Tennessee

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[59-2 USTC ¶9501]Coleman H. Dykes v. Burton J. Gerhardt, et al.

Chancery Court, Knox County, Tenn., No. 35,024, 9/3/58

Priority of liens.--County and city tax liens which had become fixed and specific before the filing of the Federal government's tax lien, and a mortgagee's lien which had been recorded prior to the filing of the Federal government's tax lien, were both entitled to priority over the Federal tax lien.

Clyde W. Key, Knoxville , Tenn. , for Coleman H. Dykes. Charles E. Rader, Knoxville, Tenn., C. J. Pursey, St. Louis, Mo., for Burton J. Gerhardt. Ambrose & Wilson, Knoxville , Tenn. , for R. T. Bales on intervening petition.

Memorandum Opinion

DAWSON, Chancellor:

In August, 1957, Clyde W. Kay filed a petition in this cause seeking to foreclose on the realty involved, to enforce his attorney's lien in the amount of $25,000.00. The question arising at this time is to determine the proper priority of liens of the United States , Gerhardt, Knox County , City of Knoxville , and Clyde W. Kay.

It appears that as far back as 1946, Coleman H. Dykes and Burton J. Gerhardt were partners, owning property located in the States of Tennessee and Missouri as tenants in common. In December 1946, they entered into a dissolution agreement, whereby Gerhardt agreed to convey to Dykes his one-half interest in the Tennessee property in return for a conveyance to him by Dykes of Dykes' half interest in the Missouri property plus a payment of $15,000 to even things up. $5,000 was actually paid to Gerhardt by Dykes.

On August, 1947, Dykes recorded a deed dated November 18, 1946 , from Gerhardt covering some eight pieces of property, Gerhardt claimed that this deed was a forgery insofar as it purported to convey the last seven tracts listed.

Some time in 1951, this action was commenced by Dykes against Gerhardt to quiet his title to all eight tracts against both the claim of forgery and against the claim of Gerhardt that Dykes owed him $10,000 under the agreement. Further, Dykes claimed his title had been slandered and sought damages.

This Court originally determined that the deed was not forged and that Dykes held fee simple title to all right tracts of land, subject, however, to an equitable lien in favor of Gerhardt for $10,000. On appeal, the Court of Appeals of Tennessee reversed in part and remanded, holding that the deed was a forgery and that Dykes was not entitled to fee simple title until the $10,000 was paid.

In the meantime, however, tax liens in favor of the United States arose when taxes were assessed against Dykes on June 30, 1952 , for $2,504.78, and on November 17, 1952 , for $10,844.92. Notices of these liens were filed in the office of the Register of Knox County on October 27, 1952 , and February 17, 1953 , respectively.

Since this property is still owned as partners, two situations must be considered:

Under the first situation, the petitioner, Clyde W. Kay, asserts that as to the one-half interest owned by Coleman H. Dykes, the order of priority should be as follows:

First: Such County and City of Knoxville liens that had matured prior to the Government's first income tax lien on October 27, 1952 .

Second: A lien of Clyde W. Kay under mortgage of November 30, 1950 , to the bank of Knoxville against such property as is embraced in the mortgage.

Third: The lien of the United States for income taxes.

As to the second situation, the petitioner Kay asserts that the priority of claim should be listed as follows:

First: The lien of Gerhardt.

Second: Kay lien.

Third: Tax lien of Knox County .

Fourth: Tax lien of the City of Knoxville .

Fifth: Tax lien of United States .

FIRST SITUATION: As to the first situation, the Court is of the opinion that both City and County tax liens which had become fixed and specific before October 27, 1952 , are entitled to priority. However, for the purposes of this suit the Court cannot agree that the lien of Mr. Kay attached from the day of the filing of the suit, which was in August, 1951, so as to have priority over the claim of the United States . The reason for this is that the lien claimed by Mr. Kay is not a fixed and specific lien. Such a lien is subject to be defeated by a failure to obtain a recovery and it is subject to fluctuation in amount because it must be based upon the amount of recovery. The determination of the amount of the lien to make it specific depends upon future Court action. Illinois Central Ry. Co. v. Wells, 104 Tenn. 706; Butler v. Givins, 137 Tenn. 438.

It has definitely been held in the case of U. S. v. Security Trust & Savings Bank of San Diego, 340 U. S. 47-53 [50-2 USTC ¶9492] and 95 Law Ed., U. S. Supreme Court Rep. Ann. at Page 53, that a lien which is not specific or perfected will not prevent the priority of the United States from applying to the entire property of the debtor, no matter what the provisions of State law. In that case, the Court held that the Federal lien was prior in right to an attachment lien where the Federal tax lien was recorded subsequent to the date of the attachment lien.

In the case of Metropolitan Life Insurance Company v. United States, 107 Fed. (2d) 311 [39-2 USTC ¶9771], and in Federal Reporter, 2d Series, 107, Page 313, it was held that even in the case of a prior recorded mortgage the Federal tax lien would be entitled to priority unless the holder of the mortgage file a bill in Chancery in the District Court for the removal of the tax lien. This decision was based upon the holding that at the time the lien of the United States arose, the mortgagor still had an interest in the property. A strong dissenting opinion was, however, rendered in this case.

In the case of United States v. New Britain , 347 U. S. Page 84 [54-1 USTC ¶9191], 98 Law Ed. U. S. Supreme Court Rep. Ann. Page 525, the Court held that where the City's or County's claim was fixed and specific, that these claims would be entitled to priority. This holding is based upon the principle that "the first in time is the first in right", and City of County tax liens arising after the filing of the Federal lien are subject thereon.

It therefore follows that the priority of claims under the first situation must be as follows:

First: County and City tax liens fixed and made specific before the filing of the Government's lien on October 27, 1952 .

Second: The lien of the United States of America for income tax.

Third: Tax liens of County of Knox and then City liens.

Fourth: The lien of Clyde W. Kay under the Bank of Knoxville mortgage dated November 30, 1950 , now held by him.

SECOND SITUATION: As to the second situation, the Court is of the opinion that the priority of liens should be as follows:

First: County and City taxes which were specific and fixed before the filing of the Federal tax lien.

Second: The lien in favor of Burton J. Gerhardt and wife.

Third: Tax lien of the United States .

Fourth: Tax liens of Knox County .

Fifth: Tax liens of the City of Knoxville .

Sixth: Attorney's lien of Clyde W. Kay.

In regard to the claim of the City of Knoxville to title to the fifty acre tract sold by tax sale, the Court is of the opinion that the sale was invalid and should be set aside inasmuch as the tax buyer in interest had no notice of and was not made a party thereto. It would be inequitable to allow this tax sale to stand in view of a forged deed, which the property owner had no notice of.

It is also provided that in the case of Metropolitan Life Insurance Company v. United States, 107 Fed. (2d) 311 [39-2 USTC ¶9771], that the tax sale of a municipality could not divest the interest of the United States unless the municipality follows the statutory provision for removal of Federal tax liens. This does not appear to have been done and the City sale is therefore of no effect and is set aside. However, the City is entitled to file its claim for the taxes due during the intervening years, subject to the pro rata of liens heretofore stated.