Priority over Attachment Lien Page2

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On February 9, 1982 the Internal Revenue Service filed a tax lien against the Clark lot. On July 23, 1983, it filed two additional liens against the lot.

The FDIC succeeded to the rights of the Bank on October 24, 1983 and believing the deed of trust lien to be in full force, it prepared to foreclose on the Clark lot. It was then the FDIC discovered the mistake and filed this lawsuit to reform the release, reinstate the lien, and declare it superior to the IRS's lien.

After a trial, the bankruptcy court stated in its conclusions of law that when the bank executed the release of lien its position was bifurcated so that it retained an "equitable lien" in the real property not controlled by Texas registration laws, but superior to them. The bankruptcy court held that the FDIC was entitled to an order reforming the Release and reinstating the FDIC's Deed of Trust and declared the reinstated interest superior to the tax lien.

The government does not appeal the decision to reform the release and reinstate the lien. It appeals only that part of the decision giving priority to the judicially reinstated lien over the tax lien.

II. Analysis

As the appellee correctly states, section 6323 of the Internal Revenue Code sets forth the priority rules which take effect when a federal tax lien competes with a private security interest as defined by state law. Aetna Insurance Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287], 591 F.2d 1035, 1038 (5th Cir. 1979). ¹ The statute provides as follows:

(a) The lien imposed by section 6321 shall not be valid as against a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirement of subsection (f) has been filed by the Secretary.

. . .

(h) For purposes of this section . . .--

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

26 U.S.C. §§6323(a) , 6323(h)(1) . In other words, a federal tax lien is not valid against a security interest which has become protected under local law against a subsequent judgment until it is properly noticed and filed. However, assuming the tax lien is properly noticed and filed, if a security interest is not protected under local law against a subsequent judgment lien, it does not affect the validity of the tax lien. Finally, the proper tax lien is valid against subsequent purchasers and holders of security interests whatever their status under local law. Accordingly, where a prior security interest exists, its validity under local law must first be established in order to determine its relative priority over a tax lien.

Under Texas law a conveyance of an interest in real property and a deed of trust are protected against subsequent purchasers and creditors without notice only when they are acknowledged or proved and filed for record as required by law. Tex. Prop. Code §13.001(a). ² An unrecorded instrument is only binding on parties to the instrument and on subsequent purchasers who (1) have not paid valuable consideration or (2) have notice of the instrument. Tex. Prop. Code §13.001(b).

Texas courts have interpreted the statute and its predecessor strictly by applying its terms only against an interest in real property which passes by a written instrument such as a conveyance or a deed of trust. See Jensen v. Bryson, 614 S.W.2d 930, 933 (Tex. Civ. App.--Amarillo 1981, no writ). Thus, where a party's interest in real property arises because of equitable principles free from any conveyance capable of recordation, the state's common law applies and protects it against subsequent judgment creditors without notice regardless of the recording requirements. See, e.g., id. (holding that interest in real property arising out of equity from fully performed contract of sale--and independently of later deed--was protected against lienor who had no notice of interest). However, where a party's interest in real property exists by virtue of a conveyance, deed of trust or other written instrument, such instrument must be properly recorded to protect the interest from subsequent purchasers or creditors who have no notice. Prewitt v. United States [86-2USTC ¶9513 ], 792 F.2d 1354, 1357-58 (holding that party's interest in real property derived from unrecorded divorce decree partitioning community property and was thus not protected against subsequent tax lien).

The appellee claims--and the bankruptcy court agreed--that on the date the tax lien was filed, the Bank held an "equitable lien" in the property and that as such it was superior to the IRS's tax lien. Amended Conclusions of Law, at ¶13, August 26, 1986 . They rely on First State Bank v. Jones, 107 Tex 623, 183 S.W. 874 (1916) and Jensen v. Bryson, 614 S.W.2d 930 (Tex. Civ. App.--Amarillo 1981, no writ) for support. Careful examination of the cases reveals, however, that their reliance is misplaced.

In Jones, the debtor had delivered a deed of trust to the bank. It covered several parcels of real property and secured a promissory note in the amount of $5500 plus interest. The deed of trust was duly recorded in December. In April, the Bank executed a release which was later discovered to be in error. Once the error was discovered, a new deed of trust was executed and filed in an effort to correct the mistake. Prior to the correction, however, a judgment lien was filed against the debtor's property which was subject to the original deed of trust. The judgment creditor filed suit against the bank arguing its lien took priority over the reformed deed. The Texas supreme court disagreed and found that the Bank's deed of trust was superior to the Jones judgment.

The court held that under the common law of Texas a judgment lien holder was not afforded the same protection as a purchaser for value; instead the judgment lien attached to only so much of the property as the debtor held. First State Bank v. Jones, 107 Tex. at __, 183 S.W. at 876. Accordingly, where the debtor held the property subject to an equitable right to reform the release, the judgment creditor's interest was also subject to that same equitable right. Moreover, the court also found that the mistake contained in the release was apparent on its face and thus gave notice of the prior encumbrance. It held that "under such circumstances, even a person claiming as an innocent purchaser would fail in his plea." Id. at __, 183 S.W. at 877.

In Jensen v. Bryson, Bryson and Lomax entered into a written contract for sale of certain property belonging to Lomax in June; Bryson took possession of the premises in July. By December, when she had fully performed her obligations under the contract, Lomax could not be located to execute the deed. In March, Jensen obtained a judgment against Lomax and in April recorded an abstract of it against the property. At that time Lomax was still the record owner and did not execute a deed to Bryson until July--a year after she had taken possession of the property. When the deed was finally recorded in August, a judicial sale was already scheduled and Bryson brought suit to enjoin it. The injunction was granted and upheld on appeal. The court of appeal found that when Bryson fully performed the contract she became vested with equitable title independent of the deed. Thus, she could have enforced her interest in the property even if Lomax had never executed the deed. "Beyond that," wrote the court, "at the time Jensen recorded his judgment lien, the undisputed fact of Mrs. Bryson's possession of the premises imparted notice of the equitable title under which she held the realty. Therefore, Jensen, charged with notice, does not qualify for the statutory preference accorded a creditor without notice . . . ." 614 S.W.2d at 933.

In this case, the IRS does not dispute that the debtor's interest in the Clark lot was subject to the equitable right of the FDIC (as successor to the bank) to reform the mistaken release. Nor is there any suggestion that the IRS had notice of that right. However, appellee's right could only be asserted against the debtor. It, unlike Bryson, did not have equitable title independent of a deed or other conveyance. Rather, it had a "mere equitable right" to have the release reformed. See Northeast Independent School District v. Aldridge, 528 S.W.2d 341, 343 (Tex. Civ. App.--Amarillo 1975, writ ref'd n.r.e.) As between the appellee and the IRS, however, the interest differs markedly. United States v. Creamer Industries, Inc. [65-2 USTC ¶9527 ], 349 F.2d 625, 628 (5th Cir.), cert. denied, 382 U.S. 957 (1965).

Section 13.001 of the Texas Property Code and its predecessor eliminated the common law distinction between judgment creditors and purchasers for value; it provided judgment creditors with the same rights and duties as were previously held only by bona fide purchasers. Diltz v. Dodson, 207 S.W. 356, 358 (Tex. Civ. App.--Ft. Worth 1918). Here the IRS is a creditor within the meaning of the statute.Creamer Industries, Inc., 349 F.2d at 628. As a result, unlike the judgment creditor in Jones, the IRS may take advantage of state recording statutes. See Prewitt v. United States , 792 F.2d at 1356-57.

The appellee's security interest in the Clark lot originally flowed from a duly filed deed of trust. When that instrument was properly recorded, the interest was protected against subsequent purchasers and creditors. However, when the records reflected that the Clark lot was free from the deed of trust, appellee's interest lost its protection. The mistake contained in the release was not apparent on its face. While the mutual mistake entitled the parties to reform the release it did not provide the bank with protection against subsequent purchasers under state law. Accordingly at the time the tax lien was filed, appellee's interest in the Clark lot was not a "security interest" within the meaning of 26 U.S.C. 6323(h)(1). When the IRS filed its tax lien without notice of the appellee's right to reform the lease, it became entitled to the protection of state's recording statute. As such, it is superior to the bank's right of reformation.

III. Conclusion

For the above reasons, the judgment of the bankruptcy court is hereby REVERSED and the case is REMANDED for disposition in accordance with this opinion.

¹ The priority rules contained in §6323 supplant the federal common law rules of "choateness" which are to be applied when other federal--i.e., non-IRS--liens compete with nonfederal interests. Aetna Ins. Co. v. Texas Thermal Indus., Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir. 1979). For this reason the bankruptcy court's alternative holding that the equitable security interest was "choate" and thus entitled to priority over the tax liens is irrelevant to the question before the Court. Therefore, this Court need not address the parties' arguments based on these conclusions.

² The predecessor to this statute was Tex. Rev. Civ. Stat. Ann. art. 6627.

 

 

[81-2 USTC ¶9658] United States of America v. Reeves Construction Company, Inc., et al.

U. S. Dist. Court , Dist. MD. , Civil Action No. M-80-1579, 5/26/81

[Code Secs. 6321 and 6322]

Priority of liens: Time of attachment: Property subject to attachment.--State law determined that a credit owed by a general contractor to a subcontractor was properly attached by way of garnishment before a federal tax lien was filed and that the perfection of the senior lien was not dependent upon the actual existence of the funds.

Russell T. Baker, Jr., John F. Hyland, Jr., Assistant United States Attorneys, Baltimore, Maryland 21201, Gregory S. Hrebiniak, Department of Justice, Washington, D. C. 20530, for plaintiff. Martin J. Alperstein, Wartzman, Rombros, Rudd & Omansky, Marc R. Kivitz, Baltimore, Maryland 21202, for William J. Hanks, Rob ert E. Bauer, Thomas N. Dombroskie, Assignees of Mercantile-Safe Deposit & Trust Company. Frank S. Astroth, Max S. Stadfeld, Blum, Yumkas, Mailman & Gutman, Baltimore , Maryland 21202 , for Construction Industry Advancement Program.

Memorandum and Order

MILLER, District Judge:

Presently pending before the court are cross motions for summary judgment, filed on behalf of defendants Hanks, Bauer, and Dombroskie, as assignees of Mercantile Safe Deposit and Trust Company, and plaintiff United States of America .

I. Statement of Facts. As conceded by the parties, the material facts in this action are not in dispute. This case was initially filed as an interpleader action by Traylor & Associates in order to determine priority among disputed claims to $29,402.16, then in the possession of Traylor & Associates, which has since been paid into the registry of the court.

[Three creditors]

Traylor & Associates ("Traylor") is the prime contractor on a construction contract with the State of Maryland Mass Transit Administration . On September 9, 1978 , Traylor entered into a subcontract with defendant Reeves Construction Company, Inc. ("Reeves") under which Reeves was to perform certain portions of the construction. The controversy in the present case involves three disputed claims of entitlement to money presently owing on account of that subcontract from Traylor to defendant Reeves.

[Writ of attachment]

The first claim stems from a writ of attachment issued by the Clerk of the District Court of Baltimore County, Maryland, on May 28, 1978 , in the amount of $59,890. The writ of attachment arose out of a judgment entered in favor of Mercantile Safe Deposit and Trust Company against defendant Reeves. Mercantile Safe Deposit and Trust Company has assigned all of its rights under the judgment and writ of attachment to defendants Hanks, Bauer and Dombroskie.

[Tax lien]

The second claim, one asserted by the plaintiff United States of America, stems from a Notice of Tax Levy which was served by the Internal Revenue Service (IRS) on July 5, 1978, seeking $30,278.95 in past due taxes assessed against defendant Reeves on June 12, 1978. Also on July 5, 1978 , a Notice of Federal Tax Lien was filed against defendant Reeves in the Superior Court of Baltimore City in the amount of $30,005.30. ¹

[Demand letter]

The third claim being asserted is that of defendant Laborer's District Council Vacation Fund of Baltimore. This claim stems from a demand letter sent by counsel for the defendant Laborer's District Council to Traylor, seeking $4,210.87 in funds allegedly due from defendant Reeves pursuant to its collective bargaining agreement.

Subsequent to the date of each of the above claims, Traylor received $20,402.16 to be paid to defendant Reeves pursuant to its subcontract. This payment relates to work performed by Reeves from October, 1977 through March, 1978. A contract claim regarding this work was submitted to the State of Maryland Mass Transit Administration on April, 1978, and was finally approved in January, 1980. That portion of Reeves' claim which was paid was arrived at as a result of direct negotiation between Reeves and representatives of the State of Maryland . Payment of the claim was received by Traylor, the general contractor, in March, 1980. (See Affidavit of Glen R. Traylor). Traylor then filed this interpleader action and paid the sum of $20,402.16 into the registry of this court. Since the parties agree that the above facts are not in dispute, motions for summary judgment have been filed to determine as a matter of law the priorities of the claimants to the $20,402.16, or any part of that sum.

II. Legal Analysis. In determining the priority of the claims asserted, it is first necessary to look to the statutory provisions regarding federal tax liens. Pursuant to 26 U. S. C. §6321, tax liens are established as follows:

If any person liable to pay any taxes 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.

Pursuant to 26 U. S. C. §6322, the lien imposed by §6321 "shall arise at the time the assessment is made." Priority against other lienholders, however, is governed by the following provisions:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

26 U. S. C. §6323(a).

[Choate v. Inchoate liens]

As stated by the Supreme Court in United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 87-8 (1963):

The priority of the federal tax lien provided by 26 U. S. C. §6321 as against liens created under state law is governed by the common-law rule--"the first in time is the first in right." United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-86. It is critical, therefore, to determine when competing liens, whether federal or state-created, come into existence or become valid for the purpose of the rule . . .. As for a lien created by state law, its priority depends 'on the time it attached to the property in question and became choate.' United States v. New Britain, supra, at 86; United States v. Security Tr. & Sav. Bank [50-2 USTC ¶9492], 340 U. S. 47. Choate state-created liens take priority over later federal tax liens, United States v. New Britain, supra; Crest Finance Co. v. United States [62-1 USTC ¶9105], 368 U. S. 347, while inchoate liens do not. See United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218; United States v. Colotta [55-2 USTC ¶9680], 350 U. S. 808.

Thus the priority of claims in the present case depends upon whether the state-created claims are choate or inchoate liens.

In order for a choate lien to have been created, three factors relating to the lien must have been unequivocably established:

(1) the identity of the lienor;

(2) the property subject to the lien;

(3) the amount of the lien.

United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954).

In the present case, it is clear that defendant Laborer's District Council's claim is an unperfected claim and therefore may not be given priority. The issue which remains is whether the writ of attachement in favor of defendants Hanks, Bauer and Dombroskie, which was issued on May 28, 1978 , created a choate lien which takes priority over the federal tax lien which was filed on July 5, 1978 .

[Federal common law?]

The relative priority of a lien of the United States for unpaid taxes is a federal question to be determined by federal law. The state court's characterization of its liens is not necessarily binding. See United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213 (1955). Therefore, the question of whether defendants Hanks, Bauer and Dombroskie's judgment lien is "choate" must first be examined under principles of federal common law.

In the regulations accompanying 26 U. S. C. §6323, a judgment lien creditor is defined as follows:

The term "judgment lien creditor" means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved. A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are established. Accordingly, a judgment lien does not include an attachment or garnishment lien until the lien has ripened into judgment, even though under local law the lien of the judgment relates back to an earlier date. If recording or docketing is necessary under local law before a judgment become effective against third parties acquiring liens on real property, a judgment lien under such local law is not perfected with respect to real property until the time of such recordation or docketing. If under local law levy or seizure is necessary before a judgment lien becomes effective against third parties acquiring liens on personal property, then a judgment lien under such local law is not perfected until levy or seizure of the personal property involved. The term "judgment" does not include the determination of a quasi-judicial body or of an individual acting in a quasijudicial capacity such as the action of State taxing authorities.

26 CFR §301.6323(h)-1(g).

In the present case, the Hanks, Bauer and Dombroskie judgment is for a certain sum of money Therefore, in order to be considered a "judgment lien creditor" under federal law, those defendants must show that they have perfected a lien under the judgment on the property in dispute in the present case.

[Issue]

Since the writ of attachment did not actually specify the funds obtainable through Traylor, the Government argues that the defendants' judgment lien was not perfected and was therefore inchoate. The Government further contends that the defendants' rights to the funds held by Traylor did not attach until those funds actually came into existence. At that point in time, the Government argues the federal tax lien attached simultaneously, and accordingly takes priority. In support of this contention, the Government cites Berkowitz v. Maxwell House Hotel Corp. [64-2 USTC ¶9824], 14 AFTR 2d 5774 (New York Supreme Court, 1964), wherein the court stated:

In United States v. Graham, 96 F. Supp. 318 [40 AFTR 403], aff'd California v. United States , 195 F. 2d 530 [41 AFTR 1103], cert. denied, 344 U. S. 831, the Court held that the federal tax lien is superior to any simultaneously attaching interest. Any money that accrued to the taxpayers under their agreement, accrued with a lien upon it.

Defendants Hanks, Bauer and Dombroskie, however, contend that their lien did attach to specified property at the time the writ of attachment was issued. They claim that the writ of attachment constituted a perfected lien which accords them the status of "judgment line creditors," entitled to priority pursuant to 26 U. S. C. §6323.

The court must look to Maryland law to determine whether the writ of attachment in issue constituted a perfected lien. Under Rule G45, Maryland Rules of Procedure, property subject to attachment consists of "any property, including a credit which has not matured and a debt due upon judgment belonging to the defendant, in the hands of the plaintiff or in the hands of another, . . ." ² (Emphasis supplied). Thus Reeves' contract rights through Traylor, which related to work completed by Reeves in March, 1978, were subject to attachment, if the attachment were properly executed.

[Attachment]

As stated in Md. Cts. & Jud. Proc. Code Ann. §11-403:

A writ of execution on a money judgment does not become a lien on the personal property of the defendant until an actual levy is made. The lien extends only to the property included in the levy.

See generally 3 MLE. §81.

In the case of attachment of property or credits of the debtor, in possession of another, attachment is obtained through a writ of garnishment. (See Rule F1, Md. Rules of Proc., which states that attachment on a judgment be in compliance with the procedure set forth in Rule G47, Md. Rules of Proc.). In addition, the rules set forth the following procedural requirements:

A writ of attachment by way of garnishment shall comply substantially with section e [f] of Rule 103 (Process--Issuance--Return) and shall notify each person upon whom it is served to appear before the court within the time set forth in Rule 307 (Time for Defendant's Initial Pleading) and show cause why the property or credits so attached should not be condemned.

Rule G47(b), Md. Rules of Procedure.

In the present case, a writ of attachment by way of garnishment was levied upon Traylor prior to the creation of the federal tax lien. Defendants Hanks, Bauer and Dombroskie have supplied this court with copies of pleadings filed by Traylor in the Circuit Court in Baltimore County in that garnishment action, and it appears that those papers were filed on or about June 26, 1978 . Since it is clear that a levy was actually made on Traylor by these defendants, they obtained a choate lien and are judgment lien creditors within the meaning of 26 U. S. C. §6323. Therefore, the claim of defendants Hanks, Bauer and Dombroskie has priority over the federal tax lien.

III. Conclusion. Accordingly, it is ORDERED this 26th day of May, 1981, by the United States District Court for the District of Maryland, as follows:

(1) Defendants Hanks, Bauer and Dombroskie's Motion for Summary Judgment (Paper 15) is GRANTED;

(2) Defendants' Motion to Strike Plaintiff's Cross Motion for Summary Judgment (Paper 18) is DENIED pursuant to Rule 6(b), Fed. R. Civ. Proc.;

(3) Plaintiff's Cross-Motion for Summary Judgment (Paper 17) is GRANTED;

(4) The Clerk shall enter judgment for defendants Hanks, Bauer and Dombroskie.

(5) The funds in the registry of the court in this case shall be paid to defendants Hanks, Bauer and Dombroskie.

¹ The discrepancy in amounts results from additions to the taxes due on the Notice of Levy.

² Although this rule specifically applies to attachment on original process, the same rule also appears to apply to attachment on judgments.

 

 

[58-1 USTC ¶9166]Gaston Electric Company v. American Construction Co., Inc., United States of America, claimant

Supreme Judicial Court, No. 11883, 12/4/57, Reversing Appellate Division, Municipal Court of the City of Boston, Commonwealth of Mass., 57-1 USTC ¶9439, 146 N. E. 2d 375

[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323(a)]

Unrecorded Federal tax lien: Effectiveness against attaching creditor.--Reversing the Appellate Division and directing that judgment be entered in the Municipal Court of the City of Boston, in favor of the claimant, the United States of America, the reviewing Court held that an unrecorded Federal tax lien for unpaid withholding taxes, as provided by 1939 Code Sec. 3672(a) and corresponding 1954 Code Sec. 6323(a), was valid against everyone except a "mortgagee, pledgee, purchaser, or judgment creditor" and that such an unrecorded lien was valid as against a creditor who had served a writ of attachment, prior to the recording of such lien and to the filing of a petition in involuntary bankruptcy, since an attachment creditor did not come within the purview of any of the excepted categories referred to in the law.

Charles F. Barrett, Rob ert J. Hoffman, Assistant United States Attorneys, for claimant. Louis A. Zonderman for plaintiff.

Present WILKINS, Chief Judge, WILLIAMS, COUNIHAN, WHITTEMORE & CUTTER, Judges.

WILKINS, Chief Judge:

In this action of contract in the Municipal Court of the City of Boston the plaintiff seeks to recover a balance of $4,498 due for labor and materials and for goods sold and delivered. The writ was dated March 11, 1954 , and a bank was served as trustee on March 12, 1954 . The writ was duly entered, and the trustee bank answered funds in the amount of $512.77. On October 29, 1954 , "an answer by way of a suggestion of bankruptcy and motion to stay the proceedings was filed on behalf of the trustee in bankruptcy" in which it was set forth that an involuntary petition was filed against the defendant on September 23, 1954 . This motion was never acted upon. The action, accordingly, was not stayed. Dunbar v. Baker, 104 Mass. 211, 212. Holland v. Martin, 123 Mass. 278, 279. Dalton-Ingersoll Co. v. Fiske, 175 Mass. 15, 19. Gray v. Chase, 184 Mass. 444, 451. Berry Clothing Co. v. Shopnick, 249 Mass. 459, 463-464. Cohen v. Industrial Bank & Trust Co., 274 Mass. 498, 501-502. Allard v. Estes, 292 Mass. 187, 193. See Reid v. Holmes, 127 Mass. 326.

On May 5, 1955 , the United States of America filed a petition to intervene, in order to recover delinquent taxes due from the defendant and to establish rights in the funds in the possession of the trustee bank. One of these was a withholding tax for the period ending June 30, 1954 , in the amount of $626.02, the assessment list covering which was received by the collector on August 2, 1954 . After hearing, the petition to intervene as claimant was allowed. The trial judge found that the funds held by the trustee bank were the property of the claimant, and ordered the trustee bank to pay them, less its costs, to the claimant. The plaintiff's "Requests For Findings of Fact and Rulings of Law" were not acted upon, because they were "mingled," and the plaintiff claimed a report to the Appellate Division as to the failure to act upon requests numbered 6, 7, 8, and 9. The Appellate Division, without passing upon those requests, dealt with "the undisputed facts . . . as a case stated," and disallowed the intervening petition. The claimant appealed.

The report to the Appellate Division was not a case stated. There was no agreement of any kind as to the facts, much less an agreement upon "all the material ultimate facts on which the rights of the parties are to be determined by the law." Scott v. Manager State Airport, Hanscom Field, 336 Mass. --, --, ¹ and cases cited. The facts were in large part contained in the testimony of the only witness, who was an officer of the Internal Revenue Service. It is only by an agreement that the findings of fact of an auditor may be made final, and this is the reason that the report of such an auditor is in effect a case stated. Merrimac Chemical Co. v. Moore , 279 Mass. 147, 151-152. Rob inson v. Lyndonville Creamery Association, 284 Mass. 396, 398.

The duty of the Appellate Division was to deal with the questions reported and with no others. The appeal brings before us the rulings of law reported by the judge to the Appellate Division and questions of law touching the action of the Appellate Division. Bresnick v. Heath, 292 Mass. 293, 296. Himelfarb v. Novadel Agene Corp., 305 Mass. 446, 447. Elliott v. Warwick Stores, Inc., 329 Mass. 406, 408. See G. L. (Ter. Ed.) c. 231, §108, as amended, §109.

There was no general request by the plaintiff that the claimant was not entitled to intervene, and this question cannot be reviewed here. Spencer v. Burakiewicz, 288 Mass. 83, 85. The failure of the trial judge to act upon the four requests reported was tantamount to a denial of them, and these questions are properly here. There was a final order of the Appellate Division which brings for our review all the rulings of law made by the trial judge and by him reported to the Appellate Division. Barry v. Sparks , 306 Mass. 80, 85. Zarrillo v. Stone, 317 Mass. 510, 511.

We shall not pass upon the technical question whether the labeling of nine requests as requests for findings of fact and rulings of law was a sufficient ground for the denial of such of them as may have been requests for rulings of law. The practice is not a good one and is unsafe, as the present case shows. We pass by this question because we are satisfied that the four requests reported could have been rightly denied on their merits.

Requests numbered 7, 8, and 9, refer to bankruptcy or the bankruptcy act. They were immaterial. Bankruptcy is not a proved fact in this case. While it is mentioned in the "answer by way of a suggestion of bankruptcy and motion to stay," there was no proof. We do not intimate that such fact would have been material.

Request numbered 6 is "That as a matter of law an attaching creditor stands in the position of a purchaser for value." "Decisions under the [Revenue] Act prior to 1913 repeatedly held that no third parties, not even innocent purchasers for value, were protected under any circumstances from an unrecorded [Federal] tax lien." MacKenzie v. United States , 109 Fed. (2d) 540, 542 (C. C. A. 9) [40-1 USTC ¶9229]. By U. S. C. (1952 ed.) Title 26, §3672(a) (Internal Revenue Code of 1939), and U. S. C. (1952 ed.) Sup. II, Title 26, §6323(a) (Internal Revenue Code of 1954), the Federal tax lien provided by U. S. C. (1952 ed.) Title 26, §3670 or §6321, respectively, is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice has been filed by either the collector of internal revenue or the Secretary of the Treasury or his delegate, respectively.

We shall treat request numbered 6 as seeking to classify the plaintiff as one to whom notice of the Federal tax lien should have been given. This is a Federal question, and the Federal courts have held that only purchasers or judgment creditors in the ordinary sense are intended. United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]. United States v. Acri, 348 U. S. 211, 213 [55-1 USTC ¶9138]. United States v. Scovil, 348 U. S. 218, 220 [55-1 USTC ¶9137]. United States v. Hawkins, 228 Fed. (2d) 517, 519 (C. A. 9) [56-1 USTC ¶9143]. An attaching creditor is not a mortgagee or pledgee. Request numbered 6 could not have been given.

Order of Appellate Division reversed.

Judgment to be entered on the finding of the Municipal Court of the City of Boston .

¹ Mass. Adv. Sh. (1957) 1041, 1042-1043.

 

 

[59-1 USTC ¶9432]Esther G. Barnes, Plaintiff-Respondent v. E. M. Hilton, Defendant, and Westport Bank, a Corporation, Garnishee, and United States of America , Intervenor-Appellant

Kansas City Court of Appeals, No. 22,898, 323 SW2d 831, 4/6/59, Rev'g and remanding Jackson Co. (Missouri) Circ. Ct., reported at, 58-2 USTC ¶9689

[1954 Code Sec. 6321]

Lien for taxes: Priority over garnishment attachment.--Lien of the United States for taxes, properly recorded on September 9, 1957, had priority over a garnishment attachment revived by the creditor on October 11, 1957, following the death of the debtor on December 21, 1956, despite the fact that the creditor had secured a final judgment against the debtor in 1952. Until the judgment was revived, it was dormant, under Kansas law, and neither execution nor garnishment could issue unless the judgment was revived against the personal representative of the judgment debtor.

O. J. Taylor, Edw. L. Scheufler, Charles K. Rice, Lee A. Jackson, and A. F. Prescott, Kansas City, Mo., and Louise Foster, Washington, D. C., for appellant. Rodger Walsh and Donald Dorei, Kansas City, Mo., and Oliver Hughes, Wichita, Kan., for respondent.

MAUGHMER, Judge:

In this case both the appellant United States of America and the respondent Esther G. Barnes assert a valid and prior lien on a certain bank account. The property involved is the sum of $3,884.75 which, when this proceeding was instituted, existed as a general deposit in the Westport Bank of Kansas City , Missouri , in the name of E. M. Hilton, who was then deceased.

[Garnishment Attachment and Lien for Taxes]

We state the facts chronologically in so far as practicable. On February 9, 1952 , respondent Barnes, in the District Court, Johnson County , Kansas , secured judgment in the sum of $13,763.62 against one E. M. Hilton. The judgment debtor Hilton died December 21, 1956 , and his widow Catherine G. Hilton was on June 12, 1957 , duly appointed as executrix of his estate by the Probate Court of Johnson County, Kansas. On June 14, 1957 , respondent Barnes filed in the Circuit Court of Jackson County, Missouri, her "petition on foreign judgment" in which the said E. M. Hilton was named defendant. There was attached an affidavit that defendant was a nonresident. The Westport Bank was summoned as garnishee under a writ of attachment. Attached to plaintiff's petition was a duly certified transcript of her Kansas judgment. The garnishee bank was served with notice on June 18, 1957 , and on September 16, 1957 , it filed answer. Therein the bank stated that (1) on the date served it had on its books an account in the name of E. M. Hilton with a credit balance of $3,884.75; (2) it had been informed the said E. M. Hilton died December 21, 1956, and (3) on September 9, 1957, an agent of the Treasury Department of the United States of America had served on it a Notice of Federal Tax Lien against said account. A copy of this lien notice was attached to the garnishee's answer. On September 24, 1957 , the court directed the garnishee to pay this money to the clerk and it did so.

In the meantime the potential parties in interest had not remained idle. Under date of October 11, 1957 , respondent Barnes secured a revivor of her judgment in the Kansas court against Catherin G. Hilton, executrix for the deceased judgment debtor and filed a duly authenticated copy with the Circuit Court in Missouri . On December 26, 1957, Catherine G. Hilton, widow, as executrix, filed her motion to intervene, to be joined as a party, and praying that the garnisheed and impounded funds be paid to her for distribution under the laws of Kansas. The record is silent as to what disposition, if any, was made of this motion.

[ United States as Intervenor]

On February 12, 1958 , appellant United States of America filed its motion to intervene. Therein it alleged (1) that E. M. Hilton and Catherine G. Hilton, his widow, were indebted to the United States of America for income taxes, penalties and interest for the taxable years 1951, 1952 and 1953, in the aggregate amount of $339,195.25; (2) that on August 30, 1957, notice and demand for payment and a jeopardy assessment were made by the District Director, Internal Revenue Service at Wichita, Kansas; (3) that on September 6, 1957, Notice of Federal Tax Lien was filed in the office of the Register of Deeds, Johnson County, Kansas; (4) that on September 9, 1957, Notice of Federal Tax Lien was filed in the office of the Recorder of Deeds, Jackson County, Missouri, and alleging that by reason thereof the Government had a prior lien, and praying that the impounded funds be paid to it.

Except for the certified copies of respondent's original judgment, its revivor against the executrix, the Letters Testamentary and the copy of the Government's Notice of Lien served on the garnishee on September 9, 1957, the record reveals no further formal proof. However, the trial court sustained the Government's motion to intervene. On March 14, 1958 , the respondent Barnes filed her motion to dismiss the Government's petition because "On the face of the petition" it has no right to intervene and no entitlement to the fund. Such a motion, if sustained, is tantamount to a confession of all facts well pleaded in such petition. Under date of June 12, 1958 , the court sustained respondent's motion to dismiss the Government's petition, entered judgment for respondent Barnes against the defendant Hilton in the sum of $16,092.52, and directed the clerk to pay the garnisheed and impounded fund of $3,884.75, less costs, to Barnes and her attorney. In due time the Government perfected its appeal. On this appeal we are concerned only with the proper disposition of the bank deposit as between Barnes and the Government.

[Jurisdiction of Circuit Court]

Appellant's first assignment of error is that the circuit court was without jurisdiction under plaintiff's petition for the reason that the defendant E. M. Hilton was dead. The petition on its face did not show that he was deceased. Moreover, after the suggestion of his death by the garnishee and before judgment, proof of revivor on October 11, 1957 , by the Kansas court and against his legal representative was made. In Missouri the bank account of a nonresident judgment debtor may be reached through execution, attachment and garnishment by the nonresident judgment holder. 26 Washington U. Law Quarterly 85; Wyeth Hardware & Manuf'g Co. v. Lang, et al., 29 S. W. 1010; Harris v. Balk, 198 U. S. 215, 25 S. Ct. 625. As stated by Judge Douglas for our Supreme Court in State ex rel. v. Kirkwood , 138 S. W. 2d 1009, 1011: "* * * it is settled that in this state one non-resident may sue another by attachment". Appellant says that under Kansas law, Ballinger v. Redhead, 1 Kan. App. 434, 40 P. 828, the judgment became dormant upon the death of the defendant. Even so, it became reanimated when the revivor judgment was entered. We believe the circuit court had jurisdiction at the time it entered judgment.

[Jurisdiction of This Court]

Respondent also questions our jurisdiction of this appeal, asserting that the dismissal of appellant's petition was a discretionary act, did not amount to a final judgment for the purpose of appeal, and that the proper corrective remedy, if any, is mandamus. As authority we are offered the opinion in State ex rel. Duggan v. Kirwood, 208 S. W. 2d 257. This case holds that mandamus is a proper remedy to require a trial court to permit intervention. In our case intervention was granted but the intervenor's petition was dismissed (denied) on the merits. We think the United States of America has an interest in the garnisheed funds and was properly joined as an intervenor. Moreover, Section 525.090, V. A. M. S., Garnishments, specifically provides: "Any person claiming property, money, effects or credits attached in the hands of a garnishee, may interplead in the cause, as provided by law in attachment cases; * * *". Respondent also says that in United States v. Acri, 348 U. S. 211, 75 S. Ct. 239 [55-1 USTC ¶9138], the Supreme Court of the United States held that: "The relative priority of the lien of the United States for unpaid taxes is, * * * always a federal question to be determined finally by the federal courts". While this is true, it does not follow that state courts should not and may not enforce such federal determinations in their own forums. Besides, Section 14.070, 3 V. A. M. S. specifically provides that suits for collection of Federal Internal Revenues "* * * may be brought in the several courts of this state, in like manner and effect as suits under the laws of this state". We rule this point against respondent. She next asserts that appellant's petition sought to inject an independent issue and action into the case, namely, the question of E. M. Hilton's tax liability. The question as to whether or not Mr. Hilton is or was liable for unpaid federal income taxes and if so, how much, is not an issue in this litigation.

[Priority]

Having disposed of the preliminary objections and assignments set forth by both appellant and respondent we now approach the principal and vital issue; that is, do each of these parties have a valid, existing lien or quasi lien upon the garnisheed bank deposit and if so, which is prior?

We first set forth some of the provisions of the Internal Revenue Code of 1954. Section 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 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 6322. 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".

Section 6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

"(a) 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--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subpect 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; * * *".

Garnishment generally, and certainly in Missouri , is a purely statutory proceeding. Before a judgment can be entered against a garnishee there must have been a prior, valid execution and unless there was a valid, existing judgment, there could be no valid execution. In Flynn v. Janssen, 284 S. W. 2d 421, 422, the Supreme Court said: "This because garnishment is purely a statutory proceeding, and under Section 525.010 RSMo 1949, V. A. M. S., which provides for subjecting persons 'to garnishment, on attachment or execution,' and the next section 525.020, a prior execution is essential. Gilbert v. Malan, 231 Mo. App. 469, 100 S. W. 2d 606. And, as pointed out in 38 C. J. S., Garnishment, Sec. 16, such prior execution must be valid. As there was no underlying judgment in the main case, there could have been no valid execution, and hence nothing to support garnishment proceedings".

In Hoffman v. Mechanics-American Nat. Bank, 249 S. W. 168, 171, the court quoted with approval as follows from Hauptman & Co. v. Whittle, 85 Mo. App. 188, 191: `The law is settled by the statute and adjudications, as well as the statement of textwriters, that before a judgment can be entered against a garnishee one must have been rendered against the principal defendant. R. S. 1889, Sec. 5332; Miller v. Anderson , 19 Mo. App. 71; Drake on Attachment, Sec. 460. A judgment against the principal defendant is the foundation upon which that against the garnishee must rest; and one prosecuting a garnishment should show that he has valid judgment against the defendant before having one entered against the garnishee. The burden was on him and not the garnishee.'" See also, Rob erts v. Meek, 45 S. W. 2D 537; Flynn v. Janssen, et al., 266 S. W. 2d 666.

In United States v. Acri, supra (348 U. S. 211, 75 S. Ct. 239 [55-1 USTC ¶9138]), defendant Acri was convicted of the murder of one Oravec, whose personal representative on August 6, 1947 , filed an action against Acri for wrongful death. On the same date certain cash and bonds were attached. The personal representative obtained judgment but in the meantime, after issuance of the writ of attachment but before judgment, the Government recorded its tax lien. The Supreme Court of the United States held first, that the relative priority of the lien of the United States for unpaid taxes is always a federal question to be finally determined by the federal courts; second, that although the Ohio courts (venue of the litigation) had designated an attachment lien "an execution in advance", such was not binding upon the United States Supreme Court; and, third, that where the federal tax lien was recorded subsequent to the attachment lien, but prior to the date the attaching creditor obtained judgment, the United States tax lien was prior.

In United States v. Liverpool & London & Globe Ins. Co., 75 S. Ct. 247 [55-1 USTC ¶9136], the Texas furniture store property of one Adams was destoryed by fire. Respondent company, as insurer, agreed upon the amount of the loss. Before payment was made the Sunnyland Wholesale Furniture Company sued the insured on an open account, attached and granisheed the insurance funds and later secured a judgment. In the meantime, and before such judgment, the United States perfected its tax liens against the fund. It was held that the United States tax liens were superior and prior.

[Effect of Death of Debtor]

These two cases seem to hold that attachment and garnishment before claimant has a valid, enforceable, final judgment, will not establish a lien entitled to precedence over a government tax lien established later but before such a judgment. It is true that in neither of these two federal cases had the garnishor reduced his claim to final judgment as the time the Government recorded its tax lien and "proved it up" as to the garnisheed tangible personal property, whereas in our case the respondent garnishor had secured a final judgment against E. M. Hilton in the state of Kansas. But before respondent Barnes inaugurated any proceedings in Missouri against the Westport Bank deposit, her judgment debtor had died. She had an existing, but dormant judgment in Kansas and one on which neither execution nor garnishment could issue unless the judgment was first revived against the personal representative of the judgment debtor, and until so revived, it was not an active, current, valid judgment. Prior to its being reactivated by revivor, the the judgment was not enforceable in Kansas . Nor will Missouri courts enforce a Kansas judgment which is not enforceable by the Kansas courts. Our own laws too, require revivor of judgments against a deceased defendant before execution.

We do not deem it necessary to decide in this case whether respondent should have dismissed her Missouri action and started again against the executrix after October 11, 1957 , when her basis judgment was revived. We do hold that her lien, actual or equitable, did not attach prior to this latter date when her judgment became valid, alive and enforceable, that is, on October 11, 1957 .

[Government Had a Prior Lien]

Now, did the Government lien for unpaid taxes attach and become enforceable prior to October 11, 1957 ? It should first be noted that under the provisions of the Internal Revenue Code set out supra, it is not required that the Government reduce its claim to judgment in order for its lien to become effective. On February 12, 1958 , appellant, United States of America , filed its motion to intervene. Therein it asserted the tax indebtedness of Mr. and Mrs. Hilton, alleged that on August 30, 1957, notice and demand for payment was made, a jeopardy assessment levied by the District Director at Wichita, Kansas, the state in which the parties were domiciled, on September 6, 1957, notice of the tax lien was filed in Johnson County, Kansas, and on September 9, 1957, in Jackson County, Missouri.

The case comes to us on appeal with all of these factual allegations admitted, since the court sustained the respondent's motion to dismiss the intervening petition of the Government. It appears, therefore, that under the sections of the Internal Revenue Code set forth above, the Government's general lien attached on August 30, 1957 , when notice, demand for payment and the jeopardy assessment were made in the state of Kansas . But under Section 6323, supra, such lien would not be valid against a judgment creditor until notice thereof had been filed in the office of the Recorder of Deeds (in Missouri ) where the property subject to the lien is situated. Therefore, the lien did not become effective against the judgment creditor and respecting this particular property until September 9, 1957 , when the notice was filed in the office of the Recorder of Deeds, Jackson County, Missouri, and notice of such lien served on the Westport Bank. We believe, therefore, and hold that under the facts as pleaded in the Government's intervening petition, its lien against this particular bank deposit became valid and effective on September 9, 1957 . See also, United States v. Eiland, 223 Fed. (2d) 118, 122 [55-1 USTC ¶9487].

It follows, therefore, that since the Government's lien attached on September 9, 1957 , and the respondent's lien did not become effective prior to October 11, 1957 , in respect to this particular fund, the Government's lien is superior and prior. However, it may be that respondent Barnes might desire to put the Government to proof as to the factual allegations of its intervening petition. If she does, she should be afforded an opportunity to do so.

Accordingly, that part of the judgment dismissing appellant's petition in intervention is reversed and the court is directed to reinstate same. In addition, that part of the judgment directing payment of the impounded fund of $3,884.75, less costs, to respondent and her attorney, is reversed and the cause is remanded for trial on the merits and in accordance with this opinion.

[Concurring Opinion]

SPERRY, C., concurs:

PER CURIAM: The foregoing opinion of Maughmer, C., is adopted as the opinion of the Court. All concur.

 

 

[82-2 USTC ¶9489]Phillips & Jacobs, Inc., Plaintiff v. Color-Art, Inc., Agent Harold Klemmetsen Defendant v. Trust Company Bank of Cobb County Garnishee and Third Party Plaintiff v. United States of America, Third Party Defendant by Interpleading on Behalf of Trust Co. Bank of Cobb County

U. S. District Court, No. Dist. Ga. , Atlanta Div., Civil Action No. C80-1904-A, 553 FSupp 14, 6/14/82

[Code Sec. 6323]

Lien for taxes: Priority: Judgment creditor.--Under Georgia law, money placed on deposit in a bank becomes a chose in action to which a federal tax liencould attach. A properly filed Notice of Federal Tax Lien validates a tax lien as to purchasers, holders of a security interest and judgment creditors, and is superior to and entitled to priority over any lien created by a summons of garnishment filed later by a judgment creditor.

James Cifelli, Cotton, Katz, White & Palmer, 46 Fifth, Atlanta, Georgia 30365, for plaintiff, J. Al Cochran, Camp, Snipes & Davis, Atlanta, Georgia 30080, for 3d party plaintiff. Curtis, L. Muncy, Department of Justice, Washington, D. C. 20530, for third party defendant.

Order

HALL, District Judge:

This matter came before the Court of the motion for summary judgment of the United States of America . Counsel for Phillips & Jacobs, Inc., Color-Art, Inc., and Trust Company Bank of Cobb County have failed to respond to the motion for summary judgment of the United States. Pursuant to Local Federal Rule 91.2, a failure to file a response to a motion indicates that there is no opposition to the motion. The Court, having considered the memorandum of law and other documents submitted by the United States in support of its motion for summary judgment and the pleadings on file, hereby makes the following findings of fact and conclusions of law as required by Rule 52(a) of the Federal Rules of Civil Procedure:

Findings of Fact

1. This is an interpleader action brought by the Trust Company Bank of Cobb County (Trust Company Bank) to interplead the amount of $9,707.32, which the taxpayer-defendant, Color-Art, Inc., had on deposit with Trust Company Bank as of October 6, 1980 .

2. This action was originally commenced in the State Court of Cobb County , State of Georgia , on or about October 6, 1980 . Pursuant to the Petition for Removal of the United States filed on November 4, 1980 , and 28 U. S. C. Sections 1444 and 1446, this action was removed from the State Court to this Court.

3. On the following dates and in the following amounts the United States assessed withholding income and FICA taxes, interest, and penalties, against the taxpayer-defendant, Color-Art, Inc., and gave notice and demand for payment of such amount: On March 19, 1979, in the amount of $4,752.98 in tax, $1,212.01 in penalties, and $107.56 in interest; on April 9, 1979, in the amount of $4,872.25 in tax, $755.20 in penalties, and $55.93 in interest; on September 24, 1979, in the amount of $12,575.06 in tax, $2,348.07 in penalties, and $190.78 in interest; on June 9, 1980, in the amount of $5,631.64 in tax, $426.50 in penalties, and $116.41 in interest; on June 30, 1980, in the amount of $4,824.02 in tax, $289.44 in penalties, and $96.74 in tax.

4. Notices of Federal Tax Lien were filed with the Clerk of Superior Court, Cobb County , Georgia , on August 3, 1979 , in the amount of $16,058.17, on November 16, 1979 , in the amount of $2,884.30, and on May 22, 1980 , in the amount of $11,190.14.

5. On August 28, 1980 , the plaintiff, Phillips & Jacobs, Inc., caused a summons of garnishment to be served upon Trust Company Bank, by which it sought, as a judgment creditor of the taxpayer-defendant, Color-Art, Inc., to garnish all property of Color-Art, Inc. which was in the possession of Trust Company Bank.

6. On September 12, 1980 , a Notice of Levy was served upon Trust Company Bank by the United States .

Conclusions of Law

1. This action was brought under 28 U. S. C., Section 2410(5), and is properly before this Court pursuant to 28 U. S. C., Section 1444. The Court has jurisdiction over the parties and the subject matter.

2. In deciding whether the plaintiff, Phillips & Jacobs, Inc., or the defendant, United States of America, is entitled to the fund interplead it is necessary for this Court to look to state law to determine the nature of the legal interest and to federal law to determine the consequences attaching thereto. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513-514 (1960); Randall v. Nakashima [76-2 USTC ¶9770], 542 F. 2d 270, 273 (5th Cir. 1976); United States v. Citizens and Southern National Bank [76-2 USTC ¶9665], 538 F. 2d 1101, 1105 (5th Cir. 1976), cert. denied, 430 U. S. 945 (1977).

3. It is settled law in Georgia that a person who places money in a bank on general deposit loses title to the money and creates a creditor-debtor relationship with the bank. The funds deposited are transformed into a chose in action. United States v. Citizens and Southern National Bank, supra at 1105; Macon National Bank v. Smith, 170 Ga. 332, 153 S. E. 4 ( Ga. 1930); Fulton County v. Wright, 146 Ga. 447, 91 S. E. 487 ( Ga. 1917).

4. A chose in action is property or rights to property to which a federal tax lien will attach. United States v. Citizens and Southern National Bank, supra at 1105; United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197, 200 (5th Cir. 1963); Internal Revenue Code of 1954, Section 6321.

5. All monies placed on deposit by the taxpayer-defendant, Color-Art, Inc., with Trust Company Bank created in the taxpayer-defendant a chose in action to which a federal tax lien would attach. United States v. Citizens and Southern National Bank, supra at 1105; United States v. Hubbell, supra at 200.

6. A federal tax lien arises upon assessment and demand, and attaches to all property or rights to property of the taxpayer, including property acquired after the date of the assessment. Internal Revenue Code of 1954, Sections 6321 and 6322; Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945).

7. A properly filed Notice of Federal Tax Lien validates a tax lien as to purchasers, holders of a security interest, and judgment lien creditors. Internal Revenue Code of 1954, Section 6323.

8. The United States holds a federal tax lien valid as against purchasers, holders of security creditors, and judgment creditors as of August 3, 1979 , November 16, 1979 , and May 22, 1980 , the dates of the filing of the Notices of Federal Tax Lien by the United States .

9. Under Georgia law a judgment creditor may not create a lien upon a debtor's chose in action except by way of summons of garnishment. Georgia Code, Section 39-113; Kilgore v. Buice, 229 Ga. 445, 192 S. E. 2d 256 ( Ga. 1972); General Lithography Company v. Sight and Sound Projection Production, Inc., 128 Ga. App. 304, 196 S. E. 2d 479 ( Ga. App. 1973).

10. When the plaintiff, Phillips & Jacobs, Inc., on August 28, 1980, caused a summons of garnishment to be served upon Trust Company Bank, the United States held a valid federal tax lien on all property and rights to property, including the chose in action of the taxpayer-defendant, Color-Art, Inc., which is superior to and entitled to priority over any lien created by the summons of garnishment of the plaintiff, Phillips & Jacobs, Inc.

11. There exists no genuine dispute as to any material fact and the United States is entitled to judgment in its favor awarding it the interplead fund as a matter of law. Rule 56(c) of the Federal Rules of Civil Procedure.

 

 

[72-1 USTC ¶9391]Investors Capital Corporation v. Albert W. Schmidt, et al.

Court of Common Pleas, Fairfield County, No. 96363, 4/10/72

[Code Sec. 6323]

Lien for taxes: Priority over other creditors: Judgment lien: Time sequence of perfection.--A lien for taxes had priority over the lien of a judgment creditor where the judgment was rendered after attachment of the Federal lien, the judgment lien being inchoate under state law at that time.

Cohen & Wolf, 955 Main St. , Bridgeport , Conn. , for plaintiff. R. N. Talarico, 156 Main St., Danbury, Conn., for City of Danbury, Edward J. Markosky Jr., 158 Deer Hill Rd., Danbury, Conn., for B. Cyr & L. Light, Rob ert J. Michael P. O. Box 88, Danbury, Conn., for D. B. Hurlburt, David S. Grossman, P. O. Box 139, Brookfield, Conn., for A. & R. Schmidt, Levin & Charmoy, 1188 Main St., Bridgeport, Conn., for Intl. Order of Golden Rule, Inc. & Tri State Electric Supply & Novelty Corp., Wayne A. Baker, 225 Main St., Danbury, Conn., for S. T. LaCava, S. H. Jones, United States Attorney, T. F. Maxwell, Assistant United States Attorney, New Haven, Conn., for defendant.

Memorandum of Decision

LEVINE, Judge:

I. The dispute herein is between two competing claimants, to wit, Dorothy B. Hulbert and the United States of America , relative to the remaining proceeds of a foreclosure by sale of a second mortgage.

[Facts]

Investors Capital Corporation commenced the present foreclosure action against Defendants Albert and Ruth Schmidt, based on a second mortgage on premises in Danbury , Connecticut . The sale price was $43,032.50. By virtue of prior orders of this Court, all sums received on the sale have been disbursed; except for $2,086.84, now being held by the Clerk.

Mrs. Hulbert's claim to the remaining proceeds arises from her attachment against Mr. and Mrs. Schmidt, recorded against the premises on January 18, 1968 . She thereafter obtained a judgment against the Schmidts on October 30, 1970 . On December 10, 1970 , and within 4 months of rendition of the judgment, a Judgment Lien was recorded by Mrs. Hulbert in the Danbury Land Records against the Schmidt premises. The judgment debt was $10,795.96, of which $9,795.96 remains unpaid.

The United States filed a "Notice of Federal Tax Lien" against the Schmidts in the Danbury Land Records, on December 1, 1969 . The notice referred to an assessment date of May 16, 1969 , and was based on unpaid income taxes. The sum claimed due under the lien was $2,589.72. Filing of such a lien against real property in Connecticut is authorized by Sec. 49-32a, Gen. Stats.

Thus, the attachment and Judgment Lien filed by Mrs. Hulbert "straddle" the U. S. tax lien.

The Federal tax lien must prevail over the Hulbert claim, as to the remaining proceds of the sale, for the reasons indicated hereinbelow.

[Federal Law]

II. It is settled law, in connection with the priority status of two competing liens, that where one arises under state law, and the other constitutes a Federal tax lien, a Federal question is presented. U. S. v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 49. In Aquilino v. U. S. [60-2 USTC ¶9538], 363 U. S. 509, 514, the Court said:

"We enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property'."

Hence, to the extent that there may be conflict between the Connecticut statutes or case law, and the applicable Federal rule, in the instant situation, the Federal authorities must control.

[Perfection of Lien]

III. The Federal tax lien is authorized by 26 USCA, §6321. The lien arises on the date on which the assessment is made. 26 USCA, §6322. However, as to certain creditors, including "judgment lien creditors", the lien is not perfected or valid, until duly filed with the proper state office. 26 USCA, §6323(a). Accordingly, the validity of the Federal lien herein can date only from December 1, 1969 , when it was filed in the Danbury Land Records.

The Hulbert attachment, when made on January 18, 1968 , was an "inchoate" lien. Phrased another way, it was a mere quasi lien, of a limited nature, which constituted, at the most, no more than an inchoate and contingent property interest. Meyers v. C. I. T. Corp., 132 Conn. 284, 287. Thus, since the Connecticut courts have described the lien as inchoate, this classification is "practically conclusive". Illinois v. Campbell , 329 U. S. 362, 371.

While the identity of the lienor, and the property attached, were clearly apparent, under the Hulbert attachment, the amount payable was not yet liquidated, and had to await the contingency of entry of final judgment. Therefore, the Hulbert attachment was not "choate", under Federal standards, as of the date the Federal tax lien was filed. U. S. v. Pioneer American Life Ins. Co. [63-2 USCT ¶9532], 374 U. S. 84, 89. However, the Federal lien was a choate and perfected lien, as of December 1, 1969 , pursuant to 26 USCA, §6323(a).

The 1968 Hulbert attachment, hence, must be deemed subordinate to the 1969 Federal tax lien, under the "choateness" doctrine. U. S. v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213. Plumb, "Federal Liens and Priorities", 77 Yale Law Journal 228, 230. 5 Rabkin and Johnson, Federal Income, Gift and Estate Taxation, (1972), p. 7337A.

In United Aircraft Corp. v. Edgerton and Sons, Inc. [62-2 USTC ¶9633], 208 F. Supp. 238 (D. C. Conn. 1962), the Court stated:

". . . a prior inchoate lien is inferior to a subsequent choate federal tax lien". (p. 239)

To the same effect, see U. S. v. Bailey [56-1 USTC ¶9225], 137 F. Supp. 578, 579 (D. C. Conn. 1955).

[Relation Back Doctrine]

IV. Mrs. Hulbert's principal contention is that, even assuming that her attachment was inchoate, as of the date of its filing, it thereafter became choate, by virtue of filing of her Judgment Lien, under §49-44, Gen. Stats., and its relation back to the date of the original attachment.

Section 49-44 provides, in part, that if the Judgment Lien is filed within four months of the date of rendition of the judgment, it shall "hold", or relate back, to the date of the original attachment.

The research of counsel, and the Court's own investigation, have not disclosed any Connecticut authority directly in point, involving the applicability of the relation back argument to the status of a Federal tax lien.

In the leading case of U. S. v. Security Trust and Savings Bank, supra, the identical assertion was pressed by an attaching creditor, under California law, seeking to achieve a priority over several Federal tax liens. The Supreme Court, in rejecting this argument, stated:

"Nor can the doctrine of relation back--which by process of judicial reasoning merges the attachment lien in the judgment, and relates the judgment lien back to the date of attachment--operate to destroy the realities of the situation. When the tax liens of the United States were recorded, Morrison (the attaching creditor) did not have a judgment lien. He had a mere 'caveat of a more perfect lien to come'. New York v. MacLay, 288 U. S. 290, 294." (p. 50).

In accord, Youngstown S. and T. Co. v. Patterson-Emerson-Comstock Co. [64-1 USTC ¶9128], 227 F. Supp. 208, 214 (D. C. N. D. Ind. 1963).

The court concludes that the Security Trust case is controlling, as to this phase of the problem. While the relation back doctrine may be successful, in determining the priorities between certain private lien claimants, it cannot defeat the Federal tax priority, under the facts of the instant case.

V. It is found that the U. S. tax lien takes priority over Mrs. Hulbert's claim, whether based on the attachment, the Judgment Lien, or both. Mrs. Hulbert's motion, seeking payment of the balance of the proceeds taken, is denied.

The Clerk of this Court is therefore ordered to disburse, from funds now held by said Clerk, the entire remaining sum of $2,086.84, to the United States of America , for application to the said Federal tax lien filed against Mr. and Mrs. Schmidt.

 

 

[71-2 USTC ¶9749]Melvin Bailey, Sheriff of Jefferson County, Alabama, Plaintiff v. United States of America; City of Birmingham, a municipal corporation; Rob ert C. Barnett, an individual; and Henry Minnifield, an individual, Defendants

U. S. District Court, No. Dist. Ala. , So. Div., Civil Action No. 71-191, 10/22/71

[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]

Validity of lien: Priority: Attorney's fees: Judgment lien: Attachment lien: Notice of levy.--The government's lien was entitled to priority over three separate and distinct liens filed to recover unpaid attorney's fees. First, a judgment lien did not have priority since the filing of notice of the lien antedated the attorney's acquisition of the judgment. Secondly, an attachment lien was subordinate to the federal tax lien under the common law doctrine of "first-in time, first-in right." Thirdly, an attorney's lien was both unenforceable under state law and inchoate under the Federal Tax Lien Act because the client's suit was prosecuted to a judgment subsequent to the date of recordation of the federal tax lien. Furthermore, there was no requirement of notice of levy and even if notice were required the logical repository was the custodian of the property, which would be the sheriff through his clerk (the party served by the government).

Richard Dominick, Dominick, Fletcher, Yeilding & Dominick, 927 Brown-Marx Bldg., Birmingham, Ala., for plaintiff. William A. Thompson, 600 City Hall, Birmingham, Ala., Rob ert C. Barnett, Barnett, Tingle & Noble, 912 City Fed. Bldg., Birmingham, Ala., for Barnett & Minnifield, Wayman G. Sherrer, United States Attorney, Henry I. Frohsin, Assistant United States Attorney, Birmingham, Ala., for defendants.

Judgment

LYNNE, Chief Judge:

In conformity with the thoroughly excellent memorandum prepared by Kirby Sevier, Law Clerk, a copy of which is attached hereto, in which the Court concurs,

It is ORDERED, ADJUDGED and DECREED by the Court that defendant and cross-complainant, United States of America, is entitled to recover the sum of $1,722.89 on deposit in the Registry of this Court in partial satisfaction of the lien filed by the United States of America by and through the Internal Revenue Service in the amount of $2,211.50, after deduction of the costs of court incurred herein in the amount of $38.64.

It is further ORDERED, ADJUDGED and DECREED by the Court that the Clerk of this Court is directed to draw a check on the funds on deposit in the Registry of this Court in favor of the United States of America, in the amount of ONE THOUSAND SIX HUNDRED EIGHTY-FOUR AND 25/100 DOLLARS ($1,684.25,) and deliver the same to Wayman G. Sherrer, United States Attorney for the Northern District of Alabama.

It is further ORDERED, ADJUDGED and DECREED by the Court that the Clerk of this Court be directed to draw a check on the funds on deposit in the Registry of this Court in the amount of THIRTY-EIGHT AND 64/100 DOLLARS ($38.64), in favor of Richard Dominick, the attorney of record for Melvin Bailey, Sheriff of Jefferson County, Alabama, the plaintiff in interpleader, and deliver the same to Richard Dominick at 927-934 Brown-Marx Building, Birmingham, Alabama 35203.

Memorandum

TO: Judge Seybourn H. Lynne

FROM: Kirby Sevier, Law Clerk

Re: Melvin Bailty v. United States , et al., CA 71-191

DATE: October 13 1971

This action was commenced by a bill of interpleader filed by Jefferson County Sheriff Melvin Bailey in attempt to ascertain the priority among claimants to a sum of money presently being held in his custody. The pertinent facts of the case, as disclosed in the pleadings and confirmed orally by the attorneys of record on September 28, 1971 , are hereinafter set forth.

Facts

On February 25, 1971 , Henry Minnifield was arrested at his home and confined in the Birmingham City Jail. At the time of his arrest, Minnifield's home was searched by police officers pursuant to a warrant authorizing the seizure of any drugs or narcotics found on the premises. During the course of this search, the arresting officers uncovered and confiscated, among other things, currency and coins in the aggragate amount of $1,722.89. This sum was deposited with the custodian of the city jail at the time of Minnifield's incarceration.

Later the same day, Minnifield, through his attorney, Rob ert C. Barnett, filed a suit in detinue against the City of Birmingham in the Circuit Court of the Tenth Judicial Circuit of Alabama. By order of the circuit court, the $1,722.89 which had been removed from Minnifield's home was immediately transferred by the jail custodian to Sheriff Melvin Bailey.

Still later on February 25th, the United States Government filed in the state probate court notice of a federal tax lien against Minnifield in the amount of $2,211.50. [Such filing was in strict compliance with Tit. 33, Ala. Code §9, which filing requirement is expressly authorized by the Federal Tax Lien Act at 26 U. S. C. A. §6323(f)]. Acting through local Internal Revenue agent H. R. Forehand, the Government on February 26th served a "Notice of Levy" on Sheriff Bailey's clerk covering all of the funds belonging to Minnifield then being held in the Sheriff's custody.

Contemporaneous with the service of this "Notice of Levy," attorney Rob ert C. Barnett initiated a suit against Minnifield in the Circuit Court of Jefferson County seeking to recover unpaid attorney's fees in the amount of $1,710.00. On the same day (February 26th) Barnett secured the issuance of a writ of attachment whereby the clerk of the circuit court ordered Sheriff Bailey to attach $1,710.00 of the funds belonging to Minnifield which were then in his custody. Although it is not clear from the record whether Barnett has successfully prosecuted his claim for attorney's fees to a judgment, for purposes of this memorandum it will be assumed arguendo that a judgment was obtained at some time on or after February 26, 1971 . As will be seen, the fact that Barnett may have ultimately secured a judgment against Minnifield will have no bearing whatsoever on the rights of the parties in the case sub judice.

[Parties Contentions]

In view of the conflicting claims to the funds held in his custody, Sheriff Bailey filed a Bill of Interpleader in this Court on March 5, 1971 , praying that the City of Birmingham , Henry Minnifield, the United States Government, and Rob ert C. Barnett be compelled to interplead and settle among themselves their respective rights to the $1,722.89. The following positions have been submitted by way of answer by the four defendants-in-interpleader:

(1) The City of Birmingham claims no right or interest in the funds in question.

(2) Henry Minnifield claims that he has never been effectively divested of ownership of the disputed funds since they were unlawfully taken from his home pursuant to a warrant which only authorized seizure of narcotics and drugs.

(3) The United States claims that it is entitled to recover all of the funds by virtue of its unsatisfied tax lien which was properly filed on February 25, 1971 .

(4) Rob ert C. Barnett claims that he is entitled to recover $1,710 out of the funds by virtue of either a judgment lien, attachment lien, or attorney's lien, all of which were admittedly acquired after the filing of the Government's tax lien. With particular refernce to the federal tax lien, Barnett contends that such lien should in no event prevail over his liens because the Government's "Notice of Levy" was served on Sheriff Bailey's clerk rather than on the clerk of the circuit court. (This latter contention was submitted orally on September 28, 1971, and does not appear in Barnett's answer.)

It is conceded by all parties that Minnifield's position is well founded in that he could not have been divested of title to the disputed funds through the wrongful seizure perpetrated by the Birmingham police. However, since both the Government and Barnett are bona fide creditors of Minnifield whose respective claims to the funds are wholly derivative from the debtor's ownership rights, Minifield himself is obviously not entitled to retain title as against either of these claimants. Consequently, this case boils down to a priority dispute between two creditors--the United States Government and Rob ert C. Barnett. The narrow issues that must be decided are as follows:

(1) Does the Government's federal tax lien take priority over Barnett's judgment lien, attachment lien, and attorney's lien, each of which was acquired, if at all, after the filing of the tax lien?

(2) Assuming that the federal tax lien is deemed superior to the liens asserted by Barnett, should such federal lien be stripped of its priority on the ground that the Government's "Notice of Levy" was served on Sheriff Bailey's clerk rather than on the clerk of the circuit court?

Discussion

Since defendant-in-interpleader Barnett is potentially armed with three separate and distinct liens in support of his claim, each of these liens will be independently measured against the strictures of the Government's tax lien to determine which has priority.

[Judgment Lien]

First, with respect to Barnett's judgment lien, §6323(a) of the Federal Tax Lien Act is controlling. This section provides in pertinent part as follows:

The [federal tax] lien imposed by section 6321 shall not be valid as against any . . . judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate. 26 U. S. C. A. §6323(a) (emphasis added.)

The unmistakable implication of this provision, as the courts have consistently recognized, is that the filing of notice of a federal tax lien instills such lien with priority as against any judgment lien thereafter acquired. E.g., United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); Youngstown Sheet & Tube Co. v. Patterson-Emerson-Comstock of Indiana [64-1 USTC ¶9128], 227 F. Supp. 208 (N. D. Ind. 1963). In the instant case, since the filing of notice of the tax lien antedated Barnett's acquisition of a judgment against Minnifield, it is clear that Barnett's claim to priority on the basis of a judgment lien is untenable.

[Attachment Lien]

Secondly, with respect to Barnett's attachment lien, such lien is unquestionably subordinate to the antecedent federal tax lien under the common law doctrine of "first-in time, first-in right." It might be noted that even had the attachment lien been acquired prior to the filing of notice of the tax lien, under the Supreme Court's landmark decision in United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 41 (1950), the federal lien would nevertheless prevail. On the basis of the Security Trust case, Professor Riesenfeld sums up the current status of prejudgment attachment liens asserted in the face of federal tax liens as follows:

Today all liens obtained by judicial proceedings prior to judgment must be considered postponed to federal tax liens acquired prior to the judgment. . . . S. Riesenfeld , Creditors' Remedies & Debtors' Protection, ch. 2, at 202 (1967) (citing numerous federal decisions upholding the superiority of federal tax liens over prejudgment attachment and garnishment liens).

[Attorney's Lien]

Thirdly, with respect to Barnett's attorney's lien, it is now well settled under Alabama law that although an attorney's lien arises upon the filing of suit on a client's behalf, such lien is not enforceable until the client's suit has been prosecuted to a judgment. Wade v. Kay, 210 Ala. 122, 97 So. 129 (1923); Peach v. Drennen, 253 Ala. 271, 44 So. 2d 257 (1950). Moreover, under the Federal Tax Lien Act, it has been consistently held that when an attorney has not procured a judgment on behalf of his client as of the date of recordation of a federal tax lien against such client, the attorney's lien is "inchoate" and therefore subordinate to the tax lien. E.g., United States v. Pay-O-Matic Corp. [58-2 USTC ¶9533], 162 F. Supp. 154 (S. D. N. Y. 1958), aff'd, United States v. Goldstein [58-1 USTC ¶9478], 256 F. 2d 581 (2d Cir.), cert. denied, 358 U. S. 830 (1958); Annotation, 94 A. L. R. 2d §15, at 782; 35 Am. Jur. 2d §22, at 39, n.3. Accordingly, in the case at bar, Barnett's failure to procure a judgment on behalf of Minnifield before February 25, 1971 , renders his attorney's lien both unenforceable under Alabama law and "inchoate" under the Federal Tax Lien Act.

[Notice of Levy]

Turning to Barnett's final argument--i. e. that the Government should be stripped of its priority because its "Notice of Levy" was served on Sheriff Bailey's clerk rather than on the clerk of the circuit court--an analysis of the authorities in point reveals that this argument is also devoid of merit. The Federal Tax Lien Act itself contains no specific requirement for giving notice of an impending levy. The Act merely requires that "[a]s soon as practicable after seizure of property, notice in writing shall be given . . . in the case of personal property [to] . . . the possessor thereof." 26 U. S. C. A. §6335(a) (emphasis added). Under Alabama law, notice of levy is required only when the contemplated execution is to be effected on a debtor's real property. Tit. 7, Ala. Code §531. In construing this requirement, the Alabama courts have repeatedly held that failure to afford the requisite notice is a mere irregularity, which will not in itself render a subsequent execution and sale void. E.g., White v. Farley, 81 Ala. 563, 8 So. 215 (1886). There is no requirement under Alabama law for notice of levy with respect to a debtor's personal property, and the few states which have such a requirement uniformly direct that the notice be served on the possessor of the property. See 33 C. J. S., Executions, §§ 97(b)(8) and 104, at 250, 256-57. Presumably, sumably, any requirement of notice of levy with respect to personalty is imposed merely as a matter of formality and admin istrative courtesy intended to apprise the custodian of such property that an execution will be forthcoming on a designated future date. In light of the foregoing principles, I conclude (1) that there is no requirement of notice of levy in the present factual context, and (2) that even if notice were required on some novel basis, the only logical repository for such notice would be the custodian of the property to be levied upon, which in this case would be Sheriff Bailey through his clerk.

On the basis of the conclusions set forth herein, it is clear beyond the purview of a doubt that the United States Government is entitled to recover the $1,722.89 presently held in Sheriff Bailey's custody.

 

 

[62-2 USTC ¶9604]United States of America, Smith, Inc., Intervenor v. Proctor Reels, Inc., Ludlow Savings Bank & Trust Co., James S. Abatiell, James S. Abatiell, Trustee

U. S. District Court, Dist. Vt. , Civil Action 3272, 6/26/62

[1954 Code Sec. 6323]

Priority of liens: Federal tax lien: Attachment lien: Attorney's lien.--The Government's tax liens had priority over an attachment lien where the tax liens were filed before the attachment creditor obtained judgment. A lawyer failed to establish a valid lien for attorney's fees.

Joseph F. Radigan, United States Attorney, Rutland, Vt., Richard W. Perkins, John G. Penn, Department of Justice, Washington 25, D. C., for plaintiff. A. Luke Crispe, 114 Main St. , Brattleboro , Vt. , for Smith, Inc., intervenor. Theodore Corsones, Rutland, Vt., for Proctor Reels, Inc.; Frederick J. Glover, Ludlow, Vt., for Ludlow Savings Bank & Trust Co.; Arthur E. Crowley, James S. Abatiell, Rutland , Vt. , for J. S. Abatiell, defendants.

Statement of the Case

GIBSON, District Judge:

The plaintiff, United States of America , brought this action, pursuant to Sections 7401 and 7403 of Title 26, U. S. C. A., to foreclose tax liens against the defendants. The tax liens arose upon the failure of defendant, Proctor Reels, Inc., to pay unemployment and withholding tax liabilities incurred in the years 1957, 1958 and 1959. Defendant Ludlow Savings Bank & Trust Co. holds on deposit money deposited by Proctor Reels, in a savings account carrying the name of "James S. Abatiell, Trustee, Proctor Reels, Inc." Defendant James S. Abatiell asserts a claim on this money by virtue of an alleged attorney's lien. Smith, Inc., intervenor in this matter, claims part of the money under an attachment. The amount of, and liability for, taxes by Proctor Reels is not disputed. At issue here is solely the relative priority of the claimants to the funds held by the bank.

Findings of Fact

1. The defendant, Proctor Reels, Inc., was a corporation licensed to do business within the State of Vermont and had its principal place of business at Proctorsville , Vermont . It became indebted to the United States for unemployment and withholding taxes in the years of 1957, 1958 and 1959, as shown in detail in the following schedule:

                                                        Amount

Taxable Period                 Nature of Tax          Assessed

1957                      Unemployment .....          $ 332.50

1958                      Unemployment .....             99.63

1958, 1st Quarter         Withholding ......          1,732.83

1958, 2nd Quarter         Withholding ......          1,583.57

1958, 3rd Quarter         Withholding ......            893.68

1958, 4th Quarter         Withholding ......            598.46

1959, 4th Quarter         Withholding ......          1,022.15

                                                     $6,262.82

The United States obtained liens for the taxes it claimed were due by making assessment and demand, and filing notice of lien in Town Clerks' offices in the towns of Cavendish, Chester , Ludlow and Plymouth , Vermont , and Montague , Mass. Because we are concerned here with only that property in the town of Plymouth , and money resulting from the sale of property in Plymouth , the proceeds of which were deposited in the bank in Ludlow , the following schedule of liens is set out:

                                                           Date Filed

Amount                 Date         Notice &

Assessed           Assessed           Demand           
Ludlow
         

Plymouth

$ 332.50 .          2/21/58          2/21/58          9/15/58          9/15/58

99.63 ....          2/13/59          2/13/59          2/25/59          2/25/59

1,732.83 .          5/16/58          5/19/58          9/15/58          9/15/58

                                                      
1/25/60

1,583.57

...                 8/15/58          8/19/58          9/15/58          9/15/58

                                                      
1/25/58

893.68 ...         11/21/58         11/21/58          2/25/59          2/25/59

                                                      
1/25/60

598.46 ...          2/13/59          2/17/59          2/25/59          2/25/59

                                                      
1/25/60

1,022.15 .          1/13/61          1/13/59         11/29/61

 

2. By negotiations between the Plaintiff and certain officers, or former officers, of defendant, Proctor Reels, Inc., an agreement was made that payments by such officers to the Plaintiff would be credited against the indebtedness of Proctor Reels. Payment in the amount of $2,554.90 was made by one Irwin Galkin, which is to be credited accordingly against the $6,262.82 of tax indebtedness and will be applied against the separate assessments in order of time. That is, the assessments dated 2/21/58 and 5/16/58 are eliminated. Further, $489.57 of the assessment dated 8/15/58 is eliminated, leaving $1,094.00 outstanding on that assessment. There remains, then, a balance of taxes due in the amount of $3,707.92.

3. In the year of 1957, Proctor Reels incurred debts in the course of its business with Smith, Inc., the intervenor in this action. The balance due to Smith, Inc. at the termination of their business transactions in November, 1957, was $2,172.69, which amount, plus interest, is currently due. On March 13, 1958 , Smith, Inc. caused a writ of attachment to issue out of Windham County Court, State of Vermont , in an action against Proctor Reels, upon all of the real estate of Proctor Reels. This attachment was served on March 17, 1958 , and included the property of Proctor Reels located in the town of Plymouth , Vermont . Motion for Judgment in that case was made by Smith, Inc. on February 10, 1961 , and was granted on May 11, 1962 , for the sum of $2,172.69 plus interest.

4. Attorney James S. Abatiell, of Rutland , Vermont , performed legal services for defendant Proctor Reels and some of its officers from August 7, 1956 to April 24, 1962 . For these services, Mr. Abatiell billed Proctor Reels, Inc., Irwin Galkin, Ira Galkin and Benjamin Sharff for the sum of $8,645.39. He has received on account the amount of $1,978.26, and now claims an attorney's lien for the balance of $6,667.13.

5. We first turn to the claimed attorney's lien of Attorney Abatiell. The Government's first lien was imposed on the rights of Proctor Reels to the standing timber on the Plymouth lot on September 15, 1958 . Obviously, then, Attorney Abatiell did not have at that time any attorney's lien on this cutting right. The agreement made whereby this timber was allowed to be cut and its proceeds substituted for Proctor Reel's right to cut this standing timber on or before a day certain left these proceeds subject to the Government's lien. Attorney Abatiell had no right in equity and justice to try to claim an attorney's lien on these proceeds. Furthermore, he had no attorney's lien on these proceeds. Generally speaking, an attorney may acquire no attorney's lien on funds he holds as trustee, as was the situation here.

6. Proctor Reels, Inc. owned certain cutting rights on timber located on the so-called Billings Lot, in the town of Plymouth , Vermont . These cutting rights were due to expire in the early part of 1960. I find that the attachments of the United States and of intervenor Smith, Inc., as filed in the town clerk's office in Plymouth , were valid liens on this property. I find that on July 1, 1959 , Proctor Reels made an arrangement with its attaching creditors to sell the timber rights on the Billings Lot in order to realize the value from them before they expired in 1960. This arrangement included an agreement to deposit the money received from such a sale in the Ludlow Savings Bank & Trust Company. The proceeds were to be held in trust for the benefit of the attaching creditors and lien holders, who would share in the proceeds on the basis of priority to the same extent as though their liens had continued on the timber lot. Attorney Abatiell was a moving spirit in negotiating this agreement.

7. I find that the sale of the timber rights on the Billings Lot was completed, and that the proceeds were deposited in the Ludlow Savings Bank in an account entitled James S. Abatiell, Trustee, Proctor Reels, Inc. I find that on the date of hearing of this matter, which was May 11, 1962 , the amount on deposit in the bank, including accumulated interest to that date, was $5,824.90.

Conclusions of Law

That Proctor Reels, Inc. is indebted to the United States and to Smith, Inc., as asserted by those parties here, is not denied. There may also be some indebtedness to Attorney James S. Abatiell, but he has not established this indebtedness to the satisfaction of this Court. But more essentially, Mr. Abatiell cannot compete for the funds in the Ludlow Savings Bank as the holder of a valid lien. The question then resolves itself to one of priority between the United States and Smith, Inc.

The attachment of Smith, Inc., which was served on March 17, 1958 , is prior in time to any of the tax liens of the United States , the first of which was field in the Plymouth town clerk's office on September 15, 1958 . However, the United States Supreme Court has made it clear in its decision in United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 (1950) that an attaching creditor will not prevail over the United States when the latter holds a valid tax lien recorded after the date of the attachment lien, but before the creditor has obtained judgment. Great force was added to that decision by later pronouncements of the Supreme Court in a series of cases involving attachments, garnishments, mechanics liens and other statutory liens. See particularly United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 264 (1955). There is no question at this point that the attachment lien is unperfected, or inchoate, until judgment is obtained. Before judgment, the lien will be subordinated by a federal tax lien which has been properly filed according to the provisions in Section 6323 of Title 26, U. S. C. A.

Since all of the federal liens in this case were filed before the intervenor, Smith, Inc., obtained judgment on May 11, 1962 , the United States is prior in right to the money held on deposit at the Ludlow Savings Bank & Trust Company, in the account entitled James S. Abatiell, Trustee, Proctor Reels, Inc.

 

 

[62-2 USTC ¶9633]United Aircraft Corporation v. Edgerton & Sons, Inc., et al. v. United States of America

U. S. District Court, Dist. Conn., Civil No. 3470, 208 FSupp 238, 7/17/62

[1954 Code Sec. 6323]

Tax liens: Priority over attachment liens.--A lien arising because of an attachment awaiting the outcome of litigation was inferior to federal tax liens, filed later in time, since it was still inchoate when the tax liens were filed.

Wiggin & Dana, 205 Church St. , New Haven , Conn. , for plaintiff. Herbert L. Cohen, 955 Main St., Richard Weldon, 1024 Main St., Howard T. Owens, 1115 Main St., Bridgeport, Conn., for defendant.

Memorandum of Decision

BLUMENFELD, District Judge:

The United States has brought a motion to determine the priority of liens upon certain funds now on deposit in the Registry of the Court.

On October 22, 1951 , the United Aircraft Corporation commenced an action in this court against John and Helen Polydys and others to recover damages for losses alleged to have been caused by their fraud. In connection with that action, an attachment was made the same day on property in Bridgeport, Connecticut, owned by the Polydyses under the provisions of Rule 64, F. R. C. P., which permits attachments at the commencement of a federal suit to the same extent and in the same manner as they are permitted by the law of the state in the district where the federal court is located. The funds in question are the proceeds of a foreclosure sale of that property held pursuant to an order of this court.

Subsequent to the attachment by the plaintiff, the United States , an intervenor in this action, made jeopardy assessments for unpaid income taxes of the Polydyses for the years 1948 and 1949. These assessments were made on December 26, 1951 and notice of federal tax liens against the property in question was filed with the Town Clerk of Bridgeport on December 28, 1951 . The single question for determination is whether the government's lien, though subsequent in time, is superior to the lien arising pursuant to the attachment pending the outcome of the litigation between United Aircraft Corporation and the defendants.

The effect as well as the validity of the attachment is governed by the law of Connecticut . Glaser v. North American Uranium & Oil Corp., 2 Cir., 1955, 222 F. 2d 552; Bernstein v. Van Heyghen Freres Societe Anonyme, 2 Cir., 1947, 163 F. 2d 246, cert. den. 332 U. S. 772, 68 S. Ct. 88, 92 L. Ed. 357. Under that law, the attachment created merely a quasi lien of a limited nature which constituted "at the most no more than an inchoate property interest." Meyers v. C. I. T. Corp., 132 Conn. 284, 287, 43 A. 2d 742 (1945). The state court's determination that the lien obtained by the attachment is inchoate is "practically conclusive" upon the federal courts. Illinois v. Campbell , 329 U. S. 362, 371, 67 S. Ct. 340, 91 L. Ed. 348 (1946). The limited interest obtained by the attachment brings this case squarely within the ambit of United States v. Security Trust & Savings Bank of San Diego [50-2 USTC ¶9492], 340 U. S. 47, 49, 50, 71 S. Ct. 111, 95 L. Ed. 53 (1950), which held that a prior inchoate lien is inferior to a subsequent choate federal tax lien. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-87, 74 S. Ct. 367, 98 L. Ed. 520 (1954) leaves no doubt that the tax lien of the United States is superior to the inchoate attachment lien of the United Aircraft Corporation notwithsanding the fact that it was filed later in time.

The lien of the United States against the funds on deposit in the Registry of the Court takes priority over the lien of United Aircraft Corporation.

SO ORDERED.

 

 

[56-1 USTC ¶9225] United States of America , Plaintiff v. James E. Bailey, New Milford Tractor Company, New Milford Oil Company, H. H. Taylor & Son, Leonard McMahon, Defendants

In the United States District Court for the District of Connecticut, Civil Action No. 5409, 137 FSupp 578, July 30, 1955

[1939 Code Secs. 3761, 3762--similar to 1954 Code Secs. 6322, 6323]

Collection: Priority of tax lien over creditor's attachment lien: Recordation subsequent to attachment lien: After-acquired property.--The Government claimed priority of its tax liens against money belonging to taxpayer as his share of his son's estate over the garnishment, judgment, and attachment of the defendants. The tax liens arose when the Collector (now the Director) received assessment lists in December 1947, May and June 1948, and in April 1950. The tax liens were appropriately filed with the Town Clerk in April 1948, July and August 1948, and in June 1952. The defendants claimed their interest in the property through a garnishment of May 27, 1952 , a judgment which followed on July 21, 1952 , and an attachment made on March 20, 1951 based on a judgment of June 16, 1950 . Under the facts all of the tax liens arose prior in time to defendants' liens and, since notice of filing was properly given, the tax liens were perfected as against the defendants who did not become judgment creditors until some time subsequent thereto, the attachment liens not being of the type requiring notice by filing. Accordingly, the tax liens were prior in time and therefore prior in right. Moreover, even if it could be claimed that a judgment lien arose under the June 16, 1950 judgment, the filing of the earlier liens would give the government priority and consume the fund in question.

Simon S. Cohen, United States Attorney, Rob ert M. Fitzgerald, Assistant United States Attorney, for plaintiff. Norman M. Dube, United Bank Building, New Milford, Conn., for New Milford Tractor Co. Ferris & Anderson, United Bank Building, New Milford, Conn., for New Milford Oil Co. Leonard McMahon, Danbury, Conn., pro se.

Memorandum of Decision on Motion for Summary Judgment

SMITH, District Judge:

The issue in this case is the relative priorities to be accorded to liens of the plaintiff and defendants New Milford Oil Company and New Milford Tractor Company which have attached to the $3,646.72 belonging to the taxpayer Bailey as his share in his son's estate now held by defendant McMahon.

[Tax Liens Filed]

The government claims its tax liens arose under Section 3671 of Title 26 of the United States Code when the Collector of Internal Revenue received assessment lists in December 1947 showing taxes of $2,055.71 due, in May and June 1948 showing $2,753.65 of unpaid taxes, and in April 1950 showing $969.65 of taxes in arrears. The tax liens were filed with the Clerk of the United States District Court in New Haven and with the Town Clerk in New Milford in April 1948, July and August 1948, and in June 1952.

[Creditors' Attachments]

The defendant New Milford Oil Company claims an interest in the money through a garnishment of May 27, 1952, and a judgment for $155.90 which followed on July 21, 1952.

The defendant New Milford Tractor Company claims an interest in the money by virtue of an attachment of the estate of Bailey's son, as to any interest Bailey might have in it, made on March 20, 1951, when the company brought suit on a judgment of June 16, 1950, for approximately $825.00.

The claims of the government are supported by the affidavit of Joseph I. Kopelman, Chief of the Special Procedures Section of the Internal Revenue Bureau in Connecticut . The defendants, who do not dispute the factual basis of the government's claims, offer their own claims in their answers to the complaint and do not attach any supporting affidavits.

Under Section 3671 the amounts due became liens against the property of the taxpayer, real or personal, and including all after acquired property. See Glass City Bank v. U. S., 326 U. S. 265 [45-2 USTC ¶9449].

[Priority in Point of Time]

All of the tax liens arose prior in time to any of the defendant's liens. To be valid against any mortgages, pledges, purchasers, or judgment creditors, Section 3672 requires that notice be given by filing in accordance with the appropriate state statute. Section 7213 of the Connecticut General Statutes, 1949 Revision, specifies that United States liens be filed in the land records of the town where the debtor's land exists or in the town clerk's office of the debtor's residence for personal property.

As against the defendant New Milford Oil Company the liens arising in December 1947, and May and June 1948, were perfected in April 1948, and July and August 1948. The filing in June 1952 of the tax lien arising in April 1950, while it followed the Oil Company's attachment in May of 1952, preceded the judgment secured in July 1952, and it also is entitled to priority. See United States v. Security Trust Co., 340 U. S. 47 [50-2 USTC ¶9492], and United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138].

[Notice of Tax Liens v. Attachments]

As against the New Milford Tractor Company, the tax liens were prior in time and therefore prior in right. The attachment lien is not of the type requiring notice by filing under Section 3672 and no claim is made apparently that a judgment lien arose under the June 16, 1950 judgment. Even if a claim was made that there was a judgment lien in 1950, the filings in 1948 of liens totaling approximately $4800 would give the government priority and would consume the fund in question. However, such claim has not been made.

It appears that the government is entitled to the relief sought.

The motion for summary judgment is granted. Form of judgment may be submitted on notice.