The company’s offshore rig exploded, causing a massive oil spill and economic losses to thousands of businesses, one of which was the debtor. The debtor sued the company but ultimately settled, foregoing further litigation. Per the settlement agreement, if the debtor submitted claims and documentation showing the cause of the economic losses, the company would reimburse the debtor if the documentation was sufficient. The debtor filed a claim with the company, but the debtor’s financial situation worsened while it was waiting for a decision on the claim. During this period, the debtor sought insurance to cover its employees, and the creditor agreed to insure the debtor in exchange for a security agreement granting the creditor a security interest in all the debtor’s assets. The creditor recorded the security agreement. Subsequently, the claims administrator decided that the debtor would not receive the full amount of its claim, so the debtor appealed. The debtor could not keep up financially and ultimately defaulted on its obligation to the creditor and missed federal employment tax payments. The Internal Revenue Service (IRS) then filed a tax lien notice against the debtor and recorded it. The debtor then filed for Chapter 11 bankruptcy. Around the same time, the debtor agreed to settle the claim with the company for the original amount offered and signed a release. The creditor then filed an adversary complaint against the debtor’s other creditors and moved for summary judgment, arguing that it held a perfected first-priority security interest in the claim amount and that its security agreement covered the debtor’s contracts. The IRS filed a cross motion for summary judgment, arguing that the claim amount was a commercial tort claim, not a contract. For that reason, the IRS argued, the tax lien automatically attached to and became perfected when it had filed the federal tax lien notice against the debtor. The bankruptcy court granted summary judgment in favor of the IRS, and the creditor appealed.
In Sunz Ins. Co. v. United States Internal Revenue Serv. (In re Payroll Mgmt.), 125 F.4th 1035 (11th Cir. 2025), the United States Court of Appeals for the Eleventh Circuit affirmed the bankruptcy court’s decision granting the IRS’s motion for summary judgment. The court first analyzed whether the claim was a commercial tort or a contract. Under Florida law, a creditor’s security interest attaches when the debtor signs a security agreement that describes the collateral, with a general description being sufficient to attach in most cases. Fla. Stat. Ann. § 679.2031(2)(c), 679.1021(pp), 679.1081(1). However, with respect to a commercial tort claim brought by a business for economic damages, a creditor’s security interest does not attach unless the commercial tort claim is “explicitly describe[d]” in the security agreement. § 679.1081(5)(a). On the other hand, federal law does not require a security agreement for a tax lien to attach. Instead, under federal law, once taxes are assessed, the IRS’s interest attaches to all the debtor’s assets, and the interest becomes perfected when notice is filed with the appropriate state registry. 26 U.S.C. § 6323(a), (f)(1)(ii). The court explained that if the IRS perfected its interest first, then the tax lien took priority under federal rules. The creditor asserted that the claim was not a commercial tort, arguing that it had converted into a contract before the creditor and the debtor entered into a security agreement because the creditor had previously submitted its claims, and the settlement agreement was already active. The court disagreed, finding that a commercial tort converts to a contract “when the claim has been (1) ‘settled’ and (2) ‘reduced to a contractual obligation to pay.’” Fla. Stat. Ann. § 679.1091 cmt. 15. The court reasoned that the second element of reduction to a contractual obligation to pay did not arise until the parties signed the release, which did not occur until after the IRS filed its lien. Therefore, the claim was a commercial tort claim because the settlement agreement did not create an automatic obligation to pay the debtor due to the multiple processes between the initial offer and the acceptance of the offer. Additionally, because the security agreement between the creditor and the debtor did not describe the commercial tort claims as collateral, the creditor’s security interest did not attach to the debtor’s claim. For these reasons, the court held that the IRS’s tax lien took priority in the claim payment and affirmed the district court’s order for summary judgment in favor of the IRS.
By Nura Elhentaty: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Hayden Mariott: [email protected]