Wisconsin

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[97-1 USTC ¶50,263] United States of America , Plaintiff-Appellant v. Carole F. Librizzi, Defendant-Appellee

(CA-7), U.S. Court of Appeals, 7th Circuit, 95-2550, 3/5/97 , 108 F3d 136, 108 F3d 136. Reversing and remanding a District Court decision, 95-1 USTC ¶50,305

[Code Sec. 6321 ]

Tax lien: Real property: Joint tenancy: Right of survivorship: Value of property: After-death increase.--The government was entitled to one-half of the proceeds from the foreclosure sale of property held in joint tenancy by married taxpayers and upon which a federal tax lien relating to the husband's unpaid taxes had attached prior to his death. Under state ( Wisconsin ) law, the government's recovery was not limited to one-half of the value of the property at the time of the husband's death. Although the husband's interest in the property ended upon his death, his wife took the interest that he could have transferred prior to death subject to the tax lien. Further, if the government had enforced the lien during the husband's lifetime, it would have compelled a severance, and his wife would have received no more than her one-half interest.

Thomas P. Schneider, Milwaukee, Wis. 53202, Gary R. Allen, Marion E. Erickson, John A. Marrella, Department of Justice, Washington, D.C. 20530, for plaintiff-appellant. William A. Jennaro, Thomas J. Lonzo, Pamela A. Johnson, Cook & Franke, 660 E. Mason St., Milwaukee, Wis. 53202, for defendant-appellee.

Before: RIPPLE, WOOD and EVANS, Circuit Judges.

WOOD, Circuit Judge:

This case presents a narrow question about the scope of a valid federal tax lien on property the taxpayer held in joint tenancy, when the lien attaches (and is recorded) prior to the taxpayer's death, but the Internal Revenue Service forecloses on the lien some two years later. Mrs. Carole Librizzi, an innocent spouse, argues that the Government may recover no more than one-half the value of the property at the time of her husband's death, while the United States asserts that once the lien attached to the property, it may recover one-half the amount the property fetches at the foreclosure sale. Although the district court ruled for Mrs. Librizzi, we conclude that the United States has the better of the argument, and we therefore reverse.

The underlying facts are undisputed. In 1975, Salvadore Librizzi (the taxpayer) and his wife Carole acquired real property located at 307 East Carlisle Avenue , Whitefish Bay , Wisconsin , which they held under Wisconsin law as joint tenants with a right of survivorship. A decade later, in 1985 and 1986, the Secretary of the Treasury made a number of tax assessments totaling $1,468,312.72 against Mr. Librizzi relating to wagering activities and associated interest and penalties. When Mr. Librizzi did not pay the amounts due, a federal tax lien arose pursuant to 26 U.S.C. §6321, and attached to all property belonging to him. On September 26, 1986 , and on December 15, 1989 , the IRS filed Notices of Federal Tax Lien for Mr. Librizzi's assessed liabilities with the Register of Deeds, Milwaukee County , Wisconsin . Mr. Librizzi died on June 19, 1990 , without having paid his taxes.

Upon her husband's death, Mrs. Librizzi took full title to the Carlisle Avenue property. Two years later, on October 6, 1992 , the United States filed a suit for foreclosure of its liens under 26 U.S.C. §7403 in the U.S. District Court for the Eastern District of Wisconsin. In that suit, Mrs. Librizzi conceded that the federal tax lien attached to Mr. Librizzi's one-half interest in the property and that when he died she acquired the property subject to that lien. She argued, however, that the Government's interest was limited to one-half of the estimated fair market value of the property at the time of Mr. Librizzi's death (that is, one-half of $152,500, or $76,250). This was an attractive position for her to take, because the property had appreciated in value during the time between his death and the suit: as of the time of suit, it was estimated to be worth some $173,100. The Government took the position that it was entitled to one-half the fair market value at the time of foreclosure, which would have yielded about $86,550--still considerably less than the amount due for the delinquent taxes. As noted above, the district court, relying on provisions of Wisconsin law we discuss below, granted summary judgment for Mrs. Librizzi, and the United States has appealed.

When dealing with tax liens under 26 U.S.C. §6321, it has been settled for years that "state law controls in determining the nature of the legal interest which the taxpayer had in the property." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722 (1985) (citations and internal quotation marks omitted). See also United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683 (1983). The federal tax lien attaches to whatever rights or interests the taxpayer has under state law. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 722; Rodgers [83-1 USTC ¶9374], 461 U.S. at 683. As the Wisconsin Supreme Court put it:

... the I.R.C. does not create any property rights, but merely attaches federally defined consequences to rights which are created under state law. Once state law has been used to determine the nature and existence of a property interest, further state law is inoperative, and the tax consequences thenceforth are dictated by federal law.

Elfelt v. Cooper, 485 N.W.2d 56, 61 ( Wis. 1992) (citations omitted). Furthermore, the U.S. Supreme Court noted in Rodgers that "once a lien has attached to an interest in property, the lien cannot be extinguished (assuming proper filing and the like) simply by a transfer or conveyance of the interest." [83-1 USTC ¶9374 ], 461 U.S. at 691 n.16.

A federal tax lien attaches at the time the tax assessment is made, and it continues until the liability has been satisfied or it becomes unenforceable due to the lapse of time. 26 U.S.C. §6322. See also Jersey State Bank v. United States [91-1 USTC ¶50,089], 926 F.2d 621, 622-23 (7th Cir. 1991); J.D. Court, Inc. v. United States [83-2 USTC ¶9454], 712 F.2d 258, 261 & n.7 (7th Cir. 1983). In this case, it is undisputed that the tax lien attached to Mr. Librizzi's undivided one-half interest in the Carlisle Avenue property in 1985 and 1986, at the time the assessments were made. Mrs. Librizzi argues, however, that the character of the lien changed at the time of Mr. Librizzi's death, when under the Wisconsin law of joint tenancy, Mrs. Librizzi became the sole owner of the property. Wis. Stat. Ann. §700.17(2)(a). At that point, she claims, the lien changed from an encumbrance on the interest in the property to an I.O.U. for the value of Mr. Librizzi's interest in the property on the date of his death. She relies principally on language in the Third Circuit's decision in United States v. Avila [96-2 USTC ¶50,357], 88 F.3d 229 (3d Cir. 1996), but also on the Wisconsin Supreme Court's early decision in Musa v. Segelke & Kohlhaus Co., 272 N.W. 657 (Wis. 1937), to support this position.

In Musa, the Wisconsin Supreme Court considered the effect of a judgment lien on property held in joint tenancy, after the joint tenant who was the judgment debtor died. The judgment lien there had been docketed, but not executed, on the date of the debtor's death. The supreme court decided that "the lien of the judgment in question could attach only to such interest or estate as Adam Musa [the debtor] actually and effectively had in the premises." Id. at 658. Because his interest was only that of a joint tenant, it was limited by the right of survivorship. Upon his death, when the property passed to the other joint tenant, the judgment lien itself was extinguished: there was no more property of the debtor on which the lien could operate. Mrs. Librizzi does not take her argument as far as Musa might suggest, as she does not contend that the tax liens vanished when Mr. Librizzi died. She does say, however, that Musa means that the lien attached only to the interest Mr. Librizzi had while alive, and that this interest was finally determined as of the moment of his death.

Later legislation and court decisions in Wisconsin indicate that the Musa rule does not have the consequences Mrs. Librizzi claims for it. Section 700.24 of the Wisconsin Statutes addresses the effect of a joint tenant's death on certain liens (including, we note, state tax liens attached pursuant to Wisconsin law):

A real estate mortgage, a security interest under ch. 409, or a lien under s. 71.91(5)(b), s. 72.86(2), 1985 stats., ch. 49 or 779 on or against the interest of a joint tenant does not defeat the right of survivorship in the event of the death of such joint tenant, but the surviving joint tenant or tenants take the interest such deceased joint tenant could have transferred prior to death subject to such mortgage, security interest or statutory lien.

Mr. Librizzi could have transferred his undivided one-half interest to Mrs. Librizzi before his death, by taking steps to sever the joint tenancy and then to convey his interest to her. In that case, the federal tax lien would have continued to encumber his one-half interest in her hands. See, e.g., United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) ("The transfer of property subsequent to the attachment of the lien does not affect the lien[.]"). The effect of §700.24 is to make it clear that the same result follows even if he did not go through those steps during his lifetime. When the undivided one-half interest passed to Mrs. Librizzi by operation of law, it came encumbered with the federal tax lien.

Taking another approach, Mrs. Librizzi points to Avila, in which the Third Circuit held that the Government could recover on a tax lien imposed on a husband's one-half interest in a joint tenancy, even though the property had later been transferred to his wife (first for a payment of $100, and later in a divorce settlement). There, as here, the district court had held that the Government could recover only the amount that the lien was worth at the time the debtor transferred his interest to his wife. Citing the Ninth Circuit's decision in Han v. United States [91-2 USTC ¶50,486], 944 F.2d 526 (9th Cir. 1991), the court reversed, holding that "because the lien is unaffected by sale, we see no basis for fixing the amount of the lien at the time of sale." Avila [96-2 USTC ¶50,357], 88 F.3d at 233 (internal quotations omitted). The lien continued to attach to the debtor's entire former interest in the property, limited only by the amount of the debt it secured and a third party's right to equitable subrogation (a complication not present in Mrs. Librizzi's case).

So far, Avila provides more support for the Government's position than the reverse, but Mrs. Librizzi relies on one additional part of the Avila decision to support her claim for a limitation on value. Similar to the Wisconsin court in Musa, the Third Circuit stated that if the debtor predeceased his wife, then the lien would be extinguished. Id. at 236. This conclusion resulted from the court's analysis of New Jersey law, which did not include anything like Wis. Stat. Ann. §700.24. As we hinted earlier, we think the "extinguishment" argument for purposes of the present case proves either too much or too little. If Mr. Librizzi's death truly extinguished the lien, then the Government would be entitled to nothing, not to the value of the debtor's interest at the time of his death. The state statute rules out this possibility, however. In a later case construing both the statute and Musa, the Wisconsin Supreme Court recognized that the rule for judgment liens is different from the rule for the types of liens mentioned in §700.24. See Northern State Bank v. Toal, 230 N.W.2d 153, 156 ( Wis. 1975) (judgment liens must be executed before the debtor's death in order to sever the joint tenancy and avoid being extinguished by the spouse's right of survivorship). Liens covered by the statute are unlike unexecuted judgment liens because they remain in force against the surviving joint tenant. See John E. Talsky, Comment, Concurrent Ownership: Joint Tenancy & Tenancy In Common Under Chapter 700, 55 Marq. L. Rev. 321, 345 (1972) (noting that under Wis. Stat. Ann. §700.24, tax liens imposed under Wis. Stat. Ann. §71.91 remain attached to the property even after the debtor spouse's death).

Finally, nothing in Musa or Avila supports the rather odd notion that the lien survived Mr. Librizzi's death, but became frozen in value as of the date of his death. The Government notes that such a rule might be unwelcome to an innocent spouse if the value of the property had declined after the date of death, since in that event she would be required to pay more than one-half the fair market value at sale. But we do not need to explore this possibility further, other than to note that the rule we adopt is not systematically biased either for or against the taxpayer. Under Wisconsin law, the tax lien ran against Mr. Librizzi's undivided one-half interest. If the Government had enforced its lien during his lifetime, it could have compelled a severance of the property and Mrs. Librizzi would have received only her one-half interest (plus an additional uncontested $21,719.25 which she paid to retire the balance of the mortgage). Wisconsin law gives her no more interest in the estate she received through the joint tenancy rule of survivorship than she would have had if Mr. Librizzi had lived.

We therefore REVERSE the judgment below and REMAND for further proceedings consistent with this opinion.

[Dissenting Opinion]

EVANS, Circuit Judge

My colleagues find Ms. Librizzi's contention that the federal tax lien extends only to the value of the property at the time of her husband's death to be an "odd notion." If it is odd, it is not the first, nor will it be the last, odd notion to grow out of what a legislature has done.

As the court correctly notes, we must look to Wisconsin law to evaluate Ms. Librizzi's claim. There we find that joint tenancy is different from other types of co-ownership, and survivorship is a concept with considerable force, as Musa v. Segelke & Kohlhaus Co., 224 Wis. 432, 272 N.W. 657 (Wis. 1937) illustrates. If Musa were all Wisconsin had to say on the subject, we would have to conclude that the IRS lien was extinguished altogether upon Mr. Librizzi's death. The result in Musa is part of the court's recognition of the special nature of a joint tenancy, in which upon the death of one joint tenant the survivor becomes the "sole and absolute owner of the property, and there consequently exists no longer any interest or property right whatsoever in the deceased joint tenant or his estate." 224 Wis. at 436. Musa also tells us that in the absence of a severance of the joint tenancy, "there remains no interest or property right in a deceased joint tenant or his estate upon his death ...." Id. Joint tenancy then presents a unique situation--one in which the usual rule that a lien follows the property does not hold true under the common law.

However, as my colleagues also point out, Musa is not the last word in Wisconsin law. Section 700.24, Wisconsin Statutes, enacted some 8 years after Musa, provides that some liens are not extinguished upon the death of a joint-tenant/debtor. State tax liens are among those which are not extinguished, and for that reason Ms. Librizzi does not argue that the federal tax lien is extinguished. But what is the lien attached to?

On this point, I acknowledge that the statute is not as clear as a bell. But if it is read in light of Wisconsin joint tenancy law, it seems to me that Ms. Librizzi should win this case.

To back up a moment, there is a difference between a transfer of an interest in a joint tenancy either by sale or through court order upon a divorce and the transfer of ownership which occurs through survivorship upon the death of a joint tenant. See, e.g., Eloff v. Riesch, 14 Wis. 2d 519, 111 N.W.2d 578 (1961); Wozniak v. Wozniak, 121 Wis. 2d 330, 359 N.W.2d 147 (1984). The former severs the joint tenancy and consequently eliminates survivorship; the transfer of interest is like the sale of any other property. In that case, the seller receives the value as of the moment of the sale and the buyer receives the property subject to any lien which may exist on the property. If Mr. Librizzi had found a buyer for his interest in the property, that incredibly foolish fellow would have taken title subject to a huge federal tax lien. The lien would follow the property and become the problem of the buyer, and the value of Mr. Librizzi's interest would never be more than it was at the moment of the sale. In contrast, in the transfer of ownership through joint tenancy, absent a statute such as §700.24, the lien is extinguished, and the survivor takes all. In short, obtaining property through survivorship is different from buying it.

Section 700.24 both affirms the right of survivorship and somewhat limits it. The surviving tenant takes "the interest such deceased joint tenant could have transferred prior to death subject to such ... statutory lien." Notably, the statute does not say simply that the surviving tenant takes the interest of such deceased joint tenant subject to the lien. It is the interest the deceased "could have transferred prior to death." It does not seem to me to be unduly odd to say that "prior to death" was put in the statute for a reason, and the reason is to limit the reach of the lien in the case of a transfer of ownership through survivorship. The lien attaches to the value of the interest in the property "prior to death"; that value is, after all, what could have been transferred. Reading the statute this way is consistent, I believe, with the often repeated statement regarding joint tenancy that after death neither the deceased nor his estate has any interest whatsoever in the property.

Under this reading of the statute the IRS's interest in the property is worth less when the ownership is transferred under survivorship than it would have been if, while still alive, Mr. Librizzi transferred his interest to Ms. Librizzi and severed the joint tenancy. The statute, I think, tries to strike a balance between the rights of survivors and the rights of lien holders, sustaining the lien but putting a limit on the damage it can inflict on a survivor. For these reasons, I would find in favor of the innocent widow Librizzi and affirm the judgment of the district court.

 

 

[61-1 USTC ¶9410]In re Century Theatre Co., Debtor #30,024, City of Milwaukee, Appellant v. Title Guaranty Company of Wisconsin, et al., Appellees

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 13225, 289 F2d 731, 4/27/61, Aff'g unreported District Court decision

[1954 Code Sec. 6321]

Priority of liens: Reorganization sale under Bankruptcy Act: Sufficienty of notice to lienor.--A motion by the City of Milwaukee to vacate a District Court order which authorized the sale of a debtor's mortgaged property which was also subject to Federal tax liens and liens of the City of Milwaukee was properly denied. A copy of the published notice of the hearing was mailed to the City Treasurer of the City of Milwaukee and was sufficient notice to the City.

John F. Kitzke, Milwaukee , Wis. , for appellant. Ralph M. Hoyt, Milwaukee , Wis. , for appellees.

Before SCHNACKENBERG and KNOCH, Circuit Judges, and MERCER, District Judge.

KNOCH, Circuit Judge:

The debtor, Century Theatre Co., filed a petition for reorganization on September 13, 1954 . The Court entered an order which, inter alia, restrained enforcement of liens against the debtor's property. The debtor's principal asset was a motion picture theatre, and the real estate on which it stood, in Milwaukee , Wisconsin . It was encumbered with mortgages aggregating $75,000.

City taxes for 1953 in the amount of $1,831.60 (plus interest) were delinquent and a lien on the realty. City taxes for 1954 in the amount of $2,254.02 became a lien on May 1, 1954 . The United States also held a tax lien.

On September 20, 1954 , the District Court entered an order setting a hearing for October 18, 1954 , on the debtor's petition to sell the property for $92,500, free and clear of all liens except for $75,000 mortgages, which were to be satisfied out of the purchase price. Tax liens were to follow the proceeds of the sale. Determination as to amounts and priorities of such liens were to be made thereafter. The order of September 20, 1954 , directed that notice of the October 18, 1954 , hearing was to be given by mailing the same to all known creditors.

The notice ¹ set out the fact that the hearing was being held to consider the petition and, in particular, the question of approving sale on the terms outlined above. One of the creditors was the City of Milwaukee which held liens for real estate taxes as indicated above.

Shortly before the hearing, another bid of $93,500 was received, which was increased to $95,000 at the hearing.

The hearing was not completed on October 18, 1954 , but was adjourned to November 1, November 15 and November 18, 1954 .

Notice of the October 18, 1954, hearing had been mailed to the City Treasurer of the City of Milwaukee . Assistant City Attorney Ewald Moerke appeared in response thereto on October 18, 1954 . He was also present at the adjourned hearings.

On November 18, 1954 , the prospective purchasers were allowed to withdraw their offers because the mortgagee refused to extend the due dates of the mortgages. Subsequently, on December 1, 1954 , the mortgagee filed a commitment to extend the due date. The $92,500 offer was renewed, and a petition for approval of the sale on the same terms as previously proposed was filed December 15, 1954 . The District Court set the matter for hearing on December 22, 1954 , and directed notice to be given by mail as before.

Notice ² was again mailed to the City Treasurer of the City of Milwaukee. The evidence shows that the notice was received in the City Treasurer's office and filed there, but that it was not transmitted to the office of the City Attorney.

At the hearing on December 22, 1954, (and later in his affidavit) Harvey C. Hartwig, counsel for the debtor, testified that he discussed the proposed sale with Mr. Moerke who had stated that he could not consent to the sale free of tax liens, but that he did not intend to appear at the hearing on December 22, 1954, because he would have no objections to offer. This statement has not been controverted.

On December 23, 1954 , the District Court authorized the sale on the proposed terms. No appeal was taken from that order. The sale was consummated. The defendant, The Title Guaranty Company of Wisconsin , issued a policy of title insurance guaranteeing the purchaser's title free of all liens except the aforesaid mortgages.

The United States , which consented to the sale, claimed priority for its tax lien over that of the City. The priority question was referred to the Referee in Bankruptcy, acting as a Master. The City took part in the lengthy hearings held by this officer. On February 21, 1958 , the Referee filed his Master's Report, in favor of the United States .

The City then, on March 4, 1958 , filed its objections to the report and moved to vacate the order of December 23, 1954 , in so far as it authorized sale free of the City's tax lien, on the ground that the City had no notice of the action. Affidavits in support of the motion stated that no copy of the order approving or confirming the sale was served on the City, and that the City Attorney was not made cognizant that there were insufficient funds to pay all tax liens until the time for appeal had expired. The City contended that authorization of such sale at a price which left nothing for the general creditors and which preserved inferior liens at the expense of superior liens, was erroneous.

The Title Guaranty Company of Wisconsin deposited with the District Court Clerk the amount needed to redeem the City's tax certificates ($6,146.29) to be turned over to the City of its motion to vacate were ultimately granted.

The District Court denied the City's motion to vacate the order of December 23, 1954 , and this appeal followed. The City states its position as follows:

I.

The District Court failed to obtain jurisdiction over the City of Milwaukee , a lien claimant. A lien claimant must receive a notice of hearing on any motion to sell a debtor's property free and clear of liens, and since the Federal Rules of Civil Procedure apply to bankruptcy, any notice not given in accordance with such rules is ineffective. The Federal Rules and Statutes of the State of Wisconsin require that in order to serve the City of Milwaukee either the Mayor or the City Clerk must be served. This was not done in the case at bar, and accordingly there was no jurisdiction over the City.

II.

The sale of the property by the District Court in the instant case where it was clear that the sale price would be insufficient to pay the liens and there was no equity for general creditors was improvident and a clear abuse of discretion.

III.

The District Court is without power to sell property of a debtor free and clear of a superior real estate tax lien and subject to an inferior mortgage lien in the absence of a positive consent of the superior lienor.

IV.

The City of Milwaukee cannot be charged with laches in the instant case, because the City always took timely action. Even if the City had delayed the action, however, no one was injured as a result of the delay and, therefore, the doctrine of laches cannot be applied.

It is not questioned by any of the parties hereto that Order 37 of the General Orders in Bankruptcy does provide that the Federal Rules of Civil Procedure shall be followed as nearly as may be in so far as those Rules are not inconsistent with the Bankruptcy Act and the General Orders.

Rule 5(a), on which the City relies, provides for service of written notices on parties affected thereby and states that no service need be made on parties in default for failure to appear except for pleadings asserting new or additional claims for relief against them, which are to be served as provided for service of summons in Rule 4. Rule 4 directs service on municipal corporations by delivery to the chief executive or in the manner prescribed by the law of the State involved. Wisconsin statutes [Sec. 262.09(2)] provide for service on the mayor or clerk of a city.

Federal Rules of Civil Procedure, Rule 5(b) provides:

* * * Service * * * shall be made by delivering a copy to him or by mailing it to him at his last known address * * * Service by mail is complete upon mailing.

The City of Milwaukee in the case before us was not a party in default. No new claim for relief was being made against a party in default. Service by mail was sufficient.

The Bankruptcy Act sets up its own rules on service, however, [11 U. S. C. 520 and 11 U. S. C. 607] which respectively provide:

Whenever notice is to be given under this chapter, the court shall designate, if not otherwise specified hereunder, the time within which, the persons to whom, and the form and manner in which the notice shall be given. Any notice to be given under this chapter may be combined, whenever feasible, with any other notice or notices to be given under this chapter.

and

* * * Except where otherwise provided in this chapter, the judge may from time to time enter orders designating the matters in respect to which, the persons to whom, and the form and manner in which notice shall be given.

The City of Milwaukee was a creditor. Its address was the City Hall, Milwaukee . The District Court held that notice addressed to the "City of Milwaukee , City Hall, Milwaukee , Wisconsin " would have been sufficient; that mailing the notice to the officer charged with collection of taxes constituted more than adequate compliance with the Court's order. We agree. The full terms of the proposed sale were set out in the notice. The City failed to appear and object to the order. No appeal was taken. The City's objections may not now be heard.

We have also considered the other contentions made by the City. Apart from the fact that these matters could have been raised at the hearing on December 22, 1954, (and adverse rulings could have been appealed) none of these contentions alters our conviction that the District Court's denial of the motion to vacate the order of December 23, 1954, or, alternatively, to order the deposited fund paid to the City, must be affirmed.

¹ UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN.

In the Matter of CENTURY THEATRE CO., a Wisconsin corporation, Debtor.

No. 30024

PROCEEDINGS FOR THE REORGANIZATION OF A CORPORATION UNDER CHAPTER X OF THE BANKRUPTCY ACT NOTICE.

TO THE CREDITORS AND STOCKHOLDERS OF DEBTOR:

NOTICE IS HEREBY GIVEN that a hearing will be held in the above named court in its courtrooms in the Federal Building, in the City of Wilwaukee, State of Wisconsin, on the 18th day of October, 1954, at 10:00 o'clock A. M., to consider Debtor's verified petition filed herein, and particularly approval of agreement for the sale of Debtor's theatre property and contents for ninety-two thousand five hundred ($92,500.00) Dollars free and clear of all liens and encumbrances, excepting first mortgages for seventy-five thousand ($75,000.00) Dollars, to L. F. Gran on behalf of a corporation to be organized by him in accordance with the terms of offer filed herein, fixing a broker's compensation on sale, and directing that all tax liens follow the proceeds of said sale, and determination as to the amount and priorities of said liens be made thereafter and to consider all other questions which may be presented to the court at such hearing in reference to said petition and said sale.

Any offers for the purchase of said assets at higher prices are solicited by the undersigned.

Dated at Milwaukee , Wisconsin , this 20th day of September, A. D. 1954.

CENTURY THEATRE CO. a Wisconsin Corporation DEBTOR.

Hartwig & Westfahl Attorneys for Debtor 238 W. Wisconsin Avenue , Milwaukee , Wisconsin

² UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN.

In the Matter of CENTURY THEATRE CO., a Wisconsin corporation, Debtor.

No. 30024

PROCEEDING FOR THE REORGANIZATION OF A CORPORATION UNDER CHAPTER X OF THE BANKRUPTCY ACT, NOTICE.

TO THE CREDITORS AND STOCKHOLDERS OF DEBTOR:

NOTICE IS HEREBY GIVEN that a hearing will be held in the above named Court in its courtrooms in the Federal Building, at Milwaukee Wisconsin, on the 22nd day of December, 1954, at 1:45 o'clock P. M., to consider Debtor's verified petition filed herein, and particularly approval of agreement for the sale of Debtor's theatre property and contents for Ninety-two Thousand five hundred ($92,500.00) Dollars, free and clear of all liens and encumbrances, excepting principal of mortgages, for Seventy-five thousand ($75,000.00) Dollars, in accordance with terms of offer filed herein, directing that all tax liens follow the proceeds of said sale and that the validity, amount and priority of said liens be determined at a later date, and to consider all other questions which may be presented to the Court at such hearing in reference to said petition and said sale.

Dated at Milwaukee , Wisconsin this 15th day of December, 1954.

CENTURY THEATRE CO. Debtor.

Hartwig & Westfahl Attorneys for Debtor 238 W. Wisconsin Avenue , Milwaukee 3, Wisconsin

 

 

[60-2 USTC ¶9520]The First National Bank of Chippewa Falls, Plaintiff-Respondent v. Charles Henneman Co. et al., Defendants Andy Johnson et al., Defendants-Respondents, Chippewa County, a body corporate, Appellant

Wis. Supreme Court, No. 214, 103 NW2d 24, 5/3/60

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

Priority of liens: Federal and State law.--Under Federal law, the U. S. was entitled to funds remaining after the setting aside of sufficient amounts to satisfy the claims of two mortgagees. Under State law ( Wisconsin ), the county's liens for real property taxes were to be satisfied out of the funds set aside for the mortgagees.

Ingolf E. Rasmus and James B. Halferty, Chippewa Falls, Wis., for The First National Bank of Chippewa Falls. Marshall Norseng, Chippewa Falls, Wis., for Charles Henneman Co. et al. Marshall A. Wiley, Chippewa Falls, Wis., and George E. Rapp, Madison, Wis., for Andy Johnson et al. Eugene R. Jackson, District Attorney, and John Frampton, Chippewa Falls, Wis., for Chippewa County, Wis. Rob ert J. Kay, Assistant United States Attorney, Madison, Wis., Charles K. Rice, Assistant Attorney General, and Lee A. Jackson, A. F. Prescott and Joseph Kovner, Attorneys, Department of Justice, Washington, D. C., for the United States. Rob ert D. Sundby, Madison, Wis., and John F. Kitzke, Assistant City Attorney, Milwaukee, Wis., amici curiae.

An action to foreclose three real estate mortgages. The plaintiff is seeking foreclosure of a mortgage upon its complaint as to one property and the defendants, Andy and Violet Johnson, are seeking foreclosure of two mortgages upon their cross complaint as to the same property and two other properties of the defendant Charles Henneman Company, an insolvent debtor. The United States of America by counterclaim makes claim for tax lien priority against all the mortgaged property, and Chippewa county by its answer makes claim for lien priority as to real estate taxes accruing since the filing of notice of the United States lien. During the pendency of the action the entire property has been sold pursuant to stipulation of the parties and the sale proceeds and all moneys are now held by the clerk of the circuit court.

Under the facts found in this case the amount of the United States tax lien far exceeds the total sum realized from the sale of the debtor's property.

During the insolvency proceedings and pursuant to stipulation of the parties in the foreclosure action, an order was entered on April 26, 1955, directing that the real estate be sold by Frank Hauptmann, assignee and receiver in the insolvency proceedings for the price of $60,500, free of all liens of the parties, and that the proceeds of said sale be substituted in the foreclosure for the real estate itself. The order further provided for the payment of said sum of $60,500 to the clerk of court to be held by him under such conditions and restrictions as the court shall direct and to abide the outcome and final determination and judgment in this action. Also in accordance with the stipulation of the parties that he pay from such sum one-third of the 1955 real estate taxes on such properties to be charged pro rata against funds as allocated to each property on the sale thereof and the clerk on February 2, 1956, paid taxes accordingly in the amount of $900.40 and retains the balance of the sale proceeds in the form of United States savings bonds.

[ Lower Court Action]

The court found that pursuant to sec. 3672, 26 U. S. C. A., Int. Rev. Code (1939), now sec. 6323, the plaintiff and the defendants Andy and Violet Johnson are entitled to receive from the money so held by the clerk the amounts due for principal, interest, costs and attorneys' fees under the respective mortgages.

The court entered judgment as follows: That there was due and owing to the plaintiff on June 20, 1959, under the note and mortgage the sum of $6,121.36, principal, $1,525.69, interest, together with attorneys' fees as provided in said mortgage in the sum of $350, and $162.10 being the taxable costs and disbursements in this action, the total being $8,159.15 together with interest on the same at the rate of four and one-half per cent per annum from June 20, 1959. It found that there was due and owing to Andy Johnson and Violet Johnson as of June 20, 1959, principal and interest on the note and mortgage of February 9, 1948, the sum of $24,893.32, attorney's fees $650, taxable costs and disbursements $100, and that there was due and owing defendants Andy and Violet Johnson as of June 20, 1959, on the note and mortgage dated February 13, 1951, the sum of $1,137.70, attorney's fees $100, a total of the aforesaid sums of $26,881.02, together with interest thereon at the rate of four per cent per annum from the 20th day of June, 1959, until paid.

The court ordered the clerk to pay these respective sums to the plaintiff and defendants Andy and Violet Johnson out of funds remaining in his hands from the sale of the mortgage premises, and further adjudged that the clerk pay to the Internal Revenue Service of the United States the balance of the proceeds of the sale of the mortgaged premises remaining in his hands.

It is from this judgment that the defendant Chippewa county appeals.

[Opinion]

DIETERICH, Judge:

The Charles Henneman Company executed and delivered to the First National Bank of Chippewa Falls on January 6, 1948 , its promissory note in the amount of $35,000 secured by a first mortgage on lots four, five and six, block nine, Allen's Addition to the city of Chippewa Falls. The mortgage was recorded in the office of the register of deeds for Chippewa county on January 9, 1948 .

On February 9, 1948 , the Charles Henneman Company executed and delivered its promissory note in the amount of $20,000 to Andy Johnson and Violet Johnson. The note was secured by a mortgage on lots four, five and six, block nine, Allen's Addition, lot eight, block five, Allen's Addition and the east one-half of lot one, block five, Mansfield's Addition. This mortgage was recorded in the register of deeds' office in the county of Chippewa on February 10, 1948 .

On October 29, 1951 , another mortgage was executed for $20,000 to Andy Johnson and Violet Johnson, which recited:

"The north half of lot one, block five, Mansfield 's Addition to the city of Chippewa Falls .

"This mortgage is given to correct the description as to the above described mortgaged premises which were erroneously described as the east half of lot one, block five, in that certain mortgage between the same parties, dated February 9, 1948, and recorded in the office of the register of deeds for Chippewa county, in volume 154 of mortgages, page 43, document no. 247938."

This corrected mortgage was recorded in the office of the register of deeds of Chippewa county on November 2, 1951 .

The United States of America filed a tax lien on April 20, 1951 , with the register of deeds of Chippewa county against the real estate of the Charles Henneman Company in the amount of $96,827.82, pursuant to the provisions of the Internal Revenue Code.

The pleadings disclose that Frank Hauptmann was appointed assignee under the provisions of the Wisconsin insolvency statutes on January 11, 1954 . The foreclosure proceedings were commenced on May 14, 1954 .

[Foreclosure Stipulation]

The following stipulation was filed as a part of the foreclosure proceedings:

"It is hereby stipulated in this assignment for benefit of creditors proceedings, by the undersigned, who are parties plaintiff and defendant respectively in the action of foreclosure in this court entitled The First National Bank of Chippewa Falls, a corporation, v. Chas. Henneman Co., et al., which is now pending, that the sale by the assignee for benefit of creditors, namely, Frank Hauptmann, of all of the remaining assets, real and personal, of the Chas. Henneman Co., for the total sum of $62,500 is hereby approved, and the funds to be allocated as to selling price as follows:

"Lots four, five and six, block

nine, Allen's Addition to the

city of 

Chippewa

 Falls .....................         $49,000

Lot
 eight, block five, Allen's Addition

to the city of 

Chippewa

Falls ......................................           4,500

North one-half of lot one, block

five, 

Mansfield

's Addition to the

city of 

Chippewa
 
Falls

 .....................           7,000

All remaining personal property ............           2,000

                                                     $62,500

 

"It is stipulated and agreed that the sales proceeds of the real estate aforementioned, shall be substituted in the said foreclosure action for the real estate itself, with the parties to the said action having the same priorities, liens and rights in such proceeds as they would have had in said real estate.

"It is further understood and agreed that this stipulation is contingent upon the release by the proper governing authority of Chippewa county, Wisconsin, of its tax liens which have accrued or will accrue through its purchase of the tax certificates covering the aforesaid real estate covering the years 1951 and subsequent thereto, substituting the sales proceeds aforementioned in place of the real estate, the said county having the same priority, lien and rights in such proceeds as it would have had in the said real estate; and that the city of Chippewa Falls, Chippewa county, Wisconsin, shall release by proper governing authority, any tax lien it may have on the aforesaid real estate, substituting its claim against the sales proceeds of the real estate aforementioned, the said city to have the same priority, lien and rights in such proceeds, as it would have in the real estate.

"It is understood and agreed that the aforesaid offer of purchase and acceptance thereof by the said assignee for benefit of creditors provides that the said sale shall be closed on or before April 30, 1955 , and if sale is not completed by that date the offer shall be null and void. In event of failure to close said sale by April 30, 1955 , then this stipulation shall have no force and effect and shall be cancelled. It is understood and agreed that Frank Hauptmann, assignee for benefit of creditors, will, in accordance with the requirements of the Wisconsin law, pay the pro rata share of the real estate taxes on the aforementioned real estate for the current year up to the time of conveyance by deed and transfer of possession to the purchasers. It is understood that this payment is without prejudice as to any claim of priority of the United States income excess profits and declared value excess profits tax lien and is made solely for the purpose of getting a record title to the real estate which is merchantable at the earliest possible date.

"Chas. Henneman Co., itself and by Frank Hauptmann, its assignee for benefit of creditors, does, in consideration of the foregoing agreement, waive any and all equity of redemption it may have in the aforesaid real estate and does expressly approve the said sale."

Pursuant to said stipulation, the court entered the following order directing sale:

"In accordance with the stipulation on file herein, executed by Charles Henneman Co., Andy Johnson and Violet Johnson, the United States of America and Frank Hauptmann as assignee for the benefit of creditors of Charles Henneman Co., either personally or by their respective attorneys and in accordance with a resolution passed by the county board of supervisors, Chippewa county, Wisconsin .

"Now, therefore, on motion of the attorneys for each and all of the parties,

"It is ordered and directed that the real estate which is the subject of this foreclosure by the plaintiff and the defendants, Andy Johnson and Violet Johnson, be sold to Albert Perrenoud, Howard H. Post, Norman J. Nelson and Arthur R. Perrenoud, for the total price of $60,500, free and clear of any and all liens of The First National Bank of Chippewa Falls, the United States of America, Andy Johnson and Violet Johnson and said Chippewa county, the funds of said selling price to be allocated . . . (as set forth above).

"The said sales proceeds from the real estate aforementioned, based on aforesaid allocation of value, shall be substituted in this foreclosure action for the real estate itself, with each of the parties to this action having the same priorities, liens and rights in said proceeds as they, it, he or she would have had in the aforesaid described real estate.

"Further it is ordered that the said sum of $60,500 shall be paid over to John Ritzinger, clerk of this court, to be held by him under such conditions and restrictions as the court shall direct and to abide the outcome and final determination and judgment in this action.

"In accordance with the terms of the stipulation referred to above, the said clerk of court, at such time as the 1955 real estate taxes are determined and levied on aforesaid real estate, shall pay one-third of the 1955 tax thereon as the pro rata share of seller, in accordance with the sales agreement. Said expense to be a charge pro rata against the funds as allocated above."

The following receipt dated July 6, 1955 , was executed by the clerk of the circuit court for Chippewa county:

"Received of Frank Hauptmann, receiver of Charles Henneman Co., the sum of $60,500, with which I agree to purchase U. S. Savings bonds in said amount; the bonds to be held by me and my successors in office to abide the judgment of the court in this action as to disposition of said funds.

"Further agreed that the bonds shall be placed for safe keeping with W. O. Kelly, Chippewa county treasurer and his successors in office and the actual control over the said bonds shall be joint with said Chippewa county treasurer."

[Question of Lien Priorities]

The only question on the appeal before this court is the allocation and distribution of the amount of $60,500 in government bonds in the possession of the clerk of the circuit court from the sale of the real estate on the basis of priority of the respective mortgagees, United States government tax lien and the Chippewa county delinquent real estate taxes.

[Priority of Mortgages and Federal Tax Lien]

The priority of the federal tax lien is controlled exclusively by federal law. The Charles Henneman Company was insolvent and an assignee and receiver had been appointed under the Wisconsin insolvency statute prior to the foreclosure proceedings. The stipulation provided that the sales proceeds of the real estate be substituted in the foreclosure action for the real estate itself, with the parties to have the same priorities, liens and rights in such proceeds as they would have had in the real estate.

Sec. 3670, 26 U. S. C. A., Int. Rev. Code, provides:

"Property subject to lien. If any 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 such person. 53 Stat. 448."

Sec. 3672, 26 U. S. C. A., Int. Rev. Code, provides:

"Validity against mortgagees, pledgees, purchasers, and judgment creditors.

"(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector.

"(1) Under state or territorial laws. In the office in which the filing of such notice is authorized by the law of the state or territory in which the property subject to the lien is situated, whenever the state or territory has by law authorized the filing of such notice in an office within the state or territory; . . ."

In United States v. New Britain (1954), 347 U. S. 81, 88, 74 Sup. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191], the court said:

"The United States is not interested in whether the state receives its taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien."

See: Michigan v. United States (1943), 317 U. S. 338, 63 Sup. Ct. 302, 87 L. Ed. 312 [43-1 USTC ¶9225, 10,002].

Under the present status of the federal law the federal tax lien attaches to all property belonging to the taxpayer and although the determination of property rights belonging to the taxpayer is a matter of application of state law, the priority of a government lien against such property is controlled by federal law. In the New Britain case (supra), the United States supreme court established the principle of "first in time, first in right," and the federal statutes specifically provide that the government lien shall not be valid as against liens filed prior to the filing of the notice by the collector. Sec. 3672, 26 U. S. C. A., Int. Rev. Code. Therefore, where, as here, there is a mortgage, recorded pursuant to state law prior to the recording of the federal tax claim, then the government can only resort to those proceeds from the sale of the property which are in excess of the mortgage indebtedness for satisfaction of its lien. River Rouge Savings Bank v. Victor Building Co. (1960), -- Mich. --, 101 N. W. (2d) 260 [60-1 USTC ¶9337].

It may be stated at this point that the mortgage of the Johnsons recorded on the 29th day of October, 1951, (the original mortgage being recorded subsequent in point of time to the notice filed by the government) merely corrected the description of the real estate, no consideration having passed at that time. The record discloses that it was the clear intent of the Charles Henneman Company to secure the loan from the Johnsons by a mortgage on the north one-half of the lot owned by the company and not by the property described in the original mortgage to the Johnsons which property the company never owned.

The priority of the government's lien is only as to the excess of sale price over and above the sums due the First National Bank of Chippewa Falls and the Johnsons by virtue of their prior recorded mortgages. After the amount available to apply on the federal tax lien has been set aside, state law is then applicable to determine the priorities between the mortgages and the real estate tax sale certificates. Samms v. Chicago Title & Trust Co. (1953), 349 Ill. App. 413, 111 N. E. (2d) 172; River Rouge Savings Bank v. Victor Building Co., supra. See for a discussion of the problem: 13 The Business Lawyer (1958 No. 4), Certain Aspects of the Priority of Tax Liens, p. 642; American Bar Asso. Sec. of Taxation (1959 meeting), Report of the Committee on Federal Tax Liens and Collection Proceedings, p. 149; 83 Reports of American Bar Asso. (1958), Report of the Special Committee on Federal Liens, p. 454.

Distribution of the proceeds of the sale price in the hands of the clerk of the circuit court

The trial court shall determine and set aside out of the proceeds of the sale price the total sum due and owing to the first mortgagee, First National Bank of Chippewa Falls , and the mortgagees, Andy Johnson and Violet Johnson, plus their respective interest, taxable costs, disbursements and attorneys' fees. The balance of said money shall be paid to the United States Government as and for complete liquidation of its lien and claim for unpaid federal taxes.

There being nothing left for distribution in so far as the real estate tax lien is concerned under the federal law, we now apply the state law as to priorities as between the First National Bank of Chippewa Falls, mortgagees, Andy and Violet Johnson, mortgagees, and Chippewa county real estate tax lien.

Priorities as between mortgagees and real estate tax liens under state law

Sec. 70.01, Stats. 1951, provides:

"General property taxes; upon whom levied. Taxes shall be levied, under the provisions of this chapter, upon all general property in this state except such as is exempted therefrom. Real estate taxes shall be deemed to be levied when the tax roll on which they are extended has been delivered to the local treasurer with his warrant for collection. When so levied such taxes shall be a lien upon the property against which they are assessed, superior to all other liens, effective as of May 1 in the year when levied, . . ."

"70.02 Definition general property. General property is all the taxable real and personal property defined in sections 70.03 and 70.04 . . ."

"70.03 Definition real property. The terms 'real property,' 'real estate' and 'land,' when used in this title, shall include not only the land itself but all buildings and improvements thereon, and all fixtures and rights and privileges appertaining thereto."

"70.10 Assessment, when made. The assessor shall begin as soon as practicable after the April election, if he is elected at such election, otherwise as soon as practicable after January first to assess all the real estate and personal property as of the close of the first day of May in each year . . ."

"70.17 Lands, to whom assessed; buildings on exempt lands. Real property shall be entered in the name of the owner, if known to the assessor, otherwise to the occupant thereof if ascertainable, and otherwise without any name. The person holding the contract or certificate of sale of any real property contracted to be sold by the state, but not conveyed, shall be deemed the owner for such purpose. The undivided real estate of any deceased person may be entered to the heirs of such person without designating them by name. The real estate of an incorporated company shall be entered in the same manner as that of an individual. Improvements on leased lands may be assessed either as real property or personal property."

"70.32 Real estate, how valued. (1) Real property shall be valued by the assessor from actual view or from the best information that the assessor can practicably obtain, at the full value which could ordinarily be obtained therefor at private sale . . ."

This court has held in Will of Koehring (1939), 230 Wis. 533, 538, 284 N. W. 523:

". . . in the absence of a clear and unambiguous statute specifically denying the state's right of priority, its right thereto exists as to all taxes by virtue of the common law."

The amended complaint discloses that the real estate taxes assessed for the years 1951, 1952 and 1953, were outstanding and unpaid.

In Fitch v. Wisconsin Tax Comm. (1930), 201 Wis. 383, 230 N. W. 37, this court said:

"In the very opening sentence of Cooley on Taxation (3d ed.) we find it stated that 'Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs. The state demands and receives them from the subjects of taxation within its jurisdiction that it may be enabled to carry into effect its mandates and perform its manifold functions, and the citizen pays from his property the portion demanded, in order that, by means thereof, he may be secured in the enjoyment of the benefits of organized society. The justification of the demands is therefore found in the reciprocal duties of protection and support between the state and those who are subject to its authority, and the exclusive sovereignty and jurisdiction of the state over all persons and property within its limits for governmental purposes.'

"The exaction of a tax can only be justified from one who is enjoying the protection of government either for himself or for his property."

The entire real estate, including all mortgagors' and mortgagees' interests in it, is assessed against the property as one unit, as defined in the statute and the rights of every person claiming any interest in the property by virtue of any lease, contract, mortgage or otherwise, is subject to the unpaid real estate tax liens. Aberg v. Moe (1929), 198 Wis. 394, 224 N. W. 132, 226 N. W. 301.

Sec. 70.01, Stats., accords priority to general property taxes and when levied such tax liens have priority over all other liens which would include recorded mortgages. River Rouge Savings Bank v. Victor Building Co., supra, Will of Koehring, supra.

It therefore follows that the mortgage interests of the First National Bank of Chippewa Falls and Andy Johnson and Violet Johnson are subject to the payment of the outstanding taxes.

The trial court shall determine the amount of real estate taxes due and unpaid on lots four, five and six, block nine, Allen's Addition, and they shall be paid in inverse order so as to maintain the integrity of the first mortgage. In other words, the taxes shall be paid out of the moneys set aside for the second mortgage and if such sum is not sufficient such remaining balance shall be paid out of the sums of money held for payment of the first mortgagee. The remainder of the properties are covered by a first mortgage held by the Johnsons, and are subject and chargeable for the taxes due on each respective parcel. Inasmuch as the proceeds of sale have been substituted for the land, any rights of subrogation of any of the parties should be preserved in the judgment. All rights to redeem from the sale of the mortgaged lands have in effect been waived by the stipulation.

The judgment of the trial court is reversed, with instructions to enter judgment in accordance with this opinion.

By the Court.--Judgment reversed, with instructions for the trial court to enter judgment in accordance with this opinion.