New York Page1

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Michael A. McGrath, Frances Y. McGrath, Petitioners-Appellants v. Commissioner of Internal Revenue, Respondent-Appellee.

U.S. 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Unpublished opinion affirming, per curiam, a Tax Court decision, Dec. 54,873(M), 84 TCM 310, TC Memo. 2002-231.

[ Code Secs. 162, 167, 179 and 263]

Business expenses: Election to expense depreciable property: Capital expenditures: Construction costs: Leased property: Improvements by lessee. --

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¬ Caution: The court has designated this opinion as NOT FOR PUBLICATION.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) and 1.167(a)-4. Petitioners contend, however, the improvements were deductible as

other 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 equity.

I.R.C. §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).

DENIED.

^* 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.

 

[98-1 USTC ¶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

(CA-2), U.S. Court of Appeals, 2nd Circuit, 96-6299, 1/26/98, 135 F3d 831, Affirming an unreported District Court decision

[Code Sec. 6323 ]

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 ( New York ) 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.

Neil B. Connelly, Kroll & Tract, 520 Madison Ave. , New York , N.Y. 10022 , 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.

Before: KEARSE and MCLAUGHLIN, Circuit Judges, and TRAGER, District Judge. ^*

MCLAUGHLIN, Circuit Judge:

Titan 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 court.

BACKGROUND

On October 26, 1990 , D.H. Farney Contractors, Inc. ("Farney") entered into a contract with the Triborough Bridge and Tunnel Authority ("TBTA") to repair both the Triborough Bridge and the Verrazano Narrows Bridge ("TBTA Project"). The contract required Farney to get performance and payment bonds from a surety company. Accordingly, Titan Indemnity Company ("Titan"), a Texas corporation licensed to write surety bonds in New York , 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").

The Contract 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.

After default, 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.

The Lawsuit

In March 1994, Titan sued in the Supreme Court of the State of New York 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.

The IRS 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, New York 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 New York 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.

NYDOL's claim 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 New York 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.

The remainder 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.

Quadrozzi's 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.

The following, therefore was the ultimate priority and distribution fixed by the district court:

  A.    $21,495.65  NYDOL super-priority (money withheld pursuant to

                      notice)

          * * * * *

  1.    $16,721.39  IRS

  2.    $10,610.07  NYDOL (remainder of back wages and interest claim

                      not

                      covered by money withheld)

  3.    $ 3,458.30  Quadrozzi

  4.    $45,316.47  Titan (remainder after above claims satisfied)

        ----------

Total:  $97,601.88

 

Titan appeals, 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.

DISCUSSION

A. Titan's Claim v. Article 3-A Trust Fund Beneficiaries

Titan 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.

Section 70(1) 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).

Second priority is given to trust claims of laborers for daily or weekly wages. Id. at (8)(B).

Third priority is given to trust claims of laborers for benefits or wage supplements. Id. at (8)(C).

Fourth priority is given to certain claims to a laborer's wages made by third parties. Id. at (8)(D).

Remaining trust claims are distributed pro rata. §77(8).

Titan misunderstands its rights under New York 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. Id. at 152.

Titan places 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 Scarsdale , it was entitled to the entire amount of the Contract Fund. Titan's faith is misplaced.

Scarsdale dealt with a priority fight between an assignee of a defaulting contractor and a completing surety. There were no trust beneficiaries. Scarsdale 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.

Scarsdale 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 Scarsdale . 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.

B. Titan's Claim v. NYDOL's Claim

Titan 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 New York 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.

Titan believes 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.

In August 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." United States 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) statement.

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.

C. New York Lien Law v. the Parties' Surety Agreement

Titan contends 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' surety agreement.

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. See Atlas Building Sys., Inc. v. Rende, 635 N.Y.S.2d 694, 695-96 (2d Dep't 1997 ); 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 legislature.

Titan concedes 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.

D. Federal Law v. State Law

Lastly, Titan 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).

Tax claims 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 liens.

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 proceeds. Id. at 515. For example, it is state law that determines whether a claim is recognized as an ordinary lien or accorded trust claim status. Id.

It is New York that determines what interest competing claimants have in the proceeds of a public improvement contract. New York has spoken clearly on this issue in Article 3-A, directing that the proceeds of a public improvement contract constitute a trust for certain claimants. New York 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 New York 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 Law.

We have considered all of Titan's additional arguments and find them to be without merit.

Accordingly, 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.

 

 

[76-1 USTC ¶9459] United States of America , Plaintiff v. James J. Hage, The Faxton Hospital , Children's Hospital and Rehabilitation Center of Utica and Dorothy Ratcliffe, Defendants

U. 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.

James M. Sullivan, Jr., United States Attorney, Syracuse , 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.

Findings and Conclusions

BRIEANT, District Judge: ^*

By this action filed March 3, 1975 , the 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 U. S. C. §7402 and 28 U. S. C. §§ 1340 and 1345. The case was tried without a jury on March 25, 1976 .

The contest has been narrowed down to two parties, plaintiff and defendant The Faxton Hospital. Priority of lien is the sole issue.

On 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 stipulation dated 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.

The Faxton Hospital 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 United States .

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."

Dorothy 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.

On July 26, 1972 The Faxton Hospital filed a Notice of Lien against Dorothy Ratcliffe with the County Clerk of Oneida County , New York , 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 Ratcliffe.

On April 11, 12 and 13, 1973 the United States 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 U. S. 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 U. S. C. §§ 6322, 6323. Government Exhibits 5 through 8 reveal that the two assessments involved here were made on March 29, 1973 and April 10, 1973 , after the hospital liens had been filed.

Under the principles established in United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954), and reaffirmed in United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963) and in United States v. Equitable Life Assur. Soc. of the U. S. [66-1 USTC ¶9444], 384 U. S. 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 United States . 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.

The hospital's 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 New Britain , 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.

The Government's reliance on In re Walton's Estate, 20 A. D. 2d 386, 247 N. Y. S. 2d 21 (1st Dept. 1964 ), is misplaced. In that case the United States 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 United States 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.

The crucial 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.

The United 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. New York courts regard a hospital lien as choate. Rivera v. Hellman, 45 Misc. 2d 891, 258 N. Y. S. 2d 25 (1965).

The Faxton Hospital is entitled to recover judgment out of the fund in the amount of $2,222.30, and the balance shall be paid to the United States 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.

 

 

[58-1 USTC ¶9329]Matter of Campione Plastering Corp

N. 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 New York 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 New York law.

George M. Aronwald, 305 Broadway, New York 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 United States.

KUSNETZ, Judge:

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, admin 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 admin 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 aforesaid.

In the 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 assignor.

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 , and 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.

The United 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 United States government for unpaid taxes of the assignor.

In United States v. Acri (348 U. S. 211 [55-1 USTC ¶9138]), the United States Supreme Court said at page 213:

"The relative priority of the lien of the United States 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 Court."

Thus, 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 lien.

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 United States 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:

"Until 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.

District 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 liens.

Oliver D. 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 Syracuse , N. Y., for lienors.

COOPER, District Judge:

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 United States for income taxes. No question is raised of the right to have the referee in bankruptcy first pass on this question.

On 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 Syracuse , and there was due to the bankrupt for work performed the sum of $17,727.27. On 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 Supreme Court of New York State on 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 Syracuse to transfer to the trustee the money due the bankrupt pending the final determination of the action.

On 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.

On March 28, 1924 , or 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.

The government 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.

The question 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 the court.

The sections of the Bankruptcy Act involved are 64(a) and 67(d), being Comp. St. Secs . 9648, 9651.

Section 64(a) 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."

Section 67(d) 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).

The first consideration then is whether or not mechanics' liens as created by the laws of the state of New York 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. 966-976.

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 Richmond Case , supra, arose under a Virginia 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 Virginia is a lien of the same kind and nature as the mechanic's lien under the Lien Law of the state of New York . 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 city of Richmond .

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)."

This court, therefore, feels itself bound by the decision of the highest court, to hold that mechanics' liens under the Lien Law of the state of New York come within the protection of section 67(d) of the Bankruptcy Act.

The City of Richmond Case , 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 advanced thereon.

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.

With this 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 Richmond Case , 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 New York 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 statute. Marshall v. People of State of New York , 254 U. S. 380-383, 41 S. Ct. 143, 65 L. Ed. 315. This was held with reference to the lien of certain corporate taxes of the state of New York .

But it was also held in Marshall 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 City of Richmond Case in the following language: "The city sought there [the City of Richmond Case ] 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 United States nor those of Virginia 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 New York ."

Whether such 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."

Whatever be 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] reported.

There being 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:

A receiver 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 U. S. 344, 26 S. Ct. 481, 50 L. Ed. 782; Marshall v. State of New York , 251 U. S. 380, 41 S. Ct. 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.

In U. S. 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; U. S. v. Canal Bank, 3 Story, 79.

In U. S. v. Duncan, 12 Ill. 523, 4 McLean , 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 land."

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.

Had the statute of Virginia made the city of Richmond taxes on the personal property of its inhabitants a lien before distraint and prior to all other liens, the decision in the City of Richmond Case , supra, would undoubtedly have been exactly opposite. The decision must then have been as in city of Chattanooga 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 Tennessee (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.

Assuming then 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 mechanics' liens.

No question 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 foreclosure.

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.

Besides the 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.

This court should accept the decision of the state court as to the validity and priority of the various mechanics' liens.

Where the 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.

The trustee became a party on his own motion to the action of foreclosure in the state court.

Inasmuch as 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 admin istration of the bankrupt estate.

If there is other estate of the bankrupt sufficient to pay the expenses of admin 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 of admin istration before the payment of the liens.

The order in this case shall not be entered until 20 days after the receipt of this memorandum.

 

 

[54-2 USTC ¶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

In 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.

Theodore F. Bowes, United States Attorney, Federal Building , Syracuse , N. Y. (T. Joseph Coffey, of Counsel). Nathaniel L. Goldstein, Attorney General of the State of New York , Albany , N. Y. (John F. Hmiel, Assistant Attorney General, of Counsel). Andrew Eckel, 150 Broadway, New York , N. Y., Attorney for defendant, Hartford Accident and Indemnity Company and third-party plaintiff. Barry and Katzman, 135 Broadway, New York , N. Y., Attorneys for defendant, Klein.

Decision

BRENNAN, District Judge:

This action 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 United States however invoked the provisions of 28 U. S. 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 forth.

This action was commenced in the Supreme Court of the State of New York , Albany County , on 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 defendant State of New York 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.

Findings of Fact

1. Defendants 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) became surety.

2. The 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 the contract.

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.

6. The contractor accepted these three orders on contract as above stated and approved them in writing.

7. The 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.

8. Eventually 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 the same.

9. On 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 .

11. The 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 fixed January 1, 1951 as the completion date, whereas the contract was not officially accepted until September 2, 1952 .

13. In 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.

15. The 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 expired October 2, 1952 , and this action was commenced and the lis pendens was filed seasonably herein, on 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 (Ex. 3).

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            
12-31-53

1. American Engineering Co. ........................          
9/20/50
         $ 51,048.09          $10,039.46

2. 

Murray

 Roth, d/b/a Atlas Metal Works ............           
3/6/51
           11,804.60            1,995.35

3. The Bayer Co. ...................................          
7/20/51
            2,000.00              293.55

4. Chicago Fire Brick Co. ..........................          
1/11/51
           13,774.44            2,454.96

5. Drake Non Clinkering Furance Block Co. Inc. .....           
3/5/51
           24,567.81            4,284.47

6. Energy Control Co. Inc. .........................          
3/28/51
              135.64               19.07

7. Hagen Corp. .....................................         
10/17/50
           11,168.30            2,147.18

8. Interstate Plumbing Supply Co. Inc. .............         
10/18/51
              838.51              110.77

9. Johns-Manville Sales Corp. ......................          
2/28/51
            7,000.00            1,190.00

10. William J. Long ................................          
6/25/51
            1,600.00              241.33

11. Paul B. Huyette Co. Inc. .......................           
4/9/51
              415.73               67.97

12. The Permutit Co. ...............................          
9/10/51
            4,534.00              765.54

13. The Whiton Machine Co. .........................          
9/14/51
            2,000.00              275.33

14. Thomas C. Vincent, Inc. & M. H. Detrich Co. ....           
2/9/51
           49,446.44            8,573.65

15. Westinghouse Electric Corp. ....................          
2/23/51
            6,722.50            1,148.83

                                                                              $187,056.06          $33,607.46

 

18. Defendant 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 follows:

                            Amount

Date filed                 of lien

1/17/51
 .......         $21,926.62

3/12/51
 .......           2,698.97

9/20/51
 .......           2,770.83

11/21/51
 ......             138.80

1/28/52
 .......           1,393.44

7/10/52
 .......             504.81

 

19. Defendant 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 writing dated 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 Contractor on October 31, 1950 as aforesaid.

22. On 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 (Ex. 3).

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.

24. No 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 on 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 found above.

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 .

27. Concerning 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.

28. Concerning 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.

From the 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 computed to December 31, 1953 in the sum of $14,845.38.

29. Concerning 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.

Discussion

The problems raised here are essentially legal. They arise by reason of the claims made by the litigants which will be discussed below.

The United States 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.

Defendant 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 above.

Klein appears 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 assignment of 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 174).

The decision 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.

"In 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.

This defendant 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 in the Lackawanna 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.

The decision here is that Klein holds only a common law assignment which must be subordinate in payment to the liens filed.

The State of New York 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.

The State 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.

The claim 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.

No authorities 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.

It is 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.

Conclusions

1. This Court has full jurisdiction over the subject matter of this action and over all of the parties to it.

2. The 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 respective rights.

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 seasonably brought.

4. Defendant 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.

5. The 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.

6. Said 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 and costs.

7. Said 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 this action.

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.

9. The 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 New York 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 from December 31, 1953 together with costs, less the amount of $139,053.03 recoverable by it against the State of New York in this action.

Judgment in conformity with the foregoing unless agreed upon, is directed to be settled on five days notice.

 

 

[59-2 USTC ¶9509]Louis J. Farone, Plaintiff v. Gabriel Baneth, Defendant

State of New York , County Court, County of Saratoga , No. AY-47, 11/19/58

[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. New York 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.

John J. O'Malley, Saratoga Springs , 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, Saratoga Springs , N. Y., for Gabriel Baneth.

SHERMAN , County Judge :

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.

[Facts]

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.

The plaintiff 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.

On July 29, 1955 , Federal Withholding taxes were assessed against McAllister for the period ending 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 and 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, Saratoga Springs , 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 $313.14.

[Issues]

The action 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 McAllister after 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.

2. Whether Farone's claim has any priority over what might be determined as a fully perfected Federal Tax Lien.

The 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.

Hearings were held by this Court on December 27, 1957 ; January 10, 1958 and 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 or about 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.

The statutes involved are Sections 6321, 6322, 6323 of the Internal Revenue Code of 1954.

[State Law]

On the 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 U. S. 265 [45-2 USTC ¶9449]; Oxford Distributing Company v. Famous Rob 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 Rob 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 New York 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.

[Decision]

In this 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 action.

However the Court determines that the United States does have a lien as against this particular amount. The motion of the plaintiff is accordingly denied.

Submit order.

 

 

[47-1 USTC ¶9231]Cranford Co., Inc. v. L. Leopold & Co., Inc. et al.

New 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 New York under three specific public improvement contracts.

[The Facts]

Prior to May 29, 1944 , Leopold made three contracts with the City of New York for the flagging of certain specific areas in Brooklyn . Cranford 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 , Cranford filed a notice of lien for the amount due under each contract.

Leopold, by three separate instruments of assignment, assigned to Modern Industrial Bank all moneys due or to become due from the City of New York 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.

On 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 taxpayer Leopold November 14, 1944 . Not until July 16, 1945 , however, did the collector of internal revenue serve upon the Treasurer-Comptroller of the city of New York 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 City of New York November 5, 1946 .

[Issue]

The question to be determined is whether the lien of the United States , which arose on November 2, 1944 , is superior to and shall prevail over the later mechanic's lien filed November 21, 1944 .

[Opinion]

Tax liens are based upon sections 3670 and 3671 of the Internal Revenue Code (26 U. S. 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."

Section 3672 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 Territorial 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 Territory."

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.

The government contends that the failure to file notice of lien is of no advantage to Cranford, because Cranford , as a mechanic's lienor, does not come within the category of either a mortgagee, pledgee, purchaser or judgment creditor. It is argued that Cranford 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.

However, the 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 perfected."

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 trust fund.

To 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 plaintiffs' rights."

[Conclusion]

Accordingly, 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.

 

 

[76-2 USTC ¶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

U. S. District Court, West. Dist. N. Y., Civ. 75-332, 407 FSupp 1213, 2/10/76

[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 U. S. 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 lien.

Anthony J. Colucci, Block, Colucci, Callahan & Crangle, 700 Genesee Bldg., Buffalo , 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.

Memorandum and Order

ELFVIN, District Judge:

Sutton Place Apartments (" Sutton Place "), 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 project.

On October 1, 1974 , the United States (" U.S. ") claimed Nero owed taxes in the sum of $45,562.12, a certain part of which U. S. claims arose from taxes such as withholding, social security, etc., attributable to the construction of the project. On said date, U. S. served upon Glick a notice of levy of U. S. 's said claim against Nero. On October 23, 1974 a notice of lien against Nero for the said tax claim was filed by U. S. in the Erie County Clerk's Office. Two days later, U. S. 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 U. S. C. §6323, and New York 's Lien Law, §240.

On 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.

Clarence claims that its judgment against Nero has priority over the claim of U. S. 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 over U. S. '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 real property.

In Anderman v. Street Realty Corp., 303 N. Y. S. 2d 474 (60 Misc. 2d 437, S. Ct. , 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. Harrison , 26 Misc. 2d 675, 205 N. Y. S. 2d 397 * * *.

In Billson (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:

"An 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 * * *."

However, although Clarence is not a mechanic's lienor, it is a trust beneficiary, along with U. S. (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 U. S. or Clarence has any priority or preference over that of the other. The answer seems to be clear that the claim of U. S. 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; * * *.

"Except as provided in this subdivision, trust claims entitled to share in any distribution of trust assets pursuant to order of the court shall share pro rata."

It 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.

The cases 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, Clarence and U. S. are both only trust beneficiaries under Article 3-A, so that the question is one of priorities between trust beneficiaries only.

Clarence's claim to priority over the claims of the United States arising out of this project is denied; to the contrary, such claims of the United States have priority over this claim by Clarence.

 

 

[67-2 USTC ¶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, respondents

N. Y. Supreme Court, Appellate Div., Fourth Dept., No. 209, 281 NY2d 208, 6/29/67

[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 mechanic's liens.

Lewis G. 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 appellant.

PRESENT: ALGER A. WILLIAMS, presiding justice; HARRY D. GOLDMAN, FREDERIC T. HENRY, FRANK DELVECCHIO, JOHN S. MARSH, associate justices.

Opinion

WILLIAMS, Presiding Justice:

The order 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.

The liens 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 Jefferson County , N. Y.

After the 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).

All actions 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.

The entire 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."

The Special 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.)

Such a 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.

"Several 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).

In Matter of the Village of Gowanda v. County of Erie (25 A D 2d 18, affd. 19 N. Y. 2d 735), we state:

"In Essenfeld 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.)'

"There are numerous other authorities which apply this general rule of construction. ( McKinney '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.

All the 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.

The 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 section.

Actually, the 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.

If the 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.

If this 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 event.

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 United States is for unpaid withholding and other taxes arising directly from construction work upon the improvement.

In Aquilino, 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 she owned.

Thereafter, in 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 1952.

The section of the Lien Law (art. 3-A, §71 (subd. 2(b)) that made the Government a trust beneficiary became effective in 1959.

The 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.)

The Special 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.

The order appealed from should be reversed and the requested injunction granted.

Concur: Henry, DelVecchio, and Marsh, JJ.; Goldman, J. dissents and votes to affirm.

 

 

[68-2 USTC ¶9496]Bethlehem Steel Corporation, Appellant v. John E. Foley, District Director of Internal Revenue, Appellee

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 32012, 399 F2d 314, 7/26/68

[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.

Donald C. 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 General, Rob ert J. Campbell, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, for appellee.

Before LUMBARD, Chief Judge, SMITH and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

In 1964, the State of New York contracted with Schwab Bros. Trucking, Inc. (the contractor) for the construction of two sections of arterial highway in Buffalo . The contractor in turn made an agreement with Bethlehem Steel Corporation ( Bethlehem ) 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.

Between 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. §§ 6321-23, ¹ he filed with the Clerk of Erie County, New York, a notice of lien relating to these assessments.

The contractor 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 New York terminated the contractor's authority to proceed under the contracts.

At the time the contractor ceased work on the project, some of the materials supplied by Bethlehem 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. Bethlehem also requested that the tax levy and seizure be withdrawn in its favor. The District Director refused the request and Bethlehem filed suit under 28 U. S. 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 Bethlehem 's right of repossession and removal accrued.

Bethlehem 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.

"The 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], 309 U. S. 78, 82." Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-513 (1960).

Once the 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 U. S. 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.

The language 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:

"Numerous 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."

Section 39-c 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.

This limited 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.

This result also accords with United States 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 lien.

If the 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. C. §6323.

Accordingly, we affirm the decision below.

¹ §6321 provides:

"If any 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."