Debts
Owed to the Taxpayer page2
Wayne County Board of County Commissioners,
Plaintiff v. Mendel, Inc., et al., Defendants, Internal Revenue Service,
Defendant-Appellee, Ohio Farmers Insurance Company, Defendant-Appellant
(CA-6),
U.S.
Court of Appeals, 6th Circuit, 00-3809, 10/29/2001, 2001
U.S.
App. LEXIS 23795. Affirming a District Court decision, 2000-2
USTC ¶50,562
[Code
Sec. 6321 ]
Lien for taxes: Validity and priority against third-parties: Property
subject to tax liens.--A construction company that entered into a
contract with a county board of commissioners to complete a bridge
project had an interest in a fund containing monies to pay for the
project that was held by the board after its completion. The contractor
was not in breach of contract and owed no amounts to the county that
would bar its claim to the funds. Therefore, it had an interest in the
fund to which a tax lien could attach.
[Code
Sec. 6323 ]
Lien for taxes: Validity and priority against third-parties:
Equitable lien: Surety.--A claim by a surety, which made payments to
a construction company's subcontractors pursuant to a performance bond,
did not have priority over a federal tax lien to funds still owed to the
contractor because it was not "first in time." The surety's
purported equitable lien became choate when the subcontractors were
paid, which was after the tax lien was assessed.
[Code
Sec. 6323 ]
Lien for taxes: Validity and priority against third-parties: Surety:
Security interest: Superpriority: Financing statement.--A surety,
which made payments to a construction company's subcontractors pursuant
to a performance bond, did not hold a security interest in funds still
owed to the contractor that took superpriority over an earlier federal
tax lien. The surety did not file a financing statement with the
appropriate office, which is required in order to perfect a security
interest.
Thomas J. Clark, Karen D.
Utiger, Department of Justice, Washington, D.C. 20530, for I.R.S. Edward
C. Baran, Baran, Piper, Tarkowsky, Fitzgerald & Theis, Mansfield,
Ohio, Janet L. Miggins, Cleveland, Ohio, for Ohio Farmers Insurance
Company.
Before: RYAN and COLE,
Circuit Judges, and WILLIAMS, District Judge. *
Caution:
This court has designated this opinion as NOT FOR PUBLICATION. Consult
the Rules of the Court before citing this case.
RYAN, Circuit Judge:
In this interpleader
action, the defendants, the Internal Revenue Service and Ohio Farmers
Insurance Company, claim the right to funds retained by the
Wayne
County
(
Ohio
) Board of County Commissioners in connection with their contract with
Mendel, Inc.
Ohio Farmers appeals from
the district court's determination that the government held a superior
tax lien thereby entitling the government to the fund. It contends that
the district court erred in awarding the retained funds to the
government because debtor-taxpayer, Mendel, did not have a right to the
retained funds to which a valid tax lien could attach. We believe that
Mendel completed the work as required by the contract, thus entitling it
to a right in the retained funds. Furthermore, because Ohio Farmers did
not comply with the superpriority provisions of 26 U.S.C. §6323(c)
(1988), we will AFFIRM the decision of the district court.
I.
Because the parties are
well aware of the largely undisputed facts in this action, we offer only
an abbreviated factual summary. Debtor-taxpayer Mendel entered into a
contract with
Wayne
County
to improve a bridge located within the county. Mendel secured a surety
bond from Ohio Farmers under which Ohio Farmers guaranteed: (1)
performance on the contract, and (2) payment to all persons supplying
labor and materials to the project. Mendel failed to pay two of its
subcontractors, United Precast and Meredith Brothers. Pursuant to the
payment bond, Ohio Farmers paid United Precast and Meredith Brothers
$7,677 and $8,258.77, respectively. Ohio Farmers did not have to fulfill
any obligations with respect to its performance bond.
During the contract period,
Mendel similarly failed to pay all of its employees' share of federal
income tax and social security withholding on wages. The government
assessed these tax liabilities on June 16, 1997, August 25, 1997,
September 22, 1997, December 8, 1997, and April 1, 1998. These assessed
tax liabilities amounted to more than $100,000.
During construction of the
bridge,
Wayne
County
made periodic payments to Mendel pursuant to the parties' contract. The
contract allowed for
Wayne
County
to withhold a certain percentage of each estimate payment until final
completion and acceptance of all work. When the work was finished,
Wayne
County
had in its possession $10,261.51 of undistributed contract funds. The
County received a notice of levy from the IRS on Mendel's property in
the amount of $101,304.56. Approximately three months later,
Wayne
County
received a letter from Ohio Farmers directing the County to mail all
remittances and checks due Mendel to Ohio Farmers as surety for Mendel.
Wayne
County
then filed this interpleader action, asking the district court to
determine the rightful owner of the retained funds.
II.
A.
"This court reviews de
novo a district court's grant of summary judgment." Blachy
v. Butcher [2000-2 USTC ¶50,629], 221 F.3d 896, 903 (6th Cir.
2000), cert. denied, 121 S.Ct. 1653 (2001).
B.
We agree with the district
court's determination that the government had a valid tax lien on the
retained funds and that that lien was superior to any interest Ohio
Farmers might claim.
Ohio Farmers first contends
that the district court erred in granting summary judgment to the
government because Mendel had no interest in the retained funds to which
a tax lien could properly attach. We must start, therefore, by
determining whether Mendel had a valid interest in the retained funds.
State law determines what rights an individual possesses in property,
but federal law dictates whether those rights are "property"
or "rights to property" under 26 U.S.C. §6321. United
States v. Safeco Ins. Co. of Am., Inc. [89-1 USTC ¶9227], 870 F.2d
338, 340 (6th Cir. 1989). This court in Safeco made clear that a
tax lien can attach to "a taxpayer's interest in property
regardless of whether that interest is less than full ownership or is
only one among several claims of ownership."
Id.
at 341. It is undisputed that Mendel completed its work on the bridge
project.
Wayne
County
never declared Mendel to be in breach of the contract, nor did it claim
any right to the retained funds. Although the
Mendel-Wayne
County
contract required that Mendel "furnish satisfactory evidence that
all obligations . . . have been paid, discharged, or waived," we
are convinced that Mendel's physical completion of the bridge evidences
an entitlement to receive the retained funds under the contract. See
In re Constr. Alternatives, Inc. [93-2 USTC ¶50,569], 2 F.3d 670,
674 (6th Cir. 1993).
Because Mendel held a valid
property interest in the retained funds, the government could properly
attach a tax lien to same. The government has a lien for unpaid taxes on
"all property and rights to property" of a taxpayer who fails
to pay his taxes after a demand has been made. 26 U.S.C. §6321. Tax
liens arise on the date of assessment and continue until the assessment
is fully satisfied or becomes unenforceable. 26 U.S.C. §6322. Tax liens
attach to all property rights the taxpayer then holds or subsequently
acquires, and continue until the underlying tax liability is satisfied
or becomes unenforceable. Safeco Ins. Co. [89-1 USTC ¶9227], 870
F.2d at 340. Because Mendel had a property interest in the retained
funds, and because they were assessed before completion of the bridge
project, the government may properly assess a lien for unpaid taxes on
that property interest.
Where there are competing
federal and state liens, the common law principle of first in time,
first in right controls. In re Terwilliger's Catering Plus, Inc.
[90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990) (citing United
States v. City of New Britain, Conn. [54-1 USTC ¶9191], 347 U.S.
81, 85, 98 L.Ed. 520, 74 S.Ct. 367 (1954)). If the competing state law
lien falls into one of the limited categories of liens enumerated in 26
U.S.C. §6323(a), the federal tax lien is perfected only upon notice
that the federal tax lien has been filed. United States, ex rel. IRS
v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 123 L.Ed.2d
128, 113 S.Ct. 1526 (1993). If the state law lien does not fall into one
of the categories enumerated in §6323(a), then the federal tax lien is
perfected upon assessment. Terwilliger's [90-2 USTC ¶50,460],
911 F.2d at 1176. Under §6323(a), a tax lien is not effective against
"any purchaser, holder of a security interest, mechanic's lienor,
or judgment lien creditor until notice [of the lien] . . . has been
filed by the Secretary." 26 U.S.C. §6323(a). We agree with the
district court that nothing in the record indicates that Ohio Farmers is
subrogated to any such rights. Therefore, the tax lien has priority over
the equitable state lien as long as it was assessed prior to the
equitable lien becoming choate.
A state-created interest
becomes choate " 'when the identity of the lienor, the property
subject to the lien, and the amount of the lien are established.' "
Terwilliger's [90-2 USTC ¶50,460], 911 F.2d at 1176 (citation
omitted). Therefore, any interest Ohio Farmers had in the retained funds
became choate on December 1, 1997, with respect to the United Precast
claim, and on February 11, 1998, with respect to the Meredith Brothers
claim. The record is clear, however, that the government had by December
1, 1997, assessed a $58,789.52 tax lien against Mendel, an amount well
in excess of the total of the retained funds. Because the tax lien
preceded any claim Ohio Farmers may have had became choate, we agree
that the district court was correct in finding that the government's
lien took priority. Ohio Farmers' contention that an unperfected claim
or lien, upon becoming perfected, "relates back" in a way that
permits it to prime an antecedent tax lien is simply not supported by
the precedent established by this court. E.g., Blachy [2000-2
USTC ¶50,629], 221 F.3d at 905; see also
United States
v. Dishman Indep. Oil, Inc. [99-2 USTC ¶50,992], 46 F.3d 523, 527
(6th Cir. 1995).
Ohio Farmers contends
finally, that under the federal tax lien statute, a surety's security
interest is given priority over a tax lien, even if it is not
"perfected" at the time of the tax lien filing. 26 U.S.C. §6323(c).
Under §6323(c)(1), a surety's security interest has priority over a tax
lien even though the security interest came into existence after the tax
lien was assessed if: "1) the surety's 'security interest' . . . is
an obligatory disbursement agreement such as a suretyship agreement; 2)
. . . the surety's interest is in 'qualified property' covered by the
terms of a written agreement entered into before the tax lien filing;
and 3) the 'security interest' would be protected under local law
against a judgment lien that arose at the same time as the tax
lien." Constr. Alternatives [93-2 USTC ¶50,569], 2 F.3d at
677-78 (footnotes omitted). Under
Ohio
law, a surety must perfect his security interest by filing a financial
statement in the appropriate office.
Id.
at 678 (citing Ohio Rev. Code §§1309.21, 1309.23 (Anderson Supp.
1992)). Because Ohio Farmers never filed a financial statement as
required by
Ohio
law, they are not able to take advantage of the superpriority provisions
of §6323(c). See id. Therefore, the district court did not err
in holding that the government had a valid tax lien on the retained
funds that was superior to any interest Ohio Farmers may claim.
III.
For the foregoing reasons,
the decision of the district court is AFFIRMED.
*
The Honorable Glen M. Williams, United States District Judge for the
Western District of Virginia, sitting by designation.
Wayne
County
Board
of
County
Commissioners
, Plaintiff v. Mendel, Inc., et al., Defendants
U.S.
District Court, No.
Dist.
Ohio
, East. Div., 5:98 CV 1795, 5/30/2000
[Code
Sec. 6321 ]
Lien for taxes: Validity and priority against third-parties: Property
subject to tax liens.--A construction company that entered into a
contract with a county board of commissioners to complete a bridge
project had an interest in a fund containing monies to pay for the
project that was held by the board after its completion. The contractor
was not in breach of contract and owed no amounts to the county that
would bar its claim to the funds. Therefore, it had an interest in the
fund to which a tax lien could attach.
[Code
Sec. 6323 ]
Lien for taxes: Validity and priority against third-parties:
Equitable lien: Surety.--A claim by a surety, which made payments to
a construction company's subcontractors pursuant to a performance bond,
did not have priority over a federal tax lien to funds still owed to the
contractor because it was not "first in time." The surety's
purported equitable lien became choate when the subcontractors were
paid, which was after the tax lien was assessed.
[Code
Sec. 6323 ]
Lien for taxes: Validity and priority against third-parties: Surety:
Security interest: Superpriority: Financing statement.--A surety,
which made payments to a construction company's subcontractors pursuant
to a performance bond, did not hold a security interest in funds still
owed to the contractor that took superpriority over an earlier federal
tax lien. The surety did not file a financing statement with the
appropriate office, which is required in order to perfect a security
interest.
ORDER
OLIVER, JR., District
Judge:
On June 26, 1998,
Plaintiff, Wayne County Board of County Commissioners ("Wayne
County"), brought an interpleader action against Defendants,
Mendel, Inc. ("Mendel"), the Internal Revenue Service
("IRS"), Ohio Farmers Insurance Co. ("Ohio Farmers")
and All Ohio Insurance Agency, Inc., in the Court of Common Pleas of
Wayne County to determine which of the Defendants is entitled to certain
proceeds of a construction contract between Mendel and Wayne County. 1
On August 6, 1998, the government removed this action to the United
States District Court for the Northern District of Ohio pursuant to 28
U.S.C. §1444. The government and Ohio Farmers both claim an interest in
the interpled funds. Presently before the court are the cross-motions
for summary judgment by Ohio Farmers and the government on their
respective claims to the interpled funds. For the reasons that follow,
the court finds that the government is entitled to the interpled funds
and therefore grants its motion for summary judgment (Doc. No. 36) and
denies Ohio Farmers' cross-motion for summary judgment (Doc. Nos. 26 and
31). 2
I.
FACTS
The facts are generally
undisputed. On December 5, 1996, the debtor-taxpayer, Mendel, entered
into a contract with
Wayne
County
to improve a bridge in
Milton
Township
, located in
Wayne
County
("the bridge project"). To obtain the contract, Mendel secured
a surety bond from Ohio Farmers under which Ohio Farmers guaranteed
performance of the contract and also guaranteed payment to all persons
supplying labor and materials to the project.
Mendel completed the
project; it was therefore unnecessary for Ohio Farmers to make any
payments with respect to its performance bond. However, Mendel did not
pay all of its subcontractors. Pursuant to its obligation on the payment
bond, Ohio Farmers paid United Precast's claim of $7,677.00 on December
1, 1997, and Meredith Brothers' claim of $8,258.77 on February 11, 1998.
Neither United Precast nor Meredith Brothers filed mechanic's liens
pursuant to Ohio Revised Code §1311.26.
Throughout its performance
on the bridge project, Mendel also failed to pay all of its employees'
share of federal income tax and social security withholding on wages.
These tax liabilities were assessed on June 16, 1997, August 25, 1997,
September 22, 1997, December 8, 1997 and April 1, 1998, and amounted to
more than $100,000. Notices of federal tax lien with respect to these
liabilities were filed on February 11, 1998, May 28, 1999 and February
4, 1999.
Wayne
County
made various payments to Mendel pursuant to the parties' contract.
However, under the terms of the contract,
Wayne
County
was authorized to retain and hold a percentage of estimated amounts due
monthly until final completion and acceptance of all work covered by the
contract. 3
Pursuant to this term,
Wayne
County
had in its possession $10,261.51 of undistributed contract funds at the
time the bridge project was complete. 4
On February 24, 1998, the
Wayne County Auditor received a Notice of Levy from the IRS regarding
Mendel and providing for a lien on all monies in
Wayne
County
's possession which
Wayne
County
was obligated to pay to Mendel. On June 1, 1998,
Wayne
County
received a letter from Ohio Farmers directing
Wayne
County
to mail all remittances and checks to Ohio Farmers as surety for Mendel.
The letter indicated that Ohio Farmers had been forced to make payments
to subcontractors and suppliers furnishing labor or material on behalf
of Mendel in connection with the bridge project. Thereafter,
Wayne
County
filed the instant interpleader action, seeking to determine to whom the
remaining contract funds (the "Fund") belong.
II.
SUMMARY JUDGMENT STANDARD
Federal Rule of Civil
Procedure 56(c) governs summary judgment motions and provides:
The
judgment sought shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law. . . .
Rule 56(e) specifies the
materials properly submitted in connection with a motion for summary
judgment:
Supporting and opposing
affidavits shall be made on personal knowledge, shall set forth such
facts as would be admissible in evidence, and shall show affirmatively
that the affiant is competent to testify to the matters stated therein.
. . . The court may permit affidavits to be supplemented or opposed by
depositions, answers to interrogatories, or further affidavits. When a
motion for summary judgment is made and supported as provided in this
rule, an adverse party may not rest upon the mere allegations or denial
of the adverse party's pleading, but the adverse party's response, by
affidavits or as otherwise provided in this rule, must set forth
specific facts showing that there is a genuine issue for trial. If the
adverse party does not so respond, summary judgment, if appropriate,
shall be entered against the adverse party.
However,
the movant is not required to file affidavits or other similar materials
negating a claim on which its opponent bears the burden of proof, so
long as the movant relies upon the absence of the essential element in
the pleadings, depositions, answers to interrogatories, and admissions
on file. Celotex Corp. v. Catrett, 477
U.S.
317, 106 S.Ct. 2548 (1986).
In reviewing summary
judgment motions, this court must view the evidence in a light most
favorable to the non-moving party to determine whether a genuine issue
of material fact exists. Adickes v. S.H. Kress & Co., 398
U.S.
144, 90 S.Ct. 1598 (1970); White v. Turfway Park Racing Ass'n, Inc.,
909 F.2d 941, 943-44 (6th Cir. 1990). A fact is "material"
only if its resolution will affect the outcome of the lawsuit.
Anderson
v. Liberty Lobby, Inc., 477
U.S.
242, 248, 106 S.Ct. 2505, 2510 (1986). Determination of whether a
factual issue is "genuine" requires consideration of the
applicable evidentiary standards. Thus, in most civil cases the court
must decide "whether reasonable jurors could find by a
preponderance of the evidence that the [non-moving party] is entitled to
a verdict."
Id.
at 252, 106 S.Ct. at 2512.
Summary judgment is
appropriate whenever the non-moving party fails to make a showing
sufficient to establish the existence of an element essential to that
party's case and on which that party will bear the burden of proof at
trial. Celotex, 477
U.S.
at 322, 106 S.Ct. at 2552. Moreover, "the trial court no longer has
a duty to search the entire record to establish that it is bereft of
genuine issue of material fact." Street v. J.C. Bradford &
Co., 886 F.2d 1472, 1479-80 (6th Cir. 1989) (citing Frito-Lay,
Inc. v. Willoughby, 863 F.2d 1029, 1034 (D.C. Cir. 1988)). The
non-moving party is under an affirmative duty to point out specific
facts in the record as it has been established which create a genuine
issue of material fact. Fulson v. City of
Columbus
, 801 F.Supp. 1, 4 (S.D.
Ohio
1992). The non-movant must show more than a scintilla of evidence to
overcome summary judgment; it is not enough for the non-moving party to
show that there is some metaphysical doubt as to material facts.
Id.
III.
LAW AND ANALYSIS
Ohio Farmers and the
government have filed cross-motions for summary judgment on their
respective claims to the Fund. Ohio Farmers asserts its entitlement to
the Fund on the basis that Mendel has no interest in the Fund to which a
tax lien could attach. Ohio Farmers contends that this is so because
Mendel did not satisfy all of the requirements of its contract with
Wayne
County
since Mendel did not pay all of its subcontractors. According to Ohio
Farmers, the money
Wayne
County
withheld pursuant to paragraph 25(a) of its contract with Mendel was
never earned by Mendel, and thus was not available for attachment by the
IRS lien.
Section 6321 of the Federal
Tax Lien Act, 26 U.S.C. §§6321-6327, gives the
United States
a lien for unpaid taxes on "all property and rights to
property" of a taxpayer who neglects to pay his taxes after demand.
This lien reaches every interest in property that a taxpayer may have, U.S.
v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720,
105 S.Ct. 2919, 2924 (1985), arises on the date of assessment and
continues until the assessment is fully satisfied or becomes
unenforceable. 26 U.S.C. §6322. A tax lien can attach even if a
taxpayer's interest in property is less than full ownership or is one
among several claims of ownership. United States v. Safeco Ins. Co.
of Am. [89-1 USTC ¶9227], 870 F.2d 338, 341 (6th Cir. 1989). See
also In re Construction Alternatives [93-2 USTC ¶50,569], 2 F.3d
670 (6th Cir. 1993). "Unresolved questions concerning the ultimate
ownership of the property will not prevent provisional attachment of a
federal tax lien." Safeco [89-1 USTC ¶9227], 870 F.2d at
341.
In the instant case, it is
undisputed that the bridge project was completed by Mendel. The fact
that Ohio Farmers paid two of Mendel's subcontractors on the project is
immaterial for the purpose of determining completion of the project. See
In re Wm. Cargile Contractor, Inc., 203 B.R. 644, 646 (S.D.
Ohio
1996). Mendel owed nothing to
Wayne
County
; thus, no payments to the county were required or other expenses
incurred to perfect Mendel's claim to the retained funds. Moreover,
Wayne
County
has never declared Mendel in breach of its contract and disavows any
claim to the retained funds. See Menuez Declaration ¶5;
Complaint ¶7. Mendel thus earned the right to receive the retained
funds, and under the principles stated above, the government has a valid
tax lien on the Fund. See Construction Alternatives [93-2 USTC ¶50,569],
2 F.3d at 674 (finding that general contractor who had completed project
and owed no obligations to owner of the project but who had not paid
several subcontractors had earned right to receive its final progress
payment and therefore federal tax lien could attach to progress
payment).
Having determined that
Mendel had an interest in the Fund to which a tax lien could attach, the
next issue is whether Ohio Farmers also has a lien on the Fund, and if
so, whether that lien is superior to the government's tax lien. Ohio
Farmers contends that it has an equitable lien on the Fund through
subrogation to the rights of United Precast and Meredith Brothers, the
two subcontractors that it paid in Mendel's stead, and also through
subrogation to the rights of
Wayne
County
. It asserts that its equitable lien is superior to the government's tax
lien because it was perfected prior to the time the federal tax lien was
filed.
Even assuming that Ohio
Farmers has a valid equitable lien on the Fund through subrogation, see
Pearlman v. Reliance Ins. Co., 371 U.S. 132, 83 S.Ct. 232 (1962)
(holding that surety who completed general contractor's contract and
paid contractor's laborers and materialmen held equitable lien on
retained contract funds through subrogation to rights of government
owner, to rights of laborers and materialmen and to rights which
contractor would have had he completed job), the court finds that the
government has priority to the Fund and is thus entitled to it. When
there is a competition between a federal tax lien and a state law lien,
priority is determined by the "first in time, first in right"
rule. Terwilliger's Catering Plus, Inc. v. Baverly [90-2 USTC ¶50,460],
911 F.2d 1168, 1176 (6th Cir. 1990) (quoting United States v. City of
New Britain, Conn. [54-1 USTC ¶9191], 347 U.S. 81, 85, 74 S.Ct.
367, 370 (1954)). If the competing state law lien falls into one of the
limited categories of liens enumerated in §6323(a), the federal tax
lien is only perfected once the notice of the federal tax lien is filed.
See United States, ex rel. IRS v. McDermott [93-1 USTC ¶50,164],
507 U.S. 447, 113 S.Ct. 1526, 1528 (1993). If the state law lien is not
among the enumerated categories in §6323(a), then the federal tax lien
need not be filed to gain priority over other interests; it is perfected
at the time the lien is assessed. Terwilliger's [90-2 USTC ¶50,460],
911 F.2d at 1176; IRC §6322.
Under §6323(a), the tax
lien is not effective against "any purchaser, holder of a security
interest, mechanic's lienor, or judgment creditor until notice [of the
lien] . . . has been filed by the Secretary." There is nothing in
the record to indicate that Ohio Farmers is subrogated to any such
rights. Thus, the tax lien has priority over any equitable lien that
Ohio Farmers can claim to the Fund as long as it was assessed prior to
Ohio Farmer's lien becoming choate. A state created lien interest is
usually held to be choate " 'when the identity of the lienor, the
property subject to the lien, and the amount of the lien are
established.' " Terwilliger's [90-2 USTC ¶50,460], 911 F.2d
at 1176 (quoting
New Britain
, 347 U.S at 84, 74 S.Ct. at 369). See also Construction Alternatives
[93-2 USTC ¶50,569], 2 F.3d at 676. Ohio Farmer's equitable lien, if it
exists, became choate on December 1, 1997 with respect to United
Precast's claim, and or February 11, 1998, with respect to Meredith
Brother's claim. By December 1, 1997, the IRS had already assessed a tax
lien in the amount of $58,789.52 against Mendel, well over the amount in
the Fund. Thus, Ohio Farmer's equitable lien would not have been
perfected at the time the tax lien was assessed and therefore, the tax
lien takes priority.
However, Ohio Farmers
contends that under §6323(c), it has a security interest in the Fund
that has priority over the government's tax lien even though its
equitable lien may not have been perfected at the time of tax lien
filing. Under §6323(c), a surety's "security interest" has
priority over a tax lien even though the security interest came into
existence after the tax lien was filed, provided the following
circumstances are applicable: "1) the surety's security interest .
. . is an obligatory disbursement agreement such as a suretyship
agreement; 2) . . . the surety's interest is in "qualified
property" covered by the terms of a written agreement entered into
before the tax lien filing; and 3) the security interest would be
protected under local law against a judgment lien that arose at the same
time as the tax lien." Construction Alternatives [93-2 USTC
¶50,569], 2 F.3d at 677-678 (citing 26 U.S.C. §6323(c)).
A "security
interest" under §6323(c) exists if "the property is in
existence and the interest has been protected under local law against a
subsequent judgment lien creditor." 26 U.S.C. §6323(h). Thus,
before Ohio Farmer's alleged security interest in the Fund would take
priority over a subsequently-arising judgment lien under local law, Ohio
Farmers would have been required to perfect its security interest by
filing a financing statement in the appropriate office. Construction
Alternatives [93-2 USTC ¶50,569], 2 F.3d at 678 (citing Ohio Rev.
Code §§1309.21, 1309.23). For example, the court in Construction
Alternatives rejected the surety's argument that it was entitled to
priority over the government under §6323(c) on the basis that the
surety had not filed a financing statement.
Id.
Similarly, Ohio Farmers never filed a financing statement and thus does
not possess a security interest under §6323(c). Accordingly, Ohio
Farmers cannot come within the superpriority provisions of §6323(c) and
it remains true that the IRS has priority to the Fund.
IV.
CONCLUSION
For the foregoing reasons,
the court finds that the government has a valid tax lien on the Fund and
that such lien is superior to any equitable lien on the Fund that Ohio
Farmers may claim. Accordingly, the court holds that the
United States
is entitled to the interpled funds and therefore grants its motion for
summary judgment on its claim to such funds (Doc. No. 36). Ohio Farmers'
motion for summary judgment on its claim to the interpled funds (Doc.
Nos. 26 and 31) is hereby denied.
IT IS SO ORDERED.
JUDGMENT
ENTRY
Pursuant to a separate
order of this same date, judgment in this interpleader action is hereby
entered in favor of the
United States
in the amount of $10,261.51; Ohio Farmer's claim to this same amount is
hereby denied.
IT IS SO ORDERED.
1
After indicating that it had no interest in the funds, Defendant All
Ohio Insurance Agency, Inc. was dismissed from this case on November 24,
1998.
2
On May 23, 2000, the court held a telephonic conference wherein the
parties were permitted to orally address several legal arguments
discussed in their briefs. However, for purposes of deciding the
parties' cross-motions for summary judgment, the court has relied on
only factual information addressed in the parties' memoranda.
3
Paragraph 25(a) of the contract provides:
Not later than the 15th day
of each calendar month the Owner shall make a progress payment to the
Contractor on the basis of a duly certified and approved estimate of the
work performed during the preceding calendar month under this contract,
but to insure the proper performance of this contract, the Owner shall
retain ten percent (10%) of the amount of each estimate until final
completion and acceptance of all work covered by this contract . . . Provided
. . . that the Owner at any time after fifty percent (50%) of the work
has been completed, if it finds that satisfactory progress is being
made, may make any of the remaining progress payments in full. .
. .
While it is undisputed that
Mendel completed the bridge project, it is not clear from the record
whether
Wayne
County
actually accepted the project. If it did, then, upon its acceptance,
Wayne
County
would have had no right to continue withholding the funds retained
pursuant to this provision. However, for purposes of the pending
cross-motions for summary judgment, the court will assume that
Wayne
County
did not accept the project and rightfully withheld the disputed funds.
4
Ohio Farmers asserts that
Wayne
County
was entitled to hold the undistributed contract funds pursuant to
paragraph 25(d) of the contract. This provision states in pertinent
part:
The Contractor shall, at
the Owner's request, furnish satisfactory evidence that all obligations
[owed to subcontractors, laborers, etc.] have been paid,
discharged, or waived. If the Contractor fails so to do then the Owner
may, after having served written notice on the said Contractor, either
pay unpaid bills, of which the Owner has written notice, direct, or
withhold from the Contractor's unpaid compensation a sum of money deemed
reasonably sufficient to pay any and all such lawful claims until
satisfactory evidence is furnished that all liabilities have been fully
discharged. . . .
There are several
prerequisites to
Wayne
County
being permitted to withhold money pursuant to this provision, including
that
Wayne
County
first request from Mendel evidence that subcontractors, laborers and the
like have been paid. In his declaration, Judson Menuez, President of
Mendel during the term of the bridge project, stated that
Wayne
County
never requested such evidence from Mendel, Menuez Declaration ¶4, and
Mendel has offered no evidence to the contrary. Accordingly,
Wayne
County
could not withhold any contract funds from Mendel pursuant to paragraph
25(d).
In re: The Dave Thomas Company, Inc., Debtor
Sherwin Williams Company, Plaintiff v. The Dave Thomas Company, Inc., et
al., Defendants
U. S.
Bankruptcy Court, West.
Dist. Ky., Case No. 3-84-01440, 51 BR 66, 7/3/85
[Code Secs. 6321 and 6323]
Liens: Validity: Property of debtor: Priority.--
The government's tax lien on the taxpayer-debtor's property had priority
over the claim of the creditor-assignee regarding an assignment of the
debtor's accounts receivable from third parties where the government's
notices of tax liens were properly filed before the date of assignment.
The accounts receivable were considered property of the taxpayer-debtor
to which tax liens for unpaid taxes could attach because
Kentucky
law does not create an enforceable trust for unpaid materialmen (the
creditor-assignee).
C. Joseph Greene,
801 W. Jefferson St.
,
Louisville
,
Ky.
40202
, for plaintiff. Richard A. Dennis, Assistant U. S. Attorney,
Louisville, Ky. 40202, Charles A. Baer, Dept. of Justice, Washington, D.
C. 20530, for defendants.
Memorandum-Opinion
BROWN, Bankruptcy Judge:
This matter comes before
the Court on motion for summary judgment by the defendant,
United States of America
, and on cross motion for summary judgment by the plaintiff, Sherwin
Williams Company, both claiming lien priority to accounts receivable of
the Dave Thomas Company, Inc. ("debtor") due from Whittenberg
Engineering & Construction Company ("Whittenberg"). The
plaintiff filed this adversary proceeding seeking a judgment that it is
entitled to a disputed fund in the amount of $15,222.96, pursuant to an
assignment from debtor to plaintiff, executed on January 9, 1984. A
default judgment was entered against the defendant,
Commonwealth
of
Kentucky
, barring it from making any claim to the funds in controversy in this
action. The defendant, Whittenberg, confessed judgment in the amount of
$15,222.96, and by Agreed Order was dismissed with prejudice. The debtor
and the Trustee also disclaimed any interest in this sum and were
likewise dismissed, with prejudice. Therefore, the sole competing
parties to this disputed fund are Sherwin Williams and the
United States
. The
United States
argues that it is a secured creditor by virtue of its tax liens which
have priority over any claim of plaintiff based upon the assignment.
Sherwin Williams argues that the
United States
has failed to show it properly perfected its liens, and further argues
that the funds in question do not constitute property of the
taxpayer/debtor against which IRS could place a lien nor levy thereon.
The facts are not in
dispute in this case. The
United States
has filed tax liens against the taxpayer/debtor pursuant to I. R. C.
Section 6321 with the Clerk of Jefferson County, Kentucky as shown in
the following schedule:
Taxable Amount Date Lien Filing
Type of Tax Period of Lien Attached Date
FICA, withholding tax .... 1Q 1983 $20,205.07 06/13/83 08/16/83
FICA, withholding tax .... 2Q 1983 $21,454.28 09/19/83 11/15/83
FICA, withholding tax .... 3Q 1983 $24,976.84 03/05/84 03/26/84
FICA, withholding tax .... 4Q 1983 $ 9,637.66 03/26/84 05/21/84
As alleged in plaintiff's Complaint, on January 9, 1984, taxpayer/debtor
assigned to plaintiff proceeds due and payable or to become due and
payable to taxpayer from Whittenberg. As further alleged in plaintiff's
Complaint, the sum of $15,222.96 became due to debtor from Whittenberg
on March 2, 1984. On March 2, 1984, the
United States
served a Notice of Levy for $71,331.64 on Whittenberg. According to
Whittenberg's answer in the state court proceeding, it subsequently
determined that it held proceeds of $25,493.20 belonging to
taxpayer/debtor. Whittenberg paid $10,270.24 of that sum to the
United States
.
The issue for determination
by this Court is whether the plaintiff or the defendant,
United States
, is entitled to this disputed fund as a matter of law and that there
exists no genuine issue as to any material fact. Bankruptcy Rule 7056;
Fed. R. Cir. P. 56(c).
The
United States
has filed tax liens against the debtor pursuant to Internal Revenue Code
("I. R. C.") Section 6321. This tax lien attaches to all
property of taxpayer/debtor as of the date of assessment. Little v.
United States [83-1 USTC ¶9343], 704 F. 2d 1100, 1105-1106 (9th
Cir. 1983). The threshold question in this case is whether and to what
extent the taxpayer had "property" or "rights to
property" to which the tax lien could attach. In answering that
question, both federal and state courts must look to state law. Aquilino
v. United States [60-2 USTC ¶9538], 363
U. S.
509, 80
S. Ct.
1277 (1960). Once the tax lien has attached to the taxpayer's
state-created interests, we must look to federal law, which determines
the priority of competing liens asserted against the taxpayer's
"property" or "rights of property". 363
U. S.
at 514, 80
S. Ct.
at 1280.
The plaintiff has argued
that the funds do not constitute property of the taxpayer, and
therefore, the IRS could not place a lien against it nor levy thereon.
Plaintiff relies on In re D & B Electric, Inc., 4 B. R. 263
(Bkrtcy., W. D. Ky. 1980) as support for its claim that the funds at
issue are not the property of the debtor. D & B held that an
unpaid materialman had an enforceable trust interest in checks made
jointly payable to it and to a subcontractor for materials furnished on
the job that gave rise to the checks. The IRS has challenged plaintiff's
status as a materialman, alleging that it has failed to establish that
its claim represents only amounts due for materials furnished on
the job that gave rise to the checks (
Kentucky
Home
Life
Building
job). The plaintiff counters this assertion with an affidavit of its
operations manager that $12,126.28 is due and owing exclusively for
materials furnished for the
Kentucky
Home
Life
Building
job.
Plaintiff's reliance on D
& B Electric in support for its position that the funds at issue
are not property of the debtor, is misplaced. First, in the instant
case, the checks in question were not made jointly payable to Sherwin
Williams and debtor. Secondly, D & B Electric was based upon
two Sixth Circuit cases dealing with Michigan law, Shelby v. Ford
Motor Co., 590 F. 2d 642 (6th Cir. 1979) and Parker v. Klochko
Equipment Rental Co., Inc., 590 F. 2d 649 (6th Cir. 1979), cert.
denied, 444 U. S. 831, 100 S. Ct. 60, 62 L. Ed. 2d 40 (1979). The
Michigan
law at issue in those cases explicitly created a trust fund for
materialmen. Shelby, supra, at 651. In contrast, the governing
statute in
Kentucky
, KRS 376.070, does not expressly create such a trust. The Court finds
that D & B Electric is factually distinguishable from the
instant case, as stated in Allgeier & Dyer, Inc., 18 B. R. 82
(W. D. Ky., 1982). Allgeier & Dyer, supra held that
construction contract proceeds were the property of the debtor's estate,
notwithstanding the fact that there were unsatisfied materialmen's
claims on that fund. The Court stated:
The case of In re D
& B Electric, Inc., 4 B. R. 263 (Bankr. W. D. Ky. 1980), is
factually distinguishable from the instant situation in that the lien
there in question was founded in equity as arising in favor of one who
waives a once available statutory remedy. In propounding a "trust
fund theory", the Court there relied on companion cases of Shelby
v. Ford Motor Co., et al., 590 F. 2d 642 (6th Cir. 1979) and Parker
v. Klochko Equipment Rental Co., Inc., et al., 590 F. 2d 649 (6th
Cir. 1979), cert. denied, 444 U. S. 831, 100 S. Ct. 60, 62 L. Ed. 2d 40
(1979), which specifically arose pursuant to a statutory trust fund in
favor of subcontractors and materialmen under the Michigan Building
Contract Fund Act Mich. Comp. Laws Ann. Section 570.151 et seq. (1967). A
comparable trust fund provision is not found in
Kentucky
statutory enactments. Here, we are dealing with mechanics liens
statutes, KRS 376.210 and KRS 376.010, which would be characterized as
arising in law and not in equity. It is the task of the legislature to
enact state law while a Federal Court is limited to the application and
interpretation of that state law. For these reasons as regards the
instant case, the Court is contrained to find that the reliance placed
on D & B Electrics, supra, is misplaced. [Emphasis supplied.]
Allgeier
& Dyer, Inc., supra,
18 B. R. at 85.
The District Court, in
speaking to this issue on appeal, stated: "D & B was
founded upon an interpretation of the Michigan Builder's Trust Fund Act.
There is no comparable
Kentucky
law which compels an application of the trust fund theory there." In
re Allgeier & Dyer, Inc., slip op., No. C 82-0261-L(b) and No. C
83-0450-L(B) (W. D. Ky. Oct. 28, 1983, unpublished).
The Bankruptcy Court for
the Eastern District of Tennessee dealt with the issue in In re
Lafollette Sheet Metal, Inc., 35 B. R. 634 (Bkrtcy., E. D. Tenn.
1983), which applied Kentucky law. The Court stated:
No reported
Kentucky
state court decision on the question of whether Ky. Rev. Stat. Section
376.070 (1972) creates a trust fund has been cited to or discovered by
this court. Henry A. Peter Supply Co. v. Hall Perry Cons. Co.,
563 S. W. 2d 749 (Ky. App. 1978), cited in and relied upon in part for
the decision in D & B Electric, does not hold that Ky.
Rev. Stat. Section 376.070 (1972) creates a statutory trust. It
merely recognizes the duty of a contractor to pay materialmen from the
payment proceeds received from the owner of the property being improved
or repaired. [Emphasis added.]
Lafollette,
supra, 35 B.
R. at 637-638.
Therefore, the Court finds
that the funds in question were "property" of the
taxpayer/debtor as of the date of assessment to which the lien attached.
I. R. C. Section 6321.
The next issue for
resolution is to determine priority of the competing liens of the
United States
and Sherwin Williams. Sherwin Williams has argued that the
United States
has failed to show it properly perfected its liens. The
United States
argues that it properly filed its liens, and that as the assignment from
the debtor to Sherwin Williams occurred subsequent to two liens filed by
the
United States
, it is entitled to priority.
Pursuant to I. R. C.,
Section 6323, a tax lien is not valid against a purchaser until the
appropriate Notice of Tax Lien is filed. As previously stated, the
United States
filed Notices of Tax Lien for $20,205.07 on August 16, 1983 and for
$21,454.28 on November 15, 1983. These tax liens attached to all
property of debtor, including any contract rights had to payments from
Whittenberg. Randall v. H. Nakashima Co. Ltd. [76-2 USTC ¶9770],
542 F. 2d 270, 273-74 (5th Cir. 1976). The liens also attached to any
after-acquired property or rights to property of debtor. Glass City
Bank v. United States [45-2 USTC ¶9449], 326
U. S.
265 (1945); Wukelic v. United States [76-2 USTC ¶9749], 544 F.
2d 285, 291 (6th Cir. 1976). Thus, the Court finds that the
United States
had a secured interest in debtor's right to receive proceeds from
Whittenberg. Furthermore, we reject plaintiff's argument that the IRS
failed to show it properly perfected its lien. The notices of tax liens
were properly filed in
Louisville
,
Jefferson County
,
Kentucky
. In
Kentucky
, a notice of federal tax lien should be recorded in the office of clerk
of the county within which the property subject to the lien is located.
I. R. C., Section 6323(f)(1)(A)(ii); KRS 382.480(1); Harrison v.
Harold Cox Concrete Const. Co., Inc. [77-2 USTC ¶9611], 440 F.
Supp. 859 (W. D. Ky. 1977). In this case, the situs of the personal
property involved is the location of the principal executive office of
the debtor, which in this case is
Jefferson County
,
Kentucky
.
I.
R. C. Section 6323(f)(2)(B).
Additionally, by affidavit,
the IRS has shown that the proper notices of assessments and demands for
payment were duly sent to the taxpayer/debtor complying with I. R. C.
Section 6331(d). Further, the Court notes that the assignment upon which
plaintiff bases its claim to the fund is dated January 9, 1984. This
assignment is subsequent to two liens which we have found were properly
filed by the
United States
, one on August 16, 1983 for $20,205.07, and one on November 15, 1983
for $21,454.28, for an aggregate of $41,659.35, more than the amount of
the fund. As the liens of the
United States
were filed before the date of the assignment, the liens of the
United States
are entitled to priority, as "first in time, first in right".
United States
v. Equitable Life Assur. Soc. of U. S. [66-1 USTC ¶9444], 384
U. S.
323, 86
S. Ct.
1561 (1966). This priority applies as well to the contract rights or
other "rights to property" which debtor assigned to plaintiff.
See, Randall v. H. Nakashima & Co., Ltd., supra. As the lien
of the
United States
attached to the property or rights to property of debtor before it was
assigned to plaintiff, the lien of the
United States
is entitled to priority over any claim of plaintiff based upon the
assignment.
The above constitutes
Findings of Fact and Conclusions of Law pursuant to Rules of Bankruptcy
Procedure 7052. A separate Order will be entered this date.
A copy of the foregoing was
mailed to C. Joseph Greene, 801 West Jefferson Street, Louisville,
Kentucky 40202, counsel for plaintiff; Richard A. Dennis, Assistant
United States Attorney, Western District of Kentucky, 211 U. S.
Courthouse, 601 W. Broadway, Louisville, Kentucky 40202, counsel for U.
S. Department of Internal Revenue; and to Charles A. Baer, Trial
Attorney, Tax Division, U. S. Department of Justice, Washington, D. C.
20530.
Order
The defendant,
United States of America
, Internal Revenue Service, having moved the Court for summary judgment,
and the plaintiff, Sherwin Williams Company, having moved the Court for
summary judgment pursuant to Bankruptcy Rule 7056 and Fed. R. Civ. P.
56; the Court having considered both motions, affidavits, memoranda of
points and authorities and exhibits, and pursuant to the
Memorandum-Opinion attached hereto,
IT IS HEREBY ORDERED that
the motion of plaintiff for summary judgment be and it is hereby
overruled. The motion for summary judgment of the defendant,
United States of America
, Internal Revenue Service, be and it is hereby sustained on the basis
that its tax liens are valid and superior to the claims of plaintiff,
and the plaintiff's complaint is hereby dismissed.
IT IS HEREBY FURTHER
ORDERED that the funds presently held in the Registry Account, U. S.
Bankruptcy Court pursuant to Order of this Court entered January 24,
1985, be paid to the
United States of America
, Internal Revenue Service.
This is a final and
appealable Order, and there is no just cause for delay.
A copy of this Order was
mailed to C. Joseph Greene, 801 West Jefferson Street, Louisville,
Kentucky 40202, counsel for plaintiff; Richard A. Dennis, Assistant
United States Attorney, Western District of Kentucky, 211 U. S.
Courthouse, 601 W. Broadway, Louisville, Kentucky 40202, counsel for U.
S. Department of Internal Revenue; and to Charles A. Baer, Trial
Attorney, Tax Division, U. S. Department of Justice, Washington, D. C.
20530.
Samuel J. Goldstein, Petitioner v. D. J. Kennedy
Company and District Director of Internal Revenue, Claimants
Court
of Common Pleas, Allegheny County, Pa., No. 837, January Term, 1957,
12/27/57
[1939 Code Sec. 3672(a)--similar to 1954 Code Sec. 6323(a)]
Tax liens: Priority: Contractor's "equitable" assignment of
funds to supplier of building materials.--A lien for taxes owed by a
building contractor was superior to the lien of a supplier of building
material. The supplier had claimed a prior right to amounts owed to the
contractor under a contract on the ground that the contractor had made
an equitable assignment of the funds before notice of the tax lien was
filed. The court found that there had been no assignment, because the
contractor merely had agreed to pay the supplier out of funds derived
under the contract, and had not relinquished control over the funds.
Samuel J. Goldstein, 310
Jones Law Bldg., Pittsburgh 19, Pa., pro se. David H. Kramer and
Samuel A. Lichter, 1601 Law & Finance Building, Pittsburgh 19, Pa.,
for D. J. Kennedy Co.
Opinion
BROWN, Judge:
This is an interpleader
action wherein the D. J. Kennedy Company and the
United States of America
claim a fund deposited in this Court by Attorney Samuel J. Goldstein.
This fund arose from a suit by Kubany Contracting Company v.
Shakarian at No. 865 October Term, 1951 in the Court of Common Pleas
of Allegheny County, Pennsylvania. In the instant case after the
statements of claim of both parties were filed, a jury was empanelled.
Kennedy Company put in its case; then the
United States of America
certified its assessments and notices and moved for withdrawal of the
jury. Exceptions by Kennedy Company were dismissed and the jury
withdrawn, there being only questions of law involved.
No requests for findings of
fact and conclusions of law were made by either party, nor has the
testimony been ordered transcribed (except a portion thereof as will be
hereinafter more fully discussed). From the above proceedings and the
briefs the court makes the following:
Findings
of Fact
1. D. J. Kennedy Company, inter
alia, is a supplier of building materials and had prior to May 28,
1951 sold and delivered to the Kubany Contracting Company, building
materials for which it had not been paid.
2. Prior to May 28, 1951
Kubany Contracting Company was a contractor, working on many jobs, among
which was a remodeling job of a building owned by Shakarian, wherein a
Lackzoom Store was operated. This building was located in downtown
Pittsburgh
.
3. On May 28, 1951 Mr.
Conley, Credit Manager for Kennedy Company wrote a letter to Kubany
Contracting Company concerning the delinquencies in its account, and
also notifying it of the stoppage in deliveries.
4. A conference was held
between Conley, representing D. J. Kennedy Company, and Kubany. The date
is not clear from the testimony, but a review of the trial Judge's notes
indicates the conference took place on or about August 14, 1951. At the
time of this conference Kubany Contracting Company was indebted to
Kennedy Company in the amount of $7,643.64. It agreed to pay this
indebtedness out of current jobs, one of which was the Shakarian job. It
was pointed out by Conley from a memo he had made that the Shakarian job
was "clear"--that it was lienable. The pertinent testimony is
more fully set forth in our discussion.
5. On July 19, 1951 Kubany
instituted suit against Shakarian to secure payment. On October 16, 1951
the
United States
received an assignment against Kubany for delinquent taxes in the amount
of $3,455.12 and filed the notice of lien on November 20, 1951. Another
assessment was received on November 15, 1951 in the sum of $8,093.64 and
the notice filed December 27, 1951. It was agreed that these would be
the only liens in dispute.
6. Kubany requested a full
accord and satisfaction of his debt to Kennedy Company, and on February
13, 1952 it was executed. Kubany paid $1,250.00 in cash and gave a note
for the balance in the sum of $5,000.00. The note was to be secured by
two assignments executed contemporaneously with the above accord and
satisfaction. One assignment for $2,000.00 was out of a Murdock Estate,
and the other, for $3,000.00 was the fund received from the Shakarian
suit.
7. Arbitration was had in
the suit of Kubany against Shakarian and an award of $5,250.00 was
obtained. A check for that amount was received by Attorney Goldstein,
drawn to the order of Goldstein and Kubany. The
United States
attached this fund in the hands of Attorney Goldstein. Goldstein
resisted the levy until his fee was paid, which occurred after the
litigation in the Federal Court.
The
balance of $3,597.05 was paid into Court in this action.
Discussion
The following are the
question to be answered:
1. What law governs
priority of liens where one is a lien of the Federal Government?
2. What statute governs the
Government liens in the instant case?
3. Was there an equitable
assignment between Kubany Contracting Company and D. J. Kennedy Company?
As to the first question,
namely, what law governs priority of liens where one is a lien of the
Federal Government, it has been settled that where a dispute as to
relative priority as between a tax lien of the United States and a lien
under State law, there exists a Federal question (U. S. v. Liverpool
& London Globe Ins. Co., Ltd., et al., 348 U. S. 215, 75 Sup.
Ct. 247 [55-1 USTC ¶9136]). In the case of U. S. v. Acri, 348
U. S.
211, 75 Sup. Ct. 239 [55-1 USTC ¶9138], the Court said, at p. 213:
"The
relative priority of the lien of the United States for unpaid taxes is,
as we said in U. S. v. Waddell Co., 323 U. S. 353, 356, 357 [45-1
USTC ¶9126]; Illinois v. Campbell, 329 U. S. 362, 371; U. S.
v. Security Trust Co., 340 U. S. 47, 49 [50-2 USTC ¶9492], always a
Federal question to be determined finally by the Federal courts. The
state's characterization of its liens, while good for all state
purposes, does not necessarily bind this Court. U. S. v. Waddell Co.,
323
U. S.
353, at 357 [45-1 USTC ¶9126]; U. S. v. Gilbert Associates, 345
U. S.
361 [53-1 USTC ¶9291]."
Having established that a
priority question, such as we have in the instant case, is a Federal
question, we turn next to what statutes are applicable to Federal liens.
It is our opinion that the Internal Revenue Code governs the liens in
dispute, specifically, §§ 3670-71-72. These sections read as follows:
"Sec.
3670. Property subject to lien.
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount (including any interest, penalty, additional
amount, or addition to such tax, together with any costs that may accrue
in addition thereto) shall be a lien in favor of the United States upon
all property and rights to property, whether real or personal, belonging
to such person." (T. 26 U. S. C. A. 1940 Ed.)
"Sec.
3671. Period of lien.
"Unless
another date is specifically fixed by law, the lien shall arise at the
time the assessment list was received by the collector and shall
continue until the liability for such amount is satisfied or becomes
unenforceable by reason of lapse of time." (T. 26 U. S. C. A. 1940
Ed.)
"Sec.
3672. Validity against mortgagees, pledgees, purchasers and judgment
creditors.
"(a)
Invalidity of lien without notice. Such lien shall not be valid as
against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the collector . . .
"(1)
Under State or Territorial laws. In accordance with the law of the State
or Territory in which the property subject to the lien is situated,
whenever the State or Territory has by law provided for the filing of
such notice; . . ."
It is to be noted that the
intent of Congress was to make Government liens paramount to all except
as to mortgagees, pledgees, purchasers and judgment creditors (§3672, supra).
These exceptions are to be strictly construed (In re Litt, 128
Fed. Supp. 34, p. 37 [55-1 USTC ¶9187]). It is incumbent upon a
claimant to prove that he comes within the class of "mortgagee,
pledgee, purchaser or judgment creditor" (Filipowicz v.
Rothensies, 43 Fed. Supp. 619, p. 624 [42-1 USTC ¶9300]).
Therefore, Kennedy Company must prove that it fits into one of the
excepted classes, which it cannot do.
[Equitable
Assignment]
It is the contention of
Kennedy Company that an equitable assignment arose as a result of the
conference between Conley, representing Kennedy Company, and Kubany;
that therefore it had a lien on the fund that was prior in time to any
lien of the United States Government.
Because of its importance,
the Court obtained a transcript from the official Court Reporter of the
testimony of Andrew B. Conley, on direct examination. We quote in part
from this testimony:
"Mr.
Lichter:
Q. Did
you, Mr. Conley, in your capacity as Credit Manager speak to Mr. Kubany
in 1951 concerning the payment of these accounts?
A. Yes.
Q. And
did you arrive at any understanding with him?
A. Yes.
Q. About
the payment?
A. Yes.
Q. What
was that understanding?
A. Well,
he was to pay the account out of the work he was currently doing.
Q. Did
he speak of what jobs he was currently doing?
A. There
were a number of jobs. I remember seeing him on the
Homewood Avenue
job.
Q. Yes.
What other jobs?
A. We
spoke specifically about this Lackzoom job, as I recall it.
Q. This
Lackzoom job, is that connected with my statement of Shakarian?
A.
That's right.
*
* *
Q. Now,
what understanding about payment of his then delinquent accounts did you
make, if any, with Mr. Kubany?
A. Well,
of course, Mr. Kubany was going to pay it out of any funds that he
received on any of these jobs. We did talk about the money that was
owing on this by Shakarian. When he collected his money from Shakarian
he was going to pay me. That was the understanding.
Q. Was
the Shakarian claim that he had, was it large or small?
A. Well,
it was large.
Q. And
he was anxious, I suppose, to clean up his accounts with you?
A. As I
remember it, that had him crippled, the money he had tied up down there.
I believe there were a number of extras on the job. He couldn't collect
his money from Shakarian so he couldn't pay us.
Q. What
was that understanding that you had with him about the payment of these
accounts?
A. The
understanding was that when he collected his money from Shakarian he
would pay it to us.
Q. Out
of the Shakarian money, or Lackzoom, whatever you call it?
A.
Yes."
A brief review of the
essentials of an equitable assignment at this time is pertinent.
"An
equitable assignment is an order, writing, or act by the assignor which
makes an absolute appropriation of a chose in action or fund to the use
of the assignee with the intention to transfer a present interest,
although not amounting to a legal assignment":
Purman
Estate, 358
Pa. 187, p. 190; and Melnick v. Pa. Co. for Banking and Trusts,
180 Pa. Superior Ct. 441, p. 444.
Applying the above to the
facts of the instant case, we see that there has been no equitable
assignment. There was no order, writing or act by the assignor which
made an absolute appropriation of the fund to the use of the assignee.
Mr. Conley, Credit Manager of Kennedy Company, testified to the
conversation with Kubany. He stated that Kubany told him that he
(Kubany) would pay the account out of the work he was doing. As to this
conversation, which Kennedy Company contends amounted to the equitable
assignment, this Court adopts the words of Mr. Justice Stewart in Woods
Estate, 243 Pa. 211, p. 214, as follows:
".
. . no particular words or form of instrument is necessary to constitute
a valid assignment; but appropriate words which in themselves are so
unequivocally expressive of an intention to transfer property are of
such common usage, that when these are not employed in a transaction of
this kind, a very reasonable inference would be that they were not
employed because not expressive of the intention of the parties."
At best, Mr. Kubany's words
constituted a mere promise. "A mere promise, although of the
clearest and most solemn kind to pay a debt out of a particular fund, is
not an assignment of the fund, even in equity": Smedley v.
Speckman, 157 Fed. Supp. 815; and from Woods Estate, supra,
p. 215: "An agreement to pay out a particular fund however clear in
its terms, is not an equitable assignment".
Further applying the
essentials of an equitable assignment, we see that the assignor must not
retain any control over the fund, any authority to collect, or any power
of revocation. If he does, it is fatal to the claim of the assignee. The
transfer must be of such character that the fund holder can safely pay
and is compellable to do so, though forbidden by the assignor (Woods
Estate, supra, p. 215). Conley testified that Kubany said he would
pay when he (Kubany) collected. From this one can see that Kubany did
not intend to relinquish control; that he or his agent intended to
collect the money. The facts show that the check was delivered to
Attorney Goldstein and Mr. Kubany.
Counsel for Kennedy Company
rely strongly on the case of Hurley v. Ashbridge,
55 Pa. Superior Ct.
523, to support the contention that there was an equitable assignment of
the Shakarian fund. The trouble with the position of Kennedy Company is
that there was no assignment, since there was no intention by Kubany to
appropriate the Shakarian fund to the use of Kennedy Company, nor was
there a relinquishment of control by Kubany over the fund. In the Hurley
case, supra, the evidence was clear that the parties intended a
pledge or appropriation of the fund, and the debtor was estopped to deny
this since he went so far as to promise to give an order to the creditor
to be first paid out of the proceeds. The Court feels that the Hurley
case further demonstrates that there was no equitable assignment in the
instant case.
Having shown that there was
no equitable assignment, it is quite clear that Kennedy Company had no
lien on the fund prior to the liens of the United States Government. We
see no merit to the argument presented by Kennedy Company, but not
pressed in the briefs, that the accord and satisfaction bolstered up the
purported equitable assignment. Research has failed to reveal any law to
that effect. Since the
United States
' notices of liens were filed on November 20, 1951 and December 27,
1951, both prior to the accord and satisfaction of February 13, 1952,
the
United States
has priority over the Kennedy Company.
Conclusions
of Law
1. The question of priority
of liens, where one is a lien of the Federal Government, is a Federal
question.
2. The tax liens in dispute
are governed by the Internal Revenue Code of 1939, as amended, §§
3670-71-72.
3. There was no equitable
assignment of the Shakarian fund to the D. J. Kennedy Company.
4. The D. J. Kennedy
Company has no lien on the fund prior to the liens of the United States
Government.
5. That the United States
Government, having priority in time, is entitled to the fund.
WHEREFORE, by virtue of our
findings of fact, our discussion and our conclusions of law, we will
enter judgment in this matter in favor of the
United States of America
.
Frank J. Farley, Plaintiff-Respondent v. John E.
Manning, Collector of Internal Revenue, Acting for and on behalf of the
United States of America, for the Fifth District of New Jersey,
Defendant-Respondent, Joseph V. Moriarty, Defendant, Margaret Moriarty,
Defendant-Appellant, and United States of America, Defendant-Respondent
In
the Supreme Court of
New Jersey
, No. A-125, September Term, 1949, 73 A2d 551, Argued April 24, 1950.
Decided May 22, 1950
On appeal from Superior Court, Chancery Division.
Lien for taxes: Property subject to lien: Property in custody of
treasurer.--A federal lien for taxes against money held by a county
treasurer was sustained where the treasurer filed an interpleader suit
disclaiming title, and ownership was found to be in the delinquent
party.
Harry A. Walsh, 1 Exchange
Place, Jersey City, N. J., for appellant Margaret Moriarty (Robert H.
Wall, 576 Newark Ave., Jersey City, N. J., attorney). Roger M. Yancey,
Assistant U. S. Attorney, 189-191 Halsey St., Newark, N. J., for
respondents United States and John E. Manning (Alfred E. Modarelli, U.
S. Attorney, 400--38th St., Union City, N. J., Theron Lamar Caudle,
Assistant Attorney General, and Andrew D. Sharpe and F. A. Michels,
Special Assistants to the Attorney General, on brief).
WACHENFELD, Judge,
delivered the opinion of the court:
A raid by the agents of the
Attorney General was made on July 9, 1946 on the residence of Joseph
Moriarty, where he lived with his mother and sisters. Moriarty eluded
the officers, went to the top floor of the building by means of a ladder
through a trap door carrying and occasionally dropping bundles
containing what subsequently proved to be cash, most of which was in
small bills, $2,055 being in bills of one dollar denomination. He
attempted to make his escape over the housetops and adjoining roofs but
was stopped at the point of a gun. Currency amounting to $27,001.50 was
seized under circumstances that will be referred to hereafter.
[Income
Tax Lien Exceeded Money Seized in Raid on Lottery]
Moriarty was arrested and
subsequently indicted in
Hudson
County
on a charge of conducting a lottery on the premises raided. He was
acquitted, however, by a trial jury on March 15, 1947. Joseph and his
sister, Margaret, pursuant to the statute, then served notice on the
Hudson County Treasurer demanding the return of the money seized at the
time of the raid. The Collector of Internal Revenue filed a lien for
delinquent income taxes, penalties and interest on the property
belonging to Joseph Moriarty. The amount of the lien exceeded the amount
of the money seized.
Moriarty and his sister
both having demanded payment and the Collector of Internal Revenue
likewise having demanded payment, the County Treasurer filed a bill of
interpleader in the then Court of Chancery alleging doubt concerning the
respective rights of the various claimants to the seized money and
prayed that the claimants be interpleaded with respect to their claims.
An order of restraint was issued enjoining the claimants from
instituting or continuing any proceedings to recover the sum seized.
Margaret Moriarty filed an
answer to the interpleader suit claiming she owner the greater portion
of the money so seized, to wit, $26,794. Joseph Moriarty filed an answer
stating he made no claim excepting for the sum of $207.50, which he
alleged was illegally taken from his person at the time of the arrest
and raid. The United States of America was permitted to intervene and
filed an answer setting forth its claim for delinquent income taxes
against Joseph Moriarty, reciting the perfecting of the lien and
alleging that the fund in court which came into possession of the County
Treasurer belonged to Joseph Moriarty.
The officers who
participated in the raid testified they found number slips, horse race
betting data and various papers relating to gambling activities
throughout the house. With respect to the ownership of the money seized
on the raided premises, the testimony of Government witnesses consisted
of their finding the lottery slips and other evidences of gambling, the
locating of the steel ammunition box containing several large bundles of
money in a bedroom closet located on the top floor of the house, an
attempt by Moriarty to bribe some of the officers and to escape with
part of the money which he removed from the ammunition box, delivery of
a key by Moriarty to one of the raiding agents and the making of
statements by him to State agents admitting ownership of all the money
seized in the house.
[Ownership
of Money Determined]
Margaret Moriarty sought to
sustain her claim for the money in question saying that on the day of
the raid she left the house in the early morning and did not return
until evening to learn for the first time the raid had taken place and
that the money she claimed to be hers had been taken from the ammunition
box. Queried concerning the source of the money seized, she stated that
the greater part thereof was given to her by her godfather over a period
of years prior to his death in 1930 and the balance represented gifts
and savings which she had accumulated. She could not give details with
reference to the exact amount of gifts but approximated sums which she
thought were received. She usually kept the key to the box in a dresser
drawer in her bedroom.
The appellant contends the
testimony relied upon by the respondent was clearly hearsay and the
court below placed total ownership in Moriarty upon mere conjecture and
an unwillingness to believe her.
We need not make a further
analysis of the evidence here submitted. In the disposition below, the
court, referring to the facts and circumstances involved, said:
"Miss
Moriarty's story of the acquisition and storage of this large sum of
cash in small denominations is so fantastic, so highly improbable, that
I find it incredible. Her testimony is contradicted in certain respects
by Mr. Grossi and by undisputed or admitted circumstances, such as the
presence of number slips in the ammunition box, the key for it not in
her personal possession but on the key ring of her brother Joseph, and
the maintenance by her of small bank accounts and a safe deposit box in
which she kept only War Bonds of comparatively small value. The large
number of bills of small denominations is more consistent with the
Government's contention that it was used in a number gambling business,
rather than with Miss Moriarity's contention of a hoarding
operation."
Coupling these observations
of the facts with and considering the many admissions against interest
made by Moriarty, particularly the following taken directly from the
record: "He (Moriarty) said, 'Can I look at you fellows counting
that money? After all it is my money and I want to see how much I got
there'", we think there is little room for doubt as to the
ownership of the money and are satisfied that it was the property of
Joseph Moriarty. One would be naive indeed to come to a converse
conclusion. No facts, reasons or authorities have been submitted
sufficient to induce us to change the factual conclusions made below.
[Interpleader
Suit]
The appellant urges
further, however, that the action of the Treasurer in filing an
interpleader suit was unauthorized and invalid and the court without
jurisdiction to entertain it, basing her contention almost entirely upon
Chapter 70 of the Laws of 1941, R. S. 2:178-7.1 to 7.5, and upon the
assertion that the money deposited with the Treasurer of Hudson County
was not subject to a lien for delinquent federal income taxes.
The act referred to
provides what shall become of currency seized by police in connection
with arrests for unlawful gaming, who shall keep custody of it, and how
it shall be disposed of in the event of acquittal or conviction. Section
4 specifies that, where the proceedings shall terminate in favor of the
person arrested, the person claiming said money shall make an
application to the court, giving notice thereof to the
County
Treasurer
, for an order directing the currency or cash to be the property of such
person and ordering the same to be returned by the
County
Treasurer
.
There is nothing in the
statute directly or by inference attempting to deprive our court of its
broad equity jurisdiction to determine on interpleader the title to
money which is the subject of conflicting claims and is in the
possession of one who has no interest therein, nor is there anything in
the act indicating such was the legislative intent.
The statute has no such
sweep or scope as suggested by the appellant and no authority is cited
in support of the view so advanced. We cannot read into the enactment a
prohibition against a customary and usual equitable procedure where none
is mentioned or recited.
As to the contention that
the money in question was not subject to a lien for delinquent income
taxes, Section 3670 of the Internal Revenue Code, entitled
"Property Subject to Lien," specifically states what property
shall be covered:
"If
any person liable to pay any tax neglects or refuses to pay the same
after demand, the amount . . . shall be a lien in favor of the United
States upon all property and rights to property, whether real or
personal, belonging to such person."
Section
367 of the Revised Statutes of the United States, 5 U. S. C. A. Sec.
316, directs how the interest of the United States shall be protected in
pending litigation in state jurisdictions by reciting that the proper
Government representative may attend to the interest of the Federal
Government in any suit pending "in any of the courts of the United
States, or in the courts of any state."
The theory that there could
be no federal lien because these moneys might revert to the County has
little weight in view of the disclaimer by the
County
Treasurer
stipulated in the record.
Lastly it is urged a
counsel fee should have been awarded to the attorney for the appellant.
The case involves a fund in court and an allowance of a counsel fee is
authorized under Rule 3:54-7 but the granting of such counsel fee is a
matter of discretion with the trial court and will not be disturbed on
review unless there is an abuse of discretion. We discern no such abuse
here.
The judgment below is
affirmed.
United States of America
v. Joel W. Jenison, et al.
U.
S. District Court, Dist. R. I., Civil Action No. 78-0249, 484 FSupp 747,
1/15/80
[Code Sec. 6323]
Lien for taxes: Notice: Notice of lavy v. notice of tax lien.--With
respect to the enforcement of a federal tax lien against a sum of money
seized by city police, the court ruled that a state Controlled
Substances Act did not entitle the city to retain the money so seized.
Therefore, the city had no valid claim to the money. The court also
ruled on the priority of various liens of other creditors. Specifically,
it held that for purposes of determining the government's priority over
other lien holders, the service of a notice of levy was not equivalent
to the filing of a notice of lien, and therefore, the government lien
was subordinate to the claim of a judgment creditor.
Lincoln C. Almond, United
States Attorney, Everett C. Sammartino, Assistant United States
Attorney, Providence, R. I. 02901, Louis J. Lombardo, Department of
Justice, Washington, D. C. 20530, for plaintiff. Keven A. McKenna, 1010
Turks Head Bldg., Providence, R. I., for Joel W. Jenison, William H.
Toohey, City Solicitor, 3275 Post Road, Warwick, R. I. 02886, Peter J.
Rosedale, 824 Hospital Trust Bldg., Providence, R. I. for Grinnell
Employees Credit Union, Anthony Vacca, Morris & Vacca, 529
Industrial Bank Bldg., Providence, R. I., John A. DeSano, 459 Charles
T., Providence, R. I. 02904, Henry H. Katz, 393 Armistice Blvd.,
Pawtucket, R. I., Richard S. Mittleman, Bietz, Sankin, Rodin &
Mittleman, 131 Wayland Avenue, Providence, R. I., Justin S. Holden,
Salter, McGowan, Arcara & Swartz, 1500 Industrial Bank Bldg.,
Providence, R. I. 02903, Edwin H. Hastings, Tillinghast, Collins &
Graham, 2000 Hospital Trust Tower, Providence, R. I., Thomas W. Heald,
Abedon & Visconti, 1025 Industrial Bank Bldg., Providence, R. I.,
Merrill W. Sherman, Tobin LeRoy & Silverstein, 1122 Industrial Bank
Bldg., Providence, R. I., for defendants.
Opinion
PETTINE, Chief Judge:
This is an action by the
United States
to enforce its tax liens against a fund of money seized from the
defendant Joel W. Jenison by the City of
Warwick
police. The City claims the fund by right of forefeiture. The remaining
defendants are private creditors who caused attachments writs to be
served against the fund.
The
United States
has filed a motion for summary judgment seeking a determination that the
City of
Warwick
has no valid claim against the fund and an adjudication as to the
priorities of its various liens against the fund. The government also
seeks judgment as to the distribution of the fund to three of the
private creditors: Grinnell Employees Credit Union (hereinafter
Grinnell), L. Vaughn Co., and Majestic Hardware, Inc. L. Vaughn,
Majestic Hardware, and Joel Jenison have joined in the motion for
summary judgment; the remaining private creditors, Fairlawn Credit Union
(hereinafter Fairlawn), Lum Realty, Inc., Greater Providence Deposit
Corporation (hereinafter GPDC), Industrial National Bank, B. M. C.
Durfee Trust (hereinafter B. M. C.), and Grinnell join in the motion for
summary judgment insofar as it seeks adjudication of the forfeiture
claim of the City of Warwick, but object to the balance of the motion. 1
The City of
Warwick
objects to the motion insofar as it concerns the City's forfeiture
claim.
In addition to the
government's claim, a number of the private creditors have filed various
counterclaims and cross claims asking the Court to determine priority
among the private creditors. 2
I.
Statement of the Facts
In August 14, 1977, the
Warwick Police Department arrested a number of persons allegedly
involved in a drug conspiracy. One of those arrested was the defendant
Joel Jenison from whom $151,899.11 in cash was seized. 3
The seized monies were deposited in a savings account by the City of
Warwick
and as of July 1, 1979, the interest earned on this account has been
$24,753.
Jenison
had a number of private creditors who caused writs of attachment to be
placed on the fund. 4
In addition, the
United States
became a creditor of
Jenison
as a result of his failure to pay federal income taxes. The Internal
Revenue Service made assessments against
Jenison
for the taxable year ending August 31, 1977 ($49,948.00) and the taxable
years 1975 ($30,909.00) and 1976 ($211,724.00). 5
Notices of levy were served upon the City of
Warwick
on September 12, 1977 for the 1977 taxes and on December 8, 1977 for the
1975 and 1976 taxes demanding that all property belonging to taxpayer
Jenison in the City's possession be surrendered to the
United States
. The City has refused to honor these levies claiming that it is
entitled to retain the monies pursuant to the provisions of R. I. G. L.
§21-28-5.05 relating to forfeitures.
In addition to the notices
of levy, the United States filed notices of lien as follows: notice of
lien for taxable year 1977 filed in Warwick, Rhode Island on September
12, 1977 and in Broward County, Florida on November 26, 1977; notices of
lien for taxable years 1975 and 1976 filed in Warwick, Rhode Island on
December 12, 1977 and in Broward County, Florida on January 5, 1978. The
notices of lien were filed in both
Rhode Island
and
Florida
because of a dispute as to
Jenison
's place of residence.
The
United States
claims a priority right to the fund over all the private creditors
except Grinnell L. Vaughn and Majestic based on its service of the
various notices of levy and filings of the various notices of lien.
II.
The City of
Warwick
's Forfeiture Claim
The City of Warwick relies
on the Controlled Substances Act, R. I. G. L. §21-28-5.05, 6
to support its forfeiture claim. This statute enumerates various items
that are subject to forfeiture to the State, including all illegally
manufactured or distributed controlled substances, all related raw
materials and equipment, and all books, records and research connected
with the sale or manufacture of such controlled substances. If the money
seized from Jenison was properly forfeited under the statute, then
neither the
United States
nor the private creditors could acquire a valid lien on
Jenison
's interest in the fund since title to the money would have passed to
the City immediately upon seizure.
A. ABSTENTION: Because the
relevant statute involves questions of applicability not previously
resolved by
Rhode Island
courts and because such resolution might avoid the present litigation,
the City of
Warwick
urges that the Court abtain from rendering a decision at this time. The
mere fact that state law is unsettled, however, is not sufficient to
mandate abstention. As Chief Justice Stone explained in Meredith v.
City of Winter Haven, 320 U. S. 228 (1943):
(T)he
difficulties of ascertaining what the state courts may hereafter
determine the state law to be do not in themselves afford a sufficient
ground for a federal court to decline to exercise its jurisdiction to
decide a case which is properly brought to it for decision.
Congress
having adopted the policy of opening the federal courts to suitors in
all diversity cases involving the jurisdictional amount, we can discern
in its action no recognition of a policy which would exclude cases from
the jurisdiction merely because they involve state law or because the
law is uncertain or difficult to determine. . . . To remit the parties
to the state courts is to delay further the disposition of the
litigation which has been pending for more than two years and which is
now ready for decision. It is to penalize petitioners for resorting to a
jurisdiction which they were entitled to invoke, in the absence of any
special circumstances which would warrant a refusal to exercise it.
Id.
at 234, 236-37.
Special circumstances do
exist in which abstention is appropriate or even mandatory, but the City
has failed to present any evidence that the present matter constitutes
one of those cases. Under the
Pullman
doctrine, for instance, a federal court should refrain from deciding a
case in which state action is challenged as contrary to the federal
constitution if there are unsettled questions of state law that may be
dispositive of the case and avoid the need for deciding the
constitutional question. Railroad Commission of Texas v. Pullman Co.,
312
U. S.
496 (1941); see 17 Wright, Miller & Cooper, Federal Practice and
Procedure: Jurisdiction §4242. Since the instant case does not involve
the constitutionality of the state forfeiture statute, the Court can see
no way in which the
Pullman
doctrine can be applied to this case.
Another instance in which
abstention is appropriate is when a similar action is already pending in
state court. See Wright, Miller & Cooper, supra at §4246. In
such a case, the federal court can choose to postpone decision for a
time to await the opinion of the state court. Even so, the decision to
postpone adjudication is a discretionary one and the Court must consider
such factors as the possible delay, the relative difficulty of
estimating what the state court would decide, and the importance to the
case of a state court determination. Since the City of Warwick has not
produced evidence of any case pending before a state court that involves
the Rhode Island forfeiture statute, 7
the Court has no basis to abstain. 8
B. THE FORFEITURE STATUTE:
The United States challenges the City's reliance on the Rhode Island
forfeiture statute on three grounds: the State of Rhode Island and not
the City of Warwick is the appropriate entity to enforce the forfeiture
provisions of the statute; money is not an item subject to forfeiture
under the statute; and no forfeiture proceeding has been initiated as
required by the statute. Since the Court agrees with the government's
second contention, there is no need to discuss the merits of the
plaintiff's other two arguments.
Because forfeitures of
property are drastic remedies, forfeiture statutes are strictly
construed against forfeiture and in favor of the person whose rights are
affected. Kane v. McDaniel, 407 F. Supp. 1239, 1242 (W. D.
Ky.
1975). This policy makes sense, since forfeitures are not punishment for
criminal activity, but rather an exercise of the police power of a state
to confiscate property that was instrumental in a crime so as to prevent
the continuance of unlawful acts.
Id.
Though some articles such as counterfeit money, narcotics, or dangerous
weapons are contraband by their very nature, other articles, such as
large sums of money, acquire that status only if their possession or
receipt is substantially and instrumentally related to illegal behavior.
See
United States
v. Bowdach, 414 F. Supp. 1346, 1353 (S. D. Fla. 1976). As Judge
Bownes pointed out in
United States
v. One 1972 Datsun, 378 F. Supp. 1200 (D. N. H. 1974),
Unlike the seizure of per
se contraband, the possession of which, without more, constitutes a
crime, and the seizure of which directly promotes the rumedial goals of
a forfeiture scheme, seizure of derivative contraband may or may not be
remedial and therefore it is imperative that it be substantially and
instrumentally connected with illegal behavior before it is subject to
forfeiture.
Id.
at 1206.
Accordingly,
the burden of establishing this connection must lie with the party
claiming the forfeiture. See Kane, supra, at 1242; Commonwealth
v. Landy, 362 A. 2d 999, 1005 (Pa. Super.
Ct.
1976).
In the instant case, the
City of
Warwick
acknowledges that money is not specifically mentioned in the
Rhode Island
forfeiture statute, but points to two out-of-state cases that have
upheld the forfeiture of money under similar statutes. Both of these
cases can easily be distinguished.
The first case cited by the
City, State of New Jersey v. Moriarity [68-1 USTC ¶9321], 235 A.
2d 247 (N. J. Super. 1967), concerned an order to show cause why monies
seized from a private garage and belonging to a convicted gambler should
not have been forfeited to the county as gambling contraband. The
New Jersey
forfeiture statute--since repealed--reads in relevant part:
Whenever any furniture,
implement, device, or machine, made or used for the purpose of
gambling or for the playing of any game wherein money or other thing of
value is wagered or gambled, [it] shall be seized or captured by the
police . . .. N. J. S. 2A:152-6 (emphasis added) (repealed by L.1978
c.95, §2c:98-2)
Although
this statute does not expressly fefer to money, the court held that
gambling monies are subject to seizure and forfeiture under the statute.
Unlike the
Rhode Island
statute, however, the
New Jersey
law has an additional provision that specifically defines money as a
"gambling device":
Whenever any money,
currency or cash shall be seized or captured by the police . . . in
connection with any arrest for violation of or conspiracy to violate any
gambling law of this state, the said money, currency or cash shall be
deemed prima facie to be contraband of law as a gambling device,
or as part of a gambling operation, and it shall be unlawful to return
the said money, currency or cash to the person or persons claiming to
own the same, or to any other person, except in the circumstances and
manner hereinafter provided.
N. J. S. 2A:152-7 (emphasis
added) (repealed by L. 1978, c.95, §2c:98-2)
A further distinction
between the present case and Moriarity is that the New Jersey
court, after engaging in a detailed analysis of the evidence presented
by the county, determined that the currency seized was indeed earmarked
for gambling purposes and that it was seized in connection with an
arrest for violation of the gambling laws. Moriarity, supra, at
258. This is in stark contrast to the City of
Warwick
's vague and inconclusive allegations--unsupported by affidavit or
documentary evidence--that the money seized from
Jenison
was directly connected with illegal activity.
The other case relied on by
the City is Commonwealth of Pennsylvania v. Landy, 362 A. 2d 999
(Pa. Super. 1976). In that case, a petition was filed for return of
money confiscated at the time of petitioner's arrest for a narcotics
offense. The relevant
Pennsylvania
statute is almost identical to its
Rhode Island
counterpart. Among the property listed as subject to forfeiture are all
controlled substances, all raw materials used in the manufacturing of
such substances, all property used as containers for controlled
substances, all vehicles used to transport the substances, and all
relevant books and records. 35 P. S. 780-128. Like R. I. G. L. §21-28-5.05,
the
Pennsylvania
statute does not specifically authorize the forfeiture of money obtained
in the illegal sale of controlled substances. Neverthless, the Landy
court concluded that under certain circumstances money is subject to
seizure and forfeiture, the primary circumstance being when the money is
the "fruit of crime"--that is, derivative contraband. 362 A.
2d at 1002. The court stressed, however, that such money proceeds cannot
be seized unless they are "directly derived from and directly
traceable to the sale of a controlled substance," id.
(emphasis added), and that the government has the burden of proving the
material allegations by a preponderance of the evidence.
Id.
at 1005.
In the case at bar, the
City of
Warwick
has failed to meet this burden. The fact that money is not specifically
included in the detailed listing of items subject to forfeiture in R. I.
G. L. §21-28-5.05 is not dispositive, but in the absence of such direct
statutory authority, the City has the burden of showing that the money
seized is substantially and instrumentally related to illegal behavior.
See One 1972 Datsun, supra. In considering the evidence in the
light most favorable to the City of
Warwick
, this Court must conclude that the City has not established this
relationship by a preponderance of the evidence. Jenison's arrest has
not led to conviction on any charge, and the City has failed to show
that there are any indictments pending against
Jenison
that directly involve the seized funds. The fact that Jenison was
observed knocking on the door of a motel room in which illegal drugs had
recently been confiscated is simply not sufficient evidence to support
the City's conclusion that "Jenison was linked to a large scale
marijuana smuggling operation and the large amounts of money he was
carrying had been used or were to used in the purchase or sale of a
controlled substance."
In consideration of the
policy of strictly construing forfeiture statutes and in light of the
City of
Warwick
's failure to establish a substantial and instrumental connection
between the seized monies and any illegal behavior, this Court concludes
that the City's claim under the
Rhode Island
forfeiture provision is invalid and must be denied. Accordingly, the
Court grants the plaintiff's motion for summary judgment as it pertains
to the City of
Warwick
's forfeiture claim.
III.
Priority of Federal Tax Liens Versus Other Liens
Pursuant to Sections 6321 9
and 6322 10
of the Internal Revenue Code of 1954, the United States obtains a lien
upon all property of the taxpayer from the date of assessment. 11
Although a tax lien is perfected on the date of assessment, it is not
entitled to priority over a choate lien 12
unless notice of lien has been filed pursuant to Section 6323(a) of the
Internal Revenue Code before the choate lien arises:
The lien imposed by section
6321 shall not be valid as against any purchaser, holder of security
interest, mechanic's lienor, or judgment lien creditor until notice
thereof which meets the requirements of subsection (f) has been filed by
the Secretary or his delegate.
26 U. S. C. §6323(a)
Thus,
any creditor achieving the status of "judgment lien creditor"
before the filing of the government's notice of lien is entitled to
priority over the
United States
with respect to property subject to the judgment lien even if the
government's assessment was made before judgment.
In order for a notice of
tax lien to be valid, it must be filed in the state in which the
property subject to the lien is situated. 26 U. S. C. §6323(f). The
code defines the situs of personal property as the residence of the
taxpayer at the time the notice of lien is filed.
Id.
Because of a dispute as to Jenison's residence, the government filed
notices of tax lien in both Rhode Island and Florida as follows: notice
of lien for taxable year 1977 filed in Warwick, Rhode Island on
September 12, 1977, and in Broward County, Florida on November 26, 1977;
notices of lien for taxable years 1975 and 1976 filed in Warwick, Rhode
Island on December 12, 1977, and in Broward County, Florida on January
5, 1978.
Subsequent to the filing of
this action, the parties stipulated that Jenison's residence be deemed
to be in Broward County, Florida at all times relevant to the case at
bar. The result of this stipulation is that the notices of lien filed in
Rhode Island
are invalid while the notices filed in
Florida
are valid.
The
United States
concedes that the liens of Grinnell, L. Vaughn, and Majestic Hardware
became choate prior to the filing of the notices of lien and thus have
priority over the
United States
. 13
In addition, it seems beyond dispute that the liens of Fairlawn, Lum
Realty, Industrial National Bank, and B. M. C. were inchoate at the time
of the filing of the notices of lien. 14
The only lien thus in dispute is that of GPDC.
Since GPDC's judgment
against Jenison dates from December 22, 1977--two weeks before the
government filed its notices of lien in
Broward
County
for the taxable years 1975 and 1976--GPDC would seem to have priority
over the government. The government disputes this; it argues that the
levy served on the City of Warwick 15
on December 8, 1977, had the effect of seizing the fund for the United
States and transferring ownership to the government, thus preventing any
subsequent party, such as GPDC, from asserting a lien against Jenison's
interest in the fund. In essence, the government argues that there are
two methods by which it can obtain priority over private creditors: one
is by filing a notice of tax lien pursuant to §6323; the other is by
serving a notice of levy pursuant to §6331. 16
After careful examination
of the cases cited by the government in support of this position, I
conclude that for the purpose of determining the government's priority
over other lien holders, service of a notice of levy is not equivalent
to filing a notice of lien.
The cases cited by the
plaintiff in support of its contention were decided on the basis of
facts significantly different from those in the present case. For
example, the government cites American Acceptance Corp. v. Glendora
Better Builders, Inc. [77-1 USTC ¶9348], 550 F. 2d 1220 (9th Cir.
1977) as support for the proposition that upon levy all ownership rights
are transferred to the
United States
. In that case, the government served a notice of levy on the corporate
employer of a delinquent taxpayer for all property and rights to
property belonging to the taxpayer in the employer's possession. Shortly
thereafter, American Acceptance Corp., a creditor of the taxpayer,
served a writ of garnishment on the employer to satisfy a judgment it
had obtained against the taxpayer. The court held that the notices of
levy "had the effect of seizing the taxpayer's property" for
the government and that "(n)o subsequent party could gain
any rights in the property" from the holder of the property since
"(a)ll rights were (now) held by the I. R. S." 500 F. 2d at
1222-23 (emphasis added). While the premise of the case is sound, it is
inapposite here. None of the private creditors in the present case is a subsequent
party seeking to gain rights from the holder after the levy
transferred all interests to the IRS. Rather, each of the private
creditors is a prior party, having acquired rights in the
property by virtue of each of its respective post- or pre-judgment
attachments before any interest was transferred to the IRS by virtue of
the levy.
Similarly, in Phelps v.
United States [75-1 USTC ¶9467], 421
U. S.
330 (1975), the other case cited by the plaintiffs, the government
levied on property prior to any other liens attaching. In Phelps,
the IRS issued a deficiency assessment against the taxpayer and thereby
acquired a §6321 lien on all of the taxpayer's property. The taxpayer
later purported to transfer his assets to an assignee for the benefit of
creditors after which the government filed a notice of tax lien and
served a notice of levy upon the assignee. An involuntary petition of
bankruptcy was later filed against the taxpayer and the trustee claimed
the property for the estate free of the federal claim on the theory that
the notice of lien was invalid since title had already passed from the
taxpayer. The court, after finding that, at the time of transfer, the
property was already subject to the tax lien and the assignee held the
property for the taxpayer, held that the levy was valid and gave the
government full legal right to the property. 421
U. S.
at 337. Again, as distinguished from the present case, at the time of
the levy there were no prior attachments or liens on the property.
In its memorandum in
support of its motion for summary judgment, the United States expressly
concedes that "when a notice of levy is served upon a person
holding property of the taxpayer, the United States acquires the
property as of the date such levy is served, except to the extent the
property is subject to a prior judicial attachment."
Plaintiff's Memorandum at 8-9 (emphasis added). This makes eminent sense
since the
United States
, by levy, can only seize whatever rights the taxpayer had. Where the
taxpayer's property or right to property is subject to preexisting liens
so is that which the government takes by levy. The
United States
later states, however, that its levy seized all property subject only to
prior judgment lien creditors. Plaintiff's Memorandum at 10. Not
only is there no statutory or judicial authority in support of that
notion, but a federal district court has expressly rejected it. In City
of Vermillion v. Stan Houston Equipment Co. [72-2 USTC ¶9496], 341
F. Supp. 707 (D. S. D. 1972), the IRS had served notice of levy as to
its entire claim, but had filed a notice of tax lien as to only a
portion of the claim. As to the priority asserted by the government by
virtue of levy only, the court stated that "notices of levy . . .
are not sufficient to serve as notices of liens" under section
6323. 341 F. Supp. at 713. The only way the government can obtain
priority over a judgment lien creditor is by complying with the
statutory requirement of 26
U. S.
C. §6323(a), (f) that a notice of lien be filed prior to the creditor
obtaining judgment. This requirement is more than mere window dressing;
it was enacted to give potential creditors protection against an
unrecorded lien. See Hoover, Inc. v. McCullough Industries [73-1
USTC ¶9237], 315 F. Supp. 1023 (E. D. Pa. 1972). It would be unfair to
allow a creditor to pursue its claim to judgment with no notice that the
government already had a perfected priority lien on all of the debtor's
property.
In light of the preceding
discussion, the Court concludes that the service of a notice of levy is
not a procedural alternative to filing a notice of tax lien. As a
result, I must conclude that GPDC has priority over the government.
The government is thus
entitled to as much of the fund as remains after the liens of Grinnell,
Majestic, L. Vaughn, and GPDC--including post-judgment interest 17--are
set aside.
IV
Priority Among the Private Creditors
Having determined that
portion of the fund to which the government is entitled, the Court's
next task is to decide how to distribute the money that remains.
Defendant Lum Realty has submitted a supplemental memorandum arguing
that priority should be determined according to state law rather than
federal law, and that the parties who had priority over the government
under federal law do not necessarily have priority under state law.
Without commenting on the merits of this argument, the Court prefers to
postpone determination of this issue until a formal motion for summary
judgment on the cross claims is filed. Although the Court expects that
such a motion will be filed forthwith, fairness dictates that all the
private creditors be put on notice that the Court is ready to consider
this issue so that they can respond if they wish to Lum Realty's
proposed formula for distribution.
1
Subsequent to the commencement of this action. Old Stone Bank satisfied
its claim against
Jenison
, and thus is no longer a relevant party.
2
Lum Realty and Fairlawn each have filed across claims against all the
other private creditors and the City of
Warwick
as well as a counterclaim against the government asking that the court
declare their priority to the fund.
BMC has filed a
counterclaim, but in the counterclaim it has asked the court to declare
its priority over the other defendants as well as over the plaintiff.
Majestic has filed neither
a cross claim nor a counterclaim, but in its answer, it asks that the
court declare its priority over all the other parties.
3
Although no narcotics were found in
Jenison
's possession, Grand Jury indictments were returned against him in
November, 1977, for possession of a weapon, possession of marijuana with
intent to distribute, and conspiracy to possess marijuana with intent to
distribute. These indictments were subsequently ruled defective.
According to
Warwick
city solicitor William J. Toohey,
Jenison
has been reindicted; however, Mr. Toohey has not been able to provide
the Court with evidence of the date or nature of these "new"
indictments. He has, however, advised by letter of December 21, 1979
that a judge of the state Superior Court has declared the search and
seizure of Mr. Jenison illegal--accepting this as fact, it in no way
affects this opinion.
4
Date of Amount of Date of * Judgment
Creditor's Name Attachment Attachment Judgment Amount
Fairlawn Credit Union ......... 8/23/77 $ 3,585.35 6/13/78 $ 3,781.65
Lum Realty, Inc. .............. 8/23/77 $ 35,000.00 5/18/78 [TEH] ** $31,352.08
Grinnell Emp. Credit Union .... 8/25/77 $ 10,000.00 2/10/75 $ 6,910.15
Greater Pvd. Deposit Corp. .... 8/29/77 $ 60,000.00 12/23/77 $45,560.00
L. Vaughn Company ............. 9/1/77 $ 5,360.06 11/11/77 $ 5,360.06
Industrial Nat'l Bank ......... 9/6/77 $131,000.00 None yet N/A
B. M. C. Durfee Trust ......... 9/7/77 $ 17,331.00 5/15/78 $28,085.44
Majestic Hardware Co. ......... 9/27/77 $ 2,000,00 7/09/74 $ 999.00
* Judgment amount stated does not include interest and costs also
awarded by court.
** Judgment on appeal to R. I. Supreme Court.
5
Since the filing of this action, an additional assessment has been made
against the taxpayer on December 25, 1978, for the year ended December
31, 1977. Since the government's prior assessments alone would exhaust
the fund, the Court sees no reason to consider this additional
assessment.
The amount assessed
including penalties and interest as of June 19, 1979 is $60,707.84 for
the year ending August 31, 1977; $47,204.46 for 1975; and $279,145.59
for 1976.
6
This section reads as follows:
21-28-5.05. Forfeiture of
controlled substances, related materials and other property, equipment
and records.--(a) The following shall be subject to forfeiture to the
state and no property right shall exist in them:
(1) all controlled
substances which have been manufactured, distributed, dispensed, or
acquired in violation of this chapter.
(2) all raw materials,
products, and equipment of any kind which are used, or intended for use,
in manufacturing, compounding, processing, delivering, importing, or
exporting any controlled substance in violation of this chapter.
(3) all property which is
used, or intended for use, as a container for property described in
paragraph (1) or (2), subject to the limitations of §21-28-5.04.
(4) all books, records and
research, including formulas, microfilm, tapes, and data which are used,
or intended for use, in violation of this chapter.
(b) Property taken or
detained under this section shall not be repleviable, but shall be
deemed to be in the custody of the law enforcement agency making the
seizure. Whenever property is forfeited under this chapter the law
enforcement agency may:
(1) retain the property for
official use;
(2) sell any forfeited
property which is not required by this chapter to be destroyed and which
is not harmful to the public, but the proceeds of any such sale, after
first deducting an amount sufficient for all proper expenses of the
proceedings for forfeiture and sale, including expenses of seizure,
maintenance of custody, advertising and court costs, shall be paid to
the general treasurer for the use thereof.
7
The appendix to the memorandum submitted by defendants GPDC and Lum
Realty includes a complaint filed in Kent County Superior Court on
September 27, 1977, by Joseph Walsh, Mayor of the City of Warwick, along
with the treasurer and chief of police of the City, to enjoin the
private creditors in the instant case from executing, levying or in any
way attempting to obtain possession of the fund of money seized from
Joel Jenison. According to the
Kent
County
clerk's office, however, that action was dismissed without prejudice on
October 13, 1977.
8
It is true that certification is permissible in circumstances that would
not merit abstention, but certification is a highly discretionary
procedure and the Court declines to utilize such a procedure in the
absence of unusual circumstances.
9
§6321 Lien for Taxes
If any person liable to pay
any tax neglects or refuses to pay the same after demand, the amount
(including any interest, additional amount, addition to tax, or
assessable penalty, together with any costs that may accrue in addition
thereto) shall be a lien in favor of the United States upon all property
and rights to property, whether real or personal, belonging to such
person.
10
§6322 Period of Lien
Unless another date is
specifically fixed by law, the lien imposed by section 6321 shall arise
at the time the assessment is made and shall continue until the
liability for the amount so assessed (or a judgment against the taxpayer
arising out of such liability) is satisfied or becomes unenforceable by
reason of lapse of time.
11
The following assessments were made against Joel Jenison: for the tax
year ending August 31, 1977, an assessment was made on September 12,
1977 in the amount of $49,948 (penalties and interest as of June 19,
1979 have increased the figure to $60,707.84); for the taxyear 1975, an
assessment was made on November 21, 1977, in the amount of $30,909
(increased to $47,204 as of June 19, 1979); for the tax year 1976, an
assessment was made on November 28, 1977 in the amount of $211,724
(increased to $279,145 as of June 19, 1979). These sums in the aggregage
exceed the fund by more than $175,000.
12
In order for a lien to be choate, the identity of the lienor, the
property subject to lien and the amount of the lien must be established.
United States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81 (1954). This, a prejudgment attachment is inchoate up until the time
of judgment because the amount of the lien has not been conclusively
established. In order for a prejudgment attachment to have priority over
a federal tax lien, then, judgment must be entered before the notice of
lien is filed. The theory of relation back to the date of attachment,
although valid as concerns priority between private creditors under
state law, is not effective for federal tax purposes.
13
Grinnell obtained a judgment against
Jenison
on February 10, 1975 and served a writ of attachment on August 25, 1977.
L. Vaughn served a prejudgment writ of attachment on the Treasurer of
the City of
Warwick
on September 1, 1977 and obtained a default judgment against
Jenison
on November 11, 1977. Majestic's judgment against
Jenison
dates from July 9, 1974 and the date of its lien is September 27, 1977.
See note 4, supra.
14
All four of these creditors have prejudgment writs of attachment. All
but Industrial National Bank have since obtained judgments against
Jenison
as follows: Fairlawn--June 13, 1978; Lum Realty--May 18, 1978; B. M.
C.--May 15, 1978. See note 4, supra.
15
Section 6331 of the Internal Revenue Code authorizes the government to
collect an unpaid tax by levy upon all property and rights to property
belonging to the delinquent taxpayer or on which there is a lien
provided by section 6221. 26 U. S. C. §6331.
16
Defendant Lum Realty and GPDC argue that the government's acceptance, on
January 5, 1978, of an assignment of rights from
Jenison
is inconsistent with its claim that it "owned" the fund as of
December 8, 1977. They contend that by accepting the assignment, the
government "elected its remedies" and is thus barred from
asserting either its levy or its lien.
Without engaging in an
extended discussion of the disfavor with which the Federal Rules view
the doctrine of election of remedies, I simply point out that the
government's acceptance of the assignment can hardly be said to have
evinced a purpose to forgo its remedies under the Internal Revenue Code.
See 25 Am. Jur. 2d Election of Remedies §14.
17
The private creditors are entitled to 6% interest on their judgments
pursuant to R. I. G. L. §9-2-8, §6-26-1; 26
U. S.
C. §623e(1), (6).
In re: Harden Robinson, Debtor. Harden Robinson,
Plaintiff v.
United States of America
, Defendant
U. S.
Bankruptcy Court, East.
Dist.
Va.
, Richmond Division, Bankruptcy Case No. 83-01087-R, 39 BR 47, 5/7/84
[Code Sec. 6321]
Lien for taxes: Pension fund: Bankruptcy: Extent of lien.--
The debtor's military pension was included as property of the bankruptcy
estate and subject to the perfected IRS lien. The IRS had a lien on the
military retirement pay not measured by the life of the plan but rather
to the extent of the present value of the debtor's retirement pay. Any
balance of the IRS's claim was unsecured.
James R. Sheeran,
2311 East Broad St.
,
Richmond
,
Va.
23223
, for debtor.
Memorandum
Opinion
SHERLLEY, Bankruptcy Judge:
This matter came before the
Court upon the filing of an objection to claim and complaint to
determine validity of lien by the debtor. After a stipulation of facts,
the Internal Revenue Service and the debtor submitted the matter to the
Court on briefs. After considering the issues raised by the parties, and
their respective arguments in support of their positions, this Court
renders the following opinion.
Statement
of Facts
The debtor, Harden
Robinson, filed a Chapter 13 petition pursuant to the Bankruptcy Code on
July 12, 1983. At the time the debtor filed his petition he was indebted
to the Internal Revenue Service (I. R. S.) for delinquent income taxes,
interest and penalties assessed for the years 1974 through 1982. On
August 12, 1982, a Notice of Federal Tax Lien with respect to the
debtor's unpaid liabilities for the years 1974 through 1981 was filed in
the Clerk's Office of the Circuit Court of Petersburg, Virginia, and on
June 22, 1983, the Notice of Federal Tax Lien with respect to the
debtor's 1982 income tax liability was also filed in the Clerk's Office
of the Circuit Court of Petersburg, Virginia.
The debtor is married and
with his wife Inez M. J. Robinson, owns real property in the city of
Petersburg
at
512 St. Matthew Street
. The real property is owned by the debtor with his wife as tenants by
the entirety with full right of survivorship at common law. The debtor's
wife has timely filed her tax returns for all the years in question here
and, therefore, is not indebted to the Internal Revenue Service.
Moreover, the debtor's wife has not filed a petition in bankruptcy. The
debtor is retired from the United States Army and receives retirement
income monthly.
On August 17, 1983, the I.
R. S. filed its proof of claim in the amount of $55,265.86. The I. R. S.
does not claim a priority as to any of the amount of the delinquent
taxes, but does assert that its claim is a secured one. The basis of the
I. R. S.'s alleged secured claim is the two Notices of Federal Tax Lien
filed in the Clerk's Office of the City of Petersburg, Virginia. It is
to that proof of claim that the debtor objects.
Conclusions
of Law
A lien in favor of the
United States
for unpaid taxes, interest and penalties arises on demand upon all real
and personal property belonging to a taxpayer (debtor herein). 26 U. S.
C. §6321. The lien is perfected under state law by filing of a notice
of a tax lien in the circuit court for the jurisdiction in which the
taxpayer resides. 26 U. S. C. §6323(f)(1). The lien remains in effect
until the taxes are paid. 26 U. S. C. §6322. The issue before this
Court is whether and to what extent the I. R. S. has a lien on the
debtor's real property owned as tenants by the entirety and on the
debtor's military retirement pay.
The I. R. S. has conceded
in its memorandum filed with this Court that its claims against the
debtor are not secured by the real estate held by the debtor and his
wife as tenants by the entirety. 1
Therefore, the only issue now before the Court is whether the I. R. S.
has a claim which is secured by the debtor's military retirement income,
and if the I. R. S.'s claim is so secured, the extent of such security.
In Chapter 13 proceedings
property of the estate includes earnings from services performed by an
individual debtor after the commencement of the case. 11 U. S. C. §§
541(a)(6) and 1306(a)(2). The instant matter (a Chapter 13 proceeding)
is distinguishable from In re Hayes, 679 F. 2d 718 (7th Cir.
1982) (where the court held that military retirement was not property of
the estate in a Chapter 7 proceeding) and, therefore, the debtor's
military pension is included as property of the estate and
subject to the perfected lien of the I. R. S. The debtor does not
seriously contest this conclusion. 2
The only issue which seems
to be seriously in dispute between the parties is the extent of the I.
R. S. lien on the debtor's military retirement income and, therefore,
the amount of the secured portion of the I. R. S. claim. The debtor
argues that the I. R. S. can only have a secured claim at most to the
extent of the present value of the retirement payments for the period of
the debtor's Chapter 13 plan. The I. R. S., however, argues that the
debtor had a vested interest in his military retirement as of the date
of the petition to which the federal tax lien has attached and,
therefore, that the I. R. S. has a secured claim as to the present value
of the military retirement including future payments as well as payment
during the life of the plan.
Pursuant to 11
U. S.
C. §506, an allowed claim of a creditor secured by a lien on property
in which the estate has an interest is a secured claim to the extent of
the value of the creditor's lien. Consequently, it appears that the I.
R. S. has a lien on the debtor's military retirement not measured by the
life of the plan but rather, to the extent of the present value of that
retirement. The debtor has cited no authority demonstrating that
something less than the present value of the military retirement is
covered by the I. R. S. lien. Therefore, this Court holds that the I. R.
S. has a secured claim to the extent of the present value of the
debtor's military retirement; and that to the extent the I. R. S. proof
of claim exceeds the present value of the debtor's military retirement,
the I. R. S. has an unsecured claim.
An appropriate Order will
issue.
Order
For the reasons expressed
in the Memorandum Opinion filed this same date, it is hereby
ORDERED, that to the extent
of the present value of the debtor's military retirement income the
Internal Revenue Service has a secured claim against the debtor; and
that any balance of the Internal Revenue Service's proof of claim is
unsecured.
And it is FURTHER ORDERED,
that should the parties be unable to determine by agreement the present
value of the debtor's military retirement income, the parties may come
before the Court upon written motion for this Court to determine said
present value for purposes of determining the amount of the secured
portion of the Internal Revenue Service's proof of claim.
1
See Defendant's Memorandum in Opposition to Debtor's Memorandum in
Support of Objection to Claim at 1.
2
See Debtor's Memorandum in Support of Objection to Claim, at 2 & 3.
Harold A. Sears and Marie K. Sears, Plaintiffs v.
United States of America
, Defendant
U.
S. District Court, So. Dist. of
Tex.
,
Houston
Div., Civil Action No. H-77-2105, 474 FSupp 988, 8/20/79
[Lien for Taxes]
Bankruptcy: Exempt property: Validity of tax lien: Time of
recording.--A federal tax lien on the taxpayers' residence that was
recorded after the effective date of the taxpayers' discharge in
bankruptcy was valid. The residence was exempt from the bankruptcy
proceeding and, therefore, it was not necessary that the lien be
recorded prior to the bankruptcy discharge in order to be valid.
Patrick William Johnson,
Chamberlain, Hrdlicka, White & Waters, 1100 Milam,
Houston
,
Texas
77002
, for plaintiffs. Jose Berlanga, Assistant United States Attorney,
Houston, Texas 77208, Howard A. Weinberger, Department of Justice,
Dallas, Texas 75242, for defendant.
Memorandum
and Order
MCDONALD, District Judge:
This is an action to
determine the validity of a federal tax lien on the plaintiffs'
residence. Jurisdiction is proper under 28
U. S.
C. §§ 1340 and 2410. United States v. Creamer Industries, Inc.
[65-2 USTC ¶9527], 349 F. 2d 625 (5th Cir. 1965), cert. denied,
382
U. S.
957 (1965). The parties have submitted the case on the pleadings with
the facts stipulated as follows:
1. The Commissioner of
Internal Revenue determined that a tax deficiency existed with respect
to the income tax return of Harold A. and Marie K. Sears, the
plaintiffs, for the tax period ended December 31, 1966.
2. The plaintiffs contested
the deficiency in the United States Tax Court and, pursuant to an
agreement between the parties, a decision was entered on December 17,
1975, that there was a deficiency in income tax due from the plaintiffs
for the tax year 1966 in the amount of $342,955.74.
3. On January 15, 1976, the
Internal Revenue Service made an assessment against the plaintiffs in
the amount of $528,635.74 for the period ended December 31, 1966. This
amount included the income taxes determined to be due pursuant to the
Tax Court proceeding plus interest.
4. On May 11, 1976, the
plaintiffs filed petitions in bankruptcy in the United States District
Court for the Southern District of Texas.
5. On July 28, 1976, the
plaintiffs received a discharge in bankruptcy effective as of May 11,
1976.
6. The Internal Revenue
Service filed a federal tax lien against the plaintiffs in
Montgomery County
,
Texas
, on July 23, 1976, in the amount of $528,635.74.
7. By letter dated October
28, 1976, the Internal Revenue Service advised the plaintiffs that the
taxes assessed on January 15, 1976, were dischargeable in bankruptcy.
8. Prior to filing for
bankruptcy, the plaintiffs owned a residence located at
28911 Enchanted Drive
,
Conroe
,
Texas
77302
, more fully described in Schedule B to their voluntary petition for
bankruptcy. Such residence was claimed as exempt by the plaintiffs in
Schedule B-4 to their petition and was allowed by the court as exempt
from the Bankruptcy Act.
The plaintiffs contend that
the federal tax lien on their residence is invalid, as it was filed
after the effective date of their discharge in bankruptcy. The
government contends that the lien lawfully stands. Both parties agree
that the applicable law is Section 17(a) of the Bankruptcy Act, 11
U. S.
C. §35(a):
A
discharge in bankruptcy shall release a bankrupt from all of his
provable debts, whether allowable in full or in part, except such as (1)
are taxes which became legally due and owing by the bankrupt to the
United States or to any State or any subdivision thereof within three
years preceding bankruptcy: Provided however, That a discharge in
bankruptcy shall not release a bankrupt from any taxes (a) which were
not assessed in any case in which the bankrupt failed to make a return
required by law, (b) which were assessed within one year preceding
bankruptcy in any case in which the bankrupt failed to make a return
required by law, (c) which were not reported on a return made by the
bankrupt and which were not assessed prior to bankruptcy by reason of a
prohibition on assessment pending the exhaustion of administrative or
judicial remedies available to the bankrupt, (d) with respect to which
the bankrupt made a false or fraudulent return, or willfully attempted
in any manner to evade or defeat, or (e) which the bankrupt has
collected or withheld from others as required by the laws of the United
States or any State or political subdivision thereof, but has not paid
over; but a discharge shall not be a bar to any remedies available under
applicable law to the United States or to any State or any subdivision
thereof, against the exemption of the bankrupt allowed by law and duly
set apart to him under this title: And provided further, That a
discharge in bankruptcy shall not release or affect any tax lien; . . .
In the context of this
case, one's attention is immediately drawn to the proviso that "a
discharge in bankruptcy shall not release or affect any tax lien."
If taken literally, that proviso would dispose of this case. The
plaintiffs, however, cite substantial authority to the effect that that
proviso has been interpreted to apply only to tax liens recorded prior
to the effective date of the discharge in bankruptcy. See In re
Braund [68-2 USTC ¶9561], 289 F. Supp. 604 (C. D. Calif. 1968), aff'd
per curiam, [70-1 USTC ¶9237], 423 F. 2d 718 (9th Cir. 1970), cert.
denied sub nom.
United States
v. McGugin, 400
U. S.
823 (1970); 1A Collier on Bankruptcy ¶1612-1619 (14th ed. 1978).
As stipulations 5 and 6 indicate, the tax lien on the plaintiffs'
residence was recorded after the effective date of their discharge in
bankruptcy. Therefore, the plaintiffs say, the proviso does not
establish the validity of the tax lien.
The government agrees. It,
however, points to a different clause in Section 17(a). According to the
government, the tax lien on the plaintiffs' residence is valid because
"a discharge shall not be a bar to any remedies available under
applicable law to the United States . . . against the exemption of the
bankrupt allowed by law and set apart to him . . ." 11 U. S. C. §35(a).
The government is right.
The plaintiffs' residence was exempt from the bankruptcy proceeding
under
Texas
' homestead provision, Tex. Rev. Civ. Stat. Ann. art. 3833 (
Vernon
), and was set apart to them by the bankruptcy court. Stipulation 8. It
is not, however, exempt from tax enforcement proceedings; a person's
home may be seized and sold to satisfy his or her tax debts. 26 U. S. C.
§6334. See Weitzner v. United States [73-1 USTC ¶9415], 309 F.
2d 45 (5th Cir. 1962), cert. denied, 372
U. S.
913 (1963). There being "remedies available under applicable law to
the United States . . . against the exemption of the bankrupt allowed by
law and set apart to him," the plaintiffs' discharge in bankruptcy
does not bar the federal tax lien.
This interpretation, the
plaintiffs argue, confuses the issue. It is stipulated, they say, that
their tax liability is dischargeable in bankruptcy. Stipulation 7. Only
liabilities for which liens are recorded prior to the effective date of
the discharge are saved by the proviso they quote from Section 17(a).
Their liability is not in that group. Thus, they maintain, their
liability was discharged.
But the plaintiffs miss the
point. Under Section 17(a), there is a crucial distinction between
non-exempt and exempt property. In order to be valid against non-exempt
property, a tax lien must be recorded prior to the effective date of the
discharge in bankruptcy; otherwise, as to that property, the liability
is discharged and the lien has no legal force. In order to be valid
against exempt property, however, it does not matter when or whether the
tax lien is recorded; the discharge in bankruptcy does not extend to the
exempt property. As Collier on Bankruptcy, which both parties
have treated as the definitive treatise in this area, states at Vol. 1A,
¶17.14[7], p. 1623:
Finally,
even, if a tax liability is dischargeable by the terms of §17a(1), it
may continue to exist against and be collected from the bankrupt's
exempt property, if any. Section 17a(1) provides explicitly that 'a
discharge shall not be a bar to any remedies available under applicable
law to the United State or to any State or any subdivision thereof,
against the exemption of the bankrupt allowed by law and duly set apart
to him under this Act.' Generally speaking, federal tax claims have been
held not subject to state exemption laws, and the Bankruptcy Act merely
gives cognizance to this policy. In effect, the discharge will not be a
bar to collection as against exempt property.
(Footnote
omitted.) Accord, Plumb, Federal Tax Liens 205 n. 72 (3d
ed. 1972).
There is an important
reason for this differential treatment of non-exempt and exempt property
in regard to tax liens under 17(a). A court of bankruptcy has no
jurisdiction over exempt property other than that necessary to set it
aside to the bankrupt. It does not have the power to administer or
distribute such property. Lockwood v. Exchange Bank, 190
U. S.
294 (1903); 1A Collier on Bankruptcy ¶6.05 (14th ed. 1978). That
being so, logic leads one to the conclusion that a discharge issued by a
bankruptcy court cannot extend to exempt property.
Congress has determined
that homesteads can be seized and sold to satisfy tax debts. 26 U. S. C.
¶¶ 6331, 6334. A ruling in the plaintiffs' favor would mean that their
residence could not be so treated. Although that outcome might be
acceptable if it was the result of an equitable consideration by the
bankruptcy court of the various claims of the creditors and obligations
of the plaintiffs, it makes no sense whatsoever when the bankruptcy
court lacks jurisdiction to administer and distribute the homestead.
The plaintiffs have
requested declaratory and injunctive relief from this Court. As the
Court has determined that the plaintiffs' discharge in bankruptcy does
not bar the federal tax lien on their home, the plaintiffs' request for
relief is DENIED. Accordingly, judgment is hereby entered for the
defendant. The plaintiffs' complaint is dismissed with prejudice.
United States of America
, Plaintiff v. Grant Foster, et al., Defendant
U.
S. District Court, Dist. Canal Zone, Balboa Div., Civil No. 6534, 1/7/75
[Code Sec. 6321]
Lien for taxes: Another's property: Successor to corporation.--The
government's outstanding tax liens against the individual taxpayer
successfully attached to funds which were awarded to his Venezuelan
corporation. The individual was the sole stockholder of the Venezuelan
corporation and he succeeded as titleholder and beneficial owner of all
property previously owned by the company, which ceased doing business in
1961. Because the individual taxpayer was the corporation's successor,
the tax liens could be applied to the corporation's share of funds to
which it was entitled under a settlement with the U. S. government for
past construction work. The Venezuelan corporation was found to be the
real party to the contract with the U. S. Government since the
contesting corporation could not prove that it existed prior to 1962.
Lester Engler, United
States Attorney, Balboa, Canal Zone, John J. McCarthy, Department of
Justice, Washington, D. C. 20530, for plaintiff. DeCastro & Robles,
P. O. Box
452
, Balboa,
Canal Zone
, for defendants.
Findings
of Fact and Conclusions of Law
CROWE, District Judge:
The Foster Construction (
Panama
) S. A. petitioned to redocket the case and to obtain a declaratory
judgment further interpreting the stipulation of settlement entered into
herein on April 30, 1970 and the judgment approving the stipulation and
the supplemented judgment entered into on August 15, 1972. The issue
being whether the petitioner was the owner of certain additional
compensation due for work in Costa Rica from the United States Bureau of
Public Roads or whether the funds were the property of the defendant,
Grant Foster or companies owned or controlled by him, in particular,
Foster Construction, C. A.
The case was redocketed and
a hearing was had on the merits. From the evidence offered and the
arguments of counsel the following findings of fact are made and
conclusions of law reached.
Findings
of Fact
1. A joint venture known as
"Foster-Williams Brothers Company" performed certain road
construction in Costa Rica, which project was financed by the United
States Bureau of Public Roads pursuant to contracts CPR 11-4285 Project
75-56-6, dated June 18, 1956, and contract CPR 11-5527, Project 75-56-6,
dated November 29, 1956, between "Foster Construction, C. A."
and Williams Brothers, as joint ventures, and the United States Bureau
of Public Roads. The joint venture and one of its sub-contractors
claimed additional compensation from the Bureau of Public Roads for work
done in this road construction project. This claim for additional
compensation was the subject of a lawsuit in the United States Court of
Claims which was disposed of by a settlement in 1974. This settlement
resulted in additional compensation being awarded to the joint venture
on the said construction project. Inasmuch as the original joint venture
of "Foster Construction, C. A. and Williams Brothers Company"
was dissolved upon the completion of the said project, the aforesaid
additional compensation is to be divided among the two said joint
venturers.
[IRS
Position]
2. The Internal Revenue
Service has taken the position that Foster Construction, C. A., which
was a Venezuelan corporation, was liquidated by Grant Foster in
approximately 1961, with Grant Foster being the last and sole
stockholder of the said Venezuelan corporation on the date that it
ceased operations, with the result that Grant Foster has succeeded as
titleholder and beneficial owner of all property previously owned by
Foster Construction, C. A. As a result of this position, the Internal
Revenue Service took the position that Grant Foster was the owner of
Foster Construction, C. A.'s share of the aforesaid additional
compensation paid to the said joint venture.
3. On May 7, 1973, the
Internal Revenue Service issued a levy on the attorney for the aforesaid
joint venture, which attorney was representing the joint venture in a
lawsuit in the United States Court of Claims pertaining to the
additional compensation being sought. This levy was in anticipation that
some additional compensation would be paid the joint venture in the near
future either because of a court order or because of a settlement being
reached among the parties. A settlement was reached by and between the
joint venturers in the Court of Claims lawsuit concerning this
additional compensation, whereby the
United States
paid $650,000 in additional compensation and the Court of Claims lawsuit
was dismissed on or about November 5, 1974. After issuance of a check
for $650,000 by the
United States
, a second levy was served on October 10, 1974, on Thomas F. Golden, in
Tulsa
,
Oklahoma
, an attorney for the aforesaid joint venture. This levy purported to
seize Foster Construction, C. A.'s share of the aforesaid additional
compensation due the joint venture, on the grounds that Foster
Construction, C. A. was the nominee of Grant Foster. After payment of
attorneys and a subcontractor, the joint venturer's share of this
additional compensation is approximately $127,432.56. Further, this levy
purported to seize said funds on the grounds that these funds were
encumbered by tax liens outstanding against Grant Foster, which tax
liens pertained to the years 1962, 1963 and 1964. The
United States
income tax liabilities asserted against Grant Foster for these years in
this levy were in the amount of $609,738.24, plus statutory additions,
for the year 1962; $96,781.24, plus statutory additions, for the year
1963; and $91,496.03, plus statutory additions, for the year 1964. In
addition, these income tax liabilities were assessed against the
taxpayer on January 25, 1971.
[Related
Corporation's Contest]
4. The Panamanian
corporation known as "Foster Construction (Panama) S. A." has
petitioned this Court to redocket the instant case on the grounds that
the aforesaid levy by the Internal Revenue Service on the funds due the
joint venture was a violation of the compromise agreement entered into
in the instant case by and between the United States of America and
Grant Foster on August 15, 1972, and approved by this Court on said
date. The United States of America contends that the aforementioned suit
settled the United States income tax liabilities it was asserting
against Grant Foster for the years 1949 to 1955, inclusive, and, in
addition, it settled the Government's claims that it was entitled to
satisfy the tax liens securing the tax liabilities for the years 1949 to
1955, inclusive, from the property of the Panamanian company known as
"Foster Construction (Panama) S. A." on the grounds that: Said
company was the alter ego of Grant Foster; said company was not in fact
a corporation, but rather a sole proprietorship owned and controlled by
Grant Foster; that the property held in the name of the said Panamanian
company had been fraudulently conveyed to it by Grant Foster; that the
said Panamanian company was indebted to Grant Foster in an amount in
excess of the amount due on the tax liabilities for the years 1949 to
1955, inclusive; and that Grant Foster owned, managed and controlled
said Panamanian company to such an extent that his creditors were
entitled to satisfy their claims against Grant Foster from the assets of
said company. The United States further contends that since Foster
Construction, C. A. is a party to the joint venture which is entitled to
the aforesaid additional compensation and since Foster Construction, C.
A. is a defunct Venezuelan corporation whose last and only stockholder
was Grant Foster, that Grant Foster is a person who is entitled to share
in the aforesaid additional compensation due the joint venture, and that
his share is therefore encumbered by the United States tax liens
outstanding against Grant Foster for the years 1962, 1963 and 1964. To
these contentions of the United States the Panamanian corporation known
as "Foster Construction (Panama) S. A." responds that the
Venezuelan corporation known as "Foster Construction, C. A."
was not a party to the aforesaid joint venture, but rather, that a Costa
Rican company known as "Foster Construction, S. A." was the
actual party to the aforesaid joint venture, and since this Costa Rican
corporation is a corporate predecessor to the Panamanian corporation
known as "Foster Construction (Panama), S. A.", aforesaid
compromise agreement entered into in this case on August 15, 1972,
precludes the United States Government from seizing the funds in
question. The Panamanian corporation admits that the name appearing on
the aforesaid United States Bureau of Public Roads contract reads
"Foster Construction, C. A." and Grant Foster testified that
no effort was made to change it as he didn't want to "rock the boat
as we might be disqualified".
[Parties
to Contract]
5. On June 18, 1956 and on
November 29, 1956, construction contracts identified respectively as
Contract No. CPR 11-5527 and Contract No. 11-5527 pertaining to a
portion of the Inter-American Highway in Costa Rica, known as Costa Rica
Project 75-56-6 were executed on behalf of the United States by the
Solicitor for the Commissioner of Public Roads, United States Department
of Commerce and a joint venture entitled "Foster Construction, C.
A. and Williams Brothers Company." These contracts called for the
construction of a portion of the
Inter-American Highway
in
Costa Rica
for the respective sums of $9,607,185.00 and $2,733,765.00 with said
work to be started by July 2, 1956 and December 15, 1956, respectively,
and to be completed by May 30, 1958. The bids submitted by the joint
venture in seeking these contracts were in the names of "Foster
Construction, C. A. and Williams Brothers Company." With the bids
for these contracts each joint venturer submitted a financial statement
and a statement of previous experience in the road construction
industry. A financial statement was submitted to the U. S. Bureau of
Public Roads in support of its bid for Contract CPR 11-4285 by the
company known as "Foster Construction, C. A.", dated November
19, 1956, and this financial statement listed total assets in the amount
of $5,604,472.24, all of which pertained to real property, construction
equipment, and bank accounts owned by the Venezuelan corporation known
as "Foster Construction, C. A." In fact, bank accounts listed
in this financial statement were located in
Venezuela
, and the real property listed was either in
Venezuela
, or was certain real property in
Miami
,
Florida
, known as "LeJeune Terminals". The accounts receivable listed
on this financial statement in the main pertained to moneys due on
contracts performed in
Venezuela
. With the bids for these contracts there was also submitted a statement
of previous experience in the construction business by the joint
venturer under the name "Foster Construction, C. A.", and this
statement of experience listed only experience gained by the Venezuelan
corporation know as "Foster Construction, C. A." in building
projects in Venezuela from 1946 to 1956. Finally, with this experience
statement there was also submitted statements by individual officers and
key employees of the Venezuelan corporation known as "Foster
Construction, C. A." which recounted their experience. In addition,
all correspondence relative to these contracts between the joint venture
and the United States Bureau of Public Roads was conducted under the
names of Williams Brothers Company and Foster Construction, C. A."
Further, the joint venture was sued by a subcontractor in the United
States District Court for the District of Nevada for additional
compensation regarding Contract CPR 11-5527, and the caption of this
lawsuit was "United States of America for the use and benefit of
Caribbean-Macomber-Brunzell, a Joint Venture, Plaintiff v. Foster
Construction, C. A. and Williams Brothers Company, a Joint Venture, also
known as Foster-Williams Brothers, a Joint Venture, and The Travelers
Indemnity Company, a Connecticut corporation, Defendants, and Glens
Falls Insurance Company, a corporation, Third Party Defendant",
Civil No. 1577. The joint venture in turn sued the United States
Government in the United States Court of Claims for additional
compensation on this contract, and this lawsuit was captioned "Foster
Construction C. A. & Williams Brothers Co., A Joint Venture,
Plaintiff v. The
United States
, Defendant," No. 417-66. Also submitted by the joint venture
to the Bureau of Public Roads with the bid for the contract was a copy
of the joint venture agreement executed by and between the joint
venturers, and this agreement listed the joint venturers as "Foster
Construction, C. A. and Williams Brothers Company."
6. The capital which was
contributed to the joint venture composed of "Williams Brothers
Company and Foster Construction, C. A." was contributed either by
the Williams Brothers Company or by the Venezuelan company known as
"Foster Construction, C. A." In fact, the Venezuelan
corporation known as "Foster Construction, C. A." had bank
accounts of the Venezuelan corporation known as "Foster
Construction, C. A." in either the New York branch or the Caracas
branch of the Bank of London & South America, Ltd. No separate or
individual bank account was maintained with the Bank of London &
South America, Ltd. in 1956 or 1957 in the name of "Foster
Construction, S. A.", which was the Costa Rican company.
7. The equipment
contributed to the joint venture was either the equipment of Williams
Brothers Company or the equipment of the Venezuelan corporation known as
"Foster Construction, C. A."
[Related
Company's Existence]
8. It appears that a Costa
Rican corporation known as "Foster Construction, S. A." was
the subject of articles of incorporation in
San Jose
,
Costa Rica
, on or about November 17, 1955. However, the books of original entry of
this company contained no entries until December 31, 1962, and there is
no record of it owning any assets or having any business activity prior
to December 31, 1962. The stock of this Costa Rican corporation was
purportedly issued on April 2, 1955, under the signature of E. F.
Sullivan as president of the said company. However, Eugene Sullivan, who
was formerly employed by Foster Construction, C. A., the Venezuelan
corporation, has admitted that he signed said stock certificates as an
accommodation to Grant Foster, but he has denied that he ever was an
officer of this Costa Rican corporation or was ever employed by the said
Costa Rican corporation, and he further alleges that he had left the
employment of Foster Construction, C. A., a Venezuelan corporation, at
the time that he affixed his signature to the stock certificates. Thus,
it appears there was no validly issued stock of this Costa Rican
corporation even oustanding in 1956 at the time the construction
contract involved herein was executed.
9. It is contended by
Foster Construction (
Panama
) S. A. that a Venezuelan corporation could not enter into the
construction contract in question but that only a Costa Rican
corporation could do so. Williams Brothers Company, however, is not a
Costa Rican corporation but is a
United States
corporation. The Bureau of Public Roads has taken the position that it
did not limit this contract to merely Costa Rican corporations and
United States
corporations. Mariano Anderson, a Costa Rican attorney who represented
the joint venture and various interests of Grant Foster in Costa Rica,
rendered an opinion which stated that a foreign corporation could do
business in Costa Rica if it had an agent with a general power of
attorney registered in Costa Rica with an office in Costa Rica and
agreed to submit itself to service of process and suit in Costa Rica.
10. The
United States
Bureau of Public Roads has also taken the position that the contract and
the papers relative to said contract are clear and unambiguous in
setting forth that Foster Construction, C. A. is a party to the contract
in question. This Court agrees with that conclusion and further finds
that Foster Construction, C. A., a Venezuelan corporation, is the party
to the contract in question.
11. It appears that the
Venezuelan corporation known as "Foster Construction, C. A."
ceased operations and doing business sometime in 1961, and that at the
time it ceased its operations Grant Foster was its sole stockholder.
12. Any of the following
stated conclusions of law which are actually findings of fact or are
mixed findings of fact and conclusions of law are incorporated herein as
though specifically set forth in this finding of fact.
Conclusions
of Law
1. This Court has
jurisdiction to reopen this equity proceeding and to resolve this issue
in dispute.
2. The contract in question
is unambiguous and complete, and it is clear from the contract itself
and from the papers executed in support of the contract that Foster
Construction, C. A. is one of the joint venturers which is a party of
this contract, and the Parol Evidence Rule prevents testimony from being
offered to change the names of one of the parties to this contract from
Foster Construction, C. A. to Foster Construction, S. A.
3. The joint venturer known
as "Foster Construction, C. A." is a Venezuelan corporation
which ceased doing business in approximately 1961 with the result that
all assets or property owned by it at that time passed by operation of
law to the ownership to its sole stockholder who, at the time of the
termination of the company, was Grant Foster. One of the assets owned by
the Venezuelan corporation known as "Foster Construction, C.
A." at the time that it ceased doing business was its right to
receive additional compensation on the contract in question as one of
the joint venturers who was a party to said construction contract; and
this right to receive additional compensation passed to the ownership of
Grant Foster upon the dissolution of said Venezuelan corporation.
[Right
to Compensation]
4. Accordingly, Grant
Foster has a right to receive that portion of the additional
compensation being paid by the United States Government on the
construction contract in question which otherwise would have gone to
Foster Construction, C. A. if said corporation had not ceased doing
business.
5. There exist valid
federal tax liens which encumber all property and rights to property
owned by Grant Foster as security for payment of the outstanding tax
liabilities due from Grant Foster to the United States Government for
the years 1962, 1963 and 1964; and these tax liens encumber Grant
Foster's right to share in the said additional compensation paid on said
construction contract. Accordingly, it is concluded that the United
States Government is entitled to partially satisfy the aforementioned
outstanding tax liens by seizing and covering into the United States
Treasury that portion of the additional compensation which would
otherwise have gone to the Venezuelan corporation known as "Foster
Construction, C. A."; and it is further concluded that the
Panamanian corporation known as "Foster Construction (Panama) S.
A." is not entitled to share in these proceeds and that its motion
and petition in this matter should be denied and dismissed.
6.
Any of the foregoing Findings of Fact which are actually conclusions of
law or are mixed questions of law and facts are incorporated in this
Conclusion of Law as though specifically set forth.
