District Where Filed Page2

---

 [Last Known Address]

Judge Lasker found that in such event the IRS could acquire priority by filing in New York because it had shown "due diligence" and "substantial compliance" with the statute. Corwin forcefully argues that this construction rewrites the statute, something only Congress can do. For now, we note that after remand it may be unecessary for the district court to reconsider this theory. Another possibility, in the absence of a residence for Harper on the specific date, might be to "construe" residence as "the last known address of the taxpayer." Cf. 26 U. S. C. §§ 6212, 6303. This too, would be statutory construction of large dimensions. In addition, this phrase has been interpreted to mean the last address known to the local IRS office, even after the taxpayer has moved and paid taxes to another IRS office. Luhring v. Glotzbach [62-2 USTC ¶9547], 304 F. 2d 556, 559 (4th Cir. 1962). A last known address interpretation might thus put creditors of the taxpayer at the mercy of whatever records the IRS office involved happended to possess. Finally, when a taxpayer has no definable residence, it may be impossible for the IRS to file under 26 U. S. C. §6323 a notice of tax lien valid against judgment lien creditors and others there specified. Such a result may be unavoidable in light of the legislative history referred to above. This would not, however, "allow tax evasion by the mere disappearance of the taxpayer," as the court below stated. 375 F. Supp. at 191. As Corwin points out, the Government's contest here is not with a taxpayer on the run but with judgment creditors who also have a claim of right. If the other creditors had not appeared, the Government could have levied on the taxpayer's property and collected from him without ever filing a notice of tax lien anywhere. 26 U. S. C. §6331; American Honda Motor Co. v. United States [73-2 USTC ¶9670], 363 F. Supp. 988, 992 (S. D. N. Y. 1973). And even if Corwin or another creditor ultimately prevails here, a substantial tax liability would still face Harper. Nonetheless, a holding that for a taxpayer without an ascertainable residence the Government can never properly file its notice of tax lien is unsatisfactory, and we hope that Congress will see fit to eliminate the possibility of such a result in the future. ¹⁶

We reverse the grant of summary judgment by the district judge and remand for further proceedings in accordance with this opinion.

¹ Another creditor, Cowles Communications, Inc., obtained a judgment for $56,820.54 in June 1972.

² Under New York law a judgment creditor does not become a judgment lien creditor until execution is delivered to the sheriff. N. Y. C. P. L. R. §5202 ( McKinney 1963). United States v. Pearson [66-2 USTC ¶9726], 258 F. Supp. 686, 691 (S. D. N. Y. 1966).

³ Appellants claim that evidence of this filing was not before the district court and thus should not be considered by us. In view of our disposition of this appeal, we need not reach this issue.

⁴ Cowles apparently has not perfected its lien.

⁵ No one has appealed the grant of priority to the stakeholder, Interpublic, and thus we do not deal with its claim.

⁶ Cowles, see notes 1 and 4 supra, was given last priority, and does not appeal.

⁷ Section 6321 provides:

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

⁸ Section 6323(a) provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

⁹ Section 6323(f) provides in part:

(1) Place for filing--The notice referred to in subsection (a) shall be filed--

(A) Under State laws.--

. . ..

(ii) Personal property.--In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; or

. . ..

(2) Situs of property subject to lien.--For purposes of paragraph (1), property shall be deemed to be situated--

. . ..

(B) Personal property.--In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, and the residence of a taxpayer whose residence is without the United States shall be deemed to be in the District of Columbia.

¹⁰ N. Y. Lien Law §240 (McKinney Supp. 1974) was changed in 1966 to reflect the new federal tax law and now essentially provides that for personal property owned by New York residents the notice shall be filed with the county clerk or city register where the taxpayer resides. See also Bankers Trust Co. v. Equitable Life Assur. Soc'y, 19 N. Y. 2d 552, 557 (1967).

¹¹ For a taxpayer residing abroad, section 6323(f)(2) assigns a residence in the District of Columbia .

¹² Letter dated January 9, 1975 . Appellants also object to consideration of this letter. See note 3 supra.

¹³ The stakeholder, Interpublic, was located in New York County . We do not, however, necessarily agree that the situs of the debt was in New York County . See text accompanying note 11 supra.

¹⁴ In addition, if Harper continued to reside in Switzerland until January 3, 1973 , the United States , by virtue of its filing of notice in Washington, D. C., on that date, would be entitled to priority over Culbertson, whose judgment lien was not perfected until February 1973.

¹⁵ E.g., the district court did not have before it the supplemental information given to us by the Government, referred to in notes 3 & 12 supra, and accompanying text, although there was evidence of the Swiss address in the record.

¹⁶ One obvious remedy is to allow filing in Washington, D. C., for a taxpayer with no identifiable residence, as is now done for a taxpayer living abroad. See note 11 supra.

[Concurring Opinion]

MANSFIELD, Circuit Judge (Concurring):

I concur in the holding that summary judgment was improperly granted by the district court because of the existence of a question of material fact; that is, the location, if any, of the taxpayer's residence on October 3, 1972 . However, I disagree with the majority's construction of 26 U. S. C. §6323(f)(2)(B) and with the burden of proof that it would place upon the government upon remand.

In my view Congress did not intend the term "residence" in §6323(f)(2)(B) to be given a strict or literal meaning that would prevent the government from filing a lien to establish its priority to collect a lawfullydue tax in the case where a taxpayer has discontinued his residence and hopped around the country. Cf. United States v. Ball [64-1 USTC ¶9191], 326 F. 2d 898, 900 (4th Cir. 1964). As Judge Learned Hand said in Guiseppi v. Walling, 144 F. 2d 608, 624 (2d Cir. 1944) (concurring opinion) "[t]here is no surer way to misread any document than to read it literally." See also Federal Deposit Ins. Corp. v. Tremaine, 133 F. 2d 827, 830 (2d Cir. 1943) (L. Hand, C. J.) ("There is no surer guide in the interpretation of a statute than its purpose when that is sufficiently disclosed; nor any surer mark of over solicitude for the letter than to wince at carrying out that purpose because the words used do not formally quite match with it.")

I believe that §6323(f)(2)(B) should be construed to mean that, where the government cannot through reasonable inquiry ascertain a taxpayer's actual residence, it may satisfy the statute's requirement by filing notice of its judgment lien with the state-designated office within the jurisdiction of the taxpayer's last known or verifiable abode. This practical construction seems to me to be in accord with the purpose of the statute, which is to put other creditors on notice, since they too would be most likely to inquire about liens in the county of the last residence of the taxpayer that could be ascertained by reasonable effort. Furthermore, the interpretation of "residence" as meaning "last known residence" is in accord with other provisions of the Code, see, e.g., 26 U. S. C. §6212 and 6303.

Under this construction of the statute there need be no fear that the government might be able to satisfy the statute's requirements merely by locating the taxpayer's last address shown on IRS tax records, since this would not necessarily be ascertainable by reasonable effort on the part of creditors. Nor is there any reason for adopting such an interpretation merely because it has been adopted by one court in construing a different statute. See Luhring v. Glotzback [62-2 USTC ¶9547], 304 F. 2d 556, 559 (4th Cir. 1962). The last publicly known address of a taxpayer, on the other hand, is ascertainable by creditors.

The government should not be obligated under §6323(f)(2)(B) to feret out the secret hideout of such a taxpayer, whether it be in Switzerland or elsewhere. While a clarifying amendment of the statute would be helpful I do not think it is essential. Congress' purpose can be implemented by a practical construction of the term "residence" as used in the existing law.

 

 

[87-2 USTC ¶9626] William F. Brooks, Plaintiff-Appellant v. United States of America, Defendant-Appellant, and Antone Construction Co., Inc., a South Carolina Corporation, Anthony J. Frank, Fidelity & Deposit Co. of Maryland, a Maryland Corporation, Defendants

(CA-4), U.S. Court of Appeals, 4th Circuit, 87-1594, 11/25/87, 833 F2d 1136, Affirming the District Court, 86-2 USTC ¶9548

[Code Secs. 6321 , 6323 and 7122 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Creation of lien: Validity of the lien: District where filed: Closing agreements: Unauthorized agreement: Compromises: Acceptance of offer.--The district court had properly ruled that a claim to the proceeds from the successful enforcement of a mechanic's lien constituted personal, and not real, property. Further, the "nerve center" of the corporation was Pennsylvania , notwithstanding the fact that it had field offices and an attorney's office in other states. Thus, the IRS's filing of a lien in the state ( Pennsylvania ) where the corporation's principal executive office was located was sufficient, even though the subject property was located in West Virginia . Finally, the district court was correct in holding that a compromise settlement between the taxpayer and the IRS was unenforceable because the offer was not signed by the Regional Commissioner and subordinate officers do not have authority to enter into compromise settlements. Moreover, the corporation's president's attempt to bribe an IRS agent was sufficient to set the settlement aside. Finally, the assignee of the proceeds of the mechanic's lien claim could not estop the government from denying the settlement agreement.

Raymond George Hasley, Mary J. Lynch, Rose, Schmidt, Chapman, Duff & Hasley. Lawrence J. Lewis, Vinson, Meek, Lewis & Pettit, 1000 First Huntington Bldg., Huntington, W.Va. 25708, for plaintiff-appellant. Michael C. Durney, Acting Assistant Attorney General, David I. Pincus, Michael L. Paup, William S. Estabrook, Michael W. Carey, Department of Justice, Washington, D.C. 20530, for U.S.

Before WIDENER, MURNAGHAN, and ERVIN, Circuit Judges.

MURNAGHAN, Circuit Judge:

In the usual stakeholder case, a party with little involvement in the underlying transactions comes to court in search of a Solomonic decision awarding the stake or portions thereof to warring parties to those transactions. Here, however, the claimants had no involvement in the events giving rise to the stake. The stake at issue, totaling over $230,000, is Antone Construction Company's share of the proceeds of a mechanic's lien action in West Virginia . The plaintiff-appellant here, William F. Brooks, was on April 5, 1979 , assigned Antone's interest in the mechanic's lien action as security for prior and current loans made to or guaranteed by Antone. Competing with Brooks is the United States , which claims the stake in partial satisfaction of Antone's tax deficiencies under tax liens filed November 22, 1978 , and March 1, 1979 . If the government's filing in Pennsylvania was effective, it was entitled to priority because it antedated the assignment of an interest to Brooks. The question then is whether a property interest in the mechanic's lien action, to be effective against Brooks, had to be perfected by the government by a filing in West Virginia before April 5, 1979 . Such a West Virginia filing has not been made.

Deciding the case without a trial upon the evidence submitted by the parties, the district court found the government tax lien, filed in Pennsylvania , being anterior to April 5, 1979 , had priority over Brooks' claim, and awarded the stake to the government. In this appeal, Brooks argues, first, that the assigned mechanic's lien action constitutes real property, so that to be valid the government's tax lien had to be filed in West Virginia; second, that he has priority because Antone is a resident of South Carolina and not of Pennsylvania, so that the government's filing in Pennsylvania was not effective against his interest even if the mechanic's lien is personal property; and third, that the government has no valid tax lien against Antone because the Internal Revenue Service agreed to a compromise settlement of Antone's tax liabilities and should be estopped from denying the settlement. Brooks so contends even if the settlement is procedurally defective, because the Service kept money paid by Antone's president in furtherance of the compromise offer.

We see no basis for overturning the District Court's decision in this case. The property at issue, the mechanic's lien, is a chose in action and constitutes personal property, so the government was not required to file its tax lien in West Virginia . The standard of review for the district court's factual findings is the "clearly erroneous" standard. Fed. R. Civ. P. 52(a). It was reasonable, and certainly not clearly erroneous, to conclude from the evidence that Antone's principal executive office was in Pennsylvania , so the tax liens were properly filed there and have priority over Brooks' security interest. The compromise settlement is not enforceable; and even though Brooks has standing to challenge the government's tax lien, Brooks cannot estop the government from denying the unenforceable settlement and cannot challenge Antone's underlying tax deficiency assessment.

FACTS

The basic facts are essentially not in dispute, except for the determination of Antone's corporate residence.

A. Facts relating to Antone Construction Company's residence. Antone was incorporated in South Carolina in March, 1977. A South Carolina attorney prepared the articles of incorporation, listing himself as the registered agent and his own law office as the required registered address for the corporation. The incorporation was done at the request of an attorney in Sharon , Pennsylvania on behalf of Anthony J. Frank of Hermitage, Pennsylvania . Anthony Frank apparently set up Antone upon the recommendation of his brother, Frederick Frank; while Antone was being formed, Frederick became a resident of Columbia , South Carolina . Anthony Frank, whose Pennsylvania residence remained undisturbed, was also the President and sole stockholder of Brimar Construction Company at the time of Antone's incorporation; Brimar's principal executive office was in Sharon , Pennsylvania .

The directors and officers of Antone were Anthony Frank (president and treasurer-comptroller), Frederick Frank, and Bernard Rosen (an employee of Brimar). Antone was involved as a subcontractor in construction projects in six states, including South Carolina but not including Pennsylvania . The first project it undertook was in Columbia , South Carolina . There, as at its other construction sites, Antone maintained a project office where records related to the project were kept. Frederick Frank maintained an office in his home in South Carolina in addition to the project office, but the home office was discontinued when he left Antone in October, 1978. The tax liens at issue here were filed after the home office was closed and after the South Carolina project office trailer had been moved to Virginia ; the sole remaining address for Antone in South Carolina was the law office of the registered agent, where Antone never conducted any business or kept any records. All executive decisions (as compared with day-to-day decisions made by managers at each project site) for Antone were apparently made by Anthony Frank in Pennsylvania or wherever he happened to be.

Checking accounts were maintained at a bank near each project to pay suppliers and employees. Payments for work were received at the local office but forwarded to Anthony Frank in Pennsylvania . Anthony Frank also arranged to send money from Pennsylvania as needed to replenish local checking accounts. Antone also had checking accounts at a bank in Sharon , Pennsylvania ; the mailing address for Antone for the accounts was P.O. Box 1278 , Sharon , Pennsylvania . Antone's registered agent in South Carolina used the same Pennsylvania post office box to send materials to Antone, addressed in care of a Brimar employee.

Antone and Brimar filed a consolidated federal income tax return for the taxable period ending January 31, 1978 , prepared by a Sharon , Pennsylvania accounting firm using information supplied by Anthony Frank. Antone was listed as Brimar's subsidiary on that return, and Antone's address was given as Box 1278 , Sharon , Pennsylvania . The same address was given by Antone in its Employer's Monthly Federal Tax Returns filed with the IRS in February, March, and April, 1979.

The only known meeting of the Antone Board of Directors was held on October 9, 1978 at Brimar's offices in Sharon , Pennsylvania . At that meeting, Anthony Frank's wife and mother-in-law replaced Frederick Frank and Bernard Rosen as directors of Antone. Anthony Frank remained the third director; his wife also became an officer of Antone.

In December, 1978, Antone filed an application for a certificate of authority to operate as a foreign corporation within Pennsylvania . The address given as Antone's proposed Pennsylvania registered office was " 155 Snyder Road , Sharon (Hermitage), Pennsylvania "--Brimar's office address. Brooks stresses that the address given for the "principal office" of Antone is 1200 First National Bank, Richland County , South Carolina and argues that the listing should be dispositive on the issue of Antone's residence because it is a "public record." However, the form merely requested "the address of its principal office in the state or county of incorporation," and the address given in response is thus not by necessity the corporation's "principal executive office" for purposes of tax lien filing. On January 5, 1979 , the Pennsylvania Department of State issued the requested certificate of authority listing the Snyder Road address (Brimar's offices) as the address of Antone's registered office in Pennsylvania .

There is some dispute about the actual ownership of Antone; Brimar apparently did not follow through on a stock purchase agreement, and the stock was then purchased by Anthony Frank's mother-in-law. The stock may have been owned instead by Anthony and Mary Frank's children. Recordkeeping was disorganized; it appears that Antone's business activities petered out in 1979. On October 6, 1980 , Antone was dissolved by the state of South Carolina . Anthony Frank was killed in a car accident in February, 1985, after interrogatories had been answered but apparently before any deposition was taken. It is clear from the record, however, that Anthony Frank controlled Antone and made all executive decisions, including deciding what projects to bid on.

B. Facts relating to Brooks' loans and security interest. In October and November, 1978, Brooks made three loans totaling $92,000 to Anthony Frank, apparently for the use of Brimar Construction Company. In November, 1978, Brimar executed a promissory note to Brooks for the loans (signed by Anthony Frank); Anthony and Mary Frank (his wife) personally guaranteed Brimar's obligation.

On April 5, 1979 , after tax lien notices had been filed in Pennsylvania by the IRS against Antone, Brooks made a fourth loan of $23,000 to Antone. On the promissory note, Antone referred to itself as a " South Carolina corporation" but listed its address as " P.O. Box 1278 , Sharon , Mercer County , Pennsylvania 16146." Anthony and Mary Frank personally guaranteed the loan. Also on April 5, 1979 , Antone (by Anthony Frank) executed a document guaranteeing Brimar's preexisting $92,000 obligation to Brooks.

To secure the four loans, on April 4 and 5, 1979, Antone executed two documents assigning Brooks a partial interest ($115,000 plus interest) in the anticipated proceeds (approximately $253,000) of a mechanic's lien action that was then pending in Cabell County , West Virginia . The record does not indicate why two different documents were executed. The two documents are substantially identical except that the April 4 assignment identifies Antone Construction Company as being located at P.O. Box 1278 , Sharon , Mercer County , Pennsylvania , while the April 5 assignment identifies Antone as a "corporation organized and existing under the laws of the State of South Carolina ." The April 5 assignment was later recorded by Brooks in the office of the Clerk of Cabell County, West Virginia on April 30, 1979 .

C. Facts relating to Government tax liens. In late 1978, Antone became delinquent in its payment of Social Security (FICA) and unemployment (FUTA) taxes. The Internal Revenue Service made tax assessments in late 1978 and early 1979, and filed tax lien notices against Antone with the Prothonotary of Mercer County, Pennsylvania (where Sharon and Hermitage are located) on November 22, 1978, and March 1, 1979. ¹

Anthony Frank also had personal tax difficulties, as did his Brimar Construction Company. As of April, 1983, the liabilities of Anthony Frank personally, Antone, and Brimar totaled about $800,000. On April 29, 1983 , Anthony Frank submitted an offer to the IRS to settle all three liabilities for a total of $250,000. The investigating officer, Rob ert C. Quigley, had met several times with Anthony Frank to negoiate the offer. Anthony Frank made statements that led Quigley to believe that Anthony Frank was going to offer a bribe to obtain expeditious acceptance of the compromise offer. Quigley reported his suspicions to the IRS Internal Security Division, which wired Quigley for sound and supervised all subsequent meetings. On June 28, 1983 , Anthony Frank stated he would give Quigley a new car if Quigley would produce a letter from the IRS accepting the offer by a certain date. The next day, Quigley delivered to Anthony Frank an "acceptance" letter bearing the stamped signature of the IRS Pittsburgh District Director; the letter had been prepared by Quigley at the direction of Inspectors from the Internal Security Division. In a complaint filed by Anthony Frank, Antone and Brimar asking a district court in Pennsylvania to enforce the compromise, Anthony Frank alleged that "[f]rom April 27, 1983 up to and including June 28, 1983, Agent Quigley made continued representations to Plaintiffs and others, including the escrow agent and third party's attorneys, that said offers in compromise would be accepted." Anthony Frank did give Quigley a new Oldsmobile, which Quigley turned over to the inspectors. On July 12, 1983 , Anthony Frank gave Quigley a cashier's check for $250,000 made out to the Internal Revenue Service, and the inspectors arrested Anthony Frank for bribery.

Anthony Frank was charged in the District Court for the Western District of Pennsylvania with attempting to bribe a public official, and a copy of the cashier's check was introduced into evidence at the trial. At the conclusion of the Government's case, Frank was granted a judgment of acquittal. See United States v. Frank, 763 F.2d 551, 552 (3d Cir. 1985) (describing bribery trial as background for dispute over check proceeds claimed by Brimar's partner in joint venture).

On February 22, 1984 , the IRS sent a letter to Anthony Frank in his capacity as President of Antone stating that it had rejected Antone's settlement offer and demanding payment of the outstanding liabilities in full. The offers of Brimar and Anthony Frank were also rejected. On March 9, 1984 , the IRS sent a letter to Anthony Frank stating that it had determined that his offers and his tender of the cashier's check were

not made in good faith and were a fraudulent attempt to relieve yourself and your corporations of the tax liabilities in question without making adequate payment. In connection therewith, you attempted to bribe the revenue officer. Because of these illegal actions, the check is not returnable to you.

The IRS applied the proceeds of the check first to Brimar's outstanding tax liabilities, second to Anthony Frank's liabilities arising from an unidentified sole proprietorship, and last to Anthony Frank's personal liabilities as a responsible officer of two corporations, Brimar and Antone, that had failed to pay the IRS sums withheld from employee wages. The money was applied to Brimar's liabilities and not to Antone's because the money in the escrow account had been earned by Brimar through its joint venture with the Gibson companies. ²

DISCUSSION

I. Priority of government tax lien

Brooks obtained and recorded in West Virginia his security interest in the disputed funds after the government filed its tax lien notices in Pennsylvania . To have priority over the government's liens, therefore, Brooks must establish that the government's notices were not filed in the proper place under 26 U.S.C. §6323(f) (1967 & Supp. 1986). He asserts that the validity and priority are established only by filing in West Virginia .

A. Nature of property at issue. The case presents the preliminary question of whether a claim to the proceeds of a successful attempt to establish by judicial process a right to a mechanic's lien (the anticipated proceeds of which were assigned to Brooks as security for a loan) is real property or personal property. If it is real property, then to have priority over Brooks, the government's tax lien had to be filed in West Virginia , the situs of the land against which Antone's mechanic's lien was filed and where the lien was enforced. 26 U.S.C.A. §6323(f)(2)(A) (Supp. 1987). If the claim is personal property, however, or a "chose in action," as described by the district court, then it could properly have been filed in Pennsylvania, the state where Antone (the corporation initially holding the mechanic's lien and assigning the right to the proceeds thereof to Brooks) resided. Id. §6323(f)(2)(B) . Here, the government filed a tax lien only in Pennsylvania . Therefore, if the district court erred in its ruling that the claim to the proceeds from a mechanic's lien was personal property, the government's claim is ineffective against Brooks.

A mechanic's lien has been defined as "a claim created by law for the purpose of securing payment of the price or value of work performed and materials furnished in erecting or repairing a building or other structure or in the making of other improvements on land, and as such it attaches to the land as well as to the buildings erected thereon." 53 Am.Jur.2d, Mechanic's Liens, §1 , at 512 (1970) (footnotes omitted). The right to acquire and enforce a mechanic's lien exists solely by positive statutory enactments; there was no mechanic's lien in the common law or in equity. Id. §2 , at 515; Kendall v. Martin, 136 W. Va. 197, 67 S.E.2d 42, 45 (1951);United States Blowpipe Co. v. Spencer, 40 W. Va. 698, 705, 21 S.E. 769, 772 (1895). Antone's lien was filed pursuant to W. Va. Code §38 -2-2 (1985) (lien of subcontractor).

A mechanic's lien gives the lienor a right to demand the sale of the property to which the lien attaches if the debt is not paid. 53 Am.Jur.2d, Mechanic's Liens, §3 , at 518 (1970). The lien is described as "purely a matter in rem and not in personam." Id. However, this does not mean that the holder of the right to the proceeds from a mechanic's lien holds an interest in real property:

While a mechanic's lien is sometimes said to be property, it is not like a mortgage. It is not an interest in land, but operates in the nature of an attachment or garnishment . . . .

Id. ³ Indeed, early cases involving mechanic's liens denied the holder the power to assign his lien to another:

There is some early authority which, in the absence of a statute to the contrary, and under the influence of the early common-law rule as to the nonassignability of choses in action, treats a mechanic's lien, even after it has been perfected by the person who performed the labor or furnished the materials, as a personal right which cannot be assigned so as to enable the assignee to prosecute the claim in his own name.

Id. §287, at 823. ⁴ The concept that the mechanic's lien is a chose in action is supported by early cases, dating from the time when that distinction played a greater role than it plays in modern jurisprudence. One example is Clement v. Reitz, 103 Ill. 315 (1882), where the court ruled that it had no jurisdiction to hear a case involving enforcement of mechanic's liens because no "freehold" was involved:

Payment of the sum ascertained to be due to [the materialmen] would relieve the land entirely from the lien established. How, then, is a freehold any more involved than in a suit to foreclose a mortgage? It has frequently been decided by this court that in a proceeding by bill to foreclose a mortgage a freehold is not involved. No difference in principle is perceived in the cases. In one case the lien is created by mortgage-deed, and in the other it is given by statute, and the proceeding in either case is simply to foreclose the lien.

Id. at 316. The same result was reached by the Colorado Supreme Court in Spangler v. Green, 21 Colo. 505, 507, 42 P. 674, 675 (1895) (court lacked jurisdiction because insufficient monetary amount in controversy and "proceeding to enforce a mechanic's lien does not involve a freehold"). The Supreme Court of Minnesota was even more emphatic:

The assertion that the statutory right of a mechanic or a material man to enforce a lien is not an estate or interest in the land on which the work of one or the materials of the other may have been performed or furnished need not be supported by argument or illustration.

Burns v. Carlson, 53 Minn. 70, 71-72, 54 N.W. 1055, 1055 (1893). The court held in Burns that because the mechanic's lien was simply a lien and not an interest in real property, "[l]ike other lien rights, it may be lost or abandoned or discharged." Id. at 72, 54 N.W. at 1055. The Supreme Court of Oregon articulated a similar view, holding that

it is clear that the mere right or privilege of preserving and perpetuating a mechanic's lien upon buildings is not an interest in land. The right may be allowed to lapse, or its duration may be terminated by a payment of the demand without a release; and a written waiver, without the observance of any of the formalities of acknowledgement, etc., required touching instruments affecting land, will constitute an insuperable barrier to the enforcement of a lien thus waived, so that the essential characteristics attending instruments effecting [sic] real property are especially wanting . . . .

Hughes v. Lansing , 34 Or. 118, 124, 55 P. 95, 97 (1898). See, e.g., W. Va. Code §38 -2-34 (1985) (suit to enforce mechanic's lien must be commenced within six months of lien filing).

In fact, as at least one court specifically noted, the mechanic's lien holder's "claim against the property is secondary, ancillary." Alberti v. Moore, 20 Okla. 78, 86, 93 P. 543, 546-47 (1908). The Oklahoma Supreme Court also noted, "The contractor is the primary debtor. If the amount could be collected from him, there would be no resulting claim against the property of the owner." Id. at 86, 93 P. at 546. In that case, where the mechanic's lienor was a subcontractor, the Oklahoma statute required that the contractor be a party defendant in the suit to enforce the lien, so that a judgment could be secured against the contractor for the arrears; the judgment was levied against the property only if the contractor failed to pay the judgment.Id. at 86, 93 P. at 546-47. See Chambers Lumber Co. v. Gilmer, 60 Ga. App. 832, 835, 5 S.E.2d 84, 87 (1939) ("As to the contractor the obligation is primary; as to the owner it is collateral only . . . .").

It is thus clear from the early cases and from the nature of the mechanic's lien proceeding itself that a mechanic's lien and, a fortiori, a claim to the proceeds of a mechanic's lien is a chose in action, and that an action to enforce a mechanic's lien is substantially an in personam action and not an in rem action. "Whether a proceeding is in rem or in personam is determined by its nature and purpose, and by these only." 1 Am.Jur.2d, Actions, §39 , at 572-73 (1962). A mechanic's lien falls within the following definition of in personam action:

A proceeding in personam is a proceeding to enforce personal rights and obligations brought against the person and based on jurisdiction of the person, although it may involve his right to, or the exercise of ownership of, specific property, or seek to compel him to control or dispose of it in accordance with the mandate of the court.

Id. at 573 (footnotes omitted). By contrast, a proceeding in rem "is essentially a proceeding to determine the right in specific property, against all the world, equally binding on everyone." Id. §40 , at 573. A mechanic's lien action merely settles the claim of an unpaid mechanic or materialman, and does not purport to settle or clear title to the property carrying the lien.

The policies behind the filing requirements for government tax liens are satisfied by our finding that a mechanic's lien is a chose in action, and that the tax lien filed in Pennsylvania , Antone's state of residence, therefore gives the government priority over a subsequent assignee of the mechanic's lien. If Brooks' assigned interest were in the underlying real property, the land in West Virginia, it is well settled that he should be required to do no more to protect his security interest than properly inspect the land records in West Virginia to establish that the land is otherwise unencumbered. Here, however, Brooks was assigned an interest in a lawsuit that Antone had pending in West Virginia to collect money due for Antone's construction work. The claim made by Antone is tantamount to an effort to collect on unpaid accounts receivable, which certainly involves no interest in real property. The mechanic's lien procedure is merely a remedy provided by West Virginia , and by virtually all other states, to ensure that mechanics and materialmen are able to collect on their accounts receivable. The Supreme Court of Appeals of West Virginia has held that "[t]he lien procedure provided for mechanics and materialmen is a cumulative remedy, and independently of the lien, such parties may resort to the ordinary common-law remedies, as by an action to recover a personal judgment. The two remedies may be pursued simultaneously, but there can be only one satisfaction."Woodford v. Glenville State College Housing Corp., 225 S.E.2d 671, 675 n. 6 (W. Va. 1976) (citing West Virginia Sanitary Engineering Corp. v. Kurish, 137 W.Va. 856, 74 S.E.2d 596 (1953)). Thus, the special benefit to Brooks of obtaining the assignment of the claim to the mechanic's lien proceeds instead of other accounts receivable, for example, was that the holder of a mechanic's lien has a much greater chance of collecting from the person owing on account than he would have of collecting on such an account ordinarily. This greater likelihood of collecting an overdue account does not also mean that there is a greater likelihood of prevailing over parties holding prior liens against the debtor/assignor, however. It is well established that "the assignee steps into the shoes of the assignor, taking it subject to all prior equities between previous parties . . . for the holder can only sell and transfer such interest as he has . . . ." Thomas v. Linn, 40 W.Va. 122, 127, 20 S.E. 878, 880 (1894). Here, Brooks' joy at the success of the mechanic's lien action unfortunately must be tempered by the knowledge that he was assigned personal property, and not an interest in real property, so that the government's prior tax lien will take priority over his assignment if the tax lien was properly filed in the state of Antone's corporate residence.

B. Proper filing of tax lien. Notices of tax liens on personal property, whether tangible or intangible, must be filed "at the residence of the taxpayer at the time the notice of lien is filed." 26 U.S.C.A. §6323(f)(2)(B) (Supp. 1987). For purposes of that provision, "the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located." Id. §6323(f)(2) .

The general rule in determining the priority of liens is that "the first in time is the first in right." United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954). However, for a tax lien to have priority over a perfected security interest, notice of the tax lien must be properly filed under §6323(f) before the competing security interest is perfected. 26 U.S.C.A. §6323(a) (Supp. 1987). Here, the government tax lien notices were filed in Pennsylvania before Brooks perfected his security interest in the anticipated proceeds of the West Virginia mechanic's lien action. Therefore, the government lien takes priority if Antone's principal executive office was in Pennsylvania , as the district court held it was.

The test in §6323 for corporate "residence" is different from the residency test used for evaluating diversity jurisdiction. Dimmitt & Owens Financial, Inc. v. United States [86-2 USTC ¶9326], 787 F.2d 1186, 1191 (7th Cir. 1986). In enacting §6323 , the Congress explicitly rejected the proposal (made by the Internal Revenue Service) that corporate residence be determined by the taxpayer's domicile. S. Rep. No. 1708, 89th Cong., 2d Sess. (1966),reprinted in 1966 U.S. Code Cong. & Admin. News 3722, 3732. The objective of the residency test in §6323 is to make "the identification of the place for filing and searching for liens as simple and certain as possible." Dimmitt & Owens, 787 F.2d at 1191. Thus, a corporation's residence for purposes of §6323 is not necessarily one of its registered offices or its place of incorporation. Dimmitt & Owens, 787 F.2d at 1190; S. D'Antoni, Inc. v. Great Atlantic & Pacific Tea Co. [74-2 USTC ¶9552 ], 496 F.2d 1378, 1382-83 (5th Cir. 1974). This court has not pronounced directly on the point. The only Fourth Circuit cases cited by Appellant involve diversity jurisdiction, where the residence inquiry is explored for a different reason: to protect out-of-state litigants from possible unfair adjudication by local fact-finders.

The Seventh Circuit has adopted a "nerve center" test for establishing a corporation's principal place of business.Dimmitt & Owens, 787 F.2d at 1191; Kanzelberger v. Kanzelberger, 782 F.2d 774, 777 (7th Cir. 1986); Sabo v. Standard Oil Co., 295 F.2d 893 (7th Cir. 1961). The Fifth Circuit has held that the principal executive office "is the headquarters of the business--the office at which the major executive decisions affecting the business are made." S. D'Antoni, Inc., 496 F.2d at 1383. The Seventh Circuit reached the same conclusion in Dimmitt & Owens, holding that although the corporation had its major asset (a manufacturing plant) in California , the headquarters in Illinois constituted the principal executive office because the officers of the company, most corporate financial records, and other typical headquarters activities were located in Illinois . 787 F.2d at 1191-92. The test adopted by the Fifth and Seventh Circuits is consistent with the language of §6323 and its legislative history. If Congress had intended to establish corporate residence at its place of incorporation or its registered office, it could easily have done so. See S. D'Antoni, Inc., 496 F.2d at 1383.

Applying that test to the facts of the present case, it is clear that the district court's finding is not "clearly erroneous" and should stand. Despite the transient presence of field offices at construction sites in the several states where Antone operated, the executive decisions were consistently made by Anthony Frank in Pennsylvania . Indeed, at the time the tax lien notices were filed, the South Carolina job site office and the South Carolina office in Frederick Frank's basement were closed. The only remaining office in South Carolina was the incorporating attorney's law office, which served only as a mail drop; no corporate business was transacted there. Except for incorporating in South Carolina , there is little if any evidence in the record that Anthony Frank attempted to establish or maintain South Carolina residency for Antone Construction. The filing of a consolidated federal tax return denoting Antone as a subsidiary of Brimar and giving a Sharon , Pennsylvania address for Antone certainly indicate that Anthony Frank considered the corporation to be effectively based in Pennsylvania .

Brooks argues that applying this kind of test for corporate residence introduces uncertainty into the process of searching for tax liens, and protests that the Pennsylvania residence was not recorded in "public records." The courts cited above did not make a distinction between public and private records. Rather, they looked at various indications of corporate residence to establish which office is "the most readily identifiable" as the principal office. Dimmitt & Owens, 787 F.2d at 1191. Here, all factors point to Pennsylvania except for the incorporation papers. Some public records also point to Pennsylvania ; for example, a Pennsylvania address was given in Antone's South Carolina annual report for the location of Antone's corporate books.

In addition, it is unreasonable for Brooks to protest that he was unfairly surprised by the finding that Antone resided in Pennsylvania . Brooks made loans over a period of several months to Frank, Brimar, and Antone, and secured guarantees by each for the various loans. When the assignment involved here was made, Brooks' lawyer went to Pennsylvania to secure the proper signatures, including a signature to bind Antone. Brooks obviously knew where Antone's "nerve center," or principal corporate executives, were located. In addition, the prudent creditor can require production of tax returns and other relevant financial materials before extending loans; in this case, the tax return would have disclosed Antone's consolidated filing with Brimar and the listing of a Pennsylvania address.

II. The purported settlement of Antone's tax liabilities

The district court properly held that the compromise settlement cannot be enforced against the government despite the superficially apparent acceptance of Frank's offer. Sections 7121 and 7122 of the tax code govern settlement of disputed tax liabilities, and authorize the Secretary of the Treasury or his delegate to enter into written agreements to settle disputes over tax liability and to compromise any civil or criminal case arising under the internal revenue laws. 26 U.S.C.A. §7121 , 7122 (1967 & Supp. 1987). Section 7122 is the exclusive method by which tax cases may be compromised.Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288-89 (1929) (prior version of statute); Shumaker v. Commissioner of Internal Revenue[81-2 USTC ¶9508], 648 F.2d 1198, 1199-1200 (9th Cir. 1981); Country Gas Service, Inc. v. United States[69-1 USTC ¶9178], 405 F.2d 147, 149 (1st Cir. 1969); United States v. Hardy [62-1 USTC ¶9286 ], 299 F.2d 600, 605-06 (4th Cir. 1962); Brast v. Winding Gulf Colliery Co. [38-1 USTC ¶9038 ], 94 F.2d 179, 181 (4th Cir. 1938). See Holland v. Commissioner of Internal Revenue [80-2 USTC ¶9469 ], 622 F.2d 95, 97 (4th Cir. 1980) (no binding agreement where form setting forth tax deficiency not approved by District Director).

The requirements of those statutes and accompanying regulations are strictly construed. Botany Worsted Mills, 278 U.S. at 288-89, cited with approval in Yarborough v. United States [56-1 USTC ¶9295 ], 230 F.2d 56, 62 (4th Cir. 1956). The letter of acceptance given to Frank was signed by the Pittsburgh IRS District Director (actually, stamped with his signature), but the authority to settle disputes involving unpaid liability over $100,000 is granted only to IRS Regional Commissioners and Regional Counsel. Delegation Order 11 (Rev. 13), 1982-1 Cum. Bull. 333. Thus, even if the District Director had signed the letter and intended to accept Frank's offer of compromise, the acceptance would have been ineffective. See, e.g., Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282 (1928) (attempted informal settlement by subordinate officials did not constitute binding agreement); Dorl v. Commissioner of Internal Revenue [74-2 USTC ¶9826], 507 F.2d 406, 407 (2d Cir. 1974) (letter of assurance from revenue officer not authorized to compromise under §7121 does not bind United States); Reimer v. United States [71-1 USTC ¶9355 ], 441 F.2d 1129, 1130 (5th Cir. 1971) (per curiam) (United States not bound by apparent settlement where agent without authority to compromise taxpayer's tax liability and form stated that IRS not waiving right to further assessment);Country Gas Service v. United States 69-1 USTC ¶9178 ], 405 F.2d 147, 149-50 (1st Cir. 1969) (because exclusive means of compromise established by §7122 not used, any arrangement taxpayer made with agent had no legal standing); McGee v. United States [83-1 USTC ¶9245 ], 566 F.Supp. 960 (M.D. Fla. 1982) (government not bound by agreement allowing installment payments where agreement not signed by qualified delegate under §7122 ).

Those cases and others have held that the exclusivity of §7122 bars enforcement of apparent agreements under general concepts of accord and satisfaction. See e.g., Bowling v. United States [75-1 USTC ¶9333 ], 510 F.2d 112, 113 (5th Cir. 1975); Moskowitz v. United States [60-1USTC ¶9204 ], 285 F.2d 451, 453 (Ct. Cl. 1961). Therefore, despite Brooks' arguments to the contrary, the fact that the government kept and applied to claims against Brimer and Anthony Frank the $250,000 tendered with the compromise offer does not create an enforceable settlement.

Even if the purported acceptance letter had been signed by an authorized official, the settlement could have been set aside by the government because of Anthony Frank's attempt to bribe the IRS agent. It is well established that an agreement with the government obtained by fraud cannot be enforced against the government. Pan American Petroleum & Transport Co. v. United States , 273 U.S. 456, 500 (1927); Crocker v. United States , 240 U.S. 74, 80-81 (1916). Brooks urges that Anthony Frank's acquittal on the bribery charge bars the application of the principle to the settlement in question; but it is also well established that because of the different burdens of proof involved, acquittal of a criminal charge is not res judicata in a civil case. United States v. National Association of Real Estate Boards, 339 U.S. 485, 492-94 (1950) (Sherman Act); Helvering v. Mitchell[38-1 USTC ¶9152], 303 U.S. 391, 397 (1938) (income tax). Here, nothing in the record or the briefs indicates that the district court's finding of fraud was clearly erroneous.

We also agree with the district court that Brooks lacks standing to attempt to estop the Government from asserting its tax lien against Antone. It is true that the tax code requires that "[u]pon the rejection of any such offer [made under §7122 ], the Secretary or his delegate shall refund to the maker of such offer the amount thereof." 26 U.S.C.A. §7809 (1967 & Supp. 1987). But Brooks' reliance on the provision is unavailing, because Brooks was not the maker of the offer. SeeRalston Steel Corp. v. United States 65-1 USTC ¶9189 ], 340 F.2d 663, 669-72 (Ct. Cl. 1965), cert. denied, 381 U.S. 950 (1965). Brooks has no standing to challenge transactions to which he is a stranger. The tax code gives Brooks standing to bring a civil action challenging the government's levy on property in which Brooks has a competing property interest, 26 U.S.C.A. §7426(a)(1) (1967 & Supp. 1987); but Brooks may not challenge the underlying tax assessment, which is conclusively presumed to be valid. Id. §7426(c) . Once the compromise transaction was voided by Anthony Frank's actions, the IRS was entitled to treat the $250,000 as any other assets of the delinquent taxpayers in government possession. In the present case, the government found only $50,000 of the fund actually belonged to one of the taxpayers at issue (Brimar), and turned the remainder over to the Gibson Companies.

Similarly, Brooks cannot estop the government from denying the existence of a settlement. As noted above, the exclusivity of §7122 prevents the application of general contract rules to enforce apparent agreements between the IRS and taxpayers. Anthony Frank's fraudulent actions in connection with making the offer of compromise would probably estop him or his estate from making a claim for refund, in any event. SeeCoy v. United States [67-2 USTC ¶9494 ], 377 F.2d 925, 928 (9th Cir. 1967) (compromise money, which was filched from government by taxpayer through misrepresentation of sale price of property subject to tax lien, could be kept by IRS despite rejection of offer). If Brooks were standing in the shoes of Anthony Frank, he could not estop the government because Anthony Frank's attempted fraud vitiated the whole transaction. And Brooks cannot attempt to estop the government on his own behalf, because he did not detrimentally rely on the government's apparent acceptance of Anthony Frank's offer. The loans and security interest under which Brooks claims were transacted in 1978 and 1979; the settlement-related activities occurred in 1983.

The order of the district court is

AFFIRMED.

¹ Another tax lien notice was filed September 18, 1979 , but that lien is not at issue in the case.

² Ultimately, the IRS retained only $50,000 of the proceeds of the check. The Gibson companies, which had been involved in joint ventures with Brimar and had agreed to release the $250,000 from an escrow account in the belief that Frank was properly settling Brimar's tax obligations with the IRS, sued to recover the proceeds. The Third Circuit held that the district court had jurisdiction to determine ownership of the proceeds of a check used as evidence. United States v. Frank, 763 F.2d 551 (3d Cir. 1985). The IRS then settled the dispute, returning $200,000 to the Gibson companies and keeping $50,000 to apply to Brimar's outstanding tax liabilities.

³ The characterization of the mechanic's lien action sometimes appears to depend on the court's view of particular proceedings. Compare Bernhardt v. Brown, 118 N.C. 700, 706, 24 S.E. 527, 528 (1896) ("judgment to enforce a mechanic's lien was a proceeding in rem") with Rutherford v. Ray, 147 N.C. 253, 259, 61 S.E. 57, 59 (1908) ("We do not think that an action to enforce the lien given for 'material furnished' is a proceeding quasi in rem. The debt is the personal liability founded upon contract. The action is to recover judgment for the debt.").

⁴ Most courts permitted the assignment of mechanic's liens, however, under accepted practices of assigning claims. E.g., Davis v. Bilsland, 85 U.S. (18 Wall.) 659, 661 (1873) (statutory mechanic's lien can be enforced by assignee in his own name, under Civil Practice Act of Montana , "which provides that actions shall be prosecuted in the name of the real party in interest . . . . When assigned, the claim really belonged to the plaintiff.").

 

 

[86-1 USTC ¶9326] Dimmitt & Owens Financial, Inc., Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-7), U.S. Court of Appeals, 7th Circuit, 85-1059, 4/9/86, 787 F2d 1186, Affirming District Court, 84-1 USTC ¶9228

[Code Secs. 6321 , 6323 , 6672 , 7402 and 7426 ]

Liens: Validity against third party: Place for filing notice: Principal executive office: Priority: Foreclosure sale: Collection of tax: Additions and penalties treated as tax.--A tax lien was properly filed with the Illinois Secretary of State against a corporation with a principal executive office in Illinois. Therefore, the lien was effective on the forty fifth day after the lien was filed against several hundred thousand dollars worth of accounts receivable collected by a factoring corporation after the effective date of the lien. The district court's disposition of the case was an appealable final order despite the absence of formal dismissals of two bankrupt parties because they ceased to be parties before judgment was rendered. The district court correctly ruled that there was no genuine issue of material fact concerning the location of the taxpayer's principal executive office in Illinois . The factoring corporation's argument that the lien should have been filed at the corporation's principal place of business in California was out of place in the tax lien context. Illinois was the nerve center and principal executive office of the corporation because the president and two executive officers worked at the Illinois facility along with some part-time employees. Furthermore, the corporation's records, minutes, tax address, and address in the factoring agreement were all in Illinois . The purpose of Code Sec. 6323(f) is to fix a place where a lien must be filed to be valid; it is important to have a simple and definite test so that the government knows where to file its liens and prospective lenders know where to look for tax liens against the borrower. The factoring corporation was obligated to search the records in Illinois for tax liens against the taxpayer and was liable for the consequences of foreclosure because of its failure to do so. The factoring corporation was obligated to pay penalties from the accounts receivable subject to the tax lien because penalties are collected in the same manner as taxes and because the lien included both the amount of tax owed and the penalties assessed against the taxpayer.

[Code Sec. 7402 ]

Court of Appeals: Findings made by trial court.--It was permissible for a district court to vacate a default judgment entered against the government for failure to attend a scheduled conference at which the government was supposed to present a judgment order. Because a Washington attorney from the Tax Division who was handling the case had not entered an appearance, a ruling was sent only to a U.S. attorney in Chicago who had entered an appearance. Although the ruling would have informed the attorney from the Tax Division of the scheduled conference, the U.S. attorney did not forward copies of the ruling because he did not forward copies unless expressly required to do so. The attorney for the Tax Division timely filed a motion to set aside the default judgment when the error was discovered a few months later. The district court did not abuse its discretion by forgiving the government's default "merely because the mistake that had led to the default was a particularly stupid one." A considerable injustice would have been committed if the default judgment were allowed to stand, and setting aside the judgment did not burden the district court with additional proceedings because the merits of the lawsuit had already been resolved. The court also did not abuse its discretion in granting the Fed. R. Civ. Proc. 60(b) motion because the party resisting the motion did not make any showing of harm resulting from reliance on the default judgment while it was in effect.

Howard J. DePree, Bates, DePree Bard & Wilson, 150 S. Wacker Drive , Chicago , Ill. 60606 , for plaintiff-appellant. Murray S. Horwitz, Assistant Attorney General, Department of Justice, Washington , D.C. 20530 , for defendant-appellee.

Before POSNER and FLAUM, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

POSNER, Circuit Judge:

This case involves the validity of a federal tax lien, and a jurisdictional and a procedural question. The case grows out of assessments that the Internal Revenue Service made in April 1979 against Unique Industries, Inc., for unpaid taxes. In July the Service filed a federal tax lien with the Recorder of Deeds of DuPage County, Illinois (and also, a few days later, in California but arguably in the wrong office--a point of some significance, as will appear). One month earlier Dimmitt & Owens Financial, Inc., a factor, had begun buying accounts receivable from Unique, obtaining a security interest which it recorded that month in Illinois by filing a financing statement with the Secretary of State of Illinois, and in September in California by filing a similar statement with the secretary of that state. The federal tax lien (provided it was filed in the right place) came into effect on the forty-fifth day after it was filed, 26 U.S.C. §6323(c)(2)(A) , but Dimmitt & Owens, unaware of the lien, kept on factoring Unique's accounts. The Internal Revenue Service served it with a notice of levy on several hundred thousand dollars worth of accounts receivable that Dimmitt & Owens collected after the (alleged) effective date of the tax lien. Dimmitt & Owens brought suit against the United States under 26 U.S.C. §7426 to enjoin the alleged wrongful levy. The government counterclaimed, seeking a judgment foreclosing its lien against the proceeds of the accounts receivable. The plaintiff joined as additional defendants Unique, a subsidiary of Unique, and Unique's president, Dudley Olsen. The claim against Unique and its subsidiary was for default on the factoring agreement; against Olsen it was for fraudulent concealment of the liens. The basis of federal jurisdiction against these additional defendants was diversity of citizenship. None of these defendants appeared, and a default order was entered against all of them, and later a default judgment against Olsen.

The plaintiff did not fare as well against the government. The basis of its claim was that the government had filed the tax lien in the wrong place. The lien must be filed at "the place at which the principal executive office" of the taxpaying corporation is located, 26 U.S.C. §6323(f)(2) , and Dimmitt & Owens contended that Unique's principal executive office had been in California rather than Illinois, and that although the Internal Revenue Service had filed in California too, it had filed in the wrong office there. The district judge held that Illinois was the right place to file, and (since there was no question that, if so, the government had filed in the right office in Illinois ) granted the government's motion for summary judgment. [84-1 USTC ¶9228 ] 589 F. Supp. 14 (N.D. Ill. 1983). The judge invited the government to present a judgment order for his signature. The government failed to appear at the appointed time and the judge entered a default judgment for Dimmitt & Owens. Later however he granted the government's motion under Fed. R. Civ. P. 60(b) to vacate that judgment, and entered a new judgment, dismissing the complaint and ordering Dimmitt & Owens to pay the government some $300,000 in satisfaction of the government's lien. Dimmitt & Owens appeals.

The initial question (characteristically not addressed by either party) is whether the judgment is final within the meaning of 28 U.S.C. §1291 , and hence appealable to us. No judgment was ever entered against two of the three private defendants, and no order was entered under Rule 54(b) of the Federal Rules of Civil Procedure that would have allowed the judgment that the district court had entered in favor of the United States against Dimmitt & Owens to be appealed without waiting for the entire litigation to be concluded. A Rule 54(b) order would have been proper because the judgment against Dimmitt & Owens wound up the entire dispute between two of the parties (the government and Dimmitt & Owens). Walker v. Maccabees Mutual Life Ins. Co., 753 F.2d 599, 601 (7th Cir. 1985). And, if the other parties remained in the lawsuit, such an order would have been essential to the appealability of the judgment against Dimmitt & Owens--provided the suit that Dimmitt & Owens had brought was really one lawsuit, and not two (one against the United States, and the other against the private defendants). But it was one suit. Although Dimmitt & Owens could have brought separate lawsuits against the United States on the one hand and the private defendants on the other, the joinder of all the defendants in one suit was proper. See Fed. R. Civ. P. 20(a).

Since no Rule 54(b) order was entered, it becomes important whether any of the private defendants are still parties to this lawsuit. A default order was entered against them, it is true, but a default order against a defendant is not a final judgment that concludes the lawsuit against that defendant, even on the matters covered by the order. 10 Wright, Miller & Kane, Federal Practice and Procedure §2692, at pp. 465-66 (2d ed. 1983). Only against Olsen was a default judgment entered. A default order is an interim ruling which merely establishes that the defendant is liable to the plaintiff. It does not determine the extent of the liability. A plaintiff in whose favor a default order is entered must still establish how much the defendant owes him, and the defendant must be ordered to pay the amount; and these steps were not taken here against Unique and its subsidiary. An order that establishes liability but leaves damages still to be fixed is a classic example of a nonfinal, nonappealable order. See, e.g., Liberty Mutual Ins. Co. v. Wetzel, 424 U.S. 737, 744 (1976); Parks v. Pavkovic, 753 F.2d 1397, 1401 (7th Cir. 1985).

However, inquiry at argument disclosed that Unique and its subsidiary are in fact no longer parties to this lawsuit. They are in bankruptcy and any effort by Dimmitt & Owens to recoup the cost of this judgment from them will be pursued if at all in the bankruptcy court. Although they have never been formally dismissed in the district court we conclude that they ceased to be parties there before the judgment for the United States was entered, so nothing of the lawsuit was left for later decision by the district court. But there should have been an order dismissing those parties. We implore the bench and bar of this circuit to tie up all jurisdictional loose ends in the district court and not allow unnecessary, and occasionally fatal, jurisdictional uncertainties to dog the appeal. See, e.g., Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280, 1282-83 (7th Cir. 1986); Kanzelberger v. Kanzelberger, 782 F.2d 774 (7th Cir. 1986); Tenneco Inc. v. Saxony Bar & Tube, Inc., 776 F.2d 1375 (7th Cir. 1985).

The principal issues on the merits are whether the district judge was correct in ruling that there was no genuine issue of material fact concerning the location of Unique's "principal executive office," and whether he acted permissibly in vacating the default judgment that he had entered against the government after ruling in the government's favor. On the first issue, Dimmitt & Owens contends that Unique's principal place of business was in California rather than Illinois . It supports this contention with cases construing this term as it appears in 28 U.S.C. §1332(c), which defines the state of citizenship of a corporation for purposes of the diversity jurisdiction. This procedure, however, uncritically assumes that "principal executive office" in 26 U.S.C. §6323(f)(2) means the same thing as "principal place of business" in 28 U.S.C. §1332(c), and it need not.

The statutes have different purposes, and statutory language must always be interpreted in light of statutory purpose. The purpose of section 1332(c) in making a corporation a citizen of the state where it has its principal place of business as well as the state where it is incorporated is to exclude from the federal diversity jurisdiction cases between a citizen of a state and a corporation whose center of gravity is in the same state even though it may be incorporated elsewhere; for such a corporation should be sufficiently "local"--sufficiently identified with the state--to avoid the obloquy that may attach to a "foreign" corporation in litigation with a local resident and that provides the modern rationale of the diversity jurisdiction. The words "principal place of business" are to be construed with this purpose in mind.

The purpose of the corresponding words in section 6323(f)(2) is different. It is to fix the place where a tax lien must be filed in order to be valid. Here the most important thing is to have a simple and definite test so that the government knows where to file its liens and prospective lenders (such as Dimmitt & Owens) know where to look for tax liens against the borrower. There are thousands of counties in the United States . It would be preposterous to have a system under which either the government had to file its liens in every county or prospective lenders had to search for liens in every county. It hardly matters whether the place in which to look for liens is also the corporation's center of gravity, the ascertainment of which might require counting employees and toting up assets rather than just locating corporate headquarters. All that matters for purposes of fixing the location for filing and searching for liens is that the place chosen be the simple, obvious, and natural place to file and look for liens. As the Senate report on the bill that became section 6323(f)(2) explained, "principal executive office" was chosen because "this is the most readily identifiable of all the offices that a business may maintain, appearing, as it does, on the annual reports filed with most States and on similar returns, and avoids the uncertainty of determining which of the many business offices that a taxpayer may maintain is its principal one." See S. Rep. No. 1708, 89th Cong., 2d Sess. 11 (1966). The term "principal executive office" should therefore be interpreted in light of the objective of making the identification of the place for filing and searching for liens as simple and certain as possible.

Since certainty of jurisdiction is a desideratum too--the parties ought to know definitely what court they belong in, and not face the prospect that their litigation may be set at naught because they made a wrong guess about jurisdiction--this circuit has long used a simple "nerve center" test for principal place of business. See, e.g., Sabo v. Standard Oil Co., 295 F.2d 893 (7th Cir. 1961); Kanzelberger v. Kanzelberger, supra, 782 F.2d at 777. In Sabo we used the term "executive offices" as a synonym for nerve center, see 295 F.2d at 894, and that led us in McKee-Berger-Mansueto, Inc. v. Board of Education, 691 F.2d 828, 833 n. 4 (7th Cir. 1982), to equate the test for principal place of business in section 1332(c) with that for principal executive office in section 6323(f)(2) , although, so far as appears, in neither Sabo nor McKee-Berger-Mansueto was there a suggestion that the real nerve center of the company might be elsewhere than at its executive offices. The result of the footnote in McKee-Berger-Mansueto is that, in this circuit, principal place of business and principal executive office mean the same thing, though adventitiously. Dimmitt & Owens overlooks the essential qualification: the cases it has cited to us on principal place of business are from circuits that reject the nerve center test in favor of a broader test which requires consideration of such things as where the assets and employees of the corporation are concentrated.

Whatever the merits of the broader test in helping to ascertain a corporation's state of citizenship for purposes of diversity jurisdiction, we think it quite out of place in the tax lien context, where certainty plays an even more central role and where the policy of confining diversity jurisdiction to cases where there is a real and not merely theoretical danger of prejudice to an out-of-state firm is irrelevant. For purposes of section 6323(f)(2) it is best to ask simply, where was the obvious place for the Internal Revenue Service to file its liens against Unique and for Dimmitt & Owens to look for possible liens against Unique? The answer is Illinois . This is not because Unique's articles of incorporation list its address as 350 Randy Road , Carol Stream, DuPage County , Illinois . That is merely its registered address, which every corporation incorporated in Illinois must have. It need not be its principal executive office; it could be a mail drop or an attorney's office. To deem it the principal executive office would be to rewrite section 6323(f)(2) . S. D'Antoni, Inc. v. Great Atlantic & Pac. Tea Co., 496 F.2d 1378, 1382-83 (5th Cir. 1974). The following facts, however, taken together, show that this address really is (or rather was) that of Unique's principal executive office. Unique's president, Olsen, and the two other officers of the company, who were his relatives, had offices at this address, along with three part-time clerical employees. Most corporate financial records and the corporation's minute book were kept there. This was the only address listed on the corporation's stationery. The factoring agreement between Unique and Dimmitt & Owens lists Carol Stream as Unique's address, as do Dimmitt & Owens' own internal records. A post office box in DuPage County was listed on Unique's federal tax returns. DuPage County was both the obvious place for Dimmitt & Owens to search for tax liens against Unique and for the Internal Revenue Service to file such liens.

Whether in some more profound, more ultimate sense it was Unique's principal executive office is unanswerable. Unique's principal asset was a plant in California that manufactured plastic binders. Although the office in Ilinois was spacious (7,500 square feet), its total payroll expense was only a small fraction (less than 3 percent) of the company's total payroll, the rest being incurred in California . Olsen, the presiding genius of the corporation, spent most of each week in California , returning to Illinois (where he and his family maintained their home) on weekends. During the week he slept in an apartment at the plant. Hence, Dimmitt & Owens argues, most of the direction of the company was supplied in California . Indeed, it argues that Unique's principal executive office was in Olsen's head, and since the head spent more time in California than in Illinois , California is where the company's principal executive office was. But this ingenious reasoning overlooks the purpose of section 6323(f)(2) , which is the only sure guide to the meaning of "principal executive office." Neither the government nor lending institutions can be charged with knowledge of the details of a businessman's behavior. The statute asks for the location of the office, not of an officer. To all outward appearance, Unique, like many other companies, had its plant in one state and its headquarters in another. And outward appearances are what count in a statute designed to fix the simple, the natural, the obvious place for filing and searching for liens. That was Illinois in this case. Dimmitt & Owens failed to search for liens in Illinois and must pay the price. Resolution of the issue on summary judgment was proper. The facts are uncontested; only the characterization is in issue.

The next question relates to the default judgment against the government. It came about in this way. On July 7, 1983 , the district judge made his ruling in the government's favor and scheduled a conference for October 11 at which the government was to present a judgment order for his signature. Because the attorney from the Tax Division of the Justice Department in Washington who was handling the case had not entered an appearance, the judge's ruling was sent only to the assistant U.S. attorney in Chicago who had filed an appearance. This lawyer, in an impressive demonstration of bureaucratic rigidity, did not forward the ruling to the Tax Division, because he does not forward copies of decisions to it unless expressly requested to do so, which he had not been in this case. On February 1, 1984 , the Tax Division's attorney on the case called the clerk of the court to find out about its status, and only then discovered that on October 11 the district judge had granted Dimmitt & Owens' motion for a default judgment when no one from the government had shown up at the conference. The next day that attorney submitted the Rule 60(b) motion to set aside the judgment.

Rule 60(b)(1) empowers the district judge to set aside a judgment (including a default judgment, see Rule 55(c)) within one year of its entry, because of mistake or inadvertence. In almost every reported case involving a motion to set aside a judgment, the party against whom the judgment was entered was complaining of the judge's refusal to set it aside. The reason is that where the motion is granted, usually the order is not a final order but merely a preliminary to a trial of the case, and hence it is not reviewable till the trial is concluded. By that time, however, the question whether the default judgment should have been left alone is pretty academic; either the party who got that judgment has won, or, if he has lost, this shows that the default judgment really was unjust--a full trial has proved it so. See 10 Wright, Miller & Kane, supra, §2693, at pp. 476-77.

In the more familiar battleground of appeals from refusals to set aside default judgments, this court has moved away from the traditional position (see id., §2693) that such judgments are strongly disfavored; we are increasingly reluctant to reverse refusals to set them aside. See, e.g., Tolliver v. Northrop Corp., No. 85-1131 (7th Cir. March 14, 1986); C.K.S. Engineers, Inc. v. White Mountain Gypsum Co., 726 F.2d 1202, 1205-06 (7th Cir. 1984); United States v. DeFrantz, 708 F.2d 310 (7th Cir. 1983); Breuer Electric Mfg. Co. v. Toronado Systems of America, Inc., 687 F.2d 182 (7th Cir. 1982). This tendency reflects the overworked condition of the federal courts, including this court and the district courts of this circuit, a condition that naturally makes us reluctant to insist on the resurrection of deceased lawsuits. But the first and strongest line of defense against abusing the broad rights of access that modern claimants have to the federal district courts lies with those courts, so when a district judge decides to overlook a default and restore the case to his docket we are disinclined to interfere. See Duling v. Markun, 231 F.2d 833, 836 (7th Cir. 1956). Moreover, the universally accepted rule that an order denying a motion to set aside a default judgment will be reversed only if the district judge can be said to have abused his discretion, see, e.g., Tolliver v. Northrop Corp., supra, slip op. at 3-4; Bermudez v. Reid, 720 F.2d 748 (2d Cir. 1983), seems transferable intact to the case where the judge grants the motion. In either case the judge is weighing imponderables--the burden on his docket (which is to say that inconvenience to other litigants), the disturbance of expectations legitimately created by the default judgment, and the inroads on the general and essential principle that litigation must end, on the one hand, and on the other hand the injustice of allowing the default judgment to stand, which in turn is a function of both the merits of the movant's substantive claims and the strength of his excuse for committing the default. With the standard of decision so multifaceted, the appellate court's ability to fault the district judge's application of the standard is quite limited, and the scope of effective judicial review is therefore slight.

The judge in this case did not abuse his discretion, which is to say did not act unreasonably, in deciding to forgive the government's default. Since he had already ruled in the government's favor, it was clear that both a considerable injustice would be committed if the default judgment against the government were allowed to stand and that setting aside the judgment would not burden the district court with a trial or other extended proceedings, the merits of the lawsuit having already been resolved. In these circumstances and in the absence of any showing that Dimmitt & Owens was hurt because it relied on the default judgment during the three and a half months in which it was in effect before the motion to set it aside was filed, the district judge did not abuse his judgment in granting the motion, merely because the mistake that had led to the default judgment was a particularly stupid one. When we consider that innocent taxpayers (as we may, with some poetic license, describe the beneficaries of successful efforts by the Internal Revenue Service to enforce its rights) will be out some $300,000 if the default judgment is enforced, that mistakes in communication even within the same department of the vast federal bureaucracy have been made inevitable by the modern growth of government, and that the government was made to compensate Dimmitt & Owens for the legal fees that the latter incurred in fighting to hold on to the default judgment, we cannot say that the district judge did the wrong thing in setting aside the judgment. Of course an argument can be made that taxpayers and everyone else will be better off if the government learns to avoid these mistakes and that enforcing the default judgment will help it to do so more than our criticisms or the district judge's forcing it to pay the modest attorney's fees (less than $4,000) that Dimmitt & Owens incurred in resisting the Rule 60(b) motion. But we do not conceive ourselves to have the authority to insist on so draconian a sanction. Rule 60(b) gives the district judge a power of lenity that he did not abuse in this case.

We need not decide whether the default judgment itself was invalid because of Fed. R. Civ. P. 55(e), which provides that no default judgment shall be entered against the United States "unless the claimant establishes his claim or right to relief by evidence satisfactory to the court," which Dimmitt & Owens manifestly failed to do, the court having in fact ruled in the government's favor on the merits of the suit. See 10 Wright, Miller & Kane, supra, §2702 . The problem is that although in form a suit by Dimmitt & Owens against the United States , in substance the suit was, or at least became, a suit by the United States to foreclose its tax lien. That must be why, when the district judge entered a judgment of default, it was a judgment dismissing the case rather than awarding the injunction that Dimmitt & Owens had sought against the levy. The reference in Rule 55(e) to the claimant's "claim or right to relief" suggests that the rule may be limited to cases where the default judgment is in favor of a claimant against the government, and thus may not cover a case where the government is the plaintiff. However, in United States v. Geisler, 174 F.2d 992, 999 (7th Cir. 1949), this court assumed that the rule does apply in such a case, and we have found a similar assumption expressed in dicta in two cases from other circuits. See United States v. Balanced Financial Management, Inc. [85-2 USTC ¶9584 ], 769 F.2d 1440, 1450 (10th Cir. 1985); United States v. Sumitomo Marine & Fire Ins. Co., 617 F.2d 1365, 1370 (9th Cir. 1980). But we need not determine in this case the scope of Rule 55(e). The judge did not purport to rely on Rule 55(e), and Rules 55(c) and 60(b)(1) gave him adequate authority to set aside the default judgment.

The other issues raised by the appeal merit only brief discussion. Dimmitt & Owens contends that it should not be liable for tax penalties, as well as unpaid taxes, assessed against Unique. But 26 U.S.C. §6662(a) provides that additions to tax, specifically including tax penalties of the type assessed against Unique, shall be collected in the same manner as taxes, while section 6321 provide that the amount of any tax lien shall include not only the unpaid tax but also assessable penalties. Finally, the evidence on which the amount of the judgment was computed was sufficient.

The judgment for the government is

AFFIRMED.

 

 

[81-1 USTC ¶9472]College Park Towers, Limited Partnership v. Antibodies, Inc. and United States of America , Intervenor

U. S. District Court, Dist. Md. , Civil No. T-80-124, 5/7/81

[Code Sec. 6323]

Lien: Validity: Place for filing notice: Corporate personal property: State law: Principal executive office.--The government's lien for unpaid federal taxes was properly filed in Chester County, Pennsylvania pursuant to state law and the government was entitled to priority with respect to the net proceeds of a sheriff's sale of the taxpayer-corporation's personal property. Chester County was the taxpayer's residence because that was determined to be the location of its principal executive office, and the government's lien did not have to be filed in another county where the debtor maintained a plant and where the creditor had obtained its judgment.

Christopher Sanger, 7315 Wisconsin Avenue , Bethesda , Maryland 20014 , for College Park Towers . Russell T. Baker, Jr., Untied States Attorney, John F. Hyland, Jr., Assistant United States Attorney, Baltimore, Maryland 21201, Garland C. Tanks, Department of Justice, Washington, D. C. 20530, for intervenor, Joseph Pickus, 1316 Munsey Building, Baltimore, Maryland 210202, for defendant.

THOMSEN, Senior Judge:

The issue in this case, which has been submitted to the court without a jury, is whether the claim of College Park Towers Limited Partnership, plaintiff herein, or the tax claim of the United States, the intervenor, is entitled to priority with respect to the $2,405 net proceeds of a sheriff's sale of personal property of Antibodies, Inc. The United States originally sought summary judgment, but when it appeared that some material facts were disputed the parties stipulated:

1. This case is submitted to the Court for a fuling on the merits, based upon the written record herein, to wit, the pleadings, exhibits, affidavits and memoranda already filed in this action.

2. All facts are deemed to be in controversy in this case except as may otherwise appear from the record.

3. The court may give whatever weight it deems appropriate to any facts or matters appearing in the record, may disregard or disbelieve any facts or matters appearing in the record, and may draw from the facts or matters appearing in the record any reasonable inferences or conclusions as it deems appropriate.

Pursuant to a fourth paragraph the parties have filed supplemental legal memoranda in support of their respect positions.

The case turns on the question whether the government's lien for unpaid federal taxes, which was filed in Chester County, Pennsylvania, on January 5, 1979 (before plaintiff became a judgment lien creditor of Antibodies, Inc., on March 15, 1979), should have been filed in Prince George's County, Maryland, where Antibodies, Inc., maintained a place of business in a building owned by plaintiff, and where plaintiff obtained its judgment against Antibodies, Inc. The government contends that the tax lien was properly filed in Chester County , Pennsylvania , because, it argues, that is where the principal executive office of the business was located. Upon consideration of all the facts in the record, the court finds and concludes that the principal executive office of Antibodies, Inc., was located in Chester County , Pennsylvania , and that the government's lien was duly filed therein.

The controlling statute is 26 U. S. C. A. 6323. The dispute herein deals with the place of filing the government's notice of lien, provided for in §6323(f), which directs:

(f) Place for Filing Notice; form--

(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

(A) Under State laws.--

. . .

(ii) Personal property.--In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated, or

. . .

(2) Situs of Property subject to lien. For purposes of paragraphs (1) and (4), property shall be deemed to be situated--

. . .

(B) Personal property.--In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, and the residence of a taxpayer whose residence is without the United States shall be deemed to be in the District of Columbia.

The applicable Pennsylvania statute is Title 74, Pa. Cons. Stat., §156-1, set out in the margin. ¹

The Senate Report on the proposed §6323(f) stated that:

Under the amendment, the residence of a corporation or a partnership is deemed to be the place at which its principal executive office is located. This is the most readily identifiable of all the offices that a business may maintain, appearing, as it does, on the annual reports filed with most States and on similar returns, and avoids the uncertainty of determining which of the many business offices that a taxpayer may maintain is its principal one.

S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), 1966 U. S. Code & Admin. News, pp. 3722, 3732.

The statute and the Senate Report were discussed at length in D'Antoni, Inc. v. The Great A & P Tea Co., Inc. [74-2 USTC ¶9552], 496 F. 2d 1378 (5 Cir. 1974). The court stated that the "natural import of the statutory language is the headquarters of the business--the office at which the major executive decisions affecting the business are made." It so held.

To the same effect is the decision of the U. S. District Court, District of Idaho, In the matter of J. E. Hall Contractors, Inc., 73-1 USTC ¶9375, at p. 80,874.

Based on the law and the facts stated above, the court concludes that the notice of the tax lien was property filed in Chester County , Pennsylvania , before plaintiff became a judgment lien creditor.

Judgment will therefore be entered herein in favor of the government.

¹ Sec. 156-1. United States tax liens; filing notices and certificates.

Notices of liens for taxes payable to the United States of America, and certificates releasing such liens and certificates discharging specific property from such liens, shall be filed by the district director of internal revenue in the office of the prothonotary of the county or counties in this State within which the property subject to such lien is situated in the case of real property, and within which the domicile of the taxpayer named in the notice of such lien is located in the case of personal property. If, after the date of this act, an amendment of the provisions of the Internal Revenue Code pursuant to which this act is adopted affects the determination of the situs of real property or personal property for the purpose of filing Federal Tax liens, the county or counties in whose prothonotary's offices such notices and certificates shall thereafter be filed shall be determined by the residence of the taxpayer or such other location to which the Internal Revenue Code refers for such determination in the case of real property and personal property respectively.

 

 

[77-2 USTC ¶9611]Jack Harrison and Kendall Kiely, d/b/a Harrison Kiely Insurance Agency, Plaintiffs v. Harold Cox Concrete Construction Company, Inc., et al., Defendants

U. S. District Court, West. Dist. Ky. at Louisville , No. C 76-0011 L(A), 440 FSupp 859, 8/16/77

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

Liens for taxes: Notice: Filing under state laws.--The government's tax lien was properly filed in the office of the county clerk according to Kentucky state law so it had priority over the lien of the judgment creditors, which was later in time. The judgment creditors' claim that the federal lien was improperly filed was unsupported so it could not defeat the lien which was supported by an affidavit stating that the lien was properly filed.

[Code Sec. 6672--result unchanged under '76 Tax Reform Act]

Penalties, civil: Failure to collect and pay over taxes: Responsible person.--The 100% penalty assessed against the taxpayer for unpaid federal withholding taxes was upheld where the taxpayer failed to respond to the government's motion for summary judgment.

Dennis Kurtz, 306 Kentucky Home Life Building, Louisville, Ky. 40202, Walter J. Swyers, Jr., Suite 400, 100 North Sixth Street, Louisville, Ky. 40202, for plaintiffs. George J. Long, United States Attorney, William F. Trusty, Assistant United States Attorney, Louisville, Ky. 40202, for defendants.

Memorandum Opinion

ALLEN, District Judge:

This action was originally brought by the plaintiffs, Jack Harrison and Kendall Kiely, doing business as Harrison-Kiely Insurance Agency (hereinafter, Harrison-Kiely), against the Harold Cox Concrete Construction Company, Inc. (hereinafter, Harold Cox) on January 10, 1975 , in Jefferson County Circuit Court to recover an unpaid debt.

On April 3, 1975 , the plaintiffs were granted a summary judgment in the amount of $5,771.79 against Harold Cox by the Circuit Court, and pursuant to that judgment the Sheriff levied upon personal property allegedly belonging to Harold Cox on June 9, 1975 . Subsequently, the property was sold for $3,000.00 with $2,056.74 remaining after costs. That sum is being held by the Receiver of the Jefferson County Circuit Court.

On February 17, 1975 , the United States made an assessment against Harold Cox in the amount of $5,658.68, plus interest, for unpaid federal withholding taxes. Additional assessments were made on March 24 and April 28, 1975, against Harold Cox for a total amount due, with penalties and interest, of $16,354.76.

The United States was granted leave by the Circuit Court to intervene as a party-defendant, pursuant to 26 U. S. C. Sec. 7424, on December 8, 1975, in order to assert its right to the fund held by the Receiver. This cause was removed to federal court upon motion of the United States , and all further proceedings in the Jefferson Circuit Court with regard thereto were stayed by our order, filed February 10, 1976.

The parties are presently before the Court upon the United States ' motion for summary judgment as against Harrison-Kiely and Harold Cox.

The issue presented by the Government's motion against Harrison-Kiely is whether the federal tax lien has priority over the plaintiffs' lien. In this matter, the Court is governed by 26 U. S. C. Sec. 6323, which states, insofar as pertinent, as follows:

(a) The lien imposed by section 6321 (for unpaid taxes) shall not be valid as against any . . . judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate . . .

"(f)(1) The notice referred to in subsection (a) shall be filed--

. . . (A)(ii) In the case of personal property, whether tangible or intangible, in one office within the State (or county or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; or

(B) In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A);".

The Kentucky statute on filing federal tax liens is K. R. S. 382.480, which provides:

"(1) Notices of tax liens payable to the United States and certificates discharging such liens shall be filed by the Collector of Internal Revenue, in duplicate, in the office of the county clerk of each county within which the property subject to the lien is located."

According to an affidavit submitted by the District Director of Internal Revenue for the District of Louisville, Kentucky, and the record of this case in the circuit court, a Notice of Federal Tax Lien against Harold Cox was filed in the office of the Jefferson County Clerk on March 13, 1975, for the assessment made February 17, 1975.

There is no dispute that the personal property in question and the defendant company were located in Jefferson County at all relevant times. However, the plaintiffs claim that K. R. S. 382.480 applies to real property only, and, therefore, the federal tax lien should have been filed with the Clerk of the United States District Court for the Western District of Kentucky. We do not agree.

First, while it is true that most of K. R. S. Chapter 382, "Conveyances and Encumbrances," pertains to real property only, some sections do specifically include personal property, to wit: K. R. S. 382.090, 382.200 (2), 382.335(1), 382.340 and 382.370. Moreover, the provisions of K. R. S. Chapter 382 predominately deal with real property only because many sections covering encumbrances on personalty were repealed, as conlflicting, when the Uniform Commercial Code was adopted in Kentucky . See 1960 Kentucky Acts, Chapter 250 (H. B. 466), Section 5, repealing sections K. R. S. 382.390, 382.400, 382.410, 382.420, 382.600, 382.610, 382.620, 382,630, 382.640, 382.650, 382.660, and 382.730. Thus, we see no reason to interpret "property" in K. R. S. 382.480 as restricted only to real property. Inasmuch as the federal tax lien was filed prior to the time of the plaintiffs' judgment against Harold Cox, the United States has priority to the fund in question.

The plaintiffs also contend that there is a question of fact whether the federal tax lien was correctly filed, alleging that it was filed in the real estate section of the County Clerk's Office and did not identify the personal property, and a question of law and fact as to whether their lien relates back to January 1975, when this suit was instituted.

A bare allegation that the federal tax lien was not properly filed, however, cannot defeat the Government's motion since it has been supported by an affidavit stating, in effect, that a lieu was properly filed for the personal property in question. See Federal Rules of Civil Procedure 56(e). Further, the Court holds that, as a matter of law, the Harrison-Kiely lien does not relate back to the institution of this suit, for purposes of determining its status with relation to the federal tax lien, because, under the clear meaning of 26 U. S. C. Sec. 6323, the plaintiffs must have already become a judgment lien creditor, see K. R. S. 355.9-301(3), where "lien creditor" is defined, prior to the filing of the tax lien in order to have priority.

There was some indication in the parties' responses to the petition for removal that there was a motion pending in the circuit court concerning the rights of Edward L. Cox to the fund in question. However, a review of the record reveals that the motion was withdrawn. Therefore, this matter shall be remanded to the circuit court for payment to the United States Government of the $2,056.74 being held by the Receiver.

Finally, with regard to the Government's motion for summary judgment as against Harold Cox, the defendant Harold Cox having failed to respond thereto, the Government's motion shall be granted, consistent with our local United States District Court Rule 7(a); and a judgment against Harold Cox in the amount of $16,354.76, plus interest according to law, shall be entered.

A judgment in conformity herewith has this day been filed.

Summary Judgment

This action having come before the Court upon the United States ' motion for summary judgment, the plaintiffs having responded thereto, and the Court being fully advised,

NOW, THEREFORE, IT IS ORDERED AND ADJUDGED that the United States' motion for summary judgment against the plaintiffs be and it is hereby granted, and that the federal tax lien of the United States, filed March 13, 1975 in the office of the County Clerk for Jefferson County, Kentucky, for the February 17, 1975 assessment against Harold Cox Concrete Construction Company, Inc., in the amount of $5,658.68, has priority and is superior to the lien acquired by the plaintiffs as a result of their April 3, 1975 judgment against said Harold Cox Concrete Construction Company, Inc.,

IT IS FURTHER ORDERED AND ADJUDGED that the United States' motion for summary judgment against the defendant be and it is hereby granted and that the defendant Harold Cox Concrete Construction Company, Inc. is liable to the United States for unpaid federal withholding taxes, penalties, interest and fees in the amount of $16,354.76, plus interest at the lawful rate.

IT IS FURTHER ORDERED AND ADJUDGED that this action be and it is hereby remanded to the Jefferson Circuit Court, Common Pleas Branch, Seventh Division, Kentucky, for payment by the Receiver of the court to the United States of the $2,056.74 in her possession.

This is a final and appealable judgment, and there is no just cause for delay.

 

 

[74-2 USTC ¶9552]S. D'Antoni, Inc., Plaintiff v. The Great Atlantic and Pacific Tea Company, Inc., Defendant United States of America, Intervenor-Appellant v. Fruehauf Trailer Division, et al., Creditors-Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 73-2357, 496 F2d 1378, 7/5/74

[Code Sec. 6323]

Lien for taxes: Notice: Where filed.--The government properly filed notices of Federal tax liens in the office of the parish recorder of the parish (Louisiana) in which the taxpayer-business maintained its executive office, or its principal place of business. The taxpayer-corporation conducted all of its business in Jefferson Parish, but, in its incorporation papers, it had designated Orleans Parish as the "registered office" address.

Harvey J. Lewis, 1718 N. B. C. Bldg., New Orleans, La., for S. D'Antoni, Inc., plaintiff. Carl J. Schumacher, Jr., 1800 N. B. C. Bldg., New Orleans, La., for Great Atlantic & Pac. Tea Co., Inc., defendant. Gerald J. Gallinghouse, United States Attorney, John R. Schupp, Assistant United States Attorney, New Orleans, La., Scott P. Crampton, Assistant Attorney General, Meyer Rothwacks, William S. Estabrock, Jane M. Edmisten, Elmer J. Kelsey, Department of Justice, Washington, D. C. 20530, for United States, intervenor-appellant. Charles L. Chassaignac, Peter A. Feringa, Jr., 1500 Nat'l Bank of Commerce Bldg., New Orleans, La., Frank J. Stich, Jr., 1010 Common St., New Orleans, La., William W. Messersmith, III, One Shell Sq., New Orleans, La., Joseph E. Friend, 1335 Nat'l Bank of Commerce Bldg., New Orleans, La., George V. Baus, 847 Nat'l Bank of Commerce Bldg., New Orleans, La., Sam Monk Zelden, 1051 Nat'l Bank of Commerce Bldg., New Orleans, La., for Fruehauf Trailer Div., et al., creditors-appellees.

Before RIVES, GEWIN and RONEY, Circuit Judges.

RONEY, Circuit Judge:

In this contest between judgment lien creditors and a United States tax lien, we are called upon to determine the correct place for filing a notice of tax lien in Louisiana to ensure a priority claim as to the personal property of a corporate tax debtor over the corporation's judgment lien creditors. The controlling statute, 26 U. S. C. A. §6323, requires such tax notice to be filed where "the principal executive office of the business" is located. In this case, the Government filed in the Louisiana parish in which the only business office of the debtor was located. The District Court held that the Government's notice should have been filed in the parish containing the debtor corporation's "registered office"--the address designated in its incorporation papers. We reverse.

[Priority of Tax Lien Claimed]

The personalty at stake in this case is the money paid into the registry of the District Court by the Great Atlantic & Pacific Tea Company, Inc. in settlement of a breach of contract action brought by S. D'Antoni, Inc., the debtor corporation. Before suit was filed, and before the other creditors involved in this case reduced their claims against D'Antoni to judgment, the United States recorded a series of notices of federal tax liens in the mortgage records of the office of the Clerk of Court of Jefferson Parish. Subsequently, the judgment creditors caused D'Antoni's interest in the suit against A & P to be seized by writs of fieri facias. The United States intervened, claiming priority based on the notices recorded in Jefferson Parish. Fruehauf Trailer Division, Fruehauf Corporation (representing the other judgment lien creditors under an agreement to prorate the fund should Fruehauf prevail) argued that the Government had filed in the wrong place and should have filed the notices either in Orleans Parish or with the clerk of the federal district court.

The general tax lien of the Government, which arises as soon as taxes are assessed and which attaches to all property and rights to property of the tax debtor, prevails against all other unperfected liens with a few statutory exceptions, including judgment lien creditors. Whenever the lien of the United States competes with that of such a protected party, it must be determined whether the United States filed notice of its lien in the proper place prior to the time the competing lienor established his status as a judgment lien creditor. If the tax lien notices, filed before Fruehauf et al. established their status as judgment lien creditors, were filed in the appropriate office, the Government is entitled to priority under the first in time, first in right doctrine. See United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963); United States v. New Britain , 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954). If filed in the incorrect place, the notices are without effect and Fruehauf obtains priority.

[Validity of Lien]

Under section 6323(a), a federal tax lien is not valid as against a judgment lien creditor until notice thereof has been filed in accordance with the requirements of subsection (f). ¹ Subsection (f) requires notice of a tax lien against personal property to be filed in the one office designated by state law for the governmental subdivision in which the personalty is situated. Personal property is deemed to be situated at the residence of the delinquent taxpayer and the residence of a corporate taxpayer is deemed to be "the place at which the principal executive office of the business is located." 26 U. S. C. A. §6323(f)(2). If a state has not designated an appropriate office, the notice is to be filed with the clerk of the federal district court for the district in which the property is situated. Louisiana law provides that federal tax lien notices are to be recorded in the mortgage records of the parish "within which the property subject to such lien is situated." La. Stat. Ann., Rev. Stat. §52:51. ² The controlling question before us is, therefore, whether D'Antoni's "principal executive office" was located in Jefferson or Orleans Parish.

[Facts]

The facts are not in dispute. D'Antoni conducted all of its business from its Jefferson Parish location. Its Orleans Parish address, on the other hand, was the "registered office" designated in its incorporation papers and the home address of its president and vicepresident, who were also incorporators, directors, and major stockholders.

The District Court held that "principal executive office" referred to D'Antoni's registered office in Orleans Parish, relying heavily on Gill Trailer & Equipment Rentals, Inc. v. S. D'Antoni, Inc., 267 So. 2d 242 (La. Ct. App. 1972). That case concerned the same issue and the same debtor involved herein. The Louisiana Court of Appeal held that notice had to be filed in Orleans Parish, concluding from legislative history that

when Congress used the term "principal executive office" to designate the residence of a corporation for purposes of 26 U. S. C. §6323, they intended to refer to the statutory residence which varying state statutes assign to corporations. In Louisiana the statutory residence of a corporation is its registered office.

267 So. 2d at 246 (footnote omitted).

After the District Court decided this case however, and subsequent to the filing of the appeal, the Supreme Court of Louisiana reversed the Court of Appeal on the ground that the clear and unambiguous letter of the law should not be disregarded "under the pretext of pursuing its spirit" through the legislative history, La., 282 So. 2d 714, 716 (1973), cert. denied, -- U. S. --, 94 S. Ct. 1485, 39 L. Ed. 2d 572 (1974).

Although we are not bound by the Louisiana Supreme Court's decision, as indeed the District Court correctly recognized, ² and conversely the state supreme court did not consider itself bound by the federal District Court's decision, ⁴ it may be of some relief to those who cherish predictability in the law to find that we agree with the reasoning of the Louisiana Supreme Court so that henceforth, the law in this particular can be similarly admin istered in both federal and state forums.

Inasmuch as Fruehauf was not in the state litigation and it asserts an additional argument not considered by the state tribunals, it is in order that we discuss briefly the arguments made before us.

[Legislative History]

Fruehauf relies, as did the Louisiana Court of Appeal, on the Legislative history of the Federal Tax Lien Act of 1966 which enacted the "principal executive office" test. The Senate Finance Committee reported that the purpose of revision was to benefit both creditors and the Government by eliminating, through specific rules, existing uncertainty over the proper filing location. To that end

[t]he amendment requires notice of a tax lien to be filed where a taxpayer resides, and not at his domicile, as presently contended by the Internal Revenue Service, because of the difficulty in determining a person's domicile, based as it is on (among other things) his state of mind. On the other hand, for purposes of determining the residence of corporations and partnerships, the amendment provides specific rules for determining their residence. Under the amendment, the residence of a corporation or a partnership is deemed to be the place at which its principal executive office is located. This is the most readily identifiable of all the offices that a business may maintain, appearing, as it does, on the annual reports filed with most States and on similar returns, and avoids the uncertainty of determining which of the many business offices that a taxpayer may maintain is its principal one.

S. Rep. No. 1708, 89th Cong., 2d Sess. (1966), 1966 U. S. Code Cong. & Admin. News, pp. 3722, 3732.

There is substantial merit in Fruehauf's argument that the address listed in the incorporation papers presents an objective standard which would avoid uncertainty and might increase the likelihood of actual notice to creditors of federal tax liens. In the case of a corporation with multiple affices, any test directed at determining the most important office is to some extent subjective. Creditors and the Government could in good faith reach different conclusions as to the appropriate location for filing of federal tax liens. The difficulty with this argument is that, despite the legislative history, it contravenes the plain words of the statute. Section 6323 does not refer, as it easily could have, to the address used to incorporate the business; it speaks of "the principal executive office of the business." The natural import of the statutory language is the headquarters of the business--the office at which the major executive decisions affecting the business are made.

[Domicile Test Rejected]

Further, the passage from the legislative history quoted above reveals that Congress rejected the concept of domicile as determinative of the proper place for filing of tax lien notices. A corporation's domicile is determined by the place in which it incorporates, which may bear no relation to the location of the company's business operations or its decision-making activities. The Louisiana concept of "registered office" is one of domicile, see La. Stat. Ann., Rev. Stat. §12:104(B), and the state corporation statute clearly contemplates the possibility that a company's principal business activities may be carried on elsewhere. See id. §12:103.

The Supreme Court of Louisiana noted an additional argument against Fruehauf's assertion that Congress intended D'Antoni's "registered office" to be its residence for federal tax lien purposes. Congress applied the "principal executive office" test to both corporations and partnerships. Use of the "registered office" interpretation would prevent the application of the test to partnerships. See 282 So. 2d at 716. Statutes should be so construed as to give effect to all their parts. 2A Sutherland, Statutory Construction §46.06 (4th ed. 1973).

We therefore hold that the tax lien notice filed by the Government in the Jefferson Parish mortgage records satisfied the requirements of section 6323(f).

Fruehauf contends in the alternative that the Louisiana provision for recordation of tax lien notices, La. Stat. Ann., Rev. Stat. §52:51, is invalid and that the proper place to file the notices in this case was the clerk's office of the United States District Court. The basis of Fruehauf's argument is that the Louisiana Recordation Act was enacted prior to the Federal Tax Lien Act of 1966 and was not amended to conform to the 1966 federal law. As Fruehauf reads the Louisiana provision dating from 1940, it allows tax lien notices to be filed in each parish in which personal property of a corporation is situated. Federal law, however, now requires notice to be filed only where the corporation's "principal executive office" is located. Thus, the argument runs, Louisiana "has not by law designated one office which meets the requirements of subparagraph (A)" and tax lien notices must accordingly be filed with the clerks of the federal district courts in Louisiana as provided in section 6323(f)(1)(B).

This argument casts doubt upon tax lien filings in Louisiana and a substantial number of states, which have similarly worded statutes, ⁵ Nothing in the legislative history of the Federal Tax Lien Act of 1966 indicates that Congress intended or expected the Act to invalidate existing state legislation. The change in the place of filing rules was designed to do away with conflicting court rulings as to where personal property was situated. S. Rep. No. 1708, supra, at 3732. Section 6323(f)(1)(B) merely limits the authority of the states by ignoring their enactments if they designate more than one office for filing within a given governmental subdivision. Id. The Louisiana statute designates the one office within the parish where the filing is to be made.

Nor can the Louisiana provision, simply because it tracks the language of the pre-1966 federal law, be said to conflict with the new federal requirement that the state designate an office in the place where the taxpayer resides. The purpose of Louisiana 's federal tax lien recordation provision was to authorize filing of lien notices in accordance with the provisions of existing federal law and "any acts or parts of acts amendatory thereof." La. Stat. Ann., Rev. Stat. §52:55. ⁶ The Louisiana statute designates appropriate offices for filing tax lien notices, specifying recordation in "the office of the parish recorder of mortgages of the parish . . . within which the property . . . is situated." But federal law governs questions bearing on the operation and enforcement of federal tax liens. United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 240, 80 S. Ct. 1108, 4 L. Ed. 2d 1192 (1960). Federal law, thus, determines where the property is situated for purposes of section 6323. Walker v. Paramount Engineering Co. [66-1 USTC ¶9106], 353 F. 2d 445 (6th Cir. 1965); see Grand Prairie State Bank v. United States [53-2 USTC ¶9247], 206 F. 2d 217 (5th Cir. 1953). The federal statute fixes the situs of personal property at the residence of the taxpayer. Thus, section 52:51 complies with the requirements of section 6323(f)(1)(A). Subparagraph (B) of that section, concerning filing in federal district courts, therefore, does not apply.

The proper place in Louisiana for filing tax lien notices against personal property is the office of the parish recorder of mortgages for the parish in which the taxpayer resides, which is deemed to be, in the case of a corporation, the location of its principal executive office. That is where the Government filed in the instant case. Its tax lien is therefore entitled to priority over subsequently perfected judgment liens. Accordingly, the judgment of the District Court is

Reversed and remanded.

¹ Section 6323 provides in pertinent part:

"(a) Purchase[r]s, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

". . .

'(f) Place for filing notice; form.--

"(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

"(A) Under State laws.--

". . .

"(ii) Personal property.--In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; or

"(B) With clerk of district court.--In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A);

". . .

"(2) Situs of property subject to lien.--For purposes of paragraph (1), property shall be deed to be situated--

". . .

"(B) Personal property.--In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located . . ."

² La. Stat. Ann., Rev. Stat. §52:51 reads:

Notices of liens for taxes payable to the United States and certificates discharging such liens shall be filed for record in the office of the parish recorder of mortgages of the parish in this state within which the property subject to such lien is situated.

³ The District Court stated in an unpublished Minute Entry, Civ. No. 68-1916 (E. D. La., January 23, 1973):

Both parties are agreed that the Internal Revenue Code, 26 U. S. C. A. §6321, gives the government preferential right to the assets of its debtor taxpayer as against any judgment lien creditor from the date of the filing of notice which meets the requirements of §6323(f). In addition, the government has not questioned the status of Fruehauf as a judgment lien creditor. The sole issue which has been raised, briefed and argued is whether the government's recording of notice of the tax lien in the mortgage records of Jefferson Parish does in fact meet the requirements of §6323(f).

There appears to be little, if any, reason for this Court to go into a detailed analysis of the issue involved here as the same issue, involving in fact the same debtor--S. D'Antoni, Inc.--has been decided by the Fourth Circuit Court of Appeal of Louisiana in Gill Trailer & Equipment Rent., Inc. v. S. D'Antoni, Inc., 267 So. 2d 242 ( La. App. 1972). While we are not, of course, bound by this decision this Court is in complete accord with the Louisiana's Court's interpretation of 26 U. S. C. A. §6323, with special emphasis on the quotation from the Senate Finance Committee at pages 245-246 and the cases cited in footnote 1 at page 246. The evidence presented at the hearing on this matter indicated that S. D'Antoni, Inc.'s registered office is in Orleans Parish, which the Louisiana court also found to be a fact. Therefore, we hold, as did the court in Gill Trailer & Equipment Rent., Inc. v. S. D'Antoni, Inc., supra, that "[s]ince no notice of lien was filed by the United States in the parish in which the corporation's principal executive office was located, the lien is not valid against judgment lien creditors."

⁴ It has been called to our attention that the United States District Court, Eastern District of Louisiana, Section B, in a proceeding arising out of a dispute between the United States Government and Fruehauf Corporation relative to the ranking of claims to proceeds in another matter but involving the same tax debtor, S. D'Antoni, Inc., concluded that it was in accord with the decision of the Fourth Circuit Court of Appeal in the present case. See S. D'Antoni, Inc. v. The Great Atlantic and Pacific Tea Company, Inc., Civil Action No. 68-1916, January 23, 1973 . That matter is presently on appeal to the Fifth Circuit Court of Appeal. We do not consider that we are bound by any expression of that court in a consideration of the matter herein.

282 So. 2d at 717.

⁵ See Alas. Stat. §43.10.090; Ark. Stat. Ann. §51-101; Del. Code Ann. tit. 25, §3101; Ill. Ann. Stat. ch. 82 §66 (Smith-Hurd Supp. 1974); Ind. Stat. Ann. §49-3221 (Burns), IC 1971, 17-3-50-1; Ky. Rev. Stat. §382.480; Me. Rev. Stat. Ann. tit. 33, 664; Miss. Code Ann. §89-5-47; Ann. Mo. Stat. §14.010 ( Vernon ); N. J. Stat. Ann. §46:16-13 (Supp. 1974); Ohio Rev. Code §317.09 (Page Supp. 1973); S. C. Code §65-2722; Tenn. Code Ann. §64-2110; Utah Code Ann. §38-6-1; Vt. Stat. Ann. tit. 9, §2051; Rev. Code Wash. Ann. §60.68.010; Wyo. Stat. §29-111.

⁶ Section 52.55 reads:

This Chapter is passed for the purpose of authorizing the filing of notices of liens in accordance with the provisions of Section 3186 of the Revised Statutes of the United States, as amended by the Act of March 4, 1913, 37 Statutes at Large, page 1016, and any acts or parts of acts amendatory thereof.

 

 

[73-2 USTC ¶9702]Gill Trailer & Equipment Rentals, Inc. v. S. D'Antoni, Inc. and/or S. D'Antoni Motor Freight Lines

La. Supreme Court, No. 52,965, 8/20/73

[Code Sec. 6323]

Lien for taxes: Validity of notice's filing: District where filed.--Under the State Supreme Court decision, the government's lien for taxes had priority over taxpayer's claim, and the taxpayer's interpretation of the state law governing this area was incorrect and inconsistent with Federal law. The government had properly filed notice of its tax lien in the parish where the debtor (S. D'Antoni) had its principal place of business and was not required to file such notice in the parish where the debtor had its registered office, as contended by the taxpayer.

Harry A. Burglass, 1645 Veterans Highway , Metairie , La. , for plaintiff-respondent. Gerald J. Gallinghouse, United States Attorney, Michaelle F. Pitard, Assistant United States Attorney, New Orleans, La., Fred B. Ugast, Acting Assistant Attorney General, Ernest J. Brown, Elmer J. Kelsey, William S. Estabrook, Department of Justice, Washington, D. C. 20530, for intervenor-applicant.

MARCUS, Justice:

This suit involves the ranking of two claims to the proceeds of a judicial sale. The contest is between a federal tax lien filed by the United States of America and a lien of a seizing creditor, Gill Trailer & Equipment Rentals, Inc., under a writ of fieri facias.

[Taxpayer's Lien]

On July 29, 1968, Gill Trailer & Equipment Rentals, Inc. filed suit in the 24th Jefferson against S. D'Antoni, Inc. Recovery Jefferson against S. D'Antoni, Inc. Recovery was sought based upon defendant corporation's failure to pay under certain lease agreements. Judgment was rendered by default on August 28, 1968 in the sum of $4,823.72, together with interest, attorney fees and costs. Pursuant to the issuance of a writ of fieri facias, Permit No. 1026 B belonging to S. D'Antoni, Inc. was seized on October 14, 1968 and sold at public auction on November 20, 1968 . Thereafter, Gill caused a rule to issue, citing the eleven parties listed on the mortgage certificate to show cause why gill should not be paid in preference out of the proceeds of the judicial sale of the said permit.

[Government's Assertion of Priority]

The United States intervened. It claims priority in payment by virtue of the filing of notice of its tax liens in the Parish of Jefferson, pursuant to the designation in 26 U. S. C. Sec. 6323(f)(2) of the "principal executive office" of the corporation as the proper location for such filing. The United States alleges that notice of federal tax liens in the amount of $79,455.26, plus statutory interest, was filed on July 15, 1968 and July 16, 1968. ¹ It contends that notice of these tax liens was filed prior to the time Gill secured judgment and effected its seizure. Accordingly, it claims that it should be paid in preference to Gill out of the proceeds of the sale.

[Improper Filing of Notice]

Gill objects to the payment of United States in preference to its claim on the ground that the Government filed its notice of tax liens in the wrong parish. Gill contends that the tax liens, instead of having been filed in Jefferson Parish, should have been filed in the parish where the registered office of the tax debtor, S. D'Antoni, Inc., was located, which, in this case, was Orleans Parish. This contention is based upon Gill's interpretation of the place of filing in 26 U. S. C. Sec. 6323(f)(2). Thus, for this reason, Gill claims that the notice filed by the Government in Jefferson Parish is without effect and cannot be enforced.

United States urges that, under the provisions of 26 U. S. C. Sec. 6323, notice of tax lien must be filed in the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed. Sec. 6323(f)(2) further provides that the residence of a corporation shall be deemed to be the place at which the "principal executive office" of the business is located. This, the United States contends is Jefferson Parish, as so alleged by Gill itself in its petition in these proceedings.

[ Lower Court 's Actions]

The District Court, after hearing on the rule to show cause, ordered the proceeds of the judicial sale turned over to the United States in partial payment of its lien. ²

Gill appealed and the Court of Appeal reversed. ³ The Court stated:

"We conclude that when Congress used the term 'principal executive office' to designate the residence of a corporation for purposes of 26 USC Sec. 6323, they intended to refer to the statutory residence which varying state statutes assign to corporations. In Louisiana the statutory residence of a corporation is its registered office."

At the instance of the United States Government, we granted a writ of certiorari or review.

We find the Court of Appeal erred in its interpretation of the statute in question.

According to 26 U. S. C. Sec. 6323(f), notice shall be filed in the case of personal property, whether tangible or intangible, "in one office within the State (or the county or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated." Personal property, in this statute, is deemed to be situated at the residence of the taxpayer at the time the notice of lien is filed [(1) and (2)(B)]. The statute recites:

"For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, * * *"

The above is the wording of the statute as amended in 1966, Pub. L. 89-719, Title I, Sec. 101(a), 80 Stat. 1125.

[Clear and Unambiguous Phrase]

We conclude that the phrase "at which the principal executive office of the business is located" is clear and unambiguous. Under no concept could it be interpreted to mean "registered office," as contended by Gill and as held by the Court of Appeal.

As we view the matter, it would have been simple for Congress, in the 1966 amendment, to have used the phrase "registered office" in defining the residence of a corporation if it so intended. We feel that to equate principal executive office" with "registered office" would contradict the clear meaning of the words of the statute. When a law is clear and free from ambiguity, the letter of it is not to be disregarded under the pretext of pursuing its spirit. Article 13 of the Civil Code; Article 5052 of the Code of Civil Procedure.

A further argument in favor of the Government's position is that the statute designates the residence of both a corporation and a partnership as the place at which the principal executive office of the business is located. Accordingly, Congress has applied this phrase to both a corporation and a partnership. It is obvious that an interpretation of the phrase "principal executive office" to mean registered office, as has been suggested, would make it inapplicable to a partnership. This is further evidence that such an interpretation would not only be contrary to the clear language of the statute, but would also lead to an inconsistent result.

[Legislative History in Accord]

We have reviewed S. Rep. No. 1708, 89th Cong., 2d Sess., pp. 10-11 (1966-2 Cum. Bull, 876, 883-884), U. S. Code Cong. & Admin. News 1966, p. 3722, which was published in connection with the 1966 amendment to 26 U. S. C. Sec. 6323 and find nothing therein indicating anything contrary to our present interpretation.

For the foregoing reasons, we hold that for purposes of 26 U. S. C. Sec. 6323(f)(2)(B), the residence of a corporation shall be deemed to be the place at which the principal executive office of the business is located in fact.

[Finding Supported by Taxpayer's Actions]

As we have heretofore stated, the United States Government filed its notice of tax liens against S. D'Antoni, Inc. in the Parish of Jefferson, the principal executive office of the tax debtor, S. D'Antoni, Inc. In argument before this Court, the question arose as to whether the record was sufficient to support the finding that the principal executive office of S. D'Antoni, Inc. was in fact located in Jefferson Parish. In this regard, we wish to point out that the general rule of venue provides that an action against a domestic corporation shall be brought in the parish where its registered office is located (Article 42(2) of the Code of Civil Procedure), which, in this case, would have been Orleans Parish. However, an exception to this general rule is provided in Article 77 of the Code of Civil Procedure which allows an action also to be brought in the parish were a business office of establishment of the corporation is located. This is exactly what Gill did in the instant case in its suit against S. D'Antoni, Inc. Furthermore, in its petition, Gill alleges that S. D'Antoni, Inc. "is a domestic corporation with its registered office in Orleans Parish but with its main business office in Jefferson Parish, at which place all of the business, contracts and other activities hereinafter described occurred." This certainly represents an admission by Gill that the principal executive office of S. D'Antoni, Inc. is located, in fact, in Jefferson Parish. Accordingly, we find it sufficient for us to so hold.

It has been called to our attention that District States District Court, Eastern District of Louisiana, Section B, in a proceeding arising out of a dispute between the United States Government and Fruehauf Corporation relative to the ranking of claims to proceeds in another matter but involving the same tax debtor, S. D'Antoni, Inc., concluded that it was in accord with the decision of the Fourth Circuit Court of Appeal in the present case. See S. D'Antoni, Inc. v. The Great Atlantic and Pacific Tea Company, Inc., Civil Action No. 68-1916, January 23, 1973 . That matter is presently on appeal to the Fifth Circuit Court of Appeal. We do not consider that we are bound by any expression of that court in a consideration of the matter herein.

Accordingly, under 26 U. S. C. Sec. 6323, the notice of the federal tax lien was properly filed in Jefferson Parish, and the United States Government is entitled to be paid in preference out of the proceeds of the judicial sale.

For the reasons assigned, the judgment of the Court of Appeal, Fourth Circuit, is reversed and that of the District Court reinstated. All costs to be paid by defendant, Gill Trailer & Equipment Rentals, Inc.

¹ Mortgage Certificate, Jefferson Parish shows: federal tax lien in the amount of $50,394.14 dated 7/11/68 recd. MOB 515-27; federal tax lien in the amount of $41,483.55 dated 7/16/68 recd. MOB 515-200; federal tax lien in the amount of $1,513.95 dated 8/19/68 recd. MOB 517-145; federal tax lien in the amount of $1,563.00 dated 9/17/68 recd. MOB 518-984.

² The amount due under the liens was $79,455.26, and the permit was sold at judicial auction for $10,600.00.

³ Gill Trailer & Equipment Rentals, Inc. v. S. D'Antoni, Inc. and/or S. D'Antoni Motor Freight Lines, 267 So. 2d 242 ( La. App. 1972).

 

 

[73-1 USTC ¶9375]In the Matter of J. E. Hall Contractors, Inc., Bankrupt

U. S. District Court, Dist. Idaho, BK-71-378, 5/15/72

[Code Sec. 6323(f)]

Tax liens: Place of filing: Principal executive officer: Location of.--A debtor corporation's principal executive office was in the State of Washington , where its records, offices and officers were all located. Therefore, federal tax liens filed in Idaho were ineffective against the bankruptcy trustee and subsequent lien creditors, even though Idaho may have been the corporation's principal place of business.

David R. Brennan, Francis P. Dicello, Sidney E. Smith, Boise, Idaho, Witherspoon, Kelley, Davenport & Toole, 1114 Old Nat'l Bank Bldg., Spokane, Wash., for Old Nat'l Bk. of Washington.

Memorandum Decision and Order Re Perfection of Securities and Allowances of Trustee's Fees and Court Costs on Property Owned by Bankruptcy and Sold by Trustee

TAYLOR, District Judge:

Subsequent to the sale of certain property of the bankrupt corporation to Potlatch Forests, Inc. various lien creditors have filed petitions for payment from the proceeds of that sale. Said sale was made with consent of all lien creditors and with the agreement that the trustee's reasonable costs of preserving and selling the property would be charged against the proceeds of the sale as would a reasonable admin istrative fee for services of the Bankruptcy Court and the Trustee. The same will be true of the items sold at the auction sale to be held in May, 1972, except Bower Machinery Company and American Machinery have not consented to payment of a share of costs.

[Issue]

In order to determine the right to proceeds and the priority of liens it has been necessary to resolve where the proper place was for filing financing statements in order to perfect liens against the trustee in bankruptcy and subsequent lien or judgment creditors.

[Contentions]

Two principal contentions have been made in regard to the place of filing. The first is that the proper place of filing was in Clearwater County , Idaho , because the debtor corporation was engaged in a "farming operation" requiring filing in the office of the County Recorder in the county of the debtor's residence. 28-9-401(1)(a) I. C.

I am convinced that this is an unreasonable interpretation of the activities of the bankruptcy corporation because it was a corporation involved in road construction, heavy logging and log transportation and not simply in a "farming operation". The ordinary person considering the operation of the debtor corporation would not conclude that it was engaged in farming. Apparently the only case considering this matter is Belgrade State Bank v. Elder, 482 P2d 135 (1971) which summarily disposed of the farming contention in a case under the UCC concerning a logger.

The second principal contention is that Spokane , Washington was bankrupt's "chief place of business" under Section 28-9-103(2) I. C. This contention is made on the theory that all of the corporate officers and managing executives lived in Washington and had offices in the building in Spokane , Washington . For the last several years the payroll records, inventory records, all purchase records and all accounting records for the corporation were maintained at this office. At this office was also located the corporation's helicopter and a substantial warehouse was maintained for spare parts and equipment. Factually, I conclude that the executive management of the bankrupt was conducted from the Spokane office after the year 1968 when all of the current records of the corporation were moved to Spokane from Elk River , Idaho . Nevertheless, I am convinced that the "chief place of business" of the bankruptcy was in the State of Idaho . Well over 90 per cent of all productive activity of the corporation occurs in Idaho . Over 90 per cent of employees worked and resided permanently in Idaho . Elk River , Idaho was listed as the address of the corporation on its Articles on Incorporation, By-Laws, tax returns and virtually all official documents dealing with the corporation. It was an Idaho corporation, not qualified to do business in Washington .

I thus hold that the proper place for filing financing statements under the requirements of the UCC was with the Secretary of State of the State of Idaho (after the effective date of the UCC in Idaho) except in the case of title vehicles which was with the Department of Law Enforcement of the State of Idaho, although filings in order "title states" are apparently valid under Section 28-9-301(4).

[Principal Executive Office]

Section 6323(f) of the Internal Revenue Code of 1954, as amended, states that tax liens shall be filed at the place required by the state in which "the principal executive office of the business" is located, or with the Clerk of the U. S. District Court of the district where such office is located. Under the facts as outlined above, I have difficulty finding that the principal executive office of the business was located in Idaho at the time when the Internal Revenue Service filed its liens. As indicated above, all of the records, all executive officers and offices were in Spokane , Washington . Although I am reluctant to so hold it seems to me that the activity of the debtor at Spokane meets the exact wording of 6323(f) of the Revenue Code. The U. S. Attorney asserts that "the principal executive office of the business" is the same as its "principal place of business", or "chief place of business", but it appears to me that the words "principal executive office" and particularly the words "office" give a very different meaning to the phrase used in the Internal Revenue Code. Congress did not use any language which indicates that the "principal executive office of the business" is determined by the place designated as the principal place of business in its Articles of Incorporation. It speaks in terms of actual office, not place designated in Articles. Thus, I hold that the Federal tax liens should have been filed in the State of Washington and that as against the trustee in bankruptcy and subsequent lien creditors, these liens are not perfected.

[Priorities]

Upon the basis of the foregoing decisions, I conclude the following lien creditors hold liens perfected against the trustee in bankruptcy and are entitled to priority among themselves in the order of filing with the Secretary of State of Idaho pursuant to 28-9-312(5)(a) I. C.                                       

 

It does not appear on the present record that the Fruehauf Corporation has ever perfected its liens as against the trustee in bankruptcy or subsequent lien creditors or any of its equipment. Its place of filing would have been with the Department of Law Enforcement of the State of Idaho because trailers are title vehicles. Both Fruehauf and International Harvester Corporation were required to file on certificates of title under Section 28-9-103(4) and 28-9-302(3)(b) & (4), I. C. International Harvester did this by filings in Idaho and Montana .

[The following is part of an order of the court dated 5/24/72 modifying the memorandum decision.--CCH]

* * * the order is corrected to show the following equipment purchased from Fruhauf Corporation and the date of lien perfection as against subsequent parties:

Make                                Model No.         Date Issued

1968 Fruehauf Log Tra.          TLH-55-R SP               
10/9/68

1968 Fruehauf Log Tra.          TLH-55-R                  
10/9/68

1968 Fruehauf Log Tra.          TLH-55-R SP               
10/9/68

1968 Fruehauf Tra.              TLY-55-SP                 9/11/68

1968 Fruehauf Tra.              TLY-55 SP                 9/11/68

1968 Fruehauf Log Tra.          TLH-55-R SP               10/9/68

1968 Fruehauf Log Tra.          TLH-55-R SP               10/9/68

1968 Fruehauf Log Tra.          TLH-55-R SP               10/9/68

1968 Fruehauf Tra.              TLY-55 SP                 9/11/68

1968 Fruehauf Tra.              TLY-55 SP                 9/11/68

1968 Fruehauf Tra.              TLY-55 SP                 9/11/68

1968 Fruehauf Tra.              TLY-55 SP                 9/11/68

1968 Fruehauf Log. Tra.         TLH-55-R SP               
10/9/68

 

Other lien creditors will be entitled to payment on the basis of the priority listed above unless some may have received a preference under the Bankruptcy Act. The length of time between the date acquiring liens and filing financing statements raises some questions about the liens of Bower Machinery Co. and N. A. Degestrom Co. as preferences.

As against any funds to be received by creditors after the sale of the equipment by the trustee, the following surcharges will be made.

(1) Actual cost of moving, storing and preserving the piece of equipment, if any, to time of sale and delivery to buyer, also any auction fees.

(2) The reasonable value of trustee's services acting as his own attorney in foreclosing the various liens by sale. This should be equivalent to the legal fees which would have been incurred by the various creditors to obtain a judicial foreclosure of the liens under State law. These fees will not be paid directly to the trustee.

(3) Fees which must be assessed against the sales for the referee's salary and expense fund under regulations adopted by the Judicial Conference of the United States under Section 40(c)(2) of the Act. The Judicial Conference promulgated the following rule on July 1, 1947 :

"1. Determination of net proceeds realized. In determining the amount of net proceeds realized in asset cases for the purpose of Section 40c(2) of the Bankruptcy Act as amended, the term 'net proceeds realized in asset cases' shall mean, in the case of sale or liquidation, the amount of money coming into the estate of a bankrupt as assets of such estate, which shall include the entire sale price of encumbered property when sold free and clear of all liens or, if not sold or liquidated, the fair cash market value of all property coming into the estate as assets of such estate, exclusive of all statutory exemptions whether State or Federal and exclusive of all expenses directly incurred in the operation of the debtor's business after bankruptcy; * * *"

In this case the fee is 3.5 per cent on the first $50,000 of net realization and 3 per cent on the balance of net realization. The lien creditors will be surcharged 3 per cent in this case.

All of the foregoing fees are surcharged on the basis that the trustee and the estate should not furnish valuable legal or admin istrative services to lien creditors at the expense of unsecured creditors, but that lien creditors should not be put to greater expense than if they had judicially foreclosed their liens and sold the property themselves.

Trustee is asked to submit an accounting of expenses, proposed admin istrative fees and proposed distribution of proceeds of sale as soon as is reasonably possible. Copies to go to the creditors committee and all concerned creditors who shall be required to file any objections thereto within 15 days of the date the accounting is mailed.

IT IS SO ORDERED.

Order ( 2/20/73 )

This matter having come on for hearing upon the Petition for Review filed by the United States in the above entitled Court on June 15, 1972 . The United States appearing through David R. Brennan, Francis P. Dicello and Sidney E. Smith, United States Attorney, the Old National Bank of Washington appearing through Witherspoon, Kelley, Davenport & Toole, and the Court having heard the argument of counsel and being fully advised in the premises

IT IS THEREBY ORDERED that the Memorandum Decision and Order Re Perfection of Securities entered by the Referee on May 15, 1972 , as amended by order dated May 24, 1972 , be and the same is hereby affirmed.