State Banking Groups Urge Reversal of Tax Lien Decision

                       TABLE OF CONTENTS

This case presents the question of whether the Internal Revenue Service must use a taxpayer's registered name on notices of federal tax liens. As more fully explained in their Motion for Leave to File Amici Curiae Brief, this is an issue of great importance to the members of the Amici who, as commercial lenders, deal with computerized lien searches on a regular basis. The Amici file this brief under Fed. R. App. P. 29 to give these commercial lenders a voice in this important issue.

This Court should review the Panel's decision en banc. The Panel's decision conflicts markedly with Congress's intent in enacting the Federal Tax Lien Act of 1966 (the "FTLA") and the Supreme Court's interpretation of the FTLA in United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), the principal case cited by the Panel in support of its decision. This conflict mandates en banc review.

Moreover, the Panel's decision involves a question of exceptional importance in the marketplace for commercial lending. Under the Panel's decision, unlike a lender's obligation to use a debtor's registered name on a UCC financing statement, the IRS may use any number of abbreviations or other variations of a taxpayer's name on a federal tax lien, thus requiring a lender to make multiple searches of state filings in attempting to uncover secret government liens. The burden on commercial lenders will be great, while, in contrast, requiring a federal tax lien to conform with the Uniform Commercial Code -- which is the same in all states -- will place little if any burden on the IRS. These ramifications in the commercial lending marketplace compel en banc review by this Court.

1. The registered name of the debtor is "Spearing Tool and Manufacturing Co."

2. Plaintiffs-Appellees Crestmark Bank and Crestmark Financial Corporation ("Appellees") filed financing statements with the Michigan Secretary of State under the Michigan Uniform Commercial Code on the assets of the debtor in April 1998 and April 2001. The financing statements used the debtor's registered name.

3. Defendant-Appellant Internal Revenue Service ("IRS") filed two notices of federal tax liens against the assets of the debtor with the Michigan Secretary of State in October 2001. The notices did not use the debtor's registered name. Instead, the notices named the debtor as "Spearing Tool & MFG Company, Inc."

4. A search of the Michigan Secretary of State's records using the State's standard search logic under the name "Spearing Tool and Manufacturing Co." does not disclose the federal tax liens filed by the IRS in October 2001.

5. On November 5, 2003, the District Court reversed the Bankruptcy Court's grant of summary judgment to the IRS, holding that Crestmark's secured interests in the debtor's assets have priority over the federal tax liens.¹

6. On June 21, 2005, a Panel of this Court reversed the District Court, holding that the IRS does not have to use a taxpayer's registered name on federal tax liens.

The Amici position is straight-forward: (1) the IRS must "identify the taxpayer" on a federal tax lien;² (2) in interpreting this requirement, federal courts should look to state law, which, in the UCC, uniformly requires a lender to use a debtor's registered name on UCC financing statements;³ and (3) the IRS should thus be required, as a matter of federal law, to obtain and file a federal tax lien under the taxpayer's registered name.

The Panel expressly rejected this position because UCC security interests are consensual while federal tax liens are involuntary, citing "the strong federal policy favoring unfettered tax collection." But this reasoning conflicts with both the purpose and the Supreme Court's interpretation of the FTLA. This Court should thus review en banc and reverse the Panel's decision.

In enacting the FTLA, Congress expressly intended to conform federal procedures for giving notice of tax liens to the states' uniform procedures for perfecting security interests set forth in the UCC. The legislative history is crystal clear on this point:

The United States Supreme Court interpreted the FTLA in Kimbell, where the issue was whether federal consensual liens of the Small Business Administration and the Farmers Home Administration should enjoy priority over competing private liens under the UCC. The Court ruled that federal law governed the issue, 440 U.S. at 726-28, that federal law should incorporate UCC state law, 440 U.S. at 727-404,⁴ and that federal liens of the FHA and the SBA do not enjoy special priority over UCC liens, 440 U.S. at 740.

The Court interpreted and relied on the FTLA in reaching its decision. In the FTLA, Congress generally eliminated special priority for federal tax liens vis a vis private liens, which, a fortiori, rebutted the government's arguments that it needed special priority for federal consensual liens. In the words of the Court:

The Panel's decision here conflicts with the FTLA and Kimbell. Congress intended to conform federal tax lien requirements to the requirements of the UCC governing private liens. But the Panel refused to conform the federal requirement to "identify the taxpayer" to the UCC requirement to use a debtor's registered name. Congress intended to modernize the relationship of federal tax liens to the liens of private creditors, to improve the status of private secured creditors, and disapproved of "unrestricted federal priority" in the area of taxation. But the Panel spoke of "unfettered tax collection" and "the federal government's interest in prompt, effective tax collection" trumping the interests of private creditors under the UCC. The Panel's decision harks back to a by-gone era, ignores Congressional policy as articulated by the Supreme Court, and, as discussed below, disrupts commercial expectations in the marketplace. It should be reviewed en banc and reversed.

II. THE PANEL'S DECISION REQUIRES LENDERS TO TAKE EXTENSIVE AND UNREASONABLE ACTIONS TO UNCOVER "SECRET" GOVERNMENT LIENS.

If the Panel's decision is not vacated and reversed, then a federal tax lien not giving the taxpayer's registered name will, in effect, be a secret government lien, capable of being discovered only by undertaking an analysis and investigation going well beyond anything that could be characterized as a "reasonable" search. The Panel's decision should thus be reviewed en banc and reversed.

Under the Panel's decision, a prudent lender will be required to take each of the following steps in an effort to discover possible secret tax liens:

• Identify all words in the debtor's name that might have common abbreviations, and identify all possible abbreviated forms of such words. For example, as the Panel pointed out, Table 6 of A Uniform System of Citation (17th ed.) (the "Bluebook"), a source commonly used by lawyers and courts, lists 158 abbreviations commonly used in pleadings, briefs, and court documents.

• Identify each numeral (e.g. "2 Men and a Truck") and each number in words (e.g. "Two Men and a Truck") and list the corresponding variations in the debtor's name. Search logic normally does not equate a written number with a numerical number.

• Review all documents in the lender's file on the debtor to ascertain any name differences or variations the debtor may have or may be using.

• Prepare a list of all possible name variations and permutations arising from common abbreviations, numbers (and numbers in words), and a review of the lender's file.

• Order a UCC search on each and every name variation and permutation.

Importantly, in many lending relationships the lender does not obtain a search on a debtor only at the beginning of the relationship. Rather, a lender may determine that it is essential to obtain a search periodically during the time that the credit facility is outstanding. Some asset-based lenders obtain a new search every 45 days, because a federal tax lien takes priority as to advances made and collateral acquired more than 45 days after a tax lien is filed. Thus, if a debtor's name has three words that have common abbreviations, then the lender would have to obtain eight searches every 45 days. Such a requirement is patently unreasonable.

Moreover, even if a creditor conducts all of the due diligence described above, it can never be sure, under the Panel's decision, that it has obtained all searches necessary to find a federal tax lien. It may have failed, for example, to identify a common abbreviation, or it may have used one abbreviation of a word while the IRS used a different abbreviation of the same word.

These burdens on lenders in the commercial marketplace must be contrasted with the slight inconvenience, if any, to the IRS if it is required to use a taxpayer's registered name on federal tax liens. Every entity has a state of organization in which it files its public documents of organization -- for example, a corporation files articles of incorporation in the state in which it is incorporated. All the IRS need do is ascertain the taxpayer's name on the document of organization -- something it can do online or by a simple telephone call to the pertinent secretary of state. The Panel is simply wrong when it states that such "a requirement might burden the government at least as much as" creditors will be burdened by having to perform multiple lien searches.

The Panel's decision is also wrong when it asserts that requiring the IRS to use the taxpayer's registered name "would run counter to the principle of uniformity." In fact, the opposite is true. Allowing the IRS to use abbreviations and other name variations undermines uniformity; whether a particular variation will be picked up in a search will depend on the state's search logic and the result might vary from state to state. But requiring the IRS to use the taxpayer's registered name will ensure uniformity; the rule has been adopted in all fifty states and a search under the registered name will disclose the federal tax lien regardless of the state's search logic.

The Panel's statement that its decision is limited to the facts of this case does not ameliorate its negative impact on the commercial lending industry. The Panel flatly held that the IRS does not need to use a taxpayer's registered name on a tax lien. The extent to which the IRS will be allowed to use abbreviations and other variations of a taxpayer's name is left to a case-by-case analysis. This provides no comfort to a commercial lender. Under the Panel's decision, multiple searches in an attempt to discover secret tax liens will be the commercial lender's inevitable burden.

Dated: August 9, 2005

²See Brief Amicus Curiae of Michigan Bankers Association dated July 15, 2004 ("MBA Brief") at pages 6 to 7 for a description of the federal "identify the taxpayer" requirement.

³See MBA Brief at 4 to 6 for a description of the UCC "registered name requirement". In brief, under Article 9 of the UCC, a financing statement for a registered organization must use the name of the debtor on the public record of the debtor's state of organization. Registered organizations are defined to include corporations, limited partnerships, limited liability companies, and the like. As used herein, "registered name" means the name on the entity's public record of organization in the state of organization.

⁴ The Court stated: . . . "When the state has gone so far in achieving the desirable goal of a uniform law governing commercial transactions, it would be a distinct disservice to insist on a different one for the segment of commerce, important but still small in relation to the total, consisting of transactions with the United States.'" 440 U.S. at 732N.28 (quoting United States v. Wagematic Corp., 360 F.2d 674, 676 (CA2 1966)). In the area of commercial transactions, the Circuit Courts repeatedly look to the UCC as a source for fashioning federal law. See, e.g., Fruehaut Corp. v. Yale Express System, 370 F.2d 433, 437 (CA2 1966) ("the Code is . . . a most appropriate source of federal law"); United States v. Walter Dunlop & Sons, Inc., 820 F.3d 1232, 1239 (CA3 1986) (Kimbell "chose state commercial law to give content to the federal rule of decision"); Mills Morris Co. v. Scanlon, 446 F.2d 722 (CA5 1971) , 732 (CA5 1971) (UCC "should generally be considered as the federal law of commerce -- including secured transactions"); Federal's, Inc. v. Matsushita Elec. Corp., 553 F.2d 509, 517 (CA6 1977) (the code is "on its way to becoming a truly national law of commerce").

⁵ Following is an example of a name that contains four words that are listed on Table 6 of the Bluebook with common abbreviations. There are sixteen possible combinations of the words and their abbreviations, which means that a creditor would have to obtain at least sixteen searches in order to determine if a federal tax lien was on file against the debtor: