Garnishment

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[97-2 USTC ¶50,739] In re Richard F. Morgan, Mary A. Morgan, Debtors. The First National Bank of Mt. Dora, Florida, Plaintiff v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan and Joseph Morgan, Defendants. United States of America, Intervenor and Richard E. and Mary A. Morgan, Cross-Plaintiffs v. United States of America, Cross-Defendants and United States of America, Cross-Plaintiffs v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan and Joseph Morgan, Cross-Defendants and V. John Brook, Chapter 7 Trustee, Cross-Plaintiff v. Richard Morgan a/k/a Richard E. Morgan, Mary A. Morgan and Joseph Morgan, Cross-Defendants

U.S. Bankruptcy Court, Mid. Dist. Fla., Tampa Div., 95-4824-8P7, 6/6/97

[Code Sec. 6323 ]

Tax liens: Validity: Priority: Bankruptcy: Trustee: Garnishment lien: Attorneys' fees.--

The IRS had a valid, enforceable tax lien, superior to the claim of a bankruptcy trustee, on funds that had been held in a bank account belonging to the debtors but that were placed in a court registry following the bank's interpleader action. The IRS had assessed the taxes, the debtors refused to make payment, and a tax lien arose against all of their properties, including their bank deposits. Furthermore, since the debtors failed to timely challenge the IRS's deficiency determination by filing a petition with the Tax Court, the deficiency became assessable. Finally, the trustee acquired a valid garnishment lien for attorneys' fees incurred with respect to the debtors on the funds in the registry that was junior to the tax lien.

Rob erta Colton, P.O. Box 1102 , Tampa , Fla. 33601-1102 , for plaintiff. Alan C. Watkins, 1509 Swann Ave., Tampa, Fla. 33606, David B. McEwen, Schneikart & McEwen, 150 Second Ave., N., St. Petersburg, Fla. 33701, for defendant V. John Brook. Brian L. Schwalb, Department of Justice, Washington , D.C. 20530 , for intervenor U.S.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

PASKAY, Chief Bankruptcy Judge:

THIS IS a Chapter 7 liquidation case and the matters under consideration are three Motions for Summary Judgment filed by the United States of America (Government); V. John Brook (Trustee); and Richard E. Morgan and Mary A Morgan (Debtors), respectively. In order to place the Motions in their proper perspective, it is helpful to briefly recap the procedural background of this adversary proceeding, originally styled, The First National Bank of Mt. Dora , Florida (Bank) v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan, and Joseph Morgan, Defendants. On July 6, 1995 , the Bank filed its Complaint for Interpleader. On August 9, 1996 , this Court entered an Order granting leave to the Government to intervene. The Order was entered on October 16, 1996 , after this Court overruled the Debtor's objection to the intervention by the Government. The Order also granted thirty days to the Government to file cross-claims against the Debtors and the Trustee, and thirty days to the Debtors to file a cross-claim against the Trustee and the Government.

On October 30, 1996 , the Debtors filed their Cross-Claim against the Government. On November 13, 1996 , the Government filed its Cross-Claim against the Trustee and the Debtors. On November 15, 1996 , the Trustee filed his Cross-Claim against the Debtors. On November 30, 1996 , the Bank deposited the funds in controversy in the Registry of this Court pursuant to an Order entered by this Court on July 31, 1995 , granting partial summary judgment of interpleader in favor of the Bank. Thus, left for consideration are the competing claims to the funds in the Registry by the Government, the Trustee, and the Debtors.

The controversy presented for this Court's consideration is the three Motions for Summary Judgment described earlier, in which each of the Movants contend that there are no genuine issues of material fact and that each is entitled to a judgment in their respective favors as a matter of law. In its Motion, the Government contends that the Debtors are indebted to the Government for unpaid, assessed income tax liabilities for the years 1992 up to and including 1995; that as a matter of law, the Government has a lien on all assets of the Debtors, including the funds held by them in the Bank which are now deposited in the Registry; and that the controlling facts are not in dispute. Therefore, the Government contends that its Motion should be granted as a matter of law. In his Motion, the Trustee contends that he and his wife obtained judgment against the Debtor, Richard Morgan, for slander of title; that in aid of execution of this judgment he garnished the funds which are in the Registry; that he has an agreement with the Government as to the respective priorities of the Trustee and the Government; and that based on the undisputed facts he acquired a valid lien on the funds vis-a-vis the Debtors. Therefore, the Trustee contends that his Motion for Summary Judgment should be granted.

Finally, the Debtors, in their Motion consisting of fifteen separate paragraphs, contend inter alia that this Court erred in permitting the Government to intervene due to "lack of knowledge"; that there is no such entity as the "Internal Revenue Service" set forth in the Constitution nor in any law written by Congress; that the assessment was improper because it was not signed by an "assessment officer"; that the Government lost all of its immunity (or sovereignty) when it filed a claim in the Bankruptcy Court; that the Proof of Claim filed contains an illegible signature; that the Proof of Claim is not supported by any documents; that the "United States of America nor the Internal Revenue Service" addressed the proof to a Table of Authorities provided by the Debtor; and that the Government successfully convinced the Court that it acquired a new client, the Southern Bank, even though "the Southern Bank sent no representative to a hearing." In addition to the foregoing, the Debtors also set forth various and sundry statements, none of which are remotely relevant to their Motion for Summary Judgment. Therefore, it is unnecessary to either recite or paraphrase them.

The Debtors in the Wherefore Clause of their Motion request the following relief:

1. Order the monies in the Registry to be paid over to the Debtors.

2. Order any monies held in the estate to be paid over to the Debtors.

3. Order the sanction of the United States of America for representing the Southern Bank of Central Florida .

4. Order the non-existent "Internal Revenue Service" sanctioned for its entry of a non-perfect document described as "Form 10."

5. Order an award of justicable (sic) money to the Debtors for the Department of the Treasury/Internal Revenue Service; as described by Title 18 United States Code; Sections 152 and 3571; for the violation in not submitting assessment forms signed by an "assessment officer" with properly delegated (published in the Federal Register) authority to sign such a documents.

6. Issue any other orders deemed justicable (sic).

In addition, the Debtors also filed a document entitled, "Objections to the Government's and Brook's Motions for Summary Judgment." Neither the Rules which govern adversary proceedings nor any other rule of procedure provide for an "objection to summary judgment." Nevertheless, this Court considers the same as a response and written argument against the Motions filed by the Government and the Trustee. Stripping the document of largely meaningless and irrelevant rhetoric, the Debtors' argument presents nothing new and is, in essence, a rehash of the matter set forth in their Motion for Summary Judgment, reiterating a twenty-five page document with some reprint from the Internal Revenue manual and citations which are claimed to support the proposition urged by the Debtors. It shall suffice to note that the foregoing contentions of the Debtors are merely restatements of the old refrain that the Internal Revenue Service (IRS) does not exist; that there is no obligation to pay income tax; that the system is voluntary; that there is nothing in the Internal Revenue Code providing that any part of earnings known as wages and commissions is regulated; that no one has an obligation to file Form 1040; and that there was no valid assessment of unpaid taxes against the Debtors.

The one and only issue involves the validity, vel non, of the tax and the garnishment liens claimed by the Government and the Trustee respectively. The facts relevant to this issue as they appear from the record can be summarized as follows.

It is without dispute that the Debtors did not file an income tax return (Form 1040) for the tax years of 1993, 1994, and 1995. On April 10, 1995 , the IRS addressed a request to Richard Morgan urging him to file his tax return for the tax year ending December 31, 1993 . On March 18, 1996 , the IRS informed Mary E. Morgan that she failed to file her tax returns for 1993, 1994, and 1995, and urged her to file her tax returns. On June 3, 1996 , the IRS requested that both Debtors contact the IRS within ten days and stated that if they failed to do so, the IRS would proceed with other action to bring them into compliance with the tax laws. (Govt. Exh. 7).

On June 10, 1996 , Richard Morgan wrote to N. Kenyon, Tax Auditor, an employee of the IRS, and informed Mr. Kenyon that he does not meet the definition of a person who is required to file any Form 1040. Mr. Morgan also demanded that the IRS furnish him with an authoritative regulation to show that he is required to file a tax return, and send him any information the IRS had as to what his gross or taxable income was for the years in question and from what source derived, plus additional documentation to show Mr. Kenyon's authority to send the letters (Govt. Exh. 8). Mrs. Morgan sent an identical letter to Mr. Kenyon.

After concluding the audit, the IRS made a jeopardy assessment of the federal income tax liabilities of Mr. Morgan for the years 1993, 1994, and 1995 in the total amount of $138,286.97 (Certificate of Assessment and Payments) (Govt. Exh. 9). On July 24, 1996 , the IRS made a jeopardy assessment of Mrs. Morgan's federal income tax liability for the years 1993, 1994, and 1995 in the total amount of $97,703.60 (Certificate of Assessment and Payments, Govt. Exh. 10). On July 24, 1996 , the IRS mailed a Notice of Jeopardy Assessment and Right to Appeal (Govt. Exhs. 11, 12). The Notice was sent to both Mr. and Mrs. Morgan.

On July 14, 1996 , the IRS filed a Notice of Federal Tax Lien (Form 668(Y)) in the amount of $138,286.97 based-on the tax liability assessed against Mr. Morgan. The Notice was filed in the Office of the County Comptroller . (Govt. Exh. 13). In addition, on July 14, 1996 , the IRS served Notices of Levy upon the Clerk of the Bankruptcy Court, one concerning the tax liability of Mr. Morgan, the other of Mrs. Morgan (Govt. Exh. 14).

On May 18, 1995 , the Debtors filed their joint Petition for Relief under Chapter 7 of the Bankruptcy Code. (Doc. No. 1). On their Schedule of Assets, the Debtors listed a joint checking account at the First National Bank of Mount Dora, Florida (Bank), stating a balance of $100,000.00. It is without dispute that on the date the Debtors filed their Petition they had three separate accounts in the same Bank: Accounts Numbers 0220338453, 02220338024, and 220338013, respectively. At the time the Debtors filed their Petition, Mr. and Mrs. Morgan were the only signatories on these accounts. (Govt. Exh. 2). On June 19, 1996 , after the commencement of the case, the Debtors amended their signature cards and added Joseph M. Morgan, their son, as an additional signatory. (Govt. Exh. 3). There is nothing in this record and it is not contended by the Debtors that Joseph Morgan contributed to the funds on deposit in the Bank.

In due course, V. John Brook was appointed as Chapter 7 Trustee and placed in charge of the admin istration of the estate of the Debtors. On June 28, 1995 , the Trustee made a written demand on the Bank to turn over all funds in the accounts maintained by the Debtors. (Govt. Exh. 4). On July 5, 1995 , Joseph Morgan made a written demand on the Bank and requested that the funds in the accounts be wire-transferred to the Bank of Mississippi, Tupelo , Routing No. 0653-00486, Account Number 22379440. (Govt. Exh. 5). Faced with the two competing claims to the funds in the three accounts, the Bank filed its Complaint for Interpleader. (Doc. No 11). The Government was not named initially by the Bank as a defendant. On July 31, 1995 , this Court entered a Partial Final Judgment in favor of the Bank, directing the Bank to deposit in the Registry all funds in the three bank accounts. (Doc. No. 23). On August 17, 1995 , the Bank deposited in the Registry in the amount of $125,943.49 in compliance with the Partial Final Judgment. (Adv. Doc. No. 26).

On July 27, 1995 , the Debtors converted their Chapter 7 case to a Chapter 13 case, (Doc. No. 12), but on September 12, 1995 , the Chapter 13 case was reconverted to a Chapter 7 case on the motion filed by the Trustee (Doc. No. 53).

On August 28, 1995 , the IRS filed a Proof of Claim in the amount of $60,322.27. (Govt. Exh. 6). The Proof of Claim was filed as secured based on the federal tax liens for assessed and unpaid income tax liability for the years 1990 through 1992, inclusive. On November 6, 1995 , this Court dismissed the Debtor's Chapter 7 case, retaining jurisdiction to determine fees and costs and to order the disbursement of the funds being held by the Clerk of the Bankruptcy Court. Furthermore, it is understood by all parties that the Court reserved jurisdiction to determine the respective right of the claimants to the funds deposited by the Bank in the Court's Registry. (Doc. No. 69).

On May 8, 1996 , after the case had been dismissed, the Debtors filed an objection to the Proof of Claim filed by the IRS. On May 22, 1996, this Court overruled the objection and after the IRS collected the assessed income tax liabilities of the Debtors for years 1990 through 1991, this Court allowed the Government's claim against Mr. Morgan in the amount of $886.70, and against Mrs. Morgan in the amount of $17,715.23. (Doc. No. 106).

As noted earlier, on October 16, 1996 , this Court granted leave to the Government to intervene in the interpleader filed by the Bank. The Government filed its Motion to Intervene, (Adv. Doc. No. 42), coupled with a Cross-Claim, (Adv. Doc. No. 44), as well as a response to the Cross-Claim filed by the Debtors, (Adv. Doc. No 43). On January 31, 1997 , this Court granted the Government's Motion to Intervene. (Adv.Doc. No. 53). Although this Court granted leave to Joseph Morgan to file a cross-claim asserting his claim against the fund in the Registry, he failed to file a cross-claim within the time fixed by this Court. Consequently, Joseph Morgan no longer has any claim against the funds in the Registry. The Government in its Cross-Claim asserted that the Government has a valid tax lien securing the Debtor's unpaid assessed federal income tax liability for the tax years of 1993, 1994, and 1995 in the total amount of $254,000.00, made up of the amount of the liability of Mr. Morgan and the amount of the liability of Mrs. Morgan in the amount of $103,539.95, plus interest and statutory additions.

The Trustee and his wife are the fee simple owners of their homestead, located in Pinellas County , Florida . There is no question that the Debtor was aware that the Trustee's residence in Pinellas County was his properly established homestead. Notwithstanding, Mr. Morgan recorded in the Office of the Clerk of the Circuit Court of Pinellas County, in O.R.Book 9190, Page 1845, an instrument dated December 12, 1995, claiming a "common law" lien, or a "commercial lien" on the Trustee's homestead.

In order to remove this cloud on the title on his homestead, the Trustee engaged the services of an attorney who filed a writ against Mr. Morgan to quiet title, for slander of title and also sought injunctive relief. On July 3, 1996, the Circuit Court in and for Pinellas County, Florida, entered its order on the Trustee's Motion for Summary Judgment, finding that the property involved was in fact the homestead of the Trustee, that the Notice of Lis Pendens recorded in the Public Records of Pinellas County is a cloud on the Trustee's title and shall be expunged. Furthermore, based on Fla. Stat: §57.105, the Court entered a judgment in favor of the Trustee and against the Debtor, Mr. Morgan, for $1,950 together with taxable cost in the amount of $210.50, or a total of $2,160.50 bearing a rate of interest at 12% per annum.

As the Debtor had not satisfied the Judgment within the time ordered by the Court, the Trustee filed a Motion for Writ of Garnishment on July 15, 1996 . On July 18, 1996 , the Clerk of the Circuit Court issued the Writ which was served on the Clerk of the Bankruptcy Court on July 14, 1996 . In due course, the Government filed an Answer to the Writ on behalf of the Government and the Clerk of the Bankruptcy Court. In its Answer, the Government stated on behalf of the Clerk that the Clerk is not indebted to Mr. Morgan, who is merely a stakeholder of the funds. On December 16, 1996 , Christine R. Brook, the Trustee's spouse, assigned her interest in the Judgment to the Trustee (State Court Exhibit C). The Government and the Trustee agreed as to the respective priority of their claims to the fund. This leaves for consideration the dispute between the Government, the Trustee, and the Debtors.

GENERAL PRINCIPLES GOVERNING SUMMARY JUDGMENTS

Motions for summary judgment are governed in adversary proceedings by F.R.B.P 7056, which adopted Fed.R.Civ.P. 56. Fed.R.Civ.P. 56 is an integral part of federal practice and was designed to secure a just, speedy, and inexpensive determination of controversies where the relevant facts are not in dispute. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). It is well established that it is appropriate to dispose of the controversy

if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).

It is clear that the moving party has the burden to establish not only the absence of any genuine issue of material fact, but also that the controlling law supports, the claim and the relief sought. Celotex Catrett, supra; Adickes v. S. H. Kress & Co., 398 U.S. 144, 157 (1970); Sweat v. Miller Brewing Co., 708 F.2d 655 (11th Cir. 1983). To assure that the non-moving party receives a fair consideration of its position and especially its right to a plenary disposition of the controversy if there are genuine issues of material facts, the underlying facts and all reasonable inferences must be viewed in a light most favorable to the non-moving parties. Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). It is equally clear, however, that the non-moving party may not rely on mere allegations or denials in the pleadings. Instead, it must set forth specific facts in affidavits or through competent evidence that there are genuine issues of material facts which require a resolution by trial.

This Court is satisfied that there are no disputed facts which would prevent the disposition of the conflicting claims of the Government and the Debtors by summary judgment. The Government made repeated efforts to secure the tax returns for the years in question and the Debtors did not file the tax returns for the years in question. It is equally without dispute that the Government sent and the Debtors received the notices of the deficiency and the notice of assessments and demand for payment; that they failed and refused to pay the amount found to be due and assessed for the years in question; that the Government made a jeopardy assessment against Mr. Morgan for the years 1993, 1994, and 1995 in the total amount of $138,286.97 and made a jeopardy assessment against Mrs. Morgan for the unpaid taxes for the same years in the amount of $97,793.60; and that the Notice of Jeopardy Assessment and Right to Appeal, along with an explanation of the income tax determination and demand for payment, were sent to both Debtors.

It is clear that the moment the assessment is made a federal tax lien arises, and shall continue until the liability for the tax assessed is satisfied or becomes unenforceable due to lapse of time. 26 U.S.C. §6322. The tax lien as a matter of law becomes a valid charge on all properties of the taxpayer.

The Debtors, who do not deny the material facts and albeit do not expressly concede the absence of any genuine issues of material fact basically dispute that: (1) they are required to pay income tax; (2) the IRS is an existing entity with power to make the assessment; and (3) that there is a valid easement because there is nothing in this record to show an assessment signed by an "assessment officer." The Debtors, therefore, contend that the Government never acquired any valid enforceable tax lien on the funds which were on deposit in the Bank, and that the Debtors are entitled to all the funds in the Registry.

Section 6201 of the Internal Revenue Code authorizes the Secretary of Treasury, or his delegate, to assess all taxes, including interest and additional taxes imposed by the Code. The assessment is made by "recording the liability of the taxpayer in the Office of the Secretary in accordance with the rules and regulations prescribed by the Secretary." 26 U.S.C 6203. While it is true that in the present instance the actual assessments are not part of this record, the Government filed a Certificate of Assessment and Payments. It is recognized that such a certificate is presumptive proof of a valid assessment. United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989), quoting United States v. Dixon [87-2 USTC ¶9485], 672 F.Supp. 503, 505 (M.D.Ala. 1987) aff'd, 849 F.2d 1478 (11th Cir. 1988). See also Freck v. Internal Revenue Service [94-2 USTC ¶50,518], 37 F.3d 986, 991-92 n.8 (3d Cir. 1994) Long v. United States [92-2 USTC ¶50,431], 972 F.2d 1174, 1181 (10th Cir. 1992). Moreover, the Debtors failed to challenge the IRS's determination of their tax liability before it was assessed by filing a timely petition with the U.S. Tax Court. 26 U.S.C. §6213. Therefore, the assessment was timely made. The Debtors had a right to challenge the correctness of the notice of deficiency issued after the jeopardy assessment of their 1993, 1994, and 1995 tax liabilities by filing a timely petition in the U.S. Tax Court. 26 U.S.C. §6961(b). While they did challenge the jeopardy assessment in the U.S. District Court, the jurisdiction of the District Court is limited to a review of the reasonableness of the assessment. Because they did not file a petition in the Tax Court within ninety days of the receipt of the notice of deficiency, the deficiency became assessable, 26 U.S.C. §6213(c), regardless of the jeopardy assessment procedure. Humphreys v. United States , 62 F.3d 667 (5th Cir. 1995). Lastly, while the Government may be named as a party in an interpleader action, the taxpayer cannot challenge the underlying tax assessment. Stoecklin v. United States, 943 F.2d 42, 43 (11th Cir. 1991); Rob inson v. U.S. [91-1 USTC ¶50,001], 920 F.2d 1157, 1161 (3d Cir. 1990); Schmidt v. King [90-2 USTC ¶50,487], 913 F.2d 837, 839 (10th Cir. 1990). The only litigation which may be brought under 28 U.S.C. §2410 is to challenge the procedural validity of the federal tax lien and the taxpayer may not attack the merits of the underlying assessment.

Based on the foregoing, this Court is satisfied that there is no dispute that the assessment has been made; that the Debtors failed and refused to pay the taxes assessed; and that as a result a tax lien arose against all properties of the Debtors, including the funds which were on deposit in the Bank. There being no genuine issues of the material fact, the Government is entitled to an Order granting its Motion for Summary Judgment vis-a-vis the Debtors, and based on the stipulation by the Trustee, its tax lien is superior to the claim of the Trustee, but only to the extent and consistent with the stipulation.

MOTION FOR SUMMARY JUDGMENT BY THE TRUSTEE

The facts relevant to the Trustee's Motion are equally without dispute. The validity of the Judgment obtained by the Trustee in the State Circuit Court is not in dispute and neither is the fact that the Trustee obtained a Writ of Execution which was served on the Clerk of the Bankruptcy Court. The only question remaining is whether the garnishment lien did attach to the funds while the funds were in custodia legis.

In light of the fact that the Chapter 7 case has been dismissed, and although ordinarily any property remaining would be returned to the Debtor, the estate as such has no further interest in the property. However, because it is understood that this Court retained jurisdiction over the adversary proceedings in which competing claims to the funds deposited in the Court's Registry have been asserted by all parties in interest, this Court is satisfied that it is appropriate to consider the validity of the garnishment lien asserted by the Trustee. Based on the foregoing, undisputed record this Court is satisfied that the Trustee acquired a garnishment lien on the funds in the Registry, albeit junior to the tax lien of the Government. Since there are no genuine issues of material fact, the Trustee's Motion for Summary Judgment should be granted.

Accordingly, it is

ORDERED, ADJUDGED AND DECREED that Motion for Summary Judgment filed by the Government be, and the same is hereby, granted.

It is further

ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgement filed by the Trustee be, and the same is hereby, granted.

It is further

ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by the Debtors be, and the same is hereby, denied.

A separate final judgment will be entered in accordance with the foregoing.

DONE AND ORDERED.

 

 

[69-2 USTC ¶9624]American Hospital Supply Corporation et al. v. Farmers State Bank of Brookshire, Garnishee v. United States of America

District Court, Harris County, Tex, 125th Judicial District, No. 706,029-A, 6/10/69

[Code Sec. 6323]

Priority of liens: Garnishment by creditor: Claims not reduced to judgment before filing of tax lien.--The lien of a writ of garnishment filed on behalf of a litigating creditor for purposes of attaching to funds placed in the Registry of the Court by the garnishee was not superior to the Government's tax lien since the litigating creditor claim had not been reduced to judgment before the filing of the Federal tax lien. Also, the Federal tax lien had priority over any claim by the interpleader for attorney's fees.

Rob ert J. Newton, Urgan, Coolidge, Pennington & Heard, 606 Houston First Savings Bldg., Houston, Tex., for American Hospital Supply Corp. Oliver S. Kitzman, Brookshire, Tex., for Farmers State Bank of Brookshire, Joel P. Kay, Ass't U. S. Attorney, Houston, Tex., for U. S.

Summary Judgment

DICKSON, District Judge:

This cause came on regularly for hearing before the Court on June 3, 1968, on the United States' motion for summary judgment, the United States by Joel P. Kay, Assistant United States Attorney, and American Hospital Supply Corporation by its attorney, Rob ert J. Newton, having announced ready, and the garnishee, Farmers State Bank of Brookshire, by its counsel Oliver S. Kitzman, appearing not, and the Court having heard the representations of the parties present and considered the pleadings filed by all parties to this proceeding and thereafter the Court having directed that the United States' motion for summary judgment be granted, now, therefore by reason of the considerations aforesaid:

It is hereby ORDERED, ADJUDGED and DECREED:

1. That Tri-County Nursing Home, Inc., is indebted to the United States of America in the amount of $2,556.21, plus interest as provided by law, for federal employment taxes for the fourth quarter of 1965 and the first three quarters of 1966, and that such liabilities are secured by federal tax liens in the amounts thereof; that the fund of money in the amount of $1,073.73 heretofore placed in the Registry of the Court by the garnishee, Farmers State Bank of Brookshire, constitutes the property and rights to property of Tri-County Nursing Home, Inc., which is duly encumbered by the federal tax liens heretofore stated.

2. That by virtue of the judgment heretofore entered in Cause No. 706,029 in this Court in March of 1967 Tri-County Nursing Home, Inc., is indebted to American Hospital Supply Corporation in the amount of $6,166.79, plus court costs and interest as provided by law.

3. That the federal tax liens asserted by the United States in this proceeding have priority to the claim asserted by the American Hospital Supply Corporation as to the fund of money in the amount of $1,073.73 in the Registry of the Court.

4. The sum of money in the amount of $1,073.73 now in the Registry of the Court be disbursed by the Clerk of the Court as follows:

a. The sum of $48.00 to the garnishee, Farmers State Bank of Brookshire, for its cost of court, by the Clerk of this Court issuing his check to the said Farmers State Bank of Brookshire and forwarding same to its attorney of record, Oliver S. Kitzman, P. O. Box 336, Brookshire, Texas;

b. The remainder of said fund in the amount of $1,025.73 to the United States for application to the heretofore stated federal employment taxes of Tri-County Nursing Home, Inc., by the Clerk of this Court issuing his check to the Treasurer of the United States in the said amount of $1,025.73 and forwarding same to its attorney of record, Morton L. Susman, United States Attorney, P. O. Box 61129, Houston, Texas 77061, to the attention of Joel P. Kay, Assistant United States Attorney.

5. That all relief sought by each party to the above numbered and entitled garnishment proceeding not herein specifically granted is denied.

Memorandum of Law in Support of the United State's Motion for Summary Judgment

This suit was instituted by the AMERICAN HOSPITAL SUPPLY CORPORATION in order to garnish certain funds held by the FARMERS STATE BANK OF BROOKSHIRE for the Tri-County Nursing Home, Inc. Said garnishment was initiated prior to the AMERICAN HOSPITAL SUPPLY CORPORATION'S judgment against the Tri-County Nursing Home, Inc.

The garnishment herein was initiated by AMERICAN HOSPITAL SUPPLY CORPORATION on July 1, 1966 . On November 18, 1966 , the UNITED STATES OF AMERICA filed a Notice of Federal Tax Lien against the taxpayer, Tri-County Nursing Home, Inc., showing an indebtedness to the UNITED STATES OF AMERICA on certain unpaid taxes in the amount of $2,556.21. A certified copy of said Notice of Federal Tax Lien is attached to the Motion for Summary Judgment as Exhibit 2. An affidavit of the District Director of Internal Revenue Service is also attached to the motion, certifying the validity of the assessment for the taxes for which the Notice of Tax Lien was filed in Waller County , Texas . No judgment was obtained against the Tri-County Nursing Home, Inc., by AMERICAN HOSPITAL SUPPLY CORPORATION until March 1967. The AMERICAM HOSPITAL SUPPLY CORPORATION admits that at the time of the filing of the Notice of Tax Lien in Waller County , Texas , by the UNITED STATES OF AMERICA on November 18, 1966 , that no judgment had been rendered in this cause in the District Court of Harris County, Texas.

Since the AMERICAN HOSPITAL SUPPLY CORPORATION'S claim against Tri-County Nursing Home, Inc., was not reduced to judgment prior to the filing of the Federal Tax Lien, the Federal Tax Lien takes priority over the claim of AMERICAN HOSPITAL SUPPLY CORPORATION. United States v. Liverpool & London & Globe Insurance Co. [55-1 USTC ¶9136], 348 U. S. 215. The Federal Tax Lien herein is likewise prior to any claim by the interpleader for attorneys' fees. United States v. R. F. Ball Construction Co., Inc., et al. [58-1 USTC ¶9327], 355 U. S. 587.

WHEREFORE, the UNITED STATES OF AMERICA prays that the garnished fund be paid to the UNITED STATES OF AMERICA , and that costs of this proceeding be charged against the plaintiff, AMERICAN HOSPITAL SUPPLY CORPORATION.

 

 

[68-2 USTC ¶9487]Lorren J. Kuffel, Appellant v. United States of America , Appellee

Ariz. Supreme Court, No. 8422, 441 P2d 771, 5/29/68

[1954 Code Sec. 6323(a)]

Lien for taxes: Priorities: Arizona law: Garnishor as purchaser.--Under Arizona law, filing and service of a writ of garnishment by the garnishor do not amount to an equitable assignment to the garnishor of the debt owed by the garnishee to the delinquent taxpayer. Accordingly the garnishor did not become a purchaser under Sec. 6323(a) entitled to record notice of the federal tax lien.

[1954 Code Sec. 6323(a)(1), prior to enactment of P. L. 89-719]

Lien for taxes: Notice of lien: Personalty: Place of filing.--In a case involving intangible personal property (a debt owed to delinquent taxpayer), notice of federal tax lien was properly filed with the county recorder in the county where the delinquent taxpayer resided.

[1954 Code Sec. 6323, prior to enactment of P. L. 89-719]

Lien for taxes: Priorities: Garnishment proceedings: Attorney's fees.--Where the Government's tax lien was entitled to priority over a garnishment lien, it was also prior to the garnishor's claim for reasonable attorney's fees.

Carroll E. Dietle, II, Stockton & Hing, 234 N. Central Ave. , Phoenix , Ariz. , for appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, J. Edward Shillingburg, Department of Justice, Washington, D. C. 20530, Jo Ann D. Diamos, United States Attorney, Tucson, Ariz., Richard C. Gormley, Assistant United States Attorney, Tucson, Ariz., for appellee.

MCFARLAND, Chief Justice:

Appellant Lorren J. Kuffel appeals from a judgment rendered in favor of appellee United States of America who was an intervenor below in the garnishment proceedings instituted by appellant against Stephen M. A. Young, defendant-debtor. Appellant contends the lower court erred in holding that a federal tax lien was prior to Kuffel's garnishment lien and refusing to set any part of the garnisheed funds aside as attorney's fees for Kuffel's attorney.

The facts of this case are undisputed. Kuffel was a resident of California , and was in the business of selling truck and automobile parts and supplies. Stephen M. A. Young, hereinafter called Young, was a resident of California doing business individually, and as Western Cut Rate Lumber Co., hereinafter designated as Western, and as Edison Trucking Co., hereinafter designated as Edison . As of April 15, 1956 , Young was indebted to Kuffel for a purchase of tires, truck parts, and other merchandise in the amount of $5,170.02, and on that date Young delivered to Kuffel an installment note for that amount. Young made only one payment for $561.67 on the note in June of 1956. Subsequent to April 15, 1956 , Kuffel sold to Young additional merchandise in the amount of $4,915.72 in excess of payments made by Young on the open account at different times. Kuffel made demands for payment of that sum, but Young failed to pay the amount owing.

On April 18, 1958 , federal excise taxes in the amount of $11,972.17 were assessed against Young in California , and, on May 22, 1958 , the District Director of Internal Revenue, San Francisco , California , filed a notice of lien for those assessed taxes with the County Recorder of Stanislaus County , Modesto , California , which was the place of residence of taxpayer Young.

On August 1, 1958, Kuffel commenced action against Young, individually, dba Western and dba Edison, in the Superior Court of Maricopa County, Arizona, based on Young's indebtedness to him. In accordance with Arizona statutes, Kuffel, as garnishor, caused writs of garnishment to issue, and to be served upon Ray Lumber Co., hereinafter designated Ray, and upon United Wholesale Distributors, hereinafter designated Distributors. On August 8, 1958 , garnishee Ray answered the writ of garnishment, stating that it was not indebted to defendant Young. Three days later the other garnishee, Distributors, answered that it was not indebted to any of the named defendants, but that it was indebted to K. A. Spears Lumber Co., hereinafter called Spears, in the amount of $8,753.60 by reason of orders for lumber placed by Distributors with Spears which were invoiced to Distributors upon the invoices of Western, and that it was informed that Western was not owned by Young.

On October 27, 1958 , the United States through the District Director served on the garnishee-Distributors a notice of levy which notified Distributors that all sums of money or other obligations in its possession and belonging or owing to Young were levied upon, seized, and demanded for satisfaction of Young's tax liability. Also, the United States government served a final demand on Distributors on March 23, 1959 .

On April 6, 1959 , the United States filed notices of a lien for taxes assessed on April 18, 1958 , with the County Recorders of Maricopa and Pima Counties in Arizona .

On June 23, 1961 , the United States ' motion to intervene was granted, and its complaint filed. The government claimed that its lien for taxes, based on the 1958 assessments, was prior to rights of Kuffel that were created by the garnishment proceedings.

In July of 1961 Distributors amended its answer to the Writ of Garnishment, and stated that at the time of the service of the writ and at the time of answering said writ it was indebted to defendant Young, individually, dba Western and dba Edison , in the sum of $8,573.60. Default was taken against Young, individually, dba Western, dba Edison , on August 2, 1961 .

Subsequently the United States moved for summary judgment based upon the priority of its existing lien for taxes. On February 4, 1964 , the trial court granted the United States government's motion for summary judgment in the total amount of $8,573.60 against Young, individually, dba Western and dba Edison; Kuffel; and Distributors, which sum was being held by Distributors as garnishee. The court held that the government liens were prior and superior to all other liens, claims and interests of all the other parties in the action, thereby refusing to allow Kuffel the reasonable value for the services of his attorneys.

Kuffel contends his filing and service of the writ of garnishment constituted an equitable assignment to him as the garnishor of the debt owed by Distributors to Young, and hence as garnishor he became a "purchaser" within the meaning of Section 6323(a) of the Internal Revenue Code of 1954 which entitled him to record notice of the tax lien. Kuffel further argues that he did not receive the requisite notice for the reason that notice of the tax lien was not filed in Arizona until after the garnishment proceedings were instituted in Arizona , although notice of the tax lien was filed in California prior to the filing and service of the writ of garnishment in Arizona .

Sections 6321, 6322, and 6323 of the Internal Revenue Code of 1954 set forth the provisions bearing on this case. ¹

The federal tax lien is created by Section 6321 of the Internal Revenue Code of 1954, and it attaches to "all property and rights to property, whether real or personal, belonging" to the delinquent taxpayer. The lien attaches not only to all property held by the taxpayer on the date the lien arose, but also to after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, 66 S. Ct. 108, 90 L. Ed. 56. The lien arises "at the time the assessment is made." Section 6322, Internal Revenue Code of 1954. The federal lien is perfected and choate at the time it arises. United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520.

The priority of a federal tax lien as against other interests created under state law is expressly governed in part by statute. Section 6323(a) of the 1954 Code--the provision relied upon by the garnishor, Kuffel--provides that, as against a holder of certain enumerated interests, including that of a purchaser, the tax lien is not valid until notice has been filed. The question then is: Did Kuffel become a purchaser within the meaning of federal law when he commenced the garnishment proceedings? We hold that he did not. The determination of those to whom Section 6323 is applicable is a federal question. United States v. L. R. Foy Construction Co., Inc. [62-1 USTC ¶9325], 300 F. 2d 207 (C. A. 10th)

In United States of America v. Liverpool & London & Globe Insurance Company [55-1 USTC ¶9136], 348 U. S. 215, 99 L. Ed. 268, 75 S. Ct. 247, in discussing priorities of a tax lien over writs of garnishment issued and served and attorney's fees, the court said:

"The question of priorities is identical with that of Acri, No. 33, this day decided, and United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S. 47, 95 L. ed. 53, 71 S. Ct. 111. On the authority of those cases we hold the tax liens of the United States superior to the lien of the garnisher.

"As to the attorney's fee allowed the garnishee insurance company, Rule 677, Vernon's Texas Rules of Civil Procedure, provides:

"Where the garnishee is discharged upon his answer, the costs of the proceeding, including a reasonable compensation to the garnishee, shall be taxed against the plaintiff; where the answer of the garnishee has not been controverted and the garnishee is held thereon, such costs shall be taxed against the defendant and included in the execution provided for in this section; where the answer is contested, the costs shall abide the issue of such contest."

"The District Court evidently found there was no contest between the insurance company and the other parties, and that the insurance company should be discharged with costs and allowance of a reasonable attorney's fee of $500. It, therefore, ordered the clerk to issue a check to the insurance company, payable out of the funds paid into the court by it.

"If the garnishment lien is not prior to the Government liens, and we have held that it is not, certainly fees allowed in that proceeding are not prior to the Government liens, and the authorization of the payment of the attorney's fees prior to the Government liens was error. The costs and fees should be adjudged against the defendant, as provided by Rule 677."

Kuffel contends the effect of Section 12-1585, A. R. S. ², is to make an equitable assignment by law from Young to him of the debt owed by the garnishee-distributor.

It did not appear from the garnishee-Distributors' answer that it was indebted to Young until after the government had intervened when Distributors amended its answer admitting its indebtedness. Furthermore, the only conceivable argument tending to support this claim would be that immediately upon service of the writ of garnishment Kuffel obtained a perfected, choate lien against Distributors' debt to Young which became an assignment.

In Gillespie Land & Irrigation Co. v. Jones, 63 Ariz. 535, 164 P. 2d 456, we said:

". . . from the date of service of the writ of garnishment any amount due or found to be due from the garnishee to the defendant is in control of the court and held by the court in abeyance until the hearing has been concluded, and cannot be paid to any person except on judgment of the court."

The effect of the writ of garnishment is, therefore, to impound any asset or property of defendant which is found in the hands of the garnishee pending the resolution of the merits of the garnishor's claim. The writ itself constitutes, at most, a lis pendens notice that a right to perfect a lien on the garnisheed property exists, but such perfection must await judicial action.

Any amount due from the garnishee to the debtor at the date of service of the writ is subject to the impounding effect of the writ. Weir v. Galbraith, 92 Ariz. 279, 376 P. 2d 396. The most garnishor Kuffel had after service of the writ of garnishment was an inchoate garnishment lien which could not have been perfected until the time judgment was rendered. At that time Kuffel did not have an absolute right to the funds impounded, but did have a right to have his claim heard without fear that the funds would be dissipated pending judgment. Under our state law Kuffel therefore had no assignment to him of Distributors' debt to Young. Furthermore, under federal law Kuffel did not become a "purchaser" within the meaning of Section 6323 Internal Revenue Code of 1954 upon service of the writ of garnishment, and he cannot claim the benefit of that section which requires that the United States give notice of its tax lien. United States v. L. R. Foy Construction Co., supra; United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d 517 (C. A. 9th).

The United States government took the necessary steps to perfect its lien. Even if Kuffel would have been entitled to record notice, which he wasn't, he did in fact receive such notice before he filed his writ of garnishment. Section 6323(a) of the 1954 Code provides that the federal tax lien is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary of the Treasury or his delegate "In the office designated by the law of the State or Territory in which the property is situated" when the State or Territory had designated an office for the filing of such notice. The property which is the subject of this case--the Distributors debt--was personal property and the situs of such property was in the state of residence and domicile of the taxpayer Young. In Re De Angelis [67-1 USTC ¶9290], 373 F. 2d 755 (C. A. 3d); Walker v. Paramount Engineering Co. [66-1 USTC ¶9106], 353 F. 2d 445 (C. A. 6th); United States v. Goldberg [66-2 USTC ¶9523], 362 F. 2d 575 (C. A. 3d); Marteney v. United States [57-1 USTC ¶9670], 245 F. 2d 135 (C. A. 10th); Investment & Securities Co. v. United States [44-1 USTC ¶9210], 140 F. 2d 894 (C. A. 9th).

Young was a resident of the State of California and the law of that state required that notice of a federal tax lien be filed in the office of the county recorder of the county within which the property subject to the lien was situated. Government Code, 34 West's Annotated California Codes, Section 27330. On May 22, 1958 , the District Director of Internal Revenue filed a notice of tax lien with the County Recorder of Stanislaus County , Modesto , California , the place of residence of Young, more than two months before the garnishor instituted his action and filed his writ of garnishment in the court below on August 1, 1958 . Consequently, the fact that the United States , through the District Director, did not file notices of lien in the State of Arizona until April 6, 1959 , was irrelevant to the Superior Court's resolution of the relative priorities of the tax lien and the garnishment lien.

This result is in accord with the practicalities of this case. To require the government to file notices of tax lien in every place where a delinquent taxpayer has personal property would impose an awesome admin istrative burden on it, particularly with respect to intangible and transitory personal property. See Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (C. A. 5th). On the other hand, the requirement that the government file its notice of lien where the taxpayer resides has the advantage of centralizing the place where the government must file its notice and where creditors of the taxpayer who are entitled to notice under Section 6323 may quickly ascertain what tax liens, if any, are outstanding against their debtor.

Kuffel also contends that even if the tax lien be held superior to the claim he asserts, the trial court erred in refusing to set aside out of the garnisheed funds an amount to compensate his attorneys for services which they rendered in creating and protecting that fund up to the time the United States government intervened in the proceeding below. The amount sought for the reasonable value of attorney's fees is $2,500.00. Kuffel did enter into a contingent-fee arrangement with his attorneys based on thirty-three and a third percent of the amount recovered. It appears that the amount claimed ($2,500.00) is close to the full amount which counsel would have received under their contingent-fee arrangement had they been successful. Kuffel would have the United States , the senior lienor, pay for its opponents' attorneys in addition to its own.

The relative priority of a United States government lien for unpaid taxes is a federal question. United States v. Equitable Life Assurance Society of the United States [66-1 USTC ¶9444], 384 U. S. 323, 86 S. Ct. 1561, 16 L. Ed. 2d 593: United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 283. The general rule in courts of the United States is that each party to the litigation bears the expense of its respective counsel. However, one exception to this rule was noted in Trustees v. Greenough, 105 U. S. 527, 26 L. Ed. 1157. In that case, a holder of certain bonds brought suit against the trustees of the state improvement fund alleging mismanagement and waste of the fund which was to secure the bonds and asking that his claim be allowed, that the fund be charged with the payment thereof, and that an accounting be had. The relief was granted, valuable property was reclaimed to the fund, and agents were appointed for the sale of the property of the fund for the purposes of liquidation. During the liquidation, the holder of the bonds who had initiated the proceedings filed a petition for an allowance from the fund of his expenses, including attorney's fees. The court approved the allowance of attorney's fees, holding that where a bondholder, in good faith, filed a bill to secure the correct application of a fund and succeeded in bringing it under the control of the court for the common benefit of the bondholders, he is entitled to be paid for his costs and counsel fees before distribution. See also Sprague v. Titonic Bank, 307 U. S. 161, 59 S. Ct. 777, 83 L. Ed. 1184. However, the principle announced in the Greenough case has no application to the instant case where counsel for the garnishor, Kuffel, neither created nor protected the debt for the government. It is plain that Kuffel's attorneys did not create an asset where there was none before; they did not reduce a mere cause of action to judgment and thereby create a fund in which the United States government seeks to share.

Kuffel's contention is analogous to that which the Supreme Court of the United States considered in United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770. In that case, a foreclosure proceeding, the mortgagee, whose interest was senior to the tax claims of the United States government, contended that it was entitled to a reasonable attorney's fee ahead of the tax claims under the equitable rules against unjust enrichment. The court rejected this contention as being without merit. It noted that the services rendered by the mortgagee's attorney were rendered for the benefit of the mortgagee to protect his own interest in the property; the United States government, the holder of an adverse interest, received no such benefit from them that its interest was to be charged for them. See also: United States v. Equitable life Assurance Society of U. S. , supra.

In the United States Supreme Court case of United States v. Liverpool & London & Globe Insurance Company, supra, it was held that a tax lien of the United States government was prior in right over a garnishment lien obtained by a creditor of the taxpayer in an action on an open account where the tax lien arose and was filed prior to the date the garnishor obtained judgment against the taxpayer, but subsequent to the date of the garnishment lien. The situation in that case is similar to the one in the instant case, and in that case the Court further held that if a garnishment lien is not prior to a federal tax lien the attorney's fees allowed to the garnishee in the garnishment proceedings are not prior to the tax lien. In that case the attorney's fees were denied to even the garnishee. See also: Nason v. Taylor , 351 Mass. 347, 221 N. E. 2d 400.

The United States Supreme Court has even held where there is a statutory lien under state law it does not take priority over the lien of the United States government for unpaid taxes--that the validity of the lien is a federal question. In United States v. Pay-O-Matic Corp. [58-2 USTC ¶9533], 162 F. Supp. 154, the court held:

"Under Section 475 of the N. Y. Judiciary Law an attorney's lien is more than mere security; it is enforceable by remedy in the nature of foreclosure and may not be extinguished by action of the parties. Here Goldstein's lien arose at the commencement of the suit in condemnation and attached to the award finally made. Reisman v. Independence Realty Corp., 195 Misc. 260, 89 N. Y. S. 2d 763, affirmed 277 App. Div. 1020, 100 N. Y. S. 2d 407; In re Cross Island Pkwy., Nassau County, 171 Misc. 652, 14 N. Y. S. 2d 238. However, 'the relative priority of the lien of the United States for unpaid taxes is, as we said in United States v. Waddill Co. [45-1 USTC ¶9126], 323 U. S. 353, 356, 357, 65 S. Ct. 304, 306, 89 L. Ed. 294; * * * always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this court.' United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213, 75 S. Ct. 239, 241, 99 L. Ed. 264. Whether attorney Goldstein's lein by state tests would be held to be choate, it is clear that under federal tests it is as compared to that of the Government inchoate. It was not established for the amount of the lien was contingent on the outcome of a trial in the state condemnation court to fix the amount of the award to be made to Pay-O-Matic for the property condemned. It was but a 'caveat of a more perfect lien to come' (United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218, 220, 75 S. Ct. 244, 246, 99 L. Ed. 271) and is therefore subordinate to the federal tax lien; United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84, 74 S. Ct. 367, 370, 98 L. Ed. 520."

In the instant case there is no doubt the claim for attorney's fees is inchoate under federal interpretation; this Court must follow the holdings of the United States Supreme Court in determining the validity of the claim for attorney's fees. Accordingly, we hold that the lower court properly held the United States government lien was prior to both Kuffel's garnishment lien and any claim for reasonable attorney's fees.

Affirmed.

STRUCKMEYER, JR., and LOCKWOOD, Justices, concurring.

¹ "Sec. 6321. LIEN FOR TAXES.

"If any person liable to pay any tax neglects to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property rights to property, whether real or personal, belonging to such person." 26 U. S. C. 1958 ed. Sec. 6321.

"Sec. 6322. FERIOD OF LIEN.

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfled or becomes unenforceable by reason of lapse of time." 26 U. S. C. 1958 ed. Section 6322.

"Sec. 6323. VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT CREDITORS.

"(a) Invalidity of Lien Without Notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or . . ." 26 U. S. C. 1958 ed., Sec. 6323.

² "§12-1585. Judgment against garnishee.

"If it appears from the answer of the garnishee, or otherwise, that the garnishee is indebted to the defendant in any amount or was so indebted when the writ was served, the court shall give judgment for plaintiff against the garnishee for the amount so admitted or found to be due defendant from the garnishee unless the amount exceeds plaintiff's judgment against defendant in which case it shall be for the amount of such judgment."

 

 

[64-1 USTC ¶9398]Lorren J. Kuffel, Plaintiff v. Stephen Monroe Andrew Young, individually Doing business as Western Cut-Rate Lumber Co. and doing business as Edison Trucking Co., Defendant v. Ray Lumber Co., a corporation, and United Wholesale Distributors, a corporation, Garnishee Defendants, United States of America, Intervenor

Ariz. Superior Court, County of Maricopa, No. 101434, 2/4/64

[1954 Code Sec. 6323]

Lien for taxes: Priority: Government as intervenor: Validity against garnishee and judgment creditor: Legal fees.--The Government's tax lien was found to be prior and superior to an amount held by a garnishee defendant, and to that of the plaintiff, an attorney who initiated the garnishment action, for services rendered to the delinquent taxpayer. The plaintiff attorney's lien was inchoate since the amount, the identity, and the specific property subject to tax had not been determined.

Henderson Stockton, 234 N. Central Ave., Lorren J. Kuffel, 507 Security Bldg., Phoenix, Ariz., for plaintiff. Gordon A. Olsson, 1122 H. St., Modesto, Calif., William J. Knudsen, Assistant United States Attorney, Federal Bldg., Phoenix, Ariz., for defendant. James C. Engdahl, Security Bldg., Phoenix , Ariz. , for garnishee defendant.

Judgment for Intervenor Against Plaintiff, Defendant, and Garnishee Defendants

HAYS, District Judge:

This cause coming on for a hearing before the Court on the 21st day of November, 1963, on a motion for summary judgment by intervenor, the United States of America, with William J. Knudsen, Jr., Assistant United States Attorney for the District of Arizona, representing intervenor; James R. Cropper appearing as attorney for plaintiff; and no appearance being made by the defendant Stephen Monroe Andrew Young, individually and doing business as Western Cut-Rate Lumber Co. and Edison Trucking Co., or counsel for the garnishee defendants Ray Lumber Co., a corporation, and United Wholesale Distributors, a corporation; and it appearing to the satisfaction of the Court that the defendant, and counsel for the plaintiff, and the garnishee defendants were each duly served with a copy of this motion and accompanying papers, and it further appearing to the Court that there is no genuine issue as to any material fact with respect to the matters raised by this motion and that intervenor is entitled to judgment as a matter of law for the relief demanded in its complaint against the aforesaid plaintiff and garnishee defendant, United Wholesale Distributors, and against defendant on an in rem basis, as follows: That the taxpayer-defendant Stephen Monroe Andrew Young, individually and doing business as Western Cut-Rate Lumber Co. and Edison Trucking Co., is liable to the United States of America for unpaid taxes with penalties and interest, plus accrued interest at the rate of six (6%) per cent per annum from April 23, 1958, to the date of this judgment in the total amount of $8,573.60; that the United States of America has valid and subsisting liens for said unpaid taxes, penalties, and interest plus accruing interest on the amounting of $8,573.60, which sum is presently being held by garnishee defendant, United Wholesale Distributors, and which is presently due and owing by the said United Wholesale Distributors to defendant, Stephen Monroe Andrew Young, individually and doing business as Western Cut-Rate Lumber Co. and Edison Trucking Co.; and that such liens of the United States of America are prior and superior to any liens, claims and/or interests of all of the other parties herein, and each of them, on such sum, including the said United Wholesale Distributors;

NOW, THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED that intervenor, United States of America, have judgment against the defendant Stephen Monroe Andrew Young, individually and doing business as Western Cut-Rate Lumber Co. and Edison Trucking Co., in the amount of $8,573.60; that the United States of America has valid and subsisting liens for said unpaid taxes, penalties and interest plus accruing interest on said amount of $8,573.60, being held by garnishee defendant United Wholesale Distributors; that such liens of the United States of America are prior and superior to any liens, claims and/or interests of all of the other parties herein, and each of them, on such sum, including the said United Wholesale Distributors; and that said garnishee defendant, United Wholesale Distributors, is hereby ordered to pay over to the United States of America the sum of $8,573.60.

Memorandum

Following oral argument on November 21, 1963 , the Court suggested additional memoranda from counsel for plaintiff and the United States outlining the facts and law in brief. The following statement of facts is intended to supplement and not to substitute for the statement of facts set forth in the Government's "Memorandum of Points and Authorities in Support of Motion for Summary Judgment" filed with this Court on June 12, 1963 .

Facts

                      

United States

 made assessments

                      against Stephen M. A. Young

Apr. 18, 1958
         for $11,972.17 plus interest.

                      Notice of tax lien filed by United

                      States in 

Stanislaus
 
County

,

May 22, 1958
          

California

, Mr. Young's residence.

Aug. 1, 1958
          Plaintiff initiated this action.

                      Plaintiff garnisheed United

                      Wholesale Distributors and Ray

Aug. 1, 1958
          Lumber Co.

                      United Wholesale Distributors

                      answered admitting an indebtedness

                      of $8,753.60 to Western

Aug. 11, 1958
         Cut-Rate Lumber Co.

                      Notice of levy served by United

                      States on United Wholesale

Oct. 27, 1958
         Distributors.

                      Bankruptcy petition on behalf

                      of Stephen M. A. Young filed

Mar. 20, 1959
         in Northern District of California.

                      Final demand by 

United States

Mar. 23, 1959
         made on United Wholesale Distributors.

                      Notices of lien filed by the

                      

United States

 in Maricopa and

Apr. 6, 1959
          

Pima Counties
, 
Arizona

.

[Law]

In this memorandum the United States will confine itself to argument concerning the relative priorities of the Government's unpaid tax lien and plaintiff's attorney's fees. At the outset it should be borne in mind that the attorney for plaintiff in this action did not create a fund. As a consequence, any cases involving the creation of a fund are immaterial (It should be noted, however, that there are numerous cases denying recovery to an attorney for his services even in those instances where he has created a fund. No citations will be given here since the facts do not warrant it).

On April 18, 1958, the date of assessment, the United States secured a lien on all property and rights to property of Mr. Young as against him and the entire world, except for the four classes set forth in 26 U. S. C. 6323(a), namely, mortgagees, pledgees, purchasers and judgment creditors. It is obvious that plaintiff's attorney does not fall in any one of these classifications.

It is clear that federal law and federal law only applies to this case. Plaintiff's attorney relies almost exclusively on In Re Washington Square Slum Clearance (1959) 5 N. Y. 2d 300, 157 N. E. 2d 587. It is submitted that this case is not in point since the assignment by the plaintiff to the attorneys in that case of 20% of the award to the attorneys for services to be rendered was made more than one year before the Government assessed a tax against the plaintiff taxpayer. In our case there is no dispute that the assessment by the United States against Young was made some three and one-half months prior to the initiation of the lawsuit. Further, when, if ever, the plaintiff in this action made an assignment to his attorney of part of his recovery has not been indicated. Finally, in the Washington Square case the plaintiff did recover an award. In this case it would appear that there is no real dispute over the relative priorities between the plaintiff himself and the United States . As a consequence, if the plaintiff in this action recovers nothing, it is extremely difficult to see how plaintiff's attorney can have an assignment of something which never comes into existence.

The Government believes that United States v. Pay-O-Matic Corp. (S. D., N. Y. 1958) [58-2 USTC ¶9533] 162 F. Supp. 154, is conclusive on the question before us. In this case Judge Ryan of the Southern District of New York ruled in a fact situation almost identical with the Washington Square case and incidentally involving the same attorney's lien statute in New York that the United States tax lien was prior to the attorney's lien since under federal tests the attorney's lien was inchoate. In view of the fact that the United States Supreme Court has ruled time and again that a lien under federal standards cannot be deemed choate unless (1) the amount, (2) the identity of the lienor, and (3) the specific property subject thereto, have been determined, a lien cannot be considered choate. In the case at bar certainly the amount of the attorney's lien, if any, does not possess the definiteness required by federal law.