New Hampshire

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[66-1 USTC ¶9411]In re George H. Bushway Estate

N. H. Sup. Ct., No. 5438, 3/30/66

[1954 Code Sec. 6323]

Lien for taxes: Priorities: Insolvent estate: Secured loans.--In an action involving the distribution of an estate the Government's tax liens had priority over all creditor's claims except as to so much of the claim of a bank as was secured by stock and other collateral which had been transferred and pledged to the bank prior to the filing of the tax liens.

Paul R. Cox, Burns, Bryant & Hinchey, Bucabrey Bldg., Washington St., Dover, N. H., for the executor as amicus curiae. Richard M. Rob erts, Acting Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Washington, D. C. 20530, Louis M. Janelle, United States Attorney, Nashau, N. H., for U. S. Rob ert B. Donovan, Perkins, Holland & Donovan, 151 Water St., Exeter, N. H., for Merchants National Bank of Newburyport, Mass.

Certification of questions by the probate court under RSA 547:30. The decedent, George H. Bushway, late of Rye , died testate on April 30, 1963 , and on June 19, 1963 Stanley M. Burns was duly appointed executor of his will. On petition of the executor, the estate was decreed on October 16, 1963 to be admin istered as insolvent, and a commissioner of insolvency was appointed. RSA 557:1. By his report filed on October 30, 1964 , the commissioner allowed claims totaling $48,270.37, including a claim of Merchants National Bank of Newburyport , Massachusetts in the sum of $16,100. The report also noted that a substantial claim of the Director of Internal Revenue Service was in litigation.

On April 21, 1965 notices of federal tax liens securing payment of tax deficiencies were filed by the Internal Revenue Service with the town clerk and register of deeds. On May 14, 1965 , the Internal Revenue Service submitted to the commissioner proof of a claim of $125,379.09, tax deficiency for 1959, with interest to May 14, 1965 of $49,729.10.

It is not disputed that the obligation to Merchants National Bank arises out of loans evidenced by three notes given by the testator in April 1963, when stock certificates in the name of the testator having an inventory value of $8,951.50 were deposited with the bank as collateral security for the notes. Further facts are stated in the opinion.

DUNCAN, Judge:

The certified questions arise out of a petition filed by the executor seeking instructions as to the proper distribution of the assets of the estate in his hands, the same being insufficient to satisfy the outstanding claims against the estate. The parties before us are in substantial agreement concerning their relative rights.

By virtue of 31 U. S. C. A., s. 191 (s. 3466 of Revised Statutes), the obligation to the United States has priority over other claims against the insolvent estate, except as to specific property of which the debtor has been divested of either title or possession before insolvency. Thelusson v. Smith, 2 Wheat. 396, 462; United States v. Gilbert Associates [53-1 USTC ¶9291] 345 U. S. 361, 366; United States v. Atlantic Municipal Corp. [54-1 USTC ¶9392], 212 F. 2d 709 (5th Cir. 1954). Cf. United States v. Vermont [64-2 USTC ¶9550], 377 U. S. 351. See Anno. 5 L. ed. 929, 933-935; United States v. Boston & Berlin Transp. Co. [65-1 USTC ¶9207], 237 F. Supp. 1004, 1009 (D. N. H. 1964).

The fact that the claim of the United States was presented to the Commissioner more than six months after his appointment (see RSA 557:7 (supp)) is no bar to priority. Timely notice of the tax deficiency was given to the executor on December 12, 1963 . 31 U. S. C. A., s. 192; King v. United States, 379 U. S. 329; Viles v. Commissioner [56-1 USTC ¶9539], 233 F. 2d 376 (6th Cir. 1956). See 26 U. S. C. A., s. 6321. The limitation of the state statute cannot bar the federal claim, presented before distribution. Reconstruction Finance Corp. v. Faulkner, 100 N. H. 193; W. T. Jones & Co. v. Foodco Realty, Inc., 318 F. 2d 881, 888 (4th Cir. 1963).

It is not questioned that possession of the collateral held by the bank was transferred to it well before filing of notice of the tax lien, and accordingly the bank's right to retain its security interest is unchallenged. 26 U. S. C. A., ss. 6321, 6323; 9 Mertens, Law of Federal Income Taxation, s. 54.44. See Mass. G. L. Anno., Ch. 106, s. 9-305; RSA 382-A:9-305 (Uniform Commercial Code). Beside the collateral standing in the name of the estate the bank holds other security for the same indebtedness. Under the statute, its claim should not be allowed in the insolvency proceedings unless the commissioner estimates the total security to be of less value than the debt. RSA 557:15. If so estimated, only the amount of its claim which exceeds the value of the security should be allowed as unsecured, and the bank may surrender the security to the executor for liquidation if dissatisfied with the commissioner's estimate of value. RSA 557:16.

The certified questions, which need not be set out here, are answered as follows: The claim of the Internal Revenue Service has priority over the claims of other creditors, except as to so much of the claim of Merchants National Bank as is secured by the collateral pledged to it. The funds in the hands of the executor available for distribution, exclusive of the value or proceeds of the securities held by the bank, should be paid to the Internal Revenue Service in satisfaction of the testator's tax indebtedness; and any remaining funds should be distributed pro rata among the unsecured creditors whose claims have been allowed by the commissioner. RSA 557:23, 24.

The question of the jurisdiction of the probate court, raised by the United States Attorney, to certify the question before us and to enter an appropriate decree for distribution is not doubtful. In re Byrne Estate, 98 N. H. 300, 302, and cases cited. In re Peterson Estate, 104 N. H. 508. RSA 547:30, supra.

Remanded.

All concurred.

 

 

[65-2 USTC ¶9571] United States of America v. Lebanon Woolen Mills Corporation, et al.

U. S. District Court, Dist. N. H., Civil Action No. 2287, 241 FSupp 393, 12/1/64

[1954 Code Sec. 6323(a)]

Tax lien: Priority against creditors: Unrecorded contract.--The purchase money security interest of a conditional vendor was superior to a lien for Federal taxes against the vendee, assessed and filed subsequent to the execution of the conditional sales contract but prior to the filing of the contract.

Louis M. Janelle, United States Attorney, Concord, N. H., for U. S. Rob ert H. Reno, 95 N. Main St., Concord, N. H., Shulins & Duncan, 11 Main St., Newport, N. H., for Lebanon Woolen Mills Corp.

Rescript on Order Permitting Movant Miller Auto Company, Inc., to Prove its Claim as a Secured Claim

CONNOR, District Judge:

This is a motion wherein Miller Auto Company, Inc., seeks a judgment granting its conditional sales contract priority over a federal tax lien, and an order permitting it to prove its claim as a secured creditor of Lebanon Woolen Mills Corporation.

From the representations at the hearing and from the memoranda supplied thereafter, it appears that both Miller and the Government are in agreement as to the following facts. On October 4, 1961, Miller sold to Lebanon Woolen Mills Corporation a 1961 Pontiac Catalina Vista sedan automobile, Serial #361L-17631, under a conditional sales agreement which was not recorded until February 23, 1962. Sometime during October, 1961, Miller made an attempt to record the conditional sales contract in Lebanon , New Hampshire , but for some reason the City Clerk of the City of Lebanon refused to record the contract.

The complaint alleges, and it is nowhere disputed by Miller, that the Commissioner of Internal Revenue made assessments against Lebanon Woolen Mills Corporation for income taxes, penalties, and interest, on January 24, 1962 , and that notice and demand was made and refused two days later. The complaint further alleges that the District Director thereafter "duly filed notices of the tax lien . . . in the proper offices as provided by law." A Receiver for Lebanon Woolen Mills Corporation was appointed by order of this court on February 14, 1962 .

The question to be determined on the above set of facts is whether the security interest of a conditional vendor is superior to a lien for federal taxes against the vendee, assessed and filed subsequent to the execution of the conditional sales contract, but prior to the filing of that contract. For the purposes of the present motion, no question is raised as to the validity of the federal tax lien or as to the amount claimed to be due under the conditional sales contract, or as to the priorities of other creditors.

[Priority of Lien]

In cases involving a contest as to the priority as between a federal tax lien and a lien or other interest arising under state law, there are, generally speaking, two main areas of inquiry. The first is to determine the nature and extent of the interest arising under state law; this is a question of state law. See Poe v. Seaborn [2 USTC ¶611], 282 U. S. 101, 110 (1930); Campbell v. Bagley [60-1 USTC ¶9340], 276 F. 2d 28 (5th Cir. 1960). The second is to determine the priority as between the state created interest and the federal tax lien; this is a federal question. E.g., United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 49-50 (1950).

As a matter of state law, the conditional sales contract in question, though unfiled, was effective to create a security interest according to its terms between the parties. NH RSA 382-A:9-201. Although the form of the agreement prescribed the retention of title in the conditional vendor, Miller, it would be more appropriate, under the terminology of the Uniform Commercial Code, NH RSA ch. 382-A, to consider Miller as the holder of a purchase money security interest and to consider his status as analogous to that of a chattel mortgagee.

Due to the insolvency of the taxpayer corporation here involved, the question of priority is determined, in the first instance, by 31 U. S. C. §191 which provides that "whenever any person indebted to the United States is insolvent, . . . the debts due to the United States shall be first satisfied; . . ." "Debts," as used in this section, includes federal taxes. Price v. United States [1 USTC ¶158], U. S. 492 (1926).

[Prior Transfers]

Despite the seemingly absolute priority thus attaching to federal tax liens in insolvency situations, it has long been recognized that certain classes of prior transfers and interests are exempt from the operation of the present statute and its predecessors. Thus, for example, a prior conveyance or mortgage executed by the taxpayer is not affected by the "absolute" priority of a federal tax lien or other subsequent debt owing to the United States; and, despite recent dicta of the United States Supreme Court to the contrary, the same may well be true of other classes of prior specific and perfected liens. See Savings and Loan Society v. Multnomah County, 169 U. S. 421, 428 (1898); Brent v. Bank of Washington, 35 U. S. (10 Pet.) 596, 611-12 (1836); United States v. Hack, 33 U. S. (8 Pet.) 271 (1834); Conard v. Pacific Insurance Co., 31 U. S. (6 Pet.) 262 (1832); Conard v. Nicholl, 29 U. S. (4 Pet.) 291 (1830); Conard v. Atlantic Insurance Co., 26 U. S. (1 Pet.) 386, 437-50 (1828); Thelusson v. Smith, 15 U. S. (2 Wheat.) 396, 426 (1817); United States v. Hooe, 7 U. S. (3 Cranch) 73 (1805); United States v. Fisher, 6 U. S. (2 Cranch) 358, 390, 395 (1805); United States v. Bond [60-2 USTC ¶9532], 279 F. 2d 837, 841 (4th Cir. 1960), cert. denied, 364 U. S. 895 (1960); Exchange Bank & Trust Co. v. Tubbs Mfg. Co. [57-2 USTC ¶9803], 246 F. 2d 141 (5th Cir. 1957), cert. denied, 355 U. S. 868 (1957); United States v. Atlantic Municipal Corp. [54-1 USTC ¶9392], 212 F. 2d 709 (5th Cir. 1954). The rationale of these cases appears to be that to the extent that the taxpayer has conveyed, mortgaged, or in any other way alienated a property interest, that property interest is no longer his and cannot be made subject to a subsequent lien for taxes owed by him.

The security interest held by Miller in the present case appears to fit well within this judicially maintained exception. Whether the vendee taxpayer corporation be deemed to have mortgaged away a property interest in the automobile or never to have received the full property interest in the automobile, it is clear that the conditional sales contract operated to create in Miller a distinct and separate security interest. To the extent of this security interest, the automobile has been alienated from the assets of the taxpayer vendee and a lien for the unpaid taxes of the vendee cannot attach to it. Accordingly, the prior purchase money security interest of Miller takes priority over the subsequent attaching federal tax liens.

Having thus indicated the decision of the question at issue in this case, and the basis for that decision, it might also be well, in light of the welter of sometimes confusing and inconsistent precedent in this area, to indicate what has not been the basis of decision.

One possible ground for decision which, at first glance, seems appealing, is found in 26 U. S. C. §6323(a) which provides that a federal tax lien "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate. . . ." Although the broad language of the statute would appear to apply to all mortgage-like agreements regardless of the time when they were executed, there are several reasons why this statutory provision has not been singled out as the basis of the decision herein.

First, section 6323 is designed to protect persons who acquire their interest during the time gap between the attaching of the federal tax lien and the recording thereof; ¹ Miller Auto, however, obtained its interest prior to the attaching of the federal tax lien, prior to the gap.

Second, as a pre-gap transaction, the conditional sales agreement here is already fully protected. ²

Third, to apply section 6323 to a pre-gap transaction is to run the risk of inflicting upon a prior and superior interest otherwise fully protected by law, the same infirmities of strict and narrow statutory construction which are visited upon gap interests whose sole hope for gaining priority is qualification under one of the four magic categories denominated in the statute.

Fourth, there is in the recent case of United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963), dictum (with which this court does not wish to express its agreement hereby) to the effect that in order for a mortgage to qualify for protection under section 6323, it must have the same degree of choateness which is supposedly ³ required of a pre-gap mortgage. ⁴ Pioneer thus emphasizes that the one true purpose of section 6323 is to protect gap mortgages, and not to go about offering protection to pre-gap mortgages which are already fully protected.

Another decisional path which the court has not followed, is that described in United States v. Anders Contracting Co. [53-1 USTC ¶9412], 111 F. Supp. 700 (W. D. S. C. 1953), a case granting priority over a federal tax lien to an unfiled conditional sales agreement under circumstances similar to those in the case at bar. The rationale of Anders stressed the theory of retention of title; since the conditional vendee never received title to the truck, the lien for the vendee's unpaid taxes could not attach to the truck. This court is reluctant to rest the decision herein on retained title theory, however, in view of NH RSA 382-A:9-202 which provides:

Each provision of this Article with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor.

While the annotation to this section bears out the sensible suggestion that resort to title theory or lien theory may be had in contexts not governed primarily by the Code, such resort seems unnecessary here. Miller possesses a valid security interest, complete as against his vendee; the security interest was executed prior to the attaching of the tax liens and, therefore, comes within the well recognized exception to the Government's statutory priority. This is not to say that analysis in terms of title theory would be altogether improper; it is simply that diagnosis in terms of "retained title" (1) may appear to some as a salvific saving pretense to rescue an otherwise sickly security interest; (2) may serve to obscure the simple substantial reality of the present priority structure, which is that a prior security interest, complete as against the debtor, prevails over a federal tax lien subsequently attaching to the debtor's property; and (3) may give the misleading impression that technicalities are more important than substance, despite the salutary trend championed by the Uniform Commercial Code.

A further approach which is not adopted here, is that of Gauvey v. United States [61-1 USTC ¶9478], 291 F. 2d 42 (8th Cir. 1961), a case which likewise upheld the priority of a prior unfiled conditional sales agreement over a subsequent tax lien. Gauvey applied section 6323 to the pre-gap conditional sale, found that a conditional sale qualified as a "mortgage" for the purposes of the statute, and held that since section 6323 said nothing about the filing of a mortgage, such filing was unnecessary. Were the conditional sales agreement in the present case a gap transaction rather than a pregap transaction, then the analysis of Gauvey would probably be adopted here. But the security interest here involved is clearly of the pre-gap variety, and, while analogous to the interest created by a chattel mortgage, is fully able to stand on its own feet, under the cases cited, and claim its rightful priority without further change of name. There appears no reason why it must be cloaked in a foreign garment and be made to pass muster before a statutory credentials committee which is exceeding the bounds of its authority.

An additional factor which is not considered controlling here is the failure of Miller to record the conditional sales agreement prior to the time when the tax lien attached and was filed. As counsel for the Government and for the Receiver have urged that failure to effect timely recordation should defeat Miller's claim to priority, detailed attention will be given here to the reasons why, in the court's opinion, the issue of Miller's recordation, regardless of the time sequence, is irrelevant.

Few cases dealing with similar situations have been called to the attention of the court. Some, e.g., Anders and Gauvey, after giving thought to the problem, concluded that compliance with the state recording statute was unnecessary; others, e.g., Mason City and Clear Lake R. R. v. Imperial Seed Company [57-2 USTC ¶9736], 152 F. Supp. 145 (N. D. Iowa 1957) simply applied the state recording statute to defeat the security interest, with little or no discussion as to why such a statute should be relevant at all.

Under the Uniform Commercial Code, as adopted by New Hampshire, NH RSA ch. 382-A, the recording requirements neither alter nor perfect the security arrangement as between obligor and obligee, NH RSA 382-A:9-201, but seek in effect to determine the priority of such an arrangement with respect to third party interests, NH RSA 382-A:9-301, 302(1)(d) and 303.

[Federal Law Controls]

But it must be remembered that the matter of priorities with respect to a federal tax lien is a federal question. United States v. Security Trust & Savings Bank, supra. This means that federal statutes and federal decisional law is, in the first instance, controlling; resort is had to the implements of state law only insofar as controlling federal authority dictates or sound federal policy counsels. This may mean that in a given situation a state recording statute would, as a matter of federal law, be found applicable; but its application would stem not from its own weight, not from its own authority, and not from its own sheer physical presence in the compilation of state statutes. Its application would result either from the directive of controlling federal authority or from the urgings of prudent federal tax policy.

Turning to the concrete problem presented in the persent case, no question about the priority of Miller's security interest would have arisen, were it not for the fact that Miller failed to record until after the filing of the tax lien. Does failure to comply with a state recording statute destroy the priority otherwise attaching to a prior complete security interest? This court has discovered no controlling statute or case which would so urge. Should compliance with the recording statute be required as a necessary step in preserving such a priority, as a matter of sound federal policy? For the following reasons, this court thinks not.

First, in all the cases, briefs, and memoranda laid before the court, no cogent argument has been advanced explaining how sound federal policy is advanced by demolishing the priority of a prior security agreement, valid and complete as between the parties, for failure to comply with the technicalities of a state recording statute. Not even the broad shot-gun arguments which are sometimes advanced in terms and purposes no more particular than "protecting the federal revenues," would, it is hoped, extend so far.

Second, it is not at all clear that the framers of the Uniform Commercial Code intended that the recording strictures, apparently designed to police conflicting private claims, should be extended to hamstring otherwise valid prior security interests in their chance encounters with federal tax liens.

Third, the reasons urging compliance with filing requirements in the situations clearly envisioned by the Code and governed by its provisions, do not urge compliance with filing requirements here. In order to create and preserve that atmosphere of confident reliance so necessary for stable commercial intercourse, both the courts and the legislatures have had to develop doctrines and procedures to protect the interests of bona fide purchasers, reliance creditors, and the like. Recording statutes are a typical result of these efforts to protect reliance interests. The federal tax lien, however, is not the product of a reliance interest; taxes are assessed and liens attach irrespective of the amount of property the taxpayer actually or apparently possesses.

It is recognized, of course, that non-reliance creditors as well as reliance creditors, are often able to secure the protection afforded by the recording statutes. Why then should the Government fare less well than these other non-reliance creditors? One reason is that the statutory protection of non-reliance creditors is itself somewhat of an anomaly; and the court has encountered no cogent argument for extending this anomaly to include federal tax liens as well. Additional reasons appear below.

Fourth, the Government not only does not rely upon apparent ownership in assessing and collecting its taxes, but also ought not to be entitled to take advantage of apparent ownership when to do so would result in the enforcement of a tax lien against the property of one whose tax liabilities have already been satisfied. Even the most solicitous regard for the protection of federal revenues does no counsel a policy of tax collection at the expense of non-liable third parties. As the representative of the Internal Revenue Service so succinctly stated at a subsequent hearing in which the present matter was involved: ⁵

I think we can take any property that belonged to the debtor. We can go that far. We wouldn't want to take anyone else's property. But if the property belonged to the debtor and it was only subject to an inchoate lien, why we could take it.

Applying this to the present case, it appears that Miller's security interest was complete and valid as against the debtor, and to this extent the automobile did not belong to the debtor. To enforce the present tax lien against the entire proceeds of the automobile without regard for the security interest of Miller, would be to take somebody else's property. See Raffaele v. Granger [52-1 USTC ¶9321], 196 F. 2d 620 (3rd Cir. 1952).

[Interest of Taxpayer]

Fifth, it is a recognized general principle of federal taxation that the interest of the Government in a taxpayer's property extends no further than the interest of the taxpayer himself; the Government can assert no rights with respect to the property which could not have been asserted by the taxpayer. Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925 (9th Cir. 1957); United States v. Winnett [48-1 USTC ¶9115], 165 F. 2d 149 (9th Cir. 1947); Karno-Smith Co. v. Maloney [40-2 USTC ¶9533], 112 F. 2d 690 (3rd Cir. 1940). See also United States v. First National City Bank [63-2 USTC ¶9572], 321 F. 2d 14, aff'd on rehearing, 325 F. 2d 1020 (2nd Cir. 1964) (appeal pending). This general rule is subject, no doubt, to certain exceptions and to the general modification that limiting interests of third parties must achieve a certain degree of definiteness and particularity in order to become effective against the Government. Prior mortgages and conveyances by their very nature have traditionally been considered to embody these characteristics; and perhaps this explains why they have remained relative strangers to the developments which have taken place since the resurrection of the word "choate" from the catacombs of linguistic disuse, and its subsequent elevation to a position of exalted reverence in the lexicons of tax lienors and lienees alike.

The conditional sales agreement here in dispute clearly delineated the extent of Miller's interest in the specific property of the taxpayer corporation. No fraud, no juggling of assets was involved. The rights of the corporation in the automobile purchased were subordinate to the security interest of Miller. The Government should succeed to no higher rights. Cf. United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960).

Sixth, the perfection of a sale or mortgage envisioned by state recording statutes differs from the perfection required of competing interests in the tax lien area. Compliance with a recording statute achieves perfection of the recorded instrument with respect to third parties. The Government is primarily concerned, however, not with perfection as against third parties, but, rather, with perfection as against the debtor whose property is subjected to the lien. As discussed above, the interest of the Government is in the property of the person who owes the tax; the tax may be collected only from the delinquent taxpayer in question or from property belonging to him. See Raffaele v. Granger, supra. It is not always a simple matter, however, to determine what property belongs to the debtor and what interests rightfully belong to others. In order to afford a certain amount of protection to the collection of federal revenues and to facilitate the proper allocation of property interests involved, the federal courts have insisted that an intervening party claiming ownership of a property interest about to be subjected to the enforcement of taxes owing by the tax debtor, must establish that his asserted interest has been sufficiently segregated from the assets of the debtor or has become sufficiently earmarked among them. The word choateness has been used in recent years to describe that quality of completeness, perfection, and specificity of which an intervenor's interest must partake in order not to be considered a part of the debtor's property and subject to the lien for the debtor's unpaid taxes. Recent formulations of choateness have said that the identity of both the debtor and the intervenor must be certain, the extent of the intervenor's claim must be definite, ⁶ and the property in which the intervenor's interest inheres must be specific. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). In certain circumstances, it might also be required that the intervenor have either title to, or possession of, the property in which he asserts his interest. ⁷ United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361 (1953).

The thrust of the federal requirement of choateness, then, is that the intervenor must show that the property interest he asserts has become sufficiently alienated from the assets of the tax debtor to satisfy the interests of federal tax policy. Whether the intervenor has also perfected his interest against other third parties is irrelevant. The New Hampshire recording statute, in its application to a conditional sale, however, concerns itself only with perfection as against third parties and adds nothing to the federally required perfection as against the conditional vendee tax debtor. Perfection as to third parties being superfluous, the statute becomes irrelevant. Miller's interest as against the tax debtor corporation was already as perfected as it could be. See NH RSA 382-A:9-201.

This is not to say that the recording statute would not be of importance to the federal concept of perfection with respect to other types of intervening interests whose choateness may be in question. Either state law ⁸ or sound federal policy, or both, may require recordation of certain types of interests as an integral step in the perfection of the respective liens arising therefrom. It is in this context that it is properly announced that in order to establish the choateness of his interest, an intervenor must comply with all the state requirements for the protection of his interest. Much of the litigation in this area concerns judgment creditors, statutory creditors' liens and statutory liens for state and local taxes. E.g., United States v. Vermont, 377 U. S. 351 (1964); United States v. White Bear Brewing Co. [56-1 USTC ¶9440], 350 U. S. 1010 (1956); United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213 (1955); United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218 (1955); United States v. City of New Britain, supra; United States v. Security Trust & Savings Bank, supra; Illinois v. Campbell, 329 U. S. 362, 371 (1946).

As noted earlier, however, mortgages and purchases have traditionally remained aloof from this hassle over choateness. Both under state law (NH RSA 382-A:9-201) and in substantial reality, the properly executed sale or mortgage operates to conclude the rights of the parties to the transaction as between themselves. Inherent in the transaction is the creation and transfer of property interests so specific as to more than meet the requirements of the federal concept of choateness. Nothing more can be done under state law to perfect their interests as against each other.

While compliance with state recording statutes may in some instances, then, be considered a necessary prerequisite to the establishment of the choateness of some types of interests, compliance with NH RSA 382-A:9-302(1)(d) in the present case does not serve to add one whit of perfection to Miller's interest as against the corporation. The statute provides only the additional, and here superfluous, perfection as against third parties; it does not add to, or affect, the requisite federal perfection or choateness.

Seventh, as noted in Gauvey v. United States, supra, Congress provided in 26 U. S. C. §6323 that a federal tax lien must be recorded before it can be valid against a subsequent purchaser, mortgagee, pledgee or judgment creditor, but Congress did not also provide that these latter interests must be recorded in order to gain priority over a tax lien. The permissible inference drawn from this provides further reason for holding that recordation of the conditional sales contract was unnecessary here.

Turning, at length, from this rather extended discourse concerning factors deemed not controlling in the present case, it is, in sum, the holding of this court that the conditional sales contract executed on October 4, 1961, operated to vest in Miller a security interest which was valid, effective and perfected as between the parties; that recordation and the attendant perfection as to third parties was not necessary; and that as a prior valid security interest, analogous to that of a chattel mortgage, the interest of Miller fits well within the recognized exception to 31 U. S. C. §191 in favor of such prior conveyances. No opinion is intended to be expressed herein with respect to the validity of the tax lien, the amount due under the conditional sales contract, or the relative priorities existing among the conditional sales contract and the interest of any creditors other than the Government.

¹ Section 6323 was enacted by Congress to remedy the harsh rule of United States v. Snyder, 149 U. S. 210 (1893), which allowed "secret" tax liens to gain priority over purchasers and mortgagees acquiring their interest between the attaching and the filing of the lien. United States v. Union Central Life Insurance Co. [61-2 USTC ¶9103], 368 U. S. 291, 294-95 (1961).

² See, e.g., Savings and Loan Society v. Multnomah County , supra at 428; Conard v. Atlantic Insurance Co., supra at 441.

³ Pioneer's intrusion of the language of "choateness" into the mortgage area appears to be a very novel approach, indeed, and embodies what is, perhaps, a conclusion unnecessarily drawn from the ambiguity latent in United States v. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587 (1958). The majority in Ball never reveals its opinion as to the nature of the claim involved. (The dissenting opinion, in turn, presents an interesting example of the difficulties encountered by pre-gap interests when the strictures of 26 U. S. C. §6323 are unnecessarily applied to them.)

The substance of the present day notion of choateness was set forth long ago in Thelusson v. Smith, supra at 426; and it was recognized at that time not only that a properly executed mortgage embodied the substance of these requirements, but also that a mortgage by its very nature is something quite apart from other liens to which the tests of perfection are applied. Thelusson v. Smith, supra at 441. It is clear that even the modern formulations of perfection, now duly dubbed "choateness," simply list characteristics which are inherent in any properly executed mortgage. See, e.g., United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954). Although the amount due under a mortgage to secure future advances may of necessity be uncertain, this is only an apparent lack of specificity. The property covered by the mortgage is not only spefic, but specifically isolated from the debtor's other assets; and the amount so secured is thus specific as to its maximum. Cf. Unuited States v. Ball Construction Co., supra at 593-94 (dissenting opinion).

⁴ In Pioneer, the priority of the principal debt secured by the mortgage was unchallenged; the holding was that the claim for attorneys' fees, also secured by the mortgage but incurred in litigation with respect to the mortgage subsequent to the attachment and filing of the federal tax lien, were subordinate to the intervening tax lien. It is herewith submitted that the holding in Pioneer should be narrowly construed as limited to the facts of that case. To construe the holding in Pioneer as generally subordinating mortgages given to secure future advances or debts not precisely ascertained, would be to vary drastically from traditional doctrine, e.g., Conard v. Atlantic Insurance Co., supra at 448, and to unsettle unnecessarily a significant sector of present day practice in the field of secured financing. Cf. United States v. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587, 593-94 (1958) (dissenting opinion).

⁵ July 6, 1964.

⁶ With respect to a mortgage, it is sufficient that the amount due have a maximum limit. See note 3, supra.

⁷ Neither possession nor title is to be required of an intervening mortgagee, as the former would convert the mortgage into a pledge or other interest, and the latter would depend upon the fortuitous circumstances as to whether title theory, lien theory, or either was recognized as a matter of local law.

⁸ While not obliged to, the federal courts would probably accept a state law denial of choateness. E.g., Illinois v. Campbell , 329 U. S. 362, 371 (1946).

 

 

[65-1 USTC ¶9207] United States of America v. Boston and Berlin Transportation Company, Inc., Romeo J. Lavigne, The Francis H. Curtin Insurance Agency, and Catherine M. Nevins

U. S. District Court, Dist. N. H., Civil Action No. 1674, 237 FSupp 1004, 11/13/64

[1954 Code Sec. 6323]

Tax lien: Mortgage lien: Effect on mortgage lien of payments by surety: Priority established as between mortgage and tax liens.--Under New Hampshire law, payments of a surety on a mortgage note will not discharge the note and mortgage, where such was not the intention of the surety. Accordingly, under the fact of the instant case the mortgage lien was not discharged by payments of the surety and remained a valid lien for the benefit of the surety, to the extent of her payments, and took precedence over the government's tax liens, which were later in point of time, or, in the case of its first lien, not filed before the execution of the mortgage.

Louis M. Janelle, United States Attorney, Nashua , N. H., for plaintiff. Walter D. Hinkley, 66 Main St., Lancaster, N. H., Arthur O. Dupont, 33 Main St., Berlin, N. H., J. L. Blais, Sheridan Bldg., Berlin, N. H., Rob ert D. Branch, 136 N. Main St., Concord, N. H., for defendants.

Opinion

CONNOR, Judge:

This was a trial, without a jury, of the issues remaining between the United States of America as plaintiff and Catherine Nevins as intervening defendant, and represents the last stage of a suit for tax lien enforcement which commenced eight years ago. The fund in which both present litigants claim priority is held is an escrow account in the Berlin Savings Bank & Trust Company in the name of J. L. Blais, trustee for Romeo J. Levigne. These funds in escrow constitute the remaining assets of the Boston and Berlin Transportation Company, against which the tax liens herein are being asserted.

The factual background leading up to the present trial is as follows. The Boston and Berlin Transportation Company, hereinafter referred to as the corporation, borrowed $13,900.80 on December 14, 1951 , and executed a mortgage on its rolling stock as security. Because of the insecure financial condition of the corporation, Mrs. Catherine Nevins was required to sign the note as "co-maker" in her individual capacity. ¹ The mortgage was duly recorded in the City Clerk's Office in Berlin , New Hampshire , on December 17, 1951 ; and two days later the note and mortgage were assigned for value to the Howard National Bank & Trust Company of Burlington , Vermont , hereinafter referred to as the bank.

On February 15, 1952 , the corporation entered into a contract to sell its motor carrier business, including the mortgage rolling stock, to Romeo J. Levigne for $27,000.00. The terms of the contract provided that Levigne would pay to the mortgagee bank the balance due on the note, and would pay the rest of the $27,000.00 consideration to the corporation. The mortgagee bank agreed to this transaction. There was no novation effected on the note; the mortgage was in no way altered.

From March through November, 1952, a series of tax liens against the corporation were duly filed. On June 8, 1953 , the note and mortgage were assigned to "Arthur O. Dupont, att. for Remeo J. Levigne." At some time in 1953, Levigne ceased making payments under his contract of purchase, but on May 26, 1954 , he gave a note to the corporation in the amount of $12,685.12, the unpaid balance. On May 19, 1955 , the District Director of Internal Revenue at Portsmouth , New Hampshire , caused to be served on Levigne a notice of levy to secure the collection of taxes claimed to be due from the corporation. From that date, the weekly payments by Levigne were deposited in Savings Account No. 27159 at the Berlin Savings Bank and Trust Company. These weekly payments of principal and interest amounted to $5,400.21 and constitute the escrow fund here in dispute. The amount now totals over six thousand dollars.

The validity of the tax lien of the United States is not here disputed. Mrs. Nevins intervened as a defendant in the proceedings, however, to assert a prior claim to the funds in escrow by virtue of her position as putative assignee of the mortgage on the rolling stock of the corporation. Mrs. Nevins claims, ineffect, that she made certain payments to the bank on the note, that she subsequently became the assignee of the mortgage and note, and that the assignment of the mortgage gives her a secured interest in the assets of the corporation.

In passing upon the claim of Mrs. Nevins, there are five issues of fact and law which must be inquired into: (1) the amount of her payments on the note; (2) her status with respect to the note; (3) her status with respect to the mortgage; (4) the priority as between the mortgage and the tax lien; and (5) the relation between the security represented by the mortgage and the actual funds held in escrow.

(1) Attorney Arthur O. Dupont was the only witness who testified at the trial. It appears that, with respect to the transactions involved in this litigation, Dupont acted simultaneously as agent for Mrs. Nevins, the corporation, and Remeo Levigne. Dupont testified that he handled through his trust account funds advanced by Mrs. Nevins and funds paid by Romeo Levigne, that he kept track of these funds in separate ledger accounts, and that he channeled these funds to the bank, to the corporation, and to the corporation's creditors on behalf of the corporation. Dupont testified that in this manner Mrs. Nevins had advanced substantial sums to shore up the sagging finances of the corporation. Various figures were mentioned during the course of the trial as being the contributions of Mrs. Nevins. The only advances relevant here, however, are these made by Mrs. Nevins in payment of the note to the bank. Dupont's final testimony with respect to these note payments was that she had paid the first nine installments on the note, from January through September, 1952, and that these payments totaled $5,200.70.

Evidence tending to counter Dupont's assertion took two forms. The answers to interrogatories submitted by Levigne in 1956, two years before Mrs. Nevins intervened, state that Levigne paid to the bank the entire amount of the mortgage between September 15, 1952 , and June 10, 1953 . A financial statement of the corporation furnished to the Internal Revenue Service on October 30, 1953 , and signed by both Dupont and Mrs. Nevins, states that Levigne had been making the payments to the bank. Dupont was unable to supply a satisfactory explanation for these two exhibits. He did state, however, that Mrs. Nevins must have made the payments because the corporation had no money to do so, and because Levigne was not legally permitted to do so until September, 1952. He also produced a check representing payment of the second and third installments, which check was drawn on his trust account from funds held in the name of Mrs. Nevins in her individual capacity. He further pointed out that the last payment to the bank listed by Levigne and equally nine installments on the note was dated June 10, 1953 , or two days after the bank had assigned the note to Dupont. Dupont's testimony was also to the effect that Mrs. Nevins had not received any reimbursement for her payments.

On the basis of the above testimony, I find that Mrs. Nevins did make the first nine payments on the note to the bank and that she has not been reimbursed for these payments. I further find that the figures presented by Levigne are reliable to the extent that they represent the amounts of money paid by Levigne. I find, however, that the payments by Levigne were made not directly to the bank, but rather were disbursed to and through the trust accounts of Dupont. How much of Levigne's payments were allocated by Dupont to the bank, to the corporation, and to the corporation's creditors, remains, due to Dupont's ambiguous status, somewhat of a mystery. I further find that Dupont's hasty mathematical calculations on the witness stand are slightly inaccurate, and that the amount of the nine installments ($579.20 each) is $5,212.80 rather than $5,200.70 as testified.

(2) Although the face of the note in question contains the signature of Mrs. Nevins as "co-maker," Dupont testified that she signed the note only because she "didn't have much choice"; that otherwise the corporation would not have received the loan. Under these circumstances, I find that Mrs. Nevins signed the note not as a principal obligor, but as a surety. Cf. Derry Bank v. Baldwin, 41 N. H. 434 (1860); Grafton Bank v. Kent , 4 N. H. 221 (1827).

(3) Dupont testified that, although the assignments of the note and mortgage were to himself as "att. for Romeo J. Levigne," he was in fact acting as agent for Mrs. Nevins as well. On this basis, Mrs. Nevins claims that she is now the assignee of that mortgage. Several interesting problems concerning the ownership and the extent of the security are suggested by this purported assignment; but as this purported assignment is not the controlling factor here, I find it unnecessary to explore them. I do find the purported assignment significant, however, as evidence indicating that at least some of the payments made on the mortgage note were not intended to discharge that instrument.

It is a familiar principle of New Hampshire law that, where justice so requires, the payment of a mortgage note will be considered not as a discharge, but as an assignment of both instruments; this is particularly true where it is the intention of the person making payment to take an assignment of the instruments for his own protection. Rossiter v. Sanaghiaro, 78 N. H. 484 (1917) Cf. also Caraway v. Jean, 97 N. H. 506 (1952); Laconia Savings Bank v. Vittum, 71 N. H. 465 (1902); Willard v. Harvey, 5 N. H. 252 (1830); Marsh v. Rice, 1 N. H. 167 (1818). This principle finds application in the case of a surety whose payment of a note is intended not to discharge the obligation and the security altogether, but to effect an assignment as against the promisor. Under such circumstances, the surety is considered to receive an assignment of the mortgage, whether it be considered as security for the note (if the note be deemed not discharged), Low v. Blodgett, 21 N. H. 121 (1850); or whether it be considered as security for the surety's right of indemnification from the principal debtor (if the note be deemed extinguished), Dearborn v. Taylor, 18 N. H. 153 (1846).

On the basis of the foregoing, I find that Mrs. Nevins, as surety, intended that her payments on the note operate to assign, rather than to discharge, the mortgage. I, therefore, find that she is an assignee of the mortgage and that the mortgage serves to secure her claim against the corporation for the nine payments which she made on the note.

The United States has interposed an objection concerning the mortgage which should be treated at this point. It is the contention of the Government that the mortgage under which Mrs. Nevins claims is void because the mortgagor corporation and the mortgagee bank agreed to a sale of the mortgaged property. The Government founds its objection upon NH RSA 360:21 and the cases of Putnam v. Osgood appearing in 51 N H. 192 (1871) and 52 N. H. 148 (1872). The Government's contention, however, misconceives the scope and purpose of the rule advanced in the authorities cited. The arrangement which the statute and cases seek to discourage is the type of secret agreement between a mortgagor and mortgagee whereby the former is free to sell the mortgaged property for his own benefit; this is deemed inconsistent with the public manifestation that the property is subject to the control of the mortgagee and is, therefore, considered a potential occasion of fraud upon the creditors of the mortgagor. Thus, a mortgage is held to be void as to creditors where there exists an agreement between the mortgagor and mortgagee with "the secret purpose . . . to protect the mortgagor in the enjoyment of the property and enable him to set his other creditors at defiance . . .." Putnam v. Osgood, 51 N. H. 192, 202 (1871). Otherwise, the "personal property of a debtor could be continually protected from attachment, and yet he be allowed the unlimited power of disposal; and this would be wholly inconsistent with the apparent object of the mortgage." Putnam v. Osgood, supra, at 198.

The present case is not one to which the foregoing principle applies. Here there is no sham mortgage allowing the mortgagor full beneficial use of his property to the fraud of his creditors. Here there is no secret agreement negating the apparent import of the mortgage itself. The sale here in question arose not through any secret subsisting power of the mortgagor, but through the subsequent consent of a bona fide mortgagee to a separate and distinct transaction designed to alter the relationships of the parties to the ultimate benefit of the mortgagee. Under the contract of sale, the proceeds were to be applied toward the note and mortgage in question, with the balance being paid to the mortgagor. The transaction was under the control of the mortgagee and redounded to the benefit of the mortgagee. Additional beneficiaries of the transaction were the creditors of the mortgagor who, through the sale of assets, were ultimately provided with at least a limited fund to satisfy their claims in what was otherwise becoming an increasingly hopeless situation. Clearly, then, this was not an arrangement whereby the mortgagor retained full authority to dispose of his mortgaged property for his own benefit, as envisioned by the authorities bolstering the Government's contention, and the mortgage can scarcely be voided on that account. Cf. Wilson v. Sullivan, 58 N. H. 260 (1878).

It remains, then, to consider the priorities attaching to the mortgage and the extent to which the escrow funds represent proceeds from the sale of the collateral subject to the mortgage.

(4) Inasmuch as the taxpayer corporation is insolvent, the debts of the United States must be satisfied first. 31 U. S. C. §191. To this seemingly absolute priority of the Government, there are, however, certain judicially recognized exceptions. It has long been held that a prior sale or mortgage by the taxpayer is not affected by the Government's statutory priority; and certain other classes of prior transfers and liens may also fall within this judicially maintained haven of immunity from the operation of the statutory priority. See, e.g., Brent v. Bank of Washington , 35 U. S. (10 Pet.) 596 (1836); Conrad v. Atlantic Insurance Co., 26 U. S. (1 Pet.) 386 (1828).

All but one of the tax liens in the present case attached between March and November, 1952, and were thus clearly subsequent to the execution of the mortgage on December 14, 1951 . 26 U. S. C. §6322. The mortgage is thus not affected by these liens.

The first tax lien in this case stands on slightly different footing, however. Although not filed until March 18, 1952 , it attached to the corporation's property prior to the execution of the mortgage in December, 1951. Were it not for remedial legislation to the contrary, the case of United States v. Snyder, 149 U. S. 210 (1893), would compel the harsh result that the unfiled "secret" tax lien would prevail over the subsequent mortgage. In 1913, however, Congress enacted statutory portection for such "gap" purchasers and mortgagees by providing that no federal tax lien would be valid as against them unless filed. 26 U. S. C. §6323. Indeed, the sweeping language of the statute may be broad enough to protect not only "gap" mortgagees, but also prior mortgagees as well, although, as discussed above, the latter were already affoded ample protection by the courts. Thus, none of the tax liens in the present case take priority over, or affect, the mortgage in question; and Mrs. Nevins, as assignee of the mortgage for value, thus becomes entitled to prior payment, to the extent of her claim, out of the proceeds of the property subject to the mortgage. See United States v. Boyd [57-2 USTC ¶9791], 246 F. 2d 477 (5th Cir. 1957).

(5) No little difficulty is encountered, however, in tracing the proceeds from the sale of the property subject to the mortgage. The $27,000.00 contract price, paid in full by Levigne, represented consideration not only for the rolling stock, but for the other assets of the corporation as well. No evidence was introduced as to the value of the trucks on the date of sale or as to the value assigned to the trucks as part of the transaction of sale to Levigne. The only value figure in evidence which is associated with the rolling stock is the $13,900.80 figure representing the note for which the trucks stood as security. While it might normally be expected that the collateral would substantially exceed in value the amount of the obligation secured, this court is in no position to conjure up the correct proportions of hypothetical commercial normalcy, or, indeed, to determine that the secured transaction here involved was, in fact, a normal one. I, therefore, find that the proceeds of the trucks serving as collateral amounted to no greater part of the $27,000.00 contract price than the amount of the obligation they secured--$13,900.80.

The $13,900.80 in question was to have been paid, under the contract of sale, directly by Levigne to the bank, in satisfaction of the note. This was not done. The entire obligation to the bank was not paid by Levigne directly, and it seems doubtful whether any of the payments by Levigne were direct. From the state of the evidence, it appears most likely that the $13,900.80, and the balance of the $27,000.00 contract price alike, were channeled through the trust accounts of Arthur Dupont. Dupont's ledger sheets might have provided sufficient guidelines for the tracing of the proceeds of the rolling stock, but these were not put into evidence. It is left for the court then to arrive at an equitable division of the funds as best it may.

As of June 8, 1953 , when the note in question had been paid off, $8,688.00 of the proceeds of the trucks appears to have been channeled to the bank. The balance of the note, $5,212.80, was paid by Mrs. Nevins. The balance of the proceeds from the trucks, also $5,212.80, thus did not go to the bank; and, on the testimony of Arthur Dupont, it did not go to reimburse Mrs. Nevins. Rather, it filtered through Arthur Dupont's trust accounts in some unknown fashion and to some unknown destination. As the escrow fund represents assets of the corporation in the form of the last payments made by Levigne, it would be harsh to assume that no part of these payments is allocable to the remaining $5,212.80 from the sale of the rolling stock; at the same time, it would be equally unreasonable to find that these last payments by Levigne are all miraculously traceable as the balance of said proceeds of the collateral.

I find that the balance of the collateral proceeds was not properly segregated and cannot be properly traced, but that said proceeds constituted a proportional amount of all payments made by Levigne subsequent to the payment of $8,688.00 to the bank. Levigne paid $15,386.20 by June 10, 1953 ; and an additional $13,103.45 in principal and interest pursuant to his own note of May 26, 1954 ; or a total of $28,489.65. Of this total, $8,688.00 went to pay the bank, presumably out of the proceeds of the sale of the collateral. The $5,212.80 balance of the collateral proceeds was not so segregated, but constitutes a proportional part, or 26.3%, of the remaining $19,801.65 paid by Levigne. On this basis, I find that 26.3% of Levigne's final payments are allocable to the sale of the rolling stock covered by the mortgage and that, as such, they are subject to Mrs. Nevin's claim as assignee of the mortgagee.

Judgment is hereby ordered for Mrs. Nevins in the amount of 26.3% of the funds accumulated in the escrow account. The United States of America , as holder of a valid tax lien on the assets of the corporation, is thereby entitled to priority over all other creditors herein (with the exception of Mrs. Nevins). Judgment is ordered for the United States in the amount of 73.7% of the funds accumulated in the escrow account, in partial satisfaction of its tax lien for $6,301.29.

¹ Mrs. Nevins and her husband were the sole stockholders of the corporation; upon the death of Mr. Nevins, Mrs. Nevins became sole stockholder.

 

 

[59-2 USTC ¶9648]Manchester Federal Savings & Loan Ass'n, plaintiff v. The Emery-Waterhouse Co., United States of America, Samuel Hurwitz Co., Atlantic Distributing Co., Katherine Ogg, Christine O. Mahar, Manchester Supply Co., Rockingham Electrical Supply Co., Gerald W. Berounsky, Weston Palmer, Daniel P. Creed Co., defendants

New Hampshire Supreme Court, Rockingham, Civ. No. 4727, 153 A2d 918, 8/18/59

[1954 Code Sec. 6323]

Lien for tax: Priority of United States lien.--The lien of the United States on proceeds arising out of foreclosure of a power of sale mortgage was junior to that of the mortgagee but was superior to creditors who had neither taken judgment nor perfected their inchoate attachment liens. Bill of interpleader, by a mortgagee to determine the disposition and distribution of surplus proceeds arising out of foreclosure of a power of sale mortgage of premises in Rye executed by George T. and Christine O. Mahar under date of September 9, 1953 . Trial by the Court upon an agreed statement of facts. All questions of law presented were reserved and transferred without ruling by the Presiding Justice, Leahy, C. J. The mortgage held by the plaintiff was foreclosed on January 3, 1957 . After satisfaction of the debt and expenses, a balance of $3,306.55 was deposited by the plaintiff with the clerk of court upon the filing of the bill of interpleader. The surplus proceeds are claimed by various creditors of George T. Mahar as well as by the United States of America , and a second mortgagee. On August 5, 1955 , New Hampshire Supply Company attached the mortgaged premises in an action against the mortgagor George T. Mahar, in which judgment was entered on May 14, 1956 , and execution was thereafter returned partially satisfied. On March 26, 1957 , the Company made demand upon the plaintiff for payment of the balance of the judgment. On May 22, 1956 , the premises were attached in an action brought by Emery-Waterhouse Company which was never entered. On June 18, 1956 , the same company again attached the premises in an action against George T. Mahar to recover $1,297.22 plus interest. This action is presently continued for judgment. Similarly, in actions against George T. Mahar which are now continued for judgment, the premises were attached on June 18, 1956 by Manchester Supply Company in an action to recover $1,837.03 and interest; and at a later time on June 18, 1956 , by Rockingham Electrical Supply Company, Inc. in an action to recover $172.86 and interest. On June 19, 1956 , the premises were attached by Weston Palmer in an action against George T. Mahar in which judgment was entered on January 15, 1957 , in the sum of $447.35 plus costs. Execution issued on January 21, 1957 has not been returned. On June 25, 1956 , the premises were attached by Daniel P. Creed Co. in an action against George T. Mahar, presently continued for judgment, to recover $183.86 plus interest. On June 26, 1956 , George T. and Christine O. Mahar executed a second mortgage of the premises, subject to the foregoing attachments, to Katherine Ogg to secure the payment of $2,500. The mortgage was recorded on June 27, 1956 at 10:20 a. m. On June 27, 1956 , at 11:58 a. m. the premises were attached by Samuel Hurwitz Company in an action against George T. Mahar, presently continued for judgment, to recover the sum of $813.74 plus interest. On the same date at 11:59 a. m. the premises were attached by Atlantic Distributing Company in an action against George T. Mahar, presently continued for judgment, to recover the sum of $137.58, plus interest. On March 3, 1958, Samuel Hurwitz Company and Atlantic Distributing Company attached the surplus in the hands of the clerk of the Superior Court, by serving trustee process upon him pursuant to leave granted by the Superior Court on February 25, 1958. On June 12, 1958 , each of these plaintiffs moved for default judgment, and an order directing that execution issue against the clerk of the court. The motions for default judgment were granted as of March 27, 1959 . On October 19, 1956 , the mortgaged premises were attached by Gerald W. Berounsky in an action against George T. Mahar. This action is presently marked "Continued for notice," no service having been had on the defendant. On March 5, 1957 , a divorce was decreed between George T. Mahar and Christine O. Mahar by decree which contained no provision concerning the disposition of property. George T. and Christine O. Mahar, as officers of George T. Mahar, Inc. are indebted to the United States of America for withholding taxes in the sum of $979.78 plus interest at six per cent per annum, commencing October 8, 1957 . Demand was made for the taxes on October 8, 1957 , giving rise to a lien under 26 U. S. C., s. 6321. Notice of the lien was duly filed in the Registry of Deeds on October 11, 1957 and with the town clerk of Rye , New Hampshire on October 12, 1957 ; and notice of levy was served on the clerk of the Superior Court on January 14, 1958 . On September 10, 1958 , an action was brought by the United States of America against George T. and Christine O. Mahar to recover upon a promissory note, and on September 11, 1958 , trustee process in this action was served upon the clerk of the Superior Court.

Booth, Wadleigh, Langdell, Starr & Peters, Charles J. Dunn for the plaintiff. Maurice P. Bois, United States Attorney, Alexander J. Kalinski, Assistant United States Attorney for the United States of America. Shaines & Brown for Samuel Hurwitz Co., and Atlantic Distributing Co. Griffin, Harrington & Brigham for Katherine Ogg and Christine O. Mahar. T. Casey Moher for Emery-Waterhouse Co. and Manchester Supply Co. Henry M. Fuller for Rockingham Electrical Supply Co. Gerald W. Berounsky, Joseph E. Michael Jr. for Weston Palmer. Samuel A. Margolis for Daniel P. Creed Co.

Opinion

DUNCAN, Judge:

Under well-established principles, surplus funds in the hands of a mortgagee, after foreclosure of a power of sale mortgage and satisfaction of the secured indebtedness and expenses, are the property of the mortgagor, subject however to encumbrances and liens existing at the time of foreclosure. Such liens attach to the surplus proceeds in equity, in the same order of priority and with the same effect as they bound the mortgaged premises before the foreclosure. Markey v. Langley , 92 U. S. 142, 145; Wiggin v. Heywood, 118 Mass. 514; Smart v. Burgess, 35 R. I. 149. Thus the surplus after foreclosure stands in the place of the debtors' equity of redemption and is subject to the pre-existing liens, which attach thereto. Spaulding v. Quincy Tr. Co., 313 Mass. 752; Antonellis v. Weinstein, 258 Mass. 323. See Rob erge v. Cyr, 84 N. H. 204, 205.

The lien of the United States for taxes arose on October 8, 1957 , upon assessment (26 U. S. C. A., s. 6322), and attached to "all property and rights of property, whether real or personal," belonging to the taxpayers, George T. and Christine O. Mahar. 26 U. S. C. A., s. 6321. Since the plaintiff's mortgage was foreclosed prior to assessment of the taxes, the lien is upon the interest of the taxpayers in the surplus funds now held by the clerk of court.

As previously indicated, that surplus is also charged with other liens arising out of pending actions against the taxpayer George T. Mahar, and with a second mortgage which is junior to certain of the prior attachments and expressly made subject to them.

However not all liens prior in time are entitled to priority over the lien of the United States . 26 U. S. C. A., s. 6323 provides that the lien of the United States for taxes "shall not be valid against any mortgagee, pledgee, purchaser, or judgment creditor" whose liens antedate the tax lien. 26 U. S. C. A., s. 6323. With the exceptions thus stated, the lien of the United States takes priority. U. S. v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191].

[Priority of Liens]

In these proceedings, the United States concedes that its lien is junior to that of the mortgagee Ogg, whose mortgage secures the payment of $2,500 and interest. It denies however that any attaching creditor holds a lien which is entitled to priority over the lien of the United States . As we understand the law upon the subject, the United States is correct in its position.

RSA 511:55 provides that attached property "shall be holden until the expiration of thirty days from the time of rendering a judgment . . . in favor of the plaintiff on which he can take execution. . .." The lien is lost by failure to levy execution within the thirty days. Murphy v. Hill, 68 N. H. 544. Thus it is plain that the attachment liens once held by New Hampshire Supply Company and by Weston Palmer expired prior to October 8, 1957 by reason of the failure to levy execution within thirty days after judgments were entered in their respective actions.

Four other creditors of George T. Mahar, namely, Emery-Waterhouse Company, Manchester Supply Company, Rockingham Electrical Supply Company, and Daniel P. Creed Company, made attachments which antedated both the foreclosure sale and the lien of the United States in actions which are now pending and marked continued for judgment. These creditors are not judgment creditors under the federal statute, since they have neither taken judgment nor perfected their inchoate attachment liens. U. S. v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]; U. S. v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191], 88.

It is apparent from what has been said that the mortgage of Katherine Ogg is prior to the lien of the United States . The latter lien has priority over the liens of the four creditors mentioned in the preceding paragraph. The liens of these creditors however have priority over the mortgage lien by virtue of the provisions of the mortgage. Accordingly a sum sufficient to satisfy the mortgage indebtedness to Katherine Ogg should be set apart as free from any claim of the United States . Cf. Southern Ohio Sav. B'k & Tr' Co. v. Bolce, 165 Oh. St. 201, 215. This sum will represent underlying interests of both George T. and Christine O. Mahar as joint tenants. Only the interest of the former is subject to the four undischarged attachments, to which the mortgage is junior; and his homestead right is exempt as against the attaching creditors. RSA 80:4. This right is in "fifteen hundred dollars worth of his homestead or of his interest therein." RSA 80:1. While Christine O. Mahar claims a dower interest, this claim cannot be sustained. Gleason v. Emerson, 51 N. H. 405.

Hence as to the sum set apart as subject to the lien of the Ogg mortgage, after deduction of the costs of these proceedings as hereinafter indicated, the existing liens of the prior attaching creditors encumber only the proportionate share thereof which shall be determined to represent the interest of George T. Mahar as joint tenant (See Davis v. Barnard, 60 N. H. 550), less the value of his homestead right if he is found to have had such a right. See Beland v. Goss, 68 N. H. 257. The balance of such sum, representing the share or interest of Christine O. Mahar and any homestead right of George T. Mahar, is subject to the lien of the mortgagee Ogg, free from other claims. See B. U. L. Rev. 181, 193-196, 45 A. B. A. J. 351, 353.

The claims of the four attaching creditors whose liens have been preserved, will in the aggregate clearly exceed the value of the interest of George T. Mahar in the sum set apart as subject to the mortgage lien. The claims of these creditors are to be satisfied in the order of priority of their attachments. Markey v. Langley, 92 U. S. 142, supra; Kittredge v. Gifford, 62 N. H. 134.

Since no attaching creditors have priority over the lien of the United States , the balance of the funds deposited with the clerk of court will be subject to the lien of the United States on account of the tax liabilities of George T. Mahar and Christine O. Mahar. This balance will apparently be insufficient to satisfy this lien in full. Hence there is no occasion to consider the effect of the suits brought by the United States and by other creditors of George T. Mahar.

The trustee process served upon the clerk by leave of Court, in the actions brought by Samuel Hurwitz Company and Atlantic Distributing Company, can operate to give these creditors no priority. Attachments of the real estate were made by these creditors after the Ogg mortgage was recorded and their liens are subject to the tax lien of the United States . Trustee process was not served upon the clerk of court until after the lien of the United States had attached to the funds in the hands of the clerk.

There remains to be considered the question of whether the costs of these proceedings and plaintiff's counsel fees should be allowed out of the proceeds in the hands of the clerk. In bills of interpleader, costs as well as counsel fees are allowable to the stakeholder out of the res. Guay v. Association, 87 N. H. 216, 222; anno. 48 A. L. R. (2d) 190, 206. In this case however, such an allowance may not be charged against the portion of the fund which is subject to the tax lien of the United States . U. S. v. Liverpool & London Ins. Co., 348 U. S. 215; U. S. v. Ball Construction Co., 355 U. S. 587 [58-1 USTC ¶9327]. See 28 U. S. C. A., s. 2412(a). It follows that any costs or counsel fees which may be allowed to the plaintiff by the Trial Court should be deducted from the sum set apart as subject to the lien of the mortgagee Ogg, before determination of the respective rights of the mortgagee and the creditors of George T. Mahar, as hereinbefore indicated. What party or parties apart from the United States , should ultimately bear the burden of such expense is likewise discretionary with the Trial Court.

Remanded.