Debts Owed to the Taxpayer page3

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Roscoe L. Greenup, Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. Mont., Great Falls Div., Civil No. 2518, 239 FSupp 330, 3/18/65

[1954 Code Sec. 6323]

Lien for taxes: Validity against mortgagees: Unjust enrichment.--Where the taxpayer had been the vendee under a contract for deed for sale of real estate and had defaulted, the Government could not foreclose a tax lien, which had been filed against the taxpayer before the default, but it could stand in the shoes of the taxpayer-vendee and sue the vendors for any unjust enrichment they might have received as a result of the default.

Rae V. Kalbfleisch, Shelby , Mont. , for plaintiff. Moody Brickett, United States Attorney, Butte , Mont. , for defendant.

Memorandum Opinion

HAMESON, District Judge:

Plaintiff seeks a decree declaring a federal tax lien claimed by the defendant ineffective with respect to property described in plaintiff's complaint and an order directing release of the lien. Jurisdiction is conferred by 28 U. S. C. A. §2410. Plaintiff has moved for summary judgment. Briefs have been filed by the respective parties, and counsel have stipulated for waiver of hearing and submission of the motion on briefs.

Plaintiff, who now holds a second mortgage on the property in question, conveyed the property by warranty deed to the present record owner, LaMont Bair. Bair has demanded that plaintiff remove the cloud on the title created by the federal tax lien. The facts are undisputed.

On August 6, 1959, Stanley L. Watkins and Raymond L. Flynn were the owners of the property and entered into a contract for deed for sale of the property to William A. Stockwell and Bea Stockwell, who made a down payment of $1500. Stockwells failed to pay the installment due January 8, 1960, and default was declared at some later date.

[Tax Lien Filed]

On March 16, 1960, the defendant filed a lien for unpaid withholding employment taxes owed by Stockwells. As of October 12, 1964, there was a balance of $546.52 due on this tax lien.

On June 24, 1960, Watkins and Flynn conveyed the property by warranty deed to the plaintiff, Roscoe L. Greenup, and on June 27, 1960, Stockwells gave a quit claim deed to Watkins and Flynn. These two deeds were recorded simultaneously on July 1, 1960.

On June 17, 1964, plaintiff conveyed the property by warranty deed to LaMont Bair.

A second tax lien was filed by defendant on May 4, 1961, but defendant concedes that since it was filed subsequent to the conveyance by the taxpayers (Stockwells) to Watkins and Flynn, it would not constitute a valid lien against the property.

Relevant provisions of the Internal Revenue Code (26 U. S. C. A.) provide in pertinent part:

"§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 lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

"§6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

(a) Invalidity of lien without notice,--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--* * *"

[Property Rights]

The question as to what extent a texpayer has "property" or "rights to property" is determined by state law, which "controls in determining the nature of the legal interest which the taxpayer had in the property." Federal law determines "the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.'" Aquilino v. United States, 1960, [60-2 USTC ¶9538] 363 U. S. 509, 514, 80 S. Ct. 1277, 4 L. Ed. 2d 1365.

The purpose of §6323, supra, was stated in Marteney v. United States, 10 Cir. 1957, [57-1 USTC ¶9670] 245 F. 2d 135, 138, as follows:

"The meaning of this section is that after notice has been given as permitted by state statute, the lien is enforceable against any mortgagee, pledgee, purchaser, or judgment creditor who acquires an interest thereafter. United States v. Security Trust & Sav. Bank, supra; United States v. Phillips, 5 Cir., [52-2 USTC ¶9421] 198 F. 2d 634. 'Congress enacted §3672 to meet the harsh condition created by the holding in United States v. Snyder, 149 U. S. 210, 13 S. Ct. 846, 37 L. Ed. 705, when federal liens were few, that a secret federal tax lien was good against a purchaser for value without notice.' United States v. Gilbert Associates, Inc., supra [[53-1 USTC ¶9291] 345 U. S. 361, 73 S. Ct. 703]."

What was the nature of the property interest of the vendees (Stockwells) on the date the federal tax lien attached? The Montana Supreme Court has held in numerous cases that the vendee under a contract for deed is the equitable and beneficial owner, leaving only the naked title in the vendor "as security for the unpaid purchase price." The rule was explained in Kern et al v. Robertson, 1932, 92 Mont. 283, 12 P. 2d 565, 567, as follows:

"Applying one of its fruitful principles, that what ought to be done is regarded as done, equity says that from the contract, even while yet executory, the vendee acquires a 'real' right, a right of property in the land, which though lacking legal title, and therefore equitable only, is none the less the real, beneficial ownership, subject, however, to a lien of the vendor as security for the purchase price as long as that remains unpaid. * * *"

See also State v. Kistner, 1957, 132 Mont. 437, 318 P. 2d 223, and cases there cited. In that case the Montana court called attention to the fact that, "The same rule prevails in California ," citing California cases, including In Re Reid's Estate, 1938, 79 P. 2d 451.

[Contract for Deed]

The contract for deed in this case provides in part:

"In the event of default in any of the terms and conditions of this agreement, by the Buyers, the Vendors may, at their option, and without the need of giving any notice whatsoever to the Buyers, take over and immediately go into the possession of said premises. All sums paid by the Buyers to the Vendors and all improvements, additions and fixtures placed upon the premises by the Buyers shall immediately thereupon become the property of the Vendors, and the Buyers shall have no right to remove the same from the premises. In the event of default, the Buyers do agree to quietly and peaceably yield possession to the Vendors, and save the Vendors harmless from any and all expense by reason of the failure of the Buyers to so yield possession." Section 17-102, R. C. M. 1947, provides:

"17-102. (8685) Relief in case of forfeiture. Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, wilful, or fraudulent breach of duty."

This section has been construed by the Montana Supreme Court in a number of cases, including Herman v. Herman, 1949 123 Mont. 39, 44, 207 P. 2d 1155, to mean that "a party is relieved of a forfeiture if he presents facts appealing to the conscience of a court of equity (citing cases)." In the more recent case of Kovacich v. Metals Bank & Trust Co., 1961, 139 Mont. 449, 451, 365 P. 2d 639, the court said that, "It has been repeatedly held by this court that to come with the provisions of section 17-102, supra, a party must set forth facts of a forfeiture which will appeal to the conscience of a court of equity."

Both parties rely upon Bensinger v. Davidson, S. D. Cal. 1956, [57-1 USTC ¶9263] 147 F. Supp. 240, where the facts in many respects are similar to the instant case. In that case the court considered California statutes (including §3275, Cal. Civil Code, from which section 17-102, supra, was taken) and California cases following the same rules as those in Montana with respect to the nature of a vendee's interest in property and the relief afforded in case of a forfeiture.

In Bensinger v. Davidson the plaintiff had entered into a conditional sales agreement for the sale of certain real property to Mr. and Mrs. John A. Purcell, who made a down payment of $10,000 on the purchase price of $69,500, the balance to be paid at the rate of $1200 a month. Purcells made six monthly payments totalling $7200 for a total sum of $17,200. After default the Purcells surrendered the property to Bensinger, released Bensinger for a consideration of $1500 and gave Bensinger a quit claim deed. The government tax lien, filed prior to the contract for deed, amounted to $9,846.36 plus penalty and interest.

With respect to the "property right" of the vendees, the court held that after default and surrender of possession, the vendees (Purcells) had a "potential cause of action against the vendor (Bensinger) for unjust enrichment." The court recognized that as between the vendor and vendees the interest of the vendees was properly eliminated by agreement and quit claim deed, but held that the vendor could not in such manner cut off or eliminate the government lien, and that the "government lien attached to Purcells' cause of action for unjust enrichment." Accordingly, the court deducted from the $17,200 paid by the Purcells a fair rental value and other items totalling $15,561.00, concluding that upon default the Purcells had a cause of action for unjust enrichment against Bensinger in the amount of $1639. Bensinger had resold the property, and the sum of $1639 had been placed in escrow. While the tax lien was held good to the extent of that amount, it was not recognized as prior to the vendor's right or lien except with respect to the cause of action for unjust enrichment.

[Unjust Enrichment]

In Bensinger v. Davidson, the court said in part: "The burden of proof is on the vendee, or here, the government standing in the vendee's shoes, to prove the amount by which the vendor has been unjustly enriched over and above the amounts she could properly retain (citing cases)." The court pointed out, however, that the facts were there stipulated and no question of burden of proof arose.

In the instant case, as in Bensinger v. Davidson, the lien of the vendors as security for the unpaid purchase price was prior to the government lien and would have been so recognized in any action to recover possession and enforce the lien in which the government was a party. The priority of the government lien in Bensinger v. Davidson was recognized to the extent of the vendees' cause of action against the vendor for unjust enrichment. In the instant case there is no proof of any unjust enrichment. In fact, the brief of the defendant expressly states that defendant agrees with plaintiff that the equitable question of unjust enrichment is not at issue. In the absence of a showing of any unjust enrichment, there is no property or right to property to which the lien is now attached.

In view of the fact that the vendees surrendered possession to the vendors and gave a quit claim deed for a nominal consideration, the government should still have a right to allege and prove any unjust enrichment, and for this purpose the vendors and vendees would be proper parties to this action. Since this is a motion for summary judgment, I have concluded accordingly that the defendant should be given an opportunity to allege and prove the amount of any unjust enrichment, if such showing can be made. If not, the motion for summary judgment will be granted.

[Order]

IT IS ACCORDINGLY ORDERED that the defendant be granted 10 days within which to advise the court and counsel for plaintiff whether it will attempt to prove that the vendees (Stockwells) had an action for unjust enrichment, to which the tax lien may attach. If not, counsel for plaintiff will prepare, serve and lodge form of judgment pursuant to Rule 11(b) of the Local Rules of Court.

 

 

 

Virginia S. Bensinger, Plaintiff v. John R. Davidson and United States of America , Defendants

U. S. District Court, So. Dist. Calif., Central Div., No. 17179-C, 147 FSupp 240, 12/18/56

[1939 Code Sec. 3670--same as 1954 Code Sec. 6321]

Tax lien: Property held by conditional sales vendee-taxpayer: Action for unjust enrichment.--In an action to quiet title, an owner of certain real estate sought to remove a lien which had attached to the same as the result of its being after-acquired property of the conditional sales vendee-taxpayer who had purchased it under a conditional sales contract wherein the owner reserved the legal title as security. The vendee-taxpayer later defaulted and possession was given back to the owner. The Court noted that under state law, the vendee-taxpayer had a cause of action for unjust enrichment against the owner for money retained by him over and above the amount of damages he suffered as a result of the default. This potential cause of action constituted property upon which the government's lien could attach. The fact that the vendee-taxpayer had quitclaimed the property back to the owner for a consideration would not affect the government's lien. The Court allowed the government to recover the money received by the owner from the vendee-taxpayer under the contract, over and above that required to place the owner in status quo.

Robert N. Richland, Martin Perlberger, 360 North Bedford Drive , Beverly Hills , Calif. , for plaintiff. Laughlin E. Waters, United States Attorney, Edward R. McHale, Chief, Tax Division, Robert A. Wyshak, Andrew J. Weisz, Assistant United States Attorneys, 600 Federal Building, Los Angeles 12, Calif., for defendants, United States of America.

CARTER, District Judge:

This case raises two principal questions, (1) what property rights are affected by a government tax lien, and (2) what is the nature and extent of the right of a vendee, under a conditional sales contract covering real property, to recover for unjust enrichment.

The action, commenced in the state court, was denominated an action for "declaratory relief." It was removed by the government to this court on the ground that it was in substance an action to quiet title against a lien claimed by the United States, on real property, 28 U. S. C. A. §2410, and that jurisdiction existed by virtue of the government's removal, 28 U. S. C. A. §1444, Wells v. Long [9 Cir. 1947] 162 Fed. (2d) 842.

Bensinger, the owner and vendor of real property, seeks to quiet title to the property against a claim of lien for delinquent federal income taxes owed by a conditional vendee. Obviously the lien could have no effect on the owner's title had the conditional sales contract never existed. The existence and history of the conditional sales contract create our problems.

On April 25, 1952, Bensinger, owner of a house and lot in Bel Air, California , entered into a conditional sales agreement with Mr. and Mrs. John A. Purcell, whereby the Purcells agreed to purchase the property for $69,500.00 with legal title reserved to the vendor by the contract until the purchase price was paid. Purcells made a down payment of $10,000 and were to pay the balance at the rate of $1200 a month. The Purcells were in possession of the property from May 1, 1952 until January 29, 1953, and made six monthly payments totaling $7200. The Purcells thus made total payments of $17,200. On January 29, 1953, after default, the Purcells surrendered possession of the property to Bensinger, and on January 31, 1953, entered into an agreement with her acknowledging default and releasing her from any and all obligations, for a consideration in the sum of $1500 paid to Purcells. At the same time the Purcells delivered a quitclaim deed to the property to Bensinger.

Prior to any of this, and on September 7, 1951, a notice of tax lien in the sum of $9,846.36 plus accruing penalties and interest due the United States of America from John A. Purcell for income taxes, had been filed in the office of the County Recorder, Los Angeles County. The lien had arisen when the assessment list was received by the Collector of Internal Revenue on June 18, 1951, showing an assessment of $14,835.36. Credits reduced that amount to the sum shown above.

Purcells had recorded the conditional sales contract and the assertion by the government of the lien led to this action.

On March 24, 1953, Bensinger entered into an agreement to sell the property to one Fox, and an escrow was opened. In order to secure the release of the government lien (as well as other liens not here involved) and complete the sale, Bensinger entered into a written agreement with the United States by which the lien was released from the real property, and by agreement transferred to the sum of $12,000 on deposit in the escrow without prejudice to the rights of the parties as thereafter determined.

I. Purcells had a property right to which the Government lien attached

The assessment of the unpaid taxes against John A. Purcell resulted in "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Internal Revenue Code of 1939, Sec. 3670 (26 U. S. C. A., 1939 ed., Sec. 3670). ". . . The lien shall arise at the time the assessment list was received by the collector . . ." Internal Revenue Code of 1939, Sec. 3671 (26 U. S. C. A., 1939 ed., Sec. 3671). This occurred on June 18, 1951. On filing of the notice of tax lien with the County Recorder on September 7, 1951, the world had notice thereof, Sec. 3672, Internal Revenue Code of 1939 (26 U. S. C. A., 1939 ed., Sec. 3672), Investment & Securities Co. v. United States [9 Cir. 1944] 140 Fed. (2d) 894 [44-1 USTC ¶9210].

Such a lien attaches to after-acquired property, Salsbury Motors Inc. v. United States [9 Cir. 1954] 210 Fed. (2d) 171 [54-1 USTC ¶9217], cert. den. 347 U. S. 953; Glass City Bank v. United States [1945] 326 U. S. 265 [45-2 USTC ¶9449]; Citizens Trust & Savings Bank v. United States [9 Cir. 1943] 135 Fed. (2d) 527 [43-1 USTC ¶9426].

The right of the United States to collect taxes is not subject to state law, Metropolitan Life Insurance Co. v. United States [6 Cir. 1939] 107 Fed. (2d) 311, 313 [39-2 USTC ¶9771], cert. den. 310 U. S. 630, but state law may control on what it considers or creates as property, Metropolitan Life Insurance Co. v. United States, supra; See, E. & J. Gallo Winery v. C. I. R. [9 Cir. 1955] 227 Fed. (2d) 699, 705 [56-1 USTC ¶9101].

We have no doubt that a conditional sales contract involving real estate is property under California law. It is a well known animal in the legal menagerie of the state. Sec. 3306, California Civil Code, sets forth the measure of damages for a breach of an agreement to convey real property, and Sec. 3307, Civil Code, the measure of damages for breach of an agreement to purchase real property. Sec. 655, Civil Code, provides "In what property may exist. There may be ownership . . . of all obligations . . .." When the Purcells on April 25, 1952, entered into the conditional sales agreement or more aptly, an agreement for the sale and purchase of real estate, they had a property right, certainly, in the contract, and we think an equitable interest in the land. ¹

When Purcells, after paying $17,200, defaulted and later surrendered possession on January 29, 1953, they had a potential cause of action for unjust enrichment against Bensinger, Freedman v. The Rector [1951] 37 Cal. (2d) 16, Barkis v. Scott [1949] 34 Cal. (2d) 1, 31 A. L. R. (2d) 1. Whether they could or not recover depended on the factors we hereafter discuss.

The lien of the government for unpaid taxes does not limit itself to tangible property. It is a broad and comprehensive lien, attaching to all of the taxpayer's property except that which may be specifically exempted, Citizens State Bank v. Vidal [10 Cir. 1940] 114 Fed. (2d) 380, 382 [40-2 USTC ¶9603]. In the last cited case it attached to a claim for work, labor and materials, and defeated a subsequent assignment of the claim to the appellant bank. In Glass City Bank v. United States [1945] 326 U. S. 265 [45-2 USTC ¶9449], the lien attached to money due the taxpayer for fees as a state receiver and defeated a subsequent attachment--execution from the state court. In Investment & Securities Co. v. United States [9 Cir. 1944] 140 Fed. (2d) 894 [44-1 USTC ¶9210], the lien attached to a claim for recovery of moneys paid on corporate assessments and defeated a subsequent assignment thereof.

A chose in action ² is property under California law, Civil Code, Sec. 14(3). Causes of action for tort have been held to be property, Carver v. Ferguson [1953] 115 A. C. A. 641, 254 P. 2d 44, Finley v. Winkler [1950] 99 Cal. App. 2d Supp. 887. A fortiori, a cause of action for unjust enrichment is property.

This cause of action grew out of Purcells' rights created by the conditional sales contract. As we demonstrate later, it is the practice in California to use the quiet title action as one method to cut off any rights of the conditional vendee and in such an action, plaintiff's relief may be denied unless he does equity to the conditional vendee, i.e. unless he refunds to the conditional vendee, the amount by which the plaintiff vendor has been unjustly enriched.

As between herself and the Purcells, Bensinger could have eliminated the Purcell interest by agreement or quitclaim deed. This she attempted to do. She could not in such manner cut off or eliminate the government's lien, Metropolitan Insurance Co. v. United States, 107 Fed. (2d) at 313.

We conclude that the government lien attached to Purcells' cause of action for unjust enrichment. See, 41 Cal. L. Rev. [1953] 241, 245, "Federal Tax Liens."

II. The extent of the Government's lien

The problems created by the situation of a defaulting vendee's attempt to avoid a forfeiture of monies paid, or the vendee's claim that the vendor is being unjustly enriched, have been considered by California cases. ³

The problems arise in various situations: For example, (1) the vendor's suit to quiet title, Nelson v. Dangerfield [1954] 125 C. A. 2d 146, Petersen v. Ridenour [1955] 135 C. A. 2d 720, where the court will refuse relief unless the vendor refunds the excess of the part payment over the damage caused by vendee's breach, Barkis v. Scott [1949] 34 Cal. 2d 116, 120-121;

(2) Actions by the vendor for damages for breach of contract by vendee, Royer v. Carter [1951] 37 Cal. 2d 544; Fellner v. Steinbaum [1955] 132 C. A. 2d 509;

(3) Action by the vendee to rescind the contract and for recovery of money paid to the vendor, Bird v. Kenworthy, [1954] 43 Cal. 2d 656; Furst v. Scharer [1953] 119 C. A. 2d 605;

(4) Actions for declaratory relief, Major-Blakeney Corp v. Jenkins [1953] 121 C. A. 2d 325;

(5) Actions by the vendor to recover the down payment, Norris v. San Mateo County Title Co. [1951] 37 Cal. 2d 269;

(6) Actions by the vendee to recover amounts paid under the theory of unjust enrichment, Baffa v. Johnson [1950] 35 Cal. 2d 36; Freedman v. The Rector [1951] 37 Cal. 2d 16.

Equitable principles are involved in the quiet title actions. It has long been the law that "in the absence of a showing that the vendor would realize more than the benefit of his bargain, that he might quiet title to the property without refunding any part of the price paid," Barkis v. Scott, 34 Cal. 2d 116, at 120-121, and cases cited therein; and conversely if "the vendor has received more than the benefit of his bargain, the court is precluded by section 3369 from quieting the vendor's title unless he refunds the excess, [Barkis v. Scott, 34 Cal. 2d 116, 121, (208 P. 2d 367), and cases cited]", Baffa v. Johnson [1950] 35 Cal. 2d 36, 39.

The actions by the vendee to rescind or for recovery after an alleged recission also involve equitable principles. Here equity demands that the vendor be restored to substantially the same position he would have been in, had the contract never been made, Bowman v. Victor [1948] 83 C. A. 2d 693, 699.

In Freedman v. The Rector [1951] 37 Cal. 2d 16, in a suit by the vendee to recover monies paid, the trial court had found that plaintiff's breach was willful, and therefore under Sec. 3275, Cal. Civil Code, vendee would be denied relief, but the court said on page 20, "We have concluded, however, that the damage provisions of the Civil Code, together with the policy of the law against penalties and forfeitures provide an alternative basis for relief independent of section 3275." In that case the vendor had received $2000. There was a $900 brokerage fee. The defendant-vendor contended there were also other expenses incurred that reduced the amount of the down payment. The case was reversed with instructions for a new trial on the issue as to what part of the down payment "accrued to the net benefit of defendant." p. 23. [Italics supplied] This was an attempt to do equity between the parties.

In only one situation is there a Code section on damages expressly applicable, viz, the action by vendor for breach of contract against the vendee. Here Sec. 3307 Cal. Civil Code states the measure of recovery.

Royer v. Carter [1951] 37 Cal. 2d 544, was an action by the vendor for breach of contract. Definitely Sec. 3307 of the Civil Code was called into play. The appellate court reversed, holding that the damages were computed as of the wrong date and should be computed as of the date of the breach of the agreement to purchase the property. The case was remanded with the direction to try the issue of damages and the court stated if the vendor "is given the equivalent of the proceeds of the sale under section 3307, she is not also entitled to expenses she would have incurred in any event."

But the court went further and stated "In many cases, however, the vendee's breach may make it necessary for the vendor to incur additional expenses to realize the benefit of his bargain. . . . (I)njustice could result if the vendor were not allowed to recover damages for additional expenses caused him by the vendee's breach . . . When such additional expenses are the natural consequences of the breach, they may be recovered in addition to those provided for in section 3307." p. 550. Again this was an attempt to do equity, notwithstanding the express provisions of Sec. 3307, Civil Code.

We think the California cases rest on the principle of "unjust enrichment" and the policy of the law against forfeitures. This language runs through the California cases. ⁴ We therefore approach the problem on equitable principles. Has Bensinger been unjustly enriched, and if so, by how much?

In the case at bar, Bensinger received a down payment of $10,000 and additional periodic payments of $7,200, a total of $17,200. By stipulation, various amounts expended by Bensinger, listed (a) to (i) in the pretrial stipulation, have been agreed upon. In addition the parties have stipulated that the fair rental value of the property for the occupancy by the Purcells was the sum of $750 per month for eight and one-half months, a total of $6,375; and that the value of the property as of the date of the breach on December 15, 1952 was $69,500; and that this was the same price at which Bensinger originally sold the property by the conditional sales contract of April 25, 1952 and the same price at which she subsequently resold the property. How much then has Bensinger been unjustly enriched by the $17,200 received? What amounts may she properly offset against this gross figure? On what remaining amount of money does the government's lien exist?

The burden of proof is on the vendee, or here, the government standing in the vendee's shoes, to prove the amount by which the vendor has been unjustly enriched over and above the amounts she could properly retain, Furst v. Scherer, supra, p. 612; Baffa v. Johnson, supra, p. 39; Major-Blakeney Corp. v. Jenkins, supra, p. 332-333; Petterson v. Ridenour, supra, p. 726. In the case at bar the facts are stipulated and no question of burden of proof arises.

A. Fair Rental Value of the period of occupancy of the property by Purcells.

In substance we are to undo what the parties have done and to do equity between them. Certainly the Purcells should be charged with the value of the use and occupancy of the property during the eight and one-half months they were in possession. In Bird v. Kenworthy, supra, the appellate court affirmed, where the "trial court found that the reasonable rental value of the property while in possession of Bird was in excess of the amount he paid under the contract," p. 659, and denied recovery to Bird, the conditional vendee. The sum of $6,375 is therefore a proper item to be retained by Bensinger.

B. Taxes, Maintenance and Trust Deed payments.

If we say that Bensinger is entitled to the fair rental value of the property, then since ordinarily an owner renting property pays the taxes, maintenance and trust deed payments, these would not be additional items that we could properly consider. In fact the plaintiff in her closing brief states, that "of all of the items listed in the stipulation of facts . . . entered into between the parties hereto only items E (taxes), F (maintenance) and G (trust deed items) would have been incurred by Bensinger had she never entered into the sales contract with Mr. and Mrs. Purcell." We may therefore not properly consider these three items if plaintiff vendor is allowed the rental value of the property.

There is a loose end however, in that the stipulation reads in (F) "To payments made to professional gardener for maintenance and restoration (undertaken by purchasers) $279.50."

The parties, at the request of the court, have broken down the item of $279.50 so that the facts now show that Bensinger made payments of $25.00 for eight and one-half months for the maintenance of the property by a gardener, totaling $212.50; and at the termination of the occupancy by the Purcells paid the gardener $67.00 to restore the premises in the condition in which they would have been had they been rented by Bensinger, reasonable wear and tear excepted. Thus, although Bensinger would have made the payments totaling $212.50 had the property been rented, the item of $67.00 is a proper matter for her to retain in connection with the claim of unjust enrichment.

C. Attorneys' fees

The parties have stipulated to two items of attorneys' fees paid by Bensinger:--$1300 in connection with the conditional sales agreement and escrow, and $2500 concerning the default and the obtaining of a release and quitclaim deed. To each of these the government objects that the plaintiff vendor may not take them into account, and cites the rule that "Generally, fees paid to attorneys are not recoverable from the opposing party either as costs, damages or otherwise in the absence of express statutory or contractural authority," Viner v. Untrecht [1945] 26 Cal. 2d 261, 272. But here, in determining the problem of unjust enrichment, we are ascertaining what expenses the vendor was out of pocket by reason of the conditional sales contract. We think clearly the two items of attorneys' fees, totaling $3,800 represent an amount Bensinger is entitled to retain.

D. Broker's Commission

It is stipulated that a broker's commission was paid by Bensinger in the sum of $3,475. The government concedes this item. It is a proper one for retention by Bensinger. Freedman v. The Rector, supra, p. 23.

E. Title Guarantee Costs and Escrow charges.

The parties have stipulated to the sum of $344.00 paid by Bensinger for title costs and escrow fees. This likewise is a proper item for retention by Bensinger.

F. Expenses in moving from the premises in May of 1952, after the execution of the Conditional Sales Contract.

Since we allow Bensinger to retain the fair rental value of the Purcells' occupancy, then since Bensinger would have moved out either under the conditional sales contract or under a rental agreement, we think the stipulated item for moving, in the sum of $420.16 is not a proper item for retention.

G. Consideration paid to the Purcells for the Release and Quitclaim Deed.

The parties have stipulated that $1,500 was paid to the Purcells for the release and quitclaim deed. This was a proper item of expense to be taken into account and the government so concedes.

We conclude that from the gross figure of $17,200 received by Bensinger, the plaintiff vendor, in any action by the Purcells for unjust enrichment, she could have retained the following sums:

(a) Attorneys' fee on conditional

sales contract ...........................         $ 1,300.00

(b) Broker's commission ..................           3,475.00

(c) Escrow, Title Guarantee ..............             344.00

(f) Paid gardener for restoration ........              67.00

(h) Attorneys' fees re default, etc. .....           2,500.00

(i) Consideration paid Purcells ..........           1,500.00

Stipulated Fair rental value .............           6,375.00

Total ....................................         $15,561.00

Thus Purcells' cause of action for unjust enrichment would have amounted to $1,639.00.

But the government's tax lien existed only against John A. Purcell.

Sec. 164 Cal. Civil Code refers to "real or personal property or any interest therein," and states that when "any such property is acquired by a husband and wife by an instrument in which they are described as husband and wife, unless a different intention is expressed in the instrument, the presumption is that such property is the community property of said husband and wife." This language was the result of the amendment of 1935, Stats. 1935, c. 707, p. 1912.

The agreement for purchase and sale described the Purcells as "husband and wife." No intention contrary to the presumption above, appears. We think the interest of the Purcells in the agreement was an interest in real property and the presumption applies. ⁵ The stipulated facts do not overcome the presumption.

The cause of action for unjust enrichment grows out of the contract for purchase and sale of the real estate. We think it is so tied in with the community interest in the contract, that the cause of action is also community property.

In California, with certain exceptions, not applicable here, the community property is liable for the debts and obligations of the husband, Stratton v. Superior Court [1948] 87 C. A. 2d 809, 811; Farmers Exch. Nat. Bank v. Drew [1920] 48 C. A. 442, 447; See: Grolemund v. Cafferata [1941] 17 Cal. 2d 679, cert. den. 314 U. S. 612.

The lien of the government therefore is good against the sum of $1,639.00 of the money in escrow.

¹ See: S. R. A. Inc. v. Minnesota [1946] 327 U. S. 558, at 565:

". . . This Court has been of the opinion that contracts for the sale of land transfer to the purchaser the equity in the land. We think this contract did so. That equity is realty. It was owned by the vendee. The United States retains only a legal title as security. In substance it is in the position of a mortgagee . . ."

² See: Filipowicz v. Rothensies [D. C. Pa. 1940] 31 Fed. Supp. 716 [40-1 USTC ¶9250] 721.

³ Throughout the cases, there runs discussion of certain of the following sections; §3275 Cal. Civil Code, (Relief in case of forfeiture, "except in a case of a grossly negligent, willful or fraudulent breach of duty"); Sec. 3294 Cal. Civil Code, (Exemplary damages; when allowable); Sections 1670-71 Cal. Civil Code (liquidated damages); Sec. 3307 Cal. Civil Code, (damages for breach of an agreement to purchase real property); and Sec. 3369 Cal. Civil Code, reading, "Neither specific nor preventive relief can be granted to enforce a penalty or forfeiture in any case . . ."

⁴ The government quotes from Perkins v. Spencer [Utah, 1952] 243 Pac. 2d 446-451, the following: "When the contract provision is unenforceable, the only way the rights of the parties can be adjusted is on the basis of damages ordinarily recoverable for such breach of contract"; and argues that the California courts in the cases heretofore cited have repeatedly used the term "damages", and as we understand the argument, that the court must look to what the damages would have been had the vendor sued the vendee for breach of contract to purchase; and since in the case at bar the property was resold within a few months after the default and breach, for the same price as originally sold, there was no basis for damages under Sec. 3307 Cal. Civil Code and hence Bensinger's claims to the retention of the moneys paid cannot be sustained. We do not understand the California cases to so hold.

⁵ But see Peiser v. Bradbury [1903] 138 Cal. 570, where under an earlier wording of Sec. 164 Civil Code, an interest under a contract to puchase real estate was held not to be property within the section.

 

 

 

Ellen Beeghly and Kindig & Beebe, Plaintiffs v. Glen H. Wilson, also known as Glenwood H. Wilson; Washington National Insurance Company; United States of America, Defendants

U. S. District Court, No. Dist. Iowa , West. Div., Civ. No. 942, 152 FSupp 726, 7/5/57

[1954 Code Secs. 6321-6323--similar to 1939 Code Secs. 3670-3672]

Lien for taxes: Enforcement against renewal commissions to which delinquent taxpayer later became entitled: Judgment creditors' rights.--A lien for unpaid income taxes, which became effective on the assessment date, attached to commissions on renewal premiums to which the delinquent taxpayer later became entitled. Creditors who recovered judgments before the assessment date, but whose garnishments were served against the insurance company, and whose proceedings auxiliary to execution were begun, after notices of the tax liens had been filed, were not entitled to priority under applicable Iowa laws. They had acquired no lien prior to the filing of notice of the tax liens. And in order for a judgment creditor to be entitled to priority under 1954 Code Sec. 6323, he must be a judgment lien creditor. The insurance company could not deduct expenses incurred in connection with the garnishment proceedings, since the tax liens attached before any garnishment was effected and before any right of set-off accrued. The company was ordered to pay the Government accumulated commissions and to pay over to it quarterly the commissions which become owing during the quarter.

George Davis, Whicher & Davis, Sioux City , Iowa , for the plaintiffs. Yelderman, Martin & Smith, Austin , Tex. , for defendant Glen H. Wilson. John J. Vizintos, Shull, Marshall, Mayne, Marks & Vizintos, Sioux City, Iowa, for defendant Washington National Insurance Company. F. E. Van Alstine, United States District Attorney, Philip C. Lovrien, Assistant United States District Attorney, Sioux City, Iowa, for defendant United States.

Opinion

GRAVEN, District Judge:

In this case the plaintiffs are holders of judgments against the defendant Glen H. Wilson. That defendant was a general agent of the defendant Washington National Insurance Company. Under his general agent's contract he was entitled to commissioners on renewal premiums paid on the policies written by him. That contract is dated November 1st, 1949. The defendant United States of America , hereinafter referred to as the Government, is the holder of claims for unpaid income taxes against the defendant Glen H. Wilson which are the subject of a tax lien. The Government claims priority over the plaintiffs as to the renewal commissions owing and to become owing the defendant Glen H. Wilson. The defendant Washington National Insurance Company makes a claim in connection with the renewal commissions to which reference will be made later.

On November 4th, 1953, the plaintiff Ellen Beeghly recovered a judgment against the defendant Glen H. Wilson in the District Court of Iowa in and for Woodbury County in the sum of $5,000.00. On the same day the plaintiff Kinding & Beebe also recovered a judgment against that defendant in the same court in the sum of $2,000.00. On November 8th, 1954, the Commissioner of Internal Revenue made an assessment against the defendant Wilson for delinquent income taxes in the sum of $1,819.43 for the tax year 1952 and in the sum of $1,088.40 for the tax year 1953. Prior to the forepart of 1953 the defendant Wilson was a resident of and domiciled at Sioux City , Woodbury County , Iowa . From that time until the present he has been a resident of and domiciled in Travis County, Texas.

The Commissioner filed notice of the tax liens in the office of the County Clerk of Courts of Travis County, Texas, on January 13th, 1955. He also filed notice of those liens in the office of the County Recorder of Woodbury County , Iowa , on January 21st, 1955.

[Claims to Renewal Commissions]

On December 16th, 1955, the plaintiffs caused general executions to be issued on their judgments. Under those executions notices of garnishment were served on the defendant Washington National Insurance Company on December 20th, 1955. As of the date of the garnishment that garnishee was not indebted to the defendant Wilson for renewal premiums. However, as of August 1st, 1956, it was indebted to him for such commissions in the sum of $552.73. Under the defendant Wilson's general agent's contract, he also was entitled to commissions on the renewal premiums paid after August 1st, 1956, on policies which had been written by him.

Chapter 630, Code of Iowa 1954, makes provision for proceedings auxiliary to execution. On January 21st, 1956, the plaintiffs commenced the present proceedings in the District Court of Iowa in and for Woodbury County under the provisions of that Chapter. The original parties defendant to the proceedings were Glen H. Wilson and the Washington National Insurance Company.

On February 10th, 1956, the Government served notice of levy on the Washington National Insurance Company claiming a lien upon renewal commissions owing and to become owing Glen H. Wilson under his general agent's contract. Glen H. Wilson and Washington National Insurance Company appeared and filed pleadings in the proceedings instituted by the plaintiffs. In its answer filed therein, the Washington National Insurance Company set forth that it had been served with the Government's notice of levy. The plaintiffs thereupon made application to the District Court of Iowa in and for Woodbury County to have the United States of America made a party defendant to the action. That application was granted. Under being made a party to the action, the United States of America removed to this Court.

[Assessment Date Is Lien Date]

There is not involved in this case Section 191, Title 31, U. S. C. A., which is known as the Government priority statute. That statute is only applicable in insolvency cases. In the present case there is no claim or showing that the defendant Glen H. Wilson was or is insolvent. There is involved Sections 6321, 6322, and 6323, Title 26, U. S. C. A. Those sections provide as follows:

Section 6321:

"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."

Section 6322:

"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 is satisfied or becomes unenforceable by reason of lapse of time."

Section 6323:

"(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice * * *"

It is not controverted that the office of the County Clerk of Courts in Texas and the office of the County Recorder in Iowa are the proper offices for the filing of notices of federal tax liens under Section 6323(a)(1). See Section 335.11, Code of Iowa 1954. The Internal Revenue Code of 1954 became effective August 16th, 1954. Under the provisions of that Code the claim of the Government for taxes becomes a lien on the date of their assessment. Prior to the effective date of that Code such a claim did not become a lien until the date the Collector of Internal Revenue received from the Commissioner of Internal Revenue an assessment list carrying the unpaid tax liability of the delinquent taxpayer. In the present case the claims of the Government were assessed on November 8th, 1954, and the lien of the Government came into existence on that date.

[Lien Upon Intangible Property]

In the present case the right of the defendant Glen H. Wilson to the renewal commissions constituted intangible property, i.e., a chose in action. Section 6321 is broad in its scope. It makes a Government tax lien a lien "upon all property and rights to property, whether real or personal." In the case of Citizens State Bank of Barstow, Texas v. Vidal (10th Cir. 1940), 114 Fed. (2d) 380, 382-83 [40-2 USTC ¶9603], the Court in referring to the tax lien statute stated:

"The statute covering collection of taxes is broad and comprehensive and Congress intended to subject all of a taxpayer's property, except that specifically, exempt to the payment of taxes. 'Property' is a word of very broad meaning and when used without qualification, may reasonably be construed to include obligations, rights and other intangibles, as well as physical things."

Section 6321 was formerly Section 3670, 26 U. S. C. In the case of Glass City Bank v. United States (1945), 326 U. S. 265, 66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449], the United States Supreme Court stated (p. 267 U. S.):

"By §3670, U. S. C., Congress impressed a lien upon 'all property and rights to property, whether real or personal, belonging' to a tax delinquent. Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes."

It is well settled that under that statute the Government has a lien upon the intangible property of a delinquent taxpayer. The tax lien is a continuing lien and will attach to obligations which come into existence thereafter. Glass City Bank v. United States, supra. In that case the tax lien was held to attach to the claim of a taxpayer for services rendered subsequent to the time the lien came into existence. The tax lien has been enforced against various types of intangible property. It has been enforced against the cash surrender value of life insurance policies owned by the taxpayer and this without reference to the question of whether the policies were fully matured or whether notice was given to the beneficiaries. Kyle v. McGuirk (3rd Cir. 1936), 82 Fed. (2d) 212 [36-1 USTC ¶9121]; Knox v. Great West Life Assur. Co. (D. C. 1952), 109 Fed. Supp. 207 [53-1 USTC ¶9247]; United States v. Ison (D. C. 1946), 67 Fed. Supp. 40 [46-1 USTC ¶9269]; Smith v. Donnelly (D. C. 1946), 65 Fed. Supp. 415 [46-1 USTC ¶9247]. It has been enforced against annuity and endowment policies. Cannon v. Nicholas (10th Cir. 1935), 80 Fed. (2d) 934 [35-2 USTC ¶9672]; United States v. Trout (D. C. 1942), 46 Fed. Supp. 484 [42-1 USTC ¶9372]. The tax lien has been enforced against disability payments payable under life insurance policies. Fried v. United States (D. C. 1955), 150 Fed. Supp. 486, reversed sub nom., Fried v. New York Life Insurance Company (2nd Cir. 1957), 241 Fed. (2d) 504 [57-1 USTC ¶9412], certiorari denied, May 27th, 1957. It has been enforced against a cause of action of a contract vendee of real estate against his vendor for restitution. Bensinger v. Davidson (D. C. 1956), 147 Fed. Supp. 240. In an article by Paul E. Anderson entitled "Federal Tax Liens--Their Nature and Priority," 41 California Law Review 241 (1953), the author states (p. 251):

"Once the federal tax lien has attached to certain property, the taxpayer is powerless to affect or to destroy the rights of the Government. * * * As of the date that the lien attaches, the property has, in effect, two owners, the United States and the taxpayer."

In the case of Bensinger v. Davidson, supra, there was a tax lien outstanding against a contract vendee of real estate who had made substantial payments under the contract. Under the California law he had a cause of action for restitution against his vendor. The contract vendee released his claim to the property by executing a quit claim deed for a modest sum. It was held that such a settlement was not binding upon the Government and that it could enforce its tax lien against the vendor for the amount due the vendee as determined by the applicable California law.

Where there is a tax lien outstanding against a taxpayer, it would seem that if the Government close to enforce that lien against intangibles to the fullest extent, then any bank paying a check of such taxpayer, any insurance company making payments of cash surrender values, disability payments or annuity payments, any party making payment to such taxpayer for services, or any party settling either a contract or tort claim with such taxpayer would be subject to the hazard of payment the same over again to the Government. Except as to such parties that come within the protection of Section 6323, the tax lien would for all practical purposes be a secret lien since it would come into existence and continue from the time the taxes were assessed in Washington, D. C. It would appear that the Government as a matter of policy has been sparing in its enforcement of tax liens against intangibles of the kind noted. See Note, Effect of A Federal Tax Lien On A Bank Deposit, 42 Iowa L. Rev. 412-420 (1957). In this connection it should be noted that state laws relating to exemptions are ineffective as against a Government tax lien. The only exemptions as to federal tax liens are those contained in Section 6334, 26 U. S. C. A. Those exemptions are:

"(1) Wearing apparel and school books.--Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

"(2) Fuel, provisions, furniture, and personal effects.--If the taxpayer is the head of a family, so much of the fuel, provisions, furniture, and personal effects in his household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $500 in value;

"(3) Books and tools of a trade, business, or profession.--So mamy of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $250 in value.

* * *

"(c) No other property exempt.--Notwithstanding any other law of the United States, no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a)."

It is to be noted that no exemption is afforded as to insurance or personal earnings.

[Priority Over Judgment Creditors]

It seems clear in the present case that the Government acquired a lien upon the chose in action for renewal commissions owned by the defendant Glen H. Wilson. The next question is whether that lien has priority over the claims of the plaintiffs. In that connection it is desirable to summarize the chain of events in chronological order. That order is as follows:

(1)--November 4th, 1953: Plaintiffs recover judgments in District Court of Iowa in and for Woodbury County .

(2)--November 8th, 1954: Government tax lien comes into existence.

(3)--January 13th, 1955: Government files notice of tax lien in Travis County, Texas, under Section 6323.

(4)--January 21st, 1955: Government files notice of tax lien in Woodbury County , Iowa , under Section 6323.

(5)--December 20th, 1955: Garnishment notices served on Washington National Insurance Company under executions issued pursuant to plaintiffs' judgments.

(6)--January 21st, 1956: Plaintiffs institute proceedings auxiliary to their executions in District Court of Iowa in and for Woodbury County .

(7)--February 10th, 1956: Government serves notice of levy under tax lien on Washington National Insurance Company.

The situation is (1) the plaintiffs recovered their judgments before the Government's tax lien came into existence; (2) the Government's tax lien was in existence and notices of it had been filed in the county offices before the Washington National Insurance Company was served with garnishment notices under the executions issued pursuant to plaintiffs' judgments; (3) those garnishment notices preceded the Government's notice of levy, and (4) the plaintiffs' proceedings auxiliary to execution were instituted prior to the Government's notice of levy.

[Applicable State Laws]

The plaintiffs' claim to priority is based upon several grounds. They claim that since their judgments were rendered prior to the time the Government filed its notices of tax liens in the county offices referred to they are "judgment creditors" within the purview of Section 6323 above set out which provides that a Government tax lien shall not be valid against a "judgment creditor" until notice is filed in the designated office. They also claim priority because their garnishment notices were served and their proceedings auxiliary to execution in the nature of a Creditors' Bill were instituted before the Government served its notice of levy. This latter claim involves several provisions of the Iowa law. Chapter 626, Code of Iowa 1954, relates to executions. Section 626.1 of that Chapter provides, in part, as follows:

"Judgments or orders requiring the payment of money, or the delivery of the possession of property, are to be enforced by execution. * * *"

Section 626.21 of that Chapter provides as follows:

"Judgments, money, bank bills, and other things in action may be levied upon, and sold or appropriated thereunder, and an assignment thereof by the officer shall have the same effect as if made by the defendant."

Section 626.26 of that Chapter provides as follows:

"Property of the defendant in the possession of another, or debts due him, may be reached by garnishment."

Rule 54(b) of the Iowa Rules of Civil Procedure provides, in part, as follows:

"The officer serving a writ of attachment or execution shall garnish such persons as the plaintiff may direct as supposed debtors, or having in possession property of the principal defendant, which shall be effected by a notice served in the manner and as an original notice in civil actions, forbidding his paying any debt owing such defendant, due or to become due, and requiring him to retain possession of all property of the defendant in his hands or under his control, to the end that the same may be dealt with according to law, * * *."

Chapter 630, Code of Iowa 1954, under which the plaintiffs instituted these proceedings relates to proceedings auxiliary to execution.

Section 630.16 of that Chapter provides as follows:

"At any time after the rendition of a judgment, an action by equitable proceedings may be brought to subject any property, money, rights, credits, or interest therein belonging to the defendant to the satisfaction of such judgment. In such action, persons indebted to the judgment debtor, or holding any property or money in which such debtor has any interest, or the evidences of securities for the same, may be made defendants."

Section 630.18 of that Chapter provides as follows:

"In the case contemplated in sections 630.16 and 630.17, a lien shall be created on the property of the judgment debtor, or his interest therein, in the hands of any defendant or under his control, which is sufficiently described in the petition, from the time of the service of notice and copy of the petition on the defendant holding or controlling such property or any interest therein."

In this connection the claim of the plaintiffs is that they come within the scope of the "diligent creditor" rule. In support of that claim they rely upon the cases of Bridgman & Co. v. McKissick and Bone (1863), 15 Iowa 260, and United States v. Fidelity & Deposit Co. (1954), 214 Fed. (2d) 565 [54-2 USTC ¶9486]. In both cases a debtor had transferred property in fraud of creditors. In the case of Bridgman & Co. v. McKissick and Bone, supra, it was held that a judgment creditor who brought an action to set aside a fraudulent conveyance had priority over the holder of an older judgment who had not instituted such an action. In the case of United States v. Fidelity & Deposit Co., supra, it was held that a bonding company which was a creditor of a taxpayer and which filed suit to set aside a fraudulent conveyance had priority over a Government tax lien which was not in existence at the time the conveyance was made. The rationale of those decisions was that after the conveyance the grantor did not have any interest in the property which was the subject matter of the conveyance to which a lien could attach and that the only right any creditor had was the right to bring an action to set aside the conveyance. As pointed out in those decisions, a conveyance which is fraudulent as to creditors is nevertheless binding as to the grantor and after such a conveyance he cannot claim any interest in the property which was the subject matter of the conveyance.

It is believed that the situation in the present case does not come within the purview of the decisions in those cases. In the present case, as heretofore noted, the property in question, i.e., the chose in action for renewal commissions, was in existence and owned by the defendant Glen H. Wilson at the time the Government's tax lien came into existence. Thus it is not a case like the cases relied on by the plaintiffs where there was no property interest to which a lien could attach.

It is well settled that under the Iowa law no lien is acquired by garnishment--all that the garnishor acquires is the right to proceed against the garnishee personally. Pierre v. Pierre (1930), 210 Iowa 1304, 232 N. W. 633. Proceedings auxiliary to execution under Chapter 630, Code of Iowa 1954, are in the nature of a Creditors' Bill. Under Section 630.18 of that Chapter the commencement of such proceedings does create a lien against the property involved. In this case the plaintiffs' garnishments were made and the proceedings auxiliary to execution were instituted after the Government had filed its notices of lien. See United States v. Liverpool & London & Globe Insurance Co. (1955), 348 U. S. 215, 75 S. Ct. 247, 99 L. Ed. 268 [55-1 USTC ¶9136], where the Government's tax lien was subsequent to the plaintiff's garnishment but prior to the plaintiff's judgment.

[Federal Law]

It seems clear that the plaintiffs' claims for priority based upon the "diligent creditor" rule or upon their garnishments or by their institution of proceedings auxiliary to execution are not well founded. That leaves for consideration their claim that they are entitled to priority because of the provisions of Section 6323 heretofore set out. Under that Section a Government lien for taxes is not "valid as against any * * * judgment creditor" until notice of the same has been filed. In the present case the plaintiffs' judgments were rendered on November 4th, 1953. The notice of the Government's tax lien was not filed until January, 1955. It is the claim of the plaintiffs that the judgments obtained by them on November 4th, 1953, gave each of them the status of a "judgment creditor" under the provisions of Section 6323. It is the claim of the Government that a creditor by merely obtaining a judgment does not thereby become a "judgment creditor" within the provisions of Section 6323. It is the claim of the Government that the plaintiffs did not acquire a lien upon the property involved prior to the filing of the notice of the Government's tax lien and that lacking such lien the plaintiffs are not entitled to priority under Section 6323.

Judgment liens are creatures of statute. Miller v. Bank of America (9th Cir. 1948), 166 Fed. (2d) 415, 417 [48-1 USTC ¶9185]. See also Riesenfeld, Collection of Money Judgments In American Law--A Historical Inventory and A Prospectus, 42 Iowa Law Review 155 (1957). Under Section 624.23, Code of Iowa 1954, a judgment becomes a lien upon the real estate of the judgment debtor upon its rendition. A judgment becomes a lien upon personal property of the judgment debtor by levy. Rule 260, Iowa Rules of Civil Procedure. In the present case there was no levy under the plaintiffs' judgments prior to the filing of the notice of the Government's tax lien. The plaintiffs had not acquired any lien upon the property in question prior to the filing of the notice of the Government's tax lien. At that time they had the status of creditors who had reduced their claims to judgment but who had not acquired any lien as to any personal property of the judgment debtor.

In the present case there is not involved the vexatious question of a "specific and perfected" lien. See Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L. J. 905 (1954). At a recent Bar meeting the current state of the law in regard to conflicts between holders of non-federal claims and the Government was summarized as follows: "If it's heads the Government wins; if it's tails the holder of the non-federal claim loses." In this connection it is to be noted that the tax lien of which the Government filed notice is most general and inchoate. However, the "specific and perfected" lien rule adopted by the United States Supreme Court is not applicable to Government tax liens; it is only applicable to non-federal liens which come in conflict with Government tax liens.

Section 6323 heretofore set out purports to afford protection to mortgagees, pledgees, purchasers and judgment creditors. However, in order to come within the protection of that Section they must meet the "conventional type" test. United States v. Gilbert Associates, Inc. (1953), 345 U. S. 361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291]. Unless the judgment or mortgage is of the conventional type it does not come within the scope of Section 6323. The judgments involved in the present case were conventional money judgments rendered by a court of record of general and original jurisdiction. Therefore, they cannot be eliminated from the provisions of Section 6323 by the "conventional type" test.

[Judgment Creditors' Lack of Liens]

There is for consideration the question of whether the plaintiff judgment holders are without the scope of Section 6323 because of their lack of liens. Section 6323 makes no reference to the matter of lien in connection with "judgment creditors." Section 6323 makes no reference to the matter of recording, yet recording is required. See cases cited in Mason City and Clear Lake Railroad Company v. Imperial Seed Company, et al. (D. C. N. D. Iowa, June 10th, 1957), 152 Fed. Supp. 145 [57-2 USTC ¶9736]. Somewhat similarly, it is held that in order for the holder of a judgment to be a "judgment creditor" within the provisions of Section 6323 he must be a judgment lien creditor. Miller v. Bank of America (9th Cir. 1948), 166 Fed. (2d) 415 [48-1 USTC ¶9185]; United States v. Levin (D. C. 1955), 128 Fed. Supp. 465 [55-1 USTC ¶9354]; United States v. Fisher (D. C. 1948), 93 Fed. Supp. 73; Bank of America v. United States (D. C. 1946), 73 Fed. Supp. 303. In the case of United States v. Fisher, supra, the rule is stated as follows (p. 76):

"The creditor must have obtained his judgment, and in the case of personal property have execution levied thereon, before a lien capable of priority over that of the United States for taxes could be created."

The case of Miller v. Bank of America , supra, involved the priority of claims to the taxpayer's bank account between a judgment holder and the Government, under what is now Section 6323. The Government was the holder of tax liens. The creditor obtained his judgment but had not obtained a lien on the property at the time the Government filed notice of its tax liens and gave notice of levy thereunder. The trial court granted priority to the Government. The judgment holder appealed. The holding of the trial court was affirmed by the United States Court of Appeals for the Ninth Circuit. That Court stated (p. 417):

"Appellant asserts that the above federal statutes should be literally construed and since the word 'lien' is omitted in connection with the term 'judgment creditor' as used therein, that it was not necessary for him to take any further action to perfect his right to the fund on deposit with the Bank of America: that the entry and docketing of the judgment was sufficient to entitle him to priority over the perfected lien of the Government in said fund.

"The principle that a clear and unambiguous statute must be literally construed is long established.

"If a literal construction would defeat the object or scope intended by Congress, or would result in 'absurdities so gross "as to shock the general moral sense", then the courts may be entitled to depart from the strict wording in order to give the statute a reasonable construction.'

"While the interpretation of the statute insisted upon by appellant probably would not have absurd or shocking results, it would clearly defeat the object intended by Congress. Moreover, it would be unreasonable to conclude that the Government intended to place itself at a disadvantage in procuring a tax lien when the decisions of the courts and the very history of the legislation in question show that before the enactment of the above statutes no lien whatsoever existed in favor of any class or classes of creditors.

"Although the precise question presented has not been decided, there have been many decisions under the statutes here involved where the courts by implication exclude the theory advanced by appellant. In all these cases it is certain that it is the lien created by the claim of a creditor within the meaning of recording acts which is contemplated, and not just the claim itself."

The "lien" requirement rule has been recognized in the following cases: Ersa, Inc. v. Dudley (D. C. 1955), 134 Fed. Supp. 627 [55-2 USTC ¶9690]; United States v. 52.11 Acres of Land (D. C. 1947), 73 Fed. Supp. 820 [48-1 USTC ¶9116]; United States v. Record Pub. Co. (D. C. 1945), 60 Fed. Supp. 194 [45-2 USTC ¶9378]. In those cases it was held that the judgment holder met the requirement. The United States Supreme Court has not as yet passed upon the question but, as above noted, the Federal Courts that have passed upon the question are in agreement that in order for the holder of a judgment to constitute a "judgment creditor" within the purview of Section 6323 such holder must have acquired a lien prior to the filing by the Government of notice of its tax lien. It is the holding of the Court in the present case that the Government is entitled to priority as to the property involved.

[Employer's Right to Deduct Expenses]

The defendant Washington National Insurance Company claims the right to deduct from any funds due to the defendant Wilson its expenses, attorney fees, and costs in connection with the garnishment proceedings. This claim is based upon a provision in the contract between Wilson and the insurance company which gives the company a first lien upon all commissions payable for any debt due from Wilson to the company. The contract states that all money expended by the company in answering or defending any attachment or garnishment involving the defendant Wilson shall constitute a debt due. Set-off has been allowed when that remedy is available under local law. Karno-Smith Co. v. Maloney (3rd Cir. 1940), 112 Fed. (2d) 690 [40-2 USTC ¶9533]. And set-off has been allowed pursuant to an agreement which was prior to the lien asserted by the United States . United States v. Winnett (9th Cir. 1947), 165 Fed. (2d) 149 [48-1 USTC ¶9115]. It has been held that at the time the Government levied upon a depositor's bank account nothing was owed since a demand note held by the bank liquidated the balance. United States v. Bank of United States (D. C. 1934), 5 Fed. Supp. 942 [1934 CCH ¶9099]; cf. Transmix Concrete v. United States (D. C. 1956), 142 Fed. Supp. 306 [56-1 USTC ¶9349]. But cf. United States v. Bank of Nevada (D. C. Nevada 1957), -- Fed. Supp. -- [57-1 USTC ¶9561]. Even where the set-off and the tax liens attach simultaneously the federal tax lien is superior. United States v. Graham (D. C. 1951), 96 Fed. Supp. 318. But in the instant case the federal tax lien attached before any garnishment was effected and so before any right of set-off accrued. The United States Supreme Court in United States v. Liverpool & London & Globe Insurance Co. (1955), 348 U. S. 215, 217, 75 S. Ct. 247, 99 L. Ed. 268 [55-1 USTC ¶9136], commented upon allowing attorney fees to the garnishee as follows:

"If the garnishment lien is not prior to the Government liens, and we have held that it is not, certainly fees allowed in that proceeding are not prior to the Government liens, and the authorization of the payment of the attorney fees prior to the Government liens was error."

It is the holding of the Court that the defendant Washington National Insurance Company may not deduct the expenses and attorney fees incurred by it in connection with the garnishment proceedings from the renewal commissions owing or to become owing to the defendant Glen H. Wilson under his general agent's contract.

[Form of Relief]

The general agent's contract of the defendant Glen H. Wilson was dated November 1st, 1949. It was cancelled on October 9th, 1950. The cancellation left unaffected his right to renewal commissions on policies written by him. During the pendency of these proceedings such renewal commissions have been accumulating. The right to such renewal commissions will continue for some time in the future. The Government requests that the Court order the defendant Washington National Insurance Company to pay it the accumulated renewal commissions to apply upon its tax lien. The Government also requests that the Court order the defendant Washington National Insurance Company pay to it for similar application the renewal commissions which become owing to the defendant Glen H. Wilson in the future. The question is raised as to the form of relief that may properly be granted in connection with the renewal commissions.

Section 6332, Title 26, United States Code, provides, in part, as follows:

"Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, * * *"

The procedure provided in that Section is in substance garnishee process.

Section 7403, Title 26, United States Code, provides, in part, as follows:

"(a) Filing.--In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary or his delegate, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability.

"(b) Parties.--All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto."

The Government was brought in as a party defendant in proceedings auxiliary to execution. Those proceedings developed into an action having all the characteristics of an action under Section 7403. Proceedings auxiliary to execution are equitable in character. It is the view of the Court that it may mold its relief to fit the situation presented herein.

It is held that unearned wages of a debtor are not subject to garnishment. Stowe v. Breen (1941), 230 Iowa 1215, 300 N. W. 518. This is true even though the statutes relating to garnishment purport to provide for amounts "to become due." Thomas v. Gibbons (1883), 61 Iowa 50, 15 N. W. 593. In United States v. Long Island Drug Co. (2nd Cir. 1940), 115 Fed. (2d) 983 [41-1 USTC ¶9140], the Court refused to give the Government a judgment against the delinquent taxpayer's future earnings. The Court stated (p. 987):

"We find nothing in §3690 or §3710 which various the general rule that a garnishee process is not to be extended to future earnings, * * *"

However, a situation involving unearned wages is to be distinguished from a situation involved an obligation payable to the debtor in installments. See Cox v. Russell (1876), 44 Iowa 556. In that latter situation a judgment in garnishment may be rendered under which the installment payments are applied for the benefit of the creditor. See 7 A. L. R. (2d) 680 (1949).

An existing obligation for services rendered is properly subjected to a Government tax lien. Glass City Bank v. United States (1945), 326 U. S. 265, 268, 66 S. Ct. 108, 90 L. Ed. 56 [45-2 USTC ¶9449]. In Fried v. New York Life Insurance (2nd Cir. 1957), 241 Fed. (2d) 504 [57-1 USTC ¶9412], certiorari denied, May 27th, 1957, the Court required monthly disability payments under an insurance policy to be paid to the Government to apply on the insured's delinquent taxes. Apparently the Court required those sums to be paid each month as they accrued. Those payments were unlike future earnings in that they were the product of a contractual right which the insurance company could not defeat and were contingent only upon the continued life of the insured. In the present case the services which entitle the defendant Glen H. Wilson to the renewal commissions have already been rendered. They are payable under an existing obligation. The Government could reach renewal commissions hereafter accruing by repeated levies. Such levies would entail frequent additional and unnecessary expense.

It is the view of the Court that this Court may properly provide that the renewal commissions to which the defendant Glen H. Wilson is entitled on premiums hereafter paid on policies written by him shall be paid by the defendant Washington National Insurance Company to the Government to apply upon its tax lien.

IT IS HEREBY ORDERED that judgment shall be entered (1) adjudging and decreeing that the claim of the Government under its tax lien is prior and superior to the claim of the plaintiffs to the renewal commissions in question which are now owing and which will hereafter become owing; (2) denying the claim of the defendant Washington National Insurance Company for expenses and attorney fees incurred in connection with the garnishment proceedings; (3) ordering the defendant Washington National Insurance Company to pay to the Government the accumulated renewal commissions now owing to apply upon its tax lien; (4) ordering that the defendant Washington National Insurance Company pay to the Government quarterly the renewal commissions which have become owing during the quarter. As permitted by Rule 52 of the Federal Rules of Civil Procedure;

IT IS FURTHER ORDERED that this opinion shall constitute the findings of fact, conclusions of law, and order for judgment in this case.

 

 

 

Atlantic National Bank v. The United States

U.S. Court of Claims, No. 30-75, 210 CtCls 340, 536 F2d 1354, 6/16/76

[Code Secs. 6321 and 6323]

Lien for taxes: After-acquired property: Priority: Notice or knowledge of lien: Security interest: Marshalling of assets.--A bank, an assignee of the taxpayer, was not entitled to any funds due the taxpayers under contracts between the taxpayer and a Federal agency. Notices of Federal tax liens had been filed prior to the assignments of the funds to the bank. Even though these funds had not been earned at the time the liens were filed, the taxpayer had sufficient interest in the funds, even after making the assignments, for the liens to attach to them. The bank's interest was not entitled to priority because it failed to demonstrate that its interest was protected under local law as against a judgment lien arising out of an unsecured interest. The bank had constructive knowledge, with the same effect as actual knowledge, of the tax liens once they were filed. Thus, it could not claim ignorance of the facts and could not recover under a theory of equitable estoppel. Finally, the invocation of the doctrine of marshalling of assets was denied since it would have been inequitable to the government, which was unable to satisfy the total obligations owed by the taxpayer from the funds due him.

H. Joel Weintraub, Maurice Steingold, Steingolf, Steingolf & Friedman, for plaintiff. Leslie H. Wisenfelder, Rex E. Lee, Assistant Attorney General, Department of Justice, Washington, D. C. 20530, for defendant.

Before SKELTON, KASHIWA , and BENNETT, Judges.

On Defendant's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment

KASHIWA , Judge, delivered the opinion of the court:

This case is before the court on cross motions for summary judgment. There is no genuine issue as to any material fact. The case involves the priority of federal tax liens over plaintiff-assignee's claim to contract proceeds. For the reasons below we hold for the defendant.

The General Services Administration (GSA) awarded contracts to Argus Security, Inc. (Argus) for the performance of uniform guard services. By June 4, 1974, the Internal Revenue Service (IRS) had filed Notices of Federal Tax Lien Under Internal Revenue Laws relating to Argus as follows:

                          Date filed with State

Amount of                 Corporation Commission,

lien                          

Richmond
, 
Virginia

    $53,870.27              March 21, 1974

     32,702.75               June 4, 1974

    $86,573.02

On June 5, 1974, and July 9, 1974, Argus made assignments to plaintiff of proceeds to be paid under its contracts. A more complete chronology of events is listed in the margin. ¹ As of January 31, 1976, Argus' unpaid tax liability arising out of the two notices of tax lien filed by June 4, 1974, totaled $78,527.93. The total due under the Argus contracts is $43,739.09. ²

Plaintiff first argues that the tax liens did not attach to the contract proceeds when the liens were filed because at that time the monies were not yet earned. Plaintiff contends that when the monies were earned, they were immediately encumbered by plaintiff's perfected security interest.

Section 6321, Int. Rev. Code of 1954, provides that upon refusal to pay a tax after demand, a lien arises in favor of the United States "upon all property and rights to property, whether real or personal," belonging to the delinquent taxpayer. Argus had a right to, and interest in, the subject due or to become due under the subject contracts to enable a federal tax lien to attach thereto. Even after the assignments to plaintiff, Argus retained a sufficient interest to which a federal tax lien could attach. In Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653], 466 F. 2d 1040, 1052 (5th Cir. 1972), cert. denied, 410 U. S. 929 (1973), the court held:

* * * a federal tax lien attaches immediately to after-acquired property without any further action required by the Government.

It has also been held that the fact that the taxpayer's right to contract proceeds was dependent on his satisfactory performance does not mean that the proceeds were not property or rights to property of the taxpayer under §6321. In City of Vermillion v. Stan Houston Equipment Co. [72-2 USTC ¶9496], 341 F. Supp. 707, 713 (D. S. D. 1972), the court stated:

The fact that the taxpayer's right to the proceeds of the contract was dependent upon his performance of the contract and acceptance by the City does not mean that the proceeds were not property or rights to property of the taxpayer under 26 U. S. C. A. Sec. 6321. Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855, 859 (9th Cir. 1962); Home Ins. Co. v. B. B. Rider Corp. [63-1 ¶9235], 212 F. Supp. 457, 462 (D. C. N. J. 1963). The taxpayer had more than a mere contingent right to the proceeds of the contract.

See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945); Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc. [74-1 USTC ¶9401], 375 F. Supp. 186, 193 (S. D. N. Y. 1974), reversed and remanded on another question [75-1 USTC ¶9299], 512 F. 2d 605 (2d Cir. 1975); United States v. Blackett [55-1 USTC 9278], 220 F. 2d 21 (9th Cir. 1955).

Clearly under §6321 we must hold that plaintiff's argument cannot be sustained.

In Glass City Bank v. United States, supra at 267-69, the Court stated that there "is a plain intent to subject to the lien 'property owned by the delinquent' when suit is filed, rather than only that owned when the lien arose" and also: "Our conclusions is that the lien applies to property owned by the delinquent at any time during the life of the lien. This is in accord with all the cases that have directly passed upon this question." [Footnote omitted.] In Seaboard Surety Co. v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962), the taxpayer was awarded a Government contract on December 31, 1956. On March 2, 1957, a trust agreement was executed assigning the proceeds of the contract to a bank. Prior to the date of the agreement the Government had a fully perfected tax lien on all property and rights to property of the taxpayer. The court stated at 859:

* * * These tax liens attached immediately to all rights of taxpayer under the government contract awarded December 31, 1956, including payments whenever earned. * * * [T]he trust agreement of March 2, 1957, could not displace the tax liens, which had already attached to taxpayer's property rights in the contract. The fact that taxpayer's rights under the contract were dependent upon its performance did not affect the tax liens * * *.

In United States Fidelity & Guaranty Co. v. United States, 201 Ct. Cl. 1, 475 F. 2d 1377 (1973), this court held that where the IRS was owed taxes by a defaulted prime contractor and the amount was paid to the IRS by the contracting agency out of retained contract funds, the tax lien has priority over a surety that has paid laborers and materialmen on its payment bond. Accord, Seaboard Surety Co. v. United States , 107 Ct. Cl. 34 [47-1 USTC ¶9128], 67 F. Supp. 969 (1946), cert. denied, 330 U. S. 826 (1947).

Plaintiff also relies on §6323. ³ Plaintiff argues that as to monies earned under these contracts by Argus on and after June 28, 1974, the Federal Tax Lien Act of 1966 grants plaintiff a priority over earlier filed notices of tax lien as a holder of a security interest within the meaning of §6323. However, since plaintiff does in fact qualify for the priority status it claims for itself under §6323, plaintiff's reliance, based as it is on a fallacious premise, collapses for lack of support.

In Donald v. Modison Industries, Inc. [73-2 USTC ¶9623], 483 F. 2d 837, 842 (10th Cir. 1973), the Court of Appeals in an opinion by Senior Judge Laramore of this court held with relation to §6323 as follows:

Summarizing the foregoing definitions and rules as applicable herein, it is apparent that the appellant's security interest will take priority over the filed Federal tax lien if the following requisites are met:

1. The "security interest" stems from a written agreement which (a) was entered into before the Federal tax lien was filed, and (b) qualifies as a "commercial transactions financing agreement" under section 6323(c)(2)(A)(i); [Emphasis supplied.]

2. The loans were made pursuant to the written agreement within 45 days of the tax lien filing or prior to receiving actual notice or knowledge that the tax lien had been filed, i. e., disbursements or loans after receipt of actual notice or 45 days, whichever is sooner, are unprotected;

3. The written agreement covered "qualified property"--here inventory--which was "acquired" by the taxpayer within 45 days of the tax lien filing; and

4. State law gives the security interest holder priority over a judgment lien by an unsecured creditor, as of the time the Federal tax lien is filed.

Accord, 9 MERTEN'S LAW OF FEDERAL INCOME TAXATION §54.66.7 (1971). ⁴

With relation to the four requirements under §6323, we observe that plaintiff does not overcome the requirement that its security interest arise from a written agreement entered into before these tax liens were filed. The first of the written agreement, i. e., the assignments, was executed on June 5, 1974. However, by June 4, 1974, defendant had filed Notices of Tax Lien Under Internal Revenue Law relating to Argus which then totalled $86,573.02. In Donald v. Madison Industries, Inc., supra at 844, the court held as follows:

* * * Since these security agreements were entered into after the tax lien filing by some eight months or more (one day after would be just as fatal), appellant clearly can draw no support from these documents with respect to the December 1969 tax lien. Section 6323(c)(1). However, they would be relevant to any tax liens filed after their execution. (Emphasis in original).

Furthermore, plaintiff's position as to its having any priority under the Federal Tax Lien Act of 1966 fails because plaintiff has not demonstrated to this court that its "security interest" at any relevant time became "protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation" as required by §6323(c)(1)(B). Therefore, we hold that plaintiff is not entitled to any priority under §6323 over the tax liens filed before June 5, 1974.

Plaintiff also argues that defendant is estopped to claim a lien having priority over plaintiff's rights. It bases its argument on this court's decision in Produce Factors Corp. v. United States, 199 Ct. Cl. 572, 467 F. 2d 1343 (1972). Plaintiff's position is that when it submitted its notices of the subject assignments and the assignments themselves to GSA as required by the Assignment of Claims Act, the failure to defendant's officials to advise plaintiff of the tax claims of which GSA had notice was a breach of the duty defendant owed to plaintiff as an assignee. As a result, so the argument goes, plaintiff is entitled to recover the monies it lent to Argus. The language of the Produce Factors Corp. decision on which plaintiff relies is as follows:

The assignee of Government contract rights is, of course, entitled to certain governmental protection of its interests. If at the time it receives notification of an assignment, the Government knows that the assignee's collateral is worthless, the Government must convey that information to the assignee so that he will not advance funds on the strength of proceeds that will never come due. * * * [199 Ct. Cl. at 582, 467 F. 2d at 1349.]

The assignee in Produce Factors Corp. was denied any recovery because it failed to establish that the Government had actual or constructive notice of a fact which it was duty bound to convey to the assignee and also because the assignee's knowledge was held to be superior to the Government's.

In order to establish an estoppel against the United States , four separate elements must be present. One of these essential requirements is for the party asserting the estoppel to be "ignorant of the true facts." Emeco Industries, Inc. v. United States , 202 Ct. Cl. 1006, 1015, 485 F. 2d 652, 657 (1973); United States v. Georgia-Pacific Co., 421 F. 2d 92, 96 (9th Cir. 1970). Plaintiff cannot set itself up as being ignorant of the IRS tax claims because it had constructive notice of the existence of said liens.

* * * The purpose of the filing of a notice of Federal tax lien is to give constructive notice. A purchaser is charged with constructive notice of all a person of ordinary intelligence and diligence would have discovered by an examination of the index to Federal tax liens in the appropriate local office. * * * 9 MERTEN'S LAW OF FEDERAL INCOME TAXATION §54.66.12 (1971). [Footnotes omitted.]

Accord, Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956); United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421 (S. D. N. Y. 1965); Goldstein v. Bankers Commercial Corp. [57-1 USTC ¶9596], 152 F. Supp. 856 (S. D. N. Y. 1957), aff'd per curiam sub nom. Goldstein v. United States [58-2 USTC ¶9662], 257 F. 2d 48 (2d Cir. 1958).

Once it is established that plaintiff was chargeable with contructive notice, that notice has the same legal significance as actual notice. In Simmons Creek Coal Co. v. Doran, 142 U. S. 417, 437 (1892), the Supreme Court stated:

* * * He is bound not only by actual, but also by constructive notice, which is the same in its effect as actual notice. * * * [Emphasis in original.]

Accord, 66 C. J. S. Notice §19(b) (1950):

* * * constructive * * * and actual notice have the same effect, and either constructive notice or actual notice is binding independently of the other. Accordingly, a person chargeable with constructive * * * notice is as much bound thereby as if the notice were actual. * * * [Emphasis supplied.] [Footnotes omitted.]

Accordingly, defendant's duty to "convey" information to an assignee is fully and completely discharged as to tax claims by the filing of tax liens. That it would perhaps have been a better course for defendant's officials to give plaintiff actual notice of the IRS claims is not a legally sufficient basis for plaintiff to recover. As a matter of law, defendant did not breach the duty imposed by Produce Factors Corp., supra. Plaintiff may not recover, therefore, on its theory of equitable estoppel.

The court need respond only briefly to plaintiff's final contention that the doctrine of marshaling assets should be invoked here to require defendant to collect its claims of offset against assets of Argus being withheld under contracts which are not in issue before this court before defendant can resort to the funds being withheld under the five contracts which are in issue in this case. ⁵ Defendant states that the total debts owed it by Argus far exceed the total monies defendant is withholding. Thus, to the extent defendant is unable to pay itself out of the $43,739.09 due and unpaid under the subject contracts ahead of plaintiff, defendant will not be reimbursed for the total of the obligations owed to it by Argus. There can be no marshaling when to do so would limit the double-fund creditor's ability to satisfy the total debt owed to it. This would be inequitable. New Bern Oil & Fertilizer Co. v. National Bank, 28 F. 2d 554, 556 (4th Cir. 1928); Caplinger v. Patty, 398 F. 2d 471, 476 (8th Cir. 1968); Victor Gruen Associates, Inc. v. Glass, 338 F. 2d 826, 829 (9th Cir. 1964).

Conclusion

For the above reasons, defendant's motion for summary judgment is granted, plaintiff's motion for summary judgment is denied, and the petition is dismissed.

¹ July 19, 1973--GSA awarded Contract number GS-03B-18175 to Argus.

February 1, 1974-GSA awarded Contract number GS-03B-18245 to Argus.

February 14, 1974--GSA awarded Contract number GS-03B-18244 to Argus.

March 21, 1974--IRS filed a notice of federal tax lien at Norfolk and Richmond , Virginia , for $53,870.27.

May 6, 1974--GSA awarded Contract number GS-03B-18336 to Argus.

May 14, 1974--IRS served a notice of levy on GSA stating that there was due, owing, and unpaid from Argus $60,803.46.

May 16 and June 4, 1974--IRS filed a notice of federal tax lien at Norfolk and Richmond , respectively, for $32,702.75.

May 29, 1974--GSA awarded Contract number GS-03B-18385 to Argus.

June 5, 1974--Argus assigned to plaintiff "all monies due or to become due from the United States " under Contract numbers GS-03B-18175, GS-03B-18244, and GS-03B-18245. The assignments contained a warranty that the assignor is not indebted to the United States for taxes and is not otherwise engaged in a controversy with the United States which might give rise to a claim of a right to set-off.

June 19, 1974--GSA received and acknowledged receipt of three documents entitled "Notice of Assignment."

June 20, 1974--IRS filed notice of federal tax lien at Norfolk and Richmond for $52,034.22.

July 9, 1974--Argus assigned to plaintiff the monies due under Contract numbers GS-03B-18336 and GS-03B-18385.

July 11, 1974--GSA received and acknowledged receipt of two documents entitled "Notice of Assignment."

July 29, 1974--Effective on this date, the five contracts were terminated by written agreement in accordance with an oral agreement of GSA and Argus on July 26, 1974.

August 2, 1974--IRS served GSA with a notice of levy stating that there was due, owing, and unpaid from Argus $132,422.78.

² There is a claim in the total amount of $23,656.98 by the Department of Labor to the withheld funds in suit. However, defendant has stated in its briefs that the court does not have to determine priorities between IRS and the Department of Labor. Since defendant prevails on the IRS claim and the IRS claim exhausts the available funds, we deem it unnecessary to discuss the Department of Labor claim.

³ Relevant portions of §6323 are as follows:

"SEC. 6323. VALIDITY AND PRIORITY AGAINST CERTAIN PERSONS.

"(a) PURCHASES, HOLDERS OF SECURITY INTERESTS, MECHANIC'S LIENORS, AND JUDGMENT LIEN CREDITORS.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanics' lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

"(c) PROTECTION FOR CERTAIN COMMERCIAL TRANSACTIONS FINANCING AGREEMENTS, ETC.--

"(1) IN GENERAL.--To the extent provided in this subsection, even though notice of a line imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which--

"(A) is in qualified property covered by the terms of a written agreement entered into before tax lien filing and constituting--

"(1) a commercial transactions financing agreement,

"(ii) a real property construction or improvement financing agreement, or

"(iii) an obligatory disbursement agreement, and

"(B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

"(2) COMMERCIAL TRANSACTIONS FINANCING AGREEMENT.--For purposes of this subsection.--

"(A) DEFINITION.--The term 'commercial transactions financing agreement' means an agreement (entered into by a person in the course of his trade or business)--

"(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade, or business, or

"(ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business;

"but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

"(B) LIMITATION ON QUALIFIED PROPERTY.--The term 'qualified property', when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

"(C) COMMERCIAL FINANCING SECURITY DEFINED.--The term 'commercial financing security' means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgages on real property, and (iv) inventory.

* * *

"(d) 45-DAY PERIOD FOR MAKING DISBURSEMENTS.--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing by reason of disbursements made before the 46th day after the date of tax lien filing, or (if earlier) before the person making such disbursements had actual notice or knowledge of tax lien filing, but only if such security interest--

"(1) is in property (A) subject, at the time of tax lien filing, to the lien imposed by section 6321, and (B) covered by the terms of a written agreement entered into before tax lien filing, and

"(2) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation."

* * *

⁴ H. R. Rep. No. 1884, 89th Cong., 2d Sess. 45 (1966), provides as follows in pertinent part:

"* * * Thus, the security interest must arise out of a written agreement entered into before the notice of tax lien was filed * * *."

⁵ Defendant contends that the doctrine of marshaling assets does not apply to the United States but we need not rule on the question in view of the inadequacy of plaintiff's position.

Concurring Opinion

BENNETT, Judge, with whom SKELTON, Judge, joins, concurring:

I concur with Judge Kashiwa's opinion and in the decision reached, but find it necessary to discuss briefly one aspect of plaintiff's rebuttal to the two affirmative defenses set up by defendant in this litigation. When faced with these defenses, plaintiff promptly asserted that its recovery could not be diminished to th extent of its assignor's delinquent taxes or underpaid employee wages, because of the terms of the Assignment of Claims Act of 1940, as amended, 41 U. S. C. §15 (1970):

Any contract of * * * the General Services Administration * * * may, in time of war or national emergency proclaimed by the President * * * or by Act or joint resolution of the Congress and until such war or national emergency has been terminated in such manner, provide or be amended without consideration to provide that payments to be made to the assignee of any moneys due or to become due under such contract shall not be subject to reduction or set-off, and if such provision or one to the same general effect has been at any time heretofore or is hereafter included or inserted in any such contract, payments to be made thereafter to an assignee of any moneys due * * * shall not be subject to reduction or set-off for any liability of any nature of the a signor to the United States or any department or agency thereof which arises independently of such contract, * * *.

It should be noted that the statute confers discretion upon contracting agencies to include the appropriate language. A "no set-off" clause is not mandatory.

The record in this case does not include copies of the five contracts themselves which were assigned as security to this plaintiff, nor has plaintiff otherwise proved to my satisfaction that the contracts originally included the no set-off language which is authorized by 41 U. S. C. §15 (1970). In fact, plaintiff implicitly concedes that no such provision originally appeared in any of the five contracts by arguing in its main brief that the provisions of the Act became operative through an implied contract amendment when it as assignee delivered copies of the assignments themselves to GSA. The instruments of assignments, which we do have before us, contain a warranty running from the assignor to plaintiff that no outstanding claims existed which might result in a set-off, reducing payments otherwise due the contractor.

Thus, plaintiff finds itself reduced to the position that each of these contracts was amended during the course of performance, so as to include by operation of law a provision binding against the Government that payments to be made to the assignee of moneys due or to become due the contractor would not be subject to reduction or set-off for the assignor's liabilities to the United States or its agencies. Plaintiff finds such an amendment implied in fact from the following circumstances: (1) the instruments of assignment to it contained the contractor's warranty that no indebtedness existed in favor of the United States ; (2) the instruments were delivered to responsible officials at GSA; and (3) GSA acknowledged receipt of such instruments without exception.

I would go a step further than Judge Kashiwa's opinion and hold as well that, as a matter of law, none of these five contracts were amended to contain a no set-off provision. In order to amend a contract, as in the case of contracting in the first instance, the parties by words or actions must manifest assent to the term of the proposed bargain. RESTATEMENT CONTRACTS §52 (1932); RESTATEMENT, SECOND CONTRACTS §52 (T. D. No. 1 (1964)). I do not think that we reasonably can say that authorized Government officials manifested their assent to the inclusion of a no set-off provision in these contracts. The Government did nothing more than to acknowledge receipt of the papers embodying the various assignments. Such an acknowledgment alone on the facts of this case is insufficient to conclude a legally effective amendment of a contract.

I agree that the petition should be dismissed.

 

 

 

City of Houston , Texas , Plaintiff v. United States of America and Riverside National Bank of Houston, Defendants

U.S. District Court, So. Dist. Tex. , Houston Div., H-84-2865, 10/28/85

[Code Secs. 6321 and 6323 ]

Assessment: Deficiency: Collection: Lien for taxes: Validity and priority against third parties: Property subject to tax liens: After-acquired property.--Although a bank's interest in an account receivable was first in time, subject to an after-acquired security interest, a federal tax lien against the account had priority over the bank's, because the account receivable was not "acquired" for purposes of a Code Sec. 6323 priority claim until the account was actually due and owing which was some five and a half months after the Government filed its first tax lien notice. In so holding the district court noted, that unless the interest in the disputed property was both first in time and choate, a secured creditor is not entitled to priority over a federal tax lien.

Daniel Doherty, P.O. Box 1562 , Houston , Tex 77251 , for plaintiff. Linda C. Groves, Department of Justice, Dallas, Tex. 75242-0599, Theodore R. Andrews, Assistant United States Attorney, Houston, Tex. 77002, for defendants.

MEMORANDUM AND ORDER

STERLING , District Judge:

Pending before the Court are the summary judgment motions of Defendants Riverside National Bank and the United States Government. Both Defendants claim they are entitled to $14,088.50 paid into the registry of the Court by the Interpleading Plaintiff in this case, the City of Houston . The relevant facts are not in dispute.

In August of 1979, Riverside National Bank commenced doing business with Flix-Tillman Construction Company. Flix-Tillman granted the Bank a security interest in its property, including its accounts receivable and contract rights, in return for a revolving line of credit. A financing statement was properly filed, and this was followed by the execution of a security agreement on September 5, 1979. On March 3, 1983, Flix-Tillman entered into a construction contract with the City of Houston . Flix-Tillman was to modify a grounds maintenance building at Hobby Airport . As consideration, the City of Houston paid $10,111.50 on a total contract price of $24,200.00. The $14,088.50 balance was to be paid on satisfactory completion of the project. The project was completed, and on January 17, 1984, the City of Houston authorized payment of the $14,088.50 contract balance. However, this contract balance was never paid because of Flix-Tillman's financial difficulties.

Flix-Tillman owed the Internal Revenue Service over $56,000.00 in back taxes. On July 14, 1983, the Internal Revenue Service began filing tax lien notices with the Harris County Clerk and Texas Secretary of State. Payment on this tax deficiency was never received, and on February 1, 1984, the Internal Revenue Service served notice of levy on the City of Houston for the $14,088.50 contract balance owed Flix-Tillman Construction Company.

By this time, Flix-Tillman had also defaulted on its obligations to Riverside National Bank. Flix-Tillman owed the Bank $50,382.38. On August 24, 1983, Flix-Tillman assigned its account receivable from the City of Houston to the Bank, and on the following day the Bank demanded payment of the same $14,088.50 contract balance the Internal Revenue Service seeks. Both the Internal Revenue Service and Riverside National Bank now assert their priority in, and superior right to, Flix-Tillman's $14,088.50 account receivable.

Riverside National Bank stakes its priority claim on its security interest in Flix-Tillman's property. This security interest was validly created. It became effective on September 5, 1979. On that date, Flix-Tillman executed a signed security agreement meeting all of the attachment requirements of TEX. CODES ANN. §9.203(a)(1) ( Vernon 1984). Contrary to the Government's assertions, this perfected security interest included Flix-Tillman's rights in the $14,088.50 contract balance owed it by the City of Houston . This contract obligation was an "account" within the language of TEX. CODES ANN. §9.106 ( Vernon 1984), and the language of Flix-Tillman's security agreement and Riverside National Bank's properly filed financing statement. Therefore, the Bank was fully secured in Flix-Tillman's property, including the after-acquired $14,088.50 account receivable, as early as September of 1979.

The Internal Revenue Service claim to the $14,088.50 account receivable arises under federal law. The Federal Tax Lien Act, as amended in 1966, 26 U.S.C. §6321 et seq. (1982), gives a lien in favor of the United States on all property and rights to property belonging to any person liable for taxes who neglects or refuses to pay after demand. 26 U.S.C. §6321 . This tax lien arises, "at the time the assessment is made," but only becomes effective against the holders of a security interest when the notice requirements of 26 U.S.C. §6322(f) are met. 26 U.S.C. §6325(a) . Proper notice under these provisions requires a filing in the offices of the Texas Secretary of State or with the County Clerk of the county in which the taxpayer resides. The Internal Revenue Service began filing in both offices on July 14, 1983. Consequently, the effective date of the Government's interest in the $14,088.50 account receivable began on July 14, 1983, almost three years subsequent to Riverside National Bank's perfection in Flix-Tillman's after-acquired property.

Although the Bank's interest in this contested account certainly arose prior to the Government's, priority is determined by Federal Law. U.S. v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1953). The general federal priority rule is, and has always been, "first in time first in right." U.S. v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84 (1963). However, this rule is qualified by a judicially created "choateness" requirement. U.S. v. Security Trust and Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47 (1950). Under this requirement any non-federal lien or competing claim must be "choate" in order to obtain priority over a 26 U.S.C. §6321 federal tax lien. "Choateness" requires the establishment of three elements. These elements are the identity of the lienor, the property subject to the lien, and the amount of the lien. U.S. v. City of New Britain, 347 U.S. at 86, Texas Oil and Gas Corp. v. U.S. [72-2 USTC ¶9653 ], 466 F.2d 1040 (5th Cir. 1972), cert. denied 410 U.S. 929 (1973). All three of these elements must be satisfied before a non-federal priority claim will be recognized as "choate."

Riverside National Bank could not satisfy all of the federal choateness elements until November 17, 1984. Prior to this date, the Bank's interest in the $14,088.50 contract balance was only as a secured creditor in an after-acquired property. After-acquired property interests cannot meet all of the choateness requirements, because the property which may be subject to an after-acquired lien has not been firmly identified or established. Texas Oil and Gas Corp. v. U.S. , 466 F.2d at 1050. It only becomes firmly established or identified when the property is actually acquired. Flix-Tillman's, and consequently Riverside National Bank's, interest in the $14,088.50 contract balance was not acquired until November 17, 1984, when the Houston City Council accepted Flix-Tillman's contract performance and authorized payment of the $14,088.50 balance. This was some five and a half months after the Internal Revenue Service filed the first of its tax lien notices. Therefore, the judicially created choateness requirements would give the Government priority in the $14,088.50 account receivable.

The Bank criticizes this result and argues it is still entitled to priority under the provisions of 26 U.S.C. §6323(c) . Section 6323(c) was a product of the 1966 Federal Tax Lien Act Amendment, which was specifically designed to alleviate the harshness of the choateness requirement. Plumb, Federal Liens and Priorities--Agenda for the Next Decade, 77 YALE L.J. 228 (1967). This change created certain classes of liens and lienholders who were granted priority over federal tax liens. Among these classes is Section 6323(c) 's protection for "certain commercial transactions, financing agreements, etc . . ." Riverside National Bank now claims it falls within the protection of this provision.

Section 6323(c) priority protection is subject to several qualifications. These qualifications are set out in the language of Section 6323(c) but have been summarized as requiring that: (1) the security interest stem from a written agreement which (a) was entered into before the Federal tax lien was filed and (b) qualified as a "commercial transactions financing agreement;" (2) the loans were made pursuant to the written agreement within 45 days of the tax lien filing or prior to receiving actual notice or knowledge that the tax lien had been filed; (3) the written agreement covered "qualified property" which was acquired by the taxpayer within 45 days of the tax lien filing; and (4) state law would give the security interest priority over a judgment lien creditor as of the time the federal tax lien was filed. Donald v. Madison Industries, Inc. [73-2 USTC ¶9623 ], 483 F.2d 837, 842 (10th Cir. 1973). The success of Riverside National Bank's Section 6323(c) priority claim depends upon its ability to prove each of the above elements. Rice Investment Co. v. U.S. , 625 F.2d 565 (5th Cir. 1980). This is a burden the Bank cannot meet.

The Bank's interest in the $14,088.50 account receivable does fall within the initial scope of Section 6323(c) . It is a "commercial transactions financing agreement." This is defined as,

an agreement (entered into by a person in the course of his trade or business)--(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business. 26 U.S.C. §6323(c)(2)(A)(i) .

"Commercial financing security" includes accounts receivable. 26 U.S.C. §6323(c)(2)(C)(ii) . Since this "commercial transactions financing agreement" stems from the written agreement signed and executed by Flix-Tillman on September 5, 1979, well before any tax lien filing, the first requirement summarized in Donald v. Madison Industries, Inc., 483 F.2d at 842, was satisfied.

The second summarized qualification requires any loans to have been made prior to actual notice or knowledge of the tax lien, or within 45 days of the tax lien's filing. 26 U.S.C. §6323(c)(2)(A) . This requirement is easily met by the Bank. The Bank began lending to Flix-Tillman in 1979. This continued for a four year period, but Flix-Tillman was in default for the full credit balance even before the Internal Revenue's first tax assessment. Therefore, the Bank's loans were necessarily made prior to the Internal Revenue Service's tax liens, and were made without actual notice or knowledge of any conflicting government claims.

The fourth Section 6323(c) requirement is wrapped up in the 26 U.S.C. §6323(h)(1) definition of "security interest." One can only have a Section 6323(h)(1) "security interest," and thereby Section 6323(c) priority, if under state law the interest would be given priority, if under state law the interest would be given priority over a judgment lien creditor as of the time the federal tax lien was filed. The relevant state law is provided by TEX. CODE ANN. §9.301(1) ( Vernon 1984). By negative implication, TEX. CODE ANN. §9.301(1) gives a perfected security interest priority over a subsequent judgment lien creditor. WHITE & SUMMERS, UNIFORM COMMERCIAL CODE, at 1031 (2d.ed. 1984). Riverside National Bank was attached and perfected in Flix-Tillman's after-acquired property on September 5, 1979. The first federal tax lien was filed almost four years later, on July 14, 1983. Under TEX. CODES ANN. §9.301(1), any judgment lien becoming effective on July 14, 1983, would have been subject to the Bank's prior perfected security interest, so the fourth summarized element in Section 6323(c) 's demands was satisfied.

Only the third qualification of Section 6323(c) bars Riverside National Bank's priority claim. 26 U.S.C. §6323(c)(1)(A) requires the security interest to be in "qualified property." "Qualified property" is defined in 26 U.S.C. §6323(c)(2)(B) as including, "only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing." The Fifth Circuit in Texas Oil and Gas Corp. v. U.S., 466 F.2d at 1040, held a similar account receivable, subject to an after-acquired security interest, was not "acquired" for purposes of the above language until the account was due and owing to the debtor. Flix-Tillman could not claim the $14,088.50 balance in question until the Houston City Council accepted its contract performance. Only then was this account due and owing. This did not occur until January 17, 1984, some five and a half months after the Government filed its first tax lien notice. Since this acquisition was well beyond the 45 day limit imposed by the Section 6323(c)(2)(B) definition of "qualified property," the Bank could not satisfy one of the required qualifications for a valid Section 6323(c) priority claim.

If any of the recognized qualifications for Section 6323(c) priority cannot be demonstrated, a secured creditor is not entitled to priority over a federal tax lien unless his interest was both first in time and choate. When these federal priority rules are applied to the undisputed facts in this case, it is apparent that Riverside National Bank's interest in Flix-Tillman's account receivable was subject to the interests of the Government. The Bank cannot satisfy all of the required elements of Section 6323(c) , and although its interest was first in time, it had not become choate until after the Internal Revenue Service filed its first tax lien notices. The United States is therefore entitled to the $14,088.50 account in dispute as a matter of law. It is, therefore,

ORDERED, ADJUDGED and DECREED that Defendant United States' motion for summary judgment is GRANTED and Defendant Riverside National Bank's motion for summary judgment is DENIED.

 

 

National Advertising Company, Inc. v. Robert Dick, Richard Dick, Sharon Dick, and the United States of America

U.S. District Court, So. Dist. Ind. Indianapolis, Div., IP 84-1565-C, 6/24/86

[Code Sec. 6321 ]

Lien for taxes: Property subject to lien: Debts owed to taxpayer.--A Federal tax lien attached to interpleaded funds that represented payment for services rendered by a delinquent taxpayer. The U.S. contended that the party who billed for the services acted only as the taxpayer's nominee, and therefore the taxpayer was the owner of the interpleaded funds. Summary judgment was granted to that effect because the nominee failed to respond. The U.S. acquired liens in the amount of the tax assessments made against the taxpayer.

William Clifford, 501 First Savings Tower, Anderson , Ind. 46016 , for plaintiff. Jeffrey Hunter, Assistant United States Attorney, Department of Justice, Washington, D.C. 20530, for defendants.

ORDER

STECKLER, District Judge:

This matter is before the Court on defendant The United States' motion for summary judgment pursuant to Fed. R. Civ. P. 56. Having considered the motion and being duly advised in the premises, the Court finds that defendant's motion for summary judgment should be granted.

This suit is an interpleader action originally filed by the plaintiff, National Advertising Company, Inc., in the Madison County Court. The complaint alleges that plaintiff has received a billing invoice in the amount of $4,628.08 from Robert Dick for services performed on behalf of plaintiff. Moreover, defendant The United States served plaintiff with a notice of levy with respect to federal income tax liabilities owed by defendants Richard and Sharon Dick. The United States contends that the services were performed by Richard Dick and therefore the payment is due Richard Dick. Plaintiff, National Advertising Company, Inc., has delivered to the Clerk the sum of $4,628.08. The United States removed the suit to federal court pursuant to 28 U.S.C. §§1441 -2 and §1446 .

On or about July 22, 1985, the United States served defendant Robert Dick its request for admissions wherein the United States requested Robert Dick to admit: (1) that the services were performed by Richard Dick; (2) that the payment due from National Advertising Company, Inc. for the services are due to Richard Dick; and (3) that Richard Dick did not perform any of the services in question as an employee of Robert Dick. Defendant Robert Dick has not denied or otherwise responded to the request. The above facts are deemed admitted by Robert Dick's failure to respond, Fed. R. Civ. P. 36; Asea, Inc. v. Southern Pacific Transporation Co., 669 F.2d 1242, 1245 (9th Cir. 1981); Anchorage-Hynning & Co. v. Moringiello, 697 F.2d 356 (D.C. Cir. 1983), and may form the basis for findings of fact in order for summary judgment. Donovan v. Carls Drug Co., Inc., 703 F.2d 650 (2d Cir. 1983); Chrapliwy v. Uniroyal, Inc., 458 F. Supp. 252, 258 (N.D. Ind. 1977).

The United States moves for summary judgment contending that Robert Dick billed the plaintiff for the services in question as Richard Dick's nominee and the true beneficial owner of the right of action against the plaintiff was Richard Dick. The United States further alleges that its federal tax lien attached to the funds now before the Court.

Defendant Robert Dick has not responded to the motion for summary judgment.

Finding no genuine issue of fact and that defendant The United States is entitled to judgment as a matter of law, the Court now enters its findings of fact and conclusions of law.

Findings of Fact

1. On the following dates a delegate of the Secretary of the Treasury made assessments against defendants Richard J. Dick and Sharon Dick for unpaid income taxes in the following sums:

                                                     Date of

                                                  Assessment and

                                                    Notice and

Year                                                  Demand        Tax

1976 ............................................ March 5, 1979  $5,685.34

1977 ............................................ March 19, 1979  4,058.37

1978 ............................................ May 25, 1979    3,890.04

 

2. On August 2, 1979, a Notice of Lien with respect to the above assessments was filed with the Recorder of Madison County Indiana.

3. These taxes and the accrued interest thereon remain unpaid as of this date.

4. On August 2, 1984, the Internal Revenue Service served a Notice of Levy with respect to the above liabilities on the plaintiff, the National Advertising Company, Inc., regarding any funds owed to Richard J. Dick.

5. The plaintiff has commenced an interpleader action regarding $4,628.08 which was billed to it in the name of Robert Dick, Richard J. Dick's father, and which it acknowledges owing for sign painting performed in the vicinity of Marion , Indiana .

6. The above sign painting services were performed by Richard J. Dick.

7. These sign painting services were billed to the plaintiff in the name of Robert Dick.

8. In billing the plaintiff for these services in his own name, the defendant Robert Dick was acting as Richard Dick's nominee.

Conclusions of Law

1. This Court has jurisdiction over this action pursuant to 28 U.S.C. §2410.

2. By operation of 26 U.S.C. §6321 , the United States acquired liens in the amounts of the foregoing assessments with respect to all property and rights to property of the defendants Richard J. Dick and Sharon Dick.

3. The right to receive the interpleaded $4,628.08 from the plaintiff for sign painting services performed in the vicinity of Marion, Indiana, belonged to Richard J. Dick rather than Robert Dick, even though the latter's name appeared on the invoices submitted to the plaintiff.

4. Because of Robert Dick's failure to respond to The United States' requests for admission, all facts set forth therein are deemed admitted pursuant to Fed. R. Civ. P. 36. Asea, Inc. v. Southern Pacific Transportation Co., 669 F.2d 1242, 1245 (9th Cir. 1981); Anchorage-Hynning and Co. v. Moringiello, 697 F.2d 356 (D.C. Cir. 1983).

5. The subject federal tax liens and the ensuing levy served on the plaintiff attached to the interpleaded funds. See 26 U.S.C. §6321 .

6. The United States is entitled to receive payment of the interpleaded funds from the plaintiff.

7. Upon full payment to the United States , the plaintiff shall be discharged from all liability arising from or connected with the services billed to it in the amount of $4,628.08 in the name of Robert Dick.

JUDGMENT

In accordance with the findings of fact and conclusions of law entered by the Court this date, summary judgment is hereby rendered in favor of The United States of America.

WHEREFORE, IT IS HEREBY ORDERED, ADJUDGED and DECREED that the plaintiff, National Advertising Company, Inc., is hereby ordered to pay to The United States of America the sum of $4,628.08, which sum shall be applied against the federal income tax liabilities of defendants Richard J. Dick and Sharon Dick for the years 1976, 1977, and 1978.

The plaintiff, National Advertising Company, Inc., shall, upon payment of such sum, be discharged from all liability arising from or connected with the services billed to it in such amount in the name Robert Dick.

 

 

 

United States of America , Plaintiff v. Americana Pools, Inc., et al., Defendants

U. S. District Court, West. Dist. Mo. , West. Div., Civil Action No. 15024-3, 7/20/67

[1954 Code Sec. 6321]

Lien for taxes: Validity against creditor.--An indebtedness owed to the delinquent taxpayer by a city was subject to the Government's tax lien against the delinquent taxpayer for unpaid taxes, penalties and interest.

F. Russell Millin , United States Attorney, John Harry Wiggins, Assistant United States Attorney, U. S. Courthouse, Kansas City , Mo. , for plaintiff. R. Vernon Smith, City Hall, Osceola, Mo., Nordahl E. Holte, 402 Waltower Bldg., Kansas City, Mo., for defendants.

Final Judgment

BECKER, District Judge:

This cause having come before the court on the motion of defendant Americana Pools, Inc., for a summary judgment and on the plaintiff's response to the court's order to show cause dated May 15, 1967, the court finds:

1. Plaintiff, the United States of America, has sued defendant Americana Pools, Inc., for unpaid taxes, penalties and interest in the amount of $2,812.29, plus interest, joining as a defendant the City of Osceola, Missouri, praying, among other things, that the court adjudge plaintiff to have a lien in the amount of $2,812.29, plus interest, encumbering the indebtedness of said city to Americana Pools, Inc., and praying that said city be ordered to pay the plaintiff the amount of its indebtedness toward satisfaction of said lien. Thereafter, said city answered admitting its contract with and its indebtedness to defendant Americana Pools, Inc., to the extent of $1,842.28, and requesting a declaratory judgment thereon and the allowance of an attorney's fee out of said sum. Thereafter, by leave of court, Americana Pools, Inc., filed its answer and cross-claim, admitted its indebtedness to the plaintiff, and the existence of aforesaid contract, and asserted its claim under the terms of aforesaid contract and arbitration proceedings held thereunder to $6,799.97 due it from said city, and prayed confirmation of the arbitration award, a reasonable attorney's fee and an order requiring said city to pay one-half the cost of arbitration and to make a determination between plaintiff and Americana Pools, Inc., as to entitlement to said fund. Thereafter, aforesaid motion for summary judgment and the court's said order to show cause were filed. Defendant city failed to answer said order to show cause and is now in default.

2. Defendant Americana Pools, Inc., is indebted to plaintiff for taxes in the amount of $2,778.05 and interest as of the date of assessment at the rate of six percent per annum plus penalties in the amount of $32.15, in the total amount of $3,691.54 as of July 20, 1967.

3. Plaintiff has a lien on the debt of defendant city to defendant Americana Pools, Inc., for the enforcement of which plaintiff has a right to recover from said city the total amount of $3,691.54 as of July 20, 1967.

4. Defendant Americana Pools, Inc., and defendant city entered into a valid contract on October 3, 1961, and thereafter, pursuant to said contract, and to the provisions of Chapter 435, Revised Statutes of Missouri, 1959, matters in dispute were duly submitted to a duly constituted board of arbitration which duly met and considered all the evidence presented to it and duly issued an award in the amount of $6,799.97 in favor of defendant Americana Pools, Inc., and against defendant City of Osceola. Thereafter, defendant Americana Pools, Inc., in this court as aforesaid, duly sought confirmation of said award in accordance with the provisions of Section 435.080, R. S. Mo., 1959.

5. Defendant Americana Pools, Inc., is entitled to confirmation of said award and to recover from defendant city said sum of $6,799.97, plus interest thereon at the rate of six percent per annum from June 20, 1962, the date of completion, amounting to $8,873.96 as of July 20, 1967.

6. The costs of said arbitration, including the arbitrator's fees, were $902.96. Said costs are taxable as costs against defendants equally under the provisions of said award and Section 435.210 R. S. Mo., 1959. Defendant City of Osceola is indebted to the arbitrators in the sum of $451.46, plus interest thereon at the rate of six percent per annum from February 28, 1967, amounting to $462.02 as of July 20, 1967, and defendant Americana Pools, Inc., is indebted to the arbitrators in the sum of $451.46, plus interest thereon at the rate of six percent per annum from February 28, 1967, amounting to $462.02 as of July 20, 1967.

7. Neither defendant is entitled to the attorney's fees prayed for.

8. Defendant City of Osceola is not entitled to the declaratory judgment sought in its answer.

9. Under the circumstances, judgment cannot be enforced by ordinary processes of execution, and plaintiff and defendant Americana Pools, Inc., have no adequate remedy at law. Enforcement of this judgment requires that defendant City of Osceola pay into the registry of this court the total sum of $9,335.98, plus interest thereon at the rate of six percent per annum from this date to the time of receipt by the clerk of this court.

It is, therefore,

ORDERED AND ADJUDGED that defendant Americana Pools, Inc., and plaintiff have and recover from defendant City of Osceola the sum of $8,873.96, plus interest thereon at the rate of six percent per annum from this date, plus the costs of this action, and that Robert R. Bayles, Kenneth F. Crabtree and Paul F. Porter have and recover $902.92 costs of arbitration: from the City of Osceola the sum of $462.02 and from Americana Pools, Inc., the sum of $462.02, plus interest on each such amount at the rate of six percent per annum from this date.

It is further

ORDERED AND ADJUDGED that the City of Osceola promptly pay into the registry of this court the total sum of $9,335.98, plus interest at the rate of six percent per annum from this date, to be disbursed by the clerk of this court as follows:

(1) To the Treasurer of the United States the sum of $3,691.54, plus interest thereon at the rate of six percent per annum from this date.

(2) To Robert R. Bayles the sum of $514.68, plus interest thereon at the rate of six percent per annum from this date.

(3) To Kenneth R. Crabtree the sum of $204.68, plus interest thereon at the rate of six percent per annum from this date.

(4) To Paul F. Porter the sum of $204.68, plus interest thereon at the rate of six percent per annum from this date.

(5) To defendant Americana Pools, Inc., the balance of the amount paid into the registry of this court pursuant to this judgment.

It is further

ORDERED AND ADJUDGED that this court retain jurisdiction for the purpose of making such other and further orders as may be necessary or desirable to secure compliance with this judgment.

 

 

 

United States of America , Plaintiff v. Great Northern Chair Company, Inc., Harry B. Weber Company, and Shelby Williams Manufacturing Company, Defendants

U. S. District Court, No. Dist. Ill. , East. Div., No. 57 C 108, 5/4/59

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

Collection of taxes: Lien for taxes: Third-party's claim.--An amount due and owing a delinquent taxpayer by its debtor was subject to the claim of the United States, secured by a Federal tax lien, for unpaid withholding and FICA taxes and to the claim of a third-party in proportion to their interests as stipulated in an agreement between them.

R. Tieken, 450, United States Court House, Chicago , Ill. , for plaintiff. Anderson, Collins & Drolet, 111 West Monroe Street, Mitchell Edelson, 100 North LaSalle Street, Chicago, Ill., for defendants.

Findings of Fact and Conclusions of Law

SULLIVAN, District Judge:

The above case came on to be heard by the Court sitting without a jury on April 29, 1959. The plaintiff was represented by R. Tieken, United States Attorney for the Northern District of Illinois, defendant, Harry B. Weber Company, was represented by Mr. Leon Drolet, defendant, Shelby Williams Manufacturing Company, was represented by Mitchell Edelson, and the defendant, Great Northern Chair Company, Inc., was not present nor represented in Court. The case was presented on oral testimony, documentary evidence and a Stipulation between the United States of America , plaintiff, and Harry B. Weber Company and Shelby Williams Manufacturing Company, defendants herein, and the Court after carefully considering all the evidence makes the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. The instant action was commenced for the collection of assessed withholding taxes and Federal Insurance Contribution Act taxes and statutory interest pursuant to authority granted by the Attorney General of the United States .

2. This is a civil action arising under the Internal Revenue Laws of the United States for the collection of withholding taxes and Federal Insurance Contribution Act taxes and interest for the quarterly periods ended December 31, 1951, March 31, 1952, June 30, 1952 and December 31, 1952.

3. The defendants, Great Northern Chair Company, Inc., Harry B. Weber Company, and Shelby Manufacturing Company, are incorporated or licensed to do business or are doing business in this judicial district.

4. On May 14, 1952 the then Commissioner of Internal Revenue made an assessment of $8,775.10 as withholding tax and FICA taxes of the defendant, Great Northern Chair Company, Inc., for the quarterly period ended December 31, 1951 and included therein $107.53 as interest, making a total assessment of $8,882.63. The then Commissioner of Internal Revenue certified the list of the said assessment to the then Collector of Internal Revenue for the District of Illinois, by whom it was received and by whom notice thereof was given to and demand for payment of the amount thereof was made upon the defendant, Great Northern Chair Company, Inc., on July 14, 1952. Penalty in the amount of $319.13 and interest in the amount of $567.02, making a total of $886.15, have accrued on said assessment to and including August 15, 1956. Payments and other credits have been made against the said assessment, leaving an unpaid balance of $532.62.

5. On August 7, 1952 the then Commissioner of Internal Revenue made an assessment of $10,414.81 as withholding tax and FICA taxes of the defendant, Great Northern Chair Company, Inc., for the quarterly period ended March 31, 1952 and included therein $120.54 as interest, making a total assessment of $10,535.35. The then Commissioner of Internal Revenue certified the list of the said assessment to the then Collector of Internal Revenue for the District of Illinois, by whom it was received and by whom notice thereof was given to and demand for payment of the amount thereof was made upon the defendant, Great Northern Chair Company, Inc., on October 31, 1952. Penalty in the amount of $375.43 and interest in the amount of $706.46, making a total of $1,081.85, have accrued on said assessment to and including August 15, 1956. Payments have been made against the said assessment, leaving an unpaid balance of $371.76.

6. On November 14, 1952 the then Commissioner of Internal Revenue made an assessment of $9,104.16 as withholding tax and FICA taxes of the defendant, Great Northern Chair Company, Inc., for the quarterly period ended June 30, 1952 and included therein $157.51 as interest, making a total assessment of $9,261.67. The then Commissioner of Internal Revenue certified the list of the said assessment to the then Collector of Internal Revenue for the District of Illinois, by whom it was received and by whom notice thereof was given to and demand for payment of the amount thereof was made upon the defendant, Great Northern Chair Company, Inc., on December 18, 1952. Penalty in the amount of $463.08 and interest in the amount of $1,023.53, making a total of $1,486.61, have accrued on said assessment to and including August 15, 1956. Payments have been made against the said assessment, leaving an unpaid balance of $5,695.95.

7. On November 14, 1952 the then Commissioner of Internal Revenue made an assessment of $10,213.02 as withholding tax and FICA taxes of the defendant, Great Northern Chair Company, Inc., for the quarterly period ended December 31, 1952 and included therein $84.64 as interest, making a total assessment of $10,297.66. The then Commissioner of Internal Revenue certified the list of the said assessment to the then Collector of Internal Revenue for the District of Illinois, by whom it was received and by whom notice thereof was given to and demand for payment of the amount thereof was made upon the defendant, Great Northern Chair Company, Inc., on December 18, 1952. Penalty in the amount of $514.88 and interest in the amount of $766.76, making a total of $1,281.64, have accrued on said assessment to and including August 15, 1956. Payments have been made against the said assessment, leaving an unpaid balance of $246.02.

8. Statutory interest due upon said assessments to and including April 29, 1959 is $1,903.93. No part of said statutory interest accrued to April 29, 1959 has been paid.

9. Pursuant to Section 3672, Internal Revenue Code of 1939, Notices of liens were filed with the Recorder of Deeds, Cook County, Illinois, and the filing fees therefor in the amount of $6.00 were paid by the then District Director of Internal Revenue, Chicago, Illinois. No part of said fees has been paid by the Great Northern Chair Company, Inc.

10. Defendant, Harry B. Weber Company, is indebted to the Great Northern Chair Company in the sum of $1,293.85. On May 7, 1954 there was served on defendant, Harry B. Weber Company, a levy warrant for distraint and notice for Federal tax lien.

11. The defendant, Shelby Williams Manufacturing Company, has made claim to the indebtedness owing from Harry B. Weber Company to the Great Northern Chair Company, Inc.

12. The United States of America , plaintiff, and Shelby Williams Manufacturing Company, defendant, respective claimants to the indebtedness due and owing from Harry B. Weber Company to Great Northern Chair Company, Inc., have agreed that their interests in the said indebtedness are $943.85 and $350.00, respectively.

Conclusions of Law

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

2. There is due and owing from the defendant, Great Northern Chair Company, Inc., to the United States of America up to and including April 29, 1959 the sum of $8,756.28.

3. Plaintiff , United States of America , is entitled to judgment with interest against the defendant, Great Northern Chair Company, Inc., in the aforesaid indebtedness in the total sum of $8,756.28, plus costs of this action, together with six per cent interest from April 29, 1959 until the judgment indebtedness is satisfied.

4. Defendant, Harry B. Weber Company, is indebted to the defendant, Great Northern Chair Company, Inc., in the amount of $1,293.85.

5. Plaintiff, United States of America, is entitled to recover for and on behalf of the Great Northern Chair Company, Inc. from Harry B. Weber Company the sum of $943.85 in full satisfaction of its claim against the said sum, said amount of $943.85 to be applied to the Judgment recovered by the United States of America against the Great Northern Chair Company, Inc., in reduction thereof.

6. The defendant, Shelby Williams Manufacturing Company, is entitled to recover for and on behalf of the Great Northern Chair Company, Inc. from Harry B. Weber Company the sum of $350.00 in full satisfaction of its claim against the said sum.

7. The defendant, Harry B. Weber Company, is discharged of its indebtedness to the Great Northern Chair Company, Inc., upon payment of the respective sums to the United States of America and Shelby Williams Manufacturing Company.