Lien Filings By The IRS – What Is The Standard?

Some of us remember and some younger folks have read about the days when a Uniform Commercial Code (“UCC”) security interest filing could be successfully made using a variation of the debtor’s name so long as that variation was “close enough.” Revised UCC Article 9 changed that rule to a requirement that the filing use the debtor’s exact legal name. See, i.e., Mich. Comp. Laws Section 440.9503(1).

In 2005, the United States Court of Appeals for the Sixth Circuit reminded us that the UCC rule does not apply to Notice of Federal Tax Lien (“NFTL”) filings by the Internal Revenue Service (“IRS”) pursuant to 26 U.S.C. § 6323. In United States v. Crestmark Bank, 412 F.3d 653 (6th Cir. 2005), the Sixth Circuit held that a NFTL filed against “SPEARING TOOL & MFG. COMPANY INC.” was adequate despite the fact that the taxpayer’s proper name was “Spearing Tool and Manufacturing Co.” As a result, in Spearing’s bankruptcy, Crestmark Bank lost the priority battle with the IRS despite the fact that Crestmark made its UCC filing against Spearing’s correct name as required by the UCC.

The Crestmark Bank case was disturbing because the Sixth Circuit admitted that Crestmark did not know of the IRS lien because Crestmark’s electronic lien searches using Spearing’s exact name did not disclose the NFTL.

The Crestmark Bank case is based on the legal conclusion that under 26 U.S.C. Section 6323: (i) federal law controls what must be in a NFTL; and (ii) the “critical issue in determining whether an abbreviated or erroneous name sufficiently identifies a taxpayer is whether a ‘reasonable and diligent search would have revealed the existence of the notices of the federal tax liens under those names.’” Having concluded that a reasonable search would have found the NTFL against Spearing and since Crestmark did not find that NTFL, the Sixth Circuit necessarily concluded that Crestmark’s UCC searches were not reasonable because Crestmark did not search on two common variants in Spearing’s name: “&” instead of “and,” plus “MFG.” instead of “Manufacturing.” ¹

So, for several years, lenders and lawyers in Michigan, Ohio, Kentucky and Tennessee have made certain that they searched against a borrower’s exact name and reasonable variations of that exact name.

Recently, a Nevada bankruptcy court decided a case similar to Crestmark Bank but reached a different result. Buenting v. Crystal Cascades Civil LLC, 398 B.R. 23 (D. Nev. Bankr. 2008) is another priority dispute between a secured lender and the IRS. This case involves mortgages on land in Nevada, but the applicable law is the same because the NFTL system does not distinguish between personal property and real property.

In Buenting the IRS’s lien filing was made before the mortgage was filed and the NFTL was filed against “Crystal Cascades, LLC a corporation.” The NFTL was wrong in that it omitted a word from the taxpayer’s exact name, “Civil,” and the NFTL incorrectly and confusingly stated that the taxpayer was a corporation despite the fact that the NFTL included the abbreviation “LLC.”

Since lien priority only becomes an issue when there is a default and inadequate assets, you can guess what happened. “Crystal Cascades Civil LLC” owned a piece of land that it acquired under that name. As noted above, the IRS caused the filing of a NFTL under the taxpayer’s prior name, Crystal Cascades LLC. After the filing of the NFTL, Buenting filed a mortgage using the precisely correct new name. So, who gets the money when the mortgaged property is sold.

The Buenting court started with the still applicable rule that was applied in Crestmark Bank, namely that “. . . if it [the state lien recording statute] also provides that ‘a reasonable inspection of the index’ would not reveal the existence of the notice of the IRS’s tax lien, then the IRS’s tax lien is not enforceable against third parties. 26 U.S.C. § 6323(f)(4).”

The Buenting court concluded that a reasonable searcher would not have found the NFTL due to the omission of the word “Civil” from the name shown on that NFTL. Like the Crestmark Bank court, the Buenting court examined (i) the local filing office and its procedures, here – the Clark County Nevada’s recorder’s office, (ii) the searches permitted by that office (mostly electronic) and (iii) the indexing logic used by that office.

The Buenting court’s decision may be a little surprising because the county recorder offered a fairly easy way to locate the NFTL. Electronic searchers of the recorder’s filings were offered a “wildcard” option that located all the extensions from a common root; hence, in this case a searcher could have searched “Crystal” or “Crystal Cascades” and the NFTL would have been discovered. Of course, using the full name “Crystal Cascades Civil” in the wildcard function did not disclose the NFTL because it did not include that much of the taxpayer’s exact name. This wildcard search option did not save the IRS because the court held that a reasonable nonprofessional searcher would have started with and used the taxpayer’s name as shown on the deed that transferred title to the taxpayer.

In the end, the Buenting court admitted that the only rule available here is that facts matter a lot. The relevant facts include: (i) the local practice for abbreviating certain words (as was found to be common in Michigan where the IRS could abbreviate a name); (ii) the search logic available at the filing office; and (iii) whether a searcher was allowed physical access to the files.

Liability Note: The Buenting court held that the test is a reasonable nonprofessional searcher. So, if a professional conducts the search, misses a NFTL and then a court holds that a reasonable nonprofessional would have found that NFTL (usually meaning the IRS wins), malpractice liability on the professional seems a strong risk.

Practitioner’s Note: According to the Buenting decision, testimony from an IRS agent showed that (i) the IRS generates NFTLs from a master index of taxpayers and taxpayer identification numbers, (ii) this master index is created when a taxpayer applies for an identification number, and (iii) this index is not changed even if a taxpayer legally changes its name (as happened here when “Crystal Cascades, LLC” became “Crystal Cascades Civil LLC”).² So, if you want to improve the likelihood that you will find any existing NFTLs, include searches against your borrower’s original name and against the name shown on the borrower’s application for a taxpayer identification number.

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¹The Sixth Circuit stated that the IRS’s use of “COMPANY” instead of “Co.” was unimportant because Michigan’s electronic search logic ignored this variation.
²In Buenting, the taxpayer did not file with the IRS a formal notice that it had changed its name. The taxpayer did, however, use the new name on several filings it made to the IRS.