sought to enforce its tax assessments against Harry Polk in the
interpleader action on the theory that Polk, Bentonite, Inc. and Stage
Construction Company are merely alter egos of one another. While the
Court finds ample evidence to support this contention, the Government
has essentially dropped this argument and now pursues the position that
the tax liens arising as a result of the $103,232 assessment against
Bentonite, Inc. on October 25, 1974, and the $20,005.93 assessment
against Bentonite, Inc. on October 29, 1974, are entitled to priority
over the unperfected and inchoate interests of each of the other
claimants to the interpleader fund.
DID THE TAX
LIENS OF THE UNITED STATES AGAINST BENTONITE, INC. GIVE THE UNITED
STATES PRIORITY OVER THE OTHER CLAIMANTS TO THE INTERPLEADER FUNDS?
The question of when a federal tax lien has priority over a security
interest created under state law must be answered by reference to
federal law. Aquilino v. United States [60-2 USTC ¶9538], 363
509 (1960); Dugan v. Missouri Neon and Plastic Advertisig Company
[73-1 USTC ¶9211], 472 F. 2d 944, 949 (8th Cir. 1973); Nevada Rock
and Sand Company v. United States [74-2 USTC ¶9617], 376 F. Supp.
161, 163 (D. Nev. 1974).
have characterized the subject of federal tax liens as being somewhat
the complexities of this area of law fade if a step by step analysis is
made as to the question of who has priority over the fund in issue.
premise, not challenged by any of the parties to this action, is that
acquires a lien against all property and rights to property belonging to
a taxpayer upon the assessment of unpaid taxes and notice of demand for
payment of same being made upon taxpayer. Section 6321 of the Internal
Revenue Code of 1954 provides:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
of the Code provides:
date is specifically fixed by law, the lien imposed by section 6321
shall arise at the time the assessment is made and shall continue until
the liability for the amount so assessed (or a judgment against the
taxpayer arising out of such liability) is satisfied or becomes
unenforceable by reason of lapse of time.
obtained liens against Bentonite, Inc., on
October 25, 1974
October 29, 1974
re Tax Lien Priority]
immediately attached to all property or rights to property belonging to
Bentonite, Inc. However, this lien was not valid against any purchaser,
holder of a security interest, mechanic's lienor, or judgment lien
March 6, 1975
, when a Notice of Federal Tax Lien was filed with the Secretary of
State. See Code Section 6323(a) and (f); Nevada Revised Statute Section
108.827; Bank of Nevada v. United States [57-1 USTC ¶9561], 251
F. 2d 820, 826 (9th Cir. 1957), cert. denied, 356
Subject to Lien]
BENTONITE, INC. HAVE PROPERTY RIGHTS TO PROPERTY IN THE REFUNDING
AGREEMENT WHEN THE FEDERAL TAX LIENS ATTACHED? Valley Bank argues
that Bentonite, Inc. had no property or property rights in the refunding
agreement at the time the tax liens attached in October, 1974, because
it had already assigned its rights to Valley Bank of
. The same factual situation arose in Nevada Rock and Sand Company v.
, supra, where the assignee was to receive the proceeds from the
contract rights directly, instead of through the assignor. The same
argument was made that there did not exist a property right to which a
tax lien could attach since the assignor had assigned its interest. The
court firmly rejected this argument and held that there was an interest
to which the tax lien could attach.
language of the
May 24, 1972
, "Assignment" could indicate an outright sale, the
circumstances surrounding the assignment, the understanding of the
parties and the subsequent conduct of the parties manifest the reality
of the transaction as a financing arrangement where the agreement was
used as collateral. Majors Furniture Mart v. Castle Credit Corp.,
602 F. 2d 538, 543 (3rd Cir. 1979); In re Joseph Kanner Hat Co.,
Inc., 482 F. 2d 937, 940 (2nd Cir. 1973).
re Holder of a Security Interest]
BANK QUALIFY AS A "HOLDER OF A SECURITY INTEREST" UNDER
SECTION 6323 OF THE CODE AND NOT ENTITLED TO PRIORITY OVER THE UNITED
STATES? As noted previously, a tax lien attaches to all property or
rights to property of a taxpayer at the moment when an assessment is
made. See Bank of
, supra, 251 F. 2d at 826;
Rock and Sand Company v.
, supra, 376 F. Supp. at 163 n. 1. That is not to say, however, that
a creditor of the taxpayer cannot obtain priority over the
after the lien has arisen. The "blueprint" on how to obtain
priority is contained in Section 6323(a) of the Code which provides:
imposed by section 6321 shall not be valid as against any purchaser,
holder of a security interest, mechanic's lienor, or judgment lien
creditor until notice thereof which meets the requirements of subsection
(f) has been filed by the Secretary. 2
Notice of Lien was filed on
March 6, 1975
. Thus, the question is whether Valley Bank or any of the other parties
to this action qualified as a "holder of a security interest"
March 6, 1975
A holder of a security interest is defined in Section 6323(h) of the
Code as follows:
Interest.--The term "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.
Refunding Agreement was assigned to Valley Bank on
July 16, 1974
. The remaining Water and Sewer Refunding Agreements were assigned to
Valley Bank on
May 24, 1972
, (although the bank's security interest in these agreements did not
January 2, 1973
. See N. R. S. Section 104.9203(1)(c). 4
obtained by Valley Bank via these assignments, however, was not a
security interest within the meaning of Section 6323(h)(1), inasmuch as
its rights were not protected under local law against a judgment lien
arising out of an unsecured obligation.
To obtain a
"security interest" sufficient to defeat an unfiled federal
tax lien, the creditor must perfects its security interest against a
hypothetical judgment lien creditor prior to the time the
files a Notice of a Federal Tax Lien. N. R. S. Section 104.9301(1)(b),
(d). Dragstrem v. Obermeyer [77-1 USTC ¶9301], 549 F. 2d 25-26
(7th Cir. 1977); United States v. Trigg, supra, 564 F. 2d at
1269-1270; George W. Ultch Lumber Co. v. Hall Plastering, Inc.
[80-1 USTC ¶9396], 477 F. Supp. 1060, 1071 (W. D. Mo. 1979); United
States v. Sterling National Bank and Trust Co. [73-2 USTC ¶9494],
360 F. Supp. 917, 925 (S. D. N. Y. 1973) modified on other grounds
[74-1 USTC ¶9336], 494 F. 2d 919 (2nd Cir. 1974). Contra, Nevada
Rock and Sand Company v.
, supra, 376 F. Supp. at 172 n. 17; United States v. Ed Lusk
Construction Company, Inc. [74-2 USTC ¶9773], 504 F. 2d 328, 331
(10th Cir. 1974). 5
of Article Nine]
FINANCING TRANSACTIONS ENGAGED IN BY VALLEY BANK WITHIN THE SCOPE OF
ARTICLE NINE? Valley Bank has argued that the assignments of the
water and sewer refunding agreements do not fall within the scope of
Article Nine of the Uniform Commercial Code and therefore, no perfection
of the assignments by filing is required. This argument is totally
without merit for a number of reasons.
Article 9 (N.
R. S. Section 104.9101 et seq.) applies to any transaction which
is intended to create a security interest in accounts and to any sale of
accounts. N. R. S. Section 104.9102. The inclusion of outright sales of
accounts within the scope of Article 9 was attributable to the fact that
the distinction between a security transfer of an account or contract
right and a sale of that account or contract right was often blurred.
See Official Comment 2 to N. R. S. Section 104.9102; George W. Ultch
Lumber Company v. Hall Plastering, Inc., supra, 477 F. Supp. at
1065-1066; Comment, Assignment of Accounts and Contract Rights,
1977 Utah L. Rev. 311, 333-334; 1 Bender's Uniform Commercial Code
Service, Secured Transactions §5A.08 (1980).
N. R. S.
Section 104.9104(6) removes certain transactions from the scope of
Article Nine. 6
All the transactions removed, however, are outright transfers of
accounts. In connection with the discussion of whether Bentonite had
property or rights to property in the refunding agreements, the
assignments involved here were never intended to be outright transfers,
but, rather, were intended to provide Valley Bank with collateral to
secure its loan. Indeed, in excluding from the U. C. C. "a transfer
of a right to payment under a contract to an assignee who is also to do
the performance under the contract," NRS 104.9104(6) illustrates
that an assignment under which the payment of an outstanding loan is
effectuated by a direct payment from the debtor to the assignee is
within the scope of Article 9 where the assignee is not obligated to do
the performance under the contract. 7
Here, Valley Bank is in no way required to perform under the refunding
agreements. See also Official Comment 6 to U. C. C. Section 9-104 which
sales as well as security transfers of accounts and chattel paper are
within the Article (see Section 9-102). Paragraph (f) [N. R. S. Sec.
104.9104(6)] excludes from the Article certain transfers of such
intangibles which, by their nature, have nothing to do with
commercial financing transactions. (Emphasis added.)
Valley Bank's reliance on N. R. S. 104.9104(6) and the cases of Spurlin
v. Sloan, 368 S. W. 2d 314 (Ky. Ct. App. 1963) and Lyon v.
Ty-Wood Corporation, 292
Super. 69, 239 A. 2d 819 (1968) is misplaced. 8
See George W. Ultch Lumber Company v. Hall Plastering, supra, 477
F. Supp. at 1066; Consolidated Film Industries v. United States,
403 F. Supp. 1279, 1281-1282 (D. Utah, 1975), rev'd on other grounds
[77-1 USTC ¶9188], 547 F. 2d 533 (10th Cir. 1977); United States v.
Damrow [63-1 USTC ¶9144], 211 F. Supp. 615, 618 (D. Wyo. 1962).
[Test re Choate Lien]
EQUITABLE LIENS INCHOATE LIENS AND NOT VALID AGAINST PERFECTED FEDERAL
TAX LIENS? The federal rule "first in time first in right"
determines whether a federal tax lien under §6321, Title 26, United
States Code or a competing lien created by state law has priority. United
States v. City of New Britain [54-1 USTC ¶9191], 347
basic federal priority standard, a federal tax lien takes priority over
a statecreated lien unless the state lien is specific and perfected in
the federal sense. United States v. Crest Finance Co. [62-1 USTC
¶9454], 302 F. 2d 568, 569 (7th Cir. 1962), on remand from [62-1 USTC
v. Trigg, supra, 465 F. 2d at 1269.
As part of
this rule, the Supreme Court has announced that a state of local lien
must be "choate" to defeat the federal lien. This is referred
to as the doctrine of choateness. United States v. City of New
Britain, supra. In order for a state of local lien to be
"choate" it must meet the three tests of (1) certainty of the
lienor, (2) certainty of the property subject to the lien, and (3)
certainty of the amount of the lien.
In addition, the Supreme Court has indicated that in order to be choate,
the state of local lien must also be enforceable summarily without the
necessity of a judicial proceeding. United States v. Vermont, 377
351 (1964), United States v. Security Trust & Savings Bank
[50-2 USTC ¶9492], 340
In Bank of
Nevada v. United States, supra, 251 F. 2d at 823-824, the Ninth
Circuit specifically rejected a contention by the appellant bank that an
equitable lien held by the bank in the form of a right of set-off could
prime a federal tax lien. Thus, in this Circuit, the rule espoused in Morrison
Flying Service v. Deming National Bank [68-2 USTC ¶9465], 404 F. 2d
856 (10th Cir. 1968), cert. denied, 393
1020 (1969) and relied upon by Valley Bank is clearly not followed. 9
See also United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d
285 (5th Cir. 1957), First National Bank of Cartersville v. Hill
[76-2 USTC ¶9623], 412 F. Supp. 422, 424 (N. D. Ga. 1976).
of U. C. C. §9-302(1)(e)]
IS N. R. S.
104.9302(1)(e) INAPPLICABLE WHERE AN ASSIGNMENT IS FOR COLLATERAL?
Plaintiff's claims that Valley Bank's interest in the refunding
agreements was perfected without filing because N. R. S. 104.9302(1)(e)
exempts these transactions from the filing requirements of that Section
At the time
the tax liens attached in October, 1974, N. R. S. 104.9302(1)(e)
A financing statement must be filed to perfect all security interests
except the following:
an 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;
significant to note that Comment 5 to this section of the Uniform
Commercial Code provides in pertinent part:
purpose of the subsection (1)(e) exemptions is to save from ex post
facto invalidation casual or isolated assignments: some accounts
receivable statutes have been so broadly drafted that all assignments,
whatever their character or purpose, fall within their filing
provisions. Under such statutes many assignments which no one would
think of filing may be subject to invalidation. The subsection (1)(e)
exemptions go to that type of assignment. Any person who regularly
takes assignments of any debtor's accounts should file. In this
connection, Section 9-104(f) which excludes certain transfers of
accounts and contract rights from the Article should be consulted.
Gilmore, who was a reporter for Article 9, has stated that U. C. C. §9-302(1)(e)
was "carefully drafted so that no assignee, engaged in a regular
course of financing, will ever be tempted to rely on it in order to
avoid a filing which ought to be made." 1 G. Gilmore, Security
Interests in Personal Property, §19.6 at p. 538 (1965).
[Hereinafter cited as Gilmore.]
N. R. S.
Section 104.9302(1)(e) was never intended to provide an escape hatch for
negligent institutional financiers. This section is applicable only when
an outright sale of an account occurs, or the security interest is
granted to an assignee who is not regularly engaged in financing
activities. See e.g., Gilmore, supra, p. 538 (the
"beneficient purpose" of U. C. C. §9-302(1)(e) was to protect
"assignees who are both insignificant and ignorant.")
of State Statute]
KNOWLEDGE BY THE UNITED STATES OF ANY PRIOR INTEREST BY VALLEY BANK OF
IRRELEVANT? As noted in footnote four of this decision, the Uniform
Commercial Code was enacted in 1965. That version had Section
9-301(1)(b), which was adopted verbatim by the Nevada Legislature, as
(1) Except as
otherwise provided in subsection (2), an unperfected security interest
is subordinate to the rights of . . .
a person who becomes a lien creditor without knowledge of the security
interest and before it is perfected.
Legislature amended the Code to conform Nevada Law with the 1972 version
of the Uniform Commercial Code. The amended version was adopted in 1973
and reads as follows:
Except as otherwise provided in subsection (2), an unperfected security
interest is subordinate to the rights of . . .
a person who becomes a lien creditor before the security interest is
Rock and Sand Company case was decided in 1974, but the facts of the
case occurred in 1971 under the old version of N. R. S. 104.9301(1)(b)
which required that the lien creditor acquire the interest without
knowledge of any other security interest. This explains footnote 17 of Nevada
Rock and Sand Company v.
, supra, 376 F. Supp. at 172 n. 17, which states:
It should be
noted that the IRS is entitled to priority over the unrecorded
assignment only if it became a lien creditor without knowledge of
the assignment. N. R. S. 104.9301(1)(b). . . .
before this Court occurred after the adoption of the new version of N.
R. S. 104.9301(1)(b) which does not have a "no-knowledge
requirement." The official reasons for the change in the Uniform
Commercial Code are stated in the comments of Appendix II for 9-301, as
(1)(b) has been amended to eliminate the element of knowledge in the
conditions under which a lien creditor may defeat and unperfected
interest. Knowledge of the security interest will no longer subordinate
the lien creditor to the unfiled security interest. The former section
denied the lien creditor priority even though he had no knowledge when
he got involved in extending credit, if he acquired knowledge while
attempting to extricate himself. It is completely inconsistent in spirit
with the rules of priority between security interests, where knowledge
plays a very minor role
knowledge on the part of the Government with respect to Valley Bank of
's interest is irrelevant under N. R. S. 104.301(1)(b).
LIENS OF THE UNITED STATES AGAINST BENTONITE, INC. VALID? Both the
Valley Bank and Benton ite, Inc. claim that the liens against Bentonite,
Inc. arising on
October 25, 1974
October 29, 1974
, have lapsed and are therefore invalid. This contention is also
6502(a) of the Code provides in pertinent part:
Period.--Where the assessment of any tax imposed by this title has
been made within the period of limitation properly applicable thereto,
such tax may be collected by levy or by proceeding in court, but only if
the levy is made or the proceeding begun--
within 6 years after the assessment of the tax.
July 29, 1980
, within the six year period provided for in the statute, the Internal
Revenue Service levied upon the City of
with respect to the tax assessments against Bentonite, Inc.
Valley Bank and Bentonite, Inc. erroneously argue that the levy is
somehow to be considered the filing of a lien. This position has
absolutely no foundation in law. This Court differentiates between the
attachment of the liens (which occurred in October, 1974) and the
istrative procedure of levying upon the debtor. The latter event merely
permits the Internal Revenue Service to preserve its lien with respect
to any funds due from the City of
to Bentonite, Inc., pursuant to any agreements between the City and
Bentonite as of the date of the levy. The former event provides the key
date for determining priority issues, along with the
March 6, 1975
date of the filing of the notice of these tax liens.
institution of this action and the demand that the interpleaded funds be
turned over to the
set forth in the Government's answer served on
July 23, 1979
, satisfies the requirement in Section 6502(a) that the tax may be
collected by a proceeding begun within six years after the assessment of
The City of
holds certain sums for the account of Bentonite, Inc. pursuant to the
six water and sewer refunding agreements. At trial, the City of
has abandoned its claim to any of the proceeds of the fund in issue. The
and Valley Bank are not the only two claimants to the fund. However, the
only party to have a perfected lien on this fund is the
. Valley Bank could have perfected its security interest arising from
the assignments of the water and sewer refunding agreements. All it had
to do was to file a financing statement covering these assignments with
the Secretary of State of the State of
March 6, 1975
. N. R. S. Section 104.9401. Failing to have taken this simple step,
Valley Bank cannot now claim priority to the interpleaded fund. George
W. Ultch Lumber Company v. Hall Plastering, Inc., supra, 477 F.
Supp. at 1071;
v. Trigg, supra, 465 F. 2d at 1270;
Rock and Sand Company v.
IT IS HEREBY
ORDERED that the Government shall submit proposed Findings of Fact,
Conclusion of Law and Judgment consistent with this Decision.
See e.g. Randall v. Nakashima [76-2 USTC ¶9770], 542 F. 2d 270
(5th Cir. 1976).
Prior to 1966, Section 6323 provided that mortgages, pledges, purchases,
and judgment creditors were entitled to priority over unfiled federal
tax liens. In 1966, Congress amended the section and included holders of
security interests, which covers others than mortgages and pledges,
among the classes of persons entitled to prevail over unfiled federal
tax liens. One of the major purposes of the revision was to harmonize
the provisions of the Internal Revenue Code with the provisions of the
Uniform Commercial Code. As the Senate Committee Report states (S. Rep.
No. 1708, 89th Cong., 2d Sess., p. 2 (1966-2 Cum. Bull. 876)--
This bill is
in part an attempt to conform the lien provisions of the internal
revenue laws to the concepts developed in the Uniform Commercial Code.
It represents an effort to adjust the provisions in the internal revenue
laws relating to the collection of taxes of delinquent persons to the
more recent developments in commercial practice (permitted and protected
under State law) and to deal with a multitude of technical problems
which have arisen over the past 50 years.
did not, however, extend priority to all persons asserting security
interests under local law, but, rather, limited the class to those
persons who had taken steps under local law to protect their interests. United
States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264, 1269-1270 (8th
Cir. 1972), cert. denied, 401
There is no claim by any of the parties to this action that they should
be classified as purchasers, mechanic's lienors, or judgment lien
The Uniform Commercial Code was originally enacted in
in 1965. That version was commonly referred to as the 1962 Code. In
legislature amended the Code to conform
law with the 1972 Code version of the Uniform Commercial Code. The
amendments, as they pertain to this case, are not significant. All
references to Nevada Revised Statutes Sec. 104.9101 et seq. will
be to the 1972 version of the Uniform Commercial Code, as amended.
In addition, it does not matter whether the "hypothetical lien
creditor test" or the "subjective knowledge lien creditor
test" is used, since there has been no evidence introduced that the
Internal Revenue Service had knowledge of Valley Bank's security
interests when the liens were acquired on October 25, 1974, and October
29, 1974. Compare Dragstrem v. Obermeyer, supra, 549 F. 2d at
25-26 with Nevada Rock and Sand Co. v.
, supra, 376 F. Supp. at 172 n. 17. Contrary to Valley Bank's
assertion at trial, the knowledge of the
under this test is measured at the time it became a lien creditor
against Bentonite, Inc. Such event occurred on
October 25, 1974
, not on the date of levy on
July 29, 1980
, as discussed.
N. R. S. 104.9104(6) provides that:
excluded from article. This article does not apply:
6. To a sale
of accounts or chattel paper as part of a sale of the business out of
which they arose, or an assignment of accounts or chattel paper which if
for the purpose of collection only, or a transfer or a right to payment
under a contract to an assignee who is also to do the performance under
the contract or a transfer of a single account to an assignee in whole
or in partial satisfaction of a pre-existing indebtedness . . .
When accounts receivable financing is involved, it is, of course, not
abnormal to have payments from account debtors go directly to a bank.
Under such circumstances a bank could not claim that the transaction was
outside the scope of Article 9.
Both Spurlin and Lyon specifically held that the
transactions at issue were absolute assignments and not security
transactions. See also Sherburne Corp. v. Carter, 340 A. 2d 82,
17 U. C. C. Rptg. Serv. 523, 526 (Sup. Ct. Vt.) (Bank's failure to file
financing statement with respect to accounts assigned to it in light of
its "professional status" allowed subsequent lienholder to
obtain priority status.)
The decision in Morrison Flying Service was made without any
discussion of the choateness doctrine. Moreover, it appears that the
subcontractor in whose favor the decision was entered could not
perfect his lien. Such is clearly not the case here, since there is no
dispute that Valley Bank could easily have perfected its security
interest in this case.
¶9289]Centex Construction Company, Inc. v. David M. Kennedy, Secretary
of Treasury, United States Treasury Department, et al.
S. District Court, So. Dist. Tex., Corpus Christi Div., C. A. No.
69-C-190, 332 FSupp 1213, 8/23/71
[Code Sec. 6323(h)(1)]
Tax liens: Priority: Security interest: Contract rights: Property in
existence.--A bank that filed its financing statement covering an
assignment of accounts and a security interest in contract rights before
the government filed its tax lien had a prior lien on the debtor's
assets. Rights in a valid, binding contract that could be ordered to be
specifically performed if breached are existing property under the Tax
Lien Act of 1966, even though the contract has not yet been performed.
Branscomb, Gary, Thomasson & Hall, 101 Hawn Bldg., Corpus Christi,
Tex., for plaintiff. James R. Sorrell, Sorrell, Anderson, Sorrell &
Atwill, 600 Petroleum Tower, Corpus Christi, Tex., for 1st State Bank,
George R. Pain, Anthony J. P. Farris, Assistant United States Attorneys,
Houston, Tex., for defendants.
in this suit, Centex Construction Company, Inc., brought this
interpleader action and deposited in the Registry of this Court the sum
named Defendant, David M. Kennedy, Secretary of Treasury (hereafter
referred to as "the Government") claims a first and prior lien
on the money deposited with this Court to the extent of $8,605.61 plus
interest accruing according to law. The lien notices were properly filed
on and subsequent to
July 22, 1969
First State Bank of
, having filed its financing statement covering an assignment of
accounts and a security interest in contract rights with the Secretary
of State of Texas on
November 1, 1968
, claims a prior lien on the same moneys.
and the First State Bank of Corpus Christi have filed with this Court a
stipulation approved as of the 12th day of July, 1971, which is being
considered by this Court to determine, without regard to any of the
other parties, which of the two named Defendants, the Government and the
First State Bank of Corpus Christi, has the prior lien against the money
By the year of
1966, the Uniform Commercial Code had been or was in the process of
being adopted in many states. It was adopted in
during the year of 1967. The term "security interest" was
defined in this new code, §1.201, as an interest in personal property
or fixtures which secures the payment or performance of an obligation,
and includes "contract rights" which are subject to Chapter 9
of such code. The old designations of "chattel mortgage" and
"pledge" were dropped. The Uniform Commercial Code in
, V. T. C. A., Bus. & C., §9.106, defines "contract
rights" as being rights "not yet earned by performance."
The chapter on "Secured Transactions," §9.102, recites that
the chapter applies "so far as concerns any personal property and
fixtures within the jurisdiction of this State
to any transaction (regardless of its form) which is intended to create
a security interest in personal property . . ., including . . .,
accounts or contract rights; and also (2) to any sale of accounts,
contract rights or chattel paper."
the provisions of §9.318 which permits, under certain circumstances,
modification of the contract, does not change the effectiveness of the
right §9.203 provides for the enforceability of a security interest in
contract rights. These provisions of the uniform act establish
"contract rights" as personal property in
Prior to the
effective date of the Federal Tax Lien Act of 1966, a chattel mortgage
or other lien covering some interest in property not yet "in
esse" or "choate" could not prevail over a Federal tax
lien arising out of and perfected under 28 U. S. C., §§ 6321, 6322 and
6323. This rule may still prevail.
the Federal Tax Lien Act of 1966, Congress obviously recognized what was
happening in the world of commercial financing, and, in amending 28 U.
S. C., §6323, changed certain of its provisions to conform to the
language of the Uniform Commercial Code, and substituted "holder of
security interest" for "mortgage and pledge." While the
term "security interest" as defined in paragraph (h)(1) of
said §6323 differs in a number of respects from the way it is defined
in the Uniform Commercial Code, nevertheless, it seems reasonable to say
that what is properly the subject matter of a "security
interest" under the Uniform Commercial Code would also be property
under the Tax Lien Act of 1966, unless the expression in the tax lien
act, "property in existence," carries forward the
"choate" doctrine to such extent that property, because it is
subject to a condition which cannot be violated without liability, is
this point, a descriptive explanation of the use of "contract
rights" is in order. In 81 Harvard Law Review 1369, at pages
1386 and 1387, an example is provided. Where the lending agency has no
interest in a refrigerator, but only a security interest in the
taxpayer-debtor's rights under a contract for the future sale and
delivery of the refrigerator, we are dealing with "contract
rights." Now, suppose the lending agency duly files its financing
statement covering such "contract rights" but, before actual
delivery of the refrigerator, the government files a tax lien under the
1966 act. Under such circumstances, does the lending agency have a
protected interest in the refrigerator when the taxpayer-debtor gets it?
Prior to the 1966 act, it would not have.
But, if the
Congress recognized the applicability of the Uniform Commercial Code by
its use of the term "security interest," and we believe it
did, then there is justification to say that "contract rights"
as such are property and the lending agency taking a security interest
therein, which has properly perfected it by filing, is protected.
we must, the contract is valid and binding and whomever has agreed to
deliver the refrigerator in the future is obligated to do so and would
be subject to a claim for specific performance or liable for the breach
if no delivery is made, and, if the refrigerator is delivered,
taxpayer-debtor is obligated to pay for it, then, logically, such
"contract rights" constitute personal property which is in
existence, and effective so long as the lending agency is paying
"money or money's worth." If protected by proper filing, a
security interest in such property should have priority over a
subsequently filed Federal tax lien. The fact that the taxpayer-debtor
had not yet received the refrigerator nor paid for it, at the time the
government filed its lien, should not defeat the lender's security.
Court has here drawn the lien too thin. There is no case law that says
it hasn't. However, there is abundant scholarly authority for the
inference that Congress intended to protect security interests in
"contract rights." See Harvard Law Review, supra, and
the various articles on the subject which are cited in Continental
Finance, Inc. v. Cambridge Lee Material Co., 265 A. 2d 539 (Sup.
Ct., New Jersey), and the references in such opinion to House Report No.
1884, Aug. 24, 1966, and Senate Report No. 1708, Oct. 11, 1966,
regarding the Federal Tax Lien Act of 1966. Based upon the history of
the act as it wended its way through the Congress, it seems plausible
that the act would recognize as being property in existence, any binding
contract which may involve future payments yet "unearned by
Law Review, Vol. 37, at page 564, in an article related to tax
liens, says, "The Assistant Secretary of the Treasury, Stanley S.
Surrey, under whose jurisdiction much of the drafting of the legislation
took place, specifically indicated in his testimony before the House
Ways & Means Committee that contract rights were an envisioned kind
of security." This article further says, "It is submitted that
as far as security interests are concerned, the act was intended to
supersede completely the choate lien doctrine." Fordham Law
Review is reassuring, and we will plunge ahead.
The case of Continental
Finance, Inc. v. Cambridge Lee Metal Co., Inc., and United States of
America, supra, which has been discussed by several scholars, at
page 539, holds that Continental Finance was protected as to the
accounts receivable assigned to it before the government placed its tax
lien against Cambridge; but the Court said the Federal government's lien
was prior to the security interest in future accounts receivable.
However, it seems clear from the opinion that Continental Finance did
not, in trying to fix a security interest in the future accounts
receivable, treat them as "contract rights" under the Uniform
Commercial Code. So, this case does not defeat First State Bank's
contention in the case now before this Court.
The only other
case which seems to be concerned, at least to some extent, with the
present right to receive money in the future is Hammes v. Tucson
Newspapers, Inc. [63-2 USTC ¶9808], 324 F. 2d 101 (1963). This case
was decided before the Federal Tax Lien Act was revised in 1966. The
controversy arose out of a bankruptcy proceeding. The bankrupt had
assigned to Tucson Newspapers the right to receive certain money. The
Court held that the assignment took precedence over the Federal tax
lien. The only language of the opinion which may have some significance
is this statement, "The fact that the property subject to the lien
is a present right to receive money in future does not make the lien in
choate, at least where the right is unconditional."
(Emphasis added.) This seems to imply that a conditional "present
right" may be choate. If there is such an implication, we admit, it
leaves much to be desired.
We are not
much inclined toward any Court's use of congressional committee reports
to determine what the words used by the Congress actually mean. One of
my law school professors said this was a very bad practice; that no
matter what Congress may have intended to do, if it didn't do it,
Congress should legislate to remedy the defect, not the courts. Of
course, this was quite a while ago, and the courts have legislated
considerably since the mid-1930's. In any event, giving due regard for
the present day scholars' concern with such committee reports, and our
own feeling that the use in the 1966 Federal Tax Lien Act of the term
"security interest" carried with it the pertinent portions of
the Uniform Commercial Code above discussed, the Court concludes that
the lien of the First State Bank of Corpus Christi is prior to the tax
lien of the United States.
therefore, ordered that, as between the Secretary of the Treasury and
First State Bank of
, the bank has a subsisting security interest in the money on deposit
with this Court which is first and superior to the Federal tax lien
under which the Secretary of the Treasury is claiming. This Court does
not here pass on the priority of the security interest of said bank or
of the Secretary as to the other claimants in this cause.
¶9853]In the Matter of Mile Hi Restaurants, Inc., Bankrupt
S. District Court, Dist. Colo., No. 32109, 233 FSupp 936, 10/21/64
[1954 Code Sec. 6323(a)]
Lien for taxes: Priority: Validity against pledgees.--The
Government's lien for taxes, filed against all of the property of the
bankrupt-taxpayer, was inferior to the claims of certain other creditors
of the taxpayer with regard to certain insurance policies which the
taxpayer had validly pledged to the other creditors before the tax lien
, for petitionering creditors.
ert Sunshine, Eugene J.
erts, 515 Majestic Bldg.,
, for respondent.
This matter is
before the Court on a petition for review of certain orders entered by
the Referee in Bankruptcy. Involved is the priority of claims of the
United States of America
, Foster R. Orr and Arden R. Grover to the proceeds of certain life
facts are not in dispute.
Restaurants, Inc., a
corporation, was adjudged a bankrupt on an involuntary petition filed on
August 6, 1962
. On that day two policies of life insurance were among the bankrupt's
assets. The policies were issued respectively by Equitable Life
Insurance Company of
(Equitable) and Connecticut General Life Insurance Company (
). Each insured the life of Arthur S. Miller, Sr., and the bankrupt was,
under the terms and conditions of each of the policies, both the owner
and the beneficiary thereof.
April 5, 1961
, the bankrupt executed to the Union National Bank (Union) its
promissory note in the principal amount of $38,000.00, and secured the
payment of the note with the two policies here involved by delivery of
the policies to
and by executing and delivering to Union blank forms of "Assignment
of Life Insurance as Collateral." On the same date Orr executed and
a guaranty of the payment of the note to the extent of $15,000.00.
July 31, 1961
, Orr paid
the balance of the principal then due, $14,207.68, and the then accrued
interest of $64.13. Thereupon
endorsed and delivered the note to Orr together with the policies and
the assignments heretofore mentioned. Neither Orr nor Union delivered
the assignments to Equitable or
October 20, 1961
, the bankrupt executed its promissory note to Grover in the principal
amount of $12,500.00. (This was a renewal note for a note executed on
April 7, 1961, for $15,000.00 executed by the bankrupt to Grover).
On November 1,
1961, in accordance with a corporate resolution, the bankrupt assigned
to Grover the Connecticut policy as collateral security for any and all
indebtedness owing to Grover by the bankrupt remaining unpaid at the
time of the settlement of the policy. Grover transmitted the executed
and the company noted on the assignment that it had been "recorded
and filed" on January 27, 1962.
On December 1
and 4, 1961 and on February 2, 1962, the United States assessed excise,
withholding and F. I. C. A. taxes against the bankrupt which became a
lien upon the property interest of the bankrupt in the policies as of
the date of assessment by virtue of Title 26 U. S. C. Sections 6321 and
6322. Notice of the lien was filed in accordance with Title 26 U. S. C.
Section 6323(a) on February 2, 1962.
noted, the bankruptcy petition was filed on
August 6, 1962
August 10, 1962
, the insured died and both policies were then in effect.
note had been in default since
December 1, 1961
, and Grover had paid all premiums on the
policy from that date to the date of the insured's death, amounting to
On the date of
death the benefits payable on the Equitable policy were $36,244.16 and
claimed a lien on the proceeds of the policies for $48,180.58 under
Title 26 U. S. C. Sections 6321-23(a).
pledgee of the policies, claimed the proceeds of the policies to the
extent of the balance due on the Union note which had been assigned to
him, plus interest and attorney's fees.
a right to have his note, together with interest, attorney's fees and
the amount paid for insurance premiums paid out of the proceeds of the
the proceeds of the policies were paid by the insurers to the trustee to
be held pending the determination of the various claims.
determined the amounts due from the bankrupt to the three claimants. The
petitions for review do not attack the Referee's determination of the
amounts due the respective claimants and the Referee's findings in this
respect are not here in issue.
determined that Orr's claim should be allowed, as secured, to be paid
out of the proceeds of the Equitable policy.
denied Grover's claim to the proceeds of the
policy and his claim was allowed as unsecured.
As to the
claim of the
, the Referee allowed $48,180.58 as a secured claim to be paid out of
the Equitable policy remaining after Orr's claim had been satisfied.
and Grover have petitioned for a review.
September 17, 1964
, this matter was heard before the Court and the Court is now duly
became a lien upon whatever property interest the bankrupt had in the
policies on the date of the tax assessment.
property interest at that time depends upon the validity or invalidity
of the Orr and Grover liens. If these liens were invalid, the tax lien
attached to the entire interest and ultimately to the entire proceeds of
the policies. If, however, Orr and Grover had valid liens, we then have
three liens competing for the same property and the relative priorities
of these liens must be determined.
essence the Court must determine:
(1) Whether or
not Orr and Grover had valid liens upon the policies; and
(2) If so, the
relative priorities of those liens with the tax lien of the
question is to be determined by state law, the second by federal law. Aquilino
v. United States [60-2 USTC ¶9538], 363
Unless the Orr
and Grover transactions are affected by the Colorado Accounts Receivable
C. R. S. '53, a question which we shall later discuss, both Orr and
Grover had liens upon the policies which were valid under the laws of
In the Orr
transaction, both policies were delivered to the Union Bank as a pledge
to secure the bankrupt's debt to
. Orr, as assignee of that debt, became possessed of the policies as
collateral security for the debt assigned to him. The delivery of a life
insurance policy to a creditor as collateral security for the debt has
been recognized by the Supreme Court of Colorado as a valid pledge. Collins
v. Dawley, 4
received an assignment of the
policy as collateral security for the bankrupt's debt to him. The
assignment was filed with
. It is admitted and the Court finds that Grover had a valid lien under
law upon the
policy unless the
affected the transaction.
the moment that neither the Orr nor Grover liens are affected by the
Accounts Receivable Statute, we turn to a consideration under federal
law of the relative priority of the three competing liens.
Title 26 U. S.
C. Section 6323(a) provides that the tax lien of the
shall not be valid as against any pledgee or mortgagee until notice
thereof has been filed by the Secretary. This notice was filed
February 2, 1962
Orr being a
pledgee and the pledge having been effected prior to the filing of the
' lien, Orr's claim would appear to have priority under Section 6323(a).
the Orr lien to prevail over the tax lien, we must apply the
"perfected lien standard". See United States v. L. R. Foy
Construction Company [62-1 USTC ¶9325], 300 F. 2d 207 (10th Cir.).
This standard requires that in order for the Orr lien to prevail over
the tax lien it must have been perfected or choate prior to the filing
of the tax lien; that is, it must have been definite in the identity of
the lienor, the property subject to the lien, and the amount of the
lien. The Orr lien stands this test in every respect.
Grover is a
mortgagee within the meaning of Section 6323(a), for it was held in United
States v. Foy [62-1 USTC ¶9325], 300 F. 2d 207 (10th Cir.) that an
assignment of the nature and character here involved is a mortgage
within the meaning of Section 6323(a).
claim also meets the perfected lien standard, that is to say, it was
perfected or choate prior to the filing of the notice of the tax lien.
It is apparent
then that if the Orr and Grover liens are valid, they have priority over
the tax lien.
for determination the effect, if any, the Accounts Receivable Statute of
the State of
may have upon the validity of the Orr and Grover liens.
contends that the life insurance policies here involved are accounts
receivable and as such are subject to the provisions of Chapter 11,
Article 2, Section 1 of the Colorado Revised Statutes 1953.
provides in essence that assignment of accounts receivable, whether
existing or contracted in the future, "may be protected" by
following the procedure specified in the statute, which includes the
filing of a notice of the assignment with the Secretary of State.
Admittedly neither Orr nor Grover complied with this statutory
statutory procedure is followed the assignee is protected against the
claims of third parties to the extent set forth in the statute.
question before the Court is whether or not the life insurance policies
here involved are included in or excluded from the operation of this
of an account receivable as set forth in the statute and insofar as here
or 'account receivable' means an existing or future right to the payment
of money presently due, or to become due:
right to payment is not represented by a judgment, a negotiable
instrument, or a nonnegotiable instrument which so represents the
obligation that an assignee who takes possession of it, takes rights
superior to those of a prior assignee of the obligation who did not take
possession of the instrument."
court decisions construing this particular provision of the statute and
we have found none.
on Similar Statute]
jurisdictions the case most nearly in point is Landy v. Nicholas,
221 F. 2d 923 (5th Cir.) which considered an identical provision of the
Florida Accounts Receivable Statute. The instruments involved in Landy
were warrants issued by the
evidencing the bankrupt's rights to payments of choices in action or
accounts owing by the
to the bankrupt. These accounts were assigned to Landy to secure loans
made by him to the bankrupt, and the warrants were delivered to Landy as
collateral security therefor. The court found itself in a situation
similar to this Court, for the
courts had not construed this provision of the statute. The court in Landy
stated at page 928:
we conclude that although there are no Florida cases of which we are
aware holding that any non-negotiable instrument can 'so represent the
obligation that an assignee who takes possession of it, takes rights
superior to those of a prior assignee of the obligation who did not take
possession of the instrument,' there must certainly be such instruments.
And we think that the statutory language indicates clearly that the
legislature intended to except from 'accounts receivable' that class of
non-negotiable instruments the delivery of which effects a valid pledge
of the obligations represented by or embodied in those instruments. In
other words, to take the present example, if the delivery of the
warrants here was a pledge of the claim against the Government, Landy's
failure to record did not prevent his security interest from being a
perfected one under the terms of the
statute. We shall therefore proceed to inquire as to the scope of the
class of non-negotiable instruments which embody obligations, for the
purposes of the law of pledges."
The court then
cited several cases which hold that delivery of stock certificates,
insurance policies and savings bank books effects a valid pledge of the
obligations represented by those instruments."
concluded at page 931:
very fact the the Florida legislature excluded from accounts receivable
obligations 'represented by' non-negotiable instruments, recognizes the
fact that some obligations may be embodied in such instruments. We do
not see any compelling reason to limit this embodiment to insurance
policies or bonds, but on the contrary think that the better
authorities, and certainly the greater number, require us to hold that
the possession of the warrants by Landy in the instant case was a pledge
of the claim against the Government, a perfected security interest, and
was expressly excluded from the statutory requirement of filing of
assignments of accounts receivable."
that the reasoning of the court in Landy which led to its
construction of the
statute is sound and equally applicable to the Colorado Accounts
therefore, that the life insurance policies here in question are
non-negotiable instruments which are expressly excluded from the
operation of the Colorado Accounts Receivable Statute.
while recognizing the rule of Collins v. Dawley, supra, thought
the rule should be limited to "indispensable instruments" and
held that the Connecticut policy was not an indispensable instrument
because it provided "the policy proceeds are payable upon receipt
of due proofs of loss and, if required by the company, upon
surrender of the policy." (Italics added). It is true, as pointed
out in Landy, that while many authorities have adopted the rule
that insurance policies and similar non-negotiable instruments may be
the subject of pledges by delivery alone, the Restatement of Securities
is more conservative in that it would limit this rule only to
"indispensable instruments". (Restatement of Securities,
Section 1, Comment (e)).
We are here,
however, confronted with a rule of law established by the highest court
of the State of
in Collins v. Dawley, supra, and this rule is binding upon this
Court in determining the property interests in the policies.
That rule does
not recognize the "indispensable instruments" limitation but
recognizes that a valid pledge of a life insurance policy is
accomplished by delivery of the policy to the pledgee with no
1. That Orr
had a valid lien on the insurance policies as a pledgee at the time of
the assessment of the taxes; that said lien was a perfected lien prior
to the time that the tax lien attached and that Orr's lien has priority
over the tax lien to the extent of the amount which the Referee found
was due and owing to Orr.
Grover, by virtue of the assignment of the Connecticut policy to him,
had a lien upon the Connecticut policy at the time that the Government's
tax lien attached; that Grover's lien was perfected prior to the time
that the Government's tax lien attached and that Grover's lien has
priority over the tax lien to the extent of the amount which the Referee
found was due and owing to Grover.
THEREFORE ORDERED that the order of the Referee that the Claim of Orr be
paid out of the proceeds of the Equitable policy be and the same is
IT IS FURTHER
ORDERED that the order of the Referee allowing the claim of Grover as an
unsecured claim be and the same is hereby reversed.
IT IS FURTHER
ORDERED that this matter is hereby remanded to the Referee to enter such
order or orders as may be necessary or proper to effectuate the decision
of this Court.
United States of America
, Appellant v. L. R. Foy Construction Company, Inc.; Valley State Bank,
; Tri-State Insurance Company,
; and Herbert A. Stumm, Appellees
U. S. Court of Appeals, 10th Circuit, No. 6751, 300 F2d 207, 2/15/62,
Reversing and remanding an unreported District Court decision
[1954 Code Sec. 6323]
Tax liens: Priority of claims to interpleaded funds: Assignments to a
bank and a surety of sums due under subcontract: Mortgagees.--The
assignment made by the delinquent taxpayer to a bank of all sums due him
under a subcontract was a security transaction and not a sale.
Consequently, the bank was not a "purchaser", but did qualify
as a "mortgagee". The bank's lien was choate and had priority
over the Government's tax lien in the amount that the taxpayer owed the
bank on the date of the federal tax lien notice. However, the
Government's tax lien had priority to the remaining funds over that of a
surety's claim which was based on an assignment of rights under the
subcontract contained in its bond application. The surety's lien was not
perfected and choate because of uncertainty as to amount at the time of
notice. Payments made by the surety for such liability were made after
the tax lien notice.
Schuldinger, Department of Justice, Washington 25, D. C. (Louis F.
Oberdorfer, Assistant Attorney General, Lee A. Jackson, A. F. Prescott
and George F. Lynch, Department of Justice, Washington 25, D. C., Newell
A. George, United States Attorney, Topeka, Kan., and
ert M. Green, Assistant United States Attorney, El Dorado, Kan., on
brief), for appellant. George Templar, 310 A. C. Office Bldg., Arkansas
City, Kan. (P. C. Frazee, 301 N. Main, Syracuse, Kan., and Earle N.
Wright and Ted M. Templar, 310 A. C. Office Bldg., Arkansas City, Kan.,
on brief), for Valley State Bank and Tri-State Insurance Co., appellees.
BRATTON, HUXMAN, and BREITENSTEIN, Circuit Judges.
States appeals from a judgment entered in an interpleader action brought
by L. R. Foy Construction Company (Foy) and claims that the trial court
erred in subordinating its claims for taxes due from Stumm (taxpayer) to
the claims of Valley State Bank and Tri-State Insurance Company (herein
referred to as Bank and Surety respectively).
Foy held the
principal contract for the construction of a high school building at
, and subcontracted certain masonry work to the taxpayer. The Bank
financed the taxpayer's operations and on
September 7, 1954
, took from him an assignment of all sums due under the subcontract.
Notice of the assignment was given to, and accepted by, Foy on
September 23, 1954
. Surety executed a contract completion bond for the taxpayer in which
Foy was named as obligee.
in various amounts with accrued interest were assessed against the
taxpayer in the period
May 8, 1955
September 21, 1956
, and lien notices thereof were filed. For the purposes of this decision
it is important to note only the first assessment as to which notice of
lien was filed on
May 18, 1955
, and on which the unpaid balance is $2,896.49 plus interest.
At the time of
the execution of the assignment the taxpayer owed $6,000 to the Bank.
Thereafter the Bank advanced further sums and payments were made on
account. At the time of the filing of the first notice of federal tax
lien, the taxpayer owed the Bank $3,510 plus interest. At the time of
trial the taxpayer's indebtedness to the Bank was $6,453.39 plus
its bond, Surety on October 7 and
December 30, 1955
, paid a total of $1,025.22 to the suppliers of materials to the
taxpayer for use in the performance of the subcontract.
Foy brought an
interpleader alleging the conflicting claims of the Bank, the Surety and
the taxpayer and paid $2,522.45 into court.
An order was
entered on the motion of the Bank making the
a party and it then appeared and asserted its tax claims. The court
found that the total amount due to the taxpayer from Foy was $5,545 plus
interest. The Surety conceded that its claim was subordinate to that of
the Bank. An appropriate judgment was entered awarding a first priority
to the Bank's claim. This exhausted the fund.
of the Internal Revenue Code of 1954 the
has a tax lien upon "all property and rights to property" of
the taxpayer. By the provisions of §6322 this lien arises at the time
of the assessment of the tax but under §6323 the lien is not valid
"as against any mortgagee, pledgee, purchaser, or judgment
creditor" until notice thereof shall have been filed as therein
Law v. Federal Law]
v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513-514, it was
held that state law controls the determination of the legal interest of
a taxpayer in property sought to be reached by a federal tax lien and
federal law determines the priority of competing liens asserted against
the property. As we pointed out in United States v. Chapman, 10
Cir., [60-2 USTC ¶9667], 281 F. 2d 862, 868, the Aquilino
decision does not decide whether state or federal law governs in
determination of the existence of the status of mortgagee, pledgee,
purchaser or judgment creditor within the purview of §6323. The meaning
of those terms as used in the federal statute is a question of federal
law and was so treated by us in the Chapman case. 1
right involved here is the right to payment by Foy for work done by the
taxpayer under his construction contract. The holding of the trial court
that such payment was due in the amount of $5,545 plus interest is not
contested. The Bank claims that the taxpayer had divested himself of all
right and title thereto by his assignment and hence, at the time of the
notice of the tax lien, he had no property or property rights in the
payment subject to that lien. The
answers that the Bank was not a purchaser within the purview of §6323.
Supreme Court has held that a valid assignment passes all the assignor's
title and interest to the assignee 2
and that after assignment the assignor has no interest which can be
reached by creditors, other than the assignee, in proceedings against
the obligor. 3
However, that court has also recognized the rule that an assignment that
is made as collateral security for a debt gives the assignee only a
qualified interest in the assigned chose, commensurate with the debt
secured even though the assignment is absolute on its face. 4
made by the taxpayer to the Bank provided that if he paid the Bank what
he then owed and the sums thereafter to be advanced, the assignment was
void. The president of the Bank testified that the assignment was made
"as security for advancement of funds that we made to him to meet
States v. Chapman we applied the definition of "purchaser"
found in United States v. Scovil [55-1 USTC ¶9137], 348
218, 221. 5
There it was held that "purchaser" as appearing in §3672 of
the 1939 Internal Revenue Code, the predecessor of §6323 of the 1954
Code, "usually means one who acquires title for a valuable
consideration in the manner of vendor and vendee." Here, as in Chapman,
we have a security transaction and not a sale. The assignment did not
make the Bank a purchaser within the protection of §6323. As the Bank
was not a purchaser, the taxpayer had a property right which was
subjected to a tax lien by the notice.
While not a
purchaser, the Bank does qualify as a mortgagee. Section 6323 does not
define "mortgagee" and we must assume that the term was used
in its ordinary and conventional sense. 6
A mortgage is a security transaction in which the mortgagor does not
make an absolute and unequivocal conveyance but retains an equity of
redemption. We have pointed out that
recognizes that assignments may be made as collateral security. 7
An assignment such as that involved here "is a common, legitimate
commercial transaction." 8
To draw a distinction between a mortgagee and an assignee in a case such
as this is to close our eyes to facts of business life.
As the Bank is
a mortgagee, the perfected lien standard applies to determine what
rights, if any, it has to a priority over the tax lien. 9
A competing lien to be perfected or choate must be definite in the
identity of the lienor, the property subject to the lien, and the amount
of the lien. 10
Those conditions are met in this case. The assignment was made by the
taxpayer to the Bank and notice thereof was accepted by the obligor. The
fact that the assignment was open-ended does not make it unperfected or
inchoate as to money advanced to and due from the taxpayer at the time
of the federal tax lien notice. 11
contends that the Bank's priority should be limited to the unpaid
balance of $1,078.39 on a note dated
April 29, 1955
, the record shows, and the trial court found, that on the date of the
federal tax lien notice, the indebtedness of the taxpayer to the Bank
was $3510. The claim of the Bank has priority over that of the
in such amount plus interest.
relies on an assignment contained in the bond application executed by
the taxpayer. Thereby the taxpayer assigned to the Surety all money due
under the construction contract as security for any liability sustained
by the Surety in connection with the bond. The payments by the Surety on
account of such liability were made in October and December, 1955, many
months after the tax lien notice. As the contractual lien of the Surety
was not perfected and choate, because of uncertainty as to amount, at
the time of the notice, the claim of the
must prevail over that of the Surety. 12
When Foy filed
its interpleader, it paid into court $2,522.45. Counsel for the Bank and
Surety, without help from the
, established that Foy owed the taxpayer an additional $3,022.25 plus
interest, and judgment was entered against Foy in that amount. Foy does
not contest this holding. The Bank and the Surety claim that the
should bear its proportionate share of the expense involved in the
collection of this additional amount. While in private litigation it is
inequitable to permit sharing in a fund without contributing to the
expense of establishing that fund, 13
the allowance of the expenses requested here would invade the paramount
federal tax lien. 14
We are compelled to recognize the supremacy of that lien.
The Bank has a
prior claim against the sums due to the taxpayer from Foy to the amount
of taxpayer's debt to it on
May 18, 1955
, plus interest. The
has a next priority in the amount of the unpaid balance of the tax
assessment made on
May 8, 1955
, plus interest. If these claims do not exhaust the fund, then the
claims of the bank arising subsequent to
May 18, 1955
, which compete with claims of the
arising subsequent to
May 18, 1955
, and supported by tax lien notices shall be given priority on the basis
of the principles herein announced.
remanded for further proceedings in accordance with this opinion.
See also Hoare v. United States, 9 Cir., [61-2 USTC ¶9681], 294
F. 2d 823, 825, in which it is said that the meaning of the word
"mortgagee" as used in §6323(a) is a federal question as to
which state law is to be considered but is not controlling.
First National Bank of
v. United Telephone Association, 187
29, 353 P. 2d 963, 973.
Hall v. Kansas City Terra Cotta Co., 97
See United States v. Chapman, 10 Cir., [60-2 USTC ¶9667] 281 F.
2d 862, 868.
Cf. United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291],
City, note 4, supra.
v. Chapman, supra, p. 870.
v. Chapman, supra, pp. 869, 870, we held that the perfected lien
standard applied in statutory lien cases also applies to contractual
United States v. City of New Britain [54-1 USTC ¶9191], 347
In Rev. Rul. 56-41, 1956-1 Cum. Bull. 562, 563, the
Internal Revenue Service ruled that: "In the case of an 'open-end
mortgage' which covers future advances, it is possible that no future
advance may ever be made. Therefore, until such an advance is actually
made, there can be no fixed and specific or perfected lien under Federal
law as distinguished from a mere contingent lien or 'caveat of a more
perfect lien to come.' Consequently, an intervening recorded Federal tax
lien has priority over advances made subsequent to the date of such
recording." See Hoare v. United States, note 1, supra,
p. 826, footnote 3.
United States v. R. F. Ball Construction Co. [58-1 USTC ¶9327],
v. Chapman, supra, 869-870.
Clarke v. Hot Springs Electric Light & Power Co., 10 Cir., 76
F. 2d 918, 924, certiorari denied 296 U. S. 624. See also Trustees v.
Cf. United States v. Chapman, supra, p. 870.
¶9548]Mary W. Mayer, Plaintiff v. Stephen Andrew, Defendant
the Municipal Court, Santa Barbara Judicial District, County of Santa
Barbara, State of California, No. 6869, July 24, 1953
Lien for taxes: Validity against assignee.--Taxpayer resided in
Los Angeles County during 1949 and 1950, where the U. S. tax liens were
recorded in 1949. He moved to
in July 1951 and in December 1951 while residing there, he acquired an
interest in an amusement company which was later sold to defendant. In
February 1952 he assigned his rights under the contract of sale to
plaintiff. The distraint was served upon defendant who paid $1,000 to
the Government. It was held that a Federal tax lien applies to
intangible property and also to property acquired after the assessment,
that the lien with respect to intangible property was properly recorded
in the county in which taxpayer was domiciled, and that the assignment
was subject to the lien and the assignee's knowledge or lack of
knowledge of the existence of the lien is immaterial.
, for plaintiff. James B. Parish,
1224 1/2 State Street
, for defendant.
is not a party to this action, and its application to intervene was
denied, the question of the priority of the tax liens against T. S.
Mayer is definitely the question which will have to be determined.
Defendant's defense is based upon the distraint served upon him by the
in response to which he has paid the Government $1,000.00. Defendant has
sought to interplead the
and has indicated that he does not care which party he pays, either the
plaintiff Mary W. Mayer or the Director of Internal Revenue.
It is conceded
that T. S. Mayer, plaintiff's assignor, resided in Los Angeles County
during 1949 and 1950; that he moved to Santa Barbara on July 1, 1951
where he has since resided; that the tax liens were recorded in Los
Angeles County in 1949; that the defendant was notified of the
assignment by T. S. Mayer to Mary W. Mayer in April, 1952 or possibly
before, and that the U. S. levied on defendant in July, 1952, subsequent
to the notice of assignment.
preliminary questions must be answered.
1. Does a tax
lien affect intangible property such as is involved in this case?
It appears to
be the law that it does cover intangible property.
is well settled that a Federal tax lien may attach to intangible as well
as tangible property."
v. Rothensies (1940: D. C. Pa. 31 Fed. Supp. 716.)
2. Does a tax
lien affect after-acquired property?
tax lien applies not only to property belonging to a taxpayer as of the
date of demand or date when the collector receives the assessment, but
also includes property acquired thereafter and owned by the delinquent
at any time during the life of the lien. Glass City Bank v.
265, 90 L. Ed. 56, 66 S. Ct. 108 [45-2 USTC ¶9449].
3. Was the tax
lien properly recorded in
, or should it have been recorded in
? Government Code Section 27330.
taxpayer owned real property located in one county, and resided in
another county, the Government should have recorded its lien in the
latter county with respect to the taxpayer's intangible personal
property since the situs of such property is the owner's domicile.
v. Spreckles (1943) 50 Fed. Supp. 789 [43-2 USTC ¶9572].
The tax lien
was properly recorded in
in 1949, at which time T. S. Mayer was domiciled in
. He later moved to
and in December, 1951 acquired the interest in the Lompoc Amusement
Company which was later sold to the defendant. His rights under the
contract were assigned to plaintiff in February, 1952, and notice of
such assignment given to defendant Andrew in April, 1952.
It is argued
that the Government can only levy upon whatever interest T. S. Mayer had
in the contract at the time of the levy, and that, at such time, he had
no interest in the contract, having previously assigned same to
On the other
side, it is argued that plaintiff could acquire only such interest T. S.
Mayer had in the contract, and the assignment to plaintiff is subject to
the existing lien of the Government.
It seems to me
that it would be a very anomalous situation if the tax lien, once
properly recorded in the county of taxpayer's domicile, and thereby
becoming a lien on his intangible property wherever located, could be
rendered invalid by the simple change of domicile. If that were the
case, the Government would have to put a "shadow" on every
delinquent taxpayer, whose duty would be to ascertain whenever the
taxpayer acquired a new domicile and then file a new lien in that
county, in order to prevent a loss of the previously existing valid
lien. I doubt very much that T. S. Mayer advised the Director of
Internal Revenue of his intention to change his domicile and the
acquisition of his interest in the Lompoc Amusement Company.
It might be
pointed out that the plaintiff was not in Court to testify as to her
knowledge or lack of knowledge of the existence of the tax lien. Her
knowledge of the lien would prevent her, I believe, from being a bona
fide purchaser. Her lack of knowledge probably would have no material
bearing on the case, in view of the points I have discussed.
It appears to
me that the defendant could have done little else than to turn over the
$1,000.00 to the Government. He should hardly be required to pay twice,
once to the
and once to the plaintiff. If plaintiff, by this decision, is wrongfully
deprived of her money, (which I do not believe to be the case,) she can
litigate the matter with the U. S. The defendant should not have to
settle the dispute for the plaintiff. The question, as I first pointed
out, involves a conflict between the
and the plaintiff.
It is the
opinion of the Court that the tax lien did fall upon the interest of T.
S. Mayer in the contract with defendant, and that plaintiff accepted the
assignment subject to the tax lien.
hereby granted in favor of the defendant, and against the plaintiff,
together with defendant's costs of suit.
United States of America
, Plaintiff in Intervention-Appellee v. Crest Finance Co., Inc.,
Court of Appeals, 7th Circuit, No. 13226, 305 F2d 332,
, On remand from U. S. Sup. Ct., Judgment of District Court reversed in
part and affirmed in part
[1954 Code Sec. 6323(a)]
Lien for taxes: Priority of finance company liens: Mechanics liens.--The
liens of a finance company to which accounts receivable were assigned as
security for amounts advanced to a contractor were choate under Illinois
law, which does not require filing or recording to perfect an assignment
of accounts receivable, and therefore had priority over liens for
federal taxes which were filed after the assignments. The liens of the
finance company, however, were subordinate to mechanics' liens which had
been perfected under
Sellers, Lee A. Jackson, Department of Justice, Washington 25, D. C., R.
Tieken, United States Attorney, Harvey M. Silets, Assistant United
States Attorney, Chicago, Ill., for plaintiff in intervention-appellee.
Irwin J. Askow, Howell B. Hardy, 7 S. Dearborn, Chicago 3, Ill., David
Levinson, John J. Faissler, C. Harker Rhodes, Jr., 77 W. Washington,
Chicago 2, Ill., Albert E. Jenner, William B. Davenport,
ert E. Pfaff, 135 S. LaSalle, Chicago 3, Ill., for other appellees.
Hamilton Clorfene, 134 N. LaSalle, Chicago, Ill., Harry G. Fins, 77 W.
Washington, Chicago 2, Ill., for defendant-appellant. A. Bruce
Schimberg, 100 W. Monroe, Chicago, Ill., Eli S. Silberfeld,
405 Lexington Ave.
, N. Y., for amicus curiae.
Before Hon. F.
RYAN DUFFY, Hon. WIN. G. KNOCH, and Hon. LATHAM CASTLE, Circuit Judges.
Recalling Mandate and Order Affirming in Part and Reversing in Part
Judgment of the District Court, and Directions for a New Mandate
This is a suit
presenting questions of lien priority, filed by Standard-Crowley-Jackson
(Standard) against Crest Finance Co., Inc. (Crest), the
United States of America
and others. Standard paid into the registry of the United States
District Court the sum of $17,369.94. Judgment of the District Court
ordered the deposited sum to be distributed in the following manner:
Peter Kiewit Sons' Company ............. $ 2,000.00
Road Machinery and Supplies Company
United States of America
affirmed the judgment of the District Court [61-1 USTC ¶9460] (291 F.
2d 1). Crest petitioned for certiorari. In its memorandum in response to
that petition, the
conceded that Crest's lien was choate unless, as a matter of law, the
failure to record the assignment made it ineffective against third
18, 1961, the Supreme Court handed down an order as follows:
the light of the Solicitor General's concession that petitioner's lien
is choate, and the Court agreeing therewith, certiorari is granted, the
judgment is vacated and the case is remanded to the Court of Appeals for
further proceedings not inconsistent with this opinion." [62-1 USTC
Upon remand to
this Court, the
filed a motion for an order reinstating its judgment in this case.
By an opinion
May 3, 1962
, we denied the motion of the
, and held the lien of Crest was superior to the subsequent lien of the
. We ordered the District Court judgment to be reversed in this respect.
there was filed with this Court, a motion by Peter Kiewit Sons' Company
and Road Machinery and Supplies Company of Minneapolis, claimants under
duly filed mechanic's liens, that the proposed order reversing the
judgment of the District Court be modified so that the District Court
judgment be reversed only as far as it related to the United States of
America, and that the judgment relating to Peter Kiewit Sons' Company
and Road Machinery and Supplies Company of Minneapolis be permitted to
stand. Crest filed objections to the motion of the lien claimants.
For the reason
that the mechanic's liens in favor of Peter Kiewit Sons' Company and
Road Machinery and Supplies Company of Minneapolis were based upon Chap.
82, Sec. 23, Ill. Rev. Stats. and have priority, and for the additional
reason that the per curiam opinion and order of the United States
Supreme Court, [62-1 USTC ¶9105] 368 U. S. 347, was concerned only with
the relative priority of Crest and the United States of America;
IT IS ORDERED,
that our mandate for the District Court dated
June 23, 1961
, be recalled;
IT IS FURTHER
ORDERED, that the judgment of the District Court ordering payments from
the deposited fund be made first to Peter Kiewit Sons' Company, $2,000,
and to Road Machinery and Supplies Company of Minneapolis, $2,816.44, be
affirmed; that the portion of said judgment ordering payment of
$12,553.50 to the United States of America be reversed; that Crest
Finance Company be paid from said deposited fund the amount of
$12,553.50, and that a new mandate from this Court be issued in
conformity with this order.
United States of America
v. William T. Harris, Jane B. Harris and Pioneer Bank & Trust
S. District Court, West. Dist. La., Shreveport Div., Civil Action No.
10,692, 249 FSupp 221, 1/14/66
[1954 Code Sec. 6323]
Tax liens: Pledgee of bank accounts: Priority.--On the authority
of the Supreme Court's decision in Crest Finance Co., Inc., 62-1
USTC ¶9105, the District Court held that the pledgee bank was entitled
to priority over the government's tax liens in two checking accounts
standing in the names of the delinquent taxpayers. The lien of the
pledgee bank was perfected before the tax liens were filed.
Shaheen, United States Attorney, Edward V. Boagni, Assistant United
States Attorney, Shreveport, La., for the government. J. W. Jones,
Bodenheimer, Looney & Jones, 705 Giddens-Lane Bldg., Shreveport,
La., for defendants.
on Motions for Summary Judgment
This action is
brought by the
to foreclose a tax lien, assessed upon the property of William T. Harris
and Jane B. Harris pursuant to Section 6321 of the Internal Revenue Code
of 1954, under the provisions of Sections 7402 and 7403 of the Code. The
Court has jurisdiction under those provisions and under 28
C. §1340. The property sought to be subjected to foreclosure
proceedings is presently in the possession of the defendant Pioneer Bank
& Trust Company, being two individual checking accounts standing in
the names of the taxpayers in the aggregate sum of $760.17.
Director of Internal Revenue assessed against the defendant taxpayers,
for income taxes in the taxable year 1962, the sum of $4,844.69, on
May 17, 1963
August 23, 1963
, a notice of tax lien was filed in the manner prescribed by Section
6323 of the Code. On
November 29, 1963
, the defendant Pioneer Bank received a Notice of Levy upon the property
of the taxpayers. Immediately after the receipt of notice the Pioneer
Bank sought to enforce a set-off agreement, arising out of a prior
indebtedness of the taxpayers to the bank, by charging both accounts
with the entire sums on deposit and applying the aggregate to the
taxpayers' debt. The Pioneer Bank has continued to refuse to discharge
the tax liability of William T. and Jane B. Harris. 1
government and the bank have moved for summary judgment on the
stipulated facts, the only issue being one of priority between the tax
lien and the privilege accorded the bank. We agree with the position
taken by the bank, and therefore grant its motion, rejecting the
Prior to the
tax assessment of
May 17, 1963
, the taxpayers were indebted to the bank in the original principal sum
of $2,061.67 under a promissory note executed by William T. Harris,
January 29, 1963
, held by the bank as holder in due course. The note provided that the
holder had the right at any time to set-off any amount that either the
maker, endorser, or guarantor had on deposit with the bank, whether such
deposit was special or general, and whether the note was then due or
not. As a security for their indebtedness, the taxpayers executed
certain collateral pledge agreements which provided that should any
indebtedness secured by the agreement become due or declared due, in
accordance with the terms thereof, any and all funds deposited to the
credit of either or both of the taxpayers but in the possession of the
bank may be applied in reduction of the secured debt.
argues vaguely that because the bank did not exercise its right of
set-off until after it had actual notice of the tax lien, that its claim
to the funds is inferior to that of the government. In support of its
position it cites Bank of Nevada v. United States [58-1 USTC ¶9228],
251 F. 2d 820 (9 Cir. 1958), cert. denied 356 U. S. 938, and United
States v. Bank of America National Trust & Savings Ass'n [64-2
USTC ¶9533], 229 F. Supp. 906 (S. D. Calif. 1964), aff'd [65-1 USTC ¶9429]
345 F. 2d 624 (9 Cir. 1965).
In Bank of
Nevada the taxpayer, prior to the assessment, submitted a financial
statement to the bank under which it was stipulated that if the taxpayer
thereafter became indebted to the bank, the latter, upon receipt of
legal process on the debtors' bank account, had the option to declare
immediately due all of his obligations to the bank. It was subsequent to
the assessment, however, when the taxpayer became indebted to the bank.
Upon notice of the federal tax lien the bank exercised its right to
set-off under the prior agreement and applied the funds in the
taxpayer's account to his unsecured indebtedness. In affirming the lower
court's finding in favor of the government, the Court stated:
* * The appellant [bank] could not protect itself from a Federal tax
levy by the taxpayer's inchoate agreement, or by an asserted right of
setoff arising from a debt that was not in existence at the time the tax
liens arose . . ." 251 F. 2d at 825.
In Bank of
America National Trust and Savings Association the issue was more
tightly framed. There the bank claimed under a statutory right of
set-off or compensation under California Code of Civil Procedure, §440.
Nevertheless, the court found the Bank of Nevada case
controlling. Significantly, the taxpayer's obligation to the bank arose
subsequent to attachment of the Federal tax lien under §6321:
. . in the Bank of Nevada case, the court went on to point out
the Government's claim arose before any right under the instruments held
by the bank. The same is true in the present case." 229 F. Supp. at
Thus, as urged
by counsel for Pioneer Bank, both of the decisions on which the
government relies are distinguishable from the situation here presented,
in that the Harrises stipulated with the bank as to the bank's right to
set-off funds on deposit to the taxpayers' credit against a debt
existing prior to the assessment and Notice of Levy.
But it is
unnecessary for us to base our decision on such a distinction; there is
a firm ground which is clearly dispositive of this case. It is well
settled that as for a lien created by State law, its priority depends
"upon the time it attached to the property in question and became
choate." United States v. City of New Britain [54-1 USTC ¶9191],
81, 85-86 (1954);
v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340
47 (1950). The rule is now cliche: "first in time, first in
right." United States v. City of New Britain, supra. See
also United States v. Crest Finance Co. [61-1 USTC ¶9460], 291
F. 2d 1 (7 Cir. 1961), rev'd [62-1 USTC ¶9105] 368
347. Although the word "choate" has fallen into some
disrepute, it being suggested that the word "complete" be
used, see e.g., Hammes v. Tucson Newspapers, Inc. [63-2 USTC ¶9808],
324 F. 2d 101 (9 Cir. 1963), the federal rule is that liens are
"perfected in the sense that there is nothing more to be done to
have a choate lien . . . when the identity of the lienor, the property
subject to the lien, and the amount of the lien are established." United
States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374
84 (1963). And it is a matter of federal law when such a lien has
acquired sufficient substance and has become so perfected as to defeat a
later-arising federal tax lien.
v. Security Trust & Sav. Bank, supra.
It is crucial,
therefore, to determine when a State created right of preference came
into existence or becomes valid under federal law, when a question of
priority vis-a-vis a federal tax lien is presented. The tax lien arises,
according to §6322, when the tax is assessed, but as against the
specific interests mentioned in §6323(a)--mortgagees, pledgees,
purchasers and judgment creditors--it is not valid until placed of
public record. Thus it is obvious that if, as a matter of federal law,
the Pioneer Bank be accorded a preference (lien) of sufficient substance
under the rigorous "choateness" test above, its claim to the
funds here in dispute will be superior to the federal tax lien.
conceded by the government, the Pioneer Bank is a pledgee of credits
represented by the taxpayers' bank deposits under a collateral pledge
agreement executed prior to the tax assessment. We are taught by the
Regulations, §301.6323-1(a)(2)(ii) that:
determination whether a person is a . . . pledgee . . . [under Federal
law], shall be made by reference to the realities and the facts in a
given case rather than to the technical form or terminology used to
designate such person . . .."
interpret this Regulation to mean that the Pioneer Bank may be a pledgee
with a perfected lien right, in the sense that nothing more need be done
to have a choate lien, by reference to the realities of the situation
A pledge is a
contract by which a debtor delivers to his creditor a thing to serve as
security. The reality of the contract lies in its purpose--security for
a debt. The thing delivered, as we are taught by the Louisiana Civil
Code, may be any corporeal movable, even money. 2
When money is the object of a pledge it is a real security quite
different from the personal security resulting from the engagement of a
surety. The contract differs even from the veritable pledge in that the
creditor secured is debtor of a sum of money, and not the possessor of
the thing of another. 3
precisely the reality of the case before us. The Pioneer Bank is the
debtor of the taxpayer under their deposit agreement. The bank becomes
the creditor under a loan, evidenced by the negotiable note executed by
Harris, and thus is a secured pledgee, however not possessing a thing
such as the watch held by the pawnbroker but rather by being debtor of
the sum of money on deposit. These agreements are preserved in a
document called a collateral pledge agreement.
these bank deposits be considered credits rather than specific currency,
the reality of the pledge is even more manifest. It is axiomatic that
every sort of assignable credit may be given in pledge. 4
The Louisiana Civil Code teaches that when the thing given in pledge
consists of a credit, "the pledge shall be complete as to all the
world," as soon as the person obligated on the credit is notified
in writing. 5
The typical pledge of this type is that of accounts receivable. But we
see nothing to prevent the person obligated on the credit from being the
pledgee himself, remembering that the reality of the pledge lies in the
security it affords the pledgee-creditor. The case before us is clear:
in order to obtain a longterm installment loan, otherwise unsecured, the
taxpayers pledged the deposits attributable to their checking accounts
to secure the creditor bank. It may not be conjecture to suggest that
these taxpayers might not have been able to obtain a loan at all without
some type of security.
federal test of "choateness," United States v. Pioneer
American Ins. Co., supra, to the realities and the facts of the case
before us, we find: (1) the identity of the lienor to be the
pledgee--the Pioneer Bank; (2) the property subject to the lien
to be the thing pledged--the individual bank accounts of the taxpayers;
and (3) the amount of the lien to be ascertainable as the amount
of money on deposit, or the value of the credit, not to exceed the
amount of the debt. We find it of no consequence that the amount of
funds subjected to the lien, and thus, the amount of the lien,
may vary during the existence of the pledge. The amount is ascertainable
at any given time, and thus the lien is perfected as to amount.
We find United
States v. Crest Finance Co. [62-1 USTC ¶9105], 368
347 (1962) rev'g [61-1 USTC ¶9460] 291 F. 2d 1 (7 Cir. 1961),
In that case Crest Finance Company claimed a lien resulting from a
pledge of the taxpayer's accounts receivable. In the Court of Appeals
the government was successful in its contention that the lien was
unperfected in that there had been no transfer of possession of the
pledged things. The Supreme Court reversed, and on remand, see 302 F. 2d
568 (7 Cir. 1962), the Court held "the lien of Crest was perfected
under the law of Illinois and was superior to the subsequent lien of the
United States," 302 F. 2d at 570, in that the State law did not
require for perfection of the lien transfer of "the pieces of paper
representing the accounts." See also Stevan v. Union Trust Co.
[63-1 USTC ¶9377], 316 F. 2d 687 (D. C. Cir. 1963); United States v.
Peoples Bank [52-2 USTC ¶9407], 197 F. 2d 898 (5 Cir. 1952); United
States v. Winnett [48-1 USTC ¶9115], 165 F. 2d 149 (9 Cir. 1947).
See generally 9 Mertens, Law of Federal Income Taxation §54.42.
in United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532],
374 U. S. 84 (1963), federal tax liens filed subsequent to a mortgage
were entitled to priority over the claim of the mortgagee for a
"reasonable attorney's fee" because the lien for an attorney's
fee was uncertain in amount: "such a lien is inchoate and is
subordinate to the intervening federal tax lien filed before the
mortgagee's lien for the attorney's fee matures." 374
Indeed, it is
difficult to conceive of a more "choate" or perfected lien
than that accorded a pledgee upon the object of the pledge. In our view
the pledge is the epitomy of the lawful causes of preference whereby a
subsequently attaching federal tax lien is subordinated to the claim of
the pledgee in the thing pledged. For the reasons above we hold that the
lien of the Pioneer Bank was perfected under the Internal Revenue Code
and within the rationale of the jurisprudence and was superior to the
subsequent tax lien of the
The motion of
for summary judgment is denied; the motion of Pioneer Bank is granted.
An appropriate decree should be presented.
After the defendants William T. Harris and Jane B. Harris were duly
served and cited and failed to plead or otherwise defend, judgment in
favor of the
in the principal sum of $1,986.06, plus interest and costs, was rendered
October 11, 1965
, against those defendants in solido.
See La. Civil Code arts. 3133-3181 (1870). See generally Slovenko, Of
Pledge, 33 Tulane Law Review 59 (1958).
See 2 Planiol, Civil Law Treatise (An English Translation by the
Louisiana State Law Institute) No. 2391 (1959).
See e.g., 2 Planiol, Civil Law Treatise (An English
Translation by the Louisiana State Law Institute) No. 2392 (1959).
Civil Code art. 3160 (1870).
Remanded [62-1 USTC ¶9454] 302 F. 2d 568 (7 Cir. 1962); on remand 305
F. 2d 332. For a detailed discussion of priority accorded pledgees
vis-a-vis the United States under a tax lien, see 9 Mertens, Law of
Federed Income Taxation §54.44.
¶9105]Crest Finance Co., Inc. v.
Court of the United States, No. 325, 368 US 347, 12/18/61, Vacating and
rem'g CA-7, which aff'd unreported Dist. Ct. decision, 61-1 USTC ¶9460,
291 F. 2d 1
[1954 Code Sec. 6323(a)]
Priority of liens: Fact finding.--The claim of a finance company
secured by promissory notes and assigned accounts receivable was
superior to the government's lien for taxes since such claim was choate
or perfected (conceded by the government and agreed to by the court).
The 7th Circuit's decision at 61-1 USTC ¶9460, holding that the finance
company's claim was inchoate and unperfected on the authority of R.
F. Ball Construction Co., (Sup.
) 58-1 USTC ¶9327, was vacated and remanded.
Jones, Seymour S. Mintz, William T. Plumb, Jr., and Hamilton Clorfene,
, D. C., for petitioner. Archibald Cox, Solicitor General, Louis F.
Oberdorfer, Assistant Attorney General, Wayne G. Barnett, Assistant to
Solicitor General, Joseph Kovner, George F. Lynch, Department of
Justice, Washington 25, D. C. Benjamin M. Nathan, Theodore M. Newman,
405 Lexington Ave., New York, N. Y., for National Commercial Finance
Conference, Inc., amicus curiae.
In the light
of the Solicitor General's concession that petitioner's lien is choate,
and the Court agreeing therewith, certiorari is granted, the judgment is
vacated and the case is remanded to the Court of Appeals for further
proceedings not inconsistent with this opinion.