Petitioners Brief — United States v. Estate of Romani

In the Supreme Court of the Cinited States

BRIEF FOR THE UNITED STATES

QUESTION PRESENTED

Since 1797, Congress has provided that any claim of

the United States against an insolvent estate “shall

be paid first” (81 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

The absolute priority that Congress established

for claims of the United States against insolvent

estates was not impliedly repealed for tax claims

TT octancnedslepennttineducnbennérsescenenees .

A. Under the absolute priority statute, all c.aims

of the United States against an insolvent

estate are to be paid before claims of other

ITI IIT citi sesnctndessdweseeentnenensescesece

B. The Federal Tax Lien Act does not repeal

the absolute priority of tax claims of the

United States against insolvent estates ..........

TABLE OF AUTHORITIES

Cases:

Beaston v. Farmers’ Bank of Delaware, 37 U.S.

nen ccncetnsceenneanecnsooses

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

SIE ihiiieusidiasianiabeepantbednienéccebeescesécceesencoceszccescenceeees

tial alllldnediaeettndtnrdnbididetahdetiseedenscessscnnecese

EEE SE ee

Estate of Silberman, 39 Cal. App. 447, 46 Cal.

BG EMI, BUD ccccccccsssccsnssecsescovscccccoscoecs

Illinois v. United States, 328 U.S. 8 (1946) ...........

(IIT)

11

11

16

12, 17

IV

Cases—Continued: Page

Illinois ex rel. Gordon v. Campbell, 329 U.S. 362

CRED encncccncnespsnespnereinenisannininetpiaetariniatiaietennesnins 15

James v. United States, 366 U.S. 213 (1961) ......... 21

Jonathan's Landing, Inc. v. Townsend, 960 F.2d

BED CERT GER GED etnennccenetecntntiteniientiiaenn 23

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

DEIIED anccensemusvnetisnsninivenedtniciatamiatinniemetiisieniniansins 5, 20

Kimbell Foods, Inc. v. Republic Nat'l Bank of

Dallas, 557 F.2d 491 (5th Cir. 1977) ...............000+. 31

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

GEER consentatrerntnstnicttndnpbentntcnssciinaiianamevitiniinnniis 13, 15, 18

Miner v. Atlass, 363 U.S. 641 (1960) ..................... 28

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

ee ee em 5, 7, 8, 20, 27, 28, 32

445 F. Supp. 824 (N.D. Cal. 1978), cert. denied,

ee 20, 27, 28, 32

New York v. Maclay, 288 U.S. 290 (1933) ............. 15

Price v. United States, 269 U.S. 492 (1926) .......... 13

Spokane County v. United States, 279 U.S. 80

CRTEIED cannnenegnesepseinmnamtaensaitiasaniinattintitiginmnsiipgittiajats 15

Thelusson v. Smith, 15 U.S. (2 Wheat.) 396

GREED cicmsimtecansseinctilatasennsiantatiiaiiaamamumaittaeass 9, 10, 14, 24

United States v. City of New Britain, 347 US. 81

GED anacenensusnpninnisnntinipricnaiitaniindnitinmmmntaidttents 19, 21, 22, 24

United States v. Emory, 314 U.S. 423

GEE ccncocunnnizcemsintniaintindininnisian 6, 11, 13, 17-18, 29, 33

United States v. Fisher, 6 U.S. (2 Cranch) 358

GETIID cctecisunnaniksitenmiocaibisitieiiatinn 11, 12, 13, 16, 17, 20, 23, 32

United States v. Gilbert Associates, Inc., 345 US.

Be GHEE scvsseesenassesereesccinniuntiitiniiintaiteedssbetnintietnitti 15

United States v. Key, 397 U.S. 322 (1970) .......... passim

V

Cases—Continued: “ \) Page

United States v. Ul Foods, Inc., 440 US. 715

Se eee 7, 8, 10, 29, 30, 31

United States v. Marzen, 37 U.S. 200 (1939) ...... 12

United States v. Moore, 423 U.S. T7 (1975) ........... 18

United States v. Oklahoma, 261 U.S. 253 (1923) ... 23

United States v. Pioneer American Insurance Co.,

fe dl 24

United States v. Snyder, 149 U.S. 210 (1898) ........ 24

United States v. State Bank of North Carolina,

lee 11

United States v. Texas, 314 U.S. 480 (194) ......... 15, 16

United States v. Vermont, 377 U.S. 351

EE ee eee 9, 15, 16, 17, 19, 22, 24

United States v. Waddill, Holland & Flinn, Inc.,

BD es Se CED cccceninttnieanenamnetnimannininiagesntabns 15, 17, 29

Statutes:

Act of July 31, 1789, ch. 5, § 21, 1 Stat. 42 ............... 12

Act of March 3, 1797, ch. 20, § 5, 1 Stat. 515 ............ 4,12

Act of March 2, 1799, ch. 22, § 65, 1 Stat. 676 .......... 12

Act of July 13/ 1866, ch. 184, § 9, 14 Stat. 98 ............ 24

Act of March 4, 1913, ch. 166, 37 Stat. 1016 ............. 4, 25

Act of September 13, 1982, Pub. L. No. 97-258,

(xa 12, 28

Bankruptcy Act of 1898, ch. 541, § 64, 30 Stat.

TUITE ssicreniteeteiecthecichcserntiieinlensiiatntclaaibansiinntnuianittatbi etait 18

fo Ff een 23

Bankruptcy Act, 11 U.S.C. 101 et seq.:

ER 23

ee Fe Ce ED ccccnctcinsccsttenntintihiintiinnn 23

BD aiete EE ED cinnecasectcinninnsibnecnitinnpnsninies 23

Be lt EEE incentcicmcicnnisinanntiiiniaiins 12

BD Teeits: MUTI incleesinnctessinathicsisinisncenisttindniebiepetiinendnnidaionnds 12

Statutes—Continued: Page

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

fF ET RR errno 25, 28

Internal Revenue Code (26 U.S.C.):

SCREENED -ctenpnthiediinnanditrenatantisiniinnitatiiindi le 3, 16, 24

PCIE cirtinsictethiinentaiatstcieaidininadabditnisice eialalia neti akan 21, 22, 24

ae 4, 5, 6, 7, 9, 16, 19, 25, 26

ae Re ee el 3

Revenue Act of 1939, ch. 247, § 401, 53 Stat. 862 ...... 25

OR 4

Se ID weschipsibsuitdehiilidiiieinsRieieerinttte nite et 5

ff Ss ee 4, 5, 6, 11, 22, 33

RR es ee 4, 8, 12, 13, 14, 23

31 U.S.C. 3713(a) 1 Ma iii) ...........ccccccccccceseccoceseccenes 23

ne ee 4, 13

RS ERS 4, 10, 12, 19, 28

Miscellaneous:

American Bar Association, Final Report of the

Committee on Federal Liens (1959) ..........ccccccccccce. 25-26

105 Cong. Rec. (1959):

BRED biecsctentagprinctqnceneuasesiaiinaiaiatnabeaiadnebiaiabias 26

a NE te Pe 26

ee. tee Se Dey 26

OF a re ee) eee 25

TN Se Te 25

Hearings on the Priority of Federal Tax Liens and

Levies Before the House Comm. on Ways and

Means, 89th Cong., 2d Sess. (1966) ...........cccccccc000- 26

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

H.R. Rep. No. 651, 97th Cong., 2d Sess. (1982) ........ 29

Note, Nesbitt v. United States: Denying an

Implied Tax Lien Exception to the Federal Priority

in Insolvency, 33 Cath. U. L. Rev. 741 (1984) ....... 5

William T. Plumb, The Federal Priority in Insol-

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

TEP UD natncinconciipssvaieeniuctsliipiinisimalgdaiasipieaiacmiiate TE a ie 27

VII

Miscellaneous—Continued:

S. 2197, 92d Cong., Ist Sess. (1970) ..............

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

S. Rep. No. 989, 95th Cong., 2d Sess. (1978)

ves #

Jn the Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-1613

UNITED STATES OF AMERICA, PETITIONER

v.

ESTATE OF FRANCIS J. ROMANI

ON WRIT OF CERTIORARI TO

THE SUPREME COURT OF PENNSYLVANIA

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The opinion of the Supreme Court of Pennsylvania

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

opinions of the Superior Court (Pet. App. 15a-20a) and

the Court of Common Pleas (Pet. App. 2la-25a) are

not officially reported.

JURISDICTION

The judgment of the Supreme Court of Pennsylva-

nia was entered on January 17, 1997. The petition for

a writ of certiorari was filed on April 10, 1997, and was

granted on June 27, 1997. The jurisdiction of this

Court rests upon 28 U.S.C. 1257(a).

(1)

STATUTES INVOLVED

1. 26 U.S.C. 6321 provides:

If any person liable to pay any tax neglects or

refuses to pay the same after demand, the amount

(including any interest, additional amount,

addition to tax, or assessable penalty, together

with any costs that may accrue in addition

thereto) shall be a lien in favor of the United

States upon all property and rights to property,

whether real or personal, belonging to such

person.

2. 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.

3. 31 U.S.C. 3713(a) provides, in relevant part:

(1) A claim 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; or

3

(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 (Pet. App.

22a).

After the date of that judgment, the Internal

Revenue 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

taxpayer who “neglects or refuses to pay the [tax]

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

tax lien is to be 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 totalling approximately $400,000

for the years 1982, 1985, 1987, 1988 and 1989 (Pet. App.

2a).

Mr. Romani died on January 13, 1992. The

administrator of his estate sought to transfer the

only asset of the estate—reai estate having a value of

approximately $53,000—to Romani Industries in sat-

isfaction of its outstanding judgment claim. The

United States objected to that transfer and filed a

proof of claim for federal taxes and interest totalling

4

approximately $489,000 (Pet. App. 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. This statute, which was

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

1 Stat. 515), was long designated as Section 3466 of

the Revised Statutes 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.” 31 U.S.C.

3713(a)(1)(B).’

Romani Industries contended, however, that the

“absolute priority” that Congress has long estab-

lished for claims of the United States against insol-

vent estates was impliedly repealed in 1966, for tax

claims, by 26 U.S.C. 6323(a). That provision, 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

' 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 insolvent 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 4, infra.

5

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

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

repealed—for federal tax debts—the absolute priority

rule of 31 U.S.C. 3713(a) (Pet. App. 2la-25a). The

court did not discuss or cite the several federal deci-

sions that had 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 collec-

tion of federal claims (Pet. App. 24a).° The court

stated that this conclusion was supported by the

policy concern that application of the “absolute prior-

2 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 pre-

sumption 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.).

6

ity” statute to federal tax claims could “frustrate

legitimate commercial expectations” (id. at 23a).

b. The Superior Court affirmed (Pet. App. 15a-20a).

The court concluded that the governing principle of

statutory construction is that an inconsistency be-

tween conflicting provisions is to be resolved by

allowing the more specific provision to prevail over

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 pro-

visions of Section 3713” in any conflict between them

(Pet. App. 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

absolute priority statute (Pet. App. 18a, quoting

United States v. Emory, 314 U.S. 423, 433 (1941)).

The Superior Court concluded, however, that this

exacting standard is met—and that the two statutes

are “most certainly, conflicting”’—because “[{i]n the

present context * * * the government’s relative

priority as a creditor differs depending upon which

section is applied” (Pet. App. 19a).

ce. The Supreme Court of Pennsylvania affirmed

(Pet. App. 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 (Pet. App. 5a-6a). In Key, the Court

stated that an implied repeal of that statute cannot

befound unless (i) there is a facial or “logical{] in-

consisten[cy]” between the two statutes, (ii) the al-

legedly 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

absolute priority to the United States” (Pet. App. 6a-

7a). The court concluded that the history and purpose

of Section 6323(a) evidence “a congressional intent

that federal priorities be limited in the tax area,

regardless of whether the debtor is insolvent” (Pet.

App. 18a).°

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

statutory directive, the relative priority of private

liens and consensual liens that arise from govern-

ment lending programs is to be determined under

% In reaching that conclusion, the Pennsylvania court did

not address the fact that, in enacting the Federal Tax Lien Act

(and on one later occasion as well), Congress declined to enact a

companion bill that would have repealed application of the

“absolute priority” statute to federal tax claims. By contrast,

in Nesbitt v. United States, 445 F. Supp. at 829, the court

stated:

This Court cannot lightly disregard the fact that Congress

has been requested on at least two occasions to amend [the

absolute priority statute] in a manner which would achieve

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

amended that section.

8

nondiscriminatory state laws (440 U.S. at 740). This

Court noted in Kimbell Foods that commercial trans-

actions are ordinarily formed in reliance upon state

commercial law and that a different rule for commer-

cial transactions involving the federal government

could upset ordinary business expectations (id. at

739). The Pennsylvania Supreme Court recognized

that “Kimbell Foods involves the priority to be ac-

corded 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” (Pet. App. lla). The court

nonetheless concluded that the same concerns apply

to both cases, for “the grant of absolute federal prior-

ity in insolvency cases, as in solvency cases, would

be destructive of commercial stability and would

frustrate legitimate commercial expectations” (id. at

13a).

The Pennsylvania Supreme Court acknowleged

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” (Pet.

App. 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.).

SUMMARY OF ARGUMENT

The absolute priority statute has been in force

since “the earliest days of the Republic” and gives

the United States “priority over all other claimants

in collecting debts due it from insolvent debtors”

(United States v. Key, 397 U.S. 322, 324 (1970)).

Under this venerable statute, debts owed to the

United States by an insolvent estate are to “be paid

first” (81 U.S.C. 3713(a)(1)), even when, as in the pre-

9

sent case, a competing creditor has a valid and en-

forceable judgment lien against the property of the

estate (Thelusson v. Smith, 15 U.S. (2 Wheat.) 396, 425

(1817)).

The Federal Tax Lien Act (26 U.S.C. 6323(a)) did

not impliedly repeal application of the absolute

priority statute to tax claims of the United States.

From its first enactment, the central purpose of

the absolute priority statute has been to ensure

the collection of taxes from insolvent debtors. The

statute contains a “clear * * * command” and

“lolnly the plainest inconsistency would warrant

* * * finding an implied exception to [its] operation”

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

No such “plain[] inconsistency” exists between the

absolute priority statute and 26 U.S.C. 6323(a). The

two statutes are logically consistent and address

separate concerns. 26 U.S.C. 6323(a) addresses the

rights of conflicting lienholders in competition with

the federal tax lien. The absolute priority statute,

by contrast, applies only to the debts owed by an

insolvent to the government, applies “whether or not

[those debts are] secured by a lien” and specifies that

all such debts must be paid in preference to the claims

of others (United States v. Vermont, 377 U.S. 351, 357

(1964)). An unconditional application of the absolute

priority statute would not deprive Section 6323(a) of

meaning, for the two statutes operate in different

contexts and to different subjects.

The history of Section 6323(a) shows that, in enact-

ing the tax lien provisions, Congress did not intend

impliedly to repeal the absolute priority statute.

Congress enacted Section 6323(a) in 1966 to expand

the classes of private liens that, since 1913, had been

protected against unfiled federal tax liens. In doing

10

so, Congress declined to enact a related proposal

that would have repealed application of the absolute

priority statute to federal tax claims. Four years

later, Congress again declined to enact the same

legislative proposal. And, in 1978, when Congress

did amend the absolute priority statute to make

it inapplicable to bankruptcy cases (31 U.S.C.

3713(a\(2)), Congress did not further revise it to

make it inapplicable to tax claims. The provisions

of the statute thus still contain as “clear a command”

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

statute provides an absolute priority to the United

States for tax claims against insolvent estates

and “makes no exception in favour of prior judgment-

creditors” (Thelusson v. Smith, 15 U.S. (2 Wheat.) at

425).

The Pennsylvania Supreme Court erred in reason-

ing that United States v. Kimbell Foods, Inc., 440

U.S. 715 (1979), supports a contrary conclusion. Kim-

bell Foods involved “the priority to be accorded a

federal consensual loan where the debtor is solvent”

and where no federal statutory priority scheme

existed (Pet. App. lla). In that context, this Court

adopted state law priority rules to avoid undue

disruption of private credit markets (440 U.S. at 734).

The Court emphasized in Kimbell Foods, however,

that federal tax claims implicate a different and

specific set of statutory rules and policy concerns and

that “the importance of securing adequate revenues

* * * justifies the extraordinary priority accorded

federal tax liens” (ibid.).

The Court has long held, in rejecting similar chal-

lenges to application of the absolute priority statute,

that any assertion that the statute is “inconvenient”

to commercial creditors must be addressed to Con-

1]

gress, not to this Court. United States v. Fisher, 6

U.S. (2 Cranch) 358, 390 (1805). Any objection to the

application of the statute based upon its “incon-

venience” to other creditors “proves too much” for,

“{ilf [that objection] is sound as applied to this kind of

a claim of the United States, it is equally sound as

applied to all claims as to which the United States”

has an absolute priority under 31 U.S.C. 3713(a).

United States v. Emory, 314 U.S. 423, 431 (1941).

ARGUMENT

THE ABSOLUTE PRIORITY THAT CONGRESS ESTAB-

LISHED FOR CLAIMS OF THE UNITED STATES

AGAINST INSOLVENT ESTATES WAS NOT IMPLIEDLY

REPEALED FOR TAX CLA'MS BY 26 U.S.C. 6323(A)

A. Under The Absolute Priority Statute, All Claims Of

The United States Against An Insolvent Estate Are

To Be Paid Before Claims Of Other Creditors Are

Paid

1. For two hundred years, Congress has provided

“an absolute priority for payment of debts due [the

United States] from insolvent” debtors (United

States v. Key, 397 U.S. 322, 329 (1970)). “Since the

earliest days of the Republic, [31 U.S.C. 3713(a)] and

its predecessors have given the Government priority

over all other claimants in collecting debts due it

from insolvent debtors. The present statute has

existed almost unchanged since 1797, and its histori-

cal roots reach back to the similar priority of

the Crown in England, an aspect of the royal pre-

rogative, founded upon a policy of protecting the

public revenues. The same policy underlies the

federal statute, United States v. State Bank of North

Carolina, 6 Pet. 29, 35 (1832), and it is established

12

that the terms of [the statute] are to be liberally

construed to achieve this broad purpose.” United

States v. Key, 397 U.S. at 324 (footnotes omitted). See

also Beaston v. Farmers’ Bank of Delaware, 37 U.S.

(12 Pet.) 102, 134 (1838).

When first enacted in 1789, the absolute priority

statute applied only to customs duties and debts due

to the United States on bonds. See Act of July 31,

1789, ch. 5, § 21, 1 Stat. 42. By 1797, however, the

absolute priority of the Urited States was extended

to encompass all debts due the government from the

estate of an insolvent debtor. See Act of March 3,

1797, ch. 20, § 5, 1 Stat. 515; United States v. Fisher, 6

U.S. (2 Cranch) at 385. The language of the statute

has remained substantially unchanged since that

time. See, e.g., Act of March 2, 1799, ch. 22, § 65, 1

Stat. 676; Act of September 13, 1982, Pub. L. No. 97-

258, Subtit. III, $1, 96 Stat. 972. In its current for-

mulation, the statute provides that “[a] claim of the

United States Government shall be paid first” when

“a person indebted to the Government is insolvent” or

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.” 31 U.S.C. 3713(a)(1).*

4 Since 1978, the absolute priority statute has expressly

been made inapplicable to cases brought under the Bankruptcy

Code (31 U.S.C. 3713(a)(2)), which contains a detailed and com-

prehensive set of priorities applicable to claims of the United

States and other parties (11 U.S.C. 507). Prior to enactment of

the Bankruptcy Code, the absolute priority statute had been

treated separately within the priority provisions applicable to

bankruptcy cases under Section 64 of the Bankruptcy Act, 11

U.S.C. 104 (1976). See United States v. Marxen, 307 U.S. 200,

202-203 (1939).

13

2. The claim of the United States in the present

case for taxes owed by the insolvent estate is entitled

to “be paid first” under the plain language of the

absolute priority statute.

a. A tax debt owed to the United States is unques-

tionably a “claim of the United States Government”

(31 U.S.C. 3713(a)(1)) within the scope of the broad

language of the absolute priority statute. See

Massachusetts v. United States, 333 U.S. 611, 625-626

(1948); Illinois v. United States, 328 U.S. 8, 9 (1946);

Price v. United States, 269 U.S. 492, 499 (1926).

Indeed, from the date of its first enactment to its

present form, the most basic function of the statute

has been to aid the government in the collection of

public revenues. See, e.g., United States v. Key, 397

U.S. at 324; United States v. Fisher, 6 U.S. (2 Cranch)

at 388. As the Court stated in United States v.

Emory, 314 U.S. 423, 426 (1941):

The purpose of [the absolute priority statute] is

“to secure adequate public revenues to sustain the

public burden” (United States v. State Bank of

North Carolina, 6 Pet. 29, 35), and it is to be

construed liberally in order to effectuate that

purpose (Bramwell v. U.S. Fidelity & Guaranty

Co., 269 U.S. 483, 487).

b. It is undisputed that the estate involved in this

case is insolvent within the meaning of the statute.

The estate’s debts exceed $489,000, and its sole asset

is real estate worth approximately $53,000 (Pet. App.

2a, 22a). Since the estate “in the custody of the ex-

ecutor or administrator, is not enough to pay all debts

of the debtor” (31 U.S.C. 3713(a)(1)(B)), the absolute

priority statute applies to this case by its plain terms.

Under the plain command of the statute, the federal

14

tax claim is therefore entitled to “be paid first” (31

U.S.C. 3713(a)(1)).

c. It is also well established that the claim of the

United States against the insolvent estate is to be

paid ahead of the claim of any judgment lienor—such

as the private creditor in this case—who has not

obtained possession of the disputed property by execu-

tion upon its lien. One hundred and eighty years ago,

this Court held that the absolute priority statute

requires debts owed to the United States to be paid

first even when a competing creditor possesses 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 (/bid.) (emphasis supplied):

the question still remains * * * whether this

right of preference [under the absolute priority

statute] can cut out a prior judgment creditor?

The law declares, “that in all cases of insolvency,

&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 judgment-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. Jd. at 426. As Justice

Cardozo explained for the Court more than a century

later, “(tlhe ruling [in Thelusson] was that the

15

general lien of a judgment upon the lands 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, 293-294 (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); Conard v.

Atlantic Insurance Co., 26 U.S. (1 Pet.) 386, 441-443

(1828).°

® This Court has “repeatedly reserved the question

whether the priority given the United States by [Revised

Statutes] § 3466 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 di-

vested the debtor of title or possession and that the lien was

therefore not sufficiently specific to raise the issue squarely.

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. 358, 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 v. Atlantic Insurance Co., 26 U.S. at 445-

446. In so ruling, the Court did “not contemplate that excep-

tions 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. at 634 n.38). The Court “has been loath to expand”

such an exception “to include other types of lien” (ibid.). The

16

The judgment creditor took no such action to obtain

possession of the disputed property before the

government’s claim arose in this case (Pet. App. 2a).

The “words [of the absolute priority statute], taken in

their natural and usual sense, * * * embrace the

case before the court” and thus “plainly give the

United States the preference they claim” (United

States v. Fisher, 6 U.S. (2 Cranch) at 385-386).

B. The Federal Tax Lien Act Does Not Repeal The

Absolute Priority Of Tax Claims Of The United

States Against Insolvent Estates

The Supreme Court of Pennsylvania acknowledged

that the plain language of the absolute priority

statute applies directly to this case (Pet. App. 6a).

The court concluded, however, that the absolute

priority created for claims of the United States by

that statute had been impliedly repealed—for tax

claims—by the enactment of the Federal Tax Lien

Act of 1966, 26 U.S.C. 6323(a). The latter statute

provides that the federal tax lien that arises by

operation of law when a taxpayer neglects to pay

an assessment (26 U.S.C. 6321) is not valid against

private lien holders (including judgment lien credi-

tors) until notice of the tax lien has been filed.

In concluding that Congress impliedly repealed

application of the absolute priority statute to federal

tax claims, the Pennsylvania Supreme Court failed

to follow this Court’s admonition that “[oJnly the

plainest inconsistency would warrant * * * finding

Court has emphasized that none of its decisions lends “support

to the assumption that the doctrine of the mortgage cases,

whatever its current vitality, would require the subordination

of unsecured claims of the United States to a specific and

perfected lien” (United States v. Texas, 314 U.S. at 486).

17

an implied exception to the operation” of the absolute

priority statute (United States v. Key, 397 U.S. at

324-325).

1. During the long history of the absolute priority

statute, this Court has frequently addressed claims of

the type presented by respondent in this case. As

long ago as 1805, in the earliest of these cases, the

Court rejected the claim of a creditor who, while

acknowledging (as respondent does in this case) that

the absolute priority statute, by its terms, confers

priority on the United States, nonetheless argued

that Congress had, in some manner apart from the

text of the statute, evidenced “an intent varying

from that which the words import.” United States v.

Fisher, 6 U.S. (2 Cranch) at 386. Chief Justice

Marshall made clear in his opinion for the Court in

that case that, because tne statute is “explicit” in

providing priority to the United States (id. at 389),

any creditor who seeks to establish an implied excep-

tion from the absolute priority statute bears a heavy

burden. /d. at 386. See also Beaston v. The Farmers’

Bank of Delaware, 37 U.S. (12 Pet.) at 134.

Applying that same reasoning, the Court has con-

sistently emphasized in numerous subsequent cases

that the absolute priority statute “on its face permits

no exception whatsoever” (United States v. Vermont,

377 U.S. 351, 357 (1964); see also, e.g., United States v.

Waddill, Holland & Flinn, Inc., 323 U.S. 353, 355

(1945)) and that “{oJnly the plainest inconsistency

would warrant * * * finding an implied exception to

the operation of so clear a command as that of [the

absolute priority statute.]” United States v. Emory,

18

314 U.S. at 433.° See also United States v. Moore, 423

U.S. 77, 82-83 (1975).

Most recently, the Court held in United States v.

Key, 397 U.S. at 332, 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.” The

Court concluded in Key that such a “plain{] inconsis-

tency” 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 absolute 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 (397 U.S. at 324-326; see also id. at 321-332).’

® In United States v. Emory, 314 U.S. at 433, 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 claims of the United States in bankruptcy

cases, impliedly repealed application of the absolute priority

statute to nonbankruptcy cases. The Court held that the

express alteration of the priority applicable in bankruptcy cases

did not implicitly repeal application of the absolute priority

statute to insolvencies outside of bankruptcy court (314 U.S. at

427):

Neither the language of § 64(a) nor the Congressional

history of the legislation here involved supports the pro-

position that § 64(a) was intended to eliminate, either

partially or wholly, the priority of claims of the United

States in non-bankruptey proceedings.

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

* In United States v. Key, 397 U.S. at 332, the Court con-

cluded that the provisions of what was then Chapter X of the

Bankruptey Act—which required “fair and equitable” treat-

ment of creditors in a reorganization—were not “plainly

19

2. The standard adopted by the Court in Key to

evaluate claims of an implied repeal of the absolute

priority statute is not satisfied in this case.

a. There is no logical inconsistency between the

Federal Tax Lien Act and the absolute priority

statute. The two statutes differ in their scope and

address different concerns. 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) governs 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 long noted

that Congress has intentionally chosen to establish

greater protection for the United States in cases

involving insolvent debtors than in cases “[w]here 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. City of New Britain, 347

U.S. 81, 85 (1954).

26 U.S.C. 6323(a) is concerned with the rights of

conflicting lienholders in competition with the federal

tax lien. The absolute priority statute, by contrast,

applies only to the debts owed by an insolvent and

applies “whether or not [those debts are] secured by a

lien” (United States v. Vermont, 377 U.S. at 357). In

the first case arising in this Court under the absolute

priority statute, the Court explained that “no lien is

inconsistent” with the absolute priority statute and did not

impliedly repeal its application in such proceedings. The Court

stated that “the- statute literally applies, and no plain inconsis-

tency with the scheme of Chapter X appears.” /bid.

20

created by this law. * * * It is only a priority in

payment * * * and this priority is limited to a par-

ticular state of things” (United States v. Fisher, 6

U.S. (2 Cranch) at 390).

As the Sixth Circuit has explained, the two stat-

utes focus on different concerns, operate in different

contexts, and are not logically inconsistent (Ken-

tucky v. United States, 383 F.2d 13, 14-15 (1967)):

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.

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 in-

sufficient to pay all his debts. Present these

essentials, the debts owing the United States

“shall be first satisfied.”

The Ninth Circuit reached the same conclusion in

Nesbitt v. United States, 622 F.2d 433 (1980), aff’g 445

F. Supp. 824 (N.D. Cal. 1978), cert. denied, 451 U.S.

984 (1981). The court noted that the absolute priority

statute (445 F.Supp. at 829-830, adopted by reference,

622 F.2d at 433):

grants a first priority to the Government as a

creditor; [Section 6321] creates a lien on ‘all the

21

property’ of a delinquent taxpayer. The [absolute]

priority is not a lien; it covers all debts to the

Government; it is available only in the case of an

insolvent debtor whose property has passed to a

third person—other than a trustee in bankruptcy

—for the benefit of creditors; and it arises at the

time of this transfer. The [Section 6321] tax lien

covers only tax debts; it arises regardless of the

solvency of the taxpayer; and it attaches at the

time the assessment list is received by the collec-

tor.

Justice Whittaker expressed the same views in

his concurring opinion in James v. United States, 366

U.S. 213 (1961), in which he concluded that the

absolute priority statute remains applicable to tax

claims notwithstanding the restrictions imposed on

enforcement of the federal tax lien. 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.

b. An unconditional application of the absolute

priority statute would not deprive 26 U.S.C. 6323 of

meaning. Section 6323 determines the effectivenesss

of federal tax liens against other types of liens and, as

this Court has noted, does “not attempt to give

priority in all cases” to the federal lien. United

States v. City of New Britain, 347 U.S. at 84. As this

Court explained in City of New Britain, however,

Congress has determined to give first priority to the

22

tax claims of the United States against insolvent

estates in the absolute priority statute (id. at 85):

When the debtor is insolvent, Congress has ex-

pressly given priority to the payment of indebted-

ness owing the United States, whether secured

by liens or otherwise, by [what is now 31 U.S.C.

3713(a)|. In that circumstance, where all the

property of the debtor is involved, Congress has

protected the federal revenues by imposing an

absolute priority.

As this Court noted in City of New Britain, the

provisions of Section 6323 do not govern the relative

rights of lien creditors in cases involving insolvents.

The rights of creditors in cases involving insolvents

are governed instead by the absolute priority statute.

347 U.S. at 85. The Court expressed the same con-

clusion in United States v. Vermont, 377 U.S. at 358,

in which it explained that whether the government

has a tax lien, and whether that lien would have

priority under Section 6323, is irrelevant in cases to

which the absolute priority statute applies: the

government’s priority in insolvencies is based merely

on whether the government has a “claim” (37 U.S.C.

3713(a)) and applies “whether or not [that claim is]

secured by a lien” (United States v. Vermont, 377

U.S. at 357).

The two statutes thus have different areas of

concern and different objectives. Section 6323 applies

to situations involving solvent debtors and also to the

insolvency situations to which the absolute priority

statute is inapplicable. The absolute priority statute

applies only to insolvencies manifested in one of

the modes specified in 31 U.S.C. 3713(a)—to cases in

which the estate of a debtor is insolvent, cases in

23

which the debtor makes a voluntary assignment of his

property or commits an act of bankruptcy and cases in

which the property of an absent debtor is attached.”

31 U.S.C. 3713(a)(1). See United States v. Fisher, 6

U.S. (2 Cranch) at 390; note 1, supra. As this Court

stated in United States v. Oklahoma, 261 U.S. 253,

260 (1923):

Mere inability of the debtor to pay all his debts

in ordinary course of business is not insolvency

within the meaning of the act, but it must be

manifested in one of the modes pointed out in the

latter part of the statute which defines or explains

the meaning of insolvency referred to in the

earlier part. United States v. State Bank of North

Carolina, 6 Pet. 29, 35; United States v. Fisher, 2

Cranch, 358, 390; United States v. Hooe, 3 Cranch,

73, 90; Prince v. Bartlett, 8 Cranch, 431, 433;

Conard v. Atlantic Insurance Co., 1 Pet. 386, 439;

8 The term “act of bankruptcy” is not defined in the abso-

lute priority statute but has been held to incorporate the

definition of that term contained in the Bankruptcy Act of

1898, ch. 541, § 3(a)(5), 30 Stat. 546 (11 U.S.C. 21(a)(5) (1976)).

See Jonathan's Landing, Inc. v. Townsend, 960 F.2d 1538, 1540

(11th Cir. 1992); Carter v. Carter, 681 F. Supp. 323, 326 n.13

(E.D. Va. 1988). Under the P»akruptcy Act of 1898, the term

“act of bankruptcy” includes such actions by a debtor as fraud-

ulent conveyances and preferential transfers. 11 U.S.C. 21

(a)(1) and (2) (1976).

The current Bankruptcy Code abolished the concept of “acts

of bankruptcy” and does not contain a definition of that term.

Jonathan's Landing, Inc. v. Townsend, 960 F.2d at 1543 n.20;

S. Rep. No. 989, 95th Cong., 2d Sess. 34 (1978). Although the

concept of an act of bankruptcy is no longer applied in bank-

ruptey law, it remains a part of the absolute priority statute.

31 U.S.C. 3713(a)(1)(a\(iii); see Carter v. Carter, 681 F. Supp.

at 326 n.13.

24

Brent v. Bank of Washington, 10 Pet. 596, 611;

Field v. United States, 9 Pet. 182, 201.

The two statutes also operate with different force

in the contexts to which they apply. In order to defeat

en unfiled federal tax lien under Section 6323, the

competing lien must be “choate”—the ident*:y of the

lienor, the property subject to the lien, and the

amount of the lien must be established. United States

v. Pioneer American Insurance Co., 374 U.S. 84, 89

(1963); United States v. City of New Britain, 347 U.S.

at 84. Different standards apply under the absolute

priority statute. Under the latter statute, a com-

peting claimant can defeat the federal claim, if at all,

only by obtaining title to or possession of the debtor’s

property before the right of preference accrued

to the United States. United States v. Vermont, 377

U.S. at 357-358; Thelusson v. Smith, 15 US. 2

Wheat.) at 425. See note 5, supra. An unconditional

application of the absolute priority statute does not

disturb application of Section 6323 in the contexts to

which the latter applies and thus does not render that

statute meaningless.

ce. The history of 26 U.S.C. 6323 shows that, in

enacting the tax lien provisions, Congress did not

intend impliedly to repeal the absolute priority

statute. Beginning in 1866, Congress established a

federal tax lien upon all property owned by a de-

linquent taxpayer. See 26 U.S.C. 6321; Act of July 13,

1866, ch. 184 § 9, 14 Stat. 98. In response to a decision

of this Court holding 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

25

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. The

language of the 1913 statute has been carried forward

in numerous revenue acts and now appears as Section

6323(a) of the Internal Revenue Code, 26 U.S.C.

6323(a). The protection established for a judgment

lien creditor (such as the private creditor in this

case) from an unfiled federal tax lien has thus existed

since 1913.

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 commercial security interests from an

unfiled tax lien. See H.R. Rep. No. 1884, 89th Cong.,

2d Sess. 1-2 (1966) (1966-2 C.B. 815, 815-816); S. Rep.

No. 1708, 89th Cong., 2d Sess. 1-2 (1966) (1966-2 C.B.

876, 876-877).° The legislative history of that Act

reflects that these amendments to the tax lien statute

were not intended to repeal or modify the absolute

priority statute. Indeed, Congress declined to enact

proposals that were made at that very time for that

very purpose.

In proposing the legislation that resulted in the

Federal Tax Lien Act, the American Bar Association

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 Associa-

% In 1939, the successor of the 1913 statute had been amend-

ed similarly to include protection from the unfiled federal tax

lien for the holders of a pledge. Revenue Act of 1939, ch. 247,

§ 401, 53 Stat. 882.

26

tion, Final Report of the Committee on Federal

Liens 7, 124 (1959) (Final Report), contained in

Hearings on the Priority of Federal Tax Liens and

Levies Before the House Comm. on Ways and

Means, 89th Cong., 2d Sess. at 85, 199 (1966) (House

Hearings).” 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. When the Federal Tax Lien Act was

enacted, however, the bills proposing amendments to

the absolute priority statute died in committee. See

105 Cong. Rec. 1030, 1258 (1959) (Index). This histoi y

is plainly inconsistent with the conclusion of the

Pennsylvania Supreme Court in this case that “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” (Pet.

App. 13a).

” The ABA's proposed amendment would have specified

that nothing in the absolute priority statute “shall impair

* * * any other valid lien or security interest which would

have been entitled to priority over the claim of the United

States immediately preceding such divestment.” Final Report,

supra, at 122. The purpose of the proposed amendment, which

Congress declined to enact, was 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 have been applicable in all insolvency

situations.

27

The subsequent history of related legislation con-

firms that Congress did not intend impliedly to repeal

the absolute priority statute. In 1970, the ABA again

submitted to the Senate Judiciary Committee a pro-

posed amendment to the absolute priority statute that

would have repealed its application to tax claims.

S. 2197, 92d Cong., Ist Sess. (1971); see William T.

Plumb, The Federal Priority in Insolvency: Pro-

posals for Reform, 70 Mich. L. Rev. 1, 9-10 (1971).

This bill also died in committee.

In enacting the Federal Tax Lien Act and again

four years later, Congress thus declined to adopt

proposed legislation that would have made the abso-

lute priority statute inapplicable to tax claims. In

view of this history of congressional rejection of such

proposals, respondent cannot satisfy its burden of de-

monstrating a “manifestation of congressional in-

tent” that “implies such an exception” was intended

(United States v. Key, 397 U.S. at 324). As the Ninth

Cireuit correctly concluded 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 indicate

that Congress intended to make tax liens the

federal government’s sole remedy for the collec-

tion of unpaid taxes. To the contrary, Congress

intended tax liens to supplement existing means

for the collection of taxes, including [the absolute

priority statute]. There is, therefore, no basis for

saying that Congress, by creating federal tax

liens, intended to modify [the absolute priority

statute] in any way.

28

The fact that Congress twice declined proposals to

remove tax claims from the absolute priority statute,

while enacting related legislation, demonstrates

that Congress did not intend to modify that statute.

Nesbitt v. United States, 622 F.2d at 433, aff’g 445 F.

Supp. at 829:

This Court cannot lightly disregard the fact that

Congress has been requested on at least two

occasions to amend [the absolute priority statute]

in a manner which would achieve the result sought

here by plaintiff, but it has not yet so amended that

section.

Accord, Estate of Silberman, 46 Cal. Rptr. 610, 615

(Ct. App. 1995) (“The fact that [Clongress was twice

presented with proposals to accomplish this end, and

did not adopt them strongly supports the inference

that it was informed of the policy considerations in

favor of such legislation and nevertheless declined to

amend the [absolute priority statute].”). Cf. Miner v.

Atlass, 363 U.S. 641, 651 (1960) (“We do not think this

failure to enact the proposed amendments can be

explained away by suggesting that * * * amendment

of the General Rules [was thought] unnecessary.”).

Over the last two hundred years, Congress has fre-

quently amended, codified and recodified the absolute

priority statute. Indeed, it has done so twice since

the Federal Tax Lien Act of 1966 was enacted. In

1978, Congress amended the absolute priority statute

to make it inapplicable to bankruptcy cases. 31 U.S.C.

3713(a)(2); note 4, supra. And, in 1982, Congress re-

codified the absolute priority statute to make minor

revisions in its terminology. See Act of September

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

972. In doing so, however, Congress emphasized that

29

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

claims. By recodifying the absolute priority statute

in 1978 and 1982 without making the twice-proposed

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 abso-

lute 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, Holland & Flinn, Inc., 323 U.S. at 355).

d. Under the standards applied by this Court in

United States v. Key, 397 U.S. at 324-326, (i) Section

6323 of the Internal Revenue Code is not inconsistent

with the absolute priority statute; (ii) an uncondi-

tional application of the absolute priority statute

would not make Section 6323 meaningless; and, (iii)

the history and text of Section 6323 and the absolute

priority statute do not reflect an intent by Congress

to modify the latter statute. The “plainest inconsis-

tency” that would be required for this Court to find

an implied exception to the operation of the absolute

priority statute thus does not exist (United States v.

Key, 397 U.S. at 325). Instead, as this Court has

observed on several occasions, the statute contains

as “clear a command” now as ever (ibid.) and the as-

serted “inconsistency is wholly wanting here”

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

3. a. 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

30

government in the tax arena is to be treated as

an ordinary creditor or as a creditor with super-

priority” (Pet. App. 7a). The Kimbell Foods case did

not involve federal tax claims; nor did it involve

insolvent debtors. Instead, it involved “the priority to

be accorded a federal consensual loan where the

debtor is solvent” and where no federal statutory

priority scheme existed (/d. at lla). In Kimbell

Foods, in the absence of any applicable federal statu-

tory scheme, the Court adopted the state law priority

rules “on which private creditors base their daily

commercial transactions” in order to avoid undue

disruption of private credit markets. 440 U.S. at 729.

The Court concluded, in the absence of any “congres-

sional directive,” that the relative priority of private

liens and consensual liens arising from government

lending programs should be determined under non-

discriminatory state laws. Id. at 740.

In Kimbell Foods, however, the Court expressly

noted that an entirely different set of statutory rules

and policy concerns becomes applicable when the

government is collecting taxes as an involuntary

creditor of a taxpayer (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

federal 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 in-

terest in recouping the limited sums advanced is

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

31

than in the tax lien area to invoke 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

lender, however, the government acts “voluntarily,

with detailed knowledge of the borrower’s financial

status” and “[b]y carefully selecting loan recipients

and tailoring each transaction with state law in

mind,” it can “establish[] terms that will secure re-

payment” (ibid.).

Recognizing the significant difference between

federal tax liens and the consensual liens created by

government loan programs, the Court stated that

“‘lals 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 Kimbell Foods, Inc. v.

Republic Nat'l Bank of Dallas, 557 F.2d 491, 500

(5th Cir. 1977). The Pennsylvania Supreme Court

thus plainly erred in relying on Kimbell Foods in

determining the scope of the priority created by

statute for the collection of non-consensual debts

owed by insolvent debtors to the United States “in its

tax collecting capacity” (440 U.S. at 738).

The Pennsylvania Supreme Court also erred in

concluding that the court should fashion an implied

exception from the absolute priority statute for tax

claims in order to protect the “legitimate commercial

expectations” of other creditors (Pet. App. 13a). The

absolute priority statute has been in force for two

hundred years, and the proper balance to be achieved

between the interests of the United States and other

32

creditors is a matter for Congress, not the courts, to

determine (Nesbitt v. United States, 445 F. Supp. at

830, adopted by reference, 622 F.2d at 433 (footnotes

omitted)):

The Court is not unmindful of the many policy

reasons why the government should not be en-

titled to priority under [the absolute priority

statute] when it is not entitled to priority under

the [Federal Tax Lien Act]. However persuasive

these policy reasons may be, they do not convince

the Court that the [Federal Tax Lien Act] is

plainly inconsistent with [the absolute priority

statute]. Plaintiff’s remedy, if there is to be a

remedy, must come from Congress and not the

courts.

See also Estate of Silberman, 46 Cal. Rptr. 2d at 615.

From its earliest decision under this statute, the

Court has consistently held that any assertion that

the statute is “inconvenient” to commercial creditors

must be addressed to Congress, rather than to the

courts. As Chief Justice Marshall explained for the

Court in United States v. Fisher, 6 U.S. (2 Cranch) at

390:

[I]t would be going a great way to say that a

constrained interpretation must be put [on the

absolute priority statute], to avoid an incon-

venience which ought to have been contemplated in

the legislature when the act was passed, and

which, in their opinion, was probably overbalanced

by the particular advantages it was calculated to

produce.

* * * ‘It is for the legislature to appreciate

[such inconveniences]. They are not of such mag-

33

nitude as to induce an opinion that the legislature

could not intend to expose the citizens of the

United States to them, when words are used

which manifest that intent.

Moreover, as the Court emphasized in United States

v. Emory, 314 U.S. at 431, any objection to the applica-

tion of the statute based upon its “inconvenience” to

other creditors simply “proves too much.” “If [that

objection] is sound as applied to this kind of a claim of

the United States, it is equally sound as applied to all

claims as to which the United States” has been given

an absolute priority under 31 U.S.C. 3713(a). 314 U.S.

at 431. “{[W]hatever may be the merits of the conten-

tion, it should be addressed to Congress and not to

this Court.” Jbid.

CONCLUSION

The judgment of the Supreme Court of Pennsylva-

nia should be reversed.

Respectfully submitted.

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

AUGUST 1997