VS. ADV. NO. 91-0078






This matter is before the Court on the Motion for Summary Judgment filed herein by the United States of America, Internal Revenue Service ("the United States"). The United States was given leave to intervene in this matter by order of this Court entered on May 29, 1992, and the United States' Complaint in Intervention was filed on the same date. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(K).

A trial on the adversary Complaint in this matter was conducted on February 27, 1992, and on April 27, 1992, this Court entered judgment for the plaintiff Dishman Independent Oil Corporation ("Dishman") against defendants Penny Oil Corporation ("Penny Oil") and/or Ron Messer jointly and severally in the amount of $365,522.25. More than a year prior to the trial, Dishman had secured and had served pre-judgment attachments against the property of Penny Oil and Ron and Edna Messer in Madison, Whitley and Knox Counties, Kentucky.

On January 1, 1992, assessments were made by the IRS against Penny Oil Corporation for excise taxes, penalties and interest due the United States for the third quarter of 1987 through the third quarter of 1988 in the total amount of $2,851,910.09. A Notice of Federal Tax Lien was filed in Whitley County on January 29, 1992. The United States filed its Motion for Summary Judgment on November 6, 1992. Dishman filed its Response on December 8, 1992. Dishman contends that its lien dates from the attachment on the property and, alternatively, that even if the attachment date is not the appropriate date, asserts equitable grounds (the delaying of the prosecution of the case in order to allow the IRS to intervene which resulted in the IRS lien predating the judgment it obtained) to deny the IRS its claimed priority. While the equitable arguments of Dishman may well have merit, because of the result reached herein, the Court need not reach that argument.

The United States has moved for Summary Judgment on its Intervening Complaint which requested that the Court find that the United States has valid and subsisting tax liens by virtue of the excise tax assessments against Penny Oil, and that these tax liens are prior to any interest Dishman may have in the property of Penny Oil, including the property subject to Dishman's pre-judgment attachment. The Complaint further requested that the pre-judgment attachment be dissolved by the Court so that the United States could proceed with the enforced collection from these assets of the excise tax liabilities secured by the tax liens.

In support of its Motion for Summary Judgment, the United States argues that its lien has priority over the claims of other creditors, with the exception of the claims of purchasers, holders of security interests, mechanic's lienors and judgment lien creditors if they arise before notice of the federal tax lien is filed. See 26 U.S.C. ''6622 and 6323(a). In the instant case, the notice of federal tax lien was filed after Dishman's attachment but before judgment was entered for Dishman, and, according to the United States, under the doctrine of "first in time, first in right", the federal tax liens take priority over Dishman's lien against the assets of Penny Oil.

The United States contends that the fact that Dishman served pre-judgment attachments on the property of Penny Oil on January 14, 1991, prior to the filing of notice of the federal tax liens does not affect priority, since the pre-judgment attachments did not give Dishman a choate interest in the property which would take priority over the federal tax liens. It is the position of the United States that Dishman's lien did not become choate until judgment was entered in its favor.

In support of its contention the United States cites United States v. Security Trust Savings Bank, 340 U.S. 47, 50 (1950). The court held there that the United States' lien for taxes was prior to that of a California creditor who had obtained a pre-judgment attachment before the United States filed its notice of federal tax lien, but did not obtain judgment until after the notice. Under California law, a creditor attaching property as security for satisfaction of a judgment that may be recovered obtains only a potential right or a contingent lien. Even the doctrine of relation back which merges the attachment lien in the judgment would not operate to change this conclusion, since California had specifically described its attachment lien as inchoate.

In Kentucky, an attachment lien becomes effective at the time of levy. See KRS 426.383 which provides in part that "[a] lien shall be created on the property of the defendant by the levy of the attachment..." In Thacker v. Commonwealth, Ky., 284 S.W.2d 325, the Court of Appeals held that

...a lien on a specific piece of property acquired by attachment does not become effective merely by issuance of the writ of attachment or by placing the writ in the hands of an officer,...; nor does a lien become effective merely upon delivery of a copy of the attachment to the debtor. ... There must be an actual levy on the property itself. (Cites omitted).

At page 326. The record in the instant case indicates that there was "an actual levy on the property", and on January 16, 1991, Dishman reported the proceeds of the attachments to the Wayne Circuit Court. See copy of Plaintiff's Report to Court and Motions in Wayne Circuit Court Case No. 91-CI-008.

Clearly, then, Dishman's lien became effective in January 1991. The lien that was created thereby was a judicial lien, as defined in 11 U.S.C. '101(36): "'judicial lien' means lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding". The preceding definition includes a lien established by attachment or garnishment according to In re Coston, 65 B.R. 224, 226 (Bkrtcy.D.N.M. 1986), a case in which the court interpreted the effect of KRS 426.383.

In Coston, the bankruptcy court dealt with this issue in a proceeding arising from a dispute concerning the ownership of a Kentucky family farm. A prejudgment attachment order had been entered in Meade Circuit Court, a certain sum was paid over to the Court Registry, and a bankruptcy petition filed. The Court ruled that the creditor had, according to KRS 426.383, acquired a lien on the attached property, and that it was a judicial lien, according to '101, as set out above.

In addition, the court ruled that the circuit court judgment operated to perfect the prejudgment attachment lien and to preserve the priority established by the attachment lien. The priority of the lien dated back to the levy on the attached property. The creditor was found to be a secured judicial lien creditor. In re Coston, pp. 226-227. Applying these principles to the instant case results in the conclusion that Dishman's lien is prior in time and right to that of the United States.

Dishman had a valid judicial lien when levy was accomplished on the attachment in January 1991. Unlike California, Kentucky does not describe its attachment lien as "potential", "contingent", or "inchoate". This lien was perfected and its priority preserved when Dishman obtained judgment in April 1992. The priority of the lien dates back to January 1991, the time of levy on the attached property. Therefore Dishman's lien is prior to the lien of the United States which was obtained in January 1992.

In consideration of all of the foregoing it is the opinion of this Court that the United States has not carried forward its burden of establishing that there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law. The United States' Motion for Summary Judgment should therefore be overruled. An order in conformity with this opinion will be entered separately.


By the Court -







Copies to:


L. Lee Tobbe, Esq.

Stuart Fischbein, Esq.

David Middleton, Esq.