New Jersey

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[99-2 USTC ¶50,925] In the Matter of Harry Johns and Claire Johns, Debtors. In the Matter of Harris L. Klear and Betty G. Klear, Debtors. State of New Jersey , Appellant v. United States of America , Appellee

U.S. District Court, Dist. N.J., CIV. 99-2521 (SMO), 10/7/99, 242 BR 265, Reversing unreported Bankruptcy Court decision

[Code Secs. 6323 and 6871 ]

Liens: Priority: Federal as to state: New Jersey: Penalties: Interest.--State (New Jersey) tax liens against bankrupt taxpayers for the amounts shown due on their state tax returns were superior to subsequent federal tax liens; however, the federal liens were superior to the state liens for penalties and interest. Under state law, the liens for the debtors' unpaid state taxes were choate, perfected and summarily enforceable on the date that their returns were filed. In contrast, the liens for penalties and interest on their state underpayments were inchoate until those amounts were formally assessed. Since the federal liens arose after the debtors' state tax returns were filed, but before the state assessed penalties and interest on their underpayments, the federal liens were inferior to the state liens for the debtors' unpaid taxes, but superior to the state liens for interest and penalties.

Charles M. Flesch, Dayna L. Olson, Department of Justice, Washington, D.C. 20530, Carol Johnston, Deputy Attorney General, Department of Public Law & Public Safety, Division of Law, Richard Hughes Justice Complex, 25 Market Street, Trenton, N.J. 08625-0106, Leonard R. Wizmur, Wizmur & Gordon, Evesham Commons, 525 Route 73 South, Marlton, N.J. 08053, for Harris and Betty Klear. Jeffrey Jenkins, Jenkins & Clayman, 6 White Horse Pike, Haddon Heights, N.J. 08035, for Harry and Claire Johns.

OPINION

IRENAS, District Judge:

Presently before this Court is the State of New Jersey , Division of Taxation's appeal from two Bankruptcy Court orders granting debtors' motions objecting to the secured claims of the State. ¹ The United States had an interest in both cases because the State alleged that its tax lien was choate and therefore entitled to priority over a United States Internal Revenue Service lien. This Court has jurisdiction pursuant to 28 U.S.C. §158(a)(1). For the reasons set forth below, this Court will reverse the Bankruptcy Court's orders.

The standard of review applied by a district court when reviewing the ruling of a bankruptcy court is determined by the nature of the issues presented on appeal. Finding of fact are not to be set aside unless they are "clearly erroneous." See Fed. R. of Bank. P. 8013; In re Indian Palms Ass'n Ltd., 61 F.3d 197, 203 (3d Cir. 1995); J.P. Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989). Questions of law are subject to de novo or plenary review. In re Brown, 951 F.2d 564, 567 (3d Cir. 1991); J.P Fyfe, 891 F.2d at 69. Since only a question of law is involved in these appeals, our review is plenary.

I.

A. Facts of Klear

Harris and Betty Klear filed a petition for relief under Chapter 13 of the Bankruptcy Code on November 6, 1997 . Following that filing, the Internal Revenue Service ("IRS") filed a proof of claim in the amount of: $25,897.66 secured; $19,341.82 priority; and $76,525.15 general unsecured claim. The IRS' secured claim included an assessed income tax liability owed by the Klears for the 1991 tax year.

While the Klears sought confirmation of their Chapter 13 Plan, the State of New Jersey , Division of Taxation ("Division" or "State") submitted an objection to confirmation on the ground that it would not receive full payment of its claims. The State's secured claim included a liability (tax, interest, and penalty) for the Klears 1991 New Jersey Gross Income Tax, N.J.S.A. 54A:9-1, et seq. The Klears moved to reclassify the State's secured lien. Specifically, they argue that because their real property was encumbered by a mortgage, only $9,097.66 was available for either the state or federal secured claims to attach.

It is undisputed that the Klears filed a timely 1991 state income tax return on April 15, 1992 , without payment, and that on May 24, 1992 the State entered it on its computers. It is uncontested that penalties and interest were included in its claimed lien. Also undisputed is that the Klears' federal taxes were assessed on May 25, 1992 . ²

B. Facts of Johns

Harry and Claire Johns filed a petition for relief under Chapter 13 of the Bankruptcy Code on June 9, 1998 . Following that filing, the Internal Revenue Service ("IRS") filed a proof of claim in the amount of: $52,880 secured claim; $4,816.71 priority claim; and $154,376.98 general unsecured claim. The IRS' secured claim included an assessed income tax liability owed by the Johns for the 1983 tax year.

While the Johns sought confirmation of their Chapter 13 Plan, the Division submitted an objection to confirmation on the ground that it would not receive full payment of its claims. The State's secured claim included a liability for unpaid New Jersey Gross Income Tax, N.J.S.A. 54A:9-1, et seq. for the 1990 tax year. The Johns filed a motion objecting to the State's claim arguing that the amount of equity they have would be consumed by the IRS' claim.

It is undisputed that the Johns filed their state income tax return on October 2, 1991 , without payment, and that on October 22, 1991 , the state entered it on its computers. It is uncontested that penalties and interest were included in its claimed lien. Also undisputed is that the Johns' 1983 federal tax liability was assessed on November 25, 1991 .

In Klear and Johns, the Division opposed the debtors' motions and argued that they did not establish that the IRS liens had priority over the state liens. On March 2, 1999 and April 6, 1999 , respectively, the Honorable Gloria Burns, United States Bankruptcy Judge, granted the Klears' and Johns' motions to reclassify the State's secured liens. In both opinions, the Bankruptcy Court held that the federal lien had priority over the state lien because the State failed to show that the amount of its lien was established before the federal lien arose.

II.

Federal tax liens do not automatically prime all other liens. Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513-14 (1960); Monica Fuel, Inc. v. IRS [95-2 USTC ¶50,477], 56 F.3d 508, 511 (3d Cir. 1995). According to the Supreme Court, the priority of statutory liens is determined by the principle "the first in time is the first in right." United States v. City of New Britian [54-1 USTC ¶9191], 347 U.S. 81, 84-85 (1954); United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993); United States v. Equitable Life Assurance Soc'y [66-1 USTC ¶9444], 384 U.S. 323, 327-29 (1966).

A state-created lien must be choate or perfected in order to take precedence over a later assessed federal tax lien. New Britian [54-1 USTC ¶9191], 347 U.S. at 84-86; McDermott [93-1 USTC ¶50,164], 507 U.S. at 449-50. The priority of a state lien depends on when it attached to the property in question and on its "choateness," when nothing more can be done to perfect it. McDermott [93-1 USTC ¶50,164], 507 U.S. at 449-50. The Supreme Court has relied on whether "[1] the identity of the lienor, [2] the property subject to the lien, and [3] the amount of the lien are established" to decide whether a state lien is choate. Id. (quoting United States v. New Britian [54-1 USTC ¶9191], 347 U.S. at 84)); Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 511.

In addition to these three requirements, a state-created tax lien must be summarily enforceable to prime a competing federal tax lien. Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 512-13, 449 & n. 13 (explaining that summarily enforceable means "without a judicial proceeding"); United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 359 n. 12 (1965)); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990), cert. denied, 501 U.S. 1212 (1991) ("state lien holder must show that he had the right to enforce the lien at some time prior to the attachment of the federal lien"); see also Minn., Dep't of Revenue v. United States of America, 184 F.3d 725, 728 (8th Cir. 1999) ("the test for choateness or perfection also requires that the creditor have the right to summarily enforce its lien").

On appeal, the Division argues that both the IRS and the Bankruptcy Court misread the applicable New Jersey tax statutes. It asserts that the state liens have priority because the identity of lienor, the property subject to the lien and the amount of the lien were established prior to May 25, 1992 in the Klear case and prior to November 25, 1991 in the Johns case, the dates the federal liens arose. In particular, the Division contends that the amount of the state liens were established on the days it received the debtors' returns (April 15, 1992 for the Klears and October 2, 1991 for the Johns). The Division also claims that the liens were summarily enforceable.

In response, the IRS claims that the state liens were inchoate because the amount of the liens were not sufficiently established on the dates the State received the debtors' tax returns. It also claims that the state liens were not perfected because they were not summarily enforceable.

III.

A.

The state liens at issue arose under the New Jersey Tax Uniform Procedure Law, N.J.S.A. 54:49-1 that provides:

The taxes, fees, interest and penalties imposed by any such State law . . . from the time the same has all be due, shall be a personal debt of the taxpayer to the State. . . . Such debt, whether sued upon or not, shall be a lien on all property of the debtor . . . except as may be provided to the contrary in any other law. . . .

Although a state lien may arise on the date the tax is due and attach to the debtor's property, the due date is not sufficient to create a choate lien. The State lien only becomes established and enforceable on the assessment date. Monica Fuel Inc. [95-2 USTC ¶50,477], 56 F.3d 508, 512 (3d Cir. 1995); N.J.S.A. 54:49-12; N.J.S.A.-13(a).

In Monica Fuels, Inc. [95-2 USTC ¶50,477], 56 F.3d 508, the Third Circuit addressed the same issue as this Court now confronts, whether an IRS lien had priority over a state tax lien. Like the liens in the present action, the state liens at issue in Monica Fuels, Inc., although related to motor fuels, arose pursuant to New Jersey 's State Tax Uniform Procedure Law ("Uniform Law"). Id. at 508-09. But, unlike the Gross Income Tax Act, the Motor Fuels Act requires that tax assessments be made according to requirements of the Uniform Law. N.J.S.A. 54:48-1 et seq; N.J.S.A. 54:39-49.

The Monica Court appropriately applied the assessment procedures of the Uniform Law which allow the Division to make an assessment only after it determines that there is a deficiency and issues a Notice of Assessment to the taxpayer. Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 509; N.J.S.A. 54:49-6.

By contrast, the assessment procedures of the New Jersey Gross Income Tax Act ("NJGITA") and not those of the Uniform Law, ³ must be applied to the Klears' and the Johns' liens in the present case. The NJGITA provides for two types of assessments: (1) pursuant to N.J.S.A. 54A:9-3(a), the "amount of tax which a return shows is due" is "deemed to be assessed on the date of the filing of the return"; ⁴ and (2) pursuant to N.J.S.A. 54A:9-2(a), the Division, after an examination or audit, may assess a deficiency in the amount the taxpayer owes beyond what is shown in a filed return, if any. A deficiency assessment may arise from under reporting, from taxpayer misrepresentation or from failure of a taxpayer to file a return. Id. Unlike a tax return assessment, a deficiency assessment requires that the Director first issue a notice of deficiency of tax. Id. The notice becomes a deficiency assessment of the tax due 90 days from service unless the taxpayer files a protest. Id. at 54A:9-2(b).

In the instant cases, the State concedes that it never formally assessed as deficiencies the interest and penalties for non-payment. But, it argues that since penalties and interest can be calculated based on the tax due as shown on the returns, they should be deemed "assessed" when the returns were filed. ⁵ The Court must decide whether the penalties and interest are deemed shown on the taxpayer's return and thus, assessed when the return is filed. If not, these items would be subject to a deficiency assessment which was not made in either Klear or Johns.

In N.J.S.A. 54A:9-5(f), NJGITA states that interest "shall be . . . assessed, collected and paid in the same manner as income tax." Also, in N.J.S.A. 54A9-6(j), NJGITA provides that penalties or additions "shall be . . . assessed, collected and paid in the same manner as taxes. . . ." However, in N.J.S.A. 54A:9-3(a), the tax deemed assessed or the filing of the return is defined as "the amount of tax which a return shows to be due." Since the taxpayers did not include penalty and interest on their returns, it would not be deemed "assessed" on the dates the returns were filed. Assessment of penalty and interest must be made through the deficiency assessment process.

The NJGITA defines deficiency as: "the amount imposed by this act, less (i) the amount shown as the tax upon the taxpayer's return. . . ." N.J.S.A. 54A:9-2(g). This definition distinguishes the tax due as shown on the return submitted by the taxpayer, even if not paid, from any later deficiency assessment which will usually include penalty and interest.

The Court finds that to the extent the State's liens include amounts actually shown as taxes due on the returns, the liens are choate; but, to the extent such liens include penalty and interest, the liens are inchoate since such amounts were never assessed by the State. Accordingly, the Court concludes that on April 15, 1992 , for the Klears and on October 2, 1991 , for the Johns--the dates each filed their state tax returns--the state liens for the amounts shown on the returns were assessed and the three prong New Britian choateness test was met. See Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 512.

B.

As discussed above, the Third Circuit requires that in addition to identity, property, and amount, the three requirements articulated by the Supreme Court, "the right to enforce a lien summarily (that is, without a judicial proceeding) is a requirement of choateness." Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 512. The federal system of assessment requires the IRS to assess and process a taxpayer's tax amount and then issue a demand letter. 26 U.S.C. §6203. Therefore, the IRS cannot begin to summarily enforce its lien until after they have admin istratively processed the taxpayer's return. The IRS argues that even if the state liens were established, they did not have priority over the federal liens because their assessments were not summarily enforceable.

Under New Jersey 's Tax Uniform Procedure Law, once a tax is properly "assessed" no judicial action is required to enforce the state's liens. N.J.S.A. 54-49-1; Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 513. Summary enforcement can be accomplished either by a warrant of execution on the taxpayer's property, N.J.S.A. 54-49-13a, or by the filing of a certificate of debt with the clerk of the Superior Court of New Jersey who will enter the debt as a judgment. N.J.S.A. 54-49-12; Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 513. ⁶ Therefore, on the days the Klears (April 15, 1992) and the Johns (October 2, 1991) filed their returns, the State could have enforced its liens for the amounts shown due on the tax returns. See Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 513 ("Choateness only requires that the state have a right to enforce its lien in a summary fashion.").

In the Klear case, the State's lien for the reported tax became choate on April 15, 1992 , while the federal tax lien arose on May 25, 1992 . In the Johns case, the State's lien for the reported tax became choate on October 2, 1991 , while the federal tax lien arose on November 25, 1991 . For the reasons set forth above, the Court concludes that the state tax liens to the extent of the taxes shown on the returns were choate prior to the later assessed federal tax liens and thus entitled to priority. However, the liens for the interest and penalties are inchoate and therefore, not entitled to priority over the federal liens. Accordingly, the Court reverses the Bankruptcy Court's orders and remands the case for a determination of the amounts of the State's liens entitled to priority in accordance with this opinion.

¹ See Consolidation Order, June 30, 1999 (consolidating In re Harris L. Klear and Betty G. Klear, decided by the Bankruptcy Court on March 2, 1999 and In re Harry Johns and Claire Johns, decided by the Bankruptcy Court on April 6, 1999 ).

² According to 26 U.S.C. §§6321 and 6322, federal tax liens arise when the underlying taxes are assessed.

³ Pursuant to N.J.S.A. 54:49-1, the New Jersey Tax Uniform Procedure Law applies unless there is a specific conflict in any other law. Here, the New Jersey Gross Income Tax Act assessment provisions conflict with the Uniform Law's assessment procedures, therefore, the Uniform Law does not govern the Gross Income Tax assessment at issue in this case.

⁴ This form of assessment occurs only in those instances where the taxpayer files a timely return but has not paid the tax due as shown on the return.

⁵ In some cases, in fact, penalties and interest cannot be determined from the face of the return because the Division has discretionary powers with respect to the imposition of penalties and interest. N.J.S.A. 54:49-11 (allowing the Director of the Division, under certain circumstances, to waive the payment of penalties and interest).

⁶ NJGITA provides that "[i]f any person liable under this act for the payment of any tax, addition to tax, penalty or interest neglects . . . to pay . . . within 10 days after the notice and demand . . . the director may . . . issue a certificate of debt. . ." The IRS argues that the lien is not summarily enforceable until this notice is given and ten days have elapsed without payment. This argument is not persuasive. Notification and demand are simply part of the State's summary enforcement process and require no judicial action. Monica Fuel, Inc. [95-2 USTC ¶50,477], 56 F.3d at 513 ("The New Jersey Statute also provides [] tools for enforcement . . . neither of which require the Division to engage in judicial contest to attain a judgment in its favor."). The state does not have to actually commence enforcement proceedings for the lien to be summarily enforceable. Id.

 

 

[71-2 USTC ¶9654]In the Matter of the General Assignment for the Benefit of Creditors of Holly Knitwear, Inc., a New Jersey Corporation, Assignor v. Rob ert S. Solomon, Assignee

Essex County Court, Probate Div., Docket No. 8644-Z, 7-27/71

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

Lien for taxes: Priority: Assignment to creditors: Federal tax lien: Secured creditors and landlord's rent claim: State law.--A Federal tax lien for unpaid withholding taxes did not have priority over a purchase money security interest; a valid and existing secured lien on assets arising out of a security agreement; or a landlord's lien for rent which had been perfected before the date of an assignment for the benefit of creditors. The Federal tax lien did have priority over a landlord's state created lien. Under New Jersey distress law a debtor-tenant is granted a grace period of 10 days within which he may commence an action to regain goods. Since the landlord's distraint action occurred on December 15, 1970 , and the assignment for the benefit of creditors took place on December 16, 1970 , nine days remained before the lien reached fruition. Thus, the landlord did not have, at the date of the assignment for the benefit of creditors, a claim sufficient to defeat the Federal lien priority. Also, the Federal tax lien had priority over: (1) unperfected wage claims; (2) state's claim for personal property taxes; and (3) attorney fees.

Rob ert S. Solomon, Kirsten, Solomon & Friedman, 744 Broad St. , Newark , N. J., for the assignee. Arnold Samuels, Hein, Smith, Mooney & Berezin, 25 E. Salem St., Hacken-sack, N. J., for claimant J. Logan. Richard W. Hill, Assistant U. S. Attorney, 970 Broad St., Newark, N. J., for claimant District Director of Internal Revenue. Philip Kagan, State House Annex, Trenton, N. J., for claimant State of New Jersey. Sidney Reitman, Kapelsohn, Lerner, Leuchter, Reitman & Masiel, 24 Commerce St., Newark, N. J., for wage claimants. Daniel Fox, Fox & Fox, 570 Broad St., Newark, N. J., for claimant Northern Financial Corp. Neil A. Kleinberg, Kleinberg, Moroney, Masterson & Schachter, 1180 Raymond Blvd., Newark, N. J., for claimant Textile Financial Corp.

Opinion

JOHNSON, Judge:

On December 16, 1970 the assignor corporation Holly Knitwear Inc. which was engaged in the manufacture of knitted fabrics effected an assignment for the benefit of creditors. Shortly thereafter, on January 15, 1971 a public auction sale of the assets of the assignor corporation was held, which sale was confirmed by order of the Probate Court of February 8, 1971 . The amount realized pursuant to said sale, $73,395, was inclusive of all machinery, equipment, and inventory held by the assignor with the sole exception of an automobile for which the additional value of $2400 was received.

[Claimants]

Subsequently this matter came before this court by means of a petition and order to show cause entered on behalf of the assignee for instructions with regard to a determination as to the priority of the various claims to the funds resulting from the sale of the assets of the said assignor. Involved herein, in addition to the assignee's request for admin istration expenses, are the following claimants:

(1) United States of America : The federal government has claimed taxes due to the Internal Revenue Service in the amount of $40,601.34 for Social Security and Withholding Taxes and for Federal Unemployment Insurance Contributions. However, the proofs indicate that all of the claims arose subsequent to the filing of these proceedings with the exception of claims for the tax quarter ending June 30, 1970 upon which an assessment was made on November 27, 1970 in the amount of $3,868.29.

(2) Jonathon Logan Inc. (hereinafter referred to as Logan ): Its claim arising out of a purchase money security interest in two sewing machines for which financing statements were filed on June 10, 1970 is in the amount of $7500. In addition, attorneys' fees are sought.

(3) Northern Financial Corp. and/or Northern Commercial Corp. (hereinafter referred to as Northern): This claim of $8,939.32 is also predicated on a purchase money security interest which was appropriately filed with the Secretary of State of New Jersey on April 7, 1969 . It too asks for reasonable attorneys' fees.

(4) Textile Financial Corp. (hereinafter referred to as Textile): This party contends it has a valid and existing secured lien on assets in an amount equal to $23,870. This interest arose out of the security agreement entered into between Textile and the assignor to secure a loan to the assignor of $124,000. Said agreement was to serve as security for all future advances made by the creditor and was also intended to provide the creditor with a secured interest in all of the assignor's after acquired property. Financing statements were filed October 3, 1967 and July 24, 1970 . Attorneys' fees are also asked.

(5) Feldwin Realty Co.: This party asserts a landlord's lien of $13,991.04 for rents due and for which it allegedly made a distraint on December 15, 1970 .

(6) State of New Jersey : The State claims priority for taxes due and owing the Business Personal Property Section in the amount of $4,652.04 in addition to some $1,339.80 due and owing the Division of Employment Security.

(7) Employees of the Assignor: These individuals seek sums totaling approximately $22,000 as wages to which they were entitled at the time of the assignment.

[Status of Amounts Received by Assignee]

I. The intial question to be determined in this matter is whether within the meaning of N. J. S. A. 2A:19-43 "all sums received by said assignee" constitutes value received for sale of collateral secured prior to the date of the assignment by purchase money security interests as defined in N. J. S. A. 12A:9-107 and by general security liens all of which were filed and perfected in accordance with N. J. S. A. 12A:9-101 et seq.

Essentially, the secured parties in question contend that their respective liens should not be included in an accounting of the general assets of the assignor's estate and hence should not be charged with any part of the assignee's request for compensation or expenses incurred during the admin istration of said estate. The facts, which are virtually uncontroverted, reveal that the parties holding these security interests agreed to a sale of the collateral on which they held valid liens solely on the understanding that if a profit resulted such would redound to the benefit of the estate and that the secured parties would receive full satisfaction to the extent of their outstanding claims. A profit was realized and accordingly these parties in interest assert their reliance on this agreement in advancing their contentions.

As authority, Logan and Northern have cited cases wherein the courts dealt with questions of an assignees' status as a general lien creditor as defined in N. J. S. A. 12A:9-301. However these references are inapposite for our purposes here. Presently at bar is not the issue of whether the funds should revert to the general assets of the estate but whether the assignee should in fact be recompensed by the security creditors for his services and expenses. It should be recognized that the assignee is not attempting to assert his statutory role as lien creditor under N. J. S. A. 2A:19-14 and 12A:9-301(3) in an effort to wrest from lesser claimants asserts which by right should belong to the general estate. Rather, such assets, as determined by the efficacy of the liens outstanding, have already been conceded to these creditors in terms of their priority. Thus the assignee's only claim here is for his efforts, costs and expenses in distributing such assets. (See In re Pynn-Hawley Co. 63 N. J. Super 50 (County Court 1960); Assignment for the Benefit of Creditors of Shay 75 N. J. Super 421 (App. Div. 1962); In re Xaviers, Inc. 66 N. J. Super 561 (App. Div. 1961).

New Jersey courts have long recognized and made mention of the fact that such receivers, trustees and assignees are agents of the court and in this capacity should be considered as working for the benefit of all creditors who seek to reclaim from the insolvent's estate that which is their just due. Sullivan v. James Leo Co. 124 N. J. Eq. 317 (E&A 1938); Seidler v. Branford Restaurant Co. 97 N. J. Eq. 153 (E&A 1925); Lerman v. Lincoln Novelty Co. 130 N. J. Eq. 144 ( Ch. 1941); Laudan v. ABC Travel System Ind. 64 N. J. Super 204 ( Ch. 1960).

It is true that the above mentioned cases concern corporate receiverships wherein the court itself took control of the insolvent enterprise. However, it is now settled that the rationales behind the statutes dealing with corporate receiverships, N. J. S. A. 14A:14-1 et seq. and assignments for the benefit of creditors, N. J. S. A. 2A:19-1 et seq., are identical. Therefore the receivership cases supply instructive precedent for the assignment proceeding before this court. In re Xaviers, Inc., supra.

Next the creditors rely on the case of Sliker v. Fisher 45 N. J. Eq. 132 (1889). Involved there were lands subject to mortgages which were conveyed to an assignee who, with the consent of the mortgagees, proceeded to sell such property free from any encumbrances. The proceeds realized from the sale were then used to pay off the mortgages but since the proceeds were less than the appraised value of the lands, the assignee asked for an allowance out of the general assets of the estate to make up the difference still due. In denying this request the court held that the mortgagees' interest in the lands were not assigned and hence the assignee had no power over them. The court refused to allow the assignee to be recompensed at the expense of the general unsecured creditors. If he was entitled to any compensation it would have had to come from the mortgagees themselves on whose behalf he had acted as agent.

It is argued by the creditors that this decision stands squarely for their central proposition, namely, that a valid security interest is superior and paramount to the rights an assignee receives by virtue of a deed of assignment. However, an appreciation of the limited intendment of that decision, to protect the unsecured creditors, and a look at a more recent case wherein Sliker was interpreted in what must be from the creditors' viewpoint a much less fortuitous light, indicates clearly that their position is not the decided state of the law. In re Pynn-Hawley Co., supra, the court stated that the statutory language "on all sums received" would lay to rest any further questions raised on account of Sliker. The text of that opinion seems to intimate that the assignee's commission could be predicated on any and all sums dealt with in the admin istration of the estate regardless of their source.

Moreover, a substantial line of cases has held that admin istration expenses must take priority over all other claims. These general expenses of receivership may be paid out of the funds in a receiver's hands before the payment of debts whether the latter be secured or unsecured. Laudan v. ABS Travel System Inc., supra; Albert and Kernahan v. Franklin Arms 107 N. J. Eq. 468 (E&A 1931); Pemberton Lumber and Millwork Industries v. William G. Ridgeway Co. 38 N. J. Super 383 (Ch. Div. 1955).

The Laudan case concerned an agreement between a travel agency and airlines, hotels and shipping lines wherein it was provided that the agency would hold all funds collected by it for transportation costs in trust for the carrier. In the subsequent proceeding by the receiver of the insolvent agency for a pro rata apportionment of the admin istration expenses, the court dismissed the argument that trust funds involved did not constitute "assets" chargeable to any part of the receiver's compensation. The court stated succinctly that New Jersey Courts have consistently afforded priority to the expenses of a receivership over a mortgage or other lien where it was equitable to do so and perceived "No valid reason why the same principle should not apply to trust funds". At p. 207.

This court is of the opinion that this policy is similarly dispositive of the matter sub judice. Granted the lien holder here did not benefit financially by consenting to a sale of the collateral to which they retained a right of reclamation, but nowhere in this jurisdiction has it been held that monetary benefit to a lien holder by a receivership is the sine qua non for the priority of general admin istration expenses of the receivership. Seidler v. Branford Restaurant, supra; Bankers Trust Co. v. Maxson 100 N. J. Eq. 1 ( Ch. 1926); Laudan v. ABC Travel Systems, supra.

What is crucial is that all parties involved have availed themselves of a process, the very existence of which is meant to benefit their own class of preferred creditors. In re Pynn-Hawley, supra, 53, and In re Francelli Carrier Inc. 77 N. J. Super 522, 527 (Ch. Div. 1962). In light of the strong precedent amassed by this State's judiciary in efforts to effectuate that process, this court would be loathe to run afoul of that which has been so consistently reinforced over the years. As stated in Laudan, supra, p. 207:

To hold otherwise would deprive the courts of the services in many cases of competent admin istrators and be subversive of the admin istration of this important branch of equity jurisdiction.

Accordingly, the creditors' motions to have the assignee relinquish their interests in toto, without deductions for admin istration expenses proportionate to the amounts claimed, are hereby denied.

[Landlord's Claim]

II. The second issue to be considered is the claim for rent by the landlord Feldwin Realty Company. The landlord contends that the rent is owing for a six month period which terminated on or about December 12, 1970 . The rental amount involved therein was $1500 per month plus additional charges for rubbish removal, power, steam and hot water. The assignee however does question the validity of these latter extra charges. The landlord also claims that a second lease was entered into with the assignor which agreement became operative on September 1, 1970 . This lease covering additional loft premises provided for rent to the landlord of another $500 plus costs. In total, the realty company is asserting a lien of some $13,991.04.

In accordance with N. J. S. A. 2A:44-165-6 the landlord is entitled to priority over all or any "title, interest, mortgage, judgment, or other encumbrance created or acquired after machinery or other chattels are placed in the premises." Since Textile's interest in after acquired property did not attach until these items were installed for use, it is clear that Feldwin's claim would be superior to that of Textiles for an amount equivalent to the sums of the total rents due for a period not exceeding six months, N. J. S. A. 2A:44-166. Equally certain is that the purchase money security interests held by Logan and Northern respectively are paramount to this claim advanced by the landlord since by their very nature those encumbrances were effectuated before the machines or chattels were placed in the premises.

Much has been made by both the assignee and the landlord of the validity of the distraint initiated just one day prior to the date of the assignment itself, viz: December 16, 1970 . However the court is of the opinion that the distraint proceedings as prescribed in N. J. S. A. 2A:33-1 et seq are irrelevant to the situation here where the landlord can rely on the strength of the Loft Act provisions, N. J. S. A. 2A:44-65, by which the efficacy of his lien is assured once rent payments fall due. Gibralter v. Slapo, 23 N. J. 459 (1957); also see N. J. Pract. Vol. 22 Landlord & Tenant Sec. 1553. Hence, this decision obviates the assignee's argument that the distraint by the landlord on the goods of the assignor, if in fact valid, constituted a voidable preference pursuant to N. J. S. A. 2A:19-3. The operable date of a lien created under the authority of the Loft Act is the first date that the rent becomes overdue. As the facts here disclose, that date was well beyond the four month period preceding the date of the assignment for the benefit of creditors within which time preferential transactions are deemed to transpire, N. J. S. A. 2A:19-3.

The landlord's lien therefore will be apportioned from that amount claimed by Textile pursuant to its general secured lien. Ultimate appropriation of that amount however must be deferred until the priority of the remaining claimants is determined.

[Relative Priorities]

III. Next to be determined are the relative priorities of the landlord's claim under N. J. S. A. 2A:44-166 and the claim of the federal government for taxes owing in the amount of $40,601.34.

The United States predicates its supremacy on the basis of 31 U. S. C. A. 191. It should be noted that this statutory provision does not create a lien in favor of the government but rather such enactment establishes a general priority in insolvency proceedings in favor of the United States for debts owing the government. Beaston v. Farmers Bank of Delaware , 37 U. S. 102 (1838); H. B. Agsten & Sons, Inc. v. Huntington Trust and Savings Bank, 388 F. 2d 156 (4 Cir. 1967); U. S. v. Haddix & Sons, Inc., 252 F. Supp. 634 (E. D. Michigan 1966); Ideco Div. of Dresser Ind. v. Clarence Drilling Co. , 422 F. 2d 165 (5 Cir. 1970).

The question of whether a state-created lien has the necessary requisites to be exexempt from the terms of 31 U. S. C. A. 191 is a matter wholly within the aegis of Federal Law. U. S. v. Waddill, Holland & Flynn, Inc. [45-1 USTC ¶9126], 65 Sup. Ct. 304, 306; 323 U. S. 353 (1945).

It is now well settled that this government's priority based on the above statute can only be defeated by "choate", perfected security interests in existence prior to the time of the obligees' indebtedness to the United States . U. S. v. Guardanty Trust, 33 F. 2d 533, 537 (8 Cir. 1929) aff'd. 280 U. S. 478, 50 S. Ct. 212 (1930) and Exchange Bank and Trust Co. v. Tubbs Mfg. [57-2 USTC ¶9803], 246 F. 2d 141, 143 (5 Cir. 1957) cert. den. 335 U. S. 868, 78 S. Ct. 118 (1958).

Further elucidation of the general standards set forth in Guaranty Trust is provided in the cases of U. S. v. Bond [60-2 USTC ¶9532], 279 F. 2d 837 (4 Cir. 1960) and Illinois ex rel. Gordon v. Campbell, 329 U. S. 362, 67 S. Ct. 340 (1946). In Bond the court stated that under the "choate lien" test it is required that state-created liens be specific to the point that nothing further need be done to make the lien enforceable. In Illinois ex rel. Gordon v. Campbell , the court, by use of a tripartite formula calling for the identity of the subject asset, the lienor, and the amount of the encumbrance, added a further embellishment to the general language employed in Guaranty Trust. See also U. S. v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367 (1954).

Thus, it is incumbent upon the landlord to prove to this court that his claim asserted under the provisions of the Loft Act constitutes a lien, which under Federal Law, will render such claim superior to that of the Government's.

Instructive on this point is the case of U. S. v. Saidman [56-1 USTC ¶9322], 231 F. 2d 503 (Dist. of Col. Cir. 1956). Involved therein was a priority claim by a landlord who relied on a District of Columbia statute which granted to lessors a tacit lien which could be enforced by attachment, judgment, or by an action against the purchaser of the encumbered assets. However, the landlord never made use of this remedial aspect of the statute and was thereby constrained to rely solely on the face of the statute to create a specific and perfected lien. The court denied his claim holding that the statute did not intend to place absolute title or possession of the chattels with the landlord. Without subsequent enforcement of this statutory lien a "specific and perfected lien in the sense long understood as essential to overturn the federal priority" was not created. At p. 507.

[ New Jersey Distress Law]

Here the facts disclose that the landlord did avail himself of the distress proceedings provided by New Jersey statutory law, N. J. S. A. 2A:33-1 et seq., in an effort to enforce the lien authorized under N. J. S. A. 2A:44-166. Hence at first impression, assuming arguendo that the distraint was proper, it would appear that in accord with Saidman the requisites of title and possession of the assets found on the premises of the debtor were retained by the landlord. Yet the terms of the distress statute do not so provide. N. J. S. A. 2A:33-9 grants the debtor tenant a grace period of ten days within which time he can commence an action to regain the goods. Since the alleged distraint occurred on December 15, 1970 and the assignment took place the following day December 16, 1970 , nine days remained before the lien reached full fruition. Thus in no way can the landlord be considered to have had, at the date of the assignment for the benefit of creditors, a claim of the quality sufficient to defeat the federal priority.

The Supreme Court of the United States decided in this fashion in a case strikingly similar in its facts to the one at bar. U. S. v. Scovil [55-1 USTC ¶9137], 75 Sup. Ct. 244, 348 U. S. 218 (1955), and in an unpublished opinion the Appellate Division of our New Jersey Superior Court did likewise. (See In the Matter of the General Assignment for the Benefit of Creditors of Koelin, Ruesch & Co., Inc., decided November 19, 1962.) There being ample authority to support this result, the U. S. Gvernment's claim for taxes due shall be considered superior to the landlord's lien for rents owing. For similar reasons the claims of wage earners and the State of New Jersey shall also be subordinate to the rights of the Federal Government.

[Wage Claims]

As regards the wage claims, the case of Rob inson-Anton Textile Co. v. Embroidery Prod. Corp., 97 N. J. Super. 507 (App. Div. 1967), is dispositive. The court decided there, as we must here, that the wage claims presented under N. J. S. A. 2A:19-30 and N. J. S. A. 34:11-31-33 were not perfected in the manner nor to the degree required, as described above, by federal law. There can be no question therefore that the federal claim warrants priority.

[State's Tax Claims]

The same must hold for the State of New Jersey 's claim of $5,901.84 plus interest for business personal property taxes and for contributions owed the Division of Employment Security. These claims, priority of which are founded upon N. J. S. A. 54:49-1, were never reduced to possession by the State and are therefore ineffectual to offset the federal claim under 31 U. S. C. Sec. 191.

[Legal Fees]

IV. Given the criteria (as set forth in Point III) by which a state-created lien preempts the federal priority arising out of 31 U. S. C. 191, the question of whether the legal fees sought by the secured parties meet that standard is easily resolved. It is manifestly clear that they do not. Unlike the purchase money and general secured interests to which the respective agreements providing for attorneys' fees attached wherein the identity of the lienor, the subject property, and the amount of the lien were all certain at the time the encumbrances arose (see U. S. v. City of New Britain, supra) the provisions pertaining to the attorneys' fees cannot be defined with definiteness. This is so because the specific ultimate amounts of these claims were dependent upon future events which at the time of these claims inception were not entirely foreseeable. See U. S. v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 83 S. Ct. 1651; 374 U. S. 84 (1963). In fact, according to the terms of the agreement the amount representing each claim could not be computed until at the very earliest the date of the assignment when the final value of the liens could be ascertained. Moreover the sums certain for these claims might well have been formulated on the basis of the proofs submitted in the affidavits of services.

This court holds, therefore, that for present purposes the claims for reasonable attorneys' fees be considered distinct and apart from the security agreements from which they arose and in such posture they must be treated as inferior to the federal tax claim under 31 U. S. C. 191.

[Priority]

V. In dealing with the remaining group of claimants, i. e., the wage earners, the landlord, and the State of New Jersey , the intent of the New Jersey Legislature is determinative. Accordingly therefore, the wage claims presented herein must prevail. As provided in the Assignment Statute, N. J. S. A. 2A:19-30, wage claims "shall be preferred and shall be paid by the assignee before any other claim or debt" and pursuant to N. J. S. A. 34:11-33 wages of employees who have bestowed labor or services upon the personal property of a manufacturer shall be paid after sale of such property "to such employees in preference to any other creditors and without delay." See also N. J. S. A. 14A:21(3).

Subsequent interpretation of these provisions has left little doubt of the favored nature of wage claims. In Long v. Republic Varnish Enamel & Co., 115 N. J. Eq. 212 (E&A 1933), involving the payment of wages during the statutory preference period in accordance with Sec. 83 of the General Corporation Act, the court stated:

It has long been regarded as a proper function of the state to foster the welfare and safeguard the interests of wage-earners. Economic and other considerations underlie this long established state policy. The amelioration of the condition of labor is recognized by enlightened government as a duty of paramount importance. And this solicitude for the wage-earners is not alone for the members of the favored class, but for the common good. It is conductive, if not, indeed, essential to the well-being of society that the economic security and contentment of the class that contributes so largely to the furnishing of its material needs be effected and sedulously maintained. An enactment such as this should be construed in the light of this sound and firmly established policy. P. 215, 216.

See also Rob inson-Anton Textile v. Emb. Prod. Corp., supra.

This philosophy has been the consistent justification for the establishment of the primacy of wage claims vis a vis, landlords' liens. This policy was reiterated in Appel v. Republic Footwear & Co., 70 N. J. Super. 335 (Ch. Div. 1961) even though there the landlord who had distrained for rent under N. J. S. A. 2A:33-1 et seq. was first in point of time to the wage claimant's lien under N. J. S. A. 14:14-21. The court ruled as it did, however, because the language of the statute, to the effect that wage claimants are prior to "all other liens that can or may be acquired" had long been considered as entitling those claims to priority over the landlord. P. 339. See also Whitehead v. Whitehead Pottery Co., 115 N. J. Eq. 257 ( Ch. 1937), and Philadelphia Dairy Prod. Co., Inc. v. Summit Sweet Shops, Inc., 113 N. J. Eq. 458 ( Ch. 1933).

Furthermore the Loft Act, N. J. S. A. 2A:44-165 et seq., does not affect the priority of the wage claims. Although there is no holding addressed specifically to this point, the courts have ruled that an analogous statute, N. J. S. A. 2A:44-66 creating a mechanic's lien and embodied within the same chapter of Title 2A as the Loft Act does not upset the wage-earners preferred status. Thus, the landlord's lien involved herein should be viewed in pari materia with the mechanic's lien, to the end that the primacy of the wage claims should still be recognized. J. S. Pierson Co. v. West Orange-Verona Bldg. Co., 112 N. J. Eq. 426, 428 (Ch. 1933).

Added indicia of the legislature's intent is evidenced within the context of the Assignment Statute itself, N. J. S. A. 2A:19-1 et seq. Therein the Legislature has immediately preceded the section dealing with the landlord's lien, N. J. S. A. 2A:19-31, by that part pertinent to wage claims, N. J. S. A. 2A:19-30. Although not creating a lien, the Assignment Act does provide wage claimants with a "preferred" status payable "before any other claims or debts." Certainly meant to be included in that category must be considered those claims or debts provided for in the immediately succeeding section of the Act.

This same legislative intendment quarantees the wage-earner's priority over the State's claim for business personal property taxes under N. J. S. A. 54:11A-1 et seq. and N. J. S. A. 54:49-1. One such enactment reflecting this purpose is N. J. S. A. 54:4-106 which, while providing for the payment of municipal personal property taxes out of the first moneys received by an assignee or a receiver, explicitly declares wage liens uneffected by the terms of that section. See Spark v. La Reine Hotel Corp., 112 N. J. Eq. 398 ( Ch. 1933).

Although the tax in question here was levied on behalf of the State rather than by one of its political subdivisions, there is ample authority to the effect that both municipal and State tax claims are subordinate to liens of wage earners. Decorative Utilities v. National Motor Corp., 123 N. J. Eq. 48 ( Ch. 1938) and Lerman v. Lincoln Novelty Co., 130 N. J. Eq. 144 ( Ch. 1941).

Still remaining however is the vexing problem of whether the varying amounts identified by the wage claimants as payments by the employer for vacation pay constitute "wages fully earned, though not yet payable" within the purview of the Assignment Act, N. J. S. A. 2A:19-30. The wage claimants argue that moneys going into the special welfare benefit fund are tantamount to deferred payments earned by the employees in consideration for services rendered. Hence they contend that these amounts can in no way be considered gratuities, gifts, or even pension funds founded on policies of good will rather than on direct labor costs.

There is no doubt that if the wage claimants are correct and the vacation pay, provided for by the Collective Bargaining Agreement of July 16, 1970 entered into between the assignor corporation and Local 222 of the ILGWU is, in fact, due and owing each employee for services rendered, such funds must be considered as "wages within the contemplation of the Assignment Act. In re Wil-low Caf. 111 F. 2d 429, 432 (5 Cir. 1940); Textile Workers Union v. Paris Fabric Mills 27 N. J. Super 381, 384 (App. Div. 1952; Botony Mills Inc. v. Textile Workers Union 50 N. J. Super 18, 30 (App. Div. 1958); In re National Meat Supply Co. 66 N. J. Super 423 (Cty. Ct. 1961).

Nevertheless, neither the express terms of the relied upon Collective Bargaining Agreement nor judicial precedent pertaining to similar provisions in other collective bargaining agreements, U. S. v. Embassy Rest. Inc. [59-1 USTC ¶9297] 79 Sup. Ct. 554; 359 U. S. 29 (1959); Joint Industries Board of Election Ind. v. United States 88 Sup. Ct. 1491; 391 U. S. 224 (1968); In re National Meat Supply Co. supra, support the wage claimant's view.

The agreement effective as of July 16, 1970 served to renew the contract (hereafter referred to as the Main Agreement) which had expired on July 15, 1970 . According to the terms of said Main Agreement the employer is to pay weekly to the union a sum equivalent to 31/2% (subject to subsequent increases) of the total gross weekly payroll of all the nonsupervisory production, maintenance, packing and shipping workers employed in its shops. 2% of these payments are to be allocated towards the Health and Welfare Fund, a "trust fund" maintained by the Union for the purpose of providing workers with health, welfare, and recreation benefits. However in Sec. A, sub. sec. (a)(1) the Agreement expressly states "that none of the payments made hereunder by the employer shall constitute or be deemed wages due to the workers." In addition, the Health and Welfare Fund as described in Sec. A, sub. sec. (b) of the Main Agreement is not meant to extend to an individual worker any legal or equitable right, title or interest in, or claim against his or any other employers' payments toward the Fund or against the Fund itself. Thus, solely the Union organization as contrasted to an individual employee in his capacity as a wage earner can lay claim to the monies apportioned to the Fund. There is absolutely no provision in the contract allowing a worker on his own initiative to secure such amount due him as a consideration for his labors. Enforcement of the trust provision is the exclusive province of either the Board of Trustees of the Fund or of the Union organization.

In a federal bankruptcy proceeding the U. S. Supreme Court had occasion to rule upon the terms of a similar collective bargaining agreement which provided for a union welfare fund. The decision there was that the contributions of the employer were not entitled to priority as "wages due the workmen" under the Bankruptcy Act. U. S. v. Embassy Rest. Inc. supra. In examining the nature of the employers' payments to the fund the court took special note of the following:

They are flat sums of $8 per month for each workman. The amount is without relation to his hours, wages, or productivity. It is due the trustees, not the workman, and the latter has no legal interest in it whatever. A workman cannot even compel payments by a defaulting employer * * *. Finally, Embassy's obligation is to contribute sums to the trustees, not to its workmen: it is enforceable only by the trustees who enjoy not only sole title, but the exclusive management of the funds. P. 556.

The mechanics and incidents of that fund being virtually identical to the correlative aspects of the subject fund, I am constrained to reach the same conclusion. Moreover in the instant case the employees' representatives have all but contracted away the legal contentions proffered by the wage claimants. In contrast to other collective bargain agreement situations, In re National Meat Supply Co., supra, the employer's payments here were not characterized as "wages." To the contrary, the agreement specifically stated, as described above, that these payments were not to be construed as wages. This fact alone more than reinforces the court's decision, it requires it.

Accordingly, it is the opinion of this court that the amounts owing the employees out of the Health and Welfare Fund be deemed not to constitute "wages" within the intendment of N. J. S. A. 2A:19-30.

Conclusion

It follows from that which has been decided above that the purchase money security interests of Logan and Northern should be satisfied first and foremost. Next in terms of priority is Textile which shall recover that amount of its claim outstanding, less that portion of its lien to which the landlord has laid greater claim (See Point 2). This amount will be included in the total apportioned to the general creditors. Among this latter group the Federal Government's claim will take precedence (See Point 3) and the small balance then remaining shall be allocated first to a satisfaction of the attorneys' fees and then towards partial payment of the wage claims.

The court has considered the requests for counsel fees by the attorneys for Logan , Northern and Textile and finds that said requests are reasonable. The fees sought by Hein, Smith, Mooney and Berezin, Esqs. of $1750, Fox and Fox, Esqs., of $1340.90, and Kleinberg, Maroney, Masterson and Schachter, Esqs. $3580.50 are hereby allowed and are to be paid by the Assignee upon final accounting.

Since the claims of Logan and Northern have been paid by the Assignee pursuant to an order of this court dated June 25, 1971 an order may be submitted to remit their respective proportionate shares of the assignees' commissions and expenses. In re Xaviers, Inc., supra.

 

 

[64-2 USTC ¶9599]In the Matter of the General Assignment for the Benefit of Creditors of: Hiawatha Do It Yourself, Inc., (a Corporation of the State of New Jersey ), Assignor to Myron S. Lehman, Assignee

Morris County Court, Probate Div. N. J., F-1-2399, 2/7/64

[1954 Code Sec. 6323]

Lien for taxes: Priority as against judgment creditors: Property in possession of debtor.--The liens of judgment creditors who left the property in the hands of the debtor had priority over federal tax liens, notice of which was filed after the judgments had been executed, except as to stock in trade. State law provides that a lien will be void after one year from issuance of the writ of execution, unless sooner satisfied. When the assignee for the benefit of creditors sold the property within one year after the writs of execution were issued, the judgment creditors' liens attached to the proceeds and were not lost by reason of the fact that the assignee did not file his account until more than one year later.

Sheldon Schachter, 11 Commerce St., Newark, N. J., Kleinber, Moroney & Masterson, 1180 Raymond Blvd., Newark, N. J., for assignee. Charles M. Egan, Egan, O'Donnell, Hanley and Clifford, 10 Park Pl. , Morristown , N. J., for the judgment creditors. David M. Satz, Jr., United States Attorney, Federal Bldg., Nathan Edgar Finkel, 11 Commerce St. , Newark , N. J., for U. S.

Opinion

LONG, J. C. C.:

This matter arises from a general assignment for the benefit of creditors and involves the question of priorities as between (1) two judgment creditors who caused levies to be made on the debtor's property prior to the assignment, and (2) a tax claim of the United States of America on which a notice was filed in the Morris County Clerk's Office before the assignment but after the levies by the judgment creditors.

On July 11, 1961, the creditor Whitlock Corporation obtained a judgment in the Morris County District Court against Hiawatha Do It Yourself, Inc., in the sum of $901.65 plus costs. On July 14, 1961 execution was issued and on July 17, 1961 the Sergeant-at-Arms effected a levy on the assets of the debtor at its place of business.

On August 2, 1961 the creditor Anchor Sales Corporation obtained a judgment in the Morris County District Court against the debtor for $201.60 plus costs. On the same day execution was issued and on August 3, 1961 the Sergeant-at-Arms effected a levy on the assets of the debtor at its place of business.

At the direction of the attorney for the judgment creditors the Sergeant-at-Arms did not proceed to sale under the executions, but left the assets levied on in the custody of the debtor and it was permitted to continue in business, which necessarily included the selling of some of the stock in trade which was on hand at the time of the levies and, possibly, the replacement of some of the stock sold.

On September 6, 1961 notice of tax claim of the United States was recorded in the Morris County Clerk's Office.

[Assignment for Creditors]

The matter apparently continued in this situation until February 24, 1962 when the debtor made an assignment of its entire estate for the benefit of creditors to Myron S. Lehman as assignee. Following the assignment the attorney for the judgment creditors advised the assignee of the judgments and the levies thereunder and advised that he claimed priority as against the assignee and the rights of any other claimants. The assignee agreed that if the judgment creditors would withhold taking action on the liens which they claimed he would convey the assets of the estate into cash by public sale and would thereafter bring the matter before the Court for a determination as to the priorities. Accordingly, and in reliance thereon, the attorney for the judgment creditors took no further action with respect to the judgments and levies.

The assignee took possession of the physical assets of the debtor and on March 15, 1962 the assets were sold at public sale for a total sum of $2,413.43. On March 23, 1962 an order was entered confirming the sale and the proceeds of sale were promptly received by the assignee.

There the matter rested until July 19, 1963 when the assignee filed his final account. The claim of the United States is listed as a priority claim in the amount of $2,042.72. The account shows total receipts of $2,584.80 and a balance on hand of $1,957.56. Apparently the assignee by inadvertence overlooked his understanding with the attorney for the judgment creditors and filed his final account without either listing the judgment creditors as parties in interest or asking for an adjudication as to their claimed priorities. Upon discovery of this, the judgment creditors filed a notice of motion for a determination as to their priorities. No objection was made to the procedure and the matter was argued as between the judgment creditors and the claim of the United States . The assignee took no position.

Although the judgment creditors did not file a formal proof of claim and were not noticed as parties in interest, it appears that the present motion is an appropriate method for bringing the matter before the Court and, since there is no objection, the matter will be disposed of on the motion.

[Properties on Which Levies Were Made]

Since the validity and effect of the levies is in question the Court deemed it necessary that inquiry be made as to the nature of the levies and the property levied on. The records of the District Court disclose that on the judgment of the Whitlock Corporation a return was made to the clerk that levy was effected on July 17, 1961, and on the judgment of Anchor Sales Corporation return was made to the clerk that levy was effected on August 3, 1961. Records of the Sergeant-at-Arms indicate that on both levies he levied on the following:

1 Paint Mixing machine

1 Counter

1 Cash Register

11 Adjustable large wood cutting table saws

Paints, hardware, lumber, tools, electric and plumbing fittings and supplies, nails, screws, and all other goods and chattels used in the operation of the said business.

[Judgment Liens]

On the facts as stated, what is the status of the judgment creditors? Under New Jersey law the lien of a judgment becomes effective upon the making of a levy by the executing officer but dates back to the delivery of a writ to him. Vineland Savings and Loan v. Felmey, 12 N. J. Super. 384 (Ch. Div. 1950). If the levies made in this case were valid and effective, and remained so, the two executing creditors had judgment liens at the time of the assignment for benefit of creditors on February 24, 1962 . As to the Assignee, he is the successor to the Assignor and acquires the property subject to rights and equities which have already attached. Van Waggoner v. Moses, 26 N. J. L. 570 (E. & A. 1857).

[Tax Lien]

With respect to the position of the United States , it is granted a priority by 31 U. S. C. A. 191. The tax obligation of the assignor is a debt entitled to the priority. However, the tax is not a valid lien as against any judgment creditor until the required notice is filed. R. S. 46:16-13; 26 U. S. C. A. Sec. 6323. The priority of the United States is subject to a pre-existing valid specific item. First National Bank and Trust Co. v. MacGarvie, 22 N. J. 539 (1956); City of Richmond v. Bird, 249 U. S. 174 (1919); Regan v. Metropolitan Haulage Co., 127 N. J. EQ. 487 (Ch. Div. 1940). The first in time is the first in right. United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85 (1954). However, to obtain such superiority, the pre-existing lien must, in the language of the federal cases, have been "perfected," that is, have become choate. United States v. Scovill [55-1 USTC ¶9137], 348 U. S. 218 (1955).

The question of whether the lien has been perfected is, for priority purposes, a question of federal law. United States v. Scovill, supra; United States v. Wadill, Holland and Flinn, 323 U. S. 353 (1944). This does not mean that it can be determined only by a federal court. The case of United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963) does not so hold, and state courts have regularly exercised their authority to determine in the first instance the question of priority in regard to federal-created liens.

The question is accordingly raised of whether the judgment creditors' liens were perfected within the meaning of the federal cases. The priority of a lien created by state law depends upon the time it attaches to the property and becomes choate. United States v. Pioneer American Insurance Co., supra. As appears from that case:

"The federal rule is that liens are 'perfected in the sense that there is nothing more to be done to have a choate lien. . . . when the identity of the lienor, the property subject to the lien, and the amount of the lien are established."

The fact that the debtor, following the levy, might have satisfied the judgment and thus have redeemed his chattels does not prevent the lien from being choate. United States v. Scovill, supra, was dealing with the statutory right of a tenant to retake its property after a distraint by giving a bond, not with the mere possibility that the judgment debtor might at some time satisfy the judgment before execution sale.

[Debtor Continued in Possession]

The levies here were made before notice of the federal lien was filed. At the time of the levies the identity of the lienors, the property subject to the liens (except for the matter hereinafter discussed) and the amounts of the liens were established. Consequently, at the time of the levies the two judgment liens had been perfected. However, after both levies the judgment debtor was permitted to remain in possession of the property levied on. It is settled in this State that the judgment creditor may, without losing his lien or his priority, direct the levying officer not to proceed to sale, provided that it is done in good faith. Caldwell v. Fifield, 24 N. J. L. 150, 155 (Sup. Ct. 1853); Cumberland Bank v. Hann, 19 N. J. L. 166 (Sup. Ct. 1842); Greene v. Sahlin, 67 N. J. Super. 592 (Ch. Div. 1961). Such conduct may afford evidence of fraudulent intent, but is not necessarily fraudulent per se. Greene v. Sahlin, supra. Accordingly, the property remains in legal custody.

It would seem, however, that in the case at hand this rule would not apply to the stock in trade which is permitted to remain in the judgment debtor's possession. Since the debtor is free to deal with the stock in trade, and the levy cannot bind subsequently acquired property, the stock in trade is neither specific nor constant, and the property subject to the lien is not established. Illinois v. Campbell , 329 U. S. 362, 375 (1946). There is therefore no perfected or choate lien on the stock in trade.

This does not affect the lien on the remainder of the property levied on. In Caldwell v. Fifield, supra, the Court said at page 158:

". . . If the plaintiff in execution may lawfully levy on a part of the defendant's property, as he clearly may, why may he not, having levied upon the whole, permit the debtor to sell or dispose of part of the property levied on without rendering the levy void as to the residue? . . ."

It is concluded that within the rule of United States v. New Britain, supra, there are established in this case: (1) the identity of the lienors; (2) the amounts of the liens; and (3) the property subject to the liens, i.e., the property levied on other than the stock in trade.

[Loss of Judgment Liens]

This being so, the judgment creditors had liens on the first four items listed on the Inventory and Levy at the time the federal notice was filed and at the time of the assignment for creditors. This would give them priority unless the lien was subsequently lost. In this connection the United States relies on R. S. 2A: 18-27 which provides as follows:

"A writ of execution issued out of a county district court shall remain valid and effective for the purpose of a levy, and shall be operative and effective against any goods and chattels levied upon, for 1 year from the date of its issuance, unless sooner satisfied. Thereafter it shall be void.

The officer shall make a return to the clerk of the proceedings had by him on such writ forthwith after a satisfaction thereof, otherwise within 1 year."

It is argued for the United States that since there was no sale by the levying officer, the writs and the levies thereunder became nullities one year after their issuance and are now entitled to no consideration whatsoever.

The time element becomes important. The writs of execution were issued on July 14, 1961 and August 2, 1961 . The levies were made July 17, 1961 and August 3, 1961 . Notice of the federal lien was filed September 6, 1961 . The assignment for creditors was made February 24, 1962 . The sale by the assignee was made March 15, 1962 and was confirmed March 23, 1962 . All of these events took place before expiration of one year from the issuance of the executions. It has already been determined that the judgment creditors did not lose their lien by permitting the assets to remain in possession of the judgment debtor. Also, as against the assignee, the property remains subject to the liens which have previously attached. The assignee is the representative of all the creditors (R. S. 2A:19-14) and the agreement to permit him to sell the assets subject to a subsequent determination of the priority of the judgment creditors appear to be valid. It appears to have been for the benefit of the other creditors and there is no showing or suggestion of prejudice to them.

Pursuant to the agreement, the assignee sold the assets free from the lien of the judgment creditors on March 15, 1962 . This was less than one year from the date of the executions and the levies were still valid to the extent heretofore stated. Thereafter the judgment creditors could not proceed to sale on their executions. In this situation the liens should be transferred to the money proceeds. Crane Iron Works v. Wilkes, 64 N. J. L. 193, 195 (Sup. Ct. 1900).

It is concluded that the rights of the judgment creditors became fixed not later than the date of confirmation of the sale on March 23, 1962 . Thereafter they should not lose their rights by a failure to do something, i.e., proceed to execution sale, which they could not do by reason of a valid agreement with the assignee. The United States cannot accept the benefits of the agreement with the assignee which made the proceeds of sale a part of the estate in the hands of the assignee without accepting the burdens. The assignee cannot free the estate from the liens by simply waiting. The effect of the liens should not depend upon whether the question of their validity is presented to a court within one year or whether the assignee presents his account within that time.

It is concluded that the liens did not terminate simply because of the expiration of one year from the date of issuance of the execution.

Accordingly, it is held that Whitlock Corporation, as a judgment creditor, takes first priority to the extent of its judgment and Anchor Sales Corporation takes second priority, both prior to the claim of the United States of America . The priority is limited, however, to the proceeds of sale of the first four items levied on by Sergeant-at-Arms. The sale by the assignee was in lots but it does not appear what part of the proceeds of sale is attributable to the items levied on. If the parties in interest are unable to reach agreement on this, a date will be assigned for the submission of proofs. Since some of the matters relied upon are the results of the Court's investigation, proofs may also be submitted concerning the levies made by the Sergeant-at-Arms and on the issue whether permitting the assets to remain in possession of the debtor was fraudulent and not in good faith.

Counsel should advise the Court as to whether agreement can be reached or it is desired to take proofs.

 

 

[63-1 USTC ¶9448]Harris Equipment & Service Co., Plaintiff v. Samson Trailer Manufacturing Corp., Defendant

New Jersey District Court, Burlington County, Nocket No. 30817, 3/25/63

[1954 Code Secs. 6321-6323]

Lien for taxes: Proceeds of execution sale.--A lien for taxes attached to the proceeds of a sale of chattels held on behalf of a judgment creditor. The court overruled the argument of the judgment creditor that since the sale was subject to existing liens, the Government's remedy was against the chattels themselves in the hands of the purchaser.

William E. Reifsteck, Cobbin, Farr and Reifsteck, 636 Penn St. , Camden , N. J., for plaintiff. David M. Satz, United States Attorney, Post Office Bldg., Newark, N. J., Giacomo Rosati, Assistant United States Attorney, 143 E. State Street, Trenton, N. J., Mitchell J. Rabil of the North Carolina Bar, admitted pro hac vice, appearing for United States.

Opinion

WOOD, District Judge:

The United States assessed wage and excise taxes against Samson Trailer Manufacturing Corp., the defendant in this action (hereinafter referred to as Samson), for the years 1961 and 1962 in the total sum of $7,913.60 plus interest. Notices of lien for the taxes in question were filed with the County Clerk of Burlington County on December 22, 1961 , and March 7 and 8, June 13 and July 26, 1962 . Internal Revenue Code (1954) Sec. 6323, 26 U. S. C. A. Sec. 6323; N. J. S. 46:16-13.

Harris Equipment & Service Co., the plaintiff in this action (hereinafter referred to as Harris), recovered a judgment against the defendant Samson for the sum of $719.27 damages and costs. Judgment was entered July 24, 1962 . On August 16, 1962 , execution on said judgment was issued to Elmer Earl, Sergeant at Arms of this Court, and on August 21, 1962 , pursuant to the writ of execution, the Sergeant at Arms levied on certain goods and chattels of Samson at its place of business in Maple Shade , New Jersey . On September 18, 1962 the Sergeant at Arms gave notice of sale and on October 11, 1962 the goods and chattels were sold at public sale. The Sergeant at Arms announced that the sale was subject to existing liens and the goods were then sold and struck off to the highest bidder. The total proceeds of sale amounted to $376.

[Notice of Levy for Taxes]

Immediately upon the conclusion of the sale, a representative of the United States Internal Revenue Service served upon the Sergeant at Arms a Notice of Levy setting forth that defendant Samson was then indebted to the United States , as per schedule in said notice set forth, in the total sum of $8,250.01 and further reciting as follows:

"You are further notified that demand has been made upon the taxpayer for the amount set forth herein, and that such amount is still due, owing, and unpaid from this taxpayer, and that the lien provided for by Section 6321, Internal Revenue Code of 1954, now exists upon all property or rights to property belonging to the aforesaid taxpayer. Accordingly, you are further notified that all property, rights to property, moneys, credits and bank deposits now in your possession and belonging to this taxpayer (or with respect to which you are obligated) and all sums of money or other obligations owing from you to this taxpayer are hereby levied upon and seized for satisfaction of the aforesaid tax, together with all additions provided by law, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth herein, or for such lesser sum as you may be indebted to him, to be applied as payment on his tax liability."

At the same time the representative served on the Sergeant at Arms a document denominated a "Final Demand" for payment of said sums in his hands.

The Sergeant at Arms properly refused to release said funds pending a determination by the court as to which claimant is entitled thereto. Stebbins v. Walber, 14 N. J. L. 80 (Sup. Ct. 1833).

The plaintiff Harris now petitions this court for an Order requiring the Sergeant at Arms to pay over the proceeds of said execution sale to the plaintiff. The matter is before the Court on Order to Show cause why the Sergeant at Arms should not be ordered to pay said monies to the plaintiff in accordance with the prayer of the petition.

The United States opposes said petition and claims the fund under its Notice of Levy and Final Demand.

[ Sale Subject to Liens]

It is apparent, and is conceded by the plaintiff that the lien of the United States is prior to the plaintiff's judgment and execution. The plaintiff, nevertheless, argues that since the Sergeant at Arms announced that the goods and chattels were to be sold subject to existing liens, the plaintiff is entitled to receive the proceeds of the execution sale and the United States must pursue its remedy against the chattels themselves in the hands of the purchasers or subsequent holders thereof.

The United States, on the other hand, contends that its lien, being a prior lien on the property of the judgment debtor, attached at once the proceeds of the sale in the hands of the Sergeant at Arms, representing as it does property or the right to property belonging to the taxpayer, (Samson) within the meaning of I. R. C. Sec. 6321, 26 U. S. C. A. Sec. 6321. The United States therefore argues that it is entitled to payment of the proceeds of sale, although the sale was conducted at the instance of the judgment creditor.

Surprisingly, the precise point here at issue does not appear to have been decided by the courts.

The plaintiff cites as support for its position the cases of Mushback v. Ryerson, 11 N. J. L. 346 (Sup. Ct. 1830) and Ersa Inc. v. Dudley [56-2 USTC ¶9621], 234 F. 2d 178 (C. A. 3, 1956). In the former, the New Jersey Supreme Court upheld the amercement of a sheriff for applying the proceeds of an execution sale of real estate to the discharge of previous liens, holding that

"A sheriff must apply the money arising from a sale to the execution under which he sells. He cannot apply it to the discharge of previous liens."

In the latter case a restaurant owner owed unemployment taxes to the Commonwealth of Pennsylvania and wage and Social Security taxes to the United States . The Commonwealth issued execution and levied on the restaurant and its equipment and caused them to be sold under its execution. The State bid the property in and then sold it to Ersa Inc. Execution and sale took place subsequent to the filing of notice of the Federal lien. The Federal Court held that the Federal lien was prior and that sale of the property under the Commonwealth's lien did not destroy the Federal lien and that the subsequent purchaser acquired the property subject thereto.

The plaintiff reasons on the basis of the Ersa case, that the execution sale did not destroy the Federal lien on this personalty and that it follows that the United States must pursue its remedy against the property in the hands of the subsequent purchaser. Plaintiff argues further that the Sergeant at Arms is without any authority to pay the proceeds of the sale to anyone but the judgment creditor. Muschback v. Ryerson, supra.

For the reasons hereafter stated I am impelled to conclude otherwise.

[Effect of Execution Sale ]

The Federal lien arises by virtue of an Act of Congress under supecific grant of authority by the Constitution of the United States . The question of its relative priority is a Federal question; U. S. v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 75 S. Ct. 239 (1955). The standing of such lien may not be impaired without the consent of Congress. U. S. v. City of New Britain, Conn. [54-1 USTC ¶9191], 347 U. S. 21, 74 S. Ct. 367 (1954).

In the Ersa case, supra, the court was dealing with liens on both real and personal property and furthermore with a sale thereof made under a lien held by a state. In this instance we are dealing with personal property only, that property consisting of chattels difficult to follow and trace in the hands of subsequent purchasers. It is one thing to hold, as did the court in Ersa Inc., supra, that the property sold remains subject to the prior lien of the United States, and quite another to say that this constitutes the sole remedy and redress of the United States. The Ersa case did not go so far.

On the other hand, in U. S. v. Blackett [55-1 USTC ¶9278], 220 F. 2d 21 (C. A. 9--1955), a liquor license and a stock of liquor were sold under an execution and levy which were subsequent and subordinate to Federal tax liens. The United States brought an action in the United States District Court praying that the proceeds of the execution sale, both of the stock of liquor and also of the liquor license, be paid to the United States for credit on the delinquent taxes. The District Court ordered that the proceeds of sale of the stock of liquor be paid to the United States but that the proceeds of sale of the liquor license be paid to the judgment creditor. Interestingly, this judgment was grounded not on the theory that the government's lien could follow the license into the hands of the new purchaser but rather on the ground that the license was not subject to lien and that the sale was an "in personam supplemantary proceeding" by the judgment creditor. The court reasoned that the liquor license transfer, being subject to veto by the State under California law, the license was not "property or a right to property" under the Internal Revenue Code. The Court of Appeals reversed and held that the proceeds of the sale were payable to the United States . The Court said in part:

"It is true that the sale was precipitated by the judgment creditor, but whatever was received through the sale became the property of the vendor owner, subject, as any other property belonging to him, to valid liens thereon in the order of their priority, in this case, first the tax lien and second the judgment creditor's lien."

The above reasoning seems sound and seems also to be clearly applicable to the present case.

The Code, 26 U. S. C. A. sec. 6321, provides

"If any person liable to pay any tax neglects or refunses to pay the same 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 person."

The property sold here was the property of Samson, the taxpayer-judgment debtor. It was sold as the debtor's property. The proceeds of sale therefore belonged to the debtor, subject only to the satisfaction of valid liens. Had there been a surplus, it would obviously have been payable to the judgment debtor. Clearly then, these chattels were property to which the Federal lien attached. As Judge Parker well expressed it in U. S. v. City of Greenville [41-1 USTC ¶9381], 118 F. 2d 963, 965:

"After the lien provided by statute attaches, the property has, in a sense, two owners, the taxpayer, and, to the extent of the lien, the United States."

The court added:

"Whether viewed as an interest of the federal government in the property to which it (the tax lien) has attached or as an instrumentality of the federal government for the collection of taxes due that government, it is beyond impairment by the exercise of state power. In the first view, it must be remembered that property of the federal government may not be taxed by the states without the consent of Congress, and in the second, that Congress has the power to levy and collect taxes of the sort here involved and to make all laws necessary and proper for that purpose, and that such laws, when made, are the surpreme law of the land. Constitution Art. I, #8, Art. VI." (citing inter alia, McCulleen v. Maryland , 4 Wheat. 316, 4 L. Ed. 579.)

It follows necessarily that the lien of the of the United States may not be impaired without the consent of the United States by an execution creditor acting under color of a state law. The Federal lien stands, regardless of the state rule (assuming same to be applicable) that a sheriff or constable must apply the proceeds of an execution sale only to the execution under which he sells. Mushback v. Ryerson, supra.

The plaintiff argues that to permit the government to seize the proceeds of this sale is, in effect, to permit the government to "have its cake and eat it"--to take the proceeds of sale, but nevertheless to preserve its lien on the subject property intact so that the latter may still be seized in the hands of purchasers. This, it is argued, is unfair and inequitable. Moreover, it is argued, the sale was announced as being subject to existing liens and therefore this must have been reflected in the purchase price received. The purchaser, it is said, must have discounted the purchase price in the light of the government's lien and purchased only the "equity" of the taxpayer in the property.

I cannot agree with this conclusion. Assuming that chattels sold "subject to existing liens" might logically be supposed to bring a lower price than property sold "free of liens" it by no means follows that the government should not, in the exercise of its paramount power to collect and to protect the Federal revenue, be able to reach the proceeds of a sale such as this, even though the sale was held by the efforts and at the instance of the judgment creditor.

The Internal Revenue Code 26 U. S. C. A. sec. 6323 is liberal in granting priority to the liens of judgment creditors (among others) which are perfected prior to the liens of the United States . The guiding principle is that "first in time is first in right." U. S. v. City of New Britain, Conn., supra. But here the federal lien was unquestionably first in time and therefore first in right. Notice thereof had been duly filed in the County Clerk 's office and the plaintiff here was thus chargeable with notice thereof. It chose to levy on and hold an execution sale of the taxpayer's property in the face of this notice, and it cannot complain of the result. The sale sale was actually in derogation of the paramount rights of the United States . The judgment creditor may not, in the face of the admitted priority, deprive the United States of its continuing lien. Cf. Jones v. Mustard, 109 F. 2d 789 (Del. Super. Ct. 1954); Glass City Bank v. U. S. [45-2 USTC ¶9449], 326 U. S. 265, 66 S. Ct. 108 (1945).

At the argument on the present application, I raised the question whether the United States , having elected to proceed against the proceeds of the execution sale, might nevertheless also proceed against the subject property. However, a determination of this issue is not called for here. Suffice it to say that the government cannot, by the unilateral action of a junior judgment creditor, be compelled to pursue chattels which are mobile and very difficult of identification, into the hands of others who choose to purchase them at an execution sale. So to hold would be to place a wholly unwarranted burden on the government and to raise substantial obstacles to the efficient and effective collection of delinquent taxes, to the impairment of the Federal revenue.

The application of Harris must be denied. An Order may be submitted directing the Sergeant at Arms to pay the proceeds of the execution sale in his hands, after deduction therefrom of his proper fees and commissions, to the United States of America .

 

 

[58-2 USTC ¶9631] United States of America v. Charles B. Bleasby, Nelson F. Stamler, County of Bergen and The Board of Chosen Freeholders of the County of Bergen . Charles B. Bleasby, County of Bergen and The Board of Chosen Freeholders of the County of Bergen , Appellants

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 12,513, 257 F2d 278, 6/25/58, Reversing District Court, 57-2 USTC ¶9903, 153 F. Supp. 724

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]

Lien for taxes: Priority: Fund adjudged forfeited to state.--A judgment of a state court declaring a fund to be forfeited to the state could not be attacked collaterally in a suit by the United States to establish priority of a lien which had been filed and asserted after the fund was seized by the state but before the forfeiture proceedings had been commenced. It was therefore unnecessary to decide whether the United States can impose a lien on property after it has passed into the actual possession of another government under sovereign claim of right to keep it in furtherance of the policy of its criminal laws.

Milton T. Lasher, Administrative Bldg., Hackensack , N. J., for appellants. David O. Walter, Department of Justice, Washington 25, D. C., for appellee.

Before MARIS, KALODNER and HASTIE, Circuit Judges.

Opinion of the Court

HASTIE, Circuit Judge:

This controversy grows out of opposing claims of the United States and the County of Bergen, New Jersey, to a fund of $127,000. This large amount in currency was seized by police officers of New Jersey as contraband subject to forfeiture in a raid upon premises occupied by an alleged bookmaker in Bergen County . ¹ A few days after this state seizure the United States undertook to perfect a lien for taxes upon all property of the bookmaker and, in so doing, levied upon the aforesaid fund in the possession of the officer holding it in the name and right of the state.

Thereafter the County of Bergen proceeded in normal course as provided in New Jersey Statutes, Annotated, Section 2A:152-9, to seek and obtain in the Superior Court of New Jersey a formal decree declaring the fund forfeited to the county as property used in a criminal activity. The Supreme Court of New Jersey affirmed the order of forfeiture. State v. Link, 1954, 14 N. J. 446, 102 A. 2d 609. Thereafter, the present action was instituted by the United States against Bergen County , its Treasurer, and the state officer who had originally seized the money to establish the priority of the tax lien which the United States had filed and asserted after the confiscatory state seizure, but before the statutory forfeiture proceeding was initiated in the New Jersey court. The District Court held that the claim of the United States prevailed over the claim of the county. D. N. J. 1957, 153 Fed. Supp. 724 [57-2 USTC ¶9903]. The county has appealed.

The Supreme Court has gone very far in sustaining the priority of United States tax liens over antecedent liens under state law, where it has been possible to view the state lien as still "inchoate" when the tax lien was perfected. United States v. Acri, 1955, 348 U. S. 211 [55-1 USTC ¶9138]; United States v. Liverpool & London & Globe Ins. Co., 1955, 348 U. S. 215 [55-1 USTC ¶9136]; United States v. White Bear Brewing Co., 1956, 350 U. S. 1010 [56-1 USTC ¶9440], reversing per curiam 7th Cir. 227 F. 2d 359; United States v. Security Trust & Savings Bank, 1950, 340 U. S. 47 [50-2 USTC ¶9492]. However, this case presents the special and unusual situation of the United States attempting to attach a tax lien to property actually in possession of the state after its seizure as contraband subject to forfeiture to the state. True, after seizure it still remained for the state to pursue the prescribed procedure for obtaining a formal decree of forfeiture. But this does not alter the fact that the United States has tried to impose a lien on property after it has passed into the actual possession of another government under sovereign claim of right to keep it in furtherance of the policy of its criminal laws. Thus, the United States is asserting an extraordinary power greater than and different from that involved in the cases above cited or any others upon which the United States relies. But we do not have to resolve the very real difficulties which this question presents, because this case can, and we think should, be decided on another ground.

In the circumstances here the judgment of forfeiture bars the United States from challenging the title of Bergen County . The controlling principle is that stated in the RESTATEMENT, JUDGMENTS, §2, comment a:

"A valid judgment in rem cannot be collaterally attacked. It is in accordance with public policy that when the rights have once been finally determined, the question of the existence of the rights cannot be again litigated. It is in the interest of the successful party and of the public that the matter should be finally determined in the proceeding in which it is decided. It is immaterial that the decision was erroneous on the facts or on the law; and it is immaterial whether the persons whose rights in the thing were affected did or did not avail themselves of an opportunity to object to the judgment."

A more detailed examination of the forfeiture proceeding in the state court will demonstrate the applicability of this principle.

The Treasurer of Bergen County brought the forfeiture suit in accordance with state law in the Superior Court of Bergen County where the res was situated. Asserting his official custody of the $127,000 and the existence of adverse claims by the gambler from whom it had been taken, by the United States and by others, the Treasurer asked that the court decree the forfeiture of the money "to the sole use and gain of the County of Bergen ." Notice and instruction to show cause why this forfeiture should not be ordered as prayed was served upon the several claimants, including the Director of Internal Revenue, as representative of the United States . The United States then contented itself with a filing denying the authority of the court to adjudicate its rights. It did not elect to participate in the trial of the merits of the claim, although it was not dismissed from the proceeding. After hearing the parties who elected to contest the county's claim, the court issued a final order, which is not part of the record in the present case, but which we judicially notice. That judgment recites, among other things, the service of a rule to show cause upon the Director of Internal Revenue and his refusal to recognize the jurisdiction of the court. It also recites the presence of an Assistant United States Attorney at the settlement of the form of judgment. In its operative provisions the judgment reads as follows:

". . . ORDERED and ADJUDGED that the sum of $127,000.00 in currency presently held by the County Treasurer of Bergen County by virtue of the seizure aforesaid, be and the same is hereby forfeited to the sole use and gain of the County of Bergen as contraband of law as part of the gambling operations of the defendant, Leo Link."

Certain private claimants appealed and this judgment of forfeiture was in due course affirmed by the Supreme Court of New Jersey in State v. Link, supra.

Thus, it appears that the State court undertook comprehensively to adjudicate title to property in State custody. The property was physically and legally within the jurisdiction of the court. Forfeiture actions of this kind are normally and properly viewed as actions in rem. RESTATEMENT, JUDGMENTS, §32, comment a. In such a proceeding it is up to all claimants who received proper notice to choose at their peril between pressing their claims or permitting the matter to go by default.

[Jurisdiction of State Court]

As claimant of an interest in a fund thus properly before a state court for disposition, the United States stood in no different position than any other interested party. This point is authoritatively decided in United States v. Bank of New York and Trust Co., 1936, 296 U. S. 463. In that federal suit the United States, believing it was entitled to a fund being admin istered by a state court, sought "to take the property . . . from the control of the state court, and to vest the property in the United States to the exclusion of all those whose claims are being adjudicated in the state proceedings." 296 U. S. at 478. In disposing of the objection of the United States to having its rights adjudicated against its wishes in the state proceeding, the Court had this to say:

"The fact that the complainant in these suits is the United States does not justify a departure from the rule which would otherwise be applicable. . . . The Government insists that the United States is entitled to have its claim determined in its own courts. But the grant of jurisdiction to the District Court in suits brought by the United States does not purport to confer exclusive jurisdiction. . . . Upon the state courts, equally with the courts of the Union, rests the obligation to guard and enforce every right secured by the Constitution and laws of the United States whenever those rights are involved in any suit or proceedings before them. . . . In this instance it cannot be doubted that the United States is free to invoke the jurisdiction of the state court for the determination of its claim, and the decision of the state court of any federal question which may be presented upon such an invocation, may be reviewed by this Court and thus all the questions which the Government seeks to raise in these suits may be appropriately and finally decided." 296 U. S. at 479.

In brief, the United States , as claimant of a tax lien on a fund, has had formal notice of a proceeding in a court with jurisdiction over that fund, to determine title to the res. Indeed, the United States was admonished to show cause why the fund should not be forfeited to the state. And, it is familiar and normal procedure for the United States to undertake to vindicate its tax liens in suits instituted in state courts by some other claimants of rights in the property. E.g. United States v. City of New Britain , 1954, 347 U. S. 81 [54-1 USTC ¶9191]; United States v. Vorreiter, 1957, 355 U. S. 15 [57-2 USTC ¶9956]; United States v. Colotta, 1955, 350 U. S. 808 [55-2 USTC ¶9680]. Here, for whatever reason, the United States has thought that it could safely disregard this state proceeding and the resultant judgment in rem establishing title to the fund. But this is a mistaken idea. The full and unqualified ownership of the fund by Bergen County has been duly determined and judicially decreed. The United States , like any other litigant, must respect the binding force of this judgment in rem by a court with jurisdiction over the res.

The judgment will be reversed.

¹ The pertinent New Jersey statute provides that "any money . . . seized . . . in connection with any arrest for violation of . . . any gambling law . . . shall be deemed prima facie to be contraband of law as . . . part of a gambling operation. . . ." N. J. S. A. 2A:152-7. Provision is also made for subsequent judicial proceedings for final disposition of the money. N. J. S. A. 2A:152-9, 10.