United States of America
, Plaintiff v. Eugene F. Schneider et al., Defendants
S. District Court, So. Dist.
, Central Div., Civil No. 72-52-1,
[Code Sec. 6323]
Tax lien: Redemption of property: Credit to taxpayers: Extinguishment
of tax lien.--The government redeemed property on which it had a tax
lien from a senior lienholder after foreclosure and sale of the
property. However, the government's tax lien and the claim out of which
it arose were extinguished as a result of its failure to state by
affidavit the maximum amount it was willing to credit the taxpayers
against the debt they owed.
Donielson, United States Attorney, Des Moines, Iowa, Jeffrey D. Snow,
Department of Justice, Washington, D. C. 20530 for plaintiff. Carl V.
Nielsen, 321 Eighth St., Altoona, Iowa, Jerry E. Williams, Roger Ferris,
10th Floor Hubbell Bldg., Des Moines, Iowa, for defendants.
came on for trial before the Court on
July 24, 1974
. Pursuant to an Order of this Court issued the same date and by
stipulation and agreement between the parties hereto, this case has been
submitted on a single legal issue: Whether the United States' redemption
of the property described in Count II of the complaint, coupled with its
failure to state by affidavit the maximum amount it was willing to
credit defendants Eugene and Ruth Schneider as required by Iowa Code §628.19,
operated to extinguish the tax lien, and the claim out of which it
arose, held by the United States against the two above-named defendants.
For the reasons set forth below, the Court is of the opinion that the
failure to set forth an amount pursuant to §628.19 did so operate and
that judgment must be entered in favor of the Schneiders.
The lien in
question arose out of an assessment made by the Internal Revenue Service
pursuant to 26 U. S. C. §6672 because of Eugene F. Schneider's failure
to pay over federal withholding taxes collected by Payne Freight Lines,
Inc. The period covered by the assessment includes the last three
quarters of 1969 and the first two quarters of 1970. It is not disputed
that the correct amount of the assessment is $84,566.66 plus interest
thereon of $11.97 per day from and after
April 1, 1974
August 3, 1973
, the property in question, a parcel of real estate owned by Eugene and
Ruth Schneider as joint tenants, was foreclosed upon and purchased at a
sheriff's sale by a lienholder whose interest was senior to that of
plaintiff. Plaintiff redeemed the property but did not include in its
redemption affidavit any statement of the maximum amount it was willing
to credit the Schneiders against the debt they owed it. On
August 7, 1974
, the time for redemption having expired, the Polk County Sheriff issued
plaintiff a deed to the property. At no time did the
seek to amend its redemption affidavit to set forth any amount it was
willing to credit defendant taxpayers.
contend that the failure to state an amount of credit extinguishes the
lien and underlying claim. The rely on Iowa Code §628.17, which
case [foreclosed property] is thus held by a redeeming creditor his
lien, and the claim out of which it arose, will be held to be
extinguished, unless he pursues the course pointed out in sections
628.18 to 628.20 inclusive (emphasis added).
§628.19, which provides:
[the creditor] is unwilling to hold the property and credit the debtor
thereon the full amount of his lien, he must state the utmost amount he
is willing to credit him with.
it is undisputed that the
did not state the utmost amount it was willing to credit the Schneiders
with, they argue §§ 628.18-628.20 were not complied with and the tax
lien and claim underlying it are extinguished.
to this argument, the
seeks, first, to remove its lien from this proceeding entirely by
arguing that it sought to reduce its assessment to judgement rather than
its lien. The Court agrees with the taxpayers that the difference
between assessment and lien is more semantic than substantive. Section
6672 of Title 26 is the provision that created the liability here in
issue. Section 6671(a) provided that the liability be assessed as a tax
and §6321 created the lien sought to be extinguished. Under the
statutory scheme an assessment, by itself, gives the
no independent right to seize any property of the taxpayers. Prior to
the creation of a lien there must be not only assessment, but demand for
payment and refusal or neglect to honor that demand by the taxpayer. See
Bauer v. Foley (2d Cir., 1968), [69-1 USTC ¶9327] 404 F. 2d
1215, 1222, modified (2d Cir., 1969), 408 F. 2d 1331; Macatee, Inc.
v. United States (5th Cir., 1954), [54-2 USTC ¶9550] 214 F. 2d 717,
C. §6321. It is the lien arising out of assessment, demand, and refusal
or neglect, not the assessment alone, which must thus be reduced to
judgment. 26 U. S. C. §7403. Any other construction of the collection
provisions of the Internal Revenue Code, especially the one urged by
plaintiff that assessment alone may be reduced to judgment, would be
inconsistent with the intent in the collection provisions to protect the
taxpayer and provide him with an opportunity either to pay an
uncontested tax or challenge one with which he disagrees prior to
seizure of his property. See Bauer, supra at 1219-21; Macatee,
supra at 720.
In addition to
the assessment lien argument, the
makes numerous claims based on the supremacy clause. In essence, it
claims that federal law--specifically, 26
C. §§ 6322 and 6342--conflicts with state law and that federal law
should be controlling. The Court can discern no substantial conflict
redemption provisions and the above-cited Internal Revenue Code
sections. Section 6322 merely provides that a lien shall exist until
satisfied or unenforceable by reason of lapse of time. It places no
limitation, whatsoever, on the manner in which a lien may be satisfied.
Section 6342 speaks only to the question of how proceeds from levy and
distraint or sale of certain property are to be applied. It does not, as
plaintiff apparently seems to believe, require that property redeemed by
as a junior lienor can be disposed of only by sale. Nothing therein can
be construed as a bar to subsequent redemption by the original owner.
as a junior lienholder sought to take advantage of a state procedure to
protect its lien and recover at least part of the assessment. That
procedure provides that the lienholder must state the maximum credit it
will allow against the assessment. This information is necessary in
order that the debtor may determine whether to exercise its right of
redemption. The government is in the uncomfortable position of seeking
the advantages of a state procedure while at the same time claiming it
is not required to comply with other portions of the same procedure. It
cannot do this under the argument that federal law is supreme.
supremacy clause argument must fall for another reason, namely, that
state law governing divestiture of federal tax liens is federal law.
v. Brosnan (1960), [60-2 USTC ¶9516] 363
237, 241. Absent a congressional direction to the contrary, respect for
the "severe dislocation to local property relationships which would
result from our disregarding state procedures,"
at 242, requires that the relationship between the parties to this
action be governed by the applicable provisions of the Iowa Code. The
has not brought any such congressional direction to the attention of the
Court and the Court, itself, has found none. Under
failure to credit the taxpayers herein with any amount less than the
total amount of its lien must necessarily result in the extinguishment
not only of the lien but also of the claim underlying it. Meredith,
Dickey & Co. v. Peterson (1899), 108
551, 79 N. W. 351; West v. Fitzgerald (1887), 72
306, 33 N. W. 688; Lamb v. Feeley (1886), 71
742, 30 N. W. 653. The liability and lien having been extinguished by
operation of law, judgment herein should issue in favor of the
taxpayers. Brosnan, supra, at 250;26 U. S. C. §6325(a)(1).
IT IS HEREBY
ORDERED that the Clerk of the Court enter judgment herein in accordance
herewith and that the costs of this action be taxed to the defendants
Eugene and Ruth Schneider.
¶9916]Beane Plumbing & Heating Company, Appellee v. D-X Sunray Oil
Company, Appellant. Charles Ellis Bourrett, d/b/a Bourrett Tin &
Furnace Shop, Appellee. Fullerton Lumber Company, Appellee. Haakinson
& Beaty Company, Appellee. Hooker Glass & Paint Mfg. Company,
Appellee. C. E. Hardy, Appellee. Mellon National Bank and Trust Company,
, Appellee. Cardinal Service Stations, Incorporated, Appellee
Court of Iowa, 134/49515, 92 NW2d 638, 10/14/58
[1954 Code Sec. 6323]
Lien for taxes: Priority of creditors: Mechanics' liens.--Mechanics'
liens, which were filed by subcontractors for amounts remaining unpaid
by the contractor for work performed in the construction of a service
station and which were perfected, attached against the service station
owner's property to the extent of the unpaid balance. Even if it were
proved that the contractor owed the owner an amount because of another
construction project wherein the owner might possibly be liable for
amounts unpaid by the contractor to other subcontractors (the evidence
did not establish that any amount was owed), the amount so owed would
not be an offset against the unpaid balance of the contract here
involved, because the subcontractors' mechanics' liens under Iowa law
have priority over any claims of the owner based on other transactions
with the contractor. To the extent of the subcontractors' claims, the
unpaid balance under the contract was not the property of the
contractor, but was the subcontractors' property, under Iowa law, and
the lien of the United States against the contractor for social
security, unemployment, etc., taxes, could attach only to the difference
between the unpaid balance of the contract and the subcontractors'
J. P. Greve,
erts, Tulsa, Okla., Corbett & Corbett, Sioux City, Ia., for
appellant. Goldberg & Nymann, Sioux City, Ia., for Beane Plumbing
& Heating Co. Spencer M. Day, Sioux City, Ia., for C. E. Hardy. J.
P. Greve, Tulsa, Okla., for Mellon National Bank & Trust Co.,
Pittsburgh, Pa., and Cardinal Service Stations. Shull, Marshall, Mayne,
Marks & Vizintos, Sioux City, Ia., for Fullerton Lumber Co. and
Haakinson & Beaty Co. Hutchinson, Hurst & Duggan, Sioux City,
Ia., for Charles Ellis Bourrett. Corbett & Corbett,
, for Hooker Glass & Paint Mfg. Co.
March 25, 1955
, appellant's predecessor in interest, Mid-Continent Petroleum
Corporation, entered into a written agreement with Bride Construction
for erection of a service station upon property in
hereafter described, and later acquired by appellant. Appellant assumed
all obligations of the agreement. The contract price was $22,904. The
construction of the station was completed in October 1955.
January 1, 1956
appellant paid Bride Construction Company $19,462 on the contract price,
leaving unpaid the sum of $3442.
Mechanics' Liens Filed]
Construction Company failed to pay several subcontractors. Most of them
are appellees herein. The subcontractors filed liens, but not within
sixty days from the completion of their work. Consequently, their liens
would only attach as against appellant's property to the extent of any
unpaid balance under the contract. Sections 572.10 and 572.11, 1954
The liens were
filed on the dates stated, and in following amounts: Charles Ellis
Bourrett, March 30, 1956, $1231; Beane Plumbing & Heating Company,
April 10, 1956, $646; Hooker Glass & Paint Mfg. Company, May 3,
1956, $610; C. E. Hardy, May 17, 1956, as a subcontractor $557; as a
principal contractor for some extra work $412.30. All above named
subcontractors gave written notice to appellant as to filing of the
liens, as provided by statute.
September 4, 1956
, plaintiff filed petition for foreclosure of his mechanic's lien.
September 24, 1956
, C. E. Hardy filed petition for foreclosure of his mechanic's lien.
Charles Ellis Bourrett and Hooker Glass & Paint Manufacturing
Company filed answers and cross-petitions in one or both of the cases
for foreclosure of their mechanic's liens. Appellant filed answer and
cross-petition to quiet title against all adverse parties. Under Order
of Court the two mechanic's lien cases were consolidated for trial. The
issues raised by the answering defendants and cross-petitioners were
also consolidated for trial, in order that all issues as between the
various mechanic's lien holders and appellant could be, and were, tried
in one case.
February 15, 1956
, the Internal Revenue Department of the
made an assessment for social security, unemployment, etc., taxes
against Bride Construction Company in the amount of $3,361.33.
May 4, 1956
, the Director served notice of levy on appellant to enforce payment of
the assessment. Neither the
United States of America
nor the Revenue Department were served with notice in these cases. They
never filed pleadings nor entered appearance.
July 21, 1955
, appellant entered into written contract with Bride Construction
Company for the erection of a service station at
. The contract price was $24,295. The construction company did not fully
complete the contract and in November 1955 appellant expended the sum of
$863.77 in completing the station. Prior to that time appellant had paid
the contractor $18,090. Deducting these two items from the contract
price leaves $5,939.23, that appellant still owed Bride Construction
Company. However, within the sixty day period for filing subcontractors'
liens three liens were filed totaling $10,284.59. If appellant will
ultimately have to pay these liens, Bride Construction Company will owe
$5,345.36 to appellant. It is the theory of appellant that this item
more than offsets the $3442 unpaid on the contract at
, and therefore there is no balance subject to appellees' liens.
The decree of
the trial court held the
matter did not enter into the situation and that there was unpaid on the
contract for erection of the
station the sum of $3442. The court established costs and mechanic's
liens as against the real estate of appellant in following order and
amounts: First; costs of the proceeding. Second; Claim of Charles Ellis
Bourrett for $1231; Third: Claim of Beane Plumbing & Heating Company
for $646; Fourth: Claim or lien of the
, if and when the same is established. Fifth: Claim of Hooker Glass
& Paint Manufacturing Company for $610; Sixth: Claim of C. E. Hardy
for $557 as a subcontractor. The court also held Hardy was a principal
contractor as to $412.30, and foreclosed lien as to said amount directly
Lumber Company, The Hawkinson & Beaty Company, and Thermoflector
Corporation also filed mechanic's liens. Thermoflector Corporation was
never served with a notice and never became a party to the action.
Fullerton Lumber Company and The Hawkinson & Beaty Company never
gave written notice to appellant as to filing of their mechanic's liens
as provided by Section 572.11. The trial court properly dismissed their
claims, and these three parties are not involved in this appeal.
urges and relies upon three alleged errors for reversal. 1. In holding
that there was an unpaid balance of $3442 on the contract from appellant
to the contractor. 2. If there was any amount unpaid on the contract to
the contractor, which appellant does not concede, it was covered by the
liens of United States of America; it also urges since government was
not a party, no lien should have been established against appellant's
property. 3. In holding that C. E. Hardy was a principal contractor to
the extent of $412.30.
property involved in this action, and as against which mechanic's liens
were established, is described as follows: S. E. one-half of Tax Lot 10
and the S. W. thirteen feet of the S. E. one-half of Tax Lot 11, and the
S. W. 150 feet of Tax Lot 15, all in Auditor's Plat of Lots 7, 8 and 9
in Block 59, Block 60, and the South one-half of Block 61 in Sioux City
East Addition, and Blocks 51 and 52 in Sioux City, Iowa; also being
described as the Southwesterly 63 feet of Lot 2, and the southwesterly
150 feet of Lot 3, in Block 51, of the Original Plat of Sioux City,
exception of evidence as to the claim of C. E. Hardy, as a principal
contractor, the parties stipulated as to the facts. In addition to $3442
stipulated as balance on
contract, there was a possible additional item of $220 not settled by
the stipulation or any evidence in the case. The trial court reserved
jurisdiction for supplemental decree, as to this small item. It is not
involved in the appeal. In supplemental decree to be entered after this
decision has been filed, whatever the trial court holds as to this item
shall be final.
as to Offset against Unpaid Balance]
There being no
question about these figures the first question in the case is whether
or not the possible amount owing by Bride Construction Company to
appellant as to the contract for erection of service station at
can offset as against $3442 unpaid on the
with the unpaid balance on the
contract of $3442 the trial court said: "Balance due on this
particular contract (
) fixes the liability of the owner to the subcontractors." We agree
with this conclusion.
We hold the
possible balance due from Bride to appellant at
cannot be used as an offset against the $3442 for two reasons: A: the
record in this case does not establish the fact that Bride owed
appellant on the
job. B: Interpretation of term "balance due" under Section
572.11 means the subcontractors have a preferred claim to any balance,
prior to any claims of the owner based on other transactions.
connection with the situation at
we must accept the record as it appears in the instant case. We cannot
project ourselves into the future, assume the happening of certain
events and base our decision on such assumption. The record shows the
following facts: the contract between appellant and Bride Construction
Company as to erection of the service station at Logan; the amount paid
to Bride, and balance owing him of $5,939.23; the filing of the
subcontractors' liens in Harrison County within sixty days of the
completion of the work of the subcontractors and on the face of such
liens claims are made for $10,284.59; the parties stipulated the
mechanic's lien action had been tried in Harrison County District Court,
but decision had not been rendered. This is the complete record as to
is whether we are justified, on the basis of this record, to say that
Bride owes appellant $3442 or more. There is no evidence in the record
as to whether the work of the subcontractors was completed, and as to
what amount, if any, will be held to be due from appellant to the
subcontractors. Since it was tried in court we can assume there was some
controversy about the matter. The situation is too problematical and too
remote for us to hold that Bride Construction Company owed appellant at
least $3442, or any amount.
as Preferred Creditors]
Interpretation of Section 572.11 as to meaning of words "balance
due" creates a question of first impression. While normally debtors
and creditors may cast a balance between themselves based on more than
one transaction, we hold the legislative intent as to said Section is
that subcontractors, as to liens properly filed and proven, shall have
the full benefit of all money due the contractor from the owner on the
building or improvement involved.
legislature said the subcontractor was entitled to recover "to the
extent of the balance due from the owner to the contractor" it
placed the subcontractor in a preferred position as to such balance. The
Section has reference to that particular job. The agreed amount to be
paid for the job should be devoted to paying the cost of the job to the
contractor and subcontractors who furnish labor and material, and should
not be subject to offsets arising from other transactions between the
owner and principal contractor.
contractor sued the owner for the balance, the owner could successfully
defend if proper subcontractor's liens existed. It creates a situation
of "no debt" from the owner to the contractor. The debt is to
the subcontractor. We will consider this theory at some length in
Lien Does Not Attach]
II. The United
States of America tax lien does not attach to the unpaid balance on the
contract, to the extent of the amount owing to the subcontractors who
perfected their lien rights. Fidelity & Deposit Co. v.
New York City
Housing Authority (2d Cir. 1957) 241 Fed. (2d) 142 [57-1 USTC ¶9410];
United States v. Bess (June 9th, 1958) 78 S. Ct. 1054 [58-2 USTC
¶9595]; Wolverine Insurance Co. et al. v. V. Lee Phillips, District
Director of Internal Revenue; United States District Court, Northern
District of Iowa, August 12, 1958; Judge Graven; Fed. Supp. [58-2 USTC
of Authorities on Attachment of Tax Liens]
federal court decisions the theory of "no debt", has been
developed and approved. This means there is no fund or property to which
the Government tax lien can attach.
In case of Wolverine
Insurance Company v. V. Lee Phillips, supra, Judge Graven approved
the doctrine. Mr. and Mrs. Loren H. Mahoney entered into a contract with
Ericksson & Kochen for the erection of a home at a cost of $30,591.
The home was erected and in accordance with the contract the owners made
payments to the contractor as the work progressed. They paid $20,568.91,
leaving unpaid the sum of $10,168.46. However, the contractors had not
paid the subcontractors, and mechanic's liens were filed within the
sixty day period in the amount of $19,248.02. As a part of the contract
between the owners and the contractors a surety bond as to performance,
and payment of subcontractors, was issued by Wolverine Insurance
Company. The insurance company paid the subcontractors and took an
assignment from the contractors as to the unpaid balance of $10,168.46
owing by the owners. Judge Graven held there was "no debt" as
between the owners and the contractors. In view of the amount owing to
the subcontractors the fund was the property of the subcontractors, not
the contractor. Consequently there was no property of the contractor to
which the tax lien could attach.
the extent of their claims, the fund of $3442 in the hands of appellant
was not the property of Bride Construction Company; it was the property
of the subcontractors. The lien of the
United States of America
was against Bride Construction Company, but there was "no
debt" owing to said construction company against which the lien
could attach. We should observe at this point that the subcontractors'
liens of the four appellees who perfected their mechanic's liens, do not
total the sum of $3442 so the "no debt" theory applies only to
the extent of the amount owing to such subcontractors. We will make the
distinction as to computations later in this decision.
decision was based on the Circuit Court decision of Fidelity &
Deposit Company v. New York City Housing Authority, supra, and the
Supreme Court opinion of
v. Bess, supra.
& Deposit Company v. New York City Housing Authority, supra, the
court said: "We are satisfied, then, that * * * the
taxpayer-contractor had no right to the withheld fund. Of necessity, it
follows that it had no 'right to property" to which a federal tax
lien might attach and the government's claim must fail."
said with reference to
v. Bess, supra: "The United States Supreme Court has but
recently stated that the tax lien statute does not create any property
rights but merely attaches the rights created under the applicable state
law. * * * Therefore, in the present case (Wolverine v. Phillips)
in order for the Government's tax liens to be of avail to it, there must
at some time have been created under state law some enforceable right in
behalf of the Contractor against the Owner for money due under the
In the Bess
case the United States Supreme Court stated: "Since Section 3670
creates no property rights but merely attaches consequences, federally
defined, to rights created under state law, Fidelity & Deposit
Co. v. New York City Housing Authority, 2 Cir., 241 Fed (2d) 142,
144 [57-1 USTC ¶9410], we must look first to Mr. Bess' right * * * as
defined by state law."
modify the decision of the trial court to the extent it attached the
lien of the
United States of America
to the fund prior to liens of subcontractors Hooker Paint & Glass
Mfg. Company and C. E. Hardy.
III. Mr. C. E.
Hardy has been engaged in service station equipment repair business in
for more than twenty years. Under contract with Bride Construction
Company he installed the tanks, pumps, hoist etc., at the station in
involved in this action. He completed his contract with Bride
Construction Company on
Saturday, July 9, 1955
. That night a flood occurred in
and it covered the D-X station with two feet of water. The tanks had not
yet been filled with gasoline and the flood floated them out of the
ground and ruined all the connections and piping attached to the tanks.
who had charge of the station for appellant, instructed Mr. Hardy to
repair all the damage and to reinstate and re-connect the tanks in the
same condition as they had been before the flood. Mr. Hardy proceeded to
do so and completed the work in about twelve days. The cost of the
repairs was $412.30. The trial court entered judgment against appellant
in favor of Mr. Hardy as a principal contractor in connection with this
item. Appellant challenges this judgment alleging the evidence does not
support the claim.
with the needed repairs to make the station useable after the flood the
record discloses that Bride Construction Company had no part in the
arrangements nor the work. The representative of appellant in
contacted Mr. Hardy direct, and requested him to make the repairs after
the flood. He completed the reinstallation and is entitled to be paid
of the trial court foreclosing a mechanic's lien on behalf of Mr. Hardy
as a principal contractor against appellant is sustained by the evidence
in the record and is correct.
Court's Decision Modified]
IV. We modify
the decision, and instruct that decree be rendered by the trial court
foreclosing the mechanic's liens against the property heretofore
described to the extent of the fund of $3442 as follows: 1. Charles
Ellis Bourrett, $1231; 2. Beane Plumbing & Heating Company $646; 3.
Hooker Glass & Paint Mfg. Co. $610; 4. C. E. Hardy, as a
subcontractor $557; 5. Balance of $398 is subject to tax lien of United
States of America to be collected by proper further proceedings herein,
or by independent action.
shall accrue on above items until judgment is rendered in accordance
with this decision, since they are a part of a specific fund allocated
by statute to the parties involved.
court costs in the District Court shall be rendered against defendant.
There is no reason for deducting the costs from the fund belonging to
the subcontractors, and possibly, to
. Defendant filed answer and cross-petition, defended vigorously, and
did not prevail.
court shall also render judgment and foreclose mechanic's lien against
appellant in favor of C. E. Hardy as a principal contractor, for
$412.30, together with statutory interest from
May 17, 1956
, date of filing mechanic's lien.
, Circuit Judge, and BLISS, WENNERSTRUM, HAYS, THOMPSON, LARSON and
LINNAN, Judges CONCUR.
¶9365]S. Birch & Sons Construction Co., a Montana Corporation, C.
F. Lytle Company, an Iowa Corporation, Green Construction Company, an
Iowa Corporation, all doing business as Birch-Lytle-Green General
Contractors, Plaintiffs v. Ralph C. Capehart, doing business as
Anchorage Freight Lines, W. A. Stephenson, Frank Jones, Chester W.
Goodman Co., James R. Smith, Hayward Lumber & Investment Company, a
California Corporation, Joe Morgan, Trustee for the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers, Local
#959, and Employment Security Commission of Alaska, Defendants, and
United States of America, Defendant and Intervenor
S. District Court,
, No. A-10,934 Civil, 192 FSupp 330,
[1954 Code Sec. 6323]
Lien: Validity against third parties: State law.--Under state law
a lien of the judgment attached when a writ of execution was levied.
Therefore, federal tax liens which were filed prior to the levy by a
judgment creditor were entitled to priority, but those filed subsequent
to the levy were not entitled to priority.
W. Goodman. Arthur D. Talbot, of Bayko, Talbot & Tulin,
, for James R. Smith. Philip T. Lyons, 5544 Figueroa,
, for Hayward Lumber & Investment Company. Hartlieb, Groh &
Rader, 227 Fourth Ave., P. O. Box 2068, Anchorage, Alaska, for Joe
Morgan, Trustee for the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers, Local #959. Ralph E. Moody,
, for Employment Security Commission. George M. Yeager,
This is an
action in interpleader under the provisions of Section 1335, Title 28 U.
S. C. A., brought by the plaintiffs to determine conflicting claims to
monies remaining in its hands representing the balance due the defendant
Ralph C. Capehart, d/b/a Anchorage Freight Lines, upon a service
contract amounting to $6,075.40, which has been paid into the registry
of the court.
claims have been filed by answer to the complaint, or, in the case of
, by petition in intervention:
Stephenson: Judgment entered
May 20, 1960
, in cause No. A-10,149 of the records of the former U. S. District
Court for the District (Territory) of
, in the sum of $1,906.71, as to which an attachment was made against
the plaintiffs on
August 20, 1954
W. Goodman: Judgment entered
May 2, 1958
, in cause No. A-11,765, records of the former U. S. District Court, in
the amount, with interest and costs, of $1,734.45.
Smith: Judgment entered
March 3, 1955
, in cause No. A-10,447, records of the former U. S. District Court, in
the amount, with interest and costs, of $1,734.45. Execution issued
April 21, 1955
; levy made
April 22, 1955
Lumber & Investment Company, by virtue of an assignment from
August 3, 1954
, in the sum of $3,000.00.
Trustee for the International Brotherhood of Teamsters, Chauffeurs,
Warehousemen and Helpers, Local #959: Wages as holiday pay for the month
of May, 1954, in the sum of $495.60, as to which there is no judgment or
Security Commission of
: Unemployment insurance contributions upon assessments
December 31, 1953
December 31, 1954
, with penalty and interest, $1,048.74, as to which no lien has been
United States of America
: Tax liens for withholding, income, FICA and excise taxes, as to
which liens have been filed as follows:
Lien No. Filed Assessment Date Amount
27648 1/8/54 11/20/53 ........... $ 1,860.29
29770 10/11/54 3/16/54 ............ $1,377.77
A-257-55 5/25/55 2/23/55 ............ 3,892.77
Total .............. $11,034.29
claim is rather involved. The judgment entered in cause No. A-11,765
provided that payment of the judgment in such cause be made out of the
funds in the registry of the court in this cause, which was paid on May
5, 1958. Thereafter Goodman was dismissed as a defendant in this case
upon his disclaimer. Upon motion of the
, that portion of the judgment rendered in cause No. A-11,765 directing
that the judgment be paid out of the registry of the court was vacated
by order entered
January 3, 1961
, and the defendant Goodman reinstated as a party defendant in this
On June 7,
1958, an order was entered discharging the plaintiffs from further
liability in the cause and awarding plaintiffs costs and attorney's fees
amounting to $603.30, payable out of the registry of the court, which
was paid, leaving a present balance in the registry fund of $3,737.65.
conference held, the matter of the priority of the several claims was
submitted by the parties to the Court for determination as a matter of
Title 26 U. S. C. A., provides that the lien imposed by Section 6321 in
favor of the United States for the collection of unpaid taxes shall not
be valid as against any mortgagee, pledgee, purchaser or judgment
creditor until notice thereof has been filed by the Secretary or his
delegate in the office designated by the law of the state or territory
in which the property subject to the lien is situated. The liens claimed
herein were so recorded in the office of the Recorder for Anchorage
, being the office so designated by territorial law, on the dates
It is held
that in the absence of a showing of insolvency the priority of statutory
liens is determined by the principle of "the first in time is the
first in right" and that the priority of each lien must depend upon
the time it attached to the property in question and became choate. Bentley
v. Kirbo, (D. C. Alaska) [59-1 USTC ¶9203] 169 F. Supp. 38, citing
[54-1 USTC ¶9191], 347
With regard to
the several judgments, the general rule is that personal property of a
judgment debtor is not subject to liens predicated upon the rendition or
entry of judgment unless made so by statute, but that such property is
subject to liens predicated upon an execution and a levy thereunder. Miller
v. Bank of
, N. T. & S. A., (C. A. 9) [48-1 USTC ¶9185] 166 F. 2d 415,
418. By statute in
a judgment when docketed becomes a lien upon the real property of the
judgment debtor only, but when a writ of execution is levied upon any
such property the lien of the judgment attaches. Sections 55-9-61 and
55-9-80, ACLA 1949. Execution was issued on the Smith judgment on April
21, 1955, upon which return was made by the U. S. Marshal showing a levy
made on April 22 but that the monies owing by plaintiff to Capehart were
claimed by various parties, and were being deposited in the registry of
the court in this action, which constitutes a sufficient levy in this
instance. Therefore it appears that the lien of this judgment is
entitled to priority over the tax lien of the
May 25, 1955
, but not as against the tax liens filed on
January 8, 1954
October 11, 1954
As to the
Stephenson judgment, no such execution or levy was made or attempted,
although an attachment was made prior to judgment. It is well settled
that a tax lien of the
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
attaching creditor obtains judgment. Narragansett Bay Gardens, Inc.
v. Grant Const. Co. [59-2 USTC ¶9557], 176 F. Supp. 451; United
States v. Hawkins, (C. A. 9) [56-1 USTC ¶9143] 228 F. 2d 517. This
judgment is therefore not entitled to priority over the tax liens and is
inferior to the lien of the Smith judgment.
or attachment was issued or levied upon the Goodman judgment. The
collection out of the registry fund being erroneous and having been set
aside, no lien could attach by reason of such.
from Capehart to the Hayward Lumber & Investment Company did not
make this claimant a "purchaser" within the meaning of Section
v. Chapman, (C. A. 10) [60-2 USTC ¶9667] 281 F. 2d 862, 869. As
the tax assessments were prior in time to the assignment, this claim is
not entitled to priority over the tax liens. Neither does it constitute
a lien against the fund prior in right to the Smith judgment. If a
contractual lien was intended, no action had been taken to perfect it. United
States v. Chapman, supra.
There is no
indication that the claim of Joe Morgan, Trustee, against Capehart was
ever liquidated, acknowledged or made choate, or constitutes a lien upon
the fund. Hence it is not entitled to priority.
statute the claim for any unpaid contributions under the Alaska
Employment Security Act becomes a lien against the personal property of
the employer only where the Commission files a notice of such claim with
the Recorder of the Recording District in which said property shall then
be situated. Section 51-5-148, ACLA Cumulative Supplement. This statute,
being Chapter 5, First Extraordinary Session,
1955, was in force at the time of the filing of this action and the
claim of the Employment Security Commission. No such lien appears to
have been filed. Therefore this claim is not entitled to priority over
the tax liens or the judgment lien.
, as intervenor, is entitled to judgment against the defendant Chester
W. Goodman in the sum of $1,734.45, to be refunded to the registry of
the court and credited to this case.
are entitled to priority of payment out of such registry fund in the
numbers 27,648 and 29,770 of the
for income and withholding taxes, totaling $3,818.71.
lien of James R. Smith, $2,749.98. As this will exhaust the fund, no
further consideration need be given to the matter of priority of the
be entered in accordance with this opinion. It is requested that the
United States Attorney prepare such judgment. No findings of fact or
conclusions of law will be necessary.
No costs to
the claimants appear to be involved. An Attorney's fee having been
included in the Smith judgment, no further fee should be allowed.
¶9808]Ellen Beeghly and Kindig & Beebe, Plaintiffs v. Glen H.
Wilson, also known as Glenwood H. Wilson; Washington National Insurance
Company; United States of America, Defendants
S. District Court, No. Dist.
, West. Div., Civ. No. 942, 152 FSupp 726, 7/5/57
[1954 Code Secs. 6321-6323--similar to 1939 Code Secs. 3670-3672]
Lien for taxes: Enforcement against renewal commissions to which
delinquent taxpayer later became entitled: Judgment creditors' rights.--A
lien for unpaid income taxes, which became effective on the assessment
date, attached to commissions on renewal premiums to which the
delinquent taxpayer later became entitled. Creditors who recovered
judgments before the assessment date, but whose garnishments were served
against the insurance company, and whose proceedings auxiliary to
execution were begun, after notices of the tax liens had been filed,
were not entitled to priority under applicable
laws. They had acquired no lien prior to the filing of notice of the tax
liens. And in order for a judgment creditor to be entitled to priority
under 1954 Code Sec. 6323, he must be a judgment lien creditor. The
insurance company could not deduct expenses incurred in connection with
the garnishment proceedings, since the tax liens attached before any
garnishment was effected and before any right of set-off accrued. The
company was ordered to pay the Government accumulated commissions and to
pay over to it quarterly the commissions which become owing during the
Whicher & Davis,
, for the plaintiffs. Yelderman, Martin & Smith,
, for defendant Glen H. Wilson. John J. Vizintos, Shull, Marshall,
Mayne, Marks & Vizintos, Sioux City, Iowa, for defendant Washington
National Insurance Company. F. E. Van Alstine, United States District
Attorney, Philip C. Lovrien, Assistant United States District Attorney,
Sioux City, Iowa, for defendant United States.
In this case
the plaintiffs are holders of judgments against the defendant Glen H.
Wilson. That defendant was a general agent of the defendant Washington
National Insurance Company. Under his general agent's contract he was
entitled to commissioners on renewal premiums paid on the policies
written by him. That contract is dated
November 1st, 1949
. The defendant
United States of America
, hereinafter referred to as the Government, is the holder of claims for
unpaid income taxes against the defendant Glen H. Wilson which are the
subject of a tax lien. The Government claims priority over the
plaintiffs as to the renewal commissions owing and to become owing the
defendant Glen H. Wilson. The defendant Washington National Insurance
Company makes a claim in connection with the renewal commissions to
which reference will be made later.
November 4th, 1953
, the plaintiff Ellen Beeghly recovered a judgment against the defendant
Glen H. Wilson in the District Court of Iowa in and for
in the sum of $5,000.00. On the same day the plaintiff Kinding &
Beebe also recovered a judgment against that defendant in the same court
in the sum of $2,000.00. On
November 8th, 1954
, the Commissioner of Internal Revenue made an assessment against the
defendant Wilson for delinquent income taxes in the sum of $1,819.43 for
the tax year 1952 and in the sum of $1,088.40 for the tax year 1953.
Prior to the forepart of 1953 the defendant Wilson was a resident of and
. From that time until the present he has been a resident of and
domiciled in Travis County, Texas.
Commissioner filed notice of the tax liens in the office of the
of Courts of Travis County, Texas, on
January 13th, 1955
. He also filed notice of those liens in the office of the
January 21st, 1955
to Renewal Commissions]
December 16th, 1955
, the plaintiffs caused general executions to be issued on their
judgments. Under those executions notices of garnishment were served on
the defendant Washington National Insurance Company on
December 20th, 1955
. As of the date of the garnishment that garnishee was not indebted to
the defendant Wilson for renewal premiums. However, as of
August 1st, 1956
, it was indebted to him for such commissions in the sum of $552.73.
Under the defendant Wilson's general agent's contract, he also was
entitled to commissions on the renewal premiums paid after
August 1st, 1956
, on policies which had been written by him.
1954, makes provision for proceedings auxiliary to execution. On
January 21st, 1956
, the plaintiffs commenced the present proceedings in the District Court
of Iowa in and for
under the provisions of that Chapter. The original parties defendant to
the proceedings were Glen H. Wilson and the Washington National
10th, 1956, the Government served notice of levy on the Washington
National Insurance Company claiming a lien upon renewal commissions
owing and to become owing Glen H. Wilson under his general agent's
contract. Glen H. Wilson and Washington National Insurance Company
appeared and filed pleadings in the proceedings instituted by the
plaintiffs. In its answer filed therein, the Washington National
Insurance Company set forth that it had been served with the
Government's notice of levy. The plaintiffs thereupon made application
to the District Court of Iowa in and for
to have the
United States of America
made a party defendant to the action. That application was granted.
Under being made a party to the action, the
United States of America
removed to this Court.
Date Is Lien Date]
There is not
involved in this case Section 191, Title 31, U. S. C. A., which is known
as the Government priority statute. That statute is only applicable in
insolvency cases. In the present case there is no claim or showing that
the defendant Glen H. Wilson was or is insolvent. There is involved
Sections 6321, 6322, and 6323, Title 26,
C. A. Those sections provide as follows:
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."
another date is specifically fixed by law, the lien imposed by section
6321 shall arise at the time the assessment is made and shall continue
until the liability for the amount so assessed is satisfied or becomes
unenforceable by reason of lapse of time."
Invalidity of lien without notice.--Except as otherwise provided in
subsection (c), the lien imposed by section 6321 shall not be valid as
against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the Secretary or his delegate--
Under state or territorial laws.--In the office designated by the law of
the State or Territory in which the property subject to the lien is
situated, whenever the State or Territory has by law designated an
office within the State or Territory for the filing of such notice * *
It is not
controverted that the office of the County Clerk of Courts in Texas and
the office of the County Recorder in Iowa are the proper offices for the
filing of notices of federal tax liens under Section 6323(a)(1). See
Section 335.11, Code of
1954. The Internal Revenue Code of 1954 became effective
August 16th, 1954
. Under the provisions of that Code the claim of the Government for
taxes becomes a lien on the date of their assessment. Prior to the
effective date of that Code such a claim did not become a lien until the
date the Collector of Internal Revenue received from the Commissioner of
Internal Revenue an assessment list carrying the unpaid tax liability of
the delinquent taxpayer. In the present case the claims of the
Government were assessed on
November 8th, 1954
, and the lien of the Government came into existence on that date.
Upon Intangible Property]
In the present
case the right of the defendant Glen H. Wilson to the renewal
commissions constituted intangible property, i.e., a chose in
action. Section 6321 is broad in its scope. It makes a Government tax
lien a lien "upon all property and rights to property, whether real
or personal." In the case of Citizens State Bank of Barstow,
Texas v. Vidal (10th Cir. 1940), 114 Fed. (2d) 380, 382-83 [40-2
USTC ¶9603], the Court in referring to the tax lien statute stated:
statute covering collection of taxes is broad and comprehensive and
Congress intended to subject all of a taxpayer's property, except that
specifically, exempt to the payment of taxes. 'Property' is a word of
very broad meaning and when used without qualification, may reasonably
be construed to include obligations, rights and other intangibles, as
well as physical things."
6321 was formerly Section 3670, 26
C. In the case of Glass City Bank v. United States (1945), 326 U.
S. 265, 66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449], the United
States Supreme Court stated (p. 267 U. S.):
U. S. C., Congress impressed a lien upon 'all property and rights to
property, whether real or personal, belonging' to a tax delinquent.
Stronger language could hardly have been selected to reveal a purpose to
assure the collection of taxes."
It is well
settled that under that statute the Government has a lien upon the
intangible property of a delinquent taxpayer. The tax lien is a
continuing lien and will attach to obligations which come into existence
thereafter. Glass City Bank v. United States, supra. In that case
the tax lien was held to attach to the claim of a taxpayer for services
rendered subsequent to the time the lien came into existence. The tax
lien has been enforced against various types of intangible property. It
has been enforced against the cash surrender value of life insurance
policies owned by the taxpayer and this without reference to the
question of whether the policies were fully matured or whether notice
was given to the beneficiaries. Kyle v. McGuirk (3rd Cir. 1936),
82 Fed. (2d) 212 [36-1 USTC ¶9121]; Knox v. Great West Life Assur.
(D. C. 1952), 109 Fed. Supp. 207 [53-1 USTC ¶9247];
v. Ison (D. C. 1946), 67 Fed. Supp. 40 [46-1 USTC ¶9269]; Smith
v. Donnelly (D. C. 1946), 65 Fed. Supp. 415 [46-1 USTC ¶9247]. It
has been enforced against annuity and endowment policies. Cannon v.
Nicholas (10th Cir. 1935), 80 Fed. (2d) 934 [35-2 USTC ¶9672];
v. Trout (D. C. 1942), 46 Fed. Supp. 484 [42-1 USTC ¶9372]. The
tax lien has been enforced against disability payments payable under
life insurance policies. Fried v.
(D. C. 1955), 150 Fed. Supp. 486, reversed sub nom., Fried v.
New York Life Insurance Company (2nd Cir. 1957), 241 Fed. (2d) 504
[57-1 USTC ¶9412], certiorari denied,
May 27th, 1957
. It has been enforced against a cause of action of a contract vendee of
real estate against his vendor for restitution. Bensinger v. Davidson
(D. C. 1956), 147 Fed. Supp. 240. In an article by Paul E.
entitled "Federal Tax Liens--Their Nature and Priority," 41
California Law Review 241 (1953), the author states (p. 251):
federal tax lien has attached to certain property, the taxpayer is
powerless to affect or to destroy the rights of the Government. * * * As
of the date that the lien attaches, the property has, in effect, two
and the taxpayer."
the case of Bensinger v. Davidson, supra, there was a tax lien
outstanding against a contract vendee of real estate who had made
substantial payments under the contract. Under the
law he had a cause of action for restitution against his vendor. The
contract vendee released his claim to the property by executing a quit
claim deed for a modest sum. It was held that such a settlement was not
binding upon the Government and that it could enforce its tax lien
against the vendor for the amount due the vendee as determined by the
Where there is
a tax lien outstanding against a taxpayer, it would seem that if the
Government close to enforce that lien against intangibles to the fullest
extent, then any bank paying a check of such taxpayer, any insurance
company making payments of cash surrender values, disability payments or
annuity payments, any party making payment to such taxpayer for
services, or any party settling either a contract or tort claim with
such taxpayer would be subject to the hazard of payment the same over
again to the Government. Except as to such parties that come within the
protection of Section 6323, the tax lien would for all practical
purposes be a secret lien since it would come into existence and
continue from the time the taxes were assessed in Washington, D. C. It
would appear that the Government as a matter of policy has been sparing
in its enforcement of tax liens against intangibles of the kind noted.
See Note, Effect of A Federal Tax Lien On A Bank Deposit, 42 Iowa L.
Rev. 412-420 (1957). In this connection it should be noted that state
laws relating to exemptions are ineffective as against a Government tax
lien. The only exemptions as to federal tax liens are those contained in
Section 6334, 26
C. A. Those exemptions are:
Wearing apparel and school books.--Such items of wearing apparel and
such school books as are necessary for the taxpayer or for members of
Fuel, provisions, furniture, and personal effects.--If the taxpayer is
the head of a family, so much of the fuel, provisions, furniture, and
personal effects in his household, and of the arms for personal use,
livestock, and poultry of the taxpayer, as does not exceed $500 in
Books and tools of a trade, business, or profession.--So mamy of the
books and tools necessary for the trade, business, or profession of the
taxpayer as do not exceed in the aggregate $250 in value.
No other property exempt.--Notwithstanding any other law of the United
States, no property or rights to property shall be exempt from levy
other than the property specifically made exempt by subsection
is to be noted that no exemption is afforded as to insurance or personal
[Priority Over Judgment Creditors]
It seems clear
in the present case that the Government acquired a lien upon the chose
in action for renewal commissions owned by the defendant Glen H. Wilson.
The next question is whether that lien has priority over the claims of
the plaintiffs. In that connection it is desirable to summarize the
chain of events in chronological order. That order is as follows:
November 4th, 1953
: Plaintiffs recover judgments in District Court of Iowa in and for
November 8th, 1954
: Government tax lien comes into existence.
January 13th, 1955
: Government files notice of tax lien in Travis County, Texas, under
January 21st, 1955
: Government files notice of tax lien in
, under Section 6323.
December 20th, 1955
: Garnishment notices served on Washington National Insurance Company
under executions issued pursuant to plaintiffs' judgments.
January 21st, 1956
: Plaintiffs institute proceedings auxiliary to their executions in
District Court of Iowa in and for
February 10th, 1956
: Government serves notice of levy under tax lien on Washington National
situation is (1) the plaintiffs recovered their judgments before the
Government's tax lien came into existence; (2) the Government's tax lien
was in existence and notices of it had been filed in the county offices
before the Washington National Insurance Company was served with
garnishment notices under the executions issued pursuant to plaintiffs'
judgments; (3) those garnishment notices preceded the Government's
notice of levy, and (4) the plaintiffs' proceedings auxiliary to
execution were instituted prior to the Government's notice of levy.
[Applicable State Laws]
plaintiffs' claim to priority is based upon several grounds. They claim
that since their judgments were rendered prior to the time the
Government filed its notices of tax liens in the county offices referred
to they are "judgment creditors" within the purview of Section
6323 above set out which provides that a Government tax lien shall not
be valid against a "judgment creditor" until notice is filed
in the designated office. They also claim priority because their
garnishment notices were served and their proceedings auxiliary to
execution in the nature of a Creditors' Bill were instituted before the
Government served its notice of levy. This latter claim involves several
provisions of the
law. Chapter 626, Code of
1954, relates to executions. Section 626.1 of that Chapter provides, in
part, as follows:
or orders requiring the payment of money, or the delivery of the
possession of property, are to be enforced by execution. * * *"
of that Chapter provides as follows:
money, bank bills, and other things in action may be levied upon, and
sold or appropriated thereunder, and an assignment thereof by the
officer shall have the same effect as if made by the defendant."
of that Chapter provides as follows:
of the defendant in the possession of another, or debts due him, may be
reached by garnishment."
Rule 54(b) of
the Iowa Rules of Civil Procedure provides, in part, as follows:
officer serving a writ of attachment or execution shall garnish such
persons as the plaintiff may direct as supposed debtors, or having in
possession property of the principal defendant, which shall be effected
by a notice served in the manner and as an original notice in civil
actions, forbidding his paying any debt owing such defendant, due or to
become due, and requiring him to retain possession of all property of
the defendant in his hands or under his control, to the end that the
same may be dealt with according to law, * * *."
1954, under which the plaintiffs instituted these proceedings relates to
proceedings auxiliary to execution.
of that Chapter provides as follows:
any time after the rendition of a judgment, an action by equitable
proceedings may be brought to subject any property, money, rights,
credits, or interest therein belonging to the defendant to the
satisfaction of such judgment. In such action, persons indebted to the
judgment debtor, or holding any property or money in which such debtor
has any interest, or the evidences of securities for the same, may be
of that Chapter provides as follows:
the case contemplated in sections 630.16 and 630.17, a lien shall be
created on the property of the judgment debtor, or his interest therein,
in the hands of any defendant or under his control, which is
sufficiently described in the petition, from the time of the service of
notice and copy of the petition on the defendant holding or controlling
such property or any interest therein."
this connection the claim of the plaintiffs is that they come within the
scope of the "diligent creditor" rule. In support of that
claim they rely upon the cases of Bridgman & Co. v. McKissick and
Bone (1863), 15
260, and United States v. Fidelity & Deposit Co. (1954), 214
Fed. (2d) 565 [54-2 USTC ¶9486]. In both cases a debtor had transferred
property in fraud of creditors. In the case of Bridgman & Co. v.
McKissick and Bone, supra, it was held that a judgment creditor who
brought an action to set aside a fraudulent conveyance had priority over
the holder of an older judgment who had not instituted such an action.
In the case of United States v. Fidelity & Deposit Co., supra,
it was held that a bonding company which was a creditor of a taxpayer
and which filed suit to set aside a fraudulent conveyance had priority
over a Government tax lien which was not in existence at the time the
conveyance was made. The rationale of those decisions was that after the
conveyance the grantor did not have any interest in the property which
was the subject matter of the conveyance to which a lien could attach
and that the only right any creditor had was the right to bring an
action to set aside the conveyance. As pointed out in those decisions, a
conveyance which is fraudulent as to creditors is nevertheless binding
as to the grantor and after such a conveyance he cannot claim any
interest in the property which was the subject matter of the conveyance.
It is believed
that the situation in the present case does not come within the purview
of the decisions in those cases. In the present case, as heretofore
noted, the property in question, i.e., the chose in action for
renewal commissions, was in existence and owned by the defendant Glen H.
Wilson at the time the Government's tax lien came into existence. Thus
it is not a case like the cases relied on by the plaintiffs where there
was no property interest to which a lien could attach.
It is well
settled that under the
law no lien is acquired by garnishment--all that the garnishor acquires
is the right to proceed against the garnishee personally.
v. Pierre (1930), 210
1304, 232 N. W. 633. Proceedings auxiliary to execution under Chapter
630, Code of Iowa 1954, are in the nature of a Creditors' Bill. Under
Section 630.18 of that Chapter the commencement of such proceedings does
create a lien against the property involved. In this case the
plaintiffs' garnishments were made and the proceedings auxiliary to
execution were instituted after the Government had filed its notices of
lien. See United States v. Liverpool & London & Globe
Insurance Co. (1955), 348 U. S. 215, 75 S. Ct. 247, 99 L. Ed. 268
[55-1 USTC ¶9136], where the Government's tax lien was subsequent to
the plaintiff's garnishment but prior to the plaintiff's judgment.
It seems clear
that the plaintiffs' claims for priority based upon the "diligent
creditor" rule or upon their garnishments or by their institution
of proceedings auxiliary to execution are not well founded. That leaves
for consideration their claim that they are entitled to priority because
of the provisions of Section 6323 heretofore set out. Under that Section
a Government lien for taxes is not "valid as against any * * *
judgment creditor" until notice of the same has been filed. In the
present case the plaintiffs' judgments were rendered on
November 4th, 1953
. The notice of the Government's tax lien was not filed until January,
1955. It is the claim of the plaintiffs that the judgments obtained by
November 4th, 1953
, gave each of them the status of a "judgment creditor" under
the provisions of Section 6323. It is the claim of the Government that a
creditor by merely obtaining a judgment does not thereby become a
"judgment creditor" within the provisions of Section 6323. It
is the claim of the Government that the plaintiffs did not acquire a
lien upon the property involved prior to the filing of the notice of the
Government's tax lien and that lacking such lien the plaintiffs are not
entitled to priority under Section 6323.
are creatures of statute. Miller v. Bank of
(9th Cir. 1948), 166 Fed. (2d) 415, 417 [48-1 USTC ¶9185]. See
also Riesenfeld, Collection of Money Judgments In American Law--A
Historical Inventory and A Prospectus, 42 Iowa Law Review 155 (1957).
Under Section 624.23, Code of Iowa 1954, a judgment becomes a lien upon
the real estate of the judgment debtor upon its rendition. A judgment
becomes a lien upon personal property of the judgment debtor by levy.
Rules of Civil Procedure. In the present case there was no levy under
the plaintiffs' judgments prior to the filing of the notice of the
Government's tax lien. The plaintiffs had not acquired any lien upon the
property in question prior to the filing of the notice of the
Government's tax lien. At that time they had the status of creditors who
had reduced their claims to judgment but who had not acquired any lien
as to any personal property of the judgment debtor.
In the present
case there is not involved the vexatious question of a "specific
and perfected" lien. See Kennedy, The Relative Priority of the
Federal Government: The Pernicious Career of the Inchoate and General
Lien, 63 Yale L. J. 905 (1954). At a recent Bar meeting the current
state of the law in regard to conflicts between holders of non-federal
claims and the Government was summarized as follows: "If it's heads
the Government wins; if it's tails the holder of the non-federal claim
loses." In this connection it is to be noted that the tax lien of
which the Government filed notice is most general and inchoate. However,
the "specific and perfected" lien rule adopted by the United
States Supreme Court is not applicable to Government tax liens; it is
only applicable to non-federal liens which come in conflict with
Government tax liens.
heretofore set out purports to afford protection to mortgagees,
pledgees, purchasers and judgment creditors. However, in order to come
within the protection of that Section they must meet the
"conventional type" test.
v. Gilbert Associates, Inc. (1953), 345
361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291]. Unless the
judgment or mortgage is of the conventional type it does not come within
the scope of Section 6323. The judgments involved in the present case
were conventional money judgments rendered by a court of record of
general and original jurisdiction. Therefore, they cannot be eliminated
from the provisions of Section 6323 by the "conventional type"
Creditors' Lack of Liens]
There is for
consideration the question of whether the plaintiff judgment holders are
without the scope of Section 6323 because of their lack of liens.
Section 6323 makes no reference to the matter of lien in connection with
"judgment creditors." Section 6323 makes no reference to the
matter of recording, yet recording is required. See cases cited in Mason
City and Clear Lake Railroad Company v. Imperial Seed Company, et al.
(D. C. N. D. Iowa, June 10th, 1957), 152 Fed. Supp. 145 [57-2 USTC ¶9736].
Somewhat similarly, it is held that in order for the holder of a
judgment to be a "judgment creditor" within the provisions of
Section 6323 he must be a judgment lien creditor. Miller v. Bank of
(9th Cir. 1948), 166 Fed. (2d) 415 [48-1 USTC ¶9185];
v. Levin (D. C. 1955), 128 Fed. Supp. 465 [55-1 USTC ¶9354];
v. Fisher (D. C. 1948), 93 Fed. Supp. 73; Bank of
(D. C. 1946), 73 Fed. Supp. 303. In the case of
v. Fisher, supra, the rule is stated as follows (p. 76):
creditor must have obtained his judgment, and in the case of personal
property have execution levied thereon, before a lien capable of
priority over that of the United States for taxes could be
The case of Miller
v. Bank of
, supra, involved the priority of claims to the taxpayer's bank
account between a judgment holder and the Government, under what is now
Section 6323. The Government was the holder of tax liens. The creditor
obtained his judgment but had not obtained a lien on the property at the
time the Government filed notice of its tax liens and gave notice of
levy thereunder. The trial court granted priority to the Government. The
judgment holder appealed. The holding of the trial court was affirmed by
the United States Court of Appeals for the Ninth Circuit. That Court
stated (p. 417):
asserts that the above federal statutes should be literally construed
and since the word 'lien' is omitted in connection with the term
'judgment creditor' as used therein, that it was not necessary for him
to take any further action to perfect his right to the fund on deposit
with the Bank of America: that the entry and docketing of the judgment
was sufficient to entitle him to priority over the perfected lien of the
Government in said fund.
principle that a clear and unambiguous statute must be literally
construed is long established.
a literal construction would defeat the object or scope intended by
Congress, or would result in 'absurdities so gross "as to shock the
general moral sense", then the courts may be entitled to depart
from the strict wording in order to give the statute a reasonable
the interpretation of the statute insisted upon by appellant probably
would not have absurd or shocking results, it would clearly defeat the
object intended by Congress. Moreover, it would be unreasonable to
conclude that the Government intended to place itself at a disadvantage
in procuring a tax lien when the decisions of the courts and the very
history of the legislation in question show that before the enactment of
the above statutes no lien whatsoever existed in favor of any class or
classes of creditors.
the precise question presented has not been decided, there have been
many decisions under the statutes here involved where the courts by
implication exclude the theory advanced by appellant. In all these cases
it is certain that it is the lien created by the claim of a
creditor within the meaning of recording acts which is contemplated, and
not just the claim itself."
"lien" requirement rule has been recognized in the following
cases: Ersa, Inc. v. Dudley (D. C. 1955), 134 Fed. Supp. 627
[55-2 USTC ¶9690];
v. 52.11 Acres of Land (D. C. 1947), 73 Fed. Supp. 820 [48-1
v. Record Pub.
(D. C. 1945), 60 Fed. Supp. 194 [45-2 USTC ¶9378]. In those cases
it was held that the judgment holder met the requirement. The United
States Supreme Court has not as yet passed upon the question but, as
above noted, the Federal Courts that have passed upon the question are
in agreement that in order for the holder of a judgment to constitute a
"judgment creditor" within the purview of Section 6323 such
holder must have acquired a lien prior to the filing by the Government
of notice of its tax lien. It is the holding of the Court in the present
case that the Government is entitled to priority as to the property
Right to Deduct Expenses]
Washington National Insurance Company claims the right to deduct from
any funds due to the defendant Wilson its expenses, attorney fees, and
costs in connection with the garnishment proceedings. This claim is
based upon a provision in the contract between Wilson and the insurance
company which gives the company a first lien upon all commissions
payable for any debt due from
to the company. The contract states that all money expended by the
company in answering or defending any attachment or garnishment
involving the defendant
shall constitute a debt due. Set-off has been allowed when that remedy
is available under local law. Karno-Smith Co. v. Maloney (3rd
Cir. 1940), 112 Fed. (2d) 690 [40-2 USTC ¶9533]. And set-off has been
allowed pursuant to an agreement which was prior to the lien asserted by
v. Winnett (9th Cir. 1947), 165 Fed. (2d) 149 [48-1 USTC ¶9115].
It has been held that at the time the Government levied upon a
depositor's bank account nothing was owed since a demand note held by
the bank liquidated the balance.
v. Bank of
(D. C. 1934), 5 Fed. Supp. 942 [1934 CCH ¶9099]; cf. Transmix
(D. C. 1956), 142 Fed. Supp. 306 [56-1 USTC ¶9349]. But cf.
v. Bank of
(D. C. Nevada 1957), -- Fed. Supp. -- [57-1 USTC ¶9561]. Even
where the set-off and the tax liens attach simultaneously the federal
tax lien is superior.
v. Graham (D. C. 1951), 96 Fed. Supp. 318. But in the instant
case the federal tax lien attached before any garnishment was effected
and so before any right of set-off accrued. The United States Supreme
Court in United States v. Liverpool & London & Globe
Insurance Co. (1955), 348 U. S. 215, 217, 75 S. Ct. 247, 99 L. Ed.
268 [55-1 USTC ¶9136], commented upon allowing attorney fees to the
garnishee as follows:
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 fees prior to the Government liens was error."
It is the
holding of the Court that the defendant Washington National Insurance
Company may not deduct the expenses and attorney fees incurred by it in
connection with the garnishment proceedings from the renewal commissions
owing or to become owing to the defendant Glen H. Wilson under his
general agent's contract.
agent's contract of the defendant Glen H. Wilson was dated
November 1st, 1949
. It was cancelled on
October 9th, 1950
. The cancellation left unaffected his right to renewal commissions on
policies written by him. During the pendency of these proceedings such
renewal commissions have been accumulating. The right to such renewal
commissions will continue for some time in the future. The Government
requests that the Court order the defendant Washington National
Insurance Company to pay it the accumulated renewal commissions to apply
upon its tax lien. The Government also requests that the Court order the
defendant Washington National Insurance Company pay to it for similar
application the renewal commissions which become owing to the defendant
Glen H. Wilson in the future. The question is raised as to the form of
relief that may properly be granted in connection with the renewal
Title 26, United States Code, provides, in part, as follows:
person in possession of (or obligated with respect to) property or
rights to property subject to levy upon which a levy has been made
shall, upon demand of the Secretary or his delegate, surrender such
property or rights (or discharge such obligation) to the Secretary or
his delegate, * * *"
procedure provided in that Section is in substance garnishee process.
Title 26, United States Code, provides, in part, as follows:
Filing.--In any case where there has been a refusal or neglect to pay
any tax, or to discharge any liability in respect thereof, whether or
not levy has been made, the Attorney General or his delegate, at the
request of the Secretary or his delegate, may direct a civil action to
be filed in a district court of the United States to enforce the lien of
the United States under this title with respect to such tax or liability
or to subject any property, of whatever nature, of the delinquent, or in
which he has any right, title, or interest, to the payment of such tax
Parties.--All persons having liens upon or claiming any interest in the
property involved in such action shall be made parties thereto."
Government was brought in as a party defendant in proceedings auxiliary
to execution. Those proceedings developed into an action having all the
characteristics of an action under Section 7403. Proceedings auxiliary
to execution are equitable in character. It is the view of the Court
that it may mold its relief to fit the situation presented herein.
It is held
that unearned wages of a debtor are not subject to garnishment. Stowe
v. Breen (1941), 230
1215, 300 N. W. 518. This is true even though the statutes relating to
garnishment purport to provide for amounts "to become due." Thomas
v. Gibbons (1883), 61
50, 15 N. W. 593. In
v. Long Island Drug Co. (2nd Cir. 1940), 115 Fed. (2d) 983 [41-1
USTC ¶9140], the Court refused to give the Government a judgment
against the delinquent taxpayer's future earnings. The Court stated (p.
nothing in §3690 or §3710 which various the general rule that a
garnishee process is not to be extended to future earnings, * * *"
a situation involving unearned wages is to be distinguished from a
situation involved an obligation payable to the debtor in installments.
See Cox v. Russell (1876), 44
556. In that latter situation a judgment in garnishment may be rendered
under which the installment payments are applied for the benefit of the
creditor. See 7 A. L. R. (2d) 680 (1949).
obligation for services rendered is properly subjected to a Government
tax lien. Glass City Bank v.
265, 268, 66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449]. In Fried v.
Life Insurance (2nd Cir. 1957), 241 Fed. (2d) 504 [57-1 USTC ¶9412],
May 27th, 1957
, the Court required monthly disability payments under an insurance
policy to be paid to the Government to apply on the insured's delinquent
taxes. Apparently the Court required those sums to be paid each month as
they accrued. Those payments were unlike future earnings in that they
were the product of a contractual right which the insurance company
could not defeat and were contingent only upon the continued life of the
insured. In the present case the services which entitle the defendant
Glen H. Wilson to the renewal commissions have already been rendered.
They are payable under an existing obligation. The Government could
reach renewal commissions hereafter accruing by repeated levies. Such
levies would entail frequent additional and unnecessary expense.
It is the view
of the Court that this Court may properly provide that the renewal
commissions to which the defendant Glen H. Wilson is entitled on
premiums hereafter paid on policies written by him shall be paid by the
defendant Washington National Insurance Company to the Government to
apply upon its tax lien.
IT IS HEREBY
ORDERED that judgment shall be entered (1) adjudging and decreeing that
the claim of the Government under its tax lien is prior and superior to
the claim of the plaintiffs to the renewal commissions in question which
are now owing and which will hereafter become owing; (2) denying the
claim of the defendant Washington National Insurance Company for
expenses and attorney fees incurred in connection with the garnishment
proceedings; (3) ordering the defendant Washington National Insurance
Company to pay to the Government the accumulated renewal commissions now
owing to apply upon its tax lien; (4) ordering that the defendant
Washington National Insurance Company pay to the Government quarterly
the renewal commissions which have become owing during the quarter. As
permitted by Rule 52 of the Federal Rules of Civil Procedure;
IT IS FURTHER
ORDERED that this opinion shall constitute the findings of fact,
conclusions of law, and order for judgment in this case.