J.D. Court, Inc. v. United States

Eventide Homes, Inc. (Eventide) was a certified nursing-care facility entitled to reimbursement from the Illinois Department of Public Services (the department) for services provided to Illinois public-aid recipients. J.D. Court, Inc. (Court) (plaintiff) held a security interest in Eventide’s accounts receivable. Prior to December 1, 1979, Eventide provided $907.38 worth of services to Illinois public-aid recipients. Eventide provided another roughly $32,000 in services to Illinois public-aid recipients from December 1, 1979, through February 14, 1980. Eventide was entitled to reimbursement from the department for those amounts. However, because Eventide had failed to pay federal income taxes, the Internal Revenue Service (IRS) (defendant) imposed a federal tax lien on Eventide’s property and levied on the amounts due to Eventide from the department. The IRS had first filed a notice of tax lien on September 17, 1979. Court sued to prevent the government from levying on the money that the department owed to Eventide, asserting priority to the funds as the holder of the security interest in Eventide’s accounts receivable. The trial court analyzed Court’s and the government’s respective rights under the Tax Lien Act of 1966 (the act) and applied the so-called “choateness doctrine.” Under that doctrine, if a state-law-created security interest conflicts with a federal tax lien, the state-law security interest is deemed to attach when the interest becomes choate (i.e., when the lienor’s identity, the subject property, and the lien amount are established). Pursuant to 26 U.S.C. § 6323(c), if the state-law security interest has attached when the IRS files its notice of tax lien or within 45 days thereafter, the state-law security interest takes priority over the federal tax lien. The district court found that Court’s security interest was choate only with respect to the $907.38 of Eventide’s accounts receivable that came into existence by December 1 (i.e., within 45 days of the IRS’s September 1979 notice of tax lien) and thus that Court’s interest took priority over the tax lien only with respect to that amount. The district court found that the government had priority in Eventide’s roughly $32,000 in accounts receivable that came into existence more than 45 days after the filing of the lien notice. Court appealed, asserting that the choateness doctrine had been abrogated by the act.