UNITED STATES v. ROMANI
Both a judgment lien and federal tax liens encumbered the real property of Francis Romani's Pennsylvania estate, worth $53,001, following his death. The estate's administrator sought a county court's permission to transfer the property to the judgment creditor. The Government objected to the conveyance, arguing that 31 USC section 3713(a), which provides that a Government claim "shall be paid first" when a decedent's estate cannot pay all of its debts, prioritized its payment. Nevertheless, the court authorized the conveyance. Ultimately, the Pennsylvania Supreme Court affirmed. The court concluded that Federal Tax Lien Act of 1966 modified the Government's preference and recognized the priority of many state claims over federal tax liens.
Does the federal priority statute, 31 USC section 3713(a), require that that a federal tax claim be given preference over a judgment creditor's perfected lien on real property where such a preference is not authorized by the Federal Tax Lien Act of 1966?
Legal provision: 31 U.S.C. 3713
No. In an opinion delivered by Justice John Paul Stevens, the Court held that section 3713(a) does not require that a federal tax claim be given preference over a judgment creditor's perfected lien on real property. Justice Stevens reasoned that section 3713(a) has been limited by Federal Tax Lien Act of 1966, which provides that says a federal lien for back taxes is not valid until the government files proper notice with state or local officials. Accordingly, Justice Stevens wrote that the Tax Lien Act "represents Congress' detailed judgment as to when the Government's claims for unpaid taxes should yield to many different sorts of interests... in many different types of property... specifically crafted for tax collection purposes." Justice Antonin Scalia filed an opinion concurring in part and concurring in the judgment.
Argument of Kent L. Jones
Chief Justice Rehnquist: We'll hear argument next in Number 96-1613, United States v. The Estate of Francis Romani.
Mr. Jones, you may proceed whenever you're ready.
Mr. Jones: Mr. Chief Justice, and may it please the Court--
On the date of his death Francis Romani owned real property worth about 50,000 dollars.
That property was subject to a private judgment lien and to a laterfiled Federal tax lien.
Both of the liens were for amounts that exceeded the value of the estate, and the estate therefore brought this case to determine whether the claim of the United States or the claim of the private judgment creditor should be paid first.
The answer to that question appears in the direct text of what is known as the absolute priority statute.
Since 1797, that statute has provided a simple rule for the narrow category of cases in which the United States seeks to recover a claim against an insolvent estate.
Unknown Speaker: Well, the statute is different in this respect.
Until the revision of the statute in question, which I think was 1982, it talked in terms of debt.
3713(a) at page 2 of your brief talks about claim, and it seems to me that a... that the word claim may be quite different than debt.
Claim sounds to me as... has the connotation of something that's not... that's ambulatory, or that hasn't been executed yet, whereas debt sounds as if it's something that's fixed.
Mr. Jones: When Congress enacted that provision in 1982 they said it was a formal change of language that was not intended to change the scope of the statute.
Unknown Speaker: But the language still is different.
Mr. Jones: The language is--
Unknown Speaker: One is claim, and the other is debt.
Mr. Jones: --The language is different, but Congress didn't intend it to have a different meaning, but moreover--
Unknown Speaker: How do you know that?
Mr. Jones: --That's... the legislative history--
Unknown Speaker: Well, but, you know we don't always pay a lot of attention to legislative history.
Mr. Jones: --It's... you may not always pay a lot of attention to it, but in the context where a change has been made to words, and the question is whether that changed the meaning of the statute, it's appropriate to look to the legislative history, especially when Congress says in that history, we're not changing the meaning.
That should be authoritative.
Unknown Speaker: A committee says in that regard.
Mr. Jones: --That's correct.
There is an answer, I think, in any event to your question apart from that, and that is... I may be... I may have the wrong case, but I think it's United States v. Moore where the Court said that whether the claim is unliquidated or not, it's still covered by the absolute priority statute.
But the importance of the absolute priority statute is that it provides the simple rule that the United States shall be paid first.
Unknown Speaker: Well then, what's the point of 6321 and 6323(a), which deal specifically with tax liens?
Mr. Jones: Yes, that's indeed the ultimate question in the case.
Unknown Speaker: Yes.
Mr. Jones: Does that statute change the application of the absolute priority statute for tax claims?
The Pennsylvania supreme court said that it did, and we say it doesn't.
The rationale of the Pennsylvania supreme court was that this tax lien statute provides a limitation on the effectiveness of the Federal tax lien, and that by limiting the validity of the lien, you limit the priority of the United States, but in United States v. Key and United States v. Emory the Court said that only the plainest inconsistency between two statutory schemes would justify disregarding this ancient and clear command that the United States be paid first.
There is no claim inconsistency between these statutory schemes.
The absolute priority statute is a priority statute.
It does not require any lien of the United States.
In United States v. City of New Britain, and United States v. Vermont, this Court held exactly that, that the right of the United States under the absolute priority statute exists wholly without regard to the existence of any lien.
Unknown Speaker: But in the New Britain case they discussed at great length the tax lien statutes, too, did they not?
Mr. Jones: Yes, because that--
Unknown Speaker: Well, why would that have been necessary if the only holding of the case was that it's governed by the absolute priority statute?
Mr. Jones: --Because in the New Britain case the debtor was solvent.
The absolute priority statute did not, by its terms, apply, and the very important part of that opinion for this purpose is what the Court went on to say about how the Tax Lien Act applies in that situation.
What the Court said was, the Tax Lien Act only determines the validity of the Federal lien.
It does not, by its terms, contain any priority provisions.
It does not set a priorities, it is a lien statute, and the Court said that to determine priorities we look to the background common law rule of first in time is first in right, unless that has been modified by statute, and the Court pointed out that in the insolvency situations to which the absolute priority statute applies, it has been modified by statute.
Congress provided specifically since 1797 that in the narrow category of cases involving insolvent estates the United States is to be paid first.
Unknown Speaker: But if... the whole thing is so strange.
What if the insolvent debtor, instead of dying, became bankrupt?
Then the Government isn't necessarily going to come out the same way.
Mr. Jones: Congress specifically has provided that bankruptcy cases are to be determined not under the absolute priority statute but under the priority provisions of the Bankruptcy Code.
It's not illogical for Congress to determine that one set of priority rules apply in one context and a different apply in different contexts.
Unknown Speaker: But if the debtor is insolvent and dies, then you say this 3713 has to apply, even if it's a tax that we're talking about.
Mr. Jones: Absolutely.
Congress said that, but more important... well, equally importantly, this Court has said that no less than seven times in the last 180 years.
Unknown Speaker: Well, what if under 3713 instead of a judgment lien there had been a prior recorded mortgage?
Mr. Jones: Well, that takes us to the heart of an ancient dispute that this Court has, by its express statements, never resolved.
Unknown Speaker: Well, what's your position?
Suppose there was a prior recorded mortgage here--
Mr. Jones: --The--
Unknown Speaker: --and we were talking about that in the case of an insolvent who dies--
Mr. Jones: --The Court--
Unknown Speaker: --versus the Government's claim.
Mr. Jones: --In New York v. Maclay, for example, the Court said a mortgage is more than a lien, that it is closer to a title and possession of the property, and--
Unknown Speaker: Well, do you concede that in the mortgage situation the mortgage holder would come out ahead of the Government here--
Mr. Jones: --I would--
Unknown Speaker: --if it were a recorded mortgage?
Mr. Jones: --I would concede it to this extent.
The Court so stated that in Thelusson.
Unknown Speaker: Yes.
Mr. Jones: The Court confirmed that in the Maclay case, but I believe it was in either Mass... United States v. Massachusetts or United States v. Texas, in one of those two opinions when they were reciting the wellestablished rule about we prevail against judgment liens but we may not prevail against mortgages, the Court said something to the effect that if the mortgage cases are still valid.
Now... and so I suppose that what the Court was saying then was, they weren't revisiting to decide whether the mortgage case--
Unknown Speaker: Well, what are you saying?
Mr. Jones: --Well, I'm... I'm just--
Unknown Speaker: I think we'll try to figure out--
Mr. Jones: --Okay.
Unknown Speaker: --what we were saying.
I want to know what you're saying about this.
Mr. Jones: --What I'm saying is that the Court has always held that we prevail against the general lien of the judgment.
The question of whether we prevail against a mortgage isn't presented in this case.
The question in particular--
Unknown Speaker: Well, I know that.
I'm asking what your position is if it were.
Mr. Jones: --Well, I'm... my position is that the Court has twice held that we lose to a mortgage, and has once said that it's not certain that that's good law.
I really don't--
Unknown Speaker: What about all the repair... the repairmen?
You know, people come in and they fix the house, and normally you fix the house or you fix the plumbing and throughout the law there are all kinds of ways of making certain those people get paid.
They're usually called mechanic's liens, and here Congress has a specific statute that says, you know, if Smith dies and he... or if Smith owes money on taxes, we get it first.
We use this magic word lien, but all that means is, we get it first.
But by the way, we don't get it first in respect to the mechanic.
Mr. Jones: --No, Con--
Unknown Speaker: He gets his money first, right?
Mr. Jones: --Congress--
Unknown Speaker: You're saying that the mechanic lien... the mechanics get their money first, before the tax money, I take it.
That's not right?
Mr. Jones: --First of all--
Unknown Speaker: I was reading 632... yes.
Mr. Jones: --the absolute priority statute doesn't create a lien.
Unknown Speaker: I mean, I'm taking... a lien is just a magic way of saying the Government gets paid first, I think.
Mr. Jones: It's not a... it's not that kind of a magic word, and this Court has made the very distinction on this subject, and so it's important for me to emphasize it.
The right of the United States under the absolute priority statute does not depend upon the existence of any lien, valid or not.
It defeats any... what the Court has described in I think seven cases that we've cited.
It defeats anything that is a quote, general lien, which is a lien that does not... as the Court said in Thelusson all the way to Gilbert Associates, a general lien does not divest title or possession from the United States.
The property remains in the debtor's estate and therefore the United States is to be paid first.
And so, is the... so the question that I believe was implicit in your remark was, is a mechanic's lien a general lien covered... you know, which the United States prevails, or is it a specific lien that might come in ahead of the United States under the absolute priority statute.
Unknown Speaker: Yes.
Mr. Jones: My perception of that is that if the Court had to reach it, under its precedent it would hold that it was a general lien, although it could hold it was a specific--
Unknown Speaker: And not like a mortgage.
Mr. Jones: --It's certainly not exactly like a mortgage.
Unknown Speaker: So then my question actually is... thank you, that is much clearer, and my question really is what any Congressman or Senator would have had in mind in saying that my goodness, we want to be certain those mechanics who come in and fix the roof are paid before the IRS, and that's what they seem to say in 1623 and, in fact, if we're reading of the statute is correct, every time a person dies insolvent the IRS gets paid before the mechanics.
Now, that to me just doesn't make any sense.
Mr. Jones: Well, I'm not... I'm not saying what our position is on mechanic's liens, because I can hear an argument to be made for saying, oh, that's a specific lien within the context of how the Court uses that term.
But let's take the judgment lien, which is also referred to in 6323, and which the Court's opinions say clearly we prevail against under the absolute priority statute.
Did Congress intend, in adopting 6323, to repeal the application of the absolute priority statute to judgment liens?
The answer to that is no.
Because at the same... in terms of intent, at the same time that the repealing legislation was presented for... I mean, that the Federal tax lien legislation was presented to Congress in 1966, Congress was also presented with three bills designed expressly to repeal the application of this statute to tax claims.
Congress conducted hearings on those legislation, informed itself of the objections, and declined to enact it.
4 years later, the same repealing legis--
Unknown Speaker: Or a committee did, anyway.
Mr. Jones: --Yes.
Unknown Speaker: I'm normally with you on legislative history, but I'm getting off the train in this instance for the reason that I'd ask before these particular bills, of what sense it would make?
What sense would it make--
Mr. Jones: It--
Unknown Speaker: --for... to have a law which says, like 6323, we normally put all these things ahead of the secret IRS lien, because it isn't necessary... but we don't--
Mr. Jones: --The sense that it--
Unknown Speaker: --we don't put it ahead when the person dies.
I'm looking for some sense in that.
Mr. Jones: --The sense that it makes is, when the tax lien provisions are applicable, they're applicable within a priority context determined by some other statute or legislation.
In the situation you've described, if he goes into bankruptcy, then it's the Bankruptcy Code that prevails, the Bankruptcy Code that is operative.
All that the tax lien provisions say is whether we have a valid lien, and then you should ask, so what if we don't have a valid lien, and the answer under the absolute priority statute is--
Unknown Speaker: Mr. Jones--
Mr. Jones: --it doesn't matter.
Unknown Speaker: --You are presenting the position as though it's clear and certain this is the Government's position, the only question mark is what this Court may have done in some mortgage cases, and yet the red brief cites an Attorney General's opinion from 1857.
But you don't... as far as I remember don't address that at all in--
Mr. Jones: Well, one of the reasons we don't address that opinion of the Attorney General is because all of that portion of their argument relates to an issue that wasn't raised below, which is whether this is--
Unknown Speaker: --No, but they can defend the judgment on the ground that it wasn't thought of below.
Mr. Jones: --They can defend it on a ground that wasn't even raised below.
Unknown Speaker: Sure.
Mr. Jones: Or addressed below.
Unknown Speaker: If their reading of the statute is correct, namely that the... what you call an absolute priority statute merely applies to unsecured claims, then we don't have to get into all this, and we would have to affirm--
Mr. Jones: --If the--
Unknown Speaker: --if that's a correct reading of the statute.
Mr. Jones: --If the Court were going to revisit the question of whether the judgment lien was subject to the absolute priority statute I would think it would want to do that in a context where it was raised below, because the Court has already decided that issue seven times.
Unknown Speaker: Well, it's been fully briefed in this, by both sides in this case.
You filed a reply brief.
Mr. Jones: And stare decisis would also suggest--
Unknown Speaker: Well--
Mr. Jones: --that what the Court would do would be to apply Thelusson, Gilbert Associates, United States v. Texas, United States v. Massachusetts, City of New Britain and Vermont, and say--
Unknown Speaker: --United States v. Massachusetts was a 5 to 4 decision, so it has less claim to stare decisis than--
Mr. Jones: --Well, it was just one of a long string of decisions, and my point is simply that this is wellsettled since 1817.
If the Court wants to revisit the issue, I would think it would do it in a case where we had an opportunity to brief it in the courts below and fully here, instead of just in a reply brief.
Unknown Speaker: --Mr. Jones--
--But you still haven't commented--
Mr. Jones: Yes--
Unknown Speaker: --on the merits of the Attorney General's brief.
Mr. Jones: --Right.
Unknown Speaker: You said we didn't discuss it because it wasn't raised below, and that's your only answer to that opinion?
Mr. Jones: No, I... that's not my only answer.
That opinion was in 1850-something.
It was... what it really was, and what the opinion reflects, is that it was an issue about whether a mortgage takes priority under the absolute priority statute, and the Court cited Conard, and maybe Thelusson, but certainly Conard for that proposition, which... we don't intend to dispute Conard.
We don't intend to dispute that a mortgage... this Court has held that a mortgage takes priority, and--
Unknown Speaker: Why not?
It doesn't make any sense.
Mr. Jones: --Well, when Justice O'Connor asked me that, it's sort of like... well, I... I'm not trying to reformulate the Court's cases.
I'm trying to describe them, and the Court's cases have contained that last caveat about, well, whether that is still good law.
We don't place that at issue in this case.
But getting back to Justice Breyer's question about why does this make sense, this makes sense because Congress has provided priorities for cases involving bankrupts in the Bankruptcy Code.
Congress has provided by indirection cases for insolvents, which is that they haven't changed the common law rule of first in time, and that's what the Court held in City of New Britain.
Unknown Speaker: Well, the priority under this would be first in time, first in right.
I mean, it's not a mystery what the priority would be if--
Mr. Jones: No, the priority here is we're paid first.
Unknown Speaker: --6323(a) governs.
Mr. Jones: No, the priority in an insolvent estate is the absolute priority statute, and that's we're paid first.
These are different rules.
Unknown Speaker: That's the issue.
If we were to say 6323(a) was the more specific and it applies, then it would be first in time, first in right, wouldn't it?
Mr. Jones: --That is... well, I wouldn't think you'd say that for a variety of reasons.
One is, the Court doesn't apply that method of analysis to the absolute priority statute, but even if it did, which of these provisions is more specific, which is a point I've been trying to get up to.
The absolute priority statute is a very narrow statute.
It has an extremely narrow scope of operation.
It only applies in these narrow categories of cases involving insolvent estates and a few other narrow insolvency situations.
The dominant majority of cases are governed by other priority provisions.
Bankruptcy cases, solvency--
Unknown Speaker: But are you saying that priorities, lien, or debt priority statutes come into play in a majority of cases where there is no insolvency?
That seems odd to me.
I would think the time that it would be most useful and probably most applicable is when there is some sort of insolvency.
Mr. Jones: --And in the vast majority of those cases they're in the Bankruptcy Code, covered by the Bankruptcy Code.
I mean, we know Congress intended to have two different priority schemes, because the absolute priority statute specifically excepts bankruptcy cases from its application.
Unknown Speaker: But Mr. Jones, the Government is owed all kinds of money by all kinds of people, and that's... the absolute priority statute could cover those debts, but here we have something that deals with tax liens, so that's the specific subject matter, as--
Mr. Jones: Well, that deals with tax liens, and that's the point, because Congress certainly knew full well that this Court had held in Thelusson in 1817 and in the several cases in the fifties, like City of New Britain, knew full well that this Court had held that you don't need a tax lien.
It doesn't matter if you don't have a valid tax lien under the... in the narrow situations that the absolute priority statute applies, and so you have to understand that these statutes really operate in different... on different issues.
Every Federal court that has considered this has recognized that the priority statute establishes priorities, the lien statute deals with liens.
These are different subjects.
There's no inconsistency between these two provisions because they both have full application in the separate contexts that they apply.
Unknown Speaker: --What is the... so I'm still back to the... I'm looking at it... to be honest with you, I'm seeing your statute as a very old one, and once you take that statute the courts have to get into a real nightmare of an issue of deciding when title is passed, or when it isn't passed.
It isn't true that any physical property in the possession of the deceased is going to go to the Government.
You have to draw odd lines.
Congress begins to pass specific statutes dealing with specific situations that set up priorities, and unless there is some reason for not applying these later, specific statutes, I don't know why we wouldn't--
Mr. Jones: Well--
Unknown Speaker: --because they're a more thoughtout, careful method of distinguishing between different kinds of--
Mr. Jones: --You can't come to that conclusion--
Unknown Speaker: --Yes.
Mr. Jones: --after reading the City of New Britain opinion, because the City of New Britain opinion says that in the insolvency situation Congress has provided specific priorities, and we win without regard to the existence of any lien.
Unknown Speaker: What's the... what is special about dying insolvent as opposed to just living and not paying your taxes?
What... what's the difference.
Mr. Jones: It's not so much that there's something special about it.
It's that the statutes have different words, they have different histories, they have different purposes, they do not conflict if you take them each at their fair reading.
The... okay, let's say the fair reading is, this is a judgment lien, our lien would not be valid against it.
The next question is--
Unknown Speaker: If you go into history, your opponent argues you go back to the prerogative of the Crown and apply to everything, just general claims and not secured claims.
Mr. Jones: --I think that that's a--
Unknown Speaker: You ignore that history?
Mr. Jones: --vast overstatement again.
I mean, they cite a case called Marshall v. New York, where the Court says that the common law rule was that specific liens, only specific liens prevail--
Unknown Speaker: Do you think they correctly or incorrectly describe the law in England before we got started?
Mr. Jones: --I... they didn't correctly describe the law in England as this Court described it in Marshall.
Unknown Speaker: Well--
Mr. Jones: As far as what the law in England was before, this Court has said it doesn't matter, because in United States v. Moore, and all the way back in 1824, I think, in the Bank of North Carolina case, the Court said that whatever the common law rule is, this priority of the United States arises solely by statute, and it is interpreting that statute that the Court has said, seven times since 1817, that a general lien such as a judgment lien, or a State and municipal tax lien, or a landlord's lien does not prevail against the absolute priority of the United States.
And in City of New Britain they said we don't need a lien in these cases.
A lien... and or repeated that same conclusion in United States v. Vermont.
The lien... the existence of a lien is a security device.
It's not a right to payment.
We don't have a lien, so when there's property... in the absolute priority situation, when there's property possessed by the insolvent estate, if it's transferred out of the estate we don't have a lien that follows it, and the absence of such a lien doesn't affect our right to be paid out of the property of the estate.
Unknown Speaker: --You do concede that certain secured creditors can get priority in an insolvent estate situation, and you would--
Mr. Jones: Yes.
Unknown Speaker: --say, well the mortgage... is there anything... well, as to the mortgage, do you make a distinction between--
Mr. Jones: I think a purchase money mortgage--
Unknown Speaker: --title States and lien States?
Mr. Jones: --I think a purchase money mortgage would plainly be the sort of thing this Court would hold as a practical matter would hold it's a specific lien that prevails against the absolute priority of the United States.
I think that much is clear, to answer your question.
Unknown Speaker: Any other--
Mr. Jones: The Court has never decided that question, and has specifically avoided it, so I can't tell you how you'd decide it.
Unknown Speaker: --I just wondered what worked in with your theory.
Mr. Jones: The theory that the Court has is that to be specific for purposes of the absolute priority statute you have to divest title or possession of the good from the debtor's estate before the claim of the United States arises.
Unknown Speaker: So then in mortgage lien States, as distinguished from title States, then in the lien States the creditor would lose.
Mr. Jones: Justice Cardozo who addressed that very point in New York v. Maclay, and he said, well, I don't have... I can't decide now whether a lien State the mortgage would win, but, he says, this... a mortgage is more than a... more than merely a lien, he said.
It's more akin to title.
It's more akin to possession.
Now, there's a reason why the Court hasn't had to address that question.
The reason is that it has never had a case before that presented anything other than a general lien that did not divest title and possession, and so that boundary is still out there.
It... but it's never been defined by the Court other than in Thelusson, and it... they said, well, it's title or possession--
Unknown Speaker: We--
Mr. Jones: --and the Court has followed that for 180 years.
Unknown Speaker: --This is a slightly picky point.
I'm reminded of my tax professor, Ernie Brown, and I'm looking at the lien statute, and you're saying, well, that's just a lien statute.
We win anyway.
But it doesn't say the United States shall have a lien.
It says the amount owed shall be a lien, right?
Mr. Jones: That's 6321.
Unknown Speaker: Yes, 6321.
Mr. Jones: 6323--
Unknown Speaker: So it says, if I die insol... I know, 6323 refers to the lien in 6321.
Mr. Jones: --And says it won't be valid--
Unknown Speaker: Yes, the lien won't be valid.
Mr. Jones: --Right.
Unknown Speaker: But what 6321 says is, the amount when I die insolvent and owe it to the IRS, it says that amount shall be a lien, so the amount that I owe you is a lien.
It's not that you have a lien.
Mr. Jones: But we don't--
Unknown Speaker: And therefore the language of the statute is consistent with it replacing the statute that you're talking about.
Mr. Jones: --Well, that... I'm sorry, I--
Unknown Speaker: I put that--
Mr. Jones: --I'm just surprised at that suggestion.
The Court... I can't remember the case, but I'm quite confident that the Court has said that the tax lien provisions supplement the right of the United States to recover a tax.
Unknown Speaker: --We have to say it's a supplement?
Mr. Jones: Well, I think it obviously is.
Every lien is a supplement to the underlying claim.
I mean, it doesn't substi... it doesn't replace the claim.
It's a security device.
The question is, do we need it?
No, we don't.
The Court has so held.
We don't need that lien.
Unknown Speaker: Why did Congress give it to you if you didn't need it?
Mr. Jones: Well, we don't need it in the absolute priority, in the narrow categories of the absolute priority statute, because there we have a right to be paid first.
When those priorities aren't applicable, yes, we benefit from the lien in other priority contexts.
Congress intended these priority rules to apply here, intended other priority rules to apply elsewhere.
I've got just a few minutes left.
I only want to make one other point at this time, and that is that respondent claims that this ancient statute should be modernized to avoid an inconvenience to creditors.
The simple answer to that is what the Court said in Emory.
Whatever the merits of that objection should be made to Congress, not the Court.
And that brings me to the point that these objections were raised with Congress twice.
In '66 and '70, Congress conducted hearings on them and declined to make the changes that respondent now asks this Court to make.
Going all the way back to 1805, in the first case that this Court decided under the absolute priority statute, Chief Justice Marshall said for this Court that the inconvenience of the statute did not justify its judicial nullification, and for that reason the Pennsylvania supreme court's decision should be reversed.
I'd like to reserve time for rebuttal.
Unknown Speaker: Very well, Mr. Jones.
Mr. McCartan, we'll hear from you.
Argument of Patrick F. McCartan
Mr. McCartan: Mr. Chief Justice, and may it please the Court--
If I may, I would like to start with the question posed by Justice Stevens, which is whether antecedent security interests, traditional security interests survive assertion of the priority of the United States Government under the priority statute.
We did not handle this case below, and cannot tell the Court, therefore, why it was not discussed below, but I can and do say that it is clearly embraced within the question presented by the Government in its petition.
That is why they argued this issue at pages 9 and 10 of the petition, and why they reargued it at pages 14 and 16 of their opening brief on the merits here.
The statute under which the Government claims priority had its origins in the prerogative of the Crown for the payment of debts due to the sovereign.
When it was enacted, there was more than a century of English precedent to the effect that antecedent security interests would survive assertion of a priority under the prerogative of the Crown.
I would urge this Court to revisit your early decisions and those of some of the lower Federal courts at the time.
It is old learning, but it demonstrates quite clearly that there is not an unbroken line of authority from Thelusson v. Smith to modern times, as contended by the Government.
Thelusson was decided in 1817.
11 years later, this Court decided Conard v. Atlantic Insurance Company, stating, and it was essentially the same Court, that Conard should be limited... or, excuse me, that Thelusson should be limited to the circumstances of that case, and stating unequivocally that Thelusson did not stand for the proposition that a perfected lien could be displaced by, and I quote, the mere priority of the Government under Revised Code section 3466.
Subsequently, this Court, in United States v. Hack and Brent v. Bank of Washington, upheld traditional security interests against assertion of priority under the priority statute.
For a period of 75 years thereafter, it was the understanding of the lower Federal courts that traditional security interests would survive assertion of priority by the Government under this statute.
The Attorney General of the United States in 1857 issued an opinion to the effect that Thelusson was overruled by Conard, and that was the understanding, that was the assumption, that was the premise on which the lower Federal courts acted from that point on.
Cottrell v. Pierson, which appears on pages 11 and 12 on our brief, I think is illustrative of the understanding of the lower Federal courts.
Now, it wasn't until 1933 in New York v. Maclay that the language of Thelusson referring to the need of a lienor to perfect the lien by acquiring title or possession was revived.
Maclay, though, was a case which involved personal property and an unliquidated amount in terms of the lien.
The New York State statute with respect to franchise taxes is very, very unusual.
Franchise taxes under the New York law are a lien in advance of the years in which they are due, so in Maclay you didn't even have the amount of the lien determined because it wasn't yet due and, secondly, any property to which it may have attached may not even have been in existence.
The lien is obviously--
Unknown Speaker: Counsel, what's your best case for support of your position that the judgment lien comes before the Government's right under 3713?
What's your best case?
Mr. McCartan: --You mean ahead, Your Honor, in terms of whether the lien survives?
I would say it would be Cottrell v. Pierson, United States v. Hack, and Brent v. Bank of Washington.
Those three cases all established the traditional security interests would survive assertion of priority by the Government under the statute.
Unknown Speaker: Well, is the judgment lien situation different somehow from a mortgage or other type of secured interest where possession changes, or title, or--
Mr. McCartan: I think not, Your Honor, and this Court itself in Rankin & Schatzell v. Scott said that a judgment lien has the same power as the mortgage to hold the land, and if we look at these early cases--
Unknown Speaker: --We... the court below didn't really get into the question of the nature of the judgment lien here, did it?
Mr. McCartan: --No, it did not, Your Honor.
Unknown Speaker: So we don't actually know the nature of it here.
Mr. McCartan: Well, we know that it was a judgment lien that was definite with respect to the identity of the judgment creditor, the amount of the judgment, and that it was immediately enforceable.
It was properly perfected--
Unknown Speaker: Did it apply to all property in the State of Pennsylvania?
Mr. McCartan: --I'm sorry, Your Honor.
Unknown Speaker: Did it apply to all property in the State of Pennsylvania--
Mr. McCartan: No, Your Honor.
It applied only--
Unknown Speaker: --or just a particular county--
Mr. McCartan: --only to property located within Cambria County, which is the county where the judgment was entered, indexed, and was immediately enforceable, and there was only one parcel of property in Cambria County which was owned by the debtor.
Unknown Speaker: --But there was nothing to make it more specific than that.
Then why isn't--
Mr. McCartan: There was nothing that need make it more specific than that, Your Honor.
In order to protect the interests that are involved here, which would be subsequent purchasers, or anyone else with an interest in the affairs of the debtor, a simple title search would reveal this.
It's not just a matter of journalizing the judgment in the court of record.
It is taking that judgment to the county recorder and then entering it there and indexing it so that it will appear in the land--
Unknown Speaker: --Well, except the suggestion is that a mortgage is specific as to property, and that judgment liens are not, and whether or not this Court can get into State lien law as to what's specific and what's general is certainly problematic, but that's the suggestion.
Mr. McCartan: --Well, Your Honor, when they say that the mortgage is more specific, are we looking at the nature of the mortgage, or are we talking just about parcels?
In this case, there was only one piece of real property located within Cambria County to which this judgment lien could attach.
The judgment lien was definite with respect to the identity of the judgment creditor--
Unknown Speaker: Well, but--
Mr. McCartan: --the amount of the lien, and the property.
Unknown Speaker: --It seems to me unlikely we're going to base our holding on that.
We have to assume that there were five other pieces of property in other counties, if your reading of the statute is correct.
Mr. McCartan: No, Your Honor, it would not apply to any property located in other counties unless that judgment were taken to those counties and indexed.
Unknown Speaker: But under your submission if you file it in every county, then your lien is good in every county.
Mr. McCartan: In every county... if you take that judgment and enter it according to State law, it is good in any county in which real property is located, and that lien has sufficient capacity to bind the land.
If you look at the early cases, Justice O'Connor, with respect to mortgages, we have to be careful, I think, in looking at these cases that we don't become hidebound by the common law's emphasis on the form of the transaction.
At common law, a mortgage took the form of a straight conveyance of title, but it was always subject to defeasance.
The mortgagor had an equity of redemption.
The mortgagee was never entitled to realize any more from the property than the amount of the secured interest.
The mortgagor's spouse even retained dollar.
The mortgagee's spouse did not.
With respect to real property... and none of the cases relied upon by the Government here involve real property.
They all involve personal property.
In cases of real property, a lien can be perfected if it is filed after entry of judgment and indexed in accordance with State law.
That was done here, and that lien was, therefore, perfected with respect to real property within the county where it was recorded.
Now, if the Government's theory is correct, it should apply to mortgage liens as well, and mortgages are liens in 30 State jurisdictions.
There's no reason to distinguish between a mortgage lien and a judgment creditor's lien, which has a history at least at long and as enforceable as a mortgage lien.
Unknown Speaker: Mr. McCartan, if I understand your position correctly you're not asserting that just the entry of the judgment would have been sufficient to overcome the Government's claim here.
That it is the entry of the judgment plus the perfection of the lien--
Mr. McCartan: That is correct.
Unknown Speaker: --by recording it in... as against particular property?
Mr. McCartan: That is correct, Your Honor.
Unknown Speaker: In Arizona, where I practiced, if you got a judgment you would have to take a... get a certified copy of the judgment from the clerk of the court and take it to the county recorder, and the county recorder would record it the same way it would record a mortgage.
Is that the way Pennsylvania procedure works, too?
Mr. McCartan: That's the way Pennsylvania works, Your Honor, and at that point, that lien is immediately enforceable without any further judicial proceedings of any kind, as was the case in United States/Texas, a case on which the Government relies here.
The mortgage, or the certified copy of the judgment is taken to the county recorder, it is indexed, and it is placed on the land records.
It is therefore specific with respect to any land that is located within that county, and it binds that property.
There is no way in which a mortgagee or a judgment lien creditor can protect themselves against the kind of theory that's asserted by the Government here.
Do you realize that 400,000 dollars of this 490,000 dollar tax lien, or tax claim, as the Government would prefer to say, was for tax years that were after the time when this judgment was entered, indexed, and perfected as a lien under Pennsylvania law?
The commercial mortgage market would be in total chaos if that theory were to be accepted.
Let me address next the question of the interaction of these two statutes.
The Government would make it appear that the only issue here is whether there is an implied exception to the priority statute, when in fact the issue is really whether there is an implied exception to one statute or an implied limitation on another, as I think Justice Breyer suggested.
There are really two separate and distinct questions presented by this phase of the case.
First, whether the competing statutes are inconsistent within some range of overlapping application.
Unknown Speaker: Well, we've applied, I think, a higher standard in justifying any displacement of section 3713.
We really have at least articulated a higher standard than just finding a more specific statute.
Mr. McCartan: Well, when you say a higher standard, Your Honor, I assume that you are referring to the test in United States v. Key, where the Court set forth a threepart test--
First, is there a facial inconsistency, or a logical inconsistency between the two statutes, secondly, would application of the priority statute make the subsequently enacted and more specific statute redundant, or does the legislative history in any way suggest a congressional intention to carve out an exception to the priority statute?
I submit that while it is doubtful in my mind that in a case that didn't even involve an inconsistency the Court was setting forth an overarching test to resolve all of these cases, I submit the situation here does satisfy the test that was set forth in United States v. Key.
To begin with, the competing statutes are inconsistent, and they are inconsistent in the very area presented by this case.
The relative priority of the Government depends upon which statute applies.
And, Justice Breyer, it doesn't make sense for the Government to argue that, well, we are here as a tax claimant as well as a lienholder, and we would prefer to proceed as the holder of a tax claim rather than as a lienholder.
If you think about that, it's another way of saying that the Government should stand in a better position as an unsecured creditor than as a secured creditor, something that Professor Kennedy, the leading commentator in this area, said was quite paradoxical, that the Government should be better off--
Unknown Speaker: I think it--
Mr. McCartan: --as an unsecured than as a secured creditor.
Unknown Speaker: --Where... suppose they're right on the lien statute, and he's clarified the argument quite well.
Suppose they're right, then where... suppose they're right, in other words, that the priority statute applies.
It would apply to people who die insolvent.
If that were true, where would the tax lien statute apply?
It couldn't apply to dead people, because the other one does for dead people.
It would apply to live people.
It couldn't apply to live bankrupt people, because the bankruptcy statute would apply to those people, so it would apply to insolvent live people who aren't... no, sorry, it would apply to people who... perhaps solvent live people.
Now, what is that universe like, the universe of solvent, live people for whom one needs a tax lien statute for the Government to collect its money?
What is that universe?
Mr. McCartan: That universe is one where the tax lien would have no... tax lien statute would have no significance whatsoever, as the Chief Justice pointed out earlier.
If the debtor is solvent, there is no need for these carefully crafted priorities in section 6326(a).
If the debtor is solvent, everyone is going to paid.
Unknown Speaker: There would at least be people who disappear, but even--
Mr. McCartan: Pardon, Your Honor?
Unknown Speaker: --There might be somebody who disappeared, leaving a house behind, and you'd have a tax lien against the property you could find.
Mr. McCartan: And that very limited area of cases is hardly what Congress had in mind--
Unknown Speaker: Is there any other area?
Mr. McCartan: --in crafting this.
The Government says, in an effort really to prove that the priority statute is really the more limited and specific statute, that the Tax Lien Act would have application to cases involving solvent debtors, where, of course, it wouldn't be necessary, and secondly in bankruptcy cases.
Contrary to what the Government suggests, priorities in bankruptcy are determined by sections 724 and 726 of the Bankruptcy Code, not the Tax Lien Act, and the Government's reliance on Terwilliger here is misplaced.
There is no reference to the Tax Lien Act in the Bankruptcy Code, nor does the Tax Lien Act apply with full force when a trustee in bankruptcy, acting under section 544 of the Bankruptcy Code, which gives the trustee status of a hypothetical judgment lien creditor at the outset of a bankruptcy proceeding, to determine what liens would survive the bankruptcy, which secured liens might exist.
The trustee would refer to the Tax Lien Act to determine if a Federal tax lien were involved, it had been perfected, but then the priorities of the bankruptcy statute would kick in to determine how these payment would be made and to whom and in what order, and in that situation, Your Honor, the Government would apply in the third category and in the sixth category, not in accordance with the provisions of the Tax Lien Act.
This is the basic structural flaw in the Government's case.
If you accept this theory, the Tax Lien Act has application only to cases where its carefully crafted protections of other creditors would have no significance, and it would also be inconsistent with what this Court itself said in the Kimbell Foods case, and that is that this statute represents congressional disapproval of the unrestricted Federal priority in tax matters.
Now, I don't think that Congress took the time to craft this very detailed statute in order to have it apply only to situations where it would have no significance, and where its priorities would be rendered totally ineffective, but that is what the Government's position is.
Going back, Justice O'Connor, to the key test, I think I've already demonstrated there is an inconsistency between the statutes, because the priority depends upon which statute is applied.
Secondly, as I've just discussed, the Tax Lien Act would be totally redundant, as would, I might add, other Federal lien statutes if the Government's theory is to be accepted.
If you have a solvent debtor, it doesn't matter if you have a lien or not, you're going to be paid.
Now, with respect to the legislative history, the Government points to two proposals that were advanced by the ABA in 1959 and again in 1970 by way of amendment to the Federal tax lien... or, excuse me, to the priority statute.
Those amendments went far beyond any issue that is involved in this case.
This Court has always been reluctant to draw any inference from congressional inaction, and I submit in this case it would be totally inappropriate to do so because of the breadth of the amendments--
Unknown Speaker: But do they go beyond what your reading of the statute was in the first part of your brief?
Mr. McCartan: --No, Your Honor.
In fact, in the final report of the ABA, which is referred to in the legislative history, I think it is clear that the ABA at that point thought that one of the proposals that was being advanced was really to clarify that traditional security interests have always survived assertion of priority by the Government under the statute.
In other words, with respect to that specific proposal, which was part of a much larger package, the ABA was of the view that they were really conforming law to what traditionally it had understood to be, contrary to the suggestion in some cases.
If you look at the legislative history of this statute in terms of how the structure of the statute has evolved over time, I think it is also clear that we meet the test set forth in The United States v. Key.
This is a statute that started out as a means of facilitating tax collection on the part of the Government.
Over the years, there has been a steady expansion of the protection afforded to competing creditors, and if you look at the committee report of the 1913 statute, Congress was of the view at that time that they were putting these other creditors on an equal footing with the Government in tax matters.
In 1966, the 1966 amendments, which gave even unsecured creditors, Justice Breyer, priority over a properly filed and perfected Federal tax lien, Congress said that these amendments were designed to bring the Federal Tax Lien Act in conformity with the provisions of the Uniform Commercial Code, and under Article 9 of the Uniform Commercial Code, secured claims are always given preference over unsecured claims.
So I think that in terms of whether we have satisfied the standards set forth in the United States v. Key, it is clear that we have.
With respect to the cases relied upon by the Government, I want to emphasize that in the case of New York v. Maclay you had a situation of a State lien, State franchise tax lien that was designed to cover all property of the debtor that were accrued in advance of the years in which the amount of taxes were due, so you had an amount that was undetermined, you had property that was undetermined.
Unknown Speaker: It wouldn't have been a perfected lien under the Uniform Commercial Code.
Mr. McCartan: It would not have been a perfected lien under the Uniform Commercial Code or under any other standard, Justice Scalia, that I can consider.
The same was true of United States v. Texas, another case on which the Government relies very heavily.
In that case, the amount of the lien was undetermined.
It required judicial proceedings to determine the amount.
The property there was not only all property used in the business, but all property that might thereafter be acquired, far different from the property in this case located within the county in which this judgment was entered, indexed, and perfected as a lien.
Every other case that is relied upon by the Government involved... and which turned on possession of the property involved, was a case involving personal property.
Liens on personal property at common law required the creditor to take possession of the collateral.
If the creditor did not have possession of the collateral, there was no lien at common law.
Unknown Speaker: Are these all very old cases, Mr. McCartan, because that's certainly not the rule now--
Mr. McCartan: No, that--
Unknown Speaker: --under the UCC.
Mr. McCartan: --Now you can make the filing with the UCC, but at common law, absent possession of the collateral, the creditor was not deemed to have a lien.
In fact, any lien on personal property absent possession was deemed to be fraudulent.
So all of these cases on which the Government relies, the socalled modern cases, are really just reaffirming, in the case of personal property, traditional common law principles.
The case is different, the considerations are different with respect to real property.
Unknown Speaker: But you want us to bring the lien statute up to date with the UCC, which is what you say the legislative history expresses as the purpose--
Mr. McCartan: Well, the--
Unknown Speaker: --and you're not going to do that if we continue to make this absolute requirement that in the case of personal property you have to be in possession.
Mr. McCartan: --Well, in terms of... no, today in terms of personal property with a UCC filing you can obtain a lien on personal property.
Unknown Speaker: Right.
Mr. McCartan: What I'm talking about are the cases involving State tax liens, where personal property was involved and this Court said, absent divestiture of title or possession of the property you don't have a perfected lien on personal property.
Unknown Speaker: Isn't what we're talking about here real property?
Mr. McCartan: That's right, Your Honor, and all of the cases that the Government relies on have turned on the requirement of possession for the property, as enunciated in Thelusson v. Smith, have involved personal property.
Unknown Speaker: So you're just saying that that feature makes it impossible for the Government to claim authority from those cases, rather than those features should be regarded by us as a basis for present law.
Mr. McCartan: That's correct, Justice Souter, and I think that, too, is really why stare decisis is not implicated here, in addition to several other reasons, but these cases on which they rely do involve personal property and not real property, and if we're talking about stare decisis we have to go back to Conard v. Atlantic Insurance Company, and there the Court was of the view that Thelusson should be limited to its facts, and that the requirement that the judgment creditor obtain title or possession of the property was limited to the facts in that case.
Unknown Speaker: Was Thelusson personal property?
Mr. McCartan: No.
Thelusson was real property, Your Honor, but in Thelusson the judgment creditor was attempting to reach the proceeds of the sale of the property and, as the Court pointed out in Conard, what the judgment creditor should have done was to proceed against the land rather than the proceeds from the sale of the land, and that is why Thelusson was being limited to what the Court said were its circumstances.
The Court was very emphatic that Thelusson did not stand for the proposition that a perfected lien could be displaced by the mere priority of the Government under revised statute section 3466.
Unknown Speaker: And that's the position you say the Attorney General in that 1857 opinion--
Mr. McCartan: That's correct, Justice Ginsburg.
In 1857 the Attorney General's opinion was to the effect that Thelusson had been overruled, not just limited to the circumstances of the case, and that the priority statute would not reach back over liens general or specific that were antecedent to the accrual of the Government's claim.
Unknown Speaker: --And yet he--
--Your position would require us to overrule Thelusson, I think.
Mr. McCartan: My position, I think, would require you to at least distinguish it, Your Honor.
Conard, if you accept what the Court said in Conard, that Thelusson did not stand for the proposition that a perfected lien could be overcome by the priority statute, then consistent with Conard you don't have to overrule it.
Unknown Speaker: But normally a lien attaches to the proceeds, or I mean... well, anyway, go ahead.
Mr. McCartan: You see what I mean, though, that the distinction made in Conard would permit the Court to proceed on the basis of Conard without addressing specifically the issue of whether Thelusson should be overruled.
As this Court said in Rankin, the judgment lien does follow the property and can be foreclosed, even in the case where a junior lienholder or unsecured creditor has moved against the property in the first instance.
I submit that the Government's position in this case, and we are talking about real property, confuses what is necessary to perfect a lien with respect to that property with satisfaction of the underlying judgment.
Requiring a creditor to take possession of the property or to foreclose on the lien is a means of satisfying the underlying obligation.
It is not required to perfect the lien under modern recording statutes, and the only cases that would indicate to the contrary are cases that have involved unspecified personal property or real property that could not be identified.
In this case, the property is clearly identified, the identity of the lienor is clear, the amount of the lien has been established, and the property is located within the county in which the lien was perfected.
We satisfy the test in United States/Key, in United States v. Campbell, and I submit that the judgment of the Pennsylvania supreme court should be affirmed.
Unknown Speaker: Thank you, Mr. McCartan.
Mr. Jones, you have 4 minutes remaining.
Rebuttal of Kent L. Jones
Mr. Jones: Thank you.
There are basically two propositions respondent makes.
One is that the Court should disclaim reliance on a distinction that's recognized for 180 years, from Thelusson through Gilbert Associates, between a general lien that does not defeat the absolute priority of the United States and a more specific lien that may.
The Court has held... I'm repeating myself, probably, but I think seven times that a judgment lien is such a general lien and that the priority of the United States prevails against it.
It's said it not only with respect to personal property, it's said it at least twice with respect to real property.
In United States v. Texas in 1941 the Court said, and I'm quoting from page 7 of our brief, but I'm quoting the Court's opinion, a general judgment lien upon the land of an insolvent debtor does not take precedence over claims of the United States unless execution of the judgment has proceeded far enough to take the land out of the possession of the debtor.
Unknown Speaker: Mr. McCartan's point, as I recall, was that the lien in that case was not perfected.
The amount was not even established.
Mr. Jones: He's confusing something that this Court has made clear shouldn't be confused, and that is the standards for specificity under the Federal Tax Lien Act, as contrasted with the standards for specificity under the absolute priority statute.
The Court in Vermont and in New Britain made clear that those are really two entirely different questions.
The question under the Federal Tax Lien Act is, is there a State lien, and the answer is yes if it's become definite in terms of the name of the lienor, the amount of the lien, and the property to which it applies.
But as the Court explained in Vermont, the question of whether you have a specific lien for purposes of the absolute priority statute is a different one, and turns on whether, as the Court said in that case, the debtor has been divested of title or possession--
Unknown Speaker: Well, why should they be different?
Mr. Jones: --They are different because the statutes have different scopes and application, which this Court has clearly held in at least two cases this century.
Unknown Speaker: Is it... was the distinction, or they're saying they're different based on the difference in language in the statutes?
Mr. Jones: And the statute's objectives, yes.
I mean, it goes back to the language.
The absolute priority statute simply says we get paid first, and the question is, well, is there something that prevents that from happening, and the Court's answer has been, well, if the property has been taken away from the debtor, then you don't get paid first.
If it's been taken away from the debtor by something so specific, like a mortgage, then you don't get paid first, but if it's just a general claim against that property, you still get paid first, because it's still in the possession of the debtor, and the statute says, and the Court says we obey the plain language of the statute that the United States gets paid first.
To reach a different conclusion the Court would have to overrule no less than seven opinions over the last 180 years.
The cases that he says are his best cases for this proposition were all in the early part of the 19th Century.
They don't... as our brief describes, they don't stand for the proposition that he contends.
This Court has expressly limited the application of those cases to the mortgage situation in the Maclay, New York v. Maclay, that's what Justice Cardozo carefully explained.
The second argument that they make is that this statute, this application of the absolute priority statute somehow makes the Federal tax lien provisions meaningless, which if you think about it is a preposterous contention that has absolutely no support for it.
The Federal tax lien provisions of course apply in the ordinary situations that the absolute priority statute doesn't apply.
In bankruptcy court, for example, they will determine whose lien comes first, where it matters whether your lien came first or not.
In the... I'm sorry.
My time has expired.
Chief Justice Rehnquist: Thank you, Mr. Jones.
The case is submitted.