6321 - Conveyances to 3rd Parties p2

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6321 Conveyances to 3rd Parties page2

[54-1 USTC ¶9298]Max C. Loewy, Plaintiff v. Maurice C. Chernus, and United States of America , Defendant

In the Circuit Court of the County of St. Louis, State of Missouri, No. 196,510, January 4, 1954. Division No. 2

Tax liens: Transferee of delinquent taxpayer.--The plaintiff was allowed to recover against the maker of a note despite the Government's claim for delinquent income taxes against an intermediate holder from whom the plaintiff had acquired the note. Contrary to the Government's contentions, the Court found that the note was transferred by the delinquent taxpayer prior to the date on which the notice of tax liens was filed by the Government with the Recorder of Deeds.

Victor A. Wallace, 506 Olive St. , St. Louis 1, Mo. , for plaintiff. Rassieur, Kammerer & Erker (Cottrell Fox, of counsel) for defendant. Harry Richards, United States Attorney, and Robert E. Brauer, Assistant United States Attorney, 12th and Market Sts., St. Louis 1, Mo., for the United States.

Substituted Findings of Fact, Declarations of Law and Decree

WITTHAUS, Judge:

This cause coming on for hearing on the 22nd day of September 1953, plaintiff appeared in person and by counsel, defendant Chernus appeared in person and by counsel and the defendant United States of America appeared by counsel. Whereupon said cause was tried by the Court and evidence introduced by the parties thereto. Argument was heard by the court and said cause submitted. The court having heard and examined the oral and documentary evidence and arguments of counsel and being fully informed as to the issues, makes the following

Findings of Fact ^*

1. On April 27, 1951, defendant Maurice C. Chernus executed the promissory note introduced in evidence as Plaintiff's Exhibit A, delivered the same to Jake Rudman who endorsed such note in blank and returned it to defendant Chernus who thereupon, for value received, delivered such note to Gordon Gasaway.

2. At the same time, defendant Chernus by assignments in blank, assigned the certificates of stock introduced in evidence as Plaintiff's Exhibits B and C and delivered them to the payee of such note as security therefore [sic], with an oral agreement that in the event of default in payment of such note the ownership of such stock should automatically pass to the owner and holder of said note.

3. On June 5, 1951, plaintiff purchased such note from Gordon Gasaway for value and before maturity thereof and there were delivered to him the shares of stock introduced in evidence as Plaintiff's Exhibits B and C as security therefor. Plaintiff has ever since been and is now the holder of such note and holds said certifcates of stock as security for the payment thereof.

4. At the time of the purchase by plaintiff, such note was complete and regular on its face and plaintiff took it in good faith and without notice of any infirmity in the instrument or defect in the title of the person from whom he purchased it.

5. On January 15, 1952, plaintiff, in writing, demanded payment of such note from defendant Chernus.

6. Nothing has been paid on said note by defendant Chernus to plaintiff.

And upon the foregoing facts the court makes the following

Declarations of Law

1. The endorsement of the note introduced in evidence as Plaintiff's Exhibit A in blank by the payee thereof rendered it payable to bearer.

2. Such note was negotiated by its delivery by Gasaway to plaintiff for value.

3. Plaintiff is a holder in due course of such note and holds it free from any defect of title of prior parties and free from defenses available to prior parties among themselves.

4. The shares of stock pledged as security and introduced in evidence as Plaintiff's Exhibits B and C followed the note as an incident thereto when it was negotiated by Gasaway to plaintiff.

5. Plaintiff holds the legal title to such shares of stock free from any defenses which might be available between the original parties to the note.

6. The oral agreement between the original parties to the note that in the event of default of payment thereof the ownership of said stock should automatically pass to the owner and holder of said note is unenforecable, and plaintiff holds such stock as pledgee thereof and as security for the payment of such note. Plaintiff is entitled to a decree that unless the amount of the judgment rendered hereinafter is paid within thirty days from the date such judgment becomes final, plaintiff may, upon giving five days written notice to defendant Chernus at his last known address, dispose of such certificates of stock by surrender to Usona Construction Company and payment by Usona Construction Company of the amount due upon such stock in liquidation of that company, or may dispose of such certificates of stock at public or private sale at the best price obtainable, and the amount so obtained credited to payment of this judgment plus interest; and if the amount thereby realized is not sufficient to pay such judgment plus interest, that plaintiff have execution against defendant Chernus for the difference between the amount so realized and the amount of the judgment plus interest; and that if the amount thereby realized is greater than the amount of such judgment plus interest, plaintiff shall pay over the excess thereof to defendant Chernus.

7. Defendant Chernus has failed to establish any of the affirmative defenses alleged in his amended answer and failed to establish any of the facts alleged in his bill for reformation and his counterclaim.

8. Defendant United States of America has failed to establish any of the affirmative defenses alleged in its answer to the interplea of defendant Chernus.

9. Plaintiff is entitled to a judgment against defendant Chernus for the full amount of the note in evidence plus interest at 41/2% per annum from April 27, 1951, to the date of entry of such judgment.

WHEREFORE, IT IS ORDERED, ADJUDGED AND DECREED

1. That plaintiff have and recover of Maurice C. Chernus $16,000.00 plus $1935.00 interest thereon, or a total of $17,935.00.

2. Upon nonpayment of the amount of the judgment rendered herein, plus interest, within thirty days from the date this judgment becomes final, plaintiff may, upon giving five days written notice to defendant Maurice C. Chernus at his last known address, dispose of Certificate No. 2 for 180 shares and Certificate No. 4 for 20 shares of the capital stock of Usona Construction Company in the name of Maurice C. Chernus, by surrender to Usona Construction Company and payment by Usona Construction of the amount due upon such stock in liquidation of such company, or may dispose of said certificates of stock at public or private sale at the best price obtainable therefor and the amount so received shall be credited to payment of this judgment plus interest; and if the amount thereby realized is not sufficient to pay this judgment plus interest, plaintiff have execution against Maurice C. Chernus for the amount of the difference between the amount so realized and this judgment plus interest; and that if the amount thereby realized is greater than this judgment plus interest, plaintiff shall pay the excess thereof to defendant Maurice C. Chernus.

3. That defendant Maurice C. Chernus take nothing by his bill for reformation and his counterclaim and judgment is hereby rendered against said Maurice C. Chernus thereon.

4. That judgment is hereby rendered against defendant United States of America .

5. That plaintiff have and recover of defendant Maurice C. Chernus his costs for which, together with the amount of $17,935.00 let execution issue.

^* In "Proposed Findings of Fact" Submitted by the United States, but rejected by the Court in favor of the Findings reported above, it was indicated that the issues involved the date of transfer of the note mentioned in the findings ultimately accepted by the Court, and the incidence of a tax lien claimed by the United States. The pertinent portion of "Proposed Findings" state:

3. Said Gasaway is indebted to the defendant United States of America for delinquent income taxes for the years 1943 through 1949, inclusive, in an amount in excess of the amount of said note. The assessment list was first signed by the Commissioner of Internal Revenue on July 18, 1951, and was received by the Collector of Internal Revenue at St. Louis , Missouri , on July 19, 1951. Notice of tax liens were filed with the Recorder of Deeds in St. Louis and St. Louis County on July 20, 1951.

4. Said Gasaway transferred and delivered said note to plaintiff at a date between July 25, 1951, and September 5, 1951.

[50-1 USTC ¶9158]Ruth A. Knight, Respondent v. Willard R. Knight et al., Defendants. United States of America , Intervener, Appellant

In the Court of Appeals for the State of New York , Decided April 22, 1948

[The following paragraph is a statement prepared by the State Reporter from the appeal papers.--CCH.]

APPEAL from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered July 17, 1947 [47-2 USTC ¶9339] affirming, by a divided court, a judgment of the Supreme Court in favor of plaintiff, entered in New York County, upon a decision of the court on a trial at Special Term (CHURCH, J.). At Special Term it was adjudged that plaintiff was entitled to a sum of money deposited with the clerk of the court by the codefendant Blue Network Company, and that the petition of the United States of America , as intervener, for payment of said moneys to it should be dismissed. On February 14, 1938, plaintiff wife obtained a decree of divorce wherein was incorporated a separation agreement made between plaintiff and her husband. The decree required defendant husband to make minimum alimony payments of $100 a month. Such payments became in arrears and on June 6, 1941, defendant husband entered into a stipulation in the divorce action whereby he agreed to pay plaintiff the sum of $20,000 in full satisfaction of all alimony. Simultaneously with the execution of the stipulation, defendant executed and delivered an assignment and power of attorney to plaintiff which, in substance, directed that in the event of any default in the provisions of the agreements, any person, firm or corporation obligated to or engaging defendant's services should deliver and pay over 25% of all the moneys or other considerations to which he was, or should become, entitled. It was agreed that the wife would not use the assignment or make any demand under it so long as the husband should faithfully and promptly live up to and comply with all the terms and conditions of the June 6th agreement. In July, 1943, the husband defaulted upon the obligation incurred in the stipulation and on October 5, 1943, plaintiff filed with Blue Network Company, the husband's employer, a copy of the assignment. By letter dated October 17, 1943, the husband instructed the employer not to pay plaintiff under such assignment. The present action was brought to compel husband and employer to comply with the assignment. Prior to the trial, the employer paid into court $2,406.26 which it had withheld from the husband's salary and was discharged from liability. Section 3670 of the Internal Revenue Code (U. S. Code, tit. 26, §3670) provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Section 3672 of the Internal Revenue Code provides: "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector". No such notice was here filed. The Appellate Division stated: "We think that, as the assignment of wages made by defendant Knight was as security for and a means of payment of the defendant's principal obligation to pay plaintiff $20,000, the plaintiff comes within the classification of a pledgee."

Lien for taxes: Taxpayer's assignment of wages.--No notice of a tax lien having been filed with the collector, the lien was ineffective as against taxpayer's divorced wife's claim to taxpayer's wages which had been assigned as security for, and as a means of payment of, alimony. Taxpayer's wife was a pledgee as to such wages. Affirming the decision of the New York Supreme Court, Appellate Division, 71 N. Y. Supp. (2d) 357, 47-2 USTC ¶9339, which affirmed the decision of the New York Supreme Court, New York County, 57 N. Y. Supp. (2d) 304.

James F. X. McGohey, United States Attorney for the Southern District of New York (Nathan Skolnik of counsel), for intervener, appellant. Louis L. Garrell, Max Chopnick and S. Leonard Wall for respondent.

Judgment affirmed, with costs; no opinion.

Concur: LOUGHRAN, Ch. J., LEWIS, CONWAY , DESMOND, THACHER, DYE and FULD, JJ.

[69-2 USTC ¶9530]Frances M. Jacobs, Plaintiff, United States of America, Intervening Plaintiff v. Aetna Life Insurance Company, a foreign corporation, and Rex C. Jacobs, Defendants Frances M. Jacobs, Plaintiff, United States of America, Intervening Plaintiff v. The Prudential Insurance Company of America , a foreign corporation, Defendant, and Rex C. Jacobs, Cross-Defendant

U. S. District Court, East. Dist. Mich. , So. Div., Civil Nos. 24870, 24871, 303 FSupp 1198, 6/6/69

[Code Sec. 6323]

Tax lien: Property and rights to property: Priority of claims: Security interest: Prior law.--Where, pursuant to a property settlement provision in the divorce decree, the former husband assigned annuity contracts as security for periodic payments of alimony, the former wife's right to the annuity contract income existed from the time of the property settlement. Accordingly, the former husband had no rights in the annuity income to which the Government's lien could attach. [The Tax Court's decision which determined the former wife's tax liability on these annuity payments was reported at 22 TCM 341, CCH Dec. 26,018(M).]

McClintock, Fulton, Donovan & Waterman, 3300 Guardian Bldg., Detroit, Mich., for F. M. Jacobs; Lawrence Gubow, United States Attorney, Robert Ritzenhein, Assistant United States Attorney, Detroit, Mich., for U. S.; for plaintiff. Robert H. Pytell, Fischer, Sprague, Franklin & Ford, 1100 Dime Bldg., Detroit, Mich., for Aetna Life Ins. Co. and R. C. Jacobs, Raymond, Chirco, Fletcher & Donaldson, 1600 Guardian Bldg., Detroit, Mich., for defendant.

Opinion

THORNTON, District Judge:

This is a case in which the plaintiff, Frances M. Jacobs, and the intervening plaintiff, United States of America , hereinafter referred to as the Government, each claims priority in right to the yearly income and accrued funds from two annuity contracts between Rex C. Jacobs and the two defendant insurance companies.

Two separate cases were filed, one against Aetna Life Insurance Company and the other against The Prudential Insurance Company of America . These cases have been consolidated for trial. For purposes of considering the legal issue(s) involved there is no difference between the two cases. Our discussion and determination, therefore, will have equal application to the two annuity contracts and be dispositive of both cases. These cases have been submitted to the Court on a Stipulation of Facts filed herein, successive briefs submitted to the Court by the plaintiff and the intervening plaintiff, and oral argument. A succinct statement of the factual background of this controversy is adequately set forth in the Government's brief of January 29, 1968. It is as follows:

"The plaintiff, Frances M. Jacobs, is the former wife of the defendant-taxpayer, Rex C. Jacobs, Rex C. Jacobs and Frances M. Jacobs were divorced on August 4, 1949, pursuant to a decree entered by the Wayne County Circuit Court, Civil No. 425931. (Stip. Ex. A.) As a result of provisions of the divorce decree captioned 'Property Settlement,' Rex C. Jacobs was obligated to make monthly payments in the sum of $500 to the friend of the court for Frances M. Jacobs. (Stip. Ex. A.)

Paragraph 4 of the 'Property Settlement' provides:

'IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the defendant pay to the plaintiff the sum of Five Hundred ($500.00) Dollars per month, in advance, commencing with the date hereof and continuing until the death of the plaintiff or defendant, whichever shall first occur, said payments to be made to the Friend of the Court. As security for the payment of said sums, the defendant shall assign and deliver to the Friend of the Court all of his right, title and interest in the Prudential Life Insurance Claim Settlement Certificate No. 146,041, and Aetna Life Insurance Company Policy No. N 1130510, and the contract supplemental thereto upon the following conditions:

(a) Upon default in the payment of said sum of Five Hundred ($500.00) Dollars the Friend of the Court may collect any and all sums due to defendant under said instruments until such default shall have been cured.

(b) Upon the death of Rex C. Jacobs to deliver said certificate and policy and supplemental contract to Frances M. Jacobs.

(c) Upon the death of Frances M. Jacobs, during the lifetime of Rex C. Jacobs, to return said Certificate, policy and supplemental contract to Rex C. Jacobs. (Emphasis added.)'

A delegate of the Secretary of the Treasury of the United States served notices of levy, based upon federal tax liens, against Aetna Life Insurance Company and Prudential Insurance Company of America on May 4, 1960, and September 15, 1961, respectively. No payments have been made pursuant to the levies. (Compl. in Intervention pars. VII, VIII.)

As a result of the annuity contracts described above and federal tax levies, a sum exceeding $30,000 has accrued. Frances M. Jacobs asserted a claim of priority to the accrued funds based upon the conditional assignments by Rex C. Jacobs to the friend of the court. The United States of America asserts that it has a superior claim to the accrued funds by virtue of its federal tax liens. The taxpayer, Rex C. Jacobs, contends that the liens of the United States of America are superior to the claim asserted by Frances M. Jacobs. (See pleadings of the respective parties.)"

Plaintiff's statement of the factual background might be couched in slightly different terms subject to correspondingly different innuendos. An example would be the Government's use of the term "conditional assignment" appearing in line 5 of the last paragraph above. Plaintiff would not use that term because it misrepresents her position here. It is her position that the assignments were absolute assignments--absolute to the extent that Rex Jacobs no longer had any property interest in the two annuity contracts against which the Government could assess tax liens. There is no question but that Rex complied with the "security for payment" provision of paragraph 4 of the property settlement. He did this contemporaneously with the entry of the divorce decree (August 4, 1949). For aught that appears in the record, the course of property settlement payments at the rate of $500 per month from Rex to Frances flowed smoothly from August 1949 until May 1953. At that time Rex was in default. Aetna and Prudential, alerted by the Friend of the Court, came to the rescue for the June installments. The even course was resumed, apparently, as Rex received the July, August and September 1953 annuity payments, again through the good offices of the Friend of the Court in alerting Aetna and Prudential that Rex had cured his default. However, this state of affairs was not to last for long. By August 21, 1953 Rex apparently decided that the most direct route was Aetna and Prudential direct to his obligee via the Friend of the Court--enough of their remittances to him and his remittances to the obligee via the Friend of the Court. He, therefore, wrote two letters, the result of which--aside from sparking this lawsuit, served to simplify bookkeeping all around and to save postage for everybody. The two letters are practically identical, both dated August 21, 1953 and signed by Rex C. Jacobs. The letter to Aetna instructs Aetna as follows:

"Please use this letter as your authority to mail $250.00, or half of the annuity check sent me to the Friend of the Court in accordance with the Assignment until further notice."

The letter to Prudential instructs Prudential as follows:

"Please use this letter as your authority to mail $250.00, or half of the annuity check sent me to the Friend of the Court the first of each month. This is in accordance with the assignment and is to be done until further notice."

From the date of those letters (August 21, 1953) to Aetna and Prudential no payment to Rex has been made by the two companies pursuant to the two annuity contracts herein. The payments were made to the Friend of the Court since that date until May 1960 (from Aetna ) and September 1961 (from Prudential). Those dates represent the dates of notices of levy, on account of federal tax liens for indebtedness of Rex Jacobs, served against the two companies. Since those dates there has accumulated a sum of money at the rate of $250 per month per annuity contract, which is payable either to the plaintiff herein, pursuant to the property settlement as provided in the divorce decree, or to the intervening plaintiff, the United States of America, pursuant to its tax liens. The two insurance companies make no claim of interest in the proceeds of the annuity contracts.

Attached to the Government's first brief is an affidavit of the District Director of Internal Revenue (dated January 26, 1968) stating that the federal tax liability of Rex C. Jacobs amounts to $166,825.76. (It is apparent that even as of today's date the fund accumulated from the annuity contract's income is not over $65,000.00, and is probably closer to $55,000.00.)

The statute pursuant to which the Government claims its priority is 26 U. S. C. A. §§ 6321 and 6323. The pertinent parts are as follows:

"§6321. Lien for taxes

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

"§6323. Validity and priority against certain persons

(a) Purchases, ¹ holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor [lien or], or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

(h) Definitions.--For purposes of this section and section 6324--

(1) Security interest.--The term 'security interest' means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth."

The Government contends that under the above statutory provisions its liens attached to the "rights" of Rex to receive the annuity payments and to the monthly payments themselves as "property" of Rex. We here quote from the Government's brief at pages 6-7:

"The taxpayer at all times retained the right to receive $250 per month on each life insurance policy and claim settlement certificate unless he defaulted in making payments of $500 per month to plaintiff in accordance with the divorce decree. (Stip. par. 2; Stip. Ex. B-2, C-2.) According to the divorce decree and conditional assignments, the taxpayer's default in making monthly payments of $500 to plaintiff was a prerequisite to any claim that could possibily be asserted by plaintiff to the funds in controversy. Thus, the conditional assignments by Rex C. Jacobs to the friend of the court were given only as security for compliance with the divorce decree. (Stip. par. 2; Stip. Ex. A, B-2, C-2.) The conditional assignments did not divest the taxpayer, Rex C. Jacobs, of his rights to demand $250 per month from each insurance company on their respective contracts.

This is not to say that the plaintiff has no interest in the policies or the payments. The plaintiff has an interest in the policy and claim settlement certificate to the extent granted her in the Chancery Decree; i.e., 'as security for payments of' the sums of money owed to the plaintiff under the "property settlement' provision of the decree. Plaintiff's interest is not an interest of complete ownership, but a security interest in the funds. Once a tax lien attaches to property or rights to property all priorities and related interests in that property or right to property are governed by federal law. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211; United States v. City of New Britain, Conn. [54-1 USTC ¶9191] 347 U. S. 81."

The Government thus categorizes plaintiff's interest in the two annuity contracts as a "security interest" and relies on §6323(a) and (h), above set forth, as the basis for its claim that its tax liens herein are "superior and prior to the claims of the plaintiff" (Government brief, page 9). The Government's reasoning is best set forth by quoting two paragraphs from its brief, at page 8:

"The essential elements to be met in this case are whether on the date the notice of lien was filed (May 23, 1957) the 'property [was] in existence' and whether on that date the plaintiff had 'parted with money or money's worth.' The properties before the Court are accrued payments under the annuity contracts. These payments came into existence when they became due; i.e., payments came into existence on a monthly basis. Thus, the only properties in existence were those payments due before the notice of tax lien came into existence.

Whether the plaintiff 'parted with money or money's worth' logically deals not with the consideration that she rendered in obtaining the original property settlement, but with the default that gave her the rights to look to the annuity payments under the security agreement. The plaintiff parted with money or money's worth entitling her to look to the annuity payments when the taxpayer defaulted on his personal obligation to make monthly payments of $500 and plaintiff parted with her right to receive the monthly payments directly from the taxpayer."

The plaintiff's answer to the Government's reliance on §6323(a) and (h) is that (a) is a 1966 amendment; that (h) is a 1966 addition to §6323; and that the effective date of each is set forth in section 114(a) of the Act. That section states that (a) and (h) "shall apply after the date of enactment of this Act, regardless of when a lien or a title of the United States arose or when the lien or interest of any other person was acquired." Section 114(b) sets forth an exception to the amendments to the effect that they shall not apply in any case if they would "(A) impair a priority enjoyed by any person (other than the United States ) holding a lien or interest prior to the date of enactment of this Act."

Plaintiff contends that in any event §6323, pre- or post-amendment, does not apply because it was intended as a protection for "gap" transactions--where a person acquires his interest subsequent to the attaching of the federal lien but prior to its filing. Plaintiff says her situation is not a gap one at all, but a pre-gap one--that her interest arose before the attaching of the lien as well as before its filing. Plaintiff cites United States v. Delaware Trust Co. [58-2 USTC ¶9907], 167 F. Supp. 465 (D. C. Del. 1958); United States v. Phillips [52-2 USTC ¶9421], 198 F. 2d 634 (5th Cir. 1952); and United States v. Lebanon Woolen Mills Corp. [65-2 USTC ¶9571], 241 F. Supp. 393 (D. C. N. H. 1964) as supportive of the above. Apart from this, plaintiff argues that §114(a) and (b) would exempt plaintiff's interest from the Government's claim, even if §6323 were applicable.

Plaintiff in its reply brief, after treating the above, joins issue with the Government at the Government's own posing of the issue--"the essential elements to be met in this case are whether on the date the notice of lien was filed (May 23, 1957) the 'property [was] in existence' and whether on that date the plaintiff had 'parted with money or money's worth'" (Government brief, page 8). The Government and plaintiff make fine distinctions in attempting to delineate what must be held to constitute "property and rights to property" and what is meant by "the property is in existence" and the "holder has parted with money or money's worth."

We think we have set forth sufficiently the positions of the parties to indicate their directly divergent views on the interpretation they place on §6323. It is our considered view that the annuity contracts here involved must encompass the whole ball of wax--the contracts and the rights inherent in those contracts, including the right to payments due in the future. The property here cannot be given the restrictive view of being limited to "the accrued payments under the annuity contracts." As for the holder parting with money or money's worth, we cannot agree with the Government that plaintiff initially parted with money or money's worth at the time of the default in the payments that gave her the right to the annuity contract income. The property settlement must be held to be the initial point at which she parted with money or money's worth. At that point she accepted a guaranty of $500 a month income, to continue until the death of the plaintiff (Frances M. Jacobs) or defendant (Rex C. Jacobs), "whichever shall first occur," as a quid pro quo.

Under the Government's own theory of insistence on the applicability of §6323 we conclude that plaintiff must prevail here. Since both parties have placed reliance on United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954) we make note that, in our opinion, our conclusion does not run afoul of the holding in New Britain.

An appropriate judgment may be presented.

¹ West Publishing Co.'s footnote appears as follows: "So in original. Probably should be 'purchasers.'"

[61-1 USTC ¶9263] United States of America , Plaintiff v. Arnold B. Carlson, Hazel M. Bigham, Aurora Savings and Loan Association, Defendants

U. S. District Court, No. Dist. Ill. , East. Div., No. 59 C 1301, 2/13/61

[1954 Code Sec. 6323(a)]

Priority of tax liens: Validity as to property transferred in divorce settlement.--The Government's tax lien was invalid against the property of the former wife of taxpayer. She received the property in the divorce settlement prior to the filing of notice of the tax lien and without knowledge of her former husband's tax liability.

Robert Tieken, United States Attorney, and Harvey M. Silets and Burton Berkley, Assistant United States Attorneys, Chicago, Ill., for plaintiff. Walter A. Johnson, Hamilton Smith, John T. Matthews, and McDermott, Will & Emery, 111 W. Monroe St., Chicago 3, Ill., and Alschuler, Putnam & McWethy, 32 Water St., Aurora, Ill., for defendant.

Decree

IGOE, District Judge:

The above case came on to be heard by the Court sitting without a jury on October 17, 1960. The plaintiff was represented by R. Tieken, United States Attorney for the Northern District of Illinois, and Harvey M. Silets and Burton Berkley, Assistant United States Attorneys for the Northern District of Illinois, the defendant Arnold B. Carlson was represented by Walter A. Johnson, defendant Hazel M. Bigham was represented by McDermott, Will & Emery and Hamilton Smith and John T. Matthews, and the Aurora Savings and Loan Association was represented by Alschuler, Putnam & McWethy.

Findings of Fact

1. The instant action was commenced for the collection of assessed income tax and statutory interest pursuant to authority granted by the Attorney General of the United States .

2. This is a civil action arising under the Internal Revenue Laws of the United States for the collection of income tax and interest for the years 1951 and 1952, authorized by the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury and directed by the Attorney General of the United States .

3. During the calendar years 1951 and 1952, the defendants, Arnold B. Carlson and Hazel M. Bigham, were husband and wife. They resided together as husband and wife to and including and at no time thereafter, December 26, 1951, at Oswego , Illinois . Defendant Hazel M. Bigham currently resides in Oswego , Illinois . Defendant Arnold B. Carlson currently resides in Aurora , Illinois .

4. The defendant Aurora Savings and Loan Association has its principal place of business in Aurora , Illinois .

5. On June 1, 1953, there was assessed against the defendant, Arnold B. Carlson, on behalf of plaintiff, the amount of $10,509.19 for unpaid income taxes for the calendar year 1952. Notice of said assessment and demand for payment thereof was given to the defendant, Arnold B. Carlson, on August 13, 1953. Payments and credits have been applied against the said assessments in the sum of $8,873.97, leaving a balance upon said assessment of $1,635.22. Statutory interest accrued and unpaid upon the said assessment to and including September 26, 1960, is $1,813.33.

6. On December 16, 1958, the defendant Arnold B. Carlson executed a Tax Collection Waiver, wherein it was stated that the unpaid balance of the assessment for the year 1952 may be collected by a proceeding in court begun on or before December 31, 1964. Said waiver was agreed to by the District Director of Internal Revenue.

7. Defendant Arnold B. Carlson filed for the calendar year 1951 a purported joint federal income tax return for himself and Hazel M. Carlson (now known as the defendant Hazel M. Bigham). Defendant Hazel M. Bigham in no way authorized or condoned the filing of the joint return by Arnold B. Carlson.

8. On August 14, 1953, there was assessed against the defendants Arnold B. Carlson and Hazel M. Bigham (as Hazel M. Carlson), on behalf of plaintiff, the amount of $15,592.49 for unpaid income taxes for the calendar year 1951. Notice of said assessment and demand for payment thereof was placed in an envelope addressed to the aforesaid defendants at 186 South Main Street , Oswego , Illinois , on August 28, 1953, and mailed on that date. No payments have been received and no credits applied against said assessment. Statutory interest accrued and unpaid upon said assessment to and including September 26, 1960, is $6,659.01.

9. Defendant Hazel M. Bigham never received said notice, and did not know that an assessment had been issued against defendant Arnold B. Carlson and herself for unpaid income taxes for the calendar year 1951 until March, 1959.

10. On August 27, 1953, a decree of divorce was entered by the Circuit Court of Kendall County, Illinois, in the case of Hazel M. Carlson, plaintiff, v. Arnold B. Carlson, defendant, Chancery Case, General No. 9393. The decree of divorce incorporated into it a property settlement agreement entered into between Hazel M. Carlson (now defendant Hazel M. Bigham) and defendant Arnold B. Carlson executed on August 26, 1953.

11. In the property settlement agreement Arnold B. Carlson agreed to convey to Hazel M. Carlson (now defendant Hazel M. Bigham) all of his right, title and interest in and to the following described real estate, then held in joint tenancy by Arnold B. Carlson and Hazel M. Carlson, said real estate being hereinafter referred to as the "Oswego property":

"That part of Sections 18 and 19 in Township 37 North, Range 8 East of the Third Principal Meridian, described as follows: Commencing at a stone at the South East corner of said Section 18, thence North along the section line 62.5 feet to the center of the Oswego and Newark Road for a place of beginning, thence South 54 West along the center line of said road 543.48 feet, thence North 3652' West 433.39 feet to an iron stake, thence North 102' West 100.50 feet to an iron stake on the Easterly right of way line of the Chicago, Burlington & Quincy Railroad, thence North Easterly along said right of way line 526.91 feet to an iron stake, thence South 3211' East 516.82 feet to the place of beginning, in the Township of Oswego, Kendall County, Illinois.

12. In consideration of said agreement and certain additional agreements with respect to cash, personal property, and insurance policies, Hazel M. Carlson in said property settlement agreement agreed to convey to Arnold B. Carlson, all of her right, title and interest in and to the following described real estate, in which she then had a dower interest, said real estate hereinafter referred to as the "Aurora property":

"That part of Lots Two (2); Three (3) and Four (4) in Block Four of Halbrook's Addition to West Aurora, described as follows: Beginning on the North Easterly line of said Lot Two (2) at a point One Hundred Eighty (180) feet South Easterly from the North Westerly corner thereof; thence South Westerly parallel with the North West Line of said Lot Two (2), Forty-Seven and Eight Tenths (47.8) feet, thence North Westerly parallel with the North East line of Lot Two (2) aforesaid One Hundred (100) feet; thence North Easterly parallel with said North West line of said Nots Two (2), Three (3) and Four (4), One Hundred Thirty-Six and Eight Tenths (136.8) feet, thence South Easterly parallel with the North Easterly line of Lot Two (2) aforesaid Thirty-Eight (38) feet, thence North Easterly parallel with the North Westerly line of said Lots Two (2), Three (3) and Four (4), One Hundred Thirty (130) feet, thence South Easterly parallel with the North Easterly line of said Lot Two (2), Forty-Seven (47) feet; thence North Easterly parallel with the North Westerly line of said Lots Two (2), Three (3) and Four (4), Forty-Five (45) feet to the North Easterly line of said Lot Four (4), thence South Easterly along said North Easterly line of Lot Four (4), Fifteen (15) feet to a point that is One Hundred Eighty (180) feet South Easterly from the North West corner of said Lot Four (4), thence South Westerly parallel with said North Westerly line of Lots Two (2), Three (3) and Four (4) 264 feet to point of beginning, in the City of Aurora, Kane County, Illinois;"

and further agreed to deliver to Arnold B. Carlson an option to purchase the Oswego property for the sum of $27,500.

13. Said divorce decree ratified, confirmed, and approved the property settlement agreement, and ordered the parties to execute and deliver the various deeds and documents necessary to effectuate the agreements recited in the property settlement agreement.

14. On August 28, 1953, defendant Arnold B. Carlson conveyed and quit-claimed all his right, title and interest in and to the Oswego property to defendant Hazel M. Bigham. On the same date defendant Hazel M. Bigham conveyed all her right, title and interest in and to the Aurora property to defendant Arnold B. Carlson, and delivered to him an option to purchase the Oswego property for $27,500. Said conveyances effectuated the agreements contained in the property settlement agreement, as ordered by the divorce decree.

15. The Aurora property has an area of 26,000 or 27,000 square feet and is located in a fairly well established commercial and industrial area in Aurora , Illinois . On August 28, 1953, it was improved with a factory building and office space added at a cost of $40,000. On November 27, 1953, a junior mortgage in the sum of $35,000 was placed on the Aurora property.

16. Defendant Hazel M. Bigham had no knowledge on August 26, 1953, August 27, 1953 or August 28, 1953 that defendant Arnold B. Carlson owed money to plaintiff for unpaid income taxes for the calendar years 1951 and 1952 or any other calendar years.

17. Notices of federal tax liens for unpaid income taxes for the calendar years 1951 and 1952 were filed with the Recorder of Deeds, Geneva , Kane County , Illinois , on August 4, 1954, but were not filed with the Recorder of Deeds, Yorkville, Kendall County , Illinois , until March 4, 1959.

18. Defendant Hazel M. Bigham conveyed the following described portions of the property described in paragraph 11 of these Findings of Fact, to the following persons on the following dates:

"(a) To Ernest L. Herget and Eleanor L. Herget, on October 1, 1954:

"That part of the South East Quarter of Section 18 and that part of the North East quarter of Section 19 in Township 37, North, Range 8 East of the Third Principal Meridian, described as follows: Commencing at the South East corner of said Section 18; thence North along the section line 62.5 feet to the center line of the Oswego and Newark Road; thence South 54 West along the center line of said road 246.4 feet for a place of beginning; thence South 54 west along the center line of said road 99 feet; thence North 3652' West 506.2 feet to the Easterly right of way line of the Chicago, Burlington and Quincy Railroad; thence Northeasterly along said Easterly right of way line 99.3 feet; thence South 3652' East 505 feet to the center line of the Oswego and Newark Road, the same being the place of beginning, in the Township of Oswego, Kendall County, Illinois, subject to streets, roads and highways.

(b) To Bruce C. McBride and Suzanna C. McBride, on October 1, 1954:

That part of the South East Quarter of Section 18 and that part of the North East Quarter of Section 19 in Township 37 North, Range 8 East of the Third Principal Meridian, described as follows: Commencing at the South East corner of said Section 18; thence North along the section line 62.5 feet to the center line of the Oswego and Newark Road; thence South 54 West along the center line of said road 151.4 feet for a place of beginning; thence South 54 West along the center line of said road 95 feet; thence North 3652' West 505.0 feet to the Easterly right of way line of the Chicago, Burlington and Quincy Railroad; thence Northeasterly along said Easterly right of way line 95.2 feet; thence South 3652' East 507.6 feet to the center line of said Oswego and Newark Road, same being the place of beginning, situated in the Township of Oswego, Kendall County, Illinois, subject to streets roads and highways.

That part of Sections 18 and 19 in Township 37 North, Range 8 East of the Third Principal Meridian, described as follows: Commencing at a stone at the Southeast corner of said Section 18, thence North along the section line 62.5 feet to the center of the Oswego and Newark Road, thence South 54 West along the center line of said road 345.4 feet for a place of beginning, thence Southwesterly along the center line of said road 95 feet; thence North 3652' West to the Easterly right of way line of the Chicago, Burlington and Quincy Railroad, thence. Northeasterly along said right of way line 95.2 feet, thence South 3652' East to the center line of said Oswego and Newark Road, being also the place of beginning, in the Township of Oswego, Kendall County, Illinois, subject to the roads, streets and highways.

19. On May 13, 1958, Hazel M. Bigham (formerly Hazel M. Carlson) defendant and Orvill W. Bigham, her second husband, executed their mortgage note in the amount of $25,000.00 payable to the Aurora Savings and Loan Association, defendant herein, and which said note was secured by a mortgage on certain real estate, which real estate represents the remaining portion of the real estate described in Paragraph 11 of these Findings of Fact after the conveyances made by the defendant Hazel M. Bigham, which are described in Paragraph 18 hereof.

The aforesaid mortgage was recorded on May 16, 1958, in the Office of the Recorder of Deeds, Kendall County , Illinois , in Book 75 of the Trust Deeds, page 191 as document 121935. The defendant Aurora Savings and Loan Association is the owner of the said note secured by the said mortgage and there remains unpaid thereon as of September 26, 1960, the sum of $21,863.80 principal, on the said note, together with interest from the date as provided in the said note.

Conclusions of Law

1. This Court has jurisdiction of this action pursuant to Sections 1340 and 1345, Title 28, United States Code, for the reason that this is a civil action arising under the Internal Revenue laws of the United States .

2. The income tax assessments which are the subject matter of this suit were timely and properly made, and this action was timely brought.

3. There is due and owing by the defendant Arnold B. Carlson to the United States of America up to and including September 26, 1960, a total of $25,706.05.

4. The plaintiff is entitled to judgment against the defendant Arnold B. Carlson for the aforesaid indebtedness in the total sum of $25,706.05, plus costs of this action, together with statutory interest from September 26, 1960, until the judgment indebtedness is satisfied.

5. Defendant Hazel M. Bigham is not indebted to plaintiff for unpaid Federal income taxes for the calendar years 1951 and 1952 in any amount whatsoever.

6. Defendant Hazel M. Bigham became a purchaser of and judgment creditor with respect to the interest of defendant Arnold B. Carlson in the property described in paragraph 11 of the Findings of Fact herein before plaintiff filed is notice of lien with respect to said property with the Recorder of Deeds, Yorkville, Kendall County, Illinois.

7. Plaintiff's lien is invalid with respect to the property described in paragraph 11 of the Findings of Fact herein pursuant to Section 3672(a) of the Internal Revenue Code of 1939 and Section 6323(a) of the Internal Revenue Code of 1954.

8. Any finding of fact which may be concluded as a matter of law is hereby so concluded.

Accordingly, judgment is entered in favor of plaintiff and against defendant Arnold B. Carlson in the sum of $25,706.05, together with the costs of this action and statutory interest from September 26, 1960, until such judgment is satisfied, and this action is dismissed without costs as to defendant Hazel M. Bigham.

[54-2 USTC ¶9612]Elmer Gunther and Jacob Gunther and Kay Myrabo, Plaintiffs v. Harry Smethurst, The United States of America and The Florida Bank & Trust Company of Winter Park , Florida , Defendants

In the Circuit Court Ninth Judicial Circuit in and for Orange County, Florida, In Chancery No. 26435, September 7, 1954

[1939 Code Sec. 3672--similar to 1954 Sec. 6323]

Lien for taxes: Priority of tax lien over pledgee's interest: Pledge v. escrow.--Plaintiff was the lessor of a defaulting taxpayer who had deposited $1,000 in a bank for the purpose of guaranteeing payment to the lessors for any damage to the building or default in the rent. The Commissioner claimed that it was an escrow arrangement and therefore the government's lien was prior to that of the lessor. The Court held that the deposit was made to afford the lessor security and therefore the arrangement resembled a pledge. Thus the lessor's claim for damages was held prior to the government's tax lien.

Charles E. Davis, Fishback, Williams & Smith, 170 East Washington Street , Orlando , Fla. , for plaintiffs. Frank J. Muscarella, Jr., Assistant United States Attorney, for the United States of America .

Report of General Master

PATTERSON, Circuit Judge:

I, the undersigned General Master in Chancery to whom this cause was heretofore referred to take the testimony and report the same together with my findings and recommendations thereon, respectfully report that on April 27, 1954, I took testimony of the parties in the Orange County Court House from 9:30 to 11:00 a. m. At such hearing the plaintiff, ELMER GUNTHER testified in behalf of the plaintiffs, and his testimony, together with a stipulation of the parties entered into at the said hearing, was reported under the direction of the official Court Reporter of Orange County, Florida, and thereafter a true transcript of such testimony and such Stipulation was made, and, together with the Exhibits filed before me, is attached hereto as a part of this Report.

Plaintiffs were represented by Hon. Charles E. Davis of counsel for the plaintiffs, and the defendant and petitioner in intervention, The United States of America was represented by the Hon. Frank J. Muscarella, Jr., Assistant United States Attorney. After careful consideration of the evidence produced before me and the Stipulation of the parties and a review of the Court files and written briefs supplied by counsel for the plaintiffs and for the United States of America, I respectfully submit the following report:

Statement of Case

The Complaint seeks a decree declaring plaintiffs entitled to a certain fund of One Thousand Dollars ($1,000.00) in the hands of the defendant Florida Bank and Trust Company of Winter Park, arising from the proceeds of a note payable to defendant Harry Smethurst deposited with said Bank September 5, 1951 by the plaintiffs as lessors and Harry Smethurst and Arthur F. Mutert as lessees of certain property, for the purpose of guaranteeing the payment to the lessors of any damage to the building, fixtures "et cetera" and to cover any default in rent, which damages plaintiffs claim did subsequently accrue entitling them to the payment of this fund.

The defendant Bank's Answer admits holding such fund and alleges that it will continue to hold the same pending order of Court.

The United States of America originally made a defendant, was dismissed as such and upon Petition and Order intervened and filed its Complaint in Intervention claiming priority to the fund in the hands of the Bank for unpaid balance of income taxes of defendant Harry Smethurst for the year 1947 assessed against him by the Commissioner of Internal Revenue on the Commissioner's assessment list dated August 23, 1948, and received by the Collector August 25, 1948, for which taxes notice and demand for payment was made upon the taxpayer, and thereafter on November 5, 1951, Warrant for Distraint was issued and thereafter on January 9, 1952 Notice of Tax Lien was filed in the office of the Clerk of the Circuit Court of Orange County, Florida. The Government also claims priority to the fund in the Bank for the unpaid balance of certain cabaret taxes for the months of January, February, March and April 1952, assessed against defendant Harry Smethurst on assessment lists signed by the Commissioner of Internal Revenue on June 16, 1952 and received by the Collector of Internal Revenue June 18, 1952, for which taxes Warrant for Distraint was issued June 16, 1952, and on June 27, 1952, Notice of Tax Lien was filed in the office of the Clerk of the Circuit Court of Orange County, Florida.

Decree pro Confesso was entered against defendant Harry Smethurst and the only question in dispute is the priority of the Government's claim to this fund in the hands of the Bank over the plaintiffs' claim.

Findings of Fact

Most of the material facts alleged in the plaintiffs' Complaint, as well as those in the Government's Complaint in Intervention, are admitted by stipulation. Undisputed testimony of the plaintiff Elmer Gunther shows that the plaintiffs suffered damage and loss to fixtures in the amount of ($867.65) Eight Hundred Sixty-seven and 65/100 Dollars, and loss of rent through June 1952 in the amount of Four Hundred Dollars ($400.00), and additional loss of rent for July and August, 1952 in the amount of Six Hundred Dollars ($600.00), without counting certain other bills the plaintiffs claim it was necessary to pay because of the default of the tenant.

Findings of Law

Section 3672(a) Internal Revenue Code in effect provides that the lien of the Government for any tax shall not be valid "as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof" has been filed in the office of the Clerk of the Circuit Court of Orange County, Florida. The question posed by this case therefore is whether or not the plaintiffs come within any of the classes of persons named in the Code against whom the Government's tax lien would not be valid until recorded in the Clerk's office.

The deposit of the note for One Thousand Dollars ($1,000.00) with the defendant Bank, which was later paid by the maker, may not measure up to a strict definition of either an escrow or a pledge, but it was clearly for the purpose of guaranteeing the lessors against damage to the fixtures and loss of rent that might be occasioned by default of the tenant. The deposit was made for the purpose of affording security or collateral to protect the lessors in the event of such loss, and in my opinion, the Section of the Code referred to should be interpreted to include persons in the plaintiffs' situation resembling most closely perhaps that of a pledgee. I believe it was intended by the Code to make the Government's lien inoperative against a person in the general category of an innocent purchaser for value, and that the deposit of the note with the Bank, although referred to as an escrow, was in effect a pledge to secure the express guarantee made by the tenant.

Recommendation

I therefore recommend that the plaintiffs have a decree declaring their claim for damages to have priority over the lien of the Government for taxes, and that the plaintiffs are therefore entitled to the fund in the hands of the defendant Bank.

Final Decree

This cause coming on to be heard and the court having considered the record herein, together with the Report of the General Master, and finding that it has jurisdiction of the subject matter and of the parties, it is

ORDERED, ADJUDGED AND DECREED that the plaintiffs, Elmer Gunther, Jacob Gunther and Kay Myrabo, be and they are hereby declared to be entitled to the monies held by The Florida Bank & Trust Company of Winter Park, Florida in the amount of One Thousand ($1,000.00) Dollars, together with such interest thereon as may have accumulated in the fund which is described in the pleadings herein.

[64-1 USTC ¶9408]Irving S. Greenwald et al., Plaintiffs and Respondents v. United States of America , Defendant and Appellant

Calif. District Court of Appeal, Second Dist., Div. One, Civ. No. 27351, 12/17/63

[1954 Code Sec. 6321]

Lien for taxes: Suit to quiet title: Another's property: Forged deed of trust.--In an action to quiet title to property, the Government's tax lien did not attach to real property held by the plaintiffs for taxes due and owing by another individual. The Government submitted no evidence that the signatures on a trust deed and note purporting to convey a property interest in the real estate to the delinquent taxpayer were not forgeries.

Francis C. Whelan, United States Attorney, Loyal E. Keir, Richard G. Sherman, Herbert D. Sturman, Assistant United States Attorneys, Los Angeles, Calif., for defendant and appellant. Eugene E. Glushon, 9171 Wilshire Bldg., Beverly Hills, Calif., for plaintiffs and respondents.

WOOD, Judge:

Defendant United States of America appeals from a summary judgment quieting plaintiffs' title to real property upon which defendant claimed a lien for unpaid taxes.

The first cause of action of the complaint alleges that: Since December 26, 1957, plaintiffs have been the owners of certain real property situated in Los Angeles , California . Defendants' claim to an adverse interest in the property is without any right, and that none of the defendants has any right, title or interest therein. The claims of Occidental Escrow Company and Sunset Investments, Inc., are false and fraudulent, and based in part upon a false and forged trust deed purports to convey legal title to the property on January 3, 1958, in favor of John F. Firestone. The trust deed purports to convey legal title to the property to said escrow company, as trustee, to secure a purported indebtedness of $2,000 in favor of said Firestone. The trust deed was recorded March 27, 1961, in Los Angeles County . The beneficial interest under that deed was assigned by said Firestone to Sunset Investments, Inc., by assignment dated March 23, 1961, and recorded March 27, 1961. A copy of the trust deed, marked "Exhibit A," is attached to and made a part of the complaint. In fact the plaintiffs did not at any time make, sign, or acknowledge the alleged trust deed, nor did either of them execute the note, nor did either of them authorize any person so to do.

The second cause of action realleges the allegations of the first cause of action, and alleges further that: About June 26, 1961, plaintiffs received a notice of default and election to sell under the trust deed. Said notice, which referred to said real property, was recorded June 14, 1961, was given by said escrow company, as trustee, and was executed by said assignee, Sunset Investments, Inc. By reason of the recording and giving of said notice of default, the trustee threatens to sell the property. Defendant trustee and defendant assignee have been advised that the deed is false, fraudulent and forged, but they have refused to recognize the claims of plaintiffs, and unless those defendants are enjoined by the court from so doing, they will proceed to sell the property before the action can be heard.

The prayer of the complaint is for a decree quieting plaintiffs' title, and ordering that the trust deed and note be delivered to and cancelled by the court.

The answer of defendant United States alleges that it has no information or belief sufficient to enable it to answer the allegations of the complaint and on that ground it denies the same, except as set forth in the following allegations; Defendant alleges that it has liens on the subject property. A delegate of the Secretary of the Treasury assessed against the defendant and taxpayer, John F. Firestone, federal taxes for the year 1958 in certain amounts (therein specified). Said defendant Firestone paid a certain amount of said assessment, leaving a balance of $4,443.97 due and unpaid. On February 20 and May 14, 1959, notices of tax lien were filed in the office of the recorder of Los Angeles County , pursuant to provisions of the Internal Revenue Code, which notices show that said balance is due and unpaid.

The prayer of the answer is that the real property be sold and the proceeds be applied in accordance with the priorities of the parties as determined by law.

On July 17, 1962, plaintiffs filed a notice of motion for summary judgment against defendant United States and in favor of plaintiffs.

A declaration of plaintiff Irving Greenwald, filed in support of the motion, states: He and his wife, plaintiff Gloria Greenwald, purchased said real property on December 26, 1957, from John F. Firestone. Neither of the plaintiffs signed said trust deed or said note. The signatures thereon are forged. At the time plaintiffs purchased the property they assumed a trust deed in the amount of $14,700 in favor of the Los Angeles Federal Savings and Loan Association, and also a trust deed in the amount of $4,750 in favor of John F. Firestone. The beneficial interest under the second trust deed was assigned to John and Frankie Dargavel by an assignment recorded on December 30, 1957, and since that date John F. Firestone has not had any right, title, or interest in said real property. If called as a witness at the trial, declarant will testify to the foregoing facts.

A declaration of Eugene Glushon, the attorney for plaintiff, filed in support of the motion, states: About June 30, 1961, he retained Harris and Harris, examiners of questioned documents, who have been recognized as handwriting experts, and who have testified as expert witnesses regarding the genuineness of documents in all the courts of this state and county. He (declarant) has submitted to Harris and Harris photostatic copies of the alleged forged trust deed and note, and he also submitted to them documents containing the true signatures of plaintiffs. John L. Harris, a member of the firm of Harris and Harris, has submitted to declarant a written report indicating that he has compared the signatures on the trust deed and note with the genuine signatures of plaintiffs, and he is of the definite opinion that the signatures on the trust deed and note are not genuine and were not signed by plaintiffs or either of them. The trust deed bears "acknowledgment executed by Iva Shaljian," a notary public. On October 25, 1961, declarant commenced an action on behalf of these plaintiffs against said notary public for damages resulting from false acknowledgment on the trust deed. The notary admits in her answer that the plaintiffs did not personally appear before her on January 3, 1958, or at any other time, and that the acknowledgment was not made on the date it bears. The beneficial interest under the alleged forged trust deed was assigned by John F. Firestone to Sunset Investments, Inc., on March 23, 1961, which assignment was recorded on March 27, 1961. On June 15, 1962, summary judgment was entered in this case in favor of plaintiffs and against defendant Sunset Investment, Inc., to the effect that defendant Sunset has no right, title, or interest in said real property.

A declaration of John L. Harris, in support of the motion, states: He has been engaged in the profession of handwriting analysis for thirty years, and has testified as an expert handwriting witness in the federal court, the superior court, and other courts in Los Angeles County . He is past president of the American Society of Questioned Document Examiners. About June 30, 1961, he was employed by Eugene Glushon to examine a note and trust deed, dated January 3, 1958, purportedly executed by plaintiffs Greenwald to secure an indebtedness of $2,000 in favor of John F. Firestone. He received photostatic copies of said instruments and compared the signatures thereon with signatures of plaintiffs appearing on certain checks and an executed copy of escrow instructions dated November 25, 1957. He is of the definite opinion that Irving and Gloria Greenwald signatures appearing on the note and trust deed are not genuine and were not signed by the persons who executed the checks and contract submitted to him for comparison purposes. He would so testify at the trial.

Defendant United States filed an opposition to the motion, stating therein that it opposes the motion for the following reasons: The controlling question is factual rather than legal. If in fact neither plaintiff executed the trust deed and note, and such instruments were executed by their agent at their request and they benefited therefrom, then the plaintiffs are bound by the terms of the trust deed and note.

An affidavit of Richard G. Sherman, one of the attorneys for defendant United States, filed in opposition to the motion, states: As a result of a preliminary investigation into the facts of this case, he received the following information from individuals questioned in regard thereto: If it is a fact that the plaintiffs did not sign the trust deed and note, then the deed and note were signed by one acting as their agent, at their request, and with their full knowledge. The plaintiffs have taken advantage of the benefits of the trust deed by acquiring title to the property which is the subject of this suit, and that without the note and trust deed they never would have been able to obtain title to said property.

The court granted the motion of plaintiffs to strike the answer of said defendant and to enter judgment for plaintiffs.

The judgment, entered October 8, 1962, decreed: That plaintiffs were during all the time mentioned in the complaint, and presently are, the owners of said real property. That the claim of the defendant United States is without any right, and said defendant has no right, title, interest, or claim in said property, and said defendant is enjoined from claiming or asserting any interest in, or lien upon, said property. That the alleged trust deed and note, purportedly executed by plaintiff are forged documents; and it is ordered that they be delivered to and cancelled by the court.

Appellant contends that the recorded trust deed creates a presumption of its genuineness, due execution, and delivery; and that this presumption can only be rebutted by evidence before a trier of fact and not on motion for a summary judgment.

Appellant's asserted lien is based upon its claim, as evidenced by notices of lien filed with the recorder, that John F. Fire stone, who was delinquent in paying federal taxes, had an interest in said trust deed and note.

"When a signature is forged . . . it is wholly inoperative, and no right to retain the instrument, . . . or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party, against whom it is sought to enforce such right, is precluded from setting up the forgery. . . ." (Civ. Code, §3104.)

Section 437c of the Code of Civil Procedure provides, in part: "The affidavit or affidavits in opposition to said motion [for summary judgment] shall be made by the plaintiff or defendant, or by any other person having knowledge of the facts, and together shall set forth facts showing that the party has a good and substantial defense to the plaintiff's action . . . or that a good cause of action exists upon the merits. The facts stated in each affidavit shall be within the personal knowledge of the affiant, shall be set forth with particularity, and each affidavit shall show affirmatively that the affiant, if sworn as a witness, can testify competently thereto." (See Estate of Kelly, 178 Cal. App. 2d 24, 29 [2 Cal. Rptr. 634].)

In the present case, the declaration of plaintiff Mr. Greenwald states that neither plaintiff signed the trust deed or note, and that the signatures thereon are forged. The declaration of a handwriting expert, who was qualified to give an opinion as to the genuineness of signatures, states that he is of the definite opinion that the signatures on the deed and note are not the signatures of the plaintiffs. The declaration of counsel for plaintiff states that the notary public, who took "the acknowledgment" of signatures on the trust deed, admitted in her answer to the complaint against her, that the plaintiffs herein did not personally appear before her. It thus appears that the declarations on behalf of plaintiffs herein contain definite statements of fact that the signatures on the trust deed and note are forged. It is apparent that the affidavit of one of the attorneys for appellant (which affidavit was filed in opposition to the motion) does not state facts, with particularity or generality, within the affiant's personal knowledge to the effect that the signatures are genuine signatures of the plaintiffs. That affidavit states that as a result of an investigation, the affiant received information that if it is a fact that plaintiffs did not sign the deed and note, then those documents were signed by someone acting as plaintiffs' agent, at their request, and with their knowledge. It is clear that statement is not a statement of facts from which a conclusion can be drawn that the signatures were made by such an agent or any agent of plaintiffs. That statement is hearsay and is a conclusion. In Maltby v. Shook, 131 Cal. App. 2d 349 [280 P. 2d 541], an affidavit in opposition to a motion for summary judgment contained statements to the effect that affiant believed that Shook had authority as agent to endorse checks. The court, in holding that the affidavit was insufficient, said (p. 353): "He [affiant] merely asserts his belief that Shook had such authority. Such belief, without more, is not competent testimony but a mere opinion or conclusion." In the present case, there was no showing by affidavit or at all that there was an agency, or that plaintiffs or either of them had done anything which would preclude them (under the last provision of said section 3104) from setting up the forgery as a defense against appellant's claim of lien. As stated in Nizuk v. Gorges, 180 Cal. App. 2d 699, 710 [4 Cal. Rptr. 565], in quoting from a federal case: "The appellants were not entitled to a denial of the motion [for summary judgment] merely on the basis of a hope that some evidence might develop at the trial."

As above indicated, appellant argues that since the acknowledged and recorded trust deed creates a presumption of its genuineness, there was an issue of fact to be tried; and that it was for the trier of fact to determine whether the forgery evidence relied on by plaintiffs outweighs or overcomes such presumption of genuineness relied on by appellant. Although plaintiffs challenged the validity or genuineness of the acknowledgment by declaring that the deed and note were forged, no affidavit was filed by appellant setting forth any fact with particularity or at all regarding any circumstance pertaining to the taking of the acknowledgment. A question therefore arises as to whether, under the circumstances here, the form of the acknowledgment and the recording of the trust deed by reason of such form create a presumption that constitutes a "substantial defense" to plaintiffs' action, as required by said section 437c, supra. A declaration filed by plaintiffs stated, as above shown, that the notary public admitted in her answer, to a complaint against her, that the plaintiffs did not personally appear before her. Other declarations filed by plaintiffs contained statements that they did not sign the trust deed or note, and that those documents were forged.

In Luttrell v. Columbia Casualty Co., 136 Cal. App. 513, 515 [28 P. 2d 1067], it was said: "[T]he truthfulness of the recitals in a certificate of acknowledgment is a matter peculiarly within the knowledge of the notary public and in the nature of things difficult for the injured party to prove. It is held, therefore, that under these circumstances, and in order to shift the burden of proof on this issue the injured party is not required to produce more than slight evidence of the falseness of such recitals, and that the denial of the owner of the property that he ever signed or acknowledged any instrument affecting the property is legally sufficient to controvert such recitals, and to shift the burden of proof to the officer making the certificate." As above stated, the appellant in the present case did not file an affidavit regarding the circumstances pertaining to the taking of the acknowledgment. Under the circumstances here, especially in view of the lack of an affidavit on behalf of appellant in support of the presumption, after plaintiffs directly challenged the genuineness of the signatures and the acknowledgment, the court could properly conclude that the appellant had not set forth facts showing that it had a good and substantial defense.

The court did not err in granting the motion for summary judgment.

The judgment is affirmed.

FOURT, Judge, and LILLIE, Judge, concurred.

[64-1 USTC ¶9408]Irving S. Greenwald et al., Plaintiffs and Respondents v. United States of America , Defendant and Appellant

WOOD, Judge:

Defendant United States of America appeals from a summary judgment quieting plaintiffs' title to real property upon which defendant claimed a lien for unpaid taxes.

The prayer of the complaint is for a decree quieting plaintiffs' title, and ordering that the trust deed and note be delivered to and cancelled by the court.

The prayer of the answer is that the real property be sold and the proceeds be applied in accordance with the priorities of the parties as determined by law.

On July 17, 1962, plaintiffs filed a notice of motion for summary judgment against defendant United States and in favor of plaintiffs.

The court granted the motion of plaintiffs to strike the answer of said defendant and to enter judgment for plaintiffs.

The court did not err in granting the motion for summary judgment.

The judgment is affirmed.

FOURT, Judge, and LILLIE, Judge, concurred.

[74-1 USTC ¶9413]Norman G. Doyle, Plaintiff, Cross-defendant and Appellant v. Thomas R. Coughlin et al., Defendants and Respondents; Grover Escrow Corporation, Defendant, Cross-complainant and Respondent; Bank of America, Cross-defendant, Cross-complainant and Appellant; United States of America, Cross-defendant, Appellant and Respondent

California District Court of Appeal, 4th Dist., Second Div., Civ. No. 13185, 3/13/74

[Code Sec. 6321]

Lien for taxes: Escrow fund: Liquor license transfer.--Government's lien for taxes on funds in an escrow account was denied. A Federal tax lien reaches only the property and rights to property of the taxpayer, but the taxpayer (buyer) no longer had any rights in the escrow account upon the successful transfer of the liquor license to the buyer. The back taxes, the subject of the lien, accrued after the transfer.

George McGill, for plaintiff, cross-defendant and appellant. Arthur W. Gray, Jr., Carden & Gray, for defendant, cross-complainant and respondent. Robert H. Fabian, Harris B. Taylor, William C. Rust, Jr., Los Angeles , Calif. , for cross-defendant, cross-complainant and appellant. William D. Keller, United States Attorney, Charles H. Magnuson, Calvin M. Young III, Assistant United States Attorneys, Los Angeles, Calif., for cross-defendant, appellant and respondent.

[Opinion]

GABBERT, Judge:

This is an appeal from an action in interpleader brought by Grover Escrow Corporation ("Grover"). At issue is ownership of $8,576.08 currently held on deposit in connection with a combined liquor license-bulk sale escrow. The controverted escrow was established to facilitate sale of a restaurant-cocktail lounge.

King's Row Restaurant, Inc. ("Buyer") and Kric Enterprises, Inc. ("Seller") signed escrow instructions with Grover on June 14, 1967. Pursuant to these instructions, as amended, Buyer was to place into escrow $65,760 (in a combination of cash and notes) and Seller was to deliver an executed bill of sale for the stock in trade, fixtures, equipment and goodwill of its restaurant-cocktail lounge. Consummation of the bulk sale portion of the above sale was conditioned, by express terms of the escrow, upon Buyer's obtaining the state's approval for the transfer to Seller of its (Buyer's) eating and on-sale general liquor license.

Buyer began operation of its purchased business on September 8, 1967, the date the liquor license was transferred from Seller. At that time, there was--as there is now--a cash balance of $8,576.08 in the escrow. ¹

Buyer operated its business, known as King's Row Restaurant, until December 1968 or January 1969. Around those times, the Internal Revenue Service ("I. R. S.") levied upon and sold the liquor license, fixtures and equipment. The levy against the liquor license, in December 1968, was for unpaid tax liabilities of Buyer. These tax liabilities all arose after the transfer of the liquor license from Seller.

A second federal levy, this time against certain items of restaurant fixtures and equipment, occurred in January 1969. The I. R. S. applied the proceeds from the resulting sale, not for the account of Buyer, but rather for the account of Seller. ²

The instant interpleader action involves claims by Seller's creditors--appellants Doyle and Bank of America National Trust and Savings Association ("Bank")--and by the United States, which has unpaid tax claims against Buyer. Both Doyle and Bank argue that state liquor laws, properly interpreted, provide that title to the escrow balance lies with creditors of Seller. Doyle and Bank maintain that, at the time the federal government acquired tax liens against Buyer, it (Buyer) no longer had an ownership interest in the $8,576.08. The United States , on the other hand, contends title to that sum must be determined by general escrow law. The United States then argues the instant escrow never closed, thereby preserving with Buyer the title and right to possession of the here contested fund. The United States urges, since its tax claims against Buyer exceed that amount, that it (the United States ) be awarded the entire escrow balance. ³

The trial court, in its findings of fact and conclusions of law, reached a decision substantially in accord with the United States ' position. The court found the "escrow did not close" and, as a result, "title to the sum of $8,576.08 is in the buyer, King's Row Restaurant, Inc." (Kelly v. Steinberg, 148 Cal. App. 2d 211, 217-218 [306 P. 2d 955].) The court then found, of the escrow balance, Grover was entitled to $2,413.50 in compensation for its escrow services and for its attorney's fees. The remaining $6,162.58 was awarded to the United States , in partial payment of $15,039.56 claimed to be owed by Buyer to the United States .

(1) Appellants Doyle and Bank correctly argue a federal tax levy reaches only the "property and rights to property" of the levied-against taxpayer. (26 U. S. C. §6321.) Further, they properly note that state law, not federal law, is determinative on the question of whether such a taxpayer has any then extant interest in the levied-upon property. (Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513 [4 L. Ed. 2d 1365, 1368, 80 S. Ct. 1277]; United States v. Bess [58-2 USTC ¶9575], 357 U. S. 51, 53 [2 L. Ed. 2d 1135, 1139, 78 S. Ct. 1054]; United States v. Lester [65-1 USTC ¶9221], 235 F. Supp. 115, 119-120.) Doyle and Bank, citing these propositions, then argue that California Business and Professions Code section 2407 ⁴, vested the escrow funds with Seller's creditors when Grover was notified the state approved the transfer of the liquor license to Buyer. Notification of this transfer, as indicated earlier, occurred prior to the government's establishment of tax liens against Buyer.

By contrast, the United States denies the existence of any vested claim by Seller or its creditors in the escrow fund. Pursuing counter argument, the United States cites to this court several cases discussing ownership rights to money deposited in escrow. (See e.g., Kelly v. Steinberg, supra, 148 Cal. App. 2d 211; Barboza v. Dellota, 130 Cal. App. 2d Supp. 890 [279 P. 2d 219]; Kellogg v. Curry, 101 Cal. App. 2d 856 [226 P. 2d 381].) These cases hold that title to the Buyer's money (deposited in escrow) does not pass to the Seller until all escrow conditions have been fulfilled. Business and Professions Code section 24074, is asserted not to change this general rule, but rather merely to establish priorities between competing classes. Presumptively, under the government's thesis, these priorities would come into operation only after completion of all escrow conditions and formal closing of the escrow. In the instant case, it was found that such a closing did not take place. ⁵

Examination of the above arguments, in the light of case law and relevant statutes, leads this court to uphold the position of appellants Doyle and Bank. We find inescapable the conclusion that sections 24070 through 24082 of the Business and Professions Code provide a highly comprehensive program to regulate liquor license transfers. This program, in fact, has been described by our Supreme Court as "giving unmistakable indication of the Legislature's determination to exercise its power to control every phase of such transfers." (Grover Escrow Corp. v. Gole, 71 Cal. 2d 61, 64 [77 Cal. Rptr. 21, 453 P. 2d 461].)

Section 24074 requires the opening of an escrow "if the intended transfer of the business or license involves a purchase price or consideration." (Italics added.) (2) The procedures and priorities of this section are mandatory and exclusive. (Grover Escrow Corp. v. Gole, supra, 71 Cal. 2d 61, 64-66.) They are designed to protect not only buyers and sellers of liquor licenses, but also the creditors of sellers. (Ibid. p. 64.)

Protection for creditors of the licensee-seller is achieved by creating a payment plan dependent upon submission of creditor claims prior to the date when the escrow holder is notified of the state's approval of the liquor license transfer. Such creditor protection (from the escrow fund) is limited to timely filing creditors. (Pacific Firestone Escrow Co. v. Food Giant Markets, Inc., 202 Cal. App. 2d 155, 157 [20 Cal. Rptr. 570].) (3) This escrow fund-creditor protection plan is intended (1) to prevent use of a liquor license or its transfer, directly or surreptitiously, as a security device and (2) to eliminate "races to the courthouse" by those creditors first privy to knowledge of an intended liquor license transfer. (Grover Escrow Corp. v. Gole, supra, 71 Cal. 2d 61, 64-65.)

(4) Specific language from section 24074 makes it clear that the requirement of opening an escrow applies broadly to "the intended transfer of [a] business" utilizing a liquor license. In Gramercy Escrow Co. v. Superior Court, 14 Cal. App. 3d 426, 431 [92 Cal. Rptr. 397], the term "business" in the context of this section was construed to include the trade name, goodwill, furniture, fixtures, equipment and other personal property or building improvements customarily used in connection with the sale of alcoholic beverages. Thus, in the instant situation, it is evident the provisions of Business and Professions Code section 24074, encompass the entirety of the buyer-seller transaction.

(5) The creditor protection purposes of section 24074 mandate the conclusion the event necessary to transfer title to the escrow fund from buyer to seller (and to seller's creditors) is the transfer of a liquor license and not, as with the ordinary escrow, the fullfillment of all escrow conditions by the parties. Moreover, language from sections 24074 and 24074.1 supports the thesis that transfer of a liquor license is pivotal to transfer of the ownership of the escrow fund. Thus, we note that section 24074 states the escrow "agreement shall . . . provide that the escrow holder shall make the payment or distribution [to seller's creditors] within a reasonable time after the completion of the transfer of the license." Likewise, section 24074.1 requires that "[a]ny person desiring to act as an escrow holder under Section 24074 shall . . . (3) Not more than 10 days after the license has been transferred and prior to the distribution of the assets held by said escrow holder . . . advise each creditor who filed a claim against the escrow [as to assets in the escrow fund]." From the above, it is apparent the Legislature intended transfer of a liquor license to change ownership of the section 24074 escrow fund.

(6, 7) The described ownership change occurs regardless of whether or not the buyer and seller have previously complied with escrow instructions concerning, inter alia, consideration and executed bills of sale. This conclusion is necessary. Any other conclusion would open the door to transfers of parts of liquor-utilizing businesses without providing the required creditor protection. ⁶

The state government, in the instant case, transferred Seller's liquor license to Buyer on September 8, 1967. As of that date, following the mandatory and exclusive provisions of section 24074, we conclude the escrow monies belonged to Seller and his timely filing creditors. Since the United States does not here claim to have been a creditor of Seller at the time of the transfer of the license, it must fail in its attempt to establish ownership rights to the escrow balance.

In view of our finding the state has enacted specific legislation to control all facets of the transfer of liquor licenses, and in view of our observation that such legislation evidences a special regard for creditors (of the licensee-seller), this court finds to be inapposite the cases on general escrow law cited by the United States. These cases--Kelly v. Steinberg, supra, 148 Cal. App. 2d 211; Barboza v. Dellota, supra, 130 Cal. App. 2d Supp. 890; and Kellogg v. Curry, supra, 101 Cal. App. 2d 856--involve sales of real estate, but without accompanying liquor licenses. Law in these cases focuses on the buyer-seller rights in escrowed funds; the opinions are unconcerned with protection of creditors.

The judgment insofar as it finds Grover entitled to $2,413.50 in compensation for its escrow services and attorney's fees is affirmed. Grover's claim is squarely justified by Business and Professions Code section 24074; its claim became vested upon the transfer to Buyer of the Seller's liquor license.

The judgment insofar as it awards $6,162.58 to the United States is reversed. The escrow fund interest of Buyer (for whose account the government seeks to collect back taxes) ceased to exist upon the transfer of the subject liquor license from Seller to Buyer. This transfer occurred prior to the accrual of the back taxes which the government now seeks to collect.

Appellants Doyle and Bank, who ask this court to award them the funds which the trial court awarded the United States , do not show, in the record, they filed their claims with Grover prior to the transfer of the liquor licenses and thus are entitled to such funds.

The judgment is therefore affirmed as to Grover and reversed as to the United States . The cause is remanded to the trial court for a determination as to ownership of the remaining $6,162.58 in the escrow account.

GARDNER, P. J., and KAUFMAN, J., concurred.

¹ The current escrow balance represents the remaining portion of Buyer deposits into escrow of $20.760. Of that latter sum, $12,146.42 was paid (prior to the transfer of the liquor license) to the State Board of Equalization and $57.50 was paid for the recording of documents.

The record is unclear as to when or whether Buyer deposited into escrow a $45,000 promissory note. Such a note was to constitute the remainder of the $65,760 consideration for the transfer of the liquor license, fixtures, and equipment of Seller's restaurant-cocktail lounge.

² Both Buyer and Seller had long overdue federal tax liabilities during December 1968 and January 1969. The I. R. S. consequently initiated the above outlined levies and sales. The legal propriety (and consistency) of such levies is not an issue before this court. It should be observed, however, that the United States treated the above Buyer-Seller transaction as effectively transferring the liquor license, but not transferring the items under the bulk sale portion of the escrow.

³ Note that, though the Buyer and Seller both have (or have had) overdue tax liabilities, the instant claim of the United States is directed only to Buyer's possible interest in the Grover escrow account.

⁴ Business and Professions Code section 24074, in pertinent part, reads: "Before the filing of such a transfer application [for a liquor license] with the department [of Alcoholic Beverage Control], if the intended transfer of the business or license involves a purchase price or consideration, the licensee and the intended transferee shall establish an escrow . . ., and the intended transferee shall deposit with the escrow holder the full amount of the purchase price or consideration [for the business]. The transfer application shall be accompanied by a description of the entire consideration. . . . The licensee and intended transferee shall also enter into an agreement, . . . directing the escrow holder . . . to pay out of the purchase price or consideration, the claims of the bona fide creditors of the licensee who file their claims with the escrow holder before the escrow holder is notified by the department of its approval of the transfer of the license or if the purchase price or consideration is not sufficient to pay the claims in full, to distribute the consideration as follows: [Italics added.]

". . .

"Third, to the United States for claims based on income or withholding taxes; . . .;

". . .

"Fifth, to the payment of escrow fees . . . and claims for reasonable attorney's fees for services rendered;

"Sixth, to the payment of claims for goods sold and delivered to the transferor for resale at his licensed premises and the payment of claims for services rendered, performed or supplied in connection with the operation of the licensed business;

"Seventh, to the payment of all other claims. The payment of these claims if sufficient assets are not available for the payment of the claim in full shall be paid pro rata.

". . . The agreement shall also provide that the escrow holder shall make the payment or distribution within a reasonable time after the completion of the transfer of the license." (Italics added.)

⁵ The trial court's conclusion that the escrow agreement did not close, in the sense that all conditions precedent in the escrow agreement were not complied with, is supported by substantial evidence. For example, according to the escrow agreement, Seller was to deposit with Grover a bill of sale for the restaurant fixtures and equipment. This was not done, and Seller does not here contend otherwise.

⁶ The statutory scheme of Business and Professions Code, sections 24073-24074.2 envisions, in this case, that the entire purchase price of the restaurant-cocktail lounge and liquor license will be in the hands of the escrow holder prior to the time the liquor license is transferred. (This may or may not have occurred. See fn. 1.) A prudent buyer would consequently require the licensee-seller to have all necessary bills of sale (for fixtures and equipment) on deposit with the escrow holder prior to the transfer of the liquor license. Thus, when the state would ultimately approve and transfer the liquor license from seller to buyer, property and money would change hands as contemplated by the parties. If the escrow fund is then found to be insufficient to cover all creditor claims, the priority-establishing portion of section 24074 would come into play.

[60-2 USTC ¶9604]United States of America, Appellant v. State of California, acting by and through the State Board of Equalization, the Department of Employment and the Department of Alcoholic Beverage Control; Charles E. Hoppe, Trustee of the Estate of Lee C. Belt, doing business as "Lejac's," Bankrupt, and Louis A. Cudia, Sr., and John S. San Fillipo, Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit., No. 16,474, 281 F2d 726, 7/11/60

[1954 Code Sec. 6321]

Lien: Attachment of lien to state liquor license: Property and rights to property.--The State of California had the right to retain the amount received by it from the bankrupt taxpayer's receiver, which amount had been derived from the sale of the taxpayer's state alcohol license, subject to a Federal tax lien, and paid the State in settlement of delinquent state taxes. The conditional demands of the State of California that a liquor license could not be renewed or transferred when an applicant was delinquent in the payment of any state taxes was lawful in the sense that it was a reasonable demand and constituted a limitation upon the right of the applicant and upon the property involved and upon the value which attached to the property and those values and no greater value became a part of the bankrupt taxpayer's estate and fell within the reach of the United States.

Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, George F. Lynch, Department of Justice, Washington 25, D. C., Lynn J. Gillard, United States Attorney, and Charles Elmer Collett, Assistant United States Attorney, San Francisco, Calif., for appellant. Stanley Mosk, Attorney General for State of California . Ernest P. Goodman, Deputy Attorney General, and Eugene B. Jacobs, Deputy Attorney General, San Francisco, Calif., for appellees.

Before: STEPHENS, BARNES and MERRILL, Circuit Judges.

MERRILL, Circuit Judge:

This case arises out of bankruptcy proceedings in which the United States petitioned for an order (1) decreeing that its tax liens against property of the bankrupt and proceeds of sale of such property were superior to the claims of the State of California for taxes, and (2) directing that California return to the receiver for payment to the United States proceeds of sale in the sum of $4,668.99. The referee denied the petition and the District Court affirmed. The United States then took this appeal.

The property involved is a liquor license issued by the State of California . Section 24049, of the California Business and Professions Code, provided at the time applicable:

"The department may refuse the renewal or transfer of any license when applicant is delinquent in the payment of any taxes due under this division or under the Sales and Use Tax Law, or any amounts due under the Unemployment Insurance Code, the Personal Income Tax Law, or the Bank and Corporation Tax Law."

Belt, the bankrupt, on May 11, 1956, was issued an on-sale general liquor license by the State of California . Prior to December 28, 1956, Belt applied to the State Department of Alcoholic Beverage Control for renewal of the license. Belt was delinquent in payment of Federal Withholding and Social Security taxes. On December 28, 1956, the United States , pursuant to a warrant of distraint, closed Belt's business operation by seizing his property, including his liquor license certificate. On January 7, 1957, an involuntary petition in bankruptcy was filed against Belt. On January 8, 1957, the United States surrendered the license certificate to the receiver in bankruptcy. The California Department of Alcoholic Beverage Control then renewed Belt's license and issued a 1957 certificate to him. On January 28, 1957, at auction, the license was sold by the receiver to certain purchasers subject to the approval of the department. This sale was confirmed (subject to state approval) by the referree on February 8, 1957. The department withheld transfer of the license to the purchasers pending payment of delinquent state sales and use taxes and unemployment contributions. The receiver then made payment to the state of these sums. After such payment and investigation of the moral character of the purchasers, the department on April 10, 1957, transferred the license and issued a certificate to the purchasers. From the proceeds of sale, the United States received $1,831.01. It seeks recovery of the amount of delinquent taxes paid to the state by the receiver as a condition to transfer of license.

The United States contends that to permit the state to retain this sum is to permit the state, through its state-created rule, to defeat the paramount right of the United States to levy and collect taxes pursuant to Article I, §8, of the United States Constitution, and is to render the United States tax claim subordinate to that of the state.

The question, however, is not as to the supremacy of the tax lien of the United States . The question is as to the nature of the "property and rights to property" (26 U. S. C. §6321) to which that lien attached. Ordinarily, in determining this question, we look to state law. United States v. Bess, 1957, 357 U. S. 51 [58-2 USTC ¶9595]. California , however, has not yet spoken upon the problem which we face in this proceeding.

In Hyde v. Woods, 1876, 94 U. S. 523, the Supreme Court dealt with the question whether a rule of the Stock Exchange requiring members' debts to be first satisfied from the proceeds of a sale of a seat was an unlawful preference as against general creditors of a bankrupt. The court stated, at page 525:

"Neither the bankrupt law nor any principle of morals is violated by this provision, so far as we can see. A seat in this board is not a matter of absolute purchase. Though we have said it is property, it is incumbent with conditions on purchase, without which it could not be obtained. It never was free from the conditions of Article 15, neither when Fenn bought, nor at any time before nor since. That rule entered into and became an incident of the property when it was created, and remains a part of it into whose hands soever it may come. As the creators of this right--this property--took nothing from any man's creditors when they created it, no wrong was done to any creditor by the imposition of this condition."

To the same effect is Chicago Board of Trade v. Johnson, 1924, 264 U. S. 1.

Here the license existed because the state had issued it. If the licensee acquired something of value, it was because the state had bestowed it upon him. Whatever value the license, as property, may have had to a purchaser depended upon its transferability. If it was transferable, it was because the state had made it so. If the state had seen fit to impose conditions upon issuance or upon transfer of property it has wholly created, that is the state's prerogative so long as its demands are not arbitrary or discriminatory. The federal government has no power to command the state in this area. It has no power to direct that property be created by the state for purposes of federal seizure.

The United States contends that the state has no right to impose such a condition against the claims of the United States ; that a state's control over the issuance of liquor licenses is derived from its police power; that the conditions here imposed by the state relate to revenue and not to police control.

Assuming, arguendo, that the conditional demands of a state, unrelated to the privilege sought to be transferred, would be regarded as arbitrary, we cannot say that such is the case here. If (as here) the conditions be lawful in the sense that they are proper and reasonable demands to make of an applicant, they constitute a limitation upon the right of the applicant and upon the property which that right constitutes and upon the values which attach to that property. Those values and no greater values became a part of the bankrupt estate and fell within the reach of the United States .

Affirmed.

[81-2 USTC ¶9493] United States of America v. The Philadelphia National Bank

U. S. District Court, East, Dist. Penn., C. A. No. 80-3779, 3/10/81

[Code Secs. 6321, 6323 and 6331]

Lien for taxes: Validity and priority against third parties: Property subject to lien.--The Internal Revenue Service was not entitled to enforce a levy on the proceeds of a savings bond that the defendant bank sold to the taxpayer because under Pennsylvania law the taxpayer had no rights in the bond that were subject to seizure. The taxpayer was indebted to the bank at the time of the levy, had given it a security interest in the bond and the fact that the bank did not exercise its right of set-off against the bond until after it had received notice of the levy did not prejudice its rights. Moreover, the taxpayer had assigned the bond to a third party who breached a condition of the assignment prohibiting subsequent re-assignments when it released the bond to the IRS and the bond was not in the defendant bank's possession at the time the notice of levy was served.

Dawn MacPhee, Assistant United States Attorney, Philadelphia 19106, for plaintiff. Shirley Wayne Holt, David J. Martin, 2200 PNB Bldg., Philadelphia, Pa. 19101, for defendant.

Memorandum Opinion and Order

WEINER, District Judge:

Presently before this court are cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The government brought suit against the defendant bank to enforce a tax levy on an interest-bearing, non-negotiable savings bond of the taxpayer, "Institute of Computer Management of Philadelphia, Inc.", also known as "Institute of Computer Sciences of Phila., Inc.", "Institute of Computer Sciences, Inc." and "Institute of Computer Sciences", (hereinafter referred to as the taxpayer).

Section 6321 of the Internal Revenue Code, 26 U. S. C. §6321, creates a lien in favor of the United States "upon all property and rights to property, whether real or personal, belonging to . . ." a person liable for any tax who has not paid it after demand. Section 6331(a) of the Code, 26 U. S. C. §6331(a), gives to the Secretary of the Treasury or his delegate, authority "to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax."

The following facts were stipulated: The taxpayer became indebted to the defendant bank in the principal sums of $275,000., $100,000. and $115,000. on June 25, 1971, May 24, 1974 and July 13, 1976, respectively. On August 12, 1974, the defendant sold to the taxpayer a $10,000 interest-bearing, non-negotiable, super savings bond, account number 9-143-1390. On the same day, the taxpayer assigned and delivered the bond to the Stuyvesant Insurance Company. By letter dated August 12, 1974 to Stuyvesant, the defendant bank accepted this assignment. The assignment was accomplished by a notation on the reverse side of the super savings bond. This notation on the reverse side of the bond is as follows:

"Restrictive assignment to Stuyvesant Insurance Company dated 8-12-74. (Certificate may not be reassigned) Assignment on file at PNB.

JFK"

On January 26, 1977, the Internal Revenue Service served a notice of levy on the defendant indicating that the taxpayer owed $23,406.90 in unpaid taxes. The notice of levy stated, in pertinent part, as follows:

"[A]ll property, rights to property, moneys, credits, and bank deposits now in your possession and belonging to this taxpayer for which respect to which you are obligated and all sums or money or other obligations owing from you to this taxpayer . . . are hereby levied upon and seized for satisfaction of the aforesaid tax."

The bank returned the notice of levy to the government marked "insufficient funds". Thereafter, Stuyvesant, by letter dated June 19, 1978, notified the bank that they had released the aforementioned $10,000. bond to the Internal Revenue Service. On June 23, 1978, the Internal Revenue Service served a final demand upon the bank for the amount set forth in the notice of levy of January 26, 1977 pursuant to section 6332 of the Internal Revenue Code, 26 U. S. C. §6332. This section provides that "any person in possession of . . . property or rights to property subject to levy upon which a levy has been made shall, upon demand . . . surrender such property. . . ." 26 U. S. C. §6332(a). The defendant bank then received a letter dated June 27, 1978, from Mid-Atlantic Agency, Inc., an agent of Stuyvesant, advising the bank that the bond "should continue to be assigned to the Stuyvesant Insurance Company" until it receives written notice that the bond may be released.

However, from June 25, 1971 through July, 1978, the taxpayer was indebted to the defendant in an aggregate sum in excess of $30,000. for loans and advances. At some point between June 23, 1978 and July 11, 1978, the defendant bank applied the proceeds of the bond to the taxpayer's indebtedness.

The government maintains that the defendant bank did not have the right to set off the taxpayer's debt against the bond because the bank did not exercise this right until after it received the notice of levy. The government also argues that the bank had no right to the proceeds of the bond since it was not in possession of the bond.

The defendant bank contends that the bond did not constitute property of the taxpayer subject to the Internal Revenue Service levy since the taxpayer had granted the bank a security interest in the proceeds of the bond. In addition, the defendant bank maintains that Pennsylvania case law provides that where the debts of a depositor exceed his deposits with the creditor in which the creditor has been granted a security interest, the depositor has no enforceable claim against the creditor.

On a motion for summary judgment, we must view the evidence in the light most favorable to the party opposing the motion. Bishop v. Wood, 426 U. S. 341, 347 n. 11 (1976); United States v. Diebold, Inc., 369 U. S. 654, 655 (1962); Drexel v. Union Prescription Centers, Inc., 582 F. 2d 781, 784 (3d Cir. 1978). To prevail upon a motion for summary judgment the moving party must conclusively demonstrate to the court's satisfaction that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law, Fed. R. Civ. P. 56(c); Majors Furniture Mart, Inc. v. Castle Credit Corp., Inc., 602 F. 2d 538, 539 (3d Cir. 1979); Drexel v. Union Prescription Centers, Inc., 582 F. 2d 781, 784 (3d Cir. 1978); Anthony v. Ryder Truck Lines, Inc., 466 F. Supp. 1287, 1291 (E. D. Pa. 1979). It is clear in the case sub judice that there is no genuine issue of any material facts since the parties have stipulated in favor of the defendant bank for the following reasons.

The approach to the issues of law raised by these motions for summary judgment has been set forth by the Supreme Court in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-14 (1960). The Aquilino court indicated that the threshold question in cases where the Federal Government asserts a tax lien is whether and to what extent the taxpayer had "property" or "rights" to property to which the tax lien could attach. Id. at 512. The rights of the government can only succeed to the property rights of the taxpayer. St. Louis Trust Co. v. United States [80-1 USTC ¶9282], 617 F. 2d 1293, 1301 (8th Cir. 1980); Wagner v. United States [78-1 USTC ¶9340], 573 F. 2d 447, 454 (7th Cir. 1978). The property rights of the taxpayer, the Aquilino court indicated, must be determined according to state law. 363 U. S. at 512-13, citing, Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82 (1940). Thus, we must look to the law of Pennsylvania to determine whether the taxpayer had property or rights to property in the bond at the time the government filed its notice of levy.

Prior to determining Pennsylvania law, we note that it is clear from the language of the notice of levy that it attached only to the existing property of the taxpayer. The notice of levy states that the levy ¹ attached to "all property . . . now in [the bank's] possession and belonging to this taxpayer." [emphasis added].

The Pennsylvania principles of law applicable to this case were recently set forth in Pittsburgh National Bank v. United States [81-1 USTC ¶9239], 498 F. Supp. 101, 102 (W. D. Pa. 1980). In that case, the Internal Revenue Service served a notice of levy upon the Pittsburgh National Bank to attach funds held in a bank account by the taxpayer. The bank maintained that, under Pennsylvania law, at the time of the levy the account of the taxpayer constituted neither property nor rights to property, and therefore, was not subject to levy by the IRS. Id. at 103. The court entered summary judgment for the bank reasoning that the taxpayer had no rights in the bank account since the taxpayer gave the bank a lien on all monies he had on deposit with it in an amount equal to the unpaid balance of a loan from the bank. Id. at 102, 104. The Pittsburgh National Bank court also stated that Pennsylvania law provides that when a bank has been given a security interest by a debtor depositor, the bank may, at any time, set off the debtor's deposits against the indebtedness of the depositor to the bank. Duffy v. Building and Loan Association, 325 Pa. 127, 189 A. 307 (1937); Aarons v. Public Service Building and Loan Association, 318 Pa. 113, 178 A. 141 (1935); General Electric Credit Corp. v. Tarr, 457 F. Supp. 935 (W.D. Pa. 1978). In Aarons, the Supreme Court of Pennsylvania held that the right of setoff actually extinguishes the "depositor's rights to draw on the deposit leaving nothing 'belonging to' the [depositor]." Aarons, supra, 318 Pa. at 116, 178 A. at 142.

Applying Pennsylvania law to the case, sub judice, it is clear that on January 26, 1977, the time the notice of levy was served upon the defendant bank, the taxpayer did not have any rights in the bond. The taxpayer gave the defendant bank a security interest in all its property held by the defendant bank. Each note signed by the taxpayer provides, in pertinent part, as follows:

"The term 'Collateral' as used herein means all property of any nature whatsoever of the [taxpayer]. . . . now or hereafter in the possession of . . . the Bank. . . . The [taxpayer] agrees that the Bank shall have a lien upon and security interest in the Collateral, and all rights in connection with the Collateral, to secure the payment of this note and any renewals. . . ."

The fact that, as plaintiff argues, the defendant bank did not exercise the right of setoff until after it received the notice of levy does not prejudice the bank's right to setoff. General Electric Credit Corp. v. Tarr, supra, at 938.

Most importantly, the taxpayer did not have rights in the bond which were subject to seizure by the IRS because at the time the notice of levy was served upon the defendant bank, the bond was not in the possession of the bank. According to the stipulated facts, the bond was in the possession of the Stuyvesant Insurance Company pursuant to a restrictive assignment. As indicated earlier, this restrictive assignment expressly prohibited re-assignment of the bond. Stuyvesant breached this condition of assignment when it released the bond to the Internal Revenue Service. Therefore, the IRS received the bond by a wrongful assignment and has no right to enforce a tax levy on the proceeds of the bond.

Order

The motion of the plaintiff for summary judgment is DENIED.

The motion of the defendant for summary judgment is GRANTED.

Judgment is entered in favor of the defendant and against the plaintiff.

IT IS SO ORDERED.

¹ The government's levy is an attempt to execute for collection purposes on specified property of the taxpayer. The government must first establish that the person levied upon has property of the taxpayer before it can be determined that the government has a priority in the proceeds of the taxpayer's property. The levy will apply only to such property or property rights as actually exist at the time the levy is made.

9 J. Mertens, Law of Federal Income Taxation, ¶¶ 54.38, 54.52 (1977 revision).

[66-1 USTC ¶9197]Oscar H. Beasley, Individually, as Disbursement Agent for Nick Kapnison and Crescendo, Inc.; and Julian S. Ertz, Oscar H. Beasley and Malcom G. Colberg, d/b/a Ertz, Beasley & Colberg, a Partnership, Plaintiffs v. Internal Revenue Service, Treasury Department of the United States of America; Bureau of Revenue, State of New Mexico; Leo Petrino; Nick Kapnison; Natalyn Kapnison; Melvin Rueckhaus; Howard Raishe; Ruth Raishe; Verne Elliott, Inc.; and Employment Security Commission of New Mexico; and Crescendo, Inc., Defendants

U. S. District Court, Dist. of N. Mex., Civil No. 5296, 11/5/65

[1954 Code Secs. 6321-6323]

Lien for taxes: Check drawn before levy: Waiver of attorneys' lien.--A lien for taxes did not apply to an amount in a bank trust account for the taxpayer for which a check, payable to a creditor, had been drawn before the levy for taxes was served. However, a representative for the taxpayer who claimed that he was authorized to pay himself a sum out of the bank account waived any right which he might have had when he gave the Internal Revenue Service a check for the balance in the account.

Ertz, Beasley & Colberg, 411 First National Bank Bldg., 219 Central Ave., N. W., Albuquerque, N. Mex., Paul A. Phillips, 420 First National Bank Bldg., West, Albuquerque, N. Mex., for plaintiffs. Frank O. Westerfield, Jr., George F. Stevens, 811 First National Bank Bldg., 219 Central Ave., N. W., Albuquerque, N. Mex., for Howard and Ruth Raishe; A. M. Frazier, P. O. Box 1799, Albuquerque, N. Mex., for Employment Security Comm.; Melvin D. Reuckhaus, 211 Central, N. W., Albuquerque, N. Mex., Pro Se., for defendants.

Memorandum

PAYNE, District Judge:

I will first try to recite the facts to the best of my ability. $Nick Kapnison and his wife owned a night club known as Crescendo, Inc. They were represented by Oscar H. Beasley. On March 31, 1962, Leo Petrino loaned Kapnison and Crescendo, Inc. $2,500.00. On May 13, 1962, Crescendo needed another $3,500.00 for one month in order to keep the business open, hoping that it could be sold. Mr. Beasley represented to Mr. Petrino that if he would lend that amount to Mr. Kapnison and Crescendo, Inc. that it could work out a sale in due course, and that Mr. Petrino would then be repaid both the $3,500.00 and the $2,500.00.

Mr. Petrino agreed to this on condition that his attorney, Mr. Rueckhaus, would say that it was safe. On a Sunday evening, Mr. Beasley, with Mr. Petrino present, called Mr. Rueckhaus. Mr. Beasley assured Mr. Rueckhaus that it was all right and that he would be handling the proceeds out of the sale and that he would make an assignment of the above amounts when the papers were completed. Thereupon, Mr. Rueckhaus assured Mr. Petrino that it was all right to make the loan. Mr. Petrino then made the loan.

The sale of the business from Kapnison and Crescendo, to Mr. Raishe, was made, and the down payment was first placed in escrow with the First National Bank and later disbursed through Stuart Hines. The sum of $7,749.46 was turned over to Mr. Beasley. It seems that Ertz, Beasley & Colberg were to receive a fee from this money but the amount was not determined, and it was to be a pro tanto payment, whatever that meant.

However, on the morning of July 19, 1962, Mr. Beasley made out a check to Electrical Products Company and Howard Raishe for $289.00, a check to Howard Raishe for $1,645.00, and a check to Leo Petrino, Melvin Rueckhaus and Howard Raishe for $3,500.00.

[Levy for Taxes]

After these checks were made out and delivered, a levy was served on Mr. Beasley by the Internal Revenue Service and he gave a check for the balance of $2,314.56 to the Internal Revenue Service. That was about 11:00 a. m., and in the afternoon of that day the Internal Revenue Service came back and served another levy on Mr. Beasley.

Thereafter, Mr. Raishe refused to endorse the $3,500.00 check although he claimed no interest in it whatsoever. Thereupon, Mr. Kapnison drew a line through the name of Howard Raishe. The check was presented to the bank and the bank refused to pay it because of its alteration. Thereafter, Mr. Beasley, or his firm, stopped payment on the check and made a check to the firm for $2,073.13 for attorneys' fees and $100.00 for costs of suit, and the balance, in the sum of $1,326.87, was interpleaded into court.

Plaintiffs take the position that the first levy could have reached only $241.43. They base this on the theory that some kind of an assignment had been made by Kapnison and Crescendo, Inc. to Ertz, Beasley & Colberg for the $2,073.13. They take the position that that amount was paid over by mistake to the Internal Revenue Service and that the Internal Revenue Service should refund that amount to plaintiffs. They further take the position that the second levy by the Internal Revenue Service did not reach any of the funds.

It appears to me that I must now determine the legal effect of the various transactions of the parties.

The money received by Mr. Beasley was placed in the firm's trust account; thus it was conceded to belong to someone else. I can only conclude that it still belonged, at that time, to the person who placed it in the hands of the firm for distribution, namely, Kapnison and Crescendo, Inc. At that point it would have been subject to levy by the Internal Revenue Service for any taxes owed by Kapnison or Crescendo, Inc.

The first question is to determine what the legal effect was when the $3,500.00 check was given to Mr. Petrino by Mr. Beasley. Section 50A-3-409 of the New Mexico Code provides as follows:

"A check or other draft does not of itself operate as an assignment of any funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until he accepts it."

This section is very similar to old Section 189 of the negotiable instruments act which is quoted in 20 N. M. 456. The Supreme Court of New Mexico, in the case of Elgin v. Gross-Kelly & Company, being 20 N. M. 450, held that this section covered the situation between the drawee and the bank, but that as between the drawer and the drawee, a check should be considered as an assignment pro tanto. Headnote No. 2 of that case reads as follows:

"The provision of the negotiable instruments statute that a check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank is a declaration of the rule that as against a drawee bank, a check is not an assignment of the fund. But, as against the drawer, the giving of a check for value on an ordinary bank deposit should be considered an assignment of the fund pro tanto."

From this case it is apparent to the Court that the check given by Mr. Beasley to Petrino, et al., constituted an assignment as between the drawer and the drawee. Accordingly, I do not believe that any levies made by the Internal Revenue Service reached this $3,500.00 check. As between Mr. Beasley and Petrino, et al., this was a bona fide assignment for a valuable consideration, and I do not believe that Mr. Beasley had any authority thereafter to stop payment on the check or to make a check to the firm for any part of that money. It is true that the bank had refused to cash the check, due to its alteration, but it is also true that Mr. Raishe had no interest in the money and that in truth and in fact the $3,500.00 belongs to Mr. Rueckhaus and should be paid over to him.

Now, with regard to the check that was given by Mr. Beasley to the Internal Revenue Service.

[Waiver of Attorneys' Lien]

The Beasley firm is claiming some sort of an assignment of this amount but I do not find that any assignment was ever executed. The fact that Kapnison and Crescendo owed the firm some unliquidated amount, which Beasley was authorized to pay himself, did not constitute an assignment of the funds. It may be that the firm had some sort of attorneys' lien on some part of the fund but this also was unliquidated. Whenever Beasley turned over the check to the Internal Revenue Service, it was a surrender of possession and a waiver of any lien which the firm may have had. It also was a waiver of any claim of lien by virtue of some sort of equitable assignment. So long as the money remained in the trust account it belonged to Kapnison and Crescendo. It had never been transferred or assigned in any way to the firm and the check on the trust account, to the Internal Revenue Service, destroyed any claim that the firm could have had to this money.

Accordingly, it is the opinion of the Court that the Internal Revenue Service is entitled to retain what was paid to it by Mr. Beasley, but that it is not entitled to any part of the $3,500.00, which was assigned to Petrino, et al. Since Mr. Rueckhaus has settled with Mr. Petrino, it is my opinion that he is entitled to the money which has been interpleaded into court and is also entitled to a refund from the Beasley firm of the balance to make it back up to the $3,500.00 represented by the check.

This Memorandum will constitute the Findings and Conclusions of the Court. An Order may be prepared accordingly.