Durand State Bank v. Earlywine

No. 2--96--0571
________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
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DURAND STATE BANK, ) Appeal from the Circuit Court
) of Winnebago County.
Plaintiff-Appellee, )
)
v. )
)
WAYNE E. EARLYWINE and ) No. 95--LM--1729X
LINDA S. EARLYWINE, )
)
Defendants )
)
(The County of Winnebago, ) Honorable
County Highway Department, ) Gerald F. Grubb,
Appellant). ) Judge, Presiding.
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JUSTICE COLWELL delivered the opinion of the court:
Plaintiff, Durand State Bank, filed a complaint against
defendants, Wayne Earlywine and Linda Earlywine, seeking to recover
the outstanding balance on promissory notes defendants had signed.
Plaintiff obtained a judgment for $9,363.39. Plaintiff filed a
memorandum of judgment with the Winnebago County recorder on August
25, 1995. Plaintiff issued a wage deduction summons on November 9,
1995, and the summons was served on Wayne's employer, the Winnebago
County Highway Department, on November 13, 1995. On February 14,
1996, the employer filed its answer to the wage deduction
interrogatories, indicating that no amounts were withheld during
the 12-week period because all wages were subject to a federal tax
levy. Plaintiff filed a contest to the employer's answers to the
wage deduction interrogatories (735 ILCS 5/12--811 (West Supp.
1995)), alleging that the federal tax lien was invalid as to
plaintiff. The court ruled in favor of plaintiff and ordered the
employer to turn over $1,108.65 to plaintiff. The employer filed
a motion to reconsider, which the court denied. The employer
appeals, arguing that it was required to honor the federal tax
levy. We affirm.
The employer asserts that it was required to honor the federal
tax levy because the Internal Revenue Service (IRS) served it with
a notice of levy on wages, salary, and other income on April 4,
1995. The employer relies on section 6332(a) of the Internal
Revenue Code (the Code) (26 U.S.C.A. 6332(a) (West Supp. 1996)),
which provides:
"Except as otherwise provided in this section, any person
in possession of (or obligated with respect to) property or
rights to property subject to levy upon which a levy has been
made shall, upon demand of the Secretary, surrender such
property or rights (or discharge such obligation) to the
Secretary, except such part of the property or rights as is,
at the time of such demand, subject to an attachment or
execution under any judicial process."
The employer argues that at the time the IRS served its notice of
levy the plaintiff had not obtained a judgment against defendants
and therefore the IRS lien had priority.
Plaintiff responds that the IRS lien was invalid as to it
because of section 6323(a) of the Code (26 U.S.C.A. 6323(a) (West
Supp. 1996)), which provides:
"The lien imposed by section 6321 shall not be valid as
against any purchaser, holder of a security interest,
mechanic's lienor, or judgment lien creditor until notice
thereof which meets the requirements of subsection (f) has
been filed by the Secretary."
The parties agree that the IRS has not filed its notice of lien.
Nevertheless, the employer ignores the plain language of
section 6323(a) and persists in maintaining a "first in time, first
in right" argument. The employer also ignores the Supreme Court's
decision United States v. Pioneer American Insurance Co., 374 U.S. 84, 88, 10 L. Ed. 2d 770, 774, 83 S. Ct. 1651, 1654-55 (1963), in
which the court explained that, although the tax lien arises when
the tax is assessed, it is not valid against judgment creditors
until it is placed of public record.
Where there are competing claims to a delinquent taxpayer's
property by a federal tax lien and a state-law lien, priority is
determined by federal law. Aquilino v. United States, 363 U.S. 509, 513-14, 4 L. Ed. 2d 1365, 1368-69, 80 S. Ct. 1277, 1280
(1960). The general rule of priority under federal law is " ' "the
first in time is the first in right." ' " United States v.
McDermott, 507 U.S. __, __, 123 L. Ed. 2d 128, 133, 113 S. Ct. 1526, 1528 (1993), quoting United States v. City of New Britain,
347 U.S. 81, 85, 98 L. Ed. 520, 525, 74 S. Ct. 367, 370 (1954).
However, because of section 6323(a), to be "first in right" over a
judgment lien creditor, the notice of the federal tax lien must be
filed "first in time." Smith Barney, Harris Upham & Co. v.
Connolly, 887 F. Supp. 337, 342 (D. Mass 1994). Unless the
government files a notice of lien with the local recording office,
the interests of judgment lien creditors are superior to those of
the government. Griswold v. United States, 59 F.3d 1571, 1575
(11th Cir. 1995). A creditor achieving the status of judgment lien
creditor before the government files its notice of lien is entitled
to priority over the United States even if the government's
assessment was made before the judgment. United States v. Jenison,
484 F. Supp. 747, 755 (D.R.I. 1980). Service of a notice of levy
is not equivalent to filing a notice of lien. Southern Rock, Inc.
v. B&B Auto Supply, 711 F.2d 683, 688 (5th Cir. 1983); Jenison, 484 F. Supp. at 756.
There is no dispute that the IRS did not file its notice of
lien. Therefore, the lien is invalid as to plaintiff, who is a
judgment lien creditor of defendants. The employer did not cite
any cases supporting its position. Rather, the employer argued
irrelevant cases and ignored the clear weight of authority
supporting the trial court's decision. Under federal law, the
plaintiff had priority over the United States' unrecorded lien, and
thus the trial court did not err in granting plaintiff's contest to
the employer's answer to the wage deduction interrogatories.
The judgment of the circuit court of Winnebago County is
affirmed.
Affirmed.
GEIGER, P.J., and BOWMAN, J., concur.