, Plaintiff v. Tillman J. Dean, Defendant
United States of America
, Plaintiff v. Otis C. Dean, Defendant
S. District Court, Mid. Dist., Ga., Thomasville Div., Civil Action
No. 81-71-THOM, Civil Action No. 81-72-THOM,
[Code Sec. 6331]
Levy and distraint: Asserted against debt: Existence of
obligation: Due date.--Individuals who were contractually
obligated to make rental payments to a lessor who was liable to
the U. S. for unpaid tax assessments had to make their payments to
the U. S. in satisfaction of a lien asserted against the debt
obligation. Although the payment was not required to be made until
a date after the date upon which the notice of levy was served,
the lessor had a clear and unconditional right to the payments at
the time the levies were served. St. Louis Union Trust Co.,
80-1 USTC ¶9282, 617 F2d 1293, followed. .
L. Muncy, Department of Justice,
, D. C. 20530, for plaintiff. Bruce Kirbo, Kirbo & Bridges,
208 West Water Street, Bainbridge, Georgia 31717, Harold Lambert,
Lambert & Floyd, 326 West Water Street, Bainbridge, Georgia
31717, for defendant.
cases above identified were consolidated for disposition and the
parties have filed cross-motions for summary judgment and briefs
in support thereof and, since it is clear that there is no
controversy concerning the facts, the cases are properly before
the Court for summary disposition.
instituted these actions against the Defendants for their failure
to honor levies served upon them. Specifically, the
seeks to recover $6,800.00 plus interest from the Defendant Otis
C. Dean, Jr., and $18,260.00 plus interest from the Defendant
Tillman J. Dean for their failure to honor levies served upon
February, 1978, the Defendant Tillman J. Dean entered into a lease
contract with L. Mervin Barbree and, at the same time, the
Defendant Otis C. Dean, Jr. entered into a lease contract with
Barbree. Under the terms of these lease agreements the Deans
became obligated to pay to Barbree annual rental payments in
certain amounts and one of the rental installments was due to be
paid on or before
January 15, 1980
December 5, 1979
, a Notice of Levy was served upon the Defendant Tillman J. Dean
which notified him that there was due, owing and unpaid to the
United States from Barbree the sum of $22,094.30 by virtue of tax
assessments made against Barbree. The Notice of Levy further
stated that all property and rights to property belonging to
Barbree then in the Defendant's possession were to be levied upon
and seized in satisfaction of said amount and that demand was made
upon the Defendant for an amount necessary to satisfy such claim.
September 25, 1979, a similar Notice of Levy was served upon Otis
C. Dean, Jr. by which a demand was made upon him for an amount
necessary to satisfy the tax lien.
January 15, 1980, a final demand was made upon the Defendant
Tillman J. Dean for the amount set forth in the Notice of Levy,
but Dean refused and has continued to refuse to honor the levy and
surrender to the
the sum of $18,260.00.
same date, January 15, 1980, a final demand was made upon
Defendant Otis C. Dean, Jr. for the amount set forth in the Notice
of Levy but Dean refused and has continued to refuse to honor the
levy and surrender to the
the sum of $6,800.00.
the terms of his lease agreement with Barbree, the Defendant
Tillman J. Dean was obligated to make a rental payment for the
year 1980 on or before January 15, 1980 and on January 2, 1980,
Dean made the rental payment to Barbree in the amount of
the terms of his lease agreement with Barbree, the Defendant Otis
C. Dean, Jr. was obligated to make a rental payment for the year
1980 on or before
January 15, 1980
and he made the rental payment to Barbree in the amount of
January 2, 1980
right of the taxpayer, Barbree, to receive the rental payments for
the year 1980 from the respective Defendants was clear and
unconditional and was in existence at the time the levies above
referred to were served on them and was an adequate interest in,
or right to, property to which the Internal Revenue Service's
levies clearly attached; and §6332(a) of the Internal Revenue
Code of 1954 provides that any person in possession of, or
obligated with respect to property or rights to, property subject
to levy must surrender such property or discharge such obligation
to the Secretary upon service of the levy.
Defendants contend that since the rental payments for the year
1980 were not required to be paid until
January 15, 1980
, they were not "due" on the dates when the levies were
served upon them, placing their reliance upon United States v.
Warren Railroad Company [42-1 USTC ¶9391], 127 F2d 134 (2
Cir. 1942). The Defendants do not contend that they were not
contractually bound to pay rent in the amounts specified in their
respective contracts "on or before
January 15, 1980
", but rather they contend that, since the payments were not
yet "due", there was nothing to be levied upon. In other
words, the Defendants raise a "timing" defense.
the Court's view that §301.6331-1(a) of the regulations adopted
by the Secretary of the Treasury and the decisions in St. Louis
Union Trust Company v. United States [80-1 USTC ¶9282], 617
F2d 1293 (8 Cir. 1980), and J. A. Wynne Co. v. R. D. Phillips
Construction Co. [81-1 USTC ¶9305], 641 F2d 205 (8 Cir.
1981), and United States v. Citizens and Southern National Bank
[76-2 USTC ¶9665], 538 F2d 1101 (5 Cir. 1976), make the defense
here asserted by the Defendants unavailing. Consistent with the
foregoing, the Court concludes that the Defendants' motions for
summary judgment should be denied and the Plaintiff's motions for
summary judgment in the respective cases should be and are hereby
sustained and judgment will be entered accordingly.
to an Opinion and Order of Judge J. Robert Elliott, United States
District Court Judge, signed on November 9, 1982 and Filed on
November 10, 1982 and for the reasons contained therein;
ADJUDGED THAT the Defendants' Motions for Summary Judgment should
be Denied and the Plaintiff's Motions for Summary Judgment in the
respective cases should be and are hereby SUSTAINED.
United States of America
, Plaintiff v. Guittard Chocolate Company, Defendant
S. District Court, No.
, No. C 81-1860 TEH,
[Code Secs. 6331 and 6332]
Levy and distraint: Action to enforce
levy: Debt owed to taxpayer: Failure to surrender property subject
to levy: Reasonable cause.--An individual was subject to an
levy on a debt he owed to a taxpayer who had failed to pay taxes
because an outstanding debt owed to a taxpayer is considered
property belonging to the taxpayer. The debtor's claim that he had
a right of set-off against his debt to the taxpayer prior to the
service of the notice of levy did not negate the existence of the
debt because federal tax liens attach on the date of the tax
assessment, which, in this case, occurred prior to the claimed
set-off. However, the debtor was not liable for a penalty for
failure to surrender property subject to a levy without reasonable
cause because his set-off claim gave rise to a bona fide dispute
as to the existence of property subject to a levy. .
J. Yamaguchi, Assistant United States Attorney,
, for plaintiff. Kenneth E. Goodin, Jay P. Wertheim, Dinkelspiel
& Dinkelspiel, One Market Plaza, San Francisco, Calif. 94105,
government filed this suit to enforce an
levy. The series of events giving rise to the levy are undisputed,
and are as follows:
November 27, 1978, the
assessed Norton Trucking (hereafter "Norton"), the
taxpayer, for $102,881.99 in unpaid taxes. Payment in full has
still not been made, and Norton is now out of business.
performed trucking services for Guittard Chocolate Co. (hereafter
"Guittard"), the defendant in this levy enforcement
1978, Norton factored its accounts to a company called Transport
Clearings (hereafter "Transport"). As a result,
Transport came into possession of certain invoices billed by
Norton to Guittard.
December, 1978, Transport made a claim against Guittard for
$40,400 on factored invoices billed from Norton to Guittard.
Guittard denied liability on the invoices, contending that they
had already paid the amount claimed by Transport directly to
Norton. At the time that Transport made its claim against Guittard,
Guittard had also received services from Norton on non-factored,
unpaid invoices totalling $12,240. Guittard advised Norton that if
it (Guittard) was forced to pay Transport on the disputed $40,400
claim, any amount paid to Transport would be used as an offset
against the $12,240 in non-factored invoices then owing to Norton.
Government filed notices of a federal tax lien in
on the following dates in 1979: January 1, January 11, April 9,
and October 30.
January 31, 1979, in a suit to which Guittard was not a party, an
court decreed that Transport was entitled to payment on any Norton
invoices billed on or before December 5, 1978. Under the
court's order, any Norton invoices billed on or after December 6,
1978 entitled Norton to payment. The total amount of the
pre-December 6, 1978 invoices billed to Guittard, and thus the
total on invoices owed by Guittard to Transport under the
court decree terms, was $40,400.
problem with this from Guittard's point of view was that, prior to
the entry of judgment by the Indiana court, Guittard had paid
directly to Norton some $30,584 on invoices dated prior to
December 6, 1978
. The dispute that had arisen in December of 1978 concerning
Guittard's liability to Transport continued despite the
court's decree, with Guittard claiming that payments made directly
to Norton on the pre-December 6 invoices were made on the basis of
authorization from Transport. Also, Guittard continued to assert
to Norton that if Guittard were required to make any payments to
Transport on the disputed invoices, such payments would be offset
against post-December 6 invoices owed by Guittard to Norton.
3, 1979, the government served a notice of levy on defendant
Guittard based on the unpaid assessment against Norton.
August 15, 1979, the
served Guittard with a final demand on its notice of levy. No
payment was made by Guittard to the
pursuant to the notice of levy and final demand.
24, 1981, Transport and Guittard entered into a settlement
agreement resolving Transport's claim for $40,400 first made in
December, 1978. Under the terms of the agreement, Guittard is to
pay Transport $20,000 in full settlement of the claim for invoices
totalling $40,400. This settlement agreement is subject to the
approval of the Bankruptcy Court, due to the fact that Transport
is now in bankruptcy. The approval of the Bankruptcy Court
apparently has not yet been received, and none of the $20,000
settlement has been paid to Transport or its trustee in
12, 1981, the government filed the instant suit to enforce an
levy. In the complaint, the government alleged that Guittard is
liable to the government for $16,320, plus interest and costs from
the date of the levy (July 3, 1979). In papers in support of its
motion for partial summary judgment the government contended that
Guittard acknowledges a debt owed to Norton, and thus due the
government on its lvey, in the amount of $12,240. The government
also sought to recover a penalty from Guittard totalling 50% of
the amount required to be surrendered by Guittard under the levy.
The claim for a penalty was based on 26
C. §6332(c)(2) in that Guittard's failure to surrender property
under the levy was allegedly without reasonable cause.
October 21, 1981, an Order was entered denying defendant
Guittard's motion to dismiss, granting the government's motion for
partial summary judgment on the levy, and denying the government's
motion for partial summary judgment as to the penalty.
the defendant raised several contentions in support of its motion
to dismiss, we note that in an action by the government to enforce
levy, the available defenses are strictly limited. The only
defenses that can be raised by the party that has failed to comply
with a levy are that (1) the person against whom the levy is made
is not in possession of the taxpayer's property, or (2) the
taxpayer's property is subject to a prior judicial attachment or
execution. United States v. Trans-World Bank [74-2 USTC ¶9632],
382 F. Supp. 1100, 1105 (C. D. Cal. 1974) and cases cited therein.
The rationale for this limitation is that the process of levy and
distraint authorized by 28
C. §6331 is the government's last resort for collecting taxes
due. Accordingly, such an extraordinary procedure is not an
appropriate one for raising a multitude of challenges to the
government's claim, particularly in light of the numerous other
procedures available to the party levied against as means of
raising challenges to the government's claim. See United States
v. Sterling National Bank [73-2 USTC ¶9494], 360 F. Supp.
917, 922-923 (S. D. N. Y. 1973), aff'd in part and rev'd in
part on other grounds [74-1 USTC ¶9336], 494 F. 2d 919 (2nd
the arguments raised by Guittard in support of its motion to
dismiss, the only one properly before the Court was the claim
that, at the time of the levy, Guittard had no property belonging
to the taxpayer Norton. This contention was based on the premise
that Guittard had a setoff against its debt to Norton at the time
that Transport made its $40,400 claim against Guittard in December
of 1978. The notice of levy was not served until July 3, 1979,
seven months after the setoff allegedly came into existence,
negating any debt owed to Norton by Guittard.
question of whether a party is in possession of the taxpayer's
property for purposes of the validity of an
levy, state law is controlling. Aquilino v. United States
[60-2 USTC ¶9538], 363
509, 512-513 (1960). Thus, whether a party against whom
enforcement of a levy is sought has a defense based on
non-possession of property depends upon whether, as a matter of
state law, the taxpayer has a right to property held by the party
levied against. American Fidelity Fire Ins. Co. v. United
States [75-2 USTC ¶9636], 385 F. Supp. 1075, 1077 (N. D. Cal.
1974). If the taxpayer has a right to the property held by the
party levied against, the government's tax lien attaches to that
defendant's motion to dismiss required a determination of whether,
law, Guittard was in possession of property belonging to the
taxpayer at the time of the levy. Under the facts of this case,
that determination involved a two-step process. First, under
California law, is a debt owed to a taxpayer a right to property
belonging to the taxpayer, and therefore subject to levy under 26
U. S. C. §6331? If so, does the
law regarding setoff negate the existence of such a debt under the
facts of this case?
law, an outstanding debt owed to a taxpayer is considered property
or a right to property belonging to the taxpayer. United States
v. Graham [51-1 USTC ¶9218], 96 F. Supp. 318, 320 (S. D. Cal.
1951), aff'd per curiam sub nom. State of
, et al. v.
United States [52-2 USTC ¶9425], 195 F. 2d 530 (9th Cir. 1952), cert.
831 (1952). Accordingly, a debt as such is subject to levy based
on the taxpayer's failure to pay taxes. Id.
Thus, if no setoff claim were asserted here, Guittard would be
subject to levy on the $12,240 in invoices owing to the taxpayer
Norton, in light of the fact that they are Norton's property under
however, claims that because it had a right of setoff against the
debt to Norton that arose in December of 1978 when Transport made
its claim, it had no property belonging to Norton at the time of
the levy in July of 1979. Again we must look to
law on the question of the existence of a setoff. See Aquilino
, supra, 363
the law of California, a setoff is the right of a judgment debtor,
who has become the owner of a judgment or claim against his
judgment creditor, to go into the court that entered the judgment
against him/her (the judgment debtor) and have his/her judgment or
claim set off against his/her creditor's judgment. Highsmith v.
2d 298, 302, 281 P. 2d 865 (1955); Harrison v. Adams, 20
2d 646, 649, 128 P. 2d 9 (1942); 15
Jur. 3d Counterclaim and Setoff §3.
was not at any time relevant to this enforcement action a judgment
debtor of taxpayer Norton. Thus, under
law, the doctrine of setoff is inapplicable. This leaves Guittard
holding a debt owed to Norton at the time of the levy, and thus
subject to a levy of the property.
the settlement agreement with Transport, Guittard insisted that it
was not liable on the claim by Transport for $40,400. If Guittard
was not liable to Transport, no setoff against taxpayer Norton
would ever arise. At best, what Guittard appears to have had in
December of 1978 when Transport made its claim is a potential
defense to a claim that might one day be filed by Norton. Guittard
authority to support its contention that such rights against
Norton as of December 1978 negated the debt it owed to Norton as
of that date.
could have argued, of course, that by entering into a settlement
agreement with Transport that required Guittard to make payments
to Transport, the claimed setoff against Norton was just as
effective as if some payment had in fact been paid to Transport.
Even accepting this argument, the settlement agreement was not
entered into until March 24, 1981, close to two years after the
government served its notice of levy on Guittard.
all times relevant to this enforcement action, Guittard was in
possession of taxpayer Norton's property in the form of a debt in
the amount of $12,240.
contended that the date of the levy, not the date of the tax lien,
determines whether the party levied against had any property
belonging to the taxpayer. Logically, of course, if the party
levied against owed money to the taxpayer on the date of the lien,
but paid that amount over to the taxpayer prior to the service of
notice of levy, the levy would be invalid because the party levied
against would have no property belonging to the taxpayer. Guittard
claims that its right to setoff effectively negated any interest
that Norton had in the money at issue, and that that right to
setoff was effective before Guittard received notice of the levy.
The contention made by Guittard is really one concerning the
priority of the federal tax lien as against the priority of the
interest claimed under state law by the party levied against.
above, the defense of lien priority cannot be raised in an action
to enforce a levy. United States v. Sterling National Bank,
supra, 360 F. Supp. at 922-923. Nonetheless, for the
edification of counsel, we make the following observations on the
issue of lien priority.
assuming for the purpose of argument that Norton [Guittard] had
some right negating its debt to Norton, it is federal law that
determines whether a state-recognized property interest has become
so perfected as to defeat a federal tax lien. United States v.
Pioneer American Ins. [63-2 USTC ¶9532], 374
84, 88 (1963). Furthermore, federal law determines the priority of
competing claims to property sought by the government to satisfy
tax obligations. Aquilino v. United States, supra, 363
at 512-513. Only choate state interests take priority over federal
tax liens. United States v. Pioneer American Ins., supra,
at 88. And federal tax liens attach on the date of the federal tax
Thus, even if the interest claimed by Guittard was sufficiently
perfected, under federal law, to defeat a federal tax lien, it
could only do so if it came into existence prior to the date of
the tax assessment against Norton.
assessment against the taxpayer was made in November of 1978.
Guittard contended that its right to setoff arose in December of
1978. Even if Guittard were correct in its contention that the
right to setoff was established in December, 1978, the federal tax
lien attached to the debt first and thus takes priority over
Guittard's claimed interest.
government in its motion for partial summary judgment sought a
penalty equal to 50% of Guittard's liability on the tax levy.
C. §6332(c)(2), the penalty for failure to surrender property
subject to a tax levy "shall be" assessed if the person
required to surrender the property fails or refuses to do so
"without reasonable cause." According to Treas. Reg. §301.6332-1(b)(2),
the imposition of a penalty is inappropriate where a bona fide
dispute exists as to the amount of property subject to the levy.
Guittard was incorrect in its contention that it had no property
belonging to taxpayer Norton at the time of the levy, the
existence vel non of a bona fide dispute is not determined
by reference to which party prevails on the merits of the
underlying claim. See United States v. Sterling National Bank,
supra, 494 F. 2d at 923. Guittard's setoff claim was made in
good faith, thus giving rise to a bona fide dispute as to the
existence, and therefore the amount, of property subject to the
under the circumstances of this case, failure to impose a penalty
will not detract from the Congressional purpose of requiring
compliance with tax livies. Id.
Accordingly, the government's motion for partial summary judgment
as to the penalty was denied.
the foregoing analysis, at the time of the levy, Guittard was in
possession of a $12,240 debt belonging to taxpayer Norton.
Guittard's motion to dismiss, treated as a motion for summary
judgment, was therefore denied as no ground in defense of the
government's enforcement action was established. Accordingly, the
government's motion for partial summary judgment in the amount of
$12,240 plus interest and costs from the date of the levy was
fide contention as to the existence of property subject to the
levy having been raised by Guittard, the government's motion for
partial summary judgment in the amount of a 50% penalty was
USTC ¶9351]Louis Freeman, Trustee in Bankruptcy of Brokol
Manufacturing Company v. Joseph F. J. Mayer, District Director of
Internal Revenue for the District of New Jersey, Appellant
Court of Appeals, 3rd Circuit., No. 12,346, 253 F2d 295, 3/10/58,
Affirming District Court, 57-2 USTC ¶9756, 152 Fed. Supp. 383
[1939 Code Secs. 3672(a), 3692, and 3710(a)--similar to 1954 Code
Secs. 6323(a), 6331(a), and 6332, respectively]
Lien for taxes: Priority in bankruptcy: Application to
outstanding obligations of bankrupt's debtors.--The
government, which had recognized tax liens, levied upon all the
property at the place of business of a bankrupt pursuant to
warrants for distraint. It did not, however, notify the bankrupt's
debtors that a levy was being made upon the amount they owed the
bankrupt; nor did it serve process upon such debtors purporting to
appropriate the debt to the satisfaction of the tax liens.
Accordingly, the government did not acquire possession of such
debts within the meaning of Sec. 67c of the Bankruptcy Act.
Therefore, the proceeds realized from the collection of the debts
after the petition in bankruptcy was filed were subject to
administration in bankruptcy, and payment of the tax liens had to
yield priority to wage claims and administrative expenses.
786 Broad St.
2, N. J., for appellee. Elmer Kelsey, Department of Justice,
25, D. C., for appellant.
GOODRICH, MCLAUGHLIN and HASTIE, Circuit Judges.
of the Court
dispute between a trustee in bankruptcy and a Collector of
Internal Revenue concerns the status and disposition of property
of Brokol Manufacturing Company, presently a bankrupt, which the
Collector reduced to possession and wishes to retain for
delinquent federal taxes. The trustee, on the other hand, has
asserted that the property in question is subject to
administration in bankruptcy where the tax lien, though
recognized, must yield priority to certain wage claims and
administrative expenses as provided in Section 67c of the
Bankruptcy Act. 11 U. S. C., 1952 ed., §107c. The matter was
originally adjudicated by a bankruptcy court [53-1 USTC ¶9319],
but on appeal this court held that the controversy did not lie
within bankruptcy jurisdiction. In re Brokol Mfg. Co.,
1955, 221 Fed. (2d) 640 [55-1 USTC ¶9357]. Thereafter, the
trustee initiated this plenary suit against the District Director
of Internal Revenue, the successor to the Collector, and recovered
judgment for the amount in dispute. D. N. J. 1957, 152 Fed. Supp.
383 [57-2 USTC ¶9756]. This appeal followed.
involuntary petition, pursuant to which Brokol Manufacturing
Company was adjudicated bankrupt, was filed the day after the
taxing authorities had levied upon all property at the Brokol
place of business in distraint for federal taxes. For purposes of
this case, the circumstances are sufficiently disclosed by an
undisputed affidavit of the Deputy Collector who made the levy. He
says that, acting under warrants authorizing him to distrain for
taxes in the amount of $5,742.25, ". . . he seized the goods,
chattels, effects and all property or rights to property of the
said taxpayer at its premises, 89 Madison Street, Newark, New
December 11, 19
51, at 3:15 P. M.; that he securely locked said premises with a
United States Government padlock, and retained the key therefor,
which key he possesses at the present time; that as a result
thereof, he has and claims possession of all of such property for
himself and for and on behalf of the Collector of Internal
Revenue, . . .."
appears without dispute that federal tax assessments against
Brokol Manufacturing Company as implemented by tax liens duly
filed in the appropriate Register's Office aggregated almost
$20,000, although the actual levy in suit was made pursuant to the
warrants for distraint totaling only $5,742.25. The tangible
property thus seized was later sold, without prejudice to the
present controversy, for $7,100.
circumstances the trustee in bankruptcy properly concedes that the
amount of $5,742.25, plus proper costs and expenses, can lawfully
be retained by the taxing authorities. The present record shows
that the Collector's costs, including a charge by Brokol's
landlord for the use of the premises after their padlocking by the
taxing authorities, aggregated $1,749.51. This sum, added to the
face amount of the warrants, gives the taxing authorities an
unchallenged right to hold assets of the taxpayer worth $7,491.76.
However, the taxing authorities realized only $7,100 from the sale
of all of Brokol's tangible property. In other words, the sale
yielded no surplus over the amount as to which the taxing
authorities had unqualified priority. It follows that the fact,
much discussed in this briefing and argument, that the government
had a lien for taxes greatly in excess of the face of the warrants
upon which the distraint was based, is of no importance in this
case. For regardless of that fact, the right of the tax collector
to retain the entire $7,100 realized from the sale of tangible
property is clear.
Collected After Bankruptcy]
doubtful matter in this case is the proper disposition of certain
additional money realized by the Collector from another source.
The court below found, and the record indicates that, after the
petition for bankruptcy was filed, the distraining tax authorities
collected $2,667.37 from certain of Brokol's customers, apparently
on account of work very recently performed by Brokol and not paid
for at the time the Collector levied upon all of Brokol's personal
property and closed its establishment. The only question of
substance in the present posture of this case is whether the
taxing authorities may keep this money or whether they must
surrender it to the trustee in bankruptcy.
67b of the Bankrputcy Act, 11 U. S. C., 1952 ed., §107b,
recognizes that a tax lien may be so impressed upon the property
of an insolvent as to be valid against a trustee in bankruptcy. In
this case the Collector says his actions amounted to such an
effective and exclusive appropriation of debts owed Brokol to the
satisfaction of Brokol's tax obligations. But Section 67c of the
Bankruptcy Act qualifies Section 67b by providing that "valid
. . . liens for taxes or debts owing to the United States . . . on
personal property not accompanied by possession of such property .
. . shall be postponed in payment to the debts [for wages and for
expenses of bankruptcy administration] specified in clauses (1)
(2) of subdivision a of Section 64 of this Act. . . ." 52
Stat. 877 (1938), 11 U. S. C., 1952 ed., §107c. Since, in order
to be situated beyond a trustee's reach under this subsection
property must be covered by a lien "accompanied by possession
of such property", it is arguable that this subsection has no
application at all to incorporeal property such as an ordinary,
debt, which is not a subject of possession in the common sense.
However, the courts have not found it too difficult to adopt the
lien concept and the possessory concept of distraint to the
seizure of choses in action, including ordinary debts for taxes.
See United States v. Liverpool & London & Globe Ins.
Co., 1955, 348
215 [55-1 USTC ¶9136]; Kyle v. McGuirk, 3d Cir. 1936, 82
Fed. (2d) 212 [36-1 USTC ¶9121]; United States v. Eiland,
4th Cir. 1955, 223 Fed. (2d) 118 [55-1 USTC ¶9487]. But see United
States v. Aetna Life Ins. Co., D. C. Conn. 1942, 46 Fed. Supp.
30 [42-1 USTC ¶9266]. But under this view of the tax collector as
a lienor who can acquire "possession" of a debt within
the meaning of Section 67c, the least that can be required of him
to establish the essential possessory relationship is notification
to the debtor that a levy is being made upon that which he owes,
or the service of appropriate process upon the debtor purporting
to appropriate the debt to the satisfaction of the tax lien. United
States v. Eiland, supra; Givan v. Gripe, 7th Cir. 1951, 187
Fed. (2d) 225 [51-1 USTC ¶9169]; United States v. O'Dell,
6th Cir. 1947, 160 Fed. (2d) 304 [47-1 USTC ¶9190]; In re
Holdsworth, D. C. N. J. 1953, 113 Fed. Supp. 878 [53-2 USTC ¶9589].
Notice to Debtors]
case the Deputy Collector seized everything within Brokol's place
of business, padlocked the premises and posted appropriate notices
of this distraint for taxes. But nothing beyond this was done by
way of notice to debtors or attempted levy upon outstanding
obligations. The following day the petition for bankruptcy was
filed. It does not appear that the Collector even knew at that
time who Brokol's creditors were. Certainly he had taken no steps
to establish possessory dominion over any sum owed Brokol. It is
clear, therefore, that whatever tax liens may in legal
contemplation have attached to debts owed to Brokol no steps were
taken sufficient to make these liens "accompanied by
possession" of the debts. Therefore, their proceeds, as later
collected, are subject to the priorities and procedures of
bankruptcy administration indicated in Section 67c.
it is to be noted that although the taxing authorities collected
$2,667.37 owed to Brokol after bankruptcy, judgment below was for
the trustee in the sum of $2,179.41, and the trustee has not
appealed. This discrepancy between collection and award represents
certain expenses incurred in the over-all effort to distrain for
the Brokol tax indebtedness. Since all concerned have agreed to
the deduction of some $500 of these expenses from the collections
of outstanding debts we make no point of the matter. We note it
because some similar issue contested in another case may present a
question of substance.
judgment will be affirmed.
USTC ¶9468]In the Matter of Deputy Construction Company, Bankrupt
S. District Court,
, No. 1596 in Bankruptcy, 6/21/57
[1954 Code Sec. 6331--similar to 1939 Code Secs. 3690 and 3692;
Rev. Stats. Sec. 3466]
Priorities: Money owed to deliquent taxpayer by bankrupt.--A
claim filed by the Government against a bankrupt who owed money to
a delinquent taxpayer was timely. The taxpayer, who had assigned
his rights to the Government, had filed a timely claim, and the
Government's claim, filed after expiration of the time for filing
claims in bankruptcy, was merely an amplification of this earlier
claim. Furthermore, the Government's claim was filed within the
time set in an order secured by the trustee in bankruptcy barring
claims after the date specified therein. At the time of the
bankruptcy, the Government had perfected an assignment or lien by
reason of the bankrupt's agreement to apply monies owed to the
taxpayer in liquidation of the tax claim as the monies were
received from sales of houses being constructed by the bankrupt
and the taxpayer. The Government did not claim a lien priority,
but asserted priority under the provisions of the Bankruptcy Act.
It was entitled to priority, there being no doubt that the
assignment was completed prior to the bankruptcy..
D'Angelo, Trustee. William J. Hagan, Office of the Regional
Counsel, Internal Revenue Service, for U. S.
of Fact, Conclusions of Law and Opinion on Claim of Government
District Director of Internal Revenue for the District of Delaware
has filed a claim against the bankrupt estate. The Trustee has
objected to the claim. A priority status is demanded by the
government on its claim based on the provisions of §64.A(5) of
the Bankruptcy Act.
Trustee's objections to the claim are first because it was
allegedly filed out of time; and secondly because the claim
itself is not entitled to priority.
the two facets of the problem will be considered.
fair to state a representative of the District Director of
Internal Revenue office has attended most of the meetings of
creditors of the bankrupt held in this proceeding.
Timeliness of the Government's Claim
bankruptcy proceeding was begun on
May 10, 19
56. The debtor was adjudicated a bankrupt on
June 4, 19
56. The first meeting of creditors was held on
June 27, 19
56. Under Sec. 57.m of the Bankruptcy Act the last day for filing
December 27, 19
56. The claim of Wayne O. Nichols, through whom the Government
asserts its claim and assertion of priority, was filed on
October 19, 19
56. There was admittedly no application for an extension of time
before the final day for filing claims.
Trustee filed a petition on
December 19, 19
56 for a bar order to be issued against the government, praying
that the government be directed to file any claim it had against
the bankrupt in any sum or on any basis by or before a day
order was entered on
December 20, 19
56, and made returnable on
January 7, 19
January 2, 19
57, the government filed its claim in this proceeding, asserting a
priority arising from an assignment and for levy made upon monies
due from the bankrupt to the above named Wayne O. Nichols.
December 7, 19
56, a memorandum was filed by the government with the Referee
setting forth the government's position upon its claim of
are the salient facts bearing upon the timeliness of the
government priority claim.
convinced that sufficient evidence was before the Court prior to
December 27, 19
56 that would justify the allowance of the claim asserted by the
government. It is true that §57 is mandatory in setting a cut-off
date for filing claims, but it is also true that claims may be
amended or amplified after the cut-off date, provided sufficient
information has been filed prior to that time as would adequately
give notice of a claim.
appears from a reading of 3 Collier, Bankruptcy 57.11, and the
notes in the supplement thereto, that the government did not file
a new claim on
January 7, 19
57, but merely perfected a claim that had been lodged prior to
December 27, 19
56, with sufficient formality to apprise the Court, the Trustee
and the creditors of its form and content and the possible extent
and basis of the claim.
not to say that undue liberality can be allowed in filing late
claims,--the statute is adamant and exceptions to the necessity of
filing fully and promptly should not be encouraged; this, however,
is a case where the rule of amplification of a prior claim should
event, the bar order served upon the government may have been
properly construed as allowing the government to set within the
return time. I find and conclude that time and hence that it
should be allowed as timely.
Propriety and Priority of the Government Claim
conclusion is that the claim has been filed within time, I must
next determine if the claim is proper, and whether the claim can
be given a priority status under §64.a(5) of the Bankruptcy Act
as asserted by the government.
cited section provides:
* * Sec. 64a.--The debts to have priority, in advance of the
payment of dividends to creditors, and to be paid in full out of
bankrupt estates, and the order of payment shall be
Debts owing to any person, including the United States, who by the
laws of the United States in (is) entitled to priority, and rent
owing to a landlord who is entitled to priority by applicable
State law; Provided, however, That such priority for rent to a
landlord shall be restricted to the rent which is legally due and
owing for the actual use and occupancy of the premises affected,
and which accrued within three months before the date of
Trustee argues that the government is not entitled to priority
unless it can show it was entitled to priority on the date on
which the petition in bankruptcy was filed, and furthermore the
Trustee claims that the government must show that the original
obligor was and is insolvent.
resume and discussion of the facts may help point up the basis of
the decision I have reached in this case.
bankrupt, Deputy Construction Co., was a
corporation engaged in the construction of homes. One of the
subcontractors employed by the bankrupt was Wayne Nichols. Wayne
Nichols owed the U. S. Government delinquent taxes,--the type of
tax is immaterial. On
March 16, 19
55 the District Director of Internal Revenue issued a levy which
was served on the Deputy Construction Co., and by that levy it
allegedly seized such property and rights of Wayne Nichols as were
then held or might be held by the bankrupt and were due and owing
to Nichols by the bankrupt.
amounted to some $3765.07. It appears at that time Wayne Nichols
was due approximately $3495.74 by Deputy Construction Co., it
appears however that this amount was not payable at any one time
but under the agreement between the bankrupt and Wayne Nichols
sums were payable as, and when, the houses on which the
contracting work had been done were sold.
no evidence was presented on this point, the Trustee does not seem
to dispute the fact that the following occurred. Some arrangement
was made between the office of the District Director of Internal
Revenue, by Mr. Gordy of the Deputy Construction Co., and by Wayne
Nichols, by which Nichols was to receive payments when they became
due, but out of these payments a certain proportion would be paid
to the government in liquidation of the tax claim.
purpose of this arrangement was apparently to allow the bankrupt
and Wayne Nichols to continue in business and allow the government
to liquidate its claim against Nichols. Again, no express evidence
was presented regarding this but from what evidence was presented
it appears inferentially that only one house was sold after the
agreement was reached by the District Director and the two other
parties, and from the proceeds realized from the sale of the house
the District Director was paid $240.00, and the balance of the
amount due Mr. Nichols was paid directly to him. As a result, the
government's claim is now computed to be approximately $2801.00.
amount is the sum arrived at by Mr. Nichols, and reflects the fact
that the government has waived its right to insist upon payment to
it of that portion of the proceeds paid to Nichols from the one
sale, through which the government was paid part of its claim and
Nichols was paid the balance of the monies due him on the
appears, therefore, that at the time of bankruptcy the government
had perfected an assignment or lien or by reason of the levy which
was honored by the Deputy Construction Co. The government does not
make a claim for a lien priority but merely asserts its right to
be paid as a fifth priority claimant under §64 of the Bankruptcy
stand or position taken by the government proper?
conclude that it is. The government has shown that at the date of
bankruptcy it had an assignment, at the very least, from Nichols
giving it the right to demand from Deputy Construction Co. any
monies which Deputy Construction was then bound to pay to Nichols.
Trustee argues that the government cannot assert a priority claim
unless it shows that both Deputy Construction Co. and Wayne
Nichols are insolvent.
reading of §64 and of the original priority statute, 31
C. A. §§ 191-193, does not show that this was the intent of the
statute. The insolvency contemplated under the statute is that of
the person or party that owes the debt to the U. S. Government.
That person or party in this case, on the date of bankruptcy, was
the Deputy Construction Co., and the insolvency and bankruptcy of
that debtor is in my opinion sufficient to allow the government to
assert a priority claim.
been long held that taxes due the U. S. Government are encompassed
within the term "debts" due the U. S. Government. See Price,
492, 70 L. Ed. 373, 46 S. Ct. 180 (1926) [1 USTC ¶158].
government, in this case, seeks only a priority in payment out of
hands of the debtor's assignee or representative, which, in this
case is the Deputy Construction Co. The problem has been raised
many times before and in the actual situation presented the
priority of the U. S. Government has been almost uniformly upheld.
N. Y. v. Maclay, 288 U. S. 290, 77 L. Ed. 754, (1933); and
see Annotation at 77 L. Ed. 757, 772; see also U. S. v. Mamxen,
307 U. S. 200, 83 L. Ed. 1222 (1939), and Annotation at 83 L. Ed.
no question in this case but that there was an assignment of the
debt to the U. S. Government prior to the bankruptcy. Cf. In re
Hanson Bakeries, Inc. 103 Fed. (2d) 665, (C. C. A. 3 1939).
examined all the cases cited by the attorneys for the government
and the Trustee. A reading of U. S. v. Eiland, 223 Fed.
(2d) 118 (C. C. A. 4 1955) [55-1 USTC ¶9487] will show that the
position of the government in this case is well taken, at least as
far as its claim of priority. Whether or not the holding of the Eiland
case as far as the lien claim is correct, I need not decide at
this time. See also In re Riggs, 51 Fed. Supp. 961, (E. D.
Pa. 1943), and In re Waxaid Co., 55 Fed. Supp. 289 (D. Md.
claim of the government will be allowed a priority status under §64(5)
of the Bankruptcy Act. The attorneys for the government and for
the Trustee should enter into an agreement, setting forth the
amount of the claim which is to be allowed to the government, and
if such agreement cannot be reached then a hearing must be held to
determine the precise amount.
be noted, further, that there is no evidence that the debtor,
Nichols, assigned his claim in any other way except to the Federal
Government. In the claim filed, Nichols itemizes payments to be
made to the government and to other parties. The Trustee should
determine if there is any basis for allowing the claim to be paid
to any party other than the Federal Government. This may be
effectively done by requiring the persons named in the claim, the
debtor, Nichols, and any other person who may be interested
therein, to come into court and show reason why the claim should
not be allowed to the Federal Government in its entirety.
USTC ¶9411]Paul L. Moskowitz, Trustee in Bankruptcy of the
Riverside Painting Co., Inc., Bankrupt, Plaintiff v. E. J. Nelson,
District Director of Internal Revenue, an agency of the United
States Treasury, Defendant
S. District Court, East. Dist. Wis., No. 61-C-209, 218 FSupp 710,
[1954 Code Secs. 6323 and 6331]
Lien for taxes: Bankrupt's assignment of receivables and
mortgage: Voidable preference: Jurisdiction.--The United
States has waived its sovereign immunity in a suit by a trustee in
bankruptcy to avoid a preference and to recover property
transferred to the United States. However, a delinquent taxpayer's
assignment of accounts receivable and of its rights under a
chattel mortgage was not a voidable preference, where the tax lien
of the United States arose prior to the assignments, although no
notice of levy was served on some of the debtors, and notices
served on others had been released before the petition in
bankruptcy was filed.
Borgelt, Skogstad & Powell, 828 N. Broadway, Milwaukee, Wis.,
for plaintiff. James Brennan, Federal Bldg., Milwaukee, Wis., for
has filed a motion to dismiss plaintiff's complaint on two
complaint fails to state a cause of action on which relief can be
action is, in effect, one against the United States, and the
United States has not consented to be sued in a proceeding of this
the oral argument, further briefs were submitted by counsel for
the parties and affidavits filed. The court has considered the
pleadings, arguments of counsel and briefs and affidavits, and is
prepared to make its decision.
as Trustee in Bankruptcy of the Riverside Painting Co. Inc. brings
this action to avoid a preference and to recover a property
transfer. Jurisdiction of these proceedings is claimed under
provisions of §60(b) of the Bankruptcy Act, 11 U. S. C. A. 96(a),
67(b) and (c) of the Bankruptcy Act, 11 U. S. C. A. 107(b) and
(c), and 70(e) of the Bankruptcy Act, 11 U. S. C. A. 110(e), and
28 U. S. C. A. 1346.
Assignment of Receivables]
complaint alleges that certain creditors of Riverside Painting
Company, Inc., formerly known as Peter P. Woboril, Inc., on
March 23, 19
60, filed a bankruptcy petition in this district. On
August 28, 19
November 27, 19
59, defendant, as District Director of Internal Revenue, assessed
taxes against the bankrupt for unpaid social security and
withholding taxes in an amount in excess of $20,000; that within
four months prior to the filing of the bankruptcy petition, the
bankrupt for and on account of an antecedent indebtedness, said
bankrupt then being insolvent, assigned certain of its accounts
receivable to defendant. A copy of the assignment attached to the
complaint as Exhibit A, recites:
for value received, PETER P. WOBORIL, INC., a Wisconsin
corporation, has assigned, transferred and set over, and does
hereby assign, transfer and set over unto the District Director of
Internal Revenue, E. J. Nelson, and to The Woboril Company, a
Wisconsin corporation, all sums which may now be due or which may
hereafter become due from its several debtors designated on
several lists of accounts heretofore furnished to the Internal
Revenue Service, and to The Woboril Company, which are
incorporated herein by reference as though specifically set forth
herein, in the approximate total amount of $58,000.00, including
all amounts which may become due to it from Brant & Nielson
Co. under the Sales Agreement of
February 12, 19
60, likewise incorporated herein by reference, it being understood
and agreed that the above mentioned assignees in the order of the
above mentioned priority shall for their own use and benefit
demand, collect and receive and adjust the indebtedness due upon
the said several accounts, so that the District Director shall
first satisfy all claims of the Internal Revenue Service with
respect to the assignor, including interest and penalties, in the
approximate amount of $40,000, and that thereafter, The Woboril
Company shall satisfy all claims due it from the assignor in the
approximate amount of $12,800.00, together with interest thereon,
by reason of its assuming the obligation of the assignor to Auto
Acceptance & Loan Corporation under a certain chattel mortgage
note and chattel mortgage upon the physical assets of the
assignor, and that upon the full payment and satisfaction of the
aforesaid claims of the assignees all accounts of the assignor so
assigned thereunder shall revert back to the assignor, or its
assignment is made as security to indemnify the said District
Director of Internal Revenue for any waivers or forebearance made
by the Internal Revenue Service with respect to the collection of
its claims against the assignor; and to indemnify The Woboril
Company for the aforesaid assumption of chattel mortgage lien
obligation and the subrogation of the same to the claims of the
Internal Revenue Service."
assignment of accounts is dated
February 15, 19
60, and signed by Peter P. Woboril, Sr., President, and Genevieve
B. Woboril, Secretary.
[Chattel Mortgage Assigned]
assignment of the chattel mortgage attached to the complaint as
Fxhibit B, recites that Peter P. Woboril, Inc.:
. . does hereby sell, assign, transfer and set over unto, first,
the District Director of Internal Revenue, E. J. Nelson, and
secondly, The Woboril Company, a Wisconsin corporation, that
certain chattel mortgage made, executed and delivered by Brant
& Nielson Co., of the City and County of Milwaukee, State of
Wisconsin, to Peter P. Woboril, Inc., together with the
indebtedness thereby secured and unpaid thereon, which
indebtedness said Corporation covenants to be in the sum of
$30,000.00, said chattel mortgage being dated
February 23, 19
60, . . . and the said Corporation hereby gives to the said
District Director of Internal Revenue, E. J. Nelson, firstly, and
the said The Woboril Company, secondly, and in that priority,
their representatives and assigns, the full power and authority,
for their own use and benefit, to ask, demand, collect, receive
and give acquittance or satisfaction for the amount of said
mortgage or any part thereof, and to bring or prosecute, at law or
equity, any proceedings thereon, and to foreclose the same in
their own respective name or names; the order of said priority
between the respective name or names; the order to said priority
between the respective assignees to be that the said District
Director of Internal Revenue, E. J. Nelson, shall first satisfy
all claims due the Internal Revenue Service from the assignor,
together with interest and penalties thereon, and then The Woboril
Company shall satisfy itself for all claims it may have by reason
of its buying and releasing a certain chattel mortgage of this
assignor made to Auto Acceptance & Loan Corporation, on the
7th day of May, 1959, which said mortgage was duly filed in the
office of the said Register of Deeds on the 14th day of May, 1959,
as Document No. 1817046; said The Woboril Company having
subrogated its priority under said original chattel mortgage (to
Auto Acceptance & Loan Corporation) to the District Director
of Internal Revenue, E. J. Nelson."
assignment is dated
February 25, 19
60, and signed by Peter P. Woboril, Sr., President, and Genevieve
B. Woboril, Secretary, on behalf of Peter P. Woboril, Inc.
[Preference of Creditor]
complaint alleges that the effect of said assignments of accounts
receivable and the chattel mortgage was to enable the defendant to
obtain a preference of money due the bankrupt from said creditor,
and that at the time of such transfer, defendant had reason to
believe the bankruptcy was insolvent. The complaint further
alleges that defendant has collected and has in his possession
certain amounts paid to defendant by debtors of the bankrupt in
the total amount of $1511.32 and that none of those accounts were
in the possession of the defendant at the time of filing of the
bankruptcy petition herein.
complaint also sets forth that the defendant, prior to the filing
of the petition in bankruptcy, levied on certain of the accounts
receivable by serving a notice of levy but that subsequent to and
on the date of filing of the petition for bankruptcy, these levies
were released, that subsequent to release of the levies and
subsequent to filing of the bankruptcy petition, the respective
debtors paid the defendant sums in the amount of $5588.65, and
said accounts at all times after releases of levies and at the
time of the payment of the sums were not in the possession of the
defendant within the meaning of §67(c) of the Bankruptcy Act;
that the debts owing bankrupt constituted personal property and
were not accompanied by possession of the United States or the
defendant at the time moneys were paid by the debtors to the
defendant, and that pursuant to §67(c) of the Bankruptcy Act, the
lien of the United States and the defendant is postponed in
payment to claims for preferred wages and for expenses of
administration. The complaint further alleges that bankrupt was
indebted for wage claims for an undetermined sum for wages earned
within four months of the filing of the bankruptcy. Plaintiff does
not allege the existence of any other liens, statutory or
consensual, against the property of the bankrupt.
demands an avoidance of the assignment of the accounts receivable,
and the assignment of the chattel mortgage and note, and prays
that all of the property be turned over to plaintiff as trustee in
bankruptcy, to be held and disbursed by him in accordance with §67(c)
of the Bankruptcy Act.
consider first the defendant's contention that the United States
has not consented to be sued since the provisions of the
Bankruptcy Act do not specifically authorize a suit against the
United States in an action by a trustee for recovery of a voidable
preference. Defendant relies on Abeken v. United States
(Mo., 1939) [39-1 USTC ¶9269], 26 F. Supp. 170, in which the
court after expressing doubts that the payment in question
constituted a preference gave three reasons why the trustee could
not recover, (1) aside from the Bankruptcy Act a creditor may be
preferred by a debtor, (2) the United States is not a
"person" within the meaning of the statute permitting
the recovery of a preference, and, (3) the United States has not
consented to be sued for the recovery of a preference.
however, claims that Congress has enacted a comprehensive
statutory system to regulate bankruptcy and although the United
States is not specifically mentioned in §60 of the Bankruptcy
Act, §67(c) of the Act does expressly mention the United States,
and so it is apparent that Congress intended that the United
States be bound by its provision, and subject to suit. Plaintiff
also relies on waiver of immunity by the United States in 28 U. S.
C. A. 1346 (Tucker Act), which provides for jurisdiction in the
district courts of the United States of
other civil action or claim against the United States not
exceeding $10,000 in amount founded either upon the Constitution
or any Act of Congress or any regulation of an executive
department or upon any express or implied contract with the United
States or for liquidated or unliquidated damages not sounding in
§60(b) of the Bankruptcy Act does not specifically mention the
United States, consideration of the case law and the various
sections of the Bankruptcy Act discloses that Congress intended
the United States to be bound by its provisions and hence a proper
defendant in an action to set aside a preference. Section 67(b) of
the Bankruptcy Act, 11 U. S. C. A. 107, exempts from the operation
of §60 "statutory liens for taxes and debts owing to the
United States" and not claims for taxes generally. If as
contended by defendant, §60 could not be applied against the
United States for want of consent to be sued, this exemption
provision would be unnecessary. See In Re Techcraft (New
York, 1959) [60-1 USTC ¶9198], 177 F. Supp. 790. I find
therefore, that the United States has waived its sovereign
immunity to be sued in cases arising under §67 and §60 of the
remains to be considered the contention of the defendant that the
complaint fails to state a cause of action.
plaintiff's action is one brought under the provisions of §60 of
the Bankruptcy Act, 11 U. S. C. A. 96. In order to have a
preference six statutory elements must be present, (1) a transfer
of debtor's property, (2) to or for the benefit of a creditor, (3)
transfer must be made or suffered while debtor is insolvent, (4)
within four months of bankruptcy, (5) it must be for or on account
of an antecedent debt which results in a depletion of the estate,
and, (6) the effect of the transfer must be to enable such
creditor to obtain a greater percentage of his debt than he would
be entitled to under the distributive provision of the Act. If any
of these elements are lacking there is no preference, but when the
requirements are met the preference is voidable only if transferee
has reasonable cause to believe that the debtor was insolvent at
the time of the transfer. Mayo v. Pioneer Bank & Trust
Company, 270 F. 2d 823. 3 Collier on Bankruptcy, p. 755 and
purposes of this motion properly pleaded allegations of the
complaint are admitted. Brennan v. United States [54-2 USTC
¶10,969], 129 F. Supp. 155; 221 F. 2d 170. Thus our inquiry is
directed to the sufficiency of the complaint to satisfy the six
necessary elements set forth above. The first element, a transfer
of the debtor's property, is the assignment of the accounts
February 15, 19
60. The alleged transfer was made by the bankrupt as security for
payment of tax liability to defendant in the approximate amount of
$40,000. The consideration therefor was the waiver or forbearance
of the defendant with respect to the collection of its claims
against the debtor. This assignment, as alleged, is valid under §241.28(1),
Wisconsin Statutes, which provides for the validity of assignments
of accounts receivable for a valuable consideration
notwithstanding the fact that the debtor is not notified, and no
person claiming through or under the assignor and no future
creditors of the assignor are entitled to any diminution of the
rights of the assignee. Section 241.28(2), Wisconsin Statutes,
provides further that such assignment shall be deemed and held to
have been fully perfected at the time such assignment was made
notwithstanding the obligor was not notified or did not assent to
further alleged that the transfer was made for the benefit of the
defendant and it was made while the debtor was insolvent within
four months of the date of bankruptcy (February 15, 1960).
However, plaintiff must show that the transfer was made for or on
account of an antecedent debt which results in a depletion of the
estate, and the effect of which is to enable the creditor to
obtain a greater percentage of his debt than he would be entitled
to under the distributive provisions of the Act. It is our opinion
that the transaction as set forth does not result in a depletion
of the estate and is not preferential.
of Tax Lien]
complaint discloses that on
August 28, 19
November 27, 19
59, there had been assessed against the debtor certain taxes in
excess of $20,000 and it further discloses that the amounts
collected by defendant were applied to said tax assessment. As a
result of these assessments defendant possessed a statutory lien
under the Internal Revenue Code. 26 U. S. C. A. §6321, against
all the property of the bankrupt to the extent of the amount of
those assessments. Plaintiff in its brief and oral argument does
not contest the existence or validity of this statutory lien.
transfer by a debtor of money in total or partial discharge of a
valid or non-preferential existing lien which would not have been
disturbed by the bankruptcy proceedings does not constitute a
preference because the assets available for general creditors are
not thereby diminished. 3 Collier p. 842. See also Greenblatt
v. Utley, 240 F. 2d 243.
a substitution of a new security for an old is non-preferential
because it does not result in a depletion of the estate. Sawyer
v. Turpin, 91 U. S. 114. Of course, any transfer in excess of
the amount of the statutory lien may be attacked as preferential
but in the instant case the complaint alleges that the money
collected by the defendant pursuant to the assignment was applied
to the tax assessments of
August 28, 19
November 27, 19
59, which created the statutory lien.
seeks to invoke the provisions of §67(c) of the Bankruptcy Act
which provides that where not enforced by sale before the filing
of a bankruptcy petition, statutory liens including liens for
taxes or debts owing to the United States on personal property not
accompanied by possession shall be postponed in payment to certain
priority claims namely wage claims and administration expenses. He
contends that the accounts receivable were not in the possession
of the defendant at the time of the filing of the bankruptcy
petition since as to certain of the assigned accounts, there were
no notices of levy served on the debtors at all and as to the
others the notices of levy had been released prior to the date of
the bankruptcy petition.
support of his position, the plaintiff cites United States v.
Eiland [55-1 USTC ¶9487], 223 F. 2d 118, and Freeman v.
Mayer [58-1 USTC ¶9351], 253 F. 2d 295, which hold that in
order to establish the necessary "possession" of a debt
by the Collector, a notice of levy must be served on the obligor.
But §67(c) and the cases cited have no application here. At the
date of bankruptcy, the bankrupt had already relinquished
ownership of the accounts receivable by assigning them to the
defendant. Had the obligors paid the accounts to the assignor or a
subsequent purchaser of the account, the assignor or purchaser
would have been held accountable and liable to the defendant for
such sums received by him.
essence, plaintiff's claim as disclosed by the complaint is that
it is entitled under the facts pleaded to judgment setting aside
the transfer as being preferential. Yet at the same time in an
effort to show the preference element he contends that the
transfer was not effective in that it gave receivable than he
already had by virtue of the statutory lien. Such positions virtue
of the statutory lien. Such positions are inconsistent and
incompatible in relation to a single cause of action. Plaintiff
cannot have it both ways.
the complaint fails to allege facts sufficient to show that the
transfer was preferential under §60 of the Bankruptcy Act, it
fails to state a cause of action and the motion of defendant to
dismiss the complaint is hereby granted. Failure to replead within
twenty days of this order will be construed as an election to
stand on the complaint, and an order will be entered at such time
without notice dismissing the action on its merits.
USTC ¶9581]In the Matter of Cherry Valley Homes, Inc., Debtor;
United States of America, Appellant
U. S. Court of Appeals, 3rd Circuit, No. 12,533, 255 F2d 706,
6/2/58, Rev'g the District Court, 58-1 USTC ¶9402
Levy and distraint: Property subject to levy: Priority of
Government's claim in reorganization: Rights based on tax debtor's
position as creditors.--Where the Government made a levy upon
an insolvent debtor for debts due by it to a tax delinquent before
the debtor commenced reorganization proceedings under Chapter X of
the Bankruptcy Act, the Government had priority over general
F. Lynch, Department of Justice, Tax Division, Washington 25, D.
C., for appellant. Josiah E. DuBois, Jr., 511 Cooper St., Camden,
N. J., for appellee.
MARIS, KALODNER and HASTIE, Circuit Judges.
of the Court
disputed question here is whether the United States is entitled to
have a certain claim paid out of the assets of Cherry Valley
Homes, a corporation in reorganization under Chapter X of the
Bankruptcy Act, 11 U. S. C. §§ 501-676, before provision is made
for the claims of general creditors. The referee in bankruptcy and
the district court [58-1 USTC ¶9402] denied the claim of
priority, and the government has appealed.
Valley Homes, Inc., hereinafter "Cherry Valley", owed M.
Tobin Co., hereinafter "Tobin", a liquidated sum of
approximately $7000 which was less than the amount of a tax claim
which the United States had asserted with all prescribed formality
against Tobin. In levying for taxes upon Tobin's property, the
government had served appropriate process on Chery Valley. 1
There is no suggestion that the notice to or demand upon this
debtor was in any way inadequate as a levy upon the debt it owed
Tobin. On the record we have a perfected levy upon specific
incorporeal property of a taxpayer, namely, a liquidated sum owed
Tobin by Cherry Valley. This levy occurred
December 3, 19
56. Cherry Valley did not file its voluntary petition for
May 28, 19
contemplation and consequence, this levy effectively and
exclusively appropriated the debt to the satisfaction of the tax
claim six months before the Chapter X proceeding was instituted. United
States v. Liverpool & London & Globe Ins. Co., 1955,
348 U. S. 215 [55-1 USTC ¶9136]; Kyle v. McGuirk, 3d Cir.
1936, 82 Fed. (2d) 212 [36-1 USTC ¶9121]; United States v.
Eiland, 4th Cir. 1955, 223 Fed. (2d) 118 [55-1 USTC ¶9487].
Such a levy is treated in law like a seizure of corporeal
property, taken into the possession of a collector by way of
distraint for taxes. See Freeman v. Mayer, 3d Cir. 1958,
253 Fed. (2d) 295, 298 [58-1 USTC ¶9351]; 26 U. S. C. §§ 6331,
6332. Appellant recognizes that such a levy at least makes the
government a lienor, with a perfected right to have the entire
debt paid to it. By whatever name the appropriation shall be
called, it seems clearly sufficient to establish a priority of
right to satisfaction which the debtor's subsequent insolvency
does not affect.
as the government urges here, since the possessory concept of
"seizure" is not strictly applicable to a debt, it seems
correct to say that the tax levy through process served upon the
debtor at least accomplished an assignment of Tobin's claim
against Cherry Valley to the United States by operation of law.
This approach brings into decisive effect the provision of Revised
Statutes, Section 3466, 31 U. S. C. §191, that "whenever any
person indebted to the United States is insolvent . . . the debts
due to the United States shall be first satisfied." This
language has been applied to claims, originally between private
parties, the benefit of which has in various ways been assigned or
transferred to the United States. Korman v. Federal Housing
Admr., D. C. Cir. 1940, 72 App. D. C. 245, 113 Fed. (2d) 743; Wagner
v. McDonald, 8th Cir. 1938, 96 Fed. (2d) 273; Howe v.
Sheppard, C. C. D. Me. 1835, 12 Fed. Cas. 672; In re
Dickson's Estate, 1938, 197 Wash. 145, 84 P. 2d 661. We think
it applies here as well.
it is argued in a general way that there is some lack of equity in
the priority thus accorded the government. But we see no inequity
in recognizing that the government acquired a priority over
general creditors when its claim was asserted and perfected
against the debt owed by Cherry Valley many months before Chapter
X proceedings were instituted. To make the argument of inequity
even colorable, though not necessarily sound, it would have to
appear that Cherry Valley was insolvent when the levy was made
upon the debt it owed. And nothing of the sort appears in this
judgment will be reversed.
Actually, three wholly owned subsidiaries of Cherry Valley were
served, but the referee and the district court have treated Cherry
Valley as the real party concerned and affected.
USTC ¶9458]First National Bank of Norfolk, Plaintiff v. Norfolk
and Western Railway Co. et al., Defendants First National Bank of
Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al.,
Defendants First National Bank of Norfolk, Plaintiff v. Norfolk
and Western Railway Co. et al., Defendants
S. District Court, East. Dist. Va., Norfolk Div., C/A 812-70-N,
813-70-N, 814-70-N, 327 FSupp 196,
[Code Secs. 6323 and 6331--Result unchanged by '69 Tax Reform Act]
Lien for taxes: Validity of lien: Levy and distraint: Notice of
levy: Attorney's fees: Interpleader.--The notice of levy
served on taxpayer's debtor on
September 8, 1970
operated to transfer the right to receive payment on this debt to
the United States. Since a bank's judgments against taxpayer did
not become liens-until September 14, 1970, the United States had a
valid, perfected lien when the bank became a judgment lien
creditor. The fact that the government did not file a notice of
its tax lien with the appropriate state authority until September
24, 1970 did not affect this result since a validly invoked levy
to enforce a tax lien effects a seizure that is tantamount to a
transfer of ownership. Furthermore, the debtor was not entitled to
attorney's fees because when the government prevails, an
interpleader is not entitled to have these fees taxed as costs if
the federal lien exceeds the amount of the interpleaded fund.
M. Quayle, Suite 1000 Maritime Tower, P. O. Box 3183, Norfolk,
Va., for plaintiff. Williams, Worrell, Kelly & Worthington,
1700 Virginia Nat'l Bldg., Norfolk, Va., for garnishees. Brian P.
Gettings, United States Attorney, Norfolk, Va., for defendant.
actions began as garnishment proceedings in the Civil Court of the
City of Norfolk, but were removed to this Court by the United
States pursuant to 28 U. S. C. §1441 and related sections. The
garnishee, Norfolk and Western Railway Co., interpleaded the sum
of $7,042.14, which it owed to Delva, Inc., the judgment debtor,
because both the United States and the First National Bank of
Norfolk asserted claims to the money. The question here is whether
the United States or the Bank is entitled to the fund which
Norfolk and Western has deposited with the Clerk of this Court.
relevant facts in this case have been stipulated by the parties.
In September 1969, the Internal Revenue Service made an FHUT
assessment against Delva, and in June 1970, Delva was assessed for
FICA taxes for the first quarter of 1970. On July 10, 1970, the
Internal Revenue Service made an additional assessment against
Delva for a bad check penalty. Thereafter, on September 4, 1970,
the District Director served a Notice of Levy, in the amount of
$1,119.00 on the Norfolk and Western which was indebted to Delva
for $7,042.14 for services performed. Norfolk and Western was
served with an amended Notice of Levy on September 8, 1970, in the
amount of $7,832.06. The Internal Revenue Service did not file a
notice of its tax lien with the Clerk of the State Corporation
Commission until September 24, 1970.
September 1, 1970, First National Bank of Norfolk obtained three
judgments on promissory notes in the Civil Justice Court; with
attorneys' fees and court costs, the total sum was $7,664.07. The
Bank served garnishment summonses on Norfolk and Western on
September 14, 1970.
both the Bank and the United States claiming the fund, Norfolk and
Western interpleaded its debt to Delva, pursuant to Code of
Virginia §8-226 (1950). The United States was added as a party
and the cases were removed to this Court.
it is clear that the Bank's judgments did not become liens on
Norfolk and Western's indebtedness to Delva until September 14,
when the garnishment summonses were issued. Code of Virginia §§
8-411, 8-441 (1950). The right to the fund deposited by Norfolk
and Western, then, depends on whether the United States had a
valid, perfected lien when the Bank became a judgment lien
Internal Revenue Code, 26 U. S. C. §6321, gives the United States
a lien on all property, real or personal, belonging to any person
who refuses or neglects to pay any federal tax after proper demand
for payment. The lien attaches at the time the assessment is made
and continues until the tax liability is satisfied. 26 U. S. C. §6322.
However, 26 U. S. C. §6323(a) provides that the lien imposed by
section 6321 is not valid against purchasers, holders of security
interests, mechanic's lienors or judgment lien creditors until
notice of the lien is filed in accordance with section 6323(f). In
the case of personal property, whether tangible or intangible,
section 6323(f)(1)(A)(ii) requires that the notice of lien be
filed in one office, designated by the law of the state in which
the property subject to the lien is situated. The Virginia statute
designating the place for filing is the Uniform Federal Tax Lien
Registration Act, Code of Virginia §55-142.1 et seq., which has
been in effect since July 1, 1970. The relevant subsection, Code
of Virginia §55-142.1(b), provides:
of liens upon personal property, whether tangible or intangible,
for taxes payable to the United States and certificates and
notices affecting the liens shall be filed as follows:
If the person against whose interest the tax lien applies is a
corporation or a partnership whose principal executive office is
in this state, as these entities are defined in the internal
revenue laws of the United States, in the office of the clerk of
the State Corporation Commission.
absence of the Notices of Levy served September 4th and September
8th, the Bank would clearly prevail and be entitled to all of the
fund; however, when the amended Notice of Levy was served on
September 8, 1970, the Bank was not a judgment lien creditor with
respect to Norfolk and Western's indebtedness to Delva. If, as the
United States contends, the Notice of Levy operated to transfer
Norfolk and Western's debt to Delva to the United States on
September 8, then the Bank's judgments, which did not become liens
until September 14, are actually worthless since Norfolk and
Western had not been indebted to Delva since
September 8, 1970
these cases are substantially the same as that in United States
v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (4th Cir. 1955).
Here, as in Eiland, what we are concerned with is a levy on
"an indebtedness with service of notice upon the debtor, the
effect of which is to transfer to the United States the right to
receive payment of the indebtedness up to the amount of the
tax." 223 F. 2d at 120.
taxpayer fails to pay the taxes assessed and due, 26 U. S. C. §6331
authorizes assertion of the lien granted by section 6321, by levy
on all the taxpayer's property except that specifically exempted
by section 6334. The "proper way to assert the lien is by
levy and notice such as was served here." Where "the
Director serves notice upon the debtor stating that the money 'is
seized and levied upon' for the payment of the tax and that demand
is made upon the debtor for the amount necessary to satisfy the
tax, he is serving a 'warrant of distress.'" [223 F. 2d 121].
Once the levy is made, the person controlling the property levied
on is obligated to surrender the property to the Secretary of the
Treasury. In this respect, the Court of Appeals stated in Eiland:
levy and notice, the debtor may discharge his debt by payment to
the creditor, whatever may have been filed in the clerk's office;
thereafter it may be discharged as to the amount of the tax, only
by payment to the Director. 223 F. 2d at 122.
person in possession of property on which levy has been made, who
surrenders the property to the Secretary is "discharged from
any obligation or liability to the delinquent taxpayer with
respect to such property or rights to property arising from such
surrender or payment." 26 U. S. C. §6332(d).
levy was made pursuant to section 6331 on Form 668-A, and notice
is part of this record. The Notice of Levy, served on Norfolk and
Western recited that the taxpayer, Delva, had failed to pay an
assessed tax. The Notice also stated:
you are further notified that all property, rights to property,
moneys, credits, and bank deposits now in your possession and
belonging to this taxpayer (or with respect to which you are
obligated) and all sums of money or other obligations owing from
you to this taxpayer, or on which there is a lien provided under
Chapter 64, Internal Revenue Code of 1954, are hereby levied upon
and seized for satisfaction of the aforesaid tax, together with
all additions provided by law, and demand is hereby made upon
you for the amount necessary to satisfy the liability set forth
herein, or for such lesser sum as you may be indebted to him, to
be applied as a payment on his tax liability. (emphasis
substantially the same factual situation in Eiland, the
Court of Appeals held that levy was an appropriate means for the
United States to assert a tax lien.
for the Bank argues that the continued vitality of Eiland
is questionable in light of 26 U. S. C. §6323(a), (f) and the
Uniform Federal Tax Lien Registration Act. Nothing in either
statute, though, indicates that such filing of notice of the tax
lien is required where there is a levy pursuant to section 6331.
Had Norfolk and Western paid the $7042.14 to the United States
when the Notice of Levy was served, the debt to Delva would have
been extinguished; nothing would have been left to satisfy the
Bank's judgment lien after it was perfected on September 14, 1970.
26 U. S. C. §6332(d). Why, then, should the fact that Norfolk and
Western did not pay the indebtedness before September 14, have any
effect on the validity of the levy? The simple answer is that the
result is unchanged. A validly invoked levy to enforce a tax lien
effects a seizure that is tantamount to a transfer of ownership.
See United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d
100 (3d Cir. 1964). In Eiland, the Court of Appeals stated:
creditor ordinarily perfects a lien upon a debt by attachment and
garnishment with service of notice thereof upon the debtor. * * *
When this has been properly done, the effect thereof is to give to
the attaching creditor a lien upon the indebtedness for the amount
necessary to satisfy the judgment rendered in the proceedings in
his favor. The effect of the federal taxing statutes to which we
have referred is to create a statutory attachment and garnishment
in which the service of notice provided by statute takes the place
of the court process in the ordinary garnishment proceeding. * * *
[C]onsequently, the service of such notice results in what is
virtually a transfer to the government of the indebtedness, or the
amount thereof necessary to pay the tax so that payment to the
government pursuant to the levy and notice is a complete defense
to the debtor against any action brought against him on account of
the debt. 223 F. 2d at 121-22.
26 U. S. C. §6323(a), (f) nor the Uniform Federal Tax Lien
Registration Act have any effect on this statement of the law
relating to the effect of levy pursuant to 26 U. S. C. §6331.
As was pointed out in Eiland, the federal and state
statutes relative to recording the claim "have reference to
tangible property, which left in the possession of taxpayer may
serve as a basis of credit, and as to which the taking of
possession by a lien claimant is generally held equivalent to the
recording of lien. * * * [I]t would be unreasonable to apply their
provisions to debts, since debtors could not be expected to search
the clerk's office before paying a debt, to see whether or not tax
liens had been filed against their creditors, nor could banks be
expected to make such search before honoring checks drawn on
deposits. * * * Prior to levy and notice, the debtor may discharge
his debt by payment to the creditor, whatever may have been filed
in the clerk's office . . ." Accordingly, the United States
is entitled to the entire fund deposited with the Clerk since the
tax assessment exceeds that amount.
remaining question is whether the Interpleader Norfolk and Western
Railway is entitled to have its attorneys' fees taxed as costs.
When the United States prevails, an Interpleader is not entitled
to have its attorneys' fees taxed as costs if the federal lien
exceeds the amount of the interpleaded fund. Such an allowance
would diminish the amount of the government's prior lien. See United
States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U.
S. 84 (1963); United States v. McCall's Administrator [70-1
USTC ¶9183], 313 F. Supp. 1399 (M. D. Pa. 1969). Norfolk and
Western's application for attorneys' fees and costs will be
denied. Counsel for the United States will present an
USTC ¶9669]Robert C. Reiling, Jr., Plaintiff v. United States of
S. District Court, No. Dist. Ind., Hammond Div. at Lafayette,
Civil No. L 76-19,
[Code Sec. 6331--result unchanged by '76 Tax Reform Act]
Levy and distraint: Levy on debt v. funds held by County
Commissioners: Bankruptcy: Priority over receiver.--An
notice of levy based on a lien against UB was properly served on a
corporation that had employed UB as a subcontractor to furnish
labor and material for a construction project, rather than upon
certain County Commissioners who were holding funds pending the
outcome of a lawsuit regarding the construction project of which
both UB and the corporation were parties. The levy was upon a
fixed, intangible debt owed to UB rather than against the funds
held by the Commissioners. Further, the Government obtained
constructive possession of the funds on the date it served its
levy which was prior to the time a receiver in bankruptcy had been
Katz, 22 Bank & Trust Bldg., Lafayette, Ind. 47901, for
plaintiff. John R. Wilks, United States Attorney, Ft. Wayne, Ind.
46801, John A. DiCicco, Steven N. Kaplan, Department of Justice,
Washington, D. C. 20530, for defendant.
of Decision and Order
cause is now before the court on defendant's motion for summary
judgment filed July 12, 1977. For reasons stated below, the motion
will be granted.
an action brought pursuant to 26 U. S. C. §7426 and 28 U. S. C.
§1346(e) seeking the return of funds that were allegedly
wrongfully levied upon by the Internal Revenue Service. The
complaint alleges that on
September 9, 1975
, the Internal Revenue Service served a notice of levy on C. W.
Ellison Builders, Inc. in the course of its efforts to recover
taxes owed by United Builders, Inc. Plaintiffs allege that at the
time the notice of levy was served, the funds that were eventually
were in the care, custody, and control of the Tippecanoe County
Commissioners, not Ellison. The Commissioners were holding the
funds pending the outcome of a lawsuit in Tippecanoe County
Circuit Court regarding a construction project. C. W. Ellison,
Inc. had previously entered into an agreement with the Board of
Commissioners to construct the Tippecanoe County Home. United
Builders had been employed by Ellison as a subcontractor to
furnish labor and material for the project. At issue in the state
lawsuit were claims with respect to contracts relating to the
project. Both Ellison and United Builders were parties to that
lawsuit. On November 17, 1975, the Tippecanoe County
Commissioners, in connection with the construction project,
drafted a check for the sum of $5,907.95, naming Ellison and
United Builders as joint payees. On November 24, pursuant to the
notice of levy, Ellison transferred this check to the
. More than a month before, on October 15, plaintiff Reiling had
been appointed receiver for United Builders.
motion for summary judgment, the moving party has the burden of
showing that there are no genuine issues of material fact in the
case, and all doubts on this point are resolved against the movant.
Rule 56, Fed. R. Civ. P; Adickes v. S. H. Kress & Co.,
398 U. S. 144 (1970); Rose v. Bridgeport Brass Co., 487 F.
2d 804 (7th Cir. 1973). The pleadings, exhibits, and briefs
submitted in this action reveal that no material issue of fact is
contested and the case is a proper one for summary judgment.
Reiling's first argument is that the levy was wrongful because not
served on the Tippecanoe County Commissioners, who were holding
the specific funds Ellison intended to apply to its obligation to
United Builders. The pertinent Treasury Regulation, however,
to levy upon a fixed, intangible debt owed to a taxpayer as well
as on his tangible assets. Ellison's debt to United Builders was
such an intangible obligation, for it was owed by Ellison to
United Builders independently of whether Ellison received payment
from the Tippecanoe County Commissioners. "A levy shall
extend only to the property possessed and obligations existing at
the time thereof. . . . [Such property may be] real or personal,
tangible or intangible." Treas. Reg. §301.6331. The Internal
Revenue Service did not notify the Tippecanoe County Commissioners
that it had made the levy because it did not levy against the fund
held by the commissioners, but against the obligation owed by
Ellison directly to United Builders. See Reiling v. United
States, Memorandum of Decision and Order on defendant's motion
to dismiss Count II of plaintiff's complaint entered February 4,
1977, at 4-5. Therefore,
did not act incorrectly in serving the levy only upon Ellison.
other argument is that the levy did not attach until Ellison
received payment from the county, a full month after Reiling had
been appointed receiver and thereby given the power to collect all
of United Builders' existing assets. If the levy had not yet
attached when Reiling was appointed, Ellison's debt to United
Builders would be included in the assets Reiling is empowered to
collect. Reiling relies on 11 U. S. C. §107(c)(3), which provides
that tax liens not accompanied by possession are to be postponed
in bankruptcy until the costs of administering the bankruptcy and
some other debts have been paid. The question turns on whether
possession is effected when a levy is served, or later. See
generally 4 Collier on Bankruptcy ¶67.27 at 396-98. The
Supreme Court recently held that §107(c)(3) does not require
actual possession and that the constructive possession obtained by
service of a levy before the appointment of a receiver protects a
tax lien from the operation of this statute. Phelps v. U. S.
[75-1 USTC ¶9467], 421 U. S. 330 (1975). See also American
Acceptance Corp. v. Glendora Better Builders, Inc. [77-1 USTC
¶9348], 550 F. 2d 1220 (9th Cir. 1977). The Government obtains
constructive possession on the date it serves its levy, and a
subsequently appointed receiver cannot reach assets already
constructively taken from the bankrupt prior to the appointment.
The date of the actual payment of the debt levied upon is
irrelevant. Therefore, the Government's levy was properly honored
by Ellison, and the amount owed by Ellison to United Builders
cannot be collected by United's receiver.
defendant's motion for summary judgment is granted, and judgment
will be entered for the defendant.
USTC ¶9243]United States of America, Plaintiff v. Jack Wilson,
George L. Cousins Contracting Co., First National Bank of Clayton,
S. District Court, East. Dist. Mo., East. Div., Civil No.
[1954 Code Sec. 6331]
Tax lien: Third party's debt.--A federal tax lien properly
attached to a debt for services rendered which a contracting
company owed to the taxpayer.
H. Webster, United States Attorney, St. Louis, Mo., for plaintiff.
Jack Wilson, 9453 Roslan Place, Overland, Mo., and Ralph Graham,
506 Olive St., and Wayne C. Smith, Jr., St. Louis, Mo., for
matter was heard by this Court on
November 22, 19
60. The defendant, George L. Cousins Contracting Company filed an
answer to the complaint, but made no appearance at the hearing.
The defendants Jack Wilson and First National Bank of Clayton did
not answer the complaint or appear at the hearing. The plaintiff
was represented by counsel who introduced evidence at the hearing.
assessment officer in the office of the Director of Internal
Revenue at St. Louis, Missouri, on
May 31, 19
56, assessed income tax against the defendant Jack Wilson for the
year 1955 in the amount of $1,610.21. A notice and demand for the
payment of this tax was made upon Jack Wilson on
June 12, 19
assessment of the said tax of Jack Wilson was recorded in the
office of the Recorder of Deeds for St. Louis, Missouri, on
December 6, 19
56, and in the office of the Recorder for St. Louis County, on the
defendant Jack Wilson entered into a contract on
September 16, 19
57, with the defendant George L. Cousins Contracting Company to
perform certain brick work on the St. Louis County Hospital in
Clayton, Missouri. There is presently an amount owed to Jack
Wilson by the George L. Cousins Contracting Company for the work
done pursuant to this contract. The Contracting Company has
tendered $824.14 of this sum owed Jack Wilson into the registry of
this Court pending the outcome of the instant case.
defendant Jack Wilson has made payments to the Director of
Internal Revenue on his 1955 tax liability since the original
assessment, so that $501.21 plus accrued interest remains due.
Court has jurisdiction of the parties to this suit and to the
cause of action.
Wilson is indebted to the United States for unpaid tax for the
year 1955 in the amount of $501.21 plus accrued interest.
federal tax lien properly attached to the debt that the George L.
Cousins Contracting Company owes to Jack Wilson in the amount of
$501.21 plus accrued interest.
Court having made its Findings of Fact and Conclusions of Law now
renders judgment as follows:
federal tax lien in the amount of $501.21 plus accrued interest is
foreclosed on the debt owed by the George L. Cousins Contracting
Company to Jack Wilson.
unpaid tax of $501.21 plus interest accruing to the date of
judgment in this case in the amount of $129.18, shall be paid to
the Director of Internal Revenue from the sum owed to Jack Wilson
by the George L. Cousins Contracting Company and deposited in the
registry of this Court.
costs of this suit in the amount of $45.00 shall also be paid from
the sum deposited in the registry of this Court.
balance remaining in the registry shall be returned to the George
L. Cousins Contracting Company.
USTC ¶9659]United States of America v. Nationwide General
Engineering Associates, Inc., International Telephone and
Telegraph Corporation, and William H. Hughes, Receiver of
Nationwide General Engineering Associates, Inc.
S. District Court, No. Dist. Ind., Fort Wayne Div., Civil 1070,
[1954 Code Secs. 6331 and 7401-7403]
Lien for taxes: Levy on debt: Notice of lien filed after
appointment of receiver for creditor-taxpayer: Jurisdiction.--Where
the United States had served a notice of levy on a debtor of a
delinquent taxpayer, and filed a notice of tax lien after a
receiver had been appointed for the insolvent taxpayer in a state
court proceeding, a United States District Court had jurisdiction
over a suit by the United States against the taxpayer and its
debtor to recover the amount owed by the debtor, which was less
than the tax deficiency. Judgment was entered for the United
States on the grounds that the proper way to assert the tax lien
was by levy and that the receiver has no greater rights than the
McNagny, Jr., United States Attorney, Charles R. LeMaster,
Assistant United States Attorney, for plaintiff. J. Byron Hayes,
Gettle Building, Fort Wayne, Ind., for defendants.
defendants, separately and severally, concur and incorporate by
reference the matters and facts contained in the plaintiff's brief
respecting the stipulations of fact as outlined and contained
in Support of Propositions of Law
chronological order respecting the appointment of the receiver on
October 24, 19
57 as being prior to the filing of the notice of the tax lien by
the Government belies the Government's contention that this matter
can be heard and determined before this court.
no question that William H. Hughes was appointed and did qualify
as receiver of Nationwide General Engineering Associate, Inc.
prior to the time that the Government first moved on
November 4, 19
57 wherein they filed their notice of a tax lien with the Recorder
of Deeds of Cook County, Illinois. Therefore, the laws of the
State of Illinois have precedence even over the laws of the United
States of America with respect to jurisdiction. Upon appointment
and qualifying William H. Hughes did make demand for payment on
the International Telephone and Telegraph Corporation and pursuant
to the laws of the State of Illinois was vested with all rights in
the sum of Six Thousand Three Hundred Eighty-four on Forty-five
hundredths ($6,384.45) Dollars which has been stipulated as due
and owing the insolvent debtor.
in the U. S. C. A. can the Government find authority that permits
a Federal agency from circumventing the jurisdictional rights of a
state court in the matter involving an insolvent debtor. Under
Illinois law, the creditor of an insolvent debtor must obtain a
judgment, cause writ of execution to be executed thereon and
delivery to the execution officer and levy upon the property in
question to create a lien. Obviously, the Government is not
complying with the laws of the State of Illinois which does have
original jurisdiction but it is attempting to circumvent the
authority of a state court by adopting this method of procedure.
case of U. S. v. O'Dell, 160 Fed. (2d) 304, (Sixth Circuit)
[47-1 USTC ¶9190] the court says on page 306, Section 34-66 of
the Revised Statutes, Title 31, U. S. C. A. Section 191 that
"Section 34-66 does not create a lien but establishes a
priority." In substance the position of the receiver is that
the Government by failing to follow the established procedures by
issuing a warrant of distraint failed to establish a lien superior
to that of the receiver.
the position of the receiver that the entire sum of Six Thousand
Three Hundred Eighty-four and Forty-five hundredths ($6,384.45)
Dollars should be ordered surrendered by this court to the
possession and control of the receiver and the Government would
then have the right and authority to establish its priority to the
funds for the payment of the delinquent taxes and follow the law
of the State of Illinois which has original jurisdiction of the
funds presently paid into this court. The receiver respectfully
would show this court that the receiver stands in the same
capacity as a trustee in bankruptcy and that the priority of the
Government's position would be governed as provided under Section
64, Title II, Chapter 7, Section 104, which provides in substance
That the assets of a bankrupt estate shall be distributed as
The actual and necessary costs and expenses of preserving the
estate subsequent to the filing of the petition including the
reasonable costs and expenses of such recovery and the costs and
expenses of administration;
Wages not to exceed $600.00 to each claimant which have been
earned within three months from the date of the commencement of
Claims having to do with criminal prosecution and the recovery
Taxes, legally due and owing by the Bankrupt to the United States
or any State of any Subdivision thereof, and
To a ratable distribution to the unsecured creditors."
the defendant, William H. Hughes as Receiver for Nationwide
General Engineering Associates, Inc. respectfully asks that the
court enter its order and judgment for the defendant herein
separately and severally and that the plaintiff take nothing by
its complaint and that the court further order the Clerk of the
Court to transfer the sum of Six Thousand Three Hundred
Eighty-four and Forty-five hundredths ($6,384.45) Dollars
deposited by the International Telephone & Telegraph
Corporation with the Clerk of the Court in the Registery to the
control of William H. Hughes as receiver; and to accept from him a
receipt thereof, for costs and for all other orders the court may
of Fact (12/5/58)
hereby stipulated by and between Nationwide General Engineering
Associates, Inc.; William H. Hughes, Receiver of Nationwide
General Engineering Associates, Inc.; and the United States, by
their respective attorney, that the following are the salient
facts in this case:
August 6, 19
57 the District Director of International Revenue Service,
Chicago, Illinois, made an assessment against Nationwide General
Engineering Associates, Inc., for federal withheld taxes for the
June 30, 19
57, in the amount of $23,267.33, including interest in the amount
of $22.78. Notice and demand for payment of this tax liability was
made on Nationwide General Engineering Associates, Inc., on
August 7, 19
57. As to the aforementioned assessment, there is presently due
and owing the sum of $12,380.90, plus interest.
September 20, 19
57 International Telephone and Telegraph Corporation, through its
subdivision, Farnsworth Electronics Company, and Nationwide
General Engineering Associates, Inc, had entered into a certain
contract whereby various sums would be due said Nationwide General
Engineering Associates, Inc. from Farnsworth Electronics Company
from time to time. On
September 20, 19
57, in connection with said contract, Farnsworth Electronics
Company owed Nationwide General Engineering Associates, Inc., the
sum of $6,384.45. This sum of $6,384.45 is still owed to
Nationwide General Engineering Associates, Inc., by Farnsworth
September 20, 19
57, a Notice of Levy, Form 668-A, Rev. July, 1956, a copy of which
is attached, marked Exhibit 1, and made a part of the stipulation
herein, was served by the District Director of the International
Revenue Service on Farnsworth Electronics Company, which company
is a subdivision of Internal Telephone and Telegraph Corporation.
This levy was in the amount of $19,088.63 and covered the tax
assessment described in paragraph I above, plus interest and
October 24, 19
57, a petition was filed in the Superior Court, Cook County,
Illinois, alleging that Nationwide General Engineering Associates,
Inc., was insolvent. On
October 25, 19
57, the Superior Court appointed William H. Hughes as Receiver of
Nationwide General Engineering Associates, Inc.
November 4, 19
57, the District Director, Internal Revenue Service, filed a
Notice of Tax Lien, Form 668 Rev., Jan. 1955, a copy of which is
attached, marked Exhibit 2, and made a part of the stipulation
herein, with the Recorder of Deeds, Cook County, Illinois, for
federal withheld taxes owed by Nationwide for the quarter ended
June 30, 19
57, the then outstanding amount of $12,380.90.
December 9, 19
57, a Final Demand, Form 668-C, Rev. Jan. 1955, a copy of which is
attached, marked Exhibit 3, and made a part of the stipulation
herein, was served on Farnsworth Electronics Company for the
amount set forth in the Notice of Levy served on Farnsworth
Electronics Company on
September 20, 19
57. Neither Farnsworth Electronics Company nor its parent
International Telephone and Telegraph Corporation, has made any
payment to the United States in connection with the Notice of Levy
served by the United States on
September 20, 19
57 or the Final Demand made by the United States on
December 9, 19
December 9, 19
57, International Telephone Telegraph Corporation, parent company
of Farnsworth Electronics Company, filed an interpleader action
regarding the funds owed by Farnsworth Electronics Company to
Nationwide General Engineering Associates, Inc., said funds being
subject to the levy of the United States, and also claimed by the
Receiver of Nationwide General Engineering Associates, Inc. Joined
as a defendant to the interpleader action was the Commissioner of
Internal Revenue, who subsequently moved to be dismissed from the
action. The United States was not made a defendant to that action.
June 24, 19
58 the United States filed its complaint in the instant action.
International Telephone and Telegraph Corporation was made a party
defendant to the instant action. The said International Telephone
and Telegraph Corporation has paid the sum of $6,384.45 into the
Registry of this Court to abide the judgment to this Court.
Neither International Telephone and Telegraph Corporation, nor its
subdivision Farnsworth Electronics Company has any claim to the
$6,384.45 sum. The sum of $6,384.45 represents the amount due from
Farnsworth Electronics Company to Nationwide General Engineering
Associates, Inc., under the terms of a contract entered into by
the parties (see paragraph II of the stipulation). The sum of
$6,384.45 was due Nationwide General Engineering Associates, Inc.,
from Farnsworth Electronics Company on
September 20, 19
57, the date of the tax levy made by the United States. At a
pre-trial conference held concerning the instant action, it was
agreed that a stipulation would be prepared whereby International
Telephone and Telegraph Corporation would be dismissed as a party
of Fact (6/22/59)
action is brought pursuant to Sections 7401, 7402(a) and 7403 of
the Internal Revenue Code of 1954 and pursuant to Section 1345 of
Title 28 of U. S. C. A.
defendant, William H. Hughes, is a citizen of the State of
Illinois and has been appointed Receiver of the Nationwide General
Engineering Associates, Inc. An assessment against the corporation
for a withholding tax deficiency was made on
August 6, 19
57 and there is due and owing a sum of $12,380.90 plus interest,
the Complaint alleges.
has filed an Answer in which the material allegations of the
Complaint are denied in a first defense. The second defense in the
Answer contends that the validity of the lien filed by the
District Director has not been adjudicated. Further, a
counterclaim is filed by Nationwide in which the sum paid by a
sub-division of International Telephone and Telegraph Corporation
into the Registry of this Court is demanded by defendant Hughes.
stipulation of fact, entered into by and between the parties to
this action and filed in this Court is hereby incorporated by
reference into these Findings of Fact and adopted by this Court as
the controlling facts herein.
Court has jurisdiction of the parties and the subject matter in
this instant suit.
law is with the plaintiff and against the defendant on the
law is with the plaintiff and against the defendant on the
Receiver takes the assets of the taxpayer subject to all
obligations and liens and the Receiver acquires no greater rights
than the taxpayer.
(5) The proper way to assert the
lien is by levy and notice such as was served here. United
States v. Eiland, 223 Fed. (2d) 118 [55-1 USTC ¶9487].
USTC ¶9487]United States of America, Appellant v. Edward I.
Eiland, Trustee in Bankruptcy of Sport Coal Company, Inc., a
corporation, Bankrupt, Appellee
In the United States Court of Appeals for the Fourth Circuit, No.
6959, 223 F2d 118,
May 23, 19
Appeal from the United States District Court for the Southern
District of West Virginia, at Charleston.
[1939 Code Secs. 3672(a) and 3690--similar to 1954 Code Sec.
6323(a) and 6331, respectively]
Lien for tax: Filing of Notice: State requirements: Items
subject to distraint.--Where the United District Director made
a levy and demand upon taxpayer-bankrupt's debtor prior to the
institution of bankruptcy proceedings, the appellate court
reversed the District Court's holding that the tax lien was not
valid as against an order of the referee in bankruptcy
transferring the amount owned under the debt to the trustee in
bankruptcy because notice had not been filed in accordance with
state law in the clerk's office of the county in which the
bankrupt's business was located. The court pointed out that the
federal and state statutes pertaining to filing notices relate to
tangible property, and not to debts. Also reversing the District
Court, the appellate court stated that it was clear that a
statutory tax lien could be asserted against intangible property
such as a debt and that the proper way to assert the lien was by
levy and notice as was served herein. Also, the rights of the
United States were not postponed to administration and wage claims
by Bankruptcy Act Sec. 67(c)..
Foster, Special Assistant to the Attorney General (H. Brian
Holland, Assistant Attorney General, Ellis N. Slack and A. F.
Prescott, Special Assistants to the Attorney General, Duncan W.
Daugherty, United States Attorney, and William T. Lively, Jr.,
Assistant United States Attorney, on brief), for appellant. Claude
A. Joyce (Edward I. Eiland on brief), for appellee.
PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
an appeal in the bankruptcy proceedings of the Sport Coal Company,
Inc., a corporation which had its office and principal place of
business in Logan County, West Virginia, and which was adjudicated
a bankrupt on a voluntary petition in bankruptcy filed
June 29, 19
June 26, 19
53, before the institution of the bankruptcy proceedings, a levy
was issued by the District Director of Internal Revenue on form
668-A directed to the Boone County Coal Corporation, levying upon
any indebtedness owing by the Boone County Coal Corporation to the
Sport Coal Company, Inc., up to the sum of $7,172.42 and demanding
that the Boone County Coal Corporation pay same to the Director
from the amount so owing. The Boone County Coal Corporation, which
owed the Sport Coal Company, Inc., the sum of $1,885.54 at that
time, accepted service of this notice of levy and demand. After
the adjudication of bankruptcy it paid this sum into the hands of
the Trustee in Bankruptcy pursuant to an order of the referee. The
United States claims a lien on this amount for the taxes for which
its levy and demand were made upon the Boone County Coal Company.
Referee in Bankruptcy held that the United States was not entitled
to prevail against the trustee in bankruptcy with respect to its
claim on this fund because no lien was filed in the office of the
Clerk of the County Court of Logan County, West Virginia. He held,
also, that, even if this position were not sustained, the claim of
the United States should be postponed to administration and wage
claims under section 67(c) of the Bankruptcy Act and that, as
these exceeded the total of the assets of the bankrupt estate, the
United States would not be entitled to receive anything on its
claim, in any event. The District Judge [55-1 USTC ¶9203]
sustained the referee on the first of these holdings and found it
unnecessary to pass upon the second. Two questions are presented
by the appeal: (1) Did the failure to file notice in the office of
the Clerk of the Court of Logan County defeat the rights of the
United States under the levy and notice served upon the Boone
County Coal Corporation? (2) If not, is the right of the United
States under such levy and notice postponed to the administration
and wage claims? We think that both of these questions should be
answered in the negative.
should be noted in the first place, that what we are dealing with
here is, not a levy upon corporeal property, where the property is
left in the possession of the bankrupt to serve as a basis for
credit, but a levy upon an indebtedness with service of notice
upon the debtor, the effect of which is to transfer to the United
States the right to receive payment of the indebtedness up to the
amount of the tax. A lien for taxes upon failure to pay on demand
is provided for by 26 U. S. C. §3670; and this lien arises upon
deposit of the assessment list with the Director, 26 U. S. C. §3671.
Where taxpayer neglects or refuses to pay the taxes due, assertion
of this lien is authorized by 26 U. S. C. §3692 by levy upon all
property and rights to property of taxpayer except such as is
specifically exempted by 26 U. S. C. §3691, which has no
application here. Upon such levy, it becomes the duty of the
debtor to pay the indebtedness levied upon, up to the amount of
the tax, to the Director. 26 U. S. C. §3710. Levy here was made
under section 3692 on form 668-A, which notified the Boone County
Coal Corporation: "That all property, rights to property,
moneys, credits and/or bank deposits now in your possession and
belonging to the aforesaid taxpayer and all sums of money owing
from you to the said taxpayer are hereby seized and levied upon
for the payment of the aforesaid tax, together with penalties and
interest, and demand is hereby made upon you for the amount
necessary to satisfy the liability set forth above from the amount
now owing from you to the said taxpayer, or for such lesser sum as
you may be indebted to him, to be applied in payment of the said
can be no question, we think, but that the lien for taxes provided
by the statute can be asserted against intangible property such as
a debt. United States v. Liverpool, London & Globe Ins.
Co., 348 U. S. 215; Cannon v. Nicholas, 10 Cir., 80
Fed. (2d) 934 [35-2 USTC ¶9672]; Kyle v. McGuirk, 3 Cir.,
82 Fed. (2d) 212 [36-1 USTC ¶9121]; United States v. First
Nat. Bank, 8 Cir., 89 Fed. (2d) 116 [37-1 USTC ¶9201]; McKenzie
v. United States, 9 Cir., 109 Fed. (2d) 540; United States
v. Long Island Drug Co., 2 Cir., 115 Fed. (2d) 983, 985-986
[41-1 USTC ¶9140]; United States v. Warren R. Co., 2 Cir.,
127 Fed. (2d) 134, 137-138 [42-1 USTC ¶9391]; Investment &
Securities Co. v. United States, 9 Cir., 140 Fed. (2d) 894
[44-1 USTC ¶9210]; United States v. Manufacturers Trust Co.,
2 Cir., 198 Fed. (2d) 366 [52-2 USTC ¶9417]; United States v.
Ocean Accident & Guarantee Corporation, 76 Fed. Supp. 277
[48-1 USTC ¶9178]. And we think it equally clear that the proper
way to assert the lien is by levy and notice such as was served
here. There is apparent holding to the contrary in such cases as United
States v. O'Dell, 6 Cir., 160 Fed. (2d) 304 [47-1 USTC ¶9190]
and Givan v. Cripe, 7 Cir., 187 Fed. (2d) 225 [51-1 USTC ¶9169],
to the effect that a "warrant of distraint" is necessary
in addition to the notice to the debtor; but where, as here, the
Director serves notice upon the debtor stating that the money
owing "is seized and levied upon" for the payment of the
tax and that demand is made upon the debtor for the amount
necessary to satisfy the tax, he is serving a "warrant of
distraint". No peculiar virtue inheres in the name ascribed
to the notice. As said in Raffaele v. Granger, 3 Cir., 196
Fed. (2d) 620, 623 [52-1 USTC ¶9321]: "Distraint is a
summary, extra-judicial remedy having its origin in the common
law. There, a form of self-help, it consisted of seizure and
holding of personal property by individual action without
intervention of legal process for the purpose of compelling
payment of debt."
creditor ordinarily perfects a lien upon a debt by attachment and
garnishment with service of notice thereof upon the debtor. See Miller
v. United States, 11 Wall. 268, 297; Kennedy v. Brent,
6 Cranch 187; Rickman v. Rickman, 180 Mich. 224, 146 N. W.
609, Ann. Cas. 1915C 1237, 1248; Strawberry Growers' Selling
Co. v. Lewellyn, 158 La. 303, 103 So. 823, 39 A. L. R. 1502;
. Jur. p. 896;
. Jur. p. 94; 7 C. J. S. p. 403. When this has been properly done,
the effect thereof is to give to the attaching creditor a lien
upon the indebtedness for the amount necessary to satisfy the
judgment rendered in the proceedings in his favor. The effect of
the federal taxing statutes to which we have referred is to create
a statutory attachment and garnishment in which the service of
notice provided by statute takes the place of the court process in
the ordinary garnishment proceeding. There is no necessity for
adjudicating the amount of the tax under the statutory proceeding
(United States v. Morris & Essex R. Co., 2 Cir., 135
Fed. (2d) 711 [43-1 USTC ¶9432], cert. den., 320 U. S. 754); and,
consequently, the service of such notice results in what is
virtually a transfer to the government of the indebtedness, or the
amount thereof necessary to pay the tax, so that payment to the
government pursuant to the levy and notice is a complete defense
to the debtor against any action brought against him on account of
the debt. Columbian Nat. Ins. Co. v. Welch, 1 Cir., 88 Fed.
(2d) 333 [37-1 USTC ¶9131]; United States v. Ocean Accident
& Guarantee Corp., 76 Fed. Supp. 277, 278 [48-1 USTC ¶9178];
United States v. Marine Midland Trust Co., 46 Fed. Supp. 38
[42-2 USTC ¶9590]. When bankruptcy occurs after the levy and
notice have been served upon a debtor of the bankrupt, the trustee
in bankruptcy cannot interfere with the rights of the United
States thereby perfected before bankruptcy.
nothing in 26 U. S. C. §3672(a)(1) which invalidates as against a
trustee in bankruptcy rights acquired under such a levy upon a
debt. That section has reference to liens upon tangible personal
property having a situs, not to the levy upon or the transfer of
debts, as to which no recording of lien could be of any advantage
to creditors. The section is as follows:
Invalidity of Lien Without Notice.--Such lien shall not be
valid as against any mortgagee, pledgee, purchaser, or judgment
creditor until notice thereof has been filed by the collector--
Under state or territorial laws.--In the office in which
the filing of such notice is authorized by the law of the State or
Territory in which are property subject to the lien is situated,
whenever the State or Territory has by law authorized the filing
of such notice in an office within the State or Territory; or * *
authorization of filing by state law reliance is placed upon West
Virginia Code (1949) ch. 38, art. 10, sec. 1, which after
providing for the filing of federal tax liens in the offices of
clerks of county courts provides:
such tax shall be a valid lien as against any mortgagee, purchaser
or judgment creditor, until such notice shall be filed in the
office of the clerk of the county court of the county or counties
in which the property subject to such lien is situated."
federal statute and the statute of West Virginia manifestly have
reference to tangible property, which left in the possession of
taxpayer may serve as a basis of credit, and as to which the
taking of possession by a lien claimant is generally held
equivalent to the recording of lien. Firestone Tire &
Rubber Co. v. Cross, 4 Cir., 17 Fed. (2d) 417. Only tangible
property can properly be said to be "situated" in a
county within the meaning of the statutes quoted; and it would be
unreasonable to apply their provisions to debts, since debtors
could not be expected to search the clerk's office before paying a
debt, to see whether or not tax liens had been filed against their
creditors, nor could banks be expected to make such search before
honording checks drawn on deposits. With respect to such
intangible property entirely different provisions are needed and
have been made by the taxing statutes. Prior to levy and notice,
the debtor may discharge his debt by payment to the creditor,
whatever may have been filed in the clerk's office; thereafter it
may be discharged as to the amount of the tax, only by payment to
the Director. 26 U. S. C. §3710(b).
can be no question, of course, but that a trustee in bankruptcy is
vested by law with all the rights which a creditor could have
obtained by legal or equitable proceedings at the time of the
bankruptcy. Under the bankruptcy act of 1898, 30 Stat. 544,
565-566, as originally enacted, the trustee was vested with no
greater rights in the property of the bankrupt than the bankrupt
himself had, with the result that unregistered chattel mortgages
and other secret liens could be asserted against the trustee after
adjudication, although by adjudication creditors were prevented
from attaching a lien to the property by legal process. Bailey
v. Baker Ice Machine Co., 239 U. S. 268; Carey v. Donahue
240 U. S. 430; Martin v. Commercial Bank, 245 U. S. 513.
Subsequent amendments to the bankruptcy act were designed to
remedy the evils which had arisen from this situation. See House
Report No. 1293, 81st Congress, 2d Session; United States
Congressional Service, 81 Congress, 2d Session, vol. 2, pp.
1985-1990. The Amendment of 1952, 66 Stat. 420, 430, finally put
section 70(c) in its present form providing: "The trustee, as
to all property, whether or not coming into possession or control
of the court, upon which a creditor of the bankrupt could have
obtained a lien by legal or equitable proceedings at the date of
bankruptcy, shall be deemed vested as if such date with the
rights, remedies, and powers of a creditor then holding a lien
thereon by such proceedings, whether or not such a creditor
effect of the section as amended is to vest the trustee, not only
with rights with respect to the bankrupt's property which
creditors had acquired at the date of bankruptcy, but also with
all rights which creditors might have acquired by legal or
equitable process on that date; but this does not help the trustee
here, since no creditor could have acquired any rights on that
date with respect to a debt on which the United States had already
made a levy and served a notice, the effect of which was to
transfer the right to receive payment of the debt to the United
States. We need not concern ourselves here with what the rights of
the United States would be had there been no levy and its rights
were dependent upon the inchoate lien on all property created by
sections 3670 and 3672 of Title 26 of the Code. In such case,
questions of a very different nature would be presented. What we
have is a perfected lien created by levy with respect to a
specific indebtedness. See Goggin, Trustee v. Division of Labor
Enforcement of California, 336 U. S. 118 [49-1 USTC ¶9142]; Untied
States v. Sands, 2 Cir. 174 Fed. (2d) 384 [49-1 USTC ¶9264].
and Wage Claims]
think, also, that the rights of the United States are not
postponed to administration and wage claims by section 67(c) of
the Bankruptcy Act which provides:
Where not enforced by sale before the filing of a petition
initiating a proceeding under this Act, and except where the
estate of the bankrupt is solvent: (1) though valid against the
trustee under subdivision b of this section, statutory liens,
including liens for taxes or debts owing to the United States or
to any State or any subdivision thereof, on personal property not
accompanied by possession of such property, and liens, whether
statutory or not, of distress for rent shall be postponed in
payment to the debts specified in clauses (1) and (2) of
subdivision a of section 64 of this Act and such liens for wages
or for rent shall be restricted in the amount of their payment to
the same extent as provided for wages and rent respectively in
subdivision a of section 64 of this Act. * * *."
section also manifestly has reference to tangible property which
can be taken into possession, not to indebtedness which has been
levied upon with notice to the debtor so that it is to all intents
and purposes assigned to the
. City of
v. Hall, 2 Cir. 139 Fed. (2d) 935, upon which the trustee
relies, dealt with tangible property. If the statute be construed
to apply to indebtedness, however, then what was done by the
here must be construed as taking into possession within meaning of
the statute. The
had done everything that it could do to assert dominion over the
indebtedness and by the levy and notice had made it impossible for
the debtor to secure a discharge thereof by payment to any one
other than the
. We may say of the action taken by the
here what was said by the Supreme Court of ordinary garnishment in
, supra, 11 Wall. 268, 279, viz.: "It arrests the
property in the hands of the garnishee, interferes with the
owner's or creditor's control over it, subjects it to the judgment
of the court (here the payment of the tax), and therefore has
the effect of a seizure". (Italics supplied).
reasons stated, the judgment appealed from will be reversed and
the case will be remanded with direction to enter an order that
the amount received by the Trustee in Bankruptcy from the Boone
County Coal Corporation be paid over to the Director of Internal
Presented by Alvin Brown and Associates,
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