Insurance page2

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Conclusions

(1) On the interpleader counterclaim, summary judgment is to be entered adjudging that Flynn as trustee in bankruptcy of Mrs. Klebanoff is entitled to the insurance proceeds.

(2) On the interpleader counterclaim, Mutual is entitled to recover out of the interpleaded sum its costs, reasonable counsel fees and expenses--limited strictly to the interpleader counterclaim proceedings.

(3) Adjudication of the federal tax claims against the bankrupt estate of Mrs. Klebanoff is to proceed in the Bankruptcy Court.

(4) On the interpleader counterclaim, final judgment is directed to be entered pursuant to Rule 54(b), there being no just reason for delay.

Rule 54(b) Certificate

With respect to the issues determined by summary judgment on the interpleader counterclaim pursuant to a Memorandum of Decision filed this date and to which this Certificate is appended, it is

CERTIFIED, in accordance with Rule 57(b), Fed. R. Civ. P.:

(1) That the Court has directed the entry of final judgment on the interpleader counterclaim; and

(2) That the Court has determined there is no just reason for delay.

¹ 28 U. S. C. §1332(a) and (c); Rule 22(1), Fed. R. Civ. P.; 3 Moore 's Federal Practice ¶22,04[2], at 3012-3013 (2d ed. 1964).

² Mutual, as part of its answer, also pleaded a set-off counterclaim, alleging indebtedness by the insured to Mutual arising from unpaid premiums and from loans on certain of the policies resulting from their lapse for non-payment of premiums. This set-off counterclaim has been withdrawn by Mutual in view of the stipulation entered into by all parties in connection with the instant motion for partial summary judgment.

³ Also reserved for later determination, by agreement of all parties, is the claim of the United States based on federal tax liens against Mrs. Klebanoff for alleged unpaid income taxes, interest and penalties totalling $66,617.32 for the taxable years 1960 and 1961 of both Klebanoffs. The Court allowed the United States to intervene as a plaintiff, pursuant to Rule 24(a), Fed. R. Civ. P., and to file its complaint in intervention, subject to a stipulation entered into by counsel for all parties, including the United States, that all proceedings on the complaint in intervention be held in abeyance until 20 days after the Court's determination of the pending motion for partial summary judgment which was filed prior to the motion of the United States for leave to intervene. See infra pp. 34-37.

⁴ 11 U. S. C. §110(a)(5)(1952). The United States Code will not be cited hereafter when referring to the Bankruptcy Act.

⁵ Burlingham v. Crouse, 228 U. S. 459, 471-473 (1912); 4 Collier on Bankruptcy §70.23(a) (14th ed. 1961).

⁶ Burlingham v. Crouse, supra note 5; Everett v. Judson, 228 U. S. 474 (1912); 4 Collier on Bankruptcy §70.23, at 1183-1184 (14th ed. 1961).

⁷ Mutual's Answers to Interrogatories, par. 17, filed September 19, 1963 in response to Plaintiff's Interrogatories, par. 17, filed August 17, 1963.

⁸ Holden v. Stratton, 198 U. S. 202 (1904); 1 Collier on Bankruptcy §6.03 (14th ed. 1961).

⁹ Pearl v. Goldberg, 300 F. 2d 610 (2 Cir. 1962). The policy in the Pearl case had a limited endowment feature (although otherwise a life insurance policy). The Court of Appeals rejected the argument of the trustee in bankruptcy that this feature took the policy outside the protection of Section 38-161.

¹⁰ Even if the insurance policies were not exempt under Connecticut law, the trustee's rights to the policies would be governed exclusively by the insurance proviso of Section 70(a)(5) since the policies had cash surrender value at the time the bankruptcy petition was filed. Burlingham v. Crouse, supra note 5.

¹¹ 4 Collier on Bankruptcy §70.23, at 1198 (14th ed. 1961) and cases there cited.

¹² 4 Collier on Bankruptcy §70.15, at 1034 (14th ed. 1961).

¹³ Allen v. Home National Bank, 120 Conn. 306, 180 Atl. 498 (1935); O'Connell v. Brady, 136 Conn. 475, 72 A. 2d 493 (1950); Connelly v. Wells, 142 Conn. 529, 115 A. 2d 444 (1955); cf. United States v. McWilliams, 234 F. Supp. 117 (D. Conn. 1964).

¹⁴ Allen v. Home National Bank, supra note 13, at 310-311.

¹⁵ In Smith v. Gilbert, 71 Conn. 149, 14 Atl. 284 (1898), the court, in holding that a son's legacy or distributive share to become due from his father's estate after termination of the mother's life estate was a remainder interest so remote and uncertain that it was not open to attachment, stated (Id. at 154-155):

"In conformity with the settled policy of this State, that all the property of a debtor should be holden for the payment of the debts of its owner, our courts have construed the language of these statutes as rendering liable to attachment certain legal and equitable interests in property, the absolute or legal title to which property is not in the debtor, but which interest is within his control and can be fairly appraised or sold; as the interest of one partner in the co-partnership property, the interest of a certui que trust in real estate, an equitable interest in shares of stock, a mortgagor's equity of redemption, and such other interests in goods or lands, whether legal or equitable, as, with justice to both debtor and creditor may, in the manner provided by statute, be appropriated to the payment of the former's debts. Punderson v. Brown, 1 Day, 93, 96; Davenport v. Lacon, 17 Conn. 275; Johnson v. Conn. Bank, 21 id. 148, 156; Bunnell v. Read, ibid. 586; Middletown Savings Bank v. Jarvis, 33 id. 372, 379.

"We have, however, never held that an uncertain interest, incapable of just appraisal, and possibly of no value, may be thus sequestered for the creditor's doubtful benefit, and we think we ought not to so hold. When an interest which may be strictly neither goods nor land is nevertheless clearly property, capable of being fairly sold and appraised, which is subject to the debtor's control, and which ought to be responsible for his debts, we say that the policy of the State for two hundred and fifty years clearly indicates that such interest is attachable property within the meaning of the statute. But the same reasoning which has induced our courts to place such a construction upon the language of our statutes, leads us to the conclusion that the defenant's interest in his father's estate is not attachable within the meaning of the law. While it is unjust that one should keep from his creditors property which can be fairly sold or applied to the satisfaction of his debts, it is equally unjust that a creditor should seize and destroy an interest of his debtor which is so uncertain and contingent that it cannot be fairly sold or appraised. The policy of the law justifies the extension of the right to attachment to property which, though not strictly within the letter, is within the equity of the statute. I does not justify such an extension of that rights as will be likely to result in the destruction of a paternal gift which can be of no present value to any one, and may never be of value to the debtor or his assignees." In Humphrey v. Gerard, 83 Conn. 346, 77 Atl. 65 (1910), the right which one may have to recover for improvements made upon real estate under a mistaken belief as to the title, although "an equitable right . . . which charges the land with a lien which courts of equity will upon proper occasion recognize, and by appropriate process enforce," was held not open to a levy of execution upon the realty, or interest therein, to satisfy plaintiffs' judgment; nor could such right be reached by a judgment lien and its foreclosure, which is merely another mode of accomplishing the result formerly attained by levy of executor. The court said ( Id. at 356):

"But not all interests in property can be appropriated by a levy of execution upon the property. That of a mortgagee cannot. Huntington v. Smith, 4 Conn. 235, 237; McKelvey v. Creevey, 72 id. 464, 467, 45 Atl. 4; Pettus v. Gault, 81 Conn. 415, 419, 71 Atl. 509. In like manner an interest which is so indeterminate, uncertain, or contingent that it is incapable of being appraised or sold with fairness to both the debtor and creditor, may not be thus levied upon."

¹⁶ Humphrey v. Gerard, supra note 15, at 356; Smith v. Gilbert, supra note 15, at 155.

¹⁷ E.g. Allen v. Home National Bank, supra note 13, at 309-311; Connelly v. Wells, supra note 13, at 535.

¹⁸ Ibid.

¹⁹ Plaintiff argues with considerable force that prior to the death of the insured her interest in the ultimate proceeds of the policies was so uncertain as to be beyond the reach of the trustee in bankruptcy. The main thrust of this argument, however, goes to the marketability of her interest on August 22, 1962 and not to its transferability. In applying Section 70(a)(5) to similarly uncertain interests (interests of bankrupt managing agent of life insurance company in renewal commissions) the Court of Appeals for this Circuit some years ago, in In Re Wright, 157 Fed. 544, 545 (1907), distinguished between marketability and transferability:

"Now, it is of little importance whether the bankrupt and the insurance company, jointly or separately, might interfere with the trustee in realizing upon these interests. If they are property which can by any means be transferred. the creditors of the bankrupt are entitled to the benefit of them, however little they may bring: marketability and assignability are quite distinct."

The Court recognizes that the Referee in Bankruptcy, in denying plaintiff's petition to declare null and void liens obtained by Tradesmens against the policies (supra, pp. 7-8), held that prior to the death of the insured, plaintiff had no interest in the policies to which a lien could attach. The Referee's ruling, even if it were binding on this Court, determined, in the context in which it was made, only that plaintiff's interest was not then subject to attachment, not that it was not transferable. Supra, pp. 22-24.

²⁰ It is arguable that the Superior Court injunctions might be construed as impairing plaintiff's power to transfer her interest in the insurance on the date the bankruptcy petition was filed. No more weight should be given to the injunctions in determining the transferability of plaintiff's interest than was given the Superior Court attachments of that interest in determining whether the interest was open to levy. Supra, pp. 22-24.

²¹ In Re Judson, 188 Fed. 702, 705 (S. D. N. Y. 1911), aff'd on other grounds, 192 Fed. 834 (2 Cir. 1912), aff'd, 228 U. S. 474 (1912). See also Walter v. Johnson, 34 F. 2d 598 (3 Cir. 1929), cert. denied, 280 U. S. 598 (1930).

²² 4 Collier on Bankruptcy §70.07, at 986 (14th ed. 1961).

²³ 4 Collier on Bankruptcy §70.09, at 999 (14th ed. 1961).

²⁴ Tradesmens' Brief, p. 1.

²⁵ Id, at 18-19.

²⁶ Tradesmens procured its lien on July 6, 1962, within four months of the filing of the bankruptcy petition against both Klebanoffs. On July 6, 1962 both Klebanoffs were insolvent Tradesmens' liens on the policies, therefore, are null and void under Section 67(a) of the Bankruptcy Act.

²⁷ See generally, 3 Moore 's Federal Practice ¶22.16, at 3051-3054 (2d Ed. 1964).

²⁸ A Connecticut state court has discretion to tax costs and to allow counsel fees and disbursements, payable out of the fund or property, in an action in the nature of an interpleader. Conn. Gen. Stat. §52-484 (1958).

²⁹ Bank of China v. Wells Fargo Bank & Union Trust Co., 209 F. 2d 467, 476-477 (9 Cir. 1953), 48 A. L. R. 2d 172.

³⁰ A/S Kreditt Bank v. Chase Manhattan Bank, 303 F. 2d 648 (2 Cir. 1962); Schirmer Stevedoring Co., Ltd. v. Seabord Stevedoring Corp., 306 F. 2d 188, 194-195 (9 Cir. 1962); Bank of China v. Wells Fargo Bank & Union Trust Co., supra note 29; Mutual Life Ins. Co. v. Bondurant, 27 F. 2d 464 (6 Cir. 1928).

³¹ Schirmer Stevedoring Co., Ltd. v. Seabord Stevedoring Corp., supra note 30, at 193-195.

³² Mutual's counsel state in their brief: "Mutual seeks only an amount for such legal services as are related to the interpleader. Itemized time records have been kept by counsel, which will facilitate a proper allocation to the interpleader claim."

³³ Schirmer Stevedoring Co., Ltd. v. Seabord Stevedoring Corp., supra note 30, at 193-195.

³⁴ Supra note 3.

The deficiency notice to Mrs. Klebanoff stated:

"The deficiency in tax is being assessed against you under the provisions of existing internal revenue laws applicable to bankruptcies the receiverships. Accordingly, no petition for redetermination may be filed with the Tax Court of the United States after the adjudication of bankruptcy or the appointment of a receiver."

³⁵ Supra note 3.

³⁶ 3 Collier on Bankruptcy §64,470[2], at 2212 (14th ed. 1964). There is some authority indicating that the second proviso applies to taxes secured by valid liens. Texas v. Porter, 74 F. 2d 269 (5 Cir. 1934), cert. denied, 294 U. S. 727 (1934); Matter of Florence Commercial Co., 19 F. 2d 468 (9 Cir. 1927), cert. denied, 275 U. S. 542 (1927); 3 Collier, op. cit. supra, ¶64,403, at 2149-2150.

³⁷ 3 Collier, op. cit. supra, §64.407[1], at 2186. Accord, Cohen v. United States [40-2 USTC ¶9799], 115 F. 2d 505 (1 Cir. 1940), where the court held that the second proviso gives the Bankruptcy Court exclusive plenary power to determine the amount or legality of any tax assessed against the bankrupt.

³⁸ 2 Collier on Bankruptcy §23.04[2], at 453 (14th ed. 1964) and cases there cited. The summary jurisdiction of the Bankruptcy Court in this regard is in no way diminished by the grant of plenary jurisdiction to United States District Court in Section 23(a) of the Bankruptcy Act.

³⁹ Rule 54(b):

"When more than one claim for relief is presented in an action, whether as a claim, counterclaim, crossclaim, or third-party claim, or when multiple parties are involved, the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. In the absence of such determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties."

⁴⁰ 6 Moore 's Federal Practice ¶¶ 54.40, 54.41[1], 56.20[3], 56.20[4], 56.21[1] (2d ed. 1953). certifies.

⁴¹ 6 Moore 's, op. cit. supra ¶54.37; Republic of China v. American Express Co., 190 F. 2d 334, 338-340 (2 Cir. 1951).

⁴² Backus Plywood Corp. v. Commercial Decal, Inc., 317 F. 2d 339, 341 (2 Cir. 1963), cert. denied, 375 U. S. 879 (1963). Cf. Original Ballet Russe v. Ballet Theatre, 133 F. 2d 187, 189 (2 Cir. 1943); Leonidakis v. International Telecoin Corp., 208 F. 2d 934, 935-936 (2 Cir. 1953); Cott Beverage Corp. v. Canada Dry Ginger Ale, Inc., 243 F. 2d 795, 796 (2 Cir. 1957).

⁴³ Dyer v. MacDougall, 201 F. 2d 265, 267 (2 Cir. 1952).

⁴⁴ Schwartz v. Eaton, 264 F. 2d 195, 196-197 (2 Cir. 1959).

 

 

 

United States of America , Plaintiff v. Colby Academy ; Aetna Casualty and Surety Company; Normesh Construction Corporation; Roger W. Kohn; and Jack Du Boff Associates Inc., Defendants

U. S. District Court, East. Dist. N. Y., No. 77 C 2163, 524 FSupp 931, 9/10/81

[Code Sec. 6323]

Lien for taxes: Priority: Assignment of future interest: Mechanic's lien: New York law: Summary judgment.--Because the taxpayer's assignment of its right to receive insurance proceeds created only an equitable interest in the assignee under New York law, federal tax liens had priority over the claim of the assignee. Thus, summary judgment was granted as to the first three liens filed, resulting in the U. S. receiving over 99% of the insurance proceeds. However, the assignee was to be given an opportunity to document its claim that it had perfected a valid mechanic's lien against the proceeds after the government's third lien was filed but before the subsequent U. S. liens were filed. If it succeeded in establishing the existence of a mechanic's lien, it would be entitled to summary judgment as to the remaining proceeds.

Edward R. Korman, United States Attorney, Michael G. Cavanaugh, Assistant United States Attorney, and Karen B. Brown, Department of Justice, New York, N. Y. 10007, for plaintiff. Harold N. Eder, 21 E. 40th Street, New York, N. Y., Roger S. Haber, Kraditor & Haber, 595 Madison, New York, N. Y., for defendants.

Memorandum and Order

NEAHER, District Judge:

This is an action brought by the United States of America ("the government") to enforce certain tax liens assessed against taxpayer-defendant Colby Academy ("Colby"). The liens amount to over $33,000, but the real purpose of this action is to determine who is entitled to the sum of $11,333.34 representing the proceeds of a casualty policy insuring Colby and written by defendant Aetna Casualty and Surety Company (" Aetna "). The proceeds are also claimed by defendants Normesh Construction Corporation ("Normesh") and Jack Du Boff Associates, Inc. ("Du Boff"), both of whom received assignments of a portion of the proceeds.

The government has moved for summary judgment and has submitted extensive documentation of its claims. Since defendants Colby, Aetna and Roger W. Kohn claim no interest in the proceeds, the sole question presented on the motion is whether under 26 U. S. C. §§ 6321-23 the interests of Normesh and Du Boff are subordinate to that of the government. For the reasons which follow, the Court is of opinion that the government is entitled to partial summary judgment to the extent indicated below.

[Facts]

The following essential facts are not in dispute. Between 1973 and 1976 the government made a series of assessments against taxpayer Colby for unpaid withholding and Federal Insurance Contributions Act taxes, with contemporaneous notices of demand for payment. As to each of these assessments the government filed a notice of federal tax lien with either the Register's Office for Kings County , where Colby is located, or with the New York Secretary of Sate in Albany , or in both these State offices. In sum, the assessments were made and notices filed on the following dates and, with penalties and interest computed as of September 10, 1981, represent liens in the following amounts:

                           Date of Assessment         Date of Filing          Balance Due,

                                     & Notice              of Notice         with Interest

Tax Period                          of Demand       of Lien [TEH] *          and Penalties

1st Qtr. 1973 ....                    8/13/73                11/1/73             $1,167.44

..................                                           11/2/73

2d Qtr. 1973 .....                    10/1/73                11/1/73              2,883.23

..................                                           11/2/73

3d Qtr. 1973 .....                    12/1/73               12/19/73              7,192.17

..................                                          12/17/73

1st Qtr. 1974 ....                     7/1/74                1/27/75              6,280.86

2d Qtr. 1974 .....                    9/30/74                1/27/75              1,729.43

4th Qtr. 1974 ....                    3/31/75                4/14/75              3,501.55

1st Qtr. 1975 ....                     9/8/75               10/10/75              6,227.54

2d Qtr. 1975 .....                     9/8/75               10/10/75              4,161.10

4th Qtr. 1975 ....                    3/29/76                 4/8/76              2,462.53

* Where two dates appear, they represent, respectively, filings in the Kings County Register's Office and in the Office of the New York Secretary of State.

Affidavit of Robert E. Mirsberger, dated July 28, 1980, Plaintiff's Exh. 1, at ¶4; Letter dated Sept. 1, 1981, John F. Murray to the Court. These tax liens were also filed in the public index located at the Office of the District Director, Internal Revenue Service, Brooklyn , New York , on June 30, 1977. Affidavit of Karen B. Brown, dated July 31, 1980, at ¶5.

[Insurance Claim]

On or about March 15, 1974, Aetna issued to Colby a policy insuring against loss of tuition resulting from damage to the school's premises, Plaintiff's Exh. 2, which were owned by and rented from one Samuel Zarcone. The premises were damaged by a fire on July 5, 1974. That same day, Du Boff, an insurance claims adjuster, was retained by the Dean of Colby to prepare and present Colby's claims to the three companies, including Aetna , which had written policies in favor of Colby. As payment for these services, the agreement assigned to Du Boff 121/2% of the monies recovered. ¹ Plaintiff's Exh. 4. It appears that on November 11, 1974, Du Boff prepared a notice of claim. Plaintiff's Exh. 5. Pursuant to this assignment, Du Boff now claims the sum of $929.71.

On July 24, 1974, Normesh entered into an agreement with the owner of the Colby premises, Zarcone, to make certain repairs following the fire. The agreement provided that $4,500 would be paid within 60 days and the balance of "$9,000.00 when fire loss is paid." Plaintiff's Exh. 9. By an instrument dated "December 1974," Zarcone as "administrator" for Colby assigned to Normesh the proceeds of the insurance policies to the extent of $13,845. Plaintiff's Exh. 7. Pursuant to this document, and apparently after partial payment, Normesh now claims $8,500 of the proceeds of the Aetna policy.

Colby instituted suit against Aetna on the policy, and judgment in favor of the insured in the amount of $17,000 was entered in Supreme Court, Kings County , on April 22, 1976. On the consent of all parties, including the government, a fee of $5,666.66 was paid to defendant Roger W. Kohn, Colby's attorney in the suit against Aetna , leaving a fund of $11,333.34, which is the subject matter of this action.

[Applicable Law]

Turning to the applicable principles of law, a federal lien imposed pursuant to 26 U. S. C. §6321 for non-payment of a tax attaches at the time of assessment and continues until the tax deficiency "is satisfied or becomes unenforceable by lapse of time." 26 U. S. C. §6322. A federal tax lien, moreover, attaches to all property rights of the taxpayer, including his interest in future proceeds of an insurance policy. P. P. G. Industries Inc. v. Hartford Fire Ins. Co. [74-2 USTC ¶9823], 384 F. Supp. 91 (S. D. N. Y. 1974), aff'd, [76-1 USTC ¶9257], 531 F. 2d 58 (2d Cir. 1976); Household Coal & Oil Distributors, Inc. v. NEDC, Inc. [63-1 41 ¶9128], 234 N. Y. S. 2d 6, 9 (Civil Court, New York County 1962). See Glass City Bank v. United States [45-2 USTC ¶9449], 362 U. S. 265, 267 (1945). Under the common law rule of "first in time, first in right," it is settled that a federal tax lien will take priority over all competing interests except those that were "choate" prior to the attachment of the federal line. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85 (1953). See United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323, 328 (1966). A lien is considered choate when "the identity of the lienor, the property subject to the lien, and the amount of the lien" are established, United States v. City of New Britain , supra, 347 U. S. at 84. Moreover, the nature of the property interest giving rise to the competing claim must be determined by reference to State law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). See Hartford Provision Co. v. United States [78-1 USTC ¶9392], 579 F. 2d 7, 9 (2d Cir. 1978).

Under New York law, the assignment of a future interest in the proceeds of a claim is an equitable interest only, and does not become a legal assignment until the proceeds have come into existence. Harold Moorstein & Co. v. Excelsior Inc. Co., 306 N. Y. S. 464, 465 (1969). See Fairbank v. Sargent, 117 N. Y. 320 (1889); P. P. G. Industries, Inc. v. Hartford Fire Ins. Co., supra, 384 F. Supp. at 95 (S. D. N. Y.) 1974), aff'd, 531 F. 2d at 63 n. 7 (2d Cir. 1976). The assignment of the proceeds of an insurance policy, the amount of which has yet to be determined, creates only an equitable interest that becomes legal and choate when there is a judgment or appropriation of the proceeds in favor of the insured-assignor. See Fairbanks v. Sargent, supra, 117 N. Y. at 336-37; P. P. G. Industries, Inc. v. Hartford Fire Ins. Co., supra; Bernstein v. Allstate Ins. Co., 288 N. Y. S. 2d 646 (Civil Court, New York County, 1968). Finally, the ripening of an equitable lien into a legal lien does not relate back to the date of execution of the original assignment. Cordaro v. Cordaro, 235 N. Y. S. 2d 289, 290 (App. Div. 4th Dept. 1962), aff'd, 241 N. Y. S. 2d 175 (1963).

[Exception to General Rule]

Applying these principles, the proceeds of the insurance claim did not come into existence--and Normesh's and Du Boff's naked assignments ripen into choate claims--until the April 22, 1976 judgment in favor of Colby. ² It is clear that each of the government's tax claims were assessed and its liens thereby attached prior to that date.

Nonetheless, Normesh seeks to benefit from a statutory exception to the "first in time, first in right" ordinary rule regarding priority. Section 6323(a) of Title 26 provides that a federal tax lien created upon assessment shall not defeat that of a

"purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) [of §6323] has been filed by the Secretary or his delegate."

In an attorney's affidavit, Normesh claims to have filed a mechanic's lien on December 19, 1974. Eder Affidavit, dated August 29, 1980, at 2. Even though this assertion--which we note is unsupported by documentary materials as required under Rule 56(e), F. R. Civ. P. -- may be sufficient to create an issue of fact, the Court is of the opinion that it fails to raise a legally material issue that could preclude a grant of partial summary judgment for the government as to the first three tax liens.

Even if Normesh could claim protection under §6323(a), it would not prevail over those tax liens filed pursuant to §6323(f) prior to the claimed attachment of the mechanic's lien. At the very earliest, Normesh's interest arose at the time of the assignment and filing of the lien in December 1974. Each of the federal liens assessed for the first, second and third quarters of 1973 were filed in November or December 1973, in both the Kings County Register's Office and the Office of the New York Secretary of State. These filings satisfied the requirements of §6323(f), see In Re Busman, 5 B. R. 332 (Bankruptcy Court, E. D. N. Y. 1980); see also Bankers Trust Co. v. Equitable Life Assurance Society, 281 N. Y. S. 2d 57 (1967); and the government has met subsequently imposed filing requirements. ³ As to these three tax liens, there are no genuine issues of fact and it is clear as a matter of law that the government's claim is prior to that of Normesh and Du Boff.

The first three tax liens, with interest and penalties through the entry of partial judgment as of the date of this memorandum and order, total $11,242.84, and constitute almost all of the proceeds of the Aetna policy. However, as to the $90.50 remaining after the satisfaction of the first three liens, a genuine issue of material fact precludes the grant of complete judgment at this time.

[Existence of Lien]

If, as claimed, Normesh perfected a valid mechanic's lien in the proceeds as of December 1974, 26 U. S. C. §6323(a) would appear to afford it priority over the next unsatisfied tax lien, assessed for the first quarter of 1975, which was not filed until January 27, 1975. Even though the proceeds of the policy may not have been ascertained exactly until the April 1976 judgment in favor of Colby,

"the requirement of choateness does not relate to the property against which a state lien is asserted but only to the lien itself. A state-created lien is not inchoate merely because the amount or value of the liened property has not been finally determined."

Corigliano v. Catla Construction Co. [64-2 USTC ¶9657], 231 F. Supp. 245, 249 (S. D. N. Y. 1964). See Crest Finance Co. v. United States [62-1 USTC ¶9105], 368 U. S. 347 (1961). See also Fox Greenwald Sheet Metal Co. v. Markowitz Bros., Inc. [71-2 USTC ¶9737], 452 F. 2d 1346, 1350 & n.18 (U. S. App. D. C. 1971).

If Normesh can demonstrate that in 1974 it perfected under New York law a lien in the policy proceeds that was definite as to "the identity of the lienor, the property subject to the lien, and the amount of the lien," United States v. City of New Britain, supra, the Court will consider the government's arguments as to why judgment in the remaining $90.50 should not be entered in Normesh's favor.

Accordingly, the government's motion for summary judgment is granted to the extent indicated in this memorandum order. Since it appears that interest on the first three liens will continue to accumulate unless judgment is entered, the Court finds that there is no just reason for delay and will direct that partial judgment be entered forthwith in the amount of these liens plus penalties and interest through the date of this memorandum and order. Rule 55(b), F. R. Civ. P.

In addition, Normesh is directed to submit any additional materials by October 2, 1981, and the government is directed to submit its response, if any, by October 16, 1981.

SO ORDERED.

The Clerk of the Court is directed to enter partial judgment in favor of the government in the amount of $11,242.84. The Clerk is further directed to forward copies of this memorandum and order to counsel for all parties.

¹ The record in this action to date does not reflect the outcome, if any, of Colby's claims against the two other insurance companies. Presumably, by the terms of Du Boff's retainer, the adjuster would be entitled to 121/2% of any proceeds of those policies.

² But see MDC Leasing v. New York Property Ins. Underwriting [79-1 USTC ¶9122], 450 F. Supp. 179, 181 (S.D.N.Y. 1978), aff'd mem., 603 F. 2d 213 (2d Cir. 1979), where the district court stated in dicta that certain interests by assignment in insurance proceeds may have become choate, for purposes of priority with regard to federal tax liens, at the time of filing of a proof of loss. It does not appear in that case, however, that subsequent litigation and judgment were necessary to bring the proceeds into existence.

³ Public Law 94-455, §2008(C)(1)(A), added new §6323(f)(4) requiring an additional filing of notices of tax liens with the office of District Director, Internal Revenue Service. For tax liens that had previously been filed, such as those involved here, the amendment was made effective July 1, 1977. The government duly filed notices pursuant to the amendment on June 30, 1977. We find no merit in Normesh's argument, which has no support in the statutory language, that this amendment destoyed the priority, ex post facto, of all tax liens previously filed under then applicable law.

 

 

 

Household Coal & Oil Distributors, Inc. (Cullen Fuel Division), Plaintiffs v. N. E. D. C., Inc., Respondent

N. Y. Civil Court, Special Term, Part I, New York County, Vol. 148, N. Y. L. J., No. 59, p. 13, 9/24/62, (234 N. Y. S. 2d 6)

[1954 Code Sec. 6323]

Federal tax liens: Fire insurance proceeds: Priority.--Federal tax liens were superior to the lien of a judgment creditor against fire insurance proceeds where three of the Federal liens were filed before the judgment was entered. The liens once filed attached to after-acquired property, which included the insurance fund. The fact that the government did not comply with the filing requirement in New York County, where the insurance fund was held, was no defense since the deficient taxpayer had no property in New York County when the first Federal lien arose.

Herman B. Zipser, 116 John St. , New York , N. Y., for plaintiff. Mendes & Mount, 27 Williams St. , Robert M. Morgenthau, United States Attorney. Foley Sq., New York , N. Y., for defendant.

BLANGIARDO, Judge:

Household Coal & Oil Dist., Inc. (Cullen Fuel Division) v. N. E. D. C., Inc.--Plaintiff, judgment creditor, moves for an order pursuant to section 794 of the C. P. A. directing certain representatives of insurance carriers to pay over the sum of $1,190.73 to the judgment creditor. By stipulation, the United States of America has been permitted to intervene in this proceeding for the purpose of asserting any rights that it may have to the fund in question and has cross-moved for an order directing the said representatives of the insurance carriers to pay over to the Treasurer of the United States the said sum of $1,190.73, which sum is due and owing by the said representatives to N. E. D. C., Inc., the judgment debtor herein.

The United States of America is interested in this proceeding by virtue of federal tax liens filed pursuant to 26 U. S. C. A., sections 6321 and 6323, against N. E. D. C., Inc., the judgment debtor herein, as follows: December 18, 1959-$1,321.93, May 26, 1960. April 22, 1960--$4,832.26, June 23, 1960. September 9, 1960--$535.42, November 1, 1960. June 24, 1960--$3,138.72, March 10, 1961. October 14, 1960 and January 13, 1961--$124.18, March 21, 1961.

The foregoing tax liens were filed in the office of the City Register in the County of Bronx since the judgment debtor had its principal office and place of business in said county and is to be considered a resident of that county (Lien Law, sec. 240, subdiv. 20).

It is conceded that the judgment creditor entered its judgment in the sum of $1,309.79, against the judgment debtor on December 29, 1960.

The fund of $1,190.73 which is the subject matter of this proceeding arose under the following circumstances: A fire occurred at the premises of the judgment debtor on January 22, 1960. It is significant to note that this event took place subsequent to December 18, 1959, which is the date of the government's first tax assessment against the judgment debtor. Sometime thereafter the insurer's representatives, the respondents herein, let it be known that they held the fund of $1,190.73 on account of said fire. Although the insured, who is the judgment debtor, filed no proof of loss, the respondents nevertheless will pay the fund to the party which may be entitled thereto.

The judgment creditor levied against the fund and although an order of this court , 1960. June 24, 1960-$3,138.72, creditor, suffice it to say that such payment was not made because of the intervening rights of the U. S. Government.

This court must now determine who is entitled to the moneys held by the respondents.

In point of time the judgment entered herein was subsequent to the filing of the first three liens as above set forth by the United States of America . Consequently, the government tax liens are superior to any other liens subsequently filed (Aquilino v. U. S. of A., [58-1 USTC ¶9191] 3 N. Y. 2d 511; In re Levitt, 7 Misc. 2d 628; Oxford Distributing Co., Inc. v. Famous Robert's, Inc., 5 App. Div. 2d 507). Up to and including December 29, 1960, the date of the entry of judgment by the judgment creditor herein, there can be no dispute that the government complied with the provision of section 240 of the New York Lien Law, and its lien for taxes was perfected at the times of the various filings (U. S. of America v. New York Telecoin Corporation [59-1 USTC ¶9255] 170 Fed. Supp. 513; U. S. of America v. Kings County Iron Works [55-2 USTC ¶9536], 224 Fed. 2d 232).

It has been firmly established that once a government tax lien is properly filed no subsequently recorded lien or claim may prevail against it (Agrilino v. United States of America [58-1 USTC ¶9191], 3 N. Y. 2d 511, 515, and cases therein cited). It is also well established that such federal tax lien is not limited to property owned by the taxpayer at the time the lien arises but also attaches to after acquired property (In re Levitt, 7 Misc. 2d 628, citing Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265). Consequently, the property or moneys in the hands of the respondents, the right to which arose some time after the government perfected its first tax lien, became subject to the said lien of the government as against the lien or right of the judgment creditor.

The judgment creditor has urged that the United States of America was bound to file its lien in the County of New York since the funds in the hands of the respondents are situate in New York County (Lien Law, section 240, subdiv. 2). The last sentence of the section provides: "If the property is in the City of New York at the time the lien arises (italics supplied), the notice or certificate shall be filed in the county within the City of New York * * * where the owner * * * resides at the time the lien arises, and also in the county where the property is situated." This court is satisfied that the contention of the government with respect thereto is correct, namely, that at the time that the first lien arose there was no property in New York County which belonged to the judgment debtor and therefore the government was not obliged to file its lien in New York County to protect its rights. And further assuming arguendo that the fund was in existence at the time of the first government lien, this court might well reach the conclusion that the fund which may be considered as a debt, chose in action or intangible right of the judgment debtor would have a situs apart from the holders of the fund in New York County (see United States v. Kings County Iron Works [55-2 USTC ¶9536], 224 Fed. 2d 232, 237).

The authorities cited by the judgment creditor are not applicable to the factual situation involved herein.

The government having satisfactorily established its prior lien to the fund in question, the motion of the judgment creditor is denied and the cross-motion of the United States of America is granted. Since there is an outstanding order of this court directing respondents to turn over the funds to the marshal who levied thereon, there may be certain fees due the marshal.

Settle order on notice to the parties in interest herein and to the city marshal who made the levy.

 

 

 

J. J. Mickelson, Trustee in Bankruptcy of the Estate of Wirt Cook, an individual doing business as St. Paul Sporting Goods Co., Plaintiff v. Pacific National Fire Insurance Company, a corporation, Defendant and United States of America, Intervenor

In the United States District Court for the District of Minnesota, Third Division, Civil Action No. 2486, November 3, 1955

[1954 Code Sec. 6321]

Lien for taxes: Rights of intervenor.--Taxpayer insured his stock of merchandise against loss or damage by fire. The stock of merchandise insured was damaged to the extent of $18,912.71 by fire, and the insurance company was liable under its policy for said amount plus interest. Taxpayer being indebted to the Government for various taxes, the court held the Government's claim to the proceeds of the fire loss was prior, first and paramount to the interest of the taxpayer.

O'Brien and Kronebusch (by W. M. Kronebusch), for plaintiff. Sam Levin, Bowen and Bowen (by Leroy Bowen), for defendant. George E. MacKinnon, United States Attorney (by Kenneth Owen, Assistant United States Attorney), for the intervenor.

Findings of Fact, Conclusions of Law and Order for Judgment

DONOVAN, District Judge:

The above entitled cause came regularly on for trial before this court at St. Paul , Minnesota , on May 26, 1955. Messrs. O'Brien & Kronebusch, by W. M. Kronebusch, appeared for plaintiff. Messrs. Sam Levin and Bowen and Bowen, by Leroy Bowen, appeared for defendant. George E. MacKinnon, United States Attorney, by Kenneth Owen, Assistant United States Attorney, appeared for the intervenor.

Pursuant to the evidence adduced at said hearing, the files and records herein and upon motion of W. M. Kronebusch, appearing on behalf of plaintiff, the court enters the following:

Findings of Facts

I. On and prior to October 8, 1952, Wirt Cook, an individual, was engaged in conducting a mercantile establishment in the city of St. Paul , Minnesota , under the trade style of "St. Paul Sporting Goods Co."

II. On April 1, 1952, defendant executed and delivered to St. Paul Sporting Goods Co. a certain policy of standard fire insurance, being defendant's policy # OC 736757, in the amount of thirty-eight thousand dollars ($38,000) insuring St. Paul Sporting Goods Co. against loss or damage to its stock of merchandise by fire for a period of one year.

III. On October 8, 1952, while said policy of insurance was in full force and effect, the stock of merchandise insured thereby was damaged to the extent of eighteen thousand nine hundred twelve dollars and seventy-one cents ($18,912.71) by a fire which was of undetermined origin and not intentionally set by, for or on behalf of the insured named in said policy.

IV. Promptly after the occurence of said fire defendant was notified thereof and of the resulting damage to the property insured under its policy of insurance and on October 15, 1952, a proper and sufficient proof of loss therefor in the amount of eighteen thousand nine hundred twelve dollars and seventy-one cents ($18,912.71) was duly delivered by the insured under said policy of insurance to defendant which has refused to recognize liability therefor.

V. Subsequent to the submission of said proof of loss and defendant's denial of liability therefor under its said policy of insurance Wirt Cook was adjudicated a bankrupt and plaintiff was elected trustee of said bankruptcy estate.

VI. On October 18, 1952, Wirt Cook was indebted to intervenor for various taxes in the sum of six thousand six hundred thirty-three dollars and thirty-eight cents ($6,633.38) plus accrued interest. On said date the interest of Wirt Cook in and to the proceeds of the fire insurance loss sustained by him as found above was duly levied upon in the possession of the defendant by the intervenor and there remained due and owing to the intervenor as of May 26, 1955, under said levy the sum of seven thousand nine hundred eighty-seven dollars and seventy-three cents ($7,987.73) on which interest accrues thereafter at the rate of one dollar five cents ($1.05) per day.

Pursuant to the foregoing findings of fact the court enters as:

Conclusions of Law

I. Defendant is liable under its policy of insurance # OC 736757 in the amount of eighteen thousand nine hundred twelve dollars and seventy-one cents ($18,912.71) with interest thereon in the sum of three dollars and fifteen cents ($3.15) per day from December 14, 1952, said interest being at the rate of six percent per annum.

II. The claim of intervenor in the amount of seven thousand nine hundred eighty-seven dollars and seventy-three cents ($7,987.73) plus interest at the rate of one dollar and five cents ($1.05) per day from May 26, 1955, to the amount of defendant's liability under its policy of insurance is prior, first and paramount to the interest of plaintiff therein, and should be paid therefrom together with intervenor's costs as allowed by law.

III. Plaintiff is entitled to have and recover of defendant the sum of eighteen thousand nine hundred twelve dollars and seventy-one cents ($18,912.71) with interest thereon in the sum of three dollars and fifteen cents ($3.15) per day from December 14, 1952, said interest being at the rate of six percent per annum, and costs as allowed by law, less the sum of seven thousand nine hundred eighty-seven dollars and seventy-three cents ($7,987.73) with interest thereon at the rate of one dollar and five cents ($1.05) per day from May 26, 1955, as awarded to intervenor in paragraph II above.

The clerk of this court is hereby authorized and directed to enter judgment accordingly.

Judgment

This cause having come on to be heard at a general term of this court on the 26th day of May, 1955, pursuant to which findings of fact, conclusions of law and an order for judgment were entered herein.

Now, Therefore, in accordance therewith, It Is Ordered, Adjudged And Decreed That:

1. Defendant shall pay to plaintiff and intervenor the sum of eighteen thousand nine hundred twelve dollars and seventy-one cents ($18,912.71) with interest in the sum of three dollars and fifteen cents ($3.15) per day from December 14, 1952, in the following proportions, to wit:

A. To intervenor, the sum of seven thousand nine hundred eighty-seven dollars and seventy-three cents ($7,987.73) with interest thereon at the rate of one dollar and five cents ($1.05) per day from the 26th day of May, 1955.

B. To plaintiff the balance thereof.

2. That plaintiff and intervenor have and recover of defendant their respective costs as allowed by law.

3. That plaintiff and intervenor each have execution therefor.

 

 

 

Jonathan Paskow, as Trustee, Plaintiff-Appellee v. Calvert Fire Insurance Company et al., Defendants, United States of America , Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 76-3179, 579 F2d 949, 9/11/78, Affirming unreported District Court decision

[Code Sec. 6323--result unchanged under '76 Tax Reform Act]

Lien for taxes: Priority: Insurance proceeds under mortgage.--The creditor of the taxpayer, the mortgagee, was entitled to an insurance fund which the taxpayer-mortgagor had retained pursuant to the mortgage contract on a building and its personal property. Although the mortgagee could not have a security interest in that part of the fund applicable to the personal property, under Florida law, it did have an equitable lien with respect to that amount. The mortgagee's superior lien came into existence at the time of the mortgage since the insurance and the collateral were one and the same property.

Robert Dixon, Gars & Dixon, 3550 Biscayne Blvd. , Miami , Fla. 33137 , for plaintiff-appellee. Robert W. Rust, United States Attorney, Miami, Fla. 33132, Scott P. Crampton, Assistant Attorney General, Gilbert E. Andrews, Crombie J. D. Garrett, Michael J. Roach, Department of Justice, Washington, D. C. 20530, for defendant-appellant.

Before GEWIN, GODBOLD and MORGAN, Circuit Judges.

GODBOLD, Circuit Judge:

The Algiers Hotel was damaged by fire. The building and some personal property in the building were mortgaged and were covered by insurance. This is a dispute over a portion of the insurance fund relating to personal property. The United States claims the fund by virtue of a tax lien filed against the mortgagor, while the mortgagee claims, first, that the tax lien cannot attach to the fund because the fund is not property belonging to the mortgagor and, second, that even if the tax lien can attach to the fund, he has a security interest in the fund that is valid against the tax lien. The district court held in favor of the mortgagee. ¹ We agree and affirm.

I. Is the fund property or a right to property belonging to the mortgagor? The government's claim rests on the federal tax lien statute, which provides, "If any person liable to pay 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." 26 U. S. C. §6321. The threshold question is whether the disputed insurance fund constitutes property or a right to property belonging to the mortgagor, who is the taxpayer in this case. ² We conclude that it does.

A. The mortgagee's rights under the insurance policy. The insurance policy has a loss payable clause in favor of the mortgagee's predecessor in interest. ³ The clause is a standard mortgage clause, also known as a New York or union mortgage clause. 5A. J. Appleman, Insurance Law and Practice §3401, at 282. It is customarily used with real property insurance and is regarded as a separate contract between mortgagee and insurer. Id. at 286-88. Glens Falls Ins. Co. v. Porter, 44 Fla. 568, 33 So. 473, 478 (1902).

Because the mortgagee has a contractual right to money payable under the loss payable clause, the mortgagor has no right to that money. Thus the money or right to receive the money is not property or a right to property belonging to the mortgagor. The loss payable clause, however, is expressly limited "to buildings only." The policy defines "buildings" to exclude most personal property. ⁴ Thus the mortgagee does not have a contractual right to the portion of the insurance fund relating to the excluded personal property.

The mortgagee argues that the limitation "to buildings only" is inconsistent with the provision that the loss shall be payable to the mortgagee "as interest may appear under all present and future mortgages" because his interest under the mortgage extends to personal property. We see no inconsistency. The quoted language is simply language of limitation, which recognizes that the mortgagee can have no greater interest in the insurance fund than in the insured collateral. 5A J. Appleman, Insurance Law and Practice, §3404, at 305-06. The language does not operate to expand the clause beyond its express limitation "to buildings only." ⁵

B. The mortgagee's equitable rights. The mortgagee does have, however, an equitable right to the disputed insurance fund. The mortgagor agreed to "keep the building and all equipment and personal property now or hereafter on said premises" covered by insurance against loss by fire or other casualty in an amount sufficient to protect the mortgagee's interest. The mortgagor procured the insurance policy pursuant to this agreement. Florida law provides that when a mortgagor has procured an insurance policy pursuant to such an agreement the mortgagee has an equitable lien on the insurance fund. Atwell v. Western Fire Insurance Co., 120 Fla. 694, 163 So. 27 (1935). Although Florida case law has characterized the mortgagee's rights as being fixed at the time of loss, ⁶ the mortgagee must act to protect his rights by giving notice of his claim to the insurer. If he does so, the insurer cannot pay a claim under the policy until the rights of the mortgagor and mortgagee are adjusted. See also Annot., 92 A. L. R. 559 (1934).

We hold that the portion of the insurance fund that is not payable to the mortgagee under the loss payable clause is property or a right to property belonging to the mortgagor. The mortgagor has a contractual or legal right to this fund. The mortgagee on the other hand has only an equitable right, specifically an equitable lien. The mortgagee cannot obtain the fund by proceeding directly against the insurer. ⁷ Rather he will not have a legal right to the fund until his rights and the mortgagor's have been adjusted. ⁸ Thus we conclude that the disputed insurance fund is, at least initially, property belonging to the mortgagor. ⁹

II. Does the mortgagee have a security interest in the insurance fund? Even though the disputed insurance fund is property belonging to the mortgagor, we conclude that the mortgagee is entitled to the fund because he has a security interest in the fund that is valid against the federal tax lien.

A. The mortgagee's security interest in proceeds. The federal tax lien statute provides that the federal tax lien shall not be valid against a security interest existing before the tax lien filing. 26 U. S. C. §6323(a). "Security interest" is defined to mean "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability." 26 U. S. C. §6323(h)(1).

The mortgagee had a U. C. C. security interest in the building and personal property. The government does not contest on appeal that this security interest was perfected. The mortgagee also had a U. C. C. security interest in proceeds. We believe the Florida Supreme Court would hold that the disputed insurance fund constituted proceeds.

Florida has enacted the 1966 version of U. C. C. §9-306(1), which provides:

"Proceeds" includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of. The term also includes the account arising when the right to payment is earned under a contract right. Money, checks and the like are "cash proceeds." All other proceeds are "noncash proceeds."

19C Fla. Stat. Ann. §679.9-306(1).

Florida has not enacted the 1972 version of U. C. C. §9-306(1), which added another sentence:

Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement.

Of this additional language the Official Comment says, "It makes clear that insurance proceeds from casualty loss of collateral are proceeds within the meaning of this section."

There is a split of authority whether the 1966 version of U. C. C. §9-306(1) should be construed to include insurance payable by reason of loss or damage to collateral. Many courts have held that such an insurance fund cannot constitute proceeds under the 1966 version, ¹⁰ but their arguments have been soundly rebutted by the Second Circuit in PPG Industries, Inc. v. Hartford Fire Insurance Co., 531 F. 2d 58 (CA2, 1976) (construing New York law). ¹¹ See also Boroff, Insurance Proceeds Under Section 9-306: Before and After, 1974 Commercial L. J. 442; Henson, Insurance Proceeds as "Proceeds" Under Article 9, 18 Catholic U. L. Rev. 453 (1968).

Two principal arguments have been advanced against construing §9-306(1) to include insurance payable by reason of loss or damage to collateral. ¹² First, §9-104(g) provides that the U. C. C. does not apply "to a transfer of an interest or claim in or under any policy of insurance." Section 9-104(g), however, is directed not at the insurance of collateral but the creation of a security interest in an insurance policy by making the policy itself the collateral. See Comment 7 to §9-104. Second, the scope of §9-306(1) is ambiguous and can be read as limited to voluntary disposition of the collateral. The section speaks of collateral being "sold, exchanged, collected or otherwise disposed of." The verb "disposed of" connotes an action, and all of the examples specifically given concern voluntary disposition. The 1966 version of §9-306(2) supports this reading by its reference to the debtor's "actions." ¹³ But the ambiguity of §9-306 can just as easily be resolved to favor the secured party. Despite the examples, the section is not expressly limited to voluntary dispositions, and the inference from §9-306(2) is hardly compelling. Section 9-306(2) basically says that a security interest does not continue in collateral when the secured party authorizes its disposition. It is hard to imagine a secured party authorizing an involuntary disposition. Thus the subsection on authorized dispositions may logically refer only to voluntary dispositions even though the general section on proceeds has a broader scope.

Because §9-306(1) can reasonably be construed to include insurance payable by reason of loss or damage to the collateral, we agree with the Second Circuit that the amendment to §9-306 incorporated in the 1972 version of the U. C. C. "is a persuasive indication of the effect which §9-306 was originally intended to have." PPG Industries, supra, 531 F. 2d at 61.

B. The property-in-existence requirement. It is not enough, however, that the mortgagee has a U. C. C. security interest in the disputed insurance fund. The federal tax lien statute defines "security interest" to require that the security property be in existence when the federal tax lien is filed.

A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

26 U. S. C. §6323(h)(1).

In this case the property, the disputed insurance fund, arguably did not come into existence until the time of loss or perhaps not until the insurance company admitted its liability under the policy. However, we agree with the Second Circuit in PPG Industries, supra, 531 F. 2d at 62, that the insurance fund is merely the collateral in another form. Accordingly, we regard the insurance fund and the original collateral as one and the same property for the purpose of determining when the property came into existence. ¹⁴

Thus although the federal tax lien can attach to the disputed insurance fund because the fund is property belonging to the mortgagor, the mortgagee has a security interest in the fund that is valid against the federal tax lien.

The judgment of the district court is AFFIRMED.

¹ The district court's opinion is reported at 38 A. F. T. R. 2d 76-5008.

² State law determines whether the taxpayer has property or a right to property to which the tax lien may attach. Aquilino v. U. S. [60-2 USTC ¶9538], 363 U. S. 509, 512-14, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365, 1368-69 (1960).

³ "C. Mortgage clause: Applicable to buildings only (this entire clause is void unless name of mortgagee (or trustee) is inserted in the Declarations): Loss, if any, under this policy, shall be payable to the mortgagee (or trustee), named on the first page of this policy, as interest may appear under all present or future mortgages upon the property herein described in which the aforesaid may have an interest as mortgagee (or trustee) in order of precedence of said mortgages, and this insurance as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy: provided, that in case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee (or trustee) shall, on demand, pay the same."

⁴ See also J. B. Kramer Grocery Co. v. Glens Falls Ins. Co., 497 F. 2d 709, 710-11 (CA-8, 1974); London & Provincial Marine & Gan. Ins. Co. v. Sykes, 66 S. W. 2d 382, 383 (Tex Civ. App. 1933).

⁵ Compare J. B. Kramer Grocery Co. v. Glens Falls Ins. Co., 497 F. 2d 709 (CA-8, 1974), where the court regarded an express limitation to buildings only as repugnant to the policy because the loss payee had a security interest in only personal property.

⁶ In Sea Isle Operating Corp. v. Hochberg, 198 So. 2d 336 (Fla. App. 1967), a Florida court said that the mortgagee's right to receive the insurance fund is fixed at the time of the loss but what the court meant was that foreclosure by the mortgagee subsequent to the casualty loss does not extinguish his equitable right to the insurance fund.

⁷ When a mortgagor filed a bill in equity against the insurer in Atwell, the Florida Supreme Court held that the insurer's motion for interpleader should be granted, essentially regarding the action as one against the mortgagor. Sumlin v. Colonial Fire Underwriters, 158 Fla. 95, 27 So. 2d 730, 731 (1946), also states that the mortgagee's remedy is against the mortgagor.

⁸ Compare U. S. v. Durham [60-2 USTC ¶9539], 363 U. S. 522, 80 S. Ct. 1282, 4 L. Ed. 2d 1371 (1960), where the Third Circuit had characterized payments contractually owing from an owner to a general contractor as not being property belonging to the general contractor because state law provided subcontractors a "direct, independent cause of action against the owner to the extent of any amount due under the general construction contract." 363 U. S. at 525, 80 S. Ct. at 1283, 4 L. Ed. 2d at 1373 (emphasis added). The Supreme Court affirmed, saying this characterization was not clearly erroneous or unreasonable.

⁹ The few courts that have considered cases with similar facts have either explicitly or implicitly concluded that funds payable under the terms of the policy to the mortgagor when the policy was procured for the benefit of the mortgagee are property of the mortgagor for the purposes of the federal tax lien statute. Corrigan v. United States Fire Ins. Co., 427 F. Supp. 940 (S. D. N. Y. 1977) (semble); Ray E. Nelson Transp. Co. v. Tri-State Ins. Co., 231 F. Supp. 492, 495 (D. Neb. 1964) (dictum); see Andrello v. Nationwide Mut. Ins. Co., 29 A. D. 2d 489, 289 N. Y. S. 2d 293 (Sup. Ct. 1968) (assumed to be property belonging to mortgagor); cf. PPG Indus., Inc. v. Hartford Fire Ins. Co., 384 F. Supp. 91 (S. D. N. Y. 1974) (security agreement assigned funds to mortgagee, but assignment regarded as equitable lien only) aff'd, 531 F. 2d 58 (CA-2, 1976) (apparently agreeing with district court on this issue). In Home Ins. Co. v. B. B. Rider [63-1 USTC ¶9770], 212 F. Supp. 457 (D. N. J. 1963), the mortgagee was named in a loss-payable clause, but in the absence of evidence whether the policy contained a mortgagee clause the court regarded the insurance funds "as vesting, at least momentarily," in the mortgagor. But cf. Insurance Co. of North America v. Putney, 136 F. Supp. 894 (E. D. Va. 1955) (not specifically analyzed on "no property" ground).

¹⁰ Universal C. I. T. Credit Corp. v. Prudential Investment Corp., 101 R. I. 287, 222 A. 2d 571 (1966); Quigley v. Caron, 247 A. 2d 94 (Me. 1968); White v. Household Finance Corp., 158 Ind. App. 394, 302 N. E. 2d 828, 836 n. 9 (Ind. Ct. App. 1973); In re Levine, 6 U. C. C. Rep. 238 (D. Conn. 1969); In re Hix, 9 U. C. C. Rep. 925 (S. D. Ohio 1969); Distributor's Warehouse, Inc. v. Madison Auto Parts & Service Corp., 8 U. C. C. Rep. 569 (Wis. Cir. Ct. 1970); In re Whitacre, 21 U. C. C. Rep. 1169 (S. D. Ohio 1976); see In re Waltman, 18 U. C. C. Rep. 576 (S. D. Ala. 1975); In re Parks, 19 U. C. C. Rep. 334 (E. D. Tenn. 1976).

¹¹ The decision has since been followed by a New York court. First National Bank of Highland v. Merchant's Mutual Insurance Co., N. Y. Sup., 21 U. C. C. Rep. 892, 392 N. Y. S. 2d 836 (1977). It was also followed in Aetna Ins. Co. v. Texas Thermal Indus., 436 F. Supp. 371 (E. D. Tex. 1977).

¹² A third argument reasons that the insurance fund cannot be proceeds because it arises from a personal contract and does not attach to the property. See, e.g., Universal C. I. T., supra. This argument is unconvincing because another personal contract, one for the sale of the collateral, clearly may give rise to proceeds.

¹³ The provision, more fully, refers to any disposition "by the debtor unless his action was authorized . . .." The 1972 version of §9-306(2) simply refers to any disposition "unless the disposition was authorized. . . ."

¹⁴ We have no occasion to consider the correctness of the Second Circuit's dictum suggestion that a different result might follow if the mortgagee did not require the mortgagor to procure insurance. See 531 F. 2d at 63 n. 7.

 

 

 

Ruth V. Pollard v. United States of America

U. S. District Court, East. Dist. Va., Civil 2909, 6/23/60

[1954 Code Sec. 6321]

Lien: Life insurance policies: Taxpayer's ownership v. beneficiary's possession and payment of premiums.--A notice of lien for unpaid federal income, withholding, and unemployment taxes filed with a life insurance company prior to the death of the taxpayer was enforceable against the proceeds of the policies to the extent of the cash surrender values. Although the beneficiary had possession of the policies and paid most of the premiums, the ownership of the policies was always vested in the taxpayer.

John W. Keith, Jr., of Rice, Schaffer & Keith, 18 North Eighth Street, Richmond, Va., and A. Russell Beazley, Jr., of Satterfield, Anderson & Beazley, 500 Travelers Bldg., Richmond, Va., for plaintiff. A. Shanley Keeter, Assistant United States Attorney, Richmond , Va. , for United States . McDonald Wellford, Travelers Bldg., Richmond , Va. , for Metropolitan Life Insurance Co.

Petition for Injunction (3/6/59)

BRYAN, District Judge:

1. The plaintiff moves the court to permanently enjoin the United States of America and/or Clifford W. Glotzbach, District Director of Internal Revenue, and/or his successor in office, from in any manner asserting or attempting to enforce a lien for Federal income taxes for the years 1953 and 1954, withholding taxes for the year 1956, and taxes under the Federal Insurance Contributions Act for the year 1955, and for cancellation and release of a tax lien on plaintiff's property filed by the United States through its agent, Clifford W. Glotzbach, District Director of Internal Revenue, Richmond, Virginia. This Court has jurisdiction of this action under 28 U. S. C. Sec. 2410.

2. E. Leonard Pollard, husband of the plaintiff, died on July 30, 1956. His life was insured by Metropolitan Life Insurance Company, under Policy Nos. 11491416, 14779221, and 14153181-A. The proceeds of said policies in the amount of $3,250.98 are payable on the insured's death to plaintiff, as beneficiary.

3. Prior to June 3, 1955, E. Leonard Pollard was self-employed and for the years 1954 through 1956, filed his separate individual Federal income tax returns with the District Director of Internal Revenue, Richmond, Virginia, pursuant to law.

4. On July 26, 1956, the defendant filed with Metropolitan Life Insurance Company Notice of Federal Tax Liens in the sum of Two Thousand, Nine Hundred Thirty-two and no/100 Dollars ($2,932.00) for unpaid 1953 and 1954 Federal income taxes, withholding taxes, and unemployment taxes assessed against E. Leonard Pollard individually and upon his separate returns.

5. The defendant claims an interest in and to said insurance proceeds by virtue of the filing of said Notice of Federal Tax Liens with Metropolitan Life Insurance Company on July 26, 1956, against E. Leonard Pollard individually, the deceased husband of Ruth V. Pollard. Such claim is adverse and prejudicial to this plaintiff. The said insurance proceeds are the property of the plaintiff, Ruth V. Pollard, and are not subject to any lien for the individual delinquent tax indebtedness of E. Leonard Pollard. Although E. Leonard Pollard at all times during the life of the policies reserved unto himself the right to change the beneficiary thereunder, nevertheless, the policies were at all material times the property of, and in the possession of Ruth V. Pollard, and substantially all of the premiums on the policies were paid out of the sole and separate funds of Ruth V. Pollard.

6. On April 4, 1957, the defendant served on Metropolitan Life Insurance Company a Notice of Levy, thereby making final demand on said insurance company to pay over to the defendant the entire cash proceeds of said insurance policies being held by said insurance company in the amount of One Thousand, Saven Hundred Twenty-four and 82/100 Dollars ($1,724.82); thereafter, the amount in excess of the cash surrender value was released by the Government and paid to Ruth V. Pollard, this amount not being in issue before the Court, but said defendant still erroneously asserts that it is entitled to the aforesaid cash surrender value.

Wherefore, plaintiff demands that this Court try, ascertain and determine the right, title, and interest of the parties plaintiff and defendant herein in and to the insurance proceeds payable by reason of the death of E. Leonard Pollard in an amount equivalent to the cash surrender value of such policies at the date of death of E. Leonard Pollard, and that this Court adjudge that the plaintiff, Ruth V. Pollard, has the sole right to such insurance proceeds; that the defendant has no right, title, or interest in or to such insurance proceeds; that the lien of said Notice of Federal Tax Lien aforesaid be cancelled and released as to plaintiff; that the levy of the said Notice of Levy be declared invalid and of no effect; that defendant be forever enjoined and restrained from asserting any claim or setting up any right, title or interest in and to said insurance proceeds under said lien; and that plaintiff recover her costs.

Memorandum by the Court

While it imposes a hardship upon the plaintiff, the priority of the Government's lien, to the extent of the cash surrender value of policy No. 14153181A of the Metropolitan Life Insurance Company, is inescapable. Even though the policy may have been retained in the possession of the plaintiff and the premiums paid by her, nevertheless the ownership of the policy was always vested in the taxpayer. Royal Arcanum v. Behrend (1918), 247 U. S. 394. The case of United States v. Burgo, 175 F. 2d 196 (3 Cir. 1949) [49-1 USTC ¶9307] seemingly arrives at a determination contrary to Royal Arcanum. Cf. Fried v. Granger, 105 F. Supp. 564 (D. C. W. D. Pa. 1952) [52-2 USTC ¶10,867], aff. 202 F. 2d 150 [53-1 USTC ¶10,890].

The United States , therefore, is entitled to recover out of the funds on deposit in the court registry the amount of its lien, with interest, as of the date it was recorded. United States v. Bess, 375 U. S. 51, 56 [58-2 USTC ¶9595]. Counsel for the United States will within fifteen days present findings of fact, the facts not being in substantial dispute, a statement of the conclusions of law in accordance with this memorandum, and a final order, first submitting them to opposing counsel for consideration as to form.

 

 

 

United States of America , Plaintiffs v. Joseph Mandel, et al., Defendants

U. S. District Court, So. Dist. Fla., Case No. 73-998-Civ-JLK, 377 FSupp 1274, 5/23/74

[Code Secs. 6321, 6323, 6332, 6502(a), 6901, and 7403]

Lien for taxes: Action to enforce: Statute of limitations: Priority over state law: Attachment of lien to cash surrender value of insurance policy.--The Commissioner in 1963 assessed a 100% penalty against the taxpayer, and in 1964 a judgment was entered in favor of the Commissioner for a portion of this tax assessment. Since the judgment was not satisfied and taxpayer's liability for the unpaid taxes remained outstanding, the Commissioner in 1973 sought to foreclose on its lien. Since the judgment had been entered well within the six-year period beginning with assessment as required under Code Sec. 6502(a), the lien was not rendered "unenforceable by reason of lapse of time" under Code Sec. 6322. The fact that foreclosure under applicable state law on the 1964 judgment was time-barred did not matter since tax assessment liens continue to exist independently of the suit or judgment which extends their existence. Secondly, taxpayer-insured's right to receive the cash surrender value of his life insurance policies was a property right to which a tax assessment lien could attach. Moreover, taxpayer's subsequent assignment of his policies to his wife did not affect the lien, and the Commissioner was entitled to foreclose even though the taxpayer and his wife did not yet surrender the policies or elect to demand their cash values. Therefore, as no factual issues were left to be resolved at trial, summary judgment in favor of the Commissioner was appropriate.

Robert W. Rust, United States Attorney, Mervyn L. Ames, Assistance United States Attorney, Miami, Fla., for plaintiffs. Sidney A. Soltz, 19 W. Flager St., Suite 511, Miami, Fla., Shutts & Bowen, 10th Floor, First Nat'l Bank Bldg., Miami, Fla., for defendants.

Summary Judgment

KING, District Judge:

This cause came on for consideration upon the parties' cross-motions for summary judgment. The court, having considered the record and being fully advised in the premises, finds and concludes that summary judgment should be granted in favor of the government against each of the defendants.

The present suit was instituted by the United States, under 26 U. S. C. §7403 (1970), to foreclose its tax assessment lien on the interests of Joseph Mandel and his wife, Carol, in a number of life insurance policies. The relevant facts are undisputed. On March 22, 1963, a delegate of the Secretary of the Treasury made a 100% penalty assessment against the defendant, Joseph Mandel, for various employment taxes in the amount of $18,248.49. ¹ The notice of the lien was duly filed. ² In June of the following year, the U. S. District Court for the Southern District of Florida entered a judgment in favor of the government against Mr. Mandel for a portion of the tax assessment, $9,896.67 plus interest. As is indicated by the unsatisfied 1964 judgment, Joseph Mandel's liability for the unpaid taxes remains outstanding.

Since the filing of the notice of lien and the entry of the judgment, Mr. Mandel has, at one time or another, been the owner of several life insurance policies, according to the terms of which he reserved the right to change the beneficiary designation. He is presently the owner of life insurance policy number 12-272-768 on which the defendant, New York Life Insurance Company (hereinafter " New York "), is the insurer. ³ In the past, he was the owner of life insurance policies, numbered 5237452, 2562554, and 3019163, on which the defendant, John Hancock Mutual Life Insurance Company (hereinafter "Hancock"), is the insurer. Mr. Mandel was also the owner of life insurance policy number 13-204-455 on which the defendant, Prudential Insurance Company of America (hereinafter "Prudential"), is the insurer. Mr. Mandel assigned the Hancock policies to his wife, Carol Mandel, on December 7, 1967; and, he assigned the Prudential policy to her on January 4, 1968. Each of the policies currently has a cash surrender value.

Because there are no factual issues left to be resolved at trial, the case is ripe for summary judgment. E.g., Ranger Insurance Company v. Algie, 482 F. 2d 861 (5th Cir. 1973). The legal questions presented concern: whether the government's tax assessment lien has been rendered "unenforceable by reason of lapse of time," as the phrase is employed in 26 U. S. C. §6322; whether the tax assessment lien on Mr. Mandel's right to receive the cash surrender values of the Hancock and Prudential policies survived the assignment of these policies to Mrs. Mandel; and, whether the defendant insurers can be compelled to pay to the government the cash surrender values of the policies in the absence of both surrender of the policies and an election by the owner of the policies to receive the cash surrender values.

The resolution of the first issue turns on an interpretation of 26 U. S. C. §§ 6322 ⁴ and 6502(a). ⁵ In Moyer v. Mathas [72-1 USTC ¶9342], 458 F. 2d 431 (5th Cir. 1972), the Fifth Circuit recently had the occasion to interpret these sections under circumstances far more aggravated than those confronting Mr. and Mrs. Mandel. There an assessment and notice of lien were filed against the delinquent taxpayer in 1949. Almost six years later, in 1955, the government brought suit in the Southern District of New York to reduce the assessments to judgment. While the government's suit was pending, the taxpayer sold part of her Florida property to a Mr. Moyer in 1958. In 1962, the government obtained a default judgment for $106,000 of the assessment. Thereafter, Mr. Moyer began having his own problems with the local tax collector--he apparently failed to pay his state property taxes. In 1969, the Clerk of the Circuit Court for Volusia County , Florida , conducted two tax deed sales of part of the property that Moyer acquired from the delinquent taxpayer. Because the Clerk paid a portion of the proceeds from the first sale to the government, and was about to make a similar payment out of the proceeds from the second sale, Mr. Moyer brought two suits. In one action, he sought to enjoin the Clerk to pay to him the funds the Clerk would otherwise have paid to the government; and, in the other, he sued for a refund of the money paid to the government after the first sale. The government counterclaimed with an action to foreclose the 1949 tax assessment lien. Not unexpentedly, Mr. Moyer asserted that the foreclosure counterclaim was time-barred. The district court did not agree, Moyer v. Mathas [71-2 USTC ¶9533], 332 F. Supp. 357 (M. D. Fla. 1971), and the Fifth Circuit affirmed.

The appellate court reasoned that §6322 states that the tax assessment lien "shall continue until the liability for the amount so assessed . . . becomes unenforceable by reason of lapse of time." The phrase, "by reason of lapse of time," was read in light of section 6502(a) which permits collection of the assessed tax "by a proceeding in court, but only if . . . the proceeding [is] begun within 6 years after the assessment of the tax." The court then held that the 1955 suit commenced in the Southern District of New York was "a proceeding in court" which satisfied the requirements of section 6502(a). Thus the government was not barred from maintaining its foreclosure action twenty years after the tax assessment lien arose.

The Fifth Circuit's holding in Moyer compels a similar result in the present case. Here, the government first brought suit in June of 1964, a year and a half after the assessment was made and the notice of lien was filed. Since that action was "a proceeding in court" well within the six year period, section 6502(a) does not prevent the government from succeeding in this suit to foreclose the 1963 tax assessment lien.

The defendants have argued that the 1963 lien was merged into the 1964 judgment. Thus the enforceability of the lien was extended only until 1971 because, according to Florida law, ⁶ the judgment was enforceable for seven years. The defendants would have the court conclude that since the present action was commenced in 1973, it was time-barred.

However, the same merger argument was expressly rejected by the trial court in Moyer, 332 F. Supp. at 359, and implicitly rejected by the Fifth Circuit. It appears to be well settled that "tax assessment liens, unlike most liens under state law, continue to exist independently of the suit or judgment which has extended their existence." United States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746, 749 (2d Cir. 1966); accord, United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1152 (9th Cir. 1970). Since there is no merger, the tax assessment lien remains enforceable long after the period for bringing suit on the accompanying judgment has expired.

In determining whether the tax assessment lien survived the assignment of the Prudential and Hancock policies, the Supreme Court's decision in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958) provides the necessary guidance. The court held that the insured's right to compel the insurance company to pay to him the cash surrender value of the life insurance policy was a property right to which the tax assessment lien attached. Moreover, "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien . . . '[the property] passes cum onere.'" Id. at 57. Following the Bess rationale, the government's tax lien attached to Mr. Mandel's right to the cash surrender value of each of the Prudential, New York , and Hancock policies. The subsequent assignment of the Prudential and Hancock policies to Mrs. Mandel did not affect the lien: she received the encumbered right to demand the cash surrender value of each of the policies. United States v. Waxman [62-1 USTC ¶9444], 205 F. Supp. 340 (N. D. Ohio 1962).

The defendant insurers have also raised an issue as to whether they can be compelled to pay to the government the cash surrender value of a policy in the absence of both an election by the policy owner to demand the cash surrender value, and surrender of the policy. The insurers have apparently misconceived the nature of the government's suit. By foreclosing its lien on the owner's rights under the life insurance policy, the government is effectively exercising the policy owner's election to demand the cash surrender value. United States v. Metropolitan Life Insurance Co., [58-2 USTC ¶9630], 256 F. 2d 17 (4th Cir. 1958); see United States v. Mitchell [65-2 USTC ¶9581], 349 F. 2d 94, 104 (5th Cir. 1965). As long as the foreclosure is considered an election, it matters not that the right to demand the cash surrender value is one of several options available to the owner. Thus the government, like the policy owner, can make the choice and compel the insurance company to pay the cash surrender value.

The insurers' concern for the surrender of the policies is misplaced. Surrender of the policies is not a prerequisite to either the existence or the foreclosure of the government's tax assessment lien on the owner's right to the cash surrender value. See United States v. Mitchell, supra. The insurers' concern undoubtedly springs from their desire to protect themselves insofar as their future obligations under the policies may be concerned. However, the judgment of the court provides ample protection. United States v. Metropolitan Life Insurance Co., supra.

To summarize briefly, the present foreclosure action is not untimely. The tax assessment lien attached to Mr. Mandel's right to demand the cash surrender of each of the New York , Prudential, and Hancock policies. When Mr. Mandel assigned the Hancock and Prudential policies to Mrs. Mandel, she received his rights under these policies subject to the government's lien. Finally, the government is entitled to foreclose its lien even though Mr. and Mrs. Mandel have not yet either surrendered the policies, or elected to demand the cash surrender values of the policies.

The government shall prepare an appropriate final judgment.

Ordered and adjudged that the government's motion for summary judgment against each of the defendants be and the same is hereby granted.

¹ The penalty assessment was made pursuant to 26 U. S. C. §6672.

² The initial notice of lien was filed on June 14, 1963. Consistent with the refiling of notice provisions of 26 U. S. C. §6323(g), the notice was refiled on November 15, 1967 and September 28, 1968.

³ Since 26 U. S. C. §7403(b) requires the joinder of anyone having an interest in the property, the insurance companies have been joined as parties defendant. See United States v. Bess, 357 U. S. 51, n. 2 (1958).

⁴ 26 U. S. C. §6322 reads:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amounts so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time."

⁵ 26 U. S. C. §6502(a) reads:

"(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--

(1) within 6 years after the assessment of the tax, or

(2) prior to the expiration of any period for collection agreed upon in writing by the Secretary or his delegate and the taxpayer before the expiration of such 6-year period (or, if there is a release of levy under section 6343 after such 6-year period, then before such release).

The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. The period provided by this subsection during which a tax may be collected by levy shall not be extended or curtailed by reason of a judgment against the taxpayer."

⁶ Fla. Stat. §95.11(2) (1973).

 

 

 

United States of America , Plaintiff v. Harold G. Steiner et al., Defendants

U. S. District Court, W. Dist. Wis., 70-C-195, 4/16/74

[Code Sec. 6321]

Tax liens: Property subject to: Insurance proceeds.--The cash surrender value of insurance policies on the life of a tax debtor could be collected by the government in satisfaction of its lien. Whatever interest his wife had would be subject to the lien.

John O. Olson, United States Attorney, Madison , Wis. , for plaintiff. William M. Ward, 69 W. Washington, Chicago, Ill., for Steiners, Young, S. S. S., S & Y Tree Farms, Inc., Vacuum Platers, Inc., and Downing, R. J., Ralph Wm. Bushnell, 204 S. Hamilton, Madison, Wis., for Equitable Life Assurance Society of U. S., and New York Life Ins. Co., Anthony J. Brondino, 501 E. Pleasant St., Milwaukee, Wis., for Catholic Family Ins. Soc., Curran & Curran, 111 Oak St., Mauston, Wis., for Bank of Mauston, John A. Cole, Cole & Conway, P. O. B. 666, Wisconsin Rapids, Wis., for Wisconsin River Power Co., E. H. Radtke, 128 S. Walnut St., Reedsburg, Wis., for Farmers & Merchants Bk., Croak & Croak, 4715 Monona Dr., Madison, for Knights of Columbus, Hollis Thompson, 107 S. Monroe, New Lisbon, Wis., for New Lisbon State Bk., for defendants.

Opinion and Order

DOYLE, District Judge:

Plaintiff has moved for a partial summary judgment in its favor with respect to certain insurance policies issued on the life of Harold G. Steiner by certain insurance companies. I find that there is no genuine issue as to the following material facts:

Facts

On January 7, 1959, a federal tax assessment was made against Harold G. Steiner who, despite notice and demand, did not pay the assessed amount; also on that date federal tax assessments were made against Harold G. Steiner and Ollie Mae Steiner who, despite notice and demand, did not pay the assessed amounts. On September 5, 1963, the United States Tax Court entered a decision against the Steiners concerning the foregoing assessments, which decision was affirmed on appeal. Accordingly, this United States District Court for the Western District of Wisconsin entered judgments on January 11, 1973, against the defendants Harold G. Steiner and Ollie Mae Steiner in amounts well in excess of one-half million dollars. Equitable Life Assurance Society of the United States (hereinafter Equitable) has issued three insurance policies on the life of Harold G. Steiner, policies numbered 12,039,888, and 12,039,887, and 12,055,378. Each of said policies has a cash surrender value. Harold G. Steiner has retained incidents of ownership in each of these policies, including the right to demand the cash surrender value of the policies. With respect to policy number 12,039,888, neither the Bank of Mauston nor any other party presently claims interest of any kind by assignment. With respect to policies numbered 12,039,887 and 12,055,378, neither the New Lisbon State Bank nor any other party presently claims any interest of any kind by assignment.

New York Life Insurance Company (policy number 20,333,344), Catholic Family Insurance Society (policy number 6,123), and Knights of Columbus (policies numbered 524,062 and 608,539, and 666,487), have issued insurance policies on the life of Harold G. Steiner who has retained incidents of ownership in these policies including the right to demand the cash surrender value of the policies. Each of the said policies has a cash surrender value. No party claims any interest in any of the said policies by assignment.

The defendant Ollie Mae Steiner asserts an interest in all of the foregoing policies as a named beneficiary.

Opinion

The cash surrender value of insurance policies on the life of the taxpayer may be collected by the government in satisfaction of the tax debt. This question is governed by federal law. Ollie Mae Steiner has no claim to the cash surrender value of these policies. In any event, whatever interest she may enjoy, if any, is also subject to the government's tax lien.

Order

It is ordered that the plaintiff's motion for partial summary judgment is granted and that judgment be entered herein ordering each of the said insurance companies to pay to the plaintiff the present cash surrender value of each of said insurance policies, to be applied to the tax liabilities of Harold G. Steiner.

 

 

 

United States of America , Plaintiff v. Thomas C. Childress, Naida W. Childress, and The National Life and Accident Insurance Company, Defendants

U. S. District Court, Middle Dist. Tenn., Nashville Div., Civil Action No. 3540, 10/30/70

[Code Sec. 6321--Result unchanged by '69 Tax Reform Act]

Tax liens: Property subject: Life insurance: Cash surrender value.--The cash surrender value of a life insurance policy was property subject to levy. The delinquent taxpayer, the insured, had the right to change the beneficiary and, thus, no vested interest in the policy had been created in the beneficiary. Further, the policy had a cash surrender value that was withdrawable at the whim of the insured. The fact that the policy required surrender of the policy as a condition for payment did not have the effect of making the interest of the insured contingent.

Charles H. Anderson, United States Attorney, Nashville , Tenn. , for plaintiff. Rex Roberts, National Life & Accident Insurance Co., Nashville , Tenn. , for defendant.

Memorandum Opinion

[Facts]

MORTON, District Judge.

The defendant National Life and Accident Insurance Company issued on July 30, 1936 a life insurance policy on the life of Thomas C. Childress in the face amount of One Thousand Dollars ($1,000.00). The insured Childress retained the right to change the beneficiary of the policy. His wife, Naida Childress, was named beneficiary on April 27, 1943. No changes have been made since this date and no assignments of ownership or other transfers have been noted on the policy. No payments or disbursements have been made with respect to said policy and it is fully paid up. It has a cash surrender value.

On November 10, 1960, the District Director of Internal Revenue made an assessment in the amount of $26,960.98 against the defendant Thomas C. Childress for federal withholding taxes. Notice of federal tax liens were filed in Washtenaw County , Michigan on January 6, 1961 and February 16, 1961 in Hillsborough County , Florida . On September 5, 1961, notice of levy was served on the defendant National Life and Accident Insurance Company.

The defendants Childress were not in the State of Tennessee and were properly served by publication in accordance with the provisions of 28 U. S. C., Section 1655.

[Issues]

Motions for Summary Judgment have been filed by the United States of America and The National Life and Accident Insurance Company.

Three questions have been raised:

1. Conditions precedent in the insurance policy--i. e., surrender of policy and non-forfeiture provisions.

2. Does the cash surrender value constitute property of insured subject to levy.

3. Is there possible double liability to the insurance company.

At the outset it should be noted that no question is raised as to the existence of the debt of Childress or as to the sufficiency of the levy.

[Property Subject to Levy]

The Court finds that the insured had a property interest in the policy. It had a cash surrender value withdrawable at the whim of the insured. The insured had the right to change the beneficiary and thus no vested interest was created in the beneficiary. ¹ Since the insured was alive at the time of the tax levy and subsequent institution of this suit, we are not faced with the question of vesting of the proceeds.

The Court further finds that the United States of America , by asserting its lien and the institution of this suit, seized the insured's property. It is the belief of this Court that the insurance company is fully protected by any judgment rendered in this proceeding. Further, it is the opinion of the Court that the stated conditions precedent in the policy of insurance do not have the effect of making the interest of the insured contingent. If the insured had lost the policy of insurance (the form issued to him by the company), would his rights have been contingent?

The Court finds no merit in the fear of the insurance company that it might be called upon to pay the cash surrender value twice. If ordered to pay by court order it would not be a volunteer. The insurer would be in the shoes of any other garnishee by attachment with the attendant rights.

Thus the Motion for Summary Judgment of the United States of America is sustained and that of The National Life and Accident Insurance Company is overruled.

The attorney for the United States will prepare the appropriate judgment.

¹ U. S. v. Metropolitan Life Ins. Co., 256 F. (2d) 17.

 

 

 

United States of America , Plaintiff v. Estate of Joseph M. Cullen, Deceased, a/k/a Mack Cullen, Anna Cullen, and Prudential Insurance Co. of America , Defendants

U. S. District Court, East. Dist. Ill., Civil No. 67-56, 3/14/68

[1954 Code Sec. 6321]

Lien for taxes: Cash surrender value of life insurance policies.--Federal tax lien attached to the cash surrender value of life insurance policies which the taxpayer owned on her life.

Carl W. Feickert , United States Attorney, Room 327 P. O. Bldg., East St. Louis , Ill. , for plaintiff. Norman J. Gundlach, Suite 605, First Nat'l Bank Bldg., East St. Louis, Ill., for defendants.

Memorandum and Order (3/14/68)

JUERGENS, District Judge:

Defendant Estate of Joseph M. Cullen was heretofore dismissed on plaintiff's motion. Default judgment was entered against defendant Anna Cullen on January 30, 1968. Plaintiff now moves for judgment on the pleadings against the sole remaining defendant, Prudential Insurance Co. of America.

The action is brought to foreclose the federal tax liens on the cash value of three policies of insurance on the life of defendant Anna Cullen, namely, Policy Numbers 80139973, 95097376 and 95543383, having cash surrender values of $192.86, $479.28 and $319.04, respectively.

Plaintiff charges there is no issue of law and no genuine issue as to any material fact and, accordingly, it is entitled to a judgment foreclosing its liens on the cash value of the policies.

A federal tax lien under sections 6321 to 6323, Internal Revenue Code of 1954, attached to all property and rights to property of defendant Anna Cullen, based on assessment of taxes against defendant and her deceased husband. The lien attached to the present value of the policies of insurance on her life with Prudential Insurance Co. of America.

It is admitted by defendant Prudential Insurance Co. of America that it has outstanding policies of insurance on the life of Anna Cullen with cash surrender values in the amounts indicated above and it does not assert any defense with the exception of a right of set-off on cross-claim against Anna Cullen in the event the United States of America should recover a judgment against defendant Prudential by virtue of its tax liens on two additional policies on the life of Joseph M. Cullen, deceased, which policies were heretofore paid by Prudential. No claim is asserted against defendant Prudential Insurance Company by reason of the policies on the life of Joseph M. Cullen on account of the payment of the proceeds of these policies to the beneficiary.

The court finds that the United States of America has a lien on the three enumerated policies for the amount of the cash surrender values of each and further funds that the lien should be foreclosed.

The court finds that the federal tax liens on Policy No. 80139973 in the amount of $192.86, Policy No. 95097376 in the amount of $479.28 and Policy No. 95543383 in the amount of $319.24 should be foreclosed and judgment should be entered in such amounts in favor of the plaintiff, United States of America .

Parties to settle the order.

Order (3/27/68)

This cause having come before this Court on motion for judgment of plaintiff, United States of America, on the pleadings as against the defendant Prudential Insurance Company of America, and this Court having read the plaintiff's brief in support of its motion and defendant's answer, and further being fully advised in the premises, finds that judgment should be entered for the plaintiff, United States of America and against the Prudential Insurance Company of America.

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Federal Tax Liens be foreclosed on the cash value of the following policies of insurance on the life of Anna Cullen:

Policy                Cash Surrender

Numbers                        Value

80139973 ....                $192.86

95097376 ....                 479.28

95543383 ....                 319.04

                             $991.18

and, that judgment be and is hereby entered in favor of the United States of America , plaintiff, and against Prudential Insurance Company of America in the amount of $192.86, $479.28 and $319.04, or a total of $991.18.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the cross-claim of the defendant Prudential Insurance Company of America against Anna Cullen is hereby dismissed since no claim was asserted against defendant Prudential Insurance Company of America by reason of its paying the proceeds of certain policies on the life of Joseph M. Cullen to Anna Cullen.

 

 

 

United States of America , Plaintiff v. Donald I. Edwards, et al., Defendants

U. S. District Court, Dist. Kan. , Civil Action No. W-3466, 4/28/67

[1954 Code Sec. 6321]

Tax liens: Insurance policies: Cash surrender value: Beneficiaries.--The Government was entitled to the cash surrender value of three life insurance policies owned by the delinquent taxpayer that had been attached to satisfy liens for unpaid taxes. Regardless of who was the actual named beneficiary on the policies, the Government's right to the cash surrender value of the policies was superior.

Bernard V. Borst, Assistant United States Attorney, Federal Bldg., Wichita, Kan., for plaintiff. William Kahrs, Kahrs, Nelson, Fanning & Hite, 816 Union Center Bldg., Wichita, Kan., for N. Y. Life Ins. Co.; Clyde Raleigh, Raleigh & Ehling, 1st Nat'l Bank Bldg., Hutchinson, Kan., for D. I. Edwards and B. J. Edwards, defendants.

Journal Entry

BROWN, District Judge:

Now on this 15th day of April, 1967, it being one of the regular judicial days of this court, this matter comes on for trial. The United States of America appears by and through Assistant United States Attorney, Bernard V. Borst; the defendants, Donald I. Edwards and Betty Jean Edwards, appear by and through their attorney of record, Clyde Raleigh; the defendant, New York Life Insurance Company, appears by and through its attorney of record, William Kahrs; there are no other appearances.

The Court finds that Winifred Doris Edwards, a/k/a Winifred Hatcher Edwards, and Washington National Insurance Company were made parties defendant hereto. The Court finds that Winifred Doris Edwards, a/k/a Winifred Hatcher Edwards was personally served with summons and a copy of the complaint on September 1, 1965; that Washington National Insurance Company, a foreign corporation licensed to do business within the State of Kansas, was served with summons, a copy of the complaint and designation of place of trial in accordance with K. S. A.-40-218 and the rules of this court; that neither of the last two above-named defendants have filed responsive pleadings herein; that the Clerk of the United States District Court for the District of Kansas, on October 28, 1966, entered default against the defendants, Winifred Doris Edwards, a/k/a Winifred Hatcher Edwards and the Washington National Insurance Company. The Court, after examining the service of process in the court file finds that it has jurisdiction over the subject matter of this law suit and over all parties hereto.

Thereupon, this matter is presented to the Court and the Court finds that the defendant, Donald I. Edwards, is indebted to the United States of America by virtue of the tax assessments for income tax for the years 1948, 1952, 1953, 1954, and 1956, and for withholding tax for the period of October 1, 1946, through June 30, 1955; that there is now due and owing to the United States of America, with respect to the assessment of said taxes plus penalties and interest to the date of judgment, the sum of $71,175.49 plus interest thereafter as provided by law said interest to accrue at the daily rate of $6.81 per day after date of judgment; that by virtue of aforesaid assessments against the defendant, Donald I. Edwards, said tax assessments constituted liens in favor of the plaintiff and against all property of the taxpayer, Donald I. Edwards, both real and personal including after acquired property of every kind in description wheresoever constituted of the date of said assessments; that defendant, Donald I. Edwards owns life insurance policy No. 411640 in the amount of $1,000.00 issued August 26, 1940, by the defendant, Washington National Insurance Company, naming Winifred Doris Edwards as primary beneficiary; that Washington National Insurance Company issued life insurance policy No. 487639 to the defendant, Donald I. Edwards, in the amount of $1,136.00 on April 8, 1946, listing Winifred Doris Edwards as primary beneficiary; that defendant, Donald I. Edwards, has submitted applications to the Washington National Insurance Company to have his named primary beneficiary changed from Winifred Doris Edwards to Betty Jean Edwards on the two insurance policies last above named herein; that New York Life Insurance Company issued life insurance policy No. 12939799 to the defendant, Donald I. Edwards, in the amount of $1,012.00 naming Winifred Hatcher Edwards as primary beneficiary; that the cash surrender value of these three life insurance policies above-named are as follows:

Policy No. 411640 as of January 26, 1965 $613.31;

Policy No. 487639 as of January 8, 1965 $816.69;

Policy No. 12939799 as of March 8, 1965 $562.95;

that the amounts of the cash surrender value of the aforesaid three insurance policies are property and rights to property of the taxpayer, Donald I. Edwards; that on January 26, 1965, the District Director of Internal Revenue, a delegate of the Secretary of Treasury, served notice of levy of the tax liens arising from the tax assessments, above described, on defendant, Washington National Insurance Company; and on February 26, 1965, final demand for payment of this levy was served on the defendant Washington National Insurance Company; notice of levy and final demand on the Washington National Insurance Company covered the two insurance policies above described; on January 26, 1965, the District Director of Internal Revenue, a delegate of the Secretary of the Treasury, served notice of levy of tax liens arising from the tax assessments above described herein on the defendant, New York Life Insurance Company and on that same date final demand for payment of this levy was served on the defendant Insurance Company; that the claims of the plaintiff are superior to any claims of any of the parties hereto; that said Federal Tax Liens should be foreclosed against life insurance policy No. 411640 and policy No. 487639 of the Washington National Insurance Company and the present cash surrender value of said policy should be ordered paid to the plaintiff or sold according to law and the proceeds therefrom paid over to the plaintiff, United States of America; that this Court should order the above described Federal Tax Liens foreclosed against policy No. 12939799 of the New York Life Insurance Company and the cash surrender value of said property should be paid over to the plaintiff or sold according to law and the proceeds therefrom paid over to the plaintiff, United States of America; that the primary beneficiary of said policies whether said beneficiary be Winifred Doris Edwards, a/k/a Winifred Hatcher Edwards or Betty Jean Edwards or both should be decreed to have no interest in or to said cash surrender value of said insurance policies which would be superior to the claim of the plaintiff, United States of America, and said United States of America shall take said proceeds free and clear from any claim of any of the defendants hereto; that the defendant Insurance Companies hereto shall pay to the Clerk of the United States District Court for the District of Kansas the cash surrender values of said insurance policies forthwith to be applied upon the judgment to be granted herein to the plaintiff and against the defendant, Donald I. Edwards.

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the defendant, Donald I. Edwards, is indebted to the United States of America by virtue of the income tax assessments against him for the years 1948, 1952, 1953, 1954, and 1956 and for withholding tax for the period of October 1, 1946, through June 30, 1955, in the amount of $71,175.49 and judgment is hereby granted to the plaintiff, United States of America and against the defendant, Donald I. Edwards thereon, said judgment to draw interest as provided by law, said interest to accumulate at the daily rate of $6.81 per day from the date of judgment.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the plaintiff, United States of America , has valid and subsisting liens on all property and rights to property of the defendant, Donald I. Edwards.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Washington National Insurance Company and the New York Life Insurance Company, defendants herein, are ordered to pay to plaintiff, United States of America, the cash surrender value of any and all policies of insurance presently owned by the defendant, Donald I. Edwards and issued by said Insurance Companies and in particular the following policies:

Policy No. 411640 and Policy No. 487639 issued by the Washington National Insurance Company and Policy No. 12939799 issued by New York Life Insurance Company; that said cash surrender values of said policies be paid forthwith by paying said money to the Clerk of the United States District Court for the District of Kansas.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the payment of the cash surrender values of said policies shall be free and clear of any and all claims of any and all parties hereto.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the defendant, Donald I. Edwards, shall pay the costs herein

 

 

 

United States of America , Plaintiff v. Ceorge A. Thinnes, Catherine Elvira Thinnes, The Western and Southern Life Insurance Company, Defendants

U. S. District Court, So. Dist. Ohio, Civil Action No. 5992, 12/30/66

[1954 Code Sec. 6321]

Lien for taxes: Cash surrender value of life insurance policies.--A lien for taxes attached to the cash surrender value of insurance policies on the life of a delinquent taxpayer, since the insured could have realized the cash surrender value at any time during his lifetime.

Joseph P. Kinneary, United States Attorney, 722 Post Office Bldg., Cincinnati, Ohio, E. Winther McCroom, 18 E. 4th St., Cincinnati, Ohio, for plaintiff. Harry A. Abrams, Henry G. Monning, 2112 Carew Tower , Cincinnati , Ohio , Lawrence H. Kyte, 211 E. 4th St. , Cincinnati , Ohio , for defendant.

Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment Facts

PORTHER, District Judge:

This action was brought by the United States as party plainiff against the taxpayers George A. and Catherine Elvira Thinnes to reduce to judgment certain federal excise tax liens and to foreclose the liens upon the property interest of the taxpayers in two insurance policies issued by the defendant, The Western and Southern Life Insurance Company. In its complaint, the United States alleged an indebtedness for unpaid federal excise taxes in the total amount of $56,229.60, plus interest thereon as provided by law, and that by virtue of assessment of these taxes, a lien arose upon all property and rights to property of the defendant-taxpayer, including the property right in the cash surrender value of life insurance policies 1186152 and 1190755 issued by the Western and Southern Life Insurance Company. In their joint Answer to the complaint of the plaintiff United States , the defendants, George A. Thinnes and Catherine Elvira Thinnes, admitted to the tax liability, but denied that the tax became a lien upon and against all property and rights to property, including the property right in the cash surrender value of the life insurance policies. The Answer of the Western and Southern Life Insurance Company to the complaint of the United States admitted the property interest of the defendants, George A. Thinnes and Catherine Elvira Thinnes in the cash surrender value of the insurance policies, alleged an offsetting loan to be deducted from the cash surrender value, and prayed the Court to order it to pay the Clerk of the Court the sum total of the surrender value and to be discharged from all liabilities to the parties hereto and to be dismissed from the action. The computation of property interest furnished by this defendant is conceded to be correct by the plaintiff United States .

The only issue before this Court, therefore, as asserted in the answer of the defendants George A. Thinnes and Catherine Elvira Thinnes, is whether the tax liens of the United States attach to the property interest of the defendants in the cash surrender value of the policies, thereby enabling the United States to foreclose on this interest in partial satisfaction of its tax lien.

Argument

Section 6321 of the Internal Revenue Code of 1954 (26 U. S. C., 6321) provides "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person". That this lien arising by virtue of the quoted section attached to the cash surrender value of life insurance policies, being a "property interest" of the insured, was decided by the Supreme Court in the case of United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 Sup. Ct. 1054 (1958) which stated (at p. 56):

The cash surrender value of the policy, however, stands on a different footing. The insured has the right under the policy contract to compel the insurer to pay him this sum upon surrender of the policy. This right may be borrowed against, assigned or pledged. Slurszberg v. Prudential Insurance Company, supra. Thus, Mr. Bess "possessed just prior to his death, a chose in action in the amount stated (i. e., the cash surrender value) which he could have collected from the insurance companies in accordance with the terms of the policies" 243 F. 2d 675, 678. It is therefore clear that Mr. Bess had "property" or "rights to property" within the meaning of Paragraph 3670, in the cash surrender value. United States v. Hoper [57-1 USTC ¶9508], 242 F. 2d 468; Knox v. Great Western Life Assurance Company [54-1 USTC ¶9373], 212 F. 2d 784; United States v. Royce Shoe Company [55-2 USTC ¶9770], 137 F. Supp. 786; Smith v. Donnelly [46-1 USTC ¶9247], 65 F. Supp. 415; United States v. Aetna Life Insurance Company [42-1 USTC ¶9266], 46 F. Supp. 30.

The holding of United States v. Bess is that the property interest of the taxpayer in an insurance policy is to be determined under state law, and that once a property interest has been determined, the tax liens of the United States attach thereto under the principles of Section 6321 of the Code (Section 3670 of the Internal Revenue Code of 1939, as considered in the Bess case). A property right in the cash surrender value of life insurance policies was recognized under Ohio law in the case of United States v. Wintner [65-2 USTC ¶9642], 247 F. Supp. 47 (ND Ohio). The defendant Western and Southern Life Insurance Company has admitted that the defendant George A. Thinnes "without the consent of the beneficiary is entitled to receive every benefit, exercise every right, and enjoy every privilege conferred upon him by said policies, including the right to assign them, the right to borrow against the policies, and the right to demand and to receive the cash surrender value thereof". (Complaint, Par. 11.) The principal enunciated in Bess, supra, that once a property interest having been determined, the federal tax lien attaches thereto, has been followed in the later cases of United States v. Reisor [60-2 USTC ¶9684], 6 A. F. T. R. 2d 5543 (DC Okla., August 10, 1960); United States v. Grobe [60-1 USTC ¶9463], 5 A. F. T. R. 2d 1446 (DC Colo. 1960); United States v. Hancock [60-2 USTC ¶9724], 6 A. F. T. R. 2d 5637 (DC Ill., 1960); United States v. Greenspahn [62-1 USTC ¶9441], 9 A. F. T. R. 2d 1314 (DC Ill., 1962).

Conclusion

As expressed in the affidavit attached hereto, the total liability of the taxpayer, by virtue of the assessment made against him, less payments and credits made to date, totals $56,229.60, plus interest to May 3, 1966, of $7,494.28, plus an accrual rate of $9.23 per day. The taxpayer George A. Thinnes does not dispute the fact of liability or the amount thereof, and it is therefore requested that the Court enter summary judgment in favor of the plaintiff for the amounts shown in the effidavit of the District Director.

As shown above, these unpaid liabilities became a lien on all property and rights to property of the defendant-taxpayer as of the date of assessment, including his property right in the cash surrender value of the insurance policies issued to him by the defendant Western and Southern Life Insurance Company. It is requested therefore that this Court order the foreclosure of the lien of the United States on the cash surrender value of the life insurance policies described and that this be accomplished by ordering defendant George A. Thinnes to surrender the respective insurance policy contracts to defendant Western and Southern Life Insurance Company and by further ordering defendant Western and Southern Life Insurance Company to pay over to the United States the cash surrender value of the policies, computed as of the date of judgment, including premium and interest refunds, to apply toward the reduction of the judgment granted.

Judgment

This cause having been submitted on plaintiff's Motion for Summary Judgment and the Court having considered the Pleadings, the Affidavits, the Exhibits and the Briefs, and having been otherwise fully informed in the premises, it is

ORDERED, ADJUDGED and DECREED that plaintiff's Motion for Summary Judgment be and is hereby granted in all respects; and it is further

ORDERED, ADJUDGED and DECREED that the plaintiff, United States , shall have judgment against the defendant, George A. Thinnes, for unpaid federal excise taxes for the period January 1957 through April 1958 in the amount of $65,941.39; and it is further

ORDERED, ADJUDGED and DECREED that the defendant, the Western and Southern Life Insurance Company, forthwith pay over to the plaintiff, the United States of America, the amount of the cash surrender value of its policies numbered 1190755 and 1186152 on the life of the defendant, George A. Thinnes, with all accrued dividends and interest on said policies, computed as of the date of such payment; and it is further

ORDERED, ADJUDGED and DECREED that upon payment as ordered above, said policies shall be deemed canceled, and all rights therein and thereunder of all parties to this action, including the defendant, George A. Thinnes, and Catherine Elvira Thinnes, and their privies, shall be foreclosed and forever barred and all obligations of the defendant, the Western and Southern Life Insurance Company, under said policies shall be deemed satisfied; and it is further

ORDERED, ADJUDGED and DECREED that this amount shall be applied in reduction of the judgment entered against the defendant, George A. Thinnes.

 

 

 

United States of America, Plaintiff v. Simon O. LaFarge, John Hancock Mutual Life Insurance Company, Home Life Insurance, New York Life Insurance Company, Renee Zelda LaFarge, and the Public Administrator as Administrator of the Goods, Chattels and Credits which were of Anna S. LaFarge, deceased, Defendants

U. S. District Court, So. Dist. N. Y., 64 Civ. 1346, 7/18/66

[1954 Code Sec. 6321]

Collections: Liens: Insurance proceeds: Cash surrender value.--A default judgment was entered for the government in its foreclosure suit. Its lien was superior to the claims of an assignee of three insurance policies previously owned by the taxpayer and assigned subsequent to the time that the tax lien was perfected.

Edward J. Dimock, United States Attorney, New York , N. Y., for plaintiff. Charles Goldenberg, 261 Broadway, New York, N. Y., for Anna S. LaFarge; Lee M. Gammill, 51 Madison Ave., New York, N. Y., for New York Life Ins. Co; Simon O. LaFarge, 139-15 83rd Ave., Jamaica, N. Y., pro se; Townley, Updike, Carter & Rogers, 220 E. 42nd St., New York, N. Y., for Home Life Insurance and John Hancock Mutual Life Ins. Co.; Renee Zelda LaFarge Blum, 3225 Ellis St., Berkeley, Calif., pro se, defendants.

Memorandum

TYLER, District Judge:

In this suit by the United States to foreclose and reduce to judgment its outstanding tax lien against defendant Simon O. LaFarge and Anna S. LaFarge, his wife, now deceased, the government here moves for a default judgment against Simon O. LaFarge pursuant to Rule 55, F. R. C. P., and for summary judgment against all of the other named defendants pursuant to Rule 56, F. R. C. P.

The essential facts are not in dispute. On May 1, 1964, the government filed this complaint seeking to foreclose the tax lien outstanding against Mr. and Mrs. LaFarge. According to Form 899 annexed to the government's papers, taxes, interest and penalties were assessed on December 23, 1957 as being due and owing from Mr. and Mrs. LaFarge in the sum of $14,209.21. Parenthetically, it appears that prior to December 23, 1957, Mr. LaFarge and his wife had executed waivers of assessment. Notice of lien was duly filed with the Register of the City of New York on March 18, 1960.

It is stated without contradiction that Simon O. LaFarge was the owner of a life insurance policy No. 3761025 issued by defendant John Hancock Mutual Life Insurance Company and that this policy was purportedly assigned by Mr. LaFarge to his then wife, Anna S. LaFarge, on or about November 17, 1960. LaFarge was also the owner of policy No. 510,557 issued by defendant Home Life Insurance Company. LaFarge purported to assign this policy to his then wife on or about November 17, 1961. ¹ Finally, it appears that Mr. LaFarge was the owner of insurance policy No. 12678221 issued by defendant New York Life Insurance Company, which policy was purportedly assigned by him to his then wife on or about November 17, 1960.

The government, of course, claims that its tax lien attached to these three policies or, more accurately, to their cash surrender values prior to the purported assignments thereof by Mr. LaFarge to his late wife. The parties defendant who have appeared in this action cannot and do not seriously dispute this conclusion.

When the summons and complaint were served and filed in this action, the three defendant insurance companies appeared. Defendant Simon LaFarge, however, did not appear and thus is in default. LaFarge did physically appear in court at the argument of this motion, however, at which time he effectively conceded that he was in default and offered no substantial defense to the complaint or opposition to this motion.

The Public Administrator of the County of New York has appeared in this case on behalf of the Estate of Anna S. LaFarge and, upon the argument of the motion, offered no serious opposition thereto.

Finally, defendant Renee Zelda LaFarge, the daughter of Mr. LaFarge and his late wife, was served in this action. She appeared through California counsel and filed an answer to the complaint. At the argument of this motion, however, counsel for the government and Mr. LaFarge informed this court that Renee LaFarge no longer had counsel and had not effectively responded to the motion now before the court. Mr. LaFarge also orally asked that this court appoint counsel for his daughter in this proceeding.

In her answer to the complaint, Renee Zelda LaFarge denies that her father was or is the owner of two of the three policies in question, those issued by New York Life Insurance Company and John Hancock Mutual Life Insurance Company. In addition, she appears to allege that the third policy was "cashed in" at Home Life Insurance Company by another and unidentified defendant, presumably either Mr. LaFarge or his late wife. Notwithstanding these allegations, it appears from the answer of the Home Life Insurance Company that the policy issued by it has never been "cashed in", and, as already indicated, that the policies were originally owned by Mr. LaFarge.

The government's motions must be granted in all respects for a number of reasons. First, as already pointed out, defendant Simon LaFarge does not seriously oppose the motion, and defendant insurance companies do not object, subject to their insistence that certain appropriate safeguards be inserted in an order to be hereinafter entered. Similarly, I do not understand the Public Administrator to oppose the motion on behalf of the estate of Anna S. LaFarge.

In view of the chronology of events briefly summarized hereinabove, it is perhaps understandable, both practically and legally, that the parties do not strongly oppose the government's motions. It is clear that the government's lien arose upon the assessment which was made on December 23, 1957. When notice of lien was duly filed on March 18, 1960, the government thereby obtained a perfected lien superior to claims of all subsequent purchasers or transferees. See United States v. Security Trust Company and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). It is settled that a tax lien of the United States may attach to the cash surrender value of life insurance policies such as the three policies here in question. See United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958). Thus, when the three policies were purportedly assigned by Mr. LaFarge on the dates after March 18, 1960, the government's perfected lien had already attached. In short, Anna LaFarge as assignee took the policies subject to the government's lien perfected on March 18, 1960, and the United States is now entitled to foreclose its lien against the proceeds thereof, irrespective of who the present owner or owners may be. See United States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746 (2 Cir. 1966). ²

Since defendant Renee Zelda LaFarge has effectively defaulted in appearing upon this motion, and because the averments in her answer, even if accepted as true, are of no legal significance in that any claim she may have with respect to one or more of the policies is subordinate to the government's perfected lien, I can conceive of no useful purpose in appointing a lawyer for her in this proceeding. Moreover, upon the facts available to me I would not have power to make such appointment in any event. See 28 U. S. C. 1915. Finally, it is at least as likely as not that Renee LaFarge did not oppose this motion because of advice that her claims would be defeated upon the conceded facts and law heretofore discussed.

The motions of the plaintiff are granted. An order should be settled on notice to all parties to provide that the government is entitled to receive the cash surrender values of the three policies in question as of the date of entry of the judgment. Further, the order should provide either that the policies be surrendered prior to payment of these cash surrender values or that the policies be deemed surrendered upon making such payments. Finally, it should be provided that, upon payment of the cash surrender values of the policies, the three defendant insurance companies shall thereupon be absolved of all further liability thereunder.

¹ The assignment of this policy provided by its terms that if Anna predeceased Simon, their daughter, Renee Zelda LaFarge, would succeed to Anna's rights as assignee.

² In this view of the matter, it is perhaps unnecessary to point out that the taxes were assessed against Anna LaFarge as well as her husband--a factor which in itself largely defeats any claim which her estate might have to the proceeds of the insurance policies.

 

 

 

United States of America v. Lilliam Wintner and Alexander Brien, Admr. of Estate of Alex S. Wintner, deceased

U. S. District Court, No. Dist. Ohio , East. Div., Civil Action No. 35830, 247 FSupp 47, 9/4/64

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

Lien for taxes: Cash surrender value of life insurance policies.--A lien for taxes attached to the cash surrender value of insurance policies on the life of a delinquent taxpayer, since the insured could have realized the cash surrender value at any time during his lifetime.

Russel E. Ake, 707-13 First Nat'l Bank Bldg., Canton , Ohio , for plaintiff. Richard Katcher, Sheldon J. Gitel, Ulmer, Berne, Laronge, Glickman and Curtis, 1130 B. F. Keith Bldg., Cleveland, Ohio, Sanders and Sanders, 821 Superior Bldg., Cleveland, Ohio, Donald C. Armour, Cleveland Trust Co., Cleveland, Ohio, for defendant.

Memorandum on Motion to Enter New Judgment Pursuant to the Supreme Court's Decision

KALBFLEISCH, District Judge:

The Court has for consideration the following motion of the plaintiff:

"Plaintiff moves the Court to vacate the judgment entered herein on January 2, 1962, and enter judgment in favor of the plaintiff and against the defendant Lillian Wintner in the amount of $18,274.65 and costs, on the following grounds:

"1. This Court filed its opinion in this action on December 8, 1961. 200 F. Supp. 157. Pursuant thereto, the Court entered judgment on January 2, 1962, in the amount of $26,002.09, plus interest and costs, in favor of the plaintiff and against the defendant Lillian Wintner. That judgment was affirmed by the Court of Appeals for the Sixth Circuit in an order dated January 18, 1963. [63-1 USTC ¶9270] 312 F. 2d 749. However, on January 6, 1964, the Supreme Court of the United States , in a per curiam decision, granted a writ of certiorari and reversed the judgment [64-1 USTC ¶9168]. (13 AFTR 2d 340.) A certified copy of the judgment of the Supreme Court was mailed by the Clerk of the Supreme Court to the Clerk of this Court on January 31, 1964.

"2. In its opinion of December 8, 1961, this Court held the doctrine of marshalling of assets applicable to the insurance proceeds involved. In reversing the decision of this Court, the Supreme Court gave no reasons, but cited its decision in Meyer v. United States, decided December 16, 1963 [64-1 USTC ¶9111] (12 AFTR 2d 6141), where it held the marshalling doctrine not applicable to insurance proceeds, under similar circumstances. However, without application of the marshalling doctrine, under the facts of the instant case, the plaintiff is entitled to recover the sum of $18,274.65, since, without application of that doctrine, the defendant Lillian Wintner received the cash values of insurance policies in that amount, subject to federal tax liens thereon. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51. Thus, although the judgment of January 2, 1962, in the amount of $26,002.09, plus interest and costs, cannot stand and must be vacated under the Supreme Court's decision, the plaintiff is entitled to judgment in a lesser amount, $18,274.65 and costs."

The defendant attacks the foregoing motion with the contention that this Court is bound by the mandate of the Supreme Court and therefore may not rehear any of the issues involved. This contention of the defendant requires the Court to determine the scope and effect of the Supreme Court's per curiam opinion in Wintner v. United States [64-1 USTC ¶9168], 375 U. S. 393, such per curiam opinion being, "The petition for writ of certiorari is granted and the judgment is reversed. Meyer v. United States, ante, p. 233."

The defendant's contention rests upon the following authorities: Sibbald v. United States, 12 Pet 488, 492, 9 L. Ed. 1167, 1169 (1838); In re C. & A. Potts & Co., 166 U. S. 263; Wenborne-Carbon Dryer Co. v. Cutler Dry Kiln Co., 21 F. 2d 692; Eastern Cherokees v. United States, 225 U. S. 573; In re Sanford Fork & Tool Co., 160 U. S. 247; Home Loan Bank of San Francisco v. Hall, 225 F. 2d 349; Gibsons v. Brandt, 181 F. 2d 650; Mays v. Burgess, 152 F. 2d 123; 5B C. J. S. 576-577; Ohio Power Co. v. United States [58-1 USTC ¶9114], 157 F. Supp. 158 National Association for the Advancement of Colored People v. Alabama, 360 U. S. 240; and defendant further says the following rules of the Supreme Court support her contention: Rules 24(1), 40(1)(d)(1), and 40(3), and also Rules 23(1)(c) and 40(1)(b)(1).

The defendant in her brief quotes certain excerpts from her petition for certiorari and the responses made thereto by the plaintiff and, based upon such excerpts and the authorities above cited, insists that this Court is limited by the reversal in Wintner, supra, to vacating the Court's former judgment of January 2, 1962, and entering judgment in favor of the plaintiff in the amount of $503.85.

This Court does not have before it any of the papers filed in the appeal from this Court's original decision to the Circuit Court of Appeals or to the United States Supreme Court; however, the Court can determine whether it may consider plaintiff's claim to $18,274.65 without knowledge of the subsidiary issues which may have been revealed by the parties on appeal. The Supreme Court in Hartford Life Ins. Co. v. Blincoe, 255 U. S. 129 (1921) clearly stated the governing principles regarding the effect of a prior reversal by the Supreme Court:

"Counsel, however, admit that the question of the inclusion of the tax was not discussed, but insist that 'the question was in the record, was necessarily involved, and was presented,' and invoke the presumption that whatever was within the issue was decided. In other words, that the case was conclusive not only of all that was decided, but of all that might have been decided.

"From our statement of the issues it is manifest that the quotation from the opinion has other explanation than counsel's and we need not dwell upon the presumption invoked or the extent of its application in a proper case. * * * The most that can be said of any question that was decided is, that it became the law of the case and as such binding on the Supreme Court of the State, * * * Certainly, omissions do not constitute a part of a decision and become the law of the case, nor does a contention of counsel not responded to. The element of taxes in the assessment was not considered by the Supreme Court, and in this court the Connecticut judgment and its effect were the prominent and determining factors. * * *

"It was urged, it is true, in the brief of counsel that the assessment 'was void because it included money for taxes erroneously claimed to be exacted under the laws of Missouri .' No notice, however, was taken of the contention and no influence given to it or to the effect it asserted. If it made any impression at all it was obviously as a state question dependent upon the state statutes upon which we would naturally not anticipate the state courts, the case necessarily going back to them." (pp. 136-37.)

See also United States v. Haley, 371 U. S. 18 (1962); Southern Ry. Co. v. Kentucky, 284 U. S. 338 (1932); and Wolff Packing Co. v. Indus. Court., 267 U. S. 552 (1925). In Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233 (1963), the case cited as controlling in the reversal of Wintner, the Supreme Court totally ignored the plaintiff's rights absent the marshaling doctrine.

Of compelling importance is the Court's declaration in Meyer that:

"The narrow question remaining is whether in such a situation the doctrine of marshaling of assets is compelled." (P. 236.)

Applicability of the marshaling doctrine was the only issue decided in Meyer, and therefore the plaintiff's claim that it is entitled to $18,274.65 without applying the marshaling doctrine has yet to be considered in this case. The pleadings, record, stipulations and briefs in the original submission of the case to this Court fully presented the alternate theory now sought to be decided under the motion before the Court, said alternate theory not having been determined in the original decision of this Court due to its reliance on the marshaling doctrine.

In opposition to plaintiff's present motion the defendant contends that even if it is determined that the Court has jurisdiction to consider the plaintiff's claim to a judgment for $18,274.65 plaintiff cannot recover the amount sought but is entitled to only $503.85.

From the stipulation of the parties it is admitted that Alex Wintner owned eight life insurance policies with a total face value of $87,500.00, which named the defendant, his wife, as beneficiary. He retained the usual powers under such policies, namely, to change the beneficiaries, demand the cash surrender value, and assign the policies. On December 13, 1948, he assigned these policies to a bank as collateral security for the repayment of a loan, and the assignments provided that in the event of his death the bank could satisfy its claim out of the net proceeds of the policies.

[Cash Surrender Value of Insurance Policies]

At the time of Mr. Wintner's death, June 8, 1954, $34,000.00 was due on the bank loan and the cash surrender value of the eight policies was $34,503.85. On June 21, 1954, the Columbus Mutual Life Insurance Company, which had issued two of the eight policies on Mr. Wintner's life having a combined face amount of $40,000.00, paid $34,000.00 to the bank in full satisfaction of Mr. Wintner's indebtedness to the bank, and the balance of 6,009.60 was paid to the defendant, Mr. Wintner's widow and beneficiary. At the time of Mr. Wintner's death the two policies issued by the Columbus Mutual Life Insurance Company had a cash surrender value of $16,229.20. The bank loan having been paid in full from these two policies, the bank, on June 23 and 24, 1954, released assignments to it of the six remaining policies and the insurance companies involved paid the combined face amount of the six policies ($47,500.00) to the defendant, Mr. Wintner's widow and beneficiary. The cash surrender value of these six policies at the time of Mr. Wintner's death was $18,274.65, the sum now claimed by the plaintiff.

Section 3670 of the Internal Revenue Code of 1939 provides:

"Property subject to lien

"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 any 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."

Section 3670 creates no property rights but merely attaches consequences to rights created under state law, therefore the Court must initially examine Mr. Wintner's rights in the policies as defined by Ohio law. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958).

Since Mr. Wintner had the power to demand the cash surrender value of each insurance policy he had "property" or "the rights to property" as defined in Section 3670. Bess, supra, p. 56. In Katz v. Ohio National Bank, 127 O. S. 531, 535 (1934), the law of Ohio is stated as follows:

"[T]he assignment of a life insurance policy as collateral security does not divest the assignor of his general property in the policy, but creates only a lien in favor of the assignee to the extent of the debt owed." See also Columbian Nat. Life Ins. Co. v. Welch [36-2 USTC ¶9439] 15 F. Supp. 777 (1936).

Thus, during his lifetime and immediately prior to his death, Mr. Wintner had an interest in the cash surrender values of his policies which he could have realized at any time by first satisfying his obligation to the bank. The tax lien attached to the cash surrender value of each insurance policy during Wintner's lifetime, and when the total cash surrender value became vested in Mrs. Wintner at his death, subject to the liens of the bank and the plaintiff (Katz, supra; Columbian Nat. Bank, supra), the tax lien then "followed the property" into the hands of the defendant. Bess, supra, p. 59.

The Supreme Court's reversal, which disallowed the doctrine of marshaling assets affects only the proceeds of the two Columbus Mutual policies which were employed to extinguish the bank's lien.

The cash surrender values of the eight policies owned by Mr. Wintner at the time of his death were encumbered by the plaintiff's tax lien. The bank's senior lien having been extinguished, the plaintiff may recover the total cash surrender value of the six remaining policies, the face amounts of which were paid to the defendant, without the necessity of marshaling assets.

The judgment entered by this Court on January 2, 1962, will be vacated and judgment will be entered in favor of plaintiff and against the defendant in the sum of $18,274.65.