Funds Page 4
¶9622]The Northern National Bank of Bemidji, Appellant v. Northern
Minnesota National Bank of Duluth, Standard Oil Company, County of
Beltrami, Minnesota, Claude Asp, an individual d.b.a. A. & B. Motor
Sales; The United States of America, Respondents, State of Minnesota,
intervening defendant, Respondent
the Supreme Court of
, No. 36311, 70 NW2d 118,
March 25, 1955
Appeal from the District Court,
St. Louis County
[1939 Code Secs. 3670-3672--similar to 1954 Code Secs. 6321-6323]
Lien for taxes: Priority of lien: Third party beneficiary contract:
Insolvency of debtor.--After a finding that no third party
beneficiary contract (for the benefit of the U. S. and others) was
executed between the promisor and the now insolvent partnership
promisee, the Court held that an assignment whereby the partnership
assigned to a bank its rights to payment from the promisor was a valid
assignment for adequate consideration. Furthermore, the claim or lien of
for taxes did not arise until the assessment list was received by the
Collector, which was sometime after the assignment had been made between
the partnership and the bank. At the time of such assignment, the
partnership was not formally insolvent since there had been no
bankruptcy proceeding, receivership, or assignment for the benefit of
creditors. Hence, the
lien was not entitled to priority either over the claim of the assignee
or over those claims of various other creditors. Since the bank's right,
as assignee, was acquired before any subsequent liens attached, it was
entitled to first satisfaction.
Bargen, Bemidji, Minn., Briggs, Gilbert, Morton, Kyle & Macartney,
and B. C. Hart, W. 2162 1st National Bank Building, St. Paul 1, Minn.,
for appellant. Nye, Montague, Sullivan, Atmore & McMillan, 1200
Alworth Building, Duluth, Minn., for Minnesota National Bank of Duluth.
Smythe & Lindquist, 606 1st National Bank, Duluth, Minn., for
Standard Oil Co. and Claude Asp. Herbert E. Olson,
. George E. MacKinnon, United States Attorney, Clifford F. Hansen,
Assistant United States Attorney, Federal Courts Building, St. Paul 2,
Minn., for the United States. K. D. Stalland, Assistant Attorney
General, George W. Olson, 369 Cedar Street, St. Paul 1, Minn., for the
1. It was
error for the trial court to conclude that defendants had acquired
rights under a contract to which they were not parties. As a general
rule, strangers to a contract acquire no rights under such a contract. A
well-recognized exception to this rule has grown up under our law known
as the doctrine of third-party beneficiary contracts. The general rule
is that a third person may enforce a promise made for his benefit even
though he is a stranger both to the contract and the consideration. To
come within the rule, a third party must be either a donee beneficiary
or a creditor beneficiary. We are not concerned here with the former
type of beneficiary. A creditor beneficiary is defined as one to whom
the promisee owes or is believed to owe a duty which is discharged by
the promisor's performance. Held, that there is nothing in the
record here that Anderson promised the partnership that it would pay
claims such as defendants have against the partnership.
2. M. S. A.
513.23 provides that the only assignments from insolvents which are
invalid as to creditors are those made without fair consideration.
Section 513.22 provides that fair consideration is given for property or
obligation (a) when in exchange for such property or obligation, as a
fair equivalent therefor and in good faith, property is conveyed or an
antecedent debt is satisfied, or (b) when such property or obligation is
received in good faith to secure a present advance or antecedent debt in
amount not disproportionately small as compared with the value of the
property or obligation. Held, that the assignments under
consideration here were valid ones for which a fair consideration was
under the record here, that none of the defendants have a prior right
over plaintiff to the funds in Northern Minnesota National Bank of
Appeal from a
judgment in favor of defendants.
from the record that on December 1, 1949, Lakehead Pipe Line Company,
Inc., referred to hereinafter as Lakehead, entered into a contract with
Anderson Brothers Corporation, referred to hereinafter as Anderson. This
contract essentially was one whereby
agreed with Lakehead to build a pipe line across the northern part of
. The contract provides, among other things, that Anderson shall be
responsible for all materials and finished work to the full amount of
payment made thereon and will be required to make good, without
additional cost to Lakehead, any injury or damage which the materials or
work may sustain from any cause before final acceptance by Lakehead,
with certain exceptions. It further provides that, when the final
estimate has been accepted by Lakehead and the time for filing liens in
connection with such work has expired, Lakehead shall pay
the remaining amount due within ten days, with certain optional
provisions with reference to earlier payments without releasing
or his bond from liability during the lien period. It also provides
that, during the performance of the work,
shall comply with all applicable laws, rules, and regulations of any
board, commission, or regulatory body. Anderson further agreed to accept
full and exclusive liability for the payment of any and all
contributions and taxes for unemployment compensation insurance, old age
pensions, and annuities imposed by any federal or state government which
are imposed with respect to or measured by wages, salaries, et cetera,
paid to employees and to indemnify and save Lakehead harmless against
also agreed to meet requirements specified under the rules and
regulations of the
istrative officials or boards charged with the enforcement of state and
federal acts in the matter.
February 28, 1950
entered into a contract with Gordon Braid, Philip LeBrun, and Joe D.
McKinnon, referred to hereinafter as the partnership. This contract
essentially was one under which the partnership agreed to clear the
right of way for the laying of pipe and to do the backfilling after the
pipe had been laid. The contract provided in part:
shall be made to SUBCONTRACTORS (the partnership) as of the First (1st)
and Fifteenth (15th) day of each month for all of SUBCONTRACTORS
operations * * *. SUBCONTRACTORS shall receive Eighty-Five (85%) Percent
of the total statements submitted. The balance of Fifteen (15%) Percent
to be withheld by
as retainage and to be paid by
to SUBCONTRACTORS upon receipt by
of its retainage from PIPELINE COMPANY. In addition,
shall withhold the payment of said retainage until SUBCONTRACTORS
furnish proof satisfactory to
that all claims for damages of any kind or character and for labor,
equipment, material and supplies which SUBCONTRACTORS are required to
furnish hereunder have been paid, settled and satisfied by
* * ANDERSON in hereby authorized to retain in its hands until the final
disposition of all claims which may be made against it and/or
SUBCONTRACTORS and for which SUBCONTRACTORS are or are claimed to be
liable hereunder, a sufficient portion of the contract price to protect
the company for and against all and any such claims and from any loss,
costs, liability, damage or expenses arising therefrom or in connection
further agree to obtain at their own cost all permits and licenses
necessary to do business in the States of North Dakota, Minnesota and
Wisconsin, and to accept full and exclusive liability for the payment of
any and all contributions or taxes for employment insurance, old age
retirement benefits, income taxes, pensions or annuities, now or
hereafter imposed by the Government of the United States and/or by the
States of North Dakota, Minnesota and Wisconsin, which are measured by
the wages, salaries or other compensation paid to the employees of
SUBCONTRACTORS for work performed under the terms of this Agreement.
parties further agree that all the terms, provisions and agreements
contained in the ANDERSON-PIPELINE COMPANY'S Contract, together with all
of its exhibits, documents, plans, specifications, general conditions
and clauses are part and parcel of this Agreement and that
SUBCONTRACTORS are completely subject to the contract between ANDERSON
and the PIPELINE COMPANY. That it is not the intention of this contract
to in any manner minimize or require less of SUBCONTRACTORS in their
than is required of
in its service to the PIPELINE COMPANY. That if there is any variance in
this contract with the PIPELINE COMPANY'S Contract that the purpose of
this variance is to increase SUBCONTRACTORS' obligations to ANDERSON
over and above ANDERSON'S obligations to the PIPELINE COMPANY."
the testimony of John A. Forester, vice president and cashier of
plaintiff bank at the time the transactions involved in this lawsuit
took place, he met Braid and LeBrun for the first time in the early part
of 1950, but he had known McKinnon for a number of years. After Braid
got into the partnership, it opened an account with plaintiff bank, and
shortly afterward the partnership asked the bank for a line of credit.
That request was granted, and by
July 1, 1950
, the partnership owed the bank $25,000 for advances and approximately
$40,000 on checks which were held as cash.
July 22, 1950
, the partnership sold, assigned, transferred, and set over to plaintiff
bank all sums of money then due or to become due under its contract with
. This assignment included all estimates, invoices, orders, or other
instruments evidencing payments due or to be made under the contract and
also all amounts retained by
as retainage. On July 31 the above assignment was accepted by Anderson,
who agreed to pay directly to plaintiff bank any and all moneys then due
and payable or to become due the partnership, including any and all
amounts held by
as retainage under the terms of their contract with the partnership. On
the date of the assignment to plaintiff bank, the total indebtedness of
the partnership to the bank was $77,000. This amount was made up of
$25,000 in notes and approximately $52,000 in cash items of unpaid
December 31, 1950
, the total indebtedness of the partnership to the bank had grown to
The work under
the contract between the partnership and
was completed about
January 5, 1951
. About this time a dispute arose between the partnership and
over the amount due under the contract, and on
January 25, 1951
, the partnership filed a lien against the pipe line. This lien was
assigned to plaintiff bank on
February 3, 1951
, and was filed with the secretary of state of
February 27, 1951
An action to
foreclose the mechanic's lien was commenced in Hubbard county district
court and then transferred to the
district court. However, that action was dismissed pursuant to a
stipulation by which it was agreed that the amount due and unpaid on the
and the partnership was $160,000. It was further agreed under that
would pay plaintiff the sum of $160,000. However, $40,000 of that amount
was to be placed in escrow with Northern Minnesota National Bank of
. The stipulation further provided that the $40,000 should remain in
escrow and be released and disbursed in the following manner:
may be disbursed pursuant to a final judgment of a court of competent
jurisdiction in a proceeding determining ownership of said monies or the
relative priorities of the various claimants thereto, provided that all
of said claimants are made parties to such proceeding."
then brought this action to determine the ownership of the $40,000
against defendants. The claims with respect to the various defendants
are as follows:
(1) The claim
United States of America
is based upon its determination that as of
April 14, 1953
, there was due from the partnership the sum of $29,993.33, which sum
includes all taxes, interest, penalties, and other items due as taxes or
as a result of the failure of the partnership to pay the same promptly.
(2) The state
claims a part of the amount due the United States Government in the sum
of $3,780.67 as liability for the payment of contributions of the
unemployment compensation fund.
(3) The claim
of Beltrami county is for personal property taxes of the partnership due
for the years 1950 and 1951.
(4) The claims
of Standard Oil Company are based upon purchases of oils, gasoline, and
similar materials by the partnership and used by the machinery in
construction of the pipe line and in the performance of the contract
and the partnership.
(5) The claim
of Claude Asp, an individual doing business as A. & B. Motor Sales,
is based upon repair parts and certain labor performed in repairing the
machinery used by the partnership.
court concluded that certain sums should be paid out of the $40,000 fund
held by Northern Minnesota National Bank of
in the following order:
(1) $275 to
Northern Minnesota National Bank of Duluth as reimbursement for the
necessary fees for legal services in performing its duties and services
istering the escrow and trust fund.
(the same being $29,993.33 less $3,402.60) to the
United States of America
, department of internal revenue.
to the state of
, department of employment security.
for personal property taxes for the year 1950. (The court determined
that Beltrami county was not entitled to any moneys from the fund for
taxes for the year 1951.)
to Standard Oil Company.
(6) $108.19 to
Claude Asp, the balance of the $40,000 fund, to apply upon his judgment
of the Trial Court]
1. The trial
court's view of the case is found in its memorandum, which states in
Court is of the opinion that if defendants may recover at all they are
entitled to recover upon the contractual provisions existing between the
Pipe Line Company and Anderson Brothers Corporation and the contract
between Anderson Brothers Corporation and the co-partnership, and upon
the further ground that when the co-partnership assigned the money due
it from Anderson Brothers Corporation to the plaintiff bank, the
plaintiff book said assignment subject to the terms and provisions and
conditions of said contracts."
Third Party Beneficiary Contract]
It is clear
from the court's memorandum that it concluded as it did because it
thought that defendants had acquired rights under a contract to which
they were not parties. In our opinion it was error for the trial court
to so conclude. As a general rule, strangers to a contract acquire no
rights under such a contract. 4 Dunnell, Dig. (3 ed.) §1733; 12 Am.
Jur., Contracts, §277; La Mourea v. Rhude, 209
53, 295 N. W. 304. A well-recognized exception to this rule has grown up
under our law known as the doctrine of third-party beneficiary
contracts. The nature of this doctrine is that the promisor engages to
the promisee to render some performance to a third person. 2 Williston,
Contracts (Rev. ed.) §347. Stated differently, the general rule is that
a third person may enforce a promise made for his benefit even though he
is a stranger both to the contract and the consideration. 12 Am. Jur.,
Contracts, §277. Therefore, it is clear that the contractual right
which third-party beneficiaries acquire under the doctrine is to enforce
a promise made for their benefit which they otherwise would not be able
to enforce. To come within the rule, a third party must be either a
donee beneficiary or a creditor beneficiary. La Mourea v. Rhude,
supra. A creditor beneficiary is defined as one to whom the premisee
owes or is believed to owe a duty which is discharged by the promisor's
performance. A donee beneficiary is one to whom the promisee intends to
make a gift of the performance by the promisor. Restatement, Contracts
§133(1)(a, b); 2 Williston, Contracts (Rev. ed.) §§ 356, 361.
Here we are
not concerned with the rule applicable to donee beneficiaries, since
there is no evidence in the record from which it could be inferred that
any of the parties intended to make a gift to defendants. Defendants,
however, are all creditors of the partnership to whom a duty is owed by
Thus, the only
relevant question with respect to the application of the doctrine in
this case is whether or not Anderson (promisor) had made a promise to
the partnership (promisee) to pay defendants and thereby give defendants
a right to force payment of the $40,000 to them rather than to plaintiff
bank. If that was the case, then defendants could claim a right to the
$40,000 which would be prior to the rights of plaintiff bank by reason
of the contract between
and the partnership. We have reviewed the contracts thoroughly, and at
no place do we find
promising the partnership that it would pay claims such as these
defendants have against the partnership.
Consideration for Assignment]
2. The next
issue pertains to whether or not the assignment made to Northern
National Bank of
strenuously contend that this case comes within M. S. A. 513.23, which
conveyance made and every obligation incurred by a person who is or will
be thereby rendered insolvent is fraudulent as to creditors without
regard to his actual intent if the conveyance is made or the obligation
is incurred without a fair consideration."
takes the position (1) that §521.02, dealing with the perfection of
assignments, has superseded §513.23; (2) that the lower court's finding
that the partnership was insolvent at the time of the assignment is not
supported by the evidence; and (3) that even if the partnership was
insolvent the assignments were given for fair consideration and that is
all that is required by §513.23.
We do not deem
it necessary to pass on any of the contentions except the one concerning
whether or not the assignment was given for fair consideration. As can
readily be seen from §513.23, the only assignments from insolvents
which are invalid as to creditors are those where the conveyance is made
or the obligation is incurred without fair consideration. The words
"fair consideration" are defined in §513.22, which reads:
consideration is given for property, or obligation,
When in exchange for such property, or obligation, as a fair equivalent
therefor, and in good faith, property is conveyed or an antecedent debt
is satisfied, or
When such property, or obligation is received in good faith to secure a
present advance or antecedent debt in amount not disproportionately
small as compared with the value of the property, or obligation
In the case at
bar, when the assignment was given, the partnership was indebted to
plaintiff bank in the sum of $77,000. After the assignment was given the
bank continued to extend credit to the partnership. While the total
amount paid by
amounted to slightly over $485,000, the partnership will still be
indebted to plaintiff for over $120,000 even if plaintiff prevails and
collects the $40,000 which represents the last money to be paid out
under the contract.
Our court has
held that a promise to furnish labor and materials in the future is fair
consideration for an assignment. Schlecht v. Schlecht, 168
168, 209 N. W. 883. We see no valid distinction between the furnishing
of labor and materials and the furnishing of money to this partnership
because, if the money had not been furnished, the contract could not
have been completed. Therefore, in our opinion it was a valid assignment
for which fair consideration was given.
3. The last
issue to be decided is whether, in spite of the validity of the
assignment, any of the defendants have a prior right to the funds in
Northern Minnesota National Bank of
In regard to
the claim of the United States of America, it appears that on October
31, 1950, some time after the assignment was given, there was due from
the partnership to the United States only $75.67. This was due to an
error in a previous return. From that time the amount due the
increased a great deal. Assessment lists for taxes due by the
partnership were received by the then collector of internal revenue on
the following dates:
April 16, 1951
June 15, 1951
August 27, 1951
October 16, 1951
government filed a notice of tax lien with the register of deeds of
Beltrami county in the amount of $20,399.21. The
claims that under 31 USCA, §191, it has priority over claims of other
creditors by reason of the insolvency of the partnership. As far as is
pertinent here, §191 reads:
any person indebted to the United States is insolvent, * * * the debts
due to the United States shall be first satisfied; and the priority
established shall extend as well to cases in which a debtor, not having
sufficient property to pay all his debts, makes a voluntary assignment
thereof, or in which the estate and effects of an absconding, concealed,
or absent debtor are attached by process of law, as to cases in which an
act of bankruptcy is committed."
On the other
hand, plaintiff bank contends that, under 26 USCA, §§ 3670 and 3671,
the United States did not acquire a lien on all property and rights to
property of the partnership until the assessment lists were received by
the collector. These sections read as follows:
"If any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount (including any interest, penalty,
additional amount, or addition to such tax, together with any costs that
may accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person."
"Unless another date is specifically fixed by law, the lien shall
arise at the time the assessment list was received by the collector and
shall continue until the liability for such amount is satisfied or
becomes unenforceable by reason of lapse of time."
We agree with
plaintiff on this issue. In
Cas. Co. v.
, (Ct. Cls.) 53 Fed. Supp. 436 [44-1 USTC ¶9133], the plaintiff
contended that 31 USCA, §191, was not applicable except where, in the
case of a living debtor, his insolvency is a formal one evidenced by a
bankruptcy, receivership, or assignment for the benefit of creditors.
The court in that case stated (53 Fed. Supp. 439):
agree with the plaintiff as to the construction of R. S. §3466 [31
USCA, §191]. A provision in similar language has been in the statutes
since 1797 and has always been construed as plaintiff would have us
253, 43 S. Ct. 295, 67 L. ed. 638; Board of Sup'rs v. Hart, 210
78, 26 So. (2d) 361 [46-1 USTC ¶9245], 174 A. L. R. 1366.
In the case at
bar, there has been no bankruptcy proceeding, receivership, or
assignment for the benefit of creditors; therefore, 31 USCA, §191, is
not applicable here. Plaintiff's right to the fund was prior to that of
because the lien acquired by plaintiff arose before the assessment lists
were received by the collector.
to Beltrami county, its claims are based upon 1950 personal property
taxes due it from the partnership. However, neither the
account nor the escrow fund were included in the tax assessment. In Land
O' Lakes Dairy Co. v. County of Wadena, 229 Minn. 263, 39 N. W. (2d)
164, we took the position that, even though personal property taxes are
imposed upon the owner thereof in personam, under M. S. A. 272.50
such taxes are a lien on the property because of which the owner is
taxed. Beltrami county concedes that this is contrary to its position in
the case at bar but contends that our position in the Land O' Lakes
case is due to a misconstruction of the statutes. We have, in the light
of this objection, reconsidered §272.50 and conclude that our rule in
the Land O' Lakes case should stand.
In regard to
the claims of Claude Asp and Standard Oil Company, it appears that
garnishments were served on
by these defendants on
December 11, 1951
October 10, 1951
, respectively. The rule with respect to garnishments which is
applicable here is that these defendants could occupy no better position
than would the partnership in a suit by it against
. Bacon v. Felthous, 103
387, 115 N. W. 205; Gilbert v. Pioneer Nat. Bank, 206
213, 288 N. W. 153. It is also clear that the lien acquired by the
service of a garnishment summons does not attach to debts assigned by
the defendant prior to such service. 8 Dunnell, Dig. (3 ed.) §3957;
see, First State Bank v. Woehler, 140
32, 167 N. W. 276; Nash v. S. M. Braman Co., 210
196, 297 N. W. 755.
In the case at
bar the garnishment summons was served more than one year after the
first assignment from the partnership to plaintiff bank. It is thus
clear that Standard Oil Company and Claude Asp received no rights prior
to those of plaintiff to the $40,000 escrow fund.
examined the various other contentions raised by defendants and find
them to be without merit.
directions to Northern Minnesota National Bank of
that, after deducting $275 fees allowed by the district court for
services in performing its duties in
istering the escrow and trust fund, it pay the balance of $40,000 to
United States of America
v. Josephine Moran, Eugene J. Moran et al., Defendants
S. District Court, East. Dist. N. Y., 68 C 1171, 1/5/71
[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]
Lien for taxes: Priorities: Foreclosure: Assignment of mortgage.--The
Government's lien in an action to assess and foreclose on the house of a
deceased taxpayer was subject to the interest of an assignee (taxpayer's
son) who purchased the mortgage on the house from his own funds after
the Tax Court's decision was rendered assessing the deficiencies and
additions to tax.
[Code Sec. 6502--Result unchanged by '69 Tax Reform Act]
Suit to collect tax: Statute of limitations: Collection after
assessment: Delay in service of summons.--In an action to collect
tax on an assessment, the timely filing of the complaint by the
Government was the commencement of the action within the limitation
period, and diligence in the service of the summons was not required to
validate commencement of the action. Further, the defense of laches was
rejected because there was no showing of prejudice resulting from the
Edward R. Neaher, United States Attorneys,
, N. Y., for the plaintiff. Eugene J. Moran, Moran & Moran, 150
, N. Y., for the defendants.
Incorporating Findings of Fact
to collect an assessment of income tax, penalties and interest, to
establish the lien of the assessment against a dwelling at
545 8th Street
, title to which is in the defendant Josephine Moran, and to foreclose
the federal tax lien against the dwelling. Plaintiff contends further
that its lien should be found superior to the lien of a first mortgage
on the premises now allegedly owned by defendant Eugene J. Moran.
of the assessment cannot be contested in this case. It was finally
adjudicated by the Tax Court in its decision of
July 17, 1962
, 21 T. C. M. 416; see 236 F. 2d 361. The decision determined that the
deficiencies in income tax and in additions to the tax for the year 1948
of James J. Moran (now deceased) and defendant Josephine Moran were--
Income tax .............. $54,168.76
Sec. 293(b) addition .... 27,084.38
Sec. 294(b) addition .... 4,911.54
The tax and
additions were assessed, in pursuance of the Tax Court decision on
November 16, 1962
, together with interest on the principal amount of tax in the amount of
$43,614.75; the total assessment was $129,779.43. Small payments were
made ($223.08) in 1963 and 1967.
filed its notice of federal tax lien in the office of the Register of
City of New York in
January 22, 1963
, in the amount of $129,779.43, giving the names of the taxpayers, James
J. Moran and defendant Josephine Moran, and their address at
545 8th Street
. The Notice of Federal Tax Lien was refiled on
August 28, 1968
James J. Moran
January 5, 1968
in the present action was filed on
November 15, 1968
. The summons was issued on the same day, and it was received by the
Marshal of the Eastern District of New York on the same day. The summons
and complaint were served on the defendant Josephine Moran on
January 11, 1969
. The summons was received by the Marshal of the Southern District of
New York on
January 15, 1963
, and the summons and complaint were served on the defendant Eugene J.
Moran in the Southern District on
January 23, 1969
The return of
tax of James J. Moran and Josephine Moran for the calendar year 1948 was
a joint return signed by both taxpayers as husband and wife; both James
J. Moran and Josephine Moran joined in signing and filing the petition
to the Tax Court for a redetermination of the deficiencies and additions
to tax asserted against them by the Commissioner of Internal Revenue for
the calendar year 1948, and the decision of the Tax Court determined the
deficiencies in tax and the additions to tax against both James J. Moran
and Josephine Moran.
are in agreement that James J. Moran and Josephine Moran had owned the
"subject premises" at
545 Eighth Street
, described in paragraph XI of the complaint, from about 1941 until July
1962. The property was owned subject to a first mortgage to South
Brooklyn Savings Institution (later named South Brooklyn Savings Bank)
originally made in 1928, and in May 1953 extended, and consolidated with
a new mortgage loan, contracted by James J. Moran and defendant
Josephine Moran, which loan was to become due
September 1, 1968
. In July 1962 (after the Tax Court memorandum opinion was issued) James
J. Moran and defendant Josephine Moran conveyed the subject premises to
Eileen Moran, their daughter. On or about April 5, 1965, defendant
Eugene J. Moran paid from his own professional earnings $2,376.43 to
South Brooklyn Savings Bank and received from it an assignment of the
consolidated mortgage on the subject premises; the amount defendant
Eugene Moran paid comprised--
Unpaid principal on bond and mortgage .... $2,288.38
"Consideration for prepayment prior
to maturity" ............................ 22.88
Interest March 22 to April 5(?) .......... 3.52
Total .................................... $2,379.95
The prepayment charge appears to relate to paragraph 26 of the mortgage
consolidation agreement of 1953, which gave the owner of the mortgaged
premises the privilege of prepaying the principal on any interest date
upon payment of 1% of the then unpaid principal. Defendant Eugene Moran
knew, when he made the payment to the Bank and received the assignment,
of the Tax Court decision, and of the tax lien, and that his parents had
transferred the subject premises to his sister. His parents knew when
they transferred the subject premises to Eileen Moran that the adverse
Tax Court decision had been rendered. The Commissioner of Internal
Revenue asserted a transferee liability against Eileen Moran, and on
March 9, 1966, the Tax Court ordered and decided that there was a
liability in the amount of $12,667.78 plus interest from July 2, 1962,
due from Eileen Moran as a transferee of assets of James J. Moran and
Josephine Moran, transferors, for income taxes and additions to taxes
due from said transferors for the taxable years 1948, 1949, and 1950. On
October 24, 1966
, Eileen Moran reconveyed the subject premises to James J. Moran and
Josephine Moran as tenants by the entirety. At all the times in question
defendant Josephine Moran has resided in the subject premises, as did
James J. Moran until his death. No interest or principal payments have
been made on the bond and mortgage since defendant Eugene Moran received
the assignment of mortgage, and they have been in default since April
The 1962 Tax
Court decision determined the liability of both husband and wife for the
tax and additions to tax, and determined also that the statute of
limitations did not bar assessment of the tax. The assessment of
November 11, 1962
, was, therefore, unimpeachable when it was made. The only limitations
issue relates to the timeliness of the present action on the assessment.
The complaint was filed seasonably. Did the delay in the service of the
summons and complaint divest the Government of the right to rely on the
timely filing of the complaint? Rule 3 makes the filing of the complaint
the commencement of the suit, and diligence in the service of process is
not required to validate the fact of "commencement." Moore
Co. v. Sid Richardson Carbon & Gasoline Co., 8th Cir. 1965, 347
F. 2d 921; Sylvester v. Warner & Swasey Co., 2d Cir. 1968,
398 F. 2d 598, 604-606; United States v. Harris, S. D. Fla. 1963,
[64-1 USTC ¶9276] 223 F. Supp. 309, aff'd 5th Cir. 1964 [64-2 USTC ¶9838],
337 F. 2d 856; Lippa & Co. v. Lenox Inc., D. Vt. 1969, 305 F.
Supp. 175, 181. Defendants argue laches, but that defense requires a
showing of prejudice arising from delay, which cannot be shown here: the
death of James J. Moran denies no useful evidence to the defense, for
the action on the assessment, really an action to enforce the judgment
of the Tax Court in its
istrative translation, if timely commenced, by its nature admitted of no
v. Manufacturers Hanover Trust Co., S. D. N. Y. 1964, 229 F.
Supp. 544, 546. Moreover, laches, on important policy grounds, is not a
defense against a statutory claim of the government. United States v.
Kirkpatrick, 1824, 22 U. S. (8 Wheat.) 720, 735; United States v.
Mack, 1935, 295
argues that its tax lien is, or should be made, superior to the mortgage
of which defendant Eugene Moran holds an assignment. It urges that, in
substance, Eugene Moran paid off the mortgage as a gift to his parents
(since he did not mean to enforce it against them and has not done so),
and took an assignment of it, rather than satisfied it of record, as a
device to deter the plaintiff from enforcing the lien against the
subject premises. The argument must be rejected. The federal tax lien
extended only to the taxpayers' interests in the subject premises, and
at no time after 1953 did they have an interest superior to the mortgage
interest of the bank. If the bank had foreborne collection of interest
and principal, and waited for the Government to foreclose its lien and
put the property in hands able to pay the bank its mortgage arrears and
resume the interest and amortization payments, the Government could not
complain. The case is no different because it is defendant Eugene Moran
who pursues that course. He was not under a duty to enlarge the
Government's rights simply because he was willing to buy the mortgage
and to forbear enforcement for as long as his parents lived in the house
and needed his forbearance. What he has done does not spell out a gift
to his parents of an enlarged equity in the subject premises; to have
done that would obviously accomplish nothing except in effect to enable
plaintiff to collect that much of his parents' tax debt out of defendant
Eugene Moran's own professional earnings; hence Eugene Moran was within
his rights in buying the mortgage and keeping it alive as against the
plaintiff's junior lien. *
After the government foreclosure, he will, perhaps, have a fairly secure
investment; it will then be evident that he made no gift to his parents
except one of forbearance for a limited time. How the matter will be
April 5, 1971
, if there is no foreclosure is another matter not now raised for
order establishing the tax debt, and directing foreclosure subject to
the Eugene Moran mortgage on five days notice.
That does not imply that defendant Eugene Moran enjoys a priority for
unpaid interest accruing after
April 5, 1965
United States of America
, Plaintiff-Appellee v. General Motors Corporation, Defendant-Appellant
U.S. Court of Appeals, 6th Circuit, 89-1423, 4/1/91, Reversing and
remanding an unreported District Court decision
[Code Secs. 6323 and
Lien for taxes: Assignment of property.--An automobile
manufacturer that owed funds to an engineering company and made payment
to the company's assignee was not liable for failing to honor an IRS
lien on the same funds for unpaid taxes of the engineering company.
According to state (
) law, when the engineering company assigned accounts receivables that
were due from the automobile manufacturer and others to a bank, all of
the company's rights in the receivables were transferred to the
assignee-bank. Thus, at the time the automobile manufacturer received
notice of the subsequent IRS levy, it was not in possession of funds
that the engineering company had any property interest in and that could
be levied upon. Furthermore, a valid tax lien could not attach to
receivables that were the subject of a prior assignment.
and NORRIS, Circuit Judges; and ALLEN, Senior District Judge. *
filed this action against General Motors Corporation ("GM"),
pursuant to 26 U.S.C. §6332(c)
, alleging that GM failed to honor an Internal Revenue Service
("IRS") levy upon property in its possession that belonged to
another taxpayer and was encumbered by federal tax liens. The district
court entered summary judgment for the government. We are asked to
decide whether, as the district court held, GM is liable under I.R.C. §6332(d)(1)
for failing to honor the levy. We conclude that it is not.
we hold that the district court erred in granting the government's
motion for summary judgment because GM was not, at the time it received
notice of the levy, in possession of property subject to the levy. We
shall, therefore, set aside the summary judgment and direct that
judgment be entered for GM.
Oakwood Engineering and Experimental, Inc. ("Oakwood") and GM
entered into a design agreement under which Oakwood was to perform
certain engineering and related services for GM. GM agreed to pay for
the services upon the terms and conditions set forth in the design
agreement. The contractual relationship continued for a number of years.
In February 1980, Oakwood negotiated a bank loan from NBD Troy Bank,
N.A. for $75,000 and gave as security an assignment to the Bank of its
"present and future" account receivables. On
July 28, 1981
, GM sent purchase order No. GEN 33534 to Oakwood calling for certain
design services. Oakwood performed the requested services and between
January 25 and
February 2, 1982
, submitted six invoices to GM in the total amount of $53,876.76.
February 19, 1982
, GM was notified by NBD Troy Bank, N.A. that Oakwood had assigned all
its account receivables to the Bank and that, as a result, any money GM
owed to Oakwood should be paid to the Bank.
February 24, and again on March 2, 1982, the IRS served notices of levy
upon GM directing GM to pay the IRS all property or rights to property
in GM's possession which belonged to Oakwood, up to $87,175.02,
Oakwood's outstanding federal tax liability.
February 26, 1982
, GM, in response to the Bank's February 19th notice, paid $53,876.76 to
NBD Troy Bank, N.A., the amount owed to Oakwood for work performed under
purchase order No. GEN 33534.
made no payments to the government pursuant to either of the levy
notices, the IRS filed this action in the United States District Court
for the Eastern District of Michigan to recover $53,876.76. The suit was
brought pursuant to I.R.C. §6332(c)
, on the theory that GM was obligated to honor the levy upon
property in its possession which was encumbered by federal tax liens.
The government claims, as it did below, that GM was in possession of
funds it owed to Oakwood and refused to surrender the property to the
IRS after notice of levy and final demand for payment.
GM claims that
under Michigan law, by assigning its account receivables to the Bank in
1980, Oakwood transferred its entire interest in the accounts to the
Bank and contends that under M.C.L. §440.9318(3), when GM received
notice of the assignment from the Bank, Oakwood had no property
interests whatever in the funds, and GM could no longer pay the account
receivables over to Oakwood. Thus, GM argues, when it received the
notice of levy, it was not in possession of any property or rights to
property subject to levy. GM contends that the Bank had a superior
interest to that of the government in the account receivables, and that
the government did not have a lien on the account receivables at all.
and GM filed cross motions for summary judgment in the district court.
The court found for the government, stating:
is clear that under the Design Agreement and purchase order GEN 33534,
Oakwood had a contractual property interest in the Funds for work
performed. The fact that the Funds may have been subject to the Bank's
lien, does not change the fact that Oakwood had a property interest in
court also found that GM's argument that the Bank had a superior
security interest in the funds was without merit. The court held that
"[l]ien priority is not a defense to an action to enforce a
levy." The district court found that the "appropriate remedy
for a person claiming a superior interest in the property is to bring an
action for wrongful levy."
A. Levy Theory
dispositive issue in this case is whether, at the time the IRS levy was
received, GM was the custodian of the property or a property interest to
which the tax lien could attach.
U.S.C. §6321 , a lien
arises when a taxpayer fails or refuses to pay his taxes after
assessment, notice and demand. See I.R.C. §§6321
and 6322 (1982).
"This lien arises upon assessment and attaches to 'all property and
rights to property, whether real or personal, belonging to [the
taxpayer]' including property which the taxpayer subsequently
acquires." United States v. Safeco Ins. Co. of Am., Inc.,
870 F.2d 338, 340 (6th Cir. 1989) (quoting 26 U.S.C. §6321
6321 is construed broadly because the language of the statute
"reveals on its face that Congress meant to reach every interest in
property that a taxpayer might have." United States v. National
Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 720 (1985).
If the tax
remains unpaid, within ten days after notice and demand, the IRS may
collect the tax by levy. 26 U.S.C. §6331
. When a taxpayer's property is held by another, the IRS customarily
serves a notice of levy upon that party, pursuant to 26 U.S.C. §6332(a)
. This notice of levy "gives the IRS the right to all property
levied upon, and creates a custodial relationship between the person
holding the property and the IRS so that the property comes into the
constructive possession of the Government." National Bank of
USTC ¶9482 ], 472
at 720 (citations omitted).
Bank of Commerce, the Supreme Court compared the
istrative levy under 26 U.S.C. §6332
to a lien foreclosure suit under 26 U.S.C. §7403
. The Court noted that the
istrative levy protects the government "against diversion or loss
while such claims are being resolved." 472
at 721. The Court specifically held that the IRS had a right to levy on
the taxpayer's joint bank accounts pursuant to 26 U.S.C. §§6331
and 6332 for
delinquent federal income taxes even though the accounts were in joint
names because the taxpayer had an absolute right under state law and
under his contract with the bank to compel the payment of the
outstanding balances in the accounts.
U.S.C. §6332(d) ,
if the custodian of the taxpayer's property honors the levy, the
custodian is "discharged from any obligation or liability to the
delinquent taxpayer with respect to such property or rights to property
arising from such surrender or payment." However, if the custodian
refuses to surrender the property in response to the levy, he is
personally liable to the government in an amount equal to the value of
the property not surrendered. 26 U.S.C. §6332(c)(1)
. The custodian has two defenses for failure to comply with a tax
levy: 1) the custodian is not in possession of the taxpayer's property;
or, 2) the property is subject to a prior judicial attachment or
execution. National Bank of Commerce [85-2
USTC ¶9482 ], 472
at 721-22; State Bank of Fraser v. United States [88-2
USTC ¶9592 ], 861 F.2d 954, 958 (6th Cir. 1988).
does not claim that the account receivables were subject to a prior
judicial attachment or execution, the question is whether, at the time
the notice of levy was received, GM held property in which Oakwood had
any interest subject to levy. If it did, then it is personally liable
6332(c)(1) for the amount the government would have collected by the
whether the account receivables were subject to levy, state law
determines "the nature of the legal interest which the taxpayer had
in the property." National Bank of Commerce, 472
at 722. The government claims that at the time the notice of levy was
served, GM clearly had property or rights to property that were subject
to levy for Oakwood's tax liability. The government argues that account
receivables are property or rights to property of a taxpayer that may be
levied upon, citing United States v. Bank of Celina [83-2
USTC ¶9688 ], 721 F.2d 163, 167 (6th Cir. 1983); United States
v. Weintraub [80-1
USTC ¶9172 ], 613 F.2d 612 (6th Cir. 1979), cert. denied,
447 U.S. 905 (1980).
We think the Celina
and Weintraub cases cited by the government can be distinguished
from the case at bar. Celina was a bank deposit setoff case which
held that the tax assessment giving rise to the tax lien attached before
the account receivables were transferred to the bank. Weintraub
was a statute of limitations case which held that because a sovereign is
exempt from operation of the statute of limitations, the fact that the
IRS did not sue the defendant to collect on its attachment for 13 years
did not preclude imposition of the liability.
GM argues that
it was not in possession of property or an interest in property
belonging to Oakwood at the time of the levy. It claims that once the
Bank notified GM that under the terms of the assignment contained in
Oakwood's security agreement with the Bank, GM should pay the Bank the
account receivables, Oakwood no longer had a property interest in those
law, an assignment is defined as a
or setting over of property, or of some right or interest therein, from
one person to another, and unless in some way qualified, it is
properly the transfer of one's whole interest in the estate, or
chattel or other thing. It is the act by which one person transfers to
another or causes to vest in another, his right to property or interest
v. Dart, 291
642, 644, 289 N.W. 281 (1939) (emphasis added).
Court of Appeals, citing Allardyce, defined an assignment as a
"transfer or setting over of property from one person or entity to
another and, unless in some way qualified, transfers one's whole
v. Baugh, 106
App. 815, 819, 308 N.W.2d 698 (1981).
concerned the assignment of a judgment and the court found that
"once a judgment is assigned, the assignor is completely
disassociated from the rest except to the extent that his obligor may
have rights against him which would then be assertable [sic] against the
M.C.L. §440.9318(3) provides that: "the account debtor [GM] is
authorized to pay the assignor [Oakwood] until the account debtor
receives notification that the amount due or to become due has been
assigned and that payment is to be made to the assignee [Bank]."
Thus, the rights of the assignor and the assignee are fixed at the time
of notification of the assignment.
It is not
disputed that Oakwood assigned its account receivables and contract
rights to the Bank. The effect of the assignment under
law was that all of Oakwood's contract rights in its account receivables
were transferred to the Bank when Oakwood's account debtors were
notified of the assignment. This post-default notice of assignment on
February 19, 1982
, divested Oakwood of legal and equitable title to the funds and
deprived Oakwood of the right to sue for their recovery. Therefore, when
GM received notice of the assignment, it was obligated to pay the Bank
and could not pay the debt to Oakwood.
IRS "steps into the taxpayer's shoes" and acquires whatever
rights the taxpayer has with respect to the property, the IRS can
succeed to rights no greater than those the taxpayer possesses. Thus,
when money or property held by a third party is not the taxpayer's
because it was assigned to another before the levy, it is no longer
subject to the levy. At the time of the levy on
February 24, 1982
, the Bank, not Oakwood, owned the funds the IRS sought.
conclude that because of the assignment on
February 19, 1982
, Oakwood no longer possessed any property right in the disputed funds.
law does not support the trial court's conclusion that some right to the
funds remained in Oakwood on
February 24, 1982
, which would permit Oakwood to control payment of the funds. The
Supreme Court has stated: "It would indeed be anomalous to say that
the taxpayer's 'property and rights to the property' include property in
which under the relevant state law, he had no property interest at
all." Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 513 n.3 (1960).
Thus, because section
6332(a) cannot resurrect a taxpayer's property rights that were
previously completely extinguished, we hold that the lower court erred
in concluding that Oakwood had sufficient property rights upon which the
government could levy.
Even if we
were to decide that on the day it received notice of the levy, GM held
property in which Oakwood had some interest, we would then have to
decide whether the government had a valid lien in Oakwood's property.
The government claims that the Bank possessed only a security interest
in the account receivables and that the government's lien is superior to
that of the Bank's. The government argues that GM mistakenly acted on
the belief that the Bank had a superior lien in the account receivables
when it paid the Bank instead of the IRS. GM argues, on the other hand,
that the government's lien theory is without merit because the tax lien
did not attach to the account receivables.
liens arise when unpaid taxes are assessed and continue until the
resulting liability is either satisfied or becomes unenforceable through
the lapse of time. 26 U.S.C. §6322
. The government's argument assumes that the account receivables in
this case were impressed with a federal tax lien. However, a tax lien
cannot attach to property which has been previously assigned or
transferred by the taxpayer at the time the assessment is made.
Assignments made prior to a tax assessment preclude lien attachment.
In this case,
Oakwood assigned its right to its account receivables to the Bank on
February 6, 1980
. The assessment made against Oakwood for unpaid withholding and Federal
Insurance Contribution Act taxes occurred
March 9, 1981
, well after Oakwood assigned its account receivables to the Bank. The
assignment extinguished any property rights in those receivables to
which the subsequent federal tax lien might have attached.
previously, state law determines the nature of the property right. National
Bank of Commerce [85-2
USTC ¶9482 ], 472
at 722. Under
law, an assignment of after-acquired account receivables defeats the
property interest of other creditors. In re United Fuel & Supply
325, 230 N.W. 164 (1930). Even though the assignment grants the
assignor, as agent of the assignee, a revocable license to collect the
accounts in the usual course of business, it does not impair the
absolute nature of the assignment.
at 330-32. This court has recognized that under
law, an assignment of future account receivables is effective when made,
not when the specific account comes into existence. Union Trust Co.
v. Bulkeley, 150 F. 510 (6th Cir. 1907). Thus, it is clear that the
assignment by Oakwood of future account receivables was absolute as of
February 6, 1980
, and left Oakwood with no property rights to which the lien could
reasons stated, we REVERSE the judgment of the district court, REMAND
the matter, and direct that summary judgment be entered for the
The Honorable Charles M. Allen, Senior District Judge of the United
States District Court for the Western District of Kentucky, sitting by
¶9433]Town of Bay Harbor Islands, a municipal corporation, Plaintiff v.
Leo Ackerman, Harry Lasser, and Fidelity & Deposit Company of
United States of America
, Intervening Plaintiff
Circuit Court, 11th Judicial Circuit, Dade County, Fla., No. 59C 10394,
[1954 Code Sec. 6323]
Tax liens: Priority: Validity against assignee.--Where the
delinquent taxpayer made a valid assignment of payments due him under a
contract prior to the filing of Federal tax liens for withholding taxes,
the assignee was entitled to priority.
420 Lincoln Rd., Miami Beach, Edmond J. Gong, United States Attorney's
Office, P. O. Box 1070, Miami 1, Fla., for plaintiff. Feibelman,
Friedman, Hyman & Durant, 228 N. E. 2nd Ave., Dixon, DeJarnette,
Bradford, et al., Dade Federal Bldg., Miami, Fla., for defendant.
of Fact, Conclusions of Law and Final Decree
came on to be heard on Final Hearing, and after consideration of the
entire record, the Court makes the following findings of fact,
conclusions of law and enters the following Final Decree:
1. On or about
the 9th day of August, 1954, a contract was entered into between Harry
Lasser, doing business as Lasser Garbage and Waste Service, and
Bay Harbor Islands
, a municipal corporation, whereby, for the consideration therein, the
said Harry Lasser was to provide certain garbage and waste service for
2. On or about
July 6, 1956
, the said Harry Lasser assigned the payments due under the contract to
Leo Ackerman, and directed that all payments be made to the said Leo
Ackerman until further notice.
3. On or about
July 15, 1959
, Raymond J. Wolf, as attorney for Harry Lasser, notified the Town of
Bay Harbor Islands that the assignment to Ackerman was terminated.
4. On April
10, 1959, the District Director of Internal Revenue at Jacksonville,
Florida, made a 100% penalty (FICA) assessment against the defendant,
Harry Lasser for the quarters ended March 31, 1958 and June 30, 1958,
and on April 10, 1959, the District Director gave the Defendant, Harry
Lasser, notice of said assessment stating the amount and demanding
payment thereof; and on May 27, 1959, the District Director filed a
notice of federal tax lien for said assessment with the Clerk of the
Circuit Court, Dade County, Miami, Florida.
5. On February
27, 1959, the District Director of Internal Revenue at Jacksonville,
Florida, made an assessment of withholding taxes for the quarter ended
December 31, 1958, in the amount of $812.34, plus interest, against
defendant, Harry Lasser; that on February 27, 1959, the District
Director gave Defendant Harry Lasser notice of said assessment, stating
the amount and demanding payment thereof; that on July 15, 1959, the
District Director filed a notice of Federal tax lien for said assessment
with the Clerk of the Circuit Court, Dade County, Miami, Florida.
6. On May 29,
1959, the District Director of Internal Revenue at Jacksonville,
Florida, made an assessment of withholding taxes for the quarter ended
March 13, 1959, in the amount of $770.64 plus interest, against
Defendant Harry Lasser; and on the same date the District Director gave
said Harry Lasser notice of said assessment, stating the amount and
demanding payment thereof; that on November 9, 1959, the District
Director filed a notice of federal tax lien for said assessment with the
Clerk of the Circuit Court, Dade County, Miami, Florida.
7. On August
28, 1959, the District Director of Internal Revenue at Jacksonville,
Florida, made an assessment of withholding taxes for the quarter ended
June 30, 1959, in the amount of $415.71 plus interest, against defendant
Harry Lasser; and on the same date the District Director gave said Harry
Lasser notice of said assessment, stating the amount and demanding
payment thereof; that on November 9, 1959, the District Director filed a
notice of federal tax lien for said assessment with the Clerk of the
Circuit Court, Dade County, Miami, Florida.
8. On or about
June 17, 1959
, said District Director served a notice of levy upon the Town of Bay
Harbor Islands, naming defendant Harry Lasser as the taxpayer, and the
total amount due to the
United States of America
for unpaid taxes in the amount of $826.69.
9. The said
Town of Bay Harbor Islands is indebted under said contract with Harry
Lasser in the sum of $1246.12 covering the amounts payable for the
months of June and July, 1959. The amounts due monthly under said
contracts were $993.06.
10. There was
a breach of said contract on the part of Harry Lasser, but the damages
resulting therefrom were deducted by said Town from the total amount of
$1,986.12 under said contract leaving a balance of $1,246.12.
1. The Court
has jurisdiction of the parties and the subject matter herein.
assignment by Harry Lasser to Leo Ackerman was terminable at the will of
Harry Lasser, and was so terminated on
July 15, 1959
United States of America
is entitled to recover of the Town of Bay Harbor Islands, the sum of
$496.58, representing the amounts due under said contract for the period
July 16, 1959
July 31, 1959
Ackerman is entitled to recover of the Town of Bay Harbor Islands, the
sum of $749.54 representing the difference between the total sum of
$1,246.12 owed after deducting the amounts to which the United States of
America is entitled to.
5. Since all
damages due to failure of Harry Lasser to perform under said contract
were deducted and retained by the Town of Bay Harbor Islands, there is
no liability on the part of Fidelity & Deposit Company of
to the Town or said parties hereto.
Plaintiff, Town of Bay Harbor Islands, is not entitled to recover its
costs and attorneys fees herein.
7. The said
Harry Lasser has no claim to any of the sums owed by the Town of Bay
Harbor Islands under the aforesaid contract.
therefore ORDERED, ADJUDGED and DECREED by the Court as follows:
1. That the
, intervening plaintiff herein, be and it is hereby awarded a judgment
against the Town of Bay Harbor Islands in the amount of $496.58 for
which let execution issue.
Defendant, and Counter-Plaintiff, Leo Ackerman, be and he is hereby
awarded a judgment against the Town of Bay Harbor Islands in the sum of
$749.54 for which let execution issue.
3. The claim
of Town of Bay Harbor Islands as against Fidelity & Deposit Company
be and the same is hereby dismissed with prejudice.
4. The prayer
contained in the Complaint of Plaintiff, Town of Bay Harbor Islands that
it be awarded its attorneys fees and costs be and the same is hereby
Counter-claim of Harry Lasser filed herein be and the same is hereby
dismissed with prejudice.
¶9761]In re Marine Midland Trust Co. of N. Y. (Arrowhead Manor, Inc.)
Y. Supreme Court,
[1954 Code Sec. 6323]
Tax lien: Priority: Assignment of funds: Validity against assignee.--The
delinquent taxpayer made a valid assignment of liquor license refund
money held by the state controller. The assignment was made for adequate
consideration before the claim or lien of the
for taxes and the assignee was entitled to priority.
Berenson, 120 Broadway,
New York City
, N. Y., for plaintiff.
This is a
motion in supplementary proceedings to permit and direct the state
comptroller to pay to the moving judgment creditor bank funds which he
The movant on
January 18, 1960
, loaned to the judgment debtor money to secure its liquor license. On
April 22, 1960
, the judgment debtor surrendered its license and immediately thereafter
on the same day assigned the proceeds to the movant. Thereafter on
May 24, 1960
, the bank recovered a judgment against the judgment debtor. Other
creditors have secured judgments which may be prior liens to that of the
movant, if its rights are based on the judgment and not the assignment.
The United States Government also claims priority to the movant, as an
assignee, but admits that its lien is junior to any judgment creditor
which has secured a lien, but senior to any securing a lien after
February 10, 1961. This is the date it secured its lien by filing with
the Register of the City of
becomes due on the date when the license is surrendered for cancellation
and created an obligation on that date whereby the comptroller was then
holding the refund for the benefit of the former licensee even though
payment is deferred by section 127 of the Alcoholic Beverage Control Law
(Strand v. Piser, 291 N. Y. 236). Accordingly, on the date of the
assignment, the judgment debtor was the possessor of the fund and could
assign it to the bank. It was not the assignment of a fund not in
existence creating an equitable lien (Palmer v. Tremaine, 259
App. Div. 951), but a valid assignment of a fund in existence, after
which the assignor had no title to the refund money to which liens of
subsequently acquired judgments could attach (Ryan v. O'Leary,
266 App. Div. 681).
With regard to
the government's claim, 26 U. S. C. A. section 6323(a) provides,
"Invalidity of lien without notice.--Except as otherwise provided
in subsection (c), the lien imposed by section 6321 shall not be valid
as against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the Secretary or his delegate--(1) In
the office designated by the State or Territory in which the property
subject to the lien is situated * * *." Such filing was not done by
it until long after the assignment. The bona fides of the assignment are
not questioned. The government claims that the bank is not protected as
a "purchaser" because the assignment was not for a present
consideration. With this view the court is not in accord. A pre-existing
liability is good consideration for a new promise and if a debtor gives
additional security to his creditor on a pre-existing debt, without new
consideration, there is sufficient consideration (17 C. J. S.,
Contracts, sec. 122, p. 472). Therefore the motion is granted. Settle
¶9248]T. R. Elliott, Virgie M. Elliott, et al., Plaintiffs v. Sioux Oil
Company, a corporation, et al. Defendants v. The Youngstown Sheet and
Tube Company, an Ohio corporation, and United States of America,
Intervenors The Bay Petroleum Corporation, a corporation, Plaintiff v.
L. S. Chism, et al., Defendants
S. District Court, Dist. of Wyo., No. 4179, 4350 Civil, 191 FSupp 847,
[1954 Code Secs. 6321, 6322, and 6323]
Priority of lien: Federal tax lien v. assignment of proceeds of crude
oil sales: Assignment treated as a mortgage.--The assignee of a
delinquent taxpayer, the assignment involving the proceeds from the sale
of crude oil, had a superior lien to the government's lien for taxes
because the assignment was filed and recorded in the state of Wyoming
before notice of the Federal tax lien was so filed. The assignment of
the proceeds of the sales of crude oil constituted a
"mortgage" on an interest affecting real property and thus the
assignor had a prior mortgage lien under Code Sec. 6323. The fact that
the tax lien had been filed earlier in
, the principal place of business of the delinquent taxpayer, was
immaterial since the "mortgage" was on an interest in land
Shaw, Denver, Colo., and Loomis, Lazear & Wilson, Cheyenne, Wyo.,
for The Youngstown Sheet & Tube Co., intervenor. John F. Raper,
United States Attorney,
, for the
here presented relates to the superiority of a federal tax lien over a
private lien. The issue of priority of liens is before this Court by the
motion by Youngstown Sheet and Tube Company to dismiss the objections of
to the Order on Pretrial Conference made and entered by this Court on
July 22, 1960
, awarding $19,215.37 to Youngstown Sheet and Tube Company. The order
directed also that the United States take nothing by virtue of its claim
for taxes due from C. M. & W. Drilling Company in these interpleader
actions, but that $1,013.30 be paid to the United States for its
landowner's royalty which it interposed for the first time at the
pretrial conference on June 3, 1960, in lieu of its claim for unpaid
claims to the fund in the registry of the court are made by the United
States Government and by Youngstown Sheet and Tube Company. The
Government seeks to be awarded $2,924.33 based on its lien for taxes
that accrued prior to January 1958 when the Court assumed control of the
assets of the delinquent taxpayer, the C. M. & W. Drilling Company.
It is the Government's contention that it is entitled to the funds held
by Sioux Oil Company which were payable to C. M. & W. Drilling
Company, which funds Sioux Oil Company paid into the registry of this
court for proper disbursement.
Sheet and Tube Company claims priority to the same funds by virtue of an
instrument labeled "Assignment of Proceeds", which instrument
it contends brings it within one of the privileged categories of Section
6323 of the Internal Revenue Code of 1954.
rely on Sections 6321 to 6323, inclusive, of the Internal Revenue Code
of 1954 and they do not dispute the following facts:
Oil Company is a corporation organized under the laws of
M. & W. Drilling Company, a
corporation, with its principal place of business in
, owns and leases property in
tax assessment by the Director of Internal Revenue for the year 1956 was
November 19, 1956
of the Federal tax lien was filed in
January 29, 1957
M. & W. Drilling Company executed in
, an "Assignment of Proceeds" to Black Hills Drilling Company
May 17, 1957
Assignment of Proceeds was filed and recorded in
May 25, 1957
letter dated May 31, 1957, Black Hills Drilling Company advised C. M.
& W. Drilling Company that payment under the Assignment of Proceeds
should be made to Continental Ensco Company, a division of Youngstown
Sheet and Tube Company; and
of the Federal tax lien was recorded in
August 22, 1957
of brevity, the assignor is referred to as "C. M. & W."
and the rival claimant to the
is referred to as "
government's tax lien was created under Section 6321, which provides
that a tax lien attaches "in favor of the
upon all property and rights to property, whether real or personal,
belonging" to the delinquent taxpayer. Such lien arises, under
Section 6322, "at the time the assessment is made and shall
continue until the liability for the amount so assessed is satisfied or
becomes unenforceable by reason of the lapse of time". Goldstein
v. Bankers Commercial Corporation, 152 F. Supp. 856, aff'd. 257 F.
2d 48 (N. Y. 1957); Beeghly v.
, 152 F. Supp. 726 (
1957). Prior rights, however, of any mortgagee, purchaser, pledgee or
judgment creditor, are unaffected by the government tax lien. (Section
6323 of the Internal Revenue Code of 1954.) This section provides that
the tax lien is not valid against such creditors "until notice
thereof has been filed . . . in the office designated by the law of the
state . . . in which the property subject to the lien is situated . .
statutes to the chronology of events, the
has a lien on the funds deposited with the court by Sioux Oil Company as
of November 19, 1956. The superiority of that claim is contingent upon
the status of
as a mortgagee, purchaser, pledgee or judgment creditor, and upon
compliance with the filing requirements of Section 6323.
derives its rights by assignment from Black Hills Drilling Company, the
named assignee in the Assignment of Proceeds.
terms of the Assignment of Proceeds by the delinquent taxpayer, C. M.
& W. declared that it owed Black Hills Drilling Company $25,252.05
for material and labor furnished, which amount the assignor
"desires to pay out of proceeds due from Sioux Oil Company for
crude oil purchased from the above-described leases, and from all other
leases in which the undersigned (i.e. the assignor) owns an interest and
from which the Sioux Oil Company purchases the oil produced
therefrom". C. M. & W. thereupon made the following assignment:
THEREFORE, the undersigned, for and in consideration of the oil well
drilled and the casing furnished as above stated by the Black Hills
Drilling Company, Inc., for the use and benefit of the above-described
leases and lands, does hereby assign, transfer and set over unto Black
Hills Drilling Company, Inc., of Newcastle, Wyoming, the sum of
Twenty-five Thousand Two Hundred Fifty-two Dollars and Five Cents
($25,252.05), payable from proceeds from the sale of crude oil from the
above-described leases and lands, and all other leases and lands in
which the undersigned owns an interest, and from which Sioux Oil Company
purchases the crude oil produced therefrom, which proceeds may now be
due, or which may hereafter become due to the undersigned from Sioux Oil
the event any part of the above stated Twenty-five Thousand Two Hundred
Fifty-two Dollars and Five Cents ($25,252.05) is hereafter paid to said
Black Hills Drilling Company by any interest owner in the
above-described leases or lands, then, and in that event, upon written
notice to that effect furnished to Sioux Oil Company, this Agreement
shall be decreased and diminished by the total sum of such payments so
undersigned does hereby agree to indemnify and hold Sioux Oil Company
harmless for making any payments hereunder and to defend said Sioux Oil
Company against any claims or litigation which may arise by virtue of
any payments so made."
of such instrument would profit from refinement and precision. Its
infirmities, however, do not detract from its intent and purpose to give
the creditor collateral security for the payment of the assignor's debt.
It is the
position of the Government that
is not a purchaser within the meaning of Section 6323 for the reason
that an assignee for past consideration is not a purchaser within the
purview of the act and the definition of that term in Federal Tax
Regulations, Section 301.6323-1. The Government stresses the
applicability of the holding in the case of The United States v.
Chapman [60-2 USTC ¶9667], 281 F. 2d 862 (C. A. 10, 1960). In that
case the assignee of a security for a loan was held to be a lienor and
not a purchaser, and since the lien was inchoate and unperfected, it was
not protected by Section 6323.
contends that it was either a purchaser or mortgagee.
The facts and
the law lead me to the conclusion that the controversial instrument was
executed as a security for the payment of a debt, and as such it
constitutes a mortgage. 6 C. J. S. "Assignments" Sec. 2(8),
page 1049; Conrad v. The Atlantic Insurance Company, 26
(1 Pet.) 386, 447 (1828). I am influenced, also, by the meaning of the
terms "mortgagee, pledgee, purchaser, or judgment creditor" as
set out in the Federal Tax Regulations, Sec. 301.6323-1(a)(ii) which
reads as follows:
determination whether a person is a mortgagee, pledgee, purchaser, or
judgment creditor, entitled to the protection of Section 6323(a), shall
be made by reference to the realities and the facts in a given case
rather than to the technical form or terminology used to designate such
person. Thus, a person who is in fact and in law a mortgagee, pledgee,
or purchaser will be entitled as such to the protection of section
6323(a) even though such person is otherwise designated under the law of
a State, such as the Uniform Commercial Code."
The subject of
the mortgage thus executed is real property, or, more specifically, is
an interest affecting real property. In the case of Stone v. Wright,
et al., 75 F. 2d 457 (C. A. 10, 1935), it was held that a lien on
the proceeds from the sale of oil produced makes it an instrument
affecting the real estate. Holding that the instrument was within the
recording requirements, the Court said at page 460:
was related to and affected real estate because the fund was to come
from mineral extracted from the real estate, and it affected that real
estate in many respects."
also, Continental Supply Company v. Marshall, 152 F. 2d 300, 307
(C. A. 10, 1946); Riverview State Bank v. Ernest, 198 F. 2d 876
(C. A. 10, 1952).
Under the rule
pronounced in United States v. R. F. Ball Construction Company
[58-1 USTC ¶9327], 355
587 (1958), the lien must be perfected in order to be privileged by
Section 6323. A claim based upon an unperfected instrument is
subordinate to the government's tax liens. Arthur Company v. Chicago
Paints, Inc. [59-2 USTC ¶9689], 175 F. Supp. 50, 53 (
1959). The proceeds mortgaged by C. M. & W. were to be derived from
the sale of oil produced and sold from certain leases and lands in
, and from "all other leases and lands" in which it owned an
interest and from which Sioux Oil Company purchased the crude oil
produced therefrom. Such property could be located in various counties
and in various states. The property rights of the taxpayer and of the
third party upon whom the government asserts its tax lien are determined
by the state law wherein the property is located, or wherein said rights
It has been
said that the claimant's lien interest must "satisfy the standards
imposed by the decisions of the federal courts where the question of
priority arises between a government tax lien and a private unperfected
lien." First State Bank of Medford v. United States [58-2
USTC ¶9758], 166 F. Supp. 204, 209-210 (
1958). It has also been intimated that a lien is not to be construed as
perfected until it has been reduced to final judgment. United States
v. White Bear Brewing Company [56-1 USTC ¶9440], 350
1010 (1956). In the case of United States v. City of New Britain
[54-1 USTC ¶9191], 347
81, 84 (1954), the standard by which a lien will be choate was expressed
* * liens under state law were perfected in the sense that there is
nothing more to be done to have a choate lien--when the identity of the
lienor, the property subject to the lien, and the amount of the lien are
universally accepted and time-honored rule, however, is that the
question of the existence of property interests is solely a question of
state law. It has been expressed by the Supreme Court in the case of Morgan,
Executor v. Commissioner of Internal Revenue [40-1 USTC ¶9210], 309
78, 80, that "State law creates legal interests and rights. The
federal revenue acts designate what interests or rights, so created,
shall be taxed". In the case of Bensinger v. Devidson [57-1
USTC ¶9263], 147 F. Supp. 240, 245 (
1956), the court said: "The right of the
to collect taxes is not subject to state law. But state law may control
on what it considers or creates as property." See also Commissioner
of Internal Revenue v. Stern [58-2 USTC ¶9594], 357
39 (1958); United States v. Bess [58-2 USTC ¶9595], 357
51 (1958); In Re Kobiela [57-2 USTC ¶9948], 152 F. Supp. 489 (
The fund in
the registry of this court to which both parties assert their claims,
was channeled there by Sioux Oil Company as the purchase price for oil
purchased from the so-called Texas-Elliott lease located in
. Section 34-21, Wyoming Statutes 1957, provides that a recorded
instrument affecting an interest in land "shall be notice to and
take precedence of any subsequent purchaser or purchasers . . .".
When, therefore, the Assignment of Proceeds was recorded in
, the mortgage ofYoungstown was perfected and thereupon protected by
Section 6323. This occurred on
May 25, 1957
, approximately three months prior to the filing in
, of the notice of tax lien. By the terms of the Assignment of Proceeds
and the prompt recording of that instrument in the county where the
property was located, the assignor-taxpayer was divested of title and
possession, and the lien was perfected. United States v. Gilbert
Associates [53-1 USTC ¶9291], 345
question to be determined is whether or not the government's recorded
January 29, 1957
, takes precedence over the mortgage recorded in
May 25, 1957
attempts to establish its priority on the theory that the assignment was
merely an assignment of accounts receivable; and that the assignee's
rights thereunder are inchoate and imperfect because the instrument was
not filed in Denver County, Colorado, which is the county in which the
principal place of business of the assignor is located as required by
the Colorado Accounts Receivable Law. Apparently the government
concludes that the property to which the federal tax lien attached was
and therefore proper notice was given to the assignee of accounts
receivable as required by Section 6323. I cannot subscribe to this
is more tenable. The proceeds of the sale of oil constitute an interest
in real property which is located in
. The federal recording law requires that notice of the tax lien be
filed in the office designated by the law of the State in which the
property subject to the lien is situated. Section 29-111, Wyoming
Statutes 1957, requires that federal tax liens be recorded in the office
and Ex-Officio Register of Deeds of the county or counties in the State
in which the property is situated. The tax lien, therefore, which was
January 29, 1957
, is not valid as against the mortgagee whose mortgage was recorded in
, the situs of the property, on
May 25, 1957
. When the notice of the tax lien was recorded in
August 22, 1957
, it had notice of the intervening rights of the prior recorded mortgage
conclusion is in accord with the purpose of Section 6323 which "is
to give notice to would be purchasers of the government's right to
collect taxes due from the owners of the property". Pipola v.
Chicco [59-1 USTC ¶15,207], 169 F. Supp. 229, 232 (N. Y. 1959). In
passing Section 6323, Congress also was provoked to avoid the evils and
insidious effect of secret federal tax liens. Marteney v. United
States [57-1 USTC ¶9670], 245 F. 2d 135 (C. A. 10, 1957). There can
be no logical argument that the filing of a tax lien in Denver County,
Colorado, the principal place of business of the delinquent taxpayer,
and the residence of the mortgagee, gives notice of such lien on the
property located in Weston County, Wyoming, to which it is intended to
Not in Issue]
In view of my
decision on the merits of the issues before me, it is not imperative
that I pass on the issue of estoppel which was raised in the motion to
dismiss. Under the circumstances of the complicated nature of the
interpleader actions from which the motion was an outcrop the question
of estoppel against the government merits at least a nod of recognition
on my part.
of the general rule absolving the government from the defense of
estoppel, I reiterate my former comment that I cannot adhere to such an
unalterable rule which would jeopardize justice. See City of
v. Montana-Dakota Utilities Company, 157 F. Supp. 664, 670 (1958).
All the proceedings in these cases leading up to and including the
pretrial order were predicated on the absence of a prior claim by the
government for delinquent taxes. At the pretrial conference the
government voluntarily admitted that its tax lien had not been filed
according to law; it thereupon asserted a claim for royalty interest
payments which was allowed. This award in the sum of $1,013.30 as a
landowner's royalty would not have been made had the government not
asserted such a claim when it ascertained that it could not claim
priority to a tax lien, and had not all the other parties agreed to
accept the substitution of claims by the government. The government
failed to present the court with its figure for the total amount of
money which it claimed against the fund in the registry as ordered by
and the other claimants respected the Court's order in this regard.
Though the other claimants to the fund were not completely satisfied
with their reduced awards, they all acknowledged at the pretrial
conference that a formula for the equitable proportionment of the funds
in the registry was necessary and desirable under the circumstances.
They acceded to the preparation of a formula by which the funds would be
or could be distributed proportionately among all the creditors of C. M.
& W. Drilling Company.
government failed to change its position until the last day allowed for
filing objections to the Order of Distribution, it thereby adversely
affected the formula and also precluded the other parties from likewise
filing objections to the pretrial order. In my opinion, I can see
inequitable results where, as here, the government does not
"observe the same rules and standards of fair dealings that are
expected of" and exercised by a private citizen. (City of
, supra, page 670.)
Be that as it
may, I find that Youngstown Sheet and Tube Company is protected by the
provisions of Section 6323 of the Internal Revenue Code of 1954, and
that the lien of the United States for unpaid taxes is inferior to the
assignment of proceeds, and that the notice of lien was improperly filed
in Colorado and was tardily filed in Weston County, Wyoming.
Accordingly, the Motion to Dismiss the Objections is granted.
¶9164]United States of America, and Dan M. Nee, Collector of Internal
Revenue for the Sixth Collection District of Missouri, Plaintiffs, v.
Charles V. Carrollo, Caroline Carrollo, Defendants The National Surety
Corporation, a corporation, Defendant and Third-Party Plaintiff
Interpleader, v. Merchants Bank of Kansas City, Missouri, a corporation,
the District Court of the United States for the Western District of
Missouri, Western Division, No. 606, Filed December 2, 1940
Lien for taxes: Validity against assignee of funds.--Defendant
bank loaned money to a criminal defendant who deposited it with his
surety on an appearance bond and received back from the surety a receipt
for the money which he assigned to the bank. Thereafter, the
levied on such funds in the hands of the surety on account of income tax
allegedly due from the criminal defendant. The Court holds that the
assignment to the bank was for a good and sufficient consideration and
was binding against the
S. Attorney, for Government. Ringolsky, Boatright, Jacobs and Perry W.
Shrader for defendants.
Findings of Fact, Conclusions of Law, Indicated Order
June 20, 1940
and the Collector of Internal Revenue instituted this action against
Charles V. Carrollo, Caroline Carrollo and The National Surety
Corporation on account of income tax alleged to be owing by Charles V.
Carrollo. The Surety Corporation was made a party defendant because, it
was alleged, it had in its possession $25,000 of the money of the
Carrollos, put up with the Surety Corporation in consideration of the
signing by that corporation of a criminal appearance bond on which
Charles V. Carrollo was principal. The terms of the bond had been
satisfied. A notice of levy had been served on the Surety Corporation in
July 3, 1940
, the Surety Corporation filed answer and cross petition. In the cross
petition it was prayed that Merchants Bank of
be required to interplead its claim. On the same day an order was made
requiring the Bank to interplead and granting leave to the Surety
Corporation to pay the $25,000 into court. Thereafter, on
July 22, 1940
, the Surety Corporation was discharged.
Bank alleges that before the levy on the Surety Corporation it had a
lien on $10,000 of the $25,000 put up with the Surety Corporation by the
stipulation of the parties it was agreed in open court that as between
plaintiffs and the Merchants Bank of Kansas City the issues should be
determined upon the pleadings, the motion of the Merchants Bank for an
order directing the payment of $10,000 to it, the oral admissions of
counsel for plaintiffs made in open court, the request of the Merchants
Bank for admission of facts and the written answers thereto (filed with
leave on October 29, 1940, a day subsequent to the hearing), the
testimony offered at the hearing, the exhibits introduced and the
affidavit of F. A. Brinkman, received in evidence by oral stipulation,
in lieu of the testimony of Brinkman. Upon the record so made I make the
following formal findings of fact.
I. On April
18, 1939, Charles V. Carrollo and Carrle Carrollo (who is the same
person as Caroline Carrollo) requested Merchants Bank of Kansas City to
advance the sum of $10,000 to be deposited as collateral security with
the National Surety Corporation so that the National Surety Corporation
would execute an appearance bond of $10,000 in a certain criminal case
pending against Charles V. Carrollo. Merchants Bank of Kansas City
agreed to advance said $10,000 upon conditions: (a) that Carrie Carrollo
and Charles V. Carrollo would execute their note to the bank for
$10,000, (b) that they would secure the note by a deed of trust on
certain real estate and (c) that they would secure the note also by an
assignment of the receipt for $10,000 which would be executed by the
National Surety Corporation. The $10,000 in question was then advanced
by Merchants Bank to Carrie Carrollo, was turned over by her to the
National Surety Corporation as collateral, the receipt of the National
Surety Corporation was given to her for the collateral so turned over,
and immediately was assigned by Carrie Carrollo to the bank as security
on the $10,000 note contemporaneously executed, being so assigned in the
presence and with the full knowledge of the agent of the National Surety
Corporation. The deed of trust referred to also was given as additional
security on the note.
$10,000 referred to in finding of fact No. I is a part of the $25,000
claimed by the plaintiffs in this proceeding by reason of the alleged
income tax obligations of Charles V. Carrollo and the notice of levy
served on the National Surety Corporation on or about
October 19, 1939
V. Carrollo responded in accordance with the obligations of the
appearance bond referred to in finding of fact No. I. That bond was
discharged. The note to the Merchants Bank referred to in finding of
fact No. I has matured and has not been paid.
I declare the
law to be (1) that this court has jurisdiction of this case and to pass
upon the motion of Merchants Bank for an order directing the payment of
$10,000 to it; (2) that the assignment to Merchants Bank by Carrie
Carrollo, referred to in finding of fact No. I, was for a good and
sufficient consideration, was binding as against the National Surety
Corporation, and as against the plaintiffs; (3) the lien of the
Merchants Bank to the $10,000 referred to in the receipt described in
finding of fact No. I was prior and superior to any lien of the
plaintiffs in this case on account of tax claims against Charles V.
Carrollo and notice of levy by plaintiffs on the National Surety
Corporation at a time subsequent to the date of the assignment; (4)
Merchants Bank of Kansas City is entitled to an order directing the
clerk of this court to pay over to Merchants Bank the sum of $10,000 out
of the amount of $25,000 heretofore deposited with the clerk of this
court by the National Surety Corporation.
is allowed plaintiffs as to each declaration of law herein stated.
Merchants Bank will prepare and submit within five days an order
appropriate to the findings of fact and conclusions of law announced
¶9220]Georgia-Pacific Corporation, a corporation, Plaintiff v.
Nielsen-Nickels Company, a corporation, et al., Defendants
S. District Court, No.
, No. C-71-211 RPF, 1/29/73
[Code Sec. 6323]
Liens: Priority: Assignee's interest: Account receivable v. General
intangible.--An assignment to a corporation constituted an
assignment of accounts receivable rather than general intangibles. The
assignment, not having been filed with the State or recorded, was
invalid and ineffective as against the Government's tax lien.
Rossi, Caputo & Liccardo, 1960 Alameda, San Jose, Calif., for
plaintiff. James L. Browning, Jr., United States Attorney, Martin A.
Schainbaum, Assistant United States Attorney,
, for defendants.
(GP) filed an action in the state court against Nielsen-Nickels (NN) for
money owing from NN to D & B Painting and Drywall Company (DB) which
GP alleged had been assigned to it. As a claimant under a tax lien, the
United States intervened in the action and removed it to the federal
court pursuant to 28 U. S. C. §1446. NN has been dismissed from this
action in interpleader after depositing with the court the amount in
controversy, $11,797. The
now moves for summary judgment on the ground that its tax lien takes
priority over GP's assignment.
asserts its lien for unpaid federal taxes accrued in the last two
quarters of 1969. Notice of the lien was filed in the debtor's county,
in accordance with 26
C. §6321. Under 26
C. §6323, the government's lien will not take priority over claims of, inter
alia, the holder of a security interest. The term "security
interest" as defined in 29
C. §6323(h)(1) applies to interest which have "become protected
under local law against a subsequent judgment lien arising out of an
unsecured obligation." Both the
and GP agree that in order for GP's interest to come within the federal
statute, it must have been perfected under
argues that no assignment was in fact made, and that, even assuming an
assignment, it was not perfected because no security agreement was
filed. GP asserts that a valid assignment was made, and that no
financing statement was required to perfect GP's interest because the
money in question was a "general intangible" within the
meaning of the California Commercial Code, assignment of which does not
require the filing of a financial statement.
court finds that an assignment was in fact made by DB to GP of monies
due under a prior contract with NN. The letter from DB's counsel to NN
advising NN to make out joint checks to DB and GP was sufficient
description of the assignment under
law. McCown v. Spencer, 8
App. 3d 216 (2d Dist. 1970). The intent to make an assignment can be
inferred from the letter itself, as well as from the affidavit of
William Hancock, Western Regional Credit Manager of GP (Plaintiff's
Exhibit A, attached to Memorandum in opposition to Summary Judgment). United
California Bank v. Behrends, 251
App. 2d. 720 (2d Dist. 1967).
court finds that the assignment made by DB to GP was of rights to
accounts receivable, GP's interest in which, in order to take priority
over the lien of the United States, must have been recorded in
accordance with Cal. Comm. Code §§ 9102(1)(a), 9302(1). There is
little doubt that DB was assigning accounts and not general intangibles
as GP argues. In its complaint to the state court, GP alleges (para.
within four years last past, defendants, and each of them, became
indebted to plaintiffs' assignor [DB] on an open book account for
balance due in the sum of approximately ELEVEN THOUSAND, SEVEN HUNDRED
NINETY SEVEN DOLLARS ($11,797.00), plus interest to date, for services
rendered and materials furnished to defendants at their special instance
traditional notion of an account, especially an "open book
account," is precisely as described by the plaintiff's complaint
above. It is a debt arising out of a sale of goods or rendering of
services. Pingree v. Sulmeyer, 315 F. 2d 422, 424 (9th Cir.
1963); Durkin v. Durkin, 133
App. 2d 283, 290 (1st Dist. 1955). The present definition under the
California Connercial Code is the same.
Comm. Code §9106.
heavy reliance upon the decision in Nunnemaker Transportation Co. v.
United California Bank, 456 F. 2d 28 (9th Cir. 1972), for the
proposition that the rights here in question are "general
intangibles." In Nunnemaker, however, the characterization
of the rights assigned by the bankrupt was not in issue; all parties,
including the court, assumed that they were general intangibles.
at 33. This assumption was strenuously opposed by Judge Ely in his
at 37. Yet even in its discussion of the overlap between
"accounts" and "general intangibles" in the
California Code, the court did not furnish GP with the umbrella it seeks
now. Commenting upon the "unique exception" to the filing
requirement of the California Commercial Code, the court stated:
term of 'general intangibles' includes some rights to payment of money
as well as the patents, copyrights, literary property rights, and other
nonmonetary rights for which it was intended . . . The Official Comment
to U. C. C. §9-106, amended in 1966, now points this our:
in some special case a contract right to receive money crystallizes not
into an account but into a general intangible, for in such cases it is a
right to payment of money that is not "for goods sold or leased or
for services rendered." Examples of such rights are the right to
receive payment of a loan not evidenced by an instrument or chattel
paper; a right to receive partial refund or purchase prices paid by
reason of retroactive volume discounts; rights to receive payment under
licenses of patents and copyrights, exhibition contracts, etc.' Uniform
Commercial Code §9-106, Comment."
supra, at 33 &n.4.
is clear that the court in no way intended to encroach upon the
traditional notion of the account; rights to money for goods sold or
services rendered were specifically exempted from the definition of
"general intangibles" described in the Comment quoted by the
court, supra. See also Judge Ely's dissent, supra.
therefore that the interest asserted by GP in the money on deposit with
this court is not a perfected security interest within the meaning of 26
C. §6323(h)(1). The tax lien of the
has priority over the claim of GP, and, accordingly, the motion for
summary judgment of the
¶9253]Keystone Bank, Plaintiff, and District Director of Internal
Revenue, Additional Plaintiff added by Court Order v. Walter J. Tierney,
of Common Pleas of Allegheny County,
, Civil Div., No. 3145,
[Code Sec. 6323]
Tax liens: Priority: Secured creditors: Estoppel.--The
government's tax lien arose and was duly filed before a secured creditor
took an assignment of the debtor's interest. Thus, the federal lien had
priority. Moreover, the secured creditor could not claim that the
government delayed unduly in assessing the tax after liability arose;
only the debtor can, in this situation, raise an estoppel argument.
Fishkin, 104 Lawyers Building,
, for plaintiff. Mark Albert, Department of Justice,
, D. C. 20530, for district director. Thomas Welsh,
, Cook, Hanna & Kelly, 3600
, for defendant.
action, one of interpleader, involves the two plaintiffs' competing
interests in a fund of some $6,000.00. Both claim priority and each,
having a claim in excess of the fund, seeks the full amount at stake.
The facts, as stipulated to by both parties, flow in a simple
chronological order. On
August 22, 1958
, and on
October 10, 1958
, Lawrence J. O'Toole (taxpayer) was assessed of tax liability for his
1952 and u951 tax returns, respectively. Notice of tax liability was
filed in the Prothonotary's Office of Allegheny County on
December 20, 1958
, and refiled on
November 21, 1967
February 13, 1973
January 17, 1968
, in order to secure a loan from Keystone Bank, taxpayer assigned his
one-quarter interest in a partnership to his wife as consideration for
her becoming an accommodation maker on the note. In turn, the wife
assigned this interest to the Bank. Certain real estate owned by the
partnership was sold subsequent to the loan. These proceeds were
deposited with defendant, Walter J. Tierney, accountant for the
partnership. Upon Keystone's commencement of an action of assumpsit,
defendant paid the fund into court and interpleaded the claimants.
argument advanced by Keystone would dispose of the matter instantly. It
is the position that the lapse of time between the taxable periods and
the assessment dates should estop the
from claiming priority in this situation. In the tax law area, however,
there has been a long-standing proposition that only the taxpayer can
attack an assessment. U. S. v. Pearson [66-1 USTC ¶9448], 258 F.
Supp. 686 (S. D. N. Y., 1966); Falik v. U. S. [65-1 USTC ¶9295],
343 F. 2d 38 (C. A. 2d, 1965); Graham v. U. S. [57-1 USTC ¶9645],
243 F. 2d 919 (C. A. 9th, 1957). Some recent, as yet unreported
decisions, have stated this proposition clearly: "[O]nce the line
[sic] is assessed, only the taxpayer has the right to question the
correctness of the same." U.
S. v. Santos,
-- F. Supp. --, (D. C. Puerto Rico, 1979); U. S. v. Formige, --
F. Supp. --, (D. C. D. C., 1979).
does not end here. Although 26 U. S. C. §6322, provides for the
assessment becoming a lien at the time it is assessed, §6323 allows
some exceptions. Keystone claims relief under §6323(c)(1)(B). That
section states that the
' lien shall not be valid against security interests "protected
under local law against a judgment lien arising, as of the time of tax
lien filing, out of an unsecured obligation." It is the Bank's
contention that since levy was made subsequent to the assignment they
were without notice. First of all, it is not the date of levy but,
rather, the date of assessment that activates the priority mechanism.
Secondly, the Internal Revenue Code clearly spells out the filing
requirements so that notice will be given to subsequent creditors. See
§6323(f). The courts have been confronted with these situations and
their analysis has led them to give priority to the
where the liens arose and were duly filed of record prior to the taking
of an assignment of a taxpayer's interest. Keystone Mercantile Corp.
v. Graham [61-1 USTC ¶9202], 192 F. Supp. 90 (M. D. Pa., 1961).
standing to argue that laches applies to the
lien. Nor can it be heard to say it was without notice of the lien and
should therefore fall into the exception of §6323(c)(1)(B).
decision awarding the interpleaded fund to the
will be entered.
¶9646]In the Matter of Farr Western Asphalt Paving, Inc., an
corporation, Bankrupt. Ed Caliendo, Trustee in Bankruptcy of Farr
Western Asphalt Paving, Inc., Petitioner v. Mardian Construction
Company, an Arizona corporation, et al., Respondents
S. District Court,
, In Bankruptcy No. B-17972, 6/5/69
[Code Sec. 6323]
Lien for taxes: Priorities: Assignment of accounts receivable:
Assignment not filed or recorded.--An assignment by the taxpayer of
a portion of accounts receivable due it, record of such assignment not
having been filed with the State or recorded, was invalid, ineffective
and void as against the Government's tax lien.
ert F. Owens,
3800 N. Central Ave.
, for bankrupt. Lester Penterman, 1108
, for trustee.
Determining Validity and Priority of Liens
came on for hearing the 4th day of June, 1969, the Trustee, Ed Caliendo,
being present, together with his attorney, Lester Penteman, and the
claimants Contractors Equipment Supply Company, and the Internal Revenue
Service of the United States being represented by their attorneys,
Philip W. Marquardt and Harold E. Patterson, respectively, and the Court
having before it the petition of the Trustee to determine the validity
and priority of the claims of Contractors Equipment Supply Company and
the Internal Revenue Service, and the matter having been argued by
counsel and a memorandum filed by the Internal Revenue Service, and the
Court being fully advised in the premises, makes the following findings
of fact and conclusions of law.
February 7, 1967
, and thereafter through 1968, Mardian Construction Company was indebted
to the bankrupt, Farr Western Asphalt Paving, Inc. in the sum of
February 7, 1967
, Farr Western Asphalt Paving, Inc. was indebted to Contractors
Equipment Supply Company in the amount of $486.82. This same day, Farr
Western Asphalt Paving, Inc. assigned to Contractors Equipment Supply
Company the sum of $486.82 out of its account receivable due from
Mardian Construction Company. This assignment was never filed in the
Office of the Secretary of State nor recorded in the State of
3. On March 17
May 28, 1967
, the Internal Revenue Service assessed against the bankrupt, taxes,
penalties and interest in the total amount of $19,481.23 which were then
due and owing and which had not been paid, although demand therefore had
been made. A Notice of Federal Tax Lien in the amount of $9,411.65 was
recorded with the
, against Farr Western Asphalt Paving, Inc. on
March 31, 1967
. Additional Notices of Federal Tax Liens against Farr Western Asphalt
Paving, Inc. in the amounts of $9,250.04 and $1,718.39 were filed with
on May 1, June 7, and
October 20, 1967
assignment of an account receivable under the law existing in the State
of Arizona in 1967 [A. R. S. 44-804] was required to be filed with the
Secretary of State to be effective against present and future creditors
of the assignor.
assignment of an account receivable is a mortgage within the purview of
A. R. S. 33-412 and must be recorded pursuant to A. R. S. 33-702, or it
is void as to subsequent creditors.
Internal Revenue Service of the United States is a creditor within the
meaning of the law of Arizona referring to filing of assignments, as it
existed in 1967, and recording of mortgages.
Internal Revenue Service has a valid and subsisting lien on all property
and property rights of Farr Western Asphalt Paving, Inc. dating from
March 17, 1967
for unpaid taxes.
assignment by Farr Western Asphalt Paving, Inc. of a portion of the
account receivable due it from Mardian Construction Company on
February 7, 1967
is invalid, ineffective, and void as against the lien of the Internal
Revenue Service for unpaid taxes.
Internal Revenue Service has a valid and subsisting first lien on the
account receivable due from Mardian Construction Company to Farr Western
Asphalt Paving, Inc. in the amount of $2,785.28.
IS ORDERED that the Internal Revenue Service is entitled to the account
receivable due from Mardian Construction Company to Farr Western Asphalt
Paving, Inc. in the amount of $2,785.28, less reasonable costs of
istration, and the same shall be paid over to the Internal Revenue
Service by the Trustee.
¶9242]North American Investments, a general partnership, and Van Dyck
Estates, a limited partnership, Plaintiffs v.
United States of America
, et al., Defendants
S. District Court, East.
, No. F79-031EDP, 9/17/80
[Code Sec. 6323]
Lien for taxes: Validity and priority against third parties: Assignee
of funds: Failure to perfect security interest.--The failure of an
assignee to perfect its security interest in funds due under a contract
between the taxpayer and a third party that had been assigned to it
rendered its interest in the money inchoate and the taxpayer retained an
interest in the funds to which a federal tax lien could attach. The
assignment of the contract rights was within the scope of Article 9 of
the California Uniform Commercial Code, the assignee was not protected
under local law against a subsequent judgment lien and the federal tax
lien had priority over the assignee's claim under UCC Secs. 9-301 and
9-302 because of his failure to perfect his security interest by filing
a notice of the assignment.
Brown, Wild, Carter, Tipton, Quaschnick & Oliver, 2300 Civic Center
Sq. Fresno, Calif. 93721, for plaintiffs. Michael Chun, Department of
Justice, Washington, D. C. 20530, George Dekmejian, Attorney General,
State of Calif. 555 Capital Mall, Sacramento, Calif. 95814, Alexander B.
T. Cobb, Seltzer, Caplan, Wilins & McMahon, 3003 Fourth Ave., San
Diego, Calif. 93102,
Michael E. James, Central Valley Solar 1999 W. Simpson, Fresno, Calif. 93705,
Guy Gurney, Division of Labor Standards Enforcement, 455 Golden Gate
Ave., San Francisco, Calif. 94102, for defendant.
Recommendation On Defendants' (
United States of America
) Motion for Summary Judgment or Partial Summary Judgment
United States of America
's Motion for Summary Judgment, or, in the alternative, Partial Summary
Judgment, came on regularly for hearing before the Honorable A. D.
Christensen, United States Magistrate. Michael Chun, Trial Attorney, Tax
Division, Department of Justice, appeared on behalf of the defendant
. Alexander B. T. Cobb of the law firm Seltzer, Caplan, Wilkins and
McMahon appeared on behalf of defendants Alan Lind and S. W. Hart and
Co., Pty. Ltd. dba Solahart-California. Guy Gurney, Esq. appeared on
behalf of the intervenor Division of Labor Standards Enforcement,
Department of Industrial Relations, State of
. There was no appearance on behalf of the plaintiff/interpleader.
Following oral argument, the matter was submitted to the Court for its
It is the
recommendation of the Court to the Honorable Edward Dean Price, United
States District Judge, that the defendant
United States of America
's Motion for Summary Judgment be granted.
The facts of
this case are as follows: On December 1, 1978, Defendant Entrophy dba
Central Valley Solar (Central) assigned to defendant-claimant S. W. Hart
and Co., PTY. LTD. dba Solahart-California (Solahart) all monies due or
to become due from plaintiff/interpleader North American Investments (N.
A. I.) to Central by reason of a certain designated contract between N.
A. I. and Central. Although Solahart was not required to render any
performance under the N. A. I.-Central contract, the assignment was not
for the purpose of collection only. Central's assignment to Solahart
constituted a transfer of a significant part of the outstanding contract
rights of Central and under the terms of the assignment, N. A. I. was to
pay the monies directly to Solahart. N. A. I. received notice of this
December 1, 1978
October 25, 1978
filed a notice of federal tax lien against Central for payroll taxes in
the amount of $9,038.43 with the
October 30, 1978
filed the same lien as described in the immediately preceding paragraph
with the U. C. C. Division, Secretary of State,
December 27, 1978
filed a notice of federal tax lien against Central for payroll taxes in
the amount of $12,578.18 with the
February 13, 1979
filed a notice of federal tax lien against Central for payroll taxes in
the amount of $13,084.01, with the U. C. C. Division, Secretary of
asserts a lien arose against all property and rights to property of
Central on the assessment dates for the amounts listed below.
Date of Assessment Amount
7- 3-78 ............... $ 3,043.67
December 4, 1978
December 28, 1978
served a Notice of Levy on N. A. I.
the tax liens, the
sought to collect from N. A. I. the monies due and owing Central under
the N. A. I.-Central contract.
Since both the
United States and Solahart claimed the funds due under the N. A.
I.-Central contract, N. A. I. filed an interpleader action in state
court on January 10, 1979, said action being removed to federal court on
February 9, 1979, wherein N. A. I. named the United States, Central and
Solahart as defendants, and deposited the entire amount remaining due
under the contract with the Court.
the filing in state court and the removal of this action to federal
court, the Division of Labor Standards Enforcement, Department of
Industrial Relations, State of
, as assignee of judgments for wages due against Central, was permitted
discussion of the issues is presented, it should be noted that during
oral argument, the attorney for Solahart, Alexander B. T. Cobb, conceded
in open court that the law would not support a recovery of that portion
of the retained construction payments subject to the IRS tax assessments
and liens prior to the assignment of
December 1, 1978
. The emphasis of his argument related to the assessment of
December 21, 1978
, in the amount of $12,578.18.
value of the funds deposited with the Court is $16,166.64.
involved in this action are as follows:
December 21, 1978
, possess any property interest in the contract rights assigned to
Solahart, sufficient to allow the attaching thereto of a federal tax
lien against Central?
2. If a
federal tax lien has so attached, is this lien entitled to priority over
the claims of the assignee Solahart to such funds?
The initial premise: Title 26 §6321, of the United States Code,
provides that if a person liable for any tax refuses to pay that tax
after demand, the amount thereof, including interest, penalty, or
addition to such tax "shall be a lien in favor of the United States
upon all 'property' and 'rights to property' belonging to such
person". In Aguilino v. United States, [60-2 USTC ¶9538],
509, 512-514, 80
1277 (1960), the Supreme Court stated:
threshold question in this case, as in all cases where the federal
government asserts its tax lien, is whether and to what extent the
taxpayer had "property' or 'rights to property' to which the tax
lien could attach. In answering that question, both federal and state
courts must look to state law . . . However, once the tax lien has
attached to the taxpayer's state-created interests, we enter the
province of federal law, which we have consistently held determines the
priority of competing liens asserted against the taxpayer's 'property'
or 'rights to property' . . . This approach strikes a proper balance
between the legitimate and traditional interest which the state has in
creating and defining the property interest of its citizens, and the
necessity for uniform
istration of the federal revenue statutes."
companion case, United States v. Durham Lumber Co., [60-2 USTC ¶9539],
363 U. S. 522, 80 S. Ct. 1285 (1960), the Court made it clear to that
extent, under applicable state law, the taxpayer has no property
interest in the funds sought to be subjected to a tax lien, there is
nothing to which the lien can attach.
ARGUMENT: Solahart urges a traditional point of view. Solahart asserts
that at the time of the third assessment and lien, Central was already
bound by a prior valid assignment to Solahart of the monies due from N.
A. I. (between the parties the assignment is complete the moment it is
made). Even though Solahart did not file the assignment as required by
UCC §9302 to protect its interest against third party creditors (§9301),
the assignment is nevertheless binding between the parties. See §9201
(recording statute is irrelevant regarding perfection of interest
against party to the transaction). Therefore, Solahart concludes,
Central no longer had any property or rights to property held by N. A.
I. and there was nothing upon which the tax lien could attach.
argues that the government's reliance on UCC §2326 is misplaced. With
this contention, the Court can agree. §2326 relates to consignment
sales and rights of creditors and the goods applicable thereto, and is
at best, a collateral matter involved with "levy upon goods"
and therefore, not pertinent or material to the ultimate resolve of this
finally presents the argument that because Solahart forbore on a claim
in consideration of Central's assignment of its rights under the N. A.
I.-Central contract, Solahart becomes a purchaser under 26 USC §6323(a)
which provides as follows:
Purchasers, holders of security interests, mechanic's lienors, and
judgment lien creditors. The lien imposed by §6321 shall not be
valid as against any purchaser, holder of a security interest,
mechanic's lienor, or judgment lien creditor until notice thereof which
meets the requirements of subsection (f) has been filed by the Secretary
or his delegate."
asserts that an individual is a purchaser when, in consideration for an
assignment, he forbears filing mechanic's liens and/or bringing suit to
recover money. Solahart's authority for this proposition is the case of Wadley
Nurseries, Inc. v. Mctac Construction Corp., [55-2 USTC ¶9661].
GOVERNMENT'S ARGUMENT: The United States develops its argument through
the use of the UCC which was adopted in
in 1963 and is contained within West's Annotated California Commercial
Code §1101 et seq. First, the government notes that UCC §2326 requires
a supplier, who delivers goods to a retailer on consignment, to file
according to Division 9 to protect himself from creditors of the
retailer. The alleged consignment agreement was not filed. Further,
pursuant to §9301 and §9302 of the UCC, a security interest in an
account must be filed to be perfected. The government's final argument
questions Solahart's qualification as a "purchaser" for two
reasons. First, as defined in Treasury regulations on procedure and
istration (1954 Code), §301.65323(h)-1(a)(3), consideration must be
reduced to a "money value". Solahart's contention that the
assignment was made in consideration for Solahart's forbearing from
filing materialmen's liens, lawsuits and stop notices is not sufficient
to satisfy the "money value" requirement.
Solahart failed to file under Division 9, and thus, its interest was
unperfected. An unperfected security interest in accounts is subordinate
to a subsequent purchaser for value without notice. UCC §9301(1)(d).
Thus, as the government argues, Solahart is not a purchaser protected
against a federal tax lien in 26 USC §6323, (IRC 1954).
Although Article 9 of the UCC and the correlative section of the
California Commercial Code §9104(f) does not apply to an assignment of
contract rights for the purpose of collection only, or to an assignment
of such rights where the assignee is also to perform under the contract,
it does apply to:
. . any transaction (regardless of its form) which is intended to create
a security interest in . . . accounts or contract rights:
. . any sale of accounts, contract rights or chattel paper;
. . and to security interest created by contract including pledge or
assignment . . . intended as security." (UCC §9102(1)(a)(b), (2).)
concludes from this language that whether the Solahart assignment is
concerning a sale of, or security interest in, the Central accounts or
contract rights, the transaction is within the scope of Article 9. See United
States v. Trigg, [72-2 USTC ¶9642], 465 F. 2d 1264, 1268 (8th Cir.
Court would point to the fact that Article 9 is not concerned with
traditional questions of title, but rather, directs its provisions to
questions of "rights, obligations and remedies". See UCC §9202.
As regards the rights of third parties, UCC §9301(1)(b) provides in
. . . an unperfected security interest is subordinate to the rights of:
the person who becomes a lien creditor after the security interest
attaches and before it is perfected unless the security interest is
perfected within 10 days after it attaches and a person who becomes a
lien creditor before the security interest attaches . . .;"
is the focal point of the Court's recommendation. Under UCC §9302, a
financial statement must be appropriately filed to perfect all security
interests except in certain specified situations. Since none of the
exceptions to filing are applicable to the Solahart assignment, that
"security interest" (within the meaning of the UCC) must be
considered "unperfected" for purposes of UCC §9301. Under UCC
§9301(3), a "lien creditor" is a creditor who "has
acquired a lien on the property involved by attachment, levy or the
like." This definition is broad enough to include the government
once the government filed its assessment against Central in the instant
v. Trigg, supra, at 1268.
From the above
statutory interpretation and reasoning, the government is entitled to
priority over Solahart under Article 9 of UCC. Whatever the nature of
the "property interests" which remained with Central after the
assignment but prior to any filing of that assignment by Solahart, that
"property interest" was sufficient to allow the attaching of a
federal tax lien. See
v. Trigg, supra, at 1269.
for this conclusion is that the cases cited within this recommendation
and others have relied upon the "Choate doctrine" which
requires, any lien, in competition with a federal priority or tax lien,
to be more fixed = "more specific" or "Choate"--than
had been generally supposed necessary.
In 1966, the
Federal Tax Lien Act, an effort on the part of Congress to conform the
tax lien laws to concepts developed in the UCC, codified much of the
As had been
previously stated, to obtain protection against the lien creditor, the
security interest must be filed. See UCC §9301 and §9302. Solahart's
failure to perfect its security interest in, or purchase of, the
assignment by Central renders said interest inchoate, otherwise
unperfected, and allows for the retention of an interest in Central upon
which a tax lien may attach. With the government entitled to priority
under UCC, whatever "interest in property" is deemed present
in Central regarding accounts denoted in the unrecorded Solahart
assignment, that interest granted by state law is adequate to negate the
argument that the accounts were sufficiently alienated from Central to
avoid attachment of the tax liens. See
v. Trigg, supra, at 1268-1269.
The determination of the relative priority of a federal tax lien is to
be decided by federal law. See Aguilino v.
, supra, as has been discussed above.
federal tax lien priority statute 26 USC §6323, now provides that if
the "holder of a security interest" is to be protected, the
interest must have become "protected under local law against a
subsequent judgment lien" at the time the tax lien is filed. Under
UCC §9301 and 9302, Solahart's unrecorded assignment was not so
perfected at the time of the tax lien filing, and thus is not protected
from the tax lien. The result is the same even if Solahart is considered
a "purchaser" since substantially identical UCC provisions
would be employed to ascertain perfection. (See below.)
attachment of the government's tax lien gives it a fully perfected
claim. Bank of Nevada v. U. S. [58-1 USTC ¶9228], 251 F. 2d, 820
(9th Cir. 1958).
of unperfected interests remain subject to the 'first in time is first
in right', priority standard. Under that standard, unperfected . . .
interests are subordinate to the federal tax lien. United States v.
Trigg, supra, at 1270.
It is the
first lien to become "Choate" that prevails. Therefore,
whether Solahart's unrecorded interest is deemed a purchase of, or a
security interest in, accounts and contract rights, it is unperfected
and subordinate. Accordingly, the government should be awarded judgment
in an amount sufficient to satisfy, so far as the fund deposited by N.
A. I. is capable, the remaining tax liability of Central, plus interest
as provided by law.
recommendation was drafted with reliance on Nevada Rock and Sand Co.
v. United States [74-2 USTC ¶9617] for language and organization.
For greater elaboration on the historical development of the UCC and the
"Choate" doctrine, see
As a result of
the above recommendation, the claim by the Division of Labor Standards
Enforcement must suffer summary judgment as well. In U. S. v.
Division of Labor Law Enforcement, 201 F. 2d 853 (1953), a case
involving the same parties and same issues, the Ninth Circuit held that
the federal statute, establishing priority over claims created by a
state statute, is supreme, and must be recognized.
In regard to
the request by N. A. I.'s attorney for a fee for the reasonable effort
in bringing this interpleader action, said request should be denied. See
v. Liverpool and Globe Insurance Co., Lts. et al. [55-1 USTC ¶9136],
215, 75 S. Ct. 247 (1955).
September 17, 1980
, the United States Magistrate filed a recommendation granting defendant
United States of America
's Motion for Summary Judgment.
This court has
reviewed the pleadings and concurs with the Magistrate's recommendation.
is hereby ordered, for the reasons set forth in the Magistrate's
recommendation, that the defendant's Motion for Summary Judgment is
¶9242]David M. Schwartz, Plaintiff v.
United States of America
States District Court, Southern District of New York, No. 68724, Decided
January 7, 1939
Rights of assignee of funds seized by U. S.--Plaintiff, an
assignee of funds seized by U. S. officers from an individual arrested
for an alleged violation of the liquor law, may maintain an action
against the United States for such sum, and his right is not subordinate
to a government claim for taxes against the assignor where such tax
claim was asserted after the money had been assigned to plaintiff in
payment of legal services and after the Government had been given notice
of such assignment. It was not necessary for plaintiff to file a claim
for refund as a condition precedent to suit.
Inselman, attorney for plaintiff. Lamar Hardy, United States Attorney,
by Earle N. Bishopp, Assistant United States Attorney, of counsel.
This is a
motion by the defendant, the United States of America, to dismiss the
amended complaint in a suit which is brought under the provisions of
what is commonly referred to as the Tucker Act (Title 28 U. S. C. §41,
subdivision 20), to recover $261 from the United States.
material facts alleged in the complaint and which, for the purpose of
this motion, must be accepted as true, are as follows:
October 26, 1937
one Joseph Vetrano was arrested in the Southern District of New York by
an investigator of the Alcohol Tax Unit of the Bureau of Internal
Revenue, for some violation of the law. In Vetrano's pockets were bills
and currency amounting to $261 which the investigator took from Vetrano,
and on the next day delivered to his superior officer, Walter F.
Carroll. On October 28, Vetrano, in payment of legal services, etc.
assigned to Mr. Schwartz, the plaintiff in this action, his title to and
interest in the $261, which was still withheld by Carroll. On December
30, Mr. Schwartz formally notified Carroll that the money had been
assigned to him by Vetrano, and demanded and was refused delivery of it.
On the same day, namely--December 30, which was upwards of two months
after the money had been taken from Vetrano and its assignment to the
plaintiff, the Internal Revenue Collector for this district assessed
against Vetrano a tax in the sum of $10,200.33 and a notice of levy of
said tax was served on Carroll. The next day, December 31, Carroll
turned the $261 over to "the defendant,
United States of America
, who received and accepted the same and illegally applied or attempted
to apply the same towards partial payment" of Vetrano's taxes.
So long as the
investigators of the Alcohol Tax Unit themselves withheld the money from
the owner, Vetrano or his assignee, as the case might be, had a cause of
action against the investigators individually for withholding it, for it
is clear that these investigators had no authority under the law to take
possession or to retain the money. When the Government, instead of
repudiating the acts of the investigators and officers, ratified their
acts by accepting the $261 and presuming to apply it toward the payment
of Vetrano's taxes, the United States became liable for the money; for
the tax had not even been assessed against Vetrano until long after
Vetrano had assigned the money to the plaintiff. To recover the money it
was proper for the plaintiff to proceed under the Tucker Act.
--64 Fed. 88, affirmed 78 Fed. 103.
Claim Not Required]
urges that even if the money is the property of the plaintiff, the
complaint should be dismissed because it fails to state that a claim for
a refund of taxes was filed with the Commissioner of Internal Revenue
and denied pursuant to §3226 of the Revised Statutes (26 U. S. C. §§
1672-1673). However, it seems to me this is not a case where a taxpayer
is seeking to recover a refund of a tax paid by him which was illegally
assessed requiring as a prerequisite to bringing suit the filing of a
claim for a refund with the Commissioner of Internal Revenue, for, if I
am right, this is simply an instance of an illegal seizure and
withholding by the United States of money belonging to a third party,
which the Government has chosen to apply toward the payment of taxes due
from Vetrano in disregard of the rights of such third party, the real
The motion to
dismiss the complaint for failure to state a cause of action is denied.