Interpleader Page5

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The government made assessments for withholding and FICA taxes against Van Cleave on October 30, 1963 , in the sum of $3,059.01. Notice of this federal tax lien covering the October 30 assessment was filed with the Clerk of the Circuit Court in Hillsborough County , Florida , where Van Cleave lived and was doing business, on November 29, 1963 .

On December 17, 1963 , Van Cleave entered into a written contract with the Strollos to perform certain interior decorating services. Van Cleave received additional advances of $1,570.96 from the Bank, executed his promissory note for that amount, and assigned the Strollo contract as security. This occurred on December 23, 1963 . There seems to be no question that the Bank took the assignment of the Strollo contract within the effective period of the general notice filed under Chapter 524, Fla. Stats. There is, however, no indication that a notice of the assignment of accounts receivable was filed with the Secretary of State contemporaneously with the execution of Van Cleave's note and his assignment of the Strollo contract, or that a notice of the assignment of the Strollo contract was ever filed.

Van Cleave completed the work on the Strollo contract for which he is admittedly due $1,004.70. Being faced with the competing claims of the Bank and the government, the Strollos filed an interpleader suit and deposited the sum due on the contract into the registry of the Circuit Court for Polk County . On its own motion, the government was dismissed from the suit but was granted leave to intervene for the purpose of asserting its tax lien. The case was ultimately heard on motion for summary judgment filed by the government.

In his final summary decree the chancellor held that the Bank was a "protected assignee" under the provisions of Chapter 524, Fla. Stats., and particularly §524.04(1)(b), Fla. Stats., at the time it received the assignment of the Strollo contract (December 23, 1963) because the general notice filed with the Secretary of State on July 5, 1963, was still in full force and effect. Thus, said the chancellor, this general notice predated the tax assessments and notice of federal tax lien, and the Bank's claim was therefore superior to the claim of the government. The chancellor held as an alternative ground that the situs of the debt involved was Polk County , Florida (where the work on the Strollo contract was done); that no notice of the federal tax lien was ever filed in Polk County ; and that, therefore, the tax lien was invalid as against the Bank. The chancellor also awarded attorney's fees to the Strollos' attorneys and ordered that these fees be paid out of the interpleader fund.

The government tax lien arose under §6321 of the Internal Revenue Code of 1954, which provides that if any person liable to pay any tax neglects to pay it after demand, the amount of the tax becomes a lien in favor of the United States upon all property belonging to that person. Section 6322 of the Code provides that the lien imposed arises at the time of assessment and continues until the amount due is satisfied.

Section 6323 of the Code relates to the validity and priority of federal tax liens against certain purchasers. This section was amended by the Federal Tax Lien Act of 1966, 80 Stat. 1125, which was signed into law during the pendency of this appeal. The government concedes that the new law applies to the case at bar.

In general, §6323 governs the validity and priority of federal tax liens against certain persons including purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. The section provides that the lien imposed by §6321 shall not be valid as against any of the abovenamed until notice of the lien is filed in one office within the state, as designated by the laws of such state, in which the property subject to the lien is situated. In Florida , the proper place of filing is with the Clerk of the Circuit Court. Section 28.20, Fla. Stats. There is no question that the Bank comes within the provisions of §6323, and thus the earliest date upon which the government's tax lien could become valid against the Bank was November 29, 1963 , the date notice of the lien was filed.

The determination of the relative priority of a federal tax lien and a state statutory lien is always a federal question to be determined under federal law. United States v. Equitable Life Assurance Society, -- U. S. --, 16 L. Ed. 2d 593, 86 Sup. Ct. -- (1966); United States v. Weissman [62-1 USTC ¶9265], 135 So. 2d 235 (D. C. A. Fla. 1961). In order for a competing claim to "prime" a federal tax lien, the claim must satisfy the federal standards of choateness and perfection, i.e., the competing lien must be perfected in the sense that there is nothing more to be done to have a choate lien. When the identity of the lienor, the property subject to the lien and the amount of the lien are established, priority is determined on the principle that "first in time is the first in right." United States v. Equitable Life Assurance Society, supra; United States v. Weissman, supra. The question to be determined is whether the Bank's claim to the amount due on the Strollo contract was perfected under federal standards prior to the filing of the notice of the federal tax lien.

The chancellor determined that the Bank was a "protected assignee" under the provisions of §524.04(1)(b), Fla. Stats., by virtue of the general notice of intention to assign accounts receivable filed July 5, 1963 . Section 524.04, Fla. Stats., provides in part that:

"(1) A written assignment for value, signed by the assignor, becomes protected at the time the assignee:

* * *

"(b) Takes an assignment during the effective period of the notice."

It has been held, however, that at least for federal purposes an assignment becomes protected under the above-quoted section ". . . the moment the assignee takes a written assignment of an account receivable then in existence as a valid and then subsisting contract which obligates the account debtor then or in the future to pay money." (Emphasis added.) Ribaudo v. Citizens Nat'l Bank of Orlando , 261 F. 2d 929, 938 (C. A. 5th 1958).

Notice of the federal tax lien was filed November 29, 1963 . The Strollo contract was not entered into until December 17, 1963 . It was not in existence as a "valid and then subsisting contract" until that date, and thus the Bank's assignment of that contract could not be "protected" prior to that date. The property subject to the Bank's lien (the amount due on the Strollo contract) and the amount of the lien were not established until after notice of the tax lien had been filed. The federal standards of choateness not having been met on November 29, 1963 , the government's tax lien was "first in time" and therefore superior to the Bank's claim.

The Federal Tax Lien Act of 1966 also amends §6323 of the Internal Revenue Code to provide that certain specifically defined interests shall have priority over federal tax liens even though these interests arise after notice of the federal tax lien has been filed. The Act deals specifically with the type of commercial security financing agreement involved in this case and provides that in such cases the financing party may make loans against new accounts receivable for 45 days after the notice of the federal tax lien is filed. In order to receive the benefit of this protection, however, §6323(c)(1)(B) provides that the security interest must be ". . . protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation." (Emphasis added.) The new Act affords the Bank no relief because its claim would not have been protected by state law against a judgment lien arising on November 29, 1963 , the time of tax lien filing. The Bank's claim was not protected by §524.04, Fla. Stats., until it took the assignment of the Strollo contract on December 23, 1963 , and §524.04, Fla. Stats., provides that: "(2) A protected assignee takes subject to: (a) Judicial liens on the account at the time his assignment became protected. . . ."

As an alternative ground for his decision, the chancellor held that tax lien was invalid because notice was filed in Hillsborough County , Van Cleave's residence, rather than in Polk County , the "situs of the debt." The new Act provides in §6323(f)(2)(B) that "In the case of personal property, whether tangible or intangible, [the place for filing notice of lien is] at the residence of the taxpayer at the time the notice of lien is filed." Moreover, it appears to be the prevailing view that for purposes of filing notice of tax lien, personal property, such as accounts receivable, is "situated" in the domicile of the taxpayer. See, e.g., United States v. Goldberg [66-2 USTC ¶9523], 362 F. 2d 575 (C. A. 3rd 1966); Walker v. Paramount Engineering Co. [66-1 USTC ¶9106], 353 F. 2d 445 (C. A. 6th 1965). Thus it would appear that with respect to the Bank's claim of lien the notice of tax lien was properly filed.

The Bank's contention that Van Cleave never acquired a property interest in the Strollo contract to which the federal tax lien could attach is without merit.

In sum, then, we hold that the chancellor erred in determining that the Bank's claim was superior to the tax lien of the United States .

In view of our decision it was also error to order the attorneys' fees to the Strollos' attorneys to be paid out of the interpleader fund. The entire fund was impressed with a federal tax lien which was superior to any later arising claim for attorneys' fees. Compare , United States v. First Federal Savings and Loan Association of St. Petersburg [63-2 USTC ¶9620], 155 So. 2d 192 (D. C. A. Fla. 1963).

In view of the foregoing the final summary decree appealed is reversed and remanded for proceedings not inconsistent herewith.

HOBSON and PIERCE, Judges, concur.

 

 

[64-2 USTC ¶9529] United States of America , Petitioner v. Ray Thomas Gravel Co., Inc., et al., Respondents

Tex. Supreme Court, No. A-9954, 380 SW2d 576, 5/27/64 , Reversing Texas Court of Civil Appeals, 64-1 USTC ¶9410, 373 S. W. 2d 333

[1954 Code Secs. 6321-6323]

Tax liens: Priority over attorney's fees: Interpleader.--A federal tax lien, which was choate under Code Secs. 6321-6323, had priority over interpleader attorney's fees which were inchoate because the amount of the fees was not established, although the identity of the lienor was known and the property subject to the lien was established.

Louis F. Oberdorfer, Assistant Attorney General, Washington, D. C. 20530, for petitioner. Fay W. Prescott, Continental Life Bldg., Fort Worth , Tex. , for respondents.

GREENHILL, Associate Judge:

The main question here is whether a federal tax lien is superior, under the circumstances, to the attorney's fees of an interpleader. The amount of the attorney's fee for the interpleader action has not yet been fixed. The courts below have held that the interpleader's attorney's fee is superior. Because of the federal statute and opinions of the Supreme Court of the United States , this holding cannot stand.

[Facts]

The facts are many and complicated. They are set out in the opinion of the Waco Court of Civil Appeals, [64-1 USTC ¶9410] 373 S. W. 2d 333. The amount tendered in the interpleader action was $7,286.07. Against that amount, there were claims for court costs; the federal government had a tax claim for $9,117.19; W. C. Turner had a claim for $2,142.13; Thomas Gravel Company had a claim for $1,345.01; and the interpleader, Glen V. Paden, asked $1,000 attorney's fees for a garnishment proceeding and for the interpleader action. Obviously there was not enough money to pay all the claims. So their priority is of importance. A background of the acts leading to the interpleader follows.

Glen V. Paden employed Seabreez Pools, Inc., to build, on a cost-plus basis, a swimming pool. The contract was executed for Seabreez by J. W. Ratliff, its president; and he was made a party to the various proceedings. His individual liability, if any, is not important to this opinion, and he will not be hereafter mentioned. Work was begun on the pool in May of 1960. It was ultimately determined in 1962 that Paden owed Seabreez $7,286.07 for the project. This money is the subject of the interpleader problem.

The government filed tax liens against Seabreez in 1959, 1960, and 1961. Before September of 1960, the United States had assessed and filed tax liens for $3,905.70. The priority of that lien for that amount is not now challenged by Turner or the gravel company. The government later filed other tax liens totalling $5,211.49, including interest. The liens, including those for $3,905.70, total $9,117.19.

On September 9, 1960 , Seabreez executed an assignment to W. C. Turner for $2,142.13 of the monies to be received by Seabreez from Paden. A dispute then existed as to whether Turner's claim was superior to all claims of the United States . The trial court in this case held Turner's assignment to be superior to all liens of the United States , whether filed before or after the assignment to Turner.

On November 4, 1960 , the Ray Thomas Gravel Company filed a suit in Tarrant County against Seabreez for $1,345.01, for labor and material used in building the swimming pool for Paden. On the same day, the gravel company also filed an application for writ of garnishment against Paden, alleging that Paden was indebted to Seabreez. Paden answered that he was not indebted to Seabreez when the writ of garnishment was served upon him, and that he should recover his costs and attorney's fees of $500.00. The answer was controverted by the gravel company, stating that Paden was indebted in quantum meruit on its contract with Seabreez. On January 5, 1961 , the Tarrant County court entered judgment that Seabreez was indebted to the gravel company. On Paden's motion for change of venue, the garnishment proceeding was transferred to Johnson County .

Seabreez, Turner, and the United States came into the garnishment, all claiming the money for which Paden was indebted to Seabreez.

In August, 1962 Paden filed this bill of interpleader. His position was that he was a stakeholder. He conceded that he was indebted to Seabreez for $7,286.07, but he was faced with the claims of the United States , the Ray Thomas Gravel Co., and Turner for that money. Paden also sought his attorney's fees: $500.00 for answering the garnishment and another $500.00 for the interpleader. The interpleader action was allowed.

The trial court held that the government's tax lien was inferior to the accrued court costs in Tarrant County in the amount of $19.25, to all court costs in Johnson County , to the claim of Turner, and to the gravel company. The judgment of that court also allowed Paden a lump sum of $1,000.00 for his attorney's fees for (a) the garnishment proceeding and (b) the interpleader action. This $1,000.00 was given priority over all claims except court costs. The judge also found that at the time the writ of garnishment was served on Paden, Paden was indebted to Seabreez in the sum of $2,286.07.

The trial court's judgment directed the clerk to pay, in order, the Tarrant County court costs of $19.25, the Johnson County court costs, certified in the transcript to be $229.50, Paden's attorney's fee of $1,000.00, Turner's claim of $2,142.13, and the gravel company's claim of $1,345.01, and to pay the balance remaining of the deposit of $7,286.07 to the government. Distribution of the deposit under the judgment would have satisfied all claims in full except the claim of the government. For that reason, only the government had a right to appeal and complain of the judgment.

In its appeal to the Court of Civil Appeals, the government asserted in three separate points of error that the trial court erred in failing to give its claim priority over (1) Paden's attorney's fees, (2) the gravel company's claim, and (3) Turner's claim. It did not complain of the trial court's failure to give its claim priority over court costs.

[Judgment of the Court of Civil Appeals]

The Court of Civil Appeals held that all the government's liens were superior to the claim of the gravel company. No application for writ of error was filed attacking that holding, and we regard that holding as final. It also held that Turner's claim was superior to the government's tax lien except as to the first $3,905.70. The government does not attack that holding, and Turner filed no application for writ of error. So we also regard that holding as final. The Court of Civil Appeals held that the attorney's fees of Paden for the garnishment proceedings were not superior to the government tax lien. Paden did not file an application for writ of error and did not assign that holding as error. The Court of Civil Appeals further held, however, that the attorney's fee for Paden as to the interpleader action was superior to the tax lien; but since the amount of the attorney's fee for the interpleader (alone) had not been fixed, that claim for attorney's fees was severed, and as to it, the judgment of the trial court was reversed and the cause remanded to the trial court. The remainder of the judgment was modified in keeping with the court's holdings and, as modified, was affirmed.

Under the judgment of the Court of Civil Appeals the order of priority of the various claims was as follows: (1) court costs; (2) Paden's attorney's fee for the interpleader action; (3) the government's claim for $3,905.70; (4) Turner's claim for $2,142.13; (5) the government's claim for its balance of $5,211.49; and (6) the gravel company's claim for $1,345.01. Paden's attorney's fees for the garnishment were adjudged to be inferior to all claims of the United States . That court did not otherwise determine the priority of that claim, and this latter matter is unimportant here.

Only the government filed application for writ of error, and it attacks only the holding that the claim of Paden for an attorney's fee in the interpleader action is superior to its claim. Paden insists that the holding is correct. In the alternative, Paden has a cross-point asserting that his attorney's fees should be placed ahead of the claims of Turner and the gravel company. In reply to the cross-point, Turner insists that inasmuch as no complaint by application for writ of error has been made of that portion of the Court of Civil Appeals' judgment establishing priority of its claim, the judgment has become final to that extent. No one complains of the order of the Court of Civil Appeals severing the claim for attorney's fees as a separate cause and as to such claim reversing the judgment of the trial court and remanding the cause for re-trial.

[Priority of Liens]

The federal cases hold that the priority of liens, generally speaking, depends upon the time at which they become fixed or choate. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955). The government's position is that its lien became choate first: that its lien was fixed before the suit began, and that the attorney's fees have not yet been fixed.

In United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963), the question was whether attorney's fees on a note were prior to a federal tax lien. The amount of the fees had not been established. To be choate, the court said (1) the identity of the lienor must be known, (2) the property subject to the lien must be established, and (3) the amount of the lien must be established. Since the third element was missing, the claim was held to be inchoate. It is also missing here.

It is clear that under this test, applicable when federal law controls, the government's present claim is superior to the interpleader attorney's fees. The question, then, is whether the government is correct in contending that this case is controlled by federal rather than state law.

[State v. Federal Law]

The Court of Civil Appeals recoginzed that in general the priority among claims when one is a federal tax lien is a matter of federal law. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955). That court proceeded to distinguish the present case from those situations in which the general rule applies, and based its decision on state law. Its decision is supported by alternative holdings. The court held that since the government had voluntarily intervened in the suit, it took the suit as it found it. The case was in state courts and was under the jurisdiction of state law; and Texas follows the rule that:

". . . a disinterested stakeholder who has reasonable doubts as to the party entitled to the funds or property in his possession, and who in good faith interpleads the claimants, is entitled to an allowance for attorney's fees." 48 A. L. R. 2d 192.

Alternatively, the Court of Civil Appeals held that interpleader attorney's fees were in the nature of court costs, and that court costs were properly the first assessment against the impleaded fund.

The question of which jurisdiction's law controls to determine the priority of liens when a federal tax lien is involved has been before the courts on a number of occasions. Consistently, the federal courts have held it a federal question to be controlled by federal law. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955). That opinion makes clear that both the question of which law to apply and the question of whether or not the particular case is of the type of cases controlled by that law are federal questions.

Just as with the jurisdiction question, there have been a number of cases before the courts dealing with the particular problem we are now confronted with--the priority between federal tax liens and attorney's fees.

In United States v. Liverpool & London & Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955), a case originating in Texas, involving the priorities of federal tax liens and a lien of garnishment, the United States Supreme Court held:

"If the garnishment lien is not prior to the Government liens, and we have held that it is not, certainly fees allowed in that proceeding are not prior to the Government liens, and the authorization of the payment of the attorney's fees prior to the Government liens was error."

In United States v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862 (10th Cir. 1960), the Liverpool & London case was cited as controlling on this point of priority between federal tax liens and attorney's fees:

"The property of the allowance of costs, including a reasonable attorney's fee, to a plaintiff in an interpleader action is well recognized, but here this judicial prerogative collides with the supremacy of the federal tax lien. Under the Ball and the London & Liverpool cases, and under the decisions of the lower federal courts announced since those decisions, the innocent stakeholder, even though he asserts no rights to the fund in dispute, may not recover his costs and attorney's fees when to do so would invade the paramount federal tax lien."

The government in the present case did not, and does not, claim priority over the general court costs. See Stanley v. Schwalby, 162 U. S. 255 (1895).

[Judgment of the Court]

We are constrained to follow the federal courts in their interpretation and application of the federal tax statutes. The cases previously cited clearly hold that the federal tax lien which is choate under Sections 6321-6323 of the Internal Revenue Code of 1954 has priority over interpleader attorney's fees. Consequently, we hold that the first tax lien, for $3,905.70, which no one disputes as being prior to the other claims of the other impleaded parties, has priority over the interpleader attorney's fees. After the government, the next in priority is Turner's claim for $2,142.13. His claim comes ahead of the subsequently filed federal lien, since that matter became final in the Court of Civil Appeals.

For those portions of the case not controlled by federal law, state law applies. Thus, the priorities between Turner and the attorney's fees are a matter of state law. In his brief to this Court, Paden asks that in the event we hold, as we do, that the federal tax lien is superior to the attorney's fees, we should order the attorney's fees to be paid out of the sum remaining in the registry of the court after paying the federal government. Paden further states that the attorney's fees should be the total sum of $1,000.00, as it presently is, rather than fixed separately for the interpleader and the garnishment.

The Texas rule is that the innocent stakeholder in an interpleader is entitled to attorney's fees, to be paid out of the impleaded fund. Nixon v. Malone, 100 Tex. 250, 98 S. W. 380 (1906); Greer v. Franklin Life Ins. Co., 148 Tex. 166, 221 S. W. 2d 857 (1949). Hence, we agree with Paden's contention. Paden's claim for an attorney's fee for the interpleader action is entitled to priority over Turner's claim.

Because of the error of the Court of Civil Appeals in giving priority to Paden's attorney's fee for the interpleader action over the government's claim, the judgment of the Court of Civil Appeals must be reversed. Under Rule 505, Texas Rules of Civil Procedure, it becomes the duty of this Court to render the judgment the Court of Civil Appeals should have rendered. Under our holdings herein, the judgment of the trial court was clearly erroneous and that judgment must be reversed and the cause remanded to the trial court. Since priority and the amount of all claims to the fund on deposit in the registry of the court must be adjudicated before the clerk can pay out the fund, all claims should be asserted in one action. Accordingly, the order of the Court of Civil Appeals severing the cause of action for attorney's fees must be set aside and the entire cause remanded to the trial court.

Inasmuch as the cause is to be remanded, we take occasion to note that on the record before us, Paden is not entitled to an attorney's fees in the garnishment action. The trial court found that at the time the writ of garnishment was served, Paden was indebted to Seabreez in the sum of $2,286.07. Since Paden answered the writ stating under oath that he was not at such time indebted in any sum, he was not entitled to an attorney's fee. See Rules 668 and 677, Texas Rules of Civil Procedure; May v. Donaldson, 141 S. W. 2d 702, 706 (Tex. Civ. App. 1940, no writ).

The order of the Court of Civil Appeals severing the cause of action of Paden for attorney's fees is set aside, and the judgments of the Court of Civil Appeals and the trial court are reversed and the cause is remanded to the trial court. The trial court will fix the amount of the attorney's fees to be allowed Paden in the interpleader action and adjust the rights, if any, of the parties to interest on their respective claims and render judgment directing payment of the claims in the following order of priority:

1. Court costs

2. The government's claim for $3,905.70

3. Turner's claim for $2,142.13, out of which shall come Paden's attorney's fee for the interpleader action. United States v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862, at 871 (10th Cir. 1960)

4. The government's remaining claims. This will exhaust the fund.

No complaint is made of the manner in which costs were assessed in the Court of Civil Appeals. Costs in this Court are assessed one-half to Paden and one-half to Turner.

 

 

[63-1 USTC ¶9127]Ellicott Paint Co., Inc., Plaintiff v. Buffalo Evening News, Inc. and J. Lee Benice, as Trustee in Bankruptcy of Andrew Joseph Beestak, Defendants Buffalo Evening News, Inc., Defendant-Stakeholder and Respondent v. United States of America, Interpleaded Defendant-Claimant and Appellant

N. Y. Supreme Court, Appellate Div., Fourth Dept., Erie County, No. 410, 233 NYS2d 339, 10/26/62

[1954 Code Sec. 6323]

Government tax lien: Counsel fees: Stakeholder in interpleader action.--A stakeholder was not entitled to counsel fees out of the balance remaining after payment of materialmen, the Government's tax lien attaching to the entire balance.

John T. Curtin, United States Attorney, 502 U. S. Court House, Buffalo, N. Y., for appellant. Vaughan, Brown, Kelly, Turner & Symons, 400 M & T Bldg., Buffalo, N. Y., for respondent.

Before Williams, P. J., Bastow, Goldman, Halpern and Henry, Judges.

Order unanimously modified in accordance with the memorandum, and as modified, affirmed without costs of this appeal to any party. Memorandum: This is an appeal from an order awarding counsel fees to the stakeholder in an interpleader action to be paid out of the balance of the fund against which the United States government asserts a tax lien. The government's lien attaches to "all property and rights to property" belonging to the delinquent taxpayer. (26 U. S. C. Sec. 6321.) A determination of what constitutes the property of the tax debtor is primarily a matter of state law. (30 Am. Jur., Internal Revenue, Sec. 219.) Aquilano v. United States, 10 N. Y. 2d 271, holds that the contractor does not have a sufficient beneficial interest in the fund held by the owner to give him a property interest except insofar as there is a balance remaining after all subcontractors and other statutory beneficiaries have been paid. In this case, there remains a balance after the payment of the materialman and it is to this balance that the tax lien attaches. The respondent, as stakeholder, is not one of the beneficiaries of the trust fund provisions of the Lien Law. Its rights stem from section 285(7) of the Civil Practice Act which contains no trust fund provision. Following the decisions in United States v. Liverpool & London & Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215, 75 S. Ct. 247, and United States v. Ball Construction Company [58-1 USTC ¶9327], 255 U. S. 587, 78 S. Ct. 442, rehearing denied 356 U. S. 934, 78 S. Ct. 770, other courts in recent decisions have denied the right of the stakeholder to recover his counsel fees in similar instances. Seaboard Surety Co. v. United States [62-2 USTC ¶9653], is the latest authority in such cases. The order should be modified by striking therefrom the last two ordering paragraphs and, as modified, the order should be affirmed without costs. (Appeal by United States of America, interpleaded defendant-claimant, from an order of Erie Special Term, Moule, J., adjudging that the balance of a fund after payment of plaintiff be paid to United States of America for withholding taxes after allowing counsel fees to the Buffalo Evening News, Inc.)

 

 

[79-1 USTC ¶9122]MDC Leasing Corp., Plaintiff v. New York Property Insurance Underwriting Association, Defendant New York Property Insurance Underwriting Association, Defendant and Third-Party Plaintiff v. Derrico Company, Inc., Public Adjustment Bureau, Inc., Crossocean Shipping, United States of America Internal Revenue Service, Mayer Pollack Steel Corp., and S. I. Dietz Company, Public Adjusters, Inc., Third-Party Defendants

U. S. District Court, So. Dist. N. Y., 77 Civ. 6197 (KTD), 450 FSupp 179, 5/5/78

[Code Secs. 6321 and 6323]

Lien for taxes: Insurance proceeds: Priority v. taxpayer's assignees: When third party's claim becomes choate: Intervenor's claim for attorney's fees.--The Government's tax lien had priority over the claim of the taxpayer's assignees to insurance proceeds owed to the taxpayer. Although the assignees' interest arose before the government perfected its lien, their claims were not choate until the amount of the insurance proceeds was fixed by the adjuster's filing a proof of loss report. Since this report was filed after the government's tax lien, the assignees were not prior in time purchasers whose claim was superior to the government's. Consequently, the Court held that the government was entitled to the insurance proceeds less the ten percent fee owed to the adjuster. Finally, the insurance company was not allowed attorney's fees as an interpleader because such claims are subordinate to government liens.

Joseph Winston, 101 Park Ave. , New York , N. Y., for plaintiff. Alan Jay Martin, Karen L. Bennett, Abrams and Martin, 92 Fulton St., New York, N. Y., for New York Property Insurance Underwriting Association. Frank A. Weg, 116 John St. , New York , N. Y., for Public Adjustment Bureau, Inc. Michael J. Carcich, Cichanowitz & Callan, 80 Broad St. , New York , N. Y. 10004, for Crossocean Shipping. Rob ert B. Fiske, Jr., United States Attorney, Richard N. Papper, Assistant United States Attorney, New York, N. Y. 10007, for United States of America and Internal Revenue Service.

Opinion

DUFFY, District Judge:

Plaintiff MDC Leasing Corporation has brought this action against New York Property Insurance Company seeking to recover out of the proceeds of certain insurance policies the amount of $37,873.38 representing moneys allegedly assigned to plaintiff on September 23, 1976 by Derrico Company, Inc., the insured, together with interest from August 1, 1976. Plaintiff now moves for summary judgment pursuant to F. R. Civ. P. 56 on the grounds that no issue as to material fact exists. Third party defendants Crossocean Shipping Co., Inc., Public Adjustment Bureau, Inc. and the United States of America have all cross-moved for summary judgment. New York Property Insurance has moved for an order allowing it to pay into the court the sum of $75,000 representing its liability under the insurance policies issued to Derrico, and for $2,877 in attorneys' fees and disbursements.

The following facts are undisputed: Derrico owned certain premises in Bronx County which were insured by New York Property Insurance. On July 22, 1976, there was a fire on those premises which caused damage subsequently valued at $75,000. On September 23, 1976, Derrico executed a document purporting to assign to MDC Leasing Co. all its right, title and interest in the proceeds of the fire loss insurance up to $34,743.47, with interest from August 1, 1976. Thereafter, on September 29, 1976, Derrico and Derrico Trucking Corp. purported to assign their right, title and interest in the fire insurance proceeds up to $70,000 to Crossocean Shipping. Immediately following the fire loss, on July 23, 1976, Public Adjustment Bureau was retained to adjust the fire loss in question pursuant to a retainer agreement calling for a fee of ten per cent of any moneys received from the fire loss claim. ¹ The proof of loss prepared by Public Adjustment was dated June 14, 1977. The United States , between July 19, 1976 and October 17, 1977, made nine assessments of federal taxes due and owing by Derrico in the total amount of $146,210.90, including interest and penalties.

Plaintiff MDC and third party defendant Crossocean claim that their interests in the proceeds are absolute and that their status is in the nature of a "purchaser" within the meaning of 26 U. S. C. §6323 which provides that a federal lien for taxes shall not be valid against a purchaser until notice thereof has been filed. §6323(a). Accordingly, plaintiff MDC contends it is entitled to priority with respect to the insurance policy proceeds, and Crossocean contends it is entitled to the balance of the fund. The United States , however, contends that the federal tax claims have priority over these claimants. According to the Government, the assignees' interest in the proceeds did not become choate until June 14, 1977 , when a proof of loss was filed by Public Adjustment. Until that time, the Government urges, the assignment was a present right to future proceeds which created merely an equitable lien in favor of the assignees. Such equitable liens may not take priority over a federal tax lien. Nor, asserts the Government, are the assignees purchasers within the meaning of section 6323(h)6, which defines a purchaser as one

. . . who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice.

The Government contends that claimants' interest is at best an equitable lien and therefore falls without the statutory exception afforded purchasers. See Engel v. Tinker National Bank [67-2 USTC ¶9525], 269 F. Supp. 199, 204 (E. D. N. Y. 1967).

A federal tax lien takes priority over competing liens unless the competing lien was choate prior to the attachment of the federal lien, United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1953), or it falls within one of the statutory exceptions carved out by the Internal Revenue Code. In the instant case, the federal government filed notices of assessment in excess of $75,000 prior to June 14, 1977 . Thus, the threshold question for my consideration is whether the assignments to MDC and Crossocean became choate on the actual date of the assignment or on June 14 when the proof of loss was filed. This must be determined since regardless of whether the claimants are "purchasers" within the meaning of section 6323, filing by the Government before the date on which their interest was "fixed" will destroy any priority they might have acquired by virtue of purchaser status.

It is well settled in New York that "an assignment of a future interest in the proceeds of a claim is equitable only and does not become a legal assignment until the proceeds have come into existence." PPG Industries, Inc. v. Hartford Fire Insurance Co. [74-2 USTC ¶9823], 384 F. Supp. 91 (S. D. N. Y. 1974), aff'd, [76-1 USTC ¶9257], 531 F. 2d 58 (2d Cir. 1976). The assignment of proceeds in an insurance policy, the amount of which is not yet fixed, would seem to be such an equitable interest which becomes a legal or choate interest only "when there is a judgment or appropriation of the proceeds in favor of the assignor." Id. This appropriation could not take place until a proof of loss was filed, which concededly did not take place until June 14, 1977 . ² Since prior to that date tax assessments in excess of $75,000 had been filed, the assignments to MDC and Crossocean are subordinate to the federal tax liens which attached before the proceeds came into existence. See Morrstein v. Excelsior Insurance Co. of Syracuse , 25 N. Y. 2d 651, 306 N. Y. S. 2d 464 (1969). Moreover, if the tax liens are deemed to attach on June 14, 1977 , when the proceeds came into existence, the Government would still prevail since in the event of simultaneous attachment the federal liens are accorded priority. United States v. Graham [51-1 USTC ¶9218], 96 F. Supp. 318 (S. D. Cal. 1951), aff'd sub nom. California v. United States [52-2 USTC ¶9425], 195 F. 2d 530 (9th Cir.), cert. denied, 344 U. S. 831 (1952).

The claim of the Public Adjustment Company need only receive passing reference since all the parties agree that it is entitled to its ten per cent fee. ³ Accordingly, its motion for summary judgment is granted. The claim of New York Property Insurance for attorneys fees, however, is opposed by all the parties. Having determined that the United States has priority and is entitled to the entire fund less the adjuster's fee, I must deny New York Property Insurance's motion. Fees for interpleaders' attorneys do not take priority over government liens. United States v. Liverpool & London & Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955), particularly where, as here, "the total amount in the interpleaded fund is insufficient to satisfy prior federal tax liens." United States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421 F. 2d 519 (2d Cir. 1970).

Accordingly, the motion of New York Property to be permitted to deposit the sum of $75,000 in court is granted. New York Property's motion for attorneys' fees is denied. The motions of the United States for summary judgment in the amount of $67,500 and the Public Adjustment Bureau for $7,500 are granted. The remaining motions are denied.

Settle judgment on seven days notice. No costs are to be allowed to any party.

¹ S. I. Dietz, in its answer to the third party complaint, also claimed a fee for adjustment services. However, it has neither moved nor responded to the within motions for summary judgment.

Mayer Pollack Steel Corporation was also named in the third party complaint as a third party defendant with an interest in the insurance proceeds. Mayer Pollack has not appeared, answered or moved in this action.

² Plaintiff argues, taking out of context the language of the Second Circuit in PPG Industries, Inc. v. Hartford Insurance Co. [76-1 USTC ¶9257], 531 F. 2d 58 (2d Cir. 1976), that the "existence requirement of §6323(h)(1) [dealing with security interests] is satisfied by the existence of an available insurance policy." Id. at 62. Plaintiff, however, concedes that its assignment is not a security interest. Moreover, the court of appeals in PPG observed that the proceeds of the fire insurance policy there in question "did not come into existence until a judgment was obtained against Hartford ." Id. In that case, however, "the original security interest was not in after acquired proceeds, but in the debtor's inventory and equipment." Id. When this was destroyed the interest continued in the insurance policy and then the proceeds. In the instant case the assignment was never in anything other than proceeds, which were not "fixed," at least until the filing of a proof of loss.

³ Although the Government's brief appears to contest this point, its affidavit submitted in support of its motion for summary judgment clearly concedes that the adjuster's fee should be allowed. Affidavit of Richard N. Papper, March 30, 1978 .

 

 

[78-2 USTC ¶9812]Juengel Construction Company, a Corporation, Plaintiff v. James R. Moenning, Mary A. Moenning, Lemay Bank and Trust Company, a Corporation, and The United States of America, Defendant

U. S. District Court, East. Dist. Mo. , East. Div., No. 77-0981C(A), 10/18/78

[Code Sec. 6323]

Tax liens: Priority: Judgment lien creditor: Interpleader: Stakeholder's attorney's fees.--At the time a federal tax lien was filed a bank had no security interest in an interpleaded fund representing accounts receivable of a contractor to which it had loaned money. The bank's lien was not choate under state or federal law and therefore did not take priority over the federal tax lien against the contractor for unpaid federal unemployment taxes, FICA taxes and withholding taxes. In addition, the court ruled that the stakeholder was not entitled to attorney's fees since such award would have diminished the portion of the interpleaded fund to which the U. S. was entitled by virtue of its tax lien.

Rob ert J. Koster, 1600 S. Hanley Road , St. Louis , Missouri 63144 , for plaintiff. Jean C. Hamilton, Assistant United States Attorney, St. Louis, Missouri 63101, James E. Crowe, Jr., Department of Justice, Washington, D. C. 20530, for defendant. Rob ert W. Saitz, 1015 Locust Street, St. Louis, Missouri 63101, for Lemay Bank & Trust Company.

Memorandum Opinion

HARPER, District Judge:

On August 11, 1977, plaintiff, Juengel Construction Company, a corporation, brought suit in the Circuit Court of the County of St. Louis, Missouri, to interplead a fund of $5,294.50 representing the balance of payments it owes to its subcontractor, St. Louis Dry Wall & Painting Company. To avoid potential double liability, it seeks a determination of the rights of the two parties defendant which claim the fund--The United States (based upon a Federal tax lien filed by the Internal Revenue Service), and Lemay Bank & Trust Company (based upon a security interest in it pursuant to a loan). The unpaid balances of the Federal tax lien and the bank loan each exceed $5,294.50.

This case reaches this Court upon the petition of the defendant, United States of America, for removal from the Circuit Court of the County of St. Louis, Missouri, pursuant to 28 U. S. C. 1444 and 1446. This Court has jurisdiction under 28 U. S. C. 1444 and 2410.

The parties fully stipulated the facts of record. The stipulation discloses that the plaintiff is a corporation organized and existing under Missouri law and is a general contractor in the construction business. James and Mary Moenning were joined as defendants in their capacity as statutory trustees and last officers and directors of St. Louis Dry Wall & Painting Company, a corporation, which forfeited its charter to do business in Missouri by failing to file annual registration reports.

Lemay Bank & Trust Company (hereinafter referred to as Lemay Bank), loaned $50,000.00 to St. Louis Dry Wall & Painting Company (hereinafter referred to as the taxpayer), and took a note secured by a security agreement covering taxpayer's business property, including its "accounts receivable now and hereafter acquired."

Lemay Bank filed the financing statements connected with the security interest in the office of the Recorder of Deeds for the City of St. Louis on October 17, 1975, and with the Secretary of the State of Missouri on October 20, 1975.

Taxpayer fell delinquent in its taxes, and on June 14, 1976, the Internal Revenue Service (hereinafter referred to as the IRS) made an assessment of unpaid Federal unemployment taxes and Federal Insurance Contribution Act taxes under 26 U. S. C. 3101 et seq., and withheld income taxes under 26 U. S. C. 3104 et seq., plus penalties and interest under 26 U. S. C. 6651 and 6656. The unpaid balance is $16,347.68 and liability is uncontested by the Moennings (statutory trustees of taxpayer). (Schedule of Unpaid Tax Liability, Stipulation 13 and 14.)

The IRS filed notice of a Federal tax lien against taxpayer with respect to the above assessments pursuant to 26 U. S. C. 6321, 6322 and 6323 in the office of the Recorder of Deeds for the City of St. Louis on July 22, 1976, and pursuant to 6323(f)(4) in a public index available for inspection at the office of the District Director of the IRS in St. Louis, Missouri, before July 1, 1975.

In 1976, the plaintiff was engaged to remodel the court house in Festus , Missouri , and on September 10th of that year it contracted with taxpayer as its subcontractor for the erection of a dry wall and studs for the price of $13,855.00 (Exhibit A). Taxpayer began work on September 29, 1976, submitted invoices on October 22, 1976, and January 24, 1977, and was paid $8,580.60. It completed the work on March 11, 1977, and became entitled to the balance of the amount owing under the contract--$5,294.50.

After the contract was entered into the IRS filed a notice of levy with the plaintiff setting forth taxpayer's delinquencies and levying upon and seizing any money in plaintiff's possession that it might owe taxpayer as its subcontractor.

Lemay Bank claims the interpleaded fund pursuant to its security interest in taxpayer's accounts receivable, and the IRS claims it pursuant to the general tax lien (Exhibits 19 and 20).

To determine which claim takes priority we turn to 26 U. S. C. 6321, 6322 and 6323 and the Federal case law. We find that a lien upon all "property and rights to property" of the taxpayer arises and is perfected upon filing a Federal tax assessment (6321, 6322 and 6323). It becomes immediately enforceable against after-acquired property as soon as the property is acquired. Bank of America National Trust & Savings Assoc. v. Mamakos [75-1 USTC ¶9211], 509 F. 2d 1217, citing case at 1219; Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265; Texas Oil & Gas v. United States [72-2 USTC ¶9653], 466 F. 2d 1040, 1047.

The Federal tax lien, though general, is a perfected choate lien when filed and cannot be defeated by a prior state lien unless the latter is also choate. New York v. Maclay, 288 U. S. 290 (1933); U. S. v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955). The state lien has both state and Federal hurdles to pass. If it is not choate under state law, it cannot prevail under the Federal tax law embodied in 26 U. S. C. 6323(a). Yet there are circumstances in which a state lien, though perfected, may not be allowed to take priority under 6323(b) and (c), the Federal choateness statutes. It must, in other words, meet both state and Federal choateness tests in order to prevail over a Federal tax lien.

In Dugan v. Missouri Neon & Plastic Advertising Company [73-1 USTC ¶9211], 472 F. 2d 944 (8th Cir. 1977), at 949, the Court stated:

"The ultimate question as to whether or not a claimant becomes a judgment lien creditor within the meaning of 26 U. S. C. 6323(a) is a federal question. However, in order to determine that question it is necessary to ascertain whether or not a lien is created under state law and, if so, the characteristics thereof. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). In answering the question of whether a lien could attach to property, the Court in Aquilino said:

`[B]oth federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute." . . . Thus, as we held only two terms ago, Section 3670 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law. . . ." . . . However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's "property" or "rights to property.'" (Citations and footnotes omitted). Aquilino v. United States , 363 U. S. 509, 512-514, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365 (1960)."

State law controls in determining the nature of the legal interest which the taxpayer had in the property sought to be reached by the United States in asserting its tax lien. Federal law determines the priority of competing liens against the taxpayer's property or rights to property. United States v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862.

In the Dugan case, supra, at 951, the Court further said:

"Judicial developments have established criteria to determine whether a particular interest should have priority over the Federal tax lien. In other words, a . . . creditor . . . must have 'attained the degree of perfection required of other liens and be choate for the purposes of the Federal rule [of priority].' United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 89, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963)."

In short, we must determine if the Federal tax lien is choate under state law and then we must look to Federal law to determine whether a lien which is perfected under state law can take priority under the Federal law. In the course of dealing with the Federal law, 26 USC 6323, we have to refer back to state law to determine what kind of property interest the taxpayer was able to pass to the Lemay Bank. Texas Oil & Gas v. United States [72-2 USTC ¶9653], 466 F. 2d 1040; United States v. Pioneer American Insurance Company [63-2 USTC ¶9532], 374 U. S. 84. The issues of state choateness and state property interest will overlap, but we will examine them separately for the sake of orderly discussion.

We find that the lien of Lemay Bank fails both the state and Federal tests for choateness. The Lemay Bank's lien was properly filed under Missouri 's Uniform Commercial Code (400.9-302 VAMS). It cannot attach unless the debtor, the taxpayer here, has rights in the collateral, which in this case was the accounts receivable. (400.9-204(1) VAMS) An account is defined in VAMS 400.9-106 as "any right to payment . . . for services rendered . . .", and in Uniform Commercial Code Comment under this section, in discussing the definition of "account" it is indicated that the words "accounts" and "accounts receivable" may be used interchangeably in this context. Taxpayer had no right to payment for services rendered until it had done work on the Festus court house and submitted invoices in late fall of 1976. Since a debtor has no rights in an account until it comes into existence (VAMS 400.9-204(2)(d)), the Lemay Bank could not have received a property interest in the accounts until taxpayer itself received that interest after performing services for the plaintiff. Thus, the Lemay Bank's lien was not perfected until long after the government's lien became choate upon filing of the tax assessment on July 22, 1976 . This is true even though the Lemay Bank had perfected its interest under state law by filing in the proper places in accordance with VAMS 400.9-302. After it has filed, a bank has no more control over the perfection of its security interest and must depend on its debtor to create the accounts receivable by contracting with third parties. United States v. White Bear Brewing Co. [56-1 USTC ¶9440], 350 U. S. 1010.

In United States v. Equitable Life, 384 U. S. 323, 331 (1965), it was held:

"It would be contrary to the Federal policy of uniformity in the Federal tax laws to permit the relative priority of Federal tax liens to 'be determined by the diverse rules of the various states.' United States v. Speers [66-1 USTC ¶9101], 382 U. S. 266, 270 (1965)."

The reason for making priority a strictly Federal question with state choateness as only one criterion instead of leaving the determination entirely to the state choateness law is set forth in Texas Oil & Gas Corporation v. United States , supra, at 1049-50, where it was said:

"It is settled law that the '. . . effect of a [state-created] lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question,' whether or not the state law would classify the private lien as specific and perfected. United States v. Security Trust [50-2 USTC ¶9492], 340 U. S. 47 at 49, 71 S. Ct. 111 at 113, 95 L. Ed. 53 at 56.

`Otherwise, a state could affect the standing of federal liens, contrary to the established doctrine, simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment, etc., is determined.'

" United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 at 86, 74 S. Ct. 367 at 371, 98 L. Ed. 520 at 526. See also United States v. Acri [55-1 USTC ¶9138], 1954, 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 264; United States v. Waddill, Holland & Flinn [45-1 USTC ¶9126], 1945, 323 U. S. 353, 65 S. Ct. 304, 89 L. Ed. 294. Thus, although a state's conclusion that a particular lien is specific and perfected '. . . is entitled to weight, it is subject to re-examination by this [federal] Court.' United States v. Security Trust [50-2 USTC ¶9492], 340 U. S. at 49-50, 71 S. Ct. at 113, 95 L. Ed. at 56. However, if state law itself would determine that a particular lien was not 'acquired' or choate, in the federal sense of the terms, that determination would be 'practically conclusive.' Illinois ex rel. Gordon v. Campbell, 1946, 329 U. S. 362, 371, 67 S. Ct. 340, 345, 91 L. Ed. 348, 355."

In Aquilino, et al. v. United States , et al. [60-2 USTC ¶9538], 363 U. S. 509, 514, it was said:

"The application of state law in ascertaining the taxpayer's property rights and of Federal law in reconciling claims of competing lienors . . . strikes a proper balance between the legitimate and traditional interest which the state has in creating and defining the property interests of its citizens and the necessity for a uniform admin istration of the Federal revenue statutes."

The 1966 amendments to 26 USC 6323 add some new features to the law of choateness and Federal priority, but they also are meant to endorse and codify prior case law. Therefore, this Court feels free to use before and after 1966 cases in support of its discussion of which lien takes priority. Dugan v. Missouri Neon, etc., supra at 949; Community State Bank of Hayti v. Midwest Steel Erection, Inc., 77-1 USTC ¶9436, p. 87; H. R. Rep. 1884 89th Cong. 2nd Session 35, 1966.

In Texas Oil & Gas v. U. S. , supra, at 1052-53, it was held that the general inquiry common to all the cases both before and after the 1966 amendments is whether the final transaction on which the lien was allegedly based had been completed by the time of the tax lien filing.

Turning to the statute, we find that 26 USC 6323(a) provides that for a private lien to be choate, the lienor must file his lien and be the holder of a security interest prior to the filing of the Federal tax lien. 26 USC 6323(h)(1) defines the existence of a security interest as an interest in property to secure payment of a debt but only where, at the time in question, the property is in existence. 6323(h)(1) corresponds exactly to the state's requirements for perfection under the Uniform Commercial Code for it is the state law which determines when a security interest becomes an interest in property and attaches. Dugan v. Missouri Neon, supra, and Texas Oil v. U.S., supra. In our discussion of state perfection, we have already stated that the Lemay Bank had no security interest in the accounts receivable in question at the time the Federal tax lien was filed.

26 USC 6323(c)(1) and (2) and 6323(d) ease the situation for banks somewhat by giving first priority to a limited class of interests--security interests in "qualified property" covered by the terms of a written agreement entered into before the tax lien filing and constituting a "commercial financing security agreement." These interests take priority if the private lienor acquires them within a 45-day grace period after the filing of the Federal tax lien. The agreement between the Lemay Bank and taxpayer was a commercial finding security agreement, because it was under 6323(c)(2)(A) "an agreement to make a loan to the taxpayer . . . to be secured by commercial financing security acquired by the taxpayer in the ordinary course of business." According to 6323(c)(2)(C), commercial financing security includes "accounts receivable." However, the accounts receivable are not "qualified property" and thus the Bank's interest cannot take priority. 6323(c)(2)(B) says that "the term 'qualified property' when used with respect to commercial transactions, includes only commercial financing security acquired by the taxpayer before the forty-sixth day after the date of tax lien filing." To determine if the commercial financing security interest was acquired forty-five days after filing of the Federal lien, we turn to the now familiar state law as the Federal case law traditionally has done. Dugan v. Missouri Neon, etc., supra at 949; Texas Oil & Gas v. U. S., supra at 1053; United States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264, cert. denied 410 U. S. 911.

We have previously discussed the state law in our inquiry into the lien's perfection under the Uniform Commercial Code. In addition, the parties stipulated that the accounts receivable which constituted the security interest were not acquired by taxpayer until after September 29, 1976, well beyond the 45 day grace period of 6323(c)(2)(B). Thus, the Lemay Bank's lien is not choate under state or Federal law and does not take priority.

We turn now to plaintiff's request that costs and attorneys' fees be paid to it out of the fund. Under most circumstances, Federal courts award such fees to a disinterested stakeholder like the plaintiff. Metropolitan Life Ins. Co. v. Bruce, 309 F. Supp. 1314. However, a stakeholder who interpleads funds into court is not entitled to attorneys' fees if such award would diminish the portion of the interpleaded fund to which the United States is entitled by virtue of its tax lien. Bank of America Natl Trust etc. v. Mamakos [75-1 USTC ¶9211], 509 F. 2d 1217.

In Spinks v. Jones [74-2 USTC ¶9657], 499 F. 2d 339, 340, it was stated:

"The stakeholder of an interpleaded fund is not entitled to attorney's fees to the extent that they are payable out of a fund impressed with a federal tax lien. (Citing cases.) . . . The judicial prerogative to award stakeholders their attorney's fees must give way to the supremacy of the federal tax lien law whenever an award would invade the amount subject to the tax lien. U. S. Chapman, 281 F. 2d 862, 870."

Accordingly, this Court finds in favor of the United States , granting it the prior right to the interpleaded fund, and denies plaintiff's request that it be granted costs and attorney's fees out of the fund.

The Court adopts this memorandum opinion and the stipulation of the parties submitted to the Court as its findings of fact, this memorandum opinion as its conclusions of law, and the clerk of the Court is directed to prepare and enter the proper judgment as outlined above.

 

 

[77-2 USTC ¶9468]Jack W. Peoples, Plaintiff v. Edward B. Allen, et al., Defendants

U. S. District Court, East. Dist. Va., Norfolk Div., Civil Action No. 77-23-N, 4/13/77

[Code Sec. 6332(d)--Result unchanged under the '76 Tax Reform Act]

Tax liens: Priority of creditors: Release of payee of tax liens: Attorneys' fees.--Since the payment of federal tax liens will statutorily release an auctioneer from any claim by the owner of the auctioned goods, the auctioneer's interpleader suit was dismissed as to amounts not claimed by third parties. The auctioneer's attorney's fees were not allowed against the interpleaded funds since the latter was insufficient to satisfy the tax liens.

Griffin and Pappas, 333 Merchants & Farmers Bank Bldg., Portsmouth , Va. 23704 , for plaintiff. Michael A. Rhine, Assistant United States Attorney, Norfolk, Va. 23501, S. Martin Teele, Jr., United States Department of Justice, Washington, D. C. 20530, Parsons, Steffen & Moore, 1108 Maritime Tower, Norfolk, Va. 23514, for defendants.

Order

CLARK, JR., District Judge:

This matter comes before the Court on the motion of the United States to dismiss the Amended Complaint.

Action was originally brought in the Circuit Court of the City of Chesapeake, Virginia, in the nature of an interpleader. The plaintiff, Jack W. Peoples, alleges that as a professional auctioneer he sold on instructions from Edward B. Allen at public auction certain items of personalty certified by Allen to be the property of Allen. Peoples holds net proceeds of the sale in the amount of $6,700.50. Peoples' interpleader complaint further states that subsequent to the sale he received a notice of levy from the United States Internal Revenue Service levying the net proceeds of the sale in their entirety alleging indebtedness of Allen to the Internal Revenue Service of $38,169.50. Peoples further alleges that he has received claims from Thomas F. Christenson and Chesapeake Marine Services, Inc., that part of the property sold by Peoples at Allen's instruction, and represented by Allen to belong to Allen, was in fact the property of Christenson and Chesapeake Marine and that value of that portion of the property is $1,625.00. Peoples is seeking judicial direction as to disposition of the $6,700.50 now in his hands.

The United States was properly made a party to the interpleader action in accordance with the provisions of 28 U. S. C. §2410 and properly removed the action from the Circuit Court of the City of Chesapeake, Virginia, in accordance with 28 U. S. C. §1444. After some earlier disagreement and after corrective measures were taken, the United States now agrees that it has been properly served.

The United States does not seek to dismiss this entire action. It seeks to dismiss all of the action except the $1,625.00 interest in the fund held by Peoples which is claimed by Christenson and Chesapeake Marine. The Government claims that as to the other $5,075.50 there is no dispute between the parties. The Court agrees.

By Congressional enactment, the payment, by Peoples to the Internal Revenue Service of the $5,075.50 in response to the levy will release Peoples from any claim by Edward R. Allen. 26 U. S. C. §6332(d). With Allen being barred by statute from making any claim against Peoples and Christenson and Chesapeake Marine having no claim against the $5,075.50, the Court finds no dispute to be decided by the Court as to the $5,075.50. See also, Bank of America National Trust and Savings Association v. Mamakos [75-1 USTC ¶9211], 509 F. 2d 1217 (9th Cir. 1975).

While the plaintiff requests that attorney's fees and costs incident to this action be allowed him out of the fund he holds and could argue that this case should not be dismissed as to the $5,075.50 without allowance of attorney's fees from the portion of the fund, the Court thinks otherwise. Such claims may not diminish the portion of an interpleaded fund to which the Government is entitled by virtue of a Federal tax lien. Bank of America Nat. Trust & Sav. Ass'n., supra; Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962); United States v. State National Bank [70-1 USTC ¶9209], 421 F. 2d 519 (2d Cir. 1970); Spink v. Jones [74-2 USTC ¶9657], 499 F. 2d 339 (5th Cir. 1974).

The Court finding no dispute as to $5075.50 of the fund held by the plaintiff, this action is DISMISSED as to that amount. The case shall remain on the Court's docket for a determination of the entitlement to the balance of $1,625.00 held by the plaintiff.

 

 

[77-1 USTC ¶9373]Hinkley & Donovan v. William D. Paine, III, et al. The Exeter Banking Company v. Exeter Depot, Inc., et al. Indian Head National Bank of Portsmouth v. United States of America and State of New Hampshire

U. S. District Court, Dist. N. H., Civil Action Nos. 76-19, 76-104, 76-201, 424 FSupp 1013, 1/14/77

[Code Sec. 6323--result unchanged by the '76 Tax Reform Act]

Tax liens: Priority: Federal v. state.--In two of three consolidated interpleader actions, liens imposed by the United States were determined to be first in time and therefore had priority over liens of the State of New Hampshire involving claims against certain debtors for unpaid taxes. In one action, however, New Hampshire 's lien was "first in time" and the court determined that the state would be entitled to summary judgment except for the reserved question of insolvency for which a later hearing was scheduled. Since there was no implied lien created under New Hampshire law, since the statutory lien was not choate at the time demands for payment were made by the state or before assessment by the United States and since New Hampshire was neither a "judgment lien creditor" nor a "holder of a security interest", the court determined which liens attached "first in time" without regard to perfection by notice. The court further determined that the bankstakeholders were not entitled to attorney's fees from the interpleaded fund where the amount in the fund was insufficient to satisfy state tax liens.

Edward Gage, Scammon, Gage & Whitman, 28 Front St., Exeter, N. H. 03833, for Exeter Banking Co. David H. Souter, Attorney General, James Sargent, State of New Hampshire, Room 208, State House Annex, Concord, N. H. 03301, for N. H. W. H. D. Townley Tilson, Assistant United States Attorney, Concord, N. H., for U. S. John J. Ryan, Casassa, Mulherrin & Ryan, Lafayette Road, Hampton, N. H., for Exeter Depot & Estate. John H. McEachern, Shaines, Madrigan, McEachern, 25 Maplewood Ave. , Portsmouth , N. H. 03801, for Indian Head Nat'l. Bank of Portsmouth .

Partial Summary Judgment

BOWNES, District Judge:

These three interpleader actions were initially commenced in the State Court and removed here by the United States . The facts have been stipulated in each case, and they have been consolidated because the primary parties and the issues of law are the same in each.

The basic issue is whether the United States or the State of New Hampshire has a priority interest in collecting their respective claims for unpaid taxes. A secondary issue is whether attorneys' fees and costs should be paid to the plaintiffs before satisfying the claims of the other parties. The statutes involved are 26 U. S. C. §§ 6321-6323 and 6331, and NH RSA 78-A:7,20 and 21.

The Federal Courts are faced with the recurring problem of whether a lien created by a state statute takes priority over a federal tax lien. United States v. Equitable Life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323 (1966); cf. United States v. Town of Marlborough , 305 F. Supp. 718 (D. N. H. 1969); United States v. Town of Pittsfield, 302 F. Supp. 316 (D. Me. 1969). This is because federal law, not state law, determines the priority between a federal tax lien and competing liens. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950); Town of Marlborough , supra, 305 F. Supp. at 720. The reason for applying federal law is the desirability of a uniform application of federal tax laws. United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361 (1953).

The provision of the Internal Revenue Code creating the federal tax liens involved in these cases does not expressly confer upon them priority over competing liens. 26 U. S. C. §6321. Instead, the common law principle that "the first in time is the first in right" is applied, and the priority of liens depends on the time competing liens attach and become choate. Equitable Life, supra, 384 U. S. at 328; United States v. Pioneer American Insurance Company [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). There are certain classes of secured creditors and other parties with an interest in the property to which a federal lien has attached who are protected or given priority by the Internal Revenue Code. 26 U. S. C. §6323. This will be treated separately, infra.

One other consideration is whether or not any of the debtors are insolvent. "Whenever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied . . .." 31 U. S. C. §191. The facts with regard to this issue have not been stipulated, and the issue has been expressly reserved.

The state liens in these cases can only prevail over the federal tax liens if they are choate and attached before the federal liens. United States v. Vermont, 377 U. S. 351 (1964); New Britain , supra, 347 U. S. 81.

A lien is choate "when [1] the identity of the lienor, [2] the property subject to the lien, and [3] the amount of the lien are established." New Britain , id. at 84.

Implied Lien

The State contends that an implied lien is established under NH RSA 78-A. Part II of that statute provides:

Each operator shall keep books and records in a form acceptable to the department showing the amount of all taxes collected. The operator shall pay the taxes over to the state as provided in this section. If the department believes that special action is necessary because payment of taxes collected may be in jeopardy, it may direct an operator to keep all taxes collected separate from any other funds. The department may require that the taxes be periodically deposited in a bank designated by the department, in an account in the name of the commission. The department may withdraw these tax collections from the bank account and apply them to the payment of the taxes due from the operator. When an operator commingles tax money with money belonging to him, the claim of the state for the tax is traceable, is enforceable against all other claims and takes precedence over all other claims against the commingled funds. No taxes collected by an operator under this chapter may be sent outside the state without the written consent of the department.

None of the three elements of a choate lien are met by this "implied lien" at the time of collection by the operator. The State is not aware of the transaction, so the identity of the lienor is not known; the property subject to the lien has not been identified and segregated; nor is the amount of the lien known or established. Had the State exercised its statutory authority to "require that the taxes be periodically deposited in a bank designated by the department, in an account in the name of the commission," the segregated funds, their amount, and the identity of the lienor would be clearly established, and the lien would be choate. As the United States notes in its memorandum at page 7, "[T]he deposited taxes would no longer belong to the taxpayer-operator, but would belong to the State . . .."

The State's contention that an implied lien is created at all is of dubious merit, Flack v. Agency, 96 N. H. 335 (1950); cf. Allen v. Bemis, 99 N. H. 247 (1954); but:

There is no dispute that the State of New Hampshire has, by statute, acquired liens upon ". . . all property and rights to property . . ." of each taxpayer-operator for unpaid meals and rooms taxes, plus statutory additions, and that the lien arose at the time demands for payment of the taxes were made. RSA 78-A:21. U. S. Memorandum, p. 5.

Statutory Lien

The next question is whether the statutory lien was choate at the time demands for payment were made by the State or at some other time before assessment was made by the United States .

In applying the three-part New Britain test to determine the choateness of the State's lien, I note the similarity in the phraseology and structure of the state and federal statutes which create and enforce the liens. ¹ See United States v. Vermont , 337 U. S. at 351, 352, 354. A comparison of the two statutes reveals the following:

1. Identity of Lienor

New Hampshire is identified as the lienor when:

any operator required to collect and transmit a tax under this chapter neglects or refuses to pay the tax after demand . . .. NH RSA 78-A:21.

The United States is identified as the lienor when:

any person liable to pay any tax neglects or refuses to pay the same after demand . . .. 26 U. S. C. §6321.

2. Property Subject to the Lien

The New Hampshire language is:

upon all property and rights to property whether real or personal, belonging to the operator. NH RSA 78-A:21.

The Federal language is:

upon all property and rights to property, whether real or personal, belonging to such person. 26 U. S. C. §6321.

3. Amount of the Lien

The State statute sets the lien as:

the amount [of the tax], together with all penalties and interest provided for in this chapter and together with any costs that may accrue in addition to the tax . . .. NH RSA 78-A:22.

The Federal language is:

the amount [of the tax] (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) . . .. 26 U. S. C. §6321.

There is no substantive difference between the requirements for choateness of the state and federal statutes.

Vermont, supra, is the closest case on point that I have found. In that case, the State of Vermont assessed a solvent taxpayer for past due state taxes pursuant to statutory language virtually the same as that of New Hampshire in this case. The United States assessment followed shortly. The State sued and obtained a judgment in State Court. Then the United States sued in Federal Court to uphold its lien. The District Court held that the State lien had priority and was upheld by the United States Supreme Court.

The United States seeks to distinguish that case because "the statutory scheme in each of those cases [ Vermont and New Britain ] provided for distraint or levy without intervening judicial proceedings." Memorandum, p. 6. The Court in Vermont , supra, 377 U. S. at 359, did note that the statutes involved in Vermont and New Britain were "summarily enforcible," but this was not basic to its discussion. Id. at n. 12. The record in New Britain does not disclose whether New Britain , Connecticut , foreclosed on its lien by admin istrative process, but in Vermont the State did not foreclose by admin istrative process even though it had that statutory right.

The Filing Issue

The next issue is whether New Hampshire is a "judgment lien creditor" or a "holder of a security interest" within the meaning of 26 U. S. C. §6323(a) which provides:

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 . . . has been filed by the Secretary or his delegate.

In Gilbert Associates, supra, 348 U. S. at 363-364, the Supreme Court held that a New Hampshire town was not a judgment creditor within the meaning of the statute. ²

That ruling still controls.

. . . The Supreme Court of New Hampshire held that since notice of the Government's lien was not filed until August 6, 1948, and the Town's taxes were assessed on April 1, 1947, and April 1, 1948, respectively, and such tax assessments are "in the nature of a judgment" under the law of New Hampshire, the Town was a judgment creditor within the meaning of [26 U. S. C. §6323] and the Government's lien was not valid as against the Town's.

Was the Town a judgment creditor within the meaning of [26 U. S. C. §6323]? The New Hampshire Supreme Court in the instant case said:

"It is settled by our decisions that the assessment of a tax is in the nature of a judgment enforced by a warrant instead of an execution Boody v. Watson, 64 N. H. 162, 167; Jaffrey v. Smith, 76 N. H. 168, 171; Nottingham v. Company, 84 N. H. 419. See also, Automatic Sprinkler Corp. v. Marston, 94 N. H. 375." 97 N. H. 411, 414, 90 A. 2d 499, 502.

We would not question or presume to say what the nature and effect of a tax proceeding is in New Hampshire . The state is free to give its own interpretation for the purpose of its own internal admin istration.

The Supreme Court of New Hampshire freely concedes, however, as it must, that the meaning of a federal statute is for this Court to decide. Congress enacted [26 U. S. C. §6323] to meet the harsh condition . . . that a secret federal tax lien was good against a purchaser for value without notice.

A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a "judgment creditor" should have the same application in all the states. In this instance, we think Congress used the words "judgment creditor" in [26 U. S. C. §6323] in the usual, conventional sense of a judgment of a court of record, since all states have such courts. We do not think Congress had in mind the action of taxing authorities who may be acting judicially as in New Hampshire and some other states, where the end result is something "in the nature of a judgment," while in other states the taxing authorities act quasi-judicially and are considered admin istrative bodies.

We conclude that whatever the tax proceedings of the Town of Walpole may amount to for the purposes of the State of New Hampshire, they were not such proceedings as resulted in making the Town a judgment creditor within the meaning of [26 U. S. C. §6323]. (Cites omitted.)

I now turn to the question of whether New Hampshire is a holder of a security interest. Since I have been unable to find any cases on point, I must determine the congressional intent of the statute.

Public Law 89-719, which amended 26 U. S. C. §6323, added the words "holder of a security interest." The question, which could not have been answered under Gilbert and which has not yet been answered definitively, is whether the State has the status of a "holder of a secured interest." Section 6323(h)(1) provides:

The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

The Senate Report which accompanied P. L. 89-719 elucidated this definition further.

(8) Definitions and special rules (sec. 6323(h) and (i) of the Code)

A number of terms relating to the provisions discussed to this point are defined in the bill. The more significant of these are discussed below.

(a) Security interest.--Under present law, mortgagees and pledgees are given priorities over tax liens, notices of which have not yet been filed. The bill, as previously indicated, applies this priority status to holders of a "security interest." A security interest is an interest in property acquired by contract for the purpose of securing payment or performance of an obligation or as indemnification against loss or liability. The term, which includes mortgagees and pledgees, is used to substantially conform the internal revenue laws in this respect to the terminology of the Uniform Commercial Code. It is intended that if a Federal tax lien is invalid against an initial holder of a security interest, it also is to be invalid to the same extent against any person who succeeds to the interest of the initial holder, whether by purchase or otherwise.

A security interest is considered as arising when the following conditions are met:

(1) the property is in existence and the interest is protected under local law against a subsequent judgment lien arising out of an unsecured obligation; and

(2) to the extent the holder has parted with money or money's worth.

For Federal tax purposes, a security interest is not considered as existing until the conditions set forth here are met even though local law may relate a security interest back to an earlier date and even though it might be an effective security interest as of the earlier date under the Uniform Commercial Code. 89 U. S. Code & Adm. News, 3-3734.

The 1966 Amendment to 26 U. S. C. §6323(a) was an attempt to more closely conform federal law to the Uniform Commercial Code. 89 U. S. Code & Adm. News, 3-3722 and 3-3724. Congress, in changing the term "pledgees" to the words "holders of security interests" did not intend to include noncommercial transactions such as state tax liens.

Congress very specifically provided for various kinds of transactions which would have priority even over filed tax liens. In doing so, they could have included state tax liens in general as they did tax assessments on real property. 26 U. S. C. §6323.

The comment to the amendment to Section 6323(a) in the Senate Report, supra, at 3724-3725 is not particularly helpful except insofar as it emphasizes the nominal nature of the change from "pledgees" to "holders of security interests."

The substitution of "holder of a security interest" for "mortgagee" and "pledgee" replaces the latter terms with a more general term used in the Uniform Commercial Code. More important, however, it is intended that, under the bill, the various types of interests defined in this provision are to have a priority over a nonfiled Federal tax lien if they come within the definitions of these terms (discussed in No. 8 below), whether or not in all other regards they are definite and complete at the time notice of the tax lien is filed.

The second sentence indicates that the concept of "choateness" would be abolished if the term "holders of secured interests" were to be applied broadly outside of commercial settings. If this transaction were to be held a "secured interest" within the meaning of the statute, it would be unnecessary to determine whether it was choate.

The statute also emphasizes the commercial nature of the term "holder of a security interest" by its requirement that the holder must have parted "with money or money's worth." 26 U. S. C. §6323(b)(6)(B).

Although it is true that a taxpayer parts with his money, and it could be argued that a state gives its citizens money's worth, these points are inapposite to the cases at hand. All taxes, both state and federal, involved in this litigation are collected by the businesses as agents of the respective governments. The businesses themselves are not paying the taxes for their own benefit. (The F. I. C. A. tax is paid in part directly by the employer, but the benefit is to the employee.) I, therefore, hold that the State is not a holder of a security interest.

Therefore, I must now determine which liens attached "first in time" without regard to perfection by notice. Equitable Life, supra; Pioneer American, supra; New Britain , supra; Vermont , supra.

In Hinkley & Donovan v. William D. Paine, III, et al, Civ. No. 76-19, Stipulation 5 states:

On January 9, 1975, the State of New Hampshire made an assessment for and demand for payment of amounts due under RSA 78-A . . ..

Stipulation 6(a) states:

On October 27, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Mt. Washington Hotel Corporation for unpaid withholding and Federal Insurance Contribution Act taxes . . ..

Stipulation 6(b) states:

On March 24, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Mt. Washington Hotel Corporation for unpaid Federal Unemployment Tax Act taxes . . ..

Therefore, the State's lien is "first in time," and the State would be entitled to summary judgment except for the reserved question of insolvency.

In The Exeter Banking Company v. Exeter Depot, Inc., et al, Civ. No. 76-104, Stipulation 2 states:

On March 17, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Exeter Depot, Inc., for unpaid Federal Insurance Contributions Act and withholding taxes, penalties and interest for the fourth quarter of 1974 in the total amount of $9,135.84. After application of all payments or credits made against said assessment, there remains due and owing upon said assessment the sum of $6,257.82, which sum is in excess of the fund before the Court.

Stipulation 6 states:

On August 25, 1975, a New Hampshire Tax Return, due July 31, 1975, reporting the amount of $3,944.00 as due from Exeter Depot, Inc., pursuant to RSA 78-A (meals and rooms taxes) for the quarter ending June 30, 1975 was completed by Thomas J. Burke, an officer of said corporation, and a verbal demand for payment of the amount shown as due was made at that time by an agent of the State. Said return was filed on August 28, 1975 together with a check in an amount equal to full payment of the amount shown on the return; however, said check was returned to the State of New Hampshire for lack of funds prior to September 23, 1975 . On September 23, 1975 at 2:30 p. m. the State of New Hampshire personally served notice of its assessment and made demand upon the taxpayer for payment . . ..

The United States is entitled to summary judgment in this case.

In Indian Head National Bank of Portsmouth v. United States of America and State of New Hampshire, Civ. No. 76-201, Stipulation 2 states:

On September 1, 1975 , a delegate of the Secretary of the Treasury of the United States of America made an assessment against Hart House, Inc. for unpaid Federal Insurance Contribution Act and withholding taxes, penalties and interest for the fourth quarter of 1974 in the total amount of $3,046.70. No payments or credits have been made against said assessment and there remains due and owing upon said assessment the sum of $3,046.70, which sum is in excess of the fund before the Court.

Stipulation 6 states:

On September 4, 1975, the State of New Hampshire personally served notice of assessments and made demands upon Hart House, Inc., d/b/a Hart House General Store and Aaron Conant Coffee Shop for payments of amounts due to be paid over pursuant to RSA 78-A (meals and rooms taxes) for the quarters ending March 31, 1975 and June 30, 1975, remaining unpaid in the net amount of $2,153.40, which amount reflects all payments and credits received to the date of assessment.

The United States is entitled to summary judgment in this case.

Attorney' Fees

26 U. S. C. §6323(b)(8) provides:

Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

* * *

--With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.

In United States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421 F. 2d 519 (2d Cir. 1970), the Court held that "a disinterested bankstakeholder is not entitled to attorney's fees from a fund when the total amount is insufficient to satisfy prior federal tax liens."

Id. at 521. I extend that holding to funds insufficient to pay state tax liens.

In Hinkley & Donovan v. William D. Paine, III, et al, Civ. No. 76-19, the Clerk will set a hearing on the reserved question of insolvency.

In The Exeter Banking Company v. Exeter Depot, Inc., et al, Civ. No. 76-104, and Indian Head National Bank of Portsmouth v. United States of America and State of New Hampshire, Civ. No. 76-201; Judgment for the United States is granted.

¹ If any operator required to collect and transmit a tax under this chapter neglects or refuses to pay the tax after demand, the amount, together with all penalties and interest provided for in this chapter and together with any costs that may accrue in addition to the tax becomes a lien in favor of the state upon all property and rights to property whether real or personal, belonging to the operator. The lien arises at the time demand is made by the commission and continues until the liability for the sum, with interest and costs, is satisfied or becomes unenforceable. Certificates of release of such lien shall be given by the commission on the satisfaction of the lien. NH RSA 78-A:21.

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

² Ironically, the result in Gilbert would now be different due to section 6323(b)(6) which provides in effect that towns with real estate liens have priority over a federal tax lien.

 

 

[76-2 USTC ¶9527]Lewis Carpet Mills, Inc., Plaintiff v. Meador Contracting Co., Inc., et al., Defendants

U. S. District Court, So. Dist. Ala. , So. Div., Civil Action No. 75-548-H, 6/10/76

[Code Secs. 6321 and 6323]

Lien for taxes: Priority: Lien against creditor.--Lewis Carpet Mills, Inc., a creditor of Spectrum Business Products, Inc., brought an action against Meador Contracting Co., Inc., which was indebted to Spectrum Business Products, for the amount owed by Meador. Meador paid this amount into court and interpleaded the U. S. which also claimed this money by way of a federal tax lien on the property of Spectrum Business Products for failure to pay taxes. While Lewis had an equitable lien upon this fund, such lien was found not to be choate. The properly filed and perfected federal tax lien, therefore, was entitled to priority. Meador Co.'s application for costs and attorneys' fees was also denied.

Alphonse Maples, Jr., 308-C Sage Ave. , Mobile , Ala. , for plaintiff. Mitchell G. Lattof, Christopher E. Peters, P. O. Box 432, Mobile, Ala., Edward J. Vulevich, Jr., Assistant United States Attorney, Mobile, Ala., for defendants.

HEAD, District Judge:

This matter comes before the Court on cross motion for summary judgment filed by plaintiff, Lewis Carpet Mills. Inc., and interplead defendant, United States of America . After having considered the pleadings in this cause, the affidavits, briefs and memorandums of law, and after having considered the applicable law, this Court finds as follows:

Findings of Fact

1. This cause was originally filed in the Circuit Court of Mobile County, Alabama on September 16, 1975 . On or about October 7, 1975 the defendant, Meador Contracting Co., Inc. filed an answer and counter-claim for interpleader seeking to join Spectrum Business Products, Inc. and the Department of the Treasury, Internal Revenue Service (the United States of America) by reason of conflicting claims of plaintiff, Lewis Carpet Mills, Inc., Spectrum Business Products, Inc. and the Department of Treasury, Internal Revenue Service.

On October 17, 1975 the Circuit Court of Mobile County, Alabama granted interpleader as to defendant, Spectrum Business Products, Inc. and defendant, Department of the Treasury, Internal Revenue Service; simultaneously discharging from any and all liability either in that action or otherwise with respect to the interplead funds, the defendant, Meador Contracting Co., Inc. The Circuit Court of Mobile County, Alabama, also awarded costs and attorneys fees, to be paid out of and deducted from the interplead funds, on behalf of the interpleading defendant, Meador Contracting Co., Inc.

2. On November 18, 1975 the United States of America , as interplead defendant, removed said cause from the Circuit Court of Mobile County, Alabama to the United States District Court for the Southern District of Alabama, Southern Division.

3. On January 8, 1976 the defendant, Meador Contracting Co., Inc., filed an "application for attorneys fees", the same having been carried with the trial of this cause. In this regard, it is to be noted that the defendant herein, Meador Contracting Co., Inc., asserts a claim for costs and attorneys fees against the fund to which the United States asserts a right. It is to be further noted that the Government claim is in excess of the fund paid into the Registry of this Court, hence, the Court finds that the stakeholder's attorneys fees and costs may not be awarded against the United States or against the fund paid into the Registry of this Court.

4. On April 8, 1976 defendant, Meador Contracting Co., Inc., filed an "application to Clerk for entry of default". On April 13, 1976 the Clerk of this Court entered a default as to the interplead defendant Spectrum Business Products, Inc. who had failed to file an appearance in this cause.

5. On the dates, in the amount, and for the taxable periods indicated below, a delegate of the Secretary of the Treasury made assessments for unpaid Withholding (WT) and Federal Insurance Contribution Act (FICA) taxes against taxpayer Spectrum Business Products, Inc., and gave notice and made demand for payment of said tax liabilities according to the following schedule:
(1) Failure to Deposit Penalty--26 U. S. C., §6656.

(2) Delinquency Penalty--26 U. S. C., §6651.

(3) Failure to Pay Tax Penalty--26 U. S. C., §6651.

(T) Amount of Tax Assessed.

(I) Amount of Interest Assessed.

** Plus Accrued Interest and Penalties According to law.

6. Spectrum Business Products neglected, failed, and refused to pay said assessments.

7. By virtue of the failure of the taxpayer Spectrum Business Products to pay the assessments set forth above, federal tax liens arose under the provisions of 26 U. S. C., Section 6321 on the date of each assessment and attached to all the property and rights to property belonging to Spectrum Business Products, Inc., including the fund of money interpleaded in this proceeding, $6,177.60.

8. The federal tax liens were perfected by proper filing on the dates indicated above.

9. Prior to February 20, 1974 , and continuously thereafter, Meador Contracting Company owed taxpayer Spectrum Business Products, Inc., $6,177.60, which remained unpaid as of the time of the filing of this lawsuit.

10. The federal tax liens of the United States attached to this right to property owned by Spectrum Business Products, Inc.

Conclusions of Law

1. Regarding the propriety of the "application for costs and attorneys fees" filed by counsel for Meador Contracting Company, Inc., this Court concludes that there is no authority to grant said costs and attorneys fees since the fund paid into the Registry of this Court is substantially less than the tax lien claimed by the Government. Security State Bank of Pharr, Texas v. Uhlhorn [64-1 USTC ¶9247], 325 F. 2d 92, cert. den. 84 S. Ct. 1334, 377 U. S. 931, 12 L. Ed. 2d 296 (5th Cir. 1963); Spinks v. Jones [74-2 USTC ¶9657], 499 F. 2d 339, 340 (5th Cir. 1974).

2. Regarding the entry of default by the Clerk of this Court on April 13, 1976, this Court is of the opinion and concludes that judgment by default be entered in favor of Meador Contracting Company, Inc., and against the interpleaded defendant Spectrum Business Products, Inc. for failure to appear and defend.

3. The United States of America has a valid federal tax lien by virtue of the assessments set forth in Paragraph IV of its Answer on all the property and rights to property of the defendant Spectrum Business Products, Inc., including the $6,177.60, interpleaded in this action.

4. Plaintiff, Lewis Carpet Mills, Inc., has shown sufficient grounds to establish an equitable lien upon the proceeds interpleaded in this action, however, it cannot be said to be a choate lien under federal law and hence is not entitled to priority over a properly filed and perfected tax lien. United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957).

5. The United States of America is entitled to priority over plaintiff, Lewis Carpet Mills, Inc., to the interpleaded fund under Title 26, U. S. C.., §6323.

6. The United States of America is entitled to a judgment of foreclosure against the property and rights to property of the taxpayer-defendant, Spectrum Business Products, Inc.

7. The United States of America is entitled to summary judgment as prayed for in its motion and a judgment awarding it $6,177.60 from the Registry of this Court.

Order

In accordance with the Findings of Fact and Conclusions of Law entered by this Court in this cause, this Court is of the opinion that judgment by default is due to be and the same is hereby entered on the Clerk's default dated April 13, 1976 against interplead defendant, Spectrum Business Products, Inc. and in favor of Meador Contracting Co., Inc. for $6,177.60.

That the motion of the plaintiff for summary judgment is DENIED and the cross-motion of the United States of America for summary judgment is due to be and the same is hereby GRANTED.

That the United States of America be granted a judgment of foreclosure against the $6,177.60 interplead in this action and in the possession of the Court and that the Clerk of this court is ORDERED to pay said sum of $6,177.60 immediately to the United States of America . Costs in this proceeding are to be taxed against defendant, Meador Contracting Co., Inc.

 

 

[74-2 USTC ¶9842]Hill and Company, Plaintiff v. United States of America, Internal Revenue Service; Eve, Inc., dba Wilmark Insurance Agency; Wilmark Insurance Agency; Mark H. Kroll, Defendants

U. S. District Court, So. Dist. Ohio , West. Div., No. 7930, 8/23/74

[Code Sec. 6331]

Levy and distraint: Shared identity: Stocks given to government.--The interpleader-plaintiff, which held stock levied upon by the IRS, was required to turn the stock certificates over to the government, since the government's tax lien was valid and the holder shared identities with the taxpayer. Furthermore, the plaintiff's claim for attorney's fees was dismissed.

Alan R. Vogeler, 1313 Provident, Cincinnati , Ohio , for plaintiff. Ralph Winkler, Assistant United States Attorney, Cleveland, Ohio, Sylvan P. Reisenfeld, 700 Executive Bldg., Cleveland, Ohio, Rob ert E. Sevila, Department of Justice, Washington, D. C. 20530 for defendant.

Findings of Fact and Conclusions of Law

PORTER, District Judge:

As indicated by the government's post-trial memorandum (document 32), this is an action on a complaint for interpleader filed by Hill and Company April 9, 1971 . In its complaint Hill and Company alleges that it received notices of levy served by the Internal Revenue Service seeking to collect the outstanding tax liabilities of Wilmark Insurance Agency and Mark H. Kroll.

Kroll is a resident of the United States Penitentiary at Atlanta , Georgia , and his deposition was taken and is on file. Besides Kroll and the United States of America , the defendants are Eve, Inc., dba Wilmark Insurance Agency, and Wilmark Insurance Agency.

Certain certificates of stock are involved, and the defendant Eve, Inc., in its answer alleged that such certificates belong to Eve, Inc., and not the defendant Mark H. Kroll and Wilmark Insurance Company. The United States in its answer admitted the notice of levy and affirmatively alleged that the defendant Wilmark Insurance Agency was indebted to the United States in the amount of $64,737.51, plus interest. The United States filed a cross-claim also. In this it alleged that the certificates of stock interpled by the plaintiff were the property of Eve, Inc., which was wholly owned by the defendant Mark H. Kroll.

As to the facts, the Court finds that they are as stipulated in document 30 herein. There are also stipulations of documents (document 31). Such stipulations are hereby adopted and incorporated herein as if set forth in their entirety.

As the government states in its post-trial memorandum (document 32, p. 2), the questions presented are three in number. The first is whether the plaintiff's interpleader action is proper. The second is whether the United States is entitled to recover on its cross-claim. The third is whether the plaintiff is entitled to recover its attorney fees in this action.

The government makes out a strong case in support of its claim that on its face this is not an appropriate case for interpleader relief, because Hill and Company has not alleged fear of multiple liability from the adverse claimants. Furthermore, the government points to §6331 of the Internal Revenue Code of 1954 (document 32, p. 2), which government levy and distraint, and §6332 of the Internal Revenue Code of 1954, which governs the duties of a party receiving an Internal Revenue Service notice of levy, stating correctly that this section contains the only judicially recognized exceptions to the absolute requirements of §6331. Id. , p. 4. The two limitations on the power of levy are satisfied in this case. Nevertheless, plaintiff did not comply with the levy, but instead filed this interpleader action.

The Court cannot, however, conclude that the plaintiff was not fearful of multiple liability because of the incarceration of Mark H. Kroll and the implications thereof.

We have not overlooked the government's assertion that §6323(d) insulates the plaintiff from multiple liability (document 32, p. 13). In short, we understand why the plaintiff sought the protection of a court order.

The Court's order is that the plaintiff turn over the stock to the United States of America , though we think plaintiff could probably have been made to comply with the levy. We find that each of the three claimants named as defendants in the complaint shares its identity with the taxpayer named in the notice of levy served upon the plaintiff. Eve, Inc., is nothing but a shell corporation. No stock was ever issued. It was organized so that Mark H. Kroll could get a loan. He needed a corporate entity for that purpose because he could not get it on his own signature. In addition, Eve, Inc., adopted the trade name Wilmark Insurance Agency (paragraph 6 of stipulation of facts (document 30)). In view of this and the other facts reflected in the stipulation made a part hereof, the Court concludes the stock on which the government made a levy belongs to the taxpayers named therein.

The government's position is double-barrelled in that it has made out a case on its cross-claim. In such cross-claim the United States alleges that in the event the certificates of stock are awarded to the claimant Eve, Inc., they should still be subject to the federal tax lien because such corporation belongs to the taxpayer Mark H. Kroll, lock, stock and barrel. As noted above, it was a shell corporation organized solely to enable Kroll to get a loan which he would otherwise not have been able to get. In other words, it was just a "front" for Kroll, the taxpayer.

That leaves for determination whether the plaintiff is entitled to attorney fees. The government cites ample authority for its contention that the law on this subject is that an interpleading stakeholder is not entitled to recover attorney fees from a fund when the total amount in that fund is insufficient to satisfy prior federal tax liens. The government cites a number of cases in support of this principle. United States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421 F. 2d 519 (2 Cir., 1970); United States v. Liverpool & London Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United States v. R. F. Ball Construction Co., [58-1 USTC ¶9327], 355 U. S. 587 (1958) (per curiam); United States v. Wilson [64-1 USTC ¶9396], 333 F. 2d 148 (3 Cir., 1964); Seaboard Security Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855, 860 (9 Cir., 1962); United States v. L. T. D. Corporation, 25 Am. Fed. Tax R. 2d 70-459 (E. D. Pa., 1970); United States v. Admr. of Estate of Helen G. McCall, 25 Am. Fed. Tax R. 2d 70-413 (M. D. Pa., 1969); Narragansett Bay Gardens, Inc. v. Grant Const. Co. [59-2 USTC ¶9557], 176 F. Supp. 451, 455 (D. R. I., 1959); Ford Motor Co. v. Hackart Construction Co., Inc. [56-2 USTC ¶9831], 143 F. Supp. 216 (N. J., 1956); United States v. Ray-Thomas Gravel Co. [64-2 USTC ¶9529], 380 SW 2d 576 (Tex., 1964); Commercial Standard Ins. Co. v. Campbell [58-1 USTC ¶9477], 254 F. 2d 433 (5 Cir., 1958); United States v. Gurley [69-2 USTC ¶9562], 415 F. 2d 144 (5 Cir., 1969); United States v. Chapman [60-2 USTC ¶9667], 381 F. 2d 862 (10 Cir. 1960); Bjork v. United States [73-2 USTC ¶9689], 486 F. 2d 939 (7 Cir., 1973).

On the other hand, the plaintiff has not cited the Court to any authority fot the payment of attorney fees in a case such as this. On that state of the record, we must accept the government's contention that plaintiff is not entitled to recover attorney fees from the stock because it is insufficient to satisfy a prior federal tax lien against it. We recognize however that plaintiff's counsel has performed a distinct service to his client, because, though apparently insulated from suit by §6323(d) of the Internal Revenue Code of 1954, discretion dictated that it be very careful to forclose any later claim against it by either of the two corporate defendants or the individual defendant. The stock was worth approximately $5,280 (based on March 16, 1971 purchase price) and the amount of the levy has already been mentioned herein. Also, as of May 13, 1974 , the stock was only worth $1,902. Hence, the plaintiff is not being treated inequitably in denial of attorney fees, because in the circumstances the government could assert that the interpleader action resulted in vexatious and unreasonable delay to it in recovering the interpleaded stock. Cf., John Hancock Mut. Life Ins. Co. v. Beardslee, 218 F. 2d 457 (7 Cir., 1954).

In sum, the Court concludes that the tax liens and levies of the United States against the interpleaded stock are prior and superior to all other claims against that stock and the plaintiff will be ordered to surrender such shares of stock to the United States . However, we feel it would be inappropriate to order plaintiff to pay any of the government's losses, concluding that grounds therefore have not been established, and, on the government's own statement, it could have minimized its losses by enforcing compliance with its levy early in the game.

An order consistent with this opinion should be prepared and submitted for approval.

Judgment

In accordance with the Findings of Fact and Conclusions of Law entered in this action on August 23, 1974 , it is hereby

ORDERED and ADJUDGED

(1) That in view of the claim of the United States to enforce its liens for unpaid taxes, this Court has jurisdiction to hear this action pursuant to Section 7402(a) of the Internal Revenue Code of 1954, (26 U. S. C., Section 7402).

(2) That the United States has valid, enforceable federal tax liens against the 3,804 shares of the capital stock of Polar-Vac Industries, Inc., made the subject of this action, and presently held by the plaintiff Hill and Company, in the name of Wilmark Insurance Agency.

(3) That the levies of the Internal Revenue Service against these shares of stock, as served on the plaintiff on August 5, 1971, are valid, and the plaintiff is directed to honor those levies by promptly surrendering the certificates for these shares of stock to the District Director of Internal Revenue, who will sell the stock in accordance with statute and apply the proceeds of the sale to the underlying tax liabilities.

(4) That all other claims, including the claim of Eve, Inc., and the plaintiff's claim for a counsel fee, are dismissed, with each party to bear its own costs.

 

 

[74-2 USTC ¶9786]The United States of America, Petitioner v. Raymond Hamlin, Jr., Sheriff, Leon County, Florida, Plaintiff v. J. H. Dowling, Inc., a Florida corporation, Defendant

U. S. District Court, No. Dist. Fla., Tallahassee Div., Civil Action No. 74-63, 10/4/74

[Code Sec. 6323]

Priority of liens: Tax lien: Attorney's fees: Priority of creditors.--In determining the priorities of liens to an interpleaded fund, the Court held that attorney's fees incurred by the creator of the fund had priority over the claim of the United States under a tax lien recorded before the creditor-creator obtained a judgment against the debtor. However, the court held that the sheriff-stakeholder was not entitled to recover attorney's fees. Further, the United States was entitled to a judgment for the remainder of the fund.

Clinton Ashmore, Assistant United States Attorney, Tallahassee , Fla. , for petitioner. W. Dexter Douglas, P. O. Box 1674 , Tallahassee , Fla. , for plaintiff. Doak S. Campbell, III, 134 W. Pensacola , Tallahassee , Fla. , for defendant.

Memorandum--Order

WEST, District Judge:

Pre-trial conference was held this day with counsel for all parties present.

The Court considered the motion of the United States for summary judgment. After hearing arguments the Court partially granted and partially denied the motion as follows:

This suit involves the sum of $3,190.88 deposited in the registry of the court as proceeds of the sale of property of the debtor Densco, Inc. The United States claimed it had a right to all this money pursuant to a prior recorded tax lien. The defendant Raymond Hamlin, the Sheriff who deposited the funds and filed an interpleader, sought to recover attorney fees out of the funds. The defendant J. H. Dowling, Inc., who secured a judgment subsequent to the government's lien and who levied and executed against property of Densco created the impounded funds and seeks to recover an attorney fee out of those funds.

It is the opinion of the Court that the defendant Raymond Hamlin, as the stakeholder, is not entitled to recover attorney fees and the Government's motion for summary judgment as to that claim will be granted. See Spinks v. Jones [74-1 USTC ¶9276] (74-1373-CA5-Aug. 23, 1974). The Court is of the opinion that equity requires the recovery of attorney fee by the creator of the fund, J. H. Dowling, Inc., and the Government's motion for summary judgment in its favor in that respect will be denied.

It is the opinion of the Court that a summary judgment in favor of J. H. Dowling Inc. in the sum of $797.72, or 25 per cent of the fund created, to be paid out of the fund should be granted. See U. S. v. Kamieniecki [67-1 USTC ¶9133], 261 F. Supp. 683 (1966); U. S. v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197 (CA 5-1963).

A final judgment will be entered in accordance with the opinion herein expressed.

Summary Final Judgment

This cause came on to be heard on motion of the United States of America for a summary judgment against the interpleaded fund filed in the Registry of the Circuit Court of Leon County, Florida, said action being removed to this Court under Title 28, Section 1444, United States Code; and the Court finding there is no genuine issue of any material fact and that the United States is entitled to a judgment in the sum of $3190.88, subject, however, to the allowance of an attorney's fee for creating the interpleaded fund, and the Court being advised, it is

ORDERED

1. That Doak S. Campbell III, Attorney for J. H. Dowling, Inc., is allowed an attorney's fee in the sum of $797.72.

2. That the application for attorney's fee by Raymond Hamlin, Jr., as Sheriff of Leon County, is hereby denied.

3. That the United States of America have judgment for the balance of the fund in the sum of $2,393.16.

4. That the Clerk of the Circuit Court of Leon County, Florida, is ordered and directed to distribute the fund as above set forth.

 

 

[74-1 USTC ¶9279]Stewart Title Company, Plaintiff v. Midwest Federal Savings and Loan Association; Leon Construction Company; Citizens Mortgage Company; and The United States of America, Defendants

U. S. District Court, So. Dist. Tex., Houston Div., Civil Action No. 71-H-964, 11/28/73

[Code Sec. 6323]

Liens: Unpaid taxes: Priority of liens: Interpleader.--Federal tax liens against a construction company had priority over insufficiently perfected claims of other creditors against funds held by a title company under a "hold-back" financing agreement between the construction company and a mortgage company. Title to such funds vested in the construction company which later filed bankruptcy. Further, no attorneys' fees were payable from the interplead fund which was less than the amount of the federal tax liens.

Charles E. Fitch, De Lange, Hudspeth, Pitman & Katz, 2454 Houston Natural Gas Bldg., Houston, Tex., for plaintiff. Fred A. Collins, 1220 Southwest Tower, Houston, Tex., for Citizens Mortgage Co., Midwest Fed. Savings & Loan Ass'n, Rob ert C. Maley, Jr., 2130 Two Shell Plaza, Houston, Tex., for Leon Const. Co., for defendants. Olney G. Wallis, Assistant United States Attorney, Houston , Tex. , for U. S.

Findings of Fact and Conclusion of Law

SINGLETON, Jr., District Judge:

The Court having carefully considered the pleadings in this cause, the stipulations of the parties entered herein, and the evidence adduced at trial, hereby enters its Findings of Fact and Conclusions of Law pursuant to Rule 52, Federal Rules of Civil Procedure:

Findings of Fact

1. Leon Construction Company, a Texas corporation, obtained a written commitment from Citizens Mortgage Company to provide $1,500,000.00 permanent financing on an apartment project located in Houston , Texas , called the Valle Alto Aprtments.

2. Stewart Title Company was to act as disbursing agent for the loan proceeds.

3. The permanent financing was funded by Citizens Mortgage Company and the loan closed on March 8, 1971, and Citizens Mortgage Company delivered to Stewart Title Company $1,500,000.00 for disbursement.

4. At closing, Leon Construction Company signed a promissory note to Citizens Mortgage Company for $1,500,000.00.

5. Out of the $1,500,000.00, $27,500.00 was deposited with Stewart Title Company pursuant to a "hold-back" agreement.

6. After closing, Leon Construction Company was the sole owner of the $27,500.00 fund.

7. It was the intention of Leon Construction Company and Citizens Mortgage Company that Citizens Mortgage Company should exercise no ownership rights in the $27,500.00 fund.

8. Leon Construction Company was not given an offset to its note for $1,500,000.00, and Citizens Mortgage Company charged Leon Construction Company interest on the full amount of $1,500,000.00.

9. Citizens Mortgage Company assigned the $1,500,000.00 promissory note and security instruments to Midwest Federal Savings and Loan Association of Minneapolis, and Citizens Mortgage Company continued to service the loan.

10. The "hold-back" agreement provided no date for compliance, and no requirement to perform work on the part of Leon Construction Company.

11. On June 25, 1971 , liens of the Internal Revenue Service against taxpayer Leon Construction Company in an amount in excess of $27,500.00 were filed with County Clerk of Harris County, Texas.

12. To date, the liens of the Internal Revenue Service, referenced above, have not been released or otherwise discharged.

13. Citizens Mortgage Company, purchased the Valle Alto Apartments at a foreclosure sale held on July 6, 1971 , for the sum of $1,555,000.00.

14. At this foreclosure sale, Citizens Mortgage Company received the full benefit of its bargain with Leon Construction Company.

15. On January 4, 1972 , Leon Construction Company filed a voluntary petition in bankruptcy in the United States District Court for the Southern District of Texas, Houston Division.

16. On February 1, 1972 , Daniel L. O'Connell was duly appointed as the Trustee in Bankruptcy for Leon Construction Company.

17. Demand was made on Stewart Title Company for the sum of $27,500.00 by Midwest Federal Savings and Loan Association, Leon Construction Company, Daniel E. O'Connell, Trustee of the estate of Leon Construction Company, and the United States of America, and the Court finds that Stewart Title Company properly instituted this interpleader action, and deposited the $27,500.00 in the Registry of the Court.

18. Other tax liens were filed by the Internal Revenue Service and an Internal Revenue Service levy was served upon Stewart Title Company on July 20, 1971 .

19. The Valle Alto Apartments are now completed and occupied.

Conclusions of Law

1. This interpleader action is properly brought by Stewart Title Company under the provisions of 28 U. S. C. §1335, and this Court has jurisdiction of this cause.

2. Title to the $27,500.00 fund vested in Leon Construction Company on March 8, 1971 , the date of closing, and Leon Construction Company has not been divested of such title.

3. If Midwest Federal Savings and Loan Association has a claim against Leon Construction Company, such claim was not sufficiently perfected under Federal standards to prime the federal tax liens, which tax liens became effective in an amount exceeding $27,500.00 on June 25, 1971.

4. The Federal tax liens against the $27,500.00 fund are entitled to priority over any claim by Midwest Federal Savings and Loan Association of Minneapolis, Citizens Mortgage Company, Leon Construction Company, and Daniel L. O'Connell, Trustee.

5. No attorneys' fees are payable from the interplead fund.

6. The Clerk of this Court should pay over the entire fund of $27,500.00 to the Internal Revenue Service, which money shall be applied as a credit to the taxes of Leon Construction Company.

 

 

[71-1 USTC ¶9458]First National Bank of Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al., Defendants First National Bank of Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al., Defendants First National Bank of Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al., Defendants

U. S. District Court, East. Dist. Va., Norfolk Div., C/A 812-70-N, 813-70-N, 814-70-N, 327 FSupp 196, 5/21/71

[Code Secs. 6323 and 6331--Result unchanged by '69 Tax Reform Act]

Lien for taxes: Validity of lien: Levy and distraint: Notice of levy: Attorney's fees: Interpleader.--The notice of levy served on taxpayer's debtor on September 8, 1970 operated to transfer the right to receive payment on this debt to the United States. Since a bank's judgments against taxpayer did not become liens-until September 14, 1970 , the United States had a valid, perfected lien when the bank became a judgment lien creditor. The fact that the government did not file a notice of its tax lien with the appropriate state authority until September 24, 1970 did not affect this result since a validly invoked levy to enforce a tax lien effects a seizure that is tantamount to a transfer of ownership. Furthermore, the debtor was not entitled to attorney's fees because when the government prevails, an interpleader is not entitled to have these fees taxed as costs if the federal lien exceeds the amount of the interpleaded fund.

Frederick M. Quayle, Suite 1000 Maritime Tower, P. O. Box 3183, Norfolk, Va., for plaintiff. Williams, Worrell, Kelly & Worthington, 1700 Virginia Nat'l Bldg., Norfolk , Va. , for garnishees. Brian P. Gettings, United States Attorney, Norfolk , Va. , for defendant.

Judgment

KELLAM, District Judge:

These actions began as garnishment proceedings in the Civil Court of the City of Norfolk, but were removed to this Court by the United States pursuant to 28 U. S. C. §1441 and related sections. The garnishee, Norfolk and Western Railway Co., interpleaded the sum of $7,042.14, which it owed to Delva, Inc., the judgment debtor, because both the United States and the First National Bank of Norfolk asserted claims to the money. The question here is whether the United States or the Bank is entitled to the fund which Norfolk and Western has deposited with the Clerk of this Court.

All the relevant facts in this case have been stipulated by the parties. In September 1969, the Internal Revenue Service made an FHUT assessment against Delva, and in June 1970, Delva was assessed for FICA taxes for the first quarter of 1970. On July 10, 1970 , the Internal Revenue Service made an additional assessment against Delva for a bad check penalty. Thereafter, on September 4, 1970 , the District Director served a Notice of Levy, in the amount of $1,119.00 on the Norfolk and Western which was indebted to Delva for $7,042.14 for services performed. Norfolk and Western was served with an amended Notice of Levy on September 8, 1970 , in the amount of $7,832.06. The Internal Revenue Service did not file a notice of its tax lien with the Clerk of the State Corporation Commission until September 24, 1970 .

On September 1, 1970 , First National Bank of Norfolk obtained three judgments on promissory notes in the Civil Justice Court ; with attorneys' fees and court costs, the total sum was $7,664.07. The Bank served garnishment summonses on Norfolk and Western on September 14, 1970 .

With both the Bank and the United States claiming the fund, Norfolk and Western interpleaded its debt to Delva, pursuant to Code of Virginia §8-226 (1950). The United States was added as a party and the cases were removed to this Court.

Initially, it is clear that the Bank's judgments did not become liens on Norfolk and Western's indebtedness to Delva until September 14, when the garnishment summonses were issued. Code of Virginia §§ 8-411, 8-441 (1950). The right to the fund deposited by Norfolk and Western, then, depends on whether the United States had a valid, perfected lien when the Bank became a judgment lien creditor.

The Internal Revenue Code, 26 U. S. C. §6321, gives the United States a lien on all property, real or personal, belonging to any person who refuses or neglects to pay any federal tax after proper demand for payment. The lien attaches at the time the assessment is made and continues until the tax liability is satisfied. 26 U. S. C. §6322. However, 26 U. S. C. §6323(a) provides that the lien imposed by section 6321 is not valid against purchasers, holders of security interests, mechanic's lienors or judgment lien creditors until notice of the lien is filed in accordance with section 6323(f). In the case of personal property, whether tangible or intangible, section 6323(f)(1)(A)(ii) requires that the notice of lien be filed in one office, designated by the law of the state in which the property subject to the lien is situated. The Virginia statute designating the place for filing is the Uniform Federal Tax Lien Registration Act, Code of Virginia §55-142.1 et seq., which has been in effect since July 1, 1970 . The relevant subsection, Code of Virginia §55-142.1(b), provides:

Notices of liens upon personal property, whether tangible or intangible, for taxes payable to the United States and certificates and notices affecting the liens shall be filed as follows:

(1) If the person against whose interest the tax lien applies is a corporation or a partnership whose principal executive office is in this state, as these entities are defined in the internal revenue laws of the United States , in the office of the clerk of the State Corporation Commission.

In the absence of the Notices of Levy served September 4th and September 8th, the Bank would clearly prevail and be entitled to all of the fund; however, when the amended Notice of Levy was served on September 8, 1970 , the Bank was not a judgment lien creditor with respect to Norfolk and Western's indebtedness to Delva. If, as the United States contends, the Notice of Levy operated to transfer Norfolk and Western's debt to Delva to the United States on September 8, then the Bank's judgments, which did not become liens until September 14, are actually worthless since Norfolk and Western had not been indebted to Delva since September 8, 1970.

Factually, these cases are substantially the same as that in United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (4th Cir. 1955). Here, as in Eiland, what we are concerned with is a levy on "an indebtedness with service of notice upon the debtor, the effect of which is to transfer to the United States the right to receive payment of the indebtedness up to the amount of the tax." 223 F. 2d at 120.

When a taxpayer fails to pay the taxes assessed and due, 26 U. S. C. §6331 authorizes assertion of the lien granted by section 6321, by levy on all the taxpayer's property except that specifically exempted by section 6334. The "proper way to assert the lien is by levy and notice such as was served here." Where "the Director serves notice upon the debtor stating that the money 'is seized and levied upon' for the payment of the tax and that demand is made upon the debtor for the amount necessary to satisfy the tax, he is serving a 'warrant of distress.'" [223 F. 2d 121]. Once the levy is made, the person controlling the property levied on is obligated to surrender the property to the Secretary of the Treasury. In this respect, the Court of Appeals stated in Eiland:

Prior to levy and notice, the debtor may discharge his debt by payment to the creditor, whatever may have been filed in the clerk's office; thereafter it may be discharged as to the amount of the tax, only by payment to the Director. 223 F. 2d at 122.

Any person in possession of property on which levy has been made, who surrenders the property to the Secretary is "discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment." 26 U. S. C. §6332(d).

Here, levy was made pursuant to section 6331 on Form 668-A, and notice is part of this record. The Notice of Levy, served on Norfolk and Western recited that the taxpayer, Delva, had failed to pay an assessed tax. The Notice also stated:

Accordingly, you are further notified that all property, rights to property, moneys, credits, and bank deposits now in your possession and belonging to this taxpayer (or with respect to which you are obligated) and all sums of money or other obligations owing from you to this taxpayer, or on which there is a lien provided under Chapter 64, Internal Revenue Code of 1954, are hereby levied upon and seized for satisfaction of the aforesaid tax, together with all additions provided by law, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth herein, or for such lesser sum as you may be indebted to him, to be applied as a payment on his tax liability. (emphasis added).

Under substantially the same factual situation in Eiland, the Court of Appeals held that levy was an appropriate means for the United States to assert a tax lien.

Counsel for the Bank argues that the continued vitality of Eiland is questionable in light of 26 U. S. C. §6323(a), (f) and the Uniform Federal Tax Lien Registration Act. Nothing in either statute, though, indicates that such filing of notice of the tax lien is required where there is a levy pursuant to section 6331. Had Norfolk and Western paid the $7042.14 to the United States when the Notice of Levy was served, the debt to Delva would have been extinguished; nothing would have been left to satisfy the Bank's judgment lien after it was perfected on September 14, 1970 . 26 U. S. C. §6332(d). Why, then, should the fact that Norfolk and Western did not pay the indebtedness before September 14, have any effect on the validity of the levy? The simple answer is that the result is unchanged. A validly invoked levy to enforce a tax lien effects a seizure that is tantamount to a transfer of ownership. See United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3d Cir. 1964). In Eiland, the Court of Appeals stated:

A creditor ordinarily perfects a lien upon a debt by attachment and garnishment with service of notice thereof upon the debtor. * * * When this has been properly done, the effect thereof is to give to the attaching creditor a lien upon the indebtedness for the amount necessary to satisfy the judgment rendered in the proceedings in his favor. The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. * * * [C]onsequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt. 223 F. 2d at 121-22.

Neither 26 U. S. C. §6323(a), (f) nor the Uniform Federal Tax Lien Registration Act have any effect on this statement of the law relating to the effect of levy pursuant to 26 U. S. C. §6331.

As was pointed out in Eiland, the federal and state statutes relative to recording the claim "have reference to tangible property, which left in the possession of taxpayer may serve as a basis of credit, and as to which the taking of possession by a lien claimant is generally held equivalent to the recording of lien. * * * [I]t would be unreasonable to apply their provisions to debts, since debtors could not be expected to search the clerk's office before paying a debt, to see whether or not tax liens had been filed against their creditors, nor could banks be expected to make such search before honoring checks drawn on deposits. * * * Prior to levy and notice, the debtor may discharge his debt by payment to the creditor, whatever may have been filed in the clerk's office . . ." Accordingly, the United States is entitled to the entire fund deposited with the Clerk since the tax assessment exceeds that amount.

The remaining question is whether the Interpleader Norfolk and Western Railway is entitled to have its attorneys' fees taxed as costs. When the United States prevails, an Interpleader is not entitled to have its attorneys' fees taxed as costs if the federal lien exceeds the amount of the interpleaded fund. Such an allowance would diminish the amount of the government's prior lien. See United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. McCall's Administrator [70-1 USTC ¶9183], 313 F. Supp. 1399 (M. D. Pa. 1969). Norfolk and Western's application for attorneys' fees and costs will be denied. Counsel for the United States will present an appropriate order on judgment in this cause within twenty days.

 

 

[70-1 USTC ¶9254] United States of America v. L. D. T. Corporation, Elaine C. Leibowitz, Executrix of the Estate of Martin G. Stein, William C. Stein, Alco Auto Parts, Inc., and The First Pennsylvania Banking and Trust Company

U. S. District Court, East. Dist. Pa. , Civil Action No. 33285, 422 F2d 341, 1/8/70

[Code Sec. 6323(h)(1)]

Lien for taxes: Priority: Security interest: Failure to file: Pennsylvania.--The Government's tax lien had priority over a claimed security interest in funds belonging to a delinquent taxpayer had by a bank. The claimed security interest was not perfected under Pennsylvania law (1958 version of the Uniform Commercial Code) by filing.
[Code Sec. 6323(a)]

Lien for taxes: Priority: Judgment creditor.--The Government's tax lien had priority over a judgment lien since the judgment lien did not arise until after notice of the government's lien had been recorded.

[Code Sec. 6323]

Lien for taxes: Interpleader: Attorney fees.--Attorney fees of an interpleading bank were not allowed against a fund which was subject to a federal tax lien.

Louis C. Bechtle, United States Attorney, Merna B. Marshall, Assistant United States Attorney, Philadelphia, Pa., for plaintiff. M. Mark Mendel, Jerome M. Dubyn, 1440 Philadelphia Saving Fund Bldg., Philadelphia, Pa., for L. T. D. Corp., E. C. Liebowitz; Thomas B. Harper, III, Stradley, Ronon, Stevens & Young, 1300 Girard Trust Bldg., Philadelphia, Pa., for Alco Auto Parts, Inc.; Eugene F. Waye, Saul, Ewing, Remick & Saul, 23rd Floor, Packard Bldg., Philadelphia, Pa., for First Penna. Bank & Trust; defendants.

Memorandum and Order

FULLAM, District Judge:

This is an action to reduce federal tax assessments against the L. D. T. Corporation to judgment, and to satisfy that judgment out of a fund held by The First Pennsylvania Banking and Trust Company. Elaine C. Leibowitz, executrix of the estate of Martin G. Stein, and William C. Stein, as well as Alco Auto Parts, Inc., also have claims to the fund held by the bank.

Prior to trial, the parties executed a stipulation covering matters of jurisdiction and the majority of the operative facts.

Findings of Fact

1. On or before May 29, 1958 , the United States made five tax assessments, gave notice thereof, and demanded payment from the taxpayer, the L. D. T. Corporation. The aggregate amount of these assessments is $11,426.74. (Stipulation, ¶4).

[Notice Filed]

2. Notice of the federal tax lien covering each of the assessments mentioned above was filed with the office of the Prothonotary, Philadelphia County , Pennsylvania , on August 18, 1958 at 9:13 a. m. Eastern Daylight Saving Time.

[Assignment of Funds]

3. On August 18, 1958 , earlier than 9:00 a. m., the L. D. T. Corporation executed an assignment to Martin G. Stein of its funds held by The First Pennsylvania Banking and Trust Company in a reserve account of the time-sales division.

4. On August 18, 1958 , Martin G. Stein sent a letter to the L. D. T. Corporation confirming the fact that his claim to the funds in the reserve account was limited to $3,500, for legal services previously rendered to the corporation.

5. The intent of the parties to the assignment was to create a security interest in the fund.