New York Page2

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² §39-c provides:

"If for any reason after the work of a private or public improvement of real property is abandoned by an owner, a contractor or a subcontractor before the completion thereof by such owner, contractor or subcontractor, or if, after the same is completed, materials delivered are not used therefor, a person who has delivered materials for the improvement which have not been incorporated therein and for which he has not received payment may repossess and remove such materials; and thereupon he shall have no lien on the real property or improvements against persons secondarily liable, for the price thereof, but he shall have the same rights in regard to the materials as if he had never parted with the possession. This right to repossess and remove the materials shall not be affected by their sale, encumbrance, attachment, or transfer from the site of the improvement, except that, if the materials have been so transferred, the right to repossess them shall not be effective as against a purchaser or encumbrancer thereof in good faith whose interest therein shall have arisen since such transfer from the site of the improvement, or as against a creditor attaching after such transfer. The right to repossession and removal given by this section shall extend only to materials whose purchase price does not exceed the amount remaining due to the person repossessing; but where materials have been partly paid for, the person delivering them may repossess them as allowed in this section on refunding the part of the purchase price which has been paid less the cost of removal."

³ The record indicates the date of only one of the three contracts between Bethlehem and Schwab (September 16, 1964), so we cannot be certain that all were signed before September 27, 1964 , the date the Uniform Commercial Code (UCC) became effective in New York . Because the result would not differ under the UCC, we have assumed that all the contracts are governed by the New York Personal Property Law (PPL).

Under PPL §99, the "property" in goods passes when the parties to a contract so intend. PPL §100 gives various rules for ascertaining intention, and the last moment at which "property" could have passed under those rules, absent a conditional sale, is upon delivery. The record reflects that all deliveries were made before February 16, 1965 , the date the IRS filed notice of its tax lien.

⁴ This letter formed a part of the Governor's bill jacket covering the enactment of §39-c, and constitutes the only legislative history to which we have been referred or which we have found which bears on the purpose of §39-c.

 

 

[66-1 USTC ¶9469] United States of America , Plaintiff-Appellee v. Certified Industries, Inc., Defendant-Appellant, Doral Park Avenue Hotel Corporation, Carol Management Corporation and Hotel Seventy Park Avenue Corporation, Defendants-Appellees, Meteor Concrete Corporation, et al., Defendants

(CA-2), U. S. Court of Appeals, 2nd Circuit, No. 30170, 361 F2d 857, 6/3/66, Reversing unreported District Court decision

[1954 Code Sec. 6323; Rev. Stat. Sec. 3467]

Claim for taxes: Trust fund doctrine: Foreclosure of mechanic's lien in state court: Surety bond filed: Injunction.--A federal District Court, in which the United States had filed suit on the theory that funds owed to a contractor were impressed with a trust to pay federal taxes owed by the contractor, had no jurisdiction to enjoin a subcontractor from proceeding with its action in a state court to foreclose a mechanic's lien. The fact that the party who had engaged the contractor filed a surety bond in the state court proceedings, whereupon the mechanic's lien was discharged and where the surety would be liable for any judgment recovered in the suit, did not alter the character of the state lien foreclosure proceeding so that it could be stayed by a federal court.

Rob ert M. Morgenthau, United States Attorney, Harvey R. Blau, Martin P. Solomon, Assistant United States Attorneys, New York, N. Y., for plaintiff-appellee. Morris A. Marks, George E. Netter, Geist, Netter & Marks, 276 Fifth Ave., New York, N. Y., for defendant-appellant. Meyer K. Sanoff, Dreyer and Traub, 16 Court, Brooklyn , N. Y., for defendants-appellees.

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

ANDERSON, Circuit Judge:

Certified Industries, Inc. takes this appeal from an order of the District Court for the Southern District of New York granting the application of the United States for a preliminary injunction which enjoined Certified from proceeding with its action in the New York State Supreme Court to foreclose a lien pending a final determination of the present action brought by the United States.

On September 10, 1962 , Carol Management Corporation engaged Meteor Concrete Corporation to supply labor, materials and equipment for the improvement of certain real property at 70 Park Avenue in New York City . The contract price was $80,000. Meteor, in turn, contracted with Certified for the concrete necessary for the making of the improvements at an agreed price of $11,940.69.

After Meteor had been paid $72,981 and had only partially performed, it defaulted on the principal contract. Carol, or its successors, then completed the contract at a cost of $3,541.41, leaving a balance of $3,477.49 due to Meteor. Certified claims that the sub-contract for the concrete was fully performed but that Meteor failed to pay the balance of $3,025.69 due on the contract price. The present action stems from the claim of the United States that Meteor did not remit withholding, social security and unemployment compensation taxes due and owing to the United States based upon work attributable to Meteor's contract with Carol. The amount of the tax claim is $3,891.01.

On July 15, 1963, Certified caused a mechanic's lien to be filed and gave the required statutory notice, ¹ pursuant to the New York Lien Law, on the 70 Park Avenue property to the extent of its unpaid claim against Meteor. An action to foreclose that lien was commenced in the Supreme Court of New York on June 11, 1964 . Pursuant to §19 of the New York Lien Law, Doral Park Avenue Hotel Corporation, Carol's successor, filed with the clerk of the state court an undertaking of Continental Casualty Company that it would pay any judgment recovered in an action to foreclose the mechanic's lien. In accordance with subdivision 4 of §19, the lien was discharged upon the filing of the bond.

The present action was brought in the Southern District of New York by the United States on June 30, 1965 . The United States does not asset a tax lien in this action, but proceeds on the theory that it is entitled to have a trust imposed on the funds owed to Meteor by Carol under the "trust fund" provisions of Article 3-A of the New York Lien Law. This action is the only one in which all of the possible known claimants are parties, although it would appear from the record that the United States had knowledge of the state court proceedings and considered the possibility of attempting to intervene therein.

[Injunction Against Foreclosure of Mechanic's Lien]

Certified moved for summary judgment in the state court foreclosure action in the early part of September, 1965. On September 15, 1965 , the United States applied for an order of the United States District Court asking Certified to show cause why a preliminary injunction, barring Certified from proceeding with its foreclosure action and its motion therein for summary judgment, should not issue pursuant to Rule 65 of the Federal Rules of Civil Procedure. The application for a preliminary injunction was granted on October 5, 1965 and Certified appeals from that order. 28 U. S. C. §1292(a)(1).

The appeal raises a difficult question with regard to federal-state relations. We begin with the premise that the anti-injunction statute, 28 U. S. C. §2283, which prohibits a federal court from granting "an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments," does not apply where the United States, as a party in interest, seeks such a stay. Leiter Minerals, Inc. v. United States , 352 U. S. 220, 226 (1957). That decision does not mean, however, that a stay is automatically granted simply on the application of the United States . After enunciating the principle above stated, the Supreme Court went on to say that it was also necessary to inquire "whether the granting of an injunction was proper in the circumstances of this case." Leiter Minerals, Inc. v. United States, supra, at 226.

The United States is not entitled to an injunction staying state court proceedings where the state court is the first court to assume jurisdiction over the subject matter property of an action in rem or quasi in rem. United States v. Bank of New York & Trust Co., 296 U. S. 463, 477 (1936); Penn General Casualty Co. v. Pennsylvania, 294 U. S. 189, 195 (1935). ² On the other hand, the mere fact that certain property in possession or custody of the state court is indirectly related to the action in the federal court is not a bar to the exercise of federal jurisdiction "where the final judgment does not undertake to interfere with the state court's possession save to the extent that the state court is bound by the judgment to recognize the right adjudicated by the federal court." Markham v. Allen, 326 U. S. 490, 494 (1946). In that case, the Supreme Court held that it was proper to exercise jurisdiction where the Alien Property Custodian sought a judgment ordering the executor of an estate being admin istered in California to pay over the net estate.

The principle applied in Markham v. Allen, supra, is derived from a line of cases which hold that the exercise of jurisdiction over property by one court does not prevent other courts from rendering "any judgment not in conflict with that court's authority to decide questions within its jurisdiction and to make effective such decisions by its control of the property." United States v. Klein, 303 U. S. 276, 281 (1938). The actions "to adjudicate rights" of which the Court speaks in Markham v. Allen, supra, are not in rem actions, but those in which the "judgments therein do not deal with the property and order distribution; they adjudicate questions which precede distribution." Commonwealth Trust Co. v. Bradford, 297 U. S. 613, 619 (1936).

There can be little doubt that the initial foreclosure proceeding in the state court was a proceeding in rem, Quimby v. Sloan, 2 E. D. Smith 594, 607, 2 Abb. Pr. 93 (Ct. Common Pleas, 1855), an action in which Certified sought to enforce "an interest in the property improved." Rapid Fireproof Door Co. v. Largo Corp., 243 N. Y. 482, 486, 154 N. E. 531 (1926). Thus, the present Lien Law provides that the mechanic's lien is "upon real property improved" ³ and that an action to foreclose the lien is governed by "[t]he provisions of the real property actions and proceedings law related to actions for the foreclosure of a mortgage upon real property." ⁴ It is, therefore, quite clear that if the bond of Continental Casualty had not been substituted for Certified's mechanic's lien in the state proceedings, the federal court would have been powerless to interfere with the state proceedings. United States v. Bank of New York & Trust Co., supra; Penn General Casualty Co. v. Pennsylvania, supra.

[Surety Bond Substituted for Lien]

We are, therefore, presented with the question of whether, in the light of the decisions discussed above, the substitution of the bond for the mechanic's lien so altered the character of the state lien foreclosure proceeding that it could be stayed by a federal court. We think that it did not.

After the discharge of a lien by the substitution of a bond, the action continues in form as a foreclosure proceeding for purposes of establishing the validity of the lien. Berger Mfg. Co. v. City of New York, 206 N. Y. 24, 30, 99 N. E. 153 (1912); Hall v. Carl G. Ek & Son Constr. Co., 17 A. D. 2d 558, 236 N. Y. S. 2d 555, 558-559 (4th Dept., 1963), aff'd, 13 N. Y. 2d 825, 192 N. E. 2d 227 (1963). In effect, the filing of the undertaking with the clerk merely shifts the lien from the real property to the bond, thereby enabling the owner of the realty to free his property from the incumbrance of the lien. It is clear, however, that the right to recover on the undertaking is not personal. Milliken Bros. Inc. v. City of New York , 201 N. Y. 65, 74, 94 N. E. 196 (1911). The action remains in equity and, although the surety may be joined as a defendant for convenience sake, the plaintiff may continue his action after substitution of the bond without making the surety a party though any judgment therein will be conclusive upon the surety. Harley v. Plant, 210 N. Y. 405, 409-410, 104 N. E. 946 (1914).

In Morton v. Tucker, 145 N. Y. 244, 249 (1895), the New York Court of Appeals declared that "[t]he bond should take the place of the property in the same form and manner as is provided for in the case of the payment of money into court, or the deposit of securities under an order of the court after action brought." The alternative ways of posting security discussed in Morton v. Tucker, supra, are provided in Sections 19 and 20 of the Lien Law as statutory procedures by which the owner of property subject to a mechanic's lien can free his realty from the incumbrance of the lien. Where a county commissioner receives monies pursuant to §20 of the Lien Law, "the money is considered as paid into court" and "the commissioner holds the fund subject to its orders." World Steel Products Corp. v. Ogden Gardens , 120 N. Y. S. 2d 553, 554 (Sup. Ct. Westchester Co., 1963).

The bond or undertaking "does not change the relation or rights of the parties otherwise than in substituting its obligations for the fund subject to the lien, and it was not within the legislative purpose in permitting substitution to deteriorate the lienor's rights." Harley v. Plant, supra, at 410. There can be no distinction made in this situation between the effect of a bond and the effect of a deposit as a substitute for the realty as security for Certified's lien. It is apparent that the New York courts would not make such a distinction. The substitution, whether it be by deposit or bond, does not fundamentally transform the in rem foreclosure action, in which there is a res under the control of the state court, into an in personam proceeding that can be stayed by another court. ⁵

The preliminary injunction order of the District Court is not saved by Leiter Minerals, Inc. v. United States , supra. The Supreme Court in that case indicated that where the United States' position is "defensive" it should be able to choose its forum "even though the state litigation has the elements of an action characterized as quasi in rem." ⁶ Certified's assertion of its lien in the state court is not, however, either a direct or an indirect challenge to the right of the United States to retain funds or title to property in its possession at the commencement of the state proceeding. The present case is more akin to United States v. Bank of New York & Trust Co., supra, of which the Supreme Court said "in remitting the United States to the state court, the Court saw no 'impairment of any rights' or 'any sacrifice of its proper dignity as a sovereign.'" Leiter Minerals, Inc. v. United States, supra at 227.

The United States, however, seeks to bring the facts of this case within Leiter Minerals by arguing both that it is only in the federal court where all claimants are parties and that the federal court is the only court in which all of the issues can be tried. The contention is made that under a recent unreported state decision, Charles V. Castaldo Constru. Corp. v. Tinley Management Corp., Civil Court of the City of New York, New York County, Index No. 150639/1963 (1965), the United States would not have been allowed to intervene in Certified's foreclosure action, and therefore, the federal court is the only court that can supply the requested relief. The Castaldo case is clearly distinguishable. Although the United States presumably attempted to intervene as of right upon a timely motion under New York Civil Practice Law and Rules §1012, the court in Castaldo concluded that the United States could not invoke Article 3-A in order to collect its tax claim. It might also have chosen, in its discretion, to deny the motion as untimely since it came after judgment. ⁷ But whatever the right of the United States to intervene in the foreclosure action may have been, it was protected by its right to bring an Article 3-A proceeding in the state court. In any event, we do not reach the merits of the Article 3-A claim of the United States , but conclude only that the right of the United States to intervene for the purpose of asserting such a claim in a foreclosure action has not been conclusively determined by the New York Courts. ⁸

As to the second facet of the claim made under Leiter Minerals, it is true that the federal court is now the only court in which all of the issues can be determined since the statute of limitations on an Article 3-A cause of action has expired. The "sovereign dignity" concept does not, however, call for protection of the United States from its own mistake in failing to make its claim by way of intervention in, or the commencement of, a state proceeding where its sole claim for relief is made under a state statute. To hold to the contrary would render meaningless the principles of comity that underlie federal-state relations in the admin istration of justice which the Supreme Court has recognized and considered in each of the injunction cases.

Finally, we find that the principle summarized in Markham v. Allen, supra, is also inapplicable. The United States seeks not merely an adjudication of its rights relative to those of Certified but an injunction which, in barring Certified from proceeding with its motion for summary judgment, directly interferes with and is in conflict with disposition of the fund under control of the state court.

The order of the District Court is reversed.

¹ Certified had, in turn, sub-contracted with another who, in fact, supplied Meteor with the concrete. Certified's sub-contractor, as the actual supplier, filed the lien and gave the notice; but, on receiving payment from Certified, assigned its claim and lien to Certified, who throughout the present case appeared as assignee.

² Leiter Minerals, Inc. v. United States , supra, 352 U. S. at 228, indicates that where the position asserted by the United States is defensive, it may be allowed to choose its forum "even though the state litigation has the elements of an action characterized as quasi in rem." The position of the United States in this action is not, however, a defensive one.

³ New York Lien Law §3.

⁴ New York Lien Law §43.

⁵ Raising the technical distinction to a substantive level would not only have an apparently unintended effect on plaintiff's rights, but would create problems in the admin istration of justice.

It seems that an owner may first make a deposit and then recover the deposit during the proceedings by substituting a bond. Application of Tumac Realty Corp., 203 Misc. 649, 123 N. Y. S. 2d 642 (City Ct. New York, 1952). The rule contended for by the United States would lead to confusion and possible collusion in that situation, i.e., a claimant with priority under Article 3-A might well have enough at stake to make it worthwhile to entice the owner-defendant to make the second substitution so that the late claimant could assert the prior claim in another action after enjoining the first action.

⁶ 352 U. S. at 228.

⁷ See, e.g., Krenitsky, et al. v. Ludlow Motor Co., Inc., 276 App. Div. 511, 96 N. Y. S. 2d 102, appeal denied, 277 App. Div. 800, 97 N. Y. S. 2d 385, reargument and appeal denied, 277 App. Div. 953, 99 N. Y. S. 2d 612 (3d Dept., 1950), appeal dismissed, 301 N. Y. 609, 93 N. E. 2d 497 (1950).

⁸ The United States itself indicates in its brief that it has appealed in Castaldo.

 

 

[69-1 USTC ¶9187]Harry R. Harman, plaintiff v. Fairview Associates, A. Friederich & Sons., Co., Insurance Company of North America and Colorcraft of Syracuse, Inc., defendants A. Friederich & Sons Co., as trustee of certain assets received for and in connection with the improvement of premises commonly known as Fairview Heights Housing, Ithaca, N. Y., pursuant to Article 3-a of the Lien Law, respondent v. Harry R. Harman, appellant; United States of America, respondent; Colorcraft of Syracuse, Inc., Industrial Commissioner of the State of New York, and Chapin-Owen Co., Inc., defendants

N. Y. Sup. Ct. , App. Div., 4th Dept., Action Nos. 1, 2, 10/31/68

[Code Sec. 6323]

Tax liens: Priorities: Materialmen's and mechanics' lien: Perfection of lien: New York law.--Under New York law, Federal tax liens must be filed in the office of the County Clerk in which real property is located. The Government's lien for withheld taxes was not perfected since it was filed in the county where the sub-contractor had its offices rather than in the county where the project was constructed. Therefore, a material supplier's materialmen's lien took priority over the Federal tax lien.

Walter J. Licata, Levy & Levy, 45 Exchange St., Rochester, N. Y., for plaintiff-appellant. Frank R. Monfredo, Liebschutz, Sutton, De Leeuw, Clark & Lewis, 31 Main St., E., Rochester, N. Y., for Friederich & Sons and Insurance Co. of North America; John T. Curtin, United States Attorney, Donald Statland, Assistant United States Attorney, Buffalo, N. Y., for U. S., defendants.

Before EARLE C. BASTOW, presiding justice; HARRY D. GOLDMAN, FRANK DEL VECCHIO, JOHN S. MARSH, G. ROBERT WITMER, associate justices.

WITMER, Judge:

This appeal presents questions as to the validity and priority of certain tax liens of the defendant United States of America (hereinafter referred to as "U. S.") and of a lien of the defendant Chapin-Owen Co., Inc. (hereinafter referred to as "Chapin") as partial assignee of subcontractor Colorcraft of Syracuse, Inc. on an apartment construction project in Ithaca, Tompkins County, New York owned by Fairview Associates, on which A. Friederich & Sons Co. (hereinafter referred to as "Friederich") was general contractor.

[Materialman's Lien]

The plaintiff, Harry R. Harman, supplied materials to Colorcraft on this job, and duly filed a mechanic's lien therefor in Tompkins County . The owner paid Friederich the balance due on the contract upon its completion. Friederich admits that it owes money to Colorcraft on this job, although the exact amount thereof is in dispute.

[Government's Lien]

The U. S. tax claim arose out of this job, being for withholding and Social Security taxes due from wages of employees of Colorcraft, and it filed liens therefor in Onondaga County wherein Colorcraft has its principal place of business, but not in Tompkins County where the project was constructed.

[Collection on Lien]

Colorcraft duly filed in Tompkins County a lien for its claim against Friederich on this project, and to the extent of the amount assigned to it, Chapin succeeded to the rights of Colorcraft under said lien.

The plaintiff instituted action No. 1 to collect his claim by foreclosure of his mechanic's lien and by enforcement against Friederich of the trust for his benefit under Article 3-A of the Lien Law (see Lien Law, §79).

Friederich thereupon instituted action No. 2 for an accounting of the trust fund in its hands from this project under Article 3-A of the Lien Law, admitted having certain funds in trust from this project, joined as defendants all persons and corporations known to it to have claims, and asked the Court to determine to whom payment should be made.

[Actions Consolidated]

On motion by Friederich the two actions were consolidated; and Harman cross-moved for summary judgment in the consolidated action for dismissal of the complaint with respect to the claims of all other lienors, asserting that none of the lienors, including assignee Chapin, is entitled to any of the fund ahead of him nor is entitled to share in the fund with him.

From the order of the Court below denying such cross-motion, Harman appeals. The claims of the industrial commissioner of the State of New York against the fund were withdrawn upon the argument of this appeal; and so we need only consider the liens of U. S. and of Chapin.

[Trust Fund]

The moneys paid by the owner, Fairview Associates, to Friederich on this job constitute a trust fund for the benefit of subcontractors and suppliers (Lien Law, Article 3-A, section 79), available for payment of claims arising from work on and materials supplied to the project (Lien Law, §71, subd. 2).

The record shows that the U. S. liens arose out of this job, as did the claim of Colorcraft, part of which was assigned to Chapin. The contention of Harman that the claims of the U. S. are barred by its failure to enforce them within one year, under Lien Law, section 77, subdivision 2, is without merit, for expressly excepted from such time limitation is an action by the trustee (Friederich in this case) "for final settlement of his accounts and for his discharge."

[Perfection of Lien]

The question presented with respect to the U. S. claims therefore, is whether its tax liens were properly filed.

The validity of Federal tax liens is governed by the laws of the state wherein the liened property is situated. (USCA, title 26, §§ 6321, 6323(a) and 6323(f); and see Aquilino v. U. S. A. [60-2 USTC ¶9538], 363 U. S. 509, 513-514; and same case, 10 N. Y. 2d 271, 282; U. S. A. v. Mark Alpha Brickwork Co. [62-1 USTC ¶9354], 202 F. Supp. 673; and U. S. A. v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862.)

New York law requires that Federal tax liens be filed in the office of the County Clerk in which the real property is located (Lien Law, §240; and see Andrello v. Nationwide Mut. Ins., 29 A. D. 2d 489).

Although subdivision 4 of section 71 of the Lien Law provides that persons having claims which the trustee is authorized to pay from trust assets are beneficiaries of the trust whether or not they have filed a notice of lien, that provision merely grants to such claimants equitable rights in the fund, if any remains, and does not aid the U. S. in an issue concerning priority of liens against the fund. (See Burack, Inc. v. Simpson Factors, 21 A. D. 2d 481, 482.)

[Government Lien Not Perfected]

The failure of the U. S. to file its liens in Tompkins County does not appear to have been urged in behalf of the cross-movant below. Nevertheless, since the matter goes to a basic issue of the rights of the parties to the fund, the question may properly be asserted on this appeal (see Guptill Holding Corp. v. State of N. Y., 20 A. D. 2d 832; Hasbrouck v. State of New York, 28 A. D. 2d 1195).

It is held, therefore, that the U. S. has failed to perfect its liens against the fund, and that the plaintiff Harman has a prior right thereto as against the claims of the U. S.

[Conclusion]

Since it is not disputed that Harman's claim exceeds the amount of the fund claimed by Colorcraft against Friederich, Special Term erred in denying the cross-motion of Harman for summary judgment against the United States of America , and in refusing to dismiss the complaint insofar as it asserts valid liens in favor of the United States of America .

The lien of Chapin having been duly filed in Tompkins County, and Chapin, as a partial assignee of subcontractor Colorcraft, being entitled to share in the trust fund (Lien Law, §71, subd. 2(a)), Special Term correctly denied Harman's cross-motion for summary judgment of dismissal of the complaint with respect to the lien of Chapin-Owen Co., Inc.

The order appealed from, therefore, should be modified by granting the cross-motion of Harman for summary judgment dismissing the complaint as against the defendant United States of America , and otherwise should be affirmed, with costs to the defendant Chapin-Owens Co., Inc., payable as a preferred claim out of the trust fund.

All concur.

 

 

[61-1 USTC ¶9303] United States of America , Plaintiff-Appellee v. Toys of the World Club, Inc., Defendant and Publishers Printing-Rogers Kellogg Corporation, Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 25853, 288 F2d 89, 3/10/61, Reversing District Court, 59-1 USTC ¶9258, 170 F. Supp. 450

[1954 Code Sec. 6323]

Lien for taxes: Priority over New York artisan's lien.--Although a New York artisan's lien is not "similar to a pledge" within the meaning of Code Sec. 6323(a), it did have priority over the government's tax lien under the principle of first in time, first in right.

Benjamin Menschel of Wallstein, Menschel & Wallstein, 233 Broadway, New York , N. Y. (Leonard M. Wallstein, Benjamin Menschel and Leonard M. Wallstein, Jr. on brief), for defendant-appellant. S. Hazard Gillespie, Jr., United States Attorney, New York, N. Y., Renee J. Rob erts, of counsel (Renee J. Rob erts and Charles T. Beeching, Jr., Assistant United States Attorneys, New York, N. Y., on brief), for plaintiff-appellee.

Before MEDINA , FRIENDLY and SMITH, Circuit Judges.

[Facts]

FRIENDLY, Circuit Judge:

This is an action by the United States seeking a declaration that its liens for withholding taxes, I. R. C. §6321, against defendant Toys of the World Club, Inc., hereafter Toys, are superior to any lien of defendant Publishers Printing-Rogers Kellogg Corporation, hereafter Publishers.

In October, 1955, Toys and Publishers agreed that Publishers should do certain printing, on paper stock to be furnished it by Toys. The printed material was to be shipped during November, 1955, beginning November 4, when Toys was to pay $2,250. Toys was to pay $2,250 more on November 11, half the balance, to wit, $7,233.45, on December 12, and a like amount on December 31. During September, in anticipation of the contract, Toys delivered 269,425 sheets of paper to Publishers. In November, Publishers shipped all the reprints ordered by Toys but received no payment. The printing used only 217,000 sheets, leaving 52,425 in Publishers' hands. On various dates from February 21, 1956 to May 23, 1956 , the United States assessed withholding taxes against Toys and filed notices of tax liens beginning March 7, 1956 . Thereafter, the United States demanded the paper in the possession of Publishers; the latter refused to comply, claiming an artisan's lien, N. Y. Lien Law, §180. On April 1, 1957 , Publishers gave notice of intention to sell the paper pursuant to N. Y. Lien Law, §201. Thereupon, Publishers' attorney and the United States Attorney for the Southern District of New York entered into a stipulation that the paper might be sold free and clear of the government's claim and that the net proceeds should be held by Publishers' attorney subject to the rights of the parties as these might subsequently be determined. The net proceeds were $1,705.69.

[District Court Decision]

The United States and Publishers each moved for summary judgment determining the superiority of its lien. The United States asserted that Publishers had not obtained an artisan's lien because Publishers had done nothing to improve the surplus paper that it held and the payment and delivery schedules were inconsistent with a lien; and that even if Publishers had an artisan's lien, this was subordinate to the tax liens of the United States . Publishers asserted the validity of its artisan's lien and contended this was entitled to priority over the tax liens, (1) because at the time of the tax assessments Toys no longer had a property interest in the paper; (2) because Publishers was a pledgee and was therefore protected by I. R. C. §6323 against unfiled liens; and (3) because in any event Publishers' lien outranked the government's under the principle of first in time, first in right. Judge Dawson sustained the government's claim that its tax liens ranked Publishers', even assuming the latter's validity. He therefore granted the government's motion for summary judgment and denied defendant's cross-motion without finding it necessary to pass on the issues with respect to Publishers' lien [59-1 USTC ¶9258], 170 F. Supp. 450 (1959).

[Conclusions]

We agreed with Judge Dawson's conclusion that the first two grounds asserted by Publishers to support the superiority of its lien were inadequate; but, with the trepidation natural in view of the course of recent Supreme Court decisions, we disagree with his ruling on the third ground. Finding no merit in the government's attacks on the validity of Publishers' lien, we therefore reverse the order granting the government's motion for summary judgment and direct that summary judgment be granted to Publishers.

I. The District Court's conclusion that the tax liens outrank Publishers' lien, assuming the latter to be valid. (1) Publishers first seeks to bring itself within the Supreme Court's decisions in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), and United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960), see Matter of The City of New York [59-2 USTC ¶9613], 5 N. Y. 2d 300, 157 N. E. 2d 587, 184 N. Y. S. 2d 585 (1959), cert. denied sub nom. United States v. Coblentz, 363 U. S. 841 (1960), and our decision in City of New York v. United States [60-2 USTC ¶9767], 283 F. 2d 829 (1960), that government tax liens will not prevail if, at the time of the assessment, the property against which the lien is asserted no longer belonged to the taxpayer, I. R. C. §6321, but rather to adverse claimants, as in Aquilino and Durham, or to an assignee for the benefit of creditors, as in City of New York. Publishers asserts these decisions apply here because, when the taxes were assessed, Publishers was holding paper, ultimately found to be worth only $1,705.69, as security for an indebtedness more than ten times that much. From a practical standpoint, Toys' interest in the paper at the time of the tax assessments was surely minimal if Publishers had a valid lien for the entire debt. However, apart from that condition, which, as we shall see, is by no means certain of fulfillment, this appears to be a situation in which the legal test necessarily turns on form rather than substance. In contrast to the situation in the City of New York and Durham cases and what the Supreme Court thought might be the situation in Aquilino, here the taxpayer had title to the property when the taxes were assessed, N. Y. Lien Law, §203. Aquilino, itself, pp. 511, 516, shows that the mere excess of a lien over the value of taxpayer's property is not enough to warrant a conclusion that the property no longer "belongs" to the taxpayer; if it were, there would have been no need for remand to the New York Court of Appeals to "asscertain the property interests of the taxpayers under state law."

(2) Publishers' second argument is based on the provisions of I. R. C. §6323(a), that, until filing as therein provided, "the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor * * *." Relying on Tax Regulations §301.6323-1, (a)(2)(ii), that "The determination whether a person is a mortgagee, pledgee, purchaser, or judgment creditor, entitled to the protection of section 6323(a), shall be made by reference to the realities and the facts in a given case rather than to the technical form or terminology used to designate such person," Publishers claims to be a "pledgee." Plainly it is not if the statute uses the word in the traditional sense. The common law drew a sharp distinction between the pledge, whereby the possession of personal property was transferred as security for indebtedness, and possessory liens arising in certain situations wherein chattels were entrusted to persons authorized to retain them until services to the chattels were compensated. This was far more than a verbal distinction, since the pledgee had the right to sell but the possessory lienor did not, Thames Iron Works Co. v. Patent Derrick Co., 1 J. & H. 93, 70 E. R. 676 (1860); American Law Institute, Restatement of Security, §§ 1, 48, 59, 72; Ray A. Brown, Personal Property (2d ed. 1955), §§ 107, 119, 128, 133.

Publishers argues that, with this substantial distinction eliminated by statute, as it is for a New York artisan's lien by Lien Law, §200, the verbal distinction ought not be given significance. The argument is not without force, since certainly the policy reasons supporting the protection against unfiled liens accorded pledgees by I. R. C. §6323 apply in like measure to artisans, warehousemen, innkeepers and carriers. However, the distinction was so well established that we cannot assume Congress intended to obliterate it, and we do not read the Regulations as broadening "pledgee" to include the holder of a possessory lien even if a regulation could perform that office. The Regulations' more modest purpose is manifested by the sentence following that quoted above, "Thus, a person who is in fact and in law a mortgagee, pledgee, or purchaser will be entitled as such to the protection of section 6323(a) even though such person is otherwise designated under the law of a State, such as The Uniform Commercial Code." The holder of a possessory lien is not "in fact and in law" a pledgee, even if statute has now given him a power to sell, on complying with certain statutory conditions, similar to what the pledgee always had. What the Regulations mean is that a person who meets the common law definition of pledgee does not lose protection because he is given some other name--not that persons who would not have been considered pledgees at common law should henceforth be so regarded. Hence, if the taxes had been assessed against Toys before the artisan's lien arose, the government would prevail.

(3) However, they were not so assessed; and the Supreme Court has said that "the federal statutes do not attempt to give priority in all cases to liens created under the paramount authority of the United States" and that when Congress enacted what is now I. R. C. §6321, it had in mind the "cardinal rule," stated by Chief Justice Marshall in Rankin v. Scott, 12 Wheat. 177, 179 (1827), "that a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds, unless the lien be intrinsically defective, or be displaced by some act of the party holding it, which shall postpone him, in a court of law or equity, to a subsequent claimant." United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84, 85-86 (1954). ¹ Is the lien given an artisan by §180 of the New York Lien Law "a prior lien" of this character?

Section 180, which we quote in the margin, ² follows the common law by authorizing an artisan who enhances he value of an article of personal property to "retain possession thereof" until his charges are paid. Section 200 goes beyond the common law by providing that such a lien against personal property "in the legal possession of the lienor, may be satisfied by the public sale of such property according to the provisions of this article." These provisions call only for the service of notice upon the owner, §201, newspaper advertisements, §202, and sale by public auction, §202. No application to a court is required.

Decisions of the Supreme Court, first rendered under the priority-in-insolvency statute, Rev. Stat. §3466, 31 U. S. C. §191, beginning with County of Spokane v. United States [1 USTC ¶387], 279 U. S. 80 (1929), and subsequently carried over to the tax lien statute, I. R. C. §6321, United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 51 (1950), have established that the government's tax lien will prevail over earlier created liens that are general or inchoate. Among liens that have been held to be thus subordinated to the government's tax lien are an attachment lien, United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); a garnishment lien, United States v. Liverpool & London & Globe Inc. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); a landlord's distress lien, United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218 (1955); mechanics' liens, whether unrecorded, United States v. Colotta [55-2 USTC ¶9680], 350 U. S. 808 (1955), or recorded, United States v. White Bear Brewing Co. [56-1 USTC ¶9440], 350 U. S. 1010 (1956); and the lien of a surety under a performance bond with an assignment of sums due and to become due, United States v. R. F. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587-88 (1958). On the other hand, in United States v. City of New Britain, supra, a city's lien for taxes and water rents was held to have become "choate" and to prevail over subsequently accruing Federal tax liens, in contrast to the ruling with respect to the tax lien of the Town of Walpole in United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361 (1953). No Supreme Court decision and none of our own seems to have dealt with the relative priority of a possessory lien and a United States tax lien thereafter accruing.

Whether the reason why New Britain succeeded where Walpole failed was that Connecticut segregated tax liens so that "The interest of each person in each item of real estate * * * shall be subject to a lien for that part of his taxes laid upon the valuation of such interest," Conn. Gen. Stat. (1949), §1853, see also §758, but New Hampshire made "The real estate of every person or corporation * * * holden for all taxes assessed against the owner thereof" as well as "all taxes thereon," N. H. Rev. Laws (1942), C. 80, §17, even though the property of Gilbert Associates was the very property on which Walpole's taxes had been assessed, 97 N. H. 411, 90 A. 2d 499 (1952), see 347 U. S. at 84, or that the requirement of "choateness" is more lenient in cases arising under the tax lien statute than under Rev. Stat. §3466, see 347 U. S. at 87, ³ the instant case seems to come within New Britain rather than Gilbert. It arises under the tax lien statute, not under Rev. Stat. §3466, and Publishers' lien was on specific property. Like the City of New Britain and unlike attaching and garnishing creditors and mechanics' lienors, Publishers could realize on its lien without having to resort to any court. Even if the government's lien under I. R. C. §6321 can be defeated only by the "fully perfected and specific lien" which alone will defeat the United States' priority under Rev. Stat. §3466, if, indeed, even that will, Illinois ex rel. Gordon v. Campbell, 329 U. S. 362, 370 (1946), Publishers' lien meets the requirements laid down in the Campbell case--certainty of the identity of the lienor and of amount, attachment to specific property, and severance of "the property from the debtor's general assets as of the crucial date," p. 376. Here there was no "more perfect lien to come," New York v. Maclay [3 USTC ¶1044], 288 U. S. 290, 294 (1933); the lien was as perfect as a lien ever can be until it ceases to be a lien--Publishers had possession of the paper and was entitled to continue to hold this until either its debt was paid or the paper was sold to satisfy this. It is unnecessary to go beyond Armory v. Delamirie, 1 Str. 505, 93 E. R. 664 (1722), to appreciate the importance the common law has attached to lawful possession, "such a property as will enable him [the possessor] to keep it against all but the rightful owner" and hence sufficient to support trover. The artisan's and other possessory liens go back to the fifteenth century, Y. B. 5 Ed. IV, Pasch. pl. 20, Y. B. 22 Ed. IV, Hil. pl. 15, cited in 7 Holdsworth, History of English Law, p. 512. We cannot believe that when Congress enacted the predecessors of the tax lien statute during and after the Civil War, 13 Stat. 470-71 (1865), 14 Stat. 107 (1866), or thereafter, it meant to allow the government to retake goods of taxpayers held at the date of assessment by third persons under such independent and ancient claims of right. Rulings under Rev. Stat. §3466 giving the United States priority over liens have stressed the absence of "a change of title or possession," New York v. Maclay, supra, at 293-94, United States v. Gilbert Associates, Inc., supra, at 366. Here there has been a change of possession; we see no reason why this should be less effective when the taxpayer has voluntarily surrendered possession to one entitled to retain it than if possession had been taken by a sheriff or marshal.

II. The validity of Publishers' lien. This brings us to the government's contentions, upon which the District Court did not pass, that Publishers had no valid lien (a) because the paper which Publishers held was surplus that Publishers had done nothing to improve, or (b) because the delivery and payment schedules negated an intention that Publishers should have a lien. We might remand for further consideration of these, 28 U. S. C. §2106, but we see no purpose in doing so since the issues are of law and have been fully briefed, and decision now may avoid a subsequent appeal to this Court.

(a) The government's first contention is largely answered by Morgan v. Congdon, 4 N. Y. 552 (1851) and Conrow v. Little, 115 N. Y. 387, 22 N. E. 346 (1889), each upholding an artisan's lien for goods delivered into the artisan's possession but not improved because the artisan stopped work when the owner failed to pay for work already done. These cases are inconsistent with any principle that the artisan may retain only chattels he has in fact improved. The government seeks to distinguish them on the basis that here, as matters turned out, the property retained was surplus which the artisan never was to improve. The government had cited no cases from New York or elsewhere to show that this difference in fact should lead to a difference in result, and we find no basis for so holding. Once it is established, as it unquestionably is, that the artisan's lien does not depend on improvement of the particular goods being retained and that surrender of part of the goods does not eliminate the artisan's privilege of holding the balance for work done in the past, Wiles Laundering Co. v. Hahlo, 105 N. Y. 234, 239, 11 N. E. 500, 502 (1887); International Electronics Co. v. N. S. T. Metal Products Co., 370 Pa. 213, 88 A. 2d 40 (1952); American Law Institute, Restatement of Security, §61 comment (f); Brown on Personal Property (2d ed.) p. 523, we can see no reason for refusing recognition to the artisan's lien on property remaining after all the work has been done and deliveries made, provided only that it came to him as part of the same transaction; it is immaterial that the owner overestimated the amount the artisan needed for his work. Braufman v. Hart Publication Inc., 234 Minn. 343, 348, 48 N. W. 2d 546, 549 (1951), in which the court noted that the law of Minnesota with respect to artisan's liens was substantially the same as that of New York .

(b) The government's second attack upon the validity of Publishers' lien rests upon the principle that there must be "nothing in the contract for doing the work, inconsistent with the right of lien, and that where a particular future time of payment is fixed, which may be subsequent to the time when the owner is entitled to a return of the article upon which the work is done, there can be no lien." Wiles Laundering Co. v. Hahlo, supra, 105 N. Y. at 240, 11 N. E. at 502; Chandler v. Belden, 18 Johns. 157, 162-63 (1820); Chase v. Westmore, 5 M. & S. 180, 105 E. R. 1016 (1816); Brown on Personal Property, §110. See CARDOZO, J. in Matter of Heinsheimer, 214 N. Y. 361, 366-67, 108 N. E. 636, 638 (1915). Assuming without deciding that this principle applies to a statutory lien which, like §180 of the New York Lien Law, goes beyond the common law only in according a power of sale, as seems indicated by Blumenberg Press v. Mutual Mercantile Agency, 77 App. Div. 87, 78 N. Y. S. 1085 (1st Dept. 1902), cf. Olson v. Orr, 94 Kan. 38, 145 P. 900 (1915), it does not avail the government on the facts here. The first payment of $2,250 was to be made simultaneously with the beginning of delivery, and the second $2,250 instalment was also to be paid long before completion. Nothing in the agreement was inconsistent with Publishers' right to refuse to deliver and cease work if these amounts were not paid. In re Tele King Corp., 137 F. Supp. 633 (S. D. N. Y. 1955). Hence Publishers had a valid lien for these sums and the authorities cited above show it did not relinquish this lien by making the deliveries. Since the amount of the proceeds is less than even the first instalment of $2,250 due Publishers, it is immaterial that Publishers may have no lien for the amounts payable only after all deliveries were to have been made.

The order granting summary judgment to the United States is therefore reversed. Since this reversal eliminates any basis for the denial of Publishers' cross-motion for summary judgment, we think it proper to direct the granting of that motion even though its denial would not itself have been appealable, 28 U. S. C. §2106; 6 Moore, Federal Practice (2d ed. 1953), par. 56.27 [2]; United States v. DeWitt, 265 F. 2d 393, 400 (5 Cir. 1959).

It is so ordered.

¹ The New Britain opinion and decision, in which Mr. Justice Jackson joined, are clearly inconsistent with the position taken in his earlier concurring opinion in United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 51 (1950), which seems to have been followed here by the District Court, that the government's lien under I. R. C. §6321 necessarily takes priority over all interests of others save the pre-filing interests specifically protected by I. R. C. §6323. As pointed out by Professor Ernest J. Brown in 72 Harv. L. Rev. 77, 83-85 (1958), the predecessor of §6323 was enacted in 1913 to protect purchasers and certain encumbrancers against prior unrecorded tax liens and thereby overcome United States v. Snyder, 149 U. S. 210 (1893), which had upheld an unrecorded tax lien against a subsequent bona fide purchaser for value. See H. R. Rep. No. 1018, 62d Cong., 2d Sess. (1912); Sen. Rep. No. 648, 76th Cong., 1st Sess. 9-10 (1939); H. R. Rep. No. 855, 76th Cong., 1st Sess. 25-26 (1939). The desire to protect certain persons acquiring interests after a tax lien had arisen but before it had been filed implies no intention to subordinate other persons who had acquired interests before any tax lien arose.

² "A person who makes, alters, repairs or in any way enhances the value of an atricle of personal property, at the request or with the consent of the owner, has a lien on such article, while lawfully in possession thereof, for his reasonable charges for the work done and materials furnished, and may retain possession thereof until such charges are paid."

³ See the discussion in Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L. J. 905, 927-30 (1954).

 

 

[40-1 USTC ¶9205]United States of America, Plaintiff, v. L. P. Larson, Jr., Company, an Illinois Corporation, L. P. Larson, Jr., Company, a Rhode Island Corporation, Newport Products Company, a Rhode Island Corporation, L. P. Larson, Jr., National City Bank of New York, a national banking corporation, William Wrigley, Jr., Company, a Delaware Corporation, Rob ert H. Kammler, Nominee of and Trustee for the William Wrigley, Jr., Company and Laurence A. Janney, Defendants

United States District Court, Southern District of New York, E. 85-368, Decided January 24, 1940

Statute of limitations: Funds on deposit with third parties.--The time for collection by the Government of income taxes for the year 1928 having been extended by waivers, this action, brought within the time as extended is timely. The Government had a prior lien on the proceeds from the sale of trade marks by taxpayer which proceeds were held by a bank and the court directs application of the deposited funds to payment of the Government's tax claim.

John T. Cahill, Esq., United States Attorney for the Southern District of New York, Attorney for Plaintiff, New York , New York . (George B. Schoonmaker, Esq., Assistant U. S. Attorney, of Counsel.) John M. Detjen, Esq., Attorney for Defendants L. P. Larson Jr., Company, an Illinois Corporation, L. P. Larson Jr., Company, a Rhode Island Corporation, Newport Products Company, a Rhode Island Corporation and L. P. Larson, Jr., 22 E. 40th Street, New York, New York. (D. Michelsohn, Esq., of Counsel.) Messrs. Shearman & Sterling, Attorneys for Defendant, National City Bank of New York, 55 Wall Street, New York New York. (Harvey Reeves, Esq., of Counsel; Laurence A. Janney, Esq., pro. se.)

CLANCY, D. J.:

Findings of Fact

The following are my findings of fact.

The defendant, L. P. Larson Jr. Company, is an Illinois corporation. The defendant, L. P. Larson Jr. Company, is a Rhode Island corporation. The National City Bank of New York is a national banking corporation.

On March 15, 1929 , L. P. Larson Jr. Company, an Illinois corporation, filed its income and excess profits tax return for 1928 with the Collector of Internal Revenue at Chicago, Illionis, disclosing a tax liability of $65,052.03 which amount was assessed by the Commissioner of Internal Revenue on August 29, 1929 . Of this amount, the sum of $6,313.00 remains unpaid and bears interest at the rate of 12 percent per annum from December 15, 1929 to October 24, 1933 and at the rate of 6 percent per annum from October 24, 1933 to the date of the entry of judgment. The sum total of this interest to the 15th day of January, 1940, is $5,279.77 and the sum of $1.05 accrues as interest for each day interafter intervening the entry of judgment.

Upon examination and audit of the return of L. P. Larson Jr. Company, an Illinois corporation, a deficiency income tax was assessed on the 15th day of August, 1930 in the sum of $3,058.17, which included interest in the sum of $217.70. This sum bore interest at the rate of 12 percent from the 13th day of September, 1930, when notice and demand was made, to the 24th day of October, 1933 and at the rate of 6 percent thereafter, to the 15th day of January, 1940. The whole amount of interest on this sum is $2,283.44. The sum of $.51 accrues as interest thereon for the time intervening January 15, 1940 and the date of the entry of judgment herein.

On the 16th day of August, 1933, there was filed by L. P. Larson Jr. Company, an Illinois corporation, with the Collector of Internal Revenue, for the Second District of New York, an offer of compromise which was dated June 29, 1933 . This offer to compromise bore the usual agreement and waiver by the taxpayer extending the statutory limitation affecting the collection of the liability sought to be compromised by the period of time not to exceed two years elapsed between the filing of the offer and the day on which final action thereon was taken. This waiver was accepted in writing by the Commissioner of Internal Revenue. This offer was rejected on April 12, 1934 . The period intervening the filing of the offer and its rejection was seven months and twenty-six days. Not later than March 5, 1935 , L. P. Larson Jr. Company, an Illinois corporation, filed with the Collector of Internal Revenue for the Second District of New York, an offer to compromise, bearing date December 19, 1934 . This offer contained an agreement and waiver by the taxpayer extending the statutory period of limitations on collection of the liability sought to be compromised for the period during which the offer was pending. The Commissioner of Internal Revenue accepted this waiver in writing. This waiver was withdrawn by L. P. Larson Jr. Company of Illinois by letter bearing date October 14, 1936 which was filed with the Commissioner of Internal Revenue on October 21, 1936 . The period intervening March 5, 1935 and October 21, 1936 , is one year, seven months and sixteen days. The sum total of the two periods during which the operation of the statutes of limitation on the collection of the liability of the L. P. Larson Jr. Company of Illinois was tolled by these two offers of compromise is two years, three months and twelve days. No check or cash was deposited by the proponent of the last offer to compromise although such tender is provided by the proper regulation. The complaint was filed on October 14, 1937 .

On the 17th day of August, 1911, application was made by L. P. Larson Jr. Company, an Illinois corporation, for registration of a trademark "Peptomint" for chewing gum. That registration was allowed on the 26th day of March, 1912 and certificate of registration No. 85,910 was thereupon issued. On the 3rd day of February, 1914, application was made by L. P. Larson Jr. Company of Chicago , Illinois , for registration of a trademark "Wintermint" for chewing gum, registration of which was made on July 24, 1914 and certificate of registration No. 98,540 was thereupon issued. Application was made on the 8th day of February, 1915 to the United States Patent Office by L. P. Larson Jr. Company of Chicago , Illinois , for registration of a trademark "Peptomint" for chewing gum which registration was allowed on December 28, 1915 and certificate of registration No. 107,789 was thereupon issued. On March 5, 1932 , a petition for renewal of registration No. 85,910, dated March 26, 1912 , was filed in the United States Patent Office by L. P. Larson Jr. Company of Illinois , stating that it was the original registrant; that it then owned and had not abandoned said trademark. This petition was verified by the Vice President of L. P. Larson Jr. Company of Illinois who swore that the registrant had continually been and was then the owner of the trademark registration and had continued the use of the trademark covered by the registration and that no assignment of the trademark had been executed by the registrant to any other firm, company, partnership or individual. The petition of L. P. Larson Jr. Company of Illinois was executed by L. P. Larson Jr. as its president.

Although the evidence does not show that the trademark "Spearmint" was registered in the United States Patent Office, the wrappings of the company's gum sold under the "Spearmint" label stated that the name was registered in the United States Patent Office and I find that it had, in any event, such a claim to the form adopted in the label and to the use of the label, that its purchase became desirable to a competitor.

On August 1, 1929 , L. P. Larson Jr. Company of Rhode Island was organized in the State of Rhode Island . In February, 1929, L. P. Larson Jr. Company of Illinois had purchased a factory property in the City of Newport, Rhode Island, and had transferred its machinery from Chicago , Illinois , to Newport , Rhode Island . At a meeting of the stockholders and directors of L. P. Larson Jr. Company of Illinois on July 9, 1929 and by a directors' meeting of August 20, 1929 , resolutions were adopted providing for the transfer by that corporation to L. P. Larson Jr. Company of Rhode Island of all of its assets except certain accounts receivable. Annexed to the resolutions in the minute book of the Illinois corporation is a copy of a proposed contract of sale not purporting to be executed by either corporation. Except for this instrument and the resolutions which expressed a then present intention to make the transfer, no evidence whatever, except the oral testimony of L. P. Larson Jr., as a witness, indicates that any transfer was made or any attempt made to execute that transfer.

The minutes of the Directors' meeting of August 20, 1929 , contained no statement that anything except the real estate was transferred by the Illinois corporation to the Rhode Island corporation. At neither the Stockholders' meeting nor the Directors' meeting of July 19, 1929 , was any authorization either proposed or granted to convey the good will of the Illinois corporation's business.

The stock of the Rhode Island corporation is now held by Larson as pledgee of the Illinois corporation but no evidence sustains a finding that the consideration for the issuance or transfer of it by the Rhode Island to the Illinois corporation was any other than the real estate and I accordingly make that as a finding. L. P. Larson, Jr. was in full and untrammeled control of both corporations at all times.

Gum manufactured by the Rhode Island corporation, if it ever was manufactured by the Rhode Island corporation, was sold only by the Illinois corporation and much of it in wrappers used by the Illinois corporation before the organization of the Rhode Island corporation, bearing the legend "L. P. Larson Jr. Company, Chicago, U. S. A."

Letters were sent by L. P. Larson Jr. Company, with a Chicago address, in December 1932 and up to and including April, 1933, referring to "our" "Wintermint" and "Spearmint" trademarks and their disposition. Such a letter, bearing date April 28, 1933, sent to the attorney for the purchaser of the trademarks, states that it "completes our delivery to you of everything that we had on hand in Newport and Chicago pertaining to the color scheme of the prohibitive labels."

To effect and evidence the transfer of the trademarks sold in April, 1933, and hereafter found as a fact, assignments were executed by the L. P. Larson Jr. Company of Illinois which were subsequently recorded in the United States Patent Office in which that corporation represented, covenanted and warranted that the entire right, title and interest in and to the said trademark and the registration thereof and the good will of the business, in connection with which the trademark is or has been used, are now owned by the assignor exclusively and had never been sold, assigned, transferred, mortgaged, pledged or encumbered. These instruments were executed by L. P. Larson Jr. as President of the Illinois corporation.

No assignment, prior to the assignment to Rob ert H. Kammler, as trustee of trademark registrations described above, is on record in the United States Patent Office. No assignment of nor any instrument or act of a nature sufficient to transfer the good will of the business of L. P. Larson Jr. Company of Illinois, prior to the Kammler assignment, is in evidence. We find that there is no evidence of any kind indicating that a transfer of any asset from L. P. Larson Jr. Company of Illinois to L. P. Larson Jr. Company of Rhode Island was ever effected excepting the testimony of L. P. Larson Jr., as a witness, and we find as a fact that no such transfer was ever made, except possibly the Newport real estate transfer, which was not proved, some paper wrappers for chewing gum and some office stationery.

An acknowledged agreement in writing, which bears date "as of April 7, 1933," was made by L. P. Larson Jr. Company, an Illinois corporation; L. P. Larson Jr. Company, a Rhode Island corporation; Newport Products Company, a Rhode Island corporation; L. P. Larson Jr., and one R. H. Kammler, as trustee, for the sale to Kammler by the other parties named of the trademarks "Spearmint," "Peptomint" and "Wintermint" for the sum of $85,000. The agreement was made by the first four of the parties named as vendors for the joint account of all as their respective interests may appear and by the trustee vendee with a saving clause providing that no responsibility for liability devolved on the part of the trustee, his representatives or assigns, for distribution of the purchase price as between them. We find this agreement was made in the form described at the instance of the attorney for Kammler, the purchaser, acting as trustee and because he was asked to negotiate with the Rhode Island corporation bearing the same name as the Illinois corporation which was the apparent record holder of title to the trademarks sold; that the Rhode Island corporation, the Newport Products Company and Larson, personally, were included as vendors only because of alleged claims made by them and to discharge such claims and whatever claims might be at any time based on appearances of interest or use and not because either L. P. Larson Jr. Company of Rhode Island, Newport Products Company or L. P. Larson, Jr. had any interest whatever in the trademarks sold. The purchase price for the trademarks was $85,000 and as part of this sum and of its payment $18,880.76 was deposited by the vendee in the National City Bank of New York to secure payment to the United States of America, which was stated to be the only creditor of L. P. Larson Jr. Company of Illinois, in the amount of $9,440.30. This statement was made in the affidavit, dated April 8, 1933, of L. P. Larson, Jr., personally and as officer of L. P. Larson Jr. Company of Illinois, L. P. Larson Jr. Company of Rhode Island and Newport Products Company, executed and delivered by him to the vendee to induce the execution of the agreement above described and to procure payment by Kammler as purchaser therein of the purchase price. This deposit was made in the name of William Wrigley Jr. Company, Rob ert H. Kammler account. Notice was given to and accepted by the National City Bank of New York that this sum was to be disbursed only on order of Laurence A. Janney, a party to this action. The execution and delivery of the affidavit of L. P. Larson, Jr., above referred to, was required by paragraph 16, §d of the contract of sale herein referred to, which provided that each of the three corporate parties to the agreement submit a written statement under oath containing a full, accurate list of the creditors of such corporation, their address, and the amount owing to each.

The balance of the purchase price, $66,119.24, was paid by the vendee to the vendors under the provisions of paragraph 16 §e of the contract of sale which provided that the said L. P. Larson Jr. Company of Rhode Island hold that amount as trustee for the sole purpose of paying the creditors enumerated in the written statement under oath thereinbefore mentioned; that this paragraph 16 §e of the contract further required that Larson should immediately cause said creditors to be fully paid and satisfied. This entire sum of $66,119.24 was disbursed by the L. P. Larson Jr. Company of Rhode Island and was not traced except the sum of $25,000 paid to a Chicago bank and immediately disbursed by it.

On January 21, 1936, a notice of levy was filed by the then Collector of Internal Revenue for the Second New York District with the National City Bank of New York upon the aforesaid deposit and upon any other property in the possession of the bank belonging to L. P. Larson Jr. Company. On January 28, 1936, a notice and demand, dated January 27, 1936, was received by the National City Bank of New York from the then Collector of Internal Revenue for the Second New York District, requiring that the bank pay over, surrender, and deliver to the Collector any property or property rights belonging to L. P. Larson Jr. Company. On October 14, 1937, a notice of tax lien, addressed to Rob ert H. Kammler, as trustee, was received by the National City Bank of New York from the then Collector of Internal Revenue for the Second New York District.

On December 4, 1937, there was received by the National City Bank of New York, an instrument purporting to be dated November 1, 1937 and purporting to be an assignment by L. P. Larson Jr. Company of Rhode Island and L. P. Larson Jr. Company of Illinois to one C. E. Palmer of Texarkana, Texas, of an interest in the sum of $4,000 in the aforesaid fund on deposit with the National City Bank of New York to the account of Rob ert H. Kammler, as trustee. It was agreed at the trial that if he testified, Palmer would state that this alleged assignment was given to him in consideration of a loan made by him to L. P. Larson Jr. Company of Rhode Island .

On December 4, 1939, the Collector of Internal Revenue for the Rhode Island District, served three several notices of tax lien upon the National City Bank of New York in the several sums of $53.33, $329.08 and $639.32 for Social Security taxes and Manufacturers' Excise tax.

Conclusions of Law

1. The statute of limitation in this case was tolled by the period of two years, three months and twelve days and thereby the statutory limitation on collection of the earlier assessment was extended to November 10, 1937 (Act of 1928, §§ 275 and 276) and this action was timely brought, being commenced on October 14, 1937 by the filing of the complaint. N. Y. C. P. A. §17; U. S. v. Northern Finance Corporation, 16 F. (2d) 998 [1 USTC ¶208].

2. The trademarks "Spearmint," "Peptomint" and "Wintermint" were never transferred from L. P. Larson Jr. Company of Illinois to L. P. Larson Jr. Company of Rhode Island .

3. The consideration for the sale of these trademarks belonged exclusively to the L. P. Larson Jr. Company of Illinois .

4. For that amount of money which constituted part of the purchase price and which was delivered to L. P. Larson Jr. Company of Rhode Island and disbursed by it; to wit, $66,119.24, L. P. Larson Jr. Company of Rhode Island was a trustee for the benefit of the United States of America, a creditor of L. P. Larson Jr. Company of Illinois, on the 7th day of April, 1933, when that money was delivered to L. P. Larson Jr. Company of Rhode Island by Kammler, as trustee. The sum of $18,880.76 on deposit in the National City Bank of New York , to the account of William Wrigley Jr. Company, Rob ert H. Kammler, as trustee, is the property of and belongs to L. P. Larson Jr. Company of Illinois .

5. The plaintiff, United States of America , has a valid lien and an immediate first claim upon this sum on deposit in the National City Bank of New York to the extent of $16,934.38 plus the sum of $1.56 for each day following the 15th day of January, 1940, until the day of entry of judgment herein.

6. Judgment is granted in favor of the plaintiff, United States of America , against L. P. Larson Jr. Company of Illinois and L. P. Larson Jr. Company of Rhode Island , in the sum of $16,934.38 with interest as above stated and with costs against both these corporations and not against the other defendants.

7. The action as against L. P. Larson, Jr. and Newport Products Corporation is dismissed without costs.

8. The defendants, National City Bank of New York, Laurence A. Janney and Rob ert H. Kammler, shall do all things necessary on their part to be done to procure the payment forthwith by National City Bank of New York to the plaintiff, United States of America, of the full amount of the judgment herein with interest thereon, out of the monies on deposit as herein shown to the account of William Wrigley Jr. Company and Rob ert H. Kammler, as trustee, withdrawal subject to the approval of Laurence A. Janney.

9. No good reason appearing to the Court for any change in the depositary of the funds on deposit in the National City Bank of New York, remaining after payment of the judgment, if any there may be, the Court will take no action in that respect.

 

 

[83-1 USTC ¶9211]Superior Financial Corp., Plaintiff v. Herbert Haskell and United States of America , et al., Defendants

U. S. District Court, So. Dist. New York, 79 Civ. 6009 (MEL), 556 FSupp 199, 2/15/83

[Code Sec. 6323]

Lien for taxes: Priority: Security interest: Cooperative apartment.--A federal tax lien filed against a cooperative apartmet owned by a delinquent taxpayer was subordinate to the claim of a creditor of the taxpayer because the creditor had perfected its security interest in the apartment under New York law prior to the filing of the federal tax lien. The creditor's claim took priority even though it had not filed a financing statement until after the government's liens had been filed. Under New York law the ownership interest in the cooperative apartment was an interest in personal property. As such, the creditor could, and did, perfect its security interest by taking possession of the stock certificate and lease on the apartment.

Joseph Gordon Gordon & Kanengiser, 159 Millburn Ave. , Millburn , N. J. 07041, for plaintiff. John S. Martin, Jr., United States Attorney, Steven E. Obus, Assistant United States Attorney, New York , N. Y. 10007, for defendants.

LASKER, District Judge:

In 1975, Herbert Haskell purchased 1,090 shares in 30 East 65th Street Corporation, a cooperative apartment corporation. He received a stock certificate and a proprietary lease on an apartment in the building. On the same day Haskell borrowed $70,000 from Superior Financial Corp. (" Superior "). Haskell executed a promissory note and delivered to Superior the stock certificate and lease as collateral. Superior and Haskell have had other dealings since this transaction, but none is material to this action.

In November 1976, and again in May 1977, the United States made assessments against Haskell for unpaid income taxes. Excluding interest, the amount of Haskell's unpaid taxes is $199,758.86. The appropriate notices were filed in the Registrar's Office in New York County in 1977. In 1979 the apartment was sold and an escrow account was created for the proceeds of $175,000. This action was filed by Superior to recover from the escrow fund the amounts that it alleges are due to it. Superior and the United States cross move, pursuant to Fed. R. Civ. Pr. 56 for summary judgment.

Whose claim has priority-- Superior 's or the government's? Title 26 U. S. C. A. §6323 provides that a federal tax lien "shall not be valid as against any . . . holder of a security interest, . . . until notice thereof . . . has been filed by the Secretary or his delegate." 26 U. S. C. A. §6323(h)(1) defines a security interest:

"(h) Definitions.--For purposes of this section and section 6324--

(1) Security interest.--The term 'security interest' means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth."

Thus, if Superior 's claim was "protected under local law against a subsequent judgment lien arising out of an unsecured obligation" before the first tax lien was filed on April 4, 1977 , then Superior 's claim has priority. If, however, Superior 's interest was not so "protected" in April 1977, the United States tax lien has priority.

The local law applicable here is the law of New York . N. Y. U. C. C. §9-103 (McKinney Cum. Supp. 1981-1982). N. Y. U. C. C. §9-301(3) defines a "judgment lien creditor" as a "lien creditor." N. Y. U. C. C. §9-301(1)(b) provides that "an unperfected security interest is subordinate to the rights of . . . a person who becomes a lien creditor before the security interest is perfected." Therefore, Superior 's claim will have priority over the subsequent tax liens if Superior 's security interest in the cooperative appartment was perfected.

A security interest which is not automatically perfected can be perfected under N. Y. U. C. C. in one of two ways: by taking possession of the collateral or by filing a financing statement in the appropriate place. N. Y. U. C. C. §9-302. ¹ The method required depends on the nature of the collateral. Since Superior did not file a financing statement until after the tax liens had been filed Superior 's claim can have priority only if a cooperative apartment is the type of collateral for which a security interest may be perfected by taking possession of the stock certificate and lease.

The parties argee that the ownership interest in a cooperative apartment, although possessing characteristics of an interest in real property is an interest in personal property under New York law. See State Tax Commissioner v. Shor, 43 N. Y. 2d 151, 400 N. Y. S. 2d 805 (1977). N. Y. U. C. C. §9-305 describes the types of personal property as to which possession in itself constitutes a perfected security interest. "A security interest in letters of credit and advices of credit . . . goods, instruments, money, negotiable instruments or chattel paper may be perfected by the secured party's taking possession of the collateral." Superior claims that this section applies because the collateral at issue here, the interest in the cooperative apartment, is most nearly analogous to a "security" (which according to the definitional provisions of the U. C. C. is one type of "instrument" under §9-305. ²

The United States , on the other hand, argues that the collateral here most closely approximate a "general intangible." A "general intangible" is defined by N. Y. U. C. C. §9-106 as "any personal property (including things in action) other than goods, accounts, contract rights, chattel paper, documents and instruments." A security interest in a "general intangible" can only be perfected by filing. (N. Y. U. C. C. §9-305 and Official Comment ¶1).

In determining how the courts of New York could classify shares in a cooperative apartment for the purposes of Article 9 of the U. C. C., both parties cite Chief Judge Breitel's decision for a unanimous Court of Appeals in Shor, supra. In Shor, the issue was "whether the debtor's interest in his cooperative apartment, that is, a stock certificate in the cooperative corporation and a 'proprietary' leasehold granted by the corporation, is a 'chattel real' or personal property." Shor, supra, 400 N. Y. S. 2d at 806. The Court held that it was personal property. Id. at 810. Judge Breitel's discussion of the legislative intent of the 1971 amendments to New York 's Banking law is relevant to the case at hand:

"These provisions indicate a legislative intention that lenders in possession of the relevant documents of title be secure from claims of subsequent creditors without any filing or recording of the security interest. Thus, a possessory security interest in cooperative apartment stock and lease would be much like a possessory security interest in ordinary chattel paper, which requires no filing for perfection (see Uniform Commercial Code, §9-305)."

Id. This reasoning is persuasive in the present controversy. ³

It follows that Superior 's security interest in Haskell's cooperative apartment was perfected when Superior took possession of the stock certificate and lease. Accordingly, Superior 's motion for summary judgment is granted. The cross-motion of the United States is denied.

Submit judgment on notice supported by affidavits as to calculations.

¹ N. Y. U. C. C. §9-302 in part provides:

"(1) A financing statement must be filed to perfect all security interests except the following

(a) a security interest in collateral in possession of the secured party under Section 9-305."

² A "security" for the purposes of the U. C. C. is defined in §8-102:

"(1) In this Article unless the context otherwise requires

(a) A 'security' is an instrument which

(i) is issued in bearer or registered from; and

(ii) is of a type commonly dealt in upon securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment; and

(iii) is either one of a class or series or by its terms is divisible into a class or series of instruments; and

(iv) evidences a share, participation or other interest in property or in an enterprise or evidences an obligation of the issuer."

N. Y. U. C. C. §8-102.

³ It should also be noted that the decision follows the policy of the U. C. C. The U. C. C. distinction between the types of collateral perfected by filing, as opposed to those perfected by possession is sensibly conceived. The object of the distinction is to insure notice to potential lenders that the collateral is already encombered. See White & Summers, Handbook for the Law Under the Uniform Commercial Code 918-40 (2nd ed. 1980). A lender who contemplates a loan secured by an ownership interest in a cooperative apartment will surely be notified that another lender has a prior claim if the other lender, and not the proposed debtor, has possession of the stock certificate and the lease. See also, Rifkin, Co-operative Proprietary Leases, 51 N. Y. S. B. J. 290 (1979), which discusses the implications of Shor, including the relative priority between a lender in possession of the stock and lease, and a Federal tax lien. The writer states:

"[I]t may be concluded that a security interest in the stock and proprietary lease can be perfected by delivery of possession. . . . In the case of security interests which have already been perfected under local law . . . the security interest is protected against subsequently filed federal tax liens. . . ."

Id. at 291-292.

 

[49-1 USTC ¶9258]Matter of Franklin Auto Supply Co., Inc., (Bellerose Motors, Inc.)

In the Supreme Court of New York, Nassau County, February 11, 1949

Lien for taxes: Priority as against judgment creditors and state tax lien.--The federal tax lien against a debtor's bank account was subordinate to the liens of the state and of creditors, where the state and the creditors had obtained judgments and had commenced proceedings supplementary to judgment by service of third-party subpoenas on the bank before the filing of the federal tax lien by the collector. As among the judgment creditors, the state has a common law priority as a sovereign.

Appearances: Nathaniel L. Goldstein, Attorney General of the State of New York, by Samuel Stern, Assistant Attorney General, Attorney for the Industrial Commissioner of the State of New York, 342 Madison Ave., New York 17 N. Y. Sullivan & Schooly, Esqs., 211 Merrick Road, Rockville Centre, N. Y., attorneys for the Nassau County National Bank of Rockville Centre, third party. Eli N. Horin, Esq., Assignee, 163-18 Jamaica Ave., Jamaica, N. Y. Morris Heller, Esq., 163-18 Jamaica Ave., Jamaica, N. Y., for the Franklin Auto Supply Co., Inc. Lewis Allinson, Julius M. Gerzof and Henry J. Miller, Esq., 22 Pine St., Freeport, L. I., N. Y., for the Mechanics Overall Service, Inc. J. Vincent Keogh, Esq., U. S. Attorney, Philip J. Jones, Assistant U. S. Attorney, 521 Federal Building, 271 Washington St., Brooklyn, N. Y., for the Collector of Internal Revenue Goldman, Horowitz & Cherno, Esqs., 1527 Franklin Ave., Mineola, N. Y., for the Fairmount Products Co. Charles G. Ritter, Esq., 278 Fulton Ave., Hempstead, N. Y., for Frank A. E. Marsh, Receiver.

[Consolidation of Supplementary Proceedings]

DIKE, Judge:

The National County Bank of Rockville Centre , hereafter referred to as the Bank, is in possession of a fund belonging to the Bellerose Motors, Inc., hereafter referred to as the Debtor.

Various creditors of the Debtor obtained judgments against it and commenced proceedings supplementary to judgment by service of third party subpoenas on the bank as follows: Franklin Auto Supply, Inc., 12/1/42; Mechanics Overall Service, Inc., 12/5/42; Fairmount Motor Products Co., 12/8/42; Henry J. Miller, 12/18/42; Frank A. E. Marsh, receiver, &c., 9/30/43; Industrial Commissioner of the State of New York, 8/10/43. The service of a third party subpoena in proceedings supplementary to judgment takes the place of the commencement of a judgment-creditor's bill in aid of execution under the old system and gives the judgment creditor a lien upon the equitable assets of the Debtor (Matter of Wicrwire Spencer St. Co. v. Kemkit, 292 N. Y. 139).

In addition, one, Eli H. Horin, hereinafter referred to as the assignee, claims the fund by assignment, and the collector of internal revenue on behalf of the United States filed a notice of levy with the Bank on November 29, 1943, and with the clerk of the United States District Court for the Eastern District of New York on November 23, 1943.

The Bank by order to show cause returnable February 9, 1944, made application to consolidate all the supplementary proceedings, to divest itself of the fund and to have the court pass upon the claims of the various creditors and for other relief.

On March 7, 1944, an order was made herein consolidating all of the supplementary proceedings and joining the assignee and the Collector of Internal Revenue as parties, and as thus consolidated the proceedings and the issues of law and fact were referred to an official referee to hear and determine the amount due to the Debtor from the Bank and the claims of all claimants to said moneys and the priorities of the various claims.

The matter duly came on to be heard before me on the 8th day of May, 1944, at which time testimony was taken and the hearing adjourned without date to afford the claimant, Collector of Internal Revenue, opportunity to audit the records of the Bank to determine the exact amount due to the Debtor. The hearing was to be resumed by service of notice to this effect by any of the parties. Such notice was finally served bringing the matter before me on December 5, 1947 , at which time the hearing was closed.

It appears that the correct amount due from the Bank to the Debtor is $2,268.22. It further appears that the assignee by stipulation has subordinated his claim to that of the United States on behalf of the collector and to the claim of the State of New York on behalf of the industrial commissioner. Since these claims exceed the amount of the fund, the claim of the assignee may be disregarded.

The other claims are as follows: Industrial Commissioner of the State of New York , $2,140.60, with interest from 1/22/43 . Franklin Auto Supply, Inc., $856.65, with interest from 11/19/42 . Mechanics Overall Service, Inc., $131.75, with interest from 12/2/42 . Fairmount Motor Products Co., $32.55, with interest from 12/8/42 . Henry J. Miller; $1,851.51, with interest from 12/18/42 . Frank A. E. Marsh, receiver, $256.10, with interest from 1/8/43 . Collector of Internal Revenue, $1,696.64, plus interest and penalties from 11/23/43 .

[Priority of Liens]

The judgment creditors assert priority because of the prior date of the service of their subpoenas upon the Bank. The United States asserts priority over all claims as a sovereign and also claims that the judgment creditors have lost their lien by failure to extend the restraining provisions of the third party subpoenas within two years of the date of the service of the said subpoenas; the State of New York on behalf of the industrial commissioner claims priority over all claims by reason of statutory and common law rights of priority of the State of New York as a sovereign for taxes due it and contends that the United States Government possesses only a statutory lien which is subordinate to the other claims by reason of the failure to file the tax lien until November 23, 1943.

I cannot agree with the contention of the United States that the judgment creditors have lost their lien by failure to extend the restraining provisions of the third party subpoenas pursuant to section 781 of the Civil Practice Act. At the time the Bank brought on this application to determine the claims and priorities to the fund it held, the two years period had not elapsed. The determination herein relates to the time of the application and there was no need to extend the restraining provisions which are in fact not questioned by the third party.

The claim of the United States for priority as a sovereign is likewise not valid. The Federal Government has no common law right of priority. The only rights which it has are those enumerated in the Constitution, in the statutes enacted pursuant thereto and in the treaties entered into under the Constitution. The right of the United States to priority depends upon statute (United States v. State Bank of North Carolina, 6 Peters; 29; Mackenzie v. United States, 109 Fed. (2d) 540 [40-1 USTC ¶9229]). It is claimed by reason of 53 U. S. Statutes-At-Large (448, U. S. Code Title 26, Sections 3670-3672) which by its terms provides for a lien that shall not be valid as against a judgment creditor until notice thereof has been filed by the Collector in the Office of the Clerk of the United States District Court for the Judicial District in which the property subject to the lien is situated. The judgments involved here and the third-party subpoenas, including that of the Industrial Commissioner, were filed prior to the date of filing of the lien by the collector on November 23, 1943 , and have priority over it. The United States Attorney makes no claim for priority under U. S. Code, Title 31, section 191, and that statute does not appear applicable (In re Meyer's Estate, 159 Pa. Super., 296 [48 A. (2d) 210, 46-2 USTC ¶9332]).

If the claim of the State of New York is sustained, the entire fund will be payable to it as its claim, including interest, exceeds $2,268.22, the amount of the fund. Its claim is for unemployment insurance contributions not paid by the Debtor. These are taxes (Carmichael v. Southern Coal & Coke Co., 301 U. S., 495; Standard Dredging Corp'n v. Murphy, 319 U. S., 306; Chamberlin, Inc., v. Andrews, 271 N. Y., 1, 299 U. S., 515).

It is contended by some of the judgment creditors that there is no proof herein that there were taxes due to the State of New York at the time they served the third-party subpoenas upon the Bank. I cannot agree. There is ample proof that the taxes in question are for 1939, 1940, 1941 and part of 1942, the last item of which was payable by July 31, 1942 .

There is also proof in the proceedings that the Debtor ceased doing business in November, 1942, and its inventory of cars was repossessed by the Bank in November, 1942, and that its few other physical assets were sold on execution in December, 1942, for $100.

As among the judgment creditors, the State of New York has a common law priority of the sovereign--a priority independent of statute ( Marshall v. People, &c., 254 U. S. , 380; Matter of Lincoln Chair, 274 N. Y., 353). It is true that by statute (Labor Law, section 522, subdiv. 6, now section 574, Labor Law) the State of New York has subordinated this right in favor of taxes due the United States (Matter of Lincoln Chair, supra), but in turn, the United States by U. S. Code, Title 26, section 3672, provides that the tax claim shall not be valid against a judgment creditor until filed as therein provided. The judgment of the state was recovered and its third-party subpoena was served prior to the filing of the United States claim. This, however, does not benefit the other judgment creditors for the statutory preference and the common law right of the sovereign to priority applies against them.

It follows that the claim of the state on behalf of the Industrial Commissioner is entitled to priority over all other claims and the third party will be directed to turn over the funds, amounting to $2,268.22, and interest, if any, accrued, in its possession in part payment of said claim.

Settle order on notice.

 

 

[72-1 USTC ¶9311]In the Matter of Thriftway Auto Rental Corp., Bankrupt. United States of America , Appellant v. Rob ert P. Herzog, Trustee; State of New York and City of New York , Appellees

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 71-1569, 457 F2d 409, 3/8/72, Aff'g an unreported District Court decision

[Code Sec. 6323]

Lien for taxes: Creation of lein under state law: New York: Docketing of city's warrants: Priority over federal lien.--Under state law, the docketing of a city's tax warrants created a statutory lien on a corporation's property which did not expire at the date of bankruptcy. The lien did not expire prior to the time of the bankruptcy petition although no actual levy was made and no additional executions or new warrants were issued. Although, theoretically, the city's lien was forever enforceable, as a practical matter its duration was unduly burdensome. Furthermore, the city's lien was sufficiently choate and therefore was entitled to priority over a federal tax lien. The identity of the lienor, the property subject to the lien, and the amount of the lien were properly established.

Whitney North Seymour, Jr., United States Attorney, Alan B. Morrison, Susan Freiman, Assistant United States Attorney, New York, N. Y., for appellant. Cornelius F. Rouche, New York, N. Y., J. Lee Rankin, Stanley Buchsbaum, Samuel J. Warms, New York, N. Y., for appellees.

Before LUMBARD, WATERMAN and FEINBERG, Circuit Judges.

FEINBERG, Circuit Judge:

The United States appeals from an unreported Memorandum Decision of the United States District Court for the Southern District of New York, Thomas F. Croake, J., reversing a decision of Edward J. Ryan, Referee in Bankruptcy, and holding that New York City's tax lien of $16,307.33 upon the property of the bankrupt, Thriftway Auto Rental Corp., is entitled to priority over two federal tax liens of $9,851.48 and $3,934.86. ¹ The assets of the bankrupt, consisting entirely of personal property, are worth only $8,638.44. Therefore, the knotty question of priority is, lamentably, worth litigating.

[Facts]

The question arises in the following context: On November 6, 1964 , the City's Director of Finance (now Finance Administrator) issued a tax warrant against Thriftway for certain unpaid sales, business and occupancy taxes. On that same day, a copy of the warrant was filed in the Office of the Clerk of New York County and the amount of the warrant was duly entered in the judgment docket. Although the City apparently collected $1,000 from Thriftway on the amount of the warrant, the City did not levy or otherwise enforce its warrant. Then, on November 18, 1964 , and again on January 13, 1965 , the United States made its tax assessments, and notices of the assessments were duly filed. The petition in bankruptcy was filed shortly thereafter, on February 15, 1965 .

All parties agree that the federal liens, which arose under 26 U. S. C. §6321, are valid against the trustee. ² What remains, then, are two issues: whether as a matter of state law the docketing of the City's warrant created a lien, and, if so, whether the lien is entitled to priority over the subsequent federal liens under the controlling federal standards. Referee Ryan held that the docketing alone, without subsequent levy, created no lien at all for the City. On the City's petition for review, Judge Croake disagreed, and further found that the lien created is entitled to priority. Manifestly, neither issue is simple, but we agree with Judge Croake and affirm.

[Creation of Lien]

I. Whether a lien is created by the docketing of municipal tax warrants is a matter of local law. The pertinent section of New York City 's Administrative Code is set out in the margin. ³ The text of this section has apparently remained substantially unchanged since first enacted and age has failed to improve its clarity. The City directs our attention particularly to the third sentence, which declares that when the county clerk enters pertinent information regarding the tax warrant in the judgment docket "the amount of such warrant so docketed shall become a lien upon the title to the interest in real and personal property of the person against whom the warrant is issued." The City maintains that by virtue of this provision it acquired a lien upon Thriftway's property as of November 6, 1964, when the warrant was docketed, and that this lien, entitled to recognition under section 67b of the Bankruptcy Act, 11 U. S. C. §107(b), is superior to the subsequent federal liens.

The United States, on the other hand, argues that the City's reading of the "seemingly clear language" of the third sentence is misleading, and then directs our attention to the sentence immediately following, which provides that after the warrant is docketed "[t]he city sheriff shall then proceed upon the warrant in the same manner and with like effect, as that provided by law in respect to executions issued against property upon judgments of a court of record. . . ." The United States maintains that this sentence incorporates into the Administrative Code Article 52 of New York's Civil Practice Law and Rules (CPLR) which prescribes the effect of executions on personal judgments generally. Citing CPLR §§ 5202, 5230(c), the United States argues that under the CPLR delivery of an execution to a sheriff by a judgment creditor gives rise to a lien upon personal property, but only for a limited period of time after which the lien expires. The Government would have us conclude that since, in the present case, no actual levy was made and no additional executions or "new warrants" were issued, whatever lien the City may have had by reason of the third sentence of the Code expired prior to the time of the bankruptcy petition by reason of the fourth sentence.

[Docketing City Warrant]

Although there is force to this suggested reading, it means that the docketing of a City tax warrant is treated only as the docketing of a private judgment. Under the CPLR, the latter creates no lien at all upon personal property, but merely enables a judgment creditor to obtain a lien through further action, e.g., as against a "transferee" by delivery of an execution, see CPLR §5202; as against another judgment creditor by levy, see CPLR §5234; City of New York v. Panzirer, 259 N. Y. S. 2d 284, 288 (1st Dep't 1965). To be sure, sentence four of the Code section intends that docketed warrants may be treated as docketed judgments, enabling the City, for example, to serve a third-party information subpoena and restraining order as may any other "judgment creditor." See City of New York v. Bedford Bar & Grill, Inc., 140 N. Y. S. 2d 762 (3d Dep't 1955 ), aff'd, 2 N. Y. 2d 429 (1957); CPLR §§ 5222, 5224. But the text of the Code section, particularly the third sentence, suggests that the City did not limit its docketed warrants to such treatment. Had the City chosen to so limit the effects of its warrants, it could easily have done so, as for example New York State has done with respect to its personal income tax warrants. Under Tax L. §692(d) ( McKinney 1966), when a tax warrant is docketed:

such amount [of the warrant] shall thereupon be a binding lien upon the real, personal and other property of the taxpayer to the same extent as other judgments duly docketed in the office of such clerk. [Emphasis added.]

A comparison of this language to the text of sentence three of the Code section, which itself seems to have been copied from a provision of the state sales tax law, Tax L. §1141(b) (McKinney 1966), does suggest that the City's docketed warrants were intended to have effects greater than "other judgments duly docketed." Indeed, the district court concluded that the tax warrant provided for by the Administrative Code serves at least "three functions: of creating a lien, of giving notice of the lien, and of operating as an execution." The court added:

The intent of the draftsmen appears to have been that only as an execution could the warrant become functus officio.

On the basis of the text alone, then, we think that the scales tip slightly in favor of the City's suggested reading of the Administrative Code.

[Pertinent Case Law]

The City's case is strongly buttressed by decisions in the New York state courts applying the Code. See Argiriou & Finkel v. Marciante Luncheonette II, Inc., 315 N. Y. S. 2d 448 (Sup. Ct. 1970); In re De Kalb Ave. Reconstr., 205 N. Y. S. 2d 125 (2d Dep't 1960 ), aff'd, 12 N. Y. 2d 1051 (1963). In De Kalb , one of the issues raised was whether the City could push back the time of the perfection of its lien for sales and business taxes from the date the warrant was docketed to the tax assessment dates, and thus obtain priority over intervening federal tax liens. The court held in favor of the federal government, but clearly indicated that the City's lien was perfected when its warrant was docketed. 205 N. Y. S. 2d at 133. More recently, in Marciante Luncheonette, supra, a question of priority arose between a judgment creditor that had obtained a restraining order and the City, which--subsequent to that order--docketed its sales and business tax warrant. The court held that the judgment creditor "had no lien at all against any of the personal property of the debtor," and that "[o]n the other hand, the City . . . established its lien by the docketing of a warrant with the County Clerk . . . ." 315 N. Y. S. 2d at 452. The decision of this court dealing with the Administrative Code similarly lends support to the City's position. See City of New York v. Hall, 139 F. 2d 935 (2d Cir. 1944); In re Saratoga Paint Co., 31 F. Supp. 514 (E. D. N. Y. 1940), aff'd sub nom. Davis v. City of New York, 119 F. 2d 559 (2d Cir. 1941) (per curiam); but see In re L. Gandolfi & Co., 42 F. Supp. 706, 708 (S. D. N. Y. 1940). The Hall and Davis decisions are perhaps distinguishable on narrow grounds, but they nonetheless suggest that in the past this court has treated the docketing of a tax warrant by the City as "impos[ing] a lien upon all the property of the bankrupt." Davis, supra, 119 F. 2d at 560. See also the decision of Referee Asa S. Herzog in In re Lum's 52nd Street Corp., Bankrupt (S. D. N. Y. 1963) (Dkt. No. 61-B-194), which squarely held, despite strenuous arguments of the United States to the contrary, that the docketing of a warrant for sales taxes creates a lien under the Administrative Code. ⁴

The United States calls our attention to Ersa, Inc. v. Dudley [56-2 USTC ¶9621] 234 F. 2d 178 (3d Cir. 1956), in which the Third Circuit reached a contrary result in applying a Pennsylvania statute in some respects similar to the City's Code. See 234 F. 2d at 181. Aside from highlighting the type of ambiguity that "drips" from these hoary statutes, Hall, supra, 139 F. 2d at 936 (Frank, J.), that decision has little relevance here, since the court merely followed an explicit holding of the Pennsylvania Supreme Court which gave its own statute a narrow construction. No comparable New York state court holding has been presented to us, and, as already indicated, what state authority there is points decidedly in the opposite direction. ⁵

At oral argument the United States contended that by adopting the City's reading of the Administrative Code this court would in effect create a municipal tax lien that would be forever enforceable, while enforcement of the federal government's tax liens is limited to six years from the date of assessment. See 26 U. S. C. §6502(a). Such an anomalous result, it was suggested, would encourage slothful municipal admin istrators. But whatever the theoretical life expectancy of the City's lien may be, we are not convinced that as a practical matter its duration will be unduly burdensome. First, as the district court noted, failure to levy on personal property prior to bankruptcy will result in subordination of the City's lien to admin istrative expenses and wage claims, see 11 U. S. C. §107(c)(3); cf. United States v. Randall [71-1 USTC ¶9286], 401 U. S. 513 (1971). Also, tax penalties will be rendered unrecoverable, see 11 U. S. C. §107(c)(4). Secondly, state (as well as federal) liens based upon taxes "legally due and owing" for more than three years prior to bankruptcy become dischargeable--at least as against property acquired after the bankruptcy. See 11 U. S. C. §35(a); United States v. Sanabria [70-1 USTC ¶9363], 424 F. 2d 1121 (7th Cir. 1970); Plumb, Federal Liens and Priorities--Agenda for the Next Decade I, 77 Yale L. J. 228, 270 (1967) [Plumb I]. Such "stale" tax liens also lose their priority status under 11 U. S. C. §104(a)(4). See Plumb I at 263. Finally, the ultimate remaining penalty on a lethargic municipality for its delay is the "ancient federal statute," still commonly termed Section 3466 of the Revised Statutes, 31 U. S. C. §191. This statute applies in certain cases of insolvency other than straight bankruptcy and provides that "the debts due the United States shall be first satisfied." See Plumb I at 237-39.

[Priority Over Federal Liens]

II. Under state law, then, the docketing of the City's warrant created a statutory lien on Thriftway's property which had not expired at the date of bankruptcy. ⁶ The question remains, however, whether--as a matter of federal law--the City's lien is entitled to priority over the subsequent federal liens. Generally, of course, the rule of "first in time, first in right" would dictate that the City prevail. See United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-86 (1954). But the United States contends that the priority of the City's lien should not be recognized because the lien is not "choate." According to the United States, in order to obtain a "choate" lien it is necessary for the City "to take possession of property or to have a lien that relates only to specific property. . . ." ⁷ The argument attempts to resurrect the double standard in determining the "choateness" of state and federal liens. That standard was finally repudiated by a unanimous Supreme Court in United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964), aff'g [63-1 USTC ¶9472] 317 F. 2d 446 (2d Cir. 1963). See generally, Plumb, Federal Liens and Priorities--Agenda for the Next Decade III, 77 Yale L. J. 1104, 1104-1107 (1968). It is true, as the United States points out, that the Vermont decision involved a solvent taxpayer and a state statute whose language was almost identical to the federal tax lien provisions, 26 U. S. C. §§ 6321, 6322. But the decision simply cannot be so facilely confined. The Court explicitly held that an "antecedent state lien . . . is sufficiently choate" if it "meets the test laid down in [ United States v. City of] New Britain [54-1 USTC ¶9191] [347 U. S. 81, (1954)] that 'the identity of the lienor, the property subject to the lien, and the amount of the lien are established.'" 377 U. S. at 358. In the present case, New York City's lien meets this test ⁸ and would therefore appear to be entitled to priority. As we indicated in a previous opinion in this area: "Doubtless we shall soon be instructed if we are wrong." United States v. Vermont, supra, 317 F. 2d at 454.

Judgment affirmed.

¹ The City has conceded that a third federal tax lien in a small amount arose before the City's contested lien and is entitled to priority.

² The trustee is not a party to this appeal and is not interested in its outcome since both the City and the United States have claims in excess of the bankrupt's assets and both concede that their liens are subject to the prior payment of admin istrative expenses and wage claims. See 11 U. S. C. §107(c)(3).

The Industrial Commissioner of the State of New York , and the New York State Tax Commission, both alleging to be priority claimants, offered token opposition to the City's motion before the Referee, but did not appeal from the district court's ruling.

³ 5 N. Y. City Charter and Administrative Code §N46-11.0(b) (1971) provides:

[1] As an additional or alternate remedy, the director of finance may issue a warrant, directed to the city sheriff commanding him to levy upon and sell the real and personal property of the vendor or officer of a corporate vendor or purchaser or other person liable for the tax which may be found within the city, for the payment of the amount thereof, with any penalties and interest, and the costs of executing the warrant, and to return such warrant to the director of finance and to pay to him the money collected by virtue thereof within sixty days after the receipt of such warrant. [2] The city sheriff shall within five days after the receipt of the warrant file with the county clerk a copy thereof, and thereupon such clerk shall enter in the judgment docket the name of the person mentioned in the warrant and the amount of the tax, penalties and interest for which the warrant is issued and the date when such copy is filed. [3] Thereupon the amount of such warrant so docketed shall become a lien upon the title to the interest in real and personal property of the person against whom the warrant is issued. [4] The city sheriff shall then proceed upon the warrant in the same manner and with like effect, as that provided by law in respect to executions issued against property upon judgments of a court of record and for services in executing the warrant he shall be entitled to the same fees, which he may collect in the same manner. [5] In the discretion of the director of finance a warrant of like terms, force and effect may be issued and directed to any officer or employee of the department of finance, and in the execution thereof such officer or employee shall have all the powers conferred by law upon sheriffs, but shall be entitled to no fee or compensation in excess of the actual expenses paid in the performance of such duty. [6] If a warrant is returned not satisfied in full, the director of finance may from time to time issue new warrants and shall also have the same remedies to enforce the amount due thereunder as if the city had recovered judgment therefor and execution thereon had been returned unsatisfied. [Enumeration and emphasis added.]

Technically, this section applies to the warrant only insofar as it represents assessed sales taxes. However, the provision relating to the assessed business taxes is identical. See 5 N. Y. City Charter and Administrative Code §B46-10.0(b) (1971). Although the provision relating to the occupancy taxes differs, see Id. at §E46-13.0(a), the parties have not argued that different treatment is required. Apparently their position is influenced by the small amount of the occupancy taxes here involved, less than $100 including penalties which are unrecoverable in bankruptcy proceedings. 11 U. S. C. §107(c)(4).

⁴ The United States did not petition for review of the decision, which is unreported.

⁵ Reliance by the United States of City of New York v. Panzirer, supra, is misplaced. In that case, although the City apparently docketed a tax warrant, it relied on its status as a judgment creditor that had served a third-party information subpoena and restraining notice, rather than on the Administrative Code provisions. Those provisions were not mentioned by the court.

⁶ This conclusion effectively answers the alternative argument of the United States that if the City has a lien, it is nevertheless invalid against the trustee under §67c(1)(B) of the Bankruptcy Act, 11 U. S. C. §107(c)(1)(B). That argument turns on treating the docketed warrant as "equivalent to a judgment lien." Appellant's brief at 12. Absent such treatment, no authority has been cited to us and we have found none, which would suggest that the lien created in favor of the City is invalid against a bona fide purchaser. Federal tax liens, once filed, are good against such a purchaser, see 4 Collier On Bankruptcy §67.281 [2.20] (14th ed. 1969); cf. United States v. Speers [66-1 USTC ¶9101], 382 U. S. 266, 276 (1965). Without authority, we would not feel free to treat differently the City's lien, which is created by docketing.

⁷ Appellant's brief at 12-13.

⁸ We note also that the City's lien is summarily enforceable by admin istrative action. See 377 U. S. at 359 & n. 12.

 

 

[62-1 USTC ¶9395]Matter of City of N. Y. ( Lincoln Square Slum Clearance Project)

N. Y. Supreme Court, Special Term, Part IX, N. Y. County, 1/12/62

[1954 Code Secs. 6321-6323]

Priority of liens: Condemnation award fund: New York City taxes: Existence of valid obligation.--A city's lien for sales and other city taxes had precedence over a Federal lien for unpaid taxes, as against a condemnation award received by the tax debtor, to the extent that the city's lien was a valid, subsisting obligation of the debtor before the time the Federal lien was filed. To the extent that it was not a valid, acknowledged obligation of the debtor, the Federal lien was superior.

A. I. Madison, 186 Joralemon St., Brooklyn, N. Y., for David Gottlieb and Enid Gottlieb Blaymore. Rob ert M. Morgenthau, U. S. Court House, Foley Square , New York 7, N. Y., for U. S.

[Case Involves Rights to Condemnation Award]

HECHT, Judge:

In the Lincoln Square Condemnation Proceeding, an award for trade fixtures was made to Burke Oldsmobile, Inc. This award, with interest thereon to May 1, 1961 , amounted to $100,719.34. The instant motions and cross-motions involve conflicting claims to the foregoing award. All parties concede that the attorneys who represented Burke in the condemnation proceeding should be paid their fee (Matter of City of N. Y. [U. S. A. Coblentz] [59-2 USTC ¶9613], 5 N. Y. 2d 300). The parties have agreed to a fee of $22,500 and payment in that amount has been authorized. A claim of $6,225 is made by the beneficiaries of one Gottlieb. On February 6, 1960 , Burke made an assignment of this amount out of the award to Gottlieb. The final decree making the award to Burke was filed on February 19. On March 4, Gottlieb recorded this assignment in the office of the City comptroller pursuant to section B15-31.0 of the New York City Administrative Code. At the time of such recordation, the amount of the award and the party to whom it was payable had all been finally determined by the final decree entered two weeks before. Therefore the assignment was not one of an inchoate interest, but rather a transfer of an existing interest in a completed award. The United States Government's lien against Burke was filed with the county clerk, and a notice of levy filed with the comptroller on March 14, 1961 , pursuant to section 6323(a) of the Internal Revenue Code of 1954. Since this filing occurred more than a year after recordation of the Gottlieb assignment, the latter has priority. The City never questioned the priority of the Gottlieb claim over its own. The federal government originally claimed priority over Gottlieb, on the authority of United States v. R. F. Ball Construction Co., Inc. ([58-1 USTC ¶9327] 355 U. S. 587). However, on December 18, 1961, after submission of these motions, the United States Supreme Court vacated a judgment of the United States Court of Appeals for the Seventh Circuit in the case of Crest Finance Co., Inc. v. United States ([61-1 USTC ¶9460] 291 F. 2d 1), which case had been decided on the authority of Ball Construction Company (supra). With commendable diligence, the Assistant United States Attorney promptly advised the court of that decision, and withdrew his objection to the Gottlieb claim. Accordingly, it will be allowed.

[Dispute Between City and Federal Governments]

After deducting the attorneys' fee and the Gottlieb claim, there is a balance of approximately $71,000 in the Burke award. This is the subject of the conflicting claims of the City and the Federal Government which can best be analyzed by a chronological statement of the pertinent events:

February 28, 1958 --Title to Burke's property vested in the city. September 23, 1958 --The city comptroller served a notice of determination on Burke. This stated that Burke owed $402,599.66 in excess of the amounts which it had reported in its sales tax returns for the period between September 1, 1954 , and August 31, 1957 ; and on its business tax return for the period between July 1, 1954 , and June 30, 1957 . December 28, 1960 --The city filed a warrant in the county clerk's office for $58,723.87. This was based on sales taxes which Burke's return showed to be due for the period from March 1 to November 30, 1960 , and for business taxes which Burke's return showed to be due for the year 1959, none of which had been paid by Burke. The amount presently due and unpaid on that warrant is $49,730.17. March 13, 1961 --The United States Government filed with the county clerk liens for federal taxes due from Burke in the aggregate sum of $32,065.88. October 19, 1961 --Burke and the city agreed to reduce to $32,974.44, the taxes of $402,599.66 claimed by the comptroller in his notice of determination of September 23, 1958 (supra). October 30, 1961 --The city filed a warrant for the foregoing $32,974.44 in the county clerk's office.

[Contentions of Parties]

The Federal Government's claim is based upon sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954. Section 6321 provides that if a person neglects or refuses to pay any tax owing by him, the amount thereof "shall be a lien in favor of the United States upon all property and rights to property * * * belonging to such person." Section 6322 provides that the lien shall arise when the assessment is made. Section 6323 provides that the lien shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed in the appropriate public office therefor, which in this case is the county clerk's office. The city, of course, does not fall within any of the foregoing categories. However, it claims priority, by virtue of his alleged right of set-off, both with regard to the $50,000 still due under the December, 1960, warrant, and with regard to the $33,000 due under the October, 1961, warrant.

[Controlling Authority]

The legal principles controlling the adjustment of the competing federal and state interests in this field have been set forth by Chief Justice Warren in Aquilino v. United States ([60-2 USTC ¶9538] 363 U. S. 509) where he said (pp. 512-14): "The threshold question in the 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, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the state.' Thus, as we held only two Terms ago, Section 3670 [now Section 6321] 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law * * *." However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.' The application of state law in ascertaining the taxpayer's property rights and of federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles. This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform admin istration of the federal revenue statutes" (citations omitted).

[City Prevails on One Issue--Loses on Other]

The application of this principle requires recognition of the city's right to priority in respect of the $49,730.17 balance of the excise taxes which Burke conceded to be due in its return prior to December 28, 1960 , which was nearly three months before the federal tax lien was filed. As was said by the Second Department in Matter of City of New York ([Coblentz] [60-2 USTC ¶9712], 11 App. Div. 2d 240, 243-9): "The doctrine that a condemnation award may be the subject of a set-off is an acceptable one. There is manifest equity in it (Matter of Nunez, 226 N. Y. 246, 250). It follows that a set-off against such an award results in a reduction of the award or the right to the award or, to equity action from [section 6321, supra] a reduction of the debtor condemnee's property and rights to property to which a lien of the United States could attach." That amount plus interest has next right of payment out of Burke's award. The United States Supreme Court has also recognized that "the Government has the same right which belongs to every creditor, to apply the unappropriated moneys to his debtor, in his hands in extinguishment of the debts due him" (U. S. v. Munsey Trust Co., 332 U. S. 234, 239). A contrary principle applies, however in the case of the $32,974.44 of excise taxes for which the City of New York filed its warrant in October, 1961, seven months after the filing of the federal tax lien. "However, a set-off may not be allowed if the claim sought to be employed for the purpose has not become due and payable and final in its nature" (Matter of City of N. Y. [Coblentz] supra). In De Camp v. Thompson (159 N. Y. 444), which is relied on in Coblentz (supra), plaintiff obtained a judgment against defendants of $1,800 for costs, which was affirmed in the Appellate Division. Defendants appealed to the Court of Appeals, and gave the required undertaking, thereby staying execution until the decision of the latter court. While the above case was pending undetermined in the Court of Appeals, defendants obtained a judgment for $300 for costs against plaintiff in another action. The court held that defendants could levy execution on their judgment without requiring them to set it off against plaintiff's $1,800 judgment. The court said, per Martin, J. (p. 448): "The authorities seem to be quite uniform to the effect that a judgment to be available as a set-off must be a valid, subsisting obligation and final in its nature, and, hence, that judgments cannot be set off against each other, where one of them has been appealed from and the appeal is still pending and undetermined. It seems quite obvious that the plaintiff, at the time of the trial, had no absolute legal right to the set-off sought to be enforced by this action. His judgment was not then, and indeed might never become payable or enforceable. Whether it would or not depended entirely upon the future action of the court to which the appeal had been taken" (citations omitted). That doctrine applies here. At the time when the federal lien attached, on March 13, 1961 , the city's claim against Burke for excise taxes from 1954 to 1957 was not "a valid, subsisting obligation" nor was it "final in its nature." It would not become final until the proceeding outlined in the New York City Administrative Code had been completed (see Coblentz, supra, 11 App. Div. 2d 1, pp. 245-6). This is emphasized by the fact that the city's claim of over $400,000 was subsequently determined to be "a valid subsisting obligation and final in its nature" for only 8 per cent of the amount originally sought. When that determination was made, the federal lien had already attached. In United States v. Munsey Trust Company (Supra), the amount of damages sustained by the United States for breach of another contract, which the government was allowed to offset against the contractor's claim in the subject case, was undisputed (see 332 U. S. at p. 237).

There is thus a vital distinction between the $50,000 for 1959-60 taxes represented by the city's December, 1960, warrant, and the $33,000 for 1954-57 taxes represented by its October, 1961, warrant. In the former case, the item was conceded to be due by Burke at the time when the federal warrant was filed. On that date, therefore, the debtor condemnee's property had been reduced by that amount. But such property was not reduced by the amount of the 1954-57 taxes until the final determination thereof, subsequent to the filing of the federal tax warrant. It may be added that adherence to the city's argument of allowing priority to the latter item would be incompatible with the "proper balance" between city and federal interests which is envisaged by Chief Justice Warren in Aquilino (supra). Upon the initiation of a condemnation proceeding, the city could file notices of determination against all condemnees subject to excise taxes. Even though the amounts stated in such notices bore no relation to reality, on the city's theory, it could then claim priority over supervening federal tax liens for whatever fraction of the foregoing amounts was ultimately determined to be due. The New York City Administrative Code provides an easy and expeditious method for final determination of the amount of excise taxes due (Matter of Coblentz, supra, 11 App. Div. 2d 1, pp. 245-6). If that method had been followed here, Burke's obligation for the 1954-57 excise taxes could have been made valid, subsisting and final long before the federal tax lien attached.

[Division of Condemnation Award]

Accordingly, the claims against the award should be paid in the following order of priority: (1) The attorneys' fee of $22,500. (2) The Gottlieb claim of $6,225, with interest. (3) The city's claim for $49,730.17, with interest. (4) The federal government's claim for $32,065.88 with interest. Since this exhausts the amount of the award, there is no need to consider the city's warrants of May, 1961, for $16,334.42 nor the federal government's lien of June 6, 1961 , for $746.90. Settle order.

 

 

[65-2 USTC ¶9632]Meadow Brook National Bank, petitioner-appellant v. Federal Insurance Company, United States of America and Irving Friedman, respondents

New York Supreme Court, Appellate Div., 117 NE, 6/14/65

[1954 Code Sec. 6323]

Tax liens: Priority: State law.--Under New York law, the service of a subpoena and restraining notice upon a third party debtor of a taxpayer was not sufficient to establish a prior lien as against a later federal tax levy in the absence of a turnover order obtained prior to the date of such levy. Also, the federal levy did not reach that portion of insurance proceeds covering jewelry which was stolen from the taxpayer and had been delivered to him on memorandum under which the jeweler retained title to the property pending payment therefor.

Lee Franklin, David C. Weisberg, 1527 Franklin Ave. , Mineola , N. Y., for petitioner-appellant. Joseph Hoey, United States Attorney, George L. Barnett, Assistant United States Attorney, Brooklyn, N. Y., for U. S., Monroe N. Kreisberg, 39-01 Main St., Flushing, N. Y., for Friedman.

In a special proceeding pursuant to statute (CPLR 2606) to determine the respective rights of creditors to the proceeds ($34,877) of a burglary insurance policy which had been paid into court by the insurance company, the petitioner Meadow Brook National Bank, a judgment creditor of the insured, appeals from so much of an order of the Supreme Court, Nassau County, entered October 6, 1964, as directed the Treasurer of Nassau County (with whom the insurance proceeds had been deposited): (a) to make payment of the sum of $16,533.01 out of such proceeds to the claimant, District Director of Internal Revenue; and (b) to make payment of the sum of $12,141 out of such proceeds to the claimant Irving Friedman. Order, insofar as appealed from, affirmed without costs. On June 8, 1963, the claimant, Irving Friedman (a jeweler), delivered to one Louis J. Goodkin two items of jewelry on memorandum, under which Friedman retained title to the jewelry pending payment therefor. Such payment was never made. On September 12, 1963 the Bank obtained a judgment of some $57,000 against Goodkin and his wife. On September 30, 1963 the Goodkins were served with subpoenas in enforcement proceedings and restraining notices pursuant to the statute (CPLR 5222, subd. [b]). On November 13, 1963 the Goodkins' home was burglarized. Among other things, the said items of jewelry were stolen. The entire loss was covered by insurance. On December 6, 1963 the Bank served a subpoena and restraining notice on the Goodkins' insurance company as a third party. On March 17, 1964 the United States Government served a levy on the Goodkins' insurance company for withholding taxes due. In our opinion, Special Term correctly held that: (1) the service of the subpoena and restraining notice on the third party insurance company on December 6, 1963 was not sufficient under the statute (CPLR 5234, subd. [c]) to establish a prior lien as against the subsequent levy of the United States Government on March 17, 1964 in the absence of a turnover order obtained prior to the date of such levy; and (2) when Goodkin received the insurance proceeds (by deposit thereof with the Treasurer of Nassau County) which covered the jewelry owned by jeweler Friedman, that part of the proceeds representing the value of the jewelry was held by Goodkin in trust for Friedman. Before September 1, 1963 the statutory lien provided by section 799-a of the former Civil Practice Act arose by mere service on the third party of a subpoena in supplementary proceedings containing a restraining notice. However, the provisions of said section 799-a have been omitted from the CPLR. After September 1, 1963 priority as against a later levy is not gained merely by serving a subpoena containing a restraining notice, but is gained only when property is ordered to be delivered, paid or transferred to a receiver (CPLR 5234, subd. [c]). The contract of insurance obtained by the Goodkins also insured the property of Friedman in the exclusive possession of the Goodkins, and it was not necessary that Friedman should have given the Goodkins prior authority or sanction to obtain such insurance (Waring v. The Indemnity Fire Ins. Co., 45 N. Y. 606). The insurance proceeds took the place of the stolen jewelry, to which Friedman concededly retained title (Green v. Wachs, 254 N. Y. 437).

BELDOCK, P. J., UGHETTA, CHRIST, HILL, and RABIN, Judges, concur.

 

 

[41-1 USTC ¶9200]Manufacturers Trust Company v. Sobel.

New York City Court --Special Term, Part 1., 26 NYS2d 145, New York Law Journal, December 21, 1940 .

Federal tax lien: Claim of judgment creditor: Priority.--Claim of judgment creditor is placed ahead of a federal lien for income and social security taxes, notice of lien not having been filed until after the date of the judgments.

COLEMAN, Judge:

The receiver in supplementary proceedings, appointed at the instance of the judgment creditor, asks to have a third party who is indebted to the judgment debtor turn over to him the amount of that indebtedness (Civil Practice Act, sec. 796). This application is opposed by the Government, which has intervened as claimant and which asks that the fund be turned over to it by virtue of an asserted lien for income and Social Security taxes.

The chronology of events is: On May 6, 1939 , the judgment creditor obtained two judgments against the judgment debtor in this court. On May 31 it instituted proceedings supplementary thereto by the service of a subpoena, with the usual restraining clauses, upon the third party. On June 20 the Collector of Internal Revenue filed with the clerk of the United States District Court a notice of lien for taxes previously assessed against the judgment debtor (53 Stat. 449; 26 U.S.C., sec. 3672). The receiver was appointed June 6, 1940 .

The assessment lists as to the several taxes were received in the office of the collector long before the entry of the two judgments; and demands upon the taxpayer for payment, except in one instance, were also earlier in time.

The claim of lien upon the Government's part must be based upon the statute (53 Stat. 449; 36 U.S.C., secs. 3670-3672), which provides that the amount of the tax upon refusal to pay "after demand *** shall be a lien," the lien arising "at the time the assessment list [is] received by the collector" (secs. 3670, 3671). But "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--*** In the office of the clerk of the United States District Court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law provided for the filing of such notice; ***" The notice of lien, as we have said, was not filed until June 20, 1939 (after the date of the judgments). It was not, therefore, until that day that the Government's lien arose. This much is conceded. But the Government contends that since a judgment creditor without more has no lien upon any specific personal property of a judgment debtor, and since the service of the third-party order creates only an "inchoate lien," or an "equitable lien" (Reynolds v. Aetna Life Ins. Co., 160 N.Y. 635; McCorkle v. Herrman, 117 N.Y. 297), the Government's lien being "legal" is paramount (cf. United States v. Snyder, 149 U.S. 210).

It is unnecessary to follow the argument, as by a plain reading of the statute a judgment creditor in the circumstances here is placed ahead of the Government. The language can have no other meaning--in case of conflict between Government and judgment creditor, the judgment being first in time the Government must yield. The Government concedes that this is the case as to a mortgagee, pledgee or purchaser; but not, it contends, as to a judgment creditor. Yet we can see no reason for any difference in treatment. The statute makes no distinction; it explicitly places each of the four classes in the same group--four classes of persons who have so acted in relation to the taxpayer as to have created a distinct legal relationship between them, here that of judgment creditor to judgment debtor.

The Government has no lien in the absence of statute (Mackenzie v. United States, 109 F.2d 540 [40-1 USTC ¶9229]). After creating a lien Congress may postpone the Government's claim; and it may extend and it has extended the list of those to whose claims it is prepared to defer its own (United States v. Snyder, 149 U.S. 210; Mackenzie v. United States, 109 F.2d 540 [40-1 USTC ¶9229]; United States v. Curry, 201 Fed. 371; cf. amendment of June 29, 1939, 26 U.S.C. 3672, 53 Stat. 882, inserting "pledgee," and deferring liens in certain cases even where prior in time). The statute is an act of self-abnegation upon the part of the Government in the collection of taxes by which it must abide. No question of strict versus loose construction arises (Gould v. Gould, 245 U.S. 151 [1 USTC ¶13]). There is no room for construction, as the statute as to these classes of persons is specific.

The motion of the receiver is granted, that of the Government is denied.

Order filed.

 

 

[89-1 USTC ¶9320] American Express Travel Related Services, Company, Inc., Plaintiff v. Kalish & Rice, Inc., J. Roger Faherty and Regent Air Corp., Defendants, and United States of America, Intervenor-Defendant

U.S. District Court, S. Dist. N.Y., 86 Civ. 4034 (KTD), 6/13/88

[Code Secs. 6321 and 6323 ]

Tax liens: Interpleader: Holder of debtor's funds: Unpaid excise taxes: Loans from corporate director: State law.--A company held funds in an account for a failed air corporation and filed an interpleader action against an advertising and marketing corporation that had done work with the debtor, as well as the debtor-corporation, to determine the appropriate payee of such funds. One state-created lien filed pursuant to a judgment rendered in favor of the advertising and marketing firm in January 1986 had priority over the government's tax lien filed in September 1986. Tax liens had been filed by the IRS against the corporation for unpaid excise taxes and the government intervened to assert claim to the funds. A federal district court in New York determined that because the lien filed by the creditor was choate prior to the perfection of the liens filed by the government, its claim on the deposited funds was superior. Another creditor, a corporate director of the corporation, had also filed a lien for the amount of loans he had made to the floundering company. However, since the other creditor had contended that this creditor's filing was void because the loans were not the result of an arm's-length bargain, he was required by the court to show substantial evidence to support the validity of his claim before it would rule on the priority of the two claims.

Rob in E. Eichen, Hahn & Hessen, 350 5th Ave., New York, N.Y. 10118, Judith Rinearson, American Express Travel Related Services Co., Inc., New York, N.Y., for plaintiff. Rob ert H. Morse, Andrew B. Sacks, Galland, Kharasch, Morse & Garfinkle, P.C., 1054 31st St., N.W., Washington, D.C. 20007-4492, Bruce N. Regenstreich, Callan, Regenstreich & Koster, 116 John St., New York, N.Y. 10038, for Kalish & Rice, Inc. Richard P. Caro, New York, N.Y., for Regent Air Corp. Patrick J. Monaghan, Jr., New York, N.Y. for J.R. Faherty. Rudolph W. Giuliani, United States Attorney, Cynthia Keeffe Dunne, Assistant United States Attorney, New York, N.Y. 10007, for U.S.

MEMORANDUM AND ORDER

DUFFY, District Judge:

American Express Travel Related Services Company, Inc. ("American Express") initiated this interpleader action against Kalish & Rice, Inc. ("K & R"), J. Roger Faherty ("Faherty") and Regent Air Corporation ("Regent") to determine the appropriate payee of funds held in an account for Regent. The United States of America (the " United States ") intervened and asserted the priority of its tax liens against Regent. Each party now moves for summary judgment pursuant to Fed.R.Civ.P. 56 as follows: K & R moves against all other parties; Faherty opposes K & R's motion and cross moves against K & R only; the United States opposes K & R's motion and cross moves against K & R only. ¹ For the following reasons, K & R's motion against the United States is granted and the United States ' motion is denied. The cross-motions regarding the priority between K & R and Faherty will be decided after a hearing pursuant to Fed.R.Civ.P. 43(e).

FACTS

This action arises out of the collapse of Regent, a public corporation incorporated in 1983 under the laws of Delaware , with its principal offices in California . The following facts regarding that collapse and its consequences are not in dispute.

Faherty became a corporate director and stockholder of Regent in 1983. He became the majority stockholder, chairman and chief executive officer of Regent in 1984. Also in 1984, in response to Regent's ongoing financial difficulties and upon approval of two members of Regent's board of directors, Faherty made serveral substantial loans to Regent. The loans were secured by various assets of Regent including accounts receivable, trademarks, licenses and operating equipment. A UCC financing statement for each loan was filed in California between December 1984 and June 1985.

Beginning in 1984 K & R performed advertising and marketing services for Regent. After several months, K & R and Regent entered into an arrangement where by K & R would submit cost estimates of all work, Regent would approve the work and K&R would then perform the work on a credit basis. When Regent failed to make payments under this agreement K&R brought suit in this court and won a judgment on November 12, 1985 . Kalish & Rice v. Regent Air, 85 Civ. 3600 (RWS).

On January 13, 1986 the Clerk of the Court for the Southern District of New York issued a writ of execution with respect to the K&R judgment. On January 17, 1986, the United States Marshal served the writ on American Express but did not seize money from Regent's account because American Express, having been notified that Faherty and Regent were asserting competing claims to the monies in the account, wished to avoid exposure to multiple liability and refused to satisfy the writ. The Marshal returned the writ "unsatisfied." American Express segregated and froze the funds referred to in the served execution, instituted this action, and deposited the funds into court in May 1986.

In September 1986 the Internal Revenue Service filed notices of its tax lien against Regent for unpaid excise taxes assessed in July and October 1985 and in February 1986. The United States was permitted by this court to intervene in this action and now asserts priority over K&R to the disputed funds. ²

DISCUSSION

A. The Federal Tax Liens

The priority of a tax lien is a matter of federal law. A tax lien arises in favor of the United States at the time an assessment of tax liability is made and the tax lien generally takes priority over a competing lien. See 26 U.S.C. §§6321 , 6322 (1982). However, under the common law rule that first in time is first in right, "[a] valid state-created lien, . . . has priority if it became choate prior to the perfection of the federal tax lien." Lerner v. United States [87-1 USTC ¶9339 ], 637 F.Supp. 679, 680 (S.D.N.Y. 1986) (citations omitted); see also 26 U.S.C. §6323(a) (1982). A state-created lien becomes choate when three factors are satisfied: "(1) the identity of the lienor must be known; (2) the property subject to the lien must be identified; and (3) the amount of the lien must be established." Lerner, 637 F.Supp. at 681 (citations omitted).

In the case at bar, the government's tax liens were not perfected until their filing in September 1986. K&R's lien was choate in January 1986 when the judgment execution was delivered to the Marshal. See N.Y.Civ.Prac.L. & R. §5202(a) ( McKinney 1978); Knapp v. McFarland, 462 F.2d 935, 938 (2d Cir.1972); Lerner, 637 F.Supp. at 680. See also International Ribbon Mills, Ltd. v. Arjan Ribbons, Inc., 36 N.Y.2d 121, 122, 365 N.Y.S.2d 808, 809, 325 N.E.2d 137, 138 (1975) ("judgment creditor also obtains a priority by issuance to the Sheriff of a property execution upon which no return has yet been made"). At the time the execution was delivered to the Marshal, K&R's lien was choate; K&R was identified as the lienor, Regent's account at American Express was identified as the property subject to the lien, and the amount of the lien was clearly established on the judgment and on the writ served on American Express by the Marshal. At the latest, K&R's lien became choate when American Express instituted this interpleader action in May 1976 and deposited the funds into court.

The United States ' argument that the return of the writ as "unsatisfied" prevented the perfection of the judgment lien is misplaced. New York law allows a judgment creditor 90 days to take additional steps to "perfect" his lien if the garnishee does not deliver the property upon service of a writ. N.Y.Civ.Prac.L. & R. §5232 ( McKinney 1978). In this case, however, before K&R's 90 days expired, American Express' filing of this action extended the effect of the levy. K&R's lien was therefore choate within the meaning of federal law and it need do no more. See United States v. Vermont [64-2 USTC ¶9520 ], 377 U.S. 351, 358, 84 S.Ct. 1267, 1271, 12 L.Ed.2d 370 (1964); United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954).

In sum, because K&R's lien was choate prior to the perfection of the tax liens, its claim on Regent's American Express account has priority over the United States .

B. Faherty's Secured Loans

The validity of Faherty's security interest in Regent's assets depends on the validity of the loan agreement between Faherty and Regent. Faherty, as both director and controlling stockholder of Regent, is a fiduciary. As such, his

dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain.

Pepper v. Litton, 308 U.S. 295, 306-07, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939) (citations and footnote omitted).

K&R claims that the Faherty's UCC filing is void because the loan is not the result of an arms length bargain. Rather, K&R argues that the loan is either the result of an invalid exercise of power by Regent's board of directors, or, if the corporate veil is pierced, a contribution to capital.

These arguments, in light of the rule in Pepper v. Litton quoted above, raise material questions of fact which cannot be resolved on the papers submitted by the parties. However, a trial is not necessary at this time because the issues are amenable to resolution through the summary hearing procedure provided by Fed.R.Civ.P. 43(e). Such a hearing provides the court with the opportunity to " 'pierce the pleadings and to assess the proof in order to see whether there is a genuine need for a trial.' [The purpose of the hearing is] to assay the alleged probative evidence of the plaintiffs in order to narrow the controverted issues to triable matters and to dispose of matters unsupported by admissible evidence." Argus, Inc. v. Eastman Kodak Co., 612 F.Supp. 904, 908 (S.D.N.Y.1985) (footnote omitted), aff'd, 801 F.2d 38 (2d Cir.1986), cert. denied, 479 U.S. 1088, 107 S.Ct. 1295, 94 L.Ed.2d 151 (1987).

In sum, K&R's motion for summary judgment against the United States is granted. This leaves the priority between Faherty's and K&R's claims as the sole remaining issue. It is for Faherty to show that there is, in fact, substantial evidence to support the validity of his claim. If he is successful, the case will be scheduled for trial; if he is not, judgment can then enter. A hearing on this issue is hereby scheduled for Monday, June 20, 1988 at 10:00 a.m. in Courtroom 705.

SO ORDERED.

¹ Regent has submitted two declarations by its attorney, Richard P. Caro, in opposition to K & R's motion for summary judgment but makes no cross motions.

² The United States argues only that its rights are superior to K&R's. It does not address its priorities relative to Faherty but attempts to reserve its rights to do so should Faherty invalidate K&R's claim.

 

 

[80-2 USTC ¶9468]Gail Mantovani, Petitioner v. Fast Fuel Corp., Respondent Solar Petroleum Corp. (formerly Fast Fuel Corp.), Respondent and Interpleading Petitioner v. The Commissioner of Internal Revenue and Andrew P. Mantovani and Gail A. Mantovani and Fred M. Schildwachter & Sons, Inc., and Lucy Varian, Respondents

U. S. District Court So. Dist. of N. Y., 79 Civ. 1566 (KTD), 494 FSupp 72, 5/22/80

[Code Sec. 6323]

Federal tax liens: Priority over creditors' claims: Interpleader.--Federal tax liens were found to have priority over claims of a taxpayer's creditors to assets in a fund held by the court in an interpleader action. M's claims (as a judgment lien creditor, a holder of a security interest in a truck, and as a holder of security interest in a general intangible) to the interpleader fund were defective and therefore inferior to those of the IRS. Under New York state law, M's claim as a judgment lien creditor was not perfected prior to the time the government filed its tax lien. Since no part of the interpleader fund was made up of proceeds from the sale of the truck, M's security interest in such vehicle did not entitle her to claim any of the proceeds in the fund on that basis. Also, since M was not assigned the debtor's rights to amounts owed the debtor by another party, the debtor retained ownership with respect to the proceeds of the interpleader fund, and it was part of the property against which the government could impose a tax lien.

Andrew P. Mantovani, 2622 E. Tremont Ave. , Bronx , New York 10461 , and John Yandrasitz, for petitioner. Rob ert B. Fiske, Jr., United States Attorney, New York , New York 10007 , Katherine J. Trager, Satterlee & Stephens, 277 Park Ave. , New York , N. Y. 10017, for respondents.

Opinion

DUFFY, District Judge:

Cross motions for summary judgment have been made in this case which involve neat questions of arcane tax law. The history of the matter is quite convoluted, but a brief review of the facts is necessary. Solar Petroleum Corp. is the successor to Fast Fuel Corp. which ceased operations owing moneys to various individuals. These included Gail Mantovani, the petitioner, the Commissioner of the Internal Revenue Service and the various other respondents. Some have abandoned their claims and the matter now stands as a simple interpleader action in which Solar holds a sum of money to which both the Mantovanis and the Commissioner of Internal Revenue lay claim. ¹ The issue is simply which claim is entitled to a priority.

The government and the Mantovanis agree that the statement of facts in the government's memorandum gives a complete and accurate picture of the situation. These facts are as follows:

This proceeding was originally commenced in State Court by the petitioner, Gail Mantovani, to enforce a judgment in her favor against the Solar Petroleum Corporation ["Solar"] as the garnishee of the Solar Fuel Oil Corp. ["the taxpayer"]. Petitioner asserts that she obtained a judgment against the taxpayer in February, 1977, and, in August, 1978, issued an execution thereof on Solar as garnishee.

Solar admits its debt to the taxpayer and interpleaded all those alleging claims to this debt including the Commissioner of the Internal Revenue Service. The Commissioner promptly removed the action to this Court and the interpleader fund is now in the custody of this Court.

The Mantovanis assert three claims to the interpleader fund. The first is based upon a judgment Gail Mantovani obtained against the taxpayer in the amount of $9,124.68. The transcript of this judgment was filed with the Clerk of Bronx County on March 7, 1977 , and delivery of the execution to the sheriff occurred on August 15, 1978 . The second claim is based upon a security agreement Gail Mantovani entered into with the taxpayer on August 21, 1973 , in which she acquired a security interest in a 1972 Dodge truck in the amount of $12,500. The UCC financing statement for the agreement was filed on November 22, 1974 . In support of their third claim, Andrew and Gail Mantovani rely upon the taxpayer's purported assignment of all its rights to the amounts owed by Solar to the taxpayer. This assignment, dated April 28, 1977 , was recorded in Bronx County on June 12, 1978 .

The United States ' claim is based upon assessed tax liabilities, secured by federal tax liens. On the dates set forth below, a delegate of the Secretary of the Treasury made assessments against the taxpayer and sent notices and demands for payment as follows:

The Internal Revenue Service served a Notice of Levy on Solar on June 15, 1978 and on August 17, 1978 served a final demand on Solar.

Respondent Schildwachter has filed a notice of appearance which does not state the basis of its claim. As shown by the Interpleader Petition, on February 1, 1978 , the taxpayer notified Solar's president that it should make the first payment of moneys due to Schildwachter and that "payment of the principal and interest have precedent over any previous instructions you may have or will receive . . ."