inc. v. Roto American Corp., 302 A.2d Respectfully submitted.

147 (N.J. Ch. 1973); see also Exchange Bank & Trust

Co. v. Tubbs Mfg. Co., 246 F.2d 141 (5th Cir.), cert. ) guia ieee Gemeeed

denied, 355 U.S. 868 (1957). The question frequently LORETTA G. ARGRETT

arises in connection with estate proceedings in state Assistant Attorney General

courts (e.g., Succession of Nobles, 684 So.2d 973 (La. LAWRENCE G. WALLACE

Ct. App. 1996). This yields an even greater potential Deputy Solicitor General

for disparate results than ordinarily occurs in federal ' KENT L. JONES 2

tax litigation. Assistant to the Solicitor

General

In the absence of a decision by this Court resolving Wesiene Wereemece

this conflict, the question whether Section 6323(a) JOAN I. OPPENHEIMER

has impliedly repealed application of the absolute Attorneys

priority statute to federal tax claims will continue to

foment recurring and wasteful litigation. Disparate APRIL 1997

treatment of otherwise identically situated taxpayers

and creditors would occur, for the applicable rule of

priority would then depend upon geographic happen-

stance. Resolution of this recurring question by this

Court is needed to avoid continuing uncertainty and

to assure even-handed application of the revenue laws.

APPENDIX A

IN THE SUPREME COURT OF PENNSYLVANIA

WESTERN DISTRICT

\ No. 59 W.D. Appeal Docket 1995

y IN RE: ESTATE OF FRANCIS J. ROMANI

Vv.

APPEAL OF: THE UNITED STATES OF AMERICA

Appeal from the Judgment of Superior Court

entered at No. 1358 Pittsburgh 1994

on May 12, 1995, affirming the order of the

Court of Common Pleas, Cambria County,

Orphan’s Court Division entered July 7, 1995

at No. 11-94-14

{Argued: Sept. 17, 1996]

{[Decided: Jan. 17, 1997]

OPINION OF THE COURT

Before: FLAHERTY, C.J., and ZAPPALA, CAPPY,

\\\ CASTILLE, NIGRO and NEWMAN, JJ.

\ FLAHERTY, Chief Justice.

The United States appeals a judgment of the Supe-

rior Court which affirmed an order of the Court of

(la)

Common Pleas of Cambria County granting a petition

filed by the Estate of Francis J. Romani to transfer

real estate in lieu of execution. We affirm. '

Francis J. Romani, who died on January 13, 1992,

left an insolvent estate with debts greatly exceeding

the value of the sole asset, a piece of real estate valued

at $53,001.00. This real estate is burdened by a judg-

ment lien and a federal tax lien. On January 25, 1985,

a judgment lien was entered and properly revived

against Mr. Romani in favor of Romani Industries,

Inc. in the amount of $400,000.27 Subsequent to the

entry of judgment against decedent, the Internal

Revenue Service filed notice of a federal tax lien

against the decedent for unpaid taxes and an unpaid

civil penalty that, with interest, totaled $489,720.04.

The administrator of the Estate of Francis J. Ro-

mani filed a petition in the Court of Common Pleas of

Cambria County to transfer the real estate in lieu of

execution on behalf of the judgment creditor, Romani

Industries, Inc., and the United States opposed the

petition. Both parties claimed priority to the pro-

perty. The lower court granted the administrator’s

request for relief, holding that the status of Romani

Industries, Inc. as a first-in-time judgment lien credi-

tor gave it priority over the government’s subse-

! As the Superior Court noted, although there was no

order of final distribution in this case, the practical effect of

the court’s order was to end the administration of the estate

by awarding its sole asset to one of the competing creditors.

Therefore, the order is final and appealable. See Estate of

Montgomery, 367 Pa.Super. 31, 532 A.2d 439 (1987).

2 The original judgment was entered at No. 1985-205 and

it was subsequently revived on June 7, 1989. The 1989 judg-

ment was entered at No. 1989-1311 and remains unpaid.

quently filed tax lien. Order dated July 7, 1994, Court

of Common Pleas of Cambria County, G.D. No.

11-94-14. The Superior Court affirmed per curiam.

In re Estate of Francis Romani, 445 Pa.Super. 637,

664 A.2d 1064 (1995). This appeal followed.

The question presented is whether section 6323(a)

of the Tax Lien Act,’ 26 U.S.C. § 6323(a), (“section

6323”), limits the operation of section 3713(a)(1) of the

federal insolvency statute, 31 U.S.C. § 3713(a)(1),

(“section 3713”), as to tax debts.’ Romani Industries,

Inc. argues that its judgment lien has priority over a

tax claim of the United States because, under section

6323, the holder of a properly entered judgment lien

has priority over subsequently filed tax lien debts.

The United States disagrees, arguing that it has an

absolute priority under section 3713 to all proceeds

remaining in an insolvent estate, regardless of the

time of filing of the tax liens.

Section 6323 provides for a “first in time” priority

to the rival lien in federal tax lien matters as follows:

* Tax Lien Act of 1966, Pub.L.No. 89-719, 80 Stat. 1125,

amending 26 U.S.C. § 6323.

* We addressed this issue in Estate of Berretta, 493 Pa.

441, 426 A.2d 1098 (1981) where an evenly divided plurality

held that section 6323 impliedly repealed the operation of the

relevant insolvency statute, Revised Statutes § 3466, 31 U.S.C.

§ 191, with respect to tax lien debts of a decedent's insolvent

estate. Berretta dealt with the relative priority of a “first in

time” judgment creditor, a bank, and the United States to

certain proceeds remaining from the sale of two parcels of real

property included in the insolvent estate of the taxpayer.

Validity And Priority Against Certain Persons

(a) Purchasers, Holders of Security Inter-

ests, Mechanic’s Lienors and Judgment Lien

Creditors.—The lien imposed by section 6321 [a

federal tax lien] 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... .”

Tax liens have been authorized by predecessor tax

lien statutes. See, Act of July 13, 1866, ch. 184, § 9, 14

Stat. 107. It was not until 1966 with the amendment

of section 6323, however, that the statute specified

priority rules to resolve conflicts between federal tax

liens and rival liens.°

Section 3713 provides for an absolute priority for

federal tax claims in insolvency as follows:

Priority Of Government Claims

(a)(1) A claim of the United States shall be paid

first when-

(B) the estate of a deceased debtor, in the

custody of the executor or administrator, is

not enough to pay all the debts of the debtor.

5 Section 6321, 26 U.S.C. § 6321, creates a lien in favor of

the United States for the amount of tax that anyone has ne-

glected to pay on the property belonging to such person.

6 Although section 6323 is undoubtedly a lien statute, it

also addresses the priority of federal tax liens against judgment

lien creditors. Thus, both statutes address priority of com-

peting liens.

The predecessor to section 3713 was Revised S

tatute

§ 3466, 31 U.S.C. § 191, which has been cubetontinity

unchanged since 1797. (“section 3466”). See, Act of

March of [sic] March 3, 1797 ch. 20, § 5, 1 Stat. 515.

The Court has not decided the question presented.

It has cautioned, however, that in considering

whether other provisions of the tax lien act operated

as implied exceptions to the insolvency statute,

“[o}nly the plainest inconsistency would warrant our

finding an implied exception to the operation of so

clear a command as that of section 3466.” United

States v. Emory, 314 U.S. 423, 433, 62 S.Ct. 317,

322-23, 86 L.Ed. 315, 325 (1941);’ United States v. Key

397 U.S. 322, 90 S.Ct. 1049, 25 L.Ed.2d 340 (1970)" In

Key, the Court said that a reviewing court is to

"Emory involved a federally guaranteed

National Housing Act (“NHA”). ” When the lees eaaiae

solvent, the United States was owed $5,988.88 as the guarantor

of the NHA loan and claimed priority under section 3466. The

nonfederal parties claimed “about $900” for wages. The Court

held that Section 3466 and the NHA were not plainly incon-

sistent because there was no provision in the NHA that ex-

—— be aah sar 4 of the United States with

a te ing r it. 314 U.S. at 430, 62 S.Ct. at

* Key involved a bankruptcy reo ization

vided for payment of claims of iesaemebaudinins tales nen

payment of the federal tax claims. The Court found that

section 3466 prevailed because no inconsistency existed between

that section and three relevant sections of the Bankruptcy Act

which required that the United States be paid its taxes under

at reorganization plan. The Court concluded that neither the

requirement that the United States be paid nor the require-

ment that the payment be fair and equitable conflicted with the

command of section 3466 that the United States be paid first

397 U.S. at 328-29, 90 S.Ct. at 1053, 25 L.Ed2d at 346-47.

determine whether the statutes are facially incon-

sistent and, if so, whether the legislative history of

the competing statute reflects a congressional intent

to modify the effect of the insolvency statute. /d. at

324, 90 S.Ct. at 1051, 25 L.Ed.2d at 344 (1970).”

The first issue is whether there is a plain incon-

sistency between the priority of section 6323 and

the absolute priority granted the United States by

section 3713. Here, the government’s relative prior-

ity as a creditor differs depending on which section is

applied. Section 6323 states that nonfederal claims

that have been duly filed prior to the filing of the

federal tax claim are valid as against federal tax

claims. On the other hand, section 3713 gives an

absolute priority to the United States against other

creditors of insolvent debtors for tax liens regardless

of when the tax lien was filed. We are constrained to

find a facial inconsistency because, with respect to

tax liens, section 6823 provides for a “first in time”

* We could utilize a principle of statutory construction to

resolve the conflict and conclude that section 6323 limits section

3713. That principle is that a conflict between various statutes

is to be avoided and, if possible, the apparent conflicting pro-

visions must be construed together with the more specific

provisions prevailing over the general ones. Busie v. United

States, 446 U.S. 398, 100 S.Ct. 1747, 64 L.Ed.2d 381 (1980);

Morton v. Mancari, 417 U.S. 535, 94 S.Ct. 2474, 41 L.Ed.2d 290

(1974). Here, section 6323 is the more specific provision be-

cause it applies only to federal tax liens, whereas section 3713 is

the more general provision in that it applies to any unpaid

claim of the government against an insolvent debtor. There-

fore, applying this principle of statutory construction, the

general provisions of section 3713 are limited by the specific

provisions of section 6323.

priority while section 3713 gives absolute priority to

the United States.”

Since we have determined that the statutes are

plainly inconsistent, we next address whether the

Tax Lien Act of 1966 evidences a congressional intent

that federal priorities in insolvency be limited in the

tax area. We look to United States v. Kimbell Foods,

Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979)

as the most recent expression of the Court on the

policy considerations that underlie the question of

whether the government in the tax arena is to be

treated as an ordinary creditor or as a creditor with

super-priority. In Kimbell Foods, the Court held that

Congress intended that the “first in time is first in

right” principle of section 6323 applied in federal

government lending cases involving solvent debtors."

” The United States argues, and other courts have held,

that no plain inconsistency exists between the statutes. See,

e.g., Carter v. Carter and T-Cas of America, Inc., 681 F.Supp.

323, 326 (E.D. Va. 1988) where the court said that because Con-

gress was silent on the matter, the court would infer that

Congress intended the Tax Lien Act of 1966 to supplement

section 3713 and not to displace it so that in certain cases of

taxpayer insolvency, section 3713 governs, and in all other

cases, section 6323 controls.

We disagree with this conclusion and find support in other

federal cases. See note 17, infra.

"In Kimbell Foods, O.K. Super Markets, (“O.K.”) bor-

rowed, during 1968, $27,000 from Kimbell Foods. The parties

executed security agreements containing a standard “dragnet”

clause that provided that the collateral would secure future

advances from Kimbell Foods. Kimbell Foods properly per-

fected its security interest.

In February, 1969, O.K. borrowed $300,000 from Republic

National Bank, (“bank”) with the bank accepting as security

the same property specified in Kimbell Foods’ 1968 agree-

The Court ruled that government lending agencies,

such as the Small Business Administration, are to be

afforded the same priority as private lenders under

non-discriminatory state laws, absent a congressional

directive to the contrary. 440 U.S. at 740, 99 S.Ct. at

1465, 59 L.Ed.2d at 731.

The Court articulated two reasons for its holding.

First, Congress, by the passage of the Tax Lien Act

of 1966, expressed its disapproval of “unrestricted

federal priority” in tax matters. 440 U.S. at 738, 99

S.Ct. at 1463, 59 L.Ed.2d at 730. See, 26 U.S.C.

§$§ 6323(b), (c), (d), and (e). The Court explained that,

ments. The bank perfected its security interest. The Small

Business Administration (“SBA”) guaranteed 90% of this loan

under the Small Business Act, which does not, in this situation,

specify priority rules to govern the SBA’s security interests.

O.K. used the bank loan to satisfy the remainder of the 1968

obligation to Kimbell Foods and to discharge a debt for in-

ventory purchased from Kimbell Foods on open account. In

late 1970, the bank assigned its security interest to the SBA.

O.K. defaulted on the SBA-guaranteed loan shortly before mid-

January, 1971.

Kimbell Foods continued to sell to O.K. on open account until

the debt was over $18,258.57 on January 15, 1971, when Kimbell

Foods sued O.K. to recover on its inventory debt. The SBA

recorded the bank’s assignment on January 21, 1971. The

United States honored its guarantee on the defaulted loan and

paid the bank 90% of the outstanding debt on February 3, 1971.

That same day, O.K., with the approval of its creditors, sold its

equipment and inventory and placed the proceeds in escrow

pending the resolution of the competing claims to the funds.

A year later, the state court entered judgment against O.K.

and awarded Kimbell Foods $24,445.37, which represented the

inventory debt and other items. Kin.>ell Foods then brought

suit in early 1972 in federal court to foreclose on its lien, claim-

ing it had a security interest in the escrow fund that was

superior to the SBA’s interest.

prior to the 1966 law, it had formulated the “choate

lien” test which modified the “first in time is first in

right” idea by requiring that the nonfederal lien be

sufficiently specific and perfected to overcome the

priority of the United States in insolvency cases. 440

U.S. at 720, 99 S.Ct. at 1454, 59 L.Ed.2d at 719." The

practical effect of the choateness test, the Court said,

was that rival liens were defeated because they failed

to pass its strict test. Jd." The Court concluded that

the Tax Law of 1966 reflected congressional intent

to disapprove unrestricted federal priority in tax

matters" and to displace the “choateness” doctrine.

2 The Court also stated that it applied the choateness doc-

trine in the solvency context to give federal tax liens special

priority. See United States v. Security Trust & Savings Bank,

supra, 340 U.S. at 51, 71 S.Ct. at 111, 95 L.Ed. at 53. For a

discussion of the history of the choate lien test, see Kennedy,

The Relative Priority of the Federal Government: The Perni-

cious Career of the Inchoate and General Lien, 63 Yale L.J. 905

(1954). Kimbell Foods, 440 U.S. at 721 n. 8, 99 S.Ct. at 1454 n.

8, 59 L.Ed.2d at 719 n. 8.

We observe that the Court has not yet held that a

perfected and specific lien is excepted from the operation of

section 3466 or section 3713. Rather, the Court has raised but

avoided the issue in cases before 1966 by holding that the

asserted lien was not sufficiently perfected and specific to

qualify under any possible exception. See, United States v.

Gilbert Associates, Inc., 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed.

1071 (1953); Jllinois v. Campbell, 329 U.S. 362, 67 S.Ct. 340, 91

L.Ed. 348 (1946); United States v. Waddill, Holland & Flinn,

Inc., 323 U.S. 353, 65 S.Ct. 304, 89 L.Ed. 294 (1945); United

States v. Texas, 314 U.S. 480, 62 S.Ct. 350, 86 L.Ed. 356 (1941);

and, New York v. Maclay, 288 U.S. 290, 53 S.Ct. 323, 77 L.Ed.

754 (1933).

“4 The Court further explained that:

... Of particular relevance here, the Act added mechanic’s

liens to the list of private interests already protected

10a

440 U.S. at 720 n. 6, 99 S.Ct. at 1454 n. 6, 59 L.Ed.2d at

719 n. 6.”

Second, the Court explained that restrictions on

federal tax lien priority are necessary to facilitate

commercial stability and to avoid the frustration of

expectations of superior lien holders. The Court

recognized that federal lien priority undercuts the

reliability of the notice filing system, which plays a

crucial role in commercial dealings. 440 U.S. at 739 n.

42,99 S.Ct. at 1464 n. 42, 59 L.Ed.2d at 731 n. 42. Prior

creditors either have no trustworthy means of dis-

covering the undisclosed security interest or, if

they are aware of the federal lien, have to adjust

against unrecorded tax liens. 26 U.S.C. § 6323(a). Holders

of consensual security interests also receive priority over

unrecorded tax liens. Jbid. Moreover, the Act gives

priority to many types of nonfederal liens even when the

Government had filed notice of the tax lien. § 6323(b).

Included in this group are repairman’s liens in personal

property, S 6323(b)(5), . . . and in limited situations, liens

securing advances. § 6323(c).

440 U.S. at 738 n. 41, 99 S.Ct. at 1464 n. 41, 59 L.Ed.2d at 730

n. 41.

5 We also note that the legislative history of the Tax Lien

Act of 1966 indicates a Congressional intent that priority to the

“first in time” lien exists whether a lien was “choate” or not.

See Senate Finance Committee’s Report 1708 which stated:

[I]t is intended that, under the bill, the various types of

interests defined in this provision are to have a priority

over a nonfiled Federal tax lien if they come within the

definitions of these terms [e. g., “purchaser,” “judgment

lien creditor,” etc.] .. . whether or not in all other regards

they are definite and complete at the time notice of the tax

lien is filed.

U.S. Code Congressional and Administrative News, 89th Con-

gress, 2d Sess., v. 3, 1966, 3722, 3724-25.

lla

their lending arrangements to protect against the

stringent choateness requirements. Jd." Further,

the Court said, considerable uncertainty would also

result from the choateness approach because the

development of priority rules on a case-by-case basis,

depending on the types of competing liens involved,

leaves creditors without a definite body of law they

require in structuring sound business transactions.

Id. For these reasons, the Court concluded, Congress

intended that restrictions on federal tax lien priority

exist.

Although Kimbell Foods involves the priority to be

accorded a federal consensual loan where the debtor is

solvent, and the case at bar involves the question of

the priority to be accorded a federal tax lien where

the debtor is insolvent, we believe that Kimbell Foods

and other cases” provide guidance as to how the

1966 would be essentially meaningless if the insolvency statute

always prevailed. See, the concurring opinion of Judge Hayns-

worth in H.B. Agsten & Sons, Inc. v. Huntington Trust &

Savings Bank, 388 F.2d 156, 161 (4th Cir. 1967), cert. den. 390

U.S. 1025, 88 S.Ct. 1413, 20 L.Ed.2d 282 (1968):

. The question of priorities [between section 6323 and

section 3713] is wholly or largely academic, unless the

debtor is insolvent, and the clearly stated purpose of the

Federal Tax Lien Act of 1966 was to regulate the priority

of federal tax claims when competing for payment out of

the assets of an insolvent taxpayer with secured claims

which would enjoy priority under state law.

"See United States v. Randall, 401 U.S. 513, 91 S.Ct. 991,

28 L.Ed.2d 273 (1971) (specific priorities of the Bankruptcy Act

override the general priority of the United States under

section 3466). See also, United States v. S.K.A. Associates,

Inc., 600 F.2d 513 (5th Cir. 1979) (SBA lien in an insolvency

held not entitled to priority under section 3466); United States

12a

federal courts would resolve the case at bar.” Here,

there is a plain inconsistency between the competing

v. Burlington Industries, 600 F.2d 517 (5th Cir.1979) (contest

between federal agency’s security interest and a warehouseman

to be decided under nondiscriminatory state law); City of Ver-

million, S.D. v. Stan Houston Equipment Co., 341 F.Supp. 707,

713 (D.S.D. 1972).

Court decisions announced before the Tax Lien Act of 1966

support an opposite result. While we do not disregard these

cases, we believe that Congressional enactments in the federal

tax lien area place the older cases in a less persuasive per-

spective. See United States v. Vermont, 377 U.S. 351, 84 S.Ct.

1267, 12 L.Ed.2d 370 (1964) (in dictum: section 3466 applies to

all an insolvent’s debts to the government, whether or not

arising from taxes); United States v. City of New Britain, 347

U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954) (in dictum: section

3466 imposes an absolute priority in insolvency, but not applied

because the record did not establish that the debtor was

insolvent); United States v. Gilbert Associates, Inc., 345 U.S.

361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953) (United States tax lien

held to have priority under section 3466); United States v.

Security Trust and Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95

L.Ed. 53 (1950) (in dictum: section 3466 permits no exception

and applies to all debts of the United States whether or not

arising from taxes whether or not secured by a lien).

We also are not persuaded by the reasoning of other federal

courts that have held that section 3713 provides for absolute

priority in tax lien cases for, we believe, those courts did not

adequately address the policy considerations weighed in

Kimbell Foods. See, e.g., Jonathan’s Landing, Inc. v. Town-

send, 960 F.2d 1538 (11th Cir. 1992); Westmoreland v. West-

moreland, Executrix, and the United States, 716 F.Supp. 217

(D.S.C. 1988); Carter v. Carter and T-Cas of America, Inc., 681

F.Supp. 323 (E.D. Va. 1988) and Nesbitt v. U.S., 445 F.Supp.

824 (N.D. Cal. 1978).

18 Since we are construing federal statutes, federal law con-

trols. A state cannot impair the standing of federal liens

without the consent of Congress. United States v. City of New

13a

statutes. Also, the Tax Lien Act of 1966 evidences a

congressional intent that federal priorities be limited

in the tax area, regardless of whether the debtor is

insolvent. Further, to hold otherwise would frustrate

the congressional purpose by defeating in insolvency

the very interests that were specifically protected

against federal priority in non-insolvency situations.

Finally, the grant of absolute federal priority in

insolvency cases, as in solvency cases, would be de-

structive of commercial stability and would frustrate

legitimate commercial expectations. We hold, there-

fore, that section 6323 limits the operation of section

3713 as to tax debts.”

Order affirmed.

Messrs. Justice Castille and Nigro concur in the

result.

JUDGMENT ENTERED THIS 17TH DAY OF

JANUARY, 1997,

/s/ CANDACE Fry _

CHIEF CLERK

Britain, 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520, 525

(1954).

Finally, the United States argues that the lien of Romani

Industries, Inc. was not sufficiently specific and perfected to

displace the first priority of the United States under section

3713. Since this issue was not addressed by the lower courts, it

is inappropriate for us to consider it at this time.

l4a

APPENDIX B

SUPERIOR COURT OF PENNSYLVANIA

PITTSBURGH DISTRICT

No. 1358 PITTSBURGH 1994

In Re: ESTATE OF FRANCIS J. ROMANI

APPEAL OF: THE UNITED STATES OF AMERICA

JUDGMENT

ON CONSIDERATION WHEREOP, it is now here

ordered and adjudged by this Court that the judgment

of the Court of Common Pleas of Cambria County be,

and the same is hereby affirmed.

BY THE COURT:

/s/ ELEANOR R. VALECHO

DEPUTY PROTHONOTARY

DATED: May 12, 1995

l5a

IN THE SUPERIOR COURT

OF PENNSYLVANIA

No. 1358 PITTSBURGH 1994

IN Re: ESTATE OF FRANCIS J. ROMANI

Vv.

APPEAL OF: THE UNITED STATES OF AMERICA

Appeal from the Order

Entered July 7, 1994

in the Court of Common Pleas,

Orphans Division

Cambria County, No. G.D. No. 11-94-14

[MAY 12, 1995]

MEMORANDUM

Before: CAVANAUGH, JOHNSON and SAYLor, JJ.

This is an appeal by the United States from an

order granting appellee’s petition to transfer real

estate in lieu of execution. We affirm.’

' Although there was no order of final distribution in this

case, the practical effect of the court’s order was to end the

administration of the estate by awarding its sole asset to one of

the competing creditors. Therefore the order is final and

appealable. Estate of Montgomery, 367 Pa.Super. 31, 531 A.2d

439 (1987).

l6a

Francis J. Romani, the decedent, died on January

13, 1992. Prior to his death, on January 25, 1985, a

judgment lien was entered against him in favor of

Romani Industries, Inc. in the amount of $400,000.

The judgment was entered at No. 1985-205. The judg-

ment was subsequently revived on June 7, 1989. It

was entered at No. 1989-1311, and remains unpaid.

The sole asset of the decedent’s estate is a piece of

real estate valued at $53,001. The estate is insolvent,

as its debts greatly exceed the value of this sole asset.

Subsequent to the entry of judgment against dece-

dent, the Internal Revenue Service filed notice of a

federal tax lien against the decedent for unpaid taxes

and an unpaid civil penalty, that with interest totaled

$489,720.04.

The administrator of the estate filed a petition to

transfer real estate in lieu of execution on behalf of

the judgment creditor, Romani Industries, Inc. The

United States opposed the petition. A hearing was

conducted on April 14, 1994, at which time the argu-

ments of counsel were heard.

Romani Industries, Inc. claimed priority pursuant

to the Federal Tax Lien Act, 26 U.S.C. §6323(a) which

provides that a federal tax lien shall not be valid

against a judgment lien creditor until notice thereof

has been properly filed.” On the other hand, the

2 The Federal Tax Lien Act provides in pertinent part:

§ 6323. VALIDITY AND PRIORITY AGAINST CER-

TAIN PERSONS.

(a) Purchasers, holders of security interests,

mechanic’s lienors and judgment lien creditors. - The

lien imposed by section 6321 [a federal tax lien] shall not

be valid against any purchaser, holder of a security

17a

United States claimed priority pursuant to the

Federal Insolvency Statute, 31 U.S.C. §3713(a)(1)(B),

which provides that the United States is entitled to

first priority among creditors of an insolvent estate.’

The court granted the petition, holding that

Romani Industries’ status as a first in time judgment

lien creditor gave it priority over the government’s

subsequently filed tax lien. The court based its

decision, in part, on In Re Estate of Berretta, 453 Pa.

441, 426 A.2d 1098 (1981), a case in which an evenly

divided plurality of the Pennsylvania Supreme Court

held that Section 6323 of the Federal Tax Lien Act

impliedly repealed Section 3713 of the Federal In-

solvency Statute.’ The present appeal by the United

States follows and requires us to determine which

statute should properly be given effect.

interest, mechanic’s lienor, or judgment lien creditor

until notice thereof which meets with the requirements

of subsection (f) has been filed by the Secretary. 26

U.S.C. §$6323(a).

* The Federal Insolvency Statute provides in pertinent

part:

§ 3713. PRIORITY OF GOVERNMENT CLAIMS.

(a1) -a claim of the United States government

shall be paid first when-

(B) the estate of a deceased debtor, in the custody

of the executor or administrator, is not enough to pay

all the debts of the debtor.

31 U.S.C, $3713(a)(1)(B).

* We are, of course, not bound by this decision, as an

equally divided plurality decision has no binding precedential

value as a ruling on the merits. Commonwealth v. Rightnour,

469 Pa. 107, 364 A.2d 927 (1976); Commonwealth v. Covil, 474

Pa. 375, 378 A.2d 841 (1977).

18a

We initially note that since we are construing

federal statutes, federal law controls. See United

States v. New Britain, 347 U.S. 81, 74 S.Ct. 367, 98

L.Ed. 510 (1953) (a state cannot impair the standing of

federal liens without the consent of Congress). The

United States Supreme Court has never squarely

considered the question whether Section 6323 con-

stitutes an implied exception to the Insolvency

Statute. It has, however, had occasion to consider

whether other provisions operate as implied excep-

tions. In so doing, the Court has held that “[oJnly the

plainest inconsistency would warrant our finding

an implied exception to the operation of so clear a

command as that of [Section 3713 of the Insolvency

Statute].” United States v. Emory, 314 U.S. 423, 433,

62 S.Ct. 317, 322-23, 66 L.Ed. 315 (1941).

In United States v. Key, 397 U.S. 322, 90 S.Ct. 1049,

25 L.Ed 340 (1970), a case cited by the United States

to support its argument for priority status, the

Supreme Court considered whether a “plainest incon-

sistency” existed between the Insolvency Statute and

Chapter X of the Bankruptcy Act. In deciding that no

such inconsistency existed, the Court set forth a

three part test to be used in determining whether a

“plainest inconsistency” exists sufficient to warrant

an implied exception to federal priority in insolvency.

Applied to the present case, the test requires that

in order to establish the existence of a “plainest

inconsistency” between the statutes, it must be dem-

onstrated that 1) the Insolvency Statute and Section

6323 are facially inconsistent; or 2) an unconditional

application of the Insolvency Statute would render

Section 6323 meaningless; or 3) the legislative his-

19a

tory of Section 6323 reflects a Congressional intent

to modify the effect of the Insolvency Statute.

The United States argues that none of these three

criteria are met, and that, therefore, Section 6323

contains no implied exception to the Insolvency Stat-

ute. In particular, the United States argues that, as

regards the first prong of the test, the two statutes

are not facially inconsistent. It avers:

Section 3713 and Section 6323 are not facially in-

consistent. Section 6323(a) is a lien statute which

applies regardless of the solvency of the debtor

and protects enumerated third parties from un-

recorded federal tax liens when the debtor conveys

property. The Federal Insolvency Statute, on the

other hand, is a priority statute, not a lien statute,

and encompasses all federal claims.

We find this argument unpersuasive. Rather, our

review persuades us that both sections clearly ad-

dress the question of the federal government’s prior-

ity as a competing creditor. Although the Federal

Tax Lien Act is undoubtedly a lien statute, Section

6323 thereof clearly addresses the priority of federal

tax liens against judgment lien creditors. Similarly,

the Insolvency Statute addresses the priority of all

federal claims against other creditors of insolvent

debtors. In the present context there can be no

dispute that the government’s relative priority as

a creditor differs depending upon which section is

applied. Since this inconsistency between the respec-

tive statute sections produces conflicting results, we

are constrained to find that the statute sections in

question are arguably facially inconsistent, and are,

most certainly, conflicting. We therefore turn to

20a

traditional rules of statutory construction to resolve

the conflict.

It is a familiar and time honored principle of statu-

tory construction that a conflict between various

statutes is to be avoided and if possible the apparent

conflicting provisions must be construed together

with the more specific provisions prevailing over the

general ones. Townsend v. Little, 109 U.S. 504, 3

S.Ct. 357, 27 L.Ed. 1012 (1883); Kepner v. United

States, 195 U.S. 100, 24 S.Ct. 797, 49 L.Ed. 114 (1904);

Bulova Watch Co. v. United States, 365 U.S. 753, 81

S.Ct. 864, 6 L.Ed.2d 72 (1961); Morton v. Mancari, 417

U.S. 535, 94 S.Ct. 2474, 41 L.Ed.2d 290 (1974); Busie v.

United States, 446 U.S. 398, 100 S.Ct. 1747, 64 L.Ed.2d

381 (1980). In the case sub judice, Section 6323 is the

more specific provision because it applies only to

federal tax liens, whereas the Insolvency Statute is

the more general provision in that it applies to any

unpaid claim of the government against an insolvent

debtor. Therefore, the general provisions of Section

3713 of the Insolvency Statute must be limited by the

specific provisions of Section 6323 of the Federal Tax

Lien Act. For this reason, we conclude that the

court’s determination that Romani Industries, Inc.

possessed priority over the United States by virtue of

its status as a first in time judgment lien creditor

was proper.

We affirm the court’s grant of Romani Industries

Inc’s petition to transfer real estate in lieu of

execution.

Order affirmed.

2la

APPENDIX C

IN THE COURT OF COMMON PLEAS OF

CAMBRIA COUNTY, PENNSYLVANIA

ORPHANS COURT DIVISION

No. 11-94-14

IN RE: THE ESTATE OF FRANCIS J. ROMANI

APPEARANCES:

FOR ESTATE: Lawrence L. Davis

103 S. Center St.

Ebensburg, PA 15931

FOR INTERNAL REVENUE SERVICE:

Angelo A. Frattarelli

Trial Attorney, Tax Division

U.S. Dept. of Justice

Washington, D.C. 20044

OPINION AND ORDER

Before: THE HONORABLE THOMAS A. Swope, JR.,

JUDGE OF THE FORTH-SEVENTH JUDICIAL DISTRICT OF

PENNSYLVANIA

This matter is before the court on a Petition To

Transfer Real Estate In Lieu Of Execution filed by

the Administrator of the above captioned estate, on

behalf of the creditor, Romani Industries, Inc. The

United States opposes the Petition. A hearing was

held on April 18, 1994, at which time arguments of

counsel were heard. The court grants the Petition.

22a

The facts in this case are not in question. The

decedent died on January 13, 1992. Prior to his death,

on January 25, 1985 a judgement was entered against

the decedent in favor of Romani Industries, Inc. in the

amount of $400,000.00. The judgement was entered to

No. 1985-205 and was subsequently revived on June 7,

1989, entered to No. 1989-1311. No amount of the

judgement has been paid. Romani Industries, Inc. is

the first in time judgement lien creditor. The sole

known asset of the estate is a piece of real estate

located in Portage Borough, valued at $53,001.00. The

Internal Revenue Service holds a tax lien, filed after

Romani Industries, Inc. perfected its lien. The assets

of the estate are completely inadequate to satisfy the

debts of the estate.

The issue to be resolved is whether the United

States’ tax lien has priority over the first in time

judgement lien of Romani Industries, Inc. Romani

Industries argues it has priority pursuant to the

Federal Tax Lien Act, which provides in relevant

part:

(a) Purchases, holders of security interests, me-

chanic’s lienors and judgement lien creditors.—

The lien imposed by section 6321 shall not be valid

as against any purchaser, holder of a security

interest, mechanic’s lienor, or judgement creditor

until notice thereof which meets the requirements

of subsection (f) has been filed by the Secretary or

his delegate. 26 U.S.C. § 6323.

Concomitantly, the United States argues that it has

priority by virtue of the Insolvency Statute, which

states in pertinent part:

(a)(1)—a claim of the United States government

shall be paid first when—

23a

(B) the estate of a deceased debtor, in the

custody of the executor or administrator, is not

enough to pay all debts of the debtor. 31 U.S.C.

§ 3713.

This exact issue was addressed in Jn re Barretta,

493 Pa. 441 (1981), in which a plurality of the Supreme

Court held that a judgement lien creditor had priority

over a federal tax lien where the judgement lien was

first in time. The plurality concluded that a plain

inconsistency exists between the two statutes. Jd. at

457. In addition, “the Tax Lien Act evidences a

Congressional intent that federal priority be limited

in the tax area,” whereby the Act impliedly repeals

the absolute federal priority of the Insolvency Statute

as to tax debts owed to the United States. Jd. The

court reasoned that the United States Supreme

Court had restricted federal priority in federal

lending cases for reason which are equally applicable

in tax lien cases. Jd. Moreover, “to grant absolute

federal priority would be destructive of commercial

stability and would frustrate legitimate commercial

expectations.” /d..

This court adopts the reasoning of the plurality in

Barretta. As a matter of statutory construction,

specific statutory provisions should prevail over con-

flicting general provisions. Jn re Meyer’s Estate, 159

Pa. Super. 296, 305 (1946). The Insolvency Statute is

a general mandate for federal priority in insolvency

situations. However, the subsequently enacted Tax

Lien Act specifically addresses the priority of federal

tax liens. In the case sub judice, a different result

would be reached depending on whether the Act or the

Statute is applied. Faced with this conflict, the Act

should be applied because it was enacted to govern tax

24a

debts specifically, whereas the Statute references

federal debts generally.

The court finds the argument, advanced by the dis-

sent in Barretta, that the an unconditional application

of the Insolvency Statute would not preclude the

meaningful operation of the Tax Lien Act, untenable.

Attempting to fit the Tax Lien Act into the legal gaps

in the Insolvency Statute limits the tax lien priori-

ties arbitrarily, so that they bear little relation to the

intended scope of the Act. To limit the operation of

the Tax Lien exclusively to cases involving solvent

tax debtors, would render the lien priorities meaning-

less, as the issue of priority is moot if the debtor

possessed sufficient assets to satisfy all claims.

Indeed, the question of lien priorities is significant

only when the debtor is insolvent. Consequently,

interpreting the Tax Lien Act so as to avoid conflict

with the Insolvency Statute would effectively reduce

the Act to little more than an academic exercise.

The effect of the Tax Lien Act is to promote

commercial stability by assuring members of the

favored classes, as set forth in the Act, such as

judgement lien creditors, that their legitimate secu-

rity interests in the property of a debtor will not be

disturbed by the existence of an unrecorded federal

tax lien. Eliminating this assurance in insolvency

cases “would undercut the reliability of the notice

filing system, which plays a crucial role in com-

mercial dealings.” Barretta, 493 Pa. at 455. Other-

wise, the fundamental unfairness of denying the un-

suspecting and innocent lien holder priority over a

subsequent federal tax lien frustrates legitimate

commercial expectations, thereby preventing the

exercise of reasonable business forethought. The

Tax Lien Act by its very language is designed to

25a

protect certain classes of creditors from the reach of

later filed tax liens and promote commercial dealings.

ACCORDINGLY THE FOLLOWING ORDER IS

ENTERED.

26a

IN THE COURT OF COMMON PLEAS OF

CAMBRIA COUNTY, PENNSYLVANIA

ORPHANS COURT DIVISION

No. 11-94-14

IN RE: THE ESTATE OF FRANCIS J. ROMANI

ORDER

Before: THE HONORABLE THOMAS A. SWOPE, JR.,

JUDGE OF THE FORTH-SEVENTH JUDICIAL DISTRICT OF

PENNSYLVANIA

AND NOW, this 7th day of July, 1994, it is hereby

ORDERED and DECREED that the Petition To

Transfer Real Estate In Lieu Of Execution is

GRANTED.

BY THE COURT

/s/ SWOPE

THOMAS A. SWOPE, JR., JUDGE

OPPOSITION

BRIEF

MAY 27 1897

RP»

CLERK

wuidl

No. 96 - 1613

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1996

UNITED STATES OF AMERICA,

Petitioner.

Vv.

ESTATE OF FRANCIS J. ROMANI,

Respondent.

On Petition for a Writ of Certiorari

to the Supreme Court of Pennsylvania

BRIEF IN OPPOSITION OF

ROMANI INDUSTRIES, INC.

LAWRENCE L. DAVIS TIMOTHY B. Dyk

DAVIS AND DAVIS (Counsel of Record)

103 South Center Street JONES, DAY, REAVIS & POGUE

Ebensburg, PA, 15931 1450 G Street, N.W.

(814) 472-9740 Washington, D.C. 20005

(202) 879-3939

Counsel for Respondents

QUESTION PRESENTED

In the case of an insolvent estate, when the government holds

a tax lien that is subordinate to a private judgment lien under the

Tax Lien Act, 26 U.S.C. § 6323(a), is the government

nonetheless entitled to priority under the Insolvency Act, 31

U.S.C. § 3713(a)?

PARTIES TO THE PROCEEDINGS

This case involves competing claims to the Estate of Francis J.

Romani. The United States contends that it is entitled to the

assets of the estate under 31 U.S.C. § 3713(a). Romani

Industries, Inc., which holds a judgment lien against the estate,

asserts that its lien has priority over the tax lien the United States

under 26 U.S.C. § 6323(a). Romani Industries and the United

States were the two parties to the proceedings below. See Pet.

App. 2a-3a. Romani Industries therefore properly is a respondent

in this matter, S. Ct. Rule 12.6, and opposes the petition.

Romani Industries has no parent company or nonwholly owned

subsidiaries.

By Order, the Clerk of the Court extended the time for filing

this Brief in Opposition to and including May 27, 1997.

BRIEF IN OPPOSITION OF ROMANI INDUSTRIES, INC.

BACKGROUND

In January 1985, Romani Industries, Inc. secured a $400,000

judgment lien against the property of Francis Romani.

Subsequently, the United States filed a notice of a federal tax lien

against the property for approximately $400,000. The tax lien

arose as a matter of law under 26 U.S.C. § 6321 from taxes owed

by Francis Romani, and also encompassed a civil penalty.

Francis Romani died seven years later, leaving as his entire

estate a building worth just over $50,000. The estate’s

administrator then petitioned the local Court of Common Pleas to

transfer title to the building to Romani Industries based on the

judgment lien, but the United States entered an opposition,

claiming priority under the Insolvency Act of 1797, 31 U.S.C.

§ 3713(a). That statute provides that a “claim of the United

States Government shall be paid first when . . . the estate of a

deceased debtor, in the custody of the executor or administrator.

is not enough to pay al! debts of the debtor.”

The Court of Common Pleas, however, rejected the United

States’ claim of priority based on the Tax Lien Act, 26 U.S.C.

§ 6323(a). That statute provides that a federal tax lien “shall not

be valid as against any . . . judgment lien creditor until notice

thereof . . . has been filed.” Because the government had not

filed notice of the tax lien until after Romani Industries had

entered its judgment lien, the Court of Common Pleas held that

Romani Industries held first-in-time priority to the building. Pet.

App. 23a. It therefore approved the transfer of the building to

Romani Industries. On appeal by the government, the Superior

and Supreme courts of Pennsylvania affirmed. Pet. App. la, 15a.

The United States then petitioned for review in this Court.

REASONS FOR DENYING THE WRIT

1. The petition for a writ of certiorari should be denied because

it involves only a narrow division in the lower courts, which has

existed for thirty years, and which has remained unchanged for

seventeen years. The decision below does not make new law in

Pennsylvania, for as Petitioner explains, at 5 n.2, “{t}he

Pennsylvania courts have long taken a narrow view of the

absolute priority statute” in tax lien cases. Specifically, in 1/46

the Pennsylvania Supreme Court held that the Tax Lien Act gives

prior liens priority over federal claims brought under the

Insolvency Act. In re Decker’'s Estate, 49 A.2d 714 (Pa. 1946),

cert. denied, 331 U.S. 807 (1947). In 1967 and 1980, the Sixth

and Ninth Circuits reached the opposite conclusion, the latter by

summary ruling. Kentucky v. United States, 383 F.2d 13 (6th

Cir. 1967);' Nesbitt v. United States, 622 F.2d 433 (9th Cir.

1980), cert. denied, 451 U.S. 984 (1981). No other federal court

of appeals has decided this issue.’

Petitioner's passing suggestion of a conflict with the Fifth

Circuit, Pet. 20 (“see also Exchange Bank & Trust Co. v. Tubbs

Mfg. Co., 246 F.2d 141 (Sth Cir.), cert. denied, 355 U.S. 868

(1957).”), is not correct: the Fifth Circuit has not addressed the

question presented by this case. The Exchange Bank decision

dealt only with mortgage liens, which identify specific property

and are choate. See 246 F.2d at 142 (applying circuit precedent

that the Insolvency Act “has no application to a valid, specific

and perfected, a fully choate lien”); accord Southern Ry. v.

United States, 306 F.2d 119, 125 (Sth Cir. 1962); Creditors

Exch. Serv. v. United States, 277 F. Supp. 885, 888-89 (S.D.

Tex. 1967) (explaining that Exchange Bank held that a “perfected

and choate lien defeats federal priority”). Petitioner itself

explains, at 10 n.5, that this Court has long held that the

‘ The Sixth Circuit has not had the opportunity to address whether it

would reach a different result in light of the substantial 1966

amendments to the Tax Lien Act, discussed infra at 4-5, which “place

the older cases in a less persuasive perspective,” Pet. App. 12a n.17.

: Petitioner appropriately does not allege a conflict between the ruling

below and Jonathan's Landing v. Townsend, 960 F.2d 1538, 1542 (11th

Cir. 1992), cited in Pet. App. 12 n.17, which decided the unrelated

question whether the Insolvency Act applies when a government lien

forces a debtor into bankruptcy.

—

Insolvency Act does not give the United States priority over

mortgage liens.

At bottom, then, Petitioner complains that Pennsylvania's half-

century-old rule on the priority of tax liens in insolvency created

a conflict beginning with the Sixth Circuit's 1967 ruling in

Kentucky v. United States, 383 F.2d 13, and ending with the

Ninth Circuit’s 1980 summary ruling in Nesbitt, 622 F.2d 433.

The law has remained unchanged for nearly two decades, and

Petitioner has presented no ground requiring this Court to

oon

2. Certainly. certiorari is not warranted on the ground that the

issue is recurring and important. as exemplified by the near

absence of relevant appellate rulings. Petitioner admits, at 13

n.7, that the Tax Lien and Insolvency Acts intersect only when

(1) property is subject to both a federal lien for a tax debt and a

previously perfected lien under state law, and (2) the owner of the

property satisfies the particular criteria of the Insolvency Act.

This is a very rare circumstance indeed. For example, no district

court has published a decision on the question since Westmoreland

v. Westmoreland, 716 F. Supp. 217 (D.S.C. 1988), ana Carter v.

Carter, 681 F. Supp. 323 (E.D. Va. 1988), nearly a decade ago.

And, while Petitioner does identify three state court rulings, see

Pet. 19-20, only one of those was decided in the past decade, and

none was decided by the state’s highest court. Moreover, while

Petitioner asserts, at 20, that “[t}he question frequently arises in

connection with estate proceedings in state courts,” it cites only

one case for that proposition, Succession of Nobles, 684 So. 2d

973 (La. Ct. App. 1996), and that decision never even mentions.

much less decides, the merits of this issue. Petitioner's assertions

that “[t}he question is frequently raised, frequently litigated and

often placed in doubt,” Pet. 19, and that the current state of the

law “foment[s] recurring and wasteful litigation.” Pet. 20,

therefore are incorrect.

3. Finally, certiorari is not warranted on the theory that the

Pennsylvania Supreme Court misapplied the precedents of this

Court. It is settled that a statute creates an implied exception to

the Insolvency Act in any of three circumstances: (1) the statute

is “logically inconsistent with the terms of the [Insolvency Act]”;

(2) the statute “[would] be rendered redundant if the [Insolvency

Act] applied”; or (3) the statute's “language or legislative history

reveal a purpose or legislative history incongruous with [the

Insolvency Act's] application.” United States v. Key, 397 U.S.

322, 326 (1970). The Pennsylvania Supreme Court properly

concluded that the Tax Lien Act gives prior judgment lienholders

priority under either the first or third prongs of that test.

The Insolvency and Tax Lien Acts are logically inconsistent.

For two centuries, the Insolvency Act has granted the United

States absolute priority in recovering obligations from insolvent

debtors. The United States prevailed over all competing creditors

no matter whether it had perfected or secured its interest.

Congress subsequently provided through the Tax Lien Act that

liens securing federal tax debts have no priority “as against any

. . . judgment lien creditor until notice thereof... has been

filed.” 26 U.S.C. § 6323(a). The duties and obligations of the

United States, as well as the rights and priorities of competing

creditors, therefore are fundamentally different under the two

acts, bringing the Tax Lien Act into conflict with the Insolvency

Act.

Moreover, application of the Insolvency Act to assign priority

to the United States would defeat Congress’ purpose as reflected

in the 1966 amendments to the Tax Lien Act, which “speciflied]

priority rules to resolve conflicts between federal tax liens and

rival liens.” United States v. Kimbell Foods, 440 U.S. 715. 721

n.6 (1979). While the amendments do not control this case,

Congress in 1966 made clear that the Tax Lien Act was designed

to deny unrestricted federal priority over creditors that lacked

notice of the federal lien. Thus, “Congress sought to ‘improv{e]

the status of private secured creditors’ and prevent impairment of

commercial financing transactions by ‘moderniziing] . . . the

relationship of Federal tax liens to the interests of other

creditors."” Jd. at 738 (quoting S. Rep. No. 1708, 89th Cong..,

2d Sess. 1-2 (1966) (alterations in Kimbell Foods)). Petitioner,

however, would vitiate Congress’ purpose by subordinating the

interests of creditors despite the fact that they lack notice of the

claim of the United States. “To ignore Congress’ disapproval of

unrestricted federal priority in an area as important to the

Nation’s stability as taxation would be inconsistent with” this

Court’s “function . . . to effectuate congressional policy.” /d.

Petitioner infers that Congress did not intend the Tax Lien Act

to limit the priority of federal tax liens in insolvency from its

failure to enact a proposal of the American Bar Association. Pet.

18. But as Petitioner argues in another pending case, “[t}hat

alternative bills . . . contained express language [addressing the

issue] does not establish that the legislation ultimately passed does

not reach such conduct.” Br. for the United States, Paradies v.

United States, No. 96-1346, at 10. Nothing in the legislative

record indicates that Congress disagreed with the goal of the ABA

proposal, and the failure to adopt it suggests just as plausibly that

Congress believed that the statute, as written, already reached that

result. Moreover, if Congress disapproved of decisions such as

Pennsylvania’s 1946 ruling in Decker’s Estate, 49 A.2d 714, it

could easily have overturned them when it amended the Tax Lien

Act in 1996.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

LAWRENCE L. DAvis TrmoTuy B. Dyk

DAVIS AND DAVIS (Counsel of Record)

103 South Center Street JONES, DAY, REAVIS & POGUE

Ebensburg, PA, 15931 1450 G Street, N.W.

(814) 472-9740 Washington, D.C. 20005

(202) 879-3939

Counsel for Respondents

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