Commercial Finance Association Urges Reversing Tax Lien Decision
United States v. Crestmark Bank et al.
- Case NameUNITED STATES OF AMERICA, DEPARTMENT OF TREASURY, INTERNAL REVENUE SERVICE, Defendant-Appellant, v. CRESTMARK BANK, A MICHIGAN BANKING CORPORATION, AND CRESTMARK FINANCIAL CORPORATION, A MICHIGAN CORPORATION, Plaintiffs-Appellees. (In Re: Spearing Tool And Manufacturing Co., Inc., Debtor.)
- CourtUnited States Court of Appeals for the Sixth Circuit
- DocketNo. 04-1053
- AuthorsWallen, DanielHelfat, Jonathan N.Green, Lloyd M.Flom, Barbara M.Kohn, Richard M.
- Institutional AuthorsOtterbourg, Steindler, Houston & Rosen, P.C.Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd.
- Cross-ReferenceFor the Sixth Circuit opinion in United States v. Crestmark Bank
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2005-18747
- Tax Analysts Electronic Citation2005 TNT 180-29
United States v. Crestmark Bank et al.
UNITED STATES COURT OF APPEALS
FOR THE
SIXTH CIRCUIT
ON APPEAL FROM THE UNITED STATES
DISTRICT COURT FOR THE EASTERN DISTRICT OF
MICHIGAN
BRIEF FOR AMICUS CURIAE COMMERCIAL
FINANCE ASSOCIATION IN SUPPORT OF APPELLEES'
PETITION FOR REHEARING, WITH SUGGESTION FOR
REHEARING EN BANC
Otterbourg, Steindler, Houston & Rosen, P.C.
Daniel Wallen
Jonathan N. Helfat
Lloyd M. Green
230 Park Avenue
New York, New York 10169
(212) 661-9100
- and -
Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd.
Barbara M. Flom
Richard M. Kohn
55 East Monroe Street, Suite 3700
Chicago, Illinois 60603
(312) 201-4000
Attorneys for Amicus Curiae
Commercial Finance Association
TABLE OF CONTENTS
Table of Authorities
Statement of Interest
Summary of Argument
Argument: The June 21 Decision Is Incorrect in Light of the Evolution
of U.C.C. Filing and Search Technology
Conclusion
TABLE OF AUTHORITIES
Cases
Clarke v. Deere & Co. (In re Kinderknecht), 308 B.R. 71
(B.A.P. 10th Cir. 2004)
Crestmark Bank v. United States (In re Spearing Tool Manufacturing
Co., Inc., 302 B.R. 351 (E.D. Mich. 2003), reversed, 412
F.3d 653 (6th Cir. 2005)
In re FV Steel & Wire Co., 310 B.R. 390 (Bankr. E.D. Wis.
2004)
ITT Commerce Finance Corp. v. Bank of the West, 166 F.3d 295
(5th Cir. 1999)
Miller v. Van Dorn Demag Corp. (In re Asheboro Precision Plastics,
Inc.), 2005 Bankr. LEXIS 1091 (Bankr. N.D.N.C. Mar. 1, 2005)
United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S. Ct.
1448 (1979)
Statutes
Federal Tax Lien Act of 1966
U.C.C. Revised Art. 9
Other Authority
B. Clark, 1 The Law of Secured Transactions Under the Uniform
Commercial Code, (rev. ed. 2005)
Lisa A. Epps, "Resowing the Mischievous Seeds of the Fifth Circuit:
In re Thriftway Auto Supply's Impact on Tradename Filings," 6 Kan.
J.L. & Pub. Pol'y 183 (Fall 1996)
U.S. District Court Case No. 03-72070
Hon. Nancy G. Edmunds
Case No. 02-49144-swr
Chapter 11
Hon. Steven R. Rhodes
Adversary No. 02-5201
STATEMENT OF INTEREST
The Commercial Finance Association ("CFA") is the national trade association for financial institutions that provide asset-based financing and factoring services to commercial borrowers. The nearly 240 members of CFA include not only Crestmark Bank and Crestmark Financial Corporation (collectively, "Crestmark"), but also substantially all of the major money-center and regional banks and other large and small commercial lenders engaged in asset- based lending.
CFA members provide financing to businesses on an international, national, regional, and local scale. Most borrowers served by CFA members depend on secured financing to operate and grow their businesses, typically because their cash flow is not sufficiently robust or certain to support unsecured debt. Asset-based financing is generally secured by first priority liens and mortgages on various forms of collateral, including accounts receivable, inventory, equipment, real estate, and other tangible and intangible property owned by the borrowers.
Financing by CFA members comprises a substantial portion of the United States credit market, exceeding $300 billion in outstanding loans, and with revolving credit and other advances by CFA members under credit agreements exceeding $2 trillion annually. Because this financing is predicated upon first priority liens and mortgages on collateral, protection from "secret liens," that may unexpectedly come ahead of such liens and mortgages, is of paramount concern to CFA and its members.
CFA members and borrowers alike are seriously affected by the decision of the three-judge panel of this Court (published at 412 F.3d 653 (June 21, 2005), the "June 21 Decision"). In the few short weeks since the June 21 Decision issued, borrowers are suffering from higher transaction costs as lenders conduct extra searches and due diligence to minimize the heightened risk.
SUMMARY OF ARGUMENT
CFA urges this Court to grant the petition for rehearing, with suggestion for rehearing en banc, filed by Crestmark with this Court (the "Petition"). CFA believes that the June 21 Decision suffers from a host of infirmities, and distorts United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S. Ct. 1448 (1979), which determined that the enactment of the Federal Tax Lien Act of 1966 (the "FTLA") was predicated upon greater synchronization between the FTLA and the Uniform Commercial Code ("U.C.C.").
The June 21 Decision ignores the transforming changes in business practice wrought by the computerization of lien searches; places both lenders and borrowers at risk due to misfiled government liens; unduly burdens secured lenders; increases credit costs borne by all borrowers for the added risks and increased lien search costs; at the margin will convince lenders not to extend credit; and will doubtless force some companies into bankruptcy that might have been able to obtain workout financing if not for the lender's fear of undiscoverable government liens.
The adoption of Revised Article 9 of the U.C.C. and the computerization of filing and search systems have made precisely identifying the debtor of paramount importance. ITT Commerce Finance Corp. v. Bank of the West, 166 F.3d 295 (5th Cir. 1999) (burden of filing a lien using correct spelling falls upon the filing party, rather than the searching party); see Clarke v. Deere & Co. (In re Kinderknecht), 308 B.R. 71 (B.A.P. 10th Cir. 2004); Miller v. Van Dorn Demag Corp. (In re Asheboro Precision Plastics, Inc.), 2005 B.R. LEXIS 1091 (Bankr. N.D.N.C. Mar. 1, 2005); In re FV Steel & Wire Co., 310 B.R. 390 (Bankr. E.D. Wis. 2004).
Indeed, the June 21 Decision acknowledged that Michigan "has limited electronic-search technology," searches disclose only precise names searched," and that the days of creditors manually searching a physical index and locating liens filed against names similar to the debtor's are gone. What the June 21 Decision underestimates is that the sea change in the filing environment necessarily alters the standard for reasonable filing behavior, Although the government is still required to identify the taxpayer, what that legal standard entails, in practice, has shifted: In today's computerized environment, the requirement to "identify the taxpayer" must be interpreted in a manner that comports with the most basic requirement for a notice filing -- that the filing be capable of being found with a proper search. Under this modern notice filing standard, the government would be required only to file its liens under the taxpayer's easily ascertainable correct name rather than burdening the lender to search repeatedly, and without certainty, under possible variations and permutations of the borrower's name.
Further, if the June 21 Decision is allowed to stand, this Court will have marched backwards in time and enshrined a confusing, inequitable, two-tier filing system. One filing standard, mandating exacting precision, applies to commercial lenders. A second, more relaxed and imprecise, filing standard applies to the federal government. However, because both lenders and the government are filing in the same place, there is a need for uniform filing standards. Unfortunately, at this juncture, lenders have been left groping in the dark for direction because the June 21 Decision offers no standard or guidance as to (a) how much more latitude the federal government has to perpetrate filing errors, or (b) how extensively a secured lender must search to avoid a finding that an imprecise government filing primes its lien. The June 21 Decision did not require the government to file its liens in any clear, predictable, searchable way -- not even to use the name shown on the borrower's tax return. Because of this, even if lenders scrupulously obtain copies of their borrowers' tax filings for search purposes, they cannot trust that the government will file liens accurately using that name.
Under the June 21 Decision, lenders will be forced to run myriad searches when confronted with borrowers whose names include words that are commonly abbreviated in more than one way. For example, countless borrowers have the word "Federal," "Associated" or "General" in their names, and there are several common abbreviations of these words. The central challenge the June 21 Decision creates, therefore, is how a lender can determine with certainty which variations exist and are common enough to require a search. This impractical and unfair search burden unjustifiably places lenders in peril of losing their lien priority to a secret or undiscoverable lien.
Although the Sixth Circuit stressed that its decision was limited to the particular facts of the case, this limitation is, as a practical matter, irrelevant to a lender seeking to protect itself against secret government tax liens, because the lender will have no assurance that the facts of any given case will not trigger the application of the June 21 Decision. Thus, prudent lenders must act as if the June 21 Decision applied to them in all cases. As the leading secured lending commentator Barkley Clark wrote:
We strongly agree with the decision of the federal district court, which is sensitive to the need for the Federal Tax Lien Act to mesh with Revised Article 9 of the UCC. Otherwise we have a repeat of the awful cases of old holding that filing under a corporation's trade name is sufficient.
B. Clark, 1 The Law of Secured Transactions Under the Uniform Commercial Code, ¶ 5.02[6] [a] at 5-14 (rev. ed. 2005).
ARGUMENT
THE JUNE 21 DECISION IS INCORRECT IN LIGHT OF THE
EVOLUTION OF U.C.C. FILING AND SEARCH TECHNOLOGY
The days are gone when a page in a county index could contain an "erroneous federal lien" that is found, by chance, because it appears "directly above a correctly filed lien under the taxpayer's correct name." Crestmark Bank v. United States (In re Spearing Tool & Manufacturing Co., Inc., 302 B.R. 351 (E.D. Mich. 2003), reversed, 412 F.3d 653 (6th Cir. 2005). Likewise, because of computer indexing and computer logic, "&" is no longer necessarily the same thing as "and," a fact recognized by the June 21 Decision.
The disparity between searches under paper- and computer-based filing systems was recognized since well before the adoption of Revised Article 9 of the U.C.C. in July 2001. Lisa A. Epps, "Resowing the Mischievous Seeds of the Fifth Circuit: In re Thriftway Auto Supply's Impact on Tradename Filings," 6 Kan. J.L. & Pub. Pol'y 183, 190-91 (Fall 1996). Thus, the District Court, noting that Revised Article 9 of the U.C.C. reflects current reasonable search practices, stated that under the new regime the "Secretary of State will not search variants of the name (as it did under [former Article 9]), and the public has no independent access to search the index." 302 B.R. at 356 (footnote omitted). See In re FV Steel & Wire Co., 310 B.R. at 394 ("'the secured party is dependent on the kind of computer search logic used by a particular state's filing office. The simple solution is to get the debtor's name right."' (citations omitted; emphasis in original)); Miller v. Van Dorn Demag Corp. (In re Asheboro Precision Plastics, Inc.), 2005 Bankr. LEXIS 1091 at *22-23. ("Under the new standard, a name error is fatal if a search under the correct name, using the filing office's standard search logic, would not disclose the financing statement.")
The District Court correctly determined that, under these circumstances, it was "not reasonable for searchers to conduct one search for liens that might include federal tax liens, and require them to conduct separate, multiple searches under the debtor's multiple possible names for a possible federal tax lien." (302 B.R. at 356-57). The District Court also rightly stressed that it is far easier for the government to ascertain and then file under the debtor's correct name than it is for the commercial creditor to guess successfully how the government may have misspelled the debtor's name. The "burden on the government to include corporate taxpayers' registered names seems slight by comparison." (Id. at 357.) Unfortunately, without any meaningful explanation, the June 21 Decision reversed the District Court, musing that the government might be as burdened by having to file under the taxpayer's correct name as a commercial lender "would be burdened by having to perform multiple lien searches." CFA is hard-pressed to credit the equivalency: at worst, the government must ascertain the taxpayer's correct legal name, while the commercial lender is required to guess which misspelling or abbreviation the government haphazardly chose for its filing.
The District Court's decision created an appropriate and level playing field for all creditors, and set an administrable standard that minimized the risk that a filed lien will be overlooked. The June 21 Decision, in contrast, accords the government unwarranted preferential treatment. Under the June 21 Decision, a tax lien that specifies the taxpayer's name incorrectly would be held legally sufficient, while a U.C.C. filing containing the identical mistake would be legally infirm.
Subjecting the government to the same filing requirements as commercial lenders would not harm the government's ability to collect taxes, as the June 21 Decision intimates. Rather, under the District Court's ruling, the government always can protect itself by filing under the taxpayer's correct name.
The June 21 Decision also unfairly imposes added costs on lenders and borrowers. Lenders are being forced to conduct multiple searches of possible name variations, abbreviations, and misspellings every time credit was advanced (or every 45 days in the case of revolving lines of credit where advances are made daily), in an attempt to uncover a tax lien. Despite making this potentially burdensome and costly effort to protect itself, a lender would remain in jeopardy of its liens being subordinated if it failed to guess which incorrect version of the debtor's name appeared on the government's tax lien notice.
The June 21 Decision thus adds needless uncertainty to the lending process and increases not only search costs (which are typically passed on to the borrower), but also the credit cost of secured financing borne by borrowers, as lenders seek compensation for the increased risk resulting from possible secret tax liens. Indeed, in the case of financially weaker businesses that need asset-based financing the most, lenders may well seek to avoid the risk by reducing the amount of credit they are willing to extend, or by refusing to extend credit altogether. The June 21 Decision will also likely lead to more bankruptcy filings as lenders balk at extending further credit to distressed companies because of the difficulties attendant in finding the government's liens.
CONCLUSION
Crestmark's Petition should be granted, the June 21 Decision should be vacated, and the 2003 decision of the District Court should be affirmed.
Dated: August 12, 2005
Daniel Wallen
One of the attorneys for amicus
curiae
Commercial Finance Association
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
Barbara M. Flom
Richard M. Kohn
55 East Monroe Street, Ste. 3700
Chicago, Illinois 60603
(312) 201-4000
Otterbourg, Steindler,
Houston & Rosen, P.C.
Daniel Wallen
Jonathan N. Helfat
Lloyd M. Green
230 Park Avenue
New York, New York 10169
(212) 661-9100
I, * * *, being duly sworn, depose and say that deponent is not a party to the action, is over 18 years of age and resides at the address shown above or at
Dharmendra Kapadia
47 Chelsea Road
Clifton, NJ 07012
upon:
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William R. Huffman
Shaheen, Jacobs & Ross, P.C.
1425 Ford Building
Detroit, Michigan 48226-3993
Steven O. Weise
Heller Ehrman LLP
601 S. Figueroa Street
Los Angeles, CA 90017-5758
Richard E. Shaw
Richard E. Shaw, P.C.
6915 Rochester Road, Suite 400
Troy, MI 48085-1285
Michael J. Haungs
Dept. of Justice, Tax Division
Appellate Section
Ben Franklin Station
P.O. Box 502
Washington, DC 20044
John A. Nolet
Dept. of Justice, Tax Division
Appellate Section
Ben Franklin Station
P.O. Box 502
Washington, DC 20044
Teresa E. McLaughlin
Dept. of Justice, Tax Division
Appellate Section
Ben Franklin Station
P.O. Box 502
Washington, DC 20044
Warner Norcross and Judd LLP
Jeffrey O. Birkhold (P27905)
James H. Breay (P11151)
111 Lyon Street NW
Grand Rapids, MI 49503-2487
- Case NameUNITED STATES OF AMERICA, DEPARTMENT OF TREASURY, INTERNAL REVENUE SERVICE, Defendant-Appellant, v. CRESTMARK BANK, A MICHIGAN BANKING CORPORATION, AND CRESTMARK FINANCIAL CORPORATION, A MICHIGAN CORPORATION, Plaintiffs-Appellees. (In Re: Spearing Tool And Manufacturing Co., Inc., Debtor.)
- CourtUnited States Court of Appeals for the Sixth Circuit
- DocketNo. 04-1053
- AuthorsWallen, DanielHelfat, Jonathan N.Green, Lloyd M.Flom, Barbara M.Kohn, Richard M.
- Institutional AuthorsOtterbourg, Steindler, Houston & Rosen, P.C.Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd.
- Cross-ReferenceFor the Sixth Circuit opinion in United States v. Crestmark Bank
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2005-18747
- Tax Analysts Electronic Citation2005 TNT 180-29