North Dakota

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[68-1 USTC ¶9102] United States of America , Appellant v. First National Bank & Trust Company of Fargo , North Dakota , Trustee of Travis Bros. Body Works, Inc., Bankrupt, and State of North Dakota , Appellees

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 18,666, 386 F2d 646, 12/4/67 , Rev'g and rem'g District Court decision, 66-2 USTC ¶9727, 256 F. Supp. 716

[1954 Code Sec. 6323]

Lien for taxes: Priorities: U. S. tax lien v. state tax lien: North Dakota. --U. S. withholding tax liens were superior to a North Dakota sales tax lien. The U. S. 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 U. S. tax liens had priority over the state tax lien.

Jeanine Jacobs, Richard M. Rob 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.

Before VAN OOSTERHOUT, GIBSON and HEANEY, Circuit Judges.

VAN 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 payment of admin istration expenses and wage claims, the priority of which is not disputed. The trial court's opinion is reported at 256 F. Supp. 716.

The material 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

The trial 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 North Dakota statutes.

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], 377 U. S. 351; United States v. Buffalo Sav. Bank [63-1 USTC ¶9166] 371 U. S. 228; United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81.

The relative priority of a lien of the United States for unpaid taxes is always a federal question to be determined by federal courts. The state's characterization of its liens is not conclusive. United States v. Equitable Life Assur. Soc'y [66-1 USTC ¶9444], 384 U. S. 323, 328; United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213.

The "first in time, first in right" doctrine applies to the determination of the relative priority of competing liens of the federal and local government. United States v. Equitable Life Assur. Soc'y, supra; United States v. Vermont , supra; United States v. New Britain , supra.

United States v. Equitable Life Assur. Soc'y thus states the principles controlling here:

"[T]he 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 choate.' United States v. New Britain , supra." 384 U. S. 323, 327-28.

The standards for choateness of a state lien are the same as those applicable to liens of the United States asserted under §§ 6321 and 6322. United States v. Vermont, supra.

When the 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 United States for withholding tax became a valid and perfected lien by April of 1960. Hence, the lien of the United States is entitled to priority over the sales tax lien under the "first in time, first in right" doctrine.

While the trial court was correct in determining that the "first in time, first in right" doctrine controls, it erred in determining that the North Dakota 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 United States calls for the result reached by the trial court. We do not agree. It is true that Rev. Stat. §3466 (31 U. S. C. A. §191) giving priority to the United States 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 United States does not assert any rights based upon §3466. The result that we have reached is in no way based upon such section.

Doubtless 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 U. S. C. A. §104(a), provides:

"The 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 United States or any State or any subdivision thereof."

Thus, some 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 admin istration costs and certain wage claims.

The trial court, after citing and quoting from the foregoing sections, observes:

"These sections have been construed to place liens of the United States 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.

We find 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.

Under the undisputed evidence before us, the lien of the United States 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 United States 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 United States was perfected, did not constitute a choate lien within the meaning of such term as defined in the cases hereinabove discussed.

The judgment is reversed and this case is remanded to the trial court with direction to establish the priority of the lien of the United States upon its claim for unpaid withholding taxes against the funds in the hands of the trustee.

¹ 26 U. S. C. A. §6323 as amended in 1966 has no pertinency to the decision in this case.

 

 

[63-2 USTC ¶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

N. D. Supreme Court, No. 7940, 5/16/63, Affirming unreported District Court decision

[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.

Rob 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, respondents.

TEIGEN, Judge (On reassignment).

This is an appeal from a part of a judgment of foreclosure of a real estate mortgage.

There is only one question to be decided on this appeal. It was stipulated by the parties as follows:

"The 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 located in McLean County , North Dakota . The first mortgage was dated July 17, 1953 , and recorded on July 20, 1953 . It was given to the Federal Land Bank of St. Paul 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 . The United States 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 found the United States 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.

At the 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.

It was 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.

The evidence does not establish that the mortgagor is insolvent.

[Government's Claim]

The federal 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 United States .

Appellant 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 New Britain case the court was dealing with statutory liens, some owned by the city for unpaid taxes and some by the United States . 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.

The Illinois 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 United States 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).

The appellant cites United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 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 New Hampshire 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 United States was entitled to priority under R. S. Section 3466.

The appellant 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.

["Non-insolvency" Cases]

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.

The appellant 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:

"That 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).

The appellant 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 thereof United States v. City of New Britain , 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 the New Britain case is authority for the propositions announced in these cases.

Section 6321, Title 26, U. S. C., establishes a lien in favor of the United States 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 filed.

In deciding 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.

Congress has said, Section 6323(a), supra, that a federal tax lien shall not be valid as against a mortgagee until notice thereof has been filed.

The precise 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 United States v. Bond, supra, wherein he states on page 848 as follows:

"When 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.

"A 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 completed.

"The 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 cited.)

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.

[State Law]

The mortgagor 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.

The mortgage in question contained a clause permitting the mortgagee to pay accrued taxes on the land to protect his security and reads as follows:

"In 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."

This 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.

Real estate 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 North Dakota 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 27-05-06 , 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. Foley, 234 Iowa 348, 11 N. W. 2d 457; Day v. Brenton, 102 Iowa 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.

For these 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:

"Provisions 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."

[Lien Priority]

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 United States 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 United States 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 same status.

The question, we believe, is open in the Supreme Court of the United States . 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.

A contrary 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.

Judgment is affirmed.

[Dissenting Opinion]

MORRIS, Circuit Judge dissenting:

On July 17, 1953 , Martin Hoyer and his wife executed a mortgage on certain lands in favor of the Federal Land Bank of Saint Paul . This mortgage was recorded July 20, 1953 , and assigned to the plaintiff, Fischer, on April 29, 1958 . The assignment was recorded May 3, 1958 . On October 13, 1958 , the assignee Fischer paid past due real estate taxes levied against the land.

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.

Subsequent to 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:

"Taxes upon real property are a perpetual paramount lien thereon against all persons, except the United States and this state."

Section 35-01-07, NDCC, provides that:

"When 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."

The 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 said:

"Some 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 United States . As against the United States 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 conclusion.

[Definite Amount]

At the time the United States 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 United States 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.

In United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 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 California 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:

"Such 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."

Questions 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:

"Payment 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."

In United 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:

"We 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."

Among the 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 Wash. 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.

 

 

[63-2 USTC ¶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, Defendants

U. 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.

Richard V. 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 Thime, defendants.

Memorandum Opinion

DAVIES, District Judge:

In this 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.

[Facts]

On March 29, 1960 , Bednar Motors, Inc., (Bednar) became indebted to the First State Bank of Cooperstown , North Dakota , (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, Griggs County , North Dakota . 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.

On 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.

The chattel 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.

Bednar Motors, 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 entered accordingly.

On 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.

The Plaintiff 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.

Abraham Thime, having priority, is entitled to the air compressor, the Bear teleliner and two Weaver twin post lifts.

Griggs County 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 U. S. C. A. §646, the Small Business Administration Act which reads as follows:

"Any 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 States."

The North Dakota Century Code, §57-02-40(1) provides:

"Taxes upon real property are a perpetual paramount lien thereon against all persons except the United States and this state."

Accordingly, 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 Griggs County 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.

Other asserted 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 Deeds on 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 North Dakota on behalf of the North Dakota Workmen's Compensation Bureau on a judgment filed with the Clerk of Griggs County, North Dakota, District Court November 14, 1961 .

[Choateness Test]

The priority of a lien created by state law depends "on the time it attaches to the property and becomes choate." United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 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.

The federal 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." United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81.

Accepting the 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 Griggs County '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 Griggs County for the 1961 and 1962 real property taxes, interest, penalties and special assessments, and the 1961 and 1962 personal property taxes and interest.

[Conclusion]

Judgment will 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.

Property which 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 Griggs County 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

The attorneys for the United States will prepare all of the instruments necessary to effectuate this Memorandum Opinion and transmit them through the Clerk of this Court.

IT IS SO ORDERED.