Debts Owed to the Taxpayer page4

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United States of America , Plaintiff v. Gridley Construction Company, and H. D. Gridley, President of Gridley Construction Company, Defendants

In the United States District Court for the Southern District of California, Central Division, No. 15,210-WM, September 23, 1954

[1939 Code Secs. 3670 and 3710--same as 1954 Code Secs. 6321 and 6332]

Collection of tax: Withholding taxes: Property subject to distraint.--Judgment was issued for the government in the amount of $4,187.50 plus interest against a company which owed $4,687.50 to an individual who owed withholding and unemployment taxes to the government. Although a notice of lien had been served on the company on April 20, 1951, the company subsequently paid the amount in question over to the individual paying only $500 to the government.

Walter S. Binns (later Laughlin E. Waters) United States Attorney, E. E. Mitchell and Edward R. McHale, Assistant United States Attorneys, Eugene Harpole and Frank W. Mahoney, Special Attorneys, Internal Revenue Service, 600 Federal Building, Los Angeles 12, Calif., for plaintiff. A. Calder MacKay, Adam Y. Bennion, MacKay, McGregor, Reynolds & Bennion, 728 Pacific Mutual Building, Los Angeles 14, Calif., for defendants.

MATHES, District Judge:

The above entitled action came on for trial before the Court sitting without a jury, at Los Angeles, California, on September 14, 1954, the Honorable William C. Mathes, Judge Presiding; the plaintiff appeared by Laughlin E. Waters, United States Attorney for the Southern District of California, Edward R. McHale, Assistant United States Attorney for said District, Chief, Tax Division, and Eugene Harpole, Special Attorney, Internal Revenue Service; the defendants did not appear. Evidence, oral and documentary, was introduced on behalf of plaintiff, and the Court, after consideration of said evidence, therefrom makes the following:

Findings of Fact

I. That the United States of America is a corporation sovereign and body politic.

II. That this action arises under the Internal Revenue laws of the United States , is authorized by the Commissioner of Internal Revenue and brought at the direction of the Attorney General of the United States .

III. That the defendants Gridley Construction Company and H. D. Gridley are located at and have their principal places of business within the jurisdiction of this court.

IV. That in April 1951 Gridley Construction Company was indebted to William F. Rice in the amount of $4,687.50; that subsequent to the 20th day of April, 1951, Gridley Construction Company paid over the sum of $4,687.50 to William F. Rice.

V. That on the 4th day of June, 1945, the Commissioner of Internal Revenue assessed Federal withholding taxes against William F. Rice for the first quarter of the year 1945 in the sum of $3,797.80 and interest thereon in the amount of $28.33. Thereafter the sum of $21.35 was paid upon said assessment. A Warrant for Distraint for the collection of said tax, penalty and interest was issued on June 20, 1945.

VI. That on the 26th day of July, 1945, the Commissioner of Internal Revenue assessed Federal withholding taxes against William F. Rice for the second quarter of the year 1945 in the sum of $3,455.50. A Warrant of District for the collection of said tax, penalty and interest was issued on August 6, 1945.

VII. That on the 12th day of July, 1945, the Commissioner of Internal Revenue assessed Federal unemployment taxes for the year 1944 against William F. Rice in the sum of $1,063.80, a penalty thereon of $159.57 and $28.52 interest, making a total assessment of $1,251.89. A Warrant of Distraint for the collection of said tax with penalty and interest thereon was issued July 20, 1945.

VIII. That on the 24th day of March, 1948, the Commissioner of Internal Revenue assessed Federal unemployment taxes for the year 1945 against William F. Rice in the sum of $1,405.21 and interest thereon of $180.73, making a total assessment of $1,585.94 upon which the sum of $26.25 was paid on October 1, 1951. A Warrant of District for the collection of said tax with penalty and interest thereon was issued May 5, 1948.

IX. That on April 20, 1951, a Notice of Lien and Levy and copies of said Warrants of Distraint were served on H. D. Gridley, the president of Gridley Construction Company, and demand made by the Collector of Internal Revenue for the sum of $4,687.50 then owing from Gridley Construction Company to William F. Rice.

X. That on October 28, 1952, a final notice and demand (Form 668-C) was served on the defendant Gridley Construction Company through its President, H. D. Gridley, demanding that the amount which was owing to William F. Rice on April 20, 1951, be turned over to the plaintiff.

XI. That the defendants have failed to pay any sum over to the plaintiff, other than the sum of $500.00.

XII. That subsequent to the commencement of this action and on the 30th day of April, 1954, the defendant Gridley Construction Company paid the sum of $500.00 to plaintiff for application against the liability of $4,687.50 asserted herein by the plaintiff against the defendants, but no other payments have been made against said asserted liability.

XIII. That the taxes so asserted against William F. Rice remain unpaid in a sum in excess of the amount claimed against the defendants herein by the plaintiff.

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

Conclusion of Law

That the plaintiff United States of America is entitled to judgment against the defendants herein by virtue of the provisions of Section 3710 of the Internal Revenue Code in the amount of $4,187.50, together with interest thereon at the rate of 6% per annum from the 30th day of April, 1951, until paid, and for plaintiff's costs herein.

Judgment

NOW, THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED that the plaintiff have and recover judgment against the defendants Gridley Construction Company and H. D. Gridley in the sum of $5,035.62 and for plaintiff's costs to be taxed by the Clerk of this court in the sum of $56.60.

 

 

 

Citizens State Bank of Barstow, Texas, Appellant, v. S. P. Vidal, Collector of Internal Revenue for the District of New Mexico; Magnolia Petroleum Company, a corporation; Montgomery Transportation Company, Inc.; K. P. Kistler, doing business as "Buckeye Grocery Store"; Ed Chase; R. W. Cowell; D. B. Dehart; A. B. Flippin; J. W. Green; R. O. Johnson; L. J. Adkins; J. E. McDaniel; Arnold Nuttall; W. R. Rash; Bernice Warren; J. W. Wiles; L. B. Hancock; Grady Thompson, doing business as "Thompson Hardware Company"; and Harry V. Vance, Trustee in Bankruptcy. Appellees

(CA-10), United States Circuit Court of Appeals, Tenth Circuit, No. 2076, 114 F2d 380, Decided July 19, 1940

Appeal from the District Court of the United States for the District of New Mexico.

Tax lien on assigned fund: Priority of claims.--In a suit to establish priority of claims, including a federal tax lien, against receivables which had been assigned by the taxpayer to the appellant, the Court affirms the decision of the trial court that the order of precedence of various claims is as follows: Labor and materials, first; Collector of Internal Revenue, second; and the bank (appellant), third. Affirming District Court decision.

William L. Kerr (H. C. Buchly and W. W. Hubbard were with him on the briefs) for appellant. L. W. Post, for appellees.

Before PHILLIPS and BRATTON, Circuit Judges, and MURRAH, District Judge.

MURRAH, District Judge, delivered the opinion of the court.

[The Facts]

The Magnolia Petroleum Company, a corporation, ¹ appropriately filed its bill of interpleader, ² acknowledged its debt to the Montgomery Transportation Company, Inc., ³ for work, labor, and materials furnished to it by Montgomery, deposited the debt, in the sum of $5,151.49, in the Registry of the Court and asked to be discharged. All parties defendant, including Appellant and Appellees, answered, claiming prior and superior rights to the fund, Appellee, S. P. Vidal, Collector of Internal Revenue for the District of New Mexico, ⁴ claims the fund in satisfaction of a deficiency assessment for income tax in the sum of $4,472.13, with penalties, for taxes for the year of 1936, due the United States Government. To perfect the said lien, the Collector filed notice of the same in the office of the Clerk of the United States District Court at Santa Fe, New Mexico, on December 13, 1938; in the office of the County Clerk of Lea County, at Lovington, New Mexico, (the domicile of Montgomery), on December 14, 1938; in the office of the County Clerk of Eddy County, State of New Mexico, at Carlsbad, New Mexico, (where part of the work was performed and material furnished), on March 13, 1938; in the office of the Clerk of the United States District Court for the Western District of Texas, at Pecos, Texas, on December 16, 1938, and in the office of the County Clerk of Winkler County, at Kermit, Texas, (where part of the work was performed and material furnished), on December 13, 1938, as provided by applicable statutes. ⁵

The warrant for distraint and notice of levy was served upon Magnolia June 16, 1939, based upon a deficiency income tax assessment against Montgomery . Appellant, Citizens State Bank of Barstow, Texas, ⁶ made claim to the fund by virtue of written assignments, executed and delivered to it by Montgomery, for which it paid a valuable consideration, without actual notice of the filing of notice by the Collector, and which said assignments covered work in Texas and New Mexico for and on behalf of Magnolia, prior to the date warrant for distraint and notice of levy was served upon the Magnolia, but after the filing of the notice of the lien aforesaid.

The fund, in question, represents the payment of a debt from the Magnolia to Montgomery for work, labor and materials furnished, evidence of which was assigned to the Bank in the manner aforesaid and the sole question presented here is the priority of the claim of the Collector and the Bank.

The trial court held that the laborers and materialmen had first claim to the fund; that the Collector of Internal Revenue had second claim to the fund; that the Bank had third claim to the fund. The Bank appeals "only from that portion of the said judgment which denies its priority to the claim of the Collector." The facts are agreed and are correctly set forth in the Court's findings. They evidence the following material facts: Montgomery Transportation Company, Inc., a New Mexico Corporation, was engaged in what might be termed oil field work; was employed and did perform labor and furnish materials in Texas and New Mexico for the Magnolia. To obtain money with which to meet current obligations, meet its payroll and operating expenses, Montgomery carried its itemized statements of work performed and material furnished, approved by Magnolia, to the Bank and for a cash consideration transferred and assigned to the Bank the itemized statements of money due and to become due thereunder. It was understood between the Bank, the Magnolia and Montgomery that from the amount due Montgomery from Magnolia there would be deducted the purchase price of Magnolia Petroleum products purchased from the Magnolia by Montgomery, in the operation of its business, and the net amount due after deductions, from time to time, would be retained by the Bank and the amount so retained credited in payment of the written assignments on due date. This course of dealing continued from the year of 1936 until about the 16th of June, 1939, but the assignments in question were for May 1, 13, 16, 22, 31, June 6, 12 and 14, 1939. At that time the assignments aggregated $13,637.42 for work, labor and materials furnished Magnolia by Montgomery , but after deducting the credits for petroleum products furnished by Magnolia to Montgomery there remained the sum now deposited in the Registry of the Court by Magnolia.

On June 16, 1939, the Collector caused to be served on the Magnolia notice of levy and warrant of distraint, making demand upon Magnolia "for the amount now owing from you to the said Montgomery Transportation Company, Inc.", which precipitated the bill of interpleader. The assignments from the Montgomery to the Bank are valid, in good faith and made in the regular course of business and the Bank had no actual knowledge of the income tax delinquency or notice of the filing of the tax lien.

During the pendency of the suit, Montgomery was adjudged a Bankrupt and the Trustee in Bankruptcy was substituted party defendant and made claim to the fund, contending it should be distributed through bankruptcy, but the assignments to the Bank and the notice of tax lien having been made and filed more than four months prior to adjudication of bankruptcy, it was decreed that the Trustee in Bankruptcy take nothing.

[Controlling Question Is Status of Tax Lien]

In the last analysis the sole question in this appeal is whether or not the filing of the notice of a tax lien by the Collector, in the manner established by these facts, gave the Collector a prior and superior lien to the Bank, as assignee of the taxpayer. This is the controlling question. The question turns on the construction of the applicable provisions of the Internal Revenue Code, ⁷ which provides for a lien in behalf of the Government for unpaid taxes, the scope of the lien and the manner of its enforcement. ⁸

The question presented may be considered under two propositions. First, is the fund against which the lien is sought to be enforced "property or rights to property, whether real or personal, belonging to such person (taxpayer)", within the context and meaning of the statute? ⁹

A claim for work, labor and material furnished is evidence of a debt and a chose in action; it is so treated by the parties here. Is it "property or rights to property"? If it is not "property" within the meaning of the Act, then no lien can attach; if it is "property" within the meaning of the Act then the lien did attach from the date the assessment list was received in the office of the Collector of Internal Revenue asserting the lien, provided notice of the said lien covering the tax assessment was filed as provided by the Act, ¹⁰ subject to the prior and intervening right of adverse claimants. ¹¹

[Scope of Tax Collection Statute]

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. ¹² "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. ¹³ "Property" within the tax laws should not be given a narrow or technical meaning. ¹⁴

[Intangibles Subject to Ownership]

The evidence of debt for labor, work and materials furnished was subject to ownership, (the Bank claims ownership); it was subject to transfer, (it was transferred), and exclusive possession and enjoyment and may be brought within the dominion and control of a court, through some recognized process (it is the subject matter of the controversy here). Under well recognized authority these are the essential ingredients of "property" where value is the test. ¹⁵

[Effect of Western Union Tel. case]

The claim which has now ripened into the fund deposited into the Registry of this Court is "property or rights to property," although intangible in character. Appellant cites United States v. Western Union Telegraph Company, ¹⁶ as authority that a lien for taxes on "property or rights to property" contemplates a lien on tangible property only. An examination of the facts in the Western Union Telegraph Company case clearly indicates that the rights of the parties to the intangible property sought to be taxed were fixed long prior to attachment of the tax lien of the United States . There the Western Union Telegraph Company became obligated to pay to the stockholders of the Northwestern Telegraph Company certain fixed profits and the stockholders of the latter company were the third party beneficiaries to the property and the Northwestern Telegraph Company did not own, possess, or control the property at the time the tax lien was sought to be enforced against it. While in the instant case the claim of the Bank to the fund in question accrued subsequent to the filing of the tax lien against the taxpayer.

[Decision as to Property Situs Unnecessary]

Appellant does not contend that it comes within the "security exemption." ¹⁷ Conceding that appellant is a "mortgagee, pledgee, purchaser or judgment creditor", and therefore entitled to the protective provisions of sub section A, 26 U. S. C. A. Section 3672, it is argued that the transitory situs of the chose in action renders nugatory the notice of filing of the tax lien, either at the domicile of the owner, which is Lea County, New Mexico, or in Winkler County, Texas, and Eddy County, New Mexico, where the work was performed and materials furnished and did not charge the Bank with notice, as contemplated by the protective provisions of the Act. We are, thereby, asked to decide the situs of the "property", or when translated into the language of the Act, the place where "situated". In our view, it is unnecessary for us to decide the situs of the "property", or whether or not the laws of the State of Texas or New Mexico provide for the filing of the notice of tax lien against "property" falling within this classification. If this "property" does not have a situs in Texas or New Mexico, or either of them, as contemplated by the applicable laws of the states, the disjunctive provisions of sub division 2, Title 26 U. S. C. A., Section 3672, provide for the filing of the notice with the Court Clerk of the United States District Court, where the "property" is situated. Therefore, in December, 1938, when the notice of the tax lien was filed both with the United States Court Clerk for the Western District of Texas, and the United States Court Clerk for the District of New Mexico, the "property" was situated either at the domicile of Montgomery in Lea County, New Mexico or the place where the work was performed and materials furnished, in Winkler County, Texas and Eddy County, New Mexico.

[Precautions Taken by Collector]

Out of an abundance of precaution the Collector filed notice of the lien at the domicile of the taxpayer and where the work was performed and materials furnished. It is significant to note that at that time the equities of the Bank had not attached, because evidence of the fund had not been assigned. The Collector met every requirement of the Act when on December 21, 1938, after notice and demand for payment and refusal to pay the tax assessments he caused the same to be recorded in the offices of the United States District Court for the District of New Mexico; the County Clerk of Lea County, New Mexico; the United States District Court for the Western District of Texas and the County Clerk at Winkler County, Texas.

[Conclusions]

The tax lien upon all the "property and rights to property" of Montgomery, including the fund, in question, became effective as of the date upon which the assessment list, signed by the Commissioner of Internal Revenue, covering the assessments was received in the office of the Collector of the District of New Mexico and became a valid lien against the claims of Montgomery for work, labor and materials furnished for Magnolia. They were thereafter assigned and transferred to the Bank, subject to the prior and subsisting lien of the United States under Title 26, U. S. C. A. Section 3670, 3671 and 3672, Revised Statutes, Section 3186. ¹⁸

The judgment is affirmed.

¹ Hereinafter called Magnolia.

² Under authority of Acts of Congress of date January 20, 1936, Chapter 13, Section 1, 49 Stat. 1096 (U. S. C. A. Title 28, Sec. 41(26).

³ Hereinafter called Montgomery .

⁴ Hereinafter called Collector.

⁵ Section 3186 of the Revised Statutes of the United States, as amended by Section 613 of the Revenue Act of 1928, (Act of May 29, 1928, 45 Stat., 875) and Section 509 of the Revenue Act of 1934 (Act of May 10, 1934, 48 Stat. 757).

26 U. S. C. A. Section 3672, which reads in part as follows:

"VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT CREDITORS

"(a) INVALIDITY OF LIEN WITHOUT NOTICE. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector.

"(1) UNDER STATE OR TERRITORIAL LAWS. In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice; or

"(2) WITH CLERK OF DISTRICT COURT. In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law provided for the filing of such notice; or

"(3) WITH CLERK OF DISTRICT COURT OF THE UNITED STATES FOR THE DISTRICT OF COLUMBIA . In the office of the clerk of the District Court of the United States for the District of Columbia , if the property subject to the lien is situated in the District of Columbia ."

⁶ A banking corporation organized under the laws of the State of Texas , and doing business in Barstow , Ward County, Texas and hereinafter called Bank.

⁷ Title 26 U. S. C. A. Sections 3670, 3671 and 3672, Revised Statutes 3186, as amended.

⁸ Cannon v. Nicholas, Collector of Internal Revenue, 80 F. (2) 934 [35-2 USTC ¶9672].

⁹ Title 26 U. S. C. A. Section 3670, 53 Stat. 448, which reads as follows:

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

¹⁰ United States v. Rosenfield, et al., 26 F. Supp. 433 [39-1 USTC ¶9204].

¹¹ Exchange National Bank of Tulsa v. Davy, et al., 13 F. Supp. 226 [36-1 USTC ¶9053].

¹² Cannon v. Nicholas, Collector of Internal Revenue, supra.

¹³ Fidelity & Deposit Co. of Maryland v. Arenz, 290 U. S. 66; Matter of Dunfee, 219 N. Y. 188, 114 N. E. 52; Gaddy v. Witt (Tex. Civ. App.) 142 S. W. 926.

¹⁴ Commissioner of Internal Revenue v. Stephens-Adamson Mfg. Co., 51 F. (2d) 681 [2 USTC ¶787].

¹⁵ Gleason v. Thas, 236 U. S. 558.

¹⁶ 50 F. (2d) 102 [2 USTC ¶754].

¹⁷ 26 U. S. C. A., subsection B of Section 3672.

¹⁸ Equitable Life Assurance Society of the United States v. Moore , et al., 29 F. Supp. 179 [39-2 USTC ¶9774].

United States v. Rosenfield, et al., supra.

 

 

 

In re Theresa A. O'Gorman-Sykes, Debtor

U.S. Bankruptcy Court, East. Dist. Va. , Norfolk Va., 99-22977-DHA, 12/13/99, 245 BR 815.

[Code Sec. 6321 ]

Tax liens: Filing: Statutory authority: Bankruptcy: Debtor: Spouse of debtor: Assets: Real property: Tenancy by the entirety: Joint tax return: State law.--

A bankruptcy court declined to confirm a debtor's Chapter 13 plan that improperly classified the IRS's claim and failed to provide for full payment of the IRS's secured claim. A tax lien attached to real property held by a debtor and her husband as tenants by the entirety because the couple filed a joint return and, thus, assumed joint responsibility for taxes owing. While property held in tenancy by the entirety cannot be reached to satisfy the debts of an individual spouse under state ( Virginia ) law, it can be used to satisfy joint obligations. Since the lien was recorded in the names of both the debtor and her husband, it attached to any property owned or subsequently acquired by them. The debtor's argument that the tax lien was improperly filed pursuant to state law filing requirements was rejected as meritless. Liens for federal taxes and provisions for their collection are federal in nature and are subject to the provisions of the Internal Revenue Code.

[Code Sec. 6321 ]

Tax liens: Bankruptcy: Schedules: Assets: Debtor: Spouse of debtor: Marital property: Personal property: Car: Title.--

A bankruptcy court declined to confirm a debtor's Chapter 13 plan that improperly classified the IRS's claim and failed to provide for full payment of the IRS's secured claim. A car purchased during the debtor's marriage and titled solely in the name of her husband qualified as marital property that was subject to the IRS's claim as part of the wife's bankruptcy estate. The mere fact that the car was not titled in the debtor's name was insufficient to establish that it was not part of her personal property and, therefore, properly excluded from the bankruptcy estate. The debtor listed the car as an asset on her bankruptcy schedules and elected to make payments due on it through the bankruptcy trustee. The record did not support the debtor's contention that her husband owned the vehicle as his separate property.

[Code Secs. 6321 and 6871 ]

Tax liens: Bankruptcy: Schedules: Assets: Debtor: Spouse of debtor: Personal property: State law: Exemptions: Levy: Judgment: Support payments: Tax refund.--

A bankruptcy court declined to confirm a debtor's Chapter 13 plan that improperly classified the IRS's claim and failed to provide for full payment. The IRS's claim was secured by the total amount of support payments owed to the debtor by her husband pursuant to a judgment against him and the support arrearages owed to her by an ex-husband. Although the support constituted property that was exempt from levy, it was still subject to the tax lien. Similarly, other items of personal property belonging to the debtor, as well as anticipated federal income tax refunds, that she sought to characterize as exempt under state ( Virginia ) law were subject to the IRS's lien.

MEMORANDUM OPINION AND ORDER

ADAMS, Bankruptcy Judge:

This case comes before the Court on the debtor's Objection To Claim of the Internal Revenue Service, filed on August 24, 1999 and the corresponding Objection to Confirmation filed by the IRS on September 20, 1999. On April 29, 1999 the debtor filed her Chapter 13 petition and schedules, and on May 19, 1999 filed her Chapter 13 plan. This Court has jurisdiction over this controversy pursuant to 28 U.S.C. §1334 and 28 U.S.C. §157(b)(2).

FINDINGS OF FACT

The IRS filed its Proof of Claim on June 2, 1999 in the total amount of $104,532.41, of which it claimed $46,016.00 as a secured claim representing taxes, penalties and interest for tax years 1984, 1985, 1990, 1993, 1994 and 1995. The balance of the IRS claim, totaling $58,516.41, represents an unsecured claim for taxes due for the years 1987, 1988, 1992 and 1993. The Internal Revenue Service recorded Federal Tax Liens in the name of Theresa A. O'Gorman in the Clerk's Office of the Circuit Court of the City of Virginia Beach as follows:

Lien Recorded                                For Tax Years    Amount

May 12, 1987 ............................... 1985           $ 5,401.41

September 29, 1987 ......................... 1984, 1985     $12,359.29

July 31, 1997 .............................. 1984           $ 6,957.88

Thereafter, the IRS filed additional Federal Tax Liens in the name of Theresa A. O'Gorman-Sykes, aka Theresa O. Riggin, aka Theresa A. O'Gorman, with the Clerk of the Virginia Beach Circuit Court:

Lien Recorded                                For Tax Years    Amount

August 21, 1989 ............................ 1984, 1985     $10,324.15

September 19, 1991 ......................... 1984, 1985     $12,359.29

September 19, 1991 ......................... 1984, 1985     $10,324.15

June 30, 1992 .............................. 1990           $ 2,503.50

May 16, 1996 ............................... 1994 *         $14,350.52

April 28, 1997 ............................. 1993, 1995     $25,814.22

May 12, 1997 ............................... 1985           $ 5,401.41

[ *  The lien recorded on May 16, 1996 for 1994 taxes was recorded in

the name of the debtor and her husband, Daniel P. Sykes]

 

Debtor's Objection To Claim contends that the debtor does not own sufficient property to secure the IRS tax lien in the amount of $46,016,00. The debtor further maintains that the total amount of her property that provides security for the tax lien, is only $6,566.00, leaving an unsecured general claim in the amount of $97,966.41. In a hearing on a Motion for Continuance on the debtor's Objection To Claim and IRS's Objection to Confirmation held on October 21, 1999, the parties elected to submit the issues before the Court on briefs. The Court has reviewed the briefs of the parties, the exhibits attached thereto and the debtor's schedules in reaching it conclusions.

The debtor listed on Schedule A an equity interest of $10,000 in her residence at 1021 Country Mill Road , Virginia Beach , Virginia . The debtor claims that the residence is owned as tenants by the entirety with her spouse. She also listed on Schedule B wearing apparel with a value of $500, furs and jewelry valued at $2,000, $300 in wages due the debtor at time of filing, household goods totaling $2.965, an automobile with a value of $14,000 and a judgment against her former spouse and an arrearage owed by her first spouse for support in the amount of $24,000. The debtor also asserts that she is not the titleholder of the 1995 Volvo automobile listed on her schedules.

CONCLUSIONS OF LAW

1. REAL ESTATE HELD IN TENANCY BY THE ENTIRETY

The Court must first decide whether the IRS may reach the real estate held by the debtor with her husband as tenants by the entirety. The Federal Tax Lien recorded on May 6, 1996 in Virginia Beach claiming 1994 taxes due in the amount of $14,350.92 is in the name of the debtor and Daniel P. Sykes. Thus, the IRS lien attached to any property then owned or thereafter acquired by Daniel and Theresa O'Gorman Sykes. By filing a joint federal income tax return, the debtor and her husband assumed joint responsibility for any income taxes due that year. The tax liability incurred as a result of the 1994 filing is therefore a joint debt and the IRS holds a valid lien against the Sykes' jointly held property. Although property held in tenancy by the entireties is not reachable by an individual spouse's creditors, as dictated by Virginia law, ¹ it may be used to satisfy joint debts. Vasilion v. Vasilion, 66 S.E.2d 599 (Va. 1951) ²; Ford v. Poston, 773 F.2d 52 (4th Cir. 1985). ³ Therefore, the debtor's equity in her residence, indicated to be $10,000 and exempted only to the extent of $1.00, secures a portion of the claim of the IRS representing the unpaid balance on tax claims arising from debtor's 1994 joint income tax return.

Debtor's argument, with respect to the real estate, that the IRS improperly filed its lien, and therefore must be treated as an unsecured creditor, is without merit. Debtor's attempt to introduce state law filing requirements in misplaced. Liens for federal taxes and provisions for their collection are strictly federal and strictly statutory. Bank of Nevada v. U.S. [58-1 USTC ¶9228], 251 F.2d 820 (9th Cir. 1957). The tax lien filings in this case meet the requirements of 26 U.S.C. §6321 et seq.

2. INTERNAL REVENUE SERVICE'S INTEREST IN DEBTOR'S VEHICLE

The IRS claims that the vehicle is marital property purchased during the marriage, and, as such, is subject to the IRS claim as part of the bankruptcy estate. The debtor argues that she does not own the vehicle, that it is titled in her husband's name alone, and therefore the IRS does not have a lien on the vehicle. The Court relies on the copy of the registration for the vehicle attached to the debtor's Objection To Claim and the parties' apparent agreement that the vehicle is titled solely in the name of debtor's husband.

The evidence in the record supports the IRS's contention that the vehicle is marital property, and is therefore subject to the IRS's claim. The fact that the vehicle is not titled in debtor's name is not dispositive. Under Virginia law, §20-107.3, ⁴ it would appear that the vehicle is marital property and therefore is property of the bankruptcy estate.

The fact that the vehicle was purchased during the marriage, that debtor listed it as an asset on her schedules (Schedule B, Item 23) and elected to make the payments due on the loan for it through her plan support the conclusion that the vehicle is marital property. In addition to proposing to pay the automobile loan payments through the trustee, the debtor lists the debt secured by the Volvo on Schedule D and indicated on Schedule H that she has no co-debtors. The debtor cannot rely solely on the fact that the vehicle is not titled in her name to support her contention that the vehicle does not constitute her "personal property." Absent any evidence to support debtor's position of separate ownership of the vehicle in Daniel Sykes, the Court finds that the vehicle constitutes marital property which the IRS lien reaches to secure its tax lien in the amount of $5,000, representing equity in the vehicle.

3. ANTICIPATED TAX REFUNDS

With respect to anticipated federal tax refunds for 1998 and 1999, this claim does not appear to be contested by the debtor. Clearly, the tax refunds relating to prepetition income are property of the estate. In re Sutphin, 24 B.R. 149 (Bankr. E.D.Va. 1982) ⁵; In re Cannon, 130 B.R. 748 (Bankr. N.D.Texas 1991) ⁶; 11 U.S.C.A. §541(a). The anticipated 1998 tax refund of $500 and the anticipated 1999 refund of $100 are therefore property of the estate, representing a return of the overpayments of prepetition taxes. The effect of the IRS lien attaching to the debtor's real and personal property affects the viability of the plan:

Having the IRS lien attach to exempt property does not, as Voelker contends, undermine §6334's goal of allowing the debtor To retain some minimal personal effects necessary for living in Our society,' because the IRS cannot summarily seize the property. The debtor retains possession and the lien simply determines the amount he has to pay the IRS. Thus, the effect of our holding that the IRS's lien attaches to Voelker's personal property will require him to pay the IRS $825.00 more than if the lien did not attach, either through larger monthly payments or through payments over a longer time period.

Matter of Voelker [95-1 USTC ¶50,028], 42 F.3d 1050, 1052 (7^th Cir. 1994).

The debtor exempted the anticipated 1998 and 1999 federal income tax refunds on Schedule C. Even though the refunds are claimed exempt by the debtor pursuant to Virginia Code Section 34-4, they are subject to the secured claim of the IRS. Matter of Voelker [95-1 USTC ¶50,028], 42 F.3d 1050, 1051 (7th Cir. 1994); ⁷ In re Reed, 127 B.R. 244, 246 (Bankr. D.Hawaii 1991); In re Carlson, 180 B.R. 593 (Bankr. E.D.Cal. 1995); Leuschner v. First Western Bank & Trust [58-2 USTC ¶9723], 261 F.2d 705, 708 (9th Cir. 1958); In re Tourville [97-2 USTC ¶50,976], 216 B.R. 457, 458 (Bankr. D.Mass. 1997).

4. SUPPORT PAYMENTS

The IRS's claim is clearly secured by the total amount of debtor's support payments due from her current husband and represented by a judgment against him ($13,000 as listed in Schedule C) and arrearages owed by her ex-husband ($11,000 as listed in Schedule C). A levy and a lien are different statutory privileges, and different rules apply to each. United States v. Wight, 1999 WL 628131, 83 A.F.T.R.2d 99-2175 (E.D. Cal). Property exempt from levy is still subject to a lien by the IRS. Matter of Voelker [95-1 USTC ¶50,028], 42 F.3d 1050 (7th Cir. 1994). Furthermore, a federal tax lien attaches to all of a debtor's property. 26 U.S.C.A. §6321. ⁸ The cases cited by debtor on this point are either inapplicable or no longer good law. ⁹ Therefore, the spousal support judgment and support arrearages are subject to the IRS lien under 26 U.S.C.A. §6321, despite being property exempt from levy.

Similarly and for the foregoing reasons, the other personal property of the debtor listed on Schedule B and claimed as exempt under state law, with a total asset value of $6,565.00, are also subject to the IRS tax lien. Those assets are:

Bank of Tidewater savings accounts ............................. $  50

Household goods and furnishings ................................ $2965

Computer ....................................................... $ 150

Clothing ....................................................... $ 500

Jewelry ........................................................ $2400

Sporting goods ................................................. $ 200

Wages due the debtor ........................................... $ 300

CONCLUSION

Because debtor's Chapter 13 plan improperly classifies the claim of the Internal Revenue Service and fails to provide for payment to the IRS the total amount of its secured claim, the debtor's plan cannot be confirmed under 11 USC Section 1325, and the debtor's Objection To Claim must be overruled.

IT IS SO ORDERED.

¹ Extent to which federal tax lien can reach taxpayer's property depends upon nature of taxpayer's interest as defined by state law. In re Raihl [93-1 USTC ¶50,290], 152 B.R. 615, (BAP 9th Cir. 1993)

² The Virginia Supreme Court in Vasilion held that realty held by husband and wife as tenants by the entireties is liable for the joint debts of both spouses and is reachable against them by proper process.

³ The Fourth Circuit in Ford v. Poston held that under Virginia law the creditors of one spouse may not attach real estate owned by tenants by the entireties--only creditors of joint debts of both spouses may reach such property.

⁴ 2. Marital property is (i) all property titled in the names of both parties, whether as joint tenants, tenants by the entirety or otherwise, except as provided by subdivision A 3, (ii) that part of any property classified as marital pursuant to subdivision A 3, or (iii) all other property acquired by each party during the marriage which is not separate property as defined above.

⁵ In that case, the Eastern District of Virginia Bankruptcy Court (Alexandria Division) held that possible federal and state income tax refunds are part of bankruptcy estate to extent that such refunds are attributable either to excessive withholding prepetition or to other prepetition income.

⁶ The Bankruptcy Court in that case held that an overpayment from a preceding year's excessive withholding, which the taxpayers elected to apply to their estimated federal income tax liability for a year in which one taxpayer's bankruptcy petition was filed, and which was received in the following year in the form of a refund, constituted estate property.

⁷ See also American Trust v. United States, 142 F.3d. 920 (6th Cir. 1998) (Internal Revenue Service (IRS) could enforce tax lien, in interpleader action brought by third party, against property that would be exempt from levy, even though IRS first sought to recover tax deficiencies by administrative levy),

⁸ "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." [Emphasis supplied] 26 USCA §6321

⁹ In re Barbier, 84 B.R. 190 (D. Nev. 1988) reversed U.S. v. Barbier [90-1 USTC ¶50,107], 896 F.2d 377 (9th Cir. 1990): In re King [89-2 USTC ¶9559], 102 B.R. 184 (Bankr. D. Neb. 1989) order reversed by Matter of King [91-2 USTC ¶50,553], 137 B.R. 43 (D. Neb. 1991); In re Riley, 88 B.R. 906 (Bankr. W.D. Wis. 1987) disagreed with by In re Voelker [94-2 USTC ¶50,299], 175 B.R. 989 (Bankr. W.D. Wis. 1994).

 

 

 

United States of America v. Helen and James Russell

U. S. District Court, Dist. Conn., Civil No. 15212, 6/21/74

[Code Secs. 6321 and 6502]

Tax liens: Property subject to: Alimony: Limitation period: State law: Effect.--A wife's alimony payments were "property" under state law (Connecticut) to which a federal tax lien could attach. Because the government's suit was filed within the applicable federal limitations periods, it could not be barred by a state limitation period.

Stewart H. Jones, Howard C. Eckenrode, 915 Lafayette Blvd. , Bridgeport , Conn. , for plaintiff. Helen H. Russell, Southbury , Conn. , pro se.

Ruling on Motion for Partial Summary Judgment

ZAMPANO, District Judge:

In this action the government, pursuant to the provisions of 28 U. S. C. §7403, seeks to secure an adjudication of indebtedness for federal income taxes and to foreclose a tax lien against the interest of the defendant Helen Russell in alimony payments due from her former husband, James Russell.

[Limitations]

I. The government's first motion for partial summary judgment requests a decree that the taxpayer, Mrs. Russell, is indebted to the United States for unpaid, assessed taxes, plus interest. The government's uncontroverted moving papers attest to the correctness of the assessments and set forth the liabilities for the years in question. In addition, the record discloses a letter from the defendant admitting her indebtedness, and at oral argument on the motion the defendant did not challenge the government's claim of liability.

The only opposition to this motion rests on the contention that the action is barred by federal and state statutes of limitations. However, the government is not bound by a state's limitations periods or subject to the defense of laches in enforcing its rights, United States v. Summerlin [40-2 USTC ¶9633], 310 U. S. 414, 416 (1940). Since the government's unchallenged affidavits conclusively demonstrate that the instant lawsuit was commenced within six years of the time the first assessment was made, 26 U. S. C. §6502(a), and within three years after each relevant tax return was filed, 26 U. S. C. §6501(a), the argument is without merit.

[Property Subject to Lien]

II. The government's second motion for partial summary judgment seeks to enforce its tax lien against Mrs. Russell's "property rights" to the weekly alimony payments of $100 she is receiving from her former husband. See 26 U. S. C. §6321.

The question whether alimony payments are "property" or "a right to property" depends on state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-513 (1960); United States v. Kocher [72-2 USTC ¶9730], 468 F. 2d 503, 506-507 (2 Cir. 1972). Under Connecticut law, alimony may be ordered paid from a husband's income, Conn. Gen. Stat. §46-21, and becomes a continuing legal obligation on the part of the husband to support his former wife. Shrager v. Shrager, 144 Conn. 483 (1957). While it is true that alimony is not a debt, per se, Wright v. Wright, 93 Conn. 296 (1919), it does represent money that is due a former wife which may be collected by a civil action for damages, Beaulieu v. Beaulieu, 18 Conn. Sup. 497, 498 (1954), or by a contempt proceeding for failure to comply with a court's order, Clancy v. Clancy, 26 Conn. Sup. 46, 52 (1965), or by specific performance, Daly v. Daly, 80 Conn. 609, 610 (1908). Thus, it would appear that Mrs. Russell's award of $100 per week in alimony is a presently exercisable and vested "right to property", as evidenced by the enforcement proceedings available to her under the statutory and decisional law of the State of Connecticut .

The Court, however, in the exercise of its equitable powers in such matters, cf. United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677, 679 (10 Cir. 1973), rejects the government's claim to the entire fund of $100 each week. Under all the circumstances here, particularly in view of the dire financial situation of the defendant, the Court limits the government's foreclosure on the aforesaid property right to the sum of $10.00 per week.

Accordingly, the motions for partial summary judgment are granted; the government shall prepare and submit an appropriate order within 30 days.

 

 

 

United States of America , Plaintiff, Appellant v. Owen M. Rye, Defendant, Appellee

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 75-1242, 550 F2d 682, 3/2/77, Vac'g and rem'g District Court decision, 75-2 USTC ¶9551, 390 FSupp 528

[Code Secs. 6321, 6323 and 7403--Result unchanged by '76 Tax Reform Act]

Lien for taxes: Property subject to lien: Support payments to former wife.--The Government's lien for unpaid taxes attached to a wife's right to receive support payments under a divorce decree from her former husband. The fact that such right under state law was not assignable and was subject to modification did not render such right to support so inchoate as to preclude it from being a property right. Further, the case was remanded to the District Court for consideration of the practical problems involved in enforcing this lien and for entry of an appropriate decree foreclosing and enforcing the Government's lien against the wife's right to receive support payments from her former husband and obligating the latter to comply therewith.

James N. Gabriel, United States Attorney, Boston, Mass. 02109, Scott P. Crampton, Assistant Attorney General, Wynette J. Hewett, Gilbert E. Andrews, Richard W. Perkins, Department of Justice, Washington, D. C. 20530, for plaintiff, appellant. Owen M. Rye, pro se.

Before COFFIN, Chief Judge, MCENTEE and CAMPBELL, Circuit Judges.

COFFIN, Chief Judge:

The sole issue in this appeal is whether the government's lien for unpaid taxes, see 26 U. S. C. §6321, can attach to a taxpayer's right to receive support payments pursuant to a divorce decree. The facts are set forth in the district court's opinion [75-2 USTC ¶9551], 390 F. Supp. 528 (D. Mass. 1975).

The government brought suit in the district court seeking a judgment against appellee's ex-wife for assessed tax liabilities, and foreclosure of federal tax liens upon all of her property and rights to property, including her right to receive support payments from appellee. ¹ The district court entered judgment for the government against the taxpayer, but, holding that under Massachusetts law her right to support payments was not "property" or a "right to property" to which a federal tax lien could attach, dismissed all claims against appellee. The government appeals from the latter part of the court's order.

We agree with the district court that whether the taxpayer's right to support payments is "property" or a "right to property" must be determined by reference to state law. The federal law "creates no property rights but merely attaches consequences, federally defined, to rights created under state law", United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958). See also Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513 (1960). Thus we must analyze the rights that Massachusetts recognizes in court-decreed support payments, and determine whether these rights amount to "property" or a "right to property" under federal law. See Note, Property Subject to the Federal Tax Lien, 77 Harv. L. Rev. 1485, 1487-91 (1964). Cf. Randall v. Nakashima & Co., Ltd. [76-2 USTC ¶9770], 542 F. 2d 270, 272-73 (5th Cir. 1976).

A Massachusetts court may enforce judgments for alimony or support "in the same manner it may enforce judgments in equity." M. G. L. A., c. 208, §35. Thus the support obligation may be enforced by execution, Knapp v. Knapp, 134 Mass. 353 (1883), or by contempt, Slade v. Slade, 106 Mass. 499 (1871); cf. Pur-Shahriari v. Pur-Shahriari, 355 Mass. 632, 633 (1969). While the "liability for unpaid alimony may not, strictly speaking, be a debt within the legal meaning of that word" it "gives to the wife in proceedings [against the estate of her deceased husband] the right as a creditor to enforce payment in the same manner and to as great an extent as if she were a creditor in the most exact sense of that word." McIlroy v. McIlroy, 208 Mass. 458, 464-65 (1911).

Thus Massachusetts law creates in this context an enforceable right to a sum of money. Ordinarily, such an interest is a "right to property" for purposes of a federal tax lien. See generally, Plumb, Federal Tax Liens at 21 (1972); Note, supra, 77 Harv. L. Rev. at 1491-97. The IRS has long maintained that alimony payments are subject to the federal tax lien, Rev. Rul. 89, 1953-1 Cum. Bull. 474, and the one federal court that has addressed this issue agreed. United States v. Russell, 74-2 USTC ¶9540 (D. Conn. 1974).

However, the district court relied on two other attributes of the Massachusetts support obligation in determining that it did not create a "right to property", 390 F. Supp. at 529: the right is not assignable; ² and it is subject to modification both as to future payments and as to arrearanges, M. G. L. A., c. 208, §37 (1976 Supp.); Watts v. Watts, 314 Mass. 129, 133 (1943). The impact of such attributes was not addressed in United States v. Russell, supra, but, applying, the reasoning of cases dealing with spendthrift trusts and trusts for support, we find that the factors relied on by the district court do not reduce the taxpayer's proprietary interests in the Massachusetts support obligation below a level that can be reached by a federal tax lien.

In the area of spendthrift trusts, the courts have consistently held that a restraint on transferability, whether arising from the trust instrument or from state law, does not immunize the beneficiary's interest from a federal tax lien. United States v. Dallas National Bank [46-1 USTC ¶9117], 152 F. 2d 582, 585 (5th Cir. 1946); Mercantile Trust v. Hofferbert [45-1 USTC ¶9124], 58 F. Supp. 701, 705 (D. Md. 1944). Since such a restraint is merely a state-created exemption from the reach of creditors, and not an aspect of the substantive right, it cannot serve to defeat the federal tax lien. Leuschner v. First Western Bank and Trust Co. [58-2 USTC ¶9723], 261 F. 2d 705, 708 (9th Cir. 1958). See Note, supra, 77 Harv. L. Rev. at 1489.

With respect to the fact that the judgment for support can be modified at any time upon application of either party, we note first that modification is not a matter for the unrestrained discretion of the court, but rather is available only when "the petitioner shows a change of circumstances since the entry of the earlier decree." Robins v. Robbins, 343 Mass. 247, 249 (1961). The support judgment is intended to be a final determination of the rights of the parties absent a real, and not just apparent, change of circumstances. Id. at 249, 252. We do not believe that this restrained discretion to modify the support judgment renders the right to support so inchoate that it is not a right to property. Rather, we agree with the reasoning of United States v. Taylor [66-2 USTC ¶9522], 254 F. Supp. 752, 756 (N. D. Cal. 1966), which held that the federal tax lien attached to the beneficiary's interest under a spendthrift trust for support: the fact that the right has a variable value does not affect the conclusion that the law lien attaches to the taxpayer's substantial and enforceable interest. "At most, it is a circumstance which may add to the practical problems of enforcing the lien." Id.

We therefore hold that the taxpayer's right to receive support payments from appellee is a right to property to which the federal tax lien, 26 U. S. C. §6321, has attached, and that the government is entitled to an adjudication of competing claims and a decree foreclosing and enforcing the lien. 26 U. S. C. §7403. We recognize, however, that the practical problems involved in enforcing this lien are substantial.

The district court has the power to adjudicate the merits of all claims to the property in question, 26 U. S. C. §7403, and jurisdiction to "render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws." 26 U. S. C. §7402. These sections give the district court the power to foreclose a lien on a debt, including a judgment debt, owing to the taxpayer by ordering the debtor to pay the government. See Mertens, Law of Federal Income Taxation, Vol. 9, §54.53 at 216-17. Cf. United States v. Taylor, supra, 254 F. Supp. at 757 (foreclosing the lien on taxpayer's interest under a trust for support by directing the trustee to pay over to the government all amounts payable to the taxpayer up to the amount of the lien).

Special problems arise in this case both because the right to support is subject to modification, and because the federal courts have traditionally exercised limited jurisdiction in matters of domestic relations. See Armstrong v. Armstrong, 508 F. 2d 348 (1st Cir. 1974); Bator, Mishkin, Shapiro & Wechsler, Hart & Wechsler's Federal Courts and the Federal System 1189-92 (2d ed. 1973). The district court unquestionably would have the power, with 26 U. S. C. §7402 as the basis of jurisdiction, to foreclose the tax lien and order appellee to pay to the government any amounts due under the support judgment up to the amount of the lien. Viewing the foreclosure as analogous to enforcement of the Massachusetts support judgment, however, raises the question of how to preserve appellee's right to seek modification of the support judgment before it is effectively enforced by foreclosure. Because the support judgment is subject to modification as to both arrearages and future payments, appellee must be given the opportunity to litigate the issue of modification before he can be compelled to pay over a specific sum under the judgment to the government. Cf. Restatement 2d of Conflict of Laws §109 and Comment c; ³ Griffin v. Griffin, 327 U. S. 220, 233-34 (1946).

The district court could perhaps consider the modification issue itself, but given the federal courts' express disclaimer of jurisdiction to determine an allowance of alimony as an original matter, see Barber v. Barber, 62 U. S. (21 How.) 582 (1859); Federal Courts and the Federal System, supra, 1189-90, we think there are sounder alternatives. The district court could foreclose the lien and abstain from entering an enforcement order pending a determination by the state probate court of the present status of the support judgment. It might also be possible to enter a conditional order directing appellee to pay to the government what he would otherwise pay to the taxpayer under the support judgment. Such an order would prevent appellee from paying the taxpayer, thus fulfilling the government's interest in "immobilizing" the payments before they are received and dissipated by the delinquent taxpayer, see Note, supra, 77 Harv. L. Rev. at 1495, 1497, but would not of its own force compel him to pay the government: rather enforcement of the affirmative obligation would be by order of the Massachusetts probate court upon application of either the taxpayer or the government. Cf. United States v. Mercantile Trust Co. [45-2 USTC ¶9417], 62 F. Supp. 837, 842 (D. Md. 1945) (foreclosing lien against beneficiary's interest in spendthrift trust, but holding that the proper method of enforcement was for Collector to apply to the state court for an order against the trustee). These two approaches have the advantage of leaving the modification issue to the state court, but the disadvantage of subjecting the government's interest in actual collection to the state court as well. Cf. 26 U. S. C. §7424 (government may intervene in state court proceeding affecting taxpayer's property and remove case to federal court); see also Plumb, supra at 253. There may be other methods of enforcement than those we have considered. However, we have serious doubts that the solution arrived at by the court in United States v. Russell, supra, is proper. The court there enforced the lien only as to $10 of the $100 monthly payment due under the alimony decree. It has been held that there is a general equitable power to refuse to order a foreclosure sale when that is not an appropriate remedy, see United States v. Boyd, [57-2 USTC ¶9791], 246 F. 2d 477, 480-81 (5th Cir. 1957), but there is no sale involved in enforcing the lien against alimony payments. Once it is established that the government has a valid lien against the taxpayer's right to receive support payments of a certain amount, a reduction in the amount solely for enforcement purposes is arguably a court-decreed exemption from levy. Under 26 U. S. C. §6334(c), which provides that the statutory exemptions from levy shall be the only exemptions, we doubt that the court would have the power to do this.

Because the district court has not yet considered the problem of enforcement, which we believe involves a delicate balancing of the government's interest in collection, the state's interest in deciding matters of family law and policy, and appellee's interest in avoiding a spiraling liability to the government under a federal court decree and to the taxpayer under a modified support decree, ⁴ and because this issue was not briefed or argued before us, we do not decide at this point what method of enforcement is proper. ⁵ Having outlined some of the problems we see, and noting that there may well be others, we remand the case to the district court for further proceedings, if necessary, and entry of an appropriate decree foreclosing and enforcing the government's lien against the taxpayer's right to receive support payments from appellee.

The judgment of the District Court dismissing the complaint against Owen M. Rye is vacated and the case is remanded with directions.

¹ The government also sought judgment against appellee for failure to honor a levy on a support payment made in 1969, see 26 U. S. C. §6332(c), but the government does not appeal from the dismissal of this claim.

² We have been cited to no Massachusetts authority on this point, but will assume that the district court was correct in asserting that the right to support payments is not assignable.

³ "A court is free to recognize or enforce a judgment that remains subject to modification under the local law of the state of rendition", Restatement 2d of Conflict of Laws §109(2) but "[p]resumably, the second court would violate due process if it were to enforce the judgment without having afforded the defendant an opportunity to litigate the question of modification . . .." Id. , Comment c.

⁴ Appellee argued before us that, if we diverted support payments from his ex-wife, the taxpayer, to the government, the state probate court might well order him to pay an additional amount to the taxpayer. In effect the federal decree would transfer the tax liability to appellee, instead of foreclosing a lien on the taxpayer's property. We express no view on whether the foreclosure would be a "change of circumstances" under Massachusetts law justifying an increase in support payments to the taxpayer, cf. Robbins v. Robbins, supra, but this would be a consequence of state law that a federal court could not alter. More disturbing is the chicken-and-egg problem posed by the fact that the federal lien attaches to after-acquired property, see Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945), which might well include the taxpayer's right to additional sums under a subsequent modification of the support judgment. However, we need not address this issue at this time.

⁵ We note, in addition, that the government would have considerably more flexibility in reaching a compromise agreement with the taxpayer and appellee than the district court will have in framing an order.

 

 

 

The George W. Ultch Lumber Company, Plaintiff v. Hall Plastering, Inc., and Mid-Continent National Bank, Defendants. United States of America , Intervening Defendant and Claimant

U. S. District Court, West. Dist. Mo. , West. Div., No. 75CV480-W-B, 477 FSupp 1060, 9/13/79

[Code Secs. 6321 and 6323]

Lien for taxes: Priority of claims: Unperfected security interest: Summary judgment.--The government's motion for a summary judgment was granted because the court determined that the United States had a valid lien for unpaid taxes against the contract right assigned to a bank by the taxpayers. The bank had not perfected its security interest by appropriately filing in accordance with the Uniform Commercial Code and, therefore, its interest was subordinate to the duly filed federal tax lien. Even if the bank were a purchaser of the contract right, the tax lien was superior because of the bank's failure to file notice. Additionally, a motion for an attorney's lien was denied because the taxpayer would not be awarded any part of the interpleaded funds and, therefore, under the terms of the contingent fee contract entered into with the taxpayer, the attorney was not entitled to a fee.

Ben R. Swank, Slagle & Bernard, 127 West Tenth Street, Kansas City, Mo. 64105, for plaintiff. Thomas A. Schwindt, Berman, Deleve, Kuchan & Chapman, 600 Home Saving Building, Kansas City, Mo. 64106, for defendant.

Findings of Fact, Conclusions of Law, Order Granting Motion of United States and Denying Motion of Mid-Continent National Bank for Summary Judgment, and Order Denying Motion of Stanford C. Madden for an Attorney's Lien

Introduction

BECKER, Senior Judge:

In this case the United States of America (United States), claiming to be a holder of a federal tax lien, and Mid-Continent National Bank (Bank), claiming to be an assignee of a contract right, have conflicting claims to a fund consisting of $6,141.94 deposited in the registry of this Court for ultimate distribution by judgment of this Court. In addition, Stanford C. Madden (Madden), counsel for Hall Plastering, Inc. (Hall), claims an attorney's lien against the fund.

The United States and Bank have each filed a motion for summary judgment. The parties agree to the material facts. Only questions of law, to be decided by this Court, remain.

Decisions

For reasons stated hereinafter, the motion of the United States for summary judgment will be granted; the motion of Bank for summary judgment and the motion of Madden for an attorney's lien will be denied.

Preliminary Findings of Fact

This interpleader action is one of a series of actions begun in the Circuit Court of Jackson County, Missouri. The United States , intervening defendant in this action, removed this interpleader action to this Court as related hereinafter. The claim of the United States is based on recorded assessments for unpaid federal taxes for the years 1968 and 1969 described hereinafter. The only parties now remaining in this action are the United States , Bank, Hall and Hall's attorney, Madden.

The original state court action was entitled The Geo. W. Ultch Lumber Company v. Jesse C. Hastings Construction Company, Hall Plastering, Inc. and United States Fidelity and Guaranty Company, civil action No. 744431 in the Circuit Court of Jackson County, Missouri. In this state court civil action the plaintiff The Geo. W. Ultch Lumber Company (Ultch) sought relief because of the failure of Hall to pay for materials sold and delivered to Hall by the plaintiff Ultch, one of the materialmen of Hall. Later, this state court civil action No. 744431 was consolidated with a second state court civil action entitled Mid-Continent National Bank v. Hall Plastering, Inc., William and Sharon Hall, Harry and Madge Taylor, and Jesse C. Hastings Construction Company, civil action No. 736898, in the Circuit Court of Jackson County, Missouri, in which on February 14, 1972, the state court entered judgment for Bank and against Hall for damages in the amount of $20,223.89, which represented the unpaid amount of the loan by Bank to Hall. In state court civil action No. 736898 Bank recovered liquidated damages of $20,223.89 because Hastings Construction Company (Hastings) had failed to make the agreed payments to Bank in accordance with a loan agreement made by Hall and Bank and an assignment by Hall to Bank, described hereinafter (Stipulation, 20, 21; Cross Claim of Bank, 8). That judgment for damages in favor of Bank against Hall remains unsatisfied.

The United States intervened in state court civil action No. 744431, described above, and removed that action to this Court under §§ 1441, 1444, and 1446(b), Title 28, United States Code. This Court granted Bank leave to intervene in the removed action, dismissed the petition (complaint) of the plaintiff Ultch, and by interlocutory judgment discharged defendants Hastings and its surety United States Fidelity and Guaranty Company (U. S. F. & G.). Prior to its discharge Hastings paid into the registry of this Court $6,141.94, which is the fund presently claimed by the United States and Bank and the subject of the attorney's lien claim of Madden.

Stipulated Additional Facts and Motions for Summary Judgment

The United States , Bank, Hall and Madden agree to the following material facts.

On May 27, 1968, Hastings entered into a contract with Northgate Theaters, Inc. (Stipulation, 1). In this contract Hastings agreed to make "alterations and additions" to the Towne Theatre, 1114 Main Street , Kansas City , Missouri (Stipulation, 1, 2). U. S. F. & G. was the surety on the performance bond of Hastings covering the Towne Theatre project. On June 12, 1968, Hall entered into a subcontract with Hastings to do plastering work at the Towne Theatre (Stipulation, 3). Specifically, Hall agreed to construct the following: drywall partitions, soundboard, insulation, rigid board insulation, suspended gypsum ceilings and sprayed-on acoustical finish. As stated above, on August 28, 1968, Hall obtained a loan from Bank and assigned to Bank, "its successors and assigns, to its and their own proper use and benefit all the Assignor's right, title and interest in and to all monies due or to become due from Hastings Construction Company under a certain contract dated June 12, 1968 between the Hall Plastering, Inc. and the said Hastings Construction Co. . . ." (Stipulation, 5, 6). On the same day, Bank gave Hastings written notice of the assignment, and Hastings acknowledged in writing the assignment (Stipulation, 7, 8). A financing statement concerning the assignment, however, was never filed of record (Stipulation, 9).

Hall failed to pay Federal Insurance Contribution Act (F. I. C. A.) and Federal Unemployment Tax Act (F. U. T. A.) taxes, owed by Hall, for the years 1968 and 1969. The Internal Revenue Service (IRS) made assessments for these unpaid taxes against Hall in 1969 and 1970. From November 3, 1969 to August 7, 1970, the IRS filed with the Recorder of Deeds of Jackson County, Missouri, notices of federal tax liens against Hall totalling $37,611.68 for the unpaid F. I. C. A. and F. U. T. A. taxes (Stipulation, 10-18). On January 3, 1976, the United States refiled notices of these federal tax liens with the Recorder of Deeds of Jackson County, Missouri (Stipulation, 19).

On April 27, 1977, a "Motion of the United States of America for Summary Judgment" was filed in this Court. A "Motion of Mid-Continent National Bank for Summary Judgment" was filed in this Court on May 11, 1977. Hall, Bank, the United States and Madden filed a "Stipulation of Facts" on March 24, 1977, and a "Stipulation" on June 30, 1977. The latter "Stipulation" states that all claims to the fund are submitted for the decision of this Court upon the following: (1) claims of Bank, the United States, Hall and Madden; (2) the "Stipulation of Facts"; and (3) motions for summary judgment filed by Bank and the United States . On September 7, 1978, this Court requested the following additional information from the remaining parties:

1. The dollar amount of all of Hall's "accounts," as defined in §400.9-106, RSMo, outstanding on August 28, 1968, and the maximum and minimum of such accounts of Hall during each month in 1968 from January to and including August, 1968;

2. The dollar amount of all Hall's "contract rights," as defined in §400.9-106, RSMo, outstanding on August 28, 1968, and the maximum and minimum of such contract rights of Hall during each month in 1968 from January to and including August, 1968;

3. (a) The dollar amount payable to Hall as subcontractor for full performance of the subcontract entered into by Hall and Hastings on June 12, 1968, and (b) the total dollar amount actually paid to Hall for performance of said subcontract;

4. The dollar amount of all of Hall's "accounts" outstanding on August 28, 1968, assigned to Bank, excluding the assignment of August 28, 1968, and the maximum and minimum of accounts assigned by Hall to Bank during each month in 1968 from January to and including August, 1968;

5. The dollar amount of all of Hall's "contract rights" outstanding on August 28, 1968, assigned to Bank, excluding the assignment of August 28, 1968, and the maximum and minimum of contract rights assigned by Hall to Bank during each month in 1968 from January to and including August, 1968; and

6. The dollar amount of all loans made by Bank from January 1 to August 31, 1968, conputed on either a monthly or quarterly or total basis.

The material additional information provided in response to the request of the Court is discussed hereinafter.

Motions for Summary Judgment

I. The Assignment of the Contract Right by Hall to Bank Is Subject to Article 9, "Uniform Commercial Code--Secured Transactions," §§ 400.9-101 et seq., RSMo Missouri law is the applicable state law in this action. The Uniform Commercial Code, as enacted in Missouri , is found in Chapter 400, RSMo. With certain exceptions, Article 9 thereof, supra, applies to any transaction which is intended to create a security interest ¹ in personal property, including accounts ² or contract rights, ³ and to any sale of accounts or contract rights. §400.9-102(1)(a), (b), RSMo. Article 9 applies to security interests created by contract including assignment. §400.9-102(2), RSMo. The Uniform Commercial Code Comment to §9-106 (§400.9-106, RSMo) explains that an "account" is "a right earned by performance, whether or not due and payable, the ordinary commercial account receivable." A "contract right" is defined as "a right to be earned by future performance under an existing contract." Because Hall did not complete the work it had agreed to perform for Hastings in the subcontract dated June 12, 1968 until April 30, 1969 (Separate Answer and Cross Claim of Hall, Case No. 744431, 4 of the Cross Claim), it is concluded that the assignment of August 28, 1968 by Hall to Bank was the transfer of a contract right and not the transfer of an account. But whether the assignment transferred a contact right ⁴ or an account will not affect the priority of the claims asserted by the United States and Bank.

Further, whether the transaction was an assignment of the contract right as collateral for the loan or whether the contract right was sold will not affect the priority of those claims. The Uniform Commercial Code as enacted in Missouri , Chapter 400, RSMo, makes both types of transactions subject to Article 9. Such transactions may serve the financing function of providing current capital. Jensen, Assignment of Accounts and Contract Rights, 1977 Utah L. Rev. 331, l. c. 332-333.

It is concluded that unless the assignment of the contract right by Hall to Bank was excluded from Article 9 by §400.9-104(f), RSMo, ⁵ the assignment complied with the plain meaning of §400.9-102, RSMo, and thus is subject to Article 9. Consolidated Film Industries v. United States (D. Utah 1975) 403 F. Supp. 1279, l. c. 1281-1282, rev'd on other grounds, (C. A. 10, 1977) [77-1 USTC ¶9188] 547 F. 2d 533; In re Komfo Products Corporation (E. D. Pa. 1965) 247 F. Supp. 229, l. c. 233; Sherburne Corporation v. Carter, 133 Vt. 411, 340 A. 2d 82, l. c. 85-86 (1975); Bramble Transportation, Inc. v. Sam Senter Sales, Inc. (Del. Super. 1971) 294 A. 2d 97, l. c. 100-101, aff'd, (Del. 1972) 294 A. 2d 104; Annot., 30 A. L. R. 3d 9, l. c. §7 (1970), and the cases collected therein.

In a Missouri case entitled Vittert Construction & Investment Company v. Wall Covering Contractors, Inc. (St. L. Mo. App. 1971) 473 S. W. 2d 799, Wall Covering Contractors, Inc. (Wall) assigned certain accounts to Clark Painting Company (Clark) for $5,101.44. Clark contended that the transaction was excluded from Article 9 by §400.9-104(f), RSMo. The St. Louis Court of Appeals rejected the argument, concluding that: (1) the transaction was not part of a sale of the business out of which the accounts arose; (2) the transaction was a commercial financing transaction; and (3) even if the assignment were for collection only, Clark's interest in the assignment was no higher than that of Wall, the assignor. The interest of Wall was admittedly subject to two other superior claims, namely, (a) a final judgment and (b) a federal tax lien. The St. Louis Court of Appeals affirmed the findings of the trial court, holding that the failure of Clark to file a financing statement made its claim subordinate to the claims of the judgment creditor and the United States . 473 S. W. 2d l. c. 803-804.

The problems encountered in applying the exclusions from Article 9 of §400.9-104(f), RSMo, are explained in Jensen, Assignment of Accounts and Contract Rights, 1977 Utah L. Rev. 331, l. c. 333-334 as follows:

While the Code avoids the difficulties of the loan/sale distinction, the drafters of the Code ran into problems when attempting to define the scope of Article Nine in such a way as to include both methods of accounts receivable financing and still exclude true sales of accounts and contract rights which do not have a financing purpose. An early draft of the Code attempted to achieve this result by including only "financing sales" of accounts and contract rights within the scope of Article Nine. The limiting term "financing" was later rejected because it was felt to be too vague and the scope was expanded to include "any sale of accounts, contract rights or chattel paper" except those excluded by section 9-104(f).

The apparently broad applicability of Article Nine inherent in the term "any sale" is narrowed by section 9-104(f) which excludes from Article Nine transfers of accounts and contract rights in the following circumstances: (a) when accounts are sold along with the sale of a business out of which they arose; (b) when accounts are transferred for collection purposes only; and (c) when the right to payment under a contract is transferred to an assignee who must also perform under the contract. There is some disagreement as to whether the section 9-104(f) list of exclusions is illustrative or exclusive. Professor Gilmore, who served as Reporter of Article Nine, has suggested that section 9-104(f) excludes all non-financing sales and that the three situations listed are only examples of non-financing sales. Other commentators, however, have concluded that Article Nine applies to any sale of accounts or contract rights except those specifically listed in section 9-104(f). Thus, the extent of Article Nine's applicability to sales of accounts and contract rights is still open to debate. [Footnotes omitted.]

Whether the list of exclusions in 400.9-104(f), RSMo, is illustrative or exclusive, commercial financing transactions are not excluded from Article 9 by §400.9-104(f), RSMo. Consolidated Film Industries v. United States, supra, (D. Utah 1975) 403 F. Supp. 1279, l. c. 1281-1282, rev'd on other grounds, (C. A. 10 1977) 547 F. 2d 533; Bramble Transportation, Inc. v. Sam Senter Sales, Inc., supra, (Del. Super. 1971) 294 A. 2d 97, l. c. 101, aff'd, (Del. 1972) 294 A. 2d 104; 2 W. Hawkland, A Transactional Guide to the Uniform Commercial Code 573 (1964); U. C. C. §9-104, Comment 6.

Because the assignment of the contract right by Hall to Bank was a commercial financing transaction, it is concluded that the assignment of the contract right is subject to Article 9.

II. Bank Has a Security Interest in the Contract Right Assigned to It by Hall. Article 9 governs the nature and validity of any security interest of Bank in the contract right assigned to Bank by Hall. Section 400.9-204(1), RSMo, a part of Article 9, provides that the three conditions (1) agreement, (2) value and (3) collateral must be met before a security interest can attach. Further, a debtor acquires no rights in a contract right until the contract has been made. §400.9-204(2)(c), RSMo.

For the following reasons it is determined that a security interest of Bank in the contract right, assigned to Bank by Hall, attached on August 28, 1968, because: (1) a written agreement of assignment was entered into by Hall and Bank on that date (Stipulation, 5, 6); (2) value, in the form of a loan, was given by Bank to Hall (Stipulation, 5, 6); and (3) the debtor, Hall, had acquired rights in the collateral, the contract right, because of the then existing subcontract of June 12, 1968, between Hastings and Hall (Stipulation, 3, 4)

Therefore, it is concluded that the assignment, by Hall to Bank, dated August 28, 1968, of the contract right constituted a security interest within Article 9, subject to the filing requirements of Article 9. ⁶

III. Bank Did Not Perfect Its Security Interest in the Contract Right Assigned to It by Hall. Section 400.9-303, RSMo, prescribes the requirements of perfection of a security interest. Ordinarily, perfection of a security interest occurs through either (1) the filing of a financing statement, or (2) possession of the collateral. The security interest of Bank, in the contract right, was not perfected by either method. First, neither Hall nor Bank filed a financing statement concerning the assignment of August 28, 1968 (Stipulation, 9). Second, Bank could not and did not perfect a security interest in the contract right by possession. §400.9-305, RSMo, and U. C. C. §9-305, Comment 1.

It is concluded that only exception from the perfection requirements provided in §400.9-302(1), RSMo ("automatic perfection"), could give Bank a perfected security interest in the contract right assigned to Bank by Hall. The exception described in subparagraph (e) of §400.9-302(1), RSMo, must be examined to determine this question.

This judicial construction of §400.9-302(1)(e), RSMo, in this action is one of first impression in Missouri . The available legal materials that are relevant to this construction are discussed below.

Section 400.9-302(1)(e), RSMo, provides:

(1) A financing statement must be filed to perfect all security interests except the following: . . .

(e) an assignment of accounts or contract rights which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts or contract rights of the assignor[.]

The Missouri Code Comment, to this Section, recommends caution to the creditor but provides no quantitative guide for measuring a "significant part." The Comment to §400.9-302(1)(e), RSMo, states:

Paragraph (e) does not define what is a "significant part" of outstanding accounts, so care should be exercised in determining whether or not to file a financing statement.

The Uniform Commercial Code Comment to §9-302 reads in pertinent part as follows:

The purpose of the subsection (1)(e) exemptions is to save from ex post facto invalidation casual or isolated assignments; some accounts receivable statutes have been so broadly drafted that all assignments, whatever their character or purpose, fall within their filing provisions. Under such statutes many assignments which no one would think of filing may be subject to invalidation. The subsection (1)(e) exemptions go to that type of assignment. Any person who regularly takes assignments of any debtor's accounts should file. In this connection Section 9-104(f) which excludes certain transfers of accounts and contract rights from the Article should be consulted.

Burden of Proof and Varying Tests of No "Significant Part" Exemption

So, in this action, according to the Uniform Commercial Code Comment, the principal factor in determining whether to apply the exemption is the regularity ⁷ with which the assignee Bank takes assignments. The language of the applicable statute, however, "focuses on the ratio between the accounts [or contract rights] assigned and the total accounts [or contract rights] of the assignor." Jensen, Assignment of Accounts and Contract Rights, 1977 Utah L. Rev. 331, l. c. 336. The case law uniformly requires that the assignee bear the burden of proof in establishing that the exemption of §9-302(1)(e) (§400.9-302(1)(e), RSMo) applies. Burke, Uniform Commercial Code Annual Survey: Secured Transactions, 33 Business Lawyer 1951 (1978). The courts and commentators are divided in regard to the nature of the required proof. Several tests, described hereinafter, have been developed. See generally Jensen, Assignment of Accounts and Contract Rights, 1977 Utah L. Rev. 331, l. c. 336-337; Annot., 30 A. L. R. 3d 9, l. c. §18[d] (1970), and the cases collected therein.

First, some jurisdictions follow the plain meaning of the statute and apply a "significant part" test. Consolidated Film Industries v. United States, supra, (C. A. 10 1977) 547 F. 2d 533 (holding that the assignee failed to prove that the assignment did not constitute a significant part of the outstanding accounts or contract rights of the assignor); Miller v. Wells Fargo Bank International Corp. (S. D. N. Y. 1975) 406 F. Supp. 452, l. c. 477, aff'd, (C. A. 2 1976) 540 F. 2d 548 (holding twenty percent of the total accounts of the assignor to be a "significant part"); In re B. Hollis Knight Co. (E. D. Ark. 1978) 461 F. Supp. 1213 (holding fourteen percent of the total accounts of the assignor not to be a "significant part"); Nevada Rock & Sand Co. v. United States Dept. of Treasury I. R. S. (D. Nev. 1974) 376 F. Supp. 161, l. c. 165 note 6 (holding that the assignment did transfer a significant part of the contract rights of the assignor, without indicating what the percentage was); Standard Lumber Company v. Chamber Frames, Inc. (E. D. Ark. 1970) 317 F. Supp. 837, l. c. 840 (holding sixteen percent of the total accounts of the assignor not to be a "significant part"); Park Avenue Bank v. Bassford, 232 Ga. 216, 205 S. E. 2d 861, l. c. 863 (1974) (holding that the assignment did transfer a significant part of the outstanding contract rights of the assignor, without indicating what the percentage was).

Second, some jurisdictions follow the Uniform Commercial Code Comment to §9-302 and apply a "casual or isolated" transaction test. Two unusual applications of the "casual or isolated" transaction test are found in Architectural Woods, Inc. v. State, 88 Wash. 2d 406, 562 P. 2d 248 (En Banc 1977) and In re First General Contractors, Inc. (S. D. Fla. 1971) 12 UCC Rep. Serv. 762. Both cases permitted "automatic perfection" in spite of findings that the assignments constituted a significant part of the accounts or contract rights of the assignor. On the other hand, in H. & Val J. Rothschild v. Northwestern National Bank of St. Paul, 309 Minn. 35, 242 N. W. 2d 844, 1. c. 847 (1976), the Supreme Court of Minnesota found that although the assignee Rothschild Bank had held only five assignments in ninety years, it did not qualify for the filing exemption because, inter alia, of its other extensive commercial financing experience.

Third, some courts appear to require for "automatic perfection" that an assignment comply with both the "significant part" and the "casual or isolated" transaction tests. City of Vermillion , S. D. v. Stan Houston Equipment Co. (D. S. D. 1972) 341 F. Supp. 707, 1. c. 712; H. & Val J. Rothschild v. Northwestern National Bank of St. Paul, supra, 309 Minn. 35, 242 N. W. 2d 844, 1. c. 847-848 (1976); E. Turgeon Construction Co. v. Elhatton Plumbing & Heating Co., 110 R. I. 303, 292 A. 2d 230, 1. c. 234-235 (1972); Abramson v. Printer's Bindery, Inc. (Tex. Civ. App. 1969) 440 S. W. 2d 326, 1. c. 327-328.

Fourth, there is authority that an assignment of accounts or contract rights insignificant in dollar amount qualifies for the filing exemption. Miller v. Wells Fargo Bank International Corp., supra, (S. D. N. Y. 1975) 406 F. Supp. 452, 1. c. 477, aff'd, (C. A. 2 1976) 540 F. 2d 548; 1 Bender's Uniform Commercial Code Service, P. Coogan, W. Hogan & D. Vagts, Secured Transactions Under the Uniform Commercial Code §4.08 [2][a], 1. c. 314.12, §4.08[2][b], 1. c. 314.12-314.13 (1978).

On November 9, 1978, counsel for the United States , Bank and Hall filed separate responses to the Court's "Request for Additional Information" of September 7, 1978, which is reproduced above in material parts under the heading "Stipulated Facts and Motions for Summary Judgment." Together the three responses state that: the dollar amount payable to Hall as subcontractor for full performance of the subcontract entered into by Hall and Hastings on June 12, 1968, was $72,561.05; the total dollar amount actually paid to Hall by Hastings for performance of the subcontract dated June 12, 1968, was $60,120.80, of which $6,141.94 was paid into the registry of this Court; the dollar amount of all loans made by Bank from January 1, 1968 to August 31, 1968, was $172,000; on September 12, 1977, all business records, books of account and other papers of Hall were destroyed by fire and flood; and no other information requested by this Court is available.

It is determined that the assignee, Bank, has failed to establish that it has met any of the above tests for qualifying for the exemption under §400.9-302(1)(e), RSMo. Bank has not shown that the assignment of the contract right by Hall to Bank on August 28, 1968, did not transfer to Bank a significant part of the contract rights of the assignor, Hall. In fact the contrary appears. Also, the assignment of the contract right by Hall to Bank on August 28, 1968, was neither casual nor isolated. Bank was, and is, engaged in extensive commercial financing. Whether Bank regularly takes assignments of contract rights, as distinguished from other collateral security, is not decisive. See H. & Val J. Rothschild v. Northwestern National Bank of St. Paul, supra, 309 Minn. 35, 242 N. W. 2d 844, 1. c. 847 (1976). Finally, Bank has not proven that the dollar amount of the contract right assigned by Hall to Bank on August 28, 1968, is insignificant. Because Bank has not met any of the above tests under §400.9-302(1)(e), RSMo, it is not necessary to determine which of the alternate tests the courts of Missouri would use in applying the exemption of §400.9-302(1)(e), RSMo.

Therefore, it is concluded that Bank does not have a perfected security interest in the contract right assigned to Bank by Hall on August 28, 1968.

IV. The United States Has a Valid Lien for Unpaid Taxes Against the Contract Right Assigned to Bank by Hall. Section 6321, Title 26, United States Code reads in the material part as follows:

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

State law determines whether the taxpayer has "property" or "rights to property" to which a federal lien for unpaid taxes can attach. Aquilino v. United States , 363 U. S. 509 1. c. 512-514, 80 S. Ct. 1277, 1. c. 1280-1281, 4 L. Ed. 2d 1365, 1. c. 1368-1369 (1960).

Bank argues that Hall "has no property or right" to the subcontract dated June 12, 1968, between Hastings and Hall to which any federal tax claim could attach. This argument is without merit. Applying the Uniform Commerical Code as enacted in Arkansas, the United States Court of Appeals for the Eighth Circuit in United States v. Trigg [72-2 USTC ¶9642] (C. A. 8 1972) 465 F. 2d 1264, 1. c. 1268, cert. denied, 410 U. S. 909, 93 S. Ct. 963, 35 L. Ed. 2d 270 (1973), stated:

We do not agree that, under Arkansas law, the assignment of accounts receivable placed the progress payments beyond the reach of a tax lien. . . .

The UCC does not classify the debtor's interest in the collateral securing the debt as "property" or "rights to property," the terms traditionally used by the Supreme Court. See Aquilino v. United States , supra, 363 U. S. at 514, 80 S. Ct. 1277. The draftsmen made no attempt to fix location of title to collateral securing a creditor's interest. . . . The UCC focuses on rights and duties of the secured party, the debtor, and third parties, rather than on the location of title. As a result, the draftsmen found it unnecessary to classify the legal interest held by the secured party and by the debtor in the collateral. If the secured party fails to perfect his interest, the UCC grants rights against the collateral to third party creditors regardless of the legal interest held by either the secured party or the debtor. [Citation omitted.] ⁸

A federal tax lien is not valid as against a holder of a "security interest" or "purchaser," however, until the appropriate notice has been filed. §6323(a), Title 26, United States Code. See generally the cases collected in Annot., 30 A. L. R. 3d 9, l. c. §34 (1970).

Bank argues that it qualifies as a holder of a protected "security interest," defined in §6323(h)(1), Title 26, United States Code §6323(h)(1), as follows:

. . . any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence' and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth. [Emphasis added.]

The better view is that a protected "security interest" under §6323(h)(1) means a perfected security interest under Article 9. 1A Bender's Uniform Commercial Code Service, P. Coogan, W. Hogan & D. Vagts, Secured Transactions Under the Uniform Commercial Code §12.08[2], 1. c. 12B-11, §12.10[1], 1. c. 12B-27-12B-28 (1978). Because Bank does not have a perfected security interest under Article 9 in the contract right, see Part III, supra, it is determined that Bank does not have a protected "security interest" under §6323(h)(1) in the contract right.

Bank also argues that it qualifies as a "purchaser" as defined in the following §6323(h)(6), Title 26, United States Code:

(6) Purchaser. The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. . . .

This argument is also without merit. Article 9 requires, with some exceptions, filing if the purchaser of contract rights or accounts is to be protected against a later bona fide purchaser. §§ 400.9-301(1)(d), 400.9-302, RSMo; Nevada Rock & Sand Co. v. United States Dept. of Treasury I. R. S., supra, (D. Nev. 1974) 376 F. Supp. 161, 1. c. 170, 172.

Because the United States filed the appropriate notices concerning its liens for unpaid taxes owed by Hall, even if Bank had a "security interest" in the contract right or was a "purchaser" of the contract right, the liens of the United States for unpaid taxes would still be valid against the contract right. ¹⁰ Therefore, it is determined that the United States has a valid lien for unpaid taxes against the contract right assigned to Bank by Hall.

V. The Unperfected Security Interest of Bank Is Subordinate to the Liens for Unpaid Taxes of the United States . The federal rule "first in time first in right" determines whether a federal tax lien under §6321, Title 26, United States Code or a competing lien created by state law has priority. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954). In United States v. Trigg, supra, (C. A. 8 1972) 465 F. 2d 1264, 1. c. 1269, cert. denied, 410 U. S. 909, 93 S. Ct. 963, 35 L. Ed. 2d 270 (1973), the United States Court of Appeals for the Eighth Circuit described this federal rule as follows:

Under the basic federal priority standard, "first in time is first in right," a federal tax lien takes priority over a state-created lien unless the state lien is specific and perfected in the federal sense before the federal tax lien arises. United States v. Equitable Life Assurance Society of United States, supra, 384 U. S. at 327, 86 S. Ct. 1561. With certain statutory exceptions, see 26 U. S. C. §6323(a), a federal tax lien arises on the date of assessment. 26 U. S. C. §6322; see United States v. Vermont, 377 U. S. 351, 353 n. 3, 84 S. Ct. 1267, 12 L. Ed. 2d 370 (1964). At the time the United States assessed the contractor's tax liability, the bank's security interest was not specific and perfected, in the federal sense, because filing was required to protect the security interest against third party creditors. See United States v. Crest Finance Co., 302 F. 2d 568, 569 (7th Cir. 1962), on remand from 368 U. S. 347, 82 S. Ct. 384, 7 L. Ed. 2d 342 (1961); cf. United States v. New Britain , 347 U. S. 81, 84, 74 S. Ct. 367, 98 L. Ed. 520 (1954).

Any perfected or exempted "security interest" that arises prior to the filing of a notice of federal tax lien takes priority over that federal tax lien. Dragstrem v. Obermeyer (C. A. 7 1977) 549 F. 2d 20, 1. c. 23. Therefore, Bank would prevail in this action if it had filed in accordance with §400.9-401(1)(c), RSMo, prior to the filing by the I. R. S. of the notices of federal tax liens against Hall. United States v. Trigg, supra, (C. A. 8 1972) 465 F. 2d 1264, 1. c. 1270, cert. denied, 410 U. S. 909, 93 S. Ct. 963, 35 L. Ed. 2d 270 (1973); Richardson v. United States (E. D. Ark. 1973) 358 F. Supp. 994, 1. c. 1000. On the other hand, unperfected security interests under Article 9 are subordinate to federal tax liens. United States v. Trigg, supra, (C. A. 8 1972) 465 F. 2d 1264, 1. c. 1270; but see Major Electrical Supplies, Inc. v. J. W. Pettit Co. (M. D. Fla. 1977) 427 F. Supp. 752, 1. c. 755-756 (holding that an unrecorded assignment was perfected under §6323(h)(1) because under Florida law a judgment lien does not attach to the right to receive payment of a debt).

Because Bank has an unperfected and unprotected security interest under Article 9 in the contract right assigned to Bank by Hall, see Part III, supra, it is determined that the security interest of Bank is subordinate to the liens of the United States for unpaid taxes.

VI. Madden Does Not Have an Attorney's Lien Superior to Liens of United States and Bank. Pursuant to §484.130, RSMo, Madden, as counsel for Hall, claims an attorney's lien allegedly superior to the liens of the United States and Bank. Section 6323(b)(8), Title 26, United States Code, the applicable federal statute, provides some protection against federal tax liens. It reads, in part, as follows:

(b) Protection for certain interests even though notice filed.--

Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

(8) Attorneys' liens.--With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, . . . [Emphasis added.]

The "Attorney's Contract" dated July 11, 1969, entered into by Madden and Hall, states in the material part as follows:

COMPENSATION: Clients hereby agree to pay attorneys for their retention and services:

A CONTINGENT FEE of 50% of the gross amount received by way of settlement of the matter, before suit is filed or trial is commenced. If suit is filed or trial is begun, attorneys to receive a fee of 50% of the gross amount received, after first deducting expenses. . . . [Emphasis added.]

The applicable Missouri statutes are §§ 484.130 ¹¹ and 484.140, ¹² RSMo. Section 484.130, RSMo, gives an attorney a lien upon the cause of action of his client. The compensation of an atorney for services rendenred is governed by the agreement entered into by the attorney and his client. Section 484.140, RSMo, gives an attorney a lien, if the notice requirement is met, upon his client's claim for a percentage of the proceeds. In other words, the statute governs attorneys' liens in contingent contracts. Madden has presented no evidence to this Court that he complied with the written notice requirements of §484.140, RSMo. With one notable exception, Orr v. Mutual Ben. Health & Accident Ass'n (K. C. Ct. App. 1947) 240 Mo. App. 236, 207 S. W. 2d 511, however, this factor alone has not barred an attorney from his statutory lien. See Whitecotton v. St. Louis & H. Ry. Co., 250 Mo. 624, 157 S. W. 776 (1913); Taylor v. St. Louis Merchants' Bridge Terminal Ry. Co., 207 Mo. 495, 105 S. W. 740 (1907). Section 484.140, RSMo, is remedial and will be liberally construed. Wait v. Atchison, T. & S. F. Ry. Co., 204 Mo. 491, 103 S. W. 60 (1907).

Nevertheless, an attorney is bound by the terms of the contract entered into with his client. §484.130, RSMo. The Supreme Court of Missouri in Whitecotton v. St. Louis & H. Ry. Co., supra, 250 Mo. 624, 1. c. 630-631, 157 S. W. 776, 1. c. 777 (1913), stated the applicable rule as follows:

. . . absent a showing of such particular kind of fraud or partial settlement, . . ., and present a complete and undisturbed settlement between the client and his adversary of the whole claim, . . ., then the measure of the attorney's recovery against the settling defendant is the attorney's contractual percentage of the compromise sum actually received by the litigant (no more and no less). (Citations omitted; emphasis added.)

Hall has not been, nor will it be, awarded any part of the interpleaded funds. Both the United States and Bank have claims to the fund superior to the claim of Hall. Because, according to the "Attorney's Contract," Madden is "to receive a fee of 50% of the gross amount received" by Hall, it is determined that Madden is not entitled to an attorney's fee in this action. Therefore, the motion of Madden for an attorney's lien will be denied.

Addendum

After the preparation of these findings of fact and conclusions of law, the United States Court of Appeals for the Eighth Circuit filed an opinion in an appeal entitled In re B. Hollis Knight Co., Davidson, Trustee v. Union National Bank of Little Rock, No. 79-1054 (C. A. 8, filed Aug. 30, 1979), reversing and remanding the decision of the District Court in an action bearing the same title, (E. D. Ark. 1978) 461 F. Supp. 1213, supra. The appeal involved the interpretation and application of the Arkansas version of Article 9, U. C. C. (Ark. Stat. Ann. §85-9-302(1)(e) amended to adopt the 1972 revision of Article 9), in circumstances similar to those in the present action.

The conclusions of law of the Court of Appeals in that case are consistent with the above conclusions of law of this Court concerning §400.9-302(1)(e), RSMo, which does not contain the 1972 revision of Article 9, U. C. C.

Orders

For the above reasons, it is hereby

ORDERED that the motion of the United States for summary judgment be, and it is hereby, granted, and that the motion of Bank for summary judgment be, and it is hereby, denied.

It is further

ORDERED that the motion of Madden for an attorney's lien be, and it is hereby, denied.

¹ §400.1-201(37), RSMo, defines "security interest" as follows:

. . . an interest in personal property or fixtures which secures payment or performance of an obligation. . . .

² §400.9-106, RSMo, defines "account" as follows:

. . . any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper.

³ §400.9-106, RSMo, defines "contract right" as follows:

. . . any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper.

⁴ The 1972 amendment to the Uniform Commercial Code eliminated the term "contract right" as unnecessary. U. C. C. §9-106, Official Reasons for 1972 Change. Because the State of Missouri has not adopted the 1972 amendment, the technical distinction between "contract right" and "account" will be retained in the instant case. Nevertheless, it is submitted that in the context of this case this technical distinction has no legal significance. Therefore, relevant case law involving "accounts" will also be cited in this opinion in regard to any discussion of "contract rights."

⁵ §400.9-104(f), RSMo, reads as follows:

This article does not apply

(f) to a sale of accounts, contract rights or chattel paper as part of a sale of the business out of which they arose, or an assignment of accounts, contract rights or chattel paper which is for the purpose of collection only, or a transfer of a contract right to an assignee who is also to do the performance under the contract[.]

⁶ The argument of Bank that it has an equitable assignment rather than a security interest is without merit. The conclusion that the assignment in question is a security interest as defined by Article 9 resolves that argument contrary to the claims of Bank. §400.1-103, RSMo.

⁷ Paragraph 5 of the Comment on U. C. C. §9-302, referring to subsection (1)(e), states that any "person who regularly takes assignments of any debtor's accounts should file." This may be another way of saying that if an assignment is to be exempted under U. C. C. §9-302(1)(e) from the filing requirements of Article 9, the assignment must be casual or isolated. ("The purpose of the subsection (1)(e) exemptions is to save from ex post facto invalidation casual or isolated assignments. . . ." U. C. C. §9-302, Comment 5.) But Professor Gilmore, who was Reporter for Article 9, emphasized regularity when he stated that U. C. C. §9-302(1)(e) was "carefully drafted so that no assignee, engaged in a regular course of financing, will ever be tempted to rely on it in order to avoid a filing which ought to be made." 1 G. GILMORE, SECURITY INTERESTS IN PERSONAL PROPERTY §19.6, l.c. 538 (1965).

Paragraph 5 of the Comment on U. C. C. §9-302, referring to subsection (1)(e), also states that U. C. C. §9-302(1)(e) is broad in scope covering for the purpose of saving "from ex post facto invalidation casual or isolated assignments . . . which no one would think of filing . . ." Professor Gilmore suggested that the "beneficent purpose" of U. C. C. §9-302(1)(e) was to protect "assignees who are both insignificant and ignorant." 1 G. GILMORE, SECURITY INTERESTS IN PERSONAL PROPERTY §19.6, l.c. 538 (1965).

⁸ Contra, In re Halprin [60-2 USTC ¶9564], (C. A. 3 1960) 280 F. 2d 407. Halprin is discussed at length in Young, Priority of the Federal Tax Lien, 34 U. CHI. L. REV. 723, l.c. 743-752 (1967). Halprin has not been followed by the majority of the cases comprising the great weight of authority. In Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770], (C. A. 5 1976) 542 F. 2d 270, 1. c. 276, the Fifth Circuit stated as follows:

Halprin has been roundly criticized in the literature. Of that court's conclusion that the taxpayer's contract right did not constitute property, Professor Young remarks that it "was a dubious position." Young, Priority of the Federal Tax Lien, 34 U. Chi. L. Rev. 723, 745 (1967). Professor Coogan labels Halprin "[a]n extreme case in which the 'no property' concept was applied," and observes: "The case seems not to have been followed to any extent under similar circumstances." Coogan, The Effect of the Federal Tax Lien Act of 1966 upon Security Interests Created under the Uniform Commercial Code, 81 Harv. L. Rev. 1369, 1373 (1968). Even assuming arguendo that Halprin is applicable to the case at bar, we also decline to follow that decision.

⁹ A contract right is "property in existence" for purposes of §6323(h)(1). Pine Builders, Inc. v. United States [76-1 USTC ¶9402], (E. D. Va. 1976) 413 F. Supp. 77, 1.c. 82-83; Centex Construction Company v. Kennedy [72-1 USTC ¶9289], (S. D. Tex. 1971) 332 F. Supp. 1213, 1.c. 1214-1216.

¹⁰ This is not to say that the claims of Bank to the contract right would then necessarily be subordinate to the liens of the United States for unpaid taxes. Whether a federal tax lien has priority over a competing lien created under state law is discussed in Part V, infra.

¹¹ §484.130, RSMo, reads as follows:

The compensation of an attorney or counselor for his services is governed by agreement, expressed or implied, which is not restrained by law. From the commencement of an action or the service of an answer containing a counterclaim, the attorney who appears for a party has a lien upon his client's cause of action or counterclaim, which attaches to a verdict, report, decision or judgment in his client's favor, and the proceeds thereof in whosesoever hands they may come; and cannot be affected by any settlement between the parties before or after judgment.

¹² §484.140, RSMo, reads in the material part as follows:

In all suits in equity and in all actions or proposed actions at law, . . ., it shall be lawful for an attorney at law either before suit or action is brought, or after suit or action is brought, to contract with his client for legal services rendered or to be rendered him for a certain portion or percentage of the proceeds of any settlement of his client's claim or cause of action, . . ., and upon notice in writing by the attorney who has made such agreement with his client, served upon the defendant or defendants, or proposed defendant or defendants, that he has such an agreement with his client, stating therein the interest he has in such claim or cause of action, then said agreement shall operate from the date of the service of said notice as a lien upon the claim or cause of action, and upon the proceeds of any settlement thereof for such attorney's portion or percentage thereof, which the client may have against the defendant or defendants, or proposed defendant or defendants, and cannot be affected by any settlement between the parties either before suit or action is brought, or before or after judgment therein, . . .

 

 

 

United States of America , Plaintiff-Appellant v. Frank G. Tuschman, Nellie D. Tuschman and Preston G. Tuschman, Defendants-Appellees

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 18297, 405 F2d 688, 1/22/69, Reversing and remanding District Court, 68-1 USTC ¶9240

[Code Sec. 6321]

Lien for taxes: Property subject: Debenture bond: Evidence as to ownership.--In a proceeding to enforce tax liens against certain property of the taxpayer, including a debenture bond, the lower court erroneously refused to receive into evidence certain documents which were sworn to either by the taxpayer or by the taxpayer's son (the other alleged owner of the bond) and which indicated that the taxpayer was the bond's sole owner. The documents consisted of financial statements submitted by the taxpayer in support of his offer to compromise the enforcement of the lien and sworn statements submitted by the son to the Federal Communications Commission in connection with his application for a broadcasting license.

Mitchell Rogovin, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Robert J. Campbell, Department of Justice, Washington, D. C. 20530, Bernard J. Stuplinski, United States Attorney, Carl Miller, Assistant United States Attorney, 400 Federal Bldg., Cleveland, Ohio, for plaintiff-appellant. Harlan Pomeroy, Norman A. Sugarman, Jonathan E. Thackery, Baker, Hostetler & Patterson, 1956 Union Commerce Bldg., Cleveland, Ohio, for defendants-appellees.

Before PHILLIPS, EDWARDS and MCCREE, Circuit Judges.

[Lien Enforcement Proceedings]

PHILLIPS, Circuit Judge:

Pursuant to a final decision of the Tax Court, the Internal Revenue service in 1962 assessed income taxes, interest and civil fraud penalties in the amount of $131,580.46 for the tax years 1950-52 against Frank G. and Nellie Tuschman ¹ and filed notices of tax liens against all their property. This suit was filed by the Government to enforce its tax liens against certain property of the taxpayer, including a $120,000 subordinated debenture bond issued to him by Tuschman Broadcasting Corporation.

[Issue of Ownership]

The principal issue raised in the District Court [68-1 USTC ¶9240] was whether this debenture bond was the property of the taxpayer alone or was owned in part by Preston Tuschman, son of the taxpayer. The District Court held that Preston Tuschman owned an interest of $103,615 in the bond and that his father owned only $16,385. The Government appeals.

[Evidence]

The District Court refused to receive into evidence a number of documents most of which were sworn to either by the taxpayer or by his son, which represented the taxpayer to be the owner of the bond.

These documents included:

1. A statement of financial condition and other information on Treasury Department Form 433 was signed and submitted by the taxpayer September 10, 1962, in support of an offer to compromise the enforcement of the tax lien. Under his statement of assets and liabilities, the taxpayer listed as an asset the $120,000 subordinated debenture bond without indicating that any other person owned any interest in the bond. The same form showed that during 1960 and 1961 the taxpayer received $7200 as interest from Tuschman Broadcasting Corporation and reported this income on his federal income tax returns for these years. Under a receipts and disbursements column the taxpayer reported $7200 received as interest from Tuschman Broadcasting Corporation the previous year.

2. On May 1, 1963, the taxpayer submitted a financial statement dated April 1, 1963, under a cover letter signed by his attorney. The $120,000 bond was listed as an asset of the taxpayer and there was not any offsetting entry which would show that any other person owned any interest in the bond.

3. On April 10, 1964, the taxpayer submitted a further official financial statement on Form 433, again listing the bond as an asset and not indicating any interest in the bond owned by any other person. Interest on the bond again was shown to have been received by the taxpayer.

4. Sworn statements were submitted by the son, Preston Tuschman, to the Federal Communications Commission in connection with an application for a broadcasting license. These included actual and projected balance sheets of Tuschman Broadcasting Corporation. These documents showed an indebtedness of $120,000 to the taxpayer. The personal balance sheet of Preston Tuschman did not show any interest claimed by him in the debenture bond.

5. The taxpayer's attorney represented to the Department of Justice in writing that the taxpayer owned the bond.

[ Lower Court Erred]

We hold that the District Court committed reversible error in refusing to receive into evidence documents, signed by the taxpayer, making material representations as to the ownership of the bond, despite the fact that the documents were offered in an effort to effect a compromise of enforcement of the tax liens. Nau v. Commissioner [58-2 USTC ¶9963), 261 F. 2d 362, 364 (6th Cir.); IV Wigmore on Evidence (3d ed.) §1061, p. 26, Representations of the attorney acting as authorized representative of the taxpayer likewise should have been admitted into evidence. See State Farm Mutual Automobile Ins. Co. v. Porter, 186 F. 2d 834, 841 (9th Cir.); Lenox Clothes Shops, Inc. v. Commissioner of Internal Revenue [43-2 USTC ¶9665], 139 F. 2d 56, 59 (6th Cir.). Sworn representations of Preston Tuschman to the Federal Communications Commission as to the ownership of the bond, which were inconsistent with his subsequent testimony at trial, were admissible not only as original evidence of the truth of the statements made but also for purposes of impeachment. Accord: Ross v. Philip Morris & Co., Ltd., 328 F. 2d 3, 14 (8th Cir.). See Carroll v. Maywood , 331 F. 2d 303 (6th Cir.); McIntosh v. Eagle Fire Co. of New York , 325 F. 2d 99 (8th Cir.).

One final matter should be mentioned. The Government urges as error the holding of the District Court that Preston Tuschman's interest included sums which, in the Government's view, arose subsequent to the filing of the tax lien. Although Rule 52(a) of the Rules of Civil Procedure requires that the District Court "find the facts specially and state separately its conclusions of law," the memorandum of the District Court gives no indication of the basis on which the sums complained of were held to be the property of Preston Tuschman. On remand, findings with respect to this issue should be stated clearly and in sufficient detail to facilitate our review in the event of appeal. B. F. Goodrich Co. v. Rubber Latex Products, Inc., 400 F. 2d 401, 402 (6th Cir.); Deal v. Cincinnati Board of Education, 369 F. 2d 55, 64-65 (6th Cir.), cert. denied, 389 U.S. 847.

Reversed and remanded for a new trial.

¹ Frank G. Tuschman is referred to herein as the taxpayer.

 

 

 

Joseph A. Badway, Defendant, Appellant v. United States of America , Plaintiff, Appellee

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 6707, 367 F2d 22, 10/20/66, Aff'g District Court, 66-1 USTC ¶9175, 250 F. Supp. 845

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

Tax liens: Purchase of mortgage deed and note.--Government's tax liens on an indebtedness owed to the transferor were superior to the claim of the purchaser of the note and the mortgage deed evidencing and securing the indebtedness. Notices of the tax liens were properly filed and recorded in the office of the town clerk where the taxpayer resided.

Harold H. Winsten, 315 Hospital Trust Bldg., Providence , R. I., for defendant, appellant. Mitchell Rogovin, Assistant Attorney General, Mark S. Rothman, Joseph Kovner, Meyer Rothwacks, Department of Justice, Washington, D. C. 20530, Frederick W. Faerber, Jr., United States Attorney, Providence, R. I., for plaintiff, appellee.

Before ALDRICH, Chief Judge, MCENTEE and COFFIN, Circuit Judges.

Opinion of the Court

MCENTEE, Circuit Judge:

This is an appeal from the judgment of the district court in an action to foreclose two federal tax liens. The essential facts are as follows. On July 18, 1952, the defendants, Joseph G. Roukous, his wife Ilia and his sister, Mary DiLullo, all of Providence, Rhode Island, borrowed $15,000 from the defendant Haddad, a resident of Wareham, Massachusetts, and gave him their promissory note for that amount. The note was secured by a mortgage on real estate located in the Town of Johnston, Rhode Island. ¹ Shortly thereafter Haddad became involved in serious tax trouble, ² and as a consequence notices of federal tax liens were filed against him. These notices were filed on January 20 and March 9, 1953, in the office of the Town Clerk of Wareham, Massachusetts, where Haddad still resided. Some four years later but while the government's tax claims against him were still pending, Haddad transferred this note and mortgage to the defendant Badway, a relative of his, who resided in Rhode Island . ³ At that time the balance on the note was $10,800. Thereafter, when the note matured, the United States and Badway both demanded payment of this balance, but since neither could produce the note in satisfaction of payment, the defendant Roukous and DiLullo refused to pay either of them.

The United States now brings this proceeding to foreclose its tax liens on Haddad's interest in the indebtedness of the defendants Roukous and DiLullo on the note. ⁴ During the pendency of this action Haddad's tax liabilities were reduced to judgment in the United States District Court [66-1 USTC ¶9175] in Massachusetts. ⁵

At the trial Badway contended (1) that the tax liens are invalid in that they were not filed in Johnston , Rhode Island , where the mortgaged real estate was located, and (2) that he, not Haddad, owns the indebtedness in question by reason of the above stated transfer for which he says he paid Haddad a present valuable consideration. ⁶

The district court found that the transfer of the note and mortgage by Haddad to Badway was fraudulent and without present consideration; that the United States had valid federal tax liens on the indebtedness of the defendants Roukous and DiLullo to the defendant Haddad which are superior to the claim of the defendant Badway and is entitled to foreclose its federal tax liens on this indebtedness. ⁷ Shortly thereafter, judgment was entered upon the court's findings. From this judgment the defendant Badway appeals.

On appeal this defendant's principal contentions are that the trial court erred in not finding that the tax liens were invalid; that it also erred in finding that the transfer of the note and mortgage to him was fraudulent and without present consideration and finally that this proceeding is untimely and is otherwise barred by the previous Massachusetts action against Haddad. ⁸

We do not agree that the trial court erred in upholding the validity of the tax liens. The jeopardy assessments, together with the required notices and demands for payment, all appear to have been timely and legally made. In addition, we think the liens were legally perfected by the filing of the lien notices in the office of the Town Clerk in Wareham , Massachusetts . Badway contends that these liens are invalid because the lien notices were not filed in Johnston , Rhode Island . The short answer to this contention is that here the government is proceeding against the delinquent taxpayer's interest in the indebtedness of the defendants Roukous and DiLullo as evidenced by their unpaid note. Haddad's interest in this indebtedness is intangible personal property, the situs of which is the domicile of its owner. Baldwin v. Missouri , 281 U. S. 586 (1930). It is undisputed that during this period Haddad resided in Wareham and in recording the tax lien notices there the United States satisfied the requirements of the Internal Revenue Code and complied with the provisions of the Massachusetts statute in perfecting the liens. ⁹ It seems apparent, therefore, that the government had valid tax liens against the promissory note of the defendants, Roukous and DiLullo, and that these liens attached to the note long prior to its purported transfer from Haddad to Badway. Under these circumstances the United States is entitled to foreclose its tax liens in this case even if the transfer to Badway was not fraudulent. Any rights Badway could acquire under even a bona fide transfer would be subject to the prior valid federal tax liens. Parlane Sportswear Co., Inc. v. United States [66-1 USTC ¶9393], 359 F. 2d 974 (1st Cir., 1966). Consequently we find it unnecessary to a proper determination of this appeal to decide whether the trial court erred in finding that the transfer from Haddad to Badway was fraudulent and without present consideration. Nor do we find it necessary to consider the merits of defendant's two remaining contentions, namely, that this action is barred by the statute of limitations and is also barred by operation of the doctrine of res judicata. Even if these defenses had merit the defendant is not entitled to the benefit of either of them now. Under Rule 8(c) of the Federal Rules of Civil Procedure the statute of limitations and res judicata are defenses which must be set forth affirmatively in the pleadings.

From our examination of the record this defendant did not comply with the requirements of Rule 8(c) ¹⁰ and therefore these defenses are deemed to have been waived. Under these circumstances he cannot properly assert or rely upon them in this court on appeal.

All other points raised have been considered and are found to be without merit.

Affirmed.

¹ The note was payable five years after date with interest at 5% per annum payable semiannually in advance. Haddad recorded the mortgage deed in Johnston on July 21, 1952, as provided by statute.

² On December 31, 1952, and again on February 20, 1953, the Commissioner of Internal Revenue made jeopardy assessments against Haddad of $78,404.41 and $21,391.11, respectively, for unpaid income taxes, penalties and interest for the taxable years 1946-1951. Timely notice and demand for payment of these assessments were sent to Haddad but they were not paid.

³ This transfer took place on January 25, 1957, at the office of Haddad's attorney in Boston . Haddad and Badway were both present. Neither the note nor mortgage deed were delivered to Badway at this meeting. Badway recorded the transfer in Johnston , Rhode Island , on April 8, 1957.

⁴ On December 14, 1961, when this suit was brought, Haddad's whereabouts were unknown. Notice of the pendency of the suit was given to him by publication pursuant to 26 U. S. C. §1655 but he did not appear or answer the case. All the other defendants were residents of Rhode Island and appeared and answered the case.

⁵ This suit was commenced in December 1958 and judgment was entered in favor of the United States on April 9, 1962, for $104,722.86 in unpaid income taxes, penalties and interest.

⁶ He also questioned the timeliness of the suit and raised other technical objections.

⁷ See the district court's opinion, 250 F. Supp. 845.

⁸ See n. 5.

⁹ Section 3672(a)(1) of the Internal Revenue Code (1939) provides that notice of federal tax lien shall be filed in the office designated by the law of the state in which the property subject to the lien is situated. Section 24, Chapter 36, General Laws of Massachusetts provides in part that no federal tax lien shall be valid against any person other than the person named in the lien unless it is recorded, in the case of personal property, in the office of the clerk of the city or town in which the person against whom a lien is filed resides or has his usual place of business.

¹⁰ Neither defense was set forth nor referred to in defendant's pleadings.