Illinois

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[2001-2 USTC ¶50,698] United States of America , Plaintiff v. Jack Jepsen, Kris Jepsen, Karen Jepsen Makutenas, Defendants-Appellants

(CA-8), U.S. Court of Appeals, 8th Circuit, 00-2812, 10/10/2001 , 2001 U.S. App. LEXIS 21628. Affirming a District Court decision, 2000-2 USTC ¶50,608

[Code Sec. 6321 ]

Tax liens: Real property: Conveyance to related parties: Sale v. gift: State law: Arkansas.--A delinquent individual's conveyance of property to his children did not constitute a valid inter vivos gift under state (Arkansas) law and, thus, the government's tax lien against the property. The transaction was a sale, not a gift, due to the existence of down payment checks, a promissory note and a mortgage. His subsequent return of down payment checks to his children did not prove that the conveyance was a gift; a letter accompanying the returned checks indicated only that the return of the down payments was a gift. Additionally, his arguments that his release of the mortgage extinguished the government's right to foreclose its lien, and that Arkansas law required production of the original promissory note by the creditor, were rejected.
[Code Sec. 6323 ]

Tax liens: Real property: Conveyance to related parties: State law: Arkansas : Illinois : Statute of limitations.--The government's tax lien against a delinquent individual's real property that he had transferred to his children was valid. The government's right to enforce the promissory note and the mortgage had not expired under state ( Arkansas ) law. The applicable statute of limitations arose under the law of another state ( Illinois ) because the promissory note was executed in that state and the transferees resided there. Illinois law provided for a 10-year limitations period within which the taxpayer could enforce the promissory note and the mortgage when the government sued to enforce its tax lien on the property.

[Code Sec. 7402 ]

Court of appeals: Appealable order: Tax liens.--A delinquent individual's contention that the district court's judgment that his transfer of real property subject to a tax lien to his children made them liable for the full amount of the judgment, rather than the amount due under a promissory note, was deemed speculative. It was unknown whether the sale of the real property would produce sufficient proceeds to satisfy the judgment. The district court did not enter a final order setting the terms for any sale of the promissory note.

Paul Kinloch Holmes III, Warner & Smith, Fort Smith, Ariz. Thomas J. Clark, Anthony T. Sheehan, Thomas J. Sawyer, Department of Justice, Washington D.C. 20530, Andrew T. Pribe, Department of Justice, Ben Franklin Station, Washington, D.C., for plaintiff-appellee. David Grant Bercaw, Ball & Mourton, Fayetteville , Ariz. , for defendants-appellants.

Before: WOLLMAN, Chief Judge, LOKEN, Circuit Judge, and BOGUE, ^* District Judge.

LOKEN, Circuit Judge:

In August 1989, Illinois resident Jack Jepsen conveyed the family's Arkansas vacation home to his children, Kris and Karen. In exchange, Jepsen received a $10,000 down-payment check from each child and an interest-bearing promissory note in the amount of $95,000 secured by a mortgage on the property. In April 1994, the United States assessed a $214,263 tax penalty against Jepsen for failure to pay employment taxes owed by his company, Jepsen of Illinois, Inc. The assessment created a lien in favor of the United States on all of Jepsen's "property and rights to property." 26 U.S.C. §§6321, 6322. After reducing the assessment to judgment, the United States commenced this action in August 1998 to foreclose its tax lien against the promissory note and mortgage on the Arkansas property. Following a bench trial, the district court ¹ entered a final judgment in favor of the government and ordered a foreclosure sale of the real property. Jepsen appeals, arguing in the alternative that he gave the property to his children in 1989, and that the applicable statute of limitations bars any claim on the promissory note and mortgage. He also objects to the conditional foreclosure remedy granted against the promissory note. We affirm.

I. Did Jepsen Give the Property to His Children?

By broadly defining the federal tax lien in 26 U.S.C. §6321, "Congress meant to reach every interest in property that a taxpayer might have." United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20, 86 L.Ed.2d 565, 105 S.Ct. 2919 (1985). In applying that statute, "we look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation." Drye v. United States [99-2 USTC ¶51,006], 528 U.S. 49, 58, 145 L.Ed.2d 466, 120 S.Ct. 474 (1999). Here, Jepsen argues he gave the vacation home to his children in August 1989 and therefore had no interest in that property when the tax lien came into existence in 1994. He concedes that the note and mortgage would be "property" for purposes of §6321 if the transaction was a sale. Whether the transaction was a gift or a sale is an issue of state law.

Under Arkansas law, proof of a gift requires clear and convincing evidence that the donor delivered the property] intending to make an immediate and final gift and to release unconditionally all future dominion and control over the property. See O'Fallon v. O'Fallon ex rel. Ngar, 341 Ark. 138, 14 S.W. 3d 506, 508 ( Ark. 2000). Arkansas law "presumes a gift when the donor registers legal title in a family member's name." Perrin v. Perrin, 9 Ark. App. 170, 656 S.W.2d 245, 248 (Ark. App. 1983); see Festinger v. Kantor, 272 Ark. 411, 616 S.W.2d 455, 463-64 ( Ark. 1981). The district court nonetheless concluded that the August 1989 transfer was a sale, and that no gift of Jack's property interest in the resulting note and mortgage occurred before the April 1994 tax assessment. We review these findings for clear error. See Bishop v. Bishop, 60 Ark. App. 164, 961 S.W.2d 770, 773 ( Ark. App. 1998). The following is a summary of the relevant underlying events.

l Jepsen conveyed the property to Kris and Karen by a warranty deed dated August 15, 1989 . Jepsen's lawyer, George Carberry, prepared the transaction documents. Carberry filed the deed and mortgage in Baxter County , Arkansas in October 1989. He then sent the document originals to Rob ert Bailie, vice president of finance of Jepsen of Illinois, with a letter stating:

Enclosed are the original, recorded warranty deed and real estate mortgage relative to Jack's sale of the Arkansas real estate to Kris and Karen. These documents should be kept along with Jack's other real estate documents.

I am also returning the original promissory note which Jack should keep.

l In August, Kris and Karen each gave Jepsen a check in the amount of $10,000 as a down payment on the property. The parties knew, however, that the children had insufficient funds to cover the checks, and Jepsen never presented them for payment. In December, Jepsen returned the $10,000 down payment checks to the children with a letter stating, "I have decided to give you the down payment required on the purchase of the Arkansas property."

l The promissory note bore interest at nine-and-a-half percent, payable annually, with the entire principal due on August 15, 1992 . Neither Kris nor Karen made any interest or principal payments on the note, nor did Jepsen ever demand any payment. The original of the note cannot be found; Jack assumes he destroyed it. During discovery, Bailie produced a copy of the note and the other documents Carberry had sent him.

l In April 1995, Kris applied for a bank loan secured in part by the Arkansas property. The bank did a title search and discovered the 1989 mortgage to Jepsen. Kris brought the mortgage to Jepsen's attention, and he released it for no consideration. At about this time, Karen executed a quit claim deed conveying her interest in the property to Kris. Jepsen's release and Karen's quit claim deed were recorded in Baxter County in April 1995.

l At trial, Jepsen testified that he intended the August 1989 transfer to be a gift but left the documentation to Carberry and Bailie. His memory of the details was hazy eleven years later. Kris testified:

In August of 1989 I wanted to purchase the property from my father. At that time I could not afford to. . . .

Around the time [Jepsen] returned the [$10,000] check to me, he discussed that he was just going to, you know, give me and Karen the property. I think he realized we couldn't afford to buy the property so he decided to give it to us.

Karen and Carberry had no recollection of the 1989 transaction. Bailie testified that he would only have acted at the direction of Jepsen.

On this record, the district court's finding that the August 1989 transaction was not a gift is not clearly erroneous. To prove the conveyance was a gift, Jepsen needed clear and convincing evidence that he intended to make an immediate and final gift at that time. Clear and convincing evidence is "evidence by a credible witness whose memory of the facts about which he testifies is distinct, whose narration of the details is exact . . . and whose testimony is so . . . convincing as to enable the fact-finder to come to a clear conviction . . . of the truth of the facts related." Bishop, 961 S.W.2d at 773. Jepsen's memory of the August 1989 transaction was indistinct and inexact, the contemporary documents were all consistent with a sale, and even Kris testified that he intended to purchase the property in August 1989.

Jepsen attempts to rescue his position by arguing that even if the August 15 transaction were a sale, he later changed his mind and gave the property to his children when he returned their down payment checks in December 1989. But as the district court noted, the letter accompanying the returned checks states that Jepsen was giving each child the $10,000 check, not his entire property interest in the note and mortgage. The trial testimony did not provide clear and convincing evidence to the contrary.

Alternatively, Jepsen argues in his reply brief that the promissory note was discharged and his interest in the mortgage extinguished when he destroyed the note. He relies on §3-604 of the Uniform Commercial Code as adopted in Illinois, ² which would govern this issue under Arkansas choice-of-law principles. But Jepsen did not argue this theory to the district court, nor did he present clear and convincing evidence that he destroyed the note with the requisite intent to discharge his children's obligation to pay the instrument. In these circumstances, we decline to depart from our normal rule that we do not consider issues first raised in a reply brief. See, e. g., United States v. Darden, 70 F.3d 1507, 1549 n. 18 (8th Cir. 1995), cert. denied, 517 U.S. 1149, 134 L.Ed.2d 569, 116 S.Ct. 1449 (1996).

Jepsen further argues that his release of the mortgage in April 1995 extinguished the government's right to foreclose its tax lien on this property. The district court concluded that release of the mortgage did not affect the government's pre-existing tax lien, citing cases holding that "once a lien has attached to an interest in property, the lien cannot be extinguished . . . simply by a transfer or conveyance of the interest." United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 691 n. 16, 76 L.Ed.2d 236, 103 S.Ct. 2132 (1983). On appeal, Jepsen argues that the government merely acquired Jepsen's right to reinstate the released mortgage under Arkansas law. But the survival of a federal tax lien is a question of federal law, and Jepsen cites no authority for the proposition that a taxpayer may defeat an existing lien by releasing a mortgage. In general, "Congress did not intend that taxpayers have the prerogative to relinquish rights in property in favor of avoiding tax liability." Drye Family 1995 Trust v. United States [98-2 USTC ¶50,651], 152 F.3d 892, 899 (8th Cir. 1998), aff'd [99-2 USTC ¶51,006], 528 U.S. 49 (1999).

Finally, citing McKay v. Capital Resources Co., 327 Ark. 737, 940 S.W.2d 869 (Ark. 1997), Jepsen argues that the United States may not foreclose on the note and mortgage because Arkansas law requires a creditor either to produce the original promissory note or to comply with the requirements of the Uniform Commercial Code relating to lost, stolen, or destroyed negotiable instruments. See ARK. STAT. ANN. §4-3-309. But these authorities deal with a creditor suing as holder of the note, not with the enforcement of a federal tax lien. The United States presented convincing evidence as to the terms of the note and the fact that Jepsen was the holder of the note when it was lost or destroyed. Jepsen cites no authority suggesting that this evidence was insufficient to establish a property interest against which the tax lien may be enforced.

II. The Statute of Limitations Issue.

The United States "acquires by its lien and levy no greater right to the property than the taxpayer himself has at the time the tax lien arises." St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282], 617 F.2d 1293, 1301 (8th Cir. 1980). Jepsen argues that the government's claim to enforce the promissory note and mortgage is time-barred because the statute of limitations on claims for payment of the note expired before the government filed this action in August 1998. Applying Arkansas conflict of law principles, the district court determined that Illinois law governs this issue because the note was made in Illinois . See Cooper v. Cherokee Vill. Dev. Co., 236 Ark. 37, 364 S.W.2d 158, 161-62 ( Ark. 1963). The parties agree that Illinois law applies.

In 1989, when the promissory note was executed, Illinois law provided that "actions on . . . promissory notes . . . shall be commenced within 10 years next after the cause of action accrued." 735 ILL. COMP. STAT. §5/13-206 (1989). Applying this statute, the district court concluded that Jepsen had the right to enforce the note for the ten years following August 15, 1992 , its maturity date. Jepsen argues that the Illinois Uniform Commercial Code was amended on January 1, 1992 , to provide a six-year statute of limitations on suits to enforce negotiable instruments such as the promissory note here at issue. See 810 ILL. COMP. STAT. §5/3-118(a) (1992); Krajcir v. Egidi, 305 Ill. App. 3d 613, 712 N.E.2d 917, 922, 238 Ill. Dec. 813 ( Ill. App. 1999). But the six-year statute was repealed on January 1, 1998 , before this action was commenced. See Ill. Pub. Act 90-451, §10 (1997).

The 1997 statute also amended §5/13-206 to add rules regarding the accrual of causes of action on promissory notes dated after January 1, 1998, rules taken from the six-year statute being repealed. See Ill. Pub. Act 90-451, §5. Jepsen argues that these amendments confirm that §5/13-206 does not apply to the note in this case. We disagree. In our view, the amendments resolved accrual issues for promissory notes dated after January 1, 1998, while leaving existing promissory notes subject to the earlier version of §5/13-206, which was carried forward unaltered in the amended law. Thus, the district court properly applied the ten-year statute of limitations in concluding that Jepsen had a right to enforce the promissory note and mortgage when the United States commenced this action to enforce its tax lien on his property.

III. The Remedy Issue.

The district court entered final judgment for the United States in the amount of $361,908.02, consisting of the amount of the April 1994 assessment, a small lien fee, and interest through June 15, 2000 . The judgment further recited that the outstanding balance of the interest-bearing promissory note, and therefore Jepsen's interest as mortgagee in the Arkansas real property, was $252,650.40 as of May 22, 2000 . The court ordered the real property sold, with the proceeds to be applied to the costs of sale, any delinquent property taxes, and then the judgment in favor of the United States (the sale has been stayed pending this appeal). The court's judgment then addressed the issue of the promissory note:

6. If the proceeds from the sale [of the real property] are insufficient to pay the amount due to the United States herein, then the United States may, in its discretion, request this Court to order the sale of Defendant Jack Jepsen's rights to payment under the promissory note in accord with 28 U.S.C. §2004.

On appeal, Jepsen challenges paragraph 6 of the final judgment, arguing that it potentially makes Kris and Karen liable for the full amount of the judgment in favor of the United States , rather than the amount due under the promissory note. This issue is speculative, because we do not know if the sale of the real property will leave a deficiency, and it is premature, because the district court has not entered a final order setting the terms for any sale of the promissory note. Appeal of this post-judgment collection issue must therefore await a final or otherwise appealable order concluding the relevant portion of the collection proceedings. See In re Joint E.&S. Dists. Asbestos Litig., 22 F.3d 755, 760 (7th Cir. 1994). Jepsen's further contention that Karen should not be liable on the promissory note because she quit-claimed her interest in the real property to Kris is without merit.

For the foregoing reasons, the judgment of the district court is affirmed.

^* The Honorable Andrew W. Bogue, United States District Judge for the District of South Dakota, sitting by designation.

¹ The Honorable H. Franklin Waters, United States District Judge for the Western District of Arkansas.

² "A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as . . . destruction, mutilation, or cancellation of the instrument." 810 ILL. COMP. STAT. Ch. §5/3-604 (Smith-Hurd 2000).

 

 

[97-1 USTC ¶50,213] United States of America , Plaintiff-Appellee v. Amos D. Davenport , Jr. and Norma L. Davenport, Defendants-Appellants

(CA-7), U.S. Court of Appeals, 7th Circuit, 96-1299, 2/11/97 , 106 F3d 1333, 106 F3d 1333. Affirming an unreported District Court decision

[Code Sec. 6321 ]

Tax liens: Property subject to lien: Marital property.--A tax lien properly attached to an individual's marital residence. At the time of assessment, the individual and his wife held the property as joint tenants; therefore, the individual had a separable interest in the property to which the lien could attach.

[Code Sec. 7403 ]

Tax liens: Marital property: Joint tenants: Tenancy by the entities: Action to enforce lien.--Marital property held by spouses as joint tenants could be sold by the government to satisfy the husband's tax liability. The transfer of the property following attachment of the tax lien from joint tenancy to a tenancy by the entirety did not prevent the sale. Even if state ( Illinois ) property law prohibited the sale of the marital residence, that state-created limitation had no effect on federal tax law. Finally, the trial court properly chose not to exercise its limited equitable discretion to refuse to order a sale of the property.

Gary R. Allen, David I. Pincus, Annette M. Wietecha, Douglas W. Snoeyenbos, Department of Justice, Washington, D.C. 20530, Thomas P. Walsh, Samuel D. Brooks, Chicago, Ill. 60604, for plaintiff-appellee. Andrew B. Spiegel, 117 W. Wesley St. , Wheaton , Ill. 60187 , for defendant-appellant.

Before: CUMMINGS, ESCHBACH, and FLAUM, Circuit Judges.

ESCHBACH, Circuit Judge:

From 1980-1987, Amos Davenport chose not to file federal income tax returns. Although the transgression was his alone, the consequences extended to his wife, Norma Davenport, when the district court ordered the sale of the Davenports ' marital residence to satisfy the federal tax liens that had allegedly attached to the property. The Davenports argue for reversal of the district court's order on the grounds that the sale of their residence violates Illinois homestead law, the Illinois tenancy by the entirety statute, and Internal Revenue Service procedural regulations. Although we sympathize with Norma Davenport's unenviable position, the law requires affirmance for the reasons below.

I. BACKGROUND

The Davenports have owned their residence at 443 Luella, Calumet City , Illinois (the "marital residence") since April 2, 1955 . In 1989, the tax man came knocking: the United States assessed taxes and penalties totalling $168,429.26 for Amos' failure to pay federal income taxes from 19801987. Notices of assessments and demands for payment dated December 11, 1989 , were sent to Mr. Davenport, but the demands were ignored. Finally, on August 16, 1994 , the United States initiated this action in district court seeking to reduce the assessments to judgment and to foreclose its liens on Amos' interest in the marital residence.

At the time the demands for payment were made, the Davenports owned the marital residence as joint tenants. However, on March 20, 1995 (after commencement of the government's foreclosure suit) the Davenports transferred the property to a tenancy by the entireties under Illinois law, presumably in hopes that the estate would then be impervious to Amos' creditors, including the United States taxing authorities.

On December 12, 1994, in response to the government's motion for summary judgment, the district court issued an order 1) entering judgment in favor of the United States in the amount of $208,003.72, ¹ 2) foreclosing the federal tax liens, and 3) ordering the sale of the marital residence in satisfaction of the liens. The court reserved ruling on whether Amos was also liable for fraud penalties for the years 1981-1987. In addition, the court refrained from specifying a specific dollar amount or percentage due Norma Davenport as a portion of the proceeds of the sale.

The Davenports appeal the partial summary judgment order decreeing the sale of the marital residence. We review this order de novo, drawing all reasonable inferences in the non-movant's favor. Hoornstra v. United States , 969 F.2d 530, 532 (7th Cir. 1992).

II. JURISDICTION

As a threshold matter, we must determine whether the district court's order is reviewable at this juncture. Although appellants' brief relies on §1291 jurisdiction, the government correctly discerns that the December 12 order did not dispose of all claims against all parties. When questioned at oral argument, the parties finally agreed that jurisdiction existed under the finality doctrine enunciated in Forgay v. Conrad, 47 U.S. (6 How.) 201 (1848). ² Despite the parties' ultimate agreement, however, we are obliged to independently confirm the basis of our appellate jurisdiction. See Mt. Healthy City Bd. of Educ. v. Doyle, 429 U.S. 274, 278 (1977); Stearnes v. Baur's Opera House, Inc., 3 F.3d 1142, 1144 (7th Cir. 1993).

The courts of appeal have jurisdiction over "all final decisions of the district courts of the United States . . . except where a direct review may be had in the Supreme Court." 28 U.S.C. §1291. The government correctly points out that, under conventional doctrine, the district court's order was not a final decision because it did not dispose of all claims against all parties. Specifically, the court left unresolved the issues of additional fraud penalties for 1981-1987 and Norma Davenport's apportioned share of the judicial sale proceeds.

Nevertheless, we take jurisdiction over this appeal under the finality doctrine first announced in Forgay v. Conrad:

[W]hen the decree decides the right to the property in contest, and directs it to be delivered up by the defendant to the complainant, or directs it to be sold . . . and the complainant is entitled to have such decree carried immediately into execution, the decree must be regarded as a final one to that extent.

Forgay, 47 U.S. at 204. The doctrine has been judicially shaped to allow the immediate review of orders directing delivery of property where such an order would subject the losing party to irreparable harm. We have repeatedly recognized the vitality of the Forgay finality doctrine, see, e.g., National Tax Credit Partners, L.P. v. Havlik, 20 F.3d 705 (7th Cir. 1994); Construction Indus. Retirement Fund of Rockford v. Kasper Trucking, Inc., 10 F.3d 465 (7th Cir. 1993), but have been careful to restrict the doctrine's application to instances that pose clearly irreparable harm. See ODC Communications Corp. v. Wenruth Investments, 826 F.2d 509 (7th Cir. 1987). Here, the possibility of irreparable harm is plain. The order entered by the district court directs the immediate sale of a unique parcel of land, appellants' marital residence. The bona fide purchaser of the residence at a judicial sale would be under no obligation to later return title to the Davenports should the district court's order be ruled error. The injury occasioned by an erroneous sale of the Davenports' property could be remedied neither by the prior posting of a bond nor by a later award of damages, because the Davenports' interests lie not only in the economic value of the house, but in the specific loss of their marital residence. There can be no questioning the possibility of irreparable harm in this instance. Under these circumstances, the district court's foreclosure and sale order is a final decision subject to our present review. ³

III. FORCED SALE OF THE MARITAL RESIDENCE

Having asserted jurisdiction, we are left with the question of whether the district court's order directing the sale of the Davenports ' marital residence was proper. The appellants assert that the sale of the property to satisfy the tax lien of only one spouse violates both the Illinois tenancy by the entireties statute and Illinois homestead law.

As support, however, the Davenports cite cases which merely recite the black letter proposition that creditors of only one spouse cannot attach a lien to property held in a tenancy by the entirety. Their brief thus muddles the two distinct legal questions involved in this case: 1) whether the tax lien properly attached to the marital residence, and 2) whether, if the lien did attach, the district court's sale order was proper.

To answer the first question, we must know whether Amos Davenport had "property" to which the lien could attach. Hoornstra v. United States , 969 F.2d 530, 532 (7th Cir. 1992). State law determines what interest a taxpayer has in property. United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683 (1983); United States v. Denlinger [93-1 USTC ¶50,040], 982 F.2d 233, 235 (7th Cir. 1992). Here, the Davenports argue that the sale was improper because, under Illinois law, a creditor of one spouse cannot attach a lien to property held in an entireties estate because neither spouse has a separate, distinguishable interest in that property. While we have no quarrel with this rule of law, its lesson is irrelevant here because the federal tax lien arose before the Davenports transferred the property from a joint tenancy into an entireties estate.

Under I.R.C. §6321, "if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to that person." This lien attaches at the time of the assessment. I.R.C. §6322. In this case, the government gave notice of the assessments and made demands for payment as required by I.R.C. §6303 on December 11, 1989 . ⁴ At that time, the Davenports held the property as joint tenants, not as tenants by the entirety. As a joint tenant, Amos clearly had a defined, separable interest in property to which the federal lien could attach. Furthermore, the Davenports ' subsequent transfer of the property into a tenancy by the entirety does not disturb the lien's attachment because "it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere . . .." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) (quoting Burton v. Smith, 38 U.S. (13 Pet.) 464, 483 (1839)) (internal quotations omitted).

Having found that the federal lien properly attached, the only question left for our review is whether the marital residence, now held as an entireties estate, can be sold by the government to satisfy the federal tax obligation of only one spouse. The Davenports insist it cannot, relying in error on McKernan Co. v. Gregory, 643 N.E.2d 1370 (Ill. Ct. App. 1994). In McKernan, the plaintiff corporation won a civil judgment against defendant. After the judgment, and for the express purpose of making his property unreachable to satisfy the judgment, Gregory transferred his marital residence into a tenancy by the entirety under Illinois law. When McKernan Co. then moved the court to force the sale of Gregory's residence to satisfy the judgment, the court refused. Once again, the Davenports confuse the issues of whether attachment occurred and whether properly attached entireties property can be sold. McKernan does not aid the Davenports because the defendant there, unlike the Davenports , transferred the property into a tenancy by the entirety before the levy could attach, not after. Thus, in holding that the sale violated the Illinois entireties statute, the McKernan court merely recognized the impropriety of selling property to satisfy a lien that never properly attached. Id. at 1375.

The Davenports also claim that the language of the Tenancy by the Entireties statute prohibits sale. This statute provides that "any real property . . . held in tenancy by the entirety shall not be liable to be sold . . . against only one of the tenants." 735 Ill. Comp. Stat. 5/12-112. In response, the government points to the following language in the tax code allowing sale:

(a) In any case where there has been a refusal or neglect to pay any tax . . . the Attorney General or his delegate . . . may direct a civil action to be filed in a district court of the United States to enforce the lien . . ..

(c) The court . . . in all cases where a claim or interest of the United States therein is established may decree a sale of such property . . . and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States.

I.R.C. §7403(a), (c) (emphasis added). On its face, §7403 grants no exemption to sale where an innocent party holds an interest in the subject property. Our path in the face of explicit contradiction between the two statutes is of course lit by the Supremacy Clause. We need not speculate on the textual conflict, however, in light of the Supreme Court's broad and binding interpretation of §7403 announced in United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677 (1983).

In Rodgers, the federal government filed suit to reduce its income tax assessments against Mr. Rodgers to judgment and to foreclose its liens against the Rodgers' marital residence. Mrs. Rodgers objected to the sale under Article 16 of the Texas constitution, which provides that homestead property "is hereby protected from forced sale, for the payment of all debts," and that "no mortgage, trust deed, or other lien on the homestead shall ever be valid [against the homestead]." TEX. CONST., Art. 16, §51. Both the district and appellate courts agreed with Mrs. Rodgers, holding that the federal tax liens could not displace her state-created homestead rights. The Supreme Court reversed, holding that although the non-delinquent thirdparty interest holder must be compensated for her interest, the Supremacy Clause prevents the use of a statecreated interest to block a forced sale under §7403. In so holding, the Court found that the language of §7403, which allows the sale of the property "in all cases," was absolute on its face:

[W]e must read [§7403] to contemplate, not merely the sale of the delinquent taxpayer's own interest, but the sale of the entire property (as long as the United States has any "claim or interest" in it), and the recognition of third-party interests through the mechanism of judicial valuation and distribution.

Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 693-94. ⁵ Any language from Illinois entireties or homestead law that limits or prohibits sale constitutes a state-created limitation on forced sale, which conflicts with the textually unfettered sale power in §7403. State-created limitations have no force to except federal law, even when an innocent third-party's rights are at issue: "the Supremacy Clause . . . is as potent in its application to innocent bystanders as in its application to delinquent debtors." Id. at 701. Rodgers thus forecloses the Davenports ' arguments that the district court's sale decree violates Illinois property laws which, in contradiction to §7403, purport to prohibit sale of the Davenports ' marital residence.

Although the Rodgers Court's interpretation of §7403 granted a district court the power to decree the sale of property regardless of an innocent third-party's statecreated rights, the Court did not read it to require use of that power in all circumstances. Noting that forced sale may at times cause undue hardship to the third party, the Court found that district courts retain limited power to refuse to order a sale allowed under §7403. The Court then enunciated four factors that a court should consider in deciding not to exercise its power to decree the sale. ⁶ In their final futile attempt to block sale, the Davenports assign legal error to the district court's failure to consider these factors.

This argument evidences a basic misunderstanding about the role of the Rodgers factors. ⁷ Application of these factors is not prerequisite to a district court's power to decree a sale under §7403. Instead, the factors serve to limit the district court's equitable discretion not to sell, and to provide a framework under which it must justify its refusal to order a sale under §7403. Consideration of these undue hardship factors is thus a matter of judicial grace, not entitlement. In fact, the Rodgers Court warned that a district court's discretionary power to refuse a sale order in light of the clear language in §7403 is very limited: "To say that district courts need not always go ahead with a forced sale authorized by §7403 is not to say that they have unbridled discretion [to do so]," id. at 709, "[w]e do emphasize . . . that the limited discretion [not to decree sale] accorded by §7403 should be exercised rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes." Id. at 711.

Here, the district court used its undisputable power granted in §7403 to order the sale of the marital residence, and chose not to exercise its limited equitable power to except the Davenports . We need not and will not upset that discretionary decision.

The district court is AFFIRMED.

¹ Although the government initially asked for $168,429.46, it later reduced its demand to $131,431.41 plus interest on the basis that it was not seeking summary judgment on the fraud penalties for 1981-1987. Including the accrued interest through February 22, 1995 , the total amount requested (and subsequently ordered due by the district court) was $208,003.72.

² After arguing both for and against our jurisdiction at oral argument, the Davenports ultimately agreed with the government's jurisdictional analysis under Forgay.

³ Although we learned at oral argument that the property has already been auctioned at a judicial sale, the sale has not mooted the issue. In Illinois , because of the necessity of court supervision over judicial sales, a court must confirm the sale before the high bid can be accepted. Well v. Schoeneweis, 427 N.E.2d 1343, 1346 (Ill. Ct. App. 1981). Before confirmation, the high bid operates as a mere offer to buy. As this opinion goes to print, neither party has advised this court of judicial confirmation of the sale.

⁴ The appellants' third argument, that the IRS regulations were not followed in the assessment and demand process, deserves little comment. Their bald allegations that the assessments were not signed by a duly authorized representative are insufficient to defeat summary judgment, and ring as hollow as their earlier argument to the district court for dismissal on the ground that the " United States " as a party was too undefined to bring litigation. Likewise, the appellants' argument that they received insufficient notice of assessments is unsupported and insufficient to defeat summary judgment on this issue. The government introduced into evidence Certificates of Assessments and Payments for each of the years in question bearing the stamp, "first notice" and the date of December 11, 1989 . Certificates of Assessments are presumptive proof that the Certificates were made in accordance with I.R.C. §6203 and the accompanying regulations, and cause the burden to shift to the plaintiff to overcome this presumption. See Hefti v. United States [93-2 USTC ¶50,591], 8 F.3d 1169, 1172-73 (7th Cir. 1993). The Davenports have not met this burden.

⁵ The district court's December 12 order left unresolved the issue of how the sale proceeds would be distributed. We fully expect that the district court will, in apportioning the proceeds, compensate Norma Davenport for her interest in the marital residence as Rodgers directs.

⁶ The factors are: 1) the extent to which a sale only of the delinquent taxpayer's partial interest would prejudice the government's financial interests; 2) whether the thirdparty interest holder in the property has a reasonable expectation that her property would not be subject to forced sale by the delinquent taxpayer or his creditors; 3) the extent of prejudice to the third-party interest holder in terms of relocation costs and in practical undercompensation; and 4) the relative character and value of the liable and nonliable interests in the property. See Rodgers [83-1 USTC ¶9374], 461 U.S. at 710-11.

⁷ In their brief, the Davenports state: "The Rodgers court noted that courts did not have unbridled discretion whether or not to go ahead with a forced sale." This is an incorrect reading of Rodgers. The Rodgers Court did not limit the discretion of a court to proceed with a sale, but to refuse to proceed with a sale given the absolute language of §7403.

 

 

[96-2 USTC ¶50,349] Central Laborers' Pension, Welfare & Annuity Funds, Plaintiff v. Oak Ridge Industries, Inc., and United States of America, Defendants

U.S. District Court, So. Dist. Ill., 95-CV-4162-JPG, 5/8/96

[Code Secs. 6322 and 6323 ]

Tax liens: Priority: Mechanics's lien: First in time.--A tax lien filed by the government against state (Illinois) funds owed to a contractor was first in time and had priority over a pension fund's competing mechanic's lien because the mechanic's lien was filed after the government made its assessment and filed a notice of lien. Generally, tax liens arise under federal law at the time an assessment is made. A mechanic's lien, on the other hand, arises on the earliest date that it becomes valid under local law against subsequent purchasers without actual notice, but not before services, labor, or materials have been furnished. Under state ( Illinois ) law, a mechanic's lien may be asserted on public funds that have not been paid over to a contractor by giving written notice to the contractor and the state and then by filing a complaint for an accounting within 90 days. Since, the mechanic's lien herein was not filed until well after the government's assessment and filing of a notice of lien, the tax lien was accorded priority.

Randy Patchett, Winters, Brewster, Crosby & Patchett, 111 W. Main St. , Marion , Ill. 62959 , for plaintiff. Gerald M. Burke, Assistant United States Attorney, Fairview Heights, Ill. 62208, Jennifer M. Blunt, Department of Justice, Washington, D.C. 20530, for defendant.

MEMORANDUM AND ORDER

GILBERT, Chief Judge:

This case involves a dispute between Central Laborers' Pension, Welfare & Annuity Funds ("Central Laborers") and the United States over lien priority. Central Laborers maintains a variety of funds to which various employers, and in this case, Oak Ridge Industries, Inc. (" Oak Ridge "), are required to make contributions pursuant to an agreement made between the local unions and Oak Ridge . Oak Ridge entered into a contract with the Illinois Department of Corrections ("IDOC") to perform asbestos abatement at the Choate Mental Health Center . Oak Ridge was required to make contributions to Central Laborers for the work done by the union employees on the project. However, Oak Ridge failed to pay $28,475.55 in required contributions. In response, Central Laborers filed a lien notice on February 21, 1995 , with the IDOC and the Illinois State Capitol Development Board ("CDB"). IDOC and CDB responded by withholding the payment of the $25,995.00 remaining due on the contract.

Unfortunately for Central Laborers, Oak Ridge has another creditor with a competing lien. This competing lien holder is the United States . The United States filed notices of federal tax liens with the Illinois Secretary of State and the Williamson County Recorder's Office, on various dates in 1994 and 1995. The first lien was assessed by the United States on December 27, 1993 , in the amount of $63,910.34. ¹ The notice of this lien was filed on February 1, 1994 . Central Laborers filed this lawsuit to determine which lien has priority. The United States has moved for summary judgment contending that its lien filed on February 1, 1994 , takes priority over Central Laborers' lien. Central Laborers failed to file a response to the motion despite being given a thirty day extension of time to file the response.

Federal Law determines the priority between competing liens. Capitol Indem. Corp. v. United States [94-2 USTC ¶50,618 ], 41 F.3d 320, 323 (7th Cir. 1994), cert. denied, 115 S. Ct. 2581 (1995). The general rule regarding the priority of liens is "the first in time is the first in right." Willow Creek Lumber Co. v. Porter Cty. Plumbing & Heating, Inc., 572 F.2d 588, 590 (7th Cir. 1978). Under federal law, a lien arises at the time an assessment is made. 26 U.S.C. §6322 . However, this lien is not valid against certain persons, including mechanic's lienors. 26 U.S.C. §6323(a) . ² Specifically, a mechanic's lienor "has a lien on the earliest date such lien becomes valid under local law against subsequent purchasers without actual notice, but not before he begins to furnish the services, labor, or materials. 26 U.S.C. §6323(h)(2) . Under Illinois law, a party may get a mechanic's lien on public funds that have not been paid to the contractor by giving written notice to the contractor and to the state. 770 Ill. Comp. Stat. §60/23(c). Following the written notice, the mechanic's lienor must file a complaint for an accounting within ninety days. Id.

Here, the notice of the mechanic's lien was not filed until February 16, 1995 , well after the December 27, 1993 , tax assessment, and well after lien notice filed on February 1, 1994 . Thus, the lien filed by the United States takes priority over Central Laborers' lien. Accordingly, the motion for summary judgment [Doc. 1] is GRANTED.

IT IS SO ORDERED.

¹ The Court need not consider the priority of the tax liens assessed after this date since, as the United States points out in its brief in support of its motion for summary judgment, the amount of the lien assessed on December 27, 1993, exceeds the total amount being held by the IDOC and CDB.

² The United States does not dispute that Central Laborers has a valid mechanic's lien.

 

 

[63-2 USTC ¶9508]Board of Education, School District No. 25, Arlington Heights, Cook County, Illinois, Plaintiff v. Bruce Electric Co., Inc., a corporation; Simplex Time Recorder Co., a corporation; Hyland Electrical Supply Co., Inc., a corporation; Hartford Accident & Indemnity Co., Ockerlund Construction Co., a corporation; A. A. Electric Supply Co., a corporation; Harold R. All, District Director of Internal Revenue, Defendants

U. S. District Court, No. Dist. Ill., East Div., Civil Action No. 61C1230, 1/16/63

[1954 Code Sec. 6323]

Priority of liens: Materialman's lien: State law.--Where a subcontractor supplied materials to an electrical contractor and subsequently perfected its materialman's lien pursuant to Illinois law to the funds paid by the contractor's creditor to the registry of the court, the balance of the money in the registry, after reduction for the amount covered by the perfected lien, is the debtor's property subject to the tax liens of the United States for unpaid federal withholding and employment taxes. Another subcontractor who failed to perfect his lien had no such priority.

William K. Blachard, Norman, Engelhardt & Zimmerman, 100 W. Monroe, Chicago 3, Ill. , for plaintiff. Bradley, Pipin, Vetter & Eaton, 135 S. LaSalle St., Chicago, Ill., for A. A. Electric Supply Co. Edward D. Lapperre, 134 S. LaSalle St., Chicago, Ill., for Hartford Indemnity Co. Morton Wasserman, Jacobs & McKenna, 33 N. LaSalle St., Chicago, Ill., for Simplex Time Recorder. Hefeld, Salins and Wener, 100 N. LaSalle St., Chicago, Ill., for Hyland Electric Supply Co. James P. O'Brien, United States Attorney, 450 U. S. Court House, Chicago, Ill., for U. S., defendants.

Findings of Fact and Conclusions of Law

WHAM, District Judge:

The above case came to be heard by the Court sitting without a jury on January 3 and 7, 1963. Plaintiff in intervention was represented by James P. O'Brien, United States Attorney for the Northern District of Illinois. Plaintiff Board of Education was represented, and the only defendants who were represented and presented a claim to the property which is the subject matter of this suit were Simplex Time Recorder Co., Inc., and Hyland Electrical Supply Co., Inc. The case was presented on documentary evidence, and the Court after carefully considering all the evidence makes the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. This action is a suit for interpleader commenced to determine the rights of the defendants and of the United States of America to a fund of $5,965.36 deposited by the plaintiff in the Registry of the Court.

2. The plaintiff is obligated to defendant Bruce Electric Company, Inc., in the amount of $5,965.36, for work done under an agreement for electrical contracting between the plaintiff and Bruce Electric.

3. Bruce Electric is obligated to Simplex for $676.65 plus statutory interest and to Hyland for $11,051.61 plus statutory interest for materials furnished Bruce Electric, as subcontractors to Bruce Electric, in connection with the construction contract between Bruce Electric and the Board of Education.

4. Simplex served the Board of Education with written notice of its claim against Bruce Electric on December 21, 1960 . On December 12, 1960 , Simplex filed an action in the Circuit Court of Cook County, Illinois, for an accounting, making Bruce Electric and the Board of Education defendants, seeking to obtain a judgment for the $676.65 owed Simplex by Bruce Electric. A default judgment was awarded Simplex on January 27, 1961 , which remains unsatisfied.

5. Hyland served the Board of Education with written notices of Hyland's claim against Bruce Electric on December 10, 1959 , and a second notice on January 19, 1960 . It has not filed a suit for an accounting making Bruce Electric a defendant. Hyland filed two suits, on March 16, 1960 , and on March 30, 1960 , respectively, in the Circuit Court of Cook County, Illinois, against the surety of Bruce Electric for an accounting of the monies due upon the surety bond of the contractor.

6. The Complaint in Intervention of the United States was filed to determine the rights of the United States to the funds in the Registry of the Court under certain liens for unpaid federal taxes due and owing by Bruce Electric.

7. On December 4, 1959, the then Commissioner of Internal Revenue made an assessment of $9,179.51 for unpaid federal withholding and F. I. C. A. taxes plus interest owed by Bruce Electric for the quarter ended September 30, 1959. Said Commissioner certified the list of said assessment to the then District Director of Internal Revenue at Chicago, Illinois, by whom notice was given and demand for payment thereof was made upon Bruce Electric on December 4, 1959. The balance of the assessment is $3,144.85 plus accrued interest as provided by law.

8. On February 19, 1960, the then Commissioner of Internal Revenue made an assessment of $5,271.82 for unpaid federal withholding and F. I. C. A. taxes plus interest owed by Bruce Electric for the quarter ended December 31, 1959. Said Commissioner certified the list of said assessment to the then District Director of Internal Revenue at Chicago, Illinois, by whom notice was given to and demand for payment thereof was made upon Bruce Electric on February 19, 1960. The balance of the assessment is $5,271.92 plus accrued interest as provided by law.

9. On June 3, 1960, the then Commissioner of Internal Revenue made an assessment for $5,751.24 for unpaid federal withholding and F. I. C. A. taxes plus interest owed by Bruce Electric for the quarter ended March 31, 1960. Said commissioner certified the list of said assessment to the then District Director of Internal Revenue at Chicago, Illinois, by whom notice was given and demand for payment thereof was made upon Bruce Electric on June 3, 1960. The balance of the assessment is $5,751.24 plus accrued interest as provided by law.

10. Notices of the federal tax liens for the quarters ended September 30, 1959 , December 31, 1959 , and March 31, 1960 , were filed with the Recorder of Deeds, Cook County , Illinois , on February 19, 1960 , April 20, 1960 and July 29, 1960 , respectively.

11. A default judgment for delinquent taxes in the amount of $14,167.91, plus accrued interest thereon as provided by law, has been entered in this proceeding in favor of the United States against Bruce Electric.

12. The plaintiff Board of Education has been discharged from any further duty in connection with this proceeding and has been awarded $37.60 out of the funds in the Registry of the Court as reimbursement in full for the costs incurred by it herein.

Conclusions of Law

1. This Court has jurisdiction of the subject matter of this action and of all parties hereto.

2. The Simplex Time Recorder Company has perfected a lien pursuant to Illinois law to the funds in the Registry of the Court.

3. The Hyland Electrical Supply Company has not perfected a lien pursuant to Illinois law to the funds in the Registry of the Court.

4. Of the funds now in the Registry of the Court, $5,927.76, the claim of Simplex in the amount of $676.65, plus 5% statutory interest thereon of $69.22, is not property of the Bruce Electric Company subject to the tax liens of the United States , and Simplex will receive $745.87 of these funds.

5. The $5,181.89 balance in the Registry of the Court after the payment of the claim of Simplex is property of Bruce Electric subject to the tax liens of the United States and is to be distributed to the United States .

 

 

[53-1 USTC ¶9270]Viola Samms, Plaintiff-Appellee v. Chicago Title and Trust Company, Defendant-Appellee, John Zapantis, Defendant-Appellee, Peoples National Bank of Chicago, Defendant-Cross-Complainant-Appellee, United States of America, Defendant-Appellant

In the Illinois Appellate Court for the First District, No. 45902, 111 NE2d 172, March 27, 1953

On Appeal from Superior Court, Cook County .

Tax liens: Validity against mortgagees, pledgees, purchasers, and judgment creditors: Mechanic's lien.--A state statute providing that a mechanic's lien was superior to the claim of a mortgagee could not be availed of by the lienholder to establish superiority of his mechanic's lien over a tax claim of the United States filed after a recorded mortgage, but prior to the lien. By subordinating its claim to that of the prior recorded mortgage in accordance with Code section 3672, the government did not thereby subordinate its claim to everything which state law placed ahead of the mortgage. The taxing power of the federal government is superior to the power of a state to create paramount state or private obligations.

Otto W. Kerner, Jr., U. S. Attorney, Chicago , Ill. , for appellant. George L. Shapiro, 11 So. LaSalle St. , Chicago , Ill. , for appellees.

Mr. Justice Schwartz delivered the opinion of the court.

This is a suit to foreclose a mortgage, in which a controversy arose between the United States of America , defendant claiming a lien for taxes, and the Peoples National Bank of Chicago, defendant-cross-complainant, assignee of a claim for mechanic's lien. The decree approves a master's report finding the respective positions of the parties as follows: first, the mechanic's lien holder to the extent of the enhancement of value by reason of the improvement; second, the mortgage indebtedness; and third, the tax claim of the United States .

The government acknowledges that its lien position is subordinate to that of the mortgage by reason of the fact that notice of its claim was not filed with the recorder of deeds until subsequent to the making of the mortgage, but contends that it is superior to that of the mechanic's lien holder whose claim did not arise until after the filing of the notice of the government's claim. The basis of the government's argument is that the Act of Congress establishing a lien for federal taxes is controlling; that claims for taxes are prior liens under circumstances such as here exist, except only as to the prior mortgage; and that the mechanic's lien, not being within the provisions of that law, cannot take precedence over the government's lien. The position taken by the lien holder is that under the statutes of Illinois its lien is superior to that of the mortgage; that the lien of the United States being subordinate to that mortgage, it is subordinate to everything declared by the law of Illinois to be superior to the mortgage.

In the determination of this question certain long established principles are applicable. In McCulloch v. Maryland , 4 Wheat. 316 (17th Law Ed.), Chief Justice Marshall wrote his memorable decision holding that the Constitution of the United States and the laws made in pursuance thereof were supreme over the laws and constitutions of the respective states. From this has been derived the principle that the federal government, in the exercise of its right to levy and collect taxes, may determine the nature and extent of the lien to be imposed upon the proper objects of its tax legislation, and when it has done so, the law of no state may defeat its purpose. United States v. City of Greenville , 118 Fed. (2d) 963, 965 [41-1 USTC ¶9381]; Michigan v. United States, 317 U. S. 338 [43-1 USTC ¶9225]; United States v. Texas, 314 U. S. 480; Spokane County v. United States, 279 U. S. 80 [1 USTC ¶387]; United States v. Reese, 131 Fed. (2d) 466 [42-2 USTC ¶9763]. In United States v. Reese, supra, the validity of the Illinois statute making state liens for taxes paramount to all others was under consideration. The court, recognizing the supreme taxing power of the federal government, said: "Ordinarily it would seem obvious that if a subsequent purchaser does not take free of an inchoate unliquidated tax statutory lien it would follow that a subsequent acquirer of a lien could not take free thereof. But this postulate obviously omits all consideration of the nature of the government's lien, of its constitutional power to levy and collect taxes and, finally, of the legislation which Congress has enacted pursuant to such power which has been declared valid by the Supreme Court." The tax may seem unjust and the method of subjecting property to its payment appear to be unfair, but if done pursuant to duly enacted legislation, there is no recourse except as Congress may provide. We must therefore look to the acts of Congress and the interpretations thereof for solution of the issue in the case before us.

Prior to 1913 the Act of Congress provided without qualification that any delinquent tax should be a lien in favor of the United States upon all property of the taxpayer from the time the assessment list was received by the collector, without the requirement of notice of any kind. ( Ch. 166, 37 U. S. Stat. L. 1016.) In United States v. Curry, (D. C.) 201 Fed. 371 (1912) it was held that despite the obvious injustice and hardship the enforcement of such a lien might impose on a bona fide purchaser and mortgagee without notice, the lien of the government for taxes was good as against them. The court there referred to United States v. Pacific Railroad (C. C.), 1 Fed. 97 (1880) where innocent purchasers, not knowing of any claim the government might have, were nevertheless subjected to loss by reason of this uncompromising exercise of taxing power. In 1913 Congress, for the purpose of avoiding the harsh effects attendant upon the exercise of this power, amended the act by adding a proviso that a lien for taxes should not be valid as against mortgagees, purchasers or judgment creditors who were such prior to the filing of a notice of lien by the government (as to this county, in the office of the Recorder of Deeds). The present law is substantially the same, but pledgees of stock prior to the filing of notice of lien by the government are also excepted. (Secs. 3670-2, Title 26, U. S. Code).

The priority of a federal tax lien as against a state tax lien was upheld in Michigan v. United States, 317 U. S. 338 [43-1 USTC ¶9225]. The court said, "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." In the light of this established superiority of the federal taxing power, what is the proper construction to be placed upon that proviso now known as Section 3672 of Title 26 of the United States Code? It is suggested that since the federal statute does not expressly announce the priority of federal liens, and since it expressly recognizes the priority of four specified classifications of lien holders, the inference is justified that no priority should be accorded to a federal lien merely because prior in time, even though notice thereof is placed of record in the manner provided by statute. Considering the history of the legislation and the object which it sought to effect, Congress must have intended to preserve the supremacy of the tax lien, except as explicitly qualified by its Act. A lien not superior in point of time and inferior to all other liens which had not been expressly stated in the qualifying language used could well have become of little or no value. In United States v. City of Greenville , 118 Fed. (2d) 963 [41-1 USTC ¶9381], the state of South Carolina asserted the priority of its tax lien over that of the federal government. The court observed: "The thing of significance to be noted is, not that the statute does not give priority to the federal tax, but that it does not grant permission to the states to interfere with a lien of the federal government * * *." This construction was adopted in United States v. Security Trust & Savings Bank, et al., 340 U. S. 47 [50-2 USTC ¶9492], in the concurring opinion of Mr. Justice Jackson: "My conclusion from this history is that the statute excludes from the provisions of this secret lien those types of interests which it specifically included in the statute and no others." (Italics supplied.) An Illinois case which supports this position is Republic National Life Insurance Co. v. Hedstrom, 346 Ill. App. 555, which arose on a state of facts almost identical with those of the instant case. The insurance company brought suit to foreclose a mortgage against the owner of the property. A tenant in possession claimed a mechanic's lien against the property, and the federal government claimed a tax lien. The order in time was as it is in the instant case--mortgagee first, United States second, and mechanic's lien third. The trial court held that the mortgagee had first priority, the mechanic's lien holder an equal status to the extent of his debt, and the United States third. The Appellate Court for the Second District, relying upon the authorities cited in the instant case, reversed the decree of the lower court and accorded first priority to the mortgagee and then placed the government ahead of the mechanic's lien. It did so on the theory that tax obligations are by nature superior to private obligations, and that the taxing power of the federal government is superior to the power of a state to create paramount state or private obligations.

[Taxing authority paramount to state law]

The mechanic's lien holder contends that the Republic case is distinguishable from the instant case. The decree there placed the mechanic's lien holder and the mortgagee on a parity, while the decree in the instant case placed the mechanic's lien ahead of the mortgage to the extent of the enhancement in value of the property. This is a distinction not germane to the issue. The central question here is whether the mechanic's lien can be placed ahead of the federal tax lien, and not the standing of a mechanic's lien in relation to a mortgagee under state law. Nor can we make any distinction based on the restriction of the mechanic's lien to an amount equivalent to the enhancement in value of the property. The federal law does not make such provision, and we cannot write it into Sec. 3672. It is a federal and not a state question. United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]. The distinction made by the mechanic's lien holder does not diminish the strength of the Republic case as authority for the government's position in the instant case.

It is argued that since the government has subordinated itself to the prior recorded mortgage in accordance with Section 3672, it has thereby subordinated itself to everything which the laws of Illinois place ahead of the mortgage. The mechanic's lien holder relies upon Ferris v. Chic-Mint Gum Co., 124 Atl. 577 (14 Del. Ch. 232). There is no doubt that this case is authority for its position, but as pointed out in the Republic case, it is against the weight of authority. Its effect is to permit states and private parties to subordinate the paramount taxing authority of the federal government by creating interests superior to mortgages and other types of liens specified in Section 3672 of the Revenue Code. Chief Justice Taft commented on the Ferris case in Spokane County v. United States, 279 U. S. 91 [1 USTC ¶387], where he said:

"The Chancellor [in the Ferris case] allowed the claims in order of the state, the mortgage, and the United States , holding that 'when the government agreed by section 3186 to take rank after the mortgagee, it must necessarily follow that it is subordinate in rank to those who are superior to its immediate senior.' The Chancellor observed that his conclusion arose out of the peculiar facts of the case, and that it was unnecessary for him to venture into the broad field of constitutional law. Without concurring in the conclusion of the Chancellor, it is enough to say that, as there is no such third creditor here, the case is not in point. Moreover, it is contended by the government that the relative priorities could have been maintained in that case by setting apart sufficient funds to pay the mortgagee before paying the federal taxes and then providing for payment of the state tax out of the sum so set apart."

The mechanic's lien holder vigorously argues the inequity of the government's position in jeopardizing the security of mechanics and material men who, by their labor and material, enhance the value of the mortgaged property. In the matter of taxes, however, this court is not permitted, on equitable considerations, to subordinate a lien for taxes fixed by an act of Congress. The power to tax imposes hardships in many cases, but the power is none the less necessary. For example, homestead rights conferred by state statutes are not exempted from federal tax liens. However, in view of our ultimate conclusion in this case, it is not the mechanic's lien holder who would be affected by our interpretation of the law, but the mortgagee.

It is also argued that as the government's claim for taxes is subordinate to the mortgage, and as the mortgagee's interest was impressed with a lien in favor of the mechanic's lien holder, therefore, the tax claim is subordinate to the mechanic's lien. It appears incongruous to the mechanic's lien holder that it should be allowed a claim prior to the mortgage, but subordinate to that of the government, and it argues that the effect of this finding is to reduce the mortgagee's preference to the extent of the mechanic's lien. This incongruity arises by virtue of our state law and not by virtue of the federal enactment. If there had been a mechanic's lien act of Congress so providing, then perhaps this court would be faced with the question of construing the two acts, but acknowledging, as we must, the supremacy of the federal law, its application must be made even though a state law creates the incongruity. Under a provision of the mortgage, the mortgagee could have paid the mechanic's lien claim, which would then have become part of the mortgage indebtedness, and thereby superior to the tax claim. It is argued, in substance, that this gives the mechanic's lien a status of like priority over the tax claim. In this case, the mortgagee did not pay the mechanic's lien claim, and whether or not such subsequent advancement made by a mortgagee takes precedence under Section 3672 is not before us for determination.

The mechanic's lien holder makes a point on the pleading. It is contended that as the government filed no answer to the cross-complaint of the mechanic's lien claimant, the averments of the cross-complaint are admitted. There is no merit in this point. Sec. 9, Ch. 82, Smith-Hurd's Ill. Rev. Stat. (1951) provides that lien claimants may, upon application, become defendants and enforce their liens by answer to a bill or petition, and may contest each other's rights, without any formal issue of record.

[Conclusion]

It is our conclusion that the claim of the mechanic's lien holder in this case is not within the meaning of Section 3672 and is subordinate to the lien of the government's tax claim. This priority of the government's lien, if only the mechanic's lien were here involved, would be full and complete as to all proceeds derived from the sale of the property resorted to. However, where, as in this case, there is a mortgage which is a lien prior to that of the government's tax claim, then the government for satisfaction of its lien can only resort to those proceeds from the sale of the property which are in excess of the mortgage indebtedness. Therefore, the priority of the government's lien in the instant case is only as to that excess. The mechanic's lien claimant by state law is given a lien prior to that of the mortgagee, which in effect means that it may resort to the proceeds from the sale of the property which are applicable to payment of the mortgage indebtedness. This is the inevitable result of the application of the Act of Congress and of the state law.

Decree reversed and cause remanded, with directions to amend the decree in accordance with the conclusions of this opinion.

Decree reversed and cause remanded, with directions.

ROBSON, P. J., concurs. TOUHY, J., took no part.

 

 

[77-1 USTC ¶9419]In the Matter of Maring Plumbing and Heating Company, Bankrupt

U. S. District Court, No. Dist. Ill. , West. Div., No. 75-B-807, 3/8/77

[Code Sec. 6323]

Lien for taxes: Priority: State v. federal law.--Properly filed federal tax lien's priority was unaffected by Illinois state law requirement that a security interest in a motor vehicle is perfected by delivering certificate of title to the Secretary of State. The federal tax lien was expressly exempt from this requirement.

Phillip B. Johnson, 205 7th St. , Rockford , Ill. for bankrupt. Samuel K. Skinner, United States Attorney, Chicago, Ill., Scott P. Crampton, Assistant Attorney General, Jerome Fink, James W. Littlefield, Department of Justice, Washington, D. C. 20530 for U. S.

Order

GRADY, District Judge:

The court is of the opinion that the validity and priority of the Internal Revenue Service lien is governed by federal law, not state law. The federal law involved is Section 6323(a) and (f) of the Internal Revenue Code which, in substance, provides that such a lien is valid in the case of personal property when notice of the lien has been filed in some office within the state in the manner designated by state law. The question here, therefore, is whether the filing in the office of the Recorder of Deeds was a sufficient compliance with Section 6323(f). We hold that it was. Chapter 82, §66, Ill. Rev. Stat., provides for the filing of Internal Revenue liens in the office of the Recorder of Deeds. The only remaining question is whether motor vehicles are a special case governed by the requirement of §3-202(b) of the Illinois Motor Vehicle Code (Ill. Rev. Stat. Chap. 951/2, §3-202(b), that a "security interest" in a vehicle is perfected by delivering the certificate of title containing the name and address of the lien holder to the Secretary of State. We believe that federal tax liens are expressly exempted from this requirement by the language of §3-201(b) of the Vehicle Code, which states that the Article does not apply to or affect "a lien given by the statute to the United States. . . ." It is apparent that this language should read "by statute" rather than "by the statutes," since the Motor Vehicle Code gives no liens to the United States . The word "the" makes no sense in the context of the statute and its presence is an obvious drafting error. Accordingly, it should be ignored in construing the statute. Ronson Patents Corp. v. Sparklets Devices, 102 F. Supp. 123, 124 (E. D. Mo. 1951).

We conclude, therefore, that the Internal Revenue Service did perfect its lien in the manner required by the applicable federal statute and that the lien takes priority over the lien claimed by appellant. The order of the Bankruptcy Court entered on August 24, 1976 , awarding the sum of $633.74 to the appellee, is reversed. The cause is remanded to the Bankruptcy Court with directions to award that sum instead to the Internal Revenue Service in partial satisfaction of its lien.

 

 

[78-1 USTC ¶9281]Donald L. Asher and Garrett Vandenburgh, Plaintiffs-Appellees v. United States of America , Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 77-1633, 570 F2d 682, 2/24/78, Aff'g District Court, 78-1 USTC ¶9280

[Code Sec. 6323(a)--result unchanged by 1976 Tax Reform Act]

Tax liens: Priority: Judgment lien creditor: Existence of lien: State law.--A judgment lien creditor was entitled to priority over a federal tax lien. Under state law ( Illinois ), delivery of a writ of execution to the sheriff (which occurred before the federal lien was filed) gives rise to a lien upon intangible personal property (such as a bank account) of the debtor.

William J. Wise, One IBM Plaza , Chicago , Ill. , for plaintiffs-appellees. Thomas P. Sullivan, United States Attorney, 219 S. Dearborn, Chicago, Ill. 60604, M. Carr Ferguson, David E. Carmack, Department of Justice, Washington, D. C. 20530, for defendant-appellant.

Before CASTLE, Senior Circuit Judge, WOOD, Circuit Judge, and WYZANSKI, Senior District Judge. ^*

CASTLE, Senior Circuit Judge:

The government appeals from the judgment below which found the plaintiffs to be judgment lien creditors with respect to the bank account of a third party debtor prior to the filing of a federal tax lien on the debtor's property. 26 U. S. C. §§ 6321 ¹ and 6323. ² Specifically, the appellant challenges the district court's holding that the appellees obtained a valid lien upon the debtor's bank account under Illinois law by delivering a writ of execution to the sheriff. Finding the district court properly interpreted Illinois law, we affirm.

[Facts]

The facts can be briefly stated. Plaintiffs Asher and Vandenburgh obtained a judgment for $83,193.75 against Wente Company (Wente) in the Circuit Court of Cook County, Illinois, on December 10, 1974 . Plaintiffs delivered a writ of execution on that judgment to the sheriff of Cook County on December 12, 1974 . On January 15, 1975 , the Internal Revenue Service (IRS) filed with the Cook County Recorder of Deeds a notice of lien on all property of Wente pursuant to an October 7, 1974 assessment of unpaid taxes totalling $14,711.40. On January 22, 1975 , the Bank of Northfield paid the $3,892.71 balance in Wente's account to the United States pursuant to a notice of levy served on the bank by the IRS. Plaintiffs obtained a citation to discover Wente's assets from the Circuit Court of Cook County on January 23, 1975 , and, upon finding the bank account depleted, requested that the IRS return the money, claiming it was wrongfully seized. Upon the refusal of the IRS to honor the request, plaintiffs brought this suit in the district court which granted summary judgment in their favor. Asher v. United States , 436 F. Supp. 22 (N. D. Ill. 1976).

[Priority]

We agree with the district court that before determining that a state lien has priority over a federal tax lien under the first in time, first in right rule of §6323, two questions must be answered in the affirmative: whether a valid lien existed under state law when the federal lien was recorded; and, if so, whether that lien is "choate" under federal law. United States v. Pioneer American Insurance Co., 374 U. S. 84, 88 (1963); Dragstrem v. Obermeyer [77-1 USTC ¶9301], 549 F. 2d 20, 22-23 (7th Cir. 1977). The government has presented only the first question for review in this appeal and, consequently, our inquiry is narrowed to whether the district court properly interpreted Illinois law. Fed. R. App. P. 28. We do not reach the federal "choateness" question. ³

The parties agree that, in Illinois , once a creditor obtains a judgment against a debtor, he obtains a lien upon the debtor's real property. Ill. Rev. Stat., ch. 77, §1. It is also undisputed that a lien is created upon tangible personal property by delivery of a writ of execution to the sheriff, id. §9, and upon intangible personal property by instituting a proceeding to discover assets under Ill. Rev. Stat., ch. 110, §73. Mid-West National Bank v. Metcoff, 23 Ill. App. 3d 607, 611, 319 N. E. 2d 336, 340 (1974); Bank of Broadway v. Goldblatt, 103 Ill. App. 2d 243, 247, 243 N. E. 2d 501, 503 (1968). Since, in the present case, the federal tax lien was recorded subsequent to the delivery of the writ of execution to the sheriff but prior to the citation to discover assets proceeding, the parties differ as to whether delivery of the writ also gives rise to a lien upon intangible personal property such as Wente's bank account.

The district court agreed with the plaintiffs and followed Levine v. Pascal, 94 Ill. App. 2d 43, 55, 236 N. E. 2d 425, 430 (1968). In Levine, the plaintiff was held to have acquired a lien upon defendant's intangible personal property (a beneficial interest in a land trust) upon delivery of the writ of execution to the sheriff:

Clearly, plaintiff became a lien creditor as defined in Section 9-301(3) of the Commercial Code when the writ of execution was placed in the hands of the sheriff. See chapter 77, section 9, Ill. Rev. Stats. 1965, and Century Pipe & Supply Co. v. Empire Factors, 19 Ill. App. 2d 165, at 169, 153 N. E. 2d 298. While it may be doubtful whether the plaintiff could effectively enforce his lien by means of the writ of execution, there is no doubt that he could do so through citation proceedings.

Id.

The government argues that the result in Levine is against the weight of the law in Illinois and is dicta. Regarding the latter argument, it appears that the plaintiff in Levine had instituted a citation to discover assets proceeding, in addition to delivering the writ of execution to the sheriff, before the competing creditor (a bank) recorded its assignment. While, from the perspective of this case, it would have been sufficient for Levine to hold that the lien attached upon commencement of the citation to discover assets action, it was necessary for that court to make some determination of when the plaintiff's lien attached. Thus, we find that Levine cannot be ignored. ⁴

In support of the argument that Levine is contrary to Illinois law, the government cites Crawford v. Schmitz, 139 Ill. 564, 569, 29 N. E. 40, 41-42 (1891), which stated that intangible personal property "could not be taken on execution." The government also lists cases holding that the test in Illinois as to whether a lien on property has been established is whether the creditor has the power to sell that property. Commerce Vault Co. v. Barrett, 222 Ill. 169, 176, 78 N. E. 47, 48 (1906); Lehman v. Cottrell, 298 Ill. App. 434, 440, 19 N. E. 2d 111, 114 (1939). Finally, the appellant notes that subsequent Illinois appellate cases citing Levine have done so only for the proposition that a lien on intangible personal property arises upon the institution of subsequent citation proceedings. Mid-West National Bank v. Metcoff, supra; Bank of Broadway v. Goldblatt, supra. See also Sterling Savings and Loan Association v. Schultz, 71 Ill. App. 2d 94, 109, 218 N. E. 2d 53, 61 (1966).

First, we do not view the cases following Levine as authority for the government's view since neither mentioned the consequences of a writ of execution being delivered to the sheriff. ⁵ In contrast, while possibly not strictly essential to the disposition of the case, Levine definitely states that the plaintiff became a lien creditor upon delivery of the writ of execution. Second, regarding the older Illinois authorities which required a right of sale before a lien arose, Levine could be interpreted as being consistent with those cases since the appellate court notes that the plaintiff had the right of sale which could be exercised through citation proceedings. Under this interpretation, it can be argued that parallel steps must be taken after delivery of the writ to the sheriff to exercise the right of sale for both tangible and intangible personal property: tangible property may be sold only after the sheriff physically takes possession of the property from the owner; intangible property may be sold only after the court orders the owner to relinquish possession to the judgment creditors. Thus, if a lien is given upon tangible personal property by delivery of the writ to the sheriff, a different method of exercising the right of sale should not prevent the similar creation of a lien on intangible personal property.

However, to the extent Levine cannot be completely reconciled with the Illinois Supreme Court cases cited by the government, we accept its statement as an accurate summary of the current Illinois law regarding the creation of liens on intangible personal property. See West v. American Telephone & Telegraph Co., 311 U. S. 223, 237 (1940). We are persuaded by the clarity of the court's statement, the substantial lapse of time since the latest Illinois Supreme Court case cited, and the reference in Levine to §9-301(3) of the intervening Uniform Commercial Code; a section which could be construed as overruling any prior inconsistent rule regarding the creation of liens. ⁶ The last reason is especially compelling in light of the language in Crawford v. Schmitz, supra at 569, 29 N. E. at 42: "This common law rule still prevails except where it has been changed by statute . . ." (emphasis added).

For the reasons stated above, the judgment of the lower court is affirmed.

Affirmed.

^* The Honorable Charles Edward Wyzanski, Jr., United States District Judge, District of Massachusetts, is sitting by designation.

¹ §6321. Lien for taxes.

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

² §6323. Validity and priority against certain persons.

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

* * *

³ The additional requirement of "choateness" is designed to prevent the states from establishing liens at arbitrary times simply to prime federal tax liens. United States v. Pioneer American Ins. Co., supra at 89. The district court found the plaintiffs' state lien to be choate under federal law since "the identity of the lienor, the property subject to the lien, and the amount of the lien [were] established." Asher v. United States, supra at 26, quoting United States v. New Britain , 347 U. S. 81, 84 (1954).

⁴ The government also argues that Levine did not decide whether a beneficial interest in a land trust was a chose in action or was some other form of personal property and, consequently, its broad statement might not apply to intangible personal property. While ostensibly declining to specify the property interest involved, the opinion in Levine can be fairly interpreted as assuming it was dealing with a chose in action. Id. at 53, 236 N. E. 2d at 430. Also Levine's definition of a chose in action, "a right to receive or recover a debt or money due on a bond, note, or other contract," easily includes intangible personal property such as a bank account. Id.

⁵ We cannot accept the government's contention that, by saying a lien on intangible property attaches upon initiation of the supplemental proceeding, the subsequent cases imply that no lien attaches at an earlier time. Such an implication, if it exists, is not persuasive in the face of the clear statement in Levine.

⁶ Ill. Rev. Stat. ch. 26, §9-301(3) provides:

(3) A "lien creditor" means a creditor who has acquired a lien on the property involved by attachment, levy or the like . . ..

The appellate court in Levine may have been interpreting the phrase "or the like" to mean that the delivery of the writ of execution to the sheriff causes a judgment creditor to become a "lien creditor." It is accepted that the words "judgment lien creditor" in §6323 generally are to be read as the equivalent to "lien creditor" in §9-301(3) of the UCC. Dragstrem v. Obermeyer, supra at 25; Nevada Rock & Sand Co. v. United States, 376 F. Supp. 161, 169 (D. Nev. 1974). Consequently, by satisfying §9-301(3), the plaintiff in this case has satisfied the state law portion of the §6323 priority inquiry.

 

[83-2 USTC ¶9515]In re: Vincent Lapiana and Barbara Lapiana, Debtors. Vincent Lapiana and Barbara Lapiana, Plaintiffs v. Farmers State Bank of Somonauk, Bank of Hinsdale, J. D. Pierce Builders, Inc., Internal Revenue Service, Millard G. Lee, Richard Mayfield, Roy Raphbun and La Salle County Treasurer, Defendants Millard G. Lee and Richard Mayfield, Cross-Claimants v. J. D. Pierce Builders, Inc., United States of America, Department of the Treasury, Internal Revenue Service, Vincent Lapiana and Barbara Lapiana, Cross-Respondents

U. S. Bankruptcy Court, No. Dist. of Ill. , East. Div., In Bankruptcy No. 81 B 7077, 31 BR 738, 6/16/83

[Code Sec. 6323]

Liens: Priority: Judgment creditor: Inchoateness: Amount of lien.--

A federal tax lien on the proceeds of a sale of property belonging to the taxpayers/debtors took precedence over the judgment creditors' lien, because their lien was inchoate. Although two of the three elements of choateness were established, the identity of the lienors and the property subject to the lien, the third element, the amount of the lien, was not clear. The creditors received judgment against the debtors and a lien on their assets (under Illinois law issuance of a citation to discover assets creates a lien) prior to the filing of notice of the federal lien, but the debtors instituted proceedings in an Illinois court to open and set aside the judgment, making it uncertain whether they would retain the judgment or any part of it at the time the notice was filed.

Joel R. Nathan, Chicago , Illinois , for plaintiffs. Eileen Marutzky, Assistant United States Attorney, Chicago, Illinois 60604, James K. Wilkens, Department of Justice, Washington, D. C. 20530, for defendants.

Order

FISHER, Bankruptcy Judge:

This matter coming on to be heard upon the Complaint of Debtors, Vincent Lapiana and Barbara Lapiana, for authority to sell certain property free and clear of liens, and upon the Answers thereto filed by Farmers State Bank of Somonauk, Bank of Hinsdale, J. D. Pierce Builders, Inc., and Millard G. Lee and Richard Mayfield ("Lee and Mayfiedl"), and upon the Crossclaim of Lee and Mayfield to determine priorities to proceeds of sale, and upon the answers to said Crossclaim filed by J. D. Pierce Builders, Inc., United States of America (the "United States"), and Debtors, and upon the Motion of Lee and Mayfield for Summary Judgment against Crossrespondents United States and Debtors, and upon the United States' Cross-Motion for Summary Judgment upon the Crossclaim of Lee and Mayfield, and

The Court having examined the pleadings filed in this matter, and having received and examined the Stipulation of Facts and Genuineness of Documents executed and submitted by Lee and Mayfield, the United States, and Debtors, and later adopted by the Trustee, and having received and examined Memoranda of the parties in support of their respective positions, and having heard the arguments of counsel, and the Court being fully advised in the premises,

The Court Finds:

1. On or about August 19, 1980, a judgment by confession, in the amount of $497,392.60 plus costs, was entered in favor of Lee and Mayfield against Debtors and others in the Eighteenth Judicial Circuit Court, Du Page County, Illinois, Case No. 80 L 1101, entitled "Millard G. Lee and Richard J. Mayfield vs. Michael J. Hart, Dorothy L. Hart, Vincent LaPiana, Barbara LaPiana, H. Gene Wininger, and Marilyn J. Wininger".

2. On August 25, 1980 , the United States made an assessment of Debtors' income tax liability for the year ended December 31, 1979 in the amount of $70,474.49.

3. Thereafter, on August 27, 1980, the Clerk of the Eighteenth Judicial Circuit, Du Page County, Illinois, issued in Case No. 80 L 1101 two citations to discover assets, one directed to Vincent LaPiana and the other to Barbara LaPiana. The citations were duly served upon Debtors on September 3, 1980 .

4. On or about September 8, 1980 , an order was entered in Case No. 80 L 1101, reciting in relevant part as follows:

". . .

It is hereby ordered and decreed;

. . .

2) That the defenants be and are hereby granted leave in accordance with Supreme Court Rule 276 to file their motion to open and/or set aside the judgment by confession entered on August 19, 1980 and/or August 18, 1980 . . .

3) That the aforemention [sic] judgment shall stand until further order of court and enforcement or/and any citations or supplemental proceedings shall be and are hereby stayed until further order of court.

4) That the Citation shall stand as a lien upon the assets of defendants until further order of court."

After a hearing, Debtors' motion to open the judgment by confession was allowed. The order opening the judgment was entered on November 26, 1980 and provides in relevant part as follows:

". . .

3. That the Plaintiffs shall have thirty (30) days to answer Defendants' Affirmative Defense and Counter-Claim and to assert such other additional claims they have have [sic] against the Defendants.

4. That the judgment heretofore entered by confession shall stand as security.

5. That the Citation heretofore issued and served on Defendants shall be continued generally and shall continue to stand as a lien upon the assets of the Defendants.

6. That the parties undertake discovery to be completed within a reasonable time and, thereafter, this matter shall be set for trial on further motion and order."

5. On December 31, 1980 , the United States filed with the Recorder of Deeds for Lake County , Illinois its Notice of Federal Tax Lien. Two days later, on January 2, 1981 , the United States filed a similar notice with the Recorder of Deeds for La Salle County , Illinois .

6. Debtors filed their voluntary joint petition for relief under chapter 11 of the Bankruptcy Code on June 15, 1981 . At the time of the filing of the petition, and at all times relevant herein, Debtors jointly held the beneficial interest in Bank of Naperville Trust No. 3461, dated December 8, 1978, an Illinois land trust (the "land trust") holding title to the real estate commonly known as 1586 Holiday Drive, Sandwich, Illinois. Said real estate is located in La Salle County , Illinois , and Debtors reside in Lake County , Illinois .

7. On October 5, 1981 , Debtors filed the instant Complaint seeking authority to sell their beneficial interest in the land trust free and clear of liens and encumbrances, any valid liens to attach to the proceeds of sale. The Court granted the requested authority, and the property was sold for $200,000.00. Upon sale, the alleged liens of J. D. PIERCE BUILDERS, INC., the United States , and Lee and Mayfield attached to the proceeds. ¹ Debtors also claim and interest therein.

8. On November 12, 1981, after the property had been sold, Lee and Mayfield filed their Crossclaim againt J. D. PIERCE BUILDERS, INC., the United States, ² and Debtors. The Crossclaim seeks a determination that Lee and Mayfield hold a valid lien in the proceeds of sale, that the lien is prior to the interests of the United States, J. D. PIERCE BUILDERS, INC., and Debtors, and for an order directing turnover of the sale proceeds to Lee and Mayfield to the extent of their alleged lien. In the Motion for Summary Judgment on their Crossclaim, Lee and Mayfield seek a determination of priority only as against the United States and Debtors. The Cross-Motion for Summary Judgment filed by the United States prays for an order upholding the priority of the federal tax lien as against the interests of Lee and Mayfield.

9. After the filing of the Motions for Summary Judgment, Debtors' chapter 11 case was converted to a case under chapter 7 of the Bankruptcy Code. LAWRENCE COOPER was appointed Trustee, and he has succeeded to any nonexempt interest which Debtors may have had in the proceeds of sale.

10. As of this date, no portion of the alleged indebtedness to Lee and Mayfield or of Debtors' 1979 income tax liability has been satisfied.

The Court Concludes and Further Finds:

1. There is no genuine issue as to any fact material to the issues decided herein.

2. In determining the question of priority raised by the instant motions, the initial inquiry must be whether the judgment creditors, Lee and Mayfield, hold a lien upon the funds in controversy. Lee and Mayfield contend that the issuance and service of a citation to discover assets under §73 of the Civil Practice Act, Ill. Rev. Stat. ch. 110, §73, ³ creates a lien on personal property belonging to the judgment debtor.

Illinois law is not at all clear upon this issue. In the leading case of Levine v. Pascal, 94 Ill. App. 2d 43, 236 N. E. 2d 425 (1st Distr. 1968), the defendants assigned their beneficial interest in a land trust to Palos State Bank as collateral for a loan. The bank never filed a financing statement to perfect its lien as then required by the Illinois Commercial Code. Several months after the making of the loan, a judgment was entered against the defendants in favor of one Levine, and Levine obtained the issuance of both a writ of execution and a citation to discover assets under §73.

In the citation proceedings, the bank claimed it had priority over Levine in the defendants' beneficial interest in the land trust. The bank argued that such an interest constitutes intangible personal property and is not subject to a lien by a writ of execution. ⁴ The Court responded as follows:

". . . As well as procuring a writ of execution, plaintiff initiated citation proceedings under section 73 of our Civil Practice Act. Having the status of judgment creditor, this remedy was available to plaintiff and sufficient to establish his claim to the beneficial interest of Land Trust No. 15222. Clearly, plaintiff became a lien creditor as defined in section 9-301(3) of the Commercial Code when the writ of execution was placed in the hands of the sheriff. . . . While it may be doubtful whether the plaintiff could effectively enforce his lien by means of the writ of execution, there is no doubt that he could do so through citation proceedings." (Emphasis added; citations omitted.)

Id. at 54-55.

As the emphasized language above indicates, the Levine court may have been drawing a distinction between creation of the lien (through delivery of the writ of execution to the sheriff) and its enforcement (through citation proceedings). However, two subsequent Illinois decisions, viz., Mid-West National Bank of Lake Forest v. Metcoff, 23 Ill. App. 3d 607, 319 N. E. 2d 336 (1974) and Bank of Broadway v. Goldblatt, 103 Ill. App. 2d 243, 243 N. E. 2d 501 (1968), ignored any such distinction. These cases interpret Levine as holding that a judgment creditor who institutes citation proceedings becomes a lien creditor within the purview of §9-301(3) of the Illinois Commercial Code.

In a recent bankruptcy court case, In re Stoner Investments, Inc., 7 Bankr. 240 (Bankr. N. D. Ill. 1980), aff'd, No. 80 C 6226 (N. D. Ill. Aug. 6, 1981), the judgment creditor, who had obtained the issuance of a citation to discover assets but not a writ of execution, argued that the citation was sufficient to create a lien on the debtor's intangible personal property. The bankruptcy court noted that Levine clearly held a lien was created upon delivery of a writ of execution to the sheriff, but interpreted Levine as further holding that a citation to discover assets can also create a lien. In re Stoner Investments, Inc., supra. The court relied principally upon the following statement from Levine:

". . . [I]t is of no materiality in this case whether the beneficial interest in a land trust be categorized as a chose-in-action or some other form of personal property. A judgment creditor may attach on either under chapter 73, subsection (2)(e) of the Civil Practice Act. . . ." (Emphasis added.)

Levine v. Pascal, supra.

In Asher v. United States [78-1 USTC ¶9281], 570 F. 2d 682 (7th Cir. 1978), the Seventh Circuit Court of Appeals had occasion to consider whether the issuance of a writ of execution creates a lien in intangible personal property. The Court, in dicta, stated that ". . . a lien is created . . . upon intangible personal property by instituting a proceeding to discover assets under Ill. Rev. Stat., ch. 110, §73," and went on to hold, relying upon Levine, that such a lien is also created upon delivery of a writ of execution to the sheriff. Asher v. United States, supra at 683-85.

The two most recent pronouncements on this issue from the Illinois courts are in direct conflict. In In re Marriage of Rochford, 91 Ill. App. 3d 769, 414 N. E. 2d 1096 (1st Distr. 1980), the judgment creditor, who had obtained the issuance of a writ of execution but not a citation to discover assets, claimed priority in the proceeds of sale of a seat on the Chicago Mercantile Exchange. The court held that a lien on tangible personal property is created by the delivery of a writ of execution to the sheriff, while a lien on intangible personal property, such as a seat on a trading exchange, ". . . may be created only through the filing of a creditor's bill . . . or by instituting proceedings to discover assets." Id. at 775 (citations omitted).

In Kaiser-Ducett Corp. v. Chicago-Joliet Livestock Marketing Center, Inc., 86 Ill. App. 3d 216, 407 N. E. 2d 1349 (3d Distr. 1980), the judgment creditor obtained the issuance of both a writ of execution and citations to discover assets. The court observed that the writ of execution had been delivered to the sheriff of the wrong county and held that although citations has also been issued, the judgment creditor had failed to perfect a lien in the judgment debtor's intangible personal property. The court stated, ". . . [A] judgment can not become a lien against personal property unless a writ of execution is delivered to the sheriff to be properly executed. . . . This is so for intangible as well as tangible personal property, even though a citation-to-discover-assets proceeding must also be instituted to obtain the intangible personal property of the debtor." Id. at 219 (citations omitted). In support of its holding, the court cited without discusson Levine v. Pascal, supra, Asher v. United States [78-1 USTC ¶9280], 436 F. Supp. 22 (N. D. Ill. 1978), aff'd, [78-1 USTC ¶9281] 570 F. 2d 682 (7th Cir. 1978), and Midwest National Bank of Lake Forest v. Metcoff, supra.

The district court in General Telephone Co. of Illinois v. Rob inson, 545 F. Supp. 788, 793 (C. D. Ill. 1982), observed that this area of Illinois law "[t]o say the least, . . . is muddled". After a thorough discussion of the relevant case law, the court concluded in dicta that the institution of citation proceedings should give rise to a lien on personal property. Id. at 797 (citations omitted). ⁵ This Court agrees that the weight of authority and the better reasoned decisions support a finding that the issuance and service of a citation to discover assets pursuant to §73 of the Civil Practice Act, Ill. Rev. Stat. ch. 110, §73, creates a lien upon the intangible personal property of the judgment debtor. Accordingly, Lee and Mayfield held a valid judgment lien upon the Debtors' joint beneficial interest in Bank of Naperville Trust No. 3461, and they hold a valid lien in the proceeds of sale.

3. Lee and Mayfield contend that their lien has priority over the Government's lien for taxes.

The lien of the United States for income taxes owed by Debtors for the year ended December 31, 1979 arose pursuant to the provisions of 26 U. S. C. §6321. That section grants the Government a lien on all property and rights to property belonging to a delinquent taxpayer. United States v. Cohen [76-2 USTC ¶9602], 271 F. Supp. 709, 714 (S. D. Fla. 1967). The lien arose at the time the assessment was made, viz., August 25, 1980 . 26 U. S. C. §6322; see Sgro v. United States [79-2 USTC ¶9733], 609 F. 2d 1259, 1261 (7th Cir. 1979); Crocker National Bank v. Trical Manufacturing Co. [76-1 USTC ¶9196], 523 F. 2d 1037, 1038 (9th Cir. 1975).

Pursuant to 26 U. S. C. §6323(a), ⁶ the Government's tax lien is not valid as against a judgment creditor's lien until proper notice thereof is filed by the Secretary of the Treasury or his delegate. In order for a judgment lien to take priority over a federal tax lien under this section, it must have attached to the property in question and be choate at the time the federal tax lien is recorded. See United States v. City of New Britain, 347 U. S. 81, 86 (1954); Sgro v. United States, supra; Dugan v. Missouri Neon & Plastic Advertising Co. [73-1 USTC ¶9211], 472 F. 2d 944, 951 (8th Cir. 1973); Asher v. United States [78-1 USTC ¶9280], 436 F. Supp. 22, 25 (N. D. Ill. 1976), aff'd on other grounds [78-1 USTC ¶9281], 570 F. 2d 682 (7th Cir. 1978).

In this case, the federal tax lien was recorded on December 31, 1980 . ⁷ The lien of the judgment held by Lee and Mayfield attached prior thereto, on September 3, 1980, when the citations to discover assets were served upon Debtors. The question remains whether that lien was choate when the federal tax lien was recorded.

The question of choateness is a matter of federal law, Sgro v. United States, supra; Bank of California, National Association v. United States [75-2 USTC ¶9614], 520 F. 2d 302, 303 (9th Cir. 1975), although local law is initially consulted to examine the lien procedure and to determine the characteristics of the state-created lien. Hartford Provision Co. v. United States [78-1 USTC ¶9392], 579 F. 2d 7, 9 (2d Cir. 1978); see also Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960). The lien is then evaluated against the federal standard of choateness, which requires that the identity of the lienor, the property subject to the lien, and the amount of the lien be established. United States v. City of New Britain, supra at 84; Sgro v. United States , supra; Hartford Provision Co. v. United States , supra.

Prejudgment liens have frequently been held inchoate and therefore subordinate to antecedent federal tax liens. See, e.g., United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Liverpool & London & Globe Insurance Co., Ltd. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950); United States v. Erlandson [70-2 USTC ¶9559], 311 F. Supp. 399 (D. Minn. 1969). In United States v. Security Trust & Savings Bank, supra, the Court explained that the attachment lien gave the creditor

". . . no right to proceed against the property unless he gets a judgment within three years . . .. Numerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded. Thus the attachment lien is contingent or inchoate . . ."

Id. at 50.

4. Under the standard of choateness articulated above, the lien held by Lee and Mayfield was inchoate when the Government recorded its tax lien on January 2, 1981 . Prior to that date, the judgment by confession had been reopened pursuant to Illinois Supreme Court Rule 276, which provides in relevant part as follows:

"A motion to open a judgment by confession shall be supported by affidavit . . . and shall be accompanied by a verified answer which defendant proposes to file. If the motion and affidavit disclose a prima facie defense on the merits to the whole or a part of the plaintiff's claim, the court shall set the motion for hearing. The plaintiff may file counter-affidavits. If, at the hearing upon the motion, it appears that the defendant has a defense on the merits to the whole or a part of the plaintiff's claim and that he has been diligent in presenting his motion to open the judgment, the court shall sustain the motion either as to the whole of the judgment or as to any part thereof as to which a good defense has been shown, and the case shall thereafter proceed to trial upon the complaint, answer, and any further pleadings which are required or permitted. . . . The original judgment stands as security, and all further proceedings thereon are stayed until the further order of the court, but if the defense is to a part only of the original judgment, the judgment stands as to the balance and enforcement may be had thereon. . . ."

The purpose of this rule is to afford the litigants a full hearing on the merits of the controversy. See Kankakee Concrete Products Corp. v. Mans, 81 Ill. App. 3d 53, 55, 400 N. E. 2d 637 (1980); Mangiamele v. Terrana, 42 Ill. App. 3d 305, 307, 355 N. E. 2d 765 (1976); Marengo State Bank v. Meyers, 89 Ill. App. 2d 421, 435, 232 N. E. 2d 75 (1967). If the defense is unsuccessful, the original judgment will be restored; if successful, the judgment will be set aside. See Excelsior Stove & Manufacturing Co. v. Venturelli, 290 Ill. App. 502, 508, 8 N. E. 2d 702 (1937); Farmers Bank of North Henderson v. Stenfeldt, 258 Ill. App. 428, 430 (1930). Thus, after a judgment is reopened, it stands as security merely, in order that a successful plaintiff may have a valid lien effective as of the date of the original judgment. See Marengo State Bank v. Meyers, supra at 435-36; Farmers Bank of North Henderson v. Stenfeldt, supra.

It is clear that the lien of such a reopened judgment is subject to numerous contingencies and may be lost entirely after trial. Enforcement is stayed pending the hearing, and the lien is continued during that time merely in order that it may relate back to the date of the original judgment if an unsuccessful defense is presented. The lien is similar in this regard to an attachment or other prejudgment lien.

The federal standard of choateness specifically requires that the identity of the lienor, the property subject to the lien, and the amount of the lien be established. In this case, the last requirement is not satisfied; the amount of the lien will not be fixed until after a trial upon the merits. ⁸

Lee and Mayfield point to Bank of California , National Association v. United States , supra, in support of their contention that the subject lien is choate. That case is clearly distinguishable and supports this Court's decision. In Bank of California, the holder of a California judgment filed a petition to register the judgment in Oregon . The Government recorded its tax lien against the judgment debtor after the judgment creditor obtained the issuance of a writ of execution in Oregon but before the judgment became a final Oregon judgment. The court observed that the California judgment was subject to challenge in the Oregon courts only on limited grounds such as fraud or lack of jurisdiction and held that while technical considerations lent support to the Government's position, the realities and facts mandated decision in favor of the judgment creditor.

In this case, the parties await a full trial on the merits, and the judgment, though technically continued in effect as security, is subject to attack upon any meritorious ground. Here, the realities and facts give decisive weight to the Government's position.

5. The lien of Lee and Mayfield, though subordinate to that of the United States , is superior to the interests, if any, of Debtors and the Trustee.

6. The Court makes no finding as to the priority of the Government's lien or the lien of Lee and Mayfield as against the alleged lien of J. D. PIERCE BUILDERS, INC.

IT IS THEREFORE ORDERED, ADJUDGED, AND DECREED that the Motion for Summary Judgment filed by Lee and Mayfield be, and the same is hereby allowed in part and denied in part, all in accordance with the foregoing.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the Motion for Summary Judgment filed by the United States be, and the same is hereby allowed.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the Crossclaim of Lee and Mayfield, except for those issues not decided herein, be, and the same is hereby allowed in part and denied in part, all in accordance with the foregoing.

IT IS FURTHER ORDERED that trial as to all remaining issues on the Complaint and Crossclaim be, and the same is hereby set for September 27, 1983 , at the hour of 2:00 p. m., Courtroom 1670, Everett McKinley Dirksen Building , 219 South Dearborn Street , Chicago , Illinois .

¹ The claims of certain defendant lienholders have already been satisfied from the proceeds of sale, including the liens of Farmers State Bank of Somonauk and Bank of Hinsdale.

² Lee and Mayfield named Internal Revenue Service as crossrespondent; a motion to substitute the United States as a party was subsequently allowed.

³ Currently §2-1402 of the Illinois Code of Civil Procedure, Ill. Rev. Stat. ch. 110, §2-1402 (1982).

⁴ Ill. Rev. Stat. ch. 77, §9, which sets forth the method of levying on personal property, refers only to "goods and chattels".

⁵ In General Telephone, a distinction was drawn between an order issued pursuant to Ill. Rev. Stat. ch. 110, §73(2), which compels the person cited to turn over assets discovered, and an order issued pursuant to Ill. Rev. Stat. ch. 110, §73(4), which merely enjoins a party from disposing of property. The court suggested that only a §73(2) order should give rise to a lien on the judgment debtor's personal property.

⁶ That section provides in relevant part as follows:

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

⁷ See 26 U. S. C. §6323(f)(1) and (2) and Ill. Rev. Stat. ch. 82, §66.

⁸ The other two requirements, concerning identity of the lienor and property subject to the lien, are met. Although the lien created through service of a citation reaches all of the judgment debtor's personal property, such a general lien satisfies the requirement that the identity of property subject to the lien be established. See Asher v. United States [78-1 USTC ¶9280], 436 F. Supp. 22, 26 (N. D. Ill. 1976), aff'd on other grounds [78-1 USTC ¶9228], 570 F. 2d 682 (7th Cir. 1978); see also Dugan v. Missouri Neon & Plastic Advertising Co., supra.

 

 

[60-2 USTC ¶9736]United States to the use of Lyall Saunders, as assignee of Sinclair Refining Co., a Corporation, Plaintiff v. Parks Construction Co., Inc., a Corporation, and Indemnity Insurance Co. of North America, a Corporation, Defendants, United States of America, Anderson Equipment Company, of Omaha, Nebraska, Burke Construction Company of Storm Lake, Iowa; and Omaha Body and Equipment Company of Omaha, Nebraska, Additional Defendants Parks Construction Co., Inc., a Corporation, and Indemnity Insurance Company of North America, a Corporation, Third Parties Plaintiff v. American Surety Company of New York, Third Party Defendant, United States of America, Intervenor

U. S. District Court, North. Dist. Iowa , West. Div., Civil No. 1151, 8/4/60

[1954 Code Sec. 6323(a)]

Tax liens: Priority: Assignment by subcontractor.--A federal tax lien arising from an assessment against a subcontractor for unpaid withholding taxes is superior to an assignment of claims by the subcontractor in a defense production contract. It is inferior, however, to the rights of the prime contractor.

Harry H. Smith, 235 Badgerow Bldg., Sioux City 1, Ia. , for plaintiff. Franklin E. Gill, Gill & Dunkle, 775 Orpheum-Electric Bldg., Sioux City 1, Ia., for defendant. Bruce A. Crary, 314 Security Bldg., Sioux City 1, Ia., for Anderson Equipment Co. A. L. Foley, Kelley & Grant, 202 Aquila Court Bldg., Omaha, Neb., Wiley E. Mayne, Jessee E. Marshall, John J. Vizintos, 1109 Badgerow Bldg., Sioux City 1, Ia., for Burke Construction Co. of Storm Lake, Ia. John E. Wear, 300 Farm Credit Bldg., Omaha, Neb., Edward L. Moran, 533 Davidson Bldg., Sioux City 1, Ia., for Omaha Body & Equipment Co. of Omaha, Neb. John J. Vizintos, D. Carlton Shull, 1109 Badgerow Bldg., Sioux City 1, Ia., for American Surety Co. of New York. F. E. Van Alstine, United States Attorney, Philip C. Lovrien, William R. Crary, Assistant United States Attorneys, Sioux City, Ia., for United States.

Findings of Fact and Conclusions of Law

BECK, District Judge:

This action came on for trial to the court without a jury in the United States District Court at Sioux City, Iowa, on the 12th day of April 1960, each of the respective parties having appeared personally and by counsel or by counsel, evidence having been introduced and received and the respective parties at the close at the trial having requested leave to file written briefs and such briefs having been submitted, and the court having had the matter under advisement and being fully informed in the premises now makes the following:

Findings of Fact

1. That the court's jurisdiction of the claims made by the respective parties arises under Title 40, Section 270(a)(b) U. S. C. A., Rule 24, Federal Rules of Civil Procedure, and Sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954.

2. That the defendants, Parks Construction Company, Inc., as general Contractor, hereinafter referred to as Parks, and Burke Construction Company, as subcontractor, hereinafter referred to as Burke, on July 28, 1958, entered into a written contract (defendant's Ex. 7), Section 1 of which is as follows:

"The Subcontractor agrees to furnish all necessary materials and/or to furnish all labor, tools, equipment and supplies necessary to perform, and to perform all work set forth in 'Section 2' hereof in the construction of Apron Operation and Taxi Way Repair for United States Air Force-53rd Fighter Group (AD) hereinafter called the Owner, at Sioux City Air Base, Iowa, in accordance with the terms and provisions of the Contract between the Owner and the Contractor, dated July 28, 1958, including all the General and Special Conditions, Drawings and Specifications and other Documents forming or by reference made a part of the Contract between the Contractor and the Owner, all of which shall be considered part of this Subcontract by reference thereto, and the Subcontractor agrees to be bound to the Contractor and the Owner by the terms and provisions thereof."

Another section of that Contract having special bearing on the issues which are before the court under this record is the following one:

"Section 4. The Contractor reserves the right to make changes in materials to be furnished or work to be performed under this Subcontract or additions thereto or omissions therefrom, upon written order to the Subcontractor.

Any additions or reductions to be made to or from the amount of the contract price resulting from changes in work or materials furnished shall be agreed upon in writing by the parties hereto, such agreement not being valid unless signed by an officer of the Contractor. In case of disagreement between the parties hereto as to additions or reductions the same shall be determined by the Architect or Engineer by certificate in writing. No addition or reduction in contract price shall be binding upon the Contractor unless agreed upon in writing or determined by the Architect or Engineer as hereinbefore provided for."

3. In the "Additional Provisions" of the general contract between Parks and the Government, which is a part of the subcontract between Parks and Burke, there are the following provisions relating to the obligation of Parks referred to as SP 1-06, Base Lines and Grades:

"The Contractor shall lay out his work from base lines and grades established by the Government and shall be responsible for all measurements in connection therewith. The Contractor shall, at his own expense, furnish all stakes, templates, platforms, equipment, and ranges and labor that may be required in setting and cutting, or laying out any part of the work . . ."

4. Under this record it is established and the court finds that Burke on or before November 23, 1959, had fully completed all of the work contemplated by the subcontract, that his performance thereunder at that time had been accepted and approved by the supervising engineers, and that the total value of his performance under that contract was $54,871.12 (defendant's Ex. 22).

5. All of that amount, the court finds, has heretofore been paid by Parks through direct payments to Burke or in the form of deductions as offsets permitted under the subcontract, except the sum of $8,137.56, which heretofore on motion of Parks and under an order of this court was deposited in Registry with the Clerk of this court, and the sum of $1,130 charged to Burke and withheld by Parks to cover the fair and reasonable value of engineering services rendered by Parks on the subcontract project.

6. The claims of the respective parties hereinafter in this Finding named, under the evidence and the stipulations entered into, the court finds, should be and are hereby established in the following amounts: (1) United States to the use of Lyall Saunders, as assignee of Sinclair Refining Co., a Corporation, $3,318.66; (2) Anderson Equipment Company of Omaha, Nebraska (hereinafter referred to as Anderson), $500; (3) United States of America (hereinafter referred to as the Government), $2,813.52, plus interest as provided for by law (See reference to stipulation in Government's brief); and (4) Omaha, $4,000.

7. That Parks at the time of Burke's completion of said subcontract and the acceptance thereof, aside from said sum deposited in Registry, was indebted to Burke on said contract for the amount it withheld for engineering fees, to-wit: $1,130.

8. That Omaha on the 16th day of January 1959, in consideration of its agreement to extent time to Burke for payments then due on a certain conditional sales contract, covering trucks used by Burke and right to Burke for use of such trucks on the construction project in which it was engaged, procured a written assignment (Omaha's Ex. 1), which was in the following form:

"ASSIGNMENT

WHEREAS, the Burke Construction Co., Inc., an Iowa corporation, with its principal place of business in Spirit Lake, Iowa, has entered into a certain construction contract with the Parks Construction Co., a Nebraska corporation, with its principal place of business in Omaha, Nebraska, for certain construction work, towit: the removal of concrete runways at the Sioux City, Iowa, airport; and,

WHEREAS, said contract provides that ten (10%) per cent of any moneys due the Burke Construction Co., Inc., under said contract shall be retained by the Parks Construction Company pending final completion of said work; and,

WHEREAS, the Burke Construction Co., Inc., has entered in a certain purchase contract with the Omaha Body and Equipment Co., a Nebraska corporation, with its principal place of business in Omaha, Nebraska, for the purchase of the necessary equipment to carry out the construction under the terms of the contract with the Parks Construction Co.; and,

WHEREAS, the Burke Construction Co., Inc., desires to secure to the Omaha Body and Equipment Co. for said equipment the payment therefor;

NOW, THEREFORE, this assignment is hereby executed by the Burke Construction Co., Inc., and the Burke Construction Co., Inc., does hereby sell, assign, and set over to the Omaha Body and Equipment Co., all of the moneys retained by the Parks Construction Co., under the ten (10%) percent provision set forth above, and directs the Parks Construction Co. to make payment of said moneys retained under said ten per cent provision recited above to the Omaha Body and Equipment Co. to insure payment to that company for the equipment purchased by the Burke Construction Co., Inc., as above outlined.

DATED this 16th day of January, 1959.

BURKE CONSTRUCTION CO., INC.

BY Wm. J. Burke

WITNESS:

W. E. Crawley"

9. That the Government's assessments for withholding tax purposes, showing such tax, period, amount assessed, amount outstanding, date of notice and demand, and date of the filing notice of lien with the Recorders of Woodbury and Buena Vista Counties, Iowa, and Douglas County, Nebraska, are correctly described in Exhibit 1, which is a part and by reference included in its complaint of intervention, total amount as heretofore indicated being $2,813.52, plus accrued interest as provided by law.

10. $5,487.11 of the amount deposited in Registry represents 10% of the total contract price earned by Burke under its performance of the subcontract.

11. That Omaha at the close of the trial of the case, by motion which the court granted, dismissed its claim herein under the Miller Act (Title 40, Section 270(a)(b) U. S. C. A.), but with notice that it reserved all of its rights to the extent of the amount of its claim under its said written Assignment to the funds deposited in Registry.

12. That all of the parties hereto are in agreement that the plaintiff's said claim of $3,318.66 and defendant Anderson's claim of $500, are within the terms and provisions of said Miller Act and are to be paid out of the amount deposited by Parks in Registry.

13. That the Government's claim for taxes under its said assessments is predicated on what rights it may have in contract balances owing to Burke under the Parks-Burke subcontract, that such rights are superior to any rights Omaha did acquire under said written Assignment, but that its claim on the fund held in Registry is junior to those of the plaintiff and the defendant, Anderson.

14. Omaha even as it dismissed its rights under the Miller Act, asserts jurisdiction in this court to determine its rights under said Assignment under Rule 24, Federal Rules of Civil Procedure, under the theory that it is a "purchaser" under the provisions of Section 6323(c)(1), Title 26, U. S. C. A. and ancillary powers of the court as to matters brought in on a complaint for intervention.

15. Park 's claim that it had a right to charge $1,130 as engineers' fees against Burke, in the main, is predicated on an oral agreement referred to in defendant's Exhibit 23, and that the furnishing of such services was a part of Burke's obligation under the subcontract. Burke's claim against Parks for amounts expended on the project in furnishing of gateguards is based on the theory that such service constituted extras, therefore not within its own obligations under this subcontract and for those reasons a proper basis for additional compensation.

16. That Burke in compliance with its subcontract furnished performance bonds with the defendant, American Surety Company of New York, as surety, as shown by defendant's Exhibits 8 and 9, and that said bonds are in full force and effect.

17. That Parks, as it entered into the general contract with the Government of the United States for the construction of all of the work which was to be done on the aforementioned construction project, furnished a payment bond with the defendant, Indemnity Insurance Company of North America, a corporation, as surety, as provided for by the contract, under which Parks and said surety jointly and severally obligated themselves to make payment to all persons supplying labor and material in the prosecution of the work which was to be done under said contract and on any duly authorized modifications thereof. Said bond since the time it was furnished and now is in full force and effect.

18. That Parks during the course of the construction under the subcontract furnished gateguards which were used on the project; that it thereafter charged Burke for such guards; that Burke had notice that such back charges were made as he accepted payments from Parks for work done on the project and that there was an agreement and understanding by and between Parks and Burke that those charges were a part of the obligations Burke had assumed under its subcontract.

Conclusions of Law

1. The $1,130 charged to Burke by Parks, as engineering fees, was a part of the construction expense Parks assumed under that part of the subcontract which is referred to in Finding of Fact No. 3, and there is no competent evidence in this record showing said part of said subcontract to have been changed or modified as inferred by the contents of defendant's Exhibit 23.

2. That Burke's claim to extra compensation for the gateguard expense, must be denied, in view of the provisions relating to incidental expense on the project in the specifications referred to and incorporated into the subcontract, and in view of the established fact under this record that Parks and Burke agreed that such expense should be an obligation of Burke.

3. That Parks and the defendant, Indemnity Insurance Company of North America , as its surety, upon Burke's completed performance under the subcontract and the supervising engineers acceptance thereof, aside from the $8,137.56 deposited in Registry became indebted to Burke on the subcontract for said additional sum of $1,130.

4. That the plaintiff's claim of $3,318.66 and Anderson 's claim of $500, are the only claims under this record which properly come within the provisions of said Section 270(a)(b) of the Miller Act.

5. That the interest acquired by Omaha in the funds referred to in the written "Assignment", did not, as it claims bring it within the term "purchaser" of said Section 6323(c)(1), Title 26, U. S. C. A., or the "perfected lien" rule referred to in First State Bank of Medford v. United States, 166 F. Supp. 204 [58-2 USTC ¶9758], and the cases having bearing on that point and therein cited, in view of its express terms showing it to be security for payment of a debt, but subject to the aforesaid limitations it did acquire a lien on the funds described in that instrument which in this proceeding should be given effect.

6. That the Government's claim of $2,813.52, constitutes a valid tax lien under the provisions of Sections 6321, 6322, and 6323 of the Internal Revenue Code of 1954, which, however, is junior to the claims of the plaintiff and the defendant, Anderson, but superior to that of Omaha.

7. That Parks, forthwith, under the Judgment to be entered herein, should pay said balance of $1,130 into Registry, and that it and its surety thereafter be released from any and all further obligations arising out of said subcontract.

8. That the respective claimants herein are entitled to payment out of such funds in the amount and from standpoint of priority in the following order: (1) the plaintiff, $3,318.66, (2) Anderson, $500, (3) the Government, $2,813.52 and interest as provided for by law, and (4) the remaining balance to Omaha.

9. That the defendant, American Surety Company's, obligation under this record extends to and includes payment of plaintiff's said claim of $3,318.66 and the defendant's Anderson, of $500 and no others, and that it upon disbursements out of said funds to said plaintiff and said Anderson be released from any and all further liability under its said performance bonds.

10. That the Clerk upon entry of Judgment carrying these Conclusions into full force and effect make disbursements of the funds held in Registry as hereinbefore designated, and that Omaha in the event of failure and refusal of Parks to deposit said additional sum of $1,130 in Registry have Judgment for that amount and interest from the date of the Judgment to be entered herein as against Parks.

Judgment in accordance with these Conclusions forthwith will be prepared and entered by this Court. No costs will be allowed.

Judgment

Findings of Fact and Conclusions of Law heretofore having been made and entered and heretofore having been filed in the Office of the Clerk of the United States District Court at Sioux City , Iowa , it is in accordance therewith:

ORDERED, ADJUDGED AND DECREED that the defendant, Parks Construction Company, Inc., a Corporation, immediately after the entry and filing of this Judgment, pay into the Registry at the Office of the Clerk of the United States District Court at Sioux City, Iowa, the sum of $1,130 for the use of the respective claimants hereinafter named, and that it and its surety, the Indemnity Insurance Company of North America, a corporation, thereafter be relieved of any and all obligations incurred under the Parks-Burke Subcontract referred to in this action.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the claimants hereinafter named, be, and they are hereby awarded interests in the funds held in Registry as aforesaid at the Clerk's Office in Sioux City, Iowa, and accorded priority as follows: (1) United States to the use of Lyall Saunders, as assignee of Sinclair Refining Company, a corporation, $3,318.66, (2) Anderson Equipment Company of Omaha, Nebraska, $500, (3) United States of America $2,961.02, being the amount of the tax plus interest accrued, and (4) Omaha Body and Equipment Company of Omaha, Nebraska, the remaining balance held in said Registry, namely $2,487.88, or $1,357.88 in the event that the defendant, Parks Construction Company, Inc., a Corporation, refuses to pay said $1,130 into said Registry.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the defendant, Omaha Body and Equipment Company of Omaha, Nebraska, be, and it is hereby awarded a Judgment against the defendants, Parks Construction Company, Inc., a corporation, and Indemnity Insurance Company of North America, a corporation, in the sum of $1,130 and interest thereon at the rate of 6% per annum from the date of this Judgment, which Judgment, however, shall be regarded fully satisfied in the event that the defendant, Parks Construction Company, Inc., a corporation pays said sum of $1,130 into said Registry within ten days from the time that it receives written notice from the Office of the Clerk of the United States District Court at Sioux City, Iowa, of the entry and filing of this Judgment.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the complaints herein insofar as they assert claims against the defendant, the American Surety Company of New York , be, and the same are hereby dismissed upon their merits and with prejudice.

IT IS FURTHER ORDERED that the respective claimants upon receipt of funds out of said Registry file with the Clerk proper receipts or releases therefor, and that the Judgments herein be without costs to any party hereto.