Fact-Finding Page4

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Against this background, Youngstown , as garnisher-creditor, appeals. It attacks the priority awards to the United States , to the laborers and to the mechanics and materialmen lienholders. There are no cross appeals. For purposes of analytic convenience, we take up the claims in the order in which Youngstown attacks them, but for reasons set forth below, we reach and decide only the priority rights between the materialman lien claimant, Lucey Products, Inc. (Lucey), and Youngstown . On all other claims, we reverse and remand to the district court for re-allocation of priorities among the remaining combatants.

The Wage Claimants and the Claims of the United States

These claimants are grouped together because their right to the priorities assigned by the district court is attacked on the common ground that both failed at trial to submit adequate proof of their asserted liens.

At the outset it is best to declare what is not in dispute on the present appeal. Youngstown does not, for example, seriously challenge the superiority of a federal tax lien arising under Sections 6321 ⁴ and 6322, ⁵ Internal Revenue Code of 1954, over a state garnishment lien ⁶ where the federal tax lien is filed before the garnishment lien is reduced to judgment. ⁷ United States v. Liverpool and London Insurance Co., 1955, [55-1 USTC ¶9136] 348 U. S. 215, 75 S. Ct. 247, 99 L. Ed. 268. Nor is the priority award to the wage claimants challenged apart from an alleged absence of substantiating proof. What Youngstown does argue is that despite the fact that the government pleaded the timely fulfillment of the recording requirements of 28 U. S. C. A. §6323, it offered no proof to that effect at trial. Neither did the wage claimants offer proof that their liens were perfected. Since the burden of proving such facts rested with both the government and the wage claimants, Worley v. United States, 9 Cir. 1965, [65-1 USTC ¶9160] 340 F. 2d 500; United States v. Hartsell, 6 Cir. 1958, [59-1 USTC ¶9162] 261 F. 2d 593, and since no evidence was forthcoming, Youngstown argues that the district court's priority award to the United States and to the wage claimants was in error.

[Proof of Filing]

In reply the United States directs our attention to the Federal Rules of Civil Procedure, particularly Rule 8(d), and to the fact that the government's complaint properly alleged assessment, notice and demand on August 18, 1965 , served that day on Gould. The complaint also stated that the filing was consummated or effectuated in the office of the Clerk of the County Court of Midland County on August 23, 1965 . Since these allegations contained in the government's complaint were not denied by Youngstown in a responsive pleading, the government argues that they are deemed admitted by Rule 8(d), and that the necessity for proof was thereby obviated.

Rule 8(d) of the Federal Rules of Civil Procedure prescribes that:

"Averments in a pleading to which a responsive pleading is required, other than those as to the amount of damage, are admitted when not denied in the responsive pleading. Averments in a pleading to which no responsive pleading is required or permitted shall be taken as denied or avoided."

The Rule is clear that the effect to be given to an undenied allegation in a pleading is dependent on whether or not the pleading is one to which a responsive pleading is required. But the government observes in its brief that none of the Federal Rules specify when a responsive pleading is required, with perhaps the sole exception of Rule 7(a) which limits the quantity of pleadings to be permitted:

"There shall be a complaint and an answer; and there shall be a reply to a counterclaim denominated as such; an answer to a cross-claim, if the answer contains a cross-claim; a third-party complaint, if leave is given under Rule 14 to summon a person who was not an original party; and there shall be a third party answer, if a third-party complaint is served. No other pleading shall be allowed, except that the court may order a reply to an answer or a third-party answer."

Despite its apparent clarity, nothing is said in Rule 7(a) or any other Rule that we have been able to find that indicates the responses allowed or required to a complaint in intervention in an interpleader suit. On the other hand, the government urges us to regard a complaint in intervention as analogous to a conventional complaint or to a counter-claim. Such analogy would, of course, require a response to all the averments in the government's complaint, and absent denials of the alleged recordations, such fact would be deemed admitted. Youngstown on its part, however, urges that the government's failure to prove the lien formalities is of lethal proportions, and merits reversal of the district court's judgment.

We think neither approach is suited to the case at bar. In the first place, the cases cited by Youngstown are cases where the issues were of substantive proportions and therefore subject to testimony on both sides. In those cases issues were given testimonial evaluation, while in the case now before us the formalities of lien perfection were never made the object of trial court inquiry. Moreover, the cases cited by Youngstown did not involve peripheral or adjectival facts. In those circumstances there was no chance that the party with the burden of responsive pleading would fail to understand that such essential facts were in issue. On the other hand, in the case at bar the government and wage claimants could have believed that their liens were not under attack because the answer of Youngstown to their several complaints contained no such challenge.

The government's position is likewise open to question. The Federal Rules of Civil Procedure are, for the most part, coherent, explicit and synoptically cover the areas of their concern. They are cogently and logically expressed. It may be that Rule 8(d) does not demand a denial of the facts involved in an intervention because it may not require a responsive pleading. Certainly, the government's analogy does not render the contrary proposition so compelling that we must decide this issue in its favor. Rather we do not essay this task of construction because it is unnecessary to a decision of the case at bar.

Although the general rule is that the failure to put in evidence all the proof necessary for a judgment is fatal error, there are occasions when the innocent, unwary and the justifiably unknowing litigants are entitled to some judicial benevolence. Such benevolence is backed by both statutory sanction and by decisions of the United States Supreme Court. In the words of Justice Black in Hormel v. Helvering, 1941, [41-1 USTC ¶9322] 312 U. S. 552, 61 S. Ct. 719, 85 L. Ed. 1037, 1041:

"Rules of practice and procedure are devised to promote the ends of justice, not to defeat them. A rigid and undeviating judicially declared practice under which courts of review would invariably and under all circumstances decline to consider all questions which had not previously been specifically urged would be out of harmony with this policy. Orderly rules of procedure do not require sacrifice of the rules of fundamental justice. . . ."

In the case at bar the wage claimants and the government had every reasonable right to assume that the basic and formal facts of their liens were not in denial. They were justifiably lulled into believing that only the legal consequences flowing from such facts were in dispute or in contention. The Federal Rules of Civil Procedure generally perceptive and endowed with prescience are normally quite explicit, but here we find them ambiguous or inconclusive in respect to the necessity of filing a responsive pleading to a plea in intervention. Such ambiguity, in conjunction with reasonable expectations as to what facts were and were not in issue, persuades us that the rigid enforcement of procedural technicalities would be inappropriate in the present instance. O'Brien v. Willys Motors, Inc., 6 Cir. 1967, 385 F. 2d 163; Frieze v. West American Ins. Co., 8 Cir. 1951, 190 F. 2d 381.

A trial is an exploration of facts, not a battle of wits. Its modus operandi stresses the paramountcy of fair notice pleading and fact finding unencumbered with an excess of detail. A litigant who was unable to find any authority demanding proof is just as disadvantaged by being uninformed as by being misinformed by the law. Woods v. Stewart, 5 Cir. 1948, 171 F. 2d 544. Therefore, while the trial court should have required that the wage claimants and the government present proof of their liens and their proper recordation, we think the circumstances require a remand to allow the submission of such proof. Such a procedure is well sanctioned and within our discretion. McKissick v. U. S. , 5 Cir. 1967, 379 F. 2d 754. As was said in Morgan v. Garris, D. C. Cir. 1962, 307 F. 2d 179, 181:

". . . Although we 'cannot hold a trial court to be in error in failing to decide an issue not put before it in a civil action' * * * it does not follow that we can never decide such an issue or remand a case to the [trial court] with direction to decide it.' Stouper v. Jones, 109 U. S. App. D. C. 106, 109, 284 F. 2d 240, 243 (concurring opinion of Judge Bazelon. The Supreme Court has said, 'we have power not only to correct error in the judgment under review but to make such disposition of the case as justice requires.' Patterson v. Alabama , 294 U. S. 600, 607, 55 S. Ct. 575, 79 L. Ed. 1082. This Court also has this power 28 U. S. C. §2106."

In our era of liberality in pleading where trials are no longer esoteric games guided by archaic rules, courts must insure that procedural niceties are not used to deprive a litigant of his day in court. As Justice Black noted in Surowitz v. Hilton Hotels Corp., 1966, 383 U. S. 363, 86 S. Ct. 845, 15 L. Ed. 2d 807, 814:

"The basic purpose of the Federal Rules is to admin ister justice through fair trials. . . . These rules were designed in large part to get away from some of the old procedural booby traps which commonlaw pleaders could set to prevent unsophisticated litigants from ever having their day in court. If rules of procedure work as they should in an honest and fair judicial system, they not only permit, but should as nearly as possible guarantee that bona fide complaints be carried to an adjudication on the merits."

This spirit which animates the Federal Rules of Civil Procedure has equal applicability to 28 U. S. C. A. §2106. To reverse and render with respect to the wage claimants and the government in the case at bar would perpetuate a "clear miscarriage of justice." Hartley & Parker, Inc. v. Florida Beverage Corporation, 5 Cir. 1965, 348 F. 2d 161, 164. It would ignore the fact that both the government and the wage claimants could well have relied on Youngstown 's failure to deny the asserted lien claims; it would ignore the uncertain state of the applicable pleading rules; and it would be a complete disregard of the fact that the trial court was not notified of or confronted with this issue. The purpose of remanding is "not a right to afford a defeated litigant another day in court because he thinks that if he were given the opportunity to bing his case again upon a different theory he might prevail." Miller v. Avrom, D. C. Cir. 1967, 384 F. 2d 319, 323. Rather its purpose is to insure that substantial justice is done, and we resort to it here only because the equities so require.

The Mechanics and Materialmen Lien Claimants

Apart from the Midland Bank, ⁸ whose priority is not here under appellate attack, ⁹ we have cornucopian facts regarding the nature and attempted perfection of materialmen's liens only with regard to Lucey. The other mechanics and materialmen lien claimants offered no proof of their liens, nor did they file briefs with this Court. On remand, however, they can present their panoply of facts respecting the existence and proper perfection of these liens for the same reasons already denominated as applicable to the government and wage claimants. We find the case of Capital Oil & Gas Co. v. Casey, Tex. Civ. App. 1927, 299 S. W. 466 (no writ), relied on by Youngstown, as no bar to this procedure. Casey involved the sufficiency of pleadings under Texas law. It therefore has no relevance to the case at bar which is governed in procedural matters by the Federal Rules. Coastal Airlines v. Dockery, 8 Cir. 1950, 180 F. 2d 874, 877. In fact, the holding of Capital v. Casey, supra, is alien to our notice concept of pleading, and must, therefore, be disregarded. Conley v. Gibson, 1957, 355 U. S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80.

The claims of Lucey Products, Inc., may now be considered in full. Lucey alleged and proved that it furnished materials to Gould on the Fuller lease in June of 1965, in aid of Gould's drilling efforts for Texaco. Notice of claim of $11,755.94, based on materials and services furnished to Gould was allegedly mailed to Texaco August 30, 1965 , with liens filed in the county in which the drilling site was located, on October 14, 1965 . As previously noted, Youngstown had its writ of garnishment served on Texaco on July 7, 1965 .

[State Law Controls]

Youngstown states that Lucey's mechanic's and materialman's lien was not choate, since its claim was not reduced to judgment. Youngstown 's claim, on the other hand, had been reduced to judgment as of November 4, 1966 , and so, argues Youngstown , takes precedence over the Lucey claim. Youngstown cites United States v. Acri, 1955, [55-1 USTC ¶9138] 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 264; Ulhorn v. Owens. S. D. Tex. 1962, 211 F. Supp. 798; First National Bank of Lubbock v. Jenkins, Civ. App. Tex. 1961, 350 S. W. 2d 52 (no writ); and United States v. Miller, Civ. App. Tex. 1960, 331 S. W. 2d 436 (writ ref'd, n.r.e.), cert. denied, 364 U. S. 880, 81 S. Ct. 168, 5 L. Ed. 2d 102, in support of its claim to a superior lien. However, these cases relate to hierarchical problems of priority between a federal tax lien and state created liens. The case at bar, on the other hand, except for the government's lien for employment taxes, presents only problems of positioning liens whose order of priority as well as existence is directed solely by state law. Erie R. Co. v. Tompkins, 1938, 304 U. S. 65, 58 S. Ct. 817, 82 L. Ed. 1188. Youngstown 's cases are therefore inapplicable to the contest between Youngstown and Lucey. In considering who is to prevail under Texas law between a garnisher who has reduced his claim to judgment and the holder of a mechanic's lien, we turn first to the controlling Texas statutes. Lucey's claim to a mechanic's and materialman's lien is asserted under Tex. Rev. Civ. Stat. Ann. Art. 5473, 5474, and 5476. Art. 5473 provides that:

"Any person * * * materialman * * * or mechanic, who shall, under contract, express or implied, with the owner of any land * * * or the owner of any gas pipe line or oil pipe line or the owner of any oil or gas pipe line right-of-way, * * * perform labor, furnish or haul material, machinery or supplies used in digging, drilling, torpedoing, operating, completing, maintaining or repairing any such * * * oil or gas pipe line, shall have a lien on the whole of such * * * oil pipe line * * *, including the right-of-way for same * * * and upon the materials and supplies so furnished or hauled, and upon said * * * oil or gas pipe line * * * for which the same are furnished or hauled, and upon all of the other * * * pipe line and right-of-way therefor, for which said material and supplies were furnished or hauled or labor performed. * * *"

Art. 5474 then confers rights on a materialman such as Lucey who furnishes supplies to a contractor such as Gould when such supplies are used in connection with a contract covering items detailed in Art. 5473:

"Any person, corporation, firm, association, partnership or materialman who shall furnish or haul such machinery, material or supplies to a contractor or subcontractor, or any person who shall perform such labor under a subcontract with a contractor, or who as an artisan or day laborer in the employ of such contractor or subcontractor shall perform any such labor, shall have a lien upon all such property or interest described in the preceding article, including right-of-way, for which said material and supplies were furnished or hauled and labor performed, in the same manner and to the same extent as the original contractor, for the amount due him for material furnished or for such hauling or labor performed."

It must be conceded that these statutes by themselves do not explicitly provide that a materialman's lien may be affixed to an account receivable owing by a garnishee (Texaco) to a debtor (Gould), nor do they provide that such liens take precedence over a writ of garnishment if the materials were furnished before the writ of garnishment issued. But these matters were both conclusively settled by the Texas Court of Civil Appeals in Crutcher, Rolfs, Cummings, Inc. et al. v. Big Three Welding Equipment Co., Inc., Tex. Civ. App. 1949, 224 S. W. 2d 884, reversed on other grounds, Big Three Welding Equipment Co., Inc. v. Crutcher, Rolfs, Cummings, Inc., et al., Tex. 1950, 229 S. W. 2d 600. In that case the debtor, an independent contractor, entered into a contract which obligated him to do various things in connection with a pipe line. In the fulfillment of this agreement with the pipe line company, the debtor became obligated to several materialmen, and they were eventually impleaded in a suit brought by another creditor who had caused a writ of garnishment to issue against the owner of the pipe line. The Court of Civil Appeals therefore had to decide priorities among creditors in a context almost identical with the fact situation in the case at bar. The result was as follows:

"We hold that Art. 5473 does apply here, and that 'these appellants' acquired mechanics' and materialmen's liens under Art. 5473 to secure their claims. The effect of this holding must be to hold that the garnisher did not acquire a garnishment lien which was enforcible as against the mechanics' and materialmen's liens acquired by 'these appellants' in virtue of Art. 5473. Whether or not Article 5466, which provides that funds subjected to mechanics' and materialmen's liens shall not be garnished by other creditors 'to the prejudice of such sub-contractors, mechanics, laborers or materialmen,' is here made expressly applicable by the terms of Art. 5479, we need not determine. For it is not disputed that the services and material for which the liens were sought were furnished and performed before the writ of garnishment was ever issued. And it is well settled that mechanics' and materialmen's liens relate back to the time when the work was performed or the material furnished. Trammell v. Mount, 68 Tex. 210, 4 S. W. 377, 379, 2 Am. St. Rep. 479; 29 Tex. Jur. 558 et seq."

In the case at bar, the materials furnished to Gould by Lucey were all delivered prior to July 7, 1965, when Youngstown caused a writ of garnishment to be issued against Texaco. Since it is not disputed that Lucey complied with the filing and notice requirements of Art. 5476a and 5476c, Lucey had a properly perfected lien which related back to a time prior to the issuance of Youngstown 's writ of garnishment. As decided by the Crutcher case, such a lien is prior in time and superior in right to a writ of garnishment issued after the materials are delivered.

This order of priorities is not altered by the fact that the acts of perfection required of the materialmen occurred after the writ of garnishment was issued. The same sequence existed in Crutcher, supra, but that case indicated that the perfection of a lien does not determine its inceptivity. Recording statutes in this instance are not lien creative, but lien corroborative. Their purpose is to avoid the pell-mell of racing to the courthouse by giving to parties a period of time during which liens can be perfected. Thus in the recent case of Trane Company v. Wortham, Tex. Civ. App. 1968, 428 S. W. 2d 417, 419 (no writ), the Texas Court of Civil Appeals noted:

"It is a rule of long standing that the mechanic's and materialman's lien statutes of this state will be liberally construed for the purpose of protecting laborers and materialmen. It is also well established that it is not the registration required by the law, but the law itself, which gives a mechanic or materialman a lien upon the property improved by the labor or by use of the materials by reason of which a lien is asserted. The filing of the affidavit required by Article 5453, V.A.C.S., does not create a lien on the property, but fixes and secures upon it an existing lien. University Savings and Loan Ass'n v. Security Lumber Co., 423 S. W. 2d 287 ( Tex. Sup. 1968)."

Despite this clear pronouncement, Youngstown urges that a mechanic's and materialman's lien is "inchoate" until reduced to judgment, and therefore inferior to a writ of garnishment upon which a judgment has already been rendered. As noted earlier, however, Youngstown 's cases on this point involve the question of priority between federal and state liens, not, as in the case at bar, priority between two liens both of state origin. We find no authority for the proposition that the concept of choateness affects the hegemony of the state-created liens here under scrutiny. Rather it is clear that the federal statutes involved in the cases which appellant has relied on do "not purport to affect the time at which local liens (are) deemed to arise or to become choate . . ." United States v. Pioneer American Ins. Co., 1963, [63-2 USTC ¶9532] 374 U. S. 84, 83 S. Ct. 1951, 10 L. Ed. 2d 770, 775. This is a matter purely of state law. We are convinced that the Crutcher case controls on the facts before us. The result is not changed by William J. Burns International Detective Agency v. General Electric Supply Co., Tex. Civ. App. 1967, 413 S. W. 2d 775 (no writ). That case was authority only for the proposition that the perfection of a mechanic's and materialman's lien must be undertaken by the one who initially furnished the materials or performed the services, and not by that person's assignee. It is true that in considering the motion for rehearing, the court in Burns suggested that a garnisher might prevail over the holder of a mechanic's and materialman's lien even if such lien were filed first. But such a suggestion, besides being merely dicta, appears to be directed to the assignee of the materialman, not to the materialman himself. The Burns case is thus not in point. ¹⁰

Finally, in valediction, Youngstown urges that Lucey was parsimonious and niggardly in its description of the oil leasehold here involved, and therefore failed to demonstrate that its claims were covered by Art. 5473. Youngstown relies on Continental Supply Co. v. Gillespie, Tex. Civ. App. 1925, 269 S. W. 859 (no writ) for the proposition that property attached under authority of a mechanic's and materialman's lien statute must be specifically described. We find no substance to this allegation. A comparison of the lien affidavit found to be inadequate by the court in Gillespie and the affidavit filed by Lucey in the case at bar reveals a substantial difference. In Gillespie, the only description of the land referred to in plaintiff's affidavit was as follows:

"That the said drill pipe material was . . . to be used in developing for oil, and producing oil from, certain land, premises and leasehold of land in what is known as the Markham Oil Field, in Matagorda County, Tex., the description of which land and mineral lease thereon is not known to affiant." (emphasis added)

In the case at bar, on the other hand, the lien affidavit filed by Lucey refers to an oil producing leasehold estate in Scurry and Kent Counties, Texas, and pinpoints those leaseholds in a most precise manner:

"Lease dated November 18, 1948 , from P. L. Fuller, W. M. Fuller and Andrew P. Fuller, Lessors, recorded in Volume 50, Page 239, Oil and Gas Lease Records, Scurry County , Texas , and in Volume 51, Page 530, Deed Records of Kent County, Texas, insofar as said lease covers Section 498, Block 97, H & T C RR Co."

Such description speaks for itself. We therefore find no basis for Youngstown 's allegation that Lucey's claim to a mechanic's and materialman's lien fails for want of specificity.

But Youngstown claims that Lucey's lien must fail for still another reason. Gillespie is cited for the further proposition that Lucey failed to establish the status of its debtor as that of a "contractor" within the meaning of Art. 5474. We find, however, that the record before us is not bare on this point as it was in Gillespie. Here, unlike Gillespie, supra, the record contains ample proof that Gould utilized materials furnished to it by Lucey in furtherance of Gould's contract with Texaco. This contract and Gould's assignment to Lucey of its claim against Texaco were both introduced into evidence. These documents established beyond question that Gould was a "contractor" within the meaning of Art. 5474. On such a state of the record there is no danger, as there was in Gillespie, that "Statutory liens will . . . be extended by implication to embrace matters beyond the plain terms of the statute." Continental Supply Co. v. Gillespie, Tex. Civ. App. 1925, 269 S. W. 859, 860 (no writ). The integrity of the Texas statute is not here in jeopardy.

[Decision]

In view of the above considerations, we reverse and remand to the district court with directions to proceed in a manner consistent with this opinion.

¹ Ten of the wage claimants were awarded the individual sums claimed; seven were awarded a lesser amount; two received nothing. On this appeal the seventeen recipients of awards have notified this Court that the amounts involved do not justify the expense of filing a brief or presenting arguments as appellees, and therefore we have no written argument on behalf of the wage claimants.

² This amount included an award of $288.96 to Midland National Bank. Although the Bank was grouped with the materialmen lienholders, it actually was entitled to priority because of a perfected assignment of a portion of the interpleaded fund.

Among the materialmen, seven claimants received the amount of their claims. Midland Bank received a reduced amount. Appellee Lucey Products was awarded $5,284.02 on a claim totaling $11,755.94. The seven claimants first mentioned have submitted no briefs on appeal. Four have so notified the clerk giving as a reason the amounts and expense involved. A fifth, E. L. Farmer & Co., has notified the Court that it does not desire to be a party to this appeal and that it disclaims any interest in the deposited fund. No expression has been noted from two of this group.

³ The United States ' claim as a federal tax lienholder was based on Gould's unpaid federal employment taxes for the second quarter of 1965. The $3,077.92 awarded the government was only in partial satisfaction of its total approved claim of $6,389.31.

⁴ 26 U. S. C. A. §6321:

"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."

⁵ 26 U. S. C. A. §6322:

"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."

⁶ Tex. Rev. Civ. Stat. Ann. Art. 4084:

"From and after the service of such writ of garnishment, it shall not be lawful for the garnishee to pay to the defendant any debt or to deliver to him any effects; nor shall the garnishee, if an incorporated or joint stock company in which the defendant is alleged to be the owner of shares or to have an interest, permit or recognize any sale or transfer of such shares or interest; and any such payment or delivery, sale or transfer, shall be void and of no effect as to so much of said debt, effect, shares, or interest as may be necessary to satisfy the plaintiff's demand. The defendant may at any time before judgment, replevy any effects, debts, shares, or claims of any kind seized or garnisheed, by giving bond, with two or more good and sufficient sureties to be approved by the officer who issued the writ of garnishment, payable to the plaintiff, in double the amount of the plaintiff's debt, and conditioned for the payment of any judgment that may be rendered against the said garnishee in such suit, which when properly approved shall be filed among the papers in the cause in the court in which the suit is pending. In all proceedings in garnishment where the defendant gives bond as herein provided for, such defendant may make any defense which the defendant in garnishment could make in such suit."

⁷ Such a rule controls the case at bar since the government alleged recordation of its lien in late August, 1965, and Youngstown did not become a judgment creditor until November, 1966.

⁸ See note 2, supra, on the grouping of the Bank with the materialmen.

⁹ Youngstown notes in its brief: "We have concluded that its [Midland Bank's] assignment was timely and properly perfected and that the claim of such Bank to the sum of $288.96 is prior and superior to the claim of all other parties. For that reason, such claim is not further discussed herein." Appellant's brief, p. 7.

¹⁰ We have also considered the statement in the Burns case that a mechanic's and materialman's lien "does not seem to take effect until after judgment." William J. Burns International Detective Agency v. General Electric Supply Co., Tex. Civ. App. 1967, 413 S. W. 2d 775, 777 (no writ). The authorities cited in support of this statement have no bearing on the facts which control the case here under review.

 

 

[73-1 USTC ¶9303] United States of America , Plaintiff v. Theodora Irene McNett, Berenice McNett, Rob ert E. McNett, John F. McNett, and Mound City Bank, Defendants

U. S. District Court, West. Dist. Wis., 70-C-8, 2/1/73

[Code Sec. 6323]

Motion for summary judgment: Validity of lien: Property transferred to trust: Fact finding.--The government's motion for summary judgment was granted where it sought to foreclose on a mortgage that attached to property before such property became part of trust principal under a will that provided the interest of trust beneficiaries could not be subject to claims of creditors.

John O. Olson, United States Attorney, Madison , Wis. , for plaintiff. W. Phil Karrmann, 73 E. Main St. , Plateville , Wis. , for defendants.

Opinion and Order

DOYLE, District Judge:

I find that there is no genuine issue as to any of the facts alleged in paragraphs III, IV, VI, VII, VIII, and IX of the complaint herein.

I find that there is no genuine issue as to any of the material facts which are stated in the section of this opinion following immediately hereafter under the heading "Facts."

Facts

Payments of $3,000.00 and $9,875.66 have been applied against the assessment in the amount of $49,536.41 which was made on December 31, 1964 . There remains due and owing the sum of $36,660.75, together with interest to the date of entry of this opinion and order in the sum of $14,100.67, or a total of $50,761.42.

No payments have been made as required on the mortgage note which appears as exhibit D to the complaint, and the entire principal and interest under said mortgage note are presently due.

Defendant McNett is in default of the installment payment agreement of December 7, 1965 , which appears as exhibit B to the complaint, except for the payments of $3,000.00 and $9,875.66.

As a result of said default, the United States is entitled to satisfy said agreement by looking to the mortgage which appears as exhibit C to the complaint, including the right to foreclose under the mortgage and mortgage note.

Opinion

In a brief in opposition to the plaintiff's motion for summary judgment, counsel for the defendants contend that the real estate which is the subject of the January 2, 1958, mortgage from Elmer D. McNett and Berenice McNett, his wife, to Louise McNett, has since become a part of the res of two testamentary trusts created by the will of Elmer D. McNett, and that the will creating said trusts provided that the interests of the beneficiaries of said trusts could not be subject to assignment, alienation, pledge, attachment or claims of creditors. These factual matters have not been presented as required by Rule 56, but I will accept them as fact for the purpose of this opinion and order.

The point is that at the time the real estate became a part of the res of the two trusts on August 16, 1966 , it was already subject to the mortgage of January 2, 1958 , and to the assessment of December 31, 1964 , and to the assignment of the mortgage on December 7, 1965 . It may be true that the interest of the beneficiaries of the trust may not be subject to assignment, alienation, pledge, attachment or claims of creditors, but a part of the res of the trust consists of the bundle of rights and duties which characterize that part at the moment it becomes a part of the res.

Order

Upon the basis of the entire record herein, the plaintiff's motion for summary judgment is granted. Within 10 days, counsel for plaintiff is to submit to the court a proposed judgment the provisions of which are consistent with the prayer of the complaint and the terms of the motion for summary judgment.

 

 

[70-1 USTC ¶9376]Wisconsin Department of Revenue, Plaintiff v. Paul Hemmy, individually and as admin istrator, Defendant v. United States of America, Intervener

Wis. Cir. Court, Branch #2, Waukesha County, No. 24029, 6/3/69

[Code Sec. 6321]

Lien for taxes: Priority: Intervener.--The Government's tax lien attached to the interest of the defendant, as the sole heir of the estate of his wife, at the date of her death and had priority over that of a claim of the State which was made subsequent thereto.

Stephen L. Koenig, Attorney for State of Wisconsin Department of Revenue. Collins, Collins & Andringa, 300 W. Main St. , Waukesha , Wis. , for Paul Hemmy. Frank C. Conley, Regional Counsel for United States Internal Revenue Service for U. S.

Decision

Voss, Circuit Court Judge:

The above entitled matter having come on for hearing before the Court on January 20, 1969, pursuant to a Notice of Motion for Summary Judgment, brought by the United States of America, the intervener herein. The plaintiff appearing by Attorney Stephen L. Koenig; the defendant appearing by Attorney Vincent J. Collins; the intervener appearing by Assistant United States Attorney Lawrence Becker. The Court having heard arguments of counsel, and having granted leave to file briefs in support of their respective contentions; said briefs having been received and reviewed, now, therefore, upon all the records and files herein, the Court finds and determines as follows.

The Motion for Summary Judgment is based upon the pleadings and a stipulation of facts entered into between the Wisconsin Department of Revenue and the United States of America by their attorneys.

It is undisputed that the United States has an uncontested claim for taxes, penalty and interest against the defendant, Paul Hemmy, in an amount in excess of $60,000.00. Notice of Federal Tax Liens, relating to the amounts claimed, were filed in Waukesha County on February 14, 1964, as Document Number 4232, and on March 16, 1964, as Document Number 4240. The United States Tax Liens predated the death of Paul Hemmy's wife, Eileen.

The State of Wisconsin docketed a Tax Warrant against Paul Hemmy with the Clerk of Circuit Court of Waukesha County on March 14, 1968 , said docketing occurring subsequent to the death of Eileen Hemmy.

The defendant, Paul Hemmy, is the sole heir, legatee and devisee of the Eileen Hemmy Estate, which is in probate in the Waukesha County Probate Court.

The issue involved in the question of priority of liens between the United States and the State of Wisconsin is whether the United States lien, in the instant matter, is a lien on Paul Hemmy's interest as an heir of his wife's estate.

The Wisconsin Supreme Court has held:

"The established rule in this state is that the property of a decedent passes, upon his death, to his legatees and devisees and the interest they may acquire, whether by inheritance or by will, they acquire at the time of death." 7 Wis. (2) 44.

It is the opinion of the Court that the lien of the United States attached to the interest of Paul Hemmy, as the sole heir of the Estate of his wife, Eileen, at the date of her death. The claim of the State of Wisconsin was not made the subject of a warrant until a date subsequent thereto. The lien of the United States is prior to that of the State of Wisconsin , and the United States is entitled to complete priority over the State of Wisconsin as to the interest of Paul Hemmy in the estate of his deceased wife.

Summary Judgment will be entered in favor of the United States of America in accordance with this decision and providing that the Administrator of the Estate of Eileen Hemmy be directed to turn over to the United States of America those assets of the estate which remain after paying the costs of admin istration.

 

 

[68-1 USTC ¶9246]Max B. Cohen, et al., Plaintiffs and United States of America, Intervenor v. William J. Daniel, Defendant Counterclaimant v. Max B. Cohen, et al., Counter-defendants.

U. S. District Court, Middle Dist. Fla., Tampa Div., Civil No. 66-99-Civ.-T;, 9/20/67, Amending findings of fact and conclusions of law in District Court decision, 67-2 USTC ¶9496

[1954 Code Sec. 6323]

Lien for taxes: Priorities: Amended findings of fact and conclusions of law.--In a case involving the priority of liens against property owned by a delinquent taxpayer, the court amended a portion of the findings of fact and conclusions of law in its prior decision (67-2 USTC ¶9496) to strike out its conclusion (67-2 USTC ¶9496) to strike out its conclusion a corporation be sold at public judicial sale. The court ruled that it had already provided for liquidation of the only assets of the corporation involved and for distribution of the proceeds from such liquidation. It felt that the rights of all parties concerned could be better protected by distribution of the proceeds of liquidation of the corporation's assets than by a sale of the stock which might not result in realization of its full value.

Arnold Levine, 725 E. Kennedy Blvd. , Tampa , Fla. , for plaintiff. Fowler, White, Gillen, Humkey & Trenam, P. O. Box 1438, Tampa, Fla., Rob ert B. McGowan, Assistant United States Attorney, P. O. Box 2841, Tampa, Fla., Rob ert L. Handros, Department of Justice, Washington, D. C. 20530, Don McGuire, 537 Tenth St., Bradenton, Fla., for defendants.

Motion to Amend Findings of Fact and Conclusions of Law ( 6/5/67 )

LIEB, District Judge:

Intervenor United States of America moves the Court, pursuant to Rule 52(b) of the Federal Rules of Civil Procedure, to amend its findings of fact and conclusions of law [67-2 USTC ¶9496] by striking out conclusion of law No. 19, on the grounds as follows:

In conclusion of law No. 19, the Court has provided for sale of the fifty shares of Max & Bill, Inc., owned by Max B. Cohen. However, the Court has also provided for liquidation of the only assets of Max & Bill, Inc., by sale of certain real property and collection of a judgment rendered in favor of Max & Bill, Inc., and for distribution of the proceeds of such liquidation. (Conclusions of law Nos. 6, 9, 10.) The Court has also determined the interests of the parties in the stock of Max & Bill, Inc. (Conclusions of law Nos. 2, 18.) Therefore, the rights of all parties could be better protected by distribution of the proceeds of liquidation of the assets of Max & Bill, Inc., according to the interests of the parties in its stock, than by a sale of the stock which might not result in realization of its full value.

The United States also requests the Court to defer entry of judgment pending ruling on this motion.

Order ( 9/20/67 )

This cause having come on for hearing on the Intervenor's Motion to Amend Findings of Fact and Conclusions of Law, and the Court having heard the argument of counsel, and no objections having been presented to the motion, and the Court being otherwise fully advised in the premises, it is hereby

ORDERED and ADJUDGED that the Motion be granted, and that the Findings of Fact and Conclusions of Law previously entered by this Court on May 25, 1967 , be amended, in that Conclusion of Law Number 19 be stricken.

 

 

[67-2 USTC ¶9496]Max B. Cohen, et al., Plaintiffs, and United States of America , Intervenor v. William J. Daniel, Defendant Counterclaimant v. Max B. Cohen, et al., Counter-defendants

U. S. District Court, Middle Dist. Fla., Tampa Div., No. 66-99-Civ. T., 5/25/67

[1954 Code Sec. 6323]

Lien for taxes: Priorities: Government as intervenor: State law.--In an action involving the priority of liens, the Government, as an intervenor, was found to have a valid first priority lien against a judgment obtained by the delinquent taxpayer-corporation against a corporate director for the conversion of the corporation's property. The taxpayer-corporation's lien on shares of its capital stock for an indebtedness owned to it by one of its directors had priority over the Government's lien for delinquent taxes owned by the director for 1958. The result was not changed even though the state law provision, "that no lien arose in favor of a corporation upon its shares of stock unless the right of the corporation to such lien was stated upon the certificates," was not met. The Government did not fall within the category of persons intended to be protected by the law, that is--good faith purchasers of the stock or those who loaned money upon the security of the stock. The Government's lien for delinquent taxes for 1961 and 1962 against the corporate director had priority over the taxpayer-corporation's lien against the corporate stock since the date of the assessment of the Government's lien was prior to the assessment of the corporation's lien.

Arnold Levine, 725 E. Kennedy Blvd. , Tampa , Fla. , for plaintiff. Fowler, White, Gillen, Humkey & Trenam, P. O. Box 1438, Tampa, Fla., Rob ert B. McGowan, Assistant United States Attorney, P. O. Box 2841, Tampa, Fla., Rob ert L. Handros, Department of Justice, Washington, D. C. 20530, Don McGuire, 537 Tenth St., Bradenton, Fla., for defendants.

LIEB, District Judge:

This cause came on for trial on March 20, 1967 , before the Court, without a jury, and the Court, having considered the pleadings, stipulations of record, pretrial order, evidence and arguments of counsel for the respective parties, makes the following findings of fact and conclusions of law:

Findings of Fact

1. Max & Bill, Inc., a corporation, was organized under the laws of the State of Florida on December 4, 1950 , and has been in existence continuously since that date.

2. The incorporators, subscribers to the capital stock and original stockholders of Max & Bill, Inc. were Max B. Cohen, one of the plaintiffs, William J. Daniel, the defendant and counterclaimant, and W. B. McKechnie. On or about December 14, 1950 , each of the aforementioned individuals subscribed to twenty-five (25) shares of capital stock of Max & Bill, Inc., and that number of shares was authorized to be issued to each. Stock certificate No. 1 of Max & Bill, Inc., dated December 14, 1950 , was issued in the name of Max B. Cohen. Stock certificate No. 2 of Max & Bill, Inc., dated December 14, 1950, was issued in the name of W. B. McKechnie, and thereafter, on or about September 23, 1960, he assigned the said certificate and the twenty-five (25) shares represented thereby to Max B. Cohen. Stock certificate No. 3 of Max & Bill, Inc., was issued in the name of W. J. Daniel, he being one and the same person as the defendant and counterclaimant herein.

3. The sole stockholders of Max & Bill, Inc. are Max B. Cohen, who owns fifty (50) shares of capital stock of the corporation, and William J. Daniel, who owns twenty-five (25) shares of capital stock thereof.

4. The original directors of Max & Bill, Inc., elected December 14, 1950 , were Max B. Cohen, William J. Daniel and W. B. McKechnie. Max B. Cohen and William J. Daniel continuously thereafter were and are directors of the corporation. W. B. McKechnie was a director continuously from his initial election until his death.

5. The officers of Max & Bill, Inc., initially elected December 14, 1950 , were Max B. Cohen, President, William J. Daniel, Vice President, and W. B. McKechnie, Secretary and Treasurer. Max B. Cohen and William J. Daniel have served as such officers continuously since their original election and are respectively the President and Vice President of the corporation. W. B. McKechnie served as Secretary and Treasurer of the corporation continuously from his initial election until his death.

6. On October 25, 1965 , purported meetings of the board of directors and stockholders of Max & Bill, Inc. were held in Miami , Florida , for the stated purpose of electing directors and officers of the corporation. Those meetings were held in violation of and contrary to the provisions of the by-laws of the said corporation, and any and all action taken or attempted to be taken at said meeting was and is void, including the election of Susan Johnston, the daughter of the said Max B. Cohen, as a director and Secretary and Treasurer of the corporation, and the election of Max B. Cohen, Jr., the son of the said Max B. Cohen, as a director and Vice President of the corporation. The said Susan Johnston and Max B. Cohen, Jr. were not legally elected directors and officers of the corporation on October 25, 1965, or thereafter, and neither of them has had any legal authority to act as a director or an officer of Max & Bill, Inc.

7. On or about November 22, 1965, Max & Bill, Inc. executed and delivered a partial release of mortgage dated November 22, 1965, and recorded November 24, 1965, in Official Record Book 263, on page 144, among the Public Records of Manatee County, Florida, releasing approximately twenty (20) acres of real property situated in said county from the liens of two mortgages executed by Samuel Friedland, as Trustee, to Max & Bill, Inc., both of said mortgages being dated December 20, 1955, one of said mortgages being recorded in Official Record Book 199, on page 192, among the Public Records of Manatee County, Florida, and the other being recorded in Official Record Book 199, on page 198, among the Public Records of said county. A part of the consideration for the execution and delivery by Max & Bill, Inc. of the said partial release of mortgage was to be the payment to the said corporation of the sum of $37,475.20 by Anthony S. Battaglia, as Trustee, or as attorney for Southern Realty & Utilities Corp. The said Susan Johnston was authorized to obtain on behalf of Max & Bill, Inc. the aforesaid sum of money from Anthony S. Battaglia, as Trustee, or as attorney for Southern Realty & Utilities Corp. She obtained the said sum of $37,475.20, but instead of delivering the same to Max & Bill, Inc., she converted the said sum to her own use.

8. The said Max B. Cohen was and is indebted to the said Max & Bill, Inc., for loans or advances by the corporation to him as follows:

  Year

Ended                      Loan         Repayment            Balance

8/13/58
 ....         $ 5,000.00                           $ 5,000.00

8/31/59
 ....                              $542.52           4,457.48

8/31/61
 ....          10,992.74                            15,450.22

8/31/62
 ....          38,474.56                            53,924.78

 

9. Section 4, of Article II, of the by laws of the said Max & Bill, Inc., adopted December 14, 1950, by the original board of directors consisting of Max B. Cohen, William J. Daniel and W. B. McKechnie, which said section has been continuously since then and now is in force and effect, provides as follows:

"The corporation shall have a first lien on all the shares of its capital stock, and upon all dividends declared upon the same, for any indebtedness of the respective holders thereof to the corporation."

10. The said Max & Bill, Inc. claims a first lien upon the fifty (50) shares of stock of said corporation owned by Max B. Cohen for the aforesaid indebtedness of Max B. Cohen to the corporation.

11. Section 614.17, Florida Statutes, which is the same as §15 of the Uniform Stock Transfer Act, and which was in full force and effect at the time Mr. Cohen acquired his shares of stock and at the time of the loans or advances by the corporation to him, reads as follows:

"614.17--No lien or restriction unless indicated on certificate.--There shall be no lien in favor of a corporation upon the shares represented by a certificate issued by such corporation and there shall be no restriction upon the transfer of shares so represented by virtue of any by-laws of such corporation, or otherwise, unless the right of the corporation to such lien or the restriction is stated upon the certificate."

12. Neither the right of the corporation to a lien nor the restriction contained in Section 4 of Article II of the by-laws of Max & Bill, Inc. was stated upon the stock certificates No. 1 or No. 2 of Max Bill, Inc.

13. The plaintiff, Max B. Cohen, is indebted to the intervenor, United States of America , for deficiencies in income taxes, with penalties and interest as follows:

  Taxable

Year                         Tax            Penalty           Interest               Total

1955 .......         $ 14,858.18            0               $ 6,373.34         $ 21,231.52

1956 .......           39,415.40            0                                    39,415.40

1957 .......           12,094.39            0                 3,736.50           15,830.89

1958 .......          117,321.27        $11,732.13           29,206.57          158,259.97

1959 .......           52,491.91            0                 9,918.09           62,410.00

Total ......                                                                   $297,147.78

 

14. The District Director of Internal Revenue made an assessment on May 12, 1961 , and filed a notice of tax lien for the assessment against the plaintiff, Max B. Cohen, for deficiency in income tax for the year 1956, with interest, in the office of the Clerk of the Circuit Court of Manatee County, Florida, on September 7, 1961 .

15. The District Director of Internal Revenue made an assessment on June 14, 1963, and filed a notice of tax lien for the assessment against the plaintiff, Max B. Cohen, for deficiencies in income taxes for the years 1955, 1957, 1958 and 1959, with penalty and interest, in the office of the Clerk of the Circuit Court of Manatee County, Florida, on September 5, 1963.

16. Stock certificate No. 1 of Max & Bill, Inc. was seized by the Internal Revenue Service on October 8, 1964 , in Bradenton , Florida , from the defendant, William J. Daniel, who was Vice President of said corporation.

17. Stock certificate No. 2 of Max & Bill, Inc. was seized by the the Internal Revenue Service on January 4, 1966, in Bradenton, Florida, from Edgar J. Johnston, Jr., an attorney at law, in Bradenton, Florida.

18. The United States of America claims that its aforementioned tax liens are first liens upon the fifty (50) shares of stock of Max B. Cohen in Max & Bill, Inc.

19. The said Max & Bill, Inc. is the owner of the following described property situated in Manatee County , Florida :

NW 1/4 of NE 1/4 of Section 5, Township 35 South, Range 17 East, and SW 1/4 of NE 1/4 of Section 5, Township 35 South, Range 17 East, and SE 1/4 of NE 1/4 of Section 5, Township 35 South, Range 17 East, and NE 1/4 of NE 1/4, LESS NE 1/4 of NE 1/4 of said NE 1/4 of Section 5, Township 35 South, Range 17 East, all of which is located in Manatee County, Florida, LESS and EXCEPT the following described property: From the Northwest corner of the Northeast 1/4 of Section 5, Township 35 South, Range 17 East, run South 0 deg. 37' East along the West line of the said Northeast 1/4, a distance of 600.86 feet to a point on the centerline of 59th Street (60 feet wide); thence run North 89 deg. 23' East a distance of 392.00 feet to the Point of Beginning; thence run North 89 deg. 42'22" East 292.80 feet; thence run South 36 deg. 21'00" East 946.75 feet; thence run North 89 deg. 43'58" East 85.34 feet; thence run South 0 deg. 32'00" East 313.85 feet; thence run South 89 deg. 33'00" West 662.56 feet; thence run South 0 deg. 37'00" East 27.08 feet; thence run South 89 deg. 33'00" West 660.00 feet; thence run North 0 deg. 38'00" West 345.08 feet; thence run North 89 deg. 43'58" East 392.00 feet; thence run North 0 deg. 37'00" West 765.00 feet to the point of beginning; containing 20.0 acres, Manatee County, Florida; LESS and EXCEPT the following described property: SE 1/4 of SE 1/4 of NE 1/4 of Section 5, Township 35 South, Range 17 East, Manatee County, Florida.

20. Max & Bill, Inc. is indebted to the United States of America for deficiencies in income tax for the taxable year ended August 31, 1961, in the amount of $3,297.82, delinquency penalty in the amount of $824.45, negligence penalty in the amount of $164.89, and interest in the amount of $859.06, a total of $5,146.22.

21. Max & Bill, Inc. is indebted to the United States of America for deficiencies in income tax for the taxable year ended August 31, 1962, in the amount of $9,039.29, delinquency penalty in the amount of $2,259.82, negligence penalty in the amount of $451.96, and interest in the amount of $1,884.26, a total of $13,635.33.

22. On May 21, 1966 , the District Director of Internal Revenue filed notice of tax lien for the assessments against the plaintiff, Max & Bill, Inc., of income taxes for the taxable year ended August 31, 1961 , with the Clerk of the Circuit Court of Manatee County, Florida.

23. On July 23, 1966 , the District Director of Internal Revenue filed notice of tax lien for the assessment against the plaintiff, Max & Bill, Inc. of income tax for the taxable year ended August 31, 1962 , with penalties and interest, with the Clerk of the Circuit Court of Manatee County, Florida.

24. The assessments of income taxes for the taxable years ended August 31, 1961, and August 31, 1962, by Max & Bill, Inc., in the total amount of $18,781.55, plus accrued unassessed interest, constitute liens in favor of the intervenor, United States of America, on all of the assets of the plaintiff, Max & Bill, Inc., including the real estate owned by said corporation and hereinabove described.

25. Don McGuire, of Bradenton, Florida, was duly appointed receiver therein of the said Max & Bill, Inc. by an order dated January 21, 1966, of the Circuit Court of the Twelfth Judicial Circuit of the State of Florida, in and for Manatee County, Florida, prior to the removal of this action from that court to this court, and he has been since his appointment and is the duly appointed qualified and acting receiver of said corporation.

26. The counterdefendants, Susan Johnston and Harry (sometimes known as Harold) Johnston, her husband, were duly served with summons and the counterclaim of the defendant and counterclaimant, William J. Daniel, herein, failed to file appearance, answer or other defenses herein, and a default has been entered herein against them.

Conclusions of Law

1. The court has jurisdiction of the parties to and the subject matter of this action.

2. The sole stockholders of Max & Bill, Inc., a Florida corporation, are Max B. Cohen and William J. Daniel, who respectively own fifty (50) and twenty-five (25) shares of the capital stock of the corporation.

3. The sole directors of Max & Bill, Inc. are Max B. Cohen and William J. Daniel.

4. The sole officers of Max & Bill, Inc. are Max B. Cohen, President, and William J. Daniel, Vice President.

5. Max & Bill, Inc. is entitled to judgment against Susan Johnston in the amount of $37,475.20, together with lawful interest thereon from December 1, 1965 .

6. Don McGuire, as Receiver for Max & Bill, Inc., shall, to the extent possible, collect the judgment in favor of Max & Bill, Inc. against Susan Johnston.

7. The United States of America is entitled to judgment against Max & Bill, Inc. in the total amount of $18,781.55, together with accrued unassessed interest, for income taxes with penalties and interest for the fiscal years of the corporation ended August 31, 1961 , and August 31, 1962 .

8. The United States of America has tax liens upon the real property hereinbefore described owned by Max & Bill, Inc. and the judgment in favor of Max & Bill, Inc. against Susan Johnston, which tax liens are in the total amount of $18,781.55, together with accrued unassessed interest, for income taxes with penalties and interest for the fiscal years of the corporation ended August 31, 1961, and August 31, 1962.

9. Don McGuire, as Receiver for Max & Bill, Inc., shall sell the real property hereinabove described of Max & Bill, Inc. in a manner to be determined by further orders of the court, upon application of the Receiver or any party to this action.

10. The monies received by the said Receiver from the collection of the judgment of Max & Bill, Inc. against Susan Johnston and from any sale of the real property of the corporation shall be paid and distributed in the following order of priority:

a. The expenses of the receivership, including the fees of the Receiver and his attorney, the monies borrowed by the Receiver for the purpose of redeeming tax certificates evidencing real property taxes upon the real property of the corporation, in amounts to be determined by further order or orders of the court, upon application of the Receiver or any party to this action.

b. The sum of $18,781.55, plus accrued unassessed interest, to be paid to the United States of America in satisfaction of its tax liens upon the assets of Max & Bill, Inc.

c. The balance shall be paid pursuant to further orders of this court upon the application of the Receiver or any party to this action.

11. Section 614.17, Florida Statutes, set out in paragraph 11 of the Findings of Fact and which provides there shall be no lien in favor of a corporation upon its shares of stock unless the right of the corporation to such a lien is stated upon the certificates, is not applicable under the facts and circumstances of this case.

12. Section 4, of Article II, which is the by-law establishing the lien, was adopted by the first board of directors of the corporation, including Mr. Cohen, and the by-laws of a corporation may be enforced as a contract between the corporation and its stockholders. Banmohl v. Goldstein, 95 N. J. Eq. 597, 124 A. 118, 119 (1924).

13. The purpose of §614.17, Florida Statutes, was to protect good faith purchasers of corporate stock for value and persons who loan money upon the security of corporate stock. Buckner v. Morris Bros. Shoe Co., 288 Ill. App., 632, 7 N. E. 2d 393 (1937), Banmohl v. Goldstein, 95 N. J. Eq. 597, 124 A. 118, 119 (1924), Doss v. Yingling, 95 Ind. App. 494, 172 N. E. 801 (1930), Tomoser v. Kamphausen, 307 N. Y. 797, 121 N. E. 2d 622 (N. Y. C. A., 1954), State v. Clarks Hill Telephone Company, -- Ind. App. --, 218 N. E. 2d 154 (1966).

14. In the instant case, the Government was and is not in the position of a good faith purchaser or of a lender or pledgee. Under the facts, the Government stands in the shoes of Mr. Cohen and can have no better defense to the corporation's lien than he has. Therefore, Max & Bill, Inc. does have valid liens upon its stock owned by Max B. Cohen for the indebtedness of Mr. Cohen.

15. Max & Bill, Inc. has liens upon the fifty (50) shares of stock of Max & Bill, Inc. owned by Max B. Cohen for his indebtednesses to the corporation as follows:

with interest thereon at 6% per

annum from 
August 31, 1958
,                            $ 4,457.48,

with interest thereon at 6% per

annum from 
August 31, 1961
,                             10,992.74,

with interest thereon at 6% per

annum from 
August 31, 1962
.                             38,474.56,

with interest thereon as aforesaid.              Total $53,924.78,

 

16. The United States of America is entitled to judgment against Max B. Cohen in the total amount of $297,147.78, together with accrued unassessed interest, for income taxes with penalties and interest due by him for the years 1955 through 1959.

17. The United States of America has tax liens upon the fifty (50) shares of stock of Max & Bill, Inc. owned by Max B. Cohen, in the total amount to $297,147.78, together with accrued unassessed interest, for income taxes with penalties and interest due by him for the years 1955 through 1959.

18. The aforesaid liens of Max & Bill, Inc., and the United States of America upon the fifty (50) shares of stock of Max & Bill, Inc. owned by Max B. Cohen have priorities as follows:

a. Max & Bill, Inc. has a first lien upon the said fifty (50) shares of stock in the amount of $4,457.48, with interest thereon at the rate of 6% per annum from August 31, 1958 .

b. The United States of America has a second lien upon the said fifth (50) shares of stock in the amount of $39,415.40, together with unassessed interest thereon, for income taxes and interest due by Max B. Cohen for the year 1956, in connection with as assessment made against the plaintiff, Max B. Cohen, by the District Director of Internal Revenue, Jacksonville, Florida, on May 12, 1961, with the notice of tax lien filed in the office of the Clerk of the Circuit Court of Manatee County, Florida, on September 7, 1961. This lien has priority over the corporation's lien for $10,992.74 referred to in paragraph (c) below for the reason that the corporation's lien does not fall within that class of liens described in 26 USCA §6323 (as amended by Sec. 101, Federal Tax Lien Act of 1966), and therefore 26 USCA §6322 [as amended by Sec. 113(a), Federal Tax Lien Act of 1966] applies. This means that the date of assessment of the Government lien is determinative of the priority of the Government lien over the corporate lien rather than the date of filing. In this instance the Government tax lien was assessed prior to assessment of the corporate lien, although the Government tax lien was not filed until after assessment of the corporate lien. Therefore, the Government tax lien has priority.

c. Max & Bill, Inc. has a third lien upon the said fifty (50) shares of stock in the amount of $10,992.74, together with interest thereon at 6% per annum from August 31, 1961 .

d. Max & Bill, Inc. has a fourth lien upon the said fifty (50) shares of stock in the amount of $38,474.56, together with interest thereon at the rate of 6% per annum from August 31, 1962 .

e. The United States of America has a fifth lien upon the said fifty (50) shares of stock in the amount of $257,732.38, together with unassessed interest thereon, for income taxes due by Max B. Cohen for the years 1955, 1957, 1958 and 1959, in accordance with an assessment made against the plaintiff, Max B. Cohen, by the District Director of Internal Revenue, Jacksonville, Florida, on June 14, 1963, with the notice of tax lien filed in the office of the Clerk of the Circuit Court of Manatee County, Florida, on September 5, 1963.

19. The fifty (50) shares of stock of Max & Bill, Inc., owned by Max B. Cohen, shall be sold at public judicial sale by the Marshal of this Court at the west door of the United States Post Office Building in the City of Tampa, Florida, after publication of notice of such sale once each week for at least four weeks prior to the sale in a newspaper regularly issued and of general circulation in Hillsborough County, Florida, and the monies received by the marshal from such sale shall be paid and distributed in the following order of priority:

a. The costs and expenses incurred by the said marshal in conducting the sale.

b. The balance shall be paid to Max & Bill, Inc. and the United States of America in accordance with the priority and amounts of their respective liens upon the said fifty (50) shares of stock as hereinbefore determined.

c. Any amount then remaining shall be paid and distributed to the said Max B. Cohen.

20. Counsel for the parties shall, within twenty (20) days, submit an appropriate judgment in accordance with the foregoing Findings of Fact and Conclusions of Law.

 

 

[68-2 USTC ¶9645]United States of America, Plaintiff v. Rudolph Miskulin, Peggy Miskulin, Security Title Insurance Company, Katherine Kirby, George Kirby, Ronald Garsha, and Rob ert C. Orpin; Al Hoefer; Loretta M. Hoefer and Virgil V. Becker, Defendants

U. S. District Court, Central Dist. Calif., No. 67-1827-R Civil, 10/3/68

[1954 Code Secs. 6321, 6323 and 7403]

Lien for taxes: Action to enforce lien: Priority of claims determined: Fact finding.--On the evidence, the District Court determined the priority of claims asserted against interpleaded joint tenancy property owned equally by a husband and wife as follows: (1) the Government's lien for unpaid withholding and social security taxes asserted against the husband's one-half interest in the fund; (2) attorney fees and costs incurred by a title insurance company under an indemnification agreement entered into with the husband and wife; (3) a claim under an assignment made by both the husband and wife in complete satisfaction of an unsecured note; and (4) a claim for attorney's fees asserted by the lawyer representing the husband and wife.

Wm. Matthew Byrne, Jr., United States Attorney, Charles H. Magnuson, Arthur M. Greenwald, Assistant United States Attorneys, Los Angeles , Calif. , for plaintiff. Rudolph Miskulin, Peggy Miskulin, 11301 Cornish, Lynwood, Calif., pro per; Brown & Brown, 3810 Wilshire Blvd., Los Angeles, Calif., for Security Title Ins. Co.; Gabler, High & Clark, 14423 Hamlin St., Van Nuys, Calif., for K. Kirby and G. Kirby; Ronald Garsha, 11301 Cornish, Lynwood, Calif., pro per; Rob ert C. Orpin, 2431/2 S. Kenmore Ave., Los Angeles, Calif., pro per; Virgil V. Becker, 1316 N. Avalon Blvd., Wilmington , Calif. , pro per; for A. Hoefer and L. M. Hoefer, defendants.

Findings of Fact and Conclusions of Law

REAL, District Judge:

The plaintiff, United States of America, having filed its motion requesting summary judgment with respect to its claim in these proceedings; the defendants, Al Hoefer, Loretta M. Hoefer and Virgil V. Becker having filed their respective motions for summary judgment on July 19, 1968; the motions having come on for hearing before the Honorable Manuel L. Real, United States District Judge, on July 29, 1968; this Court having considered the pleadings, briefs and arguments of the respective parties at said hearing; this Court on July 29, 1968, having granted summary judgment to the plaintiff, United States of America and the defendants, Al Hoefer, Loretta M. Hoefer and Virgil V. Becker and denying to the defendant, Security Title Insurance Company attorney fees and costs as claimed in its filed counterclaims for interpleader; the defendant, Security Title Insurance Company on September 24, 1968, having filed its motion requesting this Court to reconsider its ruling of July 29, 1968, denying attorney fees and costs; the defendant, Security Title Insurance Company's motion having come on for hearing before this Court on September 30, 1968; this Court having considered the defendant, Security Title Insurance Company's memorandum and affidavit in support of its motion; the plaintiff, United States of America, and the defendants, Al Hoefer, Loretta M. Hoefer and Virgil V. Becker having appeared at said hearing and consented to the awarding of attorney fees and costs; and there being filed no written opposition to the defendant, Security Title Insurance Company's motion; this Court on September 30, 1968, having awarded to the defendant, Security Title Insurance Company the sum of $600.00 in attorney fees plus costs;

THEREFORE, this Court now makes the following findings of fact and conclusions of law:

I. Findings of Fact

1. On October 15, 1965, the District Director of Internal Revenue, Los Angeles, California, made an assessment for unpaid withholding taxes and Federal Insurance Contributions Act taxes, plus penalties and interest thereon, in the amount of $1,526.89, applicable to the second quarter of 1965 against the partnership known as Beauty Unlimited-Star Beauty Salon, 3585 Imperial Highway, Lynwood, California, on which date the defendant, Rudolph Miskulin, was a partner.

2. On the same date the District Director of Internal Revenue, Los Angeles , gave the partnership notice of said assessment, stating the amount and demanding payment thereof.

3. Since the date of assessment, credits of $59.03 have been made against said assessment. There remains presently due and owing the sum of $1,467.86, plus accrued interest thereon from October 15, 1965 .

4. On February 18, 1966 the District Director of Internal Revenue, Los Angeles , California , filed a notice of federal tax liens with respect to the assessment of $1,526.89 with the County Recorder for Los Angeles County , California .

5. On February 4, 1966 the District Director of Internal Revenue, Los Angeles, California, made an assessment for unpaid withholding taxes and Federal Insurance Contributions Act taxes together with penalties and interest thereon in the amount of $2,418.92, applicable to the third quarter, 1965, against the partnership known as Beauty Unlimited-Star Beauty Salon, 3585 Imperial Highway, Lynwood, California, on which date the defendant, Rudolph Miskulin, was a partner.

6. On the same date the District Director of Internal Revenue, Los Angeles , gave the partnership notice of said assessment, stating the amount and demanding payment thereof.

7. On February 18, 1966 the District Director of Internal Revenue, Los Angeles , filed a notice of federal tax liens with respect to the assessment of $2,418.92 with the County Recorder for Los Angeles County , California .

8. On February 23, 1966 the District Director of Internal Revenue, Los Angeles, made an assessment for unpaid withholding taxes and Federal Insurance Contributions Act taxes together with penalties and interest thereon in the amount of $1,689.68 against the partnership known as Beauty Unlimited-Star Beauty Salon, 3585 Imperial Highway, Lynwood, California, applicable to the fourth quarter of 1965, on which date the defendant, Rudolph Miskulin, was a partner.

9. On the same date the District Director of Internal Revenue, Los Angeles , gave said partnership notice of said assessment, stating the amount and demanding payment thereof.

10. On February 18, 1966 the District Director of Internal Revenue, Los Angeles , filed a notice of federal tax liens with respect to the assessment of $1,689.68 with the County Recorder for Los Angeles County , California .

11. On March 4, 1966 the District Director of Internal Revenue, Los Angeles, made an assessment for taxes imposed under the Federal Unemployment Tax Act, together with interest and penalties thereon in the amount of $488.86, applicable to the calendar year 1965 against the partnership known as Beauty Unlimited-Star Beauty Salon, 3585 Imperial Highway, Lynwood, California, on which date the defendant, Rudolph Miskulin, was a partner.

12. On the same date the District Director of Internal Revenue, Los Angeles , gave said partnership notice of said assessment, stating the amount and demanding payment thereof.

13. Subsequently credits of $466.27 were applied against said assessment of $488.86. There remains an unpaid balance of $22.59, plus accrued interest.

14. On June 28, 1966 the District Director of Internal Revenue, Los Angeles , filed a notice of Federal tax lien with respect to the $488.86 with the County Recorder for Los Angeles County , California .

15. Summary of Plaintiff's Claim:

                             Taxable

                            Period              Unpaid         Accrued Interests             Total Due

Sub-Paragraph                 1965         Assessments                 to 
7-1-68
          as of 
7-1-68

A ...............         2 Qtr.             $1,467.86                   $236.15       [TEH] * $1,704.01

B ...............         3 Qtr.              2,418.92                    344.71            * 2,763.63

C ...............         4 Qtr.              1,689.68                    237.61            * 1,927.29

                         Calendar

D ...............          Year                  22.59                     36.81               * 59.40

Lien Fees .......                                                                              * 12.00

                                                                                       [TEH] * $6,466.33

* Plus accrued interest from July 1, 1968 at the rate of ninety-one cents ($.91) a day.

16. On July 24, 1964 a writ of attachment was issued out of the Compton Municipal Court in an action entitled Edna Forshay v. Miskulin, No. 29023, against certain real property held by the defendants, Rudolph Miskulin and Peggy Miskulin, in joint tenancy, the legal description of which is:

The east half of Lot 152, Tract 2551 in the City of Lynwood, County of Los Angeles, State of California, Book 24, Page 78 of Maps in the office of the County Recorder, Los Angeles, California.

17. On September 11, 1964 , a writ of attachment was issued out of the Superior Court for Los Angeles County in an action entitled Katherine Kirby v. Miskulin, No. 844583, against the real property described in paragraph 16 above.

18. In order to facilitate the sale of the real property described in paragraph 16 above, the defendants, Rudolph Miskulin and Peggy Miskulin, entered into an indemnification agreement on October 5, 1964 with the defendant, Security Title Insurance Company. Pursuant to said agreement, Security Title Insurance Company received from Rudolph Miskulin and Peggy Miskulin the sum of $18,450.00 which was then deposited in an interest bearing account at Los Angeles Federal Savings and Loan Association, Los Angeles, California, said account standing in the name of "Security Title Insurance Company as holder for Rudolph Miskulin and Reggy L. Miskulin under Indemnity Agreement No. 8322."

19. On August 1, 1968 , the defendant, Security Title Insurance Company, deposited into the registry of this Court the sum of $14,539.17, said amount constituting the balance in the account at the Los Angeles Federal Savings and Loan Association, Los Angeles , California , including interest to date of withdrawal.

20. On February 2, 1965 , the defendant, George Kirby, caused a writ of attachment to be issued out of the Compton Municipal Court in an action entitled George Kirby v. Miskulin, No. 29024, against the indemnity fund of $18,450.00.

21. On July 29, 1967 the indemnity fund described in paragraph 19 above was reduced to the sum of $13,650.00, when the lawsuit entitled Edna Forshay v. Miskulin, described in paragraph 16 above was settled by the parties in the amount of $4,800.00.

22. The sum of $18,450.00 as reduced to $13,650.00 on deposit in a joint savings account with Wilshire Federal Savings and Loan Association, Los Angeles , California , constituted joint tenancy property in which the defendants, Rudolph Miskulin and Peggy Miskulin, each had an undivided one-half interest.

23. As of September 11, 1967 , the lien arising by virtue of Section 542(a) of the California Code of Civil Procedure regarding the writ of attachment issued in the action entitled Katherine Kirby v. Miskulin, Los Angeles Superior Court No. 844583 on September 11, 1964 was not extended.

24. The defendants, Ronald Garsha and Rob ert C. Orpin, claim no right, title or interest in said fund.

25. On January 25, 1968, the defendants, Rudolph Miskulin and Peggy Miskulin, irrevocably assigned to the defendants, Al Hoefer and Loretta M. Hoefer, the sum of $5,000.00 to the paid from the fund which on said date was held by the Security Title Insurance Company pursuant to the indemnity agreement dated October 5, 1964 between the defendants, Rudolph Miskulin and Peggy Miskulin, and the defendant, Security Title Insurance Company. The assignment was made in full satisfaction of an unsecured note dated September 5, 1965 , payable to the defendants, Al Hoefer and Loretta M. Hoefer.

26. On February 23, 1968 , the defendants, Rudolph Miskulin and Peggy Miskulin, irrevocably assigned to Virgil V. Becker, in consideration of certain legal services rendered, the residue and remainder of funds of the defendants, Rudolph Miskulin and Peggy Miskulin, held by the defendant, Security Title Insurance Company. The amount of said residue and remainder was to be determined after the payment from said fund of such prior assignments or liens of record as may be legally enforceable.

27. The defendant, Security Title Insurance Company, has incurred reasonable attorney fees of $600.00 and costs of $20.04 as the interpleader in these proceedings.

28. Any conclusion of law deemed to be a finding of fact shall constitute a finding of fact.

II. Conclusions of Law

1. Jurisdiction of the action for the collection of unpaid federal taxes is conferred upon this Court by Sections 1340 and 1345 of Title 28, United States Code, and Section 7403 of Title 26, United States Code.

2. The filing of this action was authorized and requested by the Chief Counsel, Internal Revenue Service, a delegate of the Secretary of the Treasury, and was brought at the direction of the Attorney General of the United States.

3. The defendant, Rudolph Miskulin, is indebted to the plaintiff, United States of America , for unpaid federal employment and excise taxes in the amount of $6,466.33, plus accrued interest as provided by law from July 1, 1968 at the rate of $.91 per day.

4. The interpleaded fund of $14,539.17 constitutes joint tenancy property of which an undivided one-half interest is owned by each of the defendants, Rudolph Miskulin and Peggy Miskulin.

5. As of September 11, 1967 the lien arising under Section 542(a) of the California Code of Civil Procedure by virtue of the writ of attachment issued in the action entitled Katherine Kirby v. Miskulin, Los Angeles Superior Court No. 844583, on September 11, 1964 ceased to exist.

6. As of February 2, 1968 , the lien arising under Section 542(b) of the California Code of Civil Procedure by virtue of the writ of attachment issued in the action entitled George Kirby v. Miskulin, Compton Municipal Court No. 20924, on February 2, 1965 ceased to exist.

7. The plaintiff's claim of $6,466.33, plus accrued interest as provided by law constitutes a valid lien claim against the defendant, Rudolph Miskulin's undivided one-half interest in said interpleaded fund.

8. The assignment dated January 25, 1968 from Rudolph Miskulin and Peggy Miskulin to Al Hoefer and Loretta M. Hoefer in the amount of $5,000.00 constitutes a valid, lawful assignment and claim.

9. Al Hoefer and Loretta M. Hoefer's claim in the amount of $5,000.00 constitutes a valid, lawful claim against the interpleaded fund of $14,539.17.

10. The assignment dated February 23, 1968 from Rudolph Miskulin and Peggy Miskulin to Virgil V. Becker constitutes a valid, lawful assignment and claim.

11. Virgil V. Becker's claim is a valid, lawful claim against the fund of $14,539.17.

12. The claims of the following defendants are to paid from the interpleaded fund of $14,539.17 in accordance with the following priorities:

(1) First priority: Claim of the plaintiff, United States of America , in the amount of $6,466.33 plus accrued interest from July 1, 1968 at the rate of $.91 per day;

(2) Second priority: Attorney fees and costs to the defendant, Security Title Insurance Company in the amount of $620.04;

(3) Third priority: The claim of the defendants, Al Hoefer and Loretta M. Hoefer in the amount of $5,000.00;

(4) Fourth priority: The claim of the defendant, Virgil V. Becker, for the residue of the interpleaded fund of $14,539.17.

13. Any finding of fact deemed to be a conclusion of law shall constitute a conclusion of law.

 

 

[67-1 USTC ¶9133] United States of America , Plaintiff v. Steven Kamieniecki, Morris Stein, Richard W. Leonard, Indian Head National Bank of Nashua , and Gertrude Gladstone, Defendants

U. S. District Court, Dist. N. H., Civil Action No. 2524, 261 FSupp 683, 12/9/66

[1954 Code Sec. 446]

Reconstruction of income: Bank deposit--cash expenditure method: Inadequate records.--The Internal Revenue Service properly resorted to the bank deposit and cash expenditure method of reconstructing taxpayer's income where he failed to keep adequate books and records which would permit an accurate determination of his actual business and personal income.

[1954 Code Sec. 6653(b)]

Fraud penalties: Failure to file timely returns: Proof.--Fraud penalties were properly assessed where taxpayer's failure to file timely tax returns for taxable years 1956 and 1957 was due to a fraudulent intent and scheme on his part to evade his tax obligations for those years.

[1954 Code Sec. 6323]

Liens for taxes: Priority: Certificate of deposit: Unsecured interest.--The United States had a valid and first lien on the amount of the proceeds of a certificate of deposit where the issuing bank had no secured interests whatsoever in the certificate and no rights to any portion of the proceeds therefrom.

[1954 Code Sec. 6323]

Liens for taxes: Priority over attorney's fees: Inchoate lien: Unjust enrichment.--Although the amount of attorney's fees was still undetermined and indefinite and thus inchoate when the federal tax lien was filed, reasonable attorney's fees were allowed on the basis of equitable principles analogous to the doctrine of unjust enrichment where the federal lien was being asserted against a fund created by the attorney's successful prosecution of state court litigation.

Louis M. Janelle, United States Attorney, Federal Bldg., Concord, N. H., for plaintiff. Richard W. Leonard, Leonard & Leonard, 142 Main St., Nashua, N. H., for Kamieniecki and Leonard; Morris D. Stein, Stein, Cleaveland & Rudman, 184 Main St., Nashua, N. H., for Stein and Gladstone; Sherman D. Horton, Jr., Sullivan, Gregg & Horton, 148 Main St., Nashua, N. H., for Indian Head Nat'l Bank of Nashua, defendants.

Opinion

CAFFREY, District Judge:

This is a civil action of the United States seeking adjudication:

(1) that taxpayer-defendant Steven Kamieniecki is indebted to it for unpaid federal income taxes, penalties and interest for the years 1956 and 1957 in the total amount of $6,289.36, plus interest;

(2) that the United States has valid and first liens in said amount upon the proceeds of a Certificate of Deposit issued by the Indian Head National Bank of Nashua and paid into the Registry of this court;

(3) of conflicting claims of right to said proceeds as between the United States and defendants Kamieniecki, Indian Head National Bank of Nashua, Leonard, Stein and Gladstone;

(4) the United States also seeks an order decreeing foreclosure of the federal tax liens against such proceeds; and

(5) for a deficiency judgment against the defendant Kamieniecki for any amount remaining between the judgment sought against Kamieniecki and the amount realized on a foreclosure, if any, of any of the federal tax liens.

Prior to the non-jury trial the parties defendant stipulated through counsel that the following allegations of the nin-paragraph Complaint may be taken as true:

"I. This is a civil action in which the plaintiff seeks to enforce its tax liens against an amount due the taxpayer-defendant Steven Kamieniecki from the defendant Gertrude Gladstone and to obtain a deficiency judgment against the taxpayer-defendant Steven Kamieniecki for unpaid federal income taxes, penalties and interest assessed against Steven Kamieniecki.

"II. This action is commenced pursuant to Section 7401 of the Internal Revenue Code of 1954 at the direction of the Attorney General of the United States with the authorization and at the request of the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury of the United States .

"III. This Court has jurisdiction of this action under Sections 1340 and 1345 of Title 28, United States Code, and Sections 7402(a) and 7403 of the Internal Revenue Code of 1954.

"IV. (a) The taxpayer-defendant Steven Kamieniecki resides on Route 101, Manchester Road, Amherst, New Hampshire, within the jurisdiction of this court.

"(b) The defendant Morris Stein is an attorney doing business at 184 Main St. , Nashua , New Hampshire , within the jurisdiction of this court.

"(c) The defendant Richard W. Leonard is an attorney doing business at 142 Main Street , Nashua , New Hampshire , within the jurisdiction of this court.

"(d) The defendant Indian Head National Bank of Nashua is doing business at 146 Main Street , Nashua , New Hampshire , within the jurisdiction of this court.

"(e) The defendant Gertrude Gladstone resides at 374 Main Street , Nashua , New Hampshire , within the jurisdiction of this court.

"VII. On information and belief, on May 26, 1964 , the Superior Court of Hillsborough County, New Hampshire, entered a verdict in favor of the taxpayer-defendant Steven Kamieniecki against the defendant Gertrude Gladstone in the amount of $4,368.62 and, on information and belief, no part of said verdict has been paid.

"VIII. On January 6, 1964 , the defendant Indian Head National Bank of Nashua issued Negotiable Certificate of Deposit No. B 281 payable to the order of the defendants Morris Stein and Richard Leonard, attorneys for the defendant Gertrude Gladstone and Steven Kamieniecki, respectively, and said Negotiable Certificate of Deposit was issued in the amount of $5,507.71, payable on January 6, 1965 with interest at the rate of four per cent per annum or payable prior thereto upon 90-days written notice. On information and belief said Negotiable Certificate of Deposit was issued to secure any verdict which the taxpayer-defendant Steven Kamieniecki might obtain against the defendant Gertrude Gladstone in the action then pending in the Superior Court of Hillsborough County, New Hampshire, which resulted in the verdict described in paragraph VII in favor of the taxpayer-defendant Steven Kamieniecki.

"IX. The defendant Morris Stein, Richard W. Leonard, Gertrude Gladstone and the Indian Head National Bank of Nashua have, or may claim to have, an interest in the amounts described in paragraphs VII and VIII."

With reference to paragraph V. of the complain, all parties stipulated that the assessments described therein were made in the amounts and on the dates recited, and that defendant Kamieniecki received notice of the assessments at about the time recited. However, defendants Kamieniecki and Leonard deny that the assessments so made were factually correct, and also deny that said assessments accurately reflect the actual income earned by Kamieniecki in the calendar years 1956 and 1957. The paragraph in question reads as follows:

"V. On September 15, 1961, the District Director of Internal Revenue made assessments against the taxpayer-defendant Steven Kamieniecki for federal income taxes, penalties and interest for the taxable periods and in the amounts set forth in the following schedule; and on September 15, 1961 the District Director duly gave the taxpayer-defendant notices of said assessments and demanded payment thereof, but said taxpayer-defendant has not made complete payment and there remains due from said taxpayer-defendant an outstanding balance of $6,289.36, as described in the following schedule, plus interest thereon according to law.

  Taxable                                                                        Amt.         Outstanding

Period                        Tax          Penalty         Interest            Paid             Balance

1956 ..........         $1,776.94         $ 888.47          $470.89         $353.47           $2,782.83

1957 ..........          2,056.61         1,028.31           421.61             -0-            3,506.53

TOTAL .........                                                                             $6,289.36"

 

In addition to all of the above facts, which are taken as true for purposes of this case, after trial I find and rule as follows:

The answers filed by defendants Leonard, Stein and Gladstone admitted the truth of the allegations in paragraph VI. of the complaint. The Indian Head National Bank recited in its answer that it had no knowledge of these allegations, and no reference whatsoever to paragraph VI. appears in the answer of defendant Kamieniecki, apparently by reason of oversight. Paragraph VI. of the complaint recites:

"On November 7, 1961, an agent of the District Director of the Internal Revenue filed with the Town Clerk, Amherst, New Hampshire, a notice of federal tax lien for the assessments described in paragraph V; and on November 9, 1961 an agent of the District Director of Internal Revenue filed with the Register of Deeds, Hillsborough County, Nashua, New Hampshire, a notice of federal tax lien embodying the assessments described in paragraph V."

In view of the agreement of the various parties as to the truth of virtually all of the allegations in plaintiff's complaint, the only issues which remain for decision are the factual validity, vel non, of the assessments described in paragraph V, and the legal question of the priorities of the competing liens to the proceeds of the Certificate of Deposit.

Defendant Steven Kamieniecki was engaged in the scrap metal or junk business from 1951 through 1958. His principal business activity consisted of purchasing junk automobiles, usually by bidding for them, the cannibalism and processing of the metallic components of these cars, and the sale of the various metals to scrap dealers. He also purchased various types of machinery containing metallic parts, and he testified that about 1956 he converted his operation from "being a small junkie" to "being a somewhat big junkie with a big overhead." In 1956, 1957 and 1958 he also sold Christmas trees, and to some extent became involved in the demolition business beginning in 1957. In the period 1957 through 1961 he obtained various loans from defendant Indian Head National Bank on the basis of his unsecured personal notes. In the years 1956 and 1957 he made deposits to a checking account he maintained at the Second National Bank of Nashua in the amounts of $16,754.85 and $18,962.94 respectively.

The income tax returns which Kamieniecki filed in 1959 for the years 1956 and 1957 reported as his total receipts from the business the sums of $10,653.60 and $15,458.00 respectively. They disclosed gross profits for the two years in the amounts of $1330.60 and $6240.00 respectively, net losses for each of the two years in the amounts of $388.40 and $707.00 respectively, and adjusted gross income and tax due for both years in the amount of Zero.

It also appears, and I find, that while employed in New York City during the period 1942 to 1950, when taxes were withheld from the salary paid to him by his employer, Gray's Drug Store, located at 53d Street and Broadway, Kamieniecki did file federal income tax returns for the years 1942 through 1949. He moved back to New Hampshire in October of 1950 where he failed to file timely returns for the years 1950 through 1958. The returns for the two years in issue (calendar 1956 and 1957) purport to be signed by taxpayer on April 29, 1959 . They were time-stamped into the Internal Revenue office on June 30, 1959 and each bears the signature of an attorney named Raudonis as preparer. The legend, "This return prepared from information orally given me by taxpayer as he consulted receipts and records in his own possession," appears above Mr. Raudonis' signature on the Form 1040 for the year 1956. The same legend is typed on the face of the 1957 return following a typed notation "Statement by A. J. Raudonis." No credible evidence was offered as to why taxpayer did not turn over the "receipts and records" directly to Mr. Raudonis for his use in preparing the returns.

I find that defendant Kamieniecki failed to keep adequate books and records of a type which would permit anyone to accurately determine therefrom the actual income of his business and himself for the calendar years 1956 and 1957. Consequently I rule that not only was it reasonable for the Internal Revenue to resort to the bank deposit and cash expenditure method of reconstructing Kamieniecki's income, but it was indeed imperative to employ this method to determine his correct tax liability, in view of the paucity of available business records and having in mind that deposits made to the Second National Bank of Nashua alone exceeded what, on his belatedly filed returns, he claimed to be his gross income for each of the two years.

A recomputation of Kamieniecki's gross receipts for the years 1956 and 1957 on the basis of the bank deposit and cash disbursement method, prepared by Special Agent Jeannotte, was admitted in evidence as part of Government Exhibit 10. The work sheets supporting this computation of income were admitted in evidence as Government Exhibits 1, 2 and 3. Special Agent Jeannotte testified and explained his computations in great detail.

I find that the bank deposit and cash expenditure method used by him is a fair and accurate reflection of the true total business receipts of the defendant Kamieniecki for the years 1956 and 1957, and that his computation showing a tax deficiency of $1776.94 for the year 1956 and a tax deficiency of $2056.61 for the year 1957 is factually correct, and I find that the returns filed belatedly by Kamieniecki in 1959 showing no adjusted gross income and no tax due are both false and inaccurate.

I find, on the basis of the following:

(1) that Kamieniecki filed federal tax returns for the years 1942 through 1949 when in an employee status in New York , where the fact that he was subjected to withholding compelled him to file returns as a practical matter,

(2) that he failed to file any returns from 1950 to 1959 although self-employed in a business activity,

(3) that he failed to keep adequate and accurate books and records as required by law,

(4) that he did not make available even the mishmash of odd slips, papers, etc. (e.g., Defendant's Exhibit M) that he did retain to Mr. Raudonis who prepared his returns in 1959, with the result that Raudonis felt compelled to put the disclamatory legend on the face of both returns,

(5) that Kamieniecki knew, on the basis of even the fragmentary records which he proffered in evidence that he earned more than $600.00 in both 1956 and 1957, and, finally,

(6) that he begrudgingly testified at the trial that his returns as filed were in fact erroneous and that he felt that "in 1956, top money I made, profit clear for myself, $2500, and maybe $3200 in 1957, tops,"

that defendant Kamieniecki's failure to file returns for the years 1956 and 1957 when due evidences a consistent fraudulent intent and scheme on his part to evade his tax obligations for the years 1956 and 1957, as a consequence of which the District Director properly included in the assessments for 1956 and 1957 fraud penalties, under Section 6653(b) of the Internal Revenue Code of 1954, in the amounts of $888.47 for 1956 and $1028.31 for 1957, as well as interest in the amount of $470.89 for 1956 and $421.61 for 1957. Thus, having in mind that a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency, executed in August 1961 by Kamieniecki, was admitted in evidence (Government Exhibit 9), I rule that the Internal Revenue properly made total assessments against Kamieniecki in the amount of $3136.30 for 1956 and $3506.53 for 1957, and that after receiving credit for $353.47 paid against the 1956 assessment Kamieniecki is indebted to the United States in the total amount of $6289.36, plus interest as provided by law, and that the United States has a valid lien for unpaid federal income tax liabilities in that amount upon the proceeds of the Certificate of Deposit.

There remains for decision the question of the priority of the competing claimed liens of the United States , the Indian Head National Bank of Nashua , and Attorney Leonard. The claim of lien of the Indian Head National Bank arises out of the following background facts:

Kamieniecki was engaged for the demolition of a building owned by Gertrude Gladstone. While he was engaged in the demolition operation an outer wall caved in and fell, thus necessitating additional cleanup and repair work. Gladstone sued Kamieniecki in state court in an action of tort for negligence in connection with the falling of the wall. Kamieniecki in turn filed a cross-action in the nature of quantum meruit, seeking to recover for the extra work required in cleaning up and repairing the situation. A real estate attachment was made by Kamieniecki in his cross-action. Gladstone obtained a dissolution of this real estate attachment by substituting therefor a $5,000 Certificate of Deposit issued by the Indian Head National Bank of Nashua on February 17, 1961 , payable to Morris Stein, attorney for Gertrude Gladstone, and Richard Leonard, attorney for Steven Kamieniecki. Upon the maturity of this first Certificate, a successor Certificate was issued for the $5,000 plus the interest earned on the initial Certificate, and this procedure was followed as each Certificate matured, until finally a Certificate which with interest increments was worth $5,726.79 was deposited in the Registry of this court in connection with the Answer and Counterclaim for Interpleader filed herein by the Indian Head National Bank of Nashua.

The Bank claims that it has a valid possessory lien to the above-mentioned Certificate of Deposit to the extent of $5,000, plus accrued interest. The basis of this claim is the testimony of its Vice-President John A. Worthen, who stated at the trial that he had the responsibility of making all loans to Kamieniecki on behalf of the Indian Head National Bank during the period 1957 through 1963. He testified that on an unnamed date in February 1961 he had a conversation with Kamieniecki, the substance of which was that as soon as the Kamieniecki v. Gladstone litigation was terminated favorably to Kamieniecki, and he thus became entitled to the proceeds of the Certificate of Deposit as between him and Gladstone, he would then turn over to the Bank the Certificate of Deposit in payment for the two $2,500 loans made to him by the bank on February 15 and February 27, 1961.

I reject both the testimony of Worthen and Kamieniecki on this point, and I find that no such conversation ever took place and that no agreement or oral pledge ever was made by Kamieniecki to the Indian Head National Bank to secure these two loans. In so ruling, in addition to my evaluation of the credibility of the witnesses, I have in mind that Defendant's Exhibit B, the Liability Ledger of the Indian Head National Bank, totally contradicts Worthen's testimony, since with the exception of a loan not involved herein, made on January 3, 1957 and repaid on April 3, 1957, every one of the bank's loans to Kamieniecki and the entire balance of his account at all times from April 2, 1957 through September 12, 1963 is carried under a column headed "Outstanding Balances--Direct Unsecured." Both of the February 1961 loans of $2,500 are carried in this column and all loans to Kamieniecki are coded, on the same Exhibit, with a numerical key, as either Key 4, meaning time loan unsecured, or Key 2, meaning demand loan unsecured. It is not without significance that on September 12, 1963 Kamieniecki's entire balance of $8,000 was charged off against the bank's reserve for bad debts.

I find and rule that the Indian Head National Bank of Nashua has no secured interest whatsoever in the Certificate of Deposit herein, and that its filing of notice of lien on November 8, 1961, the day after the federal tax lien was filed with the Town Clerk at Amherst, New Hampshire, is a vain gesture without legal significance. Consequently, the Bank has no rights to any portion of the proceeds of the Certificate of Deposit.

To evaluate the claimed attorney's lien of Richard Leonard, the following background facts must be considered. He was retained by Kamieniecki when the Gladstone suit against Kamieniecki was filed, and he prepared Kamieniecki's cross-action and the real estate attachment which led to the substitution of the Certificate of Deposit as security for the Kamieniecki v. Gladstone cross-action. When advised that the Newfoundland American Insurance Company, Ltd. disclaimed coverage on Kamieniecki's liability policy and refused to defend the claim of Gladstone against him for the collapse of the wall and roof, Attorney Leonard prepared a petition for a declaratory judgment in state court and successfully carried it through the New Hampshire Superior Court and then to the New Hampshire Supreme Court, as a result of which the Insurance Company was compelled to defend the Gladstone v. Kamieniecki action which, after trial, terminated in a finding for Gladstone against Kamieniecki in the amount of $4,050, plus interest and costs, which judgment was paid by the Insurance Company.

Attorney Leonard represented Kamieniecki in the cross-action which eventually resulted in a judgment and verdict in favor of Kamieniecki, in the amount of $5,429.58, and the Judge of the New Hampshire Superior Court decreed an attorney's fee in his favor in the amount of $1,801.33, plus costs of $25.60, and plus one-third of the interest accruing until judgment satisfied. He also has represented Kamieniecki herein. Kamieniecki has made no payment to Leonard for legal services in any of these cases.

There are two legal obstacles to Mr. Leonard's recovering solely on the basis of an attorney's lien. First there is the law of the State of New Hampshire prior to the enactment of RSA 311 A:1, the New Hampshire Attorney's Lien statute, which became effective on May 28, 1963 . Under previously prevailing common law, an attorney in New Hampshire could only obtain a lien for an attorney's fee to the taxable amount of $1.00. RSA 525:13. Peterson v. Reilly, 105 N. H. 340, 200 A. 2d 21 (1964). The second barrier is the fact that the priority of a lien created by state law depends on the time it attached to the property in question and became choate. United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 86 (1954). A state lien is "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." Id. , p. 84. (Emphasis added.) Because the amount of Leonard's lien was still undetermined and indefinite when the federal tax lien was filed in November of 1961, his lien was only an inchoate lien at the critical date and, therefore, is subordinate to the federal tax lien. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 90-91 (1963).

The final question presented by this record is whether or not Attorney Leonard should nevertheless be allowed an attorney's lien on the basis of equitable principles analogous to the doctrine of unjust enrichment, it being crystal clear on this record that legal services rendered by him substantially and materially contributed to the creation of the fund now on deposit with the Clerk of this court, since but for his successful efforts in the declaratory judgment action which forced the Insurance Company to defend and ultimately to pay the judgment in the Gladstone v. Kamieniecki case, the security posted in the Kamieniecki v. Gladstone case would have been substantially wiped out, leaving a very small amount remaining.

The principal authority for the allowance of an attorney's lien, in a case where the facts very closely duplicate those in the instant case, is the opinion of the Court of Appeals for the Fifth Circuit in the case of United States v. J. T. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197 (1963). Like the instant case that was litigation in which a federal tax lien was being asserted against a fund created by the successful prosecution of state court litigation. In the Hubbell case the Court said, at p. 201:

"It follows that the fund here claimed was created by the efforts of and at the expense of appellees and their attorneys. On oral argument attorneys for the government assured the Court that fees earned by appellees' attorneys 'would be taken care of.' In order to insure that the efforts and expenses of appellees and their attorneys will be 'taken care of,' we remand this case to the trial court for a determination of the amount of reimbursement equitably due appellees and their attorneys for creating the fund for the benefit of the government."

To the same effect, in a case not involving the United States, see Sprague v. Taconic Bank, 307 U. S. 161, 166 (1938).

I find that the successful efforts of Attorney Richard Leonard caused the creation of the fund on deposit in the Registry of this court. Were it not for his efforts the fund, against which the federal tax lien has been successfully asserted, would not exist. Although it is a rare situation in which a court should exercise its discretion in awarding an attorney's fee out of a fund such as this, I rule that this is one of those very rare cases where equitable considerations compel the awarding of compensation. I rule that the fair and reasonable value of Attorney Leonard's services is in the amount of $2,000, to be paid out of the fund now held in the registry of this court.

The balance of the fund, or $3,726.79, is to be paid over to the United States in partial satisfaction of its valid lien for unpaid federal income taxes.

Judgment in accordance with this opinion.

 

 

[68-1 USTC ¶9184] United States of America v. Masonry Contractors, Inc., et al.

U. S. District Court, So. Dist. Tex., Houston Div., Civil Action No. 66-H-725, 1/10/68

[1954 Code Sec. 6323]

Lien for taxes: Priority: Judgment creditors.--The taxpayer's judgment creditors were not entitled to priority where the judgments were entered subsequent to the tax assessment and recording of the notices of tax liens by the government. The government enjoyed priority by being first in time.

[1954 Code Sec. 6323]

Lien for taxes: Notice: Validity: Fact finding.--A bank was not entitled to actual notice of liens filed for unpaid withholding and social security taxes. There was no indication that the bank had a right to money paid to it by a taxpayer's debtor in that it stood in the position of a mortgagee or pledgee of, or purchaser from, the taxpayer. If such had been the case, the burden of proof was on the bank and not the government. Since the government established that the taxpayer was indebted to the government, that the lien notices were properly recorded, and that the taxpayer's debtor paid sums to the bank, it was entitled to foreclosure of the liens.

John H. Baumgarten, Assistant United States Attorney, Houston, Tex., Joel P. Kay, Department of Justice, Fort Worth, Tex., for plaintiff. Paul F. Ferguson, P. O. Drawer 1141, Alvin, Tex., J. H. Broadhurst, Assistant Attorney General of Tex., Austin, Tex., Louis M. Moore, Patterson, McDaniel, Moore & Browder, 1100 Houston First Savings Bldg., Houston, Tex., Charles L. Laswell, Kamp, Laswell & Howard, 810 Houston 1st Savings Bldg., Houston, Tex., Jack H. Reeves, 601 Citizens State Bank Bldg., Houston, Tex., Jo E. Shaw, Jr., Dyche, Wheat, Thornton & Wright, 1200 Houston First Savings Bldg., Houston, Tex., Donald E. Roper, 1306 1st City National Bank Bldg., Houston, Tex., David Clayton, R. A. Kingsbury, James F. Dickson, 1023 Americana Bldg., Houston, Tex., Rob ert H. Singleton, Butler, Binion, Rice & Cook, Esperson Bldg., Houston, Tex., for defendants.

Memorandum

CONNALLY, District Judge:

Masonry Contractors, Inc. is indebted to the United States of America in the amount of $8,843.82, representing unpaid federal withholding taxes and Federal Insurance Contribution Act taxes assessed for the second quarter of 1963. In this action, the government seeks to recover a portion of that sum by foreclosing federal tax liens securing the liability. Joined as defendants are several judgment creditors of Masonry who it was thought might assert some interest in the property involved, and two parties alleged to be in possession of the property. The facts are stipulated.

As the result of performance by Masonry under two construction sub-contracts, the defendants I. D. Audish and Son and James M. Stone, d/b/a Stone Construction Company, became indebted to Masonry in amounts which were eventually reduced to $2,602.10 and $2,224.54, respectively. These debts were in existence at the time the notices of federal tax lien were filed by the government on August 20 and 21, 1963, and constituted property in the hands of Masonry, in the form of choses in action, to which the tax lien attached. None of the parties seriously disputes this proposition. However, Stone subsequently discharged its obligation to Masonry by delivering a cashier's check for $2,224.54 payable jointly to the defendants Acme Brick Company and Pearland State Bank, who divided the proceeds equally. Controversy centers over the government's attempt to reach the money in the hands of the bank, it being admitted that Acme Brick, as materialman for Masonry, is entitled to retain its share of the payment from Stone.

The defendant Audish admits his indebtedness to Masonry and makes no claim to the money held by him at the time the tax lien notices were filed. He has deposited the amount of his debt in the registry of the Court for disposition according to the judgment in this cause.

The stipulation and record give no indication as to what right, if any, the bank had to receive the money from Stone. All that was stipulated was that Stone paid the money, and by doing so, discharged its obligation to Masonry. By way of explanation, counsel advises that the bank had made a loan to Masonry, and taken an assignment of the funds which would become payable under Masonry's sub-contract with Stone. Apparently notice was given to Stone, who agreed to recognize the assignment and to make payment to the bank.

Strangely enough, the bank does not rely on the assignment; and, in fact, has made no offer of proof on the point. Instead, it takes the position that the government has failed to prove that Masonry had any property right in the $1,112.27 payment from Stone. Alternatively, the bank argues that the recording of the notices was insufficient to create a valid lien against the property of Masonry received by bank, and that actual notice was required before the property would pass from Stone cum onere.

By stipulation, it is established (1) that Masonry was indebted to the government for unpaid taxes, (2) that the lien notices were properly recorded, and (3) that Stone paid the bank $1,112.54 in satisfaction of a debt owing to Masonry from him. Such proof is sufficient to make out a case for the government. Worley v. U. S. [65-1 USTC ¶9160], 340 F. 2d 500 (9th Cir. 1965). It is not incumbent upon the government to explain the circumstances under which the payment from Stone was made, or to show what right the bank had to receive it.

The bank's argument that it was entitled to actual notice of the lien is without merit. Section 6323(c)(1) of the Internal Revenue Code of 1954, prior to the amendment in 1966, provides in pertinent part as follows:

"Even though notice of a lien . . . has been filed . . ., the lien shall not be valid with respect to a security . . ., as against any mortgagee, pledgee, or purchaser of such security, for an adequate and full consideration in money or money's worth, if at the time of such mortgage, pledge, or purchase such mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of the lien."

Without reaching the question of whether the property received by the bank was a "security", as defined in the Code [Sec. 6323(c)(2)], I find nothing in the record before me which would indicate that the bank was a mortgagee, pledgee, or purchaser of the property for an adequate and full consideration in money or money's worth. For ought that appears here, the bank is nothing more than the gratuitous recipient of money owing to Masonry. I consider the burden of establishing these exceptional circumstances, requiring actual notice of the lien, to rest on the bank; and it has wholly failed to meet its burden. Cf. Worley v. U. S. , supra.

Having determined that the government has a valid and subsisting lien against the two funds in question, only the issue of priority remains for decision. The defendants, Houston Brick and Tile Company, Texaco, Inc., Alatex, Inc., and the State of Texas , are all judgment creditors of Masonry. However, each of the judgments involved were entered and filed of record subsequent to the tax assessment and recording of the notices of lien in August of 1963. ¹ Thus, even if the abstracting of the judgments would create some character of lien against the funds here, the government still enjoys priority by being first in time. U. S. v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954).

From what has been said, it follows that the government is entitled to recover the $1,112.27 from Pearland State Bank, as well as the $2,602.10 now on deposit in the registry of the Court.

The foregoing shall constitute Findings of Fact and Conclusions of Law. Counsel for plaintiff will prepare an appropriate form of judgment promptly, forward it to opposing counsel for approval as to form, and submit same to the Court for entry.

¹ These judgment creditors make no claim to the funds. They did not appear at the trial, and have filed no briefs.

 

 

[60-2 USTC ¶9774] United States of America , Plaintiff in Intervention v. The Standard Paving Company, Peter J. Crowley Company, and A. L. Jackson Company, all Illinois corporations, joint Ventures doing business as Standard-Crowley-Jackson; Twin Excavating Co. Inc; Crest Finance Co. Inc.; Road Machinery & Supplies Co. of Minneapolis, Inc.; and Peter Kiewit & Sons' Co., Defendants The Standard Paving Company, Peter J. Crowley Company, and A. L. Jackson Company, all Illinois corporations, joint ventures doing business as Standard-Crowley-Jackson, Plaintiffs v. Twin Excavating Co. Inc.; Crest Finance Co. Inc.; Road Machinery & Supplies Co. of Minneapolis, Inc.; and Peter Kiewit & Sons' Co., Defendants

U. S. District Court, No. Dist. Ill. , East. Div., No. 59 C 8, 7/1/60

[1954 Code Sec. 6323]

Priority of lien: Fact finding.--Federal tax liens were filed in Minnesota against a subcontractor on an Illinois toll highway project. The subcontractor was also indebted to lessors of equipment used on the job and to a finance company. The prime contractor paid fund which were owed to the subcontractor into court. The court determined that the Federal tax lien took precedence over the claims of the finance company but was subordinate to the claims of the lessors of the equipment.

R. Tieken, United States Attorney, Harvey M. Silets, Assistant United States Attorney, Chicago, Ill., for plaintiff. Thompson, Raymond, Mayer, Jenner and Bloomstein, 318 South La Salle St., Chicago 3, Ill., for Standard Paving Co., Peter J. Crowley Co., A. L. Jackson Co., d/b/a Standard-Crowley-Jackson. Rappaport, Clorfene and Rappaport, 134 North La Salle St., Chicago, Ill., for Crest Finance Co., Inc. Askow, Stevens and Hardy, 7 South Dearborn St., Chicago 3, Ill., for Road Machinery & Supplies Co. of Minneapolis, Inc. David Levinson, James M. Goff, Chicago, Ill., for Peter Kiewit & Sons' Co.

Findings of Fact and Conclusions of Law

ICOE, District Judge:

The above-captioned case came on to be heard by the Court without a jury. Plaintiff in Intervention, United States of America, appeared by its attorney, R. Tieken, United States Attorney for the Northern District of Illinois, and Harvey M. Silets, Assistant United States Attorney.

The Defendants in Intervention were represented as follows: The Standard Paving Company, Peter J. Crowley Company, A. L. Jackson Company, doing business as Standard-Crowley-Jackson, represented by Thompson, Raymond, Mayer, Jenner and Bloomstein; Twin Excavating Co., Inc., not having filed its pleading or otherwise being represented; Crest Finance Co., Inc., represented by Rappaport, Clorfene and Rappaport; Road Machinery & Supplies Co. of Minneapolis, Inc., represented by Askow, Stevens and Hardy; Peter Kiewit & Sons' Co., represented by David Levinson and James M. Goff.

The Court, after having carefully considered the pleadings, the Stipulation of Facts, and exhibits, finds the following facts to be true and correct and, based thereon, reaches the following conclusions of law:

Findings of Fact

1. The defendants, Standard Paving Company, Peter J. Crowley Company, and A. L. Jackson Company, are all Illinois corporations each having its principal place of business within the state of Illinois , and are joint venturers doing business as Standard-Crowley-Jackson.

2. The defendants, Twin Excavating Co., Inc. and Road Machinery & Supplies Co. of Minneapolis, Inc., are corporations organized under the laws of the state of Minnesota with their principal places of business in Minneapolis , Minnesota .

3. Defendant Crest Finance Co., Inc., is a corporation organized under the laws of the state of Illinois with its principal place of business at Chicago , Illinois .

4. Defendant Peter Kiewit & Sons' Co., is a corporation organized under the laws of the state of Nebraska with its principal place of business at Omaha , Nebraska .

5. United States of America is a sovereign corporation and body politic.

6. The Standard Paving Company, Peter J. Crowley Company, and A. L. Jackson Company (hereinafter referred to as Standard-Crowley-Jackson) filed a complaint with the United States District Court for the Northern District of Illinois on January 5, 1959, which was assigned the civil action number 59 C 8, and thereafter it paid into the registry of the Court the sum of $17,369.94. Named as defendants in the said action were United States of America, Twin Excavating Co., Inc., and Crest Finance Co., Inc.

7. On April 13, 1959, the United States of America having petitioned the Honorable Edwin A. Rob son for leave to intervene as a party plaintiff and for an order dismissing United States of America as a party defendant in the action referred to in paragraph 6, this Honorable Court ordered that United States of America be dismissed as a party defendant and be permitted to file its complaint in intervention as a party plaintiff.

8. On April 20, 1959 , Standard-Crowley-Jackson obtained leave of the Honorable Edwin A. Rob son and did file its amended complaint in this action.

9. On May 14, 1959, United States of America as plaintiff in intervention filed its complaint in intervention with this Honorable Court by which it asserted its claim to the fund formerly deposited to the registry of the Court by Standard-Crowley-Jackson by virtue of its liens and upon all property and rights of property belonging to the defendant-taxpayer, Twin Excavating Co., Inc.

10. The action brought by the United States of America as plaintiff in intervention was brought pursuant to Sections 7401, 7402 and 7403 of the Internal Revenue Code of 1954 and pursuant to Section 1345 of Title 28, United States Code.

11. The action by the United States of America has been authorized by the Commissioner of Internal Revenue, the delegate of the Secretary of the Treasury of the United States and was brought under the direction of the Attorney General of the United States .

12. During all times between on or about April 1, 1958, and September 30, 1958, divers individuals performed services for the defendant, Twin Excavating Co., Inc., 7601 Fifty-Sixth Avenue, North, Minneapolis, Minnesota, by which defendant they were paid wages. On account of said employment and payment of wages the Commissioner of Internal Revenue made assessments against the said defendant-taxpayer for each quarter year period within said dates, of the amount deducted and withheld by said defendant from said wages, as the collection of taxes upon the income of said employees (otherwise known as "withholding tax") and Federal Insurance Contributions Act taxes in respect to the said wages. The District Director of Internal Revenue for the Internal Revenue District which includes the city of Minneapolis , Minnesota , gave notice of said assessments to and demanded payment thereof from the defendant, Twin Excavating Co., Inc. The said District Director also filed with the Registrar of Deeds, State of Minnesota , County of Hennepin , Notices of Federal Tax Liens upon all the property and rights to property belonging to the said defendant. The aforementioned assessment and dates of assessments, notices and demands and filing of notices of Federal Tax Liens are set out opposite the respective quarter-year periods as follows:

Quarter                    Kind of          Amount of           Dates of         Dates of Notices          Dates of Notices

Year Ended              Assessment         Assessment         Assessment               and Demand            of Liens Filed

6/30/58
            Tax ---                 $15,995.68

                   Penalty ---                 799.78

                   Interest ---                 39.35

                   TOTAL ---               $16,834.81            8/15/58                  8/15/58         9/10/58 & 
9/11/58

6/30/58
            Penalty ---                 303.53            11/7/58                  11/7/58                   1/20/59

9/30/58
            Tax ---                   5,231.97

                   Penalty ---                 261.60

                   Interest ---                 12.03

                   TOTAL ---               $ 5,505.60           11/14/58                 11/14/58                   1/20/59

 

13. Under Seal of the Treasury of the United States, assessment certificates dated August 15, 1958, November 7, 1958, and November 14, 1958 were issued containing therein the assessments referred to in paragraph 12 hereof of the Twin Excavating Co., Inc., 7601 Fifty-Sixth Avenue North, Minneapolis, Minnesota, for the quarterly periods ended respectively on June 30, 1958, June 30, 1958, and September 30, 1958. Copies of Notices of Demand, Form 17, for the said respective quarterly periods and account ledger cards of the Twin Excavating Co., Inc., for the said quarterly periods were subsequently prepared.

14. Notices of Federal Tax Liens, Form 668, were filed with the District Court of the United States for the District of Minnesota on September 10, 1958 , and on January 20, 1959 , respectively. Notices of Federal Tax Liens, Form 668, were filed with the Registrar of Deeds, County of Hennepin , State of Minnesota , on September 11, 1958 , and January 20, 1959 , respectively. Said Notices of Federal Tax Liens are the Notices of Liens referred to in paragraph 12.

15. No part of the outstanding aggregate balance of $22,643.94 of the assessment against the defendant, Twin Excavating Co., Inc. for withholding taxes and Federal Insurance Contributions Act taxes, together with accrued interest and penalty, has been paid.

16. The defendants, The Standard Paving Company, Peter J. Crowley Company, and A. L. Jackson Company, doing business as Standard-Crowley-Jackson, are indebted to the taxpayer-defendant, Twin Excavating Co., Inc., by at least the sum of $17,369.94. The said defendants, immediately prior to filing this suit, are in possession of at least said amount of funds belonging to the defendant-taxpayer, Twin Excavating Co., Inc., which sum has been deposited into the registry of the Court.

17. On October 9, 1958, at 11:05 a. m. notice of levy pursuant to Section 6331 of the Internal Revenue Code of 1954 was served upon the defendant, Standard-Crowley-Jackson, by and through its Executive Vice-President, A. R. Ramser, in the amount of $16,920.49, which sum represented withholding tax and Federal Insurance Contributions Act taxes assessed against the Twin Excavating Co., Inc., in the amount of $16,834.81, plus statutory additions of $85.68, and by such notice of levy the defendant, the Standard Paving Company, was put on notice that all property and rights to property, moneys, credits and bank deposits in their possession and belonging to the Twin Excavating Co., Inc., and all sums of money or other obligations owing from the Standard Paving Company to Twin Excavating Co., Inc., were thereby levied upon and seized in satisfaction of the aforesaid tax, together with all additions provided by law, and demand was made thereby upon the Standard Paving Company for the amount necessary to satisfy the liabilities set forth above or for such lesser sum as the Standard-Crowley-Jackson Company may be indebted to the taxpayer, Twin Excavating Co., Inc., to be applied as a payment under the tax liability of the Twin Excavating Co., Inc.

18. Standard-Crowley-Jackson were the principal contractors under Contract T-1A with the Illinois State Highway Commission for the construction of a certain portion of the Illinois Toll Road in the neighborhood of Harvey , Illinois , under a contract dated June 28, 1957 .

19. On September 20, 1957, Twin Excavating Co., Inc., defendant-taxpayer herein, and Standard-Crowley-Jackson, depositor of the fund herein in question, executed a contract for the performance of certain work and the furnishing of certain materials, to wit, to move, haul, place, and compact certain borrow excavation per Toll Road contract specifications at the Northern Illinois Toll Road Highway Section T-1A; the said contract provided that the borrow "must be approved by Toll Road contract specifications," and that Twin Excavating Co. Inc. had the option to haul, place and compact approximately 560,000 cubic yards of borrow at 85 cents per yard based on minimum yardage requirements set forth in the said contract, provided that such amounts were subject to Toll Road measurements.

20. Under the terms of the contract referred to in paragraph 19 hereof, Standard-Crowley-Jackson agreed to make payment to Twin Excavating Co. Inc. for performance of its work in a sum based upon Toll Road estimates only. The payments to be made initially to Twin Excavating Co. Inc., by Standard-Crowley-Jackson were based upon certain weekly reports or invoices of borrow transported from the borrow excavation and predicated on a count of a number of loads of borrow carried to the site of the construction. The weekly reports or invoices for the material delivered in the period from March 24, 1958 to June 7, 1958 , all contained the following statement:

"The above total is subject to revision as to exact quantity by cross section, by Section Engineer."

Any acceptance of the estimated work as indicated by the aforesaid weekly reports or invoices furnished to Standard-Crowley-Jackson was subject to revision.

21. On the following dates, Crest Finance Company, Inc., made loans in the amounts indicated below to Twin Excavating Co., Inc., secured by promissory notes and secured by the assignment of Twin Excavating Company's right to performance by Standard-Crowley-Jackson under their contract referred to in paragraph 19 hereof as estimated by weekly reports or invoices of materials furnished:

                                 Period           Amount Estimated

Date of               Covered by Weekly                  in Weekly

Loan                 Reports (Invoices)         Reports (Invoices)         Amount of Loan

3/21/58
 ....       
3/21/58
                              $ 7,379.79             $ 4,800.00

4/3/58
 .....       
3/24/58
 to 
3/31/58
                    18,360.00              10,575.36

4/10/58
 ....       
4/4/58
                                 9,494.50               5,468.83

4/18/58
 ....       
4/5/58
 to 
4/17/58
                     21,386.00              12,318.34

5/13/58
 ....       
4/18/58
 to 
5/12/58
                    25,296.00              12,480.00

5/19/58
 ....       
5/13/58
 to 
5/17/58
                    10,659.00               4,800.00

5/27/58
 ....       
5/19/58
 to 
5/24/58
                    11,577.00               4,800.00

6/6/58
 .....       
5/26/58
 to 
6/4/58
                     12,087.00               6,720.00

6/10/58
 ....       
6/5/58
 to 
6/7/58
                       8,500.00               5,760.00

                                                       $124,739.29             $67,722.53

None of the above assignments or notes have every been recorded for record.

22. Standard-Crowley-Jackson paid to the Crest Finance Company, Inc. the following sums on the following dates:

5/9/58
 .....         $44,316.45

7/24/58
 ....          20,000.00

                     $64,316.45

The payment made on May 9, 1958 by Standard-Crowley-Jackson of $44,316.45 was by a check made payable jointly to the taxpayer-defendant, Twin Excavating Co., Inc., and the defendant, Crest Finance Co. Inc. Crest Finance Co. Inc. deducted the sum of $30,000.00 therefrom in full payment of its advances to Twin Excavating Co., Inc., with interest thereon, based upon the three weekly reports or invoices which covered the period from March 24, 1958 to April 17, 1958, and totaling the sum of $49,240.50. The amount of $20,000.00 paid on July 24, 1958 was applied in payment against the balance of advances made by Crest Finance Co. Inc. to Twin Excavating Co., Inc., and based upon other weekly reports and invoices in paragraph 21 herein.

23. Standard-Crowley-Jackson claims there existed a substantial shortage in cubic yards of material delivered to Standard-Crowley-Jackson on the T-1A contract heretofore mentioned in paragraph 19 herein. The said shortage, it is claimed, was the difference between the cross section computation of the pit determined by the Toll Highway Section Engineer and the amount represented by Twin Excavating Company's load count; that the shortage was estimated to be between 80,000 and 90,000 cubic yards. If such shortage, or any other similar shortage did in fact exist, the amounts estimated on the weekly reports, referred to in paragraphs 20 and 21 hereof as owing by Standard-Crowley-Jackson to Twin Excavating Co., Inc. would be reduced accordingly by the dollar amount of such shortage.

24. The final cross section computation by the Section Engineer was completed on November 5, 1958 .

25. Road Machinery and Supplies Company of Minneapolis, Inc., commencing July 26, 1957 , leased to Twin Excavating Company, Inc., one American Model M-96 Sheepsfoot Tamping Roller, Serial Number 8279, at the agreed rental of $220.00 per month. A contract covering the terms of said lease arrangement was entered into on December 19, 1957 .

26. Pursuant to the terms of said contract, Twin Excavating Company, Inc., used the aforesaid Sheepsfoot Tamping Roller in connection with the work under the prime contract T-1A for the Illinois State Toll Highway Commission for the period from July 26, 1957 , to and including July 15, 1958 .

27. Twin Excavating Company, Inc. failed to return the aforesaid Sheepsfoot Tamping Roller to Road Machinery & Supplies as they were obligated to do pursuant to the terms of the aforesaid lease, and an agent of Road Machinery & Supplies Company came from Minneapolis , Minnesota to Harvey , Illinois , to obtain the return of said Sheepsfoot Tamping Roller on September 29, 1958 . In connection with obtaining the return of said Sheepsfoot Tamping Roller, Road Machinery & Supplies Company expended the sum of $356.44 expenses and required two days time of its agent, J. A. Fitzenz at $30.00 a day for a total expense of $416.44.

28. Twin Excavating Company, Inc. paid to Road Machinery & Supplies Company the sum of $660.00 in three installments dated July 31, 1957 , March 17, 1958 , and May 5, 1959 . There is now due and owing Road Machinery & Supplies Company from Twin Excavating Company, Inc., the sum of $2,816.44 in connection with the aforesaid lease of the Sheepsfoot Tamping Roller.

29. On or about December 16, 1958 , the Road Machinery and Supplies Company of Minneapolis, Inc. filed a Notice of Claim for the amount set forth in paragraph 28 herein.

30. On March 31, 1958 , Peter Kiewit Sons' Co. leased to Twin Excavating Co. Inc., one Gebhard Sheepsfoot Roller, Model 22-S/N 22262 RS 11-294 at the agreed rate of $400.00 per month. A lease agreement was executed by the parties.

31. Said Gebhard Sheepsfoot Roller was delivered to Twin Excavating Co., Inc. on March 29, 1958 , and was returned to Peter Kiewit Sons' Co. on September 3, 1958 .

32. Twin Excavating Co., Inc. used said Gebhard Sheepsfoot Roller in connection with the work under the prime contract T-1A for the Illinois State Toll Highway Commission during the period between May 1, 1958 and July 15, 1958 .

33. Twin Excavating Co., Inc. made no payment to Peter Kiewit Sons' Co. on account of the rental of said Gebhard Sheepsfoot Roller, and there is now due and owing to Peter Kiewit Sons' Co. the sum of $2,000.00 as rental for said equipment, including $1,200.00 as rental for the months of May, June and July, 1958.

34. On or about January 22, 1959 , the defendant, Peter Kiewit Sons' Co. filed a notice of lien claim with the Illinois State Toll Highway Commission, 20 North Wacker Drive , Chicago 6, Illinois , in the sum of $1,200.00.

35. The defendant, Twin Excavating Co., Inc., has not appeared nor was represented in court, and has not filed its answer or other pleading to the Complaint in Intervention filed by the United States of America .

36. Statutory interest due upon the assessments referred to in paragraph 12 to and including July 1, 1960 is $2,461.01. No part of said statutory interest accrued to July 1, 1960 has been paid.

37. United States of America , Plaintiff in Intervention, has a valid and subsisting lien in the amount of $25,104.95 against the fund referred to in paragraph 6 of these findings, deposited with this Court.

38. Road Machinery & Supplies Co. of Minneapolis, Inc., Defendant, has a valid and subsisting lien in the amount of $2,816.44 against the fund referred to in paragraph 6 of these findings, deposited with this Court.

39. Peter Kiewit & Sons' Co. , Defendant, has a valid and subsisting lien in the amount of $2,000.00 against the fund referred to in paragraph 6 of these findings, deposited with this Court.

Conclusions of Law

1. Any finding of fact which may be considered a conclusion of law is hereby concluded as a matter of law.

2. The Court has jurisdiction of the subject matter of this action.

3. The defendant, Twin Excavating Co., Inc., is indebted to the United States of America in the sum of $25,104.95, plus interest until paid, as provided by law, for taxes as set forth above in paragraph 12.

4. The United States of America is entitled to judgment with interest against the defendant in the aforesaid indebtedness in the total sum of $25,104.95, plus costs of this action, together with statutory interest, until the judgment is satisfied.

5. Under the Federal Decisions the tax liens which are the subject of the suit in intervention by the United States of America, constitute choate perfected tax liens and, in all respects, are superior to the assignments and claims on behalf of the Crest Finance Company in and to the fund now on deposit with the Clerk of the Court, as is described in paragraph 6 of the Findings of Fact.

6. There is now due and owing to the defendants, Peter Kiewit & Sons' Co., and Road Machinery & Supplies Co., of Minneapolis, Inc., by Twin Excavating Co., Inc., the sums of $2,000.00 and $2,816.44 respectively, which constitute liens which are prior in right to the aforesaid lien of the United States in the amount of $25,104.95, to the aforesaid sum of money deposited with this Court, as is more fully described in paragraph 6 of the Findings of Fact. Aquilino v. United States [60-2 USTC ¶9538]; United States v. Durham Lumber Co. [60-2 USTC ¶9539], decided by the Supreme Court of the United States June 20, 1960 .

7. The defendant, Crest Finance Co., Inc., does not fall within the class of persons protected by Section 6323, Internal Revenue Code of 1954, with respect to the relative priorities of its lien, and the lien of the United States to the fund deposited with this Court.

8. Judgment will be entered upon the aforesaid Findings of Fact and Conclusions of Law, and the fund deposited with this Court, as is more fully described in paragraph 6 of the Findings of Fact, shall be distributed as follows:

Peter Kiewit & Sons' 
Co.
 ............         $ 2,000.00

Road Machinery & Supplies Co. of

Minneapolis, Inc. ...................           2,816.44

United States of America

 ............          12,553.50

in full satisfaction of their respective claims to the aforesaid fund.

 

[66-1 USTC ¶9393]Parlane Sportswear Co., Inc., et al., Defendants-Appellants v. United States of America , Plaintiff-Appellee

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 6643, 359 F2d 974, 5/4/66 , Aff'g District Court, 65-2 USTC ¶9696, 247 Fed. Supp. 448

[1954 Code Sec. 6321]

Lien for taxes: Priority over creditor.--In a case where the creditor of the taxpayer corporation agreed to advance it money to meet its payroll, in exchange for which the taxpayer agreed to assign to the creditor money which it would receive from one of its customers, the Government's tax lien had priority over the creditor's claim to these funds since the tax lien had been properly filed before the creditor had advanced the money to the taxpayer. District Court affirmed.