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82-2
USTC ¶9684] U.
S. District Court, Mid. Dist., Ga., Thomasville Div., Civil Action
No. 81-71-THOM, Civil Action No. 81-72-THOM, Curtis
L. Muncy, Department of Justice, Opinion SMITH, District Judge: The two cases above identified were consolidated for disposition and the parties have filed cross-motions for summary judgment and briefs in support thereof and, since it is clear that there is no controversy concerning the facts, the cases are properly before the Court for summary disposition. The In
February, 1978, the Defendant Tillman J. Dean entered into a lease
contract with L. Mervin Barbree and, at the same time, the
Defendant Otis C. Dean, Jr. entered into a lease contract with
Barbree. Under the terms of these lease agreements the Deans
became obligated to pay to Barbree annual rental payments in
certain amounts and one of the rental installments was due to be
paid on or before On On September 25, 1979, a similar Notice of Levy was served upon Otis C. Dean, Jr. by which a demand was made upon him for an amount necessary to satisfy the tax lien. On
January 15, 1980, a final demand was made upon the Defendant
Tillman J. Dean for the amount set forth in the Notice of Levy,
but Dean refused and has continued to refuse to honor the levy and
surrender to the On the
same date, January 15, 1980, a final demand was made upon
Defendant Otis C. Dean, Jr. for the amount set forth in the Notice
of Levy but Dean refused and has continued to refuse to honor the
levy and surrender to the Under the terms of his lease agreement with Barbree, the Defendant Tillman J. Dean was obligated to make a rental payment for the year 1980 on or before January 15, 1980 and on January 2, 1980, Dean made the rental payment to Barbree in the amount of $18,260.00. Under
the terms of his lease agreement with Barbree, the Defendant Otis
C. Dean, Jr. was obligated to make a rental payment for the year
1980 on or before The right of the taxpayer, Barbree, to receive the rental payments for the year 1980 from the respective Defendants was clear and unconditional and was in existence at the time the levies above referred to were served on them and was an adequate interest in, or right to, property to which the Internal Revenue Service's levies clearly attached; and §6332(a) of the Internal Revenue Code of 1954 provides that any person in possession of, or obligated with respect to property or rights to, property subject to levy must surrender such property or discharge such obligation to the Secretary upon service of the levy. The
Defendants contend that since the rental payments for the year
1980 were not required to be paid until It is the Court's view that §301.6331-1(a) of the regulations adopted by the Secretary of the Treasury and the decisions in St. Louis Union Trust Company v. United States [80-1 USTC ¶9282], 617 F2d 1293 (8 Cir. 1980), and J. A. Wynne Co. v. R. D. Phillips Construction Co. [81-1 USTC ¶9305], 641 F2d 205 (8 Cir. 1981), and United States v. Citizens and Southern National Bank [76-2 USTC ¶9665], 538 F2d 1101 (5 Cir. 1976), make the defense here asserted by the Defendants unavailing. Consistent with the foregoing, the Court concludes that the Defendants' motions for summary judgment should be denied and the Plaintiff's motions for summary judgment in the respective cases should be and are hereby sustained and judgment will be entered accordingly. Judgment Pursuant to an Opinion and Order of Judge J. Robert Elliott, United States District Court Judge, signed on November 9, 1982 and Filed on November 10, 1982 and for the reasons contained therein; IT IS
ORDERED [81-2
USTC ¶9805] U.
S. District Court, No. Michael
J. Yamaguchi, Assistant United States Attorney, Opinion HENDERSON, District Judge: The
government filed this suit to enforce an On
November 27, 1978, the Norton performed trucking services for Guittard Chocolate Co. (hereafter "Guittard"), the defendant in this levy enforcement action. In late 1978, Norton factored its accounts to a company called Transport Clearings (hereafter "Transport"). As a result, Transport came into possession of certain invoices billed by Norton to Guittard. In December, 1978, Transport made a claim against Guittard for $40,400 on factored invoices billed from Norton to Guittard. Guittard denied liability on the invoices, contending that they had already paid the amount claimed by Transport directly to Norton. At the time that Transport made its claim against Guittard, Guittard had also received services from Norton on non-factored, unpaid invoices totalling $12,240. Guittard advised Norton that if it (Guittard) was forced to pay Transport on the disputed $40,400 claim, any amount paid to Transport would be used as an offset against the $12,240 in non-factored invoices then owing to Norton. The
Government filed notices of a federal tax lien in On
January 31, 1979, in a suit to which Guittard was not a party, an The
problem with this from Guittard's point of view was that, prior to
the entry of judgment by the Indiana court, Guittard had paid
directly to Norton some $30,584 on invoices dated prior to On July 3, 1979, the government served a notice of levy on defendant Guittard based on the unpaid assessment against Norton. On
August 15, 1979, the On March 24, 1981, Transport and Guittard entered into a settlement agreement resolving Transport's claim for $40,400 first made in December, 1978. Under the terms of the agreement, Guittard is to pay Transport $20,000 in full settlement of the claim for invoices totalling $40,400. This settlement agreement is subject to the approval of the Bankruptcy Court, due to the fact that Transport is now in bankruptcy. The approval of the Bankruptcy Court apparently has not yet been received, and none of the $20,000 settlement has been paid to Transport or its trustee in bankruptcy. On May
12, 1981, the government filed the instant suit to enforce an On October 21, 1981, an Order was entered denying defendant Guittard's motion to dismiss, granting the government's motion for partial summary judgment on the levy, and denying the government's motion for partial summary judgment as to the penalty. The
Levy Though
the defendant raised several contentions in support of its motion
to dismiss, we note that in an action by the government to enforce
an Thus, of the arguments raised by Guittard in support of its motion to dismiss, the only one properly before the Court was the claim that, at the time of the levy, Guittard had no property belonging to the taxpayer Norton. This contention was based on the premise that Guittard had a setoff against its debt to Norton at the time that Transport made its $40,400 claim against Guittard in December of 1978. The notice of levy was not served until July 3, 1979, seven months after the setoff allegedly came into existence, negating any debt owed to Norton by Guittard. On the
question of whether a party is in possession of the taxpayer's
property for purposes of the validity of an Thus,
defendant's motion to dismiss required a determination of whether,
under Under Guittard,
however, claims that because it had a right of setoff against the
debt to Norton that arose in December of 1978 when Transport made
its claim, it had no property belonging to Norton at the time of
the levy in July of 1979. Again we must look to Under
the law of California, a setoff is the right of a judgment debtor,
who has become the owner of a judgment or claim against his
judgment creditor, to go into the court that entered the judgment
against him/her (the judgment debtor) and have his/her judgment or
claim set off against his/her creditor's judgment. Highsmith v.
Lair, 44 Guittard
was not at any time relevant to this enforcement action a judgment
debtor of taxpayer Norton. Thus, under Up until
the settlement agreement with Transport, Guittard insisted that it
was not liable on the claim by Transport for $40,400. If Guittard
was not liable to Transport, no setoff against taxpayer Norton
would ever arise. At best, what Guittard appears to have had in
December of 1978 when Transport made its claim is a potential
defense to a claim that might one day be filed by Norton. Guittard
cited no Guittard could have argued, of course, that by entering into a settlement agreement with Transport that required Guittard to make payments to Transport, the claimed setoff against Norton was just as effective as if some payment had in fact been paid to Transport. Even accepting this argument, the settlement agreement was not entered into until March 24, 1981, close to two years after the government served its notice of levy on Guittard. Thus at all times relevant to this enforcement action, Guittard was in possession of taxpayer Norton's property in the form of a debt in the amount of $12,240. Guittard contended that the date of the levy, not the date of the tax lien, determines whether the party levied against had any property belonging to the taxpayer. Logically, of course, if the party levied against owed money to the taxpayer on the date of the lien, but paid that amount over to the taxpayer prior to the service of notice of levy, the levy would be invalid because the party levied against would have no property belonging to the taxpayer. Guittard claims that its right to setoff effectively negated any interest that Norton had in the money at issue, and that that right to setoff was effective before Guittard received notice of the levy. The contention made by Guittard is really one concerning the priority of the federal tax lien as against the priority of the interest claimed under state law by the party levied against. As noted above, the defense of lien priority cannot be raised in an action to enforce a levy. United States v. Sterling National Bank, supra, 360 F. Supp. at 922-923. Nonetheless, for the edification of counsel, we make the following observations on the issue of lien priority. Even
assuming for the purpose of argument that Norton [Guittard] had
some right negating its debt to Norton, it is federal law that
determines whether a state-recognized property interest has become
so perfected as to defeat a federal tax lien. United States v.
Pioneer American Ins. [63-2 USTC ¶9532], 374 The assessment against the taxpayer was made in November of 1978. Guittard contended that its right to setoff arose in December of 1978. Even if Guittard were correct in its contention that the right to setoff was established in December, 1978, the federal tax lien attached to the debt first and thus takes priority over Guittard's claimed interest. The
Penalty The government in its motion for partial summary judgment sought a penalty equal to 50% of Guittard's liability on the tax levy. Under 26
Though Guittard was incorrect in its contention that it had no property belonging to taxpayer Norton at the time of the levy, the existence vel non of a bona fide dispute is not determined by reference to which party prevails on the merits of the underlying claim. See United States v. Sterling National Bank, supra, 494 F. 2d at 923. Guittard's setoff claim was made in good faith, thus giving rise to a bona fide dispute as to the existence, and therefore the amount, of property subject to the levy. Furthermore,
under the circumstances of this case, failure to impose a penalty
will not detract from the Congressional purpose of requiring
compliance with tax livies. Conclusion Under the foregoing analysis, at the time of the levy, Guittard was in possession of a $12,240 debt belonging to taxpayer Norton. Guittard's motion to dismiss, treated as a motion for summary judgment, was therefore denied as no ground in defense of the government's enforcement action was established. Accordingly, the government's motion for partial summary judgment in the amount of $12,240 plus interest and costs from the date of the levy was granted. A bona fide contention as to the existence of property subject to the levy having been raised by Guittard, the government's motion for partial summary judgment in the amount of a 50% penalty was denied. [58-1 USTC ¶9351]Louis Freeman, Trustee in Bankruptcy of Brokol Manufacturing Company v. Joseph F. J. Mayer, District Director of Internal Revenue for the District of New Jersey, Appellant (CA-3),
A.
Robert Rothbard, Before GOODRICH, MCLAUGHLIN and HASTIE, Circuit Judges. Opinion
of the Court HASTIE, Circuit Judge: This dispute between a trustee in bankruptcy and a Collector of Internal Revenue concerns the status and disposition of property of Brokol Manufacturing Company, presently a bankrupt, which the Collector reduced to possession and wishes to retain for delinquent federal taxes. The trustee, on the other hand, has asserted that the property in question is subject to administration in bankruptcy where the tax lien, though recognized, must yield priority to certain wage claims and administrative expenses as provided in Section 67c of the Bankruptcy Act. 11 U. S. C., 1952 ed., §107c. The matter was originally adjudicated by a bankruptcy court [53-1 USTC ¶9319], but on appeal this court held that the controversy did not lie within bankruptcy jurisdiction. In re Brokol Mfg. Co., 1955, 221 Fed. (2d) 640 [55-1 USTC ¶9357]. Thereafter, the trustee initiated this plenary suit against the District Director of Internal Revenue, the successor to the Collector, and recovered judgment for the amount in dispute. D. N. J. 1957, 152 Fed. Supp. 383 [57-2 USTC ¶9756]. This appeal followed. [Facts] The
involuntary petition, pursuant to which Brokol Manufacturing
Company was adjudicated bankrupt, was filed the day after the
taxing authorities had levied upon all property at the Brokol
place of business in distraint for federal taxes. For purposes of
this case, the circumstances are sufficiently disclosed by an
undisputed affidavit of the Deputy Collector who made the levy. He
says that, acting under warrants authorizing him to distrain for
taxes in the amount of $5,742.25, ". . . he seized the goods,
chattels, effects and all property or rights to property of the
said taxpayer at its premises, 89 Madison Street, Newark, New
Jersey, on It also appears without dispute that federal tax assessments against Brokol Manufacturing Company as implemented by tax liens duly filed in the appropriate Register's Office aggregated almost $20,000, although the actual levy in suit was made pursuant to the warrants for distraint totaling only $5,742.25. The tangible property thus seized was later sold, without prejudice to the present controversy, for $7,100. In these circumstances the trustee in bankruptcy properly concedes that the amount of $5,742.25, plus proper costs and expenses, can lawfully be retained by the taxing authorities. The present record shows that the Collector's costs, including a charge by Brokol's landlord for the use of the premises after their padlocking by the taxing authorities, aggregated $1,749.51. This sum, added to the face amount of the warrants, gives the taxing authorities an unchallenged right to hold assets of the taxpayer worth $7,491.76. However, the taxing authorities realized only $7,100 from the sale of all of Brokol's tangible property. In other words, the sale yielded no surplus over the amount as to which the taxing authorities had unqualified priority. It follows that the fact, much discussed in this briefing and argument, that the government had a lien for taxes greatly in excess of the face of the warrants upon which the distraint was based, is of no importance in this case. For regardless of that fact, the right of the tax collector to retain the entire $7,100 realized from the sale of tangible property is clear. [Money
Collected After Bankruptcy] The only doubtful matter in this case is the proper disposition of certain additional money realized by the Collector from another source. The court below found, and the record indicates that, after the petition for bankruptcy was filed, the distraining tax authorities collected $2,667.37 from certain of Brokol's customers, apparently on account of work very recently performed by Brokol and not paid for at the time the Collector levied upon all of Brokol's personal property and closed its establishment. The only question of substance in the present posture of this case is whether the taxing authorities may keep this money or whether they must surrender it to the trustee in bankruptcy. Section
67b of the Bankrputcy Act, 11 U. S. C., 1952 ed., §107b,
recognizes that a tax lien may be so impressed upon the property
of an insolvent as to be valid against a trustee in bankruptcy. In
this case the Collector says his actions amounted to such an
effective and exclusive appropriation of debts owed Brokol to the
satisfaction of Brokol's tax obligations. But Section 67c of the
Bankruptcy Act qualifies Section 67b by providing that "valid
. . . liens for taxes or debts owing to the United States . . . on
personal property not accompanied by possession of such property .
. . shall be postponed in payment to the debts [for wages and for
expenses of bankruptcy administration] specified in clauses (1)
(2) of subdivision a of Section 64 of this Act. . . ." 52
Stat. 877 (1938), 11 U. S. C., 1952 ed., §107c. Since, in order
to be situated beyond a trustee's reach under this subsection
property must be covered by a lien "accompanied by possession
of such property", it is arguable that this subsection has no
application at all to incorporeal property such as an ordinary,
debt, which is not a subject of possession in the common sense.
However, the courts have not found it too difficult to adopt the
lien concept and the possessory concept of distraint to the
seizure of choses in action, including ordinary debts for taxes.
See United States v. Liverpool & London & Globe Ins.
Co., 1955, 348 [No
Notice to Debtors] In this case the Deputy Collector seized everything within Brokol's place of business, padlocked the premises and posted appropriate notices of this distraint for taxes. But nothing beyond this was done by way of notice to debtors or attempted levy upon outstanding obligations. The following day the petition for bankruptcy was filed. It does not appear that the Collector even knew at that time who Brokol's creditors were. Certainly he had taken no steps to establish possessory dominion over any sum owed Brokol. It is clear, therefore, that whatever tax liens may in legal contemplation have attached to debts owed to Brokol no steps were taken sufficient to make these liens "accompanied by possession" of the debts. Therefore, their proceeds, as later collected, are subject to the priorities and procedures of bankruptcy administration indicated in Section 67c. Finally, it is to be noted that although the taxing authorities collected $2,667.37 owed to Brokol after bankruptcy, judgment below was for the trustee in the sum of $2,179.41, and the trustee has not appealed. This discrepancy between collection and award represents certain expenses incurred in the over-all effort to distrain for the Brokol tax indebtedness. Since all concerned have agreed to the deduction of some $500 of these expenses from the collections of outstanding debts we make no point of the matter. We note it because some similar issue contested in another case may present a question of substance. The judgment will be affirmed. [58-1 USTC ¶9468]In the Matter of Deputy Construction Company, Bankrupt U.
S. District Court, James P. D'Angelo, Trustee. William J. Hagan, Office of the Regional Counsel, Internal Revenue Service, for U. S. Findings
of Fact, Conclusions of Law and Opinion on Claim of Government The District Director of Internal Revenue for the District of Delaware has filed a claim against the bankrupt estate. The Trustee has objected to the claim. A priority status is demanded by the government on its claim based on the provisions of §64.A(5) of the Bankruptcy Act. The Trustee's objections to the claim are first because it was allegedly filed out of time; and secondly because the claim itself is not entitled to priority. Each of the two facets of the problem will be considered. It is fair to state a representative of the District Director of Internal Revenue office has attended most of the meetings of creditors of the bankrupt held in this proceeding. The
Timeliness of the Government's Claim LYNCH, REFEREE: The
bankruptcy proceeding was begun on The
Trustee filed a petition on Such bar
order was entered on On On or
about These are the salient facts bearing upon the timeliness of the government priority claim. I am
convinced that sufficient evidence was before the Court prior to It
appears from a reading of 3 Collier, Bankruptcy 57.11, and the
notes in the supplement thereto, that the government did not file
a new claim on This is not to say that undue liberality can be allowed in filing late claims,--the statute is adamant and exceptions to the necessity of filing fully and promptly should not be encouraged; this, however, is a case where the rule of amplification of a prior claim should be followed. In any event, the bar order served upon the government may have been properly construed as allowing the government to set within the return time. I find and conclude that time and hence that it should be allowed as timely. The
Propriety and Priority of the Government Claim Since my conclusion is that the claim has been filed within time, I must next determine if the claim is proper, and whether the claim can be given a priority status under §64.a(5) of the Bankruptcy Act as asserted by the government. This cited section provides: "* * * Sec. 64a.--The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment shall be *
* * "(5) Debts owing to any person, including the United States, who by the laws of the United States in (is) entitled to priority, and rent owing to a landlord who is entitled to priority by applicable State law; Provided, however, That such priority for rent to a landlord shall be restricted to the rent which is legally due and owing for the actual use and occupancy of the premises affected, and which accrued within three months before the date of bankruptcy." The Trustee argues that the government is not entitled to priority unless it can show it was entitled to priority on the date on which the petition in bankruptcy was filed, and furthermore the Trustee claims that the government must show that the original obligor was and is insolvent. A brief resume and discussion of the facts may help point up the basis of the decision I have reached in this case. The
bankrupt, Deputy Construction Co., was a The levy amounted to some $3765.07. It appears at that time Wayne Nichols was due approximately $3495.74 by Deputy Construction Co., it appears however that this amount was not payable at any one time but under the agreement between the bankrupt and Wayne Nichols sums were payable as, and when, the houses on which the contracting work had been done were sold. Although no evidence was presented on this point, the Trustee does not seem to dispute the fact that the following occurred. Some arrangement was made between the office of the District Director of Internal Revenue, by Mr. Gordy of the Deputy Construction Co., and by Wayne Nichols, by which Nichols was to receive payments when they became due, but out of these payments a certain proportion would be paid to the government in liquidation of the tax claim. The purpose of this arrangement was apparently to allow the bankrupt and Wayne Nichols to continue in business and allow the government to liquidate its claim against Nichols. Again, no express evidence was presented regarding this but from what evidence was presented it appears inferentially that only one house was sold after the agreement was reached by the District Director and the two other parties, and from the proceeds realized from the sale of the house the District Director was paid $240.00, and the balance of the amount due Mr. Nichols was paid directly to him. As a result, the government's claim is now computed to be approximately $2801.00. This amount is the sum arrived at by Mr. Nichols, and reflects the fact that the government has waived its right to insist upon payment to it of that portion of the proceeds paid to Nichols from the one sale, through which the government was paid part of its claim and Nichols was paid the balance of the monies due him on the particular job. It appears, therefore, that at the time of bankruptcy the government had perfected an assignment or lien or by reason of the levy which was honored by the Deputy Construction Co. The government does not make a claim for a lien priority but merely asserts its right to be paid as a fifth priority claimant under §64 of the Bankruptcy Act. Is the stand or position taken by the government proper? I conclude that it is. The government has shown that at the date of bankruptcy it had an assignment, at the very least, from Nichols giving it the right to demand from Deputy Construction Co. any monies which Deputy Construction was then bound to pay to Nichols. The Trustee argues that the government cannot assert a priority claim unless it shows that both Deputy Construction Co. and Wayne Nichols are insolvent. A
reading of §64 and of the original priority statute, 31 It has
been long held that taxes due the U. S. Government are encompassed
within the term "debts" due the U. S. Government. See Price,
269 The government, in this case, seeks only a priority in payment out of hands of the debtor's assignee or representative, which, in this case is the Deputy Construction Co. The problem has been raised many times before and in the actual situation presented the priority of the U. S. Government has been almost uniformly upheld. N. Y. v. Maclay, 288 U. S. 290, 77 L. Ed. 754, (1933); and see Annotation at 77 L. Ed. 757, 772; see also U. S. v. Mamxen, 307 U. S. 200, 83 L. Ed. 1222 (1939), and Annotation at 83 L. Ed. 1229. There is no question in this case but that there was an assignment of the debt to the U. S. Government prior to the bankruptcy. Cf. In re Hanson Bakeries, Inc. 103 Fed. (2d) 665, (C. C. A. 3 1939). I have examined all the cases cited by the attorneys for the government and the Trustee. A reading of U. S. v. Eiland, 223 Fed. (2d) 118 (C. C. A. 4 1955) [55-1 USTC ¶9487] will show that the position of the government in this case is well taken, at least as far as its claim of priority. Whether or not the holding of the Eiland case as far as the lien claim is correct, I need not decide at this time. See also In re Riggs, 51 Fed. Supp. 961, (E. D. Pa. 1943), and In re Waxaid Co., 55 Fed. Supp. 289 (D. Md. 1943). The claim of the government will be allowed a priority status under §64(5) of the Bankruptcy Act. The attorneys for the government and for the Trustee should enter into an agreement, setting forth the amount of the claim which is to be allowed to the government, and if such agreement cannot be reached then a hearing must be held to determine the precise amount. It must be noted, further, that there is no evidence that the debtor, Nichols, assigned his claim in any other way except to the Federal Government. In the claim filed, Nichols itemizes payments to be made to the government and to other parties. The Trustee should determine if there is any basis for allowing the claim to be paid to any party other than the Federal Government. This may be effectively done by requiring the persons named in the claim, the debtor, Nichols, and any other person who may be interested therein, to come into court and show reason why the claim should not be allowed to the Federal Government in its entirety. 63-1 USTC ¶9411]Paul L. Moskowitz, Trustee in Bankruptcy of the Riverside Painting Co., Inc., Bankrupt, Plaintiff v. E. J. Nelson, District Director of Internal Revenue, an agency of the United States Treasury, Defendant U.
S. District Court, East. Dist. Wis., No. 61-C-209, 218 FSupp 710,
3/25/63 Wickham, Borgelt, Skogstad & Powell, 828 N. Broadway, Milwaukee, Wis., for plaintiff. James Brennan, Federal Bldg., Milwaukee, Wis., for defendant. Opinion TEHAN, District Judge: Defendant has filed a motion to dismiss plaintiff's complaint on two grounds: 1. The complaint fails to state a cause of action on which relief can be granted. 2. The action is, in effect, one against the United States, and the United States has not consented to be sued in a proceeding of this nature. After the oral argument, further briefs were submitted by counsel for the parties and affidavits filed. The court has considered the pleadings, arguments of counsel and briefs and affidavits, and is prepared to make its decision. Plaintiff, as Trustee in Bankruptcy of the Riverside Painting Co. Inc. brings this action to avoid a preference and to recover a property transfer. Jurisdiction of these proceedings is claimed under provisions of §60(b) of the Bankruptcy Act, 11 U. S. C. A. 96(a), 67(b) and (c) of the Bankruptcy Act, 11 U. S. C. A. 107(b) and (c), and 70(e) of the Bankruptcy Act, 11 U. S. C. A. 110(e), and 28 U. S. C. A. 1346. [Bankrupt's
Assignment of Receivables] The
complaint alleges that certain creditors of Riverside Painting
Company, Inc., formerly known as Peter P. Woboril, Inc., on "That,
for value received, PETER P. WOBORIL, INC., a Wisconsin
corporation, has assigned, transferred and set over, and does
hereby assign, transfer and set over unto the District Director of
Internal Revenue, E. J. Nelson, and to The Woboril Company, a
Wisconsin corporation, all sums which may now be due or which may
hereafter become due from its several debtors designated on
several lists of accounts heretofore furnished to the Internal
Revenue Service, and to The Woboril Company, which are
incorporated herein by reference as though specifically set forth
herein, in the approximate total amount of $58,000.00, including
all amounts which may become due to it from Brant & Nielson
Co. under the Sales Agreement of This assignment is made as security to indemnify the said District Director of Internal Revenue for any waivers or forebearance made by the Internal Revenue Service with respect to the collection of its claims against the assignor; and to indemnify The Woboril Company for the aforesaid assumption of chattel mortgage lien obligation and the subrogation of the same to the claims of the Internal Revenue Service." The
assignment of accounts is dated The assignment of the chattel mortgage attached to the complaint as Fxhibit B, recites that Peter P. Woboril, Inc.: ".
. . does hereby sell, assign, transfer and set over unto, first,
the District Director of Internal Revenue, E. J. Nelson, and
secondly, The Woboril Company, a Wisconsin corporation, that
certain chattel mortgage made, executed and delivered by Brant
& Nielson Co., of the City and County of Milwaukee, State of
Wisconsin, to Peter P. Woboril, Inc., together with the
indebtedness thereby secured and unpaid thereon, which
indebtedness said Corporation covenants to be in the sum of
$30,000.00, said chattel mortgage being dated The
assignment is dated The complaint alleges that the effect of said assignments of accounts receivable and the chattel mortgage was to enable the defendant to obtain a preference of money due the bankrupt from said creditor, and that at the time of such transfer, defendant had reason to believe the bankruptcy was insolvent. The complaint further alleges that defendant has collected and has in his possession certain amounts paid to defendant by debtors of the bankrupt in the total amount of $1511.32 and that none of those accounts were in the possession of the defendant at the time of filing of the bankruptcy petition herein. The complaint also sets forth that the defendant, prior to the filing of the petition in bankruptcy, levied on certain of the accounts receivable by serving a notice of levy but that subsequent to and on the date of filing of the petition for bankruptcy, these levies were released, that subsequent to release of the levies and subsequent to filing of the bankruptcy petition, the respective debtors paid the defendant sums in the amount of $5588.65, and said accounts at all times after releases of levies and at the time of the payment of the sums were not in the possession of the defendant within the meaning of §67(c) of the Bankruptcy Act; that the debts owing bankrupt constituted personal property and were not accompanied by possession of the United States or the defendant at the time moneys were paid by the debtors to the defendant, and that pursuant to §67(c) of the Bankruptcy Act, the lien of the United States and the defendant is postponed in payment to claims for preferred wages and for expenses of administration. The complaint further alleges that bankrupt was indebted for wage claims for an undetermined sum for wages earned within four months of the filing of the bankruptcy. Plaintiff does not allege the existence of any other liens, statutory or consensual, against the property of the bankrupt. Plaintiff demands an avoidance of the assignment of the accounts receivable, and the assignment of the chattel mortgage and note, and prays that all of the property be turned over to plaintiff as trustee in bankruptcy, to be held and disbursed by him in accordance with §67(c) of the Bankruptcy Act. [Consent
to Suit] We will consider first the defendant's contention that the United States has not consented to be sued since the provisions of the Bankruptcy Act do not specifically authorize a suit against the United States in an action by a trustee for recovery of a voidable preference. Defendant relies on Abeken v. United States (Mo., 1939) [39-1 USTC ¶9269], 26 F. Supp. 170, in which the court after expressing doubts that the payment in question constituted a preference gave three reasons why the trustee could not recover, (1) aside from the Bankruptcy Act a creditor may be preferred by a debtor, (2) the United States is not a "person" within the meaning of the statute permitting the recovery of a preference, and, (3) the United States has not consented to be sued for the recovery of a preference. Plaintiff, however, claims that Congress has enacted a comprehensive statutory system to regulate bankruptcy and although the United States is not specifically mentioned in §60 of the Bankruptcy Act, §67(c) of the Act does expressly mention the United States, and so it is apparent that Congress intended that the United States be bound by its provision, and subject to suit. Plaintiff also relies on waiver of immunity by the United States in 28 U. S. C. A. 1346 (Tucker Act), which provides for jurisdiction in the district courts of the United States of "Any other civil action or claim against the United States not exceeding $10,000 in amount founded either upon the Constitution or any Act of Congress or any regulation of an executive department or upon any express or implied contract with the United States or for liquidated or unliquidated damages not sounding in tort." Although §60(b) of the Bankruptcy Act does not specifically mention the United States, consideration of the case law and the various sections of the Bankruptcy Act discloses that Congress intended the United States to be bound by its provisions and hence a proper defendant in an action to set aside a preference. Section 67(b) of the Bankruptcy Act, 11 U. S. C. A. 107, exempts from the operation of §60 "statutory liens for taxes and debts owing to the United States" and not claims for taxes generally. If as contended by defendant, §60 could not be applied against the United States for want of consent to be sued, this exemption provision would be unnecessary. See In Re Techcraft (New York, 1959) [60-1 USTC ¶9198], 177 F. Supp. 790. I find therefore, that the United States has waived its sovereign immunity to be sued in cases arising under §67 and §60 of the Bankruptcy Act. There remains to be considered the contention of the defendant that the complaint fails to state a cause of action. The plaintiff's action is one brought under the provisions of §60 of the Bankruptcy Act, 11 U. S. C. A. 96. In order to have a preference six statutory elements must be present, (1) a transfer of debtor's property, (2) to or for the benefit of a creditor, (3) transfer must be made or suffered while debtor is insolvent, (4) within four months of bankruptcy, (5) it must be for or on account of an antecedent debt which results in a depletion of the estate, and, (6) the effect of the transfer must be to enable such creditor to obtain a greater percentage of his debt than he would be entitled to under the distributive provision of the Act. If any of these elements are lacking there is no preference, but when the requirements are met the preference is voidable only if transferee has reasonable cause to believe that the debtor was insolvent at the time of the transfer. Mayo v. Pioneer Bank & Trust Company, 270 F. 2d 823. 3 Collier on Bankruptcy, p. 755 and following. For the
purposes of this motion properly pleaded allegations of the
complaint are admitted. Brennan v. United States [54-2 USTC
¶10,969], 129 F. Supp. 155; 221 F. 2d 170. Thus our inquiry is
directed to the sufficiency of the complaint to satisfy the six
necessary elements set forth above. The first element, a transfer
of the debtor's property, is the assignment of the accounts
receivable on It is further alleged that the transfer was made for the benefit of the defendant and it was made while the debtor was insolvent within four months of the date of bankruptcy (February 15, 1960). However, plaintiff must show that the transfer was made for or on account of an antecedent debt which results in a depletion of the estate, and the effect of which is to enable the creditor to obtain a greater percentage of his debt than he would be entitled to under the distributive provisions of the Act. It is our opinion that the transaction as set forth does not result in a depletion of the estate and is not preferential. [Discharge
of Tax Lien] The
complaint discloses that on The transfer by a debtor of money in total or partial discharge of a valid or non-preferential existing lien which would not have been disturbed by the bankruptcy proceedings does not constitute a preference because the assets available for general creditors are not thereby diminished. 3 Collier p. 842. See also Greenblatt v. Utley, 240 F. 2d 243. Similarly,
a substitution of a new security for an old is non-preferential
because it does not result in a depletion of the estate. Sawyer
v. Turpin, 91 U. S. 114. Of course, any transfer in excess of
the amount of the statutory lien may be attacked as preferential
but in the instant case the complaint alleges that the money
collected by the defendant pursuant to the assignment was applied
to the tax assessments of Plaintiff seeks to invoke the provisions of §67(c) of the Bankruptcy Act which provides that where not enforced by sale before the filing of a bankruptcy petition, statutory liens including liens for taxes or debts owing to the United States on personal property not accompanied by possession shall be postponed in payment to certain priority claims namely wage claims and administration expenses. He contends that the accounts receivable were not in the possession of the defendant at the time of the filing of the bankruptcy petition since as to certain of the assigned accounts, there were no notices of levy served on the debtors at all and as to the others the notices of levy had been released prior to the date of the bankruptcy petition. In support of his position, the plaintiff cites United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, and Freeman v. Mayer [58-1 USTC ¶9351], 253 F. 2d 295, which hold that in order to establish the necessary "possession" of a debt by the Collector, a notice of levy must be served on the obligor. But §67(c) and the cases cited have no application here. At the date of bankruptcy, the bankrupt had already relinquished ownership of the accounts receivable by assigning them to the defendant. Had the obligors paid the accounts to the assignor or a subsequent purchaser of the account, the assignor or purchaser would have been held accountable and liable to the defendant for such sums received by him. In essence, plaintiff's claim as disclosed by the complaint is that it is entitled under the facts pleaded to judgment setting aside the transfer as being preferential. Yet at the same time in an effort to show the preference element he contends that the transfer was not effective in that it gave receivable than he already had by virtue of the statutory lien. Such positions virtue of the statutory lien. Such positions are inconsistent and incompatible in relation to a single cause of action. Plaintiff cannot have it both ways. Since the complaint fails to allege facts sufficient to show that the transfer was preferential under §60 of the Bankruptcy Act, it fails to state a cause of action and the motion of defendant to dismiss the complaint is hereby granted. Failure to replead within twenty days of this order will be construed as an election to stand on the complaint, and an order will be entered at such time without notice dismissing the action on its merits. [58-2 USTC ¶9581]In the Matter of Cherry Valley Homes, Inc., Debtor; United States of America, Appellant (CA-3),
U. S. Court of Appeals, 3rd Circuit, No. 12,533, 255 F2d 706,
6/2/58, Rev'g the District Court, 58-1 USTC ¶9402 George F. Lynch, Department of Justice, Tax Division, Washington 25, D. C., for appellant. Josiah E. DuBois, Jr., 511 Cooper St., Camden, N. J., for appellee. Before MARIS, KALODNER and HASTIE, Circuit Judges. Opinion
of the Court HASTIE, Circuit Judge: The disputed question here is whether the United States is entitled to have a certain claim paid out of the assets of Cherry Valley Homes, a corporation in reorganization under Chapter X of the Bankruptcy Act, 11 U. S. C. §§ 501-676, before provision is made for the claims of general creditors. The referee in bankruptcy and the district court [58-1 USTC ¶9402] denied the claim of priority, and the government has appealed. Cherry
Valley Homes, Inc., hereinafter "Cherry Valley", owed M.
Tobin Co., hereinafter "Tobin", a liquidated sum of
approximately $7000 which was less than the amount of a tax claim
which the United States had asserted with all prescribed formality
against Tobin. In levying for taxes upon Tobin's property, the
government had served appropriate process on Chery Valley. 1
There is no suggestion that the notice to or demand upon this
debtor was in any way inadequate as a levy upon the debt it owed
Tobin. On the record we have a perfected levy upon specific
incorporeal property of a taxpayer, namely, a liquidated sum owed
Tobin by Cherry Valley. This levy occurred In legal contemplation and consequence, this levy effectively and exclusively appropriated the debt to the satisfaction of the tax claim six months before the Chapter X proceeding was instituted. United States v. Liverpool & London & Globe Ins. Co., 1955, 348 U. S. 215 [55-1 USTC ¶9136]; Kyle v. McGuirk, 3d Cir. 1936, 82 Fed. (2d) 212 [36-1 USTC ¶9121]; United States v. Eiland, 4th Cir. 1955, 223 Fed. (2d) 118 [55-1 USTC ¶9487]. Such a levy is treated in law like a seizure of corporeal property, taken into the possession of a collector by way of distraint for taxes. See Freeman v. Mayer, 3d Cir. 1958, 253 Fed. (2d) 295, 298 [58-1 USTC ¶9351]; 26 U. S. C. §§ 6331, 6332. Appellant recognizes that such a levy at least makes the government a lienor, with a perfected right to have the entire debt paid to it. By whatever name the appropriation shall be called, it seems clearly sufficient to establish a priority of right to satisfaction which the debtor's subsequent insolvency does not affect. Alternatively, as the government urges here, since the possessory concept of "seizure" is not strictly applicable to a debt, it seems correct to say that the tax levy through process served upon the debtor at least accomplished an assignment of Tobin's claim against Cherry Valley to the United States by operation of law. This approach brings into decisive effect the provision of Revised Statutes, Section 3466, 31 U. S. C. §191, that "whenever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied." This language has been applied to claims, originally between private parties, the benefit of which has in various ways been assigned or transferred to the United States. Korman v. Federal Housing Admr., D. C. Cir. 1940, 72 App. D. C. 245, 113 Fed. (2d) 743; Wagner v. McDonald, 8th Cir. 1938, 96 Fed. (2d) 273; Howe v. Sheppard, C. C. D. Me. 1835, 12 Fed. Cas. 672; In re Dickson's Estate, 1938, 197 Wash. 145, 84 P. 2d 661. We think it applies here as well. Finally, it is argued in a general way that there is some lack of equity in the priority thus accorded the government. But we see no inequity in recognizing that the government acquired a priority over general creditors when its claim was asserted and perfected against the debt owed by Cherry Valley many months before Chapter X proceedings were instituted. To make the argument of inequity even colorable, though not necessarily sound, it would have to appear that Cherry Valley was insolvent when the levy was made upon the debt it owed. And nothing of the sort appears in this record. The judgment will be reversed. 1 Actually, three wholly owned subsidiaries of Cherry Valley were served, but the referee and the district court have treated Cherry Valley as the real party concerned and affected. [71-1 USTC ¶9458]First National Bank of Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al., Defendants First National Bank of Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al., Defendants First National Bank of Norfolk, Plaintiff v. Norfolk and Western Railway Co. et al., Defendants U.
S. District Court, East. Dist. Va., Norfolk Div., C/A 812-70-N,
813-70-N, 814-70-N, 327 FSupp 196, Frederick M. Quayle, Suite 1000 Maritime Tower, P. O. Box 3183, Norfolk, Va., for plaintiff. Williams, Worrell, Kelly & Worthington, 1700 Virginia Nat'l Bldg., Norfolk, Va., for garnishees. Brian P. Gettings, United States Attorney, Norfolk, Va., for defendant. Judgment KELLAM, District Judge: These actions began as garnishment proceedings in the Civil Court of the City of Norfolk, but were removed to this Court by the United States pursuant to 28 U. S. C. §1441 and related sections. The garnishee, Norfolk and Western Railway Co., interpleaded the sum of $7,042.14, which it owed to Delva, Inc., the judgment debtor, because both the United States and the First National Bank of Norfolk asserted claims to the money. The question here is whether the United States or the Bank is entitled to the fund which Norfolk and Western has deposited with the Clerk of this Court. All the relevant facts in this case have been stipulated by the parties. In September 1969, the Internal Revenue Service made an FHUT assessment against Delva, and in June 1970, Delva was assessed for FICA taxes for the first quarter of 1970. On July 10, 1970, the Internal Revenue Service made an additional assessment against Delva for a bad check penalty. Thereafter, on September 4, 1970, the District Director served a Notice of Levy, in the amount of $1,119.00 on the Norfolk and Western which was indebted to Delva for $7,042.14 for services performed. Norfolk and Western was served with an amended Notice of Levy on September 8, 1970, in the amount of $7,832.06. The Internal Revenue Service did not file a notice of its tax lien with the Clerk of the State Corporation Commission until September 24, 1970. On September 1, 1970, First National Bank of Norfolk obtained three judgments on promissory notes in the Civil Justice Court; with attorneys' fees and court costs, the total sum was $7,664.07. The Bank served garnishment summonses on Norfolk and Western on September 14, 1970. With both the Bank and the United States claiming the fund, Norfolk and Western interpleaded its debt to Delva, pursuant to Code of Virginia §8-226 (1950). The United States was added as a party and the cases were removed to this Court. Initially, it is clear that the Bank's judgments did not become liens on Norfolk and Western's indebtedness to Delva until September 14, when the garnishment summonses were issued. Code of Virginia §§ 8-411, 8-441 (1950). The right to the fund deposited by Norfolk and Western, then, depends on whether the United States had a valid, perfected lien when the Bank became a judgment lien creditor. The Internal Revenue Code, 26 U. S. C. §6321, gives the United States a lien on all property, real or personal, belonging to any person who refuses or neglects to pay any federal tax after proper demand for payment. The lien attaches at the time the assessment is made and continues until the tax liability is satisfied. 26 U. S. C. §6322. However, 26 U. S. C. §6323(a) provides that the lien imposed by section 6321 is not valid against purchasers, holders of security interests, mechanic's lienors or judgment lien creditors until notice of the lien is filed in accordance with section 6323(f). In the case of personal property, whether tangible or intangible, section 6323(f)(1)(A)(ii) requires that the notice of lien be filed in one office, designated by the law of the state in which the property subject to the lien is situated. The Virginia statute designating the place for filing is the Uniform Federal Tax Lien Registration Act, Code of Virginia §55-142.1 et seq., which has been in effect since July 1, 1970. The relevant subsection, Code of Virginia §55-142.1(b), provides: Notices of liens upon personal property, whether tangible or intangible, for taxes payable to the United States and certificates and notices affecting the liens shall be filed as follows: (1) If the person against whose interest the tax lien applies is a corporation or a partnership whose principal executive office is in this state, as these entities are defined in the internal revenue laws of the United States, in the office of the clerk of the State Corporation Commission. In the
absence of the Notices of Levy served September 4th and September
8th, the Bank would clearly prevail and be entitled to all of the
fund; however, when the amended Notice of Levy was served on
September 8, 1970, the Bank was not a judgment lien creditor with
respect to Norfolk and Western's indebtedness to Delva. If, as the
United States contends, the Notice of Levy operated to transfer
Norfolk and Western's debt to Delva to the United States on
September 8, then the Bank's judgments, which did not become liens
until September 14, are actually worthless since Norfolk and
Western had not been indebted to Delva since Factually, these cases are substantially the same as that in United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (4th Cir. 1955). Here, as in Eiland, what we are concerned with is a levy on "an indebtedness with service of notice upon the debtor, the effect of which is to transfer to the United States the right to receive payment of the indebtedness up to the amount of the tax." 223 F. 2d at 120. When a taxpayer fails to pay the taxes assessed and due, 26 U. S. C. §6331 authorizes assertion of the lien granted by section 6321, by levy on all the taxpayer's property except that specifically exempted by section 6334. The "proper way to assert the lien is by levy and notice such as was served here." Where "the Director serves notice upon the debtor stating that the money 'is seized and levied upon' for the payment of the tax and that demand is made upon the debtor for the amount necessary to satisfy the tax, he is serving a 'warrant of distress.'" [223 F. 2d 121]. Once the levy is made, the person controlling the property levied on is obligated to surrender the property to the Secretary of the Treasury. In this respect, the Court of Appeals stated in Eiland: Prior to levy and notice, the debtor may discharge his debt by payment to the creditor, whatever may have been filed in the clerk's office; thereafter it may be discharged as to the amount of the tax, only by payment to the Director. 223 F. 2d at 122. Any
person in possession of property on which levy has been made, who
surrenders the property to the Secretary is "discharged from
any obligation or liability to the delinquent taxpayer with
respect to such property or rights to property arising from such
surrender or payment." 26 U. S. C. §6332(d). Here, levy was made pursuant to section 6331 on Form 668-A, and notice is part of this record. The Notice of Levy, served on Norfolk and Western recited that the taxpayer, Delva, had failed to pay an assessed tax. The Notice also stated: Accordingly, you are further notified that all property, rights to property, moneys, credits, and bank deposits now in your possession and belonging to this taxpayer (or with respect to which you are obligated) and all sums of money or other obligations owing from you to this taxpayer, or on which there is a lien provided under Chapter 64, Internal Revenue Code of 1954, are hereby levied upon and seized for satisfaction of the aforesaid tax, together with all additions provided by law, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth herein, or for such lesser sum as you may be indebted to him, to be applied as a payment on his tax liability. (emphasis added). Under
substantially the same factual situation in Eiland, the
Court of Appeals held that levy was an appropriate means for the
United States to assert a tax lien. Counsel for the Bank argues that the continued vitality of Eiland is questionable in light of 26 U. S. C. §6323(a), (f) and the Uniform Federal Tax Lien Registration Act. Nothing in either statute, though, indicates that such filing of notice of the tax lien is required where there is a levy pursuant to section 6331. Had Norfolk and Western paid the $7042.14 to the United States when the Notice of Levy was served, the debt to Delva would have been extinguished; nothing would have been left to satisfy the Bank's judgment lien after it was perfected on September 14, 1970. 26 U. S. C. §6332(d). Why, then, should the fact that Norfolk and Western did not pay the indebtedness before September 14, have any effect on the validity of the levy? The simple answer is that the result is unchanged. A validly invoked levy to enforce a tax lien effects a seizure that is tantamount to a transfer of ownership. See United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3d Cir. 1964). In Eiland, the Court of Appeals stated: A creditor ordinarily perfects a lien upon a debt by attachment and garnishment with service of notice thereof upon the debtor. * * * When this has been properly done, the effect thereof is to give to the attaching creditor a lien upon the indebtedness for the amount necessary to satisfy the judgment rendered in the proceedings in his favor. The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. * * * [C]onsequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt. 223 F. 2d at 121-22. Neither
26 U. S. C. §6323(a), (f) nor the Uniform Federal Tax Lien
Registration Act have any effect on this statement of the law
relating to the effect of levy pursuant to 26 U. S. C. §6331. The remaining question is whether the Interpleader Norfolk and Western Railway is entitled to have its attorneys' fees taxed as costs. When the United States prevails, an Interpleader is not entitled to have its attorneys' fees taxed as costs if the federal lien exceeds the amount of the interpleaded fund. Such an allowance would diminish the amount of the government's prior lien. See United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. McCall's Administrator [70-1 USTC ¶9183], 313 F. Supp. 1399 (M. D. Pa. 1969). Norfolk and Western's application for attorneys' fees and costs will be denied. Counsel for the United States will present an [77-2 USTC ¶9669]Robert C. Reiling, Jr., Plaintiff v. United States of America, Defendant U.
S. District Court, No. Dist. Ind., Hammond Div. at Lafayette,
Civil No. L 76-19, Marcel Katz, 22 Bank & Trust Bldg., Lafayette, Ind. 47901, for plaintiff. John R. Wilks, United States Attorney, Ft. Wayne, Ind. 46801, John A. DiCicco, Steven N. Kaplan, Department of Justice, Washington, D. C. 20530, for defendant. Memorandum
of Decision and Order ESCHBACH, District Judge: This cause is now before the court on defendant's motion for summary judgment filed July 12, 1977. For reasons stated below, the motion will be granted. This is
an action brought pursuant to 26 U. S. C. §7426 and 28 U. S. C.
§1346(e) seeking the return of funds that were allegedly
wrongfully levied upon by the Internal Revenue Service. The
complaint alleges that on On a motion for summary judgment, the moving party has the burden of showing that there are no genuine issues of material fact in the case, and all doubts on this point are resolved against the movant. Rule 56, Fed. R. Civ. P; Adickes v. S. H. Kress & Co., 398 U. S. 144 (1970); Rose v. Bridgeport Brass Co., 487 F. 2d 804 (7th Cir. 1973). The pleadings, exhibits, and briefs submitted in this action reveal that no material issue of fact is contested and the case is a proper one for summary judgment. Plaintiff
Reiling's first argument is that the levy was wrongful because not
served on the Tippecanoe County Commissioners, who were holding
the specific funds Ellison intended to apply to its obligation to
United Builders. The pertinent Treasury Regulation, however,
permits the Reiling's other argument is that the levy did not attach until Ellison received payment from the county, a full month after Reiling had been appointed receiver and thereby given the power to collect all of United Builders' existing assets. If the levy had not yet attached when Reiling was appointed, Ellison's debt to United Builders would be included in the assets Reiling is empowered to collect. Reiling relies on 11 U. S. C. §107(c)(3), which provides that tax liens not accompanied by possession are to be postponed in bankruptcy until the costs of administering the bankruptcy and some other debts have been paid. The question turns on whether possession is effected when a levy is served, or later. See generally 4 Collier on Bankruptcy ¶67.27[5] at 396-98. The Supreme Court recently held that §107(c)(3) does not require actual possession and that the constructive possession obtained by service of a levy before the appointment of a receiver protects a tax lien from the operation of this statute. Phelps v. U. S. [75-1 USTC ¶9467], 421 U. S. 330 (1975). See also American Acceptance Corp. v. Glendora Better Builders, Inc. [77-1 USTC ¶9348], 550 F. 2d 1220 (9th Cir. 1977). The Government obtains constructive possession on the date it serves its levy, and a subsequently appointed receiver cannot reach assets already constructively taken from the bankrupt prior to the appointment. The date of the actual payment of the debt levied upon is irrelevant. Therefore, the Government's levy was properly honored by Ellison, and the amount owed by Ellison to United Builders cannot be collected by United's receiver. Judgment
Order Accordingly, defendant's motion for summary judgment is granted, and judgment will be entered for the defendant. 61-1 USTC ¶9243]United States of America, Plaintiff v. Jack Wilson, George L. Cousins Contracting Co., First National Bank of Clayton, Defendants U.
S. District Court, East. Dist. Mo., East. Div., Civil No.
60C97(2), 12/12/60 William H. Webster, United States Attorney, St. Louis, Mo., for plaintiff. Jack Wilson, 9453 Roslan Place, Overland, Mo., and Ralph Graham, 506 Olive St., and Wayne C. Smith, Jr., St. Louis, Mo., for defendant. HAYES, District Judge: This
matter was heard by this Court on Findings
of Fact The
assessment officer in the office of the Director of Internal
Revenue at St. Louis, Missouri, on The
assessment of the said tax of Jack Wilson was recorded in the
office of the Recorder of Deeds for St. Louis, Missouri, on The
defendant Jack Wilson entered into a contract on The defendant Jack Wilson has made payments to the Director of Internal Revenue on his 1955 tax liability since the original assessment, so that $501.21 plus accrued interest remains due. Conclusions
of Law 1. This Court has jurisdiction of the parties to this suit and to the cause of action. 2. Jack Wilson is indebted to the United States for unpaid tax for the year 1955 in the amount of $501.21 plus accrued interest. 3. A federal tax lien properly attached to the debt that the George L. Cousins Contracting Company owes to Jack Wilson in the amount of $501.21 plus accrued interest. Judgment The Court having made its Findings of Fact and Conclusions of Law now renders judgment as follows: 1. The federal tax lien in the amount of $501.21 plus accrued interest is foreclosed on the debt owed by the George L. Cousins Contracting Company to Jack Wilson. 2. The unpaid tax of $501.21 plus interest accruing to the date of judgment in this case in the amount of $129.18, shall be paid to the Director of Internal Revenue from the sum owed to Jack Wilson by the George L. Cousins Contracting Company and deposited in the registry of this Court. 3. The costs of this suit in the amount of $45.00 shall also be paid from the sum deposited in the registry of this Court. 4. The balance remaining in the registry shall be returned to the George L. Cousins Contracting Company. 59-2 USTC ¶9659]United States of America v. Nationwide General Engineering Associates, Inc., International Telephone and Telegraph Corporation, and William H. Hughes, Receiver of Nationwide General Engineering Associates, Inc. U.
S. District Court, No. Dist. Ind., Fort Wayne Div., Civil 1070,
6/22/59 Phil M. McNagny, Jr., United States Attorney, Charles R. LeMaster, Assistant United States Attorney, for plaintiff. J. Byron Hayes, Gettle Building, Fort Wayne, Ind., for defendants. Stipulations
of Fact GRANT, District Judge: The defendants, separately and severally, concur and incorporate by reference the matters and facts contained in the plaintiff's brief respecting the stipulations of fact as outlined and contained therein. Brief
in Support of Propositions of Law The
chronological order respecting the appointment of the receiver on There is
no question that William H. Hughes was appointed and did qualify
as receiver of Nationwide General Engineering Associate, Inc.
prior to the time that the Government first moved on Nowhere in the U. S. C. A. can the Government find authority that permits a Federal agency from circumventing the jurisdictional rights of a state court in the matter involving an insolvent debtor. Under Illinois law, the creditor of an insolvent debtor must obtain a judgment, cause writ of execution to be executed thereon and delivery to the execution officer and levy upon the property in question to create a lien. Obviously, the Government is not complying with the laws of the State of Illinois which does have original jurisdiction but it is attempting to circumvent the authority of a state court by adopting this method of procedure. In the case of U. S. v. O'Dell, 160 Fed. (2d) 304, (Sixth Circuit) [47-1 USTC ¶9190] the court says on page 306, Section 34-66 of the Revised Statutes, Title 31, U. S. C. A. Section 191 that "Section 34-66 does not create a lien but establishes a priority." In substance the position of the receiver is that the Government by failing to follow the established procedures by issuing a warrant of distraint failed to establish a lien superior to that of the receiver. It is the position of the receiver that the entire sum of Six Thousand Three Hundred Eighty-four and Forty-five hundredths ($6,384.45) Dollars should be ordered surrendered by this court to the possession and control of the receiver and the Government would then have the right and authority to establish its priority to the funds for the payment of the delinquent taxes and follow the law of the State of Illinois which has original jurisdiction of the funds presently paid into this court. The receiver respectfully would show this court that the receiver stands in the same capacity as a trustee in bankruptcy and that the priority of the Government's position would be governed as provided under Section 64, Title II, Chapter 7, Section 104, which provides in substance as follows: "(a) That the assets of a bankrupt estate shall be distributed as follows: "(1) The actual and necessary costs and expenses of preserving the estate subsequent to the filing of the petition including the reasonable costs and expenses of such recovery and the costs and expenses of administration; "(2) Wages not to exceed $600.00 to each claimant which have been earned within three months from the date of the commencement of the proceedings; "(3) Claims having to do with criminal prosecution and the recovery thereof; "(4) Taxes, legally due and owing by the Bankrupt to the United States or any State of any Subdivision thereof, and "(5) To a ratable distribution to the unsecured creditors." WHEREFORE, the defendant, William H. Hughes as Receiver for Nationwide General Engineering Associates, Inc. respectfully asks that the court enter its order and judgment for the defendant herein separately and severally and that the plaintiff take nothing by its complaint and that the court further order the Clerk of the Court to transfer the sum of Six Thousand Three Hundred Eighty-four and Forty-five hundredths ($6,384.45) Dollars deposited by the International Telephone & Telegraph Corporation with the Clerk of the Court in the Registery to the control of William H. Hughes as receiver; and to accept from him a receipt thereof, for costs and for all other orders the court may deem necessary. Stipulation
of Fact (12/5/58) It is hereby stipulated by and between Nationwide General Engineering Associates, Inc.; William H. Hughes, Receiver of Nationwide General Engineering Associates, Inc.; and the United States, by their respective attorney, that the following are the salient facts in this case: I. On II.
Prior to IV. On V. On VI. On VIII. On
Findings
of Fact (6/22/59) This action is brought pursuant to Sections 7401, 7402(a) and 7403 of the Internal Revenue Code of 1954 and pursuant to Section 1345 of Title 28 of U. S. C. A. The
defendant, William H. Hughes, is a citizen of the State of
Illinois and has been appointed Receiver of the Nationwide General
Engineering Associates, Inc. An assessment against the corporation
for a withholding tax deficiency was made on Nationwide has filed an Answer in which the material allegations of the Complaint are denied in a first defense. The second defense in the Answer contends that the validity of the lien filed by the District Director has not been adjudicated. Further, a counterclaim is filed by Nationwide in which the sum paid by a sub-division of International Telephone and Telegraph Corporation into the Registry of this Court is demanded by defendant Hughes. A stipulation of fact, entered into by and between the parties to this action and filed in this Court is hereby incorporated by reference into these Findings of Fact and adopted by this Court as the controlling facts herein. Conclusions
of Law (1) The Court has jurisdiction of the parties and the subject matter in this instant suit. (2) The law is with the plaintiff and against the defendant on the plaintiff's Complaint. (3) The law is with the plaintiff and against the defendant on the defendant's Counterclaim. (4) The Receiver takes the assets of the taxpayer subject to all obligations and liens and the Receiver acquires no greater rights than the taxpayer. (5) The proper way to assert the lien is by levy and notice such as was served here. United States v. Eiland, 223 Fed. (2d) 118 [55-1 USTC ¶9487]. [55-1 USTC ¶9487]United States of America, Appellant v. Edward I. Eiland, Trustee in Bankruptcy of Sport Coal Company, Inc., a corporation, Bankrupt, Appellee (CA-4),
In the United States Court of Appeals for the Fourth Circuit, No.
6959, 223 F2d 118, Louise Foster, Special Assistant to the Attorney General (H. Brian Holland, Assistant Attorney General, Ellis N. Slack and A. F. Prescott, Special Assistants to the Attorney General, Duncan W. Daugherty, United States Attorney, and William T. Lively, Jr., Assistant United States Attorney, on brief), for appellant. Claude A. Joyce (Edward I. Eiland on brief), for appellee. Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges. [The
Facts] PARKER, Chief Judge: This is
an appeal in the bankruptcy proceedings of the Sport Coal Company,
Inc., a corporation which had its office and principal place of
business in Logan County, West Virginia, and which was adjudicated
a bankrupt on a voluntary petition in bankruptcy filed The Referee in Bankruptcy held that the United States was not entitled to prevail against the trustee in bankruptcy with respect to its claim on this fund because no lien was filed in the office of the Clerk of the County Court of Logan County, West Virginia. He held, also, that, even if this position were not sustained, the claim of the United States should be postponed to administration and wage claims under section 67(c) of the Bankruptcy Act and that, as these exceeded the total of the assets of the bankrupt estate, the United States would not be entitled to receive anything on its claim, in any event. The District Judge [55-1 USTC ¶9203] sustained the referee on the first of these holdings and found it unnecessary to pass upon the second. Two questions are presented by the appeal: (1) Did the failure to file notice in the office of the Clerk of the Court of Logan County defeat the rights of the United States under the levy and notice served upon the Boone County Coal Corporation? (2) If not, is the right of the United States under such levy and notice postponed to the administration and wage claims? We think that both of these questions should be answered in the negative. [Levy
Upon Debt] It should be noted in the first place, that what we are dealing with here is, not a levy upon corporeal property, where the property is left in the possession of the bankrupt to serve as a basis for credit, but a levy upon an indebtedness with service of notice upon the debtor, the effect of which is to transfer to the United States the right to receive payment of the indebtedness up to the amount of the tax. A lien for taxes upon failure to pay on demand is provided for by 26 U. S. C. §3670; and this lien arises upon deposit of the assessment list with the Director, 26 U. S. C. §3671. Where taxpayer neglects or refuses to pay the taxes due, assertion of this lien is authorized by 26 U. S. C. §3692 by levy upon all property and rights to property of taxpayer except such as is specifically exempted by 26 U. S. C. §3691, which has no application here. Upon such levy, it becomes the duty of the debtor to pay the indebtedness levied upon, up to the amount of the tax, to the Director. 26 U. S. C. §3710. Levy here was made under section 3692 on form 668-A, which notified the Boone County Coal Corporation: "That all property, rights to property, moneys, credits and/or bank deposits now in your possession and belonging to the aforesaid taxpayer and all sums of money owing from you to the said taxpayer are hereby seized and levied upon for the payment of the aforesaid tax, together with penalties and interest, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth above from the amount now owing from you to the said taxpayer, or for such lesser sum as you may be indebted to him, to be applied in payment of the said tax liability." There can be no question, we think, but that the lien for taxes provided by the statute can be asserted against intangible property such as a debt. United States v. Liverpool, London & Globe Ins. Co., 348 U. S. 215; Cannon v. Nicholas, 10 Cir., 80 Fed. (2d) 934 [35-2 USTC ¶9672]; Kyle v. McGuirk, 3 Cir., 82 Fed. (2d) 212 [36-1 USTC ¶9121]; United States v. First Nat. Bank, 8 Cir., 89 Fed. (2d) 116 [37-1 USTC ¶9201]; McKenzie v. United States, 9 Cir., 109 Fed. (2d) 540; United States v. Long Island Drug Co., 2 Cir., 115 Fed. (2d) 983, 985-986 [41-1 USTC ¶9140]; United States v. Warren R. Co., 2 Cir., 127 Fed. (2d) 134, 137-138 [42-1 USTC ¶9391]; Investment & Securities Co. v. United States, 9 Cir., 140 Fed. (2d) 894 [44-1 USTC ¶9210]; United States v. Manufacturers Trust Co., 2 Cir., 198 Fed. (2d) 366 [52-2 USTC ¶9417]; United States v. Ocean Accident & Guarantee Corporation, 76 Fed. Supp. 277 [48-1 USTC ¶9178]. And we think it equally clear that the proper way to assert the lien is by levy and notice such as was served here. There is apparent holding to the contrary in such cases as United States v. O'Dell, 6 Cir., 160 Fed. (2d) 304 [47-1 USTC ¶9190] and Givan v. Cripe, 7 Cir., 187 Fed. (2d) 225 [51-1 USTC ¶9169], to the effect that a "warrant of distraint" is necessary in addition to the notice to the debtor; but where, as here, the Director serves notice upon the debtor stating that the money owing "is seized and levied upon" for the payment of the tax and that demand is made upon the debtor for the amount necessary to satisfy the tax, he is serving a "warrant of distraint". No peculiar virtue inheres in the name ascribed to the notice. As said in Raffaele v. Granger, 3 Cir., 196 Fed. (2d) 620, 623 [52-1 USTC ¶9321]: "Distraint is a summary, extra-judicial remedy having its origin in the common law. There, a form of self-help, it consisted of seizure and holding of personal property by individual action without intervention of legal process for the purpose of compelling payment of debt." [Perfection
of Lien] A
creditor ordinarily perfects a lien upon a debt by attachment and
garnishment with service of notice thereof upon the debtor. See Miller
v. United States, 11 Wall. 268, 297; Kennedy v. Brent,
6 Cranch 187; Rickman v. Rickman, 180 Mich. 224, 146 N. W.
609, Ann. Cas. 1915C 1237, 1248; Strawberry Growers' Selling
Co. v. Lewellyn, 158 La. 303, 103 So. 823, 39 A. L. R. 1502; [Filing
of Notices] There is nothing in 26 U. S. C. §3672(a)(1) which invalidates as against a trustee in bankruptcy rights acquired under such a levy upon a debt. That section has reference to liens upon tangible personal property having a situs, not to the levy upon or the transfer of debts, as to which no recording of lien could be of any advantage to creditors. The section is as follows: "(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 are 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; or * * *." For authorization of filing by state law reliance is placed upon West Virginia Code (1949) ch. 38, art. 10, sec. 1, which after providing for the filing of federal tax liens in the offices of clerks of county courts provides: "No such tax shall be a valid lien as against any mortgagee, purchaser or judgment creditor, until such notice shall be filed in the office of the clerk of the county court of the county or counties in which the property subject to such lien is situated." Both the federal statute and the statute of West Virginia manifestly have reference to tangible property, which left in the possession of taxpayer may serve as a basis of credit, and as to which the taking of possession by a lien claimant is generally held equivalent to the recording of lien. Firestone Tire & Rubber Co. v. Cross, 4 Cir., 17 Fed. (2d) 417. Only tangible property can properly be said to be "situated" in a county within the meaning of the statutes quoted; and it would be unreasonable to apply their provisions to debts, since debtors could not be expected to search the clerk's office before paying a debt, to see whether or not tax liens had been filed against their creditors, nor could banks be expected to make such search before honording checks drawn on deposits. With respect to such intangible property entirely different provisions are needed and have been made by the taxing statutes. Prior to levy and notice, the debtor may discharge his debt by payment to the creditor, whatever may have been filed in the clerk's office; thereafter it may be discharged as to the amount of the tax, only by payment to the Director. 26 U. S. C. §3710(b). There can be no question, of course, but that a trustee in bankruptcy is vested by law with all the rights which a creditor could have obtained by legal or equitable proceedings at the time of the bankruptcy. Under the bankruptcy act of 1898, 30 Stat. 544, 565-566, as originally enacted, the trustee was vested with no greater rights in the property of the bankrupt than the bankrupt himself had, with the result that unregistered chattel mortgages and other secret liens could be asserted against the trustee after adjudication, although by adjudication creditors were prevented from attaching a lien to the property by legal process. Bailey v. Baker Ice Machine Co., 239 U. S. 268; Carey v. Donahue 240 U. S. 430; Martin v. Commercial Bank, 245 U. S. 513. Subsequent amendments to the bankruptcy act were designed to remedy the evils which had arisen from this situation. See House Report No. 1293, 81st Congress, 2d Session; United States Congressional Service, 81 Congress, 2d Session, vol. 2, pp. 1985-1990. The Amendment of 1952, 66 Stat. 420, 430, finally put section 70(c) in its present form providing: "The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as if such date with the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists." The effect of the section as amended is to vest the trustee, not only with rights with respect to the bankrupt's property which creditors had acquired at the date of bankruptcy, but also with all rights which creditors might have acquired by legal or equitable process on that date; but this does not help the trustee here, since no creditor could have acquired any rights on that date with respect to a debt on which the United States had already made a levy and served a notice, the effect of which was to transfer the right to receive payment of the debt to the United States. We need not concern ourselves here with what the rights of the United States would be had there been no levy and its rights were dependent upon the inchoate lien on all property created by sections 3670 and 3672 of Title 26 of the Code. In such case, questions of a very different nature would be presented. What we have is a perfected lien created by levy with respect to a specific indebtedness. See Goggin, Trustee v. Division of Labor Enforcement of California, 336 U. S. 118 [49-1 USTC ¶9142]; Untied States v. Sands, 2 Cir. 174 Fed. (2d) 384 [49-1 USTC ¶9264]. [Administration
and Wage Claims] We think, also, that the rights of the United States are not postponed to administration and wage claims by section 67(c) of the Bankruptcy Act which provides: "c. Where not enforced by sale before the filing of a petition initiating a proceeding under this Act, and except where the estate of the bankrupt is solvent: (1) though valid against the trustee under subdivision b of this section, statutory liens, including liens for taxes or debts owing to the United States or to any State or any subdivision thereof, on personal property not accompanied by possession of such property, and liens, whether statutory or not, of distress for rent shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 of this Act and such liens for wages or for rent shall be restricted in the amount of their payment to the same extent as provided for wages and rent respectively in subdivision a of section 64 of this Act. * * *." That
section also manifestly has reference to tangible property which
can be taken into possession, not to indebtedness which has been
levied upon with notice to the debtor so that it is to all intents
and purposes assigned to the For the reasons stated, the judgment appealed from will be reversed and the case will be remanded with direction to enter an order that the amount received by the Trustee in Bankruptcy from the Boone County Coal Corporation be paid over to the Director of Internal Revenue. Reversed. |