Priority over Chattel Mortgages

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[79-1 USTC ¶9208]Borg-Warner Acceptance Corporation, Appellant v. First National Bank of Prestonsburg , Kentucky , Appellee United States of America , Appellant v. First National Bank of Prestonsburg, Kentucky; Ada Griffith (now Schwanka); Priscilla G. Ring; Rob ert H. Griffith, Jr.; Donald P. Ring; Jacquette Griffith; and Shoppers Faire, Inc., Appellees

Commonwealth of Kentucky, Court of Appeals, No. 78-CA-498-MR, 78-CA-499-MR, 577 SW2d 29, 1/12/79 ^*

[Code Sec. 6323]

Collection: Lien for taxes: Validity and priority against third parties: Security interest: Equitable mortgage: Time of creation.--Federal tax liens had priority over an equitable mortgage based on a void legal mortgage executed prior to the time of filing of the tax liens. The creation of the equitable mortgage by a court did not relate back to the attempted legal inception of the mortgage with respect to third parties. However, a lis pendens filed by another party after the first tax lien was filed but before filing of the second tax lien had priority over the second lien.

James A. Combs, P. O. Drawer 189, Prestonsburg, Ky. 41653, for Borg-Warner Corp. M. Carr Ferguson, Assistant Attorney General, Gilbert E. Andrews, Crombie J. D. Garrett, Phillip I. Brennan, Department of Justice, Washington, D. C. 20530, for the U. S. Richard E. Fitzpatrick, Tarrant, Combs, & Bullitt, 1212 First Security Plaza, Lexington, Ky. 40507, for First National Bank of Prestonsburg.

Before HAYES, HOWARD and PARK, Judges.

HAYES, Judge:

This appeal arises from a finding in the Floyd Circuit Court favorable to the plaintiff bank and unfavorable to the United States and the Borg-Warner Corporation.

It presents rather complex questions of interpretation of the Federal Tax Lien Statute, of the Kentucky law on the effect of unrecorded mortgages against third parties, and of the time at which an equitable mortgage will be deemed to have been created.

On October 25, 1973 , Shoppers Faire, Inc. executed and delivered to the First National Bank a promissory note in the amount of $53,500.00. On the same day, a purported mortgage for certain real property was executed by Rob ert and Ada Griffith, delivered to the bank, and duly filed for record. The mortgage was to serve as security for the note. The instrument was defective in that the land purported to be mortgaged was held in fee simple by Shoppers Faire, a corporation in which Rob ert and Ada Griffith were major shareholders, rather than by Rob ert and Ada Griffith. Thus the legal interest they attempted to create was void. However, because value had been given and received, the trial court would eventually find that an equitable mortgage existed between the parties to the void instrument.

When the parties to the mortgage agreement defaulted on the payments due, the bank attempted to execute on the property which the circuit court eventually found to be subject to an equitable mortgage. The other two parties at the appellate stage, the United States and the Borg-Warner Corporation, became lienholders as a result of filing, respectively, two federal tax liens and lis pendens notice of execution between the time of attempted creation of a legal mortgage and the eventual court proceeding which determined the existence of an equitable mortgage.

The lis pendens notice was filed by Borg-Warner on May 7, 1974 , i. e., between the two federal tax liens, filed respectively, April 18 and July 17, 1974 .

I. Intervening Plaintiff-Appellant United States of America

The threshold issue is whether the equitable mortgage is, for the purposes of 26 U. S. C. 6323, a section of the Federal Tax Lien Act, a "security interest" protected by state law, ¹ which might compete with federal tax liens filed April 18 and July 17, 1974.

The Floyd Circuit Court created the equitable mortgage, binding as between the parties to it, through its equitable powers. The first issue appears to be whether the court's creation of the equitable mortgage relates back to the execution of the void legal mortgage, for purposes of determining its possible existence as a security interest protected by state law, or whether it came into existence only on the date judgment was rendered.

If the creation of the equitable mortgage relates back to October 25, 1973 , the interest involved might arguably be considered a security interest protected under state law as per the Tax Lien Act. However, in the absence of known authorities on the point, it seems to this Court totally irrational to relate the equitable interest back to the date of its attempted legal inception with regard to third parties.

Even if relation back were found to exist by this Court, the result as to the United States would not change. If relation back does occur, it is necessary to look to Kentucky law to see whether the security interest as against a federal tax lien was protected under the circumstances at bar. At the risk of indulging in dictum, we will clarify what this Court's posture toward the position of the federal government would have been if it had found the bank to have an existing security interest at the times the federal tax liens were filed.

According to the judgment of the lower court, the equitable mortgage between the bank and Shoppers Faire has, as against third parties, the same effect as an unrecorded mortgage.

The United States argues that no security interest is created without proper recordation. Even the Uniform Commercial Code, which the United States cites to support this proposition, recognizes that a security interest may be created without recordation; §9-204 on attachment of security interests makes agreement that the interest attach, plus the giving of value when the debtor has rights in the collateral, sufficient. It is perfection, not creation, which in most cases requires recordation. The same general policy is expressed by KRS 382.270 and the case law flowing from it, discussed infra.

The effect of an unrecorded mortgage, otherwise valid, is described in KRS 382.270, which says that no unrecorded mortgage "shall be valid against a purchaser for a valuable consideration, without notice thereof, or against creditors. . . ." (Emphasis added). The language of the statute appears to impose the lack of knowledge requirement on purchasers, but not on creditors. However, Kentucky courts have consistently held that the noknowledge requirement does indeed apply to creditors, since "the creditor stands on the same footing as the purchaser." Sears v. Cain, 242 Ky. 702, 47 S. W. 2d 513 (1932). Since the statutory language has been repeatedly re-enacted by the General Assembly with that judicial interpretation, it must be considered to have been incorporated into the statute. Thus, under Kentucky law alone, actual knowledge on the part of the federal government would be fatal to its priority. If, however, federal law is contra, it must prevail.

There are two trends of judicial thought as to whether notice or knowledge on the part of the government can impair any priority which the government would otherwise have under 26 U. S. C. 6323.

The cases referred to below involve interests in personalty; thus in those cases Article IX of the Uniform Commercial Code is the applicable state law. The policies embodied in KRS 382.270 are sufficiently similar that for purposes of this discussion they may be treated interchangeably with the applicable Article IX provision, §9-301(1)(b), which gives priority over an unperfected security interest to "a person who becomes a lien creditor without knowledge of the security interest and before it is perfected."

One sequence of cases puts the federal government in the shoes of an ordinary lien creditor and then applies the Code to determine priorities. In those cases, when the government obtains actual knowledge of an unperfected security interest before filing the tax lien (as it apparently had in the instant case) its lien is subordinated to the prior interest. United States v. Hunt [75-1 USTC ¶9327], 513 F. 2d 129 (10th Cir. 1975); United States v. Ed Lusk Const. Co. [74-2 USTC ¶9773], 504 F. 2d 328 (10th Cir. 1974); United States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264 (8th Cir. 1972), cert. denied 410 U. S. 911 (1973).

The other approach, rather than viewing the government as a lien creditor, examines the position of a hypothetical creditor holding an interest equivalent to that held by the government. United States v. Sterling Nat'l Bank & Trust Co. [73-2 USTC ¶9494], 360 F. Supp. 917 (S. D. N. Y. 1973); modified on other grounds, 494 F. 2d 919 (2nd Cir. 1974); Fred Kraus & Sons v. United States [74-1 USTC ¶9400], 369 F. 2d 1089 (N. D. Ind. 1974); affirmed, 506 F. 2d 1404 (7th Cir. 1974); and Dragstrem v. Obermeyer, 549 F. 2d 20 (7th Cir. 1977). Under this approach, any knowledge actually in the possession of the government is not imputed to the hypothetical lien creditor, so the question of knowledge becomes immaterial.

We believe that while both approaches have some merit, the latter is the more logical extension of the Tax Lien Act, which itself is silent as to notice.

In reaching this conclusion, we adopt the reasoning of Judge Esbach in Dragstrem V. Obermeyer, Civ. No. 72 F 20, at 8 (N. D. Ind. 1975) (Memorandum of Decision and Judgment Order), previously adopted by the Seventh Circuit of the United States Court of Appeals in Dragstrem v. Obermeyer, 549 F. 2d 21 (1977) at 26:

This conclusion is supported by an analysis of the Legislative policy underlying the enactment of the Federal Tax Lien Act of 1966, the present version of 26 U. S. C. A. §6323. The legislative history, S. Rep. 1708, U. S. Code Cong. & Admin. News, 89th Cong., 2d Sess. p. 3722 (1966), makes it clear that the purpose was to bring federal tax lien law into conformity with the concepts of the Uniform Commercial Code, and thereby to permit more certainty and stability in business affairs for secured creditors. The specific legislative intent was to enable creditors to protect certain types of security interest against subsequent federal tax liens, and to do so by taking the same steps already necessary under state law to protect their interests against various other types of competing claims. This legislative policy would in no way be enhanced by a holding that a properly filed federal tax lien does not have priority over an unperfected security interest simply because the Government has knowledge of the security interest before the tax lien is filed. Conversely, whatever the policy of the Uniform Commercial Code in making an exception as to priority when a lien creditor has knowledge of an unperfected security interest, this cannot apply to a tax lien situation as the government does not rely on any notice, actual or record, in making a determination to become a creditor, or to create and file a tax lien. The rationale of the new, Section 6323(a), federal priority rule centers on not disrupting the stability of business relationships where that stability exists under state law, and not on the irrelevant fact of the existence or not of any kind of notice to the government of outstanding security interests. Indeed, one of the effects of the 1966 Act was to finally rebut the frequent secured party argument, the opposite of that made by the secured parties in the present case, that a failure to file and hence perfect a security interest under the Uniform Commercial Code ought not to subordinate the security interest to the federal lien since the government does not in any event rely on the records in becoming a creditor. (Emphasis added).

For this reason we reverse the ruling of the trial court as to the intervening plaintiff-appellant, the United States , and find that its liens are prior to the equitable mortgage held by the First National Bank of Prestonsburg.

II. Intervening Plaintiff-Appellant Borg-Warner Corporation

The First National Bank of Prestonsburg argues that Borg-Warner loses any priority it would otherwise have because it was a creditor with knowledge under KRS 382.270 and cases decided under that statute (or prior statutes using identical language) holding that the no-knowledge requirement is imposed on creditors. The factual basis of this argument is the alleged actual knowledge conveyed to Borg-Warner when the president of the bank told an officer of Borg-Warner that he intended to take a mortgage on the real estate.

The question of actual knowledge is, however, immaterial in light of our determination that the creation of the equitable mortgage, correctly created by the trial court, does not relate back to the date of the attempted legal mortgage.

The creation of an equitable mortgage between the parties to the attempted legal mortgage because of value given and received was an appropriate device for the prevention of manifest injustice as between those parties. There is, however, no sound reason for allowing such an equitable conveyance to prejudice the rights of strangers to the attempted mortgage.

The conclusion that the bank had no security interest in the land until such interest was decreed by the Floyd Circuit Court calls for some modification of that court's assertion that the equitable mortgage has the same effect as an unrecorded mortgage. It may indeed have such an effect, but only from such time as it has come into existence.

We find that Federal Tax Lien No. 1196, filed April 18, 1974, is prior to the Lis Pendens Notice of Execution filed by Borg-Warner on May 7, 1974, and that Borg-Warner's interest is in turn prior to Federal Tax Lien No. 1201, filed July 17, 1974. All of those interests are prior to the equitable mortgage held by the First National Bank of Prestonsburg.

We reverse the judgment of the Floyd Circuit Court and remand for disposition in accordance with our findings.

ALL CONCUR.

^* The decision of the panel was made prior to January 1, 1979 , but the opinion was not rendered until this date.

¹ The Federal Tax Lien Act, Internal Revenue Code of 1954, Subchapter C, (1970), provides, in pertinent part:

"26 U. S. C. §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.

". . . .

"26 U. S. C. §6323. Validity and priority against certain persons

"(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditor.--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.

". . . .

"(h) Definitions.--For purposes of this section and section 6324--

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

 

 

[72-1 USTC ¶9359]Avco Delta Corporation Canada Limited, Plaintiff-Appellee v. United States of America, Defendant-Appellant and Canadian Parkhill Pipe Stringing, Inc., et al., Defendants-Appellees

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 71-1321, 459 F2d 436, 484 F2d 692, 4/18/72

[Code Sec. 6323]

Lien for taxes: Validity of prior recorded mortgage: Ownership of mortgaged property: State law.--The Government's lien for taxes was not superior to a prior recorded mortgage where state law made the taxpayer a mortgagee for value in good faith. The actual ownership of the mortgaged property thus became immaterial, especially because the alleged real owner knew of the mortgage and did not assert its title but, in fact, guaranteed the loan.

Frank O. Wetmore, II, Edward J. Wendrow, George L. Saunders, Jr., Mark E. MacDonald, Theodore N. Miller, One First Nat'l Plaza, Chicago , Ill. , for plaintiff-appellee. Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, Department of Justice, Washington, D. C. 20530, Donald B. MacKay, United States Attorney, Springfield, Ill., for defendant-appellant.

Before DUFFY, Senior Circuit Judge, SPRECHER, Circuit Judge, and ESCHBACH, District Judge. ^*

SPRECHER, Circuit Judge:

What is the priority between a perfected tax lien and an earlier perfected chattel mortgage lien upon property not owned by the chattel mortgage debtor but owned by the taxpayer who had represented to the creditor that the debtor owned the property?

[Facts]

Three affiliated Parkhill corporations are involved: The parent corporation is Canadian Parkhill Pipe Stringing Ltd. ("Ltd."), which is the sole shareholder of the taxpayer, Canadian Parkhill Pipe Stringing, Inc., d/b/a Parkhill Pipeline, Inc. ("taxpayer"), and of the chattel mortgage debtor, Canadian Parkhill Construction Equipment, Ltd. ("Construction").

Avco Delta Corporation Canada Limited ("Avco"), which was in the business of financing the purchase and rental of construction equipment, loaned $600,000 in cash to Construction on November 13, 1969 . Avco took a note for $674,301.32 and a chattel mortgage on 29 pieces of heavy construction equipment. In the chattel mortgage executed by Construction, the mortgagor expressly covenanted that it owned the mortgaged equipment. The equipment was allegedly leased by Construction to taxpayer for use on a pipe laying job in Bureau County , Illinois . Avco filed a financing statement, listing the 29 pieces of equipment, with the recorder of Bureau County , Illinois , where the equipment was located, on November 25, 1969 , and with the Secretary of State of Illinois, on December 5, 1969 . The financing statement listed Construction as debtor.

As part of the consideration for making the $600,000 loan to Construction, Avco received a "Guarantee and Indemnity" executed on October 23, 1969, by Ltd. and taxpayer, wherein they agreed to guarantee payment as principal debtors of debts and liabilities of Construction to Avco and to indemnify and save Avco harmless from all liabilities and claims arising as a consequence of Avco's dealing with Construction.

Avco received from Construction the first two installments on the loan on December 1 and 17, 1969, but on December 30, 1969 , Construction communicated to Avco its inability to make further payments.

The government's tax claim is based upon withholding and F. I. C. A. taxes assessed against taxpayer for the third and fourth quarters of 1969 in the amount of $792,125.06. The assessment was made on February 6, 1970 , and notices of liens were filed on February 9, 1970 , with the Secretary of State of New York, where taxpayer was incorporated, and on February 16, 1970 , with the recorder of Bureau County , Illinois .

On February 16, 1970 , pursuant to a notice of seizure issued on that date, the Internal Revenue Service seized property located at Princeton, Bureau County , Illinois , including the 29 pieces of equipment listed in the Avco chattel mortgage and financing statement.

On April 20, 1970 , Avco served Construction with formal demand for payment of the loan.

[Property Sold]

On May 26, 1970 , after Avco and the government were unable to agree on the ownership of the 29 pieces of equipment or on the priorities of their respective liens, the three Parkhill companies, Avco and the Internal Revenue Service executed an agreement whereby property, including the disputed 29 pieces, was sold at auction on July 16, 1970 . The proceeds of the sale, including $603,744 allocable to the 29 items, were deposited in escrow pending the determination of the rights of Avco and the government.

This action was filed in the district court on July 16, 1970 , by Avco against the three Parkhill companies and the United States . Avco asked that its lien be adjudged a first lien on proceeds allocable to the 29 items.

After answers were filed by all defendants, Avco moved for entry of judgment on the pleadings supported by the affidavits of Avco and Parkhill officers. The three Parkhill companies consented to and prayed for the entry of summary judgment in favor of Avco. The United States opposed the motions and filed the affidavits of two revenue agents, who raised questions as to whether Construction or taxpayer owned the 29 items covered by Avco's chattel mortgage.

[ Lower Court 's Holding]

The district court allowed Avco's motion for judgment on the pleadings, holding that Avco's "chattel mortgage is a prior and superior lien on the escrow fund to the lien of the Internal Revenue Service of the Treasury Department of the United States Government for taxes due from [taxpayer]." [71-1 USTC ¶9194] 321 F. Supp. 241, 245 (S. D. Ill. 1971).

[Ownership of Property]

In the absence of any dispute regarding Construction's ownership of the 29 pieces of mortgaged equipment, Avco's lien would prevail over the government's tax lien. The lien created by 26 U. S. C. §6321 is not valid as against the holder of a security interest until filed in the designated office in the state or county in which the property is located. 26 U. S. C. §6323. The government filing in Bureau County , Illinois , occurred on February 16, 1970 , whereas Avco had perfected its security interest under Illinois law by filing its financing statement in Bureau County on November 25, 1969 . Ill. Rev. Stat. ch. 26, §9-302 (1963). Under the codified common-law rule of "the first in time is the first in right," a choate state-created lien takes priority over later federal tax liens. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 87-88 (1963). A state-created lien is choate "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954). The Avco financing statement showed Construction as the lienor, described the 29 items of equipment and established the amount secured.

However, the two affidavits filed on behalf of the government showed that taxpayer rather than Construction paid virtually the entire purchase price for the 29 items, that taxpayer received the bill of sale from the original seller for 12 of the items and that the items had been expensed on taxpayer's books and tax returns.

The affidavits filed on behalf of Avco showed that Avco had previously loaned money to the Parkhill companies on three occasions; each time the loans were prepaid before they matured prior to the $600,000 loan. Avco made its customary investigation of the financial standing of the three Parkhill companies, including an examination of the most recent interim accounts and consolidated financial statement prepared by certified accountants, supplemented by Dun & Bradstreet reports and inquiries at Construction's bank. Thereafter Construction furnished to Avco corporate resolutions authorizing the sale of the pieces of equipment from Ltd. to Construction and a copy of a bill of sale showing title to the equipment in Construction. The affidavits also stated that Avco received letters from the accounting firms of Buckley, McCarney, Swinarton & Company, stating that the equipment was included in the assets of Construction, and Touche Ross & Co., enclosing copies of invoices and bills of sale. Avco received the written guarantees of the loan from both taxpayer and Ltd. and certified copies of resolutions by the boards of directors of each company authorizing the guarantee. Prior to recording the notes and chattel mortgage in Toronto, Ontario, Canada, and the financing statement in Bureau County and with the Secretary of State of Illinois, a check was made of each of the respective recording offices which disclosed that there were no outstanding security interests in any of the pieces of equipment. The government affidavits did not contradict the facts set forth in Avco's affidavits outlining the steps which Avco took prior to consummating the loan.

The government contended that its affidavits introduced "factual uncertainty relating to the ownership of the construction equipment" sufficient to preclude the district court's summary disposition.

[Property Rights]

The district court, however, took the position that the disputed ownership was immaterial since Avco obtained its security interest in equipment which it "believed in good faith to be owned by the borrower." The court said, "Neither the so-called 'real owner' nor his creditor in such a situation can be permitted to prevail over one who has given real value in good faith reliance on the implicit representations with respect to the security." 321 F. Supp. 241, 242, 245. The district court properly looked to Illinois law to determine whether Avco had indeed perfected its security interest in the 29 items of equipment despite the questions of ownership raised by the government in the district court.

Inasmuch as section 6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law," United States v. Bess, [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958), a federal court must look to state law to determine the nature of the legal interest which the taxpayer had in the property sought to be reached. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960).

[State Law]

Illinois adopted the Uniform Commercial Code in 1961. Section 9-204 provides in part, "A security interest cannot attach until there is agreement . . . that it attach and value is given and the debtor has rights in the collateral." Ill. Rev. Stat. ch. 26, §9-204 (1963). Here there was an agreement that the security interest attach and value was given. The crucial question is whether the debtor had "rights" in the collateral. The code does not define the word "rights" except to indicate that it "includes remedies." Ill. Rev. Stat. ch. 26, §1-201(36) (1963).

Section 1-103 provides in part, "Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to . . . estoppel, fraud, misrepresentation, . . . or other validating or invalidating cause shall supplement its provisions." ¹ Ill. Rev. Stat. ch. 26, §1-103 (1963).

It is clear under Illinois law that some "title" or "rights" can be created by estoppel. An Illinois court expressed the concept in Mori v. Chicago Nat'l Bank, 3 Ill. App. 2d 49, 51, 120 N. E. 2d 567, 568 (1954):

"Whatever title the defendant has must rest on the doctrine of estoppel. This is an equitable doctrine taken over by the law. It is based upon the conduct of the true owner, whereby he has allowed another to appear as the owner, or as having full power of disposition over the property, so that an innocent person is led into dealing with such apparent owner."

The Illinois Supreme Court early stated the principle in Anderson v. Armstead, 69 Ill. 452, 454-55 (1873):

"The law is familiar, that where the owner of property holds out another, or allows him to appear, as the owner of, or as having full power of disposition over the property, and innocent parties are thus led into dealing with such apparent owner, or person having the apparent power of disposition, they will be protected. Their rights, in such cases, do not depend upon the actual title or authority of the party with whom they have directly dealt, but they are derived from the act of the real owner, which precludes him from disputing, as against them, the existence of the title or power he caused or allowed to appear to be vested in the party, upon the faith of whose title, or power, they dealt."

See also Drain v. LaGrange State Bank, 303 Ill. 330, 335, 135 N. E. 780, 782 (1922); Whalen v. Schneider, 281 Ill. 557, 565-66, 118 N. E. 41, 44 (1917); National Band & Investment Co. v. Shirra, 255 Ill. App. 415 (1930).

It appears established under Illinois law that Construction had some "rights in the collateral" arising through the acquiescence on and guarantee of its arrangement with Avco by taxpayer and Ltd., which created an estoppel. ² Whether the estoppel was express or implied makes no difference. ³

The government then asked "why, merely because the three Parkhill companies represented to Avco that Construction owned the mortgaged property (and are thus estopped from later denying that fact), a creditor of the true owner is also necessarily estopped to question the actual ownership of the property?"

In matters of substance, the government's lien does not exceed the rights of the taxpayer. Equitable Life Assurance Society v. United States [64-1 USTC ¶9433], 331 F. 2d 29, 33 (1st Cir. 1964); United States v. Winnett [48-1 USTC ¶9115], 165 F. 2d 149, 151 (9th Cir. 1947). In other words, the rights of the government rise no higher than those of the taxpayer whose property is sought to be levied on. Karno-Smith Co. v. Maloney [40-2 USTC ¶9533], 112 F. 2d 690, 692 (3rd Cir. 1940).

Although some states apparently hold that creditors of the estopped party are not likewise estopped as a matter of state law, Illinois holds otherwise. Cross v. Weare Commission Co., 153 Ill. 499, 38 N. E. 1038 (1894); Thomas v. Citizens' Horse Ry. Co., 104 Ill. 462 (1882); Reynolds v. Patterson, 4 Ill. App. 183 (1879). ⁴ Thus Construction's title to or rights in the collateral created by taxpayer's estoppel would, in Illinois , apply as against taxpayer's creditors such as the government.

[Perfection of Interest]

The government next contended that, even if Ltd. and taxpayer may be classified as "debtors" (see Ill. Rev. Stat. ch. 26, §9-105(1)(d) (1963)) with "rights in the collateral," Avco did not file a financing statement with respect to either Ltd. or taxpayer to perfect its interest as to them.

Because the estoppel created an interest or rights in Construction, binding on taxpayer and its creditors, that interest or rights were sufficient under section 9-204 of the code to permit Avco's security interest to attach to the collateral. Avco's subsequent filing of the financing statement as to Construction was then sufficient under section 9-302 to perfect Avco's security interest in the collateral without any additional filing as to Ltd. or taxpayer. In view of the facts here that Construction and taxpayer were both wholly-owned subsidiaries of Ltd. and that all three companies bore the highly distinctive name of "Canadian Parkhill," it could not be contended that a searching creditor of taxpayer could be seriously misled upon discovering the security interest claimed against Construction. The similarity in names would immediately lead to disclosure that the collateral was identical to that which the creditor believed was owned by taxpayer. Thus the application of the Illinois law of rights by estoppel and reliance would have no adverse effect upon the commercial relations intended to be protected by the Uniform Commercial Code as enacted in Illinois . See In re Colorado Mercantile Co., 299 F. Supp. 55, 58-59 (D. Colo. 1969).

The judgment of the district court is affirmed.

^* District Judge Jesse E. Eschbach of the Northern District of Indiana is sitting by designation.

¹ "The Code could have usurped the whole field of law as to commercial transactions, but it does not purport to do so." Theo. Hamm Brewing Co. v. First Trust & Savings Bank, 103 Ill. App. 2d 190, 194, 242 N. E. 2d 911, 914 (1968).

² This conclusion obviates the necessity of determining whether the affidavits on file were sufficient to give Construction some colorable title or rights other than those created by estoppel.

³ Illinois permits estoppel to arise from silence as well as from words. "Thus, where one with a duty to speak remains silent and such silence would operate to the injury of another, an estoppel will arise in favor of the party who otherwise would be injured. Moreover, one whose silence has induced or encouraged an act infringing upon his rights cannot subsequently complain of such infringement." 18 Illinois Law and Practice, Estoppel, §32. See also Jurek v. Smuczynski, 61 Ill. App. 2d 426, 433, 209 N. E. 2d 850, 853 (1965).

⁴ The guarantees of taxpayer and Ltd. could also be construed as a part of the security agreement, which, under Illinois law, "is effective according to its terms between the parties, against purchasers of the collateral and against creditors." Ill. Rev. Stat. ch. 26, §9-201 (1963).

 

 

[95-2 USTC ¶50,457] Southland Produce Company, a Delaware Corporation, dba Western Fruit Sales, Inc., Plaintiff v. Padron Brothers, a general co-partnership, et al., Defendants Hilda A. Padron, Cross-Complainant v. Internal Revenue Service, Southland Produce Company, and Belisario Padron, Cross-Defendants

U.S. District Court, East. Dist. Calif. , CV-F-93-5926-OWW, 8/2/95

[Code Sec. 6323 ]

Liens: IRS: Priority: Foreclosure: Reattachment: Perfection.--A company's junior lien on several properties lost its priority over an IRS tax lien because, when the properties were foreclosed on, the junior lien was extinguished. The owners of the properties, through an alleged collusive agreement with their attorney, had their attorney purchase and foreclose on the senior lien, buy the properties at the foreclosure, and then transfer the properties back to the owners. Even though both liens simultaneously reattached when the owner obtained title to the properties from the attorney, the tax lien was deemed perfected on the date it was originally filed before the foreclosure, and the junior lien did not become perfected until it reattached to the properties. The court rejected the company's argument that its lien was never extinguished because the owner's attorney held the properties in a constructive trust and, therefore, the owners retained equitable title. Even if a constructive trust was created, the fact remained that the foreclosure extinguished the lien. Further, the company's complaint and amended complaint did not specifically allege that the foreclosure was fraudulent and should be set aside. Moreover, the state ( California ) statute of limitations for fraud had run.

Tracy Ann Agrall, Wild, Carter & Tipton, 246 W. Shaw Ave. , Fresno , Calif. 93755-6339 , for plaintiff. Peter Sean Bradley, Parichan, Renberg, Crossman & Harvey, 2350 W. Shaw Ave. , Fresno , Calif. 93711 , for defendant. Peter Sean Bradley, Parichan, Renberg, Crossman & Harvey, 2350 W. Shaw Ave. , Fresno , Calif. 93711 , for cross-claimant. Sean K. McElenney, Department of Justice, Washington , D.C. 20530 , for counter-defendant. Sean K. McElenney, Department of Justice, Washington , D.C. 20530 , for cross-defendant.

MEMORANDUM OPINION AND ORDER RE: UNITED STATES' MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

WANGER, District Judge:

This motion concerns whether the United States ' tax lien on property owned by Hilda Padron has priority over a lien held by Southland Produce Company. The controlling issue is whether Southland's lien was extinguished by the foreclosure of a senior lien.

The liens of the respective parties arose in the following manner. ¹ The property at issue is comprised of three ranches, the Selma Ranch, the Greenwood Ranch, and the Rainbow Ranch, which were owned and operated by Padron Brothers. A senior deed of trust was held by Sequoia Community Bank on these ranches. This deed was executed on December 19, 1983 , and recorded December 30, 1983 . A junior deed of trust was executed and record by Southland on January 18, 1984 . This deed secured a promissory note in the amount of $201,500.00.

The government obtained a lien against the three ranches in 1987 because Padron Brothers failed to pay withholding and unemployment taxes assessed in 1986 and 1987. Notices of Assessment and Demand for Payment were sent to the Padrons in March of 1986 and April of 1987. On June 16, 1987 , the government filed a Notice of Federal Tax Lien with the Fresno County Recorder. The total amount of taxes owing was $68,978.73.

In March of 1985 Justo and Hilda Padron retained Henry Nunez, an attorney, to advise them regarding the liens on the ranches. Southland alleges that the Padrons made a collusive agreement with Nunez whereby Nunez would purchase and foreclose the Sequoia deed of trust, buy the ranches at the foreclosure, and then transfer the ranches back to the Padrons. The purpose was to eliminate certain junior liens encumbering the ranches. On September 6, 1986 , the Padrons paid $96,000.00 to Nunez to hold as trustee. In 1987 Nunez purchased the deed of trust held by Sequoia, allegedly using the funds given to Nunez by Justo Padron. Thereafter Padron Brothers defaulted on the Sequoia loan and on February 20, 1990 Nunez foreclosed on the Sequoia deed of trust. Nunez purchased the ranches at the foreclosure sale with a credit bid, but allegedly agreed to convey the ranches back to the Padrons. However, after the death of Justo Padron, Nunez refused to convey title to Hilda Padron.

In September of 1991 Hilda Padron sued Nunez for fraud, legal malpractice, and breach of fiduciary duty. Padron also asserted claims for constructive trust and accounting. The parties reached a confidential settlement of the suit on September 28, 1992 . As part of the settlement, Nunez transferred title to two of the ranches to Hilda Padron by quitclaim deed.

On September 1, 1993 , Southland filed a first amended complaint against Hilda Padron for declaratory relief and to quiet title. Southland claims that its lien against the ranches was not foreclosed, or in the alternative, that its lien reattached to the ranches when the Padrons reacquired legal titled from Nunez. On November 22, 1993, one of the defendants, Hilda Padron, filed a cross-complaint naming Southland, the Internal Revenue Service, ² and Belisario Padron. In her cross-complaint for interpleader, Hilda Padron concedes that she has no interest in the real property at issue. Subsequently the government removed the entire action from Fresno County Superior Court to Eastern District of California.

The two parcels Nunez quitclaimed to Padron were sold in Belisario Padron's bankruptcy proceeding. The government and Southland agreed to release their liens in the property; their liens reattached to the proceeds from the sale in the same priority.

The government moves for summary judgment on its claim that its lien is senior to Southland's. Oral argument was held on the government's motion on June 19, 1995 . Southland requested and received permission to submit a supplemental brief, which was filed on June 26, 1995 . The government was given two weeks to file a response. Its reply brief was filed July 17, 1995 . Upon full consideration of all the arguments presented in all the briefs and at oral argument, the government's motion is granted.

II. DISCUSSION

The question to be resolved is whether the government's tax lien, which was junior to Southland's lien prior to foreclosure of the Sequoia deed of trust, is now senior to Southland's lien. The government argues that under the Supreme Court's decision in United States v. McDermott its lien reattached to the ranches ahead of Southland's. Southland counters that its lien was never extinguished, and therefore never lost priority over the tax lien. To analyze the merits of the parties' contentions a review of the principles governing priority among tax liens and state law liens is required.

Where federal tax liens and state law created liens compete for priority, state law defines the property or rights to property to which liens attach, and Federal law determines the priority of federal tax liens. United States v. Equitable Life Assur. Soc. [66-1 USTC ¶9444 ], 384 U.S. 323, 330 (1966); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960). In general, the priority of liens competing with a federal tax lien is determined by the principle of "first in time is first in right." United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954). Liens that become "choate" before a federal tax lien arises have priority over the tax lien. Id. at 86.

A federal tax lien is deemed to commence upon filing of the notice of tax lien. United States v. McDermott [93-1 USTC ¶50,164 ], 113 S. Ct. 1526, 1530-31 (1993) ("the filing of notice renders the federal tax lien extant for 'first in time' priority purposes regardless of whether it has yet attached to identifiable property"). A state law lien does not become choate until it attaches to a specific, identifiable parcel. Id. at 1529-30 ("attachment to particular property" is necessary before a judgment lien is perfected). The issue presented in McDermott was whether a judgment lien had priority over a federal tax lien filed after the judgment lien. The judgment lien, docketed by a bank on July 6, 1987 , was valid against all current or after-acquired real property. Id. at 1527. Likewise, the federal tax lien, which was filed on September 9, 1987 , created an interest in favor of the United States on all real property then owned by the McDermotts and any property they acquired in the future. 26 U.S.C. §§6321 , 6322 ; Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265 (1945).

The Supreme Court held that the government's federal tax lien had priority over the bank's judgment lien in all after-acquired property. It reasoned that bank's lien was inchoate as to after-acquired property until the McDermotts actually acquired rights in particular realty. Although the federal tax lien did not attach until the same instant that the bank's lien attached, the Court ruled that "the filing of notice renders the federal tax lien extant for 'first in time' priority purposes regardless of whether it has yet attached to identifiable property." McDermott [93-1 USTC ¶50,164 ], 113 S. Ct. at 1530 (emphasis added). Accordingly, the federal tax lien had priority because it was "perfected" at the time of filing, while the bank's lien did not become perfected until the McDermotts acquired the property at issue.

Here, the government concedes that prior to the foreclosure sale the Southland lien was perfected and senior to the federal tax lien, which was created by a later filed notice. However, relying on McDermott the government argues that its tax lien became senior to Southland's lien after the foreclosure. According to the government, Southland's lien was extinguished by the foreclosure sale. The lien of a sold out junior lienor who fails redeem from a foreclosure sale is extinguished by foreclosure. Bank of Hemet v. United States [81-1 USTC ¶9379 ], 643 F.2d 661 (9th Cir. 1981). Nevertheless, where a junior lien is sold out at the foreclosure of the senior lien, if the mortgagor subsequently reacquires the property the junior lien is revived. Barberi v. Rothchild, 7 Cal.2d 537, 538-39 (1936). Southland's lien became inchoate as it no longer attached to identifiable real property. Consequently, the Southland lien reattached ³ to two of the ranches when Nunez conveyed them to Hilda Padron as part of the settlement of her suit against Nunez. On the date of the conveyance in September of 1992, Southland's lien again became perfected. But it was junior to the government's lien, which was perfected since June of 1987, when filed. See McDermott [93-1 USTC ¶50,164 ], 113 S. Ct. at 1529-30.

Southland counters that its lien was never extinguished by the foreclosure because Nunez, the Padrons' attorney, purchased the property. It contends that Nunez breached his attorney-client relationship with Padron by purchasing the Sequoia deed of trust (with money given him in trust by the Padrons) and by then foreclosing on that deed of trust and purchasing at the foreclosure sale. The wrongful purchase by Nunez at the foreclosure sale allegedly created a constructive trust in favor of the Padrons by virtue of Nunez's breach of fiduciary duty. Since the Padrons were the beneficiaries of the constructive trust, they retained equitable title to the ranches and Southland's lien was never extinguished.

An attorney who purchases a deed of trust on a client's property commits a breach of duty and holds the interest in constructive trust for the client. Calzada v. Sinclair, 6 Cal.App.3d 903, 914-16 (1970). A constructive trust is a remedy that requires a party wrongfully holding property to convey the property to the rightful owner. It is imposed to prevent unjust enrichment and provide restitution. Pacific Lumber v. Superior Court, 226 Cal.App.3d 371, 378 (1990).

The government argues that there is no evidence supporting Southland's claim that Nunez held the property in constructive trust. However, the government conceded, for the purposes of this motion, the truth of the facts alleged in Southland's first amended complaint. Since these facts are undisputed, Southland need not produce evidence of them to defeat the government's motion. ⁴ The facts conceded by the government are sufficient to establish a constructive trust in either of two ways: (1) Nunez's breach of his attorney-client relationship with Padron Brothers, Calzada, 6 Cal.App.3d at 914-15; (2) Nunez's misuse of funds given to him in trust for the benefit of the Padrons.

Assuming that Nunez held the ranches in constructive trust for Hilda Padron after purchasing them at the foreclosure, the fact remains that the foreclosure extinguished Southland's lien. If the foreclosure is not set aside, its legal effect cannot be avoided. ⁵ Southland's argument in its supplemental brief suggests that it seeks to set the foreclosure in this proceeding. It claims that where a deed of trust is foreclosed, purchased by a third party, and then transferred to the original owner for the purpose of eliminating junior liens the foreclosure is invalid. Although there are no California cases directly on point, one appellate decision states that, "[a] property owner may not sever the rights of a beneficiary under a trust deed by allowing irrigation assessments to become delinquent and then, through the assistance and connivance of a third party, reacquire title to the detriment of the junior lien claimant." Dowd v. Glenn, 54 Cal.App.2d 748, 755 (1942). The government argues Dowd is limited to its facts because the controlling statute in that case, the California Irrigation District Act, provided that the deed conveyed at an irrigation district foreclosure sale was conclusive evidence that the sale was valid, "except as against actual fraud." Dowd, 54 Cal.App.2d at 967.

Although Dowd is not controlling in this case, its premise, that actual fraud by a trustor is grounds to set aside a foreclosure sale, is sound. However, it is unnecessary to decide that question here. Assuming, arguendo, that junior lienholders can set aside a foreclosure on the ground of actual fraud by the trustor, Southland has failed to timely assert such a claim. The limitations period for fraud is three years. Cal.Civ.Proc. §338(d) . Actions to set aside a foreclosure sale on the basis of fraud are subject to the three-year statute. Hatch v. Collins, 225 Cal.App.3d 1104, 1110 (1990). Noting that §338(d) applies to equitable actions "to cancel an instrument and impose a constructive trust based on fraud," Hatch holds that §338 governs an action to set aside a foreclosure sale on the ground that the trustee and the beneficiary conspired to depress the price paid for the land through fraud. Id.

Southland's original complaint was filed August 4, 1993 , more than three years after the foreclosure of the Sequoia deed of trust on February 20, 1990 . Furthermore, neither the original complaint nor the first amended complaint specifically allege that the Padrons sought to fraudulently eliminate Southland's liens through foreclosure of the Sequoia deed of trust. ⁶ Southland did not claim that the foreclosure was fraudulent until its supplemental brief. Fraud generally must be pleaded with specificity. In actions to set aside fraudulent conveyances the plaintiff must at least allege facts showing actual or constructive fraud. See 5 B.E. Witkin , California Procedure §830, at p. 275 (3d ed. 1985). Here, Southland did not allege fraudulent intent, and thus did not state a claim to set aside the foreclosures sale on the ground that it was fraudulent.

Since Southland has not timely asserted or properly pleaded fraud it cannot set aside the foreclosure in this case (assuming arguendo that it could state a valid claim). The legal consequence of the foreclosure--destruction of Southland's junior lien--remains in effect. Once Southland's lien was extinguished, it lost its priority over the government's tax lien. Although both liens simultaneously reattached when Hilda Padron obtained title to two of the ranches, for priority purposes the tax lien is deemed perfected on the date it was filed, June 16, 1987. Even accepting Southland's theory that when Nunez purchased the ranches at the foreclosure Hilda Padron obtained equitable title, the liens were extinguished and then reattached simultaneously, giving the tax lien priority.

In its supplemental brief, Southland advances a second argument. It contends that the two ranches Nunez transferred to Padron constituted excess proceeds from the foreclosure sale. Southland claims that it has priority over the government with respect to excess proceeds of the foreclosure sale. See Cal.Civ.Code §2924k. Under §2924k, foreclosure sale proceeds are distributed in the following priority: (1) to payment of the expenses of the sale; (2) to payment of the obligations secured by the deed foreclosed upon; (3) to satisfy the outstanding obligations secured by junior liens in the order of their priority; and (4) to the trustor.

Southland is correct that under 52924k its lien attached to the foreclosure proceeds ahead of the tax lien because Southland's lien was senior to the tax lien prior to the sale. However, the proceeds were insufficient to pay any portion of Southland's note after the interests senior to Southland were satisfied, because Nunez bid the amount of the Sequoia debt. This amount consumed the proceeds of the sale. Once the expenses of the foreclosure were paid, the remainder of the proceeds were paid to Nunez to satisfy the Sequoia note. There was no excess to be paid to Southland.

Southland makes the novel argument that "where a beneficiary acquires real property by means of a credit bid, the proceeds of the sale consist of the property." (Pl's Supp. Opp. at 5:25-27). It contends that the two ranches transferred by Hilda Padron in settlement of her suit against Nunez constitute "proceeds" of the sale. There is no authority for the proposition that the very property that is the subject of the foreclosure sale can constitute the proceeds of the sale when the purchaser makes a credit bid. Southland quotes from Witter v. Bank of Milpitas, 204 Cal. 570, 580-81 (1928), in which the plaintiff claimed that foreclosure of a deed of trust was invalid because the trust beneficiary purchased the property with a credit bid but did not tender cash at the sale. That case simply holds that where the beneficiary of a trust deed forecloses, it can bid the outstanding balance of the debt without tendering cash to the trustee. ⁷ It does not hold that where property is purchased by a credit bid the property constitutes the proceeds of the foreclosure.

Moreover, the property foreclosed upon cannot reasonably be characterized as the "proceeds" of foreclosure. The very purpose of a foreclosure sale is to sell real property (i.e. convert its value to money) so that the debt(s) secured by the property can be paid. The proceeds of foreclosure cannot be the land which is sold. Rather, the price paid by the purchaser of the property constitutes the sale proceeds. Here, Nunez purchased the ranches for the amount owed on the Sequoia note. Under §2924k, Southland was not entitled to any portion of the foreclosure proceeds. Nunez's transfer of two ranches to Padron, two years after the foreclosure in settlement of Padron's claims, did not constitute proceeds of the foreclosure sale. Southland does not have any interest in the ranches under §2924k.

III. CONCLUSION

The junior liens held by Southland and the government were extinguished when the Sequoia deed of trust was foreclosed. No legal proceeding to avoid the foreclosure has been initiated. Although Southland's lien reattached to the two ranches that Hilda Padron received in the settlement of her suit against Nunez, under McDermott, the government's tax lien reattached ahead of Southland's. For the above-stated reasons, the motion for summary judgment is GRANTED as to the claim of the United States that its tax lien has priority over Southland's lien.

SO ORDERED.

¹ For the purposes of this summary judgment motion, the government accepts as true the facts alleged in Southland's first amended complaint against the Padrons, which was filed in state court.

² The government correctly notes that the Internal Revenue Service was improperly named as a party to this case. The proper party is the United States of America . Krouse v. United States [75-1 USTC ¶9364 ], 380 F. Supp. 219, 221 (C.D. Cal. 1974).

³ The government concedes the Southland lien was revived for purposes of this motion.

⁴ In fact, the government has already conceded for the purposes of trial that the Nunez Accountancy Corporation acquired the Sequoia deed of trust and then purchased the three ranches at the foreclosure sale. (Scheduling Conference Order at 5:17-21 (March 30, 1994)).

However, the government correctly points out that the settlement between Hilda Padron and Nunez does not have any collateral estoppel effect in this case because the constructive trust claim was not litigated.

⁵ Southland argues that its interests should not be prejudiced by the Padron's failure to set aside the foreclosure. However, since Southland held a junior deed of trust that was extinguished by the sale, it could have sought to avoid the sale itself on the ground that it was a fraudulent attempt to extinguish Southland's lien. See, e.g., Bank of Seoul & Trust Co v. Marcione, 198 Cal.App.3d 113 (1988) (junior lienholder stated claim to set aside nonjudicial foreclosure sale where auctioneer refused to accept junior lienor's bid).

⁶ The relevant portion of both complaints states, "Plaintiff is seeking quiet title against the claims of defendants as follows: Plaintiff contends that the lien of Plaintiff's Deed of Trust was not terminated by the Foreclosure Sale, and in the alternative, if such lien was terminated, it reattached and became an encumbrance upon the Property when defendants acquired title to the Property subsequent to the Foreclosure Sale." (Southland's Complaint, ¶20, First Amended Complaint ¶20).

⁷ This rule is now codified at Cal.Civ.Code §2924h, which states in part, "The present beneficiary of the deed of trust under foreclosure shall have the right to offset his or her bid(s) only to the extent of the total amount due the beneficiary including the trustee's fees and expenses."

 

 

[66-2 USTC ¶9668]K-R-K Investment Company, an Arizona Corporation, Plaintiff v. United States of America, Defendant

U. S. District Court, Dist. Ariz. , No. Civ.-4516-Phx., 6/20/66

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Unrecorded and unwritten contract of sale as mortgage: Liens not filed with State Division of Motor Vehicles.--An unrecorded and unwritten contract of sale under which title to the property was retained by the seller was a chattel mortgage within the meaning of Code Sec. 6323 and took priority over the Government's tax lien which had not been recorded with the Division of Motor Vehicles as required by state law so as to be valid against subsequent encumbrances. Decision in Merchant's Loan v. U. S., (DC) 57-2 USTC ¶9741, 159 F. Supp. 227, is no longer applicable since Arizona state law now requires that any motor lien vehicle lien instrument must be filed with the Arizona Motor Vehicle Division to make such lien valid.

Kanne & Bickart, 1118 Arizona Title Bldg., Phoenix , Ariz. , for plaintiff. William P. Copple, United States Attorney, Richard Gormerly, Assistant United States Attorney, Federal Bldg., Phoenix, Ariz., for defendant.

Opinion and Order

CRAIG, District Judge:

Plaintiff's and defendant's cross motions for summary judgment were heard by the Court on May 23, 1966, and taken under advisement. The Court now being fully advised,

IT IS ORDERED that the plaintiff's motion for summary judgment is granted, and defendant's motion for summary judgment is denied.

If plaintiff's unrecorded interest in taxpayer's automobile can be termed a chattel mortgage, then defendant's notice of federal tax lien, not filed with the Arizona Motor Vehicle Bureau, was not properly filed under state law, and therefore invalid against plaintiff mortgagee under Federal law requiring compliance with state law to make tax lien valid. 26 USC 6323(a)(1); ARS 11-464, as amended by Laws 1958, Ch. 85, sec. 1. (Merchants Loan v. U. S. (DC Ariz. 1957) [57-2 USTC ¶9741] 169 F. Supp. 227 is no longer applicable as decided prior to the change in ARS 11-464. This change required federal tax liens to be filed pursuant to ARS 28-325 in order to be valid against subsequent encumbrances). ARS 28-325 at the time the tax lien was filed and now requires filing of any motor vehicle lien instrument with the Arizona Motor Vehicle Division to make such lien valid.

It appears, however, more appropriate to term the informal arrangement between plaintiff and taxpayer an unrecorded and unwritten contract of sale, as the title was reserved by seller. U. S. v. Montgomery (DC Ariz. 1923) 289 F. 125. To say that such a contract is a conditional sale would ordinarily make it invalid against a subsequently acquired lien due to plaintiff's failure to record it pursuant to 14 ARS 44-305 and 9 ARS 28-325, if the subsequent tax lien had been validly acquired. As indicated above, due to the failure to follow state law as provided, the filing of the federal tax lien was ineffective, making the lien itself invalid under 26 USC 6323(a)(1) against the contract of sale. Although not specifically mentioning conditional sales, 26 USC 6323 has been held to apply by construction and intent to a contract of conditional sale in Gauvey v. U. S. (CCA 8 1961) [61-1 USTC ¶9478] 291 F. 2d 42, and to an unrecorded contract of conditional sale. GMAC v. Wall (DC NC 1965) 239 F. Supp. 433, at 435.

Therefore the full amount of the sale proceeds now deposited with the Clerk of this Court is ordered to be paid over to plaintiff.

 

 

[62-2 USTC ¶9610] United States of America , Plaintiff v. Fabricated Air Products Company, Inc., Leona Mancil, Orange National Bank, Thermal Supply Company, Defendants

U. S. District Court, East. Dist. Tex., Beaumont Div., Civil Action No. 4282, 6/22/62

[1954 Code Sec. 6323]

Priority of liens: Chattel mortgage liens: Federal tax liens.--Two holders of chattel mortgage liens recorded them five months prior to assessment and notice of Federal tax liens. The taxpayer was not insolvent and had not made a voluntary assignment of assets. Therefore, the chattel mortgage liens had priority over the tax liens.

William Wayne Justice , United States Attorney, P. O. Box 1049 , Tyler , Tex. , for plaintiff. Leyton Jenkins, Dun & Jenkins, 605 Front St., Paul R. Owens, Sexton & Owens, 711 Division St., Orange, Tex., for defendants.

Memorandum Opinion

FISHER, District Judge:

This is an action in which the United States of America, hereinafter referred to as Plaintiff, seeks a recovery of certain assessed and outstanding taxes, penalties and accrued interest against Defendant, Fabricated Air Products Company, Inc., hereinafter Referred to as Fabricated, in the total amount of $3,984.83, plus interest as provided by law, and attempts to enforce its tax liens against personal property, to wit, chattel mortgages held by the Orange National Bank, hereinafter referred to as the Bank, and Thermal Supply Company, hereinafter referred to as Thermal. The taxpayer, Fabricated, does not contest the tax liability to the Plaintiff, but, joined by the other defendants, denies insolvency and voluntary assignment of assets which would invoke Section 3466 of the Revised Statutes; further, defendants Thermal and the Bank, deny that the indebtedness owing to them was in the nature of promissory notes and accounts receivables, asserting further that they are secured creditors as evidenced by chattel mortgages properly and timely recorded and therefore, have a superior and prior lien to that of the plaintiff.

[Construction Contract]

In October or November, 1957, Fabricated entered into a construction contract with defendant, Leona Mancil, hereinafter referred to as Mancil, to install certain heating and air-conditioning equipment in a cafeteria. The approximate cost of this work was $9,000.00 and was to be paid in cash within thirty (30) days after completion. The installation was completed on or about February 17, 1958 , thereby obligating defendant Mancil to pay for the installation within thirty (30) days from that date.

Fabricated, by three separate thirty (30) day promissory notes, borrowed $6,132.00 from the Bank to purchase the air-conditioning equipment and pay for the labor needed for the completion of this job. One note for $3,432.00 was advanced to pay for the air-conditioning equipment; one note for $1,400.00 was advanced to pay for labor; and the third note for $1,200.00 was advanced to pay for labor.

Thermal supplied material only to Fabricated for this job, totaling approximately $3,800.00.

On January 3, 1958 , Mancil executed a chattel mortgage and vendor's lien note to Fabricated for $3,811.76, which amount equaled the materials supplied by Thermal, plus interest.

On January 17, 1958 , Mancil and Fabricated jointly executed a chattel mortgage and note to the Bank in the sum of $7,066.08, which amount represented the total of the three loans from the Bank to Fabricated, plus interest. This chattel mortgage and note was duly filed of record in the Chattel Mortgage Register, Orange County , Texas , on February 4, 1958 .

On February 14, 1958 , Fabricated made an assignment to Thermal of the chattel mortgage and note in the amount of $3,811.76 executed by Mancil to Fabricated on January 3, 1958 . This chattel mortgage and note was duly filed of record in the Chattel Mortgage Register, Orange County , Texas on February 14, 1958 .

[Jeopardy Assessment]

The Commissioner of Internal Revenue, on the various dates set forth in the following schedule, under the heading, "Date of Assessment", made jeopardy assessments, pursuant to Section 6862 of the Internal Revenue Code of 1954, against defendant Fabricated for withholding and federal unemployment taxes, penalties and accrued interest. The total of each assessment is itemized in the schedule under the heading "Amount Assessed and Outstanding." Concurrently with these assessments, notice thereof was given to and demand for payment was made upon the defendant taxpayer, Fabricated. On the dates specified under the heading, "Date Notice of Lien", (Form 668) was filed for the corresponding assessments in Orange County , Texas .

SCHEDULE

                                             Amount Assessed                                    Date Notice of

Type of Tax and Taxable Period               and Outstanding         Date of Assessment             Lien Filed

Withholding (3rd Qtr. 1957) ........                 $ 41.51                    
1-31-58
                 
6-4-58

Withholding (4th Qtr. 1957) ........                2,738.65                    
6-11-58
                
6-16-58

Withholding (1st Qtr. 1958) ........                  313.65                    
6-11-58
                
6-16-58

Federal Unemployment Tax (1957) ....                  891.02                    
6-11-58
                
6-16-58

Total ..............................               $3,984.83

 

The defendant taxpayer neglected and refused to pay any part of these assessments.

The plaintiff contends that Revised Statute 3466, 31 U. S. C. A., Section 191, is applicable in this case and gives the United States a priority superior to any interest claimed in the chattel mortgages and notes by the Bank and Thermal. Revised Statute 3466 provides:

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed." 31 U. S. C. A., Section 191.

Section 6321 of the Internal Revenue Code of 1954 provides:

"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 presonal, belonging to such person."

Section 6323 of the Internal Revenue Code of 1954 provides:

"(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 . . . etc."

This Court must now decide if Revised Statute 3466 (31 U. S. C. A., Section 191) is applicable to the facts above presented to give the plaintiff a priority over the chattel mortgagee defendants who perfected their chattel mortgage liens under Texas law prior to the time the Plaintiff perfected its lien under Sections 6321 and 6323 of the Internal Revenue Code of 1954.

For Revised Statute 3466 to the applicable, (a) there must be an insolvent debtor, (b) who makes a voluntary assignment of his assets.

Whether the plaintiff is entitled to preferential status given it under Section 3466 depends upon Fabricated being insolvent, within the meaning of the Statute, on January 17, 1958 and February 14, 1958, the dates of said assignments of chattel mortgages to the Bank and to Thermal; and if it was, whether the assignment or transfer to the Bank and to Thermal constituted a voluntary assignment of assets.

[Insolvency]

Discussing the issue of insolvency first, a person shall be deemed insolvent within the provisions of this Act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not at a fair valuation, be sufficient in amount to pay his debts. United States v. Oklahoma , 261 U. S. 253; 11 U. S. C. A. Section 1(15). Further, a debtor is insolvent within the meaning of the Statute if, not having sufficient property to pay all his debts, he either makes a voluntary assignment thereof or commits an act of bankruptcy. United States v. Gotwals, 156 F. 2d 692.

There is evidence that Fabricated was unable to pay its debts as they became due in the usual course of business. But this is not the test. The mere inability of the debtor to meet his obligations does not constitute insolvency within the meaning of Section 3466. The insolvency which entitles the United States to a preference over creditors can only be established where a debtor, having insufficient property to pay all his debts, makes an assignment of all his property. United States v. Oklahoma, supra.

This Court now concludes that the evidence adduced by the plaintiff is insufficient to show Fabricated had more liabilities than assets at the time in question and was insolvent as that term is defined under the cases interpreting Section 3466, 31 U. S. C., Section 191.

[Voluntary Assignment of Assets]

Assuming, arguendo, that Fabricated was insolvent, it is the opinion of this Court that Fabricated did not make a voluntary assignment of assets, within the meaning of Section 3466. The assets in question were not in the nature of accounts receivables or unsecured promissory notes as contended by the plaintiff.

A voluntary assignment has been befined as a transfer without compulsion of law by a debtor of his property to an assignee in trust to apply the same or the proceeds thereof to the payment of his debts and to return the surplus, if any, to the debtor. United States v. Gotwals, supra. The assignments in this case were not made to an assignee in trust to pay unsecured debts, but were actually made for the purpose of securing the payment of materials and labor necessary for the completion of a particular and specific installation, namely, the Mancil job, which indebtedness was not an account receivable or an unsecured promissory note but was evidence by a chattel mortgage properly filed and recorded several months prior to the plaintiff's assessment and notice of liens.

Since the chattel mortgage liens of the Bank and Thermal were acquired in the ordinary course of business, were not given with the intent to hinder, delay, or defraud any creditors, and were recorded pursuant to Texas law some five (5) months prior to the time the Plaintiff made its assessments and gave notice of its liens, Sections 6321 and 6323 of the Internal Revenue Code of 1954, would apply to give the defendants, the Bank and Thermal, a superior lien over the tax lien of the plaintiff. United States v. Atlantic Municipal Corporation [54-1 USTC ¶9392], 212 F. 2d 709; Exchange Bank and Trust Company v. Tubbs Manufacturing Company [57-2 USTC ¶9803], 246 F. 2d 141.

To hold otherwise would place an undue burden upon lending institutions not contemplated by Revised Statute 3466. In United States v. Wilkinson (1878; c.c.) 5 Dill. 295. Fed. Cas. No. 16,695, the Court, in answering the question whether the priority of United States so impresses itself upon the property of the debtor as to create a lien thereon observed that if that be the effect given to the Statute, then every person dealing with one who is or may become indebted to the United States does so at his peril; that all property of a debtor of the United States would be affected by possible liens, the existence and extent of which no one could well ascertain.

Judgment will be entered for the defendants, with costs.

 

 

[61-1 USTC ¶9484]George H. Allan, individually and as District Director of Internal Revenue Service for the District of Colorado, Appellant v. Diamond T Motor Car Company, an Illinois Corporation, Appellee

(CA-10), U. S. Court of Appeals, 10th Circuit, No. 6577, 291 F2d 115, 5/16/61, Rev'g the decision of the District Court, 60-2 USTC ¶9557

[1954 Code Sec. 6323]

Priority of liens: Conditional sales contract under Colorado law.--A Federal tax lien is entitled to priority over the claim of a vendor under a conditional sales contract even though the contract was dated before the notice of the lien was filed and is treated as a purchase money chattel mortgage under Colorado law. The notice of the tax lien had been filed (and the property seized under a distraint warrant) before the conditional sales contract had been recorded in the county in which the personal property was located. By placing the property under the vendee's control and giving it the power to sell it, the vendor had clothed the vendee with the indicia of ownership, thus creating a property right in the vendee to which the tax lien could attach. The fact that the Government knew of the delinquent taxpayer-vendee's financial embarrassment was not "actual notice" that a mortgage existed. District Court reversed.

Joseph Kovner, Department of Justice. Washington 25, D. C., (Abbott M. Sellers, Acting Assistant Attorney General, Lee A. Jackson, and Rob ert N. Anderson, Department of Justice, Washington 25, D. C., and Donald G. Brotzman, United States Attorney, 348 Post Office Bldg., Denver 1, Colo., with him on brief), for appellant. Rob ert D. Inman, 800 Majestic Bldg., (Fred M. Winner, 834 Majestic Bldg., Denver 2, Colo. , with him on brief), for appellee.

Before BRATTON, LEWIS, and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge:

The issue is whether an unrecorded purchase money chattel mortgage takes precedence over a federal tax lien. The trial court held for the mortgagee and the District Director of the Internal Revenue Service appeals.

Gamble Equipment Company (Gamble) owed federal corporate income tax in the amount of $15,215.76 for 1951. After appropriate extensions by agreement, assessment of the tax was made on October 12, 1955 . On December 10, 1955 , Gamble entered into a conditional sales agreement with appellee-plaintiff Diamond T Motor Car Company (Diamond T) covering a stock of merchandise consisting of automotive parts located in Adams County , Colorado , to secure the payment of the cost of that stock. The purchase money obligation was in the amount of $60,000 and was payable in installments, the last of which fell due in 1958. The conditional sales agreement was promptly recorded in Denver County but was not recorded in Adams County until March 11, 1957 . On February 20, 1957 , notice of the federal tax lien was filed in Adams County and on March 5, 1957 , the property was seized under a distraint warrant and was sold on April 12, 1957 , for $7,500. Diamond T sued to recover and was awarded judgment for the sale price.

[Priority of Liens Question]

The applicable federal statute, 26 U. S. C. §6323 (1958 ed.) provides that a federal tax lien such as that here asserted "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed" in the office designated by the law of the state wherein the property is located for such filing. State law controls the determination of whether the taxpayer has property or property rights to which the federal tax lien can attach and federal law determines the priority of competing liens asserted against such property. ¹ The United States Supreme Court has repeatedly applied the perfected lien standard in cases involving liens under state law in competition with federal tax liens. ² In United States v. R. F. Ball Construction Company [58-1 USTC ¶9327], 355 U. S. 587, this standard was applied to contractual liens and, following the Ball Construction Company decision, we applied the perfected lien standard to a contractual lien in United States v. Chapman [60-2 USTC ¶9667], 10 Cir., 281 F. 2d 862, 869. Federal law determines the perfection of the lien. ³

[Did Taxpayer Have Property or Property Rights]

The first question is whether, under Colorado law, the taxpayer had any property or property rights in the stock of merchandise to which the federal lien could attach. Colorado treats a conditional sales agreement as a chattel mortgage for recording purposes. ⁴ A mortgage recorded in the wrong county has no more effect than an unrecorded mortgage. ⁵ Such a mortgage is good as between the parties irrespective of recording ⁶ and only need be recorded as required by Colo. Rev. Stat. §20-1-1 (1953) to be effective against creditors and third persons having liens enforceable by execution, attachment, or contract acquired during the time when the mortgaged property remained in possession of the mortgagor. ⁷ Colorado has further held that a purchase money mortgage has preference over other claims or liens through the mortgagor even though prior in time. ⁸

[Trial Court Held for Vendor]

The trial court was impressed by the fact that in Colorado the unrecorded mortgage was good between the parties and preceded the filing of notice of the tax lien. That point is not controlling. In the Ball Construction Company case the Taxes assignment, there treated as a mortgage, was good between the parties as was pointed out in the dissenting opinion but the Supreme Court gave priority to the tax lien. The Chapman case, the decision of which was made after the disposition of the instant case in the lower court, dealt with an assignment which was argued to be a purchase good so far as the parties were concerned, and we upheld the tax lien. A secret agreement between private parties as to the title to personal property is not enough to defeat the enforceability of a federal tax lien.

The property involved here was a stock of merchandise. The agreement gave Gamble the right to sell and required the use of such of the sale proceeds as was necessary to replace articles sold. Such replacements were to be subject to the agreement. ⁹

In Exchange National Bank v. Hough, 10 Cir., 258 F. 2d 785, 788-789, we reviewed the Colorado decisions relative to the effect of chattel mortgages wherein the mortgagor had the right to sell the mortgaged property and held that when a mortgagee gives to a mortgagor general authority to sell the mortgaged property for the mortgagor's own benefit or account, the lien is waived whereas if the mortgaged property is sold and the proceeds applied on the mortgage debt, the lien of the mortgage remains valid and enforceable. In the instant case we are aided by no evidence as to sales of mortgaged property or disposition of sales proceeds. It is apparent from the face of the instrument that the mortgagor had the right to retain for his own benefit so much of the sales proceeds as were in excess of replacement cost. As we pointed out in the Exchange National Bank case the reluctance of the Colorado courts to permit the imposition of an effective lien on a stock of goods held by a dealer for sale resulted in the passage of the Colorado Inventory Mortgage Act. ¹⁰ In the instant case there was no effort made to comply with that law. In the circumstances, the authorization of sale with the right to retain part of the proceeds for the mortgagor's benefit is a waiver of the lien of the mortgage so far as those protected by the statute are concerned.

[After-Acquired Property Involved]

The stock of merchandise which was distrained and sold was not among the assets of the taxpayer at the time of the tax assessment but was acquired later by means of the purchase money mortgage transaction. There is a question of fairness in subjecting property so obtained to the antecedent tax lien and it may be argued forcibly that the interest retained by the mortgagee removes the property from a status which would subject it to the tax lien. The difficulty is that the mortgagee placed the property in the possession of the mortgagor with the right to sell in the ordinary course of business and to retain at least a portion of the proceeds. As Diamond T conferred upon Gamble "the usual evidences and indicia of ownership" ¹¹ for the very purpose of enabling Gamble to deal with the property as its own, it may not now complain that the seizure under the distraint divested the mortgagor of property which it did not own. ¹² Storke and Sears in their authoritative text, Colorado Security Law, §24, pp. 89-90, say: "An execution creditor is treated as a purchaser when there is a levy on property in the possession of the judgment debtor, to whom the true owner has given the 'indicia of ownership.'" At the time of the distraint seizure the position of the government was that of an execution creditor and, hence, the same as that of a purchaser. To say that a purchaser in such circumstances may be divested of ownership by an unrecorded purchase money mortgage is to disregard the realities of every day business life. We hold that under Colorado law Gamble had rights to the property in question which made that property subject to distraint.

The next question is the relative priority of the mortgage lien and the tax lien at the time of the seizure. This must be determined under the perfected lien rule, and there was no perfected lien because the mortgage was not recorded in the proper county at the time of the seizure under the distraint. To deny priority to the tax lien would be to subordinate that lien to a secret and unperfected contractual lien, the purchase money mortgage. The purpose of §6323 is to protect the lienors there mentioned from a secret federal tax lien, not to subject a federal tax lien to a secret private lien.

A further contention of Diamond T is that the government had notice of the conditional sales agreement. This is predicated on the theory that in October, 1955, the government knew the financial position of Gamble was such that it could not acquire additional property with its own resources. The Colorado statute, § 20-1-5 , provides in part that one who obtains an interest in personal property "with actual notice" that the same is mortgaged acquires no right to that property in preference to the mortgage even though the mortgage is not recorded. Knowledge of financial embarrassment is not "actual notice" of a mortgage. While the trial court made no finding on the question of notice, a review of the record convinces us that Diamond T did not sustain the burden of establishing such notice.

Reversed with directions to enter judgment for the defendant.

¹ Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-514.

² United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47; United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211; United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218; United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361; United States v. Colotta [55-2 USTC ¶9680], 350 U. S. 808; United States v. White Bear Brewing Company [56-1 USTC ¶9440], 350 U. S. 1010; United States v. Vorreiter [57-2 USTC ¶9956], 355 U. S. 15; and United States v. Hulley [58-2 USTC ¶9926], 358 U. S. 66.

³ United States v. Scovil, supra, p. 220.

⁴ Illinois Building Co. v. Patterson, 91 Colo. 391, 15 P. 2d 699.

⁵ Stitt v. Spengel House Furnishing Co., 58 Colo. 559, 146 Pac. 770.

⁶ McClain v. Savanac Machine Company, 94 Colo. 145, 28 P. 2d 1009.

⁷ Brug v. Herbst, 78 Colo. 128, 239 Pac. 868; Glass & Bryant Mercantile Co. v. Farmers State Bank, 83 Colo. 193, 265 Pac. 682.

⁸ Rob inson v. Wright, 90 Colo. 417, 9 P. 2d 618.

⁹ The pertinent provision of the conditional sale agreement read: "The vendee herein [Gamble] is hereby authorized to sell for value any and all of the property herein listed in this conditional sale agreement. The vendee, however, is to use the proceeds of the said sale or so much thereof as is necessary to replace the articles so sold. The articles purchased to replace the articles so sold shall be subject to all the terms and conditions of this conditional sale the same as if said articles were the original articles set forth in this conditional sale."

¹⁰ Colo. Rev. Stat. §§ 20-2-1 to 20-2-12 (1953).

¹¹ Schraeder v. Mitchell, 73 Colo. 320, 323, 215 Pac. 147.

¹² In Schraeder v. Mitchell, supra, an execution was made on cattle not owned by the judgment debtor and the seizure was upheld on the ground that the true owner had supplied the judgment debtor with the usual signs of ownership so that he could deal with the property as his own.

 

 

[60-2 USTC ¶9557]Diamond T Motor Car Company, an Illinois corporation, Plaintiff v. George H. Allen, individually, and as District Director of Internal Revenue for the District of Colorado, Defendant

U. S. District Court, Dist. Colo., C. A. No. 5705, 6/16/60

[1954 Code Sec. 6323]

Tax lien: Validity against mortgagee: Unrecorded mortgage: Peoperty seized as security of mortgage.--A conditional sales agreement between the delinquent taxpayer and a third party, though unrecorded, was held to be a valid chattel mortgage and since it was dated before the filing of the notice of federal tax lien it constituted a prior claim to property which secured the mortgage.

Fred M. Winner, 834 Majestic Bldg., and Rob ert D. Inman, 800 Majestic Bldg., Denver 2, Colo. , for plaintiff. Donald G. Brotzman, United States Attorney, 348 Post Office Bldg., Denver 1, Colo., and Harold S. Larson, Tax Division, Department of Justice, Washington, D. C., for defendant.

Amended Findings of Fact, Conclusions of Law, and Judgment

CHRISTENSON, District Judge.

This matter came on for trial on the 12th day of April, 1960, pursuant to order of Court, the plaintiff represented by Rob ert D. Inman, attorney at law, and the defendant represented by his attorney, Harold S. Larson, attorney, Tax Division, Department of Justice. At the conclusion of the testimony, the Court entered herein on said date its findings of fact, conclusions of law, and judgment. Thereafter, within the time permitted by the Federal Rules of Civil Procedure, the plaintiff filed its motion to amend the findings of fact and conclusions of law. The Court then permitted the parties to file written brief in support of and contrary to said motion to amend the findings of fact and conclusions of law, and upon consideration of said briefs filed by the parties hereto, and upon full consideration of the motion filed by the plaintiff, the Court entered its memorandum decision on the 1st day of June, 1960, directing that the motion filed by the plaintiff be granted and that counsel for the plaintiff serve and submit to the Court within fifteen days from date thereof proposed amended findings of fact and conclusions of law and a form of judgment consistent with said memorandum decision. The Court therefore finds as follows:

Findings of Fact

1. The Court has jurisdiction of this action.

2. On October 12, 1955 , corporate income tax in the amount of $15,215.76 for the fiscal year ending July 31, 1951 , was duly assessed against Gamble Equipment Company, a Colorado corporation.

3. On October 18, 1955 , first notice and demand was issued against the Gamble Equipment Company.

4. On July 23, 1955, the Gamble Equipment Company entered into an extension agreement with the defendant, providing for the payment of taxes due from the Gamble Equipment Company for the period from 1951 to 1953.

5. On December 10, 1955, the Gamble Equipment Company entered into a conditional sales agreement with the plaintiff covering certain property, consisting of automobile and truck parts on hand at the Gamble Equipment Company at 5701 Colorado Boulevard , Denver , Colorado , to secure the payment of a promissory note in the amount of $60,000.

6. The conditional sales agreement referred to in paragraph 5 above was not recorded in Adams County , Colorado , the county in which the Gamble Equipment Company was located.

7. On February 20, 1957 , a notice of federal tax lien was issued in connection with the unpaid accounts of the Gamble Equipment Company, and the notice was filed for record in the office of the clerk and recorder of Adams County , State of Colorado , and recorded in Book 648 at page 91 on said date.

8. Under a writ of distraint the property in the possession of the Gamble Equipment Company was seized by the defendant on March 5, 1957 .

9. Included in the property seized by the defendant were the parts which the Gamble Equipment Company had on hand and which were the security for the conditional sales agreement dated December 10, 1955 , between the plaintiff and the Gamble Equipment Company.

10. The parts which were the security for said conditional sales agreement were sold by the defendant and from the sale thereof the sum of $7,500.00 was received by said defendant on April 12, 1957 . Thereafter, the defendant retained said sum of money and has refused to turn said sum over to the plaintiff upon demand.

Conclusions of Law

1. The conditional sales agreement entered into between the Gamble Equipment Company and the plaintiff, dated December 10, 1955 , was a valid chattel mortgage as between said parties under the general law of Colorado , C. R.-1953, Sec. 20-1-1 , and 20-1-20 .

2. Since the date of said chattel mortgage was December 10, 1955, and since said date was prior to the filing of the notice of tax lien by the defendant on February 20, 1957, said chattel mortgage or conditional sales agreement was a prior claim to said property which secured said mortgage under the provisions of 26 U. S. C. A., Sec. 63-21, Sec. 63-23(a).

3. The plaintiff is entitled to judgment as prayed for in its complaint, together with interest.

Judgment

WHEREFORE, it is ORDERED, ADJUDGED, and DECREED that plaintiff have judgment against the defendant in the sum of $7,500.00, together with interest from April 12, 1957 .

 

 

[61-1 USTC ¶9200] St. Jerome 's Croatian Credit Union, Plaintiff v. Harold R. All, District Director of Internal Revenue, Defendant

U. S. District Court, No. Dist. Ill. , East. Div., Civil Action No. 59 C 1825, 1/4/61

[1954 Code Sec. 6323]

Tax liens: Priority over chattel mortgagee: Injunction enjoining levy upon property.--The court denied an injunction to enjoin the Commissioner from proceeding under a Notice of Levy upon property obtained under a Writ of Replevin by plaintiff chattel mortgagee, since the government liens for withholding taxes were filed before September 8, 1958, when the chattel mortgage was filed.

Albert E. Bennett, Chicago , Ill. , for plaintiff. R. Tieken, United States Attorney, Burton Berkley, Assistant United States Attorney, Chicago, Ill., for defendant.

Findings of Fact and Conclusions of Law

IGOE, District Judge:

The above captioned case came on to be heard by the Court sitting without a jury on December 28, 1960 . The plaintiff was represented by Albert E. Bennett and the defendant herein by R. Tieken, United States Attorney for the Northern District of Illinois, and Burton Berkley, Assistant United States Attorney.

The Court, after carefully considering all the plaintiff's evidence, granted the defendant's motion for a finding and makes the following findings of fact and conclusions of law:

Findings of Fact

1. The instant action was commenced to enjoin the defendant from proceeding under the Notice of Levy served on the plaintiff on October 29, 1959 , and to obtain an adjudication of the property rights of the parties hereto in certain chattel property described in Exhibit A of the complaint.

2. The plaintiff is duly licensed to do business as a credit association in the State of Illinois .

3. On April 10, 1957, the plaintiff approved a loan to Stanley E. Tribbey and Lucille L. Tribbey for $10,000, taking as evidence of such indebtedness a judgment note secured by a chattel mortgage on property described in Exhibit A of the complaint, signed by Stanley E. Tribbey and Lucille L. Tribbey.

4. The chattel mortgage described in Finding 3 was not recorded with the Recorder of Deeds of Cook County, Illinois, until September 8, 1958.

5. On July 25, 1958, the plaintiff confessed judgment in the Municipal Court of Chicago, Case No. 58 M 5499 on the note described in Finding 3 in the amount of $12,616.00 and costs. Execution was issued and placed for service and a transcript of the judgment was filed with the Circuit Court of Cook County, Illinois, on August 18, 1958.

6. On September 29, 1958, pursuant to notice, a sale was held at public auction pursuant to the execution described in Finding 5, at which sale the plaintiff bought the property on a bid of $1,000.

7. On January 16, 1959, the plaintiff instituted a replevin action against Stanley E. and Lucille L. Tribbey in the Municipal Court of Chicago, Case No. 59 M. 1172 for the recovery of this property.

8. On February 26, 1959 , the plaintiff obtained the subject chattels from Stanley E. and Lucille L. Tribbey by Writ of Replevin.

9. On March 20, 1959 , judgment was rendered for the plaintiff in the replevin action described in Finding 7.

10. On November 29, 1957 , Stanley E. Tribbey, d/b/a Mechanical Engineering Co. was assessed the following amounts for federal withholding tax for the following periods:

Period Ending 
June 30, 1956
 .........         $876.00

Period Ending 
September 30, 1956
 ....          946.50

Period Ending 
December 31, 1956
 .....          838.41

After applying certain net payments, the outstanding balance on the assessment for the taxable period ending June 30, 1956 , is $799.23. No payments or credits have been applied to the other two assessments.

11. Notice of the federal tax liens for the assessments described in Finding 10 was filed with the Recorder of Deeds of Cook County, Chicago , Illinois , on April 24, 1958 , under Document No. 17188901.

12. On November 22, 1957 , the following assessments for withholding taxes in the following amounts and for the following periods were made against Stanley E. Tribbey, d/b/a Mechanical Engineering Co.:

Period Ending 
March 31, 1957
 ....         $2,063.94

Period Ending 
June 30, 1957
 .....          2,107.54

No payments or credits have been applied to these assessments.

13. Notice of the federal tax liens for the assessments described in Finding 12 was filed with the Recorder of Deeds of Cook County, Chicago , Illinois , on April 17, 1958 , under Document No. 17183392.

14. On April 8, 1958 , the following assessments for penalties on withholding taxes were assessed against Stanley E. Tribbey, d/b/a Mechanical Engineering Co. in the following amounts and for the following periods:

Period Ending 
March 31, 1957
 ....         $48.23

Period Ending 
June 30, 1957
 .....          54.10

On May 9, 1958 , an assessment was made against Stanley E. Tribbey, d/b/a Mechanical Engineering Co. for withholding tax for the period ending December 31, 1957 , in the amount of $1,189.53. No payments or credits have been applied to the above described assessments.

15. Notice of the federal tax liens for the assessments described in Finding 14 was filed with the Recorder of Deeds of Cook County, Chicago , Illinois , on July 21, 1958 , under Document No. 17266368.

16. On October 29, 1959 , notice of the federal tax liens as described in Findings 10 through 15 and a Notice of Levy were served on the plaintiff.

17. Mechanical Engineering Co. was at all times relevant to this proceeding a sole proprietorship operated by Stanley E. Tribbey.

Conclusions of Law

1. All Findings of Fact which may be concluded as a matter of law are hereby so concluded.

2. The liens of the United States of America as described in Findings 10 through 15 are superior to that of the plaintiff as described in Finding 3, inasmuch as they were recorded prior to the chattel mortgage of the plaintiff.

3. The liens of the United States of America attached to all property of the Mechanical Engineering Co., including that machinery which the plaintiff bought at the execution sale described in Finding 6.

4. The plaintiff is not entitled to injunctive relief to prevent the defendant from proceeding under the Notice of Levy served on the plaintiff on October 29, 1959 .

5. Judgment will be entered accordingly for the defendant and costs assessed against the plaintiff.

 

 

[58-1 USTC ¶9516]Arthur L. Vermillion, Plaintiff v. Lynn Brodrick et al., Defendants

U. S. District Court, Dist. Kan. , Civil Action No. W-1007, 3/26/58

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Priority of claims: Tax liens v. surety's chattel mortgage: Surety's completion of construction jobs after contractor's default: Assignment for benefit of creditors.--A contractor defaulted on two municipal construction jobs and the surety, as required by his surety contracts, assumed responsibility for completion of the jobs, thereby sustained a financial loss. Although the surety paid all federal taxes incident to the two jobs which accrued during the period of its control and supervision, the contractor was in default to the Government on FICA and withholding taxes on employees' earnings for periods before, during and after this period on these and/or other construction contracts. Prior to its completion of the two defaulted construction contracts the surety filed and had recorded a chattel mortgage upon the defaulting contractor's machinery and equipment. Subsequently, with the consent of the Government, the surety and all his other creditors, the insolvent contractor assigned his assets to a trustee for the benefit of creditors under an agreement providing that the proceeds of the trustee's sale of the mortgaged machinery and equipment would be substituted for these specific assets. Incident to the liquidation of the insolvent contractor's business the trustee sold the mortgaged assets, paid the net proceeds therefrom into Court and petitioned the Court to determine the relative priority of the Government and the surety as to these funds. The Court held that the Government's lien for taxes covering the period before the contractor's default became a general lien against their property on the date when the assessment list was received and, since it was received prior to the recording of the surety's chattel mortgage was entitled to first priority only as to such taxes. The surety had a superior claim to the balance of the funds.

Holmes, Mitchell & Holmes, Donald I. Mitchell, 623 Beacon Building , Wichita 2, Kan. , for plaintiff. William C. Farmer, United States Attorney, William F. Kolbe, Department of Justice, Washington, D. C., George Peabody, Beacon Building, Wichita 2, Kan., for United States. Foulston, Siefkin, Schoeppel, Bartlett & Powers, 608 Fourth National Bank Building, Wichita 2, Kan., for Employers Mutual Casualty Co., defendant.

Stipulation of Fact

SAVAGE, District Judge:

COME NOW the defendants, United States of America and Employers Mutual Casualty Company, a corporation, and make the following stipulation of fact for the sole purpose of submitting this controversy to the court for decision.

1. This is an action in the nature of an interpleader action and the court has jurisdiction of the parties and the funds.

2. The defendant, Employers Mutual Casualty Company, is a corporation organized and existing by virtue of the laws and the statutes of the state of Iowa , with its principal offices at Des Moines , Iowa , and is authorized to do business in the state of Kansas .

3. The intervention of the United States of America is sanctioned and directed by the Attorney General of the United States and is authorized and requested by the Commissioner of Internal Revenue by the United States. The United States of America is a corporation sovereign and body politic.

4. The claims of the United States of America and the Employers Mutual Casualty Company are superior and prior to the claims of all other parties defendant.

5. The registry of this court has in its possession the sum of Seven Thousand One Hundred Seventy-one and 63/100 Dollars ($7,171.63). The claim of the United States of America is in the sum of Seven Thousand Four Hundred Twenty-eight and 32/100 Dollars ($7,428.32), plus interest from the due date of the taxes assessed. The claim of Employers Mutual Casualty Company is in the sum of Seven Thousand and Forty and 18/100 Dollars ($7,040.18), with interest as provided by law from February 22, 1952 . Each of these parties contend their claim and right to the funds in the hands of the registry of this court is superior to the rights of the other.

6. On July 21, 1950 , N. W. Ricke and Edward J. Ricke, a partnership doing business under the firm name and style of Ricke Bros. Construction Co., entered into a contract with the City of Pratt , Kansas for the construction of certain street improvements and sewer improvements for the City of Pratt , Kansas . The Ricke Bros. Construction Co. was required to furnish a statutory bond in compliance with the General Statutes of Kansas . Pursuant to the contract, and in accordance with the Statutes, N. W. Ricke and Edward J. Ricke made application to the defendant, Employers Mutual Casualty Company, for such statutory bond, a copy of which application and bonds is attached hereto, made a part of this stipulation, and marked Exhibit "A" [not reproduced herein]. Pursuant to such application, the statutory bond was duly executed and was filed with the Clerk of the District Court of Pratt County, Kansas on July 28, 1950 .

7. On December 15, 1950 , the Ricke Bros. Construction Co. entered into a contract with the City of Anthony , Kansas to install certain curbing and guttering in that City. The Ricke Bros. Construction Co. was required to furnish a statutory bond in compliance with the General Statutes of Kansas . Pursuant to the contract, and in compliance with the statutes, N. W. Ricke, as a partner, made application to the defendant, Employers Mutual Casualty Company, for such statutory bond. The application, statutory bond, performance bond, proposal and contract are attached hereto, made a part of this stipulation, and marked Exhibit "B" [not reproduced herein]. Pursuant to such application, the statutory bond and performance bond were executed and duly filed with the Clerk of the District Court of Harper County, Kansas on April 2, 1951 .

8. On January 1, 1951 , the Ricke Bros. Construction Co. defaulted on the contracts with the City of Pratt and the City of Anthony , Kansas . Defendant Employers Mutual Casualty Company, under its bonds and applications, supervised the completion of the operation of Ricke Bros. Construction Co., met the payroll, and undertook to cause the contracts to be completed and performed, as required by the bonds and applications. Representatives of the Employers Mutual Casualty Company had actually appeared and inspected the jobs and made payments for work performed in December of 1950. Employers Mutual Casualty Company paid all federal taxes which accrued pertaining to the completion of the contracts while such completion was under its supervision and control.

9. The Employers Mutual Casualty Company continued to cause the contracts to be performed and to meet its obligations under the bonds and applications until final completion of the contracts and the determination of its loss on February 22, 1952 . The net amount of loss to the Employers Mutual Casualty Company under both contracts was Seven Thousand and Forty and 18/00 Dollars ($7,040.18).

10. The Employers Mutual Casualty Company notified the City of Anthony by letter of the default and its assignment under the application of bond on January 4, 1951 and caused such notification to be filed with the City Clerk on January 5, 1951 . A copy of such notification is attached hereto, made a part of this stipulation, and marked Exhibit "C". The City of Pratt, Kansas was notified on January 4, 1951 by a letter directed to the City Clerk, a copy of which is attached hereto, made a part of this stipulation, and marked Exhibit "D". Said letter was received by the Clerk of Pratt, Kansas , on or about January 5, 1951 .

11. The Commissioner of Internal Revenue assessed federal internal revenue taxes for the years 1950 and 1952, together with penalties and interest thereon as provided by law, against the defendant taxpayers Norbert W. Ricke, a/k/a N. W. Ricke, and Edward Ricke, doing business as Ricke Bros. Construction Co., Anthony, Kansas. The amounts assessed and the outstanding balance of the aforesaid taxes together with pertinent dates are as follows:

12. The Employers Mutual Casualty Company filed a document captioned a chattel mortgage on January 10, 1951 at 11:45 o'clock a. m., the same being recorded in Book "N", covering the principal machinery owned and operated by the Ricke Bros. Construction Co. A copy of this document is attached hereto, made a part of this stipulation, and marked Exhibit "E".

13. On May 13, 1953 , N. W. Ricke, of the Ricke Bros. Construction Co., executed an assignment for the benefit of creditors, Exhibit "A" attached to complaint, which is made a part of this stipulation by reference. Arthur L. Vermillion, complainant herein, was thereby appointed Trustee. The Ricke Bros. Construction Co. was insolvent at the time of the execution of such assignment for the benefit of creditors. The Trustee proceeded to and did liquidate the assets of the Ricke Bros. Construction Co., including the property listed in Exhibit "E", but did not include any payments made by City of Anthony or the City of Pratt after date of default. The Trustee made payments to the secured and preferred claims that had priority over all creditors. The Trustee was unable to determine whether the claim of the Employers Mutual Casualty Company or the claim of the United States of America for taxes was superior and filed this action to determine the priority to the funds. The court has allowed fees to the Trustee and his attorneys as reflected by the file.

14. The United States of America made demands for payment on account of the assessments set forth in paragraph 11 of this stipulation.

15. The assignment for benefit of creditors referred to in paragraph 13 was made with the knowledge and consent of the United States of America and the Employers Mutual Casualty Company and all other parties to the action with the understanding that the proceeds from the sale of said machinery and equipment should stand in the place and stead of such property.

16. Neither Employers Mutual Casualty Company or United States of America has attempted to enforce this claim against the property or funds by any other judicial proceeding.

Supplemental Stipulation of Fact

COMES NOW the United States of America and Employers Mutual Casualty Company and make the following additional stipulation:

1. The complainant, Arthur L. Vermillion, sold the machinery listed in the chattel mortgage (Exhibit "E") for the total sum of $8,600.68. He made a payment of $1,014.00 to satisfy the mortgage in favor of the Bank referred to in the chattel mortgage (Exhibit "E"). The said complainant paid to the Clerk of the District Court the sum of $9,458.23.

Journal Entry of Judgment

Now on this 21st day of March, 1958, the above entitled matter comes regularly on for trial before the court, the complainant appearing by his attorney, Donald I. Mitchell, the defendant United States of America appearing by and through its attorneys, William F. Kolbe and George Peabody, the defendant Employers Mutual Casualty Company appearing by and through its attorneys Foulston, Siefkin, Schoeppel, Bartlett & Powers. None of the other defendants appearing in person or by counsel.

THEREUPON, the court is advised that William Porter, Trustee in Bankruptcy, will not appear and that a ruling has previously been entered, although not journalized, against his intervening petition and claim.

THEREUPON, the court being duly advised and having examined the record finds that all parties have been duly notified of the setting of the cause for hearing. The court further finds, that all of the parties, except those appearing, are in default and have failed to present evidence in support of their claims and that judgment should be rendered against them.

THEREUPON, the court finds that the fee previously allowed the complainant and his counsel are just and proper and have been approved by the parties and should be approved by the court.

THEREUPON, the court receives into evidence and reads the stipulation of fact as submitted by the defendant United States of America and defendant Employers Mutual Casualty Company.

THEREUPON, the cause is duly argued to the court by counsel for the defendants United States of America and Employers Mutual Casualty Company.

THEREUPON, the court being duly and fully advised makes and enters his conclusions of law as follows:

1. The court has jurisdiction of the parties and subject matter of the action.

2. The claims of the United States of America and Employers Mutual Casualty Company to the funds now held by the Registry of the Court are prior, superior and paramount to the claims of all other parties.

3. The bond applications executed by Ricke Brothers Construction Company on July 21, 1950 and December 15, 1950 did not constitute a choate lien against the machinery, equipment and assets at the time of its execution.

4. The lien of the United States of America for WT and FICA Taxes covering the period 5/1/50 through 6/30/50 in the amount of $1223.46 became a general lien against the property of the Ricke Bros. Construction Company on September 29, 1950, the date the assessment list was received, and is superior to the claim of Employers Mutual Casualty Company under their bond applications.

5. The document attached to the stipulation of fact and marked Exhibit "E" is a valid chattel mortgage and was a mortgage lien against the property described in said mortgage from and after its execution on January 10, 1951 .

6. The claim of Employers Mutual Casualty Company to the money in the Registry of the Court representing the proceeds from the sale of the machinery described in the mortgage (Exhibit "E"), is superior and prior to the claims of the United States of America which became liens subsequent to January 10, 1951 .

7. The United States of America is not entitled to priority over the referred to chattel mortgage in the funds by virtue of the assignment for the benefit of creditors.

THEREUPON, the court requests the contesting parties to provide the court with additional evidence disclosing the amount of the proceeds realized from the sale of the machinery and equipment (Exhibit "E"), and the disbursement of funds.

THEREUPON, said cause is duly continued until March 26, 1958 at which time the parties appear as above.

THEREUPON, the contesting parties submit their supplementary stipulation of fact which is by the court received.

IT IS THEREFORE BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the claim of the intervenor, William Porter, Trustee in Bankruptcy, be and the same is hereby denied and disallowed.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the claim of the Board of County Commissioners of Harper County, Kansas, the claim of the City of Anthony, Kansas, and the claim of the State of Kansas, Employment Security Division in and to the funds held by the Registry of the Court in this action are hereby denied and disallowed.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the Clerk of the Court shall pay to the United States of America the sum of $1774.01 from the funds now held by the Registry of the Court in this action.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that the Clerk of the Court, after making the payment provided to the United States of America, and after deducting the costs of this action, shall pay the balance of all funds held by it in this action to the defendant Employers Mutual Casualty Company.

IT IS FURTHER BY THE COURT CONSIDERED, ORDERED, ADJUDGED, AND DECREED that judgment be entered in favor of the United States of America and against the defendants Norbert W. Ricke, a/k/a N. W. Ricke, d/b/a Ricke Bros. Construction Company, for the outstanding balance with interest from the date of assessment.

IT IS BY THE COURT SO ORDERED.

 

 

[69-2 USTC ¶9607]Carco Acceptance Corporation, A Division of Pacific Car and Foundry, Plaintiff v. Ronald F. Kunze and The United States of America , Defendants

U. S. District Court, Dist. of Neb., Civil No. 02818, 7/29/69

[Code Sec. 6323(h)(1)]

Tax liens: Validity: Priority: Chattel mortgage: Erroneous cancellation: Nebraska.--The holder of a chattel mortgage on a truck tractor had a valid security interest during the 7-day period between the erroneous release of its chattel mortgage on the Douglas County, Nebraska certificate of title and the noting of the chattel mortgage on the new Sarpy County, Nebraska certificate since a judgment creditor, under Nebraska law, could not have received priority. Accordingly, the chattel mortgage had preference over the government's tax lien.

Lyle E. Strom, Firtzgerald, Brown, Leahy, McGill & Strom, 300 Continental Bldg., Omaha , Neb. , for plaintiff. Richard A. Dier, United States Attorney, Kearney , Neb. , for defendants.

Memorandum and Order

ROBINSON, Chief Judge:

THIS ACTION was instituted in the District Court of Douglas County, Nebraska, for the return of one 1962 Kenworth 6 Truck Tractor, or the value thereof if the same was not returned. Upon defendant's motion the action was removed from the said state court to this Court under the provisions of Title 28, United States Code §1442. By stipulation of the parties the said Truck Tractor was sold by the Internal Revenue Service and the proceeds of that sale, $4,515.00, less sale costs $32.10, were deposited with the Clerk of the United States District Court. It was further stipulated that the priorities established by this Court should attach to the funds received from the sale of said Truck Tractor.

The parties to this action have entered a Stipulation of Facts [filing #20]. Briefs have also been filed on behalf of plaintiff and defendant. Said stipulation presents the following factual situation to the Court for a determination of the legal issues involved.

Defendant, Roland F. Kunze, purchased a 1962 Kenworth Truck Tractor [Model K 825, serial No. 76546] and other equipment in July of 1965. At the time of the purchase of this truck and equipment Mr. Kunze executed a chattel mortgage in favor of Kenworth Sales and Service. The same date this chattel mortgage was assigned for consideration to Carco Acceptance Corporation [hereinafter referred to as Carco], the plaintiff in this action. A certificate of title to said truck, dated July 19, 1965 , was issued by the County Clerk of Douglas County, Nebraska, in the name of Roland F. Kunze. This certificate of title was retained in the possession of Kenworth Sales and Service and its assignee, Carco, from the date of issuance up to February 10, 1967 . [Stipulation ¶1.]

Mr. Kunze leased the subject truck in February of 1967, to W. N. Morehouse Truck Line, Inc., [hereinafter referred to as Morehouse]. Mr. Kunze desired Morehouse to buy the truck license plate, but Morehouse refused to buy said plates in any county but Sarpy because of convenience to itself. Mr. Kunze then sought an agent of Carco in order to have the certificate of title to the truck transferred from Douglas County to Sarpy County , Nebraska . [Stipulation ¶4.] To effectuate the transfer Carco had its lien on the Douglas County certificate released of record on February 3, 1967. This was believed necessary, for, in order to obtain a new certificate in Sarpy County , the certificate from the County where the vehicle was previously registered must be presented to the Sarpy County Clerk with all liens on the foreign certificate marked as released. [Stipulation ¶5.] Mr. Kunze and Carco were mistaken, however, as this retitling was not necessary for Morehouse to obtain registration plates in Sarpy County . [Stipulation ¶6.] On February 10, 1967 a new certificate of title was issued in the name of Roland F. Kunze in Sarpy County , Nebraska , and a notation of the chattel mortgage issued July 19, 1965 and held by Carco was noted on the Sarpy County certificate of title. [Stipulation ¶5.]

The legal issue presented is whether Carco had a valid security interest as defined in Section 6323[h][1] Internal Revenue Code of 1954, from February 3, 1967 until February 10, 1967, the period between the release of Carco's chattel mortgage on the Douglas County certificate of title and the noting of the chattel mortgage on the new Sarpy County certificate. Under 6323[h][1] a security interest exists at any time "the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation." If a judgment creditor under Nebraska law could have secured first priority during this seven day period, then under 6323[a] of the Code the government's tax lien should be given priority. If a judgment creditor could not have secured such priority, then Carco's chattel mortgage has preference over the government's tax lien.

It is the Court's finding that in accordance with Nebraska law and the stipulated facts [Filing #20], a creditor with a lien by judicial proceedings obtained between February 3, 1967 and February 10, 1967 , would not prevail as against Carco's security interest in the Truck Tractor. The general rule in Nebraska in regard to this question is found in Larson Cement Stone Co. v. Redlim Realty Company, 179 Neb. 134, 137 NW2d 241 [1965] where at page 244 the Court states:

"The appellants do not question the general rule relating to the discharge of a senior mortgage which was released of record upon the acceptance of a subsequent mortgage which is set out in Hadley v. Schow, 146 Neb. 163, 18 NW2d 923. It is as follows:

`It is a general rule that the cancellation of a mortgage on the record is not conclusive as to its discharge, or as to the payment of the indebtedness secured thereby. And where the holder of a senior mortgage discharges it of record, and contemporaneously therewith takes a new mortgage, he will not, in the absence of paramount equities, be held to have subordinated his security to an intervening lien unless the circumstances of the transaction indicate this to have been his intention, or such intention upon his part is shown by extrinsic evidence.'" [Emphasis own].

See also, Peoples Bank v. Trowbridge, 123 Neb. 312, 242 N. W. 647 [1932] and Edney v. Jensen, 116 Neb. 242, 216 N. W. 812 [1927]. There should be no dispute that in the instant action the release of the senior mortgage and the noting of the new mortgage was a contemporaneous transaction. For a transaction of this type seven days may be considered a reasonable time for completion. The bankruptcy division of this Court decided an action with a factual situation similar to the instant case in In The Matter of Delos Hiatt Faulhaber, Case No. B.18731L. Then there was a two day period between the release of a chattel mortgage on an auto and the noting of a later chattel mortgage. During this two day period the owner of the automobile filed bankruptcy. Jerrold L. Strasheim, Referee in Bankruptcy, held that a creditor who had obtained a lien by judicial proceedings against the automobile would not prevail against the released chattel mortgage and the noting of the later chattel mortgage on the certificate of title was a contemporaneous transaction. Thus the trustee in bankruptcy in his status as a lien creditor did not prevail.

In the instant case it is evident that the intent of Carco was simply to be of assistance to Mr. Kunze in the lease of his truck. It is apparent that throughout the transaction it was Carco's intention to retain the priority of their chattel mortgage. Also, this is not a case where "paramount equities" would call for a discarding of the general rule.

Though the Nebraska cases have all dealt with real property mortgages there is nothing in the language of the opinions to indicate a different result if a chattel mortgage had been involved.

Decisions in jurisdiction other than Nebraska also support the legal conclusions reached by this Court. See the annotations at 33 A. L. R. 149 and 98 A. L. R. 843. In Connecticut National Bank v. Chapman, 216 A. 2d 814 [1966], the Court held at page 816:

"There being no intention to release a first mortgage lien, its actual release for a momentary period should not in equity permit a subsequent lienor, who has not been prejudiced thereby, to intervene and acquire priority. That equity will act to prevent such a result is clearly established by the great weight of authority. Lomas & Nettleton Co. v. Isacs, 101 Conn. , 6144, 619, 127 A. 6."

Similar language is also found in Marine Mart, Inc. v. O/S Miss Darla Dawn, 273 F. Supp. 353 [1967], at page 357 where it is stated:

"The accepted rule spoken about by Judge Brown in the cases cited above, the execution and delivery of a new mortgage in renewal of a former one, even though accompanied by a formal satisfaction and discharge of the initial mortgage, does not have the effect of extinguishing the priority which the initial mortgage carries; should and will be applied here."

In Potwin State Bank v. J. B. Houston & Son Lumber Co., 327 P. 2d 1091 [1958], at page 1098 the court quotes the following proposition from 36 Am. Jur., Mortgages, §458, p. 916:

"It is a general rule that the question whether the taking of a new mortgage in place of a prior one amounts to an extinguishment thereof is one as to the intention of the parties, and that the acceptance by a mortgagee of a new mortgage, and his cancelation of the old one, does not amount to a payment or satisfaction and does not deprive him of his right to have the lien of the discharged mortgage continued as against an intervening lien, in the absence of an intention to give priority to the intervening lien and in the absence of paramount equities or acts or omissions of intervening lien holder to his prejudice while relying upon the apparent discharge of the senior lien." [Emphasis own.]

Finally, a case recently decided under the Uniform Commercial Code refused to allow an erroneous cancellation of a note to result in a loss of priority. The case, In Re Burkhard U. S. D. C., S. D. Ohio, February 4, 1969 Bankruptcy No. 68-1288-D, framed the issued as follows:

"The issue, therefore, is whether or not a perfected security interest under a security agreement dated 13 March 1967 was 'cancelled'." The Court then held that:

"the erroneous termination of the security agreement by the First National Bank and Trust Company of Lima when the recourse endorser [or 'guarantor'] satisfied the obligation after the lien of the trustee in bankruptcy had attached did not alter the priorities of the lien existing on the date of filing in bankruptcy and such error may be corrected in a court of equity."

The foregoing shall constitute findings of fact and conclusions of law in accordance with Rule 52[a] of the Federal Rules of Civil Procedure. As the amount of money in the registry of the court being much less than the amount owed under the chattel mortgage held by Carco is entitled to all of the same. Accordingly,

IT IS ORDERED that plaintiff will prepare an appropriate judgment for entry in accordance with this Memorandum.

 

 

[62-1 USTC ¶9348]The Edison Bank, Plaintiff v. Joseph J. Mayer, District Director of Internal Revenue Service, etc., Defendant, and United States of America, Intervenor

U. S. District Court, Dist. N. J., Civil Action No. 1055-60, 202 FSupp 620, 2/27/62

[1954 Code Sec. 6323]

Priority of liens: Federal tax lien v. chattel mortgage lien: Effect of recorded chattel mortgage on subsequent loans.--The prior lien of a chattel mortgage securing a $10,000 loan was not revived to secure subsequent loans where there was no re-executing, re-acknowledging and re-recording of the mortgage. Federal tax liens thus had priority in the proceeds of sale of the mortgage chattels, subject to payment of the balance of the original $10,000 loan.

Wilentz, Goldman, Spitzer & Sills, 252 Madison Ave. , Perth Amboy , N. J., for plaintiff. David M. Satz, Jr., United States Attorney, South Orange , N. J., for defendant.

Opinion

WORTEDYKE, District Judge:

The jurisdiction of this Court under 28 U. S. C. §1340 is invoked by the plaintiff for a declaration that it has a lien prior to that of the United States of America for unpaid Internal Revenue taxes upon the proceeds of sale of certain motor vehicles covered by a chattel mortgage given to the plaintiff by the taxpayer to secure a loan from the plaintiff Bank.

The Court finds the following stipulated facts:

Plaintiff (Bank), is a banking institution incorporated under the laws of the State of New Jersey . On March 5, 1959 the Bank loaned to Walker Rasmussen, individually and trading as Rasmussen and Sons, the sum of $10,000, as security for the repayment of which the borrower executed and delivered to the Bank a chattel mortgage of that date, covering three certain motor vehicles, described in the schedule annexed to the mortgage. Possession of the mortgaged chattels was retained by the mortgagor. The mortgage was duly recorded in the office of the Clerk of Middlesex County, in which both Bank and borrower are located, on March 6, 1959 . A record of the mortgage transaction was also made upon the certificates of ownership of the mortgaged vehicles as required by N. J. S. 39:10-11C.

Assessments of Federal Income and Federal Withholding taxes against the chattel mortgagor were duly made by the District Director of Internal Revenue at Newark , New Jersey , and notice of said assessments, stating the amounts and demanding payment thereof was given to the taxpayer and filed with the Register of Deeds for Middlesex County , New Jersey . The particulars of said assessments, including the dates on which liens for said Federal Taxes were filed, are as follows:

(To the figures in the "Balance Due" column are to be added accrued interest from date of assessment, as provided by law.)

Subsequent to the loan which was secured by the chattel mortgage, further loanswere made by Bank to the taxpayer which were evidenced by promissory notes respectively dated, in the face amounts and upon which there are balances due, as follows:

Date of                Face

Note                 Amount                     Balance Due

7/6/59
               700.00         $10.85 plus interest

                                   $4,201.54 plus interest

2/29/60
           26,180.00              from 
7/1/60

                                   $1,773.64 plus interest

4/12/60
            4,241.76              from 
7/1/60

 

The indebtedness secured by the chattel mortgage had been reduced by May 25, 1960 , to the sum of $3,500.00. For the payment of this balance taxpayer gave a new promissory note, dated May 25, 1960 , which recited that the amount thereof was secured by the chattel mortgage covering the motor vehicles previously referred to. There is a balance due on the last mentioned note of $1,000.00 with interest thereon from January 27, 1960 . In exchange for the $3,500 note, the note of March 5, 1960 (which had been secured by the chattel mortgage) was returned to the maker.

On October 23, 1960 , the mortgagor defauluted upon his indebtedness to the Bank, and the Bank took possession of the motor vehicles listed in the chattel mortgage. Due notice was given by the Bank that the vehicles would be sold at public sale on November 9, 1960 . Prior to the noticed sale date, the Internal Revenue Service seized the mortgaged chattels pursuant to 26 U. S. C. §§ 6331 and 6335. Pursuant to agreement between counsel for the Bank and for the Internal Revenue Service, the mortgaged vehicles were sold by the Bank on November 9, 1960 , for the sum of $7,900, which has been deposited in an escrow account in the Bank, subject to the determination of priority therein. It was also stipulated that the Bank incurred an expense of $48.00 in caring for the mortgaged vehicles prior to their sale.

[Scope of Chattel Mortgage]

In New Jersey , a chattel mortgage is a mere security for the payment of the debt secured thereby. "The mortgagor, before and after default until divested by grant, release or foreclosure--has an estate which the law recognizes as the proper subject of seizure and sale under the ordinary process or law. It is likewise such an estate as is in law capable of conveyance and mortgage. * * * The property in the mortgaged chattels does not, upon default, become absolute in the mortgagee. If, after condition broken, the mortgagee takes the chattels into possession, he cannot keep or dispose of them as his absolute property." Farrow v. Ocean County Trust Co., 1938, N. J. Sup. 121 N. J. L. 344, 2, A. 2d 352, 354.

Despite the giving of the chattel mortgage, the mortgagor therein retained title and possession of the mortgaged vehicles, and his interest therein was a property interest which could be subjected to the lien of a subsequent mortgage or of a levy under a judgment. Therefore, the interest of the mortgagor-taxpayer in the mortgaged chattels was susceptible to the Federal tax liens which accrued, pursuant to 26 U. S. C. §6321, with the filing of notice thereof on July 31, 1959 , in accordance with the provisions of §6323(a)(1) of the same Title. Each Federal lien became choate upon the date of its filing. 26 U. S. C. §6321 provides that such lien is impressed upon "all property and rights to property, whether real or personal" and continues until the tax liability is satisfied or the lien becomes unenforceable by reason of lapse of time. This lien is not limited to application against that property held by taxpayer at the time of the filing of notice of lien, but is imposed against all property owned at the time suit is commenced. Glass City Bank v. United States, 1945 [45-2 USTC ¶9449], 326 U. S. 265; Ersa v. Dudley, 3 Cir. 1956 [56-2 USTC ¶9621], 234 F. 2d 178. Although the chattel mortgage was dated March 5, 1959 , and recorded March 6, 1959 , the property in the mortgaged chattels did not become absolute in the mortgagee, even upon the default which occurred on May 25, 1960 . Farrow v. Ocean County Trust Co., supra.

[Original Mortgage Had Priorty]

The chattel mortgage of March 5, 1959 , having complied with the statutory requirements as to form and recording, established a valid lien in favor of the Bank. That lien continued as security for the successively reduced balances of the note, and also for the new note of $3,500 dated May 25, 1960 , which was the unpaid balance due at that time on the original note. Meanwhile, the Government choate tax liens, aggregating in excess of $19,000, had attached to the mortgagor's persistiung and increasing right, title and interest in the vehicles covered by the chattel mortgage. The current balance of $1,000 due on the $3,500 note, which is also the remainder due on the loan represented by the original $10,000 note, persists as a prior lien in favor of the Bank, as against the tax liens. United States v. Waddill Co., 1945 [45-1 USTC ¶9126], 323 U. S. 353; United States v. Security Trust & Savings Bank, 1950 [50-2 USTC ¶9492], 340 U. S. 47; United States v. City of New Britain, 1954 [54-1 USTC ¶9191], 347 U. S. 81; United States v. Acri, 1955 [55-1 USTC ¶9138], 348 U. S. 211. The $3,500 note given in substitution for the $10,000 note did not constitute such payment of the original note as would discharge the mortgage security. Shipman v. Lord, Chanc. 1899, 58 N. J. Eq. 380, 44 A. 215.

[Chattel Mortgage Was Not Revived]

N. J. S. A. 46:28-5 provides that a chattel mortgage not accompanied by immediate delivery and followed by an actual and continued change of possession of the chattels mortgaged in "absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers and mortgagees in good faith, unless the mortgage, having annexed thereto an affidavit or affirmation, made and subscribed by the holder of such mortgage, his agent or attorney, stating the consideration of such mortgage, and, as nearly as possible, the amount due and to become due thereon, be recorded * * *." The recital in a note or notes evidencing subsequent loans that they or any of them should be secured by the original chattel mortgage could not effectively create a valid lien upon the mortgage chattels as against creditors or purchasers and mortgagees protected by the chattel mortgage statute, supra. The language of the notes issued on July 6, 1959, February 29, 1960 and April 12, 1960, upon which the plaintiff relies in seeking to establish itself as a mortgagee within the protection of 26 U. S. C. §6323, is as follows:

"For further securing the payment of the liabilities aforesaid the undersigned hereby gives to The Edison Bank a lien for the amount of all the liabilities aforesaid upon all property and securities, and bargains, sells, assigns and transfers to The Edison Bank all the right, title and interest of the undersigned (maker) in and to said collateral, and all right, title and interest of the undersigned * * * in and to all property and securities, now or hereafter given unto, or left in the possession or custody, or under the control, of The Edison Bank."

Such attempt to make the original mortgage applicable to the subsequent loans without reexecuting, reacknowledging and rerecording the same, cannot revive the prior lien thereof or render it efficacious to secure those loans. When possession of a chattel is retained by the owner, a lien valid against the owner's creditors may be imposed thereon by interparty act in the form of a chattel mortgage, recorded as provided in N. J. S. A. 46:28-5. No chattel mortgage was given to secure any of these notes effective to constitute a lien upon the times of property which secured the original note. None of these notes is in the form of a chattel mortgage, and none has been recorded. Therefore, these items cannot achieve priority over the recorded Federal tax liens. Nor is the Bank's position strengthened by the line of cases which protect a mortgagee who makes future advances pursuant to a mortgage anticipating such loans where such advances are made without knowledge or actual notice of the rights of intervening creditors. The chattel mortgage of March 5, 1959 did not, by its terms, purport to secure subsequent loans. See Ward v. Cooke, 1864, 17 N. J. Eq. 93; Annot., 138 A. L. R. 566 (1942).

[Judgment of Court]

The Government's tax liens enjoy priority upon the escrowed proceeds of sale of the mortgaged chattels, subject to payment to the Bank of $1,000 balance due upon the note of May 25, 1960 and $48.00 agreed upon for the care of the vehicles prior to sale.

An order may be submitted in conformity with the views herein expressed.

 

 

[63-1 USTC ¶9240] United States of America , Appellant v. Frank J. Fahrenkamp, and Fierina G. Fahrenkamp, and Bob Taylor, Collector of Delinquent Personal Property Taxes for Polk County , Arkansas , Appellees

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 17,119, 2/1/63

[1954 Code Sec. 6323]

Priority of liens: Chattel mortgage lien: Dragnet clause: Subrogation.--The court reversed the judgment of the trial court in dismissing the intervention of the Government in asserting a tax lien. The trial court had found that property not specifically described in a chattel mortgage was covered by a "dragnet" clause and that the chattel mortgage was superior to the Government's lien. However, the case was remanded for additional consideration on the issue of subrogation by assignment of the chattel mortgagee.

[1954 Code Sec. 6323]

Priority of liens: State property taxes.--The trial court held that a county was entitled to recover property taxes in a foreclosure proceeding. This was reversed in the absence of any evidence establishing the existence or priority of the property tax lien.

Norman Sepenuk, Department of Justice, Washington 25, D. C. (John R. Jones, Jr., Acting Assistant Attorney General, Lee A. Jackson, David O. Walter, Department of Justice, Washington 25, D. C., Charles M. Conway, United States Attorney, Rob ert C. Johnson, Assistant United States Attorney, Fort Smith, Ark., on brief), for appellant. Joe H. Hardegree, Philpot Bldg., Mena, Ark., Ben Core, P. O. Box 530, De Queen, Ark. (Frank Fahrenkamp, Fierina Fahrenkamp, pro se, on brief), for appellees.

Before SANBORN, VAN OOSTERHOUT and MATTHES, Circuit Judges.

MATTHES, Circuit Judge:

The principal question for determination on this appeal is whether certain personal property not specifically described in a chattel mortgage executed by Duncan, Dieckman and Duncan Mining Company, a corporation (Duncan), was nevertheless covered by the lien of the mortgage because of the so-called "dragnet" clause contained therein. ¹ The chattel mortgage, executed on March 4, 1959 , was recorded on March 23, 1959 , and concededly the lien as to all property specifically described in the mortgage was superior to the lien of the United States Government against Duncan for unpaid withheld taxes. The trial court held that the undescribed property was also covered by the mortgage, and hence, in practical effect, the Government's claim was destroyed. For the purpose of this appeal by the Government, the facts, as fully set forth in the opinion of the trial court, W. D. Ark., [62-1 USTC ¶9411] 205 F. Supp. 921 (1962), will suffice, and since the facts are in the main undisputed, they need only be briefly summarized here.

The chattel mortgage conditionally conveyed to C. C. Bell, for the purpose of securing a loan to Duncan in the amount of $15,000: one Manganese Mill complete, building, motors, jigs and water pump; one set of scales, six jack hammers; three compressors; and seven trucks, all of which was specifically described. At the time the mortgage was executed, Duncan was the conditional owner and in possession of one Ford Loader and two Caterpillar Loaders. As security for the unpaid purchase prices of the respective loaders, the Merchants National Bank of Fort Smith , Arkansas , held the conditional sales contract to the Ford Loader, and C. I. T. Credit Corporation held the conditional sales contract to the two Caterpillar Loaders. None of the three loaders was described in or referred to in the chattel mortgage nor covered by the mortgage lien unless it was the intention of the parties that the loaders should be encompassed within the mortgage by virtue of the "dragnet" clause.

Fierina G. Fahrenkamp, wife of Frank J. Fahrenkamp, appellees herein, acquired the chattel mortgage from C. C. Bell on March 6, 1959 . At the request of Duncan, on August 21, 1959, Frank J. Fahrenkamp, an officer and a stockholder in Duncan, paid the balance due Merchants National Bank ($617) and the balance due C. I. T. ($2,561.14) on the conditional sales contracts. Fahrenkamp purchased drafts payable to these creditors, and forwarded the drafts to Duncan, who delivered them to the Bank and C. I. T. and obtained the conditional sales contracts in return.

[Suit For Personal Judgment]

In May, 1961, when Duncan was being pressed by its creditors, the Fahrenkamps filed an action in the Chancery Court of Polk County, Arkansas, against the Duncan Corporation, seeking a personal judgment for the balance due them both under the mortgage lien and the conditional sales contracts, and for an order directing the sale of all of the personal property above referred to. The Government, as a creditor of Duncan , intervened in that action and thereafter removed the cause to the United States District Court. None of Duncan's other creditors intervened in the action except the tax collector for Polk County, Arkansas, who filed a claim for alleged unpaid county taxes due from Duncan for the years 1959 and 1960.

Pending the trial, the court directed that all of the personal property be sold and appointed a special commissioner to conduct the sale. The three loaders were sold for a total of $6,500, which, together with the proceeds from the sale of the property described in the mortgage, was deposited in the registry of the court.

The court rendered judgment in favor of the Fahrenkamps and against Duncan for the balance due them; held that the chattel mortgage covered the three loaders by virtue of the "dragnet" clause, and dismissed the Government's intervention; directed that the sum of $321.34 be paid out of the proceeds to Polk County, Arkansas; and further directed that the remainder of the fund, after payment of certain expenses, be paid to the Fahrenkamps to apply upon their judgment against Duncan.

There is no controversy on this appeal as to the personal judgment against Duncan , and since the Government concedes that the lien of the chattel mortgage antedated and is superior to its lien, it makes no claim to the proceeds from the sale of the specifically described property. The issues are: (1) whether the lien of the mortgage extended to the three loaders so that the Fahrenkamps are entitled to the $6,500 derived therefrom: (2) if not, whether the Fahrenkamps were subrogated to the rights of the Bank and C. I. T. so as to be entitled to be paid $3,178.24 out of the $6,500; and (3) whether the court erred in holding that a lien existed in favor of Polk County, Arkansas, on the personal property which was the subject of the foreclosure action, and that such lien was superior to the Government's lien.

["Dragnet" Clause]

The trial court, predicating its decision upon the theory that the "dragnet" clause of the mortgage covered the three loaders in question, apparently was of the opinion that the loaders did not become the property of Duncan Corporation until August 21, 1959, the day on which Fahrenkamp paid off the existing indebtedness on them; that then, as after-acquired property, the loaders became subject to the original mortgage; and thus, that the Fahrenkamps' claim to the loaders based upon the mortgage (recorded March 23, 1959) had priority over the Government's claim first filed on August 13, 1959.

Inasmuch as the loaders were conditionally owned by Duncan and in its possession when the mortgage was executed, we seriously doubt that merely because absolute title thereto was not in Duncan at that time, the loaders were, for the purpose of the mortgage, after-acquired property. ² But whether such property be viewed as an antecedent or a subsequent acquisition, we are satisfied that it was not covered by the mortgage. Under Arkansas law, it is clear that "dragnet" provisions are not favored and are construed rather strictly. National Bank of Eastern Arkansas v. Blankenship, E. D. Ark., 177 F. Supp. 667, 673 (1959), aff'd, 8 Cir., 283 F. 2d 574 (1960); Berger v. Fuller, 180 Ark. 372, 377, 21 S. W. 2d 419, 421 (1929). The Arkansas rule as to whether "other indebtedness" is secured by a chattel mortgage by virtue of the "dragnet" clause, is concisely stated as follows:

"Where a mortgage is given to secure a specific debt named, the security will not be extended as to antecedent debts unless the instrument so provides and identifies those intended to be secured in clear terms, and, to be extended to cover debts subsequently incurred, these must be of the same class and so related to the primary debt secured that the assent of the mortgagor will be inferred. The reason is that mortgages, by the use of general terms, ought never to be so extended as to secure debts which the debtor did not contemplate." Hendrickson v. Farmers Bank & Trust Company, 189 Ark. 423, 434, 73 S. W. 2d 725, 729 (1934).

["Other Property"]

No sound reason appears why the same rule should not apply to "other property," and indeed, the rule as to after-acquired property has been so applied. Holt v. Gregory, 219 Ark. 798, 244 S. W. 2d 951 (1952). Thus, if it be assumed that the undescribed loaders in controversy were antecedent property, the mortgage did not apply thereto since the mortgage not only failed to clearly identify the loaders, but also failed to include even the slightest reference to them. National Bank of Eastern Arkansas v. Blankenship, supra, 177 F. Supp. 667, aff'd, 283 F. 2d 574; Hendrickson v. Farmers Bank & Trust Company, supra, 73 S. W. 2d 725.

If, as the trial judge apparently concluded, the loaders were subsequently-acquired property, in order to be covered by the "dragnet" clause they would have to be of the same class as the property specifically listed and so related to it that the consent of the parties to its inclusion might be inferred. National Bank of Eastern Arkansas v. Blankenship, supra, 177 F. Supp. 667, aff'd, 283 F. 2d 574. It is the province of the court to declare the rights of the parties in conjunction with their expressed intention, interpreting each mortgage according to its particular language in the light of the surrounding circumstances. Hollan v. American Bank of Commerce & Trust Company, 168 Ark. 939, 272 S. W. 654 (1925). See also American Bank & Trust Co. v. First Nat. Bank of Paris , 184 Ark. 689, 43 S. W. 2d 248 (1931). We believe that the loaders are of the same class as the other mining equipment specifically denominated in the mortgage, but cannot agree with the lower court on the crucial question relating to the intention of the parties. Fully cognizant of this Court's hesitancy to reverse a federal district judge on a question pertaining to the application of local law, National Bank of Eastern Arkansas v. General Mills, Inc., supra, 283 F. 2d 574, 576-577; Homolla v. Gluck, 8 Cir., 248 F. 2d 731 (1957), under the circumstances of this case, we nevertheless feel compelled to differ with the trial court's interpretation of the mortgage agreement to which the Arkansas law was applied. A survey of the record reveals nothing from which it can be inferred that the parties intended the mortgage to encompass subsequently-acquired equipment not listed in the agreement. In fact, in the complaint, the Fahrenkamps' sole claim to the loaders was based upon the allegation that Frank J. Fahrenkamp had assumed the security instruments covering the loaders at the time he paid the balance that Duncan Corporation owed on the loaders to the holders of the conditional sales contracts. In the reply to the Government's complaint in intervention, the Fahrenkamps reiterated their allegation that they had a lien on the loaders "by virtue of the assumption of the conditional sales contracts theretofore held by creditors of the Defendant Corporation," and again, there was no assertion whatsoever that the loaders were covered by the original mortgage agreement. As to this property, the trial proceedings remained focused upon the question whether Frank J. Fahrenkamp was entitled to be subrogated to the rights of the previous holders of the conditional sales contracts until near the completion of the trial when the Court, sua sponte, interjected the "dragnet" clause theory.

[Testimony Reviewed]

C. C. Bell, the original mortgagee, was not called upon to testify as to the intention of the original parties to extend the lien of the mortgage to subsequently-acquired property, and the Fahrenkamps presented no evidence on which to base such an inference. In fact, the testimony of both Donald Duncan, an officer of Duncan Corporation, and Frank J. Fahrenkamp is utterly inconsistent with the conclusion that the loaders were covered by the "dragnet" clause. The following direct examination of Duncan is particularly enlightening:

"Q. Did that mortgage cover all of the property, the personal property that we owned by Duncan, Dieckman and Duncan Mining Company?

"A. No, sir.

"Q. Now, you also are familiar, I believe, with these three loarders in question here, being a Ford Loader and two Caterpillar Loaders, are you not?

"A. Yes.

"Q. Now, were those covered under that mortgage?

"A. To my knowledge they wasn't."

During direct examination Fahrenkamp responded in a similar manner:

"Q. All right. Mr. Fahrenkamp, the mortgage which you came to be the holder of, the chattel mortgage from Duncan, Dieckman and Duncan Mining Company describes certain property that was legally owned by the corporation. Now, then, did the corporation have any equipment or property which was not covered by that mortgage?

"A. Yes, I believe the loaders and the compressors that I loaned them some money on to pay--that I paid off, sent checks down to pay off was equipment that wasn't in the original mortgage."

Although it might be argued that these statements merely refer to the fact that the loaders were not specifically denominated in the original mortgage, neither this testimony nor any other evidence in the record, affirmatively demonstrate an intention for the original mortgage lien to be extended to cover the loaders in question.

However, we believe that the Fahrenkamps are entitled to further consideration on their original theory of subrogation. Although this issue was pleaded and actually litigated, in view of the conclusion reached by it, the trial court did not expressly determine the subrogation issue. While there was evidence relating thereto, we make no determination as to the sufficiency of the evidence to establish subrogation by assignment, nor do we decide whether under the facts and circumstances Frank J. Fahrenkamp is entitled to be subrogated under legal or equitable principles. This determination should in the first instance be made by the trial court.

As previously indicated, the court also found that Polk County, Arkansas, was entitled to recover $321.34 for taxes due on the property of Duncan Corporation and ordered that amount paid to it out of the funds in the registry of the court. But the record is barren of any evidence to establish the existence or priority of the county's lien, United States v. Buffalo Savings Bank (U. S. Sup Ct. Jan. 7, 1963) [63-1 USTC ¶9166]; United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954), and no one appeared on behalf of the county at either the trial or on this appeal. Accordingly, we cannot allow the judgment in favor of Polk County to stand.

The judgment of the court dismissing the intervention of the Government and ordering the full amount of $6,50 to be paid to the Fahrenkamps is reversed, and the cause is remanded for additional consideration by the court solely on the subrogation issue, with the right of the interested parties to present additional evidence if the trial court deems such presentation necessary. The judgment in favor of Polk County , Arkansas , is reversed. In all other respects the judgment is affirmed.

¹ The pertinent part of the "dragnet" clause is "* * * together with all equipment of any kind and character used in connection therewith, and all additions, betterments and repairs made or to be made to or upon said property, * * *."

² At the time the mortgage was executed Duncan had possession of the loaders, had considerable equity in them, and could have specifically included them within the mortgage, subject to the conditional sales contracts. A purchaser of property under a conditional sales contract has such an interest in the property that he may mortgage it. Roachell v. Gates, 185 Ark. 350, 47 S. W. 2d 35 (1932); Howell v. Thew Shovel Co., 184 Ark. 777, 43 S. W. 2d 366 (1931); Loden v. Paris Auto Co., 174 Ark. 720, 296 S. W. 78 (1927); Thornton v. Findley, 97 Ark. 432, 134 S. W. 627 (1911). See also Cloud Oak Flooring Co. v. J. A. Riggs Tractor Co., 223 Ark. 447, 266 S. W. 2d 284 (1954).