Debts Owed to the Taxpayer page5

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Seaboard Surety Company, a New York Corp., and Hansen & Rowland, Inc., a Washington Corp., Appellants v. United States of America, Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 17,618, 306 F2d 855, 7/24/62, Affirming unreported District Court decision

[1954 Code Sec. 6321]

Lien for taxes: Future profits under Government contract: Profits assigned to trust.--A lien for withholding taxes attached immediately to the taxpayer's rights under a Government contract awarded after assessment, and this lien could not be displaced by an assignment in trust of payments to become due under the contract, the trust funds to be used to pay costs chargeable to the contract, to pay the surety's costs, and to pay other creditors. Legal expenses incurred by the surety and the trustee in bringing an interpleader suit were not entitled to priority. Since the surety and the trustee had disclaimed any interest in the trust fund except for legal expenses, they could not appeal from the order disbursing the funds (except as to the legal expenses which they had withheld).

Skeel, McKelvy, Henke, Evenson & Uhlmann, William E. Evenson, William F. Baldwin, Seattle , Wash. , for appellant. Louis F. Oberdorfer, Assistant Attorney General, Washington 25, D. C., Brockman Adams, United States Attorney, Thomas H. S. Brucker, Assistant United States Attorney, Seattle, Wash., for appellee.

Before POPE, BARNES and BROWNING, Circuit Judges.

BARNES, Circuit Judge:

This is an appeal from a judgment entered by the United States District Court directing the clerk of the court to pay appellee $28,673.16 from the funds in the registry of the court, and giving judgment against appellants in the amount of $1,903.02. Jurisdiction was conferred upon the district court by §§ 1335 and 2463, Title 28, United States Code, and §7403, Title 26, United States Code.

Judgment for appellee was entered on September 5, 1961. A timely notice of appeal was filed. This court has jurisdiction to review the judgment entered below under the provisions of §§ 1291 and 1294(1), Title 28, United States Code.

We note that Seaboard and Hansen & Rowland appeal from the judgment, but that defendant creditors have not appealed from the judgment granting appellee priority over their claims.

This was an action in interpleader brought by appellants, interpleading plaintiffs below, to determine the relative rights of various creditors, including appellee, in and to certain funds representing the profit from a completed construction job of Poland & Pfaff, Inc. (hereinafter referred to as "taxpayer").

On or about December 31, 1956, taxpayer was awarded a government construction contract. Taxpayer and C & R Builders, Inc. (hereinafter referred to as "C & R"), a joint venturer, on December 31, 1956 made application to appellant Seaboard Surety Company (hereinafter referred to as "Seaboard") for the issuance of a performance bond, and a payment of labor and material bond. As a condition to issuance of the bonds, Seaboard required "standby" agreements to be obtained from taxpayer's existing creditors. ¹ Appellee, although a creditor, ² was not requested to nor did it participate in any such agreement. None of the aforementioned creditors had any claim or debt due from taxpayer arising out of the government contract.

On March 2, 1957, a trust agreement (Ex. 1) was executed by taxpayer, C & R, Seaboard, the University Branch of the Pacific National Bank of Seattle (hereinafter referred to as "Pacific National"), and appellant Hansen & Rowland, Inc. (hereinafter referred to as "Hansen & Rowland"). The trust instrument's preamble states that the proceeds of taxpayer's government contract were assigned ³ to Pacific National. ⁴

The contract was performed and all claims arising therefrom were satisfied as of May 27, 1959. The balance in the trust account was $31,171.16 which sum is the "remaining funds" referred to in paragraph (i) of the trust agreement (set forth in footnote 4, supra).

On or about July, 31, 1958, appellee through its District Director of Internal Revenue for the Seattle District, caused a Notice of Levy (Form 668-A) to be served upon Hansen & Rowland showing a total amount (including interest) of $28,006.08 then due on appellee's liens. On or about August 15, 1958, appellee, through its same agent, caused a Final Demand (Form 668-C) to be served on Hansen & Rowland and on Seaboard.

[Interpleader Suit by Surety and Trustee]

Faced with competing claims of creditors and appellee to the profits of taxpayer from its government contract, appellants brought the interpleader action on May 29, 1959, against the creditors and appellee as defendants, asking the court to determine their respective rights to the aforementioned fund. ⁵

Appellants expressly disclaimed any interest in or right to the deposited fund of $28,673.16 for their own interest, except that they alleged that the trust account was "primarily" subject to the costs and expenses of these proceedings, the reimbursement to them for all their costs and expenses to be incurred therein, and to the payment of all beneficiaries of the trust account and defendants which otherwise on any account would have any claim against appellants or either of them.

The defendant creditors, represented by their own attorneys, fully participated in the proceedings below. Appellee moved to dismiss the action against it and intervened to enforce its tax liens. The essential facts were admitted on pretrial order, and based upon the facts above stated, the district court entered the following Conclusions of Law:

(1) That a lien for taxes under Section 6321 of the Internal Revenue Code of 1954 attaches to all "property and rights to property belonging to a taxpayer." However, rights under an executory bilateral contract are not property or rights to property within the scope of Section 6321 unless and until the agreed exchange under the bilateral contract has been performed and a right to payment has been earned.

(2) That under Washington law there was no valid legal or equitable assignment to defendant creditors or an interest in the fund to be created from performance of the government contract.

(3) That when the fund referred to in paragraph (i) of the trust agreement came into existence after prior claims to the proceeds of the government contract were paid, the tax lien of appellee attached to and had priority over the claims of defendant creditors.

(4) That under the rule announced in United States v. Liverpool & London & Globe Insurance Co., 1954, [55-1 USTC ¶9136] 348 U. S. 215, appellants were not entitled to priority over the claim of appellee for the expense incurred in bringing this action.

(5) That appellee (the intervenor) is entitled to a judgment and decree declaring that the priorities and the rights to payments from the trust account (which fund totaled $31,173.16 as of May 27, 1959) are as follows:

First Priority: The tax liens of appellee in the sum of $23,780.31 plus interest at the rate of six per cent on $21,440.31 from November 15, 1956 to date in the amount of $6,164.07 plus interest at said rate on $2,340.00 from February 28, 1957 to date in the amount of $631.80 (totaling $30,576.18).

Second Priority: The costs and attorneys' fees of appellants.

Third Priority: The priority and amounts of each of the several defendant creditors were not established, as the funds which are the subject of this interpleader action will be insufficient to satisfy the second priority.

(6) That appellee is entitled to an order directing the clerk of the district court to pay it $28,673.16 from the funds in the registry of the court.

(7) That appellee is entitled to judgment against Seaboard & Hansen & Rowland in the amount of $1,903.02. (This represents the difference between the total amount due the government and the amount deposited by the Trustee.)

(8) That appellants are entitled to judgment for costs and attorneys' fees in the amount of any balance remaining in their possession originating from the trust account after payment of the judgment in favor of appellee ($2,500 less $1,903.02, or $596.98).

An agreed computation of the interest due on the tax liens was made. On September 5, 1961, the district court entered judgment which followed in its terms the above Conclusions, i. e., the clerk was directed to pay appellee $28,673.16 from the funds in the registry of the court, and appellee was given judgment against appellants in the amount of $1,903.02. Appellants were awarded the balance of $596.98.

Appellants set forth seventeen specified errors upon which they rely in this court. For reasons set forth below, however, we believe only those errors which touch upon that part of the judgment granting appellee judgment against Seaboard and Hansen & Rowland in the amount of $1,903.02 are properly to be considered by this court.

[Disclaimer of Interest]

In their complaint appellants stated:

". . . Plaintiff trustee is ready, willing and able to pay the balance of said fund over to the clerk of this court or as this court by its judgment may otherwise direct. Plaintiffs disclaim any interest in or right to said balance of said account for their own interests, except that plaintiffs allege said account is primarily subject to the costs and expenses of these proceedings, the reimbursement of plaintiffs for all their costs and expenses to be incurred herein, and to the payment of all beneficiaries of said trust account and defendants which otherwise on any account would have any claim against the plaintiff or either of them." (Italics added.)

This partial disclaimer was repeated in the Partial Pretrial Order and the Findings of Fact. Thus, appellants disclaimed any interest in the deposited fund. The district court found they had no interest in the fund. Under these circumstances, we rely on the rule that a party who has no interest in a fund cannot appeal from an order disbursing that fund. ⁶ Defendant creditors below, who are the only parties affected by that portion of the judgment, had the right to appeal to protect their interests. They did not do so. Appellants have no right or power to represent the interests of others on appeal. Therefore, appellants' appeal must be dismissed insofar as it attempts to review the judgment of the district court awarding $28,673.16 to appellee.

Appellants are hence confined to questioning that part of the judgment entered against them granting appellee the sum of $1,903.02; this money will be paid from appellants' pockets, not from the fund, but only because appellants "pocketed" attorneys' fees before filing suit.

Since the right of appellee to the $1,903.02 depends upon its lien upon the full amount of taxpayer's profits from the construction contract, the validity of that lien is determinative of the issue between the parties.

[Tax Lien Against Future Profits]

The undisputed facts show that as of and prior to the date of the trust agreement, appellee had a fully perfected tax lien upon all property and rights to property of the taxpayer, in the sum of $21,440.31 plus interest from November 15, 1956, and $2,340 plus interest from February 28, 1957. These liens, arising upon assessment under Section 6321 of the Internal Revenue Code of 1954, continue in full force and effect until the tax liability is extinguished (26 U. S. C. §6322) and attach to all after-acquired property of the taxpayer. Glass City Bank v. United States, 1945, [45-2 USTC ¶9449] 326 U. S. 265. These tax liens attached immediately to all rights of taxpayer under the government contract awarded December 31, 1956, including payments whenever earned. On December 31, 1956, and up to March 2, 1957, (the date of the trust agreement) appellee had a prior lien ahead of all of other creditors. None of the other defendant creditors had any liens upon the property of taxpayer, and no lien upon the rights of taxpayer in the government contract. Appellee was the only creditor with a lien upon these rights. Hence, it follows that the trust agreement of March 2, 1957, could not displace the tax liens, which had already attached to taxpayer's property rights in the contract. The fact that taxpayer's rights under the contract were dependent upon its performance did not affect the tax liens, as far as the defendant creditors are concerned. Glass City Bank v. United States, supra. The tax liens were subject only to a prior, choate lien upon these rights. Alleged beneficial interests of the creditors in this case arose after the tax liens and are subordinate to the tax liens. United States v. New Britain , 1954, [54-1 USTC ¶9191] 347 U. S. 81; United States v. Christensen, 9 Cir. 1959, [59-2 USTC ¶9621] 269 F. 2d 624. ⁷

Appellee had a prior choate tax lien upon any profits of taxpayer under the government contract, and this prior tax lien was superior to the then existing non-lien creditors of taxpayer, and appellee's priority was not in any way displaced or affected by the agreement of March 2, 1957. Appellee was entitled to payment of its lien totaling $30,576.18, inclusive of interest, out of the funds in the hands of appellants as of May 27, 1959. Appellants could not diminish appellee's lien by withholding from the fund an amount to cover their attorneys' fees and costs of the interpleader action made necessary by competing claims of other creditors which were junior to the tax liens of appellee.

It appears, from appellants' complaint, that appellants, in the district court, contended that they were entitled to attorneys' fees and expenses for the preparation and filing of this action and for the prosecution of these proceedings. The district court regarded their claims as being "for the expenses incurred in bringing this action." Appellants now contend that their claims are for the expenses of the administration of the trust apart from the prosecution of the interpleader action. It is settled law that the lien of appellee's is superior to the attorneys' fees and costs of an interpleader. ⁸

In the district court, appellants did not contend and made no offer of proof that they had incurred legal expenses for matters not related to the preparation and prosecution of the instant case. They cannot do so here. Factual issues cannot be raised for the first time on appeal. Carr v. City of Anchorage , 9 Cir. 1957, 243 F. 2d 482.

We affirm the judgment awarding $1,903.02 to appellee. Appellants' appeal from that portion of the district court's judgment directing the clerk of the court to pay to appellee those funds which had been placed in the registry of the court by appellants as interpleaders is dismissed.

¹ Whose claims or debts arose prior to December 31, 1956, some of which were defendants below. By signing these agreements, the creditors promised not to take legal action against taxpayer until one year after the completion of the government contract; and taxpayer agreed to pay those creditors which signed these agreements on a pro rata basis after the expenses of the job were satisfied.

² Taxpayer, an Alaska Corporation, had employees before December 31st, 1956. On account of this employment and the payment of wages, assessments were duly made for the quarters ended September 30, 1956 and December 31, 1956 of the amount deducted and withheld by taxpayer from wages as the collection of taxes upon the income of its employees (i.e., withholding taxes). The District Director of Internal Revenue for the District of Seattle gave notice of each of these assessments to, and demanded payment of, the amount thereof from taxpayer. The District Director filed the notices of tax liens with the United States Commissioner at Fairbanks , Alaska . The amount of taxes and the penalty or interest included in each assessment, or both, the dates of filing of notices of tax liens, the amount of any payment and the amount of the unpaid balance of the assessments, are as follows:

                                                                                  Date           Notice           Notice

                                                                            Assessment              and           of Tax

Type of                       Tax                            Amount               List           Demand             Lien

Tax                        Period                       Outstanding           Received           Issued            Filed

Withholding ....          9-30-56                        $21,440.31           11-15-56         11-15-56         12-18-56

Withholding ...          12-31-56                          2,340.00            2-28-57          2-28-57           5-6-57

                                                         $23,780.31

                                          (plus accrued interest as

                                                   provided by law)

 

³ The district court found and concluded that this assignment (Ex. 5) did not in fact take place until April 8, 1957.

⁴ The operative provisions of the trust agreement here material are, in substance, as follows:

1. The taxpayer and Pacific National assigned and transferred all monies received, due or to become due Pacific National under its assignment of the government contract to Seaboard, Seaboard being authorized to receive all checks, warrants, and other instruments in payment of the contract and to endorse and deposit them in a trust account with the trustee.

2. The money held by the trustee was to be disbursed in payment of the costs and expenses directly and indirectly chargeable against the government contract.

3. In the event of default on the part of taxpayer, or on account of non-payment of claims for labor and materials, Seaboard was to have authority to use the balance of monies in the possession of the trustee for the purpose of completing the government contract and of paying any obligations which Seaboard may have been required to pay on account of the execution of the bonds.

4. Paragraph (i) of the trust agreement provided in part, that after payment of all expenses incurred in performance of the government contract, including advances made by Pacific National and certain expenses of Seaboard and the trustee:

"The remaining funds . . . shall be paid to creditors of [taxpayer], in such amounts as are indicated in statement of [taxpayer] dated December 31, 1956, or such agreed revision as may later be made between [taxpayer] and its creditors properly certified to Trustee. Any residual amount shall be paid to [taxpayer] when the time for bringing suit against [Seaboard] shall have expired and all claims and suits against [Seaboard] by reason of the operations of [taxpayer] under bonds past or present of [Seaboard] shall have been terminated."

⁵ Appellants did not, however, deposit in the registry of the court the full amount of the balance in the trust account of $31,173.16 but, instead, deposited in the registry of the court $28,673.16, and retained $2,500 for attorneys' fees in the action and for estimated costs of the action.

⁶ Spriggs v. Stone, D. C. Cir. 1949, 174 F. 2d 671 ("An [executor] cannot appeal for the protection of the interests of particular devisees or legatees who are able to protect themselves by taking an appeal of their own.") In re Michigan-Ohio Building Corporation, 7 Cir. 1941, 117 F. 2d 191 ("Speaking more specifically, a party has an appealable interest only when his property may be diminished, his burdens increased or his rights detrimentally affected by the order sought to be reviewed."); King v. Buttolph, 9 Cir. 1929, 30 F. 2d 769 ("It is fundamental that an appellant must either have or represent an interest in the subject-matter of the appeal, and it is generally held that, where it does not appear that the administrator has an interest in a controversy and he is the only party asking a review of the judgment, the appeal should be dismissed."). See also, 2 Am. Jur., Appeal and Error, §150; 4 C. J. S., Appeal and Error, §177.

⁷ The case of In re Halprin, 3 Cir. 1960, [60-2 USTC ¶9564] 280 F. 2d 407, does not stand for the proposition it is cited for by appellants, since it involved only the priority of a person financing the contract out of which the taxpayer would earn any property subject to the federal tax lien. In this case, the only creditor in that position is Pacific National, and its priority is not in dispute. Defendant creditors in this case had nothing to do with financing the construction contract. Their claims are for indebtedness incurred by taxpayer prior to December 31, 1956. At that time, and up until March 2, 1957, the defendant creditors were junior to appellee's tax lien. The fact that defendant creditors agreed to forbear from suit in return for a promise that they would be paid out of the profits of the contract does not give them priority over appellee. At the time of the March 2, 1957 agreement, defendant creditors were no more than general creditors of taxpayer, junior in every respect to appellee's tax lien. They cannot contract away appellee's tax lien. At the most, the trust agreement of March 2, 1957, so far as defendant creditors are concerned, conferred upon them an inchoate, future interest.

⁸ In United States v. Liverpool & London & Globe Ins. Co., 1955 [55-1 USTC ¶9736] 348 U. S. 215, a garnishment action, the Court held that the tax lien was prior to the garnishment lien and that "fees in [the garnishment] proceeding are not prior to the Government liens, and the authorization of the payment of the attorneys' fees prior to the Government liens was error." In United States v. Ball Construction Co., 1958, [58-1 USTC ¶9327] 355 U. S. 587, an interpleader action, the Court said: "The claim of the interpleader for its costs is controlled by United States v. Liverpool & London & Globe Ins. Co., [supra]." In United States v. Chapman, 10 Cir. 1960, [60-2 USTC ¶9667] 281 F. 2d 862, the court held that the tax lien of the United States could not be diminished by the attorneys' fees and costs, and that the interpleader would have to look to other parties for its costs.

 

 

 

Mary Jo Williams, Administrator of the Estate of Percy L. Williams, and Mary Jo Williams, Transferee of the assets of Percy L. Williams, Appellants v. United States of America, Appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 13,680, 264 F2d 227, 2/27/59, Aff'g District Court, 58-2 USTC ¶9754, 164 F. Supp. 874

[1939 Code Secs. 272(a) and (k)--same as 1954 Code Secs. 6212(a) and (b)]

Assessment and collection of decedent's deficiency: Address of deficiency notice: Liability of fiduciary: Lien for taxes against contract payments.--The mailing of a statutory notice of deficiency to an address designated by the deceased taxpayer in a power of attorney filed with the District Director prior to the taxpayer's death did not make the assessment void even though the taxpayer's death revoked the power of attorney. Accordingly, the government had a valid lien against all property in control of the defendant-wife, either as administratrix or distributee of the deceased's estate, including contractual payments due the estate under an agreement entered into between a third party and the decedent prior to his death. Moreover, the government was entitled to have its lien foreclosed and to a deficiency judgment against the defendant-wife as administratrix of the estate in the amount of any assessment remaining unsatisfied, plus interest until paid.

Sol Goodman, Cincinnati , O. (Sol Goodman, Goodman & Goodman, Theodore M. Berry, Cincinnati , O., on brief), for Appellants. David O. Walter, Washington , D. C. (Charles K. Rice, Lee A. Jackson, I. Henry Kutz, Carolyn R. Just, Washington , D. C., Hugh K. Martin, Richard H. Pennington, Cincinnati , O., on brief), for Appellee.

Before MARTIN, Chief Judge, ALLEN, Circuit Judge, and MATHES, District Judge.

PER CURIAM:

A deceased Ohio taxpayer's transferred and personal representative appeals from a judgment decreeing, among other relief, foreclosure of the Government's lien for income taxes, and dismissal of a counterclaim to enjoin collection of the taxes, claimed under an assessment made after notice of deficiency allegedly given as required by statute. [Int. Rev. Code, §§ 6212(b)(1), 6213(a), (c), 7421, 26 U. S. C. A., §§ 6212(b)(1), 6213(a), (c), 7421.]

Appellants contend that the assessment is void because the statutory notice of deficiency upon which it is predicated was not mailed to the taxpayer "at his last known address" within the meaning of Int. Rev. Code, §6212(b)(1).

There is no dispute as to the facts. A little more than one year prior to his death on November 3, 1955, the taxpayer had filed with the District Director of Internal Revenue for the District of Ohio [58-2 USTC ¶9724] a power of attorney wherein the taxpayer "authorized and requested that all communications and other matters be mailed to the following address: . . . [the name and address of his attorney in fact]."

On December 2, 1955, prior to the appointment of a personal representative to administer the estate of the decedent and before any notice of fiduciary relationship was filed under Int. Rev. Code, §6903, the Commissioner of Internal Revenue sent the challenged notice of deficiency by registered mail addressed to the taxpayer in care of and at the address of the attorney in fact as requested and directed in the power of attorney on file. The attorney returned the notice to the District Director, advising that his power of attorney had been revoked by the death of the taxpayer.

No petition for a redetermination of the claimed deficiency was ever filed with the Tax Court on behalf of the taxpayer or his estate, and the assessment in controversy followed. [Int. Rev. Code, §6213(a), (c); Cf. United States v. Flora, 357 U. S. 63 (1958) [58-2 USTC ¶9606].]

Appellants' contention that the assessment is void because the notice of deficiency was not sent to the "last known address" of the taxpayer, is based upon the fact that the District Director had in his file a residence address and a business address of the taxpayer.

It is true of course, as appellants say, that death of the taxpayer revoked the authority of the attorney. [Hunt v. Rousmanier's Administrators, 21 U. S. (8 Wheat.) 173 (1823).] But revocation of the power of attorney did not erase the taxpayer's request therein to the Director that "all communications and other matters be mailed" to the taxpayer at the attorney's address.

While we must agree with appellants that here the Director did not exert himself to see that the notice of deficiency reached proper hands, still we cannot say there was not minimum compliance with the mailing procedure authorized by §6212(a), (b)(1) of the Internal Revenue Code. [Cf.: Dolezilek v. Commissioner, 212 Fed. (2d) 458 (D. C. Cir. 1954) [54-1 USTC ¶9360]; Commissioner v. Stewart, 186 Fed. (2d) 239 (6th Cir. 1951) [51-1 USTC ¶9151]; Clark's Estate v. Commissioner, 173 Fed. (2d) 13 (2d Cir. 1949) [49-1 USTC ¶9208]; Welch v. Schweitzer, 106 Fed. (2d) 885 (9th Cir. (1939) [39-2 USTC ¶9725]; Dilks v. Blair, 23 Fed. (2d) 831 (7th Cir. 1927) [1 USTC ¶267]; Gregory v. United States, 57 Fed. Supp. 962 (Ct. Cl. 1944) [44-2 USTC ¶9536], cert. denied, 326 U. S. 747 (1945).]

Upon the findings of fact and conclusions of law made by District Judge Druffel, the judgment is affirmed.

 

 

 

Fine Fashions, Inc., Plaintiff-Appellant v. United States of America , Defendant-Appellee, and Linde Factors Corp., Defendant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 27975, 328 F2d 419, 2/17/64, Affirming unreported District Court opinion

[1954 Code Secs. 6321-6323, 6331]

Lien for taxes: Contract payments assigned: Guarantor's right to fund.--A manufacturer which assigned funds due under a government contract, to a factor which agreed to release the funds to the manufacturer only on authorization of the appellant herein, which was found to have guaranteed payment for cloth purchased by the manufacturer for use in fulfilling the government contract, had an interest in the funds held by the factor to which a lien for taxes attached, superior to appellant's claims

One dissent.

Leonard M. Wallstein, Jr., Baar, Bennett & Fullen, 29 Broadway, New York , N. Y., for plaintiff-appellant. Anthony J. D'Auria, Assistant United States Attorney, New York, N. Y. (Robert M. Morgenthau, United States Attorney, Robert E. Kushner, Assistant United States Attorney, New York, N. Y., on brief), for defendant-appellee.

Before WATERMAN, MOORE and SMITH, Circuit Judges.

SMITH, Circuit Judge:

This action was brought in the United States District Court for the Southern District of New York by Fine Fashions, Inc. to resolve conflicting claims to a fund of $6,409.85 held by Linde Factors Corp. (Linde). Linde has disclaimed any interest in the fund and has deposited it in escrow with the United States Attorney. Fine Fashions claims the fund as the beneficiary for an assignment to Linde by the Penn Garment Co. (Penn) of payments due or to become due under a contract with the United States . The United States claims the fund under a tax lien against Penn. The facts were stipulated, and the District Court, Richard H. Levet, J., rendered summary judgment for the United States . From this judgment, Fine Fashions appeals. We find no error, and affirm the judgment.

On April 12, 1957, Penn, a New Jersey manufacturer of women's apparel, was awarded a contract by the United States Military Clothing and Textile Supply Agency to manufacture 24,321 Air Force nurses' uniforms at a total price of $104,555.98. Penn was unable to purchase the necessary cloth on its own credit and asked appellant, a New York dress manufacturer, to purchase the necessary cloth and to furnish it to Penn. Appellant agreed to accommodate Penn by doing so.

On July 1, 1957, Penn and Linde, a New York financing corporation, entered into concurrent agreements. One was an assignment to Linde of all monies due or to become due to Penn under its Government contract. The second was a factoring arrangement under which Linde agreed to purchase Penn's accounts receivable for 75% of their face value; the remaining 25%, less commissions and expenses, was to be collected by Linde and paid to Penn after actual receipt of payment on the accounts.

A conference at the offices of Linde in New York by representatives of Linde, Penn, and Fine Fashions on July 2, 1957 resulted in the delivery of the following letter from Linde to Fine Fashions:

"July 2, 1957

"Fine Fashions, Inc. 1385 Broadway New York City , New York

Re: Penn Garment Company

"Gentlemen:

"We have been directed by Penn Garment Company to retain all moneys received under contract #DA-36-243-QM-(CTM)-33 in the sum of $104,580.32, and which has been assigned to us. The purpose of the foregoing is to accumulate funds for the payment of piece goods purchased from Reeves Bros., and which purchase was guaranteed by you specifically for this contract.

"Funds are to be released only to Penn Garment Company, upon written authorization of your accountant Maurice Seifert, C. P. A. until all said purchase invoices have been paid.

Very truly yours,

LINDE FACTORS CORP.

/s/ Charles Mahler

CHARLES MAHLER

Treasurer"

But instead of guaranteeing Penn's purchases of the cloth from Reeves Bros. as indicated in the "Linde Letter," on October 15, 1957 Fine Fashions actually purchased the cloth in its own name and had it shipped directly from Reeves Bros. to Penn between October 25, 1957 and March 10, 1958. Penn manufactured uniforms from some of the cloth and made partial shipments to the Government, for which Linde, Penn's assignee, received $41,710. On January 16, 1958 Linde turned over $8,979.70 to Fine Fashions, which applied that amount to the $32,010 it owed Reeves Bros. for the purchase of the cloth. Between January 10, 1958 and March 10, 1958, Linde, after securing approval of Fine Fashions' accountant, turned over $25,433.75 to Penn.

[Guarantor v. Purchaser]

On April 1, 1958 the Internal Revenue Service assessed some $40,000 in back taxes against Penn and made a levy and distraint upon the cloth and uniforms still in Penn's possession at its New Jersey plants. Claiming to be the owner of the cloth, Fine Fashions unsuccessfully petitioned the New Jersey District Court to nullify the seizure and to secure return of the cloth. The District Court denied the petition, finding that "[t]he true intent of the parties was that Fine Fashions, Inc. would pledge its credit rating to guarantee payment for the cloth and title would vest in Penn Garment Company." This finding was upheld by the Third Circuit. Fine Fashions, Inc. v. Gross [61-1 USTC ¶9479], 290 F. 2d 871, cert. denied, 368 U. S. 876 (1961).

On April 18, 1958 the United States served a Notice of Levy on Linde for Penn's back taxes. After the date of this levy, Fine Fashions made payments of $17,021.52 and of $6,009.70 to Reeves Bros. to discharge its indebtedness for the cloth. Having appropriated all the money to which it was entitled under its agreement with Penn, Linde, faced with conflicting claims to the $6,409.85 balance of the proceeds from the Government contract, turned over the fund to the United States Attorney.

Section 6321 of the Internal Revenue Code of 1954 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."

Under Section 6322 the lien arises at the time the assessment is made. The threshold question, then, is whether in April of 1958, Penn had any property right in the fund held by Linde to which the tax lien can attach. Since Section 6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law," we must look to state law to determine the nature of Penn's interest in the fund. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958); Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); City of New York v. United States [60-2 USTC ¶9767], 283 F. 2d 829 (2 Cir. 1960).

The fund is situated in New York , and the relevant agreements were made and performed in New York . Indeed, the factoring agreement specifically provided that New York law was to govern. We therefore turn to the law of New York to determine whether Penn has a property interest in the fund held by Linde. Cf. Fidelity & Deposit Co. v. New York City Housing Authority [57-1 USTC ¶9410], 241 F. 2d 142, 144 (2 Cir. 1957).

Appellant concedes on this appeal that though the assignment was absolute on its face, in fact it was merely delivered to Linde "as collateral security for the repayment of advances which Linde would make under the factoring agreement." Appellant also concedes that the letter to it from Linde did not operate as an assignment of Penn's accounts receivable. Thus, the beneficial interest in any money collected from the accounts remained in Penn, subject to Linde's right to deduct commissions and interest on its loan. The "Linde letter" simply served as another collateral security device. Linde was to retain all funds received under Penn's Government contract in order to accumulate funds to pay for the cloth purchased from Reeves Bros. The letter further provided that funds might be released to Penn, but only upon written authorization of appellant's accountant until the cloth was paid for. Appellant thereby sought to insure the availability of Penn's funds against which it could proceed if necessary. The letter did not require Linde to pay anything over to Fine Fashions, nor did it give Fine Fashions title to any funds held by Linde.

Though we have found no New York cases on point, we think that a New York court would find that Penn had a sufficient property interest in the fund held by Linde for a tax lien to attach. Cf. United States v. Long Island Drug Co. [41-1 USTC ¶9140], 115 F. 2d 983, 986 (2 Cir. 1940). Though it is well settled in New York that a contractor who fails to comply with a term in his construction contract requiring the payment of the claims of materialmen and subcontractors, has no property interest in funds retained by the owner of the building unless there is a balance remaining after satisfying the outstanding claims, ¹ the situation here is quite different. So far as appears, Penn has not breached its contract with the Government. The controversy does not concern funds withheld by the Government; rather it concerns funds actually earned and paid over pursuant to the contract. Fine Fashions is not a materialman or subcontractor, but a guarantor of Penn's obligations. The Third Circuit has so found, and we are bound by that determination since it was in issue in prior litigation between the parties. Commissioner v. Sunnen [48-1 USTC ¶9230], 333 U. S. 591, 598 (1948).

[Assignment of Claims Act]

Seeking to avoid the long and strong arm of the federal tax lien, Fine Fashions argues that the "no setoff" provision of the Assignment of Claims Act, ² 41 U. S. C. §15, precludes the United States from levying on the funds in Linde's possession. But the protection of the statute extends only to a Government contractor's assignee that is a "bank, trust company, or other financing institution." Fine Fashions is neither an assignee of a Government contractor nor a financing institution. Appellant's reliance on Chelsea Factors, Inc. v. United States, 181 F. Supp. 685 (Ct. Cl. 1960), to make its way within the ambit of the statute is unconvincing. In that case a bank, which had received an assignment of the proceeds of a Government contract, was found to be a trustee for a factoring corporation, which had also participated in financing the Government contract. The bank had taken the assignment in exchange for loaning the factoring corporation funds with which to finance the contractor. The contractor had given the bank written instructions that all funds collected under the assignment were to be paid to the factor after the bank's deduction of its loan. In upholding the right of the factor to recover a sum owed by the Government under the contract, the Court of Claims determined that the bank constituted the factor's agent or trustee within the meaning of the third proviso of the Assignment of Claims Act. Thus Chelsea Factors involved two financing institutions and the one designated as the assignee was obligated to pay over the balance of the amounts collected from the Government to the other financing party. Here Linde was not the trustee of Fine Fashions within the meaning of the third proviso of the Assignment of Claims Act; Fine Fashions is not a financing institution, nor has it a contractual right to the specific funds held by Linde. Since Linde was not a trustee for Fine Fashions, appellant had no lien on the fund that would take precedence over the tax lien. The judgment of the District Court is affirmed.

¹ United States Fid. & Guar. Co. v. Triborough Bridge Authority [47-2 USTC ¶9327], 297 N. Y. 31, 74 N. E. 2d 226 (1947); Fidelity & Deposit Co. v. New York City Housing Authority, supra; Aetna Cas. & Sur. Co. v. United States [58-2 USTC ¶9778], 4 N. Y. 2d 639, 152 N. E. 2d 225 (1958); Aquilino v. United States [61-2 USTC ¶9571], 10 N. Y. 2d 271, 176 N. E. 2d 826 (1961). Similarly, a debtor who has made as assignment for the benefit of creditors has no property interest in the subject matter of the assignment. City of New York v. United States [60-2 USTC ¶9767], 283 F. 2d 829 (2 Cir. 1960). And future earnings contingent upon the performance of a service contract represent no existing property rights. United States v. Long Island Drug Co., supra.

² The pertinent portions of the Assignment of Claims Act are as follows:

"No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred, so far as the United States are concerned. All rights of action, however, for any breach of such contract by the contracting parties, are reserved to the United States .

"The provisions of the preceding paragraph shall not apply in any case in which the moneys due or to become due from the United States or from any agency or department thereof, under a contract providing for payments aggregating $1,000 or more, are assigned to a bank, trust company, or other financing institution, including any Federal lending agency: Provided, 1. That in the case of any contract entered into prior to October 9, 1940, no claim shall be assigned without the consent of the head of the department or agency concerned; 2. That in the case of any contract entered into after October 9, 1940, no claim shall be assigned if it arises under a contract which forbids such assignment; 3. That unless otherwise expressly permitted by such contract any such assignment shall cover all amounts payable under such contract and not already paid, shall not be made to more than one party, and shall not be subject to further assignment, except that any such assignment may be made to one party as agent or trustee for two or more parties participating in such financing; 4. That in the event of any such assignment, the assignee thereof shall file written notice of the assignment together with a true copy of the instrument of assignment with (a) the contracting officer or the head of his department or agency; (b) the surety or sureties upon the bond or bonds, if any, in connection with such contract; and (c) the disbursing officer, if any, designated in such contract to make payment.

"Notwithstanding any law to the contrary governing the validity of assignments, any assignment pursuant to this section, shall constitute a valid assignment for all purposes.

"In any case in which moneys due or to become due under any contract are or have been assigned pursuant to this section, no liability of any nature of the assignor to the United States or any department or agency thereof, whether arising from or independently of such contract, shall create or impose any liability on the part of the assignee to make restitution, refund, or repayment to the United States of any amount heretofore since July 1, 1950, or hereafter received under the assignment."

[Dissenting Opinion]

MOORE, Circuit Judge (dissenting):

The majority accurately analyze the problem which is "to determine whether Penn has a property interest in the fund held by Linde." To resolve the problem they concede that they "must look to state law [ New York ]." When they look they find "no New York cases on point" and, therefore, they are content to "think that a New York court would find that Penn had a sufficient property interest in the fund held by Linde for a tax lien to attach." In other words, they apply non-existent (on their hypothesis) New York law to a situation requiring such application. But just as my colleagues gaze into the crystal ball entitled, " New York law," and find nothing, to me the answer, if not crystal clear, is definitely recognizable in sharp outline.

The fundamental question, of course, is: did Penn have a property interest in funds in Linde's possession to which the tax lien attached? Or, stated in another way: could Penn have demanded successfully that Linde pay over to it the funds in Linde's possession and enforced any such right by suit? Since the funds were to be released to Penn upon conditions which concededly had not been met, Penn had no claim whatsoever to the funds at the time of the tax levy.

The New York courts have faced and dealt with similar problems sufficiently related to the matter in issue here as to be indicative of the New York law. In United States Fid. & Guar. Co. v. Triborough Bridge Authority [47-2 USTC ¶9327], 297 N. Y. 31, 74 N. E. 2d 226 (1947) a surety which had satisfied the claims of unpaid subcontractors against the contractor-taxpayer challenged the federal tax lien on a fund representing the final payment under a construction contract. The contract between the Bridge Authority and the contractor, in addition to providing for the surety bond, provided that if the contractor failed to pay subcontrators, the Authority had the right to withhold from payments due the contractor sums required to satisfy the subcontractor's claims. The New York Court of Appeals held for the surety, stating that because the subcontractors were unpaid and because the Authority had the right to withhold the sums for the subcontractors, "the contractor had no rights to the fund and, consequently, had no property interest" upon which the Government could place its lien. 297 N. Y. at 37, 74 N. E. 2d at 228. More recently, the New York Court held Triborough Bridge Authority, supra, dispositive in a case involving similar facts. Aetna Cas. & Sur. Co. v. United States [58-2 USTC ¶9778], 4 N. Y. 2d 639, 176 N. Y. S. 2d 961, 152 N. E. 2d 225 (1958). See Fidelity & Deposit Co. v. New York City Housing Authority [57-1 USTC ¶9410], 241 F. 2d 142 (2d Cir. 1957); United States v. Long Island Drug Co. [41-1 USTC ¶9140], 115 F. 2d 983 (2d Cir. 1940); Aetna Cas. & Sur. Co. v. Port of N. Y. Authority [60-1 USTC ¶9372], 182 F. Supp. 671 (S. D. N. Y. 1960); see also In the Matter of Halprin [60-2 USTC ¶9564], 280 F. 2d 407 (3d Cir. 1960).

These cases, along with the Supreme Court decisions in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), and United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960), indicate that the fact that the taxpayer may have a property interest in the residue of a fund after competing claimants have been satisfied, as would Penn once Reeves was paid out of the contract proceeds, is not controlling. Cf. United States v. Toys of the World Club, Inc. [61-1 USTC ¶9303], 288 F. 2d 89 (2d Cir. 1961). ¹ Rather, the central question is whether under state law the taxpayer's right to the fund is contingent or is in some way subordinated to the claims of others. ² Thus, one author, commenting that labels of "ownership" or "lien" are unimportant, suggests that where a debtor could not maintain an action to recover the contested property or fund without first satisfying creditors who helped create the fund, the Government's lien is defeated by the claims of the creditors. See Seligson, Creditor's Rights, 1960 Annual Survey of American Law, 36 N. Y. U. L. Rev. 601, 611 (1961); Note, The Federal Tax Lien, 36 N. Y. U. L. Rev. 1316 (1961). I perceive no legal theory, even were there no tax lien, which would permit Penn, absent appellant's authorization to Linde, to successfully bring an action to recover the contract proceeds unless they first had been applied to satisfy the obligations of the purchase from Reeves.

Because I rely primarily upon Penn's lack of property interest in the fund, there is no need to discuss the effect of the Assignment of Claims Act.

I would reverse the order below and direct that summary judgment be granted in favor of appellant.

¹ In Toys of the World, supra, this court held that an artisan's lien on paper supplied by the taxpayer for a printing contract was superior to the tax lien. The court stated that the competing claimant failed to bring itself within the theory of the Aquilino case since it had a lien on the property, and under New York Law, N. Y. Lien Law §203, the taxpayer had title. Under these facts, quite dissimilar from ours, the panel was constrained to look to form rather than substance, 288 F. 2d at 91, a view not necessary or warranted here. It is significant that although Aquilino had been decided by the Supreme Court when Toys of the World was decided, the New York Court had yet to consider it on remand.

² In Aquilino v. United States [61-2 USTC ¶9571], 10 N. Y. 2d 271, 219 N. Y. S. 2d 254, 176 N. E. 2d 826 (1961), on remand from the Supreme Court, the New York Court held that the taxpayer did not have a sufficient beneficial interest in contract payments except insofar as the claimants, beneficiaries of a statutory trust fund under the predecessor of New York Lien Law §70, were first satisfied. Thus, any residue would be subject to the tax lien. See United States v. Durham Lumber Co. , supra, at 525.

 

 

 

United States of America , Plaintiff v. Talco Contractors, Inc., et al., Defendants

U.S. District Court, West. Dist. N.Y., 93-CV-6389T, 5/7/99

[Code Secs. 6321 , 6323 and 7403 ]

Liens for taxes: Interpleaded funds: Priority: Claims: Perfection of.--Federal tax liens filed on condemnation proceeds owed to a delinquent taxpayer by a state (New York) had priority over the claim of a bank's successor-in-interest to the interpleaded funds. The record established that the bank and the taxpayer intended that the assignment be for collateral/security purposes; the parties' agreement did not constitute an outright assignment of the proceeds. As a result, the successor's position was confined to the original assignment and could not be expanded because the bank failed to perfect its security position. Since the successor merely held an unperfected security interest, the government gained priority by filing valid tax liens against the condemnation proceeds.

DECISION and ORDER

INTRODUCTION

TELESCA, District Judge:

Plaintiff, the United States of America ("United States" or "the government"), moves this Court for an Order directing Payment from the Court's Registry of certain proceeds deposited by the State of New York in satisfaction of the government's lien. Kendamar Corporation ("Kendamar") objects to entry of such an order, arguing that it is entitled to payment of the funds at issue in preference to the government's lien. For the reasons discussed herein, the United States ' motion for payment is granted.

BACKGROUND

A tax dispute between the government and defendant Talco Contractors, Inc. ("Talco") was settled in February of 1997. As part of a "Stipulated Judgment," this Court retained jurisdiction to enforce the terms of the Settlement Agreement ("the Agreement"). The Agreement contemplated the receipt and distribution of funds from a Court of Claims condemnation suit brought by Talco against the State of New York . The Agreement provided, in pertinent part, that Talco would pay the United States the first $400,000 of the proceeds (plus 8% interest), and an additional 50% of any damages recovery after payment of reasonable attorneys' fees and litigation expenses.

In September of 1998, Talco advised this Court that the New York condemnation suit trial had been resolved and that the State of New York had agreed to settle the case for $850,000. Talco further indicated that the total amount of attorneys' fees and litigation expenses amounted to $330,518.24, leaving a balance of $519,481.76.

However, the State of New York insisted upon the release of three recorded liens before it would pay the settlement proceeds to the Court Registry, specifically: (1) an assignment of proceeds initially given by Talco to Chase Manhattan Bank which was ultimately assigned to Kendamar Corp. in the amount of $124,000; (2) a claim filed by Caledonia Lumber; and (3) a tax lien filed by the United States Internal Revenue Service (related to the instant case).

The attorneys for the United States and the defendants both requested that this Court enter an Order to Show Cause why the settlement proceeds should not be released by the State of New York to the Registry of this Court and that all interested parties show cause why the proceeds should not be distributed in accordance with the terms of the Agreement.

By Order dated September 15, 1998, this Court directed the State of New York to issue a check in the amount of $850,000 to the Registry of the court and ordered that the State would be discharged from all liability with respect to the various claims upon payment of the condemnation proceeds. This Court further ordered that the Registry of the Court pay out of said proceeds the following sums: (1) $320,618.24 to Redmond & Parrinello, LLP; (2) $400,000 to the United States of America; (3) $40,690.88 to James S. Grossman, Esq. The remainder of the proceeds, $88,690.88, were to remain in the Registry of the Court pending further Order of the Court.

The United States of America now moves for an Order of Payment from the Court's Registry the balance of the condemnation proceeds, plus any interest accrued thereon. [The only two remaining claimants to the proceeds are the United States and Kendamar.] Although Kendamar has not formally responded to the United States' current motion, its attorney, in a letter to Court, indicated that Kendamar objected to any distribution to the United States, and incorporating by reference Kendamar's response to the August 7, 1998 Order to Show Cause.

DISCUSSION

The government argues that its tax liens have priority over Kendamar's unperfected security interest. In support of its position, the government argues that Talco's assignment to Chase was a collateral assignment made for purposes of providing Chase with a security interest, not an outright assignment of proceeds, and, as such, it was subject to the requirements of U.C.C. Article 9. Because Chase did not file the appropriate financing statement with the Department of State and the County of Monroe , the U.S. argues that Kendamar, as successor in interest to Chase, holds only an unperfected security interest. Thus, since the government filed its notices of federal tax lien in 1993, it asserts that its interest in the remaining proceeds is superior to Kendamar's.

Kendamar argues that the original assignment by Talco to Chase was not only a collateral assignment, but also an outright assignment of proceeds and, accordingly, is not subject to the filing requirements of Article 9.

The Agreement between Talco and Chase provides that "[f]or value received, . . . Talco . . . hereby grants a security interest in and assigns, transfers and sets over unto Chase . . . all of Assignor's right, title and interest in a certain claim of the Assignor . . . and all proceeds of the foregoing." (Emphasis mine.) Although the Agreement appears to refer to both a security interest and an outright assignment, other provisions of the Agreement reflect that this was intended by the parties to be an assignment for collateral purposes. The sixth paragraph of the Agreement provides that "[t]his Assignment is made by Assignor as collateral and security for any and all liabilities of Assignor to Bank . . ." Additionally, the last paragraph on page 1 provides that "[i]f the Condemnation Claim exceeds the Liabilities, Bank will refund the difference to the Assignor." Talco also granted Chase the right to file UCC financing statements without Talco's signature with regard to the Condemnation Claim, which Chase failed to do.

Finally, Chase's Vice President and Senior Counsel, John C. Hart, in letter dated November 12, 1991 to the New York State Comptroller, indicated that "[a]s collateral security of all its obligations to Chase, Talco has assigned all of its right, title and interest in [the Condemnation Claim]." Mr. Hart also stated that "it is my understanding that The Office of the New York State Comptroller is the appropriate venue for filing of the Assignment with the State," citing In re Astoria Blvd., 171 Misc. 1018 (Sup. Ct. Queens County, 1939). ¹

Thus, although the Agreement between Chase and Talco might appear to be ambiguous, it is clear that the parties' intent was that the assignment of the condemnation claim proceeds was for collateral/security purposes and not an outright assignment. Kendamar's position as an assignee of Chase's claim is confined to the original assignment and cannot be expanded because Chase failed to perfect its security position.

The collateral assignment between Talco and Chase was subject to the filing requirements of U.C.C. Article 9 as a general intangible. See N.Y.U.C.C. §9-106 [Defining "general intangible" as "personal property, including things in action"]; §9-401(1)(c) [Setting forth filing requirements for perfection of security interest in general intangibles]. Because Chase did not properly perfect its security interest, the United States gained priority by filing valid tax liens on the condemnation proceeds in 1993. See N.Y.U.C.C. §9-301(1)(b) [Priority of lien creditor over unperfected security interest]. Thus, the United States ' claim has priority over the claim of Kendamar, a successor-in-interest to Chase.

Accordingly, the United States ' motion for an Order of Payment is granted. The Clerk of the Court is hereby directed to forthwith pay over the remaining proceeds held in the Registry of the Court in this action, plus any interest which has accrued thereon, to the United States .

ALL OF THE ABOVE IS SO ORDERED.

¹ I note that the case cited by Mr. Hart, In re Astoria Blvd., is a pre-U.C.C. case. New York adopted the Uniform Commercial Code on April 18, 1962. See N.Y. Session Laws 1962, Chapter 533.

 

 

 

United States of America , Plaintiff v. Harold A. Keats, Defendant

U. S. District Court, So. Dist. Fla., Miami Div., No. 7294-M-Civil, 2/28/58

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Another's property: Liquor license.--A lessor transferred his liquor license to taxpayers, who had leased his premises. The lease provided that they would transfer the liquor license then in force back to the lessor upon termination of the lease for any cause whatever by breach of its terms. Later, the taxpayers abandoned the premises and were delinquent in rent. The Government made a levy on all property in the possession of the lessor, which belonged to taxpayers, including the liquor license. The court held that taxpayers' right to the use of the liquor license was contingent upon their fulfilling the terms of the lease. Upon their default in the terms of the lease, their right to the use of the license reverted to the lessor. Therefore, the taxpayers had no interest in the license upon which the Government could levy.

James L. Guilmartin, United States Attorney, 234 Post Office Building , Miami , Fla. , for plaintiff. Pallot, Cassel, Marks, duPont Building , Miami , Fla. , for defendant.

Findings of Fact and Conclusions of Law

CHOATE, District Judge:

This cause having come on before the Court for trial, without jury, on the 20th day of February, 1958, and the Court having heard the evidence, having examined memoranda of counsel, and being fully advised in the premises thereof, the Court hereby enters the following findings of fact and conclusions of law:

Findings of Fact

1. Plaintiff is the United States of America .

2. Defendant Harold A. Keats resides at 1732 N. E. 16th Terrace, Fort Lauderdale , Florida .

3. In October, 1950, defendant Harold A. Keats leased certain premises known as 824 N. E. 18th Avenue , Fort Lauderdale , Florida , to Edward and Dorothy Brooks. As a condition of the lease, Keats agreed to transfer to the Brooks his liquor license issued for the above premises. Subsequently the application was made and the transfer to Dorothy Brooks was approved by the State Beverage Department.

4. The aforesaid lease provided that upon termination of the lease for any cause whatever by breach of the terms, the lessee would transfer the liquor license (and others) then in force back to the lessor.

5. By August, 1951, the lease was in default and the lessees had abandoned the premises and were delinquent in rent. However, the liquor license was renewed (using defendant's advance of money) by Mrs. Brooks on September 20, 1951.

6. On October 29, 1951, plaintiff made a levy on all property in possession of defendant Harold A. Keats, and belonging to the taxpayers Edward P. Brooks and Dorothy Brooks, trading as Littlebrook Inn, to satisfy a debt of $8,161.84, allegedly owing to plaintiff by said taxpayers for unpaid taxes.

7. On March 3, 1952, the plaintiff made an amended levy on all property in the possession of defendant Harold A. Keats and belonging to the aforesaid taxpayers to satisfy an alleged debt of $5,069.54 then owing to the plaintiff by said taxpayers for unpaid taxes. The property referred to in the possession of the defendant was the aforesaid liquor license.

8. In May, 1952, the taxpayer Brooks filed a voluntary Petition in Bankruptcy. The following September, the Trustee in Bankruptcy petitioned and obtained an order of Referee Earl Curry, authorizing a bankruptcy sale of the liquor license to Keats for the sum of $800.00. Keats had made application to the state for transfer of the license on July 17, 1952, and the transfer was approved by the State Beverage Department on September 24, 1952. Keats subsequently in 1953 transferred the license to others.

9. There has been no showing as to the specific value of the liquor license in question, the one witness saying it had no value in the hands of Brooks where the lease called for its return on default.

Conclusions of Law

1. The Court has jurisdiction of the parties and the subject matter herein.

2. Edward and Dorothy Brooks' right to the use of the liquor license in question was contingent upon their fulfilling the terms of that lease entered into with defendant Harold A. Keats. Upon their default in the terms of the lease, their right to the use of the license reverted to defendant Keats. See House v. Cotton, 52 So. 2, 340 ( Fla. 1951). Therefore the Brooks' had no interest in the license upon which the plaintiff could levy. The reversion of interest to defendant Harold A. Keats was not contingent upon the formal transfer by the State Beverage Department.

3. It would further appear that the sale of the license by the Trustee in Bankruptcy would be free of any lien that plaintiff might have had since plaintiff filed a claim therein. In addition the plaintiff has failed to prove the liquor license had any value, and actually in Brooks' hands after default it had no value.

 

 

 

Honolulu Redevelopment Agency, an agency of the City and County of Honolulu, Plaintiff v. Young Kwong Soy, et al., Defendants, and United States of America, Intervenor

Circuit Court, 1st Circuit, Hawaii, Civil No. 5509, 8/30/60

[1954 Code Sec. 6321]

Lien for taxes: Condemnation award: United States as intervenor.--A default order was entered against the taxpayer which allowed the U. S., as intervenor in a condemnation proceeding between a local government agency and the taxpayer involving property on which the U. S. had a tax lien, an amount of the condemnation award which represented its claim

Ted T. Tsukiyama, Harry T. Tanaka, Vernon T. Tashima, Honolulu Redevelopment Agency, Honolulu , Hawaii , for plaintiff. Louis B. Blissard, United States Attorney, Rex S. Kuwasaki, Assistant United States Attorney, Federal Building, Honolulu, Hawaii, for intervenor.

Findings of Fact and Conclusions of Law

JAMIESON, Circuit Judge:

Default having been entered against all Defendants named in the above entitled action, as evidenced by the Order Entering Default, filed on February 16, 1960, and Entry of Default, filed on May 9, 1960; and

Evidence having been adduced by Plaintiff Honolulu Redevelopment Agency and Intervenor United States of America at a hearing duly held in open Court on August 25, 1960;

The Court makes the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. Plaintiff is a duly authorized and created agency of the City and County of Honolulu, invested with the right, power and capacity to purchase, acquire, condemn and hold all such real property and appurtenances, wherever situated within its jurisdiction, as may be necessary and proper to the exercise of its powers and duties.

2. All preliminary steps required by law have been taken and exist to entitle Plaintiff to maintain these proceedings.

3. The condemnation of Parcel B-81, the real property described in the Complaint heretofore filed herein and delineated upon the map marked Exhibit "B" thereto attached, is necessary for a public use and purpose, to-wit: an urban redevelopment project known as the "Queen Emma Project" (Project No. T. H. R-1), in Honolulu , City and County of Honolulu , State of Hawaii .

4. Said Parcel B-81 constitutes or comprises an entire parcel of land.

5. The owner of record of said Parcel B-81 is Defendant YOUNG KWONG SOY, who acquired said Parcel B-81 by deed dated April 29, 1920.

6. The fair market value of said Parcel B-81, together with all improvements thereon and all appurtenances thereto, is the sum of $11,650.00 as of January 25, 1960, or November, 1959, or February, 1960.

[Tax Claim]

7. The Intervenor UNITED STATES OF AMERICA has a claim for taxes against Defendant YOUNG KWONG SOY in the total sum of $594.67, which includes interest up to and including August 31, 1960, said claim being a lien on said Parcel B-81. Said Intervenor is also entitled to the sum of $70.20, which represents costs and expenses incurred in these proceedings.

Conclusions of Law

1. Plaintiff has the right, power and capacity to condemn Parcel B-81, being the real property described in the Complaint and delineated upon the map marked Exhibit "B" thereto attached.

2. The condemnation of said Parcel B-81 is necessary for a public use and purpose, as set forth in the Complaint and found above.

3. All preliminary steps required by law have been taken and exist in order to entitle Plaintiff to maintain these proceedings.

4. The owner of record of said Parcel B-81 is Defendant YOUNG KWONG SOY.

5. The fair market value of said Parcel B-81, together with all improvements thereon and all appurtenances thereto is the sum of $11,650.00. On January 19, 1960, Plaintiff deposited the sum of $7,250.00 with the Chief Clerk of the above entitled Court to take possession of said Parcel B-81, leaving a balance in the sum of $4,400.00 due and payable by Plaintiff.

[Claim Allowed]

6. The Intervenor UNITED STATES OF AMERICA has a claim for taxes against Defendant YOUNG KWONG SOY in the total sum of $594.67, which includes interest up to and including August 31, 1960, said claim being a lien on said Parcel B-81: Said Intervenor is also entitled to the expenses incurred in these proceedings.

7. A Judgment shall be entered forthwith condemning said Parcel B-81, together with all improvements thereon and appurtenances thereto, for the public use and purpose set forth in the Complaint.

 

 

 

County of Hawaii, by James Kealoha, its Chairman and Executive Officer, Plaintiff v. William Gonsalves, Defendant, United States of America, Applicant for Intervention

Circuit Court of the Third Circuit, State of Hawaii, Law No. 2633, 3/14/60

[1954 Code Sec. 6321]

Tax lien: County condemnation proceedings: Condemned property subject to Federal tax lien.--The amount of compensation payable to the taxpayer for the taking of real property in condemnation proceedings by the County should be paid over to the intervenor, United States of America, to be applied against the satisfaction of the Federal tax lien for delinquent taxes owed by the taxpayer.

Yoshito Tanaka, County Attorney , County Building , Hilo , Hawaii , for plaintiff. Louis B. Blissard, United States Attorney, and Rex S. Kuwasaki, Assistant United States Attorney, Federal Building, Honolulu, Hawaii, for Intervenor.

Decision

MODEN, Judge:

The above entitled cause comes before this Court on the petition of the County of Hawaii by James Kealoha, Chairman and Executive Officer, to acquire for public use the two parcels of land designated as parcels 2 and 3 and described in the petition herein.

The defendant herein having defaulted in filing an answer and his counsel having withdrawn after making an appearance at the time of the hearing and counsel for the intervenor having made an appearance, and a hearing having been held herein, it is the finding of this Court that the defendant William Gonsalves is the owner of said parcels of land and that all the allegations with respect to said parcels of land are true.

The value of said parcels of land and the amount of compensation or damages payable for the taking of said parcels of land is as follows:

Parcel of           Valuation         Severance           Total

Land
                  of 
Land

            Damage           Value

Parcel 2            $50.60          none                $ 50.60

Parcel 3            $64.00          none                $ 64.00

                                                        $114.60

 

In accordance with the evidence adduced, the Court finds that all of the allegations of the petition herein are true and that the fair and just compensation for the taking of the interest of William Gonsalves in said parcels of land is the sum set forth in the above schedule, and that the lien of the intervener United States of America upon the property of defendant William Gonsalves is SEVEN THOUSAND SIXTY-FIVE AND 38/100 DOLLARS ($7,065.38) for taxes, penalty and interest up to February 23, 1960.

Plaintiff has deposited with the Clerk of this Court a check in the sum of ONE HUNDRED EIGHTY-SEVEN AND 40/100 DOLLARS ($187.40), which represents the fair and just compensation for the land designated and described in the petition herein together with interest at the rate of 6% per annum from August 11, 1949.

IT IS THEREFORE THE DECISION OF THIS COURT that the prayer of the petition herein should be and it is hereby granted and that all right, title and interest of defendant William Gonsalves in and to said parcels of land should be condemned in fee simple for the public purpose, to wit: to realign the Papaaloa Homestead Road in the district of North Hilo, County and State of Hawaii, that the sum of ONE HUNDRED EIGHTY-SEVEN AND 40/100 DOLLARS ($187.40) be paid over to the intervener United States of America to satisfy the lien of the intervener upon the property of defendant William Gonsalves, leaving an unsatisfied balance of SIX THOUSAND EIGHT HUNDRED SEVENTY-SEVEN AND 98/100 DOLLARS ($6,877.98), and that the defendant William Gonsalves is therefore indebted to the intervener United States of America in the sum of SIX THOUSAND EIGHT HUNDRED SEVENTY-SEVEN AND 98/100 DOLLARS ($6,877.98).

LET JUDGMENT AND FINAL ORDER OF CONDEMNATION BE ENTERED IN ACCORDANCE WITH THIS DECISION.

 

 

 

In the Matter of the Estate of Bennie Walton, Deceased, United States of America, Appellant v. Ray E. Trussell, as Commissioner of Hospitals of the City of New York, Respondent

N. Y. Supreme Court, Appellate Div., First Dept., 247 NYS2d 21, 2/20/64

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Priority against hospital-creditor: Right of action for damages for personal injuries.--A claim or right of action to recover damages for personal injuries is personal property to which a lien may attach. A federal tax lien which arose before the taxpayer was injured in an accident and hospitalized became choate at the time of the accident and attached to damages later recovered, with priority over the claim of the hospital which could not arise unless and until the injured party was admitted to the hospital.

Anthony J. D'Auria, Assistant United States Attorney, New York, N. Y. (Robert E. Kushner, Assistant United States Attorney, Robert M. Morgenthau, United States Attorney, New York, N. Y., on brief), for appellant. Alfred Weinstein, Municipal Bldg., New York, N. Y., Seymour B. Quel, Assistant Corporation Counsel, Leo A. Larkin, Corporation Counsel, New York, N. Y., Abraham V. Cuba, 66 Court St., Brooklyn, N. Y., for respondent.

STEVENS, Judge:

This is an appeal from a decree of the Surrogate which awarded the balance of the proceeds of a compromised personal injury action to the respondent herein.

On March 20, 1958, one Bennie Walton sustained personal injuries when he was struck by a motor vehicle. He was taken to Harlem Hospital , received treatment, and subsequently a bill for $2,158 for services rendered. Walton died March 23, 1960, at which time the bill had not been paid.

An action, begun during his lifetime to recover damages for injuries suffered in the accident, was compromised by his administratrix by leave of the court. We are here concerned with the balance which remained after payment of funeral and administration expenses and counsel fees. This sum amounting to $1,951.15 constituted the sole asset of Walton's estate, and is claimed by both appellant and respondent by virtue of their respective liens.

The Surrogate concluded the right of action possessed by decedent at the time of death was not property, and the lien of the Department of Hospitals was superior to that of the Federal Government. Accordingly the money should be paid to respondent.

[State and Federal Lien Laws]

The Department of Hospitals rested its claim upon the provisions of section 189 of the Lien Law. That section provides, in part, there shall be a lien upon all rights of action, suits, etc., of any person receiving emergency or in-patient treatment for injuries wrongfully received, and the lien shall attach to any moneys received by suit, settlement or compromise. "The lien of the hospital is for the amount of its reasonable charges for treatment, care and maintenance, at cost rates." (N. Y. Legis, Doc., 1950, No. 65[B]; 1950 Report of N. Y. Law Rev. Comm., p. 54.) It is agreed respondent had taken all steps necessary under section 189 with respect to its lien. The respondent's lien is purely statutory (O'Connor v. Higgins, 82 N. Y. S. 2d 39). The lien of appellant arises also by reason of statute. Under the applicable Federal law it is provided if any person liable for taxes, neglects or refuses to pay such tax after demand, the amount, including interest, penalties, etc., "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." Such lien (as here applicable) "shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time" (U. S. Code, tit. 26, §§ 6321, 6322).

A lien is nothing more than "A charge or security or incumbrance upon property" (Black's Law Dictionary [4th ed.], p. 1072).

The assessment for unpaid income taxes was made upon decedent July 6, 1956, in the amount of $921.82. A notice of lien for the amount was duly filed March 4, 1958 (Lien Law, §240). As of May, 1960, the amount of the lien was $1,190.36.

The earliest date at which respondent's lien could arise would be the date treatment was first received by Walton, that is, March 20, 1958.

[Nature of Right of Action]

The question before us is--which lien has priority? Resolution of this question depends in part upon the nature of a right of action. Is it personal property to which a lien may attach, or can the lien attach only to the proceeds, the fruit of the right of action?

If a right of action be property, such property is created at the moment of wrongful impact with consequential injuries. The Federal lien would attach immediately though the extent of satisfaction must await the amount of recovery, less authorized reductions or recognized priorities. It would thus be first in time because the hospital lien could not arise unless and until the injured party was admitted to the hospital within one week of the injury and some service rendered (Lien Law, §189). For such lien to be effective notice must be given to the party allegedly responsible (Lien Law, §189, subd. 1) and the lien filed in the office of the County Clerk .

One of the characteristics of property, speaking generally, is that it may be freely sold or transferred. Respondent points out that under New York law a claim or right of action to recover damages for a personal injury may not be transferred (Personal Property Law, §41, subd. 1). That fact is not determinative. The statutory provision does not necessarily affect or determine the underlying nature of a right of action. Despite the language of absolute prohibition in section 41 (subd. 1, par. [1]), wherever there is specific statutory authority, the claim is assignable (Workmen's Compensation Law, §29; General Acc. Fire & Life Assur. Corp. v. Zerbe Constr. Co., 269 N. Y. 227; cf. Juba v. General Bldrs. Supply Corp., 7 N. Y. 2d 48; Judiciary Law, §475, attorney's lien whereby he acquires a vested property right; Fair Labor Standards Act, U. S. Code, tit. 29, §216, subd. [b]; 6 C. J. S., Assignments, §33). In law, the existence of the proceeds is only potential, but equity can treat them as realized when the circumstances so warrant.

The reason for the prohibition of transfers of rights of action for damages for personal injuries is not because such rights are not property for they are choses in action and personal property (Matter of City of New York [U. S. A.--Coblentz], 5 N. Y. 2d 300, 308, cert. den. 363 U. S. 841; Black's Law Dictionary [4th ed.]). The reason is grounded in public policy, perhaps involving to some extent the ancient views on champerty and maintenance (see Sedgwick v. Stanton, 14 N. Y. 289, 295), the evil of permitting splitting of causes of action or the fact that, until otherwise provided by law, the right died with the injured party. Possibly the common-law view as now reinforced by statute is a combination of all three.

[Tax Lien First in Time]

Walton's income taxes became due at the time he was required to file his return, and the lien arose when the assessment was filed. Such lien is a continuing one and "covers property or rights to property in the delinquent's hands at any time prior to expiration" of the lien (Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, 267). In the Glass case the lien attached to a debt owed the tax delinquent (cf. Matter of Rosenberg , 269 N. Y. 247).

In United States v. Bess ([58-2 USTC ¶9595] 357 U. S. 51) the insured under a policy of insurance, retained the right to draw down or borrow against the cash surrender value of the policy or to assign the policy. Under New Jersey law the cash surrender value was considered property or a right to property. When the assured died the Government sought, in equity, to recover from the beneficiary of the life policies the amount of income taxes owed by decedent at the time of his death. Recovery was allowed to the extent of the cash surrender value, which value was considered an asset to which the lien attached.

New York law recognizes a right of action as property or a right to property (Matter of City of New York [ U. S. A. --Coblentz], supra). It is not essential that the property be reduced to actual physical possession of the tax delinquent ( United States v. Bess, supra; Glass City Bank v. United States , supra) or that it be fixed in amount or that the delinquent have legal title when the lien attaches (cf. Matter of Rosenberg , supra). The power of Congress to levy and collect taxes cannot be interfered with by the State once the State has declared what is property and has not specifically created exemptions which are thereafter recognized and adopted by Federal statutory or decisional law. (Matter of Rosenberg , supra.)

In Seaboard Sur. Co. v. United States ([62-2 USTC ¶9653], 306 F. 2d 855, 859-860) a perfected Federal tax lien attached immediately to the property rights of a taxpayer under a contract subsequently awarded and before the money was earned. It was there stated "The tax liens were subject only to a prior, choate lien upon these rights." (Cf. Hommes v. Tucson Newspapers [63-2 USTC ¶9808], 324 F. 2d 101.)

A lien becomes choate `when the identity of the lineor, the property subject to the lien, and the amount of the lien are established.'" (United States v. Pioneer Amer. Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 89.) Choate State-created liens take priority over later Federal tax liens ( United States v. New Bruain [54-1 USTC ¶9191], 347 U. S. 81, 86) while inchoate liens do not. The hospital lien by that test was inchoate.

Aquilino v. United States of America (10 N. Y. 2d 271) may be distinguished. By statute the funds received by a contractor from an owner for the improvement of real property constituted trust funds to be applied first for payment of claims of subcontractors, laborers and materialmen, arising out of the improvement. The contractor was determined to be merely a trustee and his beneficial interest extended only to the excess remaining, if any, after such claims are paid (p. 282). Section 189 of the Lien Law does not declare a trust for the benefit of the hospital.

Walton's right of action survived his death (see Decedent Estate Law, §§ 118, 119, 130). The settlement here, however, was the settlement of a claim for personal injuries, not for wrongful death. In the application of the Federal revenue act "state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the statute" (Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513). The Federal lien law "creates no property rights but merely attaches consequences, federally defined, to rights created under state law" (United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55).

Since New York recognizes a right of action as property, the Government's lien, having been duly assessed and filed, became choate upon the occurrence of the accident. It was thus first in time to that of the hospital which subsequently became choate. Being the first in time, under the circumstances here present it became first in right.

We find and conclude that decedent had a property interest in his right of action to which the Federal lien could and did attach. Nor is the hospital lien exempt from priority of the Federal lien (U. S. Code, tit. 31, §191). The order and decree appealed from should be reversed on the law, with costs, the order and decree vacated, and the Federal lien held entitled to priority.

[Concurring Opinion]

RABIN, J. P., MCNALLY, EAGER and STEUER, Judges, concur:

Order and decree unanimously reversed on the law, with costs to appellant, the order and decree vacated and the Federal lien held entitled to priority. Settle order on notice.

 

 

 

Melvin Abrams, Plaintiff v. John T. Fitts, Edward G. Gildersleeve, Jr., United States of America , Defendants

U. S. District Court, West. Dist. Ky. , at Louisville , Civil Action No. C 76-0145 L(A), 1/18/79

[Code Sec. 6323]

Collection of tax: Tax liens: Priority against third parties: Assignment of proceeds of suit.--A federal tax lien had priority over an inchoate assignment of the proceeds of a personal injury action made prior to the filing of the tax lien. Since the tort claim had not been settled at the time of the assignment, the assignee's interest in the proceeds did not constitute a security interest under Code Sec. 6323(h)(1), although a sufficient property interest in the proceeds existed to which a lien could attach. The actual notice that the IRS had of the assignment did not affect the priority of its lien.

Foster L. Haunz, 1603 Kentucky Home Life Bldg., Louisville , Ky. 40202 , for plaintiff. Albert Jones, United States Attorney, Louisville, Ky. 40202, Edward G. Gildersleeve, Jr., 235 Fifth St. Louisville, Ky. 40202, for defendants.

Memorandum Opinion

ALLEN, District Judge:

This action is submitted to the Court on the cross-motions of Melvin Abrams, plaintiff, and the United States of America , defendant, for summary judgment.

Plaintiff Abrams and defendant Fitts were formerly equal partners in a partnership known as Modern Masonry. At the time the partnership dissolved, it had incurred federal tax liabilities. Plaintiff, by agreement with the Internal Revenue Service, paid one-half of the tax liability and agreed to assist the Service in the collection of the balance from Fitts. Fitts, at that time, was engaged in a personal injury action against a third party, and Abrams believed that the proceeds of that action would be sufficient to pay the taxes.

After several months following Abrams' payment of one-half of the liability, the IRS, acting through J. G. Blanford, Revenue Agent, made demands on Abrams for payment of the balance. The balance was $3,748.22, and Abrams made a check jointly payable to Fitts and IRS, which Fitts endorsed to IRS. The check was paid on November 21, 1973. Abrams then advised IRS that he would take an assignment of the proceeds of the personal injury action as security for the note.

Subsequent to the payment of the check, Fitts went into business for himself and accumulated tax liabilities of over $8,000. Tax assessments were levied against Fitts on February 4, July 22, and September 30, 1974, and February 24, 1975. The assessment date, the amount of the assessment and the date of the filing of the tax lien are as follows:

                                            Notice of

                                                 Date

                                           Assessment

Assessment               Amount of         Lien Filed

2/4/74 ........          $2,325.65             2/8/74

7/22/74 .......             403.75            9/26/74

9/30/74 .......           2,623.86            10/3/74

2/24/75 .......             433.86            2/17/75

 

Fitts had signed a promissory note on November 21, 1973 in the amount of $3,748.22 payable to plaintiff. At the bottom of the note, he assigned to the payee the net proceeds of the personal injury suit which he had pending against the Gene B. Glick Company, Inc., et al. in the Jefferson Circuit Court. An order was entered "dismissing-settled" the personal injury suit on January 5, 1975, and subsequent to that time defendant Gildersleeve, the attorney for Fitts, has paid into this Court $1,111.07, which amount Abrams and the United States are both claiming. It should be added, also, that plaintiff has not received anything on the note from defendant Fitts, and that a default judgment has been entered for him against Fitts.

Plaintiff contends that he has a lien against the proceeds in the hands of the Court which is superior to the lien of the United States . He contends that the assignment from Fitts to plaintiff, having been made prior to the assessments and tax liens filed by the IRS, is entitled to superiority. He cites In Re Swan-Finch Oil Corp. [67-2 USTC ¶9267], 279 F. Supp. 386 (D. C. N. Y. 1967); United States v. Mark Alpha Brickwod Company [62-1 USTC ¶9354], 202 F. Supp. 673 (D. C. N. Y. 1962); and Peoples Bank v. United States [51-1 USTC ¶9296], 98 F. Supp. 874 (D. C. Ga. 1951), reversed on other grounds, [52-2 USTC ¶9407] 197 F. 2d 898.

The Government, on the other hand, contends that there is a question as to whether an assignment of proceeds of a personal injury action is valid under Kentucky law, and even if it is valid, the lien of the plaintiff is inchoate and unfair to the projected lien of the United States, even though it arose earlier in point of time. Reliance is had especially upon the case of United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954).

Both parties agree that there is no Kentucky case specifically deciding the issue of whether or not the proceeds of a tort claim may be assigned, although both are agreed that an unliquidated claim for personal injury cannot be assigned. Wittenauer v. Kaelin, 288 Ky. 679, 15 S. W. 2d 461 (1929). This Court is of the opinion that under the subsequent case of State Farm Mutual Automobile Insurance Company v. Roark, 517 S. W. 2d 737 (Ky. 1975), which is to the same effect as Wittenauer, there are situations where a third party can acquire an interest in the recovery of a personal injury claim as distinguished from the prosecution of such a claim. The Court holds that the assignment of the proceeds of the tort claim is valid.

Since United States v. New Britain, supra, was decided, the Federal Tax Lien of 1966 was adopted and important changes were made in 26 U. S. C. 6323(a) and (h). These changes are discussed at length in an excellent opinion by Chief Judge Foley in the case of Nevada R. & S. Co. v. United States Dept. of Treasury I. R. S. [74-2 USTC ¶9617] 376 F. Supp. 161 (D. C. Nev. 1974). Judge Foley points out that the Federal Tax Lien Act is an effort on the part of Congress to conform the tax lien laws to concepts developed in the Uniform Commercial Code, hereinafter U. C. C., `in order to take into account the changed nature of commercial transactions since 1913.'" See 376 F. Supp. at p. 168.

As Judge Foley points out, Congress, by enacting the 1966 Act, and particularly by adopting the definition of "security interest" in Section 6323(h)(1) and the definition of a "purchaser" under Section 6323(h)(6), has somewhat changed and modified the doctrine of choateness which was developed in United States v. New Britain, supra, and United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). See, also, United States v. R. F. Ball Construction Company [58-1 USTC ¶9327], 355 U. S. 587 (1958), which created great doubt as to whether any security interest in accounts receivable or contract rights could successfully compete with a federal tax lien.

Title 26 U. S. C. Sec. 6323(a) provides as follows:

"The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirement of subsection (f) has been filed by the Secretary or his delegate."

Title 26 U. S. C. Sec. 6323(h)(1) provides as follows:

"The term 'security interest' means may 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 first question to be answered by the Court is whether or not the taxpayer has property or rights to property to which the tax lien may attach. In answering that question both federal and state courts look to state law; however, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which determines the priority of competing liens asserted against the taxpayer's property or rights to property. See Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-514 (1960).

Under the decisions in Nevada R. & S. Co. v. United States Dept. of Treasury I. R. S. supra; United States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264 (8th Cir. 1972); and Centex Construction Company v. Kennedy, 332 F. Supp. 1213 (S. D. Tex. 1971), a sufficient property interest remained in Fitts at the time of the filing of the tax assessments and notice of the federal tax lien to reach the assignment of any proceeds of claims that might be realized from the tort claim which Fitts had against a third party.

As stated in Nevada , supra, cases decided since the enactment of the Federal Tax Lien Act have predominately characterized, in appropriate situations, the IRS as an U. C. C. lien creditor.

We next turn to a discussion of whether or not the federal tax liens are under federal law and priority over the unrecorded assignment. While the Kentucky case of Spurlin v. Sloan, 368 S. W. 2d 314 (Ky. 1963) holds that an assignment may not be recorded under the U. C. C. since it is not a security interest which is entitled to be recorded under the U. C. C. and, therefore, takes precedence over the subsequently executed attachment lien, it is not determinative of the question involved here, in view of the specific language of 26 U. S. C. Sec. 6323(h) and federal case law pertaining to choateness.

We believe that if the tort claim had been settled prior to the filing of the federal tax lien, it would have been perfected and entitled to priority over the federal tax lien. See footnote 17 on p. 172 of 376 F. Supp., Nevada , supra. However, in the instant case, the interest held by the plaintiff in the unsettled tort claim does not rise to the dignity of a security interest as defined in 26 U. S. C. Sec. 6323(h)(1), inasmuch as the proceeds of the claim here not in existence and the claim had not been settled. The fact that IRS had notice of the agreement between plaintiff and Fitts does not determine the matter, since, in determining the priority of federal tax liens and nonfederal tax liens, although the common law principle of first-in-time is first-in-right controls, the first-in-time must be specific and perfected in the federal sense.

The case at bar may be distinguished from Hammes v. Tucson Newspapers, Inc. [63-2 USTC ¶9808], 324 F. 2d 101 (9th Cir. 1963) decided prior to the adoption of the Federal Tax Lien Act., where it was held "that an assignee's right under an assignment of principal payments due under a land sale agreement was choate and entitled to priority over a federal tax lien where the identity of the assignee, the property subject to the assignment and the amount of the principle due were established prior to recordation of the tax lien."

The difference between that case and the case at bar is that the property subject to the assignment was in existence prior to the federal tax lien filing, whereas, in the case at bar, the property was not in existence until after the filing. In this connection it should be noted that House Report No. 1884, 89th Congress, 2nd Session, 1966, at p. 35, states as follows:

"Under decisions of the Supreme Court a mortgagee, pledgee, or judgment creditor is protected at the time notice of the tax lien is filed if the identity of the lienor, the property subject to the lien, and the amount of the lien are all established at such time . . . Except as otherwise provided, subsection (a) of new section 6323 retains this basic rule of Federal law. . . ."

Plaintiff has contended in his brief that the assignment of the tort claim proceeds is analogous to a pledge. If one accepts this rationale, the language contained in the preceding paragraph becomes quite relevant and requires, among other things, that the property subject to the lien and the amount of the lien be established at the time of the recording of the notice of tax lien. Here, no one knew what the amount to be recovered by Fitts as a result of his tort claim would be, and no one could say with any certainty that the case would be settled or that a judgment would be rendered in his favor.

While the Federal Tax Lien Act of 1966 was intended to liberalize the harshness of the choateness doctrine developed by the Supreme Court in cases such as United States v. R. F. Ball Construction Company, supra, it is the opinion of the Court that it was not the intention of Congress to permit a party to allow an inchoate assignment in a situation such as that which is involved in the case at bar to prevail over a federal tax lien which came into existence prior to the existence of any funds as to which the assignment related. We note particularly the following language found in Nevada , supra, at p. 167:

"But from Crest and Ball, it seems that, under the judicial doctrine, a competing non-federal claim is choate and entitled to priority if, at the time the federal tax lien arises, the performance of the secured party is complete, the accounts receivable are due and the accounts are definitely ascertainable. See United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963); Note, 52 Minn. L. Rev., supra, at 202; Annotation, 94 A. L. R. 2d 748, 790."

The Court has this day entered a summary judgment on behalf of the United States .

 

 

 

Glenn O. Lee, Plaintiff v. Ernest W. Mack and Helen R. Legg, Defendants

New York Supreme Court, Tompkins County, No. 12-1681, 182 NYS2d 391, 1/30/59

[1954 Code Secs. 6321 and 6332]

Lien for taxes: Effect on taxpayer's right to sue for recovery of alleged debt.--The existence of a Federal tax lien against the plaintiff did not serve to assign or otherwise transfer to the United States his recognized property rights in an alleged debt due him from the defendants or to his right of action thereon. All the lien actually creates in the United States is a protected right, in its order of priority, to the net proceeds of any judgment which may later be recovered by the plaintiff. Accordingly, the plaintiff was a real party in interest and possessed of the capacity to sue for recovery of the alleged debt.

John LoPinto, Ithaca , N. Y., for plaintiff. Bruce G. Dean, Ithaca , N. Y., for defendants.

ZELLER, Supreme Court Justice:

This is a motion made pursuant to Rules 109(6) and 103 of the Rules of Civil Practice by plaintiff Glenn O. Lee to strike the second affirmative defense from the answer of defendants Ernest W. Mack and Helen R. Legg on the respective grounds that the asserted defense is insufficient in law, and that it is irrelevant, sham, frivolous and prejudicial to a fair trial of plaintiff's actions.

Plaintiff's complaint adequately sets forth two causes of action for work, labor, services and materials furnished by plaintiff at defendants' request for certain repairs and improvements to real property located at 415 W. Buffalo Street, Ithaca, New York.

The defense here under attack alleges the service on defendants by the Treasury Department of a Notice of Federal Tax Lien against plaintiff for a sum substantially in excess of the value of plaintiff's asserted claims against defendants. Because the Final Demand subsequently served by the Treasury Department contained a direction requiring defendants to pay any sum due plaintiff to the United States of America, it is defendants' contention in this defense that the United States thereby has the full title and ownership of the claims being asserted by plaintiff's complaint so that plaintiff is neither a real party in interest nor possessed of the capacity to sue the claims. Defendants' conclusions are based primarily on sections 6321 and 6332 of the Internal Revenue Code which respectively provide for placing a lien upon all property and rights to property of any person delinquent in payment of an assessed tax, and impose a penalty on any person in possession of or obligated with respect to property or rights to property of a delinquent taxpayer and who fails or refuses to surrender the same to the Treasury Department on its demand. The United States has neither intervened in or otherwise been made a party to this action.

To sustain this defense in bar to plaintiff's causes of action it would be necessary to ignore several considerations deemed controlling in these particular circumstances. In the first place, the defense is untenable on its face as the very assertion of the lien itself and the language of the statutes cited in defendants' answer both presume not only plaintiff's ownership of the debt here in litigation but also, and even more basically, the actual existence of a debt in favor of the plaintiff. ( United States v. New Britain, 347 U. S. 81 [54-1 USTC ¶9191]; Aquilino v. United States of America and Colonial Sand and Stone Co., Inc., 2 App. Div. (2d) 747(3) [57-1 USTC ¶9659], leave to appeal denied, 2 App. Div. (2d) 810(2); Matter of Herlihy, 274 App. Div. 342.) Although the lien's existence could serve to make the government a proper party to this action, it does not assign or otherwise transfer ipso facto to the United States the plaintiff's recognized property rights in the alleged debt or to the right of action thereon. (U. S. Code, tit. 28, §2410; Aquilino v. United States of America and Colonial Sand and Stone Co., Inc., supra; Matter of Herlihy, supra; 53 C. J. S., Liens, §1.) All the lien per se actually creates in the United States government is a protected right, in its order of priority, to the net proceeds of any judgment which may be recovered subsequently by plaintiff. (Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449]; Marteney v. United States, 245 Fed. (2d) 135 [57-1 USTC ¶9670]; United States v. Preferred Contractors, 122 Fed. Supp. 219 [54-1 USTC ¶9352]; Matter of Bartyzel v. Przybylo, 7 Misc. 2d 628 [58-1 USTC ¶9439]; Matter of Lavenburg v. Universal Sportswear, 198 Misc. 318; see, Lien Law, §240.) It is therefore obvious that the lien in this instance has no direct defensive relation to plaintiff's causes of action.

Defendants' answer and its other defenses raise issues concerning the work to have been performed under the contract, the agreed price, the extent of plaintiff's performance under the agreement, the reasonable value of the work, services and materials actually furnished by plaintiff in the property improvement and payment. A trial of these issues is necessary to determine whether any obligation upon which the government's lien can attach runs from these defends to this plaintiff. To extend the theory of defendants' second defense to its logical and necessary conclusion results in placing on the government the burden of being both the sole plaintiff and advocate for recovery on such claims of its tax debtors. This result is inconceivable for many patent reasons and could serve to prejudice by inaction the tax debtor's right to have his contested claims resolved. This right alone is sufficient to make this plaintiff a proper party in interest in this action.

Plaintiff's action for judgment liquidating his claims against these defendants is properly pursued in this forum for determination under the laws of this state. (Civ. Prac. Act, §210; Bensinger v. Davidson, 147 Fed. Supp. 240 [57-1 USTC ¶9263]; United States v. Haddock, 144 Fed. Supp. 720 [56-2 USTC ¶9979].) Defendants' second asserted defense should be stricken on plaintiff's motion because it is not only irrelevant to plaintiff's present action but also because it is insufficient in law to constitute a bar to plaintiff's claims under the respective provisions of Rules 103 and 109(6) of the Rules of Civil Practice.

Plaintiff should be granted motion costs.

Submit order accordingly.

 

 

 

In re Johnetta Wadkins Anderson, Eddie Lee Anderson, Debtors

U.S. Bankruptcy Court, East. Dist. Ky., Lexington, 96-51395, 4/18/2000

[Code Secs. 6321 , 6323 and 6871 ]

Tax liens: Bankruptcy: Preferential payments: Recovery by trustee: Attachment of tax lien: Priority: Administrative costs.--

The IRS's tax lien against a debtor for an unpaid trust fund recovery penalty attached to personal injury proceeds payable to the debtor upon settlement of her case and payment of the funds to her attorney. Since the lien was in existence before the case was settled, it had priority with respect to proceeds that had been disbursed by the debtor to third parties and that were later recovered by the bankruptcy trustee as preferential transfers. Although the IRS's claim was secured to the extent of the recovered funds, the tax lien was subordinate to the administrative expenses incurred by the trustee, including commissions and attorneys' fees.

James D. Lyon, Trustee. David Middleton, Assistant United States Attorney, Lexington, Ky. 40507, Charles H. Keen, Department of Justice, Washington, D.C. 20530, for I.R.S.

MEMORANDUM OPINION

LEE, Bankruptcy Judge:

This case is before the court on the objection of the chapter 7 trustee to allowance of the claim of the Internal Revenue Service ("IRS") as a secured claim.

FINDINGS OF FACT

The IRS has filed two claims, claim no. 8 and claim no. 14, which amends claim no. 8 and reduces the claim of the IRS to $4,519.65, of which $3,569.88 is claimed as secured and $947.77 is admittedly unsecured.

The secured portion of the claim represents a 100% civil penalty assessed August 17, 1987 against Johnetta Watkins for withholding taxes owed for the tax period ending September 30, 1986. The court infers from the record that prior to 9/30/86 Johnetta Wadkins was the responsible party of a business and failed to remit taxes withheld from the wages of employees.

On October 10, 1987 the IRS caused to be recorded in the Fayette County Clerk's office a tax lien notice for unpaid withholding taxes in the amount of $5,126.72. This tax lien, which would have expired on 9/16/93, unless renewed, was renewed by a new notice of tax lien filed in the Fayette County Clerk's office on 6/24/93, again in the amount of $5,126.72. The latter lien was in effect against Johnetta Wadkins when she and her present husband, Eddie Lee Anderson, filed a joint petition for relief under chapter 7 of the Bankruptcy Code in this court on July 8, 1996.

Apparently some of this tax obligation has been paid because claim no. 14 fixes the amount of withholding taxes presently owed by Johnetta Wadkins and secured by the IRS lien as $3,569.88.

In 1994, prior to bankruptcy, and apparently prior to her marriage to Eddie Lee Anderson, Johnetta Wadkins suffered personal injuries in an automobile accident. In January 1995 she filed an action in the Fayette Circuit Court, Civil Action No. 95-CI-392, for damages for personal injuries suffered in the automobile accident. Prior to bankruptcy the suit was settled for $35,000, excluding $10,000 for Personal Injury Protection ("PIP") which she received in 1994 and 1995. The lawsuit was dismissed as settled on April 17, 1996.

Between the date of the settlement of the personal injury action in April of 1996 and the date of bankruptcy on July 8, 1996, numerous payments were made to creditors from the settlement proceeds and perhaps from other sources of income.

On September 26, 1996 the chapter 7 trustee filed an adversary proceeding against Craig A. Banta, M.D. to avoid as preferential a payment in the amount of $3,550 made to Dr. Banta on April 15, 1996. The complaint alleges that on January 24, 1996 the debtors assigned to Dr. Banta $3,550 of the personal injury settlement proceeds in satisfaction of an antecedent debt in that amount and that the payment made on April 15, 1996 was pursuant to the January 24, 1996 assignment. Dr. Banta's answer to the complaint in the adversary proceeding reveals the assignment was recorded on January 30, 1995 in the Fayette County Clerk's office, Book 230 at page 258, and that the $3,550 payment was made by counsel for Ms. Wadkins from the settlement proceeds prior to delivery of any of the settlement proceeds to Ms. Wadkins.

The trustee's adversary proceeding against Dr. Banta was settled by the payment by Dr. Banta of $2,000 to the bankruptcy estate. After notice and a hearing, there being no objections, the settlement was approved by the court on December 17, 1996.

It appears from the record the trustee may have recovered without suit $500 from Pam Miller in Satisfaction of an alleged preferential payment of $1,000. The trustee has recovered a total of $2,500 of the disbursements made by the debtors from the settlement proceeds. Many of the disbursements made by the debtors were payments of less than $600 on consumer debts, which the trustee is precluded from recovering by title 11 U.S.C. §547(c)(8), and which are for amounts too small to warrant attempts at recovery under the Kentucky preference statute KRS 378.060 and KRS 378.070, as made applicable by title 11 U.S.C. §544(b). See Amended Statement of Financial Affairs, Item 10, filed by debtors on October 11, 1996, Docket No. 23-1, and Amendment to Statement of Financial Affairs, Item 4, filed by debtors on July 30, 1996, Docket No. 14-1.

The IRS takes the position it has a prior lien on the proceeds of these preference recoveries, as evidenced by its filed tax liens.

CONCLUSIONS OF LAW

It seems unlikely the statutory lien of the IRS under title 28 U.S.C. §6321 would attach to a debtor's rights in a personal injury action prior to settlement of the case. However, once the case was settled and the settlement monies were paid to counsel for the debtor, the lien would have attached to the debtor's rights in the settlement monies at that point in time. Consequently, the IRS lien attached prior to the disbursement of these monies to Dr. Banta and Ms. Miller.

Therefore, when the trustee recovered as preferential a portion of the payments disbursed to Dr. Banta and Ms. Miller, the monies so recovered are subject to the IRS lien which attached to the monies prior to bankruptcy. The IRS claim is secured to the extent of the amount of such monies recovered by the trustee.

However, pursuant to title 11 U.S.C. §724, the IRS lien on these funds recovered by the trustee is subordinate to the administrative expenses in the case, to wit, the trustee's commissions and the fee of the attorney for the trustee.

 

 

 

James J. Bottom, et al., Plaintiff-Appellant v. United States of America , Defendant-appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 79-3590, 11/24/80, Affirming District Court, 79-2 USTC ¶9504

[Code Sec. 6321]

Lien for taxes: Property subject to lien: Personal injury settlement fund.--A settlement fund payable to a debtor for personal injuries sustained in an automobile accident constituted property to which a lien could attach. Personal injury settlements are not exempted from levy under federal statutes.

Anthony T. Dittmeier, 2 West Benson St. , Cincinnati , Ohio 45215 , for plaintiff-appellant. James C. Cissell, United States Attorney, Cincinnati, Ohio 45202, M. Carr Ferguson, Assistant Attorney General, Gilbert Andrews, Crombie J. D. Garrett, Joan I. Oppenheimer, Department of Justice, Washington, D. C. 20530, for defendant-appellee.

Before ENGEL, MERRITT, and KENNEDY, Circuit Judges.

Order

This appeal has been referred to a panel of the Court pursuant to Rule 9(a), Rules of the Sixth Circuit. After examination of the briefs and record, this panel agrees unanimously that oral argument is not needed. Rule 34(a), Federal Rules of Appellate Procedure.

Plaintiff is appealing the District Court's finding that a settlement fund payable to plaintiff for personal injuries sustained in an automobile accident is subject to levy by the Internal Revenue Service. Plaintiff relies primarily on In re Schmelzer, 480 F. 2d 1074 (6th Cir. 1974), for his argument that the personal injury award is not subject to judicial process under Ohio law and therefore it cannot be subject to levy.

This Court's interpretation of the effect of Ohio law on the Bankruptcy Act has no effect on this case. It is established that the collection of federal taxes should be prior to any rights of the state to exempt its citizens from federal taxing power. Herndon v. United States [74-1 USTC ¶16,127], 501 F. 2d 1219, 1223 (8th Cir. 1974). Only the federal exemption statute can exempt property from a federal levy. 26 C. F. R. §301.6334(c); Herndon v. United States , supra at 221. Personal injury settlements are not exempted from levy by the federal exemption statute. 26 U. S. C. §6334(a).

It is therefore Ordered that the judgment of the District Court be affirmed pursuant to Rule 9(d)3, Rules of the Sixth Circuit, because the questions on which the decision depends are so unsubstantial as not to need further argument.

 

 

Solomon Fried, Plaintiff-Appellee v. New York Life Insurance Company, Defendant-Appellee and United States of America , Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket Nos. 23968, 23969, 241 F2d 504, 2/15/57, Reversing an unreported decision of the District Court

[1939 Code Sec. 3670--substantially unchanged in 1954 Code Sec. 6321]

Tax lien: Attachment of disability benefits: Effect of state exemption law.--Monthly disability benefit payments to which a delinquent taxpayer had a contractual right were subject to a lien for taxes. A state law exempting such payments from execution for "any debt or liability of the insured" is ineffective against a federal lien for taxes. There was no merit in the contention that the monthly benefits could not be attached because they were similar to the proceeds of a life insurance policy.

Morris K. Siegel (Morris K. Siegel, Vincent J. Crowe, on brief), New York City , for plaintiff-appellee. Charles K. Rice, Acting Assistant Attorney General, Lee A. Jackson, Robert N. Anderson, John J. Kelley, Jr., Dept. of Justice, Washington, D. C., Leonard P. Moore, United States Attorney, Elliott Kahaner, Assistant United States Attorney, for defendant-appellant.

Before SWAN, MEDINA and WATERMAN, Circuit Judges.

WATERMAN, Circuit Judge:

Solomon Fried, born Dec. 16, 1898, took out five policies of life insurance on his life with New York Life Insurance Company between June 8, 1922 and February 8, 1930, naming his wife to be the beneficiary thereof upon his death. The total face amount of these policies is $25,000. Fried reserved the right to change the beneficiary. The policies were Twenty-Payment Life policies, and at all times material here were in full force and effect.

Fried also paid twenty additional annual premiums under each policy contract in excess of the premiums required to insure his life, in return for which the insurance company contracted to pay Fried, if he should become totally and presumably permanently disabled before age 60, a total of $250 each month that such disability continued. Each policy further provided that Fried during his lifetime, and without the consent of the beneficiary named by him to receive the policy proceeds upon his death, could receive every benefit, exercise every right, and enjoy every privilege conferred upon the insured.

In December, 1951, the Bureau of Internal Revenue assessed income tax deficiencies against Fried in the sum of $263,174.69, representing alleged deficiencies for the years 1944, 1945, 1946, 1947, 1948 and 1949.

[Attachment of Disability Benefits]

New York Life Insurance Company was promptly served that month with a notice of an income tax lien. In January, 1952, a copy of the lien was filed, warrants of distraint were issued, and levy was made upon the company. In March, 1952, a final notice and demand was served upon it.

On November 2, 1953, Fried became totally and presumably permanently disabled. The insurance company admitted its contract liability to pay him $250 each month from that date forward as long as he remained so disabled, but declined to make payment because of the government's levy. Fried sued. New York Life sought to have the United States joined as a necessary party because of the levy. This was done and Fried's suit was then removed to the U. S. District Court [54-2 USTC ¶9625]. In the meantime the insurance company also declined to turn over any of these monthly payments to the government and the United States sued it under 26 U. S. C. A. §3710 for non-compliance with the levy, notice and demand. Fried was then joined as a defendant in this second suit; the two suits were consolidated; New York Life paid into court the disability benefit payments that had by them accrued; Fried and the United States each moved for summary judgment. Fried's motion was granted and the government appeals.

The sole question before us is whether the income tax lien attaches to these monthly disability benefit payments. The Court below held that it did not. We hold otherwise, reverse the judgment below, and direct that judgment be entered for the United States .

It is admitted that Fried had a contractual right to these sums each month which the insurance company could not defeat. Therefore (unless prevented by some limitation upon it) the government by proper levy could require that these sums be applied upon Fried's delinquent taxes. The sufficiency of the undertakings of the government to prevent these payments from coming into the possession of Fried and to be so applied upon his delinquent taxes is not questioned.

[Effect of State Exemption Law]

The Court below held that a limitation upon the power of the United States to enforce its lien does exist and that the government is prevented from reaching these monthly avails of these insurance contracts because under a New York statute these sums are not "liable to execution for the purpose of satisfying any debt or liability of the insured." ¹ It is well settled law, however, that State exemption statutes are ineffective against a Federal statutory lien for federal taxes.

Kieferdorf v. Commissioner of Internal Revenue, 142 Fed. (2d) 723, 725 (9 Cir. 1944) [44-1 USTC ¶9323]; cert. denied, 323 U. S. 733, 65 S. Ct. 69 (1944), 89 L. Ed. 588; Kyle v. McGuirk, 82 Fed. (2d) 212, 213 (3d Cir. 1936) [36-1 USTC ¶9121]; Shambaugh v. Scofield, 132 Fed. (2d) 345 (5th Cir. 1942) [42-2 USTC ¶9826]; Cannon v. Nicholas, 80 Fed. (2d) 934, 935 (10th Cir. 1935) [35-2 USTC ¶9672]; Jones v. Kemp, 144 Fed. (2d) 478, 480 (10th Cir. 1944) [44-2 USTC ¶9410].

The New York Court of Appeals agrees that New York may not interfere with the power of Congress to levy, and then to collect, federal taxes on income. In re Rosenberg 's Will, 269 N. Y. 247 (1935), 199 N. E. 206, 105 A. L. R. 1238 [35-2 USTC ¶9650]; certiorari denied, 298 U. S. 669, 56 S. Ct. 834, 80 L. Ed. 1392.

A similar New York statute expressing the same state policy of protecting a disabled person's disability benefit payments from creditors' levies ² was held ineffective against the federal tax lien in U. S. v. Ocean Accident & Guarantee Corporation, Ltd., 76 Fed. Supp. 277 (S. D. N. Y. 1948) [48-1 USTC ¶9178].

If Congress had provided in the Internal Revenue Code for such an exemption, or if Congress had adopted as exemptions under the Code the exemptions set forth under State law, the holdings relied upon by the court below in Fink v. O'Neil, 106 U. S. 272, 1 S. Ct. 325, 27 L. Ed. 196 and in Custer v. McCutcheon, 283 U. S. 514, 51 S. Ct. 530, 75 L. Ed. 1239, might have been applicable, but no such provisions appear. ³

In fact the language of the House Ways and Means and Senate Finance Committees contained in their respective Committee Reports to their respective Houses of Congress with reference to Section 6334(c) of the I. R. C. of 1954 demonstrate that no such provisions were even contemplated when the 1954 Code was under consideration. ⁴

Finally it is argued upon appeal that these regularly recurring sums due and payable month after month to this living delinquent taxpayer as long as he lives, sums that will cease being payable upon his death, are similar to the "proceeds" of a life insurance policy due and payable to a beneficiary after the death of an insured delinquent taxpayer, and that our holding in Rowen v. Commissioner, 215 Fed. (2d) 641 [54-2 USTC ¶9581], requires us to affirm the decision below. We find this contention difficult to comprehend. In Rowen, 215 Fed. (2d) 641 at 649 [54-2 USTC ¶9581], we stated that the New York statute applicable to our decision in that case was not an exemption statute but a statute declaratory of a substantive right. In support of that rationale we compared the provision of the applicable statute there with the provision of the statute applicable here, and we there pointed out that the statute involved here is an express exemption provision. We also clearly indicated that the Kieferdorf case would be followed by us whenever an express exemption provision should be before us. And also see United States v. Truax, 223 Fed. (2d) 229, 231 (5th Cir. 1955) [55-1 USTC ¶9486]. We find no substance whatever to this contention.

Reversed, and it is ordered that judgment be entered for the United States below.

¹ Article 7, Section 166, paragraph 2 of New York Insurance Law (Book 27, McKinney 's Consolidated Laws of New York, Ann.) reads as follows:

"§166 * * *

"2. No money or other benefits payable or allowable under any policy of insurance against disability arising from accidental injury or bodily infirmity or ailment of the person insured, shall be liable to execution for the purpose of satisfying any debt or liability of the insured, whether incurred before or after the commencement of the disability, except as provided in subsection four, and except * * *"

The second paragraph of Section 166 was enacted into law as Section 55-b of the New York Insurance Law and was entitled as follows: "Exemption of disability insurance from execution." Chapter 626, Laws of 1934, New York State .

² Article 2, Section 33 of New York Workmen's Compensation Law (Book 64, McKinney 's Consolidated Laws of New York, Ann.) was the statute involved. It reads as follows:

"§33. Assignments; exemptions

"Compensation or benefits due under this chapter shall not be assigned, released or commuted except as provided by this chapter, and shall be exempt from all claims of creditors and from levy, execution and attachment or other remedy for recovery or collection of a debt, which exemption may not be waived. Compensation and benefits shall be paid only to employees or their dependents, except * * *"

³ 26 U. S. Code, 1952 ed. Sections 3691 and 3692 read as follows:

"Sec. 3691. Property Exempt from Distraint.

(a) Enumeration.--There shall be exempt from distraint and sale, if belonging to the head of a family--

(1) School books and wearing apparel.--The school books and wearing apparel necessary for such family; also

(2) Arms.--Arms for personal use;

(3) Livestock.--One cow, 2 hogs, 5 sheep and the wool thereof, provided the aggregate market value of said sheep shall not exceed $50;

(4) Fodder.--The necessary food for such cow, hogs, and sheep, for a period not exceeding thirty days;

(5) Fuel.--Fuel to an amount not greater in value than $25;

(6) Provisions.--Provisions to an amount not greater than $50;

(7) Household furniture.--Household furniture kept for use to an amount not greater than $300; and

(8) Books and tools of trade or profession.--The books, tools, or implements, of a trade or profession, to an amount not greater than $100."

"Sec. 3692. Levy.

In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy."

26 U. S. Code, Section 6334 of the 1954 Internal Revenue Code, reads as follows:

"Sec. 6334. Property Exempt from Levy.

(a) Enumeration.--There shall be exempt from levy--

(1) Wearing apparel and school books.--Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

(2) Fuel, provisions, furniture, and personal effects.--If the taxpayer is the head of a family, so much of the fuel, provisions, furniture, and personal effects in his household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $500 in value;

(3) Books and tools of a trade, business or profession.--So many of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $250 in value.

* * *

(c) No Other Property Exempt.--Notwithstanding any other law of the United States , no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."

26 U. S. Code, Section 6331 of the 1954 Internal Revenue Code reads as follows:

"Sec. 6331. Levy and Distraint.

(a) Authority of Secretary or Delegate.--If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. * * *

(b) Seizure and Sale of Property.--The term 'levy' as used in this title includes the power of distraint and seizure by any means. In and case in which the Secretary or his delegate may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible)."

⁴ In the Report of the House Ways & Means Committee (House Report No. 1337, 83rd Congress, 2d Session, at pp. A408-A409) and in the Report of the Senate Finance Committee (Senate Report No. 1622, 83rd Congress, 2d Session, at pp. 577-578) the identical language appears, as follows:

"Subsection (c) of this section states that no property or rights to property, other than the properties specifically made exempt in this section, shall be exempt from levy by reason of any other law of the United States . Provisions of State law cannot grant an exemption from levy, and this subsection makes it clear that no other provision of Federal law shall exempt property from levy. This section is not intended to make any change with respect to the status of life insurance policies insofar as levy thereon is concerned." (Italics added.)

 

 

 

Investment and Securities Company, a Corporation, Appellant, v. United States of America , Appellee

(CA-9), United States Circuit Court of Appeals for the Ninth Circuit, No. 10,531, 140 F2d 894, February 16, 1944

On appeal from the District Court of the United States for the Eastern District of Washington, Northern Division.

Property subject to lien: Stockholders' claim against bank.--Where taxpayers had a claim against an insolvent bank which claim was subject to a lien for unpaid taxes, the Court holds that the subsequent assignment of the claim to a third party did not make the tax lien inferior to that of the third party, that the property was subject to a tax lien, and that the notice required by statute to make the lien effective against third parties was duly recorded in the taxpayer's domicile (Wisconsin) and need not be recorded in Washington where the insolvent bank was situated. The Court further holds that since there is no federal statutory provision as to a period of limitations on the judgment, the liability of the tax now merged in the judgment has not become unenforceable by reason of lapse of time. Affirming District Court decision, 49 Fed. Supp. 620, reported at 43-1 USTC ¶9453.

Witherspoon, Witherspoon and Kelley, William V. Kelley, Spokane , Wash. , for appellant. Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, A. F. Prescott, Edward H. Horton and Maryhelen Wigle, Special Assistants to Attorney General, Washington, D. C. (Edward M. Connelly, U. S. Attorney, Harvey Erickson, Assistant U. S. Attorney, Spokane, Wash., of counsel), for appellee.

Before WILBUR, GARRECHT and HEALY, Circuit Judges.

GARRECHT, Circuit Judge:

[The Facts]

On February 18, 1934, the United States of America made an assessment for income taxes for the year 1928, against Judson G. Rosebush, a resident of Wisconsin , in the amount of $37,220.85. Notices of tax lien were filed with the Clerk of the United States District Court of Wisconsin and with the Register of Deeds for Outagamie County , Wisconsin , during April, 1934.

On April 20, 1937, Judson G. Rosebush submitted an offer of $820 for shares in the Inland Empire Paper Company of Spokane , Washington . At this time, Rosebush was indebted to the appellant, Investment and Securities Company of Spokane , Washington , in the amount of $76,749, on two promissory notes which had been transferred to the appellant as the collection and liquidating organization for the benefit of depositors of the Old National Bank of Spokane , Washington . The Inland Empire Paper Company stock was security for this indebtedness and was being sold by the appellant. At the time Rosebush made his offer to purchase the Inland Empire Paper Company stock, the appellant corporation had discovered that Rosebush had paid up his assessments on certain shares he owned in the Exchange National Bank of Spokane , Washington , and that said bank was planning to pay its creditors in full and pay something to its former shareholders. So, when Rosebush made this bid for the paper company stock, the Investment and Securities Company attempted to get an assignment of his claim against the Exchange National Bank and threatened to bring legal action against Rosebush. To avoid being sued and in consideration of the opportunity to reacquire his stock in the Inland Empire Paper Company, Rosebush finally assigned to the appellant corporation, on July 27, 1937, any recovery which might be made on the assessment paid to the Exchange National Bank. Said assignment was made subject to the prior lien of the United States for income taxes.

In the same year, 1937, the United States brought action in the District Court for the Eastern District of Wisconsin against Rosebush for the nonpayment of taxes; on November 26, 1941, judgment was entered against Rosebush in the amount of $37,220.85.

On November 27, 1941, the United States Attorney for the Eastern District of Wisconsin caused a writ of fieri facias to be issued, commanding the United States Marshal of the Eastern District of Washington to levy on property of Rosebush in his district on account of the said judgment, and the writ was duly served on the Shareholders Agent of the Exchange National Bank of Spokane for the unpaid taxes.

The present action was commenced by Charles P. Robbins, Shareholders' Agent of the Exchange National Bank of Spokane , Washington , in the nature of an interpleader. The agent paid $4,250 into court and prayed that all parties interested be joined to determine the ownership of the funds, and be enjoined from suing the said agent therefor.

The lower court found that the rights of the Investment and Securities Company under the assignment were junior to the tax lien of the United States Government.

The assignment in issue here contained the following statement:

"* * * It is understood that the Collector of Internal Revenue has filed an Order of Distraint against the party of the second part and that this assignment is subsequent and junior to any lien against said recovery that said Collector of Internal Revenue may have acquired by virtue of such Order of Distraint."

There was considerable correspondence between the Investment and Securities and Rosebush, in which Rosebush and the corporation made it very clear that the rights of the Investment and Securities Company would be junior to the rights of the United States Government.

The appellant contends that the federal tax lien was never established in Washington . The statutory provisions with respect to filing of this tax lien are:

§3670. Property Subject to Lien. (Title 26, U. S. C. A.) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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. 53 Stat. 448.

§3671. Period of Lien.

Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of iapse of time. 53 Stat. 449.

§3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

(a) Invalidity of lien without notice.

Such a lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

(1) Under State or Territorial laws.

In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice; or

(2) With the clerk of the District court.

In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law provided for the filing of such notice; or

* * * * * * *

In the absence of the required notice, the Government's lien is valid as to all except those above enumerated. It should be noted that the word "pledgee" was not in the statute prior to 1939, and therefore would not apply to the rights acquired by this assignment in 1937. The lower court found that appellant did not come within any of the above exceptions and we are in accord with this finding.

Nevertheless, the notice required by statute to make the lien effective as to third parties was duly recorded as required by the statute. The taxpayer here is a resident of Wisconsin and the notice of lien was duly recorded there. The appellant's contention that the recording should have been in the State of Washington rather than Wisconsin , the taxpayer's domicile, is in error.

The appellant contends that the rights of the Government are barred here by the Statute of Limitations. The assessment list was received by the Collector of Internal Revenue February 18, 1934; the action for collection of the taxes was begun in 1937, and within the period of limitations. Judgment was entered in 1941. There is no federal statutory provision as to a period of limitations on this judgment; it follows that in the absence of such a limitation a tax can be collected at any time; therefore, the liability of the tax now merged in the judgment has not become unenforcible by reason of lapse of time.

As to whether the property in question is subject to a government lien, this court has already determined that point. See Citizens National Trust and Savings Bank of Los Angeles , 9 Cir., 135 Fed. (2d) 527 [43-1 USTC ¶9426]; George Nelson et al. v. United States, 9 Cir., (November 23, 1943, No. 10453), 139 Fed. (2d) 162 [43-2 USTC ¶9648].

We conclude there is no error and the judgment appealed from is affirmed.