¶50,308] Joe Conzola and Bernard N. Hochberg t/a Jonar, a Texas
partnership, Plaintiff v. City of Miami, a municipal corporation,
Defendant/ /Counter-Plaintiff/Third-Party Plaintiff v. Internal Revenue
Service, an agency of the United States, and INTEXX Corporation, a
Nevada corporation, Third-Party Defendants
U.S. District Court, So.
Lien for tax: Property subject to lien: Priority of security
interest.--A secured party's claim to funds prevailed over the
government's lien under the "first in time, first in right"
rule, since the interest, which was assigned to the secured party, was
perfected before the IRS filed its notice of tax lien. Although the
interest came into existence before the federal lien for taxes arose,
such lien may attach to after-acquired property. The assignee's interest
in the property was perfected at the time of assignment, even though no
financing statement was filed. Under state (
) law, the assignee was not required to file a financing statement
because the assignment did not constitute a significant part of the
MEMORANDUM OPINION AND FINAL JUDGMENT
Joe Conzola and Bernard Hochberg, t/a Jonar ("Jonar") filed
suit against the City of
("the City") to recover funds due under an alleged contract
between Jonar and the City. The City filed an action for interpleader
against Third-Party Defendants Intexx Corporation ("Intexx")
and the Internal Revenue Service ("IRS"), who made claims to
all or part of the money demanded by Jonar. The City's complaint for
interpleader was granted and the funds due under the contract were
deposited into the court's registry. Subsequently, a default was entered
against Intexx for failure to serve or file any response to the
third-party complaint. Since both Jonar and the IRS claim an interest in
the funds, the action proceeded in order to determine the party entitled
to the funds. Prior to trial, the
United States of America
was substituted as a party in place of the IRS ("the
was tried on
August 18, 1992
before the court sitting without a jury. Having heard and considered the
testimony of the witnesses and the arguments of counsel, and reviewed
the exhibits presented, the court makes the following findings of fact
and conclusions of law.
FINDINGS OF FACT
In July 1988,
the City sought bids on the construction of two prefabricated floorless
restroom buildings ("Modulars"). The sole bidder for the
construction project was Intexx, whose principal place of business was
. In October 1988, Intexx's bid was accepted by the Miami City
Commission, which must approve all bids exceeding $4,500.00. The City
prepared and sent a purchase order to Intexx.
Manufacturing, Inc. ("Blazer"), a
corporation which built modular restroom facilities, was engaged by
Intexx to build the Modulars ordered by the City. These Modulars were to
be made at Blazer's manufacturing site located on
property it leased from Jonar. Intexx encountered financial difficulties
and could not fulfill its contract with the City. Blazer defaulted on
the lease agreement between it and Jonar, resulting in the termination
of the lease.
On November 5,
1988, Blazer, Intexx, Jonar and Nevada National Bank, a Nevada
corporation ("NNB") entered into an agreement ("the
Agreement") whereby Blazer, Intexx and NNB released to Jonar all of
their respective rights, title and interest to the buildings located on
Jonar's property, including the partially constructed Modulars. The
Agreement allocated the proceeds of the sale of certain properties,
including the Modulars, to Jonar and directed that payment be made
directly to Jonar. Jonar accepted the transfer and release of the
Modulars and agreed to use its best efforts to complete the Modulars and
deliver them to the City. Jonar also agreed to file "all such lien
notices or stop notices which may be required in the applicable
jurisdictions to protect the right of Jonar to collect such proceeds
against the claims of any and all third party creditors, including but
not limited to the State of California." To date, Jonar has not
filed any notices regarding the assignment of proceeds at issue here.
the City that it would not deliver the completed Modulars until it
received a purchase order directed to Jonar. In April 1989, Jonar
received a purchase order for the Modulars at the agreed purchase price
representative of the Secretary of the Treasury assessed taxes against
Intexx in the amounts listed as follows: $20,275.72 was assessed on July
6, 1987 (notice was filed on April 23, 1991); $4,011.67 was assessed on
March 26, 1990 (notice was filed on May 9, 1990); $11,104.08 was
assessed on July 15, 1991 (notice was filed on May 12, 1992; and $320.35
was assessed on March 13, 1989 (notice was filed on April 23, 1991).
CONCLUSIONS OF LAW
taxpayer fails to pay his tax after notice and demand has been made, a
federal tax lien arises from the date of assessment. In re Hamilton
Associates, Inc., 66 B.R. 674 (Bankr. D.
1986). The tax lien attaches to "all property and rights to
property, whether real or personal" belonging to the taxpayer. 26
U.S.C. §6321 .
"The threshold question in any case involving the federal
government's assertion of its tax lien is whether and to what extent the
taxpayer had "property" within the meaning of the federal tax
lien statute." Randall v. H. Nakashima & Co., Ltd. [76-2
USTC ¶9770 ], 542 F.2d 270, 272 (5th Cir. 1976); see also,
Nevada R. & S. Co. v.
Dep't. of Treasury I.R.S. [74-2
USTC ¶9617 ], 376 F. Supp. 161 (D. Nev. 1974) ("NRSC").
State law determines whether a taxpayer has property to which a tax lien
may attach. Randall [76-2
USTC ¶9770 ], 542 F.2d at 272; Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-14 (1960). If, under applicable
state law, the taxpayer has no property interests in the funds sought to
be subjected to a tax lien, there is nothing to which the lien can
attach. NRSC, 376 F.Supp. at 164, citing United States v.
Durham Lumber Co. [60-2
USTC ¶9539 ], 363 U.S. 522 (1960). In this case,
law governs whether Intexx had property upon which a lien could be
attached since Intexx's principal place of business is
. Thus, the tax lien can attach to the contract amount at issue here
law establishes Intexx had a property interest in the money.
A federal tax
lien extends to after-acquired property and the lien applies to
"property owned by the delinquent at any time during the life of
the lien", Randall [76-2
USTC ¶9770 ], 542 F.2d at 275, citing Glass City Bank v.
United States [45-2
USTC ¶9449 ], 326 U.S. 265, 268-69 (1945). Here, the earliest
assessment of tax liability was on
July 6, 1987
Intexx entered into its contract with the City in October 1988 and the
assignment by Intexx to Jonar did not occur until
November 5, 1988
. Thus, Intexx had property or rights to property to which a tax lien
The court must
look to federal law to determine matters of priority once it is
determined that a tax lien attaches. Randall [76-2
USTC ¶9770 ], 542 F.2d at 272; Aquilino [60-2
USTC ¶9538 ], 363
at 512-14 (1960). A tax lien imposed pursuant to section
6321 is not valid against "any purchaser, holder of a security
interest, mechanic's lienor, or judgment lien creditor" until
notice of the lien is filed by the Secretary of the Treasury. 26 U.S.C. §6323
. In the instant case, the notice of tax lien regarding the
July 6, 1987
assessment was not filed until
April 23, 1991
, which is more than two years after the Agreement assigning Intexx's
rights under the contract with the City to Jonar was entered.
argues that Jonar was required by the Agreement and
law to perfect its interest in the contract proceeds and because it did
not, Jonar's interest is inferior to the Government's perfected
interests. The Government asserts that, pursuant to N.R.S. §9302, Jonar
was required to file a financing statement to perfect its interest in
the assignment. Jonar argues it was not required to file any document in
order to perfect its interest in the contract proceeds. The court agrees
with Jonar's assertion.
law, Jonar was not required to file a financing statement in order to
perfect its interest in Intexx's rights under the contract with the City
because it was excused from filing a financing statement. N.R.S. §104.9302(e)
provides that filing of a financing statement is not required to perfect
a security interest in "[a]n assignment of accounts which does not
alone or in conjunction with other assignments to the same assignee
transfer a significant part of the outstanding accounts of the
assignor." A thorough review of the Agreement reveals that Intexx's
assignment to Jonar did not transfer a "significant part" of
Intexx's outstanding accounts to Jonar, rather the assignment
transferred Intexx's "accounts" in certain specified areas.
Applying §104.9302(e) to the facts, Jonar was not required to file a
financing agreement to perfect its interest under the Agreement. 2
The court also notes that the Government's argument that Jonar was
required to file notices pursuant to paragraph 1.b. of the Agreement
fails. That paragraph states that Jonar agrees to file "all such
lien notices or stop notices which may be required in the
applicable jurisdictions to protect the right of Jonar to collect such
proceeds against the claims of any and all third party creditors".
(emphasis added). Because
law does not require Jonar to file a notice in order to perfect its
interest, Jonar was not required to do so under the Agreement.
was complete as between Jonar and Intexx the moment it was made, see NRSC,
376 F.Supp. at 164, citing Jones v. P.W.L. & F. Co., 13
359, 373 (1878), and Jonar's interest in the contract proceeds attached
at that time. Pursuant to N.R.S. §104.9303, a security interest is
perfected when it has attached and when all of the applicable steps
required for perfection have been taken. Since, as stated before, Jonar
was not required to file a financing statement to perfect its interest,
the assignment was perfected on
November 5, 1988
when the parties entered the Agreement.
determined that Jonar's interest in the assignment has been perfected,
the court now addresses basic federal rule that "first in time,
first in right" determines whether a federal tax lien or competing
state-created lien has priority. Valley Bank of Nevada v. City of
USTC ¶9122 ], 528 F.Supp. 907, 913 (D. Nev. 1981), citing
v. City of
New Britain [54-1
USTC ¶9191 ], 347 U.S. 81, 85 (1954). Under this standard, a
federal tax lien takes priority over a state-created lien unless the
state lien is specific and perfected in the federal sense before the
federal tax lien arises. United States v. Trigg [72-2
USTC ¶9642 ], 465 F.2d 1264, 1269 (8th Cir. 1972), cert. denied,
410 U.S. 909 (1973); see also City of Henderson [82-1
USTC ¶9122 ], 528 F.Supp. at 913. Under 26 U.S.C. §6323(a)
, a federal tax lien is not valid against a holder of a security
interest until the tax lien is filed. In other words, to obtain a
security interest sufficient to defeat an unfiled federal tax lien,
Jonar must perfect its security interest against a hypothetical judgment
lien creditor prior to the time the Government files a notice of federal
tax lien. City of Henderson [82-1
USTC ¶9122 ], 528 F.Supp. at 912; N.R.S. §104.9301(1)(b). A
security interest is defined in 26 U.S.C. §6323
(h)(1) as follows:
"security interest" means 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.
In the case at
bar, Jonar held a security interest in the assignment from Intexx which
was perfected at the date of the
November 5, 1988
Agreement. Because the Government did not file notice of its lien until
April 23, 1991
, Jonar's security interest takes priority over the Government's lien.
The court does not address Jonar's argument that it entered into a
separate contract with the City concerning the Modulars since it finds
the Government's lien to be subordinate to Jonar's security interest.
Based upon the
foregoing discussion, it is ORDERED AND ADJUDGED that Jonar's claim to
the interplead fund is GRANTED and the Government's claim against the
interplead fund is DISMISSED to the extent it conflicts with the full
payment of Jonar's claim to the fund.
The court will discuss only the
July 6, 1987
tax assessment since the other three assessments arose after the
November 5, 1988
Agreement. See discussion infra in text regarding perfection of
Jonar's interest on the date of the Agreement.
The court notes there may be an alternate basis for concluding that
Jonar was not required to file a financing statement in order to perfect
its interest. Article 9 of the Uniform Commercial Code ("UCC")
and the correlative section of the
commercial code, N.R.S. §104.9104, exempts certain transactions from
the scope of the UCC. Specifically, N.R.S. §104.9104(6) provides that
the UCC does not apply to "a transfer of a right to payment under a
contract to an assignee who is also to do the performance under the
contract". In paragraph 1 of the Agreement titled "Assignment
to Jonar", Jonar was required to use its best efforts to complete
construction of the Modulars and deliver the Modulars to the City as
part of the assignment of interest under the contract. Additionally,
Charles Kaufman, III, the former chief executive officer of Intexx,
testified by affidavit that all manufacturing for the City's Modulars
was done by Jonar and Blazer. Thus, there is evidence in the record
which could support the conclusion that the transaction at issue here
does not fall within the scope of the UCC. However, because the court
bases its holding on §104.9302(e), it is unnecessary to reach this
¶9582]Lubbock Independent School District v. A. R. Preston, d/b/a Al
Preston Electric, et al.
Court, Lubbock County, Texas, No. 32169, 5/16/60
[1954 Code Sec. 6321]
Tax lien: Government as intervenor: Priority of judgment creditor and
surety.--A surety's claim for interest expended by it in making good
its contract of suretyship, and the claim of a judgment creditor for
materials furnished and for attorney fees in obtaining such judgment,
were superior and had priority over the claim of the United States of
America, as intervenor, on its tax lien as to funds held by a school
district and due the delinquent taxpayer under a contract for the
construction of a high school.
Cobb and Johnson, 820
, for plaintiff. Key & Carr, 314 Lubbock National Bank Bldg.,
Crenshaw, Dupree & Milam, P. O. Box 1499, Nelson, McCleskey &
Harringer, Central American Life Bldg., and Kilmer B. Corbin, Lubbock
National Bank Bldg., all of Lubbock, Tex., and W. B. West, III, United
States Attorney, Fort Worth 2, Tex., for defendants.
On this the
2nd day of May, A. D. 1960, during a regular term of this Court and at
the time properly set for the trial of this case with all parties having
received proper notice of such setting, there came on for hearing before
the Court, the above entitled and numbered cause, and the Plaintiff,
Lubbock Independent School District, appeared by its Attorney of Record
and the Defendants, United States Fidelity and Guaranty Company, General
Electric Supply Company, a division of General Electric Company, a
corporation, The First National Bank of Lubbock, Texas, and the United
States of America and Ellis Campbell, Jr., in his capacity as District
Director of Internal Revenue, all appeared by their respective Attorneys
of Record, and all parties so appearing announced ready for trial and
waived a jury and agreed to submit all matters of fact, as well as of
law, to the Court without the intervention of a jury and the Defendant,
A. R. Preston, d/b/a Al Preston Electric, having been properly and duly
served herein, came not, but wholly made default and his attorney,
Kilmer Corbin of Lubbock, Texas, having agreed in writing to this case
proceeding to trial at the time duly set therefor on May 2, 1960, this
matter proceeded to trial, and the Court having considered the
pleadings, stipulation of facts, and argument of Counsel, is of the
opinion that the following findings of fact should be made and that the
following Judgment should be entered and is here entered, to-wit:
I. The Court
does find that the Parties in interest in this suit have entered into a
stipulation which has been made a part of the record in this cause and
the facts agreed to therein are hereby adopted as the findings of fact
of this Court and said stipulation is hereby in all things approved.
It is the
further finding of this Court that the claim of International Business
Machines Corporation, one of the original Defendants in this cause, has
been satisfied by United States Fidelity and Guaranty Company, and that
thereby, United States Fidelity and Guaranty Company is the successor in
interest by right of subrogation to the said claim of International
Business Machines Corporation, and the said claim of International
Business Machines Corporation is included in the claim allowed in favor
of United States Fidelity and Guaranty Company, hereinafter set out.
It is the
further finding of this Court, that heretofore and on or about March 13,
1959, General Electric Supply Company did recover an Interlocutory
Judgment against the Defendant, A. R. Preston, d/b/a Preston Electric
Company in the amount of $9,245.25 upon its account and in the amount of
$755.00 attorney's fees, together with all costs and interests thereon
from the date of such Judgment at the rate of six (6%) per cent per
annum; and that said Interlocutory Judgment should now become the
Judgment of this Court and be herein affirmed.
It is the
further finding of this Court that United States Fidelity and Guaranty
Company has heretofore paid out upon its bond in this case, the sum of
$33,832.70 and that it is additionally obligated to pay upon said bond
the sum of $3,374.82 to General Electric Supply Company in satisfaction
of a lien perfected by said General Electric Supply Company upon said
Bond in accordance with Article 5160 of the Revised Civil Statutes of
Texas and that therefore, it is the finding of this Court that United
States Fidelity and Guaranty Company has, and will pay out upon its said
bond a total sum of $37,207.52 by reason of which it is entitled to
participate to that extent in the funds retained by Lubbock Independent
School District upon the Wilson Jr. High School job, the same being the
work upon which the bond of United States Fidelity and Guaranty Company
It is the
further finding of this Court that General Electric Supply Company did
furnish materials to A. R. Preston, d/b/a Preston Electric Company, for
the Wilson Jr. High School building to the extent of $9,245.25 for which
it has not been paid and to this extent of $9,245.25 the said General
Electric Supply Company is entitled to participate in the distribution
of the funds retained by Lubbock Independent School District upon said
job and contract.
It is the
further finding of this Court that McWhorter, Cobb & Johnson,
Attorneys for Lubbock Independent School District in connection with the
representation of said School District in this cause, is entitled to a
reasonable attorney's fee therefor and that the same should be paid out
of the funds retained by said School District; and that a reasonable
attorney's fee for such services is the amount of $750.00.
It is the
further finding of this Court that the said Attorney's fee of $750.00
should be paid to McWhorter, Cobb and Johnson, and that all Court Costs
herein should also first be paid out of said funds retained by such
. It is the finding of this Court that said School District retained
funds upon the Wilson Jr. High School Contract in the amount of
$18,221.73 and that the School District has now paid into the Registry
of this Court that said sum of $18,221.73; and that said funds should be
disbursed under the facts and the law in this case as follows, to-wit:
McWhorter, Cobb & Johnson, Attorney's fees in the amount of $750.00.
B. To the
Clerk of this Court for Court Costs herein the sum of $55.30.
C. To United
States Fidelity and Guaranty Company the sum of $13,950.13.
D. To General
Electric Supply Company, a division of General Electric Company, a
corporation, the sum of $3,466.30.
It is the
further finding of this Court that Alvin Reed Preston, one of the
Defendants herein, is indebted to the United States of America for
Federal Taxes in the amount of $6,614.63 plus interest thereon as
alleged by the United States of America in its pleading herein labeled
"Intervenor's Complaint" and that the said United States of
America did file notice of Tax Liens upon the dates as alleged in its
said "Intervenor's Complaint." It is the further finding of
this Court that the claims of McWhorter, Cobb & Johnson, General
Electric Supply Company and the United States Fidelity and Guaranty
Company and the Court Costs, all as herein elsewhere set out, are claims
that are superior and have priority to the claims of the United States
of America insofar as the funds retained by the Lubbock Independent
School District are concerned and that these said prior claims are in
such amounts as to fully exhaust all of the funds retained by Lubbock
Independent School District and that therefore, the United States of
America has no claim thereto and is not entitled to participate in the
distribution of the funds so retained by the Lubbock Independent School
II. IT IS
THEREFORE ADJUDGED, ORDERED AND DECREED That each of the following do
have and recover against Alvin Reed Preston, d/b/a Al Preston Electric
Company, and Al Preston Electric Company, judgments in the following
United States Fidelity and Guaranty Company is hereby awarded a Judgment
against the said Alvin Reed Preston, d/b/a Preston Electric Company and
Preston Electric Company in the amount of $37,207.52.
General Electric Supply Company, a division of General Electric Company,
a Corporation, is hereby awarded a Judgment against the said Alvin Reed
Preston, d/b/a Preston Electric Company and Preston Electric Company in
the amount of $9,245.25 plus attorney's fees in the amount of $755.00.
The United States of America is hereby awarded a Judgment against the
said Alvin Reed Preston, d/b/a Preston Electric Company and Preston
Electric Company in the amount of $6,614.63."
III. IT IS
FURTHER ORDERED, ADJUDGED, and DECREED That the $18,221.73 paid into
Court by Lubbock Independent School District as the amount retained by
said District from the Wilson Jr. High School contract, be paid by the
Clerk and disbursed as follows, to-wit:
A. To McWhorter, Cobb & Johnson,
Attorney's fees in the
amount of ............................$ 750.00
B. To the Clerk of this Court
for Court Costs herein, the
sum of ...............................$ 55.30
Guaranty Company the sum
D. To General Electric Supply
Company, a division of General
Electric Company, a
corporation the sum of ...............$ 3,466.30
IV. IT IS
FURTHER ORDERED, ADJUDGED, AND DECREED That the Judgment of General
Electric Supply Company for $9,245.25 hereinabove more specifically set
out, be and is hereby credited with the sum of $841.12 which is paid to
General Electric Supply Company out of the funds retained by
V. IT IS
FURTHER ORDERED, ADJUDGED, AND DECREED That interest at the rate of six
(6%) per cent per annum shall accrue upon the General Electric Supply
Company Judgment against Preston from March 13, 1959, and upon the
Judgment of United States Fidelity and Guaranty Company against Preston
from May 2, 1960, and upon the Judgment of United States of America
against Preston from May 2, 1960.
VI. It is also
ORDERED, ADJUDGED, AND DECREED that the lien of the United States of
America against Alvin Reed Preston and any property of the said Alvin
Reed Preston, which lien or liens were created by reason of the filing
in Lubbock County, Texas, of the Notice of such liens all as plead in
"Intervenor's Complaint" filed herein by the United States of
America, be and the same are hereby ordered foreclosed, for which
execution may issue. In this connection it is specifically ordered by
this Court that neither the said Alvin Reed Preston nor the United
States of America have any property or rights to property in and to the
funds retained by the Lubbock Independent School District and herein
elsewhere ordered disbursed, nor in the obligations of United States
Fidelity and Guaranty Company under the bond issued by it on the Wilson
Jr. High School Contract.
VII. It is
further ORDERED, ADJUDGED and DECREED that United States Fidelity and
Guaranty Company shall pay to General Electric Supply Company the sum of
$3,374.82 in satisfaction of the lien perfected by General Electric
Supply Company upon the bond of United States Fidelity and Guaranty
VIII. It is
also ORDERED, ADJUDGED AND DECREED that the
is released from all further claims by any of the Parties of this suit
arising out of the Wilson Jr. High School Contract.
IX. It is
further the ORDER of this Court that all relief not herein specifically
granted is denied.
X. For all of
the relief herein granted and not satisfied, execution may issue.
¶9930]United States Fidelity and Guaranty Company, Plaintiff v. Floyd
Miller, Trading and Doing Business as Floyd Miller Plumbing Company;
Square Supply Company, a Corporation, Defendants, and United States of
S. District Court, West. Dist. N. C., Asheville Div., Civil No. 1520,
143 FSupp 941, 9/15/56
[1954 Code Sec. 6321--similar to 1939 Code Sec. 3670]
Collection: Tax liens: Funds in hands of surety: Government
intervenor.--Taxpayer did the plumbing work under a subcontract on a
federal housing construction project, and on notice being given to the
primary contractor the balance due taxpayer was paid to the latter's
surety to comply with the terms of the bond and to pay all obligations
due those who supplied labor and materials. The government levied upon
this money for tax liens, and the surety filed an interpleader suit
against taxpayer and a material furnisher who had not yet been paid, in
which action the government intervened. The material furnisher was
entitled to the remainder of the funds on deposit, since the tax liens
extended only to real or personal property and rights thereto which
belonged to taxpayer. The latter or his surety, on default coming about,
had no property rights in the money due until the contract was completed
and all labor and materialmen were paid.
, N. C., for plaintiff. Uzzell and DuMont, Asheville, N. C., for
defendant, Square Supply Company, J. M. Baley, Jr., United States
Attorney, Asheville, N. C., for intervenor.
[Interpleader Suit by Surety]
This is an
Interpleader Suit, brought under Title 28, USCA, Sections 1335, 1397,
2361 and 2410 by plaintiff, United States Fidelity and Guaranty Company
against one Floyd Miller who did business as the Floyd Miller Plumbing
Company; the Square Supply Company and the
. The amount in controversy exceeds the sum of $500.
evidence heard the following facts are found by the Court:
corporation. The defendant, Floyd Miller is a citizen of
in the Western District of North Carolina. The defendant, Square Supply
Company is a
with the institution of this action the plaintiff paid into the registry
of this court the sum of $3,281.22, which is the basis of this
In March 1952
the Osceola Construction Company, a Florida corporation, was the
successful bidder for the construction of a Federal housing project in
Hogansville, Georgia, and as such prime contractor entered into a sub
contract with Floyd Miller, trading as the Floyd Miller Plumbing Company
for the plumbing and heating work on said project, at the agreed price
of $66,500. Thereupon plaintiff, on March 6, 1952, became surety for
Floyd Miller and executed a performance bond in accordance with the
terms and provisions of the Miller Act, Title 40, USCA, Sec. 270(a),
guaranteeing, as the law would require, the faithful performance of his
sub contract with the Osceola Construction Company and for the payment
of all labor and material claims. Work on said sub contract began on
April 1, 1952
Indebted to Materialman]
Square Supply Company supplied the bigger portion of the building
materials to Miller in the performance of his contract, and in June 1953
after all credits had been given, Miller was indebted to it for
materials furnished to him and used in the work of his sub contract the
sum of $14,133.98. At that time Miller had completed his contract except
for several minor items, but was in default under his sub contract to
material furnishers, and on notice being given to the original
contractor, the Osceola Construction Company, the balance due Miller was
paid to the plaintiff herein as his surety for the express purpose of
complying with the terms of the bond of suretyship and the paying of all
of the obligations due to those who supplied labor and materials. The
December 15, 1953
, being made payable to Floyd Miller Plumbing Company and the plaintiff,
the United States Fidelity and Guaranty Company, and being in the sum of
$5,536.09. This amount was arrived at by the accounting methods of the
Osceola Construction Company. It was delivered to the plaintiff, and
thereupon certified for payment.
That at the
time of said notice and the resulting payment, Miller was indebted to
the following three concerns for material furnished:
Square Supply Company;
Engineering and Equipment Company;
to endorse the check for that he contended the amount did not represent
that due by the construction company, insisting that it was some $1,600
short. Finally and on June 17, 1954, and after much persuasion by all
parties concerned, Miller endorsed the check in the following words:
"Pay to the order of United States Fidelity and Guaranty Company,
Atlanta, Georgia," and left it with the plaintiff, his surety, for
the purposes for which it was intended.
This check was
then forwarded to the home office of plaintiff in
and deposited to its credit for disbursement. Subsequently plaintiff
paid the claims in full of the Engineering and Equipment Company and the
Nolan Company, and the amount deposited in the registry of the court
represents the balance on hand from the payment received from the
Osceola Construction Company.
continued to hold the balance of the funds obtained from the check, even
in the face of repeated demands of defendant Square supply Company for
payment to it of the amount held.
Tax Lien Filed Against Sub-Contractor]
13, 1954 the District Collector of Internal Revenue levied upon this
money in the hands of the plaintiff for tax liens theretofore filed
against Miller for Federal Unemployment tax, and Withholding and Social
Security tax, for various periods, as is shown by the evidence, all of
which, under the law would be liens in favor of the United States
against all property and rights to property, real and personal,
belonging to Miller--in the net amount of $5,860.46, and interest.
Miller was properly served and failed to file an answer or otherwise
plead, and made no appearance whatsoever in the action, obviously
asserting no claim to the funds involved in this controversy.
action was filed by plaintiff the
made a motion to dismiss the action in main as against it, and
subsequently was granted leave to intervene as a party plaintiff and to
file its complaint as such intervenor.
for determination is whether the defendant, Square Supply Company or the
intervenor, the United States, is entitled to the remainder of the funds
deposited originally with the plaintiff by the contractor and now held
in the registry of this court; or more simply stated, was the money
herein ever a property or property right belonging to Miller?
Internal Revenue Code 26 USCA, Sec. 6321, it is provided:
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 Statesupon all property and rights to property, whether real or personal,
belonging to such person."
This is the
applicable section of the law. Under that section nothing could be
plainer than that a lien for federal taxes extends only to property and
rights to property, real or personal, which belongs to the taxpayer. The
statute so provides.
construction has been well night universally placed upon like
circumstances by the courts. Cannon v. Nicholas, 10 Cir., 1935,
80 Fed. (2d) 934 [35-2 USTC ¶9672]; United States v. Long Island
, 2 Cir., 1940, 115 Fed. (2d) 983 [41-1 USTC ¶9140]; United
States v. Warren R. Co., 2 Cir., 1942, 127 Fed. (2d)
134; U. S. v. Burgo, et al., 175 Fed. (2d) 196 [49-1 USTC ¶9307].
courts have consistently held that a contractor or a sub contractor or
his surety on default coming about, has no property rights in monies due
under contracts for construction until and after performance is complete
and all labor and materialmen have been paid in full. It is not disputed
that Miller was in default in the performance of his sub contract and
that he was and now is insolvent. He was indebted to at least three
material furnishers and the amount that was due him by the original
contract was far less than that owed by him to those who furnished the
materials. This circumstance in itself worked a default on the part of
Miller. Mr. Justice Cardozo, in a very able opinion, said:
what has been written we have assumed that the failure to pay
materialmen was a default of such a nature as to impose a duty on the
contractor to turn over the payments to the surety upon appropriate
demand." Martin v. National Surety Co., et al., 300
Miller would have no interest whatever in the amount paid by the
contractor to his surety, and evidently realizing such, has made no
demand whatever. McGraw & Co. v. Sherman Plastering Co., 60
Fed. Supp. 504; affirmed 149 Fed. (2d) 301; Great American Indemnity
, 120 Fed. Supp., 445 [54-2 USTC ¶9469]; New York Casualty Co.
v. Zwerner, 58 Fed. Supp. 473 [45-1 USTC ¶9140]; American Surety
Co. v. Westinghouse Electric, 206 U. S. 133, 80 Law Ed. 105; National
Surety Co. v. County Board of Education, 15 Fed. (2d) 993 (4th CCA).
Nothing could be clearer therefore than that he had no property or
rights to property in said payment. Since that is a fact the
government's levy on the fund in the hand of the surety in
would be ineffectual as against the claim of the defendant, Square
places its right to the fund herein under its levy and the lien created
thereby, USCA 6322, but since it is my opinion that the fund herein at
no time was the property of Miller or that he had any right thereto, I
am not impressed with this theory of the case as advanced by it.
conclude that the Square Supply Company is entitled to recover the fund
now held in the registry of this court.
submit decree carrying this into effect.
¶9264]The Steelcraft Manufacturing Co., Plaintiff v. Orville J. Hewkin,
Jr., d.b.a. Hewkin Construction Company, et al., Defendants, and United
States of America, Intervenor
S. District Court, East. Dist. Ill., Civ. Action No. 1355-D, 148 FSupp
[1939 Code Secs. 3670, 3671 and 3672--similar to 1954 Code Secs. 6321,
6322 and 6323, respectively]
Tax lien: Priority of claims: Contract assignee and materialmen v.
government tax lien.--A steel manufacturing company deposited a sum
in an interpleader suit between the government, certain materialmen and
a contract assignee of the delinquent taxpayer, and asked that it be
relieved from further liability on its payment bond. It had contracted
to erect steel bins for a party; subletting the actual construction to
the taxpayer, who immediately assigned his rights under the second
contract to a bank to induce it to advance him funds. Upon completion of
the contract, the taxpayer filed bankruptcy. The Court held that as the
assignment to the bank was executed prior to the assessment of the
unpaid taxes, it was superior to the government's lien. Upon finding
that the materialmen had complied with the provisions of the Miller Act,
40 U. S. C. A. 270b(b) as to notice and the period in which claims were
to be filed, the Court held that their claims were also superior to that
of the government in that, as the manufacturing company was primarily
liable on its payment bond for the unpaid material bills, it had a
definite ownership in the funds due the taxpayer until the completion of
the contract. The materialmen were thus third-party beneficiaries of the
funds in the hands of the manufacturing company due the taxpayer. Since
the taxpayer was not entitled to receive payment until the completion of
the contract, the government lien never attached to this fund in that
its rights could not rise higher than those of the taxpayer. Under the
Miller Act, it was not necessary for the materialmen to reduce their
claims to judgment. Being an assignee of the taxpayer, the bank stood in
his shoes, and its claim was subordinate to those of the materialmen.
Seasongood, by R. J. Katz, 1616 Union Central Bldg., Cincinnati, Ohio,
and Steely, Norwood & Hegeler, 908 First National Bank Bldg.,
Danville, Ill., for plaintiff. Joseph H. Hedge, 223 No. Neil St.,
Champaign, Ill., for Orville J. Hewkin, Jr. William F. Woods, Commercial
Bank Bldg., Champaign, Ill., for Thomas A. Hagan, Jr. John W. Schriber,
110 So. Race St., Urbana, Ill., for Hunter Lumber Co. Mitchem &
Hendrix, 206 West Elm St., Urbana, Ill., for Champaign County Bank &
Trust Co. Roger D. Doten of Dent, Hampton & Doten, 209 So.
, for Fidelity & Deposit Co. of
. Dwight H. Doss, Kaiser Bldg.,
, for Jesse Whitehouse. W. C. Noel Law Offices,
105 West Main St.
, for Joseph T. Clancy. Wise & Meyer, 1106 First National Bank
Bldg., Danville, Ill., for Ellis Gravel Co. C. M. Raemer, United States
Attorney, and Charles R. Young, Assistant United States Attorney, Post
Office Bldg., Danville, Ill., for the United States.
Manufacturing Company, an Ohio Corporation, filed suit in the nature of
an interpleader praying that it be discharged from further liability on
its payment bond executed under a contract with the Commodity Credit
Corporation for the erection of steel bins. It tendered the payment of
$15,861.51 into court to be distributed as ordered by the court.
entered into this contract with Commodity Credit Corporation prior to
August 10, 1954
and on this date subcontracted with Orville Hewkin for the erection of
the bins. Hewkin was obligated to erect the bins, furnish all materials
and supplies, except those furnished by Steelcraft and Commodity Credit
Corporation. Also on
August 10, 1954
, Hewkin "assigned all his right, title and interest" in his
contract to the Champaign County Bank and Trust Company, of
, and directed Steelcraft to make all payments to him under said
contract direct to the bank. The bank advanced at least $10,000, which
is unpaid, to Hewkin on the security of the assignment. A copy of the
assignment was served upon Steelcraft. Hewkin completed his contract and
in April, 1955 was adjudged a bankrupt, Steelcraft withheld the
$15,861.51, being the balance due under the contract with Hewkin upon
being advised that in addition to the bank's assignment there were four
unpaid materialmen, viz:
Joseph T. Clancy .........$4,371.00
Ellis Gravel Company .....1,616.75
Jessie Whitehouse ........3,862.34
Hunter Lumber Company ....140.46
The bank, the materialmen, the trustee in bankruptcy and the bankrupt,
all citizens of
, were made parties defendant. The materialmen have filed answer
asserting priority over the bank's assignment. The United States of
America intervened in the suit seeking to impress upon the sum withheld
its tax liens for delinquent withholding taxes of Hewkin in the amount
of $5,397.68 assessed December 2, 1954 for the third quarter of the year
1954, and $3,995.95 for the fourth quarter of the year 1954 assessed
March 15, 1955. At the time of the assessments all of the materialmen
involved here had delivered their materials, completed their work and
presented their bills to Hewkin. Steelcraft kept an agent on the jobs at
all times and was aware of the progress of the work and materials
Ellis filed counterclaims against Steelcraft and third-party claims for
relief against the Fireman's Fund and Indemnity Company, the surety on
the payment bond executed by Steelcraft to the Commodity Credit
Corporation. Whitehouse, in substance by his answer, also filed a
counterclaim against Steelcraft. Only the counterclaim of Ellis was
filed in the name of the United States of America in strict accordance
with the Miller Act, 40 U. S. C. A. 270b(b). In substance all the
materialmen's claims are based upon the Miller Act and at the trial of
the cause were so construed and considered. Rule 15(b) F. R. C. P. See Glens
Falls Indemnity Co. v.
, 9 Cir., 229 Fed. (2d) 370.
The Miller Act
is remedial and must be liberally construed to accomplish its purpose. Fleisher
15. Ellis Gravel Company literally complied with the notice required
under the Miller Act. Clancy gave notice to Steelcraft within 90 days
through the Agricultural Stabilization and Conservation Division of the
Department of Agriculture. Whitehouse delivered a copy of his unpaid
bill to Orville Hewkin who in turn at his request delivered it to
Steelcraft within the required 90 days of the date the material was
furnished. Thus the latter two claimants stated accurately the amount
claimed and to whom the material was furnished to Steelcraft. This court
finds that all of the notices were intended to inform Steelcraft of the
unpaid material claims of Hewkin and were sufficient notice to comply
with the Miller Act. Fleisher Co. v. United States, supra; Houston
Fire & Casualty Ins. Co. v. United States, 5 Cir., 217 Fed. (2d)
All of the
answers and claims of the materialmen were filed within one year of the
final furnishing of materials which necessarily is within one year of
the settlement between Steelcraft and Commodity Credit Corporation. The
Hunter Lumber Company filed an answer but failed to appear and make
proof of their claim at the trial, and their claim must be disallowed.
Steelcraft deducted liquidated damages in accordance with the
subcontract due to delayed completion by Hewkin which it paid to
Commodity Credit Corporation, leaving a balance due on the contract in
the amount of $15,861.51. Neither the government nor any of the
defendants have questioned the amount of liquidated damages so paid by
maintains that its tax liens are entitled to priority over the claims of
the materialmen whose claims had not been reduced to judgment. A tax
lien of the government was fully perfected at the time the assessments
were made, 26
C. A. 6321 (formerly 3671). If the materialmen were opposing the tax
liens on the basis of a statutory mechanic's or materialman's lien, the
government would have priority. United States v. Kings County Iron Works, 2 Cir., 224 Fed. (2d) 232 [55-2 USTC
¶9536]. United States v. White Bear Brewing Co., 7 Cir.,
dissenting opinion, 227 Fed. (2d) 359 [55-2 USTC ¶9776], reversed 350
1010 [56-1 USTC ¶9440]; Cf. United States v. Saidman, C. A. D.
C., 231 Fed. (2d) 503 [56-1 USTC ¶9322]; United States v. Hawkins,
9 Cir., 228 Fed. (2d) 517 [56-1 USTC ¶9143].
The facts in
the instant case present a different situation. Steelcraft was the
principal on the payment bond executed to the Commodity Credit
Corporation with Fireman's Fund Indemnity Company as surety, and is
therefore liable for the unpaid material bills as principal upon this
bond under the Miller Act. In United States Fidelity and Guaranty Co. v.
, 10 Cir., 201 Fed. (2d) 118, 121 [53-1 USTC ¶9249], the court
date of the execution of the subcontract, the prime contractor had a
specific right of ownership in any funds accruing to the subcontractor
from the performance of the subcontract. The right to withhold these
funds upon default was superior to any other claim against the fund as
the property of the subcontractor."
specific right of ownership has even been held to extend to interest on
the sums expended by a surety. Glenn v. American Surety Co., 6
Cir., 160 Fed. (2d) 977 [47-1 USTC ¶9220]. Steelcraft as the principal
on the bond had a definite ownership in the amount due Hewkin for a
specific amount at all times. Steelcraft retained the ownership of the
funds to be paid to Hewkin until the contract was fully performed. This
amount was determinable by deducting from the subcontract price the
amount which Steelcraft had advanced to Hewkin from time to time as the
work progressed. Since Steelcraft is liable under the Miller Act to the
materialmen for their unpaid bills it was entitled to retain sufficient
funds to reimburse itself, based upon its prior right of ownership which
existed from the inception of the subcontract. United States Fidelity
and Guaranty Co. v. United States, supra; Glenn v. American Surety Co.,
supra. See also General Casualty Co. of America v. United States,
5 Cir., 205 Fed. (2d) 753 [53-2 USTC ¶9483]; Karno-Smith Co. v.
Maloney, 3 Cir., 112 Fed. (2d) 690 [40-2 USTC ¶9533]; In re
Caswell Const. Co., Inc., N. D. N. Y., 13 Fed. (2d) 667 [1 USTC ¶189];
American Fidelity Co. v. Delaney, D. Vt., 114 Fed. Supp. 702
[53-2 USTC ¶9620]; Great American Indemnity Co. v. United States,
W. D. La.
, 120 Fed. Supp. 445 [54-2 USTC ¶9469]; New York Casualty Co. v.
Zwerner, N. D. Ill., E. D., 58 Fed. Supp. 473 [45-1 USTC ¶9140].
The terms of
the contract obligated Hewkin to "furnish all materials and
supplies," thereby creating an implied condition of the subcontract
that the materialmen would be paid. Houston Fire and Casualty Insurance Co. v. E. E. Cloer, 5 Cir., 217 Fed.
(2d) 506; United States v.
Fidelity and Guaranty Co., 2 Cir., 113 Fed. (2d) 888. The
materialmen are thus third-party beneficiaries of Steelcraft's specific
ownership in the amount due Hewkin derived by and from the date of the
subcontract. The government's claim is based upon the failure of Hewkin
to pay his taxes and he and his property alone are liable for their
payment. See Central Bank v. United States, 345
639 [53-1 USTC ¶9408]. Steelcraft is not liable for the payment of
Hewkin's taxes to the government. United States v. Crosland Const. Co., 4 Cir., 217 Fed. (2d) 275 [55-1 USTC ¶9112].
See Great American Indemnity Co. v.
, supra. Since Hewkin was not entitled to receive payment until be
complied with his subcontract he had no right of ownership in the amount
still due and the lien of the government never attached to this fund.
The rights of the government rose no higher than those of the taxpayer
whose right to the withheld sum never accrued. Great American
Indemnity Co. v. United States, supra; F. H. McGraw & Co. v. Sherman
Plastering Co., D. C. Conn., 60 Fed. Supp. 504, affirmed 2 Cir., F.
H. McGraw & Co. v. Milcor Steel Co., 149 Fed. (2d) 301, cert.
753. To hold otherwise would impose upon Steelcraft double liability,
that is, to the government and the unpaid materialmen. This would be
inequitable. See Karno-Smith Co. v. Maloney, 3 Cir., 112 Fed.
(2d) 690 [40-2 USTC ¶9533].
contends that its assignment is superior to the claim of the
materialmen. Steelcraft acknowledged the assignment but it is obvious
that Hewkin thereby intended to assign only his profit to be received
under the subcontract. See Mueller v. Northwestern University,
256. Furthermore, the bank could stand in no better position against
Steelcraft than Hewkin, its assignee. Reeve v. Smith, 113
47; Angelina County Lumber Co. v.
Cent. R. Co., 252
The bank does
have priority over the tax claim of the government. This is not disputed
by the government. The assignment to the bank was executed long before
the government's taxes were assessed. By virtue of 26
C. A. 6323 (formerly 3672) the bank is a purchaser to the extent of the
amount it advanced to Hewkin as present consideration for the
assignment. National Refining Co. v.
, 8 Cir., 160 Fed. (2d) 951 [47-1 USTC ¶9221]. Cf. Scovil v.
218 [55-1 USTC ¶9137]; R. F. Ball Construction Co. v. Jacobs, W.
D. Texas, 140 Fed. Supp. 60 [56-1 USTC ¶9514].
therefore concludes that Steelcraft is entitled to an order that it be
discharged upon the payment of $15,361.51 into this court and the
materialmen are entitled to be paid their claims. The balance remaining
after the payment of these claims of the materialmen must be paid to the
bank. Since this absorbs the entire fund withheld there is nothing to be
paid to the government on withholding taxes.
fact, conclusions of law and final order may be submitted.
Casualty and Surety Company, Plaintiff v. The
Authority and the
United States of America
S. District Court, So. Dist. N. Y., Civ. 136-84, 182 FSupp 671, 3/24/60
[1954 Code Sec. 6323]
Completing surety's priority: Performance bond covering contract:
"Retained percentages of payments for work done".--The
completing surety of a defaulting contractor had priority over federal
tax liens against a fund held by the Port of New York Authority, the
other contracting party, on the grounds that it represented
"retained percentages of payments for work done", where (1)
the surety executed a performance bond covering the contract entered
into on the same day, (2) the contractor, eight days thereafter,
assigned to the surety all its right, title and interest to all the
money due under the contract, and (3) the liens subsequently filed
represented claims to employment taxes on wages paid for work done under
[1954 Code Sec. 6321]
Property subject to lien: Bonus for early completion of contract:
Right to withhold for benefit of third persons.--A bonus for early
completion of work by a defaulting contractor represented "retained
percentages of payments for work done" and was lawfully withheld by
the Port of New York Authority under a contract which authorized it to
withhold amounts from any payment, final or otherwise, to assure just
claims to third persons. Thus, it was not "property"
unlawfully withheld from the contractor to which federal tax liens could
attach and, as to this portion of the fund, the completing surety also
[1954 Code Sec. 6321]
Government's claim against surety: Obligation to pay wages v.
obligation to pay taxes on wages.--A completing surety of a
defaulting contractor was not obligated under its contract to pay the
Government's claim for employment taxes due from the contractor on wages
paid under the contract. The surety's obligation to pay the wages did
not obligate it to pay the taxes which should have been remitted to the
Government by the contractor, since a failure to pay taxes is not the
same thing as a failure to pay wages.
Levine, Morgulas & Foreman,
521 Fifth Avenue
17, N. Y. (Albert Foreman, of counsel), for plaintiff. Sidney Goldstein,
111 Eighth Avenue
11, N. Y., for the
Authority. S. Hazard Gillespie, Jr., United States Attorney for the
Southern District of New York (William Scott Ellis, Assistant United
States Attorney, of counsel), for
involves the question whether Aetna's lien as completing surety of a
defaulting contractor has priority over tax liens of the
against a fund of $67,000 held by the
New York Authority
. The latter asserts no claim to the money which consists in part of
retained percentages of payments certified as earned by the contractor
for work done; and in part of the unpaid portion of a bonus concededly
due but not paid to the contractor, for early substantial completion of
the work called for by the contract.
for Summary Judgment]
The action was
commenced in the New York Supreme Court and removed here by the
government. The Port Authority, in its answer, asks that it be directed
to pay the $67,000 into this court and that thereupon the action against
it be dismissed.
Both Aetna and
moved for either complete or partial summary judgment.
's motion seeks judgment (a) directing the Authority to pay it the
$67,000; (b) dismissing the government's tax lien and claim; or, in the
alternative, for partial summary judgment in the sum of $57,381.03 and
dismissing the government's tax lien and claim as to that amount.
government's motion seeks judgment (a) adjudging the tax liens to be
superior to the plaintiff's; (b) directing the Authority to pay the
government the $67,000; (c) directing Aetna to pay the government the
balance, if any, of taxes with respect to which the government has a
prior lien, and dismissing the complaint.
also moved, alternatively, for the following relief: (a) summary
judgment on its first counterclaim for the unpaid portion of the bonus,
which amounts to $9,184; (b) summary judgment on each of its second and
third counterclaims. These, respectively, seek $8,106.26 for unpaid
withholding taxes and interest; and $1,512.71 for unpaid unemployment
insurance taxes and interest.
Issue as to Material Facts]
agree and I independently find there is no genuine issue as to any of
the material facts which I find to be as follows.
In 1954, Ranes
Construction Corp., the defaulting contractor, entered into a contract
with the Port Authority to construct Hangar No. 11 at
. On the same day, Ranes as principal and the plaintiff as surety
executed a performance bond covering that contract. Eight days later
Ranes assigned to the plaintiff all right, title and interest to all
monies due under that contract.
On July 7,
1955, all but about $1,000 worth of work on the hangar was completed
and, under the terms of the contract as amended in March, 1955, a bonus
of $57,400 became due to Ranes. All but $9,184 of the bonus was paid to
Ranes. The latter, however, was then unable to meet its financial
obligations under the contract. The plaintiff, as surety, was obliged to
and did complete the contract, and in doing so expended the sum of
$276,910.83. It thereupon made demand on the Port Authority for all
monies then due Ranes under the contract and unpaid. These amounted to
$157,380.58. The Port Authority, which had received notices of tax
liens, paid the plaintiff $90,380.58 on account and withheld $67,000 to
cover the tax liens filed by the government during August, 1955 and at
various times thereafter.
Surety v. Assignee]
conceded on oral argument that the plaintiff, as completing surety,
would be entitled, under prior authorities, to priority as to the
retained percentages of payments for work done. This concession did not
extend to the unpaid portion of the bonus. The government contended,
however, that the rule announced in the earlier cases 1
has been overruled by R. F. Ball Contracting Co. v. Jacobs.2
That contention is rejected. 3
In the Ball case, the plaintiff did not sue as completing
"surety" but as "assignee," a status which it
contended, under applicable state law as to assignments and mortgages,
constituted it a "mortgagee" under section 3672(a) of the
Internal Revenue Code of 1939 and thus entitled to priority. The Supreme
Court held the assignment to Ball did not constitute it a
"mortgagee" within the meaning of the code provision. The Ball
decision, however, left undisturbed the rule announced in the prior
cases cited above. Accordingly, on the authority of those cases, I hold
that the plaintiff's lien as completing surety has priority over the
defendant's liens for taxes against the retained percentages of payments
for work done.
government's contention with respect to the withheld portion of the
bonus is that, this "was earned by Ranes, and thus is in a category
different from that of the retained percentages" because Article 8
of contract, entitled "Withholding Payments," "applies
primarily to retained percentages." Accordingly, the argument
proceeds, the unpaid bonus is "property" of Ranes unlawfully
withheld, to which the tax liens attached, thus giving them priority
over Aetna's lien under decisions such as those in American Radiator
Co. v. City of New York4
and Schuessler v. Metropolitan Casualty Insurance Co.5
These contentions are rejected. The cases cited in their support are
inapplicable to the facts here.
provision was added to the contract by amendment executed with the
surety's consent on
March 3, 1955
. The contract originally called for complete performance of all work
under the contract by
September 15, 1955
. The amendment provided for payment of a bonus of $2,296 "for each
calendar day between July 5 and
July 31, 1955
. . . on which Hangar No. 11 is completely available for occupancy and
use . . .." The amendment further provided that the "Bonus for
Early Completion" was to be paid by monthly advances in "an
appropriate amount . . . to be determined by the Engineer, in his sole
discretion, taking into account [certain specified expenses not here
relevant] in connection with the early availability of Hangar No. 11 for
Occupancy." Article 8 of the contract, which was not modified by
the amendment, authorizes the Authority to "withhold out of any
payment, final or otherwise, such sums as the Director may deem
ample to . . . assure the payment of just claims of third persons . .
.." (Italics supplied) I hold, therefore, that the unpaid portion
of the bonus was not illegally withheld and, as to that also, the
plaintiff's lien has priority.
government's motions for partial summary judgment on its second and
third counterclaims will be considered together. Both rest on the
contention that, the government has a "lawful claim" against
the defaulting contractor which the surety is required to pay under the
provisions of its bond which obligates it to "pay or cause to be
paid . . . all lawful claims of third persons arising out of or in
connection with the [constitution] contract and work
performed thereunder . . .." (Italics supplied) The steps in the
argument in support of this contention are these. Ranes was required by
the construction contract to pay "wages"; "wages"
means "gross earnings" rather than the mere "take home
pay" which remained after deduction of withholding and unemployment
taxes. Ranes' failure to remit to the government the amounts withheld
for these taxes was a failure to pay "wages" in full. This
constituted a breach by Ranes of the construction contract and gave rise
to a "lawful claim" by the government against Ranes for the
amounts withheld. Similar contentions and argument have been repeatedly
rejected in other cases. 6
They are rejected here.
government's purported reliance on the decision of the Supreme Court in United
States v. Carter7
is misplaced. That decision does not, as the government seems to
suppose, support the foregoing argument. The basic question in that case
was, whether the defaulting contractor's failure to pay contributions to
a union welfare fund pursuant to his agreement with the union, of which
his employees were members, was a failure, in violation of section 2a of
the Miller Act,8
to pay his employees "in full." The parties had stipulated
that the contributions "were part of the consideration [the
contractor] had agreed to pay for the services of laborers on his
construction jobs." The court held the failure to pay the
contributions was a violation of the Act; and therefore the surety,
whose liability is "at least coextensive with the obligations
imposed by the Act," 9
was liable under its statutory bond, recovery on which is not limited to
"wages," which concededly had been paid. 10
The trustees of the welfare fund were allowed to assert the claim
because they "stand in the shoes of the employees and are entitled
to enforce their rights."
here, does not of course, pretend to "stand in the shoes" of
Ranes' employees. Moreover, even they have no claim to the amounts
withheld for taxes. 11
government's several motions for summary judgment and partial summary
judgment are severally denied.
plaintiff's motion for summary judgment is granted.
The order to
be entered will contain a provision dismissing the complaint as to the
Port Authority upon its payment of the $67,000 into court.
1Fidelity & Deposit Co. v. New York City Housing Authority, 2
Cir., 241 F. 2d 142 [57-1 USTC ¶9410]; Aetna Casualty & Surety
Co. v. United States, 4 N. Y. 2d 639, 176 N. Y. S. 2d 961 [58-2 USTC
¶9778]; United States Fidelity & Guaranty Co. v. Triborough
Bridge Authority, 297 N. Y. 31, 74 N. E. 2d 226 [47-2 USTC ¶9327].
See also Massachusetts Bonding & Insurance Co. v. State of New
York, 2 Cir., 259 F. 2d 33, 38 [58-2 USTC ¶9704].
6United States v. Crossland Construction Co., 4 Cir., 217 F. 2d
275 [55-1 USTC ¶9112]; Westover v. William Simpson Construction Co.,
9 Cir., 209 F. 2d 908 [54-1 USTC ¶49,022]; General Casualty Co. of
America v. United States, 5 Cir., 205 F. 2d 753 [53-2 USTC ¶9483]; United
States Fidelity Guaranty Co. v. United States, 10 Cir., 201 F. 2d
118 [53-1 USTC ¶9249]; First National Bank in Yonkers v. City of New
See United States v. Embassy Restaurant, 359
29, 35 [59-1 USTC ¶9297].
Sec. 3403, Internal Revenue Code of 1954; §31.3401(a)-1(b)(5),
R. C. 1954.
¶9109]In Re: Rex Allen and Patricia L. Allen, dba Rebet Logging and
FTBA PattiJo's, Debtors, Clackamas County Bank, an Oregon corporation,
Plaintiff v. Internal Revenue Service and
ert K. Morrow, Trustee, Defendants
S. Bankruptcy Court,
, Bankruptcy Case No. 382-01740,
[Code Sec. 6323]
Lien for taxes: Priority: Subrogation rights: State law: Good
State law protected the interests of a creditor bank against an
intervening government lien on the amount received from the sale of the
debtors' assets. The creditor had paid off the loan to another creditor
with respect to the assets but in so doing it was not acting as a
volunteer but was protecting its interests. Although the payment of the
loan for the assets and the subsequent filing of a financial statement
with the Secretary of State resulted in an alleged subrogation of the
bank's lien to that of the government, the bank claimed priority on the
basis of the prior security interest held by the other creditor. Finding
that state law applied subrogation liberally in such a case, the court
granted the bank's motion for summary judgment and ruled that it was
entitled to the funds from the sale. However, the IRS was correct in its
filing of the lien notice in the debtors' county of residence because
the debtors, husband and wife, were not considered a business
partnership that would have required the filing of the lien with the
Secretary of State.
Baker, Morrison, Dunn, Miller, Carney & Allen,
851 S. W. 6th Avenue
, for Debtor. Herbert C. Sundby, Assistant
, for Internal Revenue Service. David A. Foraker, Greene & Perris,
1515 S. W. Fifth Avenue
ert K. Morrow.
Granting Summary Judgment to Clackamas County Bank
County Bank (the bank) and the Internal Revenue Service (I. R. S.) each
filed pleadings to recover $10,684.00 resulting from the sale by the
trustee of the debtors' logging equipment. The trustee, who asserted no
interest, deposited the funds into Court. Both claimants moved for
summary judgment. The I. R. S. based its claim on a prior filing of a
tax lien on May 11, 1981 and June 16, 1981 in the debtors' county of
residence under O. R. S. 87.806(3)(b) and 26 U. S. C. §6323(a)(f). The
bank based its claim on a security interest in the equipment securing a
debt having a current balance of $22,153.39. The bank, which filed its
financing statement with the Secretary of State after the I. R. S. filed
its liens, claimed priority to these funds based upon an alleged right
to be subrogated to a prior security interest held by Ferrous Financial
Services which the bank paid off. The bank also contended that the I. R.
S. filed its tax lien in the wrong place because the debtors were a
partnership having a place of filing for tax lien purposes with the
Secretary of State under O. R. S. 87.806(3)(a).
judgment should be granted to Clackamas County Bank based upon its
rights of subrogation because I find that there is no genuine issue of
material fact in this regard and that the bank is entitled to judgment
as a matter of law. Rule 56(c) F. R. Civ. P. and Rule 756 of the
Bankruptcy Rules. On the other hand, I find that the I. R. S properly
filed its notice of lien with the Secretary of State because the debtors
are not a partnership and that there is no genuine issue as to material
fact in this regard.
law governs the priority of subrogation rights in a federal tax lien
controversy. 26 U. S. C. §6323(i)(2). A person who advances moneys to
discharge a prior lien on real or personal property and takes a new
mortgage as security will be subrogated under
law to the prior lien as against the holder of an intervening lien of
which he was excusably ignorant. Payment of the prior lien cannot bar
subrogation because it is the payment which triggers the subrogation. Metropolitan
Life Ins. Co. v. Craven, 164 Or. 274, 101 P. 2d 237 (1940). A person
who pays a debt of another for reasons of self interest is not a
law even though he did not act under legal obligation. Hult v.
Ebinger, 222 Or. 169, 352 P. 2d 583, 590-94 (1960). This circuit
applies subrogation liberally in favor of a lender who pays an
obligation of another, provided that the entire transaction places no
innocent third party in a position more unfavorable than that in which
he would have originally stood. United States v. Halton Tractor Co.
[58-2 USTC ¶9774], 258 F. 2d 612 (9th Cir. 1958). C. I. M.
International v. United States [81-1 USTC ¶9146], 641 F. 2d 671,
676-78 (9th Cir. 1980). See also Potter v. United States [53-1
USTC ¶9323], 111 F. Supp. 585, 588 (D. R. I. 1953).
The I. R. S.
did not controvert the facts justifying the right of Clackamas County
Bank to be subrogated to the security interest of Ferrous Financial
Services. On approximately
June 22, 1981
, the bank loaned the debtors approximately $42,000.00 and paid
$22,706.45 to Ferrous Financial Services in satisfaction of a prior
security interest on logging equipment which the debtors gave to
plaintiff as collateral for the new loan. Instead of perfecting an
express assignment of the Ferrous Financial interest which would have
been valid under the C. I. M. International case against the
intervening lien of the I. R. S., the bank first filed with the
Secretary of State its own financing statement on June 24, 1981 and
thereafter allowed the filing of a termination statement covering
Ferrous' interest on June 30, 1981. The bank was not a volunteer in
paying off Ferrous because it thought it was acting in its self
interest. The bank's self-inflicted and ostensible subordination of its
interest to the I. R. S. lien was negligent and ignorant because of its
failure to check the records of the debtors' county of residence prior
to allowing the filing of a termination statement. The bank's negligence
and ignorance was excusable because the I. R. S. was not misled to its
disadvantage and because of the trap to unwary but good faith lenders
represented by the failure of O. R. S. 87.806 to keep up with Oregon's
change to a central filing system governing perfection of security
interests. The I. R. S. alleged no equity to bar subrogation in favor of
urged, esoteric arguments to the effect that the bank should apply
prebankruptcy payments made by the debtor to satisfy the subrogated
portion of the debt cannot change the result under the facts of this
case. Assuming that the June 22, 1981 payment to Ferrous froze the
subrogated debt at $22,706.45, and assuming that the Ferrous agreement
lacked a future advance clause that would survive 26 U. S. C. §6323(b),
there are no allegations that the parties to the loans knew of the
existence of the I. R. S. lien, let alone that they intended to treat
the bank loan as anything other than a single loan for purposes of
applying the payments. In the absence of agreement or a contrary intent,
payments on a single under-collateralized debt lessens the burden of
debt borne by the collateral but does not free the collateral from the
security interest. There is no marshaling principle that would override
the intent of and legitimate expectations of the parties here or that
would require the bank to apply payments in the most disadvantageous
manner to defeat its right of subrogation. While the I. R. S. will not
receive a benefit from prebankruptcy payments made by the debtor to the
bank if applied to reduce the unsecured part of the bank's debt, it
cannot be said that it or its lien has been hurt by those payments and
were not a partnership within in O. R. S. 68.110 defining a partnership,
or within the meaning of any applicable federal authorities. The I. R.
S. correctly filed its lien notice in the debtors' county of residence.
The filing at the bank's request with the state authorities of an
assumed business name for Rebet Logging Co. listing both debtors as
parties of interest alone is insufficient under O. R. S. 68.120(2) to
establish a business partnership. The debtors are husband and wife and
by law are partners in a nonbusiness sense. They did not claim to be a
business partnership in their bankruptcy papers or tax returns and there
are no affidavits showing an intention to act as business partners or
evidence of relevant conduct.
foregoing reasons, Clackamas County Bank is entitled to an order
granting summary judgment in its favor and directing the Clerk to
disburse to it those funds with related interest which were deposited to
the Registry by the trustee.
Title of Pinellas, Inc., a Florida Corporation, Plaintiff v. United
States of America, Jean Dickinson, as Personal Representative of the
Estate of Evelyn J. Fisher and William H. McVay as Successor Trustee of
the Evelyn J. Fisher Revocable Trust dated August 10, 2000, Defendants.
District Court, Mid. Dist. Fla.,
April 8, 2005
Federal tax lien: Interpleader: "First in time, first in
right": Summary judgment. --
The IRS was
entitled to the proceeds from the sale of property because the IRS had
recorded a notice of federal tax lien against the owner. Although the
taxpayer had assigned the proceeds of the sale of the property to a
private trust, the IRS's lien was valid because there were no material
questions of fact regarding the validity of the federal tax lien or its
attachment to the property, the lien was recorded prior to the
assignment of the proceeds to the trust, and none of the specific
exceptions under Code
Sec. 6323 to the "first in time, first in right "rule
BUCKLEW, District Judge: This cause comes before the Court for
consideration of Defendant United States of America's ("IRS")
Motion for Summary Judgment (Doc. No. 33) and Defendants Jean
Dickinson's, as Personal Representative of the Estate of Evelyn Fisher,
and William H. McVay's, as Successor Trustee of the Evelyn J. Fisher
Revocable Trust dated August 10, 2000, ("Trust") Motion for
Summary Judgment (Doc. No. 35). Plaintiff Homestead Title ("
') opposes both motions. (Doc. No. 36). The IRS opposes the Trust's
motion. (Doc. No. 37). The Trust opposes the IRS' motion. (Doc. No. 38).
This is an interpleader action removed from state court.
filed an interpleader action in order to determine which of the two
defendants is entitled to the proceeds from the sale of the property
3754 Central Avenue
3754 Central Avenue
"). The IRS claims it is entitled to the proceeds by virtue of a
Federal Tax Lien that was recorded in
prior to the closing. The Trust claims it is entitled to the proceeds by
virtue of an assignment of the proceeds from the sale made by
International Advisory Services, Inc., a Florida Corporation 1
("IAS") the day before the closing.
November 15, 2000
ert J. Ambrose conveyed
3754 Central Avenue
to IAS by Warranty Deed. (Doc. No. 33 at 1). On
August 11, 2003
, the IRS made jeopardy assessments pursuant to 26 U.S.C. §6861
against IAS for unpaid taxes in the amount of $114,740.00, plus
$28,685.00 in penalties, and $11,593.57 in interest. (Doc. No. 33 at 2).
The IRS recorded a Notice of Federal Tax Lien against IAS on
August 14, 2003
, and has provided a Certificate of Official Record indicating that the
total balance due as of
April 9, 2004
was $170,889.53. (Doc. No. 33, exhibits B & C).
August 28, 2003
, the day before the closing, IAS assigned the proceeds of the sale
3754 Central Avenue
, which was under contract with Falichia L. Fisher, to the Trust. On
August 29, 2003
, more than two weeks after the IRS had recorded the Notice of Federal
Tax Lien, IAS conveyed
3754 Central Avenue
to Falicia L. Fisher for $202,000.00. (Doc. No. 33 at 2).
handled the closing in its offices and acted as both escrow agent and
received an affidavit by Ronald C. Keeling, Vice President of IAS,
3754 Central Avenue
was not subject to an IRS lien. (Doc. No. 36, exhibit A).
issued a check for the proceeds of the sale, in the amount of
$107,728.28, payable to the Estate of Evelyn Fisher. (Doc. No. 35 at 2).
Upon discovering the federal tax lien,
issued a stop payment order on the proceeds of the check on or about
September 5, 2003
. (Doc. No. 35 at 3).
filed this interpleader action in state court to determine whether the
IRS or the Trust is entitled to the proceeds. (Doc. No. 2) The IRS
removed this action to this Court (Doc. No. 1), and this Court
for the IRS as a defendant in this action. (Doc. No. 4). This Court then
to deposit the proceeds into the registry of this Court. (Doc. No. 11).
II. Standard of Review
Summary judgment is appropriate "if the pleadings, depositions,
answers to interrogatories and admissions on file, together with the
affidavits, if any, show that the moving party is entitled to judgment
as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears
the initial burden of showing the Court, by reference to materials on
file, that there are no genuine issues of material fact that should be
decided at trial. SeeCelotex Corp. v. Catrett, 477
317 (1986). A moving party discharges its burden on a motion for summary
judgment by "showing" or "pointing out" to the Court
that there is an absence of evidence to support the non-moving party's
at 325. Rule 56 permits the moving party to discharge its burden with or
without supporting affidavits and to move for summary judgment on the
case as a whole or on any claim. Seeid. When a moving
party has discharged its burden, the non-moving party must then "go
beyond the pleadings," and by its own affidavits, or by
"depositions, answers to interrogatories, and admissions on
file," designate specific facts showing there is a genuine issue
for trial. Id.
In determining whether the moving party has met its burden of
establishing that there is no genuine issue as to any material fact and
that it is entitled to judgment as a matter of law, the Court must draw
inferences from the evidence in the light most favorable to the
non-movant and resolve all reasonable doubts in that party's favor. SeeSpence v. Zimmerman, 873 F.2d 256 (11th Cir. 1989); Samples on
behalf of Samples v. City of Atlanta, 846 F.2d 1328, 1330 (11th Cir.
1988). The Eleventh Circuit has explained the reasonableness standard:
whether an inference is reasonable, the Court must "cull the
universe of possible inferences from the facts established by weighing
each against the abstract standard of reasonableness." [citation
omitted]. The opposing party's inferences need not be more probable than
those inferences in favor of the movant to create a factual dispute, so
long as they reasonably may be drawn from the facts. When more than one
inference reasonably can be drawn, it is for the trier of fact to
determine the proper one.
WSB-TV v. Lee, 842 F.2d 1266, 1270 (11th Cir. 1988).
Thus, if a reasonable fact finder evaluating the evidence could draw
more than one inference from the facts, and if that inference introduces
a genuine issue of material fact, then the court should not grant the
summary judgment motion. SeeAugusta Iron & Steel Works v.
Employers Ins. of
Wausau, 835 F.2d 855, 856 (11th Cir. 1988). A dispute about a material
fact is "genuine" if the "evidence is such that a
reasonable jury could return a verdict for the non-moving party." Anderson
v. Liberty Lobby, Inc., 477
242, 248 (1986). The inquiry is "whether the evidence presents a
sufficient disagreement to require submission to a jury or whether it is
so one-sided that one party must prevail as a matter of law." Id.
Both the IRS and the Trust move the Court for summary judgment. The IRS
moves on the grounds that the recorded federal tax lien takes priority
over all other claims, and it is entitled to judgment as a matter of
law. (Doc. No. 33 at 4-5). The Trust moves for summary judgment on the
's complaint for interpleader is improper. The Trust argues that
does not have a right to interpleader, because
is an interested party which is not free from fault, and because
has an adequate remedy at law against IAS. (Doc. No. 35 at 3).
opposes both motions arguing that questions of fact exist regarding the
validity of the tax lien, the validity of the Trust's claim to the
proceeds based on an allegedly fraudulent assignment, and
's duties and obligations to the Trust.
The Trust's Motion for Summary Judgment
The Trust argues that this Court should grant summary judgment in its
does not have the right to interpleader.
1. Choice of Law
The Court must first determine whether federal or state law applies. The
government removed this case pursuant to 28 U.S.C. §1444. 2
Once a federal tax lien arises, "federal law governs the priority
of competing liens asserted against a taxpayer's property."
USTC ¶50,419], 59 F.3d 1571, 1575 (11th Cir. 1995). Whether
's action is a proper interpleader is governed by Federal Rule of Civil
Procedure 22 and federal law.
2. Interpleader is Proper
First, the Trust argues that
is interested and not free from fault; therefore, it has no right to
filed a complaint for interpleader, because it was unable to determine
which Defendant had superior title to the proceeds.
has made no claim to the funds. (Doc. No. 2).
Historically, under strict interpleader, an interested plaintiff was
denied interpleader relief. SeeBradley v. Kochenash, 44
F.3d 166, 168 (2d Cir. 1995). The rules of interpleader were later
relaxed and "a bill 'in the nature of interpleader' became
available in order to 'guard against the risks of loss from the
prosecution in independent suits of rival claims where the plaintiff
himself claim[ed] an interest in the property or fund which [wa]s
subject to the risk.'" Id.
(quoting Texas v. Florida, 306
398, 406-407 (1939)).
has demonstrated that it may be exposed to double liability and may be
subjected to an adverse claim to a particular fund, which is required
pursuant to Federal Rule of Civil Procedure 22. SeeGeneral
Electric Credit Corporation v. Grubbs, 447 F.2d 286, 288 (5th Cir.
1971) (overruled on other grounds). Therefore, even if
is an interested plaintiff in this action,
's complaint for interpleader is proper. 3
Adequate Remedy at Law
The Trust argues that
has an adequate remedy at law; therefore, it should be denied
interpleader relief. (Doc. No. 35 at 7). Federal Rule of Civil Procedure
22 affords equitable relief, and as a general rule, equitable relief is
precluded where there is an adequate remedy at law. SeeMorales
v. Trans World Airlines, Inc., 504
374, 381 (1992).
The Trust argues that
's adequate remedy at law is to pay on the title claim in the amount
owed to the IRS, then pay the closing proceeds to the Trust. After
paying out twice,
would seek to recover from IAS. (Doc. No. 35 at 7). This remedy would
's possible double liability, which is exactly what an interpleader
action is designed to protect against. SeeMatter of Bohart,
743, F.2d 313, 325 (5th Cir. 1984) (citations omitted). The Trust's
proposal does not leave
with an adequate remedy at law. Accordingly, the Trust's motion for
summary judgment based on the ground that
's interpleader is improper is denied.
Motion for Summary Judgment
moves for summary judgment on the ground that the federal tax lien has
priority. Whenever the federal government asserts a tax lien, the
threshold question "is whether and to what extent the taxpayer had
'property' or 'rights to property' to which the tax lien could
attach." Aquilino v. United States [ 60-2
USTC ¶9538], 363 U.S. 509, 512 (1960).
1. Validity of the Federal Tax Lien
states that there is a question of fact as to whether or not the lien
against IAS is valid. (Doc. No. 36 at 2). The IRS has provided the Court
with a Certificate of Official Record showing a jeopardy assessment
against IAS (Doc. No. 33, exhibit B), a copy of a Warranty Deed
conveying 3754 Central Avenue to IAS on November 15, 2000 (Doc. No. 33,
exhibit A), a Notice of Federal Tax Lien against IAS recorded in
Pinellas County on August 12, 2003 (Doc. No. 33, exhibit C), and a copy
of a Warranty Deed conveying the property in question from IAS to
Falichia L. Fisher on August 29, 2003. (Doc. No. 33, exhibit D). The
Trust does not contest the validity of the tax lien against IAS or any
of these documents. There is no evidence that IAS disputes the jeopardy
assessment or the lien.
, however, argues that there are material questions of fact as to the
validity of the assessment and the tax lien because the IRS did not make
a levy against
prior to being interplead.
bases its argument on Arguelles v. City of Orlando, 855 So.2d
1202 (5th DCA Fla. 2003). Arguelles, however, is inapposite.
First, Arguelles is based on state law. Second, in Arguelles,
the court based its decision on the fact that summary judgment was
premature because discovery requests were outstanding when the lower
court granted summary judgment. Id.
does not allege that there are any outstanding discovery requests.
merely states that a question of fact exists as to the validity of the
lien and who owned
3754 Central Avenue
, but fails to address the validity of the IRS's documents. Once the
movant, here, the IRS, "satisfies its intial burden under Rule
56(c) of demonstrating the absence of a genuine issue of material fact,
the burden shifts to the nonmovant to 'come forward with 'specifics
facts showing that there is a genuine issue for trial.'" Allen
v. Tyson Foods, Inc., 121 F.3d 642, 647 (11th Cir. 1997) (quoting Matsushita
Electric Indus. Co. v. Zenith Radio Corp., 475
574, 587 (1986)).
has not come forward with specific facts showing a genuine issue for
trial. Therefore, this Court concludes that no material questions of
fact exists regarding the validity of the federal tax lien or that it
attached to the 3754 Central Avenue property prior to the transfer of
that property on August 29, 2003.
2. Priority of the Federal Tax Lien
The Court must next determine whether a valid federal tax lien has
priority over the claims of the Trust. The priority of a federal tax
lien is a question of federal law. Griswold [ 95-2
USTC ¶50,419], 59 F.3d at 1575. "The general rule is, 'first
in time, first in right.'" Id.
(quoting United States v. City of New Britain [ 54-1
USTC ¶9191], 347 U.S. 81, 85 (1954)). However, 26 U.S.C. §6323
creates a limited number of exceptions to the "first in time"
rule and requires that the lien be properly filed before notice becomes
Neither the Trust nor
argues that any of the specific exceptions listed in 26 U.S.C. §6323
apply in this case; therefore, the "first in time" rule
applies. As previously stated, the IRS recorded a Notice of Federal Tax
, the county in which
3754 Central Avenue
is located, on
August 14, 2003
. The Assignment of Contract Proceeds, on which the Trust bases its
claim, was executed on
August 28, 2003
. Therefore, the government's tax lien takes priority and attached to
the property as well as the proceeds.
Accordingly, it is ORDERED AND ADJUDGED that:
United States of America
's Motion for Summary Judgment (Doc. No. 33) is GRANTED;
2. The Trust's
Motion for Summary Judgment (Doc. No. 35) is DENIED;
3. The clerk
is directed to enter judgment in favor of Defendant United States and
pay the $108,809.55 plus any accrued interest upon receipt of the funds
in the registry of this Court to the "United States Treasury,"
to be credited to the account of International Advisory Services, Inc.;
4. The clerk
is directed to CLOSE the case and TERMINATE any pending
pretrial conference scheduled for
April 14, 2005
is hereby cancelled.
DONE AND ORDERED.
According to the Corporate Warranty Deed dated
August 29, 2003
, IAS was a "Dissolved Florida Corporation" as of that date.
There is no evidence before this Court as to when IAS dissolved.
Any action brought under section 2410 of this title against the
in any State court may be removed by the
to the district of the
for the district and division in which the action is pending.
28 U.S.C. §1444.
Section 2410(a) provides:
Actions affecting property on which United States has a lien (a) Under
the conditions prescribed in this section and section 1444 of this title
for the protection of the United States, the United States may be named
a party in any civil action or suit in any district court, or in any
State court having jurisdiction of the subject matter --(5) of
interpleader or in the nature of interpleader with respect to, real
or personal property on which the United States has or claims a mortgage
or other lien.
28 U.S.C. §2410(a)(emphasis added).
The Trust argues that
is independently liable to them for breach of contract and breach of
fiduciary duty pursuant to state law. However, these issues are pending
in a pending state court proceeding and are not before this Court. This
Court's determination as to which of the two defendants is entitled to
the proceeds of the
3754 Central Avenue
property does not affect the issues regarding
's possible independent liability.
¶9296] Benjamin Acosta, Inc., Plaintiff v.
United States of America
, et al., Defendants
District Court, Dist. Puerto Rico, Civ. 86-1650HL, 3/8/88
[Code Sec. 6323 --Result
unchanged by the Tax Reform Act of 1986 ]
Liens for unpaid taxes: Validity of liens: Attorney's lien: Puerto
Rico: Assignment of right following lien.--Prior existence of a
contingent fee agreement between an attorney and a corporate taxpayer
did not take priority over federal tax liens that were filed against the
taxpayer. Federal law only recognizes the priority of an attorney lien
over a tax lien if local law provides for attorney's liens.
law did not provide for an attorney's lien and consequently all monies
obtained from the successful conclusion of unrelated judicial claims
that were pending before the lien attached were payable to the IRS. The
district court in
further held that a subsequent assignment to a third party of the right
to any money obtained in the civil actions was also inferior to the
Rodriguez, P.O. Box 9745, Santurce, P.R. 00908, Jose D. Medina, Box 424,
Hato Rey, P.R. 00919, Jose L. Ubarri, 331 Recinto Sur St., San Juan,
P.R. 00905, for plaintiff. Stephen Carlton, Department of Justice,
Washington, D.C. 20530, Jose M. Pizarro Zayas, Federal Building Room
101, Hato Rey, P.R. 00918, for defendants.
It may be
frightening, but it is true. There exists no statutory provision in
establishing an attorney's lien on money obtained in a judgment or
settlement. Cornier v. Superior Court, 96 P.R.R. 246 (1968); Martinez v. Hernandez, 456 F.2d 262, 264 (1st Cir. 1972). The prior
existence of a valid contingent fee agreement between attorney and
successful client has no effect on this situation. Id.
Where, as here, the Internal Revenue Service ("IRS") places a
tax lien on a taxpayer's property, including the potential proceeds from
an unrelated judicial claim being brought by the taxpayer, the attorney
whose services resulted in a money judgment has no priority or right in
this jurisdiction to deduct his fees before the tax liability is
Plaintiff is a
firm of independent insurance adjusters, surveyors, and settling agents.
Plaintiff has deposited with the Court $130,000, representing the
settlement figure obtained in three civil actions instituted by
April-Agro Industries, Inc., the taxpayer, and obtained through, in
part, the professional services rendered by plaintiff. As consideration
for its services, April-Agro had agreed at the time of institution of
the actions in 1983 that plaintiff would receive 20% of any settlement
or judgment amount. In May 1986, while the actions remained pending
before the court, the IRS filed various notices of federal tax liens
against the taxpayer for sums far in excess of the $130,000 judgment. On
June 6, 1986 April-Agro transferred certain of its assets to Corporación
de Crédito Agrícola de Puerto Rico ("CCA") and Autoridad de
, including the right to any money obtained in the three aforementioned
civil actions. When the cases were settled sometime later for $130,000,
and upon receipt of a check in that amount made out to CCA, rather than
complying with the tax levies, plaintiff filed the instant suit seeking
a judicial determination that it is entitled to retain 20% of the
$130,000, naming as defendants the IRS, CCA, and Autoridad de Tierras.
There is no
dispute that the three civil actions constituted personal property of
the taxpayer as defined by
law. 2 L.P.R.A. 255. The question of whether property is owned by a
taxpayer is determined by state law. Acquilino v.
509 (1960). But once it is determined that a taxpayer owns property to
which a lien may attach, federal law establishes the relative priorities
between the federal tax lien and other creditor's claims. Accordingly,
26 U.S.C. sect. 6323 establishes a tax lien's relative "Validity
and Priority Against Certain Persons" with competing claims. Sect.
6323(b) lists ten categories of creditors who are accorded superpriority
under the tax code even though, as here, notice of the tax lien has been
filed. Subsection 8, the only category possibly applicable to plaintiff,
liens.--With respect to a judgment or other amount in settlement of a
claim or of a cause of action, as against an attorney who, under
local law, holds a lien upon or a contract enforcible against such
judgment or amount, to the extent of his reasonable compensation for
obtaining such judgment or procuring such settlement . . . (Emphasis
federal law recognizes the priority of an attorney lien over a federal
tax lien only if and to the extent that local law recognizes attorney
liens. See McKee-Burger Mansueto, Inc. v. Board of Education, 691
F.2d 828, 834 (7th Cir. 1982). As stated at the outset of this opinion,
law does not provide for attorney liens. Therefore, even though it seems
fair that plaintiff should be compensated for increasing the assets of
the taxpayer available for application to tax payment, plaintiff has no
right to deduct its fees from the settlement amount. 1
Between the IRS and plaintiff, the IRS has the right to all of the
codefendant CCA, which was assigned the right to the causes of action
one month after the notices of tax liens were filed, its claim is
inferior to and postdates that of the IRS. CCA has not opposed the
motion for summary judgment of the IRS. Plaintiff requests voluntary
dismissal against codefendant Autoridad de Tierras.
motion for summary judgment of codefendant IRS is hereby GRANTED. It is
adjudged that the entire $130,000 on deposit with the Court belongs to
the IRS. The Clerk is directed to DISMISS the case.
IT IS SO
The IRS also argues that because plaintiff is not a law firm, sect.
6323(b)(8) does not apply to it. Since we decide that attorney liens are
not available in
, it is not necessary to resolve this issue. We do note, however, the
inherent, guild-like chauvinism underlying the IRS' argument that a firm
which provides the services contemplated in sect. 6323(b)(8) may not,
nevertheless, obtain the benefits of said section merely because it is
not a "law" firm. Furthermore, the 20% fee claimed by
plaintiff subsumes the cost of attorneys employed and supervised by
plaintiff to prosecute the civil actions. At the least those
out-of-pocket costs would be recoverable.
¶9122]Valley Bank of Nevada, a Nevada banking corporation, Plaintiff v.
City of Henderson, a political subdivision of the State of Nevada
Defendant and Counterclaimant v. United States of America and Valley
Bank of Nevada, a Nevada banking corporation, Harry Polk, Bentonite,
Inc., and Stage Construction Company, Counterdefendants
S. District Court, Dist. Nev., CIV-LV-79-149, HEC, 528 FSupp 907,
[Code Secs. 6321 and 6323]
Priority of creditors: Unrecorded pledge assignment v. recorded tax
lien: Commercial lender: Notice statute v. race statute.--The United
States, which perfected a tax lien by filing it with a Secretary of
State, was entitled to priority over the interest of each of the other
claimants to a fund consisting of municipal water and sewer refunds.
Although the refund agreement had been assigned to a commercial bank,
the bank did not record its lien against the agreement. The bank,
therefore, had an unperfected and inchoate interest as an assignee to
the contract rights which were subject to attachment and it was not a
holder of a security interest. It was not excused under local law from
filing to perfect its interest on the theory that it received an
outright transfer because the transfer was intended to provide
collateral to secure its loan and it was not obligated, as an assignee,
to render any performance under the assigned contract. Its inaction was
also not excused by an application of local law, which was based on U.
C. C. §9-302(1)(e), because it was a commercial lender rather than an
insignificant and ignorant assignee for which the code section provided
an exception. The claimant, furtnermore, could not successfully
challenge the priority of the government's lien on the grounds that the
government had not establish ignorance of the assignment at the time of
the recordation because the applicable state statute had been amended to
delete the lack-of-knowledge requirement. Another claimant, an obligor
under the assigned contract, abandoned its claim to any of the proceeds
of the fund in issue.
[Code Sec. 6502]
Statute of limitations: Collection after assessment: Levy v. filing
of lien.--Liens for taxes did not lapse with the passage of time
inasmuch as (1) the
istrative procedure of collecting the assessment did not have to be
completed within six years after the tax lien was perfected, and (2) an
action was instituted within the statutory period of six years.
, Close & Brown,
300 S. Fourth St.
, for plaintiff. John Marchiano, 243 Water Street, Henderson, Nev.
89015, Heaton & Wright, 302 E. Carson, Las Vegas, Nev. 89101, for
defendant and counterclaimant. Lamond R. Mills, United States Attorney,
Las Vegas, Nev. 89101, Barry Lieberman, Department of Justice,
Washington, D. C. 20530, for counterdefendants.
The trial of
the above-captioned case was held before the Court on
November 20, 1981
Prior to the
trial, on April 7, 1981, this Court granted the Motion of the United
States to Amend the Pretrial Order filed in this case to add as an issue
of law: Whether a federal tax lien against Bentonite, Inc. on October
25, 1974, is entitled to priority over the claims of Valley Bank of
Nevada and/or City of Henderson.
Most of the
facts in this case are not in dispute.
October 13, 1969
, a Water Refunding Agreement dated
September 9, 1969
, (between the City of
and Bentonite, Inc. and Stage Construction Company) and all proceeds
therefrom were pledged and assigned to the Nevada National Bank. The
Water Refunding Agreement was based on the City of
Henderson Municipal Code
which provides that the cost of the water mains installed by a
subdivider such as Bentonite, Inc. will be repaid to the subdivider on a
quarterly basis upon payment of the connection fees by customers. The
Pledge and Assignment provided that the proceeds were to be used as
"collateral" to secure a loan. A copy of the Pledge and
Assignment was not filed with the Secretary of the State of
May 24, 1972
, Harry W. Polk, for himself, Bentonite, Inc., Stage Construction
Company, and Henderson Trailer Estates executed an agreement assigning
to Valley Bank of
certain rights which Polk was in the process of negotiating, or had been
negotiated with the City of
. The agreements, which were apparently the subject of the assignments,
were not entered into until
January 2, 1973
. These agreements, which cover water and sewer refunding agreements,
are similar to the Water Refunding Agreement previously discussed.
Notice of the assignment of these agreements has never been filed with
the Secretary of State of the State of
. No specific testimony concerning the amount of the loan in exchange
for the assignment of the refunding agreements was presented other than
the testimony of a bank official, Ted Golam, that a consolidation of
already outstanding loans took place in connection with the assignments.
According to stipulation by the parties, the City of
is currently indebted to Bentonite, Inc. and Stage Construction Company,
Inc. (a wholly owned subsidiary of Bentonite) in the sum of $24,828.72,
pursuant to the Water and Sewer Refunding Agreements previously
April 16, 1974
, Nevada National Bank assigned the Water Refunding Agreement dated
September 9, 1969
, to Valley Bank of
. Concurrently, Polk executed an Instrument of Assignment to Valley
Bank, assigning the same water refunding agreement as "collateral
of outstanding notes."
of Tax Lien]
June 24, 1974
, the Tax Court entered orders of dismissal in two cases involving
Bentonite. In Bentonite, Inc. v. Commissioner, No. 2450-67, the
Court upheld a deficiency of $61,851.92 against Bentonite, Inc., for the
fiscal year ending
June 30, 1963
. In Bentonite, Inc. v. Commissioner, No. 793-68, the court
upheld a deficiency of $12,446.91 for the fiscal year ending
June 30, 1964
. Pursuant to these decisions, the Commissioner made assessments of
$103,232 and $20,005.93 against Bentonite, Inc., for the years 1963 and
October 25, 1974
October 29, 1974
, respectively. A Notice of Federal Tax Lien covering these assessments
was filed with the Secretary of State on
March 6, 1975
July 29, 1980
, a Notice of Levy was served upon the City of
demanding the funds being held by the city for the account of Bentonite,
In 1976, Harry
Polk was convicted of a violation of Section 7215 of the Internal
Revenue Code of 1954 for his failure to collect, account for, and pay
over income and FICA taxes withheld from the pay of his employees. Polk
was sentenced to one year in jail and fined. On
July 3, 1977
, a hearing was held upon Polk's motion to modify his sentence. As a
condition of vacating the prison sentence given to Polk, Judge Thompson
ordered Polk to pay $35,000 to the
in delinquent tax obligations. The $35,000 figure was an approximation
of the employment taxes owed by Polk without taking into account any
accrued penalties and interest on the amounts due and owing. On
August 5, 1977
, Polk delivered to the Clerk of the Court a cashier's check for $35,000
payable to the Internal Revenue Service. The Court noted that "the
Internal Revenue Service is authorized to apply that payment to taxes of
any kind due from the defendant to the Internal Revenue Service."
The payments made by Polk have been fully accredited to his account.
Presented by Alvin Brown and Associates,
tax attorney, formerly with the Office of the Chief Counsel of the
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