## Facts

- In April 1986, Nationwide Power Corporation (Nationwide) owed Highlander International Corporation (Highlander) a debt and granted Highlander a security interest in certain cash collateral.
- The collateral included Nationwide’s cause of action against Litton Industrial Automation Systems, Inc. (Litton).
- Highlander did not file a UCC financing statement to perfect its security interest at that time.
- On June 9, 1986, the Internal Revenue Service assessed tax penalties against Nationwide exceeding $700,000, creating a federal tax lien on Nationwide’s property and rights to property.
- On July 3, 1986, the IRS filed a Notice of Federal Tax Lien in the appropriate Florida county as required by 26 U.S.C. § 6323(f).
- In August 1989, Nationwide obtained a judgment against Litton, and Litton owed $572,627.46 on that judgment.
- Also in August 1989, Highlander filed a financing statement in an effort to perfect its claimed security interest in the cause of action and proceeds.
- Litton filed an interpleader action and deposited $572,627.46 into the district court registry because Highlander and the United States asserted competing claims to the same funds.
- The district court held that the United States’ federal tax lien had priority because Highlander’s interest was unperfected and not protected against a judgment lien under Florida law when the IRS filed notice.

## Issues

1. Whether Highlander qualified as a “holder of a security interest” under 26 U.S.C. § 6323(a) and § 6323(h)(1) when the IRS filed notice of its federal tax lien, given Highlander’s failure to perfect under Florida law until 1989.  
2. Whether Highlander’s later perfection could defeat the federal tax lien that arose upon assessment in 1986 and was noticed in 1986.

## Decision

- The Eleventh Circuit affirmed the district court.
- Highlander did not have a qualifying “security interest” for purposes of § 6323 at the time the IRS filed its notice because Highlander’s interest was not protected under Florida law against a subsequent judgment lien creditor.
- Highlander’s later filing of a financing statement in 1989 did not give it priority over the previously noticed federal tax lien.
- The United States was entitled to priority in the $572,627.46 interpleader fund.

## Legal Principles

- A federal tax lien arises at assessment and attaches to “all property and rights to property” of the taxpayer. 26 U.S.C. § 6321.
- As a general rule, priority among competing interests follows federal law, including the statutory scheme in 26 U.S.C. § 6323.
- Under § 6323(a), a federal tax lien is not valid against certain protected classes (including holders of qualifying security interests) until notice is filed; after proper notice, unprotected competing claims are subordinate.
- A creditor holds a qualifying “security interest” under § 6323(h)(1) only if, among other requirements, the interest “has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation.”
- State law determines whether and when an interest is protected against a judgment lien creditor (for example, whether Article 9 filing is required for perfection against lien creditors); federal law determines the priority consequences under § 6323.
- When a creditor’s interest is unperfected at the time the IRS files notice of its tax lien, the creditor generally cannot later perfect and take priority over the already noticed federal tax lien with respect to the same property or proceeds.

## Conclusion

Because Highlander’s security interest in Nationwide’s cause of action and its proceeds was not perfected—and therefore not protected under Florida law against a subsequent judgment lien creditor—when the IRS filed its notice of federal tax lien, Highlander did not qualify for priority under 26 U.S.C. § 6323, and the United States’ tax lien had priority to the interpleaded $572,627.46.


Litton Industrial Automation Systems, Inc. v. Nationwide Power Corp., 106 F.3d 366 (1997)