Appellate + Supreme Court, Business Restructuring + Insolvency, and Litigation
Sixth Circuit Court of Appeals Affirms Bankruptcy Court Ruling that UCC Rules Regarding Debtor Name Do Not Apply to IRS Tax Lien Notices
On June 21, 2005, the United States Court of Appeals for the Sixth Circuit (the "Court") reversed the decision of the U.S. District Court for the Eastern District of Michigan and affirmed the grant of summary judgment in favor of the IRS by the U.S. Bankruptcy Court for the Eastern District of Michigan with regard to the matter In re Spearing Tool and Manufacturing Co., Inc., No. 04-1053, 2005 U.S. App. LEXIS 11808 (6th Cir. 2005). In its decision, the Court held that the Internal Revenue Code and Treasury Department regulations govern the form and content of a notice of tax lien, not the Uniform Commercial Code (the "UCC") or "any other provision of law regarding the form or content of a notice of lien" (26 U.S.C. § 6323(f)(3)). The Court further held that an IRS tax lien notice is sufficient if it identifies the taxpayer in a manner such that a "reasonable and diligent search would have revealed the existence of" such lien notice (Tony Thornton, 791 F.2d at 639). In reaching its decision the court noted that name variations which would appear in the relevant lien index on the same page as the correct legal name are sufficient to identify the debtor. The Court also noted that in jurisdictions which provide only electronic search results as to exact names, a reasonable and diligent search should include common abbreviations (which in the case at issue included "&" for "and" and "Mfg" for "Manufacturing"), particularly where the creditor has notice that such abbreviations are sometimes used by the debtor. The Court seemed particularly swayed by the fact that a search report returned to the creditor recommended an additional search in the name variation used by the IRS and the fact that the name in which the IRS filed its lien notice was the same name in which the debtor filed its tax returns and was also a name which the creditor knew the debtor used. The Court went on to note that in balancing the burden to creditors faced with conducting multiple searches against the burden to the IRS in having its lien invalidated for failure to comply with UCC standards, public policy (and Supreme Court decisions on the matter) favored the IRS’s ability to ensure revenue collection.
In light of this ruling, we recommend that, at a minimum, initial lien searches and "update" searches for federal tax liens be conducted using all known trade names of the debtor as well as all names in which the debtor has filed tax returns for the prior 6 years. Furthermore, if search reports for a particular jurisdiction are available in a format that lists alternate names, those searches should be carefully reviewed and copies of any filings in reasonably similar names should be obtained.
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