Prior
Law Page1
[66-1 USTC
¶9198]Yellow Motors Credit Corp., Appellee v. Boling at al.; United
States of
America
, Appellant, et al
Ohio
Court of Appeals, 9th Judicial Dist.,
Summit
County
, No. 5563,
3/31/65
[1954 Code Sec. 6323]
Tax liens: Priority: Judgment lien on motor vehicle.--Federal tax
lien filed in the office of the county recorder had priority over a
later judgment lien levied upon a motor vehicle owned by the delinquent
taxpayer.
Lewis A.
Seikel, 2nd Nat'l Bldg.,
Akron
,
Ohio
, for appellee. Merle M. McCurdy, United States Attorney,
Rob
ert J. Rotatori, Office of United States Attorney, Cleveland, Ohio, for
appellant. Brouse, McDowell, May, Bierce & Wortman, 500 First Nat'l
Tower, Akron, Ohio, for Carlton Supply Co.; Alpeter, Reed &
Diefenbach, Akron, Ohio, for Reynolds GMC, Inc., defendants.
HUNSICKER,
Judge:
This is an
appeal on questions of law from a judgment entered in the Municipal
Court of Akron,
Summit County
,
Ohio
.
Frank Boling,
Sr., purchased on different dates, two GMC trucks and executed, as part
payment therefor, two chattel mortgages. These mortgages were assigned
by the vendor of the trucks to Yellow Manufacturing Acceptance
Corporation, which later became Yellow Motors Credit Corporation. These
purchase money chattel mortgages were properly noted on the certificate
of title for each truck.
Frank Boling,
Sr., became indebted to Carlton Supply, Inc., on a note dated January 1,
1961. He also became indebted to the
United States of America
for taxes which he failed to pay. On January 18, 1962, the
United States of America
filed notices of lien attachment for tax purposes with the recorder of
Summit
County
. Subsequently, a notice of levy was filed, dated May 21, 1964, whereby
the
United States of America
seized and attached all property and funds of Boling.
In May 1963,
Carlton Supply secured judgment on its note dated January 1, 1961, and
on June 7, 1963, levied execution on the first of the trucks purchased
by Boling.
Yellow Motors
Credit Corporation brought the instant action to prevent a sale of the
trucks until the validity and priority of the liens could be determined.
In the meantime, the trucks were destroyed by fire. The liens then
attached to the fire insurance fund paid after the destruction of the
chattel property.
The trial
court determined that the first and best lien on each truck was the
purchase money chattel mortgage. The trial court then found as to the
first of the purchased (known as the 1961 truck), that Carlton Supply
had the second best lien; and the federal tax lien was found to be the
third best lien. As to the second of the trucks purchased (known as the
1963 truck), the federal tax lien was found to be a second best lien.
The dispute
herein arises from the fact that the amount of money accruing to the
federal tax lien claim is only a nominal sum, unless it should develop
that the federal tax lien as it applies to the first truck purchased is
superior to the lien of Carlton Supply.
Section 317.09
of the Ohio Revised Code provides for the recording and filing of
notices of federal tax liens in the office of the county recorder of the
county wherein the property subject to such lien is located. Section
4505.13 of the Ohio Revised Code provides that for a lien to be
effective with, respect to a motor vehicle, such lien shall be noted
upon the certificate of title for such motor vehicle. In the case before
us, neither the judgment lien of Carlton Supply, nor the recorded lien
of the
United States of America
, was noted on the certificate of title of either motor vehicle.
Section 6321,
Title 26,
U. S.
Code (also known as Section 6321 of the Internal Revenue Code of 1954),
says:
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, additional amount,
addition to tax, or assessable penalty, together with any costs that may
accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person."
Section 6323,
in its pertinent part, says:
"(a)
Invalidity of lien without notice.--Except as otherwise provided in
subsections (c) and (d), the lien imposed by section 6321 shall not be
valid as against any mortgagee, pledgee, purchaser, or judgment creditor
until notice thereof has been filed by the Secretary or his delegate--
"(1)
Under state or territorial laws.--In the office designated by the law of
the State or Terirtory in which the property subject to the lien is
situated, whenever the State or Territory has by law designated an
office within the State or Territory for the filing of such notice; or
"(2)
With clerk of District Court.--In the office of the clerk of the United
States district court for the judicial district in which the property
subject to the lien is situated, whenever the State or Territory has not
by law designated an office within the State or Territory for the filing
of such notice; or
"*
* *"
Is it
therefore required that for the federal tax lien to be superior to the
levy made by Carlton Supply on the 1961 truck, such federal lien also be
noted on the certificate of title of the 1961 truck, or that a prior
levy be made by the federal government?
We note again
that, as required by Section 317.09, Revised Code, the federal tax lien
was filed with the recorder of
Summit County
,
Ohio
, approximately eighteen months before Carlton Supply made a levy on the
1961 truck. See: Section 2329.03, Revised Code.
The federal
rule as to the priority of state-created liens over federal tax liens is
found in case of United States v. Pioneer American Ins. Co.
(1963), [63-2 USTC ¶9532] 374
U. S.
84, at p. 89, wherein the court said:
"*
* * we believe Congress intended that if out of the whole spectrum of
state-created liens, certain liens are to enjoy the preferred status
granted by Section 6323 [Title 26, U. S. Code], they should at least
have attained the degree of perfection required of other liens and be
choate for the purposes of the federal rule.
"*
* *."
In view of
this rule, and the applicable statutes set out above, the judgment lien
of Carlton Supply was not superior to the lien of the
United States
for unpaid taxes, unless it was necessary for the
United States
either to levy on the 1961 truck, or have its lien noted upon the
certificate of title.
It is
difficult to see by what process a judgment creditor could secure a
notation of lien upon a certificate of title which is usually in the
possession of the judgment debtor. To require the appellant judgment
debtor here (the United States of America) to comply with such a
requirement of noting its lien on the certificate of title, or reducing
the federal tax claim to judgment, and then levying on the goods and
chattels of the judgment debtor, would subject the federal government to
the differing and changing procedures, rules and regulations of each of
the states of the Union. If a state were so disposed, this situation
could become so burdensome to the collectors of internal revenue as to
give a state, in the matter of tax collection, a veto power over the
federal government.
This question
has been answered for us in the 1961 case of United States v. Union
Central Life Ins. Co. [62-1 USTC ¶9103], 368 U. S. 291, wherein the
court determined that a tax lien created by federal statutes (in the
instant case, Section 6321, Title 26, U. S. Code) covers all property
owned by the delinquent taxpayer, both at the time the lien arises and
thereafter until it is paid; that the subject of federal taxes,
including remedies for their collection, is independent of the
legislative action of the states; and a state requirement that notice of
a federal tax lien be filed in the manner designated by the state is not
controlling unless Congress has made it so.
In the instant
case, the priority of the federal lien is determined by the effective
date of the federal lien (the time when it is filed for record with the
county recorder), and not by the time levy was made by Carlton Supply on
the 1961 truck, or by a requirement that a notation be made upon a
certificate of title.
In the instant
case, the federal lien became effective many months prior to the
judgment levy made by Carlton Supply. Notice of that lien was given as
required by both the federal and state statutes. Thus, the lien of the
United States
was prior to the lien of Carlton Supply, and the trial court should have
so determined.
The judgment
we reach in this case is not only in accord with federal law, but with a
similar conclusion reached in the case of Atlas Finance Co. v.
Wilkerson, 382 S. W. 2d 529, wherein the Supreme Court of Tennessee
determined that a tax lien of the federal government duly filed against
all property of a taxpayer in the county where the property subject to
lien was situated had priority over a lien filed later pursuant to the
Motor Vehicle Title and Regulation Law of the state of Tennessee, by a
finance company which made a loan to a taxpayer (after the federal tax
lien was filed as required by law), and took as security therefor a
chattel mortgage on a motor vehicle, even though no other liens were
recorded on the certificate of title of taxpayer's motor vehicle, and
the finance company had no actual knowledge of any federal tax liens.
The judgment
entered herein by the trial court is contrary to law, and must be
reversed, and a final judgment rendered declaring the federal tax lien
of the United States of America a prior lien, and superior to the lien
of Carlton Supply, Inc., as to the 1961 motor vehicle involved in the
instant action.
The matter is
remanded to the trial court for execution.
Judgment
reversed and final judgment for appellant.
DOYLE, P. J.,
and BRENNEMAN, Judge, concur.
[65-1 USTC
¶9346]
United States of America
v. New Rose Development Corporation, et al.
Va.
Supreme Court of Appeals, Record No. 5807, 11/30/64
[1954 Code Sec. 6323]
Lien for taxes: Priority of creditors: Landlord's lien.--A lien
of the United States for unpaid withholding taxes for the first quarter
of 1962 was superior to a Virginia landlord's lien for rent due for
April and May 1962 established by a levy on a distress warrant.
Alec A.
Pandaleon, Department of Justice, Washington, D. C. 20530, Claude V.
Spratley, Jr., United States Attorney, Hampton, Va., Roger T. Williams,
Assistant United States Attorney, Norfolk, Va., for appellant.
Before
EGGLESTON, C. J., and BUCHANAN, SNEAD, I'ANSON and CARRICO, JJ.
I'ANSON,
Justice:
This appeal
involves the question of the relative priorities of a landlord's lien
under the laws of
Virginia
and a certain lien for unpaid federal withholding taxes due the
United States of America
.
[Facts]
New Rose
Development Corporation, defendants herein, leased to Mike Levine
certain business property in the city of
Norfolk
,
Virginia
, for a term of five years and fifteen days, beginning on
May 15, 1961
, and ending on
May 31, 1966
, at a monthly rental of $200. Levine sublet the premises to Merlin
Bakery, Inc., and in 1961 it incurred withholding tax liabilities to the
United States
in the amount of $1,450.41, which amount was reduced to $535.39, the
priority of which is not here in dispute. The corporation again incurred
withholding tax liabilities to the
United States
for the first quarter of 1962 in the amount of $1,663.62, which was
assessed on
May 3, 1962
, and the lien created was docketed in the clerk's office of the
Corporation Court of the City of
Norfolk
on
May 9, 1962
.
Neither Levine
nor his sub-tenant paid the rent on the leased premises for the months
of April and May, 1962, and the landlord caused a distress warrant to be
issued on
May 2, 1962
, for $400 for rent in arrears, and a levy was made on
May 6, 1962
, on the property of the sub-tenant on the leased premises. The rent for
the months of June and July, 1962, and for the two previous months, was
not paid and another distress warrant was issued for $800, covering the
four months, and a levy was made on
July 19, 1962
. The property levied on was sold by the High Constable of the City of
Norfolk
under the last mentioned levy, and after the payment of the costs of the
sale a balance of $2,325 remained in his hands for distribution.
The trial
court held, inter alia, that the landlord's lien for rent due for
April and May, 1962, in the amount of $400, as established by the levy
on the distress warrant made May 6, 1962, together with the costs
incurred in creating the fund and the cost of proceeding in that court
to determine the priorities, was prior to the lien of the United States
in the amount of $1,663.62, and directed the High Constable to
distribute the funds accordingly.
The
United States
contends that the trial court erred in holding that the landlord's lien
and the expenses incurred by it had priority over its lien.
This case is
controlled by what was said in United States v. Lawler [60-1 USTC
¶9319], 201 Va. 686, 691, 112 S. E. 2d 921, 926 (1960), and the
decisions of the United States Supreme Court there cited. Thus it is
unnecessary for us to repeat what has already been said. See, also United
States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374
U. S.
84, 88, 89, 10 L. ed. 2d 770, 83
S. Ct.
1651 (1963).
[Decision]
We hold that
the lien of the United States for $1,663.62, with interest, is prior to
that of the landlord's lien and it is entitled to be satisfied out of
the fund held by the High Constable ahead of the lien of the landlord
for rent and the expenses incurred by it. Accordingly, the judgment is
reversed and remanded to the court below for the entry of a judgment in
accordance with this holding.
Reversed
and remanded.
[65-1 USTC
¶9157]Commercial Mortgage & Finance Co., an Illinois Corporation,
and Trustee, Joseph R. Johnson and Mary C. Johnson, Appellees v.
Woodcock Construction Co., an Illinois Corporation, et al. (R & S
Plumbing & Heating, Inc., an Illinois Corporation, and New Milford
Lumber Co., an Illinois Corporation), Appellants. Marion Lindgren,
Appellant
Ill.
Appellate Court, Second District,
8/24/64
[1954 Code Sec. 6323]
Lien for taxes: Priorities: Mechanic's lien: Mortgage.--A lien
for federal taxes had priority over a mechanic's lien which attached
prior to the time when the taxes were assessed. The tax lien was,
however, subordinate to a real estate mortgage which was recorded before
the taxes were assessed.
Wilbur E.
Johnson,
205 7th St.
,
Rockford
,
Ill.
, for appellees. Pederson, Menzimer & Conde, 803 Talcott Bldg.,
Rockford, Ill., Sype & Kalivoda, 402 Elm St., Rockford, Ill.,
Kenneth D. Palmer, 205 7th St., Rockford, Ill. for appellants.
CARROLL,
Judge:
Plaintiffs
brought suit to foreclose a trust deed in the nature of a mortgage on
certain real estate in which plaintiff Commercial Mortgage & Finance
Co. (referred to herein as plaintiff) was the grantee and trustee. The
other plaintiffs were the owners of the note secured by the trust deed.
The complaint alleges that defendants, R & S Plumbing & Heating,
Inc. (referred to herein as R & S Plumbing) and New Milford Lumber
Co. (referred to herein as New Milford) each claim an interest in
premises described in the trust deed by virtue of a claim for mechanic's
lien; that the trust deed was executed June 5, 1961 and recorded June 8,
1961 at 12:18 o'clock; and that on June 6, 1961 both defendants by
written agreement subordinated their mechanic's lien claims to the lien
of said trust deed. Copies of these agreements are attached to the
complaint.
[Mechanic's
Lien Subordinated]
The
defendants, R & S Plumbing and
New Milford
answered the complaint and filed counter-claims for the foreclosure of
their claims for mechanic's liens. In answer to the plaintiffs'
allegation that these defendants had subordinated their rights to the
plaintiffs' trust deed, the defendant, R & S Plumbing, admitted the
signing of the subordination agreement "but says further that it
was represented to said defendant that the plaintiff herein would hold
the mortgage funds and would protect said defendant and pay defendant's
plumbing bill directly to defendant when said residence was completed,
but that in fact said plaintiff failed and neglected to hold all funds
and has failed and neglected to pay defendant, R & S Plumbing and
Heating, Inc., its plumbing bill herein." The defendant, New
Milford, in its answer also admitted the signing of the subordination
agreement but alleged "the fact to be that plaintiff represented to
this defendant that in return for signing said Subordination Agreement,
the plaintiff would hold the mortgage funds to protect this defendant
and to guarantee payment of this defendant's lumber and mill work bill
and that the plaintiff would pay said bill direct to this defendant upon
completion of the residence to be constructed upon the premises
described, but that in fact, the plaintiff has failed and neglected to
hold said funds for this purpose and has failed and neglected to pay
this defendant its lumber and mill work bill although often requested to
do so."
(Although the
defendants, R & S Plumbing and
New Milford
, filed separate pleadings below, in this court they filed a joint
brief.)
The brief of
the defendants is taken up with an attempt to show that the
subordination agreement of these defendants should not be enforced
against them for various reasons, such as equitable estoppel, that the
waivers were made by these defendants without a full disclosure of the
facts, that such a waiver is against public policy, etc. We do not deem
it necessary to weigh the merits of these arguments since these
defendants, as mechanic's lien claimants, failed to submit any proof
that they enhanced the property in value.
Section 16 of
the Mechanic's Lien Act provides as follows:
"No
incumbrance upon land, created before or after the making of the
contract under the provisions of this act, shall operate upon the
building erected, or materials furnished until a lien in favor of the
persons having done work or furnished material shall have been
satisfied, and upon questions arising between incumbrancers and lien
creditors, all previous incumbrances shall be preferred to the extent of
the value of the land at the time of making of the contract, and the
lien creditor shall be preferred to the value of the improvements
erected on said premises, and the court shall ascertain by jury or
otherwise, as the case may require, what proportion of the proceeds of
any sale shall be paid to the several parties in interest. All
incumbrances, whether by mortgage, judgment or otherwise, charged and
shown to be fraudulent, in respect to creditors, may be set aside by the
court, and the premises freed and discharged from such fraudulent
incumbrance." Ill. Rev. Stat., 1963, Chapter 82, Section 16.
Under this
statute, where the contract of the lien claimant is made after the
incumbrance in the form of a mortgage or trust deed has been recorded,
then the subsequent mechanic's lien is preferred only in proportion to
the value of the improvements which form the basis for the lien. Bradley
v. Simpson, 93
Ill.
93; Grundeis v. Hartwell, 90
Ill.
324; Marshall v.
Butler
, 174
Ill.
App. 502.
The claim for
lien of R & S Plumbing shows that the contract between R & S
Plumbing and the owner was made subsequent to the recording of the trust
deed. The claim for lien of
New Milford
alleges that the contract between it and the owner was made on June 8,
1961, the same date as the plaintiffs' trust deed was recorded. An
examination of the transcript of the testimony fails to show any
evidence of the time of day when this contract was made. Plaintiff,
having introduced into evidence the recorded trust deed showing by the
Recorder's mark that it was filed at 12:18 p. m. on June 8, 1961, we
shall assume that the trust deed was recorded prior to the making of the
contract between
New Milford
and the owner.
A mechanic's
lien claimant whose contract with the owner is made after an
incumbrance, such as a mortgage or trust deed is recorded, in order to
have a preference over the incumbrance, must prove that he has enhanced
the value of the property. If he fails to prove this, then the
incumbrance will have complete priority over the mechanic's lien. Metropolitan
Life Insurance Co. v. Ohlhaver, 284
Ill.
App. 477. There being no evidence whatsoever in the record that the
defendants enhanced the value of the property, even if the subordination
agreements were held to be a nullity, the defendants, as mechanic's
liens claimants could not have priority over the plaintiffs' trust deed.
The chancellor, in finding that the lien of the trust deed was a first
and prior lien was, therefore, correct and that part of the decree
should be affirmed.
[Withholding
Taxes]
In addition to
the mechanic's lien claimants, Marion Lindgren was made a defendant. It
appears from the record that on August 18, 1961 and September 15, 1961,
the
United States
made assessments against Woodcock Construction Co., the original
borrower, for withholding taxes which had not been paid. On October 20,
1961 and November 22, 1961, the District Director caused notices of
these liens to be filed with the Recorder of Deeds of Winnebago County.
The property was sold by the
United States
on November 20, 1961, to Kenneth D. Palmer. Palmer assigned the
Certificate of Sale to the defendant, Marion Lindgren.
Marion
Lindgren answered the complaint and filed her counterclaim. In the
counterclaim she alleges that by virtue of the provisions of 26 U. S. C.
Sec. 6323, her interest in the subject premises is superior to that of
the other parties defendant. The evidence shows that Woodcock
Construction Co., in the trust deed that it executed to Commercial
Mortgage and Finance Co., waived its right of redemption, such waiver
being allowed by statute to corporations. (Ill. Rev. Stat., 1963,
Chap. 77, Sec. 18a).
In reference
to the interest of the defendant, Marion Lindgren, the chancellor's
decree stated as follows:
"The
court further finds from the evidence that the proceedings of the United
States Treasury Department Internal Revenue Service in connection with
the seizure and sale of the subject premises as above recited were in
compliance with the statutes governing such seizure and sale, but that
only the right, title and interest of Woodcock Construction Co.,
defendant herein, was sold at said sale and that the purchaser at such
sale, the defendant Marion Lindgren being the ultimate holder of the
interest acquired under said sale, took and acquired thereby no interest
whatever in the subject premises for the reason that prior to the date
of said sale and on, to-wit: the date of the execution of said trust
deed, the defendant Woodcock Construction Co. had parted with all of its
interest in said premises by waiving in the trust deed its right to
redeem such premises from foreclosure sale, all as provided by statute
and, therefore, had no interest which could be sold by the United States
at such tax sale."
The court's
finding that the defendant, Woodcock Construction Co., had parted with
all of its interest in the premises by waiving its right of redemption
in the trust deed was erroneous.
There would
appear to be no question but that a mortgage, or a trust deed in the
nature of a mortgage, does not in any way divest the mortgagor of
whatever legal title he has to real estate. By executing a Trust Deed,
containing a waiver of its right of redemption, Woodcock Construction
Co. did not divest itself of its title to the premises.
The District
Director of Internal Revenue's Deed to the premises gave to Marion
Lindgren all the right, title and interest of Woodcock Construction Co.
in the premises. This title is subject to the interest of Commercial
Mortgage and Finance Co., as is recited in the decree of foreclosure.
The issue before us, therefore, is whether or not the interest of Marion
Lindgren is superior to that of the mechanic's lien claimants, R & S
Plumbing and
New Milford
. United States v. White Bear Brewing Co. [56-1 USTC ¶9440], 350
U. S.
1010, is a case involving the Illinois Mechanic's Lien Act. In reversing
the Court of Appeals, the Supreme Court decided that a Federal Tax Lien
has priority over a mechanic's lien claimant, even though the mechanic's
lien claimant perfected his lien prior to the filing of government tax
liens.
The remaining
question raised by Marion Lindgren's brief is whether the tax sale
extinguished all liens on the property which were inferior to that of
the government, viz: the claims for mechanic's liens.
The lien of
mechanic's lien claimants, under Section 1 of the Mechanic's Lien Act,
attaches as of one date of the contract. Ill. Rev. Stat., 1963,
Chap. 82, Sec. 1. The
New Milford
contract was made on June 8, 1961 and the R & S Plumbing contract
made on July 30, 1961. The Internal Revenue Code provides that the
government's lien arises at the time the assessment is made. Assessments
by the government were made on August 18, 1961 and September 15, 1961.
On the face of it, therefore, it would appear that the mechanic's liens
first attached to the property and are, therefore, prior liens. Although
the United States Supreme Court, in reversing the Court of Appeals in
the White Bear decision, supra, did so without an opinion,
the dissenting opinion of Justice Douglas was in pertinent part as
follows: "The court apparently holds that under 26 U. S. C. Sec.
3670, a lien that is specific and choate under State law, no matter how
diligently enforced, can never prevail against a subsequent Federal Tax
lien, short of reducing the lien to final judgment." It therefore
appears that the interest of the
United States
, which was acquired by Marion Lindgren, is superior to that of the
mechanic's lien claimants.
In support of
her contention that the tax sale extinguished the claims for mechanic's
liens, because these claims were inferior, Marion Lindgren cites the
following authorities: Blacklock v. United States, 208
U. S.
75 and Commercial Credit Corporation v. Schwartz [55-2 USTC ¶9589],
130 F. Supp. 524. In the Blacklock case, ibid, the statute
relating to the creation of government's lien for taxes provided that a
lien on all the taxpayer's property should arise upon the refusal to
honor a demand for payment of taxes. The demand had in fact been made
prior to the execution or recording of a certain trust deed, but there
was no public record of the government's lien. The government sold the
realty and ultimately issued a deed. The plaintiff, owner of the trust
deed, contended that the government was not entitled to set aside its
lien through summary, non-judicial proceedings, thus extinguishing the
plaintiffs' lien on the property without having an opportunity to be
heard, and accordingly was liable to him for the amount of the trust
deed indebtedness. The court held that the tax sale transferred the
interest the owner held at the time the government's lien first
attached, which interest was free of the trust deed incumbrance. The Commercial
Credit Corporation case, supra, presented the issue of
whether a
United States
tax sale of chattels was superior to a lien created by a chattel
mortgage. The court held that under 26 U. S. C. A. Sec. 3637(b), which
provided in substance that a sale under a distraint warrant passes to
the purchaser all right, title and interest of the delinquent taxpayer
in the property sold, the phrase "right, title or interest"
makes reference, in point of time, to the time that the government lien
attaches. The case further holds that when the government lien is
superior, it extinguishes inferior liens.
Accordingly,
that part of the decree which finds that the trust deed of the plaintiff
is a first and prior lien and is superior to liens, rights, title and
interest of all other parties is affirmed. That part of the decree which
finds Marion Lindgren has no interest in the subject premises is
reversed and this case is remanded with directions to enter a decree
consistent with the views herein expressed.
Affirmed in
part. Reversed and remanded with directions as to remainder.
ABRAHAMSON, P.
J., and MORAN, Judge, Concur.
[64-2 USTC
¶9823]The Camptown Savings and Loan Association, a corporation of the
State of New Jersey, Plaintiff-Respondent v. United States of America,
Defendant-Appellant
New Jersey
Superior Court, Appellate Division, Docket
No. A-4440-63,
9/30/64
[1954 Code Sec. 6323]
Liens: Priority of creditors: Mortgagee's attorney.--A federal
tax lien had priority over a claim for fees for the attorney of a
mortgagee. Although the mortgage had been perfected before the tax lien
was filed, the claim for attorney's fees did not arise until after the
tax lien had been filed.
Julius Barr,
Arthur A. Werthmann,
34 Union Ave.
,
Irvington
, N. J., for plaintiff-respondent. Nathan Edgar Finkel, Assistant United
States Attorney, 11 Commerce St., Newark, N. J., David M. Satz Jr.,
United States Attorney, Federal Bldg., Newark, N. J., for
defendant-appellant.
Before Judges
GAULKIN, FOLEY and COLLESTER.
PER CURIAM:
This is an
appeal by the United States from an order of the Superior Court,
Chancery Division, which adjudged that a counsel fee allowed in a
foreclosure, under R. R. 4:55-7(c), had a priority over a federal tax
lien.
The mortgage
foreclosed was executed by the taxpayer to respondent Camptown Savings
& Loan Association (hereafter Camptown) and recorded in 1954. On
May 29, 1962
the District Director of Internal Revenue filed in the
Union
County
's Register's Office a federal tax lien against the taxpayer.
The mortgage
fell into default in December 1962. Camptown instituted foreclosure on
March 25, 1963
, asking the court to allow a counsel fee pursuant to R. R.
4:55
-7(c). The
United States
was made a party defendant because of the tax lien. The final judgment
of foreclosure entered by the Chancery Division on
August 7, 1963
awarded Camptown a counsel fee of $167.41.
A mortgagee is
given certain protection against federal tax liens by 26
U. S.
C. §6323. The construction of that section and the priority of federal
verses state liens are governed by federal and not state law. United
States v. Gilbert Associates [53-1 USTC ¶9291], 345
U. S.
361, 97 L. ed. 1071, 73 S. Ct. 701 (1953). Under the facts above stated,
the federal tax lien had priority. United States v. Pioneer American
Ins. Co. [63-2 USTC ¶9532], 374
U. S.
84, 10 L. ed. 2d 770, 83
S. Ct.
1651 (1963).
Camptown
argues that Pioneer is distinguishable because in New Jersey the
amount of the fee is fixed by a rule which has the force of a statute;
the amount provided for by that rule is fixed and definite, and not
merely a "reasonable" fee, as was provided for in the mortgage
in Pioneer; and, because the fee is fixed by rule, it is an
"
admin
istration expense." Finally, Camptown argues that since the sale of
the foreclosed property produced an amount over and above the amount due
it, exclusive of the attorney's fee (but not enough to pay the federal
lien in full), the surplus constitutes a "fund in court"
within the meaning of R. R. 4:55-7(b) and therefore the fee is entitled
to priority.
We find no
merit in any of these arguments. The fee is not an
admin
istration expense, nor does the surplus money constitute a fund in court
out of which Camptown's attorney is entitled to be paid. It is admitted
that the attorney did not create, benefit or protect the so-called fund,
and he "
admin
istered" nothing. That the fee is provided for by rule or statute
is immaterial. Cf. United States v. Buffalo Savings Bank [63-1
USTC ¶9166], 371
U. S.
228, 9 L. ed 2d 382, 83 S. Ct. 314 (1963). That R. R.
4:55
-7(c) sets forth the precise percentage which is to be allowed is also
immaterial in the case at bar, for, when the federal tax lien was filed,
the mortgage was not even in default. The amount of counsel fee could
not become certain until after the mortgage fell into default, was
foreclosed and the amount due the mortgagee (and the fee) was adjudged
by the court. Here that did not happen until long after the federal tax
lien was filed. Assuming that an attorney's fee may, under proper
circumstances, be entitled to priority, the lien here was not
"choate" as is required to give a lien priority.
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81, 98 L. ed. 520, 74 S. Ct. 367 (1953); Pioneer, supra.
Reversed. No
costs.
[64-1 USTC
¶9409]
United States of America
v. McGehee
Ark.
Supreme Court, 5-3149, 2/17/64
[1954 Code Sec. 6323]
Tax liens: Priority: Arkansas: Material and labor liens: State tax
lien.--Three Federal tax liens were superior to material and labor
liens since none of the latter were choate by being reduced to a
judgment or definitely established in amount at the time of assessment
of the Federal liens. Furthermore, one of the Federal tax liens was
superior to a state tax lien where the Federal lien arose before the
state tax had been assessed and the state did not have the status of a
judgment creditor.
Charles M.
Conway, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson,
Joseph Kovner, J. Edward Schillingburg, Department of Justice,
Washington, D. C. 20530, E. A. Riddle, Assistant United States Attorney,
Fort Smith, Ark., for appellant. Davis & Mills, Springdale, Ark.,
Peter G. Estes, Fayetteville, James R. Hale, American Legion Bldg., 28
S. College Ave., Fayetteville, Wade & McAllister, 20 E. Center St.,
Fayetteville, Ark., for appellee.
FRANK HOLT,
Justice:
The question
presented in this case relates to the priorities of various liens. The
appellant, United States of
America
, and the appellees, hereinafter named, were made defendants in a
foreclosure proceeding whereupon each of them filed cross-complaints to
enforce their claims as lienholders. Upon the foreclosure sale, after
payment of costs and the indebtedness to the plaintiff-mortgagee, Frank
E. McGehee and The First Pyramid Life Ins. Co. of America, there
remained a surplus of $9,119.10 which was insufficient for the payment
of all the competing liens. The Chancellor found and awarded priority
and payment of the liens among the appellees and appellant as indicated
by us in words and figures as follows:
Only the
United States of America
appeals from this decree. Appellant's first contention for reversal is
that its three tax liens are superior to the three state created
material or labor liens (
Shelton
,
Houston
and
Rob
erts) because they had not been reduced to a sum certain or judgment
and, therefore, were not choate before the federal tax liens arose.
[Material
or Labor Liens]
A federal lien
is created by 26
U. S.
C. A. §6321. 1
A federal tax lien arises "at the time the assessment is
made". 26 U. S. C. A. §6322. 2
As to when a state created lien arises, Ark. Stat. Ann. §51-601 (1947)
et seq., provides that upon the date of supplying material or labor one
shall have a lien therefor; also, that an account of the amount due must
be filed with the Circuit Clerk within ninety days; that an action for
judgment must be commenced within fifteen months from the filing of the
account and then the Circuit Court, upon a fair trial, must ascertain
the amount of the indebtedness and render, a judgment thereon.
The federal
rule is that liens are choate when [1] the identity of the lienor, [2]
the property subject to the lien, and [3] the amount of the lien are
established.
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81. Under Arkansas law the general rule is well settled that a
materialman's or laborer's lien attaches as of the date of furnishing
material or performing labor and, thus, is in effect before being
reduced to a judgment. Ark. Stat. Ann. §51-601, et seq., supra;
Franks v. Wood, 217
Ark.
10, 228 S. W. 2d 480. It is, therefore, appellees' contention that their
liens take priority where they furnished material and labor before
appellant filed its tax liens.
The collection
of debts owing to the
United States
is a federal question and it is a matter of federal law when a state
created lien has acquired sufficient substance and become so perfected
as to defeat a federal tax lien. United States v. Security Trust
& Savings Bank [50-2 USTC ¶9492], 340
U. S.
47; Aquilino v. United States [60-2 USTC ¶9538], 363
U. S.
509. The reasoning is that this is necessary in order to achieve
uniformity in the treatment of federal tax liens in relation to liens
created by state law. As was stated in
United States
v.
New Britain
, supra:
"*
* * 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."
In the recent
case of United States v. Pioneer Ins., Co., 235 Ark. 267, 357 S.
W. 2d 653, we held that the mortgagee's lien for an attorney's fee,
provided for in the mortgage, was choate when the federal tax liens were
filed after the mortgage was recorded, the mortgagor had defaulted, the
foreclosure suit was instituted, and the property sold. However, these
tax liens were filed before a judicial determination of the amount of a
reasonable attorney's fee. On appeal, in United States v. Pioneer
Ins. Co. [63-2 USTC ¶9826], 374
U. S.
84 (1963), the United States Supreme Court, in reversing our decision,
said:
"Clearly
the identity of the lien holder and the property subject to the lien are
definite here, but it is equally apparent that the amount of the lien
for attorney's fees was undetermined and indefinite when the federal tax
liens in question were filed. * * * the 'reasonable attorney's
fee'--reasonable in relation to the service to be performed by the
attorney--had not been reduced to a liquidated amount. The final amount
was to be established by court decree and the Chancery Court set the fee
considerably below the sum requested. * * * when a mortgagee has a lien
for an attorney's fee which is uncertain in amount and yet to be
incurred and paid, such a lien is inchoate and is subordinate to the
intervening federal tax lien filed before the mortgagee's lien for
attorney's fee matures."
This
case follows the rule enunciated in earlier decisions relative to when a
state created lien is choate or inchoate when competing with a federal
lien. See, also, W. T. Jones & Co. v. Foodco Realty, Inc.,
318 F. 2d 881 (C. A. 4th Circuit, 1963).
In the case at
bar two of the tests of choateness have been fulfilled, namely, the
identity of the lienors and the property subject to the liens. The third
test, however, has not been fulfilled because the amounts of the
material and labor liens have not been determined with sufficient
certainty. It is true that an amount for each lien was furnished when
the accounts were filed, but Ark. Stat. Ann. §51-621 provides that the
amount of the lien is subject to a future judicial determination. See,
also, United States v. Colotta [55-2 USTC ¶9680], 350
U. S.
808; United States v. White Bear Brewing Co. [56-1 USTC ¶9440],
350
U. S.
1010; United States v. Vorreiter [57-2 USTC ¶9956], 355
U. S.
15; United States v. Hulley [58-2 USTC ¶9926], 358
U. S.
66. Therefore, we must hold that neither of the three federal tax liens
can be subordinated to any of the material and labor liens since none of
the latter were choate by being reduced to a judgment or definitely
established in amount at the time of the assessment of the federal
liens. The status of these state created liens, before being reduced to
a liquidated amount, serves "merely as a caveat of a more perfect
lien to come". New York v. Maclay [3 USTC ¶1044], 288
U. S.
290.
[State
Tax Lien]
The appellant
also contends for reversal that the Chancellor erred in granting the
state tax lien priority over federal tax lien No. 11,824 which arose
before the state tax had been assessed. It is appellant's contention
that the Chancellor was in error in according to the state tax lien the
status of a judgment-creditor under 26 U. S. C. A. §6323(a) 3
and, therefore, priority over federal tax lien #11,824. This federal tax
lien was assessed on May 26, 1961 and filed on August 9, 1961. The state
tax lien was assessed on June 23, 1961 pursuant to Ark. Stat. Ann. §84-1912
(Repl. 1960) which provides that a certificate of indebtedness filed by
the Commissioner of Revenue with the Circuit Clerk, when entered on the
judgment docket of the Circuit Court, has "the same force and
effect as an entry on such judgment docket of a judgment rendered by the
Circuit Court".
It is well
settled that a state may make whatever provisions it desires for the
internal
admin
istration of its own tax laws. United States v. Waddill Co. [45-1
USTC ¶9126], 323
U. S.
353. However, as stated previously, the interpretation of federal
statutes is a federal question. United States v. Security Trust &
Savings Bank, supra; United States v. Acri [55-1 USTC ¶9138], 348
U. S.
211.
In United
States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361, the
town of Walpole, New Hampshire assessed an ad valorem tax and the state
law provided that such an assessment had the same effect as a judgment.
In holding that the assessment of this ad valorem tax did not make the
city a "judgment creditor", the court said:
"A
cardinal principle of Congress in its tax scheme is uniformity, as far
as may be. Therefore, a 'judgment creditor' should have the same
application in all the states. In this instance, we think Congress used
the words 'judgment creditor' in §3672 in the usual, conventional sense
of a judgment of a court of record, since all states have such courts.
We do not think Congress had in mind the action of taxing authorities
who may be acting judicially as in New Hampshire and some other states,
where the end result is something 'in the nature of a judgment,' while
in other states the taxing authorities act quasi-judicially and are
considered
admin
istrative bodies."
Therefore,
it is manifest that the State of Arkansas is not a "judgment
creditor" within the meaning of 26 U. S. C. A. §6323(a) and it
follows that its tax lien must be subordinated to federal tax lien
#11,824 which was assessed before the state tax lien was filed pursuant
to Ark. Stat. Ann. §84-1912 (Repl. 1960).
Applying the
controlling principles we have discussed, the priority and payment of
the federal liens from the $9,119.10 surplus should be as follows:
Date Amount Amount
Claim Assessed of Claim of Award
Federal tax lien
#10,744 .............. 11/16/60 $1,499.99 $1,499.99
Gibson mortgage 4 .. 3,911.56 3,911.56
Federal tax lien
#11,824 .............. 5/26/61 2,324.28 2,324.28
Arkansas
tax
lien ................. 6/23/61 885.97 885.97
Federal tax lien
[TEH] 5
#62-10-137 ........... 1,296.42 497.30
12/7/62
Material & labor (Reduced to
liens ................ judgment) 2,813.42
Thus, after
the payment of the appellant's liens in this order, as contended by
appellant, there remains the sum of $3,911.56 allocated for the payment
of the Gibson mortgage and $885.97 allocated for the payment of the
state tax lien, or a total of $4,797.53. In conformity with our
applicable state law as previously discussed [and in accord with the
stipulations of the parties, except for the state] the distribution of
this balance should be as follows:
Amount Amount
Claim of Claim of Award
Shelton
--Materials
and labor furnished ...... 8/25/60 $1,839.85 $1,839.85
Houston--Labor
performed ................ 3/10/61 218.03 218.03
Rob
erts--Materials
and labor furnished ......
6/19/61
755.54 755.54
Gibson mortgage--Date
recorded ................. 6/21/61 3,911.56 1,984.11
Arkansas
tax lien--Date
filed .................... 6/23/61 885.97
[Judgment of Court]
Reversed and
remanded with directions to render a decree not inconsistent with this
opinion.
1
"Lien for taxes. If any person liable to pay any tax neglects or
refuses to pay the same after demand, the amount (including any
interest, additional amount, addition to tax, or assessable penalty,
together with any costs that may accrue in addition thereto) shall be a
lien in favor of the United States upon all property and rights to
property, whether real or personal, belonging to such person."
2
"Period of lien. Unless another date is specifically fixed by law,
the lien imposed by section 6321 shall arise at the time the assessment
is made and shall continue until the liability for the amount so
assessed is satisfied or becomes unenforceable by reason of lapse of
time."
3
"Invalidity of lien without notice.--Except as otherwise provided
in subsection (c), the lien imposed by section 6321 shall not be valid
as against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the Secretary or his delegate--"
4
The appellant takes no issue with the priority assigned to the
mortgagee-lienholder, Gibson. 26
U. S.
C. A. §6323(a) and (c).
5
No question is raised in this appeal regarding the Chancellor's action
in subordinating the third federal tax lien, #62-10-137, to the state
tax lien. The taxes for which this lien was asserted were assessed after
the state taxes had been assessed.
[64-1 USTC
¶9398]Lorren J. Kuffel, Plaintiff v. Stephen Monroe Andrew Young,
individually Doing business as Western Cut-Rate Lumber Co. and doing
business as Edison Trucking Co., Defendant v. Ray Lumber Co., a
corporation, and United Wholesale Distributors, a corporation, Garnishee
Defendants, United States of America, Intervenor
Ariz.
Superior Court, County of Maricopa, No. 101434, 2/4/64
[1954 Code Sec. 6323]
Lien for taxes: Priority: Government as intervenor: Validity against
garnishee and judgment creditor: Legal fees.--The Government's tax
lien was found to be prior and superior to an amount held by a garnishee
defendant, and to that of the plaintiff, an attorney who initiated the
garnishment action, for services rendered to the delinquent taxpayer.
The plaintiff attorney's lien was inchoate since the amount, the
identity, and the specific property subject to tax had not been
determined.
Henderson
Stockton, 234 N. Central Ave., Lorren J. Kuffel, 507 Security Bldg.,
Phoenix, Ariz., for plaintiff. Gordon A. Olsson, 1122 H. St., Modesto,
Calif., William J. Knudsen, Assistant United States Attorney, Federal
Bldg., Phoenix, Ariz., for defendant. James C. Engdahl, Security Bldg.,
Phoenix
,
Ariz.
, for garnishee defendant.
Judgment
for Intervenor Against Plaintiff, Defendant, and Garnishee Defendants
HAYS, District
Judge:
This cause
coming on for a hearing before the Court on the 21st day of November,
1963, on a motion for summary judgment by intervenor, the United States
of America, with William J. Knudsen, Jr., Assistant United States
Attorney for the District of Arizona, representing intervenor; James R.
Cropper appearing as attorney for plaintiff; and no appearance being
made by the defendant Stephen Monroe Andrew Young, individually and
doing business as Western Cut-Rate Lumber Co. and Edison Trucking Co.,
or counsel for the garnishee defendants Ray Lumber Co., a corporation,
and United Wholesale Distributors, a corporation; and it appearing to
the satisfaction of the Court that the defendant, and counsel for the
plaintiff, and the garnishee defendants were each duly served with a
copy of this motion and accompanying papers, and it further appearing to
the Court that there is no genuine issue as to any material fact with
respect to the matters raised by this motion and that intervenor is
entitled to judgment as a matter of law for the relief demanded in its
complaint against the aforesaid plaintiff and garnishee defendant,
United Wholesale Distributors, and against defendant on an in rem basis,
as follows: That the taxpayer-defendant Stephen Monroe Andrew Young,
individually and doing business as Western Cut-Rate Lumber Co. and
Edison Trucking Co., is liable to the United States of America for
unpaid taxes with penalties and interest, plus accrued interest at the
rate of six (6%) per cent per annum from April 23, 1958, to the date of
this judgment in the total amount of $8,573.60; that the United States
of America has valid and subsisting liens for said unpaid taxes,
penalties, and interest plus accruing interest on the amounting of
$8,573.60, which sum is presently being held by garnishee defendant,
United Wholesale Distributors, and which is presently due and owing by
the said United Wholesale Distributors to defendant, Stephen Monroe
Andrew Young, individually and doing business as Western Cut-Rate Lumber
Co. and Edison Trucking Co.; and that such liens of the United States of
America are prior and superior to any liens, claims and/or interests of
all of the other parties herein, and each of them, on such sum,
including the said United Wholesale Distributors;
NOW,
THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED that intervenor, United
States of America, have judgment against the defendant Stephen Monroe
Andrew Young, individually and doing business as Western Cut-Rate Lumber
Co. and Edison Trucking Co., in the amount of $8,573.60; that the United
States of America has valid and subsisting liens for said unpaid taxes,
penalties and interest plus accruing interest on said amount of
$8,573.60, being held by garnishee defendant United Wholesale
Distributors; that such liens of the United States of America are prior
and superior to any liens, claims and/or interests of all of the other
parties herein, and each of them, on such sum, including the said United
Wholesale Distributors; and that said garnishee defendant, United
Wholesale Distributors, is hereby ordered to pay over to the United
States of America the sum of $8,573.60.
Memorandum
Following oral
argument on November 21, 1963, the Court suggested additional memoranda
from counsel for plaintiff and the
United States
outlining the facts and law in brief. The following statement of facts
is intended to supplement and not to substitute for the statement of
facts set forth in the Government's "Memorandum of Points and
Authorities in Support of Motion for Summary Judgment" filed with
this Court on June 12, 1963.
Facts
United States
made assessments
against Stephen M. A. Young
Apr. 18, 1958 for $11,972.17 plus interest.
Notice of tax lien filed by United
States in
Stanislaus
County
,
May 22, 1958
California
, Mr. Young's residence.
Aug. 1, 1958 Plaintiff initiated this action.
Plaintiff garnisheed United
Wholesale Distributors and Ray
Aug. 1, 1958 Lumber Co.
United Wholesale Distributors
answered admitting an indebtedness
of $8,753.60 to Western
Aug. 11, 1958 Cut-Rate Lumber Co.
Notice of levy served by United
States on United Wholesale
Oct. 27, 1958 Distributors.
Bankruptcy petition on behalf
of Stephen M. A. Young filed
Mar. 20, 1959 in Northern District of California.
Final demand by
United States
Mar. 23, 1959 made on United Wholesale Distributors.
Notices of lien filed by the
United States
in Maricopa and
Apr. 6, 1959
Pima Counties
,
Arizona
.
[Law]
In this
memorandum the
United States
will confine itself to argument concerning the relative priorities of
the Government's unpaid tax lien and plaintiff's attorney's fees. At the
outset it should be borne in mind that the attorney for plaintiff in
this action did not create a fund. As a consequence, any cases involving
the creation of a fund are immaterial (It should be noted, however, that
there are numerous cases denying recovery to an attorney for his
services even in those instances where he has created a fund. No
citations will be given here since the facts do not warrant it).
On April 18,
1958, the date of assessment, the United States secured a lien on all
property and rights to property of Mr. Young as against him and the
entire world, except for the four classes set forth in 26 U. S. C.
6323(a), namely, mortgagees, pledgees, purchasers and judgment
creditors. It is obvious that plaintiff's attorney does not fall in any
one of these classifications.
It is clear
that federal law and federal law only applies to this case. Plaintiff's
attorney relies almost exclusively on In Re Washington Square Slum
Clearance (1959) 5 N. Y. 2d 300, 157 N. E. 2d 587. It is submitted
that this case is not in point since the assignment by the plaintiff to
the attorneys in that case of 20% of the award to the attorneys for
services to be rendered was made more than one year before the
Government assessed a tax against the plaintiff taxpayer. In our case
there is no dispute that the assessment by the
United States
against Young was made some three and one-half months prior to
the initiation of the lawsuit. Further, when, if ever, the plaintiff in
this action made an assignment to his attorney of part of his recovery
has not been indicated. Finally, in the
Washington Square
case the plaintiff did recover an award. In this case it would appear
that there is no real dispute over the relative priorities between the
plaintiff himself and the
United States
. As a consequence, if the plaintiff in this action recovers nothing, it
is extremely difficult to see how plaintiff's attorney can have an
assignment of something which never comes into existence.
The Government
believes that United States v. Pay-O-Matic Corp. (S. D., N. Y.
1958) [58-2 USTC ¶9533] 162 F. Supp. 154, is conclusive on the question
before us. In this case Judge Ryan of the Southern District of New York
ruled in a fact situation almost identical with the Washington Square
case and incidentally involving the same attorney's lien statute in New
York that the United States tax lien was prior to the attorney's lien
since under federal tests the attorney's lien was inchoate. In
view of the fact that the United States Supreme Court has ruled time and
again that a lien under federal standards cannot be deemed choate unless
(1) the amount, (2) the identity of the lienor, and (3) the specific
property subject thereto, have been determined, a lien cannot be
considered choate. In the case at bar certainly the amount of the
attorney's lien, if any, does not possess the definiteness required by
federal law.
[64-1 USTC
¶9356]George J.
Rob
inson, as Receiver for S & S Acceptance Corporation, the United
States of America, and the State of Colorado, Plaintiffs in Error v.
Jacob H. Chisen, Defendant in Error
Colo.
Supreme Court, No. 20133,
1/20/64
[1954 Code Sec. 6323]
Lien for taxes: Priorities: Validity against holder in due course.--The
Government's tax lien against a note secured by a deed of trust was
found to be superior to the claim of the delinquent taxpayer's attorney.
When the note secured by the deed of trust was fully paid and satisfied
by the taxpayer's employer it ceased to be a lien. The fact that the
taxpayer later came into possession of the note and deed of trust and
released it to the attorney for services rendered did not revive the
lien interest.
Louis F.
Oberdorfer, Assistant Attorney General, John M. Youngquist, Meyer
Rothwacks, Gilbert E. Andrews, Donald P. Horwitz, Department of Justice,
Washington, D. C. 30520, Lawrence M. Henry, United States Attorney,
James F. McGruder, Assistant United States Attorney, Denver, Colo., H.
D. Reed, Majestic Bldg., Denver, Colo., for S & S Acceptance Corp.;
Thomas J. Zavislan, 1480 Hoyt St., Lakewood, Colo., for George J.
Rob
inson, plaintiffs in error. Eugene D. Faus,
18th Ave.
,
Denver
,
Colo.
, for defendant in error.
MCWILLIAMS,
Chief Justice:
The following
chronology of dates and events is deemed essential to an adequate
understanding of the controversy here to be resolved.
[Facts]
On May 7, 1956
Edward MacClain and his wife, Berniece, executed a promissory note
wherein they promised, for value received, to pay Northwestern Loan
& Investment Company, hereinafter referred to as Northwestern, the
sum of $13,000 with interest thereon "from the date hereof, until
paid, at the rate of 2% per month computed upon unpaid balances."
Specifically, in the note they promised to pay "35 consecutive
installments of $509.60 each, on the 10th day of each month hereafter,
beginning June 10, 1956", with the final payment to be due and
payable on
May 10, 1959
.
To secure
payment of the note the MacClains simultaneously executed and delivered
to Northwestern a deed of trust on certain realty jointly owned by them,
situate in
Jefferson
County
, which was subject to a prior deed of trust in favor of Industrial
Federal Savings & Loan Association. The association will hereinafter
be referred to as Industrial Federal. This deed of trust in favor of
Northwestern was duly recorded on
May 22, 1956
.
On August 30,
1956 Alcove's, Inc., a corporation, caused to be recorded with the
Jefferson County Clerk & Recorder a certain judgment theretofore
rendered in its favor against Edward MacClain. Thereafter on September
12, 1956 a sheriff's certificate of purchase of the interest of Edward
MacClain in and to said property issued to Alcove's, Inc., and a
sheriff's deed conveying to Alcove's, Inc. the interest of Edward
MacClain in said property (but not the interest of Berniece MacClain)
subsequently issued and was duly recorded on June 13, 1958. By mesne
conveyances S & S, now in receivership, became the owner of Alcove's
interest in and to said property.
On September
20, 1956 and again on September 23, 1958 the
United States of America
caused to be filed with the Jefferson County Clerk & Recorder
certain notices of tax liens resulting from the MacClains' failure to
pay income taxes due the
United States
.
Similarly, on
June 23, 1958 the State of
Colorado
caused to be recorded with the Jefferson County Clerk & Recorder its
notice of tax lien against any and all property owned by the MacClains,
and MacClains having also failed to pay income taxes due the State of
Colorado
.
In the spring
of 1958 Edward MacClain became employed as a salesman of insurance and
securities for Universal Securities, Inc., with offices in
North Dakota
. This Company will hereinafter be referred to as Universal. As a part
of MacClain's contract of employment his new employer, Universal, agreed
to advance the money necessary "to get the note and deed of trust
out of Northwestern's hands", the advance to be against future
commissions to be earned by MacClain. Accordingly, by precarrangement
Northwestern on May 8, 1958 delivered the aforementioned note, the deed
of trust and an executed release of the deed of trust to its bank, the
Union National Bank of Denver with instructions to sight draft Universal
through the Dakota National Bank and upon payment of the sight draft to
then mark the note and deed of trust "paid" and deliver the
same, along with the release of deed of trust, to Universal.
A sight draft
drawn upon Universal in the amount of $9,355, this sum representing the
balance due Northwestern on the note, was honored some time in June 1958
and the money thus realized was credited to Northwestern's account in
the Union National Bank, with the note, deed of trust and release of
deed of trust being delivered to Universal.
On September
21, 1958 Edward MacClain telephoned Jacob Chisen, his attorney, and
advised him that he had just received from Universal his note to
Northwestern, the deed of trust and the release of deed of trust and,
according to Chisen, MacClain "wanted to know what to do with
it". By way of reply, Chisen suggested that MacClain "send it
on down to me on what you owe me". This was done, and on September
22, 1958 Chisen received the aforementioned note, deed of trust and
release of deed of trust. Chisen had done much legal work for the
MacClains over a period of several years, and as of September 22, 1958
the MacClains admittedly owed him some $8,400 for legal services
theretofore rendered.
On December
10, 1959 the MacClains executed and delivered an assignment whereby in
writing they "acknowledged and confirmed" their prior oral
assignment to Chisen on September 22, 1958 of the note and deed of
trust.
On this state
of events Chisen filed a complaint under Rule 105, Colo. R. C. P., the
defendants being, among others, the MacClains, the Industrial Federal, S
& S, the
United States of America
and the State of
Colorado
. Chisen alleged in his complaint that he was the holder and owner of
the Northwestern note and deed of trust; that the note was in default,
the MacClains having made no payments thereon since September 22, 1958,
and that hence they owed him $9,355 plus interest and attorney's fees.
Chisen also sought foreclosure of his deed of trust and prayed for
"a complete adjudication of the relative rights of all the parties
in and to the aforesaid real property."
By pre-trial
order it was agreed by all that the interest of Industrial Federal in
the subject property was superior to that of any other party and
appropriate protective orders in this regard were duly entered. The only
dispute is between Chisen on the one hand and S & S, the United
States of America and the State of Colorado on the other, Chisen
claiming that he is a holder in due course of the Northwestern note and
deed of trust and that inasmuch as this deed of trust was recorded on
May 22, 1956 his interest is therefore senior to all, save and except
the interest of Industrial Federal.
S & S, the
United States of America
and the State of
Colorado
have no dispute among themselves as to their respective interests in the
subject property and their relative priorities, but all claim that
Chisen's interest, if any, is junior to each of theirs. They contend
that Chisen is not a holder in due course of the Northwestern
note and deed of trust and that said note and deed of trust were
"paid and discharged" in June 1958 and in any event
"cannot be revived so as to take priority" over their
respective interests.
In holding
that Chisen's interest was senior and therefore superior to that of S
& S, the United States of America and the State of Colorado, the
trial court as a basis therefor stated that it "felt that the
intent of MacClain was to give . . . [Chisen] the note and deed of trust
as payment of the indebtedness owned by . . . MacClain to . . . [Chisen]
for services rendered" and further that the Court was "of the
opinion that the note and deed of trust held by . . . [Chisen] is prior
in time to the claims of the others."
By the present
writ of error S & S, the
United States of America
and the State of
Colorado
seek reversal of the judgment holding that their respective interests
are junior to that of Chisen.
As noted
above, the trial court based its disposition of the controversy on a
finding that when on September 22, 1958 MacClain mailed Chisen the
Northwestern note, deed of trust and release of deed of trust it was his
"intent" that such constitute "payment of the
indebtedness owed by MacClain to . . . [Chisen] for services already
rendered. . . ." In our view the crucial transaction is not the one
involving MacClain and Chisen occurring on September 22, 1958, but the
transaction occurring in June 1958 wherein Northwestern received $9,355
from Universal and in return therefor delivered to that company the
note, deed of trust and release of deed of trust. The intent of the
parties to this latter transaction and the legal significance of their
actions is dispositive of the present controversy. In other words, if
Universal acquired no interest in the subject property from
Northwestern, then it in turn had no interest to assign to
McClain and--following through--MacClain had no interest to
assign to Chisen.
So, the
precise question to be resolved is whether Northwestern, the holder of a
deed of trust on the subject property, assigned the interest created
thereby to Universal. On the basis of the record before us we hold that
it did not thus assign.
Universal did
not purchase or "discount" the note in question in June 1958.
Rather, acting in behalf of its employee--MacClain--it paid Northwestern
the balance due on the note, namely $9,355. It is parenthetically noted
that by the terms of the note the MacClains promised to make 35
consecutive monthly payments of $509.60, beginning June 10, 1956 and a
mathematical computation would indicate that if the balance due in June
1958 was $9,355, then the note was in default.
Northwestern
in turn delivered the note, deed of trust and a release of the deed of
trust to Universal. Such would indicate a complete absence of any intent
on the part of Northwestern to assign the interest created by said deed
of trust to Universal. That assignment was most definitely not
the intention of Northwestern was borne out by the testimony of one
Meer, an officer of Northwestern, who testified that some time in 1959
Chisen called and asked whether Northwestern would "endorse"
the note which he then held. Meer stated that he refused to thus
"endorse" because "with our files showing that we were
not assigning the note we naturally could not assign it at a later
date."
In Liddle
v. Lechman, 114
Colo.
189, 163 P. 2d 802 the following language is quoted with approval:
`On
the other hand, if payment of the mortgage debt is made to the mortgagee
or other holder of the mortgage, by a party who is himself personally
and primarily liable for the debt, who is in any manner and by any means
the actual primary debtor, whose duty it is to pay the debt absolutely,
and before all others, such payment operates ipso facto as an end
of the mortgage, and the lien is completely destroyed. The party so
paying is not subrogated to the rights of the mortgagee; there is no
equitable assignment to him of the mortgage security; even if he should
receive a formal assignment, the mortgage could not be thus kept alive,
but would be wholly merged and ended.' 3 Pomeroy's Equity Jurisprudence
(3rd ed.) p. 2424, §1213."
Jones v.
Sturgis, 118 Colo. 579, 199 P. 2d 645 holds that when a note secured
by a deed of trust on real property is fully paid and satisfied, the
trust deed ceases to be a lien on the property.
In the instant
case Universal prompted by reasons of its own and acting on behalf of
its employee fully paid and satisfied the note, received no purported
assignment of the deed of trust but on the contrary accepted a release
of the same. Under these circumstances the deed of trust ceased to be a
lien and the fact that MacClain later came into possession of the note,
deed of trust and release of deed of trust did not revive the lien
interest.
In Gleason
v. Dorney, 332 Mass. 646, 127 N. E. 2d 184 a third party, i.e.
not the mortgagor, paid the mortgagee the sum of $1,000 on a $2,500
mortgage, this sum representing a loss to the mortgagee in the amount of
some $885.99 on the mortgage loan. In return therefor the mortgagee gave
said third party a discharge of mortgage and the unendorsed mortgage
note. Two and one-half years later, the third party asked and got a
purported "assignment" of the mortgage from the erstwhile
mortgagee. In holding that this "assignment" was invalid, the
Supreme Judicial Court of Massachusetts held that there being no
evidence of mistake or of any other fact which might justify equitable
relief, "the purported assignment by the bank more than two and
one-half years later was a nullity, for the bank at the time had
nothing to assign." (Italics supplied.)
The judgment
is reversed and the cause remanded with directions that Chisen's
interest in the subject property, if any, be adjudged junior and
inferior to the respective interests of S & S, the
United States of America
and the State of
Colorado
and for further proceedings consonant with the views herein expressed.
MR. JUSTICE
MOORE and MR. JUSTICE FRANTZ concur.
[63-2 USTC
¶9792]Gramercy Escrow Company, a corporation, Plaintiff v. 7208
Broadway Corp., a corporation, Sid J. Berk, Price Investment Company, a
corporation, Raysims Corp., a corporation, Associated Liquor Products
Co., Los Angeles County Tax Collector, Quentin Gardner, Master Mixer,
Credit Managers Association, General Motors Acceptance Corporation, A.
Guirlani and Brothers, City of Los Angeles, Ella May Hanley, H. M.
Theresa Goynet, General Cigar Co., Inc., Youngs Market Company, Crown
Adjustment Bureau, State of California Department of Employment, State
of California Division of Labor Law Enforcement,
Rob
ert E. Austin, Western Distributing Company, State of California Board
of Equalization, Rowe Service Co., Inc., City Alarm Co., Schmidt
Refrigeration, Eckhard's Better Lemon Juice, H. G. Burton & Co.,
Israel Cohen, Intrastate Credit Service, Inc., Defendants United States
of America, Plaintiff in Intervention v. Gramercy Escrow Company, a
corporation, 7028 Broadway Corp., a corporation, Sid J. Berk, Los
Angeles County Tax Collector, Quentin Gardner, Master Mixer, A. Guirlani
and Brothers, Ella May Hanley, H. M. Theresa Goynet, Crown Adjustment
Bureau, Western Distributing Co., Defendants in Intervention
Calif.
Superior Court, County of Los Angeles, No. 796084, 6/5/63
[1954 Code Secs. 6321-6323]
Tax lien: Priority of creditors: Interpleader action: County tax
lien: Chattel mortgage.--The federal tax lien had priority, to funds
held by the taxpayer's debtor, over a mortgagee claiming under a
previously recorded chattel mortgage on the taxpayer's furniture and
fixtures because the lien of the chattel mortgage did not transfer to
the proceeds of sale of the mortgaged property. The federal tax lien
also had priority over the lien of the county tax collector because the
county lien, upon the "property assessed," did not attach to
the proceeds of sale of the assessed property.
Herbert
Colden, 965 N. La. Cienega Bldg., Los Angeles 69, Calif., for Crown
Adjustment Bureau, et al; Pauline Nightingale, Milford A. Maron, Harold
G. Stearn, Ceclia Cohn, 107 S. Broadway, Los Angeles 12, Calif., for
State of Calif., Division of Labor Law Enforcement; Mitchell, Mitchell
& Bateman, 333 Roosevelt Bldg., 727 West Seventh St., Los Angeles
17, Calif., for Western Liquor Distributors, Inc.; Joseph L. Alioto,
Walter F. Calcagno, 111 Sutter St., San Francisco 4, Calif., for A.
Guirlani & Brothers; T. G. Dalton, 548 S. Spring St., Los Angeles
13, Calif., for H. M. Theresa Goynet; Harold W. Kennedy, 648 Hall of
Administration, 500 West Temple St., Los Angeles 12, Calif., for the Los
Angeles County Tax Collector; Carl B. Sturzenacker, 4310 Beverly Blvd.,
Los Angeles 4, Calif., for Quentin Gardner; Stanley Mosk, Attorney
General, (Dan Kaufmann, Assistant Attorney General, 600 State Bldg., Los
Angeles 12, Calif., on brief), for the State Board of Equalization;
Morton M. Gerson, 6505 Wilshire Blvd., Los Angeles 48, Calif., for
Leonard Melnick, Francis C. Whelan, United States Attorney, Walter S.
Weiss, Herbert D. Sturman, Assistant United States Attorneys, Los
Angeles, Calif., for U. S., defendants. Mack, Berchin & Nast,
3859 W. Sixth St.
,
Los Angeles
5,
Calif.
, for plaintiff.
Findings
of Fact and Conclusions of Law
DIETHER,
Circuit Judge:
The
above-entitled matter came on regularly for trial before the Honorable
Leonard A. Diether, Superior Court Judge, on March 27, 1963, and April
19, 1963; plaintiff Gramercy Escrow Company was represented by its
attorneys, Mack, Berchin & Nast; plaintiff-in-intervention United
States of America was represented by its attorneys Francis C. Whelan,
United States Attorney for the Southern District of California, Walter
S. Weiss, Assistant United States Attorney, Chief, Tax Section, and
Herbert D. Sturman, Assistant United States Attorney; defendant Quentin
Gardner was represented by his attorney, Carl B. Sturzenacker; defendant
Los Angeles County Tax Collector was represented by his attorneys,
Harold W. Kennedy, County Counsel, and DeWitt W. Clinton, Deputy County
Counsel; and the Court having considered the pleadings, evidence,
briefs, and oral argument of counsel, finds as follows:
1. That this
is an action in interpleader pursuant to Sections 386 and 386.5 of the
Code of Civil Procedure.
2. That
plaintiff Gramercy Escrow Company brought this action in order to obtain
a determination with respect to the claims of the above-named parties to
the sum of $3,992.38, which sum plaintiff now holds subject to
disposition herein.
3. That the
United States of America
duly filed its complaint-in-intervention herein pursuant to Section 387
of the Code of Civil Procedure, and by reason of this fact is a party
hereto.
4. That the
plaintiff Gramercy Escrow Company duly effectuated service of summons
and complaint upon all of the above-named defendants.
5. That after
having been duly served by plaintiff, the following named defendants
failed to file answers or otherwise appear herein: Price Investment
Company; State of California Department of Employment; General Motors
Acceptance Corporation; Schmidt Refrigeration, Inc.;
Rob
ert E. Austin; Associated Liquor Products Co.; Israel Cohen; Youngs
Market Co.; Credit Managers Association of Southern California; Rowe
Service Co., Inc.; Intrastate Credit Service, Inc.; City of Los Angeles;
H. G. Burton & Co.; Raysims Corp.; City Alarm Co.; and Eckhard's
Better Lemon Juice.
6. That the
defaults of those defendants who were served but failed to appear were
duly entered by the Clerk of the Court.
7. That after
having been duly served by plaintiff, the following named defendants
filed disclaimers, wherein said defendants disclaimed any possible
right, title, or interest they might have in the funds in issue herein:
State of California Board of Equalization; State of California Division
of Labor Law Enforcement; and General Cigar Co., Inc.
8. That after
having been duly served by plaintiff, the following named defendants
filed their respective answers herein: 7208 Broadway Corp.; Ella May
Hanley; Quentin Gardner; Leonard Melnick, doing business as Master
Mixer; Sid J. Berk; Crown Adjustment Bureau; Los Angeles County Tax
Collector; A. Guirlani and Brothers; H. M. Theresa Goynet; and Western
Liquor Distributors, Inc., doing business as Western Distributing Co.
9. That the
plaintiff-in-intervention United States of America duly served those
defendants who answered the complaint in interpleader, to wit, those
defendants enumerated in "paragraph 8" herein.
10. That the
trial of the merits herein was duly set for March 27, 1963, and notice
of same was duly given to all those defendants enumerated in
"paragraph 8".
11. That the
following named defendants, after having been duly noticed, did not
appear at said trial: 7208 Broadway Corp.; Ella May Hanley; Leonard
Melnick, doing business as Master Mixer; Sid J. Berk; Crown Adjustment
Bureau; A. Guirlani and Brothers; H. M. Theresa Goynet; and Western
Liquor Distributors, Inc., doing business as Western Distributing Co.
12. That at
the trial of the merits on March 27, 1963, counsel for plaintiff moved
for the entry of defaults with respect to those defendants who answered
but failed to appear at said trial, to wit, those defendants enumerated
in "paragraph 11".
13. That the
Court granted said motion for defaults, and, as a consequence, of all
defaults and disclaimers herein, there were but four parties remaining
in this litigation, to wit, Gramercy Escrow Company,
United States of America
, Los Angeles County Tax Collector, and Quentin Gardner.
14. That at
the trial of the merits on March 27, 1963, the following was
established:
(a)
That plaintiff Gramercy Escrow Company is indebted to defendant 7203
Broadway Corp. in the sum of $3,992.38.
(b)
That defendant 7208 Broadway Corp. is indebted to defendant Quentin
Gardner in the sum of $4,275, together with interest thereon as provided
by law.
(c)
That defendant 7208 Broadway Corp. is indebted to the Los Angeles County
Tax Collector in the sum of $166.94, together with interest thereon as
provided by law.
(d)
That the defendant 7208 Broadway Corp. is indebted to the United States
of America in the sum of $4,178.83, together with interest as provided
by law.
[Issue]
15. That the
above indebtednesses having been established, the question which
remained for the Court was the relative rights of the various claimants
to the fund (i.e. the sum of $3,992.38 owed by plaintiff Gramercy Escrow
to defendant 7208 Broadway Corp.).
16. That the
remaining claimants, to wit, Quentin Gardner, Los Angeles County Tax
Collector and United States of America, all claimed to have liens on the
fund to be distributed by the Court.
17. That the
defendant Quentin Gardner claimed to have a lien on said fund by reason
of the following:
Defendant
Gardner
established that on July 28, 1960, a note for $8,000 was issued to him
by the defendant 7208 Broadway Corp. As security for the payment of said
note, a chattel mortgage on the furniture and fixtures of said
corporation was given to defendant Gardner. Thereupon, on September 22,
1960, said mortgage was duly recorded in the office of the
County
Recorder
of
Los Angeles
County
.
In
the within proceeding, the evidence indicated that the furniture and
fixtures subject to said mortgage had been sold by 7208 Broadway Corp.
The evidence further indicated that the proceeds of such sale were
within the fund to be distributed by this Court.
Gardner
contended that his lien arising from his chattel mortgage attached to
the proceeds of sale of his security. Accordingly,
Gardner
asserted that his lien of September 22, 1960 was prior to all other
liens claimed herein.
18. That the
defendant Los Angeles County Tax Collector claimed to have a lien on
said fund by reason of the following:
The
County's tax claim herein was for the sum of $166.94, $112.00 of which
was claimed to have lien status.
The
theory of the County was that its tax was a lien on the fixtures of 7208
Broadway Corp., that the fixtures constitute improvements (Section 104
of Revenue and Taxation Code), that improvements are real property for
purposes of State taxation (Section 105 of Revenue and Taxation Code),
and that accordingly, the County had a lien against such real property
under the provisions of Section 2187 of the Revenue and Taxation Code.
Section
2187 of the Revenue and Taxation Code provides as follows: "Every
tax on real property is a lien against the property assessed."
The
County, as did defendant Gardner, contended that its lien on said
fixtures transferred to the proceeds of sale of such fixture. Since said
proceeds were within the fund to be distributed by the Court, the County
further asserted that its lien attached to said fund.
[Government's
Position]
19. That the
plaintiff-in-intervention
United States of America
claimed to have a lien on said fund by reason of the following:
The
evidence established that there was due and owing to the federal
government from 7208 Broadway Corp. the sum of $4,178.83 as of March 27,
1963, with interest thereafter accruing at the rate of $0.65 per day.
The
evidence further established that the federal tax assessments were duly
made.
The
Government contended that by reason of its assessments, liens arose on
the date of such assessments against all property or rights to property
of 7208 Broadway Corp., the delinquent taxpayer. The basis of such
contention was the plain meaning of Sections 6321 and 6322 of the
Internal Revenue Code of 1954.
Since
the fund being held by plaintiff Gramercy Escrow Company was the
property of and owed to the taxpayer 7208 Broadway Corp., the Government
concluded that its liens attached thereto.
AND FROM THE
FOREGOING THE COURT CONCLUDES AS FOLLOWS:
1. That the
Court has jurisdiction of the parties and the subject matter of this
controversy.
2. That with
respect to those defendants whose defaults were duly entered by the
Clerk of the Court, said defendants are forever barred from asserting
any right, title or interest to the fund in issue herein.
3. That with
respect to those defendants who filed disclaimers herein, said
defendants are forever barred from asserting any right, title or
interest to the fund in issue herein.
4. That with
respect to those defendants who answered but did not appear at trial and
whose defaults were entered on motion of counsel for plaintiff, said
defendants are forever barred from asserting any right, title or
interest to the funds in issue herein.
5. That the
claim by defendant Gardner of lien status herein is without merit for
the following reasons:
The
lien of a chattel mortgagee does not transfer to the proceeds of sale of
the mortgaged property. Maier v. Freeman, 112
Cal.
8, 44 Pac. 357 (1896); Riddle v. Etling, 84
Cal.
App. 460, 258 Pac. 162 (1927); Reno v. A. L. Boyder, 115
Cal.
App. 697, 2 P. 2d 214 (1931), see generally 10
Cal.
Jur. 2d pp. 362-364. Accordingly, the defendant Gardner does not have a
lien on the fund to be disbursed by this Court.
6. That the
claim by defendant Los Angeles County Tax Collector of lien status
herein is without merit for the following reasons:
Revenue
and Taxation Code, Sections 2187 specifically provides that the County
lien is upon the "property assessed." There is no statutory
authority indicating that said lien is to attach to the proceeds of sale
of the "property assessed." Hence, the common law controls,
and the authorities cited with reference to the chattel mortgagee
herein, are equally applicable to the County. Accordingly, the defendant
Los Angeles County Tax Collector does not have a lien on the fund to be
disbursed by this Court.
7. That the
plaintiff-in-intervention
United States of America
has a lien on the fund in issue for the following reasons:
Liens
in favor of the
United States of America
arose on the assessment of its taxes. Section 6322 of the Internal
Revenue Code of 1954. Said liens attached to "all property and
rights to property" of the taxpayer as provided in Section 6321 of
the Internal Revenue Code of 1954.
The
fund involved herein is the property of the taxpayer 7208 Broadway Corp.
Accordingly, the federal liens attach thereto.
8. That the
plaintiff-in-intervention United States of America is the sole lien
claimant herein, and, as such, is entitled to first priority; that its
lien claim of $4,178.83 will exhaust the fund of $3,992.38; that,
accordingly, the other claimants, to wit, Los Angeles County Tax
Collector and Quentin Gardner, shall take nothing and shall be forever
barred from asserting right, title or interest to the fund in issue
herein.
[Judgment]
The
above-entitled matter came on regularly for trial before the Honorable
Leonard A. Diether, Superior Court Judge, on March 27, 1963, and April
19, 1963; plaintiff Gramercy Escrow Company was represented by its
attorneys, Mack, Berchin & Nast; plaintiff-in-intervention United
States of America was represented by its attorneys Francis C. Whelan,
United States Attorney for the Southern District of California, Walter
S. Weiss, Assistant United States Attorney, Chief, Tax Section, and
Herbert D. Sturman, Assistant United States Attorney; defendant Quentin
Gardner was represented by his attorney, Carl B. Sturzenacker; defendant
Los Angeles County Tax Collector was represented by his attorneys,
Harold W. Kennedy, County Counsel, and DeWitt W. Clinton, Deputy County
Counsel; and the Court having considered the pleadings, evidence,
briefs, and oral argument of counsel and the Court having made its
Findings of Fact and Conclusions of Law,
It
is Hereby Ordered, Adjudged and Decreed:
1. That the
plaintiff-in-intervention United States of
America
do have and recover the sum of $3,992.38 herein.
2. That the
plaintiff Gramercy Escrow Company pay over to the
plaintiff-in-intervention United States of America the sum of $3,992.38.
[63-2 USTC
¶9644]
United States of America
, Appellant v. First Federal Savings and Loan Association of St.
Petersburg, a Corporation Organized and Existing under the Laws of
United States; James C. Mort and Wilma C. Mort, his Wife; Henry Kitt;
Reliable Finance Company, a Florida Corporaton; and Best Buy Homes,
Inc., a Florida Corporation, Appellees
Fla.
District Court of Appeal, Second District, Case No. 3258, 7/31/63,
Rehearing of, 63-2 USTC ¶9620
[1954 Code Sec. 6323]
Tax lien: Priority: Mortgagee's claim for attorney's fees in
foreclosure suit.--On the authority of the United States Supreme
Court's decision in Pioneer American Insurance Co., 63-2 USTC ¶9532,
the court reaffirms its prior decision that a recorded federal tax lien
has priority over a mortgagee's claim for attorney's fees incurred in a
foreclosure action after the federal tax lien attached to the property.
Edward F.
Boardman, United States Attorney, Arnold D. Levine, Assistant United
States Attorney, P. O. Box 2841, Tampa, Fla., Louis F. Oberdorfer,
Assistant Attorney General, Lee A. Jackson, Joseph Kovner,
Rob
ert L. Waters, Department of Justice, Washington 25, D. C., for
plaintiff. W. F. Davenport, Greene & Davenport, First Federal Bldg.,
St. Petersburg, Fla., for defendant.
On
Rehearing Granted
[Reasons for Rehearing]
PER CURIAM:
This court
granted rehearing in this cause due to the importance of the question
involved and the controversy resulting therefrom.
The appellee,
in its petition for rehearing, alleged that this court overlooked the
"error" committed in United States v. Bond [63-2 USTC
¶9532], supra, upon which we largely relied. It was argued that
that case erroneously applied the "choate lien test," since
said test was developed to determine the priority of so-called
"state liens" not specifically protected under the provisions
of the Internal Revenue Code of 1954, Sec. 6323(a) (26 U. S. C. 1958
ed., Sec. 6323). Also, this court allegedly failed to give full import
to federal cases determining that the right to attorney's fees becomes
choate upon execution of the dominant contract. Recognizing the
complexity and importance of the questions presented, appreciative of
the fact that the Bond case was decided over vigorous dissent,
and aware of the less than unanimous acceptance of the Bond case
by the lower federal courts, we granted rehearing.
[Supreme
Court Precedent Case]
After granting
rehearing, however, this court was advised of the decision of the United
States Supreme Court in United States v. Pioneer American Insurance
Company [63-2 USTC ¶9532], June 10, 1963, 31 L. W. 4603. The
decision in that case is determinative of the issues raised on
rehearing, and this court therefore adheres to its initial opinion and
decision.
In the Pioneer
case, the decision of the Supreme Court of Arkansas was reversed, that
court having held that the attorney's fees were entitled to priority.
The United States Supreme Court cited with approval the cases upon which
this court has relied, and held as we have held, to-wit, that the
federal tax lien should be accorded priority over a mortgagee's claim
for attorney's fees incurred in a foreclosure action after the federal
tax lien had attached to the property. The Court in the Pioneer
case expressly rejected the contention that the "choate lien
test" did not apply when a mortgage under Sec. 6323(a) was
involved, stating that: "The federal rule is that liens are
'prefected 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.'" Since
the amount of the lien for attorney's fees was undetermined and
indefinite when the federal tax liens were filed, such amount remains
inchoate. The Court concluded:
"But,
it is said, the principal and interest of the mortgage were definite in
amount, the attorney's fee later became certain by court order and if
the tax lien were to prevail the preference of the mortgagee given by
Sec. 6323 will be frustrated since payment of the attorney's fee will
reduce the net amount realized from the mortgage. Aside from the fact
that the mortgage here will experience no such reduction, this argument
would subordinate federal tax liens to inchoate liens and in both
United States
v. New Britain and United States v. Buffalo Savings Bank
[63-1 USTC ¶9166], 371 U. S. --, the Court denied priority to local tax
liens which were imperfect when the federal tax lien was filed even
though the former had priority over the mortgage and would reduce the
recovery of the mortgagee."
The United
States Supreme Court having settled this question, we therefore
necessarily adhere to our decision and opinion.
SMITH, Circuit
Judge, and ALLEN and SHANNON, Judges, concur.
[63-1 USTC
¶9479]In the Matter of the City of New York, Relative to Acquiring
Title to Real Property for De Kalb Avenue Reconstruction, Borough of
Brooklyn City Collector et al., Appellants; United States of America,
Respondent
N.
Y. Ct. of App., 627, 190 NE2d 240, 2/19/63
[1954 Code Sec. 6323]
Priority of liens: Federal tax lien: City tax lien: Condemnation
award.--Although sales and general business taxes were due the City
of New York prior to the federal tax assessments, the rights of the
United States in a condemnation award were superior to the claim of the
City.
Leo A. Larkin,
Corporation Counsel, New York City, N. Y. (Jacob Friedes, Stanley
Buchsbaum, Samuel J. Warms, 6 E. 45th, New York City, N. Y., of
counsel), for appellants. Joseph P. Hoey, United States Attorney,
Brooklyn, N. Y. (Donald N. Ruby, Assistant United States Attorney,
Brooklyn, N. Y., of counsel), for respondent.
Appeal, by
permission of the Appellate Division of the Supreme Court in the Second
Judicial Department, from so much of an order of said court, entered
July 5, 1960, as modified, on the law and the facts, insofar as appealed
from, a resettled order of the Supreme Court at Special Term (J. VINCENT
KEOGH, J.), entered in Kings County, confirming the report of an
Official Referee with respect to the relative priorities of various
claimants against an award granted in a condemnation proceeding to Capri
Italian Restaurant and Pizzeria, Inc. (Capri), the lessee of property
located at No. 491 Hudson Avenue in the Borough of Brooklyn and known as
damage parcel No. 7, for damages for trade fixtures. The modification
consisted, in part, of determining that the rights of the
United States of America
in the said condemnation award were superior to those of the City of
New York
, and of remitting the matter to Special Term for further proceedings
not inconsistent with the views expressed in the opinion at the
Appellate Division. Stated findings of fact contained in the report of
the Official Referee were reversed and new findings made by the
Appellate Division in lieu thereof, as indicated in the opinion and
decision slip of the said court. The City of
New York
acquired title to damage parcel No. 7 on
February 8, 1956
. On February 29, March 23 and
August 23, 1956
the
United States of America
made assessments against
Capri
for taxes which it had withheld from its employees' salaries. The final
decree in the condemnation proceeding was signed and the trade fixture
award made to
Capri
on
December 17, 1956
. On
June 18, 1957
a tax warrant for unpaid sales and general business taxes was filed
against Capri by the City of
New York
in the office of the
County
Clerk
of
Kings
County
. This tax warrant recited that sales taxes were "due" for the
period from
April 1, 1954
to
February 29, 1956
and business taxes were "due" for the period from
July 1, 1953
to
February 29, 1956
. In the Court of Appeals the City Collector and the City of New York
argued, in part, that, the taxes owing to it by Capri having become due
and payable prior to the 1956 tax assessments made by the United States,
it was entitled to have these taxes set off against the amount of the
condemnation award which it was required to pay to Capri, and the
condemnation award, to which the Federal tax lien based upon the 1956
assessments might attach, had been accordingly reduced by the amount of
these taxes. The following question was certified by the Appellate
Division: "Was the order of this court, dated July 5, 1960,
properly made?"
Order
affirmed, with costs, upon the ground that the claim of the city to
sales taxes and general business taxes was not a setoff at the crucial
date for the reasons stated in the opinion at the Appellate Division.
Question certified answered in the affirmative. No opinion.
[Concurring
and Dissenting Opinion]
Concur: Judges
DYE, VAN VOORHIS, BURKE and FOSTER. Chief Judge DESMOND and Judges FULD
and SCILEPPI dissent in the following memorandum.
By express
provision of the New York City Sales Tax Law (Administrative Code of
City of New York, §N41-6.0), all sales taxes for the period for which a
return is required to be filed "shall be due * * * and payable * *
* on the date limited for the filing of the return for such
period". This being so, we believe that the sales taxes "due
and payable" to the city prior to the time of the Federal
tax assessments--as opposed to those which became due and payable after
such time--may be set off against the condemnation award made by the
city to its taxpayer, with the consequence that the amount of the
condemnation award, to which the Federal tax liens could attach, is
reduced by the amount of the taxes due the city. In other words, the
Federal taxes may be paid out of so much of the award only as remains
after payment of the "due and payable" city sales taxes. To
deny this right of setoff to the city would result in the Federal tax
lien attaching a greater share of the condemnation award than the city's
taxpayer would have been entitled to recover from the city at the time
the Federal lien arose.
Accordingly,
we would answer the certified question in the negative, modify the order
appealed from and remand the matter to Special Term so that that court
may give proper recognition to the city's right of setoff.
[63-1 USTC
¶9170]C. H. Langdeau, Receiver of ICT Insurance Company, Appellant v.
United States of America
, Appellee
Texas
Court of Civil Appeals, 3rd Supreme Judicial District, Tex., at Austin,
No. 11,010, 363 SW2d 327, 12/12/62
[1954 Code Sec. 6321]
Lien for taxes: Insolvent insurance company: Taxes plus interest.--Federal
statutes give the States power to regulate insurance companies. However,
a state statute which stops the accrual of interest in an insolvency
proceeding is not the regulation of insurance companies, but is rather
the regulation of the rights of creditors. The lower court properly
allowed in full the Government's claim for taxes plus interest filed in
the receivership. The case here was not subject to the Bankruptcy Act.
Harold
Kennedy, P. O. Box NN, Capitol Station, Austin 11, Tex. (Cecil C.
Rotsch, Harold G. Kennedy, P. O. Box NN, Capitol Station, Austin 11,
Tex., on brief), for appellant. Frederick B. Ugast, Department of
Justice, Washington 25, D. C. (Louis F. Oberdorfer, Assistant Attorney
General, Lee A. Jackson, I. Henry Kutz, George F. Lynch, Department of
Justice, Washington 25, D. C., on brief), for appellee.
JONES, Judge:
The ICT
Insurance Company was adjudged insolvent and placed in receivership by
the District Court of Travis County March 5, 1957. On June 7, 1957, the
United States filed with the Receiver, C. H. Langdeau a proof of claim
for withholding, employment and unemployment taxes assessed against the
taxpayer in the amount of $19,910.81, 1
with respect to which liens arose and for which notices of liens were
filed with the Clerk of Dallas County, Texas, as follows:
Kind of Tax List Notice of
Withholding Int. Total Signed Lien Filed
4th Qtr. 1956
$6,797.52 ........ $58.22 $ 6,855.74 3/22/57 4/15/57
Withholding &
Employment
1st Qtr. 1957
$11,599.81 ....... 11,599.81 4/15/57 5/3/57
Unemployment
1956-1957
$1,278.20 ........ 1,278.20 2/28/57 4/15/57
On February
28, 1958, the
United States
filed with the Receiver a proof of claim for additional unemployment
taxes in the amount of $363.59, for which a lien arose on November 15,
1957.
By letter
dated August 21, 1959, the Receiver submitted a check in the amount of
$18,455.55 in payment of that portion of the claim filed on June 7,
1957, covering the withholding tax for the fourth quarter of 1956,
including $58.22 in interest, and the withholding and employment tax for
the first quarter of 1957. By this letter, the Receiver notified the
Internal Revenue Service that the portion of the claim in the amount of
$1,278.20 covering unemployment taxes for 1956 had been approved as that
of a general unsecured creditor; that the claim, filed on February 28,
1958, in the amount of $631.57, had also been approved as a general
unsecured creditor's claim; and that the claim for all interest accruing
after the Insurance Company was placed in receivership had been
rejected.
In November,
1959, the
United States
filed suit in the District Court of Travis County wherein it sought
priority and allowance in full of its rejected claims. A hearing was had
on April 23, 1962, and the court ordered that the claims of the United
States filed with the Receiver on June 7, 1957 and February 28, 1958,
"be first satisfied and allowed as prior and preferred claims, and
that, before paying any of the claims of the general unsecured claims of
ICT Insurance Company, the Receiver forthwith pay to the United States
of America, amounts as follows:"
1.
On the Claim filed June 7, 1957:
(a)
$1,278.20 together with interest at the rate of six (6) per cent per
annum from January 31, 1957, due on the unemployment tax assessed;
(b)
$994.08 due as unpaid interest on $6,855.74 accruing from March 23,
1957, to August 22, 1959, on the withholding tax claim heretofore
partially paid;
(c)
$1,608.17, due as unpaid interest on $11,599.81, accruing from April 30,
1957 to August 22, 1959, on the withholding tax claim heretofore
partially paid; and,
2.
On the Claim filed February 27, 1958:
(a)
$363.59 together with interest at the rate of six (6) per cent per annum
on $361.67 from March 5, 1957.
From this
judgment, the Receiver, C. H. Langdeau, prosecutes this appeal.
It is the
position of the United States that its claims for taxes, including all
interest thereon, assessed against the ICT Insurance Company are
entitled to priority of payment ahead of the claims of general unsecured
creditors of the insolvent taxpayer, both by reason of its paramount tax
liens under Sections 6321 and 6322 of the Internal Revenue Code of 1954,
and by reason of the priority accorded to the United States by Section
3466 of the Revised Statutes of the United States for the payment in
cases of insolvency of debtors owing debts to it.
Appellant has
three points which, as he states, present only this question, "In
those cases in which the estate of an insolvent insurance company is
insufficient to pay all of its debts, does the United States Government
have a right to take out of the insolvent's assets enough to pay all of
'the debts due the United States,' including taxes, and interest
accruing subsequent to the date of the commencement of delinquency
proceedings, before any payment can be made to any other creditor,
including wage claimants?"
Unquestionably,
the answer to appellant's query would be in the affirmative if the words
"insurance company", were dropped and a different type of
company substituted. See United States v. Miller, 331 S. W. 2d
436, writ. ref., n. r. e., cert. denied, 364
U. S.
880,
81 C. Ct.
168, and authorities and federal statutes therein discussed.
The
significance of the words "insurance company" comes from the
fact that federal statutes, 2
known as the McCarran Act, or the McCarran-Ferguson Act, have given the
States a free hand in the regulation and taxation of persons engaged in
the insurance business. We quote the pertinent portions of these
statutes:
"§1011.
Declaration of policy
Congress
declares that the continued regulation and taxation by the several
States of the business of insurance is in the public interest, and that
silence on the part of the Congress shall not be construed to impose any
barrier to the regulation or taxation of such business by the several
States.
§1012. . . .
(a)
The business of insurance, and every person engaged therein, shall be
subject to the laws of the several States which relate to the regulation
or taxation of such business.
(b)
No Act of Congress shall be construed to invalidate, impair, or
supersede any law enacted by any State for the purpose of regulating the
business of insurance, or which imposes a fee or tax upon such business,
unless such Act specifically relates to the business of insurance: . .
."
If the State
of
Texas
has enacted statutes which regulate the "business of
insurance", then these statutes will prevail, even as to the
United States
, unless Congress has otherwise provided in legislation specifically
pertaining to insurance.
In 1951
Texas
enacted an Insurance Code (Ch. 491, 52nd Leg. Reg. Sess., p. 868), the
caption reading in part:
"An
Act arranging the Statutes of this State affecting the business of
insurance in appropriate Chapters and Articles in a consistent whole and
under a single code; making such editorial changes in context as are
necessary to that accomplishment; . . ."
The
emergency clause of this Act reads, in part,
"The
fact that the present laws relating to insurance are in many respects
inadequate, containing in many instances overlapping, ambiguous and
inconsistent provisions and seriously interferring with the operation of
the insurers as well as jeopardizing the insureds and protection of the
public; and the further fact that jurisdictional uncertainties arising
from the United States Supreme Courts' decision holding that the
business of insurance transacted across state lines is interstate
commerce within the meaning of the Federal Constitution, making it
practicable and necessary that such laws shall be made clear, concise,
adequate and consistent for the protection of the insuring public as
well as for the protection of those engaged in the insurance business, .
. ."
In 1955, the
above Act was amended. 3
We quote from its caption:
"An
Act providing for the Amendment of Article 21.28 of the Texas Insurance
Code of 1951, such Act concerning the liquidation, rehabilitation,
reorganization, or conservation of insurers, and placing same under the
Board of Insurance Commissioners. . . ."
In
the amending Act there appear these provisions:
"(b)
'Delinquency proceeding' means any proceeding commenced in any court of
this State against an insurer for the purpose of liquidating,
rehabilitating, reorganizing or conserving such insurer." [Art.
21.28, V. A. C. S., Sec. 1, (b).]
"(e)
Conducting of Business. Upon taking possession of the assets of a
delinquent insurer the receiver shall, subject to the direction of the
court, immediately proceed to conduct the business of the insurer, or to
take such steps as may be necessary to conserve the assets and protect
the rights of policyholders and claimants for the purpose of
liquidating, rehabilitating, reinsuring, reorganizing or conserving the
affairs of the insurer." [Art. 21.28, id., Sec. 2, (e).]
"All
wages actually owed to employees of an insurer against whom a proceeding
under this Article is commenced, for services rendered within three (3)
months prior to the commencement of such proceeding not exceeding Three
Hundred Dollars ($300) to each employee shall be paid prior to the
payment of every other debt or claim, and in the discretion of the court
may be paid as soon as practicable after the proceeding has been
commenced, except that at all times there shall be reserved such funds
as will be sufficient for the expenses of
admin
istration by the receiver." [Art. 21.28, id., Sec. 6.]
"(b)
Interest. Interest shall not accrue on any claim subsequent to the date
of the commencement of delinquency proceedings." [Art. 21.28, id.,
Sec. 8, (b).]
With respect
to Sec. 6 of Art. 21.28, supra, we are of the opinion that it
does not regulate the business of insurance. 4
It regulates the claims for wages of employees of an insurer which is in
receivership. It is for their benefit and in their aid alone. It lends
no help to the continuance of the business of insurance by the company.
In fact, this statute authorizes such wage claimants to exhaust the
funds of the company except that enough to satisfy
admin
istration expenses shall be retained. This is not a regulation of the
insurance business; it is a priority established for a class of
creditors of an insurance company. There are many statutes regulating
the rights of persons who may have claims against an insurance company
such as laborers, mechanics, materialmen, landlords, yet it would hardly
be contended that these laws regulate the insurance business simply
because they may be invoked against an insurance company.
If the
preference given by Sec. 6 is to prevail over the tax claim of the
government, then a State may not only prefer employees of the company,
but may prefer every other claim and make the debt due the United States
last. We find nothing in the McCarran Act to warrant this result.
In the
construction of the McCarran Act we have been influenced by the opinion
in United States v. Emory, 314 U. S. 423, 86 L. ed. 315, where
the Court in construing and applying Sec. 3466, U. S. C. A., supra,
in an equity receivership proceeding in a State Court stated, "Just
such proceedings as this, therefore, are governed by the plain command
of Sec. 3466 that 'debts due to the United States shall be first
satisfied.' The purpose of this section is 'to secure adequate public
revenues to sustain the public burden' . . . and it is to be construed
liberally in order to effectuate that purpose . . .. We are aware of no
cannon of statutory construction compelling us to hold that the word
'first' in a 150 year old statute means 'second' or 'third', unless
Congress later has said so or implied it unmistakably. . . . Only the
plainest inconsistency would warrant our finding an implied exception to
the operation of so clear a command as that of Sec. 3466."
We are also of
the opinion that the Texas Statute denying interest on claims after
commencement of delinquency proceedings is not applicable to a tax claim
of the
United States
.
Interest on
taxes due the United States is a part of the tax obligation 5
and is expressly secured by the lien provided in Sec. 6321, 26 U. S. C.
A., which reads:
"§6321.
Lien for taxes.
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, additional amount,
addition to tax, or assessable penalty, together with any cost that may
accrue in addition thereto) shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging, to such person."
A person who
owes interest is a debtor, the interest being the debt. As such, it is
within the provisions of Sec. 6323, 31 U. S. C. A., Revised U. S.
Statutes, Sec. 3466, which provides, in part, that when any person who
is indebted to the
United States
is insolvent, the debt due the
United States
shall be first satisfied.
We find
nothing in the McCarran Act, certainly not "unmistakably", to
warrant us in holding that the
United States
has consented that a state has been given authority to extinguish a tax
obligation or debt due the
United States
.
We are also
convinced that the disallowance of interest on claims against insurance
companies in receivership cannot be accomplished under the guise that it
is a regulation of the business of insurance. We find no relationship
between the business of insurance and whittling claims owed by an
insolvent insurer.
Appellant
cites New York v. Saper [49-1 USTC ¶9198], 336 U. S. 328, 93 L.
ed. 710, which holds that under the National Bankruptcy Act tax claims
of the United States do not bear interest after the date of bankruptcy.
The simple
answer to this authority here is that this case is not subject to nor is
it controlled by the Bankruptcy Act. Lest we be misunderstood, however,
we make these observations. We are not concerned with, though we
approve, the policy of the Bankruptcy Act or the policy of
Texas
in providing that interest on all claims shall cease when bankruptcy
occurs or delinquency proceedings are commenced.
The problem we
have and must decide is whether or not the Texas Statute in providing
for the cessation of interest, as stated, is an Act regulating the
business of insurance. We believe, and hold, that it is not such an act.
It regulates the rights of creditors of an insolvent insurance company,
a company which is incapable of doing any business itself and which is
in the process of liquidation.
The Federal
Bankruptcy Act ". . . primarily provides a way to gather the
unencumbered assets of an insolvent debtor for distribution among his
unsecured creditors . . .." Simonson v. Granquist [62-1 USTC
¶9298], 7 L. ed. 557, 82 S. Ct. --.
The Bankruptcy
Act does not purport to regulate the business of any bankrupt. It does
not do so when it denies interest on a claim after bankruptcy. By the
same reasoning, it would seem that the Texas Statute when it denies
interest on a claim subsequent to the commencement of delinquency
proceedings against an insolvent insurer does not regulate the business
of insurance.
The judgment
of the Trial Court is affirmed.
1
Including accrued interest to June 4, 1957, in the amount of $177.06.
2
Act of
March 9, 1945
, C. 20, Sec. 1, 59 Stat 33 (15 U. S. C., 1958 ed., Sections 1011-1015.)
3
Ch.
267, p. 737, Acts 54th Leg., Reg. Sess. 1955.
4
The Court in
California
League of Independent Insurance Producers v.
Aetna
Cas. & Surety Co., 175 F. Supp. --, gave its understanding of
the McCarran Act in these words:
"This
court is of the opinion that a State regulates the business of insurance
within the meaning of Section 1012(b) when a State statute generally
prescribes or permits or authorizes certain conduct on the part of the
insurance companies."
5
See
New York
v. Saper, infra, n. 18.
[62-2 USTC
¶9805]Commonwealth v. Wilson Lumber Company
Pa.
Court of Common Pleas, Lackawanna County, Pa., Nos. 191, 192, 193, 194,
4/16/62
[1954 Code Sec. 6323]
Liens for taxes: Priority: Judgment entered after filing of tax
lien.--A lien of the Commonwealth of Pennsylvania for unpaid
contributions to an unemployment compensation fund filed before a lien
for federal taxes did not have priority over the federal lien since the
Commonwealth did not reduce its claim to judgment until after the filing
of the tax lien.
Julias Altman,
Wilkes-Barre
,
Pa.
, for plaintiff. Carlon O'Malley, Jr.,
Suite
506-11
, Scranton Electric Bldg.,
Scranton
3,
Pa.
, for defendant.
HOBAN, Pleas
Judge:
On execution
initiated by plaintiff, the sheriff of
Lackawanna
County
sold personal property of defendant, Wilson Lumber Company, on
February 27, 1958
. Deducting costs, the sheriff has for distributions the sum of $956.26.
Both the Commonwealth and the
United States
claim the fund, so the sheriff petitioned for leave to pay the money
into court and have the court decree distribution.
Each of the
conflicting claims would exhaust the fund; there are no other claimants
with possible priorities, so the question comes down to one of
priorities between two sovereigns.
The facts are
simple and undisputed.
The
Commonwealth filed a lien with the prothonotary of
Lackawanna
County
for unpaid contributions to the unemployment compensation fund on May
20, 1954, and another one on July 3, 1954.
The
United States
filed its notice of lien for unpaid withholding and social security
taxes on September 3, 1954.
Scire facias
sur lien issued on the Commonwealth liens on June 10, 1955, judgments
were entered thereon on August 4, 1955, and fi. fas. were issued and
delivered to the sheriff on September 6, 1955, levy and sale followed.
The United
States contends that its lien is a perfected choate lien, and under
Federal law by right of sovereignty takes precedence over any other
lien, except those as to which it has waived sovereignty (liens of
mortgagee, pledgee, purchaser or judgment creditor), and as to those the
Federal lien is effective from the day of filing of notice in the proper
office, and the United States then acknowledges the principle of
"prior in time, prior in right".
Pennsylvania
cannot assert sovereignty over the
United States
, hence if the Commonwealth lien is to take priority by reason of timely
filing, it must be within one of the categories as to which the
United States
has waived sovereignity. It is obvious that the Commonwealth is not a
mortgagee, a pledgee, nor a purchaser. Is it in law entitled to the
status of judgment creditor upon the filing of its lien and before
proceedings to secure a formal judgment are pursued?
In Ferbo
Trading Corporation v. Jo-Mar Dress Corporation, 78 D. & C. 337
(1951), we held that the Commonwealth liens were entitled to judgment
creditor status and granted priority over United States liens on the
first in time, first in right principle.
We felt
justified in so doing on the authority of several circuit court of
appeal cases.
Since then,
however, a series of decisions by the United States Supreme Court have
laid down principles which are contrary to our holding in Ferbro.
The United
States will not question the nature and effect of a State tax proceeding
in a given State which is free to give its own interpretation for the
purpose of its own internal
admin
istration: United States v. Gilbert Associates, Inc. [53-1 USTC
¶9291], 345 U. S. 361, 73 S. Ct. 701 (1953).
But the
meaning of a Federal statute is for the
United States Court
to decide: United States v. Gilbert Associates, Inc., supra.
The
characteristic of a lien as specific and perfected by the State court of
last resort is not conclusive against the Federal government: United
States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81, 74 S. Ct. 367 (1954).
Whether a
State lien is perfected and choate vis a Federal lien is a Federal
question, to be decided under Federal law: United States v. Scovil
[55-1 USTC ¶9137], 348
U. S.
218, 75 S. Ct. 244 (1955).
The word
"judgment creditor" as used in the Internal Revenue Code must
be taken in the usual sense of a judgment of a court of record. In Gilbert
Associates, supra, the United States Supreme Court used this
language:
"A
cardinal principle of Congress in its tax scheme is uniformity, as far
as may be. Therefore, a 'judgment creditor' should have the same
application in all the states. In this instance, we think Congress used
the words 'judgment creditors' in §3672 in the usual, conventional
sense of a judgment of a court of record, since all states have such
courts. We do not think Congress had in mind the action of taxing
authorities who may be acting judicially as in New Hampshire and some
other states, where the end result is something 'in the nature of a
judgment,' while in other states the taxing authorities act
quasi-judicially and are considered
admin
istrative bodies."
In Gilbert
Associates, the town of
Walpole
,
New Hampshire
, sold certain machinery of defendants for unpaid taxes levied under
State law, but never took the property into possession. In receivership
proceedings (under State law) to liquidate the company, a sale was held,
and the priority question arose. The
United States
had filed its lien after the levy of the town taxes but before the first
tax sale. The Supreme Court of New Hampshire held that the lien of the
town taxes took priority over the Federal lien as a perfected and
specific lien. The United States Supreme Court held that,
"In
claims of this type, 'specificity' requires that the lien be attached to
certain property by reducing it to possession, on the theory that the
United States has no claim against property no longer in the possession
of the debtor . . . The taxpayer had not been divested by the Town of
either title or possession. The Town, therefore, had only a general,
unperfected lien . . ."
The
Pennsylvania Unemployment Compensation Law (Act of December 5, 1936, P.
L. (1937) 2897, as supplemented and amended, 43 P. S. §788.1) provides
for the establishment of liens on both real and personal property
against employers for unpaid contributions to the unemployment
compensation fund from the date of filing in the prothonotary's office,
and for priority over other liens, except mortgages on real estate, on
distribution of the proceeds of a judicial sale. In Ferbro v. Jo-Mar,
supra, this court held that such liens put the Commonwealth in the
status of a judgment creditor, even before execution, and granted
priority over a Federal lien.
In Ersa,
Inc. v. Dudley [56-2 USTC ¶9621], 234 Fed. 2d 178 (CCA-3, 1956),
the question of priorities came squarely before the United States Court
of Appeals for the Third Circuit. It was there decided that a
Pennsylvania lien against personal property for unemployment
compensation delinquencies was unperfected and inchoate, within the
meaning of Federal law, and gave priority to Federal liens filed after
judgment in the State court, but before fi. fas. issued. (Execution
in Pennsylvania is now commenced by writ of execution, Pa. R. C. P.
3103, effective November 1, 1960).
The circuit
court reasoned that under established Pennsylvania law such liens could
not be enforced against personal property until a writ of execution was
placed in the hands of the sheriff; therefore, under Federal law,
Pennsylvania's lien was neither perfected nor choate until the sheriff
received the writ. For its interpretation of Pennsylvania law, the court
relied on Commonwealth v. Lombardo, 356 Pa. 597 (1947), wherein
it was decided that an unemployment compensation lien filed against a
delinquent employer and prosecuted to judgment could not bind an
automobile transferred by the delinquent to an innocent third party
after the judgment, but before the fi. fa. issued.
"It
thus appears that the mere filing of the lien . . . and its reduction to
judgment does not create a perfected lien upon the delinquent employer's
personal property. The filing of the lien is only 'a caveat of a more
perfect lien to come'": Ersa, Inc. v.
Dudley
, supra.
From the
foregoing authorities we must conclude:
(a) The filing
of the Commonwealth's liens for delinquent unemployment contributions
does not give the Commonwealth the status of judgment creditor. Nor can
the reduction to judgment of these liens in the case at bar avail the
Commonwealth since the Federal lien antedated the judgments.
(b) The
interpretation by Federal courts of the lien provisions of the Internal
Revenue Code are binding on this court.
(c) Under the
Federal decisions cited, the liens of the Commonwealth were neither
perfected nor choate as of the date of filing whereas the lien of the
United States
was perfected and choate. Accordingly, the liens of the Commonwealth
cannot be sustained as against the
United States
as prior in time, prior in right.
(d) The
United States
is entitled to judgment for the fund paid into court by the sheriff.
Now, April 16,
1962, judgment is directed to be entered in favor of the United States
of America, claimant, and against the Commonwealth of Pennsylvania,
execution plaintiff, for the amount in controversy, $956.26, and the
prothonotary is directed to pay the same to the collector of internal
revenue of the United States at Scranton, Pennsylvania.
[62-1 USTC
¶9265]United States of America, Appellant v. Samuel Weissman and Beth
Weissman, his wife, et al., Appellees
Florida
District Court of Appeal, Second District, Case No. 2157, 135 SO2d 235,
12/8/61
[1954 Code Sec. 6323]
Priority of liens: Federal tax lien: State statutory landlord's
lien.--The taxpayer's statutory landlord's liens were not prior to
the federal tax liens which arose and attached to the tenant's property
on the dates the tax assessments were made.
Edward F.
Boardman, United States Attorney, Miami, Fla., Louis F. Oberdorfer, Fred
E. Youngman, Assistants Attorney General, Department of Justice,
Washington 25, D. C., for appellant. Richard T. Stierer and Adams &
Kramer, Harvey Bldg.,
West Palm Beach
,
Fla.
, for appellees.
SMITH, Judge:
Samuel
Weissman and Beth Weissman, his wife, some of the appellees here, filed
their complaint to foreclose a landlord's lien for rent given by Section
83.08, Florida Statutes. The
United States of America
, appellant here, and the other appellees, were defendants. The
plaintiffs were the owners of certain commercial rental property, and on
August 1, 1957
, they entered into a written lease with Benjamin Weissman in which the
tenant agreed to pay rent in the total amount of $10,800.00, payable in
monthly installments of $300.00 each. The rent began and the tenant went
into possession on the date of the lease and on the same date the tenant
moved onto the premises certain items of personal property belonging to
the tenant. These items of personal property remained on the premises to
the time of the institution of this suit. The rent was paid as it became
due until the payment of July, 1959, when default occurred.
The United
States of America was named party-defendant under the authority of 28 U.
S. C., §2410, by virtue of the fact that the government had filed
notices of federal tax liens under the internal revenue laws for federal
taxes owed by the tenant Weissman, they being recorded on August 5,
1955; January 23, 1958; and January 22, 1959, in the Office of the Clerk
of the Circuit Court of Palm Beach County, Florida. The answer of the
government attached certificates of assessments and alleged that the
government liens for federal taxes were prior and superior to the lien
of the plaintiffs and all other claimants. The certificates of
assessment certify that the assessments were made from February 25,
1954, through November 21, 1958.
The court
entered a final decree finding that the plaintiffs' statutory landlord's
lien for rent attached to the property as of the time the property was
brought upon the premises and was superior to any liens acquired
subsequent to that time, notwithstanding the fact that the rent may not
have become delinquent until after the filing of the federal liens, the
effect being that the federal lien filed August 5, 1955, was adjudged to
be superior to the landlord's lien and all other government liens were
adjudged to be inferior.
The appellees
contend that under the laws of the State of Florida the landlord had a
perfected lien which existed prior to the date of the recording of the
federal tax liens (except the one of August 5, 1955) and that the
principle of first in time is first in right applies in this instance.
Section 83.08, Florida Statutes, provides, in effect, that every person
to whom rent may be due shall have a lien for such rent upon all
property of the tenant usually kept on the premises and that this lien
shall be superior to any lien acquired subsequent to the bringing of
such property on the leased premises.
The Supreme
Court of Florida has held that generally a landlord's lien for the
payment of rent is superior to any judgment or other lien acquired
subsequent to the bringing of the property on the leased premises. This
lien is not dependent upon the levy of a distress warrant, nor does its
existence depend upon filing or recording, or the institution of any
proceeding for its enforcement, but it has priority over judgment,
execution or attachment liens subsequently acquired on the property, and
that this is true even as to a warrant issued for collection of taxes
imposed by the State of Florida under the Act commonly known as the
"Change Store Act." Lovett v. Lee, 1940, 141
Fla.
395, 193 So. 538. Thus, it is clear that if the
Florida
law was controlling, the decree of the trial court would be affirmed.
The liens of
the federal government arose under the Internal Revenue Code of 1954,
which provides, insofar as material to the question here, in Section
6321 that, if any person liable to pay any tax neglects to pay the same,
after demand, the amount shall be a lien in favor of the United States
upon all property belonging to such person. Section 6322 provides that
the lien imposed shall arise at the time the assessment is made and
shall continue until the amount is satisfied. Section 6323(a) provides
that the lien so imposed shall not be valid as against any mortgagee,
pledgee, purchaser, or judgment creditor until notice thereof has been
filed (in this instance in the Office of the Clerk of the Circuit Court
of Palm Beach County, Florida).
The Supreme
Court of the
United States of America
has held that, the effect of a lien in relation to a provision of
federal law for the collection of debts owing the
United States
is always a federal question. United States v. Security Trust &
Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 95 L. Ed. 53, 71 S.
Ct. 111, and that this is true regardless of what rights the landlord's
lien statute may create under state law. People of State of New York
v. Maclay [3 USTC ¶1044], 288
U. S.
290, 77 L. Ed. 754, 53 S. Ct. 323. The lien of the United States for
unpaid taxes, while a general lien in the sense that it attaches to all
of the property of the delinquent taxpayer, nevertheless is a perfected
lien at the time it arises, and where the federal tax lien and the
competing statutory lien are of equal dignity, that it, where the
competing statutory lien is a perfected lien 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, priority is to be determined on the principle that,
"the first in time is the first in right."
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81, 98 L. Ed. 520, 74 S. Ct. 367. We must, therefore, look to the
Federal statutes and decisions to determine this issue.
One of the
notices of lien was recorded before the date of the lease (which is the
same date that the rent payments began and the same date that the tenant
brought the property in question on the leased premises) and the other
two notices of liens were recorded in the county records subsequent to
the above date but prior to the first default in payment of rent. All of
the federal liens actually arose and became perfected liens on the
respective assessment dates even though not recorded in the county
records. The assessment dates are both prior to and subsequent to the
date of the lease and all of the assessment dates are prior to the first
default in payment of rent. If the government is required to record a
notice of lien to make its lien valid as against the landlord, then the
landlord's statutory lien for rent must be construed as placing the
landlord in the position of a mortgagee, pledgee, purchaser, or judgment
creditor to bring the landlord under the protection of Section 6323(a),
supra, since there is no other requirement for recording.
The terms
"mortgagee", "pledgee", "purchaser", and
"judgment creditor" are used in their ordinary and accepted
sense. United States v. Gilbert Associates [53-1 USTC ¶9291],
345
U. S.
361, 97 L. Ed. 1071, 73 S. Ct. 701.
In United
States v. Security Trust & Savings Bank, supra, the court held
that, if the purpose of the federal tax lien statute to insure prompt
and certain collection of taxes due the United States from tax
delinquents is to be fulfilled, then the rule must prevail that it is
never sufficient to defeat the federal priority merely to show a lien
effective to protect the lienor against others than the government, but
contingent upon taking subsequent steps for enforcing it. That a prior
attachment lien under
California
law was contingent or inchoate, merely a lis pendens notice that
a right to perfect a lien exists and therefore not entitled to priority
over the federal lien. The same determination has been made with respect
to mechanics' liens under state law. United States v. Colotta
[55-2 USTC ¶9680], 350 U. S. 808, 100 L. Ed. 725, 76 S. Ct. 89,
including one decision applying specifically to the State of Florida, United
States v. Hulley [58-2 USTC ¶9926], 358 U. S. 66, 3 L. Ed. 106, 79
S. Ct. 117. The
Florida
decisions on the same case are 102 So. 2d 599, and 111 So. 2d 38.
Federal Court
decisions specifically holding that a statutory landlord's lien for rent
was not a specific and perfected lien as a matter of federal law for the
purpose of determining priority with a federal lien are: United
States v. Waddill Co. [45-1 USTC ¶9126], 323 U. S. 353, 89 L. Ed.
294, 65 S. Ct. 304 (Virginia); and United States v. Scovil [55-1
USTC ¶9137], 348 U. S. 218, 99 L. Ed. 271, 75 S. Ct. 244, (South
Carolina). In these decisions the Supreme Court of the United States
held that the landlord had a lien other than that of a mortgagee,
pledgee, or judgment creditor and that the landlord was not a purchaser,
all within the meaning of that section of the Internal Revenue Code
requiring recording of notice and that the landlord was not entitled to
the protection of that section. The Federal decisions further hold that
a landlord's statutory lien for rent is inchoate and unperfected under
the circumstances here at the time the federal tax liens arose, and the
landlord's lien was not entitled to priority under the doctrine of first
in time is first in right or under any doctrine of relation back.
United States
v. New Britain, supra, and United States v. Security Trust
& Savings Bank, supra.
In Hoare v.
United States of America, Case No. 17,162 in the United States Court
of Appeals for the Ninth Circuit, opinion dated September 26, 1961,
[61-2 USTC ¶9681] the Court held that the holder of a chattel mortgage
given by a tax debtor of the United States as security for the
performance of a lease had priority by virtue of the protection provided
by Section 6323(a), supra, to the extent only of the arrearages
existing when the tax lien attached.
We, therefore,
hold that on the dates on which the federal tax liens arose and attached
to the property of the tenant taxpayer (the various dates on which the
assessments were made) that the landlord did not have a lien which was
prior to any of the federal tax liens. We are conscious of the fact that
this result places a great burden upon statutory lien holders acting in
good faith without recorded notice of federal tax liens. This is
particularly significant in this time of extensive federal taxation when
it is often said that by virtue of federal taxes the government has
become a partner with every businessman. However, the power to correct
this does not lie with this Court, but rather with the Congress of the
United States
.
The final
decree of the trial court is reversed with directions to enter a decree
in accordance with this opinion.
Reversed.
SHANNON,
Circuit Judge, and WHITE, Judge, concur.
[61-2 USTC
¶9760]First Federal Savings & Loan Association of New York,
Plaintiff-Respondent v. Harry Lewis, Laila Lewis et al., Defendants, and
United States of America, Defendant-Appellant
N.
Y. Supreme Court, Appellate Division,
7/24/61
[1954 Code Sec. 6323]
Tax liens: Priority of state taxes: New York.--Federal Tax liens
have priority over the payments made by a mortgagee for
New York
real estate taxes and for an insurance premium, and over all other
subsequently accrued real estate taxes, assessments and water charges.
However, the Federal liens can attach only to the taxpayer's interest as
a tenant by the entirety so that his wife's right of survivorship in the
proceeds upon the sale is protected under
New York
law.
S. Hazard
Gillespie, Jr., United States Attorney, Foley Sq., New York, N. Y., Mark
I. Cohen, Assistant United States Attorney, of counsel (Stephen Kurzman,
New York, N. Y., with him on brief), for defendant-appellant. Frederick
F. Hufnagel, Bertine & Hufnagel, 44 Pondfield Rd., Bronxville, N.
Y., of counsel (W. Roland Miller, II, 44 Pondfield Rd., Bronxville, N.
Y., with him on brief), for plaintiff-respondent.
BRENNAN,
Judge:
In this action
to foreclose a consolidated first mortgage on certain real property in
Westchester
County
, the essential facts are not in dispute.
It appears
that on
March 30, 1950
, the defendants, Harry Lewis and Laila Lewis, his wife, acquired the
real property which was then encumbered by a first mortgage made to
plaintiff and held by it. At the same time these owners executed and
gave to plaintiff an additional bond and mortgage covering the same
premises, and both mortgages were consolidated into a single mortgage.
Each of these mortgages was promptly recorded and, as consolidated,
contained the usual covenant authorized by statute (Real Prop. Law, §254,
subds. 4, 6), namely: that the owners agree to pay promptly all local
taxes, assessments, water rates and fire insurance premiums on the
mortgaged premises; that upon the owners' failure to do so the mortgagee
may pay these charges; and that all sums so paid by the mortgagee are to
be added to and become part of the mortgage indebtedness.
