Interest on Mortgage

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[66-1 USTC ¶9410] United States of America , Plaintiff v. William Sousa Bridgeforth, et al., Defendants

U. S. District Court, Middle Dist. Tenn., Nashville Div., Civil No. 3135, 1/21/65

[1954 Code Sec. 6323]

Lien for taxes: Validity against mortgagee: Interest accrued after sale: Legal expenses of mortgagee.--Where the contract between the parties specifically provided, the mortgagee-note holder was entitled to interest on the principal of the mortgage indebtedness from the date of sale of the realty to satisfy tax liens until the mortgage indebtedness was paid and to reasonable fees incurred by placing note in hands of attorney for collection. The indebtedness was secured by a valid mortgage placed on record prior to the accrual of the government's lien.

James F. Neal, United States Attorney, 23rd Floor, Life and Casualty Tower, Nashville, Tenn., for plaintiff. William S. Hofstetter, American Trust Bldg., Nashville , Tenn. , for Komisar, defendant.

Memorandum

MILLER, District Judge:

This matter came before the Court for further proceedings on January 21, 1965 on the Special Master's Report and for consideration of the question whether the mortgagee-note holder is entitled to interest on the principal of the mortgage indebtedness from the date of the sale and to reasonable attorney's fees.

The government takes the position that interest does not accrue from and after the date of the sale and it resists the allowance of attorney's fees on the ground that the attorney did not actually collect the indebtedness. After careful consideration the Court is convinced that the position of the government is not well taken and cannot be sustained. The only interest of the government is in the equity of the property after satisfaction of the mortgage indebtedness in full. Such indebtedness is provided for by a valid contract entered into between the contracting parties. The indebtedness was secured by a valid mortgage duly placed of record prior to the accrual of the government's interest or lien; and the priority of the mortgage indebtedness has been recognized throughout the proceeding. It was an integral part of the contract itself that the principal indebtedness would bear interest until paid, and that a reasonable attorney's fee should be paid.

The Court has been unable to find any authority, and no authority has been cited by the government, which would vest in the Court under the circumstances of this case, any discretion to disallow interest or attorney's fees. The note was duly placed in the hands of the attorney for collection and he is entitled to a reasonable attorney's fee as a matter of law.

It is, therefore, directed that an order be submitted to the Court:

(1) Confirming the Special Master's Report, to which no exceptions have been filed;

(2) Allowing interest on the principal of the indebtedness from the date of sale at the rate of six per cent (6%) per annum until the mortgage indebtedness is paid; and

(3) Allowing an attorney's fee in the amount of twelve per cent (12%) of the sum found by the Special Master to be due, including principal and interest, as of the date of the sale.

Order ( 1/26/65 )

This cause came on to be heard before the Honorable William E. Miller, Judge for the United States District Court for the Middle District of Tennessee, on motion of defendant, Eva Komisar, for payment of the balance due her on an indebtedness on certain property located at 1200 Charlotte Avenue, Nashville, Tennessee, previously sold by the United States Marshal to satisfy tax liens against William Sousa Bridgeforth; and the Court having appointed a Special Master to determine the balance on said mortgage and interest thereon, and having heard argument of Counsel and having entered its memorandum stating its findings which memorandum is incorporated herein by reference thereto and made a part of the record in this cause.

IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED that the report of the Special Master be confirmed; that out of the proceeds of the sale of the property at 1200 Charlotte Avenue, Eva Komisar be paid the sum of $10,135.70, which amount includes interest at the rate of 6% per annum up to and including January 28, 1965. That Mr. William S. Hofstetter, attorney for Eva Komisar, be paid the sum of $1,194.68 as his attorney's fee which sum represents a fee of 12% of the sum found by the Special Master to be due including principal and interest as of September 30, 1964 , the date of the sale of the property herein.

IT IS FURTHER ORDERED that the balance of the proceeds of the sale of the properties in the cause be held by the Court pending further orders.

 

 

[58-1 USTC ¶9181] United States of America v. William S. Lord as Administrator of the Estate of Israel Goldman, Anne Goldman, City Savings Bank of Laconia , N. H., Town of Gilford , N. H., The City of Laconia , Isidor Blickman

U. S. District Court, Dist. N. H., Civ. Action No. 1669, 155 FSupp 105, 5/16/57

Tax liens: Priority over mortgage: Interest on mortgage: Municipal liens.--Real property of the delinquent taxpayer was subject to a duly recorded mortgage to a bank at the time the United States recorded its liens for unpaid income taxes. After the liens of the United States were recorded, the taxpayer placed a second mortgage on the property. The second mortgage was foreclosed and the purchaser at the foreclosure sale became the record title holder of the equity of redemption. The real property was also subject to municipal tax liens. The court ruled that the proceeds from the sale of the property should be distributed according to the following priorities: (1) to the mortgage debt held by the bank plus the interest on the mortgage to the date of distribution, it being understood that the municipal tax lien was to be satisfied out of the proceeds so applied; (2) to the tax debt owing the United States; (3) to the mortgage debt that was not satisfied in (1) by reason of the appropriation to satisfy the municipal tax lien; (4) to the bank for advances to pay insurance on the property with interest thereon; (5) to the bank for municipal tax redemption expenditures; and (6) the remainder to the holder of the equity of redemption. The court also ruled that the proceeds of the sale of the taxpayers' personal property were to be applied to the claim of the United States since it was the only one to hold a valid lien on the personalty.

Maurice P. Bois, U. S. Attorney, Concord, N. H., Fred Siegel, Office of Regional Counsel, U. S. Treasury Dept., Boston, Mass., for plaintiff. William S. Lord, Admr., pro se. A. Gerard O'Neil, Laconia, N. H., Thornton Lorimer, Sulloway, Hollis, Godfrey & Soden, Concord, N. H., for defendants.

Findings and Decree

CONNOR, District Judge:

This is an action initiated by the United States to determine the merits of all claims to and liens upon certain real estate and personal property situate in the Town of Gilford , and the City of Laconia , County of Belknap , New Hampshire . The defendants were properly served either within the district under the provisions of Rule 4, Federal Rules of Civil Procedure, or without the district under the provisions of 28 U. S. C. 1656 (see also 26 U. S. C. 7403(b)). All entered appearances except Anne Goldman, against whom the clerk entered default on August 7, 1956 . Rule 55(a) F. R. C. P.

[Facts]

On June 1, 1951 , the Commissioner of Internal Revenue Service made an assessment of taxes upon the income of Israel Goldman and Anne Goldman for each of the calendar years, 1943, 1944, 1945, and 1946. Notice of liens for the collection of these taxes (26 U. S. C. 6321) against the taxpayers' real estate and personal property involved in this action was recorded at the Registry of Deeds for Belknap County on October 10, 1951 , and again on January 23, 1952 . At that time the realty was in the name of Anne Goldman as sole owner in fee simple.

The tax assessments by the United States are as follows:

Israel Goldman and Anne Goldman

  "TETaxable                                                             Unpaid

Period                    Amounts                   Payments       Balance

1943            Taxes ........    $1,571.36

                Penalties ....        78.57

                Interest .....       680.08           $49.95     $2,280.06

1944            Taxes ........     3,834.53

                Penalties ....     1,917.27

                Interest .....     1,429.49             none      7,181.29

1945            Taxes ........     8,907.34

                Penalties ....     4,453.67

                Interest .....     2,786.16             none     16,147.17

                Total ........                                  $25,608.52

Israel Goldman individually

1946            Taxes ........    $3,645.69

                Penalties ....     1,822.85

                Interest .....       921.61             none    $ 6,390.15

Anne Goldman individually

1946            Taxes ........    $3,328.08

                Penalties ....     1,664.04

                Interest .....       841.32             none    $ 5,833.44

 

At the time the United States recorded its liens, the property was subject to a duly recorded mortgage from Anne Goldman to City Savings Bank of Laconia , one of the defendants. This mortgage was dated September 21, 1949 , and secured payment of a promissory note of the same date, signed by Anne Goldman and Israel Goldman, in the amount of twenty-four thousand dollars, payable on demand with interest at five percent. At the time the United States filed its liens, there was a balance of twenty-one thousand dollars due on this note.

On October 1, 1953 , subsequent to the recording of the Government's liens, Anne Goldman mortgaged the premises to Sally K. Shafron. This second mortgage was later foreclosed, and on December 5, 1955 , Isidor Blickman, a defendant in this case, bought in the property at the foreclosure sale, thus becoming the record title holder of the equity of redemption. On April 11, 1956 , the real property and personalty were seized by the United States under the provisions of 26 U. S. C. 6331, and on June 19, 1956 , this complaint was entered and Daniel E. Donovan, Jr., of Concord , was appointed receiver of all the property. 26 U. S. C. 7403(2).

[First Mortgage and Mortgage Interest Claim]

It is conceded by the United States that the mortgage of City Savings Bank of Laconia , having been duly recorded before the recording of the tax liens, has priority over the tax liens. 26 U. S. C. 6323. This priority, of course, extends only to proceeds gathered from the sale of the real estate, since the mortgage does not cover personal property. The bank insists, however, that in addition to the twenty-one thousand dollars owing on the mortgage, it also is entitled to priority on certain items, including interest, premiums on fire insurance, and expenditures on tax redemption, totaling two thousand four hundred eighteen dollars and two cents. ¹ These will be dealt with in the order presented. A federal lien for income taxes takes priority over claims and liens arising subsequent thereto. Knox v. Great West Life Assurance Co., 212 Fed. (2d) 784 [54-1 USTC ¶9373]; Grand Prairie State Bank v. United States, 206 Fed. (2d) 217 [53-2 USTC ¶9481]; United States v. Ridley, 127 Fed. Supp. 3 [54-2 USTC ¶9665]. Whether interest due after the recording of the liens should be allowed involves legal and equitable considerations. The statutory form of mortgage secures not only the principal but also the interest. The mortgage is valid against subsequent creditors, R. L. c. 477, s. 7, and the term "mortgage" would seem to include interest. Its payment is as much of the contract between the mortgagee and mortgagor as the payment of the principal. The principal plus the payment of interest thereon as it accrued, evidenced by the note, was the entire obligation, and secured on the execution of the mortgage. United States v. Sampsell, 153 Fed. (2d) 731, 736. It is significant that government may force a sale of the property and pay senior creditors, thus stopping the running of interest.

The item claimed is in the sum of $831.25 due on July 2, 1956 ,--a sum representing something short of one year's interest, and indicating that other interest charges had been met since the recording to the tax lien. While it was within the power of the mortgagee to foreclose and thus prevent the running of interest, it hardly can be called wilful neglect or undue delay. ² This factor, when considered with the failure of the Government to prosecute the claim, would equitably require that this item be considered a part of the mortgage.

This item, plus such interest as accumulated to the date of the final distribution, is allowed as a priority with the mortgage debt.

The remaining claims of the bank are not to be entitled to like disposition but are to have priority only as to the claim of the holder of the equity of redemption. While it is true that he neither requested nor affirmatively approved the payment of the insurance premiums or the taxes, he was a tentative beneficiary of them so long, at least, as his equity was of value. The taxes would be a burden which would have to be met, and his interest to the extent that it could be established was protected in the insurance coverage.

[Second Mortgage Claim]

Despite the fact that the Government's liens were recorded prior to the creation of the second mortgage under which he holds the equity of redemption, defendant Blickman asserts that they should not have priority over his claim. It is his contention that the United States knew of his purchase of the deed of foreclosure of the second mortgage, knew that he intended to and did advance sums of money to improve the premises, and encouraged him to believe that settlement of the tax claim shortly would be reached. No sufficient evidence was offered that would tend to show that the United States acted with anything but good faith, and there is no basis for ruling that the United States is estopped from asserting its claim. Nor is there any merit to Blickman's counterclaim (dismissed as to bank) and request for affirmative relief. His allegations that the Government converted his property by an illegal seizure without due process of law are not only unsubstantiated by the record but are entirely in error in the light of the statute (26 U. S. C. 6331) and the order of this court dated June 19, 1956.

Another assertion made by defendant Blickman is that the United States has already agreed to compromise the tax assessment upon which the liens are based. The Government holds a sum of money totaling three thousand seven hundred twenty-eight dollars and eighty-five cents, which Blickman claims was accepted in part payment and is now held as a partial performance of the compromise agreement. The money in question is the accumulation of several deposits made by the Goldmans toward a proposed settlement. Before the Government either accepted or rejected the proposal, Anne Goldman withdrew the offer preparatory toward making another. The Government has never returned the money because during the pendency of the first offer Israel Goldman died and it has asked this court to rule as to its proper distribution. Since the money was originally deposited only toward a compromise settlement and not in part payment of the entire assessment, the United States may not apply any of it in satisfaction of the liens. There was no testimony as to who provided the funds for deposits on the compromise offer, and, in such circumstance, the court is of the view that the funds should be returned to payee or other representative.

Finally defendant Blickman asserts that he is at least subrogated to tax lien priority of the Town of Gilford since he purchased the premises for six hundred fifty-six dollars and fifty-three cents on June 28, 1956 , at a tax sale for 1955 taxes. Even though he received a receipt from the town's tax collector saying that he had purchased the "tax lien", he is not subrogated to the priority the Town of Gilford had held. A buyer who purchases property at a tax sale in New Hampshire (RSA 80:20) receives an estate in fee simple (Smith v. Messer, 17 N. H. 420), once all the conditions of the statute are fulfilled (RSA 80:20-30) and not the municipality's rights under a tax lien. See also RSA 80:42.

[Municipality's Tax Lien]

The Town of Gilford still has a claim amounting to seven hundred forty dollars for real estate taxes assessed as of April 1, 1956 , against this property. The law of the state provides that this claim constitutes a tax lien. RSA 80:19. Under ordinary circumstances, this tax lien, which does not have to be recorded, would give the town priority over the mortgagee, but would not necessarily give it priority over the federal government's liens. Faced with this same problem, a Connecticut state court directed that, in the distribution of the proceeds of mortgage foreclosure sales of real estate, certain municipal tax and water-rent liens should have priority over federal tax liens. This judgment was affirmed by the Supreme Court of Errors which felt that this was the logical solution to the dilemma.

"Moreover, if priority were accorded to the federal liens over those of the municipality, the result would have to be that either the rank of the municipal liens would be reduced below that of the mortgages and judgment lien, which would be in violation of the state law, or the position of the federal liens would be moved up to a place ahead of the mortgage and judgment lien, in violation of s. 3572 [now 26 USC 6323]. It can hardly be assumed that Congress intended any such result. The only reasonable interpretation of s. 3672 is that the Congress, in enacting it, expressed the intention that federal liens should be subordinated to such mortgage and judgment liens as are described therein and consequently subordinated to such other insumbrances as have priority over those mortgages and judgment liens." Louis Brown v. General Laundry Service, Inc., et al., 139 Conn. 356, 373, 374 [53-1 USTC ¶9272].

The case was appealed to the United States Supreme Court which overruled the state court's judgment.

"The United States is not interested in whether the State receives its taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien. There is nothing in the language of s. 3672 to show that Congress intended antecedent federal tax liens to rank behind any but specific categories of interests set out therein, and the legislative history lends support to this impression." United States v. City of New Britain, et al., 347 U. S. 81, 88 [54-1 USTC ¶9191].

The court ruled that "priority of these statutory liens is determined by another principle of law, namely, 'the first in time is the first in right'." Ibid., 85.

This does not mean, however, that the Town of Gilford loses its priority over the mortgagee simply because it is inferior to the federal government. When the above-case was returned to Connecticut , the Superior Court ruled . . .

"So far as state law is concerned, it is clear that with the exception of a portion of the liens of the federal government, the liens of the city must take precedence over any incumbrance on the property irrespective of the time at which that incumbrance might have attached. This means that the city may resort to the proceeds from the sale of the property which the previous supplemental judgment applied to payment of the judgment lien, and if it becomes necessary, the mortgage indebtedness." Louis Brown v. General Laundry Service, Inc., et al., [19 Conn. Sup. 3357] 113 A. 2d 601, 604 [55-1 USTC ¶9427].

This is in line with a decision of an Illinois state court. There, as here and in the Connecticut case, a mortgagee held a clear priority under the statute as against the United States tax lien. Local law gave the holder of a mechanic's lien priority over the mortgagee, and a dispute arose between the United States and the holder of the mechanic's lien as to which had seniority. After ruling that the Government had priority over the mechanic's lien and the mortgagee had priority over the Government, the court said . . .

"The mechanic's lien claimant by state law is given a lien prior to that of the mortgagee, which in effect means that it may resort to the proceeds from the sale of the property which are applicable to payment of the mortgage indebtedness. This is the inevitable result of the application of the Act of Congress and of the state law." Viola Samms, Plaintiff-Appellee, v. Chicago Title and Trust Company, John Zapantis, Defendants-Appellees, People's National Bank of Chicago, Defendant-Cross-Complainant-Appellee, and United States of America, Defendant-Appellant, 349 Ill. App. 413, 422 [53-1 USTC ¶9270].

I am disposed to adopt this reasoning, which is reflected in the order of distribution.

[U. S. Lien on Personalty]

On the state of the record, Israel Goldman had no interest in the real estate in question when the liens were recorded. The complaint described certain personal property which has been inventoried by the receiver. It is clear that of the parties to this action, only the United States holds a valid lien and right to levy on the personalty. Since there are creditors who rank behind the United States in the disposition of the real estate, equity would seem to require an order directing that the Government's claim be satisfied by first exhausting its lien against the personalty, thus reducing the burden on the realty to the benefit of the subordinate creditors.

I find that Anne Goldman and the Estate of Israel Goldman are indebted to the United States in the amount of $25,608.52, with interest thereon as allowed by law; that the Estate of Israel Goldman is indebted to the United States in the amount of $6,309.15, with interest thereon as allowed by law; that Anne Goldman is indebted to the United States in the amount of $5,833.44, with interest thereon as allowed by law; and that this indebtedness is secured by liens upon part of the property now under receivership of Daniel E. Donovan, Jr., by order of this court.

In order that all liens and claims be paid conformably with the within findings, the receiver is directed to forthwith sell all the right, title and interest in the real and personal property of the named defendants at public auction on the premises after due notice as required under 28 U. S. C. 2002, and such other notice or advertisements as the receiver deems reasonably necessary.

[Distribution of Proceeds]

After order directing the sale of the real estate and personalty by the receiver has been complied with, and after the receiver's fees are satisfied, the proceeds of said sale shall be distributed in the following order:

(a) to be applied to the mortgage debt of $21,000 that was outstanding on the dates the liens of the United States were recorded and held by City Savings Bank of Laconia, plus interest of $831.25 and interest at five percent on $21,000 from July 2, 1956, to date of distribution; it being understood that the Town of Gilford may appropriate $740 toward the satisfaction of a tax lien now outstanding ($740 to the Town of Gilford; $20,260 to City Savings Bank of Laconia).

(b) to be applied to the tax debt to the United States by Anne Goldman ($31,441.96 to the United States with allowable interest).

(c) to be applied to that part of the mortgage debt as was not satisfied in (a) but which was appropriated to satisfy the lien of the Town of Gilford ($740 to City Savings Bank of Laconia ).

(d) to the City Savings Bank for advances to pay insurance with interest thereon.

(e) to the City Savings Bank for tax redemption, Town of Gilford 1954 tax.

(f) remainder to Isidor Blickman, holder of the equity of redemption.

The proceeds of the sale of the personal property are to be applied to the claim of the United States .

¹ The items as claimed by the bank in its requests for findings of fact and conclusions of law are as follows:

Interest on mortgage to 
July 2, 1956
 .........          $ 831.25

Advance to pay fire insurance to December

30, 1955 .....................................            535.96

Interest to 
July 2, 1956
 .....................             16.49

Advance to pay fire insurance to January

17, 1957 .....................................            333.20

Interest to 
July 2, 1956
 .....................              9.16

1954 Gilford real estate tax redemption ......            689.98

Interest to 
July 2, 1956
 .....................              1.98

                                                       $2,418.02

 

² The enjoining order of June 19, 1956 , barred foreclosure.

 

 

[46-1 USTC ¶9186]United States of America, Appellant, v. Paul W. Sampsell, Trustee in Bankruptcy of the Estate of El Camino Refining Company, State of California and Universal Consolidated Oil Company, Appellees

(CA-9), United States Circuit Court of Appeals for the Ninth Circuit, No. 10,932, 153 F2d 731, February 15, 1946

Upon appeal from the District Court of the United States for the Southern District of California, Central Division.

Lien for taxes: Validity against mortgagees: Federal v. state taxes.--There is nothing in Code Secs. 3670-3672 providing for Government priority over inchoate liens which antedate its own liens. Under Sec. 67 of the Bankruptcy Act, the liens of the United States for gasoline taxes were not entitled to priority in payment over the inchoate general liens of the State of California for franchise taxes.

Lien for taxes: Validity against mortgagees: Interest accrued after adjudication: Legal expenses of mortgagee.--Where the property given as security for a debt was sufficient to pay, in addition to the principal amount, interest accrued after adjudication, and attorney's fees performed for the mortgagee in connection with the mortgage and bankruptcy proceedings, the tax liens of the United States were subordinated to the payment of such interest and attorney's fees. Affirming a District Court opinion.

Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key, A. F. Prescott, Leonard Sarner, Muriel S. Paul, Special Assistants to the Attorney General, Washington, D. C.; Charles H. Carr, U. S. Attorney, E. H. Mitchell, Assistant U. S. Attorney, Eugene Harpole, Special Assistant to Chief Counsel, Bureau of Internal Revenue, Los Angeles, Calif., for appellant. Grainger and Hunt, Los Angeles , Calif. , for appellee, Paul W. Sampsell. Rob ert W. Kenny, Attorney General, State of California, John L. Nourse, Deputy Attorney General, San Francisco, Calif., for appellee, State of California. C. E. McDowell, McIntyre Faries, Allan M. Carson, Los Angeles , Calif. , for appellee, Universal Consolidated Oil.

Before: STEPHENS, BONE and ORR, Circuit Judges.

STEPHENS, Circuit Judge:

The United States, deeming itself aggrieved by a judgment of the United States District Court adverse to its claim of priority as a lien holder upon a sum of money held in the Bankruptcy court, appeals.

[The Facts]

The El Camino Refining Company, a corporation, filed a petition for reorganization on May 12, 1942, under Chapter X of the Bankruptcy Act of 1898, c. 541, 30 Stat. 544, as amended by the Act of June 22, 1938, c. 575, 52 Stat. 840, 883. It was adjudicated a bankrupt on March 27, 1943 , and Paul W. Sampsell was appointed trustee in bankruptcy of the state on March 27, 1943 . On March 31, 1943 , he was qualified and assumed the duties of that office. In conformity with the agreement of all lien claimants and the court, the assets of the bankrupt were sold and the net proceeds received in the sum of $19,927.85. In further conformity with the agreement in which all lien claimants joined, all claims of liens together with their priority as they existed before the sale were transferred to the fund realized, subject to the expenses of admin istration to be fixed by the court.

There are three lien claimants, whose claims together exceed the value of the assets of the estate.

(1) The State of California , by and through the California State Franchise Tax Commissioner, filed a claim for April 3, 1943 , for corporate franchise taxes in the sum of $3,071.35 plus interest at 6% per annum from January 15, 1944 , until paid. The taxes were for the years 1939 and 1940 accruing January 1, 1939 , and January 1, 1940 , respectively. The exact amount of the taxes was not fixed prior to the date of the commencement of these bankruptcy proceedings. The California law provides that such taxes (imposed by the Bank and Corporation Tax Act of the State of California [Deering, California General Laws (1939 Supp.), Act 8488]) shall constitute a lien upon the real property of the taxpayer, the lien to have the same force, effect and priority as a judgment lien, and shall attach on the first day of the taxable year.

(2) The Universal Consolidated Oil Company, a corporation, filed a claim for $11,234.78 plus interest based upon real property mortgage given as security for a promissory note, which was executed and delivered on January 19, 1941 . The obligation of the note is for the principal sum of $8,444.08 with interest at the rate of 5% per annum from March 15, 1943 , until paid, together with the provision for attorney fees. On May 10, 1943 , the Referee made an order allowing to the mortgagee a secured claim upon the real property so mortgaged to the extent of the total indebtedness. The mortgage was recorded on May 3, 1941 , in the Official Records of Orange County, California. The balance due upon the said note and mortgage, principal and interest, exclusive of attorney's fees, is the sum of $10,484.78 plus interest thereon thereafter at the rate of 5% per annum until paid. The claim under the mortgage was contested by the United States and after legal notice of hearing (§58 of Bankruptcy Act; 11 USCA §94), the sum of $750 was fixed by the court as reasonable compensation for legal services performed by the law firm of Faries & McDowell for the mortgagee in connection with the mortgage in the bankruptcy proceedings.

(3) The United States filed a claim on June 20, 1942 , for gasoline taxes for a sum in excess of $20,000. The liens attached on several dates between January 6, 1942 , and June 18, 1942 , both dates being included, by virtue of the fact that the assessment lists of the Commissioner of Internal Revenue were received by the Collector at Los Angeles on those dates. (Internal Revenue Code, §§ 3670-3671, 53 Stat. 448-490, §3412, 53 Stat. 413, 26 USCA §§ 3412, 3670-3672.) No lien claim was recorded for these taxes in the office of the County Recorder of Orange County , State of California , or filed for record in the Office of the Clerk of the United States District Court for the Southern District of California, within which jurisdictions the oil refinery plant was located. The government's lien arises by virtue of §§ 3670-3671 of the Internal Revenue Code (26 USCA §§ 3670-3671). Section 3672 of the same Act (26 USCA §3672) provides that no lien shall be valid as against a mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector.

Expenses of admin istration amounting to $6,929.83 were ordered to be paid out of the estate before any of the liens were to be paid.

The Referee, affirmed by the District Court, ruled that the liens were entitled to priority in the order in which they attached, and since the assets were insufficient to pay both the state's claim and the mortgagee's claim in full, the legality of the United States ' claim, aside from the priority phase was not passed upon.

The appellant contends that the District Court erred in holding that the United States was not entitled to priority in payment for gasoline taxes out of the bankrupt estate over the claims of the State of California for franchise taxes, and of the Universal Consolidated Oil Company for interest and attorney's fees relating to its mortgage.

Three questions are presented for determination by this court: "(1) Whether the District Court erred in holding that under §67 of the Bankruptcy Act (11 USCA §107) the liens of the United States for gasoline taxes were not entitled to priority in payment over the inchoate general liens of the State of California for franchise taxes.

"(2) Whether the District Court erred in allowing interest to the Universal Consolidated Oil Company on the principal sum due under its mortgage, subsequent to the date of adjudication in bankruptcy, or sale with the mortgagee's consent, of the mortgaged property free and clear of all liens.

"(3) Whether the District Court erred in subordinating the tax liens of the United States to the payment of attorney's fees and interest on the principal sum due under the mortgage to the Universel Consolidated Oil Company subsequent to the date of adjudication in bankruptcy."

[Relative Priorities]

The lien and priority claims of the United States are based upon §§ 3670-3672 of the Internal Revenue Code (26 USCA §§ 3670-3672) for gasoline taxes due under §3412(a) of the Internal Revenue Code [26 USCA §3412(a)]. In substance these sections provide that when a tax is not paid it becomes a lien, effective at the time the assessment list is received by the collector. It is provided that the lien shall not be valid against a mortgagee, pledgee, purchaser, or judgment creditor until notice of the lien is filed with certain local officials or with the clerk of the District Court. The language of §3672, however, has been interpreted to mean that a lien of the United States is inferior to all mortgage or judgment liens which were acquired prior to the date of recording or filing of the notice. See Fox v. Queens County Sales Co., Inc. (DC N. Y., 1931), 52 Fed. (2d) 794 [1931 CCH ¶9381]; Minnesota Mutual Life Insurance Co. v. United States (DC Tex., 1931), 47 Fed. (2d) 942 [1931 CCH ¶9174].

All requisites for the attachment of government's liens for gasoline taxes claimed on appeal were fulfilled prior to the filing of the petition on May 12, 1942 . Specifically the issue deals with the relative priorities of the United States as a lien claimant and California as a lien claimant under the facts obtaining. The tax liens asserted by the State of California were inchoate as to amount, but were fixed and attached to the real property of the debtor on January 1, 1939, and January 1, 1940, both of these dates being prior to the time that the Federal tax liens attached to such property. [See California Bank and Corporation Franchise Tax Act, Deering California General Laws (1939 Supp.), Act 8488, §§ 25, 29.]

[Inchoate v. Specific Liens]

The government contends that since the state lien is general and inchoate that the United States lien being specific and perfect, arising at the time the assessment lists were received, was thereby given priority over the state lien. It is also contended by the government that §3672 of the Internal Revenue Code (26 USCA §3672) which requires recordation in certain intances does not defeat this priority since a state is not among the enumerated classes protected by the statute.

The California courts have held that even though the taxes are not fixed or payable until the assessment has been made, such subsequent assessment does not create the lien but is only a step in its enforcement. County of San Diego v. County of Riverside , 125 Cal. 495 (1899).

The determination of this controversy rests upon statutory construction. The statutes involved are the Bankruptcy Act and certain sections of the Internal Revenue Code, supra. In general, the lien claimants fall under §67 of the National Bankruptcy Act of 1898, as amended by the Chandler Act of 1938 (11 USCA §107). This section provides, in substance and for purposes herein concerned, that statutory liens for taxes and debts owning to the United States or any State or subdivision thereof, created or recognized by the laws of the United States or of any State, may be valid against the trustee. Where these laws require the liens to be perfected in order to be valid against the trustee in bankruptcy and they are not perfected but arise before bankruptcy, they are valid if perfected within the time permitted by and in accordance with the requirements of the laws of the United States or of any state. There is nothing in the Bankruptcy Act or in the Internal Revenue Code §§ 3670-3672 (26 USCA §§ 3670-3672) directly providing that perfected liens shall have priority over prior inchoate liens which is the claim of the government. We are of the opinion that the government can get no support of any kind from the statutes in aid of its position.

[Authorities Distinguished]

The cases cited by the government, with the exception of United States v. Reese, 131 Fed. (2d) 466 (CCA-7, 1942) [42-2 USTC ¶9763], do not involve bankruptcy proceedings and hence are not applicable in the instant controversy. It has been established that §3466 of the Revised Statutes (31 USCA §191) does not apply in bankruptcy proceedings so that the cases cited by the government, in holding that inchoate liens will not defeat the priority of the government's liens established by that section, do not cortrol the instant case. Davis v. Pringle, 268 U. S. 315 (1925); Guarantee Title & Trust Co. v. Guaranty & Surety Co., 224 U. S. 152 (1912); Claude D. Reese, Inc. v. United States, 75 Fed. (2d) 9 (CCA-5, 1935) [35-1 USTC ¶9126]. It has been stated that the statute fixing priority of claims of the United States has been superseded by the Bankruptcy Act in cases involving bankruptcy proceedings. The priority given the United States, however, was put back in the Bankruptcy Act by the 1926 amendment, but only as to debts due the United States under §64 (11 USCA §104). Lien creditors come under §67 (11 USCA §107) and are prior in right to taxes without a lien under §64. Reese v. United States , 75 Fed. (2d) 9 (CCA-5, 1935) [35-1 USTC ¶9126]. See also City of Dallas v. Ryan, 62 Fed. (2d) 959 (CCA-5, 1933).

In the case of In re Knox-Powell-Stockton, 100 Fed. (2d) 979 (CCA-9, 1939) [39-1 USTC ¶9277], a state inchoate tax lien was held valid under §67 and superior to a United States unsecured tax priority claim under §64. Section 64 does not give taxes of the United States or of a state priority of payment over valid existing liens under §67, since such liens are not affected by the Bankruptcy Act. Section 67 applies against the United States just as it does against any creditor. A lien does not have to be a specific or perfected lien to come within the protection of §67. The cases which have held that only perfected liens are given priority are within the §3466 of the Revised Statutes (31 USCA §191), but that section does not apply to bankruptcy proceedings, hence its all inclusive effects do not cover the situation in this case. There is nothing new in the principle that a statutory lien need not be perfected. In Detroit Bank v. United States, 317 U. S. 329 (1943) [43-1 USTC ¶9224], a federal estate tax (under §315a of the Revenue Act of 1926) attached at the date of the decedent's death without the necessity of assessment, demand for payment, recordation or other procedure to perfect it against subsequent liens. See United States v. Alabama , 313 U. S. 274 (1941).

The case of In re Van Winkle, 49 Fed. Supp. 711 (DC Ky., 1943), likewise holds that §3466 of the Revised Statutes (31 USCA §191) is not applicable in bankruptcy proceedings, saying that the section yields to the distribution scheme provided in the Bankruptcy Act. The court held that an equitable lien of a surety, upon payment of the claim against the bankrupt by the surety, may be related back to the date of the contract and assignment of the retained percentage to defeat the government's lien which arose prior to the date of actual payment, but was not prior to the date of the contract and assignment. There was no appeal from the decision. A lien against the property of a bankrupt recognized as valid by either federal or state law attaches to the property in the hands of the trustee after bankruptcy, unless invalidated by a provision in the Act. The trustee acquires no better title than the bankrupt himself had. See Bankruptcy Act, §67 (11 USCA §107); City of Richmond v. Bird, 249 U. S. 174 (1919); In re Knox-Powell-Stockton, 100 Fed. (2d) 979 (CCA-9, 1939) [39-1 USTC ¶9277].

It has been held that §64 of the Bankruptcy Act (11 USCA §104) does not defeat the priority for claims of the United States in non-bankruptcy proceedings, so that §64 did not impliedly modify §3466 of the Revised Statutes (31 USCA §191) as applied in non-bankruptcy proceedings. United States v. Emory, 314 U. S. 423, 427 (1941). The resulting inference would be that §64 of the Bankruptcy Act in general would eliminate such priority when inconsistent with the Act in bankruptcy proceedings. It has been clearly held that where §3466 of the Revised Statutes, establishing priority of the United States , in inconsistent with another national act, the situation not being justly within the scope of §3466 in view of the other act, §3466 will not apply. Cook County Nat. Bank v. United States , 107 U. S. 445 (1882) (National Bank Act); United States v. Guaranty Trust Co., 280 U. S. 478 (1930) (Transportation Act).

It is reasonable to assume that bankruptcy proceedings are of such a specialized nature that the Bankruptcy Act was intended to govern such a situation exclusively and unaffected by §3466 of the Revised Statutes (31 USCA §191). The Act was intended to set up a particular scheme of distribution not to be varied by exceptions found outside the Act, since to do so would interfere with a well ordered and efficient working Act. Section 3466 of the Revised Statutes would not even be useful by way of analogy as it sets up an over-all priority without exception governing a given set of circumstances, while the Bankruptcy Act has its own schedule of priorities intended to cover all situations within its terms and jurisdiction.

The case of United States v. Reese, 131 Fed. (2d) 466 (CCA-7, 1942) [42-2 USTC ¶9763], is not controlling here, since there was a failure in that case to consider the applicable provisions of the Bankruptcy Act, the governing statute, and also because it relies upon authorities which are inapplicable under the Bankruptcy Act.

[Rule]

There is nothing in the Internal Revenue Code, §§ 3670-3672, providing for government priority over inchoate liens which antedate its own liens.

We are of the opinion that the requirements of recordation in the Internal Revenue Code, §3672, are not applicable in the instant case. The true purpose of a recording provision is to give protection for the future rather than over events which have already taken place in the past.

[Interest Accrued After Adjudication]

The government claims that it was error to allow interest to the mortgagee subsequent to the date of adjudication in bankruptcy or sale of the mortgaged property, with its consent, and to subordinate the tax liens of the United States to such payments. The general rule holds that interest stops running upon secured and unsecured claims after a debtor passed into bankruptcy unless the estate is solvent. Brown v. Leo, 34 Fed. (2d) 127 (CCA-2, 1929); Sexton v. Dreyfus, 219 U. S. 339 (1911). There is an exception, however, holding that the rule does not apply to debts or claims of secured debts after and during bankruptcy when the mortgaged property is sufficient to pay the principal and interest of the mortgaged debt. Wilson v. Dewey, 133 Fed. (2d) 962 (CCA-8, 1943). There is a conflicting view in Lerner Stores Corporation v. Electric Maid Bake Shops, 24 Fed. (2d) 780 (CCA-5, 1928), in which it was held that the interest does not run beyond the date of the filing of a petition in bankruptcy. The Lerner case, however, relies upon the Dreyfus case which would apply the rule only where the secured creditors had exhausted their security so that there is not enough to pay the debt and interest. See People's Homestead Ass'n. v. Bartlette, 33 Fed. (2d) 561 (CCA-5, 1929). It has been held that interest runs on a secured debt after the date of filing the petition in bankruptcy, but that it ceases on the sale of mortgaged property free of liens, by reason of the fact that the sale in effect is an end of the proceedings. The duty of the trustee arises at such time to pay the claimant his debt. In re Stevens, 173 Fed. 842 (DC Ore., 1909). The question was not determined as to what may happen if the trustee fails to make the payment at that time. The statement has been made in several cases that interest runs until payment is made. Hershberger, 208 Fed. 94 (DC Penn., 1913); San Antonio Loan & Trust Co. v. Booth, 2 Fed. (2d) 590 (CCA-5, 1924); Phoenix & Homestead Ass'n, v. E. A. Carrere's Sons, 33 Fed. (2d) 563 (CCA-5, 1929); Sehen-Stevenson & Co. v. Union Trust Co., 113 Fed. (2d) 968 (CCA-4, 1940). The accrual of interest is a part of the debt to the mortgagee and should not be affected by bankruptcy. See In re Stevens, supra; San Antonio Loan & Trust Co. v. Booth, supra.

Judge Orr in the case of In re Torchia, 185 Fed. 576, 584 (DC Penn., 1911), stated: "Interest is payable on the * * * mortgage to the date of payment of the principal. * * * Having been transferred from the land to the fund realized by sale, they must be payable when and only when the fund is distributable; that is, when the referee under bankruptcy act first prepares a decree or order for distribution."

To prevent the running of interest upon a secured debt, when the security is sufficient to pay the debt and the interest, would in effect permit the bankruptcy proceedings to adversely affect the lien which is contrary to the provision in the Bankruptcy Act that a lien shall not be affected by the Act, §67. See In re Stevens, supra, at page 843.

The lien of the mortgage arose prior to the lien of the government for taxes and is entitled to priority. The security is sufficient to pay the full debt and it was given to secure the debt plus interest as one entire obligation arising at the time of the execution and delivery of the mortgage. It should not be broken down into separate parts. Nor is it necessary to make use of the doctrine of "relation back" to make after accrued interest a part of the lien of the mortgage. See Security Mortgage Co. v. Powers, 278 U. S. 149 (1928). The government made no objection to allowance for interest and attorney's fees until after determination of the cause in the District Court.

[Attorneys' Fees]

The government contends that the United States tax liens were not to be subordinated to the attorney's fees awarded to the mortgagee. Attorney's fees are a part of the secured debt and are entitled to be collected as such. There is no claim that the fees in question are not made a part of the debt or that they are not secured by the same lien, but only that the principal then due on the mortgage at the time the government lien attached may not be increased by attorney's fees for services to be performed in the future by any doctrine of "relation back". There is no need, however, for such a doctrine to support a lien for attorney's fees. Attorney's fees as well as interest are provided for in the obligation and the reasoning which supports the interest claim applies in the provision for attorney's fees. In Security Mortgage Co. v. Powers, 278 U. S. 149, 156 (1928), the attorney's fees were held to be a part of a mortgage debt even though they accrued after adjudication, the court saying. "The contingent obligation to pay attorney's fees was a part of the original transaction." See In re Gotham Can Co., 48 Fed. (2d) 540 (CCA-2, 1931).

Affirmed.