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21 West Lancaster Corp. v. Main Line Restaurant, Inc., William Plaginos, Maria Plaginos, The United States of America-Internal Revenue Service, and Commonwealth of Pennsylvania Department of Revenue, Appellant

(CA-3), U.S. Court of Appeals, 3rd Circuit, 85-1554, 5/12/86, 790 F2d 354, Reversing District Court, 86-2 USTC ¶9515

[Code Secs. 6321 and 6331 ]

Tax liens: Priority: Assignment of security interest: Property or property interest: State law v. federal law: Determination of pecuniary value.--The U.S. Court of Appeals at Philadelphia (CA-3) determined that a liquor license constituted property or rights to property to which a federal tax lien may attach. In reversing the district court's holding, 86-2 USTC ¶9515 , the appellate court ruled that although under the state law a liquor license is considered not to be property that may be subject to a security interest, the court noted federal tax lien takes precedence over state law. It also reasoned that a liquor license has pecuniary value for its holder, and may be transferred and sold. For these reasons, the court held that the IRS tax lien was valid and that the security interest of the assignee of the creditor of the restaurant was not valid as against the lien.

Michael H. Kaliner, Davis S. Fishbone, Ciardi, Fishbone & DiDonato, 913 Walnut St., Philadelphia, Pa. 19107, for appellees. Edward S.G. Dennis, Jr., United States Attorney, Philadelphia , Pa. , Glenn L. Archer, Jr., Assistant Attorney General, Michael L. Paup, William S. Estabrook, Lisa A. Prager, Department of Justice, Washington , D.C. , for appellants.

Before ADAMS, GIBBONS and WEIS, Circuit Judges.

OPINION OF THE COURT

ADAMS, Circuit Judge:

This appeal arises out of conflicting claims to a liquor license. A restaurant operator borrowed money and gave the lender a security interest in the restaurant equipment and its liquor license. Subsequently, the Internal Revenue Service (IRS) filed a lien on the license to recover taxes owed by the restaurant operator. The district court held that the prior security interest defeated the claim of the IRS. Because we conclude that a Pennsylvania liquor license is not "property" subject to a valid security interest, but is "property" subject to a federal tax lien, we will reverse.

I.

The liquor license at issue in this case was originally owned by Main Line Restaurant, Inc. (Main Line), a restaurant operator in suburban Philadelphia . In June, 1980, Main Line borrowed $60,000 from Jaybee Loan Company (Jaybee), and in exchange granted Jaybee a security interest in its restaurant equipment and its liquor license. Apparently as a result of financial difficulties, Main Line failed to pay taxes due the IRS in the latter part of 1980. The following year, 1981, the IRS made assessments against Main Line for unpaid federal employment taxes and interest for the third and fourth quarters of 1980 and for 1981.

In May, 1983, 21 West Lancaster Corporation (21 West) purchased all of Main Line 's assets, including its liquor license. Several days later, on May 23, 1983, Jaybee, the $60,000 creditor, assigned its security interest in the liquor license to William and Maria Plaginos. In June, 1983, in response to the assignment of the security interest to the Plaginos, 21 West and Main Line revised the agreement by which 21 West was to buy Main Line 's assets. The revision divided the purchase into two transactions, one for the liquor license and one for the remaining assets. Main Line sold the liquor license to 21 West for $60,000, which was to be paid by the buyer directly to the Plaginos, as assignees of Jaybee's security interest in the license. In the second part of the sale, Main Line transferred the remainder of the assets to 21 West for $115,000, also to be paid directly to the Plaginos.

On August 17, 1983, the IRS served a notice of levy upon 21 West seeking $65,729.21 in unpaid tax assessments owed by Main Line . As a result, 21 West was faced with conflicting demands: it owed the Plaginos $60,000 for the liquor license, and the IRS was seeking from it an almost identical amount to satisfy the tax lien. To resolve the situation, on June 18, 1984, 21 West deposited $62,283.12 into the registry of the district court, representing the $60,000 owed to the Plaginos, plus interest earned on that sum from December 20, 1983. Thereafter, 21 West filed an interpleader action in the district court, seeking an adjudication of the competing claims to the fund by the IRS and the Plaginos.

The district court ruled that the security interest granted in 1980 to Jaybee, into whose position the Plaginos stepped, took precedence over the subsequent IRS tax lien. It first acknowledged that under Pennsylvania law a liquor license is not property and cannot be subject to a security interest 1412 Spruce, Inc. v. Pennsylvania Liquor Control Board, 504 Pa. 394, 47 A.2d 280 (1981); In re Revocation of Liquor License No. R-2193, 72 Pa. Commw. 367, 456 A.2d 709 (1983). Noting, however, that the license does enhance the value of the licensee's business, the district court ruled that this "value enhancement component" could be subject to a security interest. Accordingly, it held that the security interest assigned by Main Line to Jaybee in 1980 was valid, and that it was senior to the subsequent lien held by the IRS. The government filed a timely appeal.

II.

Under the Internal Revenue Code, a federal tax lien is created in the amount of an unpaid tax on "all property and rights to property, whether real or personal, belonging to the delinquent taxpayer." 26 U.S.C. §6321 (1982). The lien arises automatically when the outstanding taxes are assessed, 26 U.S.C. §6322 , and extends to all property belonging to the taxpayer, Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267-68 (1945) (interpreting predecessor section of §6321 ). A lien arising under §6321 is afforded priority over all other unperfected liens or claims asserted against the taxpayer's property. §6323(a) . An IRS lien is ineffective against certain parties, including a "purchaser, holder of a security interest, mechanic's lien or judgment lien creditor," until the notice of the lien has been properly filed by the government. Id.

Thus the threshold question is whether Main Line , as owner of the liquor license, possessed "property" or "rights to property" within §6321 such that an IRS lien could attach to it. ¹ If the license is property, and an IRS lien did attach to it, we must then determine whether the IRS lien is ineffective under §6323(a) because of a prior lien or claim.

Determining whether an IRS lien attaches to property rights entails inquiry into both state and federal law. The Internal Revenue Code itself "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). A court therefore must first look to state law to ascertain the existence and nature of the interests against which an IRS lien has been asserted. See, e.g., Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14 (1960); Rodriguez v. Escambron Development Corp. [84-2 USTC ¶9698 ], 740 F.2d 92, 97 (1st Cir 1984). While state law creates legal interests and defines their incidents, "the ultimate question whether an interest thus created and defined falls within a category stated by a Federal statute requires an interpretation of that statute, which is a Federal question." In re Halprin [60-2 USTC ¶9564 ], 280 F.2d 407, 409 (3d Cir. 1960); see Bess, 357 U.S. at 56-57; Rodriguez, 740 F.2d at 97 (federal law governs whether state-created "rights are 'rights to property' to which a tax lien may attach"); JFWIRS Ltd. v United States [85-2 USTC ¶9591 ], 607 F. Supp. 566 (M.D.Pa. 1985) See also Young, Priority of The Federal Tax Lien, 34 U. Chi. L. Rev. 723, 726-28 (1967).

We turn to the status of a liquor license under the Pennsylvania Liquor Code. Once granted a liquor license may not be revoked arbitrarily by the state, 47 Pa. Stat. Ann. §4 -464 (Purdon 1985 Supp.), and the state may not arbitrarily interfere with the transfer of the license. Id. Moreover, while the Pennsylvania Liquor Code bars a licensee from directly assigning or transferring the license to another, the Liquor Control Board may transfer the license from one person to another solely upon payment of the transfer filing fee and the execution of a new bond. 47 Pa. Stat. Ann. 4-468(a). As a result, in practice a liquor license "is subject to bargain and sale in the marketplace." 1412 Spruce Inc. v. Pennsylvania Liquor Control Board, 504 Pa. 394, 405, 474 A.2d 280, 286 (1982) (Larsen, J., dissenting).

Pennsylvania courts have repeatedly recognized the additional value that a liquor license creates for a licensee. Thus, a condemnee whose license lost value as a result of the condemnation of his premises was held entitled to just compensation for the license. Redevelopment Authority of Philadelphia v. Lieberman, 461 Pa. 208, 336 A.2d 249 (1961). When a licensee dies, the Liquor Control Board may transfer the license to the licensee's surviving spouse or a person designated by the licensee. Accordingly, "the right to apply for such transfer is a right which possesses value," and the right to apply for transfer is includable in the valuation of decedent's estate. In re Feitz' Estate, 402 Pa. 437, 445, 167 A.2d 504, 508 (1961).

There is no bright-line rule or mechanical definition to guide us in determining whether a Pennsylvania liquor license, given the foregoing attributes, constitutes property or rights to property for federal tax lien purposes. Neither Congress nor the Supreme Court has essayed a broad rule of classification. In enacting §6321 , Congress "was perfectly willing to let contemporary transactions be analyzed to determine whether or not the delinquent taxpayer had any part of a bundle of rights of commercial value, to which the tax lien would attach." Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770 ], 542 F.2d 270, 278 (5th Cir. 1976). Courts confronting the question have generally classified as property or rights to property interests which can generate pecuniary value and are transferrable. See, e.g., Bess, 357 U.S. at 55 (for tax lien purposes, life insurance policies are property to the extent of their cash surrender value, since policy holder could compel payment of that amount); Note, Property Subject to the Federal Tax Lien, 77 Harv. L. Rev. 1485, 1486-87 (1964) (federal classifications have focused on transferability and leviability of interest). In the words of one court, the question to be asked is, "was the interest of the taxpayer . . . bargainable, was it transferable, did it have value? Nakashima, 542 F.2d at 278.

In view of the nature of a Pennsylvania liquor license as recounted above, it seems plain that it would constitute property or rights to property. Courts considering liquor licenses in other states have deemed them to be property. See, e.g., Bogus v. American National Bank of Cheyenne , 401 F.2d 458 (10th Cir. 1968); Paramount Finance Co. v. United States [67-2 USTC ¶9538 ], 379 F2d 543 (6th Cir 1968); Boss Co. v. Board of Commissioners [63-2 USTC ¶9671 ], 40 N.J. 379, 192 A.2d 584 (1963). Indeed, this Court, albeit without extended discussion, has treated a Pennsylvania liquor license as property for federal tax purposes. See Aqua Bar & Lounge v. United States Department of Treasury [76-2 USTC ¶9554 ], 539 F.2d 935 (3d Cir. 1976) (allowing government to bring suit to quiet title to liquor license seized as "property by IRS").

Some question, however, may be raised by two recent Pennsylvania decisions. In 1412 Spruce, Inc., supra, 504 Pa. at 400, 474 A.2d at 283, the Pennsylvania Supreme Court in 1984 held that a liquor license is not property subject to execution by a judgment holder. The court based its ruling on the language of 47 Pa. Stat. Ann. 4-468 (b.1), which states that "the license shall continue as a personal privilege and nothing herein shall constitute the license as property." ² In In re Revocation, supra, 72 Pa. Commw. at 370, 456 A.2d at 711, the Commonwealth Court held that a Pennsylvania liquor license is not property that may be subject to a security interest under the Uniform Commercial Code.

Insofar as these decisions determine the nature of Pennsylvania liquor licenses as legal interests, they are binding on this court. However, they do not determine the characterization of these interests under federal tax law. See U.S. v. Bess, 357 U.S. at 56-57 (state law preventing creditors from levying on life insurance proceeds "is inoperative to prevent the attachment of liens created by Federal statutes in favor of the United States"); Halprin, 280 F.2d at 409-410. It remains the task of this Court to evaluate whether a Pennsylvania liquor license, as created and limited by state law, constitutes property or rights to property under federal tax law.

Looking beyond the "privilege" label which the decisions apply, 1412 Spruce and In re Revocation somewhat weaken the case for classifying a liquor license as property, since their effect is to restrict a license's leviability. Nonetheless, a liquor license continues to have pecuniary value for its holder, in the form of potentially increased business revenues. Moreover, it may still be transferred and sold. ³ For example the IRS finds willing buyers when it seeks to sell liquor licenses it has acquired. See, e.g., Baltimore 55, Inc. v. Commonwealth of Pennsylvania , No. 85-1080 (M.D. Pa. Dec. 31, 1985). And private parties regularly transfer liquor licenses, "usually for consideration, and often in connection with the sale of [a] liquor business." 1412 Spruce, 504 Pa. at 400, 474 A.2d at 283. Accordingly, we conclude that a Pennsylvania liquor license constitutes property or rights to property within the meaning of §6321 , and is therefore subject to a federal tax lien.

III.

Having determined that Main Line's liquor license is property within the federal tax laws, our analysis now turns to the nature of the interest Jaybee acquired in the license through its $60,000 loan to Main Line . If that transaction conferred on Jaybee a valid security interest in the license, then the IRS's lien is ineffective against it under §6326(a) , and the Plaginos, as assignees of Jaybee, are entitled to the fund deposited in the registry of the Court.

The district judge acknowledged that under Pennsylvania law, a liquor license may not be subject to execution, see 1412 Spruce, nor may it be subject to a valid security interest, see In re Revocation. Under the Uniform Commercial Code, attachment and enforcement of a security interest is allowed only upon collateral, 13 Pa. Cons. Stat. Ann. §9203 (Purdon 1984), which is defined as "property subject to a security interest . . ." id. at §9104(a). Because the Liquor Code states that a liquor license is not property but a privilege, Pennsylvania law holds that a liquor license may not be collateral, and a creditor therefore may not hold a valid security interest in it. In re Revocation, 72 Pa. Commw. at 369-370, 456 A.2d at 711. ⁴ As a federal court, we are without power to modify this ruling, even were we so inclined, for it defines the nature of the legal interest under state law rather than its characterization under federal law. See In re Halprin, 280 F.2d at 409-410.

The effect of the Pennsylvania decisions was circumvented by the district court when it theorized that the liquor license has a value enhancement component subject to a security interest. It noted first the actual value of a liquor license, and cited the earlier Pennsylvania decisions recognizing that value, such as Lieberman and Feitz Estate. It then declared: "Therefore the court concludes that although the Liquor Code bars assignment of the license, it does not bar assignment of the value enhancement component of the license. See Branding Iron, Inc. v. Business Loans, Inc., 7 Bank. 729 (Bankr. E.D. Pa. 1980)."

Neither Branding Iron nor any other decision, however, supports the proposition that there exists a value enhancement component to a liquor license separable from the license itself. Nor do we believe such a theory to be a tenable one. Decided prior to the Pennsylvania decisions in 1412 Spruce and In re Revocation, Branding Iron made no mention of a value enhancement component; it simply canvassed Pennsylvania law and authority from other jurisdictions and concluded that a liquor license is property subject to a security interest. Specifically, it noted that the "courts of Pennsylvania have not dealt squarely with the issues of security interests attaching to liquor licenses. . . ." 7 Bankr. at 731. Now that the state courts have decided this issue, the ruling by the bankruptcy court in Branding Iron is drained of vitality. Indeed, in In re Revocation, the court expressly rejected Branding Iron. 72 Pa. Commw. at 370 n. 10, 456 A.2d at 711 n. 10.

Moreover, the distinction between the license and its value enhancement component is a highly metaphysical one. Under the district court's approach, while Main Line concededly could not validly assign a security interest in the license itself, it could validly transfer a security interest in the increased value to its business created by the license. Such an outcome would seem to contradict the unambiguous import of the Pennsylvania authority defining the nature of a liquor license, a question of state law.

To be sure, the result we reach in this case is not an altogether satisfactory one either. It leads to the anomalous conclusion that although a liquor license is not property for purposes of a security interest under Pennsylvania state law, it is property for purposes of a federal tax lien. Of greater concern to the parties, our analysis means that the assignee of a creditor who has taken what were reasonably believed to be the steps necessary to perfect its interest in the license as security will nonetheless be defeated by a subsequent tax claim. This would seem to be harsh treatment of the creditor. As the situation now stands, however, the ability to alter such a result rests with the Pennsylvania legislature, which may choose to redefine the nature of a liquor license under state law. Absent such action, this Court must conclude that under the circumstances present here, the IRS lien is valid, and the Plaginos' security interest is not. Accordingly, the judgment of the district court will be reversed.

¹ The district court did not explicitly decide whether the liquor license was property or rights to property within §6321 , although it implied that the license is such property by referring to the date the government's tax lien arose. App. at 136. Under the Internal Revenue Code such a lien can arise only on "property and rights to property. . . ." 26 U.S.C. §6321 . However, the district court also sought to distinguish earlier decisions by other courts suggesting that a liquor license could be property, and it is possible to read the opinion as disputing that conclusion.

² This subsection of the Liquor Code states that where a licensee becomes insolvent or bankrupt, the license shall be placed in safekeeping with the board for the balance of the term of the license, and for an additional year upon application to the board by the trustee, receiver, or assignee. It also provides:

The trustee, receiver, or assignee shall have, during said period of safekeeping, the same rights, benefits and obligations as to the license as the person to whom the license had been issued, including the right to transfer the license subject to the approval of the board. The license shall continue as a personal privilege granted by the board and nothing herein shall constitute the license as property.

47 Pa Stat. Ann. 4-468(b.1).

³ Of course, the right to sell a license is not absolute, since the state Liquor Control Board may deny a transfer. In that case, the licensee still has the right to appeal the denial, and may also apply for a transfer to another transferee.

⁴ 1412 Spruce, the Pennsylvania Supreme Court case, is similarly reasoned. Under Pennsylvania Rule of Civil Procedure 3107, "[r]eal or personal property" may be attached. But since 47 Pa. Stat. Ann §4 -468(b.1) states that a liquor license is not property, the court reasoned, by definition it cannot be attached. 504 Pa. at 396-97, 474 A.2d at 281.

 

 

 

In re American Way Food Service Corp., a Michigan Corporation, Debtor Lloyd H. Kempf, Trustee of American Way Food Service Corp., Plaintiff v. Internal Revenue Service of United States, Robert B. Bierman, Lansing City Treasurer, Michigan Department of Treasury, and Michigan Employment Security Commission, Defendants

U. S. Bankruptcy Court, West. Dist. Mich. , Case No. NL 80-02650, 48 BR 79, 3/12/85

[Code Sec. 6321]

Collection: Lien for taxes: Licenses: Michigan liquor license.--

A perfected federal tax lien attached to a liquor license held by a bankrupt corporation. The Bankruptcy Court, in view of the holding of the Court of Appeals for the 6th Circuit in Barr v. U. S. (64-2 USTC ¶9811) and the Michigan Supreme Court in Bundo v. City of Walled Lake (397 Mich. 672), determined that a Michigan liquor license constituted property and that the bankrupt licensee held a property interest in such license. The court noted that despite the continued claim by the Michigan Liquor Control Commission that there was no property right in a liquor license, trustees appointed by the court had consistently sold these licenses, often for a considerable sum, for the benefit of creditors.

[Code Sec. 6323]

Collection: Validity of lien: Security interests: Michigan.--

The Bankruptcy Court ruled that a federal tax lien that attached to a bankrupt corporation's liquor license took priority over any rights of an individual because he failed to perfect his lien. The individual sold his tavern business in June of 1977 to a corporation. The sales agreement granted a security interest in all the equipment and furniture and contained an agreement to reassign the license to the individual in the event of default. Financing statements, which did not include the license, were filed with the Secretary of State and the Register of Deeds. The court found that the individual failed to perfect his lien as required by the Michigan Statutes because the transfer of the business was subject to Emergency Rule 23(6), which did not prohibit the taking of a security interest in a liquor license. Further, the court found that the individual's lien was also subordinate to the interest of the bankrupt's estate because he failed to perfect his lien according to the Michigan Statutes. Furthermore, penalties and post-petition interest were not allowed on the secured claim by the U. S. because the collateral value of the liquor license was less than the amount of claim.

R. F. Rhead, Glassen, Rhead, McLean & Campbell, 200 North Capitol Bldg., Lansing, Mich. 48933-1366, for plaintiff. John A. Smietanka, United States Attorney, Daniel M. LaVille, Assistant United States Attorney, Grand Rapids, Mich. 49503, Ronald F. Fischer, Department of Justice, Washington, D. C. 20530, for United States. Frank J. Kelley, Attorney General, Richard R. Roescher, Curtis G. Beck, Assistant Attorneys General, for Michigan Department of Treasury. Ronald G. Morgan, Morgan & Fuzuk, for Robert B. Bierman. Stephen R. Sawyer, City Attorney, Alvan P. Knot, Assistant City Attorney, Lansing, Mich., for City of Lansing.

Opinion

Tax Liens--Liquor License--Distributions

NIMS, Bankruptcy Judge:

Lloyd H. Kempf (Trustee), the duly appointed and qualified trustee in this case filed his complaint against the various defendants for a determination that they had no rights to the Class "C" liquor license of the debtor. The license was sold for $22,000.00 with any rights in the defendants to follow the proceeds. Judgment was entered against the Michigan Employment Security Commission as it filed no answer and indicated by letter that it had no interest in the proceedings. A settlement was reached with the Lansing City Treasure in order to obtain its required approval of the transfer of the license and its claim has been satisfied.

Defendants United States and Robert B. Bierman have filed motions for summary judgment.

As this proceeding involves the determination of the validity, extent and priority of liens, it is a core proceedings under the Model Emergency Rule adopted by the U. S. District Court for this District and 28 U. S. C. §157.

I would find that there is no genuine issue of any material fact in this adversary proceeding and therefore this is an appropriate proceeding for disposition by summary judgment. Fed. R. Civ. P. 56, Bankr. R 7056. In Re Morweld Steel Products Corp. 8 Bankr. 946 (Bankr. W. D. Mich. 1981).

Facts

Robert B. Bierman (Bierman) sold his tavern business to American Way Food Service Corporation (American), a Michigan corporation, June 23, 1977, including the Class "C" liquor license. The agreement for sale granted a security interest in all the equipment and furniture and contained an agreement to reassign the license in the event of a default. A Michigan Liquor Control Commission (Commission) form which is undated and unsigned informed American that its application had been approved by the Commission but that the license could not be issued until certain items were furnished. One of these items was a copy of the security agreement. This paragraph included this underlined statement:

"The license is the property of the State of Michigan and cannot be listed in the documents."

Financing statements were filed with the Secretary of State and Register of Deeds, in June 1977, but these did not include the license. American still owes Bierman $9,844.00, which includes interest through December 1983.

Commencing in September 1978 and continuing through June 1980, the United States ( U. S. ) filed Notices of Federal Tax Liens total $114,850.96.

American filed a voluntary petition under Chapter 11 on August 28, 1980. On April 2, 1981, order was entered transferring the case to a case under Chapter 7.

It is the claim of the U. S. that the license is "property" on which its liens attached and since Bierman failed to perfect his security interest in the license, its liens take priority over any rights of Bierman or Trustee. Bierman claims that because the Commission prohibited the taking of a security interest in the license, he was not required to file a financing statement in order to perfect his interest, this being the method prescribed by the U. C. C. for perfecting a security interest in intangibles. It is Bierman's position that his interest in the license was perfected prior to the filing of the Notice of Tax Liens by virtue of the reassignment agreement between himself and American and that his lien is therefore superior to the interest of the U. S. or Trustee.

Tax Lien

26 U. S. C. §6321 provides:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, additional 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."

This tax lien arises at the time of assessment and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U. S. C. §6322. The lien is not valid as against any holder of a security interest or judgment creditor until notice has been filed in one office within the state as designated by the laws of such state in which the property is situated. 26 U. S. C. §6323. There is no claim that the U. S. did not perfect its lien.

However, it is questioned whether a Michigan liquor license is "property" or "rights to property" under §6321. The general question of what is property under §6321 or its predecessors has been before the courts many times. Glass City Bank v. U. S. [45-2 USTC ¶9449], 326 U. S. 265 (1945) held that the U. S. could attach a claim for past services as a state court receiver even though the claim was not in existence when the tax lien arose. The United States Supreme Court has held that §6321's predecessor created no property rights "but merely attaches consequences, federally defined, to rights created under State law." Thus, "State law controls in determining the nature of the legal interest which the taxpayer had in the property." Aquilino v. U. S. [60-2 USTC ¶9538], 363 U. S. 509 (1960). See also U. S. v. Bank of Celina [83-2 USTC ¶9688], 721 F. 2d 163 (6th Cir. 1983); Cole v. Cardoza [71-1 USTC ¶15,986], 441 F. 2d 1337 (6th Cir. 1971); U. S. v. Birris 395 F. 2d 943 (6th Cir. 1968).

Several courts have considered the liquor license in relation to §6321. Golden v. State [55-2 USTC ¶9664], 285 P. 2d 49 (D. Ct. App. Cal. 1955) held a liquor license to be property relying on In re Quaker Room 90 F. Supp. 758 (S. D. Cal. 1950) which held that a California liquor license was property under the Bankruptcy Act of 1898. The Boss Co. v. Bd. of Com'rs of Atlantic City [63-2 USTC ¶9671], 40 N. J. 379, 192 A. 2d 584 (Supr. Ct. N. J. 1963) held that once a license is issued, it becomes property for the purposes of §6321. In re Branding Iron, Inc. 7 Bankr. 729 (Bankr. E. D. Pa. 1980) pointed out that several Pennsylvania cases hold that a liquor license is property with value. In U. S. v. Blackett [55-1 USTC ¶9278], 220 F. 2d 21 (9th Cir. 1955) the court, in reversing a district judge that had held that a California liquor license was not property, held that since the license had been sold by a judgment creditor, the tax lien was against the money, which was property.

In a comment, "Property Subject To The Federal Tax Lien" 77 Harv. L. Rev. 1485 (1964) the author at p. 1487 notes:

"State labels should not control where the realities--the beneficial incidents of ownership--belie them. For example, many states proclaim by statute that liquor licenses shall not be deemed property, yet allow the holder to assign his licensee for value subject to formal approval by the licensing authority and compliance by the license with administrative regulations. In such cases the courts have generally looked behind the words of the statute to give the Government a lien on this marketable asset which otherwise might slip through its hands. If state law were held to control the classification as well as the existence of interests, the courts would be unable either to extend the scope of the lien beyond such undesirable state limitations or to classify certain state-created interests as not property subject to the lien."

The author points out in a footnote that even though N. J. Rev. Stat. §33:1-26 (Supp. 1959) stated that a liquor license was not property, Boss Co. v. Board of Com'rs, Supra, held that it was property for the purposes of §6321.

This Court is bound by the decisions of the Michigan Supreme Court on matters of state law, it being the highest court of this state. In Bundo v. City of Walled Lake 395 Mich. 672, 237 N. W. 2d 465 (1976) one of the issues on appeal was "whether an individual seeking a renewal of a class C resort liquor license under §17 of the Michigan Liquor Control Act has an 'interest' in 'properth' such that he is entitled to due process protection. The Court stated at p. 704, "We hold that a licensee has a 'property' interest in the renewal of his liquor license such that before he may be deprived of this interest he must be afforded rudimentary due process."

In Barr v. U. S. [64-2 USTC ¶9811], 337 F. 2d 693 (6th Cir. 1964) one of the necessary issues was whether a federal tax lien could rest in a Michigan liquor license. On this issue, the court stated at p. 696:

"The Internal Revenue lien on the liquor license served on the Michigan Liquor Control Commission is an authorized method of levy on a liquor licensee. Division of Labor Law Enforcement v. United States , 301 F. 2d 82 (C. A. 9, 1962)."

This court cannot help but observe that in spite of the continued claim by the Commission that there is no property right in a liquor license, trustees appointed by the court have consistently sold these licenses, often for a considerable sum, for the benefit of creditors. It is also to be noted that in this case, the license was sold for $22,000.00, which has been received and is being held by Trustee.

In view of the holding of the Michigan Supreme Court, the Court of Appeals for our Circuit and the almost unanimous decisions of other courts, I conclude that the United States has a valid lien against the liquor license of the debtor.

Security Interest of Bierman

As stated in Aquilino v. U. S. [60-2 USTC ¶9538], 363 U. S. 509 (1960), cited above, although state law controls in determining the nature of the legal interest which a taxpayer had in certain property:

"Once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights of property.'"

However, as stated in U. S. v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950):

"The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question. Hence, although a state court's classification of the lien as specific and perfected is entitled to weight, it is subject to reexamination by this Court."

In U. S. v. Scovil [55-1 USTC ¶9137], 348 U. S. 218 (1955) the court held that a tax lien took priority over a landlord's distress for rent and a lien of distraint.

The court stated, "Moreover, the distress lien was not perfected in the federal sense at the time the government's liens were filed. Such perfection is, of course, a matter of federal law." Again in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958) the court, in holding that a tax lien had attached to the cash surrender value of the deceased taxpayer's life insurance policy even though such property was not subject to creditor's liens under state law, stated that "once it has been determined that state law creates sufficient interests in the insured to satisfy the requirements of §3670, ¹ state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States."

See also U. S. v. The Liverpool & London & Globe Insurance Co., Ltd. [55-1 USTC ¶9136], 348 U. S. 215 (1954) and U. S. v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1954).

In U. S. v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264 (8th Cir. 1972) Cert. den. 409 U. S. 1078 a bank failed to perfect an assignment of a construction contract. In holding that the tax lien was superior to that of the bank's lien, the court stated:

"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."

The tax liens were perfected when filed with the Secretary of State and Register of deeds in 1979 and 1980.

If the lien of Bierman had been perfected in 1977, when created, it would have had priority over that of the U. S. In Paramount Finance Co. v. U. S. [67-2 USTC ¶9538], 379 F. 2d 543 (6th Cir. 1967) the taxpayer gave a security interest by a security agreement to a lender who furnished money to buy a tavern. This lien was perfected. Two years later a tax lien was filed by the Internal Revenue Service which later seized the liquor permit. The court held that the tax lien was invalid as to a perfected purchase money security interest.

In Bogus v. American National Bank 401 F. 2d 458 (10th Cir., 1968), even though the Wyoming statute provided that "no license shall be transferred or sold * * * nor shall it be subject to attachment, garnishment or execution," the court relied on the Wyoming Uniform Commercial Code which allowed for a security interest in intangibles, and held that a security agreement in a liquor license could be granted and, if perfected, the secured party's lien would be superior to the interest of a trustee in bankruptcy.

In a recent decision, In re Ratcliff Enterprises, Inc. Case No. 84-02465-G (Bankr. E. D. Mich. Nov. 21, 1984) Judge Graves mentions on p. 4 that since 1981, seven decisions had been rendered by the United States Bankruptcy Courts in the State of Michigan on security interests in liquor licenses. His decision was the eighth and this makes the ninth. In re Matto's Inc. 9 Bankr. 89 (Bankr. E. D. Mich. 1981) Judge Brody found that a vendor of a liquor business retained a security interest in the assets including the liquor license. As there was no perfection of the security interest, Judge Brody held that under Section 9-301 of the Uniform Commercial Code the rights of the creditor were subordinate to those of the trustee. Judge Brody's decision was cited and followed in In re Mason 18 Bankr. 817 (Bankr. W. D. Tenn. 1982) and In re Gencarelli 14 Bankr. 751 (Bankr. D. R. I. 1981).

In In re Rudy' Inc. 23 Bankr. 1 (Bankr. E. D. Mich. 1981) Judge Walker held that although a security interest by a bank in the liquor license and liquor inventory was perfected, it was not valid as to a state tax lien as Rule 19 of the Commission provided:

`(a) security agreement between a buyer and a seller of a license retail business, or between a debtor and a secured party, shall not include the license or alcoholic liquor.'"

Judge Graves in In re Ratcliff, Supra, took a different view and held that Rule 19 was contrary to the U. C. C. Art IX and that notwithstanding Rule 19, an unperfected security interest in a liquor license would be subordinate to a perfected security interest.

In In re Beefeaters, Inc. 27 Bankr. 848 (Bankr. W. D. Mich. 1983) Judge Howard of this court held that since Rule 19 did not allow a security agreement in a liquor license, there was no requirement for filing, with the Secretary of State's office, the agreement to reconvey the license as contained in the sales agreement.

In In Re Bernies, Inc., Adversary Proceeding No. 83-0029, Slip op. (Bankr. E. D. Mich. April 26, 1983) Judge Bernstein and District Judge Newblatt followed In re Beefeaters, Inc., Supra. In re Beefeaters, Inc., was decided under Rule 19 and would therefore not be determinative in this case where the creation of the lien took place prior to Rule 19's enactment.

In the case of In re McCormick 26 Bankr. 869 (Bankr. E. D. Mich. 1983), the security interest was created and perfected before the effective date of Rule 19 and was subject to Emergency Rule 23(6) which only prohibited a security agreement in alcoholic liquor. Judge Woods held that a perfected security interest in a liquor license was therefore valid.

The XXI Amendment to the Constitution of the United States repealed the XVIII Amendment and provided in part:

"Sec. 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

Ziffrin, Inc. v. Reeves 308 U. S. 132 (1939) holds that under the Twenty-first Amendment a state may adopt measures to reasonably restrict the transportation, sale or possession of intoxicating liquors.

Art. IV §39 of the Michigan Constitution of 1963 provides in part that "the legislature may by law establish a liquor control commission which, subject to statutory limitations, shall exercise complete control of the alcoholic beverage traffic within this state, including the retail sales thereof." Mich. Comp. Law §436.7 (Mich. Stat. Ann 18.977 (Callaghan 1980)) provides in part that: "The commission shall adopt rules and regulations governing the carrying out of this act the duties and responsibilities of licensees in the proper conduct and management of their licensed places." In Mallchok v. Liquor Control Commission 72 Mich. App. 341, 249 N. W. 2d 415 (1976) the court held that the commission failed to comply with the statutory procedural limitations and had denied a license on the basis of an unwritten policy rather than a rule or regulation. Under the Administrative Procedures Act of 1969 the Commission was required to "promulgate, process and publish all its rules and regulations." As stated in In re McCormick, Supra, it was because of Mallchok v. Liquor Control Commission, Supra, that the Commission adopted the emergency rules. Since in this case the transfer occurred in 1977, it was subject not to Rule 19 but to Emergency Rule 23(6) which, as noted in In re McCormick, Supra, did not prohibit the taking of a security interest in a liquor license. As Bierman failed to perfect his lien as required by Michigan Statutes, his lien is subordinate to the tax lien of the U. S.

The Liquor Licenses as Property of the Estate

Under 11 U. S. C. §541, the filing of a petition under Title 11 creates an estate comprised of all legal and equitable interests of the debtor in property as of the commencement of the case. Several courts have held that a liquor license is an asset of the estate. All of the Michigan bankruptcy court decisions cited above on the issue of perfection of a security interest in a liquor license, either held or assumed that a liquor license was property of the estate.

In re Quaker Room 90 F. Supp. 758 (S. D. Cal. 1950) held that a California Liquor License was property of the trustee even under the Bankruptcy Act of 1898. See also In re Aegean Fare, Inc. 35 Bankr. 923 (Bankr. D. Mass. 1983).

Therefore, I hold that the liquor license is property of the estate and held subject to the interest of the United States . For the same reasons that the lien of Bierman is subordinate to the U. S. it is subordinate to the interest of the estate.

Equity

The bankruptcy court is a court of equity. Where appropriate it will decide issues on equitable principles. Here, one must sympathize with Bierman. He claims that he was informed that he was prohibited from perfecting his security interest in the liquor license and could not even create such an interest. But there is a limit to how far a court can go in applying equity. In Hedges v. Dixon County 150 U. S. 182 (1893) where a bond issue exceeded the legal limitation, and the bond holders claimed that there should be an implied promise to pay, the demurrer of the debtor county was sustained. The court stated at p. 74:

"The established rule, although not of universal application, is that equity follows the law, or as stated in Magniac v. Thomson, 15 How. 299, 'that, whenever the rights or the situation of parties are clearly defined and established by law, equity has no power to change or unsettle those rights or that situation, but in all such instances the maxim 'equitas sequitur legem' is strictly applicable.'"

See also City of Litchfield v. Ballow 114 U. S. 190 (1885).

The Michigan legislature adopted the Uniform Commercial Code with certain modifications. Neither the Commission nor any of its employees could change the rights and duties established by that Code. The purpose of Article IX of the U. C. C. was to protect certain purchasers, and creditors and also trustees appointed under the Bankruptcy Act of 1898 and later the Bankruptcy Reform Act of 1978 to administer debtors' estates for the benefit of the creditors. The acts of the agents of the Commission could not estop such purchasers, creditors, and trustees from taking those acts available to them in subordinating unperfected liens.

Distributions

Distribution will be made in accordance with 11 U. S. C. §724(b). There has been raised the question as to penalties and post petition interest on the claim of the U. S. It would appear that tax claims include penalties. 11 U. S. C. §507(a). Post petition interest is allowed on all tax claims in full. 11 U. S. C. §726(a)(5). Would the fact that the U. S. has an allowed tax lien change this status of post petition interest? The claim of the U. S. is a secured claim. 11 U. S. C. §506(a); In re Busman 5 Bankr. 332 (Bankr. E. D. N. Y. 1980).

11 U. S. C. §506(b) provides:

"To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose."

There are problems with an obvious ambiguity under this section, see 3 Collier on Bankruptcy 506-36 & 506-37; In re Busman, Supra. But, §506 only allows interest where the collateral is of a value greater than the amount of the claim. Since in this case the secured claim of the I. R. S. amounts to $128,711.16 and the liquor license sold for $22,000.00 this issue is moot. The same would be true as to penalties.

Order may be entered holding that the tax lien of the United States is superior to the interest of Bierman and the estate subject to the provisions of 11 U. S. C. §724(b).

Order

This adversary proceeding having come before the Court on the Motions of the United States and Robert B. Bierman for Summary Judgment, and the Court having considered the arguments of counsel and the briefs filed by the parties, and the Court having made the Findings of Fact from which it reached the conclusions of law, as more specifically set forth in an opinion dated this date and incorporated as a part of this order, now, therefore,

1. The Motion for Summary Judgment filed by the United States is granted.

2. The Motion for Summary Judgment filed by Robert B. Bierman is denied.

3. The Trustee is hereby directed to turn over to the United States the funds received from the sale of the liquor license plus any interest received on the said sum but after deduction of any expenses incurred by the said trustee in connection with the preservation and sale of the license.

4. That service of a copy of this order, together with a copy of the opinion upon which it is based, be made by mail upon Glassen, Rhead, McLean & Campbell (R. F. Rhead, Esq.), attorneys for the plaintiff; Hon. John A. Smietanka, United States Attorney (Daniel M. LaVille, Esq., Assistant United States Attorney), Ronald F. Fischer, Esq., Trial Attorney Tax Division, Department of Justice, attorneys for the United States; Morgan & Fuzuk, P. C. (Ronald G. Morgan, Esq.), attorneys for the defendant, Robert B. Bierman; Stephen R. Sawyer, Esq., City Attorney for the City of Lansing (Alvan P. Knot, Esq., Assistant City Attorney), attorney for the defendant, City of Lansing; and Hon. Frank J. Kelley, Attorney General of the State of Michigan (Richard R. Roescher, Esq., Curits Beck, Esq., Assistant Attorneys General), attorneys for the defendant, Michigan Department of Treasury.

¹ Section 6321's predecessor.

 

 

 

Commonwealth of Kentucky Department of Alcoholic Beverage Control, Plaintiff v. United States of America, Commissioner of Internal Revenue Service, and Richard A. Eicher, Revenue Officer, Defendants

U. S. District Court, West. Dist. Ky. , Louisville , Civil Action C 76-0227 L(A), 1/6/77

[Code Secs. 6321, 6331, 7421, and 7426--result unchanged under '76 Tax Reform Act. Also U. S. Constitution, Art. I, Sec. 8, Cl. 1 and Amendment XXI, and 28 U. S. C. Secs. 2201 and 2202]

Declaratory judgment as to taxes: Lien for taxes: Levy: State liquor license: Property status: Constitutional question.--A declaratory judgment that the United States could not levy against state-issued retail liquor and beer licenses to satisfy the licensee's federal income tax liability was denied, and the federal government's motion to dismiss was granted. Despite state law to the contrary, the licenses were property for federal tax purposes. The 21st Amendment (to the U. S. Constitution), which gave the states control over commerce in intoxicating liquors, did not abridge the power of the United States to lay and collect taxes.

Mark F. Armstrong, Assistant Attorney General, Capitol Building , Frankfort , Ky. , for plaintiffs. George J. Long, United States Attorney, Louisville , Ky. , for defendants.

Memorandum Opinion

ALLEN, District Judge:

Plaintiff filed its complaint under the Declaratory Judgment Act, 28 U. S. C. Secs. 2201, 2202, and the Internal Revenue Code of 1954, Sec. 7426, alleging that the defendants had seized a retail liquor license and retail beer license on April 12, 1976, and alleging further that the control given to the states over the sale of alcoholic beverages is exclusive, and that a licensee has no property rights in the licenses, and that the seizure of the licenses is in violation of federal statutes. The Court is asked to enter a judgment declaring that the seizure of state-issued licenses is in violation of the Federal Constitution and Federal Statutes.

Defendants then made a motion to dismiss the complaint, and extensive briefs were filed for all parties. The defendants predicated their motion to dismiss upon the grounds that the Court lacked jurisdiction over the subject-matter by virtue of the Anti-injunction Act of the Internal Revenue Code, 26 U. S. C. Sec. 7421(a), and also lacked jurisdiction by virtue of the Federal Tax Exemption to the Declaratory Judgment Act, 28 U. S. C. Secs. 2201, 2202. Lack of standing and the failure to state a claim were also cited by the defendants.

The plaintiff's theory of the case seems to be based upon two contradictory principles. The first is that the defendants have no right to seize a Kentucky liquor license, since Kentucky liquor licenses under Kentucky Statutes are not considered to be property. See K. R. S. 243.440(1)(g). Secondly, the plaintiff argues that it is entitled to relief under 26 U. S. C. Sec. 7426 known as the Wrongful Levy Statute, which provides that if a levy has been made on property, or which has been sold pursuant to a levy, any person who claims that the property was wrongfully levied upon may bring a civil action against the United States.

The first contention is negated by the holding of the United States Court of Appeals for the Sixth Circuit in Paramount Finance Company v. United States [67-2 USTC ¶9538], 379 F. 2d 543 (1967), where the court stated in footnote 5 that the United States was authorized to collect the tax due it from the taxpayer by levy on and seizure of the state liquor license, and that the conclusion contra of the district judge was erroneous. That decision is predicated on the reasoning that the word "property" means anything which has a pecuniary value, and it would seem here that, despite the characterization of the Kentucky statute cited above of a liquor license as not constituting property, such a liquor license does have pecuniary value.

Plaintiff does, however, have standing to bring a cause of action under 26 U. S. C. Sec. 7426 which we have referred to and described briefly in the first paragraph on this page. However, the fact that plaintiff has standing to bring the action still leaves the Court with the question of whether or not, as a matter of law, plaintiff's complaint can withstand the motion to dismiss. Basically plaintiff's contention is that the states, under the 21st Amendment, have absolute control of liquor licenses and the control of intoxicating beverages within their borders, and that the United States cannot interfere with such control by seizing, under its taxing statutes, licenses belonging to individuals located in the State of Kentucky and issued by the State of Kentucky. This is a very broad contention and one which, we believe, is not sustained by the authorities. The Supreme Court, in cases such as William Jameson & Company v. Morgenthau, 307 U. S. 171 (1939) and Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U. S. 324 (1964), has held that the power given to the states under the 21st Amendment to control commerce in intoxicating liquors is not absolute. The 21st Amendment to the Constitution provides: "Sect. 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." Article I, Section 8, Clause 1 of the Constitution of the United States provides, insofar as pertinent, "The Congress shall have power To Lay and collect taxes, duties, imposts and excise, . . .."

Hostetter v. Idlewild, supra, holds that where there are two provisions of the same constitution, each must be considered in the light of the other and in the context of the issues and interest at stake in any concrete case. That principle is reflected in the Supreme Court's decision in Collins v. Yosemite Park Company, 304 U. S. 518 (1938) where it was held that the 21st Amendment did not give California the power to prevent shipment into that state and through that state of liquor destined for distribution and consumption in a National Park.

As we see it, the 21st Amendment and Article I, Section 8, Clause 1 of the Constitution are not incompatible. The 21st Amendment gives the states the right to prohibit absolutely the consumption of liquors within their domain or to place any conditions upon the use of it. It does not, in any way, purport to repeal the power of the United States to levy or collect taxes granted to it by Article I, Section 8, Clause 1 of the Constitution, and we see no reason why the United States is prohibited by the 21st Amendment from exercising its constitutional powers of collecting taxes which it is attempting to do in this case.

As stated in Jameson v. Morgenthau, supra, where the Federal Administration Act was attacked upon the ground that the 21st Amendment gave the states complete and exclusive control over commerce in intoxicating liquors, and hence that Congress no longer had authority to control the importation of these commodities into the United States, the Supreme Court's response was "we see no substance in this contention", id., at pp. 172-173.

We have, therefore, this day entered a judgment dismissing the complaint, since, as stated before, the plaintiffs have standing to bring the suit but their suit is without legal merit.

Judgment

The defendants, having moved to dismiss this action, and the Court having considered the briefs of the parties and all matters on record, and having filed its memorandum opinion, and being fully advised in the premises,

IT IS ORDERED AND ADJUDGED that the complaint of the plaintiff be and it is hereby dismissed with prejudice, the defendants to recover their costs herein, if any.

IT IS FURTHER ORDERED AND ADJUDGED that this is a final and appealable judgment and there is no cause for delay.

 

 

 

William Mirin, Appellant v. The Clark County Taxicab Authority and Vegas-Western Cab, Inc., a Nevada Corporation, Respondents

Supreme Court, State of Nev. , No. 7095, 1/23/74

[Code Sec. 6321]

Lien for taxes: Public utility property.--Taxpayer's certificate of public convenience and necessity was subject to levy by the IRS and subsequent transfer. The certificate was found to be property or the right to property. The Public Service Commission's Rules provided that a transfer under the execution of a satisfaction was effective only upon compliance with the Commission's rules and regulations. Thus, the court concluded that there was a proprietary interest capable of being transferred.

Kermitt L. Waters, Oscar Goodman, Goodman, Snyder & Gang, Ltd., 230 Las Vegas Blvd., South , Las Vegas , Nev. , for appellant. Robert List, Attorney General, Gary Logan, Chief Deputy Attorney General, Carson City, Nev., for Clark County Taxicab Authority, Galane, Tingey & Shearing, 302 E. Carson Ave., Las Vegas, Nev., for Vegas-Western Cab, Inc., for respondents.

Opinion

By the Court, MOWBRAY, Judge:

William Mirin, Appellant, was the holder of Certificate of Public Convenience and Necessity CPC A 883 Sub 3, issued by the Public Service Commission of Nevada (PSC), effective December 26, 1967, authorizing the operation of a taxicab business. The United States Internal Revenue Service (IRS) levied on this certificate for Mirin's failure to pay federal withholding taxes. Notice of seizure was served on the PSC on April 22, 1969. A public sale was then had, and the certificate was sold to Respondent Vegas-Western Cab, Inc., for approximately $21,000, subject to approval by Respondent Clark County Taxicab Authority (the Authority). ¹

An application was filed with the Authority by the IRS, requesting the transfer of the certificate that had been seized from Mirin. A public hearing, attended by both Mirin and his attorney, was held on February 26, 1970, and on March 27, 1970, the Authority entered its order transferring the certificate.

Mirin filed suit in the district court against the Authority and, by amended complaint, against Vegas-Western Cab, Inc., and the IRS, seeking a review of the Authority's action and an injunction against interference with his operation. On June 28, 1972, Vegas-Western filed a motion for summary judgment. The motion was granted on August 17, 1972, after a full hearing; it is from this order that Mirin appeals.

Mirin contends that his certificate of public convenience and necessity was not subject to seizure by the IRS because it was not "property" or a "right to property" as defined in the Internal Revenue Code. The Internal Revenue Code, 26 U. S. C. §6321, states:

"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." The determination of "property" or "rights to property" within the meaning of the statute is a matter of state law. Acquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); Kirby v. United States [64-1 USTC ¶9380], 329 F. 2d 735, 736 (10th Cir. 1964); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958); Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78 (1939); John Hancock Mut. Life Ins. Co. v. Hetzel, 341 P. 2d 1002, 1009 ( Kan. 1959); United States v. Ryan [54-2 USTC ¶9642], 124 F. Supp. 1 (D. Minn. 1954).

Most jurisdictions have early recognized that a certificate of public convenience and necessity is "property" or "rights to property" within the meaning of the statute. Barutha v. Prentice, 189 F. 2d 29 (7th Cir. 1951), cert. denied, 342 U. S. 841 (1951); Richardson v. National Acceptance Co., 179 F. 2d 1 (7th Cir. 1950), cert. denied, 339 U. S. 981 (1950).

Mirin's certificate of public convenience and necessity was issued by the PSC at a time when the "Rules and Regulations Governing Service and Safety of Operations of Motor Carriers within the State of Nevada", adopted by General Order No. 5, effective December 1, 1962, were in effect. Rule 223 indicated: "No grant of authority for either common or contract carriage hereafter granted shall carry with it the implication or intent of investing the holder thereof with any property right."

Appellant urges that this provision is controlling in support of the proposition that no property right that could be the subject of levy exists in the certificate of public convenience and necessity. We believe the better view is that this provision is available to the PSC in the event that it becomes necessary, in the proper administration of its authority, to revoke a certificate or refuse to approve the transfer thereof, and the holder raises a constitutional question as to his property rights in his certificate. Barutha v. Prentice, supra; NRS 706.660(1).

Rule 222(1), adopted by PSC General Order No. 5, states:

"No transfer of any operating right shall be effective except upon full compliance with these rules and regulations and until after the Public Service Commission has approved such transfer as herein provided. The mere execution of a chattel mortgage, deed of trust, or other similar document, does not constitute a transfer within the meaning of these rules. A proposed transfer of operating rights by means of the foreclosure of a mortgage or deed of trust or other lien upon such rights, or by an execution of satisfaction of any judgment or claim against the holder thereof, shall not be effective without compliance with these rules and regulations and the prior approval of the Commission."

The purpose of this section is to confer upon the PSC the power and authority to regulate operating rights evidenced by a certificate of public convenience and necessity. The rule impliedly recognizes that a transfer of these rights may occur by involuntary action and thus there must be a proprietary interest capable of being transferred and subject to levy. Barutha v. Prentice, supra; McCray v. Chrucky, 173 A. 2d 39 (N. J. 1961). One of the most recent cases on this issue is Fidler v. United States, 72-2 USTC ¶9506 at 85, 108-85, 112 (N. D. N. Y. 1972). The court stated at 85, 111-85, 112:

"To hold that either the Public Service Commission or Interstate Commerce Commission certificates are not property to which the government's tax lien attaches is to fly in the face of reality. Experience with bankruptcy of common carriers demonstrates that often the most valuable assets disposed of by the trustee are the operating rights evidenced by the Public Service Commission and Interstate Commerce Commission certificates. It is difficult to conceive of them as not being property or rights to property in the broad sense of 26 U. S. C. §6331 when they may be mortgaged, transferred, leased, and must be condemned with the payment of just compensation by the government." (Footnotes omitted.)

Therefore, we conclude that Mirin's certificate of public convenience and necessity was subject to levy and transfer by operation of law. The order, of the district court granting summary judgment in favor of Vegas-Western Cab, Inc., and against Appellant William Mirin is affirmed.

THOMPSON, C. J., BATJER, and ZENOFF, JJ., and FORMAN, D. J., concur.

¹ Administrative jurisdiction over the subject matter of the application was vested in the Clark County Taxicab Authority pursuant to NRS 706.881 to 706.885, especially NRS 706.8819(3).

 

 

 

In re: Tri-State Transportation, Inc., d/b/a Burns Trucking Company, Debtors United States of America, Plaintiff v. Tri-State Transportation, Inc. d/b/a Burns Trucking Company, Defendant

U. S. District Court, So. Dist. Ga., Savannah Div., CV481-49, 4/13/81

[Code Sec. 6321]

Lien for taxes: Property subject to seizure: Georgia Public Service Commission certificates.--The District Court, reversing the Bankruptcy Court, held that Georgia Public Service Commission certificates are property or rights to property which may be seized by the IRS to satisfy tax liens. The section of the Georgia Code which governs the certificates envisions that the certificates can be bought or sold, and they are in fact often transferred. The fact that the Georgia Public Service Commission could disapprove a transfer does not render seizure and sale by the IRS a nullity.

C. James McCallar, Jr., P. O. Box 9026 , Savannah , Ga. 31412 for debtors. Kenneth C. Etheridge, Assistant United States Attorney, Savannah , Ga. 31412 , for plaintiff.

Order

EDENFIELD, District Judge:

This case is before the Court on appeal from an Order of the Bankruptcy Court. The stipulated facts before that Court were as follows:

1. Tri-State Transportation, Inc., d/b/a Burns Trucking Company is a corporation doing business in Chatham County .

2. As of August 15, 1980, Tri-State Transportation, Inc., d/b/a Burns Trucking Company was indebted to the United States in the amount of $41,385.74 with interest accruing after that date at the rate of $12.29 per day.

3. This liability resulted in the failure of the debtor to pay Withholding and Federal Insurance Contribution Act taxes for the second, third and fourth quarters of 1979; the first and second quarters of 1980; and Federal Unemployment Tax Act taxes for 1979 and a portion of 1980.

4. These tax liabilities were assessed at various times beginning December 17, 1979, and ending June 16, 1980.

5. Representatives of the Internal Revenue Service commenced their collection efforts on or about October 12, 1980.

6. Collection efforts being unsuccessful, on May 6, 1980, a levy was served. On May 9, representatives of the Internal Revenue Service visited the offices of the debtor corporation and served upon James B. Cates, President of the debtor corporation, a notice of seizure.

7. On May 22, 1980, prior to the sale of the rights to these certificates by the government, Tri-State Transportation, Inc., filed a petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Georgia.

8. The complaint seeking to have the automatic stay lifted as to the certificates was filed by plaintiff United States on October 16, 1980.

The narrow issue on appeal is whether certain Georgia Public Service Commission "B" Certificates are property or property rights subject to seizure by the Internal Revenue Service (IRS). The United States had attempted under the terms of 11 U. S. C. §362(d) to lift automatic stay entered by the Bankruptcy Court under 11 U. S. C. §362(a). The Bankruptcy Court refused to lift the stay giving as its rationale that the certificates were not property or property rights subject to seizure by the Internal Revenue Service.

The definition of "property and right to property" is controlled by state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). Neither party discloses a Georgia case on point. Appellees point to the statute governing certificates issued by the Public Service Commission. The Georgia Code Ann. §68-504 provides that

"(c) The Commission may at any time, after notice and opportunity to be heard, suspend, revoke, alter or amend any certificate issued under this Chapter, if it shall be made to appear that the holder of the certificate has willfully violated or refused to observe any of the orders, rules, or regulations prescribed by the Commission. . . ."

"(d) Any such certificate may be transferred or hypothecated upon application to and approval by the commission, and not otherwise: Provided, that no transfer hereunder shall be permitted so as to destroy competition or create monopoly."

The Bankruptcy Court evidently relied on this statutory language to classify the certificates as a privilege rather than a right. The Bankruptcy Court also relied on Sandri v. United States [67-1 USTC ¶9425], 266 F. Supp. 139 (D. Mass. 1967). In that case, a purchaser at auction of a carrier's certificate sued the United States in restitution. The Court ordered recovery because the Public Service Commission had refused to approve the transfer after the unfortunate purchaser had paid the United States a substantial sum of auction. The Court reasoned that the United States had nothing to sell when it auctioned the certificate. The certificate was only a "privilege."

The rule that such a certificate is a mere privilege finds support in many jurisdictions as pointed out by appellee. However, the Court is not of the opinion that the reasoning in Sandri should be followed. The Court is of the opinion that such a certificate is property or a right to property. This result finds support in the language of the Georgia statute, a substantial body of case law, and common sense.

Obviously, the meaning of "property" differs with the context of the discussion. For purposes of a due process analysis, the definition of "property" is very broad. The governing Georgia statute recognizes the breadth of a due process analysis in that under the statute the privilege of possessing a certificate may be terminated only after notice and hearing and for cause. Ga. Code Ann. §68-504(c). The same statute also emphasizes the discretion of the Commission in controlling the certificates. This aspect of the statute weighs against the view that a certificate is property or a right to property since one of the normal incidents of property ownership is the right to freely dispose of one's property. Thus, the same certificate seems more like property when viewed under a due process analysis and less like property when viewed in light of the State of Georgia 's desire to retain control over the award and transfer of certificates.

Of course, in this case the concept of property must be analyzed in terms of whether or not it can be considered as an asset subject to seizure by the United States in its capacity as creditor. No doubt the intent of Congress in adopting 26 U. S. C. §6321 was to make the definition of "property" very broad. Georgia courts have recognized that "property" has a broad meaning in the context of federal tax liens. Harris v. Hill, 129 Ga. App. 403 (1973). This is because in the context of a lien, the Court looks to whether an asset can be sold to satisfy indebtedness.

The statute itself envisions that certificates can be transferred. Ga. Code Ann. §68-504(d). Although the Commission must approve any transfer, neither party contests that the certificates are often bought and sold. As the court in Fidler v. United States [72-2 USTC ¶9506], 29 A. F. T. R. 2d 1364 (N. D. N. Y. 1972) reasoned in holding that such certificates were property or property rights to which federal tax liens could attach:

To hold that either the Public Service Commission certificates are not property to which the government's tax lien attaches is to fly in the face of reality. Experience with bankruptcy of common carriers demonstrates that often the most valuable assets disposed of by the trustee are the operating rights evidenced by Public Service Commission and Interstate Commerce Commission certificates.

This analysis is more persuasive to the Court than that in Sandri, looking both to Georgia 's recognition that the definition of property in this context should be broad and to the language of section 68-504 itself. The Sandri rationale is not convincing in light of this recognition by the State of Georgia . The Sandri court reasoned that because the United States had no control over whether the Public Service Commission would approve the transfer, there existed nothing to sell. The court awarded restitution for the amount paid to the United States for the certificate. However, the analysis failed to recognize that what was transferred was not the operating rights. What was sold there was the right to request the transfer from the Public Service Commission. The fact that risk existed that the Commission would not approve the transfer should have been reflected in the purchase price. In the case at bar, the possibility that the Georgia Public Service Commission may ultimately disapprove the resulting transfer does not render seizure and sale by the Internal Revenue Service a nullity.

The only question decided here is that Public Service Commission certificates are property or rights to property which may be seized by the Internal Revenue Service to satisfy tax liens. Since the Bankruptcy Court's opinion was premised on its view that the certificates were not property or rights to property, only that question is decided here. The case is remanded for proceedings consistent with this opinion.

 

 

 

Beaufort Transfer Company, Plaintiff v. Fischer Trucking Company; Harry Morris; United States of America: Division of Employment Security, State of Missouri; Driscoll Insurance Agency, Inc.; Purcell-Ellis Tire Company; Yellow Freight Systems, Inc.; Ryder Trucklines; Norwalk Truck Lines; Navajo Freight Lines, Inc.; Wilson Freight Company; Acme Fast Freight, Inc.; Fischer Transfer Company; Philipp Transit Lines, Inc., Defendants

U. S. District Court, East. Dist. Mo. , East. Div., No. 71 C38(2), 2/21/73

[Code Sec. 6323]

Tax liens: Chattel mortgage: Garnishments: Legal expenses and fees: Cross-claim.--An amount deposited with the court in payment for the transfer of interstate and intrastate common carrier operating rights was disposed of as follows: (a) a chattel mortgage, earlier in time, had priority over the U. S. tax liens; (b) claims by garnishors were denied since the right to receive payment by the seller for the transfer of the operating rights was conditional between the time of service of the garnishments and the filing of the garnishees' answers; (c) attorney fees of the buyer that were related to the transfer of the rights were allowed since the sale contract called for a division of such expenses between buyer and seller; (d) legal expenses of the buyer related to a suit for specific performance to thwart a second sale agreement entered into by the seller were denied since these were not contemplated in the initial sale contract; (e) cross-claim by the trucking company that attempted to purchase the rights under the second agreement for loans made to the seller during pendency of the suit for specific performance were denied; (f) the buyer's request for attorney fees related to bringing this interpleader suit was denied since it was a claimant to the fund and not just a disinterested stockholder.

Fred M. Reichman, William J. Tate, Husch, Eppenberger, Donohue, Elson & Cornfeld, 7 N. 7th St., St. Louis, Mo., for plaintiff. J. H. Langworthy, 103 E. St. Louis St., Pacific Mo., Rufus D. Shannon, 200 N. Meramec, Clayton, Mo., Richard O. Funsch, 506 Olive St., St. Louis, Mo., Flynn & Parker, 319 N. 4th St., St. Louis, Mo., Thompson, Mitchell, Douglas & Neill, Hall, Reaban, Seigel & & Hyatt, 705 Olive St., St. Louis, Mo., for defendants.

Memorandum Opinion and Order

REGAN, District Judge:

This action of interpleader filed in the Circuit Court of the City of St. Louis was removed by the United States of America . The sum of $32,750 was deposited in the Registry of the Court pursuant to our order of December 9, 1971. Numerous claims against the funds have been asserted, including a claim by plaintiff.

Briefly, the facts giving rise to this action are as follows: On September 8, 1966, Fischer Trucking Company (Fischer) contracted to sell to Beaufort Transfer Company (Beaufort) Fischer's interstate and intrastate common carrier operating rights for the lump sum figure of $33,000.00, of which $250 was paid on the date of the contract, the balance to be paid within 30 days after the Interstate Commerce Commission (ICC) and the Missouri Public Service Commission approved the transfer of the rights. On the same date a "Letter of Disbursement," to be adverted to later, was executed by Fischer.

On September 20, 1966, another contract was entered into by Fischer, this one with Philipp Transit Lines, Inc. (Philipp), whereby Fischer purported to sell to Philipp the identical operating rights for the sum of $40,000. As the result of Fischer's refusal to abide by its September 8 contract, Beaufort sought and obtained a decree of specific performance. On February 9, 1970, the Supreme Court of Missouri affirmed the trial court's decree. Beaufort Transfer Co. v. Fischer Trucking Co., Mo. , 451 S. W. 2d 40.

After the mandate of the Missouri Supreme Court was filed in the court below, applications for the transfer of the operating rights were prosecuted before the respective commissions. The ICC approved the transfer of the interstate rights by an order served on November 16, 1970, the order to become effective December 21, 1970 (35 days after the service date). This suit was filed December 11, 1970, although Beaufort had not yet succeeded in obtaining the necessary approval of the Missouri Public Service Commission for the transfer of the intrastate rights. Even as late as the date this case was tried, such rights had not been obtained.

We first consider whether any of the claimants obtained a lien on the purchase price indebtedness or a right against Beaufort by virtue of garnishment. In ruling this issue we reject the contention of the United States that the service of a writ of garnishment in aid of execution would not suffice to create a lien upon an indebtedness owing to a judgment debtor. Vittert Const. & Inv. Co. v. Wall Covering Contr., Inc., Mo. App., 473 S. W. 2d 799; Dugan v. Missouri Neon & Plastic Advertising Company, 8 Cir., decided February 6, 1973.

Claims purporting to be based on execution and garnishment in aid thereof are asserted by the following claimants: The Division of Employment Security for the State of Missouri , Driscoll Insurance Agency Company, Inc., Purcell-Ellis Tire Company, Acme Fast Freight, Inc., Yellow Freight Systems, Inc., Ryder Trucklines, Inc., Norwalk Truck Lines, Navajo Freight Lines, Inc., and Wilson Freight Company.

Under Missouri law (Missouri Supreme Court Rule 90.02; Section 525.040 R. S. Mo.), notice of garnishment has the effect of attaching all money, rights, credits, or other choses in action of the judgment defendant in the garnishee's possession or charge or under his control at any time between the service of the garnishment and the time of filing the garnishee's answer. The Missouri authorities make it abundantly clear, however, that a debt which is conditional or dependent for its existence upon some contingency is not a subject of garnishment. Raithel v. Hamilton-Schmidt Surgical Co., Mo. App., 48 S. W. 2d 79, 81, 82; Beckham v. Tootle, Hanna & Co., 19 Mo. App. 596, 604; Zeltman v. Commercial Bank, 67 Mo. App. 672, 677; State ex rel. Government Employees Insurance Co., Mo. App., 454 S. W. 2d 943, 950.

In view of the foregoing, it is necessary to ascertain the precise date Beaufort became unconditionally obligated to pay the purchase price for the operating rights. The contract of September 8, 1966, expressly provides that the purchase is conditioned upon the rights being transferred by the ICC and the Missouri Public Service Commission to Beaufort without restriction and that the $32,750 balance of the purchase price shall be paid 30 days after the operating rights have been "finally transferred." The decree of specific performance directs Fischer to perform the contract by accepting the purchase price, conditioned upon the motor carrier operating rights being transferred by the ICC and the Missouri Public Service Commission. Obviously, unless the regulatory bodies authorized the transfer of the rights, Beaufort was in no event obligated to pay the purchase price. Prior to the approval of the transfers, the indebtedness was conditional and contingent.

The ICC approved the transfer of the interstate rights by an order served November 16, 1970, to be effective December 21, 1970. It is, however, unnecessary to definitively decide whether the condition or contingency as to the interstate rights was removed as of November 16, the service date, or December 21, the effective date of the order, for the reason that the "purchase" and the payment of the purchase price were conditioned upon the transfer to Beaufort of both the intrastate and the interstate rights. Beaufort was not required to accept the transfer of one of the rights unless the other was also transferred, so that until both rights were transferred the indebtedness remained conditional and contingent. ¹

By filing this interpleader suit on December 11, 1970, Beaufort waived the condition as to the approval of the transfer by the Missouri Public Service Commission, accepted the approved transfer of the interstate right as full compliance by Fischer, and thereby at that time conceded its liability for the full purchase price. In these circumstances we hold that as of December 11, 1970, Beaufort's contractual and court-ordered indebtedness to Fischer was for the first time no longer conditional or contingent, and was then owing, but not yet due (because the 30 day period had not elapsed.) In light of the foregoing determination, we consider the claims based on execution and garnishment.

The Division of Employment Security filed Certificates of Assessment against Fischer on November 17, 1966, July 27, 1966 and December 23, 1966. The filing of such certificates has the effect of a judgment of the Circuit Court where filed. Section 288.170, R. S. Mo. Executions and garnishments in aid thereof were issued on each judgment naming Beaufort as garnishee. Answers to interrogatories were duly filed by Beaufort in each proceeding, the last such answer being filed April 30, 1970. Inasmuch as the indebtedness of Beaufort to Fischer was not in existence as an unconditional obligation on April 30, it follows that the Division of Employment Security obtained no lien on the debt and that its status was simply that of a judgment creditor.

Driscoll Insurance Agency, Inc. obtained a judgment against Fischer on October 4, 1966. On March 10, 1970 execution thereon was issued returnable May 12, 1970, Beaufort being summoned as garnishee. Interrogatories were filed on April 20, 1970 and answered by Beaufort on May 5, 1970. No unconditional debt being owed by Beaufort on May 7, 1970, Driscoll obtained no lien on the debt and occupied the status of a simple judgment creditor.

Purcell-Ellis Tire Company obtained a judgment against Beaufort on July 5, 1966. An execution was issued on March 9, 1970, returnable April 10, 1970. The sheriff's return on the execution indicates service was had by handing a copy of the "Summons to the Garnishee" to the agent in charge of Beaufort. No showing is made that garnishment proceedings were in fact instituted or prosecuted. We cannot speculate with respect to this fact. Inasmuch as the return date was April 10, 1970, it was the duty of the garnishor (assuming that a garnishment had in fact been issued) to file interrogatories not later than six days after the return date. ( Missouri Supreme Court Rule 90.12; Section 525.130, R. S. Mo.) There is no contention that any such interrogatories were filed then or thereafter. The failure to timely file interrogatories had the effect of abandoning the garnishment (assuming there was a garnishment proceeding). Durham v. Jerome, 226 Mo. App. 1214, 49 S. W. 2d 637. Purcell-Ellis has no lien on the indebtedness.

Acme Fast Freight, Inc. obtained a magistrate court judgment against Fischer. A transcript of this judgment was filed in the Circuit Court of St. Louis County . On August 28, 1970, execution and garnishment in aid thereof, naming Beaufort as garnishee, were issued, returnable November 27, 1970. Interrogatories were filed November 27, 1970 and were answered by Beaufort on December 8, 1970. Acme's claim is based on the premise that Beaufort's indebtedness arose on November 16, 1970, the date the Interstate Commerce Commission order was served. We have held to the contrary, not because the debt was not then due, but for the reason that Beaufort's obligation was then, and until at least December 11, 1970, contingent and conditional. Since the indebtedness was not subject to garnishment on December 8, 1970, when the interrogatories were answered, the claim of Acme Fast Freight Inc. must also fail.

Yellow Freight Systems, Inc., after obtaining judgment, instituted garnishment proceeding in the Magistrate Court of St. Louis County . The transcript of the proceedings discloses that the answer of garnishee to the interrogatories was filed June 2, 1970, long before an unconditional indebtedness became owing to Fisher. Yellow's claim necessarily must fail.

Ryder Trucklines, Inc., Norwalk Truck Lines, Inc., Navajo Freight Lines, Inc., and Wilson Freight Company each obtained magistrate court judgments, transcripts of which were subsequently filed in the Circuit Court. We glean from the transcripts of the court proceedings that several garnishment proceedings were instituted by each judgment creditor, with the last such being returnable October 28, 1970. The transcripts are silent as to whether or when interrogatories were filed in those garnishments and whether or when, if so, the garnishee filed answers thereto. ² Claimant failed to sustain its burden of making a prima facie showing that the garnishments were still effective when Beaufort's indebtedness became unconditional. ³

The liens claimed by the United States of America and Philipp Transit Lines, Inc respectively, involve other considerations. The claim of the United States of America is based on assessments against Fischer for unpaid withholding, employment and highway use taxes. Notices of the tax liens were duly filed in Franklin County (Fischer's principal place of business) on various dates beginning September 8, 1966 and ending February 5, 1969. Other notices of tax liens were filed in St. Louis County , Missouri , on July 1, 1971. Notices of levy were served on Beaufort on April 16, 1968 and April 16, 1970. The parties have stipulated that the aggregate of the taxes owing by Fischer is $13,707.48 plus accrued interest at 6% per annum.

Section 6321, 26 U. S. C. provides for a lien for unpaid taxes on all property and rights to property belonging to the person liable for the tax. That motor carrier operating rights, particularly interstate rights, are property is well settled. See Friederich v. Dockery, 8 Cir., 209 F. 2d 677 and In re Rainbow Express, Inc., 7 Cir., 179 F. 2d 1. Hence, the lien of the United States attached to the operating rights, subject to any valid prior security interest therein.

Claimant Philipp Transit Line, Inc. is the transferee of a note executed by Fischer under date of January 4, 1966, secured by a chattel mortgage of the same date on Fischer's operating rights as well as other property. The payee of the note, Fischer Transfer Company, duly recorded the chattel mortgage under the then applicable Missouri law. Philipp purchased the note and mortgage on November 19, 1969. Still due on the note is $6,848.56 and interest at 4% per annum from December 1, 1968. ⁴ The chattel mortgage operated to confer a lien on the operating rights in favor of the holder thereof. In re Rainbow Express, Inc., 7 Cir., 179 F. 2d 1. By virtue of Section 6323(a) and (h)(1), 26 U. S. C., the lien of the chattel mortgage is prior to the later created tax lien of the United States of America .

Under the totality of the circumstances here involved, the liens of both Philipp and the United States of America attached to the proceeds of the sale of the rights. ⁵ Were this not so, the ICC right which Beaufort acquired would be encumbered with both the security interest of Philipp and the tax liens of the Government. It was in recognition of this fact that the contract of September 8, 1966 provided that should there be any tax liens or mortgages on the operating rights all such encumbrances "shall be removed prior to the consummation of this purchase as herein provided."

It is clearly to be inferred from the Letter of Disbursement that the parties contemplated that Fischer, whose obligation it was to remove the liens, would be financially unable to do so, so that Beaufort was thereby authorized to discharge these liens out of the purchase price. Whether the Letter of Disbursement constituted a contract obligating Beaufort to pay the amount of the liens in partial satisfaction of the sale price is not the real issue. What is important is that Fischer not only authorized such payments by Beaufort but even now urges that out of the monies due it from the deposit there be paid the amount of Philipp's security lien and the Government's tax liens. And the decree of specific performance, taking note thereof, directed Fischer to accept the sum of $32,750, "less any and all sums paid by Beaufort Transfer Company pursuant to the disbursement letter." In this situation, neither Philipp nor the United States is an adverse claimant insofar as Fischer's interest in the final disposition of the fund is concerned.

In view of the fact that the aggregate of the lien claims of Philipp and the United States are substantially less than the amount of the purchase price which Beaufort deposited, there would be no present problem resulting from the multiplicity of the other claims (which we have disallowed) but for the claim of Beaufort itself to substantial attorneys' fees. The contract of September 8, 1966 provides that the "Buyer and Seller hereby assume and agree to pay equally half-and-half all fees and expenses in connection with the transfer of the motor carry (sic) operating rights of Seller to Buyer, and under the Certificate of Public Convenience and Necessity, to be transferred between the Buyer and Seller, under the terms of this contract." Relying on this provision, Beaufort claims entitlement to one-half of $9,779.60 (the aggregate legal fees and expenses incurred by it in connection with the transfer of the ICC permit and the so far unsuccessful effort to obtain the Missouri rights), as well as one-half of $14,813.24 (the expenses which were incurred in connection with the suit for specific performance).

We have no doubt that the parties, knowledgeable as they were of the procedures of the regulatory bodies and the legal intracacies involved in obtaining transfers of operating rights, were aware that expert services would be essential for the purpose of seeking (and hopefully obtaining) the approval of the agencies for the transfers and that the provision of the contract relating to the division of the cost of such services was entered into with that fact in mind. We agree that Beaufort is entitled to one-half of the fees and expenses it incurred in prosecuting the application for the transfer of the ICC operating rights, and also (although the matter is not entirely free from doubt) to the fees and expenses incurred in unsuccessfully attempting to obtain the Missouri rights. Hence, the purchase price was subject to a set-off of $4,889.80.

However, neither party anticipated on September 8, 1966, that Fischer would attempt to avoid its obligation under the contract. In our judgment, the expenses incurred in connection with the suit for specific performance were not within the contemplation of the parties, and we do not believe that the contract can reasonably be construed to justify the payment to Beaufort of one-half of those expenses as distinguished from the expenses directly incurred in the efforts to obtain the approval of the transfers of the operating rights. Beaufort is not entitled to recover any portion of its specific performance expenses.

Philipp has filed a cross-claim seeking a personal judgment against Fischer based on moneys loaned in the aggregate sum of $8000. The loans were made to Fischer during the pendency of the suit for specific performance in order to enable Fischer to make the monthly payments due Fischer Transfer Company, the then holder of the note secured by the chattel mortgage. Philipp was a party to the suit and no doubt intended to apply the loan indebtedness on the purchase price of the rights if Fischer and Philipp prevailed.

In general, interpleader jurisdiction is limited to the fund in controversy. Cf. Northern Natural Gas Co. v. Grounds, 10 Cir., 441 F. 2d 705, 715. To the extent that a cross-claim is permissible under federal or Missouri law, it must arise out of the transaction that is the subject matter of the action or relate to the property that is the subject matter of the action. Philipp's asserted cross-claim fits neither category. ⁶ True, Fischer does not object to the cross-claim, but since we have no independent (e.g., diversity) jurisdiction as to the cross-claim, we decline to exercise questionable pendent jurisdiction over it.

Finally, Beaufort requests attorney's fees and expenses for bringing this interpleader. Faced with a multiplicity of claims to portions of the fund and vexed with a number of garnishment proceedings, some pending and others threatened, Beaufort was, of course, justified in bringing the claimants into one forum. Nevertheless, it was not a mere disinterested stakholder, in that in its petition for an order of interpleader it claimed entitlement to $10,127.09 out of the fund. Beaufort's claim as filed in this proceeding was increased to $12,796.42, some 39 per cent of the fund deposited.

"Costs and attorney's fees frequently are denied when the stakeholder claims an interest in the disputed fund . . .". Wright and Miller, Federal Practice and Procedure, §1719, page 483. Cf. Standard Surety & Casualty Co. v. Baker, 8 Cir., 105 F. 2d 578, 580; Continental Casualty Co. v. Associated Pipe & Supply Co., D. C. La., 310 F. Supp. 1207, 1214.

The attorneys' fees sought by Beaufort are in the sum of $4,057.50 for 121 hours of legal service in the preparation and prosecution of this action. In addition, its seeks reimbursement for cash outlays by its attorneys in the amount of $277.75. We have not been apprised of any reason why such substantial legal expenses should have been incurred in this relatively simple, uncomplicated, and essentially uncontested interpleader. That the legal services may have been performed in the period prior to our order sustaining the petition for interpleader does not mean that the services were performed for that purpose. It would appear that much time was spent in the preparation of the stipulation of facts, but these facts basically relate to the merits of the respective claims, as distinguished from the mere existence of conflicting claims, a fact which was not in controversy. The delay in obtaining the order of interpleader could not reasonably be said to have been due to resistence to such an order nor to have resulted in Beaufort's incurring any appreciable additional legal expenses.

In our view, Beaufort obtained a large benefit from the order of interpleader, in that it has been enabled to have its own contractual claim adjudicated as well as being discharged from all liability for the numerous judgment creditor garnishment claims which it had therefore been compelled to defend. And, comparably to Continental Casualty Co. v. Associated Pipe & Supply Co., supra, Beaufort has had the use and benefit of the $32,750 fund for the year from December 11, 1970, when the action was filed, to December 16, 1971, when the fund was paid into the registry of the court. In these circumstances, and bearing in mind that Beaufort is not a disinterested stakeholder, we have determined in the exercise of our discretion that an award of attorney's fees and expenses would not be appropriate.

The foregoing memorandum constitutes our findings of fact and conclusions of law.

The Clerk is directed to enter judgment in accordance herewith, awarding claimant Philipp Transit Lines, Inc., out of the fund deposited, the sum of $6,848.56 plus interest thereon at 4% per annum from December 1, 1968 in the present amount of $1,158.54, awarding claimant United States of America, out of the fund deposited, the sum of $13,707.48 plus interest at 6% per annum accrued on the assessments in the present amount of $5,262.45, awarding claimant Beaufort Transfer Company, out of the fund deposited, the sum of $4,889.80, awarding the balance of the fund deposited to Fischer Trucking Company, disallowing all other claims to the fund, and dismissing the cross-claim of Philipp Transit Lines, Inc., without prejudice.

¹ We are aware that under Missouri law, a debt may be attached although it is not yet due. Missouri Supreme Court Rule 90.25; Section 525.250 R. S. Mo. The question here, however, is not whether the indebtedness was due (e.g., 30 days after the transfer of both rights) but whether the liability was contingent (e.g., upon the approval of regulatory bodies) "In this State the statute authorizes an attachment in some instances, where the debt is not yet due, yet the provision plainly contemplates that to warrant the proceeding, there must be an actual subsisting debt which will become due by the efflux of time." State ex rel. Government Employees Insurance Co., Mo. App., 454 S. W. 2d 950, quoting from Hearne v. Keatt, 63 Mo. 84, 89.

² Claimants allege that interrogatories were filed, but presented no proof thereof. Of importance, there is no allegation whatever respecting garnishee's answers, if any, and the date thereof.

³ A claim has also been lodged on behalf of a proposed intervenor, Trailmobile, Inc. This claim is based solely on a judgment. A judgment creates no lien on the personal property of the debtor "until an execution has been issued and levied. [ Missouri ] Supreme Court Rule 76.17." United States v. Plez Lewis & Son, Inc., D. C. Mo., [67-2 USTC ¶9611] 272 F. Supp. 221, 223-224. It follows that the claim is lacking in merit, and intervention will be denied.

⁴ Philipp also asks for attorneys' fees. The note provides that if it is not paid when due, Fischer "agrees to pay all costs of collection including attorney's fees." However, we find nothing in the papers filed which gives Philipp a lien for such "costs of collection," nor is there any evidence with respect to any such "costs" or the amount thereof.

⁵ Beaufort expressly so concedes as to Philipp's lien and the United States of America impliedly agrees. A further support for the asserted tax liens of the United States on the proceeds of the sale is found in the fact that when the purchase price indebtedness was no longer conditional or contingent as of December 11, 1970, such indebtedness was then "property" of Fischer and hence covered by the tax liens under Section 6321. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265; Home Insurance Co. v. B. D. Rider Corp., D. C. N. J. [63-1 USTC ¶9235], 212 F. Supp. 457.

⁶ That Philipp seeks to have the judgment on the cross-claim paid out of Fischer's interest in the fund does not affect the fact that the cross-claim itself is not related to the fund.

 

 

 

Kenneth E. Fidler, Plaintiff v. United States of America , Defendant

U. S. District Court, No. Dist. N. Y., 72-CV-150, 4/20/72

[Code Secs. 6321 and 6331]

Lien for taxes: Levy and sale: Property subject to lien: Interstate Commerce Commission certificates: New York Public Service Commission certificates.--Certificates of public convenience and necessity issued by the Interstate Commerce Commission and the New York State Public Service Commission to a trucking firm are property within the meaning of Code Secs. 6321 and 6331. Accordingly, these certificates were subject to levy and sale to satisfy the government's tax liens.

[Code Secs. 7402 and 7421]

Jurisdiction: District Courts: Suit to quiet title: Suit to restrain collection: Exceptional circumstances.--The District Court lacked jurisdiction in an action brought by taxpayer to quiet title to certain certificates of public convenience and necessity issued by governmental agencies permitting taxpayer to engage in the trucking business. In the alternative, the action should be dismissed since the action was barred by the principle of sovereign immunity, the anti-injunction statute and the prohibition against a declaratory judgment relating to taxes.

Warren W. Bader, Costello, Cooney & Fearon, 600 Monroe Bldg., Syracuse , N. Y., for plaintiff. James M. Sullivan, Jr., United States Attorney, Syracuse , N. Y., J. Brian Ferrel, Department of Justice, Washington , D. C., 20530 for defendant.

Memorandum-Decision and Order

PORT, District Judge:

In this action, cast in the color of a suit to quiet title to certain certificates of public convenience and necessity, the defendant has moved to dismiss the complaint pursuant to Rule 12(b), Federal Rules of Civil Procedure. The plaintiff has cross-moved for an order restraining the defendant from proceeding further with a levy and sale of the certificates for unpaid taxes. An order was granted restraining the defendant from proceeding pendente lite.

The Facts

There is no dispute concerning the factual basis of the action. The plaintiff is engaged in the trucking and hauling business, operating in Central New York and in the New England States region. He operates under various certificates of public convenience and necessity issued by the Interstate Commerce Commission and the New York State Public Service Commission.

The certificates were levied upon and seized pursuant to the Internal Revenue Code ¹ for non-payment of delinquent federal withholding and other taxes. Notices of federal tax liens covering the assessments were duly filed, and a sale of the certificates was scheduled for April 17, 1972. Plaintiff, throughout these proceedings, has made it crystal clear and has emphasized that he in no way questions the validity of the assessments or tax liens. The basis of his complaint is that the certificates do not constitute property to which the liens attach.

He seeks a judgment declaring that he is the owner of the certificates; that they are not property subject to seizure; that the defendant has no right, title, or interest or any lien on them; that the defendant be enjoined from asserting any right, title, or interest in the certificates; and for a preliminary injunction restraining the sale.

Jurisdiction is alleged under 28 U. U. C. §§ 1331, 1340, 1346, 2201, 2410, and 2463 "for the quieting of title to certain certificates of public convenience and necessity wrongfully and erroneously seized from the plaintiff under color of the Internal Revenue Laws of the United States." ²

The threshold question is dual in nature. First, does jurisdiction exist under any of the sections alleged as a jurisdictional base; and secondly, if it does, is the the plaintiff's action barred by the principle of sovereign immunity, ³ the anti-injunction statute, ⁴ or the prohibition against a declaratory judgment relating to taxes? ⁵

[Suit To Quiet Title]

Falik v. United States ⁶ makes it clear that this circuit has foreclosed such a suit by the taxpayer. In Falik, a suit by a taxpayer to "remove a tax lien of the United States as a cloud on the title to her house at Woodmere, Long Island," ⁷ the court said:

The lien is obviously a "cloud" on the title and on a literal reading of the section [28 U. S. C. §2410(a)] it is difficult to see why the district court could not grant Mrs. Falik the relief she asks. But the Government urges with force that such adherence to the letter is forbidden by considerations of history and policy, and we are persuaded that the present action is not one contemplated by 28 U. S. C. §2410(a). * * * ⁸

Again, speaking to the question of whether taxpayer plaintiffs were within the contemplation of Congress in enacting the section, the court said:

It is plain that a taxpayer whose property has been subjected to a federal tax lien does not come within the Attorney General's examples of intended plaintiffs * * *. ⁹

The court, answering Mrs. Falik's argument that §2410 did not come within the anti-injunction statute, pointed out that "the action is quite similar to that contemplated by the Declaratory Judgment Act, 28 U. S. C. §2201, to which Congress was quick to attach an exception 'with respect to Federal taxes'--explaining that application of a declaratory judgment procedure in federal tax matters 'would constitute a radical departure from the long continued policy of Congress * * *'" ¹⁰ I am constrained by Falik to hold that an action to quiet title under these circumstances is not within this court's jurisdiction. ¹¹

Plaintiff contends that since the validity of the lien or underlying assessments are not in question, jurisdiction lies under 28 U. S. C. §1340, ¹² and Congress by enacting 28 U. S. C. §2410 has consented that the Government be sued in an action to quiet title. Benson v. United States, ¹³ cited by the plaintiff, appears to support this position. An examination of the facts of that case, however, shows that at least one of the plaintiffs was a non-taxpayer-owner of the property against which the lien was being asserted. ¹⁴ Insofar as Benson permits an action to quiet title to be maintained by a non-taxpayer-owner against whose property a lien for taxes has been asserted, it is in conformity with the great weight of authority in this circuit and others. ¹⁵ Insofar as Benson stands for the proposition that a taxpayer may maintain such an action, it lacks company. ¹⁶

Assuming that 28 U. S. C. §2463 is jurisdictional, ¹⁷ that section is likewise unavailable to the plaintiff-taxpayer. ¹⁸

That §1346(a) or (b) does not apply requires no discussion. The claims made by the plaintiff clearly demonstrate the inapplicability of those sections.

Section 2201, although requiring an independent jurisdictional base, similarly on its face excludes this claim.

[Government Would Prevail]

In any event, the plaintiff claims that he comes within the exception carved out of the prohibitions contained in 28 U. S. C. §§ 2201 and 7421 by Enochs v. Williams Packing Co. ¹⁹ That exception comes into play only "if it is clear that under no circumstances could the Government ultimately prevail," ²⁰ and "if equity jurisdiction otherwise exists." ²¹

As a guide to the application of these criteria, the Court instructed:

We believe that the question of whether the Government has a chance of ultimately prevailing is to be determined on the basis of the information available to it at the time of suit. Only if it is then apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim, may the suit for an injunction be maintained. Otherwise, the District Court is without jurisdiction, and the complaint must be dismissed. To require more than good faith on the part of the Government would unduly interfere with a collateral objective of the Act-protection of the collector from litigation pending a suit for refund. And to permit even the maintenance of a suit in which an injunction could issue only after the taxpayer's nonliability had been conclusively established might "in every practical sense operate to suspend collection of the * * * taxes until the litigation is ended." Thus, in general, the Act prohibits suits for injunctions barring the collection of federal taxes when the collection officers have made the assessment and claim that it is valid. * * * ²²

Holding that "[t]he record before us clearly reveals that the Government's claim of liability was not without foundation," ²³ the Court remanded the case "to the District Court with directions to dismiss the complaint." ²⁴ In this case, not only does the record clearly show "that the Government's claim of liability [is] not without foundation," but the plaintiff "does not question the merits of the underlying assessment * * *." ²⁵

[Certificates Are Property]

The plaintiff has one more arrow in his quiver which he claims brings Enochs into play. The plaintiff contends that the certificates levied upon by the Internal Revenue Service are not "property" or "rights to property" within the meaning of 26 U. S. C. §§ 6321 and 6331, and consequently, "under no circumstances could the Government prevail." He argues that he has established that "equity jurisdiction otherwise exists" since the seizure of the certificates would put him out of business. ²⁶

There is no dispute between the parties that "property" or "rights to property" of the plaintiff in the certificates are determined by the law of New York State . ²⁷ Plaintiff contends that under New York law, the Public Service Certificates belonging to the plaintiff are not property or rights to property to which the government's tax lien could attach.

In support of this position, plaintiff cites language from Public Service Commission v. Booth. ²⁸ The plaintiff's statement in his brief that the court in Booth "specifically referring to a certificate of public convenience and necessity issued by the Public Service Commission held that said certificate was a license from the State and that it is to be 'construed not as a contract, but as a temporary permit to do what otherwise would be unlawful, and is not property in any legal or constitutional sense,'" ²⁹ is in error. The correct and complete quotation is as follows:

Licenses from the state or a municipality are ordinarily to be considered, not as contracts, but as temporary permits to do what otherwise would be unlawful, and are not property in any legal or constitutional sense. ³⁰

The license referred to in the quotation was the license from the City of Rochester to operate a motor jitney bus. The case merely held that the operator of the motor jitney bus under a license from the City of Rochester also came within the purview of a legislative enactment requiring a certificate of convenience and necessity from the Public Service Commission, without which his operation would be enjoined. The cases cited by the Booth Court in support of the above quotation relate to the right to revoke a liquor license and a license to sell milk.

As conceded by the plaintiff, district court cases from the District of Massachusetts law are not controlling. ³¹ The plaintiff cites United States v. Berkshire Street Railway Co. ³² and Sandri v. United States. ³³ Although these cases can be considered as standing for the proposition that certificates of public necessity and convenience issued by the Department of Public Utilities of Massachusetts are not construed as "property" or "rights to property" within the meaning of 26 U. S. C. §§ 6321 and 6331, I do not find them particularly persuasive. The Sandri case relies on the Berkshire Street Railway Co. case as its authority; the latter case, in turn, relies on Roberto v. Commissioners of Dept. of Public Utilities. ³⁴ That case involved merely the right of the Department of Public Utilities to revoke a certificate which had been granted subject to the express "right of the department, after notice and hearing, to revoke said certificate for cause." ³⁵ The certificate was revoked for violation of the conditions under which it was granted.

Plaintiff also intimates that the certificates are not personal property subject to levy under New York law, citing Vogel v. Schenck. ³⁶ This argument of the plaintiff is disposed of by United States v. Bess. ³⁷

To hold that either the Public Service Commission or Interstate Commerce Commission certificates are not property to which the government's tax lien attaches is to fly in the face of reality. ³⁸ Experience with bankruptcy of common carriers demonstrates that often the most valuable assets disposed of by the trustee are the operating rights evidenced by Public Service Commission and Interstate Commerce Commission certificates. ³⁹ It is difficult to conceive of them as not being property or rights to property in the broad sense of 26 U. S. C. §6331 when they may be mortgaged, ⁴⁰ transferred, ⁴¹ leased, ⁴² and must be condemned with the payment of just compensation by the government. ⁴³ It is difficult to become involved in a motor carrier case reviewing an I. C. C. order where some, at least, of the rights have not been acquired by transfer. ⁴⁴

For the reasons herein, it is

ORDERED, that the defendant's motion to dismiss the complaint herein be and the same hereby is granted; and it is further

ORDERED, that judgment be entered dismissing the complaint herein for lack of jurisdiction, or in the alternative, for failure to state a claim upon which relief can be granted; and it is further

ORDERED, that the order restraining the sale of the said certificates of public convenience and necessity pending the determination of these motions, be and the same hereby is extended to and including May 2, 1972, at the expiration of which period the said stay is vacated, unless further extended by order of the Court of Appeals of this circuit.

¹ 26 U. S. C. §§ 6321, 6331 (1964).

² Plaintiff's Complaint, Para , I, filed March 17, 1972.

³ See United States v. Sherwood, 312 U. S. 584 (1941).

⁴ 28 U. S. C. §7421 (1964).

⁵ 28 U. S. C. §2201 (1964).

⁶ [65-1 USTC ¶9295] 343 F. 2d 38 (2d Cir. 1965).

⁷ Id. at 39.

⁸ Id. at 40.

⁹ Id. at 41.

¹⁰ Id. at 42 (citation omitted).

¹¹ This is the view of other circuits as well. See Cooper Agency, Inc. v. McLeod [64-2 USTC ¶9776], 235 F. Supp. 276 (E. D. S. C. 1964), aff'd [65-2 USTC ¶9603] 348 F. 2d 919 (4th Cir. 1965); Broadwell v. United States [64-2 USTC ¶9768], 234 F. Supp. 17 (E. D. N. C. 1964), aff'd 343 F. 2d 470 (4th Cir. 1965); Quinn v. Hook [64-2 USTC ¶9609], 231 F. Supp. 718 (E. D. Pa. 1964), aff'd [65-1 USTC ¶9273] 341 F. 2d 920 (3d Cir. 1965).

¹² The allegation of jurisdiction under 28 U. S. C. §1331, under the facts of this case, is subject to identical analysis, and 28 U. S. C. §7421 serves as a bar.

¹³ [71-1 USTC ¶9278] 442 F. 2d 1221 (D. C. Cir. 1971).

¹⁴ See also Raffaele v. Granger [52-1 USTC ¶9321], 196 F. 2d 620 (3d Cir. 1952).

¹⁵ See e.g. Bullock v. Latham [62-2 USTC ¶9640], 306 F. 2d 45 (2d Cir. 1962); United States v. Coson [61-1 USTC ¶9219], 286 F. 2d 453 (9th Cir. 1961); Seattle Association of Credit Men v. United States [57-1 USTC ¶9402], 240 F. 2d 906 (9th Cir. 1957); Gerth v. United States [55-2 USTC ¶9692], 132 F. Supp. 894 (S. D. Cal. 1955).

¹⁶ See Falik v. United States , supra at 43.

¹⁷ At least two courts have held §2463 not to be jurisdictional. Morris v. United States [62-2 USTC ¶9502], 303 F. 2d 533 (1st Cir.), cert. denied 371 U. S. 827 (1962); Cooper Agency, Inc. v. McLeod, supra.

¹⁸ In those cases where §2463 was found to be a jurisdictional base, the prohibitions of 28 U. S. C. §§ 2201 and 7421 were not a bar to the actions because they were brought by non-taxpayers. See Bullock v. Latham, supra; Seattle Association of Credit Men v. United States , supra; Raffaele v. Granger [52-1 USTC ¶9321], 196 F. 2d 620 (3d Cir. 1952); Rothensies v. Ullman, 110 F. 2d 590 (3d Cir. 1940); Szerlip v. Marcelle [56-1 USTC ¶9118], 136 F. Supp. 862 (E. D. N. Y. 1955); Gerth v. United States , supra.

Plaintiff quotes language from Birdsong v. Davis [59-1 USTC ¶9556], 176 F. Supp. 134, 136 (D. C. Ga. 1959), rev'd [60-1 USTC ¶9295] 275 F. 2d 113 (5th Cir. 1960) in support of jurisdiction under §2463. It is noteworthy that the cases relied upon by the Birdsong Court for the statement quoted were all actions brought by third parties.

¹⁹ [62-1 USTC ¶9545] 370 U. S. 1 (1960).

²⁰ Id. at 7.

²¹ Id.

²² Id. at 7-8 (citations omitted).

²³ Id. at 8.

²⁴ Id.

²⁵ Plaintiff's Memorandum of Law, p. 5.

²⁶ Affidavit of Kenneth E. Fidler, filed March 30, 1972.

²⁷ United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958).

²⁸ 170 App. Div. 590, 591, 156 N. Y. S. 140, 141 (3d Dep't 1915 ).

²⁹ Plaintiff's Memorandum of Law, p. 7.

³⁰ Public Service Commission v. Booth, supra, 170 App. Div. at 591, 156 N. Y. S. at 141.

³¹ Plaintiff's Memorandum of Law, p. 8.

³² [63-2 USTC ¶9766] 219 F. Supp. 861 (D. Mass. 1963).

³³ [67-1 USTC ¶9425] 265 F. Supp. 139 (D. Mass. 1967).

³⁴ 262 Mass. 583, 160 N. E. 321 (1928).

³⁵ Id. at 322.

³⁶ 12 App. Div. 2d 924, 211 N. Y. S. 2d 107 (1st Dep't 1961 ).

³⁷ [58-2 USTC ¶9595] 357 U. S. 51, 57 (1958). See also Davis v. Birdsong [60-1 USTC ¶9295], 275 F. 2d 113 (5th Cir. 1950).

³⁸ The proof of the pudding is in the eating. See, e.g., Escro Storage and Cartage, Inc. v. Frontier Distribution Line, Inc. (W. D. N. Y. 1971), aff'd -- F. 2d -- (2d Cir. Decided Feb. 16, 1972). The opening paragraph of Judge Curtin's opinion is illustrative:

This is an action arising out of the sale and transfer of trucking rights. Pursuant to an executory contract, plaintiff was operating the trucking rights of Murray 's Trucking Service, Inc. During the course of this operation, Murray 's New York Public Service certificate and Interstate Commerce Commission certificate were seized by the defendant, Internal Revenue Service, for nonpayment of delinquent Internal Revenue taxes and sold to defendant, Frontier Distribution Line, Inc.

This transfer to Frontier under the I. R. S. sale was subsequently approved by the New York State Department of Transportation.

³⁹ See e.g., McCullough v. Mattimoe, 271 F. 2d 161 (6th Cir. 1959); Barutha v. Prentice, 189 F. 2d 29 (7th Cir.), cert. denied 342 U. S. 841 (1951).

⁴⁰ See e.g., In re Rainbo Express, 179 F. 2d 1 (7th Cir.), cert. denied sub nom. Richardson v. National Acceptance Co., 339 U. S. 981 (1950).

⁴¹ 49 U. S. C. §312(b) (1964); N. Y. Transportation Law §169(2) ( McKinney 1971).

⁴² Information for Motor Truck Operators, V. as reprinted in N. Y. Pub. Serv. Law (McKinney Supp. 1971, at 37). Section V. reads in part, as follows:

Certificates and permits may not be transferred from one operator to another, either by sale or lease, without the approval of the Commission.

⁴³ See Eighth Ave. Coach Corp. v. City of New York , 286 N. Y. 84 (1941).

⁴⁴ See e.g., Kerr Motor Lines, Inc. v. United States , et al., 71-CV-480 (N. D. N. Y. decided March 28, 1972).

 

 

 

United States of America v. McFaddin Express, Inc., New Haven Board and Carton Co., Frank Rubino, Adley Express Co., Inc., Gulf Oil Corporation, Tire Service and Sales Incorporated

U. S. District Court, Dist. Conn., Civil Action No. 8527, 1/19/61

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Property subject to lien: Debt owed delinquent taxpayer.--A debt owing to a delinquent taxpayer by a third-party debtor was subject to a federal tax lien which was superior to the claims of all of the taxpayer's other creditors. BACK REFERENCES: 67FED ¶5357.123.

[1954 Code Sec. 6321]

Lien for taxes: Property subject to lien: Interstate Commerce Commission certificate.--A franchise Certificate of Public Convenience and Necessity issued by the Interstate Commerce Commission is "property" within the meaning of Code Sec. 6321 and, accordingly, subject to the Government's tax lien.

Harry W. Hultgren, Jr., United States Attorney, Henry C. Stone, Assistant United States Attorney, Federal Bldg., Hartford , Conn. , for plaintiff. Thomas A. Flaherty, 16 Leonard St., Norwalk, Conn., for McFaddin Express, Inc. & Louis DeBeradinis, Jr.; Morton Weiss, 955 Main St., Bridgeport 3, Conn., for McFaddin Express, Inc., and Adley Express; William R. Murphy, Gumbart, Corbin, Tyler & Cooper, 205 Church St., New Haven, Conn., for New Haven Board & Carton Co.; Rocco R. P. Perna, Smith Bldg., Greenwich, Conn., for Frank Rubino; Lander, Greenfield, Markle & Krick, 185 Church St., New Haven, Conn., for Gulf Oil Corp.; James J. Gentile, 945 Main St., Bridgeport, Conn., for Tire Service & Sales, Inc., defendants.

Motion for Summary Judgment by Plaintiff

BLUMENFELD, District Judge:

Plaintiff moves the Court as follows:

1. That it enter, pursuant to Rule 56 of the Federal Rules of Civil Procedure, a summary judgment in plaintiff's favor for the relief demanded in the complaint, on the ground that the affirmative defenses set forth in the defendants' answers are insufficient as a matter of law and that there is therefore no genuine issue as to any material fact and plaintiff is entitled to judgment as a matter of law.

2. This motion is based upon:

(a) Certified copy of authorization.

(b) Affidavit of Debt.

Notice of Motion

Please take notice that the undersgined will bring the foregoing motion on for hearing before this Court in the Courtroom in the United States Post Office Building, 135 High Street , Hartford , Connecticut on the 13th day of February, 1961 at 10:30 a. m. or as soon thereafter as counsel can be heard.

Final Judgment

This cause came on to be heard on motion of the plaintiff, The United States of America, for a summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, and the Court having considered the pleadings in the action, the affidavit of the plaintiff, The United States of America, in support of the motion and the affidavit of the defendant, Frank Rubino in opposition thereto, the remainder of the defendants herein failing to file affidavits in opposition thereto; and the Court having heard oral argument thereon and finding that there is no genuine issue as to any material fact and no controversial issue of fact to be submitted to the trial court; and having concluded that the plaintiff, The United States of America, is entitled to judgment as a matter of law.

It is hereby ORDERED, ADJUDGED and DECREED that the plaintiff recover of the defendant, McFaddin Express, Inc. the sum of One Hundred ninety-eight Thousand, Seventy-nine and40/100 ($198,079.40) Dollars, including interest to the date of the entry of judgment herein plus the costs of suit taxed at $50.00, and it is further

ORDERED, ADJUDGED and DECREED that the plaintiff, The United States of America, possesses valid and subsisting federal tax liens upon the debt due and owing to the defendant, McFaddin Express, Inc., from New Haven Board and Carton Company in the sum of Twenty-four Thousand, Two Hundred Forty-five and49/100 ($24,245.49) Dollars and that said liens are superior in time and right to that of any defendant or claimant herein; and it is further

ORDERED, ADJUDGED and DECREED that the plaintiff, The United States of America, be and it hereby is declared to have the exclusive and paramount right, title and interest in and to any and all funds, debts due to, or property of the defendant, McFaddin Express, Inc., presently owing by or in the possession of New Haven Board and Carton Company; and it is further

ORDERED, ADJUDGED and DECREED that the said New Haven Board and Carton Company forthwith pay to the plaintiff, The United States of America, the sum of Twenty-four Thousand, Two Hundred Forty-five and49/100 ($24,245.49) Dollars; and it is further

ORDERED, ADJUDGED and DECREED that the franchise Certificate of Public Convenience and Necessity No. MC 112718, issued by the Interstate Commerce Commission, a property or right belonging to the defendant, McFaddin Express, Inc., and subject to the tax lien of the plaintiff, The United States of America, be and the same hereby is ordered sold and the proceeds thereof paid to the plaintiff, The United States of America.

 

 

 

Tax liens: Bankruptcy: Possession prior to bankruptcy.--Levy status was accorded the government's tax lien in the proceeds of the sale of a bankrupt's Certificate of Public Convenience and Necessity where the service of levy and notice of seizure, together with service of levy on the Interstate Commerce Commission, effectuated in the government possession of the Certificate and the rights evidenced thereby. BACK REFERENCES: 64FED ¶5362.0355.

Samuel Rosen, 100 State St. , Boston , Mass. , for trustee. W. Arthur Garrity, Jr., United States Attorney, John J. Curtin, Jr., Assistant United States Attorney, Boston, Mass., Levon Kasarjian, Jr., Department of Justice, Washington, D. C. 20530, for U. S.

Order in Matter of Lien Status of Claim of the United States for Internal Revenue Taxes

LAWLESS, Referee in Bankruptcy:

1. No dispute exists as to the amount of the government claim for taxes and accordingly it is allowed on its face, as more recently amended on September 18, 1963.

2. Lien claim status is undisputed as to the amount of the government tax claim.

3. The issue before me has to do with the problem whether the Certificate of Public Convenience and Necessity No. MC61471 and the rights evidenced thereby had been reduced to possession by the government by levy prior to the filing of the petition in bankruptcy herein. If the levy as to the certificate is effectual, the parties are in agreement that the lien rights of the government in the proceeds of the sale of the certificate are not postponed herein to the payment of the first two orders of priority in bankruptcy by virtue of the provisions of Section 67(c) of the Bankruptcy Act. The trustee concedes that the certificate is property which may be subject of a levy.

I am persuaded that the steps taken herein by the government prior to bankruptcy, i.e., service of levy and notice of seizure, taken together with the service of levy on the Interstate Commerce Commission effectuated in the government possession prior to bankruptcy, within the meaning of the Bankruptcy Act Section 67(c). I adopt the position of the government to the effect that the umbrella of Division of Labor Law Enforcement v. United States [62-1 USTC ¶9389], 301 Fed. 2d 82 is broad enough to be conclusive as to the instant matter.

Accordingly it is

ORDERED that levy status is accorded to the lien of the United States of America as to the proceeds of the sale of the Certificate of Public Convenience and Necessity hereinabove referred to.