Priority over Recorded Mortgage Page3

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[80-2 USTC ¶9715] United States of America , Plaintiff v. George C. Canellis, Georgia Canellis, and Chicago Federal Savings and Loan Association, Defendants

U. S. District Court, No. Dist. Ill. , East. Div., No. 76 C 4043, 3/13/80

[Code Sec. 6323]

Lien for taxes: Priority: Mortgage: Equitable mortgage.--A son's indebtedness to his mother was secured by a trust that under Illinois law created a lien against the real property in the form of an equitable mortgage. Therefore, the mortgage resulting from the transfer of the legal title to the property was superior to the lien of the government for the amount of the security interest in the property created under the trust.

Memorandum and Order

ROBSON, Senior Judge:

This cause is before the court on plaintiff's motion for entry of judgment and defendant Georgia Canellis' renewed motion for summary judgment. For the reasons hereinafter stated, the plaintiff's motion for entry of judgment will be granted and the defendant Georgia Canellis' motion for summary judgment will be granted.

The plaintiff United States of America [hereinafter the government] brought this action in order to reduce to judgment federal tax liabilities owed by the defendant George C. Canellis. In accordance with a stipulation by the parties in this cause, it has previously been determined that George C. Canellis owes the government $130,363.04 and that by reason of Internal Revenue Code §6321 [hereinafter I. R. C. §321] the government has lien for this amount against George C. Canellis' property. The government's lien arose at the time it made assessments for Canellis' tax liability in May, 1972. I. R. C. §6322. The government has now made a motion to foreclose on its lien against George C. Canellis' property, including his 100% beneficial interest in an Illinois land trust. Jurisdiction is invoked pursuant to 28 U. S. C. §1340 and §1345 and is undisputed.

Defendant Georgia Canellis, who is George C. Canellis' mother [hereinafter Mrs. Canellis], contests this action against her son only to the extent that she claims a lien prior to the government's lien. Her renewed motion for summary judgment seeks a determination that she has a prior lien in the amount of $30,000. Briefs have been submitted in support, in answer and in reply to her motion.

I. Facts. The relevant facts appear in the oral deposition transcripts of George Canellis and Daniel Parry, various affidavits, photo copies of checks, a promissory note and a deed in trust, as well as the pleadings that have been filed in this case.

Mrs. Canellis' deposition was taken on April 26, 1979 . She was then 84 years old and living in a health care facility where she was being treated for severe injuries including head injuries. She speaks no English and testified through a Greek interpretor. She was tired and stated that several times during the deposition. Her exhaustion after direct examination precluded any cross-examination by the government. Although it appears that the deposition was terminated with the understanding that cross-examination would take place another day, that examination apparently has never occurred. In support of its contention no credible evidence exists in the record to conclude that a security interest was intended to be created in Mrs. Canellis' favor, the government asserts that the court has a special need to observe Mrs. Canellis' demeanor during direct and cross-examination. In addition, it asserts that her son was communicating with her throughout the deposition by gesture or by speaking in Greek. The government also asserts that the interpretor was suggesting answers to Mrs. Canellis. Contrary to the government's contention, upon examination of the deposition transcript, the court finds that her testimony was barely coherent. Mrs. Canellis' advanced age and the condition of her health should have precluded the taking of her deposition in the first instance. Based on the plaintiff's attempt to depose her, where everyone present including the government's attorney and her son had great difficulty communicating with her because of her age and ill health, the court would not find her competent to testify at trial. Accordingly, the court has not considered her testimony in connection with the instant summary judgment motion. 6 Moore 's Fed. Prac. ¶56.11[1.-3] at 56-2002 (2d ed. 1979).

Mrs. Canellis was widowed in May, 1956, and ever since then has maintained separate savings accounts of her own funds. Upon her husband's death, her son George Canellis acquired two laundry businesses founded by his father. From approximately 1960 until July 2, 1971 , George Canellis asked his mother to advance him several thousands of dollars for use in the operation of the businesses. She executed cashier's checks made payable to George Canellis and to herself which were allegedly paid to George with the understanding that eventually the funds would be repaid. In approximately June, 1971, George Canellis needed $5,000.00 to meet an upcoming payroll. When he contacted the family's attorney, the advisor, Daniel Parry, about this further advance, Parry suggested that prior to the disbursement of the amount, George Canellis should agree to provide security to his mother for the existing indebtedness and for what became the final advance of $5,000.00. Parry, Mrs. Canellis and her son agreed that although the total indebtedness exceeded $30,000.00, security would be provided for this amount only. To accomplish this purpose, Parry drafted documents necessary to convey George Canellis' fee interest in a residential property at 7424 Kolmar Ave. in Skolie , Illinois , to his mother as trustee of an Illinois land trust in which George Canellis retained the beneficial interest. A deed in trust and trust agreement was executed in Parry's office on July 2, 1971 . The relevant provision of the trust agreement provides:

It is hereby agreed between the trustee and the beneficiary herein that in the event of the sale of this property the trustee shall retain the sum of $30,000. from the net proceeds of the sale, being the sum the beneficiary has borrowed from the trustee in the past few years.

If, however, the sale is made after the death of said trustee, the sum of $30,000. shall be waived and be considered as having been paid and the beneficiary shall not be obligated to the trustee's estate in any sum whatsoever.

The deed in trust was recorded with the Cook County Recorder of Deeds on July 7, 1971 . The following year, in May, 1972, the government made its first assessments against George Canellis for unpaid taxes, giving rise to its lien.

II. Discussion. The instant motion for summary judgment by Mrs. Canellis raises two issues. First, has Mrs. Canellis demonstrated the absence of any genuine issues of material fact on the question of the existence and priority of her lien? Second, if so, is she entitled to summary judgment in her favor? The government asserts that the answer to both questions is no.

A. Availability of Summary Judgment. Mrs. Canellis produced documentary evidence in the form of copies of cashier's checks drawn on the First National Bank of Chicago and payable to George Canellis in the amounts of $10,000.00 and $5,000.00, dated January, 1964 and July 9, 1971, respectively. These documents support her contention that monies were withdrawn and paid by her to her son over a period of years. She also produced copies of two cashier's checks payable to herself drawn in February, 1968, and January, 1969, in the amounts of $2,000.00 and $1,000.00. She produced a copy of a promissory note dated September 22, 1970 , evidencing a promise by George Canellis to pay her $10,200.00 on demand at 6% interest. The note and checks total $30,267.00. Finally, the trust agreement previously referred to states that the sum of $30,000 should be retained by the trustee in the event of the sale of the property, ". . . being the sum the beneficiary has borrowed from the trustee in the past few years." This agreement was recorded on July 7, 1971 .

According to the deposition testimony of George Canellis and Daniel Parry, cash was advanced over a period of years to George by Mrs. Canellis to meet some of the expenses of the laundry businesses. (George Canellis at 12-13). The expectation between them was that he would repay her. (George Canellis at 12); (Parry at 10-16). It was Parry's suggestion to make a security arrangement between George and Mrs. Canellis when an additional $5,000.00 was sought to meet a payroll. (George Canellis at 13); (Parry at 4-10). Finally, the deed in trust was drafted and executed for the purpose of obtaining security for the monies previously and contemporaneously advanced. (George Canellis at 13-20); (Parry at 5-8).

The government first contends that no credible or substantial evidence exists in the record upon which to base a finding that a security interest was intended to be created in Mrs. Canellis' favor. In the case of the witness testimony, the government states that the court should not make a determination as to their actions and intentions without observing their demeanor on direct and cross-examination. However, it fails to point out any inconsistency in the testimony of George Canellis and Parry or any other basis for assailing their veracity, nor has court found any in its own review of their deposition testimony. At most, the government is asserting its desire for a further opportunity to "shake" the sworn testimony they have already given. Such bare assertions are insufficient to bar summary judgment. Weit v. Continental Illinois National Bank & Trust Co., 467 F. Supp. 197, 216 (N. D. Ill. 1978).

As for the documentary evidence, the trust instrument constitutes a writing sufficient to show a $30,000.00 indebtedness between George and Mrs. Canellis which was to be satisfied in the event the property was sold. 20 Ill. Law & Practice §73 (1956). The instrument is self-explanatory, regular on its face, and the government does not supply any type of evidence which would tend to rebut its meaning or point out why it would be inadmissible at trial. It is sufficient to establish the absence of any genuine dispute as to the fact of the indebtedness and the recording date. The government correctly asserts and the court has previously noted that the language of the trust document is not sufficient, in and of itself, to establish the intent of the parties at the time of the transactions, although it is probative evidence on that issue.

In tax cases, as with any other case, the government has the same burden as other litigants to respond to a summary judgment motion by demonstrating that triable issues of fact remain. Radio City Music Hall Corp. v. United States , 135 F. 2d 715 (3d Cir. 1943). This burden has not been met with respect to the material Mrs. Canellis has tendered in support of her motion. Therefore the court finds that summary judgment is available to her in this action.

B. Entitlement to Summary Judgment. Through her motion for summary judgment, Mrs. Canellis seeks a determination that her son's indebtedness to her was secured by the transfer in trust on July 2, 1971 , which created a lien in the trust property in her favor that has priority over the government's lien arising in May, 1972. She contends and the government does not dispute that pursuant to I. R. C. §6323, purchasers, holders of security interests [emphasis supplied] mechanic's lien-holders, and judgment lien creditors are protected from tax liens arising from subsequent assessments under certain well-defined circumstances. Subsection h(1) of section 6323 provides that a security interest comes into existence if it "has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation . . . and to the extent that at such time, the holder has parted with money or money's worth." It is further undisputed that if Mrs. Canellis' identity as a lienor, the property subject to the lien, the lien amount and its perfection, were all established prior to the government's first tax assessment, then her lien is entitled to priority over the tax lien. See United States v. New Britain , 347 U. S. 81, 84 (1954); Avco Delta Corp. v. Canada Ltd. v. United States [72-1 USTC ¶9359], 459 F. 2d 436 (7th Cir. 1971). Mrs. Canellis contends and the government vigorously disputes that according to Illinois law, the transfer in trust created a lien in the nature of an equitable mortgage which was duly perfected against a subsequent judgment lien by the recording of July 7, 1971, in accordance with Ill. Rev. Stat. ch. 30 §29 (1977).

Illinois courts recognize equitable mortgages in a variety of land transfer transactions. The basic requirement is that the intent to effect a security arrangement involving the particular property and the parties appear from the express language of the transfer documents or from the surrounding circumstances. Hibernian Banking Association v. Davis , 217 Ill. App. 36, aff'd, 295 Ill. 537, 129 N. E. 540 (1920). Contrary to the government's contention, Illinois courts will not refuse to find an equitable mortgage if the security agreement merely provides for repayment of the obligation "if and whenever" the obligor sells or disposes of the real estate. The rule is that if there is other evidence of intent from the surrounding circumstances, then express language of the agreement will not prevent a finding that security was intended, and the debtor did not make merely an aleatory promise to pay. 295 Ill. 129 N. E. 544. Thus, it is clear that Mrs. Canellis has met the basic requirement for recognition of her security interest. The government further asserts that even with the requisite intent, none of the authorities relied on by Mrs. Canellis expressly hold that an equitable mortgage will be created by a transfer to her as trustee of a land trust in which her son retained the beneficial interest. On the other hand, the government has failed to point out any case which holds that an equitable mortgage will not be created where intent is present in this type of title transaction. Therefore, this court must decide the issue as matter of first impression.

Equitable mortgages are frequently recognized where the parties to the transaction are relatives, such as uncle and nephew and parent and child. See e.g., Shaver v. Woodward, 28 Ill. 277 (1892); Warner v. Gosnell, 8 Ill. 2d 24, 132 N. E. 526 (1956). Here the loan and transfer in trust occurred between mother and son. also, it is well settled that Illinois court will enforce a security arrangement involving the assignment of a beneficial interest in land trust as either a pledge or an equitable mortgage depending on the presence or absence of certain features of the particular loan transaction. See H. Kenoe, Land Trusts, ¶5.34 at 5-138-9 (I. C. L. E.) 1978). Because security arrangements are commonly found when an assignment of a beneficial interest is made, it would not be unreasonable to find that a security arrangement could be effected when the separation of legal title and the beneficial interest in real property takes place. In fact, when Mrs. Canellis was transferred title as trustee of the land trust, she assumed the ideal position for insuring that her obligation was paid first, since an Illinois land trustee retains the power to convey title pursuant to the beneficiary's direction, her name and the record of her interest and lien appears in the chain of title, and she must be named in any actions to force conveyance of title such as in enforcement proceedings for mechanic's liens, id. at ¶6.18 at 6-27, and for mortgage foreclosures, id. at ¶6.27 at 6-42.

For these reasons, the court finds that the transfer of legal title to Mrs. Canellis by George Canellis on July 2, 1971 , created an equitable mortgage in her favor in the amount of $30,000.00. Her interest was duly perfected by the recording which took place on July 7, 1971 . Accordingly, her motion for summary judgment will be granted.

By its motion, the government seeks an order for entry of judgment against George Canellis in the amount of $130,363.04 plus interest from December 11, 1978 . As the court previously found that the government is entitled to satisfaction of its lien in this amount, the clerk of the court will be directed to enter judgment against him in accordance with this order. Further, the court will order judicial foreclosure on his property, particularly his interest in the Illinois land trust in satisfaction of this judgment subject to the prior lien of Mrs. Canellis. United States v. Lewis [67-2 USTC ¶9693] 272 F. Supp. 993 (N. D. Ill. 1967).

III. Conclusion For the reasons stated, it is therefore ordered that Georgia Canellis' motion for summary judgment shall be, and the same is hereby, granted. The United States of America 's motion for entry of judgment shall be, and the same is hereby, granted.

 

 

[56-2 USTC ¶9996] United States of America , Plaintiff v. Vaughn C. Payne, Edith Pruitt Payne, Marjorie Mitchell Bell, J. F. Schrontz, and Samuel Z. Morganstern, Defendants

U. S. District Court, East. Dist. Mo. , Civil No. 9366(1), 3/22/56

[1939 Code Sec. 41--similar to 1954 Code Sec. 446(b)]

Reconstruction of income: Net worth method.--The Commissioner, on the facts, properly recomputed the income of the taxpayers, husband and wife, by means of the net worth method. Taxpayers' contention that they received large cash gifts to account for their increase in net worth was unworthy of belief.

[1939 Code Sec. 311--similar to 1954 Code Sec. 6901]

Transferee liability: Family transfers.--The taxpayer-husband from time to time transferred certain real property and other assets to his wife, or to himself and his wife as tenants by the entireties. Such transfers, in each instance, made the taxpayer insolvent. Accordingly, the taxpayer-wife was liable as a transferee individually as to those assets transferred solely to her, and the taxpayer-husband and his wife as tenants by the entireties were liable as transferees as to the real property so transferred.

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

Lien for taxes: Priority.--The government was held to have a valid and preferential tax lien against all property owned by the taxpayers to the extent that each of them was principally liable or liable as transferees. However, with respect to one piece of real property, a deed of trust running against the property and securing a loan owing by the taxpayer-wife, was held to be prior in right to the government's tax liens.

Kurt W. Melchior, Special Assistant to Attorney General, Washington, D. C., W. Francis Murrell, Assistant United States Attorney, St. Louis, Mo., for plaintiff. Ellis S. Outlaw, St. Louis , Mo. , for defendants.

Amended Findings of Fact and Conclusions of Law

MOORE, District Judge:

This action having come on for trial on January 17, 1955, and the plaintiff and the defendants Vaughn C. Payne and Edith Pruitt Payne having appeared by counsel, and the defendant J. F. Schrontz having filed his affidavit herein by permission of the Court and with the consent of the remaining parties, and the Court having considered the evidence adduced by the parties and the arguments of counsel, and having heretofore entered its findings of fact and conclusions of law and judgment order, and defendants, Vaughn C. Payne and Edith Pruitt Payne having made a motion for new trial which the Court has allowed in part, and the Court having considered the briefs and arguments of the parties and determined to modify its findings of fact and conclusions of law previously entered herein, the Court now finds the facts and states its conclusions of law as amended, as follows:

Findings of Fact

1. This action was brought pursuant to the authorization of the Commissioner of Internal Revenue and the direction of the Attorney General of the United States .

2. The defendants Vaughn C. Payne and Edith Pruitt Payne, husband and wife, are residents of this District. They filed their joint income tax return for the taxable year 1942, and Vaughn C. Payne filed his individual income tax returns for the taxable years 1943 through 1947, inclusive, with the then Collector of Internal Revenue for the First Collection District of Missouri, and paid the taxes shown thereon.

3. Thereafter the Commissioner of Internal Revenue made an investigation of the income tax liabilities of Vaughn C. Payne and Edith Pruitt Payne for the year 1942, and of Vaughn C. Payne for the years 1943 through 1947. This investigation disclosed that Doctor and Mrs. Payne had not maintained records sufficient to permit an accurate determination of their income for the year 1942 or of Doctor Payne's income for the years 1943 through 1947. The records maintained by Doctor and Mrs. Payne were in fact insufficient for the determination of their correct income for those years.

[Net Worth Method]

4. Because of the inadequacy of the records maintained by Doctor and Mrs. Payne, the Commissioner of Internal Revenue reconstructed their income for the years 1942 through 1947, inclusive, by the use of an analysis of their net worth and expenditures during that period. While the analysis made by the Commissioner showed the net worth of both Doctor and Mrs. Payne from December 31, 1941 through December 31, 1947, all items of income from December 31, 1942 through December 31, 1947, attributable to Mrs. Payne could be and were in fact eliminated from that analysis in the determination of the unreported income of Doctor Vaughn C. Payne for the years 1943 through 1947, inclusive.

5. The Commissioner of Internal Revenue, on his June 30, 1949, assessment list, assessed additional income taxes, fraud penalties, and interest against Vaughn C. Payne as shown in the following table:

                           Assessment                                   Assessed

Year                 Date         Account No.         Inc. Tax         Penalties         Interest

1942 ....         
6/30/49
              517758         $ 444.38          $ 222.19          $249.90

1942 ....         
6/16/49
              557900            47.79               -0-            19.29

1943 ....         
6/30/49
              517759         2,846.78          1,423.39           907.50

1944 ....         
6/30/49
              517760         3,552.63          1,906.74           919.35

1945 ....         
6/30/49
              517761         1,666.89            941.50           907.97

1946 ....         
6/30/49
              517762           796.25            459.08           196.08

1947 ....         
6/30/49
              517763         8,763.12          4,930.90           690.36

 

6. These assessments were based on the existence of unreported income disclosed by the foregoing net worth analysis. The aforesaid assessment list was received by the then Collector of Internal Revenue for the First Collection District of Missouri on July 11, 1949 (except for a 1942 deficiency assessment of tax in the amount of $47.79 and interest of $19.29, which was received June 27, 1949) and thereupon the United States acquired liens therefor against the property of Vaughn C. Payne. Notices of the said liens were filed with the Recorder of Deeds for the City of St. Louis, Missouri, August 12, 1949 . Notice of these assessments and demand for payment thereof was served on defendant Vaughn C. Payne on July 1, 1949 .

7. The balance owing upon the foregoing assessments at the time of trial was $19,799.21 on account of the 1944 and 1947 assessments, plus interest on all stated assessments for 1942-1947, inclusive, from the dates thereof.

8. The aforesaid net worth analysis made by the Commissioner of Internal Revenue for Vaughn C. Payne and Edith Pruitt Payne was reasonably accurate, and fully supported the conclusion of the Commissioner that Vaughn C. Payne had received unreported income in amounts which properly gave rise to the aforesaid tax deficiency assessments. Although the deficiency assessments were made against Vaughn C. Payne, individually, the evidence shows that Edith Pruitt Payne filed a joint return with Vaughn C. Payne for the year 1942.

9. The understatement of income earned by Vaughn C. Payne in the years 1943 through 1947, and earned by Vaughn C. Payne and Edith Pruitt Payne in 1942, was wilfully made with the fraudulent intent to evade the taxes properly owing from them, and each of them.

[Fraudulent Transfers]

10. Vaughn C. Payne and Edith Pruitt Payne own as tenants by the entireties certain real property in the City of St. Louis, Missouri, described with particularity in the complaint on file in this action, and identified here as the Maffitt Avenue vacant lots and 1918 Wagoner Place. These properties were acquired with funds earned by Dr. Payne, and Dr. Payne was made insolvent by the use of his funds to purchase the said real property for himself and his wife as tenants by the entireties.

11. With funds earned by Dr. Payne, Edith Pruitt Payne in October, 1947, purchased certain real property described with particularity in the complaint and known as 536 North Taylor Avenue , St. Louis , Missouri . Title to this property was taken at that time on behalf of Vaughn C. Payne and Edith Pruitt Payne in the name of the defendant Samuel Z. Morganstern on whose behalf there was delivered to Mrs. Payne in October, 1947, a general warranty deed to Morganstern from the defendant Marjorie Mitchell Bell (then Marjorie Mitchell) and a general warranty deed from Morganstern in which the date and the name of the grantee were left blank. The use of his funds for the purchase of this property in the name of Samuel Z. Morganstern again left Vaughn C. Payne insolvent.

In 1950, after deficiency assessments were made against Vaughn C. Payne as herein described, the defendants Vaughn C. Payne and Edith Pruitt Payne, caused the name of Edith Pruitt Payne to be entered as grantee in the blank deed from Samuel Z. Morganstern, and the deed was then so recorded.

12. The transfer of the 536 North Taylor Avenue property to Edith Pruitt Payne was made with intent to defraud the creditors of Vaughn C. Payne.

13. The defendants Marjorie Mitchell Bell and Samuel Z. Morganstern were served with process in this action, but defaulted. The evidence shows that neither of them had at any time or now has any right, title or interest in any of the real property described in paragraphs 10 and 11 of these findings, although a deed of trust against the 1918 Wagoner Place property in favor of Mrs. Bell, was recorded sometime ago. This deed of trust was given without any consideration, and was a so-called "straw mortgage."

14. The defendant J. F. Schrontz is the beneficiary of a deed of trust, which secures the payment of a loan by a lien on the property described as 536 North Taylor Avenue . This deed of trust was taken by the defendant Schrontz without knowledge that the conveyance of said property to Edith Pruitt Payne was fraudulent. The amount outstanding on this loan and secured by said deed of trust on February 3, 1955, was $12,381.92; and the actual holder of said deed of trust and beneficial owner thereof on that date was one Mary E. Leonidiff.

15. The contentions of the defendants Vaughn C. Payne and Edith Pruitt Payne about certain large cash gifts to each of them, which are said to account for the increase in their net worth shown on the net worth analysis, are expressly rejected and found unworthy of belief.

16. Charges of Vaughn C. Payne and Edith Pruitt Payne that the Commissioner of Internal Revenue and his agents acted outside the bounds of the pertinent laws and regulations are not sustained by any evidence whatever. The conduct of the Commissioner of Internal Revenue and his agents in this matter was in all respects proper and correct and according to law.

17. The defendant Vaughn C. Payne is indebted to the United States for income taxes, penalties and interest for the years 1944 and 1947 in the amount of $19,799.21.

18. The defendants Vaughn C. Payne and Edith Pruitt Payne are indebted to the United States for interest accrued on the deficiency assessments made against them for the year 1942 on the Commissioner of Internal Revenue's June 30, 1949 , assessment list, from that date until paid, as provided by law.

19. The defendant Vaughn C. Payne is indebted to the United States for interest accrued on the deficiency assessments made against him for the years 1943 through 1947 on the Commissioner of Internal Revenue's June 30, 1949 assessment list from that date until paid as provided by law.

20. The understatement of income disclosed by the Commissioner's net worth analysis for the years 1943 through 1947, inclusive, disclosed unreported income all of which was fairly attributable to defendant Doctor Vaughn C. Payne.

21. Beginning in 1943, defendant Vaughn C. Payne from time to time transferred certain property and assets to his wife, Edith Pruitt Payne, or to himself and his wife as tenants by the entireties. Such transfers in each instance then made defendant Vaughn C. Payne insolvent, and with respect to each such transfer Vaughn C. Payne and Edith Pruitt Payne as tenants by the entireties are liable to the plaintiff for the transferred assets etc.

Conclusions of Law

1. This Court has jurisdiction over each of the defendants individually, except for the defendant Marjorie Mitchell Bell. As to her, this Court has jurisdiction to determine her right, title, or interest in and to certain real property known as 1918 Wagoner Place and 536 North Taylor Street , St. Louis , Missouri .

2. Defendant Edith Pruitt Payne, who did not file or sign any income tax returns for the years 1943 through 1947, inclusive, is liable as a transferee but not individually with respect to the taxes assessed against Doctor Vaughn C. Payne for those years.

3. The defendant Vaughn C. Payne is indebted to the United States for income taxes, penalties and interes for the years 1944 and 1947 in the amount of $19,799.21.

4. The defendants Vaughn C. Payne and Edith Pruitt Payne are indebted to the United States for interest accrued on the deficiency assessments made against them for the year 1942 on the Commissioner of Internal Revenue's June 30, 1949 assessment list, from that date until paid as provided by law.

5. The defendant Vaughn C. Payne is indebted to the United States for interest accrued on the deficiency assessments made against him for the years 1943 through 1947, inclusive, on the Commissioner of Internal Revenue's June 30, 1949 assessment list, from that date until paid, as provided by law.

6. Defendant Edith Pruitt Payne, and defendants Vaughn C. Payne and Edith Pruitt Payne, as tenants by the entireties, are liable to the plaintiff as transferees of the assets of Vaughn C. Payne to the extent stated in the findings of fact herein.

7. The United States of America has liens for the aforesaid taxes and interest on all property owned by Vaughn C. Payne and Edith Pruitt Payne, and each of them, to the extent that each of them is principally liable or liable as transferees, and specifically on the real property known as Maffitt Avenue lots, 1918 Wagoner Place, and 536 North Taylor Streets, St. Louis, Missouri.

8. Defendants Samuel Z. Morganstern and Marjorie Mitchell Bell, and each of them, have no right or title to or interest in any of the aforesaid real property.

9. Defendant J. F. Schrontz is the beneficiary of a deed of trust, the actual beneficial owner of which is Mary E. Leonidiff, and which runs against the property known as 536 North Taylor Avenue, St. Louis, Missouri, securing an indebtedness of $12,381.92 owing to Mary H. Leonidiff from Edith Pruitt Payne. The aforesaid deed of trust of J. F. Schrontz to the property known as 536 North Taylor Avenue is prior in right to the aforesaid liens of the United States to that property.

10. No person other than the plaintiff and the defendants has any right, title or interest in the real property described in paragraphs 10 and 11 of the findings of fact herein.

11. The plaintiff is entitled to a reformation of the title of each of the real properties described in paragraphs 10 and 11 of the findings of fact herein, vesting such title in the defendant Vaughn C. Payne, with whose funds said properties were purchased. The defendants Vaughn C. Payne and Edith Pruitt Payne are each separately and jointly liable for the tax deficiencies, penalties and interest set out herein for the year 1942; and the defendant Vaughn C. Payne is liable for the tax deficiencies, penalties and interest set out herein for the years 1943 through 1947, inclusive.

12. The plaintiff is entitled to foreclose its liens against the real properties known as 536 North Taylor Avenue, 1918 Wagoner Place and Maffitt Avenue lots, all in St. Louis, Missouri, as prior and superior in right to any other claim of right, title, or interest thereon, except only that defendant J. F. Schrontz has a prior and superior deed of trust upon the 536 North Taylor Avenue property to secure payment to him and to one Mary E. Leonidiff of the sum of $12,381.92 from the defendant Edith Pruitt Payne (26 U. S. C. Section 3678).

13. The plaintiff is entitled to a decree of foreclosure on account of its tax liens as aforesaid against the real properties referred to herein, pursuant to 28 U. S. C., Section 2001 and 2002.

 

 

[56-1 USTC ¶9179]Runyan Machine & Boiler Works, Inc., a corporation, Libellant v. Oil Screw "Captain Pete", etc. and Hyer Towing Co., Inc., a corporation, Respondents and Other Admiralty Cases Involving Hyer Towing Co., Inc. Vessels

In the United States District Court, in and for the Northern District of Florida, Pensacola Division, No. 646-P-Admr, September 15, 1955

[1939 Code Sec. 3672--same as 1954 Code Sec. 6323]

Validity of lien against mortgagee: Priority over recorded mortgage.--The failure of the Government to record its tax liens prior to the date a bill of sale for a vessel (conceded to be a mortgage) was recorded, gave the mortgage priority over the Government's lien. A similar claim involving a mortgage on another vessel was barred by laches and the statute of limitations, so that the Government's lien was superior.

John M. Coe, for Runyan Machine. Fisher & Hepner, for Gulf Barging. Holsberry, Holsberry & Emmanuel, for Standard Oil Co. Yonge, Beggs & Lane, for Maryland Casualty. Watson & Brown, for Hyer Towing Co. Geo. Roark, Jr., for Gulf Marine Supply. C. W. Eggart, Jr., for United States . Jones & Harrell, for Fairbanks . All counsel are of Pensacola , Florida .

Memorandum for the Files

Claims to the Sale Proceeds from Hyer Towing Co., Inc. Vessels

The Bisso Claim

DEVANE, District Judge:

The claim asserted by William A. Bisso, Jr., Receiver of New Orleans Coal and Bisso Towing Co. long ago lost its standing as a preferred claim over any of the other preferred claims asserted in these cases. The tragedy of having to disallow this claim is that its priority was lost through the kindness of Mr. Bisso in helping a friend (Mr. Hyer) who was in financial trouble. The claim was long ago barred by laches and the statute of limitations and is denied participation in any of the funds on deposit in the registry of this court in these cases.

* * * *

The Claims of the Government for Tax Liens

After all maritime liens asserted and allowed against the "CAPTAIN PETE" and the "KRISIDIA" are paid, some money will be left for a creditor holding priority over other creditors.

The "Captain Pete" Case

In the "CAPTAIN PETE" case priority is claimed by the government on its tax liens and by the Executrix of the Hyer Estate. The evidence in the case discloses that prior to March 17, 1954 A. M. Hyer, individually, guaranteed and endorsed a large amount of indebtedness owed by Hyer Towing Co. Inc. On March 17, 1954 the Board of Directors of the Hyer Towing Co., Inc. passed a Resolution authorizing the sale of the "CAPTAIN PETE" to Mr. Hyer in consideration of his endorsement of all said indebtedness and Mr. Hyer was given a bill of sale for the "CAPTAIN PETE". This bill of sale was recorded with the Collector of Customs for the Port of Pensacola on July 1, 1954 . All parties concede that the bill of sale executed to Mr. Hyer constituted nothing more than a mortgage securing him against loss for his endorsement of the several items of indebtedness of Hyer Towing Co., Inc. in his effort to keep the company a going concern.

Mr. Hyer died shortly after the recording of the bill of sale and the greater part of the indebtedness guaranteed by him is now a claim against the estate, which the Executrix has been forced to recognize.

The government asserts eleven different tax liens against Hyer Towing Co., Inc. The first of these tax liens was received by the District Office of Internal Revenue in Florida on November 30, 1953 and the last one on or about February 23, 1955 . No tax liens were recorded in the Office of the Clerk of the Circuit Court of Escambia County, Florida until November 8, 1954 . Five of the tax liens were received in sufficient time to have been recorded prior to the recording of the bill of sale to Mr. Hyer. The remaining tax liens were received after that date.

The government takes the position that because the bill of sale was from the Towing Company to Mr. Hyer that he was not a mortgagee without notice; that he knew at the time that certain of the tax liens were, in fact, outstanding. No question of inadequate consideration or fraud is suggested in the transaction.

The question presented is whether Section 3672 of the Internal Revenue Code is applicable to all mortgagees, pledgers, purchasers and judgment creditors who hold valid claims of indebtedness properly recorded or is only applicable to those who secure such evidence of indebtedness without knowledge of the existence of prior preferred creditors who have not perfected their liens according to law.

This court holds that the failure of the government to record these tax liens, as required by law, prior to the date Mr. Hyer recorded his mortgage gives to the Hyer mortgage a higher preference in this case. U. S. v. Peoples Bank (5th Cir.) 197 Fed. (2d) 898 [52-2 USTC ¶9407]; U. S. v. Phillips, et al. (5th Cir.) 198 Fed. (2d) 634[52-2 USTC ¶9421] and Grand Prairie State Bank v. U. S. (5th Cir.) 206 Fed. (2d) 217 [53-2 USTC ¶9481].

The "Krisidia" Case

After all maritime liens are discharged against the "KRISIDIA" the question here is whether the government's tax lien or the Bisso mortgage takes precedence.

The court has already held, with reluctance, that in connection with the Bisso claim, his claim is inferior to other preferred claims and for the reasons stated there the government's tax liens take precedence over the Bisso claim in the "KRISIDIA" case.

* * * * *

 

[88-1 USTC ¶9226] Sea Ventures Holdings AG, Plaintiff v. Wheeler's Bay, Inc., The Harris Company, The United States of America and The State of Maine , Defendants

U.S. District Court, Dist. Me., Civ. 85-0123-B, 1/13/88

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

Lien for taxes: Priority: Mortgage, over recorded.--The U.S. motion for summary judgment on its counterclaim to quiet title to certain real estate was granted. The suit grew out of an effort by the owner of a corporation organized under the laws of the State of Maine to delay, defraud, and defeat an IRS criminal tax investigation. The owner had executed two fraudulent promissory notes from the corporation to a Liechtenstein corporation, which managed the owner's Maine corporation. The notes were executed and delivered to the Liechtenstein management corporation in an attempt to provide the owner with a pretextual explanation for the IRS as to the source of certain funds which were then the subject of the criminal tax investigation of the owner. When the Liechtenstein management company was liquidated, the two fraudulent promissory notes were acquired by another Liechtenstein-based corporation, also owned by the owner of the Maine corporation. The transfer was made without consideration. The notes were recast as a note from the Maine corporation to the Liechtenstein-based corporation, also owned by the same person. Without valid consideration, the mortgage, which was the subject of the Liechtenstein-based corporation's foreclosure suit and the U.S. counterclaim to quiet title, was fraudulently executed by the owner, in his capacity as President of the Maine corporation, and given as security for its fraudulent debts to the Liechtenstein-based corporation.

Joel E. Hokkanenn, Strout, Payson, Pellicani, Cloutier, Hokkannen, Strong & Levine, for plaintiff. Stephen Hanscom, Portland, Me., for Wheeler's Bay, Inc. John A. Graustein, Drummond, Woodsum, Plimpton & MacMahon, 245 Commercial St., Portland, Me. 04101, for Harris Co. Timothy C. Woodcock, Assistant United States Attorney, Portland, Me. 04104, Daniel F. Brown, Department of Justice, Washington, D.C. 20530 for U.S. Jerome S. Matus, Assistant Attorney General, for State of Maine.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

CYR, Chief Judge:

On July 26, 1986 , the court granted the motion of the plaintiff for voluntary dismissal of the action. The court now considers the United States ' unopposed motion for summary judgment on its counterclaim to quiet title to certain real estate.

I. Background

In support of its motion for summary judgment, the United States filed a statement of material facts based on its unanswered requests for admissions, and the uncontested declaration of Daniel F. Brown, trial attorney for the Tax Division of the United States Department of Justice, made pursuant to 28 U.S.C. §1746. Plaintiff's agent for service having certified that satisfactory notice, including complete and true copies, of the United States' requests for admission was given the plaintiff's attorney, and the plaintiff having failed to respond within 30 days, the matters with respect to which admissions were requested are deemed admitted. Fed. R. Civ. P. 36(a). See United States v. Kenealy, 646 F.2d 699, 702-03 (1st Cir. 1981), cert. denied, 454 U.S. 941 (1982).

The admissions and the Daniel Brown declaration establish the following facts.

1. Sea Ventures Holdings AG [Sea Ventures] is a corporation based in and organized under the laws of Liechtenstein .

2. Sea Ventures is directed by the corporation Kyberna Verwaltungs AG [Kyberna] and both of these corporations have their principal place of business at 38 Aeulestrasse, Vaduz , Liechtenstein .

3. Frederic J. MacCaffray is either the owner, or the beneficial owner through some other cor porate or business entity, of Sea Ventures and Kyberna.

4. Both Sea Ventures and Kyberna are or were managed for Frederic J. MacCaffray by Prasidal Anstalt, a Liechtenstein-based corporation having its principal place of business at 38 Aeulestrasse, Vaduz , Liechtenstein .

5. Frederic J. MacCaffray is the President and the owner of one hundred percent of Wheeler's Bay, Inc. [Wheeler's Bay], a corporation organized under the laws of the State of Maine .

6. From approximately 1979 through 1984, Frederic J. MacCaffray was under criminal investigation by the United States of America for various drug-related and tax-related offenses.

7. Approximately in 1981, in an effort to delay, defraud and defeat a criminal tax investigation being conducted by agents of the Internal Revenue Service, Frederic J. MacCaffray, with the assistance of certain unknown individuals, including individuals connected with Prasidal Anstalt, purchased the Liechtenstein corporation Marpub Film Establishment, a/k/a Marpub Establishment, [Marpub] from French film actor Jean Paul Belmondo.

8. Marpub was managed and/or directed for MacCaffray by Prasidal Anstalt.

9. Subsequent to his purchase of Marpub, Frederic J. MacCaffray, in his capacity as president of Wheeler's Bay, executed two fraudulent promissory notes, back-dated to July 8, 1976 and July 8, 1977, from Wheeler's Bay to Marpub, in the amounts of $125,000 and $300,000, respectively.

10. No valid consideration was given for these notes.

11. While owned by Frederic J. MacCaffray, Marpub conducted no business other than the receipt of these notes.

12. The notes were executed and delivered to Marpub in an attempt to provide Frederic J. MacCaffray with a pretextual explanation for the Internal Revenue Service as to the source of certain funds which were then the subject of the criminal tax investigation of Frederic J. MacCaffray

13. Approximately in September 1980, Frederic J. MacCaffray, either in his own name or through some other corporate or business entity owned, directed and/or controlled by him, acquired, through Prasidal Anstalt, Sea Ventures and Kyberna, two Liechtenstein corporations having no assets and doing no business.

14. Frederic J. MacCaffray acquired Sea Ventures and Kyberna with the intent of further hindering, delaying and avoiding the criminal tax investigation of the Internal Revenue Service.

15. Marpub was liquidated in late 1980.

16. The two aforementioned notes from Wheeler's Bay to Marpub were acquired by Sea Ventures on or about September 12, 1980 .

17. The transfer of the two Wheeler's Bay promissory notes by Marpub to Sea Ventures was made without valid consideration.

18. On or about December 1981, the notes were recast as a note from Wheeler's Bay to Sea Ventures.

19. On or about January 15, 1982, the mortgage which was the subject of plaintiff's foreclosure suit and the United States' counterclaim to quiet title, was fraudulently executed by Frederic J. MacCaffray, in his capacity as President of Wheeler's Bay, and given as "security" for its fraudulent debts to Sea Ventures.

20. No valid consideration was given by Sea Ventures to Wheeler's Bay for either the note or mortgage in favor of Sea Ventures which are the subject of the present action.

21. Since its acquisition in 1980 by Frederic J. MacCaffray, either in his own name or through some other corporate or business entity under his ownership, direction and/or control, Sea Ventures has conducted no business except as related to the promissory note and mortgage from Wheeler's Bay.

22. Approximately from 1979 through 1983, Frederic J. MacCaffray, either individually or in his capacity as nominal or beneficial owner of some corporate or other business entity under his direction and control, made payments to Prasidal Anstalt for services rendered by it in connection with the management, direction and/or control of Marpub, Sea Ventures and Kyberna.

23. Frederic J. MacCaffray, either individually or in his capacity as owner of some corporate or other business entity under his direction or control, has made no payment to Prasidal Anstalt for services rendered by it in connection with the management, direction and/or control of Sea Ventures and Kyberna since 1983.

24. Prasidal Anstalt has received no payment of fees from any source for the management, direction and/or control of Sea Ventures or Kyberna from any source since 1983.

25. The present action was commenced by plaintiff Sea Ventures to foreclose its fraudulent mortgage so that it could obtain funds for the payment of certain management fees due and owing to Prasidal Anstalt from Sea Ventures and/or Kyberna.

26. Defendant Harris Company recorded a judgment lien against Wheeler's Bay at Book 831, Page 260, Knox County Registry of Deeds, in the amount of $20,000.

27. The aforementioned judgment lien of defendant Harris Company against defendant Wheeler's Bay was discharged on or about August 2, 1985 .

28. A tax lien in favor of defendant State of Maine and against Wheeler's Bay was recorded at Book 953, Page 157, Knox County Registry of Deeds, in the amount of $714.23.

29. On or about January 31, 1985 , Frederic J. MacCaffray entered into a plea agreement with the United States of America in connection with certain criminal charges then pending against him in the United States District Court for the District of Massachusetts.

30. Pursuant to the terms of this agreement, on June 13, 1985 , Frederic J. MacCaffray executed a quitclaim deed, on behalf of Wheeler's Bay, to the United States of America conveying title to certain real property in Knox County , Maine . The deed was recorded with the Registry of Deeds, Knox County , Maine on June 25, 1985 , in Book 1027, at Page 98.

II. Discussion

In a suit to quiet title to real property, the claimant must show both that the claimant's own title is valid and that the claimant is entitled to the removal of any cloud on the title. See Alexander Hamilton Life Insurance Company of America v. Government of Virgin Islands , 757 F.2d 534, 541 (3d Cir. 1985); 65 Am. Jur. 2d, Quieting Title and Determination of Adverse Claims, §78 . A mortgage which is invalid for want of consideration or because of fraud constitutes a removable cloud. 65 Am. Jur. 2d, Quieting Title and Determination of Adverse Claims, §§18, 19.

The undisputed facts establish that Frederic J. MacCaffray executed a valid quitclaim deed, on behalf of Wheeler's Bay, to the United States conveying the property at issue and that the deed was properly recorded. The property is adequately described in the recorded deed. See Government Exhibit A. In addition, the admissions of record show that the mortgage issued by Wheeler's Bay to Sea Ventures was not supported by adequate consideration and was fraudulent. Although the mortgage is therefore invalid, and the record shows that the judgment lien of Harris Company against Wheeler's Bay was discharged, the United States acknowledges that the title to the subject property remains encumbered by a tax lien of $714.23 in favor of the State of Maine .

In light of the foregoing, it is hereby ORDERED that the motion of the United States for summary judgment on its counterclaim is GRANTED. The Clerk of Court is directed to enter judgment declaring the mortgage from Wheeler's Bay to Sea Ventures to be fraudulent and void. It is further ORDERED that the mortgage from Wheeler's Bay to Sea Ventures be discharged of record and removed as a cloud on the title of the United States to the real property covered by the mortgage.

SO ORDERED.

 

 

[62-2 USTC ¶9584]Harold Wing, Aaron Sugarman and Edgar S. Stanley v. United States of America

U. S. District Court, Dist. Mass., Civil Action No. 58-1165-M-W, 208 FSupp 5, 6/12/62

[1954 Code Secs. 6321 and 6323(a)]

Priority of liens: Prior mortgage elements: Substantial equity of redemption: Retention of control.--A mortgage of restaurant properties, which was a voluntary assignment for the benefit of unsecured creditors, made at a time when business prospects were exeremely poor, did not take precedence over a Federal lien for unpaid income and employment taxes where the following two conditions existed: (1) the mortgagor did not have a substantial equity of redemption, and (2) control over the mortgaged property was relinquished to trustees. Even in view of a contrary, earlier view of this court in Gargill, aff'd by CA-1, 55-1 USTC ¶9164--which the court deprecated--the Federal lien in the case at hand was entitled to priority.

Jack H. Calichman, Herbert Baer, 85 Devonshire St. , Boston , Mass. , for plaintiffs. W. Arthur Garrity, Jr., United States Attorney, William Madden, Assistant United States Attorney, Thomas F. Field, Tax Division, Department of Justice, Washington 25, D. C., for defendant.

Opinion

WYZANSKI, District Judge:

Invoking the jurisdiction conferred by 28 U. S. C. §1346, plaintiffs bring this action against the United States for internal-revenue taxes alleged to have been erroneously collected by them.

The record is lamentably skimpy in showing the details of the taxes assessed, the collection, and various other items. But it may fairly be said that the case presents the question whether the plaintiffs were lawfully required to pay the United States from assets in their hands federal income and federal unemployment compensation taxes due from Allan's Restaurants, Inc., hereafter called the corporation.

[Question of Priority of Liens]

The District Director, apparently, (though on this point the record is not clear) regarded the trustees as liable for the corporation's tax on two alternate theories: (1) that the United States had a priority claim to be paid out of property assigned to the trustees of Allan's Restaurants, Inc. while the corporation was insolvent; and (2) that the United States had a senior lien upon property transferred by the corporation to the trustees. The first theory rests on a combination of R. S. §§ 3466 and 3467, 31 U. S. C., 1958 ed., §§ 191 and 192. It is based on the claim that the corporation being "indebted to the United States" and "not having sufficient property to pay all" its debts, made "a voluntary assignment thereof" to the plaintiffs, and that this assignment required that "the United States shall first be satisfied" out of the property so transferred [see 31 U. S. C. §191]; and that if the plaintiffs did not observe that priority they would be personally answerable. [See 31 U. S. C. §192.] The second theory rests on §§ 6321 and 6323(a) of the Internal Revenue Code of 1954, 26 U. S. C., 1958 ed., §§ 6321 and 6323. It is based on the claim that the District Director had against Allan's Restaurants, Inc.'s property a lien for taxes, which he filed, and that prior to that filing there was no "mortgagee" that had a lien on such property.

Upon the evidence offered, this Court makes the following findings:

1. Allan's Restaurants, Inc. is a Massachusetts corporation which began in February 1952 to operate a restaurant at 159 Tremont St. , Boston . It operated at a profit of less than $700 in the period ending September 30, 1953 ; but it lost over $21,000 in the year ending September 30, 1954 ; and over $12,000 in the year ending September 30, 1955 . From October 1, 1955 to December 31, 1955 it lost over $5,000. As of December 31, 1955 the corporation had assets of under $18,000, and liabilities in excess of $50,000. There was no sound reason to believe that, as long as it was saddled with such liabilities, the corporation's business was likely to become profitable, or that the corporation could raise new capital.

2. On January 5, 1956 the corporation executed a demand note of $60,000 to trustees to pay such of the corporation's unsecured creditors as chose to participate. To secure that note the corporation executed a "mortgage" to trustees for creditors. The trustees recorded this mortgage on January 6, 1956 . It covered all the corporate assets of every kind. There was left nothing which the corporation could sell or use in order to get funds to pay principal or interest on the mortgage.

3. The history of the company showed plainly that with its bad record of losses, no investor was likely to put new funds into the enterprise subject to existing liabilities.

4. While, after the mortgage, the corporation retained a technical equity of redemption, the equity of redemption was of no economic value.

5. The corporation did continue to do business for just under a month, that is, until February 2, 1956 . During that time, in accordance with the terms of the mortgage and with the consent of the trustees, the corporation used the mortgaged assets to continue to serve meals to customers. The money received from these customers was in turn used to buy new food supplies and to pay most of the wages and salaries of employees. The trustees' attorneys advanced as " admin istrative expenses" other funds to pay the rest of the salaries and to pay for flowers and lighting, and ultimately to pay for utilities, such as gas, electricity, and telephone service. In this month those at the restaurant provided regular operating reports to the trustees.

6. Despite the words of the mortgage, the persons who had been associated with the corporation regarded the trustees as in possession of the corporate assets. Those persons realized, moreover, that at any moment they could be ousted from such possession as they had.

7. In January 1956 it had been the hope of the trustees that the corporation would make money, and that the chief stockholder of the corporation, Mr. Schaffer, would be able to get additional capital. To enable him to get such capital, the trustees at first refused to consider selling to third parties the assets covered by the mortgage. When these hopes were disappointed, Mr. Schaffer's son, who had been a manager of the enterprise, informed the trustees that the Schaffers wanted the trustees to conclude the business. The trustees did so by foreclosing the mortgage on February 2, 1956 and selling all the mortgaged assets on that day to one Levenson for $10,000. This sum, after the deduction of admin istrative and like expenses, came into the hands of the trustees.

8. Meanwhile, on January 13, 1956 the District Director had filed assessments against the corporation for its unpaid federal income taxes and federal unemployment taxes. Under Internal Revenue Code of 1954 §6321, 26 U. S. C., 1958 ed., §6321 these taxes became a lien. On September 13, 1956 the federal government filed these tax liens in the Registry of Deeds for Suffolk County . Then the United States demanded payment from the trustees. The trustees paid the taxes in full and brought this suit for a refund.

[Mortgage First in Time--BUT]

Plaintiffs contend that the federal tax claims were not supported by a senior lien because before the federal tax lien attached, the corporation had made to the trustees a valid mortgage to secure the debts of creditors. Plaintiffs rely on Internal Revenue Code of 1954 §6323(a), 26 U. S. C., 1958 ed., §6323 which provides that ". . . the lien imposed by Section 6321 shall not be valid as against any mortgage . . . until notice thereof has been filed by the Secretary." In support of their argument plaintiffs cite U. S. v. Gargill, 1st Cir., [55-1 USTC ¶9164] 218 F. 2d, 556.

The shortest answer to plaintiffs may be found in R. S. §3466. While the wording of that statute is not too simple, the Supreme Court in U. S. v. Emory, 314 U. S. 423, 426 ruled that it "applies in terms to cases [1] in which a debtor not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or [2] in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law . . . or [3] in which an act of bankruptcy is committed."

The case at bar falls within the first category. Allan's Restaurants, Inc. did not have sufficient property to pay its debts. The transfer made to the trustees (1) embraced all the corporate property, (2) gave the corporation no right to regain title to that property unless it paid an amount at least three times the value of the property, (3) left the corporation without any economic possibility of deriving business earnings sufficient to discharge its debt to the transferee, and (4) made the corporation's nominal possession illusory and terminable at will. While the trustees purported to leave the corporation in possession of the property, this was a sham. In reality they controlled every detail of the enterprise. They had daily reports on the business. They paid all the obligations of the corporation which could not be met out of daily income. At any moment they could make demand for payment of the note, which the corporation could not have paid. Such a situation constitutes a "voluntary assignment" as that term is used in R. S. §3466. It is just as effective in stripping the transferor of possession as a consent receivership which has been held to be a voluntary assignment within §3466. Price v. U. S. [1 USTC ¶158], 269 U. S. 492; U. S. v. Butterworth-Judson Corp. [1 USTC ¶159], 269 U. S. 504. See U. S. v. Bruce Machine Co., D. Mass., [55-1 USTC ¶9383] 132 F. Supp. 525, 526.

Read narrowly, the ratio decedendi of U. S. v. Gargill is not to the contrary. The Court of Appeals addressed itself only to the question whether §3466 applied in bankruptcy. [See [55-1 USTC ¶9164] 218 F. 2d, 556, 558-559.] Gargill does not explicitly rule on the issue whether apart from bankruptcy a transfer of the type here or there involved constituted a "voluntary assignment".

[Earlier Authority Questioned]

Another answer to plaintiffs' argument is that, even on the doubtful assumption that in Gargill the referee, myself in the District Court, and the Court of Appeals, were correct in concluding that the type of mortgage there involved was entitled to the protection of §6323(a) of the Internal Revenue Code of 1954, 26 U. S. C., 1958 ed., §6323(a), the Gargill doctrine was announced in a case where the Court of Appeals assumed that the mortgagor had a "substantial equity of redemption", (p. 560, col. 2, 10th and 11th lines from the bottom of the page), and that the mortgagor had "retention of control over and possession of the mortgaged property" (p. 561, col. 1, first full paragraph.) In the case at bar, Allan's Restaurant, Inc. and nothing of economic value left; those who had run the enterprise during the period of corporate control did not regard themselves as being any longer in possession; and the mortgagees were free at any moment to foreclose. The whole transaction had no purpose except permanently to transfer all the assets of the corporation to certain creditors unless, which was beyond economic probability and beyond any reasonable expectation, the corporation could get new capital, or the corporation could suddenly reverse its record of continuous, large losses. Such a transaction was so much like a complete divestiture as not to be that type of mortgage protected by §6323(a). Despite Gargill, I would not, and I believe the Court of Appeals would not, extend the word "mortgagee" in that subsection to reach the case at bar.

Judgment for defendant.

 

Rev. Rul. 56-592, 1956-2 CB 945


SECTION 6323.--VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT CREDITORS

26 CFR 301.6323-1: Validity of lien against mortgagees, pledgees, purchasers, and judgment creditors.
A "trust mortgage" executed to certain trustees for the benefit of unsecured creditors of a taxpayer is not a mortgage within the purview of section 6323 of the Internal Revenue Code of 1954. Therefore, the trustees under such a "trust mortgage" do not have priority over a subsequently recorded Federal tax lien.
The contrary position taken in the case of United States v. Benjamin Gargill, Trustee, et al., 218 Fed. (2d) 556, will not be accepted by the Internal Revenue Service as a precedent in the disposition of other cases involving similar fact situations.

[Text]

 

Advice has been requested whether a "trust mortgage indenture" executed to trustees for the benefit of creditors of a tax debtor constitutes a valid mortgage within the meaning of section 6323 of the Internal Revenue Code of 1954.

The request stems from problems created by the practice of some tax debtors resorting to assignments of property for the benefit of creditors to the detriment of the Government's right of priority under its tax lien. A recent innovation in this respect has been the "trust mortgage indenture" which is executed by the debtor under facts similar to the following:

A taxpayer-debtor enters into an agreement with certain unsecured dreditors, and certain parties designated as trustees for the benefit of creditors, whereby the debtor will execute a promissory note to the trustees for the amount of the aggregate debt owing its creditors. The agreement provides that the note is to be secured by a mortgage of all the personal property then owned or thereafter acquired by the debtor. Simultaneously, with this agreement the debtor executes a "trust mortgage" to secure the promissory note, naming the trustees as the grantees of such mortgage. The agreement provides that the debtor is to retain possession of the property with full right to manage and use it in the ordinary course of business. It provides, also, that the trustees are to hold the property of the debtor in trust for the equal pro rata benefit of the assenting creditors without any preference of one over the other. The assenting creditors agree to forbear prosecution of their claims provided the terms of the indenture are carried out. In the event of default in payment of the note, the trustees are given power to take possession of and carry on the business, or sell the property, or receive conveyance by the debtor of its equity therein. In the event the debtor should pay the note, the provision is included for the termination of the agreement and release of the mortgage.

The mortgage was properly recorded and the debtor continued to operate his business. Less than a year thereafter, a petition in bankruptcy was filed for the debtor. Subsequent to recordation of the "trust mortgage," the United States filed a notice of a Federal tax lien for taxes due and owing from the taxpayer which were assessed prior to the execution and recording of the "trust mortgage."

The issue for consideration is whether the particular security device designated a "trust mortgage" executed by the tax debtor is a mortgage within the meaning of section 6323 of the Internal Revenue Code of 1954, so that the trustees in whose favor it is executed are entitled to priority over a subsequently recorded Federal tax lien.

Section 6322 of the Code provides that a lien in favor of the Government under section 6321 of the Code arises at the time an assessment of taxes is made. However, under the provisions of section 6323(a) of the 1954 Code, which corresponds with section 3672(a) of the 1939 Code, such lien is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor until a notice of lien has been filed by the Secretary or his delegate in the proper office.

Section 301.6323-1 of the Regulations on Procedure and Administration provides that the determination whether a person is a mortgagee, pledgee, purchaser, or judgment creditor entitled to the protection of section 6323(a) of the Code shall be made by reference to the realities and the facts in a given case, rather than to the technical form or terminology used to designate such a person. Thus, a person who is in fact and in law a mortgagee, pledgee, or purchaser, will be entitled to the protection of section 6323(a), even though such person is otherwise designated under the law of a state, such as the Uniform Commercial Code.

The effect of a lien in relation to a provision of Federal law for the collection of taxes owing to the United States is a question for the Federal courts to decide. Although a state court's classification of a lien as specified and perfected is entitled to weight, it is subject to reexamination by the court. United States v. Security Trust and Savings Bank of San Diego , Executor etc., et al., 340 U. S. 47, Ct. D. 1736, C. B. 1950-2, 151.

This principle was again emphasized by the Supreme Court of the United States in United States v. Gilbert Associates, Inc., 345 U. S. 361, Ct. D. 1757, C. B. 1953-1, 474. The lien in the Gilbert case arose from tax assessment of the town of M which was in the nature of a judgment under the law of the State of New Hampshire . The Supreme Court of the United States held that the lien was not prior to a Federal tax lien subsequently filed. The Court pointed out that a cardinal principle of Congress in its tax scheme is uniformity as far as may be. Therefore, the words "judgment creditor" should have the same application in all the states. "Congress," said the Court, "used the words 'judgment creditor' in section 3672 in the usual conventional sense of a judgment of a court of record since all States have such Courts."

In United States v. Waddill, Holland and Flinn, Inc., et al., 323 U. S. 353, Ct. D. 1624, C. B. 1945, 459, it was held that a Federal claim had priority over a landlord's lien for rent notwithstanding the fact that under Virginia law the landlord was given a fixed and specific lien which related back to the beginning of tenancy.

In the more recent case of United States v. R. P. Scovil, et al., 348 U. S. 218, Ct. D. 1779, C. B. 1955-1,548, the Court, in ruling on the meaning of the term "purchaser" for purposes of section 3672 of the Internal Revenue Code of 1939 (section 6323 of the 1954 Code), held that a purchaser within the meaning of that section usually means one who acquires title for a valuable consideration in the manner of vendor and vendee.

Under the decisions in the Gilbert and Scovil cases, the terms "purchaser" and "judgment creditor" are restrictively interpreted and only those "purchasers" and "judgment creditors" who are within the ordinary and usual meaning of those terms are held to be entitled to the protection granted by section 6323 of the Code.

The same is equally true with respect to the term "mortgagee." Thus, an indenture such as herein considered, although purporting to be a mortgage and designated or labeled a "trust mortgage," does not contain the essential characteristics of a conventional mortgage and is not within the purview of section 6323 of the Internal Revenue Code of 1954. Accordingly, the trustees in whose favor such "trust mortgage" is executed do not have priority over a subsequently recorded Federal tax lien. The contrary position taken in the case of United States v. Benjamin Gargill, Trustee, et al., 218 Fed. (2d) 556, will not be accepted by the Internal Revenue Service as a precedent in the disposition of other cases involving similar fact situations.

 

 

[55-1 USTC ¶9164] United States of America , Appellant v. Benjamin Gargill, Trustee, et al., Appellees

(CA-1), In the United States Court of Appeals for the First Circuit, No. 4874, 218 F2d 556, January 18, 1955

Appeal from the United States District Court for the District of Massachusetts.

[1939 Code Secs. 3670 and 3672--similar to 1954 Code Secs. 6321 and 6323]

Priority of federal tax lien: Mortgage v. assignment for benefit of creditors.--The Government contended that a tax lien, though recorded subsequent to a mortgage and trust indenture, was entitled to priority because the mortgage was in fact an assignment for the benefit of creditors. The court held that the mortgage was valid, as evidenced by the mortgagor's retention of possession of the property and the provisions for repayment of the mortgage debt over a period of five years in reasonable installments. The fact that the trust indenture gave the mortgagees-trustees the right to dispose of the mortgaged property at will did not make the mortgagor's equity of redemption a sham under the circumstances. The statute giving the Government priority in insolvency proceedings is not applicable to bankruptcy proceedings.

Grant W. Wiprud, Special Assistant to the Attorney General, Washington, D. C., (H. Brian Holland, Assistant Attorney General, Ellis N. Slack and A. F. Prescott, Special Assistants to the Attorney General, Washington, D. C., Anthony Julian, United States Attorney, and Francis J. DiMento, Assistant United States Attorney, both of Boston, Mass., were on brief), for appellant. Alfred Sigel, Boston Mass. , for appellees.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

Opinion of the Court

HARTIGAN, Circuit Judge:

This is an appeal by the United States Government from the order of the District Court of the United States for the District of Massachusetts denying the Government's petition for review of an order of a referee in bankruptcy establishing that the Government's tax lien was subordinate to the lien of certain trust mortgagees of the bankrupt. We have jurisdiction of this appeal by virtue of 30 Stat. 553 as amended, 11 U. S. C. §47.

The mortgage in question was attempted to be established through a series of instruments executed on February 19, 1952 . The mortgagor was Philrich Enterprises, Inc., a Massachusetts corporation engaged in the restaurant business in Newton , Massachusetts . The mortgagees were three individuals who were designated "Trustees."

[Mortgage Terms]

The mortgage itself was essentially in the usual form except that instead of listing the particular personal property mortgaged, it contained a general all inclusive clause referring to "all the stock-in-trade, goods, wares, merchandise, supplies, furniture, furnishings, fixtures, equipment, tools, appliances, accounts receivable, and all other personal property of every kind, nature and description in or upon the premises occupied by the mortgagor at its place of business at 3 Boylston Street, Newton, Massachusetts, together with the good will, trade name of said business and any and all licenses enjoyed by the mortgagor. . . ." This mortgage also attempted to secure after acquired property and allowed the mortgagor to sell the mortgaged stock-in-trade and merchandise provided they were replaced or the equivalent in funds was turned over to the mortgagees. The mortgage contained a defeasance clause conditioned upon the payment of the trustees of ". . . the sum of as stated in a note and trust agreement of even date signed by it. . . ."

The promissory note referred to in the mortgage was for $68,920.85, which amount was to be paid to the trustees in weekly installments. Each installment was to be an amount equivalent to five per cent of the gross business done by the mortgagor for the particular week prior to the date of such installment payment except that during January, February and March a payment of $100 a week would be made in lieu of the payments based on five per cent of the gross business. In no event could a weekly payment be less than $100. The note provided for payment ". . . all in or within five (5) years from this date."

[Assignment v. Mortgage]

Prior to the execution of the mortgage and note, the mortgagor and the three persons designated as trustees entered into a so-called "Indenture Trust Agreement", and it is this instrument which raises the principal doubt concerning the status of the trustees in this proceeding. This indenture recites that the mortgagor is unable to pay its debts and has requested its creditors to grant it time and allow it to carry on its business subject to the inspection and control of the trustees. It also recites that the creditors, who are listed in an attached Schedule A and to whom is owed an amount in excess of $69,920.85, desire that the business be carried on and the good will preserved, and there creditors agree to allow the business to be carried on by the mortgagor until February 18, 1957. The trustees promise to hold the mortgaged property in trust "for the equal pro rata benefit and security of such of said unsecured creditors above described as shall have assented hereto within sixty (60) days of the date of this indenture or within such further time as may be granted by the trustees in writing." The mortgagor promises to pay the trustees in the manner provided for in the note except that instead of providing for a total payment of $69,920.85 it provides that payments shall continue "until a sum equal to the debtor's entire present indebtedness to all unsecured creditors shall have been paid in full." The mortgagor also promises to conduct its business on a cash basis, to allow the trustees the right to inspect its books and to furnish financial statements to the trustees. Paragraph 8 of this agreement, upon which the Government strongly relies in its argument that this whole transaction is in the nature of an assignment for the benefit of creditors rather than a mortgage, provides:

"8. In addition to all other powers conferred on the TRUSTEES elsewhere herein, the TRUSTEES shall have the power at any time, and whether the DEBTOR be in default hereunder or not, to release any and all security held by them hereunder for such consideration as they in their sole judgment and discretion shall deem proper. The consideration so received shall be held by the TRUSTEES for the benefit of the beneficiaries and the proceeds thereof shall be applied for the benefit of such beneficiaries as herein provided. The TRUSTEE'S (sic) determination to exercise this power and their exercise thereof in good faith shall not be open to question by any person beneficiary hereunder or claiming the benefits hereof."

As further security for the performance of the mortgagor's obligation under the indenture agreement, the two stockholders of the mortgagor assigned their stock as security to the trustees, giving the trustees the right upon default by the mortgagor to sell said stock. These two stockholders presented their undated resignations as officers and directors of the mortgagor and also their powers of attorney with respect to their stock to the trustees, which instruments the trustees were authorized to date and deliver to the mortgagor corporation upon any default in the performance of the agreement.

[Recording of Mortgage and Tax Lien]

The mortgage was duly recorded in the City Clerk's Office in Newton on February 21, 1952 , and the mortgagor continued the operation of the business until the involuntary petition in bankruptcy was filed on February 16, 1953 .

The Government's claim to a lien arises out of certain federal taxes which were listed on an assessment list received in December 1951, two months before the mortgage in question was executed. It was not until June 24, 1952 that notice of this lien was recorded.

On April 13, 1954, the referee in bankruptcy certified that as the notice of tax lien was recorded after the recording of the mortgage, an order be entered establishing that the lien of the United States was subordinate to the payment of admin istration expenses and the lien of the trust mortgagees. The district court affirmed the referee's order, stating ". . . that a mortgage or pledge of any sort should be given priority over an unrecorded tax lien."

[Priority Law Inapplicable]

We shall first deal with the Government's contention that the district court was in error when it failed to apply the federal priority statute ¹ which gives the Government priority for its claims in the event of a debtor's insolvency and the commission of an act of bankruptcy. The weight of authority indicates that this statute is not applicable in proceedings in bankruptcy. 4 Collier on Bankruptcy, 264 and n.51 (14th ed. 1954); see Adams v. O'Malley, 182 Fed. (2d) 925 (8 Cir. 1950) [50-2 USTC ¶9349]; United States v. Sampsell, 153 Fed. (2d) 731 (9 Cir. 1946) [46-1 USTC ¶9186]; In re Knox-Powell- Stockton Co. , 100 Fed. (2d) 979 (9 Cir. 1939) [39-1 USTC ¶9277]. It cannot be assumed that Congress was so illogical and inconsistent as to enact §64 of the Bankruptcy Act, 11 U. S. C. §104, entitling the Government only to a fourth priority insofar as its tax claims are concerned and a fifth priority as to certain other debts owed to the United States, if it did not intend that §64 supersede, insofar as bankruptcy proceedings are concerned, the first priority given to federal claims under §3466.

[Trustees as Mortgagees]

The Government's main contention is that it is entitled to a tax lien under §3670 ² of the Internal Revenue Code of 1939 and that §3672 ³ of the Code, which invalidates unrecorded tax liens as to mortgagees, is inapplicable in the instant case because the purported mortgage was in fact an attempted assignment for the benefit of creditors.

It is clear that a lien in favor of the Government was established when the assessment list was received in December, 1951, demand presumably having been made upon the taxpayer. It is also incontrovertible that such a lien is not ". . . valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector . . ." in the proper office. If the three trustees named in the agreement of February 19, 1952 acquired the status of "mortgagee" because of the transaction occurring on that date and thus prior to the filing of notice of tax lien by the collector on June 24, 1952 , their lien is senior to and is to be preferred over the lien of the Government.

The Government contends that Congress intended that only conventional mortgagees should come within the protection of §3672, citing the language used in United States v. Gilbert Associates, 345 U. S. 361 (1953) [53-1 USTC ¶9291]. In that case the Court held that despite the fact that the New Hampshire Supreme Court had held that assessments made by taxing authorities were in the nature of judgments, the taxing municipality was not a judgment creditor within the meaning of §3672. The Court refused to follow the state law in determining whether a taxing authority was a judgment creditor or not within §3672 because it was apparent that there was a great lack of uniformity among the states as to the legal status of a tax assessment, and "A cardinal principle of Congress in its tax scheme is uniformity. . . ." United States v. Gilbert Associates, supra, at p. 364. While in some states, such as New Hampshire , tax assessments have the nature of judgments, in other states where taxing authorities act quasi-judicially and are considered admin istrative bodies, tax assessments do not have the nature of judgments. The facts in the Gilbert case and the instant case are distinguishable. Mindful of the importance of uniformity in the federal tax scheme, we are of the opinion that the sustining of the finding of the referee in the instant case will not result in a lack of uniformity with regard to the meaning of "mortgagee" in §3672.

[Validity of Mortgage]

There is no basis for the contention that in one state a transaction such as this would be construed as an attempted assignment for the benefit of creditors and in another state as a valid mortgage. The cases, In re Heleker Bros. v. Mercantile Co., 216 Fed. 963 (D. Kansas 1914); Stuart v. Bloch et al., 39 Okla. 556, 135 Pac. 1147 (1913); Penzel Company v. Jett, 54 Ark. 428 (1891), and Winner v. Hoyt, Garnishee, 66 Wis. 227, 28 N. W. 380 (1886), cited by the Government as authority for the proposition that the present transaction resulted in an assignment for the benefit of creditors are of little assistance to us. These cases involved instruments labelled "mortgages" but where the equity of redemption was a sham and where actual possession of the "mortgaged" property of the debtor was intended to be acquired immediately after execution by the purported mortgagee who within a short time thereafter would commence to liquidate the property and transfer the proceeds thereof to the debtor's creditors. Here the mortgagor remained in actual possession of the property and carried on its business for almost one year after the execution of the mortgage, and there is no evidence that this mortgage was a sham transaction intended to disguise an actual assignment for the benefit of creditors.

Because of the apparent non-existence of a conflict among the states as to the legal effect of a transaction such as that involved in the instant case, the Massachusetts decisions dealing with similar mortgages should be given considerable weight in determining whether or not the instant trustees are mortgagees under §3672.

In Massachusetts the court is reluctant to invalidate security transactions involving instruments similar to those executed by the mortgagor here. In S. Samuels & Co. v. Charles E. Fogg Co., 258 Mass. 402, 155 N. E. 429 (1927), an insolvent debtor executed a mortgage of its property to the trustees representing the debtor's creditors. The court sustained the validity of the mortgage indicating that in the absence of a secret trust benefiting the debtor, a mortgage resulting in a preference for a particular creditor or group of creditors would be upheld, distinguishing such a mortgage from an assignment for the benefit of creditors. See Shay v. Gagne, 275 Mass. 386, 176 N. E. 200 (1931); Banca Italiana Di Sconto v. Bailey, 260 Mass. 151, 157 N.E. 40 (1927).

One of the principal and necessary characteristics of a mortgage is the fact that it is a security transaction. The mortgagor does not make an absolute and unequivocal conveyance of his property but retains an equity of redemption. There is nothing in this transaction which casts any substantial doubt on the possession by this mortgagor of a substantial equity of redemption. The Government argues that Paragraph 8 of the indenture agreement gives the mortgagees a power to dispose of the secured property at will, thus making the mortgagor's equity of redemption a sham extinguishable at the mortgagees' whim. With this interpretation we cannot agree although Paragraph 8 is not totally unambiguous. The mortgage grants the mortgagor the right to dispose of mortgaged stock-in-trade and merchandise providing such property is replaced or funds equivalent in value thereto are turned over to the trustees and also implicitly allows the substitution or renewal of other articles of mortgaged property. Without expressing any opinion as to whether after acquired property or stock-in-trade can be the subject of a mortgage, there being other property conveyed as security by the present mortgagor which unquestionably can be subjected to a mortgage, a situation could conceivably arise where some of the mortgaged property is no longer of any use to the mortgagor. The mortgagor and mortgagees thereupon could agree that the property may be sold free of the mortgage and the proceeds turned over to the mortgagees in partial payment of the mortgage obligation. The present mortgagees, however, are trustees who have a fiduciary obligation to those creditors who have consented to the mortgage. Paragraph 8 is a possible, although not clearly expressed, means of allowing the trustees to release property without undergoing the threat of charges by the beneficiaries of breach of fiduciary duty. It was necessary to incorporate this provision in the indenture agreement as it was the only one of the many instruments involved in this transaction to which the creditors were parties.

Another element which supports the upholding of the mortgage status of the trustees is the retention of control over and possession of the mortgaged property by the mortgagor. This characteristic is one shared by mortgages and is not found in assignments for the benefit of creditors.

That this mortgage contemplated repayment over a period of five years and that such payments were in amounts which the mortgagor could reasonably expect to meet are features which would not be found if the mortgagor and creditors had intended that the mortgaged assets be immediately liquidated and proceeds distributed in satisfaction of the mortgagor's debts, which is the main purpose of an assignment for the benefit of creditors.

This mortgage does result in a preference as do all mortgages securing antecedent debts but this does not deprive the mortgagee of his secured position. Davis v. Schwartz, 155 U. S. 631 (1895); see Ferris v. Chick-Mint Gum Co., 14 Del. Ch. 232, 124 A. 577 (1924). That the mortgage was to secure the mortgagor's creditors does not affect its status as a mortgage. See S. Samuels & Co. v. Charles E. Fogg Co., supra; In re Pilot Radio & Tube Corporation, 72 Fed. (2d) 316 (1 Cir. 1934), cert. denied sub nom. Eckhardt et al., Trustees v. Ball et al., Trustees, 293 U. S. 584.

Two recent district court cases have dealt with the problem of classifying certain instruments as mortgages or as assignments for the benefit of creditors. The transaction in In re Maine State Raceways, 97 Fed. Supp. 1016 (D. Maine 1951) has more of the characteristics of an assignment for the benefit of creditors than does the present transaction, yet the district court found that the "Trust Mortgage" involved was not a general assignment for the benefit of creditors. Smith v. United States , 113 Fed. Supp. 702 (D. Hawaii, 1953) presented a situation bearing a greater resemblance to that in the instant case, although involving the Government's claim for priority under 31 U. S. C. §191 in a non-bankruptcy proceeding, and the district court found that as the mortgagor remained in possession and control of its business after the execution and delivery of the mortgage, the mortgage was a bona fide security transaction and not a voluntary assignment within the meaning of §191.

We, therefore, conclude that the trustees here are mortgagees within the meaning of §3672 and that the Government's tax lien is invalid as against them.

The order of the district court is affirmed.

¹ 31 U. S. C. §191, R. S. §3466.

"Priority established.

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

² "§3670. Property subject to lien

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U. S. C. §3670, 53 Stat. 448.

³ "§3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors

"(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

"(1) Under State or Territorial laws. In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; . . .." 26 U. S. C. §3672, 53 Stat. 449 as amended.

 

 

[57-2 USTC ¶9948]In the Matter of Walter Glenn Kobiela, Bankrupt

U. S. District Court, Dist. Neb. , Case No. B 0128, in Bankruptcy, 152 FSupp 489, 6/26/57

[1954 Code Sec. 6323]

Lien for taxes: Prior recorded mortgage: Effect of state law giving unrecorded liens for taxes priority.--A lien for Federal Insurance Contributions Act taxes arose against the bankrupt on November 10, 1955. Notice of the lien was not filed until December 14, 1955 . An effective state lien of a mortgage was filed on November 25, 1955 . The referee awarded the funds available to the state Commissioner of Labor for unpaid unemployment contributions, which formed the basis of his lien. Upon petition for review, the court held that a state law which subordinated the Commissioner's mortgage to a "lien for taxes" controlled, and that therefore the tax lien did not have to be recorded prior to the recording of the mortgage in order to be superior to it. The petition for review was allowed with directions to pay the government's tax lien first.

Rob ert H. Berkshire, Assistant United States Attorney, for petitioner. John E. Sidner, for Department of Labor of the State of Nebraska . William E. McCormick, for Internal Revenue Service.

Memorandum

ROBINSON, Chief Judge:

We are asked to review the Referee's order determining the priority of payment between two valid tax liens. The significance of the lien rank lies in the fact that funds are not available to satisfy one claim entirely, whichever one is preferred.

The District Director of Internal Revenue for the District of Nebraska made an assessment of, and a demand for, unpaid income, withholding, and Federal Insurance Contributions Act taxes on November 10, 1955, against the present bankrupt. This would create, as of that date, a statutory lien in favor of the United States upon all property and rights to property belonging to the bankrupt for the unpaid federal taxes. 26 U. S. C. A. 6321 and 6322, I. R. C. 1954. The District Director filed a notice of lien covering the assessment on December 14, 1955, with the Register of Deeds for Dodge County , Nebraska . Stipulation of Facts, Paragraph 5. Until this is done, the statutory lien would not be valid as against any mortgagee. 26 U. S. C. A. 6323(a)(1).

The Commissioner of the Department of Labor for the State of Nebraska caused to be recorded in the chattel mortgage records and in the real estate mortgage records of Dodge County , on November 25, 1955, a statement showing unemployment contributions and interest in default on the part of the bankrupt. By state law this statement, when so recorded, immediately became, or was effective as, a lien of a mortgage on all of the real and personal property of the defaulting employer, "subject only to lien of taxes and liens of prior record". Section 48-657, R. R. S. 1943 ( Nebr. ). Prior to the filing of the notice of lien, however, the Commissioner had no statutory lien.

[Referee's Action]

The Referee awarded the balance of the funds held by the Trustee (amounting to $520.96) to the Commissioner to apply on his claim, having determined that it was entitled to first payment. See Order of Referee, December 10, 1956 . The United States government objects to this ruling, and in its Petition for Review claims that the lien of the Department of Labor is not a mortgage within the meaning of 26 U. S. C. A. 6323 and, furthermore, that the said lien is, by the express provisions of Section 48-657, R. R. S. 1943, subject to a "lien of taxes".

In our opinion the first objection is not well taken. Collier has expressed as adequately as words might the rule which applies here. "* * * The actual existence and effect of all liens, claims, and equities, as distinguished from validity or invalidity under the provisions of the Bankruptcy Act, is a matter to be determined by the appropriate state law, as expounded by the decisions of the state courts. If anything was needed to settle this proposition, Erie Railroad Company v. Tompkins (304 U. S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, 114 A. L. R. 1487) has done so." 4 Collier on Bankruptcy, 14th ed. 1347. By statute the Commissioner of the Department of Labor, upon recording a statement of the contributions in default, will enjoy the status of a mortgagee, which is to say that he is considered to be in the position of one holding a mortgage. We are thus without authority to determine his status otherwise. Whether this provision of the statute is controlling over the federal revenue laws is a question we need not decide as the provision is not without its relevant limitations.

[Applicable State Law]

The state law, however, subjects the mortgage thus established to a "lien of taxes" and to "liens of prior record". These limitations are significant. The government's lien is not a lien of prior record. It does, nevertheless, satisfy the requirements of a lien of taxes--indeed, there is no question but that it is one. The only problem is whether the identification of the government's lien as a lien of taxes would effect a priority thereunder, despite the fact that the Commissioner has by state law the status of a mortgagee.

We think it does. The state law which endows the Commissioner with the status of a mortgagee, thus entitling him to the advantage of Section 6323 of the Code, also subordinates that status to the interests of specified lienholders. And if we must look to the state law for a determination of the Commissioner's status, we are obliged to accept that status as given, namely, with all of the limitations or qualifications thereby imposed. It is nowhere stated that such a lien refers only to state or local taxes, and there is no apparent reason why it should. Ordinarily, then, we may consider that, for the purposes of Section 6323, the requirement of prior notice is necessary, unless the state law does not require notice to subordinate a mortgagee's claim to a tax lien. In other words, the same rule for determining priority should exist for both state and federal tax liens, or at least, no more stringent rule should apply to the latter. We are thus persuaded that, should a statutory lien for unpaid federal taxes arise prior to, but be recorded after, the recordation of a mortgage, or a claim having the effect of a mortgage, that lien is not invalidated by Section 6323 for lack of prior notice when, by state law, the mortgage itself is subject to unrecorded liens of taxes. We so hold.

In view of this conclusion, the Petition for Review is allowed. Responding to its prayer, the Court directs the Referee to reconsider his Order so as to permit the government's tax lien to receive first payment.

 

 

[63-1 USTC ¶9319]Rex Finance Company v. Martha R. Cary and Walter B. Cary, et al.

(CA-4), Court of Appeal, State of La., 4th Circuit, No. 324, 9/4/62

[1954 Code Sec. 6323]

Priority of liens: Lien for taxes: Priority of previous mortgage lien.--A collateral mortgage note, pledged before the government's tax lien was recorded, had priority over and outranked the tax lien.

Clem H. Sehrt, Edward J. Royle, Sr., Virgil M. Wheeler, Jr., Edward J. Boyle, Jr., and Peter J. Butler, Pere Marquette Bldg., New Orleans, La., for M. R. Cary et al., defendants-appellants. Nicholas J. Gagliano and Kathleen Ruddell, Assistant United States Attorneys, New Orleans, La., for U. S., defendant-appellant. George E. Weigel, Maritime Bldg., New Orleans, La., Charles J. Rivet, Suite 1212, Richards Bldg., New Orleans, La., and John E. Fleury, Gretna, La., for plaintiff-appellee.

Before Judges H. W. AYRES, JAMES R. DAWKINS and HARWELL L. ALLEN.

H. W. AYRES, Judge:

The issues on this appeal concern the validity, vel non, of a pledge of a mortgage note executed by the defendants, Martha R. Cary and Walter B. Cary, and its rank as a privilege with an income tax lien asserted by the United States of America upon the property mortgaged.

On trial of the merits, the validity of the pledge of the mortgage note for the payment of an obligation in the principal sum of $12,000.00 was recognized and the obligation ranked first with preference and priority over all other levies, claims, or privileges, particularly over the tax lien of the United States of America. Plaintiff was thus held entitled to be paid by preference from the proceeds of a sale of the property mortgaged, sought by plaintiff herein through executory process. From a judgment thus rendered and signed, the defendants, Martha R. Cary, Walter B. Cary, and the United States of America , appealed.

Questions of both law and fact are presented for resolution. The material facts, concerning which there appears to be little, if any, dispute, may be first briefly summarized.

[Facts]

On August 25, 1958 , Mr. and Mrs. Cary executed a negotiable promissory note for $15,000.00, payable to bearer on demand, and secured by a mortgage on certain-described real property in New Orleans , which comprises their home. The mortgage was accepted on behalf of all future holders by one Donald L. Guedry, son-in-law of the Carys and with whom Walter B. Cary was, at the time, engaged as a partner in a used car business. For several days following execution of the aforesaid note and mortgage, Cary carried the note in his pocket, whereupon, about September 1, 1958 , on Guedry's suggestion, the note was placed in a locked drawer for safekeeping at their place of business. Guedry, who had free access to this drawer and its contents, on September 17, 1958, obtained a loan from plaintiff, Rex Finance Company, for which he executed his note for $12,000.00, the payment of which he secured by the pledge of the Cary mortgage note. This mortgage note has remained in the continuous possession of the finance company from September 17, 1958 , until the institution of the foreclosure proceedings.

The record establishes, as the trial court found, that neithr of the Carys was aware of the pledge of their note by their son-in-law; nor did either of them consent to or authorize its use by him. The evidence is convincing that Guedry came into possession of the note through either fraud, deceit, or embezzlement.

The Guedry personal note was renewed from month to month in the regular course of business in its original amount upon payment of a monthly interest charge thereon until February 5, 1959, when a renewal note in the original principal sum was executed and exchanged for the original note which was also renewed February 26, 1959, when a new note in the sum of $15,000.00 was executed in consolidation of the original loan of $12,000.00 obtained by Guedry and $3,000.00 of an obligation due by Guedry individually to Joseph Bohrer, the managing partner of plaintiff Rex Finance Company. The note, however, was dated February 17, 1959 , to correspond with the maturity date of the previous note. On Guedry's failure to pay this, his last personal note, plaintiff, after having made demand upon the Carys for payment, to no avail, instituted an action by executory process seeking the foreclosure of the property mortgaged.

In the meantime, on September 19, 1958 , an income tax lien of the Government, covering a period from 1947 to 1952, inclusive, in the sum of $110,663.24, was filed against Walter R. Cary and Martha R. Cary, notice of the recordation of which was served upon the alleged tax debtors on June 10, 1959 .

[Holder in Due Course]

A question of primary importance is whether plaintiff became a holder, in due course, as pledgee, of the mortgage note. Concerned is the matter of plaintiff's good faith. In this regard, it may be pointed out Guedry testified that, at his father-in-law's instance, he arranged for the execution of the note and mortgage; that he prevailed upon Cary to place the note in a locked drawer at their place of business. There was no denial of these facts, nor that Guedry had free access to the drawer in which the note was placed.

The record further establishes that Guedry had, on numerous occasions, negotiated prior loans with the plaintiff from which a satisfactory and harmonious business relationship had been created. Joseph Bohrer, plaintiff's managing partner, was also aware of the family relationship, as well as the business relationship existing between Cary and Guedry.

We find no proof nor suspicious circumstances in the record from which plaintiff could have reasonably concluded that Guedry's possession of the note was precarious or wrongful, or that he was without authority to pledge it as security for the loan. Bohrer was persistent in his testimony as to his lack of notice or knowledge that Guedry's possession of the note was unlawful or that he was without right or authority to pledge it. No satisfactory or convincing proof was made to the contrary. Hence, we conclude, as did the trial court, that, after it was established that Guedry was without right or authority to the ownership or possession of the collateral note, plaintiff sustained the burden of proof placed upon it (LSA-R. S. 7:52, 59) and established, by a preponderance of evidence, that it acquired the note in pledge in good faith and for value, and, hence, that it became a holder as pledgee of the note in due course.

The evidence is particularly convincing that plaintiff was without any knowledge or notice watsoever, at the time it made the loan and accepted the note in pledge, that Guedry, in reality, had no title to the note, nor authority to pledge it as security.

One who accepts a negotiable instrument in good faith and for value is under no duty to test the title of an unsuspicious negotiator. Holmes v. Falsho Realty Co., La. App. Orleans, 1931, 132 So. 519, 521; Tyler v. Whitney-Central Trust & Savings Bank, 157 La. 249, 102 So. 325, 326.

In the first of these cases, with respect to one's duty in accepting negotiable notes, the court stated:

". . . The notes, being 'bearer' notes, and not yet matured, were negotiable merely by delivery, and any person accepting them in good faith for value would be under no obligation whatsoever to make inquiry, unless some suspicious circumstances arose in connection with their negotiation. . . ."

In the second of these cases, we note this observation:

". . . If the notes are negotiable, then as each was made payable to the order of the maker, and by the maker indorsed in blank and delivered, each, by such indorsement, became, in effect, payable to bearer, and Ricau, as their bearer, was in position to pledge them, and the one to whom they were offered in pledge was in position to acquire a legal right to them as pledgee, provided such person accepted them without knowledge that Ricau had, as a matter of fact, no right to pledge them."

Even under the Negotiable Instruments Law, LSA-R. S. 7:1 et seq., the circumstance that an instrument was stolen is no defense as against a bona fide holder for value. Tyler v. Whitney-Central Trust & Savings Bank, supra; Consolidated Ass'n of Planters of Louisiana v. Avegno, 28 La. Ann. 552.

As to the rights of one acquiring a negotiable instrumemt from one having the instrument in possession and under his control, the court, in Theard v. Gueringer, 115 La. 242, 38 So. 979, 980-981, made these appropriate observations:

"A person holding in his possession and under his control, before maturity, a promissory note made to the order of the maker, and indorsed by her, may be presumed, as between that person and the public, the owner of the same, or as agent with full power to dispose of it. If the party owning the note has intrusted it to an agent, he has created a trust by means of which fraud could be perpetrated. By placing the note in his hands, he has held out to the world that they could trust him, and thrown upon himself the burden of loss when they have acted on that inducement.

"The mere possession of a negotiable note payable to the order of the payee, and indorsed by him in blank, or of a negotiable note payable to bearer, is in itself sufficient evidence of his right to present it, and to demand payment of it. The payment to such person will always be valid unless he is known to have acquired possession wrongfully. Vol. 1, Daniel's Negotiable Instruments (4th Ed.) §§ 573, 843, 844; Russell v. Longstaffe, 2 Douglass, 514; Bank v. Neal, 22 How. 107, 16 L. Ed. 323; Davidson v. Lanier, 4 Wall. 457, 18 L. Ed. 377; Angle v. Insurance Co., 92 U. S. 330, 23 L. Ed. 556; Civ. Code La. art. 2145(1).

* * *

"The rule that, where one of two innocent persons must suffer a loss, he who has so acted as to give occasion for the loss applies to this case. Mrs. Theard, in order to avoid the risk of fire, assumed the risk of theft by the custodian in whose possession and under whose control she placed the note. She herself placed it in Barnett's hands. His original possession of it was lawful. . . ."

There is nothing in the record, as heretofore observed, establishing that plaintiff took the note in pledge in bad faith. The preponderance of the evidence establishes the opposite.

Nor is there any merit in any contention that, by the exercise of vigilance, plaintiff might have discovered that Guedry was without authority to pledge the note. In this regard, it was observed in McDonald v. Harkness, 146 La. 920, 84 So. 205, 208:

"There is nothing in the record going to show bad faith, or the want of good faith, in either Batchelor or Harkness. The circumstances at the time of the transfer, as described by the witnesses, are not such as to defeat Harkness' title to the note, or deprive him of the right to have the same canceled. His title would not be defeated by proof that, with the exercise of active vigilance, he might have discovered the existence of the allegations made by plaintiff. It must be shown that he (Harkness) acted in bad faith; that he had knowledge, or closed his eyes to facts or circumstances which would carry knowledge, of a defective title in Albin Tompkins. 2 Parsons on Bills, 272, 279; Goodman v. Simonds, 20 How. 343, 15 L. Ed. 934; Bank of Pittsburgh v. Neal, 22 How. 96, 16 L. Ed. 323."

[Attaching of Lien on Real Property]

A question as to the effective date of the attachment of a lien on real property resulting from a collateral mortgage has often arisen where a matter of priority between it and other liens is concerned. It appears, however, to be well settled in the jurisprudence of this State that a lien resulting from the recordation of a mortgage securing a collateral mortgage note arises not from the registry of the act of mortgage but from the date the note is pledged to secure a loan or other indebtedness, inasmuch as, prior to that date, there is no debt nor obligation to be secured, a prerequisite to the existence of a mortgage. Meeker v. Commissioner of Clinton & P. H. R. Co., 2 La. Ann. 971; Langfitt v. Brown, 5 La. Ann. 231; D'Meza v. Generes, 22 La. Ann. 285; Richardson v. Cramer, 28 La. Ann. 357; Rob erts v. Bauer, 35 La. Ann. 453; Morris v. Executors of Cain, 39 La. Ann. 712, 2 So. 418; Walmsley v. Resweber, 105 La. 522, 30 So. 5; LSA-C. C. Art. 3293.

In the Walmsley case, in a concurring opinion, the late Justice Provosty clearly defined the operation of a collateral mortgage note.

". . . A person may make his mortgage paper in this way and hold it as long as he pleases, and by merely issuing it create a mortgage ( Rob erts v. Bauer, 35 La. Ann. 455); but, as against third persons, whose rights have attached in the meantime, the mortgage takes date and rank from issuance,--that is, from acceptance of the mortgage by the contractee,--and not from registry. So long as the maker holds the paper, there is no mortgagee and no mortgage. A person cannot, all by himself, make a mortgage. A mortgage is a contract, and a person cannot, all by himself, make a contract. He may make the evidence of a mortgage,--the mortgage notes, the mortgage act, and the registry; but he cannot, all by himself, make the contract. The contract can come into existence only by the intervention of a second person, a contractee. Mere acceptance of the notes by such second person will create the mortgage, will form the vinculum juris; but before and until such acceptance there is no contract and no mortgage. . . ."

Therefore, where the maker holds a note in his own possession until after a lien of another has attached to the property, the lien arising by the subsequent transfer of the note is subordinate to and outranked by the claim of those whose lien attached prior to such transfer. The converse is likewise true. Therefore, as of the date of the original pledge of the note, plaintiff was the holder, as pledgee, in good faith and for value, and, hence, in due course, and it, therefore, held the note free from any equities or defenses existing between the original parties.

Information subsequently received concerning the note or the pledgor's title thereto has no bearing on the pledgee's rights, and such fact is immaterial. In this regard, the following observation was made by the court in Hillard v. Taylor, 114 La. 883, 38 So. 594, 598:

"Subsequent information of the infirm origin of the notes would not have vitiated the notes in the hands of the bank, and the bank could convey as good a title as it had itself, and, in order to do so, would not have had to practice concealment, but could do so openly and above board, with full revelation of the facts. The transferee, although fully advised of the original infirmity of the notes, would acquire as good a title as the transferror [sic] had. Therefore, unless Hillard was connected with the fraudulent negotiation of the notes, he would acquire from the bank as good a title as it had, even though fully advised either actually by the bank, or presumptively through the knowledge possessed by his agent, Taylor, of the fraudulent origin of the notes. Levy v. Ford, 41 La. Ann. 873, 6 South. 671, and authorities cited at page 879 of 41 La. Ann., page 674 of 6 South.; Howell v. Crane, 12 La. Ann. 126, 68 Am. Dec. 765, and authorities cited. . . ."

Predicated upon the contention that during January, 1959, plaintiff Rex Finance Company received information as to the lack or want of authority of Guedry to pledge the Cary collateral mortgage note, the defendants would point out that, at the time of the execution of a new note in lieu of the former, and the pledge of the mortgage note to secure it, plaintiff had full knowledge of the fact that Guedry had acquired the note from the Carys through either fraud, deceit, or embezzlement, and that Guedry was, therefore, without title to the note and without right or authority to pledge it on the occasions of the execution of the new notes on February 5 and February 26, 1959.

[Novation]

In this regard, it is contended that, by the execution of a new note for $12,000.00 on February 5, 1959 , the original debt was extinguished by novation, and, hence, that plaintiff's rights, under the original pledge, no longer existed. Therefore, it was contended that a new pledge of the note was made subject to all equities and defenses existing between the makers and the pledgor of the note. It was likewise contended that, by virtue of the transaction of February 26, 1959, wherein Guedry executed another note for $15,000.00, bearing date of February 17, 1959, and for the payment of which the collateral continued to be held in pledge, the original indebtedness had been extinguished by payment, and hence, that the pledge then made was subject to all the equities and defenses existing between the Carys and Guedry, the makers and pledgor of the note.

We find no merit in either of the contentions that the original debt was novated and extinguished by the execution of a renewal note on February 5, 1959 , or that the original debt was extinguished by payment under circumstances connected with the execution of the $15,000.00 note. The circumstances relied upon in connection with the execution of the latter note were that the prior note was marked "paid" upon the return to plaintiff of plaintiff's check which had been issued simultaneously with the execution of the new note. The original debt, however, was not paid. The evidence of the debt, that is, the note itself, was only increased to include an additional loan which was consolidated with the original loan in the confection of the note. There was no intention of the parties to extinguish the former indebtedness. The intention was to substitute another note, as evidence of the indebtedness, which had been increased in amount. The manner in which the matter was handled was explained by Bohrer as a mere record of the transaction for plaintiff's office.

Novation is defined as a contract having, as its object, two propositions; the first to extinguish an existing obligation, and the second to substitute a new obligation in its place. LSA-C. C. Art. 2185. Therefore, the pre-existing obligation must be extinguished; otherwise there can be no novation. If the obligation be only modified in some parts or respects and a portion of the original obligation remains, there is no novation. LSA-C. C. Art. 2187.

Thus, the original debt of $12,000.00 remained and was incorporated in and formed a part of the $15,000.00 note executed February 26, 1959 , and dated February 17, 1959 . The surrender of the original evidence of the debt and the substitution of new evidence therefor did not operate as an extinguishment of the obligation. An extension of the maturity of the obligation only was changed. Thus, it was held that a compromise between creditor and debtor by which the amount of the debt, the terms and mode of payment, the rate of interest, and the nature of the securities changed, does not effect a novation unless the intention of the parties to novate the obligation is particularly expressed. Baker v. Frellsen, 32 La. Ann. 822; Succession of Irwin, 33 La. Ann. 63, 72; Saloy v. Dragon, 37 La. Ann. 71, 73; Studebaker Bros. Mfg. Co. v. Endom, 51 La. Ann. 1263, 1267, 26 So. 90, 72 Am. St. Rep. 489; Reconstruction Finance Corporation v. Thomson 186 La. 1, 171 So. 553. Novation is not to be presumed and the intention to make it must clearly result from the terms of the agreement or by a full discharge of the original debt. LSA-C. C. Art. 2190; Interstate Trust & Banking Co. v. Sabatier, 189 La. 199, 179 So. 80. See, also: Davis v. Welch, 128 La. 785, 55 So. 372; Varnado v. Thompson & Co., 129 La. 15, 55 So. 693; Farmers' Nat. Bank v. Belle Alliance Co., 142 La. 538, 77 So. 144; W. W. Carre Co. v. E. J. Stewart & Co., 166 La. 317, 117 So. 238; Bank of Coushatta v. Coats, 170 La. 163, 127 So. 587.

Nor, does a pledgee, by the merger of debts, lose any of its rights. In re Canal Bank & Trust Co., 186 La. 366, 376, 172 So. 421, 424; Brock v. Citizens Bank & Trust Co., 187 La. 1078, 175 So. 673.

Inasmuch as the collateral note was under continuous pledge to Rex Finance Company, which received it as such in good faith, for value and before maturity, it is immaterial that it may have subsequently received information from which Guedry's title to the note and his right to pledge it may be questioned. Therefore, a question as to whether plaintiff ever had such information need not be resolved.

Because of the fact that plaintiff acquired said collateral note in pledge before maturity in good faith and for value and without notice or knowledge of the equities or defenses existing between the makers and pledgor of the note, the conclusion is inescapable that plaintiff occupies the position of an innocent third holder of the mortgage note, free of all equities or claims that may have existed in favor of the makers. Reconstruction Finance Corporation v. Thomson, supra. The plaintiff has always retained possession of the pledged collateral note. Neither the collateral note nor the debt for which it was pledged to secure has been paid. Since the note was given as collateral security for payment of a loan, it must remain as such security until the loan is satisfied, unless the original parties agree to its surrender or the pledgee in some manner discharges or releases it.

[Priority of Liens]

As to plaintiff's claim and assertion of priority of liens as regards the increased portion of the indebtedness, it may be pointed out that plaintiff has neither appealed nor answered defendants' appeal. Hence, as that portion of plaintiff's claim was disallowed, no issue is now presented with reference thereto, and it may be properly considered abandoned, which we deem properly so because the pledge to secure such increase was subsequent in date to the filing of the Government's lien for taxes.

Plaintiff's pledge of the collateral mortgage note having preceded the recordation of the tax lien of the Government, the Government relies upon the contention that the original obligation was novated and that a subsequent pledge of the collateral note to secure a new debt created a lien or privilege inferior in rank to the Government's lien which had been previously entered of record, or that the initial obligation due plaintiff was extinguished by payment, with the same result. These contentions having been resolved adversely to the Government, it follows that, under USCA, Title 26, §6323(a)(2), since the Government's tax lien was not filed until after the pledge of the collateral mortgage note to plaintiff, the lien and privilege of the Government are inferior to and are outranked by plaintiff's claim, lien, and mortgage.

Accordingly, for the reasons herein assigned, the judgment appealed should be, and it is hereby, affirmed at defendants-appellants' cost.

AFFIRMED.

 

[53-2 USTC ¶9612]Audria Hart, Appellant v. United States of America , Appellee

(CA-8), In the United States Court of Appeals for the Eighth Circuit, No. 14,813, 207 F2d 813, November 10, 1953

Appeal from the United States District Court for the Eastern District of Arkansas.

Lien for taxes: Validity against mortgagees: Injunction issued by District Court against admin istration of taxpayers' property by State Court.--Following the notices of deficiencies the two cab companies and their sole stockholder gave the latter's sister, the appellant, a promisory note secured by a chattel mortgage, which was recorded, on all the personal property of the cab companies. The stockholder also executed to the appellant a pledge of her stock in a building company owned by her. Upon the taxpayers' petition for a redetermination of the deficiencies the Tax Court however entered judgment for the Government. The appellant applied to a chancery court in Arkansas for the foreclosure of the chattel mortgage and the pledge. A receiver was appointed and the United States intervened. Later it withdrew its intervention and filed action in the District Court for a declaration of the priority of its tax claims and an order restraining the sale of the stocks of the companies and any other property ordered sold by the chancery court. The District Court established the priority of the Government's lien and enjoined admin istration of taxpayers' property by the state court. The appeals court affirmed the judgment of the District Court as to the priority of the tax claims but modified that part of the judgment which related to the granting of the restraining order.

E. M. Arnold for appellant. Cecelia H. Goetz, Special Assistant to the Attorney General, (H. Brian Holland, Assistant Attorney General, Ellis N. Slack, Special Assistant to the Attorney General, James T. Gooch, United States Attorney, and Gerland P. Patten, Assistant United States Attorney, were with her on the brief), for appellee.

Before GARDNER , Chief Judge, and WOODROUGH and COLLET, Circuit Judges.

COLLET, Circuit Judge:

This is an action by the United States to collect taxes from an individual and three corporations and to impress its lien for those taxes on the property of that individual and the corporations. All are insolvent.

Elizabeth Shoemaker, the individual referred to, owned and operated two taxicab companies, the Yellow Cab Company and the Checker Cab & Baggage Company. She also owned the Yellow Cab Building Company. Considerable rolling stock and equipment was owned by the taxicab companies. The Building Company owned certain real estate.

In 1947 an investigation was begun by the Internal Revenue Department of the tax returns filed by Mrs. Shoemaker and the two cab companies for the years 1943 through 1945. This investigation ripened into notices of deficiency assessments for 1943 through 1945, which were sent to Mrs. Shoemaker and the two cab companies in August, 1949. On October 20, 1949 , Mrs. Shoemaker and the cab companies gave to Mrs. Audria Hart, Mrs. Shoemaker's sister, a promissory note for $59,900.00, secured by a chattel mortgage on all the personal property of the taxicab companies. The mortgage was recorded on November 2, 1949 . At about the same time, Mrs. Shoemaker executed a pledge of her stock in the cab companies and the Yellow Cab Building Company to Mrs. Hart. On November 4, 1949 , a petition was filed in the Tax Court of the United States by the taxpayers, praying for redetermination of the assessed deficiencies. June 4, 1951 , the Tax Court of the United States entered judgment against Mrs. Shoemaker for $67,112.73, against the Yellow Cab Company for $81,254.33, and against the Checker Cab for $134,133.33. A notice of lien of the judgment against Mrs. Shoemaker and the Yellow Cab Company was filed July 18, 1951 , in Pulaski County , Arkansas , the residence of the companies and Mrs. Shoemaker. On the same day the Deputy Collector demanded payment. On July 30, 1951, he seized the personal property of the Yellow Cab Company. The notice of lien of the judgment against the Checker Cab Company was filed on August 8, 1951.

[Mortgagee Brought Action in Arkansas Court]

On August 3, 1951, Mrs. Hart brought an action in the Chancery Court of Pulaski County, Arkansas, against Mrs. Shoemaker and the two cab companies on her note, and sought the foreclosure of the chattel mortgage and the pledge of the stocks securing the note. In that action it was also requested that the Chancery Court appoint a receiver. A receiver was appointed that day. He immediately took possession of the property of the Checker Cab Company. The Yellow Cab Company, having been previously seized by the Deputy Collector of Internal Revenue on July 30, 1951, was turned over to the receiver upon presentation to the Deputy Collector of the order of the Chancery Court appointing the receiver. On August 20, 1951, the United States filed a petition to intervene in the suit pending in the Chancery Court, alleging its lien was superior to that of Mrs. Hart. The petition to intervene was granted.

September 26, 1951, the United States filed an action in the United States District Court for the Eastern District of Arkansas, against Mrs. Shoemaker, Mrs. Hart, and the Yellow Cab Building Company, in which it sought to restrain a threatened increase in the capital stock of the Building Company, which would result in a deterioration in the value of the existing stock, pending determination of the interest of the United States in that stock against the claim of Mrs. Hart. The complaint prayed that the claim of the United States be declared to be "prior and paramount to the purported claim, if any, of Audria Hart in and to said stock, and that said stock be sold and the proceeds applied to the claim of the United States ." September 27, 1951, the receivership action in the Chancery Court was, on the request of Mrs. Hart, extended to include not only the property of her sister, Mrs. Shoemaker, and the cab companies, but also the Yellow Cab Building Company, Inc. A receiver was appointed for the latter company, who took possession of its property.

[Collector Withdrew Its Intervention]

November 2, 1951, the Acting Collector of Internal Revenue filed a notice of claim in the Chancery Court for taxes due the United States from all the defendants in the Chancery Court in the total amount of $277,115.56 for the years 1944 through 1951. The case in the Chancery Court was set for trial on March 27, 1952. The day before that case was to be tried, on March 26, 1952, the United States requested and was granted leave to withdraw its intervention in the Chancery Court action. On March 27, the state court entered a judgment in favor of Audria Hart for the amount of the promissory note, $59,900.00, and ordered the sale of the property covered by the chattel mortgage on April 30, 1952 . Five days before the date of this sale, to wit, on April 25, 1952, the United States amended its complaint pending in the United States District Court by joining the cab companies as defendants, and requested that a judgment be entered against all three of the taxpayers for the amount found due by the Tax Court and to declare in such judgment that the lien of the United States for such taxes be a prior lien as of the date of the filing of the assessment lists on all the property owned by these taxpayers which was then in the possession of the Chancery Court receiver, and that its lien be declared to be prior to any right, title or interest of Audria Hart. The amended complaint further sought an injunctive order restraining the disposition of any of this property, asked for the appointment of a receiver to take charge of it, and an order of sale of the property to satisfy the Government's tax judgments. Mrs. Hart answered, denying the jurisdiction of the court, alleging that all the property involved was under the control of the state court and not subject to the control of the United States Court , and asserting that the state court had exclusive jurisdiction.

[ U. S. Filed Action in District Court]

On the same day, April 25, 1952 , the United States filed a separate action in the United States District Court, in which Mrs. Hart, Mrs. Shoemaker, and H. S. Nixon, the commissioner appointed by the Chancery Court to conduct the foreclosure sale on April 30, 1952 , were made defendants. The complaint prayed that a temporary restraining order be issued, restraining these defendants from selling the stock of the corporations and any other property ordered sold by the Chancery Court in its decree of March 27, 1952, pending the final determination of the action of the United States then pending against Mrs. Hart, Mrs. Shoemaker, and the corporations, in the United States District Court. This separate action for a temporary injunction was later consolidated with the original action. A preliminary injunction was issued by the United States District Court on September 30, 1952 ; the sale advertised for April 30 and the proceedings in the state court came to a halt pending the determination of the actions in the United States Court . Upon trial of the consolidated actions, the United States District Court found that the notes and chattel mortgages were executed at a time when the makers of those instruments were insolvent and were made for the fraudulent purpose of defeating the Government's tax claims. The judgment went further than merely establishing the priority of the Government's lien against the lien claimed by Mrs. Hart and enjoined the further admin istration of the taxpayers' property by or at the direction of the state court. The present appeal is from that judgment and challenges it upon the following grounds:

(1) That the United States, having asked leave to intervene in the Chancery Court, is estopped from thereafter withdrawing from that court and instituting an independent proceeding in the United States Court for the purpose of establishing priority of its lien;

(2) That the United States Court did not have jurisdiction of the separate action of the United States because of the pendency of the action in the state court and the possession by the state court of the taxpayers' property in the state court proceeding;

(3) That the findings of fact of the trial court to the effect that the note and mortgages were fraudulent as to the United States and made for the purpose of defeating the claim of the United States were clearly erroneous and not supported by substantial evidence; and

(4) That "The court did not take into consideration certain undisputed facts, which fixed the rights of the parties."

The facts were all stipulated except upon the question of whether the notes, chattel mortgages and asignments of the stock were ineffectual to create a lien in favor of Mrs. Hart superior to the lien for taxes of the United States .

[The Pufahl Case Not in Point]

Appellant relies on Pufahl v. Estate of Parks, 299 U. S. 217, and Department of Financial Institutions v. Mercantile-Commerce Bank & Trust Co., 92 Fed. (2d) 639, to support her claim of estoppel. Neither of those cases is controlling on the facts. In the Pufahl case the receiver of a national bank litigated the question of whether an assessment made against a deceased stockholder in the bank had to be filed in the Probate Court of Illinois within the period provided by the state statute, to a final conclusion in the Illinois courts. Certiorari was granted by the United States Supreme Court "to resolve a conflict respecting the construction of relevant federal statutes." In the course of the opinion the Supreme Court stated that the receiver might, as he elected to do, prosecute his claim in a state court, and that if he does, "at least in the absence of congressional declaration to the contrary," the litigation will be governed by the common and statutory law of the state. Bearing on a question yet to be considered, the court stated that while a litigant entitled to go into the federal court by reason of diversity of citizenship or because he was a federal officer could not be denied the right to prosecute an action to judgment in the federal court, such judgment could do no more than adjudicate the validity and amount of his claim where the res, in that case the estate sought to be reached, was already in the possession and under the control of the state court. And, that "the marshalling of the [receiver's] claim with others, its priority, if any, in distribution, and all similar questions, are for the probate court upon presentation to it of the judgment or decree of the federal court." Illustrating the procedure to be followed, the court said: "Thus, though a receiver should resort to the United States District Court, he would need to present, in a probate court, any judgment obtained, if he desired payment from the assets under the control of the latter."

While the Pufahl case, with many others, is authority on the question of whether the prior possession of the res by a state court in a proceeding in rem or quasi in rem may be disturbed, and is also authority, likewise with many others, that one having the right to prosecute an action in a federal court may do so to establish rights in personam, although a procedure and forum are also available in the state courts, the Pufahl case is no authority on the facts it involved for a holding that when, as here, the United States withdrew from the state court proceeding before trial and did, as it had a perfect right to do under special statute,--go into a federal court to establish its tax claim, 28 U. S. C. A. 1345, that it was estopped from doing so because it had, by voluntary intervention, once called the state court's attention to the existence of its claim to the res.

[No Estoppel Against U. S.]

The case of Department of Financial Institutions v. Mercantile-Commerce B. & T. Co., 92 Fed. (2d) 639, does use the term "estoppel" in denying to a party, entitled to sue in the federal courts because he was an officer of the United States, the right to go into a federal court and disturb the possession of the res which was in custodia legis in the state court. In that case the court held that the objective of the action in the federal court was to remove the res from the jurisdiction of the state court, which could not be done. The term estoppel as there used applied to the peculiar facts of that case. There was no estoppel in this case, even if we assume that there could be an estoppel of the United States , absent necessary incidents of res judicata.

The right of the United States to maintain the action in the federal court to establish its tax claim and have adjudicated the priority of its tax lien against the claim of a prior lien by Mrs. Hart is clear. Those rights were personal between Mrs. Hart and the United States . Their determination did not disturb the right of possession of the property in the custody of the Chancery Court. Hence, they could be litigated in either court, principles of comity not preventing. As stated in Penn General Casualty Co. v. Pennsylvania, 294 U. S. 189, 195:

"Where the judgment sought is strictly in personam, for the recovery of money or for an injunction compelling or restraining action by the defendant, both a state court and a federal court having concurrent jurisdiction may proceed with the litigation, at least until judgment is obtained in one court which may be set up as res adjudicata in the other. See Buck v. Colbath, supra, 342; Kline v. Burke Construction Co., 260 U. S. 226, and cases cited at pages 230-231. But if the two suits are in rem or quasi in rem, requiring that the court or its officer have possession or control of the property which is the subject of the suit in order to proceed with the cause and to grant the relief sought, the jurisdiction of one court must of necessity yield to that of the other. To avoid unseemly and disastrous conflicts in the admin istration of our dual judicial system, see Peck v. Jenness, 7 How. 612, 625; Taylor v. Carryl, 20 How. 583, 595; Freeman v. Howe, 24 How. 450, 459; Buck v. Colbath, supra, 341; Farmers' Loan & Trust Co. v. Lake Street Elevated R. Co., supra, 61, and to protect the judicial processes of the court first assuming jurisdiction, Wabash R. Co. v. Adelbert College, supra, 54; Palmer v. Texas, 212 U. S. 118, 129, 130, the principle, applicable to both federal and state courts, is established that the court first assuming jurisdiction over the property may maintain and exercise that jurisdiction to the exclusion of the other. This is the settled rule with respect to suits in equity for the control by receivership of the assets of an insolvent corporation. Leadville Coal Co. v. McCreery, 141 U. S. 475, 477; Porter v. Sabin, 149 U. S. 473, 480; Farmers' Loan & Trust Co. v. Lake Street Elevated R. Co., supra; Wabash R. Co. v. Adelbert College, supra; Palmer v. Texas, supra; Lion Bonding & Surety Co. v. Karatz, 262 U. S. 77, 88, 89; Harkin v. Brundage, 276 U. S. 36."

See also Markham v. Allen, 326 U. S. 490, 494.

[Priority of Claims May Be Litigated in Federal Court]

The language heretofore quoted from Pufahl v. Estate of Parks that--"The marshalling of that claim with others, its priority, if any, in distribution * * * are for the probate court upon presentation to it of the judgment or decree of the federal court", was used in the sense that the state court having prior custody of the res would distribute it and could not be divested of its custody and right to do so, and does not mean that the state court, having prior possession of the res, has sole jurisdiction to determine rights in personam to the res. That the court in the Pufahl case did not hold that a litigant could not litigate in a federal court the priority of his claim or lien to property in the custody of the state court with another person claiming a prior lien to the property is clear from Commonwealth Trust Co. of Pittsburgh v. Bradford, 297 U. S. 613. In the latter case one of the objects of the action in the federal court was to establish a claim and its priority of payment out of funds in the hands of a receiver of a state court. Likening the control of the fund in the custody of the state court to that which a probate court exercises over such fiduciaries as guardians, admin istrators, executors, etc., the court said:

"The jurisdiction of federal courts to entertain suits against the latter [fiduciaries] is clear, when instituted in order to determine the validity of claims against the estate or claimants' interests therein. Such proceedings are not in rem; they seek only to establish rights; judgments therein do not deal with the property and order distribution; they adjudicate questions which precede distribution. Byers v. McAuley, 149 U. S. 608, 620; Security Trust Co. v. Black River National Bank, 187 U. S. 211, 227; Waterman v. Canal-Louisiana Bank & Trust Co., 215 U. S. 33, 43; Riehle v. Margolies, 279 U. S. 218, 223; Harrison v. Moncravie, 264 Fed. 776, 779. Property in its (the trustee's) possession is not in custodia legis as in case of receivers. Hinkley v. Art Students' League, 37 Fed. (2d) 225, 226; Appeal of Hall, 112 Pa. 42, 54; 3 Atl. 783; Strouse v. Lawrence, 160 Pa. 421, 425; 28 Atl. 930; Goodwin v. Colwell, 213 Pa. 614, 616; 63 Atl. 363; Nevitt v. Woodburn, 190 Ill. 283, 289; 60 N. E. 500."

[Injunction by District Court Improper]

Insofar as the action in the federal court sought, and the judgment of that court established, only rights in personam between the United States and Mrs. Hart, there was no prohibited interference with the jurisdiction of the Chancery Court. Nor was there an abuse of discretion in not deferring the exercise of the federal court's jurisdiction on principles of comity. Commonwealth Co. v. Bradford, 297 U. S. 613. But that part of the relief sought and granted which involved an injunction against the Chancery Court's sale of the property in its hands and the removal of that property from the possession and control of the Chancery Court to the federal court is an entirely different matter. The issuance of the injunction was improper. Kline v. Burke Construction Co., 260 U. S. 226. The United States seeks to justify the injunction on the ground that the parties were different in the Chancery Court and because there was no substantial identity in the interests represented, in the rights asserted, and in the purposes sought in the two proceedings. None of those reasons avoid the fact that by ordering a sale of the property in the federal court that court was drawing to it the possession, control, and admin istration of the property which was theretofore rightfully in the possession and control of the Chancery Court. That it could not do. Pufahl v. Estate of Parks, 299 U. S. 217, 226; Princess Lida v. Thompson, 305 U. S. 456, 465; Penn General Casualty Co. v. Pennsylvania, 294 U. S. 189, 195; United States v. Bank of New York & Trust Co., 296 U. S. 463.

[Mortgage Invalid As Against U. S.]

The contention that the findings of fact on the question of whether the notes and chattel mortgages were without consideration and made for the purpose of defrauding creditors were clearly erroneous is without merit. It will serve no good purpose to review the evidence. An examination of the record discloses adequate evidentiary support for the court's findings.

The point that the court did not take into consideration certain undisputed facts which fixed the rights of the parties is based upon the premise that since Mrs. Hart's mortgage was filed prior to the date when the tax assessments became liens, that fact in itself establishes the priority of the mortgage under the statute creating the tax lien. ¹ That argument ignores the fact that if the mortgage was made under such circumstances that, although it might be good between the parties as the Chancery Court held, it still was ineffectual to constitute a senior lien against other creditors, it was not such a mortgage as the statute gives priority to. The mortgage having been found to be invalid for the purpose of creating a lien prior to that of the United States , the statute does not apply to it.

For the reasons stated, the judgment must be modified to eliminate therefrom interference witht he custody, control and admin istration of the property in the Chancery Court. As so modified, it is affirmed.

¹ "(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--"

26 U. S. C. A. Sec. 3672(a).

 

 

[94-2 USTC ¶50,496] In re Bernice Elizabeth Haas, Thomas Milton Haas, Debtors. Thomas Milton Haas, Bernice Elizabeth Haas, Plaintiffs-Appellees v. Internal Revenue Service, Defendant-Appellant

(CA-11), U.S. Court of Appeals, 11th Circuit, 93-6381, 9/13/94, 31 F3d 1081, Reversing an unreported District Court decision

[Code Sec. 6323 ]

Validity of lien: Priority of lien: Notice.--An IRS lien had priority over a reinstated mortgage lien where the federal tax lien was filed prior to the reinstatement of the mistakenly released mortgage lien. Under state ( Alabama ) law, equitable reinstatement of the lien could not reinstate the lien's priority over subsequent judgment creditors without notice. While the IRS had actual notice of the erroneously released mortgage lien before portions of its lien were perfected, the court found that this knowledge was irrelevant. The IRS lien had priority because, under the hypothetical judgment lien creditor test articulated in Dragstem, some hypothetical judgment lien creditor would have been protected against the reinstated mortgage lien under state law. The IRS lien thus gained priority despite the fact that, as a creditor with notice, the IRS itself would not fall within the category of hypothetical prevailing lien creditors. In so ruling, the court declined to follow a line of cases using the alternative subjective lien creditor test, in which the IRS's actual or constructive knowledge of a prior interest would be relevant. Regardless of the application of the hypothetical judgment lien creditor test, however, the IRS also prevailed on the basis that Treasury Regulations forbid the application of a relation back principle to award an unperfected lien priority over the tax lien. Dragstem v. Obermeyer, [77-1 USTC ¶9301 ] 549 F.2d 20 (7th Cir. 1977) followed.

Carol Koehler Ide, Gary R. Allen, Linda E. Mosakowski, Michael L. Paup, Edward T. Perelmuter, David English Carmack, Department of Justice, Washington , D.C. 20530 , for appellants. Lawrence B. Voit, Silver & Voit, 4317-A Midmost Dr., Mobile , Ala. 36609-5589 , for B.E. & T.M. Haas. Thomas P. Ollinger, Jr., Fernandez, Ollinger & Combs, P.O. Box 162, Mobile, Ala. 36601, for Secor Bank.

Before ANDERSON and BIRCH, Circuit Judges, and ATKINS, ^* Senior District Judge.

I. INTRODUCTION

ANDERSON, Circuit Judge:

At issue in this case are the relative priorities to be accorded a reinstated mortgage lien and a competing federal tax lien where the federal tax lien arose prior to the reinstatement of the mortgage lien. The bankruptcy court, applying Alabama law, held that the reinstated mortgage lien had priority over the federal tax lien. The district court, following the reasoning of the bankruptcy court, affirmed. For the reasons set forth below, we reverse.

II. FACTS

On January 4, 1979 , Thomas M. Haas and Bernice E. Haas ("Debtors") executed a mortgage on their homestead in favor of Home Savings & Loan Association (a predecessor in interest to Secor Bank ("Secor")) as security for a loan of $140,994.57. The homestead was valued at $225,000. On March 31, 1986 , Alabama Federal Savings & Loan Association recorded a release of the mortgage, stating that the bank was discharging its lien on the homestead because the underlying indebtedness had been satisfied in full. The parties agree that the mortgage lien was released in error. Debtors had not in fact satisfied the underlying indebtedness.

Subsequent to the recordation of the release, the Internal Revenue Service ("IRS") filed notices of federal tax liens on the homestead totalling $506,523.24. ¹ Debtors became aware of the erroneous release at least by April 1990. Debtors filed a petition for Chapter 11 on October 7, 1991 . In a later filed adversary proceeding, Debtors sought a ruling on the extent and validity of the liens on the homestead.

The bankruptcy court, exercising its equitable powers, reinstated the erroneously discharged mortgage on May 27, 1992 . Applying Alabama law, the court concluded that, absent reliance by a subsequent creditor, a mortgage that has been satisfied by mistake may be expunged from the record by a court of equity and reinstated where such relief will not prejudice the rights of third or innocent persons. The court determined that the IRS had not detrimentally relied upon the erroneous release. Thus, the court concluded that the reinstated lien of Secor had priority over the federal tax lien.

The district court affirmed the bankruptcy court with respect to this issue, following its analysis. The district court specifically relied upon the bankruptcy court's finding of fact that the IRS, Secor, and the Debtors had continued to behave as if the mortgage still existed even after the erroneous satisfaction was entered. For the reasons that follow, we reverse.

III. STANDARD OF REVIEW

Because the district court in reviewing the decision of a bankruptcy court functions as an appellate court, we are the second appellate court to consider this case. Capital Factors, Inc. v. Empire for Him, Inc., 1 F.3d 1156, 1159 (11th Cir.1993). Thus, this Court's review with regard to determinations of law, whether made by the bankruptcy court or by the district court, is de novo. Equitable Life Assurance Soc. v. Sublett, 895 F.2d 1381, 1383 (11th Cir.1990). The district court makes no independent factual findings; accordingly, we review solely the bankruptcy court's findings of fact under the "clearly erroneous" standard. Rush v. JLJ Inc., 988 F.2d 1112, 1116 (11th Cir.1993); Bankr.Rule 8013; Bankr.Rule 7052.

IV. DISCUSSION

The IRS mounts two attacks on the judgment below which represent independent and alternative bases for reversing the judgment of the district court. First, the IRS argues that 26 U.S.C. §6323 accords the government the status of a hypothetical lien creditor, thus making actual notice of the erroneously released mortgage irrelevant. Second, the IRS asserts that the regulations accompanying section 6323 forbid application of Alabama 's relation back principle to award a mortgage lien priority over the federal tax lien. For the reasons that follow, we conclude that each of these theories is sufficient to cause us to remand this case to the district court with instructions to enter judgment for the IRS.

A. Hypothetical judgment lien creditor

Section 6321 directs that a tax lien shall arise upon "all property and rights to property" of a taxpayer neglecting to pay taxes owed. ² Moreover, the tax lien attaches to property acquired after the tax lien arises. Pursuant to section 6322 , this lien arises "at the time the assessment is made." "The overriding purpose of the tax lien statute obviously is to ensure prompt revenue collection." United States v. Kimbell Foods, Inc., 440 U.S. 715, 734-35, 99 S.Ct. 1448, 1462, 59 L.Ed.2d 711 (1979). Thus, "[i]t has long been recognized that liens to guarantee payment of taxes are an important element of the sovereign's taxing power." United States v. Second National Bank of North Miami [74-2 USTC ¶9739 ], 502 F.2d 535, 545 (5th Cir.1974), cert. denied, 421 U.S. 912, 95 S.Ct. 1567, 43 L.Ed.2d 777 (1975). ³ Despite this overriding objective, section 6323 nevertheless operates to protect holders of perfected security interests from unfiled tax liens or so-called "secret liens." See Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 568 (5th Cir.1980). ⁴ Thus, section 6323 mandates that notice of the taxing authority's lien "shall be filed" in the public records before it operates as notice effective against any holder of a security interest as that term is defined by section 6323 . 26 U.S.C. §6323(f) . The filing requirement is critical: even a holder of a security interest who has actual knowledge of an unfiled tax lien will prevail over the government. 26 U.S.C. 6323(a). See United States v. McDermott [93-1 USTC ¶50,164 ], -- U.S. --, --, --, 113 S.Ct. 1526, 1528, 1530, 123 L.Ed.2d 128 (1993) ("under the language of §6323(a) ("shall not be valid as against any . . . judgment lien creditor until notice . . . has been filed"), the filing of notice renders the federal tax lien extant for "first in time" priority purposes. . . .").

As a starting point, state law governs the inquiry of Haas' interest in "property or rights to property." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960); United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958). "This follows from the fact that the federal statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law. " United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985) (quoting United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958)). Alabama classifies itself as a "title" state with regard to mortgages. Thus, "[e]xecution of a mortgage passes legal title to the mortgagee. The mortgagor is left with an equity of redemption, but upon payment of the debt, legal title revests in the mortgagor." Trauner v. Lowrey, 369 So.2d 531, 534 (Ala.1979) (citations omitted). A mortgage, though not recorded, is valid and passes title as between the parties. See Murphree v. Smith, 291 Ala. 20, 277 So.2d 327, 329 (1973); Alexander v. Fountain, 195 Ala. 3, 70 So. 669 (1916); Simon v. Sewell, 64 Ala. 241 (1879). Thus, under Alabama law, the property interest held by Haas is an equitable right of redemption. This is a valuable property interest for it may be conveyed by the mortgagor, and it allows a mortgagor, who has retained possession of the subject property, to be possessed of legal title against all of the world except the mortgagee or its assignee. See Trauner v. Lowrey, 369 So.2d 531, 534 (Ala.1979); Jones v. Butler , 286 Ala. 69, 237 So.2d 460, 462 (1970). We therefore conclude that Haas had "property" and "rights to property" under 26 U.S.C. §6321 to which the tax lien could attach. See Southern Bank of Lauderdale County v. IRS [85-2 USTC ¶9670 ], 770 F.2d 1001, 1009-10 (11th Cir.1985), cert. denied, 476 U.S. 1169, 106 S.Ct. 2890, 90 L.Ed.2d 977 (1986).

Having ascertained that Haas had "property" and "rights to property" sufficient for attachment of the tax lien, federal law governs the priority to be accorded the competing liens. ⁵ Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-15, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960) (Attachment of federal lien depends on whether "property" or "rights to property" exist under state law; however, priority of the federal lien depends on federal law). Two basic principles govern the adjudication of priority of competing liens: (i) "the first in time is the first in right"; and (ii) a federal tax lien is superior to a nonfederal lien that is inchoate. ⁶ Atlantic States Construction, Inc. v. Hand, Arendall, Bedsole, Greaves and Johnston [90-1 USTC ¶50,065 ], 892 F.2d 1530, 1534 (11th Cir.1990). The Federal Tax Lien Act identifies several distinct situations in which a security interest may have priority over a federal tax lien, only one of which is relevant to this case: where the security interest exists prior to the IRS's filing of notice of the tax lien. 26 U.S.C. §6323(a) . We discuss below the process of perfection in the federal sense which is controlled by section 6323(h)(1) .

Secor argues that its security interest is a prior extant perfected security interest and thus should prevail. Under 26 U.S.C. §6323(a) , a federal tax lien "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 by the Secretary." To ascertain whether Secor is a "holder of a security interest," we turn to federal law for guidance. Unlike the term "property" which is left to state law for definition, the term "security interest" is defined by the Act and thus presents a question of federal interpretation. Section 6323(h)(1) provides as follows:

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

26 U.S.C. §6323(h)(1) .

To come within the protection of §6323(a) , a holder of a security interest must establish four conditions: (1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth. 26 U.S.C. §6323(h)(1) . See Atlantic States Construction, Inc. v. Hand, Arendall, Bedsole, Greaves and Johnston [90-1 USTC ¶50,065 ], 892 F.2d 1530, 1535 (11th Cir.1990). At issue in this appeal is whether the third condition was fulfilled, i.e., whether the security interest was protected under state law against a judgment lien arising out of an unsecured obligation at the time the tax lien was filed. Accordingly, we must first determine the protection that state law accords a judgment lienor against an erroneously released mortgage.

Pursuant to Ala.Code §35 -10-28, ⁷ a mortgagee's recordation of satisfaction of a mortgage suffices to extinguish the lien of that mortgage. Nevertheless, compliance with the statutory recording formalities is not conclusive evidence of actual payment of the mortgage. Bay Minette Production Credit Ass'n v. Citizens' Bank, 551 So.2d 1046, 1048 (Ala.1989). Rather, mistaken satisfaction of a mortgage does not affect the validity of an unpaid secured note secured by a mortgage where no rights of innocent third parties have intervened. Lacey v. Pearce, 191 Ala. 258, 68 So. 46 (1915). Thus, where "a mortgage has been satisfied of record by mistake, a court of equity has jurisdiction to order the cancellation expunged from the record and to order the mortgage reinstated where such relief will not prejudice the rights of third or innocent persons." Taylor v. Jones, 280 Ala. 329, 194 So.2d 80, 84 (1967). Equitable reinstatement will not be undertaken where an innocent party has relied upon the erroneous release. Gordon v. Gorman, 436 So.2d 851, 855 (Ala.1983) ("A creditor cannot take advantage of a mortgage satisfied in error unless he relied on the satisfaction of the mortgage"). Reliance cannot be demonstrated where the party has notice of the mortgage. Bay Minette, supra, at 1048 ("There is no evidence that PCA relied on the cancellation, for it was entered on the record subsequent to PCA's recording its judgment lien"). This follows from Ala.Code §35 -4-90 which provides in pertinent part:

(a) All conveyances of real property, deeds, mortgages, deeds of trust or instruments in the nature of mortgages to secure any debts are inoperative and void as to purchasers for a valuable consideration, mortgagees and judgment creditors without notice, unless the same have been recorded before the accrual of the right of such purchasers, mortgagees or judgment creditors.

Ala.Code §35 -4-90 (emphasis supplied). Thus, a judgment creditor without notice who perfects a lien is protected against subsequently recorded instruments, regardless of the date of execution or delivery of those other instruments. ⁸ Smith v. Arrow Transportation Co., Inc., 571 So.2d 1003, 1006 (Ala.1990).

Having concluded that Alabama law would protect a judgment creditor without notice from an erroneously released lien, we must now determine whether the IRS may prevail in this case. With respect to those tax liens at issue in this case, ⁹ it is clear that any tax liens filed by the IRS before the time the IRS had actual knowledge that Secor's lien had been released by mistake would prevail over Secor's unperfected lien; with respect to these tax liens, the IRS would prevail under controlling federal law as discussed below and would also prevail even under Alabama law. However, in this case, some of the federal tax liens at issue were filed after the IRS had actual knowledge, and thus we must address the question whether the IRS or Secor should prevail with respect to these tax liens.

As noted above, see n. 5 supra, it is well-established that federal law, not Alabama law, governs the priority of competing liens. This determination is governed by sections 6323(a) and (h)(1) , quoted above. A properly filed federal tax lien will prevail over a prior lien which is unperfected in the federal sense, i.e., as the perfection process is defined in §6323(h)(1) ("has become protected under local law against a subsequent judgment lien creditor").

In interpreting the phrase "protected under local law against a subsequent judgment lien," courts and commentators have determined the phrase is equivalent to being protected against a "lien creditor" as defined in U.C.C. §9-301(3). Jacob Mertens, Jr., Mertens Law of Federal Income Taxation §54A.23 at n. 4 (1993). From this generally accepted interpretation of section 6323(h)(1) , it has often been said that courts have diverged in employing the lien creditor test, some applying a "subjective knowledge lien creditor" test and some applying a "hypothetical judgment lien creditor" test. As discussed more fully below, we conclude that the "hypothetical judgment lien creditor" test is the appropriate test, and furthermore we doubt that the cases often cited as applications of the other test actually so hold. The "hypothetical judgment lien creditor test" focuses on the protection state law gives to the security interest against other hypothetical lien creditors. The pertinent inquiry is whether the security interest is protected under local law against any hypothetical judgment lien creditor that might arise, regardless of whether the Government has knowledge of the competing nonfederal interest. Dragstem v. Obermeyer [77-1 USTC ¶9301 ], 549 F.2d 20 (7th Cir.1977). By contrast, under the "subjective knowledge lien creditor test," the Government's knowledge becomes relevant. Thus, if the IRS obtains actual or constructive knowledge of the competing nonfederal interest prior to filing its federal tax liens, and if, under local law, a judgment lien creditor is protected only if he is without actual or constructive knowledge of a prior interest, the tax lien is denied priority over the nonfederal interest. See Mertens, supra, at id.

We conclude that the "hypothetical judgment lien creditor test" articulated by the Seventh Circuit in Dragstrem represents the better rule, and we embrace Dragstrem's reasoning. Conferring upon the IRS the status of a hypothetical judgment creditor accords with the language of Section 6323(h)(1) and the purposes of the Federal Tax Lien Act. Section 6323(h)(1) by its terms provides that a "security interest exists if the interest has become protected under local law against a subsequent judgment lien." 26 U.S.C. §6323(h)(1) (emphasis supplied). This language is echoed in the Treasury Regulations which define a security interest. Treas.Reg. §301.6323(h)-1 (1976). As a matter of statutory construction, the article "a" is often used in the sense of "any." Black's Law Dictionary 1 (6th ed. 1991). As explained by the Seventh Circuit in Dragstrem, the Federal Tax Lien Act

does not put the government in the position of a competing holder of a security interest or judgment lien, but rather describes the legal status which security interests must obtain under state law in order to have priority over later filed or unfiled federal tax liens.

[77-1 USTC ¶9301 ], 549 F.2d at 26 (emphasis in original) (internal quotation and citation omitted).

This interpretation accords with the central purposes underlying the Act: promoting certainty and stability in business affairs for secured creditors. See Dragstrem, supra, at 26. The certainty afforded results from the structure of the Act; where the security interest as defined under the Act qualifies for priority, this ends the inquiry. S.Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U.S.Code Cong. & Admin.News 3722, 3723. In enacting the priority scheme of the Federal Tax Lien Act, Congress intended to select a fair and appropriate position in the spectrum of priorities for the IRS. Congress selected the time the IRS filed its federal tax lien. Significantly, Congress imposed no further conditions upon the IRS; the IRS need not have this kind of knowledge or that kind of notice or be innocent of anything.

The definitional scheme articulated by Congress obviates the need for a case-by-case inquiry into whether the IRS had "notice." Such an inquiry would undermine the certainty and stability afforded by the definitional framework, effectively denigrating a central policy under the Act without providing any countervailing benefit:

This legislative policy would in no way be enhanced by a holding that a properly filed federal tax lien does not have priority over an unperfected security interest simply because the government has knowledge of the security interest before the tax lien is filed. Conversely, whatever the policy of the Uniform Commercial Code in making an exception as to priority when a lien creditor has knowledge of an unperfected security interest, this cannot apply to the tax lien situation as the government does not rely on any notice, actual or record, in making a determination to become a creditor, or to create and file a tax lien. . . . Indeed, one of the effects of the 1966 Act was to finally rebut the frequent secured party argument . . . that a failure to file and hence perfect a security interest under the Uniform Commercial Code ought not to subordinate the security interest to the federal lien since the government does not in any event rely on the records in becoming a creditor.

Dragstrem [77-1 USTC ¶9301 ], 549 F.2d at 26 (citation and internal quotation omitted).

This absence of reliance by the IRS illustrates the futility of subjecting the IRS to the application of such an equitable concept. Even were the IRS to have notice or knowledge of a prior lien, the IRS could never "rely" upon such notice or knowledge. The IRS is an involuntary creditor; it does not make a decision to extend credit. This inheres in the nature of taxation. The IRS files because that is what the statute directs it to do. This filing fixes a clear and definite place for the IRS in the priority scheme. Nothing in the statute or the legislative history suggests that Congress contemplated that the IRS either should or would check the records prior to its filings.

As a practical matter, concepts such as "notice," "knowledge," and "reliance" are meaningless when applied to the IRS. Actual knowledge by a secured creditor of the IRS's lien prior to filing does not enhance the IRS's position vis-a-vis that creditor; neither should the IRS's notice of a lien prior to filing operate to diminish its position. ¹⁰ Thus, we decline to adopt an equitable overlay to the statutory framework which would disadvantage the IRS as compared with every other creditor. See Southern Bank of Lauderdale County v. IRS [85-2 USTC ¶9670 ], 770 F.2d 1001, 1009 (11th Cir.1985), cert. denied, 476 U.S. 1169, 106 S.Ct. 2890, 90 L.Ed.2d 977 (1986). Accord First American Title Insurance Co. v. United States [88-2 USTC ¶9408 ], 848 F.2d 969, 972 (9th Cir.1988). Rather, we adopt the hypothetical judgment lien creditor test as consonant with the purposes of the Act of promoting certainty and stability, thereby effectuating Congressional intent to designate the appropriate position for the IRS in the spectrum of priorities. Accordingly, we conclude that the hypothetical judgment lien creditor test operates to put the IRS in the shoes of any subsequent judgment creditor, ¹¹ including the most favorable shoes. Thus, if any subsequent judgment creditor could prevail over Secor, then the IRS prevails. Applying the hypothetical judgment lien creditor test in this case gives the IRS's claim priority over Secor's erroneously released mortgage because a class of judgment creditors without notice could prevail over Secor's interest.

Nor do we believe that the decisions in United States v. Trigg [72-2 USTC ¶9642 ], 465 F.2d 1264 (8th Cir.1972), cert. denied, 410 U.S. 909, 93 S.Ct. 963, 35 L.Ed.2d 270 (1973), United States v. Ed Lusk Const. Co. [74-2 USTC ¶9773 ], 504 F.2d 328 (10th Cir.1974), and United States v. Hunt [75-1 USTC ¶9327 ], 513 F.2d 129 (10th Cir.1975) which have been cited as an opposing line of cases actually hold to the contrary. Although these cases have been denominated as an alternative "line" of cases supporting application of the "subjective lien creditor test," as explained below, we doubt that this authority in fact constitutes a contrary "line" of authority. Even assuming the vitality of this competing "line," we would nevertheless conclude that Dragstrem represents the better reasoned approach.

In Trigg, the Eighth Circuit held that the federal tax lien at issue prevailed over a prior security interest in accounts receivable assigned to a bank. Id. at 1270. Because the bank failed to record the security agreement which created its security interest, the court concluded that the bank's interest never became perfected in the federal sense because filing was required to protect the security interest against third party creditors. Id. at 1269. Apart from the absence of filing, the court conducted no inquiry into whether the IRS had notice or knowledge of the bank's prior lien. Because there was no suggestion in Trigg that the IRS in fact had knowledge of the bank's lien prior to its filing, the court did not have to address the issue of the effect of such knowledge. ¹² Consistent with our approach, the Eighth Circuit recognized that perfection is an inquiry to be governed by federal law. Id. at 1270.

In declining to subordinate a federal tax lien to a prior security interest in a contractor's right of payment held by a bank, the Tenth Circuit in Lusk refused to impute constructive notice to the government of the bank's lien. Id. at 330-31. The court held that there was no evidence tending to show that the IRS had knowledge of the prior lien, despite the fact that the IRS filed notice of its lien at one of the locations where the bank's lien had been filed. ¹³ Id. at 331. Outlining the federal statutory scheme which makes the tax lien superior to claims under unprotected security interests, the court concluded that the bank's interest was unprotected because the bank filed locally but failed to file a financing statement in the office of the Secretary of State. Id. at 331. Although the opinion suggests that the bank's interest would have prevailed had the IRS had actual knowledge of the improperly filed lien, that statement is dicta because of the court's conclusion that the IRS in fact had no such knowledge.

The Tenth Circuit's decision in Hunt is similarly inapposite. Although the court suggested that the IRS's knowledge of a prior unrecorded judgment lien was significant in denying the IRS priority, that decision turned on an analysis of the "rights to property" acquired by the respective lienholders. [75-1 USTC ¶9327 ], 513 F.2d at 133. The court concluded that the IRS had not acquired superior property rights vis-a-vis another creditor because of the following circumstances which the court through pointed to the IRS's bad faith. Id. at 138. The IRS intentionally by-passed a known state court proceeding following actual notice by initiating a unilateral action in federal district court when the funds in question were in the sole possession of the state district court. Id. Because the garnished funds were not attachable by the IRS when they were already in the custody of the state court, and the IRS had not been denied its right to intervene in the state court proceedings pursuant to 26 U.S.C. §7609 the federal court concluded that the IRS was estopped from asserting sufficient "rights to property" to maintain its action in federal court to foreclose its tax lien. Id. at 138-39. To read the court's reasoning to suggest anything contrary to our decision here would effectively render the court's rationale unclear. Significantly, the opinion does not undertake an analysis of or even cite to §6323(h) ; thus, we conclude that it is not persuasive authority.

We also believe that the Ninth Circuit's decision in Manalis Finance Co. v. United States [80-1 USTC ¶9158 ], 611 F.2d 1270 (9th Cir.1980) is distinguishable. Manalis did not involve the issue before us in the instant case--i.e. whether or not the competing prior private lien was perfected in the federal sense, i.e. pursuant to §6323(h)(1) . Rather, Manalis involved an issue raised by an IRS argument that its federal tax lien should supplant a concededly perfected prior private lien. It was not disputed that the prior private lien in Manalis was perfected; the IRS argument was that the federal tax lien could benefit from a state health care statute which rendered unenforceable as against a state tax lien any assignment of state health care reimbursements. A health care provider had assigned its accounts receivable to a lending institution, Manalis, which perfected its security interest. The state statute, however, provided that any assignment of state health care payments was unenforceable as against a state tax lien, thus in effect granting state tax liens a "superpriority" with respect to state health care payments. The Ninth Circuit held that the state statute did not purport to benefit a federal tax lien; the benefit was extended solely to state tax liens. The court rejected the IRS argument that, because the state tax lien could prevail, a hypothetical judgment lien creditor could prevail, and thus the IRS should prevail. In rejecting this argument, however, the court did not reject the hypothetical judgment lien creditor rule; rather, it distinguished Dragstrem, emphasizing that §6323(h)(1) "describes the process of perfection," and that the prior security interest of Manalis was fully perfected in the federal sense, i.e. pursuant to §6323(h)(1) . Thus, the state tax lien prevailed over Manalis' prior perfected security interest, not because of any deficiency in the perfection of Manalis' lien, but because of an unique state statute embodying the exercise of state sovereignty over the disposition of the state's own health care payments. In contrast, the instant case does involve the process of perfection, and Secor's lien loses because it was not fully perfected in the federal sense, i.e. pursuant to §6323(h)(1) . ¹⁴

The Sixth Circuit in Citizens State Bank v. United States [91-1 USTC ¶50,228 ], 932 F.2d 490 (6th Cir.1991) faced facts similar to those in this case. There, as here, a perfected security interest was mistakenly released. Id. at 491. The state law there, as here, provided an equitable right of reinstatement except as against parties without notice or knowledge. Id. at 493-94. Because the IRS lacked notice or knowledge, the federal tax lien prevailed. Id. at 494-95. The Sixth Circuit thus had no occasion to address the issue before us, the effect of the IRS's knowledge.

In Metropolitan National Bank v. United States [90-1 USTC ¶50,331 ], 901 F.2d 1297 (5th Cir.1990), the court expressly noted that it need not address the issue of the relevance of knowledge because the IRS had no actual knowledge of the improperly recorded deed of trust. Id. at 1301 n. 1. Like Dragstrem, it placed Trigg and Lusk in the "line of cases" employing a subjective knowledge lien creditor test. As explained above, this characterization is problematical. Although several cases have assumed the existence of this separate "line," the cases to which this is attributed do not explicitly state that they are employing such a test, and analysis of the holdings of these cases demonstrates that they do not in fact so hold.

The fact that there are no cases holding contrary to the holding in Dragstrem, i.e. the fact that there is no clear support for an opposing line of authority, weakens the attractiveness of adopting such an alternative position. Furthermore, we believe the approach set forth in Dragstrem better accords with the language and purposes underlying the Federal Tax Lien Act. Thus, we decline to recognize this alternative "line of cases" and embrace the reasoning of the Seventh Circuit in Dragstrem. Accordingly, we conclude that the IRS in its position as a hypothetical judgment lien creditor prevails over the erroneously released mortgage of Secor.

B. Relation back principle

Even if we were not persuaded that the IRS would prevail due to its status as a hypothetical judgment lien creditor, we would nevertheless conclude that the IRS prevails on the basis of its argument that the Treasury Regulations forbid application of a relation back principle to award an unperfected lien priority over the tax lien. Section 301.6323(h)-1(a)(2) of the Treasury Regulations provides in pertinent part:

(i) For purposes of this paragraph, a security interest is deemed to be protected against a subsequent judgment lien on--

(A) The date on which all actions required under local law to establish the priority of a security interest against a judgment lien have been taken, or

(B) If later, the date on which all required actions are deemed effective under local law, to establish the priority of the security interest against a judgment lien.

For purposes of this subdivision, the dates described in (A) and (B) of this subdivision (i) shall be determined without regard to any rule or principle of local law which permits the relation back of any requisite action to a date earlier than the date on which the action is performed. . . .

Treas.Reg. §301.6323(h)-1(a)(2) (1976). Under Alabama law, after the mistaken satisfaction, the mortgagee retained an equitable right to have its mortgage reinstated, as opposed to a security interest which was valid against all judgment creditors. The final action required under local law would be the reinstatement of the mortgage. Applying equitable principles, a court reinstating the mortgage would permit the perfection of the mortgage to relate back to the original date of recording, but only in the absence of the intervention of rights of innocent third parties. It is precisely the application of this type of relation back principle which the Regulations forbid. The date of perfection for a security interest under federal law is to be determined without reference to "any rule or principle of local law which permits the relation back of any requisite action." Because application of equitable reinstatement would permit the mortgagee's perfected interest to relate back to the earlier recordation, we conclude that the IRS prevails in priority over Secor's erroneously released mortgage.

V. CONCLUSION

Based on the foregoing, we reverse the district court's subordination of the IRS's lien to that of Secor's. The judgment of the district court is

REVERSED.

^* Honorable C. Clyde Atkins, Senior U.S. District Judge for the Southern District of Florida, sitting by designation.

¹ On October 13, 1987 , Thomas Haas pled guilty to 26 U.S.C. §7203 for willful failure to pay income and employment taxes for certain periods in the years 1977 through 1985. As a condition of probation, Haas was required to make monthly payments to the IRS to be applied to his income and employment tax liability. The liens at issue encompass Debtor's income tax liabilities for certain quarters of 1980 through 1986.

² The statute provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. 26 U.S.C. §6321 .

³ In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this Court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to October 1, 1981.

⁴ As articulated by the Court in Fore:

The predecessor to 6323 was first enacted by Congress in 1912 in order to protect mortgagees, purchasers and judgment creditors against a secret lien for assessed taxes and to postpone the effectiveness of the tax lien as against these interests until the tax lien was filed.

Fore v. United States [65-1 USTC ¶9101 ], 339 F.2d 70, 72 (5th Cir.1964), cert. denied 381 U.S. 912, 85 S.Ct. 1532, 14 L.Ed.2d 433 (1965) (citing H.R.Rep. No. 1018, 62d Cong., 2d Sess.). With respect to persons covered by the notice-filing provisions, prior law deemed irrelevant for priority purposes actual notice or knowledge of the federal tax lien. See Frank R. Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L.J. 905, 921 n. 99 (1954). See, e.g., F.P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726 ], 297 F.2d 692, 694 (9th Cir.1961), cert. denied, 370 U.S. 909, 82 S.Ct. 1256, 8 L.Ed.2d 404 (1962); United States v. Beaver Run Coal Co. [38-2 USTC ¶9540 ], 99 F.2d 610, 612-13 (3d Cir.1938).

⁵ Sections 6323(a) and (h)(1) govern priority in the instant case. That federal law controls priority has been established by Supreme Court cases, United States v. Rodgers [83-2 USTC ¶9572 ], 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-15, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960), and followed uniformly in the lower courts. See Citizens State Bank v. United States [91-1 USTC ¶50,228 ], 932 F.2d 490, 492 (6th Cir.1991); Metropolitan National Bank v. United States [90-1 USTC ¶50,331 ], 901 F.2d 1297, 1300 (5th Cir.1990); Dragstrem v. Obermeyer [77-1 USTC ¶9301 ], 549 F.2d 20, 22 (7th Cir.1977).

⁶ For a nonfederal lien to be considered choate, "the identity of the lienor, the property subject to the lien and the amount of the lien must be established beyond any possibility of change or dispute." Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 568 (5th Cir.1980). See United States v. Equitable Life Assur. Soc. [66-1 USTC ¶9444 ], 384 U.S. 323, 327, 86 S.Ct. 1561, 1564, 16 L.Ed.2d 593 (1966); United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 89, 83 S.Ct. 1651, 1655, 10 L.Ed.2d 770 (1963); United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). The choateness doctrine has continuing vitality except to the extent that it is supplanted by express provisions of the Federal Tax Lien Act. Aetna Ins. Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir.1979).

⁷ Section 35-10-28 provides in pertinent part:

The satisfaction in full by any one of several joint mortgagees, or his successors or assigns, on the margin of the record, and properly attested by the probate judge, or his chief clerk, or the filing of a release by such party, properly notarized, acknowledging full satisfaction of any mortgage in the names of two or more persons jointly as mortgagees standing on the probate records of any county in this state, shall be sufficient to extinguish the lien of such mortgage.

Ala.Code §35 -10-28.

⁸ Secor argues that a judgment lienor is not protected under Alabama law because such a lienor does not rely upon the nonexistence of a mortgage. We reject this argument as contrary to Alabama law. The operative inquiry under Alabama law is notice: a judgment creditor without notice is protected against an unrecorded instrument. Department of Revenue v. Price-Williams, 545 So.2d 7, 9 (Ala.1989) (holding that Alabama 's Department of Revenue is a judgment creditor for purposes of §35 -4-90). Even were Secor correct in its assertion that Alabama disallows equitable reinstatement absent "reliance", we would be forced to reject such a purely equitable inquiry as contrary to the overriding federal scheme of priorities we discuss infra. See Southern Bank of Lauderdale County v. IRS [85-2 USTC ¶9670 ], 770 F.2d 1001, 1009 (11th Cir.1985), cert. denied, 476 U.S. 1169, 106 S.Ct. 2890, 90 L.Ed.2d 977.

⁹ At issue in this case are tax liens filed from and after the time Secor's lien was released on the records. This includes liens filed both before and after the IRS had actual knowledge that the release of Secor's lien was mistaken.

¹⁰ Thus, in addition to the purposes of promoting certainty and stability, the definition of judgment lien creditor implicates another long-standing goal: uniformity. Our decision recognizes that the term "judgment lien creditor" must be interpreted in light of the overriding and long-established principle that federal law governs tax policy. In a decision prior to the enactment of the Federal Tax Lien Act, the Supreme Court explained the need for uniformity in defining "judgment creditor" required that the effect of the state's tax assessment on the federal priority question be determined according to federal law:

A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a "judgment creditor" should have the same application in all the states.

United States v. Gilbert Associates [53-1 USTC ¶9291 ], 345 U.S. 361, 364, 73 S.Ct. 701, 703, 97 L.Ed. 1071 (1953). Thus, the Court concluded that the local taxing authority was not a "judgment creditor" in the federal sense and thus was not protected by the statute. Early legislative history supports this interpretation. The senate committee report discussing this aspect of federal tax law makes it plain that a person qualifying for judgment creditor status "will be entitled as such to the protection of this section irrespective of the designation [state law gives to that person]" S.Rep. No. 1622, 83d Cong., 2d Sess., reprinted in 1954 U.S.Code Cong. & Admin.News 4621, 5224. We see no reason why if federal law should govern the definition of "judgment lien creditor" as that term is applied to creditors other than the IRS, a different result should obtain here.

There are several references in the provisions of subsection 6323(b), (c), and (d) allowing lien priority to be determined in accordance with state law for certain claimants, but no similar expressions for a section 6323(a) judgment lien creditor. The legislative history indicates that Congress was satisfied with the interpretations courts had historically given to the notice provisions of 6323(a) and chose not to disturb them. Its clear purpose in tying section 6323(b) and (c) protection to state law, however, was to override federal court decisions that had made these identified state property interests subordinate to federal tax liens. United States v. Kimbell Foods, Inc., 440 U.S. 715, 720 n. 6, 99 S.Ct. 1448, 1454 n. 6, 59 L.Ed.2d 711 (1979). Uniformity was not an overriding concern when Congress allowed state law to control in these special cases because most states had moved in the direction of incorporating the provisions of the Uniform Commercial Code into their own laws. The rules controlling "judgment lien creditor" status were presumably left undisturbed because the Uniform Commercial Code does not treat this category of creditors. See U.C.C. §9-104(h).

¹¹ As explained infra, Manalis Finance Co. v. United States [80-1 USTC ¶9158 ], 611 F.2d 1270 (9th Cir.1980) is distinguishable.

¹² Although the Trigg court in its discussion of the existence of a property interest quoted a state statute which contained language to the effect that a subsequent lien creditor without knowledge could prime an unperfected prior security interest, the court says nothing with respect to whether, under the federal priority scheme it outlines, such knowledge on the part of the IRS is relevant.

¹³ The definition of notice relied upon in Lusk was narrow, encompassing only actual knowledge. By contrast, under Alabama law, the definition of notice is broader, including not only actual knowledge but also constructive notice and inquiry notice. See White v. Boggs, 455 So.2d 820, 821-22 (Ala.1984) ("Whatever is sufficient to excite attention and put the party on his guard and call for inquiry is notice of everything to which the inquiry would have led"); Alexander v. Fountain, 195 Ala. 3, 70 So. 669 (1916) (actual notice equivalent to constructive notice). We cannot determine whether the court in Lusk might have adopted more tailored reasoning had they been faced with as broad a definition of notice as that under Alabama law.

¹⁴ To the extent any language in Manalis is inconsistent with our holding, and that in Dragstrem, it is dicta, and is unpersuasive.

Concurring Opinion

ATKINS, Senior District Judge

I concur in the judgment. I believe that adopting the "hypothetical judgment lien creditor test," as pronounced by the Seventh Circuit in Dragstem v. Obermeyer [77-1 USTC ¶9301 ], 549 F.2d 20 (7th Cir.1977), is in keeping with both the purpose and the language of the Federal Tax Lien Act.

However, I feel compelled to comment that the facts of this case make it particularly difficult to apply that rule here. The Internal Revenue Service ("IRS") not only knew that the mortgage had been mistakenly recorded as satisfied, but it conducted itself as if the mortgage had not been satisfied. It was merely fortuitous that the IRS tax lien was routinely filed after the mortgage was erroneously recorded as satisfied, but before the mistake could be corrected.

Nevertheless, in the interest of articulating a clear rule in this circuit regarding the status of federal tax liens, I agree that the IRS tax lien here should take priority over Secor's mortgage. Therefore, I concur in the judgment reversing the district court.