Bloomfield State Bank v. U.S.

Summarized by Kevin Baum , Windels Marx Lane & Mittendorf, LLP
14 years 9 months ago

Citation:

Bloomfield State Bank v. U.S., No. 10-3939 (7th Cir. May 11, 2011)

Tag(s):

7th Circuit

Ruling:

Reversing the District Court, the Seventh Circuit held that a mortgage agreement that assigns future rental income to the mortgagee creates a security interest that takes priority over a federal tax lien the IRS filed after the mortgage but before the property was actually rented. Under 26 U.S.C. § 6323(h)(1), a security interest will take priority over a tax lien if the security interest is (1) acquired an interest in “property [that] is in existence” before the IRS lien and (2) the security interest properly perfected under applicable law. The Seventh Circuit reasoned that the security interest in future rentals was in “existence” prior to the IRS filing its tax lien because Bloomfield State Bank’s (the “Bank”) mortgage agreement, including the future rents clause, attached to the real estate. The court noted that rental income, like sales income, is just a form of proceeds from land. Accordingly, the property interest in the rental income was inseparable from the interest in the land itself. Therefore, once the mortgage attached to the land, the interest in future rents came into existence. The court, however, acknowledged that the outcome of the case would have been different had the Bank only perfected an interest in the future rent and not the underlying real property. In such a case, the future rents clause would have been an after acquired property clause, which would not trump a federal tax lien.

Procedural context:

The Bank appealed the District Court’s order determining that under 26 U.S.C. § 6323(h)(1), the IRS’s tax lien took priority over the Bank’s security interest in future rental incomes.

Facts:

In 2004, the Bank made a mortgage loan secured by both (1) the borrower’s real property and (2) all future rents derived from the real property. Subsequently, the IRS filed a tax lien against the real property. After the mortgagor defaulted in 2007, a state court appointed a receiver at the Bank’s request. While administering the real property, the receiver rented some of the property, collecting $82,675 in rent, which was paid to the Bank pursuant to the terms of the Bank’s agreement with the borrower. The IRS “claimed that the tax lien took priority over the [B]ank’s lien on rentals received after the tax lien was filed, . . . including the $82,675.” The Bank sued in the District Court Southern District of Indiana seeking a declaratory judgment that its lien took priority over the tax lien. The District Court granted summary judgment in favor of the IRS. Specifically, the District Court “based [its] decision primarily on the analogy of rents to accounts receivable; accounts receivable that come into being after a federal tax lien attaches to the assets that generate them have been held not to trump the tax lien.”

Judge(s):

Posner, Wood, Tinder

ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!