IRS'S TAX LIENS HAVE PRIORITY OVER INVALID CONSTRUCTION LIEN.

                    UNITED STATES DISTRICT COURT

[2] The Court having reviewed the pleadings submitted herein, and being otherwise fully informed in the matter;

[3] IT IS HEREBY ORDERED that the Bankruptcy Court's June 15, 2000, Order granting the Internal Revenue Service's motion for summary judgment shall be, and hereby is, AFFIRMED, and thus Appellant's appeal is DISMISSED.

I. BACKGROUND

[4] Appellants B&D Drywall Supply, Inc., Lansing Drywall Supply, Inc., and William Johns ("Appellants") appeal from the Bankruptcy Court's June 15, 2000, Order granting summary judgment in favor of the Internal Revenue Service ("IRS"). The underlying matter arose from the Chapter 13 proceeding instituted by Debtor Michael Brown ("Debtor") on or about June 2, 1999. The Court sets forth the following factual background, derived solely from the record before the Bankruptcy Court.

[5] In the Debtor's Chapter 13 proceeding, the IRS filed a claim based on two tax liens: (1) a lien recorded on October 5, 1995, for $16,509.68 (for the 1994 tax year); and (2) a lien recorded on January 11, 1996, for $51,257.04 (for the 1991-93 tax years). It appears that Eyde Construction Company ("Eyde") also filed a claim based on a January 27, 1995, land contract it entered into with Debtor. ¹ On November 2, 1999, Appellants filed an adversary proceeding to determine the validity, priority and extent of the liens asserted by Appellants, the IRS and Eyde Construction. See Ex. 1.

[6] It is undisputed that in 1991, Debtor, Appellant Johns, Dennis Reilly and Richard Brown formed Lansing Drywall Supply, Inc. ("Lansing Drywall") and that Debtor served as president and treasurer of Lansing Drywall. It appears that in the first year of business, Johns and Reilly became aware that Debtor attempted to submit expense account requests for personal expenses that were unrelated to Lansing Drywall business. It is undisputed that over the course of five years, 1991-1995, Debtor constructed his personal residence using Lansing Drywall's materials and supplies in trade without compensating Lansing Drywall and "without the knowledge or consent of William Johns or Mr. Reilly." Appellants' Br. at 3. It is further undisputed that Lansing Drywall was not compensated "for any of the STOLEN materials and supplies." Id. (emphasis added). Appellants concede that they did not learn of Debtor's actions until late 1995 or early 1996, and immediately filed a notice of claim under the Marketable Record Title Act on January 2, 1996. ² Appellants subsequently filed a notice of lis pendens on January 30, 1996.

[7] The IRS subsequently filed a motion to dismiss and/or for summary judgment asserting that the IRS liens took priority because Appellants did not possess a construction lien under the Michigan Construction Lien Act. Appellants alleged that they possessed a lien under the Michigan Construction Lien Act and contended that their lien took priority over those asserted by the IRS and Eyde. Appellants alternatively argued that they had an equitable lien that took priority over the other parties' lien. On June 14, 2000, after having the benefit of a full briefing by the parties, the Bankruptcy Court conducted a hearing on the IRS' motion. See Ex. 12. On June 15, 2000, the Bankruptcy Court granted the IRS' motion for summary judgment, for the reasons stated at the hearing. The Bankruptcy Judge found that summary judgment was appropriate because Appellant could not invoke the Construction Lien Act because there was no evidence establishing that a contractual relationship existed, and thus the Construction Lien Act was inapplicable. See generally, Tr. at 44-46.

[8] This appeal ensued on June 28, 2000. ³ Appellants contend that the Bankruptcy Court erred by holding that Appellants did not possess a lien under the Michigan Construction Lien Act. Appellants also contend that the Bankruptcy Court erred by not granting an equitable lien in favor of Appellants.

II. STANDARD OF REVIEW

[9] This Court reviews a Bankruptcy Court's conclusions of law de novo and its findings of fact for clear error. See In re Holland, 151 F.3d 547, 548 (6th Cir. 1998); Bankruptcy Rule 8013 ("[the bankruptcy court's] findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous"). A grant of summary judgment is reviewed de novo. See In re Structurlite Plastics Corp., 224 B.R. 27, 29 (B.A.P. 6th Cir. 1998).

[10] In bankruptcy, summary judgment is governed in the first instance by Bankruptcy Rule 7056. By its express terms, Rule 7056 incorporates into bankruptcy practice the standards of Rule 56 of the Federal Rules of Civil Procedure. See Bankr. R. 7056; see also In re Structurlite, 224 B.R. at 29-30. It is apodictic that summary judgment should be granted only when no genuine issue of material fact exists and the movant has successfully demonstrated an entitlement to judgment as a matter of law. See Fed.R.Civ.P. 56(c). As the In re Structurlite court succinctly stated:

     A court must grant summary judgment "if the pleadings,

III. DISCUSSION

[11] District Courts have jurisdiction to hear appeals from final judgments, orders and decrees, and, with leave of the court, from interlocutory orders and decrees of bankruptcy judges. See 28 U.S.C. section 158(a) . At issue in the present appeal is the Bankruptcy Court's June 15, 2000, Order granting summary judgment in favor of the Internal Revenue Service. The Bankruptcy Court's Order granting summary judgment in favor of the IRS is final and appealable under 28 U.S.C. section 158(a)(1). See, e.g., In re Structurlite, 224 B.R. at 29.

[12] The general rule of priority under federal law is that federal tax liens attach to a taxpayer's property and are entitled to absolute priority unless otherwise provided by statute. See 26 U.S.C. section 6323; United States v. City of New Britain, Conn., 347 U.S. 81, 85-86 (1954). Section 6323(a) provides exceptions to the tax lien priority rule:

     The lien imposed by section 6321 shall not be valid against any

[13] Appellants first contend that the Bankruptcy Court erred in ruling that Appellant did not hold a construction lien pursuant to the Michigan Construction Lien Act ("Lien Act"), Mich. Comp. Laws section 570.1101 et. seq. Although courts construe the Lien Act liberally, see M.D. Marinich, Inc. v. Michigan Nat. Bank, 193 Mich. App. 447, 457 (Mich. Ct. App. 1992), it is axiomatic that certain minimum requirements must be met. The Lien Act unequivocally requires that a contract exist. The Lien Act provides that "[e]ach contractor, subcontractor, supplier, or laborer who provides an improvement to real property shall have a construction lien upon the interest of the owner or lessee who CONTRACTED for the improvement to the real property. . . . Mich. Comp. Laws section 570.1107(1) (emphasis added). The statute also provides that "[the Act] shall not be construed to prevent a lien claimant from maintaining a separate action on a contract." Mich. Comp. Laws section 570.1302(2). The term "contract" under the Lien Act is given a broad definition that extends to "a contract, of whatever nature, for the providing of improvements to real property, including any and all additions to, deletions from, and amendments to the contract." Section 570.1103(4). ⁴ The term "improvement" as contemplated under the Lien Act means "the result of labor or material provided by a contractor . . . including, but not limited to . . . building, erecting, constructing . . . or installing or affixing a fixture or material, PURSUANT TO A CONTRACT." Section 570.1104(7) (emphasis added). Finally, the Lien Act clearly indicates that a party is not precluded from instituting an action on the underlying contract as well: "In connection with an action for foreclosure of a construction lien, THE LIEN CLAIMANT ALSO MAY MAINTAIN AN ACTION ON ANY CONTRACT FROM WHICH THE LIEN AROSE." Section 570.1117(5) (emphasis added).

[14] The Bankruptcy Court ruled that the Lien Act did not apply in the instant case because Plaintiff failed to establish that a contract existed between Debtor and Appellant. See Tr. at 44-47. Upon review of the record, the Court finds no error in the Bankruptcy Court's decision. ⁵ Appellants ignore the necessity of a contract and argue that they have otherwise substantially complied with the requirements set forth by the Lien Act. This Court finds it unnecessary to address whether Appellants otherwise "substantially complied" with the Lien Act because Appellants fail to first establish the necessary predicate to invoke the Lien Act: A valid, enforceable contract.

[15] Appellants voluntarily chose to submit no affidavits or other evidence to support its claim that a contract between Debtor and Appellants existed. It therefore made no factual allegation to support its claim: Fed.R.Civ.P. 56(e) provides that "when a motion for summary judgment is made . . . an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading . . . [the adverse party] must set forth specific facts showing that there is a genuine issue for trial." ⁶ Appellants now contend that evidence of a contract was discovered at Debtor's deposition, which was held ten days prior to the Bankruptcy Court hearing. Such information was available at the time the Bankruptcy Court held its hearing on the IRS' motion for summary judgment. A trial court is not required to speculate on which portion of the record the non-moving party relies. See United States v. WRW. Corp., 986 F.2d 138, 143 (6th Cir. 1993). ⁷ The non-moving party bears the burden of designating specific facts showing there is a genuine issue for trial. See Rule 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Further, the designated portions of the record must be presented with enough specificity that the court can readily identify the facts upon which a party relies. See InterRoyal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir. 1989), cert. denied sub. nom., 494 U.S. 1091 (1990).

[16] The Court additionally notes that Appellants did not file or otherwise request a motion under Rule 56(f). In sum, Appellants had sufficient opportunity to respond and present evidence to the IRS' motion for summary judgment, both in writing and at the hearing. Appellants were obligated to come forward with evidence establishing that a genuine issue of material fact existed to preclude summary judgment. Appellants failed to do so. Upon review of the record, the Court agrees with the Bankruptcy Judge's finding that Appellant's failure to produce evidence establishing a contractual relationship renders the Construction Lien Act inapplicable. See Tr. at 38. Further, it is improper for Appellants to allude to evidence that was not presented to the bankruptcy judge (nor this Court).

[17] This Court additionally notes that the proffer of this additional evidence would not alter the Court's ruling. At the June 14, 2000, hearing, Appellants' counsel indicated that he wanted to produce a record obtained at Debtor's deposition -- "a SECRET AGREEMENT THAT [DEBTOR] HAD WITH -- WITH MR. EYDE in which Lansing Drywall was made a party -- Lansing Drywall made a party to that particular contract and there was a continuation to -- to supply goods to Mr. Eyde." Tr. at 47 (emphasis added). As Appellant's counsel concedes, the "agreement" was secret and executed between Debtor and Eyde. It is axiomatic that a party cannot consent to terms of which it is unaware, and it is beyond cavil that a contract cannot be formed in the absence of a mutual assent, obligation, or adequate consideration.

[18] Under Michigan law, a valid contract is not formed without the following essential elements: (1) parties competent to contract; (2) a proper subject matter; (3) a legal consideration; (4) mutuality of agreement; and (5) mutuality of obligation. See Thomas v. Leja, 187 Mich. App. 418, 422 (Mich. Ct. App. 1991) (citing Detroit Trust Co. v. Struggles, 289 Mich. 595, 599 (Mich. 1939)). ⁸ "Mere discussions and negotiations cannot be a substitute for the formal requirements of a contract." Id. (citing Kirchhoff v. Morris, 282 Mich. 90, 95 (Mich. 1937)). In the instant case, by Appellants' own admission, it is clear that there is the absence of any discussions: Appellants repeatedly assert in their pleadings and at oral argument that it was unaware of Debtor's secret activities. This belies their current efforts to prove the existence of a contract. In sum, Appellants' reliance on a secret agreement made by other parties is not sufficient to establish that a valid contract existed between Debtor and Appellants. Even if accepted as true, none of the statements offered by Appellants creates a contract between Debtor and Appellants under Michigan law.

B. EQUITABLE LIEN UNDER MICHIGAN COMMON LAW

[19] Appellants also contend that the Bankruptcy Court erred by not granting Appellants an equitable lien. Appellants' assignment of error is without merit. Even if an equitable lien attached, such a lien would not take priority over the two IRS liens.

[20] The Court notes that notwithstanding the existence of a legal remedy, Michigan law provides that an equitable remedy may be imposed in a construction dispute when "a breach of a fiduciary or confidential relationship, misrepresentation, concealment, mistake, undue influence, duress or fraud [exists]." Reed & Noyce, Inc. v. Municipal Contractors, Inc., 106 Mich. App. 113, 120 (Mich. Ct. App. 1981). Even assuming that Appellants are entitled to an equitable lien on Debtor's house, Appellants still lose in a priority contest with the IRS. As the Supreme Court held, federal tax liens do not "automatically have priority over all other liens;" rather, they follow the "first in time, first in right rule." United States ex rel. Internal Revenue Serv. v. McDermott, 507 U.S. 447, 449 (1993). Further, a state law lien is not first in time unless it is "perfected," or choate, at the time the notice of the federal tax lien is filed. See Id. at 449; United States v. Vermont, 377 U.S. 351, 354 (1964)(citing New Britain, 347 U.S. at 86). A state lien is perfected only if the identity of the lien holder, the property subject to the lien, and the amount of the lien are certain and established. McDermott, 507 U.S. at 449; Vermont, 377 U.S. at 355 (citing New Britain, 347 U.S. at 84)(ruling that a lien becomes choate "when there is nothing more to be done . . . when the identity of the lienor, the property subject to the lien, and the amount of the lien are established.").

[21] Under the Supreme Court cases, the IRS' lien has priority over the Appellants' claim for compensation for the value of the materials Debtor purportedly misappropriated because the amount allegedly misappropriated had not been determined at the time the IRS liens were perfected, and thus, at best, Appellants' claim to monetary relief was inchoate. In sum, the Court declines to determine whether an equitable lien should be granted when the alleged equitable lien was inchoate on the date the federal tax liens were filed.

IV. CONCLUSION

[22] For the reasons set forth above, this Court AFFIRMS the Bankruptcy Court's June 15, 2000, Order granting summary judgment, in favor of the IRS; and thus this appeal is DISMISSED.

[23] IT IS SO ORDERED.

                                   George E. Woods

² The record reflects that Debtor was terminated from Lansing Drywall Supply in December 1995.

³ A second appeal was filed on July 19, 2000, related to a separate order issued by the Bankruptcy Court and assigned to the Honorable Arthur J. Tarnow. See In re Michael Brown, Case No. 00-73212 (E.D. Mich. 2000). That appeal was subsequently reassigned to this Court as a companion case pursuant to E.D.Mich. Local Rule 83.11. See September 29, 2000, Order. The Court will address this factually distinct appeal by separate Order.

⁴ Recovery under the Lien Act is predicated on the existence of a contract: As Michigan courts have expressed, "[t]he proper amount of a lien is the lien claimant's CONTRACT PRICE less payments made on that contract to the lien claimant." Erb Lumber, Inc. v. Gidley, 234 Mich. App. 387, 396 (Mich. Ct. App. 1999) (emphasis added).

⁵ The Court additionally rejects Appellants' summary contention that the Bankruptcy Court ruled that a written contract was required under the Lien Act. Appellants failed to cite to the portion of the record in which the Bankruptcy Court purportedly made such a finding. Upon this Court's review of the record, the Court finds that Appellants' claim is unsubstantiated. Although the Bankruptcy Court ruled that a contract must exist, the Bankruptcy Court did not rule that it must be written. See, e.g., Tr. at 32 (noting that contract does not have to be in writing, but must be expressed); 34 (a lien under the Lien Act exists only if it is based on a contract); 38-40 (based on statutory provisions, a contract must exist to assert a construction lien); 45 (finding plaintiffs failed to offer evidence of the requisite contractual relationship or compliance with Section 1111(l)). As the above citations reflect, the Bankruptcy Court ruled that Appellants failed to provide evidence that a written or oral contract existed. Id. at 45-46.

⁶ Rule 56(e) provides, in full: "When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavit or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial."

⁷ Neither does it have a duty to "search the entire record to establish that it is bereft of a genuine issue of material fact." Guarino v. Brookfield Twp. Trustees, 980 F.2d 399, 404 (6th Cir. 1992) (quoting Street v. J.C. Bradford & Co., 886 F.2d 1472, 1480 (6th Cir. 1989)).

⁸ An offer, which is needed for mutuality of agreement, is defined as "the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it." Eerdmans v. Maki, 226 Mich. App. 360, 364 (Mich. Ct. App. 1998) (quoting Restatement (Second) of Contracts section 24). Clearly, Debtor did not make an offer to Appellants: Debtor instead wrongfully appropriated materials belonging to Appellants without Appellants knowledge or consent. See, e.g., Appellants' Br. at 3 (asserting that Debtor used materials and supplies "without the knowledge or consent of William Johns or Mr. Reilly. . . . Lansing never received compensation for any of the stolen materials and supplies."); Appellants' Br. at 5 ("Appellant physically improved the Debtor's property (albeit without Appellant's [sic] knowledge").