Allstate Financial v. United States ( 1997 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 96-1046
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Allstate Financial Corporation, *
*
Appellee, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
United States of America, *
*
Appellant. *
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Submitted: November 21, 1997
Filed: April 3, 1997
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Before FAGG, WOLLMAN, and HANSEN, Circuit Judges.
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WOLLMAN, Circuit Judge.
The United States appeals from a judgment in favor of Allstate
Financial Corp. (Allstate) in this action for wrongful levy. The district
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court held that Allstate’s security interest in the accounts receivable
of Dittrich of Minnesota, Inc. (Dittrich), and Zappia Transportation
Services, Inc. (Zappia), had priority over the tax lien of the Internal
Revenue Service (IRS). We affirm.
1
The Honorable Robert G. Renner, United States District Judge
for the District of Minnesota.
I.
Dittrich is a trucking company incorporated in Minnesota, with its
chief executive office in Minnesota. Zappia is a trucking company
incorporated in New York, with its chief executive office also in
Minnesota. The companies both operate out of New Ulm, Minnesota, and share
the same president, Jose Gonzalez. As it appears in the articles of
incorporation, Zappia’s name is “Zappia Transportation, d/b/a Dittrich of
Minnesota, Inc.” Dittrich and Zappia are sister corporations operating
under the parent umbrella of the “Detroit companies,”2 and were determined
by the IRS to be alter egos of one another, as well as alter egos of the
Detroit companies.
On November 26, 1991, Allstate entered into factoring and security
agreements with Dittrich and Zappia, as well as with the Detroit companies,
whereby Allstate would advance funds to them in exchange for security
interests in all their personal property, which included all accounts
receivable. Dittrich and Zappia also executed guarantee agreements,
pursuant to which they became liable for the other’s debts and obligations
to Allstate. Allstate filed financing statements in Minnesota, New York,
Illinois, and Pennsylvania covering Dittrich's accounts receivable.
Allstate filed financing statements securing Zappia’s accounts receivable
only in New York and Pennsylvania. Between November 1991 and February
1992, Allstate advanced a total of $3,794,627.32 to Dittrich and Zappia,
$1,410,996.76 of which is still owing to Allstate.
2
The "Detroit companies" consisted of Ivory, Marck Express, RW
Services, Transportation Accounting Services and WT Cartage.
Collateral owned by these companies is not at issue in this case.
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Both Dittrich and Zappia had contracts to transport mail for the
United States Postal Service (USPS). In addition to granting Allstate
blanket security interests, Zappia and Dittrich executed agreements under
which they specifically assigned their interest in the USPS accounts to
Allstate and authorized payment to be made directly to Allstate. At the
time of the levy, the USPS owed the companies more than $1 million.
In January 1992, the IRS determined that Dittrich had a tax liability
of approximately $1,065,160. IRS Revenue Officer Laura Banks contacted
Allstate sometime that month and spoke with Bret Kelly, Allstate’s chief
operating officer and senior vice president. Through her conversations
with Kelly, Banks learned of Allstate’s factoring and security agreements
with Dittrich and Zappia.
On February 5 and 6, 1992, the IRS served levies on the USPS, seeking
to satisfy part of Dittrich’s tax liability with the monies owing from the
USPS to Dittrich and Zappia. On February 10, 1992, the IRS served Dittrich
and Zappia with notices of levy and filed a notice of federal tax lien.
Additional levies on the companies’ other commercial account debtors were
served on February 13 and 14, 1992.
Allstate requested that the IRS refund the levied-upon accounts
receivable. The IRS released the levies on the other commercial account
debtors, but refused to release the USPS accounts and proceeded to seize
the USPS accounts receivable. Of the $1,026,025.80 seized, $822,037.48 was
attributable to contracts with Dittrich and $203,988.32 to contracts with
Zappia.
Allstate filed an administrative claim, alleging that the IRS had
wrongfully levied on USPS accounts receivable and requesting
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that the IRS lift the levy and pay Allstate the monies seized. The IRS
determined that Allstate was not entitled to the funds and denied the
requested relief.
Allstate filed suit for wrongful levy in federal district court. The
district court concluded that Allstate had perfected its security interest
with Zappia by virtue of Minn. Stat. § 336.9-401(2), which provides that
a filing made in good faith but in an improper place is nevertheless
effective to perfect the security interest against any persons with
knowledge of the contents of the financing statement. Accordingly, the
district court held that Allstate’s security interest had priority over the
tax lien and entered judgment for Allstate, ordering the IRS to pay
Allstate $1,026,025.80, plus interest.
On appeal, the IRS argues that the district court erred in relying
on state law to determine the priority of the relevant interests and in
ignoring relevant federal law. The IRS also contends that the district
court erred in finding that section 336.9-401(2) could redeem Allstate’s
improper filing.
Allstate contends that Zappia had no property interest in the
accounts receivable to which the tax lien could attach; that the district
court correctly applied the law in finding that Allstate’s security
interest was perfected; and that the financing statement filed in Minnesota
under the name “Dittrich of Minnesota” operated to perfect Allstate’s
security interest in the collateral of both Dittrich and Zappia. Passing
over the first two of these contentions, we affirm the district court on
the basis of the third. See Dicken v. Ashcroft, 972 F.2d 231, 233 (8th
Cir. 1992) (court of appeals may affirm district court on any basis
supported by the record).
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II.
In determining the priority of the tax lien as against Allstate's
interest, we must apply federal law. See United States v. Trigg, 465 F.2d
1264, 1269 (8th Cir. 1972); Aquilino v. United States, 363 U.S. 509, 513-14
(1960). The applicable federal law for determining priority of a tax lien
appears at 26 U.S.C. § 6323(a). Under that statute, a federal tax lien is
not valid against a holder of a security interest. A “security interest”
for purposes of section 6323(a) exists if “the property is in existence and
the interest has become protected under local law against a subsequent
judgment lien arising out of an unsecured obligation.” 26 U.S.C. §
6323(h)(1).
The applicable local law in this case is that of Minnesota. In order
to perfect a security interest under Minnesota law, a creditor must file
a financing statement in the appropriate place, and the financing statement
itself must comply with Minn. Stat. Ann. § 336.9-402, which requires that
the financing statement list the names and addresses of the debtor and the
secured party and that it describe the collateral. A financing statement
which substantially complies with that section is effective despite minor
errors, so long as they are not seriously misleading. Minn. Stat. Ann. §
336.9-402(8).
It is clear, and the IRS does not dispute, that Allstate’s security
interest in Dittrich’s accounts receivable was protected under local law,
as it was properly perfected. Because of the unique relationship between
the companies, we conclude that this financing statement was also
sufficient to perfect Allstate’s security interest in Zappia’s accounts
receivable without any additional filing as to Zappia.
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“To be effective, a financing statement ‘must reasonably notify a
creditor of prior interest in [a debtor's property].’" In re Knudson 929
F.2d 1280, 1284 (8th Cir. 1991) (quoting In re Alexander, 39 B.R. 110, 111
(Bankr. D.N.D. 1984)). “‘[T]he bottom line [to test sufficiency] is
whether a third-party searcher would be reasonably likely to find the
financing statement.’” Knudson, 929 F.2d at 1284 (citation omitted).
In Knudson the debtors, Duane and Goldine Knudson, filed for
bankruptcy as individuals, d/b/a Goldie’s Furniture, Inc. A bank claiming
a priority interest over the trustee in bankruptcy had previously filed a
financing statement against the debtors under the name “Goldie’s
Furniture,” despite the fact that the bank considered itself to be doing
business with the Knudsons as individuals. We held that a searching
creditor would not have found the financing statement unless the creditor
knew that the Knudsons did business under the name “Goldie's Furniture.”
We concluded that not all creditors of the Knudsons would have that
knowledge and found the financing statement to be insufficient to perfect
the bank’s security interest.
We conclude that the facts of this case mandate a result different
from that reached in Knudson. First, unlike the situation in Knudson,
where creditors may have been unaware of the corporate status of the party
with whom they were dealing, the IRS knew it was dealing with Zappia as
part of Dittrich. The evidence shows that Zappia’s legal name also
included the name “Dittrich of Minnesota,” and it is probable that Zappia’s
creditors were aware of that fact. Moreover, Allstate’s filing under
“Dittrich of Minnesota” constituted more than a mere filing under a trade
name. Rather, it was a filing under the name of the company that for all
practical purposes was the same entity as Zappia.
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We think this case is more akin to the situation in Avco Delta Corp.
Canada, Ltd. v. United States, 459 F.2d 436, 442 (7th Cir. 1972). In Avco
there was one parent corporation with two subsidiaries. A financing
statement was filed under the name of only one of the subsidiaries. The
court found this filing sufficient to perfect the security interest in the
collateral of both the parent and the other subsidiary corporation because
the filing under the name of one subsidiary was not seriously misleading
to a searching creditor of the other subsidiary.
The Avco court based its determination in part on the similarity of
the names of the corporations, but the controlling factor was whether the
creditor would have been misled by the filing. Minn. Stat. Ann. § 336.9-
402(8). The Ninth Circuit in Siljeg v. National Bank of Commerce of
Seattle, 509 F.2d 1009, 1012 (9th Cir. 1975), held that “filing under an
assumed trade name is effective unless it is misleading.” The relevant
question is not whether “Dittrich of Minnesota” was the true name of the
company, but whether creditors would have been seriously misled by the
filing under the name “Dittrich of Minnesota.” See id. at 1013.
Therefore, the pertinent inquiry is whether “information [was] available
in the relevant business community which put creditors on notice that they
should have searched financing statements under the name [‘Dittrich of
Minnesota’].” Id. Here, the evidence supports a finding that creditors
were put on notice that they should search under both “Dittrich” and
“Zappia” and that the filing under “Dittrich of Minnesota” was thus not
seriously misleading.
The companies’ president testified that Zappia was part of Dittrich,
as Dittrich had purchased Zappia and Zappia was not thereafter separately
incorporated. The IRS admitted that Zappia and Dittrich were being run as
one company and had the same
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president. The IRS considered the two companies to be the alter egos of
each other and is now pursuing funds belonging to Zappia to satisfy
Dittrich’s tax liability. The notice of tax lien listed “Dittrich of
Minnesota/Zappia Transportation, a corporation” as the debtor. The IRS
also referred to the companies as “brother/sister companies under the same
parent umbrella.” In addition, there is evidence that Zappia was doing
business solely as Dittrich of Minnesota, and, as indicated above, Zappia’s
articles of incorporation show Zappia’s legal name as “Zappia
Transportation, d/b/a Dittrich of Minnesota.”
Moreover, assets, as well as liabilities, were shared by the
companies. IRS agent Laura Banks testified that there was “extreme
commingling” of Dittrich’s, Zappia’s, and the Detroit companies’ assets.
Banks also stated that “all of the daily business was commingled between
the companies.” When Allstate collected money that was owed to one of the
companies and which was in excess of that presently owed, Allstate would
use that excess to offset a shortage of funds owing from the other company.
In addition, monies that were paid to Zappia were wired to Dittrich’s
account.
Given the relationship between the companies, the manner in which the
companies conducted business, and the fact that Zappia’s legal name
included the name under which the financing statement was filed, it is
reasonable to assume that Zappia’s creditors would know that Zappia was
doing business as Dittrich. A prudent creditor, therefore, would search
under both “Dittrich” and “Zappia.” Creditors would be “reasonably likely
to find the financing statement,” Knudson, 929 F.2d at 1284, and would not
be seriously misled by the filing under “Dittrich.” See Minn. Stat. Ann.
§ 336.9-401(8); Avco, 459 F.2d at 442; Siljeg, 509 F.2d at 1012.
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The purpose of filing financing statements is to put creditors on
notice of existing interests in the debtor’s property. In this case, in
addition to having actual knowledge of Allstate’s security interest in
Zappia’s accounts receivable, the IRS had, at the least, enough information
before it to conclude that the financing statement filed under “Dittrich
of Minnesota” could encompass Zappia's accounts receivable.
We conclude that Allstate was the holder of a security interest
within the meaning of 26 U.S.C. § 6323(h)(1) and therefore has priority
over the federal tax lien.
The judgment is affirmed.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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