Nothing ruins a secured party’s day faster after a debtor goes into default than the discovery of an unknown prior tax lien. Tax liens can be intimidating for secured parties and it’s tempting to believe they always win in a priority dispute. However, that perception is not always accurate. State revenue authorities have to satisfy the applicable statutes for creation of a tax lien. Failure to comply the statutory requirements may leave the state authorities unable to enforce the tax lien. That was the situation in a recent case, Etzler v. Indiana Department of Revenue, 2015 WL 5093451 (Ind. Ct. App. Aug. 31, 2015).

The Indiana Department of Revenue (the “IDR”) in 2000 filed four tax warrants in Marshall County, Indiana, for unpaid taxes owed by Dodson (the “Debtor”). The warrants were not satisfied, so in July 2010 the IDR renewed the warrants for an additional ten years.

Meanwhile, the Debtor owed his attorney, Etzler, fees for legal services rendered. To secure payment of the outstanding fees, the Debtor assigned to Etzler the right to payment of any breeder’s award proceeds owed to the Debtor by the Indiana Horse Racing Commission (the “Commission”). On November 16, 2010, Etzler filed a financing statement with the Indiana Secretary of State to secure his interest in the breeder’s award proceeds.

The next day, November 17, 2010, the IDR intercepted a payment from the Commission to the Debtor. Another such payment to the Debtor was intercepted by the IDR in 2011. In all, the IDR levied on $11,500 of Commission payments (the “Funds”). The Funds were used to satisfy the Debtor’s outstanding tax liability.

Etzler made repeated attempts to assert a superior claim and demanded that the IDR turn over the Funds. The IDR, however, denied that Etzler had a superior interest in the Funds and refused his demands for payment.

After Etzler exhausted his administrative remedies, he filed suit. The trial court granted summary judgment to the IDR and Etzler appealed. The appeals court reversed the trial court and determined that the IDR’s lien had not attached because the warrants filed by the IRD created a judgment. The resulting judgment lien only attached to personal property within the county. The Funds never left Marion County, which is where the Commission was located. Consequently, the IDR never had a lien that entitled it to seize the Funds.

Nevertheless, the IDR received a rehearing in the matter and raised three new challenges to Etzler’s claim, all based on UCC grounds. Although the court was tempted to prohibit the IDR from raising new issues on appeal, it addressed the UCC issues anyway.

First, the IDR argued that a creditor could not claim priority over the IDR’s lien because Article 9 does not apply to the extent that another statute of the state governs the creation, perfection, priority, and enforcement of security interests created by government subdivisions. The court however, pointed out that the exclusion applies only when the government unit is a debtor. Here, the IDR was a creditor.

Next, the IDR asserted that it was entitled to priority because it became a lien creditor before Etzler filed his financing statement. The court rejected this argument as well. The ID only filed its warrants in Marshall County, resulting in a judgment. The judgment lien only covered personal property located in that county. Thus, the IDR was never a lien creditor with respect to the Funds.

Finally, the IDR claimed that it had a security interest in the Funds that it perfected by possession, giving it priority over Etzler’s interest perfected by filing. However, the court noted that the IDR was not a secured party with a security interest under Indiana law. Consequently, it could not perfect its interest under the UCC.

The court concluded that the sections of Indiana’s UCC cited by the IDR did not entitle it to priority in the breeder’s award proceeds that it levied upon. It reaffirmed the original opinion that the trial court erred in granting summary judgment to the IDR.

The important thing to take away from this case is that secured parties are not the only claimants against the assets of a debtor that must comply with the applicable statutes. State authorities must also prove that they have complied with the applicable statutory requirements to obtain a tax lien against a debtor’s property. Failure to do so leaves state tax lien claims subject to challenge. The state does not always win.


Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.

UCC Expert’s Corner: Court Finds Department of Revenue Improperly Levied Without a Lien