Michigan Page2

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The later case of Kiely v. Bertrand, 67 Mich. 332, 34 N. W. 674 (1887), involved a situation wherein the principal debtor undertook a logging contract which he did not complete. The court found that nothing was due the principal debtor at the time the writ of garnishment was served on the garnishee because the uncompleted contract was executory. The court denied the garnishment on the authority of Webber. Although Webber does not directly support the Government in this case because it appears that the work had not been performed there at the time of the writ, Kiely is directed against appellant. In Kiely some work was done at the time the writ was served, but because the contract was not completed nothing was due at that time.

Finally, in Simmons Hardware Co. v. Rose, 140 Mich. 123, 103 N. W. 529 (1905), the Michigan Supreme Court again denied a writ of garnishment, supporting the lower court's decision that the case was governed by Webber and Kiely. There the principal debtor undertook to install heating and plumbing systems under a contract which provided for payments when the work reached a certain stage and a final payment upon completion. At the time of the writ all payments due had been made. The plaintiff claimed that more had been earned at the time of the writ, although not then payable. The court upheld the lower court's denial of the writ because nothing was then due.

Although Navratil may have been entitled to something for partial performance, the amount was not fixed or determined. The amount claimed for partial performance could conceivably have been reduced or even wiped out if Navratil had sued Paramount and the latter had counterclaimed for damages for breach of contract. In our opinion under Michigan law the garnishment lien was ineffective. The debt was not a contingent right or claim under the Michigan statute. Mich. Stat. Ann. §27.1856.

Nor was the lien good under the same statute permitting a creditor to reach "debts due or to become due." Appellant placed reliance on this language, but the Michigan cases construing it are against him. The leading case is Erb-Kidder Co. v. Levy, 262 Mich. 62, 247 N. W. 107 (1933). There the creditor had issued a writ of garnishment to reach rent which was due for payment at a later date. The court held that the language of the statute reached a debt that was fixed at the date of service of the writ and only payment was delayed.

In the instant case the debt was not fixed as to amount at the date the writ was served. Although some amount might possibly be due in the future, the debt was not fixed until Paramount and Navratil agreed on the amount. The Michigan statute contemplates only fixed debts existing at the time of the garnishment and payable then or in the future.

In Thorp v. Preston, 42 Mich. 511, 512, 4 N. W. 227, 228 (1880), the court stated:

The statute concerning demands payable in the future refers to claims which are fixed in amount or capable of being so fixed, and which do not depend for their validity or amount on anything to be done or earned in the future, or continued liability which may be changed by events.

Michigan is in accord with the majority of jurisdictions which hold that for a garnishment to be effective there must be an existing debt. And, in the case of a construction contract where the employer is not to become indebted to the contractor until performance of the contract, there is no debt owing to the contractor which may be reached by a garnishment until the contract is completed. 82 A. L. R. 1115.

[Debt Was Inchoate]

This is not a case where there is substantial performance by the contractor or where installments are earned and due, wherein garnishment will lie. 82 A. L. R. 1115. Here the debt was not due until the agreement fixed it. Since it appears that under both Federal and Michigan law this lien was not choate, it is inferior to the later fixed tax lien. When future performance of a contract is necessary before money payable thereon becomes due, the payment is conditioned upon the performance and is not subject to a garnishment until the condition has been fulfilled. Hopson v. Dinan, 48 Mich. 612, 12 N. W. 875 (1882); 2 A. L. R. 506.

In view of our holding that the garnishment lien was inferior to the tax liens, it becomes unnecessary to decide the question of the effect of Navratil's failure to submit the sworn statements under the mechanics lien law of Michigan .

Affirmed.

^* Judge Miller did not participate in this decision.

 

 

[63-1 USTC ¶9408]Spence Brothers, a corporation, Plaintiff, United States of America, Intervening Plaintiff v. United Electric Co., Inc., a corporation, Principal Defendant and Board of Education of the City of Flint, a municipal corporation, Garnishee Defendant, and Michigan Surety Co., a corporation, Advance Electric Supply Co., a partnership, Interstate Sanitation Co., a corporation, Interpleaded Defendants

Michigan Circuit Court, County of Genesee, No. 41774, 1/16/63

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Priorities: Funds owing to prime contractor: Effect of nonpayment of subcontractors: Michigan law.--Where the surety on a prime contractor's bond completed the work after default by the contractor and secured an assignment of accounts receivable owed by the Board of Education, for which the work was being done, the government's liens for withholding taxes owed by the contractor were entitled to priority in payment out of funds withheld by the Board of Education under a contract clause providing for retention of funds until subcontractors were paid in full. Since neither the contractor nor the surety company had paid the subcontractors in full, the court held that under Michigan law the contractor had a better claim to the retained funds than the surety company, so that the tax liens had priority over all claims except those of a prior judgment creditor.

John T. Gary, 804 Second Nat'l Bank Bldg., Saginaw , Mich. , for plaintiff. G. Franklin Killeen, 930 Beach St., Milliken & Magee, 1120 Beach St., Gilbert Y. Rubenstein, 1026 Mott Foundation Bldg., Flint, Mich., Watts A. Shelly, 941 Oakwood Blvd., Dearborn, Mich., for defendants.

Opinion

BAKER, Circuit Judge:

This case was submitted to the Court on an agreed statement of facts and written briefs were submitted. The Court having considered the facts and the briefs.

The agreed statement of facts are as follows:

These proceedings are based upon two writs of garnishment to which a disclosure and later an amended disclosure have been filed. Since the amended disclosure showed other claimants to the funds an order was entered interpleading as Claimants, Interstate Sanitation Company, Advance Electric Company, Michigan Surety Company, Simplex Time Recorder, Royalite Company, and United States of America .

Royalty, or Royalite Company has appeared and disclaimed any interest in the funds.

Simplex Time Recorder was defaulted by reason of their failure to file any answer or claim.

All of the other defendants have answered, setting forth their claims except the United States of America which was on motion dismissed as a party defendant and was granted the right to intervene as a party plaintiff. Answers to the intervening petition have been filed by Spence Brothers, Advance Electric Supply Company, and Michigan Surety Company.

This cause then and the dispute here is to determine the rights to and the priority in the funds which the Board of Education has disclosed, the rights and priorities of Spence Brothers, Interstate Sanitation Company, Advance Electric Supply Company, Michigan Surety Company and the United States of America, and is based upon the various pleadings filed, and is based upon the following stipulation as to the agreed facts here:

The facts to which the parties have agreed are that on July 22, 1958 , United Electric Company entered into a contracct to furnish the "Electrical contract work complete for the construction of the Flint Junior College Science and Technology Building " with the Board of Education with the City of Flint , a Michigan Municipal Corporation. The amount of this contract was originally one hundred forty-three thousand dollars and was subsequently reduced to one hundred forty-two thousand six hundred twenty-one dollars and fifty-three cents. A copy of the contract was attached as an exhibit marked Exhibit One. The specifications bearing the number 3805 were marked Exhibit Two. A. I. A. General Conditions, form A two six edition marked Exhibit Three and submitted as is required by statute; that is, Section 26.321, and following sections, Michigan Statutes Annotated.

United Electric Company secured a labor and material bond running to the People of State of Michigan with United Electric Company as principal and Michigan Surety Company as surety. This bond was dated July 22, 1958 , the date of the contract referred to above. This bond was conditioned upon payment by United Electric Company of all indebtedness from United Electric Company to sub-contractors, laborers, and material men in connection with the contract. A copy of this bond marked Exhibit Four was submitted. In connection with the issuance of the above bond, United Electric Company executed an application for such bond also dated July 22, 1958 . A copy of this application marked Exhibit Five was submitted.

[Default by Contractor]

United Electric Company entered upon the performance of the contract and performed substantial work in pursuance of it. However, by February 11, 1959, United Electric Company found itself in financial difficulties and called upon Michigan Surety Company for assistance. The letter of United Electric Company to Michigan Surety Company, dated February 11, 1959 , was marked Exhibit Five and was attached.

It appeared that at that time substantial sums owing to suppliers of material have not been paid by United Electric Company. After consultation between representatives of Michigan Surety Company and United Electric Company and the Board of Education, Michigan Surety Company notified the Board of Education on March 17, 1959 , that it declared the contract in default and demanded that future sums paid under the contract be paid to Michigan Surety Company. A letter of Michigan Surety Company to the Board of Education, dated March 17, 1959 , marked Exhibit Seven, was submitted.

In view of an assignment from United Electric Company to Advance Electric Company, the details of which were set forth later in more detail, the Board of Education advised Michigan Surety Company by letter dated March 19, 1959 , that it would not make all estimates payable to Michigan Surety Company. The letter of the Board of Education dated March 19, 1959 , marked Exhibit Eight, was submitted.

After further discussion, Michigan Surety Company offered by letter dated April 20, 1959 , to hold harmless the Board of Education from any claims of Advance Electric Company under its assignment, or any other person, firm or corporation. Thereafter the Board of Education authorized payments to Michigan Surety Company. The letter of Michigan Surety Company to the Board of Education dated April 20, 1959 , marked Exhibit Nine was submitted.

The minutes of the Board of Education meeting of April 28, 1959 , marked Exhibit Ten, were submitted.

[Work Completed by Surety]

Michigan Surety Company pursuant to its obligation under the bond thereupon undertook to complete the contract. In order to do so, it paid material men directly with its own funds and used United Electric Company to provide the labor to complete the contract. To this end money was paid by Michigan Surety Company to United Electric Company from which United Electric Company met its net pay roll. In the manner outlined above, Michigan Surety Company completed performance of the contract except for a small amount of work, accomplished by the Board of Education itself, the cost of which has been deducted by the Board of Education to any monies due under the contract.

In completing the work under the contract, Michigan Surety Company paid out eighty-five thousand sixty-seven dollars and fifteen cents to or for the benefit of laborers and material men. Michigan Surety Company received upon architects certificates, by check from the Board of Education payable jointly to Michigan Surety Company and the United Electric Company, the following sums: on August fourth, 1959, four thousand five hundred ninety-one dollars and one cent; on September 14, 1959, six thousand seven hundred twenty three dollars and ninety cents; on September 20, 1959, five thousand seven hundred sixty-nine dollars and eighty-five cents. A total of seventeen thousand eighty-four dollars and eighty-five cents.

A schedule of the payments made by Michigan Surety Company is marked Exhibit Eleven.

The architect's certificates upon which the three payments set forth above [were received] were certificates being dated July 13, 1959 ; August 13, 1959 ; September 9, 1959 , and are marked respectively Exhibits Twelve, Thirteen and Fourteen. A final architect's certificate was issued July 5, 1960 , and was returned to the Board of Education signed by the Michigan Surety Company and the United Electric Company on April 19, 1961 .

The Board of Education has filed an amended disclosure showing that there remains in the hands of the Board of Education a sum of seventeen thousand five hundred twenty-seven dollars and sixty-six cents unpaid under the contract subject to the terms and conditions of the contract and subject to the claims of the other parties to this action.

It is agreed by all parties that this sum represents the extent of the liability of the Board of Education under the contract as well as the funds disclosed as being still held by the Board of Education, were tax funds levied specifically for construction.

[Assignment of Funds Due Contractor]

Prior to the letter of March 17, 1959, which is Exhibit Seven, Advance Electric Company had secured on January 13, 1959, an assignment to it from United Electric Company of accounts receivable of United Electric Company from the Board of Education under the contract as well as sums due to United Electric Company under a separate account with another construction company. The assignment from United Electric Company to Advance Electric Supply Company marked Exhibit Fifteen was submitted.

Advance Electric Supply Company was a co-partnership comprised of Albert Kroger and Chester Schagne. Mr. Kroger and Mr. Schagne were also officers and substantial stockholders in United Electric Company.

This assignment which has already been referred to as Exhibit Fifteen was recorded in the office of the Register of Deeds for Genesee County on March 10, 1959 . A notice of said assignment was served on the Board of Education on March 11, 1959 , and on the Michigan Surety Company on March 11, 1959 . A copy of the notice of assignment is marked Exhibit Sixteen.

On May 5, 1959 , the Board of Education by letter advised Advance Electric Company that it had decided to recognize the assignment of the Michigan Surety Company as a prior assignment in consideration of the agreement of Michigan Surety Company to indemnify the Board of Education. This refers to the letter referred to as Exhibit Nine. This letter of the Board of Education of May 5, 1959 , is marked Exhibit Seventeen.

[Subcontractors' Claims]

Three of the parties to this suit who are sub-contractors and/or material men filed statutory notice that they relied on the security of the Michigan Surety Company bond, Exhibit Four. These proceedings refer to Michigan Statutes Annotated 26.322. These notices were served upon the Board of Education and by it properly transmitted to the Michigan Surety Company. The dates of service of these notices upon the Board of Education and the amounts claimed were as follows: Advance Electric Supply Company, served September 22, 1959 , amount four thousand nine hundred thirty-four dollars and twenty-eight cents. Advance Supply Company, served on Board of Education, December 7, 1959 , amount claimed five thousand one hundred forty-five dollars and forty-six cents. This last notice includes and is not in addition to the sum set forth in the notice of September 22, 1959 . Spence Brothers, date served, November 6, 1959 , amount, seven thousand six hundred eighteen dollars and ninety-two cents. Interstate Sanitation Company, date served, January 11, 1960 , amount claimed, one thousand two hundred forty-five dollars.

It is conceded that the amounts claimed as set out above arose out of work and material used in the completion of the contract, and the amounts are not in dispute.

Michigan Surety Company is in receivership.

Spence Brothers instituted the main action in these proceedings against United Electric Company as Defendant and obtained on January 25, 1960 , a partial summary judgment in the amount of four thousand seventy-three dollars and seventy-four cents. A writ of garnishment was issued on this judgment on February 8, 1960 , and served on the Board of Education on February 10, 1960 .

Spence Brothers obtained a further judgment in the main action against United Electric Company on March 24, 1961 , in the amount of three thousand five hundred forty-five dollars eighteen cents together with cost in the amount of ninety dollars and ninety cents. A writ of garnishment was issued on this judgment dated May 4, 1961 , and served on the Board of Education May 5, 1961 .

Spence Brothers instituted an action against Michigan Surety Company based on its obligation under its bond which was already referred to as Exhibit Four, and obtained a judgment in the Circuit Court for the County of Saginaw against Michigan Surety Company on October 2, 1961, in the amount of seven thousand seven hundred nine dollars eighty two cents together with costs in the amount of twenty-nine dollars ten cents, which judgment is unsatisfied.

It should be pointed out that the amounts included in the various judgments are not in addition to the amount which have previously been pointed out. Spence Brothers filed a notice they all involve the same work, and except for addition of costs and so forth, the same amount.

[Delinquent Withholding Taxes]

The United States of America asserts a claim against the funds held by the Board of Education for delinquent withholding taxes of United Electric Company for the second, third and fourth quarters of 1959. The amount of the assessment, date of assessment, date of notice and demand, date of filing Federal Tax lien in the Genesee County Register of Deeds office, and the outstanding balance pursuant to each assessment are as follows: second quarter, 1959, amount of assessment, four thousand four hundred thirty-five dollars thirty-six cents. Date assessed: 5/17/60 : date of notice and demand: 5/17/60 : date of filing with the Register of Deeds, 5/20/60 . Outstanding balance: four thousand four hundred thirty-five dollars thirty-six cents. Third quarter, 1959, four thousand nine hundred seventeen dollars seventeen cents. 10/30/59 . 11/8/59 . 3/28/60 , four thousand nine hundred seventeen dollars seventeen cents. Fourth quarter, 1959: one thousand one hundred three dollars sixty-nine cents. 2/26/60 . 2/26/60 . 4/26/60 . Balance: one thousand twenty dollars fifty-seven cents. The total of these amounts is ten thousand three hundred seventy-three dollars ten cents, plus interest as provided by law.

Notices of levy were served upon the Board of Education with reference to these assessments as follows: for the second quarter of 1959, notice of levy was served upon the Board of Education May 19, 1960 , for the third quarter, 1959, April 5, 1960 . For the fourth quarter, 1959, April 21, 1960 . Final demand for each quarter were made on the Board of Education on June 23, 1960 . The total unpaid balance on the above assessments is ten thousand three hundred seventy-three dollars ten cents, plus interest as provided by law.

There has been submitted on the part of the government, Exhibit Eighteen which consists of the following documents as to each quarter: as to the second quarter, third quarter and the fourth quarter withholding taxes for 1959, form 17, which is a statement of tax due, form T. Y. 60-69, the taxpayers delinquent account form 668-A; notice of levy, form 668-C; final demand; and form 899, title certificate of assessment and payments. As part of Exhibit Eighteen is also the notice of the Federal Tax lien showing their filings with the Register of Deeds' of Genesee County .

[Final Payment Certificate]

On Exhibit Fourteen A, which is the twelfth and final payment certificate of McKinney and Cline, the architects, are found the following remarks: this certificate is issued subject to the delivery of sworn statements and waivers of lien for the Electrical Contract. This certificate does not show funds expended by the owner to complete the electrical work for this project, and this amount should be deducted from the final balance. The final balance shown on this certificate is seventeen thousand nine hundred thirty-nine dollars and twenty-six cents. The amended disclosure showing the interest of third parties reflects the amount that was required to finish the job. The stipulated amount then was seventeen thousand five hundred some odd dollars. The Board of Education has advised that the job is completed. The sworn statement and waivers of lien have not been received from the contractor. The Board of Education will abide by the order of the Court in expending the monies and not raise this matter as a defense.

The exhibits one through eighteen were accepted by the Court.

The main question for decision in this case is to determine which one or ones of the various claimants are entitled to the money being held by the Flint Board of Education. The Court will review briefly some of the facts because the sequence of events becomes important in arriving at a decision in this case.

[Summary of Facts]

The United Electric Company became financially unable to proceed on February 11, 1959 . Michigan Surety Company was notified and the Board of Education was apprised of the situation on March 17, 1959 . Michigan Surety Company declared the contract in default and demanded payment from the Board of Education. Prior thereto on January 13, 1959, Advance Electric Company had secured an assignment from United Electric Company of accounts receivable from the Board of Education. United Electric Company, in its bond application, made an assignment prior thereto to the Michigan Surety Company on July 22, 1958 conditioned on any possible default by the former. The Board of Education recognized Michigan Surety Company after notification and on agreement by the Surety Company to hold the Board of Education harmless from other claims.

Michigan Surety Company paid out $85,067.15 and completed the contract, part of which has been recovered from the Board of Education. Spence Brothers has obtained judgments against United Electric Company and Michigan Surety Company. The judgments of Spence Brothers against United Electric were dated January 25, 1960 and March 24, 1961 . The judgment against Michigan Surety Company was dated October 2, 1961 .

The United States government claims a tax lien for delinquent withholding taxes against United Electric Company as follows: Second quarter 1959 $4,435.36 filed with the register of deeds May 20, 1960, Third Quarter 1959 $4,917.17 filed with the register of deeds March 28, 1960, Fourth Quarter 1959 $1,103.69 filed with the register of deeds April 26, 1960. Total amount of $10,373.10.

Some additional questions to be answered in this situation include among others the following: (1) After United Electric defaulted in payments to subcontractors, did the United Electric have any right to funds retained by the Board of Education. (2) Is the assignment of the United Electric Company to the Michigan Surety Company valid so as to permit the latter to collect the retained funds. (3) Was the assignment by United Electric Company to Advance Electric Company a valid assignment. (4) Is Spence Brothers Incorporated in any better position than other subcontractors having obtained judgments against United Electric Company and the Michigan Surety Company. (5) Are the United States government tax lien claims valid inasmuch as they are based on the rights of United Electric which has defaulted under its contract with the School Board.

In considering the various questions, the Court finds that with the financial backing of Michigan Surety Company, United Electric Company actually completed the work in a satisfactory manner. United Electric, based on its contract with the Board of Education would be the only claimant having a right to proceed directly against the Board of Education for the retained funds. Other claimants have only derivative rights based on their relationship to the principal contractor.

Michigan Surety has claimed that because funds were advanced to complete the job, that any rights which the United Electric had would pass to the Michigan Surety Company. However, Michigan Surety has not completely paid all subcontractors on the job. Thus, it cannot be said that the Michigan Surety Company has completed its obligation under the bond.

[Validity of Assignments]

Michigan Surety also claims by way of assignment of the rights of the United Electric Company. However, it is noted that this assignment was not recorded under the Michigan Statute applicable (MSA Section 19.841) and thus cannot become a mortgagee claimant as to the retained funds.

Advance Electric Company also claims by virtue of an assignment from United Electric dated January 13, 1959 . The Board of Education was notified March 11, 1959 , of this assignment which was recorded March 10, 1959 with the register of deeds' office of Genessee County . The assignment to Advance Electric was invalid because the contract between United Electric and the Board of Education contained the following language: "Neither party to the contract shall assign or sub-let as a whole without written consent of the other, nor shall the contractor sign any monies due or to become due to him hereunder, without previous written consent of the owner."

There is no evidence that the Board of Education ever agreed in writing or consented to the assignment from United Electric Company to Advance Electric. The above contract article is found at Article 33 of the General Conditions of Contract, (Exhibit 3).

The assignment to Michigan Surety Company would appear to be conditioned on the terms of the Surety Company bond which generally provided for the payment to subcontractors. Since the payments were not completely made, this is another reason why the assignment would not be valid in relation to the balance of the fund. See United States v. Munsey Trust Company, 332 U. S. 234.

Under the case of United States v. Bess (1958) [58-2 USTC ¶9595] 357 U. S. 51, it is necessary in a case of this type for the Court to determine who has property rights in the fund retained by the school board.

The fact that the United States government has filed a lien creates no property rights in the fund, but merely attaches consequences federally defined to rights created under state law.

The counsel for Michigan Surety Company has cited several federal court cases in which the facts are somewhat similar to those in the instant case. However, in all of those cases, the Surety had paid subcontractors in full and the jobs had been completed and the Surety Company was contesting with the United States government in relation to the tax lien claims.

The instant case can be distinguished from those cases inasmuch as the subcontractors have not been paid in full, it has been shown that Michigan Surety Company is insolvent and there is no evidence that the Surety Company will complete payment to the subcontractors.

[Effect of Nonpayment of Subcontractors]

Under Michigan Law is is not clear that the Board of Education could pay directly from the fund subcontractors who have claims and this is another distinguishing factor as far as the cases cited in behalf of the Surety Company. In Michigan this would appear to be possible if it was provided in the contract between the prime contractor and the Board of Education. Article 26 of the Agreement concerning payments withheld indicates that the Board of Education could withhold payments (Paragraph C) on failure of the contractor to make payments properly to subcontractors or for material or for labor. The concluding sentence states that the only remedy which the Board of Education would have in this situation would be to withhold payment until the above grounds are removed and thereafter then payment of the amount would be made. See the case of City of St. Johns v. Hudson Howe, Inc., 309 Michigan 240, where the contract did provide for direct payment by the public institution to subcontractor or material men where the prime contractor was in default.

Since neither United Electric nor Michigan Surety Company have actually completed the contract in full with the complete payment of all subcontractors, it would seem then that United Electric has better claim to the retained funds in the hands of Board of Education than the Surety Company would have.

[Tax Liens]

In view of this situation the government claim based on priority provided in Section 6321 and Section 6323 of Internal Revenue Code of 1954 must be recognized. In part the Section reads: "The lien imposed by Section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice has been filed by the secretary or his delegate."

There are no claimants who can establish any of the above named categories except Spence Brothers, Inc. where judgments have been obtained against both United Electric Company and the Michigan Surety Company. However, it becomes important in this situation as to when the notice of tax liens were filed and when the judgments were obtained.

Spence Brothers contend that inasmuch as subcontractors have not been paid that they as well as material men who have claims would be entitled to an equitable lien against the retained funds. However, there is nothing in the Michigan Law that has been brought to the attention of the Court which would justify an equitable lien being given priority over the government tax lien which is made clear by Statute with the exceptions therein noted.

The case of Philadelphia National Bank et al. v. McKinlay, 72 F. (2d) 89 is distinguished because there was no question of tax claim involved.

The case of United States v. Chapman [60-2 USTC ¶9667], 281 F. (2d) 862 is distinguished because there the state of Oklahoma has held that laborers and material men have an equitable right to payment from funds due a contractor on a public improvement in preference to general creditors. See page 867.

[Judgment Creditor]

Spence Brothers claims have priority over the Security Company, however. The Court is of the opinion that 61 ALR Second 901 applies which states as follows: "Where it has been determined either by express terms or by construction or implication that a bond of a public work contractor is conditioned upon the payment of laborers and material men, it has been held in a number of cases that the Surety of such bond is not entitled to the percentages retained by the obligee from the sums earned by the contractor as against subcontractors and material men."

It would seem that in all cases noted in the various briefs where the Surety Company had failed to pay all of the subcontractors and material men that the latter were given preferred claim to any retained funds in the hands of the owner. Thus, it would appear that Spence Brothers having obtained judgments against both United Electric Company and the Michigan Surety Company would have prior claim as to either of those claimants, but not as to the United States Government Tax lien, except in part.

The Court arrives then at this conclusion as to the distribution of the funds retained by the School Board: (1) that Spence Brothers, Inc., having priority as to date of judgment obtained on January 25, 1960 should have first claim against the fund in the amount of $4,073.74. The United States government tax liens have the next priority in the entire amount of the claim of $10,373.10 plus interest as provided by law. Spence Brothers, Inc. has another judgment obtained March 24, 1961 in the amount of $3,545.18. After deducting from the fund the above two priorities, the second Spence judgment could not be satisfied in full, but should be satisfied to the extent of the remaining balance of the fund retained by the Board of Education. Since the fund in question is thus exhausted, the remaining claimants will not receive any amounts from the fund.

Judgments as indicated above may be entered distributing the fund, no cost, a public question being involved.

 

 

[60-1 USTC ¶9337]River Rouge Savings Bank, a Michigan banking corporation, Plaintiff, Cross Defendant and Appellant v. Victor Building Company, a Michigan corporation, et al., Gilbert Construction Company, a Michigan corporation, et al., LeBlanc Construction Company, a Michigan corporation, et al., S & M Building Company, a Michigan corporation, et al., and Kerr Lumber Company, a Michigan corporation, and Raymond Excavating Company, a Michigan corporation, et al., Defendants, Cross Defendants and Appellees, United States of America, Defendant, Cross Defendant and Appellant

Mich. Supreme Court, No. 32-35, Oct. Term, 1959, 101 NW2d 260, 2/26/60

[1954 Code Secs. 6321-6323]

Liens: Priority: Mechanics' and mortgage liens.--Federal tax lien was held prior in right to mechanics' liens which arose and were recorded prior to recording of the tax lien, on the ground that the mechanics' liens were not perfected when the tax lien was filed and that the mechanics' lien claimants are not one of the creditor groups protected under Code Sec. 6323. State law giving priority to mechanics' liens over mortgage liens which are recorded after construction has begun does not alter the relative priority of the mortgage lien and the tax lien. The one-year redemption period given to the United States by the Judicial Code [28 U. S. C. §2410(c)] after judicial sales of taxpayers' property is a condition of the government's consent to be sued in the state court, and the redemption period cannot be shortened by court decree.

Kenneth J. Logan, 10573 West Jefferson Avenue , River Rouge 18, Mich. , for plaintiff. Covington, Davidson & Osborn, 220 Peoples Bank Building, Port Huron, Mich., for Kerr Lumber Co. Said M. Touma, 304-308 Peoples Bank Building, Port Huron, Mich., for Raymond Excavating Co. Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, and Fred E. Youngman, Department of Justice, Washington 25, D. C., and Frederick W. Kaess, United States Attorney, and Elmer L. Pfeifle, Jr., Assistant United States Attorney, 807, 813 Federal Building, Detroit 26, Mich., for United States.

Before the entire bench.

KAVANAGH, Judge:

Sometime prior to 1956 the S & M Building Company, a Michigan corporation, was organized to engage in certain residential building projects. This company in connection with certain other building or construction companies, namely, Victor Building Company, Gilbert Construction Company and LeBlanc Construction Company--which were directly controlled and entirely owned by S & M Building Company--commenced a residential building project embracing some 75 homes in the city of Marysville , Michigan .

The appellees, Raymond Excavating Company and Kerr Lumber Company, were retained by the building companies, the former for excavating work and the latter for furnishing lumber and other construction materials.

As construction progressed on the residences, construction loans were obtained by the building companies from plaintiff River Rouge Savings Bank. These loans were evidenced by promissory notes secured by mortgage indentures, which were recorded by plaintiff mortgagee. Subsequently, default was made by the building companies in the payment of principal and interest on each of the promissory notes secured by the real estate mortgages. Upon default, plaintiff commenced its several actions in the St. Clair county circuit court for foreclosure of its mortgage security.

At this time title searches disclosed the presence of second and third mortgages, mechanics' lien claims and government tax liens. Therefore, plaintiff joined all such lien claimants as parties defendant in its bill of complaint.

Subsequently, both Kerr Lumber Company and Raymond Excavating Company filed cross bills to foreclose their respective mechanics' liens. Cross bills were also filed by the second mortgagess to foreclose their mortgage liens.

[Tax Liens Filed]

Prior to the time plaintiff filed its bill of complaint, and beginning in February 1957, the United States government, through its district director of internal revenue, assessed sums against the S & M Building Company for withholding taxes and filed liens for such amounts. Upon demand for payment of the assessed taxes, the taxpayer, S & M Building Company, neglected and refused to pay the same or any part thereof.

On February 14, 1958 , after plaintiff had filed its bill of complaint in the St. Clair county circuit court, the S & M Building Company and the other corporations under its control were named in a petition in involuntary bankruptcy, filed in the United States district court for the eastern district of Michigan, southern division. On February 28, 1958 , a receiver in bankruptcy was duly appointed. The United States district court issued an order temporarily restraining plaintiff and cross plaintiffs from further proceedings in the circuit court. However, upon objections, the concurrent jurisdiction of the circuit court was recognized and the restraining order vacated. The parties were then permitted to proceed with the foreclosure of their respective liens in the circuit court.

[ Lower Court Decision]

The decision and decree of the lower court granted a priority to the mechanics' liens of Kerr Lumber Company and Raymond Excavating Company over the first mortgage lien of plaintiff, River Rouge Savings Bank. The court also ruled the government tax liens were subordinate to the mechanics' liens and the first and second mortgage liens, and further that the government was only entitled to a 6-month period of redemption. Regarding attorney fees and costs, the court felt the issues raised presented legal questions not covered by Michigan precedent and, therefore, denied costs to all parties.

River Rouge Savings Bank has appealed, claiming the mechanics' liens claimed by Kerr Lumber Company and Raymond Excavating Company are invalid and, therefore, not entitled to priority over its first mortgage lien. The bank seeks confirmation of all other provisions of the lower court decree.

Both Kerr Lumber Company and Raymond Excavating Company have filed cross appeals claiming they are entitled to costs and allowances for reasonable attorney fees under applicable statutory provisions (CL 1948, §§ 570.12, 570.21 [Stat. Ann. §§ 26.292, 26.301]). The cross appellants also claim the decree as to the claim of the United States should be reversed to allow the government tax liens to be prorated over the 19 lots in case No. 71-36 and accorded priority after the amount of the mortgages only and ahead of their respective mechanics' liens. The cross appellants seek affirmance of all other parts of the circuit court decree.

The United States has appealed, asking the decree of foreclosure, to the extent it awards priority to mechanics' liens over the United States tax liens, be vacated and remanded to circuit court with directions to award priority to the tax liens over the mechanics' liens. The United States further seeks correction of the decree to allow it 1 year from date of sale within which to redeem the mortgaged property.

[Bank's Contention]

On this appeal River Rouge Savings Bank claims the Raymond Excavating Company does not have a valid mechanics' lien because of failure by the company to make service of the sworn statement of contractor upon the building corporation owners as part of the statutory ¹ pre-condition to the filing of a valid mechanics' lien. The company conceded no sworn statement had been personally served upon the owners, because the company was unable to find the owners or their agents in the county after having made sufficient and repeated efforts to do so, thus fully complying with the statute. Testimony was introduced by the company which would tend to show the company had in fact, on repeated occasions, attempted to discover and serve such statement of contractor upon the owners in the county, but that all such attempts were fruitless since neither the owners nor their agents could be found.

River Rouge Savings Bank contends the Kerr Lumber Company is not entitled to a valid mechanics' lien because of the negotiation by the lumber company of the notes received by it from the various building corporation owners in amounts representing the materials furnished by the company to the owners. None of these notes was due within the time for Kerr Lumber Company to file claims of lien. These notes were indorsed by the lumber company by blank indorsement and delivered to the Port Huron branch of the Michigan National Bank, at which time the company received cash or credit to its bank account for the value of the notes from the bank. While these notes were outstanding and while they were discounted at the Michigan National Bank, Kerr Lumber Company filed its claims of lien, notice of intention and sworn contractor's affidavit having been duly served. All statutory steps to perfect its liens were properly taken by the company. Some of the lots for which liens were originally served were in time paid off and waivers of lien were given by the company. However, no lien was discharged until the company had been paid in cash.

All the owner-builders' notes to Kerr Lumber Company, or their renewals, were past due and charged back to the company by the Michigan National Bank, and were in the company's possession prior to its filing its cross bills of foreclosure. All outstanding notes were tendered by the company to the court at the trial for cancellation upon receiving payment from the sale. If valid, there is no question that the Kerr Lumber Company mechanics' liens have priority over all mortgages in this case, since construction began before any mortgages were given or recorded (CL 1948, §570.9 [Stat. Ann. §26.289]). The same is true as to the mechanics' liens of Raymond Excavating Company.

[Basis of U. S. Appeal]

The appeal of the United States is based upon error claimed in the decree of the circuit court relative to the priority given the government tax liens. The lower court subordinated the tax liens to the mechanics' liens of Kerr Lumber Company and Raymond Excavating Company.

The Federal tax liens involved in this case arose under sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954. Section 6321 provides that if any person liable to pay any tax neglects or refuses to pay such tax after demand, the amount, including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto, shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such taxpayer. Section 6322 provides that unless another date is specifically fixed by law, the lien imposed by the above section shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time. Section 6323 provides, so far as material here, that the lien in favor of the United States imposed by Section 6321 "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed" as provided in subsection (a) thereof.

In this case, the District Director of Internal Revenue assessed withholding and excise taxes against the S & M Building Company in February, May and September of 1957, which dates were subsequent to the execution and recording of the first and second mortgages on properties of S & M Building Company. The United States does not contend its lien claims are superior to the claims of the mortgagees being secured by prior recorded mortgages.

[Order of Filing]

The respective mechanics' liens, which were granted priority ahead of the government tax liens, arose and notices of intent and statements of claim of lien were duly recorded prior to the dates on which the Federal tax liens arose and were recorded.

The Federal tax lien provided by the above sections of the 1954 Internal Revenue Code, attaching as it does to all property and rights to property of the taxpayer as of the date of assessment, is valid against all subsequent claims or liens asserted against the taxpayer's property, except it is not valid as against any "mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed" as therein provided. The mechanics' lien claimants are not "mortgagees," "pledgees," "purchasers," or "judgment creditors" within the meaning of Section 6323 of the 1954 Code.

The mechanics' liens asserted by Kerr Lumber Company and Raymond Excavating Company were not choate, perfected liens at the time the Federal tax liens arose and were recorded. Upon this appeal, neither of the above mechanics' lien claimants assert any priority of their liens above those of the United States . In fact, both Kerr Lumber Company and Raymond Excavating Company admit the superiority of the government tax liens and ask reversal of the circuit court decree to the extent it awarded priority to their mechanics' liens over the tax liens.

Although the River Rouge Savings Bank does not deny the right of priority claimed by the United States over the mechanics' liens, the bank says the issue is now moot because of events subsequent to the circuit court decree. The United States contends the subsequent events involving orders of the bankruptcy referee do not moot the issues raised by the government, since the tax liens can only be extinguished by satisfaction of the assessed tax liability and the referee's orders failed either to determine or satisfy such liability.

The issue on appeal concerning Raymond Excavating Company involves the failure of the company, a contractor, to serve a sworn statement of contractor upon the owners prior to filing its affidavit and statement of lien. The applicable section of the mechanics' lien statute government such service is CL 1948, §570.4 (Stat. Ann. §26.284), which sets forth the requirements for delivering such sworn statement to the owner and provides penalties for failure to furnish such statement upon demand by the owner. The section further provides as follows:

"If neither such owner, part owner, lessee, nor his agent can be found within the county, then it shall not be necessary for the contractor to make and deliver such statement as a prerequisite to the institution of proceedings under this act, or other suit or proceeding."

The lower court found as a matter of fact that from the testimony it appeared the Raymond Excavating Company's official did endeavor to locate the owner in the county for the purpose of serving the sworn statement of contractor, and that his inability to do so did not deprive the company of a valid lien. While it is true the company, being unable to find the owners or their agents in the county, caused sworn statements to be mailed to the owners by registered mail, the return receipts indicating they had been received by the owners on the day following the filing of the statement and claim of lien, the lower court felt it was unnecessary to determine whether such actual notice alone would be sufficient.

[Lien Attached Upon Notice]

From a review of the testimony it would appear the lower court property determined a sufficient attempt had been made to locate the owners or their agents in the county. However, it would also seem that upon the receipt by the owners of the actual notice by registered mail, the lien would then attach even though such statement was not provided prior to filing the affidavit of lien. The statute, CL 1948, §570.4 (Stat. Ann. §26.284), says that "until the statement provided for in this section is made, in manner and form as herein provided, the contractor shall have no right of action or lien against the owner, part owner, or lessee on account of such contract * * *." In Holliday v. Mathewson, 146 Mich. 336, the Court held that delay in serving upon the owner or his agents the statement required by statute until after the claim of lien had been filed was not fatal to the mechanics' lien where the statement is served before the time to file a lien expires. The Court held the lien would not become effective until the statement was served. The Court said (p. 338):

"We are of the opinion that the delay in serving the statement is not fatal to the lien. No lien attached by the filing of the claim, but when the statement was served the claim became effective. It is unimportant that the statement was served after the claim was filed. Both were done within the statutory period, and a lien was perfected on July 3d by the service of the statement. There is nothing in the various cases cited inconsistent with this holding."

It would appear that in the case at bar the lien of the Raymond Excavating Company would have become valid at the time the owner actually received the statement of contractor and the fact such statement was not received until after the affidavit of lien had been filed would be inconsequential, since the lien would receive validity upon receipt of the statement, both accomplished within the statutory period for filing liens.

[Question of Costs]

On the question of the right to costs and reasonable attorney fees of cross appellants Kerr Lumber Company and Raymond Excavating Company, the lower court felt the issue involved in this litigation were without precedent in Michigan , especially insofar as the issue involving the Kerr Lumber Company notes was concerned. Basing his opinion in this regard on the novelty of the legal questions involved, the court denied costs to either party. It is conceded that under the statutes (CL 1948, §§ 570.12, 570.21 [Stat. Ann. §§ 26.292, 26.301]), the award of costs and attorney fees is discretionary. However, Kerr Lumber Company and Raymond Excavating Company claim the court abused its discretion, since they felt the issues were not without precedent. The cross appellants say the grounds for denial of costs and attorney fees are inequitable, since in effect all prevailing materialmen could be so barred in any litigation if those opposing the liens could discover any issue not precisely covered by past Michigan law. The case of Wisniewski v. Nawrocki, 153 Mich. 523, held that although the applicable statutory provisions confide the question of costs and attorney fees in mechanics' lien cases to the court's discretion, the complainant in a bill to enforce a lien, on establishing his right to a decree, should be allowed his actual disbursements and a reasonable amount for his attorney. It would appear that under the authority of the Wisniewski decision, the lower court should have awarded reasonable costs and attorney fees. Especially is that true in regard to the claim of the Raymond Excavating Company. Furthermore, it seems that although there is no Michigan authority directly in point on the issue of negotiation of the Kerr Lumber Company notes and the effect of such negotiation on the right to file mechanics' liens, there exists sufficient outside authority to decide that particular issue. Since no other reason was advanced by the lower court for its denial of costs and attorney fees than the question of novelty, and since this reason appears without actual merit, an award for costs and reasonable attorney fees should be awarded to Kerr Lumber Company and Raymond Excavating Company as prevailing parties.

[Redemption Period]

On the issue whether the United States is entitled to a 6-month or 1-year period for redemption, it appears the lower court was wrong in merely allowing the shorter period. It is clear the United States was made a party to this State court mortgage foreclosure proceeding pursuant to 28 U. S. C. §2410. Section 2410(c) reads in part as follows:

"A judicial sale in such action or suit shall have the same effect respecting the discharge of the property from liens and encumbrances held by the United States as may be provided with respect to such matters by the local law of the place where the property is situated. * * * Where a sale of real estate is made to satisfy a lien prior to that of the United States, the United States shall have 1 year from the date of sale within which to redeem."

Direct authority against the decree of the lower court granting merely a 6-month redemption period is the case of United States v. Bank of America National Trust & Savings Association, 265 F. 2d 862 [59-1 USTC ¶9249]. The court held that compliance with the subsection of the statute requiring a judicial proceeding in which the government may assert its lien, and its right of redemption within 1 year from the date of a lien foreclosure sale, is a condition of the government's consent to be sued in a civil action in any State court for foreclosure of a mortgage or other lien upon realty or personalty on which the United States has or claims a mortgage or other lien. The court said (p. 868):

"In our opinion a compliance with subsection '(c)' is a condition of the government's consent to be sued under section 2410. Subsection (c) requires (1) a judicial proceeding in which the government may assert its lien; and (2) the right of redemption within 1 year from the date of sale. Many states do not provide any period of redemption, so that regardless of the method of foreclosure, the government often has a right not available to private lien holders. This is an express condition of the government's consent to be sued."

On petition for rehearing, the court wrote as follows (p. 869):

"In enacting section 2410, Congress did more than simply provide for waiver of immunity from suit. It imposed a condition for divestiture of the property rights of the United States , i.e., a period of redemption from the foreclosure sale. If section 2410(c) is limited to foreclosure by action, followed by a judicial sale, then a government lien could be extinguished, without notice and without right of redemption, where the mortgagee proceeded under a power of sale; whereas, in foreclosure by action, the government would have a right of redemption, regardless of state law,--a wholly illogical result in those states, for example, which do not provide any right of redemption. In our opinion, a compliance with subsection (c) is a condition of the government's consent to be sued in any foreclosure under section 2410. This requires a judicial proceeding in which the government may assert its lien and the right of redemption within 1 year from the date of sale."

The United States says it does not have any present intention of exercising its right to redemption in this case, but has appealed this part of the circuit court's foreclosure decree to escape any contention that by failing to appeal from that part of the decree the United States had waived its 1-year right of redemption. Thus, the United States wishes the decree to be corrected to allow the United States 1 year from the date of sale within which to redeem the mortgaged property.

[Priority of Tax Liens]

On the issue of priority of the tax liens of the United States , it is clear the finding and decree of the circuit court is erroneous and must be corrected. The United States claims that Federal tax liens arising under sections 6321 and 6322 of the 1954 internal revenue code, notices of which were duly filed in accordance with section 6323(a) of the 1954 code, are entitled to priority in payment of proceeds derived from a foreclosure sale of mortgaged property of the delinquent taxpayer ahead of earlier unperfected mechanics' liens asserted under Michigan law against such property. It is to be noted that both of the mechanics' lien claimants--Kerr Lumber Company and Raymond Excavating Company--agree with the position of the United States and admit that such government tax liens are superior to and entitled to priority ahead of their respective mechanics' liens. Even the River Rouge Savings Bank fails to deny the priority of the United States ' lien, but claims the issue is moot because of events subsequent to the circuit court's decree whereby proceedings before a referee in bankruptcy in Federal court have in effect dissolved any lien held by the United States . The United States disputes this claim, pointing out the following facts: An involuntary petition in bankruptcy was filed against the owner-taxpayer in Federal district court subsequent to the time this action was begun in circuit court. The concurrent jurisdiction of the latter court to adjudicate the issues here involved was established. The circuit court established valid liens for unpaid taxes in favor of the United States against the S & M Building Company, the principal corporation which entirely owned and controlled all the construction or building firms against which claims were being pressed. The validity of such Federal tax liens is not in issue. The government admits the tax liens are inferior to the River Rouge Savings Bank mortgage liens but since, under Michigan law, the mechanics' liens of Raymond Excavating Company and Kerr Lumber Company take priority over the bank's mortgage liens in the situation involved in this case, and the circuit court so found, the government contends its tax liens are in effect entitled to priority over the mortgage liens as, under Federal law, the tax liens are superior to the mechanics' liens. The United States says the issue of priority of its tax liens was not determined by the bankruptcy referee and thus neither this issue nor the one involving the period of redemption are rendered moot by the action of the referee. The United States alleges that under the applicable sections of the internal revenue code of 1954 the tax lien constitutes a general lien upon all property and rights to property, real or personal, belonging to the delinquent taxpayer, and further that such lien attaches at the time the tax assessments are made and continues until the liability for the assessed amount is satisfied or becomes unenforceable through lapse of time. The United States says the referee's orders do not constitute a satisfaction of the tax liability and that the referee failed to have full jurisdiction over all the property of the delinquent taxpayer.

[Referee's Order]

It would appear the order of the referee failed to resolve the issue of priority or the validity or amount of the government liens. The referee's order merely said that with sale of the property of S & M Building Company (for $37,500) the liens, if any, of the Federal government and the State of Michigan are transferred to such proceeds and are assumed by the offerors. The referee's order, therefore, does not moot the issues involved in this appeal by the Federal government as it would seem the issues of priority and period of redemption should be decided. The question of priority of the Federal tax liens over the earlier unperfected mechanics' liens of Kerr Lumber Company and Raymond Excavating Company is fully answered by United States v. Security Tr. & Sav. Bank, 340 U. S. 47 [50-2 USTC ¶9492] and other cases in footnote. ² Neither the mortgagee, River Rouge Savings Bank, nor the mechanics' lien holders, Kerr Lumber Company and Raymond Excavating Company, dispute the priority of the Federal tax liens over the mechanics' liens.

On the issue of the validity of the mechanics' lien of Kerr Lumber Company, the question as framed by appellee Kerr Lumber Company seems preferable to that of appellant bank. Thus the lumber company asks: Where a materialman accepts notes from the owners as evidence of debt for material furnished in construction, which notes were not due within the time for filing statement and claim of mechanics' liens, and which notes were discounted by blank indorsement to a bank prior to the materialman's filing such claim of lien, but which notes and renewals thereof were past due and in materialman's possession prior to its filing .bills of foreclosure, has a waiver of the materialman's lien right occurred? No Michigan decision appears to be directly in answer to this issue; however, there are Michigan decisions involving other than mechanics' liens which are somewhat analogous to the facts of this case.

It is clear that the mere acceptance of the notes by Kerr Lumber Company as evidence of the debt, which notes were not due within the time for filing the liens, did not prevent the lien from attaching when the claim was duly filed by the Kerr Lumber Company. The cases of Marquette Lumber Co. v. Albee, 196 Mich. 127, Smalley v. Ashland Brown-Stone Co., 114 Mich. 104, and Knowlton v. Gibbons, 210 Mich. 547, may be cited in support of this statement.

[Mechanic's Lien Not Waived]

On the issue of whether the discounting of the notes at a bank by Kerr Lumber Company constituted a waiver of its lien rights where the notes were due and back in the claimant's possession prior to enforcing its liens by foreclosure, we must rely on authority from jurisdictions other than Michigan, since there seems to be no Michigan decision directly on this issue involving mechanics' liens.

The following general rule is stated in 57 CJS 800:

"The transfer or negotiation of notes taken by claimant does not defeat his right to a lien, at least where the note is indorsed back to, or taken up by, claimant so that it is in his possession and control at the commencement of the suit and he surrenders it in court at the hearing."

To the same effect, see 18 RCL 970 and 65 ALR 294, the latter saying as follows:

"The general rule as to the effect of the claimant's negotiating a note accepted by him from the owner or the contractor seems to be that such negotiation, of itself, will not constitute a waiver of the right to enforce a mechanics' lien."

In Hill v. Alliance Building Co., 6 S. D. 160 (60 N. W. 752), it was held a materialman who liquidates the amount of his claim by taking the owner's note and transfers it to another by his blank indorsement, thus binding him to pay the note if the maker fails, still retains an interest in the note which entitles him to file a valid mechanics' lien within the statutory period in his own name. The court there said (pp. 171, 172):

"In our opinion, the filing of the lien within the statutory time limit, by the parties for the benefit of whom the lien was created, and at a time when their interests required the full protection of the law enacted for their benefit, was a substantial compliance with the requirements of the statute as to notice; and the fact that the note had been, a few days prior thereto, conditionally disposed of, or transferred by an indorsement binding them to pay if the debtor failed, is of no concern to the owner of the property charged with the lien, or to his successors or assigns. The transfer of the note did not relieve Fraser & Shepherd from paying W. S. Hill & Co. for the material by which the value of the premises in controversy was largely created, as they were liable upon their indorsement if the maker failed to pay the note at maturity. Neither did such transfer release the Alliance Building Company from liability to Fraser & Shepherd upon the original contract, so long as the note remained unpaid; and to say that a materialman, in a case like the present, by assigning his claim, waives his rights, and is precluded from filing an available lien for the protection of himself and his assignee, would be to hold that our mechanics' lien law is not sufficient to provide effectual security to those who, by their labor, skill, and material, have created or enhanced the value of the property, which ought to stand as security until the debt is paid. There are no good reasons for saying that the lien is lost, or that it cannot be enforced by an assignee who has brought the note into court, and offered the same for cancellation. We therefore hold that the negotiation of the note neither defeated nor suspended the right of the claimants and payees therein named to file their lien, and make it available to their assignee or themselves in case they had been called upon to take up the note and enforce the collection of their claim against the Alliance Building Company."

Another case in support of the proposition that a mechanics' lien holder retains such interest in the note after negotiation to enforce a lien is German Bank v. Schloth, 59 Iowa 316 (13 N. W. 314). In the German Bank case the court stated (pp. 322, 323):

"Can the lien-holder, the payee of the note, after he has received the note from the indorsee, enforce the lien? We think he can, for these reasons. He at no time was without interest in the note. He was responsible while it was in the hands of the indorsee as an indorser and that responsibility was accompanied by the liability of the maker to him. The contract of the indorser and maker run together. The indorser agrees to pay, if the maker does not; and the maker is bound to the indorser if he fails to pay the indorsee. These are subsisting contracts while the paper is in the hands of the indorsee. Like all other contracts they are only enforceable by action upon default by the parties bound. The maker all the time the note is in the hands of the indorsee is bound by this contract to the payee. We conclude therefore that the payee does not cease to become a party to the contract so as to waive any liens which accompany the note."

In the case of Standard Oil Company v. Sowden, Assignee, 55 Ohio 332 (45 N. E. 320), a fact situation similar to that in the case at bar was presented. In that case the contractors, upon completion of certain oil tanks in an oil company refinery, took 3 notes from the owner of the balance due. These notes were then indorsed and sold to a bank. Within 4 months after completion of the structure and while the bank was the owner and holder of the notes, the contractors made and filed an affidavit in due form for perfecting a mechnics' lien to secure the indebtedness for erecting the structure. The court held the contractors had a valid mechanics' lien.

In McLean v. Wiley, 176 Mass. 233 (57 N. E. 347), the mechanics' lien claimant received notes under an agreement they were not taken in payment of the debt. When the claimant filed his statement of lien some of the notes were in the hands of third parties; however, they were taken up by the claimant before enforcement proceedings were begun. The supreme judicial court of Massachusetts, speaking through Chief Justice Holmes, held the trial judge properly refused to rule that the claimant could not maintain a lien for the portion of the account included in the outstanding notes. See also, National Surety Company v. Price, 162 Ky. 632 (172 S. W. 1072).

[New Question in State]

While Michigan has not ruled on the effect of negotiation of notes prior to filing claim of lien in cases involving mechanics' liens, there have been rulings involving common-law sawyers' liens and statutory watercraft liens.

In McEwan Bros. & Co. v. Carpenter, 111 Mich. 522, the Court held that evidence the owner of logs gave his notes for the saw bill and that the sawyers discounted the notes, and protected them in the hands of the holders by collateral security, is insufficient of itself to establish a waiver of the lien for sawing.

In the case of Sarmiento v. The Catherine C., 110 Mich. 120, the mechanics' lien claimant had a contract with defendant for certain labor on a boat. The contract provided for periodic payments as the work progressed. Defendant sent the claimant a first payment note, which the claimant credited on defendant's account. The note was renewed when it matured and both the original and renewal notes were discounted by the claimant. Subsequently, claimant filed his complaint seeking a lien. The note was not redeemed by claimant until before judgment. Defendant contended claimant's acts constituted a waiver of the lien, but the court rejected this contention.

In the instant case it is apparent that no waiver of the lien on the part of Kerr Lumber Company existed either by agreement or by taking the notes. This procedure is a very usual one and necessary to carrying on everyday business relationships. Contractors need credit; so do suppliers. In order to supply construction materials suppliers have to purchase these materials. They are able to do this in the ordinary business world by discounting notes obtained from purchasers, providing the necessary life blood to permit the carrying on of our complex business system. They are required to pay them in the event the maker defaults. Certainly, it was the intent of the legislature under the mechanics' lien law to permit them to file the statement so that they might protect themselves in the event of the maker's default. Default did occur in this case. Kerr Lumber Company, lien claimant, was required to pay the notes at the bank and had them available in court for discharge in the event payment was tendered. More they could not and should not be required to do. If our law was otherwise, business and credit under these circumstances would come to a complete standstill. An interpretation that would permit this to happen cannot be read into the mechanics' lien law.

On the question of the proper distribution procedure herein involved, the case of Samms v. Chicago Title and Trust Co., 349 Ill. App. 413 (11 N. E. 2d 172), seems pertinent. In that case the court said (p. 422):

"It is our conclusion that the claim of the mechanic's lien holder in this case is not within the meaning of Section 3672 and is subordinate to the lien of the government's tax claim. This priority of the government's lien, if only the mechanic's lien were here involved, would be full and complete as to all proceeds derived from the sale of the property resorted to. However, where, as in this case, there is a mortgage which is a lien prior to that of the government's tax claim, then the government for satisfaction of its lien can only resort to those proceeds from the sale of the property which are in excess of the mortgage indebtedness. Therefore, the priority of the government's lien in the instant case is only as to that excess. The mechanic's lien claimant by state law is given a lien prior to that of the mortgagee, which in effect means that it may resort to the proceeds from the sale of the property which are applicable to payment of the mortgage indebtedness. This is the inevitable result of the application of the act of congress and of the state law."

[Distribution Order]

Thus the decree, paragraph 30, should provide that the sale proceeds after expenses of sale be paid in the following order:

"(1) To the mortgagees, in order of their priority.

"(2) To the United States tax liens, prorated to respective lots of case 71-36.

"(3) To the mechanics' liens, but if proceeds be insufficient to pay them, the deficiency to be made up from the mortgagees, in reverse order of the mortgagees' priority.

"(4) To restore to the mortgagees any such deficiency paid to mechanics' liens.

"(5) To the owners."

This procedure accords to all parties the priorities to which they are entitled. If, as a matter of fact, the proceeds are insufficient to pay all liens, resulting in the United States being in part paid ahead of the mortgagees, such situation results, from the paramount United States law under which the mortgagees claim their priority over United States tax liens, in time of recording. This priority is thus qualified by the same United States law to the extent its lien displaces mechanics' liens prior to mortgages under local law.

On the other hand, the State law of Michigan accords mechanics' liens priority over mortgages recorded after construction was begun, as in the instant case.

Therefore, as to the appeal of the appellant bank, the decree sustaining the validity and amount of the mechanics' liens of Kerr Lumber Company and Raymond Excavating Company, and the priority of such liens over the mortgages, is affirmed.

As to the cross appeal of Kerr Lumber Company and Raymond Excavating Company, the decree is reversed as to disallowance of costs and attorney fees and modified to award to such cross appellants their actual filing and recording fees, taxable court costs and reasonable attorney fees in the lower court, to be determined by the lower court.

As to the appeal of the United States , the decree is reversed to allow priority to such tax liens after the amount of the mortgages only and ahead of the mechanics' liens and the United States is entitled to a period of 1 year from the date of sale within which to redeem the mortgaged property.

Cross appellants Kerr Lumber Company and Raymond Excavating Company shall have costs of this Court.

¹ CL 1948, §570.4 (Stat. Ann. §26.284).

² United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291], reversing 97 N. H. 411, 90 A. 2d 499 [52-2 USTC ¶9473]; United States v. New Britain, 347 U. S. 81 [54-1 USTC ¶9191] reversing 139 Conn. 363, 94 A. 2d 10 [53-1 USTC ¶9272]; United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138], reversing 209 F. 2d 258 (CCA-6) [54-1 USTC ¶9225]; United States v. Liverpool & London Ins. Co., 348 U. S. 215 [55-1 USTC ¶9136], reversing 209 F. 2d 684 (CCA-5) [54-1 USTC ¶9132]; United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137], reversing 224 S. C. 233, 78 S. E. 2d 277 [53-2 USTC ¶9605]; United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680], reversing, per curiam, 224 Miss. 33, 79 S. 2d 474 [55-2 USTC ¶9584]; United States v. White Bear Brewing Co., 350 U. S. 1010 [56-1 USTC ¶9440], reversing per curiam, 227 F. 2d 359 (CCA-7) [55-2 USTC ¶9776]; United States v. Vorreiter, 355 U. S. 15 [57-2 USTC ¶9956], reversing, per curiam, 134 Colo. 543, 307 P. 2d 475 [57-1 USTC ¶9415]; United States v. Hulley, 358 U. S. 66 [58-2 USTC ¶9926], reversing, per curiam, 102 S. 2d 599 (Fla.) [58-2 USTC ¶9802.]

 

 

[57-2 USTC ¶9777]In the Matter of the Estate of Edgar Acheson Ballard, Deceased In the Matter of the Estate of Lucien S. Hacke, Deceased

Probate Court, Oakland Co., Mich., Nos. 66,277, 65,677, 4/11/57

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323; Revised Statutes, Sec. 3466]

Priority of claims against estate in admin istration: Federal and state taxes, admin istration expenses, and widow's allowance.--The United States maintained it had a preferred claim against the assets of the decedent's estate for unpaid withholding and unemployment taxes. The State of Michigan claimed it had a preferred lien for an alleged unpaid Business Activities Tax. The fiduciary of the estate claimed preference for admin istration expenses and the widow and minor children of the decedent asserted allowance rights. The court ruled that expenses of admin istration had preference over secured creditors and widow's allowances and that the United States claim and lien for unpaid taxes, under Sec. 3466 of the U. S. Revised Statutes, had priority over the State of Michigan's claim and lien for unpaid taxes. Therefore, the assets of the estate were to be used to pay the asserted claims according to the following priority: (1) the admin istration expenses, (2) the claim and lien of the United States , (3) the claim and lien of the State of Michigan , and (4) the widow's allowance, etc.

John D. Kiley, Regional Counsel, Office of Chief Counsel, U. S. Treasury Department, J. W. Hutson, for admin istratrix with will annexed, Thomas M. Kavanagh, Attorney General, Eugene F. Townsend, Assistant Attorney General, for Estate of Edgar Acheson Ballard. William S. Plotkin, for estate, Thomas M. Kavanagh, Attorney General, Eugene F. Townsend, Assistant Attorney General, for Estate of Lucien S. Hacke.

Opinion of Court

MOORE, Probate Judge:

The question involved is,

"Which claim and lien against a decedent's estate has priority and to what degree, as between the Michigan Department of Revenue claiming a general lien on all the decedent's assets for an alleged unpaid Business Activities Tax, the United States Government claiming preference for unpaid withholding and unemployment taxes, the widow and minor children, asserting allowance rights, the fiduciary as to admin istration expense, and the claimant for funeral expenses?"

[Contentions of Parties]

For the State Department of Revenue, Mr. Townsend, in excellent briefs, asserts that Section 11 of the Business Receipts Statute, Act 150 of 1953; M. S. A. 7.557(11) creates a lien preference, "over all other liens and encumbrances . . . except . . . recorded liens . . ."; that specific tax liens, Kelley v. Butler, 47 P. 2d 664; 182 Wash. 310; Meyer v. Meyer (S. Dak.) 127 N. W. 595, as well as recorded mortgage liens, Smalley v. Bassford, 13 S. E. 2d 662; 191 Ga. 642; Johnson v. Jones, 97 P. 2d 933, 55 Ariz. 49, precede widow's allowances; that such tax lien priorities are constitutional, Minnesota Thrashing Co. v. Rob erts County, 34 S. Dak. 498; 194 N. W. 163; U. S. v. Alabama 313, U. S. 2744; that such lien follows the property into the hands of a decedent's fiduciary, Wilberg v. Yakima County, 132 Wash. 219; 231 Pa. 431; Buck v. Miller, 147 Ind. 586, and that a sovereign state may afford tax liens priority over other liens, Bosworth v. Anderson, 47 Ida. 697, 280 P. 227; Morey Engineering and Construction Co. v. St. Louis Rink Co., 242 Mo. 241, 146 S. W. 1142.

Mr. John Kiley, Regional Counsel for the United States Treasury Department, has filed an excellent memorandum brief in which he asserts that by Federal Statute debts due the United States Government from decedents' estates are entitled to priority over all obligations of the estate, Sec. 3466-7 U. S. Revised Statutes, U. S. C. A. Title 31, Sections 191 and 192; that section 3466 gives priority to the United States over the general liens of local governmental bodies. United States v.Gilbert Associates, Inc., (1953) 345 U. S. 361 [53-1 USTC ¶9291], and United States v. City of New Britain, (1954) 347 U. S. 81 [54-1 USTC ¶9191].

A very helpful brief by Mr. Hutson, attorney for widow and admin istratrix with will annexed in the Ballard estate, asserts that the Business Activities Tax Statute, while affording a lien on all assets, seems to provide only for lifetime collection and fails to provide any lien foreclosure machinery; that the Probate Code provisions for sequestration of decedent's assets and priorities of application of the proceeds to liens, debts, allowances and expenses, being special and specific legislation, are controlling as against other statutes; that the scope of tax laws cannot ordinarily be extended by implication or judicial construction; Waterways Navigation Co. v. Corporation and Securities Comm., 323 Mich. 153; that no forced construction of the Business Estates Tax law should supersede the plain language of the specific Probate Statute regulating preferences, and that the State's claim was lost by election when it filed a creditor's claim.

Though the amounts involved in the above causes are small, the import of the issues is far reaching. The questions involved deserve careful attention.

[Meaning of Lien, Claim, and Widow's Allowance]

Clear differentiation between the use and meaning of the words, lien, claim, allowance for widow and children, and expenses of admin istration, is of first importance.

A lien is a charge upon property of another to secure the payment or discharge of a debt or duty, 33 Am. Jur. 419, and is not waived or lost unless by some act inconsistent with its retention, 33 Am. Jur. 433.

A claim against an estate must be a debt or demand which might have been enforced by personal action for the recovery of money or a money judgment. In re Quinney's Estate, 287 Mich. 329, 283 N. W. 599.

A widow's allowance is neither a claim nor a lien, nor even a share in the husband's estate, McKana v. Enlund, 265 Mich. 214, 251 N. W. 308, but it is a statutory right, discretionary in amount, for maintenance during admin istration and settlement of the estate, M. S. A. 27.3178(138), and of course payable out of the estate's assets. Idem.

Administration expenses are necessarily incidental to the care, protection and settling of the estate and must be of benefit to the estate as a whole. Becht v. Miller, 279 Mich. 629, 273 N. W. 294.

Presentment of a claim to the Probate Court which is secured by a mortgage or lien, waives no rights but merely thereby seeks to entitle the claimant to payment out of the general assets of the estate, Fulton v. Butler, 21 Cal. 24, 81 Am. Dec. 140, Schmidt v. Grenzow, 162 Wis. 301, 41 A. L. R. 155.

The Michigan Statute provides for priority of widow's allowance over ordinary creditors' claims, M. S. A. 27.3178(165), but not over vested lien or mortgage holder's rights. The statute does afford admin istration expenses preference over the widow's allowance, M. S. A. 27.3178(138)(2).

The Probate Code is silent as to claims secured by liens or mortgages except for the section which provides for the payment of unproved claims "which are secured by a lien upon property of the decedent . . . if the court determines that the property covered by the lien is worth more than the amount of the indebtedness so secured . . .", M. S. A. 27.3178(411). Such is not the case here.

The authority of the Probate Court is entirely statutory, Smolenski v. Kent Judge, 301 Mich. 8, In re Graham's Estate, 276 Mich. 321, and hence it has no authority to foreclose or adjudicate mortgage or lien holders equities.

Thus, it is required that the fiduciary proceed in recognition of these liens in like manner as trustees in bankruptcy or as do receivers, in the sequestration of assets and the fiduciary may only sell, transfer or assign such assets subject to such liens.

To the extent necessary to safeguard the assets of the estate and preserve them for the proper assignees, distributees, lien holder or claimants, the fiduciary has a statutory duty to obtain, protect and account for them. This duty continues until barred by the lien claimant's exercise of possessory or foreclosure rights.

While exercising this duty and during its continuance, the attendant reasonable expenses of sequestration and care are not only beneficial to the entire estate, but to the lien claimant as well.

It would be unreasonable and unfair to impress this duty without granting its corollary of payment of reasonable admin istration expenses.

Thus expenses of admin istration have been held entitled to preference over secured creditors, Perez v. Gil, 29 N. W. 313, 222 P. 907, 35 A. L. R. 43, to the extent indicated.

[Priority Between U. S. and Michigan ]

There remains the problem of priority between the United States Government and the State of Michigan . In U. S. v. Gilbert Associates, 345 U. S. 361, 97 L. Ed. 1073 [53-1 USTC ¶9291].

"A general tax lien by the State of New Hampshire against property of an insolvent debtor was held inferior to the tax lien of the Federal Government, arising out of unemployment, withholding and income taxes."

The majority opinion (7 members) held that the Federal lien was entitled to preference, under Section 3466, of the U. S. Revised Statutes, stating:

"Where the lien of the town (municipality) and that of the Federal Government are both general, and the taxpayer is insolvent, Section 3466 clearly affords priority to the United States ."

citing, U. S. v. Texas, 314 U. S. 480, 86 L. ed. 356.

In U. S. v. New Britain, 347 U. S. 81, 98 L. ed. 520 [54-1 USTC ¶9191], it was held that it was of no consequence whether such lien be specific or general; that a State cannot impair the standing of Federal liens; that where a debtor is insolvent Congress has given priority to the Federal lien and that in the absence of insolvency as between such liens, rights are to be determined by the rule "first in time, first in right."

In U. S. v. Texas, 314 U. S. 480, 66 L. ed. 356, the Texas statute made State gas taxes a "preferred lien, first and prior to any and all existing liens, upon all the property of the distribution . . ." and Sec. 3466 of the Revised Statutes of the U. S. provided that debts due the United States should be satisfied first. It was held that a Federal claim was a prior claim where "an act of bankruptcy" was involved by reason of receivership through insolvency.

In U. S. v. Oklahoma, 261 U. S. 253, 67 L. ed. 638, Federal priority was held to attach wherever an act of insolvency under the bankruptcy act occurred; and that such priority cannot be impaired or superseded by State law.

[Order of Priority]

Thus, on proof of admission of the liens and claimants' rights of the State and United States , a final account shall be forthwith filed and assets in the hands of the fiduciary shall be used to pay:

First, the admin istration expenses; Next, the claim and lien of the United States ; Next, the claim and lien of the State of Michigan ; and Thereafter, widow's allowance, etc.

An order may be entered accordingly.

 

[71-2 USTC ¶9590]William C. Maguire, Plaintiff v. United States of America; City of Detroit, a Michigan municipal corporation; County of Wayne, a Michigan municipal body corporate; and State of Michigan, Defendants

U. S. District Court, East. Dist. Mich. , So. Div., Civil Action No. 32897, 328 FSupp 411, 6/28/71

[Code Sec. 6323-Result unchanged by '69 Tax Reform Act]

Tax liens: Priority against third parties: Federal withholding and employment taxes: Local personal property taxes: Michigan.--The United States' claim for unpaid Federal withholding and employment taxes had priority over a lien for personal property taxes levied by the City of Detroit. The City did not begin to reduce its lien to possession of the debtor's property until eight days after the insolvent debtor's voluntary assignment for the benefit of creditors. On the date of the assignment, therefore, the City had only a general, inchoate lien and could not consequently prevail over the general tax debt due the United States . Furthermore, the failure to meet state recording requirements in making the voluntary assignment for the benefit of creditors did not affect the right to priority for payment of debts created by Federal law.

Jeffrey D. Snow, Department of Justice, Washington, D. C. 20530, for U. S. Joseph Maisano, Assistant Corp. Counsel, for the City of Detroit, William F. Koney, Assistant Prosecuting Attorney, for the county of Wayne, for defendants.

Opinion

FREEMAN, District Judge:

A complaint for interpleader was filed by plaintiff William C. Maguire as Trustee-Mortgagee under a Trust Mortgage Indenture Agreement entered into between himself and Pioneer Water Conditioning of Michigan, Inc., the Mortgagor. Pursuant to this Indenture Agreement, plaintiff reduced all the assets of Pioneer to money in the sum of $2,754.26, a portion of which is, according to the complaint, claimed by the defendants City of Detroit, County of Wayne, and State of Michigan for the satisfaction of certain taxes owed by the Mortgagor to each defendant and secured by liens on the Mortgagor's property. This same sum of money is similarly claimed in toto by the defendant United States for unpaid Federal withholding and employment taxes which Pioneer owes the United States Government, and which claim the United States asserts is paramount to those of the other defendants.

Since the institution of this action, the court has made several rulings. On October 10, 1969, Odilla Maguire, Executrix of the Estate of William C. Maguire, now deceased, was substituted as party plaintiff, and an order entered discharging plaintiff from further liability upon the deposit with the court of $1,469.31, which sum represents the sale value of Pioneer's assets minus trustee's and attorneys' fees. On that same day, a default judgment was entered against defendant State of Michigan for failing to plead or otherwise defend itself as required by law. More recently, on February 16, 1970 , the defendant County of Wayne conceded on oral argument that the United States ' claim for back taxes has priority over any claim the County might have to the interpleaded funds. Hence, the only dispute still unsettled in the present lawsuit concerns the respective rights of the United States and the City of Detroit to the $1,469.31 on deposit with the court.

The United States maintains that it is entitled to the entire $1,469.31 because its claim for unpaid taxes against the Mortgagor is in excess of this amount and is given priority over the City of Detroit's lien for taxes under Title 31 U. S. C., §191 (§3466 of the Rev. Stats.). The City of Detroit , on the other hand, contends that it possesses a lien for personal property taxes in the amount of $207.26, which is entitled to payment out of the interpleaded funds prior to the satisfaction of the United States Government's claim. Both the United States and the City have filed motions for summary judgment on their respective claims with each alleging that there is no material issue of fact unresolved and that it is entitled to judgment as a matter of law.

[Facts]

Indeed, the material facts are not in dispute. On November 21, 1963 , Pioneer executed a Mortgage Trust Indenture Agreement which stated that Pioneer was indebted to its creditors for $55,000 and that it was mortgaging all assets to William C. Maguire as Trustee-Mortgagee, in an effort to pay those creditors. Subsequently, the Indenture Agreement was filed with the Register of Wayne County, but not, according to the affidavit of the Chief Deputy Clerk for Wayne County , with the Clerk of the Court of Wayne County.

Eight days after the conclusion of this Indenture Agreement, on November 29, 1963 , the City of Detroit served a notice of levy on the Trustee, Maguire, for Pioneer's assets which were still in the Trustee's possession. The tax lien so levied resulted from Pioneer's failure to pay over to the City the 1963 personal property taxes assessed against Pioneer. Under Michigan law, that assessment became a lien on Pioneer's assets on July 15, 1963 . At the time of the levy of this lien, Pioneer was also indebted to the United States for its 1963 Federal withholding and employment taxes which had accrued prior to Pioneer's assignment of assets in a sum exceeding the amount of interpleaded funds. Subsequently, William C. Maguire, acting as Trustee, sold the assets of Pioneer. It is the moneys collected from this sale that both the United States and the City claim should be used to satisfy their respective claims.

[Priority Determined]

We believe that on these facts, Title 31 U. S. C., §191 (§3466 of the Rev. Stats.) gives the United States ' claim for back taxes against Pioneer priority over the lien for taxes levied by the City of Detroit . That Section provides, in pertinent part:

"Whenever any person indebted to the United States is insolvent, . . . 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, . . . as to cases in which an act of bankruptcy is committed."

In construing this Section, the Sixth Circuit Court of Appeals stated:

"Whether or not the United States is entitled to assert a priority depends upon a determination of the debtor's insolvency, as manifested in Section 191. Not only must a debtor be unable to meet his debts as they mature, but also the insolvency must be disclosed in one of three modes: (1) A voluntary assignment, . . .

"The filing of a Chapter XIII petition by the Debtor, while insolvent, was sufficient to invoke the priority of the United States as a voluntary assignment under 31 U. S. C., Section 191." In Re Belkin, 358 F. 2d 378, 381-382 (6th Cir. 1966).

Here, the City of Detroit concedes that Pioneer's inability to meet its debts of $55,000 was manifested by the Trust Indenture Agreement which constituted a voluntary assignment for the benefit of creditors within the meaning of 31 U. S. C., §191 (§3466 of the Rev. Stats.), but contends that the assignment was of no legal effect under Michigan law because it was not properly filed in accordance with the provisions of M. S. A. §27A.5201. §27A.5201 M. S. A. requires the trustee-assignee to file with the Clerk of the appropriate Circuit Court, within ten days of execution of an assignment for the benefit of creditors, a surety bond, a list of the trustee-assignee's creditors as well as the creditors of the assignor, and a list of the assigned property, or the assignment is void under Michigan law. The City maintains that none of the requirements of M. S. A. §27A.5201 were met by Trustee Maguire, which would mean that Pioneer's assignment for the benefit of creditors would be void under Michigan law. Hence, according to the City, the Trust Indenture Agreement did not constitute a manifestation of Pioneer's insolvency within the meaning of §191, and the §191 priority is inapplicable in the present proceedings.

[State Recording Requirements]

We do not believe, however, that a failure to meet state recording requirements can affect the right to priority for payment of debts created by 31 U. S. C., §191 (Rev. Stats. §3466). As long as insolvency is manifested by an assignment of the debtor's property for the benefit of creditors--and the City admits that the Trust Indenture Agreement was such an assignment--the priority provided for by §191 should attach regardless of the validity of the assignment under state law. For as the Supreme Court early noted in discussing this priority:

"The priority given the United States cannot be impaired or superseded by state law." United States v. Oklahoma , 261 U. S. 253 (1923).

Indeed, even more to the point, the Supreme Court has said of §191 [§3466 Rev. Stats.]:

"The specified ways in which insolvency may be manifested include all cases in which an insolvent debtor makes an assignment of his property; there is no exception, and no regard is had to the purpose or manner of the assignment; . . ." (Emphasis added) Bramwell v. U. S. Fidelity Co., 269 U. S. 483, 488-489 (1926).

Thus, in the present action, it is irrelevant to the Government's priority under §191 that the assignment was, or was not, filed in accordance with Michigan recording requirements, since it is clear that such an assignment was in fact made for the benefit of creditors and the insolvent debtor's property sold pursuant to it.

[Liens Reduced to Possession]

Nevertheless, there is a judicial exception to the statutory priority created by §191. Under this exception, specific and perfected liens taking effect prior to the debtor's manifestation of insolvency--here the voluntary assignment--take priority over general claims of the United States despite the existence of §191. But Federal law, which the Supreme Court held in United States v. Waddill, Holland & Flynn, Inc. [45-1 USTC ¶9126], 323 U. S. 353 (1945) must be used to resolve the issue of specificity and perfection, provides that a lien created by state law cannot be deemed specific and perfected so as to defeat United States priority under §191 unless the property of the debtor is reduced to possession by the lienor.

"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. * * * 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 Town, therefore, had only a general, unperfected lien. * * * Where the lien of the Town and that of the Federal Government are both general, and the taxpayer is insolvent, §3466 [31 U. S. C. §191] clearly awards priority to the United States ." U. S. v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361, 366 (1953).

Further, this court itself has held that liens granted by state law, although specific and perfected according to state law, can nevertheless not be considered specific and perfected under Federal law until the lienor has reduced the debtor's property to possession. United States v. Haddix & Sons, Inc., 252 F. Supp. 634 (E. D. Mich. 1966).

Here, the City did not begin to reduce its lien to possession of the debtor's property until November 29, 1963 , the date of levy, which was eight days after the insolvent debtor's voluntary assignment for the benefit of creditors. On the date of the assignment, therefore, the City had only a general, inchoate lien and cannot consequently prevail over the general tax debt due the United States which is given priority under §191.

[Conclusion]

For these reasons, the United States ' motion for summary judgment is granted, and the City of Detroit 's motion for summary judgment denied.

 

 

[2002-1 USTC ¶50,361] United States , Petitioner v. Sandra L. Craft

Supreme Court of the United States, 00-1831, 4/17/2002, 122 SCt 1414, Reversing and remanding an Appellate Court decision, 2000-2 USTC ¶50,860

233 F3d 358.

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

[Code Secs. 6321 and 6323 ]

Lien for tax: Family transactions: Tenancy by the entireties: Real property: Transfer of interest to spouse: State law.--A husband's interest in entireties property constituted "property" or "rights to property" to which a federal tax lien could attach, despite the fact that, under state ( Michigan ) law, the property was exempt from the claims of creditors. Following the IRS's issuance of the lien against all of the husband's property, he and his wife jointly executed a quitclaim deed transferring his interest in a parcel of realty to her for $1. Upon the wife's sale of the property, half of the proceeds were placed in escrow pending a determination of the government's interest in the realty, and the wife brought a quiet title action seeking to recover the funds. According to the U.S. Supreme Court, the interpretation of Code Sec. 6321 is a federal question, and exempt status under state law is not binding on the federal tax collector. The Court examined the individual rights created by Michigan law in order to determine whether the husband possessed property or rights to property, and concluded that the broad language of Code Sec. 6321 demonstrates that Congress intended to reach every property interest that a taxpayer might have.

Syllabus

When respondent's husband failed to pay federal income tax liabilities assessed against him, a federal tax lien attached to "all [of his] property and rights to property." 26 U.S.C. §6321. After the notice of the lien was filed, respondent and her husband jointly executed a quitclaim deed purporting to transfer to her his interest in a piece of real property in Michigan that they owned as tenants by the entirety. Subsequently, the Internal Revenue Service (IRS) agreed to release the lien and allow respondent to sell the property with half the net proceeds to be held in escrow pending determination of the Government's interest in the property. She brought this action to quiet title to the escrowed proceeds. The Government claimed, among other things, that its lien had attached to the husband's interest in the tenancy by the entirety. The District Court granted the Government summary judgment, but the Sixth Circuit held that no lien attached because the husband had no separate interest in the entireties property under Michigan law, and remanded the case for consideration of an alternative claim not at issue here. In affirming the District Court's decision on remand, the Sixth Circuit held that its prior opinion on the issue whether the lien attached to the husband's entireties property was the law of the case.

Held: The husband's interests in the entireties property constitute "property" or "rights to property" to which a federal tax lien may attach. Pp. 3-15.

(a) Because the federal tax lien statute itself creates no property rights, United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, this Court looks initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach and then to federal law to determine whether such state-delineated rights qualify as property or rights to property under §6321, Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 58. A common idiom describes property as a "bundle of sticks"--a collection of individual rights which, in certain combinations, constitute property. State law determines which sticks are in a person's bundle, but federal law determines whether those sticks constitute property for federal tax lien purposes. In looking to state law, this Court must consider the substance of the state law rights, not the labels the State gives them or the conclusions it draws from them. Pp. 3-4.

(b) Michigan law gave respondent's husband, among other rights, the right to use the entireties property, the right to exclude others from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with respondent's consent and to receive half the proceeds from such a sale, the right to encumber the property with respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally. Pp. 4-8.

(c) The rights Michigan law granted respondent's husband qualify as "property" or "rights to property" under §6321. The broad statutory language authorizing the tax lien reveals that Congress meant to reach every property interest that a taxpayer might have. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-720. The husband's rights of use, exclusion, and income alone may be sufficient to subject his entireties interest to the lien, for they gave him a substantial degree of control over the property. See Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra, at 61. He also had the right to alienate the property with respondent's consent. The unilateral alienation stick is not essential to "property." Federal tax liens may attach to property that cannot be unilaterally alienated, United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, and excluding such property would exempt a rather large amount of what is commonly thought of as property. A number of the sticks in respondent's husband's bundle were presently existing, so it is not necessary to consider whether his survivorship right alone, which respondent claims is an expectancy, would qualify as property or rights to property. Were this Court to reach a contrary conclusion, the entireties property would belong to no one for §6321 purposes because respondent had no more interest in the property than her husband. Such a result seems absurd and would allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system. Legislative history does not support respondent's position that Congress did not intend that a federal tax lien attach to an entireties property interest. And the common-law background of the tax lien statute's enactment is not enough to overcome the broad language Congress actually used. Pp. 8-14.

(d) That Michigan makes a different choice with respect to state law creditors does not dictate the choice here. Because §6321's interpretation is a federal question, this Court is in no way bound by state courts' answers to similar questions involving state law. P. 14.

[2000-2 USTC ¶50,860], 233 F.3d 358, reversed and remanded.

O'CONNOR, J., delivered the opinion of the Court, in which REHNQUIST, J., and KENNEDY, SOUTER, GINSBURG, and BREYER, JJ., joined. SCALIA, J., filed a dissenting opinion, in which THOMAS, J., joined. THOMAS, J., filed a dissenting opinion, in which STEVENS and SCALIA, JJ., joined.

Justice O'CONNOR

delivered the opinion of the Court: This case raises the question whether a tenant by the entirety possesses "property" or "rights to property" to which a federal tax lien may attach. 26 U.S.C. §6321. Relying on the state law fiction that a tenant by the entirety has no separate interest in entireties property, the United States Court of Appeals for the Sixth Circuit held that such property is exempt from the tax lien. We conclude that, despite the fiction, each tenant possesses individual rights in the estate sufficient to constitute "property" or "rights to property" for the purposes of the lien, and reverse the judgment of the Court of Appeals.

I

In 1988, the Internal Revenue Service (IRS) assessed $482,446 in unpaid income tax liabilities against Don Craft, the husband of respondent Sandra L. Craft, for failure to file federal income tax returns for the years 1979 through 1986. App. to Pet. for Cert. 45a, 72a. When he failed to pay, a federal tax lien attached to "all property and rights to property, whether real or personal, belonging to" him. 26 U.S.C. §6321.

At the time the lien attached, respondent and her husband owned a piece of real property in Grand Rapids , Michigan , as tenants by the entirety. App. to Pet. for Cert. 45a. After notice of the lien was filed, they jointly executed a quitclaim deed purporting to transfer the husband's interest in the property to respondent for one dollar. Ibid. When respondent attempted to sell the property a few years later, a title search revealed the lien. The IRS agreed to release the lien and allow the sale with the stipulation that half of the net proceeds be held in escrow pending determination of the Government's interest in the property. Ibid.

Respondent brought this action to quiet title to the escrowed proceeds. The Government claimed that its lien had attached to the husband's interest in the tenancy by the entirety. It further asserted that the transfer of the property to respondent was invalid as a fraud on creditors. Id. , at 46a-47a. The District Court granted the Government's motion for summary judgment, holding that the federal tax lien attached at the moment of the transfer to respondent, which terminated the tenancy by the entirety and entitled the Government to one-half of the value of the property. [94-2 USTC ¶50,493], No. 1:93-CV-306, 1994 WL 669680, *3 (WD Mich., Sept. 12, 1994).

Both parties appealed. The Sixth Circuit held that the tax lien did not attach to the property because under Michigan state law, the husband had no separate interest in property held as a tenant by the entirety. [98-1 USTC ¶50,305], 140 F.3d 638, 643 (1998). It remanded to the District Court to consider the Government's alternative claim that the conveyance should be set aside as fraudulent. Id. , at 644.

On remand, the District Court concluded that where, as here, state law makes property exempt from the claims of creditors, no fraudulent conveyance can occur. [99-2 USTC ¶50,618], 65 F.Supp. 2d 651, 657-658 (WD Mich. 1999). It found, however, that respondent's husband's use of nonexempt funds to pay the mortgage on the entireties property, which placed them beyond the reach of creditors, constituted a fraudulent act under state law, and the court awarded the IRS a share of the proceeds of the sale of the property equal to that amount. Id. , at 659.

Both parties appealed the District Court's decision, the Government again claiming that its lien attached to the husband's interest in the entireties property. The Court of Appeals held that the prior panel's opinion was law of the case on that issue. [2000-2 USTC ¶50,860], 233 F.3d 358, 363-369 (CA6 2000). It also affirmed the District Court's determination that the husband's mortgage payments were fraudulent. Id. , at 369-375.

We granted certiorari to consider the Government's claim that respondent's husband had a separate interest in the entireties property to which the federal tax lien attached. 533 U.S. 976 (2001).

II

Whether the interests of respondent's husband in the property he held as a tenant by the entirety constitutes "property and rights to property" for the purposes of the federal tax lien statute, 26 U.S.C. §6321, is ultimately a question of federal law. The answer to this federal question, however, largely depends upon state law. The federal tax lien statute itself "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55 (1958); see also United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722 (1985). Accordingly, "[w]e look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation." Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 58 (1999).

A common idiom describes property as a "bundle of sticks"--a collection of individual rights which, in certain combinations, constitute property. See B. Cardozo, Paradoxes of Legal Science 129 (1928) (reprint 2000); see also Dickman v. Commissioner [84-1 USTC ¶9240; 84-1 USTC ¶13,560], 465 U.S. 330, 336 (1984). State law determines only which sticks are in a person's bundle. Whether those sticks qualify as "property" for purposes of the federal tax lien statute is a question of federal law.

In looking to state law, we must be careful to consider the substance of the rights state law provides, not merely the labels the State gives these rights or the conclusions it draws from them. Such state law labels are irrelevant to the federal question of which bundles of rights constitute property that may be attached by a federal tax lien. In Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra, we considered a situation where state law allowed an heir subject to a federal tax lien to disclaim his interest in the estate. The state law also provided that such a disclaimer would "creat[e] the legal fiction" that the heir had predeceased the decedent and would correspondingly be deemed to have had no property interest in the estate. Id. , at 53. We unanimously held that this state law fiction did not control the federal question and looked instead to the realities of the heir's interest. We concluded that, despite the State's characterization, the heir possessed a "right to property" in the estate--the right to accept the inheritance or pass it along to another--to which the federal lien could attach. Id. , at 59-61.

III

We turn first to the question of what rights respondent's husband had in the entireties property by virtue of state law. In order to understand these rights, the tenancy, by the entirety must first be placed in some context.

English common law provided three legal structures for the concurrent ownership of property that have survived into modern times: tenancy in common, joint tenancy, and tenancy by the entirety. 1 G. Thompson, Real Property §4.06(g) (D. Thomas ed. 1994) (hereinafter Thompson). The tenancy in common is now the most common form of concurrent ownership. 7 R. Powell & P. Rohan, Real Property §51.01[3] (M. Wolf ed. 2001) (hereinafter Powell). The common law characterized tenants in common as each owning a separate fractional share in undivided property. Id. , §50.01[1]. Tenants in common may each unilaterally alienate their shares through sale or gift or place encumbrances upon these shares. They also have the power to pass these shares to their heirs upon death. Tenants in common have many other rights in the property, including the right to use the property, to exclude from third parties from it, and to receive a portion of any income produced from it. Id. , §§50.03-50.06.

Joint tenancies were the predominant form of concurrent ownership at common law, and still persist in some States today. 4 Thompson §31.05. The common law characterized each joint tenant as possessing the entire estate, rather than a fractional share: "[J]oint-tenants have one and the same interest . . . held by one and the same undivided possession." 2 W. Blackstone, Commentaries on the Laws of England 180 (1766). Joint tenants possess many of the rights enjoyed by tenants in common: the right to use, to exclude, and to enjoy a share of the property's income. The main difference between a joint tenancy and a tenancy in common is that a joint tenant also has a right of automatic inheritance known as "survivorship." Upon the death of one joint tenant, that tenant's share in the property does not pass through will or the rules of intestate succession; rather, the remaining tenant or tenants automatically inherit it. Id. , at 183; 7 Powell §51.01[3]. Joint tenants' right to alienate their individual shares is also somewhat different. In order for one tenant to alienate his or her individual interest in the tenancy, the estate must first be severed--that is, converted to a tenancy in common with each tenant possessing an equal fractional share. Id. , §51.04[1]. Most States allowing joint tenancies facilitate alienation, however, by allowing severance to automatically accompany a conveyance of that interest or any other overt act indicating an intent to sever. Ibid.

A tenancy by the entirety is a unique sort of concurrent ownership that can only exist between married persons. 4 Thompson §33.02. Because of the common-law fiction that the husband and wife were one person at law (that person, practically speaking, was the husband, see J. Cribbet et al., Cases and Materials on Property 329 (6th ed. 1990)), Blackstone did not characterize the tenancy by the entirety as a form of concurrent ownership at all. Instead, he thought that entireties property was a form of single ownership by the marital unity. Orth, Tenancy by the Entirety: The Strange Career of the Common-Law Marital Estate, 1997 B.Y.U. L.Rev. 35, 38-39. Neither spouse was considered to own any individual interest in the estate; rather, it belonged to the couple.

Like joint tenants, tenants by the entirety enjoy the right of survivorship. Also like a joint tenancy, unilateral alienation of a spouse's interest in entireties property is typically not possible without severance. Unlike joint tenancies, however, tenancies by the entirety cannot easily be severed unilaterally. 4 Thompson §33.08(b). Typically, severance requires the consent of both spouses, id., §33.08(a), or the ending of the marriage in divorce, id., §33.08(d). At common law, all of the other rights associated with the entireties property belonged to the husband: as the head of the household, he could control the use of the property and the exclusion of others from it and enjoy all of the income produced from it. Id. , §33.05. The husband's control of the property was so extensive that, despite the rules on alienation, the common law eventually provided that he could unilaterally alienate entireties property without severance subject only to the wife's survivorship interest. Orth, supra, at 40-41.

With the passage of the Married Women's Property Acts in the late 19th century granting women distinct rights with respect to marital property, most States either abolished the tenancy by the entirety or altered it significantly. 7 Powell §52.01[2]. Michigan 's version of the estate is typical of the modern tenancy by the entirety. Following Blackstone , Michigan characterizes its tenancy by the entirety as creating no individual rights whatsoever: "It is well settled under the law of this state that one tenant by the entirety has no interest separable from that of the other. . . . Each is vested with an entire title." Long v. Earle, 277 Mich. 505, 517, 269 N.W. 577, 581 (1936). And yet, in Michigan , each tenant by the entirety possesses the right of survivorship. Mich. Comp. Laws Ann. §554.872(g) (West Supp. 1997), recodified at §700.2901(2)(g) (West Supp. Pamphlet 2001). Each spouse--the wife as well as the husband--may also use the property, exclude third parties from it, and receive an equal share of the income produced by it. See §557.71 (West 1988). Neither spouse may unilaterally alienate or encumber the property, Long v. Earle, supra, at 517, 269 N.W., at 581; Rogers v. Rogers, 136 Mich. App. 125, 134, 356 N.W.2d 288, 292 (1984), although this may be accomplished with mutual consent, Eadus v. Hunter, 249 Mich. 190, 228 N.W. 782 (1930). Divorce ends the tenancy by the entirety, generally giving each spouse an equal interest in the property as a tenant in common, unless the divorce decree specifies otherwise. Mich. Comp. Laws Ann. §552.102 (West 1988).

In determining whether respondent's husband possessed "property" or "rights to property" within the meaning of 26 U.S.C. §6321, we look to the individual rights created by these state law rules. According to Michigan law, respondent's husband had, among other rights, the following rights with respect to the entireties property: the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the respondent's consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally.

IV

We turn now to the federal question of whether the rights Michigan law granted to respondent's husband as a tenant by the entirety qualify as "property" or "rights to property" under §6321. The statutory language authorizing the tax lien "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. , at 719-720. "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945). We conclude that the husband's rights in the entireties property fall within this broad statutory language.

Michigan law grants a tenant by the entirety some of the most essential property rights: the right to use the property, to receive income produced by it, and to exclude others from it. See Dolan v. City of Tigard, 512 U.S. 374, 384 (1994) ("[T]he right to exclude others" is " 'one of the most essential sticks in the bundle of rights that are commonly characterized as property' ") (quoting Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979)); Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 435 (1982) (including "use" as one of the "[p]roperty rights in a physical thing"). These rights alone may be sufficient to subject the husband's interest in the entireties property to the federal tax lien. They gave him a substantial degree of control over the entireties property, and, as we noted in Drye, "in determining whether a federal taxpayer's state-law rights constitute 'property' or 'rights to property,' [t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property." [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. , at 61 (internal quotation marks omitted).

The husband's rights in the estate, however, went beyond use, exclusion, and income. He also possessed the right to alienate (or otherwise encumber) the property with the consent of respondent, his wife. Loretto, supra, at 435 (the right to "dispose" of an item is a property right). It is true, as respondent notes, that he lacked the right to unilaterally alienate the property, a right that is often in the bundle of property rights. See also post, at 7. There is no reason to believe, however, that this one stick--the right of unilateral alienation--is essential to the category of "property."

This Court has already stated that federal tax liens may attach to property that cannot be unilaterally alienated. In United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983), we considered the Federal Government's power to foreclose homestead property attached by a federal tax lien. Texas law provided that " 'the owner or claimant of the property claimed as homestead [may not], if married, sell or abandon the homestead without the consent of the other spouse.' " Id. , at 684-685 (quoting Tex. Const., Art. 16, §50). We nonetheless stated that "[i]n the homestead context . . ., there is no doubt . . . that not only do both spouses (rather than neither) have an independent interest in the homestead property, but that a federal tax lien can at least attach to each of those interests." [83-1 USTC ¶9374], 461 U.S. , at 703, n. 31; cf. Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], supra, at 60, n. 7 (noting that "an interest in a spendthrift trust has been held to constitute 'property for purposes of §6321' even though the beneficiary may not transfer that interest to third parties").

Excluding property from a federal tax lien simply because the taxpayer does not have the power to unilaterally alienate it would, moreover, exempt a rather large amount of what is commonly thought of as property. It would exempt not only the type of property discussed in Rodgers, but also some community property. Community property states often provide that real community property cannot be alienated without the consent of both spouses. See, e.g., Ariz. Rev. Stat. Ann. §25-214(C) (2000); Cal. Fam. Code Ann. §1102 (West 1994); Idaho Code §32-912 (1996); La. Civ. Code Ann., Art. 2347 (West Supp. 2002); Nev. Rev. Stat. §123.230(3) (1995); N.M. Stat. Ann. §40-3-13 (1999); Wash. Rev. Code §26.16.030(3) (1994). Accordingly, the fact that respondent's husband could not unilaterally alienate the property does not preclude him from possessing "property and rights to property" for the purposes of §6321.

Respondent's husband also possessed the right of survivorship--the right to automatically inherit the whole of the estate should his wife predecease him. Respondent argues that this interest was merely an expectancy, which we suggested in Drye would not constitute "property" for the purposes of a federal tax lien. [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. , at 60, n. 7 ("[We do not mean to suggest] that an expectancy that has pecuniary value . . . would fall within §6321 prior to the time it ripens into a present estate"). Drye did not decide this question, however, nor do we need to do so here. As we have discussed above, a number of the sticks in respondent's husband's bundle were presently existing. It is therefore not necessary to decide whether the right to survivorship alone would qualify as "property" or "rights to property" under §6321.

That the rights of respondent's husband in the entireties property constitute "property" or "rights to property" "belonging to" him is further underscored by the fact that, if the conclusion were otherwise, the entireties property would belong to no one for the purposes of §6321. Respondent had no more interest in the property than her husband; if neither of them had a property interest in the entireties property, who did? This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system. Johnson, After Drye: The Likely Attachment of the Federal Tax Lien to Tenancy-by-the-Entireties Interests, 75 Ind. L.J. 1163, 1171 (2000).

Justice SCALIA's and Justice THOMAS' dissents claim that the conclusion that the husband possessed an interest in the entireties property to which the federal tax lien could attach is in conflict with the rules for tax liens relating to partnership property. See post, at 1; see also post, at 6, n. 4. This is not so. As the authorities cited by Justice THOMAS reflect, the federal tax lien does attach to an individual partner's interest in the partnership, that is, to the fair market value of his or her share in the partnership assets. Ibid. (citing B. Bittker & M. McMahon, Federal Income Taxation of Individuals ¶44.5[4][a] (2d ed. 1995 and 2000 Cum. Supp.)); see also A. Bromberg & L. Ribstein, Partnership §3.05(d) (2002-1 Supp.) (hereinafter Bromberg & Ribstein) (citing Uniform Partnership Act §28, 6 U.L.A. 744 (1995)). As a holder of this lien, the Federal Government is entitled to "receive . . . the profits to which the assigning partner would otherwise be entitled," including predissolution distributions and the proceeds from dissolution. Uniform Partnership Act §27(1), id., at 736.

There is, however, a difference between the treatment of entireties property and partnership assets. The Federal Government may not compel the sale of partnership assets (although it may foreclose on the partner's interest, Bromberg & Ribstein §3.05(d)(3)(iv)). It is this difference that is reflected in Justice SCALIA's assertion that partnership property cannot be encumbered by individual partner's debts. See post, at 1. This disparity in treatment between the two forms of ownership, however, arises from our decision in United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983) (holding that the Government may foreclose on property even where the co-owners lack the right of unilateral alienation), and not our holding today. In this case, it is instead the dissenters' theory that departs from partnership law, as it would hold that the Federal Government's lien does not attach to the husband's interest in the entireties property at all, whereas the lien may attach to an individual's interest in partnership property.

Respondent argues that, whether or not we would conclude that respondent's husband had an interest in the entireties property, legislative history indicates that Congress did not intend that a federal tax lien should attach to such an interest. In 1954, the Senate rejected a proposed amendment to the tax lien statute that would have provided that the lien attach to "property or rights to property (including the interest of such person as tenant by the entirety)." S. Rep. No. 1622, 83d Cong., 2d Sess., p. 575 (1954). We have elsewhere held, however, that failed legislative proposals are "a particularly dangerous ground on which to rest an interpretation of a prior statute," Pension Benefit Guaranty Corporation v. LTV Corp., 496 U.S. 633, 650 (1990), reasoning that " '[c]ongressional inaction lacks persuasive significance because several equally tenable inferences may be drawn from such inaction, including the inference that the existing legislation already incorporated the offered change' " Central Bank of Denver, N.A. v. First Interstate Bank of Denver , N.A., 511 U.S. 164, 187 (1994). This case exemplifies the risk of relying on such legislative history. As we noted in United States v. Rodgers [83-1 USTC ¶9374], 461 U.S., at 704, n. 31, some legislative history surrounding the 1954 amendment indicates that the House intended the amendment to be nothing more than a "clarification" of existing law, and that the Senate rejected the amendment only because it found it "superfluous." See H. R. Rep. No. 1337, 83d Cong., 2d Sess., A406 (1954) (noting that the amendment would "clarif[y] the term 'property and rights to property' by expressly including therein the interest of the delinquent taxpayer in an estate by the entirety"); S. Rep. No. 1622, 83d Cong., 2d Sess., 575 (1954) ("It is not clear what change in existing law would be made by the parenthetical phrase. The deletion of the phrase is intended to continue the existing law").

The same ambiguity that plagues the legislative history accompanies the common-law background of Congress' enactment of the tax lien statute. Respondent argues that Congress could not have intended the passage of the federal tax lien statute to alter the generally accepted rule that liens could not attach to entireties property. See Astoria Fed. Sav. & Loan Assn. v. Solimino, 501 U.S. 104, 108 (1991) ("[W]here a common-law principle is well established . . . the courts may take it as given that Congress has legislated with an expectation that the principle will apply except 'when a statutory purpose to the contrary is evident' "). The common-law rule was not so well established with respect to the application of a federal tax lien that we must assume that Congress considered the impact of its enactment on the question now before us. There was not much of a common-law background on the question of the application of federal tax liens, as the first court of appeals cases dealing with the application of such a lien did not arise until the 1950's. United States v. Hutcherson [51-1 USTC ¶9249], 188 F.2d 326 (CA8 1951); Raffaele v. Granger [52-1 USTC ¶9321], 196 F.2d 620 (CA3 1952). This background is not sufficient to overcome the broad statutory language Congress did enact, authorizing the lien to attach to "all property and rights to property" a taxpayer might have.

We therefore conclude that respondent's husband's interest in the entireties property constituted "property" or "rights to property" for the purposes of the federal tax lien statute. We recognize that Michigan makes a different choice with respect to state law creditors: "[L]and held by husband and wife as tenants by entirety is not subject to levy under execution on judgment rendered against either husband or wife alone." Sanford v. Bertrau, 204 Mich. 244, 247, 169 N.W. 880, 881 (1918). But that by no means dictates our choice. The interpretation of 26 U.S.C. §6321 is a federal question, and in answering that question we are in no way bound by state courts' answers to similar questions involving state law. As we elsewhere have held, " 'exempt status under state law does not bind the federal collector.' " Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. , at 51. See also Rodgers [83-1 USTC ¶9374], supra, at 701 (clarifying that the Supremacy Clause "provides the underpinning for the Federal Government's right to sweep aside state-created exemptions").

V

We express no view as to the proper valuation of respondent's husband's interest in the entireties property, leaving this for the Sixth Circuit to determine on remand. We note, however, that insofar as the amount is dependent upon whether the 1989 conveyance was fraudulent, see post, at 1, n. 1 (THOMAS, J., dissenting), this case is somewhat anomalous. The Sixth Circuit affirmed the District Court's judgment that this conveyance was not fraudulent, and the Government has not sought certiorari review of that determination. Since the District Court's judgment was based on the notion that, because the federal tax lien could not attach to the property, transferring it could not constitute an attempt to evade the Government creditor, [99-2 USTC ¶50,618], 65 F.Supp.2d, at 657-659, in future cases, the fraudulent conveyance question will no doubt be answered differently.

The judgment of the United States Court of Appeals for the Sixth Circuit is accordingly reversed, and the case is remanded for proceedings consistent with this opinion.

It is so ordered.

Dissenting Opinion

Justice THOMAS, with whom Justice STEVENS and Justice SCALIA join

The Court today allows the Internal Revenue Service (IRS) to reach proceeds from the sale of real property that did not belong to the taxpayer, respondent's husband, Don Craft, ¹ because, in the Court's view, he "possesse[d] individual rights in the [tenancy by the entirety] estate sufficient to constitute 'property and rights to property' for the purposes of the lien" created by 26 U.S.C. §6321. Ante, at 1. The Court does not contest that the tax liability the IRS seeks to satisfy is Mr. Craft's alone, and does not claim that, under Michigan law, real property held as a tenancy by the entirety belongs to either spouse individually. Nor does the Court suggest that the federal tax lien attaches to particular "rights to property" held individually by Mr. Craft. Rather, borrowing the metaphor of "property as a 'bundle of sticks'--a collection of individual rights which, in certain combinations constitute property," ante, at 4, the Court proposes that so long as sufficient "sticks" in the bundle of "rights to property" "belong to" a delinquent taxpayer, the lien can attach as if the property itself belonged to the taxpayer. Ante, at 11.

This amorphous construct ignores the primacy of state law in defining property interests, eviscerates the statutory distinction between "property" and "rights to property" drawn by §6321, and conflicts with an unbroken line of authority from this Court, the lower courts, and the IRS. Its application is all the more unsupportable in this case because, in my view, it is highly unlikely that the limited individual "rights to property" recognized in a tenancy by the entirety under Michigan law are themselves subject to lien. I would affirm the Court of Appeals and hold that Mr. Craft did not have "property" or "rights to property" to which the federal tax lien could attach.

I

Title 26 U.S.C. §6321 provides that a federal tax lien attaches to "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. It is uncontested that a federal tax lien itself "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55 (1958) (construing the 1939 version of the federal tax lien statute). Consequently, the Government's lien under §6321 "cannot extend beyond the property interests held by the delinquent taxpayer," United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 690-691 (1983), under state law. Before today, no one disputed that the IRS, by operation of §6321, "steps into the taxpayer's shoes," and has the same rights as the taxpayer in property or rights to property subject to the lien. B. Bittker & M. McMahon, Federal Income Taxation of Individuals ¶44.5[4][a] (2d ed. 1995 and 2000 Cum. Supp.) (hereinafter Bittker). I would not expand " 'the nature of the legal interest' " the taxpayer has in the property beyond those interests recognized under state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960) (citing Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82 (1940)).

A

If the Grand Rapids property "belong[ed] to" Mr. Craft under state law prior to the termination of the tenancy by the entirety, the federal tax lien would have attached to the Grand Rapids property. But that is not this case. As the Court recognizes, pursuant to Michigan law, as under English common law, property held as a tenancy by the entirety does not belong to either spouse, but to a single entity composed of the married persons. See ante, at 6-7. Neither spouse has "any separate interest in such an estate." Sanford v. Bertrau, 204 Mich. 244, 249, 169 N.W. 880, 882 (1918); see also Long v. Earle, 277 Mich. 505, 517, 269 N.W. 577, 581 (1936) ("Each [spouse] is vested with an entire title and, as against the one who attempts alone to convey or incumber such real estate, the other has an absolute title"). An entireties estate constitutes an indivisible "sole tenancy." See Budwit v. Herr, 339 Mich. 265, 272, 63 N.W.2d 841, 844 (1954); see also Tyler v. United States [2 USTC ¶532], 281 U.S. 497, 501 (1930) ("[T]he tenants constitute a unit; neither can dispose of any part of the estate without the consent of the other; and the whole continues in the survivor"). Because Michigan does not recognize a separate spousal interest in the Grand Rapids property, it did not "belong" to either respondent or her husband individually when the IRS asserted its lien for Mr. Craft's individual tax liability. Thus, the property was not property to which the federal tax lien could attach for Mr. Craft's tax liability.

The Court does not dispute this characterization of Michigan 's law with respect to the essential attributes of the tenancy by the entirety estate. However, relying on Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 59 (1999), which in turn relied upon United States v. Irvine [94-1 USTC ¶60,163], 511 U.S. 224 (1994), and United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190 (1971), the Court suggests that Michigan's definition of the tenancy by the entirety estate should be overlooked because federal tax law is not controlled by state legal fictions concerning property ownership. Ante, at 4. But the Court misapprehends the application of Drye to this case.

Drye, like Irvine and Mitchell before it, was concerned not with whether state law recognized "property" as belonging to the taxpayer in the first place, but rather with whether state laws could disclaim or exempt such property from federal tax liability after the property interest was created. Drye held only that a state-law disclaimer could not retroactively undo a vested right in an estate that the taxpayer already held, and that a federal lien therefore attached to the taxpayer's interest in the estate. [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. , at 61 (recognizing that a disclaimer does not restore the status quo ante because the heir "determines who will receive the property--himself if he does not disclaim, a known other if he does"). Similarly, in Irvine, the Court held that a state law allowing an individual to disclaim a gift could not force the Court to be "struck blind" to the fact that the transfer of "property" or "property rights" for which the gift tax was due had already occurred; "state property transfer rules do not transfer into federal taxation rules." [94-1 USTC ¶60,163], 511 U.S. , at 239-240 (emphasis added). See also Mitchell [71-1 USTC ¶9451], supra, at 204 (holding that right to renounce a marital interest under state law does not indicate that the taxpayer had no right to property before the renunciation).

Extending this Court's "state law fiction" jurisprudence to determine whether property or rights to property exist under state law in the first place works a sea change in the role States have traditionally played in "creating and defining" property interests. By erasing the careful line between state laws that purport to disclaim or exempt property interests after the fact, which the federal tax lien does not respect, and state laws' definition of property and property rights, which the federal tax lien does respect, the Court does not follow Drye, but rather creates a new federal common law of property. This contravenes the previously settled rule that the definition and scope of property is left to the States. See Aquilino [60-2 USTC ¶9538], supra, at 513, n. 3 (recognizing unsoundness of leaving the definition of property interests to a nebulous body of federal law, "because it ignores the long-established role that the States have played in creating property interests and places upon the courts the task of attempting to ascertain a taxpayer's property rights under an undefined rule of federal law").

B

That the Grand Rapids property does not belong to Mr. Craft under Michigan law does not end the inquiry, however, since the federal tax lien attaches not only to "property" but also to any "rights to property" belonging to the taxpayer. While the Court concludes that a laundry list of "rights to property" belonged to Mr. Craft as a tenant by the entirety, ² it does not suggest that the tax lien attached to any of these particular rights. ³ Instead, the Court gathers these rights together and opines that there were sufficient sticks to form a bundle, so that "respondent's husband's interest in the entireties property constituted 'property' or 'rights to property' for the purposes of the federal tax lien statute." Ante, at 11, 13.

But the Court's "sticks in a bundle" metaphor collapses precisely because of the distinction expressly drawn by the statute, which distinguishes between "property" and "rights to property." The Court refrains from ever stating whether this case involves "property" or "rights to property" even though §6321 specifically provides that the federal tax lien attaches to "property" and "rights to property" "belonging to" the delinquent taxpayer, and not to an imprecise construct of "individual rights in the estate sufficient to constitute 'property and rights to property' for the purposes of the lien." Ante, at 1. ⁴

Rather than adopt the majority's approach, I would ask specifically, as the statute does, whether Mr. Craft had any particular "rights to property" to which the federal tax lien could attach. He did not. ⁵ Such "rights to property" that have been subject to the §6321 lien are valuable and "pecuniary," i.e., they can be attached, and levied upon or sold by the Government. ⁶ Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. , at 58-60, and n. 7. With such rights subject to lien, the taxpayer's interest has "ripen[ed] into a present estate" of some form and is more than a mere expectancy, id., at 60, n. 7, and thus the taxpayer has an apparent right "to channel that value to [another]," id., at 61.

In contrast, a tenant in a tenancy by the entirety not only lacks a present divisible vested interest in the property and control with respect to the sale, encumbrance, and transfer of the property, but also does not possess the ability to devise any portion of the property because it is subject to the other's indestructible right of survivorship. Rogers v. Rogers, 136 Mich. App. 125, 135-137, 356 N.W.2d 288, 293-294 (1984). This latter fact makes the property significantly different from community property, where each spouse has a present one-half vested interest in the whole, which may be devised by will or otherwise to a person other than the spouse. See 4 G. Thompson, Real Property §37.14(a) (D. Thomas ed. 1994) (noting that a married person's power to devise one-half of the community property is "consistent with the fundamental characteristic of community property": "community ownership means that each spouse owns 50% of each community asset"). ⁷ See also Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S., at 61 ("[I]n determining whether a federal taxpayer's state-law rights constitute 'property' or 'rights to property,' the important consideration is the breadth of the control the taxpayer could exercise over the property" (emphasis added, citation and brackets omitted).

It is clear that some of the individual rights of a tenant in entireties property are primarily personal, dependent upon the taxpayer's status as a spouse, and similarly not susceptible to a tax lien. For example, the right to use the property in conjunction with one's spouse and to exclude all others appears particularly ill suited to being transferred to another, see ibid., and to lack "exchangeable value," id., at 56.

Nor do other identified rights rise to the level of "rights to property" to which a §6321 lien can attach, because they represent, at most, a contingent future interest, or an "expectancy" that has not "ripen[ed] into a present estate." Id. , at 60, n. 7 ("Nor do we mean to suggest that an expectancy that has pecuniary value and is transferable under state law would fall within §6321 prior to the time it ripens into a present estate"). Cf. Bess [58-2 USTC ¶9595], 357 U.S., at 55-56 (holding that no federal tax lien could attach to proceeds of the taxpayer's life insurance policy because "[i]t would be anomalous to view as 'property' subject to lien proceeds never within the insured's reach to enjoy"). By way of example, the survivorship right wholly depends upon one spouse outliving the other, at which time the survivor gains "substantial rights, in respect of the property, theretofore never enjoyed by [the] survivor." Tyler [2 USTC ¶532], 281 U.S. , at 503. While the Court explains that it is "not necessary to decide whether the right to survivorship alone would qualify as 'property' or 'rights to property' " under §6321, ante, at 11, the facts of this case demonstrate that it would not. Even assuming both that the right of survivability continued after the demise of the tenancy estate and that the tax lien could attach to such a contingent future right, creating a lienable interest upon the death of the nonliable spouse, it would not help the IRS here; respondent's husband predeceased her in 1998, and there is no right of survivorship at issue in this case.

Similarly, while one spouse might escape the absolute limitations on individual action with respect to tenancy by the entirety property by obtaining the right to one-half of the property upon divorce, or by agreeing with the other spouse to sever the tenancy by the entirety, neither instance is an event of sufficient certainty to constitute a "right to property" for purposes of §6321. Finally, while the federal tax lien could arguably have attached to a tenant's right to any "rents, products, income, or profits" of real property held as tenants by the entirety, Mich. Comp. Laws Ann. §557.71 (West 1988), the Grand Rapids property created no rents, products, income, or profits for the tax lien to attach to.

In any event, all such rights to property, dependent as they are upon the existence of the tenancy by the entirety estate, were likely destroyed by the quitclaim deed that severed the tenancy. See n. 1, supra. Unlike a lien attached to the property itself, which would survive a conveyance, a lien attached to a "right to property" falls squarely within the maxim that "the tax collector not only steps into the taxpayer's shoes but must go barefoot if the shoes wear out." Bittker ¶44.5[4][a] (noting that "a state judgment terminating the taxpayer's rights to an asset also extinguishes the federal tax lien attached thereto"). See also Elliott ¶9.09[3][d][i] (explaining that while a tax lien may attach to a taxpayer's option on property, if the option terminates, the Government's lien rights would terminate as well).

Accordingly, I conclude that Mr. Craft had neither "property" nor "rights to property" to which the federal tax lien could attach.

II

That the federal tax lien did not attach to the Grand Rapids property is further supported by the consensus among the lower courts. For more than 50 years, every federal court reviewing tenancies by the entirety in States with a similar understanding of tenancy by the entirety as Michigan has concluded that a federal tax lien cannot attach to such property to satisfy an individual spouse's tax liability. ⁸ This consensus is supported by the IRS' consistent recognition, arguably against its own interest, that a federal tax lien against one spouse cannot attach to property or rights to property held as a tenancy by the entirety. ⁹

That the Court fails to so much as mention this consensus, let alone address it or give any reason for overruling it, is puzzling. While the positions of the lower courts and the IRS do not bind this Court, one would be hard pressed to explain why the combined weight of these judicial and admin istrative sources--including the IRS' instructions to its own employees--do not constitute relevant authority.

III

Finally, while the majority characterizes Michigan's view that the tenancy by the entirety property does not belong to the individual spouses as a "state law fiction," ante, at 1, our precedents, including Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S., at 58-60, hold that state, not federal, law defines property interests. Ownership by "the marriage" is admittedly a fiction of sorts, but so is a partnership or corporation. There is no basis for ignoring this fiction so long as federal law does not define property, particularly since the tenancy by the entirety property remains subject to lien for the tax liability of both tenants.

Nor do I accept the Court's unsupported assumption that its holding today is necessary because a contrary result would "facilitat[e] abuse of the federal tax system." Ante, at 11. The Government created this straw man, Brief for United States 30-32, suggesting that the property transfer from the tenancy by the entirety to respondent was somehow improper, see id., at 30-31, n. 20 (characterizing scope of "[t]he tax avoidance scheme sanctioned by the court of appeals in this case"), even though it chose not to appeal the lower court's contrary assessment. But the longstanding consensus in the lower courts that tenancy by the entirety property is not subject to lien for the tax liability of one spouse, combined with the Government's failure to adduce any evidence that this has led to wholesale tax fraud by married individuals, suggests that the Court's policy rationale for its holding is simply unsound.

Just as I am unwilling to overturn this Court's longstanding precedent that States define and create property rights and forms of ownership, Aquilino [60-2 USTC ¶9538], 363 U.S., at 513, n. 3, I am equally unwilling to redefine or dismiss as fictional forms of property ownership that the State has recognized in favor of an amorphous federal common-law definition of property. I respectfully dissent.

¹ The Grand Rapids property was tenancy by the entirety property owned by Mr. and Mrs. Craft when the tax lien attached, but was conveyed by the Crafts to Mrs. Craft by quitclaim deed in 1989. That conveyance terminated the entirety estate. Mich. Comp. Laws Ann. §557.101 (West 1988); see also United States v. Certain Real Property Located at 2525 Leroy Lane, 910 F.2d 343, 351 (CA6 1990). The District Court and Court of Appeals both held that the transfer did not constitute a fraudulent conveyance, a ruling the Government has not appealed. The IRS is undoubtedly entitled to any proceeds that Mr. Craft received or to which he was entitled from the 1989 conveyance of the tenancy by the entirety property for $1.00; at that point the tenancy by the entirety estate was destroyed and at least half of the proceeds, or 50 cents, was "property" or "rights to property" "belonging to" Mr. Craft. By contrast, the proceeds that the IRS claims here are from Mrs. Craft's 1992 sale of the property to a third party. At the time of the sale, she owned the property in fee simple, and accordingly Mr. Craft neither received nor was entitled to these funds.

² The parties disagree as to whether Michigan law recognizes the "rights to property" identified by the Court as individual rights "belonging to" each tenant in entireties property. Without deciding a question better resolved by the Michigan courts, for the purposes of this case I will assume, arguendo, that Michigan law recognizes separate interests in these "rights to property."

³ Nor does the Court explain how such "rights to property" survived the destruction of the tenancy by the entirety, although, for all intents and purposes, it acknowledges that such rights as it identifies exist by virtue of the tenancy by the entirety estate. Even Judge Ryan's concurrence in the Sixth Circuit's first ruling in this matter is best read as making the Federal Government's right to execute its lien dependent upon the factual finding that the conveyance was a fraudulent transaction. See [98-1 USTC ¶50,305], 140 F.3d 638, 648-649 (1998).

⁴ The Court's reasoning that because a taxpayer has rights to property a federal tax lien can attach not only to those rights but also to the property itself could have far-reaching consequences. As illustration, in the partnership setting as elsewhere, the Government's lien under §6321 places the Government in no better position than the taxpayer to whom the property belonged: "[F]or example, the lien for a partner's unpaid income taxes attaches to his interest in the firm, not to the firm's assets." Bittker ¶44.5[4][a]. Though partnership property currently is "not subject to attachment or execution, except on a claim against the partnership," Rev. Rul. 73-24, 1973-1 Cum. Bull. 602; cf. United States v. Kaufman [1 USTC ¶116], 267 U.S. 408 (1925), under the logic of the Court's opinion partnership property could be attached for the tax liability of an individual partner. Like a tenant in a tenancy by the entirety, the partner has significant rights to use, enjoy, and control the partnership property in conjunction with his partners. I see no principled way to distinguish between the propriety of attaching the federal tax lien to partnership property to satisfy the tax liability of a partner, in contravention of current practice, and the propriety of attaching the federal tax lien to tenancy by the entirety property in order to satisfy the tax liability of one spouse, also in contravention of current practice. I do not doubt that a tax lien may attach to a partner's partnership interest to satisfy his individual tax liability, but it is well settled that the lien does not, thereby, attach to property belonging to the partnership. The problem for the IRS in this case is that, unlike a partnership interest, such limited rights that Mr. Craft had in the Grand Rapids property are not the kind of rights to property to which a lien can attach, and the Grand Rapids property itself never "belong[ed] to" him under Michigan law.

⁵ Even such rights as Mr. Craft arguably had in the Grand Rapids property bear no resemblance to those to which a federal tax lien has ever attached. See W. Elliott, Federal Tax Collections, Liens, and Levies ¶¶9.09[3][a]-[f] (1995 and 2000 Cum. Supp.) (hereinafter Elliott) (listing examples of rights to property to which a federal tax lien attaches, such as the right to compel payment; the right to withdraw money from a bank account, or to receive money from accounts receivable; wages earned but not paid; installment payments under a contract of sale of real estate; annuity payments; a beneficiary's rights to payment under a spendthrift trust; a liquor license; an easement; the taxpayer's interest in a timeshare; options; the taxpayer's interest in an employee benefit plan or individual retirement account).

⁶ See 26 U.S.C. §§6331, 6335-6336.

⁷ And it is similarly different from the situation in United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983), where the question was not whether a vested property interest in the family home to which the federal tax lien could attach "belong[ed] to" the taxpayer. Rather, in Rodgers, the only question was whether the federal tax lien for the husband's tax liability could be foreclosed against the property under 26 U.S.C. §7403, despite his wife's homestead right under state law. See [83-1 USTC ¶9374], 461 U.S. , at 701-703, and n. 31.

⁸ See IRS v. Gaster [94-2 USTC ¶50,622], 42 F.3d 787, 791 (CA3 1994) (concluding that the IRS is not entitled to a lien on property owned as a tenancy by the entirety to satisfy the tax obligations of one spouse); Pitts v. United States, 946 F.2d 1569, 1571-1572 (CA4 1991) (same); United States v. American Nat. Bank of Jacksonville [58-2 USTC ¶9564], 255 F.2d 504, 507 (CA5), cert. denied, 358 U.S. 835 (1958) (same); Raffaele v. Granger [52-1 USTC ¶9321], 196 F.2d 620, 622-623 (CA3 1952) (same); United States v. Hutcherson [51-1 USTC ¶9249], 188 F.2d 326, 331 (CA8 1951) (explaining that the interest of one spouse in tenancy by the entirety property "is not a right to property or property in any sense"); United States v. Nathanson [45-1 USTC ¶9194], 60 F.Supp. 193, 194 (ED Mich. 1945) (finding no designation in the Federal Revenue Act for imposing tax upon property held by the entirety for taxes due from one person alone); Shaw v. United States [39-1 USTC ¶9463], 94 F.Supp. 245, 246 (WD Mich. 1939) (recognizing that the nature of the estate under Michigan law precludes the tax lien from attaching to tenancy by the entirety property for the tax liability of one spouse). See also Benson v. United States [71-1 USTC ¶9278], 442 F.2d 1221, 1223 (CADC 1971) (recognizing the Government's concession that property owned by the parties as tenants by the entirety cannot be subjected to a tax lien for the debt of one tenant); Cole v. Cardoza [71-1 USTC ¶15,986], 441 F.2d 1337, 1343 (CA6 1971) (noting Government concession that, under Michigan law, it had no valid claim against real property held by tenancy by the entirety).

⁹ See, e.g., Internal Revenue Manual §5.8.4.2.3 (RIA 2002), available at WESTLAW, RIA-IRM database ( Mar. 29, 2002 ) (listing "property owned as tenants by the entirety" as among the assets beyond the reach of the Government's tax lien); id., §5.6.1.2.3 (recognizing that a consensual lien may be appropriate "when the federal tax lien does not attach to the property in question. For example, an assessment exists against only one spouse and the federal tax lien does not attach to real property held as tenants by the entirety."); IRS Chief Counsel Advisory (Aug. 17, 2001) (noting that consensual liens, or mortgages, are to be used "as a means of securing the Government's right to collect from property the assessment lien does not attach to, such as real property held as a tenancy by the entirety" (emphasis added)); IRS Litigation Bulletin No. 407 (Aug. 1994) ("Traditionally, the government has taken the view that a federal tax lien against a single debtor-spouse does not attach to property or rights to property held by both spouses as tenants by the entirety."); IRS Litigation Bulletin No. 388 (Jan. 1993) (explaining that neither the Department of Justice nor IRS chief counsel interpreted United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677 (1983), to mean that a federal tax lien against one spouse encumbers his or her interest in entireties property, and noting that it "do[es] not believe the Department will again argue the broader interpretation of Rodgers," which would extend the reach of the federal tax lien to property held by the entireties); Benson [71-1 USTC ¶9278], supra, at 1223; Cardoza [71-1 USTC ¶15,986], supra, at 1343.

Dissenting Opinion

Justice SCALIA, with whom Justice THOMAS joins

I join Justice THOMAS's dissent, which points out (to no relevant response from the Court) that a State's decision to treat the marital partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members, is no more novel and no more "artificial" than a State's decision to treat the commercial partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members.

I write separately to observe that the Court nullifies (insofar as federal taxes are concerned, at least) a form of property ownership that was of particular benefit to the stay-at-home spouse or mother. She is overwhelmingly likely to be the survivor that obtains title to the unencumbered property; and she (as opposed to her business-world husband) is overwhelmingly unlikely to be the source of the individual indebtedness against which a tenancy by the entirety protects. It is regrettable that the Court has eliminated a large part of this traditional protection retained by many States.