Priority over Recorded
United States of America
, Plaintiff v. George C. Canellis, Georgia Canellis, and Chicago Federal
Savings and Loan Association, Defendants
S. District Court, No. Dist.
, East. Div., No. 76 C 4043,
[Code Sec. 6323]
Lien for taxes: Priority: Mortgage: Equitable mortgage.--A son's
indebtedness to his mother was secured by a trust that under
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
Memorandum and Order
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.
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
land trust. Jurisdiction is invoked pursuant to 28
C. §1340 and §1345 and is undisputed.
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.
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
's Fed. Prac. ¶56.11[1.-3] at 56-2002 (2d ed. 1979).
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
7424 Kolmar Ave.
, to his mother as trustee of an
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:
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.
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
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
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
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
July 7, 1971
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).
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.
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.
, 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.
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
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).
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.
App. 36, aff'd, 295
537, 129 N. E. 540 (1920). Contrary to the government's contention,
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
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.
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,
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
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.
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
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
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).
Conclusion For the reasons stated, it is therefore ordered that Georgia
Canellis' motion for summary judgment shall be, and the same is hereby,
United States of America
's motion for entry of judgment shall be, and the same is hereby,
United States of America
, Plaintiff v. Vaughn C. Payne, Edith Pruitt Payne, Marjorie Mitchell
Bell, J. F. Schrontz, and Samuel Z. Morganstern, Defendants
S. District Court, East.
, Civil No. 9366(1),
[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.
Melchior, Special Assistant to Attorney General, Washington, D. C., W.
Francis Murrell, Assistant United States Attorney, St. Louis, Mo., for
plaintiff. Ellis S. Outlaw,
, for defendants.
Findings of Fact and Conclusions of Law
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:
1. This action
was brought pursuant to the authorization of the Commissioner of
Internal Revenue and the direction of the Attorney General of 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.
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
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.
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:
Year Date Account No. Inc. Tax Penalties Interest
517758 $ 444.38 $ 222.19 $249.90
557900 47.79 -0- 19.29
517759 2,846.78 1,423.39 907.50
517760 3,552.63 1,906.74 919.35
517761 1,666.89 941.50 907.97
517762 796.25 459.08 196.08
517763 8,763.12 4,930.90 690.36
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.
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.
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.
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
536 North Taylor Avenue
. 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.
transfer of the
536 North Taylor Avenue
property to Edith Pruitt Payne was made with intent to defraud the
creditors of Vaughn C. Payne.
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
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.
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.
defendant Vaughn C. Payne is indebted to the
for income taxes, penalties and interest for the years 1944 and 1947 in
the amount of $19,799.21.
defendants Vaughn C. Payne and Edith Pruitt Payne are indebted to the
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.
defendant Vaughn C. Payne is indebted to the
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.
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.
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.
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
536 North Taylor Street
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.
defendant Vaughn C. Payne is indebted to the
for income taxes, penalties and interes for the years 1944 and 1947 in
the amount of $19,799.21.
defendants Vaughn C. Payne and Edith Pruitt Payne are indebted to the
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.
defendant Vaughn C. Payne is indebted to the
for interest accrued on the deficiency assessments made against him for
the years 1943 through 1947, inclusive, on the Commissioner of Internal
June 30, 1949
assessment list, from that date until paid, as provided by law.
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.
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.
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
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.
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,
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).
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.
¶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
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
John M. Coe,
for Runyan Machine. Fisher & Hepner, for Gulf Barging. Holsberry,
Holsberry & Emmanuel, for Standard Oil Co. Yonge, Beggs & Lane,
Casualty. Watson & Brown, for Hyer Towing
Geo. Roark, Jr., for Gulf Marine Supply. C. W. Eggart, Jr., for
. Jones & Harrell, for
. All counsel are of
for the Files
Claims to the
Proceeds from Hyer Towing Co., Inc. Vessels
The Bisso 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
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.
"Captain Pete" Case
"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
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.
asserts eleven different tax liens against Hyer Towing Co., Inc. The
first of these tax liens was received by the District Office of Internal
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.
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.
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.
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.
v. Peoples Bank (5th Cir.) 197 Fed. (2d) 898 [52-2 USTC ¶9407];
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].
maritime liens are discharged against the "KRISIDIA" the
question here is whether the government's tax lien or the Bisso mortgage
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.
* * * * *
¶9226] Sea Ventures Holdings AG, Plaintiff v. Wheeler's Bay, Inc., The
Harris Company, The
United States of America
and The State of
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
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
corporation. The notes were executed and delivered to the
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
corporation. The transfer was made without consideration. The notes were
recast as a note from the
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
counterclaim to quiet title, was fraudulently executed by the owner, in
his capacity as President of the
corporation, and given as security for its fraudulent debts to the
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.
GRANTING MOTION FOR SUMMARY JUDGMENT
July 26, 1986
, the court granted the motion of the plaintiff for voluntary dismissal
of the action. The court now considers the
' unopposed motion for summary judgment on its counterclaim to quiet
title to certain real estate.
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).
and the Daniel Brown declaration establish the following facts.
Ventures Holdings AG [Sea Ventures] is a corporation based in and
organized under the laws of
Ventures is directed by the corporation Kyberna Verwaltungs AG [Kyberna]
and both of these corporations have their principal place of business at
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,
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
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.
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.
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.
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
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.
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
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
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.
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
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.
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.
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.
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.
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
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
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.
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
. The deed was recorded with the Registry of Deeds,
June 25, 1985
, in Book 1027, at Page 98.
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
v. Government of
, 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.
facts establish that Frederic J. MacCaffray executed a valid quitclaim
deed, on behalf of Wheeler's Bay, to the
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
acknowledges that the title to the subject property remains encumbered
by a tax lien of $714.23 in favor of the State of
In light of
the foregoing, it is hereby ORDERED that the motion of the
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
to the real property covered by the mortgage.
¶9584]Harold Wing, Aaron Sugarman and Edgar S. Stanley v.
United States of America
S. District Court, Dist. Mass., Civil Action No. 58-1165-M-W, 208 FSupp
[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.
Calichman, Herbert Baer,
85 Devonshire St.
, for plaintiffs. W. Arthur Garrity, Jr., United States Attorney,
William Madden, Assistant United States Attorney, Thomas F. Field, Tax
Division, Department of Justice,
25, D. C., for defendant.
jurisdiction conferred by 28
C. §1346, plaintiffs bring this action against the
for internal-revenue taxes alleged to have been erroneously collected by
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
from assets in their hands federal income and federal unemployment
compensation taxes due from Allan's Restaurants, Inc., hereafter called
of Priority of Liens]
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
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
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.
evidence offered, this Court makes the following findings:
Restaurants, Inc. is a
corporation which began in February 1952 to operate a restaurant at
159 Tremont St.
. 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
October 1, 1955
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.
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
after the mortgage, the corporation retained a technical equity of
redemption, the equity of redemption was of no economic value.
corporation did continue to do business for just under a month, that is,
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 "
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
February 2, 1956
and selling all the mortgaged assets on that day to one Levenson for
$10,000. This sum, after the deduction of
istrative and like expenses, came into the hands of the trustees.
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
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
. Then the
demanded payment from the trustees. The trustees paid the taxes in full
and brought this suit for a refund.
First in Time--BUT]
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
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.
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  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 . . . or  in which an act of bankruptcy is
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],
492; U. S. v. Butterworth-Judson Corp. [1 USTC ¶159], 269
504. See U. S. v. Bruce Machine Co., D. Mass., [55-1 USTC ¶9383]
132 F. Supp. 525, 526.
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".
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.
Rul. 56-592, 1956-2 CB 945
SECTION 6323.--VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND
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.
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.
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
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.
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
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
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.
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.
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
The effect of
a lien in relation to a provision of Federal law for the collection of
taxes owing to the
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.
v. Security Trust and Savings Bank of
, Executor etc., et al., 340
47, Ct. D. 1736, C. B. 1950-2, 151.
was again emphasized by the Supreme Court of the
v. Gilbert Associates, Inc., 345
361, Ct. D. 1757, C. B. 1953-1, 474. The lien in the Gilbert case arose
from tax assessment of the town of
which was in the nature of a judgment under the law of the State of
. The Supreme Court of the
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."
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.
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.
United States of America
, Appellant v. Benjamin Gargill, Trustee, et al., Appellees
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
[1939 Code Secs. 3670 and 3672--similar to 1954 Code Secs. 6321 and
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.
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,
, for appellees.
MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.
of the Court
This is an
appeal by the United States Government from the order of the District
Court of the
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
in question was attempted to be established through a series of
instruments executed on
February 19, 1952
. The mortgagor was Philrich Enterprises, Inc., a
corporation engaged in the restaurant business in
. The mortgagees were three individuals who were designated
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. . . ."
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."
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:
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
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.
of Mortgage and Tax Lien]
was duly recorded in the City Clerk's Office in
February 21, 1952
, and the mortgagor continued the operation of the business until the
involuntary petition in bankruptcy was filed on
February 16, 1953
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
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
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-
, 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.
Government's main contention is that it is entitled to a tax lien under
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
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
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
, tax assessments have the nature of judgments, in other states where
taxing authorities act quasi-judicially and are considered
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.
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.
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
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
386, 176 N. E. 200 (1931); Banca Italiana Di Sconto v. Bailey,
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.
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
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
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.
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.
, 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
conclude that the trustees here are mortgagees within the meaning of §3672
and that the Government's tax lien is invalid as against them.
of the district court is affirmed.
31 U. S. C. §191, R. S. §3466.
any person indebted to the United States is insolvent, or whenever the
estate of any deceased debtor, in the hands of the executors or
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."
"§3670. Property subject to lien
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.
"§3672. Validity against mortgagees, pledgees, purchasers, and
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--
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
C. §3672, 53 Stat. 449 as amended.
¶9948]In the Matter of Walter Glenn Kobiela, Bankrupt
, 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.
ert H. Berkshire, Assistant United States Attorney, for petitioner. John
E. Sidner, for Department of Labor of the State of
. William E. McCormick, for Internal Revenue Service.
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.
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
upon all property and rights to property belonging to the bankrupt for
the unpaid federal taxes. 26
C. A. 6321 and 6322,
R. C. 1954. The District Director filed a notice of lien covering the
assessment on December 14, 1955, with the Register of Deeds for
. Stipulation of Facts, Paragraph 5. Until this is done, the statutory
lien would not be valid as against any mortgagee. 26
C. A. 6323(a)(1).
Commissioner of the Department of Labor for the State of
caused to be recorded in the chattel mortgage records and in the real
estate mortgage records of
, 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 (
). Prior to the filing of the notice of lien, however, the Commissioner
had no statutory lien.
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
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
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.
¶9319]Rex Finance Company v. Martha R. Cary and Walter B. Cary, et al.
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.
H. W. AYRES, JAMES R. DAWKINS and HARWELL L. ALLEN.
H. W. AYRES,
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
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
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.
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
, which comprises their home. The mortgage was accepted on behalf of all
future holders by one Donald L. Guedry, son-in-law of the
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,
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.
establishes, as the trial court found, that neithr of the
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.
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
for payment, to no avail, instituted an action by executory process
seeking the foreclosure of the property mortgaged.
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
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
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.
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.
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.,
App. Orleans, 1931, 132 So. 519, 521; Tyler v. Whitney-Central
Trust & Savings Bank, 157
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
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
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
242, 38 So. 979, 980-981, made these appropriate observations:
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.
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
330, 23 L. Ed. 556;
Civ. Code La.
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. . . ."
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.
920, 84 So. 205, 208:
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
v. Neal, 22 How. 96, 16 L. Ed. 323."
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;
erts v. Bauer, 35 La. Ann. 453; Morris v. Executors of Cain,
39 La. Ann. 712, 2 So. 418; Walmsley v. Resweber, 105
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 (
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. . . ."
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.
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
883, 38 So. 594, 598:
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
Ann. 873, 6 South. 671, and authorities cited at page 879 of 41
Ann., page 674 of 6 South.; Howell v. Crane, 12
Ann. 126, 68 Am. Dec. 765, and authorities cited. . . ."
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.
regard, it is contended that, by the execution of a new note for
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.
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.
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,
Am. St. Rep.
489; Reconstruction Finance Corporation v. Thomson 186
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
199, 179 So. 80. See, also: Davis v. Welch, 128
785, 55 So. 372; Varnado v. Thompson & Co., 129
15, 55 So. 693; Farmers' Nat. Bank v. Belle Alliance Co., 142
538, 77 So. 144; W. W. Carre Co. v. E. J. Stewart & Co., 166
317, 117 So. 238; Bank of Coushatta v. Coats, 170
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
366, 376, 172 So. 421, 424; Brock v. Citizens Bank & Trust Co.,
1078, 175 So. 673.
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.
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
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.
for the reasons herein assigned, the judgment appealed should be, and it
is hereby, affirmed at defendants-appellants' cost.
¶9612]Audria Hart, Appellant v.
United States of America
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
Lien for taxes: Validity against mortgagees: Injunction issued by
District Court against
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
for the foreclosure of the chattel mortgage and the pledge. A receiver
was appointed and the
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
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.
, Chief Judge, and WOODROUGH and COLLET, Circuit Judges.
This is an
action by the
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.
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.
November 4, 1949
, a petition was filed in the Tax Court of the
by the taxpayers, praying for redetermination of the assessed
June 4, 1951
, the Tax Court of the
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
, 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.
Brought Action in
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,
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.
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
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
." 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.
Withdrew Its Intervention]
1951, the Acting Collector of Internal Revenue filed a notice of claim
in the Chancery Court for taxes due the
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
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
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.
Filed Action in District Court]
On the same
April 25, 1952
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
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
"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
Pufahl Case Not in Point]
relies on Pufahl v. Estate of Parks, 299
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
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.
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
, absent necessary incidents of res judicata.
The right of
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
. 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
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
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
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."
also Markham v. Allen, 326
[Priority of Claims May Be Litigated in Federal Court]
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
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,
istrators, executors, etc., the court said:
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."
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
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
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
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
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.
Invalid As Against U. S.]
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
, the statute does not apply to it.
reasons stated, the judgment must be modified to eliminate therefrom
interference witht he custody, control and
istration of the property in the Chancery Court. As so modified, it is
"(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--"
C. A. Sec. 3672(a).
¶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
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 (
) 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.
USTC ¶9301 ] 549 F.2d 20 (7th Cir. 1977) followed.
Ide, Gary R. Allen, Linda E. Mosakowski, Michael L. Paup, Edward T.
Perelmuter, David English Carmack, Department of Justice,
, for appellants. Lawrence B. Voit, Silver & Voit, 4317-A Midmost
, for B.E. & T.M. Haas. Thomas P. Ollinger, Jr., Fernandez, Ollinger
& Combs, P.O. Box 162, Mobile, Ala. 36601, for Secor Bank.
ANDERSON and BIRCH, Circuit Judges, and ATKINS, *
Senior District 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
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.
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.
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.
court, exercising its equitable powers, reinstated the erroneously
discharged mortgage on
May 27, 1992
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.
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
STANDARD OF REVIEW
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.
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
'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.
Hypothetical judgment lien creditor
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."
v. Kimbell Foods, Inc., 440
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."
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.
USTC ¶50,164 ], --
--, --, --, 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
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
20, 277 So.2d 327, 329 (1973); Alexander v. Fountain, 195
3, 70 So. 669 (1916); Simon v. Sewell, 64
241 (1879). Thus, under
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.
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.
1169, 106 S.Ct. 2890, 90 L.Ed.2d 977 (1986).
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,
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
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:
"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.
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
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
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
v. Jones, 280
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:
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.
§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
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.
above, see n. 5 supra, it is well-established that federal
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").
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.
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.
USTC ¶9301 ], 549 F.2d at 26 (emphasis in original) (internal
quotation and citation omitted).
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
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:
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.
¶9301 ], 549 F.2d at 26 (citation and internal quotation omitted).
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
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,
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
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.
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.
the Eighth Circuit held that the federal tax lien at issue prevailed
over a prior security interest in accounts receivable assigned to a
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.
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.
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
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
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.
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.
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.
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.
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.
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.
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)
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
at 491. The state law there, as here, provided an equitable right of
reinstatement except as against parties without notice or knowledge.
at 493-94. Because the IRS lacked notice or knowledge, the federal tax
at 494-95. The Sixth Circuit thus had no occasion to address the issue
before us, the effect of the IRS's knowledge.
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
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
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
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
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
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.
. . .
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.
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
Honorable C. Clyde Atkins, Senior U.S. District Judge for the Southern
District of Florida, sitting by designation.
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
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
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,
As articulated by the Court in Fore:
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.
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).
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.
USTC ¶9301 ], 549 F.2d 20, 22 (7th Cir.1977).
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
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
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).
Section 35-10-28 provides in pertinent part:
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.
Secor argues that a judgment lienor is not protected under
law because such a lienor does not rely upon the nonexistence of a
mortgage. We reject this argument as contrary to
law. The operative inquiry under
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
's Department of Revenue is a judgment creditor for purposes of §35
-4-90). Even were Secor correct in its assertion that
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,
1169, 106 S.Ct. 2890, 90 L.Ed.2d 977.
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.
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:
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.
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.
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
v. Kimbell Foods, Inc., 440
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
As explained infra, Manalis Finance Co. v.
USTC ¶9158 ], 611 F.2d 1270 (9th Cir.1980) is distinguishable.
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.
The definition of notice relied upon in Lusk was narrow,
encompassing only actual knowledge. By contrast, under
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.
To the extent any language in Manalis is inconsistent with our
holding, and that in Dragstrem, it is dicta, and is unpersuasive.
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.
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.
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.