6321 - Conveyances to 3rd Parties p1

6321 - Conveyances to 3rd Parties Page 1

Articles by Alvin Brown
Tax Preparation
Offer In Compromise
State Offers in Compromise
Levy
IRS Tax Liens
IRS Tax Liens - continued
IRS Tax Liens - continued 2
Levy - continued
Audit Techniques Guide
Congressional Contacts
Criminal Investigation
D.O.J Criminal Tax Manual
Tax Litigation
Penalty
Installment Agreements
Statute of Limitations
Frivolous Tax Argument
Interest Abatement
IRS Misconduct
IRS Abuses
Tax Fraud
Fraud Statutes
Bankruptcy
Tax Reform Legislation
Tax Shelters
Tax Court
Trust Fund Penalty
Legislation
Innocent Spouse Relief
Important Links

Liens

Additional Information:

6321 Conveyances to 3rd Parties page1

Russell G. Ruggerio, Plaintiff v. United States of America , Defendant.

U.S. District Court, Dist. Md. , No. Div.; CIV. WDQ-04-639, January 31, 2005.

[ Code Secs. 6321 and 6323]

Lien for taxes: Third-party purchaser: State law: Equitable conversion. --

Real property purchased by a third party was not subject to federal tax liens because, under state ( Maryland ) law, the liens attached only to sale proceeds and not the property. After the purchaser and the seller entered into a contract for the sale of the property, but before settlement, the government filed tax liens against the seller. The government claimed that the tax liens had priority over the third-party purchaser's interests under Code Sec. 6323. However, Maryland recognizes the doctrine of equitable conversion, under which, upon execution of a contract of sale, the purchaser becomes the equitable owner of the property and the seller's property interests are limited to the sales proceeds. Thus, the liens attached only to the sales proceeds and not to the property itself.

.

[ Code Sec. 7402]

Suits by nontaxpayers: Quiet title: Sovereign immunity of the U.S. : Waiver. --

A federal district court rejected the government's motion to dismiss, for lack of jurisdiction, a quiet title action filed by a third-party purchaser of real property on which tax liens had allegedly been placed. The government claimed that it had not waived its sovereign immunity because the purchaser brought the action under a general jurisdictional statute (28 USC 1340), which does not constitute a waiver of sovereign immunity, but failed to plead the Quiet Title Act (28 USC 2410), under which sovereign immunity is waived. Nevertheless, the court had jurisdiction because the complaint complied with the requirements for bringing a quiet title action in that it included the name and address of the delinquent taxpayer (the seller) and identified both the IRS office that filed the lien notice and the date and place of filing.

ORDER

QUARLES, JR., District Judge: For the reasons discussed in the accompanying Memorandum Opinion, it is this 31st day of January 2005, ordered that:

1. the Plaintiff's motion for summary judgment BE, and HEREBY IS, GRANTED;

2. the Clerk shall enter judgment for the Plaintiff;

3. the Defendant's motion for summary judgment BE, and HEREBY IS, DENIED;

4. the case BE, and HEREBY IS, CLOSED; and

5. the Clerk of the Court shall send copies of this Memorandum Opinion and Order to counsel for the parties.

MEMORANDUM OPINION AND ORDER

Citing 28 U.S.C. §1340, Russell G. Ruggerio brought an action against the United States of America to quiet title. Pending are Ruggerio's motion for summary judgment and the United States ' cross motion for summary judgment. For the following reasons, Ruggerio's motion for summary judgment will be granted, and the United States ' cross motion for summary judgment will be denied.

I. BACKGROUND

On January 14, 2003, Ruggerio and Rocky A. Kimbrew entered into a contract of sale for real property in Ocean City , Maryland (the "Property"). On April 7, 2003, the day before settlement, the Department of Treasury filed two federal tax liens against Kimbrew. On January 27, 2004, the Department of Treasury informed Ruggerio that in satisfaction of Kimbrew's liens the Property would be seized. Ruggerio alleges that these liens are neither valid nor enforceable. On March 24, 2004, Ruggerio filed this action.

II. LEGAL DISCUSSION

A. Motion for Summary Judgment

1. Standard of Review

Summary judgment is appropriate when there is no genuine issue of any material fact, and the moving party is entitled to judgment as a matter of law. In Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986), the Supreme Court explained that, in considering a motion for summary judgment, "the judge's function is not ... to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248. Thus, "the judge must ask ... whether a fair-minded jury could return a verdict for the [nonmoving party] on the evidence presented." Id. at 252.

The court must view the facts and the reasonable inferences drawn therefrom "in the light most favorable to the party opposing the motion," Matsushita Electric Industrial Company v. Zenith Radio Corp., 475 U.S. 574, 587 (1986), but the opponent must produce evidence upon which a reasonable fact finder could rely. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The mere existence of a "scintilla" of evidence is not sufficient to preclude summary judgment. Anderson, 477 U.S. at 252.

2. Waiver of Sovereign Immunity

The United States may not be sued without its consent; consent is a prerequisite for jurisdiction. Randall v. United States of America, 95 F.3d 339, 345 (4 ^th Cir. 1996) ( quoting United States v. Mitchell, 463 U.S. 206, 212 (1983)). A waiver of the traditional sovereign immunity cannot be implied but must be unequivocally expressed. United States v. Testan, 424 U.S. 392, 399 (1976) ( quoting United States v. King [ 69-1 USTC ¶9410], 395 U.S. 1, 4 (1969)). Title 28 of the U.S. Code, §2410(a) waives the Government's sovereign immunity in quiet title actions. The United States contends that this Court lacks jurisdiction because Ruggerio failed to plead waiver of sovereign immunity.

Ruggerio brings this action solely under 28 U.S.C. §1340, a general jurisdictional statute which is not a waiver of sovereign immunity. See Randall, 95 F.3d at 345. Although Ruggerio failed to plead 28 U.S.C. §2410(a), the Court has examined the complaint and determined that the allegations support jurisdiction. See Randall, 95 F.3d at 345 ("all pleadings shall be construed as to do substantial justice"). In quiet title actions, the complaint must include the name and address of the delinquent taxpayer, the identity of the internal revenue office filing the lien notice and the date and place of filing. See 28 U.S.C. §2410 (b). As Ruggerio has complied with these requirements, the Court has jurisdiction.

3. Whether Ruggerio's property is subject to the tax liens

The United States may impose a lien upon a delinquent tax payer's real or personal property. See 26 U.S.C. §6321. 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). Maryland recognizes the doctrine of equitable conversion. Upon execution of a contract of sale, the purchaser becomes the equitable owner of the property and the seller retains bare legal title. See Watson v. Watson, 304 Md. 48, 60 (1985). Thereafter, the seller's property interests are limited to the proceeds of the sale. See id.

When the Defendant filed the tax liens, Kimbrew's interest in the Property was limited to his anticipated proceeds from the sale. The tax liens did not attach to the Property but rather to Kimbrew's interest in the proceeds of the sale. See SMS Associates v. Clay, 868 F.Supp. 337, 344 (D. D.C. 1994). The United States contends that the liens attached to the Property because the liens had priority over Ruggerio's interests under 26 U.S.C. §6323. Section 6323 governs the validity and priority of liens imposed against a taxpayer's property. See 26 U.S.C. §6323. This section merely established the priority of the Government's liens against the sale proceeds. See National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. at 722 ("revenue statutes do not create property rights but merely attaches federally defined consequences to rights created under state law"). Accordingly, the plaintiff's motion for summary judgment will be granted.

III. CONCLUSION

For the reasons discussed above, Ruggerio's motion for summary judgment will be granted and the United States ' cross motion for summary judgment will be denied.

[98-2 USTC ¶50,535] United States of America, Plaintiff v. James A. Kudasik, Elinor A. Evenech, John Evenech, Danette A. Cook, Johnstown Bank and Trust Company, Pauline L. Zovnar, First Philson Bank, N.A., Lola J. Wohlfarth, Somerset County, Somerset Borough, and Borough of Central City, Defendants, and Somerset Area School District, Central City Borough, Shade-Central City School District, Jefferson Township, Milford Township, Rockwood Area School District, and Shade Township, Intervenors

U.S. District Court, West. Dist. Pa., Civ. 96-209J, 6/8/98, 21 FSupp 2 d 501, 21 FSupp2d 501

[Code Secs. 6321 and 6323 ]

Tax liens, attachment of: Transfers prior to assessment: Fraudulent conveyances: Transfers for nominal consideration: Constructively fraudulent: Nominee: Foreclosure.--Federal tax liens attached to real property that was transferred by an attorney for nominal consideration to his sister and her husband prior to the assessment of taxes against him. Under the state ( Pennsylvania ) Uniform Fraudulent Conveyance Act, fraud was presumed, and the taxpayer failed to rebut that presumption. However, the taxpayer's transfer of his undivided one-half interest in another parcel was undertaken for fair consideration where his sister and brother-in-law, who were the other joint tenants, assumed the mortgage on the property and paid the real estate taxes from the date on which they acquired their interest in the property. Moreover, the taxpayer's niece, who subsequently received the property from her parents, did not qualify as the taxpayer's nominee for purposes of the tax lien since the taxpayer did not exercise active or substantial control over the property after its transfer.

[Code Sec. 7403 ]

Tax liens: Municipal taxes: Priority of liens: State law: Foreclosure.--The municipalities in which a taxpayer's fraudulently conveyed real properties were located had a first lien under state ( Pennsylvania ) law for any delinquent unpaid taxes on those parcels. Thus, those liens had priority over federal tax liens.

MEMORANDUM and ORDER

I. Introduction

SMITH, District Judge:

The United States filed a complaint against delinquent taxpayer, James A. Kudasik, seeking to reduce personal income tax assessments to judgment, set aside fraudulent conveyances of real estate and foreclose on federal tax liens. Before the court are the unopposed motions of the government for summary judgment and default judgment. Dkt. no. 32.

II. Facts

In 1976, James A. Kudasik, an attorney, purchased for $50,000 a two story building located at 158 E. Union Street in the Borough of Somerset. Located in the county seat of Somerset County , Pennsylvania , the structure was intended to serve as both his residence and law office. Dkt. no. 1, exh. A; dkt. no. 35, exh. A at 32, exh. D ¶21. In October 1979, Kudasik and his sister, Elinor Evenech, purchased for $16,000, as joint tenants with the right of survivorship, a 4.54 acre parcel of land, including mineral rights, in Milford Township , Somerset County . Dkt. no. 1, exh. J. Almost a year later, Kudasik purchased for $13,500, two parcels of ground situated in the Borough of Central City, Somerset County . Dkt. no. 1, exh. D. Less than a month later, Kudasik and a business partner conveyed in exchange for $7,000 two parcels of real estate, together with all the mineral rights, situated in Jefferson Township , Somerset County , to Kudasik, his sister Elinor and her husband, John Evenech, as joint tenants with the right of survivorship. Dkt. no. 1, exh. G.

On March, 25, 1983, Kudasik granted a mortgage on the Central City lots to Citizens National Bank in Windber in the amount of $16,500. Dkt. no. 35, exh. 6. On June 2, 1987. Kudasik conveyed the Central City parcels of land ¹ to his sister, Elinor, for a one dollar consideration. Dkt. no. 1, exh. E. The deed from Kudasik to Elinor was not recorded at that time, and Kudasik did not notify the mortgagee that the title had been transferred. Dkt. no. 35, exh. A at 61. On July 3, 1990, the deed conveying the Central City parcels to Elinor was recorded. On July 12, 1990, the Evenechs conveyed their interest in the real estate to their daughter, Danette Cook, and a deed was recorded on August 17, 1990. Dkt. no. 1, exh. E and F.

The Central City parcels were rental property and the local realty taxes were sometimes paid by the lessees and at other times by Kudasik. Dkt. no. 35, exh. A at 48. Despite the unrecorded conveyance to his sister on June 2, 1987, Kudasik used the Central City parcels as part of the collateral for a second mortgage granted to Somerset Trust Company on June 24, 1987. Dkt. no. 35, exh. 4. Kudasik satisfied the earlier mortgage to Citizens' National Bank in June 1990. Dkt. no. 35, exh. 7. In February 1991, despite the conveyances from Kudasik to Elinor and then the Evenechs to Cook, Kudasik granted yet another mortgage in the amount of $10,563.48 to Cenwest National Bank which he satisfied in April 1993. Dkt. no. 35, exh. 8, 9; dkt. no. 35, exh. A at 65. The mortgage to Somerset Trust Company was marked satisfied on March 19, 1993. Dkt. no. 35, exh. 4. Although he has not been the record owner of the Central City parcels, Kudasik has "always considered [him]self to be the owner of the property." Dkt. no. 35, exh. A at 68.

On June 2, 1987, by a separate deed, Kudasik also conveyed to Elinor his undivided one-half interest in the Jefferson Township parcels and his undivided one-half interest in the Milford Township land. Dkt. no. 1, exh. H. The deed for those parcels was not recorded until June 26, 1990. Id. The Evenechs also conveyed the Jefferson and Milford Township pieces of land to their daughter, Danette Cook, on July 12, 1990. Dkt. no. 1, exh. I. This deed was recorded on August 17, 1990.

When the Jefferson Township parcels were conveyed in 1980 to Kudasik and his sister. Elinor, they were encumbered by a $20,000 mortgage granted by Kudasik and his partners in March 1978 to Somerset Trust Company. Dkt. no. 35, exh. 3. A concrete block motel had been erected on one of the Jefferson Township parcels and the Evenechs established their residence in a mobile home located on the premises. Dkt. no. 1, exh. G; dkt. no. 35, exh. D ¶23. Despite Kudasik's one-half interest in the property and Kudasik's partnership's liability on the mortgage, the Evenechs have paid the local taxes and utilities for the Jefferson Township parcels, as well as the mortgage payments, since 1980. Dkt. no. 35, exh. A at 76; dkt. no. 35, exh. D ¶23. The 1978 mortgage was satisfied in March 1994. Dkt. no. 1, exh. G. The Milford Township parcel is unimproved and the Evenechs have paid the assessed local taxes since they acquired their interest in the real estate in 1979. Dkt. no. 35, exh. D ¶24.

Finally, Kudasik transferred his interest in the Union Street building to his sister in March 1990. Dkt. no. 1, exh. B. Although Somerset Trust Company held a June 1987 mortgage that was secured by the Union Street property, Kudasik did not notify the mortgagee of the transfer. Dkt. no. 35, exh. 4; dkt. no. 35, exh. A at 40. Kudasik continued to make all the mortgage payments until it was satisfied in March 1993. Dkt. no. 35, exh. A at 40. Kudasik characterized the mortgage as a "business loan," and admitted that he deducted the interest in preparing his income tax return. Dkt. no. 35, exh. A at 41. Then, on August 17, 1990, the Evenechs deeded their interest in the real estate to their daughter, Danette Cook. Dkt. no. 1, exh. C. Kudasik continued to live in and work from the Union Street building. From Kudasik's perspective, he believed that he was the owner of the Union Street property and "always treated it that way." Dkt. no. 35, exh. A at 42. Over the years, regardless of who held legal title to the property, Kudasik paid the local real estate taxes, the utilities, insurance and mortgage payments. Id. at 40, 47.

Kudasik, however, did not pay his personal income tax for calendar years 1983, 1985-1986, 1988-1991, and 1993, although it appears that he filed 1040 income tax returns for those years. See dkt. no. 33, at 6 n. 5; dkt. nos. 1 and 2 ¶¶30, 40, 50, 58. As a result of Kudasik's delinquency, the IRS issued assessments for the tax due, plus statutory interest and penalties. The first assessment was issued on November 15, 1993 for calendar years 1983 and 1985. Assessments followed in 1994 and 1995 for the remaining calendar years of 1986, 1988-1991 and 1993. See dkt. no. 34 ¶4. Notice of the federal tax liens for calender years 1983 and 1985-1986 was filed on June 28, 1994 in the Somerset County Prothonotary's Office showing an unpaid balance of $38,631.39. Dkt. no. 35, exh. B. Notice of the federal tax liens for tax years 1988-1990 was filed later that year showing an unpaid balance of $42,791.55. Id. at 2. A year later, on October 24, 1995, notice of the federal tax liens for 1991 and 1993 was filed indicating a balance due of $57,961.15.

Notice of a federal tax lien against Danette Cook, Kudasik's niece, was filed on March 27, 1996. The notice indicated Kudasik's indebtedness of $149,384.09 for federal taxes, interest and penalties for calendar years 1983, 1985-1986, 1988-1991 and 1993. Cook was designated "as nominee for James A. Kudasik . . . to the extent of his interest in" the real estate on Union Street , and in Central City and Jefferson and Milford Townships . Dkt. no. 35, exh. B.

Subsequently, on August 5, 1996, the government filed this civil action "for the purpose of reducing income tax assessments to judgment, setting aside numerous fraudulent conveyances of four separate real properties, and foreclosing federal tax liens against the four real properties. . . ." Dkt. no. 1 ¶1. The government sued Kudasik, Mr. and Mrs. Evenech, and Danette Cook. The complaint also named as defendants Johnstown Bank and Trust, First Philson Bank, N.A., Lola J. Wohlfarth, and Pauline L. Zovnar, due to their alleged creditor status. Some of the municipal entities within which the parcels of land were situated were named as defendants, and others were granted leave to intervene pursuant to Federal Rule of Civil Procedure 24(a). See dkt. no. 18.

The first of the government's five count complaint seeks to reduce to judgment the assessments totaling $138,206.26. The remaining four counts seek to set aside as fraudulent the conveyances from Kudasik to Elinor and from the Evenechs to Cook. If the conveyances are set aside. Kudasik would be deemed the legal owner at the time the IRS assessments were issued and foreclosure would lie.

Kudasik, who is an attorney, has filed an answer to the complaint. In it, he admits that he failed to pay income taxes due for 1983, 1985-1986, 1988-1991, and 1993, but he disputes the statutory assessments for interest and penalties. Dkt. nos. 1 and 2 ¶¶20-21. Kudasik denies that the conveyances to his sister, Elinor, and to his niece, Danette Cook were fraudulent and void, and that he conveyed the land with the intent to hinder, delay or defraud the government. Dkt. no. 2 ¶¶32, 42, 52, 60. Kudasik avers that the conveyances were made for the purpose of "affixing equity for a legitimate business purpose which business venture failed." Dkt. no. 2 ¶35; see also ¶¶42-44, 52, 60. He admits that his niece, Danette Cook, was his nominee for each of the four properties. Dkt. nos. 1 & 2, ¶9.

During Kudasik's deposition, he denied that the transfers were fraudulent or for "the purposes of avoiding a government obligation. . . ." Dkt. no. 35, exh. A at 93. He conceded that after the transfers he had no "recorded" assets and asserted that "if it was not for the foreclosures, these properties would have been transferred back to [him] by Danette Everett, with the exception of my sister Elinor. I would have made sure that she continued to have the motel and the properties that belong to her." Id.

All defendants have been served, except for John Evenech, who died on January 15, 1994. Dkt. no. 2 ¶8. Default was entered against Elinor Evenech, Danette Cook and Johnstown Bank and Trust Company. Dkt. nos. 19, 22, 23. First Philson Bank, Pauline Zovnar and Lola Wohlfarth were dismissed as defendants. Dkt. nos. 25, 26, 38.

After the close of discovery, the government moved for summary judgment against Kudasik and for default judgments against Elinor Evenech, Danette Cook and Johnstown Bank and Trust. Neither Kudasik nor Evenech, Cook nor Johnstown Bank and Trust have filed any opposition to the government's motions.

III. Summary Judgment Standard

Summary judgment shall be "rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). When a motion for summary judgment is properly supported by affidavits or the like, the non-moving party cannot defeat the motion by resting on the bare allegations contained in his or her pleadings. That is, once the moving party has satisfied its burden of identifying evidence which demonstrates the absence of a genuine issue of material fact, see Childers v. Joseph, 842 F.2d 689, 694 (3d Cir. 1988), the non-moving party is required by Federal Rule of Civil Procedure 56(e) to go beyond the pleadings by way of affidavits, depositions, answers to interrogatories, and admissions on file in order to demonstrate specific material facts which give rise to a genuine issue. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). That is, the nonmoving party "may not rest upon mere allegation or denials of his pleadings, but must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 256 (1986) (citing Fed.R.Civ.P. 56(e)).

IV. Judgment as to the Assessed Income Tax, Interest and Penalties

Section 6321 of the Internal Revenue Code provides that:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to such person.

26 U.S.C. §6321. Section 6322 explains that the "lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied. . . ." 26 U.S.C. §6322. An assessment by the IRS is presumed to be correct. Freck v. I.R.S. [94-2 USTC ¶50,518], 37 F.3d 986, 991 n. 8 (3d Cir. 1994) ("Assessments are generally presumed valid and establish a prima facie case of liability against a taxpayer . . ."); United States v. Vespe [89-1 USTC ¶9193], 868 F.2d 1328, 1331 (3d Cir. 1989); Psaty v. United States [71-1 USTC ¶9346], 442 F.2d 1154, 1160 (3d Cir. 1971).

Here, the assessments issued to Kudasik establish that he is liable for $138,206.26. Dkt. nos 1 and 2 ¶¶20-21; see also dkt. no. 34, exh. 1 (certified Form 4330). Kudasik admits that he is indebted to the government in this amount and that he has no basis to challenge the statutory additions reflected on the assessments. Dkt. no. 35, exh. A at 14-16. The government asserts that the amount owing as of October 31, 1997 increased to $186,041.86. Dkt. no. 34 ¶4. Nor has Kudasik come forward to dispute this amount. Consistent with Rule 56(c), judgment will be entered in favor of the government and against Kudasik in the amount of $186,041.86 which represents Kudasik's tax liability for calendar years 1983, 1985-1986, 1988-1991 and 1993 as of October 31, 1997.

V. Attachment of the Federal Tax Liens

The statutory language of §6321 " 'all property and rights to property' is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. Nat'l Bank of Com merce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985) (quoting 26 U.S.C. §6321). "A lien arising under Section 6321 cannot, however, extend beyond the property interest held by the taxpayer. Consequently, a federal tax lien attaches only to the property interests of the delinquent taxpayer at the time of assessment." Gardner v. United States [94-2 USTC ¶50,482], 34 F.3d 985, 987 (10th Cir. 1994) (citations omitted).

Accordingly, the assessments issued to Kudasik operated as a lien when made in 1993, 1994, and 1995. Those assessments were not made, however, until after Kudasik had conveyed his interests in the four real estate holdings to his sister, and she and her husband, in turn, conveyed them to their daughter. The question remains, therefore, whether Kudasik had any interest in these four real estate holdings in 1993, 1994 and 1995.

The government contends that Kudasik was the sole owner of these four properties because the conveyances were fraudulent when made. It argues that the fraudulent nature of the conveyances may be demonstrated under any of three different theories. In the event any conveyance should not be found fraudulent, the government asserts that it may proceed against that property because of Cook's nominee status.

VI. Fraudulent Conveyances

The government contends that Kudasik's conveyances may be declared fraudulent under sections 351 and 444 of Title 21 of the Pennsylvania Statutes which specify the recording requirements for deeds and conveyances. 21 P.S. §§351, 444. Alternatively, it argues that Pennsylvania 's Uniform Fraudulent Conveyance Act permits nullifying the deeds based upon findings of either actual or constructive fraud. See 39 P.S. §§354, 357. ²

A. Applicability of Pennsylvania 's Recording Statutes

The government's first argument relies upon its status as a creditor for past due taxes and section 444 which provides:

All deeds and conveyances . . . shall be recorded in the office for the recording of deeds . . . within ninety days after the execution of such deeds or conveyances and every such deed and conveyance . . . which shall not be proved and recorded as aforesaid, shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for a valid consideration, or any creditor of the grantor or bargainor. . . .

21 P.S. §444 (emphasis added). In 1894, however, the Pennsylvania Supreme Court held that this provision is inoperative against creditors. Davey v. Ruffell, 29 A. 894 ( Pa. 1894). It declared that "[t]he act is to be read as though the word 'creditors' was not in it, and in this respect the act of 1775 is unchanged." Id. at 896; see also Smith v. Young, 103 A. 63 ( Pa. 1918); In re Lukens, 138 F. 188 (E.D. Pa. 1905); English v. Ross, 140 F. 63, 634-350 (M.D. Pa. 1905). Accordingly, Kudasik's conveyances to his sister cannot be set aside as fraudulent simply because the government was a creditor and the deeds were not recorded within ninety days. ³

B. Uniform Fraudulent Conveyance Act

Applying the Uniform Fraudulent Conveyance Act, I conclude that several of the conveyances at issue here are fraudulent. Conveyances may be set aside as fraudulent under the Act based on either actual or constructive fraud. 39 P.S. §§354, 357. I will address the government's theory of actual fraud first.

Section 357 provides that:

Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors.

39 P.S. §357. In Iscovitz v. Filderman, 6 A.2d 270, 272 ( Pa. 1939), the Pennsylvania Supreme Court recognized that the determination of whether there was an actual intent to hinder, delay or defraud under the Act must "be proved by facts and circumstances which taken together show the existence of fraud. Although the intent must exist at the time the transfer was made, it may be shown by conduct subsequent to the execution of the conveyance of such a nature as to show fraud in its inception." Id. (citations omitted). The court affirmed the decree that several conveyances from husband to wife, and then from parents to children, were made with the intention of defrauding the creditor plaintiff. The court reasoned

[w]here the transaction is between husband and wife actual intent does appear where it is shown that there was a deed given for a nominal consideration. This is but a presumption of fact and places on the wife the burden of showing the fairness of the transaction. Since family collusion by a debtor is so easy to execute and so difficult to prove, the evidence to sustain the claim of such cases must be clear and satisfactory.

Id. (emphasis added) (citations omitted); see also County of Butler v. Brocker, 314 A.2d 265, 268 ( Pa. 1974).

Section 351 of the Act defines creditor as a "person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." 39 P.S. §351. Here, the government was a creditor by virtue of its claim for unpaid taxes. These taxes were due on April 15 of the years following the close of the tax years 1983, 1985-1986, a time before the conveyances were made. See United States v. St. Mary [72-1 USTC ¶9319], 334 F.Supp. 799, 802-03 (E.D. Pa. 1971) (citing 26 U.S.C. §§6151, 6211, 6513(b), 6601, 6653(a)).

Relying on its creditor status here, the government contends that the transfers of the Union Street and Central City properties were fraudulent. It points out that, except for the difference in familial relationship, the transfers are like those in Iscovitz which were for the nominal consideration of one dollar. I agree. Because the Court in Iscovitz was concerned about "family collusion," a presumption applies here that Kudasik intended to defraud the government when he transferred the Union Street and Central City parcels. Iscovitz, 6 A.2d at 272. That presumption places upon Elinor the burden of showing the fairness of the transaction. Because she has not appeared, and there is no evidence of record to support a finding of "fairness," the "clear and satisfactory" burden is not met. The Union Street and Central City conveyances must be set aside pursuant to 39 P.S. §359(1)(a). The subsequent conveyance to Danette Cook does not affect the government's right to have the conveyance set aside inasmuch as she was not a "purchaser for a fair consideration. . . ." Id. ; Iscovitz, 6 A.2d at 272.

According to the government, the conveyances of the Jefferson and Milford Township parcels should also be set aside because those conveyances were constructively fraudulent under §354 of the Uniform Fraudulent Conveyance Act. That section provides:

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent, is fraudulent as to creditors, without regard to actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.

39 P.S. §354. Section 353 states that "fair consideration" for the property is given "[w]hen, in exchange for such property or obligation, as a fair equivalent therefor and in good faith, property is conveyed or an antecedent debt is satisfied. . . ." 39 P.S. §353.

The record reveals that Kudasik and the Evenechs became joint tenants with the right of survivorship of the Jefferson Township parcel in September 1980 in a conveyance from Kudasik and his partner. Dkt. no. 1, exh. G. The purchase price was $7,000, but the land was encumbered by a $20,000 mortgage granted by the Kudasik partnership in March 1978. Dkt. no. 35, exh. 3. The Evenechs effectively assumed the mortgage after the 1980 conveyance by making all of the payments due until the mortgage was satisfied in March 1994. Id. ; exh. A at 76; exh. D ¶23. In addition, the Evenechs paid all the local realty taxes for the land from the date that they acquired their interest and established their residence on the premises. Then, in 1987, Kudasik conveyed his undivided one-half interest in the land to his sister. In light of this evidence, I conclude that there was fair consideration for the Jefferson Township parcel, and the transfer will not be set aside as fraudulent under §354.

The Milford Township parcel, however, does not appear to have been transferred for a fair consideration. Because Kudasik was indebted to the government at the time of the transfer, the burden is upon the defendants to demonstrate that the transfer did not render Kudasik insolvent. People's Savings & Dime Bank & Trust Co. v. Scott, 154 A. 489, 490 ( Pa. 1931). This, the defendants have failed to do. Accordingly, Kudasik's conveyance of his one-half interest in the Milford Township land in 1987 to his sister was fraudulent under §354 of the Act and must be set aside pursuant to §359(1)(a). The subsequent conveyance by Elinor to her daughter will likewise be set aside as there was only a nominal consideration for that conveyance. Id. ; Iscovitz, 6 A.2d at 272.

VII. Nominee Status

My determination that the Jefferson Township conveyance was valid under the Uniform Fraudulent Conveyance Act does not end my inquiry as to that parcel. I must still address the government's argument that this parcel should be foreclosed upon because of the nominee lien. "Property of the nominee or alter ego of a taxpayer is subject to the collection of the taxpayer's tax liability." Shades Ridge Holding Co. v. United States , 888 F.2d 725, 728 (3d Cir. 1989). The critical factor in determining whether one is a nominee is whether the taxpayer "has 'active' or 'substantial' control." Id. Factors which inform that determination include the amount of consideration paid by the nominee, whether the property was placed in the nominee's name in anticipation of a suit, the relationship between the transferor and the nominee, the failure to record the conveyance, the retention of possession by the transferor, and the continued enjoyment by the transferor of the benefits associated with the property. United States v. Klimek [97-1 USTC ¶50,281], 952 F.Supp. 1100, 1113 (E.D. Pa. 1997).

Here, it is clear that Kudasik did not exercise active or substantial control over his one half interest in the Jefferson Township property. It is true that there was a substantial delay in the recording of the Jefferson Township deed and that there are close relationships between Kudasik, Elinor and Cook. Yet, as I noted above, Elinor provided a fair consideration for the property and there are no indicia of Kudasik's continued enjoyment of the property after he conveyed his undivided one-half interest. For those reasons, and despite Kudasik's admission that Cook is his nominee. I conclude that Cook is not Kudasik's nominee for the Jefferson Township parcel. Summary judgment will be denied.

VIII. Municipal Liens

The government also seeks summary judgment against the municipalities for these four real estate holdings. It contends that these municipalities are required to establish their claims and the amounts thereof.

"[I]n the application of a federal revenue act, state law controls in determining the nature of the legal interest[s]. . . ." Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960). Under Pennsylvania law,

all taxes . . . levied by any taxing district on any property . . . shall be and are hereby declared to be a first lien on said property. Such liens shall have priority to and be fully paid and satisfied out of the proceeds of any sale of said property held under the provisions of this act.

72 P.S. §5860.301. Accordingly, the municipalities have a first lien for any delinquent unpaid taxes on the Union Street , Central City and Milford Township parcels. See In the matter of Vigne, 18 B.R. 949 (W.D. Pa. 1982) (finding claim by municipality for local realty taxes had priority over other liens).

IX. Foreclosure

Because Section 403 of the Internal Revenue Code permits foreclosure of the federal tax liens against any property in which Kudasik has an interest, 26 U.S.C. §7403(c), and because I have concluded that Kudasik is the owner of the Union Street and Central City properties and has a one-half interest in the Milford Township parcel, these properties may be sold to satisfy the tax liens. United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 694 (1983). The proceeds from the sale must be used to satisfy any claims for delinquent municipal taxes which have first priority pursuant to 72 P.S. §5860.301. The remaining proceeds for the Union Street and Central City properties shall be used to satisfy the judgment against Kudasik. The remaining proceeds from the sale of the Milford Township parcel must be distributed between the government and Ms. Cook, the holder of the other undivided one-half interest. Id.

X. Default Judgment

The motion for default judgment against Elinor Evenech, Danette Cook and Johnstown Bank and Trust pursuant to Federal Rule of Civil Procedure 55 will be granted.

An appropriate order will follow.

ORDER

AND NOW, this 8th day of June, 1998, consistent with the foregoing memorandum, it is hereby

ORDERED AND DIRECTED that:

1. The government's Motion for Default Judgment, dkt. no. 32, against Elinor Evenech, Danette Cook and Johnstown Bank and Trust Company is GRANTED.

2. The government's Motion for Summary Judgment. dkt no. 32, is GRANTED IN PART and DENIED IN PART as follows:

A. Judgment is granted in favor of the United States and against James A. Kudasik in the amount of $186,041.86 (the tax liabilities for tax years 1983, 1985-1986, 1988-1991, and 1993) plus interest from October 31, 1997, to the date that the judgment is satisfied.

B. The conveyances of the Union Street and Central City parcels and the one-half interest in the Milford Township parcels from James A. Kudasik to Elinor Evenech, as more particularly described in dkt. no. 1, exh. B, E, H, are set aside as fraudulent under Pennsylvania 's Uniform Fraudulent Conveyance Act. 39 P.S. §§357, 359(1)(a) and declared null and void. The conveyances of the Union Street and Central City parcels and the one-half interest in the Milford Township parcel from Elinor and John Evenech to Danette A. Cook, as more particularly described in dkt. no. 1, exh. C, F, I, are set aside as fraudulent under Pennsylvania 's Uniform Fraudulent Conveyance Act, 39 P.S. §359(1)(a) and declared null and void.

C. The federal tax liens, arising from the assessments issued by the Internal Revenue Service to James A. Kudasik on November 15, 1993, July 25, 1994, April 4, 1994, May 9, 1994, June 27, 1994, September 12, 1994 and October 9, 1995, attached to James A. Kudasik's fee simple interest in the Union Street and Central City properties and his undivided one-half interest in the Milford Township property on the date that such assessments were issued.

D. Judgment shall be GRANTED in favor of Somerset County, Somerset Borough, Somerset Area School District, the Borough of Central City, Shade-Central City School District, Milford Township and Rockwood Area School District, and against the United States to the extent that each of these municipal entities has a first lien for any delinquent tax at the time the Union Street, Central City and Milford Township properties are sold and said municipality has furnished a certified claim for delinquent taxes to the United States Marshal Service in advance of the sale.

E. The United States' motion for summary judgment against Shade Township and Jefferson Township is DENIED as moot.

F. The Union Street, Central City properties and Milford Township properties shall be exposed to sale at public auction by the United States Marshal pursuant to 26 U.S.C. §7403(c). The distribution of the proceeds from the sale of each property shall be allocated first to satisfy the certified claim, if any, for delinquent taxes of any of the municipalities cited in paragraph 2.D of this order. Then, the remaining proceeds from the sale of the Union Street and Central City properties shall be used to satisfy the judgment against delinquent taxpayer James A. Kudasik. The remaining proceeds from the sale of the Milford Township property shall be distributed in equal parts to Danette Cook and the government.

G. The United States shall, within thirty (30) days from the date that this Order and Judgment is entered on the docket, submit to the Court a proposed Order directing the sale of the Union Street , Central City and Milford Township properties.

The Clerk shall mark this case CLOSED.

¹ The deed conveying the Central City parcels to Evenech also conveyed two lots of ground situated in the Township of Shade , Somerset County , Pennsylvania . Dkt. no. 1, exh. E. These lots had been conveyed to Kudasik by his sister, Nettie Kudasik, on May 27, 1987 and it does not appear from the record that the government seeks to set aside this conveyance. See dkt. no. 1. For that reason, Shade Township , although previously granted status as an intervenor, has no standing to assert a claim.

² As the government noted in its brief, despite the repeal of this Act in 1993, it is still applicable to conveyances which occurred before February 1, 1994, the effective date of the new Uniform Fraudulent Transfer Act, 12 Pa.C.S.A. §5101 et seq.

³ I recognize that there is more recent authority from the Eastern District of Pennsylvania which finds §444 operative as to the creditors of a grantor. See United States v. Craig, 936 F.Supp. 298, 300 (E.D. Pa. 1966) (citing Raimo v. United States [88-1 USTC ¶9170], 1987 WL 28361 (E.D. Pa.1987)). The application of §444 in those cases, however, fails to cite any authority and relies on the statutory language alone without regard to the construction given it in decisions of Pennsylvania's highest appellate court.

[95-2 USTC ¶50,598] Katherine K. Gordon, representative of Richard E. Gordon, Jr., deceased, individually and as Trustee, Gordon/Ford/Reed Partnership, and Rick Gordon, Plaintiffs v. Reinhard Mueller, Christa-Karin Mueller, The United States of America--The Internal Revenue Service, The Christa-Karin Mueller Irrevocable Trust, and The Christa-Karin Mueller Trust, Defendants

U.S. District Court, Mid. Dist. Fla., Orlando Div., 94-782-CIV-ORL-18, 10/13/95

[Code Secs. 6323 and 7426 ]

Civil actions by nontaxpayers: Liens: Priority of claims: Judgment creditor: Equitable considerations.--The claim of an individual who, in satisfaction of a judgment, attempted to execute on a cash bond posted by a defendant in a criminal trial had priority over an IRS claim. The individual suffered financial losses due to the defendant's fraudulent activities. The cash for the bond originated from a trust in Germany . Since the individual established that money from the defendant's fraudulent activities was fraudulently transferred to the trust, the bond was subject to execution by the individual. Furthermore, the IRS lien did not attach to the cash bond because the defendant had no interest in the property. Any interest held by the defendant's wife was assigned to the trust. Even if the IRS lien had attached, the individual was entitled to equitable relief because the IRS delayed in asserting its claim and the individual, as a victim of the defendant's fraud, should have had the opportunity to execute on the bond prior to the IRS.

[Code Sec. 7422 ]

Setoff: Cash bond: Legal interest in property.--The IRS could not setoff a taxpayer's cash bond against taxes owed by the taxpayer because the government did not have a legal interest in the property.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SHARP, District Judge:

THIS CAUSE came on to be heard by this Court at trial on October 10, 1995 and after having heard from the witnesses, reviewing the exhibits, reviewing the court file, having heard argument of counsel and being otherwise fully advised in the premises, this Court makes the following findings of fact and conclusions of law:

Findings of Fact

The Plaintiffs had invested in A. T. Bliss and Company, Inc. a/k/a Omni Equities, Inc. after reasonable scrutiny. Thereafter, some questions arose as to the viability of that investment and the Plaintiffs further investigated the matter at a stockholders' meeting. At the stockholders' meeting, the Plaintiffs were personally assured by Reinhard Mueller, among others, that the reports questioning the viability of the company were false and that additional investors would be investing substantial funds in the company.

These representations were false when they were made and resulted in Plaintiffs' purchasing additional stock as well as holding on to the stock as the price continued to decline. Finally, the Plaintiffs sold the stock at a significant loss as reflected by the Final Judgments obtained in the state court proceeding.

Plaintiffs also suffered financial losses through an additional investment in a limited partnership, which is reflected in the Final Judgments in the state court proceeding. The limited partnership was closely associated with Mr. Mueller and A. T. Bliss/Omni.

The total amount due and owing Plaintiffs, as evidenced by the state court judgments, exceeds $1 million.

Plaintiffs filed, in 1985, a state court action seeking to recover the losses that were incurred through the fraudulent activities of Reinhard Mueller, A. T. Bliss/Omni and other corporations which were controlled by Reinhard Mueller.

Reinhard Mueller and the corporate defendants, being controlled by Mr. Mueller, among others, did everything in their power to delay and defuse the state court proceeding. The justice system is simply not adequately equipped to handle such abuse and is ineffective in a situation where a defendant has the time, the resources and the total lack of ethics to abuse the system. The defendants in the state court proceeding withheld information and delayed the case to such a degree that the Plaintiffs were unable to obtain judgments for many years and ultimately have been unsuccessful in collection efforts.

Plaintiffs learned that there was $450,000 cash posted as bond on behalf of Reinhard Mueller to secure his release from jail pending a criminal trial, Case No. 94-90-CR-ORL-18. The criminal case involved the same facts and circumstances for which the Plaintiffs obtained their judgments, i.e., failing to pay taxes on the money Mr. Mueller stole from investors such as the Plaintiffs. Within days of learning of the bond, the Plaintiffs filed this lawsuit seeking to execute on the bond money as partial satisfaction of the judgments Plaintiffs had obtained.

If this Court were able to administer swift justice and could have ruled on this matter in a matter of months, Plaintiffs would have prevailed and judgments would have been entered prior to the IRS ever asserting any claim of lien. However, this Court was unable to do so, due in part to Defendant Christa-Karin Mueller continuing the course of delay that the Plaintiffs had previously experienced.

The bond money came from the Christa-Karin Mueller Trust, located in Germany . The Trust was set up in 1989, just after the Gordons had obtained the original Final Judgments. The bond money was originally borrowed from the Trust. On September 20, 1994, the rights to the bond money were assigned to the Christa-Karin Mueller Irrevocable Trust. The Christa-Karin Mueller Trust and Christa-Karin Mueller Irrevocable Trust are the same entity.

The IRS waited from July 12, 1994 until October 12, 1994 before they asserted any claim of lien. The IRS offers no explanation or rationale for the delay. The IRS was aware of the bond money and its claims, but chose not to proceed. This delay by the IRS was unreasonable under the circumstances. Prior to any claim by the IRS, on September 29, 1994, this Court formally exercised jurisdiction over the funds and ordered the Clerk of Court not to disburse the funds.

Despite being fully aware of transfers to and from the Trust, the IRS never asserted any lien claims to the Trust. The IRS never asserted a claim for fraudulent conveyances against the Trust.

Mrs. Mueller has relinquished any claim she may have had to the money both by virtue of her assignment and by pleadings to this Court. The only claimants to the bond money are the Plaintiffs and the IRS.

The Trust is funded by money fraudulently conveyed to it by Reinhard and Christa-Karin Mueller. As a result of the Trust being in default, all allegations asserted by Plaintiffs against the Trust are admitted. The IRS also stipulated to facts which entitle Plaintiffs to prevail on their claim of fraudulent conveyances brought against the Trust. The IRS has not asserted any claims seeking to declare the transfers to the Trust as fraudulent.

Conclusions of Law

This Court has jurisdiction as the funds at issue are in custodia legis of this Court and this Court exercised jurisdiction over the funds prior to any claim brought by the United States of America --Internal Revenue Service.

This Court finds that Plaintiffs' action invokes, at least in part, 26 U.S.C. §7426 .

This Court must decide three primary issues in this matter: the applicability of setoff; whether the liens and levy attach to the bond money; and whether the IRS's claims are superior to that of the Plaintiffs.

This Court determines that setoff is unavailable for funds held in custodia legis, as the United States does not have any legal interest in the property. There are no Government funds involved in this case; the only funds are in the form of a bond that is held in a Government repository. Accordingly, the IRS has no claim of setoff.

The second issue presented is whether the IRS's liens or levy against Mr. and Mrs. Mueller have any effect on the bond money. In order to determine this, the Court must first determine who had ownership rights to the bond money at the time the IRS filed its claim of lien and/or levy. The only evidence presented in this case is that Christa-Karin Mueller assigned her interest in the bond money to the Christa-Karin Mueller Irrevocable Trust on September 20, 1994. The Court finds the assignment is valid, subject only to claims of creditors claiming the transfer was a fraudulent conveyance. Fraudulent conveyances are voidable, not void under Florida law. To be able to avoid such a transfer, a creditor must take affirmative steps, seeking relief from a court of competent jurisdiction.

The IRS was aware of the transfer from Mrs. Mueller to the Trust prior to filing its levy and claims of lien, but took no affirmative steps to avoid the transfer. The Court finds that the Trust is a viable, ongoing entity as evidenced by the fact that Mrs. Mueller had to request the money from the Trustee and the money came from a Luxembourg bank, which was the situs of the Trust. Moreover, the Trust must have been extended due to the undisputed fact that Mrs. Mueller, who is the sole beneficiary, has not received final distributions from the Trust.

IRS liens and levies attach only to property rights of the taxpayer. State law determines what rights the taxpayers had at the time of the liens or levy. The Court concludes Mr. and Mrs. Mueller had no rights to the funds on October 12, 1994 and October 13, 1994 and thus the IRS's claims did not attach to the money at issue.

The Plaintiff has met its burden of establishing that the Trust is a recipient of fraudulent conveyances by Mr. Mueller of monies he received through the fraudulent liquidation of his various companies. Mr. Mueller obtained assets from these fraudulent liquidations with some of the money making its way into the Trust. Thus, the assets of the Trust within this Court's jurisdiction (i.e. the bond money) are subject to execution by Plaintiffs.

Furthermore, even if the liens and levy somehow attached, this Court finds that the Government was on notice as to the availability of the bond money for tax collection purposes since July 12, 1994. The IRS made no affirmative effort to secure any rights to the bond money for three months. This Court has jurisdiction under the authority of Landau v. Vallen, 895 F.2d 888 (2d Cir. 1990) to provide equitable relief in this case. This Court finds the Plaintiffs, as victims of Reinhard Mueller's criminal activity, should be given the opportunity to execute on the bond money prior to any claim of the IRS. Plaintiffs have established a reasonable nexus between Mr. Mueller's criminal activity and the money posted as bond. The Plaintiffs were victims of that criminal activity and victims should be given the opportunity to recover, at least partially, on their claims. The IRS's delay does not afford the IRS the opportunity to seek or defeat equitable relief to be granted by this Court. This Court finds that the judgment awarding the bond money to the Plaintiffs would be effective nunc pro tunc as of the date the underlying action was filed, making Plaintiffs' claims superior to that of the IRS. Moreover, at the time the lawsuit of Plaintiffs was brought, the criteria for a choate lien, as established under United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 98 L.Ed.2d 520, 74 S.Ct. 367 (1954), were met. Plaintiffs' claim was first in time and therefore first in right under Federal common law, which controls.

The Plaintiffs prevailed on all of the issues presented. The IRS has no claim to setoff as the monies are not governmental funds. The IRS has no liens or levies against the bond money nor has the IRS sought any relief from the Trust in the form of fraudulent conveyance. Finally, the Court finds Plaintiffs' claim to be superior to that of the IRS.

DONE AND ORDERED.

[92-2 USTC ¶50,552] Linda Hamilton, Plaintiff v. United States of America , Defendant

U.S. District Court, Dist. Conn., Civ. N-90-128 (TFGD), 8/28/92, 806 FSupp 326

[Code Secs. 6321 , 6323 and 7426 ]

Lien for taxes: Conveyances to third parties: Suits by nontaxpayers: Property owners.--The transfer of real property by an executed, but unrecorded, quitclaim deed to a third party prior to the imposition of a levy on the property was sufficient to transfer all of a taxpayer's rights in the property to the third party. Therefore, the levy on the property was wrongful, and the lien was ordered released. The third party had standing to bring suit because she was in possession of the property and the transfer of title was valid. The court rejected the government's argument that the failure to record the deed allowed the taxpayer to retain a right to the property. Although a subsequent grantee who recorded a deed to the property would prevail in a contest with the third party, the second sale by the taxpayer would be wrongful. Therefore, the taxpayer's ability to convey marketable title in a second sale did not constitute a property right under Code Sec. 6321 . Finally, the levy could not be upheld by reliance on a state recording statute that protected creditors. The government had not given credit to the taxpayer in reliance on the taxpayer's status as the record owner of the property.

MEMORANDUM OF DECISION

DALY, District Judge:

Plaintiff Linda Hamilton ("Plaintiff" or "Ms. Hamilton") brings this action against the United States ("the government" or "the defendant") for an alleged wrongful levy. 26 U.S.C. §7426(a)(1) . The case raises an issue of apparent first impression in this Circuit, to wit, whether an executed but unrecorded quitclaim deed purporting to transfer specified real property from the delinquent taxpayer to a third-party defeats the government's levy on that property.

Ms. Hamilton, the third-party in question, seeks to enjoin the government's sale of residential property located at 174-176 Thompson Street , New Haven , Connecticut ("the property"). Ms. Hamilton lives there with her family in a two-family dwelling and claims ownership to it through a quitclaim deed executed in her favor by the record owner, Brenda Jones Agnew ("Ms. Jones"). Ms. Hamilton did not record that quitclaim deed, however, until after the government had seized the property to satisfy Ms. Jones' tax liabilities. Essentially arguing that as a creditor without notice of the prior transaction it is entitled to the protections afforded by Connecticut's recording statute, Conn. Gen. Stat. §42 -10, the government contends that the levy is enforceable.

The matter has been tried to the Court and the parties have supplemented their presentations with post-trial written submissions. This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.

FINDINGS OF FACT

Ms. Hamilton was looking for property to rent when, in 1983, a friend told her about a two-family home on Thompson Street that was available for sale at a relatively inexpensive price. Unemployed at the time, Ms. Hamilton was convinced that she could not obtain a mortgage for the property on her own. Ms. Jones, a long-time friend who owned two other properties and presumably could get a mortgage, offered to acquire the property, in name only, on Ms. Hamilton's behalf. The two women agreed that Ms. Hamilton would pay the closing costs and make the $3,000 down payment on the $30,000 purchase price. Thereafter, Ms. Hamilton would make all mortgage, tax and miscellaneous payments on the property. In exchange, Ms. Jones would execute a quitclaim deed transferring the property to Ms. Hamilton. This plan was chosen in lieu of a co-signing arrangement on the mortgage--with five people already waiting in line at the bank for the property, plaintiff was advised that such a co-signor arrangement would complicate matters and jeopardize any prospects she had of buying the property.

Both Ms. Jones and Ms. Hamilton were present at the November 1, 1983 closing on the property. Also present were Richard Shapiro, Ms. Hamilton's lawyer, and Owen Carber, a representative from New Haven Savings Bank ("the Bank")--both the seller of the property and the mortgagee. As the women had agreed, Ms. Hamilton paid the closing costs and the $3,000 down payment for the property. Mr. Carber executed a quitclaim deed on behalf of the Bank transferring the property to Ms. Jones. Trans. at 10. That deed was recorded with the Registry of Deeds, leaving Ms. Jones the record owner of the property. See id. at 83-84. The mortgage deed itself, in the amount of $27,000 in favor of the New Haven Savings Bank, also bore the name of Ms. Jones. Exh. 2.

On the same date as the closing, Ms. Jones executed a quitclaim deed purporting to transfer "all right, title, interest, claim and demand whatsoever" in the subject property to Ms. Hamilton. Exh. 1. ¹ Testifying at trial as to her understanding of the quitclaim deed, Ms. Jones stated that if there ever was a question as to who owned the property, the quitclaim deed "would prove that Linda owned it." Id. at 23. She later added that "I never owned the property. Only in name only did I own that property. I did not put up any money to [buy] that property. . . . I was . . . doing an honest deed for a friend." Id. at 36. The quitclaim deed, notarized and witnessed by Mr. Shapiro, was not delivered to Ms. Hamilton at the closing. Nor was it recorded until June 6, 1989, some two months after the government's seizure of the property and approximately five and one-half years after the closing. ²

From shortly after the closing until the present, Ms. Hamilton has lived in the property with her children. The first floor of the house has also been periodically leased by her during this period. She has paid all expenses for improvements and repairs to the house as well as the mortgage and tax payments, albeit with the substantial assistance of her mother, her brother and friends. See exhs. 7 (New Haven Savings Bank payment book, in name of plaintiff's mother); 10 (payment receipts from New Haven Savings Bank): exh. 14 (various receipts for expenses incurred in improving/repairing the property). Utilities were set up by Ms. Hamilton when she moved into the house and have been paid by her. At least one bill (water/sewage) however, was initially placed under Ms. Jones' name. ³

Although she helped Ms. Hamilton move in and occasionally assisted with cleaning, Ms. Jones never made any payments in connection with the property, never lived there, never rented there, never stayed there and never made any improvements or repairs to it. However, she did list 174 Thompson Street as a source of $600 in rental income on her 1987 tax return. Exh. 502. Ms. Jones also cited the following rental expenses relating to the property on the same return: $1,313 in insurance, $2,894 in mortgage interest payments, $1,510 in repairs, $1,573 in taxes, $2,000 in utilities and $1,400 in depreciation expenses. The property was similarly listed in Ms. Jones' 1988 return, filed jointly with her husband. Exh. 505. That return listed $500 in rental income on the property and $7,983 in rental expenses, including depreciation. Id. Ms. Jones explained at trial that she and Ms. Hamilton were friends and that Ms. Hamilton had no objections to her "reaping the gain" from the property. Trans. at 41. Asked whether Ms. Hamilton knew about her representations on the tax returns, Ms. Jones replied simply "[w]hy not?" Id. Ms. Hamilton's testimony on this point was not nearly as clear. Asked whether she knew that Ms. Jones was "doing things on her return related to that home," Ms. Hamilton responded as follows: "I knew that she used the tax--I really don't know. I should not say anything, because I really do not fully understand all the terms. But I did know that [] something with the interest rate or something interest that you can deduct from your taxes." Id. at 100. She also testified that Ms. Jones had mentioned something to her about taking the interest deduction "the first year that I purchased the house" but that she could not recall any later such references. Asked whether she had voiced any concerns to Ms. Jones regarding such an interest deduction, Ms. Hamilton responded that she had not. Id. ⁴

On April 11, 1989, the defendant, through IRS Collection Officer Alice Hammermann ("Officer Hammermann"), seized the subject property in order to satisfy Ms. Jones' unpaid tax liabilities. The seizure followed a property search by Officer Hammermann at the New Haven Town Hall, a review of Ms. Jones' 1987 tax return, an interview with Ms. Jones ⁵ and a check with the New Haven Tax Assessor's office, all of which indicated that Ms. Jones was the record owner of the property. Officer Hammermann also wrote a letter to the Southern Connecticut Water Authority to determine if there was any back money owed to the utility. The Water Authority's response also indicated that Ms. Jones was the owner of the property.

On April 12, 1989, immediately after learning of the seizure, Ms. Hamilton telephoned Officer Hammermann and told her that she had a quitclaim deed that would establish that she, Ms. Hamilton, was the owner of the property. Officer Hammermann replied that no such deed had ever been recorded and that if Ms. Hamilton had such a document, she would like to see it. After a successful search for the unrecorded quitclaim deed, see supra note 2, Ms. Hamilton's lawyer, V. James Ferraro, sent Officer Hammermann a copy of the deed along with a letter advising her that he was having the deed recorded with the New Haven Land Records Office. Exh. 5 (June 5, 1989 dated letter from V. James Ferraro to Alice Hammerman[n]). The letter also requested that the government "release the property at 174-176 Thompson Street , New Haven from the IRS seizure, since Brenda Jones is not the owner of the property. The true owner is Linda Hamilton." Id. Notwithstanding Ms. Hamilton's claimed rights to the property, the IRS declined to release the levy. On March 13, 1990, Officer Hammermann orally notified Ms. Hamilton that the IRS intended to advertise immediately and sell the property in order to satisfy Ms. Jones' liabilities. This suit was commenced two days later.

CONCLUSIONS OF LAW

Plaintiff brings this action pursuant to 26 U.S.C. §7426(a)(1) . That statutory section provides for suits by third-parties seeking recovery of property in which they claim an "interest," property allegedly "wrongfully" levied by the Internal Revenue Service ("IRS") in its efforts to collect taxes owing from a delinquent taxpayer. ⁶ A levy of property is "wrongful" if made "upon property in which the taxpayer had no interest at the time the lien arose or thereafter." 26 C.F.R. 301.7426-1 (1991); see also S. Rep. No. 1708, 89th Cong., 2d Sess. 3 (1978), reprinted in 1966 U.S.C.C.A.N. 3751 (" '[w]rongful,' as used here, refers to a proceeding against property which is not the taxpayer's"); Arth v. United States [84-2 USTC ¶9601 ], 735 F.2d 1190, 1193 (9th Cir. 1984) ("[p]roperty is wrongfully levied if it does not, in whole, or in part, belong to the taxpayer against whom the levy originated") (citations omitted).

The burden of proof in a §7426 proceeding rests on the plaintiff, in the first instance, to show that she has title or some other ownership interest in the property and that the government made a levy on that property because of a tax assessment against another taxpayer. Morris v. United States [87-1 USTC ¶9241 ], 813 F.2d 343, 345 (11th Cir. 1987). The burden is essentially that of establishing standing. Assuming the plaintiff proves standing, the burden then shifts to the government to prove a nexus between the property and the delinquent taxpayer. Id. The ultimate burden remains the plaintiff's--that of showing that the levy was wrongful, i.e., that the property did not belong to the taxpayer against whom the levy was directed but, in fact, belonged to the plaintiff. Security Counselors, Inc. v. United States [88-2 USTC ¶9584 ], 860 F.2d 867, 869 (8th Cir. 1988); Arth [84-2 USTC ¶9601 ], 735 F.2d at 1193.

As Ms. Hamilton is in possession of the property and as the record clearly indicates that the government made a levy on that property because of a tax assessment against another taxpayer, Ms. Hamilton has satisfied her initial standing burden. Marotta v. United States, 82-1 USTC (CCH) (N.D.N.Y. March 6, 1981) (MacMahon, J.) ("generally, courts have held possession a sufficient interest to meet the standing requirement of Section 7426 ") (citations omitted); compare Rabinof v. United States [71-2 USTC ¶9601 ], 329 F.Supp. 830, 843 (S.D.N.Y. 1971) (plaintiffs in action to enjoin enforcement of tax levy on valuable violin and bows had standing to sue under §7426 where plaintiffs had possession of the subject property) with Valley Finance, Inc. v. United States [80-2 USTC ¶9554 ], 629 F.2d 162, 168 (D.C. Cir. 1980), cert. denied, 451 U.S. 1018 (1981) (held that general creditors without a security interest in the property seized or some other "specific possessory right" did not have standing to sue under §7426 ). Defendant's arguments to the contrary are not persuasive.

The government first argues that as Ms. Jones executed the quitclaim deed on Ms. Hamilton's behalf before the Bank had even transferred the property to her, see supra note 1, she "had no rights in the Thompson Street property to quitclaim to the plaintiff at the time she executed the quitclaim deed." Gov't Post-Trial Brief at 6. As such, it submits, plaintiff acquired no legal interest in the property via the quitclaim deed. Defendant offers no legal support, however, for what the Court finds, in any event, a tenuous argument. It is sufficient, in the Court's view, that the two documents were part of the same transaction and that the execution of one was substantially contemporaneous to the execution of the other. See World Inv. Co. v. Kolburt, 317 S.W.2d 697, 701 (St. Louis Ct. of Appeals 1958) ("[t]he true test is whether [the instruments] were executed as integral acts in a series of acts which, taken together, constitute one continuous transaction, and were so intended, so that in order to carry out the intention of the parties the two instruments should be given contemporaneous operation and effect"); cf. Ethridge v. Allied Equip. & Supply Co., 26 N.J. Super. 586, --, 98 A.2d 590, 591 (1953) ("where, as in this matter, there is no intention to evade the statute and the parties contemplate the prompt execution and delivery of the prescribed title papers, the transaction should not be considered void merely because the papers were not delivered at the moment the bargain was struck or when the buyer took possession of the vehicle").

Defendant next argues that even assuming Ms. Jones had an interest in the property at the time she executed the quitclaim deed, there was no valid conveyance of the interest in the absence of actual delivery of the quitclaim deed to plaintiff. In making this argument, defendant assumes the burden of proving by clear and convincing evidence that there was no valid delivery. Lomartira v. Lomartira, 159 Conn. 558, 562, 271 A.2d 91, 93 (1970). It is well settled that "[t]he delivery of a deed with intent by the grantor to pass title is essential to a valid conveyance." City Nat'l Bank v. Morrissey, 97 Conn. 480, 483, 117 A. 493,--(1922). It is not necessary, however, that the instrument be delivered to the grantee in person; delivery to an authorized agent of the grantee is as effective as though made to the grantee herself. 23 Am. Jur. 2d, Deeds §§138 -39. In all cases, the "intent of the grantor is . . . the most important factor." D'Addario v. D'Addario, No. 256879S, 1991 Conn. Super. LEXIS 891, at *14 (April 24, 1991); see generally 23 Am. Jur. 2d, Deeds §123 .

The evidence adduced at trial indicates that Ms. Jones' intent in executing the quitclaim deed was that of effecting a transfer of the property to the plaintiff. As Ms. Jones testified at trial, "it was explained to both [myself and Ms. Hamilton at the closing] that I did not own the property. This quit-claim deed meant that it would stay in the file and if it ever came a time of question [of] who owned the house, this would prove that Linda owned it." Trans. at 23. Equally evident at trial was the fact that Ms. Hamilton intended Mr. Shapiro to act as her agent in accepting delivery of the quitclaim deed. Evidence the following exchange between Ms. Hamilton and counsel for the government:

Q--So your understanding was that the deed was in the attorney's office and that protected you as the owner of the property?

A--Yes, yes. . . .

Q--Do you know why it wasn't recorded? Do you know why it wasn't recorded?

A--I fe[lt] there wasn't a need to. I just felt it was safe, you know. I thought it was legal just the way it was. Completely legal.

Q--You mean to have it in the attorney's possession?

A--Yes.

Id. at 60.

Under all the circumstances and particularly in view of the foregoing, the Court finds that Ms. Jones intended to pass title to Ms. Hamilton via the quitclaim deed and that delivery of that deed to her was constructively made through Mr. Shapiro. The government's claim to the contrary is without merit.

Having concluded that Ms. Hamilton has standing to bring this action, the Court's focus turns to whether the government has established the condition precedent to the government seizure, namely, that a nexus exists between Ms. Jones, the taxpayer, and the property. See 26 U.S.C. §6321 (affording the government a lien for delinquent taxes upon "all property and rights to property" belonging to the taxpayer). In determining the nature of the legal interest Ms. Jones had in the subject property at the time of the seizure, the Court must look to Connecticut law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960). Whether or not any state-created interest she had in the property can then be said to constitute possession of the "property or rights to property" to which a tax lien can attach under §6321 , is a question of federal law. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 727 (1985) ("[t]he question whether a state-law right constitutes 'property' or 'rights to property' is a matter of federal law") (citation omitted); Kimura v. Battley [92-2 USTC ¶50,397 ], No. 91-35010, 1992 U.S. App. LEXIS 15509, at *8 (9th Cir. July 10, 1992) ("[o]ur initial task is to understand and define the bundle of rights and privileges that Alaska law has created in favor of the holder of a liquor license. Concomitant with our state law inquiry, we must determine as a matter of federal law whether the interest created by the statute is 'property' or a 'right to property' to which the federal tax lien can attach") (citations omitted); Terwilliger's Catering Plus, Inc. v. United States [90-2 USTC ¶50,460 ], 911 F.2d 1168, 1171 (6th Cir. 1990), cert. denied sub nom. Ohio Dep't of Taxation v. IRS,--U.S.--, 111 S. Ct. 2815 (1991) (same). An interest is said to constitute possession of the "property or rights to property" where that interest is "an economic asset in the sense that it has pecuniary worth and is transferable." Little v. United States [83-1 USTC ¶9343 ], 704 F.2d 1100, 1106 (9th Cir. 1983); see also Kimura, supra ("a liquor license will constitute property, within the meaning of federal law, if the license has beneficial value for its holder and is sufficiently transferable") (citing Little); 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516 ], 790 F.2d 354, 357 (3d Cir. 1986) (same).

In asserting that Ms. Jones had an economic asset in the property and thus rights to it, the government relies on Connecticut General Statute §47 -10, providing that "[n]o conveyance shall be effectual to hold any land against any other person but the grantor and his [or her] heirs, unless recorded on the records of the town in which the land lies." Conn. Gen. Stat. §47 -10 (emphasis added). Applying that provision to the circumstances present in the case at bar, the government submits that Ms. Hamilton's failure to record the duly executed quitclaim deed allowed Ms. Jones to retain marketable title to the property. She could pass that title to a bona fide purchaser for value who could record first and whose claim would then be superior to Ms. Hamilton's. Gov't Post-Trial Brief at 17. This is true despite the fact that as between Ms. Jones and the first purchaser, Ms. Hamilton, the quitclaim deed is valid and binding. ⁷ According to the government's analysis, the power to make this second sale amounts to an economic asset belonging to Ms. Jones. That alleged asset, in turn, would constitute a right to the property cognizable under §6321 . See Little, supra.

The Court finds the government's argument troubling. The position, akin to that taken by the government in United States v. V&E Engineering & Construction Company, would have this Court effectively sanction the knowing sale by a vendor of the same piece of property to two purchasers. 819 F.2d 331, 333 (1st Cir. 1987). In V&E, the First Circuit concluded that the Puerto Rico recording statute at issue, a race-notice statute, could not be presumed to work such a result. ⁸ As the Court explained:

[t]he government's argument amounts to asking that we construe the term "right to property" in section 6321 as referring to the possibility that the seller might fraudulently convey the sold property to an innocent third party. We cannot accept that Congress intended the term "right" to include the possibility that a party might engage in fraud. Under the Puerto Rico statutory scheme, a taxpayer, once having sold his property, no longer has a "right" to that property within the meaning of section 6321 .

Id. In so concluding, the First Circuit relied, inter alia, on a Puerto Rico statutory provision specifying that "a sale shall be perfected between vendor and vendee and shall be binding on both of them, if they have agreed upon the thing which is the object of the contract and upon the price, even when neither has been delivered." P.R. Laws Ann. tit. 31 §3746. Under that provision, noted the Court, "a vendor is bound by the sale of his property, regardless of the recording of that sale by the purchaser. He, therefore, has no 'right to property' under 26 U.S.C. §6321 ." 819 F.2d at 334.

Connecticut law regarding quitclaim deeds includes a comparable provision, Conn. Gen. Stat. §47 -36f (quoted above in note 7). Following the First Circuit's reasoning in V&E, Ms. Jones relinquished any valid right to make further transfer of the property in question when she executed the quitclaim deed transferring the property to Ms. Hamilton. ⁹ It is undoubtedly true that where, as here, the first grantee failed to record, any subsequent grantee of the property from Ms. Jones who does record would prevail in a contest with the first grantee. Nonetheless, the second transfer would have worked a fraud on the first transferee, here Ms. Hamilton. The Court is hard pressed to believe Congress would countenance this result. As there can be no valid right to sell the same property twice and as Conn. Gen. Stat. §47 -36f had the operative effect of divesting Ms. Jones of title to the property when the quitclaim deed was executed, her conceded ability to sell the property twice could only be wrongful and cannot be characterized as the kind of economic asset said to constitute a property interest under §6321 . See V&E, supra. The Court notes that had the Connecticut legislature enacted a provision outlawing the sale of real property one does not own, the government could not have made this argument. Ms. Hamilton should not be penalized merely because the precept is so obvious as to be virtually above legislating.

To the extent the United States v. Creamer Indus., Inc. and Prewitt v. United States cases in the Fifth Circuit compel a different result, the Court declines to follow them. As the First Circuit intimated in V&E, the persuasive dissent by the Honorable John R. Brown in Creamer and the concurrence by the Honorable E. Grady Jolly in Prewitt leave those decisions less than compelling authorities. Creamer involved the case of a delinquent taxpayer who had sold several tracts of land to a bona fide purchaser. [65-2 USTC ¶9527 ], 349 F.2d 625 (5th Cir.), cert denied, 382 U.S. 957 (1965). The deed subsequently recorded by the purchaser erroneously failed to include certain tracts of the land. The deed was later corrected to include the omitted property but only after a federal tax lien against the taxpayer had attached to that portion of the property. Over a vigorous dissent by Judge Brown, the majority held the lien enforceable, reasoning that the conveyance of the omitted property had not been timely recorded and that the IRS was therefore a creditor without notice and entitled to the protection of the applicable recording statute. Judge Brown made the following cogent argument in dissent: "the morality of the Government's taking property which the Court's opinion reflects was sold to, paid for by, and in equitable conscience and law belonged to a stranger, is so disturbing to me that before the heavy hand of the tax gatherer falls, it is for Congress to speak clearly to declare that this is the conscience of the country." Id. at 629-30 (Brown, J., dissenting); see generally Travis v. United States, No. 385991, 1989 U.S. Dist. LEXIS 12047, at *5 (E.D. Tenn. Sept. 27, 1989) (wherein the district court noted that Judge Brown's dissent had been "at the heart of" its ruling in favor of plaintiffs who had brought a similar claim).

Prewitt involved the filing of notice of a tax lien against real property previously owned by James and Johanna Damon. [86-2 USTC ¶9513 ], 792 F.2d 1353 (5th Cir. 1986). The notice named James Damon only. Before the notice was filed, however, Mrs. Damon had been awarded the whole of the property pursuant to a divorce decree and had subsequently sold it to Mr. Prewitt, a third-party without notice. Ms. Damon had not filed a copy of the divorce decree until after the filing of the levy notice at issue. Although conceding that on the date the lien notice was filed "James had no enforceable interest in the property as against Johanna, the divorce decree which awarded her the property having become final two months before," the Fifth Circuit reached the seemingly reluctant conclusion that it was bound by precedent to hold the lien enforceable. [86-2 USTC ¶9513 ], 792 F.2d at 1355 (noting that "[w]hile on its face somewhat appealing, [Mr. Prewitt's] argument is foreclosed by United States v. Creamer Industries, Inc."). Concurring in the majority opinion, the Honorable E. Grady Jolly explained that he fully agreed with Judge Brown's dissent in Creamer and was joining the majority "only because we are bound by our own precedent," namely Creamer. Id. at 1359 (Jolly, J., concurring). Judge Jolly then proceeded to criticize the illogical result dictated by Creamer:

Here, pursuant to the divorce decree, the property was transferred from the taxpayer to his wife in a final judgment on October 9, 1982. From that point forward, the taxpayer had no interest or right whatsoever, legal or equitable, in this property. . . . Whatever the [subsequent] lien attached to, it did not attach to this property because it in no way, shape or form belonged to the taxpayer.

Id.

Neither the Creamer decision nor the Prewitt decision persuades the Court that the government's position here is a sound one. Neither case is on all fours with the one at bar, neither is binding on this Court and neither is overly persuasive, particularly when read in conjunction with Judge Brown's and Judge Jolly's respective opinions.

More persuasive, at least at first blush, is the government's argument that Ms. Jones also had a "right to the property" to the extent that she derived economic benefit from the purported ownership of it by taking related deductions on her 1987 and 1988 tax returns. However, while evident that her purported ownership of the property in that context held pecuniary worth for Ms. Jones, that interest was not transferable. See Little [83-1 USTC ¶9343 ], 704 F.2d at 1106. As discussed above, although she could actually have sold the property twice, thereby transferring the tax advantages accompanying it, the Court will not allow that she could have done so legitimately. ¹⁰ Plaintiff has one additional source of pecuniary worth in the property arising out of the protections extended lien creditors under the Connecticut recording statute. Prudent Projects v. Travelers Ins. Co., 3 Conn. App. 429, 431 n.3, 489 A.2d 396, 397 n.3 (1985). The government not having raised this argument, the Court will not address it.

The Court holds that the foregoing rationale defeats any claimed nexus between Ms. Jones and the property in question. ¹¹ In so holding, the Court has not ignored the fact that the IRS stands before it as a creditor who put a lien on the property without notice that, in fact, the property belonged to Ms. Hamilton. There is no evidence that before Officer Hammermann seized the property on April 11, 1989 she knew that Ms. Hamilton had been living there and had been making all payments relating to the property, albeit with the substantial assistance of family and friends. Nonetheless, the Court's decision finds additional support in a distinction between this creditor and other persons or entities seeking protection under Connecticut 's recording statute. While courts in Connecticut have extended the protections of the recording statute to creditors, see Prudent Projects, 3 Conn. App. at 431 n.3, 489 A.2d at 397 n.3, it is apparent that the courts had in mind those individuals or entities that had actually extended credit to the record owner in reliance on the land records. See Second Nat'l Bank of New Haven v. Dyer, 121 Conn. 263, 184 A. 386 (1936) ("we have gone beyond the express terms of the recording statute and . . . have given the protection of the recording system to those who have given credit to one appearing upon the record to be the owner of the property although he had no beneficial right in it") (citations omitted). Defendant here is not so situated. The record is devoid of any evidence that the government ever extended credit to Ms. Jones in reliance on her record ownership of the subject property. The case does not, in sum, involve the equitable stakes typically dispositive of the conventional recording statute dispute. It calls to mind instead Judge Brown's words in dissent in Creamer:

This is a startling result. Laws of Texas which are designed to protect innocent persons dealing in faith on the revelations of title records are twisted to permit the great national sovereign to take property from one who is the acknowledged owner of it to apply on the tax debts of another the former owner who--as the trial Court found and this Court does not dispute--has transferred the property. I do not believe that Congress ever intended any such result. I do not think that a Court should lend its hand to anything so demeaning to a sovereign.

[65-2 USTC ¶9527 ], 349 F.2d at 629 (Brown, J., dissenting) (footnotes omitted).

The government offers the alternative argument that Ms. Hamilton should be estopped, as an equitable matter, from denying Ms. Jones' alleged interest in the property. The Court finds this argument unavailing, premised as it is on the government's unsupported collusion theory. As noted earlier, see supra note 2, the Court is not convinced that either woman made a deliberate decision not to record the quitclaim deed with a wrongful purpose in mind. For example, plaintiff did not testify, as the government alleges, that "she would not have wanted to be named as titular owner at the time Brenda Jones purchased the property since her one stable source of income was welfare." Gov't Post-Trial Brief at 18. Although Ms. Hamilton testified that she did not inform the State Department of Income Maintenance that she had purchased a home, see Trans. at 103, the government's above paraphrase strikes the Court as a reaching extrapolation of that testimony. ¹²

CONCLUSION

In the absence of a finding that Ms. Jones possessed the property at issue or rights to it, the Court concludes that the challenged levy was wrongful. So concluding, the Court hereby ORDERS the Clerk of the Court to enter judgment for the plaintiff. Consistent with this Order, the Commissioner of the Internal Revenue Service is directed to cause the release of the lien at issue forthwith. ¹³

SO ORDERED.

¹ Ms. Hamilton's uncontradicted testimony at trial established that Ms. Jones signed the quitclaim deed transferring the property to Ms. Hamilton before she signed the quitclaim deed through which the Bank transferred the property to her. Trans. at 84.

² None of the witnesses at trial, including either Mr. Shapiro, Ms. Jones or Ms. Hamilton, could fully account for the failure to record the quitclaim deed immediately after the closing. It appears that the deed was only mistakenly returned to Mr. Shapiro's file without having been recorded. Although Ms. Hamilton testified that she did not believe it had to be recorded, there is no evidence that she advised Mr. Shapiro not to do so. The deed did not resurface until June, 1989, when Ms. Hamilton, confronted with the seizure of the property, conducted a search for it. Only then was it recovered from a file at Mr. Shapiro's former law firm.

The government suggested at trial and in its post-trial submission that Ms. Hamilton chose not to record the deed in order to avoid jeopardizing her entitlement to welfare payments. See, e.g., Gov't Post-Trial Brief at 14, 19. The argument, part and parcel of the government's theory of collusion between the two women, is not persuasive. As the Court noted at trial, the theory does not adequately explain Mr. Shapiro's role in the transaction and his testimony that he was under the impression that the quitclaim deed had been recorded. Mr. Shapiro's testimony allows of no inference that he knowingly agreed to keep the deed in his file without recording it.

³ The government's proposed finding of fact that all other utilities, including electricity, were held and paid in the name of Brenda Jones, finds no support in the record. See Gov't Post-Trial Brief at ¶11.

⁴ The record does not support the government's claim that Ms. Jones reported ownership of the property "[o]n her tax returns for tax years 1983 through 1988." Gov't Post-Trial Brief at ¶14. Only Ms. Jones' 1987 and 1988 returns were admitted at trial; the sole reference to returns from 1983 through 1986 came in the form of a question from government counsel that was not subsequently adopted by the witness. See Trans. at 31-32. Alleged exhibits 503 and 506, cited by the government in connection with this argument, see Gov't Post-Trial Brief at ¶15, are not part of the record in this case.

⁵ When Officer Hammermann met with Ms. Jones to secure a financial statement, Ms. Jones indicated to her that she owned the Thompson Street property. Trans. at 130 (Officer Hammermann's testimony).

⁶ Recognizing that the government's rigorous tax enforcement activities at times encroach upon persons other than the delinquent taxpayer, Congress sought through this provision to provide a measure of protection for the property rights of these third-parties. See Falcon Constr. Co. v. United States , No. F-87-332 (EDP), 1988 U.S. Dist. LEXIS 16730, at *9 (E.D. Cal. June 15, 1988) (citing the section's legislative history).

⁷ Connecticut law provides that a quitclaim deed, when duly executed, "has the force and effect of a conveyance to the releasee of all the releasor's right, title and interest in and to the property described therein . . ." Conn. Gen. Stat. §47 -36f. Thus, as between Ms. Jones and the plaintiff, the deed is valid, though not recorded, and in a contest between the two, Ms. Jones could successfully claim no interest in the property.

⁸ As here, V&E involved a situation where notice of an IRS tax lien was filed before the mortgage and deed of sale from an earlier transfer of the property by the delinquent taxpayer, V & E, were recorded. The government argued that the property remained subject to the tax lien even after V & E had sold the property to innocent third-parties.

⁹ The government's attempts to distinguish V&E are unpersuasive. See Gov't Post-Trial Brief at 15 n.2.

¹⁰ The government's additional claim, that "Ms. Jones was further able to list the parcel on any and all loan and other credit applications she may have chosen to make," has no evidentiary basis in the record and was presumably offered as hypothetical support for the government's position. See Gov't Post-Trial Brief at 10. This hypothetical interest, while also of obvious pecuniary value, is only as transferable, however, as the property itself. As noted above, the property itself cannot properly be transferred.

¹¹ The Second Circuit's recent decision in SEC v. Levine, reversing a District Court's holding that assets obtained by wrongful means could not properly be considered property of the taxpayer for §6321 purposes, does not compel this Court to reach a contrary finding. 881 F.2d 1165 (2d Cir. 1989), aff'g in part, rev'g in part 689 F. Supp. 317 (S.D.N.Y. 1988). The Second Circuit reversed the District Court's conclusion on two grounds. As an initial matter, the Court found no evidence to support the finding below that the assets had been obtained by wrongful means. Assuming, arguendo, that that finding was supportable, the Court found error in the District Court's ensuing legal analysis and, specifically, its conclusion that the applicable provision of the Securities Exchange Act of 1934 would have rendered the wrongful transaction at issue void. Because the statutory provision at issue only rendered the transaction voidable and not void, and because New York law provides that a culpable party to a voidable transaction nonetheless acquires title, albeit voidable title, to the transferred goods, the Court concluded that defendants had acquired property rights in the goods and that the contrary finding below was in error. Id. at 1176.

Unlike Levine, this case does not involve a contract voidable under federal law, nor does it involve any state law providing that a voidable transaction nonetheless extends good title to the property at issue.

¹² In view of the findings above, the Court need not address plaintiff's alternative argument that Ms. Jones held the record title under the resulting trust doctrine as trustee for the benefit of Ms. Hamilton.

¹³ As the mortgage on the property has not been repaid in full, the Court declines to grant the relief requested in paragraph 2 of plaintiff's prayer for relief--the issuance of a declaration that she is the sole and absolute owner of the subject property.

[55-1 USTC ¶9469]Guaranty Bank & Trust Company of Alexandria , Louisiana , Plaintiff-Appellee v. M. D. Barton, Defendant-Appellee; United States of America , Third-Opponent-Appellant

(CA-2), In the Court of Appeal for the Second Circuit, State of Louisiana, No. 8204, January 4, 1955

Appealed from the Ninth Judicial District Court of Louisiana, in and for the Parish of Rapides.

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Liens for taxes: Property in custody of county sheriff. --On September 13, 1952, plaintiff bank instituted a suit against the taxpayer seeking judgment on a promissory note and was granted a writ of attachment under which the sheriff seized taxpayer's six motor buses. On December 19, 1952, a judgment recognized plaintiff's attachment lien and, subsequently, a writ of fieri facias was issued under which the attached property was seized. There was no sale of the seized property and no further proceedings in satisfaction of the judgment. The federal government filed a petition of third opposition on March 17, 1953, alleging the filing of three tax liens against taxpayer during July, September, and October 1952. The federal government contended that it was entitled to $1,337.92 of the balance remaining in the hands of the sheriff from the seizure and sale of taxpayer's property in the instant case. As there was no sale of any property made in the instant suit, there were no funds to be distributed. Consequently, the federal government's demands were rejected. It appeared that the action taken by the government in the instant case was an attempt to assert claim against a fund in the sheriff's hands remaining from the seizure and sale of property which was effected in an entirely different cause. Affirming an unreported judgment of a Louisiana District Court.

William J. Fleniken, Edward V. Boagni, Shreveport, La., for appellant. Provosty, Sadler & Scott, Lloyd G. Teekell, Alexandria, La., for appellees.

Before HARDY, JR., GLADNEY, and AYRES, Judges.

HARDY, Judge:

This case comes before us on appeal by the United States of America from a judgment sustaining an exception of no cause and no right of action and dismissing appellant's third opposition.

By petition filed September 13, 1952 Guaranty Bank & Trust Company of Alexandria, Louisiana instituted suit against M. D. Barton seeking judgment in the principal sum of $2,000.00 on a promissory note executed by said defendant. By supplemental and amended petition the plaintiff bank prayed and was granted a writ of attachment under which the sheriff seized six motor buses, particularly described in the sheriff's return, as property belonging to the defendant Barton. Judgment was rendered in favor of plaintiff on December 19, 1952, which judgment recognized plaintiff's lien by virtue of the attachment and, subsequently, a writ of fieri facias issued under which the attached property was seized. There was no sale of the seized property and the record discloses that there were no further proceedings for the satisfaction of the judgment.

The United States of America on March 17, 1953 filed a petition of third opposition alleging the filing of three tax liens against the defendant, Murrell D. Barton, during July, September and October, 1952, in the total principal sum of $1,448.51. The government further alleged that one of said liens in the amount of $110.59 had been paid and satisfied in full and that the principal sum claimed under the remaining liens amounted to $1,337.92. The petition of third opposition represented that the Sheriff of Rapides Parish, Louisiana, was holding in his hands the sum of $1,448.51 out of the balance remaining from the seizure and sale of property belonging to Murrell D. Barton under a writ of fieri facias in suit No. 41,962, entitled The Vernon Bank against Murrell D. Barton, on the docket of the Ninth Judicial District Court in and for the Parish of Rapides, State of Louisiana, after satisfaction of the claim of The Vernon Bank, plaintiff in said suit. The government as third opponent prayed for the issuance of a rule to show cause directed against the Sheriff and the Guaranty Bank & Trust Company, plaintiff in this suit, and, after hearing, for judgment ordering payment to third opponent of the funds remaining in the custody of the sheriff up to the amount of third opponent's claim for $1,337.92.

To the above petition of third opposition plaintiff and the respondent sheriff filed exceptions of no right or cause of action, which, after hearing, were maintained, and judgment was rendered rejecting third opponent's demands.

Before this court counsel for plaintiff have filed a motion to dismiss the appeal on the ground that there is no matter at issue for determination by this court.

The exceptions to third opponent's petition were based upon the contention that there was no sale of any property made in the instant suit; that there were no funds to be distributed, and, therefore, no dispute existed. It is obvious that these points are well taken and that there was no error in the ruling of the court from which appealed.

In argument and brief before this court counsel for the government contends that the issue presented is not procedural and urges that the holding of the district court was in reality a ruling on the merits of the case which had the effect of holding the government's tax lien to be subordinate to the attachment lien of plaintiff in suit. We find no merit in this contention, nor, indeed, can we conceive of any sound basis for such an argument. The action taken by the government in the instant case is an attempt to assert claim against a fund in the hands of the sheriff, remaining from the seizure and sale of property which was effected in an entirely different cause. We know of no authority for such procedure.

The motion to dismiss should be allowed and it is so ordered.

[65-1 USTC ¶9221]United States of America, Plaintiff v. Emanuel Lester, Rhe Lerner Oster, as independent executrix of the Last Will and Testament of Harold M. Oster, deceased, Donald U. Emmert, Odie R. Seagraves, a/k/a Otis R. Seagraves, Florence E. Seagraves, Frederic A. Collins and Frank H. Gordon, co-partners doing business under the firm name of Collins & Gordon, Thomas J. Tracy, Nicholas Atlas, Parnell J. T. Callahan and First National City Bank of New York, Defendants

U. S. District Court, So. Dist. N. Y., 63 Civ. 2048, 7/21/64

[1954 Code Sec. 6321]

Tax lien: Property interest: Assignment.--The government's motion for summary judgment was denied in a suit in which a lien for federal income taxes attempted to reach the proceeds arising from the settlement of a legal claim originally owned by a delinquent taxpayer--which claim was allegedly assigned to another individual prior to attachment of the lien. Since the assignment was not shown to have been invalid under state law, the court found that the government failed to establish that the delinquent taxpayer had some interest in the claim at the time the lien attached. Summary judgment was also denied to the assignee and persons claiming through the assignee on the ground that a triable issue existed in the government's contention that the assignment was not absolute but had been made only for collection of the proceeds and, therefore, merely created an agency relationship between the assignor and assignee.

Robert M. Morgenthau, United States Attorney, Philip H. Schaeffer, David E. Montgomery, Assistant United States Attorneys, New York, N. Y., for plaintiff. Emanuel Lester, Thomas H. Tracy, Frederic A. Collins, Frank H. Gordon, Collins & Gordon, New York, N. Y., for defendants.

Opinion

[Issue]

BRYAN, District Judge:

The United States, claiming deficiency income tax assessments of some $139,000 against one Odie R. Seagraves, sues under 26 U. S. C. §7043 to enforce a federal lien for such taxes against a special account of the New York law firm of Collins & Gordon with the Lexington Avenue and 42nd Street Branch of the First National City Bank. On deposit in the special account is the sum of $125,000 which is the proceeds of the settlement of a lawsuit brought by Emanuel Lester against the estate of the late Serge Rubinstein in the Supreme Court, New York County. Messrs. Collins & Gordon represented the plaintiff Lester in this litigation.

Defendant Lester, on whose behalf this settlement was obtained, defendants Collins & Gordon, who assert that, out of the fund, they are entitled to be paid their fees for professional services in the Rubinstein litigation and for obtaining the settlement, and defendant Tracy, who asserts a claim for services as investigator in that litigation, have now moved for judgment on the pleadings pursuant to Rule 12(c), F. R. C. P., and for summary judgment pursuant to Rule 56. ¹ The Government has made an oral cross-motion for summary judgment.

The first step in the long and tortuous chain of events which led to the institution of this action occurred in the period from 1942 to 1946 when Seagraves, a Texan, the taxpayer against whose property the tax here was levied, engaged in a joint venture with Rubinstein. Seagraves' interest in this joint venture eventually formed the basis for the suit in the New York State courts by Lester against Rubinstein which was subsequently settled for the $125,000 on deposit in the Collins & Gordon Special Account in the First National City Bank. It is the process by which this claim passed from the hands of Seagraves into the hands of Lester which has created the controversies involved in the case at bar.

[Facts]

The undisputed chronology of relevant events is as follows:

1. November 3, 1950: By a written instrument executed in Dallas, Texas, Seagraves assigned to Harold M. Oster, his attorney, and Donald U. Emmert, his accountant and office manager, his claims against Rubinstein arising out of the joint venture.

2. June 10, 1954: By a written instrument challenged in Dallas, Texas, Oster and Emmert reassigned to Seagraves the claims against Rubinstein. In this instrument a lien of $25,000 "for unpaid consideration" was reserved by Oster and Emmert.

3. June 10, 1954: By a written instrument executed in the State of Texas, Seagraves assigned to Emanuel Lester the claims against Rubinstein. This assignment was absolute on its face and recited a consideration of "the sum of ten (10) dollars and other good and valuable considerations, including the release of certain debts receipt of which is hereby acknowledged."

4. June 17, 1954: By a written instrument executed in Dallas, Texas, Lester "acknowledged" that Seagraves had an option to require reassignment to him of the claims against Rubinstein if Lester had been "unable to effect collection" by September 15, 1954.

5. September 21, 1954: By a written instrument executed in Havana, Cuba, Seagraves and Lester "abrogated and declared null, void and of no effect" Seagraves' option for reassignment of the claims against Rubinstein referred to in the instrument of June 17, 1954. The Havana instrument contained a recital of consideration and the additional statement "that the aforesaid assignment from SEAGRAVES to LESTER [that of June 10, 1954] is in full force and effect and is absolute, unconditional and without restrictions of any kind, other than may appear in the body of said document." The instrument was acknowledged by Seagraves before a notary public in Bexar County, Texas, on September 30, 1954.

6. September 21, 1954: By a joint writing signed in Havana, Cuba, Seagraves and Lester stated that the consideration for the assignment of June 10, 1954 was the release of a pre-existing indebtedness and other valuable considerations including additional cash advances for oil and gas leases. The statement was acknowledged by Seagraves before a notary public in Bexar County, Texas, on September 30, 1954.

7. March 24, 1955: Oster and Emmert, then plaintiffs of record in an action in this court against Rubinstein based on the Seagraves joint ventur claim, signed and acknowledged in Dallas, Texas, a letter to a New York attorney, to be filed in court. In this letter they reaffirmed their reassignment of the claims against Rubinstein to Seagraves before June 10, 1954, and disclaimed any interest in such claims. It appears that the action in this court was dismissed for want of jurisdiction.

8. April 15, 1955: The United States assessed a deficiency of $101,530.81 plus interest against Seagraves on his 1951 income tax.

9. October 7, 1955: The United States filed a notice of tax lien for this deficiency under 26 U. S. C. §6323 in Dallas, Texas.

10. December 12, 1955: Lester instituted suit in the Supreme Court, New York County, to enforce claims against Rubinstein arising out of the joint venture with Seagraves.

11. October 1959: Collins and Gordon were substituted as attorneys for Lester in the Rubinstein suit and Lester executed a written agreement of retainer with them the terms of which do not appear.

12. August 5, 1963: Lester and Messrs. Collins & Gordon received $125,000 from Rubinstein's estate in settlement of Lester's suit on the joint venture claims. This sum was deposited in a Special Account of Collins & Gordon with the First National City Bank.

13. August 5, 1963: The United States served a notice of levy on Lester, Collins & Gordon and the First National City Bank and thereafter commenced this action.

[Defendants' Claims]

Collins & Gordon claim an attorney's lien on the fund for their services in the Rubinstein litigation and settlement. It is not clear from the papers submitted whether Tracy, an investigator apparently retained by Lester, asserts his claim to a portion of the fund by way of assignment or by way of lien. Lester, as the owner of the claims against Rubinstein, claims the balance of the fund after payment of Collins & Gordon and Tracy as well as the other defendant attorneys. All of the claimants contend that the Government has no tax lien against the fund in question because the taxpayer Seagraves had no interest in that fund to which the lien could attach. In the alternative, they urge that even if the Government's lien has attached, Lester's ownership of the fund is prior in right to that lien and that Collins & Gordon and Tracy, who claim through Lester, are entitled to shelter behind his priority. Finally, Messrs. Collins & Gordon claim that even if the Government's tax lien is prior to Lester's ownership of or interest in the fund, their attorney's lien is prior to the Government's lien under federal common law.

[Government's Claim]

The Government, on the other hand, contends that the assignment to Lester is wholly void under Texas law because it was not recorded, and under New York law because Seagraves was insolvent at the time, and that Seagraves therefore still owns or has an interest in the claims against Rubinstein and their proceeds. In the alternative, it claims that the assignment was for collection only. Finally, the Government claims that even if the assignment is valid between the parties, its lien is prior both to Lester's interest in the fund and to Collins & Gordon's attorney's lien because they were inchoate both at the time that the Government lien arose and at the time it was filed. ²

Neither plaintiff nor defendants are entitled to summary judgment on this record.

The Government's motion for such relief must fail for the simple reason that it has not established that the taxpayer Seagraves owned or had any interest in the Collins & Gordon account in the First National City Bank on which it seeks to enforce its tax lien. Under §6321 of the Internal Revenue Code of 1954 (26 U. S. C. §6321) a federal tax lien attaches only to "all property and rights to property, whether real or personal" belonging to the person liable to pay the tax. There are limitations to the same effect in 26 U. S. C. §6331 authorizing levy and 26 U. S. C. §7403 providing for an action to enforce the lien and to subject property to payment of tax.

It is of course elementary that the Government may not take one person's property to satisfy another person's tax obligations. Unless it is established that the taxpayer is the owner of or has some interest in the property on which levy is sought to be made, the Government cannot enforce its lien against such property and the statutes relating to the lien and its enforcement so provide. In such case there is nothing to which the lien can attach.

Moreover that question is not determined by ascertaining what rights creditors of the taxpayer may have against the property under state law, as the Government seems to conceive here. In seeking to enforce its lien the Government is bound by the limitations of the statute. It can only reach property in which the taxpayer has an interest and its rights can rise no higher than his. City of New York v. United States[60-2 USTC ¶9767], 283 F. 2d 829 (2 Cir. 1960);Central Surety & Insurance Corp. v. Martin Infante Co.[57-2 USTC ¶9736], 272 F. 2d 231 (3 Cir. 1959);United States v. Burgo [49-1 USTC ¶9307], 175 F. 2d 196 (3 Cir. 1949); Transmix Concrete of Rockdale v. United States [56-1 USTC ¶9349], 142 F. Supp. 306 (W. D. Tex. 1956).

Whether or not the taxpayer has any interest in property on which levy is sought to be made, however, is determined by state rather than federal law. Aquilino v. United States [60-2 USTC ¶9638], 363 U. S. 509 (1960); United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); United States v. Bess [58-2USTC ¶9595], 357 U. S. 51 (1958); Fidelity & Deposit Co. of Maryland v. New York City Housing Authority [57-1USTC ¶9410], 241 F. 2d 142 (2 Cir. 1957). On the record as made thus far it appears that the assignment from the taxpayer Seagraves to Lester was made prior to the time when the Government's tax lien became effective. On its face the assignment was absolute and divested Seagraves of any rights whatsoever to the claims against Rubinstein which resulted in the Collins & Gordon deposit and passed to Lester the sole ownership of that claim.

The question here then is whether under applicable state law the taxpayer Seagraves had any interest in the Rubinstein claim after its assignment to Lester to which the tax lien against Seagraves could attach. In other words, was the assignment effective to divest Seagraves of all interest in the claim and to vest all interest in Rubinstein?

[Texas Statute]

(1) The Government first asserts that Texas law governs because the assignment was made there and Seagraves resided there. It is its contention that under Art. 260-1 of the Texas Revised Civil Statutes the assignment was invalid and ineffective as between Seagraves and Lester because it was not recorded under that statute. Assuming that Texas law on the question does govern, the Government's contention is not well taken.

Art. 260-1 deals with the assignment of accounts receivable as defined in §1 and provides in §2:

"The assignment of any existing or future account or accounts may be protected by the execution and delivery by the assignor to the assignee of an instrument or instruments in writing * * * and by the filing for record of the "Notice of Assignment's as hereinafter provided for."

I will pass by the somewhat doubtful question of whether the assignment of a chose in action of the nature involved here comes within the statute at all. But if Art. 260-1 does apply, at least at the time the assignment from Seagraves to Lester took place, the assignment was not invalidated as between assignor and assignee, or rendered ineffective to pass full ownership from one to the other even if, as appears here, notice was not filed under the statute.

Art. 260-1 was apparently enacted to provide a means for assuring the validity in insolvency proceedings, and particularly proceedings in bankruptcy, of non-notification assignments of accounts receivable. Sutherland & Braucher, "Trust Receipts in Texas," 14 S. W. L. J., 328, 333 (1960); Williams, "Security Interests in Goods, Fixtures and Equipment of Merchants and Manufacturers," 25 Texas L. Rev. 589, 606-07 (1947); see Ruud, "A Legislative Audit of Judicial Opinions--A Proposal," 32 Texas L. Rev. 539, 544 n. 15 (1954).

It should be noted that the statute in its terms is permissive and not mandatory. §2 provides that an assignment covered "may be protected" by filing a notice of assignment, not that a notice is required to be filed or that it is invalid or ineffective as between assignor and assignee if a notice is not filed. There is nothing either in the language of the section or the legislative background of the statute to indicate any legislative intent to upset transactions between assignor and assignee when an assignment is absolute, as it appears to be here.

This is emphasized by the provisions of the 1957 amendment to the statute which was passed on an emergency basis, apparently to deal with specific situations involving construction contracts. The amendment added the following language to §1 of the statute which defines accounts receivable:

`account' or 'account receivable' shall not include any sums of money accruing to a contractor for labor performed or material furnished on any public or private construction contract unless the assignment properly describes the land upon which the improvements are to be constructed and such assignment filed in the office of the County Clerk of the county wherein the land lies, which assignment shall not be effective prior to such filing * * *."

The use of the language "which assignment shall not be effective prior to such filing", apparently meant to relate only to the construction contract accounts receivable dealt with by the amendment, is a further indication that the statute as it was in effect when this assignment was executed and the tax lien became effective, did not render other accounts receivable invalid or ineffective as between assignor and assignee for failure to comply with the permissive language of §2. Moreover, the preamble to the amending statute stated that its purpose was merely "to change the definition of 'account' or 'account receivable' by deleting provisions excluding sums accruing to a contractor who has furnished a surety bond." 1957 Acts, 55th Reg. Sess. ch. 348, May 31, 1957. Plainly the amendment was intended not only to be limited to construction contract accounts receivable but was not intended to and could not have had any retroactive effect on other accounts receivable.

Even under the present version of Art. 260-1, a Texas court has recently indicated that the recording of an assignment of the proceeds of a construction contract is not mandatory. United States v. Ray Thomas Gravel Co.[64-1 USTC ¶9410], 373 S. W. 2d 333 (Texas Ct. Civ. App. Waco, 1963), aff'd -- S. W. 2d -- (1964). Under other Texas recording statutes failure to record an instrument does affect its validity as between the original parties. SeeLichtenstein v. F. & M. Nat'l Bank, 372 S. W. 2d 716 (Tex. Ct. Civ. App. Dallas, 1963); Cowden v. Bell, 293 S. W. 2d 611 (Tex. Ct. Civ. App. San Antonio, 1956) aff'd 157 Tex. 44, 300 S. W. 2d 286 (1957); Steed v. Crossland, 252 S. W. 2d 784 (Tex. Ct. Civ. App. Beaumont, 1952); Mitchell, Gartner & Thompson v. Young, 135 S. W. 2d 308 (Tex. Ct. Civ. App. Fort Worth, 1940).

I see nothing in the language or the background of Art. 260-1 as it stood in 1954 and 1955 which would invalidate assignments of accounts receivable as between assignor and assignee or retain in the assignor any interest in a claim assigned absolutely to an assignee merely because a notice was not filed. See R. F. Ball Constr. Co. v. Jacobs [56-1USTC ¶9514], 140 F. Supp. 60 (W. D. Tex. 1956),aff'd per curiam, [57-7 USTC ¶9269] 239 F. 2d 384 (5 Cir.), rev'd per curiam on other grounds [58-1USTC ¶9327], 355 U. S. 587, 588 (1958) (Whittaker, J., dissenting); Comment, 30 Tex. L. Rev. 233, 238 (1951); cf. Quinn v. Dupree, 157 Tex. 441, 303 S. W. 2d 769 (1957) (per curiam) (semble); Asch v. First Nat'l Bank, 304 S. W. 2d 179 (Tex. Ct. Civ. App. Dallas, 1957) (semble).

None of the cases relied upon by the Government deal with the validity as between assignor and assignee of an unfiled assignment absolute in its terms at the time when the Seagraves-Lester assignment here was made. Lawrence v. Delta Metals, Inc., 280 F. 2d 86 (5 Cir. 1960) andRepublic National Bank of Dallas v. Vial, 232 F. 2d 785 (5 Cir. 1956) both dealt only with the rights of creditors of the assignor under the Bankruptcy Act. In the Lawrence case the court assumed that the trial court had been correct in holding the assignment valid as between the parties. As has been pointed out, creditors' rights and remedies against a taxpayer do not necessarily determine the question of whether the taxpayer has a right or interest in property to which a federal tax lien may attach. The Government's tax lien rights derive from and are limited by the federal statutes which create them. They are not dependent on what rights the Government as a creditor may be able to avail itself of under state statutes.

In United States v. Phillips [52-2 USTC ¶9421], 198 F. 2d 634 (5 Cir. 1952), the federal tax lien had been filed before the assignment was executed and the validity of the assignment as between assignor and assignee was thus not even in issue. Uhlhorn v. Owens [63-1 USTC ¶9149], 211 F. Supp. 798 (S. D. Tex. 1962), aff'd per curiam [64-1 USTC ¶9247], 325 F. 2d 92 (5 Cir. 1963), South Maine State Bank v. State, 365 S. W. 2d 946 (Tex. Ct. Civ. App. Austin, 1963), and Parker Square State Bank v. Triangle Supply Co., 364 S. W. 2d 418 (Tex. Ct. Civ. App. Eastland, 1963), all dealing with situations arising subsequent to the 1957 amendment, concern assignments for security only. In each of these cases it was clear that the taxpayer still had an interest in the underlying property at the time the federal tax lien became effective regardless of the validity of the assignment.

Thus, assuming Texas law to be applicable, Art. 260-1 does not invalidate an unfiled assignment or render it ineffective as between the assignor and assignee. Seagraves, the taxpayer assignor, retained no right or interest in the Rubinstein claim to which the subsequently filed Government tax lien could attach.

[New York Statute]

(2) In the alternative the Government contends that in the event that New York rather than Texas law applies, §§ 273 and 278 of the New York Debtor and Creditor Law might render the assignment ineffective as between Seagraves and Lester were it able to establish the requisite insolvency of Seagraves and knowledge of insolvency by Lester at the time the assignment was made. To date the Government has not done so and thus this contention does not bear on its right to summary judgment.

But quite apart from this, §§ 273 and 278 merely provide for creditors' remedies by way of specific procedure under the terms of those sections. This is a procedure which the Government, as a creditor, might avail itself of in an action to set aside a fraudulent conveyance were it able to establish the requisites. But the sections do not affect or purport to affect the validity of the assignment as between the original parties so as to retain in the taxpayer Seagraves any right or interest in the assigned property to which the tax lien could attach. Cf. T. G. W. Realties, Inc. v. Long Island Bird Store, Inc., 151 Misc. 918, 272 N. Y. Supp. 602 (Sup. Ct., N. Y. Co., 1934). Again the Government has confused creditor's remedies under state statutes enacted for their benefit with property rights as between the assignor and assignee on which the Government's tax lien must depend.

[Triable Issue Present]

(3) In opposition to the defendants' motions for summary judgment the Government also contends that even if the assignment is not invalidated as between Seagraves and Lester by either Texas or New York law, Seagraves still has an interest in the proceeds of the claim against Rubinstein because the assignment to Lester was for collection only. There are statements in Seagraves' deposition which lend some support to this contention. If such parol statements are admissible to vary the terms of an instrument absolute on its face, then there is a triable issue of material fact as to whether the assignment by Seagraves was absolute or merely created an agency relationship between him and Lester.

While there do not appear to be any decisions in either New York or Texas passing directly on the question of whether under the parol evidence rule such statements are admissible to show an agency relationship instead of an outright conveyance, both states follow the general rule that parol evidence may be introduced to show that a conveyance absolute on its face was intended as security only. Warren v. Chemical Bank & Trust Co., 274 App. Div. 785, 79 N. Y. S. 2d 776 (1st Dept. 1948) (per curiam); Bradshaw v. McDonald, 147 Tex. 455, 216 S. W. 2d 972 (1949). There is no reason to suppose that both states would not follow the prevailing rule that "an assignment absolute in form can be shown to have been for collection only." 4 Corbin, Contracts, §882, at p. 545 (1951).

Since defendants' motions for judgment on the pleadings and for summary judgment are both predicated on the theory that Seagraves has no interest in the fund to which the federal tax lien has allegedly attached and there is a triable issue on this question, both must be denied.

(4) The moving defendants also contend that even if Seagraves does have an interest in the fund, Lester is a "purchaser" entitled to protection against the tax lien under §6323 of the Internal Revenue Code, 26 U. S. C. §6323. That section provides that a federal tax lien "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed." If the assignment to Lester was for collection only he could not be purchaser of the whole fund. Thus this issue of fact must in any event be tried whether or not §6323 applies. Moreover, there is also the question of whether the assignment to Lester was inchoate at the time of the filing of the federal tax lien and whether the standards of choateness are applicable to outright purchasers. It would be premature to decide such questions in the present state of the record.

(5) Finally, Messrs. Collins & Gordon alone contend that even if Lester's interest in the fund is subordinate to that of the Government their attorney's lien is entitled to priority in its own right. The short answer to this contention is that their attorney's lien could not have come into being until, at the very earliest, December 12, 1955, when suit was instituted on the Rubinstein claim in the New York courts. See New York Judiciary Law, §475. This was more than two months after the United States had filed its notice of tax lien. Not only did Collins & Gordon not have a choate attorney's lien at that time, they then had no lien whatsoever. Their interest is entirely dependent on that of Lester. See also United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950); United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963). They are not entitled to judgment on the pleadings or summary judgment on this ground either.

Pursuant to Rule 56(d), F. R. C. P., I specify the material facts existing without substantial controversy to be those stated in the paragraphs numbered 1 to 13 at pp. 2-5 of this opinion. The only material facts which are actually and in good faith controverted are whether the assignment to Lester was for collection only and, if so, whether Seagraves was insolvent at the time of the assignment.

Defendants' motions for judgment on the pleadings and summary judgment and plaintiff's motion for summary judgment are in all respects denied.

It is so ordered.

¹ Also named as defendants are Seagraves, whose tax liability gave rise to the federal lien asserted here, his wife, Oster (through his executrix) and Emmert, who at one time were assignees of Seagraves' interest in such claims, Messrs. Atlas and Callahan, attorneys, who formerly represented Lester in the Rubinstein litigation, and the First National City Bank. These defendants have not joined in the present motions. The Bank takes the position that it is merely a stakeholder.

² In paragraph 20 of its second amended complaint the Government alleges that Seagraves "is not, and has not been since 1951, in possession of or entitled to sufficient property to pay all of his debts." Other than the testimony in Seagraves' deposition that he owed a large sum of money in 1954, and the fact that he still owes the Government money, there is no evidence by way of affidavit, deposition or answers to interrogatories that Seagraves is presently insolvent as required in order for the Government to invoke the stringent provisions of the federal priority-in-insolvency statute, 31 U. S. C. §191, and the Government does not seek to do so on this motion.

[59-1 USTC ¶9134]Howard L. Davis, Plaintiff v. J. W. Bateson Company, Inc., et al., Defendants

U. S. District Court, West. Dist. Ky., at Louisville, Civil No. 2527, 8/16/57

[1939 Code Secs. 3670, 3671 and 3672(a)--similar to 1954 Code Secs. 6321, 6322 and 6323(a)]

Lien for taxes: Priorities under State law: Precedence of equitable assignment of portion of prospective judgment.--Under Kentucky law an equitable assignment to a creditor bank of a portion of a prospective judgment in favor of the bank's debtor, which was not then in existence but which it was anticipated would ultimately result from litigation instituted by the debtor-assignor, is effective to retroactively vest in the assignee a corresponding interest in the judgment proceeds, upon rendition of the judgment, which is superior to the claim of the United States for unpaid income taxes, not assessed until a later date, but before the judgment in question was rendered.

William A. Miller, 310 West Liberty Street, Louisville, Ky., for plaintiff. Thomas W. Bullitt, Kentucky Home Life Building, Louisville, Ky., for Citizens Fidelity Bank & Trust Company. William B. Cohen, 1516 Kentucky Home Life Building, Louisville, Ky., for James Drury. J. Leonard Walker, United States Attorney, Federal Building, Louisville, Ky., for United States. Marshall B. Hardy, Jr., 506 West Jefferson Street, Louisville, Ky., for Embry Bros.

Findings of Fact and Conclusions of Law

BROOKS, District Judge:

This case involves conflicting claims of the parties to a fund in the registry of the court and is submitted on the record. The Court makes the following findings of fact and conclusions of law:

Findings of Fact

1. On February 16, 1952, Howard L. Davis (hereafter called Davis) executed a subcontract for certain construction work on a United States Army installation in Kentucky with J. W. Bateson Company, Inc. (hereafter called Bateson), a corporation, with its principal office in Texas. On or about October 8, 1952, Bateson terminated its contract with Davis. On December 11, 1952, Davis filed the present action in this court against Bateson for damages for breach of contract.

On July 31, 1956, Davis and Bateson effected a compromise settlement under which Bateson paid into this court $20,000 (hereafter called the Fund) there to abide the judgment and further orders of this Court. Certain assignees, asserted lienholders and creditors of Davis thereupon claimed various interests in the Fund, and on September 7, 1956, Bateson interpleaded, among others, Citizens Fidelity Bank and Trust Company (hereafter called Citizens Fidelity), the United States of America and Embry Bros., Inc., each of whom claimed varying interests in the Fund.

2. On August 8, 1952, a $15,000 promissory note previously executed by Davis to the order of Citizens Fidelity became due and payable and Davis failed to pay the remaining $9,000 balance then due and owing on the note. Thereafter, Davis made a payment of $445.56 on his past due promissory note and reduced the unpaid principal balance to $8,554.44. Citizens Fidelity demanded payment of the unpaid balance and notified Davis that it intended to take legal action against him to recover the balance. On January 23, 1953, Davis, in consideration of Citizens Fidelity forbearing to institute legal action against him for the remaining unpaid principal balance of $8,554.44 and interest, signed, executed and delivered to Citizens Fidelity a written assignment whereby he conveyed to Citizens Fidelity all of his right, title and interest in and to the first $9,000 to be recovered by him out of the proceeds of his recovery in the present action then pending against Bateson. On February 10, 1953, Citizens Fidelity notified Bateson of such an assignment, and the notice of assignment was acknowledged. The assignment is as follows:

"KNOW ALL MEN BY THESE PRESENTS, that Howard L. Davis, a resident of Clark County, State of Indiana, hereinafter called the 'Assignor', in order to secure to Citizens Fidelity Bank and Trust Company of Louisville, Kentucky, hereinafter called the 'Assignee', payment of the sum of Eighty Five Hundred Fifty Four and 44/100 Dollars ($8554.44), representing the balance due Assignee on a promissory note in the original amount of $9000.00, plus interest thereon at the rate of 6%, which amount is justly owing by the Assignor to the Assignee, hereby

"SELLS, ASSIGNS, TRANSFERS AND SETS OVER TO Assignee all and singular:

"(1) The First $90000.00 of the proceeds that Assignor may recover in the cause entitled 'Howard L. Davis vs J. W. Bateson Company, Incorporated', cause No. 2527 in the United States District Court for the Western District of Kentucky, Louisville, Kentucky.

"(2) Additional proceeds of said judgment that might be needed to pay off the balance due under said promissory note as a result of the accumulation of interest thereon.

"UPON CONDITION, HOWEVER, that upon the payment to the Assignee of the said sum of $8554.44 plus interest due under the terms of said note in full either from the proceeds of said judgment and/or from any other source or sources, this assignment shall be null and void, and the Assignee shall, thereupon, reassign, without recourse, to the Assignor, the amount of said proceeds then remaining uncollected.

"And, until the happening of the contingencies specified in the aforesaid condition, the Assignor hereby empowers the Assignee to collect and receive the amount of said proceeds assigned herein."

3. On March 2, 1953, the United States assessed withholding and excise taxes against Davis in the amount of $4,633.72, and in August and September, 1953, assessed further withholding and excise taxes of $5,136.82 and $232.89 against Davis. The United States claims $12,044.32, with interest, out of the Fund under the provisions of Sections 3670, 3671 and 3672(a) of the Internal Revenue Code of 1939.

4. On July 2, 1952, Embry Bros., Inc., leased to Davis certain equipment at an agreed rental of $8,270 payable in monthly installments of $344.58. Davis thereafter defaulted on the lease and abandoned the equipment which was repossessed by Embry Bro., Inc. Embry Bros., Inc., is asserting an equitable lien in the amount of $1,128.80, with interest from October 26, 1952, against the Fund, and James Drury is asserting a claim in the amount of $725 and interest thereon from April 6, 1952, which arises from facts similar to those on which the claim of Embry Bros., Inc., is founded.

5. On or about December 6, 1956, this Court found that counsel for Davis held a prior and superior lien for their attorneys' fees in a total amount of $6,666.66 to be paid out of the Fund, and the amount in the Fund was thereby reduced to, and presently amounts to, $13,333.34.

Discussion

It is necessary to determine the relative priority of the respective claims of (a) Citizens Fidelity, an assignee holding an assignment of the first $9,000 of the Fund; (b) the United States as a holder of a lien for withholding and excise taxes totaling $12,044.32; (c) Embry Bros., Inc., for $1,128.80 and interest for accrued rental of equipment leased to Davis prior to termination of the contract with Bateson; and (d) James Drury in the sum of $725 and interest arising under facts similar to those upon which the claim of Embry Bros., Inc., is based.

The validity of the assignment to Citizens Fidelity depends upon Kentucky law, Erie R. Co. v. Tompkins, 304 U. S. 64, and under Kentucky law no particular form of instrument or fixed words are necessary to effect an equitable assignment of a chose in action. Commonwealth for Use and Benefit of State Highway Commission v. Wilhoit, 274 Ky. 831, 120 S. W. 2D 670; Young v. Auxier, 302 Ky. 571, 195 S. W. 2d 295; Patterson v. Miracle, 253 Ky. 347, 69 S. W. 2d 708; Power Grocery Co. v. Hinton, 137 Ky. 171, 218 S. W. 1013; McPhail v. John Hancock Mutual Life Insurance Co., 108 Fed. Supp. 902 (D. C. Ky.).

It is contended that the assignment to Citizens Fidelity was not a valid equitable assignment because it was given without consideration. While it is apparent that it was given to secure a pre-existing indebtedness, it is also established in the record by affidavits that at the time the assignment was executed the note of Davis was past due and Citizens Fidelity had demanded payment and threatened legal proceedings if the note was not paid. The assignment was then made by Davis for the "sole" consideration of the agreement of Citizens Fidelity to refrain from bringing suit against him. This forbearance agreement of Citizens Fidelity defeats the contention that the assignment was without a valid present consideration. A consideration in a legal sense, sufficient to uphold a contract may be a benefit to the promisor or a loss, forbearance or detriment suffered by the promisee. Brady v. Equitable Trust Co., 178 Ky. 693, 199 S. W. 1082; Woolum v. Sizemore, 267 Ky. 384, 102 S. W. 2d 323; Akers v. Phillips, 23 Ky. L. Rep. 813, 58 S. W. 790. Also contrary to the contention of the United States the consideration for a writing may be shown by oral proof without charging mistake or fraud. KRS 371.030; Deatley v. Phillips, 311 Ky. 693, 225 S. W. 2d 296; Ashland Oil and Refining Co. v. Dorton, 300 Ky. 385, 189 S. W. 2d 394.

A reading of the written assignment establishes that all the other essential elements of an equitable assignment are present. The subject matter is specifically designated and there is a constructive appropriation of it by the assignor to the assignee with the clearly expressed intention on the one side to assign and on the other to receive. In re Dier, 296 Fed. 816 (3d Cir.), certiorari denied 265 U. S. 584; Walker v. Brown, 165 U. S. 654; United States v. Butterworth-Judson Corp., 267 U. S. 387; and see the excellent discussion of the doctrine of equitable assignment by Judge Parker in Union Trust Company of Maryland v. Townshend, 101 Fed. (2d) 903, certiorari denied 307 U. S. 646.

This conclusion that a valid equitable assignment was made to Citizens Fidelity by the instrument of writing dated January 23, 1953, gives the claim of Citizens Fidelity priority over the lien of the United States which did not arise until March 2, 1953, at the time the tax assessment was made. Int. Rev. Code 1939, Sec. 3671. This was five weeks after Davis made his assignment to Citizens Fidelity, and therefore the tax lien could not attach to property which Davis had previously transferred and which no longer belonged to him at the time the assessment was made. Int. Rev. Code 1939, Sec. 3670; United States v. Certain Lands, 71 Fed. Supp. 76 [47-1 USTC ¶9202]; United States v. Winnett, 165 Fed. (2d) 149 [48-1 USTC ¶9115]; Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690 [40-2 USTC ¶9533]. The fact that the fund was not existing at the time of transfer is immaterial, as it is well established under equitable doctrine that an assignee of a fund to be acquired in the future has a lien thereon as soon as the fund comes into existence, and the lien relates back to the date of assignment. Union Trust Company of Maryland v. Townshend, supra; Sexton v. Kessler and Co., 225 U. S. 90; Coppard v. Martin, 15 Fed. (2d) 743, certiorari denied 273 U. S. 753.

Embry Bros., Inc., and Drury claim prior equitable liens against the fund as subcontractors furnishing material on a government contract by virtue of Title 40, U. S. C. A., Sec. 270a and 270b. This statute, however, merely gives them the right under certain conditions to sue in the name of the United States on the payment bond and "to prosecute said action to final execution and judgment for the sum or sums justly due . . ." them. Title 40, U. S. C. A., Sec. 270b. There is no authority to support their contention that the "rather vague obligation" stated in Belknap Hardware & Mfg. Co. v. Ohio River Contracting Co., 271 Fed. 144 (6th Cir.) as being assumed by the United States to look after the interests of laborers and materialmen and which is referred to in United States v. Munsey Trust Co., 332 U. S. 234, Page 240, as the "peculiarly equitable claim," has any application to funds in which the United States has no interest and over which it can exercise no control. These claimants are general creditors of Davis and have no lien on the funds in court.

Conclusions of Law

1. This court has jurisdiction of the parties and of the subject matter. Title 28, U. S. C. A., Secs. 1332; 1335; 1397, and Rule 22, Federal Rules of Civil Procedure.

2. Citizens Fidelity by virtue of the equitable assignment dated January 23, 1953, has a lien in accordance with the terms of the assignment that is prior and superior to the tax lien of the United States.

3. The tax lien of the United States, while inferior to the lien of Citizens Fidelity, is superior to the claims of Embry Bros., Inc., and Drury, who are general creditors of Davis.

In conformance with this memorandum, judgment will be tendered by Citizens Fidelity on notice.

[58-2 USTC ¶9638]Bureau of Controlled Receivables, Inc., a Corporation, Plaintiff v. United States of America, et al., Defendants

U. S. District Court, So. Dist. of Calif., Cent. Div., No. 1-58-BH, 6/23/58

[1954 Code Sec. 6323]

Collection: Validity against mortgagees: Assignee of funds.--Where withholding and federal insurance contributions act taxes were assessed on August 23 and notice and demand served on the taxpayer on October 16, the Government's lien (recorded on November 8) was not effective as to a chose in action which came into existence on October 22 and had been assigned to the present holder on October 23 in settlement of a suit begun against the taxpayer on October 15.

George Boshae for plaintiff. Laughlin E. Waters, United States Attorney, Edward R. McHale, Robert H. Wyshak and Eugene Harpole, for defendants.

Findings of Fact and Conclusions of Law

HARRISON, District Judge:

The above entitled cause came on regularly for trial in the above entitled court before the Honorable Ben Harrison, Judge Presiding, sitting without a jury, a jury having been expressly waived, George Boshae appearing as attorney for the plaintiff and Laughlin E. Waters, United States Attorney, Edward R. McHale, Robert H. Wyshak, and Eugene Harpole, appearing as attorneys for the defendant, United States of America, and the cause having been dismissed as against the fictitious defendants named in said complaint and that the entire cause having been submitted to the court pursuant to the Stipulation of Facts by the plaintiff and the defendant United States of America, and the court having considered the same and read the arguments of counsel and being fully advised makes the following Findings of Facts:

I. That the jurisdiction of the above entitled court over the action herein is invoked pursuant to Title 28, Section 2410 and Section 2463 of the United States Code.

II. That paragraphs I and III of plaintiff's complaint are true.

III. That on or about August 23, 1957 the District Director of Internal Revenue at Los Angeles, California, assessed withholding and federal insurance contributions act taxes against the defendant, Monmak, Inc. for the second quarter of 1957 for the sum of $5,906.91. Said District Director issued and served a notice and demand for payment of the assessed taxes to the taxpayer, Monmak, Inc. on October 16, 1957.

IV. That on or about October 15, 1957 the plaintiff commenced an action against the defendant, Monmak, Inc. for recovery of a claim against said defendant, in the Municipal Court of Los Angeles Judicial District, County of Los Angeles, State of California, action No 484265 in the sum of $1,544.20.

V. That on or about October 22, 1957, the defendant, The Parent Company became indebted to the defendant, Monmak, Inc. in the sum of $1,236.00.

VI. That on or about October 23, 1957 the defendant Monmak, Inc. made, executed and delivered a written assignment to the plaintiff assigning, selling, transferring and setting over to said plaintiff all monies due the defendant Monmak, Inc. pursuant to invoice No. 4817, dated October 23, 1957, in the amount of $1,236.00 from The Parent Company. That said assignment was expressed as an irrevocable order, and consented to by the defendant, The Parent. That concurrently with the execution of the said assignment the defendant, Monmak, Inc. paid to the plaintiff on his claim the sum of $302.00.

VII. That on or about October 23, 1957, and simultaneously with and in exchange for the delivery to the plaintiff of the written assignment hereinabove referred to, the plaintiff delivered a dismissal with prejudice to the defendant, Monmak, Inc. of the Municipal Court action hereinabove referred to, No. 484265.

VIII. That on or about November 8, 1957 the District Director of Internal Revenue filed a notice of tax liens in the Office of the County Recorder of Los Angeles County, State of California and that prior to the filing of said lien by the District Director the plaintiff had no knowledge of the existence of said liens prior to recordation.

IX. That on or about November 4, 1957 the District Director delivered a copy of said notice of tax lien and notice of levy to the defendant, The Parent Company.

X. That the defendant, The Parent Company, now has in its possession the sum of $1,236.00.

XI. That the court finds that the plaintiff comes within the purview of Section 6323, 26 U. S. C., and that the plaintiff was and now is the owner of the sum of $1,236.00 now in the possession of and held by the defendant, The Parent Company, as an innocent purchaser. That the court finds that the plaintiff was an innocent purchaser of the said funds in the possession of the defendant, The Parent Company at the time the defendant, United States of America, recorded its tax lien.

XII. That the defendant, United States of America has no right, title or interest in the funds now in the possession of and held by the defendant, The Parent Company in the sum of $1,236.00.

XIII. That the defendants, The Parent Company and Monmak, Inc. have no right, title or interest in said sum of $1,236.00 now in the possession of and held by the defendant, The Parent Company, except as trustee of said funds for the use and benefit of the plaintiff, Bureau of Controlled Receivables, Inc.

Conclusions of Law

From the foregoing facts the court makes the following Conclusions of Law:

I. The plaintiff is entitled to a judgment against the defendants, United States of America, The Parent Company and Monmak, Inc. quieting its title to the funds in the possession of and held by the defendant, The Parent Company in the sum of $1,236.00.

II. The plaintiff is entitled to a judgment entitling it to recover from the defendant, The Parent Company $1,236.00.

III. The plaintiff is entitled to its costs of suit herein incurred to be taxed by the Clerk but it is not allowed as to costs against the United States.

Memorandum of Decision

This case was submitted to the court for decision on a stipulation of facts. The facts are fully covered in said stipulation.

I find that plaintiff comes within the purview of 26 U. S. C. A. Sec. 6323 and that the plaintiff was the owner of said disputed sum of money, as an innocent purchaser at the time the defendant recorded its tax lien. As a result thereof I find that the defendant had no right, title or interest in said disputed sum of money and that plaintiff is entitled to a judgment quieting its title to the sum of $1,236.00.

Plaintiff is directed to submit to me proposed findings and judgment under the rule.

[63-2 USTC ¶9723]In the Matter of Paul Gignac, Bankrupt

U. S. District Court, No. Dist. N. Y., in Bankruptcy No. 43662, 8/21/63

[1954 Code Sec. 6321; Sec. 70(a), Bankruptcy Act]

Tax liens: Bankruptcy: "Rights of action" which pass to trustee: Claims for Federal income tax refunds and rebates.--Title to accrued and immediately determinable and enforceable claims for tax refunds and rebates of Federal income taxes pass to the trustee in bankruptcy immediately following the filing of the petition in bankruptcy. It is sufficient to the trustee if he can point to a res, existing fund or chose in action in which the bankrupt had a legal and equitable interest when the bankruptcy petition was filed. The referee in bankruptcy was correct in concluding that an overpayment of estimated tax of $236.11, made in 1960, fell in this category and should be applied in partial payment of an income tax deficiency of $568.88 for 1959. Sussman (CA-3) 61-1 USTC ¶9347, 289 F. 2d 76, which involved tentative carryback adjustments, distinguished on the facts.

Justin J. Mahoney, United States Attorney, Federal Bldg., Albany, N. Y. (Frank A. Dziduch, Assistant United States Attorney, O'Hear W. Fraser, of counsel) for petitioner. Geraghty & Geraghty, 52 So. Main St., Gloversville, N. Y., for trustee.

Memorandum-Decision and Order

FOLEY, District Judge:

This petition for review, as presented by the government in its briefing, poses only questions of law. The amount of money that would come to the government coffers if it is successful in the review is minimal, but I will assume--although frankly there is no persuasive showing to so conclude--that the decision of the Referee may have serious impact on the administration of the Internal Revenue Code provisions in their application that may affect the collection of substantial revenue in bankruptcy matters involving this same issue.

First, it is disconcerting to have the government in this review present a legal authority asserted to be directly in point on the question and admittedly not presented to the Referee. The case is In re Sussman, 3 Cir., [61-1 USTC ¶9347] 289 F. 2d 76, (decided April 13, 1961). The Referee's decision is dated February 6, 1962. The government, with its manpower and research resources, should seldom be in this position, although I realize its lawyers are human and fallible and may miss pertinent citations just as busy Referees and Judges may. I would think, however, that when it is discovered that the briefing before the Referee did not call his attention to an important ruling the interests of justice and efficiency in these matters should have good reason to request reconsideration. Such procedure to so request and such power granted to the Referee to reconsider are settled in the law. (2 Collier, 14th Ed. p. 1426; Matter of Pottasch, 2 Cir., 97 F. 2d 613; Castaner v. Mora, 1 Cir., 234 F. 2d 710; American A & B Coal Corp. v. Leonardo Arrivabene, S. A., 2 Cir., 280 F. 2d 119, 122).

However, despite this lapse, it is my judgment that the Sussman authority now mainly relied upon for reversal is clearly distinguishable from the facts here. The Sussman ruling by stated expression therein was made reluctantly, and it was followed again with regret to the same result in similar factual situations by the First Circuit in Fournier v. Rosenblum [63-2 USTC ¶9536], 1 Cir., decided 6/12/63, 31 Law Week, 2636. The Sussman decision is the subject of a persuasive and critical analysis by Referee Asa S. Herzog in the Journal of the National Association of Referees in Bankruptcy, Vol. 36, January 1962, p. 18. However, in the Sussman decision the writing of Judge Hastie throughout cautions that it be confined to a carryback loss claim, describing the issue as one "in this very special situation". (p. 78.) Judge Hastie considers it undisputed, citing Chandler v. Nathans, 3 Cir., F. 2d 725, that Section 70(a) of the Bankruptcy Act passes "rights of action" to the Trustee that include accrued and immediately determinable and enforceable claims for tax refunds and rebates which the bankrupt himself had or could have asserted against the United States at the time the bankruptcy petition was filed. (In re Sussman, supra, p. 77; see also 4 Collier on Bankruptcy, p. 1250). There is a flexibility of interpretation indicated both in Sussman and Fournier that it is sufficient for the trustee to acquire title if he can point to a res, existing fund or chose in action in which the bankrupt had a legal and equitable interest when the bankruptcy petition was filed. Here, the estimated tax payment of $236.11 made in 1960 by the bankrupt as a tax payment, in my judgment, reasonably fits into these important features of an existing res or fund. Therefore, I agree with the reasoning and conclusion of the Referee that it was an asset of the bankrupt's estate, and should be applied solely against the payment of the $568.88 personal income tax deficiency for 1959.

I am not impressed at all by the argument of the government that whether the estimated tax payment is an asset of the bankrupt estate or not it must first be applied against the taxpayer's self-employment tax liability of $157.94. In this instance, the financial benefit to the government would be slight, but such fact, of course, would not be controlling. The important basis for my decision in this respect is that the government seems to be cutting the corners too close to ease its burden of tax collection. There seems to me to be substantial difference in the nature of a self-employment tax and an income tax. (26 U. S. C. A. p. 98). The taxing statute and regulations pursuant thereto at times made solely for tax collection efficiency, cannot prevail over the provisions of the Bankruptcy Act enacted with the dominant purpose to collect all assets and distribute them as fairly and equitably as possible in accordance with the Act, and for the best interests of all creditors. (See In re John Horne Company, 7 Cir. [55-1 USTC ¶9266], 220 F. 2d 33, 35).

The petition to review is dismissed, and the order of the Referee is confirmed in all respects.

It is so ordered.

[60-2 USTC ¶9767]The City of New York and The Industrial Commissioner of the State of New York, Appellants v. United States of America, Appellee

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 26098, 283 F2d 829, 10/31/60, Rev'g District Court, 59-2 USTC ¶9790, 180 F. Supp. 214

[1954 Code Secs. 6321 and 6322]

Lien for taxes: Bankrupt's property.--The United States assessed tax deficiencies against a taxpayer corporation after an assignment for the benefit of creditors but before an involuntary petition in bankruptcy was filed. The Court of Appeals, reversing the District Court, held that the U. S. had not perfected a lien prior to the bankruptcy proceedings and the government's claims were ordinary tax claims under the Bankruptcy Act.

Cornelius F. Roche, New York, N. Y. (Charles H. Tenney, Corporation Counsel, on brief), for City of New York. Samuel Stern, Albany, N. Y. (Louis J. Lefkowitz, Attorney General of the State of New York, on brief), for Industrial Commissioner of the State of New York. Douglas A. Kahn, Washington, D. C. (Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Department of Justice, Washington 25, D. C., on brief), for appellee.

Before LUMBARD, Chief Judge, TUTTLE ^* and FRIENDLY, Circuit Judges.

LUMBARD, Chief Judge:

This case is before us on appeal from an order entered by the District Court for the Eastern District of New York [59-2 USTC ¶9790], confirming the order of a referee in bankruptcy granting lien status under §67b of the Bankruptcy Act to certain claims of the United States for tax deficiencies. An involuntary petition in bankruptcy had been filed against the Moderneer Footwear Co. on February 26, 1958, by creditors claiming for unpaid wages and severance pay, and the company was subsequently declared a bankrupt and a trustee appointed.

Within four months prior to the filing of the petition, a general assignment for the benefit of creditors made by the bankrupt fourteen days earlier was perfected by filing the assignment with the New York Supreme Court of Kings County, under New York Debtor and Creditor Law §3. Subsequent to such assignment, on November 22, 1957, the United States assessed tax deficiencies against the company in the amount of $4,826.64, for Federal Insurance Contributions Act and withholding taxes due for the third quarter of 1957. This claim was in addition to an earlier assessment by the United States made on October 8, 1957, for $2,067.53 plus interest, due for FICA and withholding taxes for the second quarter of 1957. On the very date on which the bankruptcy petition was filed, the federal government made a third assessment in the amount of $277.39 for Federal Unemployment Tax Act obligations, and finally, on December 19, 1958, it assessed an additional $834.21 as a further tax deficiency. The United States now seeks to have all but the last of these claims granted lien status under §67b of the Bankruptcy Act, 11 U. S. C. §107(b), which upholds the validity of "statutory liens for taxes and debts owing to the United States * * * created or recognized by the laws of the United States or of any state * * * even though arising or perfected while the debtor is insolvent and within four months prior to the filing of the petition initiating a proceeding under this title by or against him." The United States' claim is opposed by the New York State Industrial Commissioner and the City of New York, each of which have filed tax claims in the bankruptcy proceedings. ¹

The United States' contention that a lien had been perfected prior to the bankruptcy proceedings is based on §6321 of the Internal Revenue Code of 1954, the relevant portion of which reads as follows:

"§6321. Lien for Taxes.

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

Under §6322, the lien arises at the time the assessment is made. As of that moment, therefore, if there exist property or rights to property "belonging" to the debtor, the lien will attach. In determining the nature and extent of the debtor's ownership, however, we are remitted to state law since §6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U. S. 51, 55 (1958) [58-2 USTC ¶9595]; see Aquilino v. United States, 363 U. S. 509 (1960) [60-2 USTC ¶9538]; United States v. Durham Lumber Co., 363 U. S. 522 (1960) [60-2 USTC ¶9539]; Fidelity & Deposit Co. v. New York City Housing Authority, 241 F. 2d 142 (2d Cir. 1957) [57-1 USTC ¶9410].

Under long-standing New York decisional law, an assignee for the benefit of creditors takes title to the debtor's estate and holds as trustee for all the creditors. Brown v. Guthrie, 110 N. Y. 435 (1888); Brennan v. Willson, 71 N. Y. 502 (1877). The court supervises the trustee and orders distribution of the settled estate to the creditors, N. Y. Debtor and Creditor Law, §§ 8, 15, 20, so that the estate is said to be in custodia legis. In the Matter of Crevelong & Son Corp., 259 App. Div. 351, 353, 19 N. Y. S. 2d 378, aff'd, 283 N. Y. 760, 28 N. E. 2d 975 (1940); Florence Trading Corp. v. Rosenberg, 128 F. 2d 557 (2d Cir. 1942). All that the assignor owns after his assignment is completed is the right to have refunded to him whatever remains after the creditors have been satisfied. Mills v. Husson, 140 N. Y. 99 (1893).

The §6321 lien attaches only to the extent of the taxpayer's property interest, United States v. Burgo, 175 F. 2d 196 (3d Cir. 1949) [49-1 USTC ¶9307], and is not a proper basis for a levy on contingent rights before they come into being. United States v. Long Island Drug Co., 115 F. 2d 983 (2d Cir. 1940) [41-1 USTC ¶9140]. Thus, the property, after it had been assigned by the taxpayer, could not be subjected to the government's lien. Nor is the fact that some New York decisions have upheld the validity of a mechanic's lien filed after a general assignment any support for the proposition that the federal government's lien is valid on the facts before us. A case such as John P. Kane Co. v. Kinney, 174 N. Y. 69 (1903), indicates merely that the New York courts have recognized a "preferential statutory right in the nature of an unperfected equitable lien in favor of the laborer, machanic, materialman, or subcontractor." Id. at 73. Whatever policy reasons impel the New York courts to impress such a security interest on the debtor's estate even before the creditor satisfies the statutory prerequisites ² are not binding on this court or apposite when it is not a laborer but the federal government which is pressing its claim. In none of the mechanics' lien cases ³ do the New York courts base their decision upholding the lien on an assertion that the assignor retained property rights after his general assignment had been perfected. Since it is only if such rights still belong to him that §6321 impresses a lien on the taxpayer's realty or personalty, the general assignment barred a subsequent tax lien.

The United States, however, contends that §70a(8) of the Bankruptcy Act governs, despite local property law, once a petition in bankruptcy is filed. That subsection, now 11 U. S. C. §110(a)(8), reads, in relevant portion, as follows:

"The trustee of the estate of a bankrupt * * *, upon his * * * appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title * * * to all of the following kinds of property wherever located * * * (8) property held by an assignee for the benefit of creditors appointed under an assignment which constituted an act of bankruptcy, which property shall, for the purposes of this title, be deemed to be held by the assignee as the agent of the bankrupt and shall be subject to the summary jurisdiction of the court."

The United States maintains that since the present assignment was made within four months of bankruptcy it constituted an act of bankruptcy within §§ 3a(4) and 3b of the Bankruptcy Act, 11 U. S. C. §§ 21(a)(4), (b), so that upon filing of the petition the title residing in the assignee by virtue of the states' debtor-and-creditor law was extinguished by the federal bankrupty statute, and he held the property as a "naked bailee" for the bankrupt. Therefore, the federal government continues, the lien attached when the deficiency was assessed against the corporate taxpayer since the property then "belonged" to the corporation and was held in the custody of its agent.

If we could find a legitimate bankruptcy policy that is furthered by such a construction of §70a(8), it might not be enough to say merely that the language of the statute gives no retroactive effect to this incursion on local property law; it directs that the property shall "be deemed to be held by the assignee as the agent of the bankrupt," not that it should "be deemed to have been held by the assignee" as an agent. However, there is no reason to suppose that Congress intended retroactively to alter the situs of title to property generally assigned for creditors. The legislative history of the present §70a(8) indicates that it was meant to be declaratory of existing law and merely to facilitate the summary jurisdiction of the bankruptcy court under §2a(21) to require assignees to deliver property in their possession to the trustees in bankruptcy. See H. R. Rep. No. 1409, 75th Cong., 1st Sess. 34 (1937); Shor v. McGregor, 108 F. 2d 421 (5th Cir. 1939); 1 Collier, Bankruptcy para. 2.78; 4 id. para. 70.38. Thus, it makes good sense to have title to the assigned estate revert to the bankrupt at the time when the petition in bankruptcy is filed, though not before, in order to prevent the assignee from maintaining that he is an adverse claimant and thus entitled to plenary proceedings. May v. Henderson, 268 U. S. 111, 115 (1925).

Indeed, a contrary rule would throw into confusion the usual procedures whereby a state protects creditors once a general assignment has been made. Since §67c(2) of the Bankruptcy Act requires that statutory liens be possessory in order to be valid under §67b, the very purpose of a general assignment--that of preserving the debtors' assets and shielding them from levy by the more diligent creditors, see Matter of S. Feldman & Co., 237 App. Div. 720, 262 N. Y. Supp. 681 (1933)--would be undermined were we to accept the United States' contention. ⁴ If the assignee holds retroactively as a mere agent, it would well behoove a private creditor with a statutory lien to levy upon the estate so assigned and then file a petition in bankruptcy. Under the rule the federal government would have us adopt, §70a(8) would uphold a lien accompanied by such a levy if bankruptcy proceedings are begun within four months of the assignment. Thus, the creditor who is dissatisfied with the state's insolvency procedure would not merely get the federal forum to which he is entitled by reason of the Bankruptcy Act, but would also be given, to the extent of his levy, a priority which he is not allowed under state law. Curiously enough, therefore, §67b of the Bankruptcy Act, which was intended to preserve only those rights recognized under state law, would, in concert with the proposed construction of §70a(8) and §67c(2), grant more liberal priorities in the federal courts than would the state under its insolvency proceedings.

The government's further contention that §3466 of the Revised Statutes, 31 U. S. C. §191, gives the United States' tax claim a priority would be persuasive had the bankruptcy petition not been filed. However, the Bankruptcy Act did not incorporate the priority provisions of §3466 and they do not apply in bankruptcy. Davis v. Pringle, 268 U. S. 315 (1925).

Reversed with instructions to treat $5,104.03 of the claim of the United States entered on April 10, 1958, plus all claims filed thereafter, as ordinary tax claims under §64a(4) of the Bankruptcy Act.

^* Sitting by designation.

¹ The state claims $910.12 for unemployment insurance contributions and $25 for a corporate franchise tax. The city's claim is for sales and business taxes in the amount of $747.82.

² This policy, apparently founded on a desire to ensure that formalities would not defeat the rights of laborers and materialmen, whose claims sound in unjust enrichment, extends even to bankruptcy and validates a mechanic's lien filed after a bankruptcy petition. Gates & Co. v. John F. Stevens Construction Co., 220 N. Y. 38 (1917). Since a tax assessment which post-dates bankruptcy would not give rise to a statutory lien under the Internal Revenue Code, the federal claim is obviously distinguishable from the laborer's.

³ E.g., Post & McCord v. City of New York, 86 Misc. 300, 148 N. Y. Supp. 568 (1914), aff'd, 166 App. Div. 919, 152 N. Y. Supp. 1138 (1915); Matter of Marstan Plumbing Co., 176 Misc. 956, 28 N. Y. S. 2d 190 (1941).

⁴ Statutes authorizing general assignments for the benefit of creditors have been approved by the Supreme Court as consistent with the policy of the Bankruptcy Act. "[Q]uite in harmony with the purposes of the Federal Act * * * [statutes] that are regulatory of such voluntary assignments serve to protect creditors against each other and go to assure equality of distribution * * *" Pobreslo v. Joseph M. Boyd Co., 287 U. S. 518, 526 (1933).

[54-2 USTC ¶9557]Barbara Campbell and J. Francis Shirley, Plaintiffs v. United States of America, et al., Defendants

In the Municipal Court of the City and County of San Francisco, State of California, No. 317,859, June 25, 1954

Liens: Priority of alimony decree over tax lien.--Notices of tax liens against taxpayer were filed in 1947, but taxpayer was allowed to continue in business and withdraw no more than $500 per month, in order to protect the government's interest. Taxpayer married in 1948 and his wife sued for divorce in 1952, when she asked for and received temporary alimony of $500 per month. As taxpayer was unable to pay, the county sheriff seized taxpayer's business receipts. The Commissioner claimed a lien against the funds which the sheriff seized. The Municipal Court of San Francisco held that the government had no lien against the seized funds and ordered the sheriff to pay the money owing to taxpayer's wife as alimony.

Shirley, Saroyan, Calvert & Peterson, for plaintiffs. Lloyd H. Burke, United States Attorney, Charles Elmer Collett, Assistant United States Attorney, Dan S. Morrison, Acting Civil Advisory Counsel, Bureau of Internal Revenue, for defendants.

Facts of Case Stipulated to by Parties

The Case--Jurisdiction

This action is brought to determine title or ownership of money, $2607.35, delivered to the Sheriff of the City and County of San Francisco under a Superior Court writ of execution in a divorce action entitled, Barbara Campbell v. Wyman Franklin Campbell. The money is held by the sheriff under that writ. The real parties in interest are plaintiffs Barbara Campbell and J. Francis Shirley, and defendant United States of America. The Sheriff is before the court as a "stakeholder". He claims no interest in the money, requests that plaintiffs' and defendant's claims be adjudicated and the money ordered "paid to the party legally entitled thereto."

Jurisdiction in this court exists under 28 U. S. C. A., section 2410, and the laws of the State of California, including sections 89 and 738 of the Code of Civil Procedure.

The Facts

On December 31, 1947, the United States filed in the Recorder's Office in San Francisco its Notice of Tax Lien against Wyman F. Campbell in the sum of approximately $70,000 for delinquent income taxes due from Wyman F. Campbell to the United States for the years 1945 and 1946. This notice was legal and regular in every respect, and reads as follows:

"Form 668

"Notice Of Tax Lien(s) Under Internal Revenue Laws

First District of California

December 31, 1947

"Pursuant to the provisions of Sections 3670, 3671, 3672 of the Internal Revenue Code, of the United States, notice is hereby given that there have been assessed under the Internal Revenue Laws of the United States against the following named taxpayer, taxes (including interest and penalties) which after demand for payment thereof remain unpaid, and that by virtue of the above-mentioned statutes the amount (or amounts) of said taxes together with penalties, interest, and costs that may accrue in addition thereto, is (or are) a lien (or liens) in favor of the United States upon all property and rights to property belonging to said taxpayer, to wit:

"Name of Taxpayer: Wyman F. Campbell

Residence or place of business: 376 Geary Street, San Francisco

Nature

of Tax                      Year

Income         1945 46-Sep. ....       300300-A

                                       $68,670.44

               1946 47-May .....       324200-A

               Total ...........       $68,670.44

"Plus statutory interest from date of notice and demand to date of payment.

Paul V. Doyle (Seal)

Deputy Collector in Charge

"Certificate of Officer authorized By Law To Take Acknowledgements

C. W. Calbreath

Clerk, U. S. District Court

Northern District of California

Date: 31 December 1947

"W43780. United States. Notice of Tax Lien(s)

"Official Records, Recorded at Request of Collector of Internal Revenue. Filed 31st day of December, 1947 at 3:17 P. M.

Thomas A. Toomey, Recorder.

"Internal Revenue Code

"Sections 3670, 3671, 3672(a)

"Sections 3673, 3674, 3675, 3676, 3677"

On March 31, 1948, Barbara Campbell married Wyman F. Campbell and thereafter lived with his as his wife until about September, 1952. Campbell continued to operate his various businesses and ventures, including a summer resort in Napa County, known as White Sulphur Springs, and four restaurants, dining places and bars in San Francisco, known as Bob's Coffee Shop and Steak House, Bob's Nevada Lounge, Bob's Prime Ribs & Smorgasbord, and Bob's Burgers.

On September 19, 1952, Barbara Campbell commenced an action for divorce against Wyman F. Campbell in the Superior Court of the State of California, in and for the City and County of San Francisco, case number 421,275, therein. Her attorney in this action was plaintiff J. Francis Shirley.

Barbara Campbell petitioned the court for temporary alimony and support money, counsel fees and costs. In this proceeding Campbell filed his affidavit dated October 28, 1953. reading as follows:

"WYMAN FRANKLIN CAMPBELL, being first duly sworn, deposes and says:

"That he is the defendant in the above entitled action; that on the 28th day of October, 1952, the above entitled court, Hon. Harry J. Neubarth presiding, made its order directing defendant to pay to plaintiff the sum of $500.00 per month for her support during the pendency of this action and the further sum of $1,000.00 on account of attorneys' fees; that defendant, through his counsel, informed the court that the United States Treasury Department had a lien on all of the assets and income of the various enterprises operated by defendant and that the United States Treasury Department Internal Revenue Service was allowing defendant only $500.00 per month for living expenses, and no more; that defendant owes the United States of America in excess of $100,000.00 for income taxes past due and that the Treasury Department officials are allowing him to stay in business only so that this indebtedness can be liquidated; that he is not permitted to withdraw more than $500.00 per month for personal expenses; that at said hearing the Hon. Harry J. Neubarth stated that he would make his order as above set forth and that defendant could contact the officials of the Treasury Department Internal Revenue Service to see whether they would allow him an increased living allowance; that your affiant has this day discussed said matter with said officials, and they refuse to allow him any more than $500.00 per month for living allowance; that attached hereto, marked 'Exhibit A' and made a part hereof, is a copy of a letter dated October 28, 1952, directed to your affiant from Charles G. Sawyer, Division Chief #3, Treasury Department Internal Revenue Service.

"WHEREFORE, your affiant prays that the order of this court made on the 28th day of October, 1952, directing him to pay alimony pendente lite and counsel fees, be modified so that any order of this court awarding said alimony pendente lite and counsel fees be consistent with defendant's ability to pay the same."

The letter from the Treasury Department, Internal Revenue Service, dated October 28, 1953, attached to said affidavit as Exhibit A read as follows:

"Wyman F. Campbell 376 Geary Street San Francisco, California

"Dear Mr. Campbell:

"In confirmation of the agreement arrived at in a conference with you and your bookkeeper, this office is willing to release to you for personal expenses a maximum of $500.00 per month. This is being done for the purpose of protecting the Federal Government's interest. This is the maximum personal withdrawal that this office will allow, and the amount will not be increased. If this arrangement is not satisfactory your assets will be distrained.

"Respectfully yours,

Charles G. Sawyer (signed)

Division Chief #3"

On October 30, 1952, the Superior Court duly and regularly ordered Wyman F. Campbell to pay to Barbara Campbell as and for alimony and support money $500 per month, and the sum of $1000 to J. Francis Shirley on account of Barbara Campbell's counsel fees in said action, said order reading in part as follows:

"The continued proceeding under the order to show cause issued by this court on September 29, 1952, having come on regularly to be heard on October 28, 1952, before the Honorable Harry J. Neubarth, pursuant to this court's order of October 7, 1952, signed October 9, 1952, plaintiff appearing personally and with her counsel, J. Francis Shirley, Esq. of Shirley, Saroyan, Calvert & Barbagelata, defendant appearing personally, and with his counsel, Samuel Jacobs, Esq. of Dibble & Jacobs, and the plaintiff and defendant having been sworn and their testimony having been taken, . . . and the order to show cause proceeding having been fully heard by the court, and the court having been fully advised in the premises, now, therefore; . . .

"IT IS FURTHER ORDERED that defendant pay to plaintiff as and for alimony and support money the sum of $500 per month, commencing with the month of November, 1952, payable the first day of each month, and that defendant forthwith pay to J. Francis Shirley, of plaintiff's counsel, the additional sum of $1000 on account of plaintiff's counsel fees herein. . . ."

During the period March 31, 1948, to and after April 10, 1953, defendant United States attempted to collect Wyman F. Campbell's delinquent taxes, but did not levy upon or seize Wyman F. Campbell's property or his daily and weekly and monthly income and returns from his said businesses and operations.

Wyman F. Campbell failed and neglected to make the said payments to plaintiff Barbara Campbell and J. Francis Shirley, required by said Superior Court order of October 30, 1952, paid Barbara Campbell only $250 per month. On April 6, 1953, said Superior Court on application of Barbara Campbell, duly and regularly issued its order to its clerk directing the issuance of a writ of execution for the collection of the $250 per month Wyman F. Campbell was refusing to pay to Barbara Campbell (six months' delinquency, $1500), and the $1000 due and owing from Wyman F. Campbell to J. Francis Shirley.

On April 8, 1953, pursuant to said writ of execution, duly issued to said court's Sheriff on April 6, 1953, the Sheriff levied upon, seized and attached, money and property in the restaurant and bar businesses of Wyman F. Campbell, known as Bob's Coffee Shop and Steak House, and Bob's Prime Rib & Smorgasbord, and placed keepers in charge, and collected money in the amount of $2607.35 ($2535 on writ of execution, plus clerk's fees, sheriff's and keepers' fees, $72.35). Thereupon, there was delivered to said Sheriff a bank cashier's check in the amount of $2607.35, which was paid to said Sheriff by the bank, and the collected cash and property of said businesses was released.

On April 9, 1953, Sheriff Dan Gallagher received a notice from the United States reading as follows:

"Form 668-A

U. S. Treasury Dept.

U. S. Internal Revenue

San Francisco District

State of California

LEVY

"To Sheriff's Office

At City and County of San Francisco

"You are hereby notified that there is now due, owing and unpaid from Wyman F. Campbell, 376 Geary Street, San Francisco, California to the United States of America the sum of Sixty Eight Thousand Six Hundred Seventy Dollars and 44/100 dollars ($68,670.44) as and for an internal revenue tax.

"You are further notified 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 lessor sum as you may be indebted to him, to be applied in payment of the said tax liability.

"Dated at San Francisco, California, this 9th day of April, 1953.

"Glen T. Jamison

By George L. Higgins

Group Chief

San Francisco Division One

"Internal Revenue Code:

Chap. 36, Subchapter C, Distraint. Authority to Distrain. Sec. 3690, Property Exempt from Distraint. Sec. 3691, Levy. Sec. 3692, Surrender of Property. Sec. 3710, a, b, c."

Because of the receipt of said notice and the assertion and claim of lien by the United States the Sheriff holds and detains said money and refuses to pay it to plaintiffs.

The foregoing facts are stipulated to as being correct by counsel for the plaintiff and by counsel for defendant United States of America .

[Judgment]

It is adjudged that defendant United States of America has no lien or encumbrance or interest on the money, $2607.35, held by defendant Dan Gallagher, Sheriff of the City and County of San Francisco, and said money belongs to plaintiffs and their title thereto is hereby quieted, and Dan Gallagher is directed to pay said money to plaintiffs forthwith, and that the lien claimed by defendant United States of America is without validity or effect.