Marshalling of Assets

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[98-1 USTC ¶50,408] Jeremy B. Muldavin, Plaintiff v. Brenna M. Muldavin, Defendant and United States Government, Department of Internal Revenue Service, Counterclaim Plaintiff v. Brenna M. Muldavin and Jeremy B. Muldavin, Counterclaim Defendants

U.S. District Court, West. Dist. Mich. , So. Div., 1:96-cv-953, 4/14/98

[Code Sec. 6321 ]

Liens and levies: Action to enforce lien: Foreclosure: Property transferred: Sale proceeds: Assessments, validity of.--The government could enforce a tax lien against proceeds from the sale to an unrelated third party of land that a delinquent taxpayer had transferred to her daughter. Although the daughter claimed that enforcement of the lien should be stayed because her parents disputed their tax liability, the record showed that they had exhausted their avenues of challenge to the deficiencies.

[Code Sec. 6323 ]

Liens and levies: Action to enforce lien: Foreclosure: Property transferred: Sale proceeds: Equitable remedies: Doctrine of inverse alienation: Doctrine of marshaling of assets.--The government could enforce a tax lien against proceeds from the sale to an unrelated third party of land that a delinquent taxpayer had transferred to her daughter. The equitable doctrines of inverse order of alienation and marshaling of assets, which would have required that the lien first be enforced against properties to which the parents retained title, did not apply to the government. Also, since the mother had transferred the land to her daughter for no consideration, enforcement of the lien did not harm innocent third parties.

[Code Sec. 7403 ]

Liens and levies: Action to enforce lien: Foreclosure: Property transferred: Sale proceeds: Assessments, validity of: Equitable remedies: Doctrine of inverse alienation: Doctrine of marshaling of assets.--The government could enforce a tax lien against proceeds from the sale to an unrelated third party of land that a delinquent taxpayer had transferred to her daughter. Although the daughter claimed that enforcement of the lien should be stayed because her parents disputed their tax liability, the record showed that they had exhausted their avenues of challenge to the deficiencies. Also, the equitable doctrines of inverse order of alienation and marshaling of assets, which would have required that the lien first be enforced against properties to which the parents retained title, did not apply to the government.

OPINION GRANTING MOTION FOR DISTRIBUTION

HILLMAN, Senior District Judge:

This matter is before the court on motion of the United States for distribution of proceeds from the sale of real property, which were deposited with the Clerk of the Court pursuant to a partial consent decree. Upon review, I conclude that the motion should be GRANTED.

BACKGROUND

On November 17, 1989 , Jean Muldavin entered into a land contract to purchase certain real property in Manistee County , Michigan . A Memorandum of Land Contract was recorded on November 20, 1989 with the Manistee County Register of Deeds. On October 1, 1992 , the Internal Revenue Service filed notices of federal tax liens with the Manistee County Register of Deeds for amounts totaling approximately $1.8 million on all property and rights to property owned by the taxpayers Roger Muldavin and Jean Muldavin. The tax liens were for unpaid assessed tax liabilities for windfall property taxes, plus interest and penalties for the 1981-85 tax years. Thereafter, on December 18, 1992 , Jean Muldavin purported to assign her interest in the subject property to her daughter, Brenna Muldavin. On January 8, 1993 , a warranty deed was recorded conveying title to that property to Brenna Muldavin, declaring that the transfer was made pursuant to the earlier land contract with Jean Muldavin and the assignment of interest to Brenna Muldavin. On July 10, 1996 , Brenna Muldavin entered into an agreement to sell the subject property to Christopher S. and Lisa Rehan Smith ("the Smiths").

The present action began in the 19th Judicial Circuit Court for the County of Manistee . Michigan , as an action by Jeremy Muldavin seeking equitable and injunctive relief from his sister, Brenna Muldavin. In that action, Jeremy Muldavin sought some portion of the proceeds to be received by Brenna Muldavin from the sale of the real property to the Smiths. The Smiths intervened in that action and filed a third-party complaint against the United States Department of Internal Revenue to quiet title on the property. The action was removed by the United States to this court, and the United States filed a counterclaim against Jeremy and Brenna Muldavin and the Smiths to foreclose the federal tax liens pursuant to 26 U.S.C. §7403.

On February 13, 1997 , a partial consent decree was entered in the instant case. In the partial consent decree, the parties agreed that the real property be sold to the Smiths free of federal tax liens, and that the tax liens would attach to the proceeds of the sale to the same extent and in the same priority as the liens attached to the real property. The parties further agreed that the net proceeds from the sale would be deposited with the Clerk of the United States District Court for the Western District of Michigan within ten days of the closing.

On April 11, 1997 , $96.134.51 was deposited with the Clerk in accordance with the consent decree. On May 20, 1997, the parties stipulated to dismiss the Smiths and the "IRS" from the action, and to remand to the Manistee Circuit Court the original case filed by Jeremy Muldavin against Brenna Muldavin. The remaining counterclaim by the United States against Brenna and Jeremy Muldavin to foreclose the federal tax lien remained in this court. The United States has now moved to distribute to the United States the proceeds held by the Clerk of Court in partial fulfillment of the tax liens.

DISCUSSION

The federal tax liens on the subject property were perfected by the United States when it filed its notice of tax liens on October 1, 1992 . See 26 U.S.C. §6353(f) (making §6321 lien valid when filed in accordance with the laws of the state in which the property is located). The parties agreed in the partial consent decree and Brenna Muldavin reiterates in her brief that the federal notices of lien were filed on October 1, 1992 , while Jean Muldavin did not purport to transfer her interest in the subject property to Brenna Muldavin until December 17, 1992 . Under federal law, the federal tax liens take priority over any interest held by Brenna Muldavin, a fact Brenna Muldavin does not appear to contest. See First of America Bank West Michigan v. Alt [94-1 USTC ¶50,169], 848 F. Supp. 1343 (W.D. Mich. 1993) (tax lien has priority if recorded first with the register of deeds in the county where the property is situated).

Brenna Muldavin contends, however, that the court should decline to foreclose the tax lien on the money held in escrow by the Clerk of Court. She asserts that, to the best of her knowledge, Roger and Jean Muldavin continue to dispute their tax liability. She therefore contends that disbursement of the proceeds of the sale of the real property at issue in this case should be stayed pending final resolution of Roger and Jean Muldavin's tax liability.

Brenna Muldavin's position is without support in the record. The government has attached to its motion copies of the decisions of the tax court and the Sixth Circuit resolving the underlying tax liability of Roger and Jean Muldavin for the 1980-84 tax years. See Muldavin v. Comm'r of Internal Revenue [CCH Dec. 47,651(M)], 62 T.C.M. (CCH) 857, T.C.M. (P-H) 91,481 (U.S. Tax Ct. Sept. 26, 1991), aff'd, No. 92-1025, 977 F.2d 582, 1992 WL 296711 (6th Cir. Oct. 19, 1992); Muldavin v. Comm'r of Internal Revenue, Nos. 93-1623, 1624, 16 F.3d 1220, 1994 WL 18014 (6th Cir. Jan. 21, 1994). Roger and Jean Muldavin therefore have exhausted their avenues of challenge to the 1980-84 tax deficiencies, which greatly exceed the amount in contest here.

Brenna Muldavin has failed to suggest or demonstrate any legitimate basis for the Muldavins to contest the tax liability for the years 1980-84 tax years, which have been resolved by the aforementioned appeals. In addition, she has failed as a practical matter to demonstrate the reality of any ostensible challenges to said tax liability. ¹ Further, as a third-party to the tax liens, Brenna Muldavin lacks standing to contest the validity of the underlying tax assessment. See Alt [94-1 USTC ¶50,169], 848 F. Supp. at 1349.

Brenna Muldavin next contends that before foreclosing on property that has subsequently been transferred to a third party, the government must first foreclose on its liens on the properties to which debtors Roger and Jean Muldavin retain title. She asserts that the doctrine of inverse order of alienation requires a debtor to collect first against properties to which a debtor retains title, only then followed by foreclosure on liens against transferred properties, in reverse chronological order in which the properties were transferred.

As the government argues, however, the inverse order of alienation doctrine and the related doctrine of marshaling of assets are equitable principles that do not apply to the United States . See Ackerman II v. United States [70-1 USTC ¶9343], 424 F.2d 1148, 1150 (9th Cir. 1970); Alt [94-1 USTC ¶50,169], 848 F. Supp. at 1351 (holding that doctrine of marshaling assets, where liens are foreclosed in order to do the least harm to innocent third parties, does not apply to United States); Gregory Devel. Co. v. United States [81-1 USTC ¶13,403], 47 A.F.T.R.2d 81-1642, 1981 WL 1806, at * 3 (E.D. Cal. 1981) (holding that neither doctrine of inverse order of alienation nor marshaling applies to United States ); United States v. Hogue [81-1 USTC ¶9316], 47 A.F.T.R.2d 81-1206, 1981 WL 1752, at **2-3 (M.D. Fla. 1981). As the courts have held, imposition of the burden of exhausting other lien property would be inconsistent with the federal statutory scheme. See Hogue [81-1 USTC ¶9316], 1981 WL 1752, at * 3 (citing cases). Moreover, as other courts have observed, the United States has not clearly waived its sovereign immunity by way of agreement to be bound by the equitable doctrines. See Ackerman II [70-1 USTC ¶9343], 424 F.2d at 1150. "To require the Government to pick out and foreclose only those liens which will create the least hardship on third parties, would impose a considerable burden on the revenue collection process." Kovacs v. United States [66-1 USTC ¶9178], 355 F.2d 349, 351 (9th Cir.), cert denied, 384 U.S. 941 (1966).

Acknowledging that the courts have declined to use their equitable powers to discharge or release government liens based on the inverse alienation doctrine, Brenna Muldavin nevertheless contends that it is appropriate for the court to stay foreclosure of such liens. She asserts that such a stay in the instant case would serve the interests of equity by imposing the burden of the lien on the property of the taxpayers first, without incumbering the interests of the innocent owner.

In support of her suggestion that the court stay foreclosure, however, Brenna Muldavin cites United States v. Pollack [64-2 USTC ¶9688], 233 F. Supp. 775 (E.D.N.Y. 1964), where the district court temporarily stayed foreclosure based on equitable principles requiring the government to do least harm to innocent third parties. As the government notes, however, the district court in Pollack subsequently vacated its stay. See United States v. Pollack [67-1 USTC ¶9325], 370 F.2d 79 (2d Cir. 1966) (showing government appearing as appellee). I am persuaded that staying enforcement of the lien pending enforcement of liens against the taxpayers' remaining property is not supported by the case law and is indistinguishable from applying the doctrines of inverse alienation and marshaling of assets, which the courts have consistently rejected. See, e.g., Gregory Devel. Co. [81-1 USTC ¶13,403], 47 A.F.T.R.2d 81-1642, 1981 WL 1806, at * 3 (E.D. Cal. 1981). Moreover, where as here property has been transferred to the child of the taxpayer, without consideration, following the filing of tax liens, no strong equitable principles merit mitigating the harshness of the liens.

Accordingly, the court concludes that the United States may foreclose on its lien and that Brenna Muldavin is not entitled to a stay. The motion of the United States for distribution of proceeds from the sale of property which were deposited with the Clerk of Court is GRANTED. The Clerk of Court is ordered to distribute to the United States the deposited sum of $96,134.51, together with the accrued interest.

¹ Brenna Muldavin has filed a belated surreply brief to which she has attached an affidavit by her father, in which he states that he intends to challenge his 1982-85 tax liability and has continuing recourse to do so. The un-notarized "affidavit," however, does not reveal what pending cases remain for the 1982-84 tax years. In addition, in the "alternative computation" allegedly filed in case numbers 152-92, 153-92, 23624-92, and 23660-92, which they have attached to the "affidavit," Roger and Jean Muldavin have not contested years prior to 1985.

 

 

[89-1 USTC ¶9293] In re Dale E. Mitchell, Debtor. Dale E. Mitchell, Plaintiff v. Internal Revenue Service, Defendant

U.S. Bankruptcy Court, West. Dist. Okla., BK-86-7940-A, 12/5/88, 101 BR 278

[Code Secs. 6323 and 6871 ]

Bankruptcy and receivership: Liens for taxes: Marshalling of assets: Automatic stay of payment.--

Summary judgment was entered in favor of the IRS against a bankrupt individual who failed to pay any tax on approximately $1 million he received in lieu of stock bonuses from an employer who did not withhold income taxes from such payment. The tax liability was the individual's obligation, not his employer's. Thus, the IRS was not required to look first to the individual's former employer on a marshalling of assets theory because it did not withhold taxes from the payments made to the individual. Further, the IRS was not in contempt for violating the automatic stay provisions of the Bankruptcy Code when it applied a tax refund due the individual against his tax liability shortly after the individual filed his bankruptcy petition. Although there may have been a technical and inadvertent violation of the stay, the court deemed it insignificant in light of the amount of the individual's tax liability for his failure to pay tax on $1 million. The court also stated that there was an absence of willfulness on the part of the IRS, since the government alleged that the automatic setoff was accidental and the IRS did not have a bankruptcy notice in its files at the time of the setoff.

Gretchen Harris, Andrews, Davis, Legg, Bixler, Milsten & Murrah, Inc., Oklahoma City , Okla. 73102 , for plaintiff. Christopher S. Cole, Department of Justice, Dallas , Tex. 75242 , for defendant.

MEMORANDUM OF DECISION

BOHANON, Bankruptcy Judge:

The debtor-plaintiff brought his complaint seeking (1) to require that the IRS marshall assets by proceeding first against plaintiff's former employer for collection of income taxes that were not withheld; and (2) for damages caused by the IRS violating the automatic stay when it applied a refund against defendant's tax liability.

The IRS has moved for summary judgment.

The undisputed facts show that in 1985 defendant's employer paid him approximately $1,000,000 in lieu of stock bonuses and did not withhold income taxes. Whether the payment was wages subject to withholding is unclear. The defendant did not pay his 1985 tax liability for this income which is almost $388,000. In 1987 the IRS offset some $2,000 from a 1984 refund and it now appears that debtor was also entitled to another $12,000 refund that the IRS has frozen.

The initial issue is whether the IRS must look first to defendant's former employer on a marshalling theory since it did not withhold the sum of approximately $218,000.

The parties refer to two Oklahoma statutes dealing with marshalling. The first, 24 O.S. §17, relates only to cases where there are senior and subordinate liens which is not the case here. The other, 24 O.S. §4 , relates to situations where there are funds claimed by several creditors. It, therefore, is likewise inapposite for there is no "fund" in this proceeding.

The next inquiry is whether the IRS should first be required to proceed against the employer for some equitable reason.

The only decision from the Court of Appeals for this Circuit raised by either party is Markman v. Russell State Bank, 358 F.2d 488 (10th Cir. 1966). The argument there was that the bank should be required to proceed against certain collateral not available to the Markmans. The Court held, quoting from Sowell v. Federal Reserve Bank of Dallas, 294 F. 798 (5th Cir. 1923, aff'd 268 U.S. 449 (1925) that "the doctrine of marshalling assets applies only to the case of a junior lienholder who seeks to compel a senior lienholder to exhaust security." The facts of this proceeding are not remotely similar to those of Markman. Here there are not two competing creditors but, rather, the debtor and a creditor; there is no collateral or a fund but only a possible contingent claim against the former employer; and there is no compelling equitable reason to reach the result urged by defendant. The simple fact is that he could have paid the taxes when they came due. That tax liability is his obligation, not the employer's. Even if the IRS should proceed against the employer and collect the taxes that were not withheld, if withholding was required, the employer would then be subrogated to the position of the IRS to claim that amount from the debtor. So, we would be back to the starting point with much wasted time and money in pursuit of the proverbial dog's own tail. And, in any event, the debtor's confirmed plan provides for payment of the taxes in full. He argues that the employer's obligation, if any, is not provided for in the plan. However, the plan does provide for payment of the IRS' priority claim in the full allowed amount and there is nothing to indicate that, if subrogated, the employer would not step into the IRS' priority position. Furthermore, if the employer is not a party to this proceeding and if it has not had adequate notice to satisfy the due process requirements it likely would not be affected by the confirmed plan. Reliable Electric Co. v. Olson Construction Co., 726 F.2d 620 (10th Cir. 1984).

Accordingly, summary judgment will be entered in favor of the IRS denying plaintiff's marshalling claim.

The next issue concerns whether the IRS is in contempt for violation of the automatic stay. Some 40 days after the petition date the IRS applied approximately $2,000 of debtor's 1984 tax refund to his 1985 tax liability. The remainder of the 1984 refund, about $12,000, is frozen in debtor's account. IRS counsel states that its Service Center did not have a bankruptcy notice in its files and the automatic setoff was accidental.

The government argues that this court's contempt power is not based on any authorizing statute and 11 U.S.C. §362(h) does not authorize awards of damages against the government for it has sovereign immunity.

Regardless of the current status of the issue about bankruptcy court contempt power any violation of the stay will be judged by the standards of §362(h). Apparently there was a technical, inadvertent violation of the stay when the $2,000 was set off. In the context of a $400,000 tax liability for failure to pay income tax on receipt of $1,000,000 the set off pales into insignificance. Futhermore violations of the stay are void and of no effect, and the Code requires a showing of willfulness which is absent from this record. 2 Collier on Bankruptcy ¶362.11 (15th Ed. 1988).

Therefore, judgment will be entered in favor of the IRS dismissing the complaint on this claim also.

JUDGMENT ON DECISION BY THE COURT

This proceeding having come on for trial before the court, Richard L. Bohanon, United States Bankrupcty Judge, presiding, and the issue having been duly tried and a decision having been rendered,

It Is Ordered and Adjudged that, pursuant to the Memorandum of Decision filed today, judgment is entered in favor of the Internal Revenue Service dismissing the complaint.

 

 

[87-2 USTC ¶9628] In re R.L. Inge Development Corp., Debtor

U.S. Bankruptcy Court, East. Dist. Va., Richmond Div., BC 81-00600-R, 10/7/87

[Code Sec. 6323 --Result unchanged by the Tax Reform Act of 1986]

Liens: Bankrupt debtor: Involuntary payment: Allocation of tax payments.--

Liens held by various secured creditors of the debtor-corporation, including the IRS, were transferred to the proceeds from the sale of the debtor's property under court order. The debtor's tax payments made under such court action were made under judicial distraint or levy and were involuntary. Accordingly, the IRS may decide how to apply such payments to its tax liens and the court denied the debtor's request for an order directing the IRS to apply such payments to its statutorily secured liens first.

Paul S. Bliley, Jr., Browder, Russel, Morris & Butcher, 901 E. Cary St. , Richmond , Va. 23219 , for debtor.

MEMORANDUM OPINION

SHELLEY, Bankruptcy Judge:

This matter is before the Court upon the request of R.L. Inge ("Inge") for an order of this Court directing that payments made by R.L. Inge Development Corp. ("Debtor") to the Internal Revenue Service ("I.R.S.") be applied to the I.R.S.' statutorily secured tax liens prior to being applied to other tax debts owed to the I.R.S. by the Debtor. Upon the convening of a hearing on the request for an order, and after consideration of briefs filed by counsel and oral argument on the issues, this Court makes the following findings of fact and conclusions of law.

STATEMENT OF FACTS

On or about April 2, 1987, a notice was filed in the R.L. Inge Development Corp. Chapter 7 bankruptcy proceeding of the Trustee in Bankruptcy's Final Report and Account for Distribution. Inge, by counsel, moved this Court for a hearing on said Final Report. Inge objected to the characterization of certain claims filed by the I.R.S. as priority claims and sought a hearing on that issue and on the issue of the method of distribution of paid claims.

According to the Trustee's Final Report, the balance on hand to distribute in this case is in excess of $88,000.00. The majority of these funds were generated through adversary proceedings instituted for the sale of three (3) parcels of real estate owned by the Debtor.

In each of the proceedings the amount of the liens against said real property exceeded the value of the property. In each proceeding, the properties were sold with the consent of all the lien holders and the Debtor pursuant to §363 of the Bankruptcy Code which provided for the sale of the parcels free and clear of liens with the liens on said parcels being transferred to the proceeds. On January 21, 1982 this Court entered a joint order providing that the judgment liens of the secured creditors "be transferred to the proceeds of sale in the same priorities as they attach to the realty."

It is the position of Inge that the claims of the I.R.S. are secured claims and are not priority claims as indicated in the Trustee's Notice. Inge also contends that this Court pursuant to its order, directed the manner in which the subject real estate's proceeds should be applied to the liens held by the Debtor's secured creditors. The position of the I.R.S. is that this Court merely provided that the lien holders' liens would attach to the proceeds with the same priority as they had against the subject real property.

CONCLUSIONS OF LAW

Nature of the Order Dated January 21, 1982

The order dated January 21, 1982 does not provide that a certain distribution scheme be applied to the I.R.S.' superior tax liens. Rather, its intent was to preserve the I.R.S.' tax claims against the proceeds of sale as they had existed against the subject real estate prior to being sold.

Classification of the Debtor's Payment

The I.R.S.' tax claims are secured claims by reason of their properly filed tax notices. 26 I.R.C. §6321 (1987). To determine how the I.R.S.' tax liens should be treated reference should be made to §724 of the Bankruptcy Code which controls how certain tax liens are to be distributed and provides in pertinent part that:

(b) Property in which the estate has an interest and that is subject to a lien that is not avoidable under this title and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed--

(1) first . . . .

(2) second, to any holder of a claim of a kind specified in section 507(a)(1) , 507(a)(2) , 507(a)(3), 507(a)(4), 507(a)(5), or 507(a)(6) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien.

It is clear that the proceeds of sale in the case at bar fall within the purview of §724(b) by reason that all the requisite elements of subsection (b) are satisfied. Therefore, the proceeds of sale should be distributed as specified by paragraph (2) which makes a cross-reference to §507(a) (1-7). ¹

The effect of §724(b) is to modify the I.R.S.' secured tax claims to unsecured claims entitled to priority status pursuant to §507(a)(7). In re Barry [83-2 USTC ¶9514 ], 31 B.R. 683, 687 (Bankr. S.D. Ohio 1983). See alsoIn re Darnell, 58 B.R. 122 (Bankr. W.D. Ky. 1986). However, the priority rules of §507 do not completely resolve the issue presented to this Court. Priority rules are designed to settle claims between competing creditors. In re Hubler Rentals Inc. [79-2 USTC ¶9621 ], 5 B.C.D. 850 (Bankr. E.D. Pa. 1979). In the matter at hand there has been no assertion that there are competing tax lien creditors; rather, separate liens are held by one creditor--the I.R.S. Because the I.R.S. is the only competing tax lien creditor, it is necessary for this Court to ascertain whether the Debtor's payments are voluntary or involuntary in order to determine whether the I.R.S. has the right to satisfy the tax debts of the Debtor with said payments in the order of its own preference.

The cases of In re Hubler, Inc. [79-2 USTC¶9621 ], 5 B.C.D. 850 (Bankr. E.D. Pa. 1979) and O'Dell v. United States, 326 F.2d 451 (10th Cir. 1964) are persuasive to this Court in resolving the issue presented. Both cases held that a debtor whose payment is involuntary may not direct how those payments are to be allocated to his tax debts. An involuntary payment is defined as "any payment received by agents of the United States as a result of a distraint or levy from a legal proceeding in which the government is seeking to collect its delinquent taxes or file a claim therefor." In re Energy Resource [86-1 USTC ¶9338 ], 59 B.R. 702, 704 (D. Mass. 1986).

In In re Obie Elie Wrecking Co., Inc., 35 B.R. 114, 115 (N.D. Ohio 1983), the Court determined that such "distraint or levy from a legal proceeding" is where the debtor repays monies under judicial order. Accordingly, the court in Obie held that the debtor's payments were involuntary and that the I.R.S. had the right to determine how to apply the payments to the debtor's federal tax debts.

It was a result of a judicial order dated January 21, 1982 that property of the Debtor was sold and the liens held by various secured creditors of the Debtor, including the I.R.S., were transferred to the proceeds of sale for ultimate payment. Such court action constitutes the necessary judicial "distraint or levy" to cause the Debtor's payments to be involuntary. See Amos v. Commissioner [CCH Dec. 28,149 ], 47 T.C. 65, 69 (1966) (involuntary payment is where court action results in an actual seizure of property). Because the Debtor's payment was involuntary, the I.R.S. has the right to decide how to apply said payments to its tax liens.

Therefore, Inge's request for an order of this Court directing the I.R.S. to apply said payments to its statutorily secured liens first is denied.

An appropriate Order will issue.

¹ Through inadvertence, §724(b)(2) was not amended to reflect the redesignation of paragraph (6) of §507(a) as paragraph (7). See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, §350, 98 Stat. 358 (1984).

 

 

[87-2 USTC ¶9419] United States of America , Plaintiff v. Jack L. Eshelman, Betty Lou Eshelman, Timothy J. Eshelman, Tammy L. Eshelman, Thomas S. Eshelman, and Dollar Dry Dock Savings Bank, Defendants

U.S. District Court, Dist. Del., 84-518-JLL, 4/7/87, 663 FSupp 285, 633 FSupp 285

[Code Secs. 6211 , 6321 , 6323 , 7402 , 7403 and 7481 --Result unchanged by the Tax Reform Act of 1986 ]

District Court: Jurisdiction: Reopening of Tax Court decision: Date decision becomes final: Assessment of tax: Proof of error: Lien for taxes: Creation of lien: Foreclosure: Priority: Distribution of proceeds: Marshalling of assets.--Assessments against a husband and wife resulting from an earlier Tax Court proceeding were reduced to judgment because the taxpayers did not meet their burden of proving that the assessments were incorrect. The district court lacked appellate jurisdiction to consider an appeal of the Tax Court's determination and, furthermore, the taxpayers failed to file a timely appeal. As a result of a valid notice of tax lien, the IRS was entitled to a foreclosure order against real estate which the taxpayers had transferred to their children subsequent to the IRS' recording of the lien. The tax lien was entitled to priority over all other interests except for the interest of one mortgagee with whom the IRS was able to reach an agreement concerning the distribution of foreclosure proceeds. Personal service upon the children who received the transferred property was not necessary because no deficiency was sought against them. The IRS was not required to marshal the taxpayers' assets or exhaust its remedies against the taxpayers prior to the foreclosure.

William C. Carpenter, Jr., United States Attorney, Sue L. Rob inson, Assistant United States Attorney, Wilmington , Del. 19801 , Charles A. Baer, Department of Justice, Washington , D.C. 20530 , for plaintiff. Francis A. Monaco, Jr., Walsh & Monzack, Twelfth and Orange St. , Wilmington , Del. 19899-2031 , for defendants. Max S. Bell, Jr., Richards, Layton & Finger, One Rodney Square , Wilmington , Del. 19899 , for Dollar Dry Dock Savings Bank.

MEMORANDUM OPINION

LATCHUM, Senior District Judge:

On September 18, 1984, the United States of America initiated this civil action against Jack L. Eshelman, Betty Lou Eshelman, Timothy J. Eshelman, Tammy L. Eshelman, Thomas S. Eshelman, and Dollar Dry Dock Savings Bank seeking to reduce federal income tax assessments against Jack L. Eshelman and Betty Lou Eshelman to judgment, and to foreclose its tax lien against certain real property in White Clay Creek Hundred, New Castle County, Delaware, known as Lot No. 3, Block C on the Plan of Old Mill Manor which Plan is recorded in the New Castle County Recorder of Deeds Office in Wilmington, Delaware on Microfilm Record 762 ("the property in question"). (Docket Item ["D.I."] 27, 33, 34) Defendant Thomas S. Eshelman, did not answer and the Clerk duly entered a default against him. (D.I. 37 & 38) While the defendant Jack L. Eshelman was served with a summons, pursuant to 10 Del. C. §3104 and Fed.R.Civ.P. 4(e), upon the Secretary of State of Delaware on September 26, 1984 (D.I. 3), he did not file a formal answer but acknowledged the summons by making a hand written response thereto on December 20, 1984, to the U.S. Marshal. (D.I. 47)

On October 26, 1986 , the United States moved for an order granting it summary judgment which would (a) reduce its federal income tax assessments to judgment, (b) declare that its lien attaches to all the property and rights to property of defendants Jack L. Eshelman, and Betty Lou Eshelman, and (c) foreclose the tax lien on the property in question. (D.I. 39) The United States on October 30, 1986 , filed a brief in support of its summary judgment motion. (D.I. 40) Appearing defendants were to file their answering briefs on or before December 15, 1986 , but did not do so. (D.I. 42) On December 30, 1986 , the Court ordered that the appearing defendants' answering briefs be filed on or before January 20, 1987 (D.I. 44), but again no briefs were filed. On March 13, 1987, in order to move this case forward, the Court entered an order requiring the appearing defendants to file their answering briefs on or before March 27, 1987, and that in the event no briefs were filed, the order provided that the plaintiff's summary judgment motion would be decided on the briefs and record before the Court on March 27, 1987. (D.I. 45) No answering briefs were filed by March 27, 1987 . However, on April 6, 1987 , the defendants Betty Lou Eshelman, Tammy Eshelman (now Tammy Lee Westcott), and Timothy J. Eshelman filed a stipulation with the plaintiff in which they consented to the entry of summary judgment against them. (D.I. 46) The Government's motion for summary judgment against all the defendants is now ripe for decision.

I. UNDISPUTED FACTS

The United States made an assessment for unpaid federal income taxes, interest, penalties and fees in the amount of $76,136.31 for the year 1973 against Jack L. Eshelman and Betty Lou Eshelman (the "taxpayers"), and gave first notice and demand of the original assessment to the taxpayer defendants on September 18, 1978. (D.I. 40, Ex. B) These assessments were made pursuant to a decision of the United States Tax Court entered on August 15, 1978 . ( Id. , Ex.C) On December 13, 1978 , the United States duly filed and recorded a Notice of Federal Tax Lien with respect to the assessments with the Recorder of Deeds for New Castle County , Delaware . ( Id. , Ex.D)

On December 12, 1975 , defendants Jack L. Eshelman and Betty Lou Eshelman conveyed the property in question to Betty Lou Eshelman and that deed was duly recorded on January 26, 1976 . ( Id. , Ex. E) Thereafter on May 3, 1979, Betty Lou Eshelman conveyed the property in question to her three children, defendants Timothy J. Eshelman, Tammy L. Eshelman (now Tammy L. Westcott) and Thomas S. Eshelman, and that deed was recorded on May 8, 1979. ( Id. , Ex. F) This deed was recorded after the Notice of Federal Tax Lien had been recorded. ( Id. , Exs. D & E)

The defendant, Dollar Dry Dock Savings Bank (the "Bank"), is the holder of a mortgage lien on the property in question, dated March 31, 1965, and recorded in the New Castle County Recorder of Deeds Office in Mortgage Record X, Volume 60, Page 68 which mortgage was given by Jack L. Eshelman and Betty Lou Eshelman. (D.I. 20) The Bank's mortgage lien on the property in question is prior in right to the federal tax liens in issue.

On December 3, 1986 , the plaintiff filed a supplement affidavit that shows that the total amount due of assessed taxes, assessed and accrued penalties and interest made against Jack L. and Betty Lou Eshelman to November 30, 1986 , is $165,653.38 and that interest accrues thereafter at the rate of 9% per annum, compounded daily. (D.I. 43, Ex. G)

II. DISCUSSION

Notice of the original tax assessment against Jack L. and Betty Lou Eshelman was given on September 18, 1978 , pursuant to a decision of the United States Tax Court entered on August 15, 1978 . A tax court decision is reviewable only by the court of appeals and may not be questioned in this Court. 26 U.S.C. §§7481 & 7482. Furthermore, an appeal to be timely must ordinarily be filed within 90 days of the tax court's decision, 26 U.S.C. §7483 . The Eshelmans apparently did not file any such appeal. In addition, certificates of assessments and payments have been issued against Jack L. and Betty Lou Eshelman. (D.I. 40, Ex. B; D.I. 43, Ex. G) Such determinations of a deficiency assessment are presumptively correct and the taxpayers have the burden of proving them to be incorrect. Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 115 (1933); Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159-60 (3d Cir. 1971). Because the defendants have not demonstrated that the assessments are incorrect, the United States is entitled to summary judgment that defendant taxpayers, Jack L. and Betty Lou Eshelman, owe the amount of federal income taxes assessed plus statutory additions.

26 U.S.C. §6321 provides that where any person liable for a tax neglects or refuses to pay the tax, that amount, including interest costs and penalties which may accrue, shall be a lien in favor of the United States upon all property and rights to property belonging to that person. The lien arises at the time of assessment and continues until the liability is extinguished. 26 U.S.C. §6322 ; Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267-68 (1945). Thus, the United States is entitled to judgment that its lien was a valid and subsisting lien against all property and rights to the property in question of the taxpayers as of the date of original assessment and against all property that the taxpayers acquired after that date. Glass City Bank, supra.

As noted above, the United States duly filed a Notice of Federal Tax Lien on December 13, 1978 , in the New Castle County Recorder of Deeds Office. (D.I. 40, Ex. C) Under 26 U.S.C. §§6321 and 6323 , the federal tax lien, duly filed and recorded, is entitled to priority over subsequent purchasers. Because the deed of Betty Lou Eshelman dated May 3, 1979 and recorded May 8, 1979, conveying the property in question to her three children, Timothy and Thomas Eshelman and Tammy Eshelman Westcott (D.I. 40, Ex.F) was after the filing and recording of the Notice of Federal Tax Lien, their rights and interests to the property in question are subject to the prior tax claims of the United States.

Under 26 U.S.C. §7403 , this Court may order the sale of the property in question and the distribution of the proceeds. The sole party with a claim superior to that of the United States is the defendant, Dollar Dry Dock Savings Bank, which has a lien on the property in question by virtue of a mortgage dated and duly recorded on March 31, 1965 , long before the federal tax lien came into existence. However, the Dollar Dry Dock Savings Bank has consented to the sale of the property in question so long as its mortgage lien is given priority over the federal tax lien. (D.I. 20) Since the interest of the United States is superior to all other defendants, a foreclosure sale of the property in question is appropriate.

Now, reviewing the entire record, the Court finds that there are no other valid defenses raised by the defendants to the relief requested by the United States .

Timothy Eshelman and Tammy Eshelman Westcott earlier moved to dismiss the action as to them for lack of personal service and also claimed that they were not personally liable for any deficiency tax judgment. (D.I. 15 & 23) The United States in response to that motion represented that it did not seek a deficiency judgment against those defendants. (D.I 29 at 6) The Court on April 11, 1985 , after considering these contentions, denied the motion of Timothy and Tammy to dismiss. (D.I. 31)

Timothy and Betty Lou Eshelman and Tammy Eshelman Westcott also interposed, as an affirmative defense, a claim that the United States failed to marshal the assets or exhaust remedies against Jack L. Eshelman. (D.I. 27 & 28) However, there is no right of marshaling against the United States . In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148, 1150 (9th Cir. 1970); United States v. Herman [63-1 USTC ¶9135 ], 310 F.2d 846, 848 (2d Cir. 1962); United States v. Cohen [67-2 USTC ¶9602 ], 271 F.Supp. 709, 718 (S.D.Fla. 1967). Finally, Jack Eshelman's handwritten response to the summons, which details his marital problems, offers no legal defense to granting plaintiff's motion for summary judgment.

III. CONCLUSION

Based on the undisputed facts and the applicable law, the Court will grant the summary judgment motion of the United States and thereby: (1) reduce the federal tax assessments against Jack L. Eshelman and Betty Lou Eshelman to judgment, (2) declare that the United States has a valid federal tax lien on the property in question and that said tax lien is entitled to priority over all other interests in that property including any claim of Tammy Eshelman Westcott, Timothy Eshelman and Thomas S. Eshelman, except for the mortgage lien of Dollar Dry Dock Savings Bank on said property, (3) declare that the United States is entitled to a foreclosure sale of the property in question, and (4) order a sale thereof.

An order in accordance with this memorandum opinion will be entered.

 

 

[86-2 USTC ¶9833] Roger D. Malkin, Plaintiff v. United States Department of the Treasury-Internal Revenue Service, Citibank, N.A., and Hugh W. Levey, Defendants

U.S. District Court, So. Dist. N.Y. , 83 Civ. 8549(PNL), 10/14/86 , 645 FSupp 229

[Code Sec. 6323 ]

Lien for taxes: Superiority of liens: Security interest in purchase of cooperative apartment: Notice of tax lien.--The purchaser of a cooperative apartment that had been sold by a delinquent taxpayer did not have a priority interest over the government's tax lien. He filed an interpleader action contesting the government's lien against the proceeds of the sale. Although he argued that he was entitled to notice of the lien, and that the government should proceed first against other property of the delinquent taxpayer, the court disagreed. Under federal law, the court stated, the interest acquired by the purchaser was not considered an interest in securities but an interest in a residential apartment. As such, the purchaser had no claim superior to the government and was not entitled to notice of the lien. In addition, the court also determined that the government may not be enjoined from foreclosing upon the apartment property until other property of the delinquent has been foreclosed.

Rudolph W. Guiliani, United States Attorney, Harriet L. Goldberg, Assistant United States Attorney, New York, N.Y., Donald H. Chase, Morrison, Cohen & Singer, 110 East 59th Street, New York, N.Y. 10022, for defendants.

Opinion and Order

LEVAL, District Judge:

This is an interpleader action involving various claims against assets of Roger D. Malkin, consisting primarily of the proceeds of the sale of his cooperative apartment. The Internal Revenue Service (I.R.S.) moves for partial summary judgment declaring that its tax lien for plaintiff's 1980 taxes is superior to all other claims, and awarding it $648,055.74 plus interest out of the fund. Defendant Hugh Levey opposes the motion, and moves to amend his answer to assert a claim against the Government. The motion of the I.R.S. is granted; Levey's motion is denied.

Background

On December 7, 1981 , the I.R.S. issued to plaintiff Roger Malkin notice and demand for payment of unpaid 1980 income taxes. Unsure whether Malkin was a resident of Stamford , Connecticut or New York City , the Government recorded notice of its 1980 tax lien with the Stamford Town Clerk (June 10, 1982), the Connecticut Secretary of State in Hartford (June 15, 1982) and the New York City Register (July 7, 1982). In December 1982, Levey acquired a security interest in "(a) the Shares, (b) the Proprietary Lease, (c) the Apartment, (d) all distributions on, additions to, substitutions for or replacements of . . ., and (e) the proceeds from any sale or other transfer of all or any part of" Malkin's New York City cooperative apartment. For the purposes of the Government's motion, it is uncontested that Levey's security interest was perfected as of December 10, 1982 , and that Levey did not receive any actual notice of the I.R.S. lien prior to that date.

The Government claims priority pursuant to the provisions of 26 U.S.C. §6323 . Levey argues that his interest was in a security, as defined by 26 U.S.C. §6323(h)(4) , and that he was therefore entitled to actual notice of the tax lien. Levey further argues that a question of fact exists as to the continued validity of the tax liens, and finally, that the Government should be compelled to proceed first against certain property of Malkin's located in Connecticut .

Discussion

Federal law controls this question of priority. United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 49, 71 S.Ct. 111, 113 (1950). If Levey's security interest is deemed to be in a security, then he would have priority over all claims of which he did not have actual notice. §6323(b)(1)(B) . If it is not, then the traditional rule--first in time, first in right--would apply, constructive notice of a perfected lien would be sufficient, and the Government's tax lien would have priority. For the purposes of the tax lien provisions, security is defined in §6323(h)(4) as follows:

The term "security" means any bond, debenture, note or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument; or money.

The reason for the distinction between securities and other types of property is the recognition that stocks and bonds are, and should be, freely and easily marketable. Purchasers buy securities on stock and bond markets through brokers generally without even learning who their seller is. If such a purchaser ran the risk of tax liens filed against the seller's property, securities markets could no longer function with freedom; the purchase of stocks would become an expensive transaction involving representations and warranties, attorneys on both sides, searches of security filings, etc. In contrast, transactions in most other types of property have traditionally involved face to face dealing, negotiation, and higher transaction costs. It is more reasonable in such cases and more consistent with generally shared expectations to make purchasers responsible for filed tax liens. Levey argues that his security interest is in shares of the cooperative apartment, and thus pertains to a security, as defined. This contention is not persuasive.

Although it is true that the package of rights to which Levey's security interest pertains includes shares of stock in the cooperative building corporation, what is really involved is real estate--a residential apartment. The shares are not separately traded without the proprietary lease for the particular apartment. The shares confer no independent rights, apart from the lease. To consider the shares alone as giving the character of a "security" to the asset is to distort its true nature.

Furthermore, cooperative apartments are not traded in the free and simple manner that generally characterizes transactions in shares of stock. The transactions typically involve periods of negotiation, further lapse of time between agreement and written contract and still further lapse of time prior to closing. Closing documentation is complex, and title searches are commonplace. Thus the policy concerns favoring swift and cheap negotiability that led to adoption of the actual notice rule for "securities" has no application whatever to cooperative apartments.

In a different but relevant context, the Supreme Court explained "the name given to an instrument is not dispositive" in determining whether it is a security. United Housing Foundation v. Forman, 421 U.S. 837, 850, 95 S.Ct. 2051, 2059 (1975). The Court there held that shares in a publicly funded cooperative apartment building did not constitute a security for the purposes of the securities laws. The Court of Appeals has held that this ruling applies as well to private cooperative apartments. Grenader v. Spitz, 537 F.2d 612, 617 (2d Cir. 1976). Of course, those decisions interpreting the laws of the regulation of securities do not control the interpretation of the tax lien provisions, but they do involve some of the same considerations.

I conclude that for determinations of priority of tax liens, the assets here in question are not a security as defined in §6323(h)(4) .

Levey next asserts that certain documents produced in discovery create a substantial question of material fact as to whether the 1980 tax liability has been settled by the government. The documents raise no such question, and the government has supplied an affidavit from an I.R.S. Revenue Officer stating that "the liens based on the taxes owed for 1980 have never been released and indeed the 1980 taxes have never been satisfied." The settlement documents either apply to other years of tax liability, or are unexecuted copies normally generated at the time a lien is imposed. These documents raise no question of fact that precludes grant of summary judgment.

Levey also argues that the Government should be enjoined to foreclose its liens on Malkin's Connecticut property rather than against the interpleaded fund to his detriment. This is also the subject of Levey's motion to amend his answer to include this claim for relief against the government. A substantial question arises whether such an injunction would be permissible. The anti-injunction act, 26 U.S.C. §7421 , prohibits, with a few limited exceptions, any suit "for the purpose of restraining the assessment or collection of any tax . . . ." Arguably, Levey's application for an injunction runs afoul of this statute. It is unnecessary to reach this issue, however, for this court will not exercise its equitable powers to instruct the I.R.S. as to how it should collect on its tax liens.

For the reasons stated above, the Government's motion for partial summary judgment is granted. The Government is entitled to collect the 1980 back taxes plus all lawful penalties and interest from the interpleaded fund. As a result of this decision, Levey's motion to amend his answer to assert his injunction claim against the Government is mooted, and is therefore denied.

So Ordered.

 

 

[85-2 USTC ¶9715]In Re Sean Morahan, Debtor, Maine Associates, Stephen R. Weiner, and Connecticut General Life Insurance Company, Plaintiffs v. United States of America and Paulette Parker, Esquire, Defendants

U. S. District Court, Dist. Me., Civil No. 85-0149-P, 53 BR 489, 10/2/85

[Code Secs. 6325 and 7426(a)(3)]

Lien for taxes: Discharge of property from lien: Suits by nontaxpayers: Application of statute.--The United States was required to marshal its federal tax claims against a debtor in Chapter 7 liquidation and was not free to pursue those tax claims against another of the debtor's funds which was the taxpayers' only source of recovery in its claim against the debtor. Furthermore, because of the clear wording of Code Secs. 7421(a) and 7426(a)(3), the motion of the U. S. to dismiss on the bases of the existence of general sovereign immunity and specific statutory bar was denied. Also, the taxpayers' complaint could not be dismissed on the basis that the government could never be required to marshal its claims because, in cases involving government tax claims as well as in nontax cases, the courts have acknowledged that the concept of marshalling can be applied to the government in its disputes with private claimholders. Finally, the government could not prevail on a motion for dismissal on the basis that it would suffer an extreme burden in revenue collection, because no evidence had been put forth by the U. S. regarding the nature of the bankruptcy estate and any specific prejudice it would suffer from having to resort first to those funds to satisfy its tax claims.

F. Bruce Sleeper, Jensen, Baird, Gardner & Henry, 477 Congress St. , Portland , Maine 04101 , for plaintiffs. Kevin A. Gaynor, Assistant United States Attorney, Portland, Maine 04101, Christopher Kliefoth, Department of Justice, Washington, D. C. 20530, for defendants.

Memorandum and Order

CARTER, District Judge:

This case presents the question whether the Defendant United States can be required to marshal its federal tax claims against a debtor in Chapter 7 liquidation, or whether it is free to pursue those tax claims against another of the debtor's funds which is the Plaintiffs' only source of recovery in its claim against the debtor.

On May 11, 1984 , the Plaintiffs ("Maine Associates") perfected an attachment lien against all real estate in Cumberland County , Maine owned by Sean P. Morahan. Subsequently, on May 14, 1984 , June 4, 1984 , and June 20, 1984 , the United States recorded federal tax liens against Morahan in Cumberland County , attaching the same real estate that was previously attached by Maine Associates.

On September 18, 1984 , Morahan filed a petition for relief under Chapter 7 of the Bankruptcy Code, 11 U. S. C. §§ 701, et seq., with the United States Bankruptcy Court for the District of Maine. Subsequently, the bankruptcy trustee abandoned Morahan's former residence on Highland Avenue in South Portland , which also had been subject to the federal tax liens and Maine Associates' attachment liens. This real estate also was subject to a first mortgage in favor of Norstar Bank and Norstar Mortgage Services ("Norstar"). The property was sold and the Norstar mortgage was paid, with the remaining proceeds after costs of sale placed in an escrow account.

Maine Associates and the United States agreed to treat the escrow proceeds as substitute proceeds under 26 U. S. C. §6325(b)(3), and each party consequently released the real estate from the respective attachments and tax liens. On June 7, 1985 , Maine Associates filed a complaint in this Court seeking judgment with respect to the proceeds in the escrow account, claiming that the United States should be required to marshal its claims against the bankruptcy estate.

Both Maine Associates and the United States agree that the government tax liens have priority over the Maine Associates' lien on the real estate, since the Plaintiffs' lien was never reduced to judgment. 26 U. S. C. §6323(a). Nevertheless, Maine Associates contends that because the United States also has filed a claim against the bankruptcy estate of Morahan based upon the tax liens, the government should be required to marshal its claims in bankruptcy, since it is claimed that the bankruptcy estate is adequate to pay the government's claims in full.

On August 6, 1985, the United States filed a motion to dismiss the Plaintiffs' complaint, claiming that the Plaintiffs' claim is barred by the doctrine of sovereign immunity, that the relief sought is barred by the "anti-injunction act" of the Internal Revenue Code, and that this Court lacks the jurisdiction over all relevant assets necessary to order that the government marshal its claims.

The United States contends that the doctrine of sovereign immunity shields the government from suit unless specific statutory authorization can be found which removes such immunity. The First Circuit has embraced this principle, Nickerson v. United States, 513 F. 2d 31, 32 (1st Cir. 1975), and has noted that "waivers of sovereign immunity are to be strictly construed." McMahon v. United States, 342 U. S. 25, 27 (1951), cited in Nickerson v. United States, 513 F. 2d at 33.

A specific statutory prohibition against such suits is contained in 26 U. S. C. §7421(a), which states that with certain exceptions such as that contained in section 7426(a), "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person . . ." The United States relies on this wording in arguing that the Plaintiffs' action in the case at hand is barred.

The central question is whether, as the Plaintiffs contend, 26 U. S. C. §7426(a)(3), constitutes a specific statutory waiver of sovereign immunity. That section reads:

(3) Substitute sale proceeds.--If property has been sold pursuant to an agreement described in section 6325(b)(3) (relating to substitution of proceeds of sale), and person who claims to be legally entitled to all or any part of amount held as a fund pursuant to such agreement may bring a civil action against the United States in a district court of the United States.

Regarding section 7421(a) and the exception stated therein, one court has stated:

If any of the above enumerated exceptions exist, suit may be brought . . . [I]f it was the Congressional intent to permit suits for injunction in the narrowly defined exceptions to §7421(a), then it must also have been the Congressional intent to waive sovereign immunity in these limited circumstances.

Butler v. District Director of Internal Revenue [74-1 USTC ¶9113]. 369 F. Supp. 1281, 1282 (S. D. Texas 1973). See also Standard Acceptance Co. v. United States [72-1 USTC ¶9434], 342 F. Supp. 45, 47 (N. D. Ill. 1972).

Although those two cases specifically concern section 7426(a)(1), the principle contained therein also applies to section 7426(a)(3): the immunity accorded the sovereign in section 7421(a) has been waived specifically by Congress in section 7426(a)(3).

Such a waiver of sovereign immunity also is clearly contemplated by the wording of 28 U. S. C. §1346(e), which reads in part, "The district courts shall have original jurisdiction of any civil action against the United States provided in section . . . 7426 . . . of the Internal Revenue Code of 1954."

Therefore, because of the clear wording of 26 U. S. C. §§ 7421(a) and 7426(a)(3), and 28 U. S. C. §1346(e), the motion of the United States to dismiss on the bases of the existence of general sovereign immunity and specific statutory bar must be denied, particularly under the favorable light in which plaintiffs' claims are viewed in motions to dismiss. Jenkins v. McKeithen, 395 U. S. 411, 421-22 (1969).

The United States next contends that requiring the government to marshal its claims in bankruptcy would put a severe burden on revenue collection, and that marshaling is not contemplated in the statutes such as 26 U. S. C. §6325 which refer to the discharge of tax liens.

Nevertheless, the government admits that case law has invoked the marshaling principle with regard to tax claims. As one court stated:

Where the federal government has a lien on both real estate and personal property, it cannot exhaust the value of the real estate before proceeding to the personal property to the complete exclusion of the specific liens of [the other claimants].

In re Ann Arbor Brewing Co. [52-2 USTC ¶9509], 110 F. Supp. 111, 116 (E. D. Mich. 1951). See also United States v. Lord [58-1 USTC ¶9181], 155 F. Supp. 105 (D. N. H. 1957).

In a nontax case, the court in United States Fidelity & Guaranty Company v. Long, 214 F. Supp. 307, 319 (D. Ore. 1963), stated:

Generally, when two creditors seek satisfaction out of the assets of a debtor and one of them can resort to two funds and the other is limited to one, the former may be required to seek satisfaction out of the fund which the latter creditor cannot touch, so that the latter may have his claim satisfied out of the fund which is subject to the claims of both [citations omitted] . . . In the application of the doctrine, the United States and, accordingly its agencies, are on an equal basis with other creditors. [Citation omitted.]

The Plaintiffs' complaint cannot be dismissed on the basis that the government can never be required to marshal its claims. In cases involving government tax claims as well as in nontax cases, the courts have acknowledged that the concept of marshaling can be applied to the government in its disputes with private claimholders.

In addition, the government cannot prevail on a motion for dismissal on the basis that it would suffer an extreme burden in revenue collection. No evidence has been put forth by the United States regarding the nature of the bankruptcy estate and any specific prejudice it would suffer from having to resort first to those funds to satisfy its tax claims. The Supreme Court has stated that for the purposes of a motion to dismiss, the complaint "is to be liberally construed in favor of plaintiff," and that it should not be dismissed unless the complainant could `prove no set of facts in support of his claim which would entitle him to relief.'" Jenkins v. McKeithen, 395 U. S. at 421-422 (quoting Conley v. Gibson, 355 U. S. 41, 45-46 (1957)). The United States has failed to meet this strict standard, and the motion cannot be granted on the grounds of prejudice.

Finally, the United States argues that this Court has jurisdiction only over the disputed real estate proceeds and not over Morahan's bankruptcy estate, and that therefore a marshaling order would be improper.

Again, the government's motion to dismiss cannot be granted on this basis. Even though Morahan's bankruptcy case was referred to the Bankruptcy Court, this Court retains power to revoke reference pursuant to 28 U. S. C. §157(D). Moreover, the Bankruptcy Court is deemed a unit of the District Court, 28 U. S. C. §151, and the District Court has "original and exclusive jurisdiction" of all bankruptcy cases, 28 U. S. C. §1334(a).

The United States ' motion to dismiss thus fails to meet the strict test applied to such motions. For the foregoing reasons, the Defendants' motion to dismiss is hereby DENIED.

So ORDERED.

 

 

[76-2 USTC ¶9483]Atlantic National Bank v. The United States

U.S. Court of Claims, No. 30-75, 210 CtCls 340, 536 F2d 1354, 6/16/76

[Code Secs. 6321 and 6323]

Lien for taxes: After-acquired property: Priority: Notice or knowledge of lien: Security interest: Marshalling of assets.--A bank, an assignee of the taxpayer, was not entitled to any funds due the taxpayers under contracts between the taxpayer and a Federal agency. Notices of Federal tax liens had been filed prior to the assignments of the funds to the bank. Even though these funds had not been earned at the time the liens were filed, the taxpayer had sufficient interest in the funds, even after making the assignments, for the liens to attach to them. The bank's interest was not entitled to priority because it failed to demonstrate that its interest was protected under local law as against a judgment lien arising out of an unsecured interest. The bank had constructive knowledge, with the same effect as actual knowledge, of the tax liens once they were filed. Thus, it could not claim ignorance of the facts and could not recover under a theory of equitable estoppel. Finally, the invocation of the doctrine of marshalling of assets was denied since it would have been inequitable to the government, which was unable to satisfy the total obligations owed by the taxpayer from the funds due him.

H. Joel Weintraub, Maurice Steingold, Steingolf, Steingolf & Friedman, for plaintiff. Leslie H. Wisenfelder, Rex E. Lee, Assistant Attorney General, Department of Justice, Washington, D. C. 20530, for defendant.

Before SKELTON, KASHIWA , and BENNETT, Judges.

On Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment

KASHIWA , Judge, delivered the opinion of the court:

This case is before the court on cross motions for summary judgment. There is no genuine issue as to any material fact. The case involves the priority of federal tax liens over plaintiff-assignee's claim to contract proceeds. For the reasons below we hold for the defendant.

The General Services Administration (GSA) awarded contracts to Argus Security, Inc. (Argus) for the performance of uniform guard services. By June 4, 1974 , the Internal Revenue Service (IRS) had filed Notices of Federal Tax Lien Under Internal Revenue Laws relating to Argus as follows:

                          Date filed with State

Amount of                 Corporation Commission,

lien                          

Richmond
, 
Virginia

    $53,870.27              March 21, 1974

     32,702.75               
June 4, 1974

    $86,573.02

On June 5, 1974 , and July 9, 1974 , Argus made assignments to plaintiff of proceeds to be paid under its contracts. A more complete chronology of events is listed in the margin. ¹ As of January 31, 1976 , Argus' unpaid tax liability arising out of the two notices of tax lien filed by June 4, 1974 , totaled $78,527.93. The total due under the Argus contracts is $43,739.09. ²

Plaintiff first argues that the tax liens did not attach to the contract proceeds when the liens were filed because at that time the monies were not yet earned. Plaintiff contends that when the monies were earned, they were immediately encumbered by plaintiff's perfected security interest.

Section 6321, Int. Rev. Code of 1954, provides that upon refusal to pay a tax after demand, a lien arises in favor of the United States "upon all property and rights to property, whether real or personal," belonging to the delinquent taxpayer. Argus had a right to, and interest in, the subject due or to become due under the subject contracts to enable a federal tax lien to attach thereto. Even after the assignments to plaintiff, Argus retained a sufficient interest to which a federal tax lien could attach. In Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466 F. 2d 1040, 1052 (5th Cir. 1972), cert. denied, 410 U. S. 929 (1973), the court held:

* * * a federal tax lien attaches immediately to after-acquired property without any further action required by the Government.

It has also been held that the fact that the taxpayer's right to contract proceeds was dependent on his satisfactory performance does not mean that the proceeds were not property or rights to property of the taxpayer under §6321. In City of Vermillion v. Stan Houston Equipment Co. [72-2 USTC ¶9496], 341 F. Supp. 707, 713 (D. S. D. 1972), the court stated:

The fact that the taxpayer's right to the proceeds of the contract was dependent upon his performance of the contract and acceptance by the City does not mean that the proceeds were not property or rights to property of the taxpayer under 26 U. S. C. A. Sec. 6321. Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855, 859 (9th Cir. 1962); Home Ins. Co. v. B. B. Rider Corp. [63-1 ¶9235], 212 F. Supp. 457, 462 (D. C. N. J. 1963). The taxpayer had more than a mere contingent right to the proceeds of the contract.

See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945); Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc. [74-1 USTC ¶9401], 375 F. Supp. 186, 193 (S. D. N. Y. 1974), reversed and remanded on another question [75-1 USTC ¶9299], 512 F. 2d 605 (2d Cir. 1975); United States v. Blackett [55-1 USTC 9278], 220 F. 2d 21 (9th Cir. 1955).

Clearly under §6321 we must hold that plaintiff's argument cannot be sustained.

In Glass City Bank v. United States, supra at 267-69, the Court stated that there "is a plain intent to subject to the lien 'property owned by the delinquent' when suit is filed, rather than only that owned when the lien arose" and also: "Our conclusions is that the lien applies to property owned by the delinquent at any time during the life of the lien. This is in accord with all the cases that have directly passed upon this question." [Footnote omitted.] In Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962), the taxpayer was awarded a Government contract on December 31, 1956 . On March 2, 1957 , a trust agreement was executed assigning the proceeds of the contract to a bank. Prior to the date of the agreement the Government had a fully perfected tax lien on all property and rights to property of the taxpayer. The court stated at 859:

* * * These tax liens attached immediately to all rights of taxpayer under the government contract awarded December 31, 1956 , including payments whenever earned. * * * [T]he trust agreement of March 2, 1957 , could not displace the tax liens, which had already attached to taxpayer's property rights in the contract. The fact that taxpayer's rights under the contract were dependent upon its performance did not affect the tax liens * * *.

In United States Fidelity & Guaranty Co. v. United States, 201 Ct. Cl. 1, 475 F. 2d 1377 (1973), this court held that where the IRS was owed taxes by a defaulted prime contractor and the amount was paid to the IRS by the contracting agency out of retained contract funds, the tax lien has priority over a surety that has paid laborers and materialmen on its payment bond. Accord, Seaboard Surety Co. v. United States , 107 Ct. Cl. 34 [47-1 USTC ¶9128], 67 F. Supp. 969 (1946), cert. denied, 330 U. S. 826 (1947).

Plaintiff also relies on §6323. ³ Plaintiff argues that as to monies earned under these contracts by Argus on and after June 28, 1974, the Federal Tax Lien Act of 1966 grants plaintiff a priority over earlier filed notices of tax lien as a holder of a security interest within the meaning of §6323. However, since plaintiff does in fact qualify for the priority status it claims for itself under §6323, plaintiff's reliance, based as it is on a fallacious premise, collapses for lack of support.

In Donald v. Modison Industries, Inc. [73-2 USTC ¶9623], 483 F. 2d 837, 842 (10th Cir. 1973), the Court of Appeals in an opinion by Senior Judge Laramore of this court held with relation to §6323 as follows:

Summarizing the foregoing definitions and rules as applicable herein, it is apparent that the appellant's security interest will take priority over the filed Federal tax lien if the following requisites are met:

1. The "security interest" stems from a written agreement which (a) was entered into before the Federal tax lien was filed, and (b) qualifies as a "commercial transactions financing agreement" under section 6323(c)(2)(A)(i); [Emphasis supplied.]

2. The loans were made pursuant to the written agreement within 45 days of the tax lien filing or prior to receiving actual notice or knowledge that the tax lien had been filed, i. e., disbursements or loans after receipt of actual notice or 45 days, whichever is sooner, are unprotected;

3. The written agreement covered "qualified property"--here inventory--which was "acquired" by the taxpayer within 45 days of the tax lien filing; and

4. State law gives the security interest holder priority over a judgment lien by an unsecured creditor, as of the time the Federal tax lien is filed.

Accord, 9 MERTEN'S LAW OF FEDERAL INCOME TAXATION §54.66.7 (1971). ⁴

With relation to the four requirements under §6323, we observe that plaintiff does not overcome the requirement that its security interest arise from a written agreement entered into before these tax liens were filed. The first of the written agreement, i. e., the assignments, was executed on June 5, 1974 . However, by June 4, 1974 , defendant had filed Notices of Tax Lien Under Internal Revenue Law relating to Argus which then totalled $86,573.02. In Donald v. Madison Industries, Inc., supra at 844, the court held as follows:

* * * Since these security agreements were entered into after the tax lien filing by some eight months or more (one day after would be just as fatal), appellant clearly can draw no support from these documents with respect to the December 1969 tax lien. Section 6323(c)(1). However, they would be relevant to any tax liens filed after their execution. (Emphasis in original).

Furthermore, plaintiff's position as to its having any priority under the Federal Tax Lien Act of 1966 fails because plaintiff has not demonstrated to this court that its "security interest" at any relevant time became "protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation" as required by §6323(c)(1)(B). Therefore, we hold that plaintiff is not entitled to any priority under §6323 over the tax liens filed before June 5, 1974 .

Plaintiff also argues that defendant is estopped to claim a lien having priority over plaintiff's rights. It bases its argument on this court's decision in Produce Factors Corp. v. United States, 199 Ct. Cl. 572, 467 F. 2d 1343 (1972). Plaintiff's position is that when it submitted its notices of the subject assignments and the assignments themselves to GSA as required by the Assignment of Claims Act, the failure to defendant's officials to advise plaintiff of the tax claims of which GSA had notice was a breach of the duty defendant owed to plaintiff as an assignee. As a result, so the argument goes, plaintiff is entitled to recover the monies it lent to Argus. The language of the Produce Factors Corp. decision on which plaintiff relies is as follows:

The assignee of Government contract rights is, of course, entitled to certain governmental protection of its interests. If at the time it receives notification of an assignment, the Government knows that the assignee's collateral is worthless, the Government must convey that information to the assignee so that he will not advance funds on the strength of proceeds that will never come due. * * * [199 Ct. Cl. at 582, 467 F. 2d at 1349.]

The assignee in Produce Factors Corp. was denied any recovery because it failed to establish that the Government had actual or constructive notice of a fact which it was duty bound to convey to the assignee and also because the assignee's knowledge was held to be superior to the Government's.

In order to establish an estoppel against the United States , four separate elements must be present. One of these essential requirements is for the party asserting the estoppel to be "ignorant of the true facts." Emeco Industries, Inc. v. United States , 202 Ct. Cl. 1006, 1015, 485 F. 2d 652, 657 (1973); United States v. Georgia-Pacific Co., 421 F. 2d 92, 96 (9th Cir. 1970). Plaintiff cannot set itself up as being ignorant of the IRS tax claims because it had constructive notice of the existence of said liens.

* * * The purpose of the filing of a notice of Federal tax lien is to give constructive notice. A purchaser is charged with constructive notice of all a person of ordinary intelligence and diligence would have discovered by an examination of the index to Federal tax liens in the appropriate local office. * * * 9 MERTEN'S LAW OF FEDERAL INCOME TAXATION §54.66.12 (1971). [Footnotes omitted.]

Accord, Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421 (S. D. N. Y. 1965); Goldstein v. Bankers Commercial Corp. [57-1 USTC ¶9596], 152 F. Supp. 856 (S. D. N. Y. 1957), aff'd per curiam sub nom. Goldstein v. United States [58-2 USTC ¶9662], 257 F. 2d 48 (2d Cir. 1958).

Once it is established that plaintiff was chargeable with contructive notice, that notice has the same legal significance as actual notice. In Simmons Creek Coal Co. v. Doran, 142 U. S. 417, 437 (1892), the Supreme Court stated:

* * * He is bound not only by actual, but also by constructive notice, which is the same in its effect as actual notice. * * * [Emphasis in original.]

Accord, 66 C. J. S. Notice §19(b) (1950):

* * * constructive * * * and actual notice have the same effect, and either constructive notice or actual notice is binding independently of the other. Accordingly, a person chargeable with constructive * * * notice is as much bound thereby as if the notice were actual. * * * [Emphasis supplied.] [Footnotes omitted.]

Accordingly, defendant's duty to "convey" information to an assignee is fully and completely discharged as to tax claims by the filing of tax liens. That it would perhaps have been a better course for defendant's officials to give plaintiff actual notice of the IRS claims is not a legally sufficient basis for plaintiff to recover. As a matter of law, defendant did not breach the duty imposed by Produce Factors Corp., supra. Plaintiff may not recover, therefore, on its theory of equitable estoppel.

The court need respond only briefly to plaintiff's final contention that the doctrine of marshaling assets should be invoked here to require defendant to collect its claims of offset against assets of Argus being withheld under contracts which are not in issue before this court before defendant can resort to the funds being withheld under the five contracts which are in issue in this case. ⁵ Defendant states that the total debts owed it by Argus far exceed the total monies defendant is withholding. Thus, to the extent defendant is unable to pay itself out of the $43,739.09 due and unpaid under the subject contracts ahead of plaintiff, defendant will not be reimbursed for the total of the obligations owed to it by Argus. There can be no marshaling when to do so would limit the double-fund creditor's ability to satisfy the total debt owed to it. This would be inequitable. New Bern Oil & Fertilizer Co. v. National Bank, 28 F. 2d 554, 556 (4th Cir. 1928); Caplinger v. Patty, 398 F. 2d 471, 476 (8th Cir. 1968); Victor Gruen Associates, Inc. v. Glass, 338 F. 2d 826, 829 (9th Cir. 1964).

Conclusion

For the above reasons, defendant's motion for summary judgment is granted, plaintiff's motion for summary judgment is denied, and the petition is dismissed.

¹ July 19, 1973--GSA awarded Contract number GS-03B-18175 to Argus.

February 1, 1974-GSA awarded Contract number GS-03B-18245 to Argus.

February 14, 1974 --GSA awarded Contract number GS-03B-18244 to Argus.

March 21, 1974 --IRS filed a notice of federal tax lien at Norfolk and Richmond , Virginia , for $53,870.27.

May 6, 1974 --GSA awarded Contract number GS-03B-18336 to Argus.

May 14, 1974 --IRS served a notice of levy on GSA stating that there was due, owing, and unpaid from Argus $60,803.46.

May 16 and June 4, 1974 --IRS filed a notice of federal tax lien at Norfolk and Richmond , respectively, for $32,702.75.

May 29, 1974 --GSA awarded Contract number GS-03B-18385 to Argus.

June 5, 1974 --Argus assigned to plaintiff "all monies due or to become due from the United States " under Contract numbers GS-03B-18175, GS-03B-18244, and GS-03B-18245. The assignments contained a warranty that the assignor is not indebted to the United States for taxes and is not otherwise engaged in a controversy with the United States which might give rise to a claim of a right to set-off.

June 19, 1974 --GSA received and acknowledged receipt of three documents entitled "Notice of Assignment."

June 20, 1974 --IRS filed notice of federal tax lien at Norfolk and Richmond for $52,034.22.

July 9, 1974 --Argus assigned to plaintiff the monies due under Contract numbers GS-03B-18336 and GS-03B-18385.

July 11, 1974 --GSA received and acknowledged receipt of two documents entitled "Notice of Assignment."

July 29, 1974 --Effective on this date, the five contracts were terminated by written agreement in accordance with an oral agreement of GSA and Argus on July 26, 1974 .

August 2, 1974 --IRS served GSA with a notice of levy stating that there was due, owing, and unpaid from Argus $132,422.78.

² There is a claim in the total amount of $23,656.98 by the Department of Labor to the withheld funds in suit. However, defendant has stated in its briefs that the court does not have to determine priorities between IRS and the Department of Labor. Since defendant prevails on the IRS claim and the IRS claim exhausts the available funds, we deem it unnecessary to discuss the Department of Labor claim.

³ Relevant portions of §6323 are as follows:

"SEC. 6323. VALIDITY AND PRIORITY AGAINST CERTAIN PERSONS.

"(a) PURCHASES, HOLDERS OF SECURITY INTERESTS, MECHANIC'S LIENORS, AND JUDGMENT LIEN CREDITORS.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanics' lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

"(c) PROTECTION FOR CERTAIN COMMERCIAL TRANSACTIONS FINANCING AGREEMENTS, ETC.--

"(1) IN GENERAL.--To the extent provided in this subsection, even though notice of a line imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--

"(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--

"(1) a commercial transactions financing agreement,

"(ii) a real property construction or improvement financing agreement, or

"(iii) an obligatory disbursement agreement, and

"(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

"(2) COMMERCIAL TRANSACTIONS FINANCING AGREEMENT.--For purposes of this subsection.--

"(A) DEFINITION.--The term 'commercial transactions financing agreement' means an agreement (entered into by a person in the course of his trade or business)--

"(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade, or business, or

"(ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business;

"but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

"(B) LIMITATION ON QUALIFIED PROPERTY.--The term 'qualified property', when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

"(C) COMMERCIAL FINANCING SECURITY DEFINED.--The term 'commercial financing security' means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory.

* * *

"(d) 45-DAY PERIOD FOR MAKING DISBURSEMENTS.--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing by reason of disbursements made before the 46th day after the date of tax lien filing, or (if earlier) before the person making such disbursements had actual notice or knowledge of tax lien filing, but only if such security interest--

"(1) is in property (A) subject, at the time of tax lien filing, to the lien imposed by section 6321, and (B) covered by the terms of a written agreement entered into before tax lien filing, and

"(2) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation."

* * *

⁴ H. R. Rep. No. 1884, 89th Cong., 2d Sess. 45 (1966), provides as follows in pertinent part:

"* * * Thus, the security interest must arise out of a written agreement entered into before the notice of tax lien was filed * * *."

⁵ Defendant contends that the doctrine of marshaling assets does not apply to the United States but we need not rule on the question in view of the inadequacy of plaintiff's position.

Concurring Opinion

BENNETT, Judge, with whom SKELTON, Judge, joins, concurring:

I concur with Judge Kashiwa's opinion and in the decision reached, but find it necessary to discuss briefly one aspect of plaintiff's rebuttal to the two affirmative defenses set up by defendant in this litigation. When faced with these defenses, plaintiff promptly asserted that its recovery could not be diminished to th extent of its assignor's delinquent taxes or underpaid employee wages, because of the terms of the Assignment of Claims Act of 1940, as amended, 41 U. S. C. §15 (1970):

Any contract of * * * the General Services Administration * * * may, in time of war or national emergency proclaimed by the President * * * or by Act or joint resolution of the Congress and until such war or national emergency has been terminated in such manner, provide or be amended without consideration to provide that payments to be made to the assignee of any moneys due or to become due under such contract shall not be subject to reduction or set-off, and if such provision or one to the same general effect has been at any time heretofore or is hereafter included or inserted in any such contract, payments to be made thereafter to an assignee of any moneys due * * * shall not be subject to reduction or set-off for any liability of any nature of the a signor to the United States or any department or agency thereof which arises independently of such contract, * * *.

It should be noted that the statute confers discretion upon contracting agencies to include the appropriate language. A "no set-off" clause is not mandatory.

The record in this case does not include copies of the five contracts themselves which were assigned as security to this plaintiff, nor has plaintiff otherwise proved to my satisfaction that the contracts originally included the no set-off language which is authorized by 41 U. S. C. §15 (1970). In fact, plaintiff implicitly concedes that no such provision originally appeared in any of the five contracts by arguing in its main brief that the provisions of the Act became operative through an implied contract amendment when it as assignee delivered copies of the assignments themselves to GSA. The instruments of assignments, which we do have before us, contain a warranty running from the assignor to plaintiff that no outstanding claims existed which might result in a set-off, reducing payments otherwise due the contractor.

Thus, plaintiff finds itself reduced to the position that each of these contracts was amended during the course of performance, so as to include by operation of law a provision binding against the Government that payments to be made to the assignee of moneys due or to become due the contractor would not be subject to reduction or set-off for the assignor's liabilities to the United States or its agencies. Plaintiff finds such an amendment implied in fact from the following circumstances: (1) the instruments of assignment to it contained the contractor's warranty that no indebtedness existed in favor of the United States ; (2) the instruments were delivered to responsible officials at GSA; and (3) GSA acknowledged receipt of such instruments without exception.

I would go a step further than Judge Kashiwa's opinion and hold as well that, as a matter of law, none of these five contracts were amended to contain a no set-off provision. In order to amend a contract, as in the case of contracting in the first instance, the parties by words or actions must manifest assent to the term of the proposed bargain. RESTATEMENT CONTRACTS §52 (1932); RESTATEMENT, SECOND CONTRACTS §52 (T. D. No. 1 (1964)). I do not think that we reasonably can say that authorized Government officials manifested their assent to the inclusion of a no set-off provision in these contracts. The Government did nothing more than to acknowledge receipt of the papers embodying the various assignments. Such an acknowledgment alone on the facts of this case is insufficient to conclude a legally effective amendment of a contract.

I agree that the petition should be dismissed.

 

 

[70-1 USTC ¶9343]In the Matter of Leopold Ackerman II, and Wilma Franco Ackerman, Bankrupts, Lou Silverstein, Appellant v. United States of America, et al., Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 23,677, 424 F2d 1148, 4/8/70, Reversing District Court

[Code Sec. 7403]

Action to enforce lien: Community property: Foreclosure.--The taxpayer's undivided one-half interest in community property was subject to tax liens, and those liens could be enforced by foreclosure against assets of the community. However, the government may not receive from its liens more than one half of the value of the community estate.

[Code Sec. 6323]

Validity of lien: Marshaling doctrine: Junior lienholder: Community property.--A junior lienholder cannot invoke the marshaling doctrine to prevent the United States from enforcing its tax liens against any property for which enforcement is authorized by applicable federal law.

John F. Goodson, Goodson, Richmond & Rose, 3550 Central Ave. , Phoenix , Ariz. , for bankrupts. Karl Schmeidler, Johnnie M. Walters, Assistant Attorney General, Department of Justice, Washington, D. C. 20530, Richard K. Burke, United States Attorney, Phoenix, Ariz., for appellant. Richmond, Ajamie & Faye, Suite 705 United Bank Bldg., 3550 N. Central Ave., Phoenix, Ariz., Shimmell, Hill, Kleindienst & Bishop, 10th Floor, 111 W. Monroe, Phoenix, Ariz., for appellees.

Before BARNES, ELY, and HUFSTEDLER, Circuit Judges.

[Facts]

HUFSTEDLER, Circuit Judge:

This case is a companion of United States v. Overman (9th Cir.) [70-1 USTC ¶9342] -- F. 2d --. ^* Both cases involve the creation and enforcement of federal tax liens upon community property to pay a husband's antenuptial tax debts. In this case the contest is between the United States and certain state creditors over the proceeds of sale of some Arizona community assets, rather than--as in Overman--among the United States , the taxpayer, and non-debtor parties having an interest in the Washington community property sought to be sold. The community property here involved had been transferred to the trustee in bankruptcy before sale and after adjudication of the spouses' voluntary petitions in bankruptcy.

Appellant Silverstein, a judgment creditor of the debtors Leopold and Wilma Ackerman, appeals from a district court order affirming a referee's order awarding to the United States the entire proceeds from the trustee's sale of certain community assets. He contends that (1) the federal tax lien could not have attached to the marital community, (2) if it could attach thereto, its attachment was confined to the husband's interest in the community, and (3) the United States should have been compelled to exhaust the noncommunity property before resorting to the community to satisfy its debt.

Leopold and his former wife, Leslie, were divorced in 1961. In 1962, after Leopold had married Wilma, the Internal Revenue Service levied assessments against Leopold and Leslie for deficiencies in their 1959 income tax. The Service filed a tax lien based on those assessments on August 3, 1965 . On August 25 and 26, 1965, Silverstein levied a writ of garnishment on certain assets of Leopold's and Wilma's marital community, including a note and some common stock, the proceeds from the sale of which are the subject of this appeal. Another judgment creditor, Tryon, levied a writ of garnishment on the common stock in 1966.

In a contest among the United States, Silverstein, and Tryon over the distribution of the proceeds of the note and the stock following the bankruptcy trustee's sale of those assets, the referee decided that the Government's tax lien attached to the whole of the community property, that the Government's lien had priority over state creditors, and that equitable marshaling of assets was not required. The district court agreed. In Overman we held that a husband's undivided one-half interest in Washington marital community is "property" or "rights to property" within the meaning of section 6321 of the Internal Revenue Code (26 U. S. C. §6321) to which a federal tax lien, based on the husband's antenuptial tax liability, could attach. We also decided that the district court could, in its discretion, allow Government foreclosure of that lien during the life of the community even though, under state law, such foreclosure was not generally allowed a state creditor.

The community property law of Arizona does not differ materially from that of Washington . ( Maricopa County v. Douglas (1949) 69 Ariz. 35, 208 P. 2d. 646.) In Arizona as in Washington , the husband and wife each have a vested, undivided one-half interest in the community. Each spouse may dispose of his interest by will. Either may convey his interest to the other during the existence of the community. (Oglesby v. Poage (1935) 45 Ariz. 23, 40 P. 2d 90; Ariz. Rev. Stat. §14-203.) For federal income tax purposes, the husband and wife may each file a separate income tax return, reporting as his or her respective income one-half of the community income. (Goodell v. Koch (1930) [2 USTC ¶612] 282 U. S. 118.) In Arizona as in Washington , the community is immune from the claims of general creditors of either spouse for his or her antenuptial debts (e.g., Casper v. Valley Nat'l Bank (1925) 28 Ariz. 373, 237 P. 175), other than alimony and child support obligations arising from a prior marriage (Gardner v. Gardner (1964) 95 Ariz. 202, 388 P. 2d 417).

As in Overman, the Government had a lien only on the taxpayer-husband's undivided one-half interest in the community; it had no lien on the wife's interest. And as we stated in Overman, the Government may not exceed the taxpayer's interest in enforcement of its lien. We must therefore delete the Government as a contestant to Wilma Ackerman's interest in the community and hold that the Government may not receive from its liens more than one half of the value of the community estate. There is, as yet, no final order of distribution of the assets of the bankrupts' estate, and we cannot therefore pass on the rights of the respective parties to particular assets in that estate.

Silverstein also argues that the bankruptcy court should have applied the equitable doctrine of marshaling to require the United States to satisfy its liens out of property separately owned by Mr. Ackerman. There is some dispute about the quick sale value of that property, but we need not resolve it. We hold that a junior lienholder cannot invoke the marshaling doctrine to prevent the United States from enforcing its tax liens against any property for which enforcement is authorized by the applicable federal statutes. A contrary holding would create a substantial burden, unauthorized by statute, upon the collection of federal revenue. (See Kovacs v. United States (9th Cir.) [66-1 USTC ¶9178] 355 F. 2d 349, cert. denied (1966) 384 U. S. 941; United States v. Herman (2d Cir. 1962) [63-1 USTC ¶9135] 310 F. 2d 846, cert. denied sub nom. Harris v. United States (1963) 373 U. S. 903; United States v. Cohen (S. D. Fla. 1967) [67-2 USTC ¶9602] 271 F. Supp. 709, 717-19; cf. United States v. Stutsman County Implement Co. (8th Cir. 1960) [60-1 USTC ¶9224] 274 F. 2d 733.)

Finally, Silverstein argues (albeit indirectly) that enforcement of the liens against the community property is prevented by United States v. Kaufman (1925) [1 USTC ¶116] 267 U. S. 408. There the Court held that, in proceedings of bankruptcy against a partnership, the partnership assets must first be applied to the payment of the partnership debts; consequently, the United States was not entitled to any priority of payment out of such assets for the tax debt of an individual partner, except to the extent of the share of that partner, if any, in the surplus remaining after the payment of the partnership debts. Since the Arizona marital community has been analogized to a partnership (Forsythe v. Paschal (1928) 34 Ariz. 380, 271 P. 865, 866). Silverstein argues that the community assets should first be applied to the creditors of the community (Tryon and himself). The United States must then wait to satisfy its separate debt out of whatever surplus remains.

While the argument has a certain logical appeal, the rule for partnerships is easily distinguishable from our situation. Kaufman very expressly relied on the Bankruptcy Act's recognition of the partnership as a separate entity for the purpose of establishing priorities. (267 U. S. at 411-12.) There is no such recognition in the Act of the marital community as an entity. Regardless of the community's status as an entity vel non under Arizona law (see Mortensen v. Knight (1956) 81 Ariz. 325, 305 P. 2d 463), we decline to invoke an entity theory to defeat the Government's priority under the Act.

The order is REVERSED and the cause is REMANDED for further proceedings not inconsistent with the views herein expressed.

^* No. 93866.

 

 

[73-2 USTC ¶9714]First National City Bank, Plaintiff v. Phoenix Mutual Life Insurance Co. and Helen C. Gilmartin, Defendants Phoenix Mutual Life Insurance Co., Defendant and Interpleading Plaintiff v. United States of America , Interpleaded Defendant

U. S. District Court, So. Dist. N. Y., 70 Civ. 5703, 364 FSupp 390, 9/25/73

[Code Sec. 6323]

Tax liens: Marshalling of assets: Assignment of insurance policies: Existence of second mortgage: Validity.--In light of E. Meyer (Sup. Ct.) 64-1 USTC ¶9111, 375 U. S. 233, the equitable doctrine of marshalling of assets in order to satisfy tax liens out of life insurance proceeds was inapplicable to a situation where a decedent pledged life insurance policies as collateral for bank loans even though the bank could have satisfied the remaining indebtedness by foreclosure on a second mortgage on decedent's home.

Whitney N. Seymour, United States Attorney, New York, N. Y., for U. S., Weissman, Celler, Spett, Midler, 425 Park Ave., New York, N. Y., for plaintiff. Bleakley, Platt, Schmidt, Hart & Fritz, 120 Broadway, New York , N. Y., for defendant.

Opinion

EDELSTEIN, Chief Judge:

Plaintiff, First National City Bank ("Bank"), has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure in this action to recover the proceeds of policies of life insurance which became payable to it upon the death of Rob ert D. Gilmartin, the insured. The interpleaded defendant, the United States , has submitted a cross-motion for summary judgment seeking to recover a portion of those proceeds in satisfaction of a tax lien filed against Mr. Gilmartin before his death.

[Facts]

The Court has reviewed the record in this case and has found that there is no genuine issue as to any material fact. Accordingly, this is an appropriate case for summary judgment. The facts can be summarized as follows: In 1967 Rob ert D. Gilmartin assigned four policies of insurance on his life (three of which were issued by Phoenix Mutual Life Insurance Co., the interpleading plaintiff), each of which named his wife Helen R. Gilmartin as beneficiary, to the plaintiff Bank, as collateral security pursuant to his written guaranty of the obligations of his corporation, Kalflex, Inc. As further collateral, he executed a second mortgage on his residence. Fifteen months later, the United States filed a tax lien against Gilmartin for approximately $14,000; this lien was filed with Phoenix .

In July, 1970, Gilmartin died. At the time of his death, Gilmartin, as guarantor for Kalflex, Inc., was indebted to the Bank in the amount of $28,000. This amount was reduced to approximately $12,000 by the Bank's receipt of the proceeds of the one insurance policy not issued by Phoenix .

The Bank demanded from Phoenix payment of the amounts still owed it. Phoenix refused to make the payment unless the Bank obtained a release of the tax lien. The Bank then brought suit in the Supreme Court of the State of New York for payment in the amount of the proceeds of the three policies. ¹ Phoenix interpleaded the United States and the United States removed the case to the Southern District pursuant to 28 U. S. C. §§ 2410(a), ² 1441(c), ³ and 1444 (1970). ⁴ Phoenix deposited the proceeds into the court and from the fund was granted compensation for its attorneys' fees and disbursements. The remainder of the fund totals about $18,000; the cash surrender value of the policies, conceded by all parties to be the maximum amount recoverable by the Government under United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958), was $9,850.

The Bank moved for summary judgment. The United States agreed that there were no material issues of fact in dispute and filed a cross-motion for summary judgment. Mrs. Gilmartin was joined as a party-defendant and has filed a memorandum of law.

[Application of Marshalling of Assets Doctrine]

The issue of law before this Court is applicability of the equitable doctrine of marshaling of assets to this case. That doctrine has been described by the Supreme Court as "the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Sowell v. Federal Reserve Bank, 268 U. S. 449, 456-457 (1925). On the basis of this doctrine, the Government argues that the Bank, which is able to satisfy its claim from either the insurance proceeds or the second mortgage, ⁵ shall be compelled to resort to the mortgage, leaving the insurance proceeds for the United States, which has no other source from which to satisfy its claim.

[Marshalling Doctrine Rejected]

The Government's contention must be rejected on the basis of the reasoning of the Supreme Court in Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233 (1963). In Meyer the insured owned policies on his life for the benefit of his wife and assigned them to a bank as collateral security for repayment of a loan. Subsequently, the Internal Revenue Service assessed against the insured deficiencies covering income taxes due from him and filed notice of a tax lien. Upon the death of the insured, the insurance company paid the full amount of the loan to the bank and the remaining balance of the proceeds to his wife. The United States sued the petitioner-wife for recovery of the taxes due from the insured. Petitioner in Meyer argued that the proceeds in excess of the cash surrender value of the policies were exempt under N. Y. Ins. Law §166 ( McKinney 1966). ⁶ The District Court granted summary judgment for the Government on the theory that the tax lien could be satisfied out of that portion of the proceeds that represented the cash surrender value by marshaling the funds and paying the bank's claim from the remainder of the proceeds. The Supreme Court reversed, holding the equitable doctrine of marshaling of assets inapplicable to assets exempted by state law from levy by creditors. Accordingly, the doctrine could not be applied when its effect was to invade the proceeds made exempt under Insurance Law §166.

The language of the Court in Meyer is particularly appropriate to the case at hand. The Court in discussing the doctrine of marshaling of assets, said:

In considering the relevance of the doctrine here it is well to remember that marshaling is not bottomed on the law of contracts or liens. It is founded instead in equity, being designed to promote fair dealing and justice. . . . It deals with the rights of all who have an interest in the property involved and is applied only when it can be equitably fashioned as to all of the parties. . . . Federal courts have likewise [with state courts] accepted this principle of the non-applicability of the doctrine where, as here, one of the funds is exempt under state law. Meyer v. United States , at 237-238.

Marshaling of the assets in the instant case would violate both the specific holding of Meyer v. United States and the above-quoted Supreme Court guidelines for applying the doctrine. Application of the doctrine here would force the bank to foreclose the mortgage on the Gilmartin home if it is to satisfy the debt and would allow it to claim the balance of the life insurance proceeds in excess of the cash surrender value of the policies. The reduction in the total amount of life insurance proceeds available to Mrs. Gilmartin, caused by application of the doctrine, is identical to the situation in Meyer and is precluded by the holding in that case. A result which would essentially compel foreclosure of the mortgage constitutes an invasion of the concept of tenancy by the entirety and is inconsistent with the langauge of Meyer. The concept of tenancy by the entirety was well known to the common law and it has been made an integral part of New York statutory law. ⁷ Essential to the concept of tenancy by the entirety is the principle that an encumbrance incurred by one tenant may not operate to impair the right of survivorship of the cotenant. 2 American Law of Property 29 (Casner, ed. 1952). The effect of applying the doctrine of marshaling the assets in this case is to allow the tax lien incurred by Mr. Gilmartin to defeat Mrs. Gilmartin's right of survivorship. Such a result is not, in the words of the Supreme Court guidelines, "designed to promote justice" nor is it relief that "can be equitably fashioned as to all of the parties."

The Government has argued that Meyer is inapplicable as precedent because the Meyer case involved only one fund, the insurance proceeds, whereas in the instant case two distinct funds are available to the Bank. However, this Court reads Meyer to stand for the proposition that marshaling of assets will not be compelled when its effect is to contravene an established state policy of protection for one of the funds. Because of its age and fundamental nature, the concept of tenancy by the entirety is analogous on the insurance law exemption which provided the basis of the holding in Meyer. It is also similar to the other exemptions--homestead and head of the household--discussed by the Court in Meyer. Just as the Supreme Court held that marshaling of the assets cannot be applied when its effect is to defeat the policy embodied in a state exemption statute, this Court holds that the doctrine cannot be applied when its effect is to defeat a tenancy by the entirety.

Accordingly, the Government's motion for summary judgment will be denied and the motion of the plaintiff Bank granted. Gilmartin's obligation to the Bank will be satisfied from the insurance proceeds. Any excess proceeds will go to Mrs. Gilmartin and, upon satisfaction of the debt, the mortgage will be released.

Settle order on notice.

¹ The assignment agreement provided that the Bank should receive all the proceeds on the death of Mr. Gilmartin and, after satisfying the debt, pay any excess to Mrs. Gilmartin, the named beneficiary.

² This section provides as follows:

(a) Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States , the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter--

(1) to quiet title to,

(2) to foreclose a mortgage or other lien upon,

(3) to partition,

(4) to condemn, or

(5) of interpleader or in the nature of interpleader with respect to,

real or personal property on which the United States has or claims a mortgage or other lien.

³ This section provides as follows:

(c) Whenever a separate and independent claim or cause of action, which would be removable if sued upon alone, is joined with one or more otherwise non-removable claims or causes of action, the entire case may be removed and the district court may determine all issues therein, or, in its discretion, may remand all matters not otherwise within its original jurisdiction.

⁴ This section provides as follows:

Any action brought under section 2410 of this title against the United States in any State court may be removed by the United States to the district court of the United States for the district and division in which the action is pending.

⁵ It is conceded that the Government has no claim to the residence, of which Mrs. Gilmartin became the sole owner at her husband's death. The mortgage was signed by both Mr. and Mrs. Gilmartin as tenants by the entitrety. Accordingly, Mr. Gilmartin's death did not impair the Bank's right to foreclose.

⁶ This section provides as follows:

1. If any policy of insurance has been or shall be effected by any person on his own life in favor of a third person beneficiary, or made payable, by assignment, change of beneficiary or otherwise, to a third person, such third person beneficiary, assignee or payee shall be entitled to the proceeds and avails of such policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person effecting the insurance. . . .

⁷ N. Y. Est., Powers & Trusts Law §6-2.2(b) ( McKinney 1967) provides that:

(b) A disposition of real property to a husband and wife creates in them a tenancy by the entirety, unless expressly declared to be a joint tenancy or a tenancy in common.

 

 

[64-1 USTC ¶9434]American National Insurance Company v. Vine-Wood Realty Co., Appellants and Joseph A. Richman and Rosaline D. Richman, his wife, and A. Jere Creskoff, Trustee Defendants

Pa. Supreme Court, East. Dist., No. 159, 4/21/64

[1954 Code Sec. 6323]

Tax liens: Marshaling of assets: Priority of creditors.--The equitable doctrine of marshaling was not applicable and, as a result, the United States was not required to satisfy its tax lien out of a certificate of deposit upon which it alone had a lien, leaving the proceeds of a foreclosure sale of a hotel available for the satisfaction of the claims of junior creditors, where the junior creditors failed to prove that, at the time the common fund, the proceeds of the foreclosure sale, was available for distribution, there existed a second fund which was clearly available to satisfy the claim of the United States.

Louis F. Floge, 1719 Packard Bldg., Philadelphia 2, Pa. , for appellants. Edward N. Barol, 2200 Girard Bldg., for Est. of Joseph A. Richman et ux.; Joseph R. Ritchie, Jr., Assistant United States Attorney, for U. S.; Harry Wolov, Assistant City Solicitor, Philadelphia, Pa., for Sheriff of Philadelphia County, defendants.

Opinion of the Court

COHEN, Judge:

This appeal challenges the order of the court below directing payment to the United States of its lien for unpaid income taxes out of the proceeds of a foreclosure sale. ¹

[Facts]

On January 27, 1954 , appellees Richmans acquired an undivided one-half interest in the Broadwood Hotel. On April 4, 1955 , the property became subject to a first mortgage. On September 24, 1955 , appellee United States , pursuant to a favorable tax court decision, filed a tax lien against the Richmans for a deficiency in their 1948 income taxes in the amount of $35,778.59. On June 2, 1958 a second mortgage was created on the hotel which was subsequently assigned to appellant Goldberg. On July 20, 1959 the Richmans conveyed the premises to appellant, Vine-Wood Realty Co. On August 25, 1960 , a judgment lien was acquired against the property by appellant, Pennsylvania Laundry Co. (Laundry). On October 6, 1960 , the United States filed another tax lien against the Richmans based on an assessment of their unpaid income taxes for 1959 in the amount of $8,826.63.

Meanwhile, Richmans had acquired certain securities which they deposited with the Liberty Real Estate Bank and Trust Co. (Bank) as collateral for a loan. Two notices of levy and final demand were served by the United States on Bank on February 9, 1960 , and August 25, 1961 . The first was based on the Richmans' 1948 unpaid taxes and the second on their 1959 unpaid taxes. On September 12, 1961 , solely as a result of an oral request from Richmans, the United States wrote a letter to Bank agreeing to the liquidation of the collateral security. Pursuant to the terms of the letter, (1) Bank sold the securities between October 26 and December 1, 1961 and (2) liquidated its loan of $36,133.67; (3) a certificate of deposit of $36,133.57 was created on November 24, 1961, retained by Bank and made subject solely to the tax claims of the United States; (4) the balance was then paid to Richmans.

The first mortgagee on the hotel instituted foreclosure proceedings on the property on June 24, 1960 and judgment was entered for him on July 19, 1960 . The property was sold on May 1, 1961 for $1,106,000. Appellants filed exceptions to the sheriff's proposed order of distribution of these proceeds on September 1, 1961 based on the "amount, validity, and priority of lien of United States of America v. Joseph A. Richman and Rosaline D. Richman." ²

On October 3, 1961 , the United States petitioned the court below to have the sheriff distribute the proceeds of the foreclosure sale in payment of the lien for the Richmans' unpaid 1948 income taxes. Appellants opposed the petition on the grounds that (1) the creation of the certificate of deposit constituted payment to the United States of its 1948 tax lien and (2) if it did not, appellants were entitled to have this tax lien first satisfied out of the certificates of deposit in accordance with the doctrine of marshaling of assets. ³ These objections were overruled and the petition was granted. This appeal followed. ⁴

Appellant assert that the equitable doctrine of marshaling requires the United States to satisfy its 1948 tax lien out of the certificate of deposit upon which it alone has a lien, leaving the proceeds of the foreclosure sale available for satisfaction of the claims of Goldberg and Laundry. ⁵

[ Pennsylvania v. Federal Law]

In determining the applicability of the marshaling principle to the present facts, it is first necessary to establish whether this question is governed by Pennsylvania or federal law. In Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), the United States Supreme Court laid down the following guidelines for determining the proper spheres of state and federal law in cases involving the competing claims of the United States as income tax collector and other creditors to the assets of the taxpayer:

"[A]s we held only two Terms ago, Section 3670 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law. . . .' United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55. However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.' . . . The application of state law in ascertaining the taxpayer's property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform admin istration of the federal revenue statutes." 363 U. S. at 513-514.

It is undisputed (as to appellants' marshaling contention) that the United States has a valid lien for 1948 income taxes on both the proceeds of the foreclosure sale and the certificate of deposit and had a lien on the predecessor of the latter--the securities held by Bank as collateral for its loan to the Richmans. Hence, the sole question for our determination is one involving the reconciliation of "claims of competing lienors." The applicability of federal law is therefore clear.

[Applicability of Marshaling Doctrine]

Next we are confronted with the question of the applicability of the marshaling doctrine to collection of federal income taxes. In the recent case of Meyer v. United States [64-1 USTC ¶9111], 11 L. ed. 2d 293 (1964), the United States Supreme Court stated that it had never applied the principle of marshaling to federal income tax liens, nor had Congress laid down any rule with reference to the application of the doctrine (11 L. ed. 2d at 297). In Meyer, the United States attempted to invoke marshaling in its own favor. Apparently assuming that the doctrine did apply where asserted in the government's behalf, the majority of the Court held that no second fund was available for marshaling and decided against the government's contention. It is to be noted that the United States Supreme Court has not as yet been faced with a case in which marshaling was sought against the federal government in an income tax case, although the lower federal courts have been so confronted and have disagreed on the doctrine's applicability. Compare United States v. Lord [58-1 USTC ¶9181], 155 F. Supp. 105 (N. H. 1957) and Re Ann Arbor Brewing Co. [52-2 USTC ¶9509], 110 F. Supp. 111 (E. D. Mich. 1951) with Kelley Kar Company v. U. S. [56-1 USTC ¶9481], (N. D. Tex. 1950).

It is not necessary for us to speculate on what the Supreme Court will do when finally called upon to resolve this issue, for it is clear that this is not a case in which marshaling may be invoked.

The marshaling doctrine may be stated as follows: when one creditor has a claim against two funds as security and another creditor has a claim against only one of these funds, the claim of the former must be first satisfied out of that fund which is security for his loan only. United States v. Behrens [56-1 USTC ¶9294], 230 F. 2d 504, 507 (2d Cir. 1956). "It is founded . . . in equity, being designed to promote fair dealing and justice. Its purpose is to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor or a creditor having less security." ⁶ Meyer v. United States, supra, 11 L. ed. 2d at 297. However, the creditor who seeks to invoke marshaling must show that the rights of his co-creditor will be neither endangered nor injuriously delayed, and that there is no reasonable doubt of the availability of another fund to satisfy his co-creditor's demand. 35 Am. Jur. §7. Furthermore, these conditions must be shown to have existed at the time the common fund became available for distribution. Otherwise, the junior creditors would be tempted to delay distribution of the common fund as long as possible in hopes that the requirements for marshaling could be subsequently fulfilled. Appellants have failed to make such a showing.

The proceeds of the foreclosure sale were available for distribution on May 1, 1961 . On that date the lien of the United States attached to the securities of the Richmans held by Bank, for the liquidation arrangement had not as yet been entered into. Bank had a first lien on these securities. As the court below aptly stated, "At the time of the sale of the Hotel there was no evidence the United States' 1948 tax lien was or could be satisfied by its levy on the securities held by the Bank, since it was subject to a prior lien of the Bank." Hence, there has been no demonstration by appellants that at the time the common fund was available for distribution there existed a second fund which was clearly available to satisfy the claim of the United States .

The creation subsequent to the foreclosure sale of the certificate of deposit, upon which the United States admittedly has the sole lien and which is sufficient to satisfy the 1948 tax assessment, did not create a right to marshal. As stated above, the right to marshal must exist at the time the common fund is available for distribution. The subsequent creation of the certificate of deposit is therefore of no consequence. To hold otherwise would, as indicated, defeat the equitable considerations underlying the marshaling doctrine by causing delay in distribution of the common fund to inure to the benefit of junior lienors.

Moreover, even had the securities held by Bank constituted a good second fund at the time of the foreclosure sale, by failing to raise the question of marshaling promptly thereafter appellants waived the right to invoke the doctrine. The proposed schedule of distribution of the foreclosure proceeds was filed by the sheriff on February 10, 1961 . The sale took place on May 1, 1961 . Exceptions to the "amount, validity, and priority" of the United States lien were filed on September 1, 1961 . Appellants did not raise their alleged right to marshaling until October 27, 1961 in their answer and new matter to the petition by the United States commencing this action. This was almost six months after the foreclosure sale. The right to marshal is inchoate in nature and is therefore subject to displacement. Fidelity & Casualty Co. of New York v. Mass. Mut. Life Ins. Co. [35-1 USTC ¶9298], 74 Fed. 2d 881 (4th Cir. 1935); 35 Am. Jur. §5. The invocation of the doctrine is dependent upon a seasonal assertion of right by the junior lienor. 35 Am. Jur. §5, supra. Otherwise, junior lienors could cause delay in the distribution of the common fund to the prejudice of senior lienors. Hence, appellants having failed to make timely exceptions based on the applicability of the marshaling doctrine, they have waived the right to now raise it.

Appellants also argue that the conversion of the securities held by Bank into a certificate of deposit at the disposal of the United States constituted payment of the 1948 tax lien. We do not agree. There is nothing in the record to indicate that this was the intention of either the United States or the Richmans in entering this transaction. Furthermore, the fact that the letter of the United States to Bank specifically requested at the behest of the Richmans that the certificate of deposit be made available for payment of all claims of the United States against the Richmans clearly negates the appropriation of the fund to the 1948 tax debt. The result of the creation of the deposit was therefore only to shift the lien of the government from the securities to the deposit.

The fact that the United States has the sole lien on the certificate of deposit and can reach it at any time to satisfy its claims against the Richmans does not in any way aid appellants in their assertion of payment. Although a senior lienor may in a proper case be compelled to look to one fund rather than another to satisfy a claim, a court may never require a senior lienor to liquidate his lien security and thereby force him to satisfy his claim. See Kendig v. Landis, 135 Pa. 612, 619 (1890).

The United States being clearly entitled to have the sheriff distribute the proceeds from the sale of the hotel in payment of its lien for the Richmans' unpaid 1948 income taxes, the order of the court below is affirmed.

Order affirmed.

¹ Appellees move to quash this appeal on the ground that it was taken 21 days after the order of the court below was entered, in violation of the Act of June 16, 1836, P. L. 755, §89, 12 P. S. §2667, which provides for a 20 day period in which to appeal from a decree "in any case of distribution without the intervention of a jury." This statute has been superseded by the General Appeals Act of May 19, 1897 , P. L. 67, §4, as amended, 12 P. S. §1136, which provides for a three month appeal period. Section 22 of this Act (12 P. S. §1161) specifically repeals several enumerated enactments and all other acts pertaining to the subject matter of the Act. The 1836 statute is certainly included in this latter group. The motion to quash is therefore denied.

² It is to be noted that these events concerning the mortgage foreclosure took place before the above mentioned liquidation of security arrangement was agreed to and carried out and before any request for marshaling had been made.

³ On October 27, 1961 , appellants filed an answer and new matter asserting the existence of the securities pledged as collateral and raising the question of marshaling for the first time. Following the liquidation of the collateral security and the creation of the certificate of deposit, appellants filed an amended answer alleging htat the 1948 tax lien had been paid thereby.

⁴ The liens on the two funds involved here in order of time of their perfection may be diagramed as follows:

Before Nov. 24, 1961 (date of creation of certificate of deposit).

Foreclosure Proceeds

United States --1948 Income Taxes

Goldberg Second Mortgage

Laundry Judgments

United States --1959 Income Taxes

After November 24, 1961

Foreclosure Proceeds

United States --1948 Income Taxes

Goldberg Second Mortgage

Laundry Judgments

United States --1959 Income Taxes

Richmans' Securities

Bank Loan

United States --1948 Income Taxes

United States --1959 Income Taxes

Certificate of Deposit

United States --1948 Income Taxes

United States --1959 Income Taxes

⁵ In its motion to strike appellants' new matter raising the question of marshaling, the government contended that Rule 3136(f), Pa. R. C. P. does not provide for the type of proceeding necessary for a resolution of this issue. The court below apparently did not rule on this motion. Although marshaling is a principle of equity, it may be raised in any action at law. See Bugen v. New York Life Insurance Company, 408 Pa. 472, 475, 184 A. 2d 499, 501 (1962).

⁶ At the outset it is difficult for us to see how the action of the United States in pursuing its rights in the proceeds of the foreclosure sale can be labeled arbitrary, for it was the first mortgagee and not the United States which instituted the foreclosure proceedings and necessitated the action which the United States has here taken.

 

 

[81-1 USTC ¶9316] United States of America , Plaintiff v. Sharon L. Hogue, Amey, Inc., and State of Florida Department of Commerce, Defendants

U. S. District Court, Mid. Dist. Fla., Fort Myers Div., Case No. 78-33-Civ-Ft. M-GC, 3/3/81

[Code Sec. 6323]

Lien for taxes: Subsequent purchaser of attached property: Marshalling of assets doctrine.--Federal tax liens attached to the taxpayer's real property arising out of her indebtedness to the United States for income tax liabilities took priority over the claim of a subsequent purchaser of the property. The warranty deed by which the taxpayer conveyed the property to the purchaser was executed and recorded after the United States filed notice of the tax liens. The government, therefore, had a right to enforce its lien by foreclosure and judicial sale of the property. No authority existed in the federal tax statutes that would permit the Court to apply the equitable doctrine of marshalling of assets at the request of the purchaser, who was a junior lien holder.

John J. Daley, Assistant United States Attorney, Tampa, Fla., William M. Smith, Department of Justice, Washington, D. C. 20530, for plaintiff. Richard D. Sparkman, Sparkman & Sparkman, P. O. Box 7128, Naples, Fla. 33941, for Sharon L. Hogue, T. Rankin Terry, Jr., Terry, Adams & Corbin, 2132 McGregor Blvd., Ft. Myers, Fla. 33901, for Amey, Inc., Alex D. Littlefield, Jr., 401 Collins Bldg., Tallahassee, Fla. 32304, for State of Fla.

Findings of Fact and Conclusions of Law

CARR, District Judge.

This is an action by the United States of America to enforce a federal tax lien. The case was tried before the Court on February 4, 1981 . The parties to this action are in agreement with the statement of facts as set forth below. Therefore, after consideration of the evidence adduced at trial, the argument of counsel and the applicable law, the Court makes the following Findings of Fact and Conclusions of Law in compliance with Rule 52(a), F. R. Civ. P.

Findings of Fact

1. On February 27, 1969, Adrian A. Hogue, deceased husband of the Defendant Sharon L. Hogue, took title to the real property located in Lee County, Florida, known as the Dome, and more accurately described as follows:

The South 160 feet of the West 150 feet of the West half of the Southwest quarter of the Southeast quarter of Section 26, Township 47 South, Range 25 East, Lee County, Florida, less road rights of way of East Terry Street and U. S. Highway 41, together with all improvements thereon.

2. Adrian A. Hogue died on August 29, 1974. Subsequently, Defendant Sharon L. Hogue, in her individual capacity and as the personal representative of her husband's estate, purported to convey the subject property by warranty deed date November 23, 1976 to the Defendant Amey, Inc. Said warranty deed was recorded on November 26, 1976.

3. Assessments for unpaid federal income taxes were made against Adrian A. Hogue and the Defendant Sharon L. Hogue on May 3, 1976 and May 17, 1976 for the tax years 1974 and 1973, respectively. Although notice of said assessments and demand for the payment thereof were timely made on Adrian L. Hogue, there remains unpaid and outstanding by reason of said assessments the amount of $28,568.86, plus interest and statutory additions as provided by law, for which she is indebted to the United States .

4. A Notice of Federal Tax Lien with respect to the federal tax liabilities described above was duly filed on November 3, 1976, with the Clerk of the Circuit Court, Lee County , Fort Myers , Florida .

5. Defendant Amey, Inc. has alleged that there are other properties to which the federal tax liens attached, and that the United States should be required, through the doctrine of marshaling of assets, to sell any and all of such other properties before foreclosing its tax liens on the property involved in this law suit. Defendant Amey, Inc., also urges the Court to adopt and apply to this case the doctrine of inverse order of alienation.

Conclusions of Law

1. This Court has jurisdiction over the subject matter and the parties.

2. Pursuant to the provisions of Section 7403(a) of the Internal Revenue Code of 1954 (26 U. S. C.) [hereinafter I. R. C.] the United States may file an action in District Court to enforce a federal tax lien and to subject any property in which a delinquent taxpayer has any right, title or interest to the payment of such tax or liability.

3. Pursuant to the provisions of I. R. C. Section 7403(c), this Court has the duty to then adjudicate the claims and liens upon the property, and in any case where it is established that the United States has a federal tax lien, the Court may decree a sale of such property. In such a case the Court will then order the distribution of the proceeds of such sale according to its findings with respect to the interests of the parties involved.

4. It is uncontested that the Defendant, Sharon L. Hogue, is indebted to the United States of America, for her failure to pay federal income tax liabilities for the years 1973 and 1974 in the amount of $28,568.86, plus interest to February 4, 1981, and statutory additions as provided by law, and the United States is entitled to judgment against her with respect thereto.

5. This amount, pursuant to the provisions of I. R. C. Section 6321, constitutes a lien in favor of the United States upon all property and rights to property of the Defendant Sharon L. Hogue.

6. The federal tax liens arose at the time the assessments were made, May 3, 1976 and May 17, 1976 , pursuant to I. R. C. Section 6322, and said liens have continued until this date as there has been no satisfaction of the amounts so assessed and no judgment arising out of the liability.

7. The federal tax liens on the subject property were perfected against any purchaser of the property by the United States when it filed its notice of said tax liens on November 3, 1976, which fully complied with the requirements of I. R. C. Section 6323(a) and (f).

8. Since the United States perfected its federal tax liens as against any purchaser of the subject property on November 3, 1976, and since the warranty deed from Defendant Sharon L. Hogue to Defendant Amey, Inc. was not executed until November 23, 1976, nor recorded until November 26, 1976, the federal tax liens attached to the subject property take priority over any interest held by Defendant Amey, Inc., and the United States of America may enforce its lien by foreclosure and judicial sale of the subject property, unless the doctrine of marshaling assets applies.

9. The doctrine of marshaling of assets has been defined in the following manner: "[t]he equitable doctrine of marshalling rests upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233, 236 (1963); Sowell v. Federal Reserve Bank, 268 U. S. 449, 456-457 (1925).

10. In order for the Court to act in this case, it must be given the authority, directly or implicitly by statute. In discussing this issue, the United States District Court for the Southern District of Florida stated:

Refusal to apply the doctrine is based upon construction of the tax lien statutes in the following manner. The statute creates the tax lien and describes its duration. After the notice has been duly given, the power of the Court to determine the rights of the parties in respect to the lien is limited by statute. There is no statutory authority conferred on the Court to discharge or terminate the lien already attached to specific property without satisfaction of the tax or exhaustion of the property. The Court's usual equity powers are said to be limited by the special statutory provisions of §6325 regarding discharge of tax liens, which provisions make no mention of discharge by marshaling other assets of the taxpayer. That rationale is analogous to a similar refusal to apply the doctrine in levy situations.

This Court finds the line of cases refusing to apply the doctrine of marshaling assets to be more convincing.

United States v. Cohen [67-2 USTC ¶9602], 271 F. Supp. 709, 718 (S. D. Fla. 1967).

This Court can find no authority in the federal tax statutes which would permit the Court to require the United States to marshal assets of the taxpayer which are not currently within this Court's jurisdiction.

11. Similarly, other Courts have found that the United States is not required to marshal assets of a taxpayer upon the request of a junior lien holder, as such a holding "would create a substantial burden, unauthorized by statute, upon the collection of federal revenue." In Re: Ackerman [70-1 USTC ¶9343], 424 F. 2d 1148, 1150 (9th Cir. 1970); Accord, United States v. Herman [63-1 USTC ¶9135], 310 F. 2d 846, 848 (2d Cir. 1962). This situation is closely analogous to the situation in United States v. Stutsman County Implement Co. [60-1 USTC ¶9224], 274 F. 2d 733, 736 (8th Cir. 1960), wherein the Court stated that it could not "discharge a valid tax lien imposed by the statute merely because it appears to the Court that the existence of the lien bears harshly on those who have dealt with the taxpayer in disregard of the lien." In this instance, as noted above, the Defendant Amey, Inc. attempted to purchase the property from the taxpayer at a time when the federal tax lien had been properly recorded in the appropriate office.

12. Based on the foregoing, the Court finds that the doctrines of marshaling of assets and inverse order of alienation are inapplicable in this action and that the United States of America therefore has the right to a judgment foreclosing its federal tax liens upon the subject property by a judicial sale of said property.

13. The Court shall retain jurisdiction of this action for the purpose of conducting the sale of the property.

14. Judgment shall be entered in accordance with the foregoing Findings of Fact and Conclusions of Law.

 

 

[64-1 USTC ¶9168]Wintner v. United States

Supreme Court of the United States, No. 98, 375 US 393, 84 SCt 451, 1/6/64, Reversing CA-6, 63-1 USTC ¶9270

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

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Insurance cash surrender value: Policies assigned as collateral: Marshalling of assets.--Where a taxpayer assigned life insurance policies to a bank as collateral security after income tax deficiencies had been assessed, and no notice of the tax lien was filed, so that the bank's lien was superior to the tax lien, and on the death of the taxpayer the insurance company paid to the bank amounts sufficient to satisfy the debts, which approximated the cash surrender values of the policies at the time of the taxpayer's death, the Government did not have a lien against the remaining proceeds which were paid to the beneficiary. The equitable doctrine of marshalling of assets did not apply. Meyer, (Sup. Ct. ) 64-1 USTC ¶9111, followed.

Richard Katcher, Herbert B. Levine, Keith Bldg., Cleveland , Ohio , for petitioner. Archibald Cox, Solicitor General, Louis F. Oberdorfer, Assistant Attorney General, Joseph Kovner, Crombie J. D. Garrett, Department of Justice, Washington 25, D. C., for respondent.

PER CURIAM:

The petition for writ of certiorari is granted and the judgment is reversed. Meyer v. United States [64-1 USTC ¶9111] No. 61, October Term, 1963, decided

 

 

[64-1 USTC ¶9111]Ethel Meyer, Petitioner v. United States

Supreme Court of the United States, No. 61, 375 US 233, 84 SCt 318, 12/16/63, Reversing CA-2, 62-2 USTC ¶9785, 309 F. 2d 131

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

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Liens: Marshaling of assets: Tax lien v. pledgee's lien on cash surrender value of policy.--The equitable doctrine of marshaling assets does not extend to the situation where a decedent pledged life insurance policies as collateral for a loan during his lifetime. The Court denied the Commissioner's contention that a junior tax lien should be paid from the cash surrender value of the policies and the pledgee paid from the balance of the proceeds. Under applicable state law, insurance proceeds are exempt from the claim of creditors.

Three dissents.

Samuel W. Sherman, 1451 Broadway, Martin A. Gettinger, Rob ert S. Gettinger, 1407 Broadway, New York , N. Y., for petitioner. Archibald Cox, Solicitor General, Louis F. Oberdorfer, Assistant Attorney General, Louis F. Claiborne, Assistant to Solicitor General, Joseph Kovner, Michael Mulroney, Department of Justice, Washington 25, D. C., for respondent. Richard Katcher, Herbert B. Levine, Keith Bldg., Cleveland , Ohio , for Lillian Wintner, amicus curiae.

MR. JUSTICE CLARK delivered the opinion of the Court:

The ultimate issue in this case is the applicability of the doctrine of marshaling of assets. The Government urges that it be applied to effect the collection of its junior income tax lien on the cash surrender value of certain life insurance policies. The senior lien is secured by the entire proceeds of the policies and absorbs practically all of their cash surrender value. The proceeds of the policies are exempt from levy by creditors of the insured under state law.

In 1943 the deceased, Peter Meyer, pledged his insurance policies to a bank as collateral security for a loan, giving the bank the right to satisfy its claim out of the "net proceeds of the policy when it becomes a claim by death." When Mr. Meyer died, the insurance company paid the amount of the loan to the bank and the balance to the petitioner, Mr. Meyer's widow and beneficiary. The Commissioner claims, however, that the insurance proceeds must be marshaled, that the Government's admittedly junior tax lien must be paid from the cash surrender value of the policies and the bank from the remaining proceeds. The District Court agreed [62-1 USTC ¶9207], 202 F. Supp. 606, and the Court of Appeals affirmed [62-2 USTC ¶9785], 309 F. 2d 131. We granted certiorari because of the importance of the question in the admin istration of the income tax laws. We disagree with both courts and reverse the judgment.

I. Peter Meyer owned four life insurance policies which named the petitioner, his wife, as beneficiary. Their face amount was $50,000 and their cash surrender values at his death were $27,285.87. He had retained the usual powers under such policies, namely, to change the beneficiaries, demand the cash surrender value and assign the policies. In 1943, long before the tax assessments in this suit, he assigned the policies as collateral security for the repayment of a loan from the Huntington National Bank of Columbus , Ohio . The bank was given the right, in the event of death, to satisfy its claim out of the "net proceeds of the policy when it becomes a claim by death." At the time of Meyer's death, $26,844.66 was due on this loan.

It is not disputed that the Commissioner assessed deficiencies covering income taxes due by Mr. Meyer for the years 1945 and 1946, with a balance of $6,159.09 plus interest due at his dath, and that notice of lien was filed in 1955. Meyer died on December 28, 1955 , and petitioner was named executrix of his estate. After the insurance company paid the full amount of the loan to the bank and the balance remaining due on the policies to the petitioner, this suit was begun against petitioner, individually and as exeutrix, for the recovery of the full amount of the taxes due. Petitioner tendered the sum of $441.21, the difference between the cash surrender value and the amount paid to the bank, but claimed the remainder as exempt under New York Insurance Law §166. ^* The District Court, however, granted summary judgment for the Government on the theory that the tax lien could be satisfied out of that portion of the proceeds that represented the cash surrender values by marshaling the funds and paying the bank's claim from the remainder of the proceeds. It followed the holding of the Second Circuit in United States v. Behrens [56-1 USTC ¶9294], 230 F. 2d 504. The Court of Appeals affirmed on the same basis. We cannot agree.

II. This Court has held and the parties do not dispute that: absent a lien, recovery of unpaid federal income taxes from a beneficiary of insurance can be had only to the extent that applicable state law permits such recovery by other creditors of the insured, Commissioner v. Stern [58-2 USTC ¶9594], 357 U. S. 39, 46-47 (1958); the insured taxpayer's "property and rights to property" under §3670 of the Internal Revenue Code of 1954 are measured by the policy contract as enforced by applicable state law, United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55-56 (1958); the cash surrender value of an insurance policy, where subject to the control of the insured, is "property and rights to property" under the section, id., at 59; finally, the priority of liens is determined by the principle "first in time first in right," United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). Applying New York law, this results in the bank's lien being the senior one on the entire proceeds of the policies with the tax lien only attaching to the cash surrender values subject to the bank's claim. The narrow question remaining is whether in such a situation the doctrine of marshaling of assets is compelled.

III. This Court has said that "[t]he equitable doctrine of marshalling [sic] rests upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Sowell v. Federal Reserve Bank, 268 U. S. 449, 456-457 (1925). The Courts of Appeals of two Circuits have applied the doctrine, despite state law, to the collection of federal tax liens. United States v. Behrens, supra, and United States v. Wintner [62-1 USTC ¶9153], 200 F. Supp. 157, aff'd [63-1 USTC ¶9270] 312 F. 2d 749 (C. A. 6th Cir.). We note, however, that Behrens antedates our Stern and Bess Opinions as well as those in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), and United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960). These latter two cases held that competing liens of the Government for taxes and of subcontractors for labor and materials to a fund due the taxpayer under a general construction contract were controlled by applicable state law. This Court has never applied the doctrine of marshaling to federal income tax liens although it did deny the petition for certiorari filed in the Behrens case, supra, 351 U. S. 919. Nor has the Congress seen fit to lay down any rules with reference to the application of the doctrine, apparently leaving the problem to this Court.

IV. In considering the relevance of the doctrine here it is well to remember that marshaling is not bottomed on the law of contracts or liens. It is founded instead in equity, being designed to promote fair dealing and justice. Its purpose is to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor or a creditor having less security. It deals with the rights of all who have an interest in the property involved and is applied only when it can be equitably fashioned as to all of the parties. Thus, state courts have refused to apply it where state-created homestead exemptions would be destroyed, Sims v. McFadden, 217 Ark. 810, 233 S. W. 2d 375; or where the rights of insurance beneficiaries would be adversely affected, Bruns v. First Trust & Deposit Co., 250 App. Div. 370, 295 N. Y. Supp. 412; or where the rights of third parties having equal equity would be prejudiced, Barbin v. Moore, 85 N. H. 362, 159 A. 409; or where the "head of the household" exemption was involved, Westgrove Savings Bank v. Dunlavy, 190 Iowa 1054, 181 N. W. 404, and Pugh v. Whitsitt & Guerry, 161 S. W. 953 (Tex. Ct. Civ. App.). Federal courts have likewise accepted this principle of the nonapplicability of the doctrine where, as here, one of the funds is exempt under state law. See In re Bailey, 176 F. 990, where a state legislative homestead exemption was held to be a superior equity in the hands of a bankrupt, preventing the marshaling of assets to his disadvantage; Rob ert Moody & Son v. Century Savings Bank, 239 U. S. 374, 378 (1915), where Iowa's requirement that a homestead, even when validly mortgaged, may be sold only for a deficiency remaining after exhausting all other property was declared available to a junior mortgagee to prevent a marshaling of assets; and Lockwood v. Exchange Bank, 190 U. S. 294, 300-301 (1903), where a waiver of state exemption statutes was held to have no effect in bankruptcy since the title to the exempted property remained in the bankrupt and never reached the trustee's hands. It, therefore, seems clear that the courts have considered state exemption statutes when weighing the equities between parties to determine the applicability of the marshaling doctrine. This is in line with that deference to state law of our recent cases, discussed above, holding that state law controls the determination of what is included within the "property or right to property" covered by §3670 and upon which the federal tax lien could attach. In addition, this Court in United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237 (1960), when faced with a comparable problem involving collection of federal taxes, found

"it desirable to adopt as federal law state law govering divestiture of federal tax liens, except to the extent that Congress may have entered the field. It is true that such liens form part of the machinery for the collection of federal taxes. . . .. However, when Congress resorted to the use of liens, it came into an area of complex property relationships long since settled and regulated by state law. . . . We think it more harmonious with the tenets of our federal system and more consistent with what Congress has already done in this area, not to inject ourselves into the network of competing private property interests, by displacing well-established state procedures governing their enforcement, or superimposing on them a new federal rule." At 241-242.

Congress has not seen fit to change the rules this Court fashioned in these cases. Indeed, it has not only permitted them to stand but, as was said in Holden v. Stratton, 198 U. S. 202, 213-214 (1905), "It has always been the policy of Congress, both in general legislation and in bankrupt acts, to recognize and give effect to the state exemption laws." There are many examples, among which is the incorporation in the bankruptcy law of the exemptions made available by the State of a bankrupt's domicile. See 52 Stat. 847, 11 U. S. C. §24. This includes the exemption of life insurance proceeds. See Holden v. Stratton, supra, at 212-213. In addition, other exemptions have been added from time to time, such as the exclusion from taxation of the benefits from life insurance policies, Internal Revenue Code of 1954, §101(a), and the exception of life insurance benefits in which the surviving spouse has exclusive power of appointment from the rule that terminal interests may not qualify for the marital deduction. Internal Revenue Code of 1954, §2056(b)(6).

We cannot overlook this long-established policy. In the absence of a definitive statutory rule to the contrary we therefore adopt the state rule and refuse to extend the equitable doctrine of marshaling assets to this situation. New York has a specific statute which exempts insurance benefits of a widow from the claim of creditors of her husband's estate and its courts have refused to marshal assets where to do so will diminish those rights. Bruns v. First Trust & Deposit Co., supra. To apply marshaling in this case would overturn New York 's beneficent policy and, in addition, would enlarge the federal tax lien that the Congress has provided in §3670. This we will not do. The judgment is therefore

Reversed.

^* "1. If any policy of insurance has been or shall be effected by any person on his own life in favor of a third person beneficiary, or made payable, by assignment, change of beneficiary or otherwise, to a third person, such third person beneficiary, assignee or payee shall be entitled to the proceeds and avails of such policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person effecting the insurance." New York Insurance Law §166.

[Dissenting Opinion]

MR. JUSTICE WHITE, with whom MR. JUSTICE HARLAN and MR. JUSTICE STEWART concur, dissenting:

I cannot for serveral reasons join the Court in reversing the decision of the Court of Appeals.

1. It is, of course, federal law which should rule this case. We are dealing here with a federal income tax lien, created by congressional enactment. Problems of interpretation under that legislation are federal problems, and should be governed as nearly as may be, by principles of uniform application throughout the various States. Determining the priority of §3670 liens by reference to state law may permit the United States to assert its lien in one State but forbid it is another in precisely the same circumstances.

The very proposition upon which the Court's decision seems to rest--that the Government's lien under §3670 depends on whether state law recognizes similar liens asserted by private creditors--was rejected in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, where it was argued that the United States had no claim against the cash surrender value of insurance policies because a New Jersey statute barred the similar claims of private creditors. This Court looked to local law to determine whether the taxpayer had "sufficient interests to satisfy the requirements of §3670" but declared state law "inoperative to prevent the attachment of liens created by federal statutes in favor of the United States . . . . The fact that in §3691 Congress provided specific exemption from distraint is evidence that Congress did not intend to recognize further exemptions which would prevent attachment of liens under §3670."

The basic principle in Bess was further amplified by Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, and United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522, where the following guidelines were laid down:

"[A]s we held only two Terms ago, Section 3670 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . .." United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55. However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.' [Citing cases in this Court.] The application of state law in ascertaining the taxpayer's property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform admin istration of the federal revenue statutes." 363 U. S. , at 513-514.

Undoubtedly the deceased taxpayer here possessed property--the cash surrender value of insurance policies--to which the tax lien attached by the force of federal law. The problem remaining is the reconciliation of the competing claims to the proceds. Under Bess, Aquilino and Durham the problem must be solved as a matter of federal law. State law may be one of the sources guiding the formation of federal policy, but according to prior cases in this Court, it is not controlling and does not have the compelling force given it by the Court.

2. Whatever force local law is to have, however, I find it difficult to accept the Court's exposition of New York Policy.

Section 166 of the New York Insurance Law, the Court says, protects insurance benefits from the claims of creditors of the deceased insured. Obviously, however, no part of the proceeds of the policy, whether cash surrender value or otherwise, is protected from the claims of the secured creditor who has taken an assignment of the policy as collateral security during the lifetime of the insured. This is apparent from the face of the statute itself, ¹ and in this very case no question has been raised about the rights of the bank, surely a creditor, to collect every dollar owed to it from the proceeds of the policy. Likewise, had there been no bank loan here, or had it been paid by the insured prior to his death, it is conceded that the federal tax lien would be satisfied from the proceeds to the extent of the cash surrender value. In fact, the beneficiary in this case paid over to the United States the portion of the cash surrender value remaining after the debt of the bank had been paid.

New York , therefore cannot be said to have a policy of insulating the proceeds of insurance policies from the claims of creditors who have acquired a security interest in the proceeds during the lifetime of the insured. The insured in this case, the owner of the policy, could change the beneficiary and destroy the latter's interest entirely. He could likewise encumber the proceeds and limit the beneficiary's rights to the net amount remaining after the payment of creditors with liens on the proceeds. The protected interest of the beneficiary extends only to the net proceeds. In re Kelley's Estate, 251 App. Div. 847, 296 N. Y. S. 923. The beneficiary has an unsecured claim, inferior to that of encumbrancers, but good as against unsecured creditors of the insured. This is what the New York policy is, as it seems to me.

Neither is there anything in Bruns v. First Trust & Deposit Co., 250 App. Div. 370, 295 N. Y. Supp. 412, which validates the Court's definition of New York policy. In that case a bank held both insurance policies and other property as collateral security for debts owed it by the insured. The Appellate Division refused to permit collection of the bank loan from the insurance proceeds in order that unsecured creditors could resort to the other property held by the bank. The case prefers the beneficiary to the unsecured creditor who has no independent claim to the proceeds, but it does not suggest that those with security interests in the proceeds would be likewise subordinated.

Moreover, further question about New York policy is raised by In re Kelley's Estate, supra, a case which is difficult to reconcile with Bruns. In that case, as in Bruns, the insured had assigned a policy and had pledged shares of stock as security for a bank loan. Upon his death the bank was paid from the insurance proceeds and the stock remained available to the executor and the insured's estate. The Appellate Division apparently saw nothing wrong with such an application of the insurance proceeds, denied that the widow had any interest in them to the extent they were necessary to pay the bank loan and further denied the widow's claim to be subrogated to the bank's rights in the stock. ²

Twice--in this case and in United States v. Behrens [56-1 USTC ¶9294], 230 F. 2d 504 (C. A. 2d Cir.)--the Court of Appeals has ordered payment of both the lien of a bank and the inferior federal tax lien. In neither case did it indicate it was trenching upon an established state policy involving marshaling of assets. If the result is to depend upon state policy which at the very least is shrouded in doubt and which it seems to me is not what the Court says it is, I would follow our usual custom ³ of leaving to the Court of Appeals the ascertainment of the local law in which it specializes. ⁴ Pitching the result upon state law, even as a guide to the governing federal law, should lead to a remand rather than to decision here.

3. The deceased made the assignment to the bank in 1943. Deficiencies in federal income taxes for the years 1945 and 1946 were assessed on May 22, 1946 , and June 17, 1947 , respectively. Partial payments were made upon the 1945 assessments, none on the 1946. The deceased in 1951 extended the time for collection of the 1945 deficiencies until 1956 and of the 1946 deficiency until 1957. He submitted an offer of compromise in 1955 which was rejected by the Government in May of that year. Notice of tax lien was filed in July 1955, and the deceased died the following December. At that time the cash surrender value of the policies had grown to $27,285.87 and the amount due on the bank loans totaled $26,844.66. The insurance company remitted the amount of the loans to the bank and paid the remainder of the proceeds to the named beneficiary of the policies. There are no facts or findings to indicate that the amount paid to the bank by the insurance company was paid from the cash surrender value. In these circumstances I see no reason for assuming that it was and no basis for forbidding collection of the tax lien from the amounts paid the beneficiary.

The deceased first reduced the beneficiary's interest in the proceeds of the policies by making the assignment to the bank. He then allowed another lien to attach by his own default, thereby further invading the proceeds. Where there is no prior assignment, it is clear that the government lien effectively diminishes the proceeds in the hands of the beneficiary since the Government's interest in the proceeds is superior to that of the beneficiary. It is unsound to hold, as the Court does, that the lien may not have like effect when the insured has given a prior lien on the proceeds to secure a bank loan. True, paying the tax lien from the cash surrender value results in the bank being paid from the remainder. But this is precisely what the insured arranged for since the loan, by its very terms, was collectible from any part of the proceeds, which were more than sufficient to pay both the loan and government lien. ⁵

Nor is there any superior equity in the beneficiary to prevent the application of the well-established rule of marshaling, a rule long recognized by this Court. ⁶ It is not unreasonable to suppose that the beneficiary enjoyed the benefits of the bank loan which is here used to insulate the cash surrender value from the government lien. What is more, the insured and his family used and spent the income which should have been used to pay federal taxes which had been due and payable for many years. Paying both the bank and the tax lien from the proceeds is wholly consistent with the carrangements made by the insured and with this Court's holding in Bess.

Finally, the federal revenue deserves more protection than it receives today. The Court may now protect a widow, but the rule announced will protect all beneficiaries, varied as they may be. ⁷ Congress has declared that the United States shall have a lien on the assets of those persons who do not discharge their federal tax obligations. This Court now creates an exception to that policy by holding that the tax lien may not be paid from the cash surrender value of the insurance policy, solely because prior to the attachment of the tax lien Mr. Mayer had assigned the entire proceeds as collateral for a bank loan. I would not invite or validate the utilization of continuing and growing bank loans for the sole purpose of insulating insurance proceeds from the federal tax lien which otherwise would be satisfied from the policy proceeds.

There are in this case two secured creditors and two funds. The total assets are sufficient to satisfy the claims of both creditors, but the junior claimant has a lien on only one of the funds. It is entirely appropriate here to require the payment of both liens.

For the foregoing reasons, I respectfully dissent.

¹ Section 166 is quoted in part in the footnote of the Court's opinion. It obviously protects assignees, even creditor-assignees, from the other creditors of the insured.

² "When the husband executed his certificate on August 15, 1932, revoking the designation of his wife as the absolute beneficiary and redesignating her as beneficiary subject to the assignment to the Manufacturers Trust Company, he thereby diminished her interest in the policy pro tanto and, in effect, constituted the trust company the primary beneficiary to the extent necessary to satisfy its loan to him and appellant, the secondary beneficiary, as to any residue which may remain. Under section 52 of the Domestic Relations Law, and section 55-a, of the Insurance Law, the wife may acquire a vested, irrevocable right to the proceeds of the policy, free from the claims of the husband's creditors and representatives, only if the husband dies without exercising his reserved right to change the beneficiary in accordance with the provisions of the policy. Here the husband exercised that right to the extent necessary to satisfy his loan. Hence, when the trust company applied the proceeds of the policy to the payment of the loan, it was not utilizing appellant's property and she could not be subrogated to the rights of the bank with respect to the stock of the Fairview Foundry, Incorporated." In re Kelley's Estate, 251 App. Div. 847-848, 296 N. Y. S. 923-924.

³ United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522, 526-527; Propper v. Clark, 337 U. S. 472, 486-487.

⁴ The Court of Appeals has frequently dealt with §166 of the New York Insurance Law. See for example Fried v. New York Life Ins. Co. [57-1 USTC ¶9412], 241 F. 2d 504; United States v. Behrens [56-1 USTC ¶9294], 230 F. 2d 504, cert. denied, 351 U. S. 919; Rowen v. Commissioner [54-2 USTC ¶9581], 215 F. 2d 641.

⁵ Where the tax lien is inferior to local lien A but superior to local lien B, the tax lien is to be paid even though lien A, superior to the federal lien, is cut out because under local law it is inferior to lien B. United States v. Buffalo Savings Bank [63-1 USTC ¶9166], 371 U. S. 228; United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81. In the case at bar there is more reason to recognize and pay the tax lien; for if it is paid, it is only an inferior interest, that of the beneficiary, which is invaded.

⁶ "The equitable doctrine of marshaling rests upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Sowell v. Federal Reserve Bank, 268 U. S. 449, 456-457. See also Merrill v. National Bank of Jacksonville, 173 U. S. 131, 138; Scruggs v. Memphis & Charleston R. Co., 108 U. S. 368; Savings Bank v. Creswell, 100 U. S. 630, 641; Fenwick v. Chapman, 9 Pet. 461, 474; 2 Story's Equity Jurisprudence §§ 758, 760, 853-871; 2 Pomeroy's Equity Jurisprudence §§ 396, 410; 4 Pomeroy's Equity Jurisprudence §1414.

⁷ Since §166 would not protect the insurance proceeds from creditors' claims where the insured or his estate is the beneficiary, I would suppose the Court's opinion would likewise permit payment of the tax lien in such circumstances. Would the same apply to where the executor or admin istrator is the beneficiary? And what is the result when the beneficiary is the insured's partner or business associate, on a corporation in which he has an interest?