Fire Insurance Proceeds Page2

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3. On or about June 1, 1956 , the Bank agreed to extend credit to Genie Craft, to be secured in part by the pledge and delivery to the Bank of purchase contracts and notes and in part by certificates of deposit in the aggregate amount of $95,000 issued to various individuals who made time deposits in the Bank. With the exception of William B. Pinson, who deposited $20,000, and Edward A. Terres, who deposited $6,000, the depositors assigned their residual rights in the deposits to Genie Craft. Because of the expense and difficulty of collecting the balance due on the contracts and notes, the Bank placed a percentage limit on such loans.

4. On April 18, 1957 , Genie Craft executed and delivered to the Bank a pledge agreement under which it pledged to the Bank all its property as security for all outstanding loans, discounts, financial credits and accommodations theretofore extended or thereafter to be extended to Genie Craft by the Bank.

5. By August 1, 1957, the limit set by the Bank on the loans referred to in Finding 3, above, had been reached, and the Bank declined to make a further loan of $22,500, which Genie Craft had requested, unless it was given additional collateral security. Accordingly, on August 2, 1957, Genie Craft pledged as security for a $22,500 note which it executed and delivered on that day warehouse receipts of Lawrence Warehouse Company, Nos. 122926-40, dated August 1, 1957, issued to the Bank, showing that merchandise valued at a total of $37,997.09 had been placed by Genie Craft in a field warehouse at 11 North Howard Street, Baltimore, Maryland, on the top floor of the premises occupied by Genie Craft in Baltimore. The warehouse receipts stated on their face: "not insured".

6. On February 1, 1957, Michigan Fire and Marine Insurance Company had issued a policy of insurance insuring "Michael A. and Ada T. Lombardi, t/a Home Sewing Machine Company (co-ownership) and Lawrence Warehouse Company, and General Electric Credit Corporation, as their interests may appear", against loss and damage by fire to certain personal property located at Nos. 9 and 11-13 North Howard Street, and 327 West Baltimore Street, both in Baltimore, Maryland.

7. Customarily, when a bank makes a loan secured by warehouse receipts as collateral it obtains a certificate of insurance showing that the bank has been made a loss payee under the fire policy. When the Bank made the $22,500 loan on August 2, 1957 , its officers knew of that custom, but had no express understanding with Genie Craft that the Bank would be made a loss payee. A few days after the loan was made, the Bank learned that Lawrence Warehouse Company was a loss payee of the existing policy, which covered the merchandise in the warehouse along with other goods of Genie Craft. The Bank also knew that the warehouse company was holding some of the merchandise for General Electric Credit Corporation. The Bank took no action to see that it was made a loss payee, beyond asking one of Genie Craft's officers to obtain a certificate of insurance, which the officer promised to do, without specifying what the certificate would show. No certificate was ever furnished.

8. By an endorsement effective October 21, 1957, the name of the insured under the policy was changed from "Michael A. and Ada T. Lombardi, t/a Home Sewing Machine Company (co-ownership) and Lawrence Warehouse Company, and General Electric Credit Corporation, as their interests may appear", to "Genie Craft Corporation, Home Company Division". No loss payee clause was added making the warehouse company or anyone else a loss payee. At the time of the fire there was no loss payee clause.

9. In September and October 1957 Genie Craft made a public offering of $200,000 of its stock, of which only $15,000 to $20,000 was sold. The failure to sell more stock gave the Bank considerable concern. In October 1957 the Bank received a statement from the warehouse company showing that Genie Craft's warehouse charges for prior months were past due. In November 1957 the Bank knew that efforts had been made to sell the business to the Dalton Finance Company in order to salvage as much as possible but that Dalton was unwilling to take it over. On December 5, 1957 , after refusing to make any further loans to Genie Craft, the Bank loaned $25,000 to five of the officers and directors of Genie Craft, who immediately deposited the funds to Genie Craft's account in the Bank. This entry was dated November 30, 1957 , on Genie Craft's bank deposit book and on its cash receipts Ledger to make it appear that the account was not overdrawn. Later in December 1957 the Bank was informed that Genie Craft did not have enough money to keep its collection force going. The Bank knew that if the collections were not made, the accounts of Genie Craft which the Bank held as collateral for its loans would become stale and lose much of their value.

10. Genie Craft became insolvent on December 15, 1957 , and remained so until it was adjudicated bankrupt on February 4, 1958 .

11. On December 26, 1957 , a fire occurred at 11 North Howard Street which destroyed substantially all the goods covered by the pledged warehouse receipts, as well as other property of Genie Craft. Before the fire, a portion of the goods represented by the warehouse receipts pledged to the Bank had been released to Genie Craft, with the consent of the Bank; the value of the remaining goods covered by the pledged receipts was $30,050.91.

The Bank learned of the fire on December 27, 1957 , and on or before that day the Bank knew or had reasonable cause to believe that Genie Craft was insolvent.

13. On December 31, 1957 , Genie Craft executed and tendered to the Bank a written assignment of the first $22,500 payable by the insurance company on account of the fire loss. The assignment was intended to replace the security which the Bank had lost by reason of the fire. The form of the assignment was not acceptable to the Bank, so on January 3, 1958 , Genie Craft executed and delivered to the Bank another assignment, which recited the Bank's version of the pledge transactions and stated that, inadvertently, the Bank had not been made a loss payee under the policy. The Bank mailed the second assignment to the Springfield Fire and Marine Group, and Empire State Insurance Company, which had reinsured Michigan Fire, accepted the assignment on January 14, 1958 . For details, see 195 F. Supp. at 228, n. 1, and 226. See also discussion in 183 F. Supp. at 535, 536. It is now conceded that Empire acted as agent of Michigan in accepting the assignment.

14. Each of the assignments referred to in Finding 13, given by Genie Craft to the Bank, was (1) a transfer of its property, (2) to or for the benefit of the Bank, its creditor, (3) for and on account of an antecedent debt, (4) at a time when Genie Craft was insolvent, (5) within four months of bankruptcy, and (6) which would enable the Bank to obtain a greater percentage of its debt than some other creditor of the same class.

15. On January 24, 1958 , the Bank sold the accounts receivable of Genie Craft which had been pledged to it. See Finding 3. After applying against Genie Craft's loans (1) the proceeds of that sale and (2) the security deposits in which residual rights had been assigned to Genie Craft, the balance due the Bank on the Genie Craft loans was $25,866.24, which has not been paid to the Bank.

16. Against this balance the Bank still holds as security the proceeds of the time certificates of deposit made by Pinson ($20,000) and Terres ($6,000) and $478.36 belonging to Genie Craft, $26,478.36 in all. The Bank decided not to apply the proceeds of these certificates to the indebtedness of Genie Craft. Instead, the certificates of deposit of Pinson and Terres were cashed and are now held by the Bank in a special account entitled "Genie Craft Corp. Loan Account". There is no agreement between the Bank and Pinson and Terres with respect to what will happen to their security deposits of $26,000 held by the Bank in the event the Bank's claim for $22,500 in this interpleader case is unsuccessful. ²

Conclusions of Law and Discussion

A. The pledge of the warehouse receipts was in legal effect a perfected, choate pledge of the merchandise covered by the warehouse receipts issued to the Bank. 56 Am. Jur. (Warehouses §72) p. 355; In re P. J. Sullivan Co., S. D. N. Y., 247 Fed. 139, 155, aff'd, 2 Cir., 254 Fed. 660 (1918). Cf. In re Spanish American Cork Products Co., 4 Cir., 2 Fed. 2d 203, 204 (1924), cert. den. 266 U. S. 634; and Barry v. Lawrence Warehouse Co., 9 Cir., 190 F. 2d 433, 435 (1951).

B. The lien created by that pledge was superior to the federal tax lien assessed against Genie Craft on November 22, 1957 , and recorded in the District of Columbia on February 11, 1958 . United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 87 et seq. (1963).

In any event, a prior tax lien would merely take precedence over junior liens, and would not enable the Trustee in Bankruptcy to avoid otherwise valid and choate junior liens. See discussion in 183 F. Supp. at 536, 537. The validity of that ruling is not altered by later cases cited by the Trustee.

C. The lien created by the pledge, however, did not become an equitable lien on the proceeds to the policy of insurance enforecable against the Trustee in Bankruptcy of Genie Craft. Sec. 60a(6) of the Bankruptcy Act, as amended in 1950, 11 U. S. C. A. 96a(6), discussed below. For a full discussion of the 1938 and 1950 amendments, see Collier on Bankruptcy, 14th ed., vol. 3, par. 60.50, p. 972 et seq.

The authorities cited by the Bank indicate that if bankruptcy had not intervened, the lien would ordinarily be considered to have been transferred to the proceeds of the policy as an equitable lien. California Ins. Co. v. Union Compress Co., 133 U. S. 387, 10 S. Ct. 365 (1890); Ferro v. Citizens' National Trust & Savings Bank, 44 Cal. 2d 401, 282 P. 2d 849, 852-54 (1955). And if the proceeds had come into the hands of the warehouse company as a loss payee, it would have held the proceeds in trust for the Bank, as it had held the merchandise. Century Insurance Company v. First Nat. Bank, 5 Cir., 102 F. 2d 726, 728-29 (1939); American Eagle Fire Ins. Co. v. Gayle, 6 Cir., 108 F. 2d 116, 119 (1939); In re Podolsky, 3 Cir., 115 F. 2d 965, 967 (1940); and United States v. Globe & Rutgers Fire Ins. Co., N. D. Tex., 104 F. Supp. 632, 635 (1952), aff'd, 5 Cir., 202 F. 2d 696 (1953).

But since the 1938 and 1950 amendments to Sec. 60 of the Bankruptcy Act, such an equitable lien as the Bank contends that it has on the proceeds of the insurance policy cannot be enforced against the Trustee in Bankruptcy, where its enforcement would result in a preference to the Bank. Sec. 60a(6), 11 U. S. C. A. 96a(6), now states: "The recognition of equitable liens where available means of perfecting legal liens have not been employed is hereby declared to be contrary to the policy of this section."

Cases decided since 1950 indicate that the statute means what it says. Eberly v. Dudley, 9 Cir., 314 F. 2d 8, 14 (1962); Republic National Bank of Dallas v. Vial, 5 Cir., 232 F. 2d 785 (1956); Cumberland Portland Cement Co. v. R. F. C., 140 F. Supp. 739, 753 (1953), aff'd sub nom. Ralph Rogers & Co. v. R. F. C., 6 Cir., 232 F. 2d 930. So does the legislative history. U. S. Code & Cong. Serv., 81st Cong., 2d Sess., 1950, Vol. 2, pp. 1985, 1989.

The decisions which have allowed equitable liens on the ground that no means of perfecting legal liens were available only serve to emphasize the rule. In re William P. Bray Co., D. Conn. , 127 F. Supp. 62, (1954); Danais v. M. De Matteo Const. Co., D. N. H., 102 F. Supp. 874 (1952). Joseph F. Hughes Co. v. Machen, 4 Cir., 164 F. 2d 983 (1947), dealt with a right of setoff, an entirely different matter.

In the instant case the Bank had "available means" of perfecting a legal lien--by requiring that the Bank be made a loss payee under the policy. Through carelessness on the part of the Bank those means were not employed. See Findings of Facts Nos. 7 and 8. Whether the failure of Genie Craft to have the Bank made a loss payee was inadvertent or not, is unimportant. There were means available to the Bank to secure a legal lien on the proceeds before it knew of the insolvency of Genie Craft.

No doubt, as the Bank argues, ³ the assignments prepared after the fire were given to replace the security which the Bank had lost. But they were given only one month before bankruptcy, after the fire, when the Bank knew Genie Craft was insolvent.

The cases decided before 1938, cited by the Bank, are no longer controlling. Collier, op. cit., par. 60.50, at p. 975 et seq.

D. The assignments dated December 31, 1957, and January 3, 1958, given by Genie Craft to the Bank, where preferential transfers made within four months of bankruptcy, at a time when the Bank knew or was reasonable chargeable with knowledge that Genie Craft was insolvent, and are therefore voidable by the Trustee in Bankruptcy.

All the elements of a voidable preference exist. The Court is satisfied that the Bank not only had reasonable cause to believe that Genie Craft was insolvent on December 29, 1957, and January 3, 1958, but that it actually knew Genie Craft was insolvent not later than December 27, 1957, and probably some weeks earlier. The Bank's principal argument, that the assignment was not given "for or on account of antecedent debt", is answered by the facts and by the discussion under Conclusion C, above.

E. The Trustee contends that Pinson and Terres are the real parties in interest, not the Bank. The evidence shows that the Bank still holds the deposits of Pinson and Terres in the amount of $26,000, as collateral security for the balance of $25,866.24 due the Bank from Genie Craft, for which the Bank has a general claim against Genie Craft's bankrupt estate. If the Bank applies the deposits to the satisfaction of the claim, Pinson and Terres would take over the Bank's claim. Equitably, one general claim for the balance due the Bank is allowable. If the Court had held that the assignment was not a voidable preference and that the Bank had a lien on the proceeds of the policy as collateral security for its debt, a question of marshaling might have arisen, which does not now exist.

F. The Bank's alternative argument, based on the broad pledge agreement of April 18, 1957, see Finding of Fact No. 4, is answered by the 1938 and 1950 amendments to Sec. 60, 11 U. S. C. A. 96, discussed under Conclusion C, above.

Settle order within ten days.

¹ Union Trust Company is the successor to Munsey Trust Company, of Washington ; they will be referred to herein collectively as "the Bank."

² Counsel appearing for the Bank were retained by Pinson and Terres, with whom they have a fee arrangement. Counsel have no arrangement concerning either fee or costs with the Bank.

³ Brief, pp. 17, 18.

 

 

[62-2 USTC ¶9795]Lumbermen's Underwriting Alliance, a Reciprocal Inter-Insurance Exchange, Plaintiff v. Fall Creek Box & Manufacturing Co., a corporation; The First National Bank of Kemmerer, a National Banking Association; The Portland Machinery Company, a corporation; et al., Defendants, and The United States of America, Intervenor

U. S. District Court, Dist. Ore., Civil No. 61-502, 10/16/62

[1954 Code Sec. 6323]

Federal tax liens: Fire insurance fund: Validity against conditional vendor and--The District Court held that the government's tax lien on fire insurance proceeds ranked third in order to the equitable lien of a conditional vendor and the mortgagee lien of a bank. The equitable lien of the conditional vendor upon the insurance fund was in lieu of its reserved legal title to machinery sold to the deficient taxpayer under the conditional sales contract, and this lien was superior to that of both the bank and the government. The bank's mortgage lien was superior to the government's tax lien and included all expenses reasonably and necessarily incurred as attorney's fees and costs in obtaining satisfaction of the taxpayer's indebtedness to the bank.

Stephen W. Matthieu, M. E. Tarshis, 308 Pacific Bldg., Mautz, Souther, Spaulding, Kinsey & Williamson, Kenneth E. Rob erts, Tenth Floor, Board of Trade Bldg., Portland 4, Ore., for plaintiff. Darling, Vonderheit & Hershner, James L. Hershner, 260 East 11th Ave., Eugene, Ore., Clarence R. Wicks, Hart, Rockwood, Davies, Biggs and Strayer, 1410 Yeon Bldg., Portland 4, Ore., Loomis, Lazear & Wilson, Edward T. Lazear, 202 East 18th St., Cheyenne, Wyo., for defendants. Sidney I. Lezak, Acting United States Attorney, Roger G. Rose, Assistant United States Attorney, United States Courthouse, Portland 7, Ore. , for intervenor.

Opinion

Basis of Bank's Claim

EAST, Judge:

The defendant Fall Creek Box & Manufacturing Co. (Fall Creek), being the owner of certain sawmill properties situate in Lincoln and Sublette Counties, Wyoming, on March 19, 1960 mortgaged the same to the defendant The First National Bank of Kemmerer (Bank), of Kemmerer, Wyoming, to secure the payment of Fall Creek's promissory note to the Bank in the amount of $200,000, together with interest thereon at the rate of 51/2 per cent per annum on 90% of such unpaid principal, payable in installments until fully paid. Among other things, Fall Creek agreed in said mortgage to "continuously keep in full force and effect in reliable insurance companies . . . fully covered fire insurance with loss payable clause in favor of the mortgagee . . ." and accordingly secured from the plaintiff Lumbermen's Underwriting Alliance such fire insurance in the amount of $251,000 for a three-year period from January 7, 1960. The mentioned policy carried loss payable caluse in favor of the Bank as mortgagee. In connection with the Bank's position, it is important to note that Fall Creek's promissory note provided, inter alia:

"The term 'indebtedness' as used herein shall mean the indebtedness evidenced by this Note, including the principal, interest, and expenses, whether contingent, now due or hereafter to become due. . . ." [Italics supplied.]

and further, that Fall Creek

"shall pay all expenses of any nature, whether incurred in or out of court, and whether incurred before or after this Note . . ., including but not limited to reasonable attorney's fees and costs, which payee may deem reasonable or proper in connection with the satisfaction of the indebtedness. . . ."

On or about September 17, 1961 , a substantial portion of the property insured under the above-mentioned policy and mortgaged to the Bank and all of the property sold to Fall Creek under the later described conditional sales contract by Machinery, was destroyed by fire. Thereafter, the loss resulting from the fire was adjusted between the plaintiff and Fall Creek to be $195,000, with an unearned returnable premium to Fall Creek in the amount of $931.05. Plaintiff has interpleaded the aggregate of said amounts in these proceedings.

Basis of Machinery's Claim

On June 7, 1960, the defendant The Portland Machinery Company (Machinery) sold to Fall Creek certain power lathe machinery, pursuant to a conditional sales contract, for the total purchase price of $6,228, payable with a down payment of $2,048 and the balance in installments. Said contract provided, inter alia, that legal title to the property should remain in Machinery until the full payment of the purchase price and that Fall Creek

"shall keep the same insured against fire, . . . to the extent of (Machinery's) claim . . ., with loss payable clause in favor of (Machinery)."

Upon delivery of the machinery, Fall Creek installed the same in its sawmill. On August 8, 1960 , Fall Creek made a payment to Machinery in the amount of $2,048, which Machinery claims to have been applied towards the payment of its open account with Fall Creek rather than towards the payment of the purchase price under the conditional sales contract. No further payments were made by Fall Creek to Machinery. The above-mentioned policy of fire insurance did not carry a loss-payable clause in favor of Machinery.

Basis of Government's Claim

The intervenor, United States of America (Government), through the District Director of Internal Revenue, made assessment against Fall Creek for various items of unpaid federal revenue in the aggregate of $24,588.69, and the Government's lien for such unpaid taxes was perfected as of October 6, 1961 .

Issues to Be Determined

The claims of all claimants to the interpleaded fund, except as to the Bank, Machinery and Government, have been settled and various sums have been paid out of the fund as costs and attorney's fees for plaintiff and an advancement towards the Bank's claim, with which we are not concerned, and there remains in the fund $33,374.20. The Bank and Machinery concede that the Government has, under its tax lien, the prior claim to $931.05 (return of unused premium) of the fund. There is to be determined the order of priority of the liens of Machinery, Bank, and Government, respectively, upon the fund.

Machinery's Contention

Machinery contends it has the prior and superior lien upon the balance of the fund for the full amount of the unpaid purchase price on its contract in the aggregate of $7,082.61.

Bank's Contention

The Bank contends it has the prior and superior lien upon the fund for the unpaid principal of the Note in the amount of $22,519.33, together with interest aforesaid, from June 13, 1962 , also, for such sum as the Court shall adjudge as reasonable attorney's fees for establishing its claim against the fund, together with its costs in these proceedings.

Government's Contention

The Government contends that its lien is inferior to the lien of the Bank for unpaid interest and principal upon the mortgage, but contends it is superior to the Bank's claim for attorney's fees and costs and to Machinery's lien, if any.

Adjudication of Machinery's Claim

This Court is of the opinion from the evidence that:

(a) When Fall Creek made the $2,048 payment to Machinery, it gave no direction as to which of its accounts of indebtedness to Machinery the payment should be applied.

(b) Machinery did factually and rightfully under the prerogative of a creditor in the absence of any direction by the debtor, forthwith upon receipt of the $2,048 payment, apply it upon its books of accounts toward the payment of its open account for goods sold to Fall Creek rather than towards the payment of the purchase price under the conditional sales contract. Fatland v. Wentworth & Irwin, 149 Or. 77.

(c) There was unpaid upon the sales contract $7,082.61 at the time of trial, and the fair, reasonable installed market value of the power lathe machinery sold under the conditional sales contract and destroyed by the fire was in an amount of not less than the amounts unpaid said contract.

(d) The power lathe machinery covered by the conditional sales contract was considered by the fire loss adjuster for the plaintiff and its reasonable, installed market value was included and a part of the adjuster's determination of the aggregate value of Fall Creek's property destroyed by fire and that the agreed adjustment and insurance moneys payable by plaintiff and interpleaded herein included such value.

Therefrom, and by reason of Fall Creek's promise to Machinery to keep the property sold insured against loss by fire, the Court concludes that Machinery has an equitable lien upon the fund interpleaded herein to the extent of its loss.

It would seem that Fall Creek's initial right, title and interest in the power lathe property was subject to Machinery's reserved legal title and that neither Bank nor Government can acquire any greater rights than Fall Creek enjoyed just because a cash fund stands in lieu of the destroyed property.

Under this doctrine, the equitable lien upon the insurance fund stands in lieu of Machinery's legal title to the power lathe machinery as security for the payment of the amounts due under its contract aforesaid, retains the same priority, and is superior and prior to both the Bank's mortgage lien and the Government's tax lien. 5 Appleman, Insurance Law and Practice, 489; ann. 92 A. L. R. 559; United States v. Anders Contracting Co. [53-1 USTC ¶9412], 111 F. Supp. 700 (D. S. C. 1953).

Adjudication of Bank's Claim

What has been said and concluded in establishing Machinery's lien as superior, can also be said and concluded in like fashion and rationale to establish that Bank's mortgage lien is superior to Government's tax lien upon the fund. The question is, what items, in addition to the conceded unpaid principal and interest, to to make up the amount of Fall Creek's indebtedness that is secured by Bank's superior mortgage lien? It seems undeniable that it has been necessary for the Bank to incur some "expenses . . . including but not limited to reasonable attorney's fees and costs . . ." in order to obtain "satisfaction of the indebtedness" secured by its mortgage lien in these proceedings. This was the agreed measure of establishing Fall Creek's ultimate liability to the Bank upon the promissory note before as well as after the fire, and before the perfection of Government's tax lien. The Government is bound by that measure. Rushing v. Saboe, 130 Ore. 522, 529. It is only because of the Government's fixity in its position and claim that the Bank's "expenses" for attorney's fees go from normal to full dress proportions.

With apparent division with the Second Circuit (In Re New Haven Clock & Watch Co. [58-1 USTC ¶9458], 253 F. 2d 577 (1958)) and the Fourth Circuit (United States v. Bond [¶60-2 USTC ¶9532], 279 F. 2d 837 (1960)), the present rule on the question in the Ninth Circuit can best be expressed in the language of United States v. Sampsell [46-1 USTC ¶9186], 153 F. 2d 731 (9th Cir. 1946), as follows, at p. 736:

"The government contends that the United States tax liens were not to be subordinated to the attorney's fees awarded to the mortgagee. Attorney's fees are a part of the secured debt and are entitled to be collected as such. There is no claim that the fees in question are not made a part of the debt or that they are not secured by the same lien, but only that the principal then due on the mortgage at the time the government lien attached may not be increased by attorney's fees for services to be performed in the future by any doctrine of 'relation back.' There is no need, however, for such a doctrine to support a lien for attorney's fees. Attorney's fees as well as interest are provided for in the obligation and the reasoning which supports the interest claim applies in the provision for attorney's fees. In Security Mortgage Co. v. Powers, 1928, 278 U. S. 149, 156, 49 S. Ct. 84, 86, 73 L. Ed. 236, the attorney's fees were held to be a part of a mortgage debt even though they accrued after adjudication, the court saying, 'The contingent obligation to pay attorney's fees was a part of the original transaction.'" See also, United States v. Halton Tractor Co. [58-2 USTC ¶9774], 258 F. 2d 612 (9th Cir. 1958).

In Sampsell, the mortgage indebtedness had matured and the mortgagee had been adjudicated a bankrupt prior to the perfection of the Government's tax lien. The trustee in bankruptcy, in conformity with the agreement of all lien claimants, sold the assets of the bankrupt and the claims of lien with their respective priorities were reserved against the proceeds of the sale. The attorney's fees ultimately allowed were incurred after the attachment of the government's lien. The rationale of Sampsell applies with equal force to the conversion of the mortgaged property to cash by fire insurance, as distinguished from judicial sale.

The District Court for the District of Montana relies upon and follows Sampsell. Streeter Bros. v. Overfelt [62-1 USTC ¶9270], 202 F. Supp. 143 (1962). Two courts postdating Bond and New Haven Clock, supra, applying the Sampsell rule, are United States v. Pioneer American Insurance Co., 357 S. W. 2d 653 (Ark. 1962) and United States, Intervenor v. Costas, 142 So. 2d 699 ( Ala. 1962). See also Commercial State Bank v. Curtis, 109 P. 2d 558, 7 Wash. 2d 296 (1941); White v. Blair, 234 Ala. 119, 173 So. 493 (1937).

The Court concludes that the indebtedness evidenced by Fall Creek's promissory note and secured by Bank's mortgage lien includes as a part thereof all expenses reasonably and necessarily incurred as attorney's fees and costs in obtaining satisfaction of that indebtedness and therefore the Bank's mortgage lien is superior to the Government's tax lien.

Adjudication of Government's Claim

It follows from the foregoing, and the Court concludes, that the Government's tax lien ranks third in order to Machinery's equitable lien and Bank's mortgage lien, respectively, in that order.

Counsel for the parties are requested to submit to the Court on or before 15 days from the date hereof findings, conclusions and order of payment consistent with the foregoing determination of the order of priorities of the three claims, in form agreeable among them.

 

 

[63-1 USTC ¶9235]The Home Insurance Company, and American Central Insurance Company, Plaintiffs v. B. B. Rider Corporation, H M T Corporation, Austin Nichols & Co Incorporated, M. Dietz & Sons, Inc., Majestic Wine & Spirits, Inc., General Home Service Association, Ira J. Sarasohn, Roy N. Sarasohn and David E. Friedman Individually and T/A Sarasohn & Co., Michael J. Allone, Joseph Rilli, Gordon Bass, Samuel Ehrenkranz and the United States of America, Defendants

U. S. District Court, Dist. N. J., Civil Action 261-61, 212 FSupp 457, 1/14/63

[1954 Code Sec. 6323]

Lien for taxes: Priority over other liens: Bankrupt taxpayer: Fire insurance proceeds.--The Government's lien for taxes was perfected before the taxpayer's bankruptcy and prior to the liens of other claimants to the proceeds of a fire insurance policy. Since the Government's lien was for more than the amount of the insurance proceeds it was unnecessary to establish the priority rights of those with inferior claims.

Harold D. Feuerstein, 60 Park Place , Newark 2, N. J., for plaintiff. David M. Satz, Jr., United States Attorney, by F. Michael Caruso, Assistant United States Attorney, Newark, N. J., Arnold Miller, Department of Justice, Washington 25, D. C., for United States of America; Sheldon Schachter, 1180 Raymond Blvd., Newark, N. J., for Paul R. Kleinberg, Trustee in Bankruptcy of H M T Corp.; Benjamin Coe, 24 Commerce St., Newark, N. J., for Sarasohn & Co., et al.; Michael G. Alenick, 744 Broad St., Newark, N. J., for Austin Nichols & Co., Inc.; Jacob Lubetkin, by Sherwin Drobner, 9 Clinton St., Newark, N. J., for M. Dietz & Sons, Inc.; James Del Mauro, by Joseph Pecora, 195 Clifton Ave., Newark, N. J., for General Home Service Assn.; Doyle & Galvin, by Joseph Cullen, for B. B. Rider Corp.; Arthur W. Herrigel, 1060 Broad St., Newark, N. J., for Gordon Bass.

Opinion

WORTENDYKE, District Judge:

The complaint in this action brings it within the jurisdiction conferred upon this Court by the provisions of 28 U. S. C. §1335.

Some time prior to January 1, 1960 each of the two plaintiff fire insurance companies (Home and American Central) issued a fire insurance policy to H M T Corp. (T/A Jada Club).

A fire occurred on January 1, 1960 in the insured property, and the loss under each of the two fire policies was ultimately adjusted to the respective amounts of $16,250.33 under the Home policy, and $8,152.73 under the American Central policy, a total of $24,403.06.

Because of claims made by the respective defendants to these funds, the plaintiffs instituted this section for interpleader on April 7, 1961 , making the insured named in the policy, and other claimants, parties defendant. The United States of America , by reason of its tax claims, intervened. Defendant H M T Corp., the insured tax payer, was adjudicated a bankrupt on May 1, 1961 and by order of May 2, 1962 , its Trustee in bankruptcy was admitted as a claimant-defendant.

By this Court's order of October 25, 1961 , filed on October 27, 1961 , plaintiffs were authorized to deposit the adjusted amounts due under their two policies with the Clerk of this Court, and a counsel fee of $350 plus $57.30 costs were allowed to their attorney. There remains in the Registry of this Court the net sum of $23,995.76.

By written instrument dated January 5, 1960, signed by the President of the insured bankrupt corporation, the services of Sarasohn & Company (Ira J. Sarasohn, Roy N. Sarasohn and David E. Friedman) were retained to adjust the fire loss in consideration of an agreement by the insured to pay to said adjusters 10% of the amount of the adjusted loss when paid by the insurers. These adjusters claim a prior lien upon the insurance proceeds in the amount of $2,440.30 for their services and expenses, upon the theory that such services created the fund which is the subject of the present interpleader.

[Claims Asserted]

M. Dietz & Sons, Inc. claims as a conditional vendor of chattels to the insured, under a contract recorded April 16, 1959 , by virtue of which it asserts an equitable lien against the fund in the amount of $176.00.

Defendant B. B. Rider Corp. claims priority upon the fund by virtue of its conditional sale to the insured of air conditioning equipment under contract dated June 8, 1959, upon which it occured a judgment on June 16, 1960. That claim amounts to $3,071.87.

Defendant Austin Nichols & Co., Inc. makes claim against the fund for $1,090.22 on its judgment recovered against the insured on April 7, 1960 , and levy thereunder on April 8, 1960 .

Defendant General Home Service Association bases its claim upon a chattel mortgage for $1,800.00 dated December 10, 1959 . This claimant alleges that its interest in the fund is predicated upon an alleged "losspayable endorsement" upon the fire insurance policies to the extent of the lien of its chattel mortgage; endorsements and chattel mortgage bearing same date.

Defendant Gordon Bass claims upon a judgment entered October 17, 1960 , and execution thereunder, in the amount of $736.58.

Although an answer was filed on behalf of defendant Joseph Rilli, in which he asserts a claim in the amount of $1,750.00, for which amount the H M T Corp. executed an assignment on January 29, 1960 of the moneys due or to become due to it under the fire insurance policies, no appearance in behalf of this claimant was made when the case was moved to trial.

So also in the case of defendant Michael J. Allone, in whose answer he claims to have recovered a judgment on April 8, 1960 in the amount of $2,195.67 including costs, on which execution issued. No appearance was made in behalf of this claimant at the trial.

We need not consider defendants Samuel Ehrenkranz or Majestic Wine & Spirits, Inc., named in the complaint, as they failed to appear in the cause, no answer being filed in behalf of either.

[Tax Lien]

The Government claims priority against the fund with respect to its claims for withholding, and excise taxes, aggregating $51,659.57, assessed on and prior to August 28, 1959, and has moved the Court for summary judgment to that effect, in that amount. This motion was opposed by the Trustee in Bankruptcy of taxpayer-debtor, H M T Corp., as well as by Austin Nichols, B. B. Rider, Dietz, General Home Service and Sarasohn. Because of the imminence of the trial date (scheduled for the day next succeeding that on which oral argument was heard on the motion) and because of the challenges to the amount of the Government lien, I determined that the case was appropriate for plenary trial, which was held on the appointed date.

The transcript of the pretrial conference held in this case on June 12, 1962 discloses that the only question to be decided is the "validity of the Government's priority rights."

In support of its motion for summary judgment, the Government annexed to its moving papers an affidavit by the Acting Director of Internal Revenue in Newark, New Jersey, certifying, as of October 25, 1962, the following schedules of tax notices, payments and credits, filings of tax lien notices, and balances due, viz.:

                                    Withholding                 Excise                  Excise

                                        Taxes                  Taxes                   Taxes

                                      4th 1/4

Taxable period ..........                1955         5/1/54-4/30/58         5/1/58-12/31/58

Date of assessment ......             2/29/56                8/28/59                 8/28/59

Date first notice .......             3/20/56                 9/4/59                  9/4/59

Payments and Credits ....           $1,105.00

Notice of Lien filed ....             10/5/56                11/9/59                 11/9/59

Balance Due .............             $ 70.29             $45,404.92               $5,284.64

 

26 U. S. C. §6321 (1954 Code) provides that the amount of any tax not paid, after demand, by a person liable to pay the same, becomes a lien in favor of the United States upon all property and rights to property belonging to the taxpayer. The following section of the Code (§6322) provides that the tax lien arises at the time the assessment is made, but §6323 provides that such lien shall not be valid against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed.

The Trustee in Bankruptcy of the H M T Corp. contests the amount of the Government liens as reflected in the District Director's affidavit, to which reference has been made. It should be noted that the affidavit referred to was filed in this Court in support of the Government's motion for summary judgment, and, therefore, is not probative in the case as it stands in this posture. Nor did the Government introduce any official records to establish the amount of the Government liens. However, the Government, upon the trial, called one, Kaplan, an Excise Tax Agent, who conducted the investigation as a result of which the assessments were made. It is my opinion that his testimony establishes the Government lien in the amount of $45,404.92. ¹ Mr. Kaplan further testified that in the course of the investigation he had various conversations with Jerry Dimeola, an officer of H M T, who was also the manager of the Jada Club, who informed him that during the period for which the taxes were assessed the Club employed certain entertainers. From these conversations he was able to develop a picture of how the Club operated; and he used this information in conjunction with the records furnished by the accountant for the corporation in arriving at a tax assessment. It was his opinion that the entertainment utilized subjected the corporation to the 20% excise tax on such establishments, in effect during that period. Subsequently, he filled out an income tax return which Mr. Dimeola signed without objection. The trustee argues here that the presumption of validity which attaches to a tax assessment has been dissipated by the Agent's testimony, and that the Government has failed to establish its claim. Although it is true that by adducing oral testimony disclosing the manner in which the assessment was arrived at, the Government may lose the benefit of the presumption, In re Swan, 2 Cir. 1936, [36-1 USTC ¶9120] 82 F. 2d 160, the evidence in this case does not impel me to that conclusion. The Trustee relies upon the case of In re Oxford Associates, D. C. N. J. 1962, [62-2 USTC ¶9740] 209 F. Supp. 242, in which the Referee refused to allow a Government tax lien in the amount of $72,500 which refusal was affirmed by Judge Augelli of this Court. There the bankrupt was a builder who constructed an apartment house, and it was the information obtained and relied upon by the Government in determining Oxford 's profit as a result of this job, that the Court found inadequate. The Agent there discovered that a building permit estimated the cost of construction of the apartment house to be a million dollars. The Government considered this amount to be that which the builder received for his services, 15% of which it estimated to be net profit, resulting in an estimated net cost of construction of $850,000. The Agent testified that he had no knowledge of construction costs, and that his use of the 15% profit factor "was predicated on his 'past experience as a Revenue Agent in ascertaining what might be the gross profit or net profit to be derived from a one job construction of this type.'" p. 244. In that case, as in ours, an absence of records handicapped the Government authorities (in the case at bar the books of the taxpayer were lost in an earlier fire in December, 1958), but the Court in Oxford went on to mention a number of other avenues of investigation that might have been utilized in order to arrive at a more accurate and equitable computation. In the case at bar, it is my opinion that the Government used the best means available to it in ascertaining H M T's tax liability.

[Government's Argument]

The Government relies for support of its asserted priority upon United States v. Eiland, 4 Cir. 1955, [55-1 USTC ¶9487] 223 F. 2d 118. The lien in that case was claimed upon an indebtedness owed to the taxpayer by a third party for which levy was made upon the debtor. The taxpayer was adjudicated in bankruptcy, and the debtor paid the indebtedness to the trustee. Two questions were presented: (1) was the Government's lien claim defeated by failure to file notice with the County Clerk ; and (2) was the Government's claim postponed to admin istration and wage claims in the bankruptcy. Each question was answered in the negative. The Court held that the levy made by the Government under its tax claim upon the money owed to the taxpayer by the bankrupt's debtor effected (p. 121) "what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt."

What was the right, title and interest, if any, of the insured taxpayer in the presently involved insurance policies and their proceeds prior to the fire which occurred on January 1, 1960 ? Each policy was a contract by the terms of which, in consideration of the premium paid by the insured, the insurer agreed to indemnify the insured against loss by fire within the period fixed by the policy. Such a loss might never have occurred; in which event there would have been no policy proceeds to which the insured might assert any right, title or interest. The taxes in question here were assessed and the notices thereof filed prior to the occurrence of the fire. The claims of Rider and Dietz, under their respective conditional sales contracts, and of General Home under its chattel mortgage, arose prior to the fire, and the interest of General Home was allegedly recognized by the insurers by endorsements upon the policies.

In construing §6321 of Title 26, In re Halprin, 3 Cir. 1960, [60-2 USTC ¶9564] 280 F. 2d 407, held that prior to the time when a party to a bilateral contract performs his undertaking and thereby subjects the other party to an obligation to pay for that performance as agreed, the contract is wholly executory and the promise to pay is contingent upon whatever performance was bargained for in exchange. Only by conferring an agreed equivalent benefit can the promisee acquire an enforceable right to the promised payment. Where the is entirely uncertain whether the conditional promise to pay will ever become unqualified and enforecable, the interest of a party to the contract is purely contingent, and therefore not "property and rights to property" to which a tax lien under §6321 could attach. United States v. Long Island Drug Co., 2 Cir. 1940, [41-1 USTC ¶9140] 115 F. 2d 983. Until the fire occurred no lien could arise in favor either of the Government or of any other claimant upon the interest, whatever it was, of the taxpayer in either of the fire insurance policies.

[Property Rights]

The tax lien statute does not create property rights, but merely provides for the attachment of the lien to rights created under applicable State law. United States v. Bess, 1958, [58-2 USTC ¶9595] 357 U. S. 51; Wolverine Insurance Co. v. Phillips, D. C. Iowa, 1958, [58-2 USTC ¶9765] 165 F. Supp. 335, 353. The fire insurance policies were merely promises to indemnify upon the possible happening of a future event. No chose in action arose in favor of the insured until the fire occurred. However, prior to the fire, and while the insurance was in force, the Government had taken all steps necessary to perfect a tax lien upon all property of the insured. The moment the fire occurred, the agreement to indemnify embodied in the policies ripened into a chose in action in favor of the insured, which constituted "property or right to property" to which the previously inchoate tax lien immediately attached. Citizens National Trust & Savings Bank of Los Angeles v. United States , 9 Cir. 1943 [43-1 USTC ¶9426], 135 F. 2d 527.

Defendant General Home Service Association held a chattel mortgage to secure the payment of $4,800.00 on personal property of the insured which was destroyed by the fire, and it is claimed that each of the fire insurance policies bore an appropriate endorsement committing the insurer to pay, in the event of destruction by fire, proceeds of the policies to the mortgagee to the extent of its interest therein. These "loss-payable endorsements", if they existed, might constitute evidence that the fire insurance policy contracts were made, not only for the benefit of the named insured, but as well for the benefit of the chattel-mortgagee, who, when the fire occurred, would acquire a chose in action for so much of the proceeds of the policies as represented the values of the chattels constituting the security described in the mortgage. Rent-a-Car Co. v. Globe & Rutgers Fire Ins. Co., 148 A. 252, 158 Md. 169; Aetna Ins. Co. v. Thompson, 40 A. 396, 68 N. H. 20. The critical issue between the Government and the mortgagee is whether the entire insurance proceeds constituted property of the insured, within the definition of 26 U. S. C. §6321, or whether the alleged endorsements on the policies in favor of the chattel mortgagee have the effect of reducing the property rights of the insured, pro tanto. It is apparent that a debtor-taxpayer may prevent the attachment of Government liens by divesting himself of contingent rights to property before they actually vest, for no Government lien attaches to such contingent rights. See In re Halprin, supra, and United States v. Long Island Drug Co., supra. There appears in the New Jersey decisions, a distinction between the rights acquired by a mortgagee dependent upon a difference in insurance policy endorsement language. In Martin v. Franklin Fire Insurance Co., 1875, 38 N. J. L. 140, the Court had before it a policy of fire insurance which had written on its face, as revealed in defendants' declaration, "Loss if any, payable to Garrett G. Vreeland as mortgagee." The particular question confronting the Court was whether or not the law suit could be maintained by the mortgagor, the owner of the policy, in view of the endorsement. The Court answered in the affirmative, notwithstanding the fact that (p. 142) "the person to whom the loss is made payable be a mortgagee, (because) the contract * * * is with the owner, for the insurance of his property, and not with the mortgagee for the insurance of his interest. * * * The direction to pay the sum in which the insurance was effected to the mortgagee, in case of a loss, is collateral to the principal contract and is not an assignment of the policy.

"The legal effect of such a clause in favor of a third person in a policy, in terms between the insurer and the owner, is that of a direction in advance as to the mode of payment, which when made, is performance of the contract in the manner assented to by the insured, and discharges the obligation pro tanto."

In Reed v. Firemen's Insurance Co., E & A 1911, 81 N. J. L. 523, there was before the Court an insurance policy containing the language "Loss, if any, payable to David F. and James A. Reed, mortgagees, mortgage clause attached." The Court there held: "The mortgagee clause is the contract between the insurer, and the mortgagee, quite separate from the policy, yet ingrafted upon it, and to be understood by reference to the policy which renders it certain and complete."

We are left in ignorance of the language of the mortgagee clause in either of the policies here in question, because the policies are not before the Court, nor has any secondary evidence of the terms thereof been presented. The record being devoid of proof of the language employed to describe its interest in either policy, we are unable to grant priority to the chattel mortgagee, General Home Service Association, in the policy proceeds. Accordingly, the entire proceds of the insurance policies must be considered as vesting, at least momentarily, in the insured, at which time the Government's hovering liens immediately attached thereto.

On April 14, 1959 defendant-claimant M. Dietz & Sons, Inc. sold to insured-taxpayer certain store fixtures under a conditional bill of sale, by the terms of which the conditional vendee agreed to keep the chattels insured against destruction by fire. At the time of the fire, there was a balance due of $176.00 on account of the sale price, and the chattels immediately prior to their destruction were worth approximately $400.00.

On June 8, 1959 , defendant-claimant B. B. Rider Corp. sold to taxpayer-insured, under a conditional bill of sale, certain air conditioning equipment, which it installed in the premises described in the insurance policies. By the terms of the conditional sale agreement, title to the property described remained in the conditional vendor until the price had been completely paid, and the vendee agreed to insure the property against loss by fire at its own expense, but in the name of the vendor. At the time of the fire there was a balance due of $3,081.87 on this conditional sale, for which B. B. Rider recovered judgment against the conditional vendee on June 16, 1960 .

[Conditional Vendors]

As to these conditional vendors, whose property was destroyed by fire, their priority is precluded by application of the doctrine that in order to defeat a Government tax lien, one must be both prior in time and have a perfected, choate lien. In United States v. New Britain , 1954, [54-1 USTC ¶9191] 347 U. S. 81, 84, the Court enunciated the principle that a choate lien arises "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." The conditional vendors have no such perfected liens against the insurance proceeds where the property, title to which they retained pending payment was destroyed. See In re Cecire, 9 N. J. Misc. 977, where the Court held that insurance proceeds do not replace the property destroyed so as to maintain a creditor's priority established as to such property. B. B. Rider contends, however, that it has an equitable lien which arose upon the sale of its property to the insured, at which time the vendee agreed to carry fire insurance on the property in question. Assuming the existence of such lien, it is not entitled to priority over that of the Government. United States v. Morrison, 5 Cir. 1957, [57-2 USTC ¶9801] 247 F. 2d 285. B. B. Rider additionally argues that it falls within the rule of law enunciated in Insurance Company of North America v. Putney, E. D. Va. 1955, [55-2 USTC ¶9704] 136 F. Supp. 894. In that case, as in the one before me, the proceeds of two fire insurance policies were deposited with the Court pending resolution of the rights of the various parties interested therein. One policy was issued on January 8, 1952 , payable to Putney and Carreras t/a Auto Parts Warehouse, and covered the interest of the insured in all stock in trade in a specified° warehouse. That warehouse was destroyed, with all of the goods stored therein, on July 1, 1952 . The goods stored in the warehouse were not owned by the insured, but were there on consignment, and the parties had agreed that the consignee would insure the goods. In considering the respective rights to the insurance proceeds, as between the Government's tax lien (the date of which is not disclosed in the opinion) and that of the consignor, the Court held the lien of the latter to be superior, upon the ground that as between Carreras and the consignor the latter would prevail, because the Government stood "in the shoes of" Carreras. Although the last cited case is factually suggestive of that at bar, its factual differences impel me to a different legal conclusion than that reached by the Court in the Putney case.

Defendant-claimants Austin, Nichols & Co. Inc. and Gordon Bass recovered judgments against the taxpayer-insured on April 7 and October 17, 1960 , respectively, and execution was issued and levy made under each judgment upon the insured's right, title and interest in the proceeds of the fire insurance policies. These claimants are unable to achieve priority because of the well-established rule "the first in time is the first in right." United States v. New Britain, supra, at p. 85.

The lien of the United States , having attained perfection prior to the debtors' ensuing bankruptcy, does not clothe the Trustee with rights superior to those of the United States . United States v. Eiland, supra.

[Public Adjusters]

In the course of asserting its claim against the insurers upon the policies, the insured employed the services of Messrs. Sarasohn and Friedman, public adjusters, and, on January 5, 1960 , agreed to pay, for their services in adjusting the loss, 10% of the amount recovered. Clearly, at the time these adjusters were employed, the insured had already lost any right over the policy proceeds inasmuch as the Government's lien had attached thereto. However, the adjusters argue that because it was through their efforts that the fund was created, they are entitled to first priority, citing Filipowicz v. Rothensies, E. D. Pa. 1942, [42-1 USTC ¶9300] 43 F. Supp. 619, 624. In that case, an attorney's lien was given priority over a federal tax lien upon a fund "upon the well recognized principle that an attorney has a lien on a fund which has been created as a result of his efforts in litigation." (Citing Sprague v. Ticonic Bank, 307 U. S. 161.) In Filipowicz, the attorney had filed proof of claim in favor of taxpayer in bankruptcy proceedings involving taxpayer's debtor. Three dividends in the bankruptcy proceedings were received by the attorney, and upon them the Collector made levy under its lien for taxes due from the attorney's client, the creditor of the bankrupt. This case is distinguishable upon the ground that Sarasohn & Company obtained no lien, but merely a contract right. A debtor may not impair the rights of the United States established through perfection of a tax lien which has already attached to the debtor's property, by undertaking performance of a contractual obligation.

The Government having established its priority right to an amount in excess of the total on deposit in the Registry of this Court, i.e., $45,404.92 (footnote 1 supra), it is entitled to judgment in the amount of the fund. This obviates the necessity of establishing priority rights of the inferior claimants.

An order in accordance with the views herein expressed may be submitted.

¹ "MR. MILLER (Government attorney): I show you an affidavit attached to the Government motion which indicates that for the years May 1, 1954 to April 30, 1958 a total of $45,404.92 was assessed for excise taxes. Do you recall working on this case?

"MR. KAPLAN: Yes.

"MR. MILLER: Can you recall how you computed that $45,000 figure?

"MR. KAPLAN: Well, I know that I computed it on figures supplied by the taxpayer's accountant."

 

 

[64-1 USTC ¶9312]Southold Savings Bank, Plaintiff v. Minnie Finkelstein, individually and as Executrix of the Estate of Hyman B. Finkelstein, Deceased, et al., Defendants

N. Y. County Court , Nassau County , 9/25/63 , (243 N. Y. S. 2d 397)

[1954 Code Sec. 6323]

Federal tax liens: Priority: Fire insurance premium advances: Local realty taxes.--Federal tax liens had priority over subsequently accrued fire insurance premium advances and local realty taxes. The Court would not permit the "first in time, first in right" maxim to be circumvented by the device of adding the fire insurance premium advances on to the prior mortgage debt.

James W. Andrews, 161-10 Jamaica 32, N. Y., for plaintiff. Joseph P. Hoey, 271 Washington St., A. I. Madison, Lila Turner, 186 Joralemon St., Brooklyn 1, N. Y., Leo A. Larkin, Municipal Bldg., New York 7, N. Y., for defendant.

[Memorandum]

GOLDSTEIN, County Judge :

This is an action to foreclose a mortgage on real property in Nassau County . A referee to compute and report was appointed and on July 2, 1963 he rendered a report indicating that the amount due to the plaintiff was $12,345.18 which sum includes $157.42 advanced by the plaintiff for fire insurance premiums.

The United States was joined as a defendant to the foreclosure proceedings as a result of four Federal tax liens having been filed against the mortgaged premises, the earliest of which was filed March 2, 1961 with the Clerk of the County of Nassau .

The proposed order would permit the plaintiffs, Southold Savings Bank, to sell the premises at foreclosure subject to accrued local taxes and would direct a payment of a sum of money to the plaintiff for reimbursement of the fire insurance premiums advanced. The United States has interposed objection to the form of the Judgment of the Foreclosure, dealing in particular with the issue of reimbursement for fire insurance premiums and the local taxes which accrued subsequent to the date of the Federal Liens.

The sole question to resolve concerning the final form of judgment of foreclosure is whether the plaintiff be given priority for the insurance premiums advanced which accrued subsequent to the Federal Liens, and whether the premises are to be sold subject to subsequently accrued local taxes.

The priority of federal tax liens provided by 26 U. S. C., section 6321 as against liens created under State Law, is governed by the common law rule--"The first in time is the first in right" (United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-86.)

The tax lien arises, according to section 6322, when the tax is assessed but as against specific interests mentioned in section 6323-A--mortgages, pledges, purchasers and judgment creditors--it is not valid until placed on public record.

The priority of a lien created by state law depends "on the time it attaches to the property and becomes choate". ( United States v. New Britain, supra, at 86; United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47). Choate state created liens take priority over later federal liens ( United States v. New Britain, supra; Crest Finance Co. v. United States [62-1 USTC ¶9105] 368, U. S. 347) while inchoate liens do not (see United States v. Liverpool and London, Ins. Co. [55-1 USTC ¶9136], 345 U. S. 215; United States v. Scovill [55-1 USTC ¶9137], 348 U. S. 218; United States v. Colotta [55-2 USTC ¶9680] 350 U. S. 808.) It is the federal law, that when a State lien has acquired sufficient substance and has been perfected, it will be construed first in time and defeat a later arising or later filed federal lien.

A State cannot affect the status of federal liens simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment or obligation is determined. ( United States v. New Britain, supra, at 86). The federal rule is that liens are "perfected in the sense that there is nothing more to be done to have a choate lien . . . when the identity of the henor, the property subject to the lien, and the amount of the lien are established (id. at 84)."

Consequently, the plaintiffs' contention that advances for insurance premiums are to be added to the mortgage debt and relate back to the prior lien of the mortgage, must fail because the future obligation concerning payment of insurance premiums fails to meet the test of choateness required to defeat the priority of the federal tax lien (United States v. New Britain, supra; United States v. Buffalo, supra.)

The amount to be paid the plaintiff, out of the proceeds of sale, should not therefore include advances by the plaintiff for the payment of insurance premiums arising subsequent to the date the federal tax liens attached.

This Court will not permit the common law maxim, "First in time, first in right", to be circumvented by the device of adding the fire insurance premium advances on to the indebtedness as the plaintiff is herein attempting. (First Federal Savings and Loan Association v. Lewis, 14 App. Div. 2d 150; Cooperative Loan and Savings Society v. McDermott, 218 N. Y. S. 2d 268.)

This same maxim, applies with equal force to determination of priority of federal tax liens competing with local realty taxes, which are accorded on absolute priority by state statute. The United States Supreme Court has held repeatedly that federal tax liens have priority over subsequently accruing liens for local real estate taxes, even though the burden of local taxes in the event of a shortage would fall upon the mortgage whose claim under state law is subordinate to local tax liens. United States v. Buffalo Savings Bank, supra.

Plaintiff cannot circumvent the implementation of the maxim, by having the foreclosure sale conducted "subject to", the unpaid local taxes which accrued subsequent in time to the federal lien.

To permit this would be to allow the purchaser to pay the local taxes out of his own funds, having already adjusted his bid price with the knowledge that the local tax liens will survive foreclosure. The surplus monies resulting from the sale would thereby be reduced in proportion to the amount of unpaid taxes affecting in turn the surplus funds available applicable to the payment of the federal tax liens.

The United States Supreme Court has held in a tax lien foreclosure suit, brought by the United States , wherein local authorities contended superiority over the federal lien by virtue of state statutes.

"It is the very nature and essence of a lien, that in no matter whose hands the property goes it passes cum onere." Burton v. Smith, 13 Pet. 464, 483; Rankin v. Scott, 12 Wheat. 177, 179; Howard v. Railway Co., 101 U. S. 837, 845. Hence it is not debatable that a tax lien imposed by a law of Congress as we have held the present lien is imposed, cannot, without the consent of Congress, be displaced by later liens imposed by authority of any State law or Judicial decision. Michigan v. United States [43-1 USTC ¶9225, 10,002], 317 U. S. 338 (1943).

It is the opinion of this Court that the judgment of foreclosure and sale is to be granted. The proposed order shall provide that out of the proceeds of the sale, the referee shall pay the referee's expense; lawful advertising expense; the plaintiffs costs and disbursements; and out of the remainder of the proceeds the referee shall set aside the sum found to be due upon the plaintiffs mortgage with interest. This shall not include any sums by the plaintiff for advances for real estate taxes, assessments, water rates, insurance premiums, and similar charges, which became specific, perfected and definite in amount subsequent to the date the federal lien became a charge upon the property. In addition thereto the referee shall set aside the remainder of the proceeds of sale to pay other outstanding liens, if any, in accordance with their priority, in a separate bank account in his name, to be designated the "Priority Adjustment Fund".

In the event of any uncertainty or disputes as to the amounts or priorities of said liens, the referee shall apply to this Court for directions, upon notice, to all interested parties.

Settle order on notice in accordance with the terms of this decision.

 

 

[60-1 USTC ¶9435]Hartford Fire Insurance Company and Union Insurance Society of Canton, Ltd., Plaintiffs v. Dotty Sportswear, Inc., George Schochet, Nettie De Lore and Frank Grazzo; Irving Sapperstein, Joseph Hochberg, Samuel Haberman, Milton Fratkin and Edwin Hochberg, doing business as Sapperstein, Hochberg and Haberman; the State of New York and Gibraltar Factors Corporation, Defendants, United States of America, Intervenor

U. S. District Court, So. Dist. N. Y., Civil 148-200, 4/2/60

[1954 Code Secs. 6321-6323 and 6332]

Lien for taxes: Casualty insurance proceeds: Priorities.--The rights of the United States and of other claimants to the proceeds of insurance policies covering property loss, presumably loss by fire, were adjudicated in a decision granting the motions of the insurance companies and of the United States for summary judgment.

Greenhill & Greenhill, 17 John Street , New York City , N. Y., for plaintiffs. Louis J. Lefkowitz, Attorney General, 500 Eighth Avenue , New York 18 N. Y., for State of New York . Samuel Witte, 152 West 42nd Street, New York City, N. Y., for George Schochet. Stanley A. Schutzer, 150 Broadway, New York 38, N. Y., for Nettie De Lore and Frank Gnazzo. Alfred Messenger, 401 Broadway, New York 13, N. Y., for Sapperstein, Hochberg and Haberman. Michael Krieger, 350 5th Avenue, New York 1, N. Y., for Gibraltar Factors Corporation, Jacob Rappaport, 32 Broadway, New York 4, N. Y., for Pat J. Sarno and Pat Petro. S. Hazard Gillespie, Jr., United States Attorney , United States Court House, Foley Square , New York 7, N. Y., for United States of America , Intervenor.

DIMOCK, District Judge:

The plaintiffs, Hartford Fire Insurance Company and Union Insurance Society of Canton, Ltd., having moved this Court by a Notice of Motion dated February 26, 1960, for an order pursuant to Rule 56, F. R. C. P. granting plaintiffs summary judgment, directing the payment by plaintiff of the sum of $1722.99 plus interest to the United States of America, the sum of $568.56 plus interest to the State of New York, the sum of $747.50 to Gibraltar Factors Corporation, the sum of $859.38 to the partnership of Sapperstein, Hochberg and Haberman, the sum of $197.00 to W. A. Hansen & Company, a partnership, granting to plaintiff's attorneys a reasonable fee for services and the reimbursement of expenses, directing plaintiffs to pay the overage of the fund in their possession into Court, adjudging that the plaintiffs by this payment be discharged from all liability under the terms of certain policies of insurance issued by them, and ordering that the stockholders, directors and officers of Dotty Sportswear, Inc. be required to prove their claims to the sum paid into Court at a hearing upon a date to be set by this Court, and

The United States of America, by cross-motion, having moved by notice of motion dated February 24, 1960, for an order pursuant to Rule 56 of the Federal Rules of Civil Procedure granting summary judgment in favor of the United States of America or in the alternative, for an order pursuant to Title 26, U. S. C., Section 6332 directing the plaintiffs to turn over to the United States of America, the sum of $1,722.99 plus interest and

This matter having come on to be heard before me on the 22nd day of March, 1960, and the plaintiffs Hartford Fire Insurance Company and Union Insurance Society of Canton, Ltd., having appeared in support of said motion by Greenhill & Greenhill, their attorneys (Ira J. Greenhill, of counsel), and the United States of America by its attorney, S. Hazard Gillespie, Jr., United States Attorney for the Southern District of New York, (Lee Meyers, Assistant United States Attorney, of counsel) having appeared in support of said motion and the State of New York by Louis J. Lefkowitz, Attorney General of the State of New York, (Henry P. Lipscomb, Jr., Assistant Attorney General, of counsel), having appeared in support of said motion, and defendants, Irving Sapperstein, Joseph Hochberg, Samuel Haberman, Milton Fratkin, and Edwin Hochberg, doing business as Sapperstein, Hochberg and Haberman, having appeared by their attorney, Alfred Messenger, in support of said motion, and no one having appeared in opposition thereto,

NOW, on reading and filing the aforesaid notices of motion, the affidavit of Ira J. Greenhill, duly sworn to the 26th day of February, 1960, the affidavit of Lester Pike, duly sworn to the 25th day of February, 1960, the affidavit of Everett Bock duly sworn to the 25th day of February, 1960, the affidavit of Jacob Rappaport duly sworn to the 15th day of February, 1960, the affidavit of Joseph Beim duly sworn to the 11th day of February, 1960, the affidavit of Henry P. Lipscomb, Jr., duly sworn to the 15th day of January, 1960, the affidavit of Joseph Hochberg duly sworn to the 26th day of February, 1960, the affidavit of Margaret R. de Smet duly sworn to the 24th day of February, 1960, and upon the exhibits attached and made part of said affidavits and the affidavits of service attached thereto, and upon the deliberation and consideration and sufficient cause now appearing, upon motion of Greenhill & Greenhill, attorneys for the plaintiffs, and S. Hazard Gillespie, Jr., United States Attorney for the Southern District of New York, attorney for the Intervenor, United States of America, it is

ORDERED, ADJUDGED and DECREED, that the motions of the plaintiffs and of the Intervenor, United States of America for summary judgment, pursuant to Rule 56, F. R. C. P. be and the same hereby are granted; and it is further

ORDERED, ADJUDGED and DECREED, that the plaintiffs are directed to pay to the United States of America, the sum of $1,814.43, to the State of New York, $583.43, to Gibraltar Factors Corporation, $747.50, to Irving Sapperstein, Joseph Hochberg, Samuel Haberman, Milton Fratkin and Edwin Hochberg, doing business as Sapperstein, Hochberg and Haberman, the sum of $859.38, and to Pat J. Sarno and Pat Petro, co-partners doing business as W. A. Hansen & Company, the sum of $197.00, and it is further

ORDERED, ADJUDGED and DECREED, that the plaintiffs attorneys receive from said fund the sum of $1,000.00 for their services in this matter and the additional sum of $71.16 for disbursements herein, and it is further

ORDERED, ADJUDGED and DECREED, that the fund in the hands of the plaintiffs and due Dotty Sportswear, Inc., under the terms of insurance policies issued by the plaintiffs, numbered, Hartford Fire Insurance Company policy #293756 and Union Insurance Society of Canton, Ltd., #73-78-63 arising from the loss which occurred on or about April 28, 1959, shall be and is established as the sum of $8,593.80, and it is further

ORDERED, ADJUDGED and DECREED, that the plaintiffs shall pay over to the Clerk of this Court any sum remaining in their hands after the payments ordered herein and that upon said payment to the Clerk of this Court, plaintiffs are and shall be discharged from all liability under said policies of insurance to said Dotty Sportswear, Inc., for the loss which occurred on or about April 28, 1959, and it is further

ORDERED, ADJUDGED and DECREED, that the defendants, George Schochet, Nettie de Lore and Frank Gnazzo, shall be required to prove their claims to the sum paid into Court at a hearing upon a date to be set by this Court upon application of any party. Dated New York , March 29, 1960 .

 

 

[59-2 USTC ¶9566]James Charles Ryman, and Underwriters at Lloyds, London, England, to His Own Use, and the Use of Certain Other Underwriters at Lloyds, London, England, Plaintiffs v. Spruce Veneer Package Corporation, a corporation; Thomas J. Brean; R. E. Anderson and Co., Inc., a corporation, Defendants; United States of America, Intervenor

U. S. District Court, West. Dist. Wash. , So. Div., No. 2293, 175 FSupp 756, 4/8/59

[1954 Code Sec. 6231]

Liens: Withholding taxes: Fire insurance proceeds: Employees' wage claims.--The Government's lien for unpaid withholding taxes, asserted against proceeds from a fire insurance claim by intervention in a suit between the fire insurance underwriters and the taxpayer, was prior and superior to labor liens.

Clarke, Clarke, Albertson & Bovington, R. R. Albertson, New World Life Building, Seattle 4, Wash., for plaintiffs. Theodore M. Rosenblume, Hoge Building , Seattle 4, Wash. , for defendant Brean. Charles P. Moriarty, United States Attorney, Charles W. Billinghurst, Thomas R. Winter, United States Attorney's Office, Tacoma, Wash., for United States.

Findings of Fact and Conclusions of Law

BOLDT, District Judge:

The above-entitled action having come on for hearing on the 7th day of April, 1959, the plaintiffs appearing by their attorneys, Clarke, Clarke, Albertson & Bovingdon, but not appearing in court; the defendant Thomas J. Brean appearing by his attorney, Theodore M. Rosenblume, but not appearing in court; the defendants Spruce Veneer Package Corporation, a corporation, and R. E. Anderson and Co., Inc., a corporation, having been duly served with process and defaults of said defendants having been duly entered of record; and the United States of America, Intervenor, appearing by Charles P. Moriarty, United States Attorney for the Western District of Washington, and Thomas R. Winter, Special Assistant to the Regional Counsel, Internal Revenue Service, and being represented in court by said Thomas R. Winter; and the Court having jurisdiction of the parties to the above-entitled action and jurisdiction of the subject matter of the action, evidence having been introduced and the Court being fully advised in the premises, now makes the following:

Findings of Fact

I. That this is a civil action involving a controversy between citizens and residents of foreign countries, and citizens and residents of a state of the United States, to wit, the plaintiffs, citizens and residents of London, England, and the defendants, citizens and residents of the State of Washington; that the controversy between the plaintiffs and the defendants involves a sum in excess of $3,000.00, exclusive of interest and costs, to wit, the sum of $8,800.00, and is a civil action of which the District Courts of the United States have original jurisdiction.

II. That James Charles Ryman, and certain other underwriters at Lloyds, London , England , existing under the laws of Great Britain , issued a policy of insurance, insuring the defendant, Spruce Veneer Package Corporation, against loss of use and occupancy, by reason of fire, at its premises located in Puyallup , Washington , in accordance with the terms and conditions of said policy.

III. That a fire occurred on the premises of the defendant, Spruce Veneer Package Corporation, on or about the 10th day of October, 1955, as the result of which the insured made claim against the plaintiffs under the aforementioned insurance policy. That thereafter the said insured executed and delivered its Proof of Loss in the amount of $8,800.00, which was the agreed amount of loss, arising by reason of said fire.

IV. That the defendant, Thomas J. Brean, is a resident of Puyallup , Washington , and that the defendant, R. E. Anderson and Co., Inc., is a corporation, organized and existing under and by virtue of the laws of the State of Washington , doing its principal business in Tacoma , Washington .

V. That on or about September 30, 1958, intervention in this suit was authorized by the Acting Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury of the United States , and was brought under the direction of the Attorney General.

VI. That jurisdiction is conferred upon this Court by Sections 7401 and 7403 of the Internal Revenue Code of 1954 for the reason that this is a claim arising under the Internal Revenue laws of the United States , wherein the United States seeks to foreclose tax liens and obtain further relief pursuant to the alleged tax liabilities herein.

VII. That the defendant, Spruce Veneer Package Corporation, has a right to do business and is doing business in the Western Judicial District of Washington and has its principal office at 201-10th Street, Southeast, Puyallup, Washington.

VIII. That during all the following times:

From and Including              To and Including

1-1-52 ................                  3-31-52

10-1-52
 ...............                 
12-31-52

1-1-54
 ................                  
6-30-54

4-1-55
 ................                  
6-30-55

10-1-55
 ...............                 
12-31-55

the defendant, Spruce Veneer Package Corporation, employed divers persons to each of whom he paid wages on account of such employment; that by reason of said employment and payment of wages, the then Commissioner of Internal Revenue made assessments during 1952, 1953 and 1954 and a delegate of the Secretary of the Treasury made assessments during 1955 of the amounts to have been deducted and withheld by the defendant, Spruce Veneer Package Corporation, from such wages as taxes upon the income of such employees (otherwise known as withholding taxes); that interest was included in each assessment except the assessment for the second quarter year period of 1955; that the period in which the taxes accrued, the amount of each tax and interest, and the date of each assessment are as follows:

                                                       Including

                                 Total                                                Date of

Taxable Period              Assessment                Tax         Interest         Assessment

1st Q 1952 ........         $12,556.58         $12,523.64           $32.94            
5-16-52

4th Q 1952 ........           9,349.69           9,329.82            19.87            
2-13-53

1st Q 1954 ........           6,991.69           6,939.20            52.39            
6-11-54

2d Q 1954 .........           6,684.14           6,677.60             6.54             
8-6-54

2d Q 1955 .........           5,861.28           5,861.28                             
8-31-55

4th Q 1955 ........           1,019.51           1,015.67             3.84            
2-23-56

[Lien for Tax]

IX. That notice was given to and demand made of the defendant, Spruce Veneer Package Corporation, on behalf of the intervenor, for payment of the amounts assessed as described in paragraph VIII on the following dates:

Period Covered              Notice and           Notice

By Assessment                   Demand          of Lien

1st Q 1952 ........            
5-16-52
          
7-29-52

4th Q 1952 ........            
2-13-53
          
3-12-53

1st Q 1954 ........            
6-15-54
           
8-6-54

2d Q 1954 .........             
2-6-54
          
8-11-54

2d Q 1955 .........            
8-31-55
         
10-13-55

4th Q 1955 ........            
2-23-56
          
2-28-56

That on the dates shown above, notices were filed on behalf of the United States with the Auditor, Pierce County, State of Washington, wherein liens are claimed on behalf of the United States upon all property and rights to property of the defendant, Spruce Veneer Package Corporation, for the amounts of the aforesaid assessments.

X. That payments were made against the assessments described in paragraph VIII as follows:

First Quarter of 1952

10-2-57
 ...................          2,168.19

12-23-57
 ..................             77.90

Fourth Quarter of 1952

11-24-53
 ..................          $ 500.00

4-25-57
 ...................            973.11

4-26-57
 ...................            351.40

5-6-57
 ....................            297.18

5-20-57
 ...................            100.36

5-29-57
 ...................            464.52

6-20-57
 ...................            119.48

6-28-57
 ...................          1,313.21

7-5-57
 ....................            496.30

11-6-57
 ...................            530.99

12-4-57
 ...................             43.05

5-20-57
 ...................            382.35

First Quarter of 1954

11-20-57
 ..................           $ 40.00

Second Quarter of 1954

9-8-54
 ....................         $4,200.15

That no part of the balance of the assessments described in paragraph VIII has been paid.

XI. That on January 15, 1958, the defendant, Spruce Veneer Package Corporation, by its president, Carl J. Unbedacht, agreed in writing with District Director of Internal Revenue William E. Frank that the unpaid balance of the assessment of withholding taxes for the first quarter-year period of 1952 in the amount of $10,310.49 together with such interest, penalties and other additions as are provided by law which have accrued and which may accrue on the said assessment may be collected by proceeding in court begun on or before December 31, 1964.

XII. That the defendant, Thomas J. Brean, is assignee for certain employees of Spruce Veneer Package Corporation, claiming labor liens for said employees, in the total sum of $6,499.56, which assignment is evidenced by Assignment dated November 4, 1955, a true copy of which is attached to and made a part of the Complaint in Interpleader and marked Exhibit "A"; that said defendant asserts a claim against the insurance monies, payable under said policy, on account of said fire damage.

XIII. That the defendant, R. E. Anderson and Co., Inc., asserted a claim against the monies, payable under said policy, by reason of said fire damage, because of unpaid premiums arising out of said policy, in the sum of $614.20, but said defendant has failed to appear and its default has been entered herein.

And from the foregoing Findings of Fact, and Court makes the following:

Conclusions of Law

1. That the intervenor, United States of America, is entitled to have judgment against the defendant Spruce Veneer Package Corporation, a corporation, in the sum of $30,404.70, together with interest thereon as allowed by law.

2. That the intervenor, United States of America, is entitled to a decree adjudging that the liens of the United States are valid and subsisting liens against the sum of $8,800.00 heretofore paid into the registry of this Court, said liens being prior and superior to any right, title, lien or claim of any and all of the plaintiffs and defendants, or any person or persons claiming by, through or under them, or any of them.

3. That the United States of America is entitled to a decree adjudging that the said sum of $8,800.00 paid into the registry of the Court be paid over to the United States to apply on its said judgment, and that the United States do have and recover judgment against the defendant Spruce Veneer Package Corporation in the amount of $30,404.70, together with interest as allowed by law, or for the amount of such part of that sum as may remain unsatisfied after the payment and distribution of said monies in the registry of this Court.

 

 

[64-1 USTC ¶9129]Farmers Reliance Insurance Co. of New Jersey, a New Jersey corporation; Union Mutual Fire Insurance Co., a Vermont corporation; and Security Mutual Insurance Company of New York, a New York corporation, Plaintiffs v. Miami Rug Company, a Florida corporation; Allen B. Cramer, Inc., a Florida corporation; Madrid Restaurant, Inc., d/b/a El Madrid, a Florida corporation; Irving Levitt Co., Inc., a Massachusetts corporation; Commercial Bank of Miami, a Florida corporation; Estate of Russell B. Wilson; Rath Provision Company, an Iowa corporation; Coral Shopping Center, Inc., a Florida corporation; and United States of America, Defendants

U. S. District Court, So. Dist. Fla. , Miami Div., No. 584-62-Civ-EC, 11/12/63

[1954 Code Sec. 6323]

Tax liens: Priority: Fire insurance proceeds.--The interests of the fee owner and chattel mortgagee in certain fire insurance proceeds were superior to the government's lien for taxes, since their interest was based on ownership rather than on lien claims. The tax lien, however, had priority in the fund over all subsequent lien claimants.

Lane, French, Primm, Lane & Carrier, 207 Security Tr. Bldg., Miami , Fla. , for plaintiffs. Maurer, Maurer & Maurer, 307 Blount Bldg., Ft. Lauderdale, Fla., for Rath Provision Co.; Monroe Gelb, 1514 Congress Bldg., Miami, Fla., for Miami Rug Co.; Carey, Goodman, Terry, Dwyer & Austin, 650 Seybold Bldg., Miami, Fla., for Allen B. Cramer; Patterson & Maloney, 200 S. E. 6th St., Ft. Lauderdale, Fla., for Coral Shopping Center, Inc.; George Richardson, Jr., 1935 N. E. 4th Ave., Ft. Lauderdale, Fla., for Marion W. Young; Smathers & Thompson, 1301 duPont Bldg., Miami, Fla., for Commercial Bank of Miami; Sannders, Curtis, Ginestra & Gore, 1750 E. Sunrise Blvd., Ft. Lauderdale, Fla., for Madrid Restaurant; Joseph Krinsky, 18 Premont St., Boston, Mass., for Irving Levitt Co.; Lavinia L. Redd, United States Attorney, Miami, Fla., for U. S., defendants.

Opinion of the Court

(Findings of Fact and Conclusions of Law)

CHOATE, District Judge:

THIS CAUSE is an action of interpleader filed by the plaintiffs, Farmers Reliance Insurance Company of New Jersey, Union Mutual Fire Insurance Company and the Security Mutual Insurance Company and the Security Mutual Insurance of New York. ¹

The plaintiffs deposited $12,485.00 ² into the registry of the Court representing the proceeds of insured loss by fire to the contents, including improvements and betterments on the premises located at 60F and 60G Coral Circle, Coral Shopping Center, Fort Lauderdale, Florida. These premises were operated as a restaurant by the named insured and debtor, Madrid Restaurant, Inc. The fire occurred on March 18, 1962.

This Court has jurisdiction under 28 U. S. C. §1335 and 2361. ³ The cause came on for trial on August 12, 1963, and based on pre-trial stipulation and the testimony offered, the Court finds as follows.

A substantial portion of the restaurant equipment insured under the above policies was owned by the Estate of Russell B. Wilson and leased to the Madrid Restaurant, Inc. Said lease was recorded properly on October 5, 1961, and contained a covenant to insure. The property was encumbered by a mortgage in favor of Rath Provision Company and said mortgage was recorded on June 7, 1961. On April 23, 1962 , Madrid Restaurant made assignment (unrecorded) of the proceeds of claim on this fire loss to the Estate of Russell B. Wilson and Rath Provision Company to the amount of $6,555.28, but not to exceed the amount of the unpaid balance of the chattel mortgage. Wilson and Rath may be considered as one in determining their position as claimants of the fund herein.

The United States of America was named as defendant in the original action and moved to dismiss which motion was granted. The United States then appeared as intervenor and asserted claim to the fund based on various jeopardy assessments all made on April 27, 1962 , totalling $5,692.25. Notice of levy on all of the various assessments was filed of record on April 30, 1962 . ⁴

Allen B. Cramer, Inc. appeared as claimant based on its equitable lien against the loss proceeds for services in repair of the fire damaged property in the period following May 1, 1962 , per invoice of June 6, 1962 . This claim was in the amount of $1,502.92.

Miami Rug Company claimed against the fund for its open account reduced to judgment in the amount of $997.95 on September 10, 1962 . Writ of Garnishment was sought by Miami Rug Company on May 17, 1962 .

Other named defendants and intervening claimants whose claims need not be considered herein in detail are: Coral Shopping Center as owner of the premises leased by Madrid Restaurant, Inc. who filed a crossaction against Wilson and Rath and then withdrew same; the Commercial Bank of Miami, a named loss-payee on the policies, who disclaimed; Irving Levitt Company, Inc.; Irving N. Donnin; and Mood Music Systems, Inc., all of whom claimed on unsecured position (open account); Jack Samsen d/b/a Coral Press on judgment of $978.27 rendered April 18, 1962, but who did not execute until May 3, 1963; ⁵ and The Florida Industrial Commission for Unemployment Taxes whose notice of tax lien was not filed until October 26, 1962.

In is obvious we believe that the lien or claim of any of the parties to the law suit, who claimed because of indebtedness of Madrid Restaurant, Inc., is limited to the property interest of Madrid Restaurant, Inc. in the insured chattels. See Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, at 512-514 (1960). This interest was merely a lease-hold interest and was subject to the recorded lease owned by the Wilson Estate and the recorded mortgage of Rath Provision Company.

The interest of the United States or other creditors of the insured in the proceeds of the fund could not rise higher than those of the taxpayer-debtor. The taxpayer, itself, could not assert a claim in the proceeds greater than its insurable interest in the property insured since to do so would be an actionable fraud. ⁶

The interest of the Wilson Estate in the underlying property was that of fee owner subject to the mortgage of Rath Provision Company. The assignment of the insurance proceeds to the extent of this underlying interest in the property was not an assignment securing a contingent obligation as in United States v. R. F. Ball Construction Co., Inc. [58-1 USTC ¶9327], 355 U. S. 587 (1958), but was a completed transfer of interest for valid consideration, prior to the perfection of the government lien. ⁷ The agreement that the insurance proceeds could be used to repair the property if Madrid decided to rebuild and continue the restaurant business was a condition subsequent and not a condition precedent.

The Court finds from the testimony that the Wilson and Rath interest in the fund is $5,512.00 and is entitled to first priority against the fund based on their ownership as opposed to lien interest in the fund.

The remaining parties, as creditors, must rest their claims against the fund upon their lien status.

The federal tax liens became entitled to priority as against the liens of any mortgagee, purchaser, pledgee, or judgment creditor, as of the date of their filing on April 30, 1962 . Under Florida law, a judgment of and by itself does not give rise to a lien. The lien does not arise until the execution is placed in the hands of the sheriff for levy. Thus, the United States is entitled to first priority amoung the lien claimants. The Court finds that the United States has established tax liens of $5,690.00 plus $437.57 interest, or a total of $6,127.57.

The Court further finds that reasonable attorneys' fees for the plaintiffs' attorneys are in the amount of $750.00, and that judgment for them should be entered in that amount.

Miami Rug Company who obtained Writ of Garnishment on May 17, 1962 , and reduced their claim to judgment on September 10, 1962 , is entitled to the remainder of the proceeds on the basis of their proven lien of $997.95.

Some comment might be made of the equitable lien claimed by Allen B. Cramer, Inc. for services in repair of the fire damaged property in the period following May 1, 1962 . This amount was claimed for work actually performed upon the insured property in cleaning up the fire damage at the request of the insured and the insurance company representatives. Not only was this work performed after the assignment to Rath and Wilson, but it was performed after the filing of the federal tax liens. There is no question that as to the United States, the case of United States v. White Bear Brewing Company [56-1 USTC ¶9440], 350 U. S. 1010 (1956), ⁸ forecloses any contention of priority as against the United States. It may well be that Cramer has a contractual right of action that can be asserted against the insurance companies, the adjusters, or possibly Rath and Wilson , as well as the named insured. However, the testimony fails to prove a lien that would be prior to either the United States or Miami Rug Company. This is not the forum nor the cause in which to assert its possible contractual cause against the possible defendants mentioned above nor did Cramer proceed on that theory.

The fund should be distributed in accordance with the foregoing: $750.00 to the plaintiffs' attorneys; $5,512.00 to Rath Provision Company and the Estate of Russell B. Wilson, as their interests may appear; $6,127.57 to the United States ; and, $95.49 to Miami Rug Company.

Judgment will be entered in accordance herewith.

¹ Farmers Reliance Insurance Company of New Jersey is a corporation duly organized and existing under the laws of the State of New Jersey with its principal place of business at 349 West State Street , Trenton , New Jersey . Union Mutual Fire Insurance Company is a corporation duly organized and existing under the laws of the State of Vermont with its principal place of business at Montpelier , Vermont . Security Mutual Insurance Company of New York is a corporation duly organized and existing under the laws of the State of New York with its principal place of business at 349 East 149th Street , New York , New York .

² Farmers Reliance Insurance Company of New Jersey deposited funds amounting to $6,242.54 under its policy No. 9-1211. Union Mutual Fire Insurance Company deposited funds amounting to $3,121.26 under its policy No. 150131. Security Mutual Insurance Company of New York deposited funds amounting to $3,121.26 under its policy No. 1292660. The foregoing amounts are the same as the Proofs of Loss filed with said companies by the defendant Madrid Restaurant, Inc. on April 30, 1962 .

³ The defendants' citizenship is as follows: Miami Rug Company is a Florida corporation with its principal place of business in Miami, Florida; Allen B. Cramer, Inc. is a Florida corporation with its principal place of business in Fort Lauderdale, Florida; Madrid Restaurant, Inc. is a Florida corporation with its principal place of business in Fort Lauderdale, Florida; Irving Levitt Company, Inc. is a Massachusetts corporation having its principal place of business in Boston, Massachusetts; Commercial Bank of Miami is a Florida corporation having its principal place of business in Miami, Florida; the Estate of Russell B. Wilson is being probated in Broward County, Florida; Rath Provision Company is an Iowa corporation having its principal place of business in Waterloo, Iowa; and, the United States of America is a sovereign nation which has brought a complaint in intervention.

⁴ On April 27, 1962 , the levy was based on the following jeopardy assessments:

WITHHOLDING TAXES

  Taxable                       Amount         Outstanding

Period                      Assessed             Balance

4th Qtr. 1961 ....         $1,296.68           $1,296.68

4th Qtr. 1961 ....             18.56               18.56

1st Qtr. 1962 ....          1,451.57            1,451.57

1st Qtr. 1962 ....             24.20               24.20

                           $2,791.81           $2,791.81

EXCISE TAXES

  Taxable                       Amount         Outstanding

Period                      Assessed             Balance

4th Qtr. 1961 ....         $1,300.25           $1,300.25

4th Qtr. 1961 ....             11.17               11.17

1st Qtr. 1962 ....          1,574.08            1,574.08

1st Qtr. 1962 ....             15.74               15.74

                           $2,091.24           $2,091.24

 

⁵ Defendants Jack Samsen d/b/a Coral Press, Irving N. Donnin d/b/a Donnin's Antique Arms and Guns Museum , and Defendant Irving Levitt Company, Inc., failed to make an appearance and prove their alleged claims.

⁶ Sumlin v. Colonial Fire Underwriters, 27 So. 2d 730, 731 ( Fla. 1946).

⁷ Not only in satisfaction of underlying obligations, but in satisfaction of lien on policy proceeds. Atwill v. Western Fire Ins. Co., 163 So. 27 ( Fla. 1935).

⁸ See decision in United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), particularly Judge Brown's detailed review of cases at 288-89, note 4.

 

 

[64-1 USTC ¶9488]Ray E. Nelson Transportation Company, a Corporation, Plaintiff v. Tri-State Insurance Company, a Corporation, Defendant Ray E. Nelson Transportation Company, a Corporation, Plaintiff v. American Union Insurance Company, a Corporation, Defendant v. United States of America, Intervenor

U. S. District Court, Dist. of Neb., Civil 01259, Civil 01260, 4/27/64

[1954 Code Sec. 6323]

Lien for taxes: Government as intervenor: Fire insurance proceeds: Attorney's fees.--Government's tax lien did not attach to the proceeds of fire insurance policies in the name of a third party even though the policies covered the delinquent taxpayer's property subject to the tax lien. The insurance policies were personal contracts separate and complete in themselves and insured the interests of the third party in the goods, but did not insure the Government or anyone else since they were not included in the contract. Even if the Government had been entitled to the proceeds, its claim would have been subject to the lien of the attorney whose efforts created the funds.

J. C. Tye, New Pratt Bldg., Kearney, Neb., Richard J. Bruckner, Eleventh Floor, Farm Credit Bldg., Omaha, Neb., for plaintiff. Thomas J. Walsh, 610 Service Life Ins. Bldg., Omaha , Neb. , for defendant. Russell J. Blumenthal, Assistant United States Attorney, Omaha , Neb. , for United States .

Memorandum

ROBINSON, Chief Judge:

Both of these actions were originally instituted in this Court by the Plaintiff to claim the right to payment of the proceeds of certain fire insurance policies because of the alleged loss by fire of certain goods which were supposedly insured by the Defendant Insurance Companies. In both of these actions, the issues were settled before trial, with judgment being entered in plaintiff's favor and against Tri-State Insurance Company in the amount of $24,000 in the one case and in plaintiff's favor and against American Union Insurance Company in the amount of $7,263.38 in the other case. The United States as intervenor, has asserted that at least a portion of these funds are encumberred by tax liens and the proceeds of the policies have been paid into court to await determination of the validity of the tax liens.

It is the plaintiff's contention that the proceeds of these insurance policies are not subject to the tax liens, and further, that the lien of plaintiff's attorney for one-half of the proceeds in payment for services rendered is superior to any lien which might be claimed by the United States .

Most of the facts in the case were stipulated, with oral testimony and exhibits also being offered in open court. The fire which caused the loss occurred on February 17, 1961 in Kearney , Nebraska , destroying vehicles, parts, equipment, and supplies owned by the plaintiff. Several insurance policies had the plaintiff as namedinsured for this property, including policies issued by the two defendants in these actions.

The Tri-State policy covered certain named trucks, each being assigned a loss limit amount. The total of the policy coverage for 16 vehicles was $37,455.00. The American Union policy covered various automobile parts, including tires, oil, grease, and supplies for a total protection of $10,000. As mentioned above, these defendants did not pay, an action was instituted and settlements were finally made for somewhat less than the total policy limits.

On May 8, 1958 , the District Director of Internal Revenue made jeopardy assessment of income tax, fraud, penalties and interest against Ray E. Nelson for the year 1947, and against Ray E. Nelson and Galene Nelson [his wife at the time, since divorced] for the years 1948 through 1951. As per statute, Notices of Federal Tax Liens were filed in the office of the Register of Deeds, Buffalo County , Nebraska , on May 10, 1958 . The unpaid balance of these liabilities amounted to over $170,000 in December of 1962.

The articles of incorporation were filed for the plaintiff on February 4, 1958 . Ray E. Nelson was one of the incorporators and he continued to operate other businesses as a sole proprietor. Seven of the sixteen insured vehicles in question were transferred to plaintiff on July 28, 1958 from Ray E. Nelson or one of his proprietorships. Five of them were bought from third parties. One was transferred to plaintiff on January 15, 1959 , from Nelson Motor Company [one of the proprietorships] after the title was mistakenly made out in the name of the Nelson Motor Company on January 14, 1959 . The last one was transferred to the Nelson Motor Company from plaintiff on May 14, 1959 . The Government claims a lien only on those nine vehicles which were in the name of Ray E. Nelson or one of his proprietorships at any time after May 10, 1958 .

In September of 1960, the Nelson Motor Company transferred certain parts, including tires, oil, grease, etc. to the plaintiff. The American Union insurance policy covered these parts and they were included on an itemized list submitted with the proof of loss. On November 30, 1960 , some two months before the fire, this policy was transferred to the plaintiff by endorsement.

The Tri-State policy which covered the sixteen vehicles which were destroyed in the fire was purchased by the plaintiff and covered the period of January 17, 1961 , to January 17, 1962 .

The Government now contends that since the lien followed the property which had been owned by Ray E. Nelson into the hands of the plaintiff, 26 U. S. C. 1958 ed. §§ 6321, 6322, 6323, any proceeds gained from the insurance policies must be held subject to the lien also. This is a contention that we are unable to agree with. The rights of the insured under a fire insurance policy are contingent upon the possibility of a future occurrence. In Home Insurance v. B. B. Rider Corporation, [D. N. J., 1963], [63-1 USTC ¶9235] 212 F. Supp. 457, the court said:

"Where it is entirely uncertain whether the conditional promise to pay will ever become unqualified and enforceable, the interest of a party to the contract is purely contingent, and therefore not 'property and rights to property' to which a tax lien under §6321 could attach.

". . . It is apparent that a debtor-taxpayer may prevent the attachment of Government liens by divesting himself of contingent rights to property before they actually vest, for no Government lien attaches to such contingent rights."

Under this thinking, we believe that the transfer of the American policy from Nelson Motor Company to the plaintiff divested the Government of any rights under this policy itself which it had against Ray E. Nelson. Since the plaintiff purchased the Tri-State policy, Nelson never had any individual interest in the policy and it therefore has the same present disposition as the American policy.

The question which must be answered to determine this case, then, is whether or not a Government tax lien can attach to the proceeds of an insurance policy which names a third-party as the insured but which covers property that is a proper subject of the tax lien. It is our opinion that this question must be answered in the negative. An insurance policy is a contract separate and complete in itself. It insures the interest of the insured party in the goods, but does not insure anyone else, unless such other party is included in the contract. There is no statute or law involved herein requiring a person who is in possession of property which is subject to a tax lien to insure the safety of the property on behalf of the United States . The United States has paid no part of the premiums involved in the maintenance of the policy. The plaintiff had the foresight to protect its interest in property by taking out a fire insurance policy so that in the event of calamity it could be indemnified. By what right does the Government step in now and claim that its rights were also protected by this policy? The contract of insurance says nothing about the Government. The plaintiff didn't agree to pay premiums on behalf of the Government The defendants didn't agree to indemnify the Government for any loss it might incur through destruction of goods over which it claimed a lien.

The following statement is made at page 301 of 9 A. L. R. 2d:

"Regarding a policy of property damage insurance as purely a matter of personal contract between the insured and the insurer, the courts, as will be seen by the cases in the subsequent sections of this annotation, adhere to the rule [except in a few isolated cases, or where express statutory provisions to the contrary control], that the holder of a mortgage or other lien on property has no right to the proceeds of insurance taken out thereon by the owner and made payable to himself, where such owner has not bound himself to carry insurance for the former's benefit. The point has also been made in some of the cases that the mortgage or other lien was on the property itself, and did not extent to the proceeds of insurance thereon; likewise, that the proceeds of a policy of insurance represent a debt resulting from the contrary of insurance, and not the property.

"It has been observed by the court in some instances that if a lienor desired to protect himself from loss, he might have negotiated a policy for his own benefit and have protected himself from loss."

Whatever the reasoning be, the general rule is clear. We are of the opinion that the insurance policy is a personal contract which has as its only connection with the property itself the fact that the insured must have an interest in that property to make the insurance contract an enforceable one.

If the insured herein had been the taxpayer, the Government lien would have simply attached to the proceeds of the insurance policy and no problem would have arisen. However, the insured is a third-party and as such does not have the same obligation to the Government. The tax lien cannot attach to the proceeds of an insurance policy in the hands of a third person.

In any event, we believe that had the Government been found to be entitled to the claim it requested, that such claim would have been subject to the attorney's lien. It would be manifestly unjust to allow an attorney to expend all the time, trouble, and effort to trying a case, only to have the United States step in and be preferred over such attorney. We agree with the plaintiff's attorney that were it not for their effort there might never have been such a fund over which to argue. That being the case, the attorneys would be due some proper reimbursement and we believe that the original fee agreed upon between the attorneys and their client should be the sum which the attorneys should receive. Lavenburg v. Universal Sportswear 1950, N. Y. S. 2d 160.

Accordingly we conclude that the Government is not entitled to the proceeds of either of the insurance policies, and even if it were, its claim would be subject to the attorney's lien.

The foregoing shall constitute findings of fact and conclusions of law under Rule 52(a) of the Federal Rules of Civil Procedure.

The Complaint in Intervention of the United States is hereby dismissed. The plaintiff will draw a proper order of judgment within fifteen [15] days.

 

 

[57-1 USTC ¶9290]United States of America, Plaintiff v. Leonard Spraycar, Administrator for the Estate of Mary Spraycar, deceased, formerly d/b/a Coffee Cup Cafe; Pacific Fire Insurance Company of New York, N. Y., a corporation; Selma D. Ivankovich; Cliff Galle, d/b/a Clover Leaf Creamery; Ann Novis; Mabel Bergan; Regina Bloz; Joyce Smathers; Alice Tobin; Audrey Cibulske; Helen Dovich; Virginia Wemple; Irving C. Pearson; Pauline Laslovich; Charles Johnson, d/b/a Park Motors Company; Michael Sladich, d/b/a Central Meat Market; and the State of Montana, Defendants

U. S. District Court, Dist. Mont., Butte Div., Civ. No. 455, 2/21/56

[1954 Code Sec. 6323]

Lien for taxes: Priority of U. S. lien over liens of mortgagee, wage-earners, tradesmen, and the State of Montana.--Fire insurance proceeds were paid into court pending determination of the creditors' rights thereto. The United States and a mortgagee jointly moved for summary judgment. The other defendants failed to file answers and the court granted the motion to the extent of the respective rights of the United States and the mortgagee. The United States filed its notice of lien for withheld income taxes and FICA contributions for the forth quarter of 1951 on April 4, 1952 . The mortgage was recorded on July 21, 1952 . The United States ' claims for withholding taxes and FICA contributions for 1952 were filed on various dates from November 24, 1952 to April 16, 1953.

Krest Cyr , United States Attorney, Frank M. Kerr, Assistant United States Attorney, for plaintiff. J. B. C. Knight, Wade J. Dahood, Anaconda, Mont. , for defendant Selma D. Ivankovich. Irving C. Pearson, Rob ert J. Boyd, for Leonard Spraycar, admin istrator.

Stipulation as to Statement of Facts ( 10/28/55 )

[Lien for Taxes]

MURRAY, District Judge:

It is stipulated and agreed

I. That the above-entitled action for the foreclosure of the United States tax liens has been authorized by the Commissioner of the United States Internal Revenue Service and is brought under the direction of the Attorney General of the United States.

II. That during all times from October 1, 1951, to and including December 31, 1952, divers individuals performed services for Mary Spraycar, now deceased, and by whom they were paid wages. On account of said employment and the payment of wages said Commissioner made an assessment for each quarter-period of the amounts deducted and withheld by said Mary Spraycar, deceased, from said wages as taxes upon the income of such employees (otherwise known as taxes under the Federal Insurance Contributions Act and withholding taxes); and said Mary Spraycar, deceased, having failed to file a return of such taxes when due and to pay the amount of said taxes when due, penalties and interest were included in such assessment. The then Collector of Internal Revenue for the District of Montana received the list of each assessment and within ten days he gave notice thereof to and demanded payment of the amount thereof from Mary Spraycar, deceased. Said Collector filed a notice with the County Clerk and Recorder of Deer Lodge County, Montana, for each of said assessments and wherein a lien is claimed on behalf of the United States for the amount thereof upon all property of Mary Spraycar, deceased. The amount of the taxes, penalty and interest of each assessment, the date of the receipt of the assessment list thereof and the date of the filing of the notice with said County Clerk and Recorder are set opposite each taxable period, as follows:

                                                                               Filing of

Taxable Periods                   Amounts                  Lists Rec'd           Notices            Totals

4th quarter 1951         Tax .....         $651.15              4/2/52            4/4/52

                         Pen. ....           65.12

                         Int. ....            6.51                                                $ 722.78

1st quarter 1952         Tax .....          577.16             5/23/52          11/24/52

                         Pen. ....           28.86

                         Int. ....            2.18                                                  608.20

2nd quarter 1952         Tax .....          607.83             8/22/52          11/24/52

                         Pen. ....           30.39

                         Int. ....            1.70                                                  639.92

3rd quarter 1952         Tax .....          676.17            11/17/52          11/24/52

                         Pen. ....           33.81

                         Int. ....            1.33                                                  711.31

4th quarter 1952         Tax .....          247.38             3/23/53           4/16/53

                         Pen. ....           24.74

                         Int. ....            2.05                                                  274.17

                                                                                                 $2,956.38

Payments have been made upon the assessment for the fourth quarter 1951 amounting to $596.92 and the amount of $5.22 of the assessment for the fourth quarter of 1952 has been abated. No part of the balance of $2,354.24 of said assessments has been paid.

III. That on each of not less than twenty days in each of not less than twenty different calendar weeks during the calendar year 1951 Mary Spraycar, now deceased, had eight or more individuals in her employment and paid wages to them. By reason of such employment and payment of wages said Commissioner made an assessment of a federal excise tax (otherwise known as a tax under the Federal Unemployment Tax Act) in the amount of $150.13, and, said Mary Spraycar, deceased, having failed to file a return of such tax when due and to pay the amount thereof, a penalty of $5.78 and interest of 58 cents were included in said assessment, making a total assessment of $172.64. On October 11, 1952 , said Collector received the list of said assessment and, within ten days of the receipt thereof, he gave notice to and demanded payment of the amount thereof from Mary Spraycar, deceased. On December 18, 1952 , said Collector filed a notice with the County Clerk and Recorder of Deer Lodge, Montana , wherein a lien is claimed on behalf of the United States against all property of Mary Spraycar, deceased, for the payment of the amount of said assessment. No part thereof has been paid.

IV. That on the 19th day of July, 1952, the City of Anaconda , County of Deer Lodge , State of Montana , Mary Spraycar, now deceased, made and executed her promissory note, in writing, whereby she promised to pay to Selma D. Ivankovich the sum of $2,797.81. That at the time and place aforesaid, in order to secure payment of said promissory note, Mary Spraycar, now deceased, executed and delivered to Selma D. Ivankovich a chattel mortgage, as more particularly set out as Exhibit A attached to the separate Amended Complaint and Cross-Complaint of Selma D. Ivankovich, on file in this action.

That no part of said note secured by chattel mortgage has been paid and no proceedings had been had by law for the full recovery of said sum and interest or any part thereof and that the same is wholly owing and unpaid. That said chattel mortgage was made in good faith, without intent to defraud creditors or purchasers and was verified, acknowledged and recorded pursuant to the statute of the State of Montana , as in such case made and provided on the 21st day of July, 1952, in the office of the Clerk and Recorder of Deer Lodge County, State of Montana .

V. That the property described in the aforementioned chattel mortgage was insured by the defendant, Pacific Fire Insurance Company of New York , New York , a corporation, in the amount of $2,000.00.

VI. That the property described in the aforementioned chattel mortgage was destroyed by fire and that said Pacific Fire Insurance Company now owes to the estate of Mary Spraycar, deceased, the sum of $2,000.00, as a result of said loss.

VII. That the defendant, the said Pacific Fire Insurance Company, has paid into the Court the sum of $2,000.00, which sum is the full amount due and owing on the aforedescribed insurance policy and that said sum is admitted by all the parties to this stipulation to be the full amount of the obligation owing from the defendant, the said Pacific Fire Insurance Company.

VIII. That the claims for wages of the following persons: Ann Novis, Regina Bloz, Mabel Bergan, Joyce Smathers (Strizich), Alice Tobin, Audrey Cibulske, Helen Dovich and Virginia Wemple for wages earned and services performed were consolidated by judgment entered on the 10th day of March, 1953, in the District Court for the Third Judicial District for the State of Montana, in and for the County of Deer Lodge, in the amount of $1,230.23, and the costs of said action in the sum of $60.00. Said action being designated as Civil Action No. 6890.

IX. That the claims of Irving C. Pearson and Pauline Laslovich in the amount of $300.00 and $150.00, respectively, were reduced to judgment on the 4th day of September, 1953, in Civil Action No. 6958 in the District Court in the Third Judicial District of the State of Montana in and for the County of Deer Lodge.

X. That the State of Montana claims $364.40 based on a certificate of the Unemployment Compensation Commission of the State of Montana dated December 19, 1952, and filed in the office of the Clerk of the District Court of Deer Lodge County on the 24th day of February, 1953, in the amount of $364.40 and the sum of $62.97 based upon a certificate of the Unemployment Compensation Commission of the State of Montana, dated April 2, 1953, and filed in the office of the Clerk of Court on the 8th day of April, 1953.

XI. That an order pronouncing defendants to be in default was entered in the above-entitled action against the following defendants: Cliff Galle, d/b/a Clover Leaf Creamery; Ann Novis; Regina Bloz; Joyce Smathers; Alice Tobin; Audrey Cibulske; Helen Dovich; Virginia Wemple; Irving C. Pearson; Pauling Laslovich; Charles Johnson, d/b/a Park Motors Company; Michael Sladich, d/b/a Central Meat Market; and the State of Montana.

Order Granting Motion for Summary Judgment

The above entitled cause came before the Court on a motion for summary judgment, made jointly by plaintiff, United States of America , and the defendant, Selma D. Ivankovich.

The plaintiff, the United States of America, represented by Frank M. Kerr, Assistant United States Attorney, the defendants, Selma D. Ivankovich, represented by Messrs. J. B. C. Knight and Wade J. Dahood, of Anaconda, Montana, Leonard Spraycar, Administrator for the Estate of Mary Spraycar, deceased, formerly d/b/a Coffee Cup Cafe, represented by Messrs. Irving C. Pearson and Rob ert J. Boyd, appeared in this cause waived notice of the aforesaid motions for summary judgment and agreed and stipulated that the same may be considered and ruled upon by the Court without further appearance by the aforesaid parties. Default was entered against the defendants Cliff Galle, d/b/a Clover Leaf Creamery, Ann Novis, Regina Bloz, Joyce Smathers, Alice Tobin, Audrey Cibulske, Helen Dovich, Virginia Wemple, Irving C. Pearson, Pauline Laslovich, Charles Johnson, d/b/a Park Motors Company, Michael Sladich d/b/a Central Meat Market, and the State of Montana for their failure to file their answers, or otherwise appear or plead to the plaintiff's amended Complaint within the time allowed by law, or at all. Upon Stipulation of all answering parties this action was dismissed as to defendant Pacific Fire Insurance Company of New York , N. Y., a corporation.

On this showing the movants have established that there are no controverted issues of fact in this cause and the moving parties are entitled to judgment in their favor to the extent their respective rights appear as a matter of law. It is so ordered.