Recordation of Interest Page2

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The Court in the case of United States v. City of New Britain, Conn., supra, 347 U. S. 81, 74 S. Ct. 367 [54-1 USTC ¶9191], apparently assumed that liens of the character held by respondents met the test as to perfection and specificity and in the following cases it was definitely so held: United States v. Atlantic Municipal Corporation, supra, 212 Fed. (2d) 709 [54-1 USTC ¶9392]; Evans v. Stewart, supra, -- Iowa --, 66 N. W. (2d) 442; State v. Woodroff, supra, -- Ala. --, 46 So. (2d) 553; National Surety Corporation v. Sharpe, 236 N. C. 35, 72 S. E. (2d) 109.

We next consider any right of the Government to priority under Sections 3670-3672 of the Internal Revenue Code. Section 3670 provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." The next section, or 3671, provides in part: "* * * the lien shall arise at the time the assessment list was received by the collector", and Section 3672 as amended in 1942 provides in part the "lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector * * * in the office in which the filing of such notice is authorized by the law of the State * * * in which the property subject to the lien is situated * * *."

It was held in United States v. City of New Britain , Conn. , supra, that the foregoing statute does not in terms confer priority upon the federal liens and that where other statutory liens are involved, the priority of each "must depend on the time it attached to the property in question and became choate." The Court there held that priority is determined by the principle, "the first in time is the first in right." In line with this decision it was held in United States v. Atlantic Municipal Corporation, supra, that a specific and perfected lien for ad valorem taxes due to a county which had attached to the taxpayer's property prior to the filing of a federal tax lien, had priority over the federal lien, even though the taxpayer was insolvent.

[Conclusion]

Applying the foregoing principles to the facts of the instant case, we think the Court below correctly held that the federal liens were inferior to those of the judgment creditor and the income tax liens of the State of South Carolina, and also to those taxes owing to the County of Marlboro and the Town of Bennettsville which had accrued prior to the filing of the federal liens in the office of the clerk of court. It is true that under the terms of Section 3671 of the Internal Revenue Code, the federal liens arose at the time the assessment lists were received by the collector. But the record before us does not show when either assessment was received in that office. We have only before us the fact that the first lien was filed in the clerk's office on February 28, 1951 , and the second on December 20, 1951 . Very probably the assessment lists were received by the collector prior to these dates, but since the burden rested upon the Government to show any fact necessary to establish priority, we must on the record before us take the date that the liens were recorded. Long prior to this time the judgment and the South Carolina income tax liens were filed and entered in the office of the clerk of court. Also prior to the time the federal liens were recorded taxes due the County of Marlboro and the Town of Bennettsville for 1950 and the years prior thereto had accrued and constituted specific and perfected liens. To this extent such taxes have priority over the federal liens. When the first federal lien was entered in the clerk's office on February 28, 1951 , the taxes for 1951 were inchoate and not perfected. Town of Myrtle Beach v. Holliday, Tax Collector, 203 S. C. 25, 26 S. E. (2d) 12. The taxes due to these political subdivisions for the year 1951 and subsequent years must rank inferior to the federal liens.

In reaching the foregoing conclusion we have not overlooked the recent case of United States v. Scovil, -- U. S. --, 75 S. Ct. 244 [55-1 USTC ¶9137], and the companion cases of United States v. Acri, -- U. S. --, 75 S. Ct. 239 [55-1 USTC ¶9138], and United States v. Liverpool & London & Globe Insurance Co., -- U. S. --, 75 S. Ct. 247 [55-1 USTC ¶9136]. They are readily distinguishable in that in each of them the lien in controversy had not been perfected at the time the federal tax lien was received in the office of the collector. Also, in United States v. Gilbert Associates, 345 U. S. 361, 73 S. Ct. 701 [53-1 USTC ¶9291], the municipal tax lien had not been perfected. Moreover, in that case only personal property was involved.

The priority of the lien of the Darlington County Bank & Trust Company can be sustained on the further ground that under the terms of Section 3672 of the Internal Revenue Code, the lien created by Section 3670 is not valid as against an antecedent judgment creditor. We find it unnecessary to determine whether the State of South Carolina is a judgment creditor within the meaning of Section 3672.

Affirmed.

BAKER, C. J., STUKES, TAYLOR and LEGGE, JJ., concur.

 

 

[52-1 USTC ¶9269]Exeter Banking Company v. William H. Sleeper et al.

In the Supreme Court for the State of New Hampshire at Rockingham, No. 4099, 87 A2d 151, March 10, 1952

Tax liens: Improperly executed mortgage: Priority of Government over mortgagee.--In a previous proceeding the vendee of hotel property brought action against the vendor to enjoin him from foreclosing a mortgage against the vendee and to cancel the mortgage as well as the deed. There was a question in that proceeding as to whether the mortgage ever became effective for want of a valid delivery, but the Court held that the lower court's ruling that the mortgage was valid should be allowed to stand unless the vendee did equity by paying damages for breach of contract. In the present action the Government claimed priority for tax liens against the vendee which arose subsequent to the filing of the mortgage. The Court held that the effect of the prior decision was to recognize the validity of the mortgage and, therefore, decided for the mortgagee. Two dissents.

George R. Scammon, for plaintiff. John J. Sheehan, United States Attorney and Rob ert D. Branch, Assistant United States Attorney, for defendant, United States of America, Wayne J. Mullavey, for defendants, William H. Sleeper and William H. Sleeper, Jr.

PETITION, for declaratory judgment brought by the Exeter Banking Company against William H. Sleeper and others to determine ownership of a balance of $9,003.14 which it holds as a surplus remaining after satisfying its mortgage demands on certain property by foreclosure proceedings. Hearing by the Court who decreed that the fund belonged to the defendant Sleeper and ordered that the money be paid to his assignee, William H. Sleeper, Jr. The United States of America intervened as a claimant of certain taxes due it from one Lessard, who had given the defendant Sleeper a mortgage of the real estate in question dated August 29, 1946 . It excepted to the failure of the Court of make certain findings and rulings, to certain findings and rulings as made, and to a portion of the decree. The Government also excepted to the denial of its motion to set aside certain parts of the decree. Various other claimant defendants who were joined in the proceedings have transferred no exceptions to this Court.

It appears in accordance with the facts as set forth in Lessard v. Sleeper, 96 N. H. 268, which it is agreed have been incorporated herein and made a part of this case, that the plaintiff bank held a mortgage on certain property known as Hotel Constance and owned by the defendant Sleeper. The latter sold this property to Lessard, subject to this mortgage on May 1, 1945 . Later, on August 29, 1946 , Sleeper and Lessard made an agreement whereby Sleeper contracted to sell Lessard certain land, buildings, and furnishings situated in the rear of the hotel for $15,000, $5,000 of which was to be paid on or before September 1, 1948 . On the same day this agreement was made Lessard signed a note and mortgage to Sleeper covering this property and also the hotel, and Sleeper signed a deed of the property, and a bill of sale of the personalty to Lessard. It was agreed that Sleeper was to have the right to deposit the note as collateral security. The deed, mortgage and bill of sale were all to be deposited in escrow in the plaintiff bank and they were not to be delivered, nor was title to pass until the $5,000 was paid. However, Lessard was to take full possession and control of the property immediately and at the same time interest was to begin running on the note. Lessard did take full possession and control of the premises under the agreement and used them until the fall of 1948. He has never paid the $5,000 due on September 1, 1948 . Sleeper, without Lessard's knowledge or consent, recorded the mortgage on September 13, 1946 , and the deed on June 25, 1949 . He commenced foreclosure proceedings on the mortgage on or about April 26, 1949 . A bill to enjoin the foreclosure, to cancel the mortgage and to declare it null and void as well as to cancel the deed and note was brought by Lessard, who claimed fraud and mistake among other grounds. After a hearing by a master who found no fraud, upon his report recommending that the foreclosure be enjoined and the mortgage, deed, note and bill of sale be declared null and void, the report was disallowed and the bill was ordered dismissed by the Superior Court. On appeal to this Court, the order was amended to "Bill dismissed nisi." The matter was remanded to the Superior Court with an order that if Lessard were able and willing to pay Sleeper such damages as that court might find were occasioned by Lessard's breach of the agreement, a decree of cancellation might issue. Otherwise, "the order of dismissal should stand." Lessard v. Sleeper, 96 N. H. 268, 272. Sleeper then filed a motion to have his damages assessed, and the Superior Court ordered Lessard to file a bond before a day certain and upon his failure to do so, the court ruled that there should be judgment on its original order of "Bill dismissed." Subsequently, in the present declaratory judgment proceedings, the Court ruled that a valid mortgage existed between Lessard and Sleeper taking priority over all the claimant defendants including the United States of America . It appears that the liens of the Government and the other defendants were all created subsequent to the recording of the mortgage from Lessard to Sleeper on September 13, 1946 . Transferred by WHEELER, J. Other facts appear in the opinion.

George R. Scammon for the plaintiff, filed no brief.

John J. Sheehan, United States Attorney, and Rob ert D. Branch, Assistant United States Attorney (Mr. Branch orally), for the defendant, the United States of America .

Wayne J. Mullavey (by brief and orally), for the defendants William H. Sleeper and William H. Sleeper, Jr.

BLANDIN, J.

The parties agree the issue here is whether a valid mortgage lien existed on the property in question in favor of the defendant Sleeper prior to the creation of the tax liens of the claimant, the United States of America . If such a lien did exist, then Sleeper must prevail. United States v. Sempsell, 153 Fed. (2d) 731; 174 A. L. R. 1387 n. This is true here whether or not the authority of the Sempsell case, so far as it applies to inchoate liens, has been affected by the decision in United States v. Security Trust and Sav., 340 U. S. 47 [50-2 USTC ¶9492]; see also 95 L. Ed. anno. 59, 65, 67. The claimant has no lien except that given it by statute. Flack v. Agency, 96 N. H. 335 and authorities cited. In this case, the federal statute expressly provides that the lien created by 26 U. S. C. s. 3670 "shall not be valid as against any mortgagee" until certain notices are filed. 26 U. S. C. s. 3672(a)(2). Admittedly, the required notices were not filed until long after the mortgage was executed and recorded. It appears that the claimant, who concededly derives all its rights from Lessard, has none superior to those of the defendant Sleeper. The latter executed a substantial part of his agreement in that he gave Lessard exclusive possession and use of all the properties mortgaged, both real and personal, from the date of the contract until the fall of 1948. Considering that they consisted of a hotel, camps, barracks so-called, and furnishings, it is obvious that the defendant might sustain substantial damage from Lessard's failure to perform--and this fact was recognized in our previous opinion. Lessard v. Sleeper, 96 N. H. 268. So far as the record indicates, his only means of satisfying such damages are from the disputed fund.

In his original petition Lessard prayed that the mortgage foreclosure by Sleeper be enjoined and the mortgage declared null and void. The master filed a report recommending that this be done, but the Superior Court disallowed the report, ruled the mortgage valid and ordered the bill dismissed. In this situation our previous opinion recognized, as it was forced to do, that unless the Superior Court's order was reversed, Sleeper could go ahead with the foreclosure sale. This it appears is the reasonable construction of our statement that "Outstanding in the hands of the defendant the mortgage constitutes . . . a constant threat of foreclosure by power of sale." Lessard v. Sleeper, 96 N. H. 268, 272. Regardless of the earlier language in the opinion which might suggest a different conclusion, the plain purpose and effect of our order "Bill dismissed nisi" was to confirm the order and ruling of the Superior Court holding the mortgage not null and void but leaving it valid and uncancelled on the record to protect Sleeper in the event Lessard did not pay such damages as might be assessed against him for his breach. This was not inequitable since Sleeper had substantially performed by permitting Lessard to use all the property from August 29, 1946 to the fall of 1948. See Rutherford Nat. Bank v. H. R. Bogle & Co., 114 N. J. Q. 571 and authorities cited; Tancred v. Beppler, 15 N. J. Super. 394.

The claimant was put on notice of the situation by the mortgage recorded on September 13, 1946 , long prior to the inception of any of the liens. See Hargett v. Hargett, 201 Ala. 511. In this respect the case is clearly distinguishable from such decisions as Butler v. Wheeler, 73 N. H. 156 where the attaching creditors had no notice, actual or constructive, of other claims. It follows that since Sleeper had a valid mortgage which takes precedence over the Government liens, his assignee is entitled to the fund.

Judgment for the defendant, William H. Sleeper, Jr.

KENISON and DUNCAN, JJ., dissented; the others concurred.

[Dissenting Opinion]

DUNCAN, J., dissenting:

The funds held by the plaintiff bank and now claimed by the United States and the assignee of William H. Sleeper are proceeds of the sale of an equity of redemption in hotel property conveyed in 1945 by Sleeper to Edgar P. Lessard, and thereafter foreclosed by the bank under a mortgage to which Lessard's title was subject. Prior to the foreclosure, Lessard undertook to purchase adjoining property from Sleeper for the sum of $15,000 by an agreement dated August 29, 1946, more particularly set forth in Lessard v. Sleeper, 96 N. H. 268, 269. A second mortgage to Sleeper of the hotel property acquired by Lessard in 1945 was placed in escrow pursuant to the agreement, and was the subject of the litigation in which the last cited opinion was rendered. It now appears that in June 1950, the mortgage and the note secured thereby were assigned by Sleeper, and the assignee's claim to the fund held by the bank is founded upon that mortgage. The claim of the United States is based upon liens for taxes assessed against Lessard in 1947 and subsequent years. Notice of the first lien was filed in the office of the Clerk of the United States District Court on May 28, 1948 , and like notices were filed in subsequent years.

The Trial Court ruled that "as a result" of the entry of final judgment upon an order dismissing the bill in Lessard v. Sleeper, "there was a valid mortgage existing between Lessard and Sleeper," which had priority over the liens of the United States . In the opinion now rendered, which holds the second mortgage valid, apparently for the same reason, I am unable to concur.

It was expressly decided in Lessard v. Sleeper, supra, 271, that the mortgage of August 29, 1946 , never became effective, for want of valid delivery. As between Sleeper and Lessard, and their respective privies who are the adverse claimants in these proceedings, that determination is res judicata. Morgan v. Burr, 58 N. H. 470. The question of the validity of the mortgage was then in issue (cf. Laconia Nat. Bank v. Lavallee, 96 N. H. 353), and it was necessarily determined in that action. See 50 C. J. S. 237, 238; Judgments, s. 736(b). The plaintiff Lessard's right to cancellation of the mortgage depended upon its invalidity, and he was held to be entitled to cancellation provided he should do equity by satisfying any damages occasioned the defendant Sleeper by his breach of contract. It now appears that no decree of cancellation was entered because the condition was never complied with. But Lessard's failure to take the steps necessary to entitle him to the aid of equity could not operate to make the ineffective mortgage enforceable, or to validate the invalid delivery of the mortgage in 1946. Denial of the aid of equity to Lessard could not deprive him of his title to the hotel. "Having a legal right, the fact his equitable remedy is lost does not show that all his rights are obliterated." Nashua Hospital v. Gage, 85 N. H. 335, 342. No more could the denial of relief to Lessard create a property interest in Sleeper which he did not previously have. The mortgage was no more effective in 1951 than it was in 1946. Title still remained in Lessard. Stockwell v. Williams, 68 N. H. 75. It follows that Sleeper never acquired any interest in the premises owned by Lessard and later sold by the bank, and that his recent assignment of the mortgage conveyed no rights in the proceeds from foreclosure of the first mortgage.

Reliance is placed upon a statement in the former opinion that the second mortgage constituted "a constant threat of foreclosure." The sentence described the mortgage as a cloud upon title, and imported no recognition of a right of foreclosure.

The apparent concern over the chance that Sleeper was damaged by Lessard's breach of contract to purchase the adjoining property has no proper place in determination of rights in the hotel. As vendor of the other property Sleeper received substantial payments while the vendee was in possession (Lessard v. Sleeper, supra, 270) and the vendee never acquired title because he never accepted the vendor's deed. Id. 271. No damages have been determined, and the possibility of their existence is no justification for an award of over $9,000 to the assignee upon a mortgage which has previously been held ineffective. This goes beyond protection of the vendor against the nonpayment of any damages that might be assessed against the vendee. In substance, the defendant in the prior litigation is now rewarded for action previously described as a breach of contract on his part. Id.

The liens of the government attached to whatever interest Lessard had in the hotel equity. If in fact that interest was greater than the records appeared to indicate because of the invalid second mortgage, the liens attached to the larger interest. See Beland v. Goss, 68 N. H. 257. The statute creating the liens (26 U. S. C. A. s. 3670) operated to vest an immediate interest in the United States (United States v. City of Greenville, 118 Fed. (2d) 963, 965 [41-1 USTC ¶9381]) of no lesser standing than that of an attaching creditor. United States v. Security Tr. & Sav. Bk., 340 U. S. 47 [50-2 USTC ¶9492]. I would give judgment for the United States .

KENISON, J., concurred in the foregoing opinion.

 

 

[83-2 USTC ¶9448]Trust Company of Columbus , Plaintiff v. United States of America , Defendant

U. S. District Court, Mid. Dist. Ga., Columbus Div., Civil Action No. 83-21-COL, 565 FSupp 61, 6/6/83

[Code Secs. 6323 and 7426]

Suit by nontaxpayer: Wrongful levy: Validity of lien: Priority of bank's security interest: Georgia law.--The government's levy on a taxpayer's bank accounts was wrongful because it extinguished a bank's senior lien on the accounts. The bank's security interest in the accounts was senior to the tax lien because the security interest vested, under Georgia law, when the loan agreements were entered into by the taxpayer and the bank, prior to the time the tax lien was filed.

Cecil M. Cheves, Page, Scrantom, Harris, McGlamry & Chapman, Columbus , Georgia , 31994, for plaintiff. Steven Shapiro, Victoria J. Sherlock, Department of Justice, Washington, D. C. 20530, for defendant.

Opinion and Order

ELLIOTT, District Judge:

In this civil action Plaintiff, a banking corporation with its principal place of business in Columbus , Georgia , seeks to recover the amounts it paid to Defendant, the United States of America , pursuant to a Notice of Levy served upon Plaintiff by the Internal Revenue Service. The amounts involved were deposited with Plaintiff by a customer who was delinquent in paying federal FICA, withholding and unemployment taxes. Plaintiff asserts that Defendant's levy was wrongful because it extinguished Plaintiff's senior lien on the amounts on deposit with it.

Jurisdiction is predicated upon 26 U. S. C. §7426 and 28 U. S. C. §1346(e). This matter is currently before the Court on cross motions for summary judgment. Both parties agree that no dispute exists with respect to any material fact involved in this action.

Plaintiff, Trust Company of Columbus [hereinafter referred to as "the bank"], is a banking corporation which in the normal course of its business makes loans to individuals and corporations. Between September 3, 1980 and February 9, 1982 the bank made four separate loans to one of its customers, Spain & Associates, Inc. [hereinafter referred to as " Spain "]. The aggregate amount of these loans was $112,680.00. Each time Spain borrowed money from the bank it executed a promissory note in the bank's favor. Each promissory note contained the following language:

The term "collateral" as used herein shall mean the following property which has been or is hereby delivered, pledged, assigned, conveyed and transferred to the holder . . . together with all other property of every kind and description including accounts, monies and deposits now or hereafter in possession or control of Holder . . .

The undersigned agrees that the Holder shall have a lien upon, security title to and a security interest in the Collateral to secure the payment of this Note . . . (Emphasis added.)

By November, 1982 Spain was in default on payment of each of the four promissory notes and was indebted to the bank in an amount in excess of $95,000.00. Spain was likewise in default on payment of federal FICA, withholding and unemployment taxes. Therefore, on November 9, 1982 and December 10, 1982 , Defendant filed its Notice of Tax Lien in Muscogee County , Georgia , the county in which both the bank and Spain were located.

Spain had two general deposit accounts with the Plaintiff bank. On November 8, 1982 the bank received a Notice of Levy from the Internal Revenue Service requesting that the bank turn over to the IRS any funds belonging to Spain . On November 10, 1982 the bank released $4,148.05 to the IRS, that being the balance in one of Spain 's general deposit accounts. On December 2, 1982 the bank, after receiving a Notice of Final Demand for Payment from the IRS, released $17,990.62 to the IRS, that being the amount then remaining in Spain 's second general deposit account.

The bank wrote several letters to the IRS requesting that it release its levy on the Spain accounts and refund the amounts which had been forwarded by the bank. The bank asserted that the IRS levy was wrongful because it extinguished the bank's lien on the Spain accounts, given by virtue of the above-quoted language in the promissory notes. When a month passed without any reply having been received by the bank from the IRS, the bank instituted this action to recover the amounts levied upon by Defendant, together with interest, costs and reasonable attorney's fees.

The position of the bank is that Spain gave it a security interest in its general deposit accounts in each of the four promissory notes, that the bank's security interest arose prior to Defendant's tax lien, and that the bank's lien was, therefore, entitled to priority over Defendant's tax lien and resulting levy. The Defendant argues that the bank had no lien upon the Spain accounts, that it had merely an equitable right of setoff which it did not exercise, and that Defendant's levy was, therefore, proper.

The validity of the lien asserted by the bank and its priority over Defendant's tax lien appear to be questions of first impression in this district. Initially it should be noted that Plaintiff has followed the procedural requirements necessary to maintain this action. It did not refuse to honor the IRS levy; rather, it released the levied-upon funds to the IRS and then instituted this action for their recovery. As held by the United States Court of Appeals for the Sixth Circuit:

The appropriate remedy for one . . . upon whom a notice of levy has been served which he believes to be wrongful, is to surrender the property and bring an action against the government pursuant to Internal Revenue Code §7426. Such a lawsuit is the appropriate vehicle for one other than a taxpayer who wishes to contest the propriety of a levy on property in which he claims an interest.

United States v. Weintraub [80-1 USTC ¶9172], 613 F. 2d 612, 622 (6 Cir. 1979), cert. den. 447 U. S. 905 (1980); accord, United States v. Citizens & Southern National Bank [76-2 USTC ¶9665], 538 F. 2d 1101 (5 Cir. 1976), cert. den. 430 U. S. 945 (1977); Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097 (5 Cir. 1972).

Turning to the substantive issues at hand, 26 U. S. C. §7426(a)(1) provides:

If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States.

The regulations promulgated under this code section provide that a levy is wrongful if it "will or does effectively destroy or otherwise irreparably injure such person's interest in the property which is senior to the Federal tax lien". IRS Reg. §301.7426-1-(b)(iv)(d). (Emphasis added). Because the balances in the Spain accounts were extinguished by Defendant's levy, the levy was wrongful with respect to any party who had an interest in the accounts which was senior to the federal tax lien. 26 U. S. C. §7426. Security interests acquired by third parties prior to the time when notice of a tax lien is filed by the IRS are senior to a federal tax lien. 26 U. S. C. §6323(a).

In this case the Plaintiff-bank asserts that it had a security interest in the property levied upon by Defendant, that its security interest arose prior to the filing of the notice of tax lien, and that its security interest was therefore senior to Defendant's tax lien. Certainly it is true that the promissory notes containing the language which purportedly granted the bank a security interest in the Spain accounts were signed before Defendant filed its notice of tax lien. However, whether the "security interest" created by the promissory notes is one which may defeat a federal tax lien is a question which can be resolved only by applicable federal law. For federal purposes a security interest is defined as:

[A]ny interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest had become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth. 26 U. S. C. §6323(h)(1).

The security interest asserted by the bank is one acquired in property ( Spain 's interest in its deposit accounts), pursuant to contract (the promissory notes), to secure payment of an obligation ( Spain 's obligation to repay the amount of the loans with interest). The bank has clearly parted with money (the amounts loaned to Spain ) in exchange for the security interests it received in Spain 's deposit accounts.

The next question to be resolved in determining whether the bank's security interest is senior to Defendant's tax lien is whether the bank's interest had "become protected under local law against a subsequent judgment lien arising out of an unsecured obligation". 26 U. S. C. §6323(h)(1). Under Georgia law the bank's security interest would enjoy a protected and preferred status vis-a-vis a subsequent judgment lien arising out of an unsecured obligation. Macon National Bank v. Smith, 170 Ga. 332 (1930); Georgia Bank & Trust Co. v. Hadarits, 221 Ga. 125 (1965); Copeland v. Peachtree Bank & Trust Company, 150 Ga. App. 262 (1979).

The case of Macon National Bank, supra, is quite similar to the instant case. A customer had executed a promissory note in favor of his bank and therein had granted the bank a security interest in his general deposit account as collateral to secure repayment of the loan. After the security interest had been granted, but prior to the maturity date of the note, a creditor of the customer served a summons of garnishment on the bank with respect to the customer's funds on deposit with the bank. 170 Ga. at 333-34. The Supreme Court of Georgia held that the bank's interest vested at the time the customer executed the promissory note, which was prior to the date of service of the summons of garnishment, and that the bank's interest therefore was entitled to preference with respect to any amount on deposit on the date of service of the summons of garnishment. 170 Ga. at 338-39.

The security interest asserted by the Plaintiff bank herein meets the definition set forth in 26 U. S. C. §6323(h)(1). It arose prior to the date on which Defendant filed its notice of tax lien and, therefore, is considered to be senior to Defendant's tax lien under 26 U. S. C. §6323(a). The property in which the bank has a senior interest was extinguished by Defendant's levy; the levy was therefore wrongful with respect to the Plaintiff bank. 26 U. S. C. §7426.

Accordingly, the Plaintiff's motion for summary judgment in this case must be, and is hereby, granted. Judgment will be entered in favor of Plaintiff in the amount of $22,138.67, plus interest as provided in 26 U. S. C. §7426(g), plus costs.

 

 

[80-2 USTC ¶9697] Rob ert F. Vavrina, Plaintiff-Assignee and United States of America, Plaintiff-Intervenor v. Rob ert F. Koch and E. Carmen Koch, his wife, Defendants

U. S. District Court, Dist. MD. , Civil Action No. J-79-339, 6/5/80

[Code Sec. 6323]

Lien for taxes: Validity and priority against certain persons: Mortgagee.--A federal tax lien on the real property of a taxpayer had priority over the lien of a mortgagee bank in the same property because the taxpayer had previously conveyed the property in question to his son, the bank's lien was therefore not choate and the bank's counsel conceded that the bank's mortgage was invalid. The tax lien also took priority over the son's interest in the property because the evidence showed that the conveyance by the taxpayer to his son was without consideration. The son was therefore not a purchaser within the meaning of the federal tax lien statute. In addition, the conveyance by the taxpayer to his son was made after the filing of the federal tax lien.

Rob ert F. Vavrina, Callahan, Clawell & Lauderman, 210 E. Redwood St., Baltimore, Md. 21202, pro se. Russell T. Baker, Jr., United States Attorney, Gale E. Rasin, Assistant United States Attorney, Baltimore, Md. 21201, S. Martin Teel, Jr., Will E. McLeod, Department of Justice, Washington, D. C. 20530, for U. S., Marcus J. Williams, Williams, Hammond, Moore & Shockley, 18 N. Main Street, Berlin, Md. 21811, for Peninsula Bank. Leonard M. Murphy, 7901 Wisconsin Ave. , Bethesda , Md. 20014 , for the Bank of Bethesda . Rob ert F. Koch and E. Carmen Koch, 6605 Lone Oak Drive , Bethesda , Md. 20034 , pro se.

Memorandum and Order

JONES, District Judge:

This case has its beginnings in Worcester County , Maryland . The action concerns excess proceeds from a mortgage foreclosure sale which was ratified on April 21, 1978 . Specifically, all of the parties except for the plaintiff-assignee Rob ert F. Vavrina contend that a special auditor did not determine the proper priority of claimants as to the excess proceeds.

Rob ert F. and E. Carmen Koch purchased a condominium in Ocean City , Maryland in May of 1973. A mortgage in the amount of $44,250 was obtained from Baltimore Federal Savings and Loan Association and recorded in the Circuit Court for Worcester County on May 7, 1974 . Problems subsequently arose and a judicial sale was ordered. Prior to the ratification of the mortgage foreclosure sale, Peninsula Bank was permitted to file a claim for proceeds from the sale, it being the holder of two second mortgages, as hereinafter described. The Bank of Bethesda was likewise permitted to file a petition for proceeds on April 27, 1978 . The "First and Final Special Auditor's Report" was filed on September 28, 1978 (Chancery Case No. 11,465) by Paul C. Ewell, a Special Auditor of that court. After the requisite admin istrative costs, Mr. Ewell allowed the assignee his entire claim of principal and interest on the mortgage, plus costs, fees and all other proper expenses as the first priority claimant. He then determined that Peninsula Bank should take second priority "the sum of Nine Thousand Two Hundred Seventy-Three and 55/100ths Dollars ($9,273.55), representing payment of principal and interest due on the Second Mortgage. . . ." The third rung on the priority ladder, and the balance of money remaining from the mortgage foreclosure sale "amounting to Four Thousand One Hundred Sixty-Nine and 74/100ths Dollars ($4,169.74) has been applied to part payment of the claim of The United States for Internal Revenue Taxes filed therein." Certification of mailing was made to two I. R. S. agents (Harvey R. Hammer and Rob ert Longford) and reference was made to Md. Rule 595 g. 2. That rule mandates that any exceptions to that Report must be filed within a fifteen day period. Exceptions were filed by Rob ert F. Koch, Jr. and The Bank of Bethesda.

A hearing on the exceptions to that Report was set for January 17, 1979 in the Circuit Court for Worcester County (Paper #7). However, on January 16, Judge Prettyman permitted the United States , on its motion, to intervene. A Complaint in Intervention was filed asserting that a valid federal tax lien had been filed against Rob ert F. and E. Carmen Koch. While no mention was made of Mr. Ewell's Report, nor any formal exception made to the Special Auditor's Report, implicitly the United States contended that it was due any excess proceeds from the sale once the assignee's claim was satisfied. The United States thereupon removed this case to this Court pursuant to 26 U. S. C. §7424.

At a hearing held in open court on April 17, 1980 , it became apparent to the Court that the bone of contention over the Report, and thus the excess proceeds, was between Peninsula Bank, the United States and Rob ert F. Koch, Jr. All of the parties agreed that the plaintiff-assignee Vavrina had first priority to the excess proceeds. Accordingly, this Court on April 25, 1980 ratified and confirmed the Special Auditor's Report in part as to the foreclosure costs expended and as to the priority lien of Baltimore Federal Savings and Loan Association. The remaining funds from the excess proceeds were directed by the Court to be withheld by the assignee pending further Order of this Court.

Also at that hearing, the Court heard argument from counsel representing Bank of Bethesda. The Bank essentially complains that they should take priority over the United States since the United States never formally petitioned for excess proceeds prior to the Special Auditor's Report. In their Petition for Excess Proceeds, the Bank contends that they originally obtained in Montgomery County , Maryland two Confessed Judgments which were filed in the Circuit Court for Worcester County on October 1, 1977 . The Confessed Judgments were entered in the Circuit Court for Montgomery County on January 12, 1976 . Md. Rule 620 b provides that

[a] judgment of a court of another county shall constitute a lien upon real or leasehold property of the judgment debtor to the same extent as a judgment entered by the court of a county in which the real or leasehold property is located, from the date when the certified copy of the docket entries from the clerk of such other court shall have been filed will the clerk for recording.

According to the Bank's own petition, such action was not taken until October 1, 1977 . This date, regardless of the priority determination of Peninsula Bank, the United States and Mr. Koch, Jr., is subsequent to perfection of each of their liens. The Bank of Bethesda is simply too far down the priority list to warrant further discussion. Their exceptions to the Special Auditor's Report are hereby overruled.

A federal tax lien was filed against Rob ert F. and E. Carmen Koch on December 2, 1974 in the amount of $21,437.77. To perfect a tax lien, notice must be given pursuant to 26 U. S. C. §6323(f). All of the parties agree that this was done on March 18, 1976 in the amount of $18,728.24. In the interim, however, Peninsula Bank and Mr. Koch, Jr. both claim that their interest in the proceeds became perfected. Prior to discussing the priority each respective party claims, it is important to note that none of the parties has claimed that the United States is precluded from excepting to the Special Auditor's Report because the time limitations of Md. Rule 595 g. 2 have not been complied with (fifteen days). In that no party presently before the Court complains of the United States ' late objections (April 15, 1980), this issue need not be addressed. ¹

Mr. Koch, Jr.'s contention is simple: the property that was subject to the mortgage foreclosure sale was deeded to him by his parents ( Rob ert and Carmen Koch) on December 31, 1974 for a valuable consideration. This deed was apparently recorded on January 16, 1976 . A second mortgage was also apparently executed by Mr. Koch, Jr. to Peninsula Bank on June 30, 1977 . ²

Peninsula Bank's claims are likewise simple. Rob ert F. and E. Carmen Koch conveyed the subject property in December of 1974 "without any recited consideration" ³ to Mr. Koch, Jr. That deed was recorded on January 16, 1976 . A second mortgage was executed to Peninsula Bank by Rob ert F. and E. Carmen Koch on January 26, 1976 and was recorded in the Circuit Court for Worcester County . The second mortgage was dated June 30, 1977 from Mr. Koch, Jr. to Peninsula Bank.

The United States filed an objection to the Special Auditor's Report, a Supplemental Brief and a Second Supplemental Brief. The United States claims that it is entitled, by virtue of its prior existing and recorded tax lien, to priority over the second mortgage of Peninsula Bank and thus the $9,273.55 accorded Peninsula Bank by the Special Auditor. The gravamen of the United States ' claim is two-fold. First, as the United States has claimed since it was permitted to intervene, the December 31, 1974 conveyance from Rob ert F. and E. Carmen Koch to their son, Rob ert F. Koch, Jr. was without consideration and thus Mr. Koch, Jr. took the property subject to the federal tax lien (See Exhibit G attached to "Government's Objection to the First and Final Special Auditor's Report;" see also text accompanying n. 3, supra at 4). In addition, the first second mortgage recorded in favor of Peninsula Bank (March 8, 1976) was executed by Rob ert F. and E. Carmen Koch, which the United States claims (and which Peninsula Bank does not contest) was invalid. Hence, the United States contends, Peninsula Bank did not become a secured creditor until a second mortgage was executed by Mr. Koch, Jr. and recorded in the Circuit Court for Worcester County on June 30, 1977 . Second, in response to the Court's questions at the hearing in open court, the United States contends that they have properly intervened in this case under 26 U. S. C. §7424 and have properly asserted the priority of the federal tax lien under 26 U. S. C. §7425.

26 U. S. C. §6321 provides that

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, . . . 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.

It is clear that where a federal tax lien is one of a number of liens on a property, federal law determines the priority of each of the liens. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 514 (1960).

A contest between a federally created tax lien and a competing lien is resolved by the first in time, first in right rule enunciated in United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954) . . . Section 6323 of the Code, 26 U. S. C. §6323, provides that the federal lien is not valid as against judgment lien creditors until the filing of notice of the lien in accordance with 26 U. S. C. §6323(f). The state lien is prior in time if it becomes a choate lien against the property prior to the filing of the federal tax lien. . . . A state created lien is choate if the lienor has obtained judgment on the lien or if the lien is enforceable against the property by summary proceeding. United States v. Waite, Inc. [80-1 USTC ¶9128], 480 F. Supp. 1235, 1238 (W. D. Pa. 1979).

Accord, Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466 F. 2d 1040 (5th Cir. 1972), cert. denied, 410 U. S. 929 (1973); United States v. Fleming [80-1 USTC ¶9226], 474 F. Supp. 904 (S. D. N. Y. 1979).

Thus to defeat a federal tax lien, "the identity of the lienor, the property subject to the lien, and the amount of the lien must be established." Atlas, Inc. v. United States [79-1 USTC ¶9118], 459 F. Supp. 1000, 1003 (D. N. D. 1978).

At the hearing in open Court, in which all parties were permitted by the Court to present testimony if they so desired, and in the briefs submitted by all parties, the letter by Rob ert F. Koch dated April 18, 1977 to Marcus J. Williams, Esq. (Peninsula Bank's present lawyer) has not been refuted. Nor has any party considered or brought to the Court's attention that the "1974 conveyance to my son," referred to in the letter was anything other than the December 31, 1974 conveyance to Mr. Koch, Jr. of the property from which the proceeds of the mortgage foreclosure sale are the subject of the instant case. Peninsula Bank, in its brief to the Court, stated that this conveyance was "without any recited consideration." Yet a second mortgage was executed by Rob ert F. and E. Carmen Koch describing the property as the security on January 26, 1976 and recorded on March 8, 1976 . Peninsula Bank argues that their first second mortgage was perfected and that it should take priority over the federal tax lien which was filed March 18, 1976 . Such a contention assumes the validity of the first second mortgage recorded on March 8. At the exceptions hearing, Peninsula Bank's attorney conceded that this first second mortgage was invalid and that a second second mortgage was properly executed on June 30, 1977 . This argument is hardly synonymous with the legal requirements of a choate lien, United States v. Waite, Inc., 482 F. Supp. at 1238. The United States ' notice of the federal tax lien was first in time and thus it should have taken second priority as to the excess proceeds of the mortgage foreclosure sale in the Special Auditor's Report as between these two parties.

The contention of Mr. Koch, Jr. is also without merit. The evidence is that the 1974 conveyance from Rob ert F. and E. Carmen Koch to Mr. Koch, Jr. was without consideration. The letter from Mr. Koch to Mr. Williams, as referred to earlier, states that "[t]he 1974 conveyance to my son was part of a program whereby certain properties were deeded to my children for no consideration so that in the event of my death they would not be involved with estate proceedings." Mr. Koch, Jr. was not a purchaser within the meaning of the statute, 26 U. S. C. §§ 6323(a) and 6323(h)(6). Had he been, his claim would have negated the federal tax lien. Mr. Koch, Jr., in a May 12, 1980 letter to the Court, contends that this December conveyance was in consideration for an unpaid note given to his father earlier in 1974 (see also paper #13). Mr. Koch, Jr. could not or did not rebut the letter from his father to Mr. Williams. Additionally, while not dispositive, the Court is cognizant that Mr. Koch, Jr. is the son of the original property owner and that the conveyance was some twenty-nine days after the federal tax lien was filed against the Kochs. See United States v. Galvin [61-2 USTC ¶9755], 199 F. Supp. 4 (E. D. N. Y. 1961). Mr. Koch, Jr.'s priority lien, if any, is subordinate to the United States '. The Special Auditor's Report is thus modified in part as to allow the United States the second priority and the amount of $12,961.29 as the surplus proceeds of the mortgage foreclosure sale.

The Court need not consider the United States ' remaining contention. A caveat, however, is warranted. One of the salient purposes of the Federal Tax Lien Act of 1966 was to protect the United States' junior federal tax lien from being discharged without adequate notice in a plenary judicial or nonjudicial foreclosure proceeding. 1966 U. S. Code Cong. & Ad. News 3722, 3748. As alluded in footnote ¹, supra at 4 [p. 85,295], however, while Galesi v. United States [76-1 USTC ¶9235], 406 F. Supp. 623 (D. Vt. 1976), affd, [76-2 USTC ¶9753] 544 F. 2d 606 (2d Cir. 1976) is factually inapposite to the instant case, its warning as to the results of dilatoriness is clear.

¹ Suffice it to say, the Court finds Galesi v. United States [76-1 USTC ¶9235], 406 F. Supp. 623, 624 (D. Vt. 1976), aff'd, [76-2 USTC ¶9753] 554 F. 2d 606 (2d Cir. 1976) factually inapposite.

² Mr. Koch, Jr. contends that Peninsula Bank's lawyer "acted in a questionable manner." The specific matter, the only matter before the Court, is the proper determination of priorities as to excess proceeds of the mortgage foreclosure sale.

³ See infra at 6-7.

 

 

[78-1 USTC ¶9348]Ray Dodge and Eugene E. Feltz, Trustees under the Will of Ezra Royce, Plaintiffs v. United States of America, Defendant v. Estate of Ezra Royce, c/o Ray Dodge and Eugene E. Feltz, Trustees; Ezra Royce, deceased, c/o Ray Dodge and Eugene E. Feltz and Dora F. Royce, Counterclaim Defendants

U. S. District Court, Dist. Ore., Civil No. 75-977, 443 FSupp 535, 9/20/77

[Code Secs. 61 and 691--result unchanged by 1976 Tax Reform Act]

Gross income: Estates: Anticipatory assignment: Contractual rights: Income in respect of decedent.--An estate was not liable for income tax because of an oral agreement entered into by the decedent almost 30 years before death that he would devote his time to the management of his brother's business affairs in return for the latter's agreement to leave one-half his estate to the decedent's daughter. The doubtful nature of the decedent's claim precluded a finding that he had anticipatorily assigned income to his daughter. Nor did the estate receive income in respect of a decedent on account of the daughter's recovery in a suit to enforce the agreement--the estate acquired no right to receive any of the judgment money from the decedent.

Eugene E. Feltz, Casey, Palmer, Feltz & Sherry, 2408 First National Bank Tower, Portland, Ore. 97201, for plaintiffs and counterclaim defendants. Sidney I. Lezak, United States Attorney, Portland, Ore. 97207, Rob ert G. Burt, Department of Justice, Washington, D. C. 20530, for defendant.

Opinion

BELLONI, District Judge:

Ray Dodge and Eugene Feltz (plaintiffs) are trustees under the will of Ezra Royce. They seek refund of federal estate taxes already paid the defendant (Commissioner). The Commissioner has counterclaimed against the estate (estate) for income taxes and against the decedent and his wife, Dora Royce (Royces), for gift taxes. Jurisdiction is based on 28 U. S. C. §1346(a)(1).

I. Factual Background ¹

Quite unusual facts accompany this case. Ezra and Bonnie Royce were brothers. Beginning in 1908, they embarked on a series of Oregon and Washington business ventures as varied as can be imagined: Taxicabs, apple orchard, dance hall, Gray Line tours, an amusement company, etc. They operated on a partnership basis, and with one exception, took equal shares in the businesses. They usually were very successful.

In 1935, Bonnie, 47 years old and suffering from arthritis, bought a farm near Portland , and began raising pure bred Guernsey cattle. He also decreased his time spent on the brothers' joint businesses. The profits continued to be distributed equally between the brothers.

Bonnie and his wife, Isabel, had no children. Ezra had one child, Eunice Royce Dodge.

One day during 1938 when Eunice was about nine years old, Bonnie said to Ezra:

I want to talk to you about a Will. I had John Veach make a Will for me. I have put Eunice in there for half of my estate and I want an understanding with you. . . . I am doing that in return for that. I want you to take care of my interests here as long as I have them, see?

In other words, Bonnie offered to gibe one-half of his estate to Ezra's daughter, Eunice, in return for Ezra running the joint businesses. Ezra asked Bonnie to put the agreement in writing, but Bonnie refused. Bonnie also insisted that Ezra act as executor for Bonnie's estate without compensation.

After 1938, Ezra continued to devote his full time to the brothers' business affairs without charge or additional pay. Bonnie devoted little time to the businesses, but continued to receive profits.

In 1952, after Bonnie had moved to California and remarried, ² and estrangement developed between the two brothers and their wives. At Bonnie's request, they began to liquidate their business interests. This liquidation continued until 1959 when only one joint interest existed.

In 1952, Bonnie had another will drawn which left a large portion of his estate to Eunice. However, in 1963 and 1964, he executed a new will and codicil. No provision was made for Eunice in either the will or the codicil.

Bonnie died in 1964, and the 1963 will and 1964 codicil were admitted to California probate on July 27, 1964 .

In 1965, Eunice filed an action against Bonnie's estate's beneficiaries to impress a constructive trust on one-half of the net assets of the estate based on the 1938 oral contract. Also in 1965, Ezra filed an action in quantum meruit against Bonnie's estate. ³

Eunice's action resulted in a 1968 judgment in her favor. ⁴ The trial court found that Bonnie had orally agreed to leave one-half of his property to Eunice in consideration of Ezra's promise to care for Bonnie's business interest, that Ezra had fully performed the agreement, and that it was enforceable. The beneficiaries were directed to pay one-half of the estate's net assets to Eunice.

The beneficiaries appealed, and the California Court of Appeals affirmed. Dodge v. Royce, supra.

Ezra's quantum meruit case was dismissed.

Ezra died in Portland in 1967. His estate's estate tax return did not include any amount representing the value of the interest under the 1938 contract. The Commissioner audited the estate, and determined that Ezra's claim against Bonnie's estate should have been included in Ezra's estate in the amount of $427,472.91. Plaintiffs paid the additional estate tax, and filed a refund claim.

After the Commissioner denied the refund, plaintiffs filed this action. The Commissioner counterclaimed against the estate for income taxes on the net proceeds received by Eunice during 1970 from Bonnie's estate, and against the Royces for gift taxes arising out of the alleged assignment of the 1938 oral contract.

The counterclaims are the only matters presently before me.

II. Income Tax

A. Income in Respect of a Decedent. The Commissioner first relies on Internal Revenue Code §691 to bring Eunice's judgment recovery into Ezra's estate taxable income. That section provides, in general, that income in respect of a decedent shall be included in gross income of the estate in the taxable year when received ". . . if the right to receive the amount is acquired by the decedent's estate from the decedent. . . ." (Emphasis added).

The Commissioner's reliance is obviously misplaced for Ezra's estate did not acquire any right to receive any of the judgment money from Ezra.

B. Anticipatory Assignment of Income. The other prong of the Commissioner's income tax attack is based on the "anticipatory assignment of income" doctrine of Lucas v. Earl [2 USTC ¶496], 281 U. S. 111 (1930): ". . . fruits are not to be attributed to a different tree from that on which they grow." 281 U. S. at 115. More plainly: He who earns income may not avoid taxation through anticipatory arrangements. Here, the Commissioner argues that the 1938 enforceable contract was an arrangement whereby Ezra assigned to his daughter, Eunice, his rights to income under the contract.

The estate reponds with two arguments: a) Lucas v. Eary does not apply because Ezra's right to any money from Bonnie was too remote, doubtful and contingent; and b) Lucas v. Earl does not apply because Ezra neither received nor had the right to receive or possess any income as a result of the 1938 agreement.

1. The Doubtful Nature of Eunice's (Ezra's) Claim. Assuming, without deciding, that Ezra did possess a right to income as a result of the 1938 agreement, the question then arises: Of what consequence is that? Does it then necessarily follow that Lucas v. Earl applies and Ezra's estate realized income when the California state court judgment was paid to Eunice?

No. The doctrine of anticipatory assignment of income will not be applied where a right to that income or a claim for that income is ". . . doubtful, uncertain, and contingent in view of the facts. . . ." Jones v. Commissioner [62-2 USTC ¶9629], 306 F. 2d 292, 301 (5th Cir. 1962); Cold Metal Process Co. v. Commissioner [57-2 USTC ¶9921], 247 F. 2d 864 (6th Cir. 1957); see Putoma Corp. v. Commissioner [Dec. 33,911], 66 T. C. 60 (1976). Both Jones and Cold Metal Process involved claims or rights to income which the Fifth and Sixth Circuits found to be uncertain and contingent--thereby defeating the Commissioner's Lucas v. Earl arguments. Both cases involved income which was doubtful because the realization was dependent upon the outcomes of lawsuits.

So it is here. Any right which Ezra had to one-half of Bonnie's estate as a result of the 1938 agreement was, at best, extremely uncertain and doubtful. Eventually, it had to be litigated. The uncertainties are toughtfully analyzed in the following quote from plaintiffs' brief, which I adopt as findings:

Eunice, the recipient designated by Bonnie, was only nine years old. Her premature death due to illness or accident would have thrown the agreement into confusion. Bonnie, in his early fifties, could have given away virtually his entire estate in order to frustrate or minimize the agreement. Even if Bonnie intended to in good faith keep the agreement, creditors, separate business losses and other adverse financial activities could ahve whitled his estate to nothing. Certainly Ezra's early death would have immediately ended the agreement without benefit to Eunice. In addition to these uncertainties, from the very minute the agreement was made, it was overshadowed with the spector of lengthly and costly litigation. Immediately after Bonnie set forth the precise details of his plan to Ezra. Ezra could see possible legal problems. He asked for the agreement to be reduced to writing. When Bonnie refused the stage was set for six years of litigation and appeals, which in fact began in July of 1964 when Bonnie died. There can be only one conclusion from these facts: Any right that Ezra might have had to assign as a result of the 1938 oral agreement was fraught with problems and totally clouded with doubts of collectibility.

(Emphasis added).

Both California courts (trial and appellate) grappled with these same facts. The decisions reached were not easy ones to make for either court. To say that Ezra's right to any income as a result of the 1938 oral agreement was not doubtful would be to ignore reality. I conclude that the doctrine of anticipatory assignment of income does not apply here because of the doubtful nature of Ezra's rights under the 1938 contract.

2. Ezra's Right to Receive Income. Because of my ruling on the doubtful nature of Ezra's claim, I need not reach this issue.

III. Gift Tax

The Commissioner contends that Eunice's receipt of one-half of Bonnie's estate in 1970 constituted a 1964 gift based on the 1938 oral contract between Ezra and Bonnie. The reasoning employed is that Ezra gave away his right to the money to Eunice in 1938, but that the gift occurred in 1964 (when Bonnie died) because that was the date when the gift first became susceptible of valuation.

The Royces contend that no taxable gift occurred because Ezra had no power to transfer property. They alterantively contend that, if a taxable gift is found, the gift took place either in 1938 (the year of the contract) or 1970 (the year in which Eunice collected the state court judgment).

I find that a taxable gift did occur. Whatever right Ezra did have to any money from the 1938 contract he gave to Eunice in 1938. ⁵ As stated by the Supreme Court, the ". . . language of the gift tax statute, 'property . . . real or personal, tangible or intangible,' is broad enough to include property, however conceptual or contingent." Smith v. Shaughnessy [43-1 USTC ¶10,013], 318 U. S. 176, 180 (1943).

I have fully analyzed the uncertainties and doubts which attached to any rights arising from the 1938 contract. The transfer, however, did take place in 1938. What value it had I believe can be ascertained as of that time through methods suggested by the Royces in their brief. Accordingly, I conclude that a taxable gift occurred in 1938, taxable at that time.

Just cause existed for not filing a gift tax return. No penalty is warranted.

Plaintiffs' counsel is directed to submit a form of order in accordance with the rulings made in this opinion.

This opinion shall constitute findings of fact and conclusions of law in accordance with Fed. R. Civ. P. 52.

¹ This case was tried on a set of stipulated exhibits. Most all of the facts involved come from California state court memorandum opinion and opinion on appeal. Dodge v. Royce, Civil No. 73901 ( Cal. Super. Ct. , Feb. 13, 1968 ), aff'd in relevant part, Civil No. 33713 (Cal. Ct. App., Dec. 13, 1968).

² Bonnie's first wife, Isabel, died after the move to California .

³ Ezra sought $500,000.00 from the estate.

⁴ Eunice recovered $658,082.78. The estate of Bonnie was valued at $1,046,705.81 for estate tax purposes.

⁵ I assume, without deciding, that this finding will bear on the estate tax issues remaining.

 

 

[77-2 USTC ¶9757]Manalis Finance Co., a co-partnership, Plaintiff v. United States of America, Defendant

U. S. District Court, Cent. Dist. Calif., CV 74-212-WMB, 442 FSupp 579, 8/9/77

[Code Sec. 6323(h)(1)--result unchanged by '76 Tax Reform Act]

Lien for taxes: Prior lien by creditor: State law: Security interest.--A creditor, with a valid security interest in state welfare funds payable to a hospital that was delinquent in paying its employment taxes to the IRS, had a lien superior to a lien held by the United States for the unpaid taxes because a California law that made the creditor's security interest unenforceable against the state of California or its agents did not apply to the United States.

Kirsch, Arak & Bulmash, 465 S. Beverly Dr. , Beverly Hills , Calif. , for plaintiff. Arthur M. Greenwald, Assistant United States Attorney, for defendant.

Memorandum

[Text of Decision]

BYRNE, District Judge:

This action came on for trial upon stipulated facts before the Honorable Wm. Matthew Byrne, Jr. The Court has considered the stipulated facts and exhibits, the pleadings and other papers submitted by counsel, and counsels' presentations at trial. This memorandum of decision incorporates the stipulated facts and exhibits filed in this action, and shall constitute the Findings of Fact and Conclusions of Law as permitted under Rule 52(a), Federal Rules of Civil Procedure.

[Summary of Facts]

The facts giving rise to this litigation involve four entities. GAB Corporation, doing business as Manchester Community Hospital (" GAB Hospital "), not a party, was a provider of medical services during the time period relevant to this litigation, and was entitled to receive payments from the state of California under the "Medi-Cal" program. Blue Shield, also not a party, acted for the state in making Medi-Cal payments to providers, and was responsible for making the payments to GAB Hospital .

In order to finance its hospital operations, GAB Hospital entered into a factoring agreement with plaintiff Manalis Finance Co. ("Manalis") under which Manalis would lend money to GAB Hospital , and in return would take an assignment of GAB Hospital 's receivables, including the amounts receivable from Blue Shield. The assignment was perfected as a security interest under California law in 1971.

In 1973 and 1974, defendant United States made assessments for unpaid employment taxes against GAB Hospital , and thereby obtained a tax lien on Manalis's "property and rights to property." 26 U. S. C. §6321. To satisfy the assessments, the United States subsequently made two levies upon the Medi-Cal payments owed by Blue Shield to GAB Hospital . Blue Shield has paid $22,493.91 to the United States pursuant to the first levy, and holds another $52,280.40, subject to a supplemental levy, pending the outcome of this litigation.

At issue in this case are the competing claims of the United States , by way of its tax lien, and of Manalis, by way of its security interest, to the Medi-Cal payments to which GAB Hospital was entitled from Blue Shield.

[Conclusions of Law]

Manalis brings this action under 26 U. S. C. §7426(a), which permits "any person . . . who claims an interest in or lien on" property upon which the United States has asserted a tax levy to sue the United States for wrongful levy. This court has jurisdiction under that statute and 28 U. S. C. §§ 1340, 1346.

The question of when a state-created lien or other interest, such as Manalis' security interest, has acquired sufficient substance and has become so perfected that it will defeat a later-arising or later-filed federal tax lien is a matter of federal law. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 83 S. Ct. 1651, 1655 (1963). The United States concedes that if Manalis has a valid and perfected security interest, as defined by federal law, then Manalis' claims have priority over the federal tax lien and the levies by the United States are wrongful.

The relevant definition of a security interest under federal law is contained in 26 U. S. C. §6323(h)(1):

A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

The United States does not question that the "property in existence" and "money's worth" provisions of the statute are met, but asserts only that Manalis's prior interest was not "protected under local law."

The local law under which the United States seeks to avoid Manalis' security interest is California Welfare and Institutions Code §1415.5, which provides:

Moneys payable or rights existing under this chapter shall be subject to any claim, lien or offset of the State of California, and any claim of the United States of America made pursuant to federal statute, but shall not otherwise be subject to execution, levy, attachment, garnishment, or other legal process, and no transfer or assignment, at law or in equity, of any right of a provider of health care to any payment shall be enforceable against the state, a fiscal intermediary or carrier.

The United States contends that Manalis has no security interest in the Medi-Cal payments that is "protected under local law" and superior to the federal tax lien, because the assignment giving rise to the purported security interest is not "enforceable" against the United States under this statute.

The statute may be divided into two parts. The first part provides that the state and the United States , but no other persons or entities, may make claims against "moneys payable" under Medi-Cal. This provision frees paying entities, such as Blue Shield, from legal process regarding Medi-Cal payments, except process initiated by the state or the United States . Since the federal tax levies asserted here are process initiated by the United States , they are permitted by the statute. The first part of the statute therefore allows the federal tax levies to be asserted, but says nothing about the priority of the claims of the United States upon which the tax levies are founded.

The second part of the statute provides that a health-care provider's assignment of its right to receive Medi-Cal payments is not enforceable against the state, a fiscal intermediary or a carrier. As compared with the foregoing, the purpose of this part of the statute is less clear. The provision can be read to free paying entities--the state, a fiscal intermediary or carrier--from competing claims, brought by assignors and assignees, to the right to Medi-Cal payments. Under this interpretation, both the first and second parts of the statute protect paying entities: the first part protects against legal process, and the second part protects against attempts to enforce assignments. Since an attempt to enforce an assignment would often involve legal process, the parts overlap. ¹

The United States urges a different interpretation of the second part of the statute, in accordance with dictum in an opinion by a California court, Manalis Finance Co. v. Gedulig, 121 Cal. Rptr. 93 (Ct. App. 1975). The facts in Gedulig are similar to the facts in this case, except that Gedulig involved state, rather than federal, tax levies. The court held that the state tax lien had priority because the competing security interest was based solely on a factor's rights as assignee, which rights are not "enforceable against the state" under Section 14115.5. The court went on to say in a footnote that:

The statute does not declare the assignment void as between the parties [assignor and assignee]. It is limited to the situation of unenforceability of an assignment in a manner which will defeat a claim of the states or the United States .

121 Cal. Rptr. at 95 n. 1.

The United States would probably prevail here if this reasoning were followed. ²

This court is not bound by the decision of the state Court of Appeal, Commissioner v. Estate of Bosch [67-2 USTC ¶12,472], 87 S. Ct. 1776 (1967), and declines to follow its dictum, which marks two unacceptable departures from the express language of the statute.

First, the dictum substitutes the words "the state or the United States " for the statute's "the state, a fiscal intermediary or carrier" as those entities against which an assignment cannot be enforced. There is no basis for this judicial amendment of the clear language of Section 14115.5. The statute neither directly nor by inference, renders assignments unenforceable against the United States .

Second, the California court asserts in its footnote that the purpose of the second part of the statute is to prevent the "defeat [of] a claim" of the state or the United States . The statute, however, says nothing about claims brought by the enumerated entities, but rather provides that assignments are not enforceable against the entities. While this court does not rely heavily on whether an entity seeking protection under the statute is a plaintiff or defendant, the court does find that a fair inference from the language is that the legislature intended to protect the enumerated entities in their roles as holders and payors of Medi-Cal benefits. Here, the United States asks much more. It invokes the statute's protection, not as a Medi-Cal paying entity defending against a claim, but as a tax lienor in an unrelated matter seeking to have its interest declared superior to the interest of any assignee, no matter how or when the assignee's interest arose. The court finds it unlikely that the California legislature intended, by a statute in the Welfare and Institutions Code, to grant rights to the United States as tax lienor that are uncontestably superior to the rights of a provider's assignee.

The court concludes that Manalis has a valid security interest protected under local law and prior to the interest of the United States . Thus, the levies by the United States are wrongful. Manalis is entitled to recover the sum held by the United States pursuant to the levy, and is declared to have an interest prior to that of the United States in the subject funds now held by Blue Shield.

Judgment

This action came on for trial upon stipulated facts before the Honorable Wm. Matthew Byrne, Jr. The issues have been duly tried and the court has rendered its memorandum decision. Therefore,

IT IS ORDERED, ADJUDGED AND DECREED that plaintiff Manalis Finance Co. has a valid security interest in the receivables of GAB Corporation, doing business as Manchester Community Hospital , assigned to Manalis Finance Co. in an agreement executed on or about October 18, 1971 . Plaintiff's security interest is protected under local law and superior to the interest of the United States in the subject receivables.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the tax levies by defendant United States upon the subject receivables are wrongful.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that plaintiff Manalis Finance Co. shall recover the sums held by the United States pursuant to its levy, and is declared to have an interest superior to that of the United States in the subject receivables now held by California Blue Shield.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that plaintiff Manalis Finance Co. recover of defendant United States its costs of action in the amount of $--.

¹ However, the parts are not coextensive. The first part refers to "moneys payable or rights" being "subject to" legal process, thus preventing claims against a Medi-Cal payment res held by a paying entity. On the other hand, the second part bars suit against a paying entity by an assignee when wrongful payment was made to the assignor, even though the paying entity no longer holds the res.

² It appears the United States would prevail because the dictum extends the list of entities against which an assignment cannot be enforced to include the United States . However, even if the dictum is accepted, the defense of the United States might fail. Under the federal-law definition of security interest, Manalis's interest exists if it is protected against "a subsequent judgment lien." 26 U. S. C. §6323(h)(1) (emphasis added). The United States contends that Manalis's interest does not exist because it is not protected against its (the United States 's) subsequent tax lien, under the Gedulig dictum. Therefore, the United States 's defense, based on its lien, does not correspond exactly to §6323(h)(1), which speaks of a lien. The parties have not raised this issue and the court does not resolve it.

 

 

[76-1 USTC ¶9334]E. C. Miller, Plaintiff v. United States of America , Defendant

U. S. District Court, So. Dist. Ind. , Evansville Div., No. EV 75-37-C, 3/15/76

[Code Sec. 6323(h)]

Tax liens: Priority: Holder of unperfected security interest.--A federal tax lien had priority over a conflicting security interest held by the installment seller of the property in question because the security interest was not choate and perfected at the time the tax lien was filed. Applicable local law provided that a security interest will be protected against subsequent judgment liens arising out of an unsecured obligation only if it has been filed in the appropriate state office, and the holder of the interest here never did so. The fact that the Government had actual knowledge of the security interest was immaterial.

Gerling & Moore, 615 Walnut St., P. O. Box 3203 , Evansville , Ind. , for plantiff. John L. Hudgins, Assistant United States Attorney, Room 246 Federal Building, 46 E. Ohio St. , Indianapolis , Ind. , for defendant.

Entry

HOLDER, District Judge.

The above captioned action came on for judgment upon a stipulation of facts. Plaintiff Miller commenced this action on March 19, 1975 seeking recovery of property allegedly levied upon by defendant United States of America in satisfaction of unpaid taxes owed by Aluminum Products, Inc. The complaint alleges that the property thus levied upon was not in fact in fact the property of Aluminum Products, Inc., but of plaintiff Miller. Plaintiff sought declaratory relief adjudging him sole owner of the property in question and injunctive relief prohibiting defendant from selling the property. The property was sold on April 21, 1975 . In the alternative, plaintiff prays for judgment against defendant for the amount realized at the sale, interest from date of sale at 6%, and costs of action. Jurisdiction is based upon 28 U. S. C. §1346(e), granting jurisdiction in actions brought under 26 U. S. C. §7426. By motion filed May 19, 1975 , defendant moved dismissal for lack of subject matter jurisdiction, which motion was denied by entry dated July 23, 1975 . On August 4, 1975 , defendant answered in admissions and denials and asserting the defense of failure to state a claim. At a pre-trial conference held January 5, 1976 , the parties agreed that a question of law only was presented by the action and that the parties would submit a stipulation of all facts in the case. Said stipulation was filed January 30, 1976 . Defendant offered an exhibit consisting of a copy of the contract referred to in the stipulation of February 17, 1976 , stating same had been provided by counsel for plaintiff Miller. Plaintiff made no objection thereto. The parties each filed briefs in support of their respective positions. The time period for such briefing, as set out in the pre-trial entry for January 5, 1976 , is now past.

It is undisputed that the property seized by defendant was sold on April 21, 1975 , at public auction for $4,425.68 (net). The property consisted of machinery that was sold by plaintiff Miller to taxpayer Aluminum Products, Inc., pursuant to contract entered into on March 9, 1973 . That contract provided for payment of the purchase price in installments and specified that a security interest in the amount of $25,000.00 was retained in listed items of equipment, the property here in issue; the amounts to be reduced as installments were paid. It is stipulated by plaintiff and defendant that all property rights of plaintiff are set out in this contract, and further that no copy of this contract or financial statement reflecting same was filed in the office of any county or state official in the State of Indiana . It is stipulated that the Internal Revenue Service filed notices of federal tax lien against the taxpayer on four dates from October 4, 1974 to March 21, 1975 totaling $16,106.67 in the Office of the Recorder of Warrict County, Indiana, the county in which the taxpayer and the property in question were located.

Priority of liens in this case is governed by 26 U. S. C. §§ 6321, 6323. Plaintiff contends that its security interest is a superior lien to that of the United States . Defendant claims that the failure to file the contract or financial statement in the appropriate office pursuant to the Indiana Uniform Commercial Code secured transactions provisions, I. C. 1971, §26-1-9-101, et seq., makes the filed levy of a federal tax lien notice a superior lien to plaintiff's interest.

The Internal Revenue Code, 1954, as amended, provides that a lien arises in favor of the United States upon all property of the person owing federal taxes from the time of assessment of same, 26 U. S. C. §6321. This is a secret lien, superior to all subsequent charges upon the property. Interests prior in time to this federal lien arising upon assessment are superior if they are choate and perfected according to federal law. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963). Where, however, the interest conflicting with the federal lien is that of purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor, validity and priority are governed by 26 U. S. C. §6323, which requires filing of the federal tax lien, rather than mere assessment, for the federal lien to achieve priority. The contract in the instant case refers to plaintiff's interest as a security interest and it satisfies the federal law definition of a security interest as "any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability". 26 U. S. C. §6323(h)(1). The question of whether plaintiff's interest is choate is therefore determined as of the time the federal lien was filed rather than as of the time of assessment under §6321. Fred Kraus & Sons, Inc. v. United States [74-1 USTC ¶9400], 369 F. Supp. 1089, 1091 (N. D. Ind. 1974); United States v. Truss Tite, Inc. [68-1 USTC ¶9296], 285 F. Supp. 88, 91 (S. D. Tex. 1968). Federal law determines that a security interest exists at this relevant time if, inter alia, "at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation * * *". 26 U. S. C. §6323(h)(1)(A). The applicable local law, Indiana's, provides that a security interest is protected against subsequent judgment liens arising out of an unsecured obligation if it is filed in the appropriate office set out in I. C. 1971, §26-1-9-401. It is stipulated that plaintiff has never so filed. Accordingly, plaintiff had no interest sufficiently perfected at the time of the federal lien's filing to achieve priority under 26 U. S. C. §6323.

Plaintiff urges that defendant had actual knowledge of the security interest. Plaintiff informed the Internal Revenue Service of its interest before the sale occurred. This same argument was considered and rejected in Fred Kraus & Sons, Inc. v. United States [74-1 USTC ¶9400], 369 F. Supp. 1089, 1092-3 (N. D. Ind. 1974), affirmed without published opinion, 506 F. 2d 1404 (7th Cir. 1974). The District Court there held that §6323(h)(1) adopted a hypothetical lien creditor test such that the Government's actual knowledge of the security interest was immaterial in determining priority, 369 F. Supp. at 1093.

Therefore, it is ADJUDGED that the plaintiff E. C. Miller take nothing and that the action is dismissed with prejudice.

 

 

[75-2 USTC ¶9804] United States of America , Plaintiff v. Kelley Grand Market, Inc., L. C. Kelley, Alice Kelley, Floyd R. Oxford, Ida M. Oxford, Oklahoma Tax Commission, Defendants

U. S. District Court, East. Dist. Okla., No. 74-101-C, 6/30/75

[Code Secs. 6321 and 6323]

Federal tax lien: Validity and priority as against third parties: State law: State tax lien: Security interest: Notice or knowledge of third-party lien.--Under the law of Oklahoma, a security interest (defined in Code Sec. 6323(h)(1)) that was unperfected was superior to the right of the United States, which had notice and actual knowledge of the security interest when the federal tax lien was filed. Federal law rather than state law determines priority of a federal tax lien with respect to other liens, but Code Sec. 6323(a) implies that state law must be consulted as to the validity of a tax lien as against a holder of a security interest. The unperfected security interest was also superior to an Oklahoma state tax lien:

Edwin L. Gage, Assistant United States Attorney, Muskogee, Okla., for U. S. Lester D. Hoyt, Oklahoma Tax Comm., 2101 Lincoln Blvd., Oklahoma City, Okla., for Okla. Tax Comm. Floyd and Ida Oxford, 100 N. Cedar, Midwest City, Okla., pro se. James B. Bratton, P. O. Box 130, McAlester, Okla., for L. C. and A. Kelley, for defendants.

Memorandum Opinion

MORRIS, District Judge:

The United States brought this action to reduce to judgment certain federal tax liabilities assessed against Kelley Grand Market, Inc., and to foreclose the resulting tax lien on all furniture, equipment, and fixtures owned by Kelley Grand Market, Inc. In addition to naming Kelley Grand Market, Inc. as a defendant, the United States has named L. C. Kelley and Alice Kelley (hereinafter referred to as the Kelleys), Floyd R. Oxford and Ida M. Oxford (hereinafter referred to as the Oxfords) and the Oklahoma Tax Commission as defendants. The Kelleys claim a security interest in the property in question securing a debt owed to them by Kelley Grand Market, Inc. The Oxfords claim no interest in the property. The Oklahoma Tax Commission claims a tax lien on property in question but admits that all claims of record prior to June 30, 1972 , are superior to its lien.

The defendant Kelley Grand Market, Inc. failed to answer or appear. Default judgment was entered against it and in favor of the United States for the sum of $47,042.51. The issue at trial was limited to the priorities of the various liens claimed.

Based upon all the evidence and the stipulations entered into, the Court makes the following findings of fact:

1. Prior to September 30, 1970 , 55% of the capital stock of defendant, Kelley Grand Market, Inc. (hereinafter the taxpayer) was owned by defendant L. C. Kelley, and 45% was owned by defendant, Alice Kelley, his wife.

2. Kelley Grand Market, Inc., the taxpayer herein, conducted a retail grocery business at premises located at 322 East Carl Albert Parkway , McAlester , Oklahoma , until September 30, 1970 , when L. C. Kelley and Alice Kelley sold all of their capital stock in Kelley Grand Market, Inc. to defendants Floyd R. and Ida M. Oxford.

3. The assets of Kelley Grand Market, Inc. consisted of fixtures, furniture, equipment, inventory and accounts receivable. The accounts receivable were in a negligible amount (approximately $100.00) at all times here pertinent. Neither the accounts receivable nor the inventory are involved in this action.

4. By contract dated September 30, 1970 , the Kelleys sold all of their stock in Kelley Grand Market, Inc. to the Oxfords. Kelley Grand Market, Inc. was not a party to the contract.

5. The contract dated September 30, 1970 , provided that the Oxfords would cause Kelley Grand Market, Inc. to execute a security agreement pledging all of the equipment and furniture which Kelley Grand Market, Inc. owned and which was located in the Grand Market Store at that time.

6. Such Financing Statement and Security Agreement covering all fixtures, furniture and equipment of the taxpayer, was filed in the office of the County Clerk, Pittsburg County, Oklahoma, on April 12, 1972.

7. On the dates shown below, a delegate of the Secretary of the Treasury of the United States made assessments against the defendant, Kelley Grand Market, Inc. for withholding taxes and taxes imposed under the Federal Insurance Contributions Act and taxes imposed under the Federal Unemployment Tax Act, penalties and interest in the amounts listed for the taxable periods stated; notice and demand for payment of said taxes, penalties and interest were given to said defendant in accordance with law on the dates listed below:

                                        Date of

                                     Assessment

                                      & Date of

Taxable                 Type           Notice &             Amount of

Period                of Tax             Demand            Assessment

1 Q. 71 ....       WH-FICA              
5-15-72
         $ 4,726.34(T)

                                                          1,181.59(A)

                                                            157.54(B)

                                                            189.05(C)

                                                            295.23(I)

2 Q. 71 ....       WH-FICA              
3-20-72
           5,784.27(T)

                                                          1,446.07(A)

                                                            192.81(B)

                                                             86.76(C)

                                                            219.56(I)

3 Q. 71 ....       WH-FICA              
3-20-72
           6,603.93(T)

                                                            990.59(A)

                                                            330.20(B)

                                                             66.04(C)

                                                            151.62(I)

4 Q. 71 ....       WH-FICA               
4-3-72
         $ 5,663.73(T)

                                                            188.79(B)

                                                             56.63(D)

1972 .......       FUTA                 
8-14-72
             150.17(T)

1 Q. 72 ....       WH-FICA              
8-21-72
           6,473.94(T)

                                                            647.39(A)

                                                            323.70(B)

                                                             64.74(C)

                                                            120.52(I)

Total ......                                               $36,111.21

(T) Tax.

(A) Penalty imposed pursuant to the provisions of Section 6651(a)(1) of the Internal Revenue Code of 1954.

(B) Penalty imposed pursuant to the provisions of Section 6656 of the Internal Revenue Code of 1954.

(C) Penalty imposed pursuant to the provisions of Section 6651(a) of the Internal Revenue Code of 1954 for failure to pay tax.

(D) Penalty imposed pursuant to the provisions of Section 6657 of the Internal Revenue Code of 1954.

(I) Interest.

8. Notice of the assessment described was given to the defendant, Kelley Grand Market, Inc., and demand for payment thereof was made, but said defendant has neglected or refused to pay over the amounts assessed against it and owing to the United States of America, and as a result there is presently due and owing from said defendant the amount of $36,111.21, plus penalties and interest as provided by law.

9. On the dates shown below, Notices of Federal Tax Lien, Forms 668, pertaining to the assessments described above, were filed at the offices of the public officials as indicated, said Notices reciting an unpaid balance due on such assessments as incated:

Assessment for

Which Notice                                 Unpaid Balance

of Lien                  Date Notice             Recited in

Was Filed                      Filed                 Notice                Office in Which Notice Was Filed

WH-FICA                                       $6,549.75

1 Q. 71                   
5-24-72
              [TEH] *            
County Clerk
, 
Okla.
 

County
 
Oklahoma

                                               5,549.75

                          
5-25-72
              [TEH] *            
County
 
Clerk
, 
Pittsburg
 
County
 

Oklahoma

WH-FICA                                       $7,729.47

2 Q. 71                   
4-13-72
              [TEH] *            
County
 
Clerk
, 
Pittsburg
 
County
 

Oklahoma

                                               7,729.47

                          
4-13-72
              [TEH] *            
County
 
Clerk
, 
Pittsburg
 
County
 

Oklahoma

WH-FICA                                        8,142.38

3 Q. 71                   
4-13-72
              [TEH] *            
County Clerk
, 
Okla.
 

County
 
Oklahoma

                                               8,142.38

                          
4-13-72
              [TEH] *            
County Clerk
, 
Okla.
 

County
 
Oklahoma

WH-FICA                                        5,909.15

4 Q. 71                   
5-11-72
              [TEH] *            
County
 
Clerk
, 
Pittsburg
 
County
 

Oklahoma

                                               5,909.15

                          
5-11-72
              [TEH] *            
County Clerk
, 
Okla.
 

County
 
Oklahoma

* Plus penalties, interest and costs as provided by law.

10. On April 18, 1972 , Mr. Kelley filed an action in the District Court for Pittsburg County captioned L. C. Kelley and Alice Kelley, Plaintiffs v. Floyd R. Oxford, Ida M. Oxford and Kelley Grand Market, Inc., Defendants, Case No. C-72-154, seeking judgment on the notes and enforcement of the security interest from Kelley Grand Market, Inc. The United States was not named as a party defendant. A receiver was appointed on June 2, 1972 , and on July 7, 1972 , a Journal Entry of Judgment was entered in the case in favor of L. C. Kelley and Alice Kelley on all their notes and ordered the Receiver to sell all furniture, fixtures, equipment, accounts receivable, and inventory. The receiver sold these assets at a public auction on July 24, 1972 , as follows:

Furniture, fixtures and

equipment ..................         $12,000 to L. C. Kelley

Inventory ..................          20,000 to L. C. Kelley

Accounts receivable ........             100 to L. C. Kelley

No funds were paid into court, Mr. Kelley merely offsetting said amounts against the notes.

11. On July 28, 1972 , the Internal Revenue Service served a Notice of Levy on the Court Clerk, Pittsburg County .

12. On July 28, 1972 , an Order Confirming Sale was entered in the foreclosure case, Case No. C-72-154.

13. As a result of conferences between government representatives and representatives of the Kelleys, on or about August 22, 1972, an Escrow Agreement was entered into by counsel for the Kelleys, Mr. James B. Bratton, the District Director, Internal Revenue Service, and the Oklahoma Tax Commission, whereby it was agreed that L. C. Kelley would deposit $15,000 with the Court Clerk, District Court, Pittsburg County, representing the value of the inventory and accounts receivable of Kelley Grand Market, Inc., and in substitution therefor, with liens of the parties to attach to the escrow fund with the same priority they had with respect to the property sought to be discharged.

14. Subsequently, L. C. Kelley and Alice Kelley moved in the state foreclosure action to name the United States and the State of Oklahoma as additional parties defendant, which motion was granted on November 13, 1972 . Thereafter, the United States moved to dismiss itself from the action for lack of jurisdiction which was denied on March 30, 1973 . On June 22, 1973 , the United States filed its answer in Case No. C-72-154 in the District Court, Pittsburg County , raising various defenses and, in general, asserting its lien priority rights to the $15,000 fund on deposit with the District Court.

15. Case No. C-72-154 is still pending.

16. As of September 30, 1970 , the taxpayer was indebted to L. C. Kelley for $47,270.06.

17. The plaintiffs first notice of tax lien was filed on the taxpayer's property on April 13, 1972 . Prior to that date the plaintiff had actual notice of the security interest claimed by the Kelleys. This actual knowledge resulted from the fact that the day before ( April 12, 1972 ) the agent for the Internal Revenue Service, Mr. Green, examined the files of the County Clerk in Pittsburg County and saw and read the security agreement in favor of the Kelleys which was on file. The Kelleys' financing statement had been filed on April 12, 1972 .

18. The Kelleys at no time filed a financing statement covering the property in question in the office of the County Clerk of Oklahoma County .

19. The tax lien claimed by the Oklahoma Tax Commission was perfected by filing of a Sales Tax Warrant on June 30, 1972 .

Conclusions of Law

It is well settled that insofar as federal tax liens are concerned, the priority of conflicting claims are determined by federal law. Texas Oil & Gas Corp. v. United States, et al. [72-2 USTC ¶9653] 466 F. 2d 1040 (5th Cir. 1972); Superior Business Assistance Corp. v. U. S. [72-2 USTC ¶9617], 461 F. 2d 1036 (10th Cir. 1972); U. S. v. Equitable Life Assurance Society of the U. S. [66-1 USTC ¶9444], 384 U. S. 323 (1966). The controlling statutes are 26 U. S. C. §§ 6321, 6322, 6323. 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 6323(a) provides in part that "[t]he lien imposed by section 6321 shall not be valid as against any . . . holder of a security interest . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate." (Emphasis added.) A "security interest" is defined by section 6323(h)(1) as follows:

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

Therefore, unless the Kelleys have met the requirements of the above definition for security interest prior to the filing of the tax lien, their claim is subordinate to the tax lien.

The primary question then is whether the Kelleys' interest became protected under local law against a subsequent judgment lien arising out of an unsecured obligation. Under Oklahoma law a security interest would ordinarily have to be perfected to take priority over a subsequent judgment lien. 12A O. S. §9-301 provides in part that "an unperfected security interest is subordinate to the rights of . . . (b) a person who becomes a lien creditor without knowledge of the security interests and before it is perfected." (Emphasis added.) Conversely, it is clear that an unperfected security interest is superior to the rights of a person who becomes a lien creditor with knowledge of the security interest. Allen v. Banta, 262 P. 2d 904 ( Okla. 1953); Stanley v. Fabricators, Inc., 459 P. 2d 467 ( Ala. 1969). Consequently the Kelleys' interest became protected under local law at the time the United States received actual knowledge of the claim.

The other requirement that the Kelleys must satisfy to have their claim classified as a security interest under Section 6323(h)(1) is that they must have parted with money or money's worth. It is clear from the evidence that at the time the security interest was given to the Kelleys by Kelley Grand Market, Inc., the corporation owed the Kelleys a total of $47,270.06. Regardless of the fact that the Oxfords may have given mortgages to the Kelleys securing the corporation's debt, the debt was real and a valid security interest was granted to the Kelleys by the corporation to secure that debt. Any payments of the corporation's debt by the Oxfords or any money received by foreclosure proceedings which might offset a portion of the corporation's debt goes only to the amount of said claim and not to the validity of the security interest. The Court finds that the Kelleys parted with money or money's worth as consideration for the note and security interest and to that extent their claim is a "security interest" under 26 U. S. C. §6323(h)(1).

Since the Kelleys' interest is a security interest and since the plaintiff had actual knowledge of that security interest through its agent, Mr. Green, before the plaintiff's tax lien was filed, the security interest of the Kelleys has priority over the tax lien. See United States v. Hunt [74-1 USTC ¶9481], 373 F. Supp. 1079 (D. Wyo. 1974). This conclusion finds support also in a recent Tenth Circuit opinion where the Court stated that an imperfectly filed security interest "would have been superior to the Government's tax lien . . . if the Government had knowledge of that interest." United States v. Ed Lusk Construction Co. [74-2 USTC ¶9773], 504 F. 2d 328 (10th Cir. 1974). Because of the Court's findings herein it is unnecessary to make findings with respect to whether the property in question is or is not classified as a fixture. It also is unnecessary to determine the defendant Kelleys' claim that the plaintiff is estopped to assert its lien.

The Court accordingly finds that the Kelleys' security interest in the fixtures, equipment and furniture has priority over the tax lien of the United States and the tax lien of the Oklahoma Tax Commission.

The parties shall have 15 days within which to submit a judgment consistent with this opinion.

 

 

[75-2 USTC ¶9640] United States of America , Plaintiff v. Elvin Lee Bynum, Lillian Bynum, L & E Men's Clothing, Inc., L. E. B. Garage, Inc., E & B Records, Inc., Bedford-Stuyvesant Tobacco Company Incorporated, Nostrand Avenue Medical Corp., Food and Franchising Industries Corp., FFI Realty Incorporated, Metropolitan Savings Bank, Emigrant Savings Bank, Defendants

U. S. District Court, East. Dist. N. Y., 73 C 232, 6/12/75

[Code Secs. 6323 and 6861]

Jeopardy assessments: Summary judgment: Tax lien: Mortgage lien: Priority established as between mortgage and tax liens.--Summary judgment for the government based upon a jeopardy assessment against the delinquent taxpayer was appropriate. The government need only put the assessment in evidence and the burden rests with the taxpayer to counter it. General denial as to the amount of tax due and the ownership or control of corporate properties was insufficient to meet this burden. However, the mortgage lien in this case was a valid lien, and took precedence over the government's tax lien, which was filed subsequently.

David G. Trager, United States Attorney, Brooklyn , N. Y., for plaintiff. Raphael P. Koenig, 60 E. 42nd St. , New York , N. Y., for defendants.

Memorandum of Decision and Order

MISHLER, District Judge:

Plaintiff moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Defendants oppose this motion.

On February 15, 1973, pursuant to §6861 of the Internal Revenue Code of 1954, 26 U. S. C. §6861, a delegate of the Secretary of the Treasury entered jeopardy assessments against Elvin Lee and Lillian Bynum, jointly, in the amount of $229,118.69, and against Elvin Lee Bynum, individually, in the amount of $77,815.67. Both assessments were for unpaid federal taxes, penalties and interest. The joint assessment covered the tax years 1968, 1969 and 1970, while the individual assessment was for tax year 1971. Also, on February 16, 1973 , notices of federal tax liens were filed in the Office of the City Register, Kings County , Brooklyn , New York . These liens were filed pursuant to 26 U. S. C. §6321, covering all property and property rights owned by Elvin Lee and Lillian Bynum. The complaint alleges that the Bynums own or have a controlling interest in the defendant corporations, and that they own parcels of land, the mortgages for which are held by the defendant banks.

On the basis of the assessments entered against defendants Elvin Lee and Lillian Bynum, the government now moves for summary judgment in the amount of $328,918.25, plus interest and penalties accruing since October 3, 1974 . In addition, the government moves to foreclose on the liens it has filed covering all property and property rights owned by Elvin Lee and Lillian Bynum.

Defendants Elvin Lee and Lillian Bynum, together with the corporate defendants, admitted in their answer that a jeopardy assessment had been entered against them, but denied that taxes in this amount were due. These defendants also denied that the tax liens filed against Elvin Lee and Lillian Bynum attached to any of the defendant corporations, although there was no denial of the allegation that these corporations were wholly owned or substantially controlled by the Bynums. ¹ Defendant Metropolitan Savings Bank states that it has a duly recorded lien on the property on which the government wishes to foreclose, and that this lien has priority over the federal tax liens. Defendant Emigrant Savings Bank has failed to answer the complaint.

Considering first the claims advanced by the Bynums and the defendant corporations, it must be recognized that the federal assessments constitute prima facie evidence that the taxes are due and the amount charged is correct. E.g., Psaty v. United States [71-1 USTC ¶9346], 442 F. 2d 1154 (3d Cir. 1971); United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696 (2d Cir. 1965). Further, the burden is on the taxpayer to demonstrate that the assessments are incorrect. United States v. Lease, supra. It is clear that the general denials put forth by these defendants regarding the amount of tax due and the ownership or control of the corporate properties are insufficient to rebut the government's claim, or to withstand the motion for summary judgment. Rule 56(e), F. R. Civ. P.; United States v. Prince [65-2 USTC ¶9552], 348 F. 2d 746, 748 (2d Cir. 1965). Therefore, the plaintiff's motion for summary judgment in the amount of $328,918.25 must be granted. Similarly, the motion to foreclose on the liens entered against the Bynums, covering their property interests in the defendant corporations, is granted.

With respect to the lien against the property on which Metropolitan Savings Bank holds the mortgage, however, the conclusion is different. In its answer, this defendant provides evidence which demonstrates that on November 19, 1969 , it obtained a mortgage, which was duly recorded and filed on November 25, 1969 . The bank maintains that this mortgage takes priority over the federal tax lien. The bank requests an order directing that it receive the proceeds of any sale of the property.

Section 6323 of the Internal Revenue Code provides that a mortgage which is duly executed, such as that owned by this defendant, has priority over a subsequently filed tax lien. 26 U. S. C. §6323; e.g., United States v. Boston and Berlin Transportation Co. [65-1 USTC ¶9207], 237 F. Supp. 1004 (D. N. H. 1964). It is evident therefore, that defendant Metropolitan Savings Bank has a valid, prior lien on the property in question, (located at 623 East 37th Street , Brooklyn , New York ) and the motion to foreclose on this property must be granted, subject to the prior lien of the bank. It is equally apparent that with respect to the lien filed on the property in which defendant, Emigrant Savings Bank, has or may have an interest, (located at 960 Jerome Avenue , Brooklyn , New York ) the motion to foreclose must be granted. This defendant has failed to interpose any answer or defense. Consequently, the government's lien on this property must be deemed to have priority over any interest the bank may have.

The government's motion for summary judgment in the amount of $328,918.25, with interest, is granted. Plaintiff is directed to settle judgment including a direction providing for the foreclosure and sale of the premises at 960 Jerome Avenue, Brooklyn, New York, and of 623 East 37th Street, Brooklyn, New York (subject to the prior lien of the Metropolitan Savings Bank), and further directing a judicial sale of the interest of the defendants Elvin Lee Bynum and Lillian Bynum in the following corporations:

L & E MEN'S CLOTHING, INC.

L. E. B. GARAGE, INC.

E & B RECORDS, INC.

BEDFORD-STUYVESANT TOBACCO COMPANY INCORPORATED

NOSTRAND AVENUE MEDICAL CORP.

FOOD AND FRANCHISING INDUSTRIES CORP.

FFI REALTY INCORPORATED.

SO ORDERED.

¹ These defendants also alleged that the information on which the assessments were based had been obtained through an illegal wiretap. However, the Court of Appeals recently upheld the validity of this wiretap. United States v. Bynum, (2d Cir. Docket No. 72-1857, March 26, 1975 ).

 

 

[74-1 USTC ¶9400]Fred Kraus & Sons, Inc., Plaintiff v. United States of America , Defendant

U. S. District Court, No. Dist. Ind., Hammond Div., No. 72 H 122, 369 FSupp 1089, 2/11/74

[Code Sec. 6323(h)]

Tax liens: Priority: Holder of unperfected interest.--A tax lien had priority over the interest in property held by the sellers of the property to a taxpayer who became indebted to the government for income and employment taxes where that interest was not perfected under state law before the filing of the lien. The sellers' interest was not a security interest before filing of the lien because it was not protected under local law against a later judgment lien arising out of an unsecured obligation.

Charles Levin, 5231 Hohman Ave., Hammond, Ind., Marshall J. Goldsmith, 3926 Main St., East Chicago, Ind., for plaintiff. John R. Wilks, United States Attorney, Fort Wayne , Ind. , for defendant.

Order

SHARP, District Judge:

The Court now grants the cross-motion for summary judgment filed herein on December 27, 1973 by the defendant, United States of America , and denies the motion for summary judgment filed by the plaintiff, Fred Kraus & Sons, Inc., on August 29, 1973 .

Memorandum

This is a civil action brought by Fred Kraus & Sons, Inc., pursuant to 26 U. S. C. 7426, challenging the seizure and sale by the Internal Revenue Service of certain fixtures and equipment. The fixtures and equipment were purchased from the plaintiff by Betty McGrigry on November 12, 1968 .

Betty McGrigry became indebted to the United States for income and employment taxes in the amount of $3,051.60 on September 22, 1971 . On the above date federal tax liens were filed with the Recorder of Porter County, Indiana, that being the county where McGrigry resides. Federal tax liens ware again filed on September 30, 1971 against Betty McGrigry for additional taxes of $3,460.76.

Subsequent to the filing of the first federal tax lien but prior to the filing of the second federal tax lien, plaintiff Kraus & Sons filed a financing statement dated September 24, 1971 with the Recorder of Porter County. Said financing statement was for the sum of $8,356.50 and represented the unpaid balance of an amount due and owing on a retail installment contract entered into on November 12, 1968 between Betty McGrigry and the plaintiff.

On October 6, 1971 a Notice of Seizure was served on Betty McGrigry for delinquent taxes in the amount of $6,455.82. After notice of sale the equipment and fixtures were sold at a public auction in November of 1971.

Kraus & Sons filed its complaint on May 25, 1972 seeking a judgment of $6,665.24 plus interest alleging that the seizure of the subject property was illegal and void in violation of plaintiff's interest.

On February 28, 1973 this Court (Beamer, C. J.) entered an order determining that it had jurisdiction over the subject matter of this action and denied the defendant's motion to dismiss. Thereafter, the plaintiff filed a motion for summary judgment and the defendant filed a cross-motion for summary judgment. There are no disputes as to the material facts involved in the case, and the court finds that this matter is ripe for decision by means of summary judgment. Further facts will be stated below. This court has also heard oral argument on the motion for summary judgment.

[Priority of Liens]

The lien that the defendant seeks to assert here is provided for by 26 U. S. C. 6321:

"A 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."

The section 6321 lien is a secret lien which arises and is effective from the date of the assessment of the tax. The priority of the section 6321 liens as against liens created by state law is governed by the common law rule that the "first in time is the first in right". U. S. v. Trigg, (C. A. Ark. 1972), [72-2 USTC ¶9642] 465 F. 2d 1264; Latipac, Inc. v. General Tire & Rubber Co., (D. C. Cal. 1971), [72-2 USTC ¶9499] 347 F. Supp. 1043; U. S. v. Com. of Pa., Dept. of Highways, (D. C. Pa. 1972), [73-2 USTC ¶9619] 349 F. Supp. 1370; and T. H. Rogers Lumber Co. v. Apel, (C. A. Okla. 1972), 486 F. 2d 14.

A State created lien will be deemed first in time so as to defeat a later arising federal lien only when it is perfected in the federal sense that there is nothing more which remains to be done to have a "choate" lien, when the identity of the lienor, the property subject to the lien and the amount of the lien are established. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963). Thus, a section 6321 lien is entitled to priority over all other liens against the property which had not attached to the property and become choate prior to the time the federal lien arose. General Telephone Co. v. American Gas Co. [64-1 USTC ¶9459], 226 F. Supp. 929, 931 (S. D. Ill. 1964).

This priority of the section 6321 lien is mitigated by 26 U. S. C. 6323 which requires filing of the government lien to achieve priority against certain classes of creditors and protects certain creditors even after filing. Thus, for those classes of persons not protected by section 6323, the test of choateness is applied at the time of assessment, while it is applied as of the date the tax lien is filed for those that are protected, United States v. Truss Tite, Inc. [68-1 USTC ¶9296] 285 F. Supp. 88, 91 (S. D. Texas 1968). Section 6323 provides that:

"(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate."

[Holder of Security Interest]

The plaintiff purports to be a member of that class of creditors which is protected by section 6323, as he purports to be the holder of a security interest in the property that was levied against. The question then is, does plaintiff meet the requirements of section 6323. First, the court looks to the definition of security interest as provided in section 6323(h), which reads as follows:

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

As to the first tax lien filed, the plaintiff does not meet the requirement of Section 6323. The plaintiff does not seriously press an argument that his lien is in any way prior to the first filed federal tax lien. The priority of a federal tax lien vis a vis a lien created by state law is always a federal question to be determined finally by the federal courts, United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 99 L. Ed. 264 (1954). Section 6323(h) provides the test of the security interest to determine if it is entitled to the protection provided. Here the plaintiff's lien meets all of the test, except plaintiff's interest was not protected under local law against a subsequent judgment lien arising out of an unsecured obligation. This result follows, because filing of the lien is necessary for protection against a subsequent judgment lienor without notice. Burns 19-9-401 provides in pertinent part:

"19-9-401. Place of filing--Erroneous filing--Removal of collateral--(1) The proper place to file in order to perfect a security interest is as follows:

* * *

(c) in all other cases, the office of the secretary of state."

As for the status of the plaintiff's lien vis a vis the federal tax lien filed on September 30, 1971 some further facts become necessary. In an affidavit that accompanied the plaintiff's motion for summary judgment, it was asserted that the plaintiff gave actual notice on or about October 5, 1971 to a representative of the IRS that the plaintiff held a security interest in the property in question. The plaintiff therefore asserts that the government had actual knowledge of the existence of the security interest. Under certain circumstances relied upon by the plaintiff a judgment lien creditor is subordinated by an unperfected security interest if the lien creditor had knowledge of the existence of the security interest. Ind. Ann. Stat. 19-9-301(1)(d) (Burns 1964), Appendix, infra, or knowledge of the contents of an improperly filed financing statement, Ind. Ann. Stat. 19-9-401(2) (Burns 1964), Appendix, infra. The court notes that the knowledge that the plaintiff imputes to the government accrued after the filing of the second government lien, and while this may be sufficient to render the plaintiff's theory moot, this court will not decide the matter on this point.

Mr. Justice Minton in the case of United States v. Security Trust & Savings [50-2 USTC ¶9492], 340 U. S. 47, 95 L. Ed. 53 (1950), states at page 49:

". . . Although a state court's classification of a lien as specific and perfected is entitled to weight, it is subject to examination . . ."

This court is of the opinion that even though the plaintiff's lien would have been entitled to priority against a party who had notice of its existence, or its contents, this is only sufficient for state purposes. The federal test to be applied to determine the existence of a security interest sufficient to claim protection under Section 6323 must be met. Section 6323(h) does not make the priority of the federal lien depend on whether a judgment lien did, in fact, exist which had priority over a security interest. Rather, the statute prescribes the degree to which a security interest must be perfected, i. e., sufficient action must have been taken by the secured party to perfect his security interest as to all hypothetical judgment lien creditors.

The plaintiff's interest was not perfected under the laws of the state of Indiana as against a subsequent judgment lien arising out of an unsecured obligation and therefore cannot be construed as a "security interest". If the interest of the plaintiff is not a "security interest", the plaintiff cannot be deemed a "holder of a security interest" and therefore will not be entitled to the protection that is afforded this type of interest in property by Section 6323. Absent this protection the lien of the plaintiff is not entitled to priority over the federal tax lien that was filed subsequent to the plaintiff's lien.

For all of the above and foregoing reasons, the court now GRANTS the cross-motion of the defendant, United States of America .

Appendix

19-9-301. Persons who take priority over unperfected security interests--"Lien creditor."--(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of

(a) persons entitled to priority under section [19-]9-312;

(b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected;

(c) in the case of goods, instruments, documents, and chattel paper, a person who is not a secured party and who is a transferee in bulk or other buyer not in ordinary course of business to the extent that he gives value and receives delivery of the collateral without knowledge of the security interest and before it is perfected;

(d) in the case of accounts, contract rights, and general intangibles, a person who is not a secured party and who is a transferee to the extent that he gives value without knowledge of the security interest and before it is perfected.

(2) If the secured party files with respect to a purchase money security interest before or within ten [10] days after the collateral comes into possession of the debtor, he takes priority over the rights of a transferee in bulk or of a lien creditor which arise between the time the security interest attaches and the time of filing.

(3) A "lien creditor" means a creditor who has acquired a lien on the property involved by attachment, levy or the like and includes an assignee for benefit of creditors from the time of assignment, and a trustee in bankruptcy from the date of the filing of the petition or a receiver in equity from the time of appointment. Unless all the creditors represented had knowledge of the security interest such a representative of creditors is a lien creditor without knowledge even though he personally has knowledge of the security interest. [Acts 1963, ch. 317, §9-301, p. 539.]

19-9-401. Place of filing--Erroneous filing--Removal of collateral.--(1) The proper place to file in order to perfect a security interest is as follows:

(a) when the collateral is equipment used in farming operations, or farm products, or accounts, contract rights or general intangibles arising from or relating to the sale of farm products by a farmer, or consumer goods, then in the office of the county recorder in the county of the debtor's residence or if the debtor is not a resident of this state then in the office of the county recorder in the county where the goods are kept, or if the debtor is a corporation then in the office of the county recorder in the county where the principal place of business of the corporation is located, and in the office of the secretary of state, and in addition when the collateral is crops in the office of the county recorder in the county where the land on which the crops are growing or to be grown is located;

(b) when the collateral is goods which at the time the security interest attaches are or are to become fixtures, then in the office where a mortgage on the real estate concerned would be filed or recorded;

(c) in all other cases, in the office of the secretary of state.

(2) A filing which is made in good faith in an improper place or not in all of the places required by this section is nevertheless effective with regard to any collateral as to which the filing complied with the requirements of this Article [Chapter] and is also effective with regard to collateral covered by the financing statement against any person who has knowledge of the contents of such financing statement.

(3) A filing which is made in the proper place in this state continues effective even though the debtor's residence or place of business or the location of the collateral or its use, whichever controlled the original filing, is thereafter changed.

(4) If collateral is brought into this state from another jurisdiction, the rules stated section [19-]9-103 determine whether filing is necessary in this state. [Acts 1963, ch. 317, §9-401, p. 539.]

 

 

[74-1 USTC ¶9203]United States of America, Plaintiff v. Wyoming National Bank of Casper, H. A. True, Jr., Riverton Livestock Co., a Wyoming corporation, Defendants

U. S. District Court, Dist. Wyo., No. 5670 Civil, 12/17/73

[Code Sec. 6323]

Lien for taxes: Priority: Security interests from loan agreements.--Two holders of perfected security interests arising as the result of loan agreements had priority over the later-filed tax lien.

[Code Secs. 6331 and 6332]

Levy and distraint: Ownership of property.--The government's tax levy against a bank account was improper where it was owned not by the taxpayer but by the bank. The bank was accumulating in that account the proceeds of inventory sales and accounts receivable collections as a result of acquiring these assets from the taxpayer upon default under a secured loan arrangement.

Richard V. Thomas, United States Attorney, Tosh Suyematsu, Assistant United States Attorney, Cheyenne, Wyo., for plaintiff. Houston G. Williams, Frank D. Neville, Wehrli & Williams, First Nat'l Bank Bldg., Casper, Wyo., for H. A. True, Jr., Harold E. Meier, Travis Moffat, Meier & Gist, 150 N. 3rd, Lander, Wyo., for Riverton Auction & Livestock Co., William E. Barton, Claude W. Martin, Brown, Drew, Apostolos, Barton & Massey, Petroleum Bldg., Casper, Wyo., for Wyo. Nat'l Bank of Casper, for defendants.

Findings of Fact and Conclusions of Law

KERR, District Judge:

The above entitled matter having come on regularly for hearing before the Court, the Government being represented by its attorney, Tosh Suyematsu, Assistant United States Attorney for the District of Wyoming, and the defendant H. A. True, Jr., being represented by his attorneys Houston G. Williams and Frank D. Neville of the firm of Wehrli and Williams, and defendant Riverton Auction and Livestock Company being represented by its attorneys Harold E. Meier and Travis Moffat of the firm of Meier and Gist, and defendant The Wyoming National Bank of Casper being represented by its attorneys William E. Barton and Claude W. Martin of the firm of Brown, Drew, Apostolos, Barton and Massey, and the Court having heard the evidence submitted for and on behalf of all parties took said matter under advisement, and having reviewed the pleadings, evidence, exhibits and the legal memoranda, together with all reasonable inferences to be drawn therefrom, filed for and on behalf of each of the parties, and the Court being now fully advised finds the facts specially and states separately its conclusions of law thereon.

Findings of Fact

1. That this is an action for recovery of federal income taxes owed by Wyoming Beef Packers, Inc., hereinafter referred to as "Beef Packers" and also referred to as "taxpayer", by the Internal Revenue Service. The Government has invoked the jurisdiction of this Court under 28 U. S. C. Sections 1340 and 1345, and 26 U. S. C., Sections 7401 to 7403. The Government commenced this civil action arising under the Internal Revenue Laws of the United States when it sought to enforce a federal tax levy served upon the defendant The Wyoming National Bank of Casper when the Internal Revenue Service sought to levy upon an account in The Wyoming National Bank of Casper entitled "Wyoming Beef Packers Collection Account, #10-5668-9".

2. That H. A. True, Jr., and Riverton Auction and Livestock Company were joined as party defendants for the reason that without their presence before the Court a final judgment could not be made without either affecting their interest or leaving the controversy in such a condition that its final determination might be wholly inconsistent with equity and good conscience.

3. That defendant Riverton Auction and Livestock Company has asserted cross-claims against H. A. True, Jr., and against The Wyoming National Bank of Casper .

4. That plaintiff, United States of America, hereinafter referred to as "Government", brought its action pursuant to the Federal Tax Lien Act of 1966, 26 U. S. C., Sections 6321, 6323, 6331 and 6332.

5. That defendant The Wyoming National Bank of Casper , hereinafter referred to as "Bank", is a national banking association chartered under the laws of the United States of America .

6. That defendant Riverton Auction and Livestock Company, hereinafter referred to as "Riverton Auction", is a corporation organized under the laws of the State of Wyoming .

7. That defendant H. A. True, Jr., hereinafter referred to as "True", is a resident of the State of Wyoming .

[Loan Agreements]

8. That on December 1, 1969, the Bank and Beef Packers entered into a Loan and Security Agreement which opened a line of credit to Beef Packers in the amount of not to exceed Three Hundred Thousand Dollars ($300,000). Said Loan and Security Agreement provided that loans to be made under said Loan and Security Agreement would be secured by Beef Packers' accounts receivables, inventory and proceeds.

9. That one of the provisions of said Loan and Security Agreement provided:

"The loans extended hereunder shall in no event exceed 75% of the value of the inventory . . . and such of the borrower's accounts as are acceptable and approved by the bank . . .."

10. That the First National Bank of Casper had a fifty percent (50%) participation in the financing of this loan.

11. That one of the terms of said Loan and Security Agreement provided:

"So long as this loan and security agreement shall remain in effect the borrower (Beef Packers) agrees that all bank accounts and banking connections of the company shall be maintained with the (Wyoming National) Bank and the First National Bank of Casper , Casper , Wyoming ."

12. That on February 10, 1970 , the Bank filed a financing statement in the office of the County Clerk of Natrona County , Wyoming . On February 17, 1970 , the Bank filed a financing statement in the office of the Secretary of State of Wyoming. Each of said financing statements stated that the collateral securing said loan included all of Beef Packers' accounts receivables, inventory and proceeds.

13. From the inception of operations with Beef Packers, True commenced selling beef to Beef Packers, taking notes for the purchase price. On May 28, 1970 , at a directors meeting of Beef Packers, the Board of Directors of Beef Packers adopted a resolution authorizing Beef Packers to execute a security agreement with True as a secured party.

14. That on June 4, 1970, Beef Packers and True executed a security agreement covering an obligation in the amount of One Hundred Fifty-Five Thousand Three Hundred Fifty-Five and 53/100 Dollars ($155,355.53) secured by said security agreement, covering inventory, accounts receivables and proceeds, as well as the Beef Packers' motor vehicles, which had already been mortgaged to the First National Bank of Casper.

15. That on June 22, 1970 , True filed a financing statement in the office of the County Clerk of Natrona County , Wyoming .

16. That True did not file a financing statement in the office of the Secretary of State of Wyoming.

17. That Riverton Auction submitted no evidence that proved that True overreached the creditors of Beef Packers in entering into a security agreement with Beef Packers.

[Insolvency and Default]

18. That on November 24, 1970 , a buyer from Beef Packers purchased cattle at an auction conducted by Riverton Auction. Beef Packers took possession of said cattle at Riverton Auction's barn at Riverton , Wyoming , and transported said cattle to the Beef Packers' plant at Casper , Wyoming . Said cattle arrived at Beef Packers' plant in Casper , and became part of Beef Packers' inventory, and became subject to the security agreements and financing statements of the Bank and True. On November 25, 1970, Beef Packers mailed to Riverton Auction a check drawn on Beef Packers' checking account #12-7632-8 at The Wyoming National Bank of Casper in the amount of Seven Thousand Three Hundred Seventy-five and 73/100 Dollars ($7,375.73) for the purchase price of said cattle.

19. That Riverton Auction received said Seven Thousand Three Hundred Seventy-Five and 73/100 Dollars ($7,375.73) check from Beef Packers and deposited it in the First National Bank of Riverton , Wyoming . The First National Bank of Riverton endorsed said check and sent it to its correspondent bank in Casper , Wyoming , which was the First National Bank of Casper , who in turn endorsed the check and delivered said check to the Wyoming National Bank of Casper .

20. That at the close of banking hours on December 2, 1970 , The Wyoming National Bank's computer posted the transactions for that banking day. On December 2, 1970, Beef Packers had insufficient funds in checking account #12-7632-8 to pay its check to Riverton Auction in the amount of Seven Thousand Three Hundred Seventy-Five and 73/100 Dollars ($7,375.73), or the check to True in the amount of Twelve Thousand Eighty-Four and 41/100 Dollars ($12,084.41), or the Check to True in the amount of Eight Thousand Nine Hundred Sixty-Six and 98/100 Dollars ($8,966.98). These checks were among those which appeared as overdrafts in the Beef Packers' checking account that day.

21. That the Bank posted the Seven Thousand Three Hundred Seventy-Five and 73/100 Dollars ($7,375.73) check to the Beef Packers' checking account, but did not pay this check. Riverton Auction submitted no evidence that proves that the Bank had paid this check and then reversed payment on the check.

22. That at the meeting of the overdraft committee at the beginning of December 3, 1970 , these checks were dishonored and were returned by courier to the First National Bank of Casper before the Bank's midnight deadline. On December 3, 1970 , an officer of The Wyoming National Bank of Casper telephoned the president of the First National Bank of Casper , notifying him that said checks were being dishonored for insufficient funds and were being returned to his bank.

23. That the Bank gave to the First National Bank of Casper (the forwarding Bank of these checks) proper, timely notice of dishonor of the Seven Thousand Three Hundred Seventy-Five and 73/100 Dollars ($7,375.73) check payable to Riverton Auction before its midnight deadline.

24. That after banking hours on Thursday, December 3, 1970 , the First National Bank of Casper hand delivered the foregoing three (3) checks to The Wyoming National Bank of Casper . On Friday, December 4, 1970 , these three (3) checks were entered for collection at The Wyoming National Bank of Casper . There were not sufficient funds in said account to pay any of the foregoing three (3) checks at that time. The Wyoming National Bank held these three (3) checks as collection items for possible processing on Monday, December 7, 1970 .

25. That Riverton Auction submitted no evidence that proves that the Bank failed to give timely notice of dishonor before its midnight deadline.

26. That Riverton Auction submitted no evidence that proves that the Bank reversed payment on Beef Packers' check payable to Riverton Auction in the amount of Seven Thousand Three Hundred Seventy-Five and 73/100 Dollars ($7,375.73).

27. That on December 4, 1970, Riverton Auction deposited in the First National Bank of Riverton, Wyoming, a check in the amount of Two Thousand Seven Hundred Seventy-nine and 65/100 Dollars ($2,779.65) drawn on the Beef Packers' checking account, payable to Riverton Auction.

28. That the First National Bank of Riverton failed to endorse said check but forwarded said check to its correspondent bank, the First National Bank of Casper , who in turn forwarded said check to The Wyoming National Bank of Casper .

29. That when the Two Thousand Seven Hundred Seventy-Nine and 65/100 Dollars ($2,779.65) check was forwarded to the Wyoming National Bank, it lacked an essential endorsement, namely, that of the First National Bank of Riverton. The Wyoming National Bank of Casper did not pay said check and returned it to the First National Bank of Casper , its forwarding bank.

30. That said Two Thousand Seven Hundred Seventy-Nine and 65/100 Dollars ($2,779.65) check was not properly presented for payment.

31. That on Sunday, December 6, 1970, an inspection of the records and books of Beef Packers conducted under the supervision of a certified public accountant showed that the value of the accounts receivables and inventory of Beef Packers was below the level required under the Loan and Security Agreement between the Bank and Beef Packers, and that Beef Packers was in default under said agreement.

[Takeover of Inventory, Receivables]

32. That on Monday, December 7, 1970 , the Board of Directors of Beef Packers notified the Bank that Beef Packers was discontinuing its operations, and Beef Packers surrendered possession of the premises and assets to the Bank, turning over all keys, including the keys to its post office box to the Bank. The Bank, on behalf of Beef Packers' secured creditors, took over the inventory and accounts receivables provided under its Loan and Security Agreement and financing statements. The Bank collected the accounts receivables and deposited the proceeds in an account entitled "Wyoming Beef Packers Collection Account, #10-5668-9" which was opened on December 7, 1970 . The moneys were withdrawn from this account and applied to the debt due the Bank. The moneys which the Government seeks were collected over and above the debt due the Bank, and are the moneys which True claims under his filed security agreement.

33. That on Monday, December 7, 1970 , payment of all items against Wyoming Beef Packers' checking account was suspended.

34. That Wyoming Beef Packers Collection Account was created by the Bank as a convenience for the Bank. It was understood that the funds in said account were generated from sales of inventory of Beef Packers and collections of accounts receivables. Said account was under the control of the Bank. Beef Packers had neither control over said account nor authorization to write checks on that account.

35. That after Beef Packers defaulted under the terms of the Loan and Security Agreement with the Bank, the Bank took possession of Beef Packers' accounts receivables and inventory for the benefit of the secured creditors. The Bank paid off the obligation which Beef Packers owed the Bank.

36. That at the time the Bank, as a secured creditor, took over the assets of Beef Packers, the Beef Packers plant had among its inventory carcasses of meat to be processed. The Bank retained Beef Packers' employees, who were familiar with the processing of meat to continue operating the business to complete processing the carcasses. The Bank paid all bills incurred in relation to the business from Beef Packers Collection Account, by writing debit memos against said account, and writing cashier's checks. The Bank paid salaries by withdrawing funds from the Beef Packers Collection Account and depositing funds in the Beef Packers Payroll Account at the First National Bank of Casper to cover salary checks.

37. That the Bank processed the carcasses and sold the meat products. The cost of selling the meat was borne by the receipts from the sale of the meat.

38. That on December 24, 1970 , after the Bank had completed processing the meat which required processing, the remaining inventory of Beef Packers was moved from Beef Packers' plant to Weinrich's Frozen Food Lockers, Inc., in Casper , Wyoming . The Bank stored the remaining inventory at Weinrich's, paying Weinrich's a storage charge of Four Hundred Dollars ($400) per month. Weinrich's sold all but the offal. When the storage charges for the remainder of the inventory reached the point of diminishing returns, the Bank disposed of the remainder of the offal.

39. That the Bank, as a secured creditor taking possession of the inventory of meat was dealing with a perishable commodity. The Bank handled this perishable commodity in a reasonable manner and the Bank exercised reasonable business judgment in disposing of said inventory.

40. That True had asked the Bank to act as his agent in foreclosing upon the collateral of Beef Packers, and True and the Bank agreed that the Bank would act on True's behalf in collecting Beef Packers' accounts receivables and inventory for the benefit of the secured creditors.

41. That True's security interest was perfected, at the very latest, at the time the Bank took possession of the collateral on behalf of the secured creditors. That as against Riverton Auction, the filing of a financing statement on June 22, 1970, by True in the office of the County Clerk of Natrona County, Wyoming, amended per order of 12-28-73, was made in good faith, perfected True's security interest on the inventory located in Natrona County, Wyoming, and that the funds realized from the sale thereof by the Bank, as agent for True, after taking possession by the Bank, are subject to said perfected security interest, which is prior to the levy made by the United States of America, the notice of which was not filed until June 10, 1971, by the United States in the office of the County Clerk of Natrona County, Wyoming.

[Tax Lien and Levy]

42. That on June 9, 1971 , the Internal Revenue Service made assessments for federal tax liability against Beef Packers in the amount of Fourteen Thousand Sixteen and 42/100 Dollars ($14,016.42) plus interest. Beef Packers had not paid that amount assessed. On June 10, 1971 , the Internal Revenue Service filed a notice of tax lien in the office of the Natrona County Clerk, Casper , Wyoming . Also on June 10, 1971, the Internal Revenue Service served a notice of levy upon The Wyoming National Bank of Casper seeking the moneys held on deposit in an account entitled Wyoming Beef Packers Collection Account #10-5668-9.

43. That the government submitted no evidence that proves that the funds in the Wyoming Beef Packers Collection Account #10-5668-9 belonged to Beef Packers.

44. That the Government's tax lien filed against Wyoming Beef Packers Collection Account #10-5668-9 was not valid against the Bank's prior security interest in said account.

45. That the Government's tax lien filed against the Wyoming Beef Packers Collection Account #10-5668-9 was not valid against True's prior security interest in said account.

46. That the rights of the Bank under its perfected security interest in the accounts receivables and inventory of Beef Packers are superior to the rights of True, to the rights of Riverton Auction, and to the rights of all general creditors.

47. That the rights of True under his perfected security interest in the inventory and accounts receivables of Beef Packers are superior to the rights of Riverton Auction and all other general unperfected creditors, and the rights of the United States of America under its levy.

48. That taking into consideration all of the evidence, facts, and circumstances of this case, together with the reasonable inferences to be drawn therefrom, the Court finds generally for the Bank and against the Government.

49. That taking into consideration all of the evidence, facts, and circumstances of this case, together with the reasonable inferences to be drawn therefrom, the Court finds generally for the Bank and against Riverton Auction on Riverton Auction's crossclaim against the Bank.

50. That, taking into consideration all of the evidence, facts and circumstances of this case, together with the reasonable inferences to be drawn therefrom, the Court finds generally for the defendant True and against Riverton Auction on Riverton Auction's crossclaim against True.

Conclusions of Law

1. This Court has jurisdiction over the parties and the subject matter of this action. 26 U. S. C. Sections 7401, 7402, and 7403; 28 U. S. C. Sections 1340 and 1345.