Purchaser Page6

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Court's memorandum opinion and conclusions of law reveals the fallaciousness of the premise on which the argument is based. In its memorandum opinion the court stated:

"As to the Government's contention that the lien has now attached to the proceeds of the insurance policies to the extent of their cash surrender value as of the date of the taxpayer's death, this Court, with due respect to eminent authority to the contrary [presumably the Behrens case], does not agree with the theory."

And Conclusion of Law No. 3 reads as follows:

"The lien of the United States for taxes assessed against Carl Hoper, which during his life attached to the cash surrender value of the insurance policies owned by him, did not survive his death."

It is hardly necessary that we point out that these are not findings of fact, but are conclusions of law whose correctness is a matter on which this court must exercise its independent judgment.

[Res Judicata]

The taxpayer's liability in this case is based upon the disallowance of a family partnership by the Commissioner. Income derived from the partnership's business activities, which otherwise would have been taxable to certain limited partners, was attributed to the taxpayer. Except for the allowance of the tax claim against the estate of the taxpayer by the Probate Court of Cook County, Illinois, there has never been a judicial determination of the legality of the Commissioner's action and the resulting tax liability. The defendants in the proceeding below sought to show the validity of the partnership for federal tax purposes, but the District Court upheld the government's contention that by reason of the allowance of the tax claim against the taxpayer's estate by the Probate Court the claim is res judicata. Defendants have not cross-appealed from this determination nor have they questioned its correctness or argued that it is erroneous, but have proceeded here to argue the merits of the tax claim. Needless to say, they have put the proverbial cart before the horse. The District Court, in view of its determination that the doctrine of res judicata precluded inquiry into the merits of the tax claim, never reached the merits, and obviously the merits never will be reached unless the District Court was in error. The government, evidently as confused as we are by the obliqueness of defendants' argument, has not tried to support the District Court's holding on this point. Thus this court does not have the benefit of respective counsel's argument and briefs on the question of the applicability of the doctrine of res judicata to the facts of the instant case.

The liability of defendants, although dependent upon the government's tax lien, is based fundamentally upon the existence of a tax liability on the part of the taxpayer. If the defendants can prove that the taxpayer had no tax liability, it would follow that the asserted lien is without foundation in fact or in law and that the government could not succeed in this action. However, we agree with the District Court that the determination by the Probate Court of the personal tax liability of the decedent-taxpayer precludes consideration anew of the merits of his liability. Cf. Maryland Casualty Co. v. United States , Ct. Cl., 32 Fed. Supp. 746 [40-1 USTC ¶9452].

As noted above, on June 8, 1948 , a proof of claim for the income taxes in question was filed in the taxpayer's estate. The claim was disputed and the estate was represented in the proceedings by the same counsel representing defendants in the instant case. The claim was allowed in full on January 24, 1952 , and the balance of assets in the amount of $3,560.72 remaining after the payment of admin istrative expenses was paid to the government in partial satisfaction of the $43,091.98 tax claim.

The allowance of a claim against a decedent's estate in the Probate Court is a judgment, and the adjudication of allowance is final and conclusive on the parties as to the matters in dispute unless the judgment is reversed or set aside on appeal or review. United States v. Paisley , N. D. Ill., 26 Fed. Supp. 237; Sinnickson v. Perkins, 137 Ill. App. 10, aff'd 231 Ill. 492, 83 N. E. 194. Since no appeal was taken and the time therefor has expired, the decree has become final and cannot be collaterally attacked. Moore v. Sievers, 336 Ill. 316, 168 N. E. 259; People for use of Stough v. Danforth, 293 Ill. App. 280, 12 N. E. 2d 227. Defendants in their capacity as beneficiaries of the life insurance policies are successors in interest of the taxpayer to the extent of the cash surrender values. There is therefore in this situation the requisite privity and defendants are consequently bound by the judgment of the Probate Court determining the taxpayer's liability and they took the cash surrender values subject to this liability. First National Bank v. Commissioner of Internal Revenue, 7 Cir., 112 Fed. (2d) 260 [40-1 USTC ¶9472], certiorari denied 311 U. S. 691.

For the reasons set forth above, that part of the judgment of the District Court holding that the decedent-taxpayer's tax liability is res judicata is affirmed, and that part of the judgment holding that the tax lien did not attach to the cash surrender value of the insurance policies in the hands of the beneficiaries is reversed and the cause remanded for further proceedings consistent with this opinion

AFFIRMED in part, REVERSED in part ANDREMANDED.

 

 

[60-2 USTC ¶9667] United States of America , Appellant v. L. C. Chapman, et al., Appellees

(CA-10), U. S. Court of Appeals, 10th Circuit, No. 6108, 281 F2d 862, 7/29/60, Reversing District Court, 59-1 USTC ¶9182

[1954 Code Sec. 6323]

Tax liens: Priority of claims to interpleaded funds: Construction of state law.--Under Oklahoma law laborers and materialmen had an equitable right to payment from funds due a contractor on a public improvement in preference to general creditors and their claims had preference over the Federal tax lien since under Oklahoma law the contractor-taxpayer had no property or property rights to the funds retained by the interpleader to which the Federal tax lien could attach except to the extent that the retained funds exceeded the labor and material claims. The Federal tax lien took preference over the claim of the assignee Finance Company since it was not a purchaser within the meaning of Section 6323 of the 1954 Code, but was a lienor whose lien was inchoate and imperfected at the time of the filing of the Federal tax lien.

[1954 Code Sec. 6323]

Tax liens: Allowance of attorney's fees and costs in interpleader.--Even though the material and labor liens took preference over the Federal tax lien the attorney fees and costs of the interpleader may not be paid out of the funds impressed with the Federal tax lien. The inviolability of the Federal tax lien did not inure to the benefit of the labor and material claimants and they must bear the costs of the interpleader.

Karl Schmeidler, Department of Justice, Washington, D. C. (Abbott M. Sellers, Acting Assistant Attorney General, Lee A. Jackson, A. F. Prescott, George F. Lynch, Department of Justice, Washington, D. C., Paul W. Cress, United States Attorney, Leonard L. Ralston, Assistant United States Attorney, Oklahoma City, Okla., with him on brief), for appellant. Walter J. Arnote (James B. Bratton, John A. Allford, with him on brief), for McAlester Finance Corp. Granville Tomerlin, Oklahoma City, Okla. (T. H. Eskridge, Tulsa, John F. Butler, Joe W. Whitten, Oklahoma City, Okla., T. L. Blakemore, Winfrey D. Houston, Rob ert M. Murphy, Russell E. Moss, with him on brief), for Labor and Material Suppliers.

Before BRATTON, LEWIS and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge:

The issue is whether the United States has a tax claim which takes precedence over other claims to a fund deposited by Southwestern Bell Telephone Company in an interpleader action. The trial court held that a retained percentage of funds due under a construction contract, which was not payable to the contractor-taxpayer until labor and material claims were satisfied, was not property subject to a federal tax lien and that an assignee for security of construction contracts was a purchaser whose rights were not affected by the tax claims. The payment of the laborers, materialmen, and assignee exhausted the deposited fund and left nothing for the United States , which has appealed.

[Facts]

The Telephone Company contracted with R. J. Sims for certain construction work in Oklahoma . Upon the completion of the work Sims left unpaid bills in the amount of $20,151.75, incurred before August 13, 1957 , for labor and materials. To secure payment of loans, Sims, by a general assignment made December 19, 1955 , and a special assignment made July 3, 1957 , assigned to McAlester Finance Corporation his contracts with the Telephone Company. The unpaid balance was $11,697.66, plus interest and attorney's fees. Assessments of unpaid withholding and excise taxes were made against Sims in the period March 18-- November 19, 1957 , and notices of lien were filed August 6-- November 20, 1957 , in the total sum of $24,601.09.

The contracts between the Telephone Company and Sims all contained the following pertinent provisions:

"Article VII

"* * * The Telephone Company agrees to pay the Contractor [Sims] on the twentieth day of each month for 90% of the amount of completed approved work on the first day of the month and agrees to make final payment within ten (10) days after the completion and acceptance of all work by the Telephone Company.

* * *

"Article X

"The Telephone Company shall have the right to require satisfactory proofs of payment, by the Contractor, of all labor and material furnished under this contract, before acceptance of the work, but no action or non-action of the Telephone Company in requiring such proofs shall relieve the Contractor of the duty of causing any and all liens arising out of the contract to be fully satisfied and discharged."

Upon the completion of the work the ratained percentage amounted to $27,183.70, and was not paid to Sims because he failed to establish payment of labor and material furnished under the contracts. The Telephone Company brought an interpleader action under 28 U. S. C. §1335 and paid the retained sum into court. Named as defendants were Sims, the holders of the claims for labor and materials, and the Finance Company. The United States intervened asserting its tax claims.

The Finance Company takes the position that the labor and material claims must first be satisfied out of the fund and that it is then entitled to be paid. The United States contends that its tax claims must be satisfied before any payment may be made out of the fund to the laborers, the materialmen, or the Finance Company.

[Code Provisions]

Under §§ 6321 and 6322 of the Internal Revenue Code of 1954, the United States has a tax lien upon "all property and rights to property" of the taxpayer at the time of the assessment of the unpaid tax. ¹ The United States says that the retained percentage was property of the taxpayer to which its lien attached.

[Aquilino Case]

In Aquilino v. United States, 363 U. S. 509, decided June 20, 1960 [60-2 USTC ¶9538], the unpaid balance of a general construction contract was claimed by subcontractors who had supplied labor and materials and who had asserted a lien under New York law. The United States asserted that its tax liens under §§ 3670 and 3671 of the Internal Revenue Code of 1939 ² took precedence. The New York Court of Appeals upheld the tax claim and the United States Supreme Court reversed, holding that state law controls in the determination of the nature of the legal interest which the taxpayer had in the property sought to be reached by the United States in asserting its tax claim. Federal law determines the priority of competing liens asserted against the taxpayer's property or rights to property. As the New York court did not determine the nature of the property rights possessed by the taxpayer under state law, the case was remanded so that such court could "ascertain the property interests of the taxpayer under state law and then dispose of the case according to established principles of law."

[ Durham Case]

United States v. Durham Lumber Company, 363 U. S. 522 [60-2 USTC ¶9539], decided the same day as the Aquilino case, involved competing claims of the United States for unpaid withholding and unemployment insurance taxes, and of certain subcontractors under a general construction contract. The taxpayers were adjudicated bankrupt and at the time of such adjudication there was an unpaid balance due under the construction contract. This sum was paid to the trustee and the claims were resolved in the bankruptcy proceedings. The Court of Appeals for the Fourth Circuit held that under North Carolina law, except to the extent that the claim of the general contractor exceeded the claims of the subcontractors, the general contractor had no property right which is subject to seizure under the tax lien ³ and, hence, the United States could recover only so much of the unpaid balance as remained after the satisfaction of the subcontractors' claims. The United States Supreme Court affirmed on the authority of the Aquilino decision.

[Contrast of Cases]

There are important differences between these two recent cases and the one now under consideration. In the Aquilino case the subcontractors contended that under the New York lien law ⁴ the contractor-taxpayer had no property interest in the balance unpaid by the owner under the construction contract. The Durham Lumber Company case involved North Carolina statutes which expressly create a lien in favor of subcontractors, which is preferred over that of general contractors, and create a primary obligation on the part of the owner to assure the payment of subcontractors. ⁵

In the instant case, the labor and material claimants are aided by no such statutes. It is conceded that Southwestern Bell Telephone Company is a public service corporation within the intent of the Oklahoma Constitution, ⁶ and that public policy forbids a mechanic's lien against the property of such a corporation when that property is essential to the performance of public purposes. ⁷ Further, Oklahoma has no statute such as the New York lien law considered in the Aquilino case, which creates a trust fund in favor of subcontractors and permits an action by a subcontractor upon an obligation for moneys due to a general contractor, as well as moneys received by him. Nor has Oklahoma a statute similar to the North Carolina statute, before the court in the Durham Lumber Company case, which permits a subcontractor to bring a direct, independent action against the owner to the extent of any amount due under a construction contract.

More important than these statutory differences is the difference in the construction contracts. In Aquilino and Durham Lumber Company there was no point raised on the obligation of the owner to pay the balance due on the construction contract. For all that appears in those opinions the obligation to pay was absolute. Here the obligation is dependent upon the satisfaction of a condition precedent, namely, the proof of payment for labor and materials. Article VII of the contract between the Telephone Company and Sims requires the Telephone Company to pay the retained percentage after "completion and acceptance of all work by the Telephone Company." Article X gives the Telephone Company the right to require satisfactory proofs of payment for all labor and material "before acceptance of the work." Such proofs were never furnished and the Telephone Company never accepted the work. Sims, the contractor-taxpayer, could not compel the Telephone Company to pay the retained percentage to him because of his failure to pay the laborers and materialmen.

[State v. Federal laws]

As said in Aquilino, the federal statute creates no property right but attaches federally defined consequences to rights created under state law. The right to property which the United States asserts is covered by its lien is the right of Sims to compel payment by the Telephone Company of the retained percentage. That right does not exist because of the failure to pay the labor and material claims. The Oklahoma rule is that conduct of a party which dispenses with performance by the adverse party is equivalent to a waiver of the right to require performance. ⁸ This accords to the general rule, recognized in Oklahoma , that contracts must be performed according to their terms before recovery can be had thereon. ⁹ As the contractor-taxpayer had no enforceable right to the money covered by the retained percentage, there was no property or right to property to which the tax lien of the United States attached, ¹⁰ except to the extent that the retained percentage exceeded the labor and material claims.

The United States attempts to avoid this weakness in its position by arguing that as the labor and material claimants have no lien under Oklahoma law and as they cannot sue the Telephone Company because of lack of privity of contract ¹¹ they have no enforceable right to the fund which can defeat the tax claim of the United States. This is but another way of saying that the United States may rely on the weakness of the competing title.

This is a federal interpleader action ¹² and the fund has been paid into court. Right to recover from the fund must be based on the strength of a claimant's title and not on the weakness of the title of another claimant. ¹³ As the United States stands in the shoes of the contractor-taxpayer and can have no greater rights to the fund than he has, the tax claim may be asserted only against that portion of the fund remaining after the satisfaction of the claims for labor and materials.

[Finance Comapany's Position]

Unlike the United States , the Finance Company takes the position that the labor and material claims are superior to its claim. At the same time it says that if those claimants have no rights under the provisions in the Telephone Company contracts, then the Finance Company is entitled to full payment of its claim before the tax claim is paid. This makes it necessary to determine the rights of labor and material claimants to recover from the deposited fund.

Following a long line of federal decisions, ¹⁴ Oklahoma has held that laborers and materialmen have an equitable right to payment from funds due a contractor on a public improvement in preference to general creditors and that when a surety pays such claims it is subrogated to the rights of the laborers and materialmen and its right to recover from the fund takes precedence over an assignment of the fund by the contractor. ¹⁵ This same rule should apply to a construction contract of a public utility for property needed in the public service. Also, if a subrogee has such right, certainly the subrogor has it too. As Oklahoma has recognized this equitable right, it follows that the labor and material claimants here have the right to secure payment from the fund and this right is superior to that of the assignee Finance Company.

The next question is whether the United States or the Finance Company may recover the $6,945.49 remaining in the deposited fund after the satisfaction of the labor and material claims. The tax lien created by §6321 arises at the time of the assessment of unpaid taxes, ¹⁶ unless the competing claims are within §6323(a) which provides that the lien imposed by §6321 shall not be valid "as against any mortgagee, pledgee, purchaser, or judgment creditor" until notice shall have been filed as therein provided. The Finance Company asserts that it is a purchaser within the intent of §6323(a) and that its claim must prevail over the tax claims as the notices were filed after the assignments.

[State v. Federal Law]

Here again we have the problem of the applicability of state law or federal law. As previously noted, Aquilino holds that, in the determination of the existence of property or property rights subject to a federal tax lien under §6321, state law governs, while the decision of the relative rights of lien holders depends upon federal law. That case does not cover the point as to which law governs in determining the existence of the status of a mortgagee, pledgee, purchaser or judgment creditor, each of whom under §6323 is not affected by a federal tax lien until notice thereof has been filed.

[Finance Company Not Purchaser]

The problem is presented by the contention of the Finance Company that it is a purchaser under the law of Oklahoma . The Supreme Court of that state has held that under its statutes ¹⁷ every chose in action, not founded upon tort, is assignable and right of action is conferred upon the assignee. ¹⁸ A valid assignment passes the title of the assignor and, after assignment, the assignor has no interest to be reached by his creditor in any proceeding. ¹⁹ A possibility, coupled with an interest, is assignable. ²⁰ The United States relies on the definition of purchaser stated in United States v. Scovil, 348 U. S. 218, 221 [55-1 USTC ¶9137], where it is said that a purchaser within the meaning of §3672, the predecessor of $6323 of the 1954 Code, "usually means one who acquires title for a valuable consideration in the manner of vendor and vendee."

The distinction between vendor and vendee on the one hand and lienor and lienee on the other is controlling. The transaction between the Finance Company and the contractor-taxpayer was one in which the assignment of the contracts was given as security for a loan. In other words, it was a security transaction rather than a sale. This is made clear by the fact that the contractor-taxpayer gave the Finance Company a promissory note which was not satisfied by the assignment. ²¹

The general rule is that an assignment given as security for a debt "gives the assignee only a qualified interest in the assigned chose, commensurate with the debt or liability secured, although the assignment is absolute on its face." ²² The distinction between a lien and an assignment is that a lien is a charge upon property, while an assignment creates an interest in property. ²³ While there appear to be no Oklahoma cases dealing with the legal effect of an assignment as security for a debt, ²⁴ it is reasonable to conclude that the general rule would prevail and that the assignee does not receive a transfer of absolute title but, rather, a qualified interest in the assigned chose.

Both the United States and the Finance Company rely on Marteney v. United States, 10 Cir., 245 F. 2d 135, 139 [57-1 USTC ¶9670], which held that an assignee was a purchaser within the intent of §3672 of the 1939 Code. In that case there was an absolute and unqualified assignment of an interest in a judgment in return for the cancellation of the assignor's liability on a promissory note. This court said, at page 138, that "a sale, in the ordinary sense of the word, is a transfer of property for a fixed price in money or its equivalent." ²⁵ The distinction between Marteney and the case at bar is that in Marteney the assignment extinguished the liability on the promissory note, whereas here the liability on the note remained and the assignment was given merely to secure payment.

We conclude that the assignment did not make the Finance Company a purchaser within the meaning of §6323. Instead it is a lienor. At the time of the filing of the notices of the federal tax lien, the lien of the Finance Company was inchoate and had not been perfected. Not only had no action been taken to perfect the lien but, also, the amount of the debt to be collected from the security had not been determined. ²⁶

[Federal Tax Lien Superior ]

The perfected lien standard, which has been imposed by the Supreme Court in cases involving liens under state law in competition with federal tax liens, is fatal to the claim of the Finance Company. While only one such decision involves an assignment given as security for a debt, ²⁷ that decision, United States v. R. F. Ball Construction Co., Inc., 355 U. S. 587 [58-1 USTC ¶9327], rehearing denied 356 U. S. 934, is controlling here. There, as in the case at bar, the plaintiff brought an interpleader action in which moneys due under a construction contract were paid into court. A bonding company claimed under an assignment given as security to assure payment of a contingent indebtedness which did not arise until after the filing of the notice of the federal tax lien. The trial court decided for the bonding company on the ground that the assignment as collateral security was a perfected contractual lien ²⁸ and the Court of Appeals affirmed. ²⁹ The Supreme Court, in a five to four decision, reversed saying that as the assignment involved was inchoate the provisions of §3672(a) of the 1939 Code did not apply. In two recent district court decisions the Ball Construction Company decision has been applied in factual situations quite similar to that here under consideration. ³⁰

The Finance Company attempts to distinguish the Ball Construction Company decision from the instant case on the ground that Ball involved an assignment to secure a contingent or future indebtedness, whereas here the assignment was to secure a present and existing debt. This same point was raised in First State Bank of Medford v. United States, supra, and the court, while recognizing the distinguishing characteristic, disposed of the matter by saying "the distinction does not perfect an unperfected lien." ³¹

Basically, the problem is whether the perfected lien principle, established in cases involving statutory liens, applies also to contractual liens. The acceptance of an assignment of moneys due under a contract as security for a loan is a common, legitimate commercial transaction. The significance of the difference between contractual and statutory liens and the problems inherent in the imposition of the perfected lien principle on financial arrangements of the type here involved must have been considered by the majority in the Ball Construction Company case as the dissent takes pains to point out these matters. We are bound by that decision. The fact that there the assignee was asserted to be a mortgagee under Texas law and here the contention is that the assignee is a purchaser under Oklahoma law is not important. The arrangement between the Finance Company and the contractor-taxpayer did not involve a vendor-vendee relationship as required by the Scovil decision to establish the assignee as a purchaser. The tax claims of the government take precedence over the assignment to the Finance Company and the United States is entitled to a judgment for that portion of the fund remaining after the satisfaction of the claims of the laborers and materialmen, unless that sum is subject to reduction because of the award of attorney's fees and costs to the Telephone Company as plaintiff in the interpleader action.

[Attorney Fees]

Relying upon the Ball Construction Company decision and upon United States v. Liverpool & London & Globe Insurance Co., Ltd., 348 U. S. 215 [55-1 USTC ¶9136], counsel for the United States contend that the award by the trial court of costs and attorney's fees to the interpleader Telephone Company ³² was improper to the extent that the deposited fund was impressed with a federal tax lien. The Liverpool & London Ins. Co. case involved garnishment proceedings but the Ball Construction Company case was an interpleader action and the court said that the right to costs of the interpleader was controlled by the Liverpool & London Ins. Co. case. The propriety of the allowance of costs, including a reasonable attorney's fee, to a plaintiff in an interpleader action is well recognized, ³³ but here this judicial prerogative collides with the supremacy of the federal tax lien. Under the Ball and the London & Liverpool cases, and under the decisions of the lower federal courts announced since those decisions, the innocent stakeholder, even though he asserts no rights to the fund in dispute, may not recover his costs and attorney's fees when to do so would invade the paramount federal tax lien. ³⁴

There appears to be no reported case involving a situation in which, as to part of the deposited fund, there is a right superior to the tax lien. Yet that is the situation in the instant case and it presents the question as to the right of the interpleader to recover from that portion of the fund not awarded to the United States . The inviolability of a federal tax lien does not inure to the benefit of the labor and material claimants here. While it may seem inequitable to charge one group of claimants to a deposited fund with the expense of the innocent stakeholder and not similarly charge another claimant, such is the position taken by the government. It is supported by decisions which we are bound to obey.

[Conclusions]

The judgment is reversed with directions: (1) to award to the labor and material claimants the full amount of their claims, less the pro rata share of each in any award to the interpleader; (2) to award to the United States the amount of the deposited fund that remains after the deduction of the amounts due under the labor and material claims; (3) to determine the amount due the interpleader, if any, by way of costs and attorney's fees, and to provide the payment of that amount out of the share due the labor and material claimants; and (4) to take such further action as is consistent with the views herein expressed.

¹ Section 6321 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." Section 6322 provides that the lien arises at the time the assessment is made.

² These sections are identical in all important respects to §§ 6321 and 6322 of the 1954 Code.

³ United States v. Durham Lumber Company, 4 Cir., 257 F. 2d 570, 574 [58-2 USTC ¶9736].

⁴ McKinney 's N. Y. Laws, Lien Law (1958 Supp.), §36-a. See Aquilino v. United States , supra, note 2.

⁵ General Statutes of North Carolina , §§ 44-6 to 44-12. See United States v. Durham Lumber Company, 257 F. 2d 572-573 [58-2 USTC ¶9736].

⁶ Constitution of Oklahoma . Art. 9, §34.

⁷ Pittsburg Equitable Meter Co. v. Cary , 10 Cir., 67 F. 2d 65, and Oklahoma decisions therein cited.

⁸ Quinette v. Mitschrich, 109 Okl. 281, 235 P. 530, 531; Vogel v. Fisher, 203 Okl. 657, 225 P. 2d 346, 347; and Owens v. Automotive Engineers, 208 Okl. 251, 255 P. 2d 240, 247.

⁹ Camp v. Black Gold Petroleum Co., 195 Okl. 30, 154 P. 2d 769, 771; Messick v. Johnson, 167 Okl. 463, 30 P. 2d 176, 178. See also Miller v. Young, 197 Okl. 503, 172 P. 2d 994, 995, and Rollins v. Rayhill, 200 Okl. 192, 191 P. 2d 934, 937.

¹⁰ General Insurance Company of America v. Ted Price Construction Company, Ida. 1959, 175 F. Supp. 261, 263 [59-2 USTC ¶9568]; Wolverine Insurance Company v. Phillips, N. D. Ia. 1958, 165 F. Supp. 335, 353 et seq. [58-2 USTC ¶9765]; and, Central Surety and Insurance Corporation v. Martin Infante Co., N. J. 1958, 164 F. Supp. 923, 927 [58-2 USTC ¶9942], affirmed, 3 Cir., 272 F. 2d 231 [59-2 USTC ¶9736]. The opinion in Scott v. Zion Evangelical Lutheran Church, 75 S. D. 559, 70 N. W. 2d 326 [55-2 USTC ¶9669], refers to many federal and state decisions bearing on this point. Cf. United States Fidelity & Guaranty Co. v. United States, 10 Cir., 201 F. 2d 118, 121-122 [53-1 USTC ¶9249]. If United States v. Kings County Iron Works, 2 Cir., 224 F. 2d 232 [55-2 USTC ¶9536], be considered contra, the authoritative value of that case is weakened if not destroyed by the later decision of that circuit in Fidelity and Deposit Company of Maryland v. New York City Housing Authority, 2 Cir., 241 F. 2d 142 [57-1 USTC ¶9410].

¹¹ Alberti v. Moore , 20 Okl. 78, 93 P. 543; Union Bond & Investment Co. v. Bernstein, 40 Okl. 527, 139 P. 974; Newman v. Kirk, 164 Okl. 147, 23 P. 2d 163; and, Conservation Oil Co. v. Graper, 173 Okl. 127, 46 P. 2d 441.

¹² See 28 U. S. C. §1335 and Rule 22, F. R. Civ. P.

¹³ This is the general rule followed in state courts. See Curran v. Williams, 352 Mich. 278, 89 N. W. 2d 602, 604; Slavin v. Slavin, 368 Pa. 559, 84 A. 2d 313, 317; Prudential Ins. Co. of America v. Cahill, 321 Ill. App. 45, 52 N. E. 2d 481, 484; Denton Gin Co. v. Gathings, (Mo. App.) 216 S. W. 2d 959, 965; 48 C. J. S. Interpleader §41, p. 92; 30 Am. Jur., Interpleader, §27, p. 503. Cf. Shapleigh v. Mier, 299 U. S. 468, 475.

¹⁴ These are collected in Martin v. National Surety Co., 8 Cir., 85 F. 2d 135, affirmed 300 U. S. 588.

¹⁵ Fidelity Nat. Bank of Oklahoma City v. United States Casualty Co., 191 Okl. 496, 131 P. 2d 75, 77, 78.

¹⁶ 28 U. S. C. §6322.

¹⁷ 60 Okl. St. Ann. §§ 312 and 313 (1951).

¹⁸ Minnetonka Oil Co. v. Cleveland Vitrified Brick Co., 27 Okl. 180, 111 P. 326, 328.

¹⁹ Market Nat. Bank of Cincinnati , Ohio v. Raspberry, 34 Okl. 243, 124 P. 758, 759. Cf. Oklahoma Oxygen Company v. Citizens State Bank and Trust Company of Kilgore, Texas, (Okla.) 274 P. 2d 372, 373.

²⁰ Harris v. Tipton, 185 Okl. 146, 90 P. 2d 932, 934.

²¹ The trial court gave the Finance Company a judgment against the contractor-taxpayer for the balance due on the note which had not been satisfied by the award to the Finance Company out of the deposited fund.

²² 6 C. J. S. Assignments §93, p. 1150, quoted in Peterman Lumber Company v. Adams, W. D. Ark. 1955, 128 F. Supp. 6, 13.

²³ Springer v. J. R. Clark Co., 8 Cir., 138 F. 2d 722, 726; 6 C. J. S. Assignments §2(7), p. 1049.

²⁴ City Nat. Bank of Lawton v. Lewis, 73 Okl. 329, 176 P. 237, 240, distinguishes between an assignment and a pledge and holds that "an essential feature of an assignment is the transfer of title."

²⁵ Quoting Iowa v. McFarland, 110 U. S. 471, 478.

²⁶ The promissory note was for $14,774.47 and was due on July 15, 1957 . At the time of the hearing in the lower court the amount unpaid was $11,697.66, plus interest and attorney's fees. There is no showing as to when the payments were made which reduced the face amount. Likewise there is no showing that the Finance Company received any of the monthly payments due under the construction contract.

²⁷ United States v. Security Trust & Savings Bank, Executor, 340 U. S. 47 [50-2 USTC ¶9492], and United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138], were each concerned with an inchoate attachment lien. United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137], involved a landlord's distress lien. In United States v. Gilbert Associates, Inc., 345 U. S. 361 [53-1 USTC ¶9291], the question was whether the admin istrative assessment of ad valorem taxes gave a town the status of a judgment creditor. United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680]; United States v. White Bear Brewing Co., Inc., 350 U. S. 1010 [56-1 USTC ¶9440], rehearing denied 351 U. S. 958; United States v. Vorreiter, 355 U. S. 15 [57-2 USTC ¶9956]; and United States v. Hulley, 358 U. S. 66 [58-2 USTC ¶9926], all involved mechanics liens.

²⁸ R. F. Ball Construction Co. v. Jacobs, W. D. Tex. 1956, 140 F. Supp. 60 [56-1 USTC ¶9514].

²⁹ United States v. R. F. Ball Construction Co., 5 Cir., 239 F. 2d 384 [57-1 USTC ¶9269].

³⁰ First State Bank of Medford v. United States , Minn. 1958, 166 F. Supp. 204 [58-2 USTC ¶9758], and Arthur Company v. Chicago Paints, Inc., Minn. 1959, 175 F. Supp. 50 [59-2 USTC ¶9689]. See also Three Mountaineers v. Ramsey, W. D. N. C. 1956, 143 F. Supp. 888 [57-1 USTC ¶9226], and Massachusetts Bonding & Insurance Company v. Antonelli Construction Co., Mass. 1959, 173 F. Supp. 391.

³¹ 166 F. Supp. 209. A like contention was presented in Arthur Company v. Chicago Paints, Inc., supra, and determined adversely to the assignor.

³² The judgment in favor of the interpleader was for attorney's fee in the amount of $800.51 and costs of $15.00.

³³ Mutual Life Ins. Co. of New York v. Bondurant, 6 Cir., 27 F. 2d 464, 465, certiorari denied 278 U. S. 630; Treinies v. Sunshine Mining Co., 9 Cir., 99 F. 2d 651, 655, affirmed 308 U. S. 66, rehearing denied 309 U. S. 693; New York Life Ins. Co. v. Miller, 8 Cir., 139 F. 2d 657, 658; Globe Indemnity Co. v. Puget Sound Co., 2 Cir., 154 F. 2d 249, 250.

³⁴ Commercial Standard Insurance Co. v. Campbell , 5 Cir., 254 F. 2d 432, 433 [58-1 USTC ¶9477]; Narragansett Bay Gardens, Inc. v. Grant Construction Co., 176 F. Supp. 451, 454-456 [59-2 USTC ¶9557]; and Ford Motor Co. v. Hackart Construction Co., 143 F. Supp. 216, 218-219 [56-2 USTC ¶9831.].

 

 

[59-2 USTC ¶9508] Niagara County Savings Bank, Plaintiff v. Jacob Reese, et al., Defendants

Niagara County Court, State of New York, No. 45342, 1/20/58

[1954 Code Sec. 6323]

Liens: Contract vendee as "purchaser": State v. Federal law as to mechanics' liens.--A contract vendee of real estate is a "purchaser" within the meaning of Code Sec. 6323 and his claim was superior to a Federal tax lien as to surplus funds resulting from a mortgage foreclosure. Under New York state law, mechanic lienors have priority over the contract vendee's unrecorded contract, even though the lienors are not "purchasers" and are subordinate to Federal tax liens under the Aquilino decision (N. Y. State Ct. of Appeals, 58-1 USTC ¶9191). The Federal Government may not complain because state law allows the mechanic lienors to take part of the contract vendee's share, since, applying only Federal law, the U. S. does not share because the contract vendee takes the entire fund, and, applying only state law, the U. S. does not share because the contract vendee and the mechanic lienors take the entire fund.

George M. Donohue, Niagara Falls , N. Y., for DeNuccio. John C. Broughton, Buffalo , N. Y., Assistant United States Attorney, for United States . Leonard J. Brizdle, Buffalo , N. Y., for Tontine Shops. Hogan & Wattengel, Niagara Falls , N. Y., for Moyer Electric. Bernard D. Levy, Niagara Falls , N. Y., for Trustee in Bankruptcy of Jacob Reese.

[Claims]

KRONENBERG, County Judge :

In this surplus money proceeding incident to a mortgage foreclosure, the fund involved is $3,312.49 before referee's fee and costs and expenses of the proceeding.

Claimant DeNuccio, vendee under an executory contract of sale, which contract was cut off by the foreclosure of the superior mortgage, claims $2,900 paid the vendor, Reese, toward the purchase price and $500.82 for improvements made on the premises while claimant was in possession.

Claimant Tontine Shops installed materials in the premises and filed a mechanic's lien for $348. Moyer Electric likewise installed materials and filed a mechanic's lien for $311.

Claimant United States of America filed tax liens against Reese, the vendor, amounting to $5,177.87.

The trustee in bankruptcy of Reese, the mortgagor and vendor, claims anything that may be left after payment of the above-listed superior claims. Since there will obviously be nothing left for the mortgagor, no discussion of this claim is needed.

The dates affecting the rival claims are as hereinafter set forth.

[Facts]

DeNuccio entered into an unrecorded contract with Reese on September 15, 1955 to buy the premises which were encumbered by a mortgage to plaintiff. Between the date of the contract and January 15, 1956 DeNuccio paid Reese $2,900 toward the purchase price. Claimant entered into possession of the premises, as vendee, on January 16, 1956 and made improvements costing $500.92, completing the improvements April 4, 1956 .

Tontine Shops furnished materials to Reese and filed its lien March 8, 1956 . Moyer Electric filed its notice of lien March 14, 1956 .

United States filed its federal tax liens against Jacob Reese on April 6, 1956 .

Reese filed a petition in bankruptcy in June, 1956, and in November, 1956 the premises were sold pursuant to a foreclosure judgment of this court.

Turning first to the priorities between DeNuccio, the vendee in possession, and the U. S. A. , which thereafter filed tax liens against the vendor, we find that Section 6323 of the Internal Revenue Code provides that such liens are not valid against "any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed."

DeNuccio contends that he is a "purchaser" and that the $2,900 purchase money be paid before the filing of the tax liens gives him priority, so that he must be paid that sum out of the surplus before anything is paid on the tax liens. U. S. A. claims that DeNuccio is not a purchaser because no deed was delivered under the contract. The question then is whether a contract vendee in possession is a purchaser within the meaning of Section 6323.

[Contract Vendee]

The court holds that the question must be answered in the affirmative. Lacking any specific definition of the word "purchaser" by the Congress, we assume that that body meant the word to have its usual legal meaning.

"The word purchase, as designating the origin and nature of title to real property, has a technical but well settled meaning. It includes every mode of acquisition of an estate in land known to the law, except" inheritance. Strough v. Wilder, 119 N. Y. 530, 535.

The contract gave DeNuccio at least an equitable estate in the land. In re Site for Jefferson Houses, 306 N. Y. 278, holds that a contract vendee acquires "equitable title to the real property prior to the time title vested. It obtained an interest in the land of such a nature that the only estate remaining in the vendor was a lien for the purchase money, to secure the payment of which he retained the bare legal title."

Karp v. 2330 Ryer Corp., 185 Misc. 440, 56 N. Y. S. (2d) 783, holds that a contract vendee "is in equity considered as the owner" and so acquires an "estate and interest" in the real property.

"A contract for the sale of real estate immediately vests in the purchaser the equitable title while the vendor remains seized in the land for the benefit of the purchaser and holds the legal title only as security for the payment of the remainder of the purchase price. Williams v. Haddock, 145 N. Y. 144." Crippen v. Spies, 255 A. D. 411, 7 N. Y. S. (2d) 704. Italics added.

In this proceeding, the court sits as a court of equity (Corporate Inv. Co. v. Mt. Vernon Co., 206 A. D. 273, 200 N. Y. S. 372), and is "guided by equitable rules in its determination of the priorities of the claims." Davison v. MacDonald, 124 Misc. 726, 209 N. Y. S. 145, aff. 216 A. D. 759. The court must recognize DeNuccio's equitable estate and concomitant lien (Elterman v. Hyman, 192 N. Y. 113) and that he is thereby a purchaser within the meaning of Section 6323 of the Internal Revenue Code.

While claimant DeNuccio was in possession from January 16, 1956 until the end of April in that year, such fact seems immaterial here. Possession or the lack thereof might affect the right to extend a vendee's lien to cover items not here involved. See Davison v. MacDonald, supra. And possession is important when Real Property Law Section 240-a, relating to risk of loss, is applicable. But Section 6323 of the Internal Revenue Code contains no requirement that the purchaser be in possession.

Nor does that section of the Code require recording of the instrument by which the purchaser acquired his interest in the land. Since it is still the law in this State that possession is notice of the vendee's interest (See Governor's Memorandum of April 27, 1957 on veto of A. Int. 1327), the U. S. A. claim gains nothing through DeNuccio's failure to record the contract.

In deciding that DeNuccio's claim has priority over the U. S. A. claim, the court has not overlooked the December 6, 1957 decision of the Court of Appeals in Aquilino v. U. S. [58-1 USTC ¶9191], holding that state law must bow to federal law in alloting priorities to U. S. tax liens. The court has applied the federal law (IRC 6323) benefitting purchasers and, in the absence of an applicable federal definition of "purchaser," has employed the state laws' reasonable and proper definition which is consistent with the federal law.

[Mechanics' Liens]

Passing on to the question of priorities, as between DeNuccio and the mechanics lienors, Tontine and Moyer, Section 13 of the Lien Law gives the lienors priority over DeNuccio's unrecorded contract. Reedy Elevator Co. v. Monok Co., 171 A. D. 653, 157 N. Y. S. 565, app. dis., 224 N. Y. 699; Schwartz v. Rappaport, 115 Misc. 227, 187 N. Y. S. 611; Greenberg v. Marsh, 101 Misc. 18, 167 N. Y. S. 102, aff. 184 A. D. 890.

Having decided that the mechanics liens are superior to DeNuccio's claim and that DeNuccio's claim is superior to that of the U. S. A., the court is faced with the problem posed by the decision in Aquilino v. U. S., supra, which rules that U. S. tax liens are superior to mechanics liens, and indicates that the respective filing dates are immaterial since mechanics liens are not given the preferential status accorded to purchasers by I. R. C. Section 6323. See also U. S. v. Vorreiter, 78 S. Ct. 19 [57-2 USTC ¶9956]. The opinion of Justice Hill in Koehler v. Aljon Homes, 2 Misc. (2d) 474, 155 N. Y. S. (2d) 175 [57-1 USTC ¶9239], shows clearly how inequitable is the subordination of mechanics liens to tax liens.

Under federal law, the U. S. A. takes no part of the surplus moneys because the prior claim of DeNuccio, as purchaser, consumes the entire fund. Claimant U. S. A. may not be heard to complain becauses state law allows the mechanics lienors to take part of DeNuccio's share. If we apply only federal law, the U. S. A. does not share because DeNuccio takes the entire fund. If we apply only state law, the U. S. A. does not share because DeNuccio and the mechanics lienors take the entire fund. The court sees no necessity for attempting to create a hybrid of federal and state law whereby claimant U. S. A. would receive more than federal laws entitle it to.

[Conclusion]

The claims of Tontine Shops ($348) and Moyer Electric ($311) are directed to be paid and the balance remaining after proper fees and expenses is to be paid to DeNuccio. The disposition above made leaves insufficient funds to pay the full amount of DeNuccio's claim for return of the purchase price, and therefore it is unnecessary to determine the rank of his claim for improvements made.

 

 

[55-2 USTC ¶9661]Wadley Nurseries, Inc. v. Matac Construction Corp., City of New York and U. S.

In the Supreme Court of New York, Spec. Term, Part 5, New York County, June 3, 1955, (133 N. Y. L. J. No. 109, p. 8)

[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]

Priority of liens: Taxpayer's assignee as "purchaser": Receipt of assessment lists ineffective without filing.--A subcontractor of taxpayer is considered a "purchaser", within the meaning of 1939 Code Sec. 3672, where the taxpayer assigned to such subcontractor a sum due the latter out of funds which the taxpayer was to receive from the City of New York pursuant to its contract with the City. The consideration for the assignment was the subcontractor's forbearance in filing a mechanic's lien and bringing suit against taxpayer for recovery of the sum due it. As against this right of the subcontractor, the lien of the government for income taxes does not have priority since the mere filing of the assessment lists with the Collector on dates prior to the date of the assignment was not sufficient to support the priority of the lien of the government. The assessment lists must be filed in the public offices mentioned in Sec. 3672 in order that the government's lien based thereon may be granted priority over other liens against the taxpayer.

H. Broadman Epstein, 110 East 42nd Street , New York , N. Y., for plaintiff. Peter Campbell Brown, Corporation Counsel, Municipal Building , for defendant, City of New York . J. Edward Lumbard, former United States Attorney, United States District Courthouse, Foley Square, N. Y., for United States.

GREENBERG, Justice:

Plaintiff, as a subcontractor, entered into an agreement with the defendant--general contractor Matac Construction Corporation--whereby the former undertook to furnish all labor and materials necessary and required for the performance of certain items specified in the contract entered into between the defendant the City of New York and the general contractor. Most of the facts in this case were stipulated by the parties and on the basis thereof and the other evidence in the case the court concludes as follows:

1. Plaintiff concededly duly performed the terms of its contract with the general contractor, and sought to collect the sum due it from the latter. Upon its failure to pay the same plaintiff threatened to file a mechanic's lien and institute suit against the contractor. In consideration of plaintiff's forbearance in filing the lien and in instituting suit, the contractor, on September 19, 1949, executed and delivered an assignment to the plaintiff in the sum of $13,024.34 out of moneys which were due or which were to become due to the contractor from the City of New York. This assignment was filed with the Treasurer of the City of New York and the Department of Parks on September 22, 1949, and again on October 13, 1949. There is presently a balance of $15,871.98 which the city is holding, the major sum of which is being claimed by the plaintiff and the defendant the United States of America. The city is a stakeholder, it makes no claim to the money and requests the court to determine the priority in claims as between the plaintiff and the government.

2. The unpaid taxes set forth in the assessment lists in the sum of $15,448.62 and $6,746.50 were filed on April 26, 1949, and May 24, 1949, solely in the office of the Collector of Internal Revenue and were never filed in any of the public offices specified in section 3672 of the Internal Revenue Code or section 240 of the Lien Law of the State of New York.

3. Two years after the execution and filing of plaintiff's assignment and more than a year after completion of the contract and the acceptance of the work thereunder the Collector of Internal Revenue filed on May 11, 1951, and June 20, 1951, with the Treasurer of the City of New York and the Department of Parks tax levies and warrants of distraint for the sums heretofore mentioned and lists for which were filed in the office of the Collector of Internal Revenue.

4. The question of law to be decided is whether the plaintiff is a "purchaser" under the provisions of section 3672 of the Internal Revenue Code. The government contends, contrary to the position of the plaintiff, that it is entitled to priority based on the mere filing of the assessment lists with the Collector of Internal Revenue because the plaintiff is not a purchaser within the meaning of section 3672 of the Internal Revenue Code.

5. Although the assessment lists were filed in the office of the Collector of Internal Revenue on dates prior to the date of the assignment made by the general contractor to the plaintiff, nevertheless they are subordinate to the lien of the plaintiff since the assessment lists were not filed in the public offices mentioned in section 3672 of the Internal Revenue Code. Mere receipt of the assessment lists by the Collector of Internal Revenue did not constitute notice which would take precedence over the assignment filed in the appropriate office by the plaintiff.

Completely in point is Grossman v. City of New York (188 Misc., 256). There plaintiff brought an action to foreclose an assignment of moneys due under a conract made between the assignor and the City of New York for a public improvement. The facts in the instant case are similar. Plaintiff in that case moved for summary judgment and among the defenses interposed by the City of New York was an affirmative defense that there were other claims and injunctions restraining the payment of the money demanded by the plaintiff filed in the office of the comptroller, among which was a notice of lien by the United States Government, Department of Internal Revenue. The answer to the position by the government in that case, given by Mr. Justice Walter, is adopted by this court:

"The United States Attorney urges that as section 3672 does not mention assignees the liens here asserted are good as against plaintiffs from the time the assessment lists were received by the collector. If there were here any reason to believe that the assignment to plaintiffs was purely voluntary by way of gift, respectful attention would have to be given to that argument; but as all indications are that plaintiffs gave value for the assignment to them and there is no evidence to the contrary, they must be deemed to be purchasers and hence within section 3672; and as no notice of any of the liens here asserted by the United States was filed prior to the assignment to plaintiffs. I hold that none of such liens is superior to plaintiff's rights. * * *"

See also Cranford Co. v. L. Leopold & Co., Inc., et al. (189 Misc., 388 [47-1 USTC ¶9231], aff'd 273 App. Div., 754, aff'd 298 N. Y., 676).

Here, too, the assignment to the plaintiff was not voluntary by way of gift but was based upon a valid consideration, namely, plaintiff's forbearance to file a lien and to institute suit, and plaintiff therefore is a purchaser within the meaning of section 3672.

Judgment, accordingly, is directed in favor of the plaintiff for the amount set forth in the complaint.

 

 

[86-1 USTC ¶9191] United States of America , Plaintiff-Appellee v. Renato P. Varani, Defendant, Alexsandro Merucci, Defendant-Appellant

(CA-6), U.S. Court of Appeals, 6th Circuit, No. 84-1438, 1/6/86, 780 F2d 1296, Affirming and remanding unreported District Court decision

[Code Sec. 6331 ]

Collection of taxes: Levy and distraint: Ownership: Real property.--A state tax sale purchaser who failed to comply with the state (Michigan) statutory notice provisions was unable to prevent the United States from foreclosing its tax liens upon the two parcels of property. Prior to the time the purchaser acquired the property from the state following the tax sale, the record owners had conveyed their interest to the delinquent taxpayer in an unrecorded transaction. In an effort to collect the delinquent taxes, the IRS had filed a notice of lien upon the properties. When the IRS attempted to foreclose the liens, the purchaser was brought into the action in order to clear the title to the properties. The district court granted summary judgment to the IRS, ruling that the purchaser's tax deeds were void because he failed to comply with the Michigan statute requiring that notice be given to the individuals in actual possession of lands purchased at tax sale. In affirming the district court, the appellate court held that the IRS had standing to challenge the tax deeds by asserting the failure to give notice and that the notice provisions were to be strictly construed. However, the purchaser was entitled to remuneration and the case was remanded for calculation of an amount consistent with guidelines given by the appellate court.

Leonard R. Gilman, United States Attorney, Pamela Thompson, Assistant United States Attorney, Detroit, Mich. 48226, Glenn L. Archer, Jr., Assistant Attorney General, Ronald F. Fischer, Michael L. Paup, W.S. Estabrook, L.A. Snyder, Steven Shapiro, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee.

John A. Lydick, Gromek, Bendure and Thomas, 577 East Larned, Detroit, Mich. 48226, E. Donald Goodman, Lopatin, Miller, Freedman, Bluestone, Erlich, Rosen & Bartnick, 547 E. Jefferson Ave., Detroit, Mich. 48226, for defendant-appellant.

Before LIVELY, Chief Judge; and MERRITT and CONTIE, Circuit Judges.

CONTIE, Circuit Judge:

Alexsandro Merucci, personal representative of the estate of Dominic Merucci, appeals from an order of the district court granting summary judgment in favor of the United States on its complaint to foreclose tax liens on two parcels of real property in which Dominic Merucci claimed an interest pursuant to two tax deeds from the State of Michigan . For the reasons that follow, the judgment of the district court is affirmed and the case remanded for proceedings consistent with this opinion.

I. ¹

Although two parcels of property are involved in the instant appeal, the property is recorded in the Livingston County Tract Index as three parcels: the northwest one-quarter of Section 21 , the west one-half of the northeast one-quarter of Section 21 , and the east one-half of the northeast one-quarter of Section 20. ² The index reveals that on September 19, 1968 , Harry Elliott and wife transferred the property by deed to Russell and Nila Elliott. Other evidence in the record below indicates that, by land contract dated May 23, 1972 , Russell and Nila Elliott sold the property to the MacArthur Patton Christian Association for $165,000 with Renato Varani signing for the association. This transaction was never recorded in the county real estate records. The Elliotts had mortgaged the property to the Federal Land Bank on May 28, 1971 .

Richard Geiske of the Bank testified that he met with Varani on May 27, 1976 , at which time Varani paid part of the delinquency on the property. Varani asked that the receipt be written out to St. Pius X Confraternity. On June 17, 1976 , the Elliotts, at Varani's request, executed a warranty deed to St. Pius X Confraternity. The deed was never recorded. Despite the payment, the Bank Foreclosed on the mortgage and the property was transferred to the Bank on November 3, 1976 by sheriff's deed which was recorded. Next to this transaction on the tract index with respect to each parcel is the notation "Redemption Receipt L. 839 P.47." The redemption receipt does not indicate what party redeemed the property. However, the sheriff's deed, which was recorded, includes the notation "Received from St. Pius X Confraternity $84,882.57 for redemption of Sheriff's Deed Oct. 31, 1977 ."

In July or August of 1976, Varani orally leased the property, which included a house, to Henry Reason, who, with his wife and children, operated a 310-acre dairy farm, growing corn, sorghum and alfalfa. The Reasons received mail, utility service and telephone service at the property. Varani, who represented that he owned the property, asked that monthly payments be made to M.P.C. Farms, and later to several religious entities.

In 1978 the state treasurer petitioned the Livingston County Circuit Court for judgment and sale for delinquent taxes of 1976 and prior years on parcel one, described as:

East 1/2 of NE 1/4 except beginning at Southwest corner thereof, thence North 615 in center of highway, containing 741/3 acres more or less, Town 2 North, Range 3 East, Iosco Township, Livingston County.

The hearing on the complaint, after newspaper publication of the orders of the court, together with each separate parcel description came before the Livingston County Circuit Court on April 9, 1979 , and an order of judgment on the tax sale was entered on April 10, 1979 .

On October 21 and November 15, 1979 , the United States filed tax liens in the amount of $321,337.95 with the Livingston County register of Deeds against Renato P. Varani, General Douglas MacArthur, Post #375, American Legion Douglas MacArthur, Post #375, Thomas Varani, St. Pius X Confraternity, and Confraternity of St. Pius X.

The second parcel, described as "NW 1/4 and West 1/2 of NE 1/4 of Section 21 , containing 240 acres more or less, Town 2 North, Range 3 East, Iosco Township ," was similarly petitioned for sale by the State Treasurer for 1977 delinquent taxes. A judgment of tax sale was entered on April 8, 1980 .

On December 20, 1979 , Dominic Merucci bought parcel 1 from the State, and a tax deed was issued on June 16, 1980 . On January 19, 1981 , Merucci bought the second parcel and a tax deed was issued on June 15, 1981 . ³

Meanwhile, on September 12, 1980, the United States, at a public tax sale, sold the property in question to John Alstott for $153,000 pursuant to 26 U.S.C. §6331 . Alstott paid a deposit of $15,300, but never paid the balance because the government could not provide title to the property. Alstott never met Merucci, never received notice that Merucci had purchased the taxes on the property, and Alstott never recorded his own interest in the property.

On May 13, 1981, the United States filed a tax lien with respect to the property at 10080 Coon Lake Road ⁴ against

Renato P. Varani or General Douglas MacArthur Post #375, American Legion Douglas MacArthur Post #375, Thomas Varani, St. Pius X Confraternity, Confraternity of St. Pius X, Michigan Friends of the Confraternity of St. Pius X, Inc., and MacArthur-Patton Christian, a voluntary ass'n.

The lien alleged that these associations were the alter-egos, transferees, or nominees of Varani.

On January 6, 1981 , Merucci served notice on Russell Elliott of his interest in parcel one, but was unable to serve Nila Elliott. The notice indicated that "[t]his property is farm land with one house." Likewise, on October 5, 1982 , Merucci served notice on Russell Elliott of his interest in parcel two, but was unable to serve Nila Elliott. Nila Elliott received notice by publication in March and April 1981, and November 1981, respectively.

On August 25, 1981, the United States filed a complaint against Renato Varani, Ida Varani, Russell O. Elliott, Nila L. Elliott, Federal Land Bank, Henry Reason, and the Livingston County Treasurer pursuant to 26 U.S.C. §§7401 -7403, 28 U.S.C. §§1340, 1345, to reduce to judgment federal tax liabilities of Renato Varani and to foreclose liens on Varani's property. ⁵ The government proceeded pursuant to the lien of May 13, 1981 and 26 U.S.C. §§6321 , 6322 . The government sought interest and penalties in their judgment against Varani and requested that the tax lien be foreclosed and the real property sold. Varani subsequently answered and counterclaimed against the United States . On May 4, 1982 , the United States moved to dismiss the counterclaim, and, on June 3, 1982 , moved to amend the complaint to add Merucci. On August 30, the court dismissed Varani's counterclaim, ⁶ and the United States moved for default judgment based on the Varanis' failure to comply with discovery requests.

On October 7, 1982 , Merucci moved to dismiss the complaint on the ground that he, as a tax purchaser, had a lien superior to the United States , that the interest of Varani and his successors was not recorded, and that the United States had no standing to foreclose on the lien. On December 3, Merucci's motion to dismiss was denied.

On April 20, 1983 , the court entered default judgment against Russell Elliott, and, on April 26, against Varani for $372,420.51 plus interest. The court ordered that the property be sold free of both Varani's and Elliott's interests.

On July 30, 1983, the United States moved for summary judgment against Merucci on the grounds that (1) Merucci's failure to give notice of his interest in the property to Henry Reason rendered Merucci's title void under Michigan law, and (2) the government never received notice of the sale to Merucci as required by 26 U.S.C. §7425(b) . The affidavit of Charles A. Parks, IRS District Director, indicated that the IRS had received no notice of sale with respect to the property pursuant to 26 U.S.C. §7425(c)(1) . Merucci opposed the motion on the grounds that (1) the sale was judicial, and, therefore, 26 U.S.C. §7425(b) was not applicable and (2) the United States had no standing to raise Reason's lack of notice to invalidate Merucci's lack of notice. ⁷

Henry Reason's affidavit further indicated that he never received any notice from Merucci that Merucci had purchased the unpaid taxes due on the premises. In the fall of 1982, however, Merucci told Reason that he was the new owner of the premises and that Reason would have to make some arrangement with him if he wanted to stay on the property.

Nancy Haviland, Livingston County Register of Deeds, testified by deposition that the federal tax lien index was kept by grantor/grantee and was not tied in with the real estate tract index. To use the lien index, one would need to know the name of the grantee. Merucci testified by deposition that prior to his purchase of the property he had not heard of Varani, the MacArthur Patton Christian Association, or St. Pius X Confraternity. Merucci sent notice of his purchase to the Elliotts, but made no title search, nor did he call to the Federal Land Bank to discuss the properties. Merucci went to see the property after he received a certificate for payment of taxes in June 1980. Merucci visited the property to determine whether the property was vacant or improved for purposes of serving notice. Merucci did not approach the house, however. Merucci could not recall how he received the Elliotts' address nor why he believed the Elliotts owned the property. Merucci testified that when he called the township hall and asked about the owner of record, he was told that the Elliotts owned the land. In the summer of 1982, Merucci stopped at the house, told Reason he was the owner, and heard the names of Elliott and Varani. Merucci testified that he made no effort to determine who redeemed the property after foreclosure by the Federal Land Bank.

On April 18, 1984, the district court granted summary judgment, holding that Merucci never gave Reason notice as required by Mich. Comp. Laws Ann. §211.140 , and, therefore, the tax deeds were void. The "state never received absolute title to the property in question." The court found Merucci entitled to all taxes paid and the amount paid to receive the invalid tax deeds, and ordered the United States to move for appointment of a receiver to sell the property. The court ordered that the proceeds of the sale be distributed in the following order: (1) the costs of sale, (2) taxes due to Livingston County , (3) Merucci, (4) the United States , and (5) Varani. On May 2, 1984 , Merucci moved to alter or amend the judgment, and, on June 8, 1984 , the motion was denied.

II.

Prior to reviewing the district court's order in this case, we review the pertinent Michigan statutes relevant to tax sales. Mich. Comp. Laws Ann. §§211.60 et seq. Foreclosure proceedings are commenced by the state treasurer by filing a petition seeking to enforce the state tax lien against the property with the circuit court of the county in which the property is located. Section 211.61 . Notice of the proposed sale and of the right to be heard at a circuit court hearing concerning the sale must be mailed to interested parties. Section 211.61a . The circuit court then enters an order setting a date for a hearing, and the order is published in local newspapers. Sections 211.62 , 211.66 . Persons interested in the lands and desiring to contest the tax lien may appear in court and file objections to the lien. Sections 211.62 . Following the hearing, if the court decides that a sale is appropriate, the court enters judgment directing a sale, the time and place of the sale, and appointing the person responsible for conducting the sale. Section 211.67 .

Pursuant to an order of the court, the property may, as in this case, be "bid off" to the state. Sections 211.67 , 211.68 . A purchaser of property at a tax sale, including the state, does not receive title to the property until the expiration of approximately a one-year period following the sale during which persons with an interest in the property may redeem it by paying the delinquent taxes, plus interest. Sections 211.67 , 211.71 , 211.74 . Any person may purchase a state tax bid for the amount bid by the state plus interest, at any time before April 20th of the year following the sale. Section 211.84 . The purchaser receives certificates of sale which entitle him to receive title to the properties upon expiration of the period of redemption of the property. Sections 211.71 , 211.72 , 211.84 .

Section 211.73a provides in pertinent part:

The right to recover possession of land, or to a refunding of the amount paid, or to secure a tax deed, by a person claiming through or under a deed executed by the auditor general . . . shall be forever barred . . . by a failure of the tax title purchaser, his heirs or assigns, to make a bona fide attempt to give notice required by this act . . . for a reconveyance of the premises within the above specified period of 5 years. In a case of a failure to give the required notice for reconveyance within the period of 5 years from the date the purchaser, his heirs or assigns shall become entitled to a tax deed to be issued by the auditor general, the person or persons, claiming title under tax deed or certificate of purchase shall be forever barred from asserting that title or claiming a lien on the land by reason of a tax purchase; and the purchaser, his heirs or assigns shall not thereafter be entitled to a refunding of the amount paid as a condition of the purchase of the tax title by reason of any defect, irregularity, invalidity, or any cause whatever affecting the taxes or the sale of the lands for a tax lien.

(Emphasis added). The purchaser claiming under a tax deed is required to reconvey the property to a person who makes the payments required for redemption, and such reconveyance must take place within six months after "the filing of proof of publication of the notice as prescribed in section 140." Section 211.141(1) . Section 140(1) provides:

A writ of assistance or other process for the possession of land the title to which was obtained by or through a tax sale . . . shall not be issued until 6 months after there is filed with the county treasurer . . . a return by the sheriff . . . showing service of the notice prescribed in subsection (2). The return shall indicate that the sheriff has made personal or substituted service of the notice upon the following persons who were, as of the date the notice was delivered to the sheriff for service:

(a) The last grantee or grantees in the regular chain of title of the land, or of an interest in the land, according to the records of the county register of deeds.

(b) The person or persons in the actual open possession of the land.

(c) The grantee or grantees under the tax deed issued by the state treasurer for the latest year's taxes then appearing of record in the registry of deeds.

(d) The mortgagee or mortgagees named in all undischarged recorded mortgages, or assignees thereof of record.

(e) The holder of record of all undischarged recorded liens.

(Emphasis added). For form of notice, see section 211.140(2) .

Michigan law is clear. "It is a uniform principle of our tax laws that the validity of a tax-purchaser's title depends upon compliance with the statute relating thereto. Substantial compliance is not sufficient, . . . and where the notice of reconveyance is insufficient a grantee under a State tax deed acquires no title to the premises." St. Helen Resort Ass'n v. Hannan, 321 Mich. 536, 543 (1948); Whetstone v. Michigan Consolidated Gas Co., 219 F.Supp. 121, 123 (E.D. Mich. 1963). "Tax title proceedings are always closely scrutinized and strictly construed. . . . Unless notice to redeem is served within the statutory period, the purchaser cannot assert title under his tax deeds." Adair v. Bonninghausen, 305 Mich. 137, 141 (1943). "[T]he right of redemption continues as to everyone entitled to exercise it unless and until the tax-title holder cuts off the right of each one entitled to redeem by service of notice in accordance with the statute." Geraldine v. Miller, 322 Mich. 85, 93-94 (1948). Merucci, "having failed to serve the required notice of right to redeem . . ., as required by statute, . . . and five years having elapsed since he should have done so, is now barred from asserting title under his tax deeds." Brousseau v. Conklin, 301 Mich. 241, 244 (1942); McVannel v. Pure Oil Co., 262 Mich. 518, 522 (1933); Otto v. Phillips, 250 Mich. 546, 547 (1930) ("Until such notice is served as provided by the statute, the owner is under no legal obligation to redeem."); Marshall v. Anderson, 233 Mich. 480, 484-85 (1926); White v. Snow, 150 Mich. 270, 273 (1907).

"[O]n a motion for summary judgment the movant has the burden of showing conclusively that there exists no genuine issue as to a material fact and the evidence together with all inferences to be drawn therefrom must be read in the light most favorable to the party opposing the motion." Smith v. Hudson, 600 F.2d 60, 63 (6th Cir.), cert. dismissed, 444 U.S. 986 (1979). In order to sustain the district court's judgment in this case, we, prior to considering appellant's objections, must find that the aforementioned standard has been met with respect to the facts that (1) Henry Reason was a party entitled to notice pursuant to sections 211.73a , 211.140 , and (2) Merucci failed to make a bona fide attempt to serve notice on Reason within the statutory period.

First, section 211.140(1)(b) requires notice to a person in "actual open possession of the land." Reason's affidavit indicates that, with his wife and children, he operated a dairy farm and grew crops using both parcels of property from 1976. Reason received utility service, mail, and telephone service on the premises. While the statute does not define what circumstances compel a finding of "actual open possession," Reason's affidavit supports the conclusion that he was in "actual open possession of the land." Merucci admitted that upon observing the land he concluded that a farm was in operation. Further, Merucci failed to counter Reason's affidavit or produce evidence that Reason did not occupy both parcels. See Fed. R. Civ. P. 56(e). Accordingly, there is no genuine issue of material fact with respect to Reason's entitlement to notice. Second, Merucci admitted in his deposition that he never served the notice required by statute on Reason. Accordingly, the district court properly concluded that Merucci failed to comply with the statute's notice requirements, and, was therefore barred from asserting his tax deed as title. Section 211.73a . ⁸ Since Merucci failed to perfect his interest in the property, title resides in Varani and the district court properly concluded that the United States could foreclose on its lien on that property.

Merucci challenges the result reached above on several grounds which we consider in turn. First, Merucci contends that the United States ' attack on his title is an impermissible collateral attack. Authority cited by Merucci is inapposite in that there is no evidence that the issues raised in this case--the validity of Merucci's title and his compliance with his statutory obligations--have been previously determined by any state court. See United States v. United States Chain Co. [63-1 USTC ¶9223 ], 212 F.Supp. 171, 180 (N.D. Ill. 1962). Further, the statute itself provides an explicit limitation on collateral attack on tax sales. Mich. Comp. Laws Ann. §211.73a provides in pertinent part:

If within the period of 5 years the tax title purchaser, his heirs or assigns, has made a bona fide attempt to give the notice or notices required by law for the reconveyance of the premises, neither the legality or sufficiency of the sale or notice, nor the bona fides of the purchaser in this attempt to give statutory notice, shall be questioned, raised or adjudicated except in or by a suit in equity.

The statute does not prevent the district court in this case from adjudicating the issue of whether Merucci made a bona fide attempt to serve the required notices. Accordingly, the district court's decision that Merucci's title was void did not constitute an impermissible collateral attack.

Second, Merucci contends that the United States has no standing, as a matter of state law, to assert Henry Reason's lack of notice as a defect in Merucci's title. The statute, section 211.73a , provides that

[a] person who has himself been properly served with notice and failed to redeem from a sale in accordance with this act, within the period herein specified, shall not thereafter be entitled to question or deny in any manner the sufficiency of notice upon the ground that some other person or persons entitled to notice was not also served.

Implicit within this provision is that a person who has not been served or is not entitled to service may attack title on the ground that the statutory notice requirements were not complied with. This is consistent with the court's holding in Geraldine v. Miller, 322 Mich. 85, 93-94 (1948) that "the right of redemption continues as to everyone entitled to exercise it unless and until the tax title holder cuts off the right of each one entitled to redeem by service of notice in accordance with the statute." It is clear that Varani was a party entitled to redeem the property. See Mich. Comp. Laws Ann. §211.141 . Failure to serve the requisite notice renders Merucci's title "void." Whetstone, 219 F.Supp. at 123. Accordingly, regardless of the party asserting the inadequate notice, such lack of notice is an inherent defect rendering the tax title void. Therefore, Merucci's contention that the United States lacks standing to assert Reason's lack of notice has no merit and ignores the realities of the instant transaction. Until proper notice is served, Geraldine, supra, the United States , standing in Varani's shoes, retained the right to redeem the property pursuant to section 211.141 . Merucci failed to extinguish Varani's right to redeem by failing to comply with the statutory notice provisions.

Third, Merucci argues that the government is estopped from foreclosing on the lien because the government failed (1) to record its lien in a manner that could be discovered by Merucci; (2) to pay delinquent taxes on the property; and (3) to intervene in the state title acquisition process. Assuming, without deciding, that the doctrine of estoppel can be asserted in this context, we conclude that Merucci has plainly not established the requisites of that doctrine. The elements of estoppel are (1) the party estopped must know the facts; (2) the party estopped must intend that his conduct be acted on; (3) the other party must be ignorant of the true facts; and (4) the other party must rely on the former's conduct to his injury. United States v. Ruby Co., 588 F.2d 697, 703 (9th Cir. 1978), cert. denied, 442 U.S. 917 (1979); American Electrical Steel Co. v. Scarpace, 399 Mich. 306, 308 (1976); Birch Forest Club v. Rose, 23 Mich. App. 492, 498-99 (1970). The act which rendered Merucci's title void was his failure to serve Reason. Merucci cannot prove that he relied on any of the asserted government acts in failing to serve Reason and perfect his title. The government did not induce Merucci not to serve Reason or not to ascertain the identity of the occupant of the premises. Merucci simply cannot demonstrate that he was injured as a result of his reliance on the action or inaction of the government.

Fourth, Merucci contends that section 211.140a excuses his failure to serve Reason. That section provides in pertinent part:

When a proof of notice on an improved residential parcel is filed with the county treasurer, the proof shall contain the statement: "this parcel is an improved residential parcel". The proof shall show the street address, if known. An additional copy of the notice on this class of property shall be provided with the filing of the proof of notice. Failure by the holder of a tax deed to include this statement and to provide a copy shall invalidate the filing and render it null and void. The county treasurer shall forward the copy of the proof of notice to the county department of social services, which shall make an attempt to contact the owner and occupant of the property to determine if the owner or occupant is in need of assistance or protection of the court.

Merucci's argument in this regard is wholly without merit. The statute requires that "proof of notice" be filed with the county treasurer, apparently proof that notice has already been served on the occupant. The record includes no evidence that Merucci filed such a proof of notice with the county treasurer or that Merucci included an extra notice for purposes of service on the occupant. The statute reflects no intent that the purpose of this extra copy of the notice is for the county to give notice of the right of redemption or reconveyance but that the county use the information for aiding the occupants in relocating. The statute reflects no intent to excuse the purchaser from his statutory notice obligations, in light of the principle that "[t]ax title proceedings are . . . strictly construed." Adair, 305 Mich. at 141. Accordingly, this argument is without merit. The district court properly concluded that Merucci's title was void, and that the government could foreclose on its tax lien.

III.

Mich. Comp. Laws Ann. §211.141(1) provides:

(1) A person having an estate in the land; an interest in the land, either in fee, for life, or for year; a mortgagee of the land; an assignee of an undischarged mortgage on the land; the holder of a lien on the land; an executor, admin istrator, trustee, or guardian of these persons; or a person in actual possession of the land at the time of the tax purchase, shall be entitled to receive from the person, or that person's heirs or assigns, claiming title under the tax deed, within 6 months after the filing of return of service or the filing of proof of publication of the notice as prescribed in section 140, a release and quitclaim of all right and interest in the land acquired under the tax deed upon payment to the person claiming title under the tax deed or that person's heirs or assigns, or to the treasurer of the county in which the land is situated, of the amount paid for the purchase, together with 50% in addition, and personal or substituted service fees, which fees shall be the same as provided by law for service of subpoenas, for orders of publication, or for the cost of service by certified mail, together with a sum of $5.00 for each description, without additional cost or charge.

(Emphasis added). The district court ordered that Merucci receive the amount of taxes he had paid on the properties and the amounts he had expended in securing title. Merucci now seeks the reimbursement provided by section 211.141(1) above. The United States agrees that Merucci is entitled to the statutory reimbursement for parcel 2, but argues that the statute is inapplicable to parcel 1 because title to that parcel "lapsed" pursuant to section 211.73a rather than having been redeemed or reconveyed. However, title to parcel 1 did not lapse until May 7, 1985 , during the course of this appeal. Accordingly, Merucci was entitled to an award of reimbursement in accord with section 211.141(1) with respect to both parcels. Merucci is also entitled to interest "on the amount paid for the original purchase" and on subsequent taxes. St. Helen Resort, 321 Mich. at 545. The case is remanded to the district court to recompute Merucci's reimbursement.

Accordingly, the judgment of the district court is AFFIRMED and REMANDED for proceedings consistent with this opinion.

¹ The complete factual background regarding the property in question is recorded fully in neither Michigan real property records nor in the district court record. Upon the record constructed by the parties, however, we review the case.

² The property is located at 10080 Coon Lake Road , Fowlerville , Michigan and is described as follows:

In the Township of Iosco , County of Livingston described as follows:

The West half of the Northeast quarter of Section 21 ; and the Northwest quarter of Section 21 ; and the East half of the Northeast quarter of Section 20, excepting and reserving from the last above description a piece of land as follows: Beginning at the Southwest corner of said East half of the Northeast corner of Section 20, thence North 615 feet in center of highway; thence East 330 feet; thence South 615 feet; thence West 330 feet in the center of highway to place of beginning. Also excepting 1 square acre of the Northwest corner of the East half of the Northeast quarter and said Section 20, Town 2 north, Range 3 East, Michigan .

³ The tract index reveals transfers via tax deed from the State to Merucci on October 23, 1981, December 6, 1981, and June 16, 1982 with respect to the NW 1/4 of Section 21 ; on August 26, 1981, January 6, 1981, and June 16, 1982 with respect to the E 1/2 of NE 1/4 of Section 20; and on June 15, 1981, October 23, 1981, December 6, 1981, and on June 16, 1982 with respect to the W 1/2 of the NE 1/4 of Section 21 .

⁴ Both prior liens also referred to this property.

⁵ On March 13, 1979 , Varani was indicted for violation of 26 U.S.C. §7201 for the years 1972 to 1976, and was subsequently convicted.

⁶ On October 28, 1982 , Varani appealed the dismissal of his counterclaim, and, on November 21, 1983 , this court dismissed the appeal on the ground that it was interlocutory.

⁷ A second amended complaint added the state treasurer as a party on September 21, 1983 . The state opposed summary judgment on the ground that the United States had no right of notice pursuant to 26 U.S.C. §7425 .

⁸ Merucci was required to serve Reason within five years after becoming entitled to a tax deed on the property. Mich. Comp. Laws Ann. §211.73a . Accordingly, Merucci was required to serve Reason with respect to Parcel 1 by May 7, 1985 , and with respect to Parcel 2 by May 6, 1986 .

 

 

[83-2 USTC ¶9646]Mark James Co., Inc., Plaintiff v. Glen Cagel, District Director, Internal Revenue Service United States of America , Defendants v. Nathan W. Shroyer, Intervenor

U. S. District Court, East. Dist. Tax., Lufkin Div., Civil Action No. L-83-99-CA, 10/12/83

[Code Secs. 6323 and 7421]

Lien for taxes: Property subject to lien: Business purchased prior to recordation of tax lien: Injunctions.--A purchaser of a business that acquired a restaurant prior to the time that the IRS recorded a tax lien against the seller could not enjoin the IRS from selling the assets of the business pursuant to a seizure. It failed to meet its burden of proof on each of the four elements required to secure a preliminary injunction in the Fifth Circuit.

Jim Echols, 300 Republic Bank Bldg., Tyler, Tex. 75702, for The Mark James Co., Inc., Al Schulman, 806 Main St., Houston, Tex. 77002, Jeffrey K. Brown, P. O. Box 1649, Bryan, Tex. 77806, for plaintiff. Janet Hellmich, Assistant United States Attorney, Tyler, Tex. 75710, Michael Gibson, Department of Justice, Dallas, Tex. 75242, for defendants. Chester V. Hines, Pro se. James P. Kelley, P. O. Box 86, Tyler , Tex. 75710 , for intervenor.

Findings of Fact and Conclusions of Law

WAYNE, Chief Judge:

On August 4, 1983 , came on for hearing the above-styled and numbered civil action, in which the Mark James Co., Inc., demanded a preliminary injunction in this matter. The court, having heard the evidence, and having reviewed the pleadings of the parties, concludes that no preliminary injunction shall issue. The temporary restraining order, entered on July 14, 1983 , is hereby dissolved by operation of law. The court makes the following findings of fact and conclusions of law in support of its determination.

Findings of Fact

1. On June 30, 1981 , a Notice of Federal Tax Lien against Edwin A. Riley and Eva Dell Riley was filed in Houston County , Texas , in the amount of $84,740.74.

2. On September 1, 1982 , Edwin A. Riley and Eva Dell Riley entered into a contract of sale with plaintiff. The subject of the contract of sale was a restaurant business being conducted under the name of the Royal Restaurant. Included in the contract of sale were: (1) all shares of the Royal Restaurant Corporation; (2) all fixtures, equipment, and other tangible assets of the restaurant business; (3) the leasehold interest in the premises; (4) all the trade, business, goodwill, and other intangible assets of the restaurant business; and (5) all saleable food inventory. The purchase price for the restaurant business was $105,000, of which the following allocations were made: (1) A $56,958.54 promissory note, secured by a Deed of Trust to Nathan W. Schroyer; (2) $10,041.46, to be paid directly to Edwin A. Riley and Eva Dell Riley at the closing; and (3) $38,000.00, to be deposited in an escrow fund to pay the taxes, debts, and obligations arising from the restaurant business under its operation by Edwin A. Riley.

The escrow account could be disbursed only upon the joint signatures of Jeffrey K. Brown, attorney for plaintiff, and Chester V. Hines, attorney for Edwin A. Riley and Eva Dell Riley.

3. Ms. Sue Brown, a Revenue Officer for the Internal Revenue Service, testified that on October 13, 1982, she spoke on the telephone with both Jeffrey K. Brown and Chester V. Hines, and informed each, as joint signatories of the escrow fund, that taxes were due and owing from Edwin A. Riley d/b/a The Royal Restaurant, and that she had prepared levies for these taxes against each, as joint signatories for of the escrow fund. Revenue Officer Brown further testified that she apprised both Mr. Brown and Mr. Hines that the liability was large and would consume most of the escrow fund. With respect to this conversation with Mr. Hines, Revenue Officer Brown testified that Mr. Hines informed her the closing would be at 1:30 p. m. the next day (October 14, 1982), at his (Hines') office, in Crockett, Houston County, Texas, at which time she could assert the tax claims. With respect to her conversation with Mr. Brown, Revenue Officer Brown testified that Mr. Brown asked her if he needed to be present to be served with the levy, and she indicated her reply to him was that he did not.

Mr. Hines was not present at the hearing, and so did not testify. Mr. Brown was present at the hearing, and testified that he could not recall any conversations with Ms. Brown prior to October 14, 1982 .

[Post-sale Recordation of Tax Lien]

4. Revenue Officer Brown arrived at Mr. Hines' office in the late morning of October 14, 1982 , to serve the levy on Mr. Hines. (Apparently, Mr. Brown maintains an office in Bryan , Brazos County , Texas . His office was served with the levy by another Revenue Officer on the same day.) After being informed that Mr. Hines was not present, Revenue Officer Brown went to the Houston County Court, and filed there a Notice of Federal Tax Lien against Edwin A. Riley d/b/a The Royal Restaurant, for $34,024.47. Revenue Officer Brown then returned to Mr. Hines' office. Mr. Hines and Mr. Brown arrived shortly thereafter and presented Revenue Officer Brown with a check in the amount of $6,500, as payment for all federal tax liabilities. She, in turn, presented Mr. Hines with the levy against him for $34,024.47. Revenue Officer Brown was informed at this time that the closing had occurred at 8:30 a. m., instead of at 1:30 p. m.

5. On July 13, 1983 , the United States of America seized the restaurant business which plaintiff had purchased on October 14, 1982 .

6. On July 15, 1983 , a Temporary Restraining Order was issued against the United States to prevent it from selling the restaurant business which had been seized on July 13, 1983 .

7. Any finding of fact more properly deemed a conclusion of law is adopted as such.

Conclusions of Law

1. In order for the movant to secure a preliminary injunction in the Fifth Circuit, he or she must meet a four-pronged test. First, the movant must show a substantial threat that it will suffer irreparable injury if the injunction is not granted. Second, the movant must show that the threatened injury to the movant outweighs the threatened harm granting the injunction may do the non-moving party. Third, the movant must show that granting the preliminary injunction will not disserve the public interest. Finally, the movant must show a substantial likelihood of prevailing at a trial on the merits of the case-in-chief. See University of Texas v. Camenisch, 451 U. S. 390, at 392 (1981); Commonwealth Life Insurance Co. v. Neal, 669 F. 2d 300, at 303 (5th Cir. 1982); Canal Authority of the State of Florida v. Callaway, 489 F. 2d 567, at 572 (5th Cir. 1974); DiGiorgio v. Causey, 488 F. 2d 527 (5th Cir. 1973); and Blackshear Residents Organization v. Romney, 472 F. 2d 1197 (5th Cir. 1973).

2. Plaintiff has failed to establish that it will suffer irreparable injury if the injunction is not granted. Although plaintiff admittedly will lose its restaurant business if the restaurant is sold pursuant to the seizure, plaintiff nevertheless has an adequate remedy at law to avoid the same of the restaurant. Under Section 6325(b)(2)(A) of the Internal Revenue Code (26 U. S. C.), plaintiff may either pay in full the tax liability which is secured by the restaurant business or plaintiff may post a bond acceptable to the District Director of the Internal Revenue Service, for the same amount. Upon receipt of such payment, or bond in lieu thereof, the United States will discharge the restaurant business from its tax liens. ¹ In the event plaintiff were to prevail at a trial of the merits of the wrongful levy action, then of course such payment would be repaid, with interest, or its bond would be returned.

3. With respect to the balance of the equities, the threatened injury to plaintiff from not granting the injunction is limited to paying over the amount of tax liability in question, or posting a bond for an equivalent sum, pending the outcome of a trial on the merits of plaintiff's claim for wrongful levy. And if plaintiff prevails at such trial on the merits, its payment (with interest) or bond will be returned to it.

On the other hand, if the United States is enjoined from proceeding to sell the restaurant business pursuant to the levy, it cannot be assured that the collateral securing its tax claims will not diminish in market value pending a trial on the merits. As a consequence, the threatened harm which the Government could suffer from the granting of a preliminary injunction outweighs any threatened injury to plaintiff.

4. Plaintiff introduced no evidence indicating that granting the preliminary injunction would not disserve the public interest, and in light of the adequacy of its remedy at law (see conclusion of law No. 2, supra), there does not appear to be any compelling public interest to be served by interference with the tax collection process, for "taxes are the life-blood of government, and their prompt and certain availability an imperious need," Bull v. United States [35-1 USTC ¶9346], 295 U. S. 247, 259 (1935).

5. With respect to the merits of the case-in-chief, plaintiff has failed to show a substantial likelihood of prevailing at a trial thereon. Plaintiff contends it purchased all 100 shares of stock of a restaurant business from The Royal Restaurant Corporation, and that by virtue of such purchase, only the tax liabilities of The Royal Restaurant Corporation, if any, became the responsibility of plaintiff. Therefore, its argument concludes, the tax liabilities of Edwin A. Riley and Eva Dell Riley, or of Edwin A. Riley d/b/a The Royal Restaurant, did not attach to the equity in the restaurant business passed to the Mark James Co., Inc., at the closing of the contract of sale.

If on the other hand, the Mark James Co., Inc., purchased a restaurant business from Edwin A. Riley and Eva Dell Riley, it seems clear the tax liens against either, or both, attached to the equity in the restaurant business passed at the closing of the contract of sale. The Government submitted a series of documents for the proposition that the restaurant business was operated by Edwin A. Riley as a sole proprietorship, rather than as a corporation. Moreover, the contract under which the Mark James Co., Inc., acquired the restaurant business clearly indicates both that plaintiff purchased more than merely all the shares in The Royal Restaurant Corporation, and that the restaurant was purchased from Edwin A. Riley and Eva Dell Riley, not from The Royal Restaurant Corporation.

Plaintiff failed to offer evidence clearly controverting these inferences, i. e., that the restaurant was operated by Edwin A. Riley as a sole proprietorship, and the restaurant was purchased, not from the Royal Restaurant Corporation, but from Edwin A. Riley and Eva Dell Riley. If such apparent inferences are true, then plaintiff clearly had notice as to the tax liability of Edwin A. Riley and Eva Dell Riley, and of Edwin A. Riley d/b/a The Royal Restaurant. If plaintiff had such notice, the tax liens of the United States attached to the equity of $48,041.46 passed to the Mark James Co., Inc., at the closing of the contract of sale on October 14, 1982 . ² And if the tax liens attached to such equity, then clearly the levies complained of were not wrongful. Therefore, plaintiff has failed to show a substantial likelihood of prevailing on the merits at a trial of the wrongful levy action.

6. Plaintiff having failed to meet its burden of proof on each of the four elements to secure a preliminary injunction in the Fifth Circuit, such relief cannot be granted.

7. Any conclusion of law more properly deemed a finding of fact is adopted as such.

Final order will issue in accordance with these findings and conclusions.

¹ The applicable Treasury Regulation is Sec. 301.6325-1. The bond would have to comport with the provisions of Treasury Regulation Sec. 301.71011-1, regarding the form of bonds.

² Section 6321 of the Internal Revenue Code of 1954 (26 U. S. C.) provides that a lien in favor of the United States attaches to all property and rights to property of a taxpayer who has refused to pay tax for which he or she is liable, after demand therefor. Section 6323(a) provides that such a lien is valid as to a purchaser once notice of such lien has been effected.

 

 

[83-1 USTC ¶9367]William Little, Plaintiff-Appellee v. United States of America , Defendant-Appellant

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 77-3102, 5/16/83, Reversing an unreported District Court decision

[Code Sec. 6321]

Lien for taxes: Property subject to junior federal tax liens: Purchaser from state: Equitable subrogation to prior county tax lien.--An individual who purchased property from the state of California after the property had been deeded to the state in satisfaction of a county tax lien was not entitled to any portion of the proceeds from the subsequent sale of the property to satisfy junior federal tax liens. Because the county lien was extinguished by the transfer of the property to the state (under state law), the lower court erred when it upheld the claim that he subrogated to the county tax lien when he purchased the property.

Rob ert O. Harker, 595 E. Colorado Blvd. , Pasadena , California , for plaintiff-appellee. Ernest J. Brown, Department of Justice, Washington , D. C. 20530, for defendant-appellant.

Before CHAMBERS, WALLACE, and NORRIS, Circuit Judges.

Opinion

I

NORRIS, Circuit Judge:

This appeal revolves around a parcel of real property deeded to the State of California in satisfaction of a county property tax lien. The deed to the state was executed pursuant to Cal. Rev. & Tax. Code §§ 3511-3520 and conveyed "absolute title to the property." ¹ Appellee Little subsequently bought the property from the State for $4,500 at a county auction.

In addition to the senior county tax lien that was discharged by the deed to the State, the property had been encumbered by two junior Internal Revenue Service liens. ² The latter were not extinguished by the conveyance to the State or the sale to Little, and in April 1977 the government tried to sell the property to collect its liens. Little obtained a Temporary Restraining Order barring the sale and brought this action to permanently enjoin the government from selling the property on the grounds that the Internal Revenue Service liens were no longer valid.

The district court found the liens valid and denied the injunction, but ruled for Little on his alternative claim that he was equitably subrogated to the county tax lien because, in purchasing the property, he had discharged the senior county lien and thereby benefited the government. Accordingly, the district court entered judgment declaring that Little was entitled to the first $4,500 of the proceeds from the sale of the property. The government appeals from this part of the judgment.

We reverse the part of the judgment finding subrogation because we feel that Little was never in a position to discharge the county lien. That lien was legally extinguished when the State of California became the owner in fee simple of the property, and any benefit to the United States had its origin in that event, not in the subsequent purchase by Little.

II

In determining Little's rights relative to the Internal Revenue Service liens, we must look to the applicable local law. See 26 U. S. C. §6323(i)(2) (1976). The relevant California law is codified in Cal. Rev. & Tax. Code §2194 and §§ 3511-3520 (Deering 1975).

Little's claim of subrogation to the county tax lien is grounded in the assumption that he discharged the county lien when he purchased the property. However, according to Cal. Rev. & Tax. Code §2194 that lien was extinguished when the property was deeded to the State pursuant to Cal. Rev. & Tax. Code §3511. Moreover, Cal. Civ. Code §2910 (Deering 1972) provides generally that "the sale of any property on which there is a lien, in satisfaction of the claim secured thereby . . . extinguishes the lien thereon." The only encumbrances which survive the transfer of title to the State are those specifically mentioned in Cal. Rev. & Tax. Code §3520 and those which are not subject to the jurisdiction of California , e.g., the Internal Revenue Service liens in the present case. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47, 49 (1950).

That the county tax lien is extinguished when the State acquires the delinquent property follows from the State's sole purpose in engaging in the transaction; the collection of taxes. Anglo Cal. Nat. Bank v. Leland, 9 Cal. 2d 347, 350 (1937). The State takes the property in lieu of taxes and, as the new owner, assumes the risk that a later sale will not generate sufficient funds to offset the entire tax debt. At the same time, in its capacity as owner the State is empowered to sell the property, if possible, for more than the outstanding taxes and to retain the surplus, Chesney v. Gresham, 64 Cal. App. 3d 120, 131, 134 Cal. Rptr. 238, 244 (1976), or to exploit the property in any other manner it sees fit. See, e.g., People v. Lucas, 55 Cal. 2d 564, 570, 11 Cal. Rptr. 745, 747 (1961).

Such was the state of the title when Little bought the property. The county had ceased to be a lienholder and the State of California had become the absolute owner of the property, subject only to the Internal Revenue Service liens. If removal of the senior county lien was of any benefit to the United States , the United States is indebted to the State of California for this favorable turn of events. Little did no more than succeed to the State's title which was already free of the county lien. The district court therefore erred when it held that Little was equitably subrogated to the county tax lien.

The part of the district court's judgment declaring that Little is entitled to the first $4,500 of the proceeds from the sale of the property is therefore

REVERSED.

¹ Cal. Rev. & Tax Code §3520 (Deering 1975) provides in part:

The deed conveys to the State the absolute title to the property, free of all encumbrances, except:

(1) Liens for taxes levied for municipal, irrigation, reclamation, protection, flood control, public utility or other district purposes, not included among those taxes and assessments for delinquency in the payment of which the property is conveyed to the State.

(2) Liens for special assessments collected on tax rolls.

(3) Liens or assessments for other amounts which by law are collected on tax rolls by or for account of cities.

(4) Easements constituting servitudes upon or burdens to the property; water rights, the record title to which is held separately from the title to the property; and restrictions of record.

² At the time of the sale to Little the property was valued in excess of $10,000. The county lien had been for $4,844.56, and the two Internal Revenue Service liens were for $1,212.04 and $1,415.57, respectively.

 

 

[81-1 USTC ¶9322]John M. Gilliland, et al. v. United States of America

U. S. District Court, Mid. Dist. of Tenn., Nashville Div., No. 79-3333, No. 80-3166, 3/16/81

[Code Secs. 6323 and 7426]

Suits by nontaxpayers: Tax liens: Levy and distraint: Wrongful levy: Priority of claims: Purchaser at foreclosure sale.--A prior federal tax lien, duly filed under Tennessee law, had priority over the interest acquired by individuals who purchased the property at a foreclosure sale. Although the taxpayer whose delinquency necessitated the lien owned only an equitable interest in the property at the time the lien attached, the lien attached to that interest and survived the subsequent foreclosure sale of the real property.

W. A. Moody, Branstetter, Moody & Kilgore, 200 Church St., Nashville, Tenn. 37201, for plaintiffs. Hal Hardin , United States Attorney, Nashville , Tenn. 37203 , for defendant.

Memorandum

MORTON, Chief Judge:

This action alleges wrongful levy upon lands belonging to the plaintiffs, pursuant to 26 U. S. C. §7426. This court has jurisdiction by virtue of 28 U. S. C. §1346(e). The issue in the case may be simply stated as whether at the time plaintiffs acquired the subject property the lands were subject to a valid existing lien for back taxes. If the realty was subject to such a preexisting lien, then the subsequent levy by the United States would appear unobjectionable. If, however, no such valid lien encumbered the property at the time of its conveyance to the plaintiffs, the levy and seizure would be wrongful. For the reasons stated below, the court concludes that the land was encumbered by a valid lien and that the levy and seizure by the United States was therefore proper.

[Facts]

The land in question consists of 185.26 acres located in Rutherford County, Tennessee. The status of the property at all times relevant to the present suit can be traced chronologically as follows.

On April 24, 1974 . George and Marion Kinnard conveyed to Webb Home Builders, Inc., (hereinafter referred to as "Webb") ¹ a tract of land containing 249.77 acres "more or less," including the acreage at issue here. This conveyance was by an installment deed, which recited as consideration paid by Webb the sum of $192,000 in cash, together with a series of four promissory notes in the total amount of $576,000 plus interest. The notes were payable at a rate of one note each year for the following four years. An express lien was retained on the property to secure the unpaid purchase price. In the same deed, Webb conveyed legal title to a trustee to secure payment of the notes. The trustee was given the power to sell the land upon Webb's default on the notes, free of any equity of redemption or other exemption to which Webb might otherwise be entitled, all such rights being expressly waived by Webb. The deed was duly recorded on April 25, 1974 .

In December 1974, the United States assessed federal withholding and F. I. C. A. taxes owed by Webb in the amount of $12,236.31. Under 26 U. S. C. §§ 6321 and 6322, a lien arose by operation of law on the date of the assessment against all property then owned or thereafter acquired by Webb. On February 13, 1975, the government filed a Notice of Federal Tax Lien in the Rutherford County Register's Office, as required for priority over certain claimants by 26 U. S. C. §6323.

Thereafter, Webb defaulted on the note which became due on April 24, 1976 . Pursuant to the terms of the installment deed, the trustee disposed of the property at a public foreclosure sale. At the June 1, 1976 , foreclosure sale, the successful bidders were the Kinnards, grantors in the earlier conveyance to Webb. ² The United States was not provided advance notice of the foreclosure sale.

The Kinnards sold the land to the plaintiffs in the case sub judice in May 1977. A tract consisting of 123.46 acres was sold to plaintiffs John and Alma Jean Gilliland on May 16, 1977. On May 26, 1977, a total of 61.8 acres in two tracts was sold to plaintiffs Thurman and Sandra Whitworth. Both deeds were duly and promptly recorded.

Approximately two years later, on May 29, 1979 , the United States filed a Notice of Seizure and levied on the 185.26 acres purchased by the plaintiffs from the Kinnards. The levy was in satisfaction of the unpaid taxes owed by Webb and was predicated upon the assumption that the government had a valid outstanding lien upon the property which survived the foreclosure sale and the subsequent conveyance to the plaintiffs. ³

[Statute of limitations]

This action was originally filed as a quiet title action pursuant to 28 U. S. C. §2410 on July 12, 1979 . However, since it appeared that the government claimed actual title to the property and not merely a lien, the court concluded that §2410 did not confer jurisdiction over the action. The complaint was dismissed for lack of jurisdiction, but the plaintiffs' motion for a new trial was granted on condition that the complaint be amended to allege jurisdiction under the wrongful levy statute, 26 U. S. C. §7426. The amended complaint was filed on September 11, 1980 , within the 20 days allowed from the order granting the motion for a new trial.

In opposition to the motion for a new trial, the government argued, inter alia, that the nine-month statute of limitations for actions under §7426 had expired and that suit under that section should therefore be barred. See 26 U. S. C. §6532(c). While the court did not expressly rule on that argument, the government has not chosen to pursue the issue in subsequent pleadings or proceedings. In most situations, failure to argue the statute of limitations can be considered a waiver, since it is generally an affirmative defense that must be specifically pleaded. However, the court is sensitive to the ruling of some courts that the period of limitation in §6532(c) is jurisdictional and must therefore be strictly construed. See De Gregory v. United States [75-1 USTC ¶9498], 395 F. Supp. 171 (E. D. Mich. 1975); Gallion v. United States [68-1 USTC ¶9213], 389 F. 2d 522 (5th Cir. 1968). As noted by the court in United Sand and Gravel Contractors v. United States [80-2 USTC ¶9626], 624 F. 2d 733 (5th Cir. 1980), the nine-month limitation involved here "protects the legitimate interest of the United States in requiring other claimants of the seized property to bring their claims quickly." 624 F. 2d at 739. The court will therefore address the statute of limitations issue at this time.

The original complaint in this case was filed well within the nine-month limitation period. It is only the amended complaint setting forth the correct jurisdictional basis of the action which was filed beyond the nine-month period. The issue then is whether the amended complaint should be deemed to relate back to the original filing date for purposes of the statute of limitations. The court now expressly holds that the amended complaint does relate back to the original filing date, and the fact that the case was actually dismissed once in the interim is of no significance. The action was timely filed.

As noted by the court in the memorandum and order granting plaintiffs' motion for a new trial, the complaint as originally filed set forth facts necessary to state a cause of action under the wrongful levy statute. The only mistake that plaintiffs made was in failing to cite and argue that section, relying instead on an incorrect jurisdictional statute. It is well settled that a complaint need not "set forth the statutory basis for the court's jurisdiction in order for the court to assume jurisdiction, if the facts alleged provide a basis for the assumption of jurisdiction." Rohler v. TRW, Inc., 576 F. 2d 1260 (7th Cir. 1978), citing with approval, Wright & Miller, Federal Practice and Procedure, §1206. Indeed, the court could well have noted jurisdiction even without requiring an amendment to the complaint. However, dismissal followed by an order to amend the complaint and granting a new trial was the method chosen to crystallize the issues under the proper statute. The fact remains that the complaint filed on July 12, 1979, approximately seven weeks after the government's levy, set forth the salient facts necessary to state a claim under 26 U. S. C. §7426. Under the circumstances, the government's interest in requiring rapid recourse to the courts by third-party claimants to seized property has been adequately protected.

[Validity of lien]

We turn now to the substantive issues presented in this action. In order to determine the propriety of the levy, it is necessary to decide whether there was a valid existing tax lien against the property seized by the United States on May 29, 1979 .

As stated, a lien arose by operation of law against all property and rights to property owned by Webb at the time of the assessment of back taxes. ⁴ That occurred in December of 1974. It is well established that the property rights of the taxpayer to which the lien attaches are determined by state law. Aquilino v. United States, 363 U. S. 509, 4 L. Ed. 2d 1365, 80 S. Ct. 1277 (1960); United States v. Durham Lumber Company, 363 U. S. 522, 4 L. Ed. 2d 1371, 80 S. Ct. 1282 (1960); United States v. Bess, 357 U. S. 51, 2 L. Ed. 2d 1135, 78 S. Ct. 1054 (1958). See also, Slodov v. United States, 436 U. S. 238, 56 L. Ed. 2d 251, 98 S. Ct. 1778 (1978), n. 19, 436 U. S. at 256, 56 L. Ed. 2d at 267. Thus it is to the law of Tennessee that the court must look to determine the extent of Webb's interest in the subject realty on the date of the tax assessment, and the concomitant extent to which the federal tax lien attached to that property.

The defendant cites the case Walker v. Wood, 31 Tenn. App. 196, 213 S. W. 2d 523 (Tenn. App. 1948), for the proposition that mortgages and deeds of trust in Tennessee, regardless of how they might be worded, are mere sureties, creating liens in favor of the mortgagee, but leaving legal title in the mortgagor. This rule, according to the Walker court (as well as the defendant herein) is "well settled," although the only authority cited in Walker is an 1874 case, Erhert v. Chapman, 67 Tenn. 27 (8 Baxter) ( Tenn. 1874), and Gibson's Suits in Chancery, §1037(2) (5th ed. at §1084(2)).

However, Walker v. Wood is wholly at odds with the majority of Tennessee cases. Cf., Howell v. Tomlinson, 33 Tenn. App. 1, 228 S. W. 2d 112 (1949); Bertha v. Smith, 172 Tenn. 180, 110 S. W. 2d 474 (1937); Lingerfelt v. Gibson, 161 Tenn. 477, 32 S. W. 2d 1047 (1930); Lincoln Savings Bank v. Ewing , 80 Tenn. 598 (12 Lea) (1883); Henshaw v. Wells, 28 Tenn. (9 Hump.) 568 (1848). Any doubt as to the rule followed in Tennessee was laid to rest in Harris v. Buchignani, 199 Tenn. 105, 285 S. W. 2d 108 (1955), citing with approval Howell v. Tomlinson, supra, and Bertha v. Smith, supra. The Howell court included an illuminating discussion of the distinction between the law of mortgages at common law and in courts of equity. The court noted that mortgages at common law act to convey legal title to the mortgagee, while the equity practice treats the mortgage as a security, and the mortgagee as a mere lienholder. The court then said:

The law of Tennessee has kept much of the common-law theory of mortgages. While it follows the equitable theory in many particulars, it still adheres to the basic common-law notion that a mortgage vests the mortgagee with the legal title to the land and the right to immediate possession.

* * *

In states like Tennessee , which follow the "title theory," and not the "lien theory," it is generally held that a deed by the mortgagee conveys his title and estate in land, subject to the mortgagor's equity of redemption.

228 S. W. 2d at 116, quoted with approval in Savely v. Bridges, 57 Tenn. App. 372, 418 S. W. 2d 472, 480-81 (1967) (dictum).

The court therefore concludes that the installment deed conveying legal title first to Webb, then immediately to the trustee, was effective to do just that. Webb's interest was from the date of the conveyance an equitable interest only. Furthermore, because of express waivers in the deed itself, Webb's interest was further restricted. The property rights enjoyed by Webb consisted merely rights enjoyed by enjoy possession as long as it continued to make payments on the notes, and the right to have legal title conveyed to it absolutely upon the complete satisfaction of its obligation under the notes. Following default, at all times up until the foreclosure sale, Webb was entitled to tender the full balance due on the notes in satisfaction of its obligations and to thereby become entitled to legal title to the property.

Thus the tax lien which arose against all property and rights to property owned by Webb in December of 1974 attached only to Webb's equitable interests in the subject realty, for those were the only interests which Webb had or ever acquired under Tennessee law. However, it is clear that the lien did in fact attach to Webb's interests in the realty, even though those interests were equitable in nature. See Howard v. United States, 566 S. W. 2d 521 ( Tenn. 1978) (federal tax lien attached to the equitable interest of income beneficiary in a spendthrift trust). And, since Webb's equitable interests in the property continued to exist until terminated by the foreclosure sale, the issue now before the court is whether that sale was also effective to extinguish the government's rights under the tax lien.

[No discharge of lien]

Once a federal tax lien has attached, its discharge is determined by federal law. Title 26 U. S. C. §7425(b) governs the discharge of liens by non-judicial sales of the property. That section provides, in relevant part as follows:

[A] sale of property on which the United States has or claims a lien . . . made pursuant to an instrument creating a lien on such property . . .

(1) shall . . . be made subject to and without disturbing such lien . . . if notice of such lien was filed . . . in the place provided by law for such filing more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or

(2) shall have the same effect with respect to the discharge or divestment of such lien . . . of the United States , as may be provided with respect to such matters by the local law of the place where such property is situated, if--

(A) notice of such lien . . . was not filed . . . in the place provided by law for such filing more than 30 days before such sale,

(B) the law makes no provision for such filing, or

(C) notice of such sale is given in the manner prescribed in subsection (c)(1).

In the present case, it is clear that notice of the lien was filed in the manner and place required for such filing almost a year and one-half before the foreclosure sale. Notice was never given to the United States that a sale was planned, in spite of the fact that the government had a lien on all property rights of the defaulting purchaser. In addition, the sale was conducted pursuant to the terms of an instrument which created a lien on the property, a lien in favor of the Kinnards having been expressly reserved in the installment deed to Webb. In fact, it was the Kinnards who directed the trustee to hold the sale, in order to satisfy their lien. The foreclosure sale was precisely the kind of non-judicial sale contemplated by 26 U. S. C. §7425(b), and in the absence of the notice required by the statute, the sale could not operate to discharge the government's tax lien. That tax lien, having previously attached to Webb's equitable interests in the subject property, clearly survived the trustee's foreclosure sale.

[Misnomer]

The plaintiffs have also argued that even if there was a pre-existing lien against their property, it was not discoverable by a reasonable search and was therefore not binding on them. This contention is based on the asserted distinction between the "Webb Homebuilders, Inc.," to which the Kinnards sold the property under the installment deed that utlimately led to foreclosure, and the "Webb Home Builders, Inc.," named in the Notice of Federal Tax Lien filed by the government. This argument is without merit and must be rejected.

Testimony was adduced at the trial which showed that the name of the corporate entity was at all times relevant to this suit "Webb Home Builders, Inc.," the name shown on the Notice of Federal Tax Lien. This was the same corporation which purchased the realty from the Kinnards, although the installment deed was recorded with the misnomer, "Webb Homebuilders, Inc." This mistake in the deed is not sufficient to defeat the tax lien and subsequent levy. The court finds that the recorded lien was entirely sufficient to place the plaintiffs on constructive notice of the existence of the government's claim.

This is particularly true in light of the recordation system in use in the Rutherford County Register's Office, where the documents relevant to the subject property were filed. It was the testimony of an Internal Revenue Service revenue officer, who has conducted an average of two or three title searches per week, including numerous searches in Rutherford County , over the last 26 years, that the files in that county are not alphabetized, except for the initial letter of the last name. An effective search for liens in the name of "Webb Homebuilders, Inc.," would necessarily have revealed the lien in the name of "Webb Home Builders, Inc." Therefore, the plaintiffs could not have been prejudiced by the mistake in the installment deed and would have discovered the lien by a thorough and diligent search of the records. Furthermore, since the government was absolutely correct in the information recorded in the Notice of Federal Tax Lien, it should certainly not lose the protection provided by Congress because of an error in the installment deed which ultimately proved harmless.

Similarly, the fact that the government's Notice of Seizure described Webb's place of business as Lavergne , Tennessee , rather than Nashville , Tennessee , the address shown on previous documents, is irrelevant to the issues now before the court. Testimony at the trial indicated that Webb had simply moved to Lavergne after ceasing business but had been located in Nashvile prior to that time. Once again, the government was wholly correct in both the content and form of the notice, and the plaintiffs have not been prejudiced by any failure to indicate Webb's former address on the notice.

Finally, the plaintiffs have argued that the levy was wrongful because any equitable rights which Webb had to the subject land had little or no monetary value and that the lien was likewise without value. The plaintiffs have cited no cases in support of this proposition, and the court believes that the argument is without merit.

It appears that the government's lien attached to Webb's interest in the subject realty and was not discharged in the manner specified in the Internal Revenue Code. The court therefore concludes that the lien continued in full force and effect until the date of the levy and seizure and that the levy was proper under the statute.

An order will be entered dismissing the plaintiffs' action.

Order

In accordance with the memorandum contemporaneously filed, these actions are hereby dismissed.

¹ The fact that some documents pertaining to the subject realty incorrectly refer to the corporate entity as "Webb Homebuilders, Inc.," rather than the proper "Webb Home Builders, Inc.," will be discussed, infra. At the present time, it will suffice to note that the two names refer to the same corporation, and thus the simple designation "Webb" will be used throughout most of this opinion.

² Of the 249.77 acres originally conveyed, 64.51 acres had been released prior to Webb's default. Thus, the Kinnards purchased only the 185.26 acres involved in the present action at the trustee's foreclosure sale.

³ 26 U. S. C. §6331 provides in relevant part as follows:

(a) If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. . . .

(b) The term "levy" as used in this title includes the power of distraint and seizure by any means. . . .

⁴ 26 U. S. C. §6321 provides as follows:

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.

Section 6322 provides further that the lien arises at the time the assessment is made and eontinues until the tax is paid or the liability becomes unenforceable due to lapse of time.

 

 

[82-1 USTC ¶9360] United States of America , Plaintiff v. Ann G. Paladin and Carl D. Traina, Defendants

U. S. District Court, West. Dist. N. Y., Civ-78-860, 539 FSupp 100, 2/11/82

[Code Sec. 6323]

Lien for taxes: Priority: Alleged conversion or fraudulent transfer: Motion for summary judgment.--The government's liens on insurance proceeds were superior to the interest acquired by a third party who was assigned a portion of the proceeds by the taxpayer for a nominal consideration. Two liens were superior because they were filed prior to the assignment, and two other liens had priority where the third party was not a purchaser because of his failure to pay full and adequate consideration. Thus, summary judgment was appropriate on the issue of priority and on the issue of conversion by the third party. Summary judgment was inappropriate on the issue of the allegedly fraudulent transfer of the proceeds because a material question of fact concerning the application of state law was presented.

Jack Penca, Assistant United States Attorney, Buffalo , N. Y. 14202, for plaintiff. Andrew L. Gaita, 220 Convention Tower, Buffalo , N. Y. 14202, for defendants.

Memorandum and Order

ELFVIN, District Judge:

Plaintiff seeks to recover unpaid taxes assessed against the defendant Paladin for the years 1971 through 1974. It also asserts causes of action against the defendant Traina, Paladin's brother, based on his alleged conversion of money belonging to Paladin on which plaintiff claims a lien and an alleged fraudulent transfer of such money to him. Plaintiff has moved for summary judgment. Its motion has been opposed by Traina but not by Paladin.

Summary judgment is a drastic remedy which may be granted only when there are no material issues of fact to be resolved at trial. Gladstone v. Fireman's Fund Ins. Co., 536 F. 2d 1403, 1406 (2d Cir. 1976). The moving party has the burden of demonstrating that there is no material factual issue and that he is entitled to judgment as a matter of law. Rob ertson v. Seidman & Seidman, 609 F. 2d 583, 591 (2d Cir. 1979). In ruling upon a motion for summary judgment, a court "must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought * * *." Heyman v. Commerce and Industry Insurance Co., 524 F. 2d 1317, 1320 (2d Cir. 1975). After reviewing the pleadings, the transcript of Traina's pretrial deposition, Paladin's answers to interrogatories, plaintiff's request for admissions, ¹ the affidavit of Philip A. Corigliano submitted in support of the current motion, and the memoranda of law submitted by plaintiff and Traina, I have concluded that the plaintiff has established that it is entitled to summary judgment against Paladin and against Traina on its cause of action for conversion.

[Facts]

Traina and Paladin opened the Stage Pigalle Bar in 1965. Paladin ran the bar as a sole proprietorship until 1970, at which time she became ill. She executed a power of attorney in favor of Traina September 28, 1970 and authorized him to conduct transactions on her behalf with respect to chattels and goods, banking, insurance, general business operations, and records and reports. Thereafter, Traina ran the bar and also handled Paladin's personal affairs, including the preparation of her personal income tax returns.

Beginning in December, 1973, plaintiff made various tax assessments against Paladin. Withholding and Federal Insurance Contributions Act ("FICA") taxes (including interest and penalties) totalling $1,938.31 for the quarter ending September 30, 1973 were assessed December 10, 1973 . Assessments for such taxes (including interest and penalties) for the quarters ending December 31, 1973 and March 31, 1974 were made May 29, 1974 in the amount of $3,125.06 and July 10, 1974 in the amount of $704.13, respectively. Federal unemployment taxes (including interest) totalling $113.10 for the quarter ending December 31, 1973 were assessed July 10, 1974 . Additional assessments for federal unemployment and personal income taxes were made against Paladin throughout the remainder of 1974 and 1975. The assessments totalled $7,641.46.

[Proceeds Assigned]

The Stage Pigalle Bar was destroyed by a fire January 18, 1974 . Paladin executed a partial assignment of the fire insurance proceeds to Traina July 16, 1974 in the amount of $9,066.08. According to Traina's pretrial testimony, the assignment was intended to reimburse him for amounts he had previously expended to pay creditors of the bar. The written document recites the sum of one dollar as consideration for the assignment. Insurance proceeds totalling $16,000 were remitted to Paladin's attorney, Andrew Gaeta, who thereupon disbursed $9,066.08 of the proceeds to Traina.

At the time Paladin assigned said portion of the insurance proceeds to Traina, four separate tax assessments, totalling $5,880.60 had been made against her. A payment in the amount of $496 had been made toward the assessments April 4, 1974 , leaving an outstanding balance of $5,384.60. Plaintiff filed lien notices with respect to two of the assessments (totalling $4,567.37) with the Erie County Clerk April 29, 1974 and June 12, 1974 . Other notices were filed after Paladin executed the assignment. As of April 30, 1981 , the amount outstanding on all assessments made against Paladin, including accrued interest and penalties and deducting the $496 credit, was $12,384.33.

It is well-established that a tax assessment is presumed to be correct. Welch v. Helvering [3 USTC ¶1164], 290 U. S. 111, 115 (1933). Thus, in an action by the government to collect an unpaid tax assessment, the taxpayer has the burden of demonstrating by a preponderance of the evidence that the assessment is incorrect. United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696, 700 (2d Cir. 1965). In her answers to interrogatories, Paladin has stated that she does not dispute the correctness of the tax assessments made against her. Therefore, plaintiff is entitled to summary judgment against Paladin. See , United States v. Pierce, 609 F. 2d 407 (9th Cir. 1979) (per curiam).

Under 26 U. S. C. §6321, a taxpayer's failure to pay a tax assessment creates "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Plaintiff claims that Traina's receipt of a portion of the fire insurance proceeds constitutes a conversion of its lien on the proceeds. A conversion of property is any unauthorized exercise of dominion or control over the property by one who is not the owner thereof which interferes with another person's superior possessory rights in the property. Meese v. Miller, 436 N. Y. S. 2d 496, 500 (4th Dept. 1981 ); Bunge Corp. v. Manufacturers Hanover Trust Co., 325 N. Y. S. 2d 983, 988 (1st Dept. 1971 ), aff'd 335 N. Y. S. 2d 412 (1972). In order to successfully maintain a cause of action for conversion, the plaintiff must establish that its right to possession of the property was superior to the defendant's and that the defendant exercised unauthorized control over the property to the exclusion of the plaintiff's superior rights. Gold Metal Products, Inc. v. Interstate Computer Services, Inc., 436 N. Y. S. 2d 312, 313 (2d Dept. 1981 ).

Plaintiff had established that its claim to the insurance proceeds was superior to Traina's. The lien provided by section 6321 arises at the time the underlying assessment was made. 26 U. S. C. §6322. Under 26 U. S. C. §6323(a), the lien is valid against "any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor" provided that appropriate notice of the lien has been filed. Thus, at the time the proceeds were assigned to Traina, they were subject to four separate liens in plaintiff's favor in the total amount of $5,384.60. With respect to two of the liens (totalling $4,567.37), plaintiff's claim to the proceeds is valid against Traina because notice of the liens was filed prior to the assignment.

[Status as Purchaser]

The question whether plaintiff's other two liens (totalling $817.23) are also valid against Traina is somewhat more complex because notice thereof was not filed until after the insurance proceeds were assigned to him. If Traina is deemed a "purchaser" of the proceeds, plaintiff's liens would not be valid against him. A purchaser is defined as a "person who, for adequate and full consideration in money or money's worth, acquires an interest * * * in property which is valid under local law against subsequent purchasers without actual notice." 26 U. S. C. §6323(h)(6). The requirement of adequate and full consideration is a matter of federal rather than state law and must be strictly applied. Continental Oil Co. v. United States [71-1 USTC ¶9296], 326 F. Supp. 266, 270-1 (S. D. N. Y. 1971). Because the assignment of the insurance proceeds to Traina was supported by consideration in the amount of only one dollar, it was not supported by adequate and full consideration. Fritz v. United States [71-1 USTC ¶9425], 328 F. Supp. 1343, 1345-6 (D. Minn. 1971); United States v. Galvin [61-2 USTC ¶9755], 199 F. Supp. 4, 6 (E. D. N. Y. 1960). Furthermore, past consideration in the form of Traina's alleged payments to Paladin's creditors cannot be deemed adequate and full consideration sufficient to render Traina a purchaser within the meaning of section 6323. United States v. Pavenick [61-2 USTC ¶9679], 197 F. Supp. 257, 259 (D. N. J. 1961). If Paladin was indebted to Traina due to payments made by Traina to her creditors, such indebtedness could not receive priority over plaintiff's claims for taxes unless Traina had provided present adequate and full consideration for an assignment of the insurance proceeds. Thus, I conclude that Traina was not a purchaser of the insurance proceeds within the meaning of section 6323, and that plaintiff's four liens on the proceeds were superior to Traina's rights to the proceeds.

The second element of plaintiff's cause of action for conversion is whether Traina interfered with its right to possession of the insurance proceeds. Traina has argued that, because the total amount of plaintiff's liens at the time of the assignment was $5,384.60 and Paladin received almost $7,000 of the proceeds, his receipt of approximately $9,000 of the proceeds did not interfere with plaintiff's liens. Essentially, Traina argues that even after he received a portion of the proceeds plaintiff could have satisfied its claims out of the proceeds received by Paladin. ² However, Traina has not cited any cases which support his argument that he has not interfered with or excluded plaintiff's rights to the insurance proceeds. Moreover, Traina's argument is contrary to the plain language of section 6321, which provides that a tax assessment creates a lien in favor of the government "upon all property and rights to property" belonging to the taxpayer (emphasis added). See, e.g., Stevan v. Union Trust Company of District of Columbia [63-1 USTC ¶9377], 316 F. 2d 687, 692 (D. C. Cir. 1963); Welsh v. United States [55-1 USTC ¶9238], 220 F. 2d 200, 201-2 (D. C. Cir. 1955); United States v. Barndollar & Crosbie [48-1 USTC ¶9203], 166 F. 2d 793, 794 (10th Cir. 1948). Thus, plaintiff's liens attached to the entire amount of the insurance proceeds and not to a particular portion thereof. The fact that Paladin received proceeds sufficient to pay the amount of the liens (or that she possessed any other property in such a sufficient amount) is unavailing to Traina. Accordingly, I find that plaintiff is entitled to summary judgment on its cause of action for conversion against Traina. Traina's liability for conversion amounts to $5,384.60, the outstanding amount of the liens which had arisen at the time of the conversion.

[Fraudulent Transfer]

Plaintiff also seeks summary judgment on its fraudulent transfer claim against Traina. Under section 276 of New York 's Debtor and Creditor Law, a conveyance made with actual intent to defraud creditors is fraudulent and may be set aside. Because actual intent to defraud is a necessary element of a cause of action under section 276, summary judgment is inappropriate with respect thereto. Plaintiff also asserts a claim for constructive fraud under section 273 of the Debtor and Creditor Law, which provides that a conveyance made by a person who is or who will be thereby rendered insolvent is fraudulent, without regard to the person's actual intent, if the conveyance is made without fair consideration. Summary judgment under section 273 is inappropriate in the present case because it is unclear whether Paladin was insolvent or became insolvent at the time she assigned the insurance proceeds to Traina. See, Debtor and Creditor Law, §271. Additionally, Traina has testified that the assignment was made to compensate him for debts he had previously paid on Paladin's behalf. Thus, Traina has raised a factual issue concerning whether the assignment was made without fair consideration. Id. , §272.

Based on the foregoing discussion, plaintiff's motion for summary judgment is hereby ORDERED granted with respect to Paladin (Count I) and its cause of action for conversion against Traina (Count II), but is ORDERED denied with respect to its claim based on an alleged fraudulent transfer (Count III). ³

¹ Plaintiff filed a request for admissions by both defendants April 19, 1979 . Neither defendant responded to the request and the matters contained therein are therefore deemed admitted under Fed. R. Civ. P. rule 36.

² Traina's argument in this respect is a legal rather than a factual one. Accordingly, Traina has not raised any factual issue which requires trial of plaintiff's claim for conversion.

³ Judgment shall not be entered by the Clerk at this time. See, Fed. R. Civ. P. rule 54(b).

 

 

[80-1 USTC ¶9183]City & County Bank of Campbell County v. United States of America

U. S. District Court, East. Dist. Tenn. , No. Div., CIV. 3-8-79, 5/16/79

[Code Sec. 6323]

Lien for taxes: Validity: Filed after foreclosure sale but before recording of deed.--A federal tax lien was invalid against the purchaser of real property that was sold at a foreclosure sale forced by a creditor despite the fact that the tax lien was filed before the purchaser recorded its deed to the property. Because the government had actual notice of the foreclosure sale, it would be inequitable to permit the government to avoid a senior lien on real estate by awaiting a foreclosure sale and then racing the purchaser to the courthouse to file its own lien notice.

Richard E. Faires, Ridenour, Ridenour, Ridenour, Bowes & Shumate, United American Bank Bldg., Knoxville, Tenn. 37902, for plaintiff. U. S. Attorney, J. V. Crockett, Department of Justice, Washington, D. C. 20002, for defendant.

Memorandum

TAYLOR, District Judge:

This is an action to quiet title to certain real property in Campbell County , Tennessee presently encumbered with a federal tax lien. The Government has filed a counterclaim maintaining the superiority of its tax lien. The case was referred to a Special Master who has filed a report with this Court. The case is now before the Court on plaintiff's motion to accept the Special Master's report and the defendant's motion to reject.

The facts, which are more carefully set out in the Special Master's report, may be summarized as follows: Plaintiff bank loaned money to Cumberland Plastics, Inc. (debtor), and secured the loan by means by a duly recorded trust deed to the real property at issue here. When the debtor defaulted on the loan, the bank requested foreclosure of the trust deed. Formal notice of the trustee's foreclosure sale was timely delivered to the Internal Revenue Service (IRS). The land was sold to the bank, as the sole bidder, at the trustee's sale on March 14, 1977 . The bank's bid was less than the total indebtedness owed the bank. At the time of the sale there was no recorded lien on the property. However, before the bank recorded the deed to it from the Trustee, the IRS duly perfected a tax lien against the debtor and his property.

The Government contends that the validity of its tax lien as against the bank in this case is governed by the rule in Tennessee that an unrecorded deed is void as to the creditor of the vendor of the deed, including a creditor with actual notice of the conveyance. McCoy v. Hight, 162 Tenn. 507, 39 S. W. 2d 271 (1931).

The Special Master disagreed, and concluded that the Government's tax lien does not affect the bank's interest in the property as a purchaser under Tennessee law.

In the opinion of the Court, the Special Master correctly construed federal and Tennessee law. No Tennessee court has ever applied the McCoy rule in a situation like this, where the vendor is the trustee acting pursuant to a trust deed. In all cases in which the rule has been applied in favor of creditors with actual notice of the conveyance, the actual vendor was the debtor of the creditor. See McCoy, supra; City National Bank and Trust Co. of Miami v. City of Knoxville, 158 Tenn. 143, 11 S. W. 2d 853 (1928).

Furthermore, the position argued by the Government would permit the Government, when unable to avoid a senior lien on real estate, to simply await a foreclosure sale and then race the purchaser to the courthouse to file its own lien notice and deprive the purchaser, who is usually the senior lien holder on the land, of the value of his senior lien. The rule cited by the Government was never meant to be used in this fashion. No underlying policy of protecting creditors would justify endangering or upsetting duly recorded senior liens in this manner. Since the Government had actual notice of the foreclosure sale, equity cries out to protect the purchaser at that sale.

We are not sure that the rule which is relied upon by the Government would be followed by the courts of Tennessee today. We are certain that it would not be applied under the circumstances of this case.

Accordingly, it is ORDERED that defendant's motion to reject the Special Master's report be, and the same hereby is, denied. It is further ORDERED that plaintiff's motion to enter judgment in accordance with the Special Master's report be, and the same hereby is, granted.

Order Accordingly.