¶9408] First American Title Insurance Co., a Calif. Corp., Provident
Savings Bank, a Federally Chartered Savings Bank, Plaintiffs-Appellants
v. United States of America, Department of the Treasury, Internal
Revenue Service, Mark A. Moss, Provident Financial Corp., a California
U.S. Court of Appeals, 9th Circuit, 87-6190, 6/2/88, 848 F2d 969,
Reversing and remanding unreported District Court decision
[Code Secs. 6323 and
unchanged by the Tax Reform Act of 1986 ]
Collection: Validity of lien: Judicial sale: Wrong name: Priority of
recorded mortgage: Remanded cases: Discharge of liens: Other state
foreclosure proceedings.--A bank could have proven a set of facts
which would have entitled it to retain its pre-sale status as senior
lienor over the government's federal tax lien with regard to certain
real estate. Therefore, the court of appeals reversed the district
court's grant of a motion to dismiss and remanded the case to afford the
bank an opportunity to establish that its perfected lien survived the
sale. Mark A. Moss acquired real estate in which the deed was mistakenly
recorded in the name Mark H. Moss. He gave a deed of trust in the
property to the bank in order to secure payment of a promissory note
which the bank recorded. Subsequently, the name on the original deed was
corrected without notifying the bank. Later, the IRS filed federal tax
liens on the property recorded under the name Mark A. Moss. Due to its
ignorance of the correction of the name, the bank failed to notify the
IRS of the nonjudicial foreclosure sale in which it purchased the
property. In determining the nature of the bank's property interest
after the nonjudicial foreclosure sale pursuant to state law
(California), the court found that existing case law and Code Sec.
7425(b)(1) did not preclude the availability of equitable relief
recognized under state law whereby the bank's senior lien could survive
the sale rather than be extinguished through merger into the fee.
Laubscher, Sanford P. Shatz, Rutan & Tucker, 611 Anton Blvd., Costa
Mesa, Calif. 92628, for plaintiffs-appellants. William S. Rose, Jr.,
Acting Assistant Attorney General, Michael L. Paup, William S.
Estabrook, B. Paul Klein, Department of Justice, Washington, D.C. 20530,
BOOCHEVER and REINHARDT, Circuit Judges.
Title Insurance Co. and Provident Federal Savings Bank appeal from the
district court's grant of a motion to dismiss for failure to state a
claim. We reverse and remand.
concerns the status of various liens on real property located in Grand
. Mark A. Moss acquired the property in July 1983. He mistakenly
recorded the deed under the name Mark H. Ross. In October 1983, Moss
gave Provident a deed of trust in the property in order to secure
payment of a $156,000 promissory note. Provident recorded the deed on
October 19, 1983
. In January 1984, Moss corrected the name on the original deed, but
failed to notify Provident of the change.
1985 and January 1986, the Internal Revenue Service recorded tax liens
against all of Moss's property, including the Grand Terrace property.
The liens on the Grand Terrace property were junior to Provident's lien.
March 10, 1986
, Provident initiated foreclosure proceedings against the property and
conducted a title search under the name Mark H. Moss. Provident never
discovered the federal tax liens because they were recorded under the
name Mark A. Moss. Provident consequently failed to notify the IRS of
the upcoming nonjudicial sale. At the sale, Provident purchased the
property for $159,444.
failure to notify the IRS of the sale meant that the property remained
subject to the federal tax liens. See 26 U.S.C. §7425(b)(1)
. When Provident later discovered the federal liens, it received
indemnity from First American Title Insurance Co. Both entities then
instituted this action. They conceded that Provident's failure to notify
the IRS meant that the sale was "made subject to and without
disturbing" the tax liens. They argued, however, that equitable
principles would have allowed Provident, and now First American, to
retain the senior lien on the property. The district court disagreed. It
held that Provident's senior lien was extinguished when Provident
purchased the property, leaving the property subject only to the federal
tax liens. 1
We review de
novo the district court's grant of a motion to dismiss for failure
to state a claim upon which relief can be granted. Fort Vancouver
Plywood Co. v.
, 747 F.2d 547, 552 (9th Cir. 1984). Dismissal was proper only if
Provident and First American could not have proven any set of facts that
would have entitled them to relief. Conley v. Gibson, 355
41, 45-46 (1957).
The issue on
appeal is whether Provident and First American could have proven any set
of facts which would have entitled Provident to retain its pre-sale
status as senior lienor over the government. Our resolution of the issue
involves two steps. First, we must determine the nature of Provident's
property interest after the sale. Second, if Provident's lien survived
the sale, we must determine whether the lien has priority over the tax
liens. See Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-14 (1960). Each step is
analytically distinct. If our resolution of the property issue reveals
that Provident's lien did not survive the sale, then we need not reach
the priority issue because there would be no lien competing for priority
with the tax liens. If Provident's lien survived the sale, however,
then, and only then, would we reach the priority issue.
governs the resolution of each issue. United States v. Brosnan [60-2
USTC ¶9516 ], 363 U.S. 237, 240 (1960). If federal statutes do not
address the issue, the Supreme Court has specified the source of federal
law. We adopt state law as the federal common law when deciding to what
extent an individual has an interest in property to which a federal tax
lien has attached.
at 240-42; Aquilino, 363
at 512-13; see also
v. Polk [87-2
USTC ¶9432 ], 822 F.2d 871, 874 (9th Cir. 1987). We generate
uniform nationwide federal rules, however, when deciding priority
issues. Brosnan, 363
The Property Issue
Provident's lien survived the sale requires us to determine the extent
of Provident's interest in the Grand Terrace property after the sale. We
law as the federal common law to make this determination. See
at 512-13; Brosnan, 363
at 240-42; Polk, 822 F.2d at 874. Under
law, the general rule is that a mortgagee's lien is extinguished when
the mortgagee purchases the property to which his or her lien was
Civ. Code §2910 (West 1974); Cornelison v. Kornbluth, 15
3d 590, 125
Rptr. 557, 568 (1975); Strike v. Trans-West Discount Corp., 92
App. 3d 735, 155
Rptr. 132, 137 (1979). The theory is that the mortgagee's lesser
interest (the lien) has "merged" into the greater interest
(the fee). If the merger rule applies to Provident, then Provident's
lien did not survive the sale and the tax liens are the only
encumbrances on the property.
We are not
convinced, however, that the merger rule necessarily applies to
law recognizes an equitable exception to the rule:
prevent or permit a merger as will best subserve the purposes of justice
and the actual and just intent of the parties. . . . In the absence of
an expression of intention, if the interest of the person in whom the
several estates have united, as shown from all the circumstances, would
be best subserved by keeping them separate, the intent to do so will
ordinarily be implied.
v. Schiller, 213
632, 3 P.2d 1, 2 (1931) (quoting Jameson v. Hayward, 106
682, 39 P. 1078 (1895)).
and First American are entitled to equitable relief, then Provident's
lien survived the sale. Before we consider this issue, however, we first
address the government's contention that equitable relief is simply
unavailable to a senior lienor such as Provident who has failed to
notify the IRS of a nonjudicial sale.
Does existing case law foreclose the availability of equitable
On the basis
of Southern Bank v. I.R.S. [85-2
USTC ¶9670 ], 770 F.2d 1001 (11th Cir. 1985), cert. denied sub
nom. Mid-State Homes, Inc. v.
1169 (1986), the district court concluded that equitable relief was
unavailable to Provident and First American. In Southern Bank,
two senior lienors conducted nonjudicial foreclosure sales without
notifying the IRS. Each lienor purchased the property at the respective
sales. The Eleventh Circuit held that the senior liens were
extinguished, leaving the property subject only to the government's
this decision, the court applied
's rule of merger,
at 1007. When the lienors contended that elevating the government's
junior liens would be inequitable, they did not argue that
law would allow an equitable exception to the merger rule. Instead,
after the court determined that the liens did not survive the sale, the
lienors apparently argued that
law would provide equitable relief on the priority issue. The court
disagreed, stating "we cannot permit states to nullify the
effectiveness of the federal tax lien . . . by applying various
equitable principles recognized by the state."
We agree with
the Eleventh Circuit that, as to priority issues, state equitable
principles do not apply. If a federal statute does not address a
priority issue, courts generate a federal rule to decide the issue. Brosnan,
at 240. In the case before us, however, we deal with a property issue
because we must determine whether Provident's lien survived the sale. Aquilino
v. United States [60-2
USTC ¶9538 ], 363 U.S., 509, 512-14 (1960), and United States v.
USTC ¶9516 ], 363 U.S. 237, 240-42 (1960), both specify that courts
look to state law to determine the extent of an individual's property
interest in cases involving the federal tax liens. Aquilino makes
clear that the property issue is analytically distinct from the priority
at 512-14. Because Southern Bank dealt with a priority issue, the
case does not apply here.
We reject the
government's contention that United States v. Polk [87-2
USTC ¶9432 ], 822 F.2d 871 (9th Cir. 1987), precludes the
availability of equitable relief on the merger issue. In Polk,
the senior lienors conducted a foreclosure sale without notifying the
at 872. The court held that, under
law, the senior liens were extinguished regardless of the senior
at 874 (quoting Best Fertilizers of Arizona, Inc. v. Burns, 116
492, 493, 570 P.2d 179, 180 (1977)). Polk deals with
law and has no bearing on whether equitable relief is available under
law. The senior lienor's intent is irrelevant under
law, but not under
law. See Ito v. Schiller, 213
632, 3 P.2d 1, 2 (1931); Strike v. Trans-West Discount Corp., 92
App. 3d 735, 155
Rptr. 132, 137-38 (1979). Polk therefore does not preclude the
availability of equitable relief.
Does 26 U.S.C. §7425(b)(1)
preclude the availability of equitable relief?
contends that granting equitable relief to Provident would be
inconsistent with §7425(b)(1)
. We disagree. Before Congress enacted §7425(b)(1)
, some state laws allowed senior lienors to conduct nonjudicial
sales without notice to junior lienors. Junior liens held by the
government could be extinguished by operation of state law even though
the government had not been notified of a sale. S. Rep. No. 1708, 89th
Cong., 2d Sess., reprinted in 1966 U.S. Code Cong. & Admin.
News 3722, 3748. To prevent the extinction of government liens under
these circumstances, Congress enacted section
7425(b)(1) to assure that the government received notice of these
sales so that it could "review its position and determine the
appropriate action . . . ."
this would assure that the government could protect its interest in
having a fair sale. In the event the government did not receive notice,
Congress intended only to shield the government's junior liens from
extinction so the government could protect its interest at a later date.
equitable relief to Provident would not undermine Congress's intent. If
Provident's lien survives the sale, the government's junior liens still
are unaffected by the sale, and the government can protect its interest
in having a fair sale in the future when Provident sells the property or
when the government forecloses on it. Granting equitable relief also
will not discourage senior lienors such as Provident from notifying the
government of future sales. Senior lienors have a strong incentive to
notify the government because doing so will extinguish the government's
junior liens when the property is sold. See 26 U.S.C. §7425(b)(2)
and Sohn v. California Pacific Title Ins. Co., 124
App. 2d 757, 269 P.2d 223, 230 (1954). If notice is not given, the
government's liens survive the sale, leaving an encumbrance of the
property. We believe that this is the penalty that Congress intended to
impose on senior lienors such as Provident. Granting equitable relief to
Provident is not inconsistent with that intention. Section
7425(b)(1) therefore does not preclude the availability of equitable
Availability of equitable relief under
understand California law, equitable relief is available to Provident
and First American if three conditions are met: (1) Provident's best
interests would be best served by preventing a merger of the lien and
the fee; (2) the purposes of justice would be served; and (3) the
government cannot prove by a preponderance of the evidence that
Provident actually intended to merge the lien into the fee. Ito v.
Schiller, 213 Cal. 632, 3 P.2d 1, 2 (1931) (quoting Jameson v.
Hayward, 106 Cal. 682, 39 P. 1078 (1895)); see also Strike v.
Trans-West Discount Corp., 92 Cal. App. 3d 735, 155 Cal. Rptr. 132,
137-38 (1979). We need not discuss the first condition, because there is
no dispute that Provident's best interests would be served by preventing
of justice. To determine whether justice would be served by allowing
Provident's lien to survive the sale, we consider how our resolution of
the issue would affect the parties. We presume that Provident did not
act in bad faith when it failed to discover the government's liens. If
we do not grant equitable relief, Provident would lose $159,444 (the
amount Provident paid for the property) because the property would be
subject to tax liens totalling $534,000. The government, on the other
hand, would realize $159,444 which it otherwise would not have received
had Provident notified it of the sale. We recognize that any money
received by the government would go towards satisfaction of legitimate
tax liens. If Provident had notified the government, however, the
government's junior liens would have been extinguished, see 26
U.S.C. §7425(b)(2) and
Sohn v. California Pacific Title Ins. Co., 124 Cal. App. 2d 757, 269
P.2d 223, 230 (1954), and the government would not have received any
proceeds from the sale because the sale yielded only enough money to
satisfy a portion of Provident's senior lien, see Caito v. United
Calif. Bank, 20 Cal. 3d 694, 144 Cal. Rptr. 751, 754 (1978) (junior
lienor draws from proceeds only after foreclosing senior lienor paid
off). Under these circumstances, the equities favor Provident,
particularly since 26 U.S.C. §7425(b)(1)
eliminates virtually any harm the government suffered when it did
not receive notice of the sale.
Provident failed to notify the government, section
7425(b)(1) provides that the sale was "made subject to and
without disturbing" the government's lien. Even if Provident's
senior lien survives the sale, the government is virtually in the same
position it was in before the sale. If Provident sells the land, or if
the government forecloses on it, the proceeds from the sale first go
towards satisfaction of Provident's lien and any remaining proceeds go
towards satisfaction of the government's liens.
conclude that Provident and First American could prove a set of facts
which would show that the purposes of justice would be served if
equitable relief were granted.
The final condition for receiving equitable relief involves the question
of Provident's intention on the issue of merger. Because Provident did
not express any intention on the merger issue, equity will presume that
Provident did not intend to merge its lien with its fee interest if two
conditions are met: (1) Provident's best interests would be served by
preventing the merger, and (2) the purposes of justice would be served. Ito
v. Schiller, 213
632, 3 P.2d 1, 2 (1931); Strike v. Trans-West Discount Corp., 92
App. 3d 735, 155
Rptr. 132, 137-38 (1979). We have concluded that Provident and First
American could prove a set of facts to fulfill these conditions. We have
also presumed that Provident intended to prevent a merger of its
interests. On remand, the presumption is rebuttable if the government
can prove by a preponderance of the evidence that Provident actually
intended to merge its interests. See Sheldon v. La
686, 15 P.2d 1098, 1101 (1932) (merger rule not applied when no direct
or circumstantial evidence of an express intention to merge); see
also Strike, 92
3d 735, 155 Cal. Rptr. at 137 (placing burden of proof on person arguing
that merger occurred).
The Priority Issue
district court ultimately determines that Provident's lien survived the
sale, then the only remaining issue is whether the lien has priority
over the tax liens. The Federal Tax Lien Act squarely addresses this
issue and therefore obviates the necessity of relying on the federal
common law to resolve the issue. See Manalis Finance Co. v. United
USTC ¶9158 ], 611 F.2d 1270, 1273 (9th Cir. 1980); AETNA Ins.
Co. v. Texas Thermal Industries, Inc. [79-1
USTC ¶9287 ], 591 F.2d 1035, 1037-38 (5th Cir. 1979) (per curiam).
If Provident's lien survived, the Tax Lien Act gives priority to it
because Provident had perfected its lien before the government recorded
its tax liens. See 26 U.S.C. §§6323(a)
, (h)(1) ; Manalis,
611 F.2d 1273; AETNA Ins. Co., 591 F.2d at 1038.
We hold that
the district court erred in granting the government's motion to dismiss.
We have viewed the facts in the light most favorable to Provident and
First American. Whether they can actually prove their case is a matter
for the district court to decide on remand.
The district court also rejected the contention that 26 U.S.C. §7425
allowed a "taking." We need not address this issue.
United States of America
, Appellant v.
, ex rel.
ert D. Bell, Secretary, Department for Natural Resources and
Environmental Protection and Ike Marsee, Appellees
Commonwealth of Kentucky Court of Appeals,
CA-1122-MR, 568 SW2d 752, 12/16/77
[Code Sec. 6323--result unchanged by the '76 Tax Reform Act]
Lien for taxes: Notice of lien: Place for filing.--Decision of a
lower state court determining that a judgment lien creditor had priority
over a prior in time Federal tax lien was reversed, and remanded for a
determination of whether the notice of the Federal tax lien was filed in
the correct state (the state wherein the corporate debtor's
"principal executive office" was located).
Eldon L. Webb,
United States Attorney,
ert F. Trevey, Assistant United States Attorney, Lexington, Ky. 40507,
Myron C. Baum, Acting Assistant Attorney General, Gilbert E. Andrews,
Crombie J. D. Garrett, William S. Estabrook III, Department of Justice,
Washington, D. C. 20530, for appellant. Scott Allen Wilson, Kentucky
Department for Environmental Protection and Natural Resources,
Frankfort, Ky. 40601, Mark Anderson, 2317 Cumberland Ave., Middlesboro,
Ky. 40965, for appellee.
HOGGE and LESTER, Judges.
* * *
This is an
appeal from an order determining that the appellee, Ike Marsee, had a
superior right against the United States to the sum of $6,300.00 held by
the Kentucky Department of Natural Resources and Environmental
Protection as a cash bond for obtaining a strip mining permit, which had
been deposited by Carbon Coal Company Inc., a debtor of both Marsee and
the United States.
The claim of
against Carbon Coal grew out of unpaid taxes. The claim of Marsee
against Carbon Coal grew out of a loan to that company by Marsee. There
is no question that the claim of the
predated Marsee's claim. Nor is it questioned that the
first took action to effectuate its lien. The issue before this court is
complied with the statutory requirements as to filing of notice of its
A notice of
federal tax liabilities was filed on
January 3, 1972
, and on
June 29, 1972
. Ike Marsee did not file suit against Carbon Coal until
September 28, 1972
October 3, 1972
, Marsee obtained a pre-judgment attachment against Carbon Coal and, on
October 6th, served the attachment upon the Kentucky Department for
Natural Resources and Environmental Protection. On
December 7, 1972
, Marsee obtained judgment against Carbon Coal. The
had not attempted to file notice of its lien in any place other than
, although Carbon Coal had offices and connections in three states,
provides that a lien arises in favor of the
upon the taxpayer's failure to pay the taxes upon demand. IRC §6323
provides that said lien is not effective against a judgment lien
creditor until notice of same is properly filed. That section further
provides that the proper place for filing of notice of lein against the
personal property of a corporate taxpayer is the state where its
"principal executive office" is located. Therefore, if the
had properly filed its notice of federal tax liability at the time
Marsee became a judgment creditor, the claim of the
would be superior. However, if the notice had not been properly filed at
the time Marsee became a judgment creditor, Marsee's claim would be
of the "principal executive office" of Carbon Coal is basic to
any determination of whether the
filed its notice in the proper place. Unfortunately, the record is
completely void of any evidence on this critical point. As a result, the
trial court was unable to make any findings of fact respecting the
location of the principal executive office of Carbon Coal.
In the absence
of any evidence on this issue, any judgment of the trial court may
result in a gross miscarriage of justice.
reversed and remand for further proceedings consistent with this
opinion, including the taking of additional proof if necessary.
v. Joseph Bucchieri
[Code Sec. 6321]
Lien for taxes: Priority: Federal tax lien v. state seizure of
contraband: Choateness of state lien.--Contraband seized by a state
during a drug raid was subject to a federal tax lien for taxes on the
owner of the contraband. As state law provided that seized property
first be declared contraband and then, after hearing, be forfeited to
the state, the state interest was not choate until the determination of
the forfeiture proceeding. A federal tax lien arising after the seizure
and institution of the forfeiture proceeding but before the hearing on
that proceeding had priority over that inchoate state interest.
Caldwell, state's attorney, for State of Conn. Frank N. Santoro, Richard
Blumenthal, United States Attorneys, M. Carr Ferguson, Assistant United
States Attorney, New Haven, Conn. 06508, Michael J. Roach, Gilbert E.
Andrews, Crembie J. D. Garrett, Department of Justice, Washington, D. C.
20530, for U. S.
COTTER, C. J.,
LOISELLE, BOGDANSKI, LONGO and PETERS, Js.
arises out of competing claims to funds seized by
February 1, 1972
, pursuant to a search warrant authorizing search of a house in that
town. The search netted $4718.11 in cash, along with a quantity of drug
On the day of the search the Circuit Court from which the warrant had
been issued instituted an in rem proceeding for adjudication of
the seized articles as a nuisance, pursuant to General Statutes §54-33g.
Some five months later, on
June 30, 1972
filed notices of tax liens against Joseph Bucchieri and Andrew Field,
codefendants on drug charges that had resulted from the search of the
premises. Notices of the tax levies were served on the chief of police
of the town of
July 3, 1972
, at that time the custodian of the funds seized in the
February 1, 1972
, raid. Subsequently, in April, June, and November of 1973, several
proceedings were held in the Superior Court to adjudicate rights to the
seized funds. Ultimately the order presently on appeal was entered; it
determined that the claim of the state of
under §54-33g was entitled to priority over the claim of the
United States of America
under §6321 of the Internal Revenue Code. 3
States, the appellant, has framed the issue on appeal as a question of
priority in time: Was the currency seized in the narcotics raid
effectively forfeited to the state of Conecticut prior to the time that
a federal tax lien attached to all of the taxpayers' property, even
though there had been no judicial determination of forfeiture at the
time the federal tax lien arose? This statement of the issue presupposes
appropriate resolution of a threshold question that must first be
addressed: Was the property to which the federal tax lien attached the
property of the taxpayers? Until it is established that the funds seized
were funds in which the taxpayers Bucchieri and Field had property
as lienholder has no claim to the funds. Whether taxpayers have
"property" or "rights to property" to which the tax
lien may attach is a question of state law on which the
has the burden of proof. Aquilino v. United States [360 USTC ¶9538],
509, 512-14, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960); United States
v. Bess [58-2 USTC ¶9595], 357
51, 55, 78
1054, 2 L. Ed. 2d 1135 (1958); Plumb, Federal Tax Liens 27-30 (3d Ed.
1972). Only after it has been determined that a lien has attached to a
state-created interest does federal law come into play to determine the
priority of competing liens asserted against the same property. Aquilino
v. United States, supra, 514.
below established very little with specificity concerning the ownership
of the seized currency. At the time of the raid, some of the money was
found on the person of Bucchieri, and some of it was found in the room
house occupied by Bucchieri and Field. Bucchieri himself, however, twice
disclaimed, through counsel, any interest in the money, once on the
occasion of his plea of guilty to sale and possession of a controlled
drug, and again on the occasion of the April, 1973, hearing in the in
rem proceeding. The trial court's memorandum of decision indicates
that Field, Bucchieri's codefendant, 4
and a cotaxpayer, also made an in-court disclaimer to the currency. The
house was owned by someone other than Bucchieri or Field; whether and to
what extent the landlord had access to Bucchieri and Field's room is
entirely unclear. The affidavit and application for the search warrant
does indicate that the premises were the site of at least one illegal
drug sale by a person other than Bucchieri or Field. Although the record
would seem to indicate that Bucchieri was engaged in drug traffic for
made no request for the taking of evidence to determine whether the
money seized pursuant to the search warrant was money derived from the
sale of controlled drugs. Nor did the
offer any other proof of Bucchieri's title to any of the money seized.
As counsel for the
candidly conceded at oral argument, the
simply assumed that the currency belonged to Bucchieri and Field because
of the place where it was found and because no one else had asserted a
claim of ownership. Assumptions are no substitute for findings. 5
In this state
of the record, the
has certainly not yet established the taxpayer property rights that are
a prerequisite to its priority claim. We could, on this basis, affirm
the judgment below, since the
had the opportunity to participate and did participate in a hearing
designed to adjudicate competing claims to the fund in dispute. It seems
clear, however, that in the proceedings below the issue of ownership was
never squarely addressed by anyone. The state's primary concern, in the
adjudication of property as a nuisance under §54-33g, is to show that
the property "has been possessed, controlled or designed for use .
. . with intent to violate or in violation of any of the criminal laws
of this state." The state's case focuses on use for an illegal
purpose, rather than on ownership. As this court said with regard to a
predecessor statute, now repealed, dealing with seizure of intoxicating
liquor, "[t]his statute is not a criminal statute, but provides for
a civil action in rem for the condemnation and forfeiture of the
[property] which was used in violation of the law. . . . In such an
action the guilt or innocence of the owner of the [property] is not in
issue. The only issue is whether the [property] was used in violation of
law. This follows from the nature of the action which is one against the
res, an action in rem." Alcorn v. Alexandrovicz, 112
618, 623, 153 A. 786 (1931); see State v. One 1960 Mercury Station
5 Conn. Cir. Ct.
1, 240 A. 2d 99 (1968).
court specifically found that at the relevant hearing on
November 15, 1973
, and in the briefs subsequently submitted, both parties limited their
claims to the question of priority. Apparently the state was prepared to
presume, having followed the statutory requisites as to notice and in
the absence of evidence to the contrary, that the property was
contraband, while the
was prepared to indulge in a similar presumption concerning ownership.
The trial court acted on the first presumption, concluding that the
seized currency was money derived from the sale of controlled drugs, and
hence contraband subject to forfeiture under the state statute. 6
The trial court, however, reached no conclusions whatsoever on the
question of ownership. It seems reasonable to remand this case for
further proceedings to determine this crucial question.
If upon remand
the United States is able to prove that the seized currency was the
property of Bucchieri and Field, 7
the issue of priority between the claim of the state under §54-33g and
the claim of the United States under I. R. C. §6321 must be resolved.
The court below did address this issue, and concluded that the state was
entitled to priority because seizure of the property as contraband by
initiation of the in rem proceeding antedated the attachment of
the federal tax lien. The
assigned this conclusion as error, and the issue has been fully briefed
and argued. In light of the likelihood of a rehearing, it is appropriate
to resolve this claim of error now. Thomas v. Arafeh, 174
464, 467, 391 A. 2d 133 (1978); Loewenberg v. Wallace, 147
689, 694, 166 A. 2d 150 (1960);
App. Proc. §341.
of federal tax liens as against liens created under state law is
governed generally by the common-law rule that "first in time is
first in right." United States v. Equitable Life Assurance
Society of the United States [66-1 USTC ¶9444], 384
323, 327, 86 S. Ct. 1561, 16 L. Ed. 2d 593 (1966); United States v.
Pioneer American Ins. Co. [63-2 USTC ¶9532], 374
84, 87, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963);
81, 85-86, 74
367, 98 L. Ed. 520 (1954). See 2 Gilmore, Security Interests in Personal
Property §40.3, p. 1054 (1965). Some specific exceptions to this
general rule have been carved out by the Federal Tax Lien Act of 1966 in
its amendments to I. R. C. §6323, but the state has not suggested that
its claim to priority should shelter under any of these special
exemptions. In the ordinary case, the federal lien arises, under I. R.
C. §6322, when the tax is assessed, while the state lien arises when it
is specific and perfected, or choate. United States v. Equitable Life
Assurance Society of the United States, supra, 327; United States
v. Pioneer American Ins. Co., supra, 88;
, supra. 84. The determination of when a state interest has become
sufficiently choate to defeat a later-arising federal tax lien is a
matter of federal and not of state law. United States v. Equitable
Life Assurance Society of the United States, supra, 328; United
States v. Pioneer American Ins. Co., supra, 88; Aquilino v.
United States [360 USTC ¶9538], 363 U. S. 509, 513-14, 80 S. Ct.
1277, 4 L. Ed. 2d 1365 (1960); United States v.
, supra, 84. See Plumb, Federal Tax Liens 27-30 (3d Ed. 1972).
In the case
before us, these principles translate into the following question: Did
the state's claim to the seized currency immediately become choate at
the time of the institution of the in rem proceeding on February
1, 1972, so as to antedate the federal tax lien that attached on June
28, 1972; or did it first become choate after the hearing on the in
rem proceeding on April 26, 1973, and thus postdate the federal
The test that
determines, under federal law, whether a state interest competing with a
federal tax lien is sufficiently choate is that the competing interest
must be "perfected in the sense that there is nothing more 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
, supra, 84. This language has been cited repeatedly in subsequent
cases in the United States Supreme Court. Plumb, Federal Tax Liens
149-50 (3d E. 1972); 2 Gilmore, Security Interests in Personal Property
1054 (1965). The time when a state interest is perfected as against
local levying creditors is not dispositive as to choateness; an
otherwise effective attachment lien, for example, is always inchoate
until the time of judgment, and can be defeated by an intervening
recorded tax lien. United States v. Security Trust & Savings Bank
[50-2 USTC ¶9492], 340
47, 50, 71 S. Ct. 111, 95 L. Ed. 53 (1950).
The in rem
proceedings under §54-33g are difficult to align with the case law on
state liens because §54-33g provides for forfeiture rather than for a
lien. The in rem proceedings are instituted ex parte to
seize outright designated property that has been taken as contraband
pursuant to a search warrant. A hearing is afforded, as required by
constitutional principles of procedural due process, so that interested
parties may contest whether the property was in fact "possessed,
controlled . . . or . . . used, with intent to violate or in violation
of any of the criminal laws" of the state. The purpose of the
state's seizure is not to establish a lien to facilitate collection of
moneys owed to the state, but rather to exercise the sovereign power to
forfeit property shown to have been involved in an illegal enterprise.
In determining when the state's interest has become choate, we must bear
in mind the purpose of the state's exercise of its sovereign power of
forfeiture as well as the procedure that the state has devised for the
manifestation of its interest. The state's reliance on United States
v. Vermont, 377
351, 355, 84
1267, 12 L. Ed. 2d 370 (1964), is therefore not totally apposite. True, United
States v. Vermont is one of the very few cases in recent history 8
in which a state interest was held by the United States Supreme Court to
be sufficiently choate to survive challenge by a subsequent federal tax
lien. United States v. Vermont is noteworthy for its holding that
a state-created lien may be valid when it attaches to all, rather than
to specifically designated portions, of a taxpayer's property. It is
consistent with a conclusion that a state may have the power effectively
to exclude property from a federal lien, but it gives little guidance
whether in this case, under this statute, this state has exercised such
In a case of
first impression like this one, it is helpful to consult the holdings of
other courts, and the opinions of the textwriters. There are, as far as
we can discover, no cases definitively interpreting statutes that, like
§54-33g, couple an immediate forfeiture with a subsequent hearing that
may result in reclamation of the forfeited property in whole or in part.
Some twenty years ago, the United States Court of Appeals for the Third
Circuit, while noting the difficulty of the case, expressed in dictum
grave doubt that a federal tax lien could attach to property in the
possession of the state after its seizure as contraband.
v. Bleasby, 257 F. 2d 278, 279-80 (3d Cir. 1958). Judge Hastie
in Bleasby characterized as "extraordinary" the effort
by the federal government to impose its lien on property already in the
possession of the state government pursuant to the latter's
"sovereign claim of right to keep it in furtherance of its criminal
laws." In a similar vein, William T. Plumb, Jr., the leading
textwriter of federal tax liens, takes the position that seizure and
forfeiture of property under state law leaves the taxpayer with no
property to which a subsequent federal tax lien can attach, whether or
not judicial proceedings are required to finalize the forfeiture. In his
view, whatever judicial proceedings are had are at best analogus to
third-party claims of title whose pendency would not postpone the
attachment of a lien to the affected property. Plumb, Federal Tax Liens
185-87 (3d Ed. 1972).
with these arguments in favor of the state's priority is that they
assume the very points that are ultimately at issue. To what extent in
fact is the state's "sovereign claim of right" inconsistent
with the federal assertion of a tax lien? To what extent in fact has the
state exercised its power of forfeiture by the mere initiation of ex
parte proceedings to declare property a nuisance?
claim of the state in seizing contraband property must be measured by
the purpose forfeiture is intended to serve. That purpose is, clearly,
to deprive potential (and actual) criminals of access to useful
property, and hence to deter crime. In no way is that purpose the
enrichment of the coffers of the state treasury. As the text of §54-33g
states, the normal disposition of property declared to be a nuisance
under the statute is that the property "be destroyed or disposed of
to a charitable or educational institution or to a governmental agency
or institution." The property is to be taken from criminals by
the state but not for the state. It is only because the
contraband in the present case happened to be cash that the normal
course of disposition has apparently not been followed. The liquidity of
this property undoubtedly accounts also for the federal interest in
attaching it. Yet it is undeniable that the state is claiming what is in
effect a windfall, while the federal government is pursuing ordinary
means, albeit through jeopardy assessments, 9
to collect ordinary taxes in the ordinary course of Internal Revenue
Service business. The federal lien interferes in no perceptible way with
any state policy under the state forfeiture statute.
The absence of
a fundamental conflict of policy between the state and the
should not of course lead us to characterize as inchoate a state
interest that under state law has fully vested at a time antedating the
federal tax lien. The provisions of §54-33g hardly comport, however,
with an overriding legislative intent to characterize as final an ex
parte proceeding to declare property contraband, when the section
itself provides for a hearing at which competing claims may be heard and
at which forfeiture is to be adjudicated.
law has never recognized any inherent right of forfeiture apart from
statute. State v. Certain Contraceptive Materials, 126
428, 11 A. 2d 863 (1940); State v. Rosarbo,
2 Conn. Cir. Ct.
399, 199 A. 2d 575 (App. Div. 1963). In recent years this court, like
others, has become increasingly sensitive to the significance of
hearings that afford participants a meaningful opportunity to challenge
seizures, under state law, of private property. See Roundhouse
Construction Corporation v. Telesco Masons Supplies Co., 168
371, 362 A. 2d 778 (1975), cert. denied, 429
889, 97 S. Ct. 246, 50 L. Ed. 2d 172 (1976). In light of this trend, we
should not devalue the hearing mandated by §54-33g as insignificant in
the determination of when state rights attach. If the hearing and the
resultant adjudication seriously matter, as constitutionally they must,
the state cannot be deemed to have acquired a fully matured, choate
right in the seized property until that time.
reasons, we conclude that the court below was in error in its conclusion
that forfeiture under §54-33g of the General Statutes occurs as of the
time the property becomes contraband because of its illegal use. Even
though state seizure of the property may effectively remove the property
from the claims of its owners, or those who take under its owners, the
state's claim is incomplete and hence inchoate until forfeiture has been
adjudicated after interested parties have had an opportunity to be
heard. For other purposes, adjudication may enable the state's claim to
relate back to the time of initial seizure. Under the governing federal
law, however, an intervening federal tax lien takes precedence over the
state lien which is not yet fully choate. United States v. Security
Trust & Savings Bank [50-2 USTC ¶9492], 340
47, 50, 71 S. Ct. 111, 95 L. Ed. 53 (1950). Whether in this case the
will be entitled to the currency seized in the
drug raid will depend upon its ability to prove, upon remand, that the
moneys were the property of its taxpayers, Bucchieri and Field.
error, the judgment is set aside and the case is remanded for further
proceedings in accordance with this opinion.
opinion the other judges concurred.
Only the cash that was seized is presently in dispute.
"[General Statutes] Sec. 54-33g. Summons to Owner on Seizure of
Property. In Rem Action for Adjudication as Nuisance. When pursuant to
subdivision (1) of subsection (b) of section 54-33a any property has
been seized, which the state claims to be a nuisance and desires to have
destroyed or disposed of in accordance with the provisions of this
section, the judge or court issuing the warrant shall, within ten days
after such seizure, cause to be left with the owner of, and with any
person claiming of record a bona fide mortgage, assignment of lease or
rent, lien or security interest in, the property so seized, or at his
usual place of abode, if he is known, or, if unknown, at the place where
the property was seized, a summons notifying the owner and any such
other person claiming such interest and all others whom it may concern
to appear before such judge or court, at a place and time named in such
notice, which shall be not less than six nor more than twelve days after
the service thereof, then and there to show cause why such property
should not be adjudged a nuisance and ordered to be destroyed or
otherwise disposed of as herein provided. Such summons may be signed by
a clerk of the court or his assistant and service may be made by a local
or state police officer. If shall describe such property with reasonable
certainty and state when and where and why the same was seized. If the
owner of such property or any person claiming any interest in the same
appears, he shall be made a party defendant in such case. Any state's
attorney or prosecuting attorney may appear and prosecute such
complaint, and, if the judge or court finds the allegations made in such
complaint to be true and that the property has been possessed,
controlled or designed for use, or is or has been or is intended to be
used, with intent to violate or in violation of any of the criminal laws
of this state, he or it shall render judgment that such property is a
nuisance and order the same to be destroyed or disposed of to a
charitable or educational institution or to a governmental agency or
institution provided, if any such property is subject to a bona fide
mortgage, assignment of lease or rent, lien or security interest, such
property shall not be so destroyed or disposed of in violation of the
rights of the holder of such interest. Final destruction or disposal of
such property shall not be made until any criminal trial in which such
property might be used as evidence has been completed . . .. When any
money or valuable prize has been seized upon such warrant and condemned
under the provisions of this section, such money or valuable prize shall
become the property of the state, provided any such property, which at
the time of such order is subject to a bona fide mortgage, assignment of
lease or rent, lien or security interest shall remain subject to such
mortgage, assignment of lease or rent, lien or security interest. When
any property or valuable prize has been declared a nuisance and
condemned under this section, the court may also order that such
property be sold by sale at public auction in which case the proceeds
shall become the property of the state; provided, any person who has a
bona fide mortgage, assignment of lease or rent, lien or security
interest shall have the same right to the proceeds as he had in the
property prior to sale. If the judge or court finds the allegations not
to be true or that the property has not been kept with intent to violate
or in violation of the criminal laws of this state or that it is the
property of a person not a defendant, he shall order the property
returned to the owner forthwith and the party in possession of such
property pending such determination shall be responsible and personally
liable for such property from the time of seizure and shall immediately
comply with such order. Failure of the state to proceed against such
property in accordance with the provisions of this section shall not
prevent the use of such property as evidence in any criminal
Code §6321] Lien for Taxes. 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."
contest involves only I. R. C. §6321; there are no allegations
that the taxpayers are insolvent so as to allow the
to invoke Rev. Stat. §3466 (1875), 31
The charges against Field were nolled on
April 4, 1973
could have moved to supplement or correct the findings on the issue of
ownership of the seized money; Practice Book §§ 3034-3035, 3038-3039;
it failed to do so.
Although the United States initially assigned these conclusions as
error, the arguments were not briefed and hence are considered
abandoned. State v. Brown, 169
692, 706, 364 A. 2d 186 (1975).
There may also arise the problem of allocation of the fund between
Bucchieri and Field, since the tax lien against each individually was in
the amount of $3706.75, while the seized property totalled $4718.11.
The last case prior to United States v. Vermont to give local
liens priority over a federal tax lien was
v. New Britain, 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520
(1954), in which specific, perfected municipal liens for real estate
taxes and water rent were held prior to a general, perfected United
States tax lien on the theory of "first in time, first in
The jeopardy assessment provision of the Internal Revenue Code is I. R.
C. §6861, 26
United States of America
(Treasury Department, Internal Revenue Service), Appellant v. Globe
Supreme Court, No. 11726, 2/5/76, Rem'g unreported Superior Court
[Code Sec. 6323]
Tax liens: Priority: Landlord's lien: Filing.--A tax priority
dispute between the government and a company that claimed a contractual
landlord's lien was remanded for the lower court to determine whether
the company had filed an adequate financing statement and, if it had,
whether the county recorder's office had established an index for filing
financing statements at the time of filing. Had an index been
established and the company not directed that its document be filed as a
financing statement, the government would not have been charged with
notice of it at the time it filed its tax lien and the government's lien
would have priority.
Smitherman, United States Attorney, James P. Loss, Assistant United
States Attorney, Phoenix, Ariz., Scott P. Crampton, Assistant Attorney
General, Meyer Rothwacks, Elmer J. Kelsey, William M. Brown, Department
of Justice, Washington, D. C. 20530, for appellant. Francis J. Slavin,
Jr., Fennemore, Craig, Von Ammon & Udall, Suite 1700, First Nat'l
Bank Plaza, 100 W. Washington St., Phoenix, Ariz., for appellee.
Vice Chief Justice:
The Valley Gin
Company, as plaintiff in the Supreme Court, commenced this action to
determine the proper party to receive $15,694.10, the balance of the
proceeds from crops grown on land leased by the Globe Corporation to Lee
Wong Farms, Inc. The Superior Court, after authorizing the deposit of
the fund with the court, awarded the Valley Gin Company $635.40 as costs
and attorneys' fees from the fund and ordered that the Valley Gin
Company be dismissed from the action. Both the
and the Globe Corporation were named defendants. Both filed motions for
summary judgment. The court below denied the motion of the
and granted the motion of the Globe Corporation. The
has appealed. The judgment is set aside and this cause is remanded with
The facts are
not in dispute. Lee Wong Farms, Inc. leased certain lands from the Globe
Corporation. The lease, dated
December 29, 1966
, was for four years and provided for an annual rental of $45,000
payable in equal installments on January 1 and August 1 of each year.
Pursuant to the lease, Lee Wong Farms, Inc. was in possession of the
demised property in April of 1970, at which time it planted a cotton
crop scheduled for harvest in late 1970. The cost of planting and
growing the crop was advanced by the Valley Gin Company. In the summer
of 1970, Lee Wong Farms, Inc. encountered financial difficulty and was
unable to meet its obligations. Consequently, the Valley Gin Company
took over the harvesting and processing of the crop and satisfied its
claim from the proceeds. The balance was interpleaded with the result as
claimed the fund by reason of certain tax liens filed during June and
July of 1970. Globe claimed the fund because Lee Wong Farms, Inc. failed
to make the rental payment due
August 1, 1970
. Globe has asserted both a statutory and a contractual landlord's lien
on the fund, either of which it claims is entitled to priority over the
federal tax liens. The United States on appeal contends that the
statutory landlord's lien was inchoate (was not a perfected security
interest) at the time the federal tax liens were filed, that the
contractual landlord's lien did not constitute a properly protected
security interest under the Uniform Commercial Code, and that neither
the statutory landlord's lien or the contractual landlord's lien is
entitled to priority over the federal tax liens. The
also contends that since its liens are entitled to priority, the trial
court erred in awarding Valley Gin Company costs and attorneys' fees.
By the United
States Internal Revenue Code, §6321, there is created a lien in favor
of the United States upon all property and rights to property belonging
to any person who neglects or refuses to pay his tax liability after
demand. The lien arises at the time the assessment is made and continues
until the liability for the assessed amount is satisfied or becomes
unenforceable by reason of lapse of time. Internal Revenue Code, §6322.
The liens asserted by the United States are based on taxes assessed
during May and June of 1970 and recorded pursuant to the authority of §6323
during June and July of 1970.
a statutory lien by reason of A. R. S. §33-362(C), reading:
landlord shall have a lien for rent upon crops grown or growing upon the
leased premises, * * * and the lien shall continue for a period of six
months after expiration of the term of the lease."
' position is that Globe's lien was not a perfected security interest
and therefore it was not entitled to priority over the federal liens.
law, a landlord has a lien for rent upon crops grown or growing on the
leased premises until the rent is paid, A. R. S. §33-362(C), supra, and
the lien attaches at the beginning of the tenancy. In re Menzies,
60 F. 2d 1064 (D. C. Ariz. 1932); Dewar v. Hagans, 61
201, 146 P. 2d 208, 151 A. L. R. 673 (1944). The lien is for rent due or
to become due, Murphey v. Brown, 12
268, 100 P. 801 (1909). The landlord acquires a fixed, specific lien in
the amount of the rent due on his tenant's goods and property rather
than a mere claim for priority of payment. In re Menzies, supra.
The lien exists independent of any proceedings. Dewar v. Hagans,
law is as stated, the
urges that merely because the landlord's lien attaches at the beginning
of the tenancy does not mean that it is so perfected as to have priority
over the federal tax lien. As to this, a lien may be classified by the
state as choate (specific and perfected) so as to defeat other state
liens, but whether it is sufficient to defeat a federal tax lien is a
question of federal law. United States v. Pioneer American Insurance
Co. [62-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d
770 (1963); United States v. Scovil [55-1 USTC ¶9137], 348 U. S.
218, 75 S. Ct. 244, 99 L. Ed. 271 (1955); United States v. City of
New Britain, Conn. [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367,
98 L. Ed. 520 (1954); Kuffel v. United States, 103 Ariz. 321,
[68-2 USTC ¶9487] 441 P. 2d 771 (1968).
priority over a federal tax lien, a state lien must be choate under
federal law. United States v. State of Vermont [64-2 USTC ¶9520],
351, 84 S. Ct. 1267, 12 L. Ed. 2d 370 (1964); United States v.
Security Trust & Savings Bank [50-2 USTC ¶9492], 340
47, 71 S. Ct. 111, 95 L. Ed. 53 (1950); T. H.
Lumber Company v. Apel, 468 F. 2d 14 (10th Cir. 1972). To be choate
under federal law, the identity of the lienor, the identity of the
property subject to the lien and the amount of the lien must be certain.
United States v. City of New Britain, Conn., supra.
position is that the choate doctrine is no longer applicable because the
Federal Tax Lien Act of 1966 was adopted subsequent to the cited cases
and that it set new standards for determining when a state lien prevails
over a federal tax lien. It is argued that Globe's statutory lien
qualifies for priority under the Federal Tax Lien Act of 1966 for either
of two reasons. First, because Globe qualifies as a holder of a
"security interest" under the Internal Revenue Code §§
6323(a) and 6323(h)(1).
6323(a) provides that:
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
6323(h)(1) defines a "security interest" as:
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."
while Globe's statutory landlord's lien arises out of the
landlord-tenant relationship, the lien is not within the meaning of §6323(a).
The purpose of
the Federal Tax Lien Act was to conform the internal revenue laws with
the developments in the Uniform Commercial Code, Senate Report No. 1708,
House Report No. 1884, 89th Congress, 2d Session (1966). The security
interest referred to in the tax act must therefore be read in
conjunction with the Uniform Commercial Code.
of the Uniform Commercial Code does not apply to this statutory lien. A.
R. S. §44-3102(B) A lien which is not protected as a security interest
by the Uniform Commercial Code is not a security interest within the
meaning of §6323(a) of the Federal Tax Lien Act. United States v.
Sterling National Bank & T. Co. of N. Y. [73-2 USTC ¶9494], 360
F. Supp. 917 (S. D. N. Y. 1973), aff'd in part, rev'd in part on other
grounds, [74-1 USTC ¶9336] 494 F. 2d 919 (2d Cir. 1974). See
also Plumb, Federal Liens and Priorities, 77 Yale L. J. 605,
680-682 (1968). Because Globe's statutory lien was not protected as a
security interest under the Uniform Commercial Code, it is not entitled
to priority under §6323(a) of the Federal Act.
contends that its statutory lien qualifies for a priority status under
the provisions of §6323(c).
the extent provided in this subsection, even though notice of a lien
imposed by section 6321 has been filed, such lien shall not be valid
with respect to a security interest which came into existence after tax
lien filing but which--
is in qualified property covered by the terms of a written agreement
entered into before tax lien filing and constituting--
a commercial transactions financing agreement,
a real property construction or improvement financing agreement, or
an obligatory disbursement agreement, and
is protected under local law against a judgment lien arising, as of the
time of tax lien filing, out of an unsecured obligation."
6323(c)(3)(A) defines a "real property construction or improvement
financing agreement" as:
agreement to make cash disbursements to finance--
construction or improvement of real property,
contract to construct or improve real property,
raising or harvesting of a farm crop or the raising of livestock or
of clause (iii), the furnishing of goods and services shall be treated
as the disbursement of cash." (Emphasis supplied)
that it meets the requirements of §6323(c)(1) since it had entered into
a written agreement of lease before the government's lien was filed,
which agreement required it to furnish to Lee Wong Farms the lands upon
which it raised and harvested a farm crop. Globe construes the word
"goods" as including farm lands and so concludes it is
entitled to priority status. But we think such a construction is
contrary to the meaning of the word "goods" as personal
property. Words must be accorded their obvious and natural meaning. Mendelsohn
163, 261 P. 2d 983 (1953).
however, other reasons for denying Globe priority status. The
disbursements covered in §6323(c)(3) were discussed in Senate Report
No. 1708, supra. The types of financing agreements covered:
generally those involving disbursements to an owner of a property for
the construction or improvement of real property, or to a builder for a
contract to construct or improve real property, as well as disbursements
for the raising or harvesting of farm crops or the raising of livestock
or other animals. Protection is limited to interests arising from cash
disbursements by the lender except in the case of the financing of a
farm crop, livestock, or other animals, where the disbursement may also
be in the form of the supplying of goods or services." Senate
Report No. 1708, supra, page 8.
House also refers to the types of disbursements covered:
financing a farm crop is protected to the extent of the value of the
seed he furnishes to the farmer to plant a wheat crop and the value of
the use of a combine to harvest that crop, as well as cash disbursements
he makes to provide funds to pay farm laborers needed to plant and
harvest the crop." House Report No. 1884, supra, page 43.
is no indication whatsoever that the rent for farm lands is included
within the coverage.
the term "qualified property" includes only:
the case of subparagraph (A)(iii), property subject to the lien imposed
by section 6321 at the time of tax lien filing and the crop or the
livestock or other animals referred to in subparagraph (A)(iii)."
Internal Revenue Code §6323(c)(3)(B)(iii).
farm lands are not subject to the lien created by §6321 and are not
entitled to priority over the federal tax liens under Internal Revenue
Federal Tax Lien Act does not give Globe's lien a priority, this case
must be determined by the principle first in time, first in right. United
States v. City of New Britain, Conn., supra. The priority of the
liens depends on the time they became specific and perfected. In House
Report No. 1884, cited supra, at page 35, the choate doctrine as
expressed in United States v. City of New Britain, Conn., supra,
is specifically retained in the new §6323(a); that is, the state lienor
is protected if at the time notice of the tax lien is filed the identity
of the lienor, the property subject to the lien, and the amount of the
lien are all established. Several federal cases have applied the choate
doctrine since 1966. See e.g.,
Oil & Gas Corporation v.
[72-2 USTC ¶9653], 466 F. 2d 1040 (5th Cir. 1972); T. H. Rogers
Lumber Company v. Apel, supra. The choate doctrine is still viable
and must be met by a lienor in order to prevail over a federal tax lien.
statutory lien does not meet the choate principle. The amount of Globe's
lien was not certain and specific within the meaning of the applicable
federal law. True, Globe's lien related back to the date of the making
of the lease, the beginning of the tenancy, and was good for all State
purposes. Still, under federal law, its lien was inchoate in June and
July when the federal tax lien was filed.
is clear that Lawler's lien for rent cannot be paid out of the fund
interpleaded before the Government's tax lien. Section 6321 does not
confer a priority on the lien it creates, but the lien created by its
language did attach to all of
's property, pursuant to §6322, when the assessment was made on
August 31, 1956
. While under
law Lawler has a specific and not merely inchoate lien, which relates
July 1, 1949
, the beginning of the tenancy, and good for all state purposes, under
federal law his lien was inchoate at the time the federal tax lien arose
and was duly recorded on
October 26, 1956
, in the proper offices. At the time the federal tax lien attached to
's property, he was not in default in the payment of rent, and the
distress warrant and writ of attachment were not issued until several
months thereafter. Lawler's lien had not been perfected in a federal
sense when the federal tax lien came into existence. His lien was only
'a caveat of a more perfect lien to come.'" United States
v. Lawler, 201
686, 112 S. E. 2d 921 at 926 (1960).
v. Waddill, Holland & Flinn [45-1 USTC ¶9126], 323
353, 65 S. Ct. 304, 89 L. Ed. 294 (1945).
[Contractual Landlord's Lien]
argues that it has a contractual landlord's lien which constitutes a
protected security interest and, therefore, it has priority over the
federal tax liens. The United States agrees that if Globe had properly
recorded its interest in the leased premises it would have had priority
over the federal liens, but because Globe only recorded its lease under
the index for leases in the Maricopa County Recorder's Office, and not
under the index for secured transactions, the lease was not properly
recorded as a security interest. Globe replies that it was not required
to record its security agreement in order to obtain a priority because
A. R. S. §44-3104(2) excludes landlord's liens from the filing
requirements of the Uniform Commercial Code. We, however, are of the
opinion that contractual landlord's liens are not excluded from
the filing requirements of the Uniform Commercial Code.
test as to whether a transaction falls within Article 9 of the Uniform
Commercial Code is whether the transaction was intended to have effect
as security. Official Comment 1 to U. C. C. §9-102 (A. R. S. §44-3102).
Excluded are security interests that arise by statute or common law and
not by the consent of the parties. Those cases which have considered the
landlord's lien exclusion have concluded that landlord's liens arising
out of contract are not excluded from the filing requirements. See In
re Leckie Freeburn Coal Company, 405 F. 2d 1043 (6th Cir. 1969); In
re King Furniture City, Inc., 240 F. Supp. 453 (E. D. Ark. 1965); Universal
C. I. T. Credit Corp. v. Congressional Motors, 246 Md. 380, 228 A.
2d 463 (1967); Dunham's Music House, Inc. v. Asheville Theatres,
Inc., 10 N. C. App. 242, 178 S. E. 2d 124 (1970). The reasoning of
these cases is persuasive. While statutory liens and liens arising from
operation of law are excluded from filing by A. R. S. §44-3104(2), a
lien granted a lessor by contract is not excluded by the Uniform
Commercial Code. Since the Code's filing requirements apply, Globe's
contractual landlord's lien must have properly filed to have priority.
enacted the Uniform Commercial Code, A. R. S. §44-2201, et seq.,
January 1, 1968
. Pursuant to the Code, A. R. S. §44-3123, a financing statement must
be filed to perfect all security interests with certain exceptions not
here applicable. A. R. S. §44-3140(A)(1) provided at the time Globe
filed its lease that:
proper place to file in order to perfect a security interest is as
When the collateral is * * * farm products * * * 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, 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." Laws 1967,
both the debtor's residence and the county in which the land is located
, the financing statement had to be filed in the Maricopa County
Recorder's Office. Globe filed its lease with the Maricopa County
February 6, 1970
A. R. S. §44-3141(A)
provided at the time Globe filed its lease that:
financing statement is sufficient if it is signed by the debtor and the
secured party, designates by typing or printing the names and mailing
addresses of both the debtor and the secured party and contains a
statement indicating the types, or describing the items, of collateral.
A financing statement may be filed before a security agreement is made
or a security interest otherwise attaches. When the financing statement
covers crops growing or to be grown, or timber to be cut, or goods which
are or are to become fixtures, the statement must also contain a
description of the real estate concerned. A copy of the security
agreement is sufficient as a financing statement if it contains the
above information and is signed by both parties." Laws 1967,
3, §5. (Emphasis supplied)
the lease is not a part of the record before this Court and, therefore,
we are unable to determine whether the lease was sufficient as a
financing statement within the meaning of §44-3141(A).
A. R. S. §11-462,
as it read at the time Globe filed its lease, provided for an index of
leases, but not for an index of secured transactions. We also find
nothing in the record before us to establish that the Maricopa County
Recorder's Office kept an index of secured transactions in February of
1970, when Globe filed its lease. Accordingly, we cannot say whether, as
argues, Globe's lease was improperly filed under leases. This case must,
therefore, be set aside and remanded to the Superior Court.
If it is
determined that Globe's lease was sufficient as a financing statement,
the Superior Court must then determine whether the Maricopa County
Recorder's Office had established an index for the filing of financing
statements under the Uniform Commercial Code at the time Globe filed its
lease. If there was an index for financing statements and Globe did not
direct that its lease be filed as a financing statement, the court below
shall enter judgment in favor of the United States, for we consider the
law is correctly set forth in In re Leckie Freeburn Coal Company,
supra at 1046,
dealing with a multi-purpose document, it is incumbent upon the filing
party to disclose to the Clerk the purpose for recording. In the present
case the record does not show that Appellants had directed the Clerk to
record the lease as a financing statement when they paid the filing fee.
* * *
* * To allow constructive [sic] notice in this case would defeat the
purposes of the recording statutes. One object of filing a financial
statement is to insure a bona fide purchaser that his title will not be
encumbered. For the Court to hold that the filing of this instrument as
a lease provided constructive notice to those searching the records for
a financing statement would be wholly illogical."
Not Raised Below]
questions the right of the trial court to award Valley Gin Company costs
and attorneys' fees out of the fund. As stated, Valley Gin Company was
dismissed from the action by the trial court after it was ordered to
deposit the crop proceeds with the Clerk of the Superior Court, less
costs and attorneys' fees. The
did not object to the order allowing costs and attorneys' fees and has
not named the Valley Gin Company as an appellee in this appeal. Claimed
errors which are not called to the attention of the lower court will not
be considered on appeal. City of
v. Wondergem, 105
429, 466 P. 2d 383 (1970); Milam v. Milam, 101
323, 419 P. 2d 502 (1966). Since the
did not object to the award of costs and attorneys' fees in the court
below, the asserted error will not be considered in this Court.
It is ordered
that the judgment herein is set aside and this cause is remanded with
¶9341]J. K. & W. H. Gilcrest Company, Appellee v. A. & R.
Concrete Company, United States of America, et al., Appellants
Supreme Court, Nos. 212, 50465, 112 NW2d 366, 12/12/61, Reversing and
remanding decision of Polk District Court of Iowa
[1954 Code Secs. 6321 and 6322]
Priority of liens: U. S. tax lien v. subcontractor's mechanic's
lien.--Because Iowa law provided that no owner of real estate must
pay the principal contractor any sums under the building contract until
the expiration of 60 days from the completion of the improvement and
that a subcontractor's mechanic's lien can be perfected only if filed
within 60 days after such completion, the date of completion was an
essential fact not found. If 60 days from completion had expired, then
the taxpayer-principal contractor had "property" to which the
federal tax lien could attach. But if the subcontractor had perfected
his mechanic's lien within the 60 days, then he would be entitled to
priority. The trial court's decision giving the subcontractor's claim
priority over the tax lien was without sufficient basis in fact and was
thus reversed and remanded for this determination of fact.
Meadows, United States Attorney, Louis F. Oberdorfer, Assistant Attorney
General, and John B. Jones, Jr., Meyer Rothwacks, and George F. Lynch,
Department of Justice, Washington 25, D. C., for appellants. Neiman,
Neiman & Stone,
, for appellee.
action alleged its right to a subcontractor's mechanic's lien against
certain real estate and prayed foreclosure as against all defendants.
These included the principal contractor, the realty owners, the
, and certain others. Rights as between the principal contractor and the
owners of the real estate were previously determined in A. & R.
Concrete & Construction Company v. Braklow, -- Iowa --, 103 N.
W. 2d 89. It was there adjudged that the owners were indebted to the
contractor in the total sum of $3,933.07. This sum was paid into the
clerk of the district court. In the instant case a partial decree of the
trial court entered on
November 12, 1960
, to which no exception is taken, granted certain defendants other than
rights to part of the money on hand, leaving a remainder of $1,814.18.
The cause was continued solely on the issues as to the priority of the
claims of the plaintiff and the
to this sum. By answer, the
denied the priority of plaintiff's claim and prayed that its tax liens
against the principal contractor be held to be prior and superior to any
rights of the plaintiff to the fund in the hands of the clerk. The trial
court found this issue with the plaintiff in the total amount of its
claim, with interest, $1,681.04; directed payment of court costs in the
amount of $52.00; and awarded the remainder of $81.14 to the
I. No question
is made that the money in the hands of the clerk stands in the place of
the real estate which was improved or that the liens attach to it in
whatever order of priority may eventually be determined. The
states in the record that its appeal is limited to the following point
on which it relies: "The Court erred in granting priority to the
claims of (the plaintiff) over the tax lien of the
United States of America
. The abstract above contains all matters necessary to review such
The facts were
stipulated and the case tried solely on the stipulation. We think it
omits one vitally important fact, which we shall later point out.
Otherwise, after reciting the agreement between the principal
contractors and the owner, it stipulates that the plaintiff herein
furnished certain materials used in and upon the premises of the
reasonable value of $1,541.92, the last item being supplied on
November 20, 1958
. Further facts stipulated are that the plaintiff's claim for a
mechanic's lien as a subcontractor was filed on
September 3, 1959
, and notice of such filing served on the owners on
September 5, 1959
United States assessed taxes for withholding and social security against
the principal contractor on March 27, 1959, in the sum of $3,029.10; and
on May 22, 1959, assessed further taxes of $999.03, making a total of
September 14, 1960
, a notice of levy of taxes was served on the building owners; and
September 29, 1959
, a notice of the federal tax lien was filed in the office of the county
. It is further stipulated that the funds in the hands of the clerk
stand in lieu of the real estate and the liens of the contending parties
attach to such funds in the same manner as they would have to the
realty; and that the parties are entitled to foreclosure of their liens
against said moneys in such order of priority as the court may
determine. The stipulation is silent as to the date on which the work on
the real estate was completed by the principal contractor.
II. Each party
to the contention here asks that its lien be established as prior and
superior. We think, because of the absence of an essential fact in the
record, that no adjudication in favor of either can be made.
This fact is
the above noted absence of the date on which the principal contractor
completed its work. We shall attempt to make clear our reasons for so
572.13, so far as material, is quoted: "Liability of owner to
original contractor. No owner of any building, land, or improvement upon
which a mechanic's lien of a subcontractor may be filed, shall be
required to pay the original contractor for compensation for work done
or material furnished for said building, land, or improvement until the
expiration of sixty days from the completion of said building, or
improvement * * *." The section further provides that the first
paragraph does not apply if receipts or waivers of subcontractors'
claims are furnished, or a performance bond is given by the principal
contractor. Neither of these exceptions, however, appears in the present
case and we give them no further attention. It will be noted the quoted
and material part of the section makes sixty days from the completion of
the work by the principal contractor the time when he will be entitled
to receive payment from the owner, absent any filed claims for
United States relies upon Sections 6321 and 6322 of 26
C., 1958 edition. We quote them. "Lien for Taxes. 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
of Lien. Unless another date is specifically fixed by law, the lien
imposed by section 6321 shall arise at the time the assessment is made
and shall continue until the liability for the amount so assessed is
satisfied or becomes unenforceable by reason of lapse of time."
section says that "the lien shall not be valid as against any
mortgagee, pledgee, purchaser, or judgment creditor until notice 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." A mechanic's lien is
obviously not within any of the four classes named, and we give this
section no further consideration.
ex rel. Gordon v. Campbell, 329
362, 374, 375, 376, 67 Sup. Ct. 340, 347, 91 L. Ed. 348, 357, it is
said: "The long-established rule requires that the lien must be
definite, and not merely ascertainable in the future by taking further
steps, in at least three respects as of the crucial time. These are: (1)
the identity of the lienor * * *; (2) the amount of the lien * * *; and
(3) the property to which it attaches. It is not enough that the lienor
has power to bring these elements, or any of them, down from broad
generality to the earth of specific identity." We quoted this with
approval in In Re Estate of Lanc, 244
1076, 1079, 1080, 59 N. W. 2d 593, 595. It is evident that paintiff's
lien here meets the first and third tests. The identity of the lienor is
established, and likewise the specific property to which it attaches.
But it fails as to (2), because the amount is unliquidated and
uncertain. It is not enough that a specific amount be named in the lien
claim; if further proceedings are required to establish it in a definite
amount against the property, as by foreclosure, it is not specific and
perfected within the meaning of the law. Evans v. Stewart, 245
1268, 1274, 1275, 66 N. W. 2d 442, 445; In re Estate of Lanc, supra,
loc. cit., 244
1080, 59 N. W. 2d 595; United States v.
[42-1 USTC ¶9162], 314
480, 62 S. Ct. 350, 86 L. Ed. 356. So at the time the taxes against the
principal contractor were assessed by the
in the instant case, the plaintiff's lien was not specific and perfected
and the government's lien was prior.
there is another consideration which arises from application of what is
known as the "no debt" rule. This might also be designated as
the "no property" rule. If the debtor against whom the
taxes were assessed had no property to which their lien might attach, of
course it may not be enforced. So far as this case is concerned, the
only property with which we need be concerned was the indebtedness, if
any there was, owing to the principal contractor by the property owners.
This is now represented by the money in the hands of the clerk, the
right to which is the subject of the present litigation. It is settled
that in this class of cases, the first question is to what property of
the taxpayer the federal tax liens may attach. In determining the
taxpayer's interest in property claimed to be subject to such liens, the
state law is the governing rule. Aquilino v. United States [60-2
USTC ¶9538], 363
509, 512, 516, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365; United States
v. Durham Lumber Company [60-2 USTC ¶9539], 363
522, 524, 527, 80 Sup.
1282, 1283, 4 L. Ed. 2d 1371. When the property interests have been
determined according to the law of the state, the priority of the
competing liens is measured by federal law. Aquilino v. United
Property Rights Depend on Missing Fact]
It remains to
be decided whether the delinquent taxpayer, the principal contractor in
the case at bar, had property rights to which the federal liens might
attach when the tax assessments were levied or later while they were
still unsatisfied. Here section 572.13 of the 1958 code of
becomes of primary importance. It will be noted that under its
provisions no owner of real estate is required to pay the principal
contractor any sums that might otherwise be due under the building
contract until the expiration of sixty days from the time of completion
of the improvement. So, under the interpretation put upon this section
in previous cases, there is no "debt" due the contractor until
the sixty day period has elapsed, and consequently the contractor has no
property right which may be subjected to liens of the
during that time. Wolverine Insurance Company v. Phillips [58-2
USTC ¶9765], 165 Fed. Supp. 335, 354; Fidelity & Deposit Company
v. New York City Housing Authority, 2 Cir., [57-1 USTC ¶9410] 241
Fed. 142, 145, 147; United States v. Bess [58-2 USTC ¶9595], 357
51, 56, 78 Sup. Ct. 1054, 1057, 2 L. Ed. 2d 1135; Beane Plumbing
& Heating Company v. D-X Sunray Oil Company, 249 Iowa 1364,
1371, 1372, 1373, 92 N. W. 2d 638, 643, 644.
So it is clear
liens attached only to such property as the debtor contractor had when
the taxes were assessed, or which he might thereafter acquire while they
remained unpaid. Under the authorities above cited, there was no debt
during the sixty days following the completion of the improvement. But,
when this period expired, with the lien of the plaintiff still not
filed, if such be determined to be the case, the tax liens at once
attached to the sum then due from the owners to the principal
contractor. The time of "no debt" was past; a debt existed.
For the purpose of this case, it was not important that the plaintiff
did not file its claim for a mechanic's lien within sixty days from the
time it furnished the materials; it is of decisive importance whether it
filed within sixty days from the completion of the work by the principal
The point is
well made by Federal Judge Henry Graven of the United States District
Court for the Northern District of Iowa, in Randall v. Colby
[61-1 USTC ¶9178], 190 Fed. Supp. 319, 326-337 inclusive. In that case
one mechanic's lien claimant, Randall, had not filed his claim within
sixty days from the time he furnished material or labor, but did file
within sixty days from the completion of the work by the principal
contractor. Standard Glass & Paint, another claimant of a
subcontractor's lien, did not file until after sixty days from
completion of the work. It was held that Randall's lien was superior to
the federal tax liens, but Standard's was not. Sixty days after the work
was completed, Randall's claim being on file, the "debt" due
from the owner to the chief contractor was diminished by that amount and
the property to which the federal liens could attach was so much less.
But Standard's claim was not on file; the "debt" of the owner
to the contractor was matured and became property of the contractor who
owed the taxes which had been assessed. The liens for these taxes at
once attached. It is said: "It seems clear that under the Federal
law once a right arises in favor of a contractor against whom a Federal
tax lien is outstanding to a portion of the contract price, the tax lien
attaches to that portion immediately. It would also seem clear that once
a Federal lien has attached to such a portion it is no longer a part of
the balance 'due' the contractor but is 'due' to the Government." Randall
v. Colby, supra, loc. cit., 190 Fed. Supp. 335.
This will to
some extent modify our holding in Beane Plumbing and Heating Company
v. D-X Sunray Oil Company, supra. The
was not a party to that action and several of the authorities cited
above had not then been decided; we did not consider the difference
between the situations in which the subcontractor's lien was filed
within the sixty day period in which the owner is not required to pay
the contractor. and the one in which it was filed later. In the second
instance we now hold that the
tax liens, duly assessed, obtain priority. In fairness to the trial
court, it should be said that it apparently followed the Beane
case, which it felt it could not modify or disregard.
This points up
the deficiency in the stipulation of facts upon which the case was
tried. The stipulation says that "the following are the facts in
this case." The case must be tried upon the facts so stipulated.
But what we consider to be the governing fact--that is, the date when
the work was actually completed by the principal contractor so that the
sixty day period in which there was no "debt" due from the
owner to him could be determined--is nowhere stated.
of Applicable Law]
our holding is that the law as applied to the instant case is this:
United States tax liens can attach only to "property" of the
debtor taxpayer, the principal contractor; debts owed by the building
owner are "property" of the contractor; there is no debt, and
consequently no "property" until the expiration of the sixty
day period from completion of the work; this is so because the Iowa
statute, Section 572.13, supra, says so; when the sixty day
period has ended, there is a debt due from the owners to the principal
contractor in such amount as may remain unpaid and not diminished by the
amount of any subcontractor's liens that may be then on file; if any
such claims for liens are then on file, the debt, and so the
"property" is so much less; if such claims are not on file,
although they may be in existence, the lien of the assessed and unpaid
federal taxes attaches and becomes prior and superior to them.
concluded that the only means of resolving this situation is to remand
the case to the trial court for a determination of fact. If it is found
that the plaintiff's claim for a mechanic's lien was actually filed
within this sixty day period, it will be entitled to priority; if not,
liens will be superior. No other issues, either of fact or law, will be
The decree of
the trial court must be reversed, since there is no sufficient basis in
fact for its determination. Nor do we think it would be sufficient to
reverse without requiring a finding of the fact as to time above
referred to. Each party is affirmatively claiming priority; neither has
proven it. This priority should be determined so that the respective
rights may be known and disposition of the fund in the hands of the
clerk of the court may be made.
Costs will be
taxed equally to the parties; except that only $1.50 per page will be
allowed appellant for printing the record and its brief and argument.
remanded for further determination of facts, and for such decree as may
appear proper in view of such determination and our holdings above.
concur, except Bliss, Judge, not sitting.
¶9653]Tanenbaum Textile Co., Inc., Plaintiff-Respondent v. Vogue
Foundations, Inc., a Corporation Herman Golden, Defendants v. The
United States of America
the Superior Court of New Jersey, Appellate Division, A-440-54, 116 A2d
697, September 2, 1955
[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]
Tax lien: Priority of rights: United States v. subcontractor under
government contract: New trial ordered.--In an action involving a
determination of rights to a check issued by a government agency in
satisfaction of a contract such agency had awarded to a contractor (to
whose order the check was made payable), the court ordered a new trial
because of many unanswered questions. Claim to the check is made by a
firm which had been under contract to furnish raw materials to the
original contractor and also by the
for satisfaction of tax liens against such contractor. The complaint
(filed by the raw material supplier) predicated the right to possession
of the check on an April, 1952, agreement involving the complainant, the
contractor, and a bank in which a special account of the contract
proceeds was to be opened for the benefit of the complainant because of
the contractor's financial difficulties. However, the trial brought to
light further transactions whereby the original contractor, for the same
financial difficulties, had assigned the contract to another
subcontractor who ultimately finished the work and to whom the
complainant also supplied raw materials. This transaction (by virtue of
a June, 1952, agreement) raises many other issues on which the
determination of a right to the check hinges. Principally, it must be
determined to whom the check really "belongs" because the
tangible or intangible property must belong to the taxpayer in order to
be subject to a lien by the government for unpaid taxes. Consequently, a
new trial was ordered so that the case might be fully presented to the
Larner (Budd, Larner & Kent,
60 Park Pl.
, N. J.), for respondent. James C. Pitney, 744 Broad St., Newark, N. J.,
Assistant United States Attorney (Raymond Del Tufo, Jr., Federal
Building, Newark, N. J., United States Attorney), for appellant.
FRANCIS, HALL and
Tanenbaum Textile Co. brought this action in replevin to obtain
possession of a check dated
November 13, 1952
, in the amount of $6,284.25 drawn on the Treasurer of the
by the New York Quartermaster Procurement Agency to the order of
defendant Vogue Foundations, Inc. The check had been endorsed in blank
by Vogue and was in the hands of its attorney, the defendant Herman
Golden, Esq. Pursuant to the writ the Sheriff seized the instrument and
delivered it to Tanenbaum which posted a bond to secure payment in
accordance with the judgment of the court.
United States of America
intervened through the District Director of Internal Revenue, claiming
the proceeds by virtue of certain tax liens against Vogue. Golden
asserted rights in the check by reason of an alleged attorney's lien for
services rendered to Vogue. Vogue counterclaimed but its answer and
counterclaim in the replevin action are not included in the appendix and
consequently the nature of the claim does not appear. The pretrial order
reserved the counterclaim for disposition by jury trial at a later time.
In answer to the intervention, Vogue admitted the existence of tax liens
in an amount in excess of the check and also that as to it the
had a prior right to the sum represented thereby. The admission could
not have been avoided since prior to
November 13, 1952
unpaid taxes withheld by Vogue totaling $13,193.48 had appeared on the
assessment list received by the District Director, and thus constituted
C. A. 3671 (1940). In fact, $11,478.69 of these liens had been recorded
with the Register of Essex County prior to the assignment and the
agreements hereafter referred to.
without a jury, the trial court determined that Tanenbaum was entitled
to the check and the proceeds thereof and that its right was paramount
to the tax lien. Golden was declared to have no interest therein.
Judgment was entered for Tanenbaum against all defendants. The
filed this appeal.
disposition of the Vogue counterclaim raised a serious question as to
whether an appealable final judgment existed. The right of appeal arises
only when a controversy presented to the trial court is adjudicated as
to all parties and all issues (Peterson v. Falzarano, 6 N. J.
447, 453 (1951); Vollbehr v. Ingram, 22 N. J. Super. 249 (App.
Div. 1952)), subject to the qualification established by R. R. 4:55-2,
which was not taken advantage of here. However, our inquiry at the oral
argument elicited the undisputed information that the counterclaim has
since been withdrawn. On this agreement we shall deal with the issues
Recital of the
facts is necessary to an understanding of the claims of the parties.
December 6, 1951
, the New York Quartermaster Procurement Agency awarded a contract to
Vogue for the manufacture of 250,000 waterproof clothing bags at a price
of $1.05 per bag. Delivery was to be made between March 31 and
June 30, 1952
. Apparently in anticipation thereof, Tanenbaum contracted to furnish
the material necessary to the making of the bags, namely, 254,500 yards
if $.7538 per yard. The terms called for payment 10 days after delivery
of each shipment.
February and April 1952, Tanenbaum delivered in excess of 21,000 yards
of the cloth. On April 15, Vogue was advised that its credit line was
exhausted and unless satisfactory arrangements were made, further
shipments would be on a cash basis only.
As the result,
on April 25, 1952 a letter agreement was entered into under which
Tanenbaum undertook to advance $1,500 to Vogue to enable it to meet
current payroll expenses, and further to deliver the balance of the
yardage to complete the commitment to the government. To assure payment,
Vogue agreed to establish a special account in a bank to be selected by
Tanenbaum and to deposit therein all moneys received from the
for performance of the clothing bag contract, subject to withdrawal only
on the signature of an officer of Tanenbaum.
further authorized thereby to draw on the account for reimbursement of
the $1,500 and to the extent of $.76 per bag shipped to the government.
Any remaining balance was to be turned over to Vogue. The account was to
continue until all goods sent to Vogue were paid for.
It was agreed
also that Vogue would execute any documents necessary "to
effectively assign to a financial institution to be designated by"
Tanenbaum, "all of our right, title and interest" in the
government contract to secure all monies due or to become due to
Tanenbaum. The record shows that the bank account was opened. An
assignment to the Bank of Manhattan Company, dated
June 24, 1952
, was put in evidence. The late date was not explained.
In July, when
only 26,500 bags had been delivered Vogue experienced further and
apparently insurmountable obstacles in its attempt to fulfill the
government contract. On
July 17, 1952
the Procurement Agency was advised that an "impasse" had been
reached "due to factors entirely beyond our control." The
letter asserted that the lessor of the premises leased by Vogue for its
manufacturing purposes had discovered that the process used in cementing
the bags was contrary to the terms of the lease and had refused
permission for the work to continue. Efforts to locate other quarters
had been unsuccessful.
On account of
its inability to proceed further, Vogue requested permission to
"subcontract the balance" of the contract to Electro-Plastics
Fabrics, Inc. of
It proposed to do this at "no profit" and in order to expedite
cost was to be involved for the government and if any such cost arose,
Vogue would absorb it. The letter pointed out that the cloth necessary
for the remaining bags was being held by Tanenbaum which had agreed to
deliver it to Electro.
also that to safeguard the interests of Tanenbaum and Electro, an
assignment "of all the proceeds due and to become due"
under the contract would be executed to the Bank of Manhattan Company
(Italics ours). This would be done upon the granting of the permission
sought from Procurement. Tanenbaum endorsed its consent to the proposal
at the foot of the letter and noted an additional agreement to guarantee
performance by Electro.
On August 13
the Procurement Agency granted permission to subcontract the manufacture
of the balance of the 223,500 bags to Electro on condition that any
increased costs would be borne by Vogue and any savings would inure to
of this approval a further tripartite agreement was entered into by
Vogue, Tanenbaum and Electro on August 20. By it, Vogue agreed to
deliver to Electro 1,250 bags which had been completed and 10,105 which
had been partly completed. The finished bags were to be shipped by Vogue
to Electro at no cost to Tanenbaum. Electro undertook to finish the
partly completed bags at $.15 each. All others were to be manufactured
at $.32 per bag exclusive of the cost of material, an increase of $.03
over Vogue's price. This differential was absorbed by Tanenbaum,
apparently being reflected in the lower cost of the cloth to Electro.
recited that Electro would be paid out of the proceeds of the contract
which were "in the course of being assigned" by Vogue to the
Bank of Manhattan Company. And each company stipulated that to the
extent necessary to accomplish proper payment of their respective
shares, instructions would be given to the Bank.
introduced in evidence shows that Vogue shipped the materials on hand to
Electro on August 21. Thereafter Electro took over. Vogue did no further
work on the government contract and about a month later ceased business
of Proceeds of Contract]
assignment offered in evidence was the one already mentioned, dated
June 24, 1952
. Apparently no additional one was executed after Electro was granted
permission to complete the contract. Presumably it was considered
unnecessary but the absence of explanation or testimony to that effect
leaves the relation between this assignment and the June and August
agreements in a somewhat unclear state. However the contents of the
document must be noted. The recital is that Vogue has requested the Bank
to lend money to finance its operations under the government contract,
and because the Bank "may from time to time" lend money for
such purpose "all moneys due or to become due" to Vogue under
the contract are assigned to the Bank as collateral for the loans.
assignment does not seem to conform with the language of the three-party
agreement of August 20 nor the letter to the Procurement Agency of July
17 seeking permission for Electro to furnish the balance of the clothing
bags. There is some ambiguous testimony in the record about a $5,000
loan by the Bank to Vogue and the payment of the loan by a check of
Tanenbaum of August 12. No proof was offered as to any borrowing from
the Bank after Electro entered upon the performance of Vogue's contract.
to be drawn from this situation is that an effort was being made to
create an assignment which would appear to run a "bank, trust
company or other financing institution" within 31 U. S. C. A. §203
(1954); 41 U. S. C. A. §15 (1952); (see Legislative history, 2 U. S.
Code Congressional and Administrative Service 1951, p. 1414, et seq.)
and which upon filing with the Procurement Agency would result in the
naming of the Bank as payee in the future checks and possibly in
precluding a set-off of the assignor's unpaid taxes pursuant to the
statute. But it was not filed with the Agency as required by subsection
4 of section 203, supra, until after the check in question was
drawn to Vogue. In any event, the statute was designed for the
protection of the government against multiple claims and although an
assignment which did not meet the conditions imposed by Congress might
be void or unenforceable against the
, such status would not bar its legal efficacy between the parties. McKenzie
v. Irving Trust Co., 323
365, 65 S. Ct. 405, 89 L. Ed. 305 (1944); Bank of
v. Commissioner, 133 Fed. (2d) 428 (9th Cir. 1943) [43-1 USTC ¶10,012];
California Bank v. U. S. Fidelity & Guaranty Co., 129 Fed.
(2d) 751 (9th Cir., 1942).
complaint predicated the right to possession of the check upon the April
25, 1952 agreement, under which, as already noted, Vogue agreed to
execute all documents necessary "to effectively assign to a
financial institution to be designated" its interest in the
contract and the proceeds thereof as security for moneys advanced or to
be advanced by Tanenbaum. No reference is made to the specific
assignment of June 24 but it is the only one proved at the trial.
subcontract by Vogue is recited somewhat incidentally without mentioning
Electro or its interest resulting therefrom and without a statement of
facts showing any rights which flowed to Tanenbaum as a consequence.
theory of the action as established by the pleading was that by reason
of the agreement of
April 25, 1952
, the assignment of the contract and the proceeds thereof and the
establishment of the special bank account into which the payments from
the government were to be deposited, Tanenbaum was entitled to the
$6,284.25 check. The pretrial order cannot be said to have made any
change in the issues to be tried.
At the trial,
plaintiff proceeded on the theory that under the agreement of July 17,
1952 between Vogue and Tanenbaum, and the tripartite concord of Vogue,
Tanenbaum and Electro of August 20, following the granting of permission
by the Procurement Agency to subcontract to Electro, Electro was
substituted as the contractor and Vogue had no further interest in any
of the proceeds of the contract. It seems to have been urged in the
trial court, as it was before us at the oral argument, that Tanenbaum's
right to the check was established by these agreements. The previous
contract of April 25 and the assignment to the Bank were claimed to be
more surplusage and of no legal consequences.
objected to the introduction of the new theory of substitution of
Electro for Vogue (in effect) as the price contractor to complete the
contract; it objected also to the receipt in evidence of the
correspondence and the agreements relating thereto, contending that the
issue pleaded arose out of the April 25 agreement. The objection was
In the absence
of any amendment to the complaint or change in the alleged cause of
action by means of the pretrial order, the government was entitled to
assume that the trial would proceed on the issue as originally
the government concedes that he had copies of the various documents
relating to the subcontract to Vogue and the assignment to the Bank, and
that he was generally familiar with the situation because of a review of
the correspondence file of the Procurement Agency. However, he claims
unpreparedness to meet the new issue and says that its projection into
the proceedings at the trial prevented him from taking advantage of the
discovery rules to ascertain the full rights of Vogue, Tanenbaum and
Electro in the proceeds of the contract after Electro's appearance in
plaintiff expected to try could have been put beyond doubt at the
pretrail conference. But it was not done and we think for reasons to be
stated that there is sufficient merit in the government's position to
require reversal and retrial after adequate specification of the issues
in the pleadings or pretrial order. Schlossberg v.
Sewerage Authority, 15 N. J. 360, 369-370.
C. A. §3670 (1940), whenever a person neglects or refuses to pay any
tax after demand, the amount due constitutes a lien in favor of the
"upon all property and rights to property, whether real or
personal, belonging to such person."
In these times
when employers are withholding sums of money from wages for the purpose
of paying the employees' income tax, the public interest requires
liberal interpretation and application of the lien statute because such
money is the life blood of government. Thus it has been declared that
the lien attaches to after-acquired property (Glass City Bank v. U.
S., 326 U. S. 265, 66 S. Ct. 108, 90 L. Ed. 56 (1945) [45-2 USTC ¶9449];
26 U. S. C. A. §3671 (1940)) and extends not only to physical things
but intangible rights and credits as well. Citizens State Bank v.
Vidal, 114 Fed. (2d) 380, 382 (10th Cir. 1940) [40-2 USTC ¶9603];
30 Am. Jur., Int. Rev. §77.
word in the section of the statute is "belonging". The
tangible or intangible property must belong to the taxpayer in order to
be liable to the lien. The rights of the government can rise no higher
than those of the taxpayer; if he has no interest in the property sought
to be executed against the lien is ineffective.
v. Burgo, 175 Fed. (2d) 196 (3d Cir. 1949) [49-1 USTC ¶9307]; U.
S. v. Winnett, 165 Fed. (2d) 149 (9th Cir. 1947) [48-1 USTC ¶9115];
McGraw v. Sherman Plastering Co., 60 Fed. Supp. 504 (D. C. Conn.
1943), aff'd 149 Fed. (2d) 301 (2d Cir. 1945); Karno-Smith Co. v.
Maloney, 112 Fed. (2d) 690 (3d Cir. 1940) [40-2 USTC ¶9533]; U.
S. v. Long Island Drug Co., 115 Fed. (2d) 983 (2d Cir. 1940) [41-1
USTC ¶9140]; Bankers Title and Abstract Co. v. Ferber Co., 15 N.
J. 433 (1954) [54-2 USTC ¶9459].
In this case,
Tanenbaum contends that by virtue of the substitution of Electro for
Vogue in the Procurement Agency contract, Vogue had no interest in any
proceeds which subsequently flowed therefrom. The suggestion is that
even though Electro was called a subcontractor, the effect of the
writings between the parties and the government from a pragmatic
standpoint was to make Electro the prime contractor, in fact, and Vogue
simply a guarantor against loss to Procurement. Cf. Thompson v.
Commissioner, 205 Fed. (2d) 73, 77 (3d Cir. 1953) [53-1 USTC ¶9424].
And finally it asserts that when the check was issued, Vogue was simply
a trustee or holder or nominal payee without beneficial interest
judgment, the government may well have been at a disadvantage in being
forced to meet this precise issue on a complaint and pretrial order
which, to say the least, did not adequately disclose it, and without the
advantage of pretrial discovery with respect to it.
of Interest Raised]
connection, reference may be made to some matters which the government
indicated it would have looked into in advance of trial had the problem
presented to the trial court been properly pleaded.
August 20 agreement of Vogue, Tanenbaum and Electro, Vogue delivered
1,250 completed bags, 10,150 partially completed bags, and a number of
rolls of material to Electro. Title to these goods was in Vogue. They
could have been subjected to the tax lien. In any event, the 1,250 bags
were worth $1.05 each or $1,312.50 on delivery to Procurement; the
10,150 partially completed ones were to be finished by Electro for $.15
each--indicating $.90 each of value produced by Vogue--or $9,135. It is
undisputed that the shipment to Procurement for which the $6,284.25
check was issued was made up partly from these finished bags and the
remainder from the unfinished ones which were completed by Electro. Was
Vogue to receive no compensation or credit for this total work product
value of $10,447.50 when Electro made that delivery? The agreements are
silent on the subject.
Tanenbaum put a question to one of its officials as to whether Vogue
received any consideration for the subcontract to Electro. On Vogue's
objection, the inquiry was withdrawn "for the moment" but it
was never pursued again. The president of Vogue gave some testimony,
which was not very clear, to the effect that upon completion of the
contract by Electro if Vogue's debt to Tanenbaum had been satisfied, any
remaining balance was to go to Vogue. And he asserted that Lawrence
Tanenbaum told him that "if we continued the contract, we could
expect a reduction in the price" of material, the inference being
that after the subcontract in some way Vogue was to receive credits on
its obligations to Tanenbaum and in addition any surplus remaining after
the interests of the various parties were satisfied.
If Vogue was
entitled to a credit for work done on the finished and unfinished bags,
how was it to be handled? All of the the proceeds were assigned to the
Bank of Manhattan. If they were deposited in a special account there,
what would be the priorities as between the
and Tanenbaum as to Vogue's credit? If pursuant to the assignment the
check had been delivered to or received by the Bank of Manhattan, in
accordance with the August 20 agreement to give instructions for
distribution of the fund represented thereby, and if Vogue was entitled
to receive any part of the proceeds thereof either by reason of those
instructions, or if none were given but by reason of the understanding
which produced the August 20 agreement Vogue was to receive a part
thereof, the tax lien would attach to that share. And the lien would
have priority over Tanenbaum even though Vogue had agreed and so
instructed the Bank to turn the share over to Tanenbaum as a credit on
existing indebtedness. Cf.
v. Warren R. R. Co., 127 Fed. (2d) 134 (2d Cir. 1942) [42-1 USTC
¶9391]; Citizens State Bank v. Vidal, supra; Bankers Title and
Abstract Co. v. Ferber Co., supra, at page 444.
argues that after the subcontract, Vogue had no further interest in the
prime contract or the proceeds, and that thereafter no part of the
proceeds constituted tangible or intangible property belonging to Vogue.
If this is true, what is the significance of the
November 19, 1952
letter of Electro and Tanenbaum to the Bank? The date attracts
attention. It was six days after the $6,284.25 check had been issued to
Vogue. Tanenbaum then knew of the check and had demanded possession of
it. And this replevin action was instituted nine days later. The letter
said in part:
is to confirm that any moneys received by you under you assignment may
be applied by you as you see fit toward the payment of the obligations
of Vogue Foundations, Inc. to you or, in your discretion, may be paid
over to Vogue Foundations, Inc., or credited to its account with you,
and we shall have no claim whatsoever against you with respect to any
The check in
litigation was the only one outstanding at this time, so far as the
record shows. If its disposition was controlled by the assignment and
therefore it was expected to go to the Bank, what interest of Vogue
prompted the writing of the letter by Tanenbaum and Electro?
It may very
well be that the full facts will provide adequate answers to all of the
questions posed. But we think that the shift of theory pursued by
Tanenbaum at the trial probably prevented the government from preparing
to meet them. In justice, such opportunity should be given.
find no legal justification for a determination that the check in
dispute belongs to Tanebaum. The proceeds of the contract were assigned
to the Bank of Manhattan presumably in accordance with the tripartite
agreement of Vogue, Tanenbaum and Electro. And it was agreed that
appropriate instructions would be given by each of them to the Bank to
accomplish the proper disbursement of the funds. The only directions
disclosed by the proof are those contained in the letter of November 19.
Thus it would
appear that legal ownership of the check is in the Bank and not in
Tanenbaum. An abortive effort was made to show a judgment in some
allegedly to establish last of interest of the Bank in the contract
proceeds. Enough of the circumstances of that litigation do not appear
to enable us to consider its competency or relevancy.
Electro became the subcontractor, not Tanenbaum, Electro performed the
relatively minor amount of work on the bags which was left unfinished by
Vogue. And Electro shipped and billed them to the government. Obviously
the check was drawn to Vogue because it was the named prime contractor
and the Bank's assignment had not yet been filed. In this posture,
Tanenbaum's claim to ownership thereof is no greater than that of
On the record
now before us, both Electro and the Bank of Manhattan would appear to be
indispensable parties to a complete adjudication of the rights in the
check. Further, or the exhibits and proof submitted, Tanenbaum failed to
establish that it is entitled to a finding of ownership thereof.
is therefore reversed and a new trial ordered to the end that both
phases of the case we have discussed may be presented fully to the trial
¶9559]In the Matter of
Crockett, doing business as Crockett Furniture Co., Bankrupt
S. District Court, No.
, No. Div., In Bankruptcy No. 13722, 150 FSupp 352, 4/4/57
[1939 Code Secs. 3670, 3671--similar to 1954 Code Secs. 6321, 6322]
Lien for employment withholding taxes: Bankrupt's property: Taxes
owed by partnership: Former partner the bankrupt: After-acquired
property: Assessment and demand for payment as prerequisite for lien.--The
Government asserted a lien for 1953 federal employment withholding taxes
owed by a partnership against a bankrupt's individual property which he
acquired after the partnership of which he had been a member ceased
doing business. None of the assets of the bankrupt were acquired from
the partnership. The referee in bankruptcy gave the bankrupt's
individual creditors priority over the Government in the distribution of
the bankrupt's estate. The Court held that the tax lien attaches to all
after-acquired property of the delinquent taxpayer, and its priority is
determined by the general rule that first in time is first in right,
regardless of the fact that it is a general lien and not a specific
lien. However, the case was remanded to the referee to make appropriate
findings of fact concerning the assessment date of the federal taxes and
as to whether payment was demanded of the bankrupt and whether there was
a refusal to pay--all statutory prerequisites for a perfected lien.
Burke, United States Attorney, Charles Elmer Collett, Assistant United
States Attorney, and Joseph O. Greaves, Attorney, Office of Regional
counsel, Internal Revenue Service, for the United States. Herbert C.
, for the bankrupt.
United States of America
, as petitioner here, has filed with this Court a petition for review of
the order of the Referee denying a tax lien claim by petitioner.
that the above named bankrupt was adjudicated a bankrupt by this Court
July 26, 1954
United States of America
filed a proof of claim of $1511.12 for employment withholding taxes for
the first and fourth quarters of 1953 incurred by the partnership of
Crockett Brothers, of which the bankrupt was a partner. The partnership
apparently discontinued its business operations sometime in 1953. The
bankrupt thereafter went into business by himself, individually, with
none of the assets of the former partnership.
the proceedings before the Referee, claimed that the United States was
entitled to the status of a lien creditor, 1
by virtue of the statutory lien provided for in §3670 of the Internal
Revenue Code of 1939. 2
(Title 26 U. S. C. A. §6321 ), on the theory that the bankrupt
was liable, as a general partner of the former partnership, individually
for the tax liability incurred by the former partnership. The Referee
determined that petitioner failed to demonstrate that it had a lien on
any specific property of the bankrupt, and concluded that the property
of the bankrupt should be distributed in the manner prescribed by §5(g)
of the Bankruptcy Act (11 U. S. C. A. §23(g)). 3
Accordingly, the Referee relegated petitioner to the status of a
partnership creditor, giving all of the bankrupt's inividual creditors
priority in the distribution of the estate.
The issue on
review, as certified by the Referee, is:
or not the
United States of America
can assert a lien on the bankrupt's individual property which he
acquired after the partnership ceased business and from which which
partnership he secured none of its assets for employment withholding
taxes incurred by the former partnership."
It is well
established that the lien provided for in §3670 (I. R. C. 1939)
attaches to all after-acquired property of the delinquent taxpayer (Glass
City Bank v. United States, 326
265 [45-2 USTC ¶9449]; Salsbury Motors, Inc. v. United States,
210 Fed. (2d) 171 [54-1 USTC ¶9217]), and its priority is determined by
the general "first in time is first in right" rule regardless
of the fact that it is a general lien and not a specific lien. 4
81 [54-1 USTC ¶9191]). It follows, then, that if the bankrupt in the
case at bar is subject to the provisions of §3670, supra, his
property would have passed into the hands of the trustee impressed with
petitioner's lien (§§ 67(b) and (c) (11
C. A. §§ 107(b) and (c)); and cf.: United States v. Heffron,
158 Fed. (2d) 657 [47-1 USTC ¶9194]), even though such property was
acquired after the time at which the lien attached. Furthermore, it
cannot be doubted that if petitioner has a valid lien against the
individual property of the bankrupt, petitioner should be considered as
an individual lien creditor for the purposes of §5(g) of the Bankruptcy
Act, irrespective of the fact that the underlying debt could have been
asserted against the partnership estate as well (cf.: Mitchell v.
Hampel, 276 U. S. 299; Globe Indemnity Co. v. Keeble, 20 Fed.
(2d) 34; and see Lewis v. United States, 92 U. S. 618 [holding, inter
alia, that the preferential status of the United States as a
creditor of a partnership applies as well to the separate and individual
estates of the bankrupt partners]; and see also: Anno. 75 A. L. R. 997,
for Perfected Lien]
In order for
the lien of §3670 (I. R. C. 1939) to attach to the individual property
of the bankrupt, it must be established that (1) he is a "person
liable to pay" the tax, and (2) he has "neglected or refused
to pay the same after demand".
Under the law
of California, it is clear that an individual partner may be held liable
for the entire amount of a partnership debt (§15015(b) of the
California Corporations Code, and cf.: Brazil v. Azievedo, 32
Cal. App. 364), and under that rule, an individual partner has been held
liable to the United States for the employment withholding taxes of the
partnership (Heller v. United States, Civil No. 33545, N. D.
California, So. Div. 1955 [55-1 USTC ¶49,084]) and his individual
property has been held subject to the lien of §3670, supra (Underwood
v. United States, 37 Fed. Supp. 824 [41-2 USTC ¶9514], aff'd., 118
Fed. (2d) 760 [41-1 USTC ¶9296]. Hence, it is the opinion of this Court
that the bankrupt is a "person liable to pay" the tax asserted
within the meaning of §3670, supra, and that the lien claimed by
petitioner, if perfected, entitled petitioner to the status of an
individual lien creditor of the bankrupt with priority over all other
individual creditors except those asserting senior liens within the
meaning of §3672 (I. R. C. 1939).
It cannot be
determined, however, on the record now before this Court, whether
petitioner has perfected the lien it asserts against the bankrupt's
property. By the plain wording of §3670, supra, the lien does
not attach unless and until the delinquent taxpayer "neglects or
refuses to pay the same after demand". 5
It is incumbent upon petitioner to show that these statutory
prerequisites have been fulfilled before the Referee can treat
petitioner as a lien creditor.
In view of the
state of the record, it is within the power of this Court to remand this
proceeding to the Referee to make appropriate findings of fact on this
issue (Title 28 U. S. C. A. §2106; Huffman v. United States, --
Fed. (2d) -- [9th Cir., No. 15187 (March 21, 1957) [57-1 USTC ¶9521]]; N.
M. Landy, Inc. v. Nicholas, 221 Fed. (2d) 923; and In re Rockford
Baseball Club, Inc., 201 Fed. (2d) 685).
THEREFORE, ORDERED that the case be remanded to the Referee in
Bankruptcy with directions that he make a specific finding on the
Whether the bankrupt neglected or refused to pay the tax after demand;
The date on which the assessment list was received by the collector. (§3671)
it is determined that the statutory prerequisites necessary to perfect
petitioner's lien have been fulfilled, then distribution of the
bankrupt's estate shall be accomplished in a manner consistent with the
views expressed in this opinion, but if said statutory prerequisites
have not been fulfilled, then the Referee's order sought to be reviewed
by this proceeding may stand affirmed and approved.
Petitioner claims that it has a lien for taxes within the meaning of §67(b)
of the Bankruptcy Act, and contends that by virtue of said lien, it is
entitled to distribution after reasonable costs of
istration and priority wage claims.
Section 3670 of the Internal Revenue Code of 1939 provides:
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, penalty, additional amount,
or addition to such tax, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
Under §5(g) of the Bankruptcy Act, the Referee is required to
distribute the assets of an individual partner in bankruptcy first
to individual creditors, and if any residue remains after such
distribution, then partnership creditors are entitled to receive
dividends out of the bankrupt estate.
The Referee apparently concluded that the lien for taxes asserted by
petitioner would be general only with respect to partnership property,
which could be traced into the hands of the bankrupt, but as to the
individual property of the bankrupt, the lien must have been shown to
have attached to some specific property, before it could entitled the
United States to any preferred position vis-a-vis other
individual creditors of the bankrupt.
Once, however, the existence of these prerequisites is shown, the
time that which the lien attaches is the date on which the
assessment list was received by the collector. (§3671,
R. C., 1939)
¶9589]In the Matter of John W. Holdsworth and William Bauman,
Individually and the partnership known as John W. Holdsworth & Co.,
composed of John W. Holdsworth and William Bauman, and John W.
Holdsworth Incorporated, Bankrupts
the United States District Court for the District of New Jersey,
Bankruptcy No. 279-50, 113 FSupp 878, July 27, 1953
Lien for taxes: Validity against trustee in bankruptcy. Levy and
distraint.--The referee in bankruptcy denied the petition of the
trustee in bankruptcy for an adjudication that certain
tax liens were invalid, an injunction against the enforcement of the tax
liens by the Collector and a turnover order ordering certain debtors of
the bankrupts to pay the debts to the trustee. A petition for review was
filed by the trustee. The stipulation of facts did not contain essential
facts showing whether the conditions precedent to the creation of the
liens and the conditions of an effective levy and distraint were met.
The referee's conclusions were therefore erroneous. The matter was
remanded with instructions to grant a rehearing.
Breitner for trustee.
proceeding originated with a petition filed by the Trustee in bankruptcy
and an order to show cause entered thereon by the Referee in Bankruptcy.
The prayers for relief were poorly drafted, but it sufficiently appears
from the petition and the record now before the Court that the
petitioner sought: first, an adjudication that certain tax liens in
favor of the United States were invalid; second, an injunction against
the enforcement of the tax liens by the Collector of Internal Revenue;
and third, a turnover order requiring certain debtors of the Bankrupts
to pay to the Trustee the debts allegedly due and payable. The Referee,
after hearing, denied the relief sought. The proceeding is now before
this Court on a petition for review filed by the Trustee.
The action of
the Referee was obviously predicated upon the conclusions: first, that
the tax liens in favor of the United States were existent and valid; and
second, that a mere notice of "Levy," served upon each of
three debtors of the Bankrupt, was tantamount to an effective levy upon
the distraint of "all sums of money due" from the said debtors
of the Bankrupts. These conclusions were based solely on the meager
facts contained in a Stipulation of Facts, which was deficient; several
essential facts were omitted from the stipulation and were not
established by competent evidence. The facts before the Referee do not
support his conclusions.
provisions of the Internal Revenue Code, 26 U. S. C. A. 3670 and 3671,
create a statutory lien for taxes in favor of the
but only upon the fulfillment of the conditions therein prescribed.
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
upon all property and rights to property, * * *, belonging to such
person." Section 3671 provides: "Unless another date is
specifically fixed by law, the LIEN SHALL ARISE AT THE TIME THE
ASSESSMENT LIST WAS RECEIVED BY THE COLLECTOR * * *." (Emphasis by
provisions of the Code are unambiguous and must be literally construed.
When these provisions are thus construed it is clear that the conditions
precedent to the creation of the statutory lien are: first, the receipt
by the Collector of Internal Revenue of an assessment list certified by
the Commissioner of Internal Revenue in accordance with Sections 61,
3640 and 3641 of the Internal Revenue Code, Title 26 U. S. C. A.; and
second, a demand for payment by the Collector of Internal Revenue, and
the neglect or refusal of the taxpayer to pay. Cf. Detroit Bank v.
United States, 317
329, 335 [43-1 USTC ¶9224]; United States v. Reese, 131 Fed.
(2d) 446, 467 [42-2 USTC ¶9763]; Citizens State Bank of Barstow,
Tex. v. Vidal, 114 Fed. (2d) 380, 384 [40-2 USTC ¶9603]; MacKenzie
v. United States, 109 Fed. (2d) 540, 541, 542 [40-1 USTC ¶9229]; Metropolitan
Life Ins. Co. v. United States, 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771];
Filipowicz v. Rothensies, 43 Fed. Supp. 619, 623 [42-1 USTC ¶9300].
The lien arises only upon when the fulfillment of these conditions.
of the record discloses no facts which will support a determination that
the conditions prescribed by the Code were met, a determination
essential to the conclusion that the tax liens were existent and valid.
This conclusion of the Referee was therefore erroneous.
We may assume,
although the record does not support the assumption, that the action
taken by the Collector of Internal Revenue was pursuant to Sections 3690
and 3692 of the Internal Revenue Code, Title 26 U. S. C. A. Section 3690
provides: "If any person liable to pay any taxes NEGLECTS or
REFUSES to pay the same WITHIN TEN DAYS NOTICE AND DEMAND, it shall be
lawful for the collector * * * to collect the said taxes, * * *, by
distraint and sale, in the manner provided in this subchapter, of the
goods, chattels, or effects, including * * * evidences of debt, of the
person delinquent as aforesaid." Section 3692 provides: "In
case of NEGLECT or REFUSAL under Section 3690, the collector may levy, *
* *, upon all property and rights to property, * * *, belonging to such
person, or on which the lien provided in section 3670 exists, for the
payment of the sum due, * * *." (Emphasis by the Court.) We note
that these sections are not in pari materia with sections 3670 and 3671,
The right of
the Collector of Internal Revenue to proceed under these sections is
conditioned upon: first, a notice to the taxpayer of his delinquency and
a demand for payment; and second, the neglect or refusal of the taxpayer
to pay "within ten days after notice and demand." The record
is devoid of facts upon which to predicate a determination that these
conditions were met, a determination essential to the conclusion that
there was an effective levy and distraint. The conclusion that there was
an effective levy and distraint is therefore erroneous.
sufficiently appears from the Stipulation of Facts that a notice of
"Levy" was served upon each of the three debtors of the
Bankrupts, and that thereafter, pursuant to Section 3710(a) of the Code,
Title 26 U. S. C. A., a formal "Final Notice and Demand" was
served upon each of them. We assume, in the absence of any stipulation
to the contrary, that no other or further action was taken. We are of
the opinion that in the absence of a warrant of distraint a mere notice
of levy is not tantamount to an effective levy upon and distraint of
"all sums of money due" from the said debtors of the
v. O'Dell, 160 Fed. (2d) 304, 307 [47-1 USTC ¶9190]; Givan
v. Cripe, 187 Fed. (2d) 225, 228 [51-1 USTC ¶9169]. An actual or
construction seizure is essential to a valid levy and distraint; where,
as here, the subject matter is an account receivable or chose in action,
the seizure may be effected by a levy and the service of a warrant of
distraint upon the debtor. Ibid. The reported cases would indicate that
this was the usual practice followed by the Collector of Internal
discloses that the three debtors of the Bankrupts were joined as parties
to this proceeding but failed to enter an appearance or otherwise
consent to the summary jurisdiction of the Court of Bankruptcy. We agree
with the Referee's conclusion that under the circumstances they were not
subject to the Court's summary jurisdiction. We would suggest, however,
that if the debts are not disputed a multiplicity of actions might be
avoided if the debtors would voluntarily enter their appearance in this
proceeding. This would permit the determinatin of all the issues in a
will be remanded to the Referee in Bankruptcy with instructions to grant
a rehearing. We direct the attention of the Referee in Bankruptcy to the
applicable provisions of the Internal Revenue Code, supra, which
are determination of the validity, scope and effect of both the liens
and the distraints. We further direct his attention to the applicable
provisions of the Bankruptcy Act, and particularly to Sections 67 and 70
thereof, 11 U. S. C. A. 107 and 110, which are determinative of the
relative rights of the Trustee and the Collector of Internal Revenue.
See Collier on Bankruptcy, Vol. 4, pages 155 to 224, inclusive.
that this is another case in which there has been a regrettable waste of
judicial time occasioned by the palpable inadequacy of the record made
before the Referee in Bankruptcy. We have previously reminded attorneys
that the issues which arise in the many collateral matters incident to
istration of a bankrupt estate should be fully and properly tried. A
hearing before the Court of Bankruptcy is summary but it must be full
and adequate if the issues raised are to be justly decided on the
merits. Where, as here, the issues are submitted on a stipulation of
facts, the facts should be fully and adequately stated, and, if not so
stated, the stipulation of facts should be supplemented by competent and
¶9521]S. B. Huffman, trustee in bankruptcy of Charles Manfre
Transportation Co., bankrupt, Appellant v. United States of America,
U. S. Court of Appeals, 9th Circuit, No. 15,187, 242 F2d 835, 3/21/57,
Reversing and remanding unreported District Court opinion
[1939 Code Secs. 3670 and 3690--similar to 1954 Code Secs. 6321 and
Tax lien: Repossessed personal property.--Trucks belonging to the
taxpayer were repossessed under either a chattel mortgage or a
conditional sale contract. Immediately after repossession and before
bankruptcy of the taxpayer, the trucks were levied on for unpaid taxes.
The taxpayer disputed the repossession, and the trustee in bankruptcy
brought suit, which was settled. The Government asserted a prior claim
to the settlement fund. A District Court decision holding that the tax
lien was entitled to priority was reversed and the cause was remanded
because the evidence did not show whether the taxpayer claimed an
interest in the trucks or merely claimed money damages. If the claim was
for specific property, this court indicated that the Government did not
lose its priority merely because the claim was compromised for money.
Newmark, Paul E. Anderson,
, for appellant. Lloyd H. Burke, United States Attorney, Charles E.
Collett, Assistant United States Attorney, San Francisco, Calif., Joseph
O. Greaves, Leon Yudin, Washington, D. C., for appellee.
LEMMON and CHAMBERS, Circuit Judges.
here involves whether money paid to the bankrupt Manfre's trustee in
bankruptcy by a company called Utility Trailer Sales must be turned over
for its ubiquitous tax claim or whether the trustee may subordinate the
tax claim to costs of
istration and wage claims. 1
The referee, and the district court on review, held that the director of
internal revenue must take the entire sum involved which is $2,309.49.
bankruptcy, we are told Utility Trailer Sales had
"repossessed" four trucks apparently belonging to Manfre. It
is not clear whether the "repossession" was under a chattel
mortgage or a conditional sales contract. After
"repossession," we do not know what was done next. It would
appear that in some way the bankrupt, prior to the adjudication, was
disputing the repossession or some facet of it. The trustee continued
the same contentions or made others. We are told that the trustee
brought a proceeding "against Utility Trailer Sales in the
bankruptcy court below and after a hearing before the referee was
successful in achieving a compromise of the matter." The parties
attempt to tell us in a scanty way what the "matter" before
the referee was. It appears that the district court did not know what
this "matter" involved. It seems to have assumed, and events
hereafter may vindicate the assumption that at all times Manfre and his
trustee were making a claim against Utility Trailer Sales for money.
But we think
the nature of the claim prior to its compromise might be important. We
note that Utility Sales resold one of the trucks before the adjudication
and three trucks after the adjudication.
levy of the agent of the Internal Revenue service was made immediately
after the "repossession" and before bankruptcy. If the claim
of the now bankrupt was asserted by him as an interest in the trucks
(that is, "give me back my trucks") we might have one priority
question. If the claim was at all times "you took my trucks and I
want money damages," we may have the question of the applicability
of United States v. Eiland, 4 Cir., 223 Fed. (2d) 121 [55-1
USTC ¶9487], and whether we agree with it.
without deciding, we would think, if the claim which was compromised was
one made to specific property, the government should not gain or lose in
legal position by the compromise of the trustee for money.
We hold on our
own motion that the district court was not given enough facts to make a
proper review. If we did not so hold, this court probably would have to
decide the applicability of
v. Eiland, supra. That we are not disposed to do because there
is too strong a possibility that we know too little of the actual facts.
It would not
be unjust in the rough sense for appellant trustee to lose his appeal
because of the inadequacy of the record presented here and to the
district court. But we believe it is within our power to send the case
back and more consonant with justice that the case go back for an
examination of the compromise, and what was compromised, as well as
related facts. See M. M. Landy, Inc. v. Nicholas, 5 Cir., 221
Fed. (2d) 923 at 932. McGovock v. Giolitto, 7 Cir., 201 Fed. (2d)
685. When this has been done the legal suspenders that should be taken
from the rack can be better determined.
remanded for proceedings consistent with this opinion. 2
C. A. §107, sub. C.
A case in which the facts were presented to the district court in good
form is Bensinger v. Davidson, D. C., S. D. Cal., 147 Fed. Supp.
240 [57-1 USTC ¶9263].
¶9180]Publicity Building Realty Corporation, a corporation,
individually and as trustee of an express trust, Arthur E. Woerheide,
Max W. Kramer, assignee of Nelson Chesman and Company, a corporation,
Taylor R. young, Stephen A. Boggiano, Paul E. Coil, executor of the
estate of Patrick H. Cullen, deceased, Clem F. Storckman, Cullen Coil,
Sigmund M. Bass and Joseph S. Webbe, Appellants, v.
ert E. Hannegan, Collector of Internal Revenue, and United States of
America, Lee Hess, Estelle L. Hess, and June Estelle Hess, by Lee Hess,
Guardian ad Litem, Appellees.
United States Circuit Court of Appeals, Eighth Circuit., No. 12,666.,
139 F2d 583,
Appeal from the District Court of the
for the Eastern District of Missouri.
Lien for taxes: Interpleader: Jurisdiction.--The Court remands the
case to permit the creditors of X to prove, if they can, that the
insurance policies never belonged to the taxpayer but did belong to X
and consequently the Collector never acquired an interest in the
policies and therefore the funds of policies belong to the creditors and
not the Collector.
Young and Harry A. Frank (Stephen A. Boggiano, Clem F. Storckman, Cullen
Coil and Sigmund M. Bass were with him on the brief) for appellants.
John V. Lee (Messrs. Lee, Fricke & Lee were on the brief) for
appellees, Lee Hess, Estelle L. Hess, and June Estelle Hess, by Lee
Hess, Guardian Ad Litem. W.B. Waldo, Special Assistant to the Attorney
General (Samuel O. Clark, Jr., Assistant Attorney General, Sewall Key
and J. Louis Monarch, Special Assistants to the Attorney General, Harry
C. Blanton, U.S. Attorney, and Russell Vandivort, Assistant U.S.
Attorney, were with him on the brief) for appellees, Collector of
Internal Revenue and the United States.
SANBORN, WOODROUGH, and RIDDICK, Circuit Judges.
Circuit, Judge, delivered the opinion of the Court:
are cross-claimants in an interpleader action. Their cross-claims were
dismissed, and they have appealed from the order and judgment of
dismissal. The broad question presented is whether their pleadings
raised any issues of fact or of law which entitled them to a trial.
Insurance Company (hereinafter called "the Travelers"), as
June 16, 1941
, filed a complaint in interpleader under the Interpleader Act of 1936,
49 Stat. 1096 [28 U.S.C.A. §41(26)]. The complaint named Lee Hess,
Estelle L. Hess, June Estelle Hess, the United States Collector of
Internal Revenue, Publicity Building Realty Corporation (hereinafter
called "Publicity"), and George C. V. Fesler, as defendants.
The complaint showed that on March 6, 1934, the Travelers had issued two
single-premium policies on the life of Lee Hess, one for $50,000, and
one for $10,000; that Hess had paid $18,169.50 for the larger policy and
$3,633.90 for the smaller one; that Estelle L. Hess, wife of the
insured, and June Hess, his daughter, were the named beneficiaries; and
that the policies provided for cash surrender values. The complaint
further showed that, on or about July 30, 1934, Publicity, as a creditor
of George C.V. Fesler, instituted an action against the Travelers and
others in the Circuit Court of the City of St. Louis, Missouri, alleging
that the policies had been purchased by Lee Hess with money belonging to
Fesler; that, as a result. Fesler was entitled to the right, title and
interest of the insured and of his wife and daughter in the policies;
and that Publicity, as a creditor of Fesler, was entitled to have the
cash value of the policies applied in payment of the indebtedness of
Fesler to Publicity. The complaint further showed that Fesler filed an
intervening petition in the State court action, asserting that the
policies were purchased by Hess with the money of Fesler; that Fesler
was entitled to the cash value of the policies and to have it applied
upon his indebtedness to Publicity; and that the State court action is
still pending and undetermined. The complaint further showed that there
was filed with the Travelers a written assignment bearing date February
25, 1936, by which Lee Hess transferred his interest in the policies to
Thos. H. Butler, Jr., and George A. Ryan; that on or about June 2, 1941,
there were filed with the Travelers two written assignments dated
January 27, 1938, and February 4, 1938, respectively, transferring the
interests of Lee Hess and of Butler and Ryan in the policies to the
United States Collector of Internal Revenue; that on June 2, 1941, the
Collector surrendered the policies to the Travelers, demanding of it
their cash surrender value, and served upon it a written notice of a tax
lien for federal income taxes assessed against Lee Hess for the year
1934 for $19,267.47 and interest; and that the Collector also served
upon the Travelers a written notice of a levy and also a demand for
payment and warrant of distraint. The complaint also showed that the
cash value of the two policies on June 16, 1941, was $23,809.80, which
the Travelers had paid into the registry of the court below; that the
Travelers has and claims no interest in the policies, has no liability
to the defendants except under the policies, and is a disinterested
stakeholder. The prayer of the complaint was that the defendants be
decreed to interplead and settle among themselves their rights or claims
to the cash surrender value of the policies, and that the defendants be
enjoined from prosecuting their claims in other courts.
appellants other than Publicity (which was named a defendant in the
complaint) filed applications for leave to intervene, accompanied by
their proposed cross-complaints stating their respective claims to the
fund deposited in the registry of the court. These applications were
was also permitted to intervene as a claimant to the fund. The Travelers
was granted the relief prayed for in its complaint, on
April 8, 1942
, and a decree was entered requiring the defendants and interveners to
interplead for the fund paid into court, less $400.00, the costs and
attorneys' fees which were allowed to the Travelers.
cross-claims of the appellants (including Publicity) asserted, in
substance, that these cross-claimants were creditors of Fesler; that he
on October 31, 1931, became a fugitive from justice and a nonresident of
the State of Missouri; that he concealed his whereabouts so that he
could not be reached by process; that Fesler conveyed all of his
property to Lee Less; that Hess agreed with Fesler to convert his
property into cash and pay his debts; that, among other assets, Fesler
owned a royalty contract for a deodorant; that from October 31, 1931, to
February 16, 1934, Hess collected royalties upon this contract amounting
to $21,273.30; that on February 16, 1934, Hess sold the contract for
$100,000, of which $65,000 was paid in cash; that part of this $65,000
was used to pay the single premiums for the life insurance policies in
suit; that the money paid to the Travelers for those policies belonged
wholly to Fesler; and that the cash surrender value of the policies is
the money of Fesler and constitutes in effect a trust fund in which each
of the appellants is entitled to participate.
an answer to the complaint of the Travelers and an interplea in which he
asserted, in substance, that Lee Less had fraudulently procured and
appropriated Fesler's property and that the policies in suit were
purchased by Hess with Fesler's money; that the subsequent assignments
of the policies were not made to bona fide purchasers for value; that
the assignees had full knowledge that the policies had been purchased
with the money of Fesler; and that he is the equitable owner of the fund
in suit and has an equitable lien thereon or right thereto superior to
the claims of the Collector and of the United States. The prayer of
Fesler's answer was for a decree that the fund be awarded to him. Fesler
also filed a counterclaim against Lee Hess, Estelle L. Hess, June Hess,
and William Hess, demanding an accounting for all of the proceeds of the
property of Fesler converted by Lee Hess and held in trust for Fesler by
Lee Hess and William Hess.
joined, and the case came on for hearing on
June 12, 1942
. Mr. Claud O. Pearcy, counsel for Fesler, announced that he was advised
that his client intended to withdraw his claim to the deposited fund.
Fesler was called to the witness stand and was examined. He testified
that he did not desire to make any further claim to the fund; that he
had informed his counsel of that fact that morning for the first time;
that his desire to withdraw his claim had resulted from a conference
between Lee Less, Mr. Maher, counsel for the United States, and Fesler;
and that Fesler's counsel was not a party to the conference. At that
point, Mr. Pearcy notified the court that he withdrew from the case. Mr.
Maher then examined Fesler, who testified that Maher did not make him
"any promise of any money or anything", and that the
conference was held at the suggestion of Lee Hess. We quote the
remainder of Fesler's testimony:
by Mr. Young:
and Mr. Hess made a settlement yesterday afternoon?
talked about an hour?
is all right; we didn't make a settlement.
by Mr. Pearcy:
it a fact, Mr. Fesler, that the District Attorney has told you you would
be indicted for concealing certain information when you made a
settlement with the Government for 1934 tax?
Witness: Do I have to answer that? I had a conversation with the
Maher: You can answer for all of me. If you are going to quote me, quote
me correctly. You can answer it here.
did have a conversation along that line.
you, for the benefit of the record, tell us what Mr. Maher said?
said he would try to prove that I had not divulged my true status in
making settlement with the Government.
what respect, Mr. Fesler?
respect to my income-tax claim.
"Q. As to
misrepresentations as to your income in 1934?
the time you had settlement with them for income tax; for not making a
return, or for making a false return?
didn't make the return at all; the return was made by the Government.
this was, as I understand it, a statement to you that you would be
prosecuted for your failure to give information with regard to the suit
pending out here?
sir; he said he would make every effort to show that I did that.
I had misrepresented it.
by Mr. Maher:
were my exact words, that I would do my best to see you were prosecuted
for making a false statement?
didn't say you would be indicted?
sir. You said you would make every effort to do it.
by Mr. Young:
that is the reason you are withdrawing your claim to this fund?
YOung: That is all.
Maher: I think the case might well be passed for a week or ten days.
Young: We are not certain we are ready, in view of the changed
situation. We were ready up until this morning.
Court: I am not sure when I can give you a setting on that.
YOung: I suppose the quicker the better suits us both?
Maher: Yes, sir.
by Mr. Maher:
the sake of the record, did I promise you would not be prosecuted?
said you would drop the case.
said this case would be dropped?
did I make any promise about no prosecution?
said there would be nothing further to do about the case.
Because, then, it would not have been your money?
said there would be nothing to do because it would not have been your
money that you concealed?
by Mr. Walsh:
did you understand Mr. Maher to mean when he said there would be nothing
further in the case if you withdrew?
said if I withdrew, the case would be dismissed and I would go on my
by Mr. Maher:
"Q. Did I
say if you withdrew, or did I say if you got on the stand and told the
truth about whose money this was?
sir; that is right.
Maher: There is a difference.
Didn't I say if this was Mess' money, then you didn't make any false
statement in your income tax?
Maher: That is all."
17, 1942, the Collector of Internal Revenue and the United States filed
motions to dismiss the cross-claims of all of the appellants, on the
grounds: (1) that they fail to state claims against the fund upon which
relief can be granted; (2) that they show no legal or present interest
in the fund at the time it was deposited in court; (3) that the
claimants take, if at all, through the interest of Fesler and have only
unliquidated demands against him, and that Fesler's claim has been
eliminated from the case: (4) that the claims of the appellants are
between them and Fesler and have no direct relation to the controversy
over the ownership of the fund as between Fesler and Hess; (5) that the
appellants show that they have no liens of any kind on the fund; (6)
that the court should not be required to decide the liability of Fesler
to the appellants, since, if such liability were established, no right
of the appellants superior to that of the Collector and the United
States would exist; (7) that the claims of the appellants could not have
been asserted in an independent suit in the District Court, since Fesler
resides outside of the district; that, unless the claimants have liens
upon the fund, they should not be permitted to assert claims against
Fesler in a suit in which he was an involuntary party, and that a
determination of the claims against Fesler would deprive him of his
constitutional right to a trial by jury.
Court, without an opinion and without assigning any reasons therefor,
granted the motions to dismiss and decreed that the appellants have no
right, title, interest or claim in or to the fund in the registry of the
It is apparent
that the real parties in interest in this case now are: Lee Hess, who
desires to have the fund applied in payment of his liability to the
United States for income taxes; the United States, which is endeavoring
to obtain the fund to satisfy its unpaid assessment for taxes against
Hess; and the creditors of Fesler, who are asserting an equitable right
to have the fund, which they assert belongs to Fesler, applied to the
payment of their claims against him.
of the position of the Collector of Internal Revenue and the
is that their motions to dismiss admit that the appellants have the
claims which they have asserted, and deny only the power of the court to
grant the relief prayed for by the appellants. Leimer v. State Mut.
Life Assur. Co., 8 Cir., 108 F. (2d) 302, 305; Donnelly Garment
Co. v. International Ladies' Garment Workers
, 8 Cir., 99 F. (2d) 309, 316.
This court has
repeatedly said that a motion to dismiss a complaint should not be
granted unless it appears to a certainty that the plaintiff would be
entitled to no relief under any state of facts which could be proved in
support of his claim. Leimer v. State Mut. Life Assur.
, supra (p. 306 of 108 F. (2d)); Sparks v. England, 8 Cir.,
113 F. (2d) 579, 581-582; Cohen v. United States, 8 Cir., 129 F.
(2d) 733, 736; Louisiana Farmers' Protective Union, Inc. v. Great
Atlantic & Pacific Tea Co., 8 Cir., 131 F. (2d) 419, 423-424; Musteen
v. Johnson, 8 Cir., 133 F. (2d) 106, 108.
Rule 22(2) of
the Federal Rules of Civil Procedure (28 U.S.C.A. following §723c)
provides that actions brought under §24(26) of the Judicial Code as
amended [Title 28 U.S.C.A. §41(26)] shall be conducted in accordance
with those Rules. The Federal Rules of Civil Procedure do not sanction
the disposition of doubtful issues of fact or law upon motions to
dismiss for insufficiency of pleadings. The Rules contemplate a
determination of all such issues by the trial court after a hearing, and
that the trial court shall make findings of fact and conclusions of law,
to the end that the parties to the litigation and the reviewing court
may know the exact factual and legal basis for the trial court's
decision. This, of course, does not mean that if it is certain that a
plaintiff has no claim which entitles him to relief, the District Court
is obliged to hold a trial. If it clearly appears from a complaint that
a trial of the claim asserted will be futile, the court is not required
to proceed further. But even in such a case, unless the reason for the
dismissal of a complaint is obvious, we think that the court should
state the grounds upon which it relies in ordering the dismissal.
Some of the
questions which are involved in this appeal are: (1) Did the appellants
who are interveners have an absolute, or merely a discretionary, right
to intervene? (2) If their right to intervene was discretionary, did
their elimination from the case by a dismissal of their cross-complaints
amount merely to a revocation of leave to intervene? (3) Have the
creditors of an adverse claimant who are asserting an equitable right to
have his interest in the fund deposited by the stakeholder applied to
the payment of their claims, a right to interplead when they have not
obtained judgments against their debtor and have not established liens
upon the fund prior to the commencement of the interpleader action? (4)
Must the claimants in an interpleader action have a present legal right,
title or interest in the fund in order to interplead? (5) Does the
commencement of an interpleader suit cut off or impair the rights of a
creditor of an adverse claimant when that creditor is prosecuting
proceedings in the State court for the purpose of obtaining a judgment
against the adverse claimant and establishing a lien upon the fund in
suit? (6) Do the creditors of an adverse claimant who are attorneys
claiming to have acquired a lien under the laws of Missouri upon the
fund because of services rendered to an adverse claimant prior to the
institution of the interpleader action, have a right to intervene and
interplead therein as lienholders? (7) Do the creditors of an adverse
claimant who assert that they are beneficiaries of a trust created by
him in the fund in suit, have a right to interplead when the amounts of
their claims are unliquidated? (8) Do the creditors of an adverse
claimant and the beneficiaries of a trust allegedly created by him lose
whatever rights they might otherwise have in the fund if the adverse
claimant on the eve of trial disclaims any interest in the fund? (9) If
a voluntary disclaimer by the adverse claimant will destroy any rights
which his creditors may have to the fund, will an involuntary disclaimer
coerced by counsel for another adverse claimant likewise destroy such
An attempt by
this Court to rule upon these issues of law, which have not been tried
below, and which require the assumption of a factual situation as
favorable to the appellants as can reasonably be conceived in view of
their pleadings, would not be justified. As already pointed out, we do
not know upon what rule or rules of law the trial court relied in
dismissing the appellants' cross-complaints. It is elementary that
appellate courts will not ordinarily consider questions not passed upon
by the trial court. Many of the issues of law presented are important
questions relating to the present statutory remedy of interpleader.
Compare Sanders v. Armour Fertilizer Works, 292
190. We are satisfied that these issues should not be decided upon a
hypothetical state of facts. A trial may disclose that the appellants
have no rights to the fund, or that whatever rights they have are not
enforceable or are inferior to those of the
. The appellants, however, are presently contending that Lee Hess never
beneficially owned the policies the surrender value of which constitutes
a fund which they seek to have applied to the payment of their claims;
that the interest acquired by the United States from Hess was nothing
more than a naked legal title; that under the law the fund belongs to
Fesler; that in equity it ought to be awarded to the appellants as his
creditors and as beneficiaries of a trust created by him; and that the
abandonment by Fesler of his claim to the fund, particularly under the
circumstances disclosed by the record, could not affect their rights to
have the fund distributed to them.
While we shall
not, upon this appeal, express any opinion as to the merits of this
case, we consider it important that the usefulness of the statutory
remedy of interpleader, which has been greatly liberalized by the
Interpleader Act of 1936 and by Rule 22 of the Federal Rules of Civil
Procedure, shall not be impaired by narrow and restrictive rulings which
might prevent bona fide claimants, with meritorious claims to a fund
deposited by a stakeholder, from securing an adjudication of their
rights. If persons having or claiming interests in a fund are to be
enjoined, in an interpleader action, from proceeding in other courts to
establish or to enforce their claims against the fund, it would seem
that the one court remaining open to them should afford them a fair
opportunity to establish the basis for their claims, and give due
consideration to their assertions that their rights are superior to
those of other claimants. We think that the appellants should be
permitted to prove, if they can, that the policies in suit never
belonged to Lee Hess, that the Collector of Internal Revenue and the
acquired from him no interest in the fund in suit, and that the
appellants are entitled to have the fund distributed to them. If the
appellants' assertions are correct, the dismissal of their claims would
result in the Government's receiving the fund, not upon the strength of
its claim but upon the weakness of their claims.
The order and
judgment appealed from is reversed, and the case is remanded with
directions to reinstate the appellants' cross-claims and to try the
issues thereby presented upon the merits.