Bloomfield State Bank v. United States
644 F.3d 521 (2011)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A security interest in future rents, granted as part of a mortgage on existing real property, constitutes an interest in property 'in existence' under 26 U.S.C. § 6323(h)(1). Therefore, such an interest takes priority over a subsequently filed federal tax lien, even for rents collected after the tax lien is filed.
Facts:
- In 2004, a bank made a mortgage loan to a borrower, secured by the borrower's real estate and an assignment of 'all rents' derived from that property.
- In 2007, the mortgagor defaulted on the loan.
- After the mortgagor's default, the Internal Revenue Service (IRS) filed a federal tax lien against the mortgagor's real estate.
- In 2008, a court-appointed receiver rented out a portion of the mortgaged property, collecting $82,675 in rental income for the bank's account.
Procedural Posture:
- The bank filed a suit for declaratory relief against the IRS in federal district court.
- The district court granted summary judgment in favor of the IRS.
- The bank appealed the district court's decision to the U.S. Court of Appeals for the Seventh Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a mortgagee's perfected security interest in future rental income from a specific parcel of real estate take priority over a federal tax lien filed after the mortgage was created but before the rents were collected?
Opinions:
Majority - Posner, Circuit Judge
Yes, a mortgagee's perfected security interest in future rental income takes priority over a subsequently filed federal tax lien. The court's reasoning is that the 'property' that must be 'in existence' under 26 U.S.C. § 6323(h)(1) is the underlying asset securing the loan—in this case, the real estate—not the proceeds realized from that asset. The real estate existed long before the tax lien was filed. The rental income is merely proceeds from that pre-existing property, analogous to proceeds from a foreclosure sale, which would undisputedly have priority. The court distinguished this situation from a security interest in accounts receivable, where the underlying transaction creating the receivable has not yet occurred when the tax lien attaches. To hold otherwise would create an artificial distinction between selling and renting a property and would illogically force receivers to sell assets rather than manage them productively through renting.
Analysis:
This decision provides significant clarity on lien priority under the Federal Tax Lien Act, solidifying the position of mortgagees against the IRS. It establishes that rental income is treated as proceeds of existing real property, not as a separate, after-acquired asset that would be subordinate to an intervening tax lien. This precedent gives lenders greater security, ensuring that assignment-of-rents clauses are effective even when a borrower's tax delinquencies arise after the mortgage is recorded. The court's rejection of the confusing 'choateness' doctrine in favor of a straightforward statutory reading also signals a preference for plain-language interpretation over archaic legal jargon.
Unlock the full brief for Bloomfield State Bank v. United States