California

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[97-1 USTC ¶50,261] Keith A. Lawrence, et al., Plaintiffs v. Albertson's, Inc., Eleven Western Builders and Does 1 through 10, inclusive, Defendants Eleven Western Builders, a California Corporation, Cross-Complainant v. Keith A. Lawrence, Keith Alexander Lawrence II, David Allen Rob inson, Kevin Lee Rob inson, Kevin Alexander Lawrence, United States Department of The Treasury, Internal Revenue Service, State of California, Franchise Tax Board and Does 1 through 10, inclusive, Cross-Defendants

U.S. District Court, Cent. Dist. Calif. , CV 95-6465 LGB (SHx), 11/5/96

[Code Sec. 6323 ]

Liens: Priority: Mechanic's liens: Property: Interpleader fund.--Perfected tax liens had priority over a mechanic's lien against an interpleader fund that consisting of money deposited by a company with which the taxpayer had entered into a roofing contract. The taxpayer's right to receive proceeds from the contract was considered a property interest. Since the IRS properly filed notice of the liens under state ( California ) law, it was clearly entitled to the interpleader fund.

[Code Sec. 6323 ]

Liens: Priority: Mechanic's liens: Third parties: Interpleader fund.--Tax liens had priority over third parties' mechanic's liens with respect to an interpleader fund consisting of money deposited by a company with which the delinquent taxpayer had entered into a roofing contract. The tax liens were perfected first in time. Under state ( California ) law, the mechanic's liens related back to the time the claimants began working on the subject property, which occurred after the IRS filed its tax liens in the county recorder's office.

ORDER GRANTING CROSS-DEFENDANT UNITED STATES' MOTION FOR SUMMARY JUDGMENT

Cross-Defendant United States Department of the Treasury--Internal Revenue Service's Motion for summary Judgment came on regularly for hearing on November 4, 1996 . Having reviewed all pertinent papers on file and having considered the oral argument, the Court hereby GRANTS the United States ' Motion for Summary Judgment for the reasons set forth below.

I. PROCEDURAL HISTORY

BAIRD, District Judge:

This case was initiated by Plaintiffs in propria persona and cross-defendants Keith A. Lawrence ("Lawrence" or "taxpayer") and Keith Alexander Lawrence II, David Allen Rob inson, Kevin Lee Rob inson, and Kevin Alexander Lawrence (collectively "Lawrence-related parties"). On April 19, 1995 , Plaintiffs filed an action in the Orange County Municipal Court ("Municipal Court") to Foreclose Works of Improvement Lien, Seize Contractor's Bond and Other Applicable Bonds against defendant Albertson's, Inc. ("Albertson's") and Defendant and Cross-Complainant Eleven Western Builders, a California Corporation ("Eleven Western Builders"). On August 7, 1995, Eleven Western Builders filed in Municipal Court a Cross-Complaint in Interpleader ("Cross-Complaint"), naming as cross-defendants all claimants to certain construction proceeds allegedly owed to Lawrence, including the United States of America (Department of the Treasury--Internal Revenue Service ("IRS")) and the State of California--Franchise Tax Board ("Franchise Tax Board"). On September 18, 1995 , the Franchise Tax Board filed with the Municipal Court a disclaimer of any right or interest to the interpleader fund.

The United States removed the case from the Municipal Court to federal district court, the Hon. Judge Richard A. Gadbois, on September 27, 1995 . On October 6 and 18, 1995, the United States filed its Answer to the Cross-Complaint, asserting its entitlement to the entire amount of the interpleader fund. The United States based its assertion on the unpaid assessed federal income tax liabilities incurred by Keith A. Lawrence and Eleanor J. Lawrence for the 1989, 1991, and 1992 calendar years.

On October 11, 1995 , Eleven Western Builders deposited into the Court's registry the sum of $14,021.47 as the interpleader fund. On January 22, 1996 , the Hon. Judge Richard A. Paez denied Lawrence and the Lawrence-related parties' Motion to Dismiss Cross-Complaint in Interpleader (for lack of subject matter jurisdiction and for failure to state a claim) and the Motion to Strike the United States ' Opposition to the Motion to Dismiss. Additionally, on January 22, 1996 , Judge Paez discharged Eleven Western Builders and Albertson's from the action, conditioned upon Eleven Western Builders depositing an additional $930.28 into the interpleader fund. Eleven Western Builders deposited this additional sum on January 26, 1996 , thereby bringing the total principal amount of the interpleader fund to $14,951.75.

On February 5, 1996 , the case was transferred to the calendar of this Court from the calendar of Judge Gadbois.

On April 10, 1996 , Lawrence and the Lawrence-related parties filed their Answers to the Cross-Complaint in Interpleader ("Answers"). Lawrence and the Lawrence-related parties, in their Complaint and in their Answers, claim that they are entitled to receive assorted amounts of money from the interpleader fund based on mechanic's liens filed for labor, materials and/or equipment these parties furnished for the subject construction project. (See Part II, infra.)

The Court has subject matter jurisdiction pursuant to 28 U.S.C. §1444, which states that any "action brought under section 2410 of this title against the United States in any State court may be removed by the United States to the district Court of the United States for the district and division in which the action is pending." The Cross-Complaint in this case prays for relief in interpleader pursuant to 28 U.S.C. §2410(a)(5).

Presently before the Court is the United States ' Motion for Summary Judgment, filed September 24, 1996 . On October 22, 1996 , Lawrence and the Lawrence-related parties filed a document entitled "Memorandum of Points and Authorities in Support of Affidavit of Keith Alexander, Lawrence," which appears to be an opposing paper. ¹ The United States replied on October 31, 1996 . On November 1, 1996, Lawrence and the Lawrence-related parties filed a document entitled "Affidavit of Keith Alexander, Lawrence of the Criminal Activities Committed Against Him and His Family." ²

II. FACTUAL BACKGROUND

Plaintiff Lawrence has incurred unpaid federal income tax liabilities for the calendar years 1989, 1991, and 1992 (the 1989 and 1991 liabilities are owed jointly by Lawrence and his wife, Eleanor J. Lawrence). The outstanding balances, including interest and penalties through October 25, 1995 , are $11,155.07, $74,580.96, and $45,435.95 respectively. (See Stack Decl. Exs. 3 and 4, attached to United States ' Mot. Summ. J.) The IRS notified Lawrence of the assessments made against him and demanded payment of the assessment amounts. (See id. at "First notice issues" entry.)

On August 3, 1994 , the United States perfected income tax liens in the amount of $68,710.29 against Lawrence and his wife with the San Bernardino County Recorder's Office for the years 1989 and 1991. (See United States ' Answer at Exs. 1 and 2.) On April 17, 1995 , the IRS filed a federal tax lien against Lawrence in the amount of $37,567.00 with the San Bernardino County Recorder's Office in reference to his unpaid assessed income tax liability for the 1992 calendar year. (See Stack Decl. Ex. 6.)

On or about October 5, 1994 , Eleven Western Builders received from the IRS a Notice of Levy with respect to Keith A. and Eleanor J. Lawrence's unpaid tax liabilities. (See Stack Decl. Ex. 2 at 4.)

Lawrence holds a contractor's license issued by the State of California and has a "family roofing business." (Compl. ¶1, attached to Stack Decl. as Ex. 1.) The Lawrence-related parties are Lawrence 's sons, who are also in the roofing business, and provided labor and/or materials for the subject construction project. (See Stack Decl. Ex. 8 at ¶¶7 and 11.) On June 1, 1994 , Lawrence entered into a contract with Eleven Western Builders. (See Stack Decl. Ex. 7.) The subcontract agreement provided for Lawrence to furnish a new roof and repair an existing roof for the general contractor, Eleven Western Builders, on an Albertson's Grocery Store located in Fountain Valley , California ("the Project"), in exchange for the sum of $8,300. (See id.; see also Compl. ¶9.) Lawrence and the Lawrence-related parties commenced work on the Project on or about August 9, 1994 and completed work on or about January 6, 1995 . (See Lawrence Decl. ¶¶3-4, attached to Stack Decl. as Ex. 8; Compl. ¶14.)

After completion of the original work, Lawrence and the Lawrence-related parties were paid $7,470.00 by Eleven Western Builders. In addition, Eleven Western Builders paid Lawrence the sum of $387.75 on or about March 30, 1995 . (See Compl. ¶¶10 and 12.) From October 19, 1994 to January 6, 1995 , Lawrence and the Lawrence-related parties rendered extra work and additional materials, labor and equipment rentals that were not provided for by the terms of the Subcontract Agreement. (Compl. ¶11.) Lawrence and the Lawrence-related parties claim that the reasonable value of all of the additional labor, materials, and equipment is $22,809.50. That total less payments made of $7,857.75 leaves a balance due of $14,951.75. (Compl. ¶12.)

On or about February 7, 1995 , Lawrence sent a letter to Wayne and Rick Backus of Eleven Western Builders, entitled "Notice and Demand," demanding payment of $15,339.50 for the extra labor, materials, and equipment provided for the Project. (Compl. ¶12 and Ex. B attached thereto.) Eleven Western Builders made no payment to Lawrence in response to this letter. On March 10, 1995 , Lawrence and the Lawrence-related parties filed the following Mechanic's Liens with the Orange County Recorder's Office in regard to the property on which the Project is located:

1. Keith A. Lawrence: $15,339.50 for "labor, material, equipment rental, truck rental, for remodeling for Albertson's for roof repairs, built-up roof and new manzart roof." (Compl. Ex. 1 at 10.)

2. Keith A. Lawrence: $2,679.50 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 11.)

3. Keith A. Lawrence II: $4,860.00 for "roofing equipment rental, kettle rental, truck rental, propane, fuel for trucks for remodeling of Albertson's roof repairs, built-up roof and new manzart." ( Id. at 12.)

4. Keith A. Lawrence II: $2,400.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 13.)

5. David Allen Rob inson: $2,400.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 14.)

6. Kevin Lee Rob inson: $2,400.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 15.)

7. Kevin Alexander Lawrence: $600.00 for "common law contract labor for remodeling of Albertson's for roof repairs, built-up roof and new manzart roof." ( Id. at 16.)

III. ANALYSIS

A. Standards for Motions for Summary Judgment

1. Federal Rule of Civil Procedure 56

Summary judgment must be entered against a party who, after adequate time for discovery and upon motion, fails to make a showing sufficient to establish an element essential to that party's case, and on which that party would bear the burden of proof at trial. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A party moving for summary judgment may carry its initial burden by pointing out to the district court that there is an absence of a genuine issue of material fact. Celotex, 477 U.S. at 323.

"Once the initial responsibility has been met, the burden shifts to the nonmoving party to oppose the motion by showing specific facts, pursuant to Fed. R. Civ. P. 56(e), which establish a genuine issue for trial." Nilsson, Rob bins, Dalgarn, Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1544 (9th Cir. 1988). To avoid summary judgment, an adverse party "may not rest upon the mere allegations or denials of the adverse party's pleading." Fed. R. Civ. P. 56(e). The nonmovant must set forth specific facts showing that there remains a genuine issue of material fact for trial. Fed. R. Civ. P. 56(e); Celotex, 477 U.S. at 324.

A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The evidence of the nonmovant is to be believed and all justifiable inferences are to be drawn in favor of the nonmovant. Id. at 255; T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987). The determination of whether a given factual dispute requires submission to a jury must be guided by the substantive evidentiary standards that apply to the case. Anderson, 477 U.S. at 255.

On a motion for summary judgment, the district court is "under no obligation to mine the full record for issues of triable fact." Schneider v. TRW, Inc., 938 F.2d 986, 991 n.2 (9th Cir. 1991) (citing Nilsson, 854 F.2d at 1545). "[W]hen a local rule such as United States District Court--Central District of California Rule 7.14.3[ ³] has been promulgated, it serves as adequate notice to nonmoving parties that if a genuine issue exists for trial, they must identify that issue and support it with evidentiary materials, without the assistance of the district court judge." Nilsson, 854 F.2d at 1545. A district court can grant an unopposed motion for summary judgment if the moving papers are sufficient to support the motion and do not reveal a genuine issue of material fact. Henry v. Gill Indus., Inc., 983 F.2d 943, 949-50 (9th Cir. 1993) (upholding granting of unopposed motion for summary judgment on this ground); Griffin v. Allstate Ins. Co., 920 F. Supp. 127, 130 (C.D. Cal. 1996) (citing Henry, 943 F.2d at 949).

If the adverse party does not respond to the motion by showing that there remains a genuine issue of material fact for trial, "summary judgment, if appropriate, shall be entered against the adverse party." Fed. R. Civ. P. 56(e) (emphasis added).

2. Central District of California Local Rules

Under the Local Rules, on a motion for summary judgment, the moving party is required to file a proposed "Statement of Uncontroverted Facts and Conclusions of Law" and the proposed judgment. Local Rule 7.14.1. The statement is to set forth "the material facts as to which the moving party contends there is no genuine issue." Id.

A party opposing a motion must, no later than fourteen days before the date set for hearing of the motion, file either (1) evidence on which the party will rely in opposing the motion and a memorandum of points and authorities in opposition to the motion, or (2) a notice of non-opposition. Local Rule 7.6. "Papers not timely filed by a party including any memoranda or other papers required to be filed under [Local Rule 7] will not be considered and may be deemed by the Court consent to the granting or denial of the motion, as the case may be." Local Rule 7.9.

A party opposing a motion for summary judgment must "file with his opposition papers a separate document containing a concise 'Statement of Genuine Issues', setting forth all material facts as to which it is contended there exists a genuine issue necessary to be litigated." Local Rule 7.14.2. In determining a motion for summary judgment, "the Court will assume that the material facts as claimed and adequately supported by the moving party are admitted to exist without controversy except to the extent that such material facts are (a) included in the 'Statement of Genuine Issues' and (b) controverted by declaration or other written evidence filed in opposition to the motion." Local Rule 7.14.3.

B. Discussion

1. Attachment and Priority of Federal Tax Liens to the Interpleader Fund in Regard to Lawrence

The Internal Revenue Code (the "Code") provides the basis for a discussion of the attachment and priority effect of federal tax liens:

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. §6321 (emphasis added). The Code also provides that:

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

26 U.S.C. §6322 (emphasis added). In addition:

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

26 U.S.C. §6323(a) (West Supp. 1996) (emphasis added). Subsection (f) provides that notice of a lien be filed per the laws of the state in which the property subject to the lien is situated. 26 U.S.C. §6323(f) (West Supp. 1996). California Code of Civil Procedure provides that a tax lien as against the personal property of a natural person is perfected by filing a notice of the lien with the "office of the recorder of the county where the person against whose interest the lien applies resides at the time of the filing of the notice lien." (See Cal. Code Civ. Proc. §2101(c)(4).)

Property rights, as used in the Internal Revenue Code, refers to both real and personal property. "The statutory language 'all property and rights to property,' appearing in section 6321 ... is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985). Therefore, a person's rights under a contract are considered property for purposes of 26 U.S.C. §6321 et seq. Accordingly, a federal tax lien attaches to a taxpayer's rights under a contract, assuming that proper notice has been given. See Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F.2d 855, 859 (9th Cir. 1962) (IRS lien attached to taxpayer's rights pursuant to government construction contract).

A taxpayer's right to receive the proceeds from a contract is still considered property pursuant to 26 U.S.C. §6321 even if the taxpayer's entitlement to those proceeds is conditioned upon performance of the contract. Seaboard Surety [62-2 USTC ¶9653], 306 F.2d at 859; City of Vermillion v. Stan Houston Equipment Co., 341 F. Supp. 707, 713 (D.S.D. 1972).

In the instant case, Lawrence incurred unpaid tax liabilities for the calendar years of 1989, 1991, and 1992. The IRS assessed such liabilities on July 5, 1993 , July 11, 1994 , and April 24, 1995 , respectively. (See Stack Decl. §§3 and 4.) These liens were perfected against Lawrence upon the IRS filing Notices of Federal Tax Liens with the San Bernardino County Recorder's Office on August 3, 1994 , and April 17, 1995 . (See Stack Decl §§5 and 6.) See Cal. Code Civ. P. §2101(c)(4). Moreover, the IRS perfected its interest in the interpleader fund by serving a Notice of Levy in the amount of $72,645.76, with respect to the contract proceeds owed to Lawrence , on Eleven Western Builders on or about October 5, 1994 . The service of such a notice upon Eleven Western Builders, as the entity "holding" the taxpayer's property, "creat[ed] a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." National Bank of Commerce, 472 U.S. at 720-21.

Lawrence has asserted that he is entitled to proceeds from the contract between himself and Eleven Western Builders. (See Compl. ¶¶12 and 13.) An interpleader fund was established with monies deposited by Eleven Western Builders, who has since been discharged from the action. The current dispute, and the subject of this motion for summary judgment, is entitlement to the interpleader fund. The United States has established that the amount of income tax liabilities, including accruals of interest and penalties through October 25, 1995 are $11,155.07, $74,580.96, and $45,435.95, for the calendar years 1989, 1991, and 1992 respectively. (See United States ' Mot. summ. J. at 15; see also Stack Decl. Exs. 3 and 4.) Thus, Lawrence 's unpaid tax liabilities far exceed the amount of the interpleader fund. Therefore, as the IRS properly perfected its tax liens as against Lawrence, the United States is clearly entitled to the interpleader fund, as it is entitled to Lawrence's property under 26 U.S.C. §6321.

The United States has established that there is no genuine issue of material fact as to the priority of the United States over the taxpayer with respect to the interpleader fund. Thus, the burden then shifts to Lawrence and the Lawrence-related parties to establish that there does exist a genuine issue of material fact.

While it seems that Lawrence and the Lawrence-related parties are attempting to oppose the United States ' motion, they offer no evidence to support their position. It appears that they are challenging the process by which the assessments were made against the taxpayer and whether the liens on Lawrence 's property are valid. (See generally Lawrence Memorandum.) In fact, they state that "[g]enuine issues of material fact existed as to whether the Internal Revenue Service (IRS) procedures were followed in making assessments against taxpayer and whether liens on his property were thus valid, precluding summary judgment in taxpayer's quiet title action." (Lawrence Memorandum ¶4.) Although a taxpayer may not use an interpleader action to attack collaterally the merits of an assessment, the taxpayer may contest-the procedural validity of a tax lien. See Elias v. Connett, 908 F.2d 521, 527 (9th Cir. 1990) (citing United States v. Polk, 822 F.2d 871, 872 n.1 (9th Cir. 1987)). Lawrence and the Lawrence-related parties fail, however, to offer any evidence in support of their challenge.

The United States has fulfilled its burden of establishing that no genuine issue of material fact exists regarding the priority of the United States over Lawrence , as the taxpayer, with respect to the interpleader fund. As Lawrence and the Lawrence-related parties have failed to establish sufficiently that a genuine material fact exists regarding this issue, summary judgment on this particular issue is appropriate pursuant to Rule 56(c).

2. Attachment and Priority of Federal Tax Liens to the Interpleader Fund in Regard to the Lawrence-related Parties

It is well-settled law that while state law determines whether a taxpayer has an interest in property and the extent of that interest, the priority of a competing federal tax lien and a state-created lien is determined by reference to federal law. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-14 (1960). Thus, California law must be applied in determining whether the Lawrence-related parties have an interest in the subject property via mechanic's liens. Once that has been determined, federal law will determine the priority of the competing federal tax lien and the state-created mechanic's liens. See generally United States v. [Pioneer] American Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84 (1962) (stating that the priority of a federal tax lien as against a mechanic's lien is a question of federal law).

Except for one mechanic's lien, the United States does not dispute that the Lawrence-related parties acquired property interests in the interpleader fund via mechanic's liens. ⁴ This issue does not need to be discussed, however, because even assuming, arguendo, that all of the mechanic's liens were perfected by the Lawrence-related parties, the United States' federal tax liens still have priority over the interpleader fund via the rule of "first in time, first in right."

The priority of a federal tax lien created by 26 U.S.C. §6321 as against liens created pursuant to state law is governed by the common law rule of "first in time, first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954). Thus, the essence of determining priority of the United States ' federal tax liens and the Lawrence-related parties' state-created mechanic's liens is, quite simply, determining which liens were perfected "first."

Title 26 U.S.C. §6323(a) states that a federal tax lien is not entitled to priority over a mechanic's lienor until notice of the tax lien has been filed. In the present case, on August 3, 1994 , the IRS filed a Notice of Federal Tax Lien against the taxpayer in the San Bernardino County Recorder's Office with respect to his unpaid tax liabilities for the 1989 and 1991 calendar years. The unpaid balance due for these tax liabilities incurred by Lawrence greatly exceeds the principal amount in the interpleader fund.

California law provides that a perfected mechanic's lien (i.e., proper notice given, filed within the allotted time period, see Cal. Civ. Code §§3123, 3128, 3129, and 3144.) relates back to the time the claimant began working on the subject property.

Once recorded, the mechanic's lien constitute a direct lien on the improvement and the real property to the extent of the interests of the owner or the person who caused the improvement to be constructed.... The lien is subordinate to recorded encumbrances antedating the commencement of the work of improvement but takes priority over all subsequent encumbrances....

Connolly Development, Inc. v. Superior Court of Merced Cty., 17 Cal. 3d 803, 808, 132 Cal. Rptr. 477, 553 P.2d 637 (1976); see also Owens-Parks Lumber Co. v. McCarthy, 121 Cal. App. 623, 9 P.2d 310 (Cal. Ct. App. 1932) (finding that claim of lien for materials furnished relates back to time claimant began furnishing them). Thus, in the instant case, the Lawrence-related parties' mechanic's liens, assuming that they were all perfected, would relate back to the date upon which the work of improvement was commenced, which was August 9, 1994. (See Stack Decl. Ex. 8 at ¶3.) In other words, the earliest date on which the mechanic's liens of the Lawrence-related parties could have become perfected and attached to the proceeds of the Lawrence-Eleven Western Builders contract was on August 9, 1994, as this is the date upon which Lawrence and the Lawrence-related parties first commenced work on the Project. ⁵

The IRS' federal tax liens were filed against the taxpayer in the San Bernardino County Recorder's Office on August 3, 1994 , and the mechanic's liens of the Lawrence-related parties are assumed for the sake of argument to have been perfected on August 9, 1994 . Thus, the IRS's federal tax liens came "first in time," and so must be considered "first in right." The federal tax liens have priority over the mechanic's liens of the Lawrence-related parties in regard to the interpleader fund.

The evidence submitted by the United States points to the absence of a genuine issue of material fact as to whether the federal tax liens have priority over the mechanic's liens of both Lawrence and the Lawrence-related parties. Neither Lawrence nor the Lawrence-related parties have cited to or provided any evidence to suggest otherwise. As the United States has sufficiently met its burden showing that no genuine issue of material fact exists in regard to the priority of entitlement to the interpleader fund, and the opposing parties have added nothing to controvert it, the Court can properly grant summary judgment pursuant to Rule 56. The Court concludes that the IRS' federal tax liens have priority over the mechanic's liens of both Lawrence and the Lawrence-related parties in regard to the interpleader fund.

IV. CONCLUSION

For the foregoing reasons, the Court hereby GRANTS the United States ' Motion for Summary Judgment and ORDERS that the principal amount of the interpleader fund established by Eleven Western Builders of $14,951.75 be paid to the United States .

IT IS SO ORDERED.

¹ This filing by Lawrence and the Lawrence-related parties is full of irrelevant allegations. Although it cites no evidence to support any of its contentions or allegations and it is not accompanied by a separate statement of disputed facts or conclusions of law, it seems to be an opposition to the United States ' Motion for Summary Judgment. Accordingly, the Court will treat it as an "opposition."

The United States maintains that the "opposition" was not timely and should not be considered. ( United States ' Reply Mot. Summ. J. at 2.) The Court, however, chose to consider the pro per Plaintiffs' filing, but still concludes that summary judgment for the United States is appropriate.

² Despite the fact that this document was submitted on the eve of oral argument for the current motion, the Court has reviewed it. This filing, like the Lawrence Memorandum, makes many irrelevant and unsound assertions. These claims are not appropriate for the Court to consider with regard to the motion at hand. The thrust of this Affidavit seems to be that the IRS and some of its agents have fraudulently issued Notices of Levy/Lien against Lawrence . (See Affidavit ¶13.) Yet Lawrence fails to provide any supporting evidence whatsoever for the numerous allegations made in the Affidavit. In the context of this motion for summary judgment, the Affidavit fails to raise any genuine issue of material fact.

³ Local Rule 7.14.3 provides that:

In determining any motion for summary judgment, the Court will assume that the material facts as claimed and adequately supported by the moving party are admitted to exist without controversy except to the extent that such material facts are (a) included in the "Statement of Genuine Issues" [required of the opposing party by Local Rule 7.14.2] and (b) controverted by declaration or other written evidence filed in opposition to the motion.

⁴ The United States ' motion goes into great detail describing California law regarding acquiring property interests via mechanic's liens. However, the United States does not dispute that the Lawrence-related parties do, in fact, have property interests in the interpleader fund via mechanic's liens. Regardless of whether the one mechanic's lien was perfected, the crux of determining whose lien has priority is a determination of when the liens were perfected. Thus, for purposes of this discussion, it will be assumed, arguendo, that all of the Lawrence-related parties' liens were perfected. The only issue left to determine, then, is the priority of the Lawrence-related parties' liens versus the IRS' federal tax liens.

⁵ The United States brings to the Court's attention that the interpleader fund consists of monies that Lawrence and the Lawrence-related parties claim is owed for extra labor and materials furnished on the Project between October 19, 1994 and January 6, 1995 . (See Compl. ¶¶11-12.) Therefore, regardless of which date is used to determine when the mechanic's liens of the Lawrence-related parties relates back to, the earliest date is August 9, 1994, the date upon which the original work was first commenced.

 

 

[55-2 USTC ¶9667]Ralph N. Highsmith et al., Plaintiffs, v. Max Lair et al., Defendants; Morton D. Goldberg et al., Respondents; United States of America, Appellant

In the Supreme Court of California, Los Angeles , No. 22941. In Bank, 281 P2d 865, 44 A.C. 325, April 15, 1955

Appeal from a judgment of the Superior Court of Los Angeles County .

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

Lien for taxes: Rights of government do not extend beyond those of taxpayer: Setoff by judgment creditor.--Defendant Goldberg, a judgment debtor of taxpayer Lair, acquired judgments against taxpayer, without notice of a previously filed tax lien notice against taxpayer. Godberg was allowed to set off his judgments against taxpayer, against the judgment held by taxpayer against Goldberg, notwithstanding the government's claim of an interest in the judgment debt by virtue of its tax lien. State law controls in determining the right of setoff.

Laughlin E. Waters, United States Attorney, and Edward R. McHale, Assistant United States Attorney, for appellant. Maurice Rose for respondents.

[Facts]

EDMONDS , Justice:

The question here presented for decision concerns the scope and effect of notices of tax lien of the United States of America . The appeal is from a judgment [54-2 USTC ¶9602] holding that the federal government may not recover from the judgment debtors of the taxpayer the amount stated in those notices to be due for unpaid taxes, and also that it has no right to money on deposit with the municipal court.

Max Lair sued Morton and Katherine Goldberg for money assertedly due him upon a contract. After the commencement of the action, but before Lair obtained judgment for approximately $4,000, the government filed its notices of tax lien. Subsequently, and before they received actual notice of these liens, the Goldbergs acquired, in the name of H. Markus, four judgments against Lair evidencing a total indebtedness by him of about $4,200.

Levies were made by each of Lair's judgment creditors, or his assignee, upon the indebtedness evidenced by the judgment against the Goldbergs. The State also levied upon this indebtedness claiming that Lair was delinquent in the payment of taxes. The Goldbergs then deposited $4,200 with the marshal of the municipal court to the credit of Markus. This deposit was made under an agreement between the Goldbergs and Markus whereby he was to collect the amount of it from the marshal, less execution fees, and pay the balance to them. In the present action the trial court found that the Goldbergs made this deposit "in order to have the record manifest their set-offs of their acquired four judgments against said judgment in favor of Max Lair." Subsequently, upon the motion of the Goldbergs, Lair's judgment against them was satisfied of record.

The deposit is being held by the marshal pursuant to an order of the court obtained by the plaintiffs in the present suit who are alleged creditors of Lair. The prayer of the complaint was for a money judgment against him, and a declaration of the priorities of liens upon, and conflicting claims to, the indebtedness represented by the judgment obtained by Lair against the Goldbergs.

By cross-complaint, the Goldbergs named the United States of America as a cross-defendant. In its answer, the government asserted that it has first liens on the property of Lair. It asked the court to enforce those liens upon any of Lair's property held by Goldberg and, in particular, upon the deposit with the marshal. By way of cross-complaint against the Goldbergs, the government demanded a personal judgment against them. Only the government has appealed from the judgment which declared, inter alia, that the government never acquired any interest in the debt due from the Goldbergs to Lair, denied it the right to recover any amount against the Goldbergs and ordered that its cross-complaint be dismissed.

[Parties Contentions]

The United States claims that after the notices of tax liens were recorded, it had an interest in the Goldberg's debt to Lair which could not be divested by any act of the debtors. The Goldbergs contend that the United States has no interest in the deposit because the government's liens could only extend to property of Lair. It is their position that the deposit was made to satisfy claims against Lair, and he had no interest in it at any time. They also argue that the government is not entitled to a personal judgment against them because of their right of setoff against Lair and they had no property belonging to him in their possession at the time of the government's demand. Another point relied upon is that, if the court erred in applying the principle of setoff, under the rule of res judicata, the government is bound by the order satisfying the judgment in Lair v. Goldberg. Finally, they insist that no personal judgment can be rendered against them under the provisions of section 3710(b) of the Internal Revenue Code, because, at the time of the government's demand, any property of Lair which they had in their possession had been levied upon by other creditors.

[Relevant Code Provisions]

The Internal Revenue Code provides that if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount, including any interest or penalty, shall be a lien in favor of the United States upon all property and rights to property, belonging to such person. (26 U. S. C., 1946 ed., §3670.) The lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been duly filed in the office of the county recorder of the county within which the property subject to the lien is situated. (26 U. S. C., 1940 ed., 1953 Pocket Supp., §3672(a)(1); Cal. Gov. Code, §27330.)

In the event of the nonpayment of the amount of taxes claimed, the collector may levy upon all property and rights to property (with certain exceptions not here pertinent) belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due. (26 U. S. C., 1940 ed., §3692.)

Section 3710 of the Internal Revenue Code reads:

"Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process.

"Any person who fails or refuses to so surrender any of such property or rights 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 (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy." (26 U. S. C., 1940 ed., §3710.)

[Government's Rights Same as Taxpayer's]

Although by its liens the government acquired an interest as coowner of the indebtedness of Goldberg to Lair (United States v. City of Greenville, 118 Fed. (2d) 963 [41-1 USTC ¶9381]), its rights are not greater than those of the taxpayer whose property is sought to be levied upon. ( United States v. Winnett, 165 Fed. (2d) 149, 151 [48-1 USTC ¶9115]; accord: Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690, 692 [40-2 USTC ¶9533]; United States v. Graham, 96 Fed. Supp. 318, 321 [51-1 USTC ¶9218].)

`The proposition here laid down is in harmoney with the generally recognized principle that the rights of the garnisher do not rise above, or extend beyond, those of his debtor; that the garnishee shall not, by operation of the proceedings against him, be placed in any worse condition than he would have been in, had the principal debtor's claim been enforced against him directly; that the liability, legal and equitable, of the garnishee to the principal debtor, is a measure of his liability to the attaching creditor, who takes the shoes of the principal debtor, and can assert only the rights of the latter.' . . . It would be most unfair that a third person, merely by reason of his interposition, whether he was a sovereign or not, should be able to change the rights inter sese between the obligor of the chose in action and his obligee, who is the objective of the levy or attachment." ( United States v. Bank of United States , 5 Fed. Supp. 942, 945 [1934 CCH ¶9099].)

[Setoff]

In California , "a judgment debtor who has, by assignment or otherwise, become the owner of a judgment or claim against his judgment creditor, may go into the court in which the judgment against him was rendered and have his judgment offset against the first judgment. . . . Under section 368 of the Code of Civil Procedure the debtor may set off claims against the creditor which were acquired after the assignment of the judgment to a third person but prior to notice to the debtor of the assignment. . . . [T]here is no room for the exercise of discretion upon this question." (Harrison v. Adams, 20 Cal. 2d 646, 649 [128 P. 2d 9]; also see: Haskins v. Jordan, 123 Cal. 157 [55 P. 786].) Actual notice is necessary to defeat this right. (See McCabe v. Grey, 20 Cal. 509.) The rights acquired by the government as coowner of the debt never were greater than those which would have been acquired by an assignee of Lair.

In United States v. Bank of Shelby , 68 Fed. (2d) 538 [4 USTC ¶1226], the government brought an action for penalties against the bank for refusal to surrender $3,500, the amount of the deposit of one Toler, a delinquent taxpayer. The government had assessed Toler for income taxes in March. In June, the Collector served upon the bank a notice of lien for the taxes and a warrant of distress, claiming thereby to have levied on the deposit of Toler. Just prior to the levy, Toler, to meet the claims of creditors, borrowed $10,000 from the bank, giving a mortgage on his plantation.

When Toler was unable to settle with his creditors, he and the bank agreed that, from the proceeds of the loan, he would pay the bank $6,500, the amount due to it upon his past due unsecured notes in its favor. The remaining $3,500 was credited to his account. It was held that the bank had a clear right to offset the $3,500 against the $10,000 note. At the time of the levy, said the court, "there was no property or right to property of Toler which Toler could assert and consequently nothing which the tax could take a lien on or the tax officer could rightfully demand possession of." (P. 539.) The fact that the $10,000 note and the $3,500 deposit both stemmed from the same transaction was discussed, but was not considered to be the controlling factor in the case.

[Notice of Federal Tax Lien]

The government cites United States v. Winnett, 165 Fed. (2d) 149 [48-1 USTC ¶9115], and United States v. Graham, 96 Fed. Supp. 318 [51-1 USTC ¶9218], as supporting its position. In the first case, the court upheld the right of setoff which Winnett obtained prior to the date the lien was claimed. The decision does not bar a right of setoff which is obtained before actual notice of tax lien, but after the lien is recorded. In the Graham case, no consideration was given to the statutes and decisions relating to rights of setoff. In that case, the lien of the federal government was upheld solely upon the basis of its rights against the taxpayer. The right of setoff may not be ignored in determining the effect of tax liens on the claims against a debtor and the state law is controlling in a determination of those rights. (Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690, 692 [40-2 USTC ¶9533].)

The Goldbergs had no notice of the federal government's liens at the time they acquired the judgments against Lair, and those judgments were properly setoff against the one in favor of Lair. Because of those setoffs there is no property in the possession of the Goldbergs against which the tax liens may be foreclosed, and no cause of action against them for a personal judgment. This conclusion makes it unnecessary to discuss other defenses against the claims of the United States .

The judgment is affirmed.

SHENK, J., CARTER, J., SCHAUER, J., and SPENCE, Justices concurred.

TRAYNOR, Justice:

I dissent.

On February 8, 1950 , Lair brought an action against the Goldbergs and on March 26, 1951 , he secured a judgment for $4,114.22. In the meantime, on April 13, 1950 , and July 26, 1950 , the United States filed notices of tax liens against Lair in Los Angeles County . Thereafter the Goldbergs purchased three judgments against Lair and another claim against him that was subsequently reduced to judgment. None of these judgments were entered, however, until after the notices of the tax liens were filed. Had Lair's creditors sought to enforce their claims against Lair instead of selling them to the Goldbergs, they could not have reached Lair's claim against the Goldbergs until the tax liens had been satisfied. ( United States v. Security Trust & Sav. Bank, 340 U. S. 47, 50-51 [71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]]; United States v. Acri, 348 U. S. 211 [75 S. Ct. 239; 99 L. Ed. ^* -- [55-1 USTC ¶9138]]; United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 [75 S. Ct. 247, 99 L. Ed. ^>k -- [55-1 USTC ¶9136]].) In such case, the United States would have been free to enforce its liens against Lair's property by collecting the judgment in his favor against the Goldbergs. The question presented, therefore, is whether the Goldbergs can defeat this right of the United States by purchasing claims against Lair that but for the purchase would be subordinate to the tax liens. In my opinion, they cannot do so.

It is true that the Goldbergs did not have actual knowledge of the tax liens at the time they purchased the claims against Lair and that in the absence of federal legislation their right to setoff would not be prejudiced by an assignment without notice of the judgment against them. (Harrison v. Adams, 20 Cal. 2d 646, 649 [128 P. 2d 9]; Code Civ. Proc., §368.) It bears emphasis, however, that the Goldbergs did not pay their judgment creditor without notice of the tax liens against him. Instead, they purchased claims against their creditor that were subordinate, whether they knew it or not, to the tax liens, and there is no reason why these claims should have greater value against the United States in the Goldbergs' hands than they had in the hands of the Goldbergs' assignors.

Citing Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690 [40-2 USTC ¶9533], United States v. Winnett, 165 Fed. (2d) 149 [48-1 USTC ¶9115], United States v. Bank of Shelby , 68 Fed. (2d) 538 [4 USTC ¶1226], United States v. Graham, 96 Fed. Supp. 318 [51-1 USTC ¶9218], and United States v. Bank of United States , 5 Fed. Supp. 942 [1934 CCH ¶9099], the majority opinion holds, however, that the right to setoff must be determined by state law and that the Goldbergs may not be placed in a worse position toward their creditor because the United States has intervened. The cited cases considered situations in which the right to setoff arose before the tax liens were perfected or in which the delinquent taxpayer at no time held an enforcible claim against his alleged debtor. It is settled, however, that once the tax lien has been perfected it may not be displaced by operation of state law (Michigan v. United States, 317 U. S. 338, 340 [63 S. Ct. 302, 87 L. Ed. 312]; United States v. City of New Britain, 347 U. S. 81, 84 [74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191]]; United States v. Snyder, 149 U. S. 210, 214 [13 S. Ct. 846, 37 L. Ed. 705]) and that the interests of the United States may not be prejudiced by the assertion of subsequently acquired rights of third parties against the tax delinquent. ( United States v. Security Trust & Sav. Bank, 340 U. S. 47, 50-53 [71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]]; Glass City Bank v. United States, 326 U. S. 265, 267-268 [66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449]]; United States v. City of Greenville , 118 Fed. (2d) 963, 965 [41-1 USTC ¶9381]; Miller v. Bank of America, 166 Fed. (2d) 415, 417 [48-1 USTC ¶9185]; Citizens State Bank of Barstow v. Vidal, 114 Fed. (2d) 380, 383-384 [40-2 USTC ¶9603]; In re Dartmont Coal Co., 46 Fed. (2d) 455, 457; United States v. Graham, 96 Fed. Supp. 318, 321 [51-1 USTC ¶9218], affirmed, 195 Fed. (2d) 530 [52-2 USTC ¶9425]; United States v. Rosenfield, 26 Fed. Supp. 433, 436 [39-1 USTC ¶9204].)

The fact that the Goldbergs did not have actual knowledge of the tax liens when they purchased the claims against Lair does not render the enforcement of the tax liens against them inequitable. The Goldbergs' indebtedness to Lair was an asset that the United States was entitled to levy upon for the payment of taxes due. As noted above, the Goldbergs did not pay the judgment in ignorance of the tax liens but instead purchased claims against Lair. That the value of these claims was problematical was apparent from the fact that Lair's creditors were willing to sell them for approximately one third of their face value and the Goldbergs could easily have determined from an examination of the records that they were subordinate to the tax liens. Under these circumstances it cannot reasonably be said that the United States attempted to prejudice the Goldbergs' position toward their creditor by asserting its tax liens. Instead, because they failed to investigate the sources of information available to them, the Goldbergs have been permitted to succeed in defeating the enforcement of the tax liens by advancing claims that were subordinate to them.

GIBSON, Chief Justice, concurred.

^* Adv. Opn.: Page 193.

^_k Adv. Opn.: Page 195.

 

 

[75-2 USTC ¶9636]American Fidelity Fire Insurance Co., a corporation, Plaintiff v. United States of America, etc., et al., Defendants The People of the State of California, etc., Cross-Complainant v. American Fidelity Fire Insurance Co., a corporation, et al., Cross-Defendants

U. S. District Court, No. Dist. Calif. , No. 71 911 WTS, 385 FSupp 1075, 11/19/74

[Code Sec. 6323]

Lien for taxes: Priority: Surety's interest.--Federal tax liens were found to have priority over the interest of the Insurance Company (Surety) in funds owed to the taxpayer. Surety, according to state law, could be subrogated only to such rights as the creditors has against the taxpayer. The court found that no stop notices were filed with respect to mony already paid the government or with respect to funds that had been interpleaded. The court did find that the agreement between the taxpayer and surety established a security interest but the interest was not perfected by the filing of a financing satement and thus it was subordinated to the tax ilens.

Adams & Ernst, 220 Montgomery St. , San Francisco , Calif. , for plaintiff. King & Mering, 901 H St., Sacramento, Calif., Williams, Van Hoesen & Brigham, 360 Pine, San Francisco, Calif., Rosenberg, Wiseman & Sweet, 5840 Geary Blvd., San Francisco, Calif., for defendants and cross-complainants.

Memorandum of Decision

SWEIGERT, District Judge:

This action is brought by American Fidelity Fire Insurance Company ("Surety") against the United States , State of California ("State"), and other defendants seeking a judicial determination that it is entitled to certain monies due from the State of California to one Turner under a public works contract for the cleaning and painting of a state highway bridge. The State, answering, has interpleaded the unpaid contract balance of $3,427.28.

The case is presently before the Court on plaintiff Surety's, defendant United States ', and defendant State 's cross-motions for summary judgment. The sole remaining issue is whom as between plaintiff, in its capacity as surety, and defendant United States, pursuant to three federal tax liens, has the superior right to the interplead funds.

Facts

According to the evidentiary record herein, consisting of an Agreed Statement of Facts (filed July 9, 1973 ), the facts are as follows:

On June 29, 1970, the Department of Public Works of the State of California entered into a contract with Boyd M. Turner, individually and doing business as Able Painting Contractors, for the cleaning and painting of a state highway bridge for a total contract price of $36,600. Plaintiff surety posted a performance bond and a labor and materialmen's bond with respect to this contract. On October 20, 1970 , the date of satisfactory completion of the contract, the sum of $7,099.68 remained due Turner under the contract.

[Stop Notices Filed]

On October 28, 1970 , the Andrew Brown Company filed a stop notice with the State in the amount of $2,741.82 for materials allegedly supplied to Turner but no action was ever commenced to perfect that claim. On October 30, 1970 , another stop notice was filed by one Hardwick, doing business as Crest Contracting Company in the amount of $756.00 for equipment allegedly supplied to Turner; Hardwick commenced an action in Sacramento Municipal Court to perfect this claim. Later, upon stipulation of the parties to this pending action, this Court ordered the State to pay claimant Hardwick $945.00 from the withheld funds pursuant to his perfected stop notice claim.

Acting pursuant to Cal. Civil Code §3179 et seq. (formerly Cal. Code of Civil Procedure §1190 et seq.), the State withheld and set aside from the balance remaining due Turner the amounts of $3,427.28 and $945.00 (a total of $4,372.28) to meet the claims plus costs of Brown and Hardwick, respectively, should they prevail in suits to perfect their claims.

[Federal Tax Liens]

On November 12, 1970 , the United States , having assessed income and withheld income and F. I. C. A. taxes against Turner, filed a Notice of Lien with the Santa Clara Recorder. On November 13, 1970 , the United States served a Notice of Levy on the State, notifying it that Turner was indebted to the United States in the amount of $8,772.64 and that all property or rights to property belonging to Turner were levied and seized for satisfaction of these obligations.

On November 23, 1970 , counsel for plaintiff surety advised the State by letter that Surety had exercised its right of assignment pursuant to the terms of its General Agreement of Indemnity with Turner and requested that all further payments under the contract be made to Surety.

On January 19, 1971 , the United States served a second Notice of Levy on the State, notifying it that Turner was further indebted to the United States in the amount of $256.89 for unpaid income taxes for 1964 and that all property or rights to property belonging to Turner were levied and seized in satisfaction of that obligation.

On January 28, 1971 , the State made payment of $2,727.40 to the United States in response to the aforementioned levies, leaving unpaid $6,288.25 (plus interest, penalties and costs) of the federal tax claims. The State, however, continued to withhold $4,372.28 to meet the stop notice claims of Brown and Hardwick.

On March 9, 1971, the United States served another Notice of Levy notifying the State that Turner was further indebted to the United States in the amount of $6,581.73 and that all property or rights to property belonging to Turner were levied and seized for satisfaction of this obligation.

Surety contends that it, not Turner, was entitled to the unpaid contract balance and that, therefore, Turner had no property or rights to property to which the federal tax liens could attach.

[State Law Question]

The assessment of a tax liability against a delinquent taxpayer creates, as of the date of assessment, a lien in favor of the United States upon all property and rights to property belonging to the taxpayer. 26 U. S. C. §§ 6321 and 6322. The determination of what constitutes property or rights to property is a question of state law. Acquilano v. United States, 363 U. S. 590, 613 (1960); Logan Planning Mill Co. v. Fidelity and Casualty Co. of New York [63-1 USTC ¶9343], 212 F. Supp. 906, 919 (S. D. W. Va. 1962).

In support of its position that Turner had no property or property rights to which the federal tax liens could attach, Surety contends that, upon its payment of the laborers' and materialmen's claims against Turner, the defaulting contractor, it was subrogated to their rights to any monies due and owing to Turner (citing Pearlman v. Reliance Insurance Co., 371 U. S. 132 (1962) and Home Indemnity Co. v. United States, 313 F. Supp. 212 (W. D. Missouri 1970)); that its subrogation related back to the date of the suretyship agreement and the execution of its bonds (citing County of San Diego v. Croghan, 2 Cal. App. 2d 494, 38 Pac. 2d 474 (1934)) and that, by virtue of this subrogation and relation back, it succeeded to Turner's interest in the contract payments as of the date of the execution of its suretyship agreement and that there was nothing left to which the later filed federal tax lien against Turner could attach.

[Rights of Subrogation]

It is well established that a surety, upon satisfying the debts of the principal, is subrogated only to such rights as the creditors had against the principal. Cal. Civil Code §2848; United States Fidelity and Guaranty Co. v. Oak Grove School District , 205 Cal. App. 2d 226, 230-234 (1962). It has now been held in California that, if the surety on a public works contract becomes liable to the contractor's laborers and materialmen, the surety is subrogated to the contractor's right to the public entity contract funds only if the laborers and materialmen have perfected their stop notice claims. Pacific Employers Insurance Co. v. California , 3 Cal. 3d 373 (1970); 91 Cal. Rptr. 273.

In Pacific Employers no stop notices were filed. In the pending case two stop notices were filed--only one of which was eventually perfected. The argument could conceivably be made that the filing of even a single stop notice should put the public entity on notice that the contractor is defaulting and that it should withhold the unpaid balance. Under this reasoning, the surety should then be allowed to be subrogated to the rights, not only of the lone stop notice claimant, but to the rights of those other unpaid laborers and materialmen whom the surety must reimburse under its bond. However, Cal. Civil Code §3187 makes clear that disbursing officers of public entities have no duty to anticipate the filing of future stop notices and that final payment can be made to the contractor even though the stop notice period has not expired. Pacific Employers, supra; See also California Mechanic's Liens and Other Remedies, Cal. Continuing Education of the Bar, 1972, §11.6 at 267.

In the pending case, although two stop notices were filed, one of which (that of Hardwick) was eventually perfected and paid, to stop notices were filed with respect to either the $2,727.40 previously paid to the United States or with respect to the remaining interpleaded $3,427.28. The Surety, therefore, acquired no subrogation rights to these funds.

Surety further argues that Turner had no interest in monies due under the contract to which the tax liens could attach because the effect of Cal. Civil Code §3193, which provides that no assignment by the contractor of money due to him or to become due takes priority over a stop notice claimant, is that payments due the contractor become not property of the contractor, but a trust fund for the payment of laborers and materialmen. We find no support in California law for such a reading of §3193. That section merely gives a stop notice claimant priority over an assignment by the contractor. Similarly, Cal. Civil Code §§ 2858 and 2849, also cited by Surety as supporting its position, merely subrogate the surety to the remedies and securities of creditors. None of these provisions give a surety an unconditional, paramount right to the proceeds of a public works contract; all are consistent with the rule enunciated in Pacific, supra, to the effect that unless the surety is subrogated to the rights of a stop notice claimant, it has no rights in the proceeds of a public works contract.

Finally, Surety argues that, even if Turner had an interest to which the tax liens could attach, the assignment to surety pursuant to its General Agreement of Indemnity of all of Turner's rights under the contract, including the right to payment, in the event of the contractor's default or breach of the contract and/or bond takes priority over the federal tax liens.

Once it is determined that a taxpayer has a state created interest to which the tax lien can attach, the priority of competing liens must be determined according to federal law. Acquilano, supra. Federal law (26 U. S. C. §6323(a)) provides that only certain stated categories of interests, i. e., security interests, mechanic's liens, and judgment liens, have priority over federal tax liens.

[Security Interest Unperfected]

The only one of these categories into which Surety's assignment interest could possibly fall is that of a security interest. We are of the opinion that the assignment to surety pursuant to its agreement was an account or contract right within the meaning of Cal. Commercial Code §9106 and, as such, a security interest subject to the provisions of Division 9 of the Cal. Commercial Code.

However, 26 U. S. C. §6323(h)(1) requires that in order for an interest to qualify as a security interest the particular interest must be such as would be protected by state law against a subsequent judgment lien.

But Sections 9301 and 9302 of the Cal. Commercial Code provide that, with respect to such security interests in accounts and contract rights, any lien creditor, including a judgment lien creditor, will have priority over the secured interest unless a financing statement has been filed.

Apparently no such financing statement was filed by Surety with the Secretary of State with respect to the assignment in question; therefore, plaintiff Surety was not a holder of a "security interest" protected by state law against a subsequent judgment lien within the meaning of Internal Revenue Code Sections 6323(a) and 6323(h)(1) and its security interest remained subordinate to the tax liens of the United States.

Accordingly, IT IS ORDERED that,

(1) Plaintiff's motion for summary judgment should be, and the same is hereby denied.

(2) Defendant United States ' motion for summary judgment should be and the same is hereby granted.

(3) Defendant State of California 's motion for summary judgment should be and the same is hereby granted.

 

 

[56-1 USTC ¶9481]Kelley Kar Company, a corporation, Plaintiff v. United States of America, et al., Defendants

In the United States District Court for the Southern District of California, Central Division, No. 18719-BH, April 18, 1956

[1939 Code Sec. 3672(a)--substantially unchanged in 1954 Code Sec. 6323(a)]

Period of lien: Validity against mortgagees: Subrogation of rights.--A finance company held a conditional sales contract on a customer's automobile, the contract being superior to a federal tax lien as it was perfected before the tax lien. The tax lien was perfected by filing it in the office of the County Recorder , as provided by Sec. 3672 of the 1939 Code and Sec. 27,330 of the Government Code of the State of California . Sec. 195 of California's Vehicle Code, which requires the filing of notices of mortgages on motor vehicles with the California Department of Motor Vehicles, does not apply to federal taxes. After the lien had been perfected, an automobile dealer received the customer's equity in the conditional sales contract as a down payment on a new car. The court held that the amount paid by the automobile dealer to satisfy the conditional sales contract was superior to the tax lien as the dealer subrogated the finance company's rights. The amount received in excess of the amount paid to satisfy the contract when the automobile was sold was subject to the government's lien.

[1939 Code Sec. 3678--substantially unchanged in 1954 Code Sec. 7403]

Action to enforce tax lien: Proper party defendant.--The Director of Internal Revenue is not a proper party defendant to federal tax lien action, since the liens are vested in the United States and not in the Director of Internal Revenue.

[1939 Code Sec. 3653--substantially unchanged in 1954 Code Sec. 7421]

Prohibition of suit to restrain collection of tax.--Taxpayer's request to quash levy for collection of taxes based on equity was denied by the court as Sec. 7421(a) of the 1954 Code specifically prohibits suits restraining assessment or collection of taxes.

[1939 Code Sec. 311--substantially unchanged in 1954 Code Sec. 6901]

Transferred assets: Action against one transferee: Marshalling of the assets.--The Commissioner was not required to marshal the assets of a tax debtor, as the taxpayer asserted, before proceeding to levy on property in the hands of the taxpayer.

R. F. Neuman, 354 South Spring St. , Los Angeles 13, Calif. , for plaintiff. Bruce I. Hockman and Rembert T. Brown, 600 Federal Bldg., Los Angeles 12, Calif. , for United States .

Findings of Fact, Conclusions of Law and Judgment

HARRISON, District Judge:

The above entitled cause came on regularly for trial on the 21st day of March, 1956, the Honorable Ben Harrison, Judge, presiding, R. F. Neuman and Allan M. Carson appearing for the plaintiff Kelley Kar Company; Laughlin E. Waters, United States Attorney for the Southern District of California, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Bruce I. Hochman and Rembert T. Brown, Assistant United States Attorneys, appearing for defendant United States of America, the defendants Doe I, II and III having been dismissed; the Court now makes its findings of fact and conclusions of law as follows:

Findings of Fact

I One or about January 20, 1954, Budget Finance Plan, a California corporation, with its principal place of business in the County of Los Angeles, State of California, acquired a security interest in that certain 1953 Ford automobile bearing motor No. 83 LC-13916N by virtue of an assignment of a conditional sales contract. One Edgar W. Sutherland was then the registered owner of said 1953 Ford automobile.

II The Commissioner of Internal Revenue assessed against said Edgar W. Sutherland federal income taxes for the years 1946 and 1948. The Director of Internal Revenue for the Los Angeles District of California received the respective assessment lists showing the assessment of the aforesaid taxes on April 16, 1954 .

III On September 16, 1954 , a Notice of Tax Lien, No. 2067, relative to the 1946 income taxes assessed against said Edgar W. Sutherland was filed in the office of the County Recorder of Los Angeles County , California .

IV On September 20, 1954 , a Notice of Tax Lien, No. 2500, relative to the 1948 income taxes assessed against Edgar W. Sutherland was filed in the office of the County Recorder of Los Angeles County , California .

V On March 21, 1956 , there was due, unpaid and owing from said Edgar W. Sutherland for the aforesaid taxes the amount of $3,291.56.

VI On January 8, 1955, plaintiff Kelley Kar Company entered into a conditional sales contract with said Edgar W. Sutherland for sale to said Edgar W. Sutherland of a 1955 Ford automobile, and in trade under said contract said Edgar W. Sutherland conveyed to plaintiff his interest in the 1953 Ford automobile mentioned above.

VII In said date of January 8, 1955 , said Edgar W. Sutherland informed plaintiff that said 1953 Ford automobile was encumbered by a debt owing to the abovementioned Budget Finance Plan. Plaintiff thereupon made inquiry of said Budget Finance Plan as to the amount owing upon said encumbrances and was informed by said Budget Finance Plan that the amount then owing was the sum of $904.47. Thereafter plaintiff Kelley Kar Company sent to Budget Finance Plan its check in the amount of $904.47, the amount of the aforesaid indebtedness of said Edgar W. Sutherland to Budget Finance Plan.

VIII On January 12, 1955, defendant Rob ert A. Riddell, Director of Internal Revenue for the Los Angeles District of California caused to be served on Budget Finance Plan a levy on the certificate of ownership to the subject 1953 Ford automobile, which certificate said Budget Finance Plan held as security for payment of the indebtedness to it by said Edgar W. Sutherland.

IX On or about January 12, 1955 , plaintiff Kelley Kar Company stopped payment of the aforesaid check in the amount of $904.47 which had been sent to Budget Finance Plan.

X On January 14, 1955 , defendant Director of Internal Revenue caused a written Notice of Release of the aforesaid levy to be sent to Budget Finance Plan.

XI Thereafter plaintiff Kelley Kar Company paid said Budget Finance Plan the sum of $904.47, and received from said Budget Finance Plan the Certificate of Ownership to the subject 1953 Ford automobile.

XII On January 17, 1955 , the defendant Director of Internal Revenue caused to be served on plaintiff Kelley Kar Company a levy on the subject 1953 Ford automobile.

XIII No notice of the subject tax liens of the United States has at any time been filed with any office of the Department of Motor Vehicles of the State of California .

XIV The parties hereto, through their respective counsel, stipulated to the sale of said 1953 Ford automobile by plaintiff Kelley Kar Company free and clear of both tax liens of the United States and the claims of liens or rights of Kelley Kar Company, with said liens and rights to attach in like manner to the proceeds; pursuant to stipulation said 1953 Ford automobile was sold for the net sum of $1000.00, which sum is held by plaintiff subject to order of this court.

XV The Kelley Kar Company is subrogated to the rights of Budget Finance Plan to the extent of $904.47, the amount it paid to Budget Finance Plan to satisfy the prior conditional sales contract. Budget Finance Plan's conditional sales contract was prior in time to the filing of the Government's tax lien.

Conclusions of Law

I The rights acquired by Budget Finance Plan in that certain 1953 Ford automobile, motor No. 83 LC-13916N, were prior in time and superior to the rights therein later acquired by the United States of America by virtue of liens for federal taxes for the years 1946 and 1948 owed by Edgar W. Sutherland.

II Kelley Kar Company is subrogated to the rights of Budget Finance Plan in said 1953 Ford automobile to the extent it paid therefor, the sum of $904.47. Therefore, the parties having stipulated to transfer their liens and rights to the proceeds of sale of the automobile of $1000.00, the Kelley Kar Company is entitled to $904.47 and the defendant United States of America , is entitled to the surplus derived from the sale, the sum of $95.57.

III The Director of Internal Revenue, Rob ert A. Riddell, is not a proper party defendant to this action, since federal tax liens are vested in the United States of America and not in the Director of Internal Revenue.

IV The complaint fails to state a claim against the Director of Internal Revenue, Rob ert A. Riddell, upon which relief can be granted.

V The filing of Notices of Federal Tax Liens in the office of the County Recorder of the County of Los Angeles, State of California, as provided by §3672 of the Internal Revenue Code of 1939 and §27330 of the Government Code of the State of California, as all that was necessary to make valid and enforceable against the world the federal tax liens on the subject 1953 Ford automobile. The provisions of §195 of the Vehicle Code of the State of California, with respect to the filing of a notice of a chattel mortgage on a motor vehicle with the Department of Motor Vehicles of the State of California, have no application to federal internal revenue tax liens.

VI The levy served by the Director of Internal Revenue on Kelley Kar Company on January 17, 1955, was in all respects valid, sufficient and enforceable.

VII No cause of action to quash the above mentioned levy lies in equity and is specifically prohibited by §7421(a) of the Internal Revenue Code of 1954.

VIII The defendants are in no way estopped to enforce said levy against the subject 1953 Ford automobile.

IX The Director of Internal Revenue is not required to marshal the assets of a tax debtor before proceeding to levy on property in the hands of a third person.

Judgment

In accordance with the foregoing findings of fact and conclusions of law, it is ordered, adjudged and decreed:

1. That from the sum of $1,000.00 which plaintiff Kelley Kar Company holds in lieu of that certain 1953 Ford automobile, plaintiff Kelley Kar Company have judgment for and recover the sum of $904.47.

2. That from the sum of $1000.00 which plaintiff Kelley Kar Company holds in lieu of that certain 1953 Ford automobile, defendant United States of America have judgment for and recover the sum of $95.53 to be applied toward payment of the tax liens of Edgar W. Sutherland; that plaintiff Kelley Kar Company pay said sum over to the United States of America by delivering a cashier's check, payable to the Treasurer of the United States, to the attorneys for defendant United States of America.

3. That defendant United States of America discharge from that certain 1953 Ford automobile, motor No. 83 LC-13916N, its internal revenue liens for federal income taxes owed by Edgar W. Sutherland for the years 1946 and 1948, and also release its levy served on plaintiff Kelley Kar Company on January 17, 1955, in connection with the aforesaid taxes.

4. That all parties bear their own costs.

5. That the above entitled action be dismissed with prejudice, as to defendant Rob ert A. Riddell, Director of Internal Revenue.

 

 

[53-1 USTC ¶9260]United States of America, Plaintiff v. Albert Emery Breaux; Beryl Vera Breaux; Title Insurance and Trust Company, a corporation, and County of Los Angeles, a municipal corporation, Defendants

In the United States District Court for the Southern District of California, Central Division, No. 14076-WM, March 12, 1953

Federal tax liens: Applicability of state recording laws.--State recording laws do not apply to tax liens in favor of the United States (U. S. v. Snyder, 149 U. S. 210 (1893)). Therefore, by filing, on December 3, 1947, with the County Recorder of the County of Los Angeles, notice of a lien of the United States for 1946 income taxes upon property of the delinquent taxpayers which was registered under the provisions of the California Land Title Law, a valid lien within the meaning of Code Sec. 3672 was acquired, and such lien has priority over a lien in favor of the County of Los Angeles for 1952-1953 real estate taxes. Third in priority is the claim of a third party which acquired a beneficial interest in the property as the result of foreclosure in 1950 of a deed of trust, to which the property was subject when the federal tax lien was filed. The Court ordered the property to be sold as provided by Sec. 3678 of the Internal Revenue Code and Title 28, United States Code Secs. 2001 et seq., and further decreed that the proceeds of sale shall be distributed in accordance with the order of priority of the parties to the extent of their interests in the property.

Lawrence L. Otis, Gilbert E. Harris, James F. Healey, Jr., and Harold Arman, 433 South Spring Street, Los Angeles 13, Calif., Harold W. Kennedy, County Counsel, John D. Maharg, Deputy, 1100 Hall of Record, Los Angeles 12, Calif. for defendants. Walter S. Binns, U. S. Attorney, E. H. Mitchell and Edward McHale, Ass't U. S. Attorneys, and Eugene Harpole and Frank W. Mahoney, Special Attorneys for Bureau of Internal Revenue, Federal Bldg., Los Angeles 12, Calif. of the Government.

Order for Findings and Judgment (December 31, 1953)

MATHES, District Judge:

This cause having been tried and submitted to the court for decision; and it appearing to the court:

(a) that on December 3, 1947 plaintiff filed with the County Recorder of the County of Los Angeles notices of tax lien upon all property of defendants Albert and Beryl Breaux for federal income taxes for the year 1946, [Int. Rev. Code §3670, Cal. Gov. Code §27330];

(b) that the real property in controversy in this action was a portion of the Breaux property against which plaintiff claimed tax liens on December 3, 1947 ;

(c) that the real property was registered under the Land Title Law of California [Gen. Laws of Cal. , Act 8589], but plaintiff's notices of tax lien were never entered on the register as provided by §95 of the Land Title Law;

(d) that at the time of the filing of plaintiff's notices of tax lien, defendants Albert and Beryl Breaux were owners of the real property, subject to an outstanding deed of trust in favor of the Hollywood State Bank, with defendant Title Insurance and Trust Company as trustee;

(e) that a full reconveyance of the deed of trust described in paragraph (d) was executed April 5, 1948 ;

(f) that defendant Title Insurance and Trust Company is now the owner of the real property;

(g) that although the obligation of the deed of trust described in paragraph (d) was discharged with funds provided by the predecessor in interest of defendant Title Insurance and Trust Company, it does not appear that said defendant ever succeeded to any interest under that deed of trust;

(h) that a lien on the real property in controversy arose on the first Monday in March, 1952 in favor of defendant County of Los Angeles for real property taxes for the fiscal year 1952-1953;

(i) that California 's Land Title Law declares that liens arising under the laws of the United States , "which the statutes of California cannot require to appear on the register" are exempt from the requirements of the act [Gen. Laws of Cal. , Act 8589, §34];

(j) that a state has no power to require the tax systems of the United States to be subject to the recording laws of the state [U. S. Const. Art. I, §8; United States v. Snyder, 149 U. S. 210 (1893)];

(k) that the United States, by filing the notices of tax lien in the office of the County Recorder, acquired "valid liens" within the meaning of §3672 of the Internal Revenue Code, and accordingly the rights of the plaintiff in the land in question are superior to the rights of the defendants [Michigan v. United States, 317 U. S. 338 (1942) [43-1 USTC ¶9225]; United States v. City of Greenville, 118 Fed. (2d) 963 (4th Cir. 1941) [41-1 USTC ¶9381]]; and

(1) that the rights of the parties in the property are in the following order of priority: (1.) United States to the extent of its tax liens, (2.) County of Los Angeles to the extent of its tax liens, and (3.) Title Insurance and Trust Company.

IT IS NOW ORDERED that findings and judgment be awarded in favor of the plaintiff and against the defendants as prayed for in the complaint; that the real property be sold as provided by Int. Rev. Code §3678 and 28 U. S. C. §2001 et seq., and that the proceeds of the sale be distributed in accordance with the order of priority of the parties to the extent of their interests in said property.

IT IS FURTHER ORDERED that the attorneys for the plaintiff submit findings of fact, conclusions of law and judgment pursuant to local rule 7 within ten days.

IT IS FURTHER ORDERED that the Clerk this day serve copies of this order by United States mail on the attorneys for the parties appearing in this action, and upon defendants Albert and Beryl Breaux.

Findings of Fact and Conclusions of Law (March 12, 1953)

The within cause came on regularly for trial on December 4, 1952, before the Honorable William C. Mathes, District Judge; the plaintiff appeared by its attorneys, Walter S. Binns, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, and Eugene Harpole and Frank W. Mahoney, Special Attorneys, Bureau of Internal Revenue; defendant County of Los Angeles appeared by Harold W. Kennedy, County Counsel, and John D. Maharg, Deputy County Counsel, and defendant Title Insurance and Trust Company appeared by James F. Healey, Jr.; and no one appearing for the other defendants sued and served herein; and it appearing that due and proper notice of the trial of said action had been given in the time and manner as required by law; and it further appearing that each and all of the other defendants not appearing in said trial had been duly and regularly served with process and failed to appear in said action or to answer the complaint of plaintiff on file herein, that the default of said defendants and each of them for so failing to appear or to answer the complaint of plaintiff has been duly and regularly entered; and evidence both oral and written having been presented and the Court being duly advised and having heretofore filed its order for findings and judgment, now makes its

Findings of Fact

I. That this action was authorized by the Commissioner of Internal Revenue and was brought under the direction of the Attorney General of the United States.

II. At all times mentioned the defendants Albert Emery Breaux and Beryl V. Breaux were residents of Los Angeles County , California .

III. The defendant Title Insurance and Trust Company is a corporation organized and existing by virtue of the laws of the State of California with its principal place of business in Los Angeles County , California .

IV. That defendant County of Los Angeles is a body corporate and politic and political subdivision of the State of California .

V. That on December 13, 1946 , Albert Emery Breaux and Beryl V. Breaux acquired title to the following described real property situate in the County of Los Angeles , State of California :

"Lot 42, Block A of Tract 4035, as per map recorded in Book 43, page 13 of Maps in the office of the County Recorder , Los Angeles County ."

VI. That said real property is registered under the provisions of the California Land Title Law (Deering's General Laws, Act 8589).

VII. A deed of trust dated August 26, 1946, was executed by Albert Emery Breaux and Beryl V. Breaux, his wife, to Title Insurance and Trust Company, a corporation, Trustee, to secure an indebtedness of $5,000.00, in favor of Hollywood State Bank, a corporation, and any other amounts payable under the terms thereof, and was filed for registration December 13, 1946, as Document No. 30406-Q.

VIII. That on June 6, 1947, the Commissioner of Internal Revenue duly assessed income taxes for the year 1946 against Albert Emery Breaux in the sum of $4,220.18, plus interest of $60.23, or a total of $4,280.41; that said assessment list was received by the Collector of Internal Revenue for the Sixth Collection District of California on June 9, 1947; that notice and demand for payment was made on June 30, 1947; that despite said notice and demand the said sum has not been paid and the whole thereof, together with interest as prescribed by law remains outstanding and unpaid; that on December 3, 1947, the Collector of Internal Revenue filed a notice of tax lien with the County Recorder, Los Angeles County, California, covering said unpaid income tax.

IX. That on June 6, 1947, the Commissioner of Internal Revenue duly assessed income taxes for the year 1946 against Beryl Vera Breaux in the sum of $4,468.93, plus interest of $63.79, or a total of $4,532.72; that said assessment list was received by the Collector of Internal Revenue for the Sixth Collection District of California on June 9, 1947; that notice and demand for payment was made on June 30, 1947; that partial payment only has been made of said amount, and that a balance of $2,532.72, plus interest, remains outstanding and unpaid; that on December 3, 1947, the Collector of Internal Revenue filed a notice of tax lien with the County Recorder, Los Angeles County, California, covering said unpaid income tax.

X. The beneficial interest under said deed of trust dated August 26, 1946, was assigned of record by Hollywood State Bank to California-Western States Life Insurance Company by assignment dated December 23, 1947, as Document No. 30444-P.

XI. A full reconveyance of the deed of trust described in Paragraph VII above was filed with the Registrar on April 9, 1948 , as Document #7873-Q.

XII. On December 26, 1947 , a deed of trust was executed by Albert Emery Breaux and Beryl Vera Breaux to Title Insurance and Trust Company, a corporation, Trustee, to secure an indebtedness of $8,500.00 in favor of Samuel B. Barnett, Beneficiary. Said deed of trust was filed for registration on January 16, 1948 as Document No. 1119-Q.

XIII. That the deed of trust described in Finding No. VII was discharged with funds provided by the deed of trust described in Finding XII above; but defendant Title Insurance and Trust Company did not succeed to any interest in the deed of trust dated August 26, 1946 .

XIV. That a notice of default under the terms of the deed of trust described in Finding XII by Samuel B. Barnett, as alleged owner and holder of the note secured thereby, was filed May 17, 1948, as document No. 10622-Q.

XV. The beneficial interest under said deed of trust referred to in Finding XII above was assigned of record by Samuel B. Barnett to Title Insurance and Trust Company, a corporation, by assignment dated July 21, 1948, and registered on August 9, 1948, as Document No. 16599-Q.

XVI. A trustee's deed, pursuant to foreclosure of said last mentioned deed of trust, dated August 8, 1950, executed by Title Insurance and Trust Company, as Trustee, in favor of Title Insurance and Trust Company, a California corporation, was registered on October 24, 1950, as Document No. 33557-S, and certificate of title issued to Title Insurance and Trust Company as Document No. YH 95905.

XVII. That a lien arose on the 1st Monday in March, 1952, in favor of the County of Los Angeles for real property taxes for the 1952-1953 year in the amount of $183.52.

XVIII. That on December 10, 1952 , defendant, Title Insurance & Trust Company, paid the first installment of real property taxes for the year 1952-1953 in the sum of $91.77.

Conclusions of Law

I. That the United States by filing notices of tax lien in the office of the County Recorder acquired valid liens within the meaning of Internal Revenue Code Section 3672.

II. That the United States is not subject to the recording laws of the State of California . [ U. S. Const. Art. 1, §8; United States v. Snyder, 149 U. S. 210 (1893)]:

III. That the liens of the United States upon the property in question are prior and paramount to the claims of any of the defendants.

IV. That the plaintiff is entitled to a decree foreclosing its liens against said real property and to a sale of the saie real property, with the proceeds of the sale to be applied as follows:

FIRST: to the payment of the Marshal's fees, disbursements, and expenses of sale;

SECOND: to the costs of this action;

THIRD: to the United States of America the sum of $5,697.64 as of January 15, 1953, plus the sum of $0.69 interest per day from said date to date of payment, and the further sum of $3,434.03 as of January 15, 1953, plus the sum of $0.40 interest per day to date of payment;

FOURTH: to the County of Los Angeles the sum of $91.75 plus statutory interest and penalties after April 20, 1953 .

FIFTH: the balance to the Title Insurance and Trust Company.

LET JUDGMENT BE ENTERED ACCORDINGLY.

 

 

[80-1 USTC ¶9158]Manalis Finance Co., a co-partnership, Plaintiff-Appellee v. United States of America, Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 78-1130, 611 F2d 1270, 1/15/80

[Code Sec. 6323]

Lien for taxes: Priority.--A claim by a creditor against a hospital that failed to pay over employment taxes was held to have priority over a federal tax lien. The creditor's security interest under California law was perfected. The district court's interpretation of the California law concerning the creditor's rights to certain funds owned by the hospital was upheld. The district court was not bound by a state court opinion holding that the statute made the creditor's claim unenforceable against a federal claim.

Jay S. Bulmash, Kirsch, Bulmash & Assocs., Inc., 2805 Beverly Dr., Beverly Hills, California, Stephen J. Swift, San Francisco, Cal., for plaintiff-appellee. Daniel F. Ross, Washington, D. C., for defendant-appellant.

Before WRIGHT, SNEED, and FARRIS, Circuit Judges.

Opinion

WRIGHT, Circuit Judge:

This appeal involves conflicting claims to Medi-Cal funds owed Manchester Community Hospital . The dispute is between Manalis, a lender holding a perfected security interest in the hospital's accounts receivable, and the United States , which claims the money under a federal tax lien resulting from the hospital's failure to pay federal employment taxes.

The government appeals from a decision that, under I. R. C. §6323, the security interest had priority over the federal tax lien. It contends that the district court erred in its interpretation of §14115.5 of the California Welfare and Institutions Code, which concerns an assignee's right to assert a claim to Medi-Cal funds. In addition, it asserts that the court's application of I. R. C. §6323 was erroneous. This court's jurisdiction derives from 28 U. S. C. §1291.

We conclude that the district court correctly interpreted and applied both statutes and we affirm its decision.

Facts

Manchester Community Hospital , owned by GAB Corporation, borrowed money from Manalis, assigning its accounts receivable as collateral and security for the loan. A U. C. C. financing statement reflecting this assignment was filed in California in 1971. The statement served to perfect Manalis' security interest. Cal. Com. Code §9302.

Funds owed by Medi-Cal were included in the hospital's accounts receivable. These funds were to be paid out by Blue Shield as a fiscal intermediary for the state in the admin istration of the Medi-Cal program.

The hospital failed to pay its state and federal employment taxes in 1972-73. To compensate for the state tax deficiency, California levied upon and received from Blue Shield $14,384.37 that had been owed the hospital by Medi-Cal. Manalis sued in state court to recover the funds, asserting that its prior right to them was established by its perfected security interest.

The state trial court held for the state and was affirmed by the state Court of Appeal in Manalis Finance Co. v. Gedulig, 47 Cal. App. 3d 672, 121 Cal. Rptr. 93 (1975). The basis for the latter's decision was §14115.5 of the California Welfare and Institutions Code, which says:

Moneys payable or rights existing under this chapter [Basic Health Care] shall be subject to any claim, lien or offset of the State of California, and any claim of the United States of America made pursuant to federal statute, but shall not otherwise be subject to execution, levy, attachment, garnishment, or other legal process, and no transfer or assignment, at law or in equity, of any right of a provider of health care to any payment shall be enforceable against the state, a fiscal intermediary or carrier.

The Court of Appeal found the statute precluded Manalis from enforcing its assignment of Medi-Cal funds against the state of California . It also found the statute to be constitutional, despite Manalis' equal protection and due process challenges. In the course of its discussion of the constitutional issues, the court commented in a footnote:

The statute does not declare the assignment void as between the parties. It is limited to the situation of unenforceability of an assignment in a manner which will defeat a claim of the state or the United States .

47 Cal. App. 3d at 676 n. 1., 121 Cal. Rptr. at 95 n. 1.

The California Supreme Court declined to review the case.

Like California , the government levied upon the Medi-Cal money owed the hospital to obtain the employment taxes owed it. It received $22,493.91 from Blue Shield in 1973 and claims another $52,280.40 still held by Blue Shield. Manalis brought suit against the United States in federal district court, asserting its prior right to the funds because of its perfected security interest. The district court agreed with Manalis.

Although the Gedulig footnote indicated to the contrary, the district court found that §14115.5 did not make Manalis' claim unenforceable against the United States . Moreover, it found that Manalis' interest was properly a "security interest" under I. R. C. §6323(h)(1) and therefore prior to the government's subsequent tax lien under §6323(a) Manalis Finance Co. v. United States [77-2 USTC ¶9757], 442 F. Supp. 579 (C. D. Cal. 1977).

On appeal, the government makes essentially two claims: (1) that the district court erred in interpreting §14115.5 contrary to the ruling of the state court; and (2) that the district court erred in finding that Manalis' security interest met the definitional requirements of §6323(h)(1).

Discussion

Section 14115.5

The government argues that the district court erroneously failed to follow the California Court of Appeal's decision on §14115.5 in two respects. First, it did not defer to the holding of Gedulig. The state court had held the state's tax claim to be prior to Manalis' security interest. The federal court said in dictum that §14115.5 protected the state only in its capacity as Medi-Cal payor. Because this contention is not relevant to our decision, we discuss it no further.

Second, the district court did not defer to dictum in Gedulig (in the footnote quoted above) to the effect that §14115.5 would make an assignment of Medi-Cal funds unenforceable against a federal claim. The government contends that the district court was bound by the state court opinion.

1. Deference to state court in Commissioner v. Estate of Bosch [67-2 USTC ¶12,491], 387 U. S. 456 (1967), the Supreme Court said that, when application of a federal statute depends on an issue of state law, a federal court should defer to the ruling of the highest court of the state on that issue. Absent such a decision by the highest state court,

federal authorities must apply what they find to be the state law after giving "proper regard" to relevant rulings of other courts of the State. In this respect, it may be said to be, in effect, sitting as a state court.

Id. at 465, citing Bernhardt v. Polygraphic Co., 350 U. S. 198 (1956).

The district court cited Bosch to support the statement that it was "not bound by the decision of the state Court of Appeal." 442 F. Supp. at 582. The government argues that the court misapplied Bosch and should have applied a test such as that in Fidelity Union Trust Co. v. Field, 311 U. S. 169 (1940), which says:

An intermediate state court in declaring and applying the state law is acting as an organ of the State and its determination, in the absence of more convincing evidence of what the state law is, should be followed by a federal court in deciding a state question.

Id. at 177-78.

This circuit has used language similar to that in Fidelity Union Trust. See e.g., Community Nat. Bank v. Fidelity & Deposit Co., 563 F. 2d 1318, 1321 n. 1. (9th Cir. 1977); Klingebiel v. Lockheed Aircraft Corp., 494 F. 2d 345, 346 n. 2 (9th Cir. 1974). Recently it has also quoted and applied the Bosch standard. See Lewis v. Anderson, -- F. 2d (9the Cir. Oct. 29, 1979 ); Preaseau v. Prudential Insur. Co. , 591 F. 2d 74, 82 n. 9 (9th Cir. 1979).

Under either standard the district court's analysis of §14115.5 was proper.

2. The Gedulig dictum. We agree with the district court's observation that:

the dictum substitutes the words "the state or the United States " for the statute's "the state, a fiscal intermediary or carrier" as those entities against which an assignment cannot be enforced. There is no basis for this judicial amendment of the clear language of Section 14115.5

442 F. Supp. at 582.

The Gedulig dictum can hardly be called "considered dictum." Cf. Rocky Mountain Fire & Casualty Co. v. Dairyland Insur. Co. , 452 F. 2d 603, 603-04 (9th Cir., 1971) ("A federal court exercising diversity jurisdiction is bound to follow the considered dicta as well as the holdings of state court decisions.") The state court inserted the footnote only to explain that §14115.5 would not render an assignment of Medi-Cal funds void or unenforceable in all instances. The footnote was not intended to be a definitive resolution of the statute's meaning with reference to federal claims.

There was no error in the district court's interpretation of §14115.5.

Section 6323

I. R. C. §6323 sets forth the priority rules to be used when a federal tax lien has been imposed. The statute was significantly amended by the Federal Tax Lien Act of 1966. A primary purpose of the Federal Tax Lien Act was "to conform the lien provisions of the internal revenue laws to the concepts developed in [the] Uniform Commercial Code" and thereby to "[improve] the status of private secured creditors." H. R. Rep. No. 1884, 89th Cong., 2d Sess. 1-2 (1966).

At issue in this case is §6323(h)(1). Section 6323(a) provides that an unfiled tax lien is not valid as against a prior security interest, and §6323(h)(1) defines "security interest" as:

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

The government argues that Manalis' interest is not a "security interest" because it is not "protected under local law against a subsequent judgment lien." It relies on language from Dragstrem v. Obermeyer [77-1 USTC ¶9301], 549 F. 2d 20, 26 (7th Cir. 1977), to the effect that §6323(h)(1) requires the security interest to be protected against "any hypothetical judgment lien creditor." Gedulig held that Manalis' security interest was not protected against the state, which thereby becomes a hypothetical judgment lien creditor. Therefore, the government asserts, the security interest cannot be accorded priority under §6323.

We do not agree with that interpretation of §6323(h)(1) Dragstrem is distinguishable. The question there was whether an unperfected security interest could be prior to a federal tax lien when the United States had actual knowledge of the security interest at the time it filed the lien. Here Manalis' security interest was properly perfected.

Other courts have indicated that the definition in §6323(h)(1) encompasses perfected security interests. In Slodov v. United States [78-1 USTC ¶9449], 436 U. S. 238 (1978), the Supreme Court said in dictum that "the Code specifically subordinates tax liens to the interests of certain others in the property, generally including those with a perfected security interest in the property." Id. at 256-257. In a footnote, the Court observed that "Under the UCC, a perfected security interest is superior to a judgment lien creditor's claim in the property, see UCC §§ 9-301; 9-312." Id. at 258 n. 22. The Court has linked the language of §6323(h)(L)(A) with the notion of perfection under the UCC.

The Fifth Circuit also has said that "§6323 specifically subordinates federal tax liens to security interests . . . that are perfected under the U. C. C. provisions of state law prior to the filing of the tax lien." Aetna Insur. Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287], 591 F. 2d 1035, 1038 (5th Cir. 1979).

Treasury regulations also indicate that §6323(h)(1) was meant to include perfected interests. Treas. Reg. §301.6323(h)-1(a)(2) (1976) says "a security interest is deemed to be protected against a subsequent judgment lien on the date on which all actions required under local law to establish the priority of a security interest against a judgment lien have been taken." The phrase "actions required under local law to establish the priority of a security interest" generally describes the process of perfection.

Finally, the government's interpretation of §6323(h)(1) is contrary to Congress' intent, expressed in the Federal Tax Lien Act, to improve the position of the private secured creditor in the face of a federal tax lien on the secured property. If §6323(h)(1) requires the security interest to be protected against "any hypothetical judgment lien creditor," then no security interest perfected under the U. C. C. would qualify. Sections 9-307 through 9-310 of the U. C. C. describe various situations in which prior, perfected security interests can be defeated by a subsequent claim to the secured property.

There was no error in the district court's interpretation or application of §6323.

AFFIRMED.

 

 

[43-2 USTC ¶9572] United States of America , Plaintiff, v. Rudolph Spreckels, Bank of America National Trust & Savings Association et al., Defendants

Southern Division of the United States District Court for the Northern District of California, No. 3970-L, 50 FSupp 789, Filed July 21, 1943

Priority of judgment creditors: Assertion of claim against third parties.--Because of the Government's failure to properly assert its claims against third persons with adverse interests within the statutory period applicable to the assertion of a lien for unpaid taxes, the Court holds that the assignee of a judgment, upon which execution had been taken, should prevail as to all property acquired thereunder, except certain real property on which the United States had a valid and existing lien as against all the world at the time of the issuance of the execution.

Frank J. Hennessy, U. S. Attorney, Thos. C. Lynch, Assistant U. S. Attorney, Post Office Bldg., San Francisco , Calif. for plaintiff. Keyes & Erskine, 625 Market St., San Francisco, Calif., Attorneys for defendant Bank of America National Trust & Savings Association.

Opinion

ST. SURE, District Judge:

The Government sues in equity, under §3678 of the Internal Revenue Code, to enforce certain liens upon property of Rudolph Spreckels for balance of income taxes due for the year 1928 in the amount of $603,179.41 plus interest. The Collector of Internal Revenue made due demand upon the taxpayer for payment, but no payments have been made on that balance.

[The Facts]

On August 7, 1934, the Collector reported a notice of lien for taxes in the recorders' offices of Kings, Shasta and Kern counties, and the City and County of San Francisco; and in the clerks' offices of the United States District Court, Northern District of California, Northern and Southern Divisions, and of the Northern Division of the Southern District of California. During August of 1934 notices of lien and levy were served upon a number of corporations and associations in which the taxpayer held stock.

On November 22, 1934 , the taxpayer agreed in writing to waive the statutory period for collection of the aforementioned balance, and the time for collection was extended to December 31, 1935 . This suit was filed on December 30, 1935 , one day before the expiration of the time specified in the waiver. A copy of the complaint and subpoena were served on the taxpayer and returned and filed on April 2, 1936 . The other defendants named were served in October of 1940.

The defendant Bank of America National Trust and Savings Association, hereinafter called the bank, asserts an interest adverse to the claim of the Government, under a judgment against the taxpayer in the sum of $923,031.90 obtained by its assignee on June 3, 1936 . A transcript of the judgment was recorded in Kings county on October 10, 1936 , in the City and County of San Francisco on October 28, 1936 , and in San Mateo county on November 14, 1936 . The bank had execution issued upon the judgment and obtained title to various properties belonging to the taxpayer, on which the Government claims it has a prior lien.

Defendant bank contends that the statute of limitations ran as to it because of the failure of the Government to serve it with the complaint and subpoena until October of 1940, and that therefore any lien the Government might claim to property in its hands expired.

[Equity Action Is Commenced by Filing of Complaint with Intent to Prosecute Suit Diligently]

The modern Federal rule is that an action in equity is commenced by the filing of a complaint with the bona fide intent to prosecute the suit diligently provided there is no unreasonable delay in the issuance or service of the subpoena. U. S. v. Hardy, 74 Fed. (2d) 841 [35-1 USTC ¶9060]; United States v. Miller, 164 Fed. 444; Linn & Lane Timber Company v. U. S. , 236 U. S. 574. It would seem that a delay of four years and ten months in serving a defendant who was during that period available for service at all times is unreasonable on its face. The suit cannot therefore be deemed to have been commenced as to the bank as of the date of its filing.

[Application of Doctrine of Laches to Government]

The argument of counsel for the Government that the delay was due to laches on the part of its officers and that the doctrine of laches is not applicable to the United States , is not tenable. The United States as well as a private individual is bound by statutes of limitation, and it may allow its rights to lapse as well by failing to issue and serve process within a reasonable time, as by failing to file an action within the statutory period.

The Government claims that there is no statute of limitations applicable to this suit; that it is an action in equity which could have been brought at any time. §276(c) of the Internal Revenue Code provides:

Where the assessment of any income tax imposed by this Chapter has been made within the period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court, but only if begun (1) within six years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner and the taxpayer before the expiration of such six-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

Section 3671 provides that "unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the Collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." To determine when the lien becomes "unenforceable by lapse of time" these two sections should be read together, for if the statute ran on the tax itself the lien, which is only security therefor, should simultaneously expire. This question was before the court in Equitable Life Assurance Society v. Moore, 29 Fed. Supp. 179 [39-2 USTC ¶9775], and the court said:

It was the intent of Congress to give notice to third parties by the filing of the lien, and to continue that lien in existence until satisfied or until six years and such additional period as might be agreed upon by the taxpayer and the Commissioner had expired * * *. I conclude that the statute did not bar the enforcement of the lien until the expiration of the last extension * * *

[Government's Claim Against Third Parties with an Adverse Interest Should Be Asserted in Statutory Period]

I think that the Government should assert its claim against third parties claiming property of the taxpayer adversely to it within the statutory period applicable to the lien against the taxpayer. Otherwise a lien, although forever lost as against the taxpayer, could be indefinitely asserted against his creditors.

The same statutory period should not apply as to property on which the Government had properly recorded and perfected its lien. It is not urged that the taxpayer was not properly sued and served within the statutory period, and the Government did not lose its lien as to him. The Government could not be required to anticipate that third parties would execute in 1936 upon property on which it had perfected its lien, and to have sued to prevent such action in 1935. However, Section 3672 provides that "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Collecter * * * in accordance with the law of the state or territory in which the property subject to the lien is situated, whenever the state or territory has by law provided for the filing of such notice." Act 8487, Deering's General Laws (California Stats. 1923, p. 1124) provides for the filing of notices of liens for internal revenue taxes in the office of the county recorder of the county or counties within which the property subject to such lien is situated.

The lien of the Government was properly recorded in Kings county and attached to the real property located there prior to the time it was executed upon by the bank. The balance of the property to which the bank makes claim under its judgment (with the exception of certain land in Tulare county where no lien was recorded by the Government) consists of intangible personal property. Following the general rule that the situs of such property is the domicile of the owner, the Government should have recorded its lien in San Mateo county where the taxpayer resided. This was not done until 1937, after the bank had executed on such property under its judgment.

[Conclusion]

I conclude that the rights of the bank should prevail as to all property acquired under its judgment except the real property located in Kings county, upon which the United States had a valid and existing lien as against all the world, at the time execution was issued.

Judgment will be entered accordingly.

 

 

[76-1 USTC ¶9196]In the Matter of: Crocker National Bank, formerly Crocker-Citizens National Bank, a national banking association, Plaintiff v. Trical Manufacturing Company, a partnership, Trical Manufacturing Co., Inc., Trical Manufacturing and Engineering Inc., L. A. Warner, Lon A. Warner, Joel R. Bennett, Dean Sakel, United States of America, Defendants United States of America, Interpleader-Appellee v. Dean Sakel, Interpleader-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 74-2230, 9/5/75, Affirming District Court decision at, 74-1 USTC ¶9224, 373 FSupp 461

[Code Sec. 6323]

Lien for taxes: Priority: Pre-judgment creditor.--A tax lien against the assets of a corporate debtor, executed before the appellant (a judgment creditor of the corporation) received his judgment, had priority over the appellant's claim. The court, citing state law, rejected the argument that the attachment of property belonging to the corporation's predecessor prevented the corporation from taking property rights to which a tax lien could attach.

A. Alan Berger, Suite 1300 , 2 N. Second St. , San Jose , Calif. , for plaintiff. James L. Browning Jr., United States Attorney, San Francisco, Calif., Scott P. Crampton, Assistant Attorney General, Ernest J. Brown, Acting Chief, Department of Justice, Washington, D. C. 20530, for defendants.

Before KOELSCH and HUFSTEDLER, Circuit Judges, and SMITH, ^* District Judge.

Opinion

KOELSCH, Circuit Judge:

This is an appeal from a summary judgment for the United States . ¹

The question in this case results from the following sequence of events:

(1) Appellant, an unsecured creditor, placed a pre-judgment writ of attachment on the property of a partnership; (2) the partnership transferred title to the property to a successor corporation; (3) the corporation incurred unpaid tax liabilities; (4) a federal tax lien was recorded; and (5) the attaching creditor thereafter obtained a judgment. The question is whether the tax collector or appellant has prior right to the property.

The answer is: "the tax collector."

The United States has a lien under 26 U. S. C. §6321 against "all property and rights to property" of taxpayer corporation, arising at the time the tax is assessed, 26 U. S. C. §6322. Under 26 U. S. C. §6323(a), the tax lien has priority over the claim of a judgment lien creditor if notice of the tax lien is filed before the judgment is obtained; it is undisputed here that it was. As a result, appellant quite properly concedes the incontestable fact that, if the partnership had not transferred the property and itself incurred the unpaid assessment, his rights as an attaching creditor would be inferior to the tax lien. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). He nevertheless argues that transfer to the corporation alters the result.

The essential thrust of the argument is that the tax lien attaches only to property of the taxpayer; that under California law the corporation took the partnership property subject to the writ of attachment; and that upon perfection of the attachment lien by judgment it became apparent that the corporation did not obtain property to which the tax lien could attach.

That position is untenable in this case. As the parties recognize, property rights of the taxpayer are determined by reference to state law. See, e.g., Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513 (1960). It is true that under some circumstances the Court has held that a taxpayer did not obtain in any real sense property rights to which a tax lien could attach when under state law the taxpayer's rights in the property were subordinated to those of other claimants and did not vest until the other claims were satisfied. See, e.g., Aquilino, supra; United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960).

However, that is not the case here. Under California law a prejudgment attachment gives the attaching creditor an inchoate lien contingent on the outcome of the suit; it does not affect title or prevent transfer of the property subject to the lien. Security Trust & Savings Bank, supra, at 50; Bass v. Stodd, 357 F. 2d 458, 464-465 (9th Cir. 1966); Puissegur v. Yarbrough, 29 Cal. 2d 409, 412, 175 P. 2d 830, 831 (1946); Howe v. Johnson, 117 Cal. 37, 48 P. 978 (1897). The transferee of the property takes what the transferor had--a vested interest subject to divestment upon the contingency of plaintiff's obtaining judgment occurring. Hence the corporation here had a present property right to which the tax lien could attach, and the statute in terms makes the tax lien once recorded superior to the inchoate lien. ²

Indeed, appellant's position is necessarily rejected by Security Trust & Savings Bank, supra. The situation there was identical to that presented here, save there was no intervening transfer after the attachment lien was placed on the property. Were appellant's position accepted--that such a lien immediately divests the owner of the property in favor of the creditor to the extent the contingency of judgment is subsequently fulfilled--then the taxpayer in Security Trust & Savings Bank would have had precisely the same interest appellant argues the transferee corporation has here--the fact of transfer cannot alter the nature of the rights transferred--and under appellant's theory the creditor would have had rights superior to the government because the tax lien did not attach to property of the taxpayer. That of course was not the case. Taxpayer's position is essentially the doctrine of "relation back" of the time of perfection, which the Court explicitly rejected in Security Trust & Savings Bank. 340 U. S. at 50.

AFFIRMED.

^* The Honorable Russell E. Smith, United States District Judge for the District of Montana, sitting by designation.

¹ The district court's opinion is reported at Crocker National Bank v. Trical Manufacturing Co. [74-1 USTC ¶9224], 373 F. Supp. 461 (N. D. Cal. 1973).

² As Justice Harlan pointed out in his Aquilino dissent, the scheme by which state law determines property rights and federal law determines priorities can conceivably lead to defeat of the federal priority scheme by formalistic redefinition of state law to divest the taxpayer of property rights upon attachment of inchoate liens. See 363 U. S. at 520. Whatever the merits of the Aquilino Court's reconciliation of federal tax policy with the traditional policy of state determination of property interests, we think the doctrine of the Aquilino and Durham Lumber cases is limited to those instances, unlike here, where the state law gives the taxpayer no right to the property. Otherwise the priority scheme of federal law attaches. The state definition of property interests in this context is simply the definition of the relationship of conflicting parties with regard to the same piece of property. The tax lien law does the same thing. So long as the state recognizes some rights in relation to the property in the taxpayer, the Supremacy Clause enters to give the government whatever priorities Congress has deemed proper. That judgment is ultimately based on fairness, public need for revenues, and the justifiable expectations of competing parties to the property. The 1966 amendment of the tax lien law defined priorities to give some parties with fairly certain and justifiable expectations such as those created by purchase, mechanics liens, security interests and judgment liens precedence over unnoticed tax liens, and gave the public policy of revenue raising precedence over more inchoate expectations against property needed to satisfy tax claims. As applied here, the priority scheme prefers federal tax needs to appellant's conditional expectation that he will obtain a judgment and thereafter satisfy it out of the particular property, in large part because the creditor did not extend credit in reliance on the property. Transfer does not alter that policy, as the government's interest in collection remains the same, particularly here where the transfer was simply upon the incorporation of the partnership and did not alter the risk of creation of subsequent tax liability.

 

 

[45-2 USTC ¶9378]United States of America, Plaintiff, v. Record Publishing Company, a corporation, John Doe Richards, Richard Roe Deuel, co-partners doing business under the firm name and style of Richards & Deuel, Acme Color Print Company, Ltd., a corporation, State of California Employment Commission, State of California Department of Employment, John Doe, Richard Roe and Black & White Company, Defendants

In the United States District Court for the Northern District of California, Northern Division, Civil--4807, 60 FSupp 194, April 20, 1945, [Priority of lien for unpaid income taxes.]

 

[58-2 USTC ¶9837]In the Matter of The Aztec Motel, a Copartnership Consisting of Paul Edward Timm and Dart Timm, Bankrupt

U. S. District Court, So. Dist. Calif. , So. Div., In Bankruptcy No. 5160, 8/21/58

Lien for taxes: Priority against pledgee: Acquisition of bankrupt's property for less than fair value with notice of government lien.--Prior to the filing by taxpayer of a real property arrangement, but after the government had perfected its tax lien by filing notice thereof in the San Diego County Recorder's office, an individual acquired possession of taxpayer's pleasure cabin cruiser as security for the repayment of a $10,000 loan he made to the taxpayer. The Court, after finding that the vessel's home port was San Diego, that the lender had notice of the federal lien when he made the loan, and that the consideration he gave for the transfer of the boat was less than its fair value, concluded that the government's lien had priority over the lender's claim of a lien for $10,000 on the proceeds from the sale of the cruiser. Such proceeds were accordingly ordered to be first applied in satisfaction of the tax lien, whatever balance remaining to be used in payment of the lender's claim.

Homer G. Clark, Trustee in pro per. Laughlin E. Waters, U. S. Attorney, Edward R. McHale, Assistant U. S. Attorney, Eugene Harpole, Cyrus A. Johnson, Internal Revenue Service, for U. S. Charles A. Pratt, Jr., for respondent on review, Lester W. Knapp.

Findings of Fact, Conclusions of Law and Judgment Upon Petition for Review of Referee's Order of December 28, 1957, as Embodied in Referee's Order of January 13, 1958

WEINBERGER, District Judge:

After obtaining an extension of time within which so to do, the United States , on March 1, 1958 , filed a Petition for Review of the Referee's Order of January 13, 1958 . Thereafter the Referee filed his Certificate on Review. The United States and Lester W. Knapp thereafter filed briefs setting forth their respective contentions and the matter was submitted to the Court for Decision. The Court, after consideration of the Referee's Certificate on Review and the briefs of the parties, on July 30, 1958 , made a Minute Order of its decision. In accordance with said Minute Order the Court makes the following:

Findings of Fact

I. That the Pleasure Cabin Cruiser "Patricia", was built by Shane Boat Works, Seattle , Washington , and was prior to November 7, 1956 , registered in the name of Paul E. Timm.

II. That on September 26, 1956, and while the "Patricia" was owned by and registered in the name of Paul E. Timm, a Notice of Federal tax lien in the sum of $19,741.68, with interest to accrue thereon according to law was filed in the Office of the County Recorder of San Diego County, California, to secure Internal Revenue taxes previously assessed against said Paul E. Timm, doing business as The Aztec Motel.

III. That the Internal Revenue taxes secured by said lien were assessed in the following amounts and on the following dates:

Class of                   Assessment

Tax & Period                     Date           Amount

WT-FICA 3Q'53 ....            2/15/54         $ 254.49

WT-FICA 4Q'53 ....            2/15/54           338.22

WT-FICA 1Q'54 ....            5/27/54           493.18

WT-FICA 3Q'54 ....             1/7/55         1,285.01

WT-FICA 4Q'54 ....            4/22/55           553.47

WT-FICA 1Q'55 ....            5/13/55           719.92

WT-FICA 2Q'55 ....            8/15/55         2,302.26

WT-FICA 2Q'55 ....           12/23/55            37.57

WT-FICA 3Q'55 ....           11/23/55         6,233.24

WT-FICA 3Q'55 ....            4/30/56           100.90

WT-FICA 4Q'55 ....            4/11/56           642.40

WT-FICA 4Q'55 ....           11/23/56         3,496.41

WT-FICA 4Q'55 ....             6/8/56            54.24

FUTA 1955 ........            4/11/56         2,326.08

Income 1953 ......            
9/30/55
           735.25

Income 1953 ......           
11/23/55
           167.54

 

IV. That subsequent to said Assessments, Notices and Demands for payment were issued to said Paul E. Timm, the taxpayer, by the Director of Internal Revenue.

V. That no part of the Internal Revenue taxes described in said notice of lien or the interest thereon has been paid.

VI. That prior to November 6, 1956 , Lester W. Knapp personally knew of the existence of said Federal tax lien against Paul E. Timm, the then owner of the "Patricia".

VII. Thereafter and on November 6, 1956 , Lester W. Knapp, acquired possession of the "Patricia" and on November 7, 1956 , caused it to be registered by the United States Coast Guard Motorboat Registry with himself as owner under the Number 25C878.

VIII. That subsequent to these events a real property arrangement under Chapter XII of the Bankruptcy Act was filed in the matter of the AZTEC MOTEL by Paul Edward Timm and Dart Timm on March 4, 1957, in the United States District Court for the Southern District of California, Central Division.

IX. That on November 6, 1956, Lester W. Knapp paid to said Paul E. Timm the sum of $10,000 in cash and Lester W. Knapp granted to said Paul E. Timm an option to repurchase the "Patricia" on or before the 7th day of May, 1957, for the sum of $13,000 together with such additional sums as might be advanced by said Lester W. Knapp for maintenance, taxes, licenses and insurance on said vessel to said date.

X. That said Lester W. Knapp has been in possession of said vessel at all times since on or about November 6, 1956 , and that said option for repurchase of said vessel has never been exercised by said Paul E. Timm or by any other person.

XI. That since November 6, 1956 , said Lester W. Knapp has advanced the sum of $2,033.74 on account of maintenance, taxes, licenses and insurance for said vessel.

XII. That possession of the "Patricia" was so transferred to said Lester W. Knapp by said Paul E. Timm as security for repayment of the principal sum of $10,000 together with interest plus such sums as might be advanced by said Lester W. Knapp for maintenance, taxes, licenses and insurance on the said "Patricia".

XIII. That the consideration given and paid by said Lester W. Knapp for the transfer of the "Patricia" from said Paul E. Timm was less than fair.

XIV. That at no time has the United States taken or had possession of the "Patricia" or made demand for surrender of same; and said Federal tax liens have not been enforced against the "Patricia" by sale thereof.

XV. That at all times herein mentioned the Port of San Diego, California, has been the home port of the "Patricia".

From the foregoing Findings of Fact the Court draws the following:

Conclusions of Law

I. That the United States has at all times since September 26, 1956, by virtue of the provisions of §6321 and §6323 of the Internal Revenue Code of 1954 (26 U. S. C. A. 6321, 26 U. S. C. A. 6323), held valid tax liens upon said vessel (Patricia) and/or the proceeds from the sale thereof in the sum of $19,741.68, plus interest thereon of $2.92 per day from April 10, 1957, by virtue of having filed notices of Federal tax liens in the office of the County Recorder, San Diego County, California, on September 26, 1956.

II. That said tax liens held by the United States are prior in time and superior in right to any interest Lester W. Knapp had or now has to the vessel "Patricia" or the proceeds from the sale thereof.

III. That the Referee in Bankruptcy erred in his Order of January 13, 1958, by directing payment of the sum of $10,000.00 from the proceeds of the sale of the vessel "Patricia" to Lester W. Knapp before the tax liens of the United States were satisfied.

IV. That the Referee's Order of January 13, 1958, should be reversed insofar as it directs payment to Lester W. Knapp from the proceeds of the sale of the vessel "Patricia" before the tax liens of the United States thereon have been satisfied.

From the foregoing Findings of Fact and Conclusions of Law it is hereby ORDERED, ADJUDGED and DECREED in accordance with the Minute Order of this Court of July 30, 1958:

That the proceeds of the sale of the vessel "Patricia" be first applied toward the satisfaction of the tax liens of the United States which are the subject of this Review, after the payment of the costs and expenses of the sale of said vessel, and that any surplus remaining after satisfaction of said federal tax liens be paid to Lester W. Knapp in satisfaction of his lien or claimed lien of $10,000; that thereafter such sums as may remain from said proceeds, if any, be distributed in such a manner and priority as may thereafter be ordered by the Court or the Referee in Bankruptcy.

 

 

[54-2 USTC ¶9454] United States of America , Plaintiff v. John L. Asher, et al., Defendants

In the United States District Court for the Southern District of California, Central Division, No. 15782-C, June 14, 1954

Liens: Priority of tax lien over creditor's judgment.--A creditor of taxpayer attached a bank account of taxpayer on August 29, 1950. On August 5, 1952 the creditor reduced his claim to judgment. Prior to the latter date the Collector had filed notices of tax levy at the County Recorder 's office, and had levied on the bank. Since the tax liens were perfected before the creditor's claim was reduced to judgment, the tax liens were prior to the judgment.

Laughlin E. Waters, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistants United States Attorneys, and Eugene Harpole, Special Attorney for the Bureau of Internal Revenue, Federal Bldg., Los Angeles 12, Calif., for plaintiff. Swanwick, Donnelly & Proudfit, 629 So. Spring St., Los Angeles 14, Calif. , for California Bank. Hugo A. Steinmeyer and Winfield Jones, 650 So. Spring St., Los Angeles 14, Calif. , for Bank of America , Balter & Balter, 639 So. Spring St., Los Angeles 14, Calif. , for Joseph F. Schouten. Edmund G. Brown, Attorney General, and N. B. Peek, Deputy Attorney General, 600 State Bldg., Los Angeles 12, Calif., for the State of California. Roscoe E. Clough, in propria persona.

Findings of Fact and Conclusions of Law (June 11, 1954)

CARTER, District Judge:

The above matter having come on for hearing before this Court on plaintiff's motion for summary judgment as to defendant Schouten, based on the pleadings and memoranda of the parties, this Court having duly considered the matter, now makes its findings of fact as follows:

Findings of Fact

I. This action was filed pursuant to the provisions of Section 3678 of the Internal Revenue Code (Title 26 U. S. C.) for the recovery of internal revenue taxes and has been authorized by the Commissioner of Internal Revenue and directed by the Attorney General of the United States .

II. On August 15, 1950 , John L. Asher opened a commercial checking account with the Bank of America, Santa Ana Branch, in the name of "John L. Asher, Tax Account." The balance in this account over which this controversy exists, and which has been paid into Court, is $2,617.00.

III. On August 29, 1950, a writ of attachment in the amount of $34,172.77, based on a suit filed on August 28, 1950, by Joseph F. Schouten, defendant herein, in the Superior Court in and for the County of Los Angeles, was served and levied on said Bank in accordance with the provisions of Sections 537, 542 and 543 of the California Code of Civil Procedure.

IV. On September 25, 1950 , the Collector of Internal Revenue received the assessment list for withholding and federal insurance contribution act taxes for the second quarter of 1950 assessed against Asher, et al., dba Asher Oil Refinery. On September 28, 1950 , the plaintiff caused to be served and levied on said Bank a Notice of Levy for the sum of $2,012.98 upon all property, rights to property, money, credits, and/or bank deposits in the possession of the Bank and belonging to John L. Asher.

V. On March 12, 1951 , the Collector of Internal Revenue received the assessment list for withholding and employment taxes assessed against Asher, et al., dba Asher Oil Refinery, for the third quarter of 1950.

VI. On May 17, 1951 , a Notice of Tax Lien covering said assessment of taxes for the third quarter of 1950 in the amount of $434.15 was filed in the office of the County Recorder in and for the County of Los Angeles .

VII. On May 28, 1951 , a Notice of Tax Lien covering said assessment of taxes for the second quarter of 1950 in the amount of $1,908.53 was filed in the office of the County Recorder in and for the County of Los Angeles .

VIII. On November 16, 1951 , plaintiff caused to be served and levied upon said Bank a Notice of Levy for the sum of $2,663.26 upon all property, rights to property, money, credits and/or bank deposits in the possession of the Bank and belonging to John L. Asher.

IX. On August 5, 1952 , Schouten reduced his claim to judgment in the Superior Court action described above in Paragraph III, and on August 7, 1952 , he caused to be served and levied on said Bank a writ of execution in the sum of $34,172.77.

Conclusions of Law

I. The Court has jurisdiction over the parties and subject matter of this action.

II. The liens of the United States for delinquent taxes arose on the dates on which the assessment lists were received by the Collector of Internal Revenue.

III. The defendant, Schouten, did not become a "judgment creditor" within the meaning of Section 3672(a) of the Internal Revenue Code until he had recovered judgment and levied execution.

IV. The liens of the United States , described in the Findings, are prior in time and right to the interest of the defendant, Schouten, with respect to the fund represented by said checking account.

V. A commercial checking account is not a "security" within the meaning of Section 3672(b)(2) of the Internal Revenue Code.

Memorandum to Counsel (June 14, 1954)

This case presents a question of priority of conflicting claims of one Schouten and the United States . On August 29, 1950 , Schouten levied a writ of attachment on a commercial bank account in the name of John L. Asher. The attachment issued from a state court action by Schouten against Asher. On August 5, 1952 , Schouten reduced his claim to judgment and on August 7, 1952 , levied on writ of execution on the same bank account, all without notice of the government claims and liens hereafter listed.

Beginning September 25, 1950, and prior to Schouten's judgment and levy of execution, the Collector of Internal Revenue received from time to time assessment lists for federal taxes against Asher, notices of tax lien for the assessments were filed in the County Recorder's office and the United States caused notices of levy to be served and levied on the bank where Asher's account was maintained, based on the assessment lists. After Schouten's levy of execution the United States caused to be served and levied on the bank a notice of levy and warrant for distraint for the full amount it claimed.

A creditor who attaches a commercial checking account at the commencement of an action does not attain the status of a "judgment creditor" within the meaning of §3672(a) of the Internal Revenue Code until he has reduced his claim to judgment and levied execution. Miller v. Bank of America, [9 cir. 1948] 166 Fed. (2d) 415 [48-1 USTC ¶9185]. Nor can he be considered a "purchaser" within that section. Notices of tax lien filed prior to his becoming a "judgment creditor" therefore, entitle the United States to priority in payment out of the account.

The Supreme Court decision in United States v. Security Trust and Savings Bank of San Diego, [1950] 340 U. S. 49[47] [50-2 USTC ¶9492], renders nugatory the doctrine of relationship back and is controlling here. There are no substantial differences in the California statutes dealing with the attachment of realty involved in that case, and the attachment and garnishment of intangibles or personal property here involved. Finally, a creditor attaching a checking account is not entitled to the protection of Section 3672(b) of the Internal Revenue Code, since a commercial checking account is not a "security" within the definition of that section.

 

 

[40-1 USTC ¶9229]Alexander MacKenzie, Appellant, v. United States of America , Appellee

(CA-9), United States Circuit Court of Appeals for the Ninth Circuit, No. 9299, 109 F2d 540, Decided February 5, 1940

Upon appeal from the District Court of the United States for the Northern District of California, Southern Division.

Tax lien: Priority.--The United States has priority by reason of its tax lien on taxpayer's bank account where notice of its lien was filed after an assignee of taxpayer's creditor had levied an attachment against the bank account but before he obtained judgment. Affirming District Court decision.

Clyde C. Sherwood, of San Francisco , Calif. , for appellant. Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, Warren F. Wattles and Howard D. Pack, Special Assistants to Attorney General, of Washington, D. C., and Frank J. Hennessy, U. S. Attorney, and Esther B. Phillips, Assistant U. S. Attorney, of San Francisco, Calif., for appellee.

Before WILBUR, HANEY, and STEPHENS, Circuit Judges.

STEPHENS, Circuit Judge:

Action instituted by the United States of America to enforce an asserted lien for income taxes on a bank deposit of the Oakland Paving Company in the Central National Bank of Oakland. Appellant is the assignee of one Thornsberry, a creditor of the Paving Company, and claims a prior lien with respect to said bank deposit.

[The Facts]

On April 24, 1930 , said Thornsberry brought suit against the Paving Company to recover upon a promissory note for $4250.00.

On June 26, 1931 , the Commissioner of Internal Revenue of the United States assessed against the Paving Company income taxes and interest for the years 1921, 1922 and 1923 in the total amount of $11,773.27. This assessment was entered upon an assessment list which was received by the Collector of Internal Revenue in San Francisco , California on June 26, 1931 . The Collector gave notice to the Paving Company, and demand for payment on June 29, 1931 , but no part of said taxes and interest has been paid. The statutory period within which collection of these taxes can be made by the United States has been extended to December 31, 1941 , by waivers duly executed by the Paving Company.

On September 4, 1931 , a writ of attachment was issued in the Thornsberry action, and levied by the Sheriff upon the bank account of the Paving Company in the Bank. At that time the Paving Company had on deposit with the Bank the sum of $1681.54.

On April 2, 1932 , the Collector of Internal Revenue at San Francisco filed a notice of federal tax lien against the Paving Company in the sum of $11,773.27 with the Recorder of Alameda County, California, and with the Clerk of the United States District Court at San Francisco , California .

On May 28, 1932, Thornsberry recovered judgment against the Paving Company for $1700.00 plus interest, and on the same day execution was issued and levied upon the Bank but was returned unsatisfied. Thornsberry subsequently assigned this judgment to one Hillerman, who in turn assigned it to appellant.

On June 25, 1937 , the United States served notice of its tax lien on the Bank and made demand for payment. The Bank at all times refused to pay any monies to either the United States or MacKenzie or his predecessors in interest until the rights of all parties were finally determined. The Bank filed, in this proceeding, a bill of interpleader wherein it agreed to hold all deposits of the Paving Company until the rights of the respective parties were finally determined.

After hearing the District Court awarded the sum on deposit to the United States , and the present appeal followed.

[Question]

The sole question for determination is, Does the prior tax lien of the United States prevail over an attachment where notice of the tax lien was filed after attachment was levied but before the attaching litigant obtained judgment?

[Nature of Tax Lien]

The federal tax lien is entirely statutory, therefore its scope and effect are to be determined solely by the statute and the decisions interpreting it. The statute creating the lien is Section 3186 of the Revised Statutes, as amended [U. S. C. A. Title 26, Secs. 1561, 1562] which read during the period involved herein:

Sec. 3186 (a) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time.

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

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

(2) in the office of the clerk of the United States District Court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law provided for the filing of such notice * * *

The language of Section 3186 above quoted is somewhat ambiguous as to the precise time when the tax lien attaches. The first sentence provides that the tax shall be a lien in favor of the United States if the taxpayer "neglects or refuses to pay the same after demand * * *" A reading of this sentence would indicate that demand and refusal to pay are conditions precedent to the attachment of the lien. The next sentence provides that "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector * * *" Since demand is not made until after the assessment list is received, it appears that the two provisions may be inconsistent. However, for the purposes of the present case, we need not attempt to reconcile these provisions, for it appears that the assessment list was received by the Collector on June 26, 1931, and demand for payment was made three days later, on June 29, 1931, both dates being before the writ of attachment was issued in favor of appellant's predecessors. For the purpose of this discussion we shall assume, without so deciding, that the correct interpretation of the statute is that the lien arises on the latest date specified, or after demand.

[Appellant's Contentions]

Appellant bases his claims upon two contentions, first, that he is entitled to prevail even though Thornsberry was not a judgment creditor until after the Government's tax lien was recorded, since, as he argues, the lien of the United States could not operate against him until the United States made an actual levy by giving notice to the Bank or at least until the notice of lien was recorded; and, second, that he is entitled to a status of "judgment creditor" and is entitled to priority under the terms of the statute.

Appellant cites United States v. Western Union Telegraph Co., 50 Fed. (2d) 102 (CCA 2, 1931) [2 USTC ¶754] contending that it is authority that the tax lien in favor of the Government does not attach to a debt owing to the taxpayer. His argument is that the bank deposit was a debt of the bank to the depositor, and hence not subject to the lien. We do not agree with this construction of the statute. The language of the statute itself refutes this argument, for it states that the lien shall attach to "all property and rights to property, whether real or personal". Furthermore, Section 3187 of the Revised Statutes [U. S. C. A., Title 26, Sec. 1580], providing for collection of the tax by distraint and sale, specifically provides that the Collector may sell the taxpayer's "goods, chattels, or effects including stocks, securities, bank accounts, and evidences of debts". The statute is unambiguous and all-inclusive, and does not admit of any construction which would exclude a bank account.

Appellant next argues that he had a vested right in the bank account by virtue of his attachment, and that Congress could not have intended to impress a tax lien on said account to his prejudice.

An examination of the legislative history of Section 3186 makes it clear that Congress did so intend. Prior to the enactment of the amendment in 1913 the Act contained no provision for priority on the part of any third parties. Decisions under the Act prior to 1913 repeatedly held that no third parties, not even innocent purchasers for value, were protected under any circumstances from an unrecorded tax lien. United States v. Snyder, 149 U. S. 210, 13 Sup. Ct. 846. In 1913 Congress added the provision that the tax lien shall not be valid against "any mortgagee, purchaser, or judgment creditor" until recordation of the notice. Congress at this time undoubtedly recognized that under the statute as it existed prior to 1913 no third person was protected under any circumstances, from an unrecorded federal tax lien. By the 1913 amendment it intended to extend protection, not to all third parties, but to the three classes of third parties designated therein, namely, mortgagees, purchasers and judgment creditors. We conclude that in order to be protected, the claimant must show that he is within one of those three classes.

Appellant, however, contends that under the California law he is entitled to be classed as a "judgment creditor" and hence within the specific wording of the statute. His argument is that "the purpose of an attachment is to secure the satisfaction of any subsequent judgment that may be rendered in the action", and therefore one who has an attachment is entitled to a classification of "judgment creditor". We do not agree with the conclusion. No cases so holding are cited by appellant, and our research fails to disclose any. The judgment was not rendered in favor of appellant's predecessors until May 28, 1932 , after the notice of the tax lien was recorded by the Collector.

The decision of the District Court is affirmed.

 

 

[56-1 USTC ¶9300]Merchantile Acceptance Corporation of California, a corporation, Plaintiff v. Andrew Dostinich, Jr., United States of America, et al., Defendants

In the United States District Court for the Southern District of California, Northern Division, No. 1335-ND, January 27, 1956

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Tax liens: State law: Board of Equalization: Status of "mortgage creditor".--The lien of the Board of Equalization of the State of California, characterized under state law as having the force, effect and priority of a judgment lien, did not give the Board the status of a "judgment creditor" within the meaning of 1939 Code Sec. 3672(a). Accordingly, the tax liens of the United States were prior to such a state lien.

Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Rob ert H. Wyshak, Assistant United States Attorney, 600 Federal Building, Los Angeles, Calif., for United States of America. Edmund B. Brown, Attorney General for the State of California, Edward Summer, Deputy Attorney General, for the Board of Equalization of the State of California.

Findings of Fact, Conclusions of Law and Order Distributing Surplus

JERTBERG, District Judge:

This cause came on for further hearing on December 19, 1955, before the Hon. Gilbert H. Jertberg, Judge, presiding, without the intervention of a jury, in order to determine the priorities of the parties in and to the surplus resulting from the foreclosure sale under the Decree of Foreclosure entered pursuant to the trial of the above-entitled action for foreclosure of deed of trust. The defendant, United States of America, was represented by its counsel, Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, and Rob ert H. Wyshak, Assistant United States Attorney, and the Board of Equalization of the State of California was represented by Edmund G. Brown, Attorney General for the State of California, Edward Summer, Deputy Attorney General; the City of Fresno, Andrew Dostinich, Jr. and Dorothy Dostinich having disclaimed any and all interest in and to said surplus. The Court, having considered the Stipulations of Fact and arguments of counsel, makes the following Findings of Fact and Conclusions of Law.

Findings of Fact

I. This is an action for foreclosure of a deed of trust commenced in the Superior Court in and for the County of Fresno, State of California, and removed to this Court by the defendant, United States of America, pursuant to the provisions of 28 U. S. C., Secs. 1444 and 84(b)(1).

II. A foreclosure sale pursuant to the decree of foreclosure entered in the instant action has resulted in a surplus of $153.10, which has been paid to the Clerk of this Court.

III. The Commissioner of Internal Revenue assessed against the defendant and tax payer Andrew Dostinich, Jr., federal internal revenue taxes of the type set forth below, for the taxable period shown below, in the amounts shown below; that the Collector of Internal Revenue for the First District of California received the respective assessment lists showing the assessments of the aforesaid taxes on the dates shown below, on which dates liens of the United States of America arose against all property and rights to property of the taxpayer, as provided in Sections 3670 and 3671 of the Internal Revenue Code; that shortly after the receipt by the Collector of each assessment list, notice of each tax assessed was given to the taxpayer and demand was made upon him for the payment of each tax so assessed; that the taxpayer, after notice and demand, paid, if any, only those amounts shown in the table below and no more, and remains indebted to the United States of America for the balance; that on the dates specified Notices of Tax Lien were filed in the Office of the County Recorder of Fresno County, California, pursuant to Section 3672 of the Internal Revenue Code, and there show the lien number set forth below; that there remains due, owing and unpaid to the United States of America on each lien the sum shown in the last column, which represents the balance of the assessed tax plus subsequently accruing penalties and interest computed to March 31, 1954; that further interest accumulates on the total balance of assessed taxes, penalties and interest from April 1, 1954 at the statutory rate of six per centum per annum, which amounts to $.45 per day, until paid.                            

 

IV. The Board of Equalization of the State of California recorded on January 25, 1951 , in the Official Records of Fresno County, California, a Certificate of Lien, No. 14925, dated January 23, 1951 , in the sum of $9,298.19, due from Andrew Dostinich, Jr., d.b.a. Andy Dostinich Used Cars, under the Sales and Use Tax Act of the State of California .

Conclusions of Law

I. This is an action for foreclosure of a deed of trust commenced in the Superior Court in and for the County of Fresno, State of California, and removed to this Court by the defendant, United States of America, pursuant to the provisions of 28 U. S. C., Secs. 1444 and 84(b)(1).

II. The United States of America has consented to be sued herein and jurisdiction lies under 28 U. S. C., Sec. 2410.

III. The Board of Equalization for the State of California is sued pursuant to the provisions of Sec. 2931a of the California Civil Code.

IV. The lien of the Board of Equalization of the State of California, although characterized by Section 6757 of the California Revenue and Taxation Code as having the force, effect and priority of a judgment lien does not give the Board of Equalization the status of a "judgment creditor" within the meaning of Section 3672(a) of the Internal Revenue Code of 1939.

U. S. v. Gilbert Association, Inc., 345 U. S. 361, 364 (1953) [53-1 USTC ¶9291]; U. S. v. Security Trust and Savings Bank of San Diego, 340 U. S. 47, 52 (1950) [50-2 USTC ¶9492]; U. S. v. England, -- Fed. (2d) -- (9th Cir., October 5, 1955 ) [55-2 USTC ¶9693].

V. Congress used the words "judgment creditor's in Sec. 3672 in the usual, conventional sense of a judgment of a court of record.

VI. The liens of the United States of America arose on the dates the assessment lists were received, December 21, 1950 and January 6, 1951 , pursuant to Secs. 3670 and 3671 of the Internal Revenue Code of 1939 and are prior to the lien of the Board of Equalization, which did not arise until the certificate was filed on January 25, 1951 , with the County Recorder .

VII. The defendant, United States of America , is entitled to the surplus herein of $153.10.

Order Distributing Surplus

In accordance with the foregoing Findings of Fact and Conclusions of Law, it is hereby ordered, adjudged and decreed:

That the liens of the defendant, United States of America, are prior to the lien of the Board of Equalization of the State of California; that the Clerk of this Court be, and he hereby is, directed to pay over to the United States of America the surplus of $153.10 by issuing and delivering a check payable to the Treasurer of the United States in said amount to the United States Attorney for the Southern District of California.