6321 Conveyances to 3rd Parties page4

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[68-2 USTC ¶9526]Monroe Banking & Trust Company, Plaintiff v. Rufus Ben (Jack) Allen, Building Service Company, a corporation, and United States of America , Defendants

U. S. District Court, No. Dist. Miss. , East. Div., No. EC-6532, 6/18/68

[1954 Code Sec. 6321]

Lien for taxes: Priority: Property subject to lien: Subcontract Proceeds: Assignment.--A bank as assignee under an assignment by a subcontractor of the proceeds of three construction subcontracts had priority over the claims of the contractor as materialman under an agreement to supply the subcontractor with materials and withhold payment out of the subcontract proceeds. In addition, the bank had priority over the claims of the U. S. for back taxes owed by the subcontractor where the assignment of the subcontract proceeds before the taxes were assessed left no property to which the government's lien could attach in the hands of the subcontractor.

Robert D. Patterson, Patterson, Senter & King, 304 E. Jefferson St., Aberdeen, Miss., for plaintiff. Thomas J. Tubb, Tubb & Stevens, 220 Court St., West Point, Miss., H. M. Ray, United States Attorney, Oxford, Miss., for defendants.

Opinion of the Court

KEADY, District Judge:

This case poses for decision the priority of various claims, set out briefly as follows:

1. Claims of $10,658.92 asserted by Monroe Banking & Trust Company, plaintiff, to funds in the hands of defendant, Building Service Company, paid to it as prime contractor by owners under three separate contracts, for painting and related work which in each case had been subcontracted to Rufus Ben (Jack) Allen by Building Service Company, where Allen had assigned to the Bank all proceeds payable to him under said subcontracts as security for bank loans made to provide him with funds to perform the same;

2. Claims of Building Service Company to retain such funds based upon its asserted right to deduct from the assigned proceeds payable jointly to Allen and the Bank for materials sold by it to its subcontractor, Allen, in connection with the three jobs;

3. Claims of $3,884.03 asserted by the United States against the funds both previously paid to the Bank and those still retained by Building Service Company to satisfy tax liens arising against Allen on account of his failure to pay certain withholding taxes.

Plaintiff originally filed this action in the Chancery Court of Monroe County, Mississippi, against Allen, Building Service Company, and the United States of America . The case was removed to this Court by the government, pursuant to 28 U. S. C. §1444. A cross-claim asserting the lien priority of the federal tax claim was filed against the Bank and Building Service Company. By separate answers, they denied the claims of the government to any portion of the funds in issue.

Allen did not contest the claims asserted by either the Bank or the United States , and suffered judgments to be taken against him.

The facts have been largely stipulated. Building Service, the general contractor for three separate construction contracts hereinafter mentioned, has received from the contracting owners all sums thereunder, and its subcontractor, Allen, has completed all work provided by the agreements made with him. Allen did not execute a bond to pay for his labor, materials, and equipment.

On August 22, 1961, Building Service Company subcontracted to Allen the painting and caulking on the Raspet Flight Laboratory job at a price of $6,730.00. This subcontract was evidenced by written agreement between the two parties. ¹ Allen applied to the Bank for a loan to finance labor and materials needed for the job. The Bank agreed to lend him a sum not in excess of 65% of the value of the subcontract, but on condition that the proceeds of the subcontract be assigned to the Bank as security for the loan. Allen delivered his subcontract to the Bank and on October 7, 1961, he executed a letter to Building Service Company authorizing it to "make all checks due me on the Raspet Flight Laboratory . . . payable both to myself and to Monroe Banking and Trust Company". After obtaining the signature of Allen thereon, the Bank forwarded this authority to Building Service Company, which agreed thereto by formal acceptance on October 9, 1961. Relying thereon, the Bank made various loans totaling $4,276.08 to Allen under this assignment, commencing in early October, 1961, and continuing for some months thereafter. Payments from Building Service and other sources reduced the loan balance to $267.83. On the Raspet job, Building Service Company made jointly to Allen and the Bank payments totaling $3,637.47, and withheld $3,092.53 to pay for materials sold by it to Allen and used on the job. These payments were made by check and were accompanied by statements of deductions for retainage ² and for accounts purporting to be due Building Service, which were submitted to the Bank on April 23, 1962, on July 17, 1962, and on December 21, 1962. Some of these submissions by Building Service showed "less statement" and "less statement attached", but no statement showing the basis of the deductions to be the sale of materials to Allen was, in fact, ever submitted to the Bank. Moreover, all advances secured by the Raspet subcontract were made by the Bank before it received the first check and "statement" dated April 23, 1962. The Bank had no prior notice from Building Service that it was selling materials on credit to Allen for use on the Raspet job or that it intended to offset the materials account against payments due under the assigned subcontract.

On February 23, 1962, Building Service Company, as prime contractor, subcontracted to Allen the painting, labor and materials, on the Meats Research Laboratory job at a price of $7,385.00. Similiar financing arrangements were made between Allen and the Bank as in the Raspet contract. On March 22, 1962, Allen executed a letter authorizing Building Service Company to remit all checks "due me on the Meats Research Lab . . . payable both to myself and to the Monroe Banking and Trust Company . . .", which was agreed to and accepted by Building Service on March 23, 1962. On the basis of this acceptance the Bank made loans to Allen against this contract commencing in the month of March, 1962, and continuing for a period of some months thereafter, said loans aggregating $4,750.00, exclusive of renewals. Building Service Company paid to Allen and the Bank jointly two remittances under this subcontract totaling $4,536.63. The first remittance was made December 1, 1962, for $2,803.63 and the final one on February 22, 1963, for $1,733.00, said payments being made by check and accompanied by statements. The first submission showed deductions for contract retainage and for an item of $2,848.37 designated "less account attached" but no statement showing the basis of this account to be the sale of materials by it to Allen was, in fact, submitted to the Bank. Although the payments made by Building Service Company almost equaled the aggregate loans made by the Bank on this job, there is a resulting balance due the Bank of $1,550.00, arising from its apparent failure to credit its loans with the entire payments received from Building Service. Again, the Bank had made all advances before receiving from Building Service Company its first remittance and "statement". Prior thereto, the Bank had no notice that Building Service was selling materials on credit to the job and expected to offset its account against payments due by it under the subcontract.

On February 23, 1962, Building Service, again as prime contractor, subcontracted to Allen the painting on the Science Research Center job at a price of $18,000.00. On March 22, 1962, this contract was assigned to the Bank, with Allen executing a similar authority letter to Building Service Company authorizing it to "make all checks due me on the Science Research Center Building . . . payable both to myself and to Monroe Banking and Trust Company . . ." This communication was, as were the two others, forwarded by the Bank to Building Service, which formally accepted same on March 23, 1962. On the basis of this acceptance the Bank made loans against this particular contract beginning in March, 1962, and on different dates thereafter for the balance of the year 1962, with recurring loans, exclusive of renewals, made almost each month of 1963 through August of that year. The original advances by the Bank on this job extended over a period of eighteen months with loans aggregating $13,650.00. The evidence does not disclose when Allen began work on this subcontract, or the schedule of its progress. Building Service made payments to Allen and the Bank jointly of only $3,952.45, credits from other sources having reduced the loan balance to $8,841.09. The remittances of Building Service Company were by checks accompanied by statements showing deductions for retainage and other purposes, but no statement was ever actually submitted to the Bank showing the basis for withholding funds to be the sale of materials by it to Allen. Building Service made its first payment on May 22, 1963, at which time its statement noted deductions for retainage and also of $2,679.49 for "account thru April 22, 1963". The second payment by Building Service was made on June 17, 1963, at which time there was deducted, in addition to retainage, $6,868.10 for "account thru May 23, 1963". On December 30, 1963, Building Service forwarded its statement to the Bank showing completion of the subcontract, with deductions as follows:

"Less Lynch Plastics, Inc. statement

8/12/63 ..................................             $ 152.63

Less 

Science
 
Research
 
Center

 job

statement attached .......................             3,629.01

Less Balance on Personal account .........               367.03

Less Payment on Amory Housing

Project account ..........................           3 351.33"

The Bank had disbursed all but $2,400.00 of its advances to Allen before receiving the first "statement" dated May 22, 1963. Prior thereto, the Bank had no actual notice that Building Service was selling materials on credit to the job and that it was expecting to offset any account Allen owed it against the subcontract proceeds. After receipt of this statement regarding deductions from Allen's account by Building Service, the Bank made advances as follows: $500.00 on May 24, 1963, $900.00 on June 18, 1963, and $1,000.00 on July 5, 1963.

Allen was at all times and still remains indebted to Building Service after crediting his account with the amount of $10,658.52 in dispute. Allen resided in Monroe County , where he conducted an enterprise known as Jack Allen Paint Contractor. Building Service is a domestic corporation with its main office and principal place of business situated in Clay County .

Between the dates of December 14, 1962, and February 19, 1964, the Internal Revenue Service made four separate assessments against Allen for withholding taxes. Notices of these tax liens were filed in Monroe County , between the dates of April 24, 1963, and February 25, 1964. Building Service was served with notices of levy on October 25, 1963, for $1,522.98 in unpaid taxes of Allen, and on March 31, 1964, for $4,418.12, in unpaid taxes of Allen.

Building Service first asserts that, despite the assignments to the Bank, under Mississippi law it had a valid prime lien as materialman because of Allen's failure to make bond to assure his payment of materials purchased for the job. Reliance is placed upon Miss. Code Ann. §373 (1942 Recomp.), which provides, in relevant part, that:

"No contractor or master workman except as hereinafter provided, shall have the right to assign, transfer, or otherwise dispose of in any way, the contract or the proceeds thereof, to the detriment or prejudice of the subcontractors, journeymen, laborers, and materialmen as declared hereinabove and all such assignments . . . shall be subordinate to the rights of the subcontractors, journeymen, laborers, and materialmen, as well as the owner. Provided, however, this section shall not apply to any contract or agreement where the contractor or the master workman shall enter into a solvent bond conditioned as provided for in the following section [This is a reference to §374 of the 1942 Code]." (Emphasis added).

This contention is without merit for the reason that §373 relates only to persons who are protected by §372 of the Code. This latter section confers the right to acquire a lien upon any person furnishing materials or labor to "any contractor or master workman" by giving "notice in writing to the owner . . . of the amount due him and claim the benefit of this section; and thereupon the amount that may be due . . . by such owner . . . to the contractor or master workman, shall be bound in the hands of such owner" to satisfy the claim asserted. It is settled law that §372 confers a lien by subrogation only to the rights of the contractor, and in order for a lien to arise and become fixed, there must first be written notice served upon the owner and at the time of his receipt of such notice the owner must be indebted to his contractor. Chancellor v. Melvin, 211 Miss. 590, 52 So. 2d 360 (1951). The right to acquire a lien under §372 is limited to persons engaged by the original contractor, and does not extend to others who supply materials or labor at the request of a subcontractor. Thus, remote materialmen, as is the status of Building Service here, are not so protected. Alabama Marble Company v. United States Fidelity & Guaranty Company, 146 Miss. 414, 111 So. 573 (1927); United States Fidelity & Guaranty Company v. Maryland Casualty Company, 199 So. 278 ( Miss. 1940). It is quite clear that §§ 272, 273, and 274 are interdependent and must be considered together as one plan of protection. A contrary result was reached by the Chancery Court of Monroe County, Mississippi, in Cause No. 15039 styled First National Bank of Aberdeen v. Allen, et al. In an unreported, unappealed decision, the Chancellor broadly held, on page 3 of his opinion, that: "Under our law where no performance bond is made by a contractor he cannot make a valid assignment which would defeat the rights of materialmen or laborers."

The Chancellor's error is apparent upon examination of the following passage in Alabama Marble Company at p. 574:

"To put it in different words, the bond here, which the law provides may be given to take the place of the old mechanic's lien, or materialman's lien, was intended to guarantee payment only to the contractor or materialman who deals directly with the principal contractor."

The scope of §373 in prohibiting certain assignments, is made plain not only by its express terms restricting it to the rights of laborers and materialmen "as declared hereinabove" (under §372) and to the owner but also by §374. A bond under §374 obligates the person making the contract to faithfully perform it for the benefit of the owner and also to assure payment "to all persons furnishing labor or material under said contract". ⁴ Yet, the Supreme Court of Mississippi, in Alabama Marble Company v. United States Fidelity & Guaranty Company, supra, and United States Fidelity & Guaranty Company v. Maryland Casualty Company, supra, has expressly construed the statutory scope of such bond as not extending to labor and materials furnished subcontractors. The Supreme Court has stated that: "If the contractor does not give the bond provided by the statute [§374], laborers and materialmen have an equity [under present Code, §372] . . . in the funds due the contractor by the owner of the building . . .. The purpose of the bond section of the statute [§374] was to provide for the protection of materialmen and laborers, the bond being in lieu of their equity in the funds arising out of the building contract." Dixon v. United States Fidelity & Guaranty Company, 117 So. 243, 248 ( Miss. 1928).

Different considerations would be applicable if we were construing the rights of the parties to the proceeds of a public works contract supported by a contractor's bond under Miss. Code Ann. §9014 (1942 Recomp.). Although the prime contracts made by Building Service were apparently for public constructions, the subcontracts between Building Service and Allen are wholly private contracts, and thus governed by the provisions of §372, et seq. of the Code. Davis Co., Inc. v. D'Lo Guaranty Bank, 138 So. 802 ( Miss. 1932). It necessarily follows that Building Service, in its capacity as a supplier of material to its subcontractor, Allen, had no right to acquire a lien under §372, and is not in a position to invoke §373 to invalidate the assignments made by Allen to the Bank.

Building Service next urges that it had the right to offset its materials account to Allen against funds remitted to the Bank because the Bank, as assignee, was charged with notice that Allen was obligated to furnish the material, labor and equipment as provided by the subcontracts and that the assignments were necessarily subject to that contractual obligation.

The general rule is that "an assignee of a nonnegotiable chose in action requires no greater rights than was possessed by his assignor, and simply stands in the shoes of the latter", 6 Am. Jur. 2d, Assignments, §102, p. 282. This rule is applicable to the assignee of the proceeds of a construction contract in the sense that he is bound by the terms of the contract to the same extent as his assignor. 13 Am. Jur. 2d, Building and Construction Contracts, §92, p. 91. These general principles, together with the equitable limitations to be herein discussed, are recognized in Mississippi . We are cited to Hancock Bank of Gulfport v. G. E. Bass, Inc., and United States Fidelity & Guaranty Company, 247 Miss. 274, 154 So. 2d 278 (1963); and R. B. Tyler Company v. Laurel Equipment Company, 187 Miss. 590, 192 So. 573 (1940), but neither case is applicable to aid Building Service on the facts of this record.

In Hancock Bank, the assignment to the Bank of the proceeds of the subcontract was not accepted until after the subcontractor had incurred a pre-existing indebtedness to materialmen. That case stands for the proposition that the assignee of the proceeds of a contract may not recover to the detriment of one who is owed a debt by the assignor which had become due before the assignment was made.

Tyler is a somewhat closer case. R. B. Tyler Company, a general contractor, engaged one Broome to haul sand. Broome, who had no trucks and no funds, was furnished a letter by Tyler indicating its willingness to pay 50% of the amount due to Broome to the party selling the trucks and the other 50% to Broome. Laurel Equipment Company, relying on this letter, agreed by formal contract to sell Broome eight used trucks, specified for delivery on a certain date. After this delivery date of the trucks, as above specified, Broome gave Laurel Equipment Company a formal assignment of the proceeds payable to him by R. B. Tyler Company. The evidence showed that all but one of the trucks involved in the sale had been delivered to Broome and had been put to work before the assignment was served upon Tyler and that the assignment "went down about the time the last truck was taken down there". Tyler deducted from the proceeds paid to Laurel Equipment Company the sums paid out by Tyler each week for Broome's labor payroll, including truck drivers, for gasoline and oil used in operating the trucks, and for truck repairs. The evidence showed that Laurel Equipment Company, the assignee, knew or should have known that Broome was otherwise unable to meet the necessary costs of operation, paid on this current basis, and that he could not have done the work at all without its being handled in the manner stated. On these facts, the Supreme Court of Mississippi concluded that Laurel Equipment Company had not relied upon an acceptance of the assignments as a basis of its transaction. The Court stated that: "The acceptance of the assignment by the obligor in the simple terms used in this case does not of itself create a new debt as between him [Tyler] and the assignee [Laurel Equipment Company]." Tyler , supra, at 575. However, the Supreme Court carefully pointed out what is to this Court a most significant limitation upon its holding:

"If, however, in the case before us, the assignee, first before making the sale and delivering the trucks to the assignor, had obtained the acceptance of the obligor to pay the assignee one half of the gross proceeds of the contract--had the assignee in making the sale and deliveries, acted in reliance upon the acceptance of the assignment rather than upon the assignment itself--a different question would be presented; but the evidence shows that the sale and deliveries were made to the assignor before the acceptance, appellee's chief witness having testified, as already stated, that the last of the several trucks went down about the time the assignment was sent down. Reliance not having been placed upon the acceptance and delivery having been made before the acceptance, the legal effect of the acceptance was but an acknowledgement of notice of the assignment and created no new or independent obligation." Tyler , supra, at 575.

In the present case the circumstances are quite different and fit more neatly into the above limitation than into the general rule. The Bank made certain that Building Service had accepted the assignments before it, in fact, made any advances, and acted at all times in reliance upon the assignments as security for its loans. The Bank would not have made the loans to Allen without security of the contract proceeds, and it is fair to conclude from the course of dealings between the parties that Allen could not have performed his subcontracts without bank financing, a fact of which Building Service was quite aware.

Although an assignee's rights in the proceeds of a contract are ordinarily limited to such rights as the assignor had therein, such is not the case where another party to the contract, having accepted an assignment of the contract and knowing that the assignee is changing his position by relying thereon, creates, to the detriment of the assignee, additional obligations with the assignor. This equitable limitation applies here. The Supreme Court has held that: "Where a person knows of an assignment and either incurs additional obligations to the assignor or makes payment to him, or other persons, in preference thereto, he cannot escape liability to the assignee." Ewin Engineering Corp. v. Deposit Guaranty Bank & Trust Co., 62 So. 2d 572, 576 ( Miss. 1953), citing four supporting Mississippi decisions.

It was encumbent upon Building Service to notify plaintiff Bank at the time of its acceptance of the assignments, that it proposed to make credit sales of materials to Allen and retain the right to deduct any such account from the assigned proceeds. The duty was upon Building Service to have made this unmistakably clear to the Bank as a condition to accepting the assignments, because it was the party to whom all funds would be paid for the work done by Allen as subcontractor. It would be inequitable to allow Building Service, which had no materialman's lien on these proceeds, and failed to require a performance bond from Allen, to remain silent and induce the Bank to make loans to enable Allen to perform subcontracts for the production of funds which had to first come into the hands of Building Service, as prime contractor, and then deduct its account before the Bank would have any right to any portion thereof. The subcontracts did not contain a clear and express reservation for Building Service first to pay its own account as materialman, and, absent such a clause, no right to do so would exist. Cf. First National Bank of Aberdeen v. Monroe County , 131 Miss. 828, 95 So. 726 (1923).

The record does not show facts which would preclude or estop the Bank from enforcing its assignments against those portions of the contract proceeds retained by Building Service. It did not accept the assignments until they were first approved by Building Service, and it made its loans to Allen in reliance thereon. Building Service knew that Allen had to have bank financing with which to perform the contracts and while the Bank necessarily knew that Allen had to buy materials from someone, it had advanced all of the funds, except $2,400.00, to Allen in the regular course of business, before receiving information of any kind that Building Service was deducting for an indebtedness due it. With respect to the first "statement" of May 22, 1963, submitted on the Science Research Center contract, which was prior to the advancing of the last $2,400.00, the Bank was merely informed of a deduction referred to as "less Science Research Center job, statement attached, $3,629.01", with no statement being attached and without information of any kind imparting notice to the Bank as to the reason, or basis, for such deduction. Standing alone, that did not fairly inform the Bank that Building Service was asserting a prior right to deduct for materials sold by it to Allen on credit, and thereby impose upon the Bank a duty to cease financing. So far as the Bank knew, the deduction claimed by Building Service might have been a charge-back for unsatisfactory performance or other cause justified by the terms of the basic contracts between the owners and Building Service, to which the subcontracts were expressly made subject. Withholding retainage, for example, was consistent with the plain terms of the subcontracts. The Bank was without negligence in the conduct of its business arrangements with Allen, and by accepting the checks which were remitted by Building Service under the circumstances disclosed by this record, it did not agree to settle its claim for less than what was due it. Under these circumstances there was no accord and satisfaction arising out of the Bank's mere acceptance of the checks.

It, therefore, follows that the Bank's claim is prior to that of Building Service. This priority extends not only to the principal sum, but to accrued interest and attorney's fees thereon, as Building Service has retained funds sufficient to satisfy those items. The Bank's right to interest and attorney's fees is based upon the provisions of its notes, the validity of which has not been challenged by anyone. The effectiveness, therefore, of those provisions should not be defeated by the withholding by Building Service of funds under a mistaken view of its rights. Franklin Life Insurance Company v. Falkingham, 229 F. 2d 300 (7 Cir. 1956).

The government bases its claim for priority upon §§ 6321-6323 inclusive, of the Internal Revenue Code of 1954. §6321, which is basic here, provides that one's failure to pay any tax will result in a lien upon "all property and rights to property . . . belonging to such person". The government's two-pronged argument for priority over the Bank with regard to its tax lien is as follows: It claims that the Bank's assignments due to their precise nature were not effective, thus leaving to Allen property rights in the proceeds, to which the tax liens attached; it further claims that, although the Bank may have gained some interest in the proceeds, it still did not qualify as a mortgagee, pledgee or purchaser, under §6323(a) so as to be protected prior to the filing of the lien notices in Monroe County, Mississippi, nor as the pledgee of a "security", under §6323(c)(1), until it had actual knowledge of the tax lien. The government has conceded that no tax lien upon these proceeds could be valid as against Building Service, were it to prevail over the Bank, for the reason that Building Service was at all times owed by Allen a sum greater than the amount of the contract proceeds due him. Thus, Allen was admittedly without the right to compel payment from Building Service, and he personally had no "property" or "rights to property" in the proceeds of the subcontracts. See Miss. Code Ann. §1481, 1942; Shapleigh Hardware Company v. Brumfield, 159 Miss. 180, 132 So. 93 (1931); United States of America v. Raley Contracting Company [62-2 USTC ¶9706], Cause No. EC 13-61 (E. D. D. C. N. M.) [Memorandum Opinion by Judge Claude F. Clayton dated August 6, 1962.]

Having thus eliminated any tax lien claim to funds in the hands of Building Service, this Court is brought to consider the government's claim to certain funds previously paid to the Bank by Building Service and also funds adjudged to be payable to the Bank in this case. ⁵

Whether or not the government is entitled to priority in any amount depends entirely upon the effectiveness of the assignments to vest full title in the Bank to the proceeds of the subcontracts. The answer to this question must be determined by the law of this state. United States v. R. F. Ball Construction Company, Inc. [58-1 USTC ¶9327], 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 2d 510 (1958); Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 4 L. Ed. 2d 1365 (1960); United States of America v. Raley Contracting Company, Inc., supra, at p. 7.

There is ample authority among the Mississippi decisions to establish that the financial arrangements disclosed by this record constituted equitable assignments which were valid and binding upon all parties. The substantive acts of the parties indicate that they all intended that Allen would be deprived of any interest in the proceeds until the Bank had been paid in full. It is clear that the Bank proposed and carried out its agreement to lend up to 65% of the value of the subcontracts; the subcontracts were manually delivered by Allen to the Bank; and the Bank did not proceed to make any loans until Allen had executed the letters of authority and had same accepted by Building Service. All of these arrangements were understandingly and purposely made by the interested parties, showing an intention consistent with vesting in the Bank an ownership of the subcontracts' proceeds to the extent of its advances.

In Mississippi , the assignee of a nonnegotiable chose in action is invested with an equitable title by delivery alone, which the courts of law will protect. Simmons v. Smith County Bank, 83 So. 2d 441 ( Miss. 1955); Anaconda Aluminum Company v. Chester T. Sharp, 136 So. 2d 585 ( Miss. 1962). These cases align Mississippi with the general rule that "the true test of an equitable assignment is whether the debtor would be justified in paying the debt to the person claiming to be the assignee". 6 Am. Jur., 2d, Assignments, §83, p. 266. Under state law there was a valid, equitable assignment of the proceeds of each of the three subcontracts. The circumstances surrounding the transaction and the legal effect thereof are undisputed by the assignor, assignee and the obligor, and questioned only by a stranger to the transaction. At no time subsequent to the effective date of any of the three assignments could Jack Allen have had any property rights in a legal sense in such proceeds until the Bank was first satisfied. Moreover, from an economic standpoint these subcontracts, without bank financing, represented nothing of present value to Allen, and it was the Bank's advances which enabled any funds whatsoever to be realized upon the subcontracts. The position of the government is without any appeal, particularly because all three subcontracts had been made, the proceeds assigned to the Bank, and the Bank had made all its advances on the first two jobs and substantial advances on the last job, before the assessment against Allen of the oldest tax liability, an event which did not occur until December 14, 1962.

Service Fire Insurance Company of New York v. Reed, 220 Miss. 794, 72 So. 2d 197 (1954), strongly relied upon by the United States , is clearly distinguishable on its facts. A very brief sketch of the factual situation in Service Fire will illustrate its inapplicability. An automobile purchased by one Reed, partially financed by Universal C. I. T. Corporation, and insured by Service Fire Insurance Company, was destroyed by fire shortly after it was purchased. Reed signed a proof of loss containing a release which required Service Fire to pay Universal C. I. T. (the agent of Service Fire) the balance owing it by Reed and a small garage bill owed by Reed. Reed later filed suit asking for the actual cash value of his car, less the amount paid for his account. The jury returned a verdict for $600.00 and judgment was entered against Service Fire for that amount. Service Fire's appeal involved a contention that Reed had no interest in the lawsuit because he had assigned his interest to Furchess Motor Company, and placed reliance upon a letter from Reed to Universal C. I. T. requesting it to "make the coverage of my account payable to Furchess Motor Company . . . and mail the check to them so it may apply on another car as a down payment". 72 So. 2d 197, 199 ( Miss. 1954). The court held that the assignment was invalid, stating it was nothing more than a direction to pay over the check. In the case at Bar, however, the Bank has much more solid ground upon which to rely than the mere words of Allen. In Service Fire, the purported assignor did not relinquish control, but here, a check payable to Allen and the Bank jointly would have been without value to Allen, except with the Bank's endorsement. The purported assignee in Service Fire did not assume any control of the chose in action, but here the Bank made clear through the words and acts of its officers that it considered itself entitled to full control over the proceeds of the subcontracts, at least until its advances to Allen had been repaid. Thus, it is clear that the mere fact that Allen was named as one of the payees does not, as urged by the government, make him vested with a property right, to the derogation of the unsatisfied rights of the Bank.

There being no property or rights to property remaining in Allen subsequent to the dates of the respective assignments, the government's claim must fail. There is thus no need to enter the province of federal law, since an interpretation of §6323(a) and (c)(1) is to be resorted to only after there is an initial determination that the taxpayer had "property rights" to which a tax lien might attach. Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 84 L. Ed. 585 (1940); United States v. Colotta [55-2 USTC ¶9680], 350 U. S. 808, 100 L. Ed. 725 (1955); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 2 L. Ed. 2d 1135 (1958).

Counsel for plaintiff shall prepare a decree in accordance with this opinion and the relief prayed for in the complaint will be granted. The plaintiff is entitled to a judgment against Building Service Company in the principal amount of $10,658.92, plus six percent per annum interest accrued from due date, and ten percent attorney's fees thereon; the cross-bill of the United States of America is dismissed as to both the Bank and Building Service. Costs will be taxed two-thirds to Building Service Company and one-third to the United States of America .

¹ Printed form of each subcontract contains this provision: "That no claim for services rendered or materials furnished by the Contractor (Building Service) to the Subscontractor (Allen) shall be valid unless written notice thereof is given by the Contractor to the Subcontractor during the first ten days of the calendar month following that in which the claim originated." (Emphasis added). The evidence fails to show any such notice was given to the Bank.

² The subcontract (in each case) referred to withholding a "retained percentage" of unspecified amount. Ten per cent was, in fact, deducted by Building Service, but this is of no consequence to the issues.

³ In their brief, counsel for Building Service concedes it had no right to deduct for the two items, personal account $367.03, and Amory Housing Project $351.33.

⁴ §374 said Code, provides: "When any contractor or subcontractor entering into a formal contract with any person, firm or corporation, for the construction of any building or work or the doing of any repairs, shall enter into a bond with such person, firm or corporation guaranteeing the faithful performance of such contract and containing such provisions and penalties as the parties thereto may insert therein, such bond shall also be subject to the additional obligations that such contractor or subcontractor, shall promptly make payments to all persons furnishing labor or material under said contract; and in the event such bond does not contain any such provisions for the payment of the claims of persons furnishing labor or material under said contract, such bond shall nevertheless inure to the benefit of such person furnishing labor or material under said contract, the same as if such stipulation had been incorporated in said bond; and any such person who has furnished labor or materials used therein . . ." (Emphasis added).

⁵ The government's claims total $3,884.03, which sum is divisible into two categories. The first category, consisting of the December 14, 1962, and April 8, 1963, assessments make up the amount of $1,216.21 (balances of $332.01 and $884.20 respectively) claimed to be owing to the government in any event. The remaining $2,667.82 of the $3,884.03 total is contended by the government to be contingent upon this Court's holding Building Service liable to the Bank. In view of this Court's ruling, both claims must be dealt with.

 

 

[61-2 USTC ¶9762]First State Bank of Ada, a Minnesota Banking Corporation, Plaintiff v. A. E. Kraling, doing business as Kraling Construction Company, the County of Norman, and American Casualty Company of Reading, Pennsylvania, Defendants and United States of America, Intervenor

Minn. District Court, Ninth Judicial Dist., 9/19/61

[1954 Code Sec. 6321]

Tax lien: Priority: Surety and assignee: Government as intervenor.--The claim of a bank for money loaned to the delinquent taxpayer and secured by the assignment of rights under a construction contract, and the claim of the surety for funds expended in making good its contract of suretyship, were superior and had priority over the Government, as intervenor, on its tax lien to funds held by a county and due the delinquent taxpayer under a contract to perform public work.

Lewis W. Child, Child and Child, 1st National Bank Bldg., Minneapolis, Minn., for the First State Bank of Ada. J. P. Dosland, Dosland and Dosland, American State Bank Bldg., Moorhead, Minn., for A. F. Kraling. O. E. Austinson, Ada , Minn. , for the County of Norman . Donald F. Pratt, Guesmer, Carson, McGregor, Clifford and Pratt, 1120-1130 Roanoke Bldg., Minneapolis, Minn., for the American Casualty Company. John J. Connelly, Assistant United States Attorney, for the United States .

Order

SYLVESTRE, District Judge:

A hearing was held in the above-entitled matter before the court and the undersigned as one of the judges thereof at chambers in the court-house at Crookston , Minnesota , on August 17, 1961, on the following Motions:

[Plaintiff's Motion]

(1) The written Motion of the plaintiff filed with the clerk of this court on July 26, 1961 for a summary judgment against the intervenor in plaintiff's favor "for the relief demanded in plaintiff's cross-claim to the complaint in intervention of the United States of America, namely: adjudging and decreeing that the claimed tax lien of the United States of America against the defendant, A. E. Kraling did not attach to the $14,167.16 proceeds remaining payable by the County of Norman under its contract with A. E. Kraling which had been assigned to the plaintiff, First State Bank of Ada, and that said claimed lien of the United States of America is subject to and inferior to the right, title and interest of the plaintiff in the sum of $14,167.16 admitted to be owing by the defendant, County of Norman, under the terms of the contract with defendant, A. E. Kraling";

[Defendant's Motion]

(2) The written Motion of the defendant, American Casualty Company of Reading, Pennsylvania, filed with the clerk of this court on July 21, 1961 for a summary judgment against the intervenor in favor of said moving defendant "for the relief demanded in defendant's cross-claim, namely: adjudging and decreeing that the claimed tax lien of the United States of America against the defendant, A. E. Kraling, did not attach to the $14,167.16 proceeds remaining payable by the County of Norman under its contract with A. E. Kraling, and that said claimed lien of the United States of America is subject to and inferior to the right, title and interest of said defendant, American Casualty Company of Reading, Pa., in and to the sum of $14,167.16 admitted to be owing by the defendant, County of Norman under the terms of the contract with defendant, A. E. Kraling"; and,

[Government's Motion]

(3) The oral Motion of the intervenor made at the hearing for a summary judgment adjudging that the United States has a lien in the amount of $13,646.24 with lawful interest thereon from January 14, 1959 until paid on the aforesaid sum of $14,167.16 admitted to be owing by the defendant, County of Norman, under its contract with defendant, A. E. Kraling, which lien is prior and superior to all other liens or claims against said property and ordering the defendant, County of Norman, to pay over to the United States out of said sum of $14,167.16 a sum sufficient to satisfy the said lien of the United States.

The parties, in the order named in the caption, will hereinafter for brevity be called: "the bank", "Kraling", "the county", "the surety company" and "the United States ".

[Parties' Representatives]

At the hearing the parties appeared and were represented as follows:

(1) the bank by Mr. Lewis W. Child of the firm of Child and Child of Minneapolis;

(2) Kraling by Mr. J. P. Dosland of the firm of Dosland and Dosland of Moorhead;

(3) the county by its county attorney, Mr. O. E. Austinson of Ada ;

(4) the surety company by Mr. Donald F. Pratt of the firm of Guesmer, Carson, McGregor, Clifford and Pratt of Minneapolis; and

(5) The United States by Mr. John J. Connelly, Assistant United States Attorney for the District of Minnesota.

There was no appearance at the hearing for or in behalf of Mr. Henry Nycklemoe, Trustee in Bankruptcy of A. E. Kraling.

At the hearing the parties requested and were granted leave to file written briefs to supplement their oral agreements and the matter was finally submitted to the court on such briefs on September 1, 1961.

[Facts]

It appeared to the court that there was no genuine dispute between the parties with respect to the following facts:

(1) On or about April 25, 1958, Kraling and the County entered into a written contract dated that day wherein and whereby Kraling, therein called the "contractor," in consideration of the price specified in his proposal to be paid to him by the county agreed to do public work in the improvement and extension of County Ditch No. 1 of Norman County, Minnesota, in accordance and compliance with the plans and specification therefore and to perform and furnish all labor, skill and materials in the doing of such work. The contract contained the following provision:

"Article II. That the contractor will pay and cause to be paid as they become due all just claims by persons or corporations supplying skill, labor, tools, materials or any supplies furnished the Contractor and used in the performance of this contract, and save harmless the County from all legal costs and charges that may accrue on account of the doing of said work herein specified and contracted to be done."

[Surety Bond]

(2) For the purpose of giving validity to the contract above-mentioned, on April 25, 1958, Kraling as principal and the surety company as surety executed and delivered to the county as obligee a contractor's bond in form and containing provisions complying with the requirements of §574.26 of the Minnesota Statutes, wherein and whereby the principal and surety jointly and severally bond themselves in the penal sum of $97,024.48 which bond is conditioned, among other things, for the performance and fulfillment of said contract and for the payment, as they become due, of all just claims by persons or corporations supplying skill, labor, tools, materials and supplies furnished the contractor and used in the performance of the contract.

(3) Thereafter Kraling entered upon the performance of said contract and the doing of said public work.

[Assignment of Contract]

(4) On June 10, 1958, the bank loaned Kraling $10,000 and to evidence said loan Kraling made and delivered to the bank his promissory note dated that day wherein and whereby he promised to pay to the order of the bank the sum of $10,000 on demand with interest thereon at the rate of seven percent per annum payable annually. To secure said loan Kraling executed and delivered to the bank on June 10, 1958, an instrument, therein denominated "Assignment, County Ditch Contract, Ditch No. 1," reading as follows:

"June 10th, 1958.

Norman County , Minnesota Office of County Auditor , Ada , Minnesota

Re: Assignment

County Ditch contract, Ditch No. 1.

In Consideration of the First State Bank of Ada, Ada, Minnesota, having made and at various times will continue to make Cash advances of Money on loans up to and including the sum of $10,000. I/We herewith assign, transfer and set over unto the First State Bank of Ada , Ada , Minnesota , my or our Interest, title and right to Cash payments made by Norman County Treasurer on Completed Estimates approved by Authorized Engineer on County Ditch Job No. Ditch No. One, (known as the Hegne Ditch). Such assignment to stand and continue in full force and effect until such time as this assignment is cancelled in writing.

"I herewith authorize the Norman County Auditor to issue such Warrants for payment of Estimates on said ditch No. 1 in favor of Kraling Construction Co. and First State Bank of Ada , Ada , Minn. Jointly.

Signed this 10th day of June 1958.

Kraling Construction Co.

by A. E. Kraling

Owner.

Witness O. C. Ogard Anthony C. Sipe"

This assignment was filed in the office of the Auditor of the county on June 10, 1958, and in accordance with the terms thereof payments were thereafter made by the county on account of said contract.

(5) On or about September 18, 1958 the bank loaned Kraling $3,000 and to evidence said loan Kraling made and delivered to the bank his promissory note dated September 18, 1958, wherein and whereby he promised to pay to the order of the bank the sum of $3,000 on demand with interest at the rate of seven percent per annum payable annually.

(6) No part of the loans evidenced by said notes has ever been paid to the bank.

(7) Sometime before June 2, 1959 Kraling stopped work upon the project for the improvement and extension of said ditch; he refused and materially failed to perform and failed to substantially complete the said contract and the work he had agreed to do thereunder, and he abandoned the same.

[Government's Tax Lien]

(8) Various assessments have been made, on behalf of the United States , against Kraling for unpaid withholding FICA and FUTA taxes. The dates of assessment, the dates of Notice and demand, and the amounts assessed are as follows:

                                                Date of

Period &                       Date of         Notice &             Amount

Type of Tax                 Assessment           Demand           Assessed

3-Q-58 WT-FICA ....            1-14-59          1-14-59         $ 6,295.43

4-Q-58 WT-FICA ....            1-14-59          1-14-59           5,510.86

1958 FUTA .........            1-14-59          1-14-59           1,839.95

Total .............                                             $13,646.24

No part of the total of $13,646.24 has been paid.

A Notice of Federal Tax Lien, wherein a lien was claimed by the United States on all property and rights to property belonging to Kraling, was filed with the Register of Deeds of Norman County on January 15, 1959, and served upon the county.

[Surety's Payments]

(9) Various persons and corporations had just claims against Kraling aggregating in excess of $30,000 for skill, labor, tools, materials and supplies furnished to Kraling and used by him in his part performance of the contract while he was engaged in doing work thereunder which claims he failed and neglected to pay. The surety company, between April 13, 1959 and November 7, 1959, and prior to the commencement of this action, paid to such persons and corporations sums aggregating more than $30,000 in payment of said claims after they were past due.

(10) After Kraling had materially filed to perform and failed to substantially complete said contract and had abandoned the same the county on or about June 2, 1959 and thereafter caused others to perform and complete the work which Kraling had agreed but failed to do under the contract.

[Funds in Hands of County]

(11) The county by judicial admissions in its pleadings in this action has admitted it "presently has in its possession and under its control the sum of $14,167.16 due and unpaid on account of said April 25, 1958 contract with defendant Kraling" and prays for a determination by the court whether the bank, the surety company, the United States or any other party or person is entitled to said sum of $14,167.16. There is no contention by any party that the county is obligated to pay any more than $14,167.16 to any one.

There being no substantial controversy as to the existence of the foregoing facts and it appearing to the court after considering the arguments and briefs of counsel and all the files and proceedings herein that upon such facts the summary judgment hereafter ordered should be entered herein as a matter of law.

[Conclusions]

IT IS HEREBY ORDERED, as follows:

[1] That a summary judgment be entered in this action adjudging, determining and declaring that the intervenor United States of America has no right to or interest in any part of the sum of $14,167.16 mentioned in the pleadings in this action which the defendant, County of Norman, has in its possession and under its control, and that said intervenor is not entitled to recover any part of said sum from said defendant.

[2] That the Motion of the intervenor be and the same is in all things denied.

[3] That the Motion of the plaintiff is denied except in the respect it is partially granted by the entry of the summary judgment herein ordered.

[4] That the Motion of the defendant, American Casualty Company of Reading , Pennsylvania , is denied except in the respect it is partially granted by the entry of the summary judgment herein ordered.

Let Summary Judgment Be Entered Accordingly, but the entry of such summary judgment is stayed for thirty [30] days from the date hereof.

 

 

[71-2 USTC ¶9737]Fox-Greenwald Sheet Metal Co., Inc. v. Markowitz Bros., Inc., Continental Casualty Co., Blake Construction Co., Inc., Appellant United States of America

(CA-DC), U. S. Court of Appeals, Dist. Col. Circuit, No. 23,160, 452 F2d 1346, 10/12/71, Reversing and remanding District Court, 301 F. Supp. 1135, 69-1 USTC ¶9291

[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]

Tax liens: Priority: Assignment.--
Where a subcontractor executed an assignment which was contrary to an antiassignment clause, the assignment was valid as between the parties to the assignment and sustained a priority claim against a subsequent judgment awarded the assignor. Therefore, federal tax liens against the assignor which were filed after the assignment but before the judgment award were not superior to the assignment claim insofar as the judgment proceeds were concerned. Furthermore, the assignment claim was not barred by the statute of limitations where although the taxpayer did not collaborate in the bringing of the suit, he did gain party status through intervention by leave of court.

Robert D. Roadman, Marshall E. Miller, 1010 Bender Bldg., 1120 Connecticut Ave., N. W., Washington, D. C., for appellant. Thomas A. Flannery, United States Attorney, Washington, D. C., Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Fred B. Ugast, Janet R. Spragens, Department of Justice, Washington, D. C. 20530, for appellee.

Before ROBINSON, MACKINNON and ROBB, Circuit Judges.

ROBINSON, Circuit Judge:

This is a contest between the United States (the Government) and Blake Construction Company, Inc. (Blake), intervenors during the tenure of this litigation in the District Court. Both are creditors of Fox-Greenwald Sheet Metal Company (Fox-Greenwald) with competing claims to monies paid into the registry of the court in satisfaction of a judgment in favor of Fox-Greenwald against Markowitz Brothers (Markowitz) and Continental Casualty Company (Continental). The District Court awarded the fund in issue to the Government. ¹ Blake, on this appeal, protests that it held the superior claim. We agree, and accordingly reverse the award.

[Facts]

I. Blake was the prime contractor selected by the General Services Administration for construction in the 1960s of a building complex for the National Bureau of Standards at Gaithersburg , Maryland . Blake engaged Markowitz as its mechanical subcontractor for the project and Markowitz, in turn, contracted with Fox-Greenwald for the performance of the sheet metal work.

In August, 1963, facing difficulties in meeting its payroll, ² Fox-Greenwald asked Blake for a $50,000 loan. To this Blake agreed, but on condition that it be given a $50,000 promissory note to evidence the transaction and, as security for payment of the note, an assignment of all monies due and to become payable to Fox-Greenwald under its contract with Markowitz. ³ Aware that Fox-Greenwald had covenanted in the contract against such an assignment without Markowitz' prior written consent, ⁴ Blake contacted Markowitz in order to ascertain its position. Over the telephone, Markowitz' president gave an unqualified consent to the assignment, and in reliance thereon Blake consummated the loan. It is clear from the evidence that but for that conversation, Blake would not have made the loan. ⁵

Blake remitted $20,000 to Fox-Greenwald on August 15, and the remaining $30,000 on August 27, 1963. On the latter date, Fox-Greenwald delivered to Blake a promissory note in the sum of $50,000 payable 60 days thereafter, and executed an assignment of all monies forthcoming from Markowitz under the contract. ⁶ Markowitz, however, never reduced its previous oral consent to writing. After closing the loan Blake repeatedly requested Markowitz to do so, and after two months discontinued what seemed to be an exercise in futility. The note matured on October 26, 1963, and Fox-Greenwald had paid only $500 on it. In 1964, Blake brought an action ⁷ on the note in the District Court to recover the balance of principal and interest due. ⁸ That suit remained pending at the time the court resolved the conflicting claims of Blake and the Government to the fund arising in the case at bar. ⁹

In February, 1964, Markowitz terminated its contract with Fox-Greenwald and refused to make further payments on it. Shortly thereafter, Fox-Greenwald filed suit in the District Court against Markowitz and Continental, its surety, for breach of contract. A jury awarded Fox-Greenwald a verdict and the judgment entered on the verdict was affirmed by this court on appeal. ¹⁰ Continental, on August 20, 1968, paid the amount of the judgment into the registry of the District Court, ¹¹ and three claimants promptly intervened. ¹² One was paid in full, ¹³ and because the residue of the fund is too small to satisfy the aggregated claims of the other two, the dispute now before us ripened. ¹⁴

The two claimants remaining are Blake, asserting the assignment from Fox-Greenwald of the amounts due it from Markowitz, and the Government, endeavoring to enforce unsatisfied tax liens filed against Fox-Greenwald after the assignment. ¹⁵ Under the law then in force, ¹⁶ the tax liens took precedence over Blake's claim if the assignment did not elevate it to a secured status; ¹⁷ otherwise, as the Government appears to concede, the claim outranked the subsequently-filed tax liens. ¹⁸ Thus priority between the Government and Blake to the fund depended upon the validity and enforceability of the assignment. ¹⁹ The District Court held that the antiassignment clause in Markowitz' contract with Fox-Greenwald, coupled with Markowitz' refusal to furnish a written consent, rendered the assignment ineffective against the Government, and that in any event the statute of limitations barred its enforcement. ²⁰ We think the District Court erred on both points.

[Nonassignability Clause]

II. In asserting its claim of priority to the in-court fund, Blake does not challenge the validity of the nonassignability clause contained in Markowitz' contract with Fox-Greenwald. ²¹ Blake argues, rather, that as a matter of proper interpretation of the clause, only Markowitz could insist upon its observance. In that position Blake finds solid support in the decisions.

Judicial holdings sustain overwhelmingly the proposition that a contractual ban on assignment ordinarily serves to protect the obligor alone, and in no way imperils the transaction as between assignor and assignee. ²² "Where a term in a contract prohibits assignment and is not rendered ineffective by statute or otherwise, the term is to be construed, unless a different intention is manifested, . . . to be for the benefit of the obligor, and not to prevent the assignee from acquiring rights against the assignor. . . ." ²³ The obligor, of course, may gain from a valid and unwaived nonassignability provision the prerogative to resist or even nullify the assignment. ²⁴ That does not mean, however, that the assignee cannot compel the assignor to stand by his bargain where the obligor has not seen fit to interfere. ²⁵ And perhaps nowhere has the rule that an assignment offending such a provision normally binds the assignor to the assignee seen greater application than where the assigned claim was for monies due or to become due under a contract. ²⁶

The District Court recognized these principles for the most part. "If," said the court, "this proceeding were merely to decide any claim to the fund as between Blake and Fox-Greenwald, the rights, so far as the assignment is concerned, would be with Blake, notwithstanding failure of Markowitz to execute a written consent to it." ²⁷ Referring to some of the precedents, however, the court felt that "[t]hese cases are authority to sustain the validity between the parties of the assignment in question," ²⁸ but that "[t]hey do not sustain a priority claim against a subsequent judgment lien." ²⁹ "In this case," the court concluded, "the rights of the United States have intervened by reason of the tax liens which were filed" ³⁰ and "the lien of the United States is superior to the claim of Blake and must be enforced by payment from the registry of the court to the extent that such fund is available in amount." ³¹

We cannot readily share the District Court's view that the Government's tax lien on the monies due Fox-Greenwald by Markowitz prevails over the security lien which the assignment purported to confer upon Blake. Surely that view encounters formidable difficulties when examined in light of the principles which underlie the canon favoring inter-parties validity of assignments contractually forbidden. There is not the slightest whisper in the record of an intention to benefit anyone but Markowitz by insertion of the antiassignment provision in its contract with Fox-Greenwald. By the same token, Fox-Greenwald's assignment to Blake, though in contravention of that prohibition, was not void on that account; it was, as we have said, valid and binding as between Blake and Fox-Greenwald, subject at most to such rights as Markowitz had and might assert under the nonassignability clause. ³² The important consideration is that only Markowitz could avail itself of that option; third parties could gain naught from it. That is evident from cases wherein the offending assignment was upheld, not only as between the assignor and the assignee, but against creditors of the assignor as well. ³³ But the District Court's decision permitted the Government, as a creditor of Fox-Greenwald, to upset a transaction Fox-Greenwald itself was powerless to disturb, and to defeat an assignment indefeasible at the instance of Fox-Greenwald. It likewise permitted the Government, whose rights to the monies were derivative through Fox-Greenwald, to gain priority over Blake to whose rights by assignment Fox-Greenwald's own interest in the monies was subordinate. ³⁴

[Protection of Obligor]

III. Were we called upon to make an independent determination of the effect of the antiassignment clause upon the assignment to Blake, we would unhesitatingly follow the course of judicial decision heavily prevailing across the Nation. The canonical rule that, absent manifestation of a broader purpose, such a clause will be construed as protection for the obligor only, appeals to us as an accurate reflection of what the parties very probably intended. Obligors naturally shy away from the prospect of conflicting claims and the specter of double liability; they may well be interested in the obligee's personal performance and apprehensive about any material change in duties in that regard. These are the concerns usually dictating inclusion of a nonassignability provision; the realities of everyday business experience militate against any unsupported presumption that the parties had the interests of anyone but the obligee in mind. Consequently, "as assignment has become a common practice, the policy which limits the validity of restraints on alienation has been applied to the construction of contractual terms open to two or more possible constructions," ³⁵ and that makes good sense to us.

It is not, however, our mission, as we conceive it, to resolve the issue as a matter of either federal or District of Columbia law. For while "[t]he effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question," ³⁶ the efficacy of particular transactions to generate nonfederal rights in property, including liens, is not. ³⁷ Federal law, of course, furnishes the standard by which the relative priority of federal tax liens and state-created liens is ascertained, ³⁸ that is, whether the state lienholder falls within the class shielded against the federal lien. ³⁹ But the question whether given events are effective to give rise to a nonfederal lien is clearly one of state law; ⁴⁰ obviously, the transaction must pass muster under state law before a federal question is reached. Here the question is whether, in view of the nonassignability provision and Markowitz' refusal of consent, the assignment to Blake was effective at all. ⁴¹ That aspect of the case, we think, must be left to state law--the applicable state rule fixing the consequences to be attached to that provision.

By that we do not mean the District of Columbia law. For although the District was the forum chosen for Fox-Greenwald's suit against Markowitz, so far as the record discloses it had little or no connection with the contract between them, into which the antiassignment clause was incorporated. ⁴² Manifestly, then, we are not to draw upon District law, but instead upon the law of the jurisdiction having the more essential contacts with the contract transaction. ⁴³

Preliminarily, we note that it is the locus of that transaction, and not the assignment transaction, ⁴⁴ that is vital in the choice-of-law process. The controversy does not emanate from the events by which Fox-Greenwald undertook to assign to Blake, but from the contract between Markowitz and Fox-Greenwald containing the non-assignability provision. The Government's challenge is not based on alleged deficiencies in the asignment itself, but on the claim that the antiassignment clause disabled Fox-Greenwald from making any sort of assignment of rights under the contract. The question thus arising is the construction properly to be given to that clause, and that question is referable to the law governing the interpretation of the contract. ⁴⁵

The Constructional problem, in our view, is to be treated under the law of Maryland , where the contract called for performance. ⁴⁶ It was, as we have said, a contract to do the sheet metal work in a five-building complex; it was, too, a contract requiring a performance of substantial size and duration. ⁴⁷ There is nothing before us to indicate that the parties had any expectation that the contract might be construed by reference to any other law, nor to suggest that any other state bore a more significant relationship to the contract. We turn, then, to the Maryland law for such guidance as it may afford in the interpretation of the antiassignment clause. ⁴⁸

The validity of contract provisions prohibiting assignment has been upheld in Maryland, ⁴⁹ and the Maryland approach to construction of such provisions does not seem to differ essentially from that prevalent in other parts of the country. While Maryland holds an assignment inoperative in the face of a nonassignability clause intended for the protection of the assignor, ⁵⁰ its highest court has recognized the effectiveness of assignments between assignor and assignee where, as here, the prohibition is not so designed. ⁵¹ The pains the court has taken to sharply distinguish the two situations ⁵² makes it evident that interpretation of antiassignment provisions is an integral part of the decisional process. And the court's constructional preference is sufficiently indicated by its declination in Rubberoid Company v. Glassman Construction Company ⁵³ to extend the scope of a nonassignability clause beyond its plainly apparent purpose. ⁵⁴ We note also, as a reflection of state policy, that shortly after the assignment in suit Maryland adopted the Uniform Commerical Code, ⁵⁵ which goes to the extent of outlawing restrictions on the transferability of accounts receivable in security transactions. ⁵⁶ With these circumstances, and the absence of a more definitive ruling, we are unwilling to assume that Maryland would fashion and apply to the situation at bar a constructional rule at variance with the strong current of judicial opinion elsewhere. ⁵⁷

[Statute of Limitations]

IV. Statutes of limitation are statutes of repose; their purpose is to quiet stale controversies, the evidence as to which may be eroded by time. ⁵⁸ Neither of the two debtors here involved--Fox-Greenwald or Markowitz--has itself urged a time barrier to Blake's resort to the fund held in the registry of the District Court. The Government, however, as a creditor of Fox-Greenwald, invoked such a limitation ⁵⁹ against Blake, another Fox-Greenwald creditor, ⁶⁰ on the basis of the long interval between the accrual of Blake's cause of action on Fox-Greenwald's note and Blake's effort to enforce the assignment securing it. In the interest of clarity, we recount the relevant events.

By its terms, the note matured on October 26, 1963, ⁶¹ and only $500 had been paid on it. It was secured by Fox-Greenwald's assignment to Blake of all monies due and to become due from Markowitz pursuant to the contract for the sheet metal work. Markowitz' liability under the contract was the subject of earlier inquiry in this case, begun in 1964, and the monies Markowitz was found to have owed comprised the in-court fund in original amount. Blake did not intervene to assert an interest in the litigation or the resulting fund until August, 1968. ⁶² The District Court held, and the Government argues here, that by then the statute of limitations had barred all rights in the fund which Blake may have derived by virtue of the assignment. This view we cannot accept.

The parties' transactions generated two claims, each susceptible to a statutory time bar, and it is important to carefully differentiate them. One was Blake's claim against Fox-Greenwald on the note evidencing the loan. The other was Fox-Greenwald's claim against Markowitz on the contract, which was assigned to Blake as security for the payment of the note. They were separate claims with separate origins, involving different debtors and different obligations. They were interrelated only in the sense that Blake's derivative claim against Markowitz secured Blake's original claim against Fox-Greenwald. And they were unrelated, in the sense that prosecution of each claim presented its own problems in terms of the statute. ⁶³

The District's general statute of limitations ⁶⁴ as the law of the forum, governed the litigation in which the parties have engaged. ⁶⁵ The statute specifies enforcement periods of twelve years for contracts under seal ⁶⁶ and three years for all other contracts. ⁶⁷ The three-year period applied to suit on Fox-Greenwald's note ⁶⁸ and, we may assume with the record devoid of anything to summon the longer period, to suit on the assigned debts of Markowitz as well. ⁶⁹ As to each, the statute started running when the cause of action arose, ⁷⁰ subject to arrest upon commencement of appropriate litigation. ⁷¹ With these basic principles in mind, we turn to a consideration of each of the two claims.

Blake's cause of action on its principal claim, attested to by Fox-Greenwald's note, ripened on October 27, 1963, the day after the note matured without payment. ⁷² Blake's suit against Fox-Greenwald on the note ⁷³ was brought during 1964, well within the three-year period. The action tolled the statute on the note, ⁷⁴ and the action was still pending when the District Court passed its decision on the parties' conflicting claims to the fund. Thus Blake's right to enforce, in that action, Fox-Greenwald's obligation on the note was then still preserved. ⁷⁵

Blake's suit against Fox-Greenwald, however, did not interrupt the running of the statute as to Blake's claim against Markowitz on the obligations assigned by Fox-Greenwald. The creditor's causes of action on the principal debt and on an assigned chose securing it are independent. ⁷⁶ A suit halting the statute on one debt does not automatically have the same effect on another debt comprising its security. ⁷⁷ Nor could Fox-Greenwald's assignment of Markowitz' debts to Blake ex proprio vigore extend Markowitz' liability beyond the enforcement period set by the statute. ⁷⁸ We must, therefore, investigate further to ascertain whether the statute foreclosed Blake's claim for the monies due Fox-Greenwald by Markowitz before Blake sought to litigate it.

As we have stated, Fox-Greenwald undertook an assignment to Blake not only of accounts already due by Markowitz but also of accounts to become due. The statute, of course, would not begin to run on any obligation of Markowitz until it fell due, ⁷⁹ and the record leaves fuzzy the extent to which the in-court fund might represent debts maturing subsequent to Fox-Greenwald's default on the notes. In any event, Blake's cause of action against Markowitz accrued in toto during February, 1964, when Markowitz repudiated its contract with Fox-Greenwald and refused further payments on it. ⁸⁰ Measuring the three-year limitation period from that point, it follows that the statute, absent some circumstances suspending it, would have completed its run during February, 1967.

The statutory bar did not, however, fall so soon. Fox-Greenwald instituted suit--the case at bar--against Markowitz in 1964, well within the limitation period, on the self-same claim that had previously been assigned to Blake as security for the payment of the note. With legal title and security rights to the assigned choses, ⁸¹ Blake could, and indeed properly should, have joined in the action as a real party in interest. ⁸² But though Blake did not collaborate in the bringing of the suit, Blake did gain party status therein, and rightly so, ⁸³ through intervention by leave of court, during the course of the supplemental proceedings directed toward disposition of the in-court fund, which arose in satisfaction of the judgment on the already-assigned claim. It is well settled that, even after the expiration of the statutory period, an assignee may be admitted to an action commenced by his assignor after the assignment but before the statute has run. ⁸⁴ Here, Blake's intervention introduced no new cause of action but facilitated a terminal ruling on the old. ⁸⁵ Fox-Greenwald's suit against Markowitz, we hold, arrested the statute not only for itself, but upon Blake's intervention for the benefit of the latter as well.

[Conclusion]

We conclude, then, that the assignment to Blake was valid and effective against Fox-Greenwald, that the statute of limitations did not proscribe Blake's access to it, and that Blake's claim on the balance of the fund deposited in the registry of the District Court has priority over the Government's. ⁸⁶ We accordingly reverse the judgment appealed from, and remand the case to the District Court for distribution of the fund consistently with this opinion. ⁸⁷

So ordered.

¹ Fox-Greenwald Sheet Metal Co. v. Markowitz Bros., Inc., Fox-Greenwald's requisitions. See text infra following note 9. [69-1 USTC ¶9291] 301 F. Supp. 1135 (D. D. C. 1969).

² That, we are told, was because Markowitz was cutting

³ The contract price for the sheet metal work was $1,050,000. Fox-Greenwald represented that it was then more than 90% comlete, and that more than $200,000 was owing under the contract and at least an equal amount would become due on completion.

⁴ The relevant provision reads:

Subcontractor agrees that he will not subject, or assign, or transfer this Contract or any part thereof or any interest therein or any moneys due hereunder without first obtaining the written consent of the Contractor.

⁵ See note 57, infra.

⁶ Also, two corporations and three persons individually endorsed the note in guaranty of its payment. See note 8, infra.

⁷ Blake Construction Co. v. Fox-Greenwald Sheet Metal Co., Civ. No. 350-64 ( D. D. C.).

⁸ Joined with Fox-Greenwald as defendants were Sam Fox Sheet Metal Company, a Colorado corporation, and Philip M. Fox, both of whom were guarantors on the note. See note 6, supra. See also note 87, infra.

⁹ See note 87, infra.

¹⁰ Markowitz Bros., Inc. v. Fox-Greenwald Sheet Metal Co., 130 U. S. App. D. C. 217, 399 F. 2d 588 (1968).

¹¹ Continental's reason, as alleged in its petition, was notification by creditors of Fox-Greenwald of claims totaling an amount in excess of the judgment.

¹² Blake, the Government, and the attorney who had represented Fox-Greenwald.

¹³ See note 14, infra.

¹⁴ The amount Continental paid into court was $114,232.49. Pursuant to a stipulation of the intervening creditors, the District Court has paid therefrom $28,878.97 to Fox-Greenwald's attorney for fees and advanced costs, leaving a balance of $85,352.52. At the time of intervention, the Government's claim was $112,189.45 plus interest and additions provided by law, and Blake's claim was $50,000 with 6% interest from August 27, 1963, subject to a credit for the $500 Fox-Greenwald had paid.

¹⁵ The assessments were made between December 16, 1963, and March 13, 1964, and the liens were filed between February 17 and May 6, 1964, in all cases subsequent to consummation of Blake's loan to Fox-Greenwald and the execution of the latter's assignment to Blake.

¹⁶ The events giving rise to the respective claims of the Government and Blake transpired prior to the Federal Tax Lien Act of 1966, 80 Stat. 1125 (1966), 26 U. S. C. §§ 6323 et seq. (Supp. V. 1965-69). The pre-Act provisions are relevant not only for that reason but also because pre-Act priorities enjoyed by parties other than the Government remain unimpaired by the Act. 80 Stat. 1146 (1966).

¹⁷ Section 6321 of the Internal Revenue Code of 1954, 26 U. S. C. §6321 (1958), imposed "a lien in favor of the United States upon all property and rights to property whether real or personal, belonging to" the delinquent taxpayer. Section 6322 of the Code, 26 U. S. C. §6322 (1958), provided generally that the lien "shall arise at the time the assessment is made . . .." However, Section 6323(a), 26 U. S. C. §6323(a) (1958), specified that the lien "shall not be valid as against" certain classes of persons until notice thereof was filed. See United States v. Leventhal, 114 U. S. App. D. C. 340, 342, 316 F. 2d 341, 343 (1963). Among those protected against an unfiled lien were assignees whose prior liens were choate--were, as expressed in United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 86 (1954), "certain as to amount, identity of the lienor [and] the property subject thereto." See cases cited infra note 18. As we have pointed out, supra note 15, Blake's loan and Fox-Greenwald's assignment antedated the assessments of the taxes and the filing of liens. And while it is unclear from the record whether Maryland or District of Columbia law governs the mechanics of the assignment transaction, see note 44, infra, neither imposed a filing requirement as assignments of choses in action. See D. C. Code §28-2303 (1961); Md. Code art. 8, §1 (1957).

¹⁸ Aside from the possible effect of the antiassignment clause, considered in Parts II and III, infra, it seems clear that Fox-Greenwald's assignment to Blake satisfied the choateness requirement, see note 17, supra. Crest Finance Co. v. United States [62-1 USTC ¶9105], 368 U. S. 347 (1961), rev'g [61-1 USTC ¶9460], 291 F. 2d 1 (7th Cir. 1961). See also United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 91 n. 9 (1963); Corigliano v. Catla Const. Co. [64-2 USTC ¶9657], 231 F. Supp. 245, 248-49 (S. D. N. Y. 1964). Cf. United States v. R. F. Ball Const. Co. [58-1 USTC ¶9327], 355 U. S. 587, 593-94 (1958).

¹⁹ There is no claim, or basis in the record for assuming that Fox-Greenwald, for all its apparent woes, is insolvent. See 31 U. S. C. §191 (1964); United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351, 357-58 (1964); United States v. City of New Britain , supra note 17, 347 U. S. at 85.

²⁰ Fox-Greenwald Sheet Metal Co. v. Markowitz Bros., Inc., supra note 1, 301 F. Supp. at 1136-37.

²¹ The courts have almost invariably sustained the validity of such provisions. See cases collected in Annot., 37 A. L. R. 2d 1251 (1954). We have intimated a similar view, Meyer v. Washington Times Co., 64 App. D. C. 218, 220, 76 F. 2d 988, 990, cert. denied, 295 U. S. 734 (1935). See, however, Portuguese-American Bank v. Welles, 242 U. S. 7, 11-12 (1916), but see also Martin v. National Sur. Co., 300 U. S. 588 (1937).

²² E.g., Paxson v. Commissioner [44-2 USTC ¶9457], 144 F. 2d 772, 775 (3d Cir. 1944) (agency contract); Johnson v. Landucci, 21 Cal. 2d 63, 130 P. 2d 405, 408, 148 A. L. R. 1355 (1942) (land contract); Home Builders, Inc. v. Dellwood Corp., 379 Pa. 255, 108 A. 2d 731, 733 (1954) (dealer franchise agreement). See also the cases cited infra notes 24, 26, and numerous earlier cases collected in Annot., 148 A. L. R. 1361 (1944). And see 4 A. Corbin, Contracts §873 at 496-97 (1951); 1 G. Gilmore, Security Interests in Intangible Property §7.8 at 220-21 (1965); 3 S. Williston, Contracts §423 at 140-41 (3d ed. 1960). We speak, of course, only of an assignment or rights as distinguished from an attempted delegation of an obligation. We also distinguish the situation sometimes encountered, notably in statutes and trusts, where an antiassignment provision is plainly intended to protect the assignor.

²³ Restatement (Second) of Contracts §154 (Tent. Draft No. 3, 1967). This statement would change the earlier version, Restatement of Contracts §176 (1932), from a flat rule of law to a canon of interpretation, and we regard the latter as the true basis of the decisions.

²⁴ See, e.g., Guerin v. Blair, 33 Cal. 2d 744, 204 P. 2d 884, 885-86 (1949); Detroit Greyhound Employees Fed. Credit Union v. Aetna Life Ins. Co., 7 Mich., App. 430, 151 N. W. 2d 852, 856 (1967); Concrete Form Co. v. W. T. Grange Const. Co., 320 Pa. 205, 181 A. 589, 590 (1935).

²⁵ See cases cited supra notes 22, 24 and infra notes 26, 33.

²⁶ E.g., Frank Sullivan Co. v. Midwest Sheet Metal Works, 335 F. 2d 33, 39 (8th Cir. 1964); Dole Co. v. Aetna Cas. & Sur. Co., 269 F. Supp. 72, 79 (D. Me. 1967); McLaughlin v. New England Tel. & Tel. Co. 345 Mass. 555, 188 N. E. 2d 552, 558 (1963); Charles I. Hosmer, Inc. v. L. P. Federico & Son, 89 N. H. 378, 199 A. 567, 568 (1938); McClendon v. Dean, 45 N. M. 496, 117 P. 2d 250, 254 (1941). See also Portuguese-American Bank v. Welles, supra note 21, 242 U. S. at 12.

²⁷ Fox-Greenwald Sheet Metal Co. v. Markowitz Bros., supra note 1, 301 F. Supp. at 1136.

²⁸ Id. (emphasis in original).

²⁹ Id.

³⁰ Id.

³¹ Id.

³² Text supra at notes 22-26.

³³ See, e.g., McLaughlin v. New England Tel. & Tel. Co., supra note 26; Staples v. City of Somerville, 176 Mass. 237, 57 N. E. 380, 381 (1900); McClendon v. Dean, supra note 26. See also Portuguese-American Bank v. Welles, supra note 21.

"Ordinarily a contractual prohibition of assignment is for the benefit of the obligor. In such cases third parties cannot assert the invalidity of a prohibited assignment if the obligor makes no objection." Restatement (Second) of Contracts §154 comment d at 194. (Tent. Draft No. 3, 1967). We also note that in Paxson v. Commissioner, supra note 22, like here, the assignor's creditor was the Government asserting a tax deficiency.

³⁴ See cases cited supra notes 26, 33.

³⁵ Restatement (Second) of Contracts §154, comment a at 192 (Tent. Draft No. 3, 1967).

³⁶ United States v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U. S. 47, 49 (1950); See also United States v. Pioneer Am. Ins. Co., supra note 18, 374 U. S. at 88 n. 7, and cases there cited.

³⁷ See cases cited infra note 40.

³⁸ E.g., United States v. Pioneer Am. Ins. Co., supra note 18, 374 U. S. at 88-89; United States v. City of New Britain, supra note 17, 347 U. S. at 86; United States v. Security Trust & Sav. Bank, supra note 36, 340 U. S. at 50.

³⁹ E.g., Stevan v. Union Trust Co., 115 U. S. App. D. C. 36, 41-42, 316 F. 2d 687, 692-93 (1963).

⁴⁰ Id. There we pointed out that "[i]n the ordinary course of affairs the initial determination of the character of the lien under state law is determined by a state court and that decision is final on the interpretation of state law." See also United States v. Cohen [67-2 USTC ¶9602], 271 F. Supp. 709, 716 (S. D. Fla. 1967); United States v. Lebanon Woolen Mills Corp. [65-2 USTC ¶9571], 241 F. Supp. 393, 395 (D. N. H. 1964); Corigliano v. Catla Const. Co., supra note 18, 231 F. Supp. at 247; Three Mountaineers, Inc. v. Ramsey [57-1 USTC ¶9226], 143 F. Supp. 888, 892-93 (W. D. N. C. 1956); United States v. Truss Tite, Inc. [68-1 USTC ¶9296], 285 F. Supp. 88, 91 (S. D. Tex. 1968). And see United States v. American Nat'l Bank [58-2 USTC ¶9564], 255 F. 2d 504, 506-07 (5th Cir.), cert. denied, 358 U. S. 835 (1958). An analogy is found in the well settled rule that the existence of property to which the federal tax lien might attach is a question of state law although, of course, the domain of federal law is entered once it is ascertained that the lien has attached to some state-created interest. E.g., United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522, 526 (1960); Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513-14 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958).

⁴¹ As we have stated, text supra at notes 16-19, the priority of Blake's assignment lien over the Government's tax lien is clear, indeed is seemingly conceded, if the assignment was not frustrated by the contract prohibition.

⁴² Neither Markowitz nor Fox-Greenwald is a District of Columbia corporation. We have no indication that either conducts business within the District. The place where the contract between them was made does not appear in the record before us.

⁴³ See, e.g., Richards v. United States , 369 U. S. 1, 8-9 (1962). Vanston Bond Holders Protective Committee v. Green, 329 U. S. 156, 161-62 (1946); Tramontana v. S. A. Empresa de Viacao Aerea Rio Grandense, 121 U. S. App. D. C. 338, 341-43, 350 F. 2d 468, 471-73 (1965), cert. denied, 383 U. S. 943 (1966); Dovell v. Arundel Supply Corp., 124 U. S. App. D. C. 89, 90-92, 361 F. 2d 543, 544-46, cert. denied, 385 U. S. 841 (1966); Lummus Co. v. Commonwealth Oil Ref. Co., 280 F. 2d 915, 924-25 (1st Cir.), cert. denied, 364 U. S. 911 (1960); Fleet Messenger Serv. v. Life Ins. Co., 315 F. 2d 593, 596 (2d Cir. 1963); Neville Chemical Co. v. Union Carbide Corp., 422 F. 2d 1205, 1210-11 (3d Cir.), cert. denied, 400 U. S. 826 (1970); Bowles v. Zimmer Mfg. Co., 277 F. 2d 868, 872-73 (7th Cir. 1960). See also Restatement (Second), Conflict of Laws §6 (1971).

⁴⁴ Again the record leaves us very much in the dark. Fox-Greenwald is a Maryland corporation, and was then engaged in a large construction project in Maryland ; conceivably, the assignment transaction could have occurred there. A somewhat stronger suggestion is that the situs of the assignment transaction was Blake's place of business in the District, and it is clear that Fox-Greenwald's note was payable there.

⁴⁵ Newspaper Readers Serv. v. Canonsburg Pottery Co., 146 F. 2d 963, 965 (3d Cir. 1945) (assignability of rights under contract); Canister Co. v. National Can Corp., 6 F. R. D. 613, 614 (D. Del. 1946) (assignability of contractual right); Wetherell Bros. Co. v. United States Steel Co., 105 F. Supp. 81, 86 (D. Mass.), aff'd, 200 F. 2d 761 (1st Cir. 1952) (assignability of franchise right without other contracting party's consent); Hunter-Wilson Distilling Co. v. Faust Distilling Co., 84 F. Supp. 996, 999 (M. D. Pa. 1949), modified, 181 F. 2d 543 (3d Cir. 1950) (assignability of warranty); Eagle v. New York Life Ins. Co., 48 Ind. App. 284, 91 N. E. 814, 818 (1910), (assignability of insurance policy as collateral security for loan).

The Restatement (Second), Conflict of Laws §208 (1971), sums it up. It provides that "[w]hether, and under what conditions a contractual right, which is not embodied in a document, can be effectively assigned is determined by the local law of the state which has the most significant relationship to the contract and the parties with respect to the issue of assignability." That law "determines whether there must be consent to the assignment by the obligor or by some third person, as the beneficiary of a life insurance policy." Id. , comment a. Only if the right is so assignable does there arise a question as to what law governs the validity of the assignment and the rights created thereby as between the assignor and the assignee. Restatement Second, Conflict of Laws §209, comment a (1971).

⁴⁶ Alexander v. Barker, 64 Kan. 396, 67 P. 829, 830-31 (1902); Garnes v. Frazier & Foster, 118 S. W. 998, 999 (Ct. App. Ky. 1909); Cookson v. Knauff, 157 Pa. Super. 401, 43 A. 2d 402, 407-08 (1945); Baffin Land Corp. v. Monticello Motor Inn, 70 Wash. 2d 893, 425 P. 2d 623, 627 (1967). The same conclusion has been reached where, as here, the place of making did not appear, Elk River Coal & Lumber Co. v. Funk, 222 Iowa 1222, 271 N. W. 204, 208-09 (1937); Watts v. Long, 116 Neb. 656, 218 N. W. 410, 412-13 (1928), and where the services were to be rendered by independent contractors and their servants, United States-Alaska Packing Co. v. Luketa, 58 F. 2d 944, 945-46 (9th Cir. 1923); Pratt v. Sloan, 41 Ga. App. 150, 152 S. E. 275, 277 (1930). The Restatement (Second), Conflict of Laws §196 (1971), declares that "[t]he validity of a contract for the rendition of services and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that the services, or a major portion of the services, be rendered, unless, with respect to the particular issue, some other state has a more significant relationship . . . to the transaction and the parties, in which event the local law of the other state will be applied."

⁴⁷ The contract price for the sheet metal work to be done by Fox-Greenwald was $1,050,000, and the record indicates that Fox-Greenwald engaged in performance over a period of about a year before Markowitz terminated the contract. As stated in the Restatement (Second), Conflict of Laws §196, comment b (1971), "[t]he importance in the choice-of-law process of the place where the services, or a major portion of the services, are to be rendered depends somewhat upon the nature of the services involved. This place enjoys greater significance when the work is to be more or less stationary and is to extend over a considerable period of time. This is ture of a contract for employment on the ordinary labor force of a particular factory or of a contract with an independent contractor who will provide labor on a construction project."

⁴⁸ "Several factors serve to explain the importance attributed by the rule to the place where the contract requires services, or a major portion of the services, be rendered. The rendition of the services is the principal objective of the contract, and the place where the services, or a major portion of the services, are to be rendered will naturally loom large in the minds of the parties. Indeed, it can often be assumed that the parties, to the extent that they thought about the matter at all, would expect that the local law of the state where the services, or a major portion of the services, are to be rendered, would be applied to determine many of the issues arising under the contract. The state where the services are to be rendered will also have a natural interest in them and indeed may have an overriding interest in the application to them of certain of its regulatory rules. The rule of [Section 196] also furthers the choice-of-law values of certainty, predictability and uniformity of result and, since the place where the contract requires that the services or a major portion of the services, are to be rendered will be readily ascertainable, of ease in the determination of the applicable law." Restatement (Second), Conflict of Laws §196 comment c (1971).

⁴⁹ E.g., Bimestefer v. Bimestefer, 205 Md. 541, 109 A. 2d 768, 770-71 (1954); Michaelson v. Sokolove, 169 Md. 529, 182 A. 458, 459-60 (1936).

⁵⁰ Bimestefer v. Bimestefer, supra note 49, 109 A. 2d at 771 (restriction on assignment of benefits under employees' group life insurance certificate). Michaelson v. Sokolove, supra note 49, 182 A. at 459-60 (restriction on assignment of insurance benefits payable to surviving widow or children).

⁵¹ See Bimestefer v. Bimestefer, supra note 49, 109 A. 2d at 772; Michaelson v. Sokolove, supra note 49, 182 A. at 460.

⁵² Michaelson v. Sokolove, supra note 49, 182 A. at 460. See also Bimestefer v. Bimestefer, supra note 49, 109 A. 2d at 772.

⁵³ 248 Md. 97, 234 A. 2d 875, 878-79 (1967).

⁵⁴ There the Court held that a prohibition against assignment of a subcontractor's interest under a building subcontract without the general contractor's consent did not preclude an equitable assignment resulting from change of the subcontractee from a sole proprietorship to a corporation where the interests of the general contractor--the beneficiary of the nonassignment provision--were unaffected. 234 A. 2d at 878-79.

⁵⁵ Md. Acts 1933, ch. 538, Md. Code Ann. art. 95B (1964 Replacement), effective February 1, 1964.

⁵⁶ "A term in any contract between an account debtor and an assignor which prohibits assignment of an account or contract right to which they are parties is ineffective." Md. Code Ann. art. 95B, §9-318(4) (1964 Replacement). The official comment to this subsection points to its applicability to assignments of "sums due and to become due under . . . construction contracts," among others, "even if made to an assignee who took with full knowledge that the account debtor had sought to prohibit or restrict assignment of the account or of the money to be earned under the contract."

⁵⁷ In this view, we do not reach other problems related to the antiassignment clause, including the question whether its enforcement was in any event precluded by an estoppel arising from Markowitz' telephonic consent and Blake's change of position in reliance thereon. See text supra at notes 4-6.

⁵⁸ Poole v. Terminex Co., 91 U. S. App. D. C. 287, 288, 200 F. 2d 746, 747 (1952).

⁵⁹ D. C. Code §12-301(7) (1967), discussed in text at note 64 et seq.

⁶⁰ See note 86, infra.

⁶¹ That is, 60 days after August 27, 1963, its date.

⁶² Blake's motion for leave to intervene was filed on August 1, 1968, leave was granted on August 21, and Blake's petition demanding payment from the fund was filed on the day following. We intimate no view as to whether a statute of limitations is tolled upon the filing of a motion for leave to intervene or only upon the allowance of intervention.

⁶³ As later appears in text, solution of the problems allied with one claim might ameliorate, but would not eliminate, the problems incidental to the other.

⁶⁴ D. C. Code §12-301 (1967).

⁶⁵ Filson v. Fountain, 90 U. S. App. D. C. 273, 274, 197 F. 2d 383, 384 (1952); Caplan v. Manhattan Life Ins. Co., 71 App. D. C. 250, 252-53, 109 F. 2d 463, 465-66 (1939); Wells v. Alropa Corp., 65 App. D. C. 281, 282, 82 F. 2d 887, 888 (1936).

⁶⁶ D. C. Code §12-301(6) (1967).

⁶⁷ D. C. Code §12-30-(7) (1967).

⁶⁸ The note bore Fox-Greenwald's corporate seal but did not indicate, by recital or otherwise, that the execution of a sealed instrument was intended. In such circumstances, we accept the corporate seal only as a mark of identification and genuineness, and the twelve-year limitation on the enforcement of sealed instruments does not apply. See Simonson v. International Bank, 114 U. S. App. D. C. 160, 312 F. 2d 887 (1963); Sigler v. Mt. Vernon Bottling Co., 104 U. S. App. D. C. 260, 261-62, 261 F. 2d 378, 379-80 (1958). Rather, the three-year period applicable to "a simple contract, express or implied," D. C. Code §12-301(7) (1967), governed suit on the note. Munter v. Lankford, 98 U. S. App. D. C. 116, 117 232 F. 2d 373, 374 (1956); Brice v. Walker , 73 App. D. C. 377, 378, 121 F. 2d 864, 865 (1941); Hoffman v. Sheahin, 73 App. D. C. 374, 375-77, 121 F. 2d 861, 862-64 (1941).

⁶⁹ The record does not reveal whether Markowitz' obligation to pay Fox-Greenwald for the sheet metal work was embodied in a sealed contract, which would invoke the 12-year limitation. See text supra at note 66. Since in either event our conclusion would be the same, we act on the assumption that it did not. And since an assignee stands in the shoes of his assignor, deriving the same but no greater rights and remedies than the assignor then possessed, see, e.g., 3 S. Williston, Contracts §432 (3d ed. 1960); Restatement of Contracts §167(1) (1932), the statute of limitations continues to run against the assignee as it had against the assignor before. See United States v. Nashville C. & St. L. Ry., 118 U. S. 120, 125 (1886); United States v. Buford, 28 U. S. (3 Pet.) 12, 30-31 (1830); Campbell v. Wilson, 13 D. C. (2 Mackey) 497, 500-01 (1883); United States v. Taylor, 144 F. Supp. 15, 17 (E. D. Pa. 1956).

⁷⁰ Hanna v. Fletcher, 97 U. S. App. D. C. 310, 313, 231 F. 2d 469, 472, cert. denied, 351 U. S. 989 (1956); H. Herfurth, Jr., Inc. v. Acker, 85 U. S. App. D. C. 158, 159, 177 F. 2d 38, 39 (1949); Howard University v. Cassell, 75 U. S. App. D. C. 75, 79, 126 F. 2d 6, 10 (1941), cert. denied, 316 U. S. 675 (1942).

⁷¹ Reynolds v. Needle, 77 U. S. App. D. C. 53, 54, 132 F. 2d 161, 162 (1942); Maier v. Independent Taxi Owner's Ass'n, 68 App. D. C 307, 309, 96 F. 2d 579, 581 (1938); Branham v. Johnson, 66 App. D. C. 230, 231, 85 F. 2d 807, 808 (1936).

⁷² It has long been held in this jurisdiction that in computing the limitation period, the day on which the cause of action accrues is to be excluded. Baker & Bro. v. Ramsburg's Sons, 15 D. C. (4 Mackey) 1, 3 (1885). That rule is incorporated in the Uniform Commercial Code, now in force in the District of Columbia , D. C. Code §3-122 (1967).

⁷³ See note 7, supra, and accompanying text.

⁷⁴ See cases cited supra note 71.

⁷⁵ We hasten to add, however, that even if this were not so Blake's right to enforce Markowitz' liability on the assigned obligations would not be impaired. The rule is well settled that the running of a statute of limitations on the principal debt does not itself affect the creditor's right to resort to the security. Lewis v. Hawkins, 90 U. S. (23 Wall) 119, 125-26 (1874); Lavin v. Lynch, 203 Mich. 143, 168 N. W. 1024, 1025, 2 A. L. R. 804 (1918); Hyde v. Hartford Fire Ins. Co., 70 Neb. 503, 97 N. W. 629, 631 (1903); Hulbert v. Clark, 128 N. Y. 295, 28 N. E. 638, 639-40 (1891); Batten v. Jurist, 306 Pa. 64, 158 A. 557, 559, 81 A. L. R. 625 (1932); Connecticut Mut. Life Ins. Co. v. Dunscomb, 108 Tenn. 724, 69 S. W. 345, 346 (1902); United Cigarette Machine Co. v. Brown, 119 Va. 813, 89 S. E. 850, 854-55 (1916).

⁷⁶ The statute may commence at a different time on the security than on the debts, as in the present case. See also Peterson v. Rochelle, 287 S. W. 1105, 1106 (Tex. Civ. App. 1926). Additionally, the statutory periods may be of different lengths. See Brice v. Walker , supra note 68, 73 App. D. C. at 377, 121 F. 2d at 864.

⁷⁷ See Yazoo Delta Mortgage Co. v. Harlow, 150 Miss. 105, 116 So. 441, 445-56 (1928).

⁷⁸ See Campbell v. Wilson , supra note 69, 13 D. C. (2 Mackey) at 500.

⁷⁹ See cases cited supra note 70.

⁸⁰ Kosty v. Lewis, 115 U. S. App. D. C. 343, 349, 319 F. 2d 744, 750 (1963), cert. denied, 375 U. S. 964 (1964); Munter v. Lankford, supra note 68, 98 U. S. App. D. C. at 117-18, 232 F. 2d at 375-76.

⁸¹ This was so whether the assignment was governed by District or by Maryland law. D. C. Code §28-2303 (1967); Md. Code art. 8, §1 (1957). See note 44, supra, and accompanying text.

⁸² Fed. R. Civ. P. 17(a). See also D. C. Code §28-2303 (1967); Compton v. Atwell, 93 U. S. App. D. C. 99, 101-02, 207 F. 2d 139, 141-42 (1953). By the view we prefer, this follows notwithstanding the fact that the assignment was for purposes of security. 3A J. Moore , Federal Practice ¶17.09 [1-1] at 279 (2d ed. 1970). Even by the other view in vogue, Fox-Greenwald, as assignor, retained sufficient title to support an action in its own name, Texas San Juan Oil Corp. v. The Deepwater No. 1, 194 F. Supp. 396, 397 (S. D. N. Y. 1961), with the result that its institution of the suit tolled the statute on the claim as a whole. Kelley v. Bluff Creek Oil Co., 158 Tex. 180, 309 S. W. 2d 208, 212 (1958). And in any event Markowitz, with full knowledge of the assignment, waived any defect in this regard by failing to object. Pierce v. Gillet & Co., 64 App. D. C. 156, 157, 75 F. 2d 675, 676 (1935).

⁸³ See cases cited infra note 84.

⁸⁴ Weldon v. United States, 65 F. 2d 748, 749 (1st Cir. 1933); Hoffman v. United States [40-1 USTC ¶9320], 32 F. Supp. 939, 941 (S. D. N. Y. 1940); Iowa Nat'l Mut. Ins. Co. v. Chicago, B. & O. R.R., 246 Iowa 971, 68 N. W. 2d 920, 926-27 (1955); Service v. Farmington Sav. Bank, 62 Kan. 857, 62 F. 670, 671-72 (1900) Roberts v. United States Fidelity & Guar. Co., 273 S. W. 2d 39, 41 (Ky. 1954); Van der Stegen v. Neuss, Hesslein & Co., 270 N. Y. 55, 200 N. E. 577, 578, 105 A. L. R. 605 (1936); Suber v. Chandler, 36 S. C. 344, 15 S. E. 426, 427 (1892); Yeary v. Hinojosa, 307 S. W. 2D 325, 333-34 (Tex. Civ. App. 1957); Corrigan v. Stormont, 160 Va. 727, 170 S. E. 16, 17-18 (1933).

⁸⁵ Compare Link Aviation v. Downs , 117 U. S. App. D. C. 40, 42, 325 F. 2d 613, 615 (1963).

⁸⁶ With this disposition, we need not consider the question whether in any event the Government could assert the statute of limitations against Blake. See, however, Chafee v. Blatchford, 17 D. C. (6 Mackey) 459, 482-84 (1888).

⁸⁷ We note from the record in Blake's suit against Fox-Greenwald that, after submission of this appeal, a judgment was entered in Blake's favor but only against one of the individual defendants therein. See note 8, supra. The record in that case does not elaborate further, and neither it nor any party has informed us as to any satisfaction of that judgment. On remand, the District Court will of course make appropriate inquiry in that regard, and any adjustment of Blake's recovery from the in-court fund as may be warranted on that account.

 

 

[54-1 USTC ¶9309]A. C. Pierce Co., Inc. (A. C. Pierce Plumbing Co., Inc.) v. John P. Hall et al.

In the United States District Court for the Eastern District of Louisiana (Baton Rouge Division), Civil Action No. 965, March 15, 1954

Tax liens: Rights of Government against assignee of delinquent taxpayer.--The Government's tax lien for withholding taxes did not attach to money owing under a purchase order where it appeared that the purchase order was assigned prior to the time that notice of tax lien was filed and recorded.

Gladney, White & May, Louisiana National Bank Building, Baton Rouge , La. , for plaintiff. Lansing L. Mitchell, Assistant United States Attorney, Lawler & Childress, Shell Building, Houston, Tex., Kemble K. Kennedy, Louisiana National Bank Building, Baton Rouge, La., Murray F. Cleveland, Hibernia Building, New Orleans, La., Bert E. Durrett, Louisiana National Bank Building, Baton Rouge, La., for defendants.

Findings of Fact and Conclusions of Law

CHRISTENBERRY, District Judge:

The Court hereby makes the following findings of fact, based upon the pleadings, the exhibits, and the agreed statement of facts forming a part of the record in these proceedings:

1. Plaintiff, A. C. Pierce Plumbing Co., Inc., is a Louisiana corporation, domiciled in Baton Rouge , Louisiana , and defendants are John P. Hall, Modern Insulators, Inc. and B. & B. Engineering & Supply Co., Inc., all citizens of Texas , and Frank Scofield, Collector of Internal Revenue, Austin , Texas .

2. Plaintiff, which held a subcontract for certain defense work at Camp Polk , Louisiana , issued a purchase order dated July 21, 1951, to Modern Insulators, Inc. for the performance of certain work on a unit price schedule; and the work described in the purchase order, upon completion, amounted to $3,455.32. This amount was paid into the Registry of the Court for the reason that the three other defendants made demands for payment and plaintiff was in doubt as to which claimant should be paid.

3. On July 30, 1951, Modern Insulators, Inc., in consideration of advances made and to be made to it by B. & B. Engineering & Supply Co., Inc. and John P. Hall, formally assigned to B. & B. Engineering & Supply Co., Inc. and John P. Hall any and all proceeds from the above described purchase order, which joint assignment was acknowledged and agreed upon in writing by the plaintiff herein.

4. In accordance with the said assignment, B. & B. Engineering & Supply Co., Inc., between July 26, 1951 and September 21, 1951, sold and delivered to Modern Insulators, Inc. materials aggregating an agreed price of $1,621.68, all of which materials were used and installed by Modern Insulators, Inc. on the job at Camp Polk, Louisiana, and no payment of any portion thereof has been made to said assignee.

5. In accordance with the said assignment, John P. Hall made various advances to and for Modern Insulators, Inc. in the total sum of $10,046.99 between August 1, 1951 and September 12, 1951, of which amount $4,252.05 was used to cover the payroll and labor costs of Modern Insulators, Inc. on the job at Camp Polk, Louisiana, and no payment of any portion thereof has been made to said assignee.

6. On November 8, 1951, a Notice of Tax Lien for the withholding taxes under the Internal Revenue Laws was filed and recorded against Modern Insulators, Inc. (formerly Comfort, Inc.) in the Parish of East Baton Rouge, State of Louisiana, in the total amount of $8,852.09; and the same lien was filed and recorded in the Parish of Calcasieu, State of Louisiana, on November 2, 1951.

7. Form 23C-1 of the Treasury Department, Internal Revenue Service, being entitled "Assessment Certificate, Commissioner's Assessment List", dated in the Office of the Commissioner of Internal Revenue, Washington, D. C. on June 8, 1951, being Special Assessment List No. 3 for the month of June, 1951, levied assessments against Modern Insulators, Inc. (formerly Comfort, Inc.) in the total amount of $5,916.36, and said Assessment List was received by the Collector of Internal Revenue at Austin, Texas, on June 15, 1951.

Conclusions of Law

The Court hereby enters the following conclusions of law:

1. Modern Insulators, Inc. (formerly Comfort, Inc.) did not have any "rights to property" in the fund in controversy within the contemplation of United States Code Annotated Title 26, Secs. 3670-3672, either at the time the Assessment Lists were received by the Collector or at the time the Notices of Lien were filed and recorded. F. H. McGraw & Co. v. Sherman Plastering Co. (D. C. Conn. 1943) 60 Fed. Supp. 504, aff'd (CCA 2, 1945) 149 Fed. (2d) 301, cert. den. 326 U. S. 753, 90 L. Ed. 452, 66 S. Ct. 92; Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690 [40-2 USTC ¶9533]; New York Cas. Co. v. Zwerner, 58 Fed. (2d) 473.

2. Plaintiff, A. C. Pierce Plumbing Co., Inc., is entitled to the sum of $360.53 for costs and attorneys' fees in connection with these Interpleader proceedings.

3. Defendants, John P. Hall and B. & B. Engineering & Supply Co., Inc., are entitled to $1,547.40, and $1,547.39, respectively, representing the remainder of the funds on deposit in the Registry of this Court.

 

 

[63-2 USTC ¶9808]Kenneth Hammes, Trustee in Bankruptcy, in the Matter of Arizona Stores, Inc., Bankrupt, Appellant v. Tucson Newspapers, Inc., an Arizona corporation, Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 18384, 11/4/63

[1954 Code Sec. 6323]

Tax liens: Priority over bankrupt's assignment.--Federal tax liens did not take precedence over an assignment by a bankrupt of the right to receive certain moneys. The assignment of the right to receive moneys due and payable on October 1, 1961 was recorded on October 7, 1960. The right to receive the moneys was "choate" at the time the first Federal tax lien was filed, April 7, 1961.

William A. Scanland, Boyle, Bilby, Thompson & Shoeinhair, 9th Floor Valley National Bldg., Tucson, Ariz., for appellant. Zipf, Larkin and Lyle, 808 Arizona Land Title Bldg., Tucson , Ariz. , for appellee.

Before HAMLEY, JERTBERG and DUNIWAY, Circuit Judges.

DUNIWAY, Circuit Judge:

The trustee in bankruptcy of Arizona Stores, Inc. appeals from a decision of the district court following review by it of a decision of the referee in bankruptcy. The question presented is whether a federal tax lien takes precedence over an assignment by the bankrupt to appellee Tucson Newspapers, Inc. of the right to receive certain moneys.

The facts are not disputed. Arizona Stores, Inc. was adjudicated a bankrupt on May 4, 1961. On August 9, 1960 it had executed and delivered to Tucson Newspapers a written assignment of "the principal payments, each in the sum of $6,775.19 which become due and payable on October 1, 1960 and October 1, 1961 respectively under" an agreement of sale of real property, dated August 20, 1959, and recorded October 13, 1959, in which Arizona Stores was vendor. The assignment recites that it is "made as security for any indebtedness of Arizona Stores Corporation . . . to Tucson Newspapers, Inc. for advertising, and if the said Arizona Stores Corporation . . . does not owe Tucson News papers, Inc. any money for advertising on October 1, 1960 and/or on October 1, 1961 then this assignment shall be of no force or effect." The assignment was recorded on October 7, 1960. Federal tax liens were recorded on the following dates and in the following amounts:

                                $10,103.61

                                 (assessed

April 7, 1961 .....         Feb. 24, 1961)

April 10, 1961 ....                 395.53

July 13, 1961 .....               5,517.59

The amount of indebtedness of Arizona Stores to Tucson Newspapers for advertising varied as follows:

October 1, 1960 ......               None

February 22, 1961 ....         $ 9,016.75

April 7, 1961 ........          15,631.72

April 10, 1961 .......          15,731.72

May 4, 1961 ..........          18,321.93

July 13, 1961 ........          18,321.93

October 1, 1961 ......          18,321.93

At no time after February 22, 1961 was the indebtedness less than the sum owed on that date. Tucson Newspapers did not receive the October, 1960 payment that had been assigned to it because on that date Arizona Stores did not owe it any money. The record does not show whether, and if so when, the bankrupt collected that payment. We presume that it was collected when due, and was thus no longer owing when the bankruptcy occurred in May of the next year. So far as appears, the duty of the land purchaser to make the October 1, 1960 and 1961 payments was not subject to any conditions.

The question is whether, at the time that the first federal tax lien was recorded, the right of Tucson Newspapers to receive the moneys to become due and payable on October 1, 1961 was "choate" ¹ so as to take precedence over the federal tax lien. The district court held that it was, and we agree. It will be observed that when the federal lien was recorded the debt which the assignment was given to secure was substantially greater than the tax claim, and substantially greater than the amount then covered by the assignment, the October 1, 1961 payment.

We reject the contention that the August 9, 1960 assignment expired by its own terms on October 1, 1960, because no money was owed by the bankrupt to Tucson Newspapers on that date. While the language of the instrument could be so construed, we think that a more reasonable construction, and the one apparently given to it by the parties to it, is that it "shall be of no force or effect" as to the payment due on that date, but shall still continue to be effective, as to the next payment, as security for indebtedness incurred during the year following October 1, 1960, unless all of that indebtedness is paid by October 1, 1961. So interpreted, it is like the usual condition in a mortgage, that when the debt secured is paid, the conveyance effected by the mortgage shall be void, except that here there are two items of property constituting the security, and each is treated separately. As is usual, the solecism "and/or" is worse than useless, contributing nothing but doubt to the instrument in which it appears.

The district court held that the assignment of August 9, 1960 is a mortgage, under Ariz. Rev. Stat., 1956, §33-412 and the decision in Gamble v. Consolidated Nat'l Bank, 1928, 33 Ariz. 117, 262 Pac. 612. We agree. It also held that Tucson Newspapers is a mortgagee within the meaning of 26 U. S. C. §6323(a), which is a federal law question. Again, we agree. (See Hoare v. United States, 9 Cir., 1961,[61-2 USTC ¶9681] 294 F. 2d 823, 825). But this is not the end of the matter.

As is stated in United States v. Pioneer American Ins. Co., 1963, [63-2 USTC ¶9532] 374 U. S. 84, 89, it is still required that the lien created by the mortgage be choate, and this question must be answered by federal law. In the Pioneer American case, it is stated that the question is what is "the time it [the lien] attached to the property in question and became choate." (p. 88) It is further stated that a lien becomes choate "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." (p. 89) We now apply these tests to the case at bar.

There is no question that the identity of the lienor, Tucson Newspapers, Inc., became established long before the federal tax lien was recorded. The property subject to the lien is the right of the bankrupt to receive, on October 1, 1961, the principal payment to become due on that date under the agreement of sale. That right existed on the date when the assignment was executed (August 9, 1960), on the date when the assignment was recorded (October 7, 1960), on the date when the federal tax was assessed (February 24, 1961), and on the date when the tax lien was recorded (April 7, 1961). The fact that the property subject to the lien is a present right to receive money in future does not make the lien inchoate, at least where the right is unconditional.

The amount of the lien, i.e., the amount owed to Tucson Newspapers and secured by the assignment, was established by dealings between the bankrupt and the lienor, and the record shows without contradiction, that from February 22, 1961 the balance due was never less than $9,016.75. On the crucial day, April 7, 1961, it was $15,631.72, and it never dropped below that figure thereafter. We think it safe to say that February 22, 1961 is prior to April 7, 1961 within the "first in time is the first in right" test reiterated inPioneer American (p. 87).

This is quite different from the situation in Pioneer American, which involved attorney fees to be fixed by the court in the event of foreclosure. Default had occurred before any of the federal tax liens were recorded, but action to forclose was not filed until after some federal liens were recorded, and did not go to judgment until after the last federal lien was recorded. It was conceded that a right to the attorney fees accrued at the time of default, but this right was held not to amount to a choate lien because the fees had not been incurred or paid (by the lien holder), or fixed in amount by the court in the foreclosure action, when the federal liens attached. The Court followed United States v. Ball Constr. Co., 1958 [58-1 USTC ¶9327] 355 U. S. 587, which held that, in the case of a security for future advances, the lien is not choate as to advances made after the federal lien has been recorded. This is not the rule, however, as to such an interest, when the advances have been made before the federal lien has attached. (Hoare v. United States, supra, at 826; see also Crest Finance Co., Inc. v. United States, 1961 [62-1 USTC ¶9105] 368 U. S. 347, reversing United States v. Crest Finance Co., 7 Cir., 1961 [61-1 USTC ¶9460] 291 F. 2d 1, where the facts are stated. Pioneer American cites Crest Finance with apparent approval.) The present case is in the latter category.

Affirmed.

¹ This word is described in Webster's New International Dictionary, 2d ed., as "rare," and does not appear at all in Funk & Wagnall's New Stanard Dictionary (1923 ed.). We do not find it particularly couth, and use it only because the Supreme Court has revived it in federal tax lien cases. What is wrong with "complete" (Webster, 2d ed.)?

 

 

[68-2 USTC ¶9485]Dale E. Harter and Levi E. Postlewait, Plaintiffs v. District Director of Internal Revenue, Defendant

U. S. District Court, East. Dist. Wash. , No. Div., Civil No. 2934, 6/11/68

[1954 Code Sec. 6321]

Lien for taxes: Monies due from broker and pledged as security for payment to supplier: Ownership of property: State law.--The Government's tax lien did not attach to monies to become due to the taxpayer from a lumber broker and assigned by the taxpayer to a lumber supplier. Under an agreement between the parties the broker was required to pay the supplier for logs delivered to the taxpayer. The monies were the property of the supplier rather than the taxpayer. Since the monies were not the property of the delinquent taxpayer the Government's tax liens against him did not attach thereto.

William G. Luscher, North 4407 Division, Spokane, Wash., for Harter; Thomas F. Curran, Hennessey, Curran, Jansen, Bentley & Kelly, North 711 Lincoln, Spokane, Wash., for Postlewait; for plaintiffs. Smithmore E. Meyers, United States Attorney, 851 U. S. Courthouse, Spokane , Wash. , for defendant.

Findings of Fact and Conclusions of Law

POWELL, District Judge:

This cause having come on regularly for hearing before the undersigned, the Honorable, Judge Powell, of the above entitled Court, sitting without a jury; Plaintiff, Dale E. Harter, appearing by himself and represented by his attorney, William G. Luscher; Defendant appearing by Smithmore E. Meyers, the United States District Attorney; a written decision having been made on January 22, 1968; and Order adding Levi E. Postlewait, as Plaintiff, pursuant to the written decision, having entered February 21, 1968, Levi E. Postlewait appearing by his attorney, Thomas F. Curran; evidence having been introduced and the Court having considered the records and files herein, and having viewed the witnesses and testimony in the record herein, and being fully advised in the Premises, now makes the following:

Findings of Fact

1. This action is brought under Title 28, U. S. C., Section 1340 during the period from June, 1960, to March, 1964, Plaintiff, Dale E. Harter, was at all times a resident of Spokane , Washington , and was engaged in the lumber brokerage business, doing business under the name of Inland Empire Buying Service.

2. During the period of June, 1960, to October, 1963, Plaintiff, Dale E. Harter, purchased lumber from William McDonald, then, Route 1, Box 65 , Usk , Washington , who was then doing business under the name of McDonald Lumber Company.

3. The Internal Revenue Service filed assessment and a lien against William McDonald for unpaid taxes. The lien was filed in the Auditor's Office as provided by 26 U. S. C. Section 6321 and following, on February 18, 1963.

4. In August of 1963 William McDonald, the taxpayer, bought logs from the Plaintiff, Levi E. Postlewait, to be manufactured into lumber at his mill. In order to secure Levi E. Postlewait, William McDonald and the Plaintiff, Dale E. Harter, signed authority for payment from McDonald Lumber Company dated August 8, 1963, which is in evidence as P-I-2. Then to secure payment to the Plaintiff, Levi E. Postlewait, for logs to be delivered to William McDonald in the future, William McDonald and Plaintiff, Dale E. Harter signed authority for payment dated August 14, 1963, which is in evidence as P-I-3.

5. Relying upon the promise of the Plaintiff, Dale E. Harter, to pay the amount stated in the document dated August 14, 1963, Plaintiff, Levi E. Postlewait produced and delivered logs to William McDonald during the remaining part of August, September, and the early part of October, 1963. The Plaintiff, Dale E. Harter, carried out his promise to Levi E. Postlewait to make payment as agreed for the logs until October 4, 1963, when the Defendant served a notice of levy on Plaintiff, Dale E. Harter, requesting McDonald's property to pay his taxes. As a result of the notice of lien and the insistence by the Defendant's agents, the Plaintiff, Dale E. Harter, paid to the Defendant the following sums on the following dates: October 21, 1963--$522.60; November 5, 1963--$59.96; and On November 5, 1963--$1,330.79; total payments of $1,913.35.

6. That the Plaintiff, Levi E. Postlewait, notified the Plaintiff, Dale E. Harter, prior to October 21, 1963, that the foregoing sums belonged to Plaintiff, Levi Postlewait.

7. On December 16, 1963, Plaintiff, Levi E. Postlewait, sued the Plaintiff, Dale E. Harter, in Superior Court of the State of Washington, for Spokane County, Number 172976 and after trial, before the Honorable Judge Raymond F. Kelly, the Court orally found on February 27, 1964, that the moneys delivered to the Defendant by the Plaintiff, Dale E. Harter, were not monies owed to William McDonald but were moneys belonging to Levi E. Postlewait. However, no final Judgment was entered in this case.

8. Plaintiff, Dale E. Harter, filed a claim for refund of the said funds with the Internal Revenue Service. Said claim was rejected by the Defendant, Internal Revenue Service. This suit then followed.

9. In August of 1963, the taxpayer, William McDonald, operated a saw mill and used the method described herein to pay Plaintiff, Levi E. Postlewait for logs yet to be delivered and yet to be manufactured into lumber in the taxpayer, William McDonald's mill. The taxpayer, McDonald could only use his mill to make money to pay his taxes if he operated the saw mill. To operate the mill, logs were necessary.

From the foregoing Findings of Fact, the Court makes the following:

Conclusions of Law

1. The Court has jurisdiction of the parties and of the subject matter of this action.

2. The moneys paid to the Defendant by the Plaintiff, Dale E. Harter, was a payment of money belonging to Levi E. Postlewait and not to William McDonald.

3. Plaintiff, Dale E. Harter, and Plaintiff, Levi E. Postlewait, are entitled to Judgment against the Defendant, the District Director of the Internal Revenue, in the sum of $1,913.35 plus interest at 6 per cent per annum from November 3, 1963, until paid and for their costs incurred herein.

Opinion

Plaintiff paid funds to defendant which he now claims belonged to a third person. Jurisdiction is under 28 U. S. C. §1340.

The Internal Revenue Service filed assessments and a lien against William McDonald for unpaid taxes. The lien was filed in the Auditor's Office as provided by 26 U. S. C. §6321 et seq. on February 18, 1963.

In August 1963 McDonald, the taxpayer, executed two assignments of money to become due from Harter for future purchases of lumber and to be paid to Levi Postlewait. The taxpayer operated a sawmill and used this method to pay for logs yet to be delivered and to be manufactured into lumber. On October 4, 1963, the defendant served a notice of levy on plaintiff requesting McDonald's property to pay his taxes. As a result the payment involved here was made.

I must determine either, (1) that the money was the property of McDonald or Postlewait, or (2) the priority between the lien and the assignments.

The law requires that the determination of ownership be under state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); Johnson Service Co. v. Roush, 57 Wn. 2d 80 (1960), 355 P. 2d 815.

I have determined on the question of ownership that the money involved in this case was the property of Levi Postlewait and not the property of William McDonald at the time of the levy. This is under the rule expressed in In Re Halprin v. United States [60-2 USTC ¶9564], 280 F. 2d 407 (3 Cir. 1960).

The taxpayer McDonald was a producer of lumber. He could only use his property and make money to pay his taxes if he operated his sawmill. Logs were necessary. In order to obtain logs he transferred the account to be due from Harter, the plaintiff, to Levi Postlewait, the furnisher of logs in the future. It is my determination that Harter was required under the assignments to pay Postlewait and that the payment to the United States was a payment of Postlewait's property and not McDonald's.

Postlewait is a necessary party to this action under Rule 17, Federal Rules of Civil Procedure. Plaintiff has been offered an opportunity to add Postlewait as a party plaintiff but has not done so.

Unless Postlewait voluntarily appears or is brought into the action within thirty days from the date of this opinion the action will be dismissed as lacking a necessary and indispensable party plaintiff; otherwise judgment will be entered for the plaintiff and Postlewait as prayed for in plaintiff's complaint.

If this case were to be decided on the question of priorities, the first in time is first in right. The lien filed February 18, 1963, gave the defendant a priority as of that date on all property owned by the taxpayer McDonald. Since I am holding that the property is not the property of McDonald, comments on priorities are unnecessary.

DONE BY THE COURT this 22 day of January, 1968.

 

[60-2 USTC ¶9564]In the Matter of Norman E. Halprin, Bankrupt Commercial Sales, Inc., Assignee of Norman E. Halprin, Appellant United States of America, Claimant-Appellee

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 13,034, 280 F2d 407, 7/1/60, Rev'g an unreported District Court decision

[1954 Code Secs. 6321, 6322, and 6323]

Tax lien: Monies to become due under contract to bankrupt taxpayer: Priority over earlier assignment.--Monies to become due for services under an executory contract between the taxpayer and a promisor were irrevocably assigned in writing to a third party and the assignment was agreed to in writing by the promisor. A subsequent withholding tax lien against the bankrupt taxpayer did not reach monies due from the promisor because the promise to pay was not "property" belonging to the taxpayer under the original executory contract, and the promisor's obligation to pay ran to the third party and not to the taxpayer when the obligation to pay arose under the assignment.

Irving L. Epstein, 500 Lincoln Trust Bldg., Scranton , Pa. , for appellant. George F. Lynch, Assistant United States Attorney, Federal Bldg., Scranton, Pa., for appellee.

Before MCLAUGHLIN, KALODNER and HASTIE, Circuit Judges.

Opinion of the Court

HASTIE, Circuit Judge:

The question on this bankruptcy appeal is whether an outstanding obligation to pay money is property subject to a tax lien filed by the United States against property of the bankrupt, or is property of a third person to which no such lien has attached.

Norman E. Halprin, the bankrupt, was a manufacturer. In January 1956 federal withholding taxes in the amount of $7735.25 were assessed against him. On February 2, 1956 notice of lien for these taxes was duly filed and publicly recorded. It is clear that thereafter, pursuant to Sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954, ¹ a lien in favor of the United States attached to and had been perfected against all tangible and intangible property owned or acquired by Halprin. Glass City Bank v. United States, 1945, 326 U. S. 265 [45-2 USTC ¶9449].

Prior to that time, in the regular course of business, Halprin had contracted with David D. Doniger & Co. to sew and complete jackets from cut-out material to be supplied by Doniger. This contract provided that Halprin was to receive an agreed price on delivery of the jackets, properly sewn and completed by him. In June 1956, Halprin, needing funds to meet current payrolls, borrowed money from the present claimant, Commercial Sales, Inc., giving as security an irrevocable assignment in writing of all sums to become due in the future under the then executory Doniger contract. Doniger was given written notice of this assignment and consented to it in a writing wherein Doniger expressly promised to pay Commercial all monies which should become due under its contract with Halprin.

Thereafter goods were manufactured and delivered by Halprin and accepted by Doniger. When Halprin became bankrupt Doniger admitted an outstanding obligation to pay $3017.16 for goods thus manufactured and delivered after the assignment. Believing Commercial entitled to this money, the trustee petitioned in the bankruptcy proceeding for authority to disclaim title of this debt owed by Doniger. The referee denied the petition, viewing the debt as property of the bankrupt, to which the government's tax lien against the bankrupt had attached. The court below sustained that holding. Commercial, the defeated claimant, has appealed.

We begin our analysis of the foregoing transactions with the assignment and Doniger's promise to pay Commercial pursuant thereto. All relevant transactions occurred in Pennsylvania which has adopted the Uniform Commercial Code. P. S. Tit. 12A. Sections 9-102 and 9-204 of that title sanction and make immediately effective such a creation of a security interest in a right under an executory contract as the parties attempted here. Analytically, the three parties created a new primary obligation by substituting a new promise by Doniger to pay Commercial for Doniger's original promise to pay Halprin. If the original manufacturing contract had been a third-party beneficiary contract, with Doniger promising from the outset to pay Halprin's creditor for Halprin's work, it would have been apparent that the parties had created no obligation to pay Halprin and that Doniger's promise to pay the third-party could not have been reached by any lien filed against Halprin. This is essentially the contractual situation created in this case albeit by a three party arrangement modifying the obligations of an original bilateral contract. For, after Doniger agreed to make payment direct to Commercial, pursuant to Halprin's assignment, Halprin ceased to be entitled even formally, much less beneficially, to receive Doniger's performance. Cf. Taylor v. Stanley Co., 305 Pa. 546, 158 Atl. 157. Therefore, if the lien against Halprin had not attached to Doniger's obligation before this third-party agreement, it could not attach thereafter.

[What Are Property Rights?]

This brings us to the critical question in the case. Did the government's tax lien attach to the Doniger-Halprin contract before Commercial entered the picture?

Under the terms of Section 6321 of the Internal Revenue Code of 1954 a duly perfected lien of the United States for taxes attaches to "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. Application of this statute involves a two-step inquiry in which both state and federal law must be consulted. State law creates legal interests and defines their incidents, but the ultimate question whether an interest thus created and defined falls within a category stated by a federal statute requires an interpretation of that statute, which is a federal question. Morgan v. Commissioner, 1940, 309 U. S. 78 [40-1 USTC ¶9210]; Fidelity & Deposit Co. v. New York City Housing Authority, 2d Cir., 1957, 241 F. 2d 142 [57-1 USTC ¶9410]. ² Our federal problem is whether, in a wholly executory bilateral contract, valid under state law, a promise to pay for goods or services which are yet to be delivered or performed is property of the promisee within the meaning of this lien-creating statute. We must apply what relevant data we can find, including our understanding of the nature and characteristics of contract rights and property rights at common law, in order to decide what kinds of intangible rights Congress covered in the phrase "property and rights to property", as it is used in Section 6321.

Of course a debt, an unqualified obligation to pay money, is property of the creditor to which a lien for his taxes may attach. And such a property right usually arises from a contract. This happens when one party to a bilateral contract performs his undertaking and thereby subjects the other party to an obligation to pay for that performance as agreed. E.g., Citizens State Bank of Barstow v. Vidal, 10th Cir., 1940, 114 F. 2d 380 [40-2 USTC ¶9603]. But prior to that time, while the contract is wholly executory, the promise to pay is contingent upon whatever performance was bargained for in exchange. Only by conferring an agreed equivalent benefit can the promisee acquire an enforceable right to the promised payment. Thus, it is entirely uncertain whether the conditional promise to pay will ever become unqualified and enforceable. In analogous circumstances contingent obligations are held to be beyond the reach of the ordinary garnishment statute. Hagy v. Hardin, 1898, 186 Pa. 428, 40 Atl. 804. Stowe v. Breen, 1941, 230 Iowa 1215, 300 N. W. 518; cf. Riegelhaupt v. Russo, 1935, 13 N. J. Misc. 278, 177 Atl. 878. Nor are such contingent interests viewed as property of a decedent for estate tax purposes. Commissioner v. Cardeza's Estate, 3d Cir. 1947, 173 F. 2d 19, 23-24 [49-1 USTC ¶10,708]. Coming to the actual problem at hand, the Court of Appeals for the Second Circuit has refused to treat a conditional promise to pay in an executory contract as such a right of property as is contemplated by the federal tax lien statute. United States v. Long Island Drug Co., 2d Cir. 1940, 115 F. 2d 983 [41-1 USTC ¶9140]; see Beeghly v. Wilson, N. D. Iowa 1957, 152 F. Supp. 726, 737 [57-2 USTC ¶9808]; United States v. Newhard, W. D. Pa. 1955, 128 F. Supp. 805, 809 [55-1 USTC ¶9234]. We think the very language of Section 6231, "property . . . belonging to such person" suggests this limitation to rights of payment which have been earned.

[Creditor's Position]

It is fair that this distinction be utilized to protect persons in the position of Commercial here. It is eminently appropriate that one who finances property-producing transactions be able to look for security to the acquisitions he is making possible. This justifies the common law rule enabling a purchase-money mortgagee, even one with notice, to prevail over the holder of a prior security interest claiming under an after-acquired property clause. 4 American Law of Property 225 (Casner ed. 1952). The financing of the performance of a manufacturing contract such as we have here is a transaction essentially similar to a purchase-money mortgage; in a real sense, the debt now owed by Doniger was created by funds furnished by Commercial.

In such circumstances, a federal tax lien tends to defeat its ultimate purpose if it impedes the effective assignment of future earnings as security for funds needed to make such earnings possible. The result of such extension of the tax collector's reach is likely to be the destruction of the earning power, and with it the taxpaying power of the burdened business.

From a somewhat different approach, such a lender as Commercial has enriched the taxpayer's estate by the amount loaned to the taxpayer. For this reason, it is not unreasonable to allow it a corresponding security interest in the fruit of the borrowed money, with the government relegated to the borrowing taxpayer's net after the lender is reimbursed. The government has suffered no diminution of the assets which were available to satisfy its tax claim before the loan. In addition, if the tax collector should seize the borrowed funds before their expenditure he could do so.

For these reasons we conclude that Doniger's promise to pay for goods if and when delivered, as stated in an executory bilateral contract did not constitute "property . . . belonging to" Halprin, subject to a tax lien under Section 6321. Later, when goods were manufactured and delivered to Doniger, his unqualified obligation to pay, as it then came into existence, ran solely to Commercial and thus could not be reached by any lien on Halprin's property.

Accordingly, the judgment will be reversed.

¹ Section 6321 provides that after demand the amount of a taxpayer's overdue taxes "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." Section 6322 provides that the lien arises "at the time the assessment is made." Section 6323 makes the lien invalid "as against any mortgagee, pledgee, purchaser, or judgment creditor" until proper notice of lien has been filed.

² We do not think this analysis is inconsistent with the result recently reached by the Supreme Court in Aquilino v. United States, (Decided June 20, 1960) [60-2 USTC ¶9538]. Aquilino involved the competing claims of the federal government and subcontractor to a fixed debt owed the taxpayer-contractor by the owner of a building. There, as in our case, the problem was whether the taxpayer's interest qualified as "property" within the meaning of the federal tax-lien statute. Without deciding this question the Supreme Court remanded the case to the state court to determine whether the taxpayer's interest was full ownership subject to a contractor's lien or only a bare legal title with beneficial ownership in the subcontractor. Insofar as this state law determination would reflect a genuine difference in legal characteristics and not be merely the attachment of a label to an interest the substantial incidents of which were already known to the Court, it was obviously a necessary preliminary to the disposition of any federal question of interpretation of the federal statute which might arise.