The later case
of Kiely v. Bertrand, 67
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
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
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
and the latter had counterclaimed for damages for breach of contract. In
our opinion under
law the garnishment lien was ineffective. The debt was not a contingent
right or claim under the
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
cases construing it are against him. The leading case is Erb-Kidder
Co. v. Levy, 262
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
and Navratil agreed on the amount. The
statute contemplates only fixed debts existing at the time of the
garnishment and payable then or in the future.
In Thorp v.
511, 512, 4 N. W. 227, 228 (1880), the court stated:
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.
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.
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
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
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
Judge Miller did not participate in this decision.
¶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
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
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.,
, 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.
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
statement of facts are as follows:
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
Royalite Company has appeared and disclaimed any interest in the funds.
Recorder was defaulted by reason of their failure to file any answer or
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.
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
" with the Board of Education with the City of
, 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.
Electric Company secured a labor and material bond running to the People
of State of Michigan with United Electric Company as principal and
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.
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.
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.
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.
Completed by Surety]
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.
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
A schedule of
the payments made by Michigan Surety Company is marked Exhibit Eleven.
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.
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.
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.
assignment which has already been referred to as Exhibit Fifteen was
recorded in the office of the Register of Deeds for
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.
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
May 5, 1959
, is marked Exhibit Seventeen.
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
Surety Company is in receivership.
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
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
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.
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:
: date of notice and demand:
: date of filing with the Register of Deeds,
. Outstanding balance: four thousand four hundred thirty-five
dollars thirty-six cents. Third quarter, 1959, four thousand nine
hundred seventeen dollars seventeen cents.
, four thousand nine hundred seventeen dollars seventeen cents.
Fourth quarter, 1959: one thousand one hundred three dollars sixty-nine
. 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.
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
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
Fourteen A, which is the twelfth and final payment certificate of
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.
one through eighteen were accepted by the Court.
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.
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.
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
January 25, 1960
March 24, 1961
. The judgment against Michigan Surety Company was dated
October 2, 1961
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.
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
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.
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.
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.
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.
Electric Company also claims by virtue of an assignment from United
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
. 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).
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
v. Munsey Trust Company, 332
Under the case
of United States v. Bess (1958) [58-2 USTC ¶9595] 357
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
government has filed a lien creates no property rights in the fund, but
merely attaches consequences federally defined to rights created under
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
government in relation to the tax lien claims.
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.
of Nonpayment of Subcontractors]
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
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
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.
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
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
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.
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
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.
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.
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
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.
indicated above may be entered distributing the fund, no cost, a public
question being involved.
¶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
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
by the Judicial Code [28
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.
10573 West Jefferson Avenue
, River Rouge 18,
, 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.
to 1956 the S & M Building Company, a
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
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.
construction progressed on the residences, construction loans were
obtained by the building companies from
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
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.
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.
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
district court for the eastern district of Michigan, southern division.
February 28, 1958
, a receiver in bankruptcy was duly appointed. The
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.
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
precedent and, therefore, denied costs to all parties.
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
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
has appealed, asking the decree of foreclosure, to the extent it awards
priority to mechanics' liens over the
tax liens, be vacated and remanded to circuit court with directions to
award priority to the tax liens over the mechanics' liens. The
further seeks correction of the decree to allow it 1 year from date of
sale within which to redeem the mortgaged property.
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.
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
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
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.
of U. S. Appeal]
The appeal of
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.
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
does not contend its lien claims are superior to the claims of the
mortgagees being secured by prior recorded mortgages.
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.
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.
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
. 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.
River Rouge Savings Bank does not deny the right of priority claimed by
over the mechanics' liens, the bank says the issue is now moot because
of events subsequent to the circuit court decree. The
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
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:
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."
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.
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):
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."
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
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
, 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
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.
On the issue
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
was made a party to this State court mortgage foreclosure proceeding
pursuant to 28
C. §2410. Section 2410(c) reads in part as follows:
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
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
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.
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."
for rehearing, the court wrote as follows (p. 869):
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
, 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."
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
had waived its 1-year right of redemption. Thus, the
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.
of Tax Liens]
On the issue
of priority of the tax liens of the
, 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
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
' 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
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
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
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
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.
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
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
v. Security Tr. & Sav. Bank, 340
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
decision appears to be directly in answer to this issue; however, there
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.
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.
general rule is stated in 57 CJS 800:
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
To the same
effect, see 18 RCL 970 and 65 ALR 294, the latter saying as follows:
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):
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."
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):
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
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.
v. Wiley, 176
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
632 (172 S. W. 1072).
Question in State]
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
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
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.
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):
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."
decree, paragraph 30, should provide that the sale proceeds after
expenses of sale be paid in the following order:
To the mortgagees, in order of their priority.
tax liens, prorated to respective lots of case 71-36.
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.
To restore to the mortgagees any such deficiency paid to mechanics'
To the owners."
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
law to the extent its lien displaces mechanics' liens prior to mortgages
under local law.
On the other
hand, the State law of
accords mechanics' liens priority over mortgages recorded after
construction was begun, as in the instant case.
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,
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
, 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
is entitled to a period of 1 year from the date of sale within which to
redeem the mortgaged property.
appellants Kerr Lumber Company and Raymond Excavating Company shall have
costs of this Court.
CL 1948, §570.4 (Stat. Ann. §26.284).
United States v. Gilbert Associates, 345
361 [53-1 USTC ¶9291], reversing 97 N. H. 411, 90 A. 2d 499 [52-2 USTC
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.]
¶9777]In the Matter of the Estate of Edgar Acheson Ballard, Deceased In
the Matter of the Estate of Lucien S. Hacke, Deceased
Court, Oakland Co., Mich., Nos. 66,277, 65,677, 4/11/57
[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323; Revised Statutes,
Priority of claims against estate in
istration: Federal and state taxes,
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
claimed it had a preferred lien for an alleged unpaid Business
Activities Tax. The fiduciary of the estate claimed preference for
istration expenses and the widow and minor children of the decedent
asserted allowance rights. The court ruled that expenses of
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
istration expenses, (2) the claim and lien of the
, (3) the claim and lien of the State of
, and (4) the widow's allowance, etc.
John D. Kiley,
Regional Counsel, Office of Chief Counsel, U. S. Treasury Department, J.
W. Hutson, for
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.
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
istration expense, and the claimant for funeral expenses?"
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
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.
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
361 [53-1 USTC ¶9291], and United States v. City of New Britain,
81 [54-1 USTC ¶9191].
A very helpful
brief by Mr. Hutson, attorney for widow and
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.
amounts involved in the above causes are small, the import of the issues
is far reaching. The questions involved deserve careful attention.
of Lien, Claim, and Widow's Allowance]
differentiation between the use and meaning of the words, lien, claim,
allowance for widow and children, and expenses of
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.
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
329, 283 N. W. 599.
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
istration and settlement of the estate, M. S. A. 27.3178(138), and of
course payable out of the estate's assets. Idem.
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
629, 273 N. W. 294.
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.
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
istration expenses preference over the widow's allowance, M. S. A.
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.
of the Probate Court is entirely statutory, Smolenski v. Kent Judge,
8, In re Graham's Estate, 276
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.
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
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
the problem of priority between the United States Government and the
. In U. S. v. Gilbert Associates, 345
361, 97 L. Ed. 1073 [53-1 USTC ¶9291].
general tax lien by the State of
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."
majority opinion (7 members) held that the Federal lien was entitled to
preference, under Section 3466, of the U. S. Revised Statutes, stating:
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
U. S. v. Texas, 314
480, 86 L. ed. 356.
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.
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.
Thus, on proof
of admission of the liens and claimants' rights of the State and
, a final account shall be forthwith filed and assets in the hands of
the fiduciary shall be used to pay:
istration expenses; Next, the claim and lien of the
; Next, the claim and lien of the State of
; and Thereafter, widow's allowance, etc.
An order may
be entered accordingly.
¶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
S. District Court, East. Dist.
, 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
. 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
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
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
for unpaid Federal withholding and employment taxes which Pioneer owes
the United States Government, and which claim the
asserts is paramount to those of the other defendants.
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
for failing to plead or otherwise defend itself as required by law. More
February 16, 1970
conceded on oral argument that the
' 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
and the City of
to the $1,469.31 on deposit with the court.
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
, 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
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.
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
, with the Clerk of the Court of Wayne County.
after the conclusion of this Indenture Agreement, on
November 29, 1963
, the City of
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
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
and the City claim should be used to satisfy their respective claims.
that on these facts, Title 31 U. S. C., §191 (§3466 of the Rev.
Stats.) gives the
' claim for back taxes against Pioneer priority over the lien for taxes
levied by the City of
. That Section provides, in pertinent part:
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
this Section, the Sixth Circuit Court of Appeals stated:
or not the
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, . . .
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).
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
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
[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
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:
priority given the
cannot be impaired or superseded by state law."
even more to the point, the Supreme Court has said of §191 [§3466 Rev.
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).
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]
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
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.
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
C. §191] clearly awards priority to the
." U. S. v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345
361, 366 (1953).
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.
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
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
which is given priority under §191.
' motion for summary judgment is granted, and the City of
's motion for summary judgment denied.
, Petitioner v. Sandra L. Craft
Court of the United States, 00-1831, 4/17/2002, 122 SCt 1414, Reversing
and remanding an Appellate Court decision, 2000-2
233 F3d 358.
On Writ of Certiorari to the
Court of Appeals for the Sixth Circuit.
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 (
) 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
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.
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
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
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.
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.
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.
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.
(c) The rights
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.
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.
¶50,860], 233 F.3d 358, reversed and remanded.
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.
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.
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
, 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.
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.
, 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).
appealed. The Sixth Circuit held that the tax lien did not attach to the
property because under
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.
, 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.
, at 659.
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.
, at 369-375.
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
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
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
, 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.
, at 59-61.
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
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 (M. Wolf ed. 2001) (hereinafter Powell).
The common law characterized tenants in common as each owning a separate
fractional share in undivided property.
, §50.01. 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.
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
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.
, at 183; 7 Powell §51.01. 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.
, §51.04. 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
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.
, §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,
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.
's version of the estate is typical of the modern tenancy by the
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.
505, 517, 269 N.W. 577, 581 (1936). And yet, in
, 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
Comp. Laws Ann. §552.102 (West 1988).
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
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
, 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.
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
, at 61 (internal quotation marks omitted).
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.
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.' "
, 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
, 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
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
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
, 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.
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
L.J. 1163, 1171 (2000).
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[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.
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.
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
, N.A., 511
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").
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
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.
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."
v. Bertrau, 204
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
, 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
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.
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
THOMAS, with whom Justice STEVENS and Justice SCALIA join
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
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.
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.
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[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)).
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
property. But that is not this case. As the Court recognizes, pursuant
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.
244, 249, 169 N.W. 880, 882 (1918); see also Long v. Earle, 277
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
265, 272, 63 N.W.2d 841, 844 (1954); see also
[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
does not recognize a separate spousal interest in the
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
'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.
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
, 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],
, 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).
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").
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.
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
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
, 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.
v. Rogers, 136
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
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."
, 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."
[2 USTC ¶532], 281
, 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.
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[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[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).
conclude that Mr. Craft had neither "property" nor
"rights to property" to which the federal tax lien could
federal tax lien did not attach to the
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
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
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
istrative sources--including the IRS' instructions to its own
employees--do not constitute relevant authority.
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.
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.
The parties disagree as to whether
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
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,
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[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.
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.
Even such rights as Mr. Craft arguably had in the
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[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
See 26 U.S.C. §§6331, 6335-6336.
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
, at 701-703, and n. 31.
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
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).
See, e.g., Internal Revenue Manual §126.96.36.199.3 (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.,
§188.8.131.52.3 (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.
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.
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.