United States of America
, Appellant v. First National Bank & Trust Company of
, Trustee of Travis Bros. Body Works, Inc., Bankrupt, and State of
Court of Appeals, 8th Circuit, No. 18,666, 386 F2d 646,
, Rev'g and rem'g District Court decision, 66-2 USTC ¶9727, 256 F.
[1954 Code Sec. 6323]
Lien for taxes: Priorities:
tax lien v. state tax lien:
--U. S. withholding tax liens were superior to a
sales tax lien. The
withholding tax liens became valid and perfected in April 1960 when the
assessments were made while the lien for state sales taxes did not
become specific, perfected and choate before June 1960, when the amount
of the lien was first established. Before June 1960 the delinquent
taxpayer had filed no sales tax returns disclosing its sales tax
liability and the state had made no attempt to determine the amount of
such tax or make an assessment thereof. Under the "first in time,
first in right" doctrine, the
tax liens had priority over the state tax lien.
Jacobs, Richard M.
erts, Acting Assistant Attorney General, Lee A. Jackson, Crombie J. D.
Garrett, Department of Justice, Washington, D. C. 20530, John O. Garaas,
United States Attorney, Box 272, Fargo, N. Dak., for appellants. Kenneth
M. Jakes, Special Assistant Attorney General, North Dakota State Tax
Dept., Bismarck, N. Dak., for appellee.
OOSTERHOUT, GIBSON and HEANEY, Circuit Judges.
OOSTERHOUT, Circuit Judge:
This is an
appeal by United States of America from final judgment of the District
Court [66-2 USTC ¶9727] determining that the lien of the State of North
Dakota for certain unpaid paid sales tax of the bankrupt, Travis Bros.
Body Works, Inc., (Travis), was entitled to priority over the lien of
the United States for unpaid withholding tax with respect to a fund of
$7,819.40 remaining in the hands of the bankruptcy trustee after the
istration expenses and wage claims, the priority of which is not
disputed. The trial court's opinion is reported at 256 F. Supp. 716.
facts are not in dispute. On March 30 and April 19, 1960, respectively,
the District Director of Internal Revenue assessed and made demands upon
Travis for withholding taxes for the fourth quarter of 1959 and the
first quarter of 1960 and notice of such liens was filed on April 1 and
April 22, 1960, all in accordance with 26 U. S. C. A. §§ 6321 and
6322. The assessments aggregated $8774.72 plus accruing interest.
In June of
1960 Travis filed past due sales tax returns for the third and fourth
quarters of 1959 and the first quarter of 1960 with the North Dakota Tax
Commission. Sales tax was then computed and notice of sales tax liens
covering each of the three quarters was filed on
June 6, 1960
All of the
transactions hereinabove related with respect to federal and state liens
occurred prior to the filing of voluntary petition of bankruptcy by
Travis. The bankruptcy adjudication was made on
June 29, 1960
. The trial court properly determined that the liens of the United
States for the withholding tax arose "at the time the assessments
were made" and that "the instant assessments for withholding
taxes for periods of the fourth quarter of 1959 and the first quarter of
1960 were made on March 30 and April 19, 1960, respectively, and were
duly served . . ." 1
court, upon the basis of the North Dakota sales tax statutes set out in
pertinent part in its opinion at p. 718 of 256 F. Supp., determined that
under North Dakota law the sales tax became a lien on the last day of
the month immediately following the taxable quarter and that the lien
for the tax is imposed upon all property of the taxpayer for past due
taxes. Such appears to be a permissible interpretation of the
A federal tax
lien arises and is a perfected choate lien when assessed in the manner
provided by statute. United States v. Vermont [64-2 USTC ¶9520],
Sav. Bank [63-1 USTC ¶9166] 371
[54-1 USTC ¶9191], 347
priority of a lien of the
for unpaid taxes is always a federal question to be determined by
federal courts. The state's characterization of its liens is not
v. Equitable Life Assur. Soc'y [66-1 USTC ¶9444], 384
323, 328; United States v. Acri [55-1 USTC ¶9138], 348
"first in time, first in right" doctrine applies to the
determination of the relative priority of competing liens of the federal
and local government.
v. Equitable Life Assur. Soc'y, supra;
v. Equitable Life Assur. Soc'y thus states the principles
relative priority of a state lien is determined by the rule 'first in
time is first in right,' which in turn hinges upon whether, on the date
the federal lien was recorded, the state lien was 'specific and
perfected.' A state lien is specific and perfected when 'there is
nothing more to be done . . .--when the identity of the lienor, the
property subject to the lien, and the amount of the lien are
established.' Thus, the priority of each statutory lien . . . must
depend on the time it attached to the property in question and became
, supra." 384
for choateness of a state lien are the same as those applicable to liens
asserted under §§ 6321 and 6322. United States v. Vermont, supra.
standards laid down by the Supreme Court in the cases heretofore cited
are applied to the undisputed facts in this case, it is established
beyond question that the lien of the state for sales tax did not become
specific, perfected and choate before June of 1960, when the amount of
the lien was first established. Prior to that time, Travis had filed no
sales tax returns disclosing its sales tax liability and the state had
made no attempt to determine the amount of such tax or make an
assessment thereof. The lien of the
for withholding tax became a valid and perfected lien by April of 1960.
Hence, the lien of the
is entitled to priority over the sales tax lien under the "first in
time, first in right" doctrine.
trial court was correct in determining that the "first in time,
first in right" doctrine controls, it erred in determining that the
tax was prior in point of time.
The state and
the trial court expressed the view that Travis' involvement in the
bankruptcy proceedings subsequent to the attachment of the lien of the
calls for the result reached by the trial court. We do not agree. It is
true that Rev. Stat. §3466 (31
C. A. §191) giving priority to the
on claims against insolvent debtors does not apply to bankruptcy
proceedings. See Adams v. O'Malley, 8 Cir., [50-2 USTC ¶9349]
182 F. 2d 925; In re Taylorcraft Aviation Corp., 6 Cir., [48-1
USTC ¶9288] 168 F. 2d 808. In our present case, the
does not assert any rights based upon §3466. The result that we have
reached is in no way based upon such section.
Congress could, if it chose to do so, effect the priority of federal tax
liens in bankruptcy proceedings. It has done so to some extent. Section
64(a) of the Bankruptcy Act, 11
C. A. §104(a), provides:
debts to have priority, in advance of the payment of dividends to
creditors, . . . shall be (1) the actual and necessary costs . . .; (2)
wages . . .; (3) (costs of contesting discharge); (4) taxes legally due
and owing by the bankrupt to the
or any State or any subdivision thereof."
limited priorities are given under the Act over tax liens, but such
specified priorities are in no way questioned in this action. Section
67(b) of the Act, 11 U. S. C. A. §107(b), preserves statutory liens for
taxes although perfected while the debtor was insolvent and within four
months of bankruptcy, and §67(c) provides that under certain
circumstances tax liens be postponed in payment in favor of
istration costs and certain wage claims.
court, after citing and quoting from the foregoing sections, observes:
sections have been construed to place liens of the
or of any State or subdivision thereof on a parity, Adams v. O'Malley
[50-2 USTC ¶9349], 182 F. 2d 925 (8th Cir., 1950), with the result that
the doctrine of 'first in time, first in right,' applies. United
States v. Bradley [63-2 USTC ¶9657], 321 F. 2d 224 (5th Cir.,
1963)." 256 F. Supp. 716, 717.
nothing in the Bankruptcy Act or any other federal statute which in any
way impairs the operation of the "first in time, first in
right" doctrine with respect to the competing tax claims here
involved of the state and federal government.
undisputed evidence before us, the lien of the
for unpaid withholding taxes was completed, perfected and choate before
the lien of the state for state sales tax became choate and effective.
Thus, the claim of the
being first in time is entitled to priority. The decision of the
District Court to the contrary is induced by an erroneous view of the
law. The lien of the state for sales tax, at the time the lien of the
was perfected, did not constitute a choate lien within the meaning of
such term as defined in the cases hereinabove discussed.
is reversed and this case is remanded to the trial court with direction
to establish the priority of the lien of the
upon its claim for unpaid withholding taxes against the funds in the
hands of the trustee.
C. A. §6323 as amended in 1966 has no pertinency to the decision in
¶9554]Hans A. Fischer, Plaintiff and Respondent v. Martin Hoyer and
Hilda Hoyer, his wife, Defendants and Respondents, State of North
Dakota, Defendant, and United States of America, Defendant and Appellant
D. Supreme Court, No. 7940, 5/16/63, Affirming unreported District Court
[1954 Code Sec. 6323(a)]
Priority of liens: Prior mortgage: Tax lien: Subsequent real estate
taxes paid.--In order to protect his interest, a mortgagee, whose
lien was prior to a Federal tax lien, paid subsequent real estate taxes.
The amount of these taxes became a part of the mortgage debt and had
priority over the Federal tax lien. Two dissents.
ert Vogel, United States Attorney, Fargo, N. D., for appellant. Conmy
& Conmy, Dakota National Bank Bldg., Bismarck, N. D., for Martin
Hoyer; Wattam, Vogel, Vogel, Bright & Peterson, Edwards Bldg., 201/2
Broadway, P. O. Box 1389, Fargo, N. D., for Hans A. Fischer,
This is an
appeal from a part of a judgment of foreclosure of a real estate
There is only
one question to be decided on this appeal. It was stipulated by the
parties as follows:
only issue to be determined in this appeal is: Did the District Court
err in holding and determining that the taxes advanced by the mortgagee
on the mortgaged property in the sum of $996.81 and paid subsequent to
the assessment and filing of the notice of federal tax lien and interest
thereon in the sum of $121.68 were entitled to priority over such
federal tax lien?"
The action was
instituted to foreclose the first and second mortgages on real property
. The first mortgage was dated
July 17, 1953
, and recorded on
July 20, 1953
. It was given to the Federal Land Bank of
and assigned by it to the plaintiff, Hans A. Fischer, a respondent in
this appeal, on
April 29, 1958
. The assignment was recorded on
May 3, 1958
. The unpaid balance of the mortgage when assigned was $13,696.01. The
second mortgage was dated
November 5, 1958
, and runs in favor of the said Hans A. Fischer in the amount of $6,000
and was recorded
December 10, 1958
was named a party defendant. It answered alleging the tax liens filed
against the mortgagor on
April 2, 1954
, covering federal tax liability including accrued interest to date,
equalled $52,076.80. It prayed that priority of the different liens be
adjudged and that all liens be foreclosed according to the provisions of
Section 2410, Title 28, U. S. C.
A judgment of
foreclosure was entered on
November 15, 1960
, in favor of the plaintiff on its first mortgage, interest, taxes
advanced, and costs in the amount of $17,429.81. It decreed that the
plaintiff had a valid and subsisting lien superior and paramount to
defendants' liens. The real property, or so much thereof as may be
necessary to satisfy the plaintiff's lien, was ordered sold on
foreclosure sale to satisfy plaintiff's lien. It ordered the surplus
money, if any, arising from such sale to be brought into court to abide
the further ther order of the court. In its findings of fact the court
the owner and holder of a tax lien in the amount of $51,785.17 as of
October 26, 1960
, and held that it constituted a second lien on the premises prior and
superior to the claims of all other defendants. The plaintiff's second
mortgage was also adjudged inferior to the federal tax lien.
direction of the mortgagors, the sheriff, on foreclosure sale, sold the
premises described in the mortgage as a distinct and entire tract for
the sum of $35,000 cash and requested court authority to pay over and
dispose of the proceeds of the sale as follows: To the sheriff for fees,
commissions and disbursements of sale $364.00; to Hans A Fischer,
mortgagee, the amount of $17,510.56; and to the United States of
America, the balance of $17,125.44, which was approved by the court.
stipulated and agreed between the parties, including the United States,
that distribution of the proceeds be made by the sheriff in accordance
with his report of sale on foreclosure, with the understanding that the
United States in no way waived its right to appeeal from that portion of
the judgment relating to the real estate taxes paid by the plaintiff and
included by the court as a part of the mortgage indebtedness. The
plaintiff agreed to repay such amount in the event of reversal. The
disputed amount included in mortgagee's judgment was for taxes advanced
by the mortgagee on
October 13, 1958
, in the amount of $996.81, plus interest thereon through
October 26, 1960
, in the amount of $121.68, or a total of $1,118.49. This is the only
amount with which we are concerned in this appeal.
does not establish that the mortgagor is insolvent.
claim of priority is based on several court interpretations of Sections
6321, 6322, and 6323(a) of Title 26, U. S. C., 1958 Edition. Sections
6321 and 6322 create the federal tax lien but do not in themselves
determine what priority shall be given. Under these sections no notice
of filing is required before a lien becomes valid and effective. Section
6323(a) requires the valid of notices of the lien before it can be valid
against mortgagees, pledgees, purchasers and judgment creditors. It
argues that the payment of the delinquent taxes by the mortgagee was of
benefit to him in the preservation of his security but that such payment
was of no benefit to the
cites and relies on United States v. City of New Britain [54-1
USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520, establishing
the principle of "first in time is the first in right" in
determining the federal priority of liens, and Illinois v. Campbell,
329 U. S. 362, 67 S. Ct. 340, 91 L. Ed. 348, establishing that the
competing lien must be a specific, perfected and choate lien.
We do not
believe these two cases are applicable in this case. In the
case the court was dealing with statutory liens, some owned by the city
for unpaid taxes and some by the
. The court held that as between two groups of statutory liens attaching
to the same real estate, with no question of insolvency involved, the
principle of "the first in time is the first in right"
applies. It was proposed that the mortgagee could have paid the
delinquent real estate taxes with the amount so paid becoming a part of
the mortgage debt covered by the mortgage lien and that the federal tax
lien would therefore be invalid as to such amount by virtue of Section
6323(a). However, the court said it need not pass upon the merits of
this suggestion as that situation was not presented by the record in the
case, and we do not find this question passed on by the Supreme Court in
any other case.
v. Campbell case, supra, involves an insolvent debtor. It
involved a contest of priority between a lien for State unemployment
compensation taxes filed upon all of the personal property of the
employer used by him in connection with his business and a lien on
behalf of the
for federal social security taxes. The court held that the State statute
making it unnecessary for the director of labor to describe the property
to which the lien is to attach did not make it sufficiently specific or
perfected to defeat the priority of the federal lien subsequently filed.
In other words, the State's lien was inchoate at the time the federal
lien was filed and therefore subsequent. This case deals with competing
statutory liens and does not come under Section 6323(a).
cites United States v. Gilbert Associates [53-1 USTC ¶9291], 345
361, 73 S. Ct. 701, 97 L. Ed. 1071, which involved competing federal and
municipal tax claims. The federal lien was for employment, withholding
and income taxes unpaid, and its lien was filed
August 6, 1948
. The town's lien grew out of personal property taxes assessed against
the taxpayer for the years 1947 and 1948. The taxpayer was declared
insolvent and a temporary receiver was appointed in 1949. In September
of 1948, and again in September of 1949, the town sold the property at
tax sale for the taxes accruing in the years 1947 and 1948 respectively.
It appears the town bid in the property at its own sales. The Supreme
Court of New Hampshire held that the town's sale of the taxes resulted
in something "in the nature of a judgment" under
law and, therefore, the town was a judgment creditor within the meaning
of Section 6323(a). The United States Supreme Court reversed the State
court and held that Congress in Section 6323(a) used the words
"judgment creditor" in the usual conventional sense of a
judgment of a court of record and its meaning did not extend to the
action of taxing authorities who may be acting judicially where the end
result is something "in the nature of a judgment." The court
further held that inasmuch as the taxpayer was insolvent, the
was entitled to priority under R. S. Section 3466.
next cites United States v. Waddill Co. [45-1 USTC ¶9126], 323
U. S. 353, 65 S. Ct. 304, 89 L. Ed. 294, wherein the court held a
landlord's lien inchoate because it was uncertain as to amount and a
municipal tax lien was held inchoate because until levy there was no
certainty as to the property subject to the lien. The court in that case
held it is a matter of federal law whether a lien created by statute is
sufficiently specific and perfected so as to being it within a claimed
exception to the priority of the United States under R. S. Section 3466
which governs claims of the United States against insolvent debtors.
In the case of
United States v. Security Trust & Savings Bank [50-2 USTC ¶9492],
340 U. S. 47, 7 S. Ct. 111, 95 L. Ed. 53, also cited by appellant,
priority was accorded to a federal tax lien recorded after an attachment
lien but prior to the time the attaching creditor obtained judgment. In
this case appellant argues the rule of choatness was extended to
"non-insolvency" cases. The court held the judgment creditor
was not entitled to the benefits of Section 6323(a) because he was not a
judgment creditor when the federal lien attached. The attachment lien
gave the attachment creditor no right to proceed against the property
until he obtained judgment.
next argues that the principle was also extended to nonstatutory
contractual liens in United States v. Ball Construction Co. [58-1
USTC ¶9327], 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 2d 510, but a
careful reading of that case with its dissenting opinion leads us to
conclude the court decided the contesting lien claimant was not a
"mortgagee" within the meaning of Section 6323(a), Title 26,
U. S. C., and therefore not of the preferred class.
In a very
recent case entitled United States v. Buffalo Savings Bank,
decided January 7, 1963 [63-1 USTC ¶9166], -- U. S. --, 9 L. Ed. 2d 283
S. Ct. --, the Supreme Court of the United States held that in the
foreclosure of a mortgage, it was improper for the court to tax, as a
part of the expenses of the sale, real estate taxes and other
assessments levied upon the subject land prior to the satisfaction of a
prior tax lien of the United States. It is a per curiam opinion and its
holding is based upon the court's decision in United States v. City
of New Britain, supra, and in comment thereon states:
case rules this one, for there the Court quite clearly held that federal
tax liens have priority over subsequently accruing liens for local real
estate taxes, even though the burden of the local taxes in the event of
a shortage would fall upon the mortgagee whose claim under state law is
subordinate to local tax liens."
Both cases are
distinguishable from the instant case in that in each of those cases the
unpaid taxes were statutory liens and the claimant did not come within
the definition of a mortgagee as described in Section 6323(a).
then cites two Circuit Court of Appeals cases: United States v.
Christensen [59-2 USTC ¶9621], 269 F. 2d 624, and United States
v. Bond [60-2 USTC ¶9532], 279 F. 2d 837. Both of these cases gave
priority to federal tax liens over subsequent real estate taxes paid by
the mortgagee and applied the choate lien test, citing in support
v. City of
, supra. A similar result was obtained in Union Central Life
Insurance Co. v. Peters [60-2 USTC ¶9697], 361 Mich. 283, 105 N. W.
2d 196, and Bank of America National Trust & Savings Ass'n v.
Embry, 10 Cal. Rep. 602. These cases are not controlling of the
federal question and we believe were erroneously decided. We do not feel
case is authority for the propositions announced in these cases.
Title 26, U. S. C., establishes a lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to a person liable to pay any tax, and who neglects or refuses
to pay the same after demand. Section 6323(a) provides that a lien
provided by Section 6321 shall not be valid as against any mortgagee,
pledgee, purchaser or judgment creditor until notice thereof has been
questions concerning the relevant priorities of a federal tax lien and
other liens, the State law determines the nature and extent of the
property interests of the taxpayer and the federal law determines the
priority of the competing liens themselves. Aquilino v. United States
[60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365; United
States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 80 S. Ct. 1108,
4 L. Ed. 2d 1192; United States v. Bess [58-2 USTC ¶9595], 357
U. S. 51, 78 S. Ct. 1054, 2 L. Ed. 2d 1135; and United States v. Aori
[55-1 USTC ¶9138], 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 2d 264.
said, Section 6323(a), supra, that a federal tax lien shall not
be valid as against a mortgagee until notice thereof has been filed.
question has not heretofore been decided by the United States Supreme
Court. To arrive at their decisions, the Circuit Court of Appeals cases
and the State Supreme Court cases above cited have transplanted rules
developed for the classification of interests which did not enjoy the
statutory preference of a mortgagee. It cannot be said that Congress
intended that the preferred (mortgagee, pledgee, purchaser and judgment
creditor) and the unpreferred interest should be classified under the
same rules. We quote from the very scholarly dissenting opinion of Judge
Haynsworth, Circuit Judge of the United States Court of Appeals, Fourth
Circuit, the case of
v. Bond, supra, wherein he states on page 848 as follows:
the Supreme Court adopted the rule of 'the first in time is the first in
right' (authorities cited) for the purpose of classifying liens
competing, without the benefit of a statutory preference, with the tax
lien, substantial qualification was essential if the tax lien was not be
emasculated. Among the many liens and priorities recognized by the laws
of the states, most were far from the standing of those interests which
Congress had selected for preferential treatment. Without substantial
qualification of a simple rule of priority in time and a reserved right
of federal classification, such interests, created and controlled by the
states, would threaten frustration of the tax lien.
state's provisional remedies may provide a number of interlocutory
liens, but the posessor of such a lien need not be classified with the
judgment creditor whom the statute prefers. The litigant who commences
his action by attachment, entertains some hope of beoming a judgment
creditor, but he may encounter many a pitfall along the way. As a
judgment creditor, he is on the embryonic stage. His attachment may be
perfected in itself, but, viewed as a first step toward ascent to the
preferential status of a judgment creditor, it is neither perfected nor
Supreme Court might have said, as Mr. Justice Jackson did say,
(authorities cited) that all interests should be deferred to the tax
lien save only those which Congress chose to prefer. Resort to the
inchoate test, applied to the competing lien, approached the same
result. At least is avoided the necessity of treating the lien products
of a state's provisional remedies as judgments." (Authorities
We turn now to
State law to determine the nature and extent of the property interests
of the taxpayer as it exists in this case.
had hypothecated his property for the performance of the acts described
in the mortgage, to wit, the payment of the mortgage debt, the payment
of taxes, insurance premiums, etc. Section 35-02-01 N. D. C. C. The
mortgage created a lien on his land. Crandell v. Barker, 8 N. D.
263, 78 N. W. 347; Colonial & United States Mortgaging Co. v.
Northwest Thresher Co., 14 N. D. 147, 103 N. W. 915; Nash v.
Northwest Land Company, 15 N. D. 566, 108 N. W. 792; Capital
Trust & Savings Bank v. Wallace, 45 N. D. 182, 177 N. W. 440; State
v. Divide County, 68 N. D. 708, 283 N. W. 184; First National
Bank of Waseca v. Paulson, 69 N. D. 512, 288 N. W. 465; Federal
Farm Mortgage Corp. v. Berzel, 69 N. D. 760, 291 N. W. 550; and Nechtle
v. Topp, 78 N. D. 789, 52 N. W. 2d 842. It is a special lien.
Section 35-02-02, N. D. C. C.
The fee simple
title of the mortgagor thus became subject to the mortgage which is a
special lien on the land.
in question contained a clause permitting the mortgagee to pay accrued
taxes on the land to protect his security and reads as follows:
the event mortgagor fails to pay when due any taxes, liens, judgments or
assessments, lawfully assessed against property herein mortgaged, or
fails to maintain insurance as hereinbefore provided, mortgagee may make
such payment or provide such insurance, and the amount(s) paid therefor
shall become a part of the indebtedness secured hereby and bear interest
from the date of payment at the rate of six per cent per annum."
contractual clause is in conformity with our statutes which provide that
when a holder of a special lien is compelled to satisfy a prior lien for
his protection, he may enforce payment of the amount so paid by him as a
part of the claim for which his own lien exists. Section 35-01-07, N. D.
C. C. Foster v. Furlong, 8 N. D. 282, 78 N. W. 986; and Merchants'
State Bank of Fargo v. Tufts, 14 N. D. 238, 103 N. W. 760.
taxes subsequently levied constitute a prior lien to the mortgage lien.
Section 57-02-40, N. D. C. C. Where the mortgagor fails to pay the real
estate taxes, the mortgagee, for his own protection, is entitled by
virtue of the statute (Section 35-01-07, supra) to pay such taxes
and to enforce payment of the amount so paid by him as a part of the
claim for which his mortgage lien exists. The payment of the taxes by
the mortgagee extinguishes the original tax lien and the amount paid is
secured by the mortgage by force of statute and by the covenants of the
mortgage. It is a charge upon the mortgaged premises in addition to the
original mortgage debt and of the same grade and rank. The mortgage lien
attaches to such payment. Omlie v. O'Toole, 16 N. D. 126, 112 N.
W. 677. This rule is the general rule. 36 Am. Jur., Mortgages, Secs.
341, 342 and 346; 59 C. J. S., Mortgages, Sec. 325. It constitutes a
single and indivisible demand and claim for taxes paid are collateral
and subordinate to the mortgage and may not be separated and collected
in an independent action. 36 Am. Jur., Mortgages, Sec. 352; 59 C. J. S.,
Mortgages, Sec. 325(b).
There is only
one form of action in
for the protection of private rights known as a civil action, Rule 2, N.
D. R. Civ. P., and the district court has the power, according to the
usages of courts of law and equity, necessary to the full and complete
jurisdiction of the causes. Section
, N. D. C. C. In a mortgage foreclosure, the plaintiff is entitled to
reimbursement for taxes paid as a part of the mortgage debt, Omlie v.
O'Toole, supra, and if he fails to seek reimbursement in the
foreclosure his right is gone. To permit him to maintain another suit
for reimbursement would permit him to split the action. Warnecke v.
348, 11 N. W. 2d 457; Day v. Brenton, 102
482, 71 N. W. 538. The causes of action may not be divided. Jacobson
v. Mutual Benefit Health & Accident Ass'n, 73 N. D. 108, 11 N.
W. 2d 442; 1 Am. Jur. 2d, Actions, Sec. 129.
It is a lien
upon everything that would pass by a grant to the property, Section
35-02-11, N. D. C. C., and is valid as to third persons and a second
mortgagee with notice. Union National Bank v. Milburn & Stoddard
Co., 7 N. D. 201, 73 N. W. 527.
reasons the extent of the property interest of the mortgagor in the
subject property under State law is subject to the rights of the
mortgagee. He has a lien thereon to secure his indebtedness, including
subsequent taxes paid. This is a usual and ordinary right of which we
must assume Congress had knowledge when it enacted Section 6323(a) and
we quote again from the dissenting opinion of Judge Haynesworth, page
851, as follows:
in mortgages requiring or permitting the mortgagee to discharge ad
valorem tax liens and extending the mortgage lien to such disbursements,
as well as to the expense of enforcement of the mortgagee's rights, are
commonplace. There is nothing novel in recognition of the fact that the
protection of the mortgage lien extends to such disbursements and
expenses, made pursuant to such provisions, as fully as to the principal
of the mortgage debt itself. It is a usual and conventional right of a
mortgagee. When Congress created the preference, such rights of the
mortgagee were generally recognized in commerce and in law. If we are to
give the language of the statute its usual and ordinary meaning, we
cannot deny to the mortgagee his usual and ordinary rights. Since the
statute confers the preference upon the mortgagee, it seems to require
us to recognize the preference, at the least, to the extent that his
preference has been traditionally and commonly recognized in the state
courts. I see no reason to suppose that Congress intended the preference
it commanded to differ in kind and quality from the preference the
selected classes have enjoyed historically and, in commercial circles,
are generally thought to have."
As we stated
above, the question of the priority of the competing claims is
determined by federal law. By the enactment of the statute Congress has
declared the federal policy to be that a tax lien of the
shall not be valid as against the mortgagee until notice thereof has
been filed. Section 6323(a), supra. The mortgagee's lien was
complete prior to the filing of the
tax lien. It also provided for interest, statutory attorney's fees and
costs of foreclosure pursuant to statute in the event of foreclosure.
Interest which accrued on the indebtedness subsequent to the filing of
the federal tax lien and foreclosure costs were allowed by the court and
are not challenged by the appellant in this case. We see no reason why
subsequently accruing taxes paid by the mortgagee should not enjoy the
we believe, is open in the Supreme Court of the
. We believe the Congress has decided the question and its statute
should govern our decision. It requires a recognition of the preference
a mortgagee has enjoyed generally and historically.
holding will encourage prompt mortgage foreclosures for nonpayment of
real estate taxes. Bidders at the sheriff's sale will deduct the unpaid
real estate taxes in computing their bids because, after sheriff's deed,
the purchaser must then pay the real estate taxes in order to record his
deed, Section 11-18-02, N. D. C. C., and to remove the real estate tax
lien which is prior to the mortgage, Section 57-02-40, N. D. C. C. The
federal tax lien will have been removed as a lien against the mortgaged
property by the foreclosure of the mortgage which was filed prior to the
filing of the federal tax lien, Section 6323(a), Title 26, U. S. C. We
do not believe it presumptuous to assume Congress recognized this when
it enacted the legislation providing a prior mortgagee shall occupy a
preferred position to a subsequently filed federal tax lien.
Circuit Judge dissenting:
July 17, 1953
, Martin Hoyer and his wife executed a mortgage on certain lands in
favor of the Federal Land Bank of
. This mortgage was recorded
July 20, 1953
, and assigned to the plaintiff, Fischer, on
April 29, 1958
. The assignment was recorded
May 3, 1958
October 13, 1958
, the assignee Fischer paid past due real estate taxes levied against
On April 2,
1954, the United States filed in the office of the register of deeds of
the county wherein the land was situated a federal tax lien pursuant to
the provisions of Sections 6321, 6322, and 6323(a), Title 26, U. S. C.,
based upon the assessment of federal taxes against the landowner and
mortgagor, Martin Hoyer.
the recording of the federal lien, taxes were levied pursuant to the
laws of the State of North Dakota, which remained a lien on the land
until they were paid by Fischer on
October 13, 1958
. Section 57-02-40, NDCC, provides that:
upon real property are a perpetual paramount lien thereon against all
persons, except the
and this state."
35-01-07, NDCC, provides that:
the holder of a special lien is compelled to satisfy a prior lien for
his own protection, he may enforce payment of the amount so paid by him
as a part of the claim for which his own lien exists."
mortgage in question contained a provision that in event the mortgagor
failed to pay lawful taxes when due, the mortgagee might make the
payment and the amount thereof would become a part of the indebtedness
secured by the mortgage. The right vested in the mortgagee by the
statute and by the provision in the mortgage is in accord with the
general rule that where the mortgagor neglects to pay taxes that are a
paramount lien on the property, the mortgagee may pay them and add them
to the principal as a part of the sum secured by the mortgage. 59 C. J.
S., Mortgages, Section 178e; 36 Am. Jur., Mortgages, Sections 341, 342.
The reason for the rule is that the taxes being a paramount lien, the
protection of the security by the payment of taxes benefits not only the
mortgagee but also the mortgagor who owns the property and has a right
of redemption and junior lien-holders who also rely upon the property as
security for their liens. In 36 Am. Jur., Mortgages, Section 346, it is
authorities even uphold the view that the junior mortgagee is entitled
to reimbursement in such case in preference to the claim of the senior
mortgagee. Other authorities hold that the junior mortgagee, by paying
taxes on the mortgaged premises, acquires a lien of the same rank and
dignity as that of his mortgage lien."
In the case
before us, the taxes levied by state authority which were paid by the
mortgagee were subject and inferior to the tax lien of the
. As against the
they never became a paramount lien. The majority opinion holds that when
the mortgagee paid the state taxes, the lien therefor was extinguished
and the amount so paid became a part of the principal debt secured by
the mortgage and was therefore a part of the prior mortgage lien and as
such became superior to the federal lien. I cannot agree with that
At the time
acquired its superior tax lien, the mortgage was for a definite amount
and if we consider interest, it secured an amount that could be
calculated to any certain date pursuant to the terms of the mortgage.
While it is true that the mortgagee had the right to pay past due taxes
which could as against the mortgagor and inferior lienholders be added
to the principal debt, this right permitted the addition of an amount
that was uncertain, indefinite and impossible of calculation or
determination under the terms of the mortgage. Valuations of property
and tax levies to which they are applied vary from year to year. The
mortgagee's right was to pay and add to the principal of the mortgage
debt such amount or amounts as might result in the various years from
the application of the taxing process. At the time the lien of the
was filed the taxes involved in this controversy were not determinable.
All that then existed was a right to tax in an indefinite amount which
would be determined from year to year. Insofar as such amounts might be
paid by the mortgagee under the terms of the mortgage they were
inconsummate as against the mortgagor and as a lien against the land. In
both aspects they were definitely inchoate.
States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340
47, 71 S. Ct. 111, 95 L. Ed. 53, the court held that a federal tax lien
was superior to an inchoate attachment lien obtained under
law. In United States v. City of New Britain [54-1 USTC ¶9191],
347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520, the court referred to the
inchoate attachment lien involved in the Security Trust and Savings
Bank case, and said:
inchoate liens may become certain as to amount, identify of the lienor,
or the property subject thereto only at some time subsequent to the date
the federal liens attach and cannot then be permitted to displace such
federal liens. Otherwise, a State could affect the standing of federal
liens, contrary to the established doctrine, simply by causing an
inchoate lien to attach at some arbitrary time even before the amount of
the tax, assessment, etc., is determined."
similar to the one now before us have been considered by federal and
state courts. In United States v. Christensen [59-2 USTC ¶9621],
269 F. 2d 624, it is said:
of state taxes on mortgaged property by a prior mortgagee after federal
tax liens are recorded does not give the mortgagee a lien for such local
taxes superior to the appellant's prior tax liens."
States v. Bond [60-2 USTC ¶9532], 279 F. 2d 837, the court
considered a claim by a mortgagee for reimbursement for real estate
taxes paid to the county. These taxes had accrued after federal tax
liens had been recorded. It was held that the federal tax liens were
superior to the claim of the mortgagee for real estate taxes paid to the
county. The court states:
have derived an indelible impression from the cases (involving
determination of priority of federal tax liens over competing liens)
decided by the Supreme Court, which reveal the persistent application of
the choate lien test, first in insolvency cases, then in statutory
lien cases, and finally in nonstatutory contractual lien cases."
cases in state courts applying the choate lien test in determining the
priority of federal tax liens over state taxes paid by a mortgagee are
the following: Metropolitan Life Insurance Co. v. United States,
9 A. D. 2d 356, 194 N. Y. S. 2d 168, and Union Central Life Insurance
Co. v. Peters [60-2 USTC ¶9697], 361 Mich. 283, 105 N. W. 2d 196.
If the taxes
paid by the mortgagee be considered advances under the terms of the
mortgage, the mortgage lien to the extent of the sum advanced was not
perfected until payment. There was no certainty as to payment or the
amount until after the federal lien attached. The rule of priority
enunciated by the case above cited is applicable to advances. American
Surety Company of New York v. Sundberg [61-2 USTC ¶9574], 58
2d 337, 363 P. 2d 99. It is a rule of the federal courts and should be
followed in this case. I would reverse the judgment.
¶9597]United States of America, Plaintiff v. Bednar Motors, Inc., a
corporation; State of North Dakota; Griggs County, North Dakota, a
public corporation; Crane-Johnson Company, Inc., a corporation; John
Njellum, Herman Weiss, Russell C. Nerison and Clinton R. Ottmar,
Partners doing business as Nejellum, Weiss, Nerison & Ottmar; O'Day
Equipment, Inc., a corporation; Adams, Inc., a corporation; Abraham
Thime, an individual; and General Trading Company, a corporation,
S. District Court, Dist. N. D., S. E. Div., Civil No. 3922, 7/9/63
[1954 Code Sec. 6323]
Priorities of liens: Federal tax liens: State and county tax liens:
Small Business Administration mortgage.--The priority of
state-created liens is based upon their choateness and once liens have
become choate, the priority of the various liens is determined on the
basis that the first in time in the first in right. Previously perfected
liens for real property taxes, interest, penalties and special
assessments, personal property taxes and interest, and a previously
recorded mortgage took priority over subsequently filed North Dakota and
federal liens for taxes and a North Dakota judgment lien.
Boulger, Assistant United States Attorney, Fargo, N. D., for plaintiff.
Helgi Johanneson, Attorney General, Kenneth W. Jakes, Assistant Attorney
General, Bismarck, N. D., for State of N. D.; A. C. Bakken, State's
Attorney, Cooperstown, N. D., for Griggs County, N. D.; Gene F. Johnson,
Van Osdel & Foss, First National Bank Bldg., Fargo N. D., for Adams,
Inc.; M. W. Duffy, Duffy & Bakken, Cooperstown, N. D., for Abraham
action, stripped of its many complexities, the Plaintiff seeks judgment
against the Defendant, Bednar Motors, Inc., foreclosure of a real and a
chattel mortgage, a determination as to the several liens asserted, and
application of the proceeds of sale to the satisfaction of the mortgage
indebtedness and other liens.
March 29, 1960
, Bednar Motors, Inc., (Bednar) became indebted to the First State Bank
, (Bank) in the sum of $25,000.00. Bednar executed its note in that
amount, and to secure its payment executed a real and a chattel
mortgage. Both were filed for record
April 4, 1960
, with the Register of Deeds,
. Bednar failed to make the installment payment due
December 29, 1960
, and failed to make any payments thereafter which resulted in the note
being in default.
June 16, 1961
, the bank assigned the note and mortgages to the Small Business
Administration, an agency of the Plaintiff. Pursuant to the provisions
contained in the note and mortgages, the Small Business Administration
exercised its option and declared the entire outstanding balance, both
principal and interest due and payable, and notified Bednar on
October 27, 1961
, of its intention of foreclose.
mortgage and that portion of the real estate mortgage covering Lots 19,
20 and 21 of Block 74 and the south 50 feet of Lots 1, 2, 3, and 4, and
the east four feet of Lot 5 in Block 75, all in the Original Townsite of
the City of Cooperstown, Griggs County, North Dakota, are sought to be
foreclosed in this action.
Inc.; General Trading Company; Crane-Johnson Company, Inc.; O'Day
Equipment Company, Inc.; and John Njellum, Herman Weiss, Russell C.
Nerison and Clinton R. Ottmar, then partners doing business as Njellum,
Weiss, Nerison & Ottmar, are all in default and judgment will be
April 24, 1961
, subsequent to the execution and recording of the mortgages, the
Defendant, Adams, Inc., sold certain Burroughs bins to Bednar under a
conditional sales contract filed with the Griggs County Register of
Deeds on that date. By order of this Court on
March 21, 1963
, Adams, Inc., was granted permission to take possession of the bins for
the purpose of attempting to sell the same and, if sold, to hold the
monies received pending disposition by further order of this Court.
now concedes that the bins are not subject to its real property mortgage
since the evidence disclosed the bins were in no manner ever attached to
the realty but were simply sitting on the floor and retained their
identity as personal property. Adams, Inc., having priority, is entitled
to the Burroughs bins or, if sold, to the proceeds of sale.
Next to the
considered is the conditional sales contract under which Abraham Thime
purchased from General Trading Company one air compressor, one Bear
teleliner and two Weaver twin post lifts. The contract was filed with
the Griggs County Register of Deeds
March 24, 1961
. The machinery had been bought by Bednar from General Trading Company
in January of 1960 under a conditional sales contract which was never
recorded. When Bednar could no longer make the payments due under the
contract, Abraham Thime was substituted as purchaser and the contract
recorded. The machinery is attached to the realty by bolts and can be
removed without damage to the building although removal of the teleliner
will leave a pit covered with a steel plate. Although the machinery was
on the realty at the time the mortgages were executed, it was not
included in the chattel mortgage, and the Court finds that its
attachment to the premises was not such as to destroy its nature as
personal property and was not included in the real property mortgage.
having priority, is entitled to the air compressor, the Bear teleliner
and two Weaver twin post lifts.
has a statutory lien against the real property covered by the
Plaintiff's mortgage for real property taxes, including penalties,
interest and special assessments for the years 1960, 1961 and 1962. The
priority of a lien for taxes due on property is established by 15
C. A. §646, the Small Business Administration Act which reads as
interest held by the Administration in property, as security for a loan,
shall be subordinate to any lien on such property for taxes due on the
property to a State, or political subdivision thereof, in any case where
such lien would, under applicable State law, be superior to such
interest if such interest were held by any party other than the United
Dakota Century Code, §57-02-40(1) provides:
upon real property are a perpetual paramount lien thereon against all
persons except the
and this state."
the Court finds that Griggs County, North Dakota, has priority for real
property taxes, penalties, interest and special assessments for the
calendar years, 1960, 1961 and 1962, over the mortgage indebtedness on
the real property claimed by the Plaintiff. The asserted lien of
for 1960, 1961 and 1962, for personal property taxes assessed against
Bednar must also take priority over the mortgage indebtedness of the
Plaintiff agreeable to the law heretofore cited. Ordinarily a lien for
personal property taxes assessed against property in one class cannot be
asserted on property in another class, but here there is a claim for
personal property taxes asserted against all the property subject to the
chattel mortgage, and as no evidence was presented by the Plaintiff to
designate the various classes, priority will be granted against all the
personal property of Bednar.
liens arising after the filing of the real and chattel mortgages
referred to are those of the State of North Dakota and the
United States of America
. The North Dakota Tax Commissioner filed a lien against Bednar for
sales taxes, interest and penalties, with the Griggs County Register of
March 25, 1961
. The Unied States filed a lien for withholding taxes
May 3, 1961
, and again on
November 14, 1961
. The remaining lien to be considered is that of the State of
on behalf of the North Dakota Workmen's Compensation Bureau on a
judgment filed with the Clerk of Griggs County, North Dakota, District
November 14, 1961
of a lien created by state law depends "on the time it attaches to
the property and becomes choate."
[54-1 USTC ¶9191], 347
81. Choate state-created liens take priority over later federal tax
liens, and it is a matter of federal law when such lien has acquired
sufficient substance and has become so perfected as to defeat a later
arising or later filed federal tax lien.
rule is that liens are "perfected in the sense that there is
nothing more to be done to have a choate lien--when the identity of the
lienor, the property subject to the lien, and the amount of the lien are
established." The priority of the federal tax lien as against liens
created under state law is governed by the common law rule: "the
first in time is the first in right."
[54-1 USTC ¶9191], 347
state liens as being perfected, as indeed the Court must on the present
state of the record, the priorities are established as of the date of
filing. The result is that
's lien for the 1960, 1961 and 1962 real property taxes, interest,
penalties and special assessments, together with the County's lien for
the 1960, 1961 and 1962 personal property taxes and interest, take
priority over the mortgage indebtedness. The mortgage indebtedness takes
priority over the last filed state and federal liens for taxes and the
state judgment lien. However, the state and federal tax liens and
the state judgment lien take precedence over the liens of
for the 1961 and 1962 real property taxes, interest, penalties and
special assessments, and the 1961 and 1962 personal property taxes and
be entered against the Defendant, BEDNAR MOTORS, INC., and in favor of
the Plaintiff in the amount of $25,776.27 and interest thereon from
April 27th, 1962, at the rate of five and one-half per cent per annum on
$18,054.88, and at the rate of six per cent per annum on $6,014.01 to
date of entry of judgment, together with Plaintiff's costs and
disbursements to be fixed and assessed by the Clerk of this Court.
is the subject matter of this action will be sold and both the real and
chattel mortgages foreclosed. After satisfaction of court and
foreclosure sale costs, sufficient funds to satisfy the liens of
will be set aside, and the remainder of the sale proceeds will be
applied to the satisfaction of the Plaintiff's judgment entered herein.
If any funds then remain, they will be applied to the satisfaction of
the several liens in the following order: First, to the satisfaction of
the state tax lien; second, to the satisfaction of the federal tax lien;
and third, to the satisfaction of the state judgment lien.
If there be
sufficient funds realized from the foreclosure sale to satisfy all
liens, then the funds set aside will be unconditionally released to
Griggs County; but if not, then the monies set aside shall be applied as
follows: First, to the satisfaction of Griggs County's lien for 1960
real property taxes, interest, penalties and special assessments, and
its lien for 1960 personal property taxes and interest; second, to the
satisfaction of the lien of the North Dakota Tax Commissioner for unpaid
sales taxes filed March 25th, 1961, together with interest and
penalties; third, to the satisfaction of liens of the United States of
America for withholding taxes filed May 3rd, 1961, and again November
14, 1961; fourth, to the satisfaction of the judgment lien of the State
of North Dakota filed November 14th, 1961; and lastly, to the
satisfaction of the liens of Griggs County for 1961 and 1962 real
property taxes, interest, penalties and special assessments, and for the
1961 and 1962 personal property taxes and interest
will prepare all of the instruments necessary to effectuate this
Memorandum Opinion and transmit them through the Clerk of this Court.
IT IS SO