Iowa

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[74-2 USTC ¶9768] United States of America , Plaintiff v. Eugene F. Schneider et al., Defendants

U. S. District Court, So. Dist. Iowa , Central Div., Civil No. 72-52-1, 10/9/74

[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.

Allen L. 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.

Order

STUART, District Judge:

This matter 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 .

[Facts]

On 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 United States seek to amend its redemption affidavit to set forth any amount it was willing to credit defendant taxpayers.

The Schneiders contend that the failure to state an amount of credit extinguishes the lien and underlying claim. The rely on Iowa Code §628.17, which provides:

In 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).

and §628.19, which provides:

If [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.

Since it is undisputed that the United States 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.

In resistance to this argument, the United States 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 United States 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, 719; 26 U. S. 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.

[Supremacy Clause]

In addition to the assessment lien argument, the United States makes numerous claims based on the supremacy clause. In essence, it claims that federal law--specifically, 26 U. S. C. §§ 6322 and 6342--conflicts with state law and that federal law should be controlling. The Court can discern no substantial conflict between the Iowa 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 the United States 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.

The government 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.

[Conclusion]

Plaintiff's supremacy clause argument must fall for another reason, namely, that state law governing divestiture of federal tax liens is federal law. United States v. Brosnan (1960), [60-2 USTC ¶9516] 363 U. S. 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," Id. at 242, requires that the relationship between the parties to this action be governed by the applicable provisions of the Iowa Code. The United States has not brought any such congressional direction to the attention of the Court and the Court, itself, has found none. Under Iowa law the United States 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 Iowa 551, 79 N. W. 351; West v. Fitzgerald (1887), 72 Iowa 306, 33 N. W. 688; Lamb v. Feeley (1886), 71 Iowa 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). Accordingly,

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.

 

 

[58-2 USTC ¶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, Pittsburgh , Pennsylvania , Appellee. Cardinal Service Stations, Incorporated, Appellee

Supreme 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' claims.

J. P. Greve, R. S. Rob 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, Sioux City , Ia. , for Hooker Glass & Paint Mfg. Co.

PETERSON, Judge:

On March 25, 1955 , appellant's predecessor in interest, Mid-Continent Petroleum Corporation, entered into a written agreement with Bride Construction Company of Sioux City for erection of a service station upon property in Sioux City 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.

Prior to January 1, 1956 appellant paid Bride Construction Company $19,462 on the contract price, leaving unpaid the sum of $3442.

[Subcontractors' Mechanics' Liens Filed]

Bride 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 Iowa Code.

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.

On February 15, 1956 , the Internal Revenue Department of the United States 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.

On July 21, 1955 , appellant entered into written contract with Bride Construction Company for the erection of a service station at Logan , Iowa . 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 Sioux City , and therefore there is no balance subject to appellees' liens.

[Trial Court's Holding]

The decree of the trial court held the Logan matter did not enter into the situation and that there was unpaid on the contract for erection of the Sioux City 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 United States , 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 against appellant.

Fullerton 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.

[Appellant's Contentions]

Appellant 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.

I. The 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, Iowa.

With the 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 Sioux City 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.

[Question 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 Logan can offset as against $3442 unpaid on the Sioux City contract.

In connection with the unpaid balance on the Sioux City contract of $3442 the trial court said: "Balance due on this particular contract ( Sioux City ) 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 Logan 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 Logan 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.

A. In connection with the situation at Logan 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 the Logan situation.

The question 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.

[Subcontractors as Preferred Creditors]

B. 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.

When the 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.

If the 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 Division II.

[Tax Lien Does Not Attach]

II. The United States of America tax lien does not attach to the unpaid balance on the Sioux City 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 ¶9765].

[Discussion of Authorities on Attachment of Tax Liens]

In recent 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.

Similarly, to 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.

Judge Graven's 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 United States v. Bess, supra.

In Fidelity & 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."

Judge Graven said with reference to United States 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 contract."

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."

We therefore 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.

[Subcontractor as Contractor]

III. Mr. C. E. Hardy has been engaged in service station equipment repair business in Sioux City for more than twenty years. Under contract with Bride Construction Company he installed the tanks, pumps, hoist etc., at the station in Sioux City involved in this action. He completed his contract with Bride Construction Company on Saturday, July 9, 1955 . That night a flood occurred in Sioux City 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.

Mr. Yarger, 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.

In connection 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 Sioux City contacted Mr. Hardy direct, and requested him to make the repairs after the flood. He completed the reinstallation and is entitled to be paid therefor

The decision 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.

[Trial 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.

No interest 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.

Judgment for 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 United States . Defendant filed answer and cross-petition, defended vigorously, and did not prevail.

The trial 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.

MODIFIED AND AFFIRMED

GARFIELD , Circuit Judge, and BLISS, WENNERSTRUM, HAYS, THOMPSON, LARSON and LINNAN, Judges CONCUR.

 

 

[61-1 USTC ¶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

U. S. District Court, Dist , Alas. , Anchorage , No. A-10,934 Civil, 192 FSupp 330, 4/6/61

[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.

Roger Cremo, Anchorage , Alaska , for Chester W. Goodman. Arthur D. Talbot, of Bayko, Talbot & Tulin, Anchorage , Alaska , for James R. Smith. Philip T. Lyons, 5544 Figueroa, Los Angeles , California , 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, Attorney General, Juneau , Alaska , for Employment Security Commission. George M. Yeager, United States Attorney, for United States .

Opinion

HODGE, District Judge:

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.

The following claims have been filed by answer to the complaint, or, in the case of the United States , by petition in intervention:

W. A. 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 Alaska , in the sum of $1,906.71, as to which an attachment was made against the plaintiffs on August 20, 1954 .

Chester 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.

James R. 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 .

Hayward Lumber & Investment Company, by virtue of an assignment from Capehart dated August 3, 1954 , in the sum of $3,000.00.

Joe Morgan, 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 other lien.

Employment Security Commission of Alaska : Unemployment insurance contributions upon assessments December 31, 1953 to December 31, 1954 , with penalty and interest, $1,048.74, as to which no lien has been filed.

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

                                  
4/9/54
 .............            257.85

                                  
3/11/54
 ............            322.80

                                                                                   1,958.42

A-257-55            5/25/55       2/23/55 ............          3,892.77

                                  
2/23/55
 ............          1,555.40

                                  
2/23/55
 ............          1,767.41

                                                                                   7,215.58

                                  Total ..............                           $11,034.29

 

The Goodman 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 United States , 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 case.

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.

Upon pre-trial 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 law.

Section 6323, 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 by the United States herein were so recorded in the office of the Recorder for Anchorage Precinct, Territory of Alaska , being the office so designated by territorial law, on the dates indicated.

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 United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85.

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 America , N. T. & S. A., (C. A. 9) [48-1 USTC ¶9185] 166 F. 2d 415, 418. By statute in Alaska 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 United States filed May 25, 1955 , but not as against the tax liens filed on January 8, 1954 and 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 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 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.

No execution 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.

The assignment from Capehart to the Hayward Lumber & Investment Company did not make this claimant a "purchaser" within the meaning of Section 6323. United States 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.

By Alaska 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, SLA 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.

Conclusion

The United States , 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.

The claimants are entitled to priority of payment out of such registry fund in the following order:

(1) Liens numbers 27,648 and 29,770 of the United States for income and withholding taxes, totaling $3,818.71.

(2) Judgment 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 other liens.

Judgment may 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.

 

 

[57-2 USTC ¶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

U. S. District Court, No. Dist. Iowa , 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 Iowa 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 quarter.

George Davis, Whicher & Davis, Sioux City , Iowa , for the plaintiffs. Yelderman, Martin & Smith, Austin , Tex. , 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.

Opinion

GRAVEN, District Judge:

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.

On 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 Woodbury County 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 domiciled at Sioux City , Woodbury County , Iowa . From that time until the present he has been a resident of and domiciled in Travis County, Texas.

The Commissioner filed notice of the tax liens in the office of the County Clerk of Courts of Travis County, Texas, on January 13th, 1955 . He also filed notice of those liens in the office of the County Recorder of Woodbury County , Iowa , on January 21st, 1955 .

[Claims to Renewal Commissions]

On 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.

Chapter 630, Code of Iowa 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 Woodbury County under the provisions of that Chapter. The original parties defendant to the proceedings were Glen H. Wilson and the Washington National Insurance Company.

On February 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 Woodbury County 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.

[Assessment 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, U. S. C. A. Those sections provide as follows:

Section 6321:

"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."

Section 6322:

"Unless 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."

Section 6323:

"(a) 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--

"(1) 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 Iowa 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.

[Lien 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:

"The 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."

Section 6321 was formerly Section 3670, 26 U. S. 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.):

"By §3670, 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. Co. (D. C. 1952), 109 Fed. Supp. 207 [53-1 USTC ¶9247]; United States 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]; United States 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. United States (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. Anderson entitled "Federal Tax Liens--Their Nature and Priority," 41 California Law Review 241 (1953), the author states (p. 251):

"Once the 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 owners, the United States and the taxpayer."

In 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 California 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 applicable California law.

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 U. S. C. A. Those exemptions are:

"(1) Wearing apparel and school books.--Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

"(2) 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 value;

"(3) 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.

* * *

"(c) 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 (a)."

It is to be noted that no exemption is afforded as to insurance or personal earnings.

[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:

(1)-- November 4th, 1953 : Plaintiffs recover judgments in District Court of Iowa in and for Woodbury County .

(2)-- November 8th, 1954 : Government tax lien comes into existence.

(3)-- January 13th, 1955 : Government files notice of tax lien in Travis County, Texas, under Section 6323.

(4)-- January 21st, 1955 : Government files notice of tax lien in Woodbury County , Iowa , under Section 6323.

(5)-- December 20th, 1955 : Garnishment notices served on Washington National Insurance Company under executions issued pursuant to plaintiffs' judgments.

(6)-- January 21st, 1956 : Plaintiffs institute proceedings auxiliary to their executions in District Court of Iowa in and for Woodbury County .

(7)-- February 10th, 1956 : Government serves notice of levy under tax lien on Washington National Insurance Company.

The 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]

The 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 Iowa law. Chapter 626, Code of Iowa 1954, relates to executions. Section 626.1 of that Chapter provides, in part, as follows:

"Judgments or orders requiring the payment of money, or the delivery of the possession of property, are to be enforced by execution. * * *"

Section 626.21 of that Chapter provides as follows:

"Judgments, 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."

Section 626.26 of that Chapter provides as follows:

"Property 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:

"The 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, * * *."

Chapter 630, Code of Iowa 1954, under which the plaintiffs instituted these proceedings relates to proceedings auxiliary to execution.

Section 630.16 of that Chapter provides as follows:

"At 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 made defendants."

Section 630.18 of that Chapter provides as follows:

"In 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."

In 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 Iowa 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 Iowa law no lien is acquired by garnishment--all that the garnishor acquires is the right to proceed against the garnishee personally. Pierre v. Pierre (1930), 210 Iowa 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.

[Federal Law]

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 them on 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.

Judgment liens are creatures of statute. Miller v. Bank of America (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. Rule 260, Iowa 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.

Section 6323 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. United States v. Gilbert Associates, Inc. (1953), 345 U. S. 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" test.

[Judgment 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 America (9th Cir. 1948), 166 Fed. (2d) 415 [48-1 USTC ¶9185]; United States v. Levin (D. C. 1955), 128 Fed. Supp. 465 [55-1 USTC ¶9354]; United States v. Fisher (D. C. 1948), 93 Fed. Supp. 73; Bank of America v. United States (D. C. 1946), 73 Fed. Supp. 303. In the case of United States v. Fisher, supra, the rule is stated as follows (p. 76):

"The 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 created."

The case of Miller v. Bank of America , 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):

"Appellant 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.

"The principle that a clear and unambiguous statute must be literally construed is long established.

"If 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 construction.'

"While 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.

"Although 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."

The "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]; United States v. 52.11 Acres of Land (D. C. 1947), 73 Fed. Supp. 820 [48-1 USTC ¶9116]; United States v. Record Pub. Co. (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 involved.

[Employer's Right to Deduct Expenses]

The defendant 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 Wilson to the company. The contract states that all money expended by the company in answering or defending any attachment or garnishment involving the defendant Wilson 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 the United States . United States 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. United States v. Bank of United States (D. C. 1934), 5 Fed. Supp. 942 [1934 CCH ¶9099]; cf. Transmix Concrete v. United States (D. C. 1956), 142 Fed. Supp. 306 [56-1 USTC ¶9349]. But cf. United States v. Bank of Nevada (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. United States 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:

"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 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.

[Form of Relief]

The general 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 commissions.

Section 6332, Title 26, United States Code, provides, in part, as follows:

"Any 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, * * *"

The procedure provided in that Section is in substance garnishee process.

Section 7403, Title 26, United States Code, provides, in part, as follows:

"(a) 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 or liability.

"(b) Parties.--All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto."

The 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 Iowa 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 Iowa 50, 15 N. W. 593. In United States 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. 987):

"We find nothing in §3690 or §3710 which various the general rule that a garnishee process is not to be extended to future earnings, * * *"

However, 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 Iowa 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).

An existing obligation for services rendered is properly subjected to a Government tax lien. Glass City Bank v. United States (1945), 326 U. S. 265, 268, 66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449]. In Fried v. New York Life Insurance (2nd Cir. 1957), 241 Fed. (2d) 504 [57-1 USTC ¶9412], certiorari denied, 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.