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
law required production of the original promissory note by the creditor,
Tax liens: Real property: Conveyance to related parties: State law:
: 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 (
) law. The applicable statute of limitations arose under the law of
another state (
) because the promissory note was executed in that state and the
transferees resided there.
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.
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.
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,
, for defendants-appellants.
WOLLMAN, Chief Judge, LOKEN, Circuit Judge, and BOGUE, *
resident Jack Jepsen conveyed the family's
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
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
on all of Jepsen's "property and rights to property." 26
U.S.C. §§6321, 6322. After reducing the assessment to judgment, the
commenced this action in August 1998 to foreclose its tax lien against
the promissory note and mortgage on the
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.
Did Jepsen Give the Property to His Children?
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
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
138, 14 S.W. 3d 506, 508 (
law "presumes a gift when the donor registers legal title in a
family member's name." Perrin v. Perrin, 9
App. 170, 656 S.W.2d 245, 248 (Ark. App. 1983); see Festinger v.
411, 616 S.W.2d 455, 463-64 (
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.
App. 164, 961 S.W.2d 770, 773 (
App. 1998). The following is a summary of the relevant underlying
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
in October 1989. He then sent the document originals to
ert Bailie, vice president of finance of Jepsen of Illinois, with a
the original, recorded warranty deed and real estate mortgage relative
to Jack's sale of the
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
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
l In April
1995, Kris applied for a bank loan secured in part by the
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
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. . . .
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
and Carberry had no recollection of the 1989 transaction. Bailie
testified that he would only have acted at the direction of Jepsen.
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.
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
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
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
1149, 134 L.Ed.2d 569, 116 S.Ct. 1449 (1996).
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
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
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
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
The Statute of Limitations Issue.
"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
conflict of law principles, the district court determined that
law governs this issue because the note was made in
. See Cooper v. Cherokee Vill. Dev. Co., 236
37, 364 S.W.2d 158, 161-62 (
1963). The parties agree that
In 1989, when
the promissory note was executed,
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
App. 3d 613, 712 N.E.2d 917, 922, 238
Ill.Dec. 813 (
App. 1999). But the six-year statute was repealed on
January 1, 1998
, before this action was commenced. See
Pub. Act 90-451, §10 (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
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
commenced this action to enforce its tax lien on his property.
The Remedy Issue.
court entered final judgment for the
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
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
(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.
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
, 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.
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.
The Honorable H. Franklin Waters, United States District Judge for the
Western District of Arkansas.
"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).
United States of America
, Plaintiff-Appellee v. Amos D.
, Jr. and Norma L. Davenport, Defendants-Appellants
Court of Appeals, 7th Circuit, 96-1299,
, 106 F3d 1333, 106 F3d 1333. Affirming an unreported District Court
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.
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 (
) 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.
, for defendant-appellant.
CUMMINGS, ESCHBACH, and FLAUM, Circuit Judges.
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
' marital residence to satisfy the federal tax liens that had allegedly
attached to the property. The
argue for reversal of the district court's order on the grounds that the
sale of their residence violates
homestead law, the
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.
have owned their residence at 443 Luella,
(the "marital residence") since
April 2, 1955
. In 1989, the tax man came knocking: the
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
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
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.
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
as a portion of the proceeds of the sale.
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.
, 969 F.2d 530, 532 (7th Cir. 1992).
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
(6 How.) 201 (1848). 2
Despite the parties' ultimate agreement, however, we are obliged to
independently confirm the basis of our appellate jurisdiction.
SeeMt. Healthy City Bd. of Educ. v. Doyle, 429
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
. . . 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.
we take jurisdiction over this appeal under the finality doctrine first
announced in Forgay v. Conrad:
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.
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
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
OF THE MARITAL RESIDENCE
asserted jurisdiction, we are left with the question of whether the
district court's order directing the sale of the
' marital residence was proper. The appellants assert that the sale of
the property to satisfy the tax lien of only one spouse violates both
tenancy by the entireties statute and
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.
, 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
transferred the property from a joint tenancy into an entireties estate.
§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
At that time, the
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
' 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,
(13 Pet.) 464, 483 (1839)) (internal quotations omitted).
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
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
law. When McKernan Co. then moved the court to force the sale of
Gregory's residence to satisfy the judgment, the court refused. Once
confuse the issues of whether attachment occurred and whether properly
attached entireties property can be sold. McKernan does not aid the
because the defendant there, unlike the
, transferred the property into a tenancy by the entirety before the
levy could attach, not after. Thus, in holding that the sale violated
entireties statute, the McKernan court merely recognized the impropriety
of selling property to satisfy a lien that never properly attached.
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
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
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
§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.
USTC ¶9374 ], 461 U.S. 677 (1983).
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
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
has any "claim or interest" in it), and the recognition of
third-party interests through the mechanism of judicial valuation and
¶9374 ], 461
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."
at 701. Rodgers thus forecloses the
' arguments that the district court's sale decree violates
property laws which, in contradiction to §7403, purport to prohibit
sale of the
' marital residence.
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
assign legal error to the district court's failure to consider these
evidences a basic misunderstanding about the role of the Rodgers
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."
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
. We need not and will not upset that discretionary decision.
court is AFFIRMED.
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.
After arguing both for and against our jurisdiction at oral argument,
ultimately agreed with the government's jurisdictional analysis under
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
, 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.
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 "
" 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
have not met this burden.
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.
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
In their brief, the
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
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.
¶50,349] Central Laborers' Pension, Welfare & Annuity Funds,
Plaintiff v. Oak Ridge Industries, Inc., and United States of America,
U.S. District Court, So. Dist. Ill.,
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 (
) 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.
Patchett, Winters, Brewster, Crosby & Patchett,
111 W. Main St.
, 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.
involves a dispute between Central Laborers' Pension, Welfare &
Annuity Funds ("Central Laborers") and the
over lien priority. Central Laborers maintains a variety of funds to
which various employers, and in this case, Oak Ridge Industries, Inc.
"), are required to make contributions pursuant to an agreement
made between the local unions and
entered into a contract with the Illinois Department of Corrections
("IDOC") to perform asbestos abatement at the
was required to make contributions to Central Laborers for the work done
by the union employees on the project. However,
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.
for Central Laborers,
has another creditor with a competing lien. This competing lien holder
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
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
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.
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,
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)
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)
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
Comp. Stat. §60/23(c). Following the written notice, the mechanic's
lienor must file a complaint for an accounting within ninety days. Id.
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
takes priority over Central Laborers' lien. Accordingly, the motion for
summary judgment [Doc. 1] is GRANTED.
IT IS SO
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
does not dispute that Central Laborers has a valid mechanic's lien.
¶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,
S. District Court, No. Dist. Ill., East Div., Civil Action No. 61C1230,
[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.
Blachard, Norman, Engelhardt & Zimmerman, 100 W. Monroe, Chicago 3,
, 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.
of Fact and Conclusions of Law
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.
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
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.
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
served the Board of Education with written notice of its claim against
Bruce Electric on
December 21, 1960
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.
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.
Complaint in Intervention of the
was filed to determine the rights of the
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
March 31, 1960
, were filed with the Recorder of Deeds,
February 19, 1960
April 20, 1960
July 29, 1960
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
against Bruce Electric.
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.
1. This Court
has jurisdiction of the subject matter of this action and of all parties
2. The Simplex
Time Recorder Company has perfected a lien pursuant to
law to the funds in the Registry of the Court.
3. The Hyland
Electrical Supply Company has not perfected a lien pursuant to
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
, and Simplex will receive $745.87 of these funds.
$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
and is to be distributed to the
¶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
Appellate Court for the First District, No. 45902, 111 NE2d 172,
March 27, 1953
On Appeal from Superior Court,
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
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.
Kerner, Jr., U. S. Attorney,
, for appellant. George L. Shapiro, 11 So.
, for appellees.
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
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
its lien is superior to that of the mortgage; that the lien of the
being subordinate to that mortgage, it is subordinate to everything
declared by the law of
to be superior to the mortgage.
determination of this question certain long established principles are
applicable. In McCulloch v.
, 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
, 118 Fed. (2d) 963, 965 [41-1 USTC ¶9381]; Michigan v. United
338 [43-1 USTC ¶9225]; United States v. Texas, 314
480; Spokane County v. United States, 279
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
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. (
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).
of a federal tax lien as against a state tax lien was upheld in Michigan
v. United States, 317
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
, 118 Fed. (2d) 963 [41-1 USTC ¶9381], the state of
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,
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.
authority paramount to state law]
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
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
place ahead of the mortgage. The mechanic's lien holder relies upon Ferris
v. Chic-Mint Gum Co., 124 Atl. 577 (14
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
91 [1 USTC ¶387], where he said:
Chancellor [in the Ferris case] allowed the claims in order of
the state, the mortgage, and the
, 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."
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.
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.
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
reversed and cause remanded, with directions to amend the decree in
accordance with the conclusions of this opinion.
reversed and cause remanded, with directions.
ROBSON, P. J.,
concurs. TOUHY, J., took no part.
¶9419]In the Matter of Maring Plumbing and Heating Company, Bankrupt
S. District Court, No. Dist.
, 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.
205 7th St.
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.
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
. 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).
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
¶9281]Donald L. Asher and Garrett Vandenburgh, Plaintiffs-Appellees v.
United States of America
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 (
), 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.
, 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
Senior Circuit Judge, WOOD, Circuit Judge, and WYZANSKI, Senior District
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
law by delivering a writ of execution to the sheriff. Finding the
district court properly interpreted
law, we affirm.
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
December 12, 1974
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
pursuant to a notice of levy served on the bank by the IRS. Plaintiffs
obtained a citation to discover Wente's assets from the
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
, 436 F. Supp. 22 (N. D. Ill. 1976).
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
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
law. Fed. R. App. P. 28. We do not reach the federal
"choateness" question. 3
agree that, in
, 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
App. 3d 607, 611, 319 N. E. 2d 336, 340 (1974); Bank of Broadway v.
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.
court agreed with the plaintiffs and followed Levine v. Pascal,
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:
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
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
argues that the result in Levine is against the weight of the law
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
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.
169, 176, 78 N. E. 47, 48 (1906); Lehman v. Cottrell, 298
App. 434, 440, 19 N. E. 2d 111, 114 (1939). Finally, the appellant notes
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
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
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
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
law regarding the creation of liens on intangible personal property. See
West v. American Telephone & Telegraph Co., 311
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).
reasons stated above, the judgment of the lower court is affirmed.
The Honorable Charles Edward Wyzanski, Jr., United States District
Judge, District of Massachusetts, is sitting by designation.
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
2§6323. Validity and priority against certain persons.
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
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.
81, 84 (1954).
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
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.
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.
"lien creditor" means a creditor who has acquired a lien on
the property involved by attachment, levy or the like . . ..
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.
¶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
, East. Div., In Bankruptcy No. 81 B 7077, 31 BR 738,
[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
, for plaintiffs. Eileen Marutzky, Assistant United States Attorney,
Chicago, Illinois 60604, James K. Wilkens, Department of Justice,
Washington, D. C. 20530, for defendants.
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
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,
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".
August 25, 1980
made an assessment of Debtors' income tax liability for the year ended
December 31, 1979
in the amount of $70,474.49.
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
is hereby ordered and decreed;
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
. . .
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.
That the Citation shall stand as a lien upon the assets of defendants
until further order of court."
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:
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.
That the judgment heretofore entered by confession shall stand as
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.
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."
December 31, 1980
filed with the Recorder of Deeds for
its Notice of Federal Tax Lien. Two days later, on
January 2, 1981
filed a similar notice with the Recorder of Deeds for
La Salle County
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
, and Debtors reside in
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,
, 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
and Debtors. The Cross-Motion for Summary Judgment filed by the
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.
Concludes and Further Finds:
1. There is no
genuine issue as to any fact material to the issues decided herein.
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.
law is not at all clear upon this issue. In the leading case of Levine
v. Pascal, 94
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
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.
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
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.)
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
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).
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
v. Metcoff, supra.
court in General Telephone Co. of Illinois v.
inson, 545 F. Supp. 788, 793 (C. D. Ill. 1982), observed that this
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
3. Lee and
Mayfield contend that their lien has priority over the Government's lien
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
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.
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
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.
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],
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
, supra; Hartford Provision Co. v.
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
211 (1955); United States v. Liverpool & London & Globe
Insurance Co., Ltd. [55-1 USTC ¶9136], 348
215 (1955); United States v. Security Trust & Savings Bank
[50-2 USTC ¶9492], 340
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:
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
App. 3d 53, 55, 400 N. E. 2d 637 (1980); Mangiamele v. Terrana,
App. 3d 305, 307, 355 N. E. 2d 765 (1976); Marengo State Bank v.
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
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.
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
Mayfield point to Bank of
, National Association v.
, 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
judgment filed a petition to register the judgment in
. The Government recorded its tax lien against the judgment debtor after
the judgment creditor obtained the issuance of a writ of execution in
but before the judgment became a final
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
, 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
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
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
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
p. m., Courtroom 1670,
219 South Dearborn Street
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.
Lee and Mayfield named Internal Revenue Service as crossrespondent; a
motion to substitute the
as a party was subsequently allowed.
Currently §2-1402 of the
Code of Civil Procedure, Ill. Rev. Stat. ch. 110, §2-1402 (1982).
Ill. Rev. Stat. ch. 77, §9, which sets forth the method of levying on
personal property, refers only to "goods and chattels".
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
That section provides in relevant part as follows:
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."
See 26 U. S. C. §6323(f)(1) and (2) and Ill. Rev. Stat. ch. 82, §66.
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
¶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
S. District Court, North. Dist.
, West. Div., Civil No. 1151,
[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.
Smith, 235 Badgerow Bldg.,
, 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.
of Fact and Conclusions of Law
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:
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:
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."
section of that Contract having special bearing on the issues which are
before the court under this record is the following one:
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.
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:
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
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
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,
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
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,
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;
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,
the Burke Construction Co., Inc., desires to secure to the Omaha Body
and Equipment Co. for said equipment the payment therefor;
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.
this 16th day of January, 1959.
CONSTRUCTION CO., INC.
BY Wm. J. Burke
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.
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
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.
'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
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.
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
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
3. That Parks
and the defendant, Indemnity Insurance Company of
, 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
'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
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
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
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.
accordance with these Conclusions forthwith will be prepared and entered
by this Court. No costs will be allowed.
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
, it is in accordance therewith:
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
, be, and the same are hereby dismissed upon their merits and with
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.
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