Condemnation Proceedings

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[63-1 USTC ¶9386]Apollo Savings and Loan Association, Plaintiff-Appellee v. William E. Burow and Joan S. Burow, Defendants and J. R. Willens, Trustee, Defendant-Appellee and United States of America, Defendant-Appellant

Ill. Appellate Court, 2d Dist., 2d Div. October Term, No. 11629, 2/19/63

[1954 Code Sec. 6323(a)]

Tax liens: Priority over attorney fees incurred in foreclosure of mortgage and trust deed.--Although principal amounts plus interest secured by a mortgage and a trust deed had priority over the government's lien for taxes because such instruments were recorded before the government's lien was filed, the lien was held to be superior to attorney fees incurred by the mortgagee and the trustee for foreclosure of the mortgage and trust deed since such fees were inchoate at the time the government's lien was filed.

James P. O'Brien, United States Attorney, John Hieber, Assistant United States Attorney, U. S. Court House, Chicago, Ill., Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, David I. Granger, Department of Justice, Washington 25, D. C., for appellant. Fischel, Kahn, Heart & Weinberg, 111 W. Monroe St. , Chicago 3, Ill. , for appellee.

WRIGHT, District Judge:

The plaintiff, Apollo Savings and Loan Association filed its complaint in the Circuit Court of Du-Page County on May 15, 1961 , to foreclose a mortgage held by it, executed by the defendants, William E. Burow and Joan S. Burow. Attached to the complaint were the promissory obligation and the mortgage securing the obligation. Both provided for a reasonable attorneys' fee for the mortgagee in the event of default and court proceedings.

On July 14, 1961 , the plaintiff filed an amendment to its complaint reciting that the defendants, had executed a trust deed dated May 13, 1958 , on the property involved, to J. R. Willens, but asserted that this lien was inferior to its own. The trust deed also provided for reasonable attorney's fee. The amendment to the complaint also recited that the United States possessed a lien on the property involved by virtue of a notice of tax lien filed May 24, 1960, on an assessment made May 29, 1959, in the amount of $525.41, and a notice of tax lien filed November 23, 1960, on assessments made on June 7, 1957, and May 29, 1959, in the respective amounts of $125.12 and $512.14. The amendment to the complaint also asserted that this lien of the United States was inferior to that of the plaintiff.

The United States filed its answer to the complaint and amendment thereto, on September 5, 1961 . It recited therein that assessments for unpaid federal income taxes were made on June 7, 1957, and May 29, 1959; that notices of said liens were filed November 23, 1960, and May 24, 1960, respectively; that there was no outstanding balance under the June 7, 1957, assessment; that the outstanding balance on the May 29, 1959, assessment was $529.26, plus interest, and denied that its lien was inferior to plaintiff's lien.

[Trial Court's Decree]

On December 4, 1961 , the trial court filed its decree of foreclosure and sale and allowed the plaintiff a first and prior lien for principal and interest due, for advances made pursuant to the terms of the mortgage and obligation note for real estate taxes and insurance and for costs including an attorney's fee of $1,215.00. The trial court also decreed foreclosure of the trust deed held by J. R. Willens and allowed an attorney fee of $300.00.

The decree further found that the defendant, United States of America, is the owner and holder of a tax lien against the premises in question by reason of the District Director of Internal Revenue Services having recorded a Notice of Federal Tax Lien on May 24, 1960, with the County Recorder of DuPage County, Illinois, against William E Burow, Jr., and Joan Burow for the sum of $525.41 for federal income taxes for the year 1958, said income tax having been assessed on May 29, 1959, in the amount of $525.41; and there is now due and owing to the United States of America by reason of said lien the sum of $529.26, plus interest at the statutory rate of six percent from September 12, 1961, to the date of payment.

The decree provided that said lien of the United States of America is in all respects subject, inferior and subordinate to the lien of the plaintiff's mortgage and the lien of the note held and owned by Joseph R. Willens, as trustee, and secured by the trust deed made in favor of Joseph R. Willens, trustee under said trust deed.

[Government's Contention]

The United States admits that the principal amount secured by the mortgage and trust deed and the interest thereon have priority over the government's lien for taxes, but contends that the tax lien of the United States has priority over attorney fees allowed for plaintiff's attorneys because the claim for attorney fees was inchoate and subsequent in time to the lien for federal taxes and that the trial court erred in holding the government tax lien inferior to the lien for attorney fees.

The question of priority of lien for federal taxes is governed by the statutory provisions and must be construed according to federal law. United States v. Security Trust and Savings Bank [50-1 USTC ¶9492], 340 U. S. 47.

Section 6321 of the Internal Revenue Code of 1954 imposes a lien in favor of the United States upon all property of a person liable to pay any tax who neglects or refuses to pay after demand. Section 6322 of that code provides that this lien shall arise at the time assessment is made, except that under Section 6323(a) of the 1954 code, the tax lien is not valid against a mortgagee, pledgee, purchaser or judgment creditor until notice of the lien has been filed.

Congress had the authority to enact legislation for the collection of federal taxes. The meaning of such statutes must be determined by the court. United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361. Congress unquestionably intended by Section 6323 to give priority to the claim of a mortgagee where the notice of lien was filed after the mortgage was recorded. The sole question, therefore, is whether the attorney fees provided for in the mortgage upon answer being filed or foreclosure of the mortgage by the mortgagee shall take precedence over the tax lien where the attorney fees were incurred after the notice of the federal tax lien.

There can be no question in the instant case that the attorney fees were indefinite in amount and were not due and payable to the mortgagee under the terms of the mortgage until the foreclosure proceedings was filed by the mortgagee.

[Judicial Precedents]

In United States v. Bond, 4 Cir., 1960, [60-2 USTC ¶9532], 279 F. 2d 837, cert. denied 364 U. S. 895, the court in the majority opinion after a studious review of the cases decided by the Supreme Court of the United States on the question of choate and inchoate liens held that the attorney fees for the mortgagee were inchoate and subordinate to the federal tax lien where notice of the tax lien was prior to the incurrence of attorney fees. The court in that case reasoned that at the time the federal lien was recorded, no attorney fees had been incurred and, therefore, when the federal liens were recorded the amount of the attorney fees were uncertain and inchoate and in fact might never be incurred.

The rationale of United States v. Bond, supra, was recognized by the court in Hoare v. United States, 9 Cir., 1961, [61-2 USTC ¶9681] 294 F. 2d 823. In that case a chattel mortgage was executed before the notice of the federal tax lien to secure payments of rent. The court allowed the mortgagee's lien for the amount in arrears on the date the federal tax lien was effective under the provisions of Section 6323 of the Internal Revenue Code of 1954, but held that the amount of rent in default subsequent to the date of the federal tax lien was inferior and subordinate to the federal tax lien. The holding in this case as in other cases indicates that the protection afforded by Section 6323 to a mortgagee includes only the definite amount due the mortgagee prior to the notice of the federal tax lien.

A general rule governing priority between federal tax liens and those arising under state law is that a competing lien will have priority over a federal lien only if the competing lien arises and becomes perfected and choate prior to the time the federal lien attaches. A lien is regarded as choate when the identity of the lienor is established, the property subject to the lien is known, and the amount of the lien is established, United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81.

[Attorney Fees Inchoate]

In the instant case, the attorney fees allowed the plaintiff were not incurred until the mortgage foreclosure proceedings were instituted which was subsequent to the notice of the federal tax lien. On the date of the filing of the notice of the federal tax lien the attorney fees provided for in the mortgage and trust deed did not meet the choate test as enunciated by the United States Supreme Court in United States v. New Britain, supra., and other cases.

The attorney fees were not incurred or the amount thereof definitely fixed until after the filing of the notice of the federal tax lien. In such case, the federal tax lien is superior to the lien for attorney fees. United States v. Lorton [62-1 USTC ¶9490], 206 F. Supp. 351 (1961).

The decree of the Circuit Court of DuPage County is reversed and remanded with directions to proceed in conformity with the views herein expressed.

Decree reversed and remanded. CROW, Judge and SPIVEY, Judge, Concur.

 

 

[58-1 USTC ¶9187] United States of America , Plaintiff v. Sandusky J. Bates, et al., Defendants

U. S. District Court, East. Dist. Ky., Frankfort Div., No. 143, 158 FSupp 32, 12/18/57

[1954 Code Secs. 6322 and 6323--similar to 1939 Code Secs. 3671 and 3672]

Lien for taxes: Priority.--Taxpayer recovered $11,000 fire insurance proceeds on a claim, and the amount was deposited with the court for determination of priority of liens for $1,200 attorney fees in connection with the recovery and for unpaid federal taxes in an amount in excess of $11,000. Under Kentucky R. S. §30.200, the attorney's lien was perfected as against the insurance recovery when the funds were paid into the court. In the absence of showing of filing of the tax lien notice and proof of assessment of the tax before perfection of the attorney's lien, the lien for services is superior to the tax lien. After payment of the $1,200 to the attorney, the remainder of the fund should be applied to the tax claim.

Henry J. Cook, United States Attorney, John M. Kelley, Assistant United States Attorney, Lexington, Ky., for plaintiff. Samders & Redwine, Pikeville , Ky. , for defendant J. E. Sanders. Funk, Chancellor & Marshall, Frankfort, Ky., Ogden, Galphin & Abell, Marion E. Taylor Building, Louisville, Ky., for defendant.

Memorandum

FORD, District Judge:

Upon the record, this case is submitted for judgment disposing of certain funds now in the Registry of the Court which were derived from satisfaction of a judgment determining liabilities under fire insurance policies issued to the defendant Sandusky J. Bates (hereinafter referred to as Sam J. Bates), and which were in effect upon a building owned by him when it was destroyed by fire in the fall of 1951.

[Lien for Taxes]

Plaintiff seeks judgment for the payment of its alleged liens out of the funds relying upon the following allegations:

"Plaintiff has liens for its unpaid taxes in amounts exceeding $11,000 on a fund of $11,000, representing the proceeds from the settlement of a fire insurance claim by defendant Sandusky J. Bates against the nine defendant insurance companies.

* * *

"The plaintiff's aforesaid liens are prior and superior in right to any right, title or interest of any of the defendants to said fund, except that upon information and belief the defendants Chat Chancellor, Sarah Chancellor and Thomas F. Marshall, partners doing business as Funk, Chancellor and Marshall, have an attorneys' charging lien thereon in the amount of $4,515.84, which is prior and superior to plaintiff's liens."

[Attorney Fees]

The defendant J. E. Sanders filed his Answer denying priority or superiority of plaintiff's liens and asserting a lien pursuant to K. R. S. §30.200 in the sum of $1200 for services rendered as attorney for Sam J. Bates in connection with the recovery of the funds here involved.

Findings of Fact

1. By contract with the property owner Sam J. Bates, the defendant J. E. Sanders served as his attorney and rendered substantial service in connection with the preparation of his case. His original contract called for a fee in a sum equal to 331/3% of the amount recovered, but by subsequent agreement with his client he agreed to accept the sum of $1200 for his services. Other counsel associated with him in the case performed the principal amount of the work involved in the litigation.

2. In support of plaintiff's claim, there is no showing whatever by pleading or proof as to the time the assessments for the alleged delinquent taxes were made or as to when alleged liens on account thereof arose, as provided by 28 USCA §6322 (formerly 28 USCA §3671), nor is there any showing that notices thereof were filed as required by 28 USCA §6323 (formerly 28 USCA §3672).

3. There is no showing by pleading or proof that the property owner Sam J. Bates was or is insolvent within the meaning of 31 USCA §191.

Conclusions of Law

1. This Court has jurisdiction of the parties and of the subject matter of this action. 28 USCA §1396.

2. Upon the payment into Court of the funds here involved, in satisfaction of the judgment in favor of Sam J. Bates, the attorney's lien in favor of the defendant J. E. Sanders was perfected as against the amount recovered "in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." U. S. v. New Britain , 347 U. S. 81, 84 [54-1 USTC ¶9191].

3. "The statute creating the federal liens here involved, I. R. C. §3670 (now 28 USCA §6321) does not in terms confer priority upon them." U. S. v. New Britain, supra, pp. 84-85.

4. The absence of both pleading and proof, in support of plaintiff's claim of priority showing that the alleged taxes were assessed and the liens arose pursuant to 28 USCA §6322 at a time prior to the perfection of the lien of the defendant J. E. Sanders renders plaintiff's alleged liens merely general liens under 28 USCA §6321 (formerly 28 USCA §3670), and thus precludes adjudging to them a position of priority under the rule that "the first in time is the first in right". U. S. v. New Britain, supra, p. 87.

5. In the absence of any allegations or proof that the property owner Sam J. Bates is or was insolvent, the record fails to show the plaintiff entitled to the priority provided in 31 USCA §191.

For the reasons indicated, the plaintiff's claim that its tax liens set out in the Complaint are prior or superior to the attorney's charging lien in favor of the defendant J. E. Sanders should be denied, and the claim of the defendant J. E. Sanders that his lien for services to Sam J. Bates herein referred to is superior to the alleged claim of the plaintiff should be granted.

The remainder of the fund now in the hands of the Court, after the payment of the claim of J. E. Sanders, should be applied to the tax claim of the Government sicne there is no dispute in the record in respect to the Government's right to have such remainder so applied.

Let judgment be submitted for entry in conformity herewith.

 

 

[57-1 USTC ¶9506]American Alliance Insurance Company, Aetna Insurance Company, Commonwealth Insurance Company, Home Insurance Company, Kansas City Fire and Marine Insurance Company, New England Fire Insurance Company, Niagara Fire Insurance Company, Philadelphia Fire and Marine Insurance Company, Royal Exchange Assurance Company, Sun Insurance Company, and Westchester Fire Insurance Company, All Corporations, (Plaintiffs) Respondents v. Louis H. Mitchell, Betty K. Mitchell, as Individuals Doing Business as Mayer's, Mayer's, a Partnership, Edward K. Schwartz and Melman Fixture Company, Inc., a Corporation, Defendants, United States of America, (Intervenor) Appellant

Court of Appeals, St. Louis , Mo. , No. 29,701, 299 SW2d 536, 2/28/57

Appeal from the Circuit Court, City of St. Louis .

[1954 Code Sec. 6323]

Lien for taxes: Allowance of attorney fees to holder of funds.--The lower court properly allowed a fee of $1,500 to the attorneys for insurance companies who were holding insurance proceeds from fire losses sustained by taxpayers. Since the taxes allegedly due the United States exceed the amount of the proceeds, the United States claimed that it had a prior lien on the entire proceeds without reduction for any attorney fees, citing a Supreme Court decision involving a Texas case. The court holds that since the Supreme Court in effect held that State law is determinative, the allowance of the attorney fees was in accord with Missouri law.

Willson, Cunningham & McClellan, J. H. Cunningham, Jr., Richard D. Gunn, Boatmen's Bank Building, 314 North Broadway, St. Louis 2, Mo., for respondents. Edward K. Schwartz, 722 Chestnut, St. Louis 1, Mo. , for defendants. Harry Richards, United States Attorney, Rob ert E. Brauer, Assistant United States Attorney, 402 New Federal Building, 12th and Market Street, St. Louis, Mo., Charles K. Rice, Assistant Attorney General, James P. Garland, Rob ert E. Manuel, Department of Justice, Washington, D. C., for intervenor-appellant.

[ U. S. Priority Over Counsel Fees]

ANDERSON , Presiding Judge:

This is an appeal from a judgment of the Circuit Court sustaining a bill of interpleader and allowing a fee of $1500 to the attorneys for the plaintiffs to be paid out of the fund paid into the registry of the court. The appeal is by the United States , one of the claimants to said fund. No question has been raised as to the propriety of the decree of interpleader, or the reasonableness of the fee allowed. The sole question is whether an award of counsel fees may be made in an interpleader action where the United States is made a party and claims priority to the entire fund under the federal tax lien statutes.

[Rights to Insurance Proceeds]

The plaintiffs in their bill of interpleader alleged that they had incurred liability under certain policies of fire insurance issued to Louis H. Mitchell and Betty K. Mitchell, a partnership doing business as Mayer's, by reason of fire losses sustained on July 16, 1949, and August 19, 1949. The admitted liability was for $4,000 for the July 16th loss, and $43,680 for the August 19th loss. It was alleged that said companies were faced with conflicting claims to the proceeds due; that defendants Louis H. Mitchell and Betty K. Mitchell claimed said proceeds as owners of the property damaged and destroyed; that defendant Melman Fixture Company, Inc., claimed the fund as assignee in the amount of $4,000; and that the defendant Director of Internal Revenue of the United States Government, First District of Missouri, claimed said fund for unpaid taxes due from said insureds to the United States in an amount in excess of the total sums payable by plaintiffs. Respondents' bill prayed that the defendants be required to interplead and assert their claims to said fund, and that plaintiffs be allowed their reasonable costs, including attorneys' fees, to be paid out of the fund, and that they be discharged from all further liability to each of said defendants.

[ United States Was Interpleader]

The court below dismissed the Director of Revenue as a party defendant, for lack of jurisdiction. Thereafter, the United States of America filed its motion for permission to intervene and to interplead for said fund. This motion was sustained. An intervening petition was then filed by the United States . In said petition it was alleged that the Commissioner of Internal Revenue in his August 30, 1949, special list made jeopardy assessments of additional income tax, interest, and 50% fraud penalties against Louis H. Mitchell for the years 1942 through 1946; that said taxes were unpaid and were in the total amount of $597,876.53; that said list was received on August 30, 1949, by the Collector of Internal Revenue, St. Louis, Missouri, who gave notice to and demanded payment of the defendant Mitchell on September 1, 1949; that no part of said assessment having been paid, except for the sum of $705.01 which was credited on the 1942 account, the director issued warrants for distraint for the collection thereof on May 10, 1951; that on September 1, 1949, and on September 20, 1949, written notice of tax liens in the total sum of $598,581.54 against defendant Mitchell were filed with the Recorder of Deeds, St. Louis, Missouri, and the Recorder of Deeds, St. Louis County, Clayton, Missouri; that, on October 10, 1949, a notice of deficiency was mailed to defendant Louis H. Mitchell; that thereafter said defendant filed a petition for review with the tax court of the United States; that the tax court, on March 23, 1951, entered its decision affirming the determination of the commissioner, and finding the deficiencies in taxes and penalties to be correct as set forth in the deficiency notice; that on or about September 30, 1949, there was served upon each of the plaintiffs a notice of levy dated September 29, 1949, in the amount of $601,335.01 (which amount included interest to date of the levy), together with copies of warrants for distraint and tax liens, and demanding payment of their indebtedness to Louis H. Mitchell, to be applied in payment of said tax liability; that upon failure to pay said indebtedness to the United States, pursuant to its demands, the Collector of Internal Revenue, on or about October 24, 1949, served upon plaintiffs a final notice and demand for the payment and surrender by them of any deposits, monies, credits, property and rights to property, belonging to or owned by Louis H. Mitchell, for the satisfaction or partial satisfaction of the unpaid tax due from said defendant to the United States. The petition further alleged that, subsequently, federal tax liens arose out of assessments for income taxes against the defendants Louis H. Mitchell and Betty K. Mitchell for the years 1948, 1951, 1952, and 1953, in the amount of $17,398.82, no part of which has been paid.

It was also alleged that there was assessed against defendants Louis H. Mitchell and Betty K. Mitchell an F. I. C. A. tax, together with interest and penalties, in the total amount of $3,827.42, for the fourth quarter of 1948, no part of which has been paid.

The prayer of the petition was that the merits of all claims to the funds held by plaintiffs be fully determined, and that the liens and claims of the United States be accorded priority; that the court decree defendant Louis H. Mitchell indebted to the United States in the sum of $601,335.01, with interest; that the court decree defendants Louis H. Mitchell and Betty K. Mitchell indebted to the United States in the sum of $17,398.82, with interest; that the court decree Louis H. Mitchell and Betty K. Mitchell indebted to the United States in the sum of $3,827.42, with interest; that the court decree the entire proceeds held by plaintiffs to be due solely to defendant Louis H. Mitchell, and that said proceeds be first applied to the payment of $601,335.01 and interest due to the United States; or, in the alternative, to order the share of Betty K. Mitchell be first applied to the payment of the joint and several indebtedness to the United States in the amounts of $17,398.82 and $3,827.42; and that the share of defendant Louis H. Mitchell be applied to the satisfaction of the indebtedness of $601,335.01 with interest. The petition, then prayed for a deficiency judgment against Louis H. Mitchell and Betty K. Mitchell for any unsatisfied amounts due.

On October 3, 1955 , a hearing was had on the issues presented by plaintiffs' bill of interpleader. At the conclusion of the hearing the matter was taken under advisement. Thereafter, and on May 24, 1956 , the court found the issues in favor of plaintiffs. The bill of interpleader was sustained; defendants and intervenors were ordered to interplead for the funds paid into court; plaintiffs were discharged from all further liability to defendants and intervenors; and the law firm of Willson, Cunningham and McClellan was allowed the sum of $1500 for services rendered plaintiffs in connection with said suit--said sum to be paid out of the funds theretofore tendered into court by plaintiffs. The defendants named in the decree were Louis H. Mitchell, Betty K. Mitchell, individually and as co-partners doing business as Mayer's, Mayer's, a partnership, Edward K. Schwartz and Melman Fixture Company, Inc. The intervenors named were Morris A. Shenker and the United States of America .

Thereafter, on June 1, 1956 , the appellant filed its motion for a new trial, praying that the court vacate its previous order of May 24, 1956 , and grant a new trial on the grounds, inter alia, that plaintiffs' attorneys were not entitled to receive an allowance out of the funds deposited in court as a matter of law. This motion was overruled. Thereafter, in due time, intervenor, United States of America , appealed.

[Was Allowance of Attorneys' Fees Premature?]

Appellant contends that the court erred in awarding attorneys' fees out of the fund deposited in court prior to an adjudication of the merits and priority of the various claims, for the reason that the United States would be entitled to the whole fund, undiminished by attorneys' fees and costs, should it prevail by establishing the priority of its lien. In making this contention Intervenor relies upon the ruling of the Supreme Court of the United States in United States v. Liverpool & London & Globe Insurance Co., 348 U. S. 215, 99 L. Ed. 268, 75 S. Ct. 247 [55-1 USTC ¶9136]. In that case suit was brought in a Texas State Court against one Adams . The latter at the time had owing to him the proceeds of certain fire insurance policies. These proceeds were garnished by the plaintiff. The insurance company thereupon moved to have the United States made a party by reason of the fact that it had asserted a claim to the funds. This motion was granted. Thereafter, the United States removed the suit to the U. S. District Court [53-1 USTC ¶9121]. After removal, and on its motion, the United States was dismissed from the case, but thereafter filed its petition in intervention claiming a prior lien on all property and rights to the property of Adams for unpaid taxes. The District Court held the lien of the creditor superior to that of the government and awarded the insurance company, garnishees, an allowance of attorney's fees. The Court of Appeals affirmed this allowance[54-1 USTC ¶9132], as well as the trial court's determination that the garnishment lien was superior to the federal tax lien. The Supreme Court reversed both holdings. In voiding the allowance of the attorney's fee, the court said:

"As to the attorney's fee allowed the garnishee insurance company, Rule 677, Vernon's Texas Rules of Civil Procedure, provides:

'Where the garnishee is discharged upon his answer, the costs of the proceeding, including a reasonable compensation to the garnishee, shall be taxed against the plaintiff; where the answer of the garnishee has not been controverted and the garnishee is held thereon, such costs shall be taxed against the defendant and included in the execution provided for in this section; where the answer is contested, the costs shall abide the issue of such contest.'

"The District Court evidently found there was no contest between the insurance company and the other parties, and that the insurance company should be discharged with costs and allowance of a reasonable attorney's fee of $500. It, therefore, ordered the clerk to issue a check to the insurance company, payable out of the funds paid into the court by it.

"If the garnishment lien is not prior to the Government liens, and we have held that it is not, certainly fees allowed in that proceeding are not prior to the Government liens, and the authorization of the payment of the attorney's fees prior to the Government liens was error. The costs and fees should be adjudged against the defendants, as provided by Rule 677."

[State Law Governs]

It will be observed that the above case was a proceeding in garnishment brought under the Texas statutes, and that the Supreme Court held that the costs, including an attorney's fee to the garnishee, should be taxed against the defendant, as provided by Rule 677, Vernon's Texas Rules of Civil Procedure. In other words, it seems to us that the Liverpool case stands for the proposition that costs in such cases should be taxed in accordance with the applicable state law. This seems to be in accord with the long established principle announced by the Supreme Court of the United States . That court has many times held that where the sovereign invokes the aid of a court, it must submit to the application of the same principles which govern private suitors. The Paquete Habana, 189 U. S. 453, 23 S. Ct. 593, 47 L. Ed. 900; The Nuestra Senora de Regla, 108 U. S. 92, 2 S. Ct. 287, 27 L. Ed. 662. See also, Jones et al. v. Watts et al., (C. A. 5), 142 Fed. (2d) 575. Any other rule would be unconscionable, and we look with narrowing eyes upon appellant's attempt to use our courts free from the obligation to abide by the rule which binds other litigants.

Our courts of equity have always exercised inherent jurisdiction to award counsel for the interpleading plaintiff a fee chargeable against the fund brought into court,Concordia Fire Insurance Co. v. Alexander, Mo. App., 50 S. W. 2d 687; and we see nothing in the actual holding in the Liverpool case,supra, which denies the right of the court to exercise that jurisdiction where the United States is a party.

We agree with the reasoning advanced by the learned District Judge in United States v. Ullman, 115 Fed. Supp. 211 [53-2 USTC ¶9648], when the identical question was before him. In that case, the United States contended that the court was without power to make an allowance of attorneys' fees on the theory that to do so would, in effect, be allowing costs and attorneys' fees against the United States , which was not permissible, except as provided in Section 2412, Title 28 U. S. C. The court reviewed said section and stated that there was nothing therein which indicated an intent on the part of Congress to grant to the United States rights superior to any other litigant in interpleader actions. The court said:

"There is nothing in the language of the statute which would warrant the Court in penalizing an innocent stakeholder simply because the United States happens to be a party to the litigation. A holding as contended for by the Government would engraft by decisional law a preference in favor of the United States not specifically provided for by Congress as unwarranted on equitable principles. That the sum ultimately recovered by the United States might be slightly diminished is of no moment. It is still the property of the defendant. It would be an extremely strained construction of words to describe that slight diminution as costs and attorneys' fees taxed against the United States . I cannot and will not so construe the plain language of the statute. Rather do I believe that this case merits the application of the equitable principles underlying all interpleader actions."

Another case in point is that of R. F. Ball Construction Co. v. Jacobs et al., 140 Fed. Supp. 60 [56-1 USTC ¶9514], affirmed by the U. S. Court of Appeals for the Fifth Circuit on December 26, 1956 [57-1 USTC ¶9269]. In that case a general contractor filed an interpleader action joining various parties, including the United States , and the court had occasion to review the decision in the Liverpool case with respect to the allowance of attorney's fee. The court said:

"The Government, on the other hand, contends that under the case of United States v. Liverpool , etc., supra, the interpleader is not entitled to his costs. There can be no question as to the status of Ball in this matter. Ball was an innocent stakeholder confronted with conflicting claims to a fund which was in his hands, and he adopted the proper course of employing attorneys and tendering this money into court. As was said by the Supreme Court in its opinion therein, theLiverpool case had to do solely with a garnishee's fee under Rule 677 of the Texas Rules of Civil Procedure and did not purport to deal with an Interpleader action under Texas Rule 43 or Rule 22 of the Federal Rules of Civil Procedure, 28 U. S. C. A., and it is therefore not controlling. On the other hand, the case of United States v. Ullman, D. C., 115 Fed. Supp. 211 [53-2 USTC ¶9648], is directly in point, and I adopt the reasoning of the Court in that case and hold that Ball is entitled to his interpleader's fee in this case * * *."

The appellant has cited two decisions which rely on theLiverpool case as controlling authority that counsel fees may not be allowed in interpleader actions, namely, Ford Motor Co. v. Hackart Construction Co. (N. J.), 143 Fed. Supp. 216 [56-2 USTC ¶9831], and Boston Insurance Co. v. Stubbs (W. D. Washington, not officially reported, but available 1956 C. C. H., par. 9695 [56-2 USTC ¶9695]). In our judgment, the effect of the Liverpool opinion was misconstrued in each case.

The judgment appealed from should be affirmed. It is so ordered.

M. C. MATTHES, Judge, concurs.

GEORGE P. ADAMS, Special Judge, concurs.

 

 

[59-2 USTC ¶9613]In the matter of acquiring title, Re: Washington Square Slum Clearance, Borough of Manhattan, City of New York, United States of America, Appellant, Bernard W. Coblentz, New York University, Tailored Contour, Inc., and the City of New York, respondents In the matter of the City of New York, respondent, relative to acquiring title to real property for the Washington Square Slum Clearance, Borough of Manhattan, United States of America, Appellant, Bernard W. Coblentz et al., Respondents

New York City Court of Appeals, Docket No. 127, 5 NY2d 300, 3/5/59, Aff'g unreported order of Appellate Div. of the Supreme Court in the First Judicial Department

[1954 Code Sec. 6323]

Lien for taxes: Priority: Condemnation award fund: University's judgment for arrears in rental: New York City attorney's lien.--A Federal tax lien for unpaid withholding taxes against a fund arising from a condemnation award for trade fixtures formerly owned by delinquent taxpayer was subordinate to New York University's judgment for arrears in rental and the lien of an attorney, provided for in New York Judiciary Law, for the fee due him for services rendered in securing the award. The University obtained the judgment on May 23, 1956 , and filed a notice of its judgment lien on May 28, 1956 . The attorney's retainer contract was entered into on March 8, 1954 . The Federal tax assessments were not made until 1955 and the tax lien was not filed until May 23, 1956 , over two years after the attorney's retainer contract and after the attorney had fully performed the services necessary to create the fund. The attorney was a "purchaser" within the meaning of Code Sec. 6323, by virtue of the assignment clause in his retainer contract. Pay-O-Matic Corp., (CA-2) 58-1 USTC ¶9478, cert. denied, Oct. 13, 1958 , in which a contrary decision resulted, distinguished.

One dissent.

Jurisdiction: State court: Attorney's suit to enforce retainer contract: Federal Government as intervenor.--In the instant suit brought in the State court by an attorney to enforce his retainer contract as to funds held by New York City , the Federal Government, which intervened, challenged the court's jurisdiction. In rejecting the Government's contention, the court held that the Government is not cast in the role of a defendant being sued without its consent, but, rather, that it takes the role of a claimant to disputed funds. "In so acting, the Government suffers no impairment of its sovereignty by prosecuting such a claim in the appropriate forum where the funds are held."

Paul W. Williams, United States Attorney, United States Court House, Foley Square, New York, N. Y., (Nicholas Tsoucalas, Elliot L. Hoffman, of counsel), for United States of America, appellant. A. D. Jahr, Bernard W. Coblentz, pro se, 44 Court Street, Brooklyn, N. Y., for respondent Tailored Contour, Inc., Lester Nelson, Gerdes, Montgomery & Miller, 1 Wall Street, New York, N. Y., for respondent New York University, Charles W. Tenney, Corporation Counsel, Municipal Building, New York, N. Y., for respondent City of New York, Norris Darrell, John F. Dooling, Jr., Caroline K. Simon, David G. Oringer, for New York County Lawyers Association, amicus curiae, in support of respondents' position.

[Facts]

DYE, Judge:

On this appeal the respondent, an attorney, and the appellant Government are contesting the relative priority in payment of the attorney's fee for services rendered and the Government's lien for unpaid withholding taxes. The question posed is whether the attorney, by virtue of the assignment clause in his retainer contract, is a "purchaser" of "property" or "rights to property" within the meaning of section 6323 (formerly §3672) of title 26 of the United States Code.

As part of its Washington Slum Clearance project, DP #125, the City of New York condemned the fee of premises occupied under a leasehold by Tailored Contour, Inc. (hereinafter Tailored). As compensation for the taking of its trade fixtures, Tailored was awarded $5,750 which, with legal interest, a total of $6,056, the City Comptroller is holding, pending determination of priority in payment.

The petitioner Coblentz, an attorney, instituted this proceeding for an order declaring that his claim for an attorney's lien in the amount of $1,211.20 had priority over a judgment lien noticed by New York University, as project sponsor, for arrears in rent in the sum of $920 and a lien for withholding taxes due the United States Government in the sum of $8,436.78. The Special Term ruled that the liens should be paid in the following order: First to the University, second to Coblentz and third to the Government, and directed the Comptroller to pay the claims in that order to the extent of the funds withheld. Upon appeal, the Appellate Division, First Department, unanimously affirmed and granted the Government permission to appeal to this court, certifying that a question of law is involved which ought to be reviewed.

It is undisputed that:

On March 8, 1954

Tailored retained the respondent Coblentz to appear for and to represent them in the condemnation proceeding and for their services "agree to pay, and do hereby assign to said BERNARD W. COBLENTZ for his services in the matter Twenty (20%) per cent of the award and interest that may be paid or awarded for the said property. [Trade fixtures] * * * plus disbursements", that

On August 5, 1955

Title vested in the City of New York on the entry of the order of condemnation (Administrative Code of City of New York, §B15-36.0);

On September 25, 1956

Final decree of condemnation was signed;

On May 23, 1956

The Bureau of Internal Revenue duly filed withholding tax lien in the sum of $8,436.78 viz.:

                                 Assessment                Amount

Tax Period                             Date         of Assessment

3-31-55
 ................               5-55            $ 1,549.76

6-30-55
 ................               8-55              1,317.98

9-30-55
 ................              11-55              2,059.21

3-31-56
 ................                                 3,000.00

Delinquent interest ....                                   509.83

Total ..................                               $ 8,436.78

On May 23, 1956

New York University, as a sponsor of the project, obtained a judgment in the Municipal Court, City of New York, against Tailored in the sum of $920, being the reasonable value of the use and occupation of the condemned premises (Administrative Code, §B15-37.0, subd. b).

On May 28, 1956

New York University filed a notice of its judgment lien against Tailored with the Comptroller. Because of such filing, the City Comptroller retained the damage check due Tailored.

On January 28, 1957

Coblentz moved at Special Term, pursuant to section 475 of the Judiciary Law, to have his attorney's lien enforced and paid from the proceeds of the award, claiming that it had attached from the commencement of the condemnation proceedings and that he had a first lien on the proceeds to the amount agreed upon, which could not be defeated by the claims of others whose claims, if any, attached only to the balance. The Government appeared and cross-moved for an order declaring its tax lien.

In ruling that the Government's lien for taxes was subordinate to both the judgment for arrears in rental and the attorney's lien for services, the Special Term deemed that under State law the petitioner, by virtue of the assignment, had a property interest in the award as "purchaser" within the meaning of section 3672 (as it then was, now §6323) of title 26 of the United States Code, and that, as to him, the Government's position was subordinate because its lien was not valid against a purchaser within the meaning of that section unless notice thereof had been filed as provided (Lien Law, §240, National Refining Co. v. United States, 160 Fed. (2d) 951 [C. C. A., 8th Cir.] [47-1 USTC ¶9221]; Grossman v. City of New York, 188 Misc. 256; Matter of Astoria Blvd., 171 Misc. 1018; Government lien filed May 23, 1956 , attorney's lien and assignment dated March 8, 1954 ). This ruling was in accordance with the long-established principle that an attorney's lien upon his client's recovery is a vested property right created by law and not a priority of payment.

[ New York Law]

By statute in New York (Judiciary Law, §475) it is expressly provided:

"§475. Attorney's lien in action, special or other proceeding. From the commencement of an action, special or other proceeding in any court or before any state, municipal or federal department, except a department of labor, or the service of an answer containing a counterclaim, the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination. The court upon the petition of the client or attorney may determine and enforce the lien." (Italics supplied.)

It is to be noted that the statute gives an attorney a lien on the cause of action which attaches to the judgment from the commencement of the action.

Section 475, in substance, declares the common law. The origin of an attorney's lien, whether as retaining or as charging, is obscure, but in all events, irrespective of type, has been recognized and enforced by the courts from very early times (see Fourth Annual Report of N. Y. Judicial Council, 1938, p. 49; 7 C. J. S., Attorney and Client, §210 et seq.; 5 Am. Jur., Attorneys at Law, §208 et seq.). The underlying purpose at both common law and now, by statute, is to protect an attorney against the knavery of his client (Matter of Rosentover v. Weiss, 247 App. Div. 137, affd. 272 N. Y. 557; Goodrich v. McDonald, 112 N. Y. 157) and, being created by statute, does not require the giving of any notice in order to bring it into existence (Matter of Drake v. Pierce Butler Radiator Corp., 202 Misc. 935) for it is generally regarded as an equitable assignment to the attorney of the fund procured by his efforts to the extent of the amount of his lien (Matter of Herlihy, 274 App. Div. 342).

When, however, the right depends on contract, as it does here, the terms of the contract must be examined in light of the statute (Matter of Heinsheimer, 214 N. Y. 361).

Under this retainer contract the client, Tailored, agreed to pay "and do hereby assign" to said Coblentz for his services 20% of the award and interest. When that express language is read in light of the statute, the parties must be deemed to have intended to, and in fact did, accomplish an immediate transfer of a percentage interest in Tailored's cause of action against the city for the taking of its trade fixtures and which became effective at, as and of the time of the making and which amounted to a pro tanto assignment of the proceeds. In other words, the attorney by virtue of the assignment clause in the contract presently acquired a vested property interest in the award which he had "purchased" for a good and valuable consideration, to wit: his services as rendered and to be rendered in the premises. He had title to "property and rights to property" (a cause of action, as we know, is property) which neither the client nor anyone claiming through or against him could subsequently disturb. By the same token, the measure of the client's "property and rights to property" (the cause of action) from the date of the retainer contract was the balance remaining after transfer to the attorney of his agreed share.

Title to property and right to property are exclusively a matter of State law ( AEtna Cas. & Sur. Co. v. United States, 4 N. Y. (2d) 639 [58-2 USTC ¶9778]; United States v. Bess, 357 U. S. 51 [58-2 USTC ¶9595]; United States Fid. & Guar. Co. v. Triborough Bridge Auth., 297 N. Y. 31 [47-2 USTC ¶9327]; Fidelity & Dep. Co. v. New York City Housing Auth., 241 Fed. (2d) 142 [57-1 USTC ¶9410] [see Scarsdale Nat. Bank & Trust Co. v. United States Fid. & Guar. Co., 264 N. Y. 159, 163, 164]; Matter of United States Cas. Co. v. Met Contr. Corp., 11 Misc. (2d) 492; Matter of [American] Lumbermen's Mut. Cas. Co. v. Great Atlantic Constr. Corp., 11 Misc. (2d) 491; Vincent v. Matthews, 126 Fed. Supp. 102; Alabama-Tennessee Natural Gas Co. v. Lehman-Hoge & Scott, 122 Fed. Supp. 314 [54-2 USTC ¶9519]; Royal Ind. Co. v. United States, 93 Fed. Supp. 891; Matter of Cummins Constr. Corp., 81 Fed. Supp. 193; Herrmann v. Rogers , 358 U. S. 332; Rogers v. Calumet Nat. Bank, 358 U. S. 331).

By Federal statute liens for taxes owing to the United States arise upon receipt by the Collector of the assessment list (U. S. Code, tit. 26, §6322, formerly §3671) but they attach only to "property and rights to property" belonging to the taxpayer (§6321). To quote a succinct comment by Judge MEDINA: "In adopting this legislation, the Congress did not create property interests on which a lien might be imposed; there is no suggestion that it authorized the federal courts to do so. On the contrary, it took for granted here, as it normally does in the tax law, the vital existence of state laws creating and maintaining various interests. The statute was fashioned to require the courts to determine for federal purposes whether those state-created interests are 'property" or 'rights to property.' That classification of interests is a federal question; the existence of the interests to be federally classified, however, is solely a question of state law." (Fidelity & Dep. Co. v. New York City Housing Auth., supra, p. 144.)

As a generality, it may be said that the right of the Government to levy and collect taxes uniformly throughout the land may not be defeated by the State court rule or regulation (United States v. Vorreiter, 355 U. S. 15 [57-2 USTC ¶9956], revg. 134 Col. 543; United States v. White Bear Brewing Co., 350 U. S. 1010 [56-1 USTC ¶9440], revg. 227 Fed. (2d) 359 [55-2 USTC ¶9776]; United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680], revg. 224 Miss. 33 [55-2 USTC ¶9584]; United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137]; United States v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191]; United States v. Kings County Tron Works, 224 Fed. (2d) 232 [55-2 USTC ¶9536]; Aquilino v. United States, 3 N. Y. (2d) 511 [58-1 USTC ¶9191]).

A government tax lien, however, is not always paramount. By Federal statute, it "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary" (U. S. Code, tit. 26, §6323, subds. [a], [b], formerly §3672).

The courts below have ruled Coblentz to be a "purchaser" within the meaning of that section as indeed he was by State law, and that, accordingly, the only "property" or "rights to property" belonging to the taxpayer was the balance of the proceeds remaining after the attorney's retainer assignment had been satisfied in full. The client's interest thus amounted to no more than 80% of the proceeds remaining after satisfaction of the judgment held by New York University since the award was made subject to its judgment for arrears in rental.

[Government's Contentions]

The Government seeks reversal of the judgment appealed from on two grounds: lack of jurisdiction in the State court to determine the rights of the United States in the proceeds of the award, and that, if the State courts have jurisdiction, its determination was wrong.

[Jurisdiction]

The challenge to jurisdiction is on the ground of sovereign immunity which the Government asserts has never been waived in a matter of this sort and has not been waived here (Stanley v. Schwalby, 162 U. S. 255) and that it was not made a party to the proceeding or served with process therein and that jurisdiction was not conferred by the voluntary appearance of the United States Attorney since only Congress has the power to so consent (Minnesota v. United States, 305 U. S. 382; United States v. Shaw, 309 U. S. 495).

In the setting of this case, these contentions must be rejected. This is not a situation in which the Government is cast in the role of a defendant being sued without its consent but, rather, that of a claimant to disputed funds. In intervening for the purpose of presenting its claim, the United States is an actor--voluntarily asserting a claimed right--and is not a defendant. In so acting, the Government suffers no impairment of its sovereignty by prosecuting such a claim in the appropriate forum where the funds are held (United States v. Bank of New York Co., 296 U. S. 463; Merryweather v. United States, 12 Fed. (2d) 407 [1926 CCH ¶7125]; cf. Moscow Fire Ins. Co. v. Bank of New York & Trust Co., 161 Misc. 903, affd. 253 App. Div. 644, affd. 280 N. Y. 286, affd. 309 U. S. 624). Since the enactment of section 316 of title 5 of the United States Code, an official of the Department of Justice, whenever required to attend to the interests of the United States , is authorized to appear in any suit pending in any of the United States courts or of any State court. The jurisdiction thus recognized is not defeated by failure to expressly follow the procedure laid down in section 2410 of title 28 of the United States Code. Subdivision (d) of that section has reference to the release of a lien against real or personal property so as to permit its sale and has no reference to the enforcement of an attorney's lien under section 475 of the Judiciary Law. An action brought pursuant to that section need not comply with the procedural directions prescribed in section 2410 of title 28 (Lavenburg v. Universal Sportwear, 92 F. Supp. 473; Matter of Meltzer v. Ceglia, 9 Misc. (2d) 464). Thus, it is manifest that the situs of the fund being in New York , its State courts have jurisdiction to determine its distribution.

[Retainer Contract]

As we turn to the merits, perhaps it would be well to again mention that in the court below the attorney's retainer contract and its assignment were treated as an immediate transfer of 20% of the client's cause of action which brought the attorney and his lien within the exception accorded to purchasers (U. S. Code, tit. 26, §6323). When the taxpayer signed the retainer agreement, it effectively divested itself of a part of its cause of action; that since the Government's lien for taxes attaches by statute only to "property and rights to property" belonging to the taxpayer (§6321), only the unassigned balance was liable for the tax. Thus the pivotal question turns on who holds the "property and rights to property" liable for the tax rather than on priority in payment of conflicting claims.

The appellant Government now says that such ruling is wrong for the reason that Coblentz was not a purchaser by virtue of the assignment clause within the meaning of section 6323; that all Coblentz obtained was a potential or contingent right conditioned on the making of an award--that under Federal tests his right was inchoate, and he had no more than a "mere caveat of a more perfect lien to come".

[Pay-O-Matic Case]

The Government relies on the recently decided Federal court case entitled United States v. Pay-O-Matic Corp. (162 Fed. Supp. 154 [58-2 USTC ¶9533]; 256 Fed. (2d) 581 [58-1 USTC ¶9478]). Pay-O-Matic, just as Tailored, was a lessee in possession of premises and the owner of trade fixtures taken by the City of New York in connection with the same Washington Square Slum Clearance project--by the same order in condemnation dated August 5, 1955 . Subsequent to the making of that order, and

On November 18, 1955

Pay-O-Matic, by written agreement retained Goldstein & Sons, as attorneys to represent it in a suit against the city for the taking of its trade fixtures. Among other things, the agreement recited that "it [Pay-O-Matic] agrees to pay and hereby assigns to said attorneys twenty-five (25%) per-cent of any award and interest than may be made for trade fixtures contained in said property".

On November 22, 1955 Goldstein filed a notice of lien with the City Comptroller for his fee.

On December 6, 1955 the Government filed a lien for withholding taxes for the year 1955.

On June 27, 1956 the Government filed an amended lien for unpaid withholding and unemployment taxes for the same period totaling $11,822.42.

On August 22, 1956 a final decree was entered awarding damages to Pay-O-Matic in the sum of $4,569.28.

Thereafter, the United States commenced suit in the United States District Court, Southern District of New York, for payment of its tax lien and moved for summary judgment in its favor. Goldstein appeared in the action and cross-moved for summary judgment in his favor. In granting the Government's motion, RYAN, Judge, ruled that while section 475 of the Judiciary Law, and cases cited, gave an attorney a lien for services which arise at the commencement of the suit and attached to the proceeds, he nonetheless applied the general principle expressed in United States v. Waddill Co. (323 U. S. 353 [45-1 USTC ¶9126]) that priority in payment of a Government lien for unpaid taxes was `always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court.' United States v. Acri, 348 U. S. 211, 213 [55-1 USTC ¶9138] * * * Whether attorney Goldstein's lien by state tests would be held to be choate, it is clear that under federal tests it is as compared to that of the Government inchoate. It was not established for the amount of the lien was contingent on the outcome of a trial in the state condemnation court to fix the amount of the award to be made to Pay-O-Matic for the property condemned. It was but a 'caveat of a more perfect lien to come' (United States v. Scovil, 348 U. S. 218, 220 [55-1 USTC ¶9137]. * * *) and is therefore subordinate to the federal tax lien; United States v. City of New Britain, 347 U. S. 81, 84 [54-1 USTC ¶9191]". (United States v. Pay-O-Matic Corp., supra, pp. 155-156.)

On appeal, the United States Court of Appeals, 2d Circuit, affirmed April 28, 1958 without opinion (United States v. Goldstein, 256 Fed. (2d) 581 [58-1 USTC ¶9478]) under authority of United States v. Ball Constr. Co. (355 U. S. 587 [58-1 USTC ¶9327]) and certiorari was denied October, 1958 (358 U. S. 830).

In Waddill (supra) the United States claimed its lien for taxes was entitled to priority in payment over State and municipal claims and arrears in rental against an insolvent taxpayer. In allowing the Government a preference, the court pointed out that the other claimants, having failed to perfect their lien prior to the assignment for the benefit of creditors, could not invoke local rules and regulations even though valid for State purposes to defeat the Government. With this there can be no serious quarrel. We followed that general principle in Aquilino v. United States (3 N. Y. (2d) 511 [58-1 USTC ¶9191]). There, it also appeared that the Government had duly filed its tax lien before the plaintiffs had filed their notice (Lien Law, §240, subd. 2). The plaintiffs sought to avoid this consequence by arguing that their lien dated back to the making of the contract for, under State law, funds received by a contractor from the owner are deemed trust funds (Lien Law, §§ 36-a, 13, subd. [7]), a contention which had to be rejected for the very good and simple reason that the Government lien attached as soon as it satisfied the State's requirement as to filing first, which it so happened was first in point of time.

The Ball case (supra), relied on as authority in the Circuit Court, was an interpleader to determine priority of rival claims. There a subcontractor, in order to induce a surety to file a performance bond, assigned to the surety all sums due or to become due under the subcontract as collateral for any liability it might sustain through nonperformance of the subcontract and for any other liability to the surety not exceeding the penalty of the bond. The United States Supreme Court ruled that such assignment did not constitute the surety a "mortgagee" of those sums within the meaning of subdivision (a) of section 3672 of the Internal Revenue Code of 1939 (as amd. in present §6323) which provides that a Federal tax lien shall not be valid as against any mortgagee until notice thereof has been filed. Here, again, there was lack of timely notice which could not be cured by resort to a State rule or regulation so as to defeat the Government's prior claim in point of time (cf. United States v. Security Trust & Sav. Bank, 340 U. S. 47 [50-2 USTC ¶9492]).

At first glance, Pay-O-Matic would seem to be controlling and require a reversal. An examination of the authorities on which it was based suggests that it was an extension of the well-recognized "first in time, first in right" doctrine in the determination of priority in payment of conflicting claims. Here, there is a clear difference in this case and Pay-O-Matic. It is to be noted in the first instance that the cases were instituted in different courts under different law and to enforce different claims. Here, the attorney sued in the State court to enforce his retainer contract (Judiciary Law, §475). The Federal Government intervened and demanded preference in payment of its lien for taxes. In point of time, the attorney's retainer antedated the condemnation order by over one year, that is, March 8, 1954 to August 5, 1955 . The tax assessment was not made until May, 1955 through November, 1955, in point of time, over 14 to 21 months subsequent to the making of the retainer contract and which was the earliest time on which the taxpayer and the attorney could be said to have had notice that Tailored owed withholding taxes.

The Government's lien for taxes was not filed until May 23, 1956 , two years and two months after the attorney's retainer contract and after the attorney had fully performed the services necessary to create the fund. In point of time, then, the Government's claim was last. The tardiness of the Government in filing may not be excused by asserting sovereign paramountcy. To do so would be the reverse of the rule under which recovery had been allowed in Aquilino and Ball (supra).

[Summary]

By way of summary, it is well established that the laws of the several States, including the common law, as declared by the highest courts of such States, prevail upon and are enforced in the courts of the United States except where the Constitution, Treaties or Statutes of the United States otherwise require (Erie R. R. v. Tompkins, 304 U. S. 64). That case overruled and disapproved the contrary doctrine of Swift v. Tyson (16 Pet. [41 U. S. ] 1). The determination of what constitutes property of a taxpayer on the date of the asserted lien by the Government is a matter of State law (AEtna and Bess, supra, and cases cited; Aquilino, supra, petition for certiorari granted, No. 132, Feb. 24, 1959, 27 U. S. Law Week 3231).

[Arrears in Rental]

Compensation for private property taken for public use is to be determined by the procedures established for the exercise of the sovereign power of eminent domain, subject only to certain constitutional limitations not here involved (Dohany v. Rogers, 281 U. S. 362). Under the New York City Administrative Code, title vests in the city on the entry of the condemnation order (§B15-36.0). By section B15-37.0, the value of the property taken is reduced by the reasonable value of the use and occupancy from the date the property was condemned until actual payment of the award. Here the University, as sponsor, had a claim for such use and occupancy which was confirmed by a judgment entered and filed the same day the Government lien was filed. Furthermore, as the lower courts have properly ruled, the award was made subject to the payment of that judgment as provided by the Code (supra) which together constituted it a first lien on the proceeds of the award. At most, the owner had right and title to the award as made, less the $920 judgment due the University, payment of which, in the first instance, was made subject to the judgment. Of the balance the attorney had acquired, by prior assignment, 20% of the award and interest which took effect upon the commencement of the action. The "property and rights to property" which remained was all that the taxpayer had to which the Government lien for taxes could attach in any event.

The order appealed from should be affirmed, with costs.

[Dissenting Opinion]

FUND, Judge (dissenting):

In my view, the lien of the United States for unpaid taxes is superior both to the attorney's lien of the respondent Coblentz and the judgment lien of the respondent New York University .

Although "a new trend" may be portended by Commissioner v. Stern, 357 U. S. 39 ([58-2 USTC ¶9594] see American Bar Assn., Proceedings of Section of Real Property, Probate & Trust Law, Part II [1958], p. 81), the cases actually decided by the Supreme Court point the conclusion that the Government's tax lien is superior to the lien of an attorney on a condemnation award where such award was made after a notice of tax lien had been filed against the taxpayer-client. (See United States v. Ball Constr. Co., 355 U. S. 587 [58-1 USTC ¶9327]; United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137]; see, also United States v. Pay-O-Matic Corp., 162 Fed. Supp. 154 [58-2 USTC ¶9533] affd. 256 Fed. (2d) 581 [58-1 USTC ¶9478], cert. denied 358 U. S. 830; Aquilino v. United States, 3 N. Y. (2d) 511 [58-1 USTC ¶9191], cert. granted Feb. 24, 1959 , 27 U. S. Law Week 3231.)

The respondent Coblentz and his client, Tailored Contour, Inc., entered into a retainer agreement whereby the latter authorized the respondent to act for it in the condemnation proceedings and agreed to pay him, and "do hereby assign" to him, for his services, 20% of "the award and interest that may be paid" for the property to be taken. As is manifest, no provision of the agreement transferred title or possession to any property and, just as clearly, there was no vendor-vendee relationship created between the respondent and his client, as those terms are ordinarily understood. The respondent agreed to represent the client and to perform legal services, the fee to be paid to him, uncertain in amount, being strictly contingent, payable only if and after an award was made. Indeed, the client was free, despite the retainer agreement, to terminate the attorney-client relationship at any time he chose. (See Matter of Weitling, 266 N. Y. 184.) At best, therefore, the respondent obtained a potential and inchoate interest, for he had the right neither to receive any money nor to proceed against the property involved in the condemnation proceeding unless and until an award was made. (See, e.g., United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138]; United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137], supra.) And, beyond all this, there was the possibility that some eventuality might prevent him from ever obtaining even a part of the award.

All of these factors negate any inference that the assignment relied upon constituted a purchase or stamped the respondent a purchaser within the meaning of the Internal Revenue Code. (See United States v. Pay-O-Matic Corp., 162 Fed. Supp. 154 [58-2 USTC ¶9533], affd. 256 Fed. (2d) 581 [58-1 USTC ¶9478], cert. denied 358 U. S. 830, supra; United States v. Ball Constr. Co., 355 U. S. 587 [58-1 USTC ¶9327], supra; United States v. Scovil, 348 U. S. 218, 221 [55-1 USTC ¶9137], supra; United States v. Hawkins, 228 Fed. (2d) 517, 518-519 [56-1 USTC ¶9143].) The Pay-O-Matic case, also involving priority between an attorney's lien on a condemnation award and a federal tax lien, is indistinguishable from the case before us. In reaching its conclusion, that the attorney's lien was subordinate to the lien of the Government, the court wrote (162 Fed. Supp. 156):

"Whether attorney Goldstein's lien by state tests would be held to be choate, it is clear that under federal tests it is as compared to that of the Government inchoate. It was not established for the amount of the lien was contingent on the outcome of a trial in the state condemnation court to fix the amount of the award to be made to Pay-O-Matic for the property condemned. It was but a 'caveat of a more perfect lien to come' (United States v. Scovil, 348 U. S. 218, 220 [55-1 USTC ¶9137] * * *) and is therefore subordinate to the federal tax lien; United States v. City of New Britain, 347 U. S. 81, 84 [54-1 USTC ¶9191]."

It is likewise my opinion that the judgment lien of New York University is subordinate to the tax lien. The Government filed its notice of tax liens on May 23, 1956 , both in the office of the City Register, the place designated by section 240 of this state's Lien Law, and with the City Comptroller. The University obtained its judgment against the taxpayer, Tailored Contour, on the same day, May 23, 1956 , but such judgment was neither filed nor docketed, as required, in the office of the Clerk of the County of New York , until June 5. Since the University could not have a lien against the fixtures belonging to the taxpayer until its judgment was docketed (Civ. Prac. Act, §§ 509, 510), it is clear that the Government's lien for taxes was prior in time. Once the federal tax lien is properly filed, no subsequently recorded lien or claim may prevail against it. (See United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680]; United States v. New Britain , 347 U. S. 81, 84 [54-1 USTC ¶9191].)

The order appealed from should be reversed and the Comptroller directed to pay to the United States , in partial satisfaction of its tax liens, the moneys heretofore awarded to Tailored Contour, Inc.

Chief Judge CONWAY and Judges DESMOND, FROESSEL, VAN VOORHIS and BURKE concur with Judge DYE; Judge FULD dissents in a separate opinion.

Order affirmed.

 

 

[58-1 USTC ¶9478] United States of America , Plaintiff-Appellee v. Samuel Goldstein, Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket Nos. 24920, 256 F2d 581, 4/28/58, Aff'g an unreported District Court decision

[1954 Code Sec. 3401--substantially unchanged from 1939 Code Sec. 1621; 1954 Code Sec. 6323(a)--similar to 1939 Code Sec. 3672(a)(3)]

Collection of taxes: Withheld taxes: Federal lien v. lien for attorney's fees.--The defendant appealed from a summary judgment for the United States enforcing withholding tax liens against a taxpayer in priority to an attorney's lien for professional services against the same debtor. The Court of Appeals affirmed the District Court, and cited United States v. R. F. Ball Construction Co., 355 U. S. 587, 58-1 USTC ¶9327.

Arthur D. Goldstein, Samuel Goldstein & Sons, New York City , for defendant-appellant. Nicholas Tsoucalas, Assistant United States Attorney, New York City (Paul W. Williams, United States Attorney, John A. Guzzetta, Assistant United States Attorney, New York City, on the brief), for plaintiff-appellee.

Before CLARK, Chief Judge and LUMBARD and WATERMAN, Circuit Judges.

PER CURIAM:

Affirmed on the opinion of District Judge Ryan; and see also United States v. R. F. Ball Construction Co., 355 U. S. 587 [58-1 USTC ¶9327].

 

 

[47-1 USTC ¶9202] United States of America , Plaintiff, v. Certain Lands Situate in St. Charles County , Missouri , Weldon Springs Condemnation Cases, Defendants.

In the United States District Court for the Eastern Division of the Eastern Judicial District of Missouri., Nos. 765, 771, 777, 781, 785, 791, 797, 810, 811, 817, 827, 835, 841, 865, 875, 877, 985, 987, 991, 995, 997, 1000, 1001, 1010, 1015, 1021 Docket. Division 1., 71 FSupp 76, 07/11/46

Liens for taxes: Condemnation proceedings: Commission awards: Subordination to judgment creditors.--Rights acquired by attorneys for fees through an assignment of commissions awarded from landowners in condemnation proceedings instituted by the United States, the amounts of which were held in the Registry of the Court, were found to be claims prior in time and paramount to the claims of the United States for taxes due from such assignor.

Harry C. Blanton, U.S. District Attorney, Russell Vandivort, Walker Cooper, A.G. Edwards and A.J. Hughes, Special Assistant U.S. Attorneys, for plaintiff. Samuel M. Watson and Oliver T. Johnson, for defendant Mertia Callaway. Thompson, Mitchell, Thompson & Young, for R. Newton McDowell. C.S. Hale and Walter R. Brown, for Federal Farm Mortgage Corp. and C.S. Hale, Trustee, Intervenors. Adams, Adams & Adams, for Kansas City Title Insurance Co., Intervenor.

Findings of Fact and Conclusions of Law

 

MOORE, D.J.:

The Court finds the facts in each of the above entitled and numbered cases as follows:

Findings of Fact

 

1. In each of these cases there is in the registry of the Court a certain sum of money in an amount as shown by the records of the Clerk, which sum constitutes five percent of the amount of condemnation awards fixed by previous orders and judgments of the Court herein, and paid by the United States of America as plaintiff condemnor into the registry of the Court for the account of the owners of the lands involved herein, as compensation for the taking of such lands by the United States of America. Said amount of five percent has heretofore by order of the Court been awarded and allowed to the account of R. Newton McDowell as commissions or compensation due and owing from the several landowners, to him, pursuant to the agreement between the United States of America and the said McDowell as well as the several agreements on the part of the said landowners embodied in the terms of the certain contracts for purchase of their lands by the United States, which contracts have been given effect as stipulations for agreed condemnation verdicts herein.

2. On May 15, 1942, said R. Newton McDowell, by a written instrument of that date, duly assigned to Blatchford Downing for the benefit of the latter's law firm, now bearing the name of Caldwell, Downing, Noble & Garrity of Kansas City, Missouri, all of the said McDowell's right, title and interest in and to the said five percent commissions due to him from the said landowners, as security for attorney's fees for legal services theretofore rendered, and thereafter to be rendered by said Downing, at the express instance and request of said McDowell, said assignment being designated Downing's Exhibit "A" herein, and made a part hereof by reference.

3. On April 20, 1942, said McDowell and said Downing entered into a written agreement of said date, designated Downing's Exhibit "B" herein, and made a part hereof by reference, whereby said parties agreed upon the amount of attorney's fees for certain items of services specified therein aggregating seven thousand dollars ($7,000.00), the amount of compensation for certain other items of services referred to therein being left open and undetermined for future adjustment and agreement, and further agreed that in addition thereto, said Downing should receive five percent of the amounts payable to said McDowell as his five percent commissions or compensation above referred to, which amount was at the time of trial herein estimated and fixed at $3309.00, as of said time, subject to increase if the amounts payable to McDowell become increased by reason of additional amounts becoming payable to the landowners or to McDowell.

Thereafter, said Downing and his law firm performed certain legal services at the express instance and request of said McDowell, of the reasonable value of $5,296.00, and the total amount of such attorneys' fees for services rendered up to the time of trial herein, namely, January 24, 1946, amounted to $15,605.00 as more fully itemized in memorandum designated Downing's Exhibit "C" herein, which is made a part hereof by reference. Said amounts itemized in said memorandum and agreement of $15,605.00 are fair and reasonable charges for the services rendered.

Said Downing or his law firm incurred and expended out of pocket expenses in connection with legal services rendered at the instance and request of said McDowell in the total sum of $1250.00.

Against the foregoing charges, there has been paid by McDowell to said Downing, or his law firm, the sum of $2400.00, applied on attorneys' fees, and the sum of $1119.34 to apply on expenses, leaving unpaid, due and owing, the sums of $13,205.00 on account of attorneys' fees, and $130.66 on account of expenses.

4. The Collector of Internal Revenue of the United States has heretofore made assessment of Federal taxes against said R. Newton McDowell in the total sum of $54,473.71, including interest and penalties as of August 8, 1945 . The nature of the taxes assessed, the taxable years, dates the assessment lists were received by the Collector, and the amounts of the assessments respectively, are as shown and stated in the amended claim of the United States for and on behalf of the Collector of Internal Revenue for the 6th District of Missouri.

Nothing herein is to be deemed a finding or adjudication in any respect with reference to the validity of said tax assessments in whole or in part, or of the ultimate liability of said McDowell for payments thereof, it having been expressly agreed and stated in Court in these proceedings, and ordered that the validity of such tax assessments and ultimate liability for such tax claims was not to be adjudicated in these proceedings.

5. The said Collector of Internal Revenue for the 6th Collection District of Missouri, caused notices of lien for said taxes to be duly filed on July 7, 1945, with the Recorder of Deeds of Jackson County, Missouri, and on July 16, 1945, with the Recorder of Deeds of the City of St. Louis, and counties of St. Charles, Lincoln, Warren and Franklin, Missouri, and between June 1, 1945 and July 20, 1945, caused warrants of distraint, notice of liens and notices of levy for said taxes to be served upon the landowners named as defendants in the condemnation proceedings herein.

6. The aggregate amount of funds representing such five percent commissions or compensation awarded to the account of said McDowell in the registry of this Court of Division No. 1 hereof (omitting the amounts involved in four cases which have been passed for hearing, and not involved herein) is $17,037.90.

Conclusions of Law

 

1. The claim of R. Newton McDowell for five percent commissions or compensation in the condemnation proceedings herein was a claim against the owners of the several parcels of land herein involved, pursuant to the agreement on the part of the said landowners embodied in the terms of the contracts for the purchase of their lands by the United States . Such funds in the registry of this Court as are being held for the account of R. Newton McDowell were awarded in payment of that claim. By the terms of his agreement with the War Department, McDowell had not, and could not have, any claim against the United States for such commissions or compensation.

2. The written assignment of the said claim against the landowners from R. Newton McDowell to Blatchford Downing, dated May 15, 1942, Downing's Exhibit "A" herein, is valid and effective according to its terms, and vests in said Downing as of May 15, 1942, the right to receive, as security for his attorneys' fees for legal services rendered, such amount of the funds in the registry of this Court heretofore awarded to the account of said McDowell in payment of the said claim as may be necessary to pay said Downing the sum of $13,205.00 attorneys' fees, and $130.66 expenses.

3. Said rights and title of said Downing are prior in time and senior and paramount to the claims of the United States or its Collector of Internal Revenue for the 6th District of Missouri, on account of said tax assessments and tax lien notices, warrants or distraints, and they are not subject to any deduction by way of set off in favor of the United States on account of such tax claims, and said Downing is entitled to have such amounts paid and distributed to him, and disbursed by the Clerk of this Court, such disbursements to be made from the funds on deposit in the respective cases above numbered, beginning with the lowest numerical number until said claim of Downing is paid and discharged in full.

4. After payment and disbursement to said Downing of said funds in the amounts above stated, the United States Collector of Internal Revenue for the 6th District of Missouri is entitled to receive disbursement of the remaining funds in the registry of this Court in any of these proceedings, the same to be held by him on account of said tax assessments against said R. Newton McDowell by virtue of his tax lien and notices and distraint, or warrants of distraint, the same to be, however, without prejudice to the rights of McDowell or parties claiming under him, to demand and sue for recovery and repayment of such of said funds as he or parties claiming under him may claim constitute collections of tax claims or liabilities whose validity remains to be adjudicated.