Bona Fide Purchaser for Value Page 4

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9. On December 10, 1985 , the Court denied both motions for summary judgment, finding that questions of fact remained as to the comparative values of the two annuities. Trial was called on December 17, 1985 .

10. At trial, the IRS presented evidence as to the comparative fair market present values of the two annuities as of April 18, 1983 in the form of expert testimony of John P. Huffman, a financial analyst employed by the IRS.

11. Huffman testified that the fair market present value of an annuity as of a given date is a function of three factors: the number of payments to be made; the amount of each payment; and the appropriate discount rate to be applied. Huffman further testified that the discount rate is calculated by determining the interest rate, as of the valuation date, for low-risk government and corporate bonds of the same maturity period as the annuity, and factoring in an appropriate increase, based on an assessment of the specific risk associated with the payor of the annuity as of the valuation date. Huffman testified that once these three factors have been fixed, the present value is calculated using a standard mathematical formula. (Tr. 12-13.)

12. Huffman testified that he determined the fair market present value of the STV Annuity as of April 18, 1983 as follows:

(a) The amount of each payment was fixed at $5,510.42; thus, the only two variables to be determined were the number of payments and the discount rate. (Tr. 13.)

(b) Huffman calculated that the possibility that Sandra would die during the remaining term of the STV Annuity would have an effect of less than one percent on the present value of that annuity; thus, Huffman fixed the number of payments at 162, the full term of the annuity. In making this calculation, Huffman used a life expectancy for Sandra of 31 years, based on her age as of the valuation date (i.e., 41 years, two months), and based on life expectancy tables promulgated by the Secretary of the Treasury. Huffman testified that using a life expectancy of higher than 31 years would make the possibility that Sandra would die during the remaining term of the STV Annuity even smaller; thus, the number of payments was still properly fixed at 162, applying any life expectancy equal to or greater than 31 years. (Tr. 13-14.)

(c) Huffman determined the discount rate in the following manner: First, he researched STV's financial statements as of the starting date of the STV Annuity (i.e., November, 1981), and determined that STV was carrying the STV Annuity on its own books as of that date at the discount rate of 20%. Next, he independently determined, based on a review of STV's financial situation as of that date, that the difference between that 20% rate and the spread of similar term low-risk government and corporate bonds as of that date was a reasonable assessment of the additional risk attributable to STV. Next, he researched STV's financial statements as of April, 1983, and determined that the additional risk attributable to STV over a low-risk government or corporate payor as of that date was similar to that additional risk as of November, 1981. Finally, he determined the market rates for similar term low-risk government and corporate bonds as of April, 1983, and factored in this additional risk. In this matter, Huffman arrived at a discount rate of 16%. (Tr. 14-17.)

(d) Applying the standard mathematical formula to these three factors, Huffman calculated the fair market present value of the STV Annuity as of April 18, 1983 to be $364,935. (Tr. 17, 19.)

13. Huffman testified that he determined the fair market present value of the Life Annuity as of April 18, 1983 as follows:

(a) The amount of each payment was fixed at $2,346.67; thus, the only two variables to be determined were the number of payments and the discount rate. (Tr. 17.)

(b) Huffman used a life expectancy of 31 years (see Finding 12(b), above), and thus the number of payments was fixed at 372. (Tr. 17-18.)

(c) Huffman determined that the Life Annuity was dependent on the STV Annuity as of April 18, 1983; that is, since Scala had no independent reserve to fund the Life Annuity as of that date since no payments had yet been made to him under the STV Annuity, his ability to fund the Life Annuity as of that date was totally dependent on his receiving payments under the STV Annuity. Thus, the risk factor attributable to the Life Annuity in respect of determining the discount rate for that annuity was at least as great as the risk factor attributable to the STV Annuity; i.e., Scala assumed all of the risk attributable to STV, and any additional risk of his own. Huffman determined that any additional risk attributable to Scala did not require increasing the discount rate for the Life Annuity; thus, Huffman valuated that discount rate at 16%. (Tr. 18-19.)

(d) Applying the standard mathematical formula to these three factors, Huffman calculated the fair market present value of the Life Annuity as of April 18, 1983 to be $174,725. (Tr. 19.)

14. Huffman testified that he was aware that the Family had asserted in their summary judgment papers that Sandra's life expectancy as of the valuation date was higher than 31 years, and was as high as 45 years. Huffman testified that he recalculated the value of the Life Annuity using the highest value asserted by the Family, i.e., 45 years, and determined that the value was $175,862. (Tr. 19-20).

15. The Family presented evidence on the value of the Life Annuity in the form of expert testimony of Loia P. McInally, an actuary in private practice. The Family presented no evidence on the value of the STV Annuity.

16. McInally testified that he calculated the present fair market value of the Life Annuity as of the valuation date by using a 38.7 year life expectancy and a 9.5% interest rate, both of which were derived from tables promulgated by the Pension Benefit Guarantee Corporation. (Tr. 45-47.) Using these figures, McInally obtained a fair market value of $291,946.

17. McInally testified that a "single premium immediate annuity" is an annuity purchased by a single lump sum payment, all of which is received by the payor before the first annuity payment is made. (Tr. 53.)

18. McInally testified that when he determines the present value of an annuity, that determination represents an attempt to determine the price which a large insurance company would charge for such an annuity, purchased in a lump sum, i.e., as a single premium immediate annuity. (Tr. 39, 53.)

19. McInally testified that the 9.5% rate which he used in valuing the Life Annuity was appropriate for a single premium immediate annuity (Tr. 53-54), but would not be appropriate for an annuity which was funded by another annuity, i.e., by an unsecured promise to make a series of payments over a period of years. (Tr. 55-57.) McInally further testified that in his experience, he was not aware of any situation where an insurance company had issued an annuity based on an unsecured promise by the annuitant to make periodic payments in the future. (Tr. 55-56.)

20. McInally testified that determining the fair market value of an annuity funded by an unsecured promise to make periodic payments in the future was a "different problem, altogether" from determining the fair market value of a single premium immediate annuity (Tr. 57), and that the fair market value of an annuity funded by an unsecured promise to make periodic payments in the future "probably" would be lower than the fair market value of an equivalent annuity funded in advance as a single premium immediate annuity. (Tr. 61-62.) McInally further testified that he had no experience in valuing annuities which were funded by unsecured promises to make periodic payments in the future. (Tr. 62.)

21. McInally testified that when he was engaged by the Family to value the Life Annuity, he was not given any details about the consideration given for the Life Annuity (i.e., the STV Annuity). Consequently, his opinion was totally based on the assumption that the Life Annuity was a single premium immediate annuity, i.e., that the Trustee had received the entire payment for the Life Annuity before he had issued the first payment in May, 1983. (Tr. 62.) Moreover, in valuing the Life Annuity, he did not take into account any financial data about STV; did not consult Moody's or any other source to evaluate STV; did not know what discount rate STV used in its own books to discount the STV Annuity; and did not know what other deferred liabilities STV was carrying on its books in April, 1983. (Tr.70-71.)

22. McInally testified that he was not competent to adjust his valuation of the Life Annuity to take into account the fact that the Life Annuity was funded by an unsecured promise to make periodic payments in the future (i.e., by the STV Annuity) and was not, as he had assumed in making his initial valuation during his direct examination, a single premium immediate annuity. (Tr. 64.)

23. The Family declined at trial to permit McInally to offer an expert opinion of the value of the STV Annuity. (Tr. 65.) McInally testified that he was not competent to offer such an opinion at trial. ( Id. )

CONCLUSIONS OF LAW. 1. The court has subject matter over this action pursuant to 28 U.S.C. §1331. The court has jurisdiction over the United States pursuant to 28 U.S.C. §2410(a)(5).

2. The issue presented in this case is whether Scala is a "purchaser" of the STV Annuity within the meaning of Section 6323(h)(6) of the Code.

3. The burden of proof is on the Family to establish that Scala is a "purchaser" of the STV Annuity; that is, the Family has the burden to prove that the fair market present value of the Life Annuity as of April 18, 1983 constituted "adequate and full consideration in money or money's worth" for the fair market present value of the STV Annuity as of that date. Coventry Care, Inc. v. United States [74-1 USTC ¶9163 ], 366 F. Supp. 497, 500-501 (W.D. Pa. 1973).

4. The Family's argument that the Service should be bound by the valuation tables set forth in Treas. Reg. §25 -2512-9(e) in valuing the Life Annuity is without merit. Even if the Regulation were binding in valuing the Life Annuity (which the IRS contends would be improper given that this case does not involve the resolution of a tax liability dispute), the regulation would also be binding with respect to the STV Annuity, which is also a private annuity. The testimony is undisputed that the value of the STV Annuity applying the cited Regulation is $587,614 (Tr. 30; see Supplemental Declaration of John P. Huffman, para. 8), which is approximately $200,000 more than value of the Life Annuity under this Regulation. Thus, even if the Family's argument were accepted, the Life Annuity still would not constitute "adequate and full consideration" for the STV Annuity.

5. The Family did not meet its burden of proof at trial to establish that the Life Annuity constituted "full and adequate consideration" for the STV Annuity as of April 18, 1983 . This conclusion is based on the following:

(a) The Family cannot, as a matter of law, seek to rely on a hybrid offer of proof consisting of Huffman's valuation of the STV Annuity and McInally's valuation of the Life Annuity, since the two witnesses used totally different theories in their respective valuations.

(b) The weight of McInally's valuation of the Life Annuity is diminished because McInally conceded that he was not made aware of pertinent facts surrounding the purchase of the Life Annuity; he further conceded that his valuation was not appropriate for the type of annuity that the Life Annuity actually is; and he said he did not consider himself competent to offer a revised opinion on the value of the Life Annuity once all the facts that were not initially disclosed to him by the Family were finally revealed to him at trial.

(c) McInally's testimony is not persuasive because he testified that his valuation represented the price which a large insurance company would charge for an annuity, and this is an incorrect standard, as a matter of law. See Dix v. Commissioner [Dec. 28,121 ], 46 T.C. 796 (1966) aff'd [68-1 USTC ¶9322 ], 392 F.2d 313, 316 (4th Cir. 1968); Dunigan v. United States [70-2 USTC ¶12,727 ], 434 F.2d 892, 894 (5th Cir. 1970).

(d) Because Huffman applied a consistent method in valuing the two annuities, the court adopts his testimony. The Family's attempt to discredit Huffman's expertise on the ground that he is not an actuary is rejected. The only factor in valuing the annuities which required actuarial knowledge was the determination of the appropriate life expectancy. The Family did not dispute Huffman's testimony that the difference between the respective valuations of the two annuities is not materially changed when any life expectancy within the range asserted by McInally is utilized.

6. Above all, even if McInally's testimony were accepted and the court permitted the Family to adopt Huffman's valuation of the STV Annuity while using McInally's valuation of the Life Annuity, the Family still did not meet its burden of proof, since the respective values thus obtained are $364,935 and $291,946; using these figures, the STV Annuity is worth a full 25% more than the Life Annuity. Given these figures, as a matter of law, the purchase of the Life Annuity did not constitute "adequate and full consideration" for the STV Annuity.

7. In conclusion, the court finds that Scala was not a "purchaser" of the STV Annuity, within the meaning of Section 6323(h)(6) of the Code.

An appropriate order follows.

ORDER

AND NOW, this 26th day of March, 1986, for the reasons set forth in the foregoing Memorandum, it is ORDERED that Trustee John Scala was not a "purchaser" of the STV Annuity within the meaning of Section 6323(h)(6) of the Internal Revenue Code, and thus, is not exempt from the underlying tax lien in this matter. It is ORDERED that the Clerk shall immediately release to the United States the entire fund previously interplead by plaintiff STV Engineers, Inc. It is further ORDERED that all monthly payments which have become due to defendant Sandra Ash Heilman (under the Employment Agreement at issue in this matter) between February 1, 1985 and the date of this Order which STV Engineers have not interplead, and all future payments, be immediately paid by STV Engineers, Inc. to the United States.

 

 

[71-2 USTC ¶9510]Nomellini Construction Co., Plaintiff v. United States ofAmerica, Defendant United States ofAmerica, Third-Party Plaintiff v. Rob ert Simpson, H. L. Scarborough and Billy D. Machen, d/b/a Simpson & Scarborough, Third-Party Defendants

U. S. District Court, East. Dist. Calif., Civil No. 8784, 328 FSupp 1281, 6/3/71

[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]

Liens: Priorities: Purchaser "defined": State law: Fact finding.--A general contractor who seized construction equipment from a delinquent taxpayer for a debt due him was not entitled to priority over the Government's tax lien. The contractor was not a purchaser within the meaning of Code Sec. 6323 since the transaction resulting in the seizure of the property lacked the ingredients of a sale, and no attempt was made to perfect title to the property under state law.

[Code Sec. 6332--Result unchanged by '69 Tax Reform Act]

Liens: Conversion of property by third-party: Government's remedy: Common law action: After-acquired property.--A general contractor was personally liable for the conversion of the taxpayer's machinery and equipment which were subject to the Government's tax lien. Although the Government abandoned its conversion action under Code Sec. 6332 due to a technical deficiency in its notice, that was not its exclusive remedy. It could still pursue its common law remedy as a result of the contractor's tortious act in converting the property and rendering the Government's lien valueless. The contractor was also liable for seizing joint venture funds owing to the taxpayer under a construction contract. The Government's lien, which was timely filed, attached to all property and rights to property belonging to the taxpayer, including after-acquired property. Such funds were subject to the Government's tax lien as soon as the money was in the hands of the delinquent taxpayer. Similarly, the contractor was liable for seizing funds representing accrued earnings due the taxpayer under the construction contract. The contractor's use of such funds in order to satisfy a collateral obligation owed to him by the taxpayer was of no consequence. The Court declined to award pre-judgment interest on the ground that damages were unliquidated and not easily determined and because justice required its disallowance.

Mazzera, Snyder & DeMartini, Suite 300, Sutter Bldg., 115 N. Sutter St., Stockton, Calif., for plaintiff. Dwayne Keyes, United States Attorney, John M. Youngquist, Assistant United States Attorney, San Francisco, Calif., for defendant.

Memorandum and Order

MCBRIDE, District Judge:

Nomellini Construction Company originally commenced this case in the Superior Court of San Joaquin County to quiet title to certain personal property encumbered with government tax liens. The United States removed the action to this Court, however, and counterclaimed to foreclose its liens and to impress Nomellini with personal liability for converting the liened property. The conflict arose shortly after Nomellini had seized money and construction equipment from a partnership known as Simpson & Scarborough, which had incurred tax delinquencies in an amount exceeding $30,000. Essentially, the government contends that its tax liens had attached to the delinquent taxpayer's property prior to Nomellini's seizure and now provide a predicate for its counterclaims. Nomellini, on the other hand, claims a right to possess the equipment and money free of the government's interests. The facts appear below in more detail together with my conclusions.

The Tax-Liened Equipment: Nomellini's Claim to Priority

A general contractor, Nomellini Construction Company had undertaken a housing project in Stockton , California , subcontracting its cement work to the Simpson & Scarborough partnership. By the end of 1961, the partnership had become heavily indebted to Stockton Building Materials Company, which had supplied concrete for the Stockton job. Soon apparent that the partnership could not pay its debt, the president of Stockton Building Materials Company threatened Nomellini with a mechanic's lien. To resolve the impasse, Nomellini convened a meeting on January 12, 1962 , with the partnership and its creditor. During the meeting, Nomellini agreed to assume the partnership's debt in return for the creditor's promise not to lien the job.

After the meeting, Nomellini told Simpson, the partnership's spokesman, that he wanted all of the partnership equipment. Simpson replied, "If that is the way it has to be, that is the way it will be." Nomellini assured Simpson that he could continue to use the equipment as needed. Simpson then agreed to deliver the equipment to Nomellini's construction yard, but never did so. Between February 6 and 16, however, Nomellini sent his own employees to seize the equipment at a construction lot in Stockton , where they retrieved most of it. Several months later Nomellini located and seized the remaining equipment.

A few days after the January 12 meeting, Simpson sent Nomellini a list of partnership equipment, but they did not reduce their agreement to writing. They did execute a bill of sale purportedly signed on January 15, 1962 , but this was post-dated and not in fact executed until sometime after February 16, 1962 . Furthermore, Nomellini did not apply for a transfer of title to his newly-acquired vehicles.

In the meantime, the federal government assessed employment and withholding taxes against the partnership, and these remain unpaid in the amount of $30,032.65. Under §6321 of the Internal Revenue Code, this amount became a lien upon all of the delinquent taxpayer's property on the assessment date, February 2, 1962 . The United States filed notice of its lien on February 16, 1962 , and two weeks later served a notice of levy upon Nomellini. With the exception of a 1960 F-600 Ford truck, Nomellini refused to relinquish any of the equipment and eventually brought the quiet title action which led to this lawsuit.

[Priority Determined]

On these facts, Nomellini seeks the protection of §6323 of the Internal Revenue Code of 1954:

Except as otherwise provided in subsections (c) and (d), 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

It claims a "purchaser" priority by virtue of the January 12, 1962 , transaction in which it assumed the partnership's indebtedness in return for the equipment. ² This question, of course, is to be resolved in light of federal law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 4 L. ed. 2d 1365 (1960).

Neither §6323 nor other provision of the 1954 Code defines the term "purchaser", and cases construing it do little to sharpen its meaning. The Supreme Court has said, for example, that a purchaser within the purview of §6323 "usually means one who acquires title for a valuable consideration in the manner of vendor and vendee." United States v. Scovil [55-1 USTC ¶218], 348 U. S. 218, 99 L. ed. 271 (1955). Citing Scovil, the Ninth Circuit has added that §6323 protects purchasers "in the ordinary sense." United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d 517 (9th Cir. 1955). Internal revenue regulations are consistent with both of these decisions. ³

Viewed in the "ordinary sense", the Nomellini-Simpson & Scarborough transaction hardly supports the plaintiff's claim to a purchaser priority. First, Nomellini's demand for the equipment and Simpson's reluctant assent--"If that is the way it has to be, that is the way it will be"--do not comprise a "sale", at least under traditional concepts of offer and acceptance. Nomellini did not offer to "buy" the equipment, and the partnership certainly did not agree to "sell" it. Indeed, the vagueness of the transaction convinces me that not even the parties themselves knew what they intended to be the ultimate result. Second, the transaction lacks another essential indicia of a sale, agreement on a purchase price. In return for his assumption of the indebtedness, Nomellini demanded all of the partnership equipment without knowing its quantity or value and without deciding whether to pay or retain $37,000 then owing to the partnership for work on the Stockton job. Finally, the fact that Nomellini did not transfer title to the vehicles or take immediate possession of them, almost automatic steps for true purchasers, illustrates its complete lack of intention to "purchase" the equipment. ⁴ See California Vehicle Code §5600 and former Civil Code §3440.

As these facts exhibit, not even the parties themselves had defined their transaction. Indeed, it appears to me that Nomellini purposefully left it open to permit him to confirm, modify, or revoke the arrangements, depending upon the partnership's future financial stability. To conclude that this arrangement constituted a true sale simply ignores the facts. The most to be said is that the form of the transaction was left in limbo and was not to be consummated until some future date.

Nomellini's failure to perfect the transfer supplies an additional reason for rejecting his bid for priority. ⁵ Under Caifornia law, as I have pointed out, Nomellini should have transferred title to the vehicles and taken immediate possession of the equipment to fully protect his rights. ⁶ While federal law determines rights to priority, the Supreme Court has recognized in an analogous situation that failure to perfect one's interest under local law is "practically conclusive" on the priority issue. United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 95 L. ed. 53 (1950). Accordingly, some opinions have denied priority to sales left unperfected under local law. Leipert v. R. C. Williams & Co. [57-2 USTC ¶10,044], 161 F. Supp. 355 (S. D. N. Y. 1957); see also Allan v. Diamond T Motor Car Co. [61-1 USTC ¶9484], 291 F. 2d 115 (10th Cir. 1961). Admittedly, other opinions have awarded priority in similar circumstances, but in these cases only minor technicalities prevented the purchasers from obtaining perfected title. See United States v. Boston & Berlin Transportation Co. [60-2 USTC ¶9782], 188 F. Supp. 304 (N. H. 1960); see also Gauvey v. United States [61-1 USTC ¶9478], 291 F. 2d 42 (8th Cir. 1961). This case, in contrast, displays fundamental omissions which persuade me to follow those opinions denying priority. ⁷

For these reasons, therefore, I conclude that the partnership property in Nomellini's hands is burdened with the government's tax liens. I shall now consider the remaining issues.

Government's Conversion Claim

Not content merely to impress its liens, the United States seeks to recover the value of the Simpson & Scarborough equipment in Nomellini's hands. Originally, it sued for such recovery under the common law of conversion and under §6332 of the Internal Revenue Code, which imposes liability upon persons who refuse to surrender levied property. It has now abandoned its statutory claim, however, and has rested entirely upon its conversion theory.

Section 6332 of the Internal Revenue Code ⁸ authorizes the Secretary to demand surrender of levied property and imposes personal liability to the extent of the value of the property on those who refuse to comply. Invoking this provision, the government served Nomellini with a notice of levy pursuant to §6331 of the Code and Regs §301.6331-1 and demanded surrender of the Simpson and Scarborough equipment. Nomellini refused, however, and eventually sold some of the equipment, intermingled it with his own equipment, and permitted the remainder to rust away to "junk", as Mr. Nomellini characterized it at trial.

Notwithstanding Nomellini's complete disregard of the levy, the government later chose to forego suit under §6332, apparently feeling that a technical deficiency in its notice prevented a valid levy. ⁹ Instead, it chose to rely entirely on a long-standing remedy, available to the government as well as to private litigants, which permits a conversion action against defendants who intentionally impair a lienor's security. United States v. Matthews, 244 F. 2d 626 (9th Cir. 1957), George Adams & Co. v. South Omaha National Bank, 123 F. 641 (8th Cir. 1903); United States v. Allen, 207 F. Supp. 545 (E. D. Wash. 1962); United States v. Webster- Rob inson Machinery & Supply Co. [65-1 USTC ¶9255], 15 A. F. T. R. 2nd 453 (W. D. Wash. 1965). Nomellini contends, however, that §6332 provides the exclusive means of imposing liability and that the government's abandonment of the claim, therefore, bars its recovery. ¹⁰ For reasons to be explained, I reject the argument and find for the government on its conversion theory.

Although Nomellini cites no authority to support its argument, it apparently hopes to invoke the rule that a remedy in a statute creating a new right is the exclusive means of enforcement. See United States v. Babcock, 250 U. S. 332, 63 L. ed 1011 (1919). A close examination of the history and purpose §6332, however, will reveal that this is an inappropriate case in which to apply the rule.

At one time, the Internal Revenue Service was powerless to force the surrender of a delinquent taxpayer's property in the hands of third persons, who could thus refuse to relinquish the property and thereby frustrate a tax sale. United States v. Metropolitan Life Ins. Co. [42-2 USTC ¶9609], 130 F. 2d 149 (2nd Cir. 1942). To remedy this obvious oversight, Congress enacted the predecessor of §6332, requiring the surrender of levied property on demand and enforcing the newly-created right with a penalty equal to the value of the property. Since the statutory penalty enforced a new right, therefore, it was arguably intended to be the exclusive means of recoving damages for failure to surrender the equipment. In this case, however, the conversion action rests not upon Nomellini's refusal to relinquish the equipment after demand, but upon his subsequent conduct rendering the government's liens valueless. Under these circumstances, §6332 was certainly never intended to foreclose the government from its common law remedies.

[Common Law Remedy]

The statutory and common law remedies redress different evils. The manifest purpose of §6332 is to force the physical surrender of levied property to permit admin istrative sale, while the common law remedy casts a wider net to provide relief for any tortious act which impairs the lienor's interest in the converted property. With one exception, ¹¹ therefore, one remedy does not necessarily include the other. Under these circumstances, I cannot conclude that the creation of one narrow remedy was meant to eradicate all other established forms of relief.

The facts of this case do not invoke much sympathy for Nomellini's position. True, the government's deficient levy perhaps justified Nomellini's refusal to relinquish the equipment (see United States v. O'Dell [47-1 USTC ¶9190], 160 F. 2d 304 (6th Cir. 1947)) and may have even permitted it to use the equipment in a manner which would not imperil the tax liens. Having knowledge of the government's claims, however, it had no right to ignore them, dissipate the entire security, and thus render the claims valueless. ¹² A prudent property holder believing the levy to be unlawful would have preserved the security and applied for a release of the levy under §6343 of the Internal Revenue Code. Discovery of a minor technicality in the notice of levy should not permit one to dispose of taxliened property with impunity. In short, those like Nomellini who choose "to shoot first and ask questions later" must pay for their errors.

Left to be decided is the difficult question of valuation. The list below, compiled from all the evidence and from Joint Exhibit #5, represents (1) the items which I find Nomellini to have converted in disregard of the government's liens, and (2) their values at time of conversion.

1. 1947 Ford 2-ton dump truck ........           $ 250.00

2. 1946 White Water truck ............             250.00

3. 1948 Dodge pickup truck ...........             150.00

4. Large equipment trailer ...........           1,500.00

5. Small equipment trailer ...........             500.00

6. Aljoa Sportsman house .............             800.00

7. Gar-bro power buggy ...............             200.00

8. Flatbed tilt trailer ..............           1,500.00

9. 

Davis

 ditch digger ................           3,000.00

10. Two electric generators ..........             300.00

11. Five trowel machines .............             800.00

12. Three sidewalk machines ..........           1,500.00

13. Schramm air compressor ...........             400.00

14. Four cement vibrators ............             200.00

15. Two 2-wheel buggies ..............             100.00

16. Black & Decker hammer ............              85.00

17. 900 steel stakes .................             750.00

18. Steel curb and gutter forms ......           1,000.00

19. Plaster mixer on trailer .........             150.00

20. 200 steel panels for forms .......           2,000.00

21. 1956 Ford 1-ton pickup truck .....             100.00

TOTAL ................................         $15,535.00

Joint Venture Funds

In addition to the value of the equipment, the United States seeks to recover cash in the amount of $11,738.95. It rests its claim upon Nomellini's seizure of two distinct sums of money allegedly owing to the taxpayer, Simpson & Scarborough, under a construction contract. The facts and my conclusions follow.

Simpson & Scarborough, the defaulting taxpayer, had subcontracted the cement work on a joint venture project run by Nomellini Construction Company and Lathrop Construction Company. On March 1, 1962 , two weeks after the filing of the tax liens, the United States served its notice of levy upon the joint venture, intending to seize the taxpayer's right to payment under the construction contract. On March 26, 1962 , the joint venture issued a check for $10,000 drawn jointly to Nomellini and the taxpayer, who immediately endorsed it to Nomellini. Further, when the taxpayer had finished his cement work, the joint venture owed it $1,738.95, the amount of the contract price remaining after settlement of laborers and materialmen's claims. ¹³ Although it was owing to the partnership under its contract, Nomellini seized the $1,738.95, ostensibly to satisfy the partnership's obligation on a collateral debt.

On these facts, the government claims both the $10,000 and the $1,738.95 by virtue of its tax lien and its levy. For reasons which follow, I find for the government under its lien.

The government's lien arose on February 2, 1962 , and became fully protected against subsequent interests on its filing date, February 16, 1962 . Under §6321 of the Internal Revenue Code, it attached not only to "all property and rights to property" belonging to the taxpayer on February 2, but also to any after-acquired property. See cases cited in 174 A. L. R. 1380.

Despite the lien's broad applicability, Nomellini contends that Simpson & Scarborough had no property interest in the money to which the liens could attach. Claiming for its major premise that a tax lien will not attach to a right to receive future earnings, ¹⁴ it concludes that an actual advance of yet-to-be-earned funds is likewise immune. ¹⁵

[Lien on After-acquired Property]

Nomellini's argument is a non-sequitur. Whether or not the government's liens may attach to the ephemeral right to receive future earnings, they certainly may attach to an actual advance of the funds. A cash advance represents a valuable property right in the hands of its owner. Calling the money a "future advance" does not destroy its buying power or impair its value. Once in the hands of the taxpayer, therefore, the money became property enveloped with the government's liens. ¹⁶ Welsh v. United States [55-1 USTC ¶9238], 220 F. 2d 200 (D. C. Cir. 1955); Lapp v. United States [70-2 USTC ¶9685], 316 F. Supp. 386 (S. D. Fld. 1970). Under accepted principles, the tax lien then followed the $10,000 advance into the hands of the transferee, Nomellini, and provides a basis of recovery. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 2 L. ed. 2d 1135 (1958).

True, the government cannot now point to the precise encumbered money, but several considerations convince me that this is an unnecessary requirement. First, Nomellini knew of the government's asserted interest and deliberately chose to ignore it. Its influence in the joint venture, in fact, was instrumental in securing the so-called "future advance", which was little more than a scheme to circumvent the government's claims. Second, the task of tracing money is nearly impossible and imposing such a requirement would therefore severely impede the government's collection efforts. Similarly, permitting holders of tax-liened money to escape liability by the easy maneuver of commingling funds creates an unjustified loophole. Finally, I find to compelling reason to treat the impairment of lien rights in money any more leniently than the impairment of the same rights in equipment, which is not so easily hidden. ¹⁷ Consequently, I think the proper remedy is to impose personal liability for the value of the money, $10,000. See United States v. Matthews; George Adams & Fredrick Co. v. South Omaha National Bank; United States v. Allen; United States v. Webster- Rob inson Machinery & Supply Co., supra.

As to the $1,738.95 remaining due to the partnership on the job's termination, the government's lien had also attached to this sum. This amount represents accrued earnings and is "property" belonging to the taxpayer, notwithstanding his indebtedness to Nomellini on a collateral obligation. See Sims v. United States , 359 U. S. 108, 3 L. ed. 2d 667 (1959). Nomellini's seizure of the money could not divest the liens, and for the reasons expressed above, Nomellini is likewise liable for this amount.

Conclusion

For the reasons discussed, I have concluded that Nomellini is liable for $15,535.00 on the equipment and $11,738.95 on the joint venture funds, for a total of $27,273.95. I decline the government's suggestion to award pre-judgment interest, however, because damages were unliquidated and not easily determined and, in my opinion, justice requires its disallowance. United States v. Campbell, 293 F. 2d 816 (9th Cir. 1961); see also Rob ert C. Herd & Co. v. Krawill Machinery Corp., 256 F. 2d 946 (4th Cir. 1958).

This Memorandum and Order shall constitute my findings of fact and conclusions of law under F. R. C. P. Rule 52.

IT IS THEREFORE ORDERED that the plaintiff take nothing by his action to quiet title and that judgment be entered for the defendant on its counterclaims in the amount of $27,273.95.

¹ The parties agree that this case is governed by the collection provisions of the code as they existed prior to their extensive 1966 amendments.

² Nomellini does not claim to be a mortgagee, pledgee, or judgment creditor and, consequently, I consider only its claim to purchaser status. Moreover, it has not argued that the taxpayer, by virtue of the January 12 agreement, had divested himself of any property to which the tax liens could attach. See Aquilino v. United States , supra.

³ Regs. §301.6323-1 provides that "The term 'purchaser' means a person who, for a valuable present consideration, acquires property or an interest in property."

⁴ The government eventually levied upon the title certificates in Simpson's hands. For over nine months after the alleged sale, Nomellini had not even bothered to get them from Simpson. Certainly, nine months is ample time within which to transfer ownership and is far beyond the allowed ten days. See Vehicle Code §5902.

Furthermore, former Civil Code §3440, effective at the time of these transactions, provided that a sale of personal property without immediate delivery was conclusively presumed fraudulent as against the transferor's creditors. In view of this provision, a true purchaser would obviously take immediate possession of the goods to preserve his interest.

⁵ My previous ruling does not bar me from discussing the effect of state law upon the priority issue. That opinion merely held that federal law determines the priority issue and the state law in itself is not necessarily dispositive.

⁶ Absent application for a new title certificate, no interest passes to the transferee (Vehicle Code §5600), and a sale without a transfer of actual possession is void vis-a-vis competing creditors. Former Civil Code §3440. The United States is entitled to invoke the protection of these statutes to the same extent as non-governmental creditors. See United States v. Creamer Industries [65-2 USTC ¶9527], 349 F. 2d 625 (5th Cir. 1965).

⁷ The 1966 amendments to §6323 deny priority to claimants who fail to perfect their interests under state law. While these amendments do not govern this case, they do represent Congressional satisfaction with that line of case denying priority to sales left unperfected under state law.

⁸ Section 6332. Surrender of property subject to levy.

(a) Requirement.

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

(b) Penalty for violation.

Any person who fails or refuses to surrender as required by subsection (a) any property or rights to property, subject to levy, upon demand by the Secretary or his delegate, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes for the collection of which such levy has been made, together with costs and interest on such sum at the rate of 6 percent per annum from the date of such levy.

⁹ The government abandoned its §6332 action as soon an Nomellini asserted in the Pre-trial Order that the notice of levy addressed jointly to Nomellini Construction Co. and Lathrop Construction Co. did not bind Nomellini in its individual capacity.

¹⁰ Nomellini thrusts its entire argument toward the exclusive remedy issue. It does not attack the general principle that a conversion action will lie against one who impairs a lienor's security. I must assume, therefore, that it acknowledges the propriety of a conversion action, assuming I find the §6332 remedy not to be exclusive.

¹¹ When the allegedly converting act is a single demand and refusal, the two remedies may overlap. In this case, and only in this case, does the difficult question arise of whether the statutory remedy is exclusive. As I have pointed out, the government here does not rest its claim upon demand and refusal.

¹² At common law, Nomellini's treatment of the liened property clearly constitutes conversion. See 53 Am. Jur., Trover & Conversion §55 (commingling goods), §51 (permitting the goods' destruction), and §35 (selling the goods to another).

¹³ The contract between Simpson & Scarborough and the Joint Venture required that 10% of the contract price be retained to protect the joint venture from claims asserted against it for acts of the partnership. After claims in the amount of $1,067.86 were asserted, the balance due Simpson & Scarborough was $1,738.95.

¹⁴ More precisely, Nomellini contends that a right to future earnings, in contrast to accrued but unpaid earnings, is insufficient to constitute "property" within the meaning of §6321. Under my view of the case, I need not decide this issue.

¹⁵ Nomellini's argument, I think, confuses the government's rights under a levy with its rights under a lien. Unlike a lien, which attaches to after-acquired property, a levy is only effective on property existing on the date of levy. United States v. Mitchell, 349 F. 2d 94 (5th Cir. 1965). On that date I might agree with Nomellini that the partnership had no "property right" subject to levy in its yet-to-be-earned contract price. On March 1, the date of levy, the partnership had no money due under the terms of the contract, and the government has not convinced me that on or before that date the contract price had been retroactively increased to reflect work already performed. Because I find for the government under its lien, however, I need not decide whether the partnership had a property interest in the joint venture contract on the date of levy.

¹⁶ The fact that the check was payable jointly to the taxpayer and Nomellini does not change this result. The money was advanced to the taxpayer to enable it to pay off a collateral debt owed to Nomellini, and it was to be earned by the taxpayer alone. The only reason Nomellini, in its capacity as a member of the joint venture, joined itself as payee was to insure repayment of the loan. Under these circumstances, Nomellini can hardly claim that money used to pay off an indebtedness to it did not constitute "property" in the hands of its debtor.

¹⁷ I recognize that the negotiability of money creates unique problems which may call for relaxed rules. Section 6323 of the Code, however, creates a priority even against filed tax liens for those who take encumbered money without knowledge of the lien. This section, therefore, provides adequate protection for those who innocently impair the government's lien rights. Since Nomellini knew of the government's asserted interest, it cannot invoke this protection.

 

 

[74-1 USTC ¶9163]Coventry Care, Inc. v. United States of America, David Sage, Inc., and Western Pennsylvania National Bank

U. S. District Court, West. Dist. Pa., Civil Action No. 72-762, 366 FSupp 497, 11/1/73

[Code Sec. 6323]

Collection of assessed tax: Validity of lien: Holder in due course: Purchaser for value: Priority of tax lien: Promissory notes.--The IRS had prior claim to the $35,000 promissory note assigned to it by taxpayer, since the note was validly assigned and IRS was a holder in due course (HDC). IRS was a HDC because it took the note in payment of an antecedent tax debt. The District Court further held that, where the IRS filed and gave notice of the tax lien, it had a prior claim to the $20,000 promissory note assigned by the taxpayer to A (who later assigned to B), because both A and B failed to give adequate consideration at the time the note was purchased. Thus, they were not holders in due course or purchasers for value.

H. David Rothman, 822 Frick Bldg., Pittsburgh, Pa., Rob ert W Smiley, 630 Grant Bldg., Pittsburgh, Pa., Thomas Daley, 633 U. S. Courthouse, Pittsburgh, Pa., Thomas J. Shannon, 1707 Oliver Bldg., Pittsburgh, Pa., for plaintiff. Garland Tanks, Department of Justice, Washington , D. C. 20530, for defendants.

Opinion

Re: Claims of David Sage, Inc. and United States of America

KNOX, District Judge:

This is an action of interpleader filed by the plaintiff Coventry Care, Inc., a Pennsylvania business corporation, which has paid into court pursuant to order dated September 15, 1972, the sum of $57,750 which sum represents the two notes hereinafter mentioned, one for $35,000 and the other for $20,000 plus interest thereon. The purpose of the interpleader was to determine the rights of the various parties to the proceeds of said notes. By order of this court, the claims of David Sage, Inc. a New York corporation and the United States of America as to their respective priorities in this fund were assigned for hearing first before a determination of the other claims. Hearing on the claims of these two parties was duly held before the court non-jury on August 2, 1973 , at which time testimony was taken. As a result htereof, the court makes the following findings of fact with respect to the claim of David Sage, Inc., and the United States of America .

Findings of Fact

(Claims of David Sage, Inc., and United States of America )

1. On May 6, 1971 , Coventry Care, Inc., ( Coventry ) issued a $20,000 promissory note to Contemporary Institute, Inc. (Contemporary) as part consideration for the purchase of a subsidiary of Contemporary. The $20,000 note was assigned by Contemporary to Western Pennsylvania National Bank (WPNB) on May 21, 1971 .

2. On May 6, 1971 , Coventry also issued a $35,000 promissory note to Contemporary as part consideration for the purchase of a subsidiary of Contemporary. The note was assigned by Contemporary to the United States Internal Revenue Service on May 21, 1971 .

3. The $35,000 note has been in the possession of the Internal Revenue Service since this assignment on May 20, 1971 , until it was placed in the custody of the court as Government's Exhibit 11, which was moved into evidence.

4. The assignments by Contemporary mentioned in Paragraphs 1 and 2 were executed by Rob ert C. Braumuller, the President and Chief Executive Officer of Contemporary on May 20, 1971. They were dated May 21, 1971 . Braumuller resigned his offices on May 24, 1971 .

5. The $20,000 note was assigned by Contemporary to WPNB to secure an obligation of Contemporary owed to the bank.

[Assessment of Tax]

6. On the dates set forth below, a delegate of the Secretary of the Treasury, made assessments in accordance with law against the taxpayer, Contemporary Institute, Inc. for unpaid withholding and Federal Insurance Contributions Act taxes, penalties and interest in the amount of $47,111.76. The aforementioned assessments are more fully described hereinbelow:

1 Failure to file penalty, 26 

U. S.

 C., 6651(a)(1).

2 Depositor receipt penalty, 26 

U. S.

 C. 6656.

3 Failure to pay penalty, 26 

U. S.

 C. 6651(a)(2).

4 Accrued failure to pay penalty, 26 

U. S.

 C. 6651(a)(2).

5 Interest after 
December 31, 1972
, accrues at $6.80 per day. 

Notice and demand for payment was made on the date of each assessment.

The total amount due on 
August 2, 1973
, the date of hearing, was $51,867.10.

7. The tax lien for the June 4, 1971 , assessment was filed on July 14, 1971 . The second tax lien for the August 6, 1971 , assessment was filed on August 20, 1971 . Both of the liens were filed with the Prothonotary of Allegheny County, Pittsburgh , Pennsylvania .

8. As evidenced by the endorsements on the note, WPNB assigned the $20,000 note back to Contemporary on June 1, 1971 ; and Contemporary assigned the note to United Professional Data Processing (UPDP) on June 9, 1971 . UPDP assigned the note to David Sage, Inc. (Sage) on October 18, 1971 .

9. No actual amount in money or property was paid by David Sage, Inc., at the time of the assignment on October 18, 1971 , nor is there any evidence as to what, if any, value UPDP paid for the note on June 9, 1971 , or at any other time.

[Notice of Levy]

10. The subject note was in the possession of "United" when it received, on or about September 27, 1971 , a notice of levy from the Internal Revenue Service directed specifically to an alleged sum of $10,000 due to Contemporary and directed generally to any assets in the possession of United belonging to the taxpayer, Contemporary. United replied and disputed the $10,000 obligation, seeking a release of the notice of levy. It failed to advise Internal Revenue Service of its possession of the subject note.

11. David Sage, President of David Sage, Inc., (Sage) asserts that in return for the $20,000 note, he promised on October 18, 1971 , to give UPDP a 25% interest in a business venture that had not yet assumed any definite form.

12. David Sage, the said president of Sage, allegedly took possession of the instrument as part of preliminary discussions of a proposed venture, the terms of which were not then, or ever, reduced to writing. The total capitalization of the venture was not articulated, nor had any agreement been arrived at concerning the value and cost of the services of United, which services were to be part and parcel of any agreement yet to be consummated.

13. Later, the business venture took the form of a New York corporation, Energy Management Corporation (Energy) which was not incorporated, and, hence, not created until January 21, 1972 .

14. David Sage has not yet transferred any stock of Energy of UPDP.

15. UPDP has not yet made any demand for said stock or any other demand consistent with its promised 25% interest in the planned business venture.

16. David Sage asserts that he does not know whether he would transfer 25% of the shares of Energy to UPDP if the $20,000 note is not paid.

17. Actual notice of levy under the assessments set forth in Finding No. 6 was given Coventry Care, Inc. on September 20, 1971 . David Sage, Inc., first learned of claims against the $20,000 note when it was dishonored on presentation for payment on November 6, 1971 . UPDP learned of the levy when it received notice thereof on September 27, 1971 .

18. The Internal Revenue Service demanded payment of the $35,000 note on November 15, 1971 .

19. On September 15, 1972 , Coventry Care, Inc., paid into court the sum of $57,750 being the amount owing on the $20,000 note and the $35,000 above described and requested that the various parties asserting claims in this fund be interpleaded to determine their respective rights therein. David Sage, Inc. and the United States of America have each filed claims asserting their rights and priorities in the said fund which is before the court for distribution.

Discussion

(A) Claim of David Sage, Inc.

The question of the priority of the claim of David Sage, Inc. vis-a-vis the United States of America depends upon Section 6323 of the Internal Revenue Code (26 U. S. C. 6323) and also the position of David Sage, Inc. under the Uniform Commercial Code as adopted by both New York and Pennsylvania. While the government claims that its position is secure because it filed its notices of lien on July 14 and August 20, 1971, prior to October 18, 1971, when Sage, Inc. took delivery of the $20,000 note, allegedly became a holder in due course, nevertheless we prefer to disallow the claim of David Sage, Inc. on the firmer ground that it was not a holder in due course, nor a purchaser under Section 6323.

There can be little doubt that the note in question, which is in evidence as Exhibit A, was negotiable instrument and hence constituted a security under the definition Section H of the Internal Revenue Code 6323. The Internal Revenue Code Section 6323(b)(1)(A) provides:

(b) Protection for certain interests even though notice filed.--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

(1) Securities.--With respect to a security (as defined in subsection (h)(4))--

(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien;

[Taking for Value]

Of particular importance to the decision of this case are certain provisions of Article III of the Uniform Commercial Code (12 Purdon's Pa. Statutes Section 3); (N. Y. Uniform Commercial Code, Section 3). Section 3-302 of the Uniform Commercial Code provides as follows:

"Holder in Due Course.

(1) A holder in due course is a holder who takes the instrument

(a) for value; and

(b) in good faith; and

(c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.

(2) A payee may be a holder in due course.

(3) A holder does not become a holder in due course of an instrument:

(a) by purchase of it at judicial sale or by taking it under legal process; or

(b) by acquiring it in taking over an estate; or

(c) by purchasing it as part of a bulk transaction not in regular course of business of the transferor.

(4) A purchaser of a limited interest can be a holder in due course only to the extent of the interest purchased."

Section 3-303 provides:

"Taking for Value.

A holder takes the instrument for value

(a) to the extent that the agreed consideration has been performed or that he acquires a security interest in or a lien on the instrument otherwise than by legal process; or

(b) when he takes the instrument in payment of or as security for an antecedent claim against any person whether or not the claim is due; or

(c) when he gives a negotiable instrument for it or makes an irrevocable commitment to a third person."

Further, Section 3-307 provides:

"Burden of Establishing Signatures, Defenses and Due Course.

(1) Unless specifically denied in the pleadings each signature on an instrument is admitted. When the effectiveness of a signature is put in issue

(a) the burden of establishing it is on the party claiming under the signature; but

(b) the signature is presumed to be genuine or authorized except where the action is to enforce the obligation of a purported signer who has died or become incompetent before proof is required.

(2) When signatures are admitted or established, production of the instrument entitles a holder to recover on it unless the defendant establishes a defense.

(3) After it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course."

We hold that under the circumstances of this case, claimant David Sage, Inc. did not give value for the purchase of this note and has not sustained its burden of establishing that it or some person under whom it claims is in all respects a holder in due course as required by Section 3-307.

Of crucial importance, of course, is the provision of 303(c) that value is given when the purchaser gives a negotiable instrument for it (which was not done) or makes an irrevocable commitment to a third person.

Anderson Uniform Commercial Code, 1971 Edition, has this commentary on Section 3-303: "By recognizing an irrevocable commitment as value, the Code makes an exception to the provision of Section 3-303(a) under which the consideration is not value where not yet performed." Crest Finance Co. v. First State Bank, 37 Ill. 2d 243, 226 N. E. 2d 369, is cited.

The instances of irrevocable commitment which are given are those where the acquirer of the instrument furnishes an irrevocable letter of credit to a third person or himself transfers the paper to a holder in due course to whom he is absolutely liable.

[Executory Contract]

It is further clear that a promise to give consideration in the future, such as to perform services as an attorney, makes a person a holder in due course only to the extent that the services have been performed. See Korzenik v. Supreme Radio, Inc., 347 Mass. 309, 197 N. E. 2d 702 (1964). Anderson in the commentary on Section 3-303.6 makes the flat statement: "An executory contract is not value".

Again, in O. P. Ganjo, Inc. v. Tri-Urban Realty Corp., 108 N. J. Super. 517, 261 A. 2d 722 (1969), the court had a complicated situation involving a subcontractor who was complained of as being too slow and who needed money and notes were given so that he could raise funds. The maker put the note in the desk drawer and the subcontractor stole it. Only $1,000 was advanced originally and the balance was to be paid if and when the subcontractor finished the job which he never did. It was held that the plaintiff who had advanced the original $1,000 was a holder in due course only to this extent and not for the balance to be paid under the note when the job was completed.

See also Restatement of Trust 2d 302 and comment (J) thereunder holding that promise to make payment in the future is not value. 11 Am. Jur. 2d Sec. 428, page 459 states that the time when the value is given is decisive in these questions and that a taker takes for value only to the extent that the agreed consideration has been performed or has made an irrevocable commitment such as delivering a negotiable instrument which may be in the hands of a holder in due course or an irrevocable letter of credit.

[Holder in Due Course]

Applying these rules to the facts of this case, it is easy to determine that regardless of the validity of the transfers to David Sage, Inc. the latter is not a holder in due course because no value was given on October 18, 1971 , or any other date. While David Sage, Inc. may have regarded itself as being bound to give a 25% interest in a business venture which had not then assumed any definite form but which has since taken the shape of a New York business corporation which was not incorporated until January 1, 1972, nevertheless it can readily be seen that the agreement to give a 25% interest in this business venture as of October 18, 1971, was so vague and nebulous as to be unenforceable. We are not told whether the business venture was to be a general partnership, a joint venture, a limited partnership or a corporation or if the latter, how many and what classes of shares would be issued. In any event, the agreement was merely an executory contract which David Sage, Inc. could have refused to perform because of failure of consideration, that is, because of the fact that the government's rights to these notes had intervened by virtue of its liens and levies and the notes were therefore worthless. See Restatement of Contract, Section 274. We therefore hold that David Sage, Inc. had not made an irrevocable commitment and had not given value as required by Section 3-303 of the Uniform Commercial Code, partucularly bearing in mind that under 3-307 it had the burden of establishing that it was in all respects a holder in due course.

(B) Claim of the United States Government.

In view of our holding with respect to the claim of David Sage, Inc., we can then easily dispose of the claims of the United States Government. There appears to be no question that the $35,000 note which was executed on May 6, 1971 , was assigned to the Internal Revenue Service on May 20 or 21, 1971, by Rob ert C. Braumuller, President and Chief Executive Officer of Contemporary Institute, Inc. We hold that the assignment of such note to the Internal Revenue Service was within the powers of Braumuller as President and Chief Executive Officer on May 21, 1971 . See Gilliam v. Consolidated Foods Corp., 424 Pa. 407, 227 A. 2d 858 (1967) Altex Aluminum Supply Co. v. Asay, 72 N. J. Super. 582, 178 A. 2d 636 (1962).

[Superior Lien]

The liens in question were duly filed by the government on June 4, 1971 , for the first lien and August 6, 1971 , for the second lien with the Prothonotary of Allegheny County, Pennsylvania, pursuant to Pennsylvania law. 74 Purdon's Pa. Stat. 156-1, et seq. It appears that as to the $35,000 note, the government is a holder in due course since under 3-303(b) of the Uniform Commercial Code, a holder takes an instrument for value when he takes it in payment of or as security for an antecedent claim. As to the $20,000 note, we hold that the government's lien under the June 6, 1971 filing was superior to any alleged transfer of the same on June 9, 1971 , or subsequently on October 18, 1971 . ¹ The record shows that notice of the levy on the $20,000 note was given to Coventry Care by the Government on September 20, 1971 .

The shelter provision of 26 U. S. C. 6323(b)(1)(A), quoted supra. would protect UPDP as a purchaser if it paid value on June 9, 1971 , without actual notice or knowledge of the government's lien. Under 6323(h)(6), however, a purchaser is one who acquires his interest for an "adequate and full consideration in money or money's worth." There is no evidence that UPDP paid anything for this note.

The burden was on the claimant to bring itself within the shelter provision. U. S. v. Franklin Federal Saving & Loan Assn., 140 F. S. 286 (M. D. Pa. 1956); Filopowicz v. Rothensis, 43 F. S. 619 (E. D. Pa. 1942).

Conclusions of Law

1. The court has jurisdiction of the fund paid into court and which is before it for distribution and of the parties claimant thereto.

2. The United States of America , through its Internal Revenue Service, is a holder in due course of the $35,000 note duly assigned to it by Rob ert C. Braumuller, President and Chief Executive Officer of Contemporary Institute, Inc. on May 20 or May 21, 1971 .

3. The assignment of such note was within the actual and apparent powers and authority of said Rob ert C. Braumuller as President and Chief Executive Officer of the Corporation, Contemporary Institute, Inc.

4. Claimant, David Sage, Inc., is not a holder in due course of the $20,000 note assigned to it on October 18, 1971 .

5. The said claimant David Sage, Inc. did not pay value for acquisition of the said note by assignment dated October 18, 1971 .

6. The said David Sage, Inc. has not shown that it is an assignee of a holder in due course of the said instrument.

7. Said David Sage, Inc. is not a transferee for value within the meaning of 26 U. S. C. 6323(b)(1)(A) or 26 U. S. C. 6323(h)(6).

8. The claimant, David Sage, Inc. has no priority in the fund now before the court for distribution.

9. The number one claimant with priority to distribution of said fund is the United States of America .

10. The liens held by the United States of America and levies and notices pursuant thereto were duly filed and given in accordance with law and give the United States priority in said fund.

11. The amount due the United States on said liens as of August 2, 1973 is the sum of $51,867.10 as set forth in the findings of fact.

12. A further hearing will be required to determine priority of other claimants of the said fund after payment of the claims of the United States of America Internal Revenue Service.

¹ 26 U. S. C. 6321 provides:

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

26 U. S. C. 6323(a) provides:

"Validity against Mortgagees, Pledgees, Purchasers, and Judgment Creditors. (a) 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) Under State or Territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or

(2) With Clerk of District Court.--In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law designated an office within the State or Territory for the filing of such notice; or

(3) With Clerk of District Court for District of Columbia.--In the office of the clerk of the United States District Court for the District of Columbia, if the property subject to the lien is situated in the District of Columbia."

 

 

[66-2 USTC ¶9556]Union Life Insurance Company, Plaintiff v. Lynn W. Perkins and The Franklin Life Insurance Company, Defendant Harold E. del Castillo and United States of America , Intervenors

U. S. District Court, East. Dist. Ark. , West. Div., LR-65-C-109, 257 FSupp 154, 6/30/66

[1954 Code Secs. 6321 and 6323]

Tax liens: Priority of creditors: Wage assignment: State laws: Status of purchaser not proved.--A creditor of an insurance salesman who had satisfied the salesman's debt to one insurance company did not have priority over the Government's tax claims against the salesman to a fund established by another insurance company under a valid wage assignment executed by the salesman, since the creditor failed to prove that he was a "purchaser," under Code Sec. 6323(a), of the assigned interest for a valuable consideration prior to the filing of notice of the Government's tax lien.

Wayne W. Owen, Union Life Bldg., Little Rock , Ark. , for Union Life, Plaintiff. A. F. House, 720 W. Third St., Little Rock, Ark., for H. E. del Castillo, James W. Gallman, Assistant United States Attorney, 521 U. S. Post Office & Courthouse, Little Rock, Ark., for U. S.

Memorandum Opinion

HENLEY, District Judge:

This interpleader suit involves a controversy between the United States and a private creditor of the defendant Lynn W. Perkins, a life insurance salesman formerly in the employ of plaintiff, Union Life Insurance Co., and the defendant The Franklin Life Insurance Co. The private creditor, Harold E. del Castillo, came into the case by way of intervention. ¹ Federal jurisdiction is not questioned and is established. 28 U. S. C. A., §1335.

The case has been submitted to the Court upon the pleadings, a partial stipulation of certain depositions taken upon interrogatories and cross-interrogatories, documentary evidence, and memorandum briefs. This memorandum includes the Court's findings of fact and conclusions of law. Actually, there is only one disputed question of fact in the case.

[Facts]

For a number of years prior to June 11, 1962, Lynn W. Perkins was an insurance salesman for the defendant The Franklin Life Insurance Co., hereinafter Franklin. Perkins was employed in New Mexico and operated out of an agency belonging to the intervenor, Castillo. Perkins was compensated by means of commissions paid on the business written by him. $Beginning [in] 1961 Perkins became heavily indebted to Franklin , and under the terms of the contract between Franklin and Castillo, the latter was secondarily liable to the former for the debts of Perkins.

[Wage Assignment]

By June 11, 1962 , Perkins was also selling life insurance for plaintiff, Union Life Insurance Co. of Little Rock, Arkansas , and was being paid on a commission basis.

On the date above mentioned Perkins addressed the following letter to Union Life Insurance Co.:

"This letter will authorize you to withhold twenty five percent (25%) of my earned commissions from Union Life Insurance Co. This amount is to be paid to Franklin Life Insurance Co. of Springfield, Ill. until such time that my financial obligations to them are paid in full."

Pursuant to that letter Union duly withheld 25 percent of the commissions earned by Perkins and credited them to the account of Franklin . ²

[Lien Attaches]

On March 23, 1962 , the Commissioner of Internal Revenue assessed against Perkins and his wife with respect to calendar year 1960 federal income taxes, penalty and interest totalling $5,722.36. Notice was given and demand was made upon the taxpayers on the same day that the assessment was made. Apparently, the taxpayers, who were then living in Austin , Texas , made a substantial payment because the present balance of the tax claim is $2,843.49 plus "statutory additions." On July 28, 1964 , the Government filed its notice of tax lien in Travis County, Texas, in which the City of Austin is located and where Perkins resided.

In the meantime Perkins had been discharged by Franklin , and he undertook to revoke his 1962 authorization to Union to withhold 25 percent of his commissions for the benefit of Franklin . However, it appears that Union did not honor the attempted revocation. In due course Castillo satisfied the obligation of Perkins to Franklin and became subrogated to the rights of the latter so that Franklin really has no interest in the case.

On April 7, 1964, more than two years after the assessment of the federal taxes, penalty and interest, but some months before the notice of federal tax lien was filed in Austin, the Director of Internal Revenue for the Revenue District of Arkansas served a notice of levy on Union and demanded that Union pay over to the Government the amount of the credits to the account of Franklin based on the Perkins authorization of June 11, 1962. Apparently, however, the matter was not pressed; the credits were not paid over to the Government, and this suit was commenced in July 1965. Union paid into the registry of the Court the sum of $1,899.60 and was discharged. The record reflects that all but about $200 of the sum paid into Court was credited to the account of Franklin by Union prior to the date of the filing of the Government's notice of lien.

The position of the Government is that by virtue of the lien provisions of 26 U. S. C. A. §6321, its claim to the fund in court is superior to the claim of Castillo. Castillo contends, on the other hand, that by virtue of the provisions of 26 U. S. C. A., §6323(a) his claim to the fund is superior to that of the Government with respect to all credits to the Franklin account prior to the date of the filing of the notice of the tax lien. Castillo concedes that the claim of the Government has priority with respect to credits made after the lien notice was filed.

Section 6321 provides that if any person liable to pay any federal tax neglects or refuses to pay the same after demand, the amount thereof, including penalty and interest, shall be a lien in favor of the Government on all of the taxpayer's property and rights to property whether real or personal. The lien attaches when the assessment is made and continues until the liablity for the amount of the assessment is satisfied or becomes unenforceable by reason of lapse of time. 26 U. S. C. A. §6322.

However, section 6323(a) provides that until notice of lien is filed, the lien was not valid "as against any mortgagee, pledgee, purchaser or judgment creditor" of the taxpayer.

From that has been said, it is clear that the Government had a lien on all the property and rights in property belonging to Perkins from and after March 23, 1962 . Castillo contends, however, that in June 1962, more than two years prior to the filing of the Government's notice of lien, Franklin became a "purchaser" within the meaning of section 6323(a) of 25 percent of the commissions of Perkins due and to become due from Union, and that the section just mentioned is applicable.

Answering that contention the Government urges that under Arkansas law the authorization by Perkins to Union to withhold 25 percent of his commissions for the benefit of Franklin was not a valid assignment of that percentage of the commissions; that the assignment, if it was one, was not recorded in Arkansas; and that in any event Franklin did not become a "purchaser" of that percentage of the Perkins commissions within the meaning of the federal statute and regulations.

Countering that argument, Castillo says that although the letter from Perkins to Union was not acknowledged or recorded, it was a valid assignment, and that there was present consideration for it so that Franklin would be considered a "purchaser" of the interest within the meaning of section 301.6323-1 of the Treasury Regulations. Under that section of the Regulations the term "purchaser" is defined as meaning "a person who, for a valuable present consideration, acquires property or an interest in property." The Government denies that there was "valuable present consideration" for the 1962 authorization.

[State Law]

1. The Government's attack on the validity of the June 11, 1962, authorization from Perkins to Union as an assignment of 25 percent of the earned commissions of Perkins cannot be sustained.

It is true that the authorization was not recorded as provided by the relevant provisions of the Arkansas version of the Uniform Commercial Code, Ark. Stats., Ann., §§ 85-9-301 et seq. But the absence of recordation although it might well affect priorities would have no bearing on the validity of the instrument as between the immediate parties thereto.

Nor can the Court agree with the Government that the assignment was invalid in the light of the provisions of sections 1 and 2 of Act 34 of 1911 ( Arkansas ), Ark. Stats., Ann. §§ 81-316 and 317. Section 81-316 clearly has no applicability to the assignment here involved. Section 81-317 provides that no assignment of or order for wages to be earned in the future shall be valid when made by a married man, unless the written consent of his wife to making such assignment or order for wages shall be attached thereto. That section was passed obviously to protect the wives and children from the improvidence or extravagance of wage earning husbands, and it may be doubted that it can be invoked successfully by a creditor of the spouses. More basically, however, the Court agrees with counsel for Castillo that the "wages" referred to in the statute are payments usually considered as "wages" paid to pay laborers and the like, and do not include commissions paid to life insurance agents. ³

[Priority]

2. Coming now to the question of the applicability of section 6323 of the Internal Revenue Code, it has been observed already that Castillo does not claim priority with respect to any commissions earned by Perkins after the Government filed its notice of lien in Texas . Castillo goes further and concedes that if the assignment to Franklin was merely a security for a preexisting debt not supported by new consideration, then Franklin was not a "purchaser" of the 25 percent interest in the commissions earned by Perkins from Union , and that the claim of the Government would have priority.

Castillo contends that there was present, valuable consideration for the assignment consisting of an alleged agreement on the part of Franklin and Castillo that no suit would be filed against Perkins to collect the debt which he owed Franklin and for which Castillo was secondarily liable if Perkins would execute the assignment in question. Castillo says that Perkins executed the assignment in consideration of the alleged forbearance to sue, and that no suit was in fact filed. The Government says that there was never any agreement not to sue.

The record before the Court includes the depositions of Castillo and of Perkins, together with the deposition of R. Raymond Bailey, Franklin 's assistant vice president.

By answer to direct interrogatory No. 9 Castillo stated that to induce Perkins to write the letter to Union he promised Perkins that he would not bring any suit against him for the indebtedness if the money was paid by Union to cover the indebtedness "or any amount that would be applied on the debt consisting of 1/4 of his earnings." Castillo further stated that, "This was done by agreement between Lynn Perkins and myself with the approval of Franklin Life." By answer to direct interrogatory No. 10 Castillo stated that Mr. Bailey had authorized him to bind Franklin by the promise made to Perkins. By answer to cross interrogatory No. 5 Castillo stated that the alleged agreement between him and Perkins was oral "and involved no writings."

In answering direct interrogatory No. 2 Perkins stated that he executed the assignment of his own free will; that he owed money at the time, and that he wanted to pay what he owed. Direct interrogatory No. 3 inquired whether immediately prior to the assignment, or at any other time, Franklin threatened suit against him to collect its account. The answer was "No." Direct interrogatory No. 4 asked whether Perkins received "any assurance from Franklin Life Insurance Company that the company would not institute suit against you on the account." The answer was: "There was never anything said about a suit before or after I made the assignment."

Cross interrogatory No. 5 propounded to Perkins asked how he happened to make the assignment. He answered: "When the letter was written I did not know that Franklin was going to cancel my contract which caused me to lose 19 of my renewals plus a large bonus I had due me. I wanted to do what was right, but the Franklin Life didn't."

Direct interrogatory No. 3 put to Mr. Bailey asked if he had taken any steps in behalf of the company to collect the indebtedness from Perkins. He stated that Castillo was instructed to collect the debt or have the same charged to his account. In reply to direct interrogatory No. 4 he stated that there were no negotiations between him and Perkins, and that such negotiations as there were took place between Perkins and Castillo.

Bailey's answer to cross interrogatory No. 1 reveals that Franklin never made any direct demand on Perkins; that demand was made on Castillo. And by way of answer to cross interrogatory No. 2 Bailey stated that there was never any written forbearance from suit to his knowledge "as all matters relating to the collection of the Lynn Perkins' balance and the obtainment of the letter assignment were handled in behalf of the Company by Harold E. Del Castillo."

The burden in this case is upon Castillo to show by a preponderance of the evidence that he is entitled to the benefit of section 6323. MacKenzie v. United States, 9 Cir., [40-1 USTC ¶9229] 109 F. 2d 540; United States v. Franklin Federal Savings & Loan Ass'n, M. D. Pa. [56-1 USTC ¶9495], 140 F. Supp. 286; Filipowicz v. Rothensies, E. D. Pa. [42-1 USTC ¶9300], 43 F. Supp. 619.

Both Castillo and Perkins are directly interested witnesses. Castillo wants to obtain the bulk of the fund on deposit in the registry; on the other hand, it is manifestly to the interest of Perkins for the Government to obtain the entire fund; in addition, it is clear from the deposition of Perkins that he bears hard feelings toward Castillo and Franklin and feels that he has been treated badly. The Court is not acquainted with either of those witnesses; nor has the Court had the benefit of observing their demeanor and deportment while testifying. One is as worthy of belief as the other. Actually, the deposition of Bailey does not corroborate or contradict either Castillo or Perkins on the crucial question of whether as consideration for the assignment Castillo in so many words or by implication agreed that no suit would be filed against Perkins. That there was no suit does not establish that there was an agreement that no suit would be filed.

It is clear that any agreement of forbearance was between Perkins and Castillo rather than between Perkins and some other representative of Franklin . The direct interrogatories propounded to Perkins inquired whether suit had been threatened by Franklin and whether any assurance had been given by Franklin that Perkins would not be sued if he executed the assignment. If the answers of Perkins had been literally and strictly responsive to the relevant interrogatories, it could perhaps be said that the answers do not negative the idea that Perkins and Castillo agreed that there would be no suit if the assignment were executed.

But, the answer to direct interrogatory No. 4 is: "There was never anything said about a suit before or after I made the assignment." The Court thinks that this answer amounts to a representation that Perkins never discussed the possibility of a suit with anyone, including Castillo, and that there was no agreement for forbearance. And the answer to direct interrogatory No. 2 to the effect that Perkins executed the assignment of his own free will tends to negative the idea that the assignment was made under pressure or threat of suit or for the purpose of avoiding suit.

In the Court's estimation the testimony of Castillo and that of Perkins are in conflict. The Court cannot resolve the conflict, and Castillo must be held to have failed to discharge his burden of proof. Hence, the entire fund in Court must be awarded to the Government.

That conclusion brings up another matter. When the interpleader was discharged, the Court awarded counsel for the interpleader an attorney's fee of $100. On October 18, 1965 , the Government filed a motion to set aside that award. On January 11, 1966 , the Court wrote counsel and reserved ruling on that motion. The Court stated that although the amount involved was small, the Court viewed the question as a serious one which would not survive if the Government's claim to the fund not be sustained. That claim has survived, and the question recurs. The Government's statement in support of its motion is cryptic and only one case is cited; counsel for the interpleader has not yet filed a statement in opposition to the motion. The fee awarded was taxed against the fund as part of the costs, and the Court will treat the propriety of the award as a matter of costs.

Judgment in favor of the Government for the balance of the sum in Court will be entered. If counsel cannot agree about the question of the fee, counsel for the Government will file a supplemental statement of reasons and authorities in support of its motion within the next ten days, and counsel for the interpleader may file an opposing statement within ten days thereafter unless he prefers to confess the motion and pay back the $100 which he had received.

Judgment

Pursuant to memorandum opinion this day filed herein, it is by the Court CONSIDERED, ORDERED, and ADJUDGED that the Intervenor, United States of America, have and recover of and from the defendant, Lynn W. Perkins, the sum of $2,843.49 plus statutory additions. It is further CONSIDERED, ORDERED, and ADJUDGED that the Clerk of this Court be, and he hereby is, authorized and directed to pay over to the Government the balance of the money deposited in the Registry of this Court in this cause by plaintiff, Union Life Insurance Company, and that the Government's judgment against the aforesaid Lynn W. Perkins be credited with that sum. It is further CONSIDERED, ORDERED, and ADJUDGED that the intervention of Harold E. del Castillo be, and the same hereby is, disallowed and dismissed.

¹ The original defendants were Perkins, Franklin, and the Government. The Government moved to dismiss the complaint as against it and for leave to assert its position by means of an intervention. That motion was granted, and the Government intervened in due course.

² One small cash remittance was made by Union to Franklin . In general, however, the withholdings were simply credited to the account of Franklin on the books of Union .

³ The Court does not accept the suggestion of counsel for Castillo that the record does not adequately establish the fact that Perkins was a married man in June 1962. If the Court thought the matter of importance, it would permit the record to be reopened.

 

 

[64-2 USTC ¶9760]Pasadena Investment Co., a corporation, Plaintiff v. Pasadena Air Products, Inc., a corporation, et al., Defendants

U. S. District Court, So. Dist. Calif., Central Div., No. 62-282-CC Civil, 234 FSupp 128, 7/15/64

[1954 Code Secs. 6323 and 7422]

Tax liens: Priority: Validity against third party: Purchaser for value: Refund of amount belonging to third party.--Government's tax lien did not attach to accounts receivable purchased from the delinquent taxpayer by a third party bona-fide purchaser. Further, the bona-fide third party purchaser was entitled to a refund of the amount turned over to the Collector and applied to the delinquent taxpayer's liability without complying with the requirement for filing a refund claim since he was not a taxpayer in this respect.

McLaughlin & McLaughlin, 1224 Bank of America Bldg., 650 S. Spring St., Los Angeles 14, Calif. , for plaintiff. Ward W. Waddell, Jr., donald K. Bjelke, 3165 Pacific Highway , San Diego 12, Calif. , for defendant.

Memorandum Decision

EAST, District Judge:

In these multiparty proceedings, the plaintiff Pasadena Investment Co., a corporation (PIC), named as original party defendants:

Pasadena Air Products, Inc., a corporation (PAP) and Bradford Industries, Inc., a corporation (Bradford), now each suceeded by William A. Wylie as Trustee in Bankruptcy (Trustee);

Bruce Stevens, an officer of PAP and Bradford (Stevens); North American Aviation, Inc., a corporation (American); General Dynamics/Convair (Convair); and

Rob ert A. Riddell, Director, Internal Revenue (Riddell).

American counterclaimed against PIC; and cross-complained against PIC, United States of America (Riddell), Trustee for PAP and Bradford , and several other cross-defendants not now within our scope of inquiry;

Convair cross-complained against PIC, Trustee for PAP and Bradford , and another cross-defendant not now within our scope of inquiry;

Riddell cross-complained against American; and

Trustee for Bradford and PAP cross-complained against Stevens; PIC; Pasadena Finance Co., a corporation (PFC); Lyle A. Adrianse (Adrianse), an officer of PIC and PFC; and Boys Town, U. S. A., a corporation (Boys Town).

Basically, the claims and counterclaims of the parties arise out of this situation:

PAP and Bradford held contracts with American and Convair to furnish and supply work and services in manufacturing or assembling vital aviation equipment, as from time to time authorized and requested by purchase order contracts, compensation to be payable when any given work or production under the purchase order contracts had been accepted and invoiced in due form by American and Convair, respectively. PIC was engaged in the business of "factoring" accounts receivable under the laws of the State of California .

On or about April 24, 1961 , PIC and Bradford entered into a Factoring Agreement whereby PIC agreed to purchase from Bradford "all acceptable accounts receivable." Notice of this transaction was recorded pursuant to California law on April 24, 1961 . Under this Agreement, PIC, for adequate value, purchased certain unpaid invoices issued to Bradford by Convair in the aggregate amount of $9,943.05, and by American in the aggregate amount of $14,234.87.

On or about November 16, 1961 , PIC entered into a similar agreement with PAP, which was likewise recorded on November 16, 1961 , and under which PIC purchased certain unpaid invoices issued to PAP by American in an aggregate amount in excess of $73,000.00.

Each of these accounts-receivable Factoring Agreements contained basically the same terms and phraseology, which, in effect, gave PIC an option to purchase any accounts receivable which it elected to purchase and the power to refuse to purchase any accounts which it found unacceptable.

On December 6, 1961 , Riddell, under a valid federal tax lien, levied upon and took possession of all the machinery and equipment ownd by Bradford , and on December 9, 1961 , Riddell entered an assessment against PAP for third-quarter 1961 withholding and FICA federal taxes in the aggregate of $34,431.99.

PIC was aware that the American purchase order contracts contained a nonassignable provision (as will be later discussed), and, by arrangement with PAP, PIC permitted remittances from American upon invoices to PAP (factored to PIC) to be paid directly to PAP; however, PIC exercised a type of internal control with PAP which channeled American's remittances directly to PIC. Notwithstanding this form of control, and during the period of December 12, 1961 , to December 21, 1961 , American remitted to PAP $72,994.93 in payment of invoices to PAP (theretofore factored to PIC) which escaped PIC's control and did not reach PIC. The evidence is clear that American was advised of PAP's factoring of its invoices to PIC, and, furthermore, PIC had requested American's consent thereto; however, American had at all times refused to recognize or honor the interest of PIC under the factoring arrangement, relying on a non-assignability clause included in all of the purchase order contracts. ¹

On December 14, 1961, Stevens, as the President of PAP, had acquired a cashier's check in the amount of $18,807.66 from the proceeds of remittances from American on factored invoices which had escaped PIC's control, and on this date Riddell's collection agent caused the cashier's check to be appropriately endorsed by Stevens and applied the proceeds thereof to the purchase of certificates for the payment of the fourth quarter 1961 withholding and FICA taxes owed by PAP to the government, which quarterly payment of taxes was not then assessed as delinquent.

On December 15, 1961 , Riddell filed his notice of a tax lien arising on his asessment of delinquent taxes against PAP.

On January 5, 1962, American owed PAP $51,160.72 on issued invoices, a number of which, aggregating $10,801.36, had been factored to PIC, and on this date Riddell levied his tax lien upon the entire indebtedness. Thereupon, American refused to honor the levy by reason of the asserted factoring of the invoices aggregating the sum of $10,801.36, and the claims of PIC for payment of the amount of $72,994.93 theretofore paid PAP, and now holds the entire sum of $51,160.72, with claims of offset against Riddell, all subject to order herein.

American and Convair have each deposited their indebtedness to Bradford , in the amounts of $14,234.87 and $9,943.05, respectively, with the registry of this Court.

On January 22, 1962 , involuntary bankruptcy proceedings were instituted against both Bradford and PAP, and on April 5, 1962 , Trustee was appointed for each.

On March 20, 1962, Riddell sold all of the tangible properties of Bradford and accounts receivable due Bradford from American and Convair, at a tax sale upon his above-mentioned levy, to Adrianse, who in turn assigned all of his right, title and interest therein to PIC.

Out of these transactions and the pretrial orders and stipulations entered herein, the parties' demands are delineated as follows:

PIC SEEKS TO RECOVER FROM:

Defendant                                                                   Amount         Rate of Interest

(1) Riddell (proceeds of the cashier's check aforesaid) .......         $18,807.66        $5% from 
12-14-61

(2) American (less whatever sum it recovers from Riddell) .....          72,994.93         7% from 
12-22-61

(3) American (on invoices factored, and being a part of

$51,160.72 levied upon by Riddell) ............................          10,801.36         7% from 
12-22-61

(4) American (amount of invoices factored by 
Bradford
 and

tendered into registry) .......................................          14,234.87

(5) Convair (amount of invoices factored by 
Bradford
 and

tendered into registry) .......................................           9,943.05         7% from 
12-22-61

 

RIDDELL seeks to recover from American the amount of $34,431.99 of the sum of $51,160.72 due on invoices to PAP (of which $10,801.36 has been factored), now held by American.

TRUSTEE for Bradford seeks to recover the amounts of $14,234.87 and $9,943.05 owed by American and Convair, respectively, tendered into registry.

TRUSTEE for Bradford and PAP seeks to recover from Stevens, Adrianse, PIC, PFC, and Boys Town all moneys and properties received by these parties, respectively, from either Bradford or PAP within four months from date of adjudication of bankruptcy as alleged voidable preferences.

Dealing now with the claims of the respective parties in the above order:

PIC's Claim Against Riddell, Item 1

It appears that following the execution of the factoring agreement between PIC and PAP, the parties made use of a complicated "rebate account," and Riddell contends that this modus operandi reduced and branded the factoring agreement as (a) an agreement by PIC to loan moneys to PAP upon the security of American and Convair invoices rather than (b) a purchase for value by PIC. I find from the evidence that this "rebate account" was simply a bookkeeping facility to show that status of the money account between PIC and PAP.

It is uncontroverted that to this account PIC entered as credit charges (PIC's account payable) the amounts payable (a) loan upon, or (b) purchase price for, respectively, invoices of American and Convair immediately upon ascertainment of the fave value and factoring of an invoice. Subsequent credit charges were entered as further percentages became payable as hereinafter pointed out. Then, as funds were actually paid from time to time upon demand by Stevens for PAP or Bradford operating capital and expenses, or as PAP or Bradford may have become chargeable for other items in connection with the factoring agreement, debit charges were entered to the "rebate account." This arrangement was merely a bookkeeping account which at all times showed funds actually paid to PAP and Bradford upon purchase prices, which did not always coincide with dates and amounts of actual purchase of the invoices. The important thing is that always the "rebate account" revealed immediately upon a purchase of an invoice an entered account payable to PAP and Bradford for the full consideration of the (b) "purchase price" as it became payable upon the invoice. Many times this account was overdrawn in favor of PAP and Bradford , although the officers of PIC endeavored to withhold overpayment of purchase prices. It is important to note that Stevens, who had in the first instance requested this arrangement by written direction to PIC, objected, and incessantly complained to the officers of PIC and to Riddell's collecting agent to the effect that PIC took all the proceeds from the invoices and would not give him enough operating funds. Suffice to say, this bookkeeping arrangement and system did not vitiate the wording of the intent and warranties of the factoring agreements so as to render them "(a) loans" upon the invoices as security.

I conclude that the factoring by PIC of PAP and Bradford 's invoices was a "purchase" for value of the invoices as protected by §6323(a) of the Internal Revenue Code of 1954. 26 U. S. C. A. 6323 (1963). Advance Industrial Finance Co. v. Western Equities, Inc., 173 Cal. App. 2d 420 (1959); Refinance Corp. v. Northern Lumber Sales, Inc., 163 Cal. App. 2d 73 (1958); Bass v. Aetna Factors Co., 272 F. 2d 707 (9th Cir. 1959); Miana v. Credit Discount Co., 27 Cal. Rep. 2d 335 (1945).

I find from the evidence that Riddell's collecting agent did not obtain possession of the cashier's check and its proceeds under or by virtue of the Director's levy of December 9, 1961, or, for that matter, under any lawful levy or process, but, on the contrary, the proceeds of the cashier's check were voluntarily turned over by Stevens to, and knowingly received by, Riddell's collecting agent for application upon a several and distinct tax account owed by PAP. Further, that Riddell's collecting agent had actual knowledge, as related to him by Stevens, that the cashier's check represented payments received by PAP from American in payment of invoices then factored and sold to PIC. It follows that in view of this finding it is not necessary to determine the relative priorities of PIC under its recorded notice of the factoring agreements with PAP on November 16, 1961, and of Riddell under his notice of tax lien filed on December 15, 1961.

Finally, I conclude under the rule announced in 49 Cal. Jur. 2d, Trusts, p. 321, §468 (1959), and the teachings of Stuart v. Chinese Chamber of Commerce of Phoenix [48-2 USTC ¶9315], 168 F. 2d 709 (9th Cir. 1948), and Kirkendall v. United States [40-1 USTC ¶9283], 31 F. Supp. 766 (Ct. Cl. 1940), that PIC is entitled to recover this item of $18,807.66, with interest, from Riddell ( United States --Tucker Act).

PIC's Claim Against American, Item 2

As noted above, American's purchase orders to PAP contained provisions of nonassignability of moneys due or to become due thereunder. While PIC had requested American to approve the factoring agreements and the purchases thereunder, such approval and consent was not forthcoming from American, and PIC had effectuated the internal control within PAP to channel American remittances to the hands of PIC. I am satisfied that such provisions of nonvoluntary assignment of moneys due or to become due under the terms of contracts are reasonable demands and restrictions for a debtor to make and are not contrary to public policy. Further, that the language of the provisions of nonvoluntary assignment as here involved are appropriate and clear. I conclude that the agreement not to assign moneys due or to become due under the purchase orders are valid, effectual, and American had all lawful right to enforce the provisions. PIC, having had knowledge of the provisions; having asked consent and knowing it was withheld, further dealt with PAP at its own risk; at least, as here, not to the jeopardy of American. Parkinson v. Caldwell, 126 Cal. App. 2d 548, 272 P. 2d 934 (1954).

PIC urges that St. Paul Fire & Marine Ins. Co. v. Barnes Construction Co., 26 Cal. Reptr. 646 (1962), and 31 Cal. Reptr. 52 (1963) outmodes Parkinson, supra. I feel not, because the language of the nonvoluntary assignment provisions there provides:

"That the subcontractor shall not sublet, assign or transfer this contract, or any part hereof, without the written consent of the contractor." (31 Cal. Reptr. 54.)

While it is true that St. Paul held that the wording of this provision did not prohibit the assignment of moneys due under the contract, it did so upon this reasoning:

"It is true that if a contract does contain a provision which prohibits assignment, the performance provisions of the contract are not then assignable without the written consent of the other contracting party. This does not mean, however, that the contract proceeds . . . may not be freely assigned . . . 'It is established that a provision in a contract or a rule of law against assignment does not preclude the assignment of moneys due or to become due under the contract. . . .'" Citing Trubovitch v. Riverbank Canning Co., 182 P. 2d 185 (26 Cal. Reptr. 647, 648.)

St. Paul applies a well-known rule of construction favoring free alienability of property. Where a contract clause restricting assignability of the contract is silent as to the assignability of the money to become due under the contract, then this rule of construction is properly used to interpret the intent of the parties; however, in our case the contract expressly restricts the assignment of moneys due. American's and PAP's intent is too clearly spelled out to allow indulgence in rules of construction.

I conclude that American held all lawful right to withhold its consent to the factoring and sales of PAP's invoices to PIC and to disregard the same and to look solely to PAP for good and sufficient receipt; accordingly, PIC cannot recover this item of $72,994.93 or any part thereof which American rightfully and in good faith paid to its creditor PAP.

PIC'S Claim Against American, Item 3

For the reasons and under the authorities referred to above in concluding that PIC is entitled to prevail upon its claim against Riddell (Item 1), I likewise conclude that PIC is entitled to recover from American the amount of $10,801.36, with interest thereon. Further, should American insist upon the receipt of the trustee of PAP, in that event any part of said sum of $10,801.36 and interest so paid to the trustee shall be deemed trust funds of PIC in the hands of such trustee and immediately recoverable by PIC. The balance of the amount of $51,160.72 is payable first to the satisfaction of the tax lien levy of Riddell and the overplus, if any, to the trustee for PAP.

PIC'S Claim Against American's and Convair's Deposits in Court, Respectively, Items 4 and 5

Trustee for Bradford claims the status of an ideal creditor of Bradford under the provisions of §70(c) of the Bankruptcy Act, 11 U. S. C. A. §110(c) (1963), and, as such, entitled to the said items of $14,324.87 and $9,943.05, each being payments by American and Convair, respectively, upon invoices factored and sold to PIC by Bradford. However, Advance Industrial, Refinance Corp., and Bass, supra, present hurdles that the trustee cannot jump, and I conclude that since PIC has recorded its factoring agreements as provided by California law prior to adjudication and is a purchaser for a valuable consideration, it is entitled to recover these deposited items of $14,234.87 and $9,943.05.

Claims of Trustee for PAP and Bradford Against PIC, PFC, and Adrianse for Voidable Preferences

As will be later developed, here also the trustee is faced with purchases for value of the invoices from PAP and Bradford by PIC.

It appears from the evidence that the value paid by PIC through the "rebate account" in the first instance and immediately upon factoring, was 75% of the face value of the invoice, with further percentages payable to PAP Bradford, respectively, depending upon timely payment of the invoices, with a net gain of approximately 3% to PIC, representing a reasonable and lawful profit for its risk of purchase. Section 60(a) of the Bankruptcy Act describes the elements of a "preference" as follows:

(1) making or suffering a transfer of his property,

(2) to or for the benefit of a creditor,

(3) for or on account of an antecedent debt (resulting in a depletion of the estate),

(4) while insolvent, and

(5) within four months of bankruptcy,

(6) the effect of which transfer will be to enable the creditor to obtain a greater percentage of his debt than some other creditor of the same class.

Further, that such a preference may be avoided only if the transferee ". . . had reasonable cause to believe that the debtor was insolvent. The burden of proof of the existence of all these essential elements is upon the trustee." Collier Bankruptcy Manual 2d, ¶60.01, p. 619. Even though PIC had the right to refuse to purchase any given invoice under the factoring agreement, nevertheless, the agreement on the part of PAP to factor and sell all invoices was sufficient to create mutuality under the contract to the extent that any overdrawn amounts appearing as dibit items on the "rebate account" did not constitute a several and distinct "antecedent debt" on a several and distinct contract other than the factoring agreement. Therefore, PIC, being the debtor, could apply such amount of overdrafts as advancements upon future purchases under the continuing mutual factoring agreement. Therefore, any overdrawn amounts in the "rebate account" would not constitute an "antecedent debt" within the meaning of §60(a), supra, and would be a part of the consideration or purchase price paid for an invoice so factored. I conclude that PIC paid "fair present consideration" for each invoice purchased under the factoring agreements with PAP and Bradford and the necessary element [(3) above] of a preference is wanting. In re Nizolek Furniture & Carpet Co., 71 F. Supp. 1012 (D. N. J. 1947); In re Pusey, Maynes, Breish Co., 122 F. 2d 606, 608-9 (3rd Cir. 1941); 3 Collier on Bankruptcy, §60.19, p. 824-5; Collier Bankruptcy Manual, §60, p. 662. Moreover, the evidence fails to establish that PIC "had reasonable cause to believe that" either PAP or Bradford were insolvent at the time of the factoring.

I conclude that the trustee for PAP and Bradford cannot recover from either PIC, PFC or Adrianse for any moneys or properties received by either of them from either PAP or Bradford or their accounts, respectively.

Trustee's Claims for PAP and Bradford Against Stevens and Boys Town

I find from the evidence that the trustee has failed to establish that either Stevens or Boys Town has received any properties, assets or funds of either PAP or Bradford which have not been fully utilized for the use and benefit of PAP and Bradford , respectively. Accordingly, I conclude that the trustee for either PAP or Bradford cannot recover herein against Stevens or Boys Town on account of any voidable preference.

Accordingly, each of the cross-actions of the trustee for PAP and Bradford against Stevens, Adrianse, PIC, PFC and Boys Town should be dismissed;

American's counterclaim against PIC and American's cross-complaint against PIC, United States of America , Riddell, State of California , Baron & Chestney Collection Bureau, Raymond Mitchell, and the trustee for PAP and Bradford , should be dismissed;

PIC should have judgment against Riddell for Item 1, against American for Item 3 and Item 4, and against Convair for Item 5 (to the extent of the tenders herein by American and Convair on Items 4 and 5, respectively), and against PAP for the sum of $72,994.93 paid by American on invoices factored to PIC, less the amount recovered by PIC from Riddell;

PIC's cause against Bradford and Stevens should be dismissed;

United States of America should have judgment against American for tax levy in the amount of $34,431.99; and

Convair's cross-complaint against PIC and Trustee for PAP and Bradford should be dismissed.

It seems that as of now, and under the present issues and equities, no party hereto should recover costs incurred herein prior to this date.

Counsel for PIC is requested to prepare, serve, and submit proposed findings of fact, conclusions of law and judgments in conformity with this memorandum decision, and in the event all parties cannot agree as to form of such proposals, then this Court will, upon the request of any party, set the proposals for settlement by the Court.

PROCEEDINGS: HEARING for the settlement of the form of findings of fact, conclusion of law and judgment:

Court and Counsel confer re issues in the motion.

All counsel make statements to the Court re the findings and judgment.

IT IS ORDERED that the Court's Memorandum of Opinion be adopted as the Findings of Fact and Conclusions of Law.

IT IS FURTHER ORDERED continued to July 17, 1964 at 2:00 P. M. for further hearing for the settlement of the form of judgment.

¹ "SUBCONTRACTING AND ASSIGNMENT--This order may not be subcontracted in whole nor assigned, nor may any assignment of any money due or to become due be made by Seller without, in each case, the prior written consent of Buyer (North American)."

 

 

[78-1 USTC ¶9172]Georgia-Pacific Corporation, a Delaware corporation, Plaintiff v. Lazy Two T Ranch, Inc., a Nevada corporation; Melburne Valley Properties, Inc., a Nevada corporation; and United States of America, Defendants

U. S. District Court, No. Dist. Calif. , No. C-75-1667-SC, 9/19/77

[Code Secs. 6213 and 6323--Result unchanged under the '76 Tax Reform Act]

Liens for taxes: Validity of lien: No notice of deficiency.--Two earlier opinions of the court (see Georgia-Pacific Corp. at 76-2 USTC ¶9666 and 77-1 USTC 77-1 USTC ¶9430), finding that the purchaser of a promissory note had greater rights than the government because the government did not have a valid lien on the funds of the note, were vacated and a stipulated judgment was substituted. Under the stipulated judgment, the government was awarded a portion of the interpleaded funds in satisfaction of unpaid taxes.

Joseph A. Darrell, Thelen, Marrin, Johnson & Bridges, Two Embarcadero Center, San Francisco, Calif. 94111, for plaintiff. Michael R. Pinatelli, Jr., Stokes, Clayton & McKenzie, 333 Franklin St., Suite 202, San Francisco, Calif. 94102, for defendant. James L. Browning, Jr., United States Attorney, John M. Youngquist, Assistant United States Attorney, San Francisco , Calif. , for United States .

Stipulation

CONTY, District Judge:

IT IS HEREBY AGREED AND STIPULATED by and between the parties having appeared in this action, by their respective undersigned attorneys, as follows:

1. The fund of money interpleaded and deposited by plaintiff with the registry of the Court is $48,279.47, plus interest earned on said fund from and after its receipt by the Clerk and deposit in an interest-bearing account pursuant to the Court's order of October 23, 1975 .

2. The named party-defendants were served with copies of the summons and complaint in this action, excepting the defendant MELBURNE VALLEY PROPERTIES, INC., and have answered the complaint and made cross-claims.

3. The named party-defendant MELBURNE VALLEY PROPERTIES, INC., is not a necessary nor a real party in interest as to the subject matter of this litigation and, not having been served with process nor having otherwise appeared in this action, the parties hereto stipulate and agree that MELBURNE VALLEY PROPERTIES, INC., be ordered dropped as a named party-defendant.

4. A judgment in this action was entered on April 20, 1976, was appealed to the United States Court of Appeals for the Ninth Circuit by notice of appeal filed by the defendant UNITED STATES on July 27, 1976, and by the defendant LAZY TWO T RANCH, INC., on August 27, 1976, and the case was later remanded by said Court of Appeals to this Court for further proceedings by order filed August 1, 1977, pursuant to a stipulation for remand filed by and between all appellants and appellees in that Court on July 7, 1977. The mandate on remand was received and filed in this Court on August 3, 1977 .

5. The parties having now settled their differences on the subject matter of this action hereby stipulate, agree and request that the Court now order:

(a) Vacation and withdrawal of its opinion and order filed on April 19, 1976 ;

(b) Vacation of its judgment filed on April 19, 1976 and entered April 20, 1976 ;

(c) Vacation and withdrawal of its opinion and order filed on June 11, 1976 ; and

(d) Filing and entry of judgment in the form attached hereto as Appendix A and incorporated by this reference as a part of this stipulation.

6. Upon the receipt of this stipulation subscribed in behalf of all parties hereto, the attorneys for the defendant UNITED STATES shall submit this stipulation and order to the Court and shall contemporaneously lodge with the Court the original of the forms of judgment set forth in Appendix A for approval, filing and entry.

Order

It appearing that the foregoing Stipulation for Vacation of Judgment and for Entry of Judgment in Interpleader has been subscribed and submitted in behalf of plaintiff and all defendant-claimants in this action, that said stipulation is dispositive of this action, and that good cause exists therefor;

NOW THEREFORE, said stipulation is hereby approved by the Court and it is:

(1) ORDERED that the named party-defendant MELBURNE VALLEY PROPERTIES, INC., be and it hereby is DROPPED as a party-defendant in this action; and it is further

(2) ORDERED that the opinion and order of the Court filed in this action on April 19, 1976 (Docket Item No. 58) be and it hereby is VACATED, withdrawn and cancelled of record; and it is further

(3) ORDERED that the judgment of the Court filed in this action on April 19, 1976 , and entered of record on April 20, 1976 (Docket Item No. 59) be and it hereby is VACATED, withdrawn and cancelled of record; and it is further

(4) ORDERED that the further opinion and order of the Court filed in this action on June 11, 1976 (Docket Item No. 73) be and it hereby is VACATED, withdrawn and cancelled of record; and it is further

(5) ORDERED that judgment in this action be forthwith filed and entered by the Clerk in the form appearing as Appendix A to this stipulation and order.

Judgment in Interpleader

Pursuant to the Stipulation and Order for Judgment in Interpleader filed in this action, it is hereby:

(1) ORDERED, ADJUDGED and DECREED that the plaintiff GEORGIA-PACIFIC CORPORATION be and it hereby is discharged from any and all further liability with respect to that fund interpleaded in this action in the sum of $48,279.47, constituting plaintiff's final payment under a certain note secured by a deed of trust on certain real property under an obligation owing by plaintiff to defendant LAZY TWO T RANCH, INC., as alleged and set forth in particular in the Complaint in Interpleader herein; and it is further

(2) ORDERED, ADJUDGED and DECREED that all defendants herein--to wit: LAZY TWO T RANCH, INC., and the UNITED STATES OF AMERICA--and each of them, their officers, agents and/or attorneys, be and they hereby are permanently enjoined and restrained from instituting or prosecuting any non-judicial proceeding and/or any proceeding in any state or federal court against plaintiff and/or said certain real property concerning said interpleaded fund and/or any obligations or liabilities of plaintiff with respect thereto; and it is further

(3) ORDERED, ADJUDGED and DECREED that the defendant LAZY TWO T RANCH, INC., shall forthwith convey to plaintiff all of its right, title and interest in and to that certain real property referred to in clause (1) above; and it is further

(4) ORDERED, ADJUDGED and DECREED that the fund in interpleader--to wit: the sum of $48,279.47 plus interest earned thereon from the date deposited by the Clerk in an interest-bearing account pursuant to the Court's order of October 23, 1975, to the date of the Clerk's withdrawal of said sum--shall be forthwith disbursed and paid over by the Clerk as follows:

(A) To the plaintiff GEORGIA-PACIFIC CORPORATION: the sum of $3,478.64, comprising $3,336.00 in attorneys' fees and $142.64 in costs;

(B) To the defendant UNITED STATES OF AMERICA: the sum of $15,627.93, to be applied by said defendant to pay and satisfy certain internal revenue tax assessments, including interest thereon through September 15, 1977, in accordance with certain agreements and stipulations entered into by and between the defendant UNITED STATES and the defendant LAZY TWO TO RANCH, outside of the record in this action; and

(C) To the defendant LAZY TWO T RANCH, INC.: the sum of the balance of said fund reduced by the foregoing payments, including interest earned thereon -- set forth above;

and it is further

(5) ORDERED, ADJUDGED and -- CREED that each party-defendant shall bear its own costs and attorneys' fees in this action.

 

 

[76-2 USTC ¶9666]Georgia-Pacific Corporation, a Delaware Corporation, Plaintiff v. Lazy Two T Ranch, Inc., et al., Defendant

U. S. District Court, No. Dist. Calif. , No. C-75-1667 SC, 4/19/76

[Code Secs. 6212 and 6323]

Deficiency notice: Mailed to last known address: Change of address known to IRS: Federal tax lien: Validity of lien: Notice or knowledge of lien.--In order for a valid tax lien to arise the IRS must mail a deficiency notice to the taxpayer at its "last known address." In this case the IRS failed to do so. Therefore, the District Court held that even though notice of a tax lien had been filed by the government, the tax lien was not effective against the subsequent purchaser or a security, who did not have actual notice or knowledge of the existence of the lien at the time of the purchase.

Paul R. Haerle, Joseph A. Darrell, Thelen, Marrin, Johnson & Bridges, 2 Embarcadero Center, San Francisco, Calif., for plaintiff. James L. Browning, Jr., United States Attorney, Martin A. Schainbaum, Assistant United States Attorney, San Francisco , Calif. , John R. Bernard, Michael R. Pinatelli, Jr., Stokes, Clayton & McKenzie, 333 Franklin St. , San Francisco , Calif. , for defendants.

Order

CONTI, District Judge:

This a Rule 22, Federal Rules of Civil Procedure, interpleader action pursuant to which Georgia-Pacific Corporation has deposited the sum of $48,279.47 with the court.

On September 14, 1970 , Melburne Valley Properties, Inc., sold a piece of land located in Mendocino County , California , to Boise Cascade Corporation. Boise Cascade gave Melburne a promissory note for $225,605, secured by a deed of trust on the property. On February 15, 1973 , Boise Cascade sold this property to Georgia-Pacific who took subject to the deed of trust. On October 12, 1974 , Melburne assigned its interest in the promissory note to Lazy Two T Ranch. As a result of this, Georgia-Pacific became obligated to pay Lazy Two T Ranch the remaining monies due under the promissory note.

After the sale of the property to Georgia-Pacific, but before the assignment of the promissory note to Lazy Two T Ranch, the United States allegedly sent two tax deficiency notices to Melburne listing deficiencies for 1970 and 1971. The first was addressed to Melburne in Yerington , Nevada , at the address used on Melburne's tax returns for 1970 and 1971. The second was addressed to Melburne in Mendocino County , the locale of the property.

Melburne did not contest these tax deficiencies in the Tax Court within the required 90-day period, and on August 12, 1974 , the back taxes listed in the notices were assessed against Melburne. On October 2, 1974 , Notices of Federal Tax Lien with respect to Melburne's back taxes were filed in Mendocino County , California , Carson City , Nevada , and in the office of the Navada Secretary of State. On February 12, 1975 , a Notice of Levy was served on Georgia-Pacific by the IRS. On June 1, 1975 , the final payment under the promissory note became due and Georgia-Pacific interpleaded this payment into the court because of the conflicting claims of the IRS and Lazy Two T Ranch.

In addition, it should be noted that Melburne and Lazy Two T Ranch have overlapping boards of directors. Frank and Nancy Tunzi have been respectively the President and Secretary-Treasurer of both Lazy Two T Ranch and Melburne. Further, on October 1, 1974 , Frank Tunzi received the second deficiency notice. He, therefore, had actual knowledge of this notice before the promissory note was assigned to Lazy Two T Ranch.

Lazy Two T Ranch and the United States both move for summary judgments in their favor.

Lazy Two T Ranch moves for summary judgment in its favor on four grounds: (1) Lazy Two T Ranch has never demanded the interpleaded fund; (2) Georgia-Pacific has an interest in the fund; (3) the tax assessment against Melburne is invalid, because it was not mailed to Melburne at its last known address; and (4) Lazy Two T Ranch did not have actual knowledge of the tax lien at the time it purchased the promissory note.

(1) Lazy Two T Ranch has a claim to the fund: Lazy Two R Ranch claims that a prerequisite to an interpleader action is a demand of two or more parties on a particular fund. Lazy Two T Ranch contends that it has never demanded the fund interpleaded by Georgia-Pacific, and, therefore, that this action in interpleader is not proper. This is incorrect.

Neither statutory nor Rule 22 interpleader require that two parties make a demand on an interpleaded fund. Both require that two or more parties have claims to the interpleaded fund. In fact, interpleader jurisdiction is established when the stakeholder seeks to have adjudicated claims which are not actual but are instead merely prospective in nature. Knoll v. Socory Mobile Oil Company, 368 F. 2d 425, 428 (10th Cir. 1966), cert. den. 386 U. S. 977 (1967). It has even been held that the identity of certain of the claimants to the fund need not be known. A/S Krediit Park v. Chase Manhattan Bank, 155 F. Supp. 30 (S. D. N. Y. 1957).

An action in interpleader under Rule 22 is appropriate where the interpleading party is subject to the claims of two or more persons such that he may be exposed to double or multiple liability. We have this situation here. The IRS is asserting a tax lien on the last payment due Lazy Two T Ranch under the promissory note. Likewise, Lazy Two T Ranch is claiming the right to the last payment due under the promissory note in a state default proceeding against Georgia-Pacific. In the absence of an interpleader action, Georgia-Pacific might have to pay both Lazy Two T Ranch and the IRS.

(2) Georgia-Pacific is a disinterested stakeholder: Lazy Two T Ranch contends that interpleader is inappropriate because Georgia-Pacific has an interest in the interpleaded fund. Georgia-Pacific has requested that this court order Lazy Two T Ranch to convey to it the real property in question. Lazy Two T Ranch contends that Georgia-Pacific may not, as part of an interpleader action, request other relief in the form of a conveyance of property in exchange for payment of the fund. Again, this is incorrect.

Statutory and Rule 22 interpleader have effectively abolished the old common law requirement that the stakeholder have no interest in and assert no claim to the subject matter of the fund. 3A Moore , Federal Practice, #22.11, p. 3087, fn. 4, 5.

Further, in this case Georgia-Pacific is not asserting an interest in the fund. It is asking for relief as a result of having deposited the fund with the court. Once a stakeholder has established that interpleader is appropriate, his right to relief is absolute. Railway Express Agency v. Jones, 106 F. 2d 341, 344 (7th Cir. 1939). As the result of an interpleader action, a court may permanently enjoin the claimants in an appropriate manner and grant other adequate relief to the stakeholder. Francis I. du Pont & Co. v. Sheen, 324 F. 2d 3 (3rd Cir. 1963). The court may make any order which will afford the stakeholder complete relief from vexatious litigation. In this case, that would include ordering Lazy Two T Ranch to convey the property in question to Georgia-Pacific.

(3) Tax Assessment: Lazy Two T Ranch contends that the IRS tax assessment against Melburne is invalid, because it was not mailed to Melburne at its last known address.

The United States argues that Lazy Two T does not have standing to raise this issue. In support of this the United States cites the case of Graham v. United States [57-1 USTC ¶9645], 243 F. 2d 919, 922 (9th Cir. 1957). In this case the Ninth Circuit held that the transferee of a taxpayer, although not collaterally estopped, may not question the validity of a tax assessment against the taxpayer where the question has been decided in an earlier court proceeding. The court stated as follows:

We believe that only the taxpayer may question the assessment for taxes, and assert noncompliance by the Commissioner in sending the taxpayer a notice of deficiency by registered mail. At 922.

Even though Lazy Two T may not have standing to challenge the IRS failure to send Melburne a deficiency notice at its last known address, this court must decide this question before it can reach the fourth issue raised by Lazy Two T's motion for summary judgment. Lazy Two T contends that it did not have actual notice or knowledge of a tax lien at the time it purchased the promissory note in question. Actual notice or knowledge presupposes the existence of a valid tax lien. If the deficiency notice in question is invalid, no tax lien can be said to have arisen therefrom, and the question of actual knowledge is moot.

No assessment of a deficiency and no levy or proceeding in court for its collection may be made until a deficiency notice has been mailed to the taxpayer at his last known address and until the expiration of 90 days. 26 U. S. C. §§ 6212, 6213. The proper address for the IRS to use for deficiency notices is the address shown on the last tax return of the taxpayer. Welch v. Schweitzer [39-2 ¶9725], 106 F. 2d 885 (9th Cir. 1939). In this case, the IRS sent the taxpayer his deficiency notice at the address given on the disputed tax return. This address was held not to be the taxpayer's last known address, where the taxpayer had given a new address on a subsequent return, and had not moved out of the tax district. This is similar to the case at bar. Melburne's address on the tax returns for the disputed years (1970-71) was listed as Yerington , Nevada . However, the address listed on Melburne's return for 1972 is Carson City , Nevada . Both of these addresses are within the tax district of Ogden, Utah .

Further, the United States does not dispute that the address to which the IRS sent Melburne's income tax forms for the 1973 tax year was Melburne's address in Carson City , Nevada . (Affidavit of Theordore A. Watkins, paragraph 3). Therefore, at the time that the IRS allegedly sent Melburne the deficiency notice in question, the IRS Service Center at Ogden , Utah , was aware of the taxpayer's new address. The Ninth Circuit was held that when the IRS is aware that a taxpayer has changed his address, a deficiency notice must be sent to the new address. Cohen v. United States [62-1 USTC ¶9202], 297 F. 2d 760, 773 (9th Cir. 1962). Therefore, the IRS did not send either of the deficiency notices in question to the taxpayer's last known address.

The United States cites several cases for the proposition that the address on a subsequent tax return is not sufficient to give notice of a change of address. However, these cases involve situations where the taxpayer has moved from one tax district to another, and where the taxpayer's address change is not available to the IRS Service Center at the time it sends out the deficiency notice. See, Culver v. Budlong [CCH Dec. 31,500], 58 T.C. 850 (1972); Luhring v. Glotzbach, [62-2 USTC ¶9548] 304 F. 2d, 556, 559 (4th Cir. 1962).

(4) Actual Notice of Knowledge of the Tax Lien: 26 U. S. C. §6323(b)(1) provides that even though notice of a tax lien has been filed by the government, the tax lien is not effective against the subsequent purchaser of a security who does not have actual notice or knowledge of the existence of the lien at the time of the purchase. In this case, the transfer of the promissory note to Lazy Two T took place on October 21, 1974. The IRS filed Notices of Federal Tax Lien with respect to Melburne's deficiences on October 2, 1974. These notices were filed in compliance with 26 U. S. C. §6323(f) which requires filing in the manner designated by the state in which the security is located. On October 1, 1974, Frank Tunzi, the president of Lazy Two T, came into possession of the second notice of deficiency. Therefore, on the date of the purchase of the security, the president of Lazy Two T had actual knowledge of Melburne's tax problems. This knowledge is imputed to Lazy Two T. 26 U. S. C. §6323(i)(1).

The only issue here is whether Lazy Two T's knowledge of the deficiency notice constitutes knowledge of a tax lien, as required by 26 U. S. C. §6323(b)(1).

The procedure for assessment and collection of Internal Revenue taxes are statutory. 26 U. S. C. §6212 provides for the mailing of a deficiency notice to inform a taxpayer of the IRS determination of a deficiency. 28 U. S. C. §6323(a) provides for the filing of a petition to contest this deficiency in the Tax Court. 26 U. S. C. §6213(c) provides that if the taxpayer does not file a petition within 90 days, the deficiency shall be paid upon notice or demand. And 26 U. S. C. §§ 6321, 6322 provide that a tax once assessed becomes a lien in favor of the United States upon all property and rights to property belonging to the delinquent taxpayer.

The government argues that since Lazy Two T had actual knowledge of the deficiency notice, and since a tax lien would arise automatically therefrom, Lazy Two T had actual knowledge of a lien. The problem with this argument is that a valid lien cannot arise unless the IRS has mailed a deficiency notice to the taxpayer at its last known address. In this case, the IRS has not done this. Therefore, Lazy Two T cannot be held to have actual knowledge of a tax lien that does not exist.

It is, therefore, the order of this court that Lazy Two T's motion for summary judgment be granted and that it is entitled to the fund of $48,279.47 deposited with this court, plus interest accrued to this date. It is the further order of this court that Georgia-Pacific be relieved of all liability from the claims of both interpleaded parties relating to the matters before this court. Lazy Two T is hereby ordered to convey to Georgia-Pacific the real property in question, and it is permanently enjoined from prosecuting a default judgment against Georgia-Pacific in state court with respect to this property. Finally, it is hereby ordered that Georgia-Pacific receive reasonable attorney's fees and costs, to be paid out of the fund deposited with this court.

Judgment

A motion by the Defendant LAZY TWO T RANCH, INC. (hereinafter, "LAZY TWO T") for summary judgment having been considered by the Court, and the Court having ordered on April 19, 1976, in Open Court, that said motion be granted, IT IS HEREBY ORDERED, ADJUDGED AND DECREED pursuant to said order granting the motion for summary judgment that:

1. LAZY TWO T is entitled to the fund of $48,279.47 deposited with this Court, plus interest accrued from date of deposit to date of disbursement.

2. The Plaintiff GEORGIA-PACIFIC CORPORATION (hereinafter, "G-P") is relieved of all liability from the claims of LAZY TWO T and of the Defendant UNITED STATES OF AMERICA relating to the matters before this Court.

3. LAZY TWO T is hereby ordered to convey to G-P the real property in question.

4. LAZY TWO T is hereby permanently enjoined from prosecuting any judicial or non-judicial foreclosure proceeding against the real property in question or against G-P.

5. G-P is entitled to reasonable attorney's fees and costs, to be paid out of the fund deposited with this Court.

6. The Clerk of this Court shall pay, from the fund of $48,279.47 deposited with this Court, to G-P such reasonable attorney's fees and costs as are fixed by subsequent order of this Court, and shall pay the balance of said fund, including accrued interest, to LAZY TWO T.

 

 

[39-2 USTC ¶9720]Edward Morrison, J. Henry Townsend, Clarence J. Blaker, C. Wesley Townsend, Joseph M. Fitzgerald, R. F. Hyman, James B. Miley, and Reginald R. Rose, formerly trading as a co-partnership under the firm name and style of Morrison & Townsend, Appellants, v. United States of America, Appellee

(CA-6), United States Circuit Court of Appeals for the Sixth Circuit, No. 8417, Decided October 9, 1939

On appeal from the United States District Court for the Eastern District of Michigan, Southern Division.

Enforcement of tax lien.--On stipulation, the Court reverses the decree of the District Court which held that a purchaser for value of stock from a seller against whom an income tax lien had previously been filed took subject to the lien even though he had no knowledge of it. The stipulation and reversal result from the provisions of Sec. 401, 1939 Act, amending Sec. 3672 of the Code (Sec. 3186 R. S.) to provide that a lien shall not be valid in such situations. This provision is applied retroactively under the terms of the amendment. Reversing District Court decision, 39-1 USTC ¶9204, 26 Fed. Supp. 433.

Bulkley, Ledyard, Dickinson & Wright, Detroit , Michigan , for appellants. John C. Lehr, U. S. Attorney, Detroit , Michigan , for appellee.

Before HICKS and SIMONS, JJ.

Decree

HICKS, Circuit Judge:

This cause came on for hearing upon the stipulation of counsel for the Appellants and counsel for the Appellee that the Amended Decree of the United States District Court for the Eastern District of Michigan, Southern Division, may be reversed and a decree of this Court may be entered in conformity therewith. Upon consideration thereof, it appears to the Court that:

[Lower Court Decree]

This is an appeal from the Amended Decree of the United States District Court for the Eastern District of Michigan, Southern Division, adjudging that the lien of the United States of America, upon all property and rights to property of one Carl Rosenfield for unpaid 1927 and 1928 income taxes due from the said Carl Rosenfield, is a valid and subsisting lien or charge upon 500 shares of Packard Motor Car Company stock, evidenced by certificates numbered D-16365 to D-16369, inclusive, purchased by the Appellants after the filing of notices of such tax lien pursuant to provisions of the Acts of Congress for such cases made and provided, but, in the regular course of business of the Appellants as stock brokers, and without actual notice of such tax lien, and that all the rights, interest or title of the Appellants in and to the said 500 shares of stock are junior and subordinate to the lien of the United States upon the said shares of stock. The Court below further adjudged and ordered that the interlocutory order previously entered in said cause enjoining and restraining the Appellants and the Packard Motor Car Company from transferring or disposing of said stock, be confirmed and made final; that the said 500 shares of stock, together with accumulated dividends thereon, be delivered and paid into the Registry of the Court and sold for the satisfaction of the judgment awarded in favor of the United States against the said Carl Rosenfield for income taxes found to be due from the said Carl Rosenfield for the years 1927 and 1928. No appeal has been taken by said Carl Rosenfield from the Amended Decree of the Court below awarding judgment as against him. An appeal from the Amended Decree was duly taken by the Appellants, the individual members of the partnership of Morrison & Townsend.

[Subsequent Legislation]

Subsequent to the taking of the appeal in this cause and before the Amended Decree of the Court below has become final, the Revenue Act of 1939 was enacted and became a low on June 29, 1939, at 10:00 p. m. Eastern Standard Time. Section 401 of the Revenue Act of 1939, amends Section 3672 of the Internal Revenue Code (formerly Section 3186 of the Revised Statutes, as amended), by adding a new Subsection "(b)," which in substance provides that even though a notice of a lien for taxes has been filed in the manner prescribed by Section 3672 of the Internal Revenue Code, or Section 3186 of the Revised Statutes, as amended, the lien shall not be valid with respect to a security as against any mortgagee, pledgee, or purchaser of such security if, at the time of the mortgage, pledge, or purchase, the mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of the lien. The new Subsection of the statute defines a security as, among other things, a share of stock. Subsection (b)(3) of the statute, as amended by the Revenue Act of 1939, then provides that "except where the lien has been enforced by a proceeding, suit, or civil action which has become final before the date of enactment of the Revenue Act of 1939, this Subsection shall apply regardless of the time when the mortgage, pledge, or purchase was made or the lien arose."

In view of the foregoing, and upon consideration of the stipulation of counsel for the Appellants and counsel for the Appellee.

[Decrees Vacated]

IT IS HEREBY ORDERED, ADJUDGED AND DECREED, that the Amended Decree of the Court below, adjudging the lien of the United States of America upon said 500 shares of Packard Motor Car Company stock, and accrued dividends thereon, to be valid and superior to the right, title and interest of the said partnership of Morrison & Townsend in and to such stock and accumulated dividends, and directing that said stock and accumulated dividends be sold for the purpose of satisfying the judgment awarded against the said Carl Rosenfield and granting a permanent injunction against Packard Motor Car Company and the partnership of Morrison & Townsend with respect to the transfer and disposition of said stock, is reversed and vacated.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED, that the lien of the United States of America for unpaid income taxes due from the said Carl Rosenfield for the years 1927 and 1928 is not valid as to the said 500 shares of Packard Motor Car Company stock, evidenced by certificates numbered D-16365 to D-16369, inclusive, and accumulated dividends thereon; that the said 500 shares of Packard Motor Car Company stock, with accumulated dividends thereon, are the sole property of the said partnership of Morrison & Townsend; that the temporary restraining order previously entered in this cause, enjoining the Packard Motor Car Company and the said partnership of Morrison & Townsend from transferring and disposing of the said 500 shares of Packard Motor Car Company stock, is vacated; that the Clerk or Register of the said District Court is ordered to transfer and deliver the said 500 shares of Packard Motor Car Company stock, with accumulated dividends thereon, to the said partnership of Morrison & Townsend, or their counsel of record; that the $250.00 cash deposit, in lieu of the bond on appeal, made by the Appellants with the Clerk of the said District Court, be returned or refunded to the Appellants, or their counsel of record; and that no costs, as between the parties to this appeal, be awarded.