A. McGrath, Frances Y. McGrath, Petitioners-Appellants v. Commissioner
of Internal Revenue, Respondent-Appellee.
Court of Appeals, 5th Circuit; 03-60273,
September 9, 2003
Unpublished opinion affirming, per curiam, a Tax Court decision, Dec.
54,873(M), 84 TCM 310, TC Memo. 2002-231.
Secs. 162, 167,
Business expenses: Election to expense depreciable property: Capital
expenditures: Construction costs: Leased property: Improvements by
The Tax Court
properly concluded that a lessee of commercial property was not entitled
to a business expense deduction claimed in connection with improvements
that were made to a lessor's property in order for the taxpayers to
occupy the space. The Appeals court concluded that the deduction of the
costs were not allowable as "other payments" under Code
Sec. 162(a)(3), because the taxpayers' costs did not include capital
improvements made to the lessor's property. The taxpayers were, however,
entitled to depreciation deductions for the cost of improvements until
the point that their lease terminated.
Before: Barksdale, Garza and Dennis, Circuit Judges.
Caution: The court has designated this opinion as NOT FOR PUBLICATION.
Consult the Rules of the Court before citing this case.®
PER CURIAM: *
Petitioners challenge, pro se, the Tax Court decision that certain
expenses, characterized as capital improvements, were not wholly
deductible in 1995. That year, pursuant to leasing commercial space,
Petitioners were required by the lease to make substantial and quite
fundamental permanent improvements to the leasehold in order to, inter
alia, be able to occupy it. The improvements, completed in 1995, cost
more than $111,000. Concomitantly, the lease called for Petitioners to
receive a six-month rent reduction, valued at approximately $18,000.
Petitioners deducted the entire cost of the improvements on their 1995
tax return. The lease was terminated in 1997.
The IRS agrees that the portion of the expenses corresponding to the
rent reduction was deductible in 1995. At issue is whether the remaining
$92,000 was deductible then, or whether Petitioners could only take
depreciation deductions until the lease's termination in 1997.
Generally, lessees must depreciate improvements they make to the
leasehold. See 26 C.F.R. §§1.162-11(b)
Petitioners contend, however, the improvements were deductible as
payments required to be made as a condition to the continued use or
possession, for purposes of the trade or business, of property to which
the taxpayer has not taken or is not taking title or in which he has no
§162(a)(3) (emphasis added).
We review such contentions de novo. E.g., Byram v. United
States [ 83-1
USTC ¶9381], 705 F.2d 1418, 1421-23 (5th Cir. 1983). "Other
payments" do not include capital improvements a lessee makes to a
lessor's property. Duffy v. Central R.R. Co. [1 USTC ¶127], 268
U.S. 55, 64 (1925); McGrath v. Comm'r of Internal Revenue [ CCH
Dec. 54,837(M)], 84 T.C.M. (CCH) 310 (2002).
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion
should not be published and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
¶50,168] Titan Indemnity Company, Plaintiff-Appellant v. The Triborough
Bridge and Tunnel Authority, Inc., Quadrozzi Equipment Leasing Corp.,
Quadrozzi Concrete Corp. and Helen Carr Corp., Defendants, Internal
Revenue Service and NYS Dept. of Labor, Defendants-Appellees
U.S. Court of Appeals, 2nd Circuit, 96-6299, 1/26/98, 135 F3d 831,
Affirming an unreported District Court decision
Lien for taxes: State lien law: Funds held in trust: Priority: Claim
of surety.--A surety company's claim did not have priority, ahead of
several other parties including the IRS, with regard to funds withheld
from a contractor following its default on a public improvement
contract. The funds were held in trust under state (
) lien law, which determined the order of priority. The IRS claim for
income and FICA taxes was entitled to first priority after deduction of
a state claim for back wages that had been withheld from the contractor
pursuant to notice before default occurred. The unsupported argument
that state lien law accorded first priority status only to state claims,
not federal tax claims, was rejected.
Connelly, Kroll & Tract,
520 Madison Ave.
, for plaintiff-appellant. Jeffrey S. Oestericher, United States
Attorney's Office, New York, N.Y. 10007, Patricia Smith, Department of
Labor, New York, N.Y. 10271, for defendants-appellees.
and MCLAUGHLIN, Circuit Judges, and TRAGER, District Judge. *
Indemnity Company appeals from a judgment of the United States District
Court for the Southern District of New York (McKenna, J.)
determining competing claims to the proceeds of a public improvement
contract. We reject all of Titan's arguments, and affirm the district
October 26, 1990
, D.H. Farney Contractors, Inc. ("Farney") entered into a
contract with the
and Tunnel Authority ("TBTA") to repair both the
("TBTA Project"). The contract required Farney to get
performance and payment bonds from a surety company. Accordingly, Titan
Indemnity Company ("Titan"), a
corporation licensed to write surety bonds in
, issued the customary performance bond and a labor and material payment
bond on behalf of Farney. On or about
November 15, 1990
, Farney commenced work.
In the fall of
1991, Farney stopped working on the TBTA project; and sometime
thereafter Farney was declared in default of its contract obligations.
At this time, TBTA held a fund of $97,601.88 that it admittedly owed
Farney for its work ("Contract Fund").
Fund lies at the vortex of this litigation. TBTA withheld $91,153.90
pursuant to liens, levies, and restraining orders, including $21,495.65
withheld pursuant to a "notice to withhold" from the New York
Department of Labor (NYDOL). The remaining $6,447.98 was withheld as
"contract retainage," that is, money withheld from each
contract payment as security for future performance.
TBTA demanded that Titan complete the project. Titan and TBTA entered
into a completion agreement, whereby Titan hired another company as a
completion contractor to finish the job. The repairs were then
completed, and on
June 8, 1994
, the TBTA issued its final certificate of completion.
All the while,
the TBTA continued to hold the $97,601.88 Contract Fund. Five creditors
made claim to this money--(1) the IRS demanded $16,721.39 for income and
FICA taxes that had been withheld on behalf of Farney employees who had
worked on the project; (2) the New York State Department of Labor
(NYDOL) had issued a notice to withhold $48,450, pursuant to §220-b of
New York Labor Law, which represented its estimate of Farney's
liability, including wages, interest, and penalties for failure to pay
two of its employees the prevailing wage rate under New York law; (3)
Quadrozzi Concrete Corp. and Quadrozzi Equipment Leasing Corp.
("Quadrozzi") sought $3,458.30 for concrete and other
materials provided to Farney for the TBTA project; (4) Helen Carr
Construction Corp. asserted a claim arising from an unrelated judgment
against Farney on another project; and (5) Titan, the surety, claimed
the lion's share including $90,350, the amount it had to pay to complete
the project, giving TBTA appropriate credit for the amounts TBTA had
already paid Titan.
In March 1994,
Titan sued in the Supreme Court of the State of
seeking a determination of the parties' rights in, and distribution of,
the Contract Fund. The TBTA filed an answer and an interpleader claim
admitting that it had the Contract Fund and seeking to deposit it with
the court pending adjudication of the parties' claims. As a
disinterested stakeholder, the TBTA made no claim to the Contract Fund.
removed the action to the United States District Court for the Southern
District of New York (McKenna, J.) and all the parties moved for
summary judgment. Granting some of the motions and denying others, the
district court made the pivotal ruling that the Contract Fund was a
trust fund under section 70 of Article 3-A of the New York Lien Law
("3-A trust fund"). As such, said the court, the order of
priority for claims against the fund is set forth in Lien Law, Article
3-A, section 77. Accordingly, the court determined that the IRS' claim
for taxes arising from the TBTA project received first priority.
While no one
disputes that the Contract Fund is an Article 3-A trust fund, it is not
as simple as all that. As the district court noted,
has introduced into the calculus the paradoxical notion of
"super-priority," which means that certain claims jump to the
head of the line and are deducted from the Fund before the
priority of the other liens is even evaluated. The district court
determined that under
law some of NYDOL's claims earned "super-priority" status and,
consequently, were deducted from the $97,601.88 Contract Fund before the
other creditors even lined up.
ultimately consisted of three parts: (1) $22,931.50 in back wages owed
because Farney failed to pay an employee the prevailing wage rate under
law; (2) $9,174.22 in interest due on those back wages; and (3) a 25%
penalty assessed for Farney's failure to pay the prevailing wage rate.
The district court ruled that the wages owed and actually withheld by
TBTA pursuant to NYDOL's withholding notice "are properly deducted
from the funds retained by the [TBTA] before they form the corpus of
[the] 3-A trust." Those wage funds, the district court determined,
were entitled to a "super-priority" under section 220-b of the
New York Labor. Accordingly, because the money TBTA actually withheld
pursuant to NYDOL's withholding notice amounted to $21,495.65, the
district court granted NYDOL a "super-priority" for that sum.
of NYDOL's claim--$10,610.67 in remaining back wages and interest, and
the 25% penalty--was determined not to enjoy this
"super-priority." Rather, the court determined that the
remaining back wages and interest constituted an Article 3-A trust claim
entitled to second priority after the IRS's tax claim. NYDOL's 25%
penalty claim was not considered an Article 3-A trust claim at all.
claim for payment for materials was treated as an Article 3-A trust
claim and awarded third priority. All the remaining funds were awarded
to Titan as surety.
The claims of
Helen Carr Corp. and the penalty portion of the NYDOL's claim were
granted nothing, the court concluding that those claims did not
constitute trust beneficiary claims under Article 3-A of the New York
Lien Law. The district court determined that NYDOL, insofar as its claim
for the penalty, and Helen Carr would have to pursue their claims
against Farney independently of this action.
therefore was the ultimate priority and distribution fixed by the
A. $21,495.65 NYDOL super-priority (money withheld pursuant to
* * * * *
1. $16,721.39 IRS
2. $10,610.07 NYDOL (remainder of back wages and interest claim
covered by money withheld)
3. $ 3,458.30 Quadrozzi
4. $45,316.47 Titan (remainder after above claims satisfied)
arguing that the district court erred: (1) by according priority to the
trust fund beneficiaries over Titan's suretyship claim; (2) by according
NYDOL's claim priority over Titan's claim; (3) by finding that New York
Lien Law, rather than the parties' agreement, established the priority
of claims; and (4) by applying state rather than federal law in
determining the IRS's rights.
Titan's Claim v. Article 3-A Trust Fund Beneficiaries
maintains that the district court erred when it determined that Titan's
claim as a completing surety was inferior to Article 3-A trust claims.
Titan argues that its claim to the Contract Fund is superior to 3-A
trust claims, a priority it earned when it became equitably subrogated
to the rights of both Farney and TBTA in the Contract Fund.
of New York Lien Law states that funds "received by a contractor
under or in connection with a contract for . . . a public improvement in
this state, . . . and any right of action for any such funds due or
earned or to become due or earned, shall constitute assets of a
trust." N.Y. Lien Law §70(1). It is undisputed that the proceeds
of the contract at issue are trust funds under Section 70 of the New
York Lien Law.
That said, the
next inquiry is the order of priority. The priority of claimholders is
established by section 77 of the Lien Law. First priority is
given to claims for taxes and for unemployment insurance and other
contributions due by reason of employment. N.Y. Lien Law §77(8)(A).
priority is given to trust claims of laborers for daily or weekly wages.
priority is given to trust claims of laborers for benefits or wage
priority is given to certain claims to a laborer's wages made by third
trust claims are distributed pro rata. §77(8).
misunderstands its rights under
law. Generally in a public improvement contract, the contractor is
required to find a surety that will secure the performance of his
contract. Upon default by the contractor, the surety, pursuant to a
performance bond, completes the contract, at its own cost and expense.
It then becomes equitably subrogated to the rights of the contractor and
certain of the rights of the owner in the unpaid balance of the contract
price. See Tri-City Electric Co., Inc. v. New York, 96 A.D.2d
146, 149 (N.Y. App. Div. 1983); Scarsdale Nat'l Bank & Trust Co.
v. United States Fidelity & Guaranty Co., 190 N.E. 330 (N.Y.
1934). Under a performance bond, a completing surety becomes entitled to
the money still owed by the owner to the defaulting contractor, but only
after the claims of all 3-A trust fund beneficiaries are first
satisfied. Tri-City Electric Co., Inc., 96 A.D.2d at 149. It is
perfectly clear that the rights of a surety in the trust proceeds do not
trump those of the Article 3-A trust fund beneficiaries.
great faith in Scarsdale Nat'l Bank & Trust Co. v. United States
Fidelity & Guaranty Co., 190 N.E. 330 (N.Y. 1934), to
demonstrate that its claim should have taken priority over the claims of
the 3-A trust beneficiaries. Titan argues that, like the surety in
, it was entitled to the entire amount of the Contract Fund. Titan's
faith is misplaced.
dealt with a priority fight between an assignee of a defaulting
contractor and a completing surety. There were no trust beneficiaries.
held that the assignee was entitled only to whatever rights the
assignor, the defaulting contractor, had. The surety, having completed
the duties the contractor owed to the property owner, became subrogated
to the rights of the owner as against the contractor; and because the
surety completed the project it had a claim to withheld money superior
to the defaulting contractor. A fortiori, the surety also had priority
over the claim of a mere assignee of the contractor.
and its progeny stand for the unremarkable proposition that an assignee
stands in the shoes of his assignor when it comes to awarding
priorities. The district court's decision is in complete accord with
. After the claims of all the designated Article 3-A trust
beneficiaries were paid, Titan was awarded the remainder (almost 50%) of
the Contract Fund over the claims of Farney's judgment creditor. It is
entitled to no more.
Titan's Claim v. NYDOL's Claim
maintains that the district court erred by giving the New York
Department of Labor's claim under section 220-b of New York Labor Law
priority over its claim.
New York Labor
Law §220, known as the "prevailing wage law," requires that
all employees on public work projects be paid the prevailing rate of
wages and supplements for the locality in which the project is located.
N.Y. Labor Law §220. Whenever the Commissioner of Labor determines that
there are unpaid wages or supplements due under a contract that is
subject to the
prevailing wage law, the Commissioner must notify the concerned public
agency to withhold from money due the contractor a sufficient sum to
satisfy the law. 220-b(2)(A).
In the fall of
1991, NYDOL determined that Farney had failed to pay prevailing wages
and supplements to two employees. Following §220-b, NYDOL issued a
notice to TBTA to withhold $48,450.00 from payments due Farney,
representing NYDOL's estimate of underpayments, interest and a possible
penalty. At the time of Farney's default, the TBTA had actually withheld
$21,495.65 from Farney pursuant to this notice.
that the $21,495.65 should not have been awarded to NYDOL because Farney
had already defaulted before NYDOL sent the notice to TBTA to withhold
payment to Farney. Titan argues that, once Farney had defaulted, Farney
was no longer owed any money; and therefore, no money could properly be
withheld pursuant to section 220-b. This argument will not detain us
long, because we do not agree that Farney was already in default when
TBTA received NYDOL's notice.
1995, the Internal Revenue Service submitted a Rule 3(g) Statement
setting forth the facts as to which the IRS believed there was no
genuine issue. In paragraph 8 of the 3(g) Statement, the IRS asserted
that "[a]t the time of Farney's default, the TBTA was holding
$97,601.88 . . . which Farney had earned, but had not been paid under
the Contract." Titan took no exception to this assertion. Because
it is undisputed that the $21,495.65 withheld pursuant to NYDOL's notice
is part of the $97,601.88 TBTA already held at the time of Farney's
default, the IRS's statement obviously means that the $21,495.65 was
held by TBTA at the time of default. Because this money was withheld
pursuant to NYDOL's notice, the notice must have been received by TBTA
prior to Farney's default.
It is well
established that if a party fails to object or respond to the factual
assertions in an opposing party's 3(g) Statement, those factual
assertions will be deemed true. See Champion v. Artuz, 76 F.3d
483, 486 (2d Cir. 1996) (per curiam). This Court has recently cautioned
that it will not accept the "tactic of contending on appeal that
summary judgment was inappropriate on the ground that there were issues
of fact to be tried after [a party] had declined to dispute the
government's Rule 3(g) Statement."
v. All Right, Title and Interest in Real Property and Appurtenances,
77 F.3d 648, 658 (2d Cir.), cert. denied, 117 S. Ct. 67 (1996).
Because Titan did not object to the IRS's implicit statement that Farney
was not yet in default when TBTA received NYDOL's notice to withhold, we
will not entertain an argument that now contradicts an undisputed 3(g)
Titan makes a
last ditch effort (in its reply brief) to call into question the
granting of "super-priority" to a claim under Labor Law §220-b,
noting that "super-priority" status has to date been granted
only to a perfected mechanic's lien. Titan contends that, because a
labor lien under §220-b is not the equivalent of a mechanic's lien, it
was inappropriate to grant NYDOL's labor lien "super-priority"
status. The core of Titan's argument is that giving any recognition at
all to NYDOL's claim under §220-b was improper because Farney was
already in default when Titan received NYDOL's notice. We have earlier
rejected this argument, supra. Because we find that no substantial issue
has been raised regarding the granting of "super-priority"
status to §220-b claims we will leave resolution of that unbriefed
issue to a more appropriate time.
Lien Law v. the Parties' Surety Agreement
that the district court erred when it determined that the priority of
claims was governed by New York Lien Law rather than by the parties'
New York Lien
Law specifically establishes the priority of claims to funds received in
connection with a public improvement contract. N.Y. Lien Law §77(8).
Nowhere in Article 3-A of the New York Lien Law does it provide that the
priority of claims prescribed therein is to apply only when the parties
have not otherwise agreed. The purpose of Article 3-A is to safeguard
the rights of those working on construction projects by providing for
the payment of obligations incurred in performing the contract.
Sys., Inc. v. Rende, 635 N.Y.S.2d 694, 695-96 (2d
); Ingalls Iron Works Co. v. Fehlhaber Corp., 337 F. Supp. 1085
(S.D.N.Y. 1972). The statute would be disemboweled if the parties to a
construction contract could provide that one of them is to receive
contract funds ahead of other workers and creditors protected by the
that the trust beneficiaries' claims are valid under New York Lien Law,
but Titan claims it should have received the money first and then been
allowed to settle the trust beneficiaries' claims itself. Such an
arrangement would leave the trust beneficiaries at the mercy of Titan
and therefore, obviously defeat the salutary purpose of Article 3-A.
Federal Law v. State Law
maintains that the district court erred when it determined the priority
of the IRS's tax claim under New York Lien Law rather than federal law.
Section 70 of
the New York Lien Law provides for the creation and enforcement of
statutory trusts out of the funds earned by a contractor working on a
public improvement of real property. The purpose of the trust fund is to
provide for the payment of obligations incurred in performing the
contract, including tax obligations. See Flintkote Co. v. United
States [69-1 USTC ¶9242], 47 F.R.D. 322, 325 (S.D.N.Y. 1969), aff'd
[71-1 USTC ¶9184], 435 F.2d 556 (2d Cir. 1971).
arising from the performance of a public improvement contract are
expressly granted first priority. N.Y. Lien Law §77(8)(A); see also
Onondaga Commercial Dry Wall Corp. v. 150 Clinton Street, Inc., 25
N.Y.2d 106, 110 (1969). These tax claims have often included claims for
federal taxes as well as state and local taxes. See General
Fire-Proof Door Corp. v. Citibank, N.A., 544 F. Supp. 191 (S.D.N.Y.
1982); Marv Laxer Associates, Inc. v. Moredall Realty Corp., 533
F. Supp. 8 (S.D.N.Y. 1981).
Titan makes a
novel and unsupported argument that the provision of Article 3-A
granting tax claims first priority applies only to state and local
taxes, asserting that federal tax claims are governed solely by federal
law. Titan misunderstands the law governing the priority of federal tax
It is true
that, as a general rule, the priority of competing liens against a
taxpayer's property, including tax liens, is governed by federal law. See
Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509 (1960).
But in Aquilino, the Supreme Court held that it is state law that
determines the nature of the interest each claimant has in disputed
at 515. For example, it is state law that determines whether a claim is
recognized as an ordinary lien or accorded trust claim status.
that determines what interest competing claimants have in the proceeds
of a public improvement contract.
has spoken clearly on this issue in Article 3-A, directing that the
proceeds of a public improvement contract constitute a trust for certain
has determined that the most important of those claimants, and those
receiving first priority are those asserting tax claims. There is
nothing in Article 3-A or elsewhere that indicates that
chose to limit that priority to only certain types of tax claims. Absent
convincing proof to the contrary, we see no reason to narrow the plain
language of Article 3-A to deny the IRS its claim under New York Lien
considered all of Titan's additional arguments and find them to be
the judgment of the district court is affirmed.
The Honorable David G. Trager of the United States District Court for
the Eastern District of New York, sitting by designation.
United States of America
, Plaintiff v. James J. Hage, The
, Children's Hospital and
and Dorothy Ratcliffe, Defendants
S. District Court, No. Dist. N. Y., 75-CV-109, 417 FSupp 74, 5/14/76
[Code Sec. 6321]
Taxes: Lien for taxes: Hospital's prior lien: Priority.--A
hospital's lien was sufficiently choate to be entitled to priority over
a federal tax lien because it was specific and perfected prior to the
time the federal lien attached. The identity of the lienor hospital, the
property subject to the lien (the proceeds of a lawsuit for personal
injuries) and the amount of the lien were all established more than one
year prior to the time the tax lien first came into existence.
Sullivan, Jr., United States Attorney,
, N. Y., Gustave DiBianco, for plaintiff. James J. Hage, pro se, 1129
First National Bank Bldg., Utica, N. Y., Lockwood and Lockwood, 285
Genesee St., Utica, N. Y., for defendants.
District Judge: *
By this action
March 3, 1975
United States of America
sought to assert priority of and foreclose various federal tax liens
upon a fund then held by defendant James J. Hage, an attorney. The fund
arose out of the settlement of a state court action for personal
injuries brought by Mr. Hage for his client, Dorothy Ratcliffe, the
taxpayer-debtor, against the Rockford Auto Service Company, based on
claims of negligence.
This Court has
subject matter jurisdiction pursuant to 26
C. §7402 and 28 U. S. C. §§ 1340 and 1345. The case was tried without
a jury on
March 25, 1976
has been narrowed down to two parties, plaintiff and defendant The
Faxton Hospital. Priority of lien is the sole issue.
December 12, 1975
, the Clerk of the Court noted the default of defendants Dorothy
Ratcliffe and The Children's Hospital and Rehabilitation Center of
Utica, for failing to answer or otherwise plead to the complaint. By a
January 12, 1976
, the original fund of $7,000.00 had been reduced to $4,616.67 and
accrued interest, if any. The remaining parties consented to the payment
of $2,383.33 to Mr. Hage to satisfy his prior lien for legal services
and disbursements in connection with the personal injury action.
Pursuant to this stipulation, Mr. Hage deposited the balance of
$4,616.67 with the Clerk of the Court and was dismissed from the action.
Plaintiff claims taxes, interest and penalties totalling $6,455.77,
which exceed the balance in the fund.
claims a lien on the fund pursuant to New York Lien Law, §189, which,
it contends, is entitled to priority over the tax lien of the
New York Lien
Law §189 provides in relevant part that a hospital shall
". . .
have a lien upon any and all rights of action, suits, claims,
counterclaims or demands, of any nature whatsoever, of any person
receiving emergency treatment or admitted to any such hospital and
receiving treatment, care and maintenance therein, on account of any
personal injuries received within a period of one week prior to
receiving emergency treatment or admission to the hospital and as the
result of the negligence . . . of any other person or persons or
corporation, which any such injured person, . . . may or shall have,
assert or maintain against any such other person or corporation for
damages on account of such injuries, for the amount of the reasonable
charges of such hospital, for the treatment, care and maintenance of
such injured person at cost rates in such hospital."
Ratcliffe was injured in an auto accident on
December 6, 1971
, and admitted to The Faxton Hospital on the same day to be treated for
those injuries. She was discharged from the hospital on
January 7, 1972
, owing $1,750.65 for the treatment she had received. On
February 24, 1972
she was readmitted and then finally discharged on
March 1, 1972
, owing an additional $471.65.
July 26, 1972
The Faxton Hospital filed a Notice of Lien against Dorothy Ratcliffe
, in the amount of $1,750.65. On
October 25, 1972
, it filed an additional Notice of Lien for $471.65. Thus the total
amount of the liens which the hospital claims against the fund is
$2,222.30. Plaintiff conceded on the trial before me that this amount
represents a reasonable charge for the treatment provided to Dorothy
On April 11,
12 and 13, 1973 the
filed tax liens in the proper state offices against Dorothy Ratcliffe
d/b/a Ratcliffe Rest Home, for unpaid withholding, social security and
unemployment taxes. Pursuant to 26
C. §6321, plaintiff acquired a lien ". . . upon all property and
rights to property, whether real or personal" belonging to the
taxpayer-debtor, except for special situations not relevant here. Liens
imposed by §6321 arise at the time the assessment is made, 26
C. §§ 6322, 6323. Government Exhibits 5 through 8 reveal that the two
assessments involved here were made on
March 29, 1973
April 10, 1973
, after the hospital liens had been filed.
principles established in United States v. City of New Britain
[54-1 USTC ¶9191], 347
81, 84 (1954), and reaffirmed in United States v. Pioneer American
Ins. Co. [63-2 USTC ¶9532], 374
84 (1963) and in
v. Equitable Life Assur. Soc. of the U. S. [66-1 USTC ¶9444],
323 (1966), as against a filed federal tax lien, the relative priority
of a perfected state lien is determined by the traditional rule
"first in time is first in right." The federal statutes cited
do not purport to give priority in all cases to liens created under the
paramount authority of the
. Where the lien created by state law is both specific, i. e., where it
attaches to specific property, and 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" prior to the date that the federal tax
lien arises, the state lien has priority. United States v. City of
New Britain, supra at p. 84.
In this case
it is clear that the hospital's lien is specific, since it attached to a
specific fund, i. e., the proceeds of the settlement of the negligence
action for personal injuries brought against Rockford Auto Service Co.
by Dorothy Ratcliffe. N. Y. Lien Law §189(2)(a)(ii). Furthermore, the
hospital's lien was also perfected prior to the time the federal liens
attached. Nothing more needed to be done to perfect it. Neither the
tortfeasor nor attorney Hage could have compromised or collected the
claim in derogation of the hospital's rights.
lien was sufficiently choate to be entitled to priority over the federal
tax lien, since it satisfied all three requirements of the test laid
down in City of
, supra. The identity of the lienor (The Faxton Hospital), the
property subject to the lien (the proceeds of the lawsuit against
Rockford Auto Service Co.), and the amount of the lien ($2,222.30), were
all established by
October 25, 1972
. The Government's own evidence shows that the federal tax lien did not
attach until the assessments were made in March and April of 1973.
Government's reliance on In re Walton's Estate, 20 A. D. 2d 386,
247 N. Y. S. 2d 21 (1st
), is misplaced. In that case the
made an assessment for unpaid income taxes on
July 6, 1956
and filed its notice of lien on
March 4, 1958
. Walton, the taxpayer-debtor, did not enter the hospital until
March 20, 1958
. The Court held that the pre-existing tax lien of the
had attached to Walton's right to action as soon as it arose and was
thus senior to the hospital's lien, since the latter could not have
arisen until later, when Walton had been admitted to the hospital and
some services rendered.
distinction between that case and the one presently before the Court is
that here the cause of action arose and the taxpayer received hospital
care over one year prior to the time that the tax lien first came into
existence. The facts are thus precisely the opposite of the situation in
Walton, and applying the exact same legal principle of first in
time, first in right, this Court reaches the opposite result, and finds
the hospital lien senior to the tax lien.
States also seeks to rely upon the hospital's admission that it has
taken no action to enforce its lien in any court of record pursuant to
N. Y. Lien Law §189(10). There are two difficulties with this position.
First, subsection 10 states only that the lien may be enforced
and not that it must be enforced. Under state law, the enforcement of a
lien is an entirely separate quesfrom perfection, and the failure to
enforce a lien by turning it into a judgment does not make that lien any
less perfected. As a practical matter, nothing need be done by the
hospital, since a tortfeasor settling in derogation of its rights and
within ten years after filing would pay twice. St. Luke's Hospital v.
Consolidated Mutual Ins. Co., 32 Misc. 2d 657 (1961). Second, and
more importantly, the Supreme Court has made it clear in the cases cited
above that the question of whether a competing state lien is perfected,
is to be determined by examining the choateness of the state lien under
the standards enunciated in City of New Britain. Since there can
be no doubt that the hospital lien here meets those federal standards in
all respects, and that in this context subsection 10 merely provides the
hospital with a method of enforcing a lien which is already choate under
those standards, that subsection is of no help to plaintiff.
courts regard a hospital lien as choate. Rivera v. Hellman, 45
Misc. 2d 891, 258 N. Y. S. 2d 25 (1965).
is entitled to recover judgment out of the fund in the amount of
$2,222.30, and the balance shall be paid to the
in partial satisfaction of Dorothy Ratcliffe's tax lien.
The Clerk of
this Court shall prepare and enter final judgment in compliance with
Rule 58(1), F. R. Civ. P.
Of the Southern District of New York, sitting by designation.
¶9329]Matter of Campione Plastering Corp
Y. Sup. Ct., Spec. Term, Part I, Queens Cty., File No. 799-56, 11/19/57,
(147 N. E. 2d 801)
[1954 Code Sec. 6323--similar to 1939 Code Sec. 3672]
Lien for taxes: Priority as against mechanics' liens.--The Court
approved the supplemental account of an assignee for the benefit of
creditors in which Federal tax liens were given priority as against two
mechanic's liens. The mechanic's lienors failed to refile their notices
of liens or to commence actions to foreclosure their liens within one
year from the dates of the original filings, thereby losing their liens
and becoming merely general creditors under
law. A mechanic's lienor, which has lost its enforceable lien, is not
entitled to protection against a Federal tax levy either as a statutory
assignee or a trust beneficiary under
Aronwald, 305 Broadway,
7, N. Y., for Assignee. Irving J. Berman, 10 East 40th Street, New York,
N. Y., for City Wide Lathers Co., Inc. Goldman, Horowitz & Cherno,
390 East Old Country Road, Mineola, N. Y., for Eastern Building Supply
Co. Leonard P. Moore, United States Attorney, Brooklyn, N. Y., for the
In the account
of the assignee for the benefit of creditors herein, filed on
June 28, 1957
, he reported that he had a balance on hand of $3,147.90. In the order
of this court, dated
August 1, 1957
, settling the assignee's account,
istration expenses were fixed in the total sum of $1,309.22, leaving a
balance for distribution of $1,838.68. Of this balance, Eastern Building
Supply Company (hereafter referred to as Eastern) was ordered paid, as a
priority claim, the sum of $1,473.84, leaving a balance of $364.84,
which was directed to be paid to the District Director of Internal
Revenue of the United States for Brooklyn and New York on account of its
claim for taxes against the assignor. By an order of this court dated
October 4, 1957, disposing of a contested motion made by City Wide
Lathers Co., Inc. (hereafter referred to as City Wide), the account of
the assignee filed on June 28, 1957 was opened and the order, dated
August 1, 1957, vacated for all purposes to enable the claims of the
United States Treasury Department and City Wide to be received,
evaluated and adjudicated. Upon that motion, it appeared that the
istration expenses in the sum of $1,300.22 had already been distributed
and the sum of $364.84 paid to the United States District Director of
Internal Revenue. The sum of $1,473.84, which was directed to be paid to
Eastern, however, was withheld because of a communication received from
the United States Treasury Department advising the attorney for the
assignee that the government had overlooked the return date of the
application to settle the assignee's account, and a telephone
communication from the attorney for City Wide that it intended to make
the motion, which resulted in the order dated October 4, 1957, as
assignee's supplemental account, sworn to on October 29, 1957, following
the receipt of all claims, the claims of Eastern and of City Wide were
allowed only as general claims and disallowed as priority claims; the
balance of $1,473.84 still in the hands of the assignee was allowed to
the United States Government over and above the sum of $364.84
previously paid to it on account of its claim for taxes against the
The claims of
Eastern and City Wide were based upon the filing of mechanic's liens for
$1,473.84 and $1,361.20 respectively, on
October 24, 1955
September 28, 1955
, respectively. Since neither of these mechanic's lienors refiled their
notices of mechanic's liens within one year from the dates of their
respective original filing nor within that time commenced an action to
foreclose such liens, accompanied with the filing of a notice of
pendency of action, it is the position of the assignee that each of said
lienors lost their lien under the provisions of section 17 of the Lien
Law; that as a result, they became merely general creditors entitled to
no preference over the United States government or any other
governmental agency for taxes.
States attorney appearing for the United States of America, has
submitted an affidavit in which he claims priority for the government by
reason of the assignor's indebtedness for the nonpayment of federal
taxes in accordance with its amended claim filed on or about July 19,
1957, in the sum of $5,208.24. Eastern, which originally opposed the
motion to reopen this proceeding, submitted no papers in opposition to
the supplemental account. City Wide, however, appearing by an attorney,
submitted an affidavit in which it claims priority over the claim of the
United States government as a "cestuique trustent, the
beneficiary of trust funds which have been traced to and are presently
in the hands of the Assignee." Its claim of priority is based upon
the fact that the assignor engaged it to do work for the improvement of
real property and that the assignor, or the assignee on its behalf,
received payment from the owner for this improvement and such funds were
trust funds within the meaning of section 36 of the Lien Law.
Consequently, it is entitled as such cestuique trustent to the
sum of $1,361.20 with interest.
The court is
of the opinion that City Wide has no priority over the claim of the
government for unpaid taxes of the assignor.
States v. Acri (348
211 [55-1 USTC ¶9138]), the United States Supreme Court said at page
relative priority of the lien of the
for unpaid taxes is * * * always a federal question to be determined
finally by the federal courts. The state's characterization of its
liens, while good for all state purposes, does not necessarily bind this
the United States Supreme Court held that a federal tax lien was
entitled to priority over a mechanic's lien notwithstanding state law to
the contrary (United States v. Colotta, 350 U. S. 808 [55-2 USTC
¶9680]). In that case, a materialman had performed work under a
contract with the taxpayer prior to the time that a federal tax lien had
accrued or been filed. Under section 356 of the Mississippi Code of
1942, a mechanic's lien was declared perfected from the time of
contracting. The Supreme Court of Mississippi gave priority to such a
lien (79 So., 2d 474). The United States Supreme Court, however, granted
certiorari and reversed without opinion, thereby holding that the
federal tax lien was entitled to priority notwithstanding that it had
accrued or was filed subsequent to the effective date of the mechanic's
In the instant
case, City Wide no longer has an enforcible lien (Lien Law, sec. 17).
Its sole basis for priority is section 36 of the Lien Law pursuant to
which a trust is created in the fund in the hands of the owner which
must first be applied for the purpose of paying the cost of the
improvement. That section provides that "Such trust may be enforced
by civil action * * * by any person entitled to share in the fund,
whether or not he shall have filed, or had the right to file, a notice
of lien or shall have recovered a judgment for a claim in connection
with the improvement." In
v. Kings County Iron Works (224 Fed. (2d) 232 [55-2 USTC ¶9536]),
the United States Court of Appeals for the Second Circuit held, however,
at page 237, that a mechanic's lienor is not entitled to protection
either as statutory assignee or trust beneficiary "within any of
the special classes against whom filing is required." The court
also said at pages 235-236:
and unless the mechanic's lienor perfects his rights to the trust fund
by filing a timely civil action in accordance with section 75 of the N.
Y. Lien Law, the contractor retains a paramount interest in the property
in question, so that the debt belongs to him and is subject to federal
levy as such. Furthermore, until such a suit is brought, the fact and
the amount of the final mechanic's lien remain uncertain. This means
that for federal tax purposes the state lien is general and inchoate
until such time."
In light of
all of the foregoing the court is of the opinion that City Wide has no
priority over the tax claim of the United States Government either as a
mechanic's lienor or a trust beneficiary. Accordingly, the supplemental
account of the assignee dated
October 29, 1957
, is settled and approved as submitted. The application of the attorney
for the assignee for an additional allowance is granted to the extent of
$75 in view of the substantial fee he has already been allowed and paid
in this matter. The balance remaining in the hands of the assignee after
the payment of the foregoing additional allowance will be paid to the
United States Government on account of its claim for taxes against the
assignor in addition to the $364.84 already paid.
[1 USTC ¶189]In
re Caswell Construction Co., Inc.
Court of the United States for the Northern District of New York, 13 F2d
667, Decided July 12, 1926Mechanics' liens filed in 1921 have priority
over Federal income taxes assessed subsequent to the filing of the
Burden, U. S. Atty., and H. V. S. Groesbeck and B. Fitch Tompkins, Asst.
U. S. Attys., all of Syracuse, N. Y., for the United States. William F.
Canough and Irving J. Higbee, both of
, N. Y., for lienors.
This is a
petition by mechanics' lienors for an order directing the trustee in
bankruptcy to pay their liens before paying the claim of the
for income taxes. No question is raised of the right to have the referee
in bankruptcy first pass on this question.
November 22, 1920
, an involuntary petition in bankruptcy was filed against the Caswell
Construction Company, and the company was adjudicated a bankrupt on
January 17, 1921
. When the petition was filed the bankrupt was engaged in performing
certain construction work for the city of
, and there was due to the bankrupt for work performed the sum of
December 17, 1920
, James K. Bryant was appointed receiver of the bankrupt estate, and a
trustee was elected
February 2, 1921
. Prior and subsequent to the filing of the petition in bankruptcy and
within the four months permitted by the Lien Law of New York State
(Consol. Laws, c. 33), from the furnishing of the last item of labor or
material several mechanics' liens were duly filed against the fund in
the possession of the city of Syracuse.
An action to
foreclose these liens was instituted in the
February 3, 1921
. On application to this court an order was made allowing the trustee to
be made a party to the action in the state court. During the pendency of
this action in the state court a stipulation was entered into by the
lienors and the trustee, upon which an order of this court was made
directing the city of
to transfer to the trustee the money due the bankrupt pending the final
determination of the action.
February 2, 1923
, a judgment of the state Supreme Court was entered declaring the liens
valid in the sum of $24,609.30 and ordering the payment thereof in order
of priority. The trustee appealed from this judgment to the Appellate
Division of the Supreme Court. The appeal was later dismissed.
March 28, 1924
April 28, 1924
, a notice of assessment of additional income taxes for the year 1920
against the Caswell Construction Company, amounting to about $19,000,
was filed with the Collector of Internal Revenue of the proper district.
It is this additional income tax which the lienors claim is subordinate
to their liens.
opposes the petition of the lienors and insists that the income tax in
question must be paid before the mechanics' liens. If so paid, there
will be nothing for the lienors.
of priority under the Bankruptcy Act as between the government's claim
of additional income taxes later assessed and mechanics' liens earlier
filed seems not to have been decided by any court. At least, no case
deciding this question is given in the relatively hasty brief of the
attorneys for the mechanics' lienors nor in the more voluminous brief,
of the government counsel, and none has been found by the industry of
of the Bankruptcy Act involved are 64(a) and 67(d), being
Comp. St. Secs
. 9648, 9651.
reads as follows: "Debts which have priority: (a) The court shall
order the trustee to pay all taxes legally due and owing by the bankrupt
to the United States, state, county, district, or municipality in
advance of the payment of dividends to creditors, and upon filing the
receipts of the proper public officers for such payment he shall be
credited with the amount thereof, and in case any question arises as to
the amount or legality of any such tax the same shall be heard and
determined by the court."
reads thus: "Liens given or accepted in good faith and not in
contemplation of or in fraud upon this act, and for a present
consideration, which have been recorded according to law, if record
thereof was necessary in order to impart notice, shall, to the extent of
such present consideration only, not be affected by this act."
There is no
provision of the Bankruptcy Law expressly giving government taxes
priority of payment over liens. The government contends that section
64(a) controls and requires that the federal taxes be first paid. The
lienors contend that their liens are protected by section 67(d) and are
not affected by section 64(a).
consideration then is whether or not mechanics' liens as created by the
laws of the state of
are included within the term "liens" in section 67(d). The
words "liens given or accepted in good faith" would seem to
exclude statutory liens or any liens other than voluntary liens, such as
mortgages and the like. Statutory liens and common-law liens, like those
of lodging house keepers, are neither "given" nor
"accepted" in good faith or otherwise. The only liens that can
be given or accepted in good faith would seem to be voluntary liens.
Statutory and common-law liens are not voluntary liens, but are exactly
the opposite, namely, involuntary liens. They arise by operation of law,
with or without some affirmative action on the part of the lienors, and
without any participation on the part of the owner of the property. They
are not given voluntarily, but they are imposed involuntarily upon the
property of the owner, who may be called a lienee. There is authority
for holding that statutory liens do not come under and are not included
within the provisions of section 67(d). In re Cramond (D. C.) 145 F.
The weight of
authority, however, is that liens both voluntary and statutory do come
within the provisions of section 67(d). In re Yoke Vitrified Brick Co.
(D. C.) 180 F. 235, 238; Norris v. Trenholm, 209 F. 827, 126 C. C. A.
551; Re Purvis (D. C.) 293 F. 102, 106, 108; City of Richmond v. Bird,
249 U. S. 174, 39 S. Ct. 186, 63 L. Ed. 543; In re San Joaquin Packing
Co. (C. C. A.) 295 F. 311.
The lien in
the City of
, supra, arose under a
statute giving a landlord a lien on the goods and chattels of his tenant
for rent due. Under that statute the lien attaches upon a levy on the
goods and chattels of the tenant under a distress warrant. The
landlord's lien under this law of
is a lien of the same kind and nature as the mechanic's lien under the
Lien Law of the state of
. The Supreme Court held that such lien was preserved by section 67(d)
of the Bankruptcy Law, and was superior to the lien of taxes due to the
In Re San
Joaquin Packing Co. (C. C. A.) 295 F. 311, the court in the Ninth
Circuit said: "The respondent's (mechanic's) lien on the building
was not affected by the bankruptcy. Section 67(d)."
therefore, feels itself bound by the decision of the highest court, to
hold that mechanics' liens under the Lien Law of the state of
come within the protection of section 67(d) of the Bankruptcy Act.
The City of
, supra, and decided upon the language of 67(d) as it was prior to the
amendment of 1910. The section was amended in that year and the word
inserted "to the extent of such present consideration only."
The amendment of 1910 can have no bearing on statutory liens. It was the
evident purpose of the amendment to limit the protection of section
67(d) so far as voluntary liens, such as installment mortgages,
buildings loan mortgages, and the like, are concerned, to the amount
Even if the
amendment applies to statutory liens, it may be presumed that the state
court found the liens in the case at bar valid only for the amount of
labor and material furnished up to the time of filing the liens.
preliminary question disposed of, we return to the main question as to
whether mechanics' liens are to be preserved and remain unaffected under
section 67(d) of the Bankruptcy Act or federal income taxes are to have
priority under section 64(a).
As was said in
the City of
, supra: "Section 64(a) directs that taxes be paid in advance of
dividends to creditors; and 'dividend' as commonly used throughout the
act means partial payment to general creditors. In section 65(b) for
example, the word occurs in contrast to payment of debts which have
priority. And as the local laws gave no superior right to the city's
unsecured claim for taxes we are unable to conclude that Congress
intended by section 64(a) to place it ahead of valid lien holders."
As have been
previously stated, there is no provision of the Bankruptcy Act other
than section 64(a) which is claimed to give taxes any priority of
payment over liens protected by 67(d). Section 67(d) says that the liens
included therein are not affected by any provisions of the Bankruptcy
Act, hence it follows that the liens coming within section 67(d) are not
subordinated to the prior payments of taxes under section 64(a) merely
because such taxes are taxes.
Only in case
such taxes are themselves liens having priority in time over mechanics'
liens can taxes be given priority and paid before the payment of liens
which come under section 67(d). Of course, no provision of the law of
the state of
gives any lien to federal taxes. That would not be a subject for state
legislation. No provision of federal statute was cited by the counsel on
either side, giving income taxes the character of a lien, and none can
be found by the court other than section 3186 of the Revised Statutes
(Comp. St. Sec. 5908), which reads: "If any person liable to pay
any tax neglects or refuses to pay the same after demand, the amount
shall be a lien in favor of the United States from the time when the
assessment list was received by the collector, except when otherwise
provided, until paid, with the interest, penalties, and costs that may
accrue in addition thereto upon all property and rights to property
belonging to such persons: Provided, however, that such lien shall not
be valid as against any mortgagee, purchaser, or judgment creditor until
notice of such lien shall be filed by the collector in the office of the
clerk of the district court of the district within which the property
subject to such lien is situated: Provided further. whenever any state
by appropriate legislation authorizes the filing of such notice in the
office of the registrar or recorder of deeds of the counties of that
state, or in the state of Louisiana in the parishes thereof, then such
lien shall not be valid in that state as against any mortgagee,
purchaser, or judgment creditor, until such notice shall be filed in the
office of the registrar or recorder of deeds of the county or counties,
or parish or parishes in the state of Louisiana, within which the
property subject to the lien is situated."
In the case at
bar the notice of assessment of additional income tax for the year 1920
was filed with the collector on April 28, 1924, more than three years
after the filing of the mechanics' liens in question and the
adjudication in bankruptcy and election of the trustee, and more than
one year after the decision determining the validity of the liens. In so
far, therefore, as the income tax became a lien by virtue of section
3186, such lien was subsequent and subordinate in point of time to the
mechanics' liens in question. Hence priority of lien of the later
assessed federal income tax over the earlier filed mechanic's lien is
not given by any statute.
True, it has
been held that a lien for taxes exists by common law independent of
v. People of State of
143, 65 L. Ed. 315. This was held with reference to the lien of certain
corporate taxes of the state of
But it was
also held in
v. New York, supra, that the priority of the state's lien for taxes,
said to have priority by common law as above stated, "could be
defeated or postponed only through the passing of title to the debtor's
property absolutely or by way of lien before the sovereign sought to
enforce his right," and all that was held in that case was that the
right of the state to payment of these taxes was prior to that of the
general creditors. The court distinguished the Marshall Case from the
in the following language: "The city sought there [the City of
] in vain to have taxes declared payable out of the bankrupt's assets in
preference to the claim of the landlord thereon which was secured by a
specific lien arising upon distraint. This court held that the city did
not have such superior right since neither the laws of the
nor those of
accorded such priority. Here it is not sought to gain priority over a
lien existing at the time when the receiver was appointed; and the
priority over unsecured creditors is granted by the common law of
common-law lien as was held to exist as to state taxes could exist as to
taxes in favor of the federal government, in view of the fact that it is
held that the common law does not obtain as to the United States and its
courts, need not be determined at this time, and if such priority
existed it would doubtless likewise be "defeated--by way of lien
before the sovereign sought to enforce his right."
the law as to the status of taxes of the United States as an attribute
of sovereignity or as existing at common law, it is clear that the
United States may limit its priority by statute when it does so
expressly and this it was done by sections 3466 and 3186 of the Revised
Statutes (Comp. St. Secs. 6372, 5908), and sections 64(a) and 67(d) of
the Bankruptcy Law.
The effect in
this case of section 3186 of the Revised Statutes, and 64(a) and 67(d)
of the Bankruptcy Law, has been shown. Section 3466 of the Revised
Statutes does not apply here. The courts hold that as to estates in
bankruptcy the Bankruptcy Act supersedes section 3466 of the Revised
Statutes. In re Jacobson (C. C. A.), 263 F. 883; Liberty
Mutual Insurance Co. v. Johnson Shipyards Corp. (D. C.), 300 F. 952,
affirmed (C. C. A.), 6 F. (2d) 752 [1 USTC ¶131]; Guaranty Co. v.
Title Guarantee Co., 224 U. S. 152, 32 S. Ct. 457, 56 L. Ed. 706; Davis
v. Pringle, 268 U. S. 315, 45 S. Ct. 549, 69 L. Ed. 974; Mellon
v. Michigan Trust Co., 271 U. S. 236, 46 S. Ct. 511, 70 L. Ed. --,
decided by the Supreme Court May 24, 1926, and not yet [officially]
then no law which made the federal income tax in the case at bar a lien
upon the property of the bankrupt at the time of adjudication of
bankruptcy, either in priority to or in parity with the liens of the
mechanics' lienors then existing, such mechanics' liens under section
67(d) must be deemed attached to the property, and the priority of
payment of federal taxes secured by section 64(a), whether as to
unsecured creditors or otherwise, attaches only to the corpus of the
bankrupt estate, subsequent and subordinate to the mechanics' liens in
suit. Not only does this logically follow from the foregoing, but there
is support for this view by inference in the following cases:
appointed by a federal court takes property subject to all liens,
property, and privileges existing or accruing under the laws of the
state. York Mfg. Co. v. Cassell, 201
344, 26 S. Ct. 481, 50 L. Ed. 782; Marshall v. State of
143, 65 L. Ed. 315.
The title of
the trustee in bankruptcy, when appointed, relates to the date of
adjudication. Section 70 of Bankruptcy Act (Comp. St. Sec. 9654); In re
Cramond (D. C.) 145 F. 966, 978; Metcalf Bros. v. Barker, 187 U. S. 165,
174, 23 S. Ct. 67, 47 L. Ed. 122; Schoenherr v. Van Meter, 215 N. Y.
548-553, 109 N. E. 625.
v. Lewis, 13 N. B. R. 33, 38-39, Fed. Cas. No. 15,595, at 924 (6 D. Pa
1875), affirmed 92 U. S. 618, 23 L. Ed. 513, it was said: "The
claim of the government extends only to that which was the property of
the debtor when he became insolvent, and his property is only that, in
substance, which remains after the satisfaction of liens upon it."
See, also, Prince v. Bartlett, 8 Cranch, 431, 3 L. Ed. 614;
v. Canal Bank, 3 Story, 79.
v. Duncan, 12
, 607, Fed. Cas. No. 15,003, at page 935 (D. C. Ill.), the court said:
"It has been uniformly held in all the cases that the priority of
the United States does not disturb any specific lien, nor the perfected
lien of a judgment, that is it does not supersede a mortgage on land,
nor a judgment made perfect by the issue of an execution and a levy on
It is true
that there are two cases referring to mechanics' liens in which
reference is made to taxes as prior to such liens. While the cases are
not clear as to what taxes are referred to, it is reasonably certain
that they refer to local real property taxes, which, by the law of the
state, are imposed upon property prior to all liens voluntary or
involuntary. Such cases are In re Cramond (D. C.), 145 F. 966-978,
supra, and In re Yoke Vitrified Brick Co. (D. C.), 180 F. 235-239.
made the city of
taxes on the personal property of its inhabitants a lien before
distraint and prior to all other liens, the decision in the City of
, supra, would undoubtedly have been exactly opposite. The decision must
then have been as in city of
v. Hill, 139 F. 600, 71 C. C. A. 584, 3 Ann. Cas. 237, where the Circuit
Court of Appeals held that because by the statute of
(Acts 1903, pp. 663, 667) local taxes were made "a first mortgage
or lien on the property regardless of liens or division of
interest," such taxes must be paid before liens.
New Jersey v.
Anderson, 203 U. S. 483, 27 S. Ct. 137, 51 L. Ed. 284, and various other
cases cited by government counsel, are not in point, for in none of
these cases was the court called upon to decide the priority of taxes
over liens. The question was usually whether the taxes were prior to
general creditors or to the claims of wage-earners under section 64b who
had not filed liens before adjudication.
that the mechanics' liens were valid liens under the Lien Law of the
state of New York (Consol. Laws, c. 33) from and after the time of the
filing pursuant to the provisions of sections 3 and 5 of that statute,
there seems to be no law and no authority which gives prior to the
income tax of the United States, subsequently assessed, over duly filed
mechanics' liens, where notice of the assessment was not placed in the
hands of the collector until three years after the filing of these
has arisen here as to the validity of petitioner's mechanics' liens. So
far as the status of these liens upon this motion is concerned, their
validity would not depend upon whether or not any action had been
brought in the state court to foreclose them, though here their validity
was duly adjudicated prior to the filing of the notice of additional
income tax assessment. Under the laws of the state they become liens
from and after the time of their filing, regardless of actions of
This court is
constrained to hold, therefore, that the proper construction of the
Bankruptcy Act requires the holding that mechanics' liens filed before
the adjudication in bankruptcy be paid out of the funds of the estate
prior to the payment of the income taxes assessed long after
adjudication herein. It is also constrained to hold that the mechanics'
liens filed after the adjudication in bankruptcy, since they were filed
within the time required by the Lien Law, take precedence over the
interest of the trustee in bankruptcy. In the matter of New
York-Brooklyn Fuel Corporation v. Seymour K. Fuller, as Trustee, etc.,
11 F. (2d) 802, decided in the Second circuit
March 26, 1926
, opinion by Judge Manton.
If such liens
are prior to the interest of the trustee in bankruptcy, they are also
prior to the lien of the government taxes, as the latter did not attach
for nearly three years.
strictly legal consideration which moves the court to this conclusion,
the court also realizes the injustice which might be done to these
lienors if their right to attack or review the imposition of income
taxes has been lost and they are helpless before a claim of income tax
of $19,000, not imposed until 1924, but levied for the year 1920 upon a
corporation whose total assets at the close of that year were
approximately $17,000, a sum less than the income tax assessment upon
the corporation for that year.
should accept the decision of the state court as to the validity and
priority of the various mechanics' liens.
trustee has voluntarily become a party to an action in a state court,
that court has the right to declare the rights and interests of the
parties, though not the power to take the fund from the court of
bankruptcy. Schoenberr v. Van Meter, 215 N. Y. 548, 555, 109 N. E. 625.
became a party on his own motion to the action of foreclosure in the
the amount of the liens held valid by the New York Supreme Court exceeds
the total amount of the fund in question, there is nothing with which to
satisfy government's claim for taxes. Such taxes are, however, prior
claim as to any other estate, if any, of the bankrupt, subject, however,
to the expense of
istration of the bankrupt estate.
If there is
other estate of the bankrupt sufficient to pay the expenses of
istration of the bankruptcy, an order may be directed, directing the
trustee to pay the $17,727.27 and accrued interest to the mechanics'
lienors in their order of priority as determined by the final judgment
of the state court.
If there is no
other estate, the order may contain a provision for paying the expenses
istration before the payment of the liens.
The order in
this case shall not be entered until 20 days after the receipt of this
¶9658]Thomas C. Vincent, Inc., Plaintiff v. P. R. Matthews Co., Inc.,
et al. Defendants Hartford Accident and Indemnity Company, Defendant and
Third Party Plaintiff v. P. R. Matthews Co., Inc., Peter R. Matthews,
Alice Matthews, Albert Weiss, Third Party Defendants
the United States District Court for the Northern District of New York,
No. 3976, 126 FSupp 102, September 2, 1954
[1939 Code Sec. 3672--similar to 1954 Sec. 6323]
Liens for taxes: Priority of mechanics' and surety's liens.--The
government held a tax lien against a contractor, and claimed priority or
equality to mechanics' and surety's liens against funds held by New York
State. The District Court held that the tax liens were subject and
subordinate to the mechanics' liens and to the equitable lien of the
surety. As the funds were insufficient to satisfy the other liens in
full, the claim of the government was disallowed.
, N. Y. (T. Joseph Coffey, of Counsel). Nathaniel L. Goldstein, Attorney
General of the State of
, N. Y. (John F. Hmiel, Assistant Attorney General, of Counsel). Andrew
Eckel, 150 Broadway,
, N. Y., Attorney for defendant, Hartford Accident and Indemnity Company
and third-party plaintiff. Barry and Katzman, 135 Broadway,
, N. Y., Attorneys for defendant, Klein.
may be described as one brought to enforce liens under a contract for a
public improvement. Authority therefore is found in the New York State
Lien Law Section 42, and since the provisions of that law apply, this
type of action is usually litigated in the state courts. The
however invoked the provisions of 28
C. A. 2410 and 1444 and removed the cause into this Court where the
issues were tried.
The facts are
not seriously in dispute and following state practice, the litigants
submitted proposed findings and conclusions which, while perhaps are
unnecessarily detailed, have been considered and as finally adopted are
set out below. Same furnish a factual background which will not be
repeated. The procedural history of the action will be briefly set
was commenced in the Supreme Court of the State of
June 18, 1951
, to foreclose the liens filed against a contract for a public
improvement, and to recover upon the Payment Bond posted thereunder, the
deficiencies arising upon said foreclosure. The case was subsequently
removed to this Court by defendant
United States of America
. Subsequently plaintiff and all defendant mechanic's lienors assigned
their liens and the causes of action based thereon, to defendant
Hartford Accident and Indemnity Company, by assignments filed
November 14, 1952
. By an amended pleading, said defendant pleaded said assignments and
added a new cause of action to impress and enforce its equitable lien
upon the available funds held by
under said contract by virtue of its subrogation rights.
By a third
party summons and complaint served upon the above named third party
defendants, defendant Hartford seeks to hold them liable, under a
written indemnity agreement, for the losses sustained and incurred by
it, by reason and in consequence of posting said Payment Bond.
All of the
issues framed by all of the pleadings, came on for trial before this
Court and all of the parties appeared by their respective counsel,
except that defendant P. R. Matthews Co. Inc., and the third party
defendants (other than Albert Weiss against whom the action was
discontinued), defaulted in appearing at said trial.
P. R. Matthews Co. Inc. (hereafter referred to as the Contractor) and
defendant People of the State of New York acting through the Department
of Mental Hygiene (hereafter referred to as the State) entered into a
contract for a public improvement (Ex. 1), dated November 17, 1949, No.
941, Specifications No. 12884, Project No. 7482, for Additional Power
Plant Facilities, Power House Building No. 33, Hudson River State
Hospital, Poughkeepsie, New York, at a price of $419,990.00
(subsequently adjusted to $423,708.07), under which contract the
Contractor posted a Performance Bond and also a Payment Bond pursuant to
§137 of the New York State Finance Law, each dated November 17, 1949,
in the penal sum of $419,990.00 upon which bonds defendant Hartford
Accident and Indemnity Company (hereafter referred to as the Surety)
contractor proceeded with the work under said contract and prior to
October 20, 1950
, received seven progress payments under estimates duly approved and
certified by the State. The Contractor also earned $48,000.00 certified
by the State to be payable under Estimate No. 8 approved by the State on
October 24, 1950, and such sum was not piad to him because certain liens
were filed with the Comptroller against the contract and such sum is
still held by the State subject to adjudication in reference to said sum
in this action. No further moneys were earned by the Contractor under
3. After the
contractor received from the State certificate No. 8 dated
October 24, 1950
, no further moneys were earned by the contractor under the contract.
4. In addition
to the sum of $248,050.00 paid to the contractor as progress payments
numbers 1 to 7 inclusive and the sum of $48,000.00 certified by the
State on Certificate of Payment No. 8, the contractor Matthews had
earned the sum of $25,734.59 which are held by the State as retained
percentages pursuant to the provisions of State Finance Law §139, as a
guarantee that he would complete the work called for by the contract in
accordance with the terms and conditions thereof.
5. During the
time that the contractor continued to perform the work under the
contract and prior to
October 24, 1950
the State issued to the contractor three orders on contract calling for
additional work to be done by him in the amounts of $4,435.59, $949.10
and $1,026.38 respectively.
contractor accepted these three orders on contract as above stated and
approved them in writing.
contractor never asked the State for an extension of time for completion
of the contract as referred to in the General Conditions of the
Contract, paragraphs 85, 86 and 87.
and pursuant to Article 26 of said contract, the State served a seven
day notice (Ex. P) upon the Contractor, returnable August 15, 1951, and
did on August 15, 1951, serve notice (Ex. Q.) upon the Contractor that
it declared the contract cancelled, a copy of which notice was served
upon the Surety together with a demand (Ex. R) that the Surety complete
August 20, 1951
, The Surety advised the State (Ex. 16) that it would so complete and
requested an extension of the completion date under the contract. On
August 23, 1951
, the State advised the Surety (Ex. 17) that an appropriate extension
would be granted upon completion. The Surety thereafter completed the
contract and was ordered to, and did, make changes in the work for all
of which it has been reimbursed by the State out of the unexpended
contract funds in the hands of the State. No extension of time was
requested or granted on account of such work changes.
10. The Surety
continued the work required by the contract, completed same and issued
its statement of cost of completion in the sum of $36,605.04, which was
paid pursuant to certificate dated
September 2, 1952
contract originally provided that the work thereunder be completed by
January 1, 1951, and it, and Article 21 of the Specifications, further
provided for liquidated damages for delayed completion, at the rate of
$25.00 per day, but further provided, §85, in substance that if the
work is delayed for reasons beyond the control of the Contractor, or by
acts of the State or by changes ordered in the work, the State would
consider the causes for delays and grant an appropriate extension of the
completion date. Accordingly the State notified the Surety on
August 29, 1952
(Ex. 2) that it had considered all the causes for delay and that the
date of completion of the contract was extended to
September 15, 1952
. Completion and acceptance of the contract was officially certified by
the State on
September 2, 1952
12. Upon the
trial, the State claimed damages under Article 21, paragraphs 84-88 of
the contract for delayed completion of the contract and elected to claim
them at the liquidated rate of $25.00 per day based on 610 days, in the
total sum of $15,250.00. No oral testimony was offered by the State to
support the claim. It rested its claim upon the provisions of the
contract and specifications and the fact that the contract originally
January 1, 1951
as the completion date, whereas the contract was not officially accepted
September 2, 1952
addition to the proof of the extension granted by the State mentioned
above, the Surety produced documentary evidence that the State ordered
changes and extra work done under the contract, by five Orders on
Contract, the last of which was approved by the State Architect on
November 28, 1951, and by the State Comptroller on December 20, 1951,
and further proof tending to show that the work was substantially
completed by February 8, 1952, in that said proof shows that no payrolls
were incurred for work done on the job site thereafter (Ex. 22) coupled
with proof that the State inspected and approved the work in June or
early July 1952.
14. The State
has failed to establish by proof any damages sustained by it by reason
or arising out of, the breach of the contract by the Contractor.
financial status of the contract and the unexpended balance thereunder,
is now as follows, which said balance is held by the State as a
stakeholder free from any claims against it by the State, viz:
Contract price ......................................... $419,990.00
Additions, orders No. 1, 2, 3, 5 ....................... $ 7,218.07
Deductions, order No. 4 ................................ 3,500.00 3,718.07
Adjusted contract price ................................ $423,708.07
Paid contractor on estimates 1-7 ....................... $248,050.00
Paid surety for completion costs ....................... 36,605.04 284,655.04
Unexpended balance ..................................... $139,053.03
Consisting of: Amount certified as earned Oct. 24,
1950 under estimate No. 8 .............................. $ 48,000.00
Balance uncertified prior to default ................... 91,053.03 $139,053.03
16. During the
prosecution of the work prior to the default, the following defendants
furnished and supplied to defendant P. R. Matthews Co. Inc. labor and
materials used in the prosecution of the work under the contract,
concerning which they seasonably filed, refiled, and/or extended,
notices of mechanic's liens (Ex. 4) which complied in all respects to
the requirements of the New York Mechanic's Lien Law as to form,
sufficiency and dates and places of filing. The time to file liens
October 2, 1952
, and this action was commenced and the lis pendens was filed seasonably
June 15, 1951
, and all parties whose names appear on the lien docket were made
parties to this action as provided by said statute, and appeared herein
17. The said
Liens were filed by said Lienors on the following dates and were duly
assigned to the Surety after the commencement of the action, by
assignments filed on
November 14, 1952
. Due proof was made (Ex. 9) that the following amounts are now due and
payable thereon, with interest from the dates of filing (Ex. 4) which
interest has already been computed to December 31, 1953, viz:
Lien Amount Interest to
Lienor filed due
1. American Engineering Co. ........................
$ 51,048.09 $10,039.46
Roth, d/b/a Atlas Metal Works ............
3. The Bayer Co. ...................................
4. Chicago Fire Brick Co. ..........................
5. Drake Non Clinkering Furance Block Co. Inc. .....
6. Energy Control Co. Inc. .........................
7. Hagen Corp. .....................................
8. Interstate Plumbing Supply Co. Inc. .............
9. Johns-Manville Sales Corp. ......................
10. William J. Long ................................
11. Paul B. Huyette Co. Inc. .......................
12. The Permutit Co. ...............................
13. The Whiton Machine Co. .........................
14. Thomas C. Vincent, Inc. & M. H. Detrich Co. ....
15. Westinghouse Electric Corp. ....................
United States of America
filed notices with the State Comptroller of tax liens (Ex. G.) against
the Contractor which complied in all respects with the applicable State
and Federal Statutes as to form, sufficiency, and filing dates as
Date filed of lien
Julius Klein loaned the Contractor $25,000.00 by check on
October 31, 1950
secured by a promissory note dated
October 31, 1950
, payable on demand. As further security for the payment of said note
the Contractor executed and delivered to said defendant an assignment in
October 31, 1950
in evidence as Exhibit B. That assignment was mailed to the Department
of Public Works on
November 15, 1950
(Ex. A) and was returned to the State Comptroller on
November 21, 1950
(Ex. C) because it did not contain the Trust Covenant mentioned in
Section 25 of the Lien Law with the request that the assignment be
corrected and refiled.
20. That check
was deposited to the credit of the Contractor's account with the
National City Bank of New York (Ex. J) on November 1, 1950, and on the
same date at 2 P. M. the Contractor used that money as a deposit to
support a bid interposed by the Contractor to the State (Ex. 5) in
connection with a proposed contract advertised by the State for heating
work, etc. at the Wassaic State School. The Contractor was not the
lowest bidder and the deposit was accordingly returned by the State to
the Contractor on
November 3, 1950
(Ex. 6) and deposited to the credit of the Contractor's account with
said bank on
November 8, 1950
(Ex. J). All of that money was subsequently disbursed by the Contractor
out of said account not later than
November 17, 1950
(Ex. J.) part of which was used to pay for labor and material used on
the contract in suit (Ex. K.).
21. That the
defendant, Julius Klein, had no knowledge what the Contractor did with
the moneys after the loan was made by said Julius Klein to the
October 31, 1950
November 22, 1950
, the Contractor executed and delivered to defendant Klein another
assignment (Ex. E.) containing said trust provision with a footnote that
it was given to correct the
October 31, 1950
assignment, which was filed with the proper State Departments within 20
days of its date on
November 24, 1950
23. That the
$25,000.00 which the defendant Klein loaned to the Contractor on October
31, 1950 was advanced to the said Contractor secured by the assignment
given by said Contractor to the defendant Klein on October 31, 1950
which was corrected by the assignment given on November 22, 1950 which
latter corrected assignment was duly filed on November 24, 1950.
advances were made under said assignment filed
November 24, 1950
, nor were any moneys loaned by defendant Klein to the Contractor after
October 21, 1950
, and said assignment was given to secure the said indebtedness created
October 31, 1950
25. The second
assignment filed November 24, 1950, containing the trust covenant to
apply the proceeds of the loan to this contract, under pain of larceny,
was not executed until several days after the entire moneys had been
completely appropriated and disbursed by the Contractor (Ex. J.), as
26. It is
found that no moneys were loaned or advances made by defendant Klein to
the Contractor, subsequent to
October 31, 1950
upon the assignment filed
November 24, 1950
the Performance Bond in suit, it is found that the Surety completed the
contract to the satisfaction of the State. It has also performed its
engagements under the Payment Bond, by paying all claims for labor and
material furnished and supplied to the Contractor under the contract.
the third party summons and complaint of the Surety, it is based on a
written agreement (Ex. 13) indemnifying the Surety against all loss,
damages and expense, including counsel fees, sustained or incurred by
reason or in consequence of posting bonds on behalf of the Contractor,
including the bonds in suit. The case was discontinued as to Albert
Weiss and the answer of the remaining defendants admits, by failure to
deny, the execution and delivery of the indemnity agreement and they
defaulted in appearing upon the trial.
documentary proof (Ex. 14) and uncontradicted testimony adduced at the
trial by the Surety, it is found as a fact that the Surety sustained
losses in discharging its liability to the lienors, exclusive of loss
expense and counsel fees in the sum of $168,390.51 plus interest from
the dates when said payments were made. Said interest has already been
December 31, 1953
in the sum of $14,845.38.
jurisdictional questions raised by the State it is found as a fact that
plaintiff Thomas Vincent, Inc. and also defendant Hartford Accident and
Indemnity Company, its assignee, are nonresidents of the State of New
York, being corporations organized under the laws of Connecticut.
The funds in
suit being in the hands of the State as a stakeholder, it is also found
as a fact that its fiscal status, its revenues, property, or its
activities as a political entity, are not involved in this action to
impress and enforce liens against said funds.
raised here are essentially legal. They arise by reason of the claims
made by the litigants which will be discussed below.
in effect urges its tax liens should receive a priority in payment or at
least be treated on a parity with the mechanic's and materialmen's
liens. No precedents are cited to uphold the above contentions. In fact
the law seems to reject them. Cases could be cited which are applicable
by analogy but the question seems to be squarely passed upon in U. S.
Fidelity & Guarantee Co. v. Triborough Bridge Authority, 297 N.
Y. 31, which discusses federal decisions and in effect holds that the
government asserting a tax lien has the same status as the
contractor-taxpayer whose interest is subordinat to lien creditors.
Since such creditors assert valid liens here in excess of the available
fund, the claim will be denied.
Klein claims the right to share pro rata with the lien creditors by
reason of the assignment of
November 24, 1950
. The validity of the claim depends entirely upon the statute which must
be applied in light of the facts which are detailed in the findings made
to base his claim upon the provisions of the Lien Law Sec. 25(2) and
claims the status of a lienor who must be considered on a parity with
other lienors. (Lien Law Sec. 13(1).) He must depend upon the instrument
filed November 24, 1950, since the first assignment dated October 31,
1950 was never in fact filed, (Lien Law Sec. 16) and was fatally
defective in that it did not contain the covenant required by Sec.
25(5). (Amiesite Contr. Co. v. Luciano Contr. Co., 284 N. Y. 223
at 227; Lanna v. Gates Incorp., 142 Misc. 171). Turning then to
the assignment of November 24, 1950, we find that on its face it recites
that the indebtedness secured, was contracted on October 31, 1950 and
that the instrument did not contemplate either a present or future
advance of moneys to be used in the prosecution of the contract. No
doubt it was a purpose of the Legislature in enacting the provisions of
the Lien Law relative to assignments, to afford a means whereby a
contractor could obtain necessary working capital. Here, however, the
instrument accomplished no such purpose. It further secured a past
indebtedness already secured by a promissory note and the common law
October 31, 1950
. The Court attaches no importance to the fact that the assignment
recites, that it is given to correct the previous instrument above
referred to, which had no vitality as a statutory assignment since it
was not filed. (Lien Law Sec. 16). The attempt to revitalize same runs
squarely into the provision that such assignments are not authorized to
secure a past indebtedness. (Lanna v. Gastes Inc., supra, at page
in Lee v. Bailey Corp., 267 N. Y. 161 seems to foreclose the
assignee's claim here. The following quotation taken from the opinion at
page 165 is appropriate.
terms, Section 25 of the Lien Law applies only to 'advances' made upon
an assignment. A prior indebtedness secured by an assignment is not an
advance upon an assignment."
That a part of
the original indebtedness eventually found its way into the work
required by the contract does not change the result. (Scarsdale Nat.
B. & T. Co. v. U. S. F. & G. Co., 264 N. Y. 159 at 163.)
Equitable considerations are not available since the relief sought is
based only in the statute.
relies upon Arrow Iron Works v. Greene, 260 N. Y. 330. That case
was decided however when the law placed no limitation upon the
effectiveness of assignments in so far as the time of the advancements
were concerned. It is understood that the law was amended in 1930 (See Lee
v. Bailey supra, 164-165) and in Sec. 25(1) & (2) the
effectiveness of assignments was declared limited to the amount of
advance actually made thereon. As above stated there were no
advancements made upon the assignment here.
On its face it
is difficult to reconcile the decision in Lackawanna Steel Corp. v.
Greenough Eng. Co., 150 Misc. 147. Affirmed 266 N. Y. 594 with the
holding in Lee v. Bailey Corp., supra. In any event the Lee
case is later in point of time and this Court is bound thereby. Further
case the matter of priority of the assignment under Sec. 25(1) was the
issue litigated and the application of sub-div. (2) seemed not to be in
dispute. The court there held that a past indebtedness would not support
the priority of the assignment under Sec. 25(1). Advances actually made
upon the assignment is the basis of parity under sub-div. (2). If past
indebtedness is ineffective to invoke priority it would seem also to be
ineffective to invoke parity.
here is that Klein holds only a common law assignment which must be
subordinate in payment to the liens filed.
The State of
raises certain questions which will also be discussed.
It is asserted
that this Court has no jurisdiction since the State has not consented to
be sued in this Court. The same question was raised by a motion to
dismiss which was denied in an opinion filed
April 13, 1954
, familiarity with same will be assumed.
The State next
asserts that the fund in the hands of the State, which represents the
balance of the contract price unearned by the Contractor due to his
default is forfeited and this Court may not adjudicate in regard
thereto. This contention involves the interpretation and application of
certain sections of the Lien Law. It seems to be conceded that the
question has been decided adversely to the State in Hartford Accident
& Ind. Co. v. First National Bank & Trust Co., 281 A. D. 607
affirmed by the New York Court of Appeals May 20, 1954. A motion to
reargue that decision has been made but this Court will follow the law
as it now stands and no further comment on this contention is necessary.
further contends that under the terms of the contract it is entitled to
damages for delayed completion of the contract at the rate of $25.00 per
day for the period from
January 1, 1951
(which was the completion date set out in the contract) to
September 2, 1952
when the work was finally accepted. This contention is based upon the
provisions of the contract which provide for liquidated damages of
$25.00 per day in the event of a delay in completion beyond the date
fixed in the contract.
seems to be an afterthought. At the time of the trial it was first
asserted that a claim for damages consisting of extra expense, such as
engineering costs, was made. No proof was offered and it is based upon
the provisions of the contract alone.
are cited which support the claim made and claimant relies upon language
found in Hartford Accident & Ind. Co. v. First National Bank
& Trust Co., supra. There is no question that damages may result
from a breach of contract, which is all that the above case holds.
sufficient for this decision that the State under the provisions of the
contract extended ". . . the contract date of completion to
September 15, 1952
in order to compensate for delays beyond your control . . .". The
provisions of the contract authorize such action, the State's claim
would make same without effect. It is urged that the extension was given
to the Surety rather than to the Contractor, which is correct, but it is
the contract which is extended for all parties interested. The State
recognizes the contract for the purpose of a recovery of damages, it may
not repudiate its own voluntary modification thereof. The claim of
damages is dismissed.
1. This Court
has full jurisdiction over the subject matter of this action and over
all of the parties to it.
contract in suit was completed to the satisfaction of the State within
the date of completion fixed by it. It having proved no claims for
damages arising out of the breach thereof by the Contractor, there is
now in its hands as a stakeholder, the sum of $139,053.03 subject to
distribution among the other parties to this action according to their
3. All of the
statutory requirements of the New York Lien Law concerning an action to
foreclose mechanic's liens have been complied with and said action was
United States of America
holds a claim as a tax collector against and as such stands in the shoes
of the Contractor as a taxpayer. The tax liens filed by it are subject
and subordinate to the mechanic's liens filed herein and to the
equitable lien of the Surety which lien dates back to
November 17, 1949
, the date of the bonds in suit. The funds in suit being insufficient to
satisfy those liens in full, the Contractor has no interest in the fund
to which the tax liens can attach, consequently the claim of the
Government is disallowed and dismissed.
assignment filed by defendant Klein on November 24, 1950, having been
given to secure a past indebtedness and no advances having been made
upon said assignment, and there being no proof of probative value that
the money was loaned for the purpose of the contract in suit, said
assignment cannot be treated as a lien within the meaning of Section 25
of the New York Lien Law, and it is subject and subordinate to said
liens held by the Surety.
assignment, however, is valid against the Contractor as a common law
assignment upon which said defendant is entitled to judgment against the
Contractor for $25,000.00 with interest from
October 31, 1950
Surety, as assignee of the liens, is entitled to recover all moneys due
the Contractor by the State, to the exclusion of all other parties to
8. The Surety
having performed all the conditions of the Performance and Payment Bonds
exacted by the State, and made good all the defaults of its principal in
failing to complete the contract and to pay for the labor and material
used in the prosecution of the work under said contract as in said
contract and bonds provided, it thereby became subrogated as of November
17, 1949 (the date of its bonds) to all the rights of the State in and
to the contract moneys on hand and has an equitable lien thereon,
enforceable in this action.
aggretate of the claims of the Surety amount to $220,663.52, plus
interest on $187,056.06 from
December 31, 1953
. That being in excess of the fund in suit, the Surety is entitled to
judgment against the State of
in the sum of $139,053.03 without interest or cost.
10. The Surety
is also entitled to judgment against the third party defendants (except
Albert Weiss) in the sum of $183,235.95 plus interest on $168,390.57
December 31, 1953
together with costs, less the amount of $139,053.03 recoverable by it
against the State of
in this action.
conformity with the foregoing unless agreed upon, is directed to be
settled on five days notice.
¶9509]Louis J. Farone, Plaintiff v. Gabriel Baneth, Defendant
, County Court,
, No. AY-47,
[1954 Code Secs. 6321, 6322, and 6323]
Tax liens: Priority: Assignee's claim to funds held by third party.--Federal
tax liens had priority over the claim of an alleged assignee of a
delinquent taxpayer as to funds due the delinquent taxpayer for plumbing
work furnished a motel.
state laws which might favor the alleged assignee must be subordinated
to the Federal statutes. Assignee's motion to compel the motel owner to
pay over the funds to him is denied.
, N. Y., for the motion. Theodore F. Bowes, United States Attorney
(Kenneth P. Ray, Assistant United States Attorney, New York, N. Y., of
counsel), in opposition. George F. Perkins,
, N. Y., for Gabriel Baneth.
This is a
proceeding brought by Louis J. Farone to compel Gabriel Baneth to pay
over a certain sum held by Baneth pursuant to a stipulation of
settlement in the action brought by the plaintiff against the defendant
to recover moneys allegedly owing to the plaintiff, by reason of an
alleged assignment of moneys due under a contract by and between Norman
McAllister and the defendant.
The facts are
that on or about
May 10, 1955
, Norman McAllister entered into a contract with one Gabriel Baneth to
furnish and install for Mr. Baneth a plumbing system for a 15 unit
motel. The performance of the contract was generally completed according
to McAllister on or about
August 1, 1955
. In the action, the defendant contended that certain materials were of
inferior quality, the work not performed in a good workmanlike manner,
certain requisites not completed as well as various other deficiencies.
At the trial
term of County Court held in June of 1957, a settlement was reached.
and the defendant, each represented by counsel were present as well as
Norman McAllister, the alleged assignor. No question as to the
assignment was raised by any of the parties. The stipulation was made in
open court and placed upon the record. It was agreed that Baneth would
pay to Farone "as assignee of McAllister" the sum of $1,000.00
and turn over to Farone certain unused materials. General releases were
to be executed, but on a point raised by Mr. Perkins representing Baneth
to the effect that notices of liens against McAllister had been filed
with Baneth, the stipulation was made subject to such notices. The
settlement has not been consummated.
July 29, 1955
, Federal Withholding taxes were assessed against McAllister for the
March 31, 1955
in the principal amount of $298.83 together with interest. Of this
amount, McAllister paid $111.65 on
July 31, 1957
leaving an outstanding balance of $201.49 with interest. On
November 30, 1956
Federal Withholding Taxes for periods ending
June 30, 1955
September 30, 1955
were assessed against McAllister, which, together with interest totaled
$711.13, with interest. On
February 2, 1957
, a notice of Federal Tax Liens was filed with Commissioner of Accounts,
, N. Y., in the amount of $796.08. On
January 12, 1956
a notice of tax lien was filed in the same office in the amount of
instituted by Farone as alleged assignee of McAllister against Baneth
was to recover for the sum of $551.08 allegedly owed by Baneth to
McAllister as the balance due on the original contract and for the
recovery of $1,514.77 for labor and materials furnished Baneth by
August 2, 1955
. Two questions are presented on this motion:
1. Whether or
not Farone has any right to or interest in the sum held by Baneth in the
credit of Norman McAllister, taxpayer.
Farone's claim has any priority over what might be determined as a fully
perfected Federal Tax Lien.
Government's interest in this motion was brought about by the service of
an Order to show cause served by Farone's attorney upon the District
Director of Internal Revenue.
held by this Court on
December 27, 1957
January 10, 1958
February 28, 1958
, and sworn testimony taken. Each party to the proceeding was given time
within which to file briefs. The brief of the Government was received on
July 20, 1958
. Mr. Perkins indicated he did not intend to file a brief. No brief has
been received from Mr. John O'Malley, attorney for Farone despite
several requests made by this Court. This decision is based entirely
upon the law and the facts. This Court is not too much concerned with
the argument as to whether the assignment of the contract from
McAllister to Farone was proper. Certainly there was money due from
Baneth either to McAllister, Farone, the Saratoga Distributing Company
(nonexistent) or the Saratoga Modern Distributing Company. The
Government contends that from the reading of the contract, no mention is
made as to Farone being the assignee. Assuming that the assignment is
proper, then the assignee would be the Saratoga Distributing Company
which the plaintiff argues should have read the Saratoga Modern
Distributing Company, a corporation, of which corporation, Margaret E.
Farone, wife of the plaintiff, apparently has a controlling interest.
Perhaps Farone individually was not the proper plaintiff, but as
previously stated no question was raised as to the assignment by any of
the parties to the action at the time of trial and settlement. The sole
remaining question is whether the assignment is not valid as against the
Federal Tax Liens involved in this case. This Court holds that any
assigned rights under this contract are subservient to those of the
Federal Government under its Federal Tax Liens, and the funds held by
Baneth are impressed with fully perfected Tax Liens.
involved are Sections 6321, 6322, 6323 of the Internal Revenue Code of
question as to the assignment of the contract and the necessity of
filing, Section 15 of the New York State Lien Law is to be considered.
This Court has
examined into the various cases submitted by the counsel for the
Government and it seems well settled that this lien attaches to after
acquired property as well as to present property rights of the
delinquent Taxpayer. Glass City Bank v. U. S., 326
265 [45-2 USTC ¶9449]; Oxford Distributing Company v. Famous
ert's, Inc., 173 N. Y. S. (2d) 468 [58-2 USTC ¶9538]; In re
Levitt (Bartyzel v. Przybylo), 169 N. Y. S. (2d) 407 [58-1 USTC ¶9439].
It is also
well settled that a levy need not be served by the Internal Revenue
Service to perfect its lien. Oxford Distributing Company v. Famous
ert's Inc., supra; In re Levitt, supra. There can be no question
that any amount due and owing to McAllister at the time the assessments
were made are subject to the tax liens of the Government. Aquilino v.
United States, 169 N. Y. S. (2d) 9 [58-1 USTC ¶9191].
The laws of
the State of
and the authorities thereunder which might favor the plaintiff in the
action as an alleged assignee of McAllister must be subordinated to the
Federal statutes involved. The Government's power to tax obviously
includes the power to enforce collection of taxes.
proceeding the question is not one of judgment as requested by the
Government, but one of either granting or denying the request of Farone
of the $1,000.00 as agreed upon by stipulation in the settlement of the
Court determines that the
does have a lien as against this particular amount. The motion of the
plaintiff is accordingly denied.
¶9231]Cranford Co., Inc. v. L. Leopold & Co., Inc. et al.
York Supreme Court, Special Term, Part 4, 117 NYLJ 1282, April 2, 1947
Lien for taxes: Priority of creditors: New York mechanic's lienor as
"purchaser".--Claim of mechanic's lienor, arising under
New York statute, is that of an assignee by operation of the statute,
and, as that of a "purchaser", within the meaning of Code Sec.
3672, is prior to an unrecorded tax lien of the government.
This is an
action brought by Cranford Company, Inc. (Cranford) for determination by
the court of the order of priority of the various liens and claims
existing against certain funds due to defendant L. Leopold &
Company, Inc. (Leopold) from the City of
under three specific public improvement contracts.
May 29, 1944
, Leopold made three contracts with the City of
for the flagging of certain specific areas in
delivered to Leopold ready-mixed concrete and other necessary materials
for the job and claims it has not been paid for the materials. On
November 21, 1944
filed a notice of lien for the amount due under each contract.
three separate instruments of assignment, assigned to Modern Industrial
Bank all moneys due or to become due from the City of
under the flagging contracts above mentioned. These instruments of
assignment were duly filed on
July 31, 1944
. Advances were made from time to time by Modern Industrial Bank upon
the security of the assignments under the three contracts.
November 2, 1944
, the Collector of Internal Revenue for the Third District, New York,
received in his office an assessment list from the commissioner of
internal revenue containing an assessment against Leopold for $367.26
for the second quarter of 1944. Demand for payment was made on the
November 14, 1944
. Not until
July 16, 1945
, however, did the collector of internal revenue serve upon the
Treasurer-Comptroller of the city of
a notice of levy in the sum of $3,606.82 for various items of taxes
assessed against Leopold. This sum includes the assessment of $367.26
above mentioned. Final notice and demand for payment were served on the
November 5, 1946
to be determined is whether the lien of the
, which arose on
November 2, 1944
, is superior to and shall prevail over the later mechanic's lien filed
November 21, 1944
Tax liens are
based upon sections 3670 and 3671 of the Internal Revenue Code (26
C.). Section 3670 provides that if any person liable to pay a tax
refuses to pay it after demand, the amount, with its interest and
penalties and costs 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." Section 3671 provides that "The
lien shall arise at the time the assessment list was received by the
Collector and shall continue until the liability for such amount is
satisfied or becomes unenforcible by reason of lapse of time."
of the same Code provides, in relation to the lien: "Section 3672.
Validity against mortgagees, pledgees, purchasers and judgment
creditors--(1) Invalidity of lien without notice. Such lien shall not be
valid as against any mortgagee, pledgee, purchaser, or judgment creditor
until notice thereof has been filed by the collector--(1) under State of
laws. In the office in which the filing of such notice is authorized by
the law of the State or Territory in which the property subject to the
lien is situated, whenever the State or Territory has by law authorized
the filing of such notice in an office within the State or
It is conceded
that the notice of the government's tax lien was not recorded in any of
the places set forth in section 3672.
contends that the failure to file notice of lien is of no advantage to
, as a mechanic's lienor, does not come within the category of either a
mortgagee, pledgee, purchaser or judgment creditor. It is argued that
must show that it comes within the four classes enumerated.
Prior to the
passage of section 3672, the government's lien for taxes was valid, even
against the rights of a purchaser of real estate in good faith who
purchased without notice of the government's existing unrecorded tax
lien (United States v. Snyder, 149 U. S. 210; MacKenzie v.
United States, 109 Fed. (2d) 540 [40-1 USTC ¶9229]).
In the MacKenzie
case, it was stated "By the 1913 amendment it [Congress] intended
to extend protection, not to all third parties but to the three
classes of third parties designated therein * * *." We conclude
that in order to be protected, the claimant must show that he is within
one of those three classes." (Italics and brackets supplied.)
In the recent
case of In re Capital Foundry Corporation (64 Fed. Supp. 885), in
a bankruptcy proceeding, it was held that the liens of the United States
for taxes arose on the dates when the assessment lists were received in
the collector's office and though unfiled were superior to the lien of a
mechanic's lienor which was filed later. The holding is definite that a
mechanic's lienor does not fall within the category of mortgagee,
pledgee, purchaser or judgment creditor.
Court of Appeals in John P. Kane Co. v. Kinney (174 N. Y. 69),
declared: "* * * The object and purpose of the Mechanic's Lien Law
was to protect a person who, with the consent of the owner of real
property, enhanced its value by furnishing materials or performing labor
in its improvement by giving him an interest therein to the extent of
the value of such material or labor. The filing of the notice of lien is
the statutory method prescribed by which the party entitled thereto
perfects his inchoate right to that interest. That is the manner and
mode of procedure in which the right is asserted. A certain time is
allowed in which the lien may be asserted or lost. During that time
there is a preferential statutory right in the nature of an unperfected
equitable lien in favor of the laborer, mechanic, materialman or
sub-contractor. And when a notice of lien is filed that right is
As is well
known, the New York Lien Law provides that moneys paid for a public
improvement are a trust fund for the payment of the proper expenses of
constructing the building. It was held in Anderson v. Hayes Const.
Co. (243 N. Y. 140), that the statutory lien attaches to the debt
and that lienors to the extent of their interests are statutory
assignees. This interpretation was followed by the Circuit Court of
Appeals in the Second Circuit in In re Weston (68 Fed. (2d) 913).
The court said: "Here the mechanic's lien is asserted against a
fund to be paid by the state for a public improvement. There is no
specific res but the lienor becomes by virtue of the statute the
assignee of the debt to contractor to the extent of his claim."
Similarly it may well be said that the lienor is a cestui of the
argument of the government that since section 3672 (supra) does
not mention assignees, the liens asserted by the government are to be
preferred against the mechanics' liens from the time the assessment
lists were received by the collector, one may with advantage cite the
decision in Grossman v. City of New York (N. Y. L. J., November
1, 1946, Walter J.). There the court said: "* * * but as all
indications are that plaintiffs gave value for the assignment to them
and there is no evidence to the contrary they must be deemed to be
purchasers, and hence, within section 3672; and as no notice of any of
the liens here asserted by the United States was filed prior to the
assignment to plaintiffs I hold that none of such liens is superior to
while the decision in In re Capital Foundry Corporation (supra)
is entitled to great respect, I hold that plaintiff Cranford is in the
position of an assignee by operation of the statute; that assignees in
such a situation are to be treated as purchasers under the statutory
exceptions; and that they are protected unless and until the lien of the
United States Government is recorded. Settle judgment in accordance with
the foregoing and in accordance with stipulation entered into between
plaintiff and defendant Modern Industrial Bank.
¶9628]Sutton Place Apartments, Gene B. Glick Company, Inc., Plaintiffs
v. United States America, R. J. Nero Construction Co., Inc., Clarence
Sand & Gravel Corp., et al., Defendants
S. District Court, West. Dist. N. Y., Civ. 75-332, 407 FSupp 1213,
[Code Sec. 6323]
Lien for taxes: Priority: State law: Mechanic's lienor v. judgment
creditor.--Where (1) the United States had filed a notice of tax
lien against a construction subcontractor, (2) a supplier of materials
had obtained a judgment against the subcontractor, and (3) money due
from the client to the general contractor had been paid into the
District Court so that the court might determine priority among the
subcontractor's creditors, the supplier and the United States were trust
beneficiaries under state (New York) law. Also under state law, the
claim of the
for unpaid withholding taxes took priority over the judgment creditor's
claim. The supplier could have established priority as a mechanic's
lienor with respect to materials furnished for the construction project,
but it omitted to do so. Although based on the same transactions as
those that would have underlain a mechanic's lien, the judgment did not
encumber the real property and did not assume the priority of such a
Colucci, Block, Colucci, Callahan & Crangle, 700 Genesee Bldg.,
, N. Y. for plaintiffs. Richard J. Arcara, United States Attorney,
Buffalo, N. Y., Louis J. Lefkowitz, Attorney General, Buffalo, N. Y.,
Richard J. Schroff, Boniello, Gellman, Anton, Brydges & Conti, 770
Main St., Niagara Falls, N. Y., Eugene F. Pigott, Jr., Offermann,
Fallon, Mahoney & Cassano, 1776 Statler Hilton, Buffalo, N. Y.,
Goldman, Costa & Getman, 705 Brisbane Bldg., Buffalo, N. Y., Lucien
A. Morin, II, Woods, Oviatt, Gilman, Sturman & Clarke, 44 Exchange
St., Rochester, N. Y., Leonard J. Brizdle, Brizdle and Hankin, 1010
Genesee Bldg., Buffalo, N. Y., Sydney L. Treibel, 518 Statler Hilton,
Buffalo, N. Y. Harry Stockwell, 6994 Torawando Creek Rd., Lockport, N.
Y., pro se.
"), a partnership, engaged Gene B. Glick Company, Inc.
("Glick") as general contractor to construct certain
residential premises ("the project"). R. J. Nero Construction
Co., Inc. ("Nero"), was a subcontractor and Clarence Sand and
Gravel Corp. ("Clarence") supplied materials to Nero for the
October 1, 1974
") claimed Nero owed taxes in the sum of $45,562.12, a certain part
claims arose from taxes such as withholding, social security, etc.,
attributable to the construction of the project. On said date,
served upon Glick a notice of levy of
's said claim against Nero. On
October 23, 1974
a notice of lien against Nero for the said tax claim was filed by
in the Erie County Clerk's Office. Two days later,
filed a notice of lien for said tax claim against Nero with the Office
of the New York State Secretary of State. All this was done in
compliance with the provisions of 26
C. §6323, and
's Lien Law, §240.
January 17, 1975
, Clarence entered a judgment against Nero for $3,413.90 for materials
supplied to Nero for the project. At no time did Clarence file a notice
of mechanic's lien against the project or the real property thereby
improved as it could have done in compliance with Section 3 of the New
York State Lien Law. After entering the said judgment against Nero,
Clarence served a restraining notice upon Glick demanding that Glick
turn over to Clarence the amount of said judgment. Thereupon Glick and
Sutton Place paid into Court, pursuant to Rule 22(1) of the Federal
Rules of Civil Procedure, the sum of $27,271.71 which presumably Glick
had received or had a right to receive from Sutton Place in partial
payment of the amount due for the construction of the project, leaving
to the court the determination of priority disputes among U. S.,
Clarence and others.
claims that its judgment against Nero has priority over the claim of
because it is for materials furnished for the project and, as such, is
the same as a mechanic's lien and entitled to priority or preference
's tax lien. This court cannot agree with this contention for the
reasons hereinafter set forth.
In order ot
obtain a mechanic's lien, Clarence was required to comply with the
requirements of Article 2 of New York's Lien Law and, particularly, with
Sections 3, 9, 10, and 11 thereof. It failed to do so. Instead, it chose
to try to collect what was due it by obtaining a judgment against Nero,
the subcontractor with whom it was doing business. It could have chosen
both remedies, but is chose only to seek a judgment. A mechanic's lien,
to which it was entitled, would have attached to or encumbered the real
property and would have affored Clarence certain priorities. The
judgment against Nero did not attach to or encumber the real property
and did not have the priorities of a mechanic's lien, even though it was
based on money due for materials furnished for the improvement of the
v. Street Realty Corp., 303 N. Y. S. 2d 474 (60 Misc. 2d 437,
, Sullivan Co., 1969), the court said, at 476-477: "The third claim
(that of Lucyk Construction Co., Inc.) is founded upon a default
judgment * * *." Lucyk claims priority as a mechanic's lienor
because its judgment was for materials furnished or labor performed for
the improvement of the realty prior to foreclosure. Admittedly, however,
Lucyk failed to file any notice of lien as required by the Lien Law.
(Lien Law §§ 3, 10) It may not, therefore, claim the status of a
mechanic [sic] lienor. Billson Housing Corp. v.
, 26 Misc. 2d 675, 205 N. Y. S. 2d 397 * * *.
(S. Ct., Suff. Co., 1960) the builder of a house on defendant's realty
sought to impress an equitable lien thereupon. The court said, 205 N. Y.
S. 2d at 389:
equitable lien may be decreed upon proof of the expenditure of money in
the improvement of real property by a person in a confidential
relationship to the owner * * * or proof of an intention that the
premises would be held as security for the obligation * * *. In the
instant case, no confidential relationship is alleged, nor is it alleged
that plaintiff is entitled to a contractual lien. On the facts alleged
in the complaint, plaintiff's only claim to a lien is that its work,
labor and materials having gone into the premises, the intention that
the premises stand as security must be implied. This, of course, is the
basis of and reason for the mechanic's lien provisions of the Lien Law,
§1, et seq., and as the attorney for the plaintiff revealed on oral
argument, plaintiff was entitled to and filed for a mechanic's lien but
lost its lien by failure to comply with the Lien Law. It is, however,
well settled that at common law, mechanics' liens were not recognized on
either the law or the equity side of the court. * * * No mechanics'
lien, equitable or otherwise, having existed prior to the statute, no
equitable mechanics' lien can be decreed in this case * * *."
although Clarence is not a mechanic's lienor, it is a trust beneficiary,
(under the provisions of Section 71 of Article 3-A of New York's Lien
Law) of the funds deposited by Glick with the court for the benefit of
such claimants. Sections 70, 71 and 77.8(a) of Article 3-A are
particularly applicable to the question whether the claim of either
or Clarence has any priority or preference over that of the other. The
answer seems to be clear that the claim of
has priority over Clarence's claim. Subdivision 8 of section 77 of
Article 3-A reads in pertinent part as follows:
* * in any distribution of trust assets pursuant to order or judgment in
an action to enforce a trust, the following classes of trust claims
shall have preference, in the order named: (a) trust claims for taxes
and for unemployment insurance and other contributions, due by reason of
employments, and for amounts of taxes withheld or required to be
withheld; * * *.
as provided in this subdivision, trust claims entitled to share in any
distribution of trust assets pursuant to order of the court shall share
seems from this statute that U. S.'s lien for unpaid withheld income
taxes, social security taxes and unemployment insurance taxes connected
with and arising from the construction work involved clearly has
priority over the claims of Clarence based on its judgment against Nero.
cited by Clarence in its brief are to be distinguished from the instant
case. In Aquilino v. United States, 10 N. Y. 2d 271, 219 N. Y. S.
2d 254 (1961) the claimants were mechanic's lienors; Clarence is solely
a judgment creditor-trust beneficiary and is not a mechanic's lienor.
Furthermore, in Aquilino, the debt due U. S. was not for withheld
but unpaid income and social security taxes which in any way connected
with the particular project which the trust fund assets arose, but were
due to U. S. before the contract for the particular project was entered
into. Corbin-Kellogg Agency v. Tasker, 248 App. Div. 58, 289 N.
Y. S. 156 (3rd Dept., 1936), and Cobleskill Savings and Loan Assn. v.
Rickard, 15 A. D. 2d 286, 223 N. Y. S. 2d 246 (3rd Dept. 1962) held
that under Sect. 13(1) of the Lien Law a judgment is entitled to
priority over a mechanic's lien if two conditions are met: (1) the
judgment is filed prior to the mechanic's lien and (2) the judgment is
for materials or labor or finances furnished for the particular project
involved. Clarence did and does not satisfy the first of these
conditions. Onondaga Com. D. Wall Corp. v. 150 Clinton St., 25 N.
Y. 2d 106, 302 N. Y. S. 2d 795 (1969), involved the question of relative
priorities between mechanic's lienors under Article 2 of the Lien Law
and trust beneficiaries under Article 3-A of that law. The former were
declared to have priority claims upon a fund deposited in court to
"take the place" of the property. In the instant case,
are both only trust beneficiaries under Article 3-A, so that the
question is one of priorities between trust beneficiaries only.
claim to priority over the claims of the
arising out of this project is denied; to the contrary, such claims of
have priority over this claim by Clarence.
¶9599]Onondaga Commercial Dry Wall Corp., petitioner v. 150 Clinton
Street, Inc., respondent United States of America, intervenor-appellant
v. Onondaga Commercial Dry Wall Corp., et al., defendant, Adirondack Dry
Wall Corp., et al., defendants, Adirondack Carpenters Pension Fund,
Y. Supreme Court, Appellate Div., Fourth Dept., No. 209, 281 NY2d 208,
[1954 Code Sec. 6323]
Lien for taxes: New York law: Mechanic's liens: Trust fund action.--The
institution of mechanic's lien foreclosure actions (under Article 3, New
York Lien Law) against a fund owed to a contractor for improvements made
to certain apartment buildings did not prevent the Government's right to
enforce its liens for unpaid taxes against the contractor by intervening
in an Article 3-A (trust fund) proceeding as a specifically named trust
fund beneficiary. The Government's right to share in the trust fund,
however, would have been eliminated if the Article 3 action had
terminated and the fund had been exhausted through satisfaction of the
Spicer, Jr., 125 Sherman St., Watertown, N. Y., Richard F. Schwerzmann,
315 National Bank Bldg., Watertown, N. Y., for 150 Clinton Street, Inc.;
Richard F. Schwerzmann, 315 National Bank Bldg., Watertown, N. Y., for
Adirondack Carpenters, respondents. James P. Shanahan, Assistant United
States Attorney, Donald A. Statland, Federal Bldg., Syracuse, N. Y., for
A. WILLIAMS, presiding justice; HARRY D. GOLDMAN, FREDERIC T. HENRY,
FRANK DELVECCHIO, JOHN S. MARSH, associate justices.
appealed from denies the application of the
United States of America
, appellant herein, for an order restraining the prosecution of
mechanic's lien foreclosure actions instituted in the Supreme Court
under article 3 of the Lien Law.
asserted in the article 3 actions were against a conceded balance due to
the contractor by the owner, upon a contract for the construction of
certain apartment dwellings in
, N. Y.
institution of those actions, Onondaga Commercial Dry Wall Corp.
commenced this present action in the Supreme Court of Onondaga County,
based on the same factual situation, under the provisions of article 3-A
(the trust provisions of the Lien Law).
are now pending. The
United States of America
was permitted to intervene in the latter action by court order, and it
is in this action that the appeal arises.
problem revolves around the construction of the language of section 79,
article 3-A, of the Lien Law, which provides: "Nothing in this
article shall prevent the enforcement of any lien as provided in
articles two and three of this chapter and neither such lien nor any
satisfaction obtained thereby shall be deemed a diversion of trust
assets or an unauthorized preference."
Term Justice construed this sentence to mean that the commencement of an
action to enforce a lien under article 3 absolutely nullifies any
benefits to the parties to an action to establish a claim to trust
assets as defined in section 70, article 3-A, unless, after the
termination of the article 3 action and the distribution of funds,
thereunder, a surplus should remain. (All of the parties concede that
there will be no surplus here.)
construction of a single sentence, so as to entirely destroy the
beneficial provisions of article 3-A is completely inconsistent and
inharmonious with the rules of statutory construction.
rules of statutory construction come into play and the application of
any or all of them sustains defendant's position. The first is the rule
that to get the sense of a statute one must read the whole of it (People
v. Ryan, 274 N. Y. 149; People v. Dethloff, 283 N. Y.
309)." (People v. Martell, 16 N. Y. 2d 245, 247).
(25 A D 2d 18, affd. 19 N. Y. 2d 735), we state:
Bros. v. Hostetter (14 N. Y. 2d 47, 52) in considering certain
specific language of the Alcoholic Beverage Control Law, the court said:
This is sweeping language but, as this court wrote some years ago in
construing the latter subdivision, "In the interpretation of
statutes, the spirit and purposes of the act and the objects to be
accomplished must be considered. * * * Literal meanings of words are not
to be adhered to or suffered to 'defeat the general purpose and manifest
policy intended to be promoted'". (People v. Ryan, 274 N. Y.
149, 152.) "There is no more likely way to misapprehend the meaning
of language--be it in a constitution, a statute, a will or a
contract", Judge Learned Hand has reminded us, "than to read
the words literally, forgetting the object which the document as a whole
is meant to secure." (Central Hanover Bank & Trust Co. v.
Commissioner of Int. Revenue [47-1 USTC ¶10,537], 159 F. 2d 167,
169; see, also, Spencer v. Childs, 1 N. Y. 2d 103, 106-07; Cabell
v. Markham, 148 F. 2d 737, 739.)'
are numerous other authorities which apply this general rule of
's Cons. Laws of N. Y., Book 1, Statutes, §97, and cases cited.)"
Unless we were
willing to hold that the institution of the mechanic's lien foreclosure
action under article 3 renders a proceeding under article 3-A
meaningless and ineffective, then the above-quoted language of section
79 cannot be construed literally.
provisions of articles 3 and 3-A should be considered together, side by
side. If that is done, it becomes apparent that the Legislature intended
to provide that the passage of 3-A should not be interpreted as a repeal
of article 3 or a diminution of its benefits.
On the other
hand, an intelligent legislature approach would not contemplate that the
very definite beneficial provisions of 3-A be completely nullified and
in effect repealed should an article 3 action be started.
legislative intention must have been, just as the statute says, only
that the satisfaction of liens in a completed or terminated article 3
action should not be considered trust fund diversions. That declaration
could have been the chief purpose of the enactment of the entire
granting of the injunction which was sought would result in complete
equity. The failure to grant such injunction will almost certainly
result in the frustration of the priority lien of the Government
provided for in section 77, subdivision 8, article 3-A, of the Lien Law.
injunction is granted, all of the proper parties will or can then be
before the court by designation as parties or through orders permitting
intervention, and the rights of the United States of America, if any,
can be determined.
produces a result adverse to any present article 3 parties, that result
would be a proper one as respective rights are defined by the
Legislature and contemplated by article 3-A.
If the statute
gives certain rights, they should not be denied simply because someone
would be harmed by the assertion of those rights by one beneficially
protected by the statute.
In denying the
injunction, Special Term relied upon Aquilino v. United States of
America (10 N. Y. 2d 271), apparently on the theory that the United
States of America would have no rights against the trust fund in any
This case is
also urged by the respondent, but Aquilino is not a precedent
that in any way affects this present case.
In the present
case, the lien that is asserted by the
is for unpaid withholding and other taxes arising directly from
construction work upon the improvement.
there was a prior general tax liability because of work which had
nothing to do with the improvement which was involved. There the
assessment list included general assessments against Fleetwood. Sometime
later, after the general tax had been assessed, Fleetwood, as general
contractor, agreed with one Ada Bottone to remodel a restaurant which
the summer of 1952, Fleetwood entered into subcontracts with Home
Maintenance Company and Colonial Sand and Stone Company to furnish labor
and materials for the remodeling job.
At that time,
the United States Government had no lien against the improvement under
article 3-A of the New York State Lien Law. Aquilino was decided
in July of 1961, and all of the events which gave rise to the fund in
which the Government sought to participate took place no later than
The section of
the Lien Law (art. 3-A, §71 (subd. 2(b)) that made the Government a
trust beneficiary became effective in 1959.
Government's priority was established in section 77, subdivision 8,
article 3-A. The determination in Aquilino was merely that the
contractor had no "property interest" in the trust funds that
could be reached or obtained by the Government.
In the present
case the Government relies on section 71, subdivision 2(b) which
specifically provides that it shall be entitled to share in the trust
funds. So obviously Aquilino should not be construed as authority
to exclude the Government from participation, statutorily given, in the
trust funds. (Petrow v. Bonim Demolition & Construction Corp.,
51 Misc. 2d 589.)
Term Justice also relied on language of section 78 of article 3-A which
excludes certain of its provisions from affecting the enforcement of a
lien as provided in articles 2 and 3 of the Lien Law, but this language
is not inconsistent with the interpretation here made but simply means
that if an article 3 action has proceeded to its conclusion the
provisions of article 3-A shall not interfere with that conclusion nor
bar distribution under the terms of article 3.
appealed from should be reversed and the requested injunction granted.
DelVecchio, and Marsh, JJ.; Goldman, J. dissents and votes to affirm.
¶9496]Bethlehem Steel Corporation, Appellant v. John E. Foley, District
Director of Internal Revenue, Appellee
U. S. Court of Appeals, 2nd Circuit, Docket No. 32012, 399 F2d 314,
[1954 Code Sec. 6323]
Lien for taxes: Priorities: Levy and sale of uninstalled construction
materials: Materialman's rights under New York law.--The Government
and not a materialman was entitled to the proceeds from the seizure and
sale of uninstalled steel construction materials (to satisfy a lien for
back taxes against the contractor), since the materialman failed to
exercise its remedy under New York law (the right to repossess and
remove the materials) before the federal tax lien attached and the
property was seized and sold. District Court affirmed.
Lubick, Hodgson, Russ, Andrews, Woods & Goodyear, Suite 1800 One M
& T Plaza, Buffalo, N. Y., for appellant. C. Donald O'Connor,
Assistant United States Attorney, Thomas A. Kennelly, Acting United
States Attorney, Buffalo, N. Y., Mitchell Rogovin, Assistant Attorney
ert J. Campbell, Lee A. Jackson, Joseph Kovner, Department of Justice,
Washington, D. C. 20530, for appellee.
LUMBARD, Chief Judge, SMITH and ANDERSON, Circuit Judges.
In 1964, the
contracted with Schwab Bros. Trucking, Inc. (the contractor) for the
construction of two sections of arterial highway in
. The contractor in turn made an agreement with Bethlehem Steel
) for the purchase and delivery of heavy construction materials to be
used on the highway project. The materials were shipped to the job site
between the first of August and the end of November, 1964.
January 15 and February 16, 1965, the District Director of the Internal
Revenue Service assessed allegedly delinquent taxes due from the
contractor in the amount of $200,672.65; and on February 16, pursuant to
§§ 6321-23 of the Internal Revenue Code of 1954, 26 U. S. C. §§
he filed with the Clerk of Erie County, New York, a notice of lien
relating to these assessments.
experienced grave financial difficulties during early 1965 and at some
point in late February or early March it was forced to abandon the
construction project. On March 24, the State of
terminated the contractor's authority to proceed under the contracts.
At the time
the contractor ceased work on the project, some of the materials
had neither been installed in the project nor paid for by the contractor
and remained stored at the site. On March 5, the District Director,
pursuant to the tax lien filed by the IRS on February 16, levied upon
and seized numerous pieces of equipment and supplies, including the
heavy building materials supplied by Bethlehem.
On June 4,
Bethlehem notified the District Director of its claim under §39-c of
the New York Lien Law, 2
which permits a materialman to repossess and remove materials supplied
by him but not paid for and which remain unused or uninstalled after the
project has been completed or abandoned.
also requested that the tax levy and seizure be withdrawn in its favor.
The District Director refused the request and
filed suit under 28
C. §§ 1340 and 2463 to recover possession of the seized materials.
Pursuant to a
stipulation by the parties to the suit, the unused and uninstalled
materials were sold and the proceeds were paid into the registry of the
District Court [67-2 USTC ¶9729], to be paid over as may be determined
by the ultimate disposition of the issues in this case. The parties
further stipulated that the tax lien filed by the IRS attached to the
uninstalled materials in question, which, it was agreed, were lawfully
levied and seized prior to Bethlehem's exercise of its right of
repossession under §39-c of the New York Lien Law, and that Bethlehem
took all steps necessary to protect its rights, if any, under §39-c.
Indeed, the record before us reflects that the IRS tax lien was filed on
February 16, three days before the earliest date on which the project
could be considered abandoned and before
's right of repossession and removal accrued.
moved for summary judgment on the ground that its right to repossess and
remove under §39-c is a property right in the uninstalled materials
which upon exercise extinguished the IRS lien which attached only to the
property or interest in the property which the contractor then had. The
IRS cross-moved for summary judgment asserting the priority of its lien
and from the order granting that cross-motion and entering judgment for
the Government, Bethlehem now brings this appeal. We affirm.
threshold question in this case, as in all cases where the Federal
Government asserts its tax lien, is whether and to what extent the
taxpayer had 'property' or 'rights to property' to which the tax lien
could attach. In answering that question, both federal and state courts
must look to state law, for it has long been the rule that 'in the
application of a federal revenue act, the state law determines the
nature of the legal interest which the taxpayer had in the property . .
..' (footnote omitted) Morgan v. Commissioner [40-1 USTC ¶9210],
78, 82." Aquilino v. United States [60-2 USTC ¶9538], 363
509, 512-513 (1960).
nature and extent of the contractor's property rights have been
ascertained under state law, the questions of priority are then
determined under federal law because §6321 "creates no property
rights but merely attaches consequences, federally defined, to rights
created under state law. . . ." United States v. Bess [58-2
USTC ¶9595], 357
51, 55 (1958). Since it is clear under the applicable portions of the
New York Personal Property Law 3
that "the property" in the uninstalled materials has passed to
the contractor by the dates of the federal tax assessment and the levy
and seizure, the issues are narrowed to determining what property or
other interest the appellant may have had by virtue of §39-c and
whether that interest affects the contractor's property or rights to
property in the uninstalled materials in a manner which defeats the
IRS's perfected tax lien.
and meager legislative history of §39-c indicate that the provision was
designed to remedy a specific plight in which materialmen often found
themselves. Charles Howard Levitt, counsel to the Lien Law Revision and
Enforcement Association, in a letter 4
urging the then Governor, Franklin D. Roosevelt, to approve the bill
which became §39-c, wrote:
cases occur annually where an operation is completed or abandoned, and
the materials amounting to thousands of dollars are left at the
operation. Notwithstanding the fact that the person responsible for the
cost of this material is hopelessly insolvent, the seller of the
material is not in a position to repossess himself of such material
without obtaining the consent of the buyer. Such consent is rarely
given. In every one of these instances, the materialman whose material
is left on the operation, sustains an unwarranted loss."
was apparently enacted to provide a self-help remedy for these
materialmen and to avoid the senseless and unfair waste which might
otherwise occur if they were not permitted to repossess and remove
unpaid for and uninstalled materials. There is no indication in the
language of the section or in the legislative history, however, that the
legislature intended that the materialmen should retain a property
interest in each item of the material until it is installed in the
project. Rather, it seems likely that the legislature, without engaging
in the use of property labels imbued with special meaning or legal
consequences, merely intended that a right to repossess and remove
unpaid for and uninstalled materials should accrue to the materialman if
and when the project is completed or abandoned.
legislative purpose is not subverted by a construction of the federal
tax lien law and §39-c which renders the contractor's after accruing
right inferior to the IRS's earlier perfected tax lien. Indeed, both the
state policy to avoid the unfairness and senseless waste resulting from
the inability of the materialman to recover uninstalled materials left
at a completed or abandoned project site and the federal policy to
create a uniform and manageable system for the priority of liens are
effectuated by this construction.
also accords with
v. Aquilino, supra, where the property interest of the
contractor which the IRS unsuccessfully sought to attach was the bare
legal title in funds held in trust for the benefit of the materialmen,
and in which the contractor had no beneficial interest. In the instant
case, although the power of the contractor to dispose of the materials
was considerably limited by §39-c, at the very least it had the right
to use the materials in the project and be paid by the state for them.
In the absence
of clearer legislative intent to retain something akin to ownership in
the materialman, we believe that the contractor's "rights to
property" were sufficient for the attachment of the federal tax
materialmen wish to establish priorities in these uninstalled materials
and protection from federal tax liens, they may still avail themselves
of the contractual secured interests which are protected under 28 U. S.
we affirm the decision below.
person liable to pay any tax neglects or refuses 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."