Property Rights of 3rd Parties page3

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In re Tennessee Forging Steel Corporation, Debtor

U. S. District Court, East. Dist. Tenn. , Bankruptcy No. BK-3-77-722, 5/10/78

[Code Sec. 6323--result unchanged by '76 Tax Reform Act]

Lien for taxes: Fixture v. personalty: Kentucky law.--A tax lien was not defeated by an earlier judgment lien because the sheriff's return of the judgment lien only described real property. The property in question had not become a fixture to the real property under Kentucky law because, while it was the judgment debtor's original intention to incorporate the property in question into the real estate, at the time of execution it had not been incorporated, the judgment debtor had abandoned his plans to incorporate it into the realty, and, finally, the property in question was adaptable to any suitable real estate, and had not been prepared specifically for the real estate encumbered by the judgment lien.

John A. Walker, Jr., Egerton, McAfee, Armistead & Davis, 500 Park National Tower, Knoxville, Tenn. 37901, for debtor. George L. Cass, Buchanan, Ingersoll, Rodenwald, Kyle & Buenger, 600 Grant St., Pittsburgh, Pa. 15219, for Pennsylvania Engineering Corporation. Robert E. Simpson, Assistant United States Attorney, Internal Revenue Service.

Memorandum

BARE, Bankruptcy Judge:

I. The question presented is whether the notices of Federal tax liens filed against the above debtor have priority over the interest of Pennsylvania Engineering Corporation in property sold by the debtor. The funds have been escrowed.

On December 13, 1976 , Pennsylvania Engineering Corporation (PEC) obtained a consent judgment against the debtor in the amount of $230,000.00, Civil Action No. B73C-1, United States District Court for the Eastern District of Arkansas, Northern Division.

On January 11, 1977 , PEC filed a "Certification of Judgment for Registration in another District" with the United States District Court for the Western District of Kentucky, C77-0002-P(A).

On January 19, 1977, the United States District Court for the Western District of Kentucky issued a writ of execution (fieri facias) on the judgment to the United States Marshal for the Western District of Kentucky commanding him to levy upon the goods and chattels, lands and tenements of the Tennessee Forging Steel Corporation located in the Western District of Kentucky.

On January 21, 1977 , the writ of execution was delivered to the United States Marshal for the Western District of Kentucky. Special instructions shown on the U. S. Marshal's Service Process Receipt and Return indicate as follows:

"Serve Notice on any officer, director, agent, or employee of Tennessee Forging Steel Corporation located at attached legal description." ¹

On March 15, 1977 , the U. S. Marshal made the following return:

"Served Wm. Rivers--Attorney--1130 A 3/15/77 At U. S. Ct. Hse. and P. O. Bldg., Paducah , Ky.

Posted: 1) office--tan colored trailer, 2) Large steel beam structure--still under construction, 3) Blue-colored bldg.--alliminum [sic] siding. F. H."

Attached to the return is a legal description of the real property.

On February 17, 1977 , PEC filed with the Marshall County Court Clerk's Office a "Notice of Execution," which Notice is of record in Encumbrance Book 6, page 327. ²

On October 29, 1977 , and November 14, 1977 , the Internal Revenue Service filed notices of federal tax liens in the amounts of $579,750.93 and $88,600.01, respectively. In addition, prior to the filing of the debtor's Chapter XI petition in this court on December 5, 1977 , the Internal Revenue Service seized the personal property of the debtor located at Calvert City , Marshall County, Kentucky.

In or about November 1977, and subsequent to the execution and levy by the U. S. Marshal, the debtor negotiated a sale of certain machinery and equipment to Nucor Corporation. The machinery and equipment was located at the debtor's property at Calvert City , Marshall County, Kentucky. It was not physically annexed to the property and was part of the same property which had been seized by the Internal Revenue Service.

On February 3, 1978 , an order was entered by this court authorizing the debtor to complete the sale to Nucor with the lien rights of all parties attaching to the proceeds derived therefrom. It is these proceeds, some $110,000.00, that are the subject of this litigation.

PEC asserts (1) that the equipment located at the Calvert City plant constituted fixtures, (2) that, even though the equipment had not been physically annexed to the property, Kentucky law does not require such annexation, and (3) that fixtures are subject to liens on real estate on which the fixtures are located.

The IRS asserts that PEC did not acquire an execution lien on the machinery and equipment because (1) the U. S. Marshal failed to describe any property other than real property in the return of execution, (2) the machinery and equipment sold to Nucor was not fixtures because the machinery and equipment retained its character as personal property at all times, and (3) the U. S. Marshal did not actually or constructively seize the property.

II. The first issue to be determined is whether the equipment located at the Calvert City plant and later sold to Nucor constituted fixtures. I find and conclude that it did not but instead retained its character as personal property at all times. The equipment was never attached to the realty or adapted to the debtor's use. Much of the property remained either in shipping crates or on shipping pallets stacked so as to protect it from the weather. The remainder of the property was left where it had been unloaded. It was, of course, intended when purchased that it would become at some future time a part of the debtor's industrial plant, but it never became such since construction was terminated and the equipment never installed or physically affixed to the premises.

Under K. R. S. 355.9-313, the law as to whether goods not incorporated into a structure are fixtures is determined by the law of Kentucky other than that act. The test as it has developed under Kentucky case law consists of three parts.

"[F]irst annexation to the realty, either actual or constructive; second, adaptation or application to the use or purpose to which that part of the realty to which it is connected is appropriated; and third, intention to make the article a permanent accession to the freehold." Doll v. Guthrie, 233 Ky. 77, 24 S. W. 2d 947 (Ct. of App. Ky. 1929).

These rules have been followed in a long line of Kentucky cases. See Tarter v. Turpen, 291 S. W. 2d 547 (Ct. of App. Ky. 1956); City of Newport v. Dorsel Co., 281 Ky. 372, 136 S. W. 2d 11 (Ct. of App. Ky. 1940); Bank of Shelbyville v. Hartford, 268 Ky. 135, 104 S. W. 2d 217 (Ct. of App. Ky. 1937); First State Bank of Eubank v. Crab Orchard Banking Co., 255 Ky. 800, 75 S. W. 2d 517 (Ct. of App. Ky. 1934); De Charette's Guardian v. Bank of Shelbyville, 218 Ky. 691, 291 S. W. 1054 (Ct. of App. Ky. 1927).

Annexation involves the attachment to realty. Adaption involves the application of the object to the use or purpose of the property to which it is connected. Intention relates to the intention of the party who made the annexation. Doll v. Guthrie, supra. See generally, 35 Am. Jur. 2d, Fixtures, §5. The application of these definitions, however, generally comes before the courts after the objects are in place. In the case before this court the goods in question had neither been annexed to the realty or attached to the buildings situated thereon nor adapted to the debtor's use. They could be moved about and could be moved from the premises without any harm to the land.

As for constructive annexation, it is said in 35 Am. Jur. 2d, Fixtures, §11, that "the mere introduction of chattel property upon realty with the unfulfilled or uncompleted intention to attach it will not confer upon it the status of a fixture. . . ." An exception is made in the case of materials specially fabricated for installation in a particular structure, but "articles of a general kind suitable for use in any number of other similar structures" do not fall within the exception.

Under Kentucky law, to effect an execution lien on personal property, the seizure of the property, either actual or constructive, is an indispensible act. CTC Investment Co., Inc. v. Daniel Boone Coal Corp. 58 F. 2d 305 (Ed Ky. 1931). Actual seizure contemplates literal possession of the object. Constructive seizure requires the officer to reduce the property to his dominion and control. In CTC the court quoted from Chittenden v. Rodgers, 42 Ill. 100, as follows:

"The officer must perform some act which not only indicates an intention to seize the property, but he must reduce it to possession, or, at least, bring it within his immediate control."

In the case before this court the United States Marshal in executing the levy on the Calvert City property did no more than serve a copy of the execution on an agent of the debtor and post three notices on buildings located on the property. As pointed out by the Internal Revenue Service, the record is bare of any other action the Marshall took if, indeed, he took any other action. His return indicates no seizure either actual or constructive of any equipment or fixtures. There is no proof that the Marshal even observed the machinery or equipment, inventoried the same, or later made any effort to advertise or sell the property. ³ Only a description of the realty is attached to the execution.

Kentucky law is clear that the property on which the levy is made "must be adequately described." Stephens Mfg. Co. v. Miller, 429 S. W. 2d 384 (1968). In that case one of the executions before the court (the Stephens execution) bore the following return:

"Executed the within Execution by levying upon all of H. C. Miller's of Bardstown fixtures and equipment and his motor vehicle. . . ."

The court quoted with approval 33 CJS, Executions, §105, p. 260, as follows:

"Personal property levied on should be described with particularity and distinctness"

and held that

". . . The levies for Stephens and Washington did not describe the fixtures or equipment or state where they were located. The report identified them only as property of the debtor in his possession. The Stephens and Washington executions were not levied according to statutory requirements, therefore, no lien for either of them was perfected." (Emphasis added). 429 S. W. 2d at 387.

Applying the three step test enunciated in the Kentucky cases cited, I find and conclude that the goods never became fixtures under Kentucky law. I have been cited no Kentucky case nor has independent research disclosed one that has applied the law of fixtures to property of the nature involved in this controversy. Hill v. Mundy, 11 S. W. 956 (1889), cited by PEC, applied the law of fixtures to ice in a hotel ice house. In that case the only feasible use of the ice was by the hotel, and it was actually being used in the operation of the business, unlike the property in the case at bar. In Roderick v. Sonborn, 76 A. 263 (Me. 1909), also cited by PEC, the same test was applied to storm windows and doors which were specially fitted to a house and which had been affixed to the house in past winters. These cases are clearly distinguishable.

Even if the property sold to Nucor constituted fixtures under Kentucky law, it appears doubtful whether PEC's lien attached to that property. Stephens Mfg. Co. v. Miller, supra, referred both to fixtures and equipment and the court held that both must be described in the officer's return so as to make them reasonably identifiable.

I find and conclude (1) that the materials subsequently sold to Nucor never became fixtures according to Kentucky law, and (2) that PEC never acquired lien rights in the materials so as to defeat the later filed Federal tax liens.

This Memorandum constitutes findings of fact and conclusions of law, Bankruptcy Rule 752.

¹ The attached legal description refers to a 6-page description of the property.

² Filed pursuant to Kentucky Revised Statutes, 382.440, Memorandum of Action Affecting Real Property to be Filed.

³ K. R. S. 426.340(1) enacts that the officer shall advertise the property for sale taken by him within 30 days after the levy.

 

 

 

Western Specialty Co., plaintiff and respondent v. The United States of America , defendant and appellant

State of Calif. Court of Appeal, 4th District, Civ. No. 7461, 6/7/65, (44 Cal. Rptr. 923)

[1954 Code Sec. 6321]

Lien for taxes: Another's property.--A plumbing contractor-taxpayer had no interest in funds deposited by the prime contractor to indemnify a title company, which the prime contractor subsequently quitclaimed to a materialman, to which tax liens could attach.

Allan Lame, Security First Nat'l Bank, Imperial Beach , Calif. , for plaintiff and respondent. Francis C. Whelan, United States Attorney, Loyal E. Keir, Richard G. Sherman, Assistant United States Attorneys, Los Angeles, Calif., for defendant and appellant.

BROWN (GERALD), P. J.:

The plaintiff, Western Specialty Company (Western), seeks by declaratory relief to establish its right to certain funds claimed by the appellant, United States of America , to be subject to federal tax liens.

[Facts]

The controversy arises out of a series of transactions relating to two phases of a construction project. In February and March, 1959, Kearny Villa Construction Company ( Kearny ), the prime contractor, entered into contracts with Copper Products Plumbing Company (Copper) for the installation of plumbing in the project. The two contracts totaled $241,800. Copper purchased its supplies from Western. On March 14, 1959 , Copper assigned to Western $122,434 of the money due or to become due from Kearny . Kearny acknowledged the assignment, paying the amount of the assignment in installments by joint checks to Copper and Western. At this time Western had supplied materials worth $9,697 to the Kearny project and Copper was indebted to Western for approximately $120,000 in materials on other projects. Western completed the supply of materials totalling $72,932 to Copper for the Kearny project on October 29, 1959 . The projects were completed in January 1960.

In October and December 1959, and in May 1960, the United States of America assessed withholding taxes and penalties against Copper. Tax liens were filed in January, February and June 1960, totalling $20,350.69.

In preparation for the sale of the properties title insurance was sought. Kearny deposited funds with the title insurance company to indemnify it against lien claims for plumbing work or materials. The funds were deposited in March 1960. The remainder of these funds is the focus of this dispute.

In March 1960, Western filed two actions against Kearny , Copper and others seeking to foreclose materialmen liens on the project. A similar suit was filed by Drake Steel Company in February 1960. About two weeks after Western's actions were filed, Copper filed suits against Kearny and the landowner to foreclose mechanics liens. The United States of America was not a party to these actions.

The claim of Drake Steel Company was recognized and paid out of the indemnity funds. Western prevailed in its actions, and Copper suffered adverse judgments in each of its suits. In exchange for a release of Western's liens and a satisfaction of judgment, Kearny quitclaimed the balance of the funds on deposit with the title company to Western. The United States of America claims Copper had an interest in the funds deposited and its tax liens attached to this interest. Western filed this action against the United States of America and the title company seeking to establish its right to the funds. By stipulation the title company deposited the funds in a savings and loan association subject to the further order of the court, and it was then dismissed as a defendant. Judgment favored Western.

The authorities cited by appellant do not support its contention that Copper had an interest in the funds. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 [83 S. Ct. 1651, 10 L. Ed. 2d 770] deals with the priority of liens in a situation where the government's lien clearly attached to the subject property.United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197 held a tax lien could attach to a chose in action (a cause of action for economic duress), and having attached to the chose before its partial assignment the assignee took subject to the lien. The statutes cited, 26 U. S. C. §§ 6321 and 6322, deal generally with the right of the government to a lien for unpaid taxes and the period of the lien. None of these authorities sheds light on the basic issue, i. e. whether the taxpayer in the instant case, Copper, had any interest in the indemnity funds to which the tax liens could attach.

Appellant concedes the funds were deposited to indemnify the title company from liability for any lien claims for plumbing work or materials. Kearny had no duty to indemnify the title company, at least until its liability was established. (Alberts v. American Casualty Co., 88 Cal. App. 2d 891, 899 [200 P. 2d 37].) In the actions filed by Copper it was determined Copper had no lien claim against the property, and the United States of America has never sought to establish any. Thus, even if it were assumed the indemnity agreement between Kearny and the title company was intended to inure to the benefit of third parties, neither Copper nor the United States of America has brought itself within the laws intended to be benefited.

[Judgment of the Court]

The funds deposited to secure the performance of the indemnity agreement constituted a pledge. (Civ. Code, §2986.) The pledged funds remained the legal property of Kearny . (Anderson v. Pacific Bank, 112 Cal. 598 [44 P. 1063, 53 Am. St. Rep. 228, 32 L. R. A. 479].) When Kearny quiteration its interest in the funds in consideration of Western's release of liens and satisfaction of judgment it was doing precisely what it had agreed to do--indemnify the title company against lien claims.

Judgment affirmed.

Coughlin, Judge, and Finley, Judge, pro tem., ^* concurred.

^* Retired judge of the superior court sitting under assignment by the Chairman of the Judicial Council.

 

 

 

United States of America v. Akron Mechanical Contractors, Inc. and Aetna Casualty and Surety Company

U. S. District Court, Dist. Md., No. 18104 Civil Action, 308 FSupp 496, 1/22/70

[Code Sec. 6321]

Tax liens: Property subject to lien: Subcontractor: Construction materials: State law.--Under Maryland law, Akron Mechanical Contractors, Inc. had no property interest in certain materials it furnished in its capacity as a subcontractor on a construction job. Therefore, the government could not assert a lien on this property as a creditor of Akron . Summary judgment was granted in favor of the surety company which was liable to pay the obligation only to the extent Akron had an interest in the materials in question.

Stephen H. Sachs, United States Attorney, Alan B. Lipson, Assistant United States Attorney, Baltimore, Md., Richard A. Scully, Sidney Bixler, Department of Justice, Washington, D. C. 20530, for plaintiffs. William A. Fisher, Jr., 10 Light St., Baltimore, Md., Alexander M. Heron, 700 Brawner Bldg., 888 17th St., N. W., Washington, D. C. 20530, for defendants.

NORTHROP, District Judge:

In this action the United States seeks to have Akron Mechanical Contractors, Inc. ( Akron ) adjudged liable for unpaid federal income withholding and Federal Insurance Contribution Act taxes and to assert a lien on certain property allegedly belonging to Akron . Both sides agree that a determination of Akron 's property interest in the property levied upon will resolve this dispute. On cross motions for summary judgment, this court concludes that Akron had no interest in the property in question at the time of the assessment.

The parties submitted a stipulation of facts and the following statement is taken from that and from admissions in the answer. In November, 1961, Dorset Contracting Company (Dorset) entered into a contract with the state of Maryland for the renovation of a hall of the University of Maryland . Dorset then entered into a subcontract with Akron for the plumbing, heating, ventilating and air-conditioning work involved in the renovation. Akron began work in January, 1962. In the course of work, Akron had materials furnished by suppliers delivered to the job site. The practice was for Akron to bill Dorset for materials delivered on a monthly basis and for Dorset to pay for the materials as billed. On August 10, 1962 , following a dispute between Dorset and Akron , Dorset terminated the subcontract. On August 13, 1962 , the Internal Revenue Service assessed Akron for unpaid taxes for the second quarter of 1962. On August 30, 1962 , the District Director of Internal Revenue filed notice of a lien in the amount of $24,186 for the unpaid taxes and that same day he levied upon materials worth $42,765 located on the construction site.

The materials seized had been paid for either by Akron or Dorset . Of those paid for by Akron some had further been billed to and paid for by Dorset either before the assessment or after it. Neither at the time of assessment nor subsequently were the materials seized broken down into those paid for either initially or ultimately by Dorset and those paid for by Akron but all were on the job site at the time of the levy. Shortly after the levy, Dorset, in order to insure that work on the project could proceed without interruption, entered into an agreement with the District Director whereby the materials were released to Dorset upon Dorset's guarantee of payment of the taxes assessed to the extent Akron was determined to have an interest in the materials. Aetna Casualty and Surety Company became a surety on Dorset 's obligation to the Internal Revenue Service. Dorset continued the work on the subcontract and completed it at a loss of $268,000. Aetna Casualty and Surety Company, on the basis of its obligation to pay the assessment to the extent Akron is determined to have had a property interest in the materials seized, was made a defendant in this action by the United States. Asserting that Akron had no interest in the materials seized, Aetna has moved for summary judgment on that count. There being no dispute as to the facts or inference thereof, summary judgment is in order.

Under section 6321 of the Internal Revenue Code of 1954, a tax lien attaches to "all property and rights to property" belonging to the taxpayer. Thus, as stated in Aquilano v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960),

[t]he threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached." Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82, 60 S. Ct. 424, 426, 84 L. Ed. 585. Thus, as we held only two Terms ago, Section [6321] "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, 78 S. Ct. 1054, 1057, 2 L. Ed. 2d 1135.

Looking then to Maryland law to determine Akron's property interest in the materials in question, the case of Dermer v. Faunce, 191 Md. 495, 62 A. 2d 304 (1948) is the most analogous. The owner of certain property entered into a contract with a general contractor for the improvement of the property. The general contractor entered into a contract with a subcontractor for the installation of a plumbing and heating systerm. In the course of performing work on the contract, the subcontractor delivered materials to the job site. Thereafter, the owner, because of a breach by the general contractor, ordered the subcontractor off the premises and took possession of the materials. The subcontractor brought an action of replevin. The Maryland Court of Appeals held that the subcontractor was entitled to replevy the materials. The court did, however, look to the contract between the general contractor and the subcontractor to determine whether there had been any agreement as to the passing of title to the materials, but found no such agreement. The court stated:

We are unable to find anything in the contract between [the subcontractor] and [the general contractor] to indicate that the parties intended title to pass by mere delivery of material to the premises or by anything short of physical annexation. 191 Md. at 499, 62 A. 2d at 306.

Thus, Dermer v. Faunce indicates that the construction contract itself serves to determine property interests in construction materials whenever the parties so intend.

Looking to the contract between Dorset and Akron there was no explicit provision for the passing of "title" to materials delivered to the construction site. The contract did provide for partial payments for labor and materials as the work progressed and the practice prior to the termination of the contract was for Akron to bill Dorset for materials delivered to the job site on a monthly basis. The contract also provided:

ARTICLE 20--Contractor's Right to Terminate Contract

It is understood and agreed that if the Subcontractor should be adjudged bankrupt, or if he should make a general assignment for the benefit of his creditors, or if a receiver should be appointed on account of his insolvency, or if he should persistently or repeatedly refuse or should fail, except in cases for which extension of time is provided, to supply enough properly skilled workmen or proper materials, or if he should fail to make prompt payment for material or labor or persistently disregard laws, ordinances or the instructions of the Contractor, or otherwise be guilty of a substantial violation of any provision of this contract, then the Contractor may, without prejudice to any other right or remedy and after giving the Subcontractor five (5) days' written notice, terminate the employment of the Subcontractor and take possession of the premises and of all materials, tools and appliances thereon and finish the work herein contemplated by whatever method he may deem expedient. In such cases the Subcontractor shall not be entitled to receive any further payment until the work is finished. If the unpaid balance of the contract sum shall exceed the expense of finishing the work, including compensation for additional managerial and administrative services, such excess shall be paid to the Subcontractor. If such expense shall exceed such unpaid balance, the Subcontractor shall pay the difference to the Contractor. [emphasis supplied]

Besides this termination provision, the contract contained two other provisions which relate, in some sense, to the question of title to materials. Article 16 of the subcontract provided that the architects or the general contractor may inspect materials furnished and required removal of or make a deduction from the contract price for substandard materials and article 27 provided that a certificate of acceptance or payment for materials furnished shall not constitute acceptance of materials subsequently found to be defective.

The Government argues that the intent of the parties as to title of materials does not appear in the contract. The Government would have this court refer to the provisions of the Uniform Sales Act, which was in effect in Maryland at the time the contract was executed, which set out presumptions as to the parties' intent as to title when no clear intent appears in the contract. In its memorandum of law submitted with its motion for summary judgment, however, the Government admits that the contract before this court was a contract for the installation of complete systems and not a contract for the sale of constituent materials. Contracts in which the furnishing of materials was merely incidental to construction activities were not deemed "contracts to sell" within the meaning of the Uniform Sales Act. See Foley Corp. v. Dove, 101 A. 2d 841 (D. C. Mun. App. 1954); 1 UNIFORM LAWS ANNOTATED sec. 1 n. 95 (1950). Therefore the contract involved in this case is not strictly within the scope of the Uniform Sales Act and the presumptions as to intent set out in the Sales Act are not applicable to it. The Government also argues that, to the extent title to materials is dealt with in the contract, articles 16 and 27 require the inspection and approval of materials before title to them passes. Pointing out that no such inspection and approval had been made at the time of assessment, the Government claims that title to the materials remained in Akron at the time of assessment.

Such a construction, this court concludes, is inconsistent with article 20 of the subcontract. That provision explicitly sets out the relationship between the parties in the event of the premature termination of the subcontract by Dorset . While it does not indicate where, in the event of such termination, title to materials delivered to the site but not yet paid for by Dorset lies, it does explicitly permit Dorset to take "possession" of such materials and complete the job. In the course of oral argument on the motion for summary judgment, the Government conceded that under the contract Dorset's right to "possession" of the materials precluded Akron from removing the materials from the job site. Moreover, article 20 not only confers on Dorset a right to possess the materials but also limits Akron 's rights after termination to claims against Dorset for the unpaid balance of the contract price. In that the article limits Akron 's rights after termination to claims against Dorset, it impliedly excludes any other interest Akron may be said to have retained with regard to the subject matter of the contract, including title to the materials on the job site. This court concludes, therefore, that the parties envisioned that, upon termination under article 20 of the subcontract, whatever interest Akron had in the materials on the constructions site would pass to Dorset so that it could promptly proceed to complete the work contracted for.

Such a construction is consistent with expressions in the contract to the effect that time was of the essence. The contract contained two typewritten modifications of what appears to be an otherwise boilerplate contract which indicate that the work was to be "pursued diligently" (article 2) and "in the most expeditious manner possible" (attached schedule "A"). Because time was of the essence, it was necessary for the general contractor to insure that the progress of construction was not delayed in the event it was necessary to dismiss the subcontractor. To insure that progress continued, the general contractor provided in the contract that, in the event of termination, he could take over the materials and equipment necessary to complete the work to the exclusion of any property interest of Akron . By taking over the materials already on the job site, he saved the time involved either in having the defaulting subcontractor remove his materials and in having new materials delivered or in bargaining with the defaulting contractor for the purchase of those materials already on the job site.

The agreement between Dorset and the Internal Revenue Service upon which Aetna has given its bond made explicit reference not only to the materials seized but also to sums due Akron from Dorset as of the date the contract was terminated. The agreement also stated that the levy was upon "payments which might be due by Dorset to Akron, Inc.", not simply the materials alone. Therefore, a complete resolution of the dispute between the United States and Aetna requires a determination not only of Akron's property interest in the materials seized but also of Akron's interest in any claim for money against Dorset.

With regard to Akron 's claim for money due from Dorset , article 20 of the contract is again relevant. Article 20 provided that, in the event of termination, the subcontractor was not entitled to further payment until the work was finished. Furthermore, the amount to which the subcontractor was to be entitled when the work was finished was subject to being set off by amounts expended by Dorset in completing Akron 's work. The parties have stipulated that the work on the contract has been completed and that the cost to Dorset of completing Akron 's work exceeded the unexpended contract balance. Therefore, Akron is due nothing from Dorset . A fortiori, the United States , which succeeded to Akron 's right to payment on its contract, is due nothing from Dorset . See United States v. Raley [62-2 USTC ¶9706], 210 F. Supp. 54 (N. D. Miss. 1962). This result is consistent with those decisions to the effect that, where a surety assumes the obligation of a defaulting contractor prior to the assessment of federal taxes, the surety's claim to the balance of the contract price is superior to a federal tax lien. See, e.g., Fidelity & Deposit Co. v. New York City Housing Auth. [57-1 USTC ¶9410], 241 F. 2d 142 (2d Cir. 1957); New York Cas. Co. v. Zwerner [45-1 USTC ¶9140], 58 F. Supp. 473 (N. D. Ill. 1944). Here, the general contractor, much like a surety, took over and completed the subcontractor's obligations under the contract. Given a contract which expressly entitles the general contractor to set off the cost of completing the subcontractor's obligation, there is no reason he should fare worse than a surety. This court, therefore, grants summary judgment for Aetna Casualty and Surety Company as to count II of the complaint.

Accordingly, the clerk will enter judgment in favor of the defendant Aetna Casualty and Surety Company.

 

 

 

Claude Berdoll v. Emzy Barker et al.

Tex. Dist. Ct., Travis County., No. 124,343, 12/31/62

[1954 Code Secs. 6321-6323]

Lien for taxes: Harvested crops delivered to milling company: Priority over lien for seeds.--The lien of the United States for taxes owed by a tenant-farmer attached to harvested crops which he had delivered to a feed and milling company, except for the one-third of the crops to which the landlord was entitled, and this lien for taxes was superior to the company's lien for seeds and fertilizer furnished to the tenant-farmer, but was subordinate to costs of this suit.

J. H. Hart, 904 Brown Bldg., Austin , Tex. , for plaintiff. Frank Hoagland, 1004 Perry-Brooks Bldg., Austin , Tex. , for Capitol Feed & Milling Co., Inc., James L. Cutcher, Box 751 , Taylor , Tex. , for Emzy Barker, Ernest Morgan, United States Attorney, P. O. Box 1429 , Waco , Tex. , for defendants.

Final Judgment

ROBERTS, District Judge:

On November 13, 1962, this cause was regularly called for trial, when came plaintiff Claude Berdoll in person and by his attorney of record, defendant Emzy Barker in person and by his attorneys of record, defendant Capitol Feed & Milling Company, Inc., by its manager and its attorney of record, and defendant and Intervenor United States of America by its attorneys of record, and all parties announced ready for trial. No demand for trial by a jury having been made by any party, the court heard all of the pleadings and all evidence offered by any party, and the argument of counsel, and thereupon took the case under advisement until this December 28, 1962 .

The court, having duly considered the pleadings, evidence, argument, and briefs submitted, on this December 28, 1962 , finds, adjudges, and decrees as follows:

[Ownership of Harvested Crops]

1. The court finds that plaintiff Claude Berdoll is the owner of one-third of all 1961 crops harvested by defendant Emzy Barker from plaintiff Berdoll's lands; that plaintiff Berdoll's said one-third of said crops was delivered by defendant Emzy Barker to defendant Capitol Feed & Milling Company, Inc.; that plaintiff Berdoll's said one-third of said crops is now in the possession of said defendant Capitol Feed & Milling Company, Inc., at Austin, Texas; that plaintiff Berdoll's said one-third of said crops is now and it was at the time it was delivered to defendant Capitol Feed & Milling Company, Inc., of the value of $2,372.31; that plaintiff Berdoll is entitled to the possession of said one-third, or, if said defendant Capitol Feed & Milling Company, Inc., elects to retain said one-third of said crops, then to the sum of $2,372.31, which sum said Capitol Feed & Milling Company, Inc., may pay to plaintiff Claude Berdoll in lieu of delivering to plaintiff Claude Berdoll his one-third of said crops.

2. That defendant and intervenor United States of America has a tax lien upon all of the corn and maize delivered by defendant Emzy Barker to defendant Capitol Feed & Milling Company, Inc., during 1961, except the portion thereof, of the value of $2,372.31, which was and is the property of plaintiff Claude Berdoll.

3. That defendant and intervenor United States of America does not have a lien upon or any claim or right to any part of plaintiff Claude Berdoll's one-third of the crops harvested during 1961 from plaintiff Claude Berdoll's lands.

4. That defendant Emzy Barker did not own and that he does not now own any of the grain or any interest in any of the grain delivered to defendant Capitol Feed & Milling Company, Inc., during 1961 in the name of Emzy Barker, III.

5. That defendant Emzy Barker is indebted to the United States of America in the sum of $13,143.27 for taxes which became due and payable on or before April 3, 1959 .

6. That defendant Emzy Barker is indebted to defendant Capitol Feed & Milling Company, Inc., for seeds and fertilizer purchased during 1961, in the sum of $12,956.11.

[Priority of Tax Lien]

7. That the lien of the United States of America for said sum owing to it by defendant Emzy Barker is prior and superior to any lien or claim which defendant Capitol Feed & Milling Company, Inc., has upon any grain owned by defendant Emzy Barker which was delivered to said defendant Capitol Feed & Milling Company, Inc., during 1961, but that said United States of America does not have any lien or claim upon or against any part of said grain, or its value, which is herein found to be the property of plaintiff Claude Berdoll.

THEREFORE, upon said findings so made, it is ADJUDGED and DECREED:

1. That plaintiff Claude Berdoll is the owner of grain of the value of $2,372.31 delivered by or for defendant Emzy Barker to defendant Capitol Feed & Milling Company, Inc., during 1961; that defendant Capitol Feed & Milling Company, Inc., shall now deliver to plaintiff Claude Berdoll, at Austin, Texas, grain of the present value of $2,372.31 at Austin, Texas, or said defendant Capitol Feed & Milling Company, Inc., shall pay plaintiff Claude Berdoll, at Austin, Texas, the sum of $2,372.31 for such grain; that if said grain is not delivered by defendant Capitol Feed & Milling Company, Inc., to plaintiff Berdoll or full payment therefor made within twenty days after this judgment becomes final, plaintiff Claude Berdoll shall have writ of possession against said Capitol Feed & Milling Company, Inc., for said grain, or, at his election, writ of execution against defendant Capitol Feed & Milling Company, Inc., for said sum of $2,372.11, together with 6% per anum interest thereon from said date, and for the court costs which shall accrue by reason of executing this provision of this judgment.

2. That defendant and intervenor United States of America has no lien upon or claim to any grain delivered to defendant Capitol Feed & Milling Company, Inc., in the name of Emzy Barker, III.

3. That to secure payment of said sum of $13,143.27 owing by defendant Emzy Barker to defendant and intervenor United States of America, said defendant and intervenor United States of America has a tax lien upon all of the corn and maize delivered by defendant Emzy Barker to defendant Capitol Feed & Milling Company, Inc., during 1961, save and except the portion thereof, of the value of $2,372.31, which was and is the property of plaintiff Claude Berdoll; that such lien is prior and superior to any lien upon or claim to said grain asserted by defendant Capitol Feed & Milling Company, Inc.; that such tax lien of said United States of America be, and the same is hereby, foreclosed on said portion of said grain; that order of sale shall issue commanding the seizure and sale of such portion of such grain and the application of the proceeds of such sale, first, to payment of the costs of the issuance of such process and the execution thereof; second, in satisfaction of the sum herein adjudged to be owing by defendant Emzy Barker to defendant and intervenor United States of America as taxes; third, if any sum then remains, to satisfaction of the sum herein adjudged to be owing by defendant Emzy Barker to defendant Capitol Feed & Milling Company, Inc.; and if any sum then remains, that it be paid to defendant Emzy Barker.

4. That defendant Capitol Feed & Milling Company, Inc., have and recover of and from defendant Emzy Barker the sum of $12,956.11; that to secure payment to defendant Capitol Feed & Milling Company, Inc., of said sum of $12,956.11, it has a lien upon all grain delivered to it by or for defendant Emzy Barker during 1961, save and except the portion thereof which is herein adjudged to have been and to now be the property of plaintiff Claude Berdoll; that said lien of said defendant Capitol Feed & Milling Company, Inc., is secondary and inferior to the lien herein adjudged to be held by the United States of America upon said defendant Emzy Barker's portion of said grain; that subject to such prior lien of the United States of America, said lien of said Capitol Feed & Milling Company, Inc., is hereby foreclosed; that if after satisfaction of said tax lien of said United States of America from the proceeds of the foreclosure herein decreed to said United States of America there remains any of such proceeds, such remaining sum shall be applied to payment of the sum herein adjudged to defendant Capitol Feed & Milling Company, Inc., and if any sum then remains, it shall be paid and delivered to defendant Emzy Barker.

5. All relief prayed for by any party to this suit which is not herein specifically granted is denied.

6. All costs of this suit are adjudged against defendant Emzy Barker. Payment of such costs shall be made by the sheriff in executing the process herein directed to be issued commanding the sale of the grain upon which defendant and intervenor United States of America has a tax lien out of the proceeds of such sale before delivery of any part of such proceeds of such sale to said defendant and intervenor United States of America or said defendant Capitol Feed & Milling Company, Inc., or defendant Emzy Barker.

[Exceptions to Judgment]

To which rulings and judgment of the court denying to defendant and intervenor United States of America any of the relief prayed for by it, said defendant and intervenor excepts; and to which rulings and judgment of the court denying to defendant Capitol Feed & Milling Company, Inc., any of the relief prayed for by it, said defendant Capitol Feed & Milling Company, Inc., excepts, and said defendant and intervenor United States of America and said defendant Capitol Feed & Milling Company, Inc., each in open court give notice of appeal to the Court of Civil Appeals for the Third Supreme Judicial District of Texas.

 

 

 

United States of America , Plaintiff v. Anders Contracting Company, Inc., and Greenville Auto Sales Company, Defendants

In the United States District Court for the Western District of South Carolina, Greenville Division, Civil Action 1364, 111 FSupp 700, April 21, 1953

Lien for taxes: Property subject to lien: Conditional sales contract.--Where, subsequent to the filing of the Government's first tax lien, taxpayer purchased a truck under a conditional sales contract, which was recorded after the filing of the second tax lien, it was held that the Government's claims were not superior to the seller's claim, because under the conditional sales contract title to the truck was still vested in the seller and the tax liens could not cover property not possessed by taxpayer.

John C. Williams, United States Attorney, Greenville , S. C., for plaintiff. J. Wilbur Hicks, Esq., Greenville , S. C., for defendants.

Opinion and Order

WYCHE, District Judge:

From the agreed facts and certain documents in this case it appears that: On September 15, 1950 , the Government duly filed a tax lien against the Anders Company for something over $8000.00 in the proper Recording Office for Greenville County , South Carolina .

[The Conditional Sales Contract]

On April 6, 1951, the Auto Sales Company sold a Ford truck to the Anders Company, and, contemporaneously with the sale, and as a part thereof, took a conditional sales contract, securing a note for the balance of the purchase price, which provided, among other things, as follows: The purchaser "hereby acknowledged having this date received from Greenville Auto Sales, Inc., the motor vehicle herein below described, in its present condition, together with its equipment, for which I agree to pay you on the terms and conditions set forth in the note." And, "It is agreed that the title to and ownership in said chattel are vested in you and your assigns, irrespective of any taking and delivery thereof to me until said indebtedness shall have been paid in money, at which time ownership and title shall pass to me." Further, "if any of my indebtedness shall become due and remain unpaid, or if the chattel is removed or attempted to be removed from the State, or otherwise disposed of; or if the said chattel shall be used in violation of the prohibition law, either State of Federal, then this mortgage shall become immediately due and collectible." Also, "it is further agreed, that in the event of default or breach of any of the conditions of this contract or mortgage, that the mortgagee shall be entitled to the immediate possession of said chattel, and is hereby authorized to sell the same after 5 days legal notice. * * *."

On July 5, 1951 , the Government filed another tax lien against the Anders Company in the amount of $1583.00.

On July 23, 1951 , the conditional sales contract given to the Auto Company, and described above, was duly recorded.

[Purchaser Defaulted]

The Anders Company defaulted in its payments and on January 21, 1952, the Auto Company made an agreement with the Deputy Collector of Internal Revenue at Greenville, South Carolina, in which it was agreed that the truck should be sold, the proceeds held in trust and the claims of all parties transferred to the proceeds, the purchaser taking clear title to the truck. The sale was held after advertisement for fifteen days, and the Auto Company was the highest bidder at $250.00, and became the purchaser at that price.

The Anders Company made no claim to the funds. The question to be determined is: Who is entitled to the $250.00, the Government, by virtue of its tax liens, or the Auto Company, under the terms of its conditional sales contract?

[Two Liens Claimed by Government]

The Government contends that it had two liens on the truck and is entitled to the proceeds by virtue of one or both of these liens, the first lien arising out of a tax claim, filed September 15, 1950, before the sale of the truck on April 6, 1951, and the second lien arising out of a tax claim, filed July 5, 1951, after the sale above mentioned; and that both liens became effective inasmuch as the conditional sales contract dated April 6, 1951, was not filed for record until July 23, 1951.

The contention of the Auto Company is that there was vested in the Anders Company only a limited property right when the truck was sold to it; that the Auto Company retained the general property, as indicated by the terms of the conditional sales contract, and the lien which was retained concurrently with the sale to the Anders Company; and that the property rights retained by the seller, and the lien created by the conditional sales contract or mortgage, are superior to both of the tax claims of the Government, irrespective of whether or not the contract was recorded.

[ South Carolina Law on Chattel Mortgage]

The Government bases its claim on the Federal Statutes as set forth in 26 USCA 3670-3672. These sections do not define property, or rights to property mentioned in the statute, therefore, I must look to the law of South Carolina to determine the property and property rights of the parties. Karno-Smith Co. v. Maloney, (1940) (CCA 3), 112 Fed. (2d) 690 [40-2 USTC ¶9533].

Under the law of South Carolina , an instrument of the nature of the conditional sales contract given to the Auto Company by the Anders Company, is classed as a chattel mortgage. Regardless of its classification, this instrument is a contract between the buyer and the seller and the parties are free to incorporate into such a contract any terms mutually agreeable and the courts are required to enforce such terms unless they contain something repugnant to the laws of the State.

Under the provisions of the conditional sales contract, the Auto Company retained title and conveyed only possession of the truck to the purchaser, and in case of default it had the right to regain possession without aid from the courts. The Auto Company having both title and possession was authorized under the contract, to sell the truck.

[Buyer Never Acquired Title]

The Anders Company never obtained title to the truck. It only got possession and an equitable right to obtain title upon performance of the contract, by paying in accordance with the terms laid down in the agreement. Title was not only retained by the seller, but was protected by a contemporaneous lien expressed in the conditional sales contract, enabling the seller to extinguish any rights the purchaser had under the contract. The Anders Company never obtained any absolute property or property rights in the truck. Such rights as it acquired were qualified and limited by the terms of the retention title contract and sales agreement which were executed before any property or property rights vested in the Anders Company as purchaser.

[An Analogous Situation]

A case which is closely analogous to the principles involved in the case at bar is Goodrich Silvertown Inc. v. Rogers, et al., 189 S. C. 101, 200 S. E. 91, where the Easterby Motor Company on March 15, 1934, sold an automobile to the defendant Rogers and took a chattel mortgage on the car, which provided that its lien would cover all after-acquired property placed on the car, and was recorded on the same date. On May 12, 1934 , the plaintiff Goodrich Silvertown, Inc. sold tries to the defendant Rogers and took a retention title contract, which was not recorded until twelve days later, May 24, 1934 . The tires were placed on the car when they were bought. The Easterby Company claimed the tires under its chattel mortgage, and the Goodrich Silvertown, Inc. brought an action against Rogers and Easterby Company to determine ownership of the tires. The plaintiff Goodrich Silvertown, Inc. obtained judgment and Easterby Company appealed. Judge G. Dewey Oxner (now Associate Justice of the Supreme Court of South Carolina) tried the case and wrote an opinion (adopted and approved by the Supreme Court of South Carolina) in which he said: "The fact the mortgage of the defendant motor company contained a clause covering after acquired property is not controlling. Before the sale of the tires to Rogers , title thereto was in the plaintiff. It passed to Rogers simultaneously, with the taking effect of the mortgage to the plaintiff, it being in effect a single transaction and Rogers only acquired title subject to the title retention contract, this being the true intention of the parties. He was never, therefore, able at any time, either prior or subsequent to the purchaser, to pass any greater rights than he had. In this connection see the following from Judge Cothran's opinion in Carroll v. Cash Mills, 125 S. C. 332, 344, 118 S. E. 290, citing Holt v. Henley, 232 U. S. 637, 640, 34 S. Ct. 459, 58 L. Ed., 767, involving a similar point, and quoting therefrom with approval as follows (page 293): 'The mortgagees have no equity and do not bring themselves within the statutory provision. We believe the better rule in a case like this. * * * is that the "mortgagees take just such an interest in the property as the mortgagor (purchaser) acquired; no more, no less.'"

"Under the rule in the Cash Mills case, a mortgage intended to cover after acquired property can only attach itself to such property in the condition in which it comes into the mortgagor's hands. In the case at bar, the tires were subject to the interest of the seller, who by virtue of its sales contract retained a specific lien thereon. See, also, in this connection, Berry , Section 1805, hereinabove. And, as I have pointed out, the transaction does not come within the Recordation Act as such acts are intended for the protection of subsequent, not prior creditors or purchasers."

Here the Anders Company received only a qualified property right or interest in the truck, which right or interest was subject to the terms of the contract and the Government's lien could cover only such property and property rights as the Anders Company possessed. As stated in the case of Karno-Smith Co. v. Maloney, supra, "We think it clear that in a case of this kind the rights of the collector rise no higher than those of the taxpayer * * *."

[Government Claims a Superior Lien]

The Government contends further that its claim to a superior lien is protected by the South Carolina Recording Act, because the first claim of the Government was recorded September 15, 1950, the truck was sold to the Anders Company April 6, 1951, and because the second claim of the Government was filed July 5, 1951, and the conditional sales contract of the Auto Sales Company was not recorded until July 23, 1951. The Federal Statute, 26 USCA 3670, provides that upon failure to pay any tax the amount shall become a lien in favor of the United States . This would have created a general lien against all property and property rights of the taxpayer. Congress did not leave the matter thus, but by Section 3672, provided: "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector," in accordance with State Recording Acts where the States provide for the tax claim to be filed under those Acts. South Carolina 's statute provides that Federal tax claims might be recorded as therein provided. Code of Laws of South Carolina , 1952, §65-2721. A Federal tax claim does not become a lien until it is filed in accordance with the South Carolina Recording Act, and the effect of the lien is then calculated and determined under and by that Act which is contained in §60-101, Code of Laws of South Carolina, 1952, the pertinent provisions of which are as follows: "* * * all mortgages or instruments in writing in the nature of a mortgage of any property, real or personal, * * * shall be valid so as to affect the rights of subsequent creditors (whether lien creditors or simple contract creditors) or purchasers for valuable consideration without notice only from the day and hour when they are recorded * * *."

[Effect of the Recording Act]

In order to determine the effect of the Recording Act it is necessary to keep in mind the rules of the common law so as to determine what change the Recording Act made in such rules. Under the common law, deeds, mortgages, etc., did not have to be recorded, yet they were good, not only between the parties, but as against the world. This led to harsh situations and inflicted many injustices. In order to ameliorate the common law rule, the courts of equity developed the doctrine of "purchasers for value without notice". The common law rule was changed to some extent by the South Carolina Recording Acts. The change was expressed by Judge Oxner in the Goodrich case, as follows: "A Study of the development of the Recordation Acts (Sec. 8875 of the Code) shows that they were an outgrowth of efforts to protect 'subsequent purchasers and creditors' from 'secret liens'. These are the true key words to any proper study and application of the principles. Such study shows (and it is undisputed) that at the common law, a mortgage, deed or other instrument, although not recorded, was good not only between the parties but against the world. This led to difficult situations and to hardships when thereafter innocent purchasers and mortgagees were involved. In other words, the evil of such secret transfers and secret liens became evident, and resulted in the equitable doctrine of 'subsequent purchaser for value without notice' as well as the development of the Recording Acts."

Under the South Carolina law, the common law rule that a chattel mortgage or a mortgage over real estate is good against the world, though unrecorded, remains in effect except as changed by the Recording Act. In this case the reghts reserved in the conditional sales contract of the Auto Company are good against the world, unless such rights are limited by the Recording Act. As said in the Goodrich case, supra: "Therefore, the important point is that the common-law doctrine as to the validity of a paper such as that of the plaintiff is applicable here except insofar as it is limited if at all by the terms of the Recording Act. By its terms, however, the Act (Sec. 8875) merely places a limitation upon such validity insofar as it affects the rights of subsequent purchasers or creditors without notice, and in the case at bar, the defendant motor company cannot claim the benefit of the limitation in that it is a prior creditor. Nor can the defendant qualify as a subsequent purchaser without notice because when it repossessed the automobile, the title retention contract of the plaintiff was on record." (Italics supplied)

[Government's Claims Not Out of Contract]

The Recording Act provides that mortgages shall be valid so as to protect the rights of subsequent lien creditors, subsequent simple contract creditors, or purchasers for valuable consideration without notice, only after being recorded. Liability for the Government arises out of the statute and not out of contract. At common law the chattel mortgage held by the Auto Company did not have to be recorded to be effective against the claim of the Government and there is nothing in the Recording Act which changes this rule under the facts in this case.

The position of the Government is not sustained by the rules of common law or those prescribed by the Recording Act of South Carolina, neither is it sustained by any equitable principle. The Government has suffered no loss by reason of the failure to record the chattel mortgage, and to hold that the Government could take the property, which had been sold to the taxpayer, even though title had been retained by the seller, would result in an unjust enrichment of the Government at the expense of the Auto Company.

For the foregoing reasons I conclude that neither of the claims of the Government is superior to the claim of the Greenville Auto Sales Company, and that the Greenville Auto Sales Company is entitled to the Two Hundred, Fifty ($250.00) Dollars, in question, free of the trust involved, and of all claims made by the Government herein, and

IT IS SO ORDERED.

 

 

 

J. C. Gauvey, d/b/a Gauvey Rig and Trucking Company, Appellant v. United States of America, Appellee. Reversing the District Court, 60-2 USTC ¶9634, 185 F. Supp. 374

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 16,624, 291 F2d 42, 6/1/61

[1954 Code Sec. 6323]

Lien for taxes: Conditional sales contract as mortgage: Prior filing by mortgagee not required.--A contract for the conditional sale of property under which title to the property was retained by the seller was security of a mortgagee within the meaning of Code Sec. 6323 which became specific and perfected upon execution. As such, it was entitled to priority over a Federal tax lien filed after execution of the contract. The fact that the seller's lien on the property secured by the contract was filed after the filing of the Federal lien was not material. Code Sec. 6323 does not require prior filing by a mortgagee as a condition precedent to the protection afforded by that provision.

Mart R. Vogel, Edwards Bldg., Fargo, N. D. (George A. Soule, Black Bldg., Fargo, N. D., and Alan Foss, First National Bank Bldg., Fargo, N. D., with him on brief), for appellant. Gordon Thompson, Assistant United States Attorney, Fargo, N. D. (Robert Vogel, United States Attorney, Fargo, N. D., with him on brief), for appellee.

Before JOHNSEN, Chief Judge; and WOODROUGH, and MATTHES, Circuit Judges.

MATTHES, Circuit Judge:

We have for determination the question of whether the lien of the Government for unpaid taxes is entitled to priority over the rights of appellant which were created by a document denominated as a "conditional sale contract" antedating the assessment and filing of the notice of the tax lien.

[Execution of Conditional Sales Contract]

On May 1, 1956, the appellant agreed to sell to Basin Rig & Trucking, Inc. (Basin), certain personal property in accordance with the terms of a conditional sale contract which, in summary, contained these pertinent provisions: title to the property was reserved by the seller, appellant here, until the purchase price had been fully paid; the buyer, Basin, agreed that the loss, injury or destruction of the property did not release the buyer from payment of the purchase price; the buyer agreed to keep the property insured for the benefit of seller for not less than the amount owing and also agreed to pay all taxes thereon. Upon default by the buyer of any of the terms of the contract and the failure to pay all sums thereunder, or whenever the debt was deemed insecure, seller was authorized to take possession of the property and all rights of the buyer under the contract ceased and terminated. Buyer agreed that all payments made should belong to and be retained by seller as rental and liquidated damages. Upon taking possession of the property, the seller was authorized to sell the same at public or private sale. Further terms indicated that the buyer had executed a purchase price note. The property was delivered to buyer on May 1, 1956 , the date the contract was entered into.

On April 10, 1956 , Basin, the buyer, also executed a chattel mortgage covering four I. C. C. trucking permits as security for the purchase price of the property which was the subject of the conditional sale contract. The contract and chattel mortgage were not filed for record until April 17, 1957 . Delinquent withholding and excise taxes were assessed against Basin in November and December, 1956, and on February 19, 1957 , a tax lien for $8,368.25 was filed with the Register of Deeds of Williams County, North Dakota.

[ Lower Court 's Decision]

Basin defaulted in the terms of the conditional sale contract and appellant instituted an action for foreclosure of the contract and a sale of the property. It appears from the opinion of the United States District Court, Gauvey v. Basin Rig. & Trucking, Inc. [60-2 USTC ¶9634], 185 F. Supp. 374, 376, that pursuant to a judgment of that court, the United States Marshal sold the property but the amount realized was insufficient to satisfy all liens. This circumstance required the trial court to adjudicate and determine the question of priority. Its ruling was in favor of the Government as to the conditional sale contract and in favor of appellant as to the chattel mortgage. The theory of the trial court is fully reflected in its opinion, which exhaustively deals with the basic and underlying question of priority as well as various facets of the state and federal laws under consideration. In summary, the court held, (1) that the chattel mortgage covering the I. C. C. permits, which antedated the filing of the tax lien, was within the interests protected by §6323 of the Internal Revenue Code of 1954, and was superior to the tax lien even though the mortgage was filed for record after the notice of the tax lien had been filed; (2) that the conditional sale contract was not within the specific categories of antecedent interests protected by §6323, to wit, "any mortgagee, pledgee, purchaser, or judgment creditor," and that furthermore, even though the conditional sale contract antedated the filing of the tax lien, under interpretation of the North Dakota Recording Statute, it was inferior and subject to the latter.

[Analysis of Statute]

Although considerable attention was given by the trial court to the substance and effect of the North Dakota Recording Statutes in dealing with the conditional sale contract, and this issue has been briefed by the parties, we direct ourselves to the meaning and effect of §6323, for, to our minds, it controls our decision in the instant appeal.

Section 6321 of the Internal Revenue Code of 1954, Title 26 U. S. C. A. §6321 (§3670 of the 1939 Code), provides that if any person neglects or refuses to pay any tax after demand, the amount shall be a lien in favor of the United States upon all real or personal property belonging to such person. Section 6322 (§3671, 1939 Code), provides that this lien shall arise at the time the assessment is made. Section 6323 (§3672, 1939 Code), then provides that "the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate" in certain designated offices.

The deceptively simple language of §6323 has given rise to a mass of litigation involving its proper interpretation and application. While not a specific priority statute as such, ¹ it is clear that §6323 was designed to give protection to the enumerated classes against secret, unrecorded federal liens. While the courts have had frequent occasion to apply the statute to transactions subsequent to the attachment of the federal lien, it is equally clear that §6323 will not be applied to have retroactive effect upon pre-existing rights of certain classes of creditors. ² In reality, the main point of contention has revolved around the four specific categories of interest, which Congress has not seen fit to further define. Are the named categories to be given a literal interpretation--are form and labels to control--or shall the determination be made by reference to substance and the realities of the situation?

We are mindful of the teaching of the Supreme Court that "(t)he relative priority of the lien of the United States for unpaid taxes is * * * always a federal question to be determined finally by federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court. * * *." United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213.

The trial court reached the conclusion that since under North Dakota law, the conditional sale contract was not a mortgage, citing Tickfer v. Investment Corporation, 63 N. D. 613, 249 N. W. 702, 704, the rule "first in time, first in right" applied. Having so determined, the court relied on the statement in United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 88, that "(t)here is nothing in the language of §3672 to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein, * * *."

Our analysis of the various cases convinces that private liens or rights which compete with liens for federal revenues fall into two categories--those designated by the statute and those which are not mentioned, more particularly, it may be said that the division frequently lies between contractual claims and mere statutory rights. In the absence of a statutory specification of the extent to which given facts fit into the generic terms of §6323, there is left for court determination the circumstances under which the statute will protect one who claims to be within one of the classes designated.

[Theory of Inchoate Liens]

From the adjudications arising on facts which have brought the statute under consideration, there has evolved what is sometimes referred to as the doctrine of inchoate and general liens. ³ Such liens have fared badly in contests for priority, the courts holding that the federal tax lien defeats an antedating lien that is not specific and perfected. Supreme Court decisions which have applied this doctrine are United States v. Security Trust & Savings Bank (1950) [50-2 USTC ¶9492], 340 U. S. 47, where judicial attachment lien affecting real estate antedated filing notice of federal tax lien; United States v. Gilbert Associates (1953) [53-1 USTC ¶9291], 345 U. S. 361, involving contest between town tax liens and lien for federal taxes; United States v. New Britain (1954) [54-1 USTC ¶9191], 347 U. S. 81, involving relative priority of local real estate and water taxes over federal tax liens; United States v. Acri (1955) [55-1 USTC ¶9138], 348 U. S. 211, where the question was whether a judicial attachment lien was entitled to priority over federal lien. A later case applying this test is United States v. Ball Construction Co. (1958) [58-1 USTC ¶9327], 355 U. S. 587 (R. F. Ball Construction Co. v. Jacobs, W. D. Tex. [56-1 USTC ¶9514], 140 F. Supp. 60, affirmed, 5 Cir. [57-1 USTC ¶9269], 239 F. 2d 384), reversing a holding that an assignment made by subcontractor to his performance-bond surety, a chattel mortgage under Texas law, was within the protection of the federal statute. The Court stated, at p. 587:

"The instrument involved being inchoate and unperfected, the provisions of §3672(a) [now §6323, 1954 Code], Revenue Act of 1939, 53 Stat. 449, as amended 53 Stat. 882, 56 Stat. 957, do not apply. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47; United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 86-87. * * *."

In all of the foregoing and other cases which could be cited, the Government, by application of the inchoate and unperfected doctrine, was successful in establishing priority of the federal lien even though the filing of notice thereof postdated the creation of the competing lien. ⁴ While we recognize from the teachings of the Supreme Court that "the statute excludes from the provisions of this secret lien those types of interests which it specifically included in the statute and no others" (italics added), ⁵ we are not persuaded to believe that in making determination of whether a person falls within one of the four categories, we must disregard substance and realities and resolve the issue on the basis of form, technicalities, or labels. Indeed, the Treasury Department promulgated Regulation 301.6323-1(a)(2)(ii) dealing with "meaning of terms" used in §6323 which, in our view, evinces a clear purpose to give the terms a realistic application. It provides:

"The determination whether a person is a mortgagee, pledgee, purchaser, or judgment creditor, entitled to the protection of section 6323(a), shall be made by reference to the realities and the facts in a given case rather than to the technical form or terminology used to designate such person. Thus, a person who is in fact and in law a mortgagee, pledgee, or purchaser will be entitled as such to the protection of section 6323(a) even though such person is otherwise designated under the law of a State such as the Uniform Commercial Code."

Many courts have accorded the terms a broad and realistic meaning. In National Refining Co. v. United States, 8 Cir. [47-1 USTC ¶9221], 160 F. 2d 951, there was a contest between the Government and National Refining Company as to a fund deposited in court which the Government claimed by virtue of a lien for unpaid taxes against one McDowell, which was recorded in July, 1945. National's claim was based upon a prior equitable assignment by McDowell of certain commissions to be earned by him and the validity and enforceability of this assignment were evidenced by a judgment of the Jackson County, Missouri Circuit Court entered September 6, 1945 . We reversed the ruling of the United States District Court in favor of the Government, holding that National was a "purchaser" within the meaning of §3672 of the 1939 Code (now §6323). Compare also United States v. Boston and Berlin Transportation Co. (D. C. N. H.) [60-2 USTC ¶9782], 188 F. Supp. 304, where a buyer under contract for purchase of trucking business was held to be a "purchaser" within the meaning of the statute even though the contract provided that title could not pass until the I. C. C. approved the sale and the Government's lien was filed before approval of the I. C. C. was obtained; Elliott v. Sioux Oil Company (D. C. Wyo.) [61-1 USTC ¶9248], 191 F. Supp. 847, where an assignment of the proceeds of crude oil from assignor's leases as security for payment of a debt was held to be a mortgage within the meaning of the statute; and Marteney v. United States, 10 Cir. [57-1 USTC ¶9670], 245 F. 2d 135, involving assignment of proceeds of judgment while suit was pending. And compare Randall v. Colby (N. D. Iowa) [61-1 USTC ¶9178], 190 F. Supp. 319.

[Is the Contract a Mortgage?]

This brings us to the crucial issue of whether the contract between appellant and Basin for the sale of the property in question constituted a mortgage within the meaning of §6323. As reference to 47 Am. Jur., Sales, §833, and Vol. 2, Williston on Sales, Rev. Ed., §§ 324, 337, will disclose, there is confusion in regard to the relationship between conditional sales and chattel mortgages. Without attempting to collate or comment upon the various holdings on the subject, which of necessity depend upon the state statutes involved and the facts and circumstances present, the general rule seems to be that where personal property is sold and delivered to the purchaser with a reservation of title in the seller until the price is paid, the transaction is, in substance, a mortgage. See §324 of Williston on Sales, supra; 47 Am. Jur., Sales, §833; 14 C. J. S., Chattel Mortgages, §7 at p. 589, which states that the general test to be applied in determining whether the transaction is a mortgage or conditional sale is:

"If the transfer is intended merely to secure an existing indebtedness or loan, it is a mortgage; but if the debt is extinguished, or if the money advanced is not by way of a loan, and the grantor has the privilege of refunding if he pleases and thereby of entitling himself to a reconveyance, the transaction is a conditional sale."

The trial court's decision obviously was influenced by the statement appearing in Tickfer v. Investment Corporation, supra, 249 N. W. 702, at p. 704: "(o) ur law recognizes contracts of conditional sale as distinct from mortgages." The quoted statement must be viewed and considered in context and in light of the fact that Tickfer involved a contest or controversy between the assignee of the conditional sales contract and the purchaser of the automobile, and the rights of the respective parties under the contract upon default by the buyer. That the North Dakota court recognized the principle that a document is not interpreted solely by its label is clear from this pronouncement also appearing in the Tickfer opinion at 249 N. W. p. 705:

"Inevitably, any contract whereby money is made payable in the future to one party and its payment secured by a chattel to which the party paying will have a clear title upon making the payments takes on the aspect of a mortgage. 'Such a transaction' says Williston, §579, 'is in its essence analogous to a transfer of title to the buyer, and a mortgage back by the buyer to the seller in order to secure the price.'"

In the later case of Mevorah v. Goodman, . . . N. D., 65 N. W. 2d 278, the Supreme Court of North Dakota again recognized that a conditional sale contract may under proper circumstances, be regarded as a form of security, stating at p. 286:

"A seller of personal property under a conditional sale contract holds the legal title to the goods only as security for the performance of the contract by the buyer and where the seller wrongfully repossesses the property and wrongfully detains it, he is an implied trustee of the property for the purchaser from whom the property was taken."

Also persuasive here is the North Dakota statute, §5107-10 of Vol. 10, North Dakota Century Code Annotated, which in relevant part provides:

"All reservations of the title to personal property, as security for the purchase money thereof, when the possession of such property is delivered to the vendee, shall be void as to subsequent creditors without notice, unless such reservation is in writing and is filed the same as a mortgage of personal property. In indexing such instruments, the register of deeds shall treat the purchaser as mortgagor and the vendor as mortgagee." (Italics supplied).

The intention of the parties to the transaction, as ascertained from the terms of the agreement, their conduct, and the attending circumstances, is an important factor in determining the realities of the situation. 14 C. J. S. Chattel Mortgages, §7, p. 590.

The document under consideration is before us in summarized form in the agreed statement of the parties. There is no ambiguity therein--analysis of the terms and conditions thereof impels a finding that the parties intended it as a high-grade security to assure the seller's receipt of the purchase price and performance of other obligations and conditions agreed to by the buyer which were expressed in the contract.

[Effect of Prior Government Filing]

Being mindful that the Supreme Court has adhered to the principle that the statute is not to be extended to afford protection to holders of inchoate and unperfected liens, we are nevertheless satisfied that the conditional sale contract does not fall within that category. The lien provided therein came into existence upon execution of the contract--it was no less choate and perfected than the companion chattel mortgage which the trial court ruled was entitled to priority over the Government's lien. As to the fact that the contract was not recorded until after notice of the Government's lien was filed, we are in full agreement with the trial court's ruling upon this point in dealing with the chattel mortgage. While there appears to be a division in the courts on this question, we observe that the factor of recording is not mentioned in §6323 and, in our opinion, this element should not be read into the statute as a condition precedent to the protection afforded the enumerated classes. ⁶

Irrespective of the nomenclature employed, realistically the conditional sale contract was a mortgage within §6323; appellant falls within the protected class and his lien is entitled to priority. Accordingly, the judgment is reversed with directions to enter a judgment in accordance with the views herein expressed.

¹ See United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, at p. 85; United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361, at pp. 365-366. See and compare §3466 Rev. Stat. (1875), 31 U. S. C. A. §191, imposing strict priorities when tax debtor is insolvent.

² The history of §6323 and its predecessors has frequently been reviewed, wherein it is observed that the statute was enacted to counteract the harsh condition created by the holding in United States v. Snyder, 149 U. S. 210 (1893), to the effect that a secret federal tax lien was good against a subsequent purchaser for value without notice. See United States v. Gilbert Associates, supra, at pp. 363, 364; concurring opinion of Mr. Justice Jackson, United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 at pp. 52-53; and Kennedy, "The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien." 63 Yale L. J. 905, 919 et seq. See also, Anderson, "Federal Tax Liens--Their Nature and Priority," 41 Cal. L. R. 241.

³ See Kennedy, supra, "The Relative Priority of the Federal Government," 63 Yale L. J. at pp. 911 et seq.; Mason City and Clear Lake R. Co. v. Imperial Seed Co. (N. D. Iowa) [57-2 USTC ¶9736], 152 F. Supp. 145, 155, where the court refers to the doctrine as the "specific and perfected rule."

⁴ See collation and discussion of cases, Reeve, "The Relative Priority of Government and Private Liens," 29 Rocky Mountain L. R. 167. It will be noted that most of these cases involved statutory liens, not readily classified within the four specific categories of §6323. See also, discussion, Mason City and Clear Lake R. Co. v. Imperial Seed Co., supra, 152 F. Supp. at pp. 152-156.

⁵ From Mr. Justice Jackson's concurring opinion in United States v. Security Trust & Savings Bank, 340 U. S. at p. 53.

⁶ See Mason City and Clear Lake R. Co. v. Imperial Seed Co., supra, 152 F. Supp. 145 [57-2 USTC ¶9736], 157, where Judge Graven cites authority pro and con. Here, the trial court at p. 377 of 185 F. Supp., relied upon the statement; "Neither does the fact that the instrument was not recorded under the State's fraudulent conveyance statutes--thus to impart constructive notice to subsequent purchasers, mortgagees and the like--make any difference here, for the instrument was valid between the parties to it, and Congress, by §3672(a) expressly subordinated federal tax liens to antecedent mortgages," which appeared in the dissent by Mr. Justice Whittaker in United States v. R. B. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587, noting that the quoted statement "is not at variance with any expressed statements of the majority." See also, Anderson, supra, "Federal Tax Liens," 41 Cal. L. R. at pp. 258, 259.

 

 

 

United States of America , Appellant v. James R. Coson, Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 16,517, 286 F2d 453, 1/23/61, Modifying and affirming decision of DC Calif., 169 F. Supp. 671; 59-1 USTC ¶9168

[1954 Code Sec. 6321]

Validity of Federal tax lien: Suit to quiet title against lien: Necessity of demand.--A tax lien was adjudged null and void and was cancelled and removed as a cloud upon the title to real property where no demand was made upon the owner of the property as required by the statute. Thus the lien was valueless because it failed to comply with the required procedures. In addition it was filed against property not belonging to the taxpayer since the delinquent taxpayer was a partnership and the owner of the property was not an actual partner nor a partner by estoppel.

Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Kenneth E. Levin, Department of Justice, Washington 25, D. C., Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Los Angeles, Calif., for appellant. Wadsworth , Fraser & McClung, Los Angeles , Calif. , for appellee.

Before CHAMBERS, Chief Judge, POPE, Circuit Judge, and KILKENNY, District Judge.

POPE, Circuit Judge:

Coson, as plaintiff, filed his complaint in the court below alleging that he was the owner of certain described real property in Los Angeles County, California; that the defendant United States claimed an interest in and to that property by virtue of its filing on November 15, 1955, in the office of the County Recorder of that County, of a notice of federal tax lien No. 42005, for Federal Withholding taxes, Federal Insurance Contributions Act taxes for the second and third quarters of 1955, and Federal Excise Cabaret taxes for the months of July and August, 1955, amounting, altogether, to the sum of $133,691.80. He alleged that the Government's claim of lien was invalid for two reasons: first, because plaintiff had never been a general partner in Moulin Rouge (the partnership which operated the hotel and gambling establishment at Las Vegas, Nevada, whose operation gave rise to the taxes referred to); and second, for the reason that the defendant had never demanded that plaintiff pay the taxes referred to or any portion thereof as required by Title 26 U. S. C. §3670. ¹

Plaintiff prayed for judgment that he was the owner of the property; that the defendant had no right, title, or interest in or to it or any part thereof; and that the notice of federal tax lien be cancelled and defendant enjoined from claiming any interest in the property under that lien. ²

The complaint, as filed, based the jurisdiction of the district court upon Title 28 U. S. C. §2410. In his brief plaintiff asks leave to amend to allege jurisdiction under Title 28 U. S. C. §1340.

The court found and concluded that the Government has no lien for the taxes asserted in the notice of tax lien and judgment was ordered that it be declared that the United States has no lien for the taxes asserted in the notice of federal tax lien filed as against the property described in the complaint, and ordering that the United States refrain from any further assertion of such a lien based on the assessments which it made in 1955 "of Bisno, Rubin, and the Moulin Rouge."

Upon this appeal the principal attack made by the Government upon the judgment below is through its contention that the trial court was without jurisdiction to entertain the action. As previously noted, the complaint predicated jurisdiction upon, the provisions of Title 28 U. S. C. §2410. Subdivisions (a) and (b) of that section are set forth in the margin. ³

The trial court, relying upon the decisions of this court in Seattle Association of Credit Men v. United States [57-1 USTC ¶9402], 240 F. 2d 906, and Wells v. Long, 162 F. 2d 842, held that the effect of §2410 is only a waiver of sovereign immunity and does not operate to confer jurisdiction upon a federal court to entertain such a suit as this. The trial court proceeded, however, to hold that it had jurisdiction of the action by virtue of §1340 of Title 28 which provides: "The district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue, or revenue from imports or tonnage except matters within the jurisdiction of the Customs Court."

The appellant asserts that §1340 will not support jurisdiction in this case for several reasons: first, that the suit is not one arising under an act of Congress providing for internal revenue. In support of this contention it cites Johnston v. Earle [57-2 USTC ¶9695], 9 cir., 245 F. 2d 793. That was a case in which two officers of the Internal Revenue Bureau were sued for alleged tortious seizure and conversion to their own use of a tractor belonging to the plaintiff. This court held that §1340 did not support the claimed jurisdiction since the recovery sought was solely for tortious conversion, a state tort, by one citizen of the state against other citizens of the same state. There was no claim for the return of federal taxes alleged to have been wrongfully assessed. We think that case is not in point here where the complaint puts in issue the validity of a claimed federal tax lien. In our view, as stated in United States v. Brosnon [60-2 USTC ¶9516], 363 U. S. 237, 241, "such liens form part of the machinery for the collection of federal taxes", and we think therefore that the Act of Congress which provided for such liens, was an Act of Congress "providing for internal revenue."

Second, the appellant says that §1340 "at most is only a general grant of jurisdiction which in order to be effective must be buttressed by some other specific grant of jurisdiction governing any given case." In support of that position the Government cites only First National Bank of Emlenton, Pa. v. United States [59-1 USTC ¶9329], 3 cir., 265 F. 2d 297. That case is not in point here for it held no more than that §1340 did not accomplish a waiver of sovereign immunity. All that the court held was that a suit "against the United States is not maintainable unless the sovereign has consented to be sued in such an action"; that such consent was not contained in §1340, and that it found no sucn consent in Title 28 U. S. C. §§ 1346(a)(1), 1346(a)(2), or §2463.

We find no fault with anything that was said in that case, but we think it is of no assistance here where the court below relies upon Title 28 U. S. C. §2410 for the Government's consent to be sued. If therefore the action here is one within the class of cases defined in §1340 and if it also is the type of case with respect to which sovereign immunity was waived by §2410, we should find that the trial court had original jurisdiction to entertain it.

We proceed to inquire whether this action comes within the language of §1340. The first problem is whether it meets the test referred to in Skelly Oil Co. v. Phillips Co., 339 U. S. 667, 672, where it is stated that "It has been settled doctrine that where suit is brought in the federal courts upon the sole ground that the determination of the suit depends upon some question of a federal nature, it must appear, at the outset, from that declaration or the bill of the party suing, that the suit is of that character."

We think that the case of Hopkins v. Walker, 244 U. S. 486, sufficiently discloses that the instant case meets the test just referred to. That was a case in which the owners of a patented placer mining claim brought suit against defendants who had filed certificates of location of lode claims based upon alleged discoveries of lodes within the exterior boundaries of the placer claim. It was alleged that there were no known lodes within the placer at the time of the application for patent and that in any event the lode claims asserted were excessive in area. The bill in the district court predicated jurisdiction upon the suit being one arising under the laws of the United States and involving the requisite amount in controversy. The Court noted the rule above stated with respect to what the cause of action must disclose to the effect that such a case arises where the statement of plaintiff's cause of action "unaided by any anticipation or avoidance of defenses, discloses that it really and substantially involves a dispute or controversy respecting the validity, construction or effect of a law of Congress." It held that the action satisfied that requirement because "in both form and substance the bill is one to remove a particular cloud from the plaintiffs' title, as much so as if the purpose were to have a tax deed, a lease or a mortgage adjudged invalid and cancelled. It hardly requires statement that in such cases the facts showing the plaintiffs' title and the existence and invalidity of the instrument or record sought to be eliminated as a cloud upon the title are essential parts of the plaintiff's cause of action."

Such is the case here. The complaint not only alleges the plaintiff's title and ownership, but it sets out the notice of federal tax lien filed by the United States and specifically alleges two reasons why that claim of lien is invalid. The action here is as clearly one to remove a particular cloud from plaintiff's title as was the one considered in Hopkins v. Walker , supra.

This poses a further question whether such a suit comes within the provisions of §2410 of Title 28 (see footnote 3, supra), which grants permission to make the United States a party in a suit "to quiet title" to property on which the United States claims a lien.

It is plain that the words "quiet title" used in subdivision (a) in that section are not intended to refer to a suit to quiet title in the limited sense in which that term is sometimes used, (see the discussion in Hopkins v. Walker, supra, pp. 490, 491), but that as used in the section here referred to it comprehends a suit to remove a cloud upon the title of a plaintiff. This is made plain both by the text and the history of the provision. Subdivision (b) of §2410 makes it mandatory that "the complaint shall set forth with particularity the nature of the interest or lien of the United States ." Plainly that stamps the action as one to remove a specific, particularly described, cloud upon the plaintiff's property. In a strictly limited type of suit to quiet title, such a particularization is never necessary. Not only does this language disclose that the words "quiet title" were used in a broad sense to cover a suit to remove a cloud on title but the legislative history of the insertion of this provision in the section demonstrates that it was intended to cover a suit of the character here before us.

It is shown by the Reviser's notes to the 1948 Judicial Code, that §2410 was based on §§ 901 to 905 as they appeared in Title 28 of the 1940 edition of U. S. C. Prior to the Act of December 2, 1942, 56 Stat. 1026, §901 referred merely to suits "for the foreclosure of a mortgage or other lien upon real estate, for the purpose of securing an adjudication touching any mortgage or other lien the United States may have or claim on the premises involved."

The language relating to suits to quiet title was inserted by amendment of the date last mentioned. That amendment followed a report, H. R. 1191, 77th Cong., First Session, dated August 15, 1941 . Another amendment then provided for was designed to include actions with respect to personal property as well as those relating to real property, but the language relating to suits to quiet title was inserted pursuant to the recommendation of the then Attorney General of the United States who noted that at that time there was "no provision whereby the owner of real estate may clear his title to such real estate of the cloud of a Government mortgage or lien." (Italics ours.) The text of the letter which served to bring about the insertion of the language we now consider is set forth in the margin. ⁴ In our opinion it is clear that the waiver of immunity exists for the specific type of suit here brought, naniely, one to remove a cloud on the title.

We inquire next whether this is an action "arising under" any Act "providing for internal revenue" within the meaning of §1340. Insofar as the plaintiff's claim is based upon an assertion that the Government's lien is void and ineffective because of a failure to make demand upon the plaintiff, (or for the other failures specified in the appellee's requested amendment, see footnote 2, supra), ⁵ it must be said that the suit "really and substantially involves a dispute or controversy respecting the validity, construction or effect of such a law, upon the determination of which the result depends." ⁶

Plainly enough as concerns his contention that the lien claimed by the United States is void because of want of prior demand, plaintiff undertook to bring a suit the result of which depends upon the meaning of Title 26 U. S. C. §6321 which provides for a lien in favor of the United States against the property of a person liable for a tax who "neglects or refuses to pay the same after demand." (Italics added.) He cites authority to support his claim that the effect of the law was that a lien upon his property was dependent upon a prior demand to him personally. The result so far as that portion of the case is concerned would turn upon the determination of that question which is one involving the construction or effect of the law. ⁷

For reasons hereafter noted we find it unnecessary to consider (except as it bears on the question of whether proper demand was made) the other ground named in the complaint, namely, that Coson never became liable for the taxes. ⁸

The appellant raised one other question relating to the court's jurisdiction to hear the case. It is contended that this suit. which as we have noted is essentially one to remove a cloud upon the plaintiff's title, is tantamount to an attempt to enjoin collection of taxes in violation of §7421 of the 1954 Internal Revenue Code, which provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." A similar provision was in §3653 of the 1939 Code.

We think that this argument proves too much, for §2410 of Title 28 was enacted as positive law by the Act of June 25, 1948 . We cannot assume that all Government tax liens were excluded from the meaning of §2410(a). Yet such would be the result if the prohibition against injunctions operated to prevent the maintenance of an action such as this. Plainly §2410 authorizes it. We agree with the holding of the trial court that the prohibition against suits to restrain collection or assessment of taxes has no bearing upon this case which is one for a wholly different purpose. ⁹ We think it plain that the only type of relief needed here is a decree holding the tax lien a cloud on plaintiff's title and cancelling it. There is no need for any injunctive relief. We hold that the court below had jurisdiction.

This brings us to the merits of the case. The court's opinion, which the Judge treated as his findings, found there had been no notice or demand respecting these taxes given to Coson, individually, prior to commencement of his action. He also found: "Between March and August of 1955, plaintiff invested $31,000 in a newly organized Las Vegas, Nevada, hotel and gambling establishment known as the 'Moulin Rouge' and obtained a 1.70 per cent interest therein. He reasonably and in good faith thought he was investing as a limited partner in a limited partnership. The Moulin Rouge was not, however, a limited partnership. Upon first ascertaining this, plaintiff promptly mailed notices of renunciation." ¹⁰

The Moulin Rouge establishment and operations were conducted in the State of Nevada . In preparation for carrying out the declared intention of the organizers, articles of limited copartnership were prepared but the required certificate was never filed with the county recorder. Nevada had adopted the Uniform Partnership Act, (now Nevada Revised Statutes, §§ 87.010-87.430) and the Uniform Limited Partnership Act, (now Nevada Revised Statutes, §§ 88.010-88.310). §88.120, which is §11 of the Uniform Limited Partnership Act. provided as follows: "A person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership; provided, that on ascertaining the mistake he promtly renounces his interest in the profits of the business, or other compensation by way of income."

The announcement of the intended formation of Moulin Rouge, the brochures, prospectuses, leases, and contracts relating to the business, all described it as a limited partnership, and gambling licenses were issued to it as "a limited partnership". That every one connected with the enterprise intended that it be a limited partnership cannot be questioned. What became of Coson's money which he intended to invest in a limited partnership does not appear for his name did not appear in any of the books, accounts or records of the enterprise either as lender, investor or otherwise. At one time Coson at the request of one Zalk prepared a financial statement in response to Zalk's representation that such a statement would need to be furnished to the state licensing authorities in connection with the gambling license for Moulin Rouge, but the record does not show that these were ever used or presented to the state authorities; and that they were not used is confirmed by the fact that Coson's name was not listed on the gambling license although the names of some twenty-five other persons were; and it appeared that those twenty-five persons between them held 100% of the ownership of the enterprise. ¹¹

There is evidence that Coson thought he acquired a 1% interest in the enterprise which he believed was a limited partnership, but evidence is lacking that this object was ever accomplished. A witness who had been a legal adviser for the organizers of the enterprise, at the time of the trial a Superior Court judge in Los Angeles, testified that the books of Moulin Rouge showed no interest of Coson in the enterprise, and that Bisno, one of the two managing partners, had taken credit for money received from many people in his own name as his own capital.

It also appears that in September, 1955, after the enterprise had gotten into financial difficulties, a substantial number of investors or would-be investors gathered at Las Vegas , where the enterprise was carried on, for the purpose of reorganizing the business and creating a corporation. At that time Coson learned that the books and records of Moulin Rouge failed to disclose that he had any interest therein. The attorney mentioned above also testified that he met Coson at that meeting; that Coson asked him whether he, Coson appeared to have any money or interest in Moulin Rouge, to which the attorney replied that the books did not disclose anything of that character; that although stock certificates in the proposed new corporation were being distributed at that time to persons who appeared on the books as creditors or investors, Coson received none of those.

There is in evidence an exhibit which is a certified copy of a special tax return made on Form 11(C) disclosing a tax liability for slot machines amounting of $19,750. The return called for a list of names and addresses of all owners to be attached, and attached to that was a list of individuals which included Coson with his address. This was filed with the district director and purported to be a return for a period ending June 30, 1956 ; it was dated June 30, 1955 , and signed by Rubin, one of the partners mentioned above.

The record shows how Coson's name came to be attached to that return. One Engle, a certified public accountant who represented the Moulin Rouge in the preparation of the return in question, and who believed it to be a limited partnership, explained that Rubin had given him Coson's name as one of a group of individuals "who were prepared to make application to purchase an interest in Moulin Rouge". He stated that it was his understanding that these applications had not yet been made; his thought was that if the new owners came into the enterprise after a slot machine license was procured, it would be necessary to procure another license because of such new members, and that this would involve the expenditure of another $19,000 for slot machine taxes; that if a partnership procured a slot machine license and then a partner were dropped, the enterprise could continue under the same license providing the internal revenue service was notified, "and you would not have to take a new stamp, but if you added new partners you may have to add new stamps." He said that he decided there would be nothing wrong in putting down on the list of owners "all of the people that we knew of that would be making application for the purpose of an interest in the Moulin Rouge." He further testified that Coson's name did not appear as an owner of an interest in the Moulin Rouge on the latter's books and that the first time he heard of Coson was when Rubin suggested that Coson's name be added to the list which was attached to the return. He spoke of Coson and Zalk with whom Coson was associated as "potential" investors.

On the basis of the court's finding and all of the evidence in the case the only conclusion to be drawn is that Coson was simply not a member of the partnership. ¹² Our decision on this point is ruled by Giles v. Vette, 263 U. S. 553. The facts in that case were similar to those here. It was claimed that Hecht and Finn were members of a certain partnership because they had contributed to its capital. The partnership was operated in the State of Illinois where both the Uniform Partnership Act and the Uniform Limited Partnership Act were in effect, the same as is the case in Nevada . Both Hecht and Finn erroneously believed they had become limited partners in a limited partnership; they made the renunciation provided for by §11. This renunciation was not made until after creditors had filed petitions in bankruptcy against the partnership and a receiver had been appointed. It was found that the §11 renunciation was made within a reasonable time notwithstanding. The court said at p. 563-564:

"Hecht and Finn contributed to the capital of the business, and each erroneously believed that he had become a limited partner in a limited partnership. Neither took any part in the control of the business or exercised any rights or powers in respect of it other than those which might belong to one not a general partner. . . . They made the renunciation provided for. No person suffered any loss or disadvantage because it was not made earlier, or because of reliance on any statement in the certificate. . . .

"Section 11 is broad and highly remedial. The existence of a partnership--limited or general--is not essential in order that it shall apply. The language is comprehensive and covers all cases where one has contributed to the capital of a business conducted by a partnership or person erroneously believing that he is a limited partner. It ought to be construed liberally, and with appropriate regard for the legislative purpose to relieve from the strictness of the earlier statutes and decisions."

An interesting thing about that case is that it was held that Hecht and Finn were not liable as general partners at all. The creditors in that case had all become creditors prior to the time of the §11 renunciation, for the bankruptcy preceded it. The legal situation was that they were never partners.

It is not important whether it be said that the renunciation here operated to relieve Coson from liability ab initio, (Cf. Oteri v. Scalzo, 145 U. S. 578, 588) or whether we say that Coson was not a general partner at any time, first because he never had the necessary intent to join a partnership in that capacity, ¹³ and second, because his renunciation under §11 was fully effective.

Since Coson himself had no part in the insertion of his name on the tax return previously described and knew nothing about it, it cannot be said that he represented or held himself out as a partner or consented to any such representation or holding out. He was neither an actual partner nor a partner by estoppel.

At the trial some emphasis was placed on the fact that near the end of July, 1955, one Tonis, purporting to be the owner of an undivided 31/2% interest in the Moulin Rouge business, assigned that interest to Coson and Zalk. Coson testified that it was his understanding this was an assignment of an interest in a limited partnership. However, even if this were an assignment of an interest in a general partnership, it could not operate to make Coson a member of any such partnership. The transfer by a partner of his partnership interest does not make the assignee of such interest a partner in the firm. Hazen v. Warwick, 256 Mass. 302, 152 N. E. 342; Johnston v. Ellis, 49 Idaho 1, 285 P. 1015; Bynum v. Frisby, 73 Nev. 145, 311 P. 2d 972. ¹⁴

All of this is significant in view of the fact that on December 27, 1956 , when this suit was started, no notice or demand concerning these taxes had been given to or served upon Coson. This procedural prerequisite to the securing of a Government lien for such taxes is made plain by the statute. See Detroit Bank v. United States , 317 U. S. 329, 335. §6321 of Title 26 U. S. C. recites that the amount of taxes shall be a lien upon the property of a person liable to pay the tax who "neglects or refuses to pay the same after demand." ¹⁵ The procedure for making such demand is set forth in §6303(a) of the same title as follows:

"Where it is not otherwise provided by this title, the Secretary or his delegate shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to §6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. . . ."

The only notices and demands which were given or served were addressed to "Alexander Bisno and Louis Rubin, Moulin Rouge, 900 W. Bonanza Rd. , Las Vegas , Nevada ." These were given in August, September and October, 1955. The argument of the Government is that those notices constituted sufficient notice to Coson to sustain a lien upon his property because Coson was in law a general partner; that in respect to this type of taxes, the taxes constituted an obligation of the partnership, as such, and hence an obligation of each of the partners. Says the Government: "It is an established principle of partnership law that notice and/or demand on one or more partners is notice to all."

The fallacy in this is the assumption that Coson became a general partner. No authority has been cited for the Government's claim that notice given to Bisno and Rubin would serve as a notice and demand on Coson; nor has our research turned up any support for the Government's contention in that regard. What the Government has attempted to do here is to rely upon the obsolete rule mentioned in footnote 13 supra, that when an attempt to create a limited partnership is abortive or defective for any reason (as for failure to file a certificate) the would-be limited partners automatically become general partners. As noted in Giles v. Vette, supra, at p. 562, this strict ruling was carried so far that in the words of the Commissioner's Note it "deprived the existing statutory provisions for limited partners of any practical usefulness." It was to do away with that ancient rule that the Uniform Act was drafted. See Giles v. Vette, supra; Gilman Paint & Varnish Co. v. Legum, 197 Md. 665, 80 A. 2d 906, 29 A. L. R. 2d 286. And see note under §11 in 8 Uniform Laws Ann. p. 24.

It will be noted that our decision here is based upon our holding that the Government's lien was irregular, insufficient and valueless from a procedural standpoint for failure to serve the statutory notice and demand in connection therewith and for failure to comply with required procedures.

In developing that conclusion many circumstances tend to show that not only were these required procedures not complied with but that Coson was not a taxpayer and not liable for the tax to begin with. Whether that non-liability could also constitute the basis for a suit of this kind, or for relief under §2410(a) of Title 28, we need not here decide. The recent case of Pipola v. Chicco [60-1 USTC ¶15,276], 2d cir., 274 F. 2d 909, appears to give a negative answer to that question. But that case agrees with what we hold here, that in an action of the kind here involved plaintiff may attack the Government lien for taxes as irregular or valueless "from a procedural standpoint", and may raise the question whether the Government "complied with required procedures . . . or whether by error the assessment was made against a taxpayer other than the one intended." ¹⁶

Since our decision here is not based upon any holding that the assessment of the taxes was without merit,--no suggestion is made that the assessment of the partnership was improper,--but rather upon the ground that the lien was valueless for want of compliance with required procedures (as well as because it was filed against property not belonging to the taxpayer), we find no occasion here for comment as to whether we agree with the views expressed in the Pipola case, supra.

In holding as we do that the lack of proper notice or demand was fatal to the acquisition of the Government's lien against Coson, the emphasis here is somewhat different than that employed by the trial judge who held that the assessment itself was void as against Coson because the taxes were never assessed to Coson, the record of assessment in the office of the Bureau making no reference whatever to Coson. The Government argues that there is no requirement that an assessment be made against any person. Although our decision as to the lack of proper notice or demand is sufficient to dispose of this case, it would appear that the trial court was right in holding the assessment was insufficient for failure to comply with the statutory requirements. ¹⁷

That portion of the amendment of the complaint requested here, through the paragraph thereof numbered "4", (see note 2, supra), which conforms to the proof and the findings, is allowed.

The judgment is modified by eliminating therefrom the sentence reciting that defendant "is hereby permanently enjoined from further asserting any claim of lien" and inserting the following:

"It is further ordered, adjudged and decreed that the asserted lien for taxes as set forth in the Federal Tax Lien as filed, is null, void and valueless, and a cloud upon the title of plaintiff to the aforesaid property and the same is hereby cancelled and removed as a cloud upon said title."

As so modified, the judgment is affirmed.

¹ This was a reference to the 1939 Revenue Code.

² In his brief here, and pending the appeal, plaintiff asked leave to amend his complaint by adding a paragraph reading as follows: "That the said claim of lien was arbitrarily and capriciously imposed by reason of the following facts:

1. No assessment upon which said lien was based was ever made against plaintiff;

2. No notice or demand for payment of taxes had been served upon plaintiff at the time of the commencement of this action;

3. No notice of the assessment had ever been furnished to plaintiff, within sixty days from the making of the assessment, or otherwise; and

4. Plaintiff was not a partner in the Moulin Rouge.

That the continued imposition of said lien upon plaintiff's real property will ruin and destroy plaintiff's property rights for the reason that plaintiff borrowed $133,500.00 from the California Bank which he used to purchase real property for $108,000.00 and did then enter into a twenty-year lease to erect a department store building on the said real property incurring and paying a leasing commission of $20,000.00; that thereafter, to-wit, on November 15, 1955, the defendant did file a Claim of Lien upon the said real property and plaintiff is by reason thereof unable to erect the department store pursuant to the terms of said lease; that unless said lien is speedily removed plaintiff will become liable to the lessee for non-performance of the terms of said lease and may be required to file a petition in bankruptcy."

³ "§2410. Actions affecting property on which United States has lien (a) Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, including the District Court for the Territory of Alaska, or in any State court having jurisdiction of the subject matter, to quiet title to or for the foreclosure of a mortgage or other lien upon real or person property on which the United States has or claims a mortgage or other lien.

(b) The complaint shall set forth with particularity the nature of the interest or lien of the United States . In actions in the State courts service upon the United States shall be made by serving the process of the court with a copy of the complaint upon the United States attorney for the district in which the action is brought or upon an assistant United States Attorney. . . . In such actions the United States may appear and answer, plead or demur within sixty days after such service or such further time as the court may allow."

⁴ H. R. 1191, 77th Cong. First Sess. August 15, 1941 . PERMITTING THE UNITED STATES TO BE MADE PARTY DEFENDANT IN CERTAIN CASES INVOLVING PERSONAL PROPERTY. "It should be observed in this connection that under existing law there is no provision whereby the owner of real estate may clear his title to such real estate of the cloud of a Government mortgage or lien. Welch v. Hamilton, (S. D. Calif.) 33 F. 2d 224, and U. S. v. Turner, (C. C. A. 8) 47 F. 2d 86. In many instances persons acting in good faith have purchased real estate without knowledge of the Government lien or in the belief that the lien had been extinguished. In other instances, mortgagees have foreclosed on property and have failed to join the United States . It appears that justice and fair dealing would require that a method be provided to clear real estate titles of questionable or valueless Government liens. Accordingly, I suggest that the bill be amended by inserting the phrase 'to quiet title or' between the words 'matter' and 'for the foreclosure of' in line 4 of page 2 of the bill."

⁵ The propriety of the allowance of an amendment of the complaint pending an appeal is well settled. See Mullaney v. Anderson, 342 U. S. 415.

⁶ The phraseology quoted here is from Shulthis v. McDougal, 225 U. S. 561, 569. This in substance has been repeated many times. See for instance the language first above quoted from Hopkins v. Walker, supra, and the cases cited in South Side Theaters v. United West Coast Th. Corp., 9 Cir., 178 F. 2d 648, 649, in support of the following statement: "An action so arises where an appropriate statement by the plaintiff, unaided by an anticipation or avoidance of defenses, shows that it actually and substantially involves a controversy respecting the validity, construction, or effect of an act of Congress upon the determination of which the result depends."

⁷ We have been discussing the language used in §1340, supra, which is the section relied upon by the trial court. While the court made no formal finding as to the amount in controversy here, it is plain that, as the sum named in the complaint suggests, the amount actually in controversy was in excess of the amount required by Title 28 U. S. C. §1331 to support an action which "arises under . . . laws . . . of the United States." Since, aside from the amount in controversy matter, the considerations involved are the same whether §1340 or §1331 is applied, we see no point in remanding the case for a special finding that the matter in controversy exceeds the requisite sum or value to satisfy §1331.

⁸ If this were the sole basis for the complaint we might have to consider a rule once announced by this court, apparently not recognized elsewhere, that a case does not "arise under" a federal statute where the meaning of the statute is not in question, but the case turns solely on issues of fact. See Marshall v. Desert Properties, Inc., 9 cir., 103 F. 2d 551, 552. But see contra: Hart and Wechsler, "The Federal Courts and the Federal System," p. 763, and Mishkin, "The Federal 'Question' in the District Courts," 53 Columbia Law Review 157, pp. 169 et seq. Regardless of the correctness of our decision in the Marshall case, the court here might, were it necessary, consider this second ground of the complaint under its "pendent" jurisdiction. See Hurn v. Oursler, 289 U. S. 238, 246; Romero v. International Term. Co., 358 U. S. 354, 380.

⁹ We note also that the prohibitions of §7421 are not without exceptions. Appellee's brief asserts that the amount of the claimed lien is so great that he could not, because of his financial limitations, pay the tax and sue to recover the amount; that this leaves him utterly unable to employ the usual device of paying and suing to recover back. If such were the facts, this might be a case "where complainant shows that in addition to the illegality of an exaction in the guise of a tax there exist special and extraordinary circumstances sufficient to bring the case within some acknowledged head of equity jurisprudence," and hence that "a suit may be maintained to enjoin the collector." Miller v. Standard Nut Margarine Co., [3 USTC ¶878], 284 U. S. 498, 509. If such were plaintiff's predicament, his hardship would resemble that of Griffin in Griffin v. Illinois, 351 U. S. 12. A party financially unable to use a remedy available to those more advantaged would appear to suffer extraordinary hardship. See Lassoff v. Gray [59-1 USTC ¶15,325], 6 Cir., 266 F. 2d 745, 747.

There is no finding to support such a position here and we find no cause for a remand for any such purpose.

¹⁰ As hereafter noted, this quoted finding has particular significance upon the question whether notice to Moulin Rouge and Bisno and Rubin was sufficient notice or demand upon Coson.

¹¹ On December 24, 1956, the Gaming Control Board recited: "The files reflect no information re a Mr. Zalk and Mr. Coson. An invested capital statement was submitted, however an application was never submitted and the two subjects were never processed for a license."

¹² Inexplicably, appellant's brief says: "The District Court has found that Coson was a member of the partnership Moulin Rouge and that that partnership was not a limited partnership." The record shows no such finding. It shows, on the contrary, that appellant, in its Points on Appeal, complained that "The District Court erred in failing to find and to hold that plaintiff was a general partner in the 'Moulin Rouge' a general partnership." Appellant's brief does not contend that Coson did not make the mistake stated in the quoted finding or that he did not make prompt renunciation as the court found.

¹³ Of course an intent to become a general partner may be inferred from conduct. In this case no such conduct was shown. Coson had nothing to do with the management of Moulin Rouge, or with its organization. The only conduct shown on his part was consistent solely with his belief that he was dealing with a limited partnership. The ancient rule that a failure to comply with statutory provisions required to form a limited partnership renders the association a general partnership, (cf. 68 C. J. S. p. 1015) vanished with the enactment of the Uniform Limited Partnership Act. As stated in the Commissioners' Note on the Act: "Third: The limited partner not being in any sense a principal in the business, failure to comply with the requirements of the act in respect to the certificate, while it may result in the nonformation of the association, does not make him a partner or liable as such. The exact nature of his ability [liability] in such cases is set forth in Sec. 11." (Vol. 8, p. 4 Uniform Laws Annotated)

¹⁴ In the case last cited the court, after quoting from the Nevada Uniform Partnership Act, said (p. 975, 311 P. 2d): "It is clear from this provision that an assignment of a partnership interest from one partner to a stranger does not bring that stranger into fiduciary relationship with the remaining partners nor require them to resort to dissolution in order to prevent such a relationship from arising. The stranger remains a stranger entitled only to share in the partnership's worth and to demand an accounting upon dissolution." The Nevada case is of interest in that it notes the partners remaining in the firm were under no fiduciary duty to give information concerning the firm to the new assignee. The absence of such a duty shows the reason why notice to a partnership would not be notice to such an assignee for there could be no inference that the information would be passed on to him.

¹⁵ §6321, 26 U. S. C.: "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."

¹⁶ The court in Pipola accepted the Government's argument that the plaintiffs could not question the assessment on the merits or question the liability of the taxpayer for the tax, but that the only permissible issue that could be tried would be whether or not the lien was defective or valueless from a procedural standpoint or for failure to comply with required procedures. It was said that this distinction between the merits of the assessment or the liability for the tax on the one hand, and procedural defects on the other, was the same distinction that would be applied had the Government sought to collect the tax by an action under §3678 of the 1939 Revenue Code, (§7403 of the 1954 Code). Said the court (p. 912): "In a suit by the government to enforce a tax lien under §3678, the defendant clearly can raise such questions as whether the assessment complied with required procedures . . . or whether by error the assessment was made against a taxpayer other than the one intended." The court also said, speaking of the Attorney General's letter referred to in the report mentioned supra, (footnote 4), that the court thought that the Attorney General was speaking "not of cases where an assessment might lack merit but of liens that were irregular from a procedural standpoint, that had been filed against property not belonging to the taxpayer or that were valueless for other reasons not going to the merits of the assessment." Cf. U. S. v. Morrison [57-2 USTC ¶9801], 5 cir., 247 F. 2d 285, 290.

In the Pipola case Chicco was an individual who owned the premises where the business of accepting wagers was carried on. The taxes were assessed against Chicco.

In the case before us the taxes were assessed against Moulin Rouge of which Coson was not a member. It may be said here that this case presents a question "whether by error the assessment was made against a taxpayer other than the one intended," or whether this was a lien "that had been filed against property not belonging to the taxpayer" within the meaning of that language in the Pipola case.

The holding in Pipola, otherwise without precedent, was based on that court's interpretation of certain language used in Bull v. United States [35-1 USTC ¶9346], 295 U. S. 247.

¹⁷ §6203 of Title 26 prescribes the method of assessment as follows: "The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary or his delegate in accordance with rules or regulations prescribed by the Secretary or his delegate. Upon request of the taxpayer, the Secretary or his delegate shall furnish the taxpayer a copy of the record of the assessment." (Italics supplied.)

The regulation on assessment and collection is as follows: "§301.6203.1. Method of Assessment.--The district director shall appoint one or more assessment officers, and the assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period if applicable, and the amount of the assessment. . . . If the taxpayer requests a copy of the record of assessment the district director shall furnish the taxpayer a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed." (Italics added.)

 

 

 

Chrysler Credit Corporation, Plaintiff v. Empire Mutual Insurance Company, Defendant Third Party Plaintiff v. Chase Manhattan Bank, Third Party Defendant #1 and United States of America by the Director of Internal Revenue, Third Party Defendant #2.

U. S. District Court, So. Dist. N. Y., 69 Civ. 5720, 11/30/72

[Code Sec. 6323]

Lien for taxes: Priority: Proceeds of automobile insurance contract.--The Government's lien against the taxpayer for unpaid unemployment taxes was inferior to that of the loss payee (the holder of automobile purchase money security agreement) to proceeds of an insurance policy arising from the destruction of the taxpayer's automobile. The loss payee clause provided an independent interest in the purchase money security holder which was not the taxpayer's at the time of the purported attachment of the Government's lien to the proceeds.

[Code Secs. 6532(c) and 7426]

Jurisdiction: Civil actions by nontaxpayers: Statute of limitations.--The Court held that the nine-month statute of limitations provided by Code Sec. 7426 was not applicable in a suit brought by the plaintiff-purchase money security holder against the insurer, where the latter brought the Government into the suit as a third party defendant. The insurer, not the purchase money security holder, had sued the government charging, not wrongful levy, but improper endorsement of a draft which was properly drawn by the insurer as defendant and third party plaintiff. Further, since there was no claim against the Government by the purchase money security holder, and since the insurer as defendant/third party plaintiff could not assert the jurisdictional defense against the purchase money security holder's action for nonpayment, that defense was not available to the government. Thus, the Government's motion for lack of jurisdiction was denied.

Samuel Schwartz, Rood, Schwartz & Cohen, 1776 Broadway, N. Y., for plaintiff. Raymond J. MacDonnell, 1965 Broadway, N. Y., for defendant and third party plaintiff. Matthew F. Donahue, 80 Pine St., New York, N. Y., for third party defendant #1. Whitney North Seymour, Jr., United States Attorney, Joseph D. Danas, Assistant United States Attorney, New York, N. Y., for third party defendant #2.

Opinion

PIERCE, District Judge:

This is a motion by the plaintiff Chrysler Credit Corporation (hereinafter "Chrysler") for summary judgment against the defendant Empire Mutual Insurance Company (hereinafter "Empire") for payment of the proceeds of an insurance contract in which plaintiff was named as loss payee. The defendant Empire, as third party plaintiff, has joined the Chase Manhattan Bank (hereinafter "Chase") and the United States , by the Director of Internal Revenue (hereinafter "government") as third party defendants.

[Facts]

The facts of the case are as follows: On March 12, 1968 , a James A. Duggan purchased a Plymouth station wagon from Bayside Car Sales, Inc., and Chrysler purchased the assignment of the retail instalment contract from Bayside, the following day, and filed a copy with the Office of the City Register of Queens County on March 18, 1968 . Paragraph 8 of the Additional Terms and Conditions in the security agreement required Duggan to insure the car against loss naming Chrysler as loss payee, "as its interest may appear." Mr. Duggan took out an insurance policy with Empire, which took effect on April 2, 1968 , in which he did name Chrysler as loss payee, together with himself. On or about April 25, 1968 , the car was destroyed and Empire agreed to pay on the policy.

However, prior to these transactions, the Internal Revenue Service had assessed 100% penalties against Mr. Duggan for unpaid employment taxes and on April 5, 1967 , the government filed a notice of lien for the amount of $2,485.54, which had been assessed on February 10, 1967 for the second and third quarters. Subsequently on November 26, 1968 , the government filed another notice of lien for the amount of $3,541.90, which had been assessed on September 5, 1968 for the fourth quarter of 1967.

[Notice of Levy]

On July 3, 1968 , the District Director served a Notice of Levy on Empire. On August 22, 1968 , Empire turned over a draft to the IRS in the amount of $2,317.56, in payment of its obligation to Duggan and Chrysler under the insurance policy. The draft was made payable to James Duggan, Chrysler Credit Corporation, and the Director of Internal Revenue. The District Director deposited the draft without the endorsements of Duggan or Chrysler and applied the entire proceeds to Duggan's unpaid taxes. Duggan himself and Chrysler received nothing from the draft. Thereafter Chrysler instituted this suit in the Civil Court of New York against Empire on August 27, 1969 .

[Third-Party Complaint]

Empire served a third party complaint against Chase and the government naming them as third party defendants in December 1969, and alleged improper endorsement of the draft by the government and improper payment on the draft by Chase after improper endorsement. Empire sought a determination of its rights in relation to Chase and the government under §§ 3017 and 3019 of the CPLR. The government removed the case to the federal courts pursuant to Title 28, United States Code, Sections 1444, 2410(a) and 1441(c).

[Motion for Summary Judgment]

In opposition to plaintiff's motion for summary judgment, Empire alleges that in issuing the draft to the order of all the parties who might have had a legal interest in the monies, it acted in good faith and in compliance with Article 26 of the United States Code. It further contends that Chrysler's claim, if any, should be against the U. S. Treasurer and not against it.

[Answer to Third Party Complaint]

The United States interposed an answer to the third party complaint and it also opposes plaintiff's motion for summary judgment and cross moves for dismissal of Empire's action against it, or in the alternative, summary judgment in its favor. Empire opposes these motions of the government as well as the plaintiff's motion. Chase has also answered, but its allegations and defenses are not dispositive of the motions before this Court.

[Priorities]

While Chrysler's motion for summary judgment is against the defendant Empire alone for nonpayment of its share of the insurance proceeds, Empire has asserted as its defense to Chrysler's complaint and in opposition to Chrysler's motion that it acted "in good faith and in compliance with Article 26 of the United States Code." However, to determine whether in fact Article 26 does provide Empire with a valid defense against Chrysler's claim it is necessary to ascertain the relative positions of Duggan, Chrysler, and the government vis-a-vis the insurance proceeds.

The arguments of the government and of Chrysler on this point are as follows: The government concedes that, even though its tax lien was prior in time to the March 1968 transaction, ¹ the purchase money security agreement between Chrysler and Duggan had priority over the tax lien on the car itself. However, the government contends that the car was destroyed, and with it, Chrysler's superior lien. The government argues that the superiority of the lien on the car does not carry over to the insurance proceeds for the car, and that the government's lien on the proceeds is superior to Chrysler's interest in the proceeds, which amounts to an equitable lien. Chrysler, on the other hand, does not recognize the distinction between its interest in the car and its interest in the proceeds, and demands payment from Empire, on the basis of having a lien superior to that of the government. The government admits that its lien could not attach until the right to receive the proceeds came into existence--when the car was destroyed and/or when Empire recognized its obligation under the insurance policy.

The government cites several cases in support of its contention that Chrysler's allegedly equitable lien on the insurance proceeds is inferior to its tax lien. However, a complete reading of these cases leaves doubt as to which position these cases actually do support. The point of difficulty revolves around the significance of the "loss payee" clause in the insurance contract.

In Schleimer v. Empire Mutual Insurance Company, 318 NYS 2d 182, the Court found that the presence of a standard mortgage clause was dispositive of whether or not there was a "separate and independent insurance of the mortgagee's interest." Without it, the mortgagee is generally subject to the same defenses available against the mortgagor. Thus a mortgagee clause would imply an interest independent of the insured's and therefore not subject to claims against the insured, such as a general tax lien. However, the Court noted that such standard mortgagee clauses are not generally found in automobile polices, and thus it considered the absence of such a clause not dispositive in automobile policy cases.

Schleimer quotes at great length an unreported New York case, Jefferson Credit Corporation v. Fulton Fire Insurance Company, 5th M. C. decided May 9, 1951, aff'd App. Term., 1st Dept., New York Law Journal, March 7, 1952. In that case, plaintiff, named as loss payee in an automobile insurance contract, moved for summary judgment against the insurer for the proceeds of the policy. The insured had transferred her interest in the car and the transferee was not named in the policy. The defendant insurance company argued that since the named insured no longer had any interest in the car, and could not claim against the company, neither could the loss payee, since its interest was derived solely through the named insured. In holding against the defendant insurance company the Court stated:

"I find that the loss payee clause in the policy creates a separate, distinct, and independent insurance of the mortgagee's interest and such clause remains in force and effect, . . . for such period as the mortgagee has an independent interest in the chattel."

In Schleimer itself, the Court did not "attach any significance to the fact that the word 'mortgage' is not used to describe plaintiff's interest. The interest of the plaintiff is of such a sufficient nature so as to warrant protection under the policy". The Schleimer court then cited two other cases where the absence of the word "mortgage" was not held detrimental to plaintiff's cause. Schleimer thus expressed a willingness to interpret a loss payee clause in an automobile policy as implying a mortgagee's interest with resultant effect, despite the absence of a specific mortgagee clause in the policy. And the cases cited therein indicate that New York recognizes the independent interest created by a mortgagee or loss payee clause. This is relevant in that the government admits that the courts look to the law of the state to determine if the taxpayer had rights in a piece of property when a general tax lien is created.

[Loss Payee Clause]

The legal effect to be given a loss payee clause, then, is dispositive of the rights of Chrysler to the proceeds. A federal case cited by the government as strongly supporting its position, decided in the District Court of New Jersey, found the wording of the loss payee clause to be determinative of the rights of the parties. Home Insurance Company v. B. B. Rider Corporation [63-1 USTC ¶9235], 212 F. Supp. 457, involved facts similar to the instant case. There, also the priority of the federal tax lien over various interests was at issue. One of the defendants, General Home Service Association, held a chattel mortgage, obtained, as in the instant case, after the assessment and filing of the federal tax lien, on personal property destroyed by fire, and they claimed the policy bore an endorsement committing the insurer to pay the proceeds of the policies to them to the extent of their interest. The New Jersey Court stated:

"These 'loss-payable endorsements', if they existed, might constitute evidence they the fire insurance policy contracts were made, not only for the benefit of the named insured, but as well for the benefit of the chattel mortgagee, who when the fire occurred, would acquire a chose in action for so much of the proceeds of the policies as represented the value of the chattels constituting the security described in the mortgage."

In the opinion of that Court, the real question in issue was whether the entire insurance proceeds constituted property of the insured or whether the endorsements reduced the rights of the insured pro tanto. ²

[Home Insurance Case]

It is to be noted that in the Home Insurance case the issue was resolved against the loss payee because the policies were not before the court, nor was any secondary evidence of their terms:

"The record being devoid of proof of the language employed to describe its interest in either policy, we are unable to grant priority to the chattel mortgagee, . . . in the policy proceeds. Accordingly, the entire proceeds of the insurance policies must be considered as vesting, at least momentarily, in the insured, at which time the Government's hovering liens immediately attached thereto." (Emphasis added.)

Such is not the case here. Here the insurance policy is before the court, and from the wording ³ of the loss payee clause, and the importance attributed to it in automobile policies as evidenced by the Schleimer case, supra, it is evident that the entire proceeds did not vest in the insured so as to permit the government's tax liens to attach to the whole amount. In light of the importance of the loss payee clause recognized by New York , and the holding in the New Jersey case (this Court has found no Second Circuit case on point), this Court cannot adopt the government's contention that it has priority over Chrysler's allegedly equitable lien on the proceeds.

[Independent Interest]

The Court finds that the loss payee clause provided an independent interest, pro tanto, for Chrysler which was not the taxpayer's at the time of the purported attachment of the government's lien to the proceeds. Duggan had assigned away his right to the proceeds while it was still a contingent right, before the levy could attach. Therefore, when Empire paid over to the government the draft made payable to all three, it was not turning over a draft which represented only the taxpayer's interest in the proceeds. In light of the fact that Empire actually turned over to the government Chrysler's property as well as Duggan's by writing a single check, the defenses provided by Title 26, United States Code, Section 6332(a) and (d) are not available to Empire against Chrysler. ⁴ In its papers before the Court Empire has raised no other valid defense to Chrysler's motion for summary judgment in its favor. Accordingly, plaintiff's motion for summary judgment against the defendant Empire is granted.

[Jurisdiction]

The Court now turns to the determination of the two motions by the government. The first motion is for dismissal of the complaint as to the government for lack of jurisdiction. The lack of jurisdiction results purportedly from the running of the statute of limitations as provided for by Title 26, United States Code, Sections 7426 and 6532(c). The government's argument is plausible only if one can agree with its assumptions as to the nature of this suit.

The government contends that despite the plaintiff's characterization of its suit as one against Empire only, it is really a suit against the United States Government for wrongful levy. The plaintiff did not join the government as a party; Empire as third-party plaintiff joined both Chase and the government as third-party defendants. It is thus necessary to determine what effect, if any, the joining of third parties had on plaintiff's suit. In other words, can a third-party defendant so reword or construe the plaintiff's complaint as to make it a direct attack upon itself, and thus change the nature of the suit.

"¶14.15 . . . While a defendant may now impled a third party only on the ground that the third party is liable to the defendant, plaintiff is still entitled to assert against the third party certain claims. Plaintiff is not required to do so." (Emphasis in original.)

"¶14.26 . . . Unless he chooses to amend his pleading to state a claim against the third party, the plaintiff has no direct concern with him; the third party is brought in solely to answer a claim by the defendant that he is or may be liable over to the defendant, and he cannot be held liable to the plaintiff." 3 Moore , Federal Practice.

Thus, it would seem that the impleading by Empire of the government as a third-party defendant need not have any effect on the plaintiff's action against the defendant, unless the plaintiff had chosen to assert claims against the government--which it did not.

It was Empire which brought the government into this action and the government has moved to have that complaint against itself dismissed. Therefore, the legal efficacy of its positions must be judged as to Empire, and not as to Chrysler.

The defense of statute of limitations would be available to the government only if Chrysler had sued it directly or made a claim directly against it. The statutes on which the government is depending refer to suits by aggrieved parties other than the delinquent taxpayer. If this were a direct suit by Chrysler against the government for wrongful levy, clearly the nine-month period would have elapsed before the suit was instituted, and the defense might well be applicable. However, Empire the third-party plaintiff, and not Chrysler, has sued the government, charging, not wrongful levy, but rather "improper endorsement of the draft which was properly drawn by defendant and third-party plaintiff EMPIRE".

Even if the Court were to consider the statute of limitations as a defense against the third party complaint of Empire, Empire would not qualify as

"any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or a lien on such property and that such property was wrongfully levied upon . . ." 26 U. S. C. §7426(a).

so that the nine-month statute of limitations would be applicable to Empire's claim against the government.

Thus, the government's motion for dismissal of the complaint against it on the grounds that the action of Chrysler is barred by the nine-month statute is not responsive to the complaint of the third-party plaintiff against it, which is the only complaint with which the government need concern itself.

[Third Party Defendant Relationship]

The Court now turns to the relationship of the third-party defendant to the original plaintiff to determine if the government's defense of lack of jurisdiction has merit there. Rule 14(a) provides that

"The third-party defendant may assert against the plaintiff any defenses which the third party plaintiff has to the plaintiff's claim. The third party defendant may also assert any claim against the plaintiff arising out of the transaction or occurrence that is the subject matter of the plaintiff's claim against the third party plaintiff." (Emphasis added.)

This would seem to limit the government's defenses to the plaintiff's claim against Empire to defenses which Empire itself could raise. Chrysler has not chosen to assert any claims at all against the third-party defendant. Thus to accept the government's interpretation that Chrysler's claim against Empire is really a claim against the government would be to force Chrysler to assert a claim it has not chosen to assert and need not have asserted. Since there is no claim against the government by Chrysler, and since the defendant/third party plaintiff Empire could not assert the jurisdictional defense of Title 26, United States Code, sections 7426 and 6532(c) against Chrysler's action for nonpayment, that defense is not available to the government here either. Accordingly, the government's motion to dismiss the complaint as to it for lack of jurisdiction is denied.

In the alternative, the government has moved for summary judgment in its favor because its tax lien was superior to Chrysler's equitable lien, with regard to the insurance proceeds. The Court has found otherwise with respect to that share of the insurance proceeds which was not the taxpayer's but was Chrysler's in its granting of Chrysler's motion for summary judgment. But assuming arguendo that the government were correct in its assumption, its argument would again be addressed to the merits of Chrysler's nonexistent claims against it and not to the allegations in Empire's third-party complaint.

In view of the Court's decision to grant Chrysler's motion for summary judgment in its favor, there remains the third-party complaint of Empire against Chase and the government. Chase in its responding papers asserts that the "check" alluded to by Empire is really a "payable through" draft. The procedure regularly followed with such a draft makes Chase merely a collecting bank, and places the responsibility for deciding if payment is to be made and for examining endorsements with Empire. Chase presents such drafts to Empire for approval and for inspection, and in the affidavit of Edward Lada, Chase avers that Empire has in the past requested Chase to return checks for missing endorsements and the like. Empire has not replied to these assertions by Chase as to the procedure regularly followed between Chase and Empire with respect to these "payable through" drafts.

Nor has the government fully responded to the allegations in Empire's third-party complaint, except to admit the collection of the proceeds and to deny the improper endorsement and subsequent liability to Empire.

In light of the disposition of the main claim, the Court invites the remaining parties to submit additional papers to assist in the complete disposition of this case. In particular, Empire is invited to reply to the issues raised by Chase's answer and the government is invited to redirect its attention to the allegations of the third-party complaint and respond accordingly.

[Conclusion]

In conclusion, plaintiff's motion for summary judgment in its favor is granted in the amount of $1912.68, with interest from August 22, 1968 . The government's motion for dismissal for lack of jurisdiction is denied, as is its motion for summary judgment in its favor. Finally, to assist the Court in making a complete disposition of the issues involved in this case, defendant Empire is invited to reply to third-party defendant Chase's answer, and the government is invited to respond to the allegations of its liability to Empire in the third-party complaint by the close of the business day on January 12, 1973 .

So Ordered.

¹ The first assessment was in February, 1967, and the second, though after the March, 1968 transaction, is considered a continuation of the earlier assessment, under the provisions of 26 USC §6321.

² United States v. Long Island Drug Company [41-1 USTC ¶9140], 115 F. 2d 983 (2d Cir. 1940) makes clear that a debtor-taxpayer may prevent the attachment of government liens by divesting himself of contingent rights to property before they actually vest, for a government lien cannot attach to such contingent rights. The results of such a divestiture would be to reduce pro tanto the taxpayer's interest in the contingent right and this reduction would remain in effect when the contingent right matures into a present right.

³ Item 5. Loss Payee: Any loss under Part III is payable as interest may appear to the named insured and (Name and Address)

Chrysler Credit Corp., 9745 Queens

Blvd., Elmhurst , N. Y.

⁴ These sections provide a defense against actions by the delinquent taxpayer to third parties who turn over to the government property subject to levy. In that this Court has determined Chrysler's share of the proceeds was not subject to the levy, this defense is unavailable to Empire.

 

 

 

Commerce and Industry Insurance Company, Interpleading Plaintiff v. Liz Cartage, Inc., et al., Interpleading Defendants

U. S. District Court, So. Dist. N. Y., 73 Civ. 5338, 12/4/74

[Code Sec. 6323]

Lien for taxes: Priority: Insurance proceeds: Consignment of property: New York law.--A federal tax lien against a delinquent taxpayer had no validity against a consignor of property who entrusted its freight to be carried on the taxpayer's truck. The government could not assert its lien out of insurance proceeds payable to the consignor since under state law the taxpayer had no interest in the proceeds.

Owertsman, Sessler, Nagelberg & Pfeffer, 115 Broadway, New York , N. Y. for plaintiff. Paul J. Curran, United States Attorney, Joseph P. Marro, Assistant United States Attorney, New York, N. Y., for defendant. Harris J. Klein, 280 Broadway, New York , N. Y. for Spector Freight System, Inc.

Memorandum

FRANKEL, District Judge:

Two of the interpleaded defendants, the United States of America and Spector Freight System, Inc. (Spector), have moved for summary judgment in this interpleader action. The interpleading plaintiff, Commerce and Industry Insurance Company, commenced the action in order to resolve the competing claims to a fund of $4,500 which represents the proceeds payable on a property damage insurance policy issued by the plaintiff in the name of one of the interpleaded defendants, Liz Cartage, Inc. (Liz). The policy was in effect on May 1, 1972 , when a truck belonging to Liz which was carrying a consignment of freight entrusted to it by Spector, was hijacked. Pursuant to the insurance policy, plaintiff made available the maximum amount payable, $4,500.

Claims to the fund created by the insurance proceeds have been made by the United States , Spector, and Consolidated Freightways. Consolidated has abandoned its claim. The court is left, then, with the rival claims to the fund of the United States and Spector. The United States asserts that Liz owes it $36,324.51 in unpaid taxes. The Internal Revenue Service has filed four tax liens against Liz, the earliest lien having been assessed on October 2, 1972 , and filed on November 24, 1972 , in the amount of $11,369.60. The Internal Revenue Code of 1954 provides that a tax lien arises at the time of the assessment and continues until the assessment is satisfied or made unenforceable by lapse of time, 26 U. S. C. §6322. Since it is undisputed that Spector did not reduce its claim to judgment until June 28, 1973, the provisions of the Code which provide for notice to judgment lien creditors, 26 U. S. C. §6323(a), have no bearing on the case.

Spector's claim, however, centers upon the proposition that the disputed insurance proceeds, like the hijacked property they replaced, were never the property of Liz; that, as between Liz and Spector, the proceeds belonging to the latter; and that the tax lien never attached to the interpleaded funds. The court sustains these contentions. Upon the undisputed facts, Liz did not own the hijacked property and would not have owned the insurance proceeds. As between Spector and Liz, the relationship was in pertinent legal essence that of bailor and bailee, with Spector, having paid its shippers, standing in their shoes. Spector recovers, therefore, whether or not the Liz-Spector agreement provided for insurance of the kind in question.

We must look, of course, to state law to determine the property interests, if any, of Liz to which the federal lien might attach. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960). We find that the law of New York , like the law elsewhere, vindicates Spector's claim.

The insurance policy, in familiar terms, covered property "held in trust" by Liz, "or on consignment, . . . or for which the assured may be liable." It is agreed that the hijacked property was not in the category, also covered by the policy, of things "belonging to the assured. . . ." Where, as here, an insurance policy protects "the property [1] of the insured, or [2] held by them in trust or on commission," it is clear that the proceeds relating to property in category [2] belong to the owners of the property, not to the insured, whether or not the insured had agreed with the owners to take out such insurance. Stillwell v. Staples, 19 N. Y. 401 (1859); Exton & Co. v. Home Fire & Marine Ins. Co., 249 N. Y. 258 (1928); Polley v. Daniels, 264 N. Y. S. 194, 197 (App. Div. 3d Dept. 1933); Morrison v. Warren , 20 N. Y. S. 2d 26 (Sup. Ct. N. Y. Co.), aff'd, 24 N. Y. S. 2d 988 ( App. Div. 1st Dep't 1940 ); Meadow Brook National Bank v. Federal Ins. Co., 260 N. Y. S. 2d 814 (App. Div. 2d Dept. 1965); Home Insurance Co. v. Baltimore Warehouse Co., 93 U. S. 527 (1876).

These principles govern the instant case. Spector, although it has claimed the entire fund, appears to be entitled only to the amount of its own demonstrated interest in the goods represented by the insurance proceeds, namely, the sum of $4,033.59 paid by it to its own shippers and consignees. The remaining funds--$466.41--will be awarded to the Government pursuant to its tax lien.

Settle an order for final judgment in accordance with this opinion.

 

 

 

Equibank, a Pennsylvania Banking Corporation, Plaintiff-Appellant v. United States of America Internal Revenue Service, Defendant-Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 83-3587, 749 F2d 1176, 1/10/85

[Code Sec. 6323]

Liens: Louisiana.--Under Louisiana law, chandeliers are "component parts" of a mansion, preventing their removal by the IRS to satisfy a tax deficiency. The mortgage on the mansion (and therefore the chandeliers) took precedence over an IRS lien for the chandeliers. Determination of whether the chandeliers were an integral part of the house was made by considering what a "reasonable man" might think.

Roy C. Cheatwood, Jones, Walker, Waechter, Poitevent, Carrere, Denegre, 225 Baronne St., New Orleans, La. 70112, for plaintiff-appellant. Glenn L. Archer, Jr., Assistant Attorney General, Michael L. Paup, William S. Estabrook, Department of Justice, Washington, D. C. 20530, for defendant-appellee.

Before RUBIN, POLITZ and GARWOOD, Circuit Judges.

POLITZ, Circuit Judge:

Equibank appeals the denial of a petition for injunction against the Internal Revenue Service which removed certain chandeliers from a house subject to an Equibank mortgage. Concluding that under controlling provisions of the Louisiana Civil Code the chandeliers are component parts of the house and, as such, are subject to the priming mortgage of Equibank, we reverse.

Facts

Norman L. Johnson and Gayfred Dorthea McNabb Johnson owned a fine home, appropriately called a mansion, on St. Charles Avenue in New Orleans , Louisiana . Equibank held a mortgage on the house, primed by a first mortgage in favor of Hibernia National Bank. The Johnsons defaulted on the mortgages and failed to pay their income taxes. The IRS made jeopardy assessments, secured a lien and served notices of levy and seizure of the residence. Hibernia brought a foreclosure action and Equibank intervened. The Louisiana state court ordered the foreclosure of both mortgages and the sale of the property to satisfy the mortgage indebtednesses. The mortgages primed the IRS lien.

Prior to the auction sale ordered by the court, with the consent of the Johnsons the IRS took physical possession of the residence. The house was valued at $3,000,000 and the contents had an approximate value of $1,500,000 at the time of the seizure. The interior house lighting included several valuable antique crystal chandeliers.

The IRS removed and stored the contents of the house, including the furniture, fixtures, appliances and decorations. The IRS took the chandeliers, some valued as high as $75,000, and other light fixtures. In order to remove these electrical units, it was necessary to disconnect the internal house wiring from the wiring of the chandeliers and other fixtures. This disconnect took place in electrical workboxes located inside the ceiling and within the walls. In addition, the bolts and other fasteners securing the chandeliers and fixtures were taken off and the units were lowered to the floor. Upon completion of the removal, the workboxes containing the internal house wiring were exposed along with the holes made by the securing connectors. Persons effecting the safe removal had to have sufficient knowledge of electricity and electrical wiring to separate the internal wires from the unit wires without risking harm to the worker, or damage to the house and fixtures by the touching of exposed wires or the "shorting-out" of the circuitry. This type removal is not comparable to the simple and ordinary unplugging of a lamp or other electrical appliance from a wall socket. The latter requires little knowledge of the mysteries and vagaries of electricity, and involves minimal risk absent abuse.

Equibank filed a state court injunctive action seeking the return of the chandeliers. The IRS removed the suit to federal court. After hearing the district court denied the injunction requested, based on a finding that the chandeliers were not component parts of the residence and were thus not covered by Equibank's mortgage.

Analysis

Whether the chandeliers were component parts of the Johnson residence or separate movables depends upon the interpretation of articles in the 1978 revision of Book 2 of the Louisiana Civil Code. As is usually the case in civilian intepretative methodology, several articles are to be considered in parimateria ¹ but the critical codical provision is article 466 which states:

Things permanently attached to a building or other construction, such as plumbing, heating, cooling, electrical or other installations, are its component parts.

Things are considered permanently attached if they cannot be removed without substantial damage to themselves or to the immovable to which they are attached.

Professor A. N. Yiannopoulos, the official reporter for the Louisiana State Law Institute's revision of Book 2 of the Civil Code, called as an expert witness by the IRS, gave testimony about the history of the revision of those articles and of his opinion as to their meaning, with particular emphasis on article 466. The professor was of the opinion that under article 466 items are component parts of a building or other construction: (1) if they fit within one of the categories listed in the first paragraph of the article, in which event they are considered permanently attached as a matter of law, or (2) if they are actually permanently attached as described in the second paragraph. He stated:

The first paragraph considers, are meant to consider these things as component parts as a matter of law as to which the test of permanent attachment would be immaterial.

* * *

I would consider these things as a matter of law being component parts . . . you do not need to worry about the test of damage to themselves or to the building as to things covered by 466, first paragraph. These are component parts even if their removal would not cause damage to the building or to themselves.

To complete the discussion, the professor testified that the second paragraph of article 466 covered items other than those listed in the first paragraph. A second paragraph item was to be considered a component part only if its removal occasioned substantial damage to itself or to the immovable to which it was attached. Professor Yiannopoulos concluded by expressing his opinion that the chandeliers were not component parts of the Johnson residence, although he was of the view that an electrical hot water heater would be so classified. He explained the difference by referring to societal expectation:

We are talking about [what] an ordinary man who purchases a house with ordinary prudence ought to know and ought to expect. We are talking about what ideas prevail in society today with respect to an ordinary buyer of ordinary prudence. Or an ordinary mortgagor or an ordinary mortgagee of ordinary prudence. It is an objective test rather than a subjective test.

The Louisiana Legislature did not define or otherwise describe an electrical installation when it enacted article 466 in 1978. We find no post-1978 jurisprudence addressing the issue. The Expose des Motifs and history of the predecessor articles, however, lend some guidance to today's interpretative task.

Prior to the 1978 revisions to Book 2 articles 467 and 469 governed the inquiry whether a particular item was a component part of a building. ² Former article 467 declared that wire screens, water pipes, gas pipes, sewerage pipes, heating pipes, radiators, electric wires, electric and gas lighting fixtures, bathtubs, lavatories, closets, sinks, gasplants, meters and electric light plants, heating plants and furnaces were immovables when actually connected or attached to the building. Albert Tate, Jr., a civilian scholar, then an intermediate appellate court judge, later a justice of the Louisiana Supreme Court and now a member of this court, expressed the view that the 1912 Legislature amended article 467, vastly expanding the items specifically covered, to overrule decisions of the Louisiana courts classifying items such as chandeliers as movable despite the fact that society considered such items integral parts of buildings. LaFleur v. Foret, 213 So. 2d 141 ( La. App. 1968). The Expose des Motifs notes the position of societal views in the determination of items which compose component parts of a building, observing that

Lines of demarcation [between movables and immovables] are ordinarily drawn in accordance with prevailing ideas in society . . . In contemporary civil law, the distinction rests, in principle, on physical notions of mobility and on "inherent" characteristics of things.

Thus, the views of the public on which items are ordinarily regarded as part of a building must be considered in defining those items which the legislature meant to include within the term electrical installation. See also Yiannopoulos, Property 2 LOUISIANA CIVIL NAW TREATISE §22 (1980).

In this technological age many electrical units are designed for connection to the electrical power source by persons with little or no knowledge of electricity. This is accomplished by the simple expedient of inserting a male plug into a female socket. The electrical unit can be disconnected just as readily by simply pulling the plug out of the socket. Such items are legion: table and floor lamps, toasters, can openers, blenders, drills, soldering irons, mixers, knife sharpeners, radios, television sets, record players, stereo units, and on, and on ad infinitum. We are persuaded that these units, in the eyes of society, are movable; they are not electrical installations. They are not fixed in place. No special knowledge or expertise is needed to engage or disengage the electrical power source. They do not constitute component parts of the building or other construction in which they are found.

Other electrical units do not access the electric energy source through the plug arrangement but are "permanently" connected to the interior wiring of the building or other construction. The connection and disconnection from the power source poses a danger to the untutored or unskilled and requires knowledge of electricity and of electrical wiring. Such items include builtin stoves or ovens, wall and ceiling electric heaters, central heating and air conditioning, heat pumps, electrical hot water heaters, built-in public address and alarm systems, overhead fans, interior, physically attached light fixtures, exterior lighting, automatic garage door controls, and like electrical equipment. We are persuaded that these electrical units, from the societal viewpoint, are not movable; they are electrical installations which become a component part of the building or construction to which they are attached.

From the foregoing we conclude that a lamp which is simply plugged into a socket is a movable and may be removed from a residence without violating the mortgage, but an installed light fixture, be it an expensive, antique chandelier or a garden-variety fixture, becomes a component part of the building.

The ordinary view of society being a relevant consideration, we conclude our consideration by asking the near-rhetorical question: Does the average, ordinary, prudent person buying a home expect the light fixtures to be there when he or she arrives to take possession? Does that person expect the room to become illuminated when the light switch is thrown or should that person reasonably expect no response to the switch and, upon looking up, reasonably expect to see only a hole in the ceiling with the interior house wiring sticking out of the electrical workbox? In our view, the societal expectation is to have the lights go on. We therefore conclude that the Louisiana Legislature intended that the physically attached light fixtures were electrical installations and, as such, were component parts of the residence, thus respecting what "everybody knows" about which items "go with the house." See Simonett, "The Common Law of Morrison County ," 49 ABAJ 203 (March 1963).

The chandeliers are electrical installations. They are component parts of the Johnson residence despite the fact that they could be removed without damage to the chandeliers or the residence. They are subject to Equibank's mortgage.

The judgment of the district court is REVERSED and the matter is remanded for entry of a judgment consistent herewith.

¹ The pertinent articles include:

Art. 462. Tracts of land, with their component parts, are immovables.

Art. 463. Buildings, other constructions permanently attached to the ground, standing timber, and unharvested crops or ungathered fruits of trees, are component parts of a tract of land when they belong to the owner of the ground.

Art. 464. Buildings and standing timber are separate immovables when they belong to a person other than the owner of the ground.

Art. 465. Things incorporated into a tract of land, a building, or other construction, so as to become an integral part of it, such as building materials, are its component parts.

Art. 466. Things permanently attached to a building or other construction, such as plumbing, heating, cooling, electrical or other installations, are its component parts.

Things are considered permanently attached if they cannot be removed without substantial damage to themselves or to the immovable to which they are attached.

Art. 467. The owner of an immovable may declare that machinery, appliances, and equipment owned by him and placed on the immovable, other than his private residence, for its service and improvement are deemed to be its component parts. The declaration shall be filed for registry in the conveyance records of the parish in which the immovable is located.

Art. 468. Component parts of an immovable so damaged or deteriorated that they can no longer serve the use of lands or buildings are deimmobilized.

The owner may deimmobilize the component parts of an immovable by an act translative of ownership and delivery to acquirers in good faith.

In the absence of rights of third persons, the owner may deimmobilize things by detachment or removal.

Art. 469. The transfer or encumbrance of an immovable includes its component parts.

² The text of the prior articles read:

Art. 467. Wire screens, water pipes, gas pipes, sewerage pipes, heating pipes, radiators, electric wires, electric and gas lighting fixtures, bathtubs, lavatories, closets, sinks, gasplants, meters and electric light plants, heating plants and furnaces, when actually connected with or attached to the building by the onwer for the use or convenience of the building are immovable by their nature.

Art. 469. The owner is supposed to have attached to his tenement or building forever such movables as are affixed to the same with plaster, or motar, or such as can not be taken off without being broken or injured, or without breaking or injuring the part of the building to which they are attached.

 

 

 

Old Colony Insurance Company, a Corporation of Massachusetts , et al. v.

(CA-3), In the United States Court of Appeals for the Third Circuit, No. 11,682, 227 F2d 520, December 8, 1955

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

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Priority of insurance proceeds distribution: Destruction of bailorcustomers' property.--A bailee collected insurance proceeds resulting from a fire which destroyed goods entrusted to it by bailor-customers. The court, after determining proper state law, held that the purpose of the insurance contract was to insure the bailor-customers' goods. Therefore, the bailor-customers were entitled to the proceeds of the policy and the government was entitled to only that portion of the funds not representing property of the bailor-customers for satisfaction of unpaid tax liens against the bailee. Affirming the decision of the District Court, 129 Fed. Supp. 545, reported at 55-2 USTC ¶9628.

Leonard I. Garth, 45 Church St. , Paterson 1, New Jersey , for appellants. F. Earl Walter, Jr., Saul J. Zucker, 744 Broad St., Newark 2, New Jersey, Abraham J. Asche, 295 Madison Ave., New York 17, New York, Charles H. Hoens, Jr., Asst. U. S. Attorney, U. S. Court House, Newark 1, New Jersey, for appellees.

Before BIGGS, Chief Judge, and KALODNER and HASTIE, Circuit Judges.

Opinion of the Court

PER CURIAM:

Every pertinent question of fact and issue of law has been adequately dealt with in the thorough and detailed opinion of Judge Modarelli. We find no error in the findings and conclusions expressed by him. Accordingly, the judgment will be affirmed on his opinion, 129 Fed. Supp. 545 [55-2 USTC ¶9628].