Owed to the Taxpayer page5
Seaboard Surety Company, a New York Corp., and
Hansen & Rowland, Inc., a Washington Corp., Appellants v. United
States of America, Appellee
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,
, 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
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
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.
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
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
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
(4) That under the rule
announced in United States v. Liverpool & London & Globe
Insurance Co., 1954, [55-1 USTC ¶9136] 348
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.
In their complaint
". . . 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.
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
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.
, 1954, [54-1 USTC ¶9191] 347
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
, 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.
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.
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
. 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
(plus accrued interest as
provided by law)
The district court found and concluded that this assignment (Ex. 5) did
not in fact take place until April 8, 1957.
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.
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:
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."
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
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.
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.
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
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
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.
, O. (Sol Goodman, Goodman & Goodman, Theodore M. Berry,
, O., on brief), for Appellants. David O. Walter,
, D. C. (Charles K. Rice, Lee A. Jackson,
Henry Kutz, Carolyn R. Just,
, D. C., Hugh K. Martin, Richard H. Pennington,
, O., on brief), for Appellee.
Before MARTIN, Chief Judge,
ALLEN, Circuit Judge, and MATHES, District Judge.
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
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
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
Upon the findings of fact
and conclusions of law made by District Judge Druffel, the judgment is
Fine Fashions, Inc., Plaintiff-Appellant v.
United States of America
, Defendant-Appellee, and Linde Factors Corp., Defendant
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
Leonard M. Wallstein, Jr.,
Baar, Bennett & Fullen, 29 Broadway,
, 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
claims the fund under a tax lien against
The facts were stipulated, and the District Court, Richard H. Levet, J.,
rendered summary judgment for the
. From this judgment, Fine Fashions appeals. We find no error, and
affirm the judgment.
On April 12, 1957, Penn, a
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
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
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
A conference at the offices
of Linde in
by representatives of Linde, Penn, and Fine Fashions on July 2, 1957
resulted in the delivery of the following letter from Linde to Fine
"Fine Fashions, Inc.
New York City
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
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.
LINDE FACTORS CORP.
/s/ Charles Mahler
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
[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
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
On April 18, 1958 the
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:
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount . . . shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person."
Section 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],
51, 55 (1958); Aquilino v. United States [60-2 USTC ¶9538], 363
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
, and the relevant agreements were made and performed in
. Indeed, the factoring agreement specifically provided that
law was to govern. We therefore turn to the law of
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
cases on point, we think that a
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
591, 598 (1948).
of Claims Act]
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.
Fid. & Guar. Co. v.
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;
Cas. & Sur. Co. v.
[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.
The pertinent portions of the Assignment of Claims Act are as follows:
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
are concerned. All rights of action, however, for any breach of such
contract by the contracting parties, are reserved to 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.
any law to the contrary governing the validity of assignments, any
assignment pursuant to this section, shall constitute a valid assignment
for all purposes.
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
Circuit Judge (dissenting):
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
]." When they look they find "no
cases on point" and, therefore, they are content to "think
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)
law to a situation requiring such application. But just as my colleagues
gaze into the crystal ball entitled, "
law," and find nothing, to me the answer, if not crystal clear, is
definitely recognizable in sharp outline.
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.
courts have faced and dealt with similar problems sufficiently related
to the matter in issue here as to be indicative of the
Fid. & Guar. Co. v.
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
Authority, supra, dispositive in a case involving similar facts.
Cas. & Sur. Co. v.
[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
Cas. & Sur. Co. v.
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.
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
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.
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.
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
, supra, at 525.
United States of America
, Plaintiff v. Talco Contractors, Inc., et al., Defendants
District Court, West.
Dist. N.Y., 93-CV-6389T, 5/7/99
Secs. 6321 , 6323
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
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
' motion for payment is granted.
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
. 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
condemnation suit trial had been resolved and that the State of
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
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
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.
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
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.
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
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
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
' claim has priority over the claim of Kendamar, a successor-in-interest
' 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
ALL OF THE ABOVE IS SO
I note that the case cited by Mr. Hart, In re Astoria Blvd., is a
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
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
, for plaintiff. Pallot, Cassel, Marks,
, for defendant.
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:
1. Plaintiff is the
United States of America
2. Defendant Harold A.
Keats resides at 1732 N. E. 16th Terrace,
3. In October, 1950,
defendant Harold A. Keats leased certain premises known as
824 N. E. 18th Avenue
, 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.
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 (
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
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
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,
, for plaintiff. Louis B. Blissard, United States Attorney, Rex S.
Kuwasaki, Assistant United States Attorney, Federal Building, Honolulu,
Hawaii, for intervenor.
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
at a hearing duly held in open Court on August 25, 1960;
The Court makes the
following Findings of Fact and Conclusions of Law:
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
, City and
, State of
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.
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.
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.
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
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.
, for plaintiff. Louis B. Blissard, United States Attorney, and Rex S.
Kuwasaki, Assistant United States Attorney, Federal Building, Honolulu,
Hawaii, for Intervenor.
The above entitled cause
comes before this Court on the petition of the
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
Parcel 2 $50.60 none $ 50.60
Parcel 3 $64.00 none $ 64.00
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
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
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.
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
, received treatment, and subsequently a bill for $2,158 for services
rendered. Walton died March 23, 1960, at which time the bill had not
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
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
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.
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
One of the characteristics
of property, speaking generally, is that it may be freely sold or
transferred. Respondent points out that under
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. ),
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
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.
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
265, 267). In the Glass case the lien attached to a debt owed the
tax delinquent (cf. Matter of
, 269 N. Y. 247).
In United States v. Bess
([58-2 USTC ¶9595] 357
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
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.
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 (
v. Bess, supra; Glass City Bank v.
, supra) or that it be fixed in amount or that the delinquent have
legal title when the lien attaches (cf. Matter of
, 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
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
84, 89.) Choate State-created liens take priority over later Federal tax
v. New Bruain [54-1 USTC ¶9191], 347
81, 86) while inchoate liens do not. The hospital lien by that test was
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
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
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
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
S. District Court, West. Dist.
, 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.,
, for plaintiff. Albert Jones, United States Attorney, Louisville, Ky.
40202, Edward G. Gildersleeve, Jr., 235 Fifth St. Louisville, Ky. 40202,
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:
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
. 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
[54-1 USTC ¶9191], 347
Both parties agree that
there is no
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
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.
v. New Britain, supra, was decided, the Federal Tax Lien of 1966
was adopted and important changes were made in 26
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.
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
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.
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
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
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
As stated in
, 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
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.,
, 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
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
, 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
84, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963); Note, 52
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
Glenn O. Lee, Plaintiff v. Ernest W. Mack and Helen
R. Legg, Defendants
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
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.
, N. Y., for plaintiff. Bruce G. Dean,
, N. Y., for defendants.
ZELLER, Supreme Court
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
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
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. (
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
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
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
Submit order accordingly.
In re Johnetta Wadkins Anderson, Eddie Lee
Bankruptcy Court, East.
Dist. Ky., Lexington, 96-51395, 4/18/2000
Secs. 6321 , 6323
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
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
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,
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.
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
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
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.
, 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.
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
law and therefore it cannot be subject to levy.
This Court's interpretation
of the effect of
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.
, 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
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
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.
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
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
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.
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.
Commissioner of Internal Revenue, 142 Fed. (2d) 723, 725 (9 Cir.
1944) [44-1 USTC ¶9323]; cert. denied, 323
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
The New York Court of
Appeals agrees that
may not interfere with the power of Congress to levy, and then to
collect, federal taxes on income. In re
's Will, 269 N. Y. 247 (1935), 199 N. E. 206, 105 A. L. R. 1238
[35-2 USTC ¶9650]; certiorari denied, 298
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
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
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
Article 7, Section 166, paragraph 2 of New York Insurance Law (Book 27,
'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,
Article 2, Section 33 of New York Workmen's Compensation Law (Book 64,
's Consolidated Laws of New York, Ann.) was the statute involved. It
reads as follows:
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 * * *"
Code, 1952 ed. Sections 3691 and 3692 read as follows:
"Sec. 3691. Property
Exempt from Distraint.
shall be exempt from distraint and sale, if belonging to the head of a
(1) School books and
wearing apparel.--The school books and wearing apparel necessary for
such family; also
(2) Arms.--Arms for
(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
(5) Fuel.--Fuel to an
amount not greater in value than $25;
to an amount not greater than $50;
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."
Code, Section 6334 of the 1954 Internal Revenue Code, reads as follows:
"Sec. 6334. Property
Exempt from Levy.
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
, no property or rights to property shall be exempt from levy other than
the property specifically made exempt by subsection (a)."
Code, Section 6331 of the 1954 Internal Revenue Code reads as follows:
"Sec. 6331. Levy and
(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)."
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
. 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,
United States of America
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.
and Kelley, William V. Kelley,
, 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:
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
, 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
, during April, 1934.
On April 20, 1937, Judson
G. Rosebush submitted an offer of $820 for shares in the Inland Empire
Paper Company of
. At this time, Rosebush was indebted to the appellant, Investment and
Securities Company of
, 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
. 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
, 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
for income taxes.
In the same year, 1937, the
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
, 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
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
. The statutory provisions with respect to filing of this tax lien are:
Subject to Lien. (Title 26,
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.
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.
against mortgagees, pledgees, purchasers, and judgment creditors.
of lien without notice.
lien shall not be valid as against any mortgagee, pledgee, purchaser, or
judgment creditor until notice thereof has been filed by the collector--
State or Territorial laws.
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
the clerk of the District court.
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
* * * * * *
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
and the notice of lien was duly recorded there. The appellant's
contention that the recording should have been in the State of
, 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
, 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].
conclude there is no error and the judgment appealed from is affirmed.