Reply Brief — United States v. Estate of Romani

No. 96-1613

In the Supreme Court of the United States

OcToBER TERM, 1997

REPLY BRIEF FOR THE UNITED STATES

TABLE OF AUTHORITIES

Cases:

Adickes v. S. H. Kress & Co., 398 U.S. 144 (1970) ..

Brent v. Bank of Washington, 35 U.S. (10 Pet.)

596 (1836)

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

386 (1828)

Cook County National Bank v. United States,

107 U.S. 445 (1883)

Davis v. Pringle, 268 U.S. 315 (1925)

Farrey v. Sanderfoot, 500 U.S. 291 (1991)

Guarantee Title & Trust Co. v. Title Guaranty &

Surety Co., 224 U.S. 152 (1912)

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

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

(1946)

LMS Holding Co., In re, 50 F.3d 1526 (10th Cir.

Lucas v. South Carolina Coastal Council, 505 U.S.

1003 (1992)

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

(1948)

Mellon v. Michigan Trust Co., 271 U.S. 236

(1926)

Neal v. United States, 116 S. Ct. 763 (1996)

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

Ramsey v. United Mine Workers of America,

401 U.S. 302 (1971)

SBA v. McClellan, 364 U.S. 446 (1960) ...................

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

(1929)

Terwilliger’s Catering Plus, Inc., In re, 911 F.2d

1168 (6th Cir. 1990)

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

II

Cases Continued: Page

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

00 — 17, 18

United States v. Cutting & Trimming, Inc., 206

F. Supp. 951 (D. Vt. 1962), aff'd, 377 U.S. 351

0 18

United States v. Emory, 314 U.S. 423 (1941) 10, 11,

13, 14, 15, 19

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

() | EEE ee 3, 10

United States v. Gilbert Associates, Inc., 345 U.S.

0 /! 3, 4, 5

United States v. Guaranty Trust Co., 280 U.S.

Z T 12, 14

United States v. Hack, 33 U.S. (8 Pet.) 271

0 ee 5, 6

United States v. Hooe, 7 U.S. (8 Cranch) 73

(| | eee 5, 6

United States v. Key, 397 US. (1970) 11, 12,

14, 17, 19

United States v. Lewis, 26 F. Cas. 920 (C.C. E.D.

Pa.) (No. 15,595), aff d, 92 U.S. 618 (1875) .............. 6

United States v. Moore, 423 U.S. 77 (1975) .......... 14, 15

United States v. Oklahoma, 261 U.S. 253 (1923) ..... 15

United States v. Security Industrial Bank, 459

US t) SS ee 11

United States v. Texas, 314 U.S. 480 (1941) 7

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

„% 9, 11, 17

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

Ie ee 8

United States Department of Agriculture v.

Remund, 380 U. S. 589 (1947) .. . . e 14

W. H. Powell Lumber Co. v. Federal Land Bank

Ass’n, 561 S.W.2d 700 (Mo. Ct. App. 1978) ....:.+:-0++ 3

Cases—Continued: Page

Westmoreland v. Westmoreland, 716 F. Supp. 217

ESE SELL 11

Youakim v. Miller, 425 U.S. 231 (1976) . 2

Constitution, statutes and rule:

U.S. Const. Amend. V (Takings Clause) 10

EE ... 15

F ...... 15, 16, 17, 18

r 2, 5, 16

e 17

r .. 15

. cccccsccccccecsescsccesescecesecocccseeces 6

r .. 10, 15

13 Pa. Cons. Stat. Ann. (Purdon 1984):

ELA 9

. SE 10

EE 9

J 10

11 10

ES 2

Miscellaneous:

Black s Lc Dictionary (4th ed. 1968ù 3

Shippen Lewis, Eliminating Archaic Features of

Execution Process in Pennsylvania, 63 U. Pa.

D 3

Note, Nesbitt v. United States: Denying an Implied

Tax Lien Exception to the Federal Priority in

Insolvency, 33 Cath. U. L. Rev. 741 (1984) ............. 12

In the Supreme Court of the United States

OcTOBER TERM, 1997

No. 96-1613

UNITED STATES OF AMERICA, PETITIONER

.

ESTATE OF FRANCIS J. ROMANI

ON WRIT OF CERTIORARI TO

THE SUPREME COURT OF PENNSYLVANIA

REPLY BRIEF FOR THE UNITED STATES

1. Respondent devotes the first and largest portion of

its argument (Resp. Br. 10-26) to a contention that was

neither raised nor addressed in the courts below. The

question addressed below was whether the preference

established by the absolute priority statute for claims of

the United States was implicitly repealed, for tax claims,

by the provisions of the Federal Tax Lien Act. Respon-

dent now asserts, however, that it was “incorrect” for the

Pennsylvania Supreme Court to reach and decide that

question (Resp. Br. 10). Respondent asserts that it is

unnecessary to reach that question because this case in-

volves a competing private judgment lien and, in respon-

dent’s view, the absolute priority statute “does not over-

ride judgment liens on real property” (ibid.). Respondent

claims that the Pennsylvania Supreme Court was “in-

correct” in assuming to the contrary (ibid.).

(1)

2

Respondent did not raise this contention in the courts

below or in its brief in opposition at the petition stage. To

the contrary, the brief filed by respondent in the Penn-

sylvania Supreme Court reflects the very same “assump-

tion” that respondent now criticizes that court for making

(Resp. Br. 10; see Resp. Br. Pa. Sup. Ct. 2, 4-10). It is

plainly “inappropriate” for respondent to disavow its long-

standing position and seek to raise a new contention in

this Court “in the first instance.” Ramsey v. United

Mine Workers of America, 401 U.S. 302, 312 (1971). See

also Youakim v. Miller, 425 U.S. 231, 234 (1976); Adickes

v. S. H. Kress & Co., 398 U.S. 144, 147 n.2 (1970); Sup. Ct.

R. 15.2. Moreover, the new contention that respondent

belatedly seeks to advance has been addressed and rejected

by this Court on several occasions.

a. The plain text of the absolute priority statute

requires any claim of the United States to “be paid first”

from the estate of an insolvent debtor. 31 U.S.C. 3713(a).

In Thelusson v. Smith, 15 U.S. (2 Wheat.) 396 (1817), 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 enforce-

able judgment lien in the assets of the estate. The Court

stated (id. at 426):

A judgment gives to the judgment-creditor a lien on

the debtor’s lands, and a preference over all subsequent

judgment-creditors. But the act of congress defeats

this preference in favour of the United States, in the

cases specified in the 65th section of the act of 1799.

The Court concluded that, for a competing private lien

claim to be excepted from the operation of the absolute

priority statute, the property to which the lien applies

must be divested from the debtor’s estate before the claim

of the United States accrued (ibid.):'

If * * * before the right of preference has accrued to

the United States, the debtor has made a bona fide

conveyance of his estate to a third person, or has

mortgaged the same to secure adebt, or if his property

has been seized under a fi. fa., the property is divested

out of the debtor, and cannot be made liable to the

United States.

This Court has often cited and relied on this holding of

Thelusson. See, e.g., United States v. Gilbert Associates,

Inc., 345 U.S. 361, 366 (1953); Pet. Br. 15. Applying

Thelusson, the Court has consistently concluded that, so

long as the property has not been “divested” from the

debtor’s estate by “a change of title or possession,” the

absolute preference established by the statute for the

United States to “be paid first” from the assets of that

estate is controlling. New York v. Maclay, 288 U.S. 290,

293-294 (1983).

The abbreviation “fi. fa.” in this passage from the decision in

Thelusson refers to the common law writ of fieri facias. That writ

commanded the sheriff to execute on a judgment by seizing and selling

the personal and real property of the judgment debtor. See, e.g., Ship-

pen Lewis, Eliminating Archaic Features of Execution Process in

Pennsylvania, 63 U. Pa. L. Rev. 652, 652-653, 656 (1915); W.H. Powell

Lumber Co. v. Federal Land Bank Ass'n, 561 S.W.2d 700, 703 (Mo. Ct.

App. 1978); Blacks Law Dictionary 754 (4th ed. 1968).

2 The Court has often emphasized that any creditor who seeks to

establish an implied exception from the absolute priority statute bears

a heavy burden. See United States v. Fisher, 6 U.S. (2 Cranch) 358, 386

(1805); Pet. Br. 17-18. Respondent simply overlooks this precedent in

contending that “the government bears a heavy burden to establish

that the federal priority statute abrogates centuries of common-law

protection” (Resp. Br. 12). In Thelusson and New York v. Maclay,

supra, the Court plainly rejected the suggestion that there is “common-

4

This longstanding interpretation of the absolute prior-

ity statute is entitled to especially heavy deference. As

this Court stated in Neal v. United States, 116 S. Ct. 763,

769 (1996):

[Wie give great weight to stare decisis in the area of

statutory construction {unless} * * * intervening

development of the law has “removed or weakened the

conceptual underpinnings from the prior decision or

* * * later law has rendered the decision irreconcil-

able with competing legal doctrines or policies“

Absent those changes or compelling evidence bearing

on Congress’ original intent, NLRB v. Longshoremen,

473 U.S. 61, 84 (1985), our system demands that we

adhere to our prior interpretations of statutes [even

where] * * * there may be little in logic to defend the

statute’s treatment

b. Respondent errs in contending that this Court has

“disavowed the broad holding” of Thelusson (Resp. Br. 18).

In New York v. Maclay, 288 U.S. at 293-294, the Court

adopted the very holding that respondent claims has been

“disavowed.” In that case, the Court explained that a

judgment lien creditor who has not obtained “title or pos-

session” from the estate by seizure * or some other

equivalent act” cannot prevail against the plain command

of the statute that the United States be paid first.” Jbid.

See also United States v. Gilbert Associates, Inc., 345 U.S.

at 366 (the competing creditor must have “divested” the

insolvent debtor “of either title or possession”); Pet. Br.

15 (citing cases).*

law protection” for judgment liens from the absolute priority of the

United States. See also note 3, infra.

3 Respondent urges that judgment liens are traditionally perfected

without acquiring possession of the property and that the government’s

position in this case is therefore “unwarranted as a matter of precedent,

5

Respor.dent is also incorrect in claiming that, in four

early decisions, the Court rejected the analysis of Thelus-

son and held that “the federal priority statute does not

override antecedent security interests” (Resp. Br. 16, 18).

Two of the cases that respondent cites (United States v.

Hooe, 7 U.S. G Cranch) 73 (1805); United States v. Hack,

33 U.S. (8 Pet.) 271 (1834)) do not even involve the question

of the effect of the absolute priority statute on perfected

liens.“ The other two cases (Conard v. Atlantic Insur-

history, and common sense” (Resp. Br. 20). That argument simply

misses the point of Thelusson and its numerous progeny. The fact that

the private lien may be valid as against other liens does not mean that

it defeats the absolute priority of the government's claim in insolven-

cies. In United States v. Gilbert Associates, Inc., supra, the Court

relied on Thelusson in holding that a federal tax claim is entitled to

priority over a prior-filed state tax lien. The Court stated (345 U.S. at

366):

In claims of this type, “specificity” requires that the lien be

attached to certain property by reducing it to possession, on the

theory that the United States has no claim against property no

longer in the possession of the debtor. Thelusson v. Smith, 2

Wheat. 396. Until such possession, it remains a general lien.

When the private creditor has not taken sufficient steps to “divest” the

property from the insolvent's estate, the United States “shall be paid

first” under the plain text of the statute. 31 U.S.C. 8713(a). The Court

thus held in Gilbert Associates that, because “(t}he taxpayer had not

been divested by the Town of either title or possession * * *, [the

absolute priority statute] clearly awards priority to the United States”

(345 U.S. at 366).

Respondent is also incorrect in its premise (Resp. Br. 20-21) that the

decisions establishing this rule involved only personal, and not real,

property. Thelusson v. Smith itself involved a judgment lien on real

property. See 15 U.S. (2 Wheat.) at 425.

In United States v. Hooe, 7 U.S. (8 Cranch) at 91, the absolute

priority statute was inapplicable because the debtor’s deed of trust con-

veyed only part of his property to trustees. For the absolute priority

statute to be applicable, it was necessary for the debtor to have made a

6

ance Co., 26 U.S. (1 Pet.) 386 (1828); Brent v. Bank of

Washington, 35 U.S. (10 Pet.) 596 (1836)) are fully con-

sistent with Thelusson. The creditor in both Conard and

Brent, unlike the creditor in Thelusson, obtained title or

possession of the disputed property before the govern-

ment’s priority claim accrued.’ As this Court explained in

Massachusetts v. United States, 333 U.S. 611, 634 n.38

(1948), the decisions in Conard and Brent “did not contem-

plate that exceptions were being made” from the absolute

priority statute but “conceived that the funds or property

affected, being covered by mortgage, belonged in fact to

third persons, not to the insolvent debtor.” In arguing to

the contrary, respondent ignores the Court’s explanation

of its own decisions and, in particular, ignores the Court’s

voluntary assignment of all his property. Ibid. See also 31 U.S.C.

3713(a1 (AG).

In United States v. Hack, 33 U.S. (8 Pet.) at 275, the absolute

priority statute was inapplicable because the funds assigned for the

benefit of creditors were “not the funds of John Stouffer, the debtor of

the United States, but of [the partnership) of John and Jacob Stouffer

* * *: and the partnership property is insufficient to satisfy the

partnership creditors.”

5 Conard v. Atlantic Insurance Co., 26 U.S. (1 Pet.) at 446, involved

a competing creditor who possessed an endorsed bill of lading that

purportſed] to be a transfer in praesenti” and which served as “a

mortgage of the goods, and the returns” (id. at 447). Brent v. Bank of .

Washington, 35 U.S. (10 Pet.) at 614, involved the right of the issuer of

stock to refuse any transfer until the obligations owed to it were fully

paid.

Respondent errs in relying (Resp. Br. 17) on United States v. Lewis,

26 F. Cas. 920 (C. C. E.D. Pa.) (No. 15,595), aff'd, 92 U.S. 618 (1875).

The rights of lienholders under the absolute priority statute were not at

issue in that case because, as the court noted, “there are no liens in this

case to interfere with the priority of the United States.” 26 F. Cas. at

924.

7

emphatic warning that it is “loath to expand” such an

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

The Court similarly distinguished Conard and Brent in

New York v. Maclay, 288 U.S. at 293-294. The Court

observed that the distinction between Conard and Brent

on the one hand, and the Thelusson line of cases on the

other, flows from the “distinction between the liens of

judgments and of mortgages.” Id. at 294. The Court ex-

plained that, while a judgment lien does not effect a trans-

fer of title or possession, mortgage liens “have been

thought to have the effect of a conveyance, divesting the

debtor of his title and leaving nothing but an equity to

which a preference can attach.” Ibid..“

The decisions of this Court have consistently articu-

lated the principle that a “general judgment lien upon the

lands of an insolvent debtor does not take precedence over

claims of the United States unless execution of the judg-

ment has proceeded far enough to take the land out of the

possession of the debtor.” United States v. Texas, 314 U.S.

480, 485 (1941). The competing creditor cannot prevail

against the absolute priority of the United States in

insolvency cases unless the creditor has obtained title or

The Court noted in New York v. Maclay, 288 U.S. at 294, that it

had not determined “whether the holding in the mortgage cases is to be

applied in jurisdictions where a mortgage upon real estate is a lien and

nothing more.” Because that case, like the present case, did not involve

a mortgage, the Court stated that “[iJnto these refinements and their

consequences, there is no need to enter now.” Ibid.

7 The Court noted in United States v. Texas, 314 U.S. at 486, that

early decisions had held that a mortgagee would avoid the govern-

ment’s absolute priority. The Court stated, however, “that it intended

by its decision to lend no 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.” Ibid.

8

possession of the disputed asset and thus divested that

asset from the insolvent’s estate in advance of the accrual

of the government’s claim. See, e.g., Illinois ex rel. Gor-

don v. Campbell, 329 U.S. 362, 376 (1946); note 3, supra.*

c. Respondent mistakenly asserts (Resp. Br. 21-22)

that a lien that is perfected under state law is necessarily

excepted from the government’s absolute priority in insol-

vency. To be excepted from the operation of the absolute

priority statute, it is a necessary but not a sufficient con-

dition for the lien to be perfected under state law. Illinois

ex rel. Gordon v. Campbell, 329 U.S. at 371 (“[A] state

court’s characterization of a lien as specific and perfected

is not conclusive” for purposes of the absolute priority

statute.); Spokane County v. United States, 279 U.S. 80,

95 (1929). See note 3, supra. See United States v. Wad-

dill, Holland & Flinn, Inc., 323 U.S. 353, 357 (1945). In

addition to being perfected under state law, a competing

lien can defeat the federal claim under the absolute prior-

ity statute only if “before the right of preference has

accrued to the United States * * * the property is

divested out of the debtor.” Thelusson v. Smith, 15 U.S. (2

Wheat) at 426. Such divestment occurs when “seizure by a

marshal or some other equivalent act has * * * brought

about a change of title or possession.” New York v.

Maclay, 288 U.S. at 293-294. Unless the private lien

“divests” title or possession of the asset from the debtor’s

8 Respondent misstates our position by claiming that the United

States advocates “that judgment liens, for purposes of the priority stat-

ute, are not perfected unless and until they are reduced to possession”

(Resp. Br. 23). See also id. at 20. We advocate only what this Court

held in Thelusson v. Smith, New York v. Maclay, and other similar

cases (Pet. Br. 15)}—that a private judgment creditor may avoid the

absolute priority of the United States only by “divesting” the disputed

property from the insolvent’s estate by obtaining a change of possession

or title before the government’s absolute priority accrues.

9

estate, the priority of the United States remains absolute.

See note 3, supra. See also United States v. Vermont, 377

U.S. 351, 358 n.8 (1964); Pet. Br. 15 n.5.

Respondent is thus not correct in asserting that its

judgment lien “satisfies all of the federal requirements

imposed by this Court” for a private lien to prevail against

the government’s absolute priority (Resp. Br. 20). Al-

though respondent possessed a valid judgment lien, re-

spondent took no steps to execute on that lien or to obtain

title or possession of the property before the absolute

priority of the government arose. See Illinois ex rel.

Gordon v. Campbell, 329 U.S. at 376 (the competing lien

is not excepted from the absolute priority statute because

the creditor “acquired neither title nor possession, The-

lusson v. Smith”).

d Respondent asserts that the longstanding rule of

the Thelusson line of cases poses “significant practical

problems” for commercial creditors (Resp. Br. 23). It is

apparent, however, that commercial creditors have been

able to coexist with the absolute priority statute—and

with this Court’s application of that statute to judgment

liens—during the 180 years since Thelusson was decided.

History refutes respondent’s concern over “practical”

problems. See also notes 6 & 7, supra.

® Contrary to respondent’s assumption, commercial security inter-

ests are not inherently impervious to competing interests. For

example, under the Uniform Commercial Code, a buyer in the ordinary

course of business takes free of a security interest in inventory created

by the seller even though the security interest is perfected and even

though the buyer knows of its existence. See, e.g., 13 Pa. Cons. Stat.

Ann. § 9307 (Purdon 1984). Numerous provisions of the Uniform Com-

mercial Code require a secured party to obtain possession of particular

kinds of collateral to defeat the interests of third parties or other

secured creditors. See, e. g., id. § 9304 (letters of credit, money, instru-

ments other than instruments constituting a part of chattel paper),

10

This Court has, in any event, repeatedly rejected reli-

ance upon such “practical” objections to the absolute

priority statute. See United States v. Fisher, 6 U.S. (2

Cranch) 358, 390 (1805); Pet. Br. 32-33. As the Court

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

In the first place, whatever may be the merits of the

contention, it should be addressed to Congress and

not to this Court. In the second place, the argument

proves too much. If it 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

asserts priority under [the absolute priority statute].

e. Respondent objects (Resp. Br. 24) to the fact that

creditors of an insolvent debtor may receive different

treatment under the absolute priority statute than they

would under the Bankruptcy Code. Congress, of course,

directly provided for that result in 1978, when it elected to

make the absolute priority statute inapplicable to cases

brought under the Bankruptcy Code. 31 U.S.C. 3713(a)(2);

Pet. Br. 12 n. 4. By expressly eliminating application of

the absolute priority statute in one carefully drawn con-

text, Congress cannot be understood impliedly to have

eliminated the statutory priority in all other contexts as

well.

f. Respondent errs in asserting that the absolute

priority statute runs afoul of the Takings Clause of the

Fifth Amendment (Resp. Br. 25-26). The absolute priority

statute was enacted almost 200 years before respondent

acquired its judgment lien. Whatever rights respondent

§ 9305 (goods, instruments, money, negotiable instruments, chattel

paper), § 9308 (purchaser of chattel paper or instruments), § 9309 (holder

in due course of negotiable instrument, or holder to whom a negotiable

document of title has been negotiated, or protected purchaser of

security).

11

acquired under its lien, those rights were subject to the

preexisting scheme of regulation—and to the absolute pri-

ority statute.

In a few narrow settings, this Court has construed stat-

utes affecting the rights of creditors to be prospective in

their application to avoid takings issues. See, e.g., United

States v. Security Industrial Bank, 459 U.S. 70, 78-82

(1982). The application to respondent of this Court’s 180-

year-old precedents interpreting this 200-year-old statute

threatens no retroactive taking of rights: “since the insol-

vency act has been a law of the United States * * * for

approximately two hundred (200) years, this is not a case

where the United States has taken action to destroy or

deprive a judgment lienholder of property rights which

existed before the government’s action.” Westmoreland v.

Westmoreland, 716 F.Supp. 217, 222 (D.S.C. 1988). See

also Lucas v. South Carolina Coastal Council, 505 U.S.

1003, 1030 (1992).

2. The Federal Tax Lien Act dos not impliedly repeal

application of the absolute priority statute to tax claims of

the United States.

a. The Court has clearly described the standard that

must be met to sustain the heavy burden of establishing an

implied repeal of the absolute priority statute. Recogniz-

ing that the statute “on its face permits no exception

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

the Court has held that “[oJnly the plainest inconsistency

would warrant * * * finding an implied exception to the

operation of so clearacommand * * *.” United States v.

Emory, 314 U.S. at 433. The Court explained in United

States v. Key, 397 U.S. 322, 332 (1970), that the requisite

“plainest inconsistency” could occur only if (i) the compet-

ing statute is logically inconsistent with the absolute

priority statute; (ii) an unconditional application of the

absolute priority statute would deprive the competing

12

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. Id. at 324-326, 332.

For the reasons described in our opening brief (Pet. Br.

19-33) and further discussed below (pages 17-19, infra),

that standard is not met in this case.

b. Recognizing the heavy burden imposed by this

standard, respondent seeks to invoke an entirely different

principle of statutory construction. Respondent urges the

Court to apply the interpretive principle that “a specific

statute” should prevail in a conflict “with an earlier and

more general statute” (Resp. Br. 28). Respondent

asserts that, in five early decisions involving the absolute

priority statute, the Court applied that interpretive prin-

ciple rather than the “plainest inconsistency” standard

articulated in Emory and Key (Resp. Br. 29-30)."

10 Respondent incorrectly asserts that the government’s brief in the

court below acknowledged that, if a “general” statute must give way to

a “specific” statute, the broad mandate of the absolute priority statute

“should yield to the specific priorities of the tax lien legislation” (Resp.

Br. 30 n.28). The material that respondent quotes is an extract from a

law review note set forth in our brief; it is not from the text of the

government’s argument. Moreover, the portion of the note that respon-

dent fails to quote is directly at odds with the position that respondent

urges (U.S. Br. Pa. Sup. Ct. 26, quoting Note, Nesbitt v. United States:

Denying an Implied Tax Lien Exception to the Federal Priority in

Insolvency , 33 Cath. U. L. Rev. 741, 772 (1984)):

Though general rules of construction suggest that the broad man-

date of section 3466 should yield to the specific priorities prescribed

by the tax lien legislation, such rules are inapplicable in light of

the Supreme Court’s demonstrated attitude of special deference to

the Insolvency Statute. Rather, the three-part “plainest inconsis-

tency” test enunciated by the Court in United States v. Key must

control * .

1 The cases on which respondent relies are United States v. Guar-

anty Trust Co., 280 U.S. 478 (1930); Mellon v. Michigan Trust Co., 271

13

This Court has, however, previously addressed and

rejected that contention. In United States v. Emory, 314

U.S. at 432-433, the Court reviewed the very decisions on

which respondent relies and concluded that they are

consistent with the requirement that Jolnly the plainest

inconsistency” with the absolute priority statute “would

warrant our finding an implied exception” to that statute.

Id. at 433. In Emory, the Court rejected the contention

that the more specific and more recent provisions of the

National Housing Act superseded application of the abso-

lute priority statute to government loan claims arising

under that Act (314 U.S. at 430):

We are aware of no canon of statutory construction

compelling us to hold that the word “first” in a 150

year old statute means “second” or “third,” unless

Congress later has said so or implied it unmistakably.

Explaining that “[oJnly the plainest inconsistency would

warrant our finding an implied exception” to the absolute

priority statute (id. at 433), the Court reviewed the earlier

decisions on which respondent now relies (note 11, supra)

and held that they do not “require[] a different conclusion”

(id. at 431-432). U

U.S. 236 (1926); Davis v. Pringle , 268 U.S. 315 (1925); Guarantee Title &

Trust Co. v. Title Guaranty & Surety Co., 224 U.S. 152 (1912); and

Cook County National Bank v. United States, 107 U.S. 445 (1883).

These cases were all decided before the Court described the “plainest

inconsistency” standard in Emory in 1941 and before the Court further

articulated that standard in Key in 1970. It is implausible for respon-

dent to rely on pre-Emory decisions to contend that the interpretive

standard adopted and applied in Emory and Key is no longer control-

ling. See notes 12 & 13, infra.

2 The Court distinguished Cook County National Bank v. United

States, supra, on the ground that the statute involved in that case

“included specific provisions concerning the distribution of the assets of

insolvent banks which were plainly inconsistent with the granting of

14

Following the decision in Emory, the Court has consis-

tently applied the standard articulated in that case in

evaluating claims of an implied repeal of the absolute pri-

ority statute. See, e.g., United States v. Moore, 423 U.S.

77, 82-83 (1975); SBA v. McClellan, 364 U.S. 446, 453 (1960)

(absolute priority statute is not “plainly inconsistent”

with the purposes and provisions of the Small Business

Act); United States Department of Agriculture v. Re-

mund, 330 U.S. 539, 544 (1947) (“there is no irreconcilable

conflict between giving emergency loans to distressed

farmers and giving priority to the collection of these loans

pursuant to § 3466”); Massachusetts v. United States, 333

U.S. at 634; Illinois v. United States, US. 8, 12

(1946).“ In United States v. Key, supra, this Court

elaborated the standard of Emory by establishing a three-

part test for determining whether a plain inconsistency

exists between the absolute priority statute and subse-

quent legislation. See pages 11-12, supra. The Court has

priority to general claims of the United States.” United States v.

Emory, 314 U.S. at 432. The Court similarly distinguished United

States v. Guaranty Trust Co., supra, on the ground that there was a

“direct inconsistency” between the Transportation Act of 1920 and the

absolute priority statute that precluded application of the latter statute.

United States v. Emory, 314 U.S. at 432-433. See also note 13, infra.

13 In United States Department of Agriculture v. Remund, 330 US.

at 544-545, the Court reversed the decision of the court of appeals which

had relied (as respondent would) on United States v. Guaranty Trust

Co., supra, in holding that emergency loans made to farmers pursuant

to the Acts of February 23, 1934, and June 19, 1934, were excepted from

the absolute priority statute. The Court stated (330 U.S. at 544-545):

We reiterate what was said in United States v. Emory, 314 U.S.

423, 433: “Only the plainest inconsistency would warrant our

finding an implied exception to the operation of so clear a command

as that of § 3466 [the absolute priority statute].“ In this case, as in

that, we think such inconsistency is wholly wanting. United States

v. Guaranty Trust Co., supra, is therefore inapposite.

15

now consistently applied the interpretive principles estab-

lished in Emory and Key for more than fifty years. See,

e.g., United States v. Moore, 423 U.S. at 82-83; Pet. Br. 17-

18. As the Court has expressly concluded, nothing in the

cases on which respondent relies supports a departure

from that analysis. United States v. Emory, 314 U.S. at

431-432; notes 12 & 13, supra.

e. The interpretive principle that a more specific and

recent provision may impliedly repeal a more general stat-

ute does not, in any event, support respondent’s position in

this case. It is not realistic to assert that either of the

two statutes involved in this case is “more specific” than

the other. The absolute priority statute and Section 6323

are both “specific” statutes that apply only in narrowly

and precisely defined situations.

The absolute priority statute applies only to insolven-

cies that are manifested in one of the modes specified by

the statute—to cases in which the estate of a debtor is in-

solvent, cases in which the debtor makes a voluntary as-

signment of his property, and cases in which the property

of an absent debtor is attached. 31 U.S.C. 3713(a)(1)(A);

United States v. Oklahoma, 261 U.S. 253, 259-260 (1923),

The absolute priority statute has no application to the

far greater number of cases that involve either solvent

debtors or insolvent debtors in bankruptcy. 31 U.S.C.

3713(a)(2). The rights of competing creditors in those

ordinary situations are determined under the tax lien pro-

visions of 26 U.S.C. 6323 and not under the absolute prior-

ity statute.”

4 “Where one of the competing liens is a federal tax lien,” the

provisions of 26 U.S.C. 6323 determine the lien priorities in bankruptcy

cases. In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168, 1176 (6th

Cir. 1990). Moreover, the bankruptcy trustee is armed with the status

of a hypothetical judgment lien creditor and bona fide purchaser of real

property (11 U.S.C. 544) and 26 U.S.C. 6323 determines whether the

16

Indeed, there are vastly more tax claims asserted in

cases involving solvent debtors and in bankruptcy cases

(to which the federal tax lien rules set forth in 26 U.S.C.

apply) than in non-bankruptcy insolvencies (to which

the absolute priority statute applies). Thus, while the

absolute priority statute could be said to be more

“general” in the sense that it applies to non-tax as well as

tax claims of the government, it is more “specific” in that

it is inapplicable to solvent debtors and to insolvent

debtors in bankruptcy. Conversely, while the federal tax

lien provisions are more “general” in the sense that they

apply to the typical debtors who are either solvent or in

bankruptcy, they are more “specific” in the sense that

they apply only to tax claims. at.

The proper reconciliation of any competing applications

of these two statutes thus cannot rationally be resolved

based upon generalities about which statute is more

“specific” and which is more “general” in nature. Instead,

recognizing the age and narrow sphere of operation of the

absolute priority statute, the Court has consistently

concluded that the clear command of that statute that the

United States “be paid first” (81 U.S.C. 3713(a)) “must

trustee may avoid the tax lien in bankruptcy. In re LMS Holding Co.,

50 F.3d 1526 (10th Cir. 1995). Cf. Farrey v. Sanderfoot, 500 U.S. 291,

297 (1991) (“Ordinarily, liens and other secured interests survive

bankruptcy.”).

5 The Internal Revenue Service advises us that, for the period of

October 1, 1994, to September 30, 1996, there were 89,740 bankruptcy

cases in which the United States filed tax claims. During that same

period, there were 565 cases involving the absolute priority statute in

which the government filed claims. Of those 565 cases, 121 arose in

ing the absolute priority statute averaged $150 million per year.

17

apply according to its terms except where expressly su-

perseded, or where excluded by a later enactment ‘plainly

inconsistent’ with it.“ United States v. Key, 397 U.S. at

332. See also Pet. Br. 17-18.

d. As we explain in detail in our opening brief (Pet. Br.

19-21), the absolute priority statute and the federal tax

lien provisions are not logically or “plainly” inconsistent.

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 specified types of

insolvencies. 31 U.S.C. 3713(a(1). The Court has long

noted that, in enacting the absolute priority statute, Con-

gress deliberately chose to establish greater protection

for the United States in cases involving insolvent debtors

than in cases where the debtor is not insolvent.”

United States v. Vermont, 377 U.S. at 358. To accomplish

this greater protection in this narrow category of cases,

the absolute priority statute operates independently of

liens possessed by the United States, including liens for

taxes. In the narrow situations to which it applies, the

absolute priority statute requires the United States to

“be paid first” “whether or not [its claim is] secured by a

lien.” Id. at 357. Accord, United States v. City of New

Britain, 347 U.S. 81, 85 (1954). There is no logical incon-

sistency in the decision of Congress to give the United

States priority in the narrow categories of cases described

in the absolute priority statute while not giving it priority

in other settings. See United States v. Vermont, 377 U.S.

at 358.

Respondent errs in asserting that, if the absolute prior-

ity statute governs according to its terms in cases involv-

ing tax claims, the federal tax lien provisions of 26 U.S.C.

6323 would be made inoperative “in the vast majority of

cases where those priorities could even possibly be signifi-

18

cant” (Resp. Br. 33)."° Far more tax claims are determined

in cases involving solvent debtors and in bankruptcy

cases—to which the federal tax lien rules apply—than in

the narrowly-defined insolvency situations to which the

absolute priority statute is applicable. See note 15, supra.

It is the federal tax lien provisions, not the absolute

priority statute, that apply “in the vast majority of cases.”

e. Respondent erroneously asserts that “[t)he legisla-

tive history of the Tax Lien Act and its predecessors

confirms that the Congress intended for the Act to apply

to all tax claims, even where the debtor is insolvent”

(Resp. Br. 34). There is no support for that assertion, and

respondent cites none. Instead, as we demonstrate in our

opening brief (Pet. Br. 24-26), the legislative history is

overwhelmingly to the contrary.

From the enactment of the predecessor of 26 U.S.C.

6323 in 1913 through the revisions of that statute in the

Federal Tax Lien Act in 1966, nothing in the legislative

history suggests that Congress intended to depart from

the traditional protection it has afforded to the claims of

the United States in insolvency cases under the absolute

priority statute. Instead, as we describe in detail in our

opening brief (Pet. Br. 24-28 & n.10), the history of the tax

lien provisions reflects that Congress declined to enact

several contemporaneous and related proposals to repeal

6 Respondent acknowledges that there are some “cases where the

Tax Lien Act priorities would matter even though the debtor was sol-

vent” (Resp. Br. 33). In addition to bankruptcy cases, priorities under

26 U.S.C. 6323 control when the proceeds of specific property involved

in a case involving a solvent debtor are insufficient to satisfy the inter-

ests of the claimants. See United States v. Cutting & Trimming, Inc.,

206 F. Supp. 951 (D. Vt. 1962), aff'd sub nom. United States v. Ver-

mont, supra (in an action to foreclose a tax lien, the absolute priority

statute did not apply because the record disclosed no insolvency on the

part of the taxpayer); United States v. New Britain, 347 U.S at 85-86.

19

or modify the absolute priority statute. When a similar

bill to delete application of the absolute priority statute to

tax claims was proposed in 1970, Congress »zain declined

to enact it (Pet. Br. 27). This history of persistent con-

gressional refusals to adopt the very amendment to the

absolute priority statute that respondent now seeks to

accomplish through litigation plainly does not constitute a

“manifestation of congressional intent” impliedly to repeal

that statute. United States v. Key, 397 U.S. at 324.

f. There is thus no logical inconsistency between the

absolute priority statute and the federal tax lien statute.

Application of the “clear{} * command“ of the

absolute priority statute does not deprive the tax lien

provisions of meaning. And, the legislative history does

not reflect any actual intent of Congress impliedly to

repeal the absolute priority statute in enacting the federal

tax lien provisions. The “plainest inconsistency” required

to establish “an implied exception” to the absolute priority

statute does not exist. United States v. Emory, 314 U.S.

at 433.

For the foregoing reasons and those stated in our

opening brief, the judgment of the Supreme Court of

Pennsylvania should be reversed.

Respectfully submitted.

SETH P. WAXMAN

Acting Solicitor General

NOVEMBER 1997