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There is still to be considered the conflicting claims of the Bonding Company, the unpaid claimants, and the Government tax lien as to the amount of the unpaid balance exceeding the required ten percent. The Bonding Company asserts priority as to that sum over the Government tax liens by virtue of an assignment from the Contractor. The bond application by the Contractor to the Bonding Company executed March 3d, 1958 , contained an assignment by the Contractor to the Bonding Company of all amounts to become due it under the contract as security for any liabilities incurred by the Bonding Company under the bond.

The Bonding Company has made payments to those who furnished labor and materials for the improvement, and who were not paid by the Contractor, in excess of the amounts here involved. The assignment by the Contractor was to secure the Bonding Company against future liability. An assignment to secure against future liability will not prevail against a Government tax lien. United States v. F. R. Ball Construction Co., Inc. (1958) [58-1 USTC ¶9327], 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 510. This Court discussed that case in Randall v. Colby (1961) [61-1 USTC ¶9178], 190 F. Supp. 319, 338 et seq. It seems clear that the claim of the Bonding Company to the unpaid balance of the contract price under its assignment is inferior to the claim of the Government under its tax lien.

In the case of Randall v. Colby, supra, this Court stated (p. 335) its view as to the present state of the law in regard to the status of a Federal tax lien in connection with the unpaid balance of the contract price for the construction of an improvement as follows:

"It seems clear that under the Federal law once a right arises in favor of a contractor against whom a Federal tax lien is outstanding to a portion of the contract price, the tax lien attaches to that portion immediately. It would also seem clear that once a Federal tax lien has attached to such a portion it is no longer a part of the balance 'due' the contractor but is 'due' to the Government. Under the rule of the Aquilino and Durham cases, in order for a Federal tax lien against a contractor to attach to the conract price there must have been a time at which the owner is not entitled to take credit on the contract price for the claims of the subcontractors. On the other hand, if there was a time when the owner was not entitled to take credit for claims of subcontractors out of the contract price and the contractor against whom a tax lien was outstanding would have had the right, save for the tax lien, to demand and receive payment of the balance of the contract price, then the tax lien would attach to the balance due on the contract price."

In order for the Government's tax lien to attach to the unpaid balance here involved, there must have been a time after the lien came into existence when the balance, or a portion thereof, was due the Contractor and could have been paid by the Owner to the Contractor, save for the tax lien, without incurring liability for so doing.

It is the claim of certain of the defendants that the amount in question never has become due because of Article 32 of "General Conditions of the Contract for Construction of Buildings" which is incorporated by reference in the contract between the Owner and the Contractor and provides, in part, as follows:

"Neither the final payment nor any part of the retained percentage shall become due until the contractor, if requested, shall deliver a complete release of all liens arising out of this contract. * * *"

It is clear that the Contractor, because of its bankrupt condition, cannot itself ever deliver a complete release of all liens arising under the contract. Therefore, if the Owner "requested" such releases it could prima facie result in the situation that the balance of the contract price in question never would become due. However, in the present case the Owner paid the amount in question into Court as the balance remaining unpaid under the contract for disposition by Court. The payment into Court of the unpaid balance of the contract price is inconsistent with the theory that the complete release of all liens was a condition precedent to the Owner's liability for such balance. The payment into Court of that balance would seem to constitute a waiver by the Owner of the provisions of the contract referred to. The Owner failed to make any showing as to the amount required to remedy the claimed breach or breaches of contract on the part of the Contractor. Upon the failure of the Owner to do so, the unpaid balance then became due so far as the Owner was concerned. The pivotal question is whether at the time it became due the Contractor was entitled to it, save for the Government tax lien.

In the case of United States v. Durham Lumber Co., supra, the Court stated (p. 526 U. S.):

"The Court of Appeals was correct in asserting that the Government's tax lien attached to the taxpayers' property interests in the fund as defined by North Carolina law. * * *"

It is necessary to ascertain what interests the different parties in the present action have to the unpaid balance in question under the Iowa law. The rights of those parties are defined by the provisions of Chapter 573 and the decisions of the Iowa Supreme Court interpreting those provisions.

In the present case, the Owner has retained the sum of $895.43 in excess of the ten percent required by Chapter 573. The unpaid claimants have claims on file in excess of the ten percent. It developed during the litigation that the Owner had no claim against such excess. The question is, when it so developed, was that excess due the Contractor and could the Owner, apart from the Government tax lien, pay the excess to the Contractor without incurring liability to the unpaid claimants?

Section 573.25 of Chapter 573 provides as follows:

"The filing of any claim shall not work the withholding of any funds from the contractor except the retained percentage, as provided in this chapter."

[Cases Involving Excess]

There are two Iowa cases which are of importance. They are the cases of Hercules Mfg. Co. v. Burch (1944), 235 Iowa 568, 16 N. W. 2d 350, and Sinclair Refining Co. v. Burch (1944), 235 Iowa 594, 16 N. W. 2d 359. The former case was commented on in 30 Iowa Law Review 568 (1945). They both involved actiosn brought under what is now Chapter 573. In the case of Hercules Mfg. Co. v. Burch, supra, the contractor had made an assignment to a bank of the amount which would become due him under a construction contract with the Iowa State Highway Commission. The contractor failed to pay a number of those who had furnished labor or materials for the project. Those claimants filed claims with the Commission. The contractor completed the project. The Highway Commission had retained not only ten percent of the contract price but also retained a sum in excess of that amount. The surety on the contractor's bond paid the unpaid claimants and became their assignee and subrogee. The case involved the conflicting claims of the bank, as assignee of the contractor, and the surety company, as the assignee and subrogee of the unpaid claimants, to the amount retained by the Highway Commission in excess of the required ten percent. The Iowa Supreme Court stated (p. 352 N. W. 2d):

"* * * The lower court held that claimants for labor and material and the surety as their assignee and subrogee had no right to any part of the contract price except the 10 per cent retention fund and awarded the amount in controversy to the bank. The surety has appealed. We think the trial court was right."

The holding in the case of Sinclair Refining Company v. Burch, supra, is in accord. Under the doctrine of those cases, where an owner retains an amount in excess of the ten percent required to be retained under Chapter 573, the contractor, upon completion of the improvement, is entitled to such excess even though there are unpaid claims on file for labor and materials furnished for the improvement and if the contractor has made an assignment which includes that excess the assignee is entitled to such excess ahead of the unpaid claimants.

When a Government tax lien comes into existence against a taxpayer, it becomes a lien on all causes of action which the taxpayer can assert against other persons. See cases cited in Randall v. Colby (D. C. 1961) [61-1 USTC ¶9178], 190 F. Supp. 319, 327. Such a lien operates as an assignment of such causes of action to the Government. In the present case, the Government's tax lien made it the assignee of any claim that the Contractor might have for the balance of the contract price. As such assignee, its situation is similar to that of the assignee of the contractor in the cases of Hercules Mfg. Co. v. Burch and Sinclair Refining Co. v. Burch, supra.

It seems clear that under the Iowa law the claim of the Government as a tax lien assignee of the Contractor to the excess of $895.43 is prior and superior to the claims of the unpaid claimants and the Bonding Company. It also seems clear that when it developed that the Owner had no claim against that excess it then became due to the Contractor and also thereupon became due the Government under its tax lien.

The Court holds as follows:

(1) that the required ten percent, or the sum of $5,350.00, is due to the unpaid claimants.

(2) that the $895.43 in excess of that ten percent is due the Government under its tax lien.

(3) that the Owner has no claim against either the said ten percent or the excess.

(4) that the Owner is not entitled to be awarded or to recover the attorney fees and expenses claimed by it.

(5) that the Owner is free from any liability to any and all of the defendants and to the Intervenor.

IT IS ORDERED that judgment be entered accordingly.

Some of the more recent literature relating to some of the matters here involved is Plumb, Federal Tax liens, 47 A. B. A. Journal 455 (May 1961); Final Report of American Bar Association Committee on Federal Liens (1959); Myers, The Fall and Rise Of The Security Interest, 8 Practical Lawyer 60-78 (December 1960); McNamara, The Surety and Federal Tax Liens, 28 Insurance Counsel Journal 92 (January 1961); and Comment, 46 Iowa Law Review 666 (1961).

This opinion shall constitute the Findings of Fact and Conclusions of Law under Rule 52(a) of the Federal Rules of Civil Procedure.

 

 

[61-1 USTC ¶9157] United States of America , Plaintiff v. Henry's Bay View Inn, Inc., et al., Defendants

U. S. District Court, So. Dist. N. Y., Civ. 148-255, 191 FSupp 632, 12/13/60

[1954 Code Sec. 7403]

Action to enforce tax lien: Government's right to interest on fund held by disinterested stakeholder: Stakeholder's right to costs out of fund.--Insurance companies were not liable for interest on a fund consisting of insurance proceeds owing to a delinquent taxpayer against whom the government sought to enforce a tax lien. The fund, which the insurance companies moved to pay into court, was held by them pursuant to a government-obtained court order staying the distribution of the insurance proceeds. There was nothing to indicate that the insurance companies were under any contractual obligation to pay interest, and there are no statutes governing interest in a case such as this. Furthermore, the insurance companies were entitled to costs from the fund, in view of the fact that the fund was substantially in excess of the government's lien.

S. Hazard Gillespie, United States Attorney, United States Court House, Foley Sq., New York , N. Y., for plaintiff. Grey & Murphy, John C. McCarthy, 280 Broadway Ave., Louis J. Lefkowitz, 500 Eighth Ave., Sahn, Shapiro & Epstein, 350 Fifth Ave., Charles H. Tenny, Municipal Bldg., New York, N. Y., Giller & Dreyer, 215 E. 149th St., Bronx, N. Y., for defendants.

MCGOHEY, District Judge:

This is an action brought by the United States under section 7403 of the Internal Revenue Code of 1954 (26 U. S. C. §7403) to enforce a tax lien against Henry's Bay View Inn. The inn was insured under four insurance policies and was damaged by fire in April, 1958, while the policies were still in force. Claimants of the proceeds other than the United States , are made defendants.

The plaintiff obtained an order staying defendant insurance companies from paying out any of the proceeds. Defendant insurance companies filed an answer and cross complaint against the other defendants alleging ignorance of the respective rights of the various claimants, admitting their liability under the policies as adjusted by the New York Board of Fire Underwriters and declaring their willingness to pay the sum due into court. Three parties were subsequently joined by defendant insurance companies. The insurance companies now move to be allowed to pay the sum due into court, to be discharged and to recover costs from the sum deposited.

There is no opposition to the motion other than an oral argument by the United States seeking to have the insurance companies pay interest on the amounts due and to deny them recovery of costs.

Jurisdiction of this action is based on 28 U. S. C. section 1345, giving the District Court original jurisdiction of all civil actions commenced by the United States . Under Rule 22, F. R. C. P., a defendant in any civil action, who is exposed to multiple liability from adverse claimants, may, by cross-claim, interplead the adverse claimants. This enables the District Court to entertain the interpleader under its equitable powers. Under 28 U. S. C. section 2361, the court has the power to grant the relief sought on this motion.

The defendant insurance companies have alleged grounds which entitle them to discharge and there is no opposition to the grant of this relief. The only question is whether costs should be allowed out of the fund and whether interest should be added thereto.

Interest is generally allowed when it is provided for by contract or statute or as a compensatory element for wrongful detention of money when there is a duty to pay. United States v. McDonald Grain and Seed Co., 135 F. Supp. 854 (D. N. D. 1955); New York Life Ins. Co. v. Cooper, 76 F. Supp. 976 (S. D. N. Y. 1944). The motion papers disclose no contractual provision requiring the defendant insurance companies to pay interest on the money tendered. Neither federal nor state statutes prescribe any rule which governs interest in such a case as this. Accordingly, the court has discretion to decide whether any actions of the defendant insurance companies warrant the imposition of interest on the fund. The papers disclose nothing warranting an allowance of interest. Cf. Hancock Mutual Life Ins. Co. v. Doran, 138 F. Supp. 47 (S. D. N. Y. 1956); Aetna Life Ins. Co. v. Du Roure, 123 F. Supp. 736 (S. D. N. Y. 1954).

Costs including reasonable attorneys' fees are generally allowed from the fund to a successful disinterested stakeholder. Globe Indemnity Co. v. Puget Sound Co., 154 F. 2d 249 (2 Cir. 1946); Aetna Ins. Co. v. Dickler, 100 F. Supp. 875 (S. D. N. Y. 1951). When the United States is asserting a tax lien and is one of the parties impleaded, the question becomes whether the stakeholder can recover costs from the fund to which the United States may acquire title. This question arises from two considerations: first, 28 U. S. C. section 2412(a) which permits costs to be assessed against the government only when provided by Congress; and, second, the priority of the tax lien over the stakeholder's right to costs. Where the lien priority has been decided in favor of the United States and the fund is not sufficient to leave a balance after the lien has been satisfied, it is clear that costs will not be allowed to the stakeholder. United States v. R. F. Ball Constr. Co., Inc. [58-1 USTC ¶9327], 355 U. S. 587 (1958); United States v. Liverpool & London & Globe Ins. Co., Ltd. [55-1 USTC ¶9136], 348 U. S. 215 (1955); Narragansett Bay Gardens, Inc. v. Grant Constr. Co. [59-2 USTC ¶9557], 176 F. Supp. 451 (D. R. I. 1959); Ford Motor Co. v. Hackart Constr. Co. [56-2 USTC ¶9831], 143 F. Supp. 216 (D. N. J. 1956). However, where the tax lien priority is not adjudicated and the fund exceeds the amount claimed by the government, there is no reason to deny costs and attorneys' fees to the disinterested stakeholder otherwise entitled to them since the elements requiring departure from the general rule are not present. See United States v. Ullman [53-2 USTC ¶9648], 115 F. Supp. 211 (E. D. Pa. 1953). Here the fund offered is $23,750 and the tax lien asserted by the government is for $6,644.32.

The motion is granted.

Settle order in accordance herewith.

 

 

[59-2 USTC ¶9557]Narragansett Bay Gardens, Inc., Plaintiff v. Grant Construction Company, Inc., The Wardwell Lumber Company, John Correira--doing business as Alma's Hardware and Supply, John A. O'Connell, John Marshall--doing business as Marshall's Landscaping Company, Defendants United States of America, Intervening Plaintiff v. Narragansett Bay Gardens, Inc., Grant Construction Company, Inc., The Wardwell Lumber Company, John Correira--doing business as Alma's Hardware and Supply, John Marshall--doing business as Marshall's Landscaping Company, and Narragansett Improvement Company, Defendants in Intervention United States of America, Plaintiff v. John Marshall--doing business as Marshall's Landscaping Company, Commodore Perry Village, Inc., Narragansett Improvement Company, Grant Construction Company, Inc., The Wardwell Lumber Company, and John Correira--doing business as Alma's Hardware and Supply, Defendants

U. S. District Court, Dist R. I., Civil Action Nos. 2289, 2406, 176 FSupp 451, 6/11/59

[1954 Code Sec. 6323]

Lien for taxes: Priority as against attachment creditors: Allowance of attorneys' fees and costs in interpleader.--A tax lien of the United States which was recorded before attachment creditors obtained judgments was entitled to priority, attachment liens being inchoate for federal tax purposes. Since the tax lien was in excess of the amounts owed to the delinquent taxpayer by two debtors who had filed bills for interpleader and paid the funds into court, they could have no recourse to the runds for counsel fees and court costs.

Russell C. King, Rob ert J. Conley, Providence , R. I., for plaintiff. Morphis A. Jamiel, Warren, R. I., for defendants, Grant Construction Company, Inc., et al., Joseph Mainelli, United States Attorney, Samuel S. Tanzi, Assistant United States Attorney, Providence, R. I., for intervening plaintiff.

Opinion

DAY, District Judge:

These actions, which were consolidated for trial, present identical questions as to the priority of federal tax liens over Rhode Island attachments and as to the allowance of counsel fees and costs to the debtors of a delinquent taxpayer as plaintiffs in a complaint in interpleader and a counterclaim in interpleader.

Civil Action No. 2289 was originally begun as a bill in equity for interpleader in the Superior Court for the State of Rhode Island . One of the defendants named therein was John A. O'Connell, then and now District Director of Internal Revenue for the District of Providence. The action was subsequently removed to this Court by him pursuant to the provisions of 28 U. S. C. A. §1442 and §1444. The remaining respondents named in said bill of complaint are Grant Construction Company, Inc. and The Wardwell Lumber Company, both Rhode Island corporations; John Correira, doing business as Alma's Hardware and Supply; and John Marshall, doing business as Marshall's Landscaping Company. Both Correira and Marshall are citizens of Rhode Island .

[Claims to Funds in Debtor's Hands]

After the removal of said bill in equity to this Court, the plaintiff, in accordance with the Federal Rules of Civil Procedure, filed a new complaint conforming to said Rules. In this complaint the plaintiff alleges in substance that it has in its hands and possession the sum of $2,400 due and owing to the defendant John Marshall under a certain contract between them; that it claims no interest in said sum; that on November 7, 1957 the defendants Wardwell Lumber Company, John Correira and Grant Construction Company, Inc. caused writs of attachment, returnable to a court of the State of Rhode Island, to be served upon it, attaching the personal estate of the defendant John Marshall in its hands and possession; that on December 4, 1957 it received notice that federal tax liens in the aggregate sum of $5,636.24 against all the property rights and monies of the said John Marshall had been perfected in accordance with the provisions of the Internal Revenue Code of 1939, notice of such liens having been recorded as provided by law in the office of the Town Clerk at Bristol, Rhode Island on August 28, 1957 and November 7, 1957; that judgments were entered on December 5, 1957 in favor of said Wardwell Lumber Company, Grant Construction Company, Inc. and John Correira in their respective actions against the said John Marshall; that on December 12, 1957, executions issued on said judgments; that said judgment creditors have made demands upon the plaintiff for the satisfaction of said executions out of the personal estate of said John Marshall in its hands and possession; that said John Marshall claims to be entitled to receive said sum of $2,400, and has threatened to institute proceedings against plaintiff for its recovery; and that plaintiff is willing to pay said sum to the person or persons legally entitled thereto, but is in doubt as to whom it should be paid. After the recital of these facts the complaint concludes with a prayer that the plaintiff be permitted to deposit said sum of $2,400 in the registry of this Court; that the defendants and each of them be required to interplead and settle among themselves their respective claims in and to said sum of $2,400; and that the plaintiff be awarded reasonable costs and counsel fees.

[Federal Tax Liens]

Thereafter, it appearing that the federal tax liens were claimed by the United States and not by the named defendant John A. O'Connell, the latter was dismissed as a party defendant and the United States was granted leave to intervene as a party plaintiff and to file a complaint as intervenor. In this intervening complaint (in which the remaining defendants, the plaintiff Narragansett Bay Gardens, Inc., and Narragansett Improvement Company, a Rhode Island corporation, were joined as defendants) the United States alleges that the said John Marshall owes certain taxes and penalties aggregating $7,019.06; that said taxes were duly assessed, that liens were duly perfected thereon, and that notice thereof was duly recorded as provided by law; that Narragansett Bay Gardens, Inc. is indebted to said John Marshall in the sum of $2,400; that the defendants are each claiming an interest therein; and that the United States seeks a determination that John Marshall is indebted to it in said sum of $7,019.06, with interest as allowed by law, as well as a determination of the rights of the respective parties in and to said sum of $2,400.

In Civil Action No. 2406, brought by the United States , the defendants are the said John Marshall, John Correira, Grant Construction Company, Inc., Wardwell Lumber Company, Narragansett Improvement Company, in addition to Commodore Perry Village, Inc., a Rhode Island corporation. This complaint likewise alleges that John Marshall is indebted to the plaintiff for certain federal taxes and penalties in the aggregate sum of $7,019.06, with interest thereon as allowed by law; that said taxes were duly assessed, that liens were duly perfected thereon, and that notice thereof was duly recorded as provided by law; that the defendant Commodore Perry Village, Inc. is indebted to the said John Marshall in the sum of $1,341; and that each of the defendants is claiming an interest in said sum. The complaint concludes with a prayer that this Court adjudge and decree that the said John Marshall is indebted to the plaintiff in the amount of $7,019.06, together with accrued interest thereon as allowed by law; and that this Court determine the rights of all of the parties to said sum of $1,341.

In its answer Commodore Perry Village, Inc. counterclaims in interpleader, alleging that on November 4, 1957 a writ of attachment, returnable to a court of the State of Rhode Island, was served upon it in an action then pending in said court wherein Narragansett Improvement Company was plaintiff and the said John Marshall was defendant; that said writ attached the personal estate of the latter in its hands and possession; that it then had in its hands and possession the sum of $1,341 belonging to said John Marshall, that thereafter on December 4, 1957 it received notice that federal tax liens in the sum of $5,636.24 against all the property rights and monies of said John Marshall had been perfected, notice of such federal liens having been recorded, as provided by law, in the office of the Town Clerk at Bristol, Rhode Island on August 28, 1957 and November 7, 1957; that on December 4, 1957 a levy was made upon it; that a question has arisen as to the relative priority as between said attachment lien and said tax liens; and that it is in great doubt as to which of said lienors is entitled to priority of payment. The counterclaim prays that this Court order the plaintiff and the defendants Narragansett Improvement Company and John Marshall to interplead their respective claims to said sum of $1,341; and award it counsel fees and costs.

Prior to trial, Narragansett Bay Gardens, Inc. deposited the sum of $2,400 into the registry of the Court, and Commodore Perry Village, Inc. likewise deposited the sum of $1,341. Also, by agreement of the parties, the complaint in Civil Action No. 2406 was dismissed as to the defendants Grant Construction Company, Inc., Wardwell Lumber Company, Narragansett Improvement Company and John Correira. At the same time, the defendant John Marshall having failed to plead or otherwise defend, an entry of default was made against him. In Civil Action No. 2289, similar entries of default were made for the same reasons against him and against the defendant Narragansett Improvement Company.

[Facts]

The evidence adduced during the trial established the following facts: that at the time of the institution of these actions the defendant John Marshall was indebted to the Government in the sum of$7,019.06 on account of unpaid withholding and excise taxes; that notice of the assessment of these taxes and demands for the payment thereof were seasonably made upon him; that notice of the perfection of tax liens in the sum of $5,634.24 on all the property rights and monies of the defendant John Marshall was received by Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. on December 4, 1957, notice of said liens having been recorded on August 8, 1957 and November 7, 1957; that judgments in favor of Grant Construction Company, Inc., Wardwell Lumber Company and John Correira in their respective state court actions were entered on December 5, 1957; and that no judgment in favor of Narragansett Improvement Company has as yet been entered in its action in the state court.

[Priority of Tax Liens]

It is well settled that a tax lien of the United States is entitled to priority over an attachment lien created pursuant to state law if the federal lien is recorded prior to the date when the attachment creditor obtains judgment. United States v. Liverpool & London & Globe Insurance Co., Ltd., 1955, 348 U. S. 215 [55-1 USTC ¶9136]; United States v. Acri, 1955, 348 U. S. 211 [55-1 USTC ¶9138]; United States v. Security Trust Co., 1950, 340 U. S. 47 [50-2 USTC ¶9492].

In United States v. Acri, supra, the Supreme Court held at page 213:

"The relative priority of the lien of the United States for unpaid taxes is, as we said in United States v. Waddill Co., 323 U. S. 353, 356, 357 [45-1 USTC ¶9126]; Illinois v. Campbell, 329 U. S. 362, 371; United States v. Security Trust Co., 340 U. S. 47, 49 [50-2 USTC ¶9492], always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court."

Here the attachment liens are inchoate for federal tax purposes, the fact and amount of such liens being contingent on the outcome of the actions in which they were issued. Since the tax liens of the United States were recorded prior to the entry of judgments in favor of said attaching creditors, and were in an amount in excess of the aggregate of the sums held by the debtors of the delinquent taxpayer, I find and conclude that the federal tax liens have priority over the liens of said attaching creditors and that the sums presently on deposit in the registry of the Court are payable to the United States.

[Allowance for Attorneys' Fees and Costs]

There remains the question of whether any amount should be deducted from each of said sums as an allowance to Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. for counsel fees and costs sustained by them in these proceedings.

It is admittedly the general rule, in the absence of a statute making provision to the contrary, that a party who is confronted with conflicting claims to a fund in his possession and who claims no interest therein, may in good faith interplead the several claimants, deposit the fund involved in the registry of the Court, and recover his reasonable costs and counsel fees out of such fund. This rule is followed both in the federal courts and in the courts of Rhode Island . See, e.g., Palomas Land & Cattle Co. v. Baldwin, 1951, 9 Cir., 189 Fed. (2d) 936; Manchester Paint Works v. Stimson, 1853, 2 R. I. 415. It is agreed here that both Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. are merely disinterested stakeholders who have asserted no claims of ownership to the funds involved.

Despite the existence of this general rule, the Government contends that such an allowance of counsel fees and costs cannot be made where (1) the United States under a federal tax lien is the prevailing claimant to a fund and (2) the amount due under such federal tax lien exceeds the amount of the fund.

On the other hand, the stakeholders contend that I should follow the general rule which prevails in the usual interpleader proceeding in the courts of Rhode Island .

In support of its position, the Government relies upon the holding of the Supreme Court in United States v. Liverpool & London & Globe Insurance Co., Ltd., supra. While it may be claimed that the denial of counsel fees and related costs in that case was based upon the peculiar provisions of the state statute there involved, I believe that any latent ambiguity therein is removed by the subsequent per curiam decision in the later case of United States v. R. F. Ball Construction Co., 1958, 355 U. S. 587 [58-1 USTC ¶9327]. In my judgment the contention of the Government is sound. I concur with the observations and reasoning of Chief Judge Forman in Ford Motor Co. v. Hackart Construction Co., 1956, D. C. N. J., 143 Fed. Supp. 216 [56-2 USTC ¶9831], where he said at page 218-219:

"The determination of the Supreme Court on the facts of the Liverpool & London case that counsel fees could not be allowed is controlling here. It is not significant that the source of power used by the lower courts in that case to justify their allowance was a Texas rule which here it is inherent equity authority plaintiff asked this court to exercise. None of the three opinions in the Liverpool case (the district court's opinion is reported as Sunnyland Wholesale Furniture Co. v. Liverpool & London & Globe Ins. Co., 107 Fed. Supp. 405 [53-1 USTC ¶9121]) questions the validity of the application of the Texas rule in the federal court. That rule was treated throughout that case as a competent source of power for the allowance of counsel fees in the ordinary case just as is the equity power of this court ordinarily a valid source of power to be utilized for that purpose. But in the Liverpool case and in this one these usual prerogatives of the court must fall before the primacy of the federal tax lien. A superior source of power forbids the allowance of counsel fees here. The Supreme Court held in the Liverpool case that property subject to a valid and paramount tax lien cannot be invaded even for the allowance of the counsel fees to an innocent stakeholder, and this court must obey that ruling."

A similar conclusion was reached in United States v. Gasaway, 1958, D. C. Mo., 1 A. F. T. R. 2d 1189 [58-1 USTC ¶9412]. There, as here, a disinterested stakeholder sought to recover counsel fees in an interpleader action in which the United States was the prevailing claimant. The Court, relying on United States v. Liverpool & London & Globe Insurance Co., Ltd., supra, and United States v. R. F. Ball Construction Co., supra, held that since the fund involved was insufficient to satisfy the prevailing federal tax lien, no recourse to such fund could be had for the allowance of counsel fees to the stakeholder. This decision is of particular force in view of the clear precedents under the state law for awarding such fees in similar actions not involving claims under federal tax liens. See, e.g., Woodson v. Woodson, 1949, 359 Mo. 972, 224 S. W. (2d) 978; John A. Moore & Co. , Inc. v. McConkey, 1947, 240 Mo. App. 198, 203 S. W. (2d) 512.

In further support of this interpretation of the Liverpool decision, see Commercial Standard Insurance Co. v. Campbell, 1958, 5 Cir., 254 Fed. (2d) 432 [58-1 USTC ¶9477]; Boston Insurance Co. v. Stubbs, 1956, D. C. Wash., [56-2 USTC ¶9695] 51 A. F. T. R. 1782; cf. United States v. Goldstein, 1958, 2 Cir., 256 Fed. (2d) 581 [58-1 USTC ¶9478]. See also 9 Mertens, Law of Federal Income Taxation (Zimet Revision 1958), §54.46.

The cases of United States v. Ullman, 1953, D. C. Pa., 115 Fed. Supp. 211 [53-2 USTC ¶9648], and American Alliance Insurance Co. v. Mitchell, 1958, -- Mo. App. --, 299 S. W. (2d) 536 [57-1 USTC ¶9506], relied upon by Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc., are in my opinion clearly contrary to the weight of authority, and hence I am unwilling to follow them.

In conclusion, I find and conclude that said John Marshall was at the time of the institution of these actions indebted to the United States in the sum of $7,019.06 for federal taxes and penalties thereon, plus interest; that the United States has valid prior liens on the sums of $2,400 and $1,341 presently on deposit in the registry of this Court, which liens are superior to any liens thereon in favor of the attaching creditors of the said John Marshall; that the United States is entitled to the payment of said sums, such payment to be applied to the reduction of said indebtedness; and that the prayer of Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. for the entry of orders awarding them their respective counsel fees and costs must be, and they hereby are, denied. The United States will prepare and submit to me within ten (10) days a computation of the amount presently due and owing by the said John Marshall as federal taxes and penalties, plus interest thereon; and thereupon judgments shall be entered in each of these actions in favor of the United States in that amount less the sum of $3,741 ($2,400 plus $1,341) and in accordance with the other conclusions hereinbefore expressed.

 

 

[58-1 USTC ¶9412]United States of America, Plaintiff v. Gordon Gasaway, and Edna Gasaway, and Kenneth Teasdale and John O. Price, as Trustees of Usona Construction Company, a corporation, Defendants.

U. S. District Court, East. Dist. Mo. , East. Div., Case No. 57C300, Court No. 2, 2/17/58

[1954 Code Sec. 6323]

Collection: Lien for taxes: Counsel fees of trustee for counter-claim and cross-claim in interpleader.--A trustee in liquidation of a corporation holding funds belonging to a delinquent stockholder filed a counter-claim and cross-claim in interpleader asking that the Court order the funds paid into the Court, order the discharge of the trustee, and allow the trustee a reasonable sum for attorneys' fees for interpleader. The Court held that it was without jurisdiction to grant the relief requested, because the Government had not consented to be sued in a case of this kind by way of counter-claim and interpleader. However, because the Government agreed, the Court indicated that it would: (a) enter an order entitling the trustee to deposit the funds in the Registry of the Court; (b) discharge him from liability on account of the Government's claims upon deposit of the funds; and (c) dismiss him as a party to the collection suit upon deposit of the money. However, the trustee was not allowed a sum for attorney's fees.

Harry Richards, United States Attorney, Rob ert E. Brauer, Assistant United States Attorney, Federal Building , St. Louis 1, Mo. , for plaintiff. Cobbs, Armstrong, Teasdale & Ross, Walter M. Clark, 506 Olive Street, St. Louis 1, Mo., for Kenneth Teasdale and John O. Price. John Grossman, 722 Chestnut Street , St. Louis , Mo. , for Gordon Gasaway and Edna Gasaway.

Stipulation

HAYLER, District Judge:

It is hereby stipulated and agreed between the parties as follows:

1. Prior to the institution of this action, separate defendant Gordon Gasaway was the registered owner of 150 shares of common stock of Usona Construction Company, a Missouri corporation. Said corporation was dissolved and defendants Teasdale and Price (now deceased) acted as Trustees in liquidation of said corporation. At present, as Trustee, defendant Teasdale has in his possession the sum of $13,185.50, which amount is claimed by defendant Gasaway as his distributive share of the proceeds of the liquidation of Usona Construction Company.

2. As alleged in its Complaint, plaintiff claims certain tax deficiencies on the part of defendants Gordon and Edna Gasaway, in amounts substantially in excess of the fund held by defendant Teasdale; and plaintiff, having heretofore filed and recorded certain tax liens, claiming that defendants Gordon and Edna Gasaway are indebted to plaintiff in an amount in excess of that held by defendant Teasdale has asked in its Complaint that the Court adjudge and decree that the aforesaid liens are valid and enforce said liens against defendants Teasdale and Price.

3. The parties stipulate and agree that both plaintiff and defendant Gordon Gasaway claim the fund held by defendant Teasdale; further, it is agreed that defendant Teasdale makes no claim whatsoever to the aforesaid fund, except a claim for expenses and attorneys' fees with respect to this action. Further, it is agreed by and between all of the parties that there has not yet been any final adjudication or determination by any court or proper tribunal as to which of plaintiff or defendant Gordon Gasaway is entitled to the fund held by defendant Teasdale.

4. In response to plaintiff's Complaint, defendants Teasdale and Price filed their Answer, and also filed their Counterclaim and Cross-Claim (against defendants Gasaway) In Interpleader, alleging that no claim to the fund was made by defendants Teasdale and Price, that conflicting claims to said fund had been made by plaintiff and defendant Gordon Gasaway, and asking that the Court order the fund paid into Court, order the discharge of Teasdale and Price, allowing defendants Teasdale and Price a reasonable sum for attorneys' fees, and ordering that a hearing be had on the merits of the conflicting claims of plaintiff and separate defendants Gasaway. It is further stipulated and agreed that since there is a dispute as to the ownership of the fund, the aforesaid sum of $13,185.50 may, upon approval of the Court, be paid into the Registry of the Court by defendant Teasdale, pending determination by the Court as to the ownership thereof, and that the sole question for decision by the Court in this hearing is whether or not defendant Teasdale is entitled to receive a reasonable sum as and for his attorneys' fees with respect to the Counterclaim and Cross Claim In Interpleader heretofore filed by defendants Teasdale and Price.

Findings of Fact and Conclusions of Law

On November 15, 1957 , the counter-claim and cross-claim in interpleader of the defendant Teasdale came on for hearing.

The plaintiff appeared by its attorney, Rob ert E. Brauer, Assistant United States Attorney, the defendants Gordon Gasaway and Edna Gasaway appeared by their attorney, John Grossman; defendant Teasdale appeared in person and by his attorney, Walter M. Clark.

The parties announced ready for trial, and the Court after having considered the evidence and the briefs of the attorneys, finds the facts and states its conclusions of law as follows:

Findings of Fact

1. The Court adopts as its findings of fact the facts contained in the Stipulation signed by the parties and upon which the counter-claim and cross-claim were submitted.

Conclusions of Law

1. The counter-claim and the cross-claim in interpleader of defendant Teasdale ought to be and is hereby dismissed, and the relief therein ought to be and is hereby denied, because the plaintiff has not consented to be sued in a case of this kind by way of counter-claim and interpleader; thus, this Court is without jurisdiction to grant the relief therein requested.

2. Nevertheless, because the plaintiff agrees thereto, defendant Teasdale will be given the following relief:

a. An Order will be entered entitling him to deposit in the Registry of the Court the sum of $13,185.50; and

b. Discharging him, upon the deposit of said sum in the Registry of this Court, from any and all liability on account of the claims of the United States of America, plaintiff, and defendants Gordon Gasaway and Edna Gasaway against said sum of money; and

c. Dismissing him as a party to this law suit upon said deposit of said sum of money.

3. The requested relief, that defendant Teasdale be given a reasonable allowance for attorney's fees for interpleader, the United States , and defendants Gordon Gasaway and Edna Gasaway and depositing the sum of $13,185.50 in the Registry of this Court will be denied.

 

 

[56-2 USTC ¶9831]Ford Motor Company, a corporation of the State of Delaware, Plaintiff v. The Hackart Construction Company, Inc., a corporation of the State of New York , et al., Defendants

U. S. District Court Dist. N. J., Civ. Action 169-55, 143 FSupp 216, 6/27/56

[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323(a)]

Collection: Lien for taxes: Counsel fees of interpleading stakeholder.--A general contractor agreed to perform certain construction work for a corporation which was confronted with claims to money which it owed the contractor. The corporation brought a suit in interpleader against the contractor and his creditors, and the United States intervened, asking that its tax liens upon the contractor's property be declared paramount to all other claims to the fund and that they be foreclosed. The corporation was not entitled to counsel fees since it was determined that the federal tax lien was paramount. There was a contest between the claim for fees and the federal lien claim, and the corporation was not sufficiently disinterested in the distribution of the fund since some of the creditors had filed counterclaims against it alleging an express agreement by it to pay the amount due under the contract in consideration for continuance of performance by them after the contractor's default. Liverpool & London Ins. Co., 55-1 USTC ¶9136, 348 U. S. 215, was followed.

Lynch, Lora & Milstein, George R. Milstein (Benjamin Gross, of counsel), for plaintiff. Raymond Del Tufo, Jr., United States Attorney, George H. Barlow, Assistant United States Attorney, for Intervenor , United States of America .

On Application for Allowance of Costs and Counsel Fees

Opinion

FORMAN, Chief Judge:

This interpleader action was begun by a complaint filed February 18, 1955 in which the United States was named a party defendant. The suit arose in the following fashion:

The defendant Hackart Construction Company, as general contractor, agreed with the plaintiff, the Ford Motor Company, to perform construction work at the site of the plaintiff's plant at Metuchen , New Jersey . Subsequently, the plaintiff found itself confronted with many claims to money which it owed Hackart and which totaled far in excess of the amount Hackart had yet to be paid.

This suit in interpleader was then brought naming as defendants the Hackart Company, many laborers and materialmen who had claims against Hackart, the State of New Jersey and the United States . The plaintiff was permitted to interplead. The United States then moved that the complaint be dismissed as to it on the ground that it had not consented to be made a defendant and the motion was granted. Subsequently, the United States filed its complaint in intervention asking that its tax liens upon property of Hackart Construction Company be declared paramount to all other claims to the fund and that they be foreclosed.

[Federal Tax Lien Paramount ]

It was determined that the claim of the United States under its federal tax lien was paramount to all other claims asserted to the fund and it was ordered that the entire fund be paid over to the United States. At this time plaintiff's counsel asked that a counsel fee be granted to them out of the fund. The United States opposes the allowance of counsel fee on the ground that to allow it out of this fund would be to allow counsel fees against the United States without its consent, contrary to the express provision of 28 U. S. C. §2412(a), and on the further ground that the tax lien raises the rights of the United States even higher than the traditional rights of an innocent stakeholder to such counsel fees.

The almost exclusive reliance of plaintiff's counsel is upon Judge Clary's decision in United States v. Ullman, 115 Fed. Supp. 211 (E. D. Pa. 1953) ¹ [53-2 USTC ¶9648] in which he allowed counsel fees to an interpleading stakeholder despite the claim of the United States that to do so would be contrary to 28 U. S. C. §2412(a). Although the government claim involved in the Ullman case arose out of a tax lien, since that lien had not been foreclosed nor its priority established at the time the counsel fees were allowed Judge Clary did not, because he could not, discuss the relative priority of a paramount government lien and a claim for counsel fees out of the fund in interpleader. Thus, Judge Clary's decision concerning counsel fees, coming as it did before the question of priorities of interest in the fund had been reached, did not purport to resolve a conflict between a government lien and an allowance of fees. This is made clear by his statement of the issue involved:

"The simple legal question to be determined in these two actions is, therefore, whether an award of counsel fees and costs may be granted in an interpleader action to a disinterested third party stakeholder who interpleads the United States and other claimants to a fund." 115 Fed. Supp. at p. 214.

The argument that the government's lien, if paramount, defeats even the inherent equity power of the court to allow counsel fees seems not to have been either advanced or considered in the Ullman case.

[Interpleader's Counsel Fees Disallowed]

Counsel fees to the plaintiff in this case are foreclosed by the decision of the United States Supreme Court in United States v. Liverpool & London Ins. Co., 348 U. S. 215 (1955) [55-1 USTC ¶9136]. In that case suit was brought in a Taxas state court against an insured who was owed the proceeds of a fire insurance policy by the Liverpool & London & Globe Insurance Company. The fund in the hands of the insuror was garnished by the plaintiff and the insuror moved in the state court to have the United States added as a party defendant because the United States had also asserted a claim to the fund held by it. The motion to add the United States was granted. Thereafter the United States removed the suit to the United States District Court for the Northern District of Texas. Further facts may be taken from the opinion of the Court of Appeals for the Fifth Circuit, 209 Fed. (2d) 684, 686-687 [54-1 USTC ¶9132]:

"Subsequently, and upon the ground that it had not consented to be made a party defendant the Government moved that the action against it be dismissed and that it be allowed to intervene as a party plaintiff for the purpose of seeking foreclosure of its lien. This motion was granted and the United States filed its petition in intervention . . . claiming first and prior tax liens under Section 3670 et seq. of Title 26, U. S. C on any and all property and rights to property belonging to the taxpayers. The appellee insurance Company filed responsive pleadings in which it tendered its loss draft in the sum of $7,500.39 into the registry of the court and prayed for an order directing the clerk to receive and collect this draft and place the proceeds in the registry of the court and that Adams and his wife (the insureds), the United States, and the appellee furniture company (the garnishor) be required to interplead. . . . It further prayed for a discharge from any other . . . liability and for a reasonable attorney's fee in the sum of $500.00. . . .

"The District Court made fact findings. . . . The court was further of the opinion that there was no contest between the appellee insurance company and any other parties to the case and concluded that the insurer was entitled to a reasonable attorney's fee. . . ."

The facts in this case are substantially similar to those outlined in the opinion quoted from above. In both cases there was a stakeholder who was confronted with claims of creditors of the owner of the fund and with lien claims of the United States for taxes. In both the fund was insufficient to satisfy the total amount of the claims and in both were presented substantial questions of priority to the fund among the several claimants.

The District Court allowed the Liverpool & London & Globe Insurance Company a counsel fee upon the authority of Rule 677, Vernon 's Texas Rules of Civil Procedure. This court is asked to award the fee in the exercise of its inherent equity power to do so in interpleader cases. See Globe Indemnity Co. v. Puget Sound Co., 154 Fed. (2d) 249, 250 (2nd Cir. 1946) and cases cited. This difference is seized upon by counsel for the plaintiff, but I am of the opinion that it is a difference without significance for the reasons stated below.

The award of counsel fees under the Texas rule by the district court was affirmed by the Court of Appeals for the Fifth Circuit, 209 Fed. (2d) 684, as was its determination that the garnishment lien was superior to the federal tax lien. The Supreme Court, however, reversed on the merits, 348 U. S. 215, and also voided the allowance of counsel fees saying:

"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 attorney's fees prior to the Government liens was error. . . ." 348 U. S. at p. 217.

The determination of the Supreme Court on the facts of the Liverpool & London case that counsel fees could not be allowed is controlling here. It is not significant that the source of power used by the lower courts in that case to justify their allowance was a Texas rule while here it is inherent equity authority plaintiff asks this court to exercise. None of the three opinions in the Liverpool case (the district court's opinion is reported at 107 Fed. Supp. 405 [53-1 USTC ¶9121]) questions the validity of the application of the Texas rule in the federal court. That rule was treated throughout that case as a competent source of power for the allowance of counsel fees in the ordinary case just as is the equity power of this court ordinarily a valid source of power to be utilized for that purpose. But in the Liverpool case and in this one these usual prerogatives of the court must fall before the primacy of the federal tax lien. A superior source of power forbids the allowance of counsel fees here. The Supreme Court held in the Liverpool case that property subject to a valid and paramount federal tax lien cannot be invaded even for the allowance of counsel fees to an innocent stakeholder, and this court must obey that ruling.

Plaintiff argues elaborately that overruling by implication is not looked upon with favor. Hence, it contends the Liverpool case may not be construed as having overruled the Ullman case, for it does not mention it. In any event, as has been shown, the Ullman case is not analgous to this case because there was no contest between the claim for fees and the lien claim of the United States and it dealt with situations wherein the stakeholder only came forward with the stake, deposited it with the court and requested payment of its counsel fee and expenses. There was no show of resistance on the stakeholder's part to any claimant to the fund. Fees proportionate with this pro forma labor were allowed. ²

Moreover, the plaintiff is not sufficiently disinterested in the distribution of the fund to qualify for a fee. Some of the many defendants have filed counterclaims against the plaintiff alleging an express agreement by the plaintiff to pay in full the amount due under the construction contract in consideration for continuance of performance under the contract by the defendants after Hackart's default. If the allegations of these counterclaims are correct and the plaintiff is liable for the amounts due the defendants for their full performance on the project, distribution of the fund to the defendants rather than to the government would substantially reduce the potential liability of the plaintiff under the agreements alleged in the counterclaims. ³ It is true that plaintiff's attorney specifically postponed his application for fees from the conventional time of the filing of the complaint until the determination of the claim of the United States , but he is not helped thereby.

The motion for counsel fees and costs will be denied and an appropriate order should be submitted to that effect by the United States Attorney, consented to as to form only, by counsel for the plaintiff, or noticed for settlement.

¹ Mention is also made of the case of United States v. Thorn, USTC Par. 9405 (D. C. Pa. 1954) [55-1 USTC ¶9405] decided upon the reasoning in the Ullman case.

² Two complaints were consolidated for consideration and $1,000 was allowed to cover fees and costs for each.

³ This potential liability under the counterclaims was undoubtedly the motivating reason behind the plaintiff's appearance in opposition to the government's motion to foreclose its lien and pay the fund over to it. This has caused the plaintiff the expenditure of considerably more energy than that usually incurred by a stakeholder who merely wants to get its money safely paid into court and then retire from the scene. This also accounts for the unusually high fee demanded by the plaintiff--$6,000--which the court approved as reasonable while reserving decision as to its allowability. It is peculiarly appropriate that the plaintiff should bear the expense of the resistance rather than the fund.

* * *

 

[56-2 USTC ¶9695]Boston Insurance Company, Northern Assurance Company, and National Fire Insurance Company, Plaintiffs v. H. Frank Stubbs; Arthur R. Knodel; Fritz Schadde, L. H. Rogers and L. E. Sticha; Jesse D. Lander and Paul K. Cook; and John T. McLaughlin, Director, Unemployment Insurance Division, Territory of Alaska, Defendants

U. S. District Court, West. Dist. Wash. , So. Div., No. 1846, 3/20/56

[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323(a)]

Collection: Lien for taxes: Validity against creditors: Fact-finding.--Federal tax liens on insurance proceeds were valid and prior to the following claims: an attorneys' lien for services in settling the fire insurance claim arising when a fire occurred at taxpayers' Club Cafe, writs of attachment and notices of garnishment by a bakery and another creditor, and a lien by the Employment Security Commission of Alaska based upon an assignment of the proceeds of the insurance claim.

[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323(a)]

Collection: Lien for taxes: Attorneys' fees of interpleading insurance company.--Insurance companies brought an interpleader action against the creditors of taxpayers to determine the disposition of the proceeds from taxpayers' insurance claim settlement. They were not entitled to attorneys' fees and costs in view of the fact that Federal tax liens were valid and prior to the claims of all other creditors. Liverpool & Globe Insurance Co., 55-1 USTC ¶9136, 348 U. S. 215, was followed.

Clarke, Clarke & Albertson, New World Life Building , Seattle , Wash. , for plaintiff. Charles P. Moriarty, United States Attorney, Guy A. B. Dovell, Assistant United States Attorney, for intervenor.

Complaint in Interpleader (Filed October 14, 1954 )

BOLDT, District Judge:

Come now the plaintiffs and, for cause of action in interpleader, state:

[Suit to Collect Fire Insurance]

I. That plaintiffs, and each of them, are insurance companies, duly authorized to write policies of insurance covering property in the Territory of Alaska and that each of said plaintiffs issued a policy of insurance naming Bert Adams and Mary Adams, d.b.a. Club Cafe, as insureds and covering their interest in said Club, or its contents, which was located in Fairbanks, Alaska, against the hazard of loss by fire in accordance with the terms and conditions of said policies.

II. That a fire occurred at said Club on or about the 28th day of December, 1950, as a result of which said insureds made claim against the plaintiff insurance companies under the aforementioned insurance policies as to which claim plaintiff companies denied liability, and that the insureds thereafter instituted suit against said insurance companies for the purpose of endeavoring to collect said claim, the suit being Cause No. 1745 in the records of the above-entitled Court.

III. That in said action the insurance companies, in addition to pleading defenses as to any liability, also pleaded affirmatively that various liens, attachments and garnishments had been filed against said insurance claim, as more specifically hereinafter referred to; that in said Cause No. 1745 a stipulation of settlement was entered into between the parties, a copy of which is hereto attached marked "Exhibit A" and by reference made a part hereof the same as if set forth in full herein, whereby settlement was agreed upon in the amount of $3,000.00, which said sum was to be paid into court in an interpleader action in order that the rights of the respective claimants to said fund could be therein adjudicated, and that this action is brought pursuant to said settlement stipulation.

[Claims of Creditors]

IV. That the defendants, H. Frank Stubbs and Arthur R. Knodel are citizens and residents of the State of Washington, residing in Pierce County, Washington; that they were attorneys of record for the insured in said Cause No. 1745 and are claiming an attorneys' lien on said fund for their services in the amount of $1,500.00, plus advanced costs and expenses.

V. That the defendants, Fritz Schadde, L. H. Rogers and L. E. Sticha, are citizens and residents of the Territory of Alaska, residing at Fairbanks, Alaska, and that they are, or were, doing business as the North Pole Bakery, and that in Cause No. 6698 in the District Court for the Territory of Alaska, Fourth Division, they caused a writ of attachment and notice of garnishment to be served upon the Insurance Commissioner of the Territory of Alaska as process agent for the insurance companies which are plaintiffs in this action, setting forth that Norbert Adams and wife were indebted to them in the sum of $1,997.73, together with interest and costs, and purporting to attach any indebtedness from said insurance companies to the said Norbert Adams and wife.

VI. That the defendants, Jesse D. Lander and Paul K. Cook, are citizens and residents of the Territory of Alaska, residing at Fairbanks, Alaska, and that in Cause No. 6672 in the District Court for the Territory of Alaska, Fourth Division, they caused a writ of attachment and notice of garnishment to be served upon the Insurance Commissioner of the Territory of Alaska as process agent for the insurance companies which are plaintiffs in this action, setting forth that Norbert Adams, Sr., is indebted to them in the sum of $4,870.35, together with interest and costs, and purporting to attach any indebtedness from said insurance companies to the said Norbert Adams.

VII. That John T. McLaughlin is Director of the Unemployment Insurance Division of the Territory of Alaska and that on April 3, 1951, the said N. J. Adams executed an assignment of the proceeds of his insurance claim in favor of the Employment Security Commission of Alaska in the amount of $850.11, and that said Employment Security Commission filed on June 7, 1951, lien No. 124609 in the amount of $901.46, which said lien purported to be against all property or funds of the said N. J. Adams.

[Claim of Government]

VIII. That the Internal Revenue Department of the United States filed in the Commissioner's office at Fairbanks, Alaska, and served on the Insurance Commissioner of Alaska as process agent for the insurance companies the following notices of lien and levies as against Norbert Adams:

"Lien No. 20074, dated May 28, 1951 , in the amount of $1,462.38;

"Lien No. 19628 dated March 9, 1951 , in the amount of $2,474.84;

"Notice of Levy dated November 10, 1951 , under Liens No. 20751 and No. 21075, in the amount of $1,479.39,"

and that the said Internal Revenue Department has, through its authorized counsel, signified its intention of intervening in the above-entitled action for the purpose of asserting its said liens and levies and claims of priority as to the fund paid into court in this action.

IX. That, as herein above set forth, adverse claimants of diverse citizenship are claiming an interest in the insurance proceeds herein before referred to and that, although ample time has been allowed, said claimants have been unable to agree among themselves as to their respective priorities on the division of said fund, and that plaintiffs, having no knowledge of the respective rights and priorities of said claimants and being desirious of avoiding the possibility of multiple liability, do hereby deposit into court the full amount due under the settlement stipulation in Cause No. 1745, to wit, the sum of $3,000.00, in order that there may be an adjudication as to the respective rights of the claimants and that plaintiffs may receive a full and complete release of liability to any party.

X. That an order should be entered by this Court prohibiting the defendants, and each of them, from instituting or continuing any suit, action, claim or process against the insurance companies relating to the funds herein paid into court except by filing their responsive pleadings and claims in this interpleader action.

XI. That there should be no proceedings in this action until sufficient time has elapsed for the Department of Internal Revenue of the United States to intervene and assert its claim under its aforesaid liens and levies.

[Claim by Insurance Companies for Attorneys' Fees]

XII. That $300.00 is a reasonable sum to be allowed plaintiffs in this interpleader action out of the funds paid into court for the services of their attorneys in connection with the institution and maintenance of this interpleader action.

WHEREFORE, plaintiffs pray that an order be entered discharging plaintiffs, and each of them, from any and all liability to all defendants arising out of the insurance policy and fire loss referred to in Cause No. 1745 of the records of the above-entitled court, and that appropriate orders be entered prohibiting the defendants, and each of them, from proceeding against the plaintiffs in relation to said fund or claims in any other cause and proceeding, and that plaintiffs be allowed the sum of $300.00 for the services of their attorneys and their costs and disbursements out of the funds paid into the court in this proceeding.

Order and Judgment (March 20, 1956)

[Conclusions]

This matter coming on regularly to be heard before the above-entitled Court, and upon due consideration of the Pre-trial Order entered this day, and briefs and arguments thereon, it is hereby

ORDERED, ADJUDGED and DECREED that the entire fund remaining to wit $2,000.00 on deposit in the registry of the court in this action belongs to the United States of America by virtue of the priority of its valid liens thereon for taxes due from Norbert J. and Mary J. Adams, and it is further

ORDERED, ADJUDGED and DECREED that the Clerk of the Court pay to the United States of America all of said funds, to wit $2,000.00 and it is further

ORDERED, ADJUDGED and DECREED that plaintiffs, Boston Insurance Company, Northern Assurance Company and National Fire Insurance Company, are hereby discharged from all further liability with respect to that fund, and the claims thereto of all parties other than the United States of America are hereby foreclosed, and it is further

ORDERED, ADJUDGED and DECREED that the request of the interpleading plaintiffs for their attorneys' fees and costs be denied on the authority of the decision of the Supreme Court of the United States in United States v. Liverpool & Globe Insurance Company, 348 U. S. 215 [55-1 USTC ¶9136].

 

 

[75-1 USTC ¶9211]Bank of America National Trust & Savings Association, etc., Plaintiff-Appellant v. Socrates Mamakos, United States of America, William K. Weeks, et al., Defendants-Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 73-1700, 509 F2d 1217, 1/21/75, Affirming District Court decision, 73-1 USTC ¶9290

[Code Sec. 6323]

Tax liens: Priority of creditors: Attorney's fees of stakeholder.--The Appellate Court affirmed the District Court's holding that the attorney's fees of an interpleading bankstakeholder were not allowed against a fund which was insufficient to satisfy prior federal tax liens.

Joseph M. Thornhill, Legal Dept., Bank of America, San Francisco , Calif. , for plaintiff-appellant. William A. Whilledge, Department of Justice, Washington , D. C. 20530, for defendants-appellees.

Before DUNIWAY, WRIGHT and INGRAHAM, ^* Circuit Judges.

Opinion

DUNIWAY, Circuit Judge:

Bank of America National Trust & Savings Association (the bank), plaintiff in this interpleader action, appeals from denial of its motion for relief from judgment under Rule 60(b), F. R. Civ. P. We affirm.

On December 1, 1971, Williams Weeks deposited in the commercial checking account which he and his wife maintained at the bank's Cloverdale branch a check drawn on a Florida bank for $13,500. On December 3, 1971, the Internal Revenue Service (IRS) filed a notice of tax lien against the Week's property and served on the Cloverdale branch a notice of levy (in the amount of $670,190) against Weeks' account. Also on December 3, or slightly before that date, Socrates Mamakos, attorney for the Weeks, presented for payment a $13,500 check drawn on their account. The Florida check had not yet cleared, and Mamakos was told that the check could not be honored for want of sufficient funds. Later, the Florida check was paid and $13,500 was credited to the Weeks' account.

On December 9, 1971, Mamakos wrote a letter to the bank's attorneys claiming that he was entitled to the money in his clients' account by virtue of his presentment of their check before the IRS levy. As Mamakos suggested, the bank then filed an action in interpleader in state court, naming the Weeks, Mamakos, and the government as defendants. At the government's behest, the action was removed to federal court pursuant to 28 U. S. C. §§ 1441(a) and 2410(a)(5).

Shortly thereafter, on March 1, 1972, Mamakos disclaimed any interest in the interpleaded funds and advised the bank's attorneys that his clients no longer contested the government's right to collect the money. The bank, however, declined the government's invitation to stipulate to the dismissal of the action, refusing to pay over the interpleaded funds unless it could deduct its costs and reasonable attorneys fees (approximately $547.50). The government then moved for summary judgment, and the bank moved for discharge with a direction to pay over the money to the government less its costs and fees. On November 10, 1972, the district judge granted the government's motion for summary judgment and denied the bank's motion.

Almost a month later, the bank filed its Rule 60(b) motion, alleging that the district judge's memorandum opinion was based on an erroneous finding of fact, that the IRS levy occurred about the same time as, or after, the proceeds from the Florida check were credited to the Weeks' account, and on an incorrect conclusion of law, that 26 U. S. C. §6332(d) provides an absolute defense against a third party claimant for a stakeholder like the bank which satisfies the government's tax levy with contested funds. The district judge properly denied the motion.

Under Rule 60(b)(1), a district judge may grant relief from a judgment predicated on "mistake, inadvertence, surprise, or excusable neglect." His ruling on such a motion may not be disturbed on appeal absent a showing that he has abused his discretion. Martella v. Marine Cooks & Stewards Union, 9 Cir., 1971, 448 F. 2d 729; Title v. United States , 9 Cir., 1959, 263 F. 2d 28, 31.

Assuming, without deciding, that this is a proper case for entertaining a Rule 60(b) motion, which we seriously doubt, we find no abuse of discretion. The bank argues that because there were no funds in the Weeks' account at the time the IRS served its notice, the levy was ineffective. (See 26 U. S. C. §6331(b)). ¹ But the bank failed to raise the point in opposition to the government's motion for summary judgment, asserting it only after judgment had been entered. This alone indicates that denial of the motion was not an abuse of discretion. We note also that the argument is incorrect. The IRS, on December 3, 1971 , gave notice not only of a tax levy, see 26 U. S. C. §§ 6331-32, but of a tax lien, see 26 U. S. C. §6321. This lien attached to all after-acquired property of the Weeks, including their Cloverdale bank account. Glass City Bank v. United States, 1945, [45-2 USTC ¶9449], 326 U. S. 265; Seaboard Surety Co. v. United States, 9 Cir., 1962 [62-2 USTC ¶9653] 306 F. 2d 855, 859. Thus, had the bank correctly investigated its legal position before filing its action in interpleader, it would have discovered the government's paramount and unquestionable right to the disputed funds. ²

Even were we to hold that the IRS levy was ineffective, the district court on remand would have to disallow the bank's claims for costs and attorneys fees. Such claims may not diminish the portion of an interpleaded fund to which the government is entitled by virtue of a federal tax lien. Seaboard Surety Co. v. United States, supra; United States v. State National Bank of Connecticut, 2 Cir., 1970, [70-1 USTC ¶9209] 421 F. 2d 519; Spinks v. Jones, 5 Cir., 1974, [74-2 USTC ¶9657] 499 F. 2d 339. See United States v. R. F. Ball Construction Co., 1958, [58-1 USTC ¶9327] 355 U. S. 587; United States v. Liverpool & London & Globe Insurance Co., 1955, [55-1 USTC ¶9136] 348 U. S. 215.

Affirmed.

^* The Honorable Joe McDonald Ingraham, Senior United States Circuit Judge for the Fifth Circuit, sitting by designation.

¹ This argument obviously depends on the fact that funds from payment of the Florida check were not credited to the Weeks' account until after the IRS levy. The bank is correct in asserting that the district court erroneously found that the levy occurred after, or at about the same time as, the Florida funds were credited, but the court's error was harmless for the reasons stated below.

² Even if 26 U. S. C. §6332(d) does not provide an absolute defense against third party claimants to money paid in satisfaction of a tax lien, but only against taxpayers claiming the funds, §6321 and the cases cited above clearly establish the government's right to the money in the Weeks' account.

 

 

[74-2 USTC ¶9657]Paul G. Spinks and Mary E. Spinks, Plaintiffs--Appellees v. J. L. Jones, Sr. and J. L. Jones, Jr., d/b/a J. L. Jones Construction Company, et al., Defendants v. United States of America, Intervenor-Appellant.

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 74-1373, 499 F2d 339, 8/23/74 , Summary Calendar. ^* Vacating and remanding District Court, 74-1 USTC ¶9276

[Code Sec. 6323]

Priority of liens: Interpleader: Stakeholders' attorney's fees.--The award of attorney's fees to the stakeholder of an interpleaded fund was improper where the fund was partially impressed with Federal tax liens. The awarded fees were taken "off the top" of that part of the fund which was subject to tax liens. The award invaded the tax lien by reducing the amount which the government could recover.

Alvin t. Prestwood, Montgomery , Ala. , for plaintiff-appellee. Edward J. Vulevich, Jr., Ass't U. S. Attorney, Mobile, Ala., Scott P. Crampton, Ass't Attorney General, Meyer Rothwacks, Daniel F. Ross, Jonathan S. Cohen, Dept. of Justice, Washington, D. C. 20530, L. Y. Sadler, Jr., P. O. Box 516, Camden, Ala., for defendants.

Before COLEMAN, DYER and RONEY, Circuit Judges.

PER CURIAM:

The sole question on this appeal is the propriety of the District Court's [74-1 USTC ¶9276] award of attorney's fees to the stakeholders of an interpleaded fund partially impressed with federal tax liens. The award reduced the Government's recovery pro tanto. We vacate and remand.

J. L. Jones Construction Company recovered a judgment against Paul and Mary Spinks in an Alabama court. Faced with conflicting claims against the moneys represented by the state judgment, including federal tax liens, the Spinkses brought an interpleader action. The District Court determined the priority of each claim and ordered distribution of the fund: first, $3,700 to the Construction Company's attorney, employed on a contingent retainer, for his services in creating the fund; second, $500 to the Spinkses as reasonable attorney's fees for bringing the interpleader action; third, $2,070.74 in full payment to Marshall Lumber & Mill Company on its mechanic's lien; and fourth, the balance of the $11,100 fund to the United States in partial satisfaction of its tax liens. The Government appealed the $500 reduction in the amount otherwise available to it caused by the award of attorney's fees to the Spinkses.

The stakeholder of an interpleaded fund is not entitled to attorney's fees to the extent that they are payable out of a part of the fund impressed with a federal tax lien. Commercial Standard Insurance Co. v. Campbell [58-1 USTC ¶9477] 254 F. 2d 432, 433 (5th Cir. 1958); see United States v. R. F. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 2d 510 (1958); United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197 (5th Cir. 1963); United States v. State National Bank [70-1 USTC ¶9209], 421 F. 2d 519 (2d Cir. 1970); United States v. Wilson [64-1 USTC ¶9396], 333 F. 2d 147 (3d Cir. 1964). See generally J. Moore, Federal Practice ¶22.16[2], at 3159-3162 (1974); C. Wright & A. Miller, Federal Practice & Procedure: Civil §1719, at 488-489 (1972). The Spinkses stress that here, unlike the above cases, the Government does not have the paramount claim. This distinction finds no support in the decided 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 tax lien. United States v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862, 870 (10th Cir. 1960). In this case, the District Court's fee award "off the top" invaded the tax lien by reducing the amount which would therein be recoverable by the Government. The portion of an interpleaded fund that is subject to a Government tax lien cannot be reduced by an award of attorney's fees to the stakeholder for bringing the interpleader action.

We therefore vacate the judgment insofar as it decreases the sum otherwise available to the United States for satisfaction of its tax lien by the $500 attorney's fees to the Spinkses and remand this cause to the District Court for further consideration in the light of this opinion.

Vacated and remanded.

^* Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York et al., 431 F. 2d 409, Part I (5th Cir. 1970).

 

 

[70-1 USTC ¶9209] United States of America , Plaintiff-Appellant v. The State National Bank of Connecticut, Defendant-Appellee and Charles Wergeles, Dorothy Wergeles, Charles Wergeles, Jr. and Theresa Mastrogiovanni Rust, Defendants

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 34142, 421 F2d 519, 1/29/70, Reversing unreported District Court

[Code Sec. 6323]

Liens for taxes: Validity of liens: Bank-stakeholder.--A disinterested bank-stakeholder was not entitled to attorney's fees from the funds in the taxpayer's bank accounts when the amounts in the accounts were insufficient to satisfy prior federal tax liens.

Stephen H. Hutzelman, Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Department of Justice, Washington, D. C. 20530. Stewart H. Jones, United States Attorney, Hartford , Connecticut , for plaintiff-appellant. Abram W. Spiro, 54 Main St. , Danbury , Conn. , Rob ert M. McAnerney, 43 Corbin Dr. , Darien , Conn. , for defendant-appellee.

Before KAUFMAN and FEINBERG, Circuit Judges, and LEVET, District Judge. ^*

LEVET, District Judge:

This appeal involves the question of whether a District Court may award attorney's fees to a bank-stakeholder from the funds in a taxpayer's bank accounts when the amount in the accounts is substantially less than the amount awarded in judgment to the United States upon foreclosure of federal tax liens. We reverse the District Court's judgment.

The facts are as follows:

On December 23, 1965, the United States filed a complaint in the United States District Court for the District of Connecticut against taxpayers Charles and Dorothy Wergeles for the purpose of reducing tax liens to judgment and of foreclosing the liens on certain bank accounts said to be the property of Dorothy Wergeles. The two bank accounts, both on deposit with the defendant State National Bank of Connecticut ("the bank") at its Ridgefield office, are Account No. 748 in the name of Dorothy Inez Wergeles in trust for defendant Charles Wergeles, Jr., and Account No. 749 in the name of Dorothy Inez Wergeles in trust for defendant Theresa Mastrogiovanni, now known as Theresa Mastrogiovanni Rush. On January 24, 1966, the bank filed an answer and counterclaim admitting that Accounts No. 748 and 749 were on deposit with it and that the accounts contained balances as of that date in the sums of $2,000 plus accrued interest and $300.94 plus interest, respectively. The bank asked the court to adjudge whether the United States or one or more of the defendants were entitled to the accounts; sought permission to deposit such funds in the registry of the court and be discharged from all liability; ¹ and requested the award of costs and attorney's fees payable out of Accounts No. 748 and 749.

On May 18, 1969, the United States filed a motion for summary judgment. On July 9, 1969, the District Court, T. Emmet Clarie, Judge, without written opinion, granted the motion for summary judgment, held that the taxpayers were jointly and severally liable to the United States for the taxable year 1956 in the amount of $27,155.39, and ordered that Dorothy Wergeles surrender the deposit books for Accounts No. 748 and 749 to the bank, which was directed to pay such funds to the United States for application to the above judgment. The court also awarded the bank $400 in attorney's fees to be paid out of the above accounts.

Although the tax adjudged to be due was $27,155.39, the deposits totaled only $2,300.94 plus interest. The United States appealed from the award of $400 in attorney's fees to the bank. On appeal, the bank neither submitted a brief nor presented argument. 26 U. S. C. §6321 (1954 Code) provides for a lien for unpaid taxes in favor of the United States upon the taxpayer's personal property, including bank deposits. Notice of the federal tax liens pertaining to the assessment against Charles and Dorothy Wergeles was duly filed with the Secretary of State, Hartford , Connecticut on April 24, 1963. The present taxpayer's accounts in the form of revocable trusts were subject to these liens.

It is well established that accounts deposited in a bank by the depositor in trust for another are tentative trusts only, revocable at will until the depositor dies or completes the gift in his or her lifetime by some unequivocal act or declaration. Such a trust may be subject to claims of creditors. Fruchtman v. Manning, 156 Conn. 500, 242 A. 2d 723 (1968); Fasano v. Meliso, 146 Conn. 496, 152 A. 2d 512 (1959); Stamford Sav. Bank v. Everett, 132 Conn. 92, 42 A. 2d 662 (1945). See also Matter of Totten, 179 N. Y. 112 (1904); Beaver v. Beaver, 117 N. Y. 421 (1889); Mabie v. Bailey, 95 N. Y. 206 (1884); Matter of O'Sullivan, 173 Misc. 554 (1940); Matter of Weinberg, 162 Misc. 867 (1937).

We take judicial notice that banks today frequently recommend, indeed solicit, the opening of trust accounts. Under the terms of such accounts, the depositor remains in control of the fund with the right of withdrawal during his lifetime, with the understanding that upon his death title to the funds vests in the designated beneficiary. Presumably, experienced bankers also know full well that such accounts may be subject to federal tax liens. Consequently, the possibility of disputed claims to the funds is not an unexpected business risk. The duty of a bank as a primary depository is to hold the fund; and ordinarily when conflicting claims arise, it becomes merely a stakeholder. When the United States brought suit in the case at bar to reduce the tax liens to judgment and have the sums in the two accounts applied in reduction of such judgment, the bank, as a depository, became only a disinterested stakeholder.

Assuming, arguendo, that a bank-stake-holder could enforce a lien for attorney's fees in the absence of prior federal tax liens, it is evident that no such lien for attorney's fees is enforceable when the available funds are insufficient to satisfy a judgment based on prior federal tax liens.

The bank may not rely on 26 U. S. C. §6323(b)(8), which provides for priority for an attorney's lien when the attorney's efforts procured a judgment against which a previously filed federal tax lien has attached. No efforts by the bank procured any such judgment.

Nor can the bank gain relief under 26 U. S. C. §6323(e)(3), which provides that a lien or security interest deemed to be prior to a federal tax lien shall extend to reasonable expenses, including attorney's fees incurred in collecting or enforcing the secured obligation. There is no lien or security interest (independent of the attorney's fees) which has priority over the federal tax lien in this case.

Moreover, the equitable doctrine of reimbursement by way of allowance for attorney's fees, recognized in Sprague v. Ticonic Bank, 307 U. S. 161, 164 (1939), has no application here since no fund was unconditionally created as a result of the appellee bank's action. See Culter v. American Federation of Musicians of United States and Canada, 231 F. Supp. 845, 849 (S. D. N. Y. 1964), aff'd 366 F. 2d 779 (2nd Cir. 1966), cert. denied, 386 U. S. 993 (1967).

We hold that a disinterested bank-stake-holder is not entitled to attorney's fees from a fund when the total amount in the fund is insufficient to satisfy prior federal tax liens. United States v. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587 (1958); United States v. Liverpool & London Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United States v. Wilson [64-1 USTC ¶9396], 333 F. 2d 147 (3rd Cir. 1964); Seaboard Surety Company v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962); United States v. Henry's Bay View Inn, Inc. [61-1 USTC ¶9157], 191 F. Supp. 632 (S. D. N. Y. 1960).

We reverse the judgment insofar as it awarded $400 in attorney's fees from the amount on deposit with the bank.

^* Of the Southern District of New York, sitting by designation.

¹ It appears from the record that the court did not rule directly on the portion of the bank's counterclaim which was in the nature of interpleader. Instead, the court granted the government's motion for summary judgment and ordered that the bank "deliver to the United States a check payable * * * in the full net amount of said accounts * * *." Therefore, we need not discuss further the issue of interpleader.

 

 

[64-1 USTC ¶9396] United States of America v. Anthony J. J. A. Wilson, Hedwig C. Wilson, Massachusetts Mutual Life Insurance Company, and Travelers Insurance Company, Travelers Insurance Company, Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 13,859, 333 F2d 147, 4/10/64, Affirming District Court, 61-2 USTC ¶9693, 195 F. Supp. 332

Tax liens: Recovery of interpleader costs.--An insurance company was denied recovery of costs of interpleading in the Wilson case, 64-1 USTC ¶9395, where the allowance of such costs would have impaired the value of the Government's lien attaching against insurance policies of a delinquent taxpayer. In private actions in the nature of interpleader in which the stakeholder asserts or maintains a substantial adversary position, courts properly exercise their discretion to disallow recovery of costs.

L. F. Oberdorfer, Assistant Attorney General, L. A. Jackson, J. Kovner, M. A. Mulroney, Dep't of Justice, D. M. Satz, Jr., U. S. Attorney, Newark, N. J., for appellee. Stryker, Tams & Dill, Burtis W. Horner, Newark, N. J., for Travelers Ins. Co., appellant.

Before BIGGS, Chief Judge, and MCLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY and SMITH, Circuit Judges.

Opinion of the Court

[Facts]

PER CURIAM:

This is the appeal of the Travelers Insurance Company ("Travelers") in the Section 7403, Internal Revenue Code of 1954, action brought against delinquent taxpayer, Anthony Wilson, and involving foreclosure of a tax lien on his interest in certain unmatured insurance policies. The separate appeal of the Massachusetts Mutual Life Insurance Company in this same proceeding is filed concurrently herewith and is reported at [64-1 USTC ¶9395] -- F. 2d -- (1964).

The facts of the case at bar are set out in the opinions of the court below reported at [60-1 USTC ¶9400] 182 F. Supp. 567 (1960), at [61-1 USTC ¶9268] 191 F. Supp. 69 (1961), and at [61-2 USTC ¶9693] 195 F. Supp. 332 (1961), and in the "Tabulation of Information re Life Insurance Policies" appended to our opinion in United States v. Sullivan [64-1 USTC ¶9392], -- F. 2d -- (1964), filed concurrently herewith. The "Tabulation" is incorporated into this opinion by reference. ¹

It is unnecessary to recite the facts here. For present purposes it is sufficient to state that unlike the four other tax lien-insurance cases decided this day, no question was presented below as to Travelers respecting policy loans or automatic premium loans and the proper measure of the Government's recovery. ² The company professed its willingness to turn over the cash surrender value of its policy to the Government pursuant to a proper order of the court. Travelers, however, made application for an allowance of a setoff for its costs in the proceeding, which consisted almost exclusively of attorney's fees. ³ The court below denied the company's request and this determination forms the basis of the present appeal.

[Status as Stakeholder]

Travelers asserts that its status in the case at bar has been that of a stakeholder of its policy's cash surrender value and that by reason thereof, it is entitled to recover its costs out of the fund citing as authority a number of cases dealing with interpleader. Travelers' claim in the circumstances of this case is ill-founded and does not require extended discussion. The company, of course, was in a fundamental sense a stakeholder in the proceeding below notwithstanding the fact that it occupied the nominal status of defendant rather than interpleader. But it is far from clear that Travelers acted the role of a disinterested party.

[Recovery of Costs Denied]

The Government flatly asserts on this appeal without citing any record references in support of its claim, that Travelers "devoted substantial time and energy to developing and briefing an argument on the automatic premium loan question [which was posed with respect to its co-defendant, the Massachusetts Mutual Life Insurance Company]." Brief for Appellee, p. 65. Some substance is given to this assertion by the fact that in its appeal brief filed with this court, Travelers devoted some twenty-three pages of argument to the automatic premium loan and related issues (because of their "fundamental importance to the insurance industry," Brief for Appellant, p. 5) and only four pages to the cost question. Travelers apparently did not particularize its costs other than as indicated in note 3 supra. In private actions in the nature of interpleader in which the stakeholder asserts or maintains a substantial adversary position, courts properly exercise their discretion to disallow recovery of costs. See Groves v. Sentell, 153 U. S. 465, 485-86 (1894); Century Ins. Co. v. First Nat'l Bank, 102 F. 2d 726, 729 (5 Cir.), cert. denied, 308 U. S. 570 (1939); American Smelt. & Ref. Co. v. Naviera Andes Peruana, S. A., 208 F. Supp. 164, 171-72 (N. D. Cal. 1962).

It would be superfluous, however, to pursue this line of inquiry further. What is more clearly of controlling importance here is the fact that the Government's delinquency claim against Wilson far exceeded the total amount of its judgment. To allow Travelers to recover its costs, therefore, would be to impair the value of the tax lien. We are of the view that existing law precludes such a result. See United States v. Ball Constr. Co. [58-1 USTC ¶9327], 355 U. S. 587 (1958) (per curiam); United States v. Liverpool & London & Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); Seaboard Sur. Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9 Cir. 1962); United States v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862 (10 Cir. 1960); Narragansett Bay Gardens v. Grant Constr. Co. [59-2 USTC ¶9557], 176 F. Supp. 451 (D. R. I. 1959).

No other issues being presented on this appeal, the judgment against Travelers Insurance Company will be affirmed.

¹ Those facts set out in the "Tabulation" which are enclosed by parentheses are not in the record of the case. The "Tabulation" must be read with that in mind.

² There apparently had been no applications for pay-outs of the policy's cash surrender value at times pertinent to the Government's claim and premiums on the policy had been prepaid through the time of judgment in the court below.

³ The "Affidavit in Support of Application for Counsel Fee" filed by counsel for Travelers stated that "a fair and reasonable charge [for counsel fees] would be $650.00, together with our out-of-pocket expenses in the amount of $7.88."

 

 

[62-2 USTC ¶9653]Seaboard Surety Company, a New York Corp., and Hansen & Rowland, Inc., a Washington Corp., Appellants v. United States of America, Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 17,618, 306 F2d 855, 7/24/62, Affirming unreported District Court decision

[1954 Code Sec. 6321]

Lien for taxes: Future profits under Government contract: Profits assigned to trust.--A lien for withholding taxes attached immediately to the taxpayer's rights under a Government contract awarded after assessment, and this lien could not be displaced by an assignment in trust of payments to become due under the contract, the trust funds to be used to pay costs chargeable to the contract, to pay the surety's costs, and to pay other creditors. Legal expenses incurred by the surety and the trustee in bringing an interpleader suit were not entitled to priority. Since the surety and the trustee had disclaimed any interest in the trust fund except for legal expenses, they could not appeal from the order disbursing the funds (except as to the legal expenses which they had withheld).

Skeel, McKelvy, Henke, Evenson & Uhlmann, William E. Evenson, William F. Baldwin, Seattle , Wash. , for appellant. Louis F. Oberdorfer, Assistant Attorney General, Washington 25, D. C., Brockman Adams, United States Attorney, Thomas H. S. Brucker, Assistant United States Attorney, Seattle, Wash., for appellee.

Before POPE, BARNES and BROWNING, Circuit Judges.

BARNES, Circuit Judge:

This is an appeal from a judgment entered by the United States District Court directing the clerk of the court to pay appellee $28,673.16 from the funds in the registry of the court, and giving judgment against appellants in the amount of $1,903.02. Jurisdiction was conferred upon the district court by §§ 1335 and 2463, Title 28, United States Code, and §7403, Title 26, United States Code.

Judgment for appellee was entered on September 5, 1961 . A timely notice of appeal was filed. This court has jurisdiction to review the judgment entered below under the provisions of §§ 1291 and 1294(1), Title 28, United States Code.

We note that Seaboard and Hansen & Rowland appeal from the judgment, but that defendant creditors have not appealed from the judgment granting appellee priority over their claims.

This was an action in interpleader brought by appellants, interpleading plaintiffs below, to determine the relative rights of various creditors, including appellee, in and to certain funds representing the profit from a completed construction job of Poland & Pfaff, Inc. (hereinafter referred to as "taxpayer").

On or about December 31, 1956 , taxpayer was awarded a government construction contract. Taxpayer and C & R Builders, Inc. (hereinafter referred to as "C & R"), a joint venturer, on December 31, 1956 made application to appellant Seaboard Surety Company (hereinafter referred to as "Seaboard") for the issuance of a performance bond, and a payment of labor and material bond. As a condition to issuance of the bonds, Seaboard required "standby" agreements to be obtained from taxpayer's existing creditors. ¹ Appellee, although a creditor, ² was not requested to nor did it participate in any such agreement. None of the aforementioned creditors had any claim or debt due from taxpayer arising out of the government contract.

On March 2, 1957, a trust agreement (Ex. 1) was executed by taxpayer, C & R, Seaboard, the University Branch of the Pacific National Bank of Seattle (hereinafter referred to as "Pacific National"), and appellant Hansen & Rowland, Inc. (hereinafter referred to as "Hansen & Rowland"). The trust instrument's preamble states that the proceeds of taxpayer's government contract were assigned ³ to Pacific National. ⁴

The contract was performed and all claims arising therefrom were satisfied as of May 27, 1959 . The balance in the trust account was $31,171.16 which sum is the "remaining funds" referred to in paragraph (i) of the trust agreement (set forth in footnote 4, supra).

On or about July, 31, 1958, appellee through its District Director of Internal Revenue for the Seattle District, caused a Notice of Levy (Form 668-A) to be served upon Hansen & Rowland showing a total amount (including interest) of $28,006.08 then due on appellee's liens. On or about August 15, 1958 , appellee, through its same agent, caused a Final Demand (Form 668-C) to be served on Hansen & Rowland and on Seaboard.

[Interpleader Suit by Surety and Trustee]

Faced with competing claims of creditors and appellee to the profits of taxpayer from its government contract, appellants brought the interpleader action on May 29, 1959 , against the creditors and appellee as defendants, asking the court to determine their respective rights to the aforementioned fund. ⁵

Appellants expressly disclaimed any interest in or right to the deposited fund of $28,673.16 for their own interest, except that they alleged that the trust account was "primarily" subject to the costs and expenses of these proceedings, the reimbursement to them for all their costs and expenses to be incurred therein, and to the payment of all beneficiaries of the trust account and defendants which otherwise on any account would have any claim against appellants or either of them.

The defendant creditors, represented by their own attorneys, fully participated in the proceedings below. Appellee moved to dismiss the action against it and intervened to enforce its tax liens. The essential facts were admitted on pretrial order, and based upon the facts above stated, the district court entered the following Conclusions of Law:

(1) That a lien for taxes under Section 6321 of the Internal Revenue Code of 1954 attaches to all "property and rights to property belonging to a taxpayer." However, rights under an executory bilateral contract are not property or rights to property within the scope of Section 6321 unless and until the agreed exchange under the bilateral contract has been performed and a right to payment has been earned.

(2) That under Washington law there was no valid legal or equitable assignment to defendant creditors or an interest in the fund to be created from performance of the government contract.

(3) That when the fund referred to in paragraph (i) of the trust agreement came into existence after prior claims to the proceeds of the government contract were paid, the tax lien of appellee attached to and had priority over the claims of defendant creditors.

(4) That under the rule announced in United States v. Liverpool & London & Globe Insurance Co., 1954, [55-1 USTC ¶9136] 348 U. S. 215, appellants were not entitled to priority over the claim of appellee for the expense incurred in bringing this action.

(5) That appellee (the intervenor) is entitled to a judgment and decree declaring that the priorities and the rights to payments from the trust account (which fund totaled $31,173.16 as of May 27, 1959 ) are as follows:

First Priority: The tax liens of appellee in the sum of $23,780.31 plus interest at the rate of six per cent on $21,440.31 from November 15, 1956 to date in the amount of $6,164.07 plus interest at said rate on $2,340.00 from February 28, 1957 to date in the amount of $631.80 (totaling $30,576.18).

Second Priority: The costs and attorneys' fees of appellants.

Third Priority: The priority and amounts of each of the several defendant creditors were not established, as the funds which are the subject of this interpleader action will be insufficient to satisfy the second priority.

(6) That appellee is entitled to an order directing the clerk of the district court to pay it $28,673.16 from the funds in the registry of the court.

(7) That appellee is entitled to judgment against Seaboard & Hansen & Rowland in the amount of $1,903.02. (This represents the difference between the total amount due the government and the amount deposited by the Trustee.)

(8) That appellants are entitled to judgment for costs and attorneys' fees in the amount of any balance remaining in their possession originating from the trust account after payment of the judgment in favor of appellee ($2,500 less $1,903.02, or $596.98).

An agreed computation of the interest due on the tax liens was made. On September 5, 1961 , the district court entered judgment which followed in its terms the above Conclusions, i. e., the clerk was directed to pay appellee $28,673.16 from the funds in the registry of the court, and appellee was given judgment against appellants in the amount of $1,903.02. Appellants were awarded the balance of $596.98.

Appellants set forth seventeen specified errors upon which they rely in this court. For reasons set forth below, however, we believe only those errors which touch upon that part of the judgment granting appellee judgment against Seaboard and Hansen & Rowland in the amount of $1,903.02 are properly to be considered by this court.

[Disclaimer of Interest]

In their complaint appellants stated:

". . . Plaintiff trustee is ready, willing and able to pay the balance of said fund over to the clerk of this court or as this court by its judgment may otherwise direct. Plaintiffs disclaim any interest in or right to said balance of said account for their own interests, except that plaintiffs allege said account is primarily subject to the costs and expenses of these proceedings, the reimbursement of plaintiffs for all their costs and expenses to be incurred herein, and to the payment of all beneficiaries of said trust account and defendants which otherwise on any account would have any claim against the plaintiff or either of them." (Italics added.)

This partial disclaimer was repeated in the Partial Pretrial Order and the Findings of Fact. Thus, appellants disclaimed any interest in the deposited fund. The district court found they had no interest in the fund. Under these circumstances, we rely on the rule that a party who has no interest in a fund cannot appeal from an order disbursing that fund. ⁶ Defendant creditors below, who are the only parties affected by that portion of the judgment, had the right to appeal to protect their interests. They did not do so. Appellants have no right or power to represent the interests of others on appeal. Therefore, appellants' appeal must be dismissed insofar as it attempts to review the judgment of the district court awarding $28,673.16 to appellee.

Appellants are hence confined to questioning that part of the judgment entered against them granting appellee the sum of $1,903.02; this money will be paid from appellants' pockets, not from the fund, but only because appellants "pocketed" attorneys' fees before filing suit.

Since the right of appellee to the $1,903.02 depends upon its lien upon the full amount of taxpayer's profits from the construction contract, the validity of that lien is determinative of the issue between the parties.

[Tax Lien Against Future Profits]

The undisputed facts show that as of and prior to the date of the trust agreement, appellee had a fully perfected tax lien upon all property and rights to property of the taxpayer, in the sum of $21,440.31 plus interest from November 15, 1956, and $2,340 plus interest from February 28, 1957. These liens, arising upon assessment under Section 6321 of the Internal Revenue Code of 1954, continue in full force and effect until the tax liability is extinguished (26 U. S. C. §6322) and attach to all after-acquired property of the taxpayer. Glass City Bank v. United States, 1945, [45-2 USTC ¶9449] 326 U. S. 265. These tax liens attached immediately to all rights of taxpayer under the government contract awarded December 31, 1956 , including payments whenever earned. On December 31, 1956 , and up to March 2, 1957, (the date of the trust agreement) appellee had a prior lien ahead of all of other creditors. None of the other defendant creditors had any liens upon the property of taxpayer, and no lien upon the rights of taxpayer in the government contract. Appellee was the only creditor with a lien upon these rights. Hence, it follows that the trust agreement of March 2, 1957 , could not displace the tax liens, which had already attached to taxpayer's property rights in the contract. The fact that taxpayer's rights under the contract were dependent upon its performance did not affect the tax liens, as far as the defendant creditors are concerned. Glass City Bank v. United States, supra. The tax liens were subject only to a prior, choate lien upon these rights. Alleged beneficial interests of the creditors in this case arose after the tax liens and are subordinate to the tax liens. United States v. New Britain , 1954, [54-1 USTC ¶9191] 347 U. S. 81; United States v. Christensen, 9 Cir. 1959, [59-2 USTC ¶9621] 269 F. 2d 624. ⁷

Appellee had a prior choate tax lien upon any profits of taxpayer under the government contract, and this prior tax lien was superior to the then existing non-lien creditors of taxpayer, and appellee's priority was not in any way displaced or affected by the agreement of March 2, 1957. Appellee was entitled to payment of its lien totaling $30,576.18, inclusive of interest, out of the funds in the hands of appellants as of May 27, 1959 . Appellants could not diminish appellee's lien by withholding from the fund an amount to cover their attorneys' fees and costs of the interpleader action made necessary by competing claims of other creditors which were junior to the tax liens of appellee.

It appears, from appellants' complaint, that appellants, in the district court, contended that they were entitled to attorneys' fees and expenses for the preparation and filing of this action and for the prosecution of these proceedings. The district court regarded their claims as being "for the expenses incurred in bringing this action." Appellants now contend that their claims are for the expenses of the admin istration of the trust apart from the prosecution of the interpleader action. It is settled law that the lien of appellee's is superior to the attorneys' fees and costs of an interpleader. ⁸

In the district court, appellants did not contend and made no offer of proof that they had incurred legal expenses for matters not related to the preparation and prosecution of the instant case. They cannot do so here. Factual issues cannot be raised for the first time on appeal. Carr v. City of Anchorage , 9 Cir. 1957, 243 F. 2d 482.

We affirm the judgment awarding $1,903.02 to appellee. Appellants' appeal from that portion of the district court's judgment directing the clerk of the court to pay to appellee those funds which had been placed in the registry of the court by appellants as interpleaders is dismissed.

¹ Whose claims or debts arose prior to December 31, 1956 , some of which were defendants below. By signing these agreements, the creditors promised not to take legal action against taxpayer until one year after the completion of the government contract; and taxpayer agreed to pay those creditors which signed these agreements on a pro rata basis after the expenses of the job were satisfied.

² Taxpayer, an Alaska Corporation, had employees before December 31st, 1956 . On account of this employment and the payment of wages, assessments were duly made for the quarters ended September 30, 1956 and December 31, 1956 of the amount deducted and withheld by taxpayer from wages as the collection of taxes upon the income of its employees (i.e., withholding taxes). The District Director of Internal Revenue for the District of Seattle gave notice of each of these assessments to, and demanded payment of, the amount thereof from taxpayer. The District Director filed the notices of tax liens with the United States Commissioner at Fairbanks , Alaska . The amount of taxes and the penalty or interest included in each assessment, or both, the dates of filing of notices of tax liens, the amount of any payment and the amount of the unpaid balance of the assessments, are as follows:                                                                                 

³ The district court found and concluded that this assignment (Ex. 5) did not in fact take place until April 8, 1957 .

⁴ The operative provisions of the trust agreement here material are, in substance, as follows:

1. The taxpayer and Pacific National assigned and transferred all monies received, due or to become due Pacific National under its assignment of the government contract to Seaboard, Seaboard being authorized to receive all checks, warrants, and other instruments in payment of the contract and to endorse and deposit them in a trust account with the trustee.

2. The money held by the trustee was to be disbursed in payment of the costs and expenses directly and indirectly chargeable against the government contract.

3. In the event of default on the part of taxpayer, or on account of non-payment of claims for labor and materials, Seaboard was to have authority to use the balance of monies in the possession of the trustee for the purpose of completing the government contract and of paying any obligations which Seaboard may have been required to pay on account of the execution of the bonds.

4. Paragraph (i) of the trust agreement provided in part, that after payment of all expenses incurred in performance of the government contract, including advances made by Pacific National and certain expenses of Seaboard and the trustee:

"The remaining funds . . . shall be paid to creditors of [taxpayer], in such amounts as are indicated in statement of [taxpayer] dated December 31, 1956, or such agreed revision as may later be made between [taxpayer] and its creditors properly certified to Trustee. Any residual amount shall be paid to [taxpayer] when the time for bringing suit against [Seaboard] shall have expired and all claims and suits against [Seaboard] by reason of the operations of [taxpayer] under bonds past or present of [Seaboard] shall have been terminated."

⁵ Appellants did not, however, deposit in the registry of the court the full amount of the balance in the trust account of $31,173.16 but, instead, deposited in the registry of the court $28,673.16, and retained $2,500 for attorneys' fees in the action and for estimated costs of the action.

⁶ Spriggs v. Stone, D. C. Cir. 1949, 174 F. 2d 671 ("An [executor] cannot appeal for the protection of the interests of particular devisees or legatees who are able to protect themselves by taking an appeal of their own.") In re Michigan-Ohio Building Corporation, 7 Cir. 1941, 117 F. 2d 191 ("Speaking more specifically, a party has an appealable interest only when his property may be diminished, his burdens increased or his rights detrimentally affected by the order sought to be reviewed."); King v. Buttolph, 9 Cir. 1929, 30 F. 2d 769 ("It is fundamental that an appellant must either have or represent an interest in the subject-matter of the appeal, and it is generally held that, where it does not appear that the admin istrator has an interest in a controversy and he is the only party asking a review of the judgment, the appeal should be dismissed."). See also, 2 Am. Jur., Appeal and Error, §150; 4 C. J. S., Appeal and Error, §177.

⁷ The case of In re Halprin, 3 Cir. 1960, [60-2 USTC ¶9564] 280 F. 2d 407, does not stand for the proposition it is cited for by appellants, since it involved only the priority of a person financing the contract out of which the taxpayer would earn any property subject to the federal tax lien. In this case, the only creditor in that position is Pacific National, and its priority is not in dispute. Defendant creditors in this case had nothing to do with financing the construction contract. Their claims are for indebtedness incurred by taxpayer prior to December 31, 1956 . At that time, and up until March 2, 1957 , the defendant creditors were junior to appellee's tax lien. The fact that defendant creditors agreed to forbear from suit in return for a promise that they would be paid out of the profits of the contract does not give them priority over appellee. At the time of the March 2, 1957 agreement, defendant creditors were no more than general creditors of taxpayer, junior in every respect to appellee's tax lien. They cannot contract away appellee's tax lien. At the most, the trust agreement of March 2, 1957 , so far as defendant creditors are concerned, conferred upon them an inchoate, future interest.

⁸ In United States v. Liverpool & London & Globe Ins. Co., 1955 [55-1 USTC ¶9736] 348 U. S. 215, a garnishment action, the Court held that the tax lien was prior to the garnishment lien and that "fees in [the garnishment] proceeding are not prior to the Government liens, and the authorization of the payment of the attorneys' fees prior to the Government liens was error." In United States v. Ball Construction Co., 1958, [58-1 USTC ¶9327] 355 U. S. 587, an interpleader action, the Court said: "The claim of the interpleader for its costs is controlled by United States v. Liverpool & London & Globe Ins. Co., [supra]." In United States v. Chapman, 10 Cir. 1960, [60-2 USTC ¶9667] 281 F. 2d 862, the court held that the tax lien of the United States could not be diminished by the attorneys' fees and costs, and that the interpleader would have to look to other parties for its costs.

 

 

[73-2 USTC ¶9689] Rob ert D. Bjork, Plaintiff-Appellee v. United States of America, Defendant-Appellant and George E. Mahin, Director, Illinois Department of Revenue, Defendant-Appellee

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 72-1936, 486 F2d 934, 10-4-73, Rev'g and rem'g, 72-2 USTC ¶9693

[Code Sec. 6323]

Collection: Validity of liens: Validity and priority against third parties: Beneficial interest.--Pursuant to a Bulk Sales Stop Order issued by the Illinois Department of Revenue, seeking a claim of the State of Illinois under its Retailers Occupation Tax, the purchaser of a card and gift shop created a fund from a portion of the purchase price in order to satisfy the claim against the seller. The seller's beneficial interest in the fund was a sufficient property interest to which the tax liens of the United States could attach. Since the State's stop order did not create a vested interest in the fund, interrupting possession only and not the transfer of beneficial interest in the fund, and since no State lien had arisen by the date of the Government's tax lien, the Government prevailed. Also, the Government prevailed in its appeal from the award of attorney's fees and costs incurred by the purchaser's attorney.

William J. Scott, Attorney General, Bonny Barezky, Assistant Attorney General, Chicago, Ill., Rob ert D. Bjork, 20 N. Wacker Drive, Chicago, Ill., for plaintiff-appellee. Scott P. Crampton, Assistant Attorney General, Karl Schmeidler, Department of Justice, Washington, D. C. 20530, James R. Thompson, United States Attorney, William T. Huyck, Assistant United States Attorney, Chicago, Ill., for defendant-appellant.

Before FAIRCHILD and SPRECHER, Circuit Judges, and GRANT, ^* Senior District Judge.

SPRECHER, Circuit Judge:

The Cline Letter Service, Inc. (Cline) made a bulk transfer of its card and gift shop and office supply business to Martin J. Kucera in July, 1971, under the provisions of Article 6 of the Uniform Commercial Code, ILL. REV. STAT. ch. 26, §§ 6-101 to -110 (1971). On July 15, 1971 , Kucera gave notice to those creditors of Cline who appeared on the transferee's sworn list of creditors that on July 30 he would purchase Cline's business for $13,000 cash. All the requirements of the Bulk Transfer provisions of the U. C. C., as enacted in Illinois, ¹ were complied with.

Among Cline's creditors were the United States (the Government) and the Director of the Illinois Department of Revenue (the State). On July 24 the State, acting pursuant to the Retailers' Occupation Tax Act, §5j (ILL. REV. STAT. ch. 120 §444j (1971)), ² issued a Bulk Sales Stop Order to Kucera, directing him to withhold $2,500 from the purchase price as a fund from which to satisfy Cline's obligation to the State for taxes due under the Act. At that time, the obligation was undetermined as to amount. In fulfillment of this stop order, Kucera procured a certified check for $2,500 payable to himself and endorsed it to his attorney, Rob ert D. Bjork, on July 30, 1971 , the date the purchase was closed. Bjork thereafter held the check as an escrow deposit pending determination of the exact amount owed to the State by Cline.

[Government's Tax Lien]

On October 10, 1971 , the Government assessed income withholding, Social Security and unemployment taxes against Cline in the amount of $2,323.69. Bjork was served with a notice of levy on October 27, and notice of the tax lien was filed in the appropriate public office the same day. When the Government and the State failed to reach agreement on the proper disposition of the fund and both sides continued to press Bjork, he filed this statutory interpleader action (28 U. S. C. §1335) on January 14, in the district court. Shortly thereafter, when Cline filed its final return on January 31, 1972 , the exact amount of the retailers' occupation tax due the State was determined.

In an opinion filed July 24, 1972 , the district court denied the Government's motion for summary judgment. The State's subsequent motion for summary judgment was granted on August 7, 1972 , and judgment was entered awarding the fund as follows: $1,387.62 to the State, $24.48 in costs and $400.00 in attorney's fees to Bjork and the remaining $687.90 to the Government. The Government has appealed, and we reverse.

[Was Fund Seller's Property?]

The issue presented is whether under Illinois law, the escrow fund was Cline's property on October 10, the date when, if at all, the Government's lien attached. ³ As the district court stated:

"Federal tax liens attach only to 'property and rights to property' of the taxpayer. 26 U. S. C. §6321. State law must be examined to decide whether the taxpayer had any property or rights to property. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960); [Avco Delta Corp. Canada Ltd. v. United States , Nos. 72-1428, 72-1899 (7th Cir., Aug. 1, 1973 );] Continental Oil Co. v. United States [71-1 USTC ¶9296], 326 F. Supp. 266, 269 (S. D. N. Y. 1971). If under state law the taxpayer does have property or rights to property then it is a question of federal law whether the federal lien has priority over the liens of others. United States v. Security Trust & Savings Bank [50-2 USTC ¶9420], 340 U. S. 47, 49-50 (1950)." ⁴

The district court concluded that at the time of the sale when the escrow fund was established (July 30), the State had a vested interest in the fund and taxpayer Cline had only a contingent interest to the extent of any money remaining after that due to the State and, therefore, that the Government's lien attached on October 10 only to this contingent interest. We do not agree that the transfer of funds into an escrow account established a vested interest in the State. ILL. REV. STAT. ch. 120, §444.

By ascertaining ownership of the property at the time of transfer, we do not seek to determine who had the right to possession or physical custody of the fund. If that were the question, the answer would be simple: the right to possession passed from Kucera to Bjork at the time of the transfer, and it was still in Bjork on October 10. Indeed, it remained in Bjork until he endorsed the check and deposited it in the district court registry. At any time between July 30 and the date of deposit, Bjork could unquestionably have cashed the check and received the proceeds. Just as clearly, he would not have been able to retain the proceeds as his own, for Bjork had no beneficial interest in the fund. The ownership of the benecial interest is what we seek to determine.

Immediately before the transfer, Kucera had the beneficial interest in the fund. Absent a stop order, there is no question but that the beneficial interest in what became the fund would have shifted to Cline at the time of the transfer. This result is dictated by the contract between Cline and Kucera by which Kucera agreed to give Cline a full $13,000 in cash in return for Cline's business assets. Since Cline performed his part of the bargain, had there been no stop order Cline would have prevailed against Kucera in an action to recover the full $13,000.

[Ownership Not Vested in the State]

How did the stop order affect the shifting of the beneficial interest on July 30th? Section 5j's (supra note 2) purpose is to insure the existence of some cache of the seller's property from which the seller's tax liability can be satisfied. To accomplish this purpose, the statute appeals to the purchaser's self-interest in avoiding personal liability for the tax and gives him a means of doing so without breaching his contract with the seller. It provides for the creation of what the parties have referred to as an "escrow fund". Section 5j does not purport to vest ownership of the held fund in the State. On the contrary, it leaves the State to its usual methods of determining and assessing the tax as set out in §§ 5 and 5a of the Act, ILL. REV. STAT. ch. 26, §§ 444 and 444a.

Under the district court's interpretation of §5j, the State would be able to acquire a "vested interest" in funds due the taxpayer under a bulk sale contract, an interest good against all creditors who acquire a lien on the property subsequent to the issuance of the stop order. This interpretation effects a suspension of the normal procedures for obtaining a lien, ⁵ a result which is difficult to justify without clearer authority in the statutory language. ⁶ Given Section 5j's apparent reliance on the remedial procedures of Sections 5 and 5a of the Act, the most reasonable interpretation of the effect of a stop order is that it insures some cache of the seller's property from which to satisfy the seller's tax liability only insofar as no perfected lien attaches to the fund prior to the determination of the amount of such liability to the State. ⁷

[Seller Had Beneficial Interest]

Accordingly, we conclude that the stop order did not interrupt the transfer of beneficial interest in the fund to Cline on July 30, but only interrupted possession. ⁸ Unless or until the State proceeded to obtain a lien on the funds, beneficial interest resided in Cline. No State lien having arisen by October 10, Cline had sufficient property interest in the fund for the Government's tax lien to attach. Fine Fashions, Inc. v. United States [64-1 USTC ¶9270] 328 F. 2d 419 (2d Cir. 1964).

The Government must also prevail in its appeal from the award of attorney's fees and costs to Bjork out of the fund. Bjork depends on the district court's holding that the Government's lien did not attach to sustain his award. Since we reverse that holding and since the law on this point is clearly in the Government's favor when it has a valid lien, ⁹ we likewise reverse the award of fees and costs.

The judgment of the district court is reversed and the cause remanded with directions to enter judgment awarding the fund to the Government in the full amount of its lien, as determined by the district court. If any amount should remain after the award to the Government, the district court shall determine if this interpleader action was brought by Bjork in good faith. ¹⁰ If it should so determine, it shall award Bjork as attorney's fees the amount remaining in the fund, up to $400. If any amount shall remain after the award to Bjork, or if the district court should determine that this action was not brought in good faith, it shall award the remainder to the State, up to the full amount of its lien, as determined by the district court. The remainder, if any, shall be awarded to Cline. Bjork's filing and service fees in the district court are to be assessed against the State.

In view of the relative amounts of the awards reversed herein, we tax costs in this court in favor of the Government, one-fourth of the taxable costs to be assessed against Bjork and three-fourths against the State. No costs shall be paid out of the interpleaded fund.

REVERSED AND REMANDED WITH DIRECTIONS.

^* Senior District Judge Rob ert A. Grant of the Northern District of Indiana is sitting by designation.

¹ In the official version of the U. C. C., Article 6 comprises eleven sections, one of which, §6-106, is optional. Illinois is one of the 32 jurisdictions which has chosen not to adopt the optional section. Since §6-106 is the only section which compels the transferee to see to the application of the proceeds of the transfer, the effect of choosing not to adopt the section is to enact a creditor-notice statute rather than a creditor-protection statute.

² "If any taxpayer, outside the usual course of his business, sells or transfers the major part of any one or more of (A) the stock of goods which he is engaged in the business of selling, or (B) the furniture or fixtures, or (C) the machinery and equipment, of any business that is subject to the provisions of this Act, the purchaser or transferee of such assets shall, within 10 days after the sale or transfer, file a report of the sale or transfer with the Department disclosing the name and address of the seller or transferor, the name and address of the purchaser or transferee, the date of the sale or transfer, a description of the property sold, the amount of the purchase price and such other information as the Department may reasonably require. The seller or transferor shall pay the Department the amount of tax, penalty and interest (if any) due from him under this Act up to the date of the sale. The seller or transferor or the purchaser or transferee, at least 30 days before the date of the sale or transfer, may notify the Department of the intended sale of transfer and request the Department to audit the books and records of the seller or transferor, or to do whatever else may be necessary to determine how much the seller or transferor owes to the Department hereunder up to the date of the sale or transfer. The Department shall take such steps as may be appropriate to comply with such request.

"The purchaser or transferee shall withhold enough of the purchase price to cover the amount of all tax, penalty and interest due and unpaid by the seller or transferor under this Act or, if the payment of money or property is not involved, shall withhold the performance of the condition that constitutes the consideration for the sale or transfer, until the seller or transferor produces a receipt from the Department showing that such tax, penalty and interest have been paid or a certificate from the Department showing that no tax, penalty or interest is due from the seller or transferor under this Act.

"The purchaser or transferee is relieved of any duty to withhold from the purchase price and of any liability for tax, penalty or interest due hereunder from the seller or transferor if the Department fails to notify the purchaser or transferee of the amount claimed by the Department to be due hereunder from the seller or transferor within 30 days after the sale or transfer had ben reported to the Department where the seller or transferor, or the purchaser or transferee, did not notify the Department of the intended sale or transfer at least 30 days before the date of the sale or transfer, or if the Department fails to notify the purchaser or transferee of the amount claimed by the Department to be due hereunder from the seller or transferor within 10 days after the sale or transfer has been reported to the Department where the seller or transferor, or the purchaser or transferee, did notify the Department of the intended sale or transfer at least 30 days before it occurred and did request an audit or such other review as might enable the Department to determine how much it claims to be due hereunder from the seller or transferor up to the date of the sale or transfer.

"If the seller or transferor fails to pay the tax, penalty and interest (if any) due from him hereunder and the Department makes timely claim therefore against the purchaser or transferee as hereinabove provided, then the purchaser or transferee shall pay the amount so withheld from the purchase price to the Department. If the purchaser or transferee fails to comply with the requirements of this Section, the purchaser or transferee shall be personally liable to the Department for the amount owed hereunder by the seller or transferor to the Department up to the amount of the reasonable value of the property acquired by the purchaser or transferee.

"Any person who shall acquire any property or rights thereto which, at the time of such acquisition, is subject to a valid lien in favor of the Department shall be personally liable to the Department for a sum equal to the amount of taxes secured by such lien but not to exceed the reasonable value of such property acquired by him."

³ The State does not argue that any lien it may have has priority over the Government's lien. Bjork makes such an argument for the State, based on 26 U. S. C. §§ 6323(c)(1)(A)(iii) and (B). However, the argument fails to take the statutory definitions into account. The State's stop order to Kucera and Kucera's subsequent endorsement of the check to Bjork with the understanding that Bjork would pay the State the amount it finally assessed do not constitute an "obligatory disbursement agreement" within the meaning of §6323(c)(4)(A). As only one example of the failure of this series of events to fit the definition. Bjork does not meet the requirement that he have entered into the agreement "in the course of his trade or business."

⁴ "§6321. Lien for taxes.

"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 (emphasis added).

⁵ Section 5 (Ill. Rev. Stat. ch. 120, §444) imposes a penalty upon the seller for failure to make a return or pay the tax and sets forth the admin istrative procedures for determining the amount of tax due from the seller. In part, the section provides that if the seller fails to provide a return, the Department shall determine the amount of the tax due from him. Proof of such determination may be made at a hearing before the Department or in any legal proceeding. The Department shall issue to the taxpayer a notice of liability. The latter has 20 days to file a protest and request a hearing. Thereafter, the Department shall issue a final assessment, or, if no protest is filed, the notice of tax liability shall become final. At any time before the final assessment is reduced to judgment, the Department may grant a rehearing, pursuant to which it shall issue a revised final assessment. In the case of a failure to pay the tax or penalty, where the above review procedures have terminated, or where the taxpayer has filed a return, the Department may bring suit to recover this amount. Likewise, the person assessed may file a suit in court for review of the final assessment or revised final assessment.

Section 5a of the Retailers' Occupation Tax Act (Ill. Rev. Stat. ch. 120, §444a), provides in part that the Department shall have a lien for the tax, penalty or interest, upon all the real and personal property of the taxpayer after a final assessment or revised final assessment has been issued, or whenever a return is filed without payment of the tax or penalty shown therein to be due. Where the lien arises because of the issuance of a final assessment or revised final assessment, the lien shall not attach until all proceedings in court have terminated. Section 5a also provides for the issuance of a jeopardy assessment lien (infra note 7). It further provides that "[n]othing in this Section shall be construed to give the Department a preference over the rights of any bona fide purchaser, mortgagee, judgment creditor or other lien holder arising prior to the filing of a regular notice of lien or a notice of jeopardy assessment lien . . .."

⁶ The district court's interpretation cannot be buttressed by the bulk sales provisions of the U. C. C. for Illinois has adopted a creditor-notice statute (supra note 1). The Illinois enactment does not obligate the transferee to apply the consideration for the transfer to the debts of the transferor. There is nothing in these provisions which even remotely divests the transferor of his property interest in the purchase price and vests the creditors with such a possessory interest.

⁷ The State has the authority to proceed rapidly under §5a, which provides in part:

"[I]f the Department finds that the collection of the amount due from any taxpayer will be jeopardized by delay, the Department shall give the taxpayer notice of such findings and shall make demand for immediate return and payment of such tax, whereupon such tax shall become due and payable. If the taxpayer, within 5 days after such notice (or within such extension of time as the Department may grant), does not comply with such notice or show to the Department that the findings in such notice are erroneous, the Department may file a notice of jeopardy assessment lien . . . [which] shall have the same scope and effect as the statutory lien hereinabove provided for in this Section."

Ill. Rev. Stat. ch. 120, §444a.

⁸ The fund does not fit neatly into the strictures of any device-created legal relationship, such as escrow or trust. However, the requirement that the purchaser set aside part of the purchase price is analogous to the institution of a proceeding by means of a writ of attachment to insure preservation of the property until the attachment creditor can obtain a perfected lien. In such a situation, the attachment creditor runs the risk that its lis pendens will be ineffective against a federal tax lien which arises and becomes perfected before the attachment creditor obtains a perfected lien. United States v. Security Trust & Savings Bank [50-2 USTC ¶9420], 340 U. S. 47 (1950).

⁹ United States v. R. F. Ball Constr. Co., 355 U. S. 587, 588 (1958); United States v. Liverpool & London & Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215, 217 (1955) (per Minton, J.); United States v. State Nat'l Bank [70-1 USTC ¶9209], 421 F. 2d 519, 521 (2d Cir. 1970); United States v. Gurley [69-2 USTC ¶9562], 415 F. 2d 144, 150 (5th Cir. 1969); United States v. Wilson [64-1 USTC ¶9396], 333 F. 2d 147, 149 (3d Cir. 1964); Seaboard Sur. Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855, 860 (9th Cir. 1962).

¹⁰ See Aetna Life Ins. Co. v. Bowen, 308 F. Supp. 1394, 1396-97 (W. D. Mo. 1969).

 

 

[58-1 USTC ¶9327] United States of America , Petitioner v. R. F. Ball Construction Company, Inc., and United Pacific Insurance Company

Supreme Court of the United States., No. 97, 355 US 587, 78 SCt 442, 3/3/58, Reversing CA-5, 57-1 USTC ¶9269, 239 F. 2d 384

On writ of certiorari to the United States Court of Appeals for the Fifth Circuit.

[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323(a)]

Tax liens: Priority: Assignment to surety on subcontractor's bond as "mortgage."--Before notice of federal tax liens was filed, the taxpayer-subcontractor assigned to the surety on its bond sums due and to become due for performance of the subcontract, as security for any liability which the subcontractor might incur to the surety. The assignment did not make the surety a "mortgagee" as to those sums, so as to entitle its claim to priority over the federal tax liens.

Four dissents.

J. Lee Rankin, Solicitor General, Charles K. Rice, Assistant Attorney General, Earl E. Pollock, Assistant to Solicitor General, A. F. Prescott, George F. Lynch, Department of Justice, for petitioner. Jack Hebdon, Josh H. Groce, Frost Bank Building, San Antonio, Tex., for United Pacific Insurance Co. Richard U. Simon, 1407 Oil & Gas Building, Fort Worth, Tex., for R. F. Ball Construction Co., Inc.

PER CURIAM:

The judgment is reversed. The instrument involved being inchoate and unperfected, the provisions of §3672(a), Revenue Act of 1939, 53 Stat. 449, as amended, 53 Stat. 882, 56 Stat. 957, do not apply. See United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]; United States v. City of New Britain, 347 U. S. 81, 86-87 [54-1 USTC ¶9191]. The claim of the interpleader for its costs is controlled by United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 [55-1 USTC ¶9136].

[Dissenting Opinion]

JUSTICE WHITTAKER, with whom JUSTICE DOUGLAS, JUSTICE BURTON and JUSTICE HARLAN join, dissenting:

The question presented is whether an "assignment" made by a subcontractor to his performance-bond surety of all sums to become due for performance of the subcontract, as security for any indebtedness or liability thereafter incurred by the subcontractor to the surety, constituted the surety a "mortgagee" of those sums within the meaning of §3672(a) of the Internal Revenue Code of 1939, as amended.

Ball Construction Company had contracted to construct a housing project in San Antonio , Texas . On July 17, 1951, it entered into a subcontract with Jacobs under which the latter agreed to do the necessary painting and decorating of the buildings, and to furnish the labor and materials required, for a stipulated price. The terms of the subcontract required Jacobs to furnish to Ball a corporate surety bond, in the amount of $229,029, guaranteeing performance of the subcontract. On July 21, 1951, Jacobs, to induce respondent, United Pacific Insurance Company, to sign the bond as surety, assigned to the surety all sums due or to become due under the subcontract, as collateral security to the surety for any liability it might sustain under its bond through nonperformance of the subcontract, and for "the payment of any other indebtedness or liability of the [subcontractor to the surety] whether [t]heretofore or [t]hereafter incurred," not exceeding the penalty of the bond. On April 30, 1953, a balance of $13,228.55 became due from Ball under the subcontract, but, because of outstanding claims of materialmen against Jacobs, Ball did not pay the debt. In May, June, and September, 1953, the District Director of Internal Revenue filed, in the proper state office, federal tax liens against Jacobs, aggregating $17,010.85. Between December 1953, and March 1954--thus during the co-existent period of the bond and the assignment--Jacobs incurred indebtedness, independent of the subcontract, to the surety in the amount of $12,971.88.

[Surety as Mortgagee]

The surety, contending that its assignment of July 21, 1951, constituted it a "mortgagee" within the meaning of §3672(a), claimed priority of right to the $13,228.55 fund over the subsequently filed federal tax liens. The Government disputed the claim and asserted a superior right to the fund under its tax liens. Several creditors of Jacobs, holding unpaid claims for materials furnished for and used in performing the subcontract, asserted priority to a portion of the fund over the claims of both the surety and the Government. Because of these rival claims, Ball instituted this interpleader action, under which he impleaded the surety, the Government, and the materialmen, and paid the fund into the registry of the court to abide the judgment. Before conclusion of the trial the materialmen's claims were satisfied. The District Court held that, by the terms of the "assignment" and on its date of July 21, 1951, the surety became a mortgagee of the fund and that its right thereto was superior, under §3672(a), to the subsequently filed federal tax liens. 140 Fed. Supp. 60 [56-1 USTC ¶9514]. The Court of Appeals, adopting that opinion, affirmed. 239 Fed. (2d) 384 [57-1 USTC ¶9269].

[Cases Distinguished]

This Court now reverses summarily, citing United States v. City of New Britain, 347 U. S. 81 [54-1 USTC ¶9191], and United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]. We believe those cases are not in point nor in any way controlling. Neither of them even involve either the question here presented or the statute here conceded by the parties to be controlling. Rather, they involved entirely different facts, presented very different questions, and were controlled by and decided upon other statutes. They were controlled by and decided upon §§ 3670 and 3671 of the Internal Revenue Code of 1939, ¹ which, in pertinent part, provided: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property . . . belonging to such person" (§3670) from the time ". . . the assessment list was received by the collector . . .." (§3671.) Whereas the statute governing this case, as the parties concede, is §3672(a) of the Internal Revenue Code of 1939, as amended, ² which, in pertinent part, provided: "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--(1) . . . in the office in which the filing of such notice is authorized by the law of the State . . . in which the property subject to the lien is situated . . .."

The controversy in New Britain was over that portion of the proceeds of a real estate mortgage foreclosure sale which exceeded the amount of the mortgage. The City of New Britain, in virtue of its unpaid annual ad valorem tax liens which attached to the real estate on October 1 in each of the years 1947 through 1951, and its water-rent liens which had accrued from December 1, 1947, to June 1, 1951, claimed priority of right to the fund over general federal tax liens against the mortgagor which had been effected under §§ 3670 and 3671 by deposit of assessment lists in the Collector's office on various dates between April 26, 1948, and September 21, 1950. Thus, some of the City's liens had attached to the real estate prior to receipt by the Collector of the assessment lists and some had not.

This Court was not there dealing with any mortgage, pledge or other contractual lien, but was only dealing, as it said, with "statutory liens" (id., at 84); and in deciding the issue of their priority it observed that, although §§ 3670 and 3671 created a lien in favor of the United States upon all property of the taxpayer as of the time the assessment list was received by the Collector, "Congress [had] failed to expressly provide for federal priority . . ." (id., at 85) under those sections, and the Court held ". . . that priority of these statutory liens is [to be] determined by [the] principle of law [that] 'the first in time is the first in right.'" Ibid. The Court then vacated the judgment of the state court and remanded the case for determination of the order of priority of the various liens asserted, in accordance with the opinion.

We think it is not only apparent that §3672(a) had no application to that case but also that the Court expressly so declared. It noted that the City of New Britain contended that, because applicable state statutes provided that real estate tax and water-rent liens should take precedence over all other liens and encumbrances and §3672(a) subordinated federal tax liens to antecedent mortgages, the Court should hold that the City's tax and water-rent liens--having priority over mortgages--were prior in rank to the federal tax liens; but the Court disagreed, saying: "There is nothing in the language of §3672[(a)] to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein . . .." Id. , at 88. (Italics supplied.) As we have observed, supra, "the specific categories of interest set out" in §3672(a) were and are those of "any mortgagee, pledgee, purchaser or judgment creditor."

In the Security Trust case a creditor instituted a suit in California against one Styliano on a note and, on October 17, 1946 , pursuant to provisions of the California Code of Civil Procedure, procured an attachment of a parcel of real estate owned by Styliano. While the attachment suit was pending the Government, on December 3, 5 and 10, 1946, filed notices of federal tax liens against Styliano in the proper state office. Thereafter, on April 24, 1947 , judgment was rendered against Styliano in the attachment suit, thus perfecting the attachment lien on the real estate. Subsequently Styliano sold the real estate, subject to these liens, and the purchaser filed a suit to quiet his title, impleaded the attachment lienor and the Government, and paid the purchase price into the registry of the court to abide the judgment. The California trial court ordered the fund to be applied, first, in payment of the attachment lien, and, second, in payment of the federal tax liens. The California District Court of Appeal affirmed. On certiorari this Court reversed, pointing out that, under the law of California as declared in Puissegur v. Yarbrough, 29 Cal. 2d 409, 412, 175 P. (2d) 830, 831-832, an attaching creditor obtains "only a potential right or a contingent lien" until a judgment perfecting the lien is rendered, and that meanwhile the lien "is contingent or inchoate--merely a lis pendens notice that a right to perfect a lien exists." Id. , at 50. Naturally, in those circumstances, the tax liens which became perfected in December 1946, were superior to the attachment lien which did not become perfected until May 1947. There, as in New Britain , this Court was not dealing with any mortgage, pledge or other contractual lien, or with any question of priority of an antecedent mortgage over subsequently filed tax liens.

It thus seems quite clear to us that the New Britain and Security Trust cases did not involve the question here presented nor deal with the statute here conceded to be controlling and, therefore, they do not in any way support the Court's decision here.

[Assignment as Mortgage]

We also think that, under the law and the facts in this record, the "assignment" was in legal effect a "mortgage," and inasmuch as it antedated the filing of the federal tax liens it was superior to them under the expressed terms of §3672(a). That section does not define the term "mortgagee" and, hence, we must assume that it was there used in its ordinary and common-law sense. United States v. Gilbert Associates, Inc., 345 U. S. 361, 364 [53-1 USTC ¶9291]; United States v. Security Trust & Savings Bank, supra, at 52 (concurring opinion). Substance, not form or labels, controls the nature and effect of legal instruments. "State law creates legal interests and rights." Morgan v. Commissioner, 309 U. S. 78, 80 [40-1 USTC ¶9210]. The law of Texas , where the questioned assignment was made and was to be performed, makes such an "assignment" a valid mortgage. Southern Surety Co. v. Bering Mfg. Co., 295 S. W. 337, 341; Williams v. Silliman, 74 Tex. 626, 12 S. W. 534. Although the relation of a state-created right to federal laws for the collection of federal credits is a federal question, the State's classification of state-created rights must be given weight. United States v. Security Trust & Savings Bank, supra, at 49-50. Here, the State's determination that such assignments are mortgages in legal effect, and its classification of them accordingly, is not met by anything of countervailing weight. The period of the assignment was coextensive with the bond. The bond remained effective throughout the period here involved and, hence, so did the assignment. The fact that the assignment was of property to be afterwards acquired did not affect its validity as a "mortgage," Conrad v. The Atlantic Ins. Co., 1 Pet. 386, 448, nor did uncertainty in the amount (not exceeding the fixed maximum) of the generally identified obligation, so secured, do so. Ibid. Neither does the fact that the instrument was not recorded under the State's fraudulent conveyance statutes--thus to impart constructive notice to subsequent purchasers, mortgagees and the like--make any difference here, for the instrument was valid between the parties to it, and Congress, by §3672(a), expressly subordinated federal tax liens to antecedent mortgages. The questioned assignment conveyed to the surety all sums then due and thereafter to become due under, and for performance of, the then existing subcontract--performance of which was guaranteed by the surety's bond--as security for the payment of sufficiently identified but contingent and unliquidated obligations which the subcontractor might incur to the surety during the coextensive period of the bond and the assignment. In these circumstances, I think it is clear that the assignment was in legal effect a mortgage, completely perfected on its date, in all respects choate, and valid between the parties; and inasmuch as it antedated the filing of the federal tax liens it was expressly made superior to those liens by the terms of §3672(a).

For these reasons, I dissent and would affirm the decision and judgment of the Court of Appeals.

¹ 53 Stat. 448 and 449, 26 U. S. C. (1952 ed.) §§ 3670 and 3671.

² 53 Stat. 449, as amended by §401 of the Revenue Act of 1939, c. 247, 53 Stat. 882, and §505 of the Revenue Act of 1942, c. 619, 56 Stat. 957, 26 U. S. C. §3672(a).

 

 

[55-1 USTC ¶9136] United States of America , Intervenor, Petitioner v. The Liverpool & London & Globe Insurance Company, Ltd., and Sunnyland Wholesale Furniture Company

In the Supreme Court of the United States, No. 34.--October Term, 1954, 348 US 215, 75 SCt 247, January 10, 1955

On Writ of Certiorari to the United States Court of Appeals for the Fifth Circuit.

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Priority of liens: Insurance proceeds: Garnishment by creditor.--The lien of a writ of garnishment filed on behalf of a litigating creditor of taxpayer for the purpose of attaching insurance proceeds agreed to be paid was not superior to a subsequently filed federal income tax lien. Companion case ofU. S. v. Michael P. Acri, 55-1 USTC ¶9138, followed.

Simon E. Sobeloff, Solicitor General, H. Brian Holland, Assistant Attorney General, Charles K. Rice, Ellis N. Slack, A. F. Prescott, Fred E. Youngman, Special Assistants to the Attorney General, for petitioner. Arthur S. Goldberg, 1032 Fidelity Union Life Building, Dallas, Tex., Goldberg & Alexander, of counsel, James R. Alexander, 1032 Fidelity Union Life Building, Dallas, Tex., of counsel, Searcey L. Johnson, for respondent.

MINTON, Justice:

This is a case involving priority of federal tax liens and a lien of garnishment.

[The Facts]

On March 8, 1952 , fire destroyed certain property of Adams, engaged in a furniture business in Temple , Bell County , Texas . Respondent insurance company and another were the insurers. The insurance companies agreed on the amount of the loss, and they were to share the payment equally. Before the insurance money was paid, a creditor of Adams, the Sunnyland Wholesale Furniture Company, on April 8, 1952 , sued Adams on an open account. At the same time, a writ of garnishment was issued and served upon the Liverpool & London & Globe Insurance Company, attaching the insurance funds due and owing Adams . On April 21, 1952 , the assessment lists covering the unpaid federal taxes of Adams and his wife for 1948 and 1950 were received in the office of the Collector of Internal Revenue for Texas . On April 26, 1952 , notice of tax liens was filed in the office of the county clerk of Bell County , Texas , in favor of the United States for $10,417.57, with interest. Notice of the tax liens with warrants of distraint and notice of levy were served on the respondent insurance company. On June 20, 1952 , judgment was entered against Adams in favor of Sunnyland for $2,516.70, with interest and costs. When the garnishee, the respondent insurance company, answered, it named the United States an additional party defendant and requested a determination of priorities of the garnisher and the United States, and asked for reasonable attorney's fees. The amendment was allowed, and the United States was served with process to appear in the state court. On petition of the United States the interpleader action was removed to the Northern District of Texas, and the United States was dismissed as a party defendant and permitted to file its complaint for foreclosure of its tax liens. The respondent insurance company paid $7,500.39 into the registry of the court and asked for an attorney's fee of $500. The District Court held [53-1USTC ¶9121] the lien of the garnisher superior to the liens of the United States for taxes and allowed the garnishee $500 for attorney's fees. 107 Fed. Supp. 405. The Court of Appeals affirmed [54-1 USTC ¶9132], one judge dissenting. 209 Fed. (2d) 684. We granted certiorari, 347 U. S. 973.

[Opinion]

The question of priorities is identical with that ofAcri, No. 33 [55-1 USTC ¶9138], this day decided, and United States v. Security Trust Co., 340 U. S. 47 [50-2 USTC ¶9492]. On the authority of those cases we hold the tax liens of the United States superior to the lien of the garnisher.

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

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

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

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

The judgment is Reversed.