Massachusetts

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[96-1 USTC ¶50,160] Progressive Consumers Federal Credit Union, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-1), U.S. Court of Appeals, 1st Circuit, 95-1712, 3/19/96, Reversing and vacating an unreported District Court decision

[Code Sec. 6323 ]

Priority of liens: Unjust enrichment: State law: Extinguished interest: Mistake.--A refinanced mortgage had priority over tax liens under a state's (Massachusetts) doctrine of unjust enrichment because the credit union that was the original mortgage holder extinguished its initial interest by mistake during refinancing. The credit union executed and recorded its original mortgage before the government recorded its tax liens. No reasonable lender in the credit union's position would have intended, upon refinancing, to replace the first mortgage bearing the attachment of junior tax liens with a second mortgage bearing the attachment of senior tax liens, thereby relinquishing its senior interest on the property. The transferee of the refinanced mortgage was subrogated to the credit union's original priority position. Absent the inadvertent discharge of the mortgage, the government would not have gained priority over the credit union's second mortgage. Finally, the lower court erred when it held that reliance on the state's unjust enrichment cases was misplaced because such cases do not concern federal tax liens. Reestablishing the transferee's position, of itself, did not disturb the status of the competing liens, whether a private lienor or the federal government, in terms of their effective dates of attachment for the determination of priority. Federal law remained intact to determine both the choateness of the state created lien and its order of priority in relation to any competing federal liens.

[Code Sec. 7402 ]

Jurisdiction: District courts: Quiet title: Priority of liens.--A lender's suit for a determination that its mortgage secured by real property had priority over federal tax liens could be maintained under the quiet title provisions of 28 U.S.C. Sec. 2410(a)(1). The government's argument that sovereign immunity was not waived because the relief sought by the lender was not available in a quiet title action since no judicial sale had taken place was rejected. The lender sought only a determination of priority between competing liens; it did not initiate a foreclosure action and did not seek to extinguish the federal liens.

[Code Sec. 7402 ]

Jurisdiction: District courts: Declaratory judgment act: Priority of liens.--The Declaratory Judgment Act did not bar a lender's action for a determination of the priority of its mortgage secured by real property relative to federal tax liens because the claim did not contest the legitimacy of the government's tax assessment or the borrower's tax liability.

Stephen M. Sheehy, Kaye, Fialkow, Richmond & Rothstein, 100 Federal St. , Boston , Mass. 02110 , for plaintiff-appellant. Donald K. Stern, United States Attorney, Boston, Mass. 02109, Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, William S. Estabrook, Kevin M. Brown, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: BOUDIN, STAHL, Circuit Judges, and BOWNES, Senior Circuit Judge.

BOWNES, Senior Circuit Judge:

On October 8, 1993, Progressive Consumer Federal Credit Union ("Progressive"), plaintiff-appellant, filed a complaint against the Internal Revenue Service ("the government"), defendant-appellee, in the Land Court Department of the Trial Court of Plymouth County, Commonwealth of Massachusetts. Progressive sought a declaration that its mortgage had priority over properly recorded federal tax liens. The government filed a notice of removal pursuant to 28 U.S.C. §1444 , removing the action to the United States District Court for the District of Massachusetts. The district court entered a memorandum and order granting the cross-motion of the United States for summary judgment on May 26, 1995 , holding that Progressive's mortgage was not entitled to priority over the federal tax liens under the Massachusetts common law doctrines of equitable subrogation or unjust enrichment.

The mortgage at issue is secured by real property located in Marshfield , Massachusetts . In 1987, as owners of the property, Jeremiah and Deborah Folkard ("the Folkards") executed a $150,000.00 mortgage note which was properly recorded in favor of the Miles Standish Federal Credit Union ("MSFCU"). Between 1988 and 1990, the government recorded six notices of tax liens on the Folkards' property for unpaid federal taxes. The total amount of the liens, exclusive of interest accrued since recording, was $94,560.93. In 1990, the Folkards refinanced their mortgage debt, then $130,905.55, with MSFCU, executing a new note and mortgage to secure a debt of $142,000.00. At the time of this transaction, MSFCU was presumably unaware of the existing tax liens. The 1987 mortgage was discharged at the moment the new mortgage was recorded on November 26, 1990 . This resulted in priority of the federal tax liens, because of their recording dates, over the new mortgage. On October 19, 1992 , MSFCU assigned its interest in the 1990 note and mortgage to Progressive. The record does not reflect when Progressive became aware of the record priority of the federal tax liens over its mortgage.

I. JURISDICTION

The threshold issue to be decided in this case, whether the district court properly exercised subject-matter jurisdiction over Progressive's claim, was raised for the first time on appeal. The government argues that the district court lacked jurisdiction on two grounds: (1) the government has not waived its sovereign immunity and therefore cannot be sued; and (2) the Declaratory Judgment Act, 28 U.S.C. §2201(a), specifically bars the relief requested. ¹ Lack of subject-matter jurisdiction can be raised at any point during litigation. There can be no doubt of our power and duty to decide the issue. See Bender v. Williamsport Area School Dist., 475 U.S. 534, 541 (1986); Wells Real Estate v. Greater Lowell Bd. of Realtors, 850 F.2d 803, 813 (1st Cir. 1988).

A. Waiver of Sovereign Immunity

It has long been established that the United States is not subject to suit without a waiver of sovereign immunity, and that any such waiver is to be strictly construed. Nickerson v. United States [75-1 USTC ¶9336 ], 513 F.2d 31, 32-33 (1st Cir. 1975). The government correctly argues that Progressive wrongly relies on the Declaratory Judgment Act ("the Act"), 28 U.S.C. §2201(a), to constitute a waiver of sovereign immunity because the Act "neither provides nor denies a jurisdictional basis for actions under federal law, but merely defines the scope of available declaratory relief." McCarthy v. Marshall [84-1 USTC ¶9141 ], 723 F.2d 1034, 1037 (1st Cir. 1983). Title 28 U.S.C. §2410(a)(1) provides the only basis for finding a waiver of sovereign immunity in this case. ²

Under section 2410, the government waives its sovereign immunity in both quiet title and foreclosure actions. See 28 U.S.C. §§2410(a)(1), (2). A party bringing a foreclosure under this section, however, must seek a judicial sale of the underlying property. 28 U.S.C. §2410(c). We begin by discussing whether Progressive's claim of priority constitutes a quiet title action within the meaning of 28 U.S.C. §2410(a)(1).

The Scope of Quiet Title Actions Under 28 U.S.C. §2410(a)(1)

The government contends that Progressive's claim does not fall within the coverage of section 2410(a)(1) because its claim of priority is not a quiet title action within the meaning of the statute. It follows, argues the government, that because no judicial sale has taken place, there can be no waiver of sovereign immunity and hence Progressive cannot maintain its cause of action. We disagree for the reasons that follow.

Section 2410(a)(1) has never been read to incorporate the formalistic distinctions state law pleading rules. United States v. Coson [61-1 USTC ¶9219 ], 286 F.2d 453, 457 (9th Cir. 1961). In Coson, the Ninth Circuit held that "[i]t is plain that the words 'quiet title' ... are not intended to refer to a suit to quiet title in the limited sense in which that term is sometimes used ... but that as used in the section here referred to it comprehends a suit to remove a cloud upon the title of a plaintiff." Id. Both the text and the history of section 2410 support this view. The quiet title provision was inserted by amendment to the predecessor statute, following a recommendation by the Attorney General of the United States (future Justice Jackson). The heart of the recommendation stated:

[U]nder existing law there is no provision whereby the owner of real estate may clear his title to such real estate of the cloud of a Government mortgage or lien. ... In many instances persons acting in good faith have purchased real estate without knowledge of the Government lien or in the belief that the lien had been extinguished. ... It appears that justice and fair dealing would require that a method be provided to clear real estate titles of questionable or valueless Government liens.

H.R. Rep. No. 1191, 77th Cong., 1st Sess. 2 (1941); S. Rep. No. 1646, 77th Cong., 2d Sess. 2 (1942).

The government points out that, under Massachusetts law, a plaintiff must have both actual possession and legal title to maintain a quiet title action, see MacNeil Bros. Co. v. Realty Co. of Boston, Inc., 131 N.E.2d 178 (Mass. 1956 (citing cases)), and suggests that the contours of the state law cause of action should guide our interpretation of section 2410(a)(1), particularly where the state law is consistent with federal common law (as the government argues it is here). That is, the government argues that Congress intended to waive sovereign immunity only in those cases that would traditionally have been termed "quiet title" actions; because Progressive did not bring and could not have brought such an action, ³ we should deem this case to be outside the scope of section 2410(a)(1).

If, in substance, the relief the plaintiff sought here--a declaration of the priority of Progressive's mortgage over the government's tax lien--is congruent with the relief available in a quiet title suit, it would frustrate congressional intent to block plaintiff's access to relief. Congress, after all, was concerned not with the niceties of common law pleading, but with practical problems facing owners whose property was encumbered by government liens. What label the state has attached to the cause of action is a helpful but not determinative guide to the proper interpretation of the federal statute. See Harrell v. United States [94-1 USTC ¶50,137 ], 13 F.3d 232, 235 (7th Cir. 1993).

The government, however, contends that the relief that Progressive seeks would not have been available in a quiet title action. Progressive does not seek to remove the government's lien as invalid, but rather to establish the priority of its own mortgage over the concededly valid federal tax lien. Such relief would not have been available in a traditional quiet title action, only in a foreclosure action, where valid but junior liens are extinguished in favor of a senior lien. It follows, argues the government, that because no judicial sale has taken place, see §2410(c), there can be no waiver of sovereign immunity.

A careful reading of the authorities, however, does not support the government's narrow portrayal of the relief available to quiet title plaintiffs. The government principally relies on Kadson v. G.W. Zierden Landscaping, Inc., 541 F. Supp. 991 (D. Md. 1982), aff'd sub nom. Kadson v. United States , 707 F.2d 820 (4th Cir. 1983). In Kadson, suits were brought by tax sale purchasers to foreclose all equities of redemption in properties on which the United States held tax liens. The district court held that the suits were more properly characterized as foreclosure actions than quiet title actions and that judicial sale was required in order for sovereign immunity to be waived. Id. at 995-96.

Unlike the plaintiffs in Kadson, Progressive seeks only a determination of priority between competing liens; it never initiated a foreclosure action and did not seek to extinguish the federal lien. The Kadson court cited United States v. Morrison [57-2 USTC ¶9801 ], 247 F.2d 285, 289 (5th Cir. 1957), for the proposition that "priorities among valid interests are the subject of foreclosure suits," whereas "the alleged invalidity of adverse interests are the subjects of quiet title actions." Kadson, 541 F. Supp. at 995. This, however, does not tell the whole story of the Morrison opinion, in which the Fifth Circuit explained that the "relief sought [in section 2410(a)(1) claims], as traditional to equity as the woolsack, is the judicial determination of the validity and rank of the competing liens." Id. (emphasis added). The court pointed out that it was an "unsound premise" to hold that a quiet title action "is one to extinguish the lien of the United States, rather than what it really is--a determination that a tax lien does not exist, has been extinguished, or is inferior in rank." Id. (emphasis added). Similarly, in Estate of Johnson [88-1 USTC ¶9165 ], 836 F.2d 940 (5th Cir. 1988), the court rejected the government's contention that foreclosure is the only relief available where lien priorities are in dispute. It explained:

[W]e think that section 2410, an integral part of the Judicial Code rather than an admin istrative mechanism of the tax structure, establishes a specific jurisdiction for these suits as bills to quiet title or for foreclosure of the private lien. The jurisdiction does not depend on the specific relief sought, [e.g.] foreclosure. Rather it rests on the existence of the traditional controversy in which a private party asserts an ownership [interest] which is superior to the claimed lien of the United States government. (Quoting United States v. Morrison [57-2 USTC ¶9801 ], 247 F.2d 285 (5th Cir. 1957).

[88-1 USTC ¶9165 ], 836 F.2d at 945.

Other courts have adopted this logic. In Brightwell v. United States [93-1 USTC ¶50,223 ], 805 F. Supp. 1464 (S.D. Ind. 1992), the court reasoned:

[While] [t]raditionally, actions to quiet title have sought determinations of who owns particular property, ... [u]nder federal law, the definition is somewhat broader; a party may maintain a quiet title action against the United States when the government asserts that a federal tax lien exists against the property, 28 U.S.C. §2410(a), and thus lien priority disputes have been considered "quiet title" actions [for the purposes of section 2410].

[93-1 USTC ¶50,223 ], 805 F. Supp. at 1469 (citing McEndree v. Wilson, 774 F. Supp. 1292, 1295-96 (D. Colo. 1991)). Moreover, while a priority claim of the sort raised by Progressive has not yet been decided by this Circuit, we have held and reaffirm today that section 2410(a)(1) controversies encompass disputes concerning both the "validity and priority of liens," as distinguished from actions seeking "their extinguishment in a manner not permitted by the statutes." Remis v. United States [60-1 USTC ¶9183 ], 273 F.2d 293, 294 (1st Cir. 1960).

These cases undercut the government's contention that a quiet title action is appropriate under section 2410(a)(1) only where the plaintiff seeks a decree that the government's lien is defective or invalid and seeks to have the cloud removed from his title. In support of its position, the government primarily relies on Raulerson v. United States [86-1 USTC ¶9458 ], 786 F.2d 1090 (11th Cir. 1986), where the court held that "section 2410 waives sovereign immunity only in actual quiet title actions, not suits analogous to quiet title actions." [86-1 USTC ¶9458 ], 786 F.2d at 1091. The court concluded that plaintiff Raulerson's complaint was not an action to quiet title because he had already forfeited title to his property and had waived his property interest by the terms of a plea agreement. Id. The instant case is not like Raulerson because Progressive has title to the Folkards' property and has not waived its ownership interest. Furthermore, Progressive merely seeks a determination regarding the priority of its ownership interest. The Raulerson plaintiff, in contrast, sought a declaration that the IRS's claim had priority over the valid claims of other branches of government to ensure that the IRS's jeopardy assessment would not be satisfied from his other assets. Id. at 1091-92. Consistent with the broad construction accorded section 2410's quiet title provision by a number of other jurisdictions, we hold that Progressive's claim falls within the meaning and scope of the statute.

The Declaratory Judgment Act and Section 2410

In the alternative, the government argues that even if we were to hold that the district court has jurisdiction to hear Progressive's claim, the Declaratory Judgment Act ("the Act"), 28 U.S.C. §2201(a), nonetheless bars the court from granting the relief requested. The Act provides, inter alia, that a federal district court has the authority to grant declaratory relief "[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes ...." 28 U.S.C. §2201(a). A claim challenging the power of the IRS to assess and collect taxes is barred by the Act. McCarthy v. Marshall [84-1 USTC ¶9141 ], 723 F.2d 1034, 1037 (1st Cir. 1983).

Similarly, "[w]hen a federal tax lien is involved, ... an action pursuant to section 2410(a) will not lie if its sole purpose is to challenge the validity of the underlying assessment." Johnson v. United States [93-1 USTC ¶50,201 ], 990 F.2d 41, 42 (2d Cir. 1993). This is because the purpose of section 2410 is "to waive the government's immunity from suit so as to permit a court of proper jurisdiction to determine the relative position of government liens on property as against other lienors--not to permit a collateral attack on the tax assessment." Broadwell v. United States [64-2 USTC ¶9768 ], 234 F. Supp. 17, 18 (E.D.N.C. 1964), aff'd [65-1 USTC ¶9310 ], 343 F.2d 470 (4th Cir.), cert. denied, 382 U.S. 825 (1965); accord, McMillen v. United States Dep't of Treasury, 960 F.2d 187, 189 (1st Cir. 1991); Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d. 38, 41 (2d Cir. 1965); Remis v. United States [59-1 USTC ¶9458 ], 172 F. Supp. 732, 733 (D. Mass. 1959), aff'd [60-1 USTC ¶9183 ], 273 F.2d 293 (1st Cir. 1960). Congress thus did not intend section 2410(a)(1) to extend a new remedy by which a plaintiff, whether taxpayer or third party, could contest the government's assessment of taxes. ⁴ Where a plaintiff does not challenge the underlying tax assessment, however, section 2410(a) has been recognized as a vehicle for determining lien priority. See Estate of Johnson [88-1 USTC ¶9165 ], 836 F.2d at 945 (executor's claim of priority of estate interest in estate over federal tax lien constitutes quiet title action where it does not contest merits of assessment); Morrison [57-2 USTC ¶9801 ], 247 F.2d at 290-91 (property seller's claim of priority of vendor's lien over federal lien constitutes quiet title action where no hazard posed to revenues); First of America Bank--West Michigan v. United States [94-1 USTC ¶50,169 ], 848 F. Supp. 1343, 1349 (W.D. Mich. 1993) (nontaxpayer third party has standing under section 2410 to "merely ... assert the priority of its lien over the federal tax lien"); McEndree, 774 F. Supp. at 1296 (vendor of property eligible to maintain quiet title action alleging priority of equitable mortgage over federal tax liens where no challenge to tax assessment itself).

Progressive's claim in no way contests the legitimacy of the government's tax assessment or the taxpayers' liability. It follows that "[s]ince the quiet title action specifically mandated by section 2410 is in substance a suit for a declaratory judgment," the Declaratory Judgment Act will not operate as a wrench to deprive the district court of its jurisdiction in this case. Aqua Bar & Lounge Inc. [76-2 USTC ¶9554 ], 539 F.2d at 940; see also McEndree, 774 F. Supp. at 1297 (Section 2410(a) provides an exception to the Declaratory Judgment Act, as plaintiff's remedies are limited to declaratory relief).

In summary, because we conclude that the government waives its sovereign immunity under 28 U.S.C. §2410(a)(1), and that the Declaratory Judgment Act poses no bar to the relief sought, we accordingly hold that the district court properly exercised subject-matter jurisdiction over Progressive's claim.

II. THE MERITS

We now turn to the substantive issue on appeal: whether Massachusetts law entitles Progressive's mortgage priority over the federal tax liens.

Because the decision to grant summary judgment calls a legal standard into play we review the district court's order granting summary judgment for the United States de novo. In re Varrasso, 37 F.3d 760, 763 (1st Cir. 1994); Maldonado-Denis v. Castillo-Rodriguez, 23 F.3d 576, 581 (1st Cir. 1994); Quaker State Oil Refining Corp. v. Garrity Oil Co., 884 F.2d 1510, 1513 (1st Cir. 1989). Summary judgment is appropriate only when "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The district court held and we agree that because there are no disputed material issues of fact summary judgment is appropriate.

As our discussion of jurisdiction relates, it is well-settled that federal law determines the priority of competing federal and state created liens. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983); Brosnan [60-2 USTC ¶9516 ], 363 U.S. at 240-41. Section 6321 of the Internal Revenue Code ("the Code") authorizes the government to assert liens upon "all property and rights to property" belonging to the taxpayer for delinquent taxes. 26 U.S.C. §6321 . Section 6322 of the Code further provides that "the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322 .

These provisions do not, however, grant federal tax liens automatic priority over all other liens. I.R.S. v. McDermott [93-1 USTC ¶50,164 ], -- U.S. --, 113 S. Ct. 1526, 1528 (1993). The determination of priority is governed by the rule of "first in time, first in right." Id. at 1527. A federal lien which attaches first is thus senior, so long as notice is properly filed. ⁵ In order for a state created lien to take priority over a later assessed federal lien it must be "choate" or "perfected" so that "the identity of the lienor, the property subject to the lien, and the amount of the lien are established" prior to the filing of the subsequent federal lien. United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84 (1954); United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963); see also Baybank Middlesex v. Elec. Fabricators Inc., 751 F. Supp. 304, 310 (D. Mass. 1990); United States v. Rahar's Inn, Inc. [65-1 USTC ¶9411 ], 243 F. Supp. 459, 460 (D. Mass. 1965). Choateness of a state created lien is a matter of federal law and mirrors the standard applicable to liens asserted by the government under sections 6321 and 6322 of the Code. United States v. First Nat'l Bank and Trust Co. [68-1 USTC ¶9102 ], 386 F.2d 646, 647-48 (8th Cir. 1967)(citing United States v. Vermont [64-2 USTC ¶9520 ], 377 U.S. 351, 354 (1964)). State recording statutes are relevant "only insofar as controlling federal authority dictates or sound federal policy counsels" their application. United States v. Lebanon Woolen Mills Corp. [65-2 USTC ¶9571 ], 241 F. Supp. 393, 398 (D.N.H. 1964). Section 6323(i)(2) of the Code authorizes application of the common law doctrine of equitable subrogation where provided by state law. ⁶

Just as federal law governs the issue of priority, it is equally well-settled that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest ... in the property ... to be reached by the statute." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960)(quoting Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 U.S. 78, 82 (1940)); see also Maryland v. Louis, 451 U.S. 725, 746 (1981)(courts must proceed from "the basic assumption that Congress did not intend to displace state law"). "The point at which a state created security interest attaches is a matter of state law." ICM Mortg. Corp. v. Herring, 758 F. Supp. 1425, 1426 (D. Colo 1991)(citing Sec. Pac. Mortg. Corp. v. Choate [90-1 USTC ¶50,143 ], 897 F.2d 1057, 1058-59 (10th Cir. 1990)). Federal revenue statutes "creat[e] no property rights but merely atta[ch] consequences, federally defined, to rights created under state law." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958). For this reason, "it is critical to determine when competing state created liens come into existence or become valid." Matter of Fisher [80-2 USTC ¶9583 ], 7 B.R. 490, 494 (W.D. Pa. 1980) (citing Pioneer Am. Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 87 (1963)); see also; Aquilino [60-2 USTC ¶9538 ], 363 U.S. at 514 (Reconciliation of state law defining when a state created lien becomes effective and federal law governing priority between competing liens "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").

The government argues that because section 6323(i)(2) explicitly authorizes the application of local laws of subrogation and is silent as to the application of the doctrine of unjust enrichment, the district court was correct in deeming the latter doctrine inapplicable to Progressive's claim. We disagree. While the court was correct in stating that Congress gave an "explicit directive with respect to determining the priority of federal tax liens," it was incorrect in holding that "there is no basis upon which to presume the applicability of a common law doctrine" not expressly provided for by the statute. To essentially translate a directive for a federal scheme of priority into a preemption of state law governing the nature and extent of state created liens was unwarranted. To the contrary, federal courts should presume applicability of state common law doctrines in determining the status of state created liens. Such determinations do not contravene federal law simply because they ultimately bear on the federal issue of who was first in time in determining priority.

Before addressing the status of Progressive's current mortgage, we briefly review its history. In 1987, MSFCU financed the Folkards' first mortgage in the amount of $150,000.00. Between 1988 and 1990, the IRS filed six tax liens on the property, totalling $94,560.93. In 1990, MSFCU refinanced the Folkards' first mortgage debt, then $130,905.55, by executing a new note to secure a debt of $142,000.00. The recording of the 1990 mortgage discharged the 1987 mortgage, rendering the tax liens senior to MSFCU's second mortgage on the record title to the property. In 1992, MSFCU assigned its mortgage to Progressive. Progressive argues that under the doctrine of unjust enrichment, MSFCU should be reinstated to its initial 1987 mortgage position and that Progressive is entitled to effectively occupy MSFCU's reinstated position. We agree.

A. Massachusetts Common Law Doctrine of Unjust Enrichment

Under Massachusetts law, the doctrine of unjust enrichment provides that "where a mortgage has been discharged by mistake, equity will set the discharge aside and reinstate the mortgage to the position which the parties intended it to occupy, if the rights of the intervening lienholders have not been affected." North Easton Co-op Bank v. MacLean, 15 N.E.2d 241, 245 (Mass. 1938)(second mortgagee not prejudiced by reinstatement of first mortgage where first mortgage had been discharged by mistake upon first mortgagee's acceptance of new note without knowledge of intervening lien) (citations omitted); see also Provident Co-Operative Bank v. Talcott, Inc., 260 N.E.2d 903, 909 (Mass. 1970)(assignee of first mortgagee declared holder of first mortgage to prevent unjust enrichment of second mortgagee where first mortgagee discharged mortgage through inadvertence and second mortgagee's position not adversely affected by acts of first mortgagee); Piea Realty v. Papuzynski, 172 N.E.2d 841, 846 (Mass. 1961)(exchange of new mortgage notes for old ones did not constitute discharge of old mortgage where parties had no intent to alter substance or priority of old notes and mortgagor's grantees did not show adverse change of position in reliance upon transaction).

The government maintains that no "mistake" was made because MSFCU intended to refinance the Folkards' first mortgage, and so by law must have intended the consequences of its actions--i.e. the extinguishment of its original security interests. Massachusetts law, however, clearly contemplates situations where the intention to renew is not tantamount to the intention to extinguish existing security interests upon refinancing a mortgage. See North Easton Co-op Bank, 15 N.E.2d at 245; Provident, 260 N.E.2d at 909; Piea Realty, 172 N.E.2d. at 846; see also Financial Acceptance Corp. v. Garvey, 380 N.E.2d 1332, 1335 ( Mass. 1978) ("Under Massachusetts law the renewal of a note in a different form does not operate to discharge a mortgage where the debt itself has not been paid . ... even where the new note includes a new debt"); Worcester N. Sav . Inst. v. Farwell, 198 N.E. 897, 899 (Mass. 1935)(where bank, due to negligence of its counsel, failed to discover later mortgage on property and discharged first mortgage upon refinancing, first priority restored to bank because bank did not intend for discharge of interest); compare ICM Mortg. Corp., 758 F. Supp. at 1427 (where refinancing of deed of trust not intended to extinguish security interest, second deed of trust renewed prior obligation, resulting in priority of state created lien over federal tax lien); see generally 33 A.L.R. 149 ("It is a general rule that the cancellation of a mortgage on the record is not conclusive as to its discharge .... [a]nd where the holder of a senior mortgage discharges it of record, and contemporaneously therewith takes a new mortgage, he will not, in the absence of paramount equities, be held to have subordinated his security to intervening lien unless the circumstances of the transaction indicate this to have been his intention .... "). We are thus convinced that an action based on the failure to discover a properly recorded lien is precisely the type of inadvertence the Massachusetts doctrine of unjust enrichment aims to rectify. Furthermore, we are persuaded, in accord with Progressive's view, that no reasonable lender in MSFCU's position would have intended, upon refinancing, to replace a first mortgage bearing the attachment of junior tax liens with a second mortgage bearing the attachment of senior tax liens, thereby relinquishing its senior interest on the property.

The district court held that reliance on the Massachusetts line of unjust enrichment cases was misplaced because such cases do not concern federal tax liens. Although it is true that Massachusetts case law does not address reinstatement of a state created lien to a position of priority over a federal government lien, we are not persuaded by the district court's reasoning. We think that cases involving the reinstatement of mortgages which have been inadvertently discharged to the advantage of unintended and unexpected beneficiaries are sufficiently analogous to Progressive's claim to warrant applicability. Whether or not federal tax liens are involved in such cases, to us, seems immaterial. This is mainly because the unjust enrichment doctrine operates only to restore a state created lien to the position it occupied prior to the inadvertent discharge. Reestablishing the party's position, of itself, does not disturb the status of competing liens--whether those of a private lienor or the federal government--in terms of their effective dates of attachment for the determination of priority. It equitably determines the effective date of the state created lien independent of other existing liens. Federal law remains intact to determine both the choateness of the state created lien and its order of priority in relation to any competing federal liens.

Moreover, while Massachusetts courts have not had occasion to apply the doctrine of unjust enrichment to the federal government under this set of circumstances, federal courts have held that the doctrine is applicable where the federal government is concerned; and in several instances, have restored state created liens to their intended positions without regard for the United States' potential loss of priority under federal law. See United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d 310, 333 (2d Cir. 1994)(holding that where government ran afoul of notice requirements of federal statute governing priority between federal tax liens and interests of subsequent purchasers, to deny subsequent holder of security interest priority over tax lien would allow government to "leap frog" the interests vested in two prior mortgage liens and would represent "a classic example of unjust enrichment"); Dietrich Indus., Inc. v. United States, 988 F.2d 568, 573 (5th Cir. 1993)(holding that where purchaser who paid vendor's senior mortgage debt as part of purchase transaction with expectation that property was free of additional encumbrances, to deny equitable subrogation remedy "would give the government an unearned windfall in that it would elevate the government's liens for no good reason"); Han v. United States [91-2 USTC ¶50,486 ], 944 F.2d 526, 530 n.3 (9th Cir. 1991)(holding that where purchasers of residential property paid off and discharged priority position lender unaware that additional federal tax lien attached to property, to require the purchasers to pay a portion of the taxpayer's delinquent taxes would "unjustly enrich" and "produce a windfall" in favor of the United States).

Finally, we note that no rights of the government are impaired by MSFCU's mortgage reinstatement. The government argues that the IRS is unlike a private creditor in that it does not bargain for interest rates and thus can never be unjustly enriched where valid liens have attached for unpaid taxes. But Progressive does not argue, nor do we suggest, that the government would be unjustly enriched by the ultimate satisfaction of its legitimate tax liens. The point is that the government could not have anticipated its current priority status because from the outset its 1988-1990 liens were clearly junior to MSFCU's 1987 mortgage lien. Absent the inadvertent discharge of MSFCU's mortgage in 1990, the government would not have gained serendipitous priority over MSFCU's second mortgage lien in 1990. This resulted in the government's unjust enrichment at the expense of MSFCU in 1990, and ultimately of Progressive in 1992. We hold that because MSFCU extinguished its initial 1987 mortgage interest by mistake upon refinancing the Folkards' second mortgage in 1990, it should be equitably restored to its original 1987 lien position.

The government argues that the equities in favor of MSFCU may not apply to Progressive because there is no evidence that Progressive was unaware of the earlier government lien when it took the assignment of the mortgage from MSFCU. But it is hornbook law that the assignee of a mortgage succeeds to all of the assignor's rights power and equities; and Massachusetts has applied this rule in a situation very like this case. Provident Co-operative Bank, 260 N.E.2d at 908 ("By virtue of her purchase from Provident, Mrs. Hutchinson succeeded to all of Provident's rights in relation to the mortgage assigned, including the right to a judicial determination whether it was a first mortgage or a second mortgage."). Thus Progressive may assert any equitable rights and defenses that MSFCU could have asserted before it assigned the mortgage.

C. Conclusion

The parties do not dispute that MSFCU's mortgage lien was choate as of its original recording in 1987. It identified the lienor as MSFCU, described the Folkards' property, and established the amount of the lien so that nothing more needed to be done for the lien to be "perfected." New Britain [54-1 USTC ¶9191 ], 347 U.S. at 89. MSFCU was thus a holder of a security interest in the Folkards' property that attached before the filing of the federal tax liens between 1988-1990. See 26 U.S.C. §6323(h)(1) . Because we hold that MSFCU should be restored to its original mortgage lien position and that Progressive should be subrogated to that same position, it follows that under the federal rule of priority, Progressive's mortgage is first in time and hence first in right over the tax liens asserted by the government.

We reverse the district court's decision and vacate its entry of summary judgment in favor of the United States . Summary judgment shall be entered in favor of Progressive and an appropriate declaratory judgment order shall be entered. Costs awarded to Progressive.

¹ The district court had prima facie jurisdiction to hear Progressive's claim because it involves issues of federal tax liens and taxation. See 28 U.S.C. §§1331, 1340; see also United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240 (1960); United States v. Coson [61-1 USTC ¶9219 ], 286 F.2d 453, 455-56 (9th Cir. 1961).

² In relevant part, 28 U.S.C. §2410 provides:

§2410. Actions affecting property on which United States has lien

(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,

...

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

³ As mortgagee, Progressive holds legal title to the property, see J&W Wall Sys., Inc. v. Shawmut First Bank & Trust Co., 594 N.E.2d 859, 860 (Mass. 1992), but it is not in possession.

⁴ Congress did intend section 2410(a)(1) to be a basis for taxpayer challenges to the procedural validity of tax liens. See Rob inson v. United States [91-1 USTC ¶50,001 ], 920 F.2d 1157, 1161 (3d Cir. 1990) (where IRS failed to send notice of deficiency to taxpayer when lien filed); Rodriguez v. United States [86-1 USTC ¶9289 ], 629 F. Supp. 333, 336 (N.D. Ill. 1986) (where IRS failed to send notice of deficiency when levied on property); Ringer v. Basile [87-1 USTC ¶9229 ], 645 F. Supp. 1517, 1525-26 (D. Colo. 1986) (where IRS violated own procedures when seized property). Likewise, with regard to third party nontaxpayer plaintiffs, courts have adopted the view that "[t]he validity of a lien, depending upon compliance or noncompliance with statutory requirements, or the priority of a lien validly filed is quite a far cry from permitting a third party to attack the tax assessment upon which a properly filed lien is based." Pipola v. Chicco [59-1 USTC ¶15,207 ], 169 F. Supp 229, 232 (S.D.N.Y. 1959), modified [60-1 USTC ¶15,276 ], 274 F.2d 909 (2d Cir. 1960). Progressive does not challenge the procedural validity of the tax liens. It is a matter of record that the liens were properly filed with the Plymouth County ( Massachusetts ) Registry of Deeds.

⁵ The Code provides that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof ...." 26 U.S.C. §6323(a) .

⁶ "Where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by section 6321 or 6324 ." 26 U.S.C. §6323(i)(2) .

 

 

[97-2 USTC ¶50,976] In re Albert Tourville, Debtor. Albert Tourville, Plaintiff v. Internal Revenue Service, Defendant

U.S. Bankruptcy Court, Dist. Mass., 96-41423-JFQ, 11/19/97

[Code Secs. 6321 and 6323 ]

Lien for taxes: Bankruptcy estate, exemption from: Pension benefits: Personal property: Recording of lien.--

A tax lien was valid against a bankrupt individual's pension benefits and personal property, even though they were not part of the bankruptcy estate. State ( Massachusetts ) law exempted the pension benefits from attachment, but state law could not exempt property from a federal tax lien. The debtor's exempt personal property was also subject to the tax lien because the lien was properly filed with the district court.
DECISION

QUEENAN, Jr., Bankruptcy Judge:

Albert Tourville (the "Debtor") has brought this complaint seeking a determination of his tax liability owed the Internal Revenue Service and requesting the avoidance of the Service's tax lien because of lack of perfection. Before the court are cross motions for summary judgment. At issue is whether the Internal Revenue Service has a lien for unpaid taxes on the personal property of the Debtor, and if so, to what extent.

The IRS initially filed a proof of claim asserting a secured claim in the sum of $151,789 and an unsecured priority claim in the sum of $8,302. The Debtor having thereafter filed returns, the IRS has amended its claim to reflect a $4,664.66 secured claim, a $2,495.58 unsecured priority claim and a $762.24 general unsecured claim.

The Debtor's bankruptcy schedules list personal property having a total value of $6,200 (cash at $1,000, household goods at $2,000, wearing apparel at $2,000 and a motor vehicle at $1,200). The schedules also list a "UTC pension plan" with an "unknown" value. This reflects the Debtor's interest in the ERISA-qualified pension plan maintained by United Technology Corp. The I.R.S. values this pension benefit at $30,836, which the Debtor does not contest.

On September 26, 1994 , the I.R.S. assessed the Debtor for his liability on the 1987 taxes. On June 13, 1995 , it filed with the Clerk of the United States District Court for the District of Massachusetts a notice of the lien which resulted from this assessment. The Debtor filed a chapter 13 petition with this court on April 4, 1996 . He claimed his personal property as exempt under section 522(d) of the Bankruptcy Code.

I. VALIDITY OF LIEN ON PENSION BENEFITS

Being subject to a restriction on transfer that is enforceable under applicable nonbankruptcy law, the Debtor's pension benefits are not part of the bankruptcy estate. 11 U.S.C. §541(c)(2) (1994). Patterson v. Shumate, 504 U.S. 753 (1992). The question nevertheless remains whether they are subject to the I.R.S. tax lien.

According to the Debtor, Mass. Gen. Laws chapter 235, section 34A invalidates the claimed lien. This statute states that pension plan benefits "shall not be attached or taken on execution or other process to satisfy any debt or liability," with certain exceptions that do not apply here. The I.R.S. contends that this statute does not apply to its tax lien because federal statutes demand that a tax lien shall attach to all property rights or property of the Debtor. Essentially, the United States argues that state law of creditor process is subordinate to the operation of the federal tax lien.

The general law concerning federal tax liens is not in dispute. If a taxpayer neglects to pay federal taxes after demand, a lien securing the tax is created in favor of the United States on "all property and rights to property, whether real or personal, belonging to such a person." 26 U.S.C. §6321 (1994). The Supreme Court has dispelled most doubts regarding the statutory language, stating "all 'property and rights to property' is broad and reveals Congress meant to reach every interest in property." U.S. v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985) (entire balance of debtor's joint bank account subject to lien). The tax lien will attach to the taxpayer's present and future property interests, and will remain until the amounts it secured are paid, or the statute of limitations on the collection of such liabilities expires. 26 U.S.C. §6322 (1994). See also Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268 (1945).

But are these pension benefits exempt from the lien by reason of the Massachusetts statute? They are not. State law is powerless to exempt property from the federal tax lien. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51 (1958) (that life insurance surrender value is not subject to creditor process under state law is deemed irrelevant on the fixing of federal tax lien on policy).

In United States v. Rye [77-1 USTC ¶9264], 550 F.2d 682 (1st Cir. 1977), the First Circuit held that the federal government's tax lien attaches to a taxpayer's right to receive support payments pursuant to a state court divorce decree, notwithstanding the general exemption from creditor process granted to such payments. The court stated:

In the area of spendthrift trusts, the courts have consistently held that a restraint on transferability, whether arising from the trust instrument or from state law, does not immunize the beneficiary's interest from a federal tax lien. United States v. Dallas National Bank [46-1 USTC ¶9117], 152 F.2d 582, 585 (5th Cir. 1946); Mercantile Trust v. Hofferbert [45-1 USTC ¶9124], 58 F. Supp. 701, 705 (D. Md. 1944). Since such a restraint is merely a state-created exemption from the reach of creditors, and not an aspect of the substantive right, it cannot serve to defeat the federal tax lien. Leuschner v. First Western Bank and Trust Co. [58-2 USTC ¶9723], 261 F.2d 705, 708 (9th Cir. 1958).

II. VALIDITY OF LIEN UPON EXEMPT PROPERTY

The lien also attaches to the items of personal property which the Debtor has exempted from the bankruptcy estate. Exempt property is subject to a tax lien, notice of which is properly filed. 11 U.S.C. §522(c)(2) (1994). The I.R.S. properly filed a notice of this lien with the Clerk of the District Court for the District of Massachusetts. The notice of a federal tax lien must be filed, as to personal property, in the "one office within the State . . . as designated by the laws of such State" or with the clerk of the local district court "whenever the State has not by law designated one office. . . ." 26 U.S.C. §6323(f) (1994). Massachusetts requires a filing as to personal property interests with both the Clerk of the Town in which the Debtor resides and with the Secretary of the Commonwealth. Mass. Gen. Laws ch. 106, §9-401(c) (Law Co-op 1984 & Supp). Because Massachusetts has designated no "one" office for this filing, the Service's filing with the District Court was proper. See SSG, Inc. v. Omni Medical Health & Welfare Trust, 93-1 USTC ¶50,353 (D. Mass. 1993); Rev. Rul. 85-89, 1985-2 C.B. 326.

III. CONCLUSION

As security for payment of $4,664.66 owed for 1987 taxes, the I.R.S. has a valid and perfected lien upon all the Debtor's personal property, including the pension benefits and property claimed as exempt in this bankruptcy proceeding.

 

 

[65-2 USTC ¶9517]In the Matter of Nap J. Hudon & Son, Inc., Bankrupt

U. S. District Court, Dist. Mass., in Bankruptcy, No. 1088-62, 12/14/64

[1954 Code Sec. 6323]

Tax liens: Priority: State-created liens.--

A lien created by operation of state law did not take priority over a federal tax lien where the property (accounts receivable) subject to the liens did not come into existence until after the federal taxes had been assessed and notice of such assessment had been filed. Under such circumstances, the state-created lien was inchoate and was not entitled to priority.

Murray H. Falk, Assistant United States Attorney, 1107 U. S. P. O. & Courthouse, Boston, Mass., for U. S. Samuel Rosen, Richmond, Rosen & Kagan, 100 State St., Boston, Mass., for trustee. George Michaels, Michaels & Adler, 99 State St., Boston, Mass., for Merchants Finance Corp.

Findings of Fact and Conclusions of Law

HANNON, Referee:

This cause having come on for a hearing on the 28th day of October, 1964, this Court, after having considered the documentary evidence introduced, the pleadings on file, and the oral argument of counsel, makes the following findings of fact and conclusions of law.

Findings of Fact

1. The debtor Nap J. Hudon & Son, Inc. has been adjudicated a bankrupt following the filing of an involuntary Petition in Bankruptcy against it on November 6, 1962 .

2. On May 1, 1964 , petitioner Merchants Finance Corporation filed a petition to establish a lien on a fund of money in the sum of $13,185.13 held by the Trustee in Bankruptcy of the debtor. On October 23, 1964 , the United States of America filed an objection to the petition on the ground that the lien of Merchants was not entitled to priority of payment to the fund as against the federal tax liens filed by the United States .

[Amount and Dates of Tax Liens]

3. Assessments for federal withholding and Social Security taxes were made against the bankrupt and notices of federal tax liens were filed with the City Clerk, City Hall, Quincy , Massachusetts , on the dates and in the amounts set forth in the following schedule:

                                                                  Date

Taxable                  Date of          Amount of          Notice of

Period                Assessment         Assessment         Lien Filed

4th Qtr. 61               
2-2-62
          $5,027.69            
4-27-62

1st Qtr. 62               
5-4-62
           7,165.88            
6-15-62

2nd Qtr. 62               
8-8-62
           4,771.31            
8-22-62

3rd Qtr. 62              
11-2-62
           3,897.92           
11-30-62

 

4. The District Director of Internal Revenue, Boston, Massachusetts, filed a proof of claim in the present bankruptcy proceeding dated January 14, 1963, in the amount of $21,683.74, representing unpaid taxes and accrued interest to November 6, 1962, including an estimated tax liability of $287.29 for the fourth quarter of 1962.

5. The sum of $13,185.13 held by the Trustee in Bankruptcy represents the proceeds of two contracts between the bankrupt and the Quincy Shipbuilding & Repair Corporation (hereinafter referred to as Quincy ). The Trustee obtained this sum upon the filing of a petition for leave to collect accounts receivable from Quincy on December 24, 1962 . The United States and the Trustee entered into a Stipulation filed on January 9, 1963, under which the Trustee agreed not to subject the accounts receivable to admin istrative expenses, wage claims or any other expenses prior to a final judicial determination on the issue of whether certain levies served by the Government on Quincy reduced the accounts receivable to "possession" within the meaning of Section 67(c) of the Bankruptcy Act. The parties agreed that the Trustee would be entitled to subject the accounts receivable to reasonable expenses of admin istration directly related to collecting the accounts and bringing them before the Bankruptcy Court. The Stipulation also reserved the Government's right to establish its claim to the accounts at a future date.

[Basis of Petitioner's Lien]

6. On January 10, 1961 , the bankrupt obtained a loan in the sum of $20,000 from the petitioner, payable in 36 successive monthly installments. The bankrupt and petitioner also entered into a security agreement of even date whereby the bankrupt pledged as collateral security all its machinery, equipment, stock in trade and accounts receivable, then owned or thereafter acquired. The bankrupt also pledged, assigned, and transferred to the petitioner as further security any deposits or other sums at any time due from the petitioner to the bankrupt, and all property, and all rights and interest of the bankrupt therein, at any time delivered to the petitioner, whether for safekeeping or otherwise. Pursuant to the provisions of the Massachusetts Uniform Commercial Code, Financing Statements were filed with the City Clerk, Boston , Massachusetts , and with the Secretary of the Commonwealth of Massachusetts , on January 10, 1961 . The Financing Statements covered a chattel mortgage on all personal property located on the premises of the bankrupt, together with "Accounts Receivable and inventory now owned or hereafter acquired", and the proceeds of such collateral.

7. On June 27, 1962 , the bankrupt received Purchase Order No. 3901 in the amount of $1,510 from Quincy to convert an Army tug numbered LT-1966 into a Navy tug numbered YTM-747. The bankrupt submitted the following invoices to Quincy for work performed: $535 on August 8, 1962 ; $43 on August 13, 1962 ; $1,510 on August 17, 1962 ; $1,485 on August 30, 1962 , for a total of $3,573. After certain adjustments, the bankrupt's account was credited in the sum of $3,491.97.

8. On July 9, 1962 , the bankrupt received Purchase Order No. 3908 in the amount of $4,020 from Quincy for work on a Navy oil barge numbered YO-177. The bankrupt submitted invoices to Quincy totaling $10,371.76 on various dates between August 6 and August 13, 1962 , for work performed to the date of each invoice. After certain adjustments, the bankrupt's account was credited in the sum of $9,693.16.

9. The bankrupt owed petitioner the sum of $17,308 on February 2, 1962 , the date of the first federal tax assessment, and $17,058.94 on May 4, 1962 , the date of the second federal tax assessment.

[Notice of Liens]

10. A duly authorized delegate of the District Director of Internal Revenue, Boston, Massachusetts, served Notices of Levy, Form 668-A, on Quincy pertaining to the tax liabilities of the bankrupt on August 20, 1962, in the sum of $4,855.06; August 30, 1962, in the sum of $12,730.99; November 2, 1962, in the sum of $17,793.71, and November 30, 1962, in the sum of $21,865.42. Final Demands were served upon Quincy on September 14 and November 30, 1962 .

Conclusions of Law

1. Section 6321 of the Internal Revenue Code of 1954 accords the United States of America a lien upon all property and rights to property, whether real or personal, belonging to a taxpayer who neglects or refuses to pay his tax liability after demand. Section 6322 provides that the lien imposed by Section 6321 shall arise at the time the assessment is made.

[Applicable Law]

2. The determination of the priority of a federal tax lien as against a competing lien created by operation of state law, is governed by federal law. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84. The priority of a state-created lien, such as petitioner's security interest, depends "on the time it attached to the property in question and became choate". United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 86. A choate state-created lien will take priority over a later arising federal tax lien. United States v. Pioneer American Ins. Co., supra. Under federal law, a state-created lien will be considered choate only if it is specific and definite in three essential respects: (1) the identity of the lienholder; (2) the amount of the lien; and (3) the property subject to the lien. United States v. Vermont, 377 U. S. 351; United States v. Pioneer American Ins. Co., supra; United States v. City of New Britain , supra.

[Petitioner's Lien Was Inchoate]

3. In the present proceeding, petitioner's lien met the first two requirements of choateness, to wit, the identity of the lienholder (petitioner), and the amount of the lien (the bankrupt owed petitioner $17,308 on February 2, 1962, and $17,058.94 on May 4, 1962), prior to the time the federal taxes were assessed and the tax liens arose. However, petitioner's lien did not meet the third requirement of choateness--that the property subject to the lien be specific and definite--until the respective dates on which the bankrupt submitted invoices to Quincy for work done under the contracts executed on June 27 and July 9, 1962 . For only on those dates did the "property subject to the lien" come into existence.

4. The earliest invoice submitted under the June 27, 1962 , contract was dated August 8, 1962 , while the earliest invoice submitted under the July 9, 1962 , contract was dated August 6, 1962 . However, two federal tax assessments in the combined amount of $12,646.98 (including interest to November 6, 1962 , the date of filing of the involuntary Petition in Bankruptcy) had been made on February 2, 1962 , and May 4, 1962 , and notices of federal tax liens pertaining to these assessments had been filed on April 27, 1962 and June 15, 1962 . All of these dates were prior to the time the contracts between the bankrupt and Quincy were executed and also prior to the time the accounts receivable came into existence. Therefore, petitioner's lien on the accounts receivable under the two contracts with Quincy is inchoate with respect to these two tax assessments. United States v. Vermont, supra; United States v. Pioneer American Ins. Co., supra; United States v. City of New Britain, supra.

[Crest Finance Case]

5. The case of Crest Finance Co. v. United States [62-1 USTC ¶9105], 368 U. S. 347, relied on by petitioner, is clearly distinguishable from the instant case. In the Crest case, a finance company had made current loans to the taxpayer and had taken as security therefor specific assignments of payments then due the taxpayer from a third party on account of work already performed by the taxpayer as a subcontractor on a construction job. The federal tax liens in question arose after the specific collateral assignments. However, at the time the tax liens arose the amount owing to the taxpayer by the third party for the work performed was still subject to final computation and revision. The Court of Appeals affirmed the decision of the District Court, holding that the finance company's security interest was not choate by federal standards. United States v. Crest Finance Co. [61-1 USTC ¶9460], 291 F. 2d 1 (C. A. 7th). The finance company petitioned the Supreme Court for a writ of certiorari on this issue, and the Solicitor General filed a memorandum with the Court in which the Government confessed error. The Solicitor General advised the Court that the property subject to the finance company's lien was the specific right to payment for work performed, and that the indefiniteness of the amount due for that work went, not to the definiteness of the lien (which was for the liquidated amount of the notes evidencing the loans from the finance company to the taxpayer), but to the value of the property subject to the lien. The Supreme Court accepted the Solicitor General's concession, and agreed that the finance company's lien was choate.

6. The critical difference between the present proceeding and Crest is that at the time the first two tax liens arose the property against which the competing lien attached was, in Crest, specific and definite (the accounts receivable for the work already performed under the contract) but, in this case, not yet in existence (the purchase orders had not been received). Therefore, petitioner's security interest in the accounts receivable was completely inchoate on February 2 and May 4, 1962 , and the federal tax liens arising on those dates were in fact prior in time and therefore prior in right to any after-perfected interest of petitioner in the accounts owed the bankrupt by Quincy .

[Priority of Federal Liens]

7. Based on the invoices submitted by the bankrupt, the adjusted sum of $9,693.16 for work performed under the July 9, 1962 contract was due on August 13, 1962 , with $1,914 due on August 17, 1962 , under the June 27, 1962 contract, making a total of $11,607.16. Since the first two tax liens in the combined amount of $12,646.98 are entitled to priority over petitioner's lien, the United States is entitled to the entire $11,607.16, leaving a balance due of $1,039.82 on these two liens.

8. The bankrupt submitted its final invoice for work performed under the June 27, 1962 contract on August 30, 1962 , in the amount of $1,485. Of this amount the United States is entitled to receive $1,039.82 in complete satisfaction of the balance due under the first two tax liens, leaving a remainder of $445.18. Petitioner's lien became choate as to this remainder on August 30, 1962 , the date the account receivable came into existence. However, prior to this date an assessment for withholding taxes for the second quarter of 1962 in the amount of $4,847.65 (including interest to November 6, 1962, the date of filing of the involuntary Petition in Bankruptcy) had been made on August 8, 1962, and a notice of federal tax lien had been filed on August 22, 1962. Therefore, the United States is entitled to apply the entire $445.18 to this assessment.

9. Moreover, since the District Director had served a Notice of Levy in the sum of $17,793.71 on Quincy prior to November 6, 1962, the date of filing of the involuntary Petition in Bankruptcy against the bankrupt, the United States had reduced the accounts receivable to possession within the meaning of Section 67(c) of the Bankruptcy Act, thereby entitling the United States to receive payment of the entire fund without diminution of admin istrative expenses and wage claims under Sections 64(a)(1) and 64(a)(2) of the Bankruptcy Act. Rosenblum v. United States [62-1 USTC ¶9384], 300 F. 2d 843 (C. A. 1st); United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (C. A. 4th); In re Benjamin Motor Express, Inc. (decided February 6, 1964 ), [64-1 USTC ¶9426], 13 A. F. T. R. 2d 1273 (Mass.). However, in accordance with the terms of the Stipulation signed by the Trustee and the United States , payment of the entire fund to the United States shall be subject to the Trustee's right to receive reasonable expenses of admin istration directly related to collecting the accounts and bringing them before the Bankruptcy Court.

 

 

[57-1 USTC ¶9260]Agricultural Insurance Company of Watertown, New York, et al. v. Manuel Andrade and Fall River Trust Company

U. S. District Court, Dist. Mass., Civil Action No. 55-783-A, 146 FSupp 893, 12/14/56

[1939 Code Secs. 3670, 3671 and 3672--similar to 1954 Code Secs. 6321, 6322 and 6323 respectively]

Tax lien: Bank which takes a negotiable instrument for collection not a holder in due course.--In an action of interpleader, an insurance company deposited a sum of $4,000 into court as the result of the conflicting demands of the U. S. Government and a taxpayer's bank. A negotiable note had been executed by the insurance company some time before in settlement of a claim that a taxpayer had against one of its insured. A year prior to the execution of the note, the government acquired and filed notice of a lien for unpaid taxes. Subsequent to its being deposited by the taxpayer, the note was dishonored after his bank forwarded the same for collection because of the government's lien. After determining that the note was in fact negotiable, the Court held that the taxpayer's bank could not be considered a holder in due course in that under the terms of an arrangement between it and its depositors, the bank did not purchase notes or drafts deposited by its customers, but simply acted as an agent of the payees for the purposes of collecting the same. The fact that well-known customers were permitted to draw against the notes or drafts pending their collection did not alter the relationship of the parties.

Charles W. O'Brien, Brickley Sears & Cole, Boston , Mass. , for plaintiff. Frank M. Silvia, Jr., 41 North Main Street, Fall River, Mass., for Fall River Trust Co. Anthony Julian, United States Attorney, Andrew A. Caffrey, Assistant United States Attorney, Boston, Mass., for United States of America, Intervenor.

Opinion

ALDRICH, District Judge:

This is an action of interpleader in which the fund ($4,000) has been paid into court. The complainant, Agricultural Insurance Company of Watertown , New York , hereinafter called Agricultural, is a New York corporation. The defendant Andrade is a citizen of Massachusetts . The defendant Fall River Trust Company, hereinafter called the Bank, is a Massachusetts corporation. The third named defendant was the United States . There was no jurisdictional basis to make the government a defendant, and it was dismissed. Subsequently, however, it intervened as a party plaintiff, and made claim to the fund.

In July, 1952 the government acquired a tax lien, in an amount in excess of $4,000, against Andrade pursuant to sections 3670, 3671 and 3672 of the Internal Revenue Code of 1939, identical in all material respects with 26 U. S. C. A. §§ 6321, 6322 and 6323, (I. R. C. 1954). In December, 1952, notices of this lien were filed with the Fall River City Clerk and Registry of Deeds. In December, 1953 Andrade and Agricultural agreed upon $4,000 as the amount due Andrade in settlement of a claim. On January 25, 1954 one Parker, Agricultural's Massachusetts representative duly authorized, prepared a draft to the order of Andrade in the amount of $4,000. The draft, in form, was essentially identical with that reproduced with the opinion in the case of Jerome v. Eastern Finance Corp., 317 Mass. 364, at 366. The only difference in form was that whereas the Jerome draft bore at its left-hand end the words,

"Accepted COLONIAL FIRE . . . INSURANCE COMPANY

.....

For Loss Department."

the present instrument read along its lefthand end,

"LOSS DRAFT

.....

For the Company"

It differed in substance, however, in that Parker signed the paper, filling the blank over the printed words "For the Company." Parker sent the draft to one Perron, Agricultural's claims representative or agent in Fall River , authorizing him to sign at the lower right-hand corner and deliver the draft to Andrade, which he did. On January 29, 1954, Andrade "deposited" the draft ¹ at the Bank. It was later dishonored.

Pausing here, I hold that the instrument was negotiable at the time it was delivered to the Bank. The government says it was not, because it was incomplete, or conditional, on its face--to wit, to be valid only "upon acceptance," citing Berenson v. London & Lancashire Fire Ins. Co., 201 Mass. 172, and Jerome v. Eastern Finance Corp., supra. I do not agree. I find that the signature of Parker appeared on its face to be, and was, the countersignature, or the "acceptance" called for by the printed language of the form. ²

The government also claims that the draft was not an unconditional promise to pay because it bore a "release" endorsement on its back. This contention, too, is unsound. Before Andrade delivered the draft to the Bank he executed the release endorsement, in the manner called for. This effectively removed and discharged the condition from the instrument.

The government's lien attaches to a liquidated indebtedness. Under §3672(b)(2), however, the Bank would have a right to recover on a negotiable instrument paramount to the government's lien if it was a holder in due course. This requires the Bank to show that it became a holder for value without notice. It had no actual notice. The statute expressly provides that recording of the lien is not such notice. For some reason the government does not argue that the Bank was not a holder in due course if the instrument was negotiable, but makes some contentions that holding in due course would make no difference, which I do not understand. However, the Bank has failed to satisfy me that it became a holder. If the draft was received for collection, only, the Bank would be regarded as an agent of the payee, and not a holder. This is so even though it permitted the payee, as a customer, to draw against the paper prior to collection. Boston-Continental National Bank v. Hub Fruit Co., 285 Mass. 187; Grower's Marketing Service, Inc. v. Webster & Atlas National Bank, 318 Mass. 496; Kirstein Leather Co. v. Deitrick, 1 Cir., 86 F. 2d 793. The general relation of Andrade and the Bank was a matter of contract, the material portion of which was as follows:

"Items received for deposit or collection are accepted on the following terms and conditions. This Bank acts only as depositor's collecting agent and assumes no responsibility beyond its exercise of due care. All items are credited subject to final payment and to receipt of proceeds of final payment in cash or solvent credits by this Bank at its own office."

The deposit slip in this particular instance bore the same legend. It was true that the Bank had a "practice to allow well known Fall River residents who were also customers to draw against an insurance draft deposited by said well known customer if an Assistant Treasurer approved the request to do so by said customer," and that such request was made in the instant case, and so approved, and that the Bank forthwith permitted withdrawals from Andrade's account against such a credit. This credit was predicated on the Bank's opinion of the payee "as a well known resident . . . [and] customer." It did not constitute a purchase of the instrument, or vary the written agreement that the credit was "subject to final payment" and that the Bank was a collecting agent only. I find that the Bank was not a holder. Accordingly, it cannot claim as against the government's lien.

Judgment for the United States . No costs to any party.

¹ Strictly, being drawn on the drawer, it was more in the nature of a note than a draft. Mass. G. L. (Ter. Ed.) Ch. 107, §153 (§130 of the N. I. L.). This was not changed by the fact that it was to be "paid through" a certain bank, since the called-for acceptance was to be by the drawer, not the bank.

² There was no other space for acceptance. The government confuses the perhaps more usual situation for which this form was prepared, viz., where a claim is tentatively "settled" with the insured by the claims representative (e.g., Perron), who alone signs the draft and delivers it to the insured, who "deposits" it. The Bank forwards the draft for collection, and if the insurance company approves the settlement it ratifies the claim agent's action by acceptance. Until then the instrument was conditional, or incomplete. But here the process was reversed--the company signed the acceptance before delivery. There was no necessary priority. Mass. G. L. Ch. 107, §161.

 

 

[63-1 USTC ¶9198]Milton Savings Bank and Others v. United States of America and Another

Massachusetts Supreme Judicial Court, No. 12,792, 187 NE2d 379, 1/7/63

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Prior mortgage liens: Preservation of junior Federal tax lien under Massachusetts law following foreclosure sale.--Under the laws of Massachusetts a mortgagee acquires title to the mortgaged premises, subject to defeasance upon the performance of the condition of payment of the mortgage indebtedness and the mortgagor has merely an equity of redemption accompanied by a right to possession. Therefore, in the event of the institution of foreclosure proceedings and a foreclosure sale, a junior Federal tax lien, notice of which was filed following the registration of the mortgages, is not preserved but is divested as the result of such foreclosure sale. The reference in the Massachusetts statutes to the preservation of liens for "other public taxes" has reference only to taxes based upon real property.

Lawrence A. Sullivan, Henry P. Monaghan, 10 Post Office Square, Boston 9, Mass., for Condon and Savings Banks Ass'n of Mass., amicus curiae; John P. Curran, 10 State St., Boston, Mass., for Milton Savings Bank, petitioners. Joseph Kovner, George F. Lynch, Department of Justice, Washington 25, D. C., Daniel B. Bickford, Assistant United States Attorney, for the United States; Edward J. McCormack, Jr., Attorney General, William C. Ellis, Assistant Attorney General, Joseph S. Ayoub, Assistant Attorney General, Boston, Mass., for the Director of the Division of Employment Security; James S. Ballantyne, 84 State St., Boston, Mass., for Massachusetts Conveyancers Ass'n, amicus curiae, respondents.

Before WILKINS, SPALDING, WHITTEMORE, CUTTER, KIRK, and SPIEGEL, Judges.

WALKINS, Judge:

A judge of the Land Court granted this petition to amend two certificates of title to registered parcels of land by striking out tax liens of the respondents, the United States of America ¹ and the Commonwealth. The petitioners are Milton Savings Bank, the holder of two prior recorded mortgages, and Francis D. Condon and Margaret I. Condon, purchasers at foreclosure sales under the mortgages. The case is here on report. G. L. (Ter. Ed.) c. 185, §15.

The parties agreed upon all the facts. The bank on November 25, 1955 , lent $10,000 to Edwin A. Dobson and Adelaide T. Dobson and took their note secured by a mortgage on lots 21 and 22 on First Avenue , Scituate . On March 15, 1957 , the bank lent the Dobsons $9,500 and took their note secured by a mortgage on lot 25. The mortgages were in the usual Massachusetts form, and conveyed the fee to the mortgagee subject to defeasance upon performance of a condition subsequent, namely, payment, and conferred the statutory power of sale in the event of default. The mortgages were registered in the Plymouth County Registry District of the Land Court and were noted on the respective certificates of title.

On June 24, 1958 , the United States filed in the Registry District a notice of tax lien for withholding taxes against Edwin A. Dobson, in connection with a restaurant operation. The lien was noted on the certificates for lots 22 and 25.

On May 27, 1958, and October 16, 1958, the Commonwealth filed in the Registry District notices of tax liens against Edwin A. Dobson for unemployment security taxes imposed under G. L. c. 151A, §16, inserted by St. 1941, c. 685, §1. The first lien was noted on the certificate for lot 21, and the second on the certificates for all three lots.

On May 13, 1959 , upon the bank's petition under St. 1943, c. 57 (as amended through St. 1959, c. 105), the Land Court gave leave to foreclose by taking possession and sale. The bank entered, took possession, and conducted the foreclosure sales at public auction on June 9, 1959, in conformity with G. L. (Ter. Ed.) c. 244, §14. The petitioners Condon were the highest bidders, and purchased for the aggregate sum of $21,900, an amount in each case less than the indebtedness of the mortgage note and other property charges. Decrees of the Land Court approving the various steps in the foreclosure proceedings were duly filed in the Registry District.

The judge in the Land Court outlined the Federal tax lien statutes and the Massachusetts substantive law as to mortgages. He reached the conclusion that foreclosure sales divested the Federal junior tax liens, and ruled that this result fell within United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237. ² He also ruled that the liens for State employment security taxes were divested.

The Federal Liens

The judge's conclusion was clearly correct. The Federal liens were asserted under 26 U. S. C. (1958) §6321, which provides, "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." To recognize the junior liens would deprive the mortgagee of property without due process of law in violation of the Fifth Amendment to the constitution of the United States .

The mortgaged real estate was not property belonging to the taxpayer. Under Massachusetts law, as it has been declared for well over 100 years, the mortgagor has merely an equity of redemption accompanied by a right to possession. The paramount title is in the mortgagee. As was said in 1842 by Chief Justice Shaw in Ewer v. Hobbs, 5 Met. 1, 3, this was to give the mortgagee "effectual security." Again, a mortgage was defined by Chief Justice Shaw in Bayley v. Bailey, 5 Gray, 505, 509, as "a conveyance of real estate, or of some interest therein, defeasible upon the payment of money, or the performance of some other condition." United States Trust Co. v. Commonwealth, 245 Mass. 75, 78; Perry v. Miller, 330 Mass. 261, 263. In the United States Trust Co. case, Chief Justice Rugg stated that "for many years our statutes have treated the interest of the mortgagee as real estate for property and inheritance taxation. In this aspect the mortgagee is regarded as holding the legal title to the land and not a mere lien for security. G. L. c. 59, §4, cl. 2; §§ 11 to 14" (page 78). Harlow Realty Co. v. Cotter, 284 Mass. 68, 69. It should be emphasized, however, that the property right of a mortgagee of real estate is based upon deed and contract and antedates any statute. See Hall v. Bliss, 118 Mass. 554, 559; Dane's Abridgement (1824 ed.) Vol. 4, c. 112, Mortgages, 164-165; Report of the Commissioners Appointed to Revise the General Statutes of the Commonwealth (1835) Part III, c. 107, §§ 7-8 (p. 187), and notes (p. 192).

In the answer of the United States there was a prayer for a determination that the Federal tax liens constituted "other public taxes" within §14. The judge rejected this interpretation and ruled, correctly as no one now doubts, that the phrase applied only to taxes based upon real property, such as local real estate taxes and betterments. The United States now concedes that the Federal tax liens were not preserved by G. L. (Ter. Ed.) c. 244, §14.

In its brief the United States argues two issues, neither of which was discussed in the careful and extended decision of the judge of the Land Court . It argues: (1) The Federal tax liens were expressly preserved by the terms of the notices of sale. (2) Property may not be divested of a junior Federal tax lien by a foreclosure of a senior mortgage under a power of sale pursuant to G. L. (Ter. Ed.) c. 244, §14, if the result is to preserve and afford priority to liens junior under Federal law to the Federal tax lien. The second issue is not presented on the record, and must be ignored as immaterial.

The first issue, which is very narrow and untenable, is based upon the phraseology of the actual notices of sale of these particular properties. In the notices were the words, "Said premises are to be sold subject to any and all tax liens, unpaid taxes, tax titles, and any or all municipal liens and assessments, if any there be" (italics supplied). The United States seizes upon the phrase "subject to any and all tax liens" as expressly including the junior Federal tax liens which are an occasion for this petition.

The notices were given by the mortgagee pursuant to G. L. (Ter. Ed.) c. 244, §14, which prescribes the procedure in the foreclosure of a mortgage of real estate under a power of sale, and sets forth the form of the notice and the requirements for its publication. The pertinent words are that a sale will be "subject to . . . all restrictions, easements, improvements, outstanding tax titles, municipal or other public taxes, assessments, liens or claims in the nature of liens . . .." (italics supplied).

In other words, a sale subject to liens and taxes "if any there be," as stated in the notice given by the mortgagee, is now contended to be broader than the requirement of §14, which refers to "all" liens.

We are of opinion that the argument based upon the form of the notices is even less persuasive than that based upon §14 which has been abandoned. It would have been unreasonable for anyone to construe the mortgagee's notices as intended to go beyond the requirements of §14, and gratuitously to reach out and protect junior encumbrances. See Holzman v. Bristol County Sav. Bank, 277 Mass. 383, 385-386.

A mortgagee in executing a power of sale contained in a mortgage is bound to exercise good faith and to use reasonable diligence to protect the rights and interests of the mortgagor under the contract. Clark v. Simmons, 150 Mass. 357, 359; Sandler v. Silk, 292 Mass. 493, 496; Union Mkt. Natl. Bank v. Derderian, 318 Mass. 578, 581-582; West Roxbury Co-op. Bank v. Bowser, 324 Mass. 489, 492. As Knowlton, J., said in Clark v. Simmons, at pages 359-360, "In determining whether, in a particular case, a mortgagee has acted in good faith and with a due regard for the interests of the mortgagor, the nature of his authority must be considered. He has a right, after giving the prescribed notices, to have the mortgage property sold by auction for the payment of his debt. It is his duty, for the benefit of the mortgagor whom he represents, so to act in the execution of the power as to obtain for the property as large a price as possible. . . . [S]o far as the mortgage leaves him a power of selection of methods of giving notice and of making the sale, he is to act reasonably and exercise a sound discretion." In the case at bar, the bank would not have been acting reasonably if it had made the sales subject to junior liens. Had it done this, it would not have been trying to obtain for the property as large a price as possible, but would have been taking a course which would have tended to reduce the returns on the foreclosure sales and thus to increase any deficiency.

The cases cited by the United States do not support the contention that the terms of the notices went beyond what the statute required. They relate to sales subject to specified claims and hold that a purchaser at foreclosure sale cannot sue a mortgagor for the amount of such claims. Spencer Sav. Bank v. Cooley, 177 Mass. , 49; Crane v. White, 215 Mass. 478; Natick Five Cents Sav. Bank v. Bailey, 307 Mass. 500. In the case at bar the question is to what claims the sales were made subject.

The Massachusetts Liens

The argument of the director of the division of employment security in support of the employment security tax liens is but a feeble echo of that of the United States as to the scope of the notice of the foreclosure sale. This we have rejected. Moreover, the argument is made in the teeth of the statute creating the lien. General Laws c. 151A, §16, inserted by St. 1941, c. 685, §1, provides that such a lien (1) shall be subordinate to prior recorded liens, such as the mortgages in the case at bar, and (2) shall not even be valid against a subsequent mortgagee unless and until a notice of the lien is recorded, or, in an appropriate case, registered.

Decision affirmed.

¹ The United States was made a party respondent pursuant to 28 U. S. C. (1958) §2410(a).

² In the Brosnan case Mr. Justice Harlan, speaking for the majority, said at pages 241-242: "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 believe that, so far as this Court is concerned, the need for uniformity in this instance is outweighed by the severe dislocation to local property relationships which would result from our disregarding state procedures. Long accepted nonjudicial means of enforcing private liens would be embarrassed, if not nullified where federal liens are involved, and many titles already secured by such means would be cast in doubt. 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."

 

 

 

[54-2 USTC ¶9484]W. A. Rob inson, Inc. v. Trawler Leretha, Inc.

In the Supreme Judicial Court of Massachusetts, June 9, 1954

Collection of taxes: Priority of state tax claims: Revised Statutes §3466.--A bill for a receivership was brought against taxpayer by a judgment debtor. A receiver was appointed, and the claim of the United States for taxes and the claim of Massachusetts for unemployment security contributions were allowed. A lower court gave the United States priority, and Massachusetts contested. The Supreme Court of Massachusetts decided that the Revised Statutes §3466, which grants the United States priority where the debtor is insolvent, was applicable because the appointment of a receiver was an act of bankruptcy. Thus, the United States tax claims were held to be prior.

George Fingold, Attorney General, Stephen F. LoPiano, Jr., Assistant Attorney General, for the director of the division of employment security. Francis J. DiMento, Assistant United States Attorney (John M. Doukas, Special Assistant to Regional Counsel, Internal Revenue Service, with him), for the United States .

Present: QUA, Chief Justice, and RONAN,WILKINS, SPALDING, and COUNIHAN, Justices.

COUNIHAN, Justice:

This case comes here upon an appeal from and exceptions to the entry of a decree in proceedings arising out of a bill for a receivership brought by a judgment creditor against a debtor corporation, Trawler Leretha, Inc. G. L. (Ter. Ed.) c. 156, §51.

The bill alleged that the plaintiff recovered judgment against the debtor and that it had neglected for thirty days after demand on execution to pay the amount due with officer's fees or to exhibit to the officer real or personal property belonging to it and subject to be taken on execution sufficient to satisfy the same. The bill sought the appointment of a receiver. A decree was entered, the debtor although duly served not being represented, appointing a receiver of the estate, property, money, debts, and effects of every kind and nature of or belonging to the debtor, and the receiver was directed to collect, get in, and take charge of all and singular thereof, and to hold the same subject to the order of the court.

Subsequently the receiver filed a report, an account, and a request that he be authorized to pay the balance of the receivership assets to the United States of America for tax claims. In his report he recommended for allowance these claims of the United States for taxes and also a claim of the Commonwealth of Massachusetts through the division of employment security for contributions from the debtor as an employer. This report in substance was allowed by the court. A decree was entered allowing payment of expenses and fees of the receiver and directing that a balance of $716.93, which was insufficient to pay both of these claims, be turned over to the clerk of courts for the county of Bristol to be held by him until further order of the court determining the question of priority of the United States for tax claims over the priority of the Commonwealth for payments due it.

Subsequently on motion of the United States the judge made the following order for a decree: "It appearing from an examination of the records that the defendant corporation was insolvent, in the sense that its property was, as of the time of the appointment of the receiver, insufficient to pay its debts, the motion of the United States of America that the clerk, Charles E. Harrington, Esquire, be ordered to pay to it the sum of $716.93 is allowed. Let a decree enter accordingly." On the same day a decree was entered ordering the clerk of courts to pay the United States the said sum of $716.93 by check to the order of the collector of internal revenue for the district of Massachusetts. The Commonwealth appealed from and excepted to the entry of this decree.

There was no error.

The only question to be decided is whether the United States or the Commonwealth is entitled to this money. The applicable statutes appear in the margin. ¹

The Commonwealth does not argue that it is incompetent for the United States to provide by statute that debts due it shall have priority as provided in U. S. C. (1946 ed. Title 31, §191 (U. S. Rev. Sts. §3466, Act of March 3, 1797), but it asserts that former §3466 is not applicable for the reason that no act of bankruptcy was committed by the debtor. It appears that years ago this court did decide that insolvency of itself, in circumstances similar to those existing here, did not give the United States the priority it sought under former §3466. Commonwealth v. Phoenix Bank, 11 Met. 129, 147-156. United States v. Commissioner of Banks, 254 Mass. 173, 177-179.

The present basic bankruptcy act is that of 1898. Until 1903 the judicial appointment of a receiver was not considered as an act of bankruptcy except by a small minority which held that such a receivership was the equivalent of a general assignment within the scope of the fourth act of bankruptcy or something which might amount to a transfer to hinder, delay, or defraud creditors and thus the commission of the first act of bankruptcy. Remington on Bankruptcy, §156. By progressive amendments in 1903, 1926, and 1938 it is now provided in U. S. C. (1946 ed.) Title 11, §21(a), that "Acts of bankruptcy by a person shall consist of his having . . . (5) while insolvent or unable to pay his debts as they mature, procured, permitted, or suffered voluntarily or involuntarily the appointment of a receiver . . . to take charge of his [the debtor's] property."

We are of opinion that by reason of these amendments resulting in what now appears as Title 11, §21(a), the scope of former §3466 has been extended. Davis v. Michigan Trust Co., 2 Fed. (2d) 194, 197.

The effect of this provision was to make the appointment of a receiver to take charge of the property of the debtor, voluntary or involuntary, when insolvent in either the bankruptcy sense or the equity sense, an act of bankruptcy. Here the judge in the order for the decree appealed from found that the debtor was insolvent in the sense that its property was insufficient to pay its debts when the receiver was appointed to take charge of all the property of the debtor. This in effect constituted a general receivership. Standard Accident Ins. Co. v. E. T. Sheftall & Co., 53 Fed. (2d) 40. Otis Elevator Co. v. Monks, 191 Fed. (2d) 1000.United States v. Emory, 314 U. S. 423, 426. United States v. Texas , 314 U. S. 480, 483. Compare National Refining Co. v. Pennsylvania Petroleum Co., 66 Fed. (2d) 914.

In these circumstances the claims of the United States were entitled to priority over the claim of the Commonwealth.Illinois v. Campbell , 329 U. S. 362, 367-370.Massachusetts v. United States , 333 U. S. 611, 617. (See footnote at pages 625-626 for a good collection of cases.)

Exceptions overruled.

Decree affirmed.

¹ "Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed." U. S. C. (1946 ed.) Title 31, §191 ( U. S. Rev. Sts. §3466, Act of March 3, 1797 ).

"Contributions and interest thereon or penalties assessed in lieu thereof, shall have priority over all other claims against an employer, except wage claims." G. L. (Ter. Ed.) c. 151A, §17, as appearing in St. 1941, c. 685, §1.