BLOOMFIELD STATE BANK v. UNITED STATES OF AMERICA (May 11, 2011)

Bloomfield State Bank made a mortgage loan secured by real estate and all rents directly or indirectly related to the real estate. A few years later, the mortgagor defaulted and the IRS filed a tax lien against the real property. A court-appointed receiver rented some of the property the following year. The IRS filed for a declaratory judgment that its tax lien had priority over the Bank's lien with respect to the rental income. Judge McKinney (S.D. Ind.) granted summary judgment to the IRS. The Bank appeals.

In their opinion, Judges Posner, Wood, and Tinder reversed and remanded. The federal tax law gives a security interest priority over a tax lien only when the secured property is in existence at the time of the lien. The IRS argues that the "property" referred to in the statute is the rent itself -- which was not in existence at the time of the tax lien. The Bank argues that the "property" referred to in the statute is the real estate -- which was in existence at the time of the tax lien. The Court noted that there were no reported appellate decisions on the issue and inconsistent lower court rulings. The Court concluded that the statute was clear and the government was wrong. The statute's reference to property is a reference to the property that is the source of the value to repay the loan, not the proceeds from that value. Here, the source of the value is the real property. The real property existed when the mortgage was issued, long before the tax lien was filed. The rental income belongs to the Bank.