In Re Nerland Oil, Inc. Superpumper, Inc., Claimant-Appellant v. Nerland Oil, Inc., Debtor-Appellee. United States of America Through the Internal Revenue Service, Creditor-Appellee
Docket: 01-2962
Court: Court of Appeals for the Eighth Circuit; September 12, 2002; Federal Appellate Court
In the case of In re Nerland Oil, Inc., Superpumper, Inc. appeals a district court decision affirming the bankruptcy court's summary judgment favoring the IRS regarding federal tax liens assessed against Nerland Oil, which took precedence over a state court judgment that allowed Superpumper to set off its debt to Nerland Oil. Superpumper contends that the district court erred in ruling that (1) it did not complete a valid setoff under North Dakota law in 1996; (2) unfiled federal tax liens obstructed its ability to set off the debt; and (3) it could not raise the same defenses against the IRS as it could against Nerland Oil. The Eighth Circuit affirmed the district court's order, holding that jurisdiction was appropriately established in both the bankruptcy and district courts under the relevant statutes. The procedural background includes the founding of Nerland Oil in the 1970s, its relationship with Conoco, and the sale of the Dakota Fuel Stop to Superpumper in 1995, which was financed by a $350,000 promissory note secured by a mortgage on the property.
Superpumper agreed to arrange future fuel supply for the Dakota Fuel Stop as part of its purchase agreement, leading to two contracts with West Fargo Truck Stop, Inc. (WFTS), owned by Brent Nerland. These contracts provided Superpumper with a credit of $579,332 towards the purchase price, with WFTS designated as the exclusive supplier of Conoco brand fuel and responsible for hauling fuel to Superpumper locations. Both contracts included binding arbitration clauses. Although no formal contract existed between Nerland Oil and Superpumper for servicing the Dakota Fuel Stop, it was common industry practice for Nerland Oil to manage credit card receivables from Conoco, which it failed to remit to Superpumper, resulting in a debt of $348,856.26 owed by Nerland Oil as of October 31, 1996. Superpumper sought to offset this amount against a $359,790.18 debt owed to Nerland Oil under a promissory note and mortgage, but Nerland Oil refused.
Superpumper filed a lawsuit in January 1997 to enforce the setoff, which was ordered to arbitration due to the contracts' clauses. After an unsuccessful appeal to the state supreme court, the arbitration panel ruled in favor of Superpumper in August 1999. However, Nerland Oil filed for Chapter 7 bankruptcy on November 5, 1999, invoking an automatic stay that prevented the enforcement of any state court judgment. Consequently, Nerland Oil and WFTS contested the arbitration award in state court, which was initially upheld but later reversed by the state supreme court due to the bankruptcy stay. In April 2000, Superpumper initiated an adversary proceeding in bankruptcy court to have the arbitration award confirmed, while Nerland Oil counterclaimed to reverse the award and sought damages for alleged breaches of the supply agreements.
The United States, via the IRS, sought summary judgment against Nerland Oil, asserting a superior interest in promissory note payments due to multiple federal tax liens established in the 1990s for unpaid federal excise and employment taxes. By the time of Nerland Oil's bankruptcy filing, the owed amount to the IRS was $1,693,979.57, stemming from tax assessments prior to a sale to Superpumper. The IRS contended that it should not be constrained by an arbitration award because it was not a participant in the arbitration.
During a September 19, 2000 hearing, the bankruptcy court considered the summary judgment motions, relying on the arbitration record and additional evidence regarding the tax liens. The court determined that the tax liens were "choate" upon assessment, granting the IRS priority over Superpumper. The court noted that Superpumper did not hold an implied security interest, affirming the validity of the IRS's lien under 26 U.S.C. § 6323(a).
Superpumper appealed to the district court, which upheld the bankruptcy court's ruling, emphasizing that setoffs are treated as liens and thus subordinate to the federal tax liens. Additionally, the district court found that Superpumper could not trace credit card receivables, categorizing it as a general creditor in the bankruptcy estate with a lower repayment status. The district court also clarified that Superpumper did not qualify as a "purchaser" under 26 U.S.C. § 6323 since the asset at issue was the right to payments, not the convenience store itself.
Subsequently, on August 31, 2001, the bankruptcy trustee attempted to dismiss the appeal, arguing the judgment was not final. However, the bankruptcy court certified the judgment as final on September 19, 2001, and the district court confirmed this. On November 9, 2001, the appellate court denied the trustee's motion to dismiss the appeal.
On October 17, 2001, the bankruptcy court lifted the bankruptcy stay, prompting Nerland Oil to seek vacating and modifying the arbitration award in state court, while Superpumper moved to confirm the award. The state trial court denied Nerland Oil's motion to vacate on June 6, 2002, and affirmed the arbitration award on June 18, 2002. Superpumper subsequently updated the appeal record to include the favorable state court order.
The summary judgment review is performed de novo, assessing evidence favorably for the nonmoving party to identify any genuine issues of material fact under Federal Rule of Civil Procedure 56. Federal law dictates that lien priority is determined by the principle that "the first in time is the first in right." A federal tax lien attaches and becomes choate at the time of assessment, as outlined in 26 U.S.C. § 6321 and § 6322. In this case, federal tax liens totaling $1,693,979.57 against Nerland Oil were assessed and became choate in 1993 and 1994. Competing state interests can only take priority if they became choate before federal assessments or fall within specific statutory exceptions.
Federal law governs the priority order of liens, while state law determines the nature of competing interests. Superpumper's claim for setoff arose under 11 U.S.C. § 553(a), which preserves creditors' rights to offset mutual debts incurred prior to bankruptcy. However, such setoff rights must be valid under applicable non-bankruptcy law. Superpumper's state-law interest in the setoff became choate when it demanded the setoff in October 1996.
As of October 1996, Nerland Oil faced $1,693,979.57 in unpaid federal taxes, assessed since at least 1993. Consequently, any transactions attempted by Superpumper, including a proposed setoff transaction, are subordinate to the federal tax liens. Superpumper, as an inferior lienholder, cannot execute a setoff to recover losses from credit card receivables until the federal tax liens are satisfied, as these liens remain effective until the liability is resolved. Satisfying the federal tax liens will fully deplete the Nerland Oil bankruptcy estate.
Federal tax liens encompass all property interests of the delinquent taxpayer, including those acquired post-assessment. Thus, the liens applied to all of Nerland Oil's property interests, including a promissory note obtained from the sale of the Dakota Fuel Stop after the liens were recorded. Superpumper argues that its position differs from typical lien priority cases, asserting that: (1) its debt to Nerland Oil is not subject to the tax liens; (2) the credit card receivables used for the setoff were its own funds held in trust by Nerland Oil; and (3) since the bankruptcy filing occurred after the setoff, only the remaining promissory note and mortgage should be part of the bankruptcy estate.
These arguments are found unconvincing. The promissory note held by Superpumper is indeed property subject to a federal tax lien. Federal law determines the classification of property interests for lien satisfaction, and property is broadly defined to include any legally protected rights or interests with exchangeable value. Additionally, Superpumper mischaracterizes the situation by conflating its debt to Nerland Oil with Nerland Oil's debt to Superpumper. They are distinct debts, each with specific rights and implications, which Superpumper's attempted setoff transaction fails to appropriately recognize.
The relevant property interest is identified as Superpumper's debt to Nerland Oil, specifically the right to collect payments under a promissory note. Federal tax liens transferred the right to all of Nerland Oil's property to the IRS, including the right to collect Superpumper's debt, thereby rendering Superpumper's debt owed to the IRS rather than Nerland Oil. Consequently, the nature of the credit card receivables is irrelevant, as there was no debt owed to Nerland Oil to offset the debt owed by Nerland Oil to Superpumper at the time of the attempted setoff transaction.
The timing of the attempted setoff in relation to the bankruptcy filing is also deemed irrelevant since the federal tax liens were assessed in 1993 and 1994, prior to Superpumper's attempted setoff in October 1996, which nullified the transaction. Superpumper's recourse lies in 26 U.S.C. § 6323, which protects certain creditors from the IRS's priority rule during bankruptcy proceedings. This statute specifies conditions under which federal tax liens can be invalidated against certain types of creditors, with 'purchaser' status defined in relation to acquiring property interests under local law.
Superpumper argues that it qualifies as a purchaser under § 6323(a) because it made installment payments for the Dakota Fuel Stop and that the setoff transaction constituted a payment on the purchase-money mortgage. However, even if these payments could establish Superpumper as a purchaser, it would only pertain to the Dakota Fuel Stop and not the right to receive payments under the promissory note. Therefore, Superpumper would only be protected under § 6323(a) against taxes on the Dakota Fuel Stop, which is not at issue here.
Superpumper further claims it acquired the right to receive payments under the note through the attempted setoff transaction prior to the filing of federal tax liens. To qualify for protection under § 6323, Superpumper bears the burden of proving it provided adequate consideration, acquired a valid interest in property other than a lien, and that this interest is valid under local law against subsequent purchasers.
The attempted setoff transaction did not convert Superpumper into a purchaser under 6323 because the interests involved were mutual debts, lacking adequate monetary consideration. Superpumper aimed to avoid paying the outstanding balance on a promissory note, and the district court correctly concluded that since the setoff did not introduce new money into the bankruptcy estate, it cannot be classified as a payment for rights under the note. A valid payment requires something of value to be exchanged to discharge an obligation, but there is no evidence that Nerland Oil agreed to cease remitting credit card receivables in exchange for Superpumper's release from its note obligations. Instead, Superpumper's setoff request was a retrospective remedy that Nerland Oil rejected. The exceptions under 6323 are narrowly defined, and Superpumper is more accurately described as a judgment lien creditor, with its interest becoming choate on June 18, 2002, after IRS tax liens had been filed in September 1998. Thus, Superpumper is not entitled to superpriority under 6323(a). The district court's affirmation of the bankruptcy court's decision prioritizing federal tax liens in the distribution of Nerland Oil's bankruptcy estate is upheld.
The document notes the involvement of two judges, Chief Judge Rodney S. Webb and Bankruptcy Judge William A. Hill, in the case. It highlights that WFTS lacked authorization to sell Conoco fuel products and did not possess the necessary trucks for fuel transportation. Superpumper asserts that the setoff transaction was completed on August 18, 1999, in line with an arbitration panel's decision referencing state law, while the bankruptcy petition was filed later on November 5, 1999. If valid, the setoff would leave a balance of $10,994 on the promissory note and mortgage.
Superpumper seems to pursue a constructive trust theory regarding credit card receivables, claiming these funds were held in trust by Nerland Oil and should be exempt from the bankruptcy estate for IRS tax lien purposes. However, North Dakota law imposes a high evidentiary burden for establishing a constructive trust, which Superpumper has not satisfied due to failure to raise the issue in the bankruptcy court and agreeing to the existing record of facts post-arbitration.
In addition, the document references the Federal Tax Lien Act of 1966, which established specific exemptions from federal tax liens, and notes that Superpumper's theory of "setoff as payment" was not presented in the bankruptcy court, leading to a waiver of the argument for the appellate court. The appellate court can address legal conclusions based on the established record but cannot consider arguments requiring additional factual findings.
