Priority over Recorded
, I.R.B. 2003-44,
October 16, 2003
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. --
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.
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
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
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).
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.
The principal author of this revenue ruling is
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).
United States of America
v. Howard I. Green, Mary Green, Roylan Finance and Ernestine Woodmansee
District Court, East.
, Civ. 96-7275,
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
. Under state (
, 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.
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 (
) law did not require mortgage assignments to be recorded to have
priority over subsequent creditors.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
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.
contends that Howard conveyed the Property with actual intent to hinder,
delay, or defraud his present and future creditors in violation of
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
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
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
The circumstances surrounding the First Agreement versus the Second
Agreement raise a question as to the genuineness of the Second
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.)
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
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;
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.)
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.)
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.)
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.
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.
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
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.
The evidence as to the transfer of assets was vague and unconvincing and
their valuation was inconsistent and inflated in that:
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
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.)
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.)
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.)
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 &
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.
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.
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.).
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.)
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.
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.)
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.)
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.
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.)
September, 1983, Howard and Mary Green opened bank accounts in
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,
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
, 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,
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.)
Green filed Federal income tax returns (Form 1040) for the years 1979
through 1981 substantially underreporting his Federal income tax
November 13, 1997
, Trial Transcript ("Tr2"), p. 7, ln. 17--p. 8, ln. 23.)
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
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.)
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.)
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
, 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
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.)
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
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.)
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.)
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,
12; Tr2, p. 152, lns. 9-17.)
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.)
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.)
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:
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:
Twenty Five Thousand Dollars ($25,000.00) as an immediate cash advance
against the purchase price . . .
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%)
. . . (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,
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
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
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.)
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
September 30, 1979
. (Roylan Ex. 8.)
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.)
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,
to 26 U.S.C. §6321, a federal tax lien arises in favor of the
upon the assessment of Howard Green's taxes.
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).
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
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
in the amount of $187,600.20, plus statutory additions accruing from
October 9, 1991
, for his 1980 tax liability.
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
law, it is invalid against the
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
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).
"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."
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.
statute defines fair consideration as follows:
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.
Stat. Ann. §353 (repealed 1994).
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
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.
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.)
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.
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
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."
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
recording statute requires that all deeds and conveyances concerning
lands "shall be recorded" in order to be valid against
subsequent purchasers and creditors. 21
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 (
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
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 (
1893) (citing Phillips v. Bank of Lewistown, 18
394, 402 (
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
, 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.
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.
AND NOW, this
10th day of April, 1998, after a two-day bench trial, it is hereby
1. The liens
are valid and existing liens against the property at 990 Old Huntingdon
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
$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
Woodmansee holds a valid first-lien mortgage on the Property that has
priority over the claims of the
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
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
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
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
No testimony of Ms. Woodmansee was elicited at trial regarding Roylan
Finance or the Roylan mortgage.
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.)
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.
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 (
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.
¶50,557] Associates Financial Services Company of Alabama, Inc.,
Plaintiff v. Margaret M. Vardaman, et al., Defendants
District Court, No. Dist.
, 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.
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
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
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
a non-owner-spouse routinely joins in the execution of conveyances by an
owner-spouse. Associates did what any prudent mortgage lender in
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.
is in default on her said mortgage to Associates.
Based on the
foregoing facts, the court reaches the following
The court has
jurisdiction over the parties and over the subject matter.
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.
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
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
, which will, thereafter, have only the statutory right of redemption
which secondary lienholders have under the laws of the State of
after foreclosure of a first mortgage. After such foreclosure, the
will have no other right, title, claim or interest in and to the subject
position taken by the
in this case, as set forth in the pre-trial order, is:
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).
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
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
could justify morally, much less legally, the position it has taken in
this case. The
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
under circumstances like these. There is no obligation, and never has
been an obligation, upon a mortgage lender in
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
, is facially preposterous. It comes close to a violation of Rule 11,
appropriate, separate order will be entered.
United States of America
, Plaintiff v. John F. McKeown, et al., Defendants
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
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.
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,
Lot No. 20,
Lakes of the Four Seasons, Unit No. 1,
, 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
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
' 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
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
. 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,
March 31, 1993
, was $21,986.69. Francis J. Schafer does not contend that he is
entitled to be paid before the
from the proceeds of the sale of the subject real estate.
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
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.
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
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
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
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
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,
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,
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
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
, 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
and 1984 Federal Income Tax Liability
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
. 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.
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,
(citing United States v. Janis [76-2
USTC ¶16,229 ], 428 U.S. 433 (1976)). As the
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
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).
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
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.
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
¶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
USTC ¶9191 ], 347 U.S. 81, 85 (1954); see also Meyer v.
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
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
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.
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
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
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.
it is ORDERED, ADJUDGED, AND DECREED THAT:
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,
Lot No. 20,
Lakes of the Four Seasons, Unit No. 1,
, as shown on plat in Plat Book 3, page 75, in the Recorder's Office, in
Porter County, Indiana.
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;
20, the federal tax liens are superior to the interest of all other
parties with respect to John F. McKeown's one-half interest;
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
, and served upon all parties, on or before
April 29, 1994
The motion was one for partial summary judgment, as the
had not yet amended its complaint to name
of the Four Seasons Property Owners Association. As the Amended
Complaint has been filed, the
has now extended its motion to one for summary judgment against all
¶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
Bankruptcy Court, West. Dist. Okla.,
[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.
inson, Oklahoma City, Okla. 73102, for plaintiff. M. Kent Anderson,
Department of Justice,
, for defendant.
DECISION AND ORDER
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
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
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.
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.
of the IRS is that when FDIC's security agreement on the inventory was
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
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
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.
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.
defined to be inventory, under 12A O.S. 1981, §9-109(4),
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
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.
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.
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).
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.
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.
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.
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.
¶9405]Bank of America National Trust and Savings Association, a
national banking association, Plaintiff v. United States of America, et
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.
Jones, 650 S. Spring St.,
, for the Plaintiff. James M. Carter,
Attorney, by Edward R. McHale, 600 Federal Building,
, for the Defendant.
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:
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
, and plaintiff has at all times since that time been the record owner
of said property and entitled to possession thereof."
should be noted that while the
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
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
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.
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.
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.
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.
¶9300]Re: In the Matter of the Application of Cecile
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
S. District Court, Dist. S. Dak., Civ. 71-43W, 358 FSupp 392,
[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
. 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.
P. O. Box
, Deadwood, S. Dak., for plaintiff. William F. Clayton,
, D. Dak., for U. S.
On June 1,
erts, owner of the Bodega Bar in Deadwood,
, 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
ert Dardis, subject to all of the terms of the original contract between
July 3, 1970, and extending into May, 1971, the
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
erts and Kelley, together with the assignment thereof, were filed in the
office of the Register of Deeds,
On March 22,
1971, Dardis, having been in default on his payments, Mrs.
erts instituted a summary foreclosure action and advertised a sale of
the "goodwill of the business and all business licenses
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
, conducted a sale of the Bodega Bar, at which Mrs.
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,
, 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.
erts. This levy was issued in order to enable the
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.
erts, and indicated to the Commissioner of Revenue of the State of
that such issuance cancelled Dardis' licenses.
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.
erts, but would be deposited with the state court pursuant to S. D. C.
On June 2,
1971, the licenses, having been deposited with the state court, that
court entered an order allowing Mrs.
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,
was served with an order to show cause why the licenses held by the
state court should not be released and returned to Cecile
On August 10,
filed a petition for removal with this Court and the case was heard on
its merits on August 14, 1972.
of the Internal Revenue Code, entitled "Lien for Taxes,"
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
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
) holding a lien or interest prior to the date of enactment of this act.
. ." The effect of such an exception would allow for Mrs.
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.
erts and O. A. Kelley, created in Mrs.
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.
States contends, that since neither the contract of sale, dated June 1,
1966, between Mrs.
erts and O. A. Kelley, nor the assignment thereof between Kelley and
ert Dardis, specifically mentions "liquor licenses," a lien
did not arise in favor of Mrs.
erts and therefore, the summary foreclosure of the personal property in
the Bodega Bar did not contemplate a foreclosure of the liquor licenses.
of sale, dated June 1, 1966, between Mrs.
erts and O. A. Kelley, provided for the sale of the following:
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."
of the contract to
ert Dardis contained the same wording as set forth above.
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.
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
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
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
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
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
erts' contract of sale and foreclosure thereof are senior to the tax
liens asserted by the
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.
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
's. See also, Depue v. McIntosh, 127 N. W. 532; Janssen v.
Tusha, 287 N. W. 501.
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
erts' bulk sale affidavit of the stock and business of the Bodega Bar,
under which Dardis was able to secure the transfer of
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.
This brings us
to the crucial question of whether the written contract between Mrs.
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.
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.
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.
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.
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.
, 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
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).
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.
erts, because of what the Government believes is a technical loophole.
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.
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.
erts and Kelley. The licenses are the key to the sale, and the parties
to the agreement knew it and relied upon it.
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.
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.
erts is our choice. We have exercised our discretion." To what
avail would the Government's efforts then be? Mrs.
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.
constitutes the Court's findings of fact and conclusions of law under
Rule 52 F. R. C. P.
¶9634]J. C. Gauvey, d/b/a Gauvey Rig & Trucking Company, Plaintiff
v. Basin Rig & Trucking, Inc., a corporation, et al., Defendants
S. District Court, Dist. N. D., N. W. Div., Civil No. 15, 185 FSupp 374,
[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.
Vogel, Bright & Peterson, George A. Soule, Van Osdel & Foss,
Fargo, N. D., for plaintiff.
Attorney, Fargo, N. D., for
United States of America
. John F. Lord, of Lord, Ulmer, Bair & Daner,
, N. D., for Marvin Anderson. Walter O. Burk, Willison, N. D., for First
National Bank in Dickinson, N. D., and Bernard Cersonsky.
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.
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
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.
of the Internal Revenue Code of 1954 provides that any unpaid tax shall
constitute a lien in favor of the
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.
statutes (NDRC 1943) are as follows:
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.
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; 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."
contends that his liens are superior to the federal tax lien and that he
is not within the provisions of any of said
statutes quoted. He further contends that the lien of the
attaches only to whatever equity the vendee had in the personal property
described in said conditional sale contract.
contends that plaintiff is within the provisions of said state statutes;
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
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
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.)
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.
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 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.,
81, 88 [54-1 USTC ¶9191].
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.
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
1-0119, NDRC 1943, defines a debtor and creditor thusly:
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."
13-0101, NDRC 1943, provides the further definition:
of Debtor and Creditor. In this chapter, unless the context or subject
matter otherwise requires:
'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
'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."
taxes due the
are considered debts. "The word 'debts' as used in R. S. Section
3466 includes taxes." Price, Receiver v.
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].
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].
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
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.
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.
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
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.
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
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
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
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.
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.
the Government will prepare and submit appropriate form of judgment in
IT IS SO
United States of America
, Plaintiff v. William F. Eagle,
, Woodward and Kligman, T. D. Taylor, Thomas D. Sligh,
, Employment Security Commission of the State of
City of Columbia
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
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
Morrisette, Jr., United States
, S. C., Frank H. Cormany, Sr., Assistant
Attorney, Aiken, S. C., for
. 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.
of Fact, Conclusions of Law, and Order
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,
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.
chattel mortgage was recorded on
December 31, 1947
, in the office of the Clerk of Court for
) in Chattel Mortgage Book 276 at page 432.
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
on the note and mortgage above mentioned was on
May 23, 1951
March 3, 1953
, the first and only affidavit for extension of said mortgage was filed
in the Office of the Clerk of Court for
) in Chattel Mortgage Book "383" at page 385.
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.
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.
March 23, 1953
, a public sale was held at
2330 Main Street
), 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
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.
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.
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.
July 23, 1953
, the District Director of Internal Revenue served on the defendant
Edens, Woodward, and Kligman, a levy of $1,196.40.
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.
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
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
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.
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.
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
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.
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
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
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.
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.
plaintiff take nothing against the defendants Edens & Woodward,
, Woodward & Kligman, T. D. Taylor, or Thomas D. Sligh, by its
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.
be entered accordingly.
United States of America
, Plaintiff v. C. Burton Marsh, as Clerk of the
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.
Guilmartin, District Attorney, Miami, Florida, and Miss Edith House,
Assistant U. S. Attorney, Jacksonville, Florida, for the Government. No
appearance for the defendant.
of Fact and Conclusions of Law Accompanying Order Granting Motion for
Findings of Fact
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.
plaintiff holds Federal tax liens for taxes assessed as follows against
Year Tax Assessed
1944 .... $ 620.18 $1,232.38
1946 .... 4,022.36 1,162.68
1947 .... 31,346.15 4,701.92
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
October 16, 1950
taxpayer, Zacheus Russ, died on
July 15, 1948
. His estate is presently being
istered in the
Court of Lake County
has filed proof of claim for such taxes with the
's Court for said county.
April 24, 1954
entered an order in said probate proceedings declaring that the estate
6. Real estate
taxes were assessed against property belonging to the decedent in
, for the year 1951 by said county.
7. In 1952,
issued tax certificates numbered 53, 56, 57, 76 and 77 against said
lands described in Plaintiff's Complaint.
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
August 2, 1954
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
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.
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.
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
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
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.