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."
The record indicates the date of only one of the three contracts between
and Schwab (September 16, 1964), so we cannot be certain that all were
September 27, 1964
, the date the Uniform Commercial Code (UCC) became effective in
. Because the result would not differ under the UCC, we have assumed
that all the contracts are governed by the New York Personal Property
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.
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.
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
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
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,
, N. Y., for defendants-appellees.
LUMBARD, Chief Judge, and FRIENDLY and
, Circuit Judges.
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.
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
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.
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
that Meteor did not remit withholding, social security and unemployment
compensation taxes due and owing to the
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.
action was brought in the Southern District of New York by the
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.
Against Foreclosure of Mechanic's Lien]
moved for summary judgment in the state court foreclosure action in the
early part of September, 1965. On
September 15, 1965
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).
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.
220, 226 (1957). That decision does not mean, however, that a stay is
automatically granted simply on the application of the
. 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
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
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
to pay over the net estate.
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
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,
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.
Bond Substituted for Lien]
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
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
, 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).
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.
, 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
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
preliminary injunction order of the District Court is not saved by Leiter
Minerals, Inc. v.
, 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
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.
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
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
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
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
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
, but conclude only that the right of the
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
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
istration of justice which the Supreme Court has recognized and
considered in each of the injunction cases.
find that the principle summarized in Markham v. Allen, supra, is also inapplicable. The
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.
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.
2Leiter Minerals, Inc. v.
, supra, 352
at 228, indicates that where the position asserted by the
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
in this action is not, however, a defensive one.
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
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.
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
itself indicates in its brief that it has appealed in Castaldo.
¶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
, App. Div., 4th Dept., Action Nos. 1, 2,
[Code Sec. 6323]
Tax liens: Priorities: Materialmen's and mechanics' lien: Perfection
law.--Under New York law, Federal tax liens must be filed in the
office of the
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.
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.
C. BASTOW, presiding justice; HARRY D. GOLDMAN, FRANK DEL VECCHIO, JOHN
S. MARSH, G. ROBERT WITMER, associate justices.
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.
Harry R. Harman, supplied materials to Colorcraft on this job, and duly
filed a mechanic's lien therefor in
. 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.
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
wherein Colorcraft has its principal place of business, but not in
where the project was constructed.
duly filed in
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.
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).
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.
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
against the fund were withdrawn upon the argument of this appeal; and so
we need only consider the liens of
and of Chapin.
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,
shows that the
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."
presented with respect to the
claims therefore, is whether its tax liens were properly filed.
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.)
law requires that Federal tax liens be filed in the office of the
in which the real property is located (Lien Law, §240; and see Andrello
v. Nationwide Mut. Ins., 29 A. D. 2d 489).
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.)
Lien Not Perfected]
The failure of
to file its liens in
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.
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.
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
United States of America
, Plaintiff-Appellee v. Toys of the World Club, Inc., Defendant and
Publishers Printing-Rogers Kellogg Corporation, Defendant-Appellant
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
Menschel of Wallstein, Menschel & Wallstein, 233 Broadway,
, 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.
erts, of counsel (Renee J.
erts and Charles T. Beeching, Jr., Assistant United States Attorneys,
New York, N. Y., on brief), for plaintiff-appellee.
, FRIENDLY and SMITH, Circuit Judges.
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.
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
May 23, 1956
assessed withholding taxes against Toys and filed notices of tax liens
March 7, 1956
. Thereafter, the
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.
and Publishers each moved for summary judgment determining the
superiority of its lien. The
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
. 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).
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.
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
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,
argues that, with this substantial distinction eliminated by statute, as
it is for a
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.
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
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?
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.
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
tax lien thereafter accruing.
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
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
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.
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.
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
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
343, 348, 48 N. W. 2d 546, 549 (1951), in which the court noted that the
with respect to artisan's liens was substantially the same as that of
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.
granting summary judgment to the
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 ; United States v.
DeWitt, 265 F. 2d 393, 400 (5 Cir. 1959).
It is so
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
"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."
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).
¶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
ert H. Kammler, Nominee of and Trustee for the William Wrigley, Jr.,
Company and Laurence A. Janney, Defendants
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.
Attorney for the Southern District of New York, Attorney for Plaintiff,
. (George B. Schoonmaker, Esq.,
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.:
are my findings of fact.
L. P. Larson Jr. Company, is an
corporation. The defendant, L. P. Larson Jr. Company, is a
corporation. The National City Bank of
is a national banking corporation.
March 15, 1929
, L. P. Larson Jr. Company, an
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
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.
examination and audit of the return of L. P. Larson Jr. Company, an
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
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
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
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
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
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
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
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,
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.
, 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
, 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.
, 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
was executed by L. P. Larson Jr. as its president.
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
August 1, 1929
, L. P. Larson Jr. Company of
was organized in the State of
. In February, 1929, L. P. Larson Jr. Company of
had purchased a factory property in the City of Newport, Rhode Island,
and had transferred its machinery from
. At a meeting of the stockholders and directors of L. P. Larson Jr.
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
of all of its assets except certain accounts receivable. Annexed to the
resolutions in the minute book of the
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
corporation to the
corporation. At neither the Stockholders' meeting nor the Directors'
July 19, 1929
, was any authorization either proposed or granted to convey the good
will of the
The stock of
corporation is now held by Larson as pledgee of the
corporation but no evidence sustains a finding that the consideration
for the issuance or transfer of it by the
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.
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.
sent by L. P. Larson Jr. Company, with a
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
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
prior to the assignment to
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.
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,
ert H. Kammler account. Notice was given to and accepted by the National
City Bank of
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.
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
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
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
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
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.
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].
trademarks "Spearmint," "Peptomint" and
"Wintermint" were never transferred from L. P. Larson Jr.
to L. P. Larson Jr. Company of
consideration for the sale of these trademarks belonged exclusively to
the L. P. Larson Jr. Company of
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
, to the account of William Wrigley Jr. Company,
ert H. Kammler, as trustee, is the property of and belongs to L. P.
Larson Jr. Company of
United States of America
, has a valid lien and an immediate first claim upon this sum on deposit
in the National City Bank of
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
6. Judgment is
granted in favor of the plaintiff,
United States of America
, against L. P. Larson Jr. Company of
and L. P. Larson Jr. Company of
, 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.
defendants, National City Bank of New York, Laurence A. Janney and
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
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.
¶9211]Superior Financial Corp., Plaintiff v. Herbert Haskell and
United States of America
, et al., Defendants
S. District Court, So. Dist. New York, 79 Civ. 6009 (MEL), 556 FSupp
[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.
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.
Gordon & Kanengiser,
159 Millburn Ave.
, N. J. 07041, for plaintiff. John S. Martin, Jr., United States
Attorney, Steven E. Obus, Assistant United States Attorney,
, N. Y. 10007, for defendants.
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.
"). Haskell executed a promissory note and delivered to
the stock certificate and lease as collateral.
and Haskell have had other dealings since this transaction, but none is
material to this action.
1976, and again in May 1977, the
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
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
to recover from the escrow fund the amounts that it alleges are due to
cross move, pursuant to Fed. R. Civ. Pr. 56 for summary judgment.
'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
C. A. §6323(h)(1) defines a security interest:
Definitions.--For purposes of this section and section 6324--
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."
'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
's claim has priority. If, however,
's interest was not so "protected" in April 1977, the
tax lien has priority.
The local law
applicable here is the law of
. 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
's claim will have priority over the subsequent tax liens if
's security interest in the cooperative appartment was perfected.
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
did not file a financing statement until after the tax liens had been
'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.
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
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
, 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).
how the courts of
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
's Banking law is relevant to the case at hand:
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
's security interest in Haskell's cooperative apartment was perfected
took possession of the stock certificate and lease. Accordingly,
's motion for summary judgment is granted. The cross-motion of the
judgment on notice supported by affidavits as to calculations.
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
A "security" for the purposes of the U. C. C. is defined in §8-102:
this Article unless the context otherwise requires
'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
either one of a class or series or by its terms is divisible into a
class or series of instruments; and
a share, participation or other interest in property or in an enterprise
or evidences an obligation of the issuer."
Y. U. C. C. §8-102.
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:
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. . . ."
¶9258]Matter of Franklin Auto Supply Co., Inc., (Bellerose Motors,
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
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.
of Supplementary Proceedings]
County Bank of
, hereafter referred to as the Bank, is in possession of a fund
belonging to the Bellerose Motors, Inc., hereafter referred to as the
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.
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.
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.
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
on behalf of the collector and to the claim of the State of
on behalf of the industrial commissioner. Since these claims exceed the
amount of the fund, the claim of the assignee may be disregarded.
claims are as follows: Industrial Commissioner of the State of
, $2,140.60, with interest from
. Franklin Auto Supply, Inc., $856.65, with interest from
. Mechanics Overall Service, Inc., $131.75, with interest from
. Fairmount Motor Products Co., $32.55, with interest from
. Henry J. Miller; $1,851.51, with interest from
. Frank A. E. Marsh, receiver, $256.10, with interest from
. Collector of Internal Revenue, $1,696.64, plus interest and penalties
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
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
The claim of
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
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
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).
contended by some of the judgment creditors that there is no proof
herein that there were taxes due to the State of
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
has a common law priority of the sovereign--a priority independent of
statute (Marshall v. People, &c., 254
, 380; Matter of
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
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.
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.
¶9311]In the Matter of Thriftway Auto Rental Corp., Bankrupt.
United States of America
, Appellant v.
ert P. Herzog, Trustee; State of
and City of
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.
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.
LUMBARD, WATERMAN and FEINBERG, Circuit Judges.
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.
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
made its tax assessments, and notices of the assessments were duly
filed. The petition in bankruptcy was filed shortly thereafter, on
February 15, 1965
agree that the federal liens, which arose under 26
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.
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.
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. . . ."
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
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
), 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
has done with respect to its personal income tax warrants. Under Tax L.
1966), when a tax warrant is docketed:
[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
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
The intent of
the draftsmen appears to have been that only as an execution could the
warrant become functus officio.
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]
case is strongly buttressed by decisions in the
state courts applying the Code. See Argiriou & Finkel v.
Marciante Luncheonette II, Inc., 315 N. Y. S. 2d 448 (Sup.
1970); In re
Ave. Reconstr., 205 N. Y. S. 2d 125 (2d
), 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
. . . ." 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
to the contrary, that the docketing of a warrant for sales taxes creates
a lien under the Administrative Code. 4
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
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
state court holding has been presented to us, and, as already indicated,
what state authority there is points decidedly in the opposite
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
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
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
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
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
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
shall be first satisfied." See Plumb I at 237-39.
Over Federal Liens]
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
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
81, 85-86 (1954). But the
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
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
81, (1954)] that 'the identity of the lienor, the property subject to
the lien, and the amount of the lien are established.'" 377
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.
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.
The trustee is not a party to this appeal and is not interested in its
outcome since both the City and the
have claims in excess of the bankrupt's assets and both concede that
their liens are subject to the prior payment of
istrative expenses and wage claims. See 11 U. S. C. §107(c)(3).
Commissioner of the State of
, 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.
5 N. Y. City Charter and Administrative Code §N46-11.0(b) (1971)
 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.  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.  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.
 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.  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.  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
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
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).
did not petition for review of the decision, which is unreported.
Reliance by the
of City of
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.
This conclusion effectively answers the alternative argument of the
that if the City has a lien, it is nevertheless invalid against the
trustee under §67c(1)(B) of the Bankruptcy Act, 11
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],
266, 276 (1965). Without authority, we would not feel free to treat
differently the City's lien, which is created by docketing.
We note also that the City's lien is summarily enforceable by
istrative action. See 377
at 359 & n. 12.
¶9395]Matter of City of
Slum Clearance Project)
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
A. I. Madison,
186 Joralemon St., Brooklyn, N. Y., for David Gottlieb and Enid Gottlieb
ert M. Morgenthau, U. S. Court House,
7, N. Y., for U. S.
Involves Rights to Condemnation Award]
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
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.
Between City and Federal Governments]
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
August 31, 1957
; and on its business tax return for the period between
July 1, 1954
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
October 30, 1961
--The city filed a warrant for the foregoing $32,974.44 in the county
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.
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
istration of the federal revenue statutes" (citations omitted).
Prevails on One Issue--Loses on Other]
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
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
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
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
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
of Condemnation Award]
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.
¶9632]Meadow Brook National Bank, petitioner-appellant v. Federal
United States of America
and Irving Friedman, respondents
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.
David C. Weisberg,
1527 Franklin Ave.
, 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
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
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.
J., UGHETTA, CHRIST, HILL, and RABIN, Judges, concur.
¶9200]Manufacturers Trust Company v. Sobel.
New York City Court--Special Term, Part 1., 26 NYS2d 145,
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.
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.
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
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
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).
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
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
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.
¶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
District Court, S. Dist. N.Y., 86 Civ. 4034 (KTD), 6/13/88
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
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.
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.
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.
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.
United States of America
") 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
opposes K & R's motion and cross moves against K & R only. 1
For the following reasons, K & R's motion against the
is granted and the
' motion is denied. The cross-motions regarding the priority between K
& R and Faherty will be decided after a hearing pursuant to
arises out of the collapse of Regent, a public corporation incorporated
in 1983 under the laws of
, with its principal offices in
. The following facts regarding that collapse and its consequences are
not in dispute.
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
between December 1984 and June 1985.
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).
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.
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
was permitted by this court to intervene in this action and now asserts
priority over K&R to the disputed funds. 2
The Federal Tax Liens
of a tax lien is a matter of federal law. A tax lien arises in favor of
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
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)
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.
' argument that the return of the writ as "unsatisfied"
prevented the perfection of the judgment lien is misplaced.
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
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
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
Faherty's Secured Loans
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
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.
v. Litton, 308
295, 306-07, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939) (citations and
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
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
1088, 107 S.Ct. 1295, 94 L.Ed.2d 151 (1987).
K&R's motion for summary judgment against the
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
in Courtroom 705.
Regent has submitted two declarations by its attorney, Richard P. Caro,
in opposition to K & R's motion for summary judgment but makes no
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.
¶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
S. District Court So. Dist. of N. Y., 79 Civ. 1566 (KTD), 494 FSupp 72,
[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
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.
2622 E. Tremont Ave.
, and John Yandrasitz, for petitioner.
ert B. Fiske, Jr., United States Attorney,
, Katherine J. Trager, Satterlee & Stephens,
277 Park Ave.
, N. Y. 10017, for respondents.
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.
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:
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.
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.
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
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
June 12, 1978
' 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:
Revenue Service served a Notice of Levy on Solar on
June 15, 1978
August 17, 1978
served a final demand on Solar.
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 . . ."
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