The U.S. Court of Appeals for the Sixth Circuit has concluded that the U.S. Internal Revenue Service need not conform to state UCC registration standards.

In this case, United States of America v. Crestmark Bank (In re: Spearing Tool and Manufacturing Co., Inc.), No. 04-1053 (6th Cir., decided June 21, 2005), the court determined that a tax lien filed as “SPEARING TOOL & MFG. COMPANY INC.” served sufficient notice to the lender, even though the bank failed to find the IRS lien when it searched for the debtor’s proper name, “Spearing Tool and Manufacturing Co.”

“We express no opinion about whether creditors have a general obligation to search name variations,” the court cautioned, perhaps hoping to stem concern among lenders. “Our holding is limited to these facts.”

The dispute arose out of agreements entered into between Spearing Tool and Crestmark Bank in 1998 and 2001, whereby Spearing granted Crestmark security interests it its assets and accounts receivable.

Thereafter, in October 2001, the IRS filed two notices of federal tax lien against Spearing for unpaid federal employment taxes with the Michigan Secretary of State. The IRS filed its lien using the name Spearing gave on two of its quarterly returns.

Crestmark submitted lien search requests to the Michigan Secretary of State using Spearing’s registered name. Because Michigan had limited electronic-search technology, searches disclosed only liens matching precise names. However, following a February 2002 request, the Secretary of State’s office included a handwritten note stating: “you may wish to search using Spearing Tool & Mfg. Company Inc.”

Crestmark did not search for the latter name until after Spearing filed a chapter 11 bankruptcy petition in April 2002. Upon discovering the IRS lien, Crestmark filed a complaint to determine lien priority. The bankruptcy court held the government had priority; the district court reversed.

In reversing the district court and affirming the bankruptcy court, the Sixth Circuit noted that the Internal Revenue Code provides that the form and content of IRS liens are prescribed by the U.S. Treasury Secretary and are valid “notwithstanding any other provision of law regarding the form or content” (sic).

Under federal law, an IRS tax lien need not perfectly identify the taxpayer. “The critical issue in determining whether an abbreviated or erroneous name sufficiently identifies a taxpayer is whether a ‘reasonable and diligent search would have revealed the existence of the notices of the federal tax liens,’” the court stated, citing the Eighth Circuit.

Crestmark had noticed that Spearing sometimes used the ampersand and abbreviation “Mfg.” for manufacturing, the court stated. In addition, the lender was urged to search using these terms.

The court noted that public policy considerations supported its legal conclusion, because the government, as an  involuntary creditor, is entitled to special priority over voluntary creditors. “Thus, while we understand that a requirement that the IRS comply with UCC Article 9 would spare banks considerable inconvenience, we conclude from Supreme-Court precedent that the federal government’s interest in prompt, effective tax collection trumps the bank’s convenience in loan collection.”

Following this decision, secured lenders may want to supplement their lien search requests with known variations of lender names, and may consider requiring loan applicants to disclose the names under which they file federal tax returns.