Contract Assignment Page2

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Originally, the United States 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 U. S. 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).

While some have characterized the subject of federal tax liens as being somewhat complex, ¹ 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.

The initial premise, not challenged by any of the parties to this action, is that the United States 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 such person.

Section 6322 of the Code provides:

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

Here the United States obtained liens against Bentonite, Inc., on October 25, 1974 , and October 29, 1974 .

[Exceptions re Tax Lien Priority]

These liens 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 creditor until 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 U. S. 938 (1958).

[Property Subject to Lien]

DID 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 Nevada . The same factual situation arose in Nevada Rock and Sand Company v. United States , 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.

While the 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).

[Qualification re Holder of a Security Interest]

DID VALLEY 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 Nevada v. United States , supra, 251 F. 2d at 826; Nevada Rock and Sand Company v. United States , 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 United States after the lien has arisen. The "blueprint" on how to obtain priority is contained in Section 6323(a) of the Code which provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary. ²

Here the 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" prior to March 6, 1975 . ³ A holder of a security interest is defined in Section 6323(h) of the Code as follows:

(1) Security 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.

The Water 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 "attach" until January 2, 1973 . See N. R. S. Section 104.9203(1)(c). ⁴

The interest 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 United States 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. United States , 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

[Applicability of Article Nine]

WERE THE 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[1] (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 provides:

In general 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.)

Thus, 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 Pa. 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]

ARE 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 U. S. 81 (1954).

Under this 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 ¶9105] 368 U. S. 347 (1961); United States 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. Id. 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 U. S. 351 (1964), United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950).

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 U. S. 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).

[Inapplicability 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 are untenable.

At the time the tax liens attached in October, 1974, N. R. S. 104.9302(1)(e) provided:

(1) A financing statement must be filed to perfect all security interests except the following:

. . .

(e) 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;

It is significant to note that Comment 5 to this section of the Uniform Commercial Code provides in pertinent part:

The 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. (Emphasis added)

Professor 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.")

[Amendment of State Statute]

IS KNOWLEDGE BY THE UNITED STATES OF ANY PRIOR INTEREST BY VALLEY BANK OF NEVADA 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 follows:

(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of . . .

(b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected.

The Nevada 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:

(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of . . .

(b) a person who becomes a lien creditor before the security interest is perfected.

The Nevada 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. United States , 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). . . .

The facts 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 follows:

Paragraph (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

Therefore, knowledge on the part of the Government with respect to Valley Bank of Nevada 's interest is irrelevant under N. R. S. 104.301(1)(b).

[Statute of Limitations]

ARE THE 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 and October 29, 1974 , have lapsed and are therefore invalid. This contention is also untenable.

Section 6502(a) of the Code provides in pertinent part:

Length of 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--

(1) within 6 years after the assessment of the tax.

On July 29, 1980 , within the six year period provided for in the statute, the Internal Revenue Service levied upon the City of Henderson with respect to the tax assessments against Bentonite, Inc.

Both the 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 admin 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 Henderson 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.

Moreover, the institution of this action and the demand that the interpleaded funds be turned over to the United States 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 tax.

Conclusion

The City of Henderson holds certain sums for the account of Bentonite, Inc. pursuant to the six water and sewer refunding agreements. At trial, the City of Henderson has abandoned its claim to any of the proceeds of the fund in issue. The United States 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 United States . 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 Nevada prior to 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; United States v. Trigg, supra, 465 F. 2d at 1270; Nevada Rock and Sand Company v. United States , supra.

IT IS HEREBY ORDERED that the Government shall submit proposed Findings of Fact, Conclusion of Law and Judgment consistent with this Decision.

¹ See e.g. Randall v. Nakashima [76-2 USTC ¶9770], 542 F. 2d 270 (5th Cir. 1976).

² 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.

Congress 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 U. S. 909 (1973).

³ 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 creditors.

⁴ The Uniform Commercial Code was originally enacted in Nevada in 1965. That version was commonly referred to as the 1962 Code. In 1973, the Nevada legislature amended the Code to conform Nevada 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.

⁵ 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. United States , supra, 376 F. Supp. at 172 n. 17. Contrary to Valley Bank's assertion at trial, the knowledge of the United States 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.

⁶ N. R. S. 104.9104(6) provides that:

Transactions 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 . . .

⁷ 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.

⁸ 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.)

⁹ 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.

 

 

[72-1 USTC ¶9289]Centex Construction Company, Inc. v. David M. Kennedy, Secretary of Treasury, United States Treasury Department, et al.

U. 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.

Gary Norton, 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.

Memorandum and Order

COX, District Judge:

The Plaintiff in this suit, Centex Construction Company, Inc., brought this interpleader action and deposited in the Registry of this Court the sum of $9,929.23.

The first 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 .

The Defendant First State Bank of Corpus Christi , 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.

The Government 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 deposited.

[Uniform Commercial Code]

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 Texas 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 Texas , 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

"(1) 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."

and 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 Texas .

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.

In considering 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 not "choate."

[Contract Rights]

Perhaps, at 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.

Assuming, as 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.

Perhaps the 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 performance."

The Fordham 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.

[Prior Cases]

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.

[Congressional Intent]

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.

It is, therefore, ordered that, as between the Secretary of the Treasury and First State Bank of Corpus Christi , 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.

 

 

[64-2 USTC ¶9853]In the Matter of Mile Hi Restaurants, Inc., Bankrupt

U. 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 was filed.

Donald Bain, 1700 Broadway, Denver , Colo. , for petitionering creditors. Rob ert Sunshine, Eugene J. Rob erts, 515 Majestic Bldg., Denver , Colo. , for respondent.

Order

CHILSON, District Judge:

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 insurance policies.

The essential facts are not in dispute.

Mile Hi Restaurants, Inc., a Colorado 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 Iowa (Equitable) and Connecticut General Life Insurance Company ( Connecticut ). 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.

On 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 Union and by executing and delivering to Union blank forms of "Assignment of Life Insurance as Collateral." On the same date Orr executed and delivered to Union a guaranty of the payment of the note to the extent of $15,000.00. July 31, 1961 , Orr paid Union the balance of the principal then due, $14,207.68, and the then accrued interest of $64.13. Thereupon Union 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 Connecticut .

On 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 assignment to Connecticut and the company noted on the assignment that it had been "recorded and filed" on January 27, 1962.

[Assessment and Lien]

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.

As previously noted, the bankruptcy petition was filed on August 6, 1962 . On August 10, 1962 , the insured died and both policies were then in effect.

The Grover note had been in default since December 1, 1961 , and Grover had paid all premiums on the Connecticut policy from that date to the date of the insured's death, amounting to $1704.27.

On the date of death the benefits payable on the Equitable policy were $36,244.16 and on the Connecticut policy $20,453.49.

The United States claimed a lien on the proceeds of the policies for $48,180.58 under Title 26 U. S. C. Sections 6321-23(a).

Orr, as 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.

Grover claimed 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 Connecticut policy.

By stipulation the proceeds of the policies were paid by the insurers to the trustee to be held pending the determination of the various claims.

[Referee's Order]

The Referee 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.

The Referee determined that Orr's claim should be allowed, as secured, to be paid out of the proceeds of the Equitable policy.

The Referee denied Grover's claim to the proceeds of the Connecticut policy and his claim was allowed as unsecured.

As to the claim of the United States , 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.

The United States and Grover have petitioned for a review.

On September 17, 1964 , this matter was heard before the Court and the Court is now duly advised.

The taxes became a lien upon whatever property interest the bankrupt had in the policies on the date of the tax assessment.

The bankrupt's 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.

Therefore, in 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 United States .

The first question is to be determined by state law, the second by federal law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509.

Unless the Orr and Grover transactions are affected by the Colorado Accounts Receivable Statute, Chapter 11-2-1 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 Colorado .

In the Orr transaction, both policies were delivered to the Union Bank as a pledge to secure the bankrupt's debt to Union . 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 Colo. 138.

Grover received an assignment of the Connecticut policy as collateral security for the bankrupt's debt to him. The assignment was filed with Connecticut . It is admitted and the Court finds that Grover had a valid lien under Colorado law upon the Connecticut policy unless the Colorado Accounts Receivable State affected the transaction.

[Priority]

Assuming for 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 United States 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 United States ' lien, Orr's claim would appear to have priority under Section 6323(a).

However, for 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).

The Grover 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.

[Accounts Receivable Statute]

There remains for determination the effect, if any, the Accounts Receivable Statute of the State of Colorado may have upon the validity of the Orr and Grover liens.

The United States 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.

This statute 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 requirement.

When the statutory procedure is followed the assignee is protected against the claims of third parties to the extent set forth in the statute.

The specific question before the Court is whether or not the life insurance policies here involved are included in or excluded from the operation of this statute.

The definition of an account receivable as set forth in the statute and insofar as here pertinent states:

`Account' or 'account receivable' means an existing or future right to the payment of money presently due, or to become due:

"Which 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."

Counsel have cited no Colorado court decisions construing this particular provision of the statute and we have found none.

[Decision on Similar Statute]

From other 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 United States evidencing the bankrupt's rights to payments of choices in action or accounts owing by the United States 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 Florida courts had not construed this provision of the statute. The court in Landy stated at page 928:

"Therefore, 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 Florida 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 Florida 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."

The court concluded at page 931:

"The 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."

We believe that the reasoning of the court in Landy which led to its construction of the Florida statute is sound and equally applicable to the Colorado Accounts Receivable Statute.

We conclude, 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.

The Referee, 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 Colorado 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 limitations expressed.

[Conclusions]

The Court concludes, therefore:

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.

2. That 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.

IT IS 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 hereby affirmed.

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.

 

 

[62-1 USTC ¶9325] United States of America , Appellant v. L. R. Foy Construction Company, Inc.; Valley State Bank, Syracuse , Kansas ; Tri-State Insurance Company, Tulsa , Oklahoma ; and Herbert A. Stumm, Appellees

(CA-10), 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.

Moshe 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 Rob 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.

Before BRATTON, HUXMAN, and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge:

The United 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).

[Facts]

Foy held the principal contract for the construction of a high school building at Garden City, Kansas , 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.

Federal taxes in various amounts with accrued interest were assessed against the taxpayer in the period May 8, 1955 , to 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 interest.

Pursuant to 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.

[Interpleader]

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 United States 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.

[Statutory Provisions]

Under §6321 of the Internal Revenue Code of 1954 the United States 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 provided.

[State Law v. Federal Law]

In Aquilino 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

[Property Right]

The property 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 United States answers that the Bank was not a purchaser within the purview of §6323.

[Rights of Assignee]

The Kansas 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

The assignment 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 payrolls."

In United States v. Chapman we applied the definition of "purchaser" found in United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 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.

[Assignee as Mortgagee]

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 Kansas 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.

[Lien Was Choate]

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 While the United States 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 United States in such amount plus interest.

[Surety's Standing]

The Surety 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 United States 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 United States , 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 United States 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 United States 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 United States arising subsequent to May 18, 1955 , and supported by tax lien notices shall be given priority on the basis of the principles herein announced.

Reversed and remanded for further proceedings in accordance with this opinion.

¹ 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.

² First National Bank of Topeka v. United Telephone Association, 187 Kan. 29, 353 P. 2d 963, 973.

³ Hall v. Kansas City Terra Cotta Co., 97 Kan. 103, 154 Pac. 210, 212.

⁴ Everett v. Arkansas City , 118 Kan. 444, 235 Pac. 856.

⁵ See United States v. Chapman, 10 Cir., [60-2 USTC ¶9667] 281 F. 2d 862, 868.

⁶ Cf. United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361, 364.

⁷ Everett v. Arkansas City, note 4, supra.

⁸ United States v. Chapman, supra, p. 870.

⁹ In United States v. Chapman, supra, pp. 869, 870, we held that the perfected lien standard applied in statutory lien cases also applies to contractual liens.

¹⁰ United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84.

¹¹ 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.

¹² United States v. R. F. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587; United States v. Chapman, supra, 869-870.

¹³ 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. Greenough, 105 U. S. 527.

¹⁴ Cf. United States v. Chapman, supra, p. 870.

 

 

[53-2 USTC ¶9548]Mary W. Mayer, Plaintiff v. Stephen Andrew, Defendant

In 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 Santa Barbara County 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.

Elmo Cure, Granada Building , Santa Barbara , for plaintiff. James B. Parish, 1224 1/2 State Street , Santa Barbara , for defendant.

Memorandum of Opinion

JENSEN, Acting Judge:

Although the United States 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 U. S. in response to which he has paid the Government $1,000.00. Defendant has sought to interplead the U. S. 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.

Several 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.

"It is well settled that a Federal tax lien may attach to intangible as well as tangible property."

Filipowicz v. Rothensies (1940: D. C. Pa. 31 Fed. Supp. 716.)

2. Does a tax lien affect after-acquired property?

The Federal 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. United States --1945--326 US 265, 90 L. Ed. 56, 66 S. Ct. 108 [45-2 USTC ¶9449].

3. Was the tax lien properly recorded in Los Angeles County , or should it have been recorded in Santa Barbara County ? Government Code Section 27330.

Where the 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. United States v. Spreckles (1943) 50 Fed. Supp. 789 [43-2 USTC ¶9572].

The tax lien was properly recorded in Los Angeles County in 1949, at which time T. S. Mayer was domiciled in Los Angeles County . He later moved to Santa Barbara County 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 plaintiff.

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.

[Taxpayer's Domicile Changed]

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 U. S. 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 U. S. 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.

Judgment is hereby granted in favor of the defendant, and against the plaintiff, together with defendant's costs of suit.

 

 

[62-2 USTC ¶9611] United States of America , Plaintiff in Intervention-Appellee v. Crest Finance Co., Inc., Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 13226, 305 F2d 332, 7/10/62 , 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 Illinois law.

Abbott M. 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, Rob 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. , New York , N. Y., for amicus curiae.

Before Hon. F. RYAN DUFFY, Hon. WIN. G. KNOCH, and Hon. LATHAM CASTLE, Circuit Judges.

Order 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

of 

Minneapolis

 .........................           2,816.44

United States of America

 ...............          12,553.50

 

This Court 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 United States conceded that Crest's lien was choate unless, as a matter of law, the failure to record the assignment made it ineffective against third parties.

On December 18, 1961, the Supreme Court handed down an order as follows:

"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." [62-1 USTC ¶9105] (368 U. S. 347)

Upon remand to this Court, the United States filed a motion for an order reinstating its judgment in this case.

By an opinion dated May 3, 1962 , we denied the motion of the United States , and held the lien of Crest was superior to the subsequent lien of the United States . We ordered the District Court judgment to be reversed in this respect.

Thereafter, 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.

 

 

[66-1 USTC ¶9180] United States of America v. William T. Harris, Jane B. Harris and Pioneer Bank & Trust Company

U. 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.

Edward L. 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.

Rulings on Motions for Summary Judgment

DAWKINS, JR., Chief Judge:

This action is brought by the United States 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 U. S. 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.

The District 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 . On 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

Both the 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 government's demand.

[Tax Liens]

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, dated 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.

The government 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 909.

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], 347 U. S. 81, 85-86 (1954); United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U. S. 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 U. S. 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 U. S. 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. United States 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.

[Pledgee's Lien]

As fully 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:

"The 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 . . .."

We 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 here presented.

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

This is 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.

Further, if 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.

Applying the 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 U. S. 347 (1962) rev'g [61-1 USTC ¶9460] 291 F. 2d 1 (7 Cir. 1961), controlling. ⁶ 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.

By contrast, 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 U. S. at 91.

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 United States .

[Judgment of Court]

The motion of the United States for summary judgment is denied; the motion of Pioneer Bank is granted. An appropriate decree should be presented.

¹ 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 United States in the principal sum of $1,986.06, plus interest and costs, was rendered and signed October 11, 1965 , against those defendants in solido.

² See La. Civil Code arts. 3133-3181 (1870). See generally Slovenko, Of Pledge, 33 Tulane Law Review 59 (1958).

³ See 2 Planiol, Civil Law Treatise (An English Translation by the Louisiana State Law Institute) No. 2391 (1959).

⁴ See e.g., 2 Planiol, Civil Law Treatise (An English Translation by the Louisiana State Law Institute) No. 2392 (1959).

⁵ La. Civil Code art. 3160 (1870).

⁶ 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.

 

 

[62-1 USTC ¶9105]Crest Finance Co., Inc. v. United States

Supreme 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. Ct. ) 58-1 USTC ¶9327, was vacated and remanded.

Edmund L. Jones, Seymour S. Mintz, William T. Plumb, Jr., and Hamilton Clorfene, 800 Colorado Bldg., Washington , 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.

PER CURIAM:

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.