Alerts and Updates
Tax Liens Loom Larger
June 30, 2005
Sixth Circuit Promotes Less Stringent Notice Requirements for IRS and More Cumbersome Search Protocols for Secured Lenders
Secured lenders are now accustomed to the stringent requirements for capturing a borrower's name "letter-perfect" on financing statements under UCC § 9-503(1). Even the simplest deviation from this requirement may jeopardize the validity of a filed financing statement and open up the lender to potential lien and priority challenges, particularly in the context of a borrower's bankruptcy case. With its June 21, 2005, decision in United States v. Crestmark Bank, the United States Court of Appeals for the Sixth Circuit refused to impose the same strict "letter-perfect" name requirement on the Internal Revenue Service when it files a notice of tax lien against a delinquent taxpayer. In the wake of Crestmark, secured lenders monitoring their borrowers' tax compliance must search broadly in order to ensure that their liens are not compromised by priming tax liens that might otherwise go undetected if a search were limited only to the borrower's correct legal name.
In Crestmark, Spearing Tool and Manufacturing Co. (the "Borrower") entered into secured financing arrangements (the "Credit Facilities") with Crestmark Bank and Crestmark Financial Corporation (together, the "Lender"). As security for the Credit Facilities, the Borrower pledged to the Lender a security interest in essentially all of its assets. The Lender perfected its security interest by filing financing statements bearing the Borrower's precise legal name in the office of the Michigan Secretary of State as required by Michigan's adoption of UCC § 9-503(1).
Following extension of the Credit Facilities, the Borrower failed to keep current its federal employment tax obligations. On October 15, 2001, the IRS filed notices of tax lien against the Borrower that identified "Spearing Tool & Mfg. Company Inc." as the delinquent taxpayer. Although the Lender periodically searched the Secretary of State's office for tax lien filings, it did so using the Borrower's exact legal name and therefore did not uncover the tax lien filings made by the IRS that used abbreviations rather than the correct legal name. The Lender also ignored initial warnings from the Secretary of State's office that it "may wish to search" under the alternative name. Following the Borrower's ultimate bankruptcy filing, the Lender sued the IRS to determine the validity, extent and priority of the tax liens specifically as they related to the Lender's properly perfected liens under the Michigan UCC.
On the IRS's appeal to the Sixth Circuit, the Lender argued that the IRS's failure to use the Borrower's precise legal name violated Michigan state law with respect to the required form of a lien notice, and that the tax liens against Spearing therefore were invalid to the extent that they impacted the Lender's prior perfected security interest. The Sixth Circuit rejected this position and held, that: (1) federal law, not state law, governs the form of notice required for the IRS to comply with the federal tax lien statute; and (2) the IRS complied with the federal law requirements by providing information about the taxpayer such that a "reasonable and diligent search would have revealed the notices of the federal tax liens."
Following Crestmark, lenders should protect themselves against potentially priming federal tax liens on a borrower's assets by obtaining broader searches in the applicable state office designated for federal tax lien filings. Commonly abbreviated corporate names should be included in all searches so that all probable variations in a borrower's name may be found. Lenders should also ascertain the name in the IRS records for the borrower's taxpayer identification number. Moreover, to the extent that the state office identifies a possible relevant variation such as the Michigan office did in Crestmark, a lender should proceed to conduct a search under this name to ensure that all reasonable steps are taken to identify and address potentially priming tax liens.
For Further Information
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