Michigan2
Christine
A. Richards, Plaintiff v. Jeffrey Richards, United States of
America
, Department of Treasury, Internal Revenue Service, Defendants.
United States of America
, Counter-Plaintiff v. Christine A. Richards, Counter-Defendant.
U.S.
District Court, West. Dist.
Mich.
, So. Div.; 4:04-CV-23,
March 28, 2005
.
[ Code
Secs. 6322, 6323
and 7403]
Tax liens: Priority. --
A federal tax
lien on proceeds from the sale of real property had priority over a
previously recorded state judicial lien because the judicial lien was
not fully established under state (
Michigan
) law. To place a lien against real property, state law required that
the creditor execute the lien against the debtor personally through the
local sheriff's office. Since no prior execution occurred, the judicial
lien was not effective against third parties, including the IRS.
OPINION
ENSLEN, District Judge: This matter is before the Court to determine
Defendant/Counter-Plaintiff
United States of America
's Motion for Summary Judgment. This action relates to a federal tax
lien. The Motion has been fully briefed and oral argument is
unnecessary. See W.D. Mich. L. Civ. Rule 7.2(d).
I. Background
Plaintiff Christine A. Richards filed this action to quiet title
regarding proceeds from commercial real property located in
St. Joseph
,
Michigan
. The
United States
then counterclaimed and asserted the validity of its tax liens as to
proceeds from the property pursuant to 26 U.S.C. §§7401
and 7403.
The liens relate to unpaid federal income tax of Jeffrey E. Richards,
Plaintiff's former husband, equaling $369,838.48 plus interest and
penalties arising on and after
September 1, 2004
. 1
The federal taxes were assessed between
September 2, 1996
and
August 5, 2002
. (Decl. of Elizabeth Lan.)
On
June 24, 1996
, the Richards were divorced. (Lan Decl.; J. of Divorce, at 1.) Pursuant
to the Judgment of Divorce, the Circuit Court made the following
pertinent awards of property and monies: (1) it awarded Jeffrey Edwards
the subject property free and clear of any claims by Christine Edwards; 2
(2) it awarded Christine Edwards the sum of $50,000 in cash payable
immediately; (3) it awarded Christine Edwards a sum of money to pay a
mortgage on Christine Edwards' residential property "in the
approximate amount of Seventy-two [Thousand] ($72,000) Dollars"
payable immediately; and (4) it awarded Christine Edwards the sum of
$21,000 payable on January 30, 1998. (J. of Divorce at 4-5.)
Following the entry of Judgment, Jeffrey Edwards failed to make the
required property settlement payments to Plaintiff. This failure
resulted in the recording, with the Register of Deeds, of a judicial
lien in favor of Plaintiff as to the property on
August 27, 1996
. (Lan Decl.; Stip & Order Re: Lien.) Plaintiff claims the lien
amount includes the property awards made to her in the Judgment of
Divorce. The subject property was sold by agreement of the Richards on
October 5, 2004
. (Lan Decl.; Exs. 10 & 11.) In accordance with a Stipulation and
Agreed Order in this suit, a portion of the sale proceeds ($123,158.36)
was then placed in escrow pending determination of the competing
parties' interests. (
United States
' Mem., at 3.) Both parties claim the whole amount.
According to the
United States
' tax documentation, its tax liens against Jeffrey Richards arose on and
after
September 2, 1996
, following the divorce and the recording of Plaintiff's lien. (Lan
Decl.) However, the parties dispute whether the August lien was
effective. In tax parlance, the issue is whether the judicial lien was
inchoate at the time it was recorded because it was not sufficiently
established. It is also argued by the
United States
that the lien was not effective because it had not been properly
perfected under state law.
II. Standards for Summary Judgment
Under Federal Rule of Civil Procedure 56, summary judgment is
appropriate when the pleadings, depositions, answers to interrogatories
and admissions on file, together with affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law. The initial burden is
on the movant to specify the basis upon which summary judgment should be
granted and to identify portions of the record which demonstrate the
absence of a genuine issue of material fact. Celotex Corp. v. Catrett,
477
U.S.
317, 322 (1986). The burden then shifts to the non-movant to come
forward with specific facts, supported by the evidence in the record,
upon which a reasonable jury could find there to be a genuine fact issue
for trial. Anderson v.
Liberty
Lobby, 477
U.S.
242, 248 (1986).
III. Legal Analysis
The right of the sovereign to taxes is not a begrudging one under
Federal law. Title 26 United States Code
§6322 states that a federal tax lien arises in favor of the
United States
upon the assessment of taxes. This language has been interpreted to mean
not only property held by the tax payer at the time of assessment, but
also all after-acquired property. See United States v. McDermott
[ 93-1
USTC ¶50,164], 507 U.S. 447, 455 (1993). This includes the proceeds
of a real estate sale where the real estate is subject to a tax lien. Municipal
Trust & Sav. Bank v. United States [ 97-1
USTC ¶60,275], 114 F.3d 99, 101 (7th Cir. 1997). Thus, in this
instance, the assessment of taxes against Jeffrey Richards has created a
large lien in favor of the
United States
as to all personal and real property owned by him, including the
proceeds of any real estate sales.
As to competing liens, the rule applicable under Federal law is that the
first in time is the first in right. United States v. City of New
Britain [ 54-1
USTC ¶9191], 347 U.S. 81, 85 (1976). In this case, the property
settlement lien is first in time. Thus, it is first in right provided it
qualifies as a "choate" lien and meets the other requirements
of federal law. Blachy v. Butcher [ 2000-2
USTC ¶50,629], 221 F.3d 896, 905 (6th Cir. 2000). A state-created
judicial lien is choate only "when the identity of the lienor, the
property subject to the lien, and the amount of the lien are
established." City of New Britain [ 54-1
USTC ¶9191], 347
U.S.
at 84. The first two requirements are met here, but the parties dispute
the third requirement.
As to whether the amount of the lien was established, there is no legal
requirement that the notice of lien itself set forth the amount of the
lien. Rather, the requirement is that the lien amount be established as
"a sum certain" by the underlying judgment. Hensley v.
Harbin [ 99-2
USTC ¶50,961], 196 F.3d 613, 616 (6th Cir. 1999); see also
26 C.F.R. §301.6323(h)-1(g);
S & S Gasket Co. v. United States [ 81-1
USTC ¶9115], 635 F.2d 568, 571 (6th Cir. 1980). As stated above,
the Judgment of Divorce involved three property awards in favor of
Plaintiff: (1) the award of $50,000 to Plaintiff payable immediately;
(2) the award of $21,000 to Plaintiff payable on
January 30, 1998
; and (3) the award of the mortgage amount in the approximate amount of
$72,000.00 payable immediately.
Of these awards, only the first represents the award of a sum certain.
The mortgage amount is not a sum certain because it was stated only
approximately. The $21,000 award was stated as a certain amount, but was
not due and payable as of the time of the filing of the lien. Thus, it
cannot prime the federal tax lien.
Furthermore, while the $50,000 award was choate at the time of the
filing of the lien, no interest determination as to the award was
choate. This is because of a peculiarity in
Michigan
's statutory interest statute, Mich. Comp. Laws §600.6013, which has
been interpreted as not applying to divorce judgments. 3
Reigle v. Reigle, 474 N.W.2d 297, 300 (Mich. Ct. App. 1991) (citing
Thomas v. Thomas (On Remand), 439 N.W.2d 270, 271 (1989)). Rather,
interest awards in divorce actions are purely within the equitable
discretion of the Circuit Court.
Id.
Since the Circuit Court had not announced an interest award at the time
of the filing of the lien, no interest award was choate at that time,
within the meaning of federal law. This does not mean that the $50,000
lien was not choate, only that an additional interest award was not
choate.
While the $50,000 lien was choate, there is an additional important
argument why it (and the other asserted awards) were not perfected liens
for the purposes of federal law. Federal law insists that only certain
judgment liens will be given priority over federal tax liens. These
liens are defined as follows:
The term
"judgment lien creditor" means a person who has obtained a
valid judgment, in a court of record and of competent jurisdiction, for
the recovery of specifically designated property or for a certain sum of
money. In the case of a judgment for the recovery of a certain sum of
money, a judgment lien creditor is a person who has perfected a lien
under the judgment on the property involved. A judgment lien is not
perfected until the identity of the lienor, the property subject to the
lien, and the amount of the lien are established. Accordingly, a
judgment lien does not include an attachment or garnishment lien until
the lien has ripened into judgment, even though under local law the lien
of the judgment relates back to an earlier date. If recording or
docketing is necessary under local law before a judgment becomes
effective against third parties acquiring liens on real property, a
judgment lien under such local law is not perfected with respect to real
property until the time of such recordation or docketing. If under
local law levy or seizure is necessary before a judgment lien becomes
effective against third parties acquiring liens on personal property,
then a judgment lien under such local law is not perfected until levy or
seizure of the personal property involved. The term
"judgment" does not include the determination of a
quasi-judicial body or of an individual acting in a quasi-judicial
capacity such as the action of State taxing authorities.
26 C.F.R. §301.6323(h)-1(g)
(emphasis added).
In other words, a competing state-created judgment lien is not effective
until it attaches under the governing state law. See Redondo Const.
Corp. v. United States [ 98-2
USTC ¶50,841], 157 F.3d 1060, 1063 (6th Cir. 1998). This includes,
as stated above, any state law requirement of levy as a condition of
attachment.
Under
Michigan
law, real property liens are disfavored and several procedural steps are
required to create such liens:
Chapter 60 of
the Revised Judicature Act (RJA), M.C.L. §600.6001 et seq.;
M.S.A. §27A.6001 et seq., ordinarily governs collection of
judgments and execution against real estate for monies owed. A judgment,
by itself, does not create a lien against a debtor's property. Under the
scheme provided in chapter 60, the creditor must first obtain a judgment
for the amount owed, then execute that judgment against the debtor's
property. A creditor may execute against real property owned by a debtor
only after attempting to execute against the debtor's personalty and
determining that the personal property is insufficient to meet the
judgment amount. M.C.L. §600.6004; M.S.A. §27A.6004. To place a lien
against a debtor's real property, the creditor must deliver the writ of
execution and a notice of levy against the property to the sheriff, who
then records the notice of levy with the register of deeds to perfect
the lien.
George v. Sandor M. Gelman, P.C., 506 N.W.2d 583, 585 (Mich. Ct.
App. 1993).
In this case, there was no prior execution against personalty and no
execution and levy made by a court officer. Therefore, the lien is not
effective against third parties holding valid secured interests,
including the
United States
. 4
IV. Conclusion
For the above reasons, Counter-Plaintiff United States of America is
entitled to summary judgment in its favor and against Christine A.
Richards. Likewise, it is entitled to the award of the whole of the
escrow funds.
Judgment shall issue consistent with this Opinion.
JUDGMENT
In accordance with the Opinion of this date;
IT IS HEREBY ORDERED that Defendant/Counter-Plaintiff United
States of America's Motion for Summary Judgment (Dkt. No. 26) is GRANTED
and summary judgment is AWARDED in favor of
Defendant/Counter-Plaintiff United States of America and against
Plaintiff/Counter-Defendant Christine A. Richards.
IT IS FURTHER ORDERED that the federal tax lien of the United
States of America as to the real property at issue are ADJUDGED
prior in right to the judgment liens asserted by Christine A. Richards,
and the escrow agent holding the sale proceeds shall deliver those funds
to the United States of America forthwith.
1
There is no controversy remaining as to Jeffrey Richards, because he has
stipulated to entry of judgment against him as to the unpaid tax
liabilities in the amount of $369,838.48.
2
Pursuant to state statute, Mich. Comp. Laws §552.401, a divorce award
of real property has the same effect as a quit claim deed. Namely, it is
effective to convey the real estate between the parties. See
Mich.
Comp. Laws §565.3. Though the failure to record the deed did create an
unnecessary cloud on title, it did not change the character of the
transaction as to the Richards. See Mich. Comp. Laws §565.29
(unrecorded conveyances are effective except as against good faith
purchasers). Also, while Plaintiff did have the right to payment of
monies under the divorce decree, the decree did not impose any ownership
interest in the real estate relating to the payment of those monies. In
short, Plaintiff was no longer an owner of any part of the property
after the decree.
3
In most cases, a judgment lien will bear interest under Mich. Comp. Laws
§600.6013 at the statutory rate; thus, both the sum certain lien amount
and the statutory interest will be deemed choate because the interest
calculation can be determined by the set formula and the calendar alone.
It is true that payments by a judgment debtor will add a measure of
uncertainty to any interest calculation, though this reason is
insufficient to deem a lien inchoate --otherwise the system for lien
creation would serve no effective purpose.
4
The lien was effective against the spouse who by stipulation waived
those requirements. This stipulation, though, did not bind third-party
non-signatories.
[66-2 USTC
¶9763]In the Matter of
Union
Wrecking Company, Inc., Bankrupt
U.
S. District Court, East. Dist. of
Mich.
, So. Div., No. 52111-B, 8/8/66
[1954 Code Secs. 6321-6323]
Federal tax liens: Bankruptcy proceeding: Michigan state tax liens:
Priority.--Various liens for Michigan state taxes did not have
priority over filed federal tax liens in a bankruptcy proceeding because
the amount due and owing for such state taxes was undetermined and
indefinite (at least until the assessments were made) and thus were
inchoate at the time the federal liens attached. In addition, a lien for
the state business activities tax did not have priority since the state
statutory prerequisites for lien status had not been met.
Jerrald B.
Sherman, 2400 First Nat'l Bldg., Detroit, Mich., Raymond J. Lynch, 512
Buhl Bldg., Detroit, Mich., for Union Wrecking Co.
Opinion
ROTH, District
Judge:
Presented for
determination is the question of the relative priority to be accorded to
statutory federal and state liens in a bankruptcy proceeding.
The facts have
been stipulated and are as follows:
1. On
May 14, 1962
, an involuntary petition was filed with the United States District
Court, Eastern District of Michigan, Southern Division, against Union
Wrecking Company.
2. On
June 14, 1962
, the Union Wrecking Company was adjudicated a bankrupt.
3. The federal
government filed a proof of claim on
December 27, 1962
in which it asserted lien rights for $24,150.49 of its tax indebtedness.
1
The types of tax, the periods involved, the assessment dates, the dates
of the notice and demand, the account numbers, the amounts assessed
including accrued interest for the taxes assessed prior to bankruptcy,
and the date notice of lien was filed with the Register of Deeds, Wayne
County, Michigan, are as follows:
Dates of Date Notice
Type of Tax Assessment Notice & of Lien Was
& Period Dates Demand Filed Amount
Federal Unemployment Tax--26 U. S. C.
§3301 et seq. ..........................
3-2-62
3-2-62
4-27-62
$ 1,060.60
* 25.53
Withholding Tax--26 U. S. C. §3301
et seq. .................................
5-7-62
5-7-62
5-9-62
21,714.74
* 49.94
Excise Tax--26 U. S. C. §4481 ...........
5-7-62
5-7-62
5-9-62
$ 171.90
* 13.32
Excise Tax--26 U. S. C. §4481 ...........
5-7-62
5-7-62
5-9-62
660.00
* 33.63
Excise Tax--26 U. S. C. §4481 ...........
5-7-62
5-7-62
5-9-62
165.00
* 2.08
Excise Tax ..............................
5-7-62
5-7-62
5-9-62
247.50
* 6.75
* Accrued interest to the date of the petition in bankruptcy.
4. The State
of
Michigan
filed a proof of claim on
December 5, 1962
asserting liens for taxes due to the State of
Michigan
in the total amount of $15,140.02 by virtue of five different specific
state tax statutes. The specific taxes, the tax periods, the due dates
for returns, whether returns were filed, whether the tax was paid,
whether the claim is a department audit or a deficiency audit, the
assessment dates, and the amounts due are as indicated below.
* The abbreviations refer to the following tax statutes:
ST--Sales Tax--M. S. A. §7.521 et seq.
IT--Intangibles Tax--M. S. A. §7.556(1) et seq.
UT--Use Tax--M. S. A. §9.555(1) et seq.
BAT--Business Activities Tax--M. S. A. §7.557(1) et seq.
DMT--Diesel Motor Fuel Tax--M. S. A. §7.316.
The federal
government asserts lien rights for the taxes set forth in paragraph 3 of
the statement of facts pursuant to §6321, §6322 and §6323 of the
Internal Revenue Code of 1954. 2
Lien rights
are claimed by the State of Michigan for taxes set forth in paragraph 4
of the statement of facts by virtue of the Michigan Collection of
Specific Taxes Act (M. S. A. §7.501 et seq.) and the specific tax acts
indicated in that paragraph. 3
Since the
federal and state tax liens total $39,613.88 and only $15,874.88 is
available for distribution after the payment of
admin
istration expenses, it becomes necessary to determine the order in which
the competing liens are to be satisfied.
It is the
contention of the State of
Michigan
that lien priority is determined by the common law principle of
"first in time is the first in right" and that in determining
this time sequence effect must be given to applicable state law.
The state tax
statutes, with the exception of the Business Activities Tax Act, upon
which the state relies for its lien claims provide that a lien for the
specific tax involved shall attach "from and after the date of any
report upon which the specific tax computed is required by this act to
be filed." A lien based upon these statutes attaches by operation
of law. No affirmative action is required by the state. The tax need not
be assessed, public notice need not be given. The federal tax lien
arises after assessment of tax liability is made but the lien is not
valid as against the trustee in bankruptcy unless notice is given as
required by Section 6323 of the Internal Revenue Code prior to
bankruptcy. 4
The required
reports for the state tax claims based upon the aforementioned statutes
became due before the federal liens attached. The state tax claims, by
reference to state law, therefore, carry earlier lien dates than the
claim of the federal government. (See paragraphs 3 and 4 of the
Statement of Facts.) Accordingly, the State of
Michigan
contends that its liens must be accorded priority over the federal
liens. 5
The question
presented, therefore, is whether in determining lien priority this court
in a bankruptcy proceeding must accept state designated lien dates as
controlling.
Valid liens, 6
except for the postponement of certain nonpossessory statutory liens,
including tax liens, asserted against personalty to the payment of
expenses of
admin
istration and wage priority claims pursuant to Section 67c(1), are
preserved by the Bankruptcy Act. 7
City of
Richmond
v. Bird, 249
U. S.
174; 3 Collier on Bankruptcy, §64.02(2) (14th Ed. 1964). The Bankruptcy
Act, however, does not prescribe in what order such liens are to be
satisfied. It is to general lien law, therefore, that our inquiry must
be directed.
The relative
priority of a lien of the federal government for unpaid taxes and
competing state liens is a federal questgion to be determined by federal
law. United States v. Acri [55-1 USTC ¶9138], 348
U. S.
211 (1955), United States v. Security Trust and Savings Bank
[50-2 USTC ¶9492], 340
U. S.
47 (1950). The Supreme Court of the
United States
has dealt with this question on numerous occasions in a non-bankruptcy
context. There the Supreme Court has given recognition to the fact that
the purpose of §6321 is to insure the prompt and certain collection of
taxes due to the United States and that if it were to adopt an
unqualified rule of lien priority based upon substantive
characterization and time designation solely within the control of the
individual states, that such an approach could conceivably threaten and
frustrate the accomplishment of the governmental tax policy. United
States v. Acri [55-1 USTC ¶9138], 348
U. S.
211 (1955); United States v. Security Trust and Savings Bank
[50-2 USTC ¶9492], 340
U. S.
47 (1950). Presumably for this reason, in part at least, the Supreme
Court has held in cases involving federal lien claims based upon §6321
and competing state liens that the rule of "first in time is first
in right" is not to be mechanically applied, United States v.
New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85 (1954) and that a
state's designation as to the character of a lien and the time at which
the lien attaches is not conclusive, U. S. v. Acri [55-1 USTC ¶9138],
348 U. S. 211 (1955), United States v. Security Trust and Savings
Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). State created tax (or
statutory) liens that antedate federal liens take priority over the
latter only if the state liens have become "choate" prior to
the attachment of the federal liens. United States v. Security Trust
and Savings Bank [50-2 USTC ¶9492], 340
U. S.
47 (1950);
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81 (1954); United States v. Pioneer American Insurance Company
[63-2 USTC ¶9532], 374
U. S.
84 (1963); and United States v. Vermont [64-2 USTC ¶9520], 377
U. S.
370 (1964). The required status of choateness is attained "when the
identity of the lienor, the property subject to the lien and the amount
of the lien is established."
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81, 84. 8
While the cases referred to above were decided in a non-bankruptcy
context, the doctrine developed in these cases and the policy
consideration upon which they were based appear to be equally applicable
in a bankruptcy proceeding. See Consumers Power Company v. Rubiner
[64-1 USTC ¶9219], 225 F. Supp. 926 (1963). 9
The state tax
liens involved here must then be examined with reference to the criteria
for "choateness" set out by the Supreme Court of the
United States
.
The identity
of the taxpayer is not in question here. The fact that the lien of the
State of
Michigan
attached to all of the property of the bankrupt rather than to specific
identifiable property does not render the lien inchoate. United
States v. Vermont [64-2 USTC ¶9520], 377
U. S.
370.
However, the
third prerequisite, the requirement that the amount of the lien must be
established prior to the time that the federal lien attaches, is not
met. All of the taxes in issue here, with the exception of the Business
Activities Taxes by reference to state law attained lien status from the
date the bankrupt was required to file its report. The reports for all
such taxes were due prior to the date upon which the federal liens
attached. The bankrupt filed its report for three sales tax periods and
paid the taxes based upon the reports. In all other cases the bankrupt
did not file the required reports. [See Paragraph 4 of the Statement of
Facts.] Assessments for all taxes due, including deficiencies for the
three sales tax periods for which the bankrupt had paid his tax as shown
in his report, were not made until after the federal lien attached. 10
The amount due and owing for such taxes, therefore, were undetermined
and indefinite, at least until the assessments were made and were,
therefore, inchoate at the time the federal liens attached.
In addition,
the State of
Michigan
claims a lien for $768.12 based upon the Business Activities Tax Act.
(See Paragraph 4 of the Statement of Facts.) This assertion of lien is
without merit, even if the state's theory of lien priority were
accepted. The Business Activities Tax Act provides that a lien shall
attach "at the time any tax computed under the provision of this
act is determined to be due, either by the return of the taxpayer or by
assessment." The bankrupt did not file the required report and the
State of
Michigan
did not make an assessment until after the federal lien attached. The
statutory prerequisites for lien status were, therefore, never complied
with, with respect to this tax.
For the
foregoing reasons, the lien claims of the State of
Michigan
must be subordinated to the federal liens. 11
An appropriate
order may be submitted.
1
The total claim of the federal government amounted to $73,567.05.
2
26 U. S. C. §6321 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."
26 U. S. C. §6322
provides: "Unless another date is specifically fixed by law, the
lien imposed by §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. §6323
provides in part that "The lien imposed by §6321 shall not be
valid as against any mortgagee, pledgee, purchaser, or judgment creditor
until notice thereof has been filed by the secretary or his
delegate."
3
The applicable provision of the tax statutes relied upon by the State of
Michigan
are set forth in the appendix accompanying this Opinion.
4
In U. S. v. Speers [66-1 USTC ¶9101], 382 U. S. 266, the Supreme
Court of the United States held that a trustee in bankruptcy was a
judgment creditor for purposes of avoiding an unrecorded federal tax
lien.
5
The State of Michigan also claims lien status for two tax claims
pursuant to the Business Activities Tax Act (MSA 7557 [11]) this claim
is considered on page nine of this opinion.
6
Liens not subject to attack by the trustee under Sections 60, 67 and 70
of the Bankruptcy Act.
7
Section 67c in pertinent part provides: "Where not enforced by sale
before the filing of a petition initiating a proceeding under this act,
and except where the estate of the bankrupt is solvent: (1) though valid
against the trustee under subdivision b of this section, statutory
liens, including liens for taxes or debts owing to the United States or
to any State or any subdivision thereof, on personal property not
accompanied by possession of such property, and liens, whether statutory
or not, of distress for rent shall be postponed in payment to the debts
specified in clauses (1) and (2) of subdivision a of Section 64 of this
Act. * * * ."
The liens here
were asserted against personal property and were, therefore, postponed
in payment to
admin
istrative expenses. There were no priority wage claims filed.
8
The doctrine that a line competing with the federal government must be
choate in order to prevail over a claim asserted by the federal
government was first developed in cases dealing with the Federal
Priority Statute. Rev. Stat. §3466, 31 U. S. C. §191.
Section 3466
provides that: "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."
Section 3466
creates only a priority and not a lien. The inchoate lien doctrine as
developed in the construction of Section 3466 cases is, therefore, not
directly applicable to the present controversy. United States v.
Bradley [63-2 USTC ¶9657], 321 F. 2d 224 (1963); United States
v. Sampsell [46-1 USTC ¶9186], 153 F. 2d 731 (1946); In re
Knox-Powell-Stockton Co. [39-1 USTC ¶9277], 100 F. 2d 979 (1939).
For the
limited applicability of §3466 in bankruptcy proceedings see 3 Collier
on Bankruptcy §64.502 (14 Ed. 1964).
For a
scholarly and exhaustive analysis of the development and application of
the inchoate lien doctrine see Kennedy "The Relative Priority of
the Federal Government; The Pernicious Career of the Inchoate and
General Lien," 63 Yale Law Journal 905 (1954) and "From
Spokane to
Vermont
: The Campaign of the Federal Government Against the Inchoate
Lien." 50
Iowa
Law Review 724 (1965).
9
In re Knox-Powell-Stockton [39-1 USTC ¶9277], 100 F. 2d 979
(1934), United States v. Sampsell [46-1 USTC ¶9186], 153 F. 2d
731 (1946) and United States v. Bradley [63-2 USTC ¶9657], 321
F. 2d 224 (1963) hold to the contrary. However, the Knox and Sampsell
cases were decided prior to the Supreme Court's decisions in United
States v. Security Bank and Trust [50-2 USTC ¶9492], 347
U. S.
81 (1950);
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81 (1954); United States v. Pioneer American Insurance Company
[63-2 USTC ¶9532], 374
U. S.
84 (1963) and United States v. Vermont, 377
U. S.
370. In the Bradley case the government conceded that the amount
of the state's lien was fixed and determined but contended that the lien
was inchoate because it did not attach to specific property. The Court
held that a state tax lien is not inchoate merely because it is general
and does not attach to specific property. The result reached in United
States v. Bradley [63-2 USTC ¶9657], therefore, may be justified on
the basis of United States v. Vermont, 377
U. S.
370 (1964) without reference to its holding that the
"choateness" doctrine is not applicable in bankruptcy
proceedings.
10
The assessments for all taxes, except for one sales tax, were actually
made approximately five months after the petition in bankruptcy was
filed. No assessments were made for the Diesel Motor Taxes since the
statute M. S. A. 7.316(10) does not provide for assessment.
11
This case was submitted prior to the amendment of Section 67(c) on
July 5, 1966
. However, the amendment would not, in any way, affect the result
reached here.
Appendix
The lien
provisions relied upon by the State of
Michigan
are as follows:
M. S. A.
7.501--Collection of Specific Taxes
"Sec. 6.
The lien of the state provided for herein, shall attach to the property
of any corporation, copartnership, party or person, from and after the
date in each and every year that any report upon which specific taxes
are computed is required by law to be made."
M. S. A.
7.534--Sales Tax Act
"Sec. 13.
The tax herein imposed in addition to the interest and penalties
provided in sections 9 and 11 hereof, and costs that may accrue in
addition thereto, shall be a lien in favor of the state against all
property and rights of property, both real and personal, then owned or
afterwards acquired by any person or persons, firm, association or
corporation, liable therefor, to secure the payment of such tax,
interest, penalties and costs, which lien shall attach to the property
from and after the date that any report upon which the specific tax is
computed is required by this act to be filed. Such lien shall take
precedence over all other liens and incumbrances whatsoever,
irrespective of character or date, except previously recorded bona fide
financing."
M. S. A. 7.557
[11]--Business Activities Tax Act
"Sec. 11.
The specific tax herein imposed, together with interest and penalties
thereon, shall be a lien in favor of the state against all property and
rights of property, both real and personal, owned at the time the lien
attaches or afterwards acquired by any person liable for the tax, to
secure the payment of tax. Such lien shall attach to the property at the
time any tax computed under the provisions of this act is determined to
be due either by the return of the taxpayer or by assessment by the
department in accordance with section 10 of this act and shall take
precedence over all other liens and encumbrances whatsoever, except bona
fide liens recorded prior to such determination or assessment."
M.
S. A. 7.316 [10]--Diesel Motor Fuel Tax Act
"Sec. 30.
The tax herein imposed, in addition to the interest and penalties
provided herein and the costs that may accrue in addition thereto, shall
be a lien in favor of the state against all property and rights of
property, both real and personal, then owned or afterward acquired by
any person, as defined herein, liable therefor, to secure the payment of
such tax, interest, penalties and costs which lien shall attach to the
property From and after the date that any report upon which the tax
herein imposed is computed is required by this chapter to be filed. Such
lien shall take precedence over all other liens and encumbrances
whatsoever."
[73-2 USTC
¶9793]In the Matter of the Dissolution of Co-Med Drug Company, Inc., a
Michigan
corporation
State
of Mich., Court of Appeals, Division 1, No. 12862, 212 NW2d 28, 8/30/73
[Code Sec. 6323]
Lien for taxes: Priority: Detroit's claim for personal property
taxes.--Although the Detroit claim for personal property taxes was
filed a month prior to the Federal government's claim for taxes, the
Federal Government's claim had priority, even over
admin
istrative expenses. The trial court's decision was thus sustained.
Scott P.
Crampton, Assistant Attorney, General, Meyer Rothwacks Crombie J. D.
Garrett, James H. Bozarth, Department of Justice, Washington, D. C.
20530, Ralph B. Guy, Jr., United States Attorney, Fred M. Mester,
Assistant United States Attorney, Detroit, Mich., for U. S. Michael M.
Glusac, Joseph Maisano, 1010 City-County Bldg., Detroit, Mich., for City
of Detroit.
Before QUINN,
P. J., J. H. GILLIS and BASHARA, JJ.
PER CURIAM:
City of
Detroit
appeals from the judgment of the trial court which denied the city
recovery of 1969 personal property taxes assessed against Co-Med Drug
Company Inc.
Appellee, the
United States
, has accepted the following statement of facts by appellant:
"On
November 26, 1969
, Co-Med Drug Company, Inc., a
Michigan
corporation, having its principal place of business in the City of
Detroit
, State of
Michigan
, filed a petition for corporate dissolution. An order dissolving the
corporation and appointing a permanent receiver was entered by the
court. On
February 15, 1970
, the City of
Detroit
filed its claim against the subject debtor for 1969 and 1970 personal
property taxes in the amounts of $1,760.66 and $751.52 respectively, the
latter tax item being claimed as an expense of
admin
istration. On March 16, 1970, the United States Internal Revenue Service
filed a proof of claim for various items of federal taxes assessed at
varies [sic] dates in the amount of $13,407.92 and asserted priority
thereon under Section 3466 of the Revised Statutes (31 USCA 191). On
March 8, 1971
, the Internal Revenue Service filed an amended claim in the amount of
$11,764.18. All the assets of the debtor have been liquidated and the
receiver has on hand for distribution to creditors the sum of
$11,277.77. The total claims filed are substantially in excess of the
funds available for distribution."
It is the
position of the city that In re Dissolution of Ever Krisp Food
Products Co., 307 Mich. 182; 11 NW 2d 852 (1943), dictates that its
claim for 1969 personal property taxes has priority over the claim of
the United States for its taxes. The
United States
contends that United States v. Gilbert Associates, Inc. [53-1
USTC ¶9291], 345
U. S.
361; 73 S. Ct. 701; 97 L. Ed. 1071 (1973), controls and establishes the
priority of the
United States
tax claim.
The trial
judge agreed with the
United States
and overruled Ever Krisp, supra. The Court also ruled that the
priority of the
United States
was subject to the prior payment of
admin
istration expenses allowed in the amount of $9,747.50. We agree. See 31
U. S.
C. 191. 1
The amount of
the lien filed by the
United States
exceeded the total assets of the estate. The policy decision that the
United States
may wish to allocate the
admin
istration expenses from that portion of its priority should not be
disturbed by this Court. See In the Matter of the Estate of William
H. Reynolds, 38 Misc. 2d 278; 235 N. Y. S. 2d 752 (1962).
Affirmed.
1
Whenever any person indebted to the
United States
is insolvent, * * * the debts due to the
United States
shall be first satisfied; * * *."
[67-2 USTC
¶9514]
United States of America
, Plaintiff-Appellee v.
County
of
Wayne
, Defendant-Appellant
(CA-6),
U. S. Court of Appeals, 6th Circuit, No. 17146, 378 F2d 671, 6/14/67,
Aff'g District Court decision, 65-2 USTC ¶9708, 247 F. Supp. 84
[1954 Code Sec. 6323]
Tax liens: Priority: County personal property tax: Insolvency.--The
Federal tax lien had priority where the local taxing authority had taken
no action to attach a general lien on the taxpayer's personal property
before the taxpayer became insolvent and his assets held for the benefit
of creditors. The government's motion for summary judgment was properly
granted.
Philip I.
Brennan, Richard C. Pugh, Acting Assistant Attorney General, Lee A.
Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530,
Lawrence Gubow, United States Attorney, Federal Bldg., Detroit, Mich.,
for plaintiff-appellee. Samuel H. Olsen, Prosecuting Attorney, Aloysius
J. Suchy, William F. Koney, Assistant Prosecuting Attorneys, 601
City-County Bldg., Detroit, Mich., for County of Wayne;
Rob
ert Reese, Corporation Counsel, Joseph Maisano, Assistant Corporation
Counsel, 1010 City-County Bldg., Detroit, Mich., for City of Detroit,
amicus curiae; Frank J. Kelley, Attorney General, T. Carl Holbrook,
William D. Dexter, Assistant Attorneys General,
Rob
ert A. Derengoski, Solicitor General, State Capitol, Lansing Mich., for
State of Michigan, amicus curiae, defendant-appellants.
Before WEICK,
Chief Judge, O'SULLIVAN and CELEBREZZE, Circuit Judges.
PER CURIAM:
The question
on appeal is whether a local tax lien, which is a general lien upon the
taxpayer's personal property, is superior to the priority of the United
States Government under Section 3466 of the Revised Statutes, where the
local taxing authority has taken no action to attach its general lien to
specific property of the taxpayer before the taxpayer becomes insolvent
and his assets subject to a distribution for the benefit of his
creditors.
The District
Court [65-2 USTC ¶9708] granted the motion of the
United States
for summary judgment. We affirm for the reasons set forth in the
District Court's opinion of October 7, 1965, and also the opinions of
the Supreme Court of the United States in Spokane County v. United
States [1 USTC ¶387], 279 U. S. 80; New York v. Maclay, 288
U. S. 290; United States v. Texas [42-1 USTC ¶9162], 314 U. S.
480; United States v. Waddill Co. [45-1 USTC ¶9126], 323 U. S.
353; Illinois v. Campbell, 329 U. S. 362; United States v.
Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361; United
States v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81; United States v. Vermont [64-2 USTC ¶9520], 377
U. S.
351; United States v. Equitable Life [66-1 USTC ¶9444], 384
U. S.
323.
Affirmed.
[65-2 USTC
¶9445]United States of America, Plaintiff v. Leland Door Company, a
corporation; Louis F. Davis, Trustee; Township of Suttons Bay, Michigan;
Village of Suttons Bay, Michigan; Michigan Employment Security
Commission; Michigan Corporation and Securities Commission; and Michigan
Department of Revenue, Defendants.
U.
S. District Court, East. Dist.
Mich.
, So. Div., Civil Action No. 25208, 243 FSupp 918, 5/12/65
Lien for taxes: Priority of creditors: Claim of township.--Tax
liens against funds of an insolvent taxpayer held by a trustee under a
trust mortgagee were prior to the claim of a township which, after
assessing taxes, took no further steps to divest the taxpayer of title
or possession to the property.
Lawrence
Gubow, U. S. Attorney,
Rob
ert F. Ritzenhein, Assistant U. S. Attorney,
Detroit
,
Mich.
, for plaintiff. Frank J. Kelley, Hector Cisneros, Kenney, Rockwell,
Kenney & Chapman,
Detroit
,
Mich.
, Aylsworth & Clancey,
Traverse City
,
Mich.
, for defendant.
Opinion
on Order Granting Motion for Summary Judgment
MACHROWICZ,
District Judge:
This is an
action instituted by the
United States of America
to foreclose its tax liens against a fund held by defendant, Louis F.
Davis, as trustee under a trust mortgage for the benefit of creditors,
of assets of the defendant-taxpayer, Leland Door Company.
Davis
was appointed trustee for the purpose of liquidating the Leland Door
Company and presently holds a balance of Twenty-two Thousand Two Hundred
Eighty-four and 12/100 Dollars, ($22,284.12) in his hands as such
Trustee.
The Government
alleges in its complaint that the Leland Door Company was insolvent at
the time of the execution of the trust mortgage and that, under Sec. 191
of Title 31 U. S. C. which gives absolute priority to debts owing to the
government in cases where a taxpayer is insolvent, the sum now in the
hands of the Trustee should be fully applied toward payment of
Government liens, regardless of claims of any of the defendants herein
against the debtor. More specifically, the Government seeks a decree
adjudging and decreeing that the Leland Door Company is indebted to the
United States of America
in the sum of One Hundred Sixteen Thousand Sixty-five and 30/100
Dollars, ($116,065.30), plus interest as provided by law. Further, the
Government seeks an adjudication that said taxpayer was insolvent at the
time of the execution of the trust deed, and that pursuant to provisions
of Sec. 191, Title 31 U. S. C., the claims of the Government for the
unpaid tax assessments set forth in the complaint are entitled to be
first satisfied from any and all assets remaining in the possession of
the Trustee; that the Court order that the whole of the fund now in the
Trustee's hands be turned over to the United States of America in
payment of such unpaid taxes and interest; and that upon payment
thereof, in accordance with the final determination of this Court, if
any part of the liability of the defendant Leland Door Company remains
unsatisfied, the United States of America do have and recover judgment
against said defendant-taxpayer for the amount thereof, together with
interest and costs as provided by law.
Defendant-trustee,
in his pleadings, makes no claim on the fund and asks only that the
Court determine the ownership thereof.
The Township
of Suttons Bay, the Michigan Corporation and Securities Commission and
the Michigan Employment Security Commission are the only defendants who
have filed any pleadings in which a claim is made against the fund.
The Government
filed a motion for a summary judgment on the ground that, as a matter of
law, it is entitled to an award of the entire fund now before the Court,
in partial satisfaction of its tax liens. In support of the motion it
relies on a deposition of Trustee Davis and an affidavit of the District
Director of Internal Revenue.
The sworn
deposition was taken of Trustee Davis and was filed herein. In the
deposition he testified, from records of the taxpayer turned over to
him, that the debts of the company were four or five times greater than
its assets.
Subsequent to
the date on which its pleadings were filed, the Michigan Employment
Security Commission, through its attorney, advised the Government that
it would not challenge the priority of the Government to the fund in
question, in view of the provisions of Title 31, Sec. 191, U. S. C.
The Michigan
Corporation and Securities Commission asserted two liens, each in the
amount of Two Hundred Eighty-nine and 25/100 Dollars, ($289.25), one
created on
May 15th, 1960
, and the other a year later. This defendant does not challenge
application of the law on the issue of priority but it did question, at
the time of the hearing on the motion for summary judgment, the use of
the Trustee's sworn deposition to establish insolvency.
The Township
of Suttons Bay bases a claim of One Thousand Four Hundred and Four and
30/100 Dollars, ($1,404.30) upon taxes assessed for 1960 which it
contends became a lien against property of the taxpayer on
December 20, 1960
. The Township alleges in its answer to the complaint that its lien was
in the process of being perfected prior to any action by the Government
but that the Trustee induced the Township not to perfect its lien as the
Trustee would recognize priority of said claim. The Township further
alleges, pursuant to this agreement, that it waived its lien-holding
rights in the actual physical assets of the taxpayer, in exchange for a
lien against any funds received by the Trustee from sale of the
taxpayer's assets and a priority to receiving payment therefrom.
The Township
of Suttons Bay did not appear at the hearing on the motion for summary
judgment but did file a memorandum of authorities in support of its
claim, after the hearing on the motion. It argues that the liability of
the taxpayer to it arose prior to liability to the Government and that,
although no physical possession of the assets subject to defendant's
lien was taken by defendant, under Sec. 7, 81 M. S. A., all taxes became
a debt to defendant on the tax day provided for in the law; that the
amount of the assessment became a lien upon property upon which the tax
was assessed; and that the lien continues in effect until payment.
Priority is claimed over any claim made in behalf of the Government
because the Township's lien came into being prior to assessment by the
Government.
Defendant,
Township of Suttons Bay, does not in its brief dispute the insolvency of
the taxpayer but relies on the decision of the Michigan Supreme Court in
In the Matter of Ever Krisp Food Production Co., 307 Mich. 182
(1943) to accord priority to liens of the type claimed by the Township
even in cases where the provisions of Sec. 191, Title 31 U. S. C. apply.
In that case a judicial exception was applied to the absolute priority
rule because a specific and perfected lien was involved and such liens
were regarded as outside the provisions of the absolute priority rule.
The judicial
exception to the absolute priority rule and the test of specificity is
discussed in United States v. Gilbert Associates [53-1 USTC ¶9291],
345
U. S.
361 (1953), in the following language (p. 366):
In
claims of this type "specificity" requires that the lien be
attached to certain property by reducing it to possession, on the theory
that the United States has no claim against property no longer in the
possession of the debtor. Thelusson v. Smith, 2 Wheat. 396, 4 L.
Ed. 271. Until such possession, it remains a general lien. There is no
ground for the contention here that the Town had perfected its lien by
reducing the property to possession. The record reveals no such action.
The mere attachment of the Town's lien before the recording of the
federal lien does not, contrary to the holding of the Supreme Court of
New Hampshire, give the Town priority over the
United States
. The taxpayer had not been divested by the Town of either title or
possession. The Town, therefore, had only a general, unperfected lien. United
States v. Waddill, Holland & Flinn, Inc., supra; People of State of
Illinois ex rel Gordon v. Campbell, 329
U. S.
362, 370, 67 S. Ct. 340, 345, 91 L. Ed. 348. Where the lien of the Town
and that of the Federal Government are both general, and the taxpayer
is insolvent, §3466 clearly awards priority to the
United States
. United States v. Texas [42-1 USTC ¶9162], 314
U. S.
480, 488, 62 S. Ct. 350, 354, 86 L. Ed. 356. (Emphasis added.)
Since these
standards were not applied by the Supreme Court of Michigan in the Ever
Krisp case, that decision is not controlling here.
In the instant
case the
defendant
Township
took no further steps, after assessing the taxes, to divest the taxpayer
of title or possession. The test of specificity established in the Gilbert
Associates case, as applied to facts in the present suit, clearly
entitles the Government to priority over the lien of the Township.
Upon hearing
of the motion for summary judgment all parties were afforded an
opportunity to submit evidence to refute the Government's claim that the
defendant-taxpayer, Leland Door Company, was insolvent. No evidence
having been presented and the unrefuted sworn testimony of the Trustee
on deposition, of which all parties had notice and at which they could
appear and cross-examine the deponent, affords sufficient proof to the
Court to warrant a finding of insolvency of the taxpayer-defendant,
Leland Door Company.
It should be
noted that the Trustee was interested solely in liquidation of the
taxpayer-company and assumed no position in these proceedings on the
question of priority in favor of any party.
For the
reasons herein stated the motion of the plaintiff,
United States of America
, for summary judgment, is hereby granted and the plaintiff may present
an appropriate order for signature and entry.
[59-1 USTC
¶9237]Chrysler Corporation, a Delaware Corporation, Plaintiff v. Long
& Long, Inc., Commercial Credit Corporation, A Maryland Corp., James
P. Long, Sr., Eleanor A. Long, United States of America, L. C.
Laviolette, d/b/a Detroit Ad-Ver-Tis-Er, Harold E. Stoll, Wayne County
Treasurer, Defendants
U.
S. District Court, East. Dist.
Mich.
, So. Div., Civil No. 13843, 171 FSupp 541,
12/30/58
[1954 Code Sec. 6323]
Lien for taxes: Priority of creditors' claims.--When the
franchise of an automobile dealer (the taxpayer) was cancelled by the
Chrysler Corporation, the dealer returned certain parts and equipment
for credit. The amount of this credit was deposited in court for payment
to creditors in the order of their priority. It is held that the lien
for personal property taxes in
Michigan
was superior to any chattel mortgages without reference to the time when
the latter were created or perfected. Since the liens of the
municipalities for personal property taxes came into being before the
assessment and notice of tax liens of the
United States
, they have priority over the federal tax lien. Therefore, such personal
property taxes, with penalties and interest to date, should be paid
first out of the fund on deposit. Next, the amount of a chattel mortgage
given by the taxpayer and two individual stockholders of the taxpayer on
March 9, 1954, to a commercial credit company should be paid, with
interest at 6% to date, that being the interest fixed by the mortgage.
The remainder should be paid to the two individual stockholders who held
a chattel mortgage executed in 1952, which covered after-acquired
property. This leaves nothing for payment on the federal lien which was
recorded in May, 1954.
Dickinson
, Wright,
Davis
, McKean & Cudlip, 800 National Bank Building,
Detroit
,
Mich.
, for plaintiff. Arthur H. Rice, 1117 Penobscot Building, for L. C.
Laviolette, Bernard F. Zinn, 1021 Penobscot Building, for Commercial
Credit Corp., Roy J. Andes, 1214 Griswold Bldg., for Long & Long,
Inc., Gerald K. O'Brien, Hobart Taylor, Jr., B. C. Stanczyk, 508 County
Building, for H. E. Stoll and Fred W. Kaess, United States Attorney, all
of Detroit, Mich., for the United States and Stanley Draganski, Chester
C. Pierce, Hamtramck, Mich., for City of Hamtramck.
Opinion
O'SULLIVAN,
District Judge:
This cause was
submitted upon a stipulation of facts, which the Court adopts as its
Findings of Fact.
[Priority
of Liens]
For a better
understanding, however, of the Court's Opinion and Conclusions of Law,
the following should be recited. The subject matter of this suit is the
sum of $25,518.56, deposited with this Court by the plaintiff, Chrysler
Corporation, incident to its interpleader. $1,035.00 of this fund has
been paid to the plaintiff for attorney fees and costs, leaving
$24,483.56 available for distribution among the defendant claimants.
This fund came into existence under the following circumstances:
defendant Long & Long, Inc., a Michigan Corporation, was a Chrysler
dealer. In early 1954, its franchise was cancelled and it returned to
the Chrysler Corporation certain parts and equipment and was given
credit therefor by the Chrysler Corporation. This credit, finally
determined on
August 10, 1954
, was the sum deposited in court. The defendants assert conflicting
claims and priorities to the balance of this fund. Their respective
claims are as follows:
[Loans
by Individuals]
1) James P.
Long, Sr., and Eleanor A. Long, his wife: On August 16, 1952, these
defendants loaned to Long & Long, Inc., the sum of $177,718.26,
taking, on that date, the corporation's note therefor, secured by a
chattel mortgage of even date. At all times involved herein, said
corporation continued to be indebted to the said individual Longs, who
will be referred to hereafter as the Longs, thereunder, in an amount
upwards of $125,000.00. The chattel mortgage was recorded in the Wayne
County Register of Deeds office on
August 3, 1953
. Prior to
March 9, 1954
, the individual Longs took possession of the goods covered by the
chattel mortgage. On or about March 9, 1954, they joined with the
corporate defendant Long & Long, Inc., in executing a promissory
note to the Commercial Credit Corporation in the sum of $25,486.58 and
subordinated their aforementioned chattel mortgage to a new mortgage
then given by Long & Long, Inc., to Commercial Credit Corporation,
securing said last mentioned note and covering the same chattels that
were subject to the earlier chattel mortgage held by the individual
Longs. At the time of this latter transaction, the transfer to Chrysler
Corporation of the property covered by both chattel mortgages was in
contemplation and Long & Long, Inc., gave assignments of the
proceeds that would arise from such transfer to the Commercial Credit
Corporation and to the individual Longs, the assignment to the latter
being, by agreement, subordinated to the chattel mortgage and assignment
given to the Commercial Credit Corporation. The aforesaid assignment to
the Commercial Credit Corporation was dated
March 9, 1954
, and the assignment to the individual Longs was dated
March 10, 1954
. There is no question about the validity and bona fides of the mortgage
given by Long & Long, Inc., to the individual Longs in 1952. It was
properly recorded, as required by
Michigan
statute, on
August 3, 1953
.
The individual
Longs claim they are entitled to the fund on deposit with this court,
less the amount due Commercial Credit Corporation upon its note from
Long & Long, Inc. The stipulation of facts recites that the amount
owed on this latter note at the time of the commencement of the
interpleader proceedings was the principal sum of $11,664.07. The note
bore interest at the rate of six percent per annum.
[Commercial
Lender]
2) Commercial
Credit Corporation: Commercial Credit Corporation, using the trust
receipt method, had been financing the purchase of automobiles by Long
& Long, Inc., as a Chrysler dealer and on or about
March 9, 1954
, Long & Long, Inc., was indebted to Commercial Credit Corporation
thereon in the sum of $120,945.86. In addition to said debt, Long &
Long, Inc., was then indebted to Commercial Credit in the sum of
$25,486.58, which represented the amount owing to Commercial Credit
Corporation by reason of the failure of Long & Long, Inc., to have
accounted to Commercial Credit Corporation for all the proceeds of the
sale of motor vehicles which were subject to trust receipts. On
March 9, 1954
, Long & Long, Inc., and defendants James P. Long, Sr., and Eleanor
A. Long, his wife, joined in executing the aforesaid promissory note to
defendant Commercial Credit Corporation in the amount of $25,486.58. The
said chattel mortgage securing this note covered various parts and
equipment, as well as future acquisitions by the mortgagor and
specifically covered accounts receivable then owned by the mortgagor and
such accounts as might thereafter be owned by the mortgagor. On the same
date the assignment was executed by Long & Long, Inc., covering
whatever credits might thereafter become due to Long & Long, Inc.,
by reason of its return to Chrysler Corporation of various parts and
equipment for credit. As stated above, the balance owing on the last
mentioned not at the commencement of this litigation was the sum of
$11,664.07. Commercial Credit Corporation asserts its right to
participate in the fund on deposit to the extent of the aforesaid
principal amount, together with interest to
December 9, 1957
, in the amount of $3,624.61 and additional interest upon the aforesaid
principal sum from and after
December 9, 1957
, at the rate of six percent.
[Federal
Taxes]
3)
United States of America
: On
January 15, 1954
, and
February 12, 1954
, the District Director of Internal Revenue at
Detroit
,
Michigan
, assessed Federal income taxes against Long & Long, Inc., for the
years 1945, 1946, 1948 and 1950. The said Director filed notice of the
liens arising from such tax assessments with the Register of Deeds
office for Wayne County, Michigan, during the month of May, 1954, and
not prior thereto. It is conceded that the tax claims of the
United States
exceed the sum of $50,000.00. The United States of America claim a
superior right to all defendants to the fund on deposit by reason of
said liens.
[Property
Taxes]
4)
Wayne
County
and the City of
Hamtramck
: The City of Hamtramck, Michigan, levied a personal property tax
against the personal property of Long & Long, Inc., on
January 1, 1953
, in the amount of $1,372.04, which said taxes were due and payable on
July 1, 1953
. On
December 1, 1953
, the Treasurer of the City of
Hamtramck
assessed an additional personal property tax against said Long &
Long, Inc., for county taxes in the sum of $564.04. The total amount of
these taxes was $1,936.08 and was duly returned delinquent to Wayne
County Treasurer as of
March 1, 1954
. A four percent collection fee of $77.45 was assessed, and it is
claimed that interest has been accruing upon these unpaid taxes at the
rate of one-half of one percent per month from
March 1, 1954
.
These taxing
authorities claim they are entitled to that much of the money on deposit
as represents the amount of the aforesaid taxes with accumulated
interest and penalties. They assert their right to be superior to the
claims of all the other defendants.
[Interpleader]
5) L. C.
Laviolette: This defendant was named in the interpleader and duly
served, but has filed no answer or other pleading in the cause.
Accordingly, there is no claim as to him pending in this litigation.
Conclusions
of Law
(a) Personal
property taxes of the City of Hamtramck and the County of Wayne: The
Hamtramck City Charter provides that personal property taxes shall be a
lien on all personal property of the persons assessed, from and after
the first day of July of each year and shall take precedence of
"any sale, assignment or chattel mortgage, levy or other lien, on
such personal property executed or made after said first day of July,
except where such property is actually sold in the regular course of
trade."
[Property
Taxes]
The
Michigan
statute covering the lien of the taxing authorities for personal
property taxes (M. S. A. §7.81) provides:
"The
personal property taxes hereafter levied or assessed by any city or
village shall be a first lien, prior, superior and paramount to any
other claims, liens and encumbrances whatsoever upon the personal
property assessed as herein provided, any provisions in the charter of
such cities or villages to the contrary notwithstanding."
Although the
Charter provisions of the City of Hamtramck would appear to make the
lien for personal property taxes superior only to chattel mortgages
executed on or after July 1, the date when the tax becomes due, the
state statute provides no limitation upon the priority of the tax lien
to chattel mortgages or other liens whether coming into existence before
or after the date on which the lien for personal property taxes become
effective. Briefs filed make reference to various Michigan cases, to
wit: Lucking v. Ballantyne, 132 Mich. 584; Dunitz v. Albert
Pick & Co., 241 Mich. 55; and Detroit Trust Co. v. City of
Detroit, 269 Mich. 81, for the proposition that the chattel mortgage
of the individual Longs is superior to the personal property tax liens.
At the time of these decisions, the
Michigan
statute did not contain the provision quoted above providing for the
priority of such tax liens over all other liens of whatever kind or
nature and of whatever origin in time. These cases cited had to do with
the question of whether or not a lien for personal property tax was
superior to a chattel mortgage lien created prior to the effective date
of the tax. Since these decisions, the
Michigan
statute has been amended (Act 38, P. A. 1934 (1st Ex Sess)) to
specifically make a lien for personal property taxes superior to a
chattel mortgage without reference to the time when the chattel mortgage
lien was created or perfected. Construing this statute, the Supreme
Court of Michigan has confirmed such superiority. In re Ever Krisp
Food Products Co., 307
Mich.
182, 207; In re Rite-way Tool and Manufacturing Co., 333
Mich.
551. The liens of the municipalities for personal property taxes came
into being prior to the assessment and notice of the tax liens of the
United States
.
The fact that
the property upon which this personal property tax lien was affixed was
sold prior to any enforcement of the lien does not, in this Court's
opinion, detract from the municipal taxing authorities recovering the
amount of their lien from the proceeds of the sale of the property
subject thereto.
"The
owner of the property cannot sell or remove the property, so as to
effect the lien, unless the lienor consents or unless he does so under
an order of court. It has been held that, where property encumbered by
any fixed lien is sold free from the lien, the proceeds stand in the
place of the thing sold and the lien attaches to the proceeds." 53
C. J. S. "Liens" Sec. 12, page 859. See also, In re
Ever Krisp Food Products Co., supra.
Accordingly,
this Court is of the opinion that the amount of the personal property
taxes owing to the City of
Hamtramck
and the
County
of
Wayne
, with penalties and interest to date, shall first be paid out of the
fund deposited under the interpleader.
[Chattel
Mortgage Was
Superior
to Federal Tax Lien]
(b) Claim
of the
United States of America
: As indicated above, the stipulation of facts raises no question as
to the bona fides of the chattel mortgage given by Long & Long,
Inc., to James P. Long, Sr., and Eleanor A. Long, his wife, on
August 16, 1952
. This chattel mortgage was regularly recorded as required by
Michigan
law on
August 3, 1953
. Briefs of the
United States
attack the validity of this recording on the ground that the affidavit
required by
Michigan
statute (M. S. A. 26.929) was not affixed to the mortgage when recorded.
In this the Government is in error, as the exhibit attached to the
stipulation of facts as Exhibit A discloses that the statutory affidavit
was affixed to the chattel mortgage when recorded. This chattel mortgage
was, therefore, perfected as of
August 3, 1953
. The chattel mortgage to Commercial Credit Corporation was executed on
March 9, 1954
, and was properly recorded in the office of the Register of Deeds on
March 10, 1954
, thereby becoming perfected as a lien upon the property in question.
The director of Internal Revenue gave notice of his tax lien in the
month of May, 1954. The Internal Revenue Code of 1939, Section 3672,
provides in relation to the priority of a lien for taxes such as is
involved here, as follows:
"Such
lien shall not be valid as against any mortgagee, pledgee, purchaser, or
judgment creditor until notice thereof has been filed by the collector.
"(1)
In the office in which the filing of such notice is authorized by the
law of the state or territory in which the property subject to the lien
is situated, whenever the state or territory has by law authorized the
filing of such notice in an office within the state or territory."
It is not
disputed that the place of filing of such notice of tax lien under
Michigan
law is the Register of Deeds office. The filing of such notice in May,
1954, was subsequent to the perfecting of chattel mortgage liens of the
individual Longs and the Commercial Credit Corporation. The
United States
' lien was, therefore, subordinate to the lien of the chattel mortgagees
and likewise to that of the municipal taxing authorities.
In its brief,
the
United States
questions whether or not the consideration for the chattel mortgage to
the Commercial Credit Corporation was a present one. The stipulation of
facts, however, sets forth that such mortgage was given for a present
consideration.
[Mortgage
on After-Acquired Property]
James P. Long,
Sr., and his wife, and the Commercial Credit Corporation both received
assignments from Long & Long, Inc., specifically assigning to them
any accounts receivable that would arise out of the contemplated
transfer of mortgaged property to the Chrysler Corporation. It is
claimed by the
United States
, however, that the chattel mortgage liens applied only to the personal
property covered by the mortgages and not to the proceeds of a
subsequent sale thereof. A reading of both of the chattel mortgages in
question discloses that they covered after-acquired property of the
mortgagor. The mortgage to James P. Long, Sr., and wife, mentioned
accounts receivable without specifically referring to accounts
receivable that might thereafter arise, but did cover any "personal
property of every kind and nature which at any time hereafter may be
purchased for, or added to, or used in connection with said personal
property or business". The mortgage to the Commercial Credit
Corporation specifically covered all accounts receivable which might at
any time hereafter be added to or used in connection with the personal
property-subject to the chattel mortgage.
The United
States claims that somewhere between the time of the perfecting of the
chattel mortgage liens of James P. Long, Sr., and his wife, and
Commercial Credit Corporation, and the time that the account receivable
became payable from the Chrysler Corporation to the mortgagor in the
aforesaid chattel mortgages, the liens thereof were lost and that the
lien of the United States for its taxes became a prior lien. This Court
does not think so. The Court believes that although not spelled out with
as nice language as might have been employed, the two chattel mortgages
did in fact constitute mortgages upon the accounts receivable which
later accrued to Long & Long, Inc., from Chrysler Corporation. The
Supreme Court of Michigan has held that book accounts may be made
subject to chattel mortgages and that such a mortgage may apply to
future as well as existing accounts.
In Dunn v.
Michigan Club, 115 Mich. 409, a judgment creditor caused a writ of
garnishment to be issued and sought to have such garnishment take
precedence over a previous chattel mortgage which covered, among other
things, present and future book accounts. In sustaining the priority of
a chattel mortgage to an account receivable, the Supreme Court of
Michigan said:
"It
is no longer an open question in this state that accounts are the
subject of assignment, and may be mortgaged, and this applies as well to
future accounts as to existing accounts."
Aside from the
question of whether or not a technical construction of the chattel
mortgage given to James P. Long, Sr., and wife, sufficiently described
future accounts receivable so as to constitute the chattel mortgage a
lien upon accounts receivable, this Court is of the opinion that what
was done here should in no way be construed as a relinquishment of the
liens of the chattel mortgages in question.
On
March 9, 1954
, both James P. Long, Sr., and wife, and the Commercial Credit
Corporation had valid liens which were prior in time and effectiveness
to the notice of tax lien filed by the District Director of Internal
Revenue. What they did in allowing the chattels to be delivered to
Chrysler Corporation, taking at the same time assignments of the
proceeds of credits to be issued by Chrysler Corporation, were but
proceedings to protect and confirm the liens then existing. Mortgagees
so protected should be allowed to recover their debts from the proceeds
of the sale of property upon which they had a valid mortgage.
"A
mortgagee is entitled to the proceeds of a sale of mortgaged property by
the mortgagor when the sale is made upon the condition, agreement or
understanding that the proceeds shall be paid to the mortgagee or his
representative. This right of the mortgagee is superior to the claims of
the mortgagor, the mortgagor's creditors, a purchaser or other persons
whose claims were inferior to the mortgage liens prior to the
sale." 14 C. J. S. 891.
Everything
that was done by the chattel mortgagees in question evidenced a
diligence to protect valid liens then existing. This Court does not feel
that this diligence should be held to subordinate their rights to the
tax lien of the
United States
.
Accordingly,
it is this Court's opinion that out of the fund remaining after payment
of the taxes of the City of Hamtramck and the County of Wayne, there
shall be paid to the Commercial Credit Corporation the balance owing it
on its note and chattel mortgage, to wit: $11,664.07, with interest
thereon at six percent, being the interest fixed in the note and
mortgage, to this date. The balance of the fund shall be paid to the
defendants James P. Long, Sr., and Eleanor A. Long, his wife.
[Interest]
The defendant
James P. Long, Sr., and Eleanor A. Long, his wife, contend that interest
on the balance owing to the Commercial Credit Corporation should not be
allowed subsequent to the date of filing of the interpleader and the
deposit of the fund with the Clerk of this court. In support of this
contention, they cite various authorities for the proposition that where
a debtor deposits money in court in an effort to have determined to whom
the amount deposited should be paid, interest on the obligation of such
debtor is suspended from the time of deposit of the funds. There is good
reason for such principle, but this Court does not feel it applies to
this case. We are not dealing with any obligation of the Chrysler
Corporation as a debotr. The defendants James P. Long, Sr., and wife,
were joint makers on the note to Commercial Credit Corporation, the
balance of which is to be paid to Commercial Credit Corporation out of
the fund now on deposit. There was nothing to prevent James P. Long,
Sr., and wife, paying the note in question and thus stopping the running
of interest.
Commercial
Credit Corporation has filed in this cause a cross claim against Long
& Long, Inc., and James P. Long, Sr., and Eleanor A. Long. They seek
thereby to obtain a judgment against the last mentioned defendants for
the amount of the balance due on its note and mortgage of
March 9, 1954
, with interest. The order to be entered under this Opinion shall
provide for such a judgment with proper recitation that such judgment is
rendered upon a written instrument and and that on the date of delivery
of such instrument James P. Long, St., and Eleanor A. Long were husband
and wife, so that any execution to be issued upon said judgment will be
in accordance with the provisions of Section 557.54 of Michigan Compiled
Laws, 1948. Payment, however, to the Commercial Credit Corporation of
the amount of its note with interest out of the fund now on deposit with
the Clerk of this Court, shall constitute satisfaction of any such
judgment.
A judgment in
conformity with this Opinion may be presented for signature after
submission to all counsel for approval as to form.
[52-2 USTC
¶9509]In the Matter of
Ann Arbor
Brewing Company, a Corporation, Bankrupt
In
the United States District Court for the Eastern District of Michigan,
Southern Division, No. 32470, 110 FSupp 111, October 24, 1951
Tax liens of the federal and the state or city authorities:
Priority.--Prior to the filing of bankruptcy proceedings a bankrupt
owed taxes to the federal government, the City of Ann Arbor, the school
district and the county. The city had possession of both his real and
personal property. The question of priority of tax liens was raised. The
Court considered the various provisions of the Federal Constitution and
concluded that in bankruptcy matters the provisions of the Bankruptcy
Act were the supreme law of the land. The statute of a state or the
ordinances of a city cannot affect the validity of federal tax liens or
make their own tax liens superior to those of the federal government.
The liens of the federal government in this case were valid and were of
equal dignity with the liens of except the latter's liens on specific
property except the latter's liens on specific porperty which had
priority over general liens. Liens of equal dignity and rank should be
paid in the order of time the liens attached, subject, however to the
equity rule that one who has liens on more than one piece, group or type
of property, some of which are subject to junior liens, cannot exhaust
the property covered with junior liens until he has exhausted his rights
against the other property not so covered. Payments of the various liens
were ordered accordingly.
Weiswasser,
Jaffe & Radner, 917 Dime Building,
Detroit
26,
Michigan
, for petitioner.
Opinion
and Order Re Tax Claims
MCKENZIE,
Referee in bankruptcy:
This matter is
before the Court on an Order to Show Cause directed to the several
taxing authorities, mentioned in detail hereinafter, to prove the
amount, validity and respective priority of their alleged liens and
claims.
Several
hearings were had and extensive briefs were filed by the City of
Ann Arbor
, the Collector of Internal Revenue and the Trustee. The Court has
carefully considered the proofs submitted, the oral arguments of counsel
and the several briefs as filed.
The Receiver
in this case received an offer of $25,500, for the real and personal
property in this estate free and clear of liens. After due notice to all
lien holders and also to all creditors of the above bankrupt, and after
hearings had thereon, the above offer was accepted with the consent of
the various lien holders and all valid liens were transferred to the
proceeds of the sale. Action was taken on said matters at the time of
the first meeting of creditors in the above estate on
March 23, 1950
, and the reclamation petition of the holder of first and second
mortgages on both the real estate and personal property was decided at
that time without objection by any of the taxing authorities. A formal
order granting said reclamation petition was entered on
March 30, 1950
. There was no appeal from this order. On
July 28, 1950
the petition for an order to show cause re the marshaling of liens was
filed and the order to show cause referred to at the beginning of this
opinion and order was entered.
Since
apparently most of the troublesome questions regarding tax liens and
their relative priorities have been raised in this case, the Court has
given these matters careful consideration even though the final results
may not leave much money in dispute.
The relative
priority of state and federal tax liens is the most important question
in dispute. Can the state or its subsidiary taxing authorities, to wit:
cities, school districts and counties, by apt wording in their statutes
or ordinances affect the taxing authority of the federal government? Are
their alleged tax liens superior to those of the federal government
because of claims to priority included in their laws?
A basic
consideration of fundamentals is necessary.
1. Article VI
of the Constitution of the
United States
provides:
"This
Constitution and the Laws of the United States which shall be made in
Pursuance thereof; and all Treaties made, or which shall be made, under
the Authority of the United States, shall be the supreme Law of the
Land; and the Judges in every State shall be bound thereby, any Thing in
the Constitution or Laws of any State to the Contrary
notwithstanding."
Article I,
Section 8, provides in part:
"The
Congress shall have Power to lay and collect Taxes, Duties, Imports and
Excises, to pay the Debts and provide for the common Defense and general
Welfare of the United States; but all Duties, Imports and Excises shall
be uniform throughout the United States;
*
* *
"To
establish an uniform Rule of Naturalization, and uniform Laws on the
subject of Bankruptcies throughout the
United States
;
*
* *
"To
make all Laws which shall be necessary and proper for carrying into
Execution the foregoing Powers, and all other Powers vested by this
Constitution in the Government of the United States, or in any
Department or Officer thereof."
The laws
enacted by congress are the supreme Law of the land.
McCulloch
v.
Maryland
(1819) 4 Wheat. 316;
Florida
v. Mellon, Secretary of the Treasury, etc. (1927) 273 U. S. 12
[The
Bankruptcy Act]
Since under
Article I, Section 8 of the United States Constitution, the
United States
has exclusive jurisdiction in bankruptcy matters, the provisions of the
Bankruptcy Act are the supreme law of the land. This act provides for
the payment of the debts of the bankrupt and gives priority to certain
of these debts. This same priority must apply uniformly throughout the
entire
United States
.
Section 64
a(4) of the Bankruptcy Act provides:
"The
debts to have priority, in advance of the payment of dividends to
creditors, and to be paid in full out of bankrupt estates, and the order
of payment, shall be (4) taxes legally due and owing by the bankrupt to
the United States or any State or any subdivision thereof; Provided,
That no order shall be made for the payment of a tax assessed against
any property of the bankrupt in excess of the value of the interest of
the bankrupt estate therein as determined by the court; and provided
further, That, in case any question arises as to the amount or legality
of any taxes, such question shall be heard and determined by the
court."
Section 67 b
provides:
"The
provisions of section 60 of this Act to the contrary notwithstanding,
statutory liens in favor of employees, contractors, mechanics,
landlords, or other classes of persons, and statutory liens for taxes
and debts owing to the United States or any State or subdivision
thereof, created or recognized by the laws of the United States or of
any State, may be valid against the trustee, even though arising or
perfected while the debtor is insolvent and within four months prior to
the filing of the petition in bankruptcy or of the original petition
under chapter X, XI, XII, or XIII of this Act, by or against him. Where
by such laws such liens are required to be perfected and arise but are
not perfected before bankruptcy, they may nevertheless be valid,, if
perfected within the time permitted by and in accordance with the
requirements of such laws, except that if such laws require the liens to
be perfected by the seizure of property, they shall instead be perfected
by filing notice thereof with the court."
Section 67 c
provides:
"Where
not enforced by sale before the filing of a petition in bankruptcy or of
an original petition under chapter X, XI, XII, or XIII of this Act,
though valid under subdivision b of this section, statutory liens,
including liens for taxes or debts owing to the United States or to any
State or subdivision thereof, on personal property not accompanied by
possession of such property, and liens, whether statutory or not, of
distress for rent shall be postponed in payment to the debts specified
in clauses (1) and (2) of subdivision a of section 64 of this Act, and,
except as against other liens, such liens for wages or for rent shall be
restricted in the amount of their payment to the same extent as provided
for wages and rent respectively in subdivision a of section 64 of this
Act."
Section 64
a(4) deals only with taxes that are merely debts. Section 67 c deals
with taxes that have become liens on personal property only. Congress
must have intended the two groups of taxes to be treated differently or
it would not have provided for them as it has.
Since the tax
liens on the personal property are made subordinate to
admin
istration expenses and labor claims by Section 67 c, unless the property
is in the possession of one of the taxing authorities, and there will
not be money enough to pay all tax liens in full, it becomes important
to determine whether there is to be any variance of priority among the
tax liens and which law is to apply.
There can be
no question but that the Bankruptcy Act, not state law, will control the
method of payment. (
U. S.
v. Wadill, Holland & Flinn, Inc., 323 U. S. 353; 89 L. Ed.
294). There can also be no question but that the federal government can
create just as valid a tax lien as any state or subdivision thereof. The
questions remaining to be answered, however, are these: (1) Are all
these statutory liens of equal rank; and (2) Are those of equal rank to
be grouped together, or are they to be paid in the order of time in
which their liens attached or became perfected?
[Liens
of Equal Dignity or Rank]
Liens of equal
dignity or rank should be paid in the order of time the liens attached.
"First in time, first in right".
Rankin
v. Scott, 12 Wheat. 177-179; 6 L.
Ed. 592;
U. S.
v. City of
Greenville
, 118 Fed. (2d) 963 [41-1 USTC ¶9381];
In
re Taylorcraft Aviation Corp.,
168 Fed. (2d) 808 [48-1 USTC ¶9288].
The case of In
re Ever Krisp Food Products Co., 307 Mich. 182, merely holds city
and county personal property taxes were complete and perfected liens and
would be paid before U. S. taxes merely claiming priority under Section
3466 U. S. code. The
United States
made no claim to a lien in this case.
The city of
Ann Arbor
, and as agent for the school district and the
county
of
Washtenaw
, had possession of the property, both real and personal, at the time
these bankruptcy proceedings were filed. Apparently, therefore, if no
other valid considerations intervene, their tax claims should be paid
before general
admin
istration expenses and labor claims are paid, under the provisions of
Section 67 c of the Bankruptcy Act heretofore quoted. They are, however,
subject to their pro-rata share of the cost of protecting and preserving
the property and the cost of sale.
Since only the
personal property taxes are subordinate to
admin
istration expenses and labor claims and the real estate taxes are not,
but both are subject to their pro-rata share of the cost of protecting,
preserving and selling the property, the court makes the following
findings and determination of costs. The cost of the appraisal was
$189.00 and $85.00 of this sum will be charged to the real estate and
$104.00 to the personal property, based on the appraised value of each.
The receiver's fee will be allowed at $200.00 for these purposes and
divided $85.00 to the real estate and $115.00 to the personal property.
There was a private offer submitted to creditors and approved by the
court so there are no auctioneer's fees to be paid. Therefore, the costs
of protecting, preserving and selling the property will be $170.00 to be
charged against the real estate and $219.00 to be charged against the
personal property.
The federal
government's claims to liens for its taxes are based on the provisions
of Section 3670, 3671 and 3672 of Title 26,
U. S.
C. A. The applicable portions of these sections are as follows:
"Section
3670. Property subject to lien.--If any person liable to pay any tax
neglects or refuses to pay the same after demand, the amount (including
any interest, penalty, additional amount, or addition to such tax,
together with any costs that may accrue in addition thereto) shall be a
lien in favor of the United States upon all property and rights to
property, whether real or personal, belonging to such person. 53 Stat.
448."
"Section
3671. Period of lien.--Unless another date is specifically fixed by law,
the lien shall arise at the time the assessment list was received by the
collector and shall continue until the liability for such amount is
satisfied or becomes unenforceable by reason of lapse of time. 53 Stat.
449."
"Section
3672. Validity against mortgagees, pledgees, purchasers and judgment
creditors.--(a) Invalidity of lien without notice. Such lien shall not
be valid as against any mortgagee, pledgee, purchaser, or judgment
creditor until notice thereof has been filed by the collector--
(1)
Under State or Territorial laws. In accordance with the law of the State
or Territory in which the property subject to the lien is situated,
whenever the State or Territory has by law provided for the filing of
such notice."
The court
finds that liens of the federal government arising under Section 3670
and 3671 of Title 26, U. S. C. A. are just as valid as and of equal
dignity with liens arising under Section 40 of Act 206, P. A. of
Michigan of 1893, as amended, (7.81 M. S. A.) or under Section 171 of
the Ann Arbor City charter. The court further finds that the trustee in
bankruptcy was not a judgment creditor within the purview of Section
3672, supra (In re Taylorcraft Aviation Corp., 168 Fed. (2nd)
808-810); and that the state taxing authorities were not mortgagees,
pledgees, purchasers or judgment creditors within the purview of said
Section 3672.
Therefore, the
cases cited by the City of Ann Arbor concerning the validity of the
Michigan Statute (Act 104 of 1923, M. S. A. 7-751) requiring the real
estate to be described in a federal tax lien before it is valid do not
apply to the present case. In each of those cases a purchaser, mortgagee
or judgment creditor was involved. These cases were:
United States
v. Maniaci, 36 Fed. Supp. 293, affirmed 116 Fed. (2nd) 935;
United States
v. City of
Detroit
, et al., 138 Fed. (2nd) 418, on re-hearing 141 Fed. (2nd) 1021;
United States
v. Youngblood, 141 Fed. (2nd) 914. The court has found no cases
which hold such recording is a prerequisite to the validity of a federal
tax lien as between the federal government and other taxing agencies.
There are,
however, still several serious questions to be answered. The city of Ann
Arbor, the county of Washtenaw and the school district had specific
liens on the land in question and the personal property while the
federal government had only a general lien on all the property of the
bankrupt until it filed its specific lien against the real estate with
the register of deeds for Washtenaw county on December 2, 1949. As
stated before, however, this filing was not necessary to make the
general liens good against the real estate as between the various taxing
agencies. (
U. S.
v. City of
Greenville
, 118 Fed. (2nd) 963; Paul v.
United States
, 127 Fed. (2nd) 64 [42-1 USTC ¶10,163], affirmed in Michigan v.
United States, 317
U. S.
338, 87 L. Ed. 312 [43-1 USTC ¶9225]).
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
city, county and school district on this realty. The specific liens of
the city, county and school district on the real estate amount to
$689.19 so the court will allow these specific liens to be paid in full.
The mere fact
that the liens of the city, county and school district were on specific
property was not the controlling factor in this decision. The court
applied the general equity rule that where one has liens on more than
one piece, group or type of property, some of which are subject to
junior liens, he cannot exhaust this property covered with junior liens
until he has exhausted his rights against the other property not so
covered. The court realizes that the usual term is "satisfied his
lien"; and that would have been very close to the result in this
case, if not actually accomplished, had it not been for the intervention
of the provisions of Section 67 c subordinating the government's lien on
personal property to the payment of
admin
istration expenses and labor claims. After much thought and
consideration of this problem and the assembling of many sets of
figures, the above decision seemed the only practical and feasible one.
The amount of
money in the hands of the trustee allocated to the real estate is
$2925.40. Against this has been charged, supra, $170.00 as the cost of
its protection and preservation. This will leave $2755.40 to be divided
among the tax lien claimants. After paying the city, county and school
district on their specific liens the sum of $689.19 there will be
$2066.21 left. Since the government's valid liens effective prior to
August 31, 1949, when the Corporation and Securities Commission's
general lien on all property became effective, exceed this sum this
balance of $2066.21 will be be paid to the government. A detailed
statement of the amounts and effective dates of the various government
liens will be set out hereafter.
We now come to
the liens on the personal property. As heretofore discussed, the city,
county and school district had valid possession of this personal
property and had advertised it for sale prior to the filing of the
petition in bankruptcy. Therefore, their personal property tax claims
are not to be subordinated to
admin
istration expenses and labor claims (Section 67 c of Bankruptcy Act) and
they did not lose this security by permitting the trustee to sell the
property (Goggin v. Division of Labor, 336 U. S. 118, 93 L. Ed.
543).
Since they are
the only taxing agencies which had possession of the property, their
personal property tax lien in the sum of $689.19 will be paid in full.
The amount of money allocated to the personal property was $3579.31, and
against this was charged $219.00 for its protection and preservation.
Deducting these two sums from $3579.31 we have $2671.12, which sum is
subject to deductions for
admin
istration expenses and labor claims, and the balance will be divided
among the other taxing agencies in the order of time their respective
liens became effective. Each lien will be paid in full in the order of
its priority before the next junior lien is paid.
[Payment
of Liens]
The various
liens will be paid in the amount and in the order stated below after
crediting against the government's claims first the sum of $2066.21
derived from the sale of real estate.
Payment must
be delayed, however, until the
admin
istration expenses have been determined and allowed, and the amount of
priority labor claims determined. After the
admin
istration expenses and priority labor claims have been paid in full the
balance of the funds on hand will be paid to the tax lien claimants as
herein indicated.
I. City of
Detroit
personal property tax for $62.63, which became a lien
July 15, 1944
.
II. Federal
taxes due to the
United States
, to wit:
1.
3rd quarter 1948 employment tax in the amount of $198.16, which became a
lien on
December 27, 1948
.
2.
3rd quarter 1948 withholding tax in the amount of $1,457.02, which
became a lien on
December 27, 1948
.
3.
4th quarter 1948 withholding tax in the amount of $564.65, which became
a lien on
March 17, 1949
.
4.
4th quarter 1948 employment tax in the amount of $195.87, which became a
lien on
March 31, 1949
.
5.
1st quarter 1949 employment tax in the amount of $164.93, which became a
lien on
May 18, 1949
.
6.
1st quarter 1949 withholding tax in the amount of $580.51, which became
a lien on
May 23, 1949
.
III. 7a.
Federal taxes due to the
United States
for 2nd quarter 1949 employment tax in the amount of $106.77, which
became a lien on
August 31, 1949
.
7b.
Michigan Corporation and Securities Commission, corporation tax in the
amount of $195.75, which became a lien on
August 31, 1949
.
The
tax liens listed in 7a and 7b are of equal rank and are to be pro-rated
if there is not enough money to pay both taxes in full.
IV. 8. Federal
taxes due to the
United States
for 3rd quarter 1949 employment tax in the amount of $127.82, which
became a lien on
December 5, 1949
.
V. 9a.
Michigan Unemployment Compensation Commission claim for 3rd quarter 1949
contributions tax in the amount of $101.20, which became a lien on
December 12, 1949
.
9b.
Federal tax due to the
United States
for 3rd quarter 1949 withholding tax in the amount of $493.04, which
became a lien on
December 12, 1949
.
The
tax liens listed in 9a and 9b are of equal rank and are to be pro-rated
if there is not enough money to pay both taxes in full.
VI. 10.
Michigan Unemployment Compensation Commission claim for 4th quarter 1949
contributions tax in the amount of $25.02, which became a lien on
February 8, 1950
.
Federal
taxes due to the
United States
, to wit:
11.
Supplemental withholding tax for the 4th quarter 1948 in the amount of
$28.33, which became a lien on
February 27, 1950
.
12.
4th quarter 1949 employment tax in the amount of $129.31, which became a
lien on
March 6, 1950
.
13.
4th quarter 1949 withholding tax in the amount of $208.50, which became
a lien on
March 8, 1950
.
14.
Additional 1944 income tax in the amount of $23,846.58, which became a
lien on
May 15, 1950
.
15.
Assessed interest on 1945 income tax in the amount of $116.80, which
became a lien on
May 15, 1950
.
In view of the
foregoing findings--
IT IS HEREBY
ORDERED that the various tax liens be paid in the order, amounts and
manner heretofore provided, and that the other provisions contained in
the foregoing Opinion and Order be given full force and effect.
