Priority over Recorded Mortgage Page1

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Rev. Rul. 2003-108 , I.R.B. 2003-44, October 16, 2003 .

[ Code Sec. 6323]


Tax liens: Validity and priority against certain persons: Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors: Notice or knowledge of lien. --

For purposes of Code Sec. 6323(a), a purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor is protected against a statutory tax lien for which a notice of federal tax lien has not been filed, notwithstanding actual knowledge of the statutory tax lien. The ruling addresses fact scenarios in which prior to becoming a purchaser, security interest holder, mechanic's lienor, or judgment lien creditor, a third party has actual knowledge of a statutory tax lien, with respect to which no notice of federal tax lien has been filed. The ruling notes that in Beaver Run Coal Co., CA-3, 38-2 USTC ¶9540, the issue was whether a mortgage lien had priority over the government's statutory tax lien as to particular property in the taxpayer's possession. The court held that the mortgagee was protected against the statutory tax lien even though the mortgagee had actual knowledge of a possible tax liability because a notice of federal tax lien was not filed. In enacting the Federal Tax Lien Act of 1966 (P.L. 89-719), Congress had the opportunity to overrule Beaver Run Coal Co., or to otherwise indicate that actual knowledge of a statutory tax lien is relevant for purposes of Code Sec. 6323(a), but did not do so.

ISSUE

When a notice of federal tax lien has not been filed, does actual knowledge of a statutory tax lien affect the lien priority of a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor?



FACTS

Prior to becoming a purchaser, security interest holder, mechanic's lienor, or judgment lien creditor, a third party has actual knowledge of a statutory tax lien, with respect to which no notice of federal tax lien has been filed.



LAW AND ANALYSIS

Section 6323(a) of the Internal Revenue Code provides that the statutory tax lien imposed by I.R.C. §6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof has been filed. Section 6323(a) is silent as to the effect of actual knowledge of a statutory tax lien upon this priority when a notice of federal tax lien has not been filed.

In United States v. Beaver Run Coal Co., 99 F.2d 610 (3d Cir. 1938), the issue was whether a mortgage lien had priority over the Government's statutory tax lien as to particular property in the taxpayer's possession. The court held that the mortgagee was protected against the statutory tax lien even though the mortgagee had actual knowledge of a possible tax liability because a notice of federal tax lien was not filed.

In enacting the Federal Tax Lien Act of 1966, Congress had the opportunity to overrule Beaver Run Coal Co., or to otherwise indicate that actual knowledge of a statutory tax lien is relevant for purposes of section 6323(a), but did not do so. See TKB International, Inc. v. United States, 995 F.2d 1460, 1466 n. 4 (9 ^th Cir. 1993) (noting that Congress in 1954 declined to limit the protections of section 6323(a) to parties without notice or knowledge of the statutory tax lien). Cf. I.R.C. §6323(b) (actual notice or knowledge of existence of statutory tax lien relevant for certain superpriority provisions).



HOLDING

For purposes of I.R.C. §6323(a), a purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor is protected against a statutory tax lien for which a notice of federal tax lien has not been filed notwithstanding actual knowledge of the statutory tax lien.



DRAFTING INFORMATION

The principal author of this revenue ruling is Rob in Ferguson of the Office of the Associate Chief Counsel, Procedure and Administration (Collection, Bankruptcy & Summonses Division). For further information regarding this revenue ruling contact Branch 1 of the Collection, Bankruptcy & Summonses Division at (202) 622-3610 (not a toll-free call).

 

[98-1 USTC ¶50,348] United States of America v. Howard I. Green, Mary Green, Roylan Finance and Ernestine Woodmansee

U.S. District Court, East. Dist. Pa. , Civ. 96-7275, 4/10/98

[Code Sec. 6321 ]

Lien for taxes, property subject to: Fraudulent conveyance.--A husband's conveyance of real estate to himself and his wife for nominal consideration and a mortgage he granted to a corporation whose sole shareholder was his mother-in-law were set aside as fraudulent against the United States . Under state ( Pennsylvania , since repealed) law, the conveyance was presumed fraudulent and the couple failed to prove fair consideration was given. Likewise, the mortgage was fraudulent where it was given after the IRS notified the husband he was being investigated for tax fraud, no payments were ever made on the obligation, and he lied to the IRS about the company's operations. The argument that the mortgage was given as repayment for the lifelong parental support of his wife was unpersuasive.

[Code Sec. 6323 ]

Lien for taxes, property subject to: Priority of lien: Assignment of mortgage.--A taxpayer's mother-in-law held a valid assignment of first mortgage on his property, which had priority over federal tax liens, where she received it in exchange for cash used to settle a lawsuit between the taxpayer and his first wife. Although the assignment was not recorded, state ( Pennsylvania ) law did not require mortgage assignments to be recorded to have priority over subsequent creditors.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

RENDELL, Judge:

The United States ("the government") brought this suit to set aside as fraudulent an April 1981 conveyance from Howard Green ("Howard") to Howard and Mary Green ("Mary") (collectively, "the Greens") of a property at 990 Old Huntingdon Pike, Huntingdon Valley, Pennsylvania 19006 (the "Property"), and ultimately to foreclose federal tax liens on the Property in partial satisfaction of outstanding tax liabilities.

The government contends that Howard conveyed the Property with actual intent to hinder, delay, or defraud his present and future creditors in violation of Pennsylvania law. It asserts that Howard transferred the Property to himself and his wife for nominal consideration, and that no evidence exists to substantiate the fairness of this transaction. The Greens, though, insist that the conveyance was made for fair and sufficient consideration, and they argue that the transfer was made pursuant to a valid antenuptial agreement entered into the day before their wedding in April 1980.

In addition, both Roylan Finance and Ernestine Woodmansee, Mary's mother, contend that they hold valid liens on the Property that have priority over any of the government's claims. Roylan Finance argues that it has a $300,000 mortgage on the Property that Howard granted to it in 1988, and Ernestine Woodmansee asserts that she holds a valid assignment of a $50,000 first mortgage on the Property as well.

In an effort to sort out these competing claims, a bench trial was held on November 12 and 13, 1997, and the parties have submitted post-trial memoranda. The following constitute my findings of fact and conclusions of law in accordance with F.R.Civ.P. 52(a).

1. Howard and Mary Green met in November 1979, and were married on April 13, 1980 . (November 12, 1997, Trial Transcript ("Tr1"), p. 36, lns. 8--11.) Prior to their marriage Howard Green had his attorneys prepare a twelve-page antenuptial agreement ("First Agreement"). (Tr1, p. 36, lns. 12--17 and Gov't Ex. 25.)

2. The First Agreement expressed Howard's desire to maintain his assets for his children. The First Agreement provided that if Howard and Mary Green were still married at the time of his demise, Mary would receive $100,000 and would be permitted to live in his home for a period of one year after his death. (Tr1, p. 40, ln. 14--p. 41, ln. 1 and Ex. 25.)

3. Prior to signing the First Agreement, both Howard and Mary obtained advice from their attorneys with respect to entering into the antenuptial agreement. This agreement was initialed by Howard and Mary Green on each and every page, their signatures were witnessed and they each signed in the presence of a notary. (Tr1, p. 37--40.) Mary signed the First Agreement on April 8, 1980 . Howard signed it on April 10, 1980 . An original of this document was maintained by the Greens and produced to the government in connection with this litigation. (Tr1, p. 37--40; Tr2, p. 141, ln. 20--p. 142, ln. 17.)

4. The Greens testified that on April 12, 1980 , the day before their wedding, they entered into a second antenuptial agreement dated that day (the "Second Agreement") because Mary was unhappy with the First Agreement. (Tr2, p. 87.) In the Second Agreement, Howard agreed to leave $1 million to Mary upon Howard's demise and to transfer his interest in the Property to both Mary and himself in 1981, if they were then living together as man and wife, in exchange for certain property and cash which Mary was transferring to Howard. (Tr1, p. 41--42.) Howard transferred his interest in the Property to himself and to Mary Green by indenture dated April 13, 1981 , and recorded on May 19, 1981 . The indenture stated that the transfer was made for nominal consideration in the amount of "$1 and other good and valuable consideration." (Gov't Ex. 38.)

5. The Second Agreement sets forth property purportedly being transferred to Howard by Mary as part of their revised understanding. The evidence failed to support the transfer of this property, in that only the vague testimony of the Greens was offered, with no documentary proof. Further, the documentary evidence that related to the assets referred to failed to support the purported transfers in 1980. The Greens' testimony regarding the Second Agreement and transfer of Mary's assets referred to therein was not credible, for several reasons. The following facts detract from the genuineness and authenticity of the Second Agreement: ¹

(1) The circumstances surrounding the First Agreement versus the Second Agreement raise a question as to the genuineness of the Second Agreement:

(a) Unlike their signatures on the First Agreement, the Greens' signatures on the Second Agreement were not notarized or witnessed; (Tr1, p. 42; Tr2, p. 143, ln. 23--p. 144, ln.2.)

(b) Unlike the First Agreement, the Greens do not have an original of the Second Agreement, but only a copy. (Tr1, p. 42.) Accordingly, the government could not perform forensic testing on the alleged Second Agreement for purposes of determining the date upon which it was created;

(c) Unlike the First Agreement, the Second Agreement was not prepared by Howard Green's attorneys, it was not reviewed by Mary Green's attorneys, and it was not initialed on each page;

(d) The Second Agreement which sets forth the agreement regarding the transfer of the Property was neither recorded nor referred to in the April 13, 1981 , deed which actually transferred the Property; (Gov't Ex. 38.)

(e) The Second Agreement substantially changed, but nowhere referred to, or expressly superseded or invalidated, (Tr2, p. 144, lns. 12-14), the First Agreement; (Tr1, p. 42.)

(2) The existence of the Second Agreement contradicts a sworn statement that Mary Green gave to the IRS. In 1991, Mary Green submitted an affidavit to the IRS in an attempt to obtain "innocent spouse relief" under 26 U.S.C. §6013(e). (Tr2, p. 11, ln. 13--p. 12, ln.6.) In that affidavit, Mary Green stated that she did not benefit from Howard Green's understatement of taxes, because the couple had entered into an antenuptial agreement by which Howard Green maintained the benefit of his assets for his children and Mary Green was to receive only $100,000 upon his death. The affidavit never referred to the Second Agreement or its terms. (Tr1, pages 45-46.)

(3) The Second Agreement conveniently recites assets that Mary would transfer, yet there was no evidence as to why the Greens--specifically, Mary--wanted to give these assets to Howard, a multi-millionaire--or otherwise wanted these conveyances to occur.

(4) The purported value of items conveyed adds up to one-half of the 1980-81 value of the Property, yet the value of the assets was unsupported and, in fact, controverted by the Greens' own proof.

(5) Howard Green had no need or desire for the assets Mary Green was conveying, and according to his testimony, sold them or turned them into cash.

(6) The testimony of Charles Fox, the only witness who corroborated the Second Agreement and the circumstances of its execution, was not credible, in that he had told the government that he knew nothing about an antenuptial agreement. (Tr2, p. 163, lns. 9-13; Tr2, p. 164, ln. 22--p. 165, ln. 3.) No explanation of this inconsistency was offered. His trial testimony was not credible, in part because of this and based also on his demeanor and his bias in favor of the Greens.

(7) The evidence as to the transfer of assets was vague and unconvincing and their valuation was inconsistent and inflated in that:

(a) Mary allegedly gave Howard approximately $8,000 in cash, approximately $12,000 in liquidation of her retirement account, $2,000 equity in her Ford Mustang, a piano allegedly worth $15,000, two antique paintings allegedly worth $8,500, and a $25,000 promissory note, in exchange for the Property.

(b) Howard Green's interrogatory responses specifically set forth the amount of cash he received from Mary Green as $7,867, but the responses did not provide any supporting documentation. The Greens also failed to produce any documentation to support this amount at trial. Mary Green does not recall when the transfer of the cash actually occurred, nor does she remember the method (by check or money order) or amount of the transfer. (Tr2, p. 147, ln. 2--p. 148, ln. 2 and Tr1, p.65, lns. 9-13.)

(c) Howard Green testified in his interrogatory responses that the liquidation of Mary's retirement fund resulted in a transfer of a very specific sum, $11,917, to him. (Tr2, p. 145, lns. 12-18.) The evidence showed that the value of the retirement account liquidated was actually $9,767.14. Additionally, the retirement account was liquidated on June 16, 1982 , two years after the Second Agreement was allegedly entered into. (Tr1, p. 81, lns. 6-24.)

(d) As to the transfer of Mary's car, Mary has no copy of the title or transfer of title, and any value of the car to Howard was slight, as Howard already owned other luxury automobiles at the time of the alleged transfer, including a Mercedes, two Cadillac Eldorado convertibles, a Mercury station wagon, and a vintage Ford Mustang. (Tr1, p. 75, lns. 13-25; Tr2, p.90, lns. 1-20.)

(e) The transfer of the piano and its value are also unsupported. Mary and Howard Green testified that Mary Green transferred a Steinway Grand Piano to Howard Green in 1980 as consideration for the transfer of the Property. They claim that the piano was worth approximately $15,000, (Tr1, p. 65, lns. 18-20), but no expert testimony was ever submitted regarding its value. Mary Green also continued to depreciate the piano, as an expense of her music business, on both her 1980 and 1981 income tax returns. (Tr1, p. 80, ln. 21--p. 81, ln. 1 & Gov't Exs. 15 & 20 (Schedule C--Mary Green--Musical Director).) Moreover, the amount she paid for the piano, as testified to and as reflected on the returns, was approximately $4,900, (Tr1, p. 70, lns. 22-24). No gain was reflected on either return relating to its alleged transfer. (Gov't Exs. 15 & 20.)

(f) There is no evidence to support the value of the two antique paintings. Mary Green testified that she did not remember how much she paid for them. The paintings were not separately insured. (Tr1, p. 83-84.) Howard Green testified that he learned the value of the paintings by describing them to an art dealer prior to entering into the antenuptial agreement. (Tr2, p. 91, ln. 18--p. 92, ln. 8; Tr2, p. 148, ln. 3--p. 149, ln. 2.) However, no expert testimony was given regarding their value. No documentation regarding Howard's alleged sale of the paintings was submitted, and the identity of the alleged purchaser was not disclosed.

(g) Mary Green also claims to have given Howard Green a $25,000 note in consideration for the transfer of the Property. (Green Exs. 8 & 9.) Yet the note does not require Mary Green to make any payments until after Howard's death. Moreover, it gives her credit for any payment she makes toward household expenses in excess of 50% of the household expense. The Greens claim that Mary has paid off the note, but they did not submit any credible evidence reflecting the dates, amounts and source of such payments. ² In addition, no evidence was submitted as to the fair market value (amount of consideration) of such a note as of the date of the transfer.

(8) Additionally, IRS Appeals Officer Reginald White testified that the sworn statement given to the IRS by Mary did not refer to Howard's transfer of an interest in the Property in 1981, a fact that he would have wanted to know in making his recommendation on innocent spouse treatment. (Tr2, p. 14, ln. 24--p. 16, ln. 2.) In direct contradiction of the facts posited by the Greens at trial, the affidavit affirmatively stated that "[t]here were no transfers in excess of $500 by Howard to or for me for the years of and immediately after the returns except for those funds that were deposited in our joint bank account which were used in running the household." (Gov't Ex. 26 at 4.).

(9) Prior to the time of the transfer of the Property, Green had filed his 1979 tax return, which was substantially false and was filed with the intent to defraud the government. (Tr1, p. 95 & Gov't Exs. 1-8 & 29 (specifically Ex. 4, p. 19, & Ex. 6.)

(10) The April 1981 transfer to Mary of an interest in the Property occurred at a time when Howard Green was involved in a scheme to defraud millions of dollars from investors. He later pled guilty to fraudulent practices which occurred between 1977 and 1981.

(11) In early 1981, Green's scheme was collapsing and Green was forced to file corporate bankruptcy on behalf of Fidelity America Finance Company ("FAFCO") and Fidelity America Mortgage Company ("FAMCO"). The bankruptcy petition was filed on February 4, 1981 , approximately two months before the transfer of the Property. (Tr1, p. 49, lns. 15-17; Tr1, p. 95; Tr2, p. 106, lns. 18-20.)

(12) In 1981, Green also began liquidating his other assets. Greentrust, which Green estimated to be worth approximately $1.4 million, was liquidated by 1982. (Tr2, p. 159.)

6. The Second Agreement was not executed when and as the Greens testified, and the Property was not transferred in 1981 in accordance with its terms. There was no obligation or debt pursuant to which Howard transferred the Property in 1981. The consideration set forth in the Second Agreement was never given and therefore not given as consideration for, or prior to, the transfer of a one-half interest in the Property.

7. Mary Green failed to establish by clear and convincing evidence that she gave fair consideration to Howard Green for the conveyance of the Property.

8. On February 3, 1983, Norman Kranzdorf ("Kranzdorf"), the trustee appointed to the bankruptcy cases of FAFCO and FAMCO, filed suit against Green in the United States District Court for the Eastern District of Pennsylvania ("Kranzdorf complaint"). (Gov't Ex. 18; Tr2, p. 125, lns. 12-17.)

9. The Kranzdorf complaint charged Green with civil fraud, mismanagement and misappropriation of corporate assets. The conduct on which the Kranzdorf complaint was based occurred from 1977 through 1981. (Gov't Ex. 18; Tr2, p. 125, ln. 12--p. 127, ln. 10.) Ultimately, a $17 million judgment was entered in favor of Kranzdorf and against Green. (Gov't Ex. 17.)

10. On April 11, 1983, Green was indicted on charges of conspiracy, securities fraud, mail fraud, and the filing of a false income tax return for the 1979 tax year (26 U.S.C. Section 7602(1)). The conduct alleged in the indictment, to which Green ultimately pled guilty, occurred from 1978 until 1981. (Tr1, p. 95, lns. 7-21; Tr2, p. 134, ln. 4--p.141, ln. 15; Gov't Exs. 1-8, 29.)

11. On June 1, 1983 , Howard Green transferred his remaining interest in the Property to his two children, Stacy and Clayton Green. This conveyance was subsequently set aside. (Tr1, p. 50, lns. 11-13.)

12. In September, 1983, Howard and Mary Green opened bank accounts in Maryland under false names, and then transferred money to, and liquidated, those accounts. Mary Green disguised her appearance by wearing a black wig and glasses in the bank. (Tr1, p. 55, ln. 24--p. 58, ln. 7; Tr2, p. 134, lns. 1-22.)

13. Shortly thereafter, Howard Green fled prosecution and Mary Green went with him. (Tr1, p. 57, ln. 23--p. 58, ln. 3; Tr2, p. 134, lns. 10-12; Tr2, p. 166, ln. 22--p. 168, ln. 20.)

14. In April 1984, Howard Green was apprehended in Baltimore , Maryland , redeeming coupons from his bearer bonds. Mary Green was with him at the time of his arrest. (Tr2, p. 135, lns. 7-20; Tr1, p. 58, ln. 4-7 & p. 96, lns. 2-9.) Howard Green was carrying two sets of false identification at the time of his arrest. (Tr2, p. 135, ln. 21--p. 136, ln. 1.)

15. In July, 1984, Howard Green entered into a plea agreement with the government. He pled guilty to numerous counts of the indictments, including the intentional filing of a false income tax return for the 1979 tax year. As part of his plea agreement, Howard Green was required to pay $1.1 million in restitution, pay a fine and serve 30 months in jail. (Tr1, p. 97, lns. 2-19; Gov't Exs. 4, 6, 29; Tr2, p. 141, lns. 3-8; Tr2, p. 136, ln. 8--p. 138, ln. 9.)

16. Howard Green filed Federal income tax returns (Form 1040) for the years 1979 through 1981 substantially underreporting his Federal income tax liabilities. ( November 13, 1997 , Trial Transcript ("Tr2"), p. 7, ln. 17--p. 8, ln. 23.)

17. The Internal Revenue Service ("IRS") later made assessments against Green for Federal income tax liabilities as reflected below: (Government ("Gov't") Ex. 10.)

                                                        DATE OF    AMOUNT OF

PERIOD                                                 ASSESSMENT TAX ASSESSED

1979 .................................................  
10/09/91
   $51,845.00

1980 .................................................  
10/09/91
   $42,044.00

1981 .................................................  
10/09/91
   $46,408.00

 

18. In 1991, prior to the making of the assessments against Howard Green, Howard and Mary Green agreed to the amount of the assessments against Howard Green and waived their right to challenge them. (Gov't Ex. 9.)

19. In accordance with the law, on or about the dates of assessment, notice and demand for payment of the unpaid taxes and statutory additions was given. (Gov't Ex. 10.)

20. Although notice and demand for payment of each of the assessments described above was given, Howard Green neglected or refused to pay over in full the amounts assessed. The sum of $652,139.83 remains due and owing to the United States , plus statutory additions and interest accruing thereon from October 9, 1991 . (Gov't Ex. 10; Tr2, p. 7, ln. 21--p. 8, ln. 8.) ³

21. On February 10, 1992 , the IRS recorded a Notice of Federal Tax Lien against Howard Green with the Prothonotary of Montgomery County, Pennsylvania. The notice concerned the tax years 1979 through 1981. (Gov't Ex. 57.)

22. In addition to the government's tax lien claim, both Roylan Finance Company and Ernestine Woodmansee, Mary Green's mother, contend that they still hold valid liens on the Property that have priority over the government's claims.

23. First, Roylan Finance Company ("Roylan") claims to have a $300,000 mortgage on the Property. On February 1, 1988 , approximately one year after he was released from prison, Howard Green received an examination report letter from the IRS proposing adjustments for the 1979, 1980 and 1981 tax years. His 1979 return was filed jointly with his former wife Ina Green. His 1980 and 1981 returns were filed jointly with Mary Green. The examination report letter pertained to Howard Green individually and Howard and Mary Green jointly. (Gov't Exs. 11, 15, 19, 20; Tr2, p. 24, ln. 22--p. 25, ln. 11.)

24. On February 29, 1988 , Howard Green wrote a letter to the IRS protesting each of the proposed adjustments to his and Mary's tax liabilities. (Gov't Ex. 11.)

25. On March 1, 1988 , one day after Howard Green wrote this letter to the IRS, he granted a mortgage on his residence to Roylan, a company created by Howard Green. (Tr2, p. 150, lns. 22-24.) The sole owner of the company is Mary Green's mother, Ernestine Woodmansee ("Ms. Woodmansee"), and the company was created by Howard Green for the lone purpose of holding a $300,000 mortgage on his personal residence. ⁴ Ms. Woodmansee never gave Howard and Mary $300,000. Rather, the mortgage was given to her to repay her for supporting Mary over the course of her life. Ms. Woodmansee neither required nor expected to be repaid for her parental support. (Tr1, p. 61, ln. 16--p. 62,

ln. 12; Tr2, p. 152, lns. 9-17.)

26. The mortgage was put in the name of Roylan Finance, not Ernestine Woodmansee, because Howard and Mary wanted their creditors to believe that the mortgage was valid and that it was held by a legitimate finance company, rather than Mary's mother. ⁵ In fact, Howard Green admitted lying to an IRS investigator about why Roylan had not taken legal action against the Greens. Green falsely told the investigator that Roylan had not initiated legal proceedings because Green was a "tough son of a bitch." He made this statement in order to "get rid of" the IRS investigator, and did not mention that the owner of Roylan was Mary Green's mother, Ernestine Woodmansee. (Tr2, p. 151, lns 17-23.) Mary Green was not legally obligated to repay her mother for any expenditures, nor did her mother expect to be repaid. (Tr2, p. 152, ln. 18--p. 153, ln. 1.)

27. On February 23, 1989 , Howard and Mary Green also executed and filed a UCC-1 Financing Statement, which gave Roylan Finance a security interest in all of their personal property. (Tr1, p.62, ln. 19-23; Tr2, p. 151, lns. 8-14.) This financing statement was filed just two months before, and in anticipation of, a judgment being entered against Howard Green in the Kranzdorf lawsuit. (Tr2, p. 153, ln. 20--p. 154, ln. 3.)

28. Ernestine Woodmansee produced evidence of another first-lien mortgage on the Property in the amount of $500,000. On September 27, 1979 , Howard had entered into a Property Settlement and Separation Agreement ("Agreement") with his first wife Ina Green. (Gov't Ex. 22.) That Agreement provided in paragraph 6(c) on pages 6-7 that:

In consideration of Wife's transfer of her interest in the Premises to Husband, Husband agrees to deliver to Wife the sum of Seventy Five Thousand One Dollars ($75,001.00) as follows:

1) Twenty Five Thousand Dollars ($25,000.00) as an immediate cash advance against the purchase price . . .

2) A note as an immediate additional advance against the purchase price in the sum of Fifty Thousand Dollars ($50,000.00) at ten percent (10%) annual interest.

3) . . . (e) To secure the Note described in subparagraph (c)(2) of this Article, Husband agrees to execute a first mortgage in the amount of Fifty Thousand Dollars ($50,000.00) to Wife on the real estate located at 990 Old Huntingdon Pike, Huntingdon Valley , Pennsylvania .

29. Pursuant to this Agreement, Howard executed a $50,000 Mortgage Note and a Mortgage in favor of Ina Green on September 30, 1979 . (Green Exs. 4, 5.) The Mortgage was recorded October 29, 1979 , in the Office for the Recording of Deeds in and for Montgomery County in Mortgage Book 4814, page 475. (Green Ex. 5; Tr2, pages 84-86.)

30. Over the course of the years that followed, Howard Green defaulted on the mortgage to Ina Green, eventually resulting in litigation. (See generally Tr2, p. 51, ln. 9--p. 60, ln. 17.)

31. On or about June 12, 1990 , intending to purchase the Mortgage, as well as to assist Howard and Mary Green in settling the litigation with Ina Green, Ernestine Woodmansee withdrew $50,000 from a safe deposit box and gave the money to Howard Green. (Tr2, pages 157-58, 177.) Howard Green then paid that money to Ina Green through Ina Green's attorney. (Roylan Ex. 6; Tr2, pages 52, 53, 58, 157-158.) The bank money order used to make the payment to Ina Green contained the initials "EEW" on the line marked "sender information." (Roylan Ex. 6.)

32. On June 29, 1990 , Ina Green executed an Assignment of her Mortgage ("Assignment") and delivered the Assignment and Mortgage to Howard Green. (Roylan Ex. 7; Tr2, pages 51, 52.) Howard Green shortly thereafter turned the Assignment and Mortgage over to Ernestine Woodmansee. (Tr2, pages 158, 178.) Ina Green clearly intended to assign the Mortgage, and her attorney was never asked for a mortgage satisfaction piece. (Roylan Ex. 7; Tr2, pages 56, 57.)

33. At the time Ina Green executed the Assignment, the balance due under the Mortgage was $50,000 principal plus interest at ten (10) percent per annum from September 30, 1979 . (Roylan Ex. 8.)

34. No payments having been made, the balance due under the Mortgage is now in excess of $140,000, which represents $50,000 unpaid principal balance plus ten (10) percent per annum interest from September 30, 1979 . (Roylan Ex. 8; Green Exs. 4, 5; Tr2, p. 60.)

35. The Mortgage, which has never been satisfied, is held by Ernestine Woodmansee, who expects to eventually receive full payment of the balance due her under the terms of the Mortgage. (Tr2, pages 55, 177-178.)

36. Pursuant to 26 U.S.C. §6321, a federal tax lien arises in favor of the United States upon the assessment of Howard Green's taxes.

37. Section 6321 provides in part:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, 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.

38. A federal tax lien arises against all of a taxpayer's property on the date of the assessment if the assessment is not paid. United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 353 n.3 (1964); United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954).

39. Tax assessments by the government are presumptively correct. Sullivan v. United States [80-1 USTC ¶9344], 618 F.2d 1001, 1008 (3d Cir. 1980); United States v. Vespe [89-1 USTC ¶9193], 868 F.2d 1328, 1331 (3d Cir. 1989).

40. In this case, the government established its prima facie case by offering into evidence the Form 4340 Certificate of Assessments and Payments for the tax years 1979 and 1980 assessed on October 9, 1991 . Psaty v. United States [71-1 USTC ¶9346], 442 F.2d 1154, 1159 (3d Cir. 1971). Moreover, Green has consented to the assessments and does not challenge their accuracy here.

41. For the tax year 1979, Green owed $51,845.00 in federal income taxes, excluding interest and penalties. He is indebted to the United States in the amount of $244,897.43, plus statutory additions accruing from October 9, 1991 , for his 1979 tax liability.

42. For the tax year 1980, Green owed $42,044.00 in federal income taxes, excluding interest and penalties. He is indebted to the United States in the amount of $187,600.20, plus statutory additions accruing from October 9, 1991 , for his 1980 tax liability.

43. Therefore, tax liens arose and attached to all of Howard Green's property and rights to property on the date of the assessment, October 9, 1991 .

44. If the conveyance from Howard Green to Mary Green was fraudulent under Pennsylvania law, it is invalid against the United States and the United States shall be allowed to foreclose its tax liens against the Property.

45. The law governing fraudulent transfers in this case is the Pennsylvania Uniform Fraudulent Conveyance Act. ⁶ Under §357 of that statute, every conveyance made and every obligation incurred with actual intent to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors. 39 Pa. C.S.A. §357 (repealed 1994). The "requisite intent under §357 must be shown by clear and convincing evidence," United States v. Gleneagles Inv. Co., 565 F. Supp. 556, 580 (E.D. Pa. 1983), and intent to defraud will "be inferred from all the circumstances surrounding the transaction, including conduct subsequent to the conveyance." United States v. Purcell [93-2 USTC ¶50,648], 798 F. Supp. 1102, 1113 (E.D. Pa. 1991).

46. "Under Pennsylvania law, a conveyance from husband to wife for nominal consideration is presumed fraudulent on its face as to creditors, and no further evidence of actual fraud is required." United States v. Klayman, 736 F. Supp. 647, 649 (E.D. Pa. 1990). ⁷ "When a transfer from husband to wife for apparently nominal consideration has been alleged, the burden is on the wife to show by clear and satisfactory proof that the conveyance was fair." Gleneagles, 565 F. Supp. at 580.

47. Here, the April 13, 1981 , deed by which Howard transferred the Property to his wife Mary stated that the conveyance was for nominal consideration in the amount of "$1 and other good and valuable consideration." (Gov't Ex. 38.) Therefore, the Greens have the burden to show by clear and convincing evidence that the transfer was for fair consideration.

48. The Pennsylvania statute defines fair consideration as follows:

Fair consideration is given for property or obligation: (a) When, in exchange for such property or obligation, as a fair equivalent therefore and in good faith, property is conveyed or an antecedent debt is satisfied; or (b) When such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the Property or obligation obtained.

39 Pa. Stat. Ann. §353 (repealed 1994).

49. As detailed above, the Greens did not prove that property was exchanged, or that an antecedent debt was satisfied or secured, and, therefore, they failed to meet their burden at trial to show by "clear and satisfactory proof" that Mary gave consideration, let alone that it was sufficient. Gleneagles, 565 F. Supp. at 580.

50. I find that the Greens did not meet their burden to show that the conveyance was fair, and I hold that the conveyance was fraudulent to Howard Green's creditors and is set aside. Accordingly, the government shall be permitted to foreclose its tax liens against Howard's property. ⁸

51. I find that Roylan's $300,000 mortgage has also been tainted by actual fraud. A mortgage that is granted with actual intent to defraud will be set aside as against present and future creditors. 39 Pa. C.S.A. §357 (repealed 1994). The government (as creditor) has the burden to show actual intent by clear and convincing evidence, In re Lease-a-Fleet, Inc., 155 B.R. 666, 673 (E.D. Pa. 1993), and, as above, intent to defraud will "be inferred from all the circumstances surrounding the transaction, including conduct subsequent to the conveyance." Purcell [93-2 USTC ¶50,648], 798 F. Supp. at 1113.

52. On February 1, 1988 , Howard received a letter from the IRS explaining that he was being investigated for tax fraud for 1979, 1980, and 1981. (Gov't Exs. 11, 15, 19, 20; Tr2, p. 24, ln. 22--p. 25, ln. 11.) By that time, he had already pled guilty to conspiracy and securities fraud, (Gov't Exs. 4, 6, 29), served time in prison, (Tr1, p. 97, lns. 2-19), and fled from prosecution. (Tr1, p. 57, ln. 23--p. 58, ln.3; Tr2, p. 134, lns. 10-12; Tr2, p. 166, ln. 22--p. 168, ln.20.) He was also facing a lawsuit from Norman Kranzdorf, the trustee of his bankrupt estate. (See supra ¶¶12, 13.) On February 29, 1988 , he wrote a letter to the IRS protesting his 1979-1981 tax liabilities. (Gov't Ex. 11.) And then, the very next day, he granted the mortgage to Roylan Finance, a corporation whose sole owner was his mother-in-law, and which was created for the lone benefit of holding the mortgage. (Tr2, p. 150, lns. 22-24.) No payments have ever been made on this obligation, and Howard has lied to IRS investigators regarding Roylan Financing's operations. (Tr2, p. 151, lns. 17-23.)

53. Roylan's only defense is that the mortgage was given to repay Ernestine Woodmansee for her life-long support to Mary, rather than to defraud creditors. However, in light of "all the circumstances surrounding the transaction, including conduct subsequent to the conveyance," Purcell [93-2 USTC ¶50,648], 798 F. Supp. at 1113, I find this argument unpersuasive, and I find the transfer to have been fraudulent.

54. The evidence presented at trial demonstrates that Howard gave the mortgage to Roylan to shield the Property from the government's tax investigation and from the Kranzdorf lawsuit, both of which were rapidly expanding when the mortgage was granted in 1988. The facts and circumstances surrounding this transaction show convincingly that Howard Green granted the mortgage to Roylan Finance in 1988 with actual intent to defraud his creditors. Therefore, the Roylan mortgage shall be set aside as fraudulent.

55. As to Ernestine Woodmansee's claimed first-lien $50,000 mortgage on the Property, the government makes two arguments as to why I should set it aside. I do not find either contention persuasive. First, the government argues that Howard Green, and not Ernestine Woodmansee, really holds the assignment. It contends that Ernestine never really paid $50,000 to Ina Green in exchange for the assignment, but that Howard Green instead obtained the assignment himself and then gave it to Ernestine in yet another attempt to defraud his creditors. Thus, the government argues that we should set aside the $50,000 mortgage, because either (1) the assignment is really Howard's property and, as such, is subordinate to the government's tax liens, or because (2) Howard's decision to give the assignment to Ernestine was a fraudulent "conveyance."

56. I disagree. The government did not substantiate either of these claims with sufficient evidence at trial. Both Ernestine Woodmansee and Howard Green testified as to the $50,000 mortgage. Ernestine stated that she "gave Howard $50,000 for the mortgage" and that she expected the mortgage to be paid off. (Tr2, p. 177.) Likewise, Howard testified that Ernestine Woodmansee gave him $50,000 as part of a "package" deal by which Howard settled his lawsuit with Ina and the mortgage was assigned to Ernestine. (Tr2, p. 158.) The government's only response to this testimony was to challenge its credibility and to argue that the mortgage was a sham because Ernestine never expected it to be repaid. Yet it is the government's burden to show by clear and convincing evidence that the mortgage is fraudulent, In re Lease-a-Fleet, Inc., 155 B.R. at 673, and the attack on the credibility of the witnesses was insufficient to meet this burden. Ernestine Woodmansee was a credible witness. Further, this transaction and the events leading up to it predated 1981 and have reasonable explanations in terms of the need to resolve marital agreements and litigation. On the record before me, there is no clear and convincing evidence that Howard, rather than Ernestine, paid for the assignment of the mortgage, nor any indication that Howard currently holds the assignment. Instead, the evidence demonstrates that Ernestine Woodmansee paid $50,000 for an assignment of the mortgage from Ina Green, and that Ernestine still holds the mortgage to this day.

57. I am also unpersuaded by the government's second argument, namely, that its lien has priority over Ernestine Woodmansee's claim because Ernestine never recorded the assignment of her mortgage. The Pennsylvania recording statute requires that all deeds and conveyances concerning lands "shall be recorded" in order to be valid against subsequent purchasers and creditors. 21 Pa. C.S.A. §§351, 444. Mortgages are considered conveyances within these sections and they must be recorded, Southwestern Nat'l Bank v. Riegner, 140 A. 615, 617 ( Pa. 1928), but the statute does not specifically require that assignments of mortgages be recorded as well. Therefore, the issue is whether the case law supports the government's argument.

58. The case law in Pennsylvania does not require mortgage assignments to be recorded. At least two courts have stated that "an assignment of a mortgage [is] a conveyance within the recording acts." Fries v. Null, 26 A. 554, 557 ( Pa. 1893) (citing Phillips v. Bank of Lewistown, 18 Pa. 394, 402 ( Pa. 1852)). But these courts do not hold, as the government suggests, that assignments of mortgages must be recorded to have priority over subsequent creditors. Fries cited Phillips only to support its view that a mortgage is a "conveyance" of property within the meaning of the recording statute. Similarly, Phillips was ruling on a motion to exclude evidence, and it held merely that a certified copy of an assignment may be admitted into evidence if the assignment is recorded. Neither Fries nor Phillips, nor any other court in Pennsylvania , has ever held that an assignment must be recorded in order to be valid, or in order for the underlying mortgage to take precedence over future creditors. Thus, Ernestine Woodmansee's failure to record the assignment of the Ina Green mortgage does not affect the standing of the mortgage she holds vis-a-vis the government's interest in Howard's property. Ernestine Woodmansee holds a valid $50,000 mortgage that takes priority over the government's tax liens.

59. Accordingly, I conclude that the transfer of Howard Green's property to himself and Mary Green in 1981, and Roylan's $300,000 mortgage on Howard Green's property, shall both be set aside as fraudulent. However, Ernestine Woodmansee continues to hold a valid mortgage in the face amount of $50,000 that has priority over the government's tax lien. An appropriate Order follows.

ORDER

AND NOW, this 10th day of April, 1998, after a two-day bench trial, it is hereby ORDERED that:

1. The liens of the United States are valid and existing liens against the property at 990 Old Huntingdon Pike, Huntingdon Valley , Pennsylvania ("the Property");

2. The transfer of the Property from Howard Green to himself and Mary Green shall be set aside as fraudulent and is invalid against the claims of the United States ;

3. The $300,000 Mortgage on the Property executed by Howard Green in favor of Roylan Finance Company shall be set aside as fraudulent and is invalid against the claims of the United States ;

4. Ernestine Woodmansee holds a valid first-lien mortgage on the Property that has priority over the claims of the United States ; and

5. The federal tax liens attaching to the Property shall be foreclosed, and the proceeds from the foreclosure sale shall be distributed in an amount sufficient to satisfy, first, the lien of Ernestine Woodmansee, and, second, the claims of the United States .

¹ I have no doubt that the Greens prepared this document, but I conclude that it was not prepared before the April 1981 conveyance of the Property.

² Howard Green testified that Mary Green paid certain household expenses, (Tr2, p. 95-96), but no evidence other than Green's self-serving testimony was submitted as to the source of the funds used to pay those expenses.

³ This amount represents the combined totals of taxes assessed for 1979, 1980, and 1981, plus interest and penalties to the date of assessment, October 9, 1991 .

⁴ No testimony of Ms. Woodmansee was elicited at trial regarding Roylan Finance or the Roylan mortgage.

⁵ Howard Green testified that he put the mortgage in the name of Roylan Finance Company to make it easier to reconvey it to Mary without involving Mary's siblings. (Tr2, p. 154, lns. 11-18.)

⁶ The Conveyance Act has since been repealed, but it still controls this case since the alleged fraudulent activity occurred prior to Feb. 3, 1994 , the effective date of the law's repeal.

⁷ The Greens' arguments as to why this presumption does not apply are unavailing. First, the Greens contend that the presumption should not be used because they were not married at the time of the April 12, 1980 , agreement which first stated Howard's intent to deed the Property to Mary. However, the Greens were married at the time of the actual transfer in April 1981, and I have concluded that the Second Agreement did not predate this transfer. The Greens also argue that Howard was solvent and that the value of the Property was insignificant in relation to his total assets. However, Howard's financial status and the total value of his estate are irrelevant. Where, as here, there is a conveyance from husband to wife for nominal consideration, actual fraud is presumed, regardless of whether the transferor was in debt. Klayman, 736 F. Supp. at 649; Sheffit v. Koff, 100 A.2d 393, 396 ( Pa. Super. Ct. 1954).

⁸ The government also asserts that Howard's transfer should be set aside because it was constructively fraudulent, but I need not reach this issue because its fraudulent nature has been shown.

 

 

[94-2 USTC ¶50,557] Associates Financial Services Company of Alabama, Inc., Plaintiff v. Margaret M. Vardaman, et al., Defendants

U.S. District Court, No. Dist. Ala. , East. Div., Civ. 93-AR-1103-E, 6/29/94

[Code Sec. 6323 ]

Liens: Validity: Filing: Recorded mortgage.--Title to real property was subject first to a mortgage lien and then to a U.S. tax lien that was recorded after the mortgage was recorded. A title insurance search revealed that no liens existed against the mortgagor's real property. The mortgagee had no knowledge that the mortgagor's husband, who joined in executing the mortgage as a non-owner-spouse, was a delinquent taxpayer. The property was later deeded to the husband as part of their divorce proceeding.

MEMORANDUM OPINION

ACKER, JR., District Judge:

Because the court felt in the light of the agreed facts that defendant United States of America had the burden of proof despite the fact that it was a defendant, United States was called upon to present its evidence first, at the conclusion of which plaintiff, Associates Financial Services Company of Alabama, Inc. (Associates), offered an oral motion for judgment pursuant to Rule 52(c), F.R.Civ.P. The court took that motion under advisement and called upon Associates to present its evidence, which it did.

Based (1) upon the "Agreed Summary" in the pre-trial order entered in the above-entitled cause on May 18, 1994 , (2) upon the Clerk's entry of default against defendant, Margaret M. Vardaman (Mrs. Vardaman), and, (3) upon the evidence offered and received at the bench trial conducted on June 27, 1994 , the court makes the following

Findings of Fact

1. The court hereby adopts and incorporates herein by reference the facts set forth in paragraph 5(a) of the pre-trial order, entitled "Agreed Summary." There is reason to repeat herein these agreed pertinent facts, some of which are more significant than others.

2. No notice of tax lien was recorded by the United States in the Office of the Judge of Probate of Calhoun County, Alabama, naming Mrs. Vardaman as an alleged delinquent taxpayer or as the alleged "nominee" of her then husband, defendant and delinquent taxpayer, H. Merrill Vardaman (Mr. Vardaman), until after the subject mortgage was executed by Mrs. Vardaman in favor of plaintiff Associates, delivered to Associates and duly recorded by Associates in the office of the Judge of Probate of Calhoun County.

3. Prior to being named as mortgagee in, and recording, the subject mortgage executed by Mrs. Vardaman, Associates received no constructive notice and no actual notice that her said real property was encumbered by any lien or liens of any kind in favor of United States. The mere knowledge that Mr. Vardaman at that time had tax liens recorded against him, if Associates had such knowledge (which may or may not be true), did not put Associates on notice of any limitation on its ability to obtain a valid first mortgage lien on the real property owned only by Mrs. Vardaman. The mere fact Mr. Vardaman joined Mrs. Vardaman in executing the said mortgage had no legal significance for the purposes of this case. In Alabama a non-owner-spouse routinely joins in the execution of conveyances by an owner-spouse. Associates did what any prudent mortgage lender in Alabama would do under the same or similar circumstances, namely, order a title insurance binder. In this case the title binder and the subsequent policy of mortgage title insurance issued by a title insurance company after the closing of the loan transaction correctly reflected that no liens existed against Ms. Vardaman's real property.

Mrs. Vardaman is in default on her said mortgage to Associates.

Based on the foregoing facts, the court reaches the following

Conclusions of Law

The court has jurisdiction over the parties and over the subject matter.

Mrs. Vardaman is not only in default on the mortgage but has no right, title, claim or interest in and to the real property formerly owned by her and the subject of this action, viz:

A parcel of real property in the City of Anniston, Alabama, being more particularly described as follows: Beginning at a point on the South line of Glenwood Terrace 218 feet East of the Southeast intersection of Glenwood Terrace and Maplewood Place as shown on the map of Club View Heights recorded in the Office of the Probate Judge of Calhoun County, Alabama, in Plat Book "B", Page #145; thence East along the South line of Glenwood Terrace 80 feet; thence South and parallel to Maplewood Place 200 feet; thence West 80 feet; thence North 200 feet to the point of beginning; same being situated in Calhoun County, Alabama.

Mr. Vardaman currently holds the fee simple title to the said real property by virtue of the deed from Mrs. Vardaman to him executed as an aspect of their divorce proceeding. However, Mr. Vardaman's said title is subject first to the mortgage lien of Associates and only thereafter to the tax liens of the United States .

Any and all liens in favor of the United States are secondary and inferior to the mortgage lien of Associates, and any purchaser of the said real property at a properly conducted mortgage foreclosure sale conducted pursuant to the power of sale contained in the subject mortgage will obtain title free and clear of any and all claims by the United States. In other words, a foreclosure sale will cut off any and all liens held by the United States , which will, thereafter, have only the statutory right of redemption which secondary lienholders have under the laws of the State of Alabama after foreclosure of a first mortgage. After such foreclosure, the United States will have no other right, title, claim or interest in and to the subject real property.

The peculiar position taken by the United States in this case, as set forth in the pre-trial order, is:

If plaintiff had notice or knowledge that Margaret Vardaman held title to the real property as the nominee of H. Merrill Vardaman, the federal tax liens are superior to the mortgage. (emphasis supplied).

This constitutes a very apologetic and oblique way of making a very tentative claim on a hypothesis which is not even asserted to be the correct hypothesis. The United States offered no credible evidence to indicate that Associates had any notice that Ms. Vardaman held title as so-called "nominee," and presented no law to the effect that the facts known by Associates could have led it to conclude that the true or equitable title was in Mr. Vardaman and not in Mrs. Vardaman. Nothing suggests, much less proves, that Mrs. Vardaman was holding title for the benefit of Mr. Vardaman, but if she had been holding as constructive trustee for her financially distressed husband, there is a crucial distinction between equitable or true title as between Mrs. Vardaman and Mr. Vardaman and equitable or true title as between Mrs. Vardaman and Associates. The court finds it hard to understand how the United States could justify morally, much less legally, the position it has taken in this case. The United States points to no federal statute or decision which even purports to exempt it from the real estate lien or conveyance laws of the State of Alabama under circumstances like these. There is no obligation, and never has been an obligation, upon a mortgage lender in Alabama to search for liens against the kinfolks of a borrower before making a loan to the borrower on the security of the borrower's real property. Such a proposition, which seems to be the proposition here put forward timidly by United States , is facially preposterous. It comes close to a violation of Rule 11, F.R.Civ.P.

An appropriate, separate order will be entered.

DONE.

 

 

[94-1 USTC ¶50,217] United States of America , Plaintiff v. John F. McKeown, et al., Defendants

U.S. District Court, No. Dist. Ind., Hammond Div., Civ. 2:92-CV-119-RL, 3/31/94

[Code Sec. 6323 ]

Validity of lien: Priority: Recorded mortgage.--The government had a valid tax lien on a delinquent taxpayer's one-half interest in two lots of real property. However, a mortgage on one of the two lots took priority over the tax lien because the mortgage was recorded before the notices of tax lien were filed.

[Code Sec. 7403 ]

Action to enforce lien: Conclusiveness of assessment.--The government had valid tax liens on a delinquent taxpayer's one-half interest in two lots of real property. The taxpayer failed to show that the tax assessments represented on the government's Form 4340, Certificates of Assessments and Payments, were incorrect. The taxpayer's arguments concerning the constitutionality of the federal income tax laws did not provide a basis for denying the validity of the government's liens.

ORDER

LOZANO, District Judge:

This matter is before the Court on Plaintiff's Motion for Summary Judgment on the issues of Defendant, John F. McKeown's, liability for 1981 and 1984 federal income taxes and the priority of the federal tax liens relating to said taxes vis-a-vis other creditors with respect to the real property sought to be foreclosed, filed by the United States of America, on May 12, 1993. ¹ For the reasons stated herein, this Motion for Summary Judgment is GRANTED.

BACKGROUND

This action was brought by the United States of America to reduce to judgment federal tax assessments against Defendant, John F. McKeown, and to foreclose the outstanding tax liens which have attached to real property described as follows:

Lot No. 19, Lakes of the Four Seasons, Unit No. 1, Porter County, Indiana, as shown on plat in Plat Book 3, page 75 in Recorder's Office, in Porter County, Indiana.

Lot No. 20, Lakes of the Four Seasons, Unit No. 1, Porter County , as shown on plat in Plat Book 3, page 75, in the Recorder's Office in Porter County, Indiana.

Lot No. 19 was acquired by John F. McKeown and Peggy J. McKeown on October 25, 1977 . Lot No. 20 was acquired by John F. McKeown and Peggy J. McKeown on March 26, 1982 .

Defendants, Peggy J. McKeown, Citizens Federal Savings & Loan Association, and Francis J. Schafer were joined as Defendants in this action pursuant to 26 U.S.C. §7403(b) , to adjudicate their claims to the subject real property. Additionally, by order dated June 28, 1993 , this Court granted the United States ' Motion for Leave to Amend its Complaint to add Lakes of the Four Seasons Property Owners Association (LOFS) as a party to this action so that it could assert any lien or claim that it may have to the real property. On November 17, 1993 , a default judgment was entered against LOFS. On December 20, 1993 , the Court set aside the default judgment. LOFS does not claim a lien superior to that of the United States . Citizens Federal has filed a Cross-Complaint for foreclosure of a mortgage entered into by John F. McKeown and Peggy J. McKeown dated May 8, 1978 , and recorded May 10, 1978 , in the Porter County Recorder's office. The balance on the mortgage, as of March 31, 1993 , was $21,986.69. Francis J. Schafer does not contend that he is entitled to be paid before the United States from the proceeds of the sale of the subject real estate.

On June 10, 1985 , a delegate of the Secretary of the Treasury of the United States of America made an assessment in accordance with the law relating to Defendant, John F. McKeown's, 1981 federal income tax liability. Exhibit A-2, submitted as a supplement to Plaintiff's Motion for Summary Judgment, establishes that on June 10, 1985 , the Internal Revenue Service assessed taxes, penalties, and interest against John F. McKeown relating to 1981, and that notice of the assessment and demand for payment were made in the amount of $4,087.77. However, the assessed balance due for 1981 is $3,925.91, plus interest and statutory additions from the date of assessment. The difference from the figure of $4,087.77 results from additional payments and/or credits to that account. (Exh. A-2) Exhibit A-1, a certificate of assessment and payments for the 1984 tax liability of John F. McKeown evinces assessments made on February 3, 1986 , and February 17, 1986 , in the amount of $4,385.42. Although notice of the assessments and demand for payment were made upon John F. McKeown on June 10, 1985, February 3, 1986, and February 17, 1986, he has neglected, failed, and refused to pay the assessments, and remains indebted to the United States in the amount of $3,925.91 for 1981, and $4,385.42 for 1984, plus statutory interest and additions from the dates of assessment. As a result of McKeown's failure to pay the tax assessments, federal tax liens arose pursuant to the provisions of 26 U.S.C. §§6321 and 6322 which attach to all property and rights to property of John F. McKeown, including the subject real property, as of the dates of the assessment.

Exhibit B evinces that the notice of the federal tax liens which arose by virtue of the tax assessments for 1981 was filed with the office of the Recorder of Deeds, Porter County, Indiana, on June 11, 1985 . Exhibit C shows that notice of the federal tax liens which arose by virtue of the tax assessment for 1984 was filed with the Porter County Recorder of Deeds on January 30, 1987 .

On May 22, 1986 , the LaPorte Superior Court issued a Decree of Dissolution of Marriage in Cause No. 44649, dissolving the marriage between John F. McKeown and Peggy J. McKeown. Pursuant to the Decree of Dissolution of Marriage, the subject real property was ordered sold and the proceeds divided equally between John F. and Peggy J. McKeown. The real property has never been sold.

DISCUSSION

Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is proper only if it is demonstrated that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); First Wis. Trust Co. v. Schroud, 916 F.2d 394, 398 (7th Cir. 1990). In other words, the record must reveal that no reasonable jury could find for the nonmovant. Karazanos v. Navistar Int'l Transp. Corp., 948 F.2d 332, 335 (7th Cir. 1991); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). In deciding a motion for summary judgment, the Court must read all facts in the light most favorable to the nonmoving party. Anderson, 477 U.S. at 255; Richardson v. Penfold, 839 F.2d 392, 394 (7th Cir. 1988).

The burden is upon the moving party to identify those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits," if any, which it believes demonstrates an absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. Once the moving party has met this burden, the nonmoving party may not rest upon mere allegations but "must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); Becker v. Tanenbaum-Hill Assoc., Inc., 914 F.2d 107, 110 (7th Cir. 1990); Schroeder v. Lufthansa German Airlines, 875 F.2d 613, 620 (7th Cir. 1989). "Whether a fact is material depends on the substantive law underlying a particular claim and 'only disputes over facts that might effect the outcome of the suit under governing law will properly preclude the entry of summary judgment.' " Walter v. Fiorenzo, 840 F.2d 427, 434 (7th Cir. 1988) (citing Anderson, 477 U.S. at 248).

"[A] party who bears the burden of proof on a particular issue may not rest on its pleading, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact which requires trial." Beard v. Whitley County REMC , 840 F.2d 405, 410 (7th Cir. 1988). Therefore, if a party fails to establish the existence of an essential element of its case on which it bears the burden of proof at trial, summary judgment will be appropriate. In this situation, there can be " 'no genuine issue as to any material fact', since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex, 477 U.S. at 323.

1981 and 1984 Federal Income Tax Liability

The United States offers as evidence of McKeown's tax liability two Certificates of Assessments and Payments (Form 4340) which evince the existence or the making of an assessment pursuant to the Internal Revenue laws of the United States . The Form 4340 is a certified public document which is self-authenticating under Federal Rule of Evidence 902(4), and which is admissible under the public records and reports exception to the hearsay rule contained in Federal Rule of Evidence 803(8). See Schmidt v. Internal Revenue Service [89-2 USTC ¶9529 ], 717 F. Supp. 763, 764 (D. Kan. 1989). By introducing into evidence certified copies of the federal tax assessment, the Government establishes its prima facie case of liability. United States v. Hart, 89-1 USTC ¶9255 (C.D. Ill. 1989), aff'd, 917 F.2d 26 (7th Cir. 1990); see also Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933); United States v. Rindskopf, 105 U.S. 418 (1881). Once the Government has established a prima facie case of liability, the burden is placed on the taxpayer to show that the assessment is incorrect and what the correct amount of liability is. Hart, Id. (citing United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433 (1976)). As the United States points out in its Memorandum in support of its Motion for Partial Summary Judgment, the Form 4340 constitutes "presumptive proof of a valid assessment." United States v. Dixon [87-2 USTC ¶9485 ], 672 F. Supp. 503, 506 (M.D. Ala. 1987), aff'd 849 F.2d 1478 (11th Cir. 1988). See also United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1017 (11th Cir. 1989).

There is no factual evidence before this Court which could establish that the amounts alleged to be owing by the United States are incorrect. McKeown's arguments concerning the constitutionality of the federal income tax laws provide no basis for denial of the Motion for Partial Summary Judgment, and have been rejected by this and many other courts. See Order, January 26, 1993 (and cases cited therein).

The Court finds as a matter of law that Defendant, John F. McKeown, has failed to meet his burden of proof to show that the assessments involved herein are incorrect, and has failed to meet his burden of proof to show the correct amount of taxes involved. Thus, summary judgment in favor of the Plaintiff, United States of America , is GRANTED as to the issue of Defendant, John McKeown's, tax liability for the 1981 and 1984 federal income taxes. Defendant, John F. McKeown, is liable for federal income taxes, penalties, and interest in the amount of $3,925.91 for 1981 and $4,385.42 for 1985, plus statutory interest and additions from the dates of assessment.

Tax Liens

Where there are competing claims to a delinquent taxpayer's property between a federal tax lien and other interests created by state law, the question of priorities is governed by federal law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-514 (1960); see also United States v. Safeco Ins. Co. of Am. [89-1 USTC ¶9227 ], 870 F.2d 338 (6th Cir. 1989). The long-established priority rule with respect to federal tax liens is that "the first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954); see also Meyer v. United States [64-1 USTC ¶9111 ], 375 U.S. 233, 236 (1963). Thus, the first in time first in right rule will determine the priority of claims asserted in this case. When the United States made its federal tax assessment against John McKeown, giving notice and demand for payment, statutory liens arose and attached to all property and rights to property of John McKeown. 26 U.S.C. §§6321 and 6322 . Under 26 U.S.C. §6322 , these liens arose at the time the assessment was made and shall continue until the liability for the amount assessed is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 .

In order to protect its interest, section 6323 requires the United States to file a Notice of Federal Tax Lien. Unless such a notice is filed "the lien imposed by section 6321 shall not be valid against any purchaser, holder of a security interest, mechanics lienor, or judgment lien creditor." 26 U.S.C. 6323(a).

It is undisputed that the notice of federal tax liens which arose by virtue of the tax assessments for 1981 was filed with the office of the Recorder of Deeds, Porter County, Indiana, on June 11, 1985, and that the notice of the federal tax liens which arose by virtue of the tax assessments for 1984 was filed with the Porter County Recorder of Deeds on January 30, 1987. The United States concedes that the mortgage of Citizens Federal Savings & Loan Association has priority over the federal tax lien with respect to the proceeds of sale from Lot 19 because it was recorded prior to the filing of the Notices of Federal Tax Lien. The federal tax liens do not attach to Peggy McKeown's interest in the subject real property, as she has not been assessed for the tax involved herein.

Accordingly, it is ORDERED, ADJUDGED, AND DECREED THAT:

(1) the United States has valid federal tax liens on all property and rights to property of Defendant, John F. McKeown, including his one-half interest in the real property described as follows:

Lot No. 19, Lakes of the Four Seasons, Unit No. 1, Porter County, Indiana, as shown on plat in Plat Book 3, page 75 in Recorder's Office, in Porter County, Indiana.

Lot No. 20, Lakes of the Four Seasons, Unit No. 1, Porter County , as shown on plat in Plat Book 3, page 75, in the Recorder's Office, in Porter County, Indiana.

(2) With respect to Lot 19, described above, the federal tax liens are superior to the interest of all parties except Citizen's Federal Savings & Loan Association with respect to John F. McKeown's one-half interest;

(3) With respect to Lot 20, the federal tax liens are superior to the interest of all other parties with respect to John F. McKeown's one-half interest;

(4) The federal tax liens which have attached to the real property described above shall be foreclosed, and that property shall be sold at a foreclosure sale according to law, free and clear of any right, title, lien, claim or interest of any of the Defendants herein pursuant to a forthcoming Order of Sale, which will address the distribution of the proceeds of sale. A proposed Order of Sale is to be filed by the United States , and served upon all parties, on or before April 29, 1994 .

¹ The motion was one for partial summary judgment, as the United States had not yet amended its complaint to name Lake of the Four Seasons Property Owners Association. As the Amended Complaint has been filed, the United States has now extended its motion to one for summary judgment against all Defendants.

 

 

[88-1 USTC ¶9266] In re Travelers Petroleum, Inc., Debtor. Travelers Petroleum, Inc., Plaintiff v. Internal Revenue Service, Defendant, Federal Deposit Insurance Corporation, in its corporate capacity, Intervenor

U.S. Bankruptcy Court, West. Dist. Okla., BK-87-02556-B, 12/29/87

[Code Sec. 6323 --Results unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Priority: Property subject to lien.--

A contest over liens between the IRS and the Federal Deposit Insurance Corporation was resolved in favor of the IRS since the taxpayer's trucks, which were the object of the liens, constituted equipment rather than inventory, and the FDIC's lien could attach only to the taxpayer's inventory. The trucks, which were leased to other corporations prior to the sale, failed to qualify as inventory because they were not part of a leasing business operated by the taxpayer. They were leased in order to revitalize the taxpayer's petroleum distribution business. Petroleum could not be distributed without a common carrier license, which the taxpayer did not possess. In order to enjoy the use of one, the taxpayer purchased a corporation that had one and leased some of its trucks to the corporation. The remaining trucks were leased to another corporation in an effort to boost the taxpayer's business.

Ray K. Babb, Jr., Neal Hunt, 4101 Perimeter Center Dr., Oklahoma City, Okla. 73112, Kenneth I. Jones, Jr., Jones, Blaney & Pringle, 204 N. Rob inson, Oklahoma City, Okla. 73102, for plaintiff. M. Kent Anderson, Department of Justice, Dallas , Tex. 75242 , for defendant.

MEMORANDUM DECISION AND ORDER

LINDSEY, Bankruptcy Judge:

The trial of this adversary proceeding was held November 24, 1987. The Court ruled that the debtor's trucks to which a federal tax lien had attached had a value, in the aggregate, of $194,050.00 as of the date of bankruptcy. In a previous hearing, the Court had ruled that the Internal Revenue Service ("IRS") was secured in that portion of the proceeds of a note which represented those trucks sold free and clear to Fitz Freight.

At the trial, the Court took under advisement the issue of whether the debtor's trucks were "equipment" under 12A O.S. §9-109(2) or "inventory" under 12A O.S. §9-109(4) for purposes of determining the lien priority between the Internal Revenue Service and the Federal Deposit Insurance Corporation. Post-trial briefs were filed simultaneously by the IRS and the FDIC, and the issue is now ripe for determination.

Originally, the debtor was a general contractor which built service stations and convenience stores. Prior to 1978, debtor purchased a fleet of tank trucks and took over the supply and distribution of petroleum to Circle K convenience stores and various other customers. Because debtor purchased the gasoline from suppliers and then resold it, debtor did not need a common carrier license. However, in November, 1984, debtor stopped supplying petroleum to Circle K. Because of credit problems which resulted from that loss of business, debtor loss its ability to purchase petroleum for resale.

In order for debtor to distribute petroleum owned by others, it was necessary for debtor to have a common carrier license. In November, 1984, Travelers Development, Inc., the holding company for debtor, acquired Fitz Freight, Inc., which had a common carrier license.

Debtor subsequently leased some of the trucks to Fitz. In 1985, debtor leased the balance of the trucks to Petro-Chemical Transport, Inc. ("PCT"), which is not an affiliate of debtor.

In the summer of 1986, debtor sold all of its trucks to Fitz. As part of the transaction, Fitz executed a promissory note to the debtor representing the purchase price of the trucks.

On January 5, 1987, after the sale to Fitz, IRS perfected its federal tax lien. The trucks transferred to Fitz were the only unencumbered assets of debtor to which the federal tax lien could attach. On June 16, 1984 , FDIC had perfected its security interest in all of debtor's present and after-acquired inventory.

If the leasing of the trucks to Fitz and to PCT prior to the sale of the trucks to Fitz changed the status of the trucks from equipment to inventory, FDIC and IRS agree that FDIC has the prior perfected lien. However, if the trucks retained their status as equipment despite being leased, IRS has the prior lien, since FDIC admits it has no security interest in equipment. IRS contends that whether the trucks are inventory or equipment is determined at the time the security agreement is executed. National Business Systems, Inc. v. Borg-Warner Acceptance Corporation, 792 F.2d 710, 714 (8th Cir. 1986). FDIC counters that the determination of whether the trucks are inventory or equipment is made at the time the security interest attaches, rather than when the security agreement is executed. Borg-Warner Acceptance Corporation v. Dugger (In re Teel), 9 B.R. 85, 89 (Bankr. N.D. Tex. 1981).

The position of the IRS is that when FDIC's security agreement on the inventory was executed, on June 16, 1984 , it is undisputed that the trucks were being used as equipment and so they would continue to be equipment even if their use was converted to inventory. That argument ignores the fact that FDIC's security interest extended to after-acquired inventory. A security interest in after-acquired property attaches only when the property is acquired, and thus is always perfected before it attaches. Furness Withy (Chartering), Inc., Panama v. World Energy Systems Association, 642 F.Supp. 50, 2 U.C.C. Rep. Serv. 2d 1035, 1043 (W.D. Tenn. 1985); 12A O.S. 1981, §9-204, comment 4.

While goods cannot fit into two classifications at the same time under §9-109, goods can change their classification to accommodate changes in circumstances. See 12A O.S. 1981, §9-109, comment 2. If circumstances changed so that debtor's trucks could properly be reclassified as inventory, then FDIC's security interest would attach when the trucks acquired inventory status.

The key determination in this proceeding is whether the trucks originally classified as equipment, became inventory by virtue of their being leased to Fitz or to PCT.

Goods are defined to be inventory, under 12A O.S. 1981, §9-109(4),

"if they are held by a person who holds them for sale or lease or to be furnished under contracts of service or if he has so furnished them, or if they are raw materials, work in process or materials used or consumed in a business. Inventory of a person is not to be classified as his equipment."

IRS asserts that the trucks were not "held for lease." IRS further contends that being leased is not the equivalent of being held for lease and that the distinction is determinative. FDIC argues that there is no distinction between "held for lease" and "leased," relying upon The Chicago Home for Girls v. Carr, 300 Ill. 478, 133 N.E. 344 (1921) (a case to enjoin the collection of taxes assessed against real estate). FDIC contends that the actual leasing transaction in this case establishes that the trucks were held for lease.

Whether there is a distinction between being "held for lease" or merely being "leased" misses the focus of the §9-109(4) definition of inventory. Inventory, whether held for sale or lease, implies the criterion that the prospective sale or lease be in the ordinary course of business. See 12A O.S. §9-109 comment 3.

IRS takes the position that the evidence establishes that the trucks were leased to Fitz to solve the common carrier licensing problem and were leased to PCT to make the best of a slow down in business. FDIC takes the contrary position that the evidence that there was more than one lease transaction, and that debtor's paving equipment was also occasionally leased, establish that debtor was engaged in the business of leasing. FDIC relies on State v. Tillem, 127 N.J. Super. 421, 317 A.2d 738 (1974) (a case to determine whether that defendant was engaged in the business of "loan sharking" in violation of criminal statutes), for the proposition that debtor need only be engaged in the leasing enterprise as a part of its regular business, as opposed to occasionally participati[ng] in single transactions.

After hearing the evidence and reviewing the record and briefs, the Court has reached the conclusion that the occasional leasing of paving equipment and the various truck leases were merely steps in furtherance of debtor's plan to conserve and to employ these assets until the debtor's business could be revitalized or restructured. See Paccar Financial Corporation v. Benton Trucking Service, Inc., 21 B.R. 574, 579 (Bankr. E.D. Mich. 1982) (where the Court commented that the sales made as part of a plan to convert the conduct of debtor's business operation were not sales by the debtor in the ordinary course of its business).

The debtor's business is to construct convenience stores and service stations and to distribute petroleum products. The leases were merely incidental to its business purpose and did not make debtor a person in the business of leasing goods of that kind. See id. at 578.

Accordingly, the Court holds that all trucks at issue were equipment under §9-109(4) at all times prior to filing of the petition herein, and are subject to the federal tax lien. Judgment will be entered granting the Internal Revenue Service lien priority as to the proceeds of the promissory note representing the sale of the trucks, in the amount of $194,050.00.

JUDGMENT

In accordance with its Order issued this same 29th day of December, 1987, it is ORDERED, ADJUDGED and DECREED that the defendant, Internal Revenue Service, have judgment in its favor.

The Internal Revenue Service's tax lien has priority over the lien of the Federal Deposit Insurance Corporation as to the proceeds of the promissory note representing the sale of the trucks, in the amount of $194,050.00.

 

 

[49-2 USTC ¶9405]Bank of America National Trust and Savings Association, a national banking association, Plaintiff v. United States of America, et al., Defendants

In the United States District Court, Southern District of California, Gentral Division, Civil No. 8836-M, June 10, 1949

Government's lien for taxes: Priority of creditor's lien.--Where the United States filed its claim of lien after a third party had made a loan to the property owner, said lien was inferior and subordinate to the third party's right to exact from the property full payment of the debt which the property secured.

Winfield Jones, 650 S. Spring St., Los Angeles , California , for the Plaintiff. James M. Carter, United States Attorney, by Edward R. McHale, 600 Federal Building, Los Angeles , California , for the Defendant.

Memorandum of Decision

This is an action of equitable nature in the form of a suit to quiet title to real property situate in the County of Los Angeles, State of California, which is specifically described in the complaint.

As the result of pre-trial proceedings pursuant to Rule 16, F. R. C. P. and a subsequent stipulation of facts all issues which arose under the complaint and answer have been settled by agreement. There admittedly remains but one question for decision; viz., the true amount of the priority lien claim of the plaintiff on the real property involved herein. The crucial facts of the case are as follows:

"On the 27th day of August, 1948, plaintiff, the beneficiary under a certain deed of trust dated November 7, 1946, executed by James O. Griffin and Vera L. Griffin, as trustors, to Corporation of America, a California corporation, as trustee, which deed of trust was recorded on December 2, 1946, in Book 24006, P. 93, of Official Records of Los Angeles County, California, and which deed of trust covered the real property which is the subject of this action, caused the real property covered by said deed of trust to be sold at foreclosure sale by the trustee under said deed of trust by exercise of the power of sale therein contained by reason of the default of the trustors in payment of the indebtedness secured thereby. At the time of said sale, said deed of trust secured the payment of an indebtedness of said trustors to plaintiff totalling $19,498.13, being the unpaid principal balance on two promissory notes dated November 7, 1946, and May 2, 1947, respectively, interest thereon to the date of said sale, advances made to protect said real property and costs, expenses and fees in connection with said foreclosure. The said real property was also at the time of said sale subject to numerous liens of the United States of America, as more fully set forth in that defendant's answer, for withholding taxes, federal unemployment contribution taxes, federal unemployment taxes and income taxes due from said trustors to the United States; however, the notice of lien relative to each of the said tax debts was recorded in the office of the County Recorder of Los Angeles County, California, the county in which said real property is situated, subsequent to the time that the aforesaid deed of trust was recorded and subsequent to the time that the consideration for each of the aforesaid promissory notes was paid by plaintiff. Plaintiff being the highest and best bidder at said foreclosure sale purchased the said real property at said sale for the sum of $15,150.00, and Corporation of America, the trustee under said deed of trust, executed and delivered its trustee's deed to said property to plaintiff. Said deed was recorded on September 1, 1948, as document No. 2371 in the office of the County Recorder of Los Angeles County , and plaintiff has at all times since that time been the record owner of said property and entitled to possession thereof."

Primarily it should be noted that while the United States can not be denied the right to subject the real property involved in this action to its enforceable tax liens, in doing so it must recognize, observe and condition its impositions in accordance with correlated requirements of law. See Title 26 U. S. C. Section 3670; Goldenberg v. West-over, 150 Fed. (2d) 388, (C. C. A. 9, 1945) [45-2 USTC ¶9362].

In the light of the restrictive effects of the tax liens under the provisions of Section 3672 of Title 26 United States Code, it is clear that although the foreclosure and sale of the real property involved in this suit did not operate to effece or detach the Government's liens they still remain subordinate and inferior to plaintiff's right to exact from the property full payment of the debt which the property secured. See United States v. Sampsell, 153 Fed. (2d) 731, (C. C. A. 9, 1946) [46-1 USTC ¶9186].

We think in equity and good conscience the defendant has too generously construed Section 580(d) of California Code of Civil Procedure. Our attention has not been called to any applicable interpretation of this code section and we have found none by independent search.

The salutary provisions of Section 580(d) are designed and intended to implement a statutory public policy ordained to protect debtors as a class against deficiency judgments in foreclosures. See California Bank v. Stimson, 89 A. C. A. 618, (1949).

It is clear that the remedial and relief aspects of Section 580(d) are for the benefit and protection of mortgage and trust deed debtors and that its scope and purview should not be enlarged to diminish or impair rights of others. Under the record before us the existing relative rights of the two lien claimants now having the entire ownership interests in the property in suit are not in any way involved in the deficiency proscriptions that are specified or contained in the language of Section 580(d) of the California Code of Civil Procedure.

In the face of the changed situations and circumstances since the foreclosure sale there is no equity in now requiring the primary lienholder to subordinate and confer any part of a just indebtedness to another lienholder, especially one subordinate in rank. United States v. Sampsell, supra.

We conclude by declaring the lien of the plaintiff to be a prior lien on the property involved in this suit for the sum of $19,498.13; that upon a resale of said property, which is hereby decreed to be made by the Marshal, the proceeds of sale should be paid after the deduction of costs of sale, first to plaintiff in payment of the aforesaid amount, to-wit, $19,498.13, and second, if any surplus there be, to the United States to apply upon its liens for taxes; and that at such sale either of the parties hereto should be allowed to bid for said real property and plaintiff should be allowed a credit on its bid at such sale for the amount of the aforesaid indebtedness, to-wit, $19,498.13.

Findings of fact, conclusions of law and appropriate judgment are ordered to be prepared herein in accordance with this memorandum decision and within five days from notice hereof, without costs, and attorneys for the plaintiff will accordingly prepare, serve and file such findings of fact, conclusions of law and judgment herein.

 

 

[73-1 USTC ¶9300]Re: In the Matter of the Application of Cecile Rob erts, d/b/a The Bodega Bar, Deadwood, South Dakota, for a Low Point Beer License for the year 1971-1972 and an Intoxicating Liquor License, Class E, for the year 1971

U. S. District Court, Dist. S. Dak., Civ. 71-43W, 358 FSupp 392, 1/23/73

[Code Secs. 6321 and 6323(a)]

Assessment: Deficiency: Collection: Priority of lien.--The oral contract of sale and foreclosure and a written contract were a mortgage and therefore senior to tax liens asserted by the United States . Since parole evidence could be presented to establish the existence of an oral contract, and the oral contract and a written contract created a mortgage, the mortgage was entitled to priority over an unrecorded federal tax lien.

Francis J. Parker, P. O. Box 586 , Deadwood, S. Dak., for plaintiff. William F. Clayton, United States Attorney, Sioux Falls , D. Dak., for U. S.

Before BOGUE, District Judge.

Memorandum Decision

[Facts]

Gentlemen:

On June 1, 1966, Cecile Rob erts, owner of the Bodega Bar in Deadwood, South Dakota , entered into a contract with one O. A. Kelley in which she agreed to sell and he agreed to buy the Bodega Bar.

On November 6, 1967, Kelley assigned his interest in the aforementioned contract to one Rob ert Dardis, subject to all of the terms of the original contract between Kelley and Rob erts.

Beginning on July 3, 1970, and extending into May, 1971, the United States made tax assessments against Dardis, d/b/a the Bodega Bar, in the total sum of $9,330.77.

On March 19, 1971, the original contract between Rob erts and Kelley, together with the assignment thereof, were filed in the office of the Register of Deeds, Lawrence County , South Dakota .

On March 22, 1971, Dardis, having been in default on his payments, Mrs. Rob erts instituted a summary foreclosure action and advertised a sale of the "goodwill of the business and all business licenses thereon."

On March 29, 1971, two notices of tax levies were filed by the Internal Revenue Service in the Register of Deeds office, Lawrence County, South Dakota, one of such forms being for the assessment of taxes for the period ending September 30, 1969, in the sum of $2,890.26, and the second notice being for tax assessments for the period ending December 31, 1969 in the sum of $1,652.71.

On April 3, 1971, pursuant to the foreclosure action, the sheriff of Lawrence County , South Dakota , conducted a sale of the Bodega Bar, at which Mrs. Rob erts was the high bidder.

On April 29, 1971, two further notices of tax levy were filed by the Internal Revenue Service in Lawrence County Register of Deeds office. The first of such notices covered the period ending June 30, 1970, and was in the sum of $1,460.07. The second of such notices covered the period ending December 31, 1970, and was in the sum of $2,005.58.

On May 3, 1971, the United States , after having discovered that the liquor licenses used in the operation of the Bodega Bar had been removed from the premises, served a notice of levy on the Deadwood City Council, which had received possession of the licenses from Mrs. Rob erts. This levy was issued in order to enable the United States to sell the licenses to satisfy Mr. Dardis' tax liabilities.

On May 14, 1971, the Deadwood City Council issued two new liquor licenses to Mrs. Rob erts, and indicated to the Commissioner of Revenue of the State of South Dakota that such issuance cancelled Dardis' licenses.

The Commissioner of Revenue, having learned of the interest of the United States, declared that "until a determination is made as to the proper party in interest in the presently existing license," such license would be issued in the name of Mrs. Rob erts, but would be deposited with the state court pursuant to S. D. C. L. §15-6-67(c).

On June 2, 1971, the licenses, having been deposited with the state court, that court entered an order allowing Mrs. Rob erts to operate under the licenses "pending a resolution of the basic questions involved herein . . ." A notice of depository was mailed to the United States on June 3, 1971.

On July 27, 1971, the United States was served with an order to show cause why the licenses held by the state court should not be released and returned to Cecile Rob erts.

On August 10, 1971, the United States filed a petition for removal with this Court and the case was heard on its merits on August 14, 1972.

[The Law]

Section 6321 of the Internal Revenue Code, entitled "Lien for Taxes," provides:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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. A. §6323(a) provides that "[t]he lien imposed by §6321 shall not be valid as against any purchaser, holder of a security interest, mechanics lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate." In this case such notice had to be filed with the Lawrence County, South Dakota, Register of Deeds, 26 U. S. C. A. §6323(f)(1)(A)(ii); S. D. C. L. 44-7-2, in order to have priority over the aforementioned interests. The language quoted above was effectuated by a 1966 amendment. Prior to 1966, §6323(a) provided that the lien imposed by §6321 was not valid as against any purchaser, mortgagee, pledgee and judgment creditor until notice thereof which met the requirements of subsection (f) had been filed by the Secretary or his delegate. The 1966 amendment made the language above quoted effective as of November 2, 1966, regardless of when a lien or title of the United States arose or when the lien or interest of any other person was acquired. Nevertheless, the amendment provided for exceptions in certain cases. The amendments made by this title would not apply in any case in which such amendments would "impair a priority enjoyed by any person (other than the United States ) holding a lien or interest prior to the date of enactment of this act. . ." The effect of such an exception would allow for Mrs. Rob erts to enjoy the status of either a mortgagee, pledgee, or judgment creditor and still fall within the provisions of §6323(a) providing for notice. Thus, if the contract dated June 1, 1966, between Mrs. Rob erts and O. A. Kelley, created in Mrs. Rob erts the status of either a mortgagee, pledgee, judgment creditor, secured party, mechanics lienor or judgment lien creditor, the United States, in order to obtain priority, would necessarily have had to file notice of the tax lien in the office of the Register of Deeds, Lawrence County, South Dakota.

[Government's Contention]

The United States contends, that since neither the contract of sale, dated June 1, 1966, between Mrs. Rob erts and O. A. Kelley, nor the assignment thereof between Kelley and Rob ert Dardis, specifically mentions "liquor licenses," a lien did not arise in favor of Mrs. Rob erts and therefore, the summary foreclosure of the personal property in the Bodega Bar did not contemplate a foreclosure of the liquor licenses.

The contract of sale, dated June 1, 1966, between Mrs. Rob erts and O. A. Kelley, provided for the sale of the following:

"All of the furnishings, furniture, fixtures, utensils, and other equipment on the date hereof utilized in connection with the operation of the Bodega Bar and Bodega Cafe, at Nos. 662 and 664 Main Street, Deadwood, South Dakota, including cash registers, adding machine, safe and restaurant supplies, all signs advertising the businesses of Bodega Bar and Bodega Cafe, whether at the places of said businesses or elsewhere . . .. As a part of the sale transaction represented by this instrument, purchaser is also purchasing the good will of the business named above and vendor has agreed to not enter into the restaurant business in Lawrence County, South Dakota, or to hold any interest in such a business, for a period of twenty years after date hereof."

The assignment of the contract to Rob ert Dardis contained the same wording as set forth above.

[The Court]

Although the parties have stipulated that a liquor license is "property" to which a federal lien may attach, this Court is disposed to disregard such a stipulation and proceed to a determination of whether, under South Dakota State Law, such a license constitutes "property". S. D. C. L. 35-2-1.2 requires all retail liquor license applications be submitted to the governing board of the municipality wherein the applicant intends to conduct business. The local board is clothed with a wide discretion in determining whether a license will issue, and this discretion is additionally given to the Commissioner of Revenue under S. D. C. L. 35-2-5.2. The exercise of such discretion is imposed not only upon applications for "new licenses" but also upon the transfer of licenses to either a new location or to another person. S. D. C. L. 35-2-7.

S. D. C. L. 35-2-7 provides:

"Any license granted under this title may be transferred to a new location or to another person. Where the transfer is to another person, the licensee must show in writing, under oath, that he has made a bulk sale of the business operated under such license, which bulk sale may be conditioned upon the granting of a transfer of the license and the transferee must make application exactly as if an original applicant, and such application shall take the same course and be acted upon as if an original application. . . ."

From the above statutes, it is readily apparent that a liquor license in the State of South Dakota is nothing more than a personal privilege to participate in the monopoly granted to the state by the Twenty-First Amendment to the United States Constitution and implemented by Title 35 of the South Dakota Compiled Laws. Being a privilege, its avlue necessarily depends upon the circumstances of its use. Standing alone, a liquor license is worthless under the South Dakota statute. It is not a severable commodity from the premises where it is used. If it is transferred to another person, the transferee must also be the purchaser of the original licensee's business. The statutes could not be more explicit. Thus, the monetary value of a liquor license in South Dakota arises only by sale of a licensee's business and the transferee's subsequent approved application. But in and of itself, a liquor license vests no property rights in a license holder which can be considered "property" within the verbiage of §6321. The government, therefore, may not assert a tax lien against such a license, standing alone.

Since the foreclosure of the personal property of the Bodega Bar under a contract previously filed was validly carried out, and having already determined that a liquor license is not severable from the premises which are transferred, Mrs. Rob erts' contract of sale and foreclosure thereof are senior to the tax liens asserted by the United States .

Moreover, even should this Court accept the stipulation of the parties that a liquor license, by itself, is a sufficiently valuable property right to which a federal tax lien may attach, there is another line of reasoning which disposes of the government's claim.

[Oral Contracts]

The general rule provides that a written contract supersedes all negotiations or stipulations. S. D. C. L. 53-8-5. However, as early as 1914, South Dakota Courts have recognized exceptions to this rule. Thus, in Barnes v. Hill City Lumber Company, 147 N. W. 775 (1914), the Court held that a valid oral contract, collateral to a written contract, may exist as an independent contract, even though the consideration may be found in some of the terms of the written contract, but only if such oral contract does not modify or change the terms of the written contract to which it is collateral. Moreover, parole evidence may be presented to establish the existence of any such oral contract which is not inconsistent with the terms of the written contract, if from the circumstances of the case, the Court infers that the party did not intend the contract to be a complete and final statement of the whole transaction. See Putnam v. Dickinson, 142 N. W. 2d 111, involving an interpretation of a statute similar to South Dakota 's. See also, Depue v. McIntosh, 127 N. W. 532; Janssen v. Tusha, 287 N. W. 501.

The testimony taken during the course of the trial and received over objection by the Government, conclusively shows that a collateral oral agreement was, in fact, entered into between the parties to the original contract, which contemplated the transfer of the liquor licenses in question to the purchaser, subject of course, to the conditions of the written contract. This agreement was confirmed by Dardis under Rob erts' bulk sale affidavit of the stock and business of the Bodega Bar, under which Dardis was able to secure the transfer of Rob erts' liquor license to him. It is also confirmed by the testimony that the purchase price of $50,000 in the written contract included payment for the liquor licenses. This collateral oral agreement, in no manner, changes or modifies the terms of the written contract, and as between the vendor and purchaser, was an enforceable agreement.

[Court's Conclusion]

This brings us to the crucial question of whether the written contract between Mrs. Rob erts and O. A. Kelley for the sale of the property and the collateral oral contract for the sale of the liquor licenses, created in Mrs. Rob erts the status of a "purchaser, holder of a security interest, mechanics lienor, or judgment lien creditor" under the 1966 amendment to 26 U.S.C.A. §6323(a) or the status of a "purchaser, mortgagee, pledgee, and judgment creditor" under 26 U. S. C. A. §6323(a) before the 1966 amendment. As discussed previously, under Public Law 89-719, §114(b) Exceptions, the 1966 amendment, which changed the classifications of protected individuals and which had November 2, 1966 as the effective date, did not apply "in any case (2) in which such amendments would (A) impair a priority enjoyed by any person (other than the United States) holding a lien or interest prior to the date of enactment of this Act . . ." Thus, if the June 1, 1966 contract created in Mrs. Rob erts the status of even the latter four enumerated persons, she would be entitled to the protections of §6323(a).

This Court is satisfied, under the reasoning of Gauvey v. United States [61-1 USTC ¶9478], 291 F. 2d 42 (8th Cir. 1961) that the written contract and collateral oral agreement constituted a mortgage within the meaning of §6323(a), as amended, §6323(a) (1966). As such, it is entitled to priority over an unrecorded federal tax lien. The Government argues, however, that regardless of the label attached to Mrs. Rob erts' interest, since the written contract did not include liquor licenses, the filing of such on March 19, 1971 , did not have the effect of giving notice to other creditors. Therefore, unless Mrs. Rob erts filed a sworn statement of the lien with the Lawrence County Register of Deeds prior to foreclosure, as required by S. D. C. L. 21-54-4, the foreclosure on April 3, 1971 , was invalid. However, as stated in Gawvey v. United States , supra, "the factor of recording is not mentioned in §6323 and, in our opinion, this element should not be read into the statute as a condition precedent to the protection afforded the enumerated classes." Id. p. 47. Citation was then made to Mason City & Clear Lake R. Co. v. Imperial Seed Co. [57-2 USTC ¶9736], 152 F. Supp. 145, 157, and the following quote was set out in footnote 6: "Neither does the fact that the instrument was not recorded under the State's fraudulent conveyence statutes--thus to impart constructive notice to subsequent purchasers, mortgagees and the like--make any difference here, for the instrument was valid between the parties to it, and Congress, . . . expressly subordinated federal tax liens to antecedent mortgages . . ." (emphasis added). In this case, even though the collateral oral contract covering the liquor licenses was never recorded (obviously) and an affidavit was never filed prior to foreclosure, nevertheless the oral contract was binding between the parties to it and thus is entitled to priority (emphasis added).

[Key to the Sale ]

Finally, a very real and most practical aspect of this case must not escape consideration by this Court. The power of the Government is now brought to bear on Mrs. Rob erts, because of what the Government believes is a technical loophole. Had Mrs. Rob erts' counsel, now deceased, listed the liquor licenses in the written contract initially, the Government would not now be urging that the lien attaches to Mrs. Rob erts' liquor licenses, but the counsel advised her that it was not necessary to do this and that she and Kelley could accomplish the transfer of the liquor licenses by oral agreement. She relied upon this advice and proceeded. This Court takes judicial notice of the fact that a very great portion of the business of the Bodega Bar and Gife is the sale of liquor. We would be naive indeed then to feel that the business could long survive without such licenses. A valid oral contract was entered into by Mrs. Rob erts and Kelley. The licenses are the key to the sale, and the parties to the agreement knew it and relied upon it.

Further, the City Council of Deadwood, even with notice that the United States Government was attempting to impress its lien upon Dardis' liquor licenses, issued new licenses to Mrs. Rob erts--which they had every right to do. No authority exists which could force the City Council or the State Commissioner of Revenue to grant a license to anyone. The Council made its choice and even if the Federal Government presented one hundred tax sale purchasers of liquor licenses, one right after the other, the Council could still say, and this Court is confident it would say, "Mrs. Rob erts is our choice. We have exercised our discretion." To what avail would the Government's efforts then be? Mrs. Rob erts obtained new licenses from the Deadwood City Council to be used on the premises she owned. The Dardis licenses having been turned in and not being part of any business and not having any specific location as required by law, simply ceased to exist.

The foregoing constitutes the Court's findings of fact and conclusions of law under Rule 52 F. R. C. P.

 

 

[60-2 USTC ¶9634]J. C. Gauvey, d/b/a Gauvey Rig & Trucking Company, Plaintiff v. Basin Rig & Trucking, Inc., a corporation, et al., Defendants

U. S. District Court, Dist. N. D., N. W. Div., Civil No. 15, 185 FSupp 374, 8/1/60

[1954 Code Sec. 6323]

Tax liens: Validity against mortgages: Unrecorded chattel mortgage: Priority.--Under Sec. 6323 a Federal tax lien was specifically and expressly subordinate to an unrecorded chattel mortgage which was valid between the parties to it and antedated the filing of the tax lien.

[1954 Code Sec. 6323]

Tax liens: Validity against mortgages: Unrecorded conditional sales contract: State law: Priority.--Under Sec. 6323 a Federal tax lien was not specifically and expressly subordinate to an unrecorded conditional sales contract which was not treated as a mortgage under state law; thus, under applicable state law the unrecorded conditional sales contract was subordinate to the tax lien of the U. S. government who was a "subsequent creditor without notice" for deficiencies owed it.

Wattam, Vogel, Vogel, Bright & Peterson, George A. Soule, Van Osdel & Foss, Fargo, N. D., for plaintiff. Rob ert Vogel , United States Attorney, Fargo, N. D., for United States of America . John F. Lord, of Lord, Ulmer, Bair & Daner, Mandan , N. D., for Marvin Anderson. Walter O. Burk, Willison, N. D., for First National Bank in Dickinson, N. D., and Bernard Cersonsky.

Memorandum and Order

REGISTER, District Judge:

The conditional sale contract here involved between plaintiff and Basin Rig & Trucking, Incorporated, and involving personal property in the total sum of $175,000, was dated and executed on May 1, 1956 . Title to such property was reserved by the vendor (plaintiff) until full performance by the vendee (Basin). On May 1, 1956 , possession of the property covered by the sale contract was delivered to the vendee. The sale contract was filed in the office of the Register of Deeds of Williams County, North Dakota, on April 11, 1957 . A chattel mortgage covering four ICC trucking permits, also given as security for the purchase price of the property included in said contract, and which was dated and executed on April 10, 1956, was also filed in said office on April 11, 1957.

On February 19, 1957 , the Director of Internal Revenue for the district of North Dakota filed federal tax lien number 7735 in the office of the Register of Deeds of Williams County, North Dakota. This lien, bearing the date February 13, 1957 , was in the sum of $8,368.25 and represented unpaid withholding and excise taxes owed by defendant Basin Rig and Trucking for the year ending September 30, 1956 . Assessment was duly made by said Director as to such withholding and excise taxes in November and December, 1956.

As a result of Marshal's sale of the property involved (pursuant to a judgment on file herein, and which sale has been confirmed by an order of this Court), it appears that insufficient money was realized with which to pay all liens. In accordance with said judgment, a part of the proceeds of said sale has been delivered to the Clerk of this Court to be held subject to the Court's determintion as to the priority of the federal tax lien. The sole remaining question involves the priority of the conditional sale contract, the chattel mortgage and the federal tax lien.

Section 6321 of the Internal Revenue Code of 1954 provides that any unpaid tax shall constitute a lien in favor of the U. S. upon all property and rights to property, real or personal, belonging to the person owing the tax. Section 6322 of said Code provides that such lien arises at the time the assessment is made. Section 6323 of said Code provides, in pertinent part, that ". . . the lieu 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--" in the office designted by the law of the state in which the property subject to the lien is situated.

The applicable North Dakota statutes (NDRC 1943) are as follows:

"51-0710. Conditional Sales Must Be in Writing and Filed. All reservations of the title to personal property, as security for the purchase money thereof, when the possession of such property is delivered to the vendee, shall be void as to subsequent creditors without notice, and purchasers and encumbrancers in good faith and for value, unless such reservation is in writing and is filed the same as a mortgage of personal property. In indexing such instruments, the register of deeds shall treat the purchaser as mortgagor and the vendor as mortgagee.

"35-0406. Mortgage Void as to Creditors Unless Filed. A mortgage of personal property is void as against creditors of the mortgagor and subsequent purchasers and encumbrancers of the property in good faith for value, unless the original or an authenticated copy thereof is filed by depositing it in the office of the register of deeds of the county where the property mortgaged, or any part thereof, is situated at the time of filing.

"35-0407. Filing; Operates as Notice. The filing of a mortgage of personal property in conformity with the provisions of this chapter operates as notice thereof to all subsequent purchasers and encumbrancers as to so much of the property as is, at the time mentioned in section 35-0406, situated in the county or counties wherein the mortgage or an authenticated copy thereof is filed."

Plaintiff contends that his liens are superior to the federal tax lien and that he is not within the provisions of any of said North Dakota statutes quoted. He further contends that the lien of the United States attaches only to whatever equity the vendee had in the personal property described in said conditional sale contract.

Defendant United States contends that plaintiff is within the provisions of said state statutes; that the United States is a "subsequent creditor without notice" within the meaning of Section 51-0710, and is a "creditor" within the meaning of Section 35-0406; and that said conditional sale contract and chattel mortgage are void as against it, the United States of America .

[The Chattel Mortgage]

The execution and delivery of the chattel mortgage here involved antedated the filing of the federal tax lien. Under the express terms of Section 6323(a) of the Internal Revenue Code of 1954 it is, therefore, superior to such tax lien. The specific language of Section 6323 indicates that Congress intended federal tax liens to rank behind the specific categories of interests therein set forth, which are "any mortgagee, pledgee, purchaser or judgment creditor". "Neither does the fact that the instrument was not recorded under the State's fraudulent conveyance statutes--thus to impart constructive notice to subsequent purchasers, mortgagees and the like--make any difference here, for the instrument was valid between the parties to it, and Congress, by Section 3672(a) expressly subordinated federal tax liens to antecedent mortgages." U. S. v. R. F. Ball Construction Co., Inc., et al., 355 U. S. 587, 594 [58-1 USTC ¶9327]. (The quoted statement is taken from the dissenting opinion by Mr. Justice Whittaker, and is not at variance with any expressed statements of the majority.)

The chattel mortgage here involved was valid as between the parties to it and it antedated the filing of the federal tax lien. There is no requirement in Section 6323 that the mortgage, to be included in the specific category of interest set out therein, be filed prior to the filing of the federal tax lien. Said federal tax lien is specifically and expressly subordinated to the chattel mortgage.

"In Section 6323, Congress attempted to give a measure of protection to mortgagees, pledgees, purchasers and judgment creditors against Government tax liens. . . . Section 6323 provides that the tax lien imposed by Section 6321 shall not be valid 'against any mortgagee' until notice thereof hs been filed. Section 6323 makes no reference to the matter of recording. On its face it would appear that Section 6323 only requires that the mortgage be executed before the notice of federal tax lien has been filed." Mason City and Clear Lake R. Co. v. Imperial Seed Co., et al., (8 Cir.) 152 F. Supp. 145, pp. 155, 156 & 157 [57-2 USTC ¶9736]. This is consistent with the thinking of the Court of Appeals for the Fifth Circuit in the case of U. S. v. Ball Construction Co., 239 F. 2d 384 [57-1 USTC ¶9269], which case was reversed by the Supreme Court solely on the question of whether the instrument there involved was a "mortgage" within the meaning of that term as used in said Section 6323.

[Conditional Sales Contract]

The conditional sale contract here involved is not, however, within the specific categories of interests set out in Section 6323. It is not a "mortgage" under the decisions of the Supreme Court of North Dakota. "Our law recognizes contracts of conditional sale as distinct from mortgages." Tickfer v. Investment Corp. of Forgo, 63 N. D. 613, 249 N. W. 702, 704. While antedating the filing of the federal tax lien, it was not expressly made superior to that lien by the terms of Section 6323. It therefore appears that the rule "first in time, first in right" is applicable. "There is nothing in the language of Section 3672 to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein, and the legislative history lends support to this impression." United States v. City of New Britain et al., 347 U. S. 81, 88 [54-1 USTC ¶9191].

[ North Dakota Law]

Pursuant to the provisions of Section 51-0710, NDRC 1943, and because possession of the personal property described in the conditional sale contract was delivered to the vendee, all reservations of title to such property, as security for the purchase money therefor, were "void as to subsequent creditors without notice, and purchasers and encumbrancers in good faith and for value" unless such reservation was in writing and was filed the same as a mortgage of personal property. Plaintiff denies that the defendant United States of America is a "subsequent creditor without notice." If the Government has succeeded in placing itself in the category of a "subsequent creditor without notice", such conditional sale contract is, of course, void as to it.

"The omission to file the contract, as has been seen, does not operate to render the same void in toto, nor void as between the parties to it. Such omission, by the terms of the statute, renders it void only as to certain classes of persons; among others, 'subsequent creditors without notice'. As to other classes not referred to in the statute, the omission to file is of no consequence.' Thompson v. Armstrong, 11 N. D. 198, 91 N. W. 39, 41. Also see: In re Pierce, (8 Cir.) 157 Fed. 755.

Section 1-0119, NDRC 1943, defines a debtor and creditor thusly:

"Debtor and Creditor; Definition. Except as otherwise defined and used in the title Debtor and Creditor Relationship of this code, everyone who owes to another the performance of an obligation shall be called a debtor and the one to whom he owes it shall be called a creditor."

Section 13-0101, NDRC 1943, provides the further definition:

"Definitions of Debtor and Creditor. In this chapter, unless the context or subject matter otherwise requires:

"1. 'Debtor' shall mean one who, by reason of an existing obligation, is or may become liable to pay money to another, whether such liability is certain or contingent; and

"2. 'Creditor' shall mean one in whose favor an obligation exists by reason of which he is or may become entitled to the payment of money."

In general, taxes due the United States are considered debts. "The word 'debts' as used in R. S. Section 3466 includes taxes." Price, Receiver v. United States , 269 U. S. 492, 499. "Income taxes, apart from the right of preference in payment, are but debts." United States v. Western Union Telegraph Co. et al., (2 Cir.) 50 F. 2d 102, 103 [2 USTC ¶754]. To the same effect, see: Hartman et al. v. Lauchli, (8 Cir.) 238 F. 2d 881 [57-1 USTC ¶9571].

[ U. S. as Subsequent Creditor Without Notice]

At the time the taxes covered by the federal tax lien became due, Basin became a debtor of the creditor United States of America . Such relationship came into being subsequent to the execution and delivery of the conditional sale contract. It is conceded that the Government was "without notice" of the claims of plaintiff prior to his (plaintiff's) filing of the conditional sale contract. It is the opinion of this court that the defendant United States of America has the status of a "subsequent creditor without notice" within the meaning of that phrase as used in Section 51-0710, NDRC 1943. See: Edmundson v. Scofield et al., (D. C. S. D. Texas) 92 F. Supp. 91 [50-1 USTC ¶9318].

"The taxes in question in the present case became due at the time the Imperial Seed Company was required to file its tax returns and from that time on the Government was a creditor of the Imperial Seed Company. Hartman v. Lachli, 8 Cir., 1956, 238 F. 2d 881, 887 [57-1 USTC ¶9571], certiorari denied 77 S. Ct. 1048. Until those taxes were assessed the Government had the status of an unsecured creditor. The assessment of those taxes gave the Government a lien against all the property of the Imperial Seed Company. The Government acquired liens against the property in question totalling approximately $16,000 before it had notice of the plaintiff's unrecorded mortgage lien. As to the taxes secured by those liens, the situation of the Government was that of a creditor who had acquired liens upon property included in an unrecorded mortgage without notice of such mortgage." Mason City and Clear Lake R. Co. v. Imperial Seed Co., et al., supra, pp. 157, 158.

[ South Carolina Law Distinguished]

Plaintiff submits his position herein is "well stated" and supported by the Court in the case of United States v. Anders Contracting Co., Inc. et al. (D. C. W. D. So. Car.) 111 F. Supp. 700 [53-1 USTC ¶9412]. It appears that the Anders case is distinguishable from the one here under consideration in that the interpretation placed upon the South Carolina Recording Act by that Court reveals a vital difference between it and the applicable North Dakota statute.

The pertinent facts in the Anders case, stated briefly, are as follows: On April 6, 1951 , Auto Sales Company sold a truck to Anders on a conditional sale contract in which the vendor retained title to the truck; this instrument was duly recorded on July 23, 1951 . Prior to this transaction, and on September 15, 1950 , the Government had filed a tax lien against Anders. A second tax lien was filed by the Government against Anders on July 5, 1951 . By agreement, and after default by Anders on the conditional sale contract, the truck was subsequently sold and the proceeds held in trust awaiting decision as to the respective rights of the Government and the Auto Sales Company.

The Court in that case held that under the law of South Carolina a conditional sale contract is classed as a chattel mortgage; it further held that under the law of South Carolina the Anders Company, under the contract, acquired only a qualified property right or interest in the truck and that the Government's lien could affect only such property or property rights in the truck as Anders possessed. The Court therein discussed the respective priority of the contract lien (expressly reserved to the seller by the terms of the conditional sale contract) and the Government liens, and the effect of the applicable South Carolina recording statutes, in part, as follows: "A Federal tax claim does not become a lien until it is filed in accordance with the South Carolina Recording Act, and the effect of the lien is then calculated and determined under and by that Act which contained in Section 60-101, Code of Laws of South Carolina 1952, the pertinent provisions of which are as follows: `* * * all mortgages or instruments in writing in the nature of a mortgage of and property, real or personal, * * * shall be valid so as to affect the rights of subsequent creditors (whether lien creditors or simple contract creditors) or purchasers for valuable consideration without notice only from the day and hour when they are recorded * * *'"". U. S. v. Anders, supra, p. 703. The Court then discussed the rules of the common law, the reasons for the development of the recording acts and the changes the recording act made in such common law rules. Thereafter, at page 704, it is stated: "In this case the rights reserved in the conditional sales contract of the Auto Company are good against the world, unless such rights are limited by the Recording Act.", and "The Recording Act provides that mortgages shall be valid so as to protect the rights of subsequent lien creditors, subsequent simple contract creditors or purchasers for valuable consideration without notice, only after being recorded. Liability for the Government arises out of the statute and not out of contract. At common law the chattel mortgage held by the Auto Company did not have to be recorded to be effective against the claim of the Government and there is nothing in the Recording Act which changes this rule under the facts in this case."

As this Court reads the Anders decision, that Court in interpreting the terms "subsequent lien creditors" and "subsequent simple contract creditors" under the state Recording Act there involved limited the same to those creditors whose claims were based upon contract. In other words, under such interpretation, only contract creditors are protected thereby, giving them priority over those creditors whose liens have been created by operation of law.

[Contractual v. Statutory Lien]

In the case here before the Court, the vital issue is whether the Government is a "subsequent creditor without notice" within the meaning and provisions of Section 51-0710, NDRC 1943. There is no reasonable basis upon which to interpret the North Dakota statute in the restricted sense that the Court in Anders interpreted the South Carolina Recording Act. The term "lien" is generic in nature, including both contractual liens--liens acquired by contract--and statutory liens, that is, liens created by operation of law.

As heretofore stated, the North Dakota Code defines "creditor" and Section 51-0710 makes no distinction between so-called "contract creditors" and those creditors whose claims or liens are statutory in nature. It seems clear to this Court that the term "subsequent creditors" embraces and includes not only creditors whose claims are based upon contract, but also those whose claims are statutory in nature--such as the Government in the case of a federal tax lien.

As so forcibly and ably expressed by the Court in Anders, a contrary decision (the decision arrived at by the Court herein) appears to be harsh. However, as previously stated, in this state a conditional sale contract is distinct from a chattel mortgage. It is not governed by Section 35-0406, NDRC 1943, relating to mortgages of personal property, but by the specific provisions of Section 51-0710. The provisions of that section (51-0710) are clear, specific and unambiguous. Apparently the North Dakota legislature, in passing such statute, had in mind and was of the opinion that the good and just effects of such statute would outweigh and counterbalance any ill effects and inequities that might result therefrom. In this statute the legislature specified the procedure and means by which a vendor in such a conditional sale contract could protect his rights therein. The burden was placed upon such vendor to exercise due diligence in taking the required action for his own protection. In any event, it is for the Court to give effect to the plain words and meaning of a statute rather than to attempt to legislate. An analysis of the statutes, both federal and state, which are here involved, and their application to the facts of this case leads inescapably to the conclusions heretofore stated.

Judgment will be entered adjudging and decreeing that the chattel mortgage here involved is superior and prior to the federal tax lien; further, that said federal tax lien is superior and prior to the conditional sale contract here involved.

Counsel for the Government will prepare and submit appropriate form of judgment in conformity herewith.

IT IS SO ORDERED.

 

 

[59-2 USTC ¶9656] United States of America , Plaintiff v. William F. Eagle, Edens and Woodward, Edens , Woodward and Kligman, T. D. Taylor, Thomas D. Sligh, County of Richmond , Employment Security Commission of the State of South Carolina , City of Columbia , South Carolina , Defendants

U. S. District Court, East. Dist. S. C., Columbia Div., C. A. 6312, 7/23/59

[1954 Code Sec. 6323]

Lien for taxes: Validity of prior mortgage: Extension of mortgage after recording of tax lien.--In December, 1947, the taxpayer gave a chattel mortgage to secure payment of a promissory note, and the mortgage was recorded a few days later. No required monthly payments were made on this mortgage after May, 1951. In February, 1953, the United States filed a notice of federal tax lien against the taxpayer, and in March, 1953, an affidavit for extension of the mortgage was filed in the office of the county clerk of court. In that same month, the taxpayer transferred all the personal property covered by the mortgage to the mortgagee's agent. The property was later sold at public and private sales, the net proceeds after expenses of sale being slightly less than the unpaid principal and interest on the mortgage. It is held that the entire proceeds should be retained by the mortgagee, since the antecedent mortgage had priority over the tax lien, including a further amount of taxes assessed after the transfer of the property to the mortgagee.

N. Welch Morrisette, Jr., United States Attorney , United States Courthouse, Columbia , S. C., Frank H. Cormany, Sr., Assistant United States Attorney, Aiken, S. C., for United States . James Julien Bush, South Carolina Employment Security Commission, Edens & Woodward, 502 Palmetto Building, Frank A. Graham, Jr., 707 Security Federal Building, Baker & Baker, G. M. A. C. Building, Columbia, S. C., for defendants.

Findings of Fact, Conclusions of Law, and Order

WYCHE, District Judge:

The above case was submitted upon a stipulation and supplemental stipulation between the plaintiff and the defendants Edens and Woodward; Edens, Woodward and Kligman, and T. D. Taylor. Having fully considered the facts therein set forth, and the arguments of counsel in behalf of said parties, as orally made and as contained in their respective briefs, in compliance with Rule 52(a), Federal Rules of Civil Procedure, 28 USCA, I find the facts specially and state my conclusions of law thereon, in the above cause, as follows:

Findings of Fact

1. On December 23, 1947, W. F. Eagle gave a chattel mortgage to the defendant, T. D. Taylor, covering all of the personal property which is the subject of this action to secure the payment of his promissory note of even date in the sum of $7,000.00, with interest at the rate of six per cent (6%) per annum on the unpaid balance, the principal and interest being payable together in monthly installments of $150.00, commencing on the 15th day of January, 1948.

2. This chattel mortgage was recorded on December 31, 1947 , in the office of the Clerk of Court for Richland County ( South Carolina ) in Chattel Mortgage Book 276 at page 432.

[Federal Tax Lien]

3. On February 11, 1953, plaintiff, United States of America, filed notice of Federal tax lien number 4415 in the Office of the Clerk of Court for Richland County (South Carolina) against the property of Eagle covered by said chattel mortgage for taxes due in the amount of $853.66 for which assessment lists were received by the Director of Internal Revenue during the year 1952, and arising from Eagle's failure to pay payroll and F. U. C. A. taxes for certain periods in the years 1951 and 1952.

4. The last payment made by Eagle to Taylor on the note and mortgage above mentioned was on May 23, 1951 .

5. On March 3, 1953 , the first and only affidavit for extension of said mortgage was filed in the Office of the Clerk of Court for Richland County ( South Carolina ) in Chattel Mortgage Book "383" at page 385.

[Transfer to Mortgagee]

6. On March 5, 1953, Eagle by written instrument transferred and delivered to the defendant, Melton Kligman, as agent for T. D. Taylor, all of the personal property in question "to be sold for the satisfaction" of the subject note and mortgage, either at public or private sale "at the discretion of the mortgagee or his agent"; and, in which instrument Eagle acknowledged his breach of the terms and conditions of the mortgage.

[Further Federal Tax Lien]

7. On March 18, 1953, the United States of America filed another notice of Federal tax lien number 4705 in the Office of the Clerk of Court for Richland County (South Carolina) against subject property of Eagle for taxes due in the amount of $245.69 for which the assessment lists were received by the District Director of Internal Revenue for the years 1952 and 1953, which arose out of Eagle's failure to pay payroll taxes for certain periods in the year 1952.

[Priority]

8. On March 23, 1953 , a public sale was held at 2330 Main Street ( Columbia , South Carolina ), the former place of business of the defendant Eagle, of a part of the Eagle property, and items not sold on that day were subsequently sold at private sales.

9. At said public sale, E. B. Blackmon and S. H. Hutton, representatives of the District Director of Internal Revenue, publicly declared that the property then offered for sale was subject to Federal tax liens whereupon the defendant, Edward M. Woodward, as attorney for the defendant, T. D. Taylor, announced that should the claims of the United States against the property be superior to the claims of the mortgagee, the monies derived from the sale would be applied to the settlement of the claims of the Government.

10. The subject property of Eagle was sold by the defendant, Melton Kligman, as agent of the defendant, T. D. Taylor, for the total sum of $6,496.40, which was received by him and transferred to the law firm of the defendants, Edens and Woodward, on behalf of the defendant, T. D. Taylor.

11. As of March 23, 1953 , the outstanding balance due upon subject note and mortgage, including interest to that date, was $5,796.20.

12. From the proceeds of the sale of the property in question, disbursements of $2,212.93 were made as expenses of the sale, including among other things, $500.00 to the law firm of Edens & Woodward as attorneys' fee; $26.10 for advertising sale; $30.00 to auctioneer; $25.00 to appraiser; $200.00 sales commission upon the sale of a boiler; $101.30 for insurance on the property; and $91.45 for hauling certain of the property, which enumerated items total $973.85.

13. The note and mortgage in question provide for the payment of all costs of collection, including a reasonable attorney's fee of not less than 10 per cent of the principal indebtedness, together with interest thereon, in the event of default.

14. On July 23, 1953 , the District Director of Internal Revenue served on the defendant Edens, Woodward, and Kligman, a levy of $1,196.40.

15. On August 14, 1953 , said District Director served on the same individuals a final notice and demand for payment in the sum of $1,196.40, which was the total of the tax liens filed against the defendant, Eagle.

16. The plaintiff's second lien, to-wit, that mentioned in paragraph 7 hereof ($245.69), is subsequent in time to the renewed chattel mortgage of the defendant, Taylor.

Conclusions of Law

1. The notice given by the recording of subject chattel mortgage on December 23, 1947, had expired when the 1951 and 1952 assessments lists were received by plaintiff's agent, and on February 11, 1953, when notice of plaintiff's tax lien in the amount of $853.66 plus interest was filed in the Office of the Clerk of Court for Richland County against William Eagle, by virtue of the provisions of Title 60, Section 305, South Carolina Code (1952).

2. It does not follow, however, as contended by plaintiff, that plaintiff, by filing its said lien on February 11, 1953 , became a subsequent creditor of William F. Eagle within the meaning of Title 60, Section 101, South Carolina Code (1952) so as to subordinate the lien of the mortgagee, T. D. Taylor.

[Priority]

3. In the case of United States v. Anders Contracting Co., Inc. (1953) 111 Fed. Supp. 700 [53-1 USTC ¶9412], I had occasion to consider the question of priority between a prior unrecorded conditional sales contract and a subsequent and duly recorded federal tax lien. In concluding that the lien of the unrecorded conditional sales contract was superior, it was my opinion that neither the South Carolina Recording Act, (referred to in paragraph 2 hereof) nor the common law of the State, requires that a chattel mortgage, valid between the parties, be recorded to be effective against such a claim of the Government.

4. The liability of the mortgagor here to the Government arose out of statute and not out of contract, and it has suffered no loss by reason of the failure of the mortgagee to file timely the statutory affidavit extending the notice given by the original recording of the chattel mortgage, and the position of the Government, therefore, that its lien mentioned in paragraph 3 above, Findings of Fact, is superior to that of the mortgagee under his mortgage, is not sustained by the rules of common law, the Recording Act of South Carolina, or any equitable principle.

5. In the case of R. F. Ball Company v. Jacobs (1956) USDC, W. D. Texas, 140 Fed. Supp. 60 [56-1 USTC ¶9514], the District Court held in a contest between a prior unrecorded assignment (which the Court construed to be an instrument in the nature of a mortgage) and a subsequent duly recorded federal tax lien, that the unrecorded assignment (in effect a mortgage) good between the parties was superior to the tax lien under the provisions of Section 3672(a) of the Internal Revenue Code of 1939 which provides, among other things, that a tax lien shall not be valid against any mortgagee until notice thereof has been filed by the collector with the appropriate Clerk of Court.

6. The District Court's judgment in the Ball case, supra, was affirmed by the United States Court of Appeals for the Fifth Circuit (239 Fed. (2d) 384 [57-1 USTC ¶9269]). On certiorari, the United States Supreme Court [58-1 USTC ¶9327] reversed the judgment below in a per curiam opinion, five members of the court, stating that the assignment was inchoate and unperfected for which reasons Section 3672(a), Internal Revenue Code had no application, thereby leaving undecided the specific question here involved. However, in a dissenting opinion by Justice Whittaker, joined by three other members of the Court, the view was expressed that the assignment was in effect a "mortgage", completely perfected on its date, fully choate, and, although unrecorded, good between the parties, and therefore superior to the federal tax lien because Congress by Section 3672(a), Internal Revenue Code of 1939 expressly subordinated federal tax liens to antecedent mortgages, whether or not recorded as required by the State's Fraudulent Conveyance Statutes.

7. The decision in the Anders case, supra, and that of the District Court and Court of Appeals in the Ball case, supra, (reversed on other grounds by a majority decision of the Supreme Court of the United States), cannot be reconciled with the decision in the case of Underwood v. United States (1941) CCA, 5 Cir., 118 Fed. (2d) 760 [41-1 USTC ¶9296], and other cases therein cited, principally on the ground of the contrariety of view as to whether Section 3672(a), Internal Revenue Code of 1939 subordinates a federal tax lien to any antecedent mortgage or only to one which has been recorded in accordance with the Recording Act of the State involved. Inasmuch as a majority of the Supreme Court of the United States concluded that the assignment involved in the Ball case, supra, did not amount to a "mortgage", no decision was rendered on the precise question here at issue. However, as already stated, the separate dissenting opinion, concurred in by three other members of the Court, after reaching the conclusion contrary to the majority that the assignment was in legal effect a mortgage, expressed the view that an antecedent mortgage, although unrecorded, is superior to a subsequently recorded federal tax lien. While not decisive, this dissenting opinion under the peculiar circumstances of the case, adds strength to my holding in the Anders case, supra, which case is controlling of the instant controversy.

8. The defendant, T. D. Taylor, therefore, is entitled to all funds in the hands of the defendants, Edens & Woodward and/or Edens, Woodward and Kligman, arising out of the sale of the properties in question, because after deduction of reasonable expenses of sale, the amount in their hands, before the payment of rent to the defendant Thomas D. Sligh was and is less than the amount due and owing upon the note and chattel mortgage held by the defendant T. D. Taylor.

9. All other issues raised by the pleadings in this cause have been disposed of, with the exception of the plaintiff's claim against the defendant William F. Eagle. With reference to this claim the plaintiff obtained judgment by default against the defendant William F. Eagle. The defendant William F. Eagle made a motion for leave to file an answer. At the hearing of his motion, he admitted that he owed the taxes, and, therefore, the Government is entitled to judgment against him for the amount of the taxes. His motion to file an answer is therefore denied.

Order

Therefore, IT IS ORDERED:

1. That plaintiff take nothing against the defendants Edens & Woodward, Edens , Woodward & Kligman, T. D. Taylor, or Thomas D. Sligh, by its complaint.

2. That the defendant T. D. Taylor is entitled to the entire fund in the hands of the defendants Edens & Woodward, as described in the complaint, and no other party to this action has any right, title, or interest in, or lien upon the same.

Let judgment be entered accordingly.

 

 

[54-2 USTC ¶9606] United States of America , Plaintiff v. C. Burton Marsh, as Clerk of the Circuit Court of Sumter County , Florida , Defendant

In the United States District Court for the Southern District of Florida, Ocala Division, No. 281-Civil-Ocala, August 11, 1954, (125 F. Supp. 918)

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

Tax liens: Priority over local tax liens.--Federal tax liens were held prior to local real estate tax liens because the Federal liens were perfected prior to the local liens.

James L. Guilmartin, District Attorney, Miami, Florida, and Miss Edith House, Assistant U. S. Attorney, Jacksonville, Florida, for the Government. No appearance for the defendant.

Findings of Fact and Conclusions of Law Accompanying Order Granting Motion for Preliminary Injunction

Findings of Fact

SIMPSON, District Judge:

1. This Court has jurisdiction of this case under Section 1340 and 1345, Title 28 U. S. Code and Section 3800, Title 26 U. S. Code.

2. The plaintiff holds Federal tax liens for taxes assessed as follows against Zacheus Russ:

                                     Interest

Year                    Tax          Assessed

1944 ....          $ 620.18         $1,232.38

1946 ....          4,022.36          1,162.68

1947 ....         31,346.15          4,701.92

 

These taxes were assessed on an assessment list signed by the Commissioner of Internal Revenue on October 13, 1950 , and received by the Collector of Internal Revenue for the District of Florida on October 16, 1950 .

3. The taxpayer, Zacheus Russ, died on July 15, 1948 . His estate is presently being admin istered in the County Judge 's Court of Lake County , Florida .

4. Plaintiff has filed proof of claim for such taxes with the County Judge 's Court for said county.

5. On April 24, 1954 , the County Judge of Lake County entered an order in said probate proceedings declaring that the estate is insolvent.

6. Real estate taxes were assessed against property belonging to the decedent in Sumter County , Florida , for the year 1951 by said county.

7. In 1952, Sumter County issued tax certificates numbered 53, 56, 57, 76 and 77 against said lands described in Plaintiff's Complaint.

8. Application has been made for the issuance of tax deeds upon said tax certificates and the sale of the property was accordingly scheduled by the defendant for August 2, 1954 .

9. The issuance of such tax deeds will cause irreparable injury, loss or damage to the plaintiff in that the deeds will impair or destroy the security of the plaintiff's tax liens insofar as they attach to the aforesaid real estate and, further, will cast a cloud on any title to said lands at any later sale under the authority of the Probate Court or of the United States.

10. On July 29, 1954 , this court issued an order restraining the said defendant from proceeding with the sale, expiring August 9, 1954 .

11. A copy of such temporary restraining order was served upon the defendant, together with a notice of a hearing to be held at 11 A. M. August 9, 1954, before this court on the plaintiff's motion for a preliminary injunction.

12. No appearance was made at the time set on August 9, 1954 , for the plaintiff and no contest was raised with regard to the granting of the plaintiff's motion.

Conclusions of Law

The Federal tax liens held by the plaintiff became perfected on October 16, 1950 , at the time the assessment list was received by the Collector of Internal Revenue pursuant to Section 3671 of Title 26, U. S. Code. Being prior in time, the Federal tax liens are prior in right to the liens of Sumter County, Florida, under the decision of the United States Supreme Court in U. S. v. City of New Britain (1954), 347 U. S. 81 [54-1 USTC ¶9191]. In addition, the United States is entitled to priority under the terms of Section 191 of Title 31, U. S. Code, as the estate is insolvent. U. S. v. Gilbert Associates, Inc. (1953) 345 U. S. 361 [53-1 USTC ¶9291].

In view of the showing by the plaintiff of irreparable injury if the sale is conducted and tax deeds issued to innocent purchasers for value, the court is of the opinion that a preliminary injunction should be issued. An order to this effect has been entered by the court.