Trust Receipts

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[57-2 USTC ¶9904]James C. Styles and Matthias G. Richardson, co-partners d/b/a Styles Express, Plaintiffs v. Eastern Tractor Manufacturing Corporation and the United States of America , Defendants

U. S. District Court, So. Dist. N. Y., Civil 98-57, 154 FSupp 393, 8/14/57

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]

Collection of taxes: U. S. liens for taxes: Priority over liens under state law: Warehouseman's lien.--This was an action by a warehouseman to foreclose a lien on plows stored with it by a tractor manufacturing company. The United States was made a party defendant because notices of Federal tax liens were filed. In asserting priority, the government claimed that it had filed notice prior in time to the default in payment of storage charges and that, in any event, it contended, a warehouseman's lien arising under state law is not protected under the Internal Revenue Code as are mortgagees, pledgees, purchasers or judgment creditors. In awarding the government's motion for summary judgment, the Court held that a competing private lien which is specific and choate under state law, but which is in the process of judicial enforcement, cannot prevail as against a federal tax lien, even though the private lien might be prior in time to the federal tax lien, unless the private lien has been reduced to judgment.

Harry Gold, 243 Wall Street , Kingston , N. Y., for plaintiffs. Paul W. Williams, United States Attorney, James R. Lunney, Assistant United States Attorney, of counsel, for defendant United States.

Opinion

LEVET, District Judge:

The plaintiffs in this action, as warehousemen, seek to foreclose a lien on 1094 Eastern Tractor Plows stored with them by the defendant Eastern Tractor Manufacturing Corporation between September 1, 1948 and December 31, 1954 , at the agreed price of $30.00 per month, totaling $2,280.00. Plaintiffs admit receiving $1,700.00 for storage charges from September 1, 1948 to May 1, 1953 , leaving a credit of $20.00 on account of the storage charge for the month of May, 1953, and an unpaid balance of $580.00. The United States was made a party defendant in this action because notices of Federal Tax Liens were filed with the Court Clerk, Ulster County , on August 22, 1953 , November 10, 1953 , and November 15, 1954 , for the sums of $22,034.25, $19,734.00 and $637.00 respectively. The government relies upon the notice filed August 22, 1952 , and since said notice was filed prior to a default in payment of plaintiff's storage charges, it is argued by the government that its lien is prior to the warehousemen's lien. Furthermore, the government contends that a warehouseman's lien is not protected under the Internal Revenue Code as are mortgagees, pledgees, purchasers or judgment creditors.

The facts as above stated are not disputed and both the plaintiffs and the government have moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.

[Warehouseman's Lien]

Plaintiff's lien arose under Section 112 of the New York General Business Law which provides that a warehouseman shall have a lien on goods deposited for all lawful charges for storage. The lawfulness of the charges in the case at bar is not disputed.

The government asserts its lien for unpaid federal taxes pursuant to Sections 3670, 3671 and 3672 of the Internal Revenue Code of 1939, 26 USCA Sections 3670-3672. Section 3670 provides that if any person liable to pay any federal tax refuses to pay the same after demand, the amount of said tax shall be a lien in favor of the United States upon all property, or property rights, real or personal, belonging to such person. Section 3672 of the Internal Revenue Code of 1939 states that, unless otherwise specified by law, the lien arises at the time of the assessment. Section 3672 provides that such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector in the office designated by the law of the state in which the property subject to the lien is located.

As was stated in United States v. Acri, 348 U. S. 211 at 213 [55-1 USTC ¶9138]: "The relative priority of the lien of the United States for unpaid taxes is . . . always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court."

[Perfected Lien in Process of Judicial Enforcement]

In United States v. White Bear Brewing Co., Inc., 350 U. S. 1010 [56-1 USTC ¶9440], the Supreme Court reversed without an opinion two lower courts which accorded priority to a mechanic's lien over a federal tax lien which arose after the mechanic's lien had come into existence and after the mechanic's lien had been recorded according to state law. Moreover, the federal tax lien arose subsequent to the institution of an action in the state court to enforce the mechanic's lien. In expressing his dissent, Mr. Justice Douglas noted:

"* * * The Court holds that a federal tax lien has priority over a statutory mechanic's lien, even though the mechanic's lien was specific, prior in time, perfected in the sense that everything possible under state law had been done to make it choate, and was being enforced before the federal tax lien arose. * * *" (p. 1010)

The conclusion which may be drawn from the above-mentioned case is that a competing private lien which is specific and choate under state law, but which is in the process of judicial enforcement, cannot prevail as against a federal tax lien, notwithstanding that the private lien antedated the tax lien, unless the private lien has been reduced to a final judgment. The plaintiffs in the instant case have not reduced their warehousemen's lien to a final judgment and, therefore, the government's tax lien is superior to their lien.

Accordingly, the government's motion for an order awarding it summary judgment is granted.

So ordered.

 

 

[56-1 USTC ¶9115]United States of America, Plaintiff v. Joseph Profaci, Ninfa Profaci, Mamma Mia Importing Co., Inc., a corporation, Mamiapro Realty Corp., Smith-Weihman Company, Inc., County of Kings, New York, Santuzza Oil Co., Inc., Sunshine Edible Oil Co., Inc., Lafayette National Bank, National City Bank of New York, South Brooklyn Savings & Loan Association, Bensonhurst National Bank, Salvatore Profaci, New York State Insurance Fund and the People of the State of New York, Defendants

In the United States District Court for the Eastern District of New York, Civil Action No. 13290, 137 FSupp 795, November 7, 1955

[1954 Code Sec. 6323]

Priority of tax liens: Trust receipts.--The Government filed a notice for a tax lien on the same date that the holder of a trust receipt for edible oils presented the taxpayer's check to the bank for payment. This creditor was unable to prove that it retained title to the oil or that the trust receipt was anything more than a promise to pay. There was no proof that any money deposited in the taxpayer's bank account was specifically allocated to pay for the oil represented by the trust receipt. Therefore, the holder of the trust receipt was not entitled to preferential payment of the proceeds of the check. The Government's tax lien had priority. Furthermore, the trust receipt holder was not a mortgagee, pledgee, purchaser, or judgment creditor of the taxpayer under 1954 Code Sec. 6324(c).

Leonard P. Moore, United States Attorney (Richard C. Packard, Assistant United States Attorney, of Counsel), for plaintiff. Charles Fredericks, Smith-Weihman Company, Inc., for defendant.

ABRUZZO, District Judge:

Large tax liens were filed against the defendants, Joseph Profaci, Ninfa Profaci, Mamma Mia Importing Company, Inc., and Mamiapro Realty Corp. by the plaintiff, United States of America . As a result of these tax liens a civil suit for the collection of taxes was started by the United States against the defendants above named and the defendants, Smith-Weihman Company, Inc., County of Kings , New York , Santuzza Oil Company, Inc., and others.

Smith-Weihman Company, Inc., one of the defendants in this action which will hereinafter be referred to as Smith-Weihman, makes this motion and seeks an order directing the Lafayette National Bank of Brooklyn to pay to it out of funds deposited in the bank in the name of the defendant, Mamma Mia Importing Company, Inc., hereinafter referred to as Mamma Mia, the sum of $2,971.75 with interest from December 6, 1952. Smith-Weihman had been engaged in various trust receipt transactions with Mamma Mia prior to the commencement of this action. It held in various warehouses imported edible oil for the account of Mamma Mia in accordance with written contracts between the parties.

On October 31, 1952 , Mamma Mia requested the release of 100 cases of Italian olive oil valued at $4,740.07. On that date an order was drawn on a Pennsylvania warehouse, where the oil was stored, and on the same date a trust receipt was executed by Mamma Mia to Smith-Weihman. Mamma Mia became possessed of this oil. On November 6, 1952 , Smith-Weihman received a payment of $494.70 and on November 25, 1952 , a further payment of $1,273.62. On December 5, 1952 , Mamma Mia issued its check in the amount of $2,971.75 drawn on the Lafayette National Bank of Brooklyn in favor of Smith-Weihman for the balance due on that transaction. On December 6, 1952 , this check was deposited by Smith-Weihman for collection, and on or about December 10, 1952 , it was returned, marked "Account Attached." On December 5, 1952 , the same day that the check was issued, federal income tax liens totaling $135,397.37 relating to income tax returns for the years 1944 to 1949 were filed in the Internal Revenue Department of this District against Mamma Mia by the District Director of Internal Revenue. Notice of this lien was filed with the Lafayette National Bank on that date which resulted in the nonpayment of the check to Smith-Weihman.

In the action begun by the plaintiff to foreclose the tax liens, Smith-Weihman was named as a defendant due to the fact that it held a real estate mortgage against premises owned by another defendant at which Mamma Mia carried on its business, and also due to the fact that it held a chattel mortgage executed by Mamma Mia on chattels in that building.

On February 19, 1953 , a temporary receiver was appointed over all the assets of Mamma Mia and on April 22, 1953 , a permanent receiver was appointed.

The issue raised by this motion is whether or not Smith-Weihman is entitled to a preferential payment of the proceeds of the check of December 5th. The plaintiff contends it is entitled to a priority because of its assessment of taxes on the same date. Smith-Weihman bases its claim of preference on Section 52 of the Personal Property Law and because the transaction was such that title to the olive oil delivered to Mamma Mia remained in Smith-Weihman until full payment was made. Section 52 of the Personal Property Law provides as follows:

"§52. What constitutes trust receipt transaction and trust receipt

"1. A trust receipt transaction within the meaning of this article is any transaction to which an entruster and a trustee are parties, for one of the purposes set forth in subdivision three of this section, whereby

"(a) The entruster or any third person delivers to the trustee goods, documents or instruments in which the entruster (i) prior to transaction has, or for new value (ii) by the transaction acquires or (iii) as the result thereof is to acquire promptly, a security interest; or

* * *

"3. A transaction shall not be deemed a trust receipt transaction unless the possession of the trustee thereunder is for a purpose substantially equivalent to any one of the following:

"(a) In the case of goods, documents or instruments, for the purpose of selling or exchanging them, or of procuring their sale or exchange; or * * *"

The facts before me as to the relevancy of this section are contained in (1) the invoice and statement regarding the purchase of 100 cases of oil sent to Mamma Mia which reads of follows:

"STATEMENT

New York 4, Oct. 31, 1952

NEW YORK

"MAMMA MIA IMPORTING CO., INC.

1414-- 65th St. , Brooklyn 19, N. Y.

SMITH-WEIHMAN CO., INC.

15 Moore Street

Mdse. as per bill rendered.

"RE: OUR INVOICE #6725 OF 12/6/50 COVERING 1000 CASES ITALLAN RIVIERA OLIVE OIL PACKED IN TINS LITHOGRAPHED WITH THE MAMMA MIA BRAND.

900 CASES @ $40.00 PER CASE

60 CASES @ 42.00 PER CASE

40 CASES @ 44.00 PER CASE

PLUS CHARGES--$42,453.65 EQUIVALENT TO $42,453.7--PER CASE

TO WITHDRAWAL OF 100 CASES OF THE ABOVE *$4245.37

DUTY                            490.20

WITHDRAWALENTRY

& SERVICES                        4.50

                              $4740.07

 

Lot 5981"

(2) A trust receipt delivered by Mamma Mia immediately after the delivery of the oil; and

(3) The check dated December 5, 1952 , in the sum of $2,971.75.

In addition thereto, we have the two partial payment checks.

[Trust Receipt Is Not a Preference]

These documents indicate an outright sale passing title to Mamma Mia. There is no proof that the trust receipt was anything more than a promise to pay. Smith-Weihman's preference is only effectual if it were able to follow the 100 cases of oil or the proceeds of the sale. There is nothing before me to evidence that these 100 cases were ever sold. There is a suggestion they were. There is no proof before me that there was any deposit of money in the Mamma Mia account specifically allocated to these particular 100 cases of oil. As a matter of fact, the proof is undisputed that when the check of December 5th was drawn there was more money in the bank than the amount of the check, so at best there was a mixture of funds. This precluded Smith-Weihman from identifying the funds. They are now in a position where they can neither identify the sale of this oil nor follow and identify the funds received from the sale of this oil. Under these circumstances the trust receipt cannot be recognized as a preference.

The plaintiff's claim of priority is predicated on Section 6324(c) of the Internal Revenue Code of 1954 (formerly 26 U. S. C. A., Sec. 3672(a)). That section provides that a lien for federal taxes shall not be valid as against any mortgagee, pledgee, or purchaser, if at the time of the mortgage, pledge or purchase such mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of the lien. United States v. Security Tr. & Sav. Bk., 340 U. S. 47 [50-2 USTC ¶9492].

Recently the Circuit Court of Appeals had occasion to pass upon that particular section (26 U. S. C. A., Sec. 3672(a)). United States v. Kings County Iron Works, 224 Fed. (2d) 232 (C. A. 2d) [55-2 USTC ¶9536]. It held that the Government's lien gives it a fully perfected claim superior to all except mortgagees, pledgees, purchasers, or judgment creditors of the taxpayer.

Smith-Weihman does not fall within any one of these excepted categories. Its motion must, therefore, be denied.