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(3) As for setoff, as an initial matter, TRW may not use § 553 because it is trying to setoff a postpetition claim against a pre-petition claim, which is not allowed. Additionally, setoff is unavailable under state law because there is no mutuality: on the one hand, since TRW only 'participated' in the Loan, TRW was not a lender; likewise, the Debtor and the Debtor-in-possession are also not the same entities. And, at the time TRW purchased its participation, it was not owed any money by the Debtor. Moreover, to the extent TRW can show that it was assigned the Loan documents, since setoff in Michigan is an equitable remedy, the equities in this case are such that the court denies setoff.
Facts: The trustee (the "Trustee") of the Creditor's Trust and Disbursing Agent filed a postconfirmation adversary proceeding seeking a determination of the priority of competing liens (the "Liens") against property of the estate - one on behalf of the IRS and one on behalf of Roland Machinery Co. ("Roland"). The IRS is a tax lien claimant and Roland is a secured commercial creditor of the estate. The Liens were both recorded at the exact same moment - February 14, 2005 at 4:30 PM.
Issues: "Who has priority, as between the IRS as a tax lien creditor and a private secured creditor, when they each recorded their liens at the exact same moment?"
Rules: 26 U.S.C. § 6321, the Federal Lien Tax Act of 1966 (the "Act"), provides that the IRS has a lien against a taxpayer's property if that taxpayer fails to pay taxes. With regard to future-acquired property, under United States by & Through IRS v. McDermott, 507 U.S. 447 (1993), "...the federal tax lien is ordinarily dated, for purposes of 'first in time' priority against § 6323(a) competing interests, from the time of the filing, regardless of when it attaches to the subject property." And, a state judgment lien does not have priority pursuant to the Act until the state lien is perfected, which does not occur until the identity of the lienor, the identity of the property and the amount of the lien are all established. With regard to property that currently exists in the estate, McDermott also said that "the 'first to record' rule is inappropriate when the government is a creditor, because it is an 'involuntary creditor' and could not bargain for additional security to protect against the risk of nonpayment."
Holding: The IRS' lien has priority over Roland's lien as to the estate's current and future-acquired property.
Reasoning: The Act was enacted to conform the lien provisions of the Internal Revenue Code with the rights of a secured creditor under the Uniform Commercial Code. Under the Act, the question to ask is whether the creditor competing with the IRS "is a holder of a security interest pursuant to 26 U.S.C. § 6323(h)(1)... [which requires that] the property has to be in existence and the holder has to have parted with money." Under Illinois law, attachment of a security interest (pursuant to a security agreement) must exist to enforce the security agreement. But, to have priority over third parties, there must also be perfection of the security interest, which generally occurs once there is attachment and by filing the financing agreement. Under the reasoning of the United States by & Through IRS v. McDermott, 507 U.S. 447 (1993), because "if a federal tax lien takes priority over a security interest that attaches at the same time, it must follow that a federal tax lien has priority over a simultaneously filed or recorded security interest."
Facts: Crystal Cascades Civil, LLC, the debtor, owned three parcels of land, which were encumbered by a number of loans made by, inter alia, the plaintiffs. In 2003, the debtor failed to
