Alabama
[99-2 USTC
¶50,709] In re Charles William Fletcher, Sr., Debtor.
United States of America
, Plaintiff v. Charles William Fletcher, Sr., Willie Mae Fletcher,
Helmsing, Sims & Leach, and Joseph O. Verneuille, Jr., Trustee,
Defendants
U.S.
Bankruptcy Court, So. Dist. Ala.,
98-11117-WSS, 6/21/99
[Code Sec.
6323 ]
Tax liens: Mortgage held by attorney: Subsequently filed tax liens:
Priority: Validity of attorney's security interest: Alabama law: Money
or money's worth.--
An attorney who was granted a mortgage on his client's home as security
for the debt for fees owed with respect to his criminal defense work and
his handling of various civil matters for the client and his company
held a valid security interest in the property under state (Alabama)
law. Since that interest was perfected before the IRS filed tax liens
against the client, the mortgage had priority over the liens. The
attorney was found to have "parted with money or money's
worth." His billing records substantiated a portion of the fees
owed to him for legal work performed on behalf of the client and the
company; the record established that the parties had agreed to a fixed
fee for the attorney's representation in connection with the client's
criminal indictment; and the client testified that he considered himself
to be personally liable to the attorney for his legal fees.
ORDER DETERMINING PRIORITY OF FEDERAL TAX LIENS
SHULMAN,
Bankruptcy Judge:
This matter
came before the Court on the complaint of the
United States of America
, Internal Revenue Service (hereinafter "the IRS") to
determine the extent and priority of liens. William R. Sawyer appeared
on behalf of the IRS, and Irvin Grodsky appeared on behalf of Helmsing,
Sims & Leach. After considering the testimony, evidence and briefs
of the parties, the Court makes the following findings of fact and
conclusions of law:
FINDINGS
OF FACT
The Debtor,
Charles William Fletcher, Sr. (hereinafter "Fletcher"), owned
Fletcher Oil Company, Inc. (hereinafter "Fletcher Oil"), a
wholesale distributor of petroleum products. Fred Helmsing (hereinafter
"Helmsing") of the law firm of Helmsing, Sims & Leach
represented both Fletcher Oil and Fletcher individually. The Internal
Revenue Service (hereinafter "the IRS") began an examination
of Fletcher's personal income tax returns for the years 1987, 1988 and
1989 in the early 1990s. Helmsing represented Fletcher in his
negotiations with the IRS and eventually petitioned the U.S. Tax Court
on Fletcher's behalf to recalculate the income tax deficiency for the
years at issue. On
June 16, 1995
, the IRS assessed taxes of $101,713.46, $24,227.97 and $26,015.96
respectively for 1987, 1988 and 1989. 1
On
February 15, 1998
and
March 17, 1998
, the IRS filed notices of federal tax liens for 1987, 1988 and 1989
taxes.
There was no
dispute that Helmsing was aware of Fletcher's federal income tax
liability at the time the taxes were assessed. Helmsing testified that
he instructed Fletcher to pay the assessed taxes from monies Fletcher
was to receive from an inheritance. Neither Fletcher nor Helmsing
received a tax bill from the IRS after the assessment. Helmsing stated
that he never considered the tax liability again until the IRS filed its
notices of tax lien in 1998. He assumed that the taxes had been paid
from the inheritance monies.
Throughout the
1990s, Fletcher and Fletcher Oil continued to have legal difficulties.
Beginning in 1993, Fletcher Oil suffered a financial decline which led
to corporate bankruptcy. The company also was found liable for excise
taxes. Fletcher was indicted on 53 counts for federal excise tax
evasion, and eventually pled guilty to one count in return for dismissal
of the remaining charges. The Fletchers also were responsible for a
personal guarantee to an individual named Ratcliff for an amount in
excess of $1 million. The debt was secured by all the property of
Fletcher Oil and the Fletchers' home. Helmsing represented the Fletchers
individually in all of the above listed matters.
Helmsing
produced statements for legal services provided to Fletcher Oil through
January 7, 1997
totaling $50,823.61. He also produced a billing instruction worksheet
(hereinafter "the work sheet") showing additional fees that
had accumulated but were unbilled as of
April 1, 1997
(the date of Helmsing's mortgage) for approximately $12,500.00. The
worksheet also showed that more than $16,461.00 in additional fees had
been earned but not billed for the period of
April 1, 1997
to
February 25, 1998
, the date that the IRS filed its tax lien. Helmsing also agreed to
represent Fletcher in the 53-count criminal indictment for a fixed fee
of $75,000,00. 2
There was no written fee agreement between Helmsing and Fletcher.
Helmsing testified that he did not feel that a written contract was
necessary given the longevity of his relationship with Fletcher and his
family.
Helmsing and
Fletcher testified that they considered the fees for services billed to
the corporation to be owed by Fletcher individually because much of the
time was spent dealing with matters related to the Fletchers' personal
liability. Fletcher testified that he always considered himself
personally liable for Helmsing's fee, and the evidence showed that a
substantial portion of the legal work was for Fletcher individually. The
Fletchers agreed to pay Helmsing $150,000.00 to satisfy the debt for
fees for the criminal defense work and all civil matters handled for the
Fletchers and Fletcher Oil. They agreed to sign a promissory note
evidencing the debt and agreed to grant Helmsing a mortgage on their
home to secure the debt. On
April 1, 1997
, the Fletchers executed the note and mortgage in favor of Helmsing. The
mortgage was recorded on
April 7, 1997
, and a corrected mortgage was recorded on
June 25, 1997
. As indicated above, the IRS filed notices of federal tax liens for
1987, 1988 and 1989 taxes on
February 15, 1998
and
March 17, 1998
.
CONCLUSIONS
OF LAW
The issue
before the Court is the priority of Helmsing's mortgage in relation to
the IRS's tax lien on the Debtors' home. The following is a time line of
the key events from the IRS's pretrial brief:
June 16, 1995
1987, 1988 and 1989 taxes assessed
April 1, 1997
Mortgage to Helmsing executed
April 8, 1997
Mortgage to Helmsing recorded
June 20, 1997
Corrected mortgage to Helmsing executed
June 25, 1997
Corrected mortgage to Helmsing recorded
Sept. 11, 1997
Fletcher convicted for fraud
Feb. 25, 1998
Federal tax lien recorded
March 17, 1998
Corrected federal tax lien recorded
March 27, 1998
Chapter 7 petition filed
Under §6321 of Title 26 of the United States Code, a tax lien is
created following the demand by the IRS and the taxpayer's failure to
pay. Section 6323(a) of Title 26, United States Code, provides:
"The lien imposed by section 6321 shall not be valid as against any
purchaser, holder of a security interest . . . until notice thereof
which meets the requirements of subsection (f) has been filed by the
Secretary." As the IRS states in its pre-trial brief, it is
undisputed that the IRS's notice of the tax lien was filed after
Helmsing recorded his mortgage. It would appear from these facts that
the Helming mortgage would have priority over the IRS's later filed
lien.
However, the
IRS attacks the applicability of §6323(a) to Helmsing's mortgage on
grounds that the mortgage does not meet the two requirements of 26
U.S.C. §6323(h)(1), which defines a "security interest" as:
any interest
in property acquired by contract for the purpose of securing payment or
performance of an obligation or indemnifying against loss or liability.
A security interest exists at any time (A) if, at such time, the
property is in existence and the interest has become protected under
local law against a subsequent judgment lien arising out of an unsecured
obligation, and (B) to the extent that, at such time, the holder has
parted with money or money's worth.
According
to the IRS,
Alabama
's recording statute, Alabama Code §35-4-90(a) (1975), answers whether
a security interest is protected under local law as provided in
subsection (A) of §6323(h)(1):
All
conveyances of real property, deeds, mortgages, deeds of trust or
instruments in the nature of mortgages to secure any debts are
inoperative and void as to purchasers for valuable consideration,
mortgagees and judgment creditors without notice, unless the same have
been recorded before the accrual of the right of such purchasers,
mortgagees or judgment creditors.
The
IRS argues that Helmsing's mortgage would not prevail over the IRS's
lien because
Alabama
's recording statute only protects those who record over a prior unfiled
interest if the recording party does not have knowledge of the prior
unrecorded interest. The IRS further asserts that since
Alabama
's recording statute does not shield the Helmsing mortgage, it does not
meet the first requirement under §6323(h)(1)(A) to be a security
interest and therefore cannot be protected as a security interest under
26 U.S.C. §6323(a).
Helmsing
asserts that even if he had actual knowledge of the IRS's lien, his
previously recorded mortgage prevails over the IRS's subsequently filed
tax lien based on the Eleventh Circuit's ruling in In re Haas
[94-2 USTC ¶50,496], 31 F.3d 1081 (11th Cir. 1994). Helmsing also
maintains that the IRS's argument regarding the definition of a security
interest under 26 U.S.C. §6323(h)(1) is based on a misapplication of
state law to an issue that is properly decided under federal law.
The Court
agrees with Helmsing that the Haas opinion squarely addresses the
issues raised by the present fact situation. In finding that an IRS tax
lien had priority over a lender that had mistakenly released its
mortgage, the
Haas Court
held:
. . .
[S]ection 6323 mandates that notice of the taxing authority's lien
"shall be filed" in the public records before it operates as
notice effective against any holder of a security interest, as that term
is defined by section 6323. 26 U.S.C. §6323(f). The filing
requirement is critical: even a holder of a security interest who has
actual knowledge of an unfiled tax lien will prevail over the
government. See United States v. McDermott [93-1 USTC ¶50,164], 507
U.S. 447, --, --, 113 S.Ct. 1526, 1528, 1530, 123 L.Ed.2d 128 (1993)
("under the language of §6323(a) ('shall not be valid as against
any . . . judgment lien creditor until notice . . . has been filed'),
the filing of notice renders the federal tax lien extant for 'first in
time' priority purposes. . ."). (Emphasis added.)
The Haas
opinion also addressed the IRS's argument regarding the definition of a
"security interest" under §6323(h)(1)(A). According to Haas,
the requirement under §6323(h)(1)(A) (the interest exists if it
"has become protected under local law against a subsequent judgment
lien arising out of an unsecured obligation") is determined by a
"hypothetical judgment lien creditor" test rather than a
"subjective knowledge lien creditor test". Under a
"hypothetical judgment lien creditor" test, the focus is on
"the protection state law gives the security interest against other
hypothetical lien creditors. The pertinent inquiry is whether the
security interest is protected under local law against any hypothetical
judgment lien creditor that might arise, regardless of whether the
[party] has knowledge of the competing nonfederal interest." Haas
[94-2 USTC ¶50,496], 31 F.3d at 1087 (citation omitted). In discussing
the relevance of actual knowledge of a competing interest in a priority
dispute, the Eleventh Circuit stated: "As a practical matter,
concepts such as 'notice,' 'knowledge,' and 'reliance' are meaningless
when applied to the IRS. Actual knowledge by a secured creditor of the
IRS's lien prior to filing does not enhance the IRS's position vis-a-vis
that creditor; neither should the IRS's notice of a lien prior to filing
operate to diminish its position."
Id.
at 1088.
Under
Alabama
's recording statute, §35-4-90, a recorded mortgage has priority over a
subsequently filed judgment lien. As Helmsing pointed out in his
post-trial brief, Baldwin County Federal Savings Bank v. Central Bank
of the South, 585 So.2d 1279 (Ala. 1990), the case cited by the IRS,
involved the issue of whether a recorded judgment creditor who had
knowledge of an unrecorded purchase had priority over the purchaser,
while the issue in the present case is whether a recorded mortgage has
priority over a subsequently recorded tax lien. In light of Haas,
the Court finds that Helmsing's mortgage fulfills the first requirement
under 26 U.S.C. §6323(h)(1) to be a "security interest." 3
As stated
above, §6323(h)(1) has two requirements for finding that a security
interest exists. Under the second requirement of §6323(h)(1)(B), a
security interest exists "to the extent that . . . the holder has
parted with money or money's worth." The IRS argued in its
pre-trial brief that Helmsing's mortgage was not a "security
interest" as defined by §6323(h)(1) because Helmsing could not
prove that it parted with money or money's worth. At the time that the
IRS filed its pre-trial brief, Helmsing had not presented any billing
records of its time spent for the Fletchers. At trial, the IRS
maintained that the billing records only reflected time spent on behalf
of Fletcher Oil, and did not enumerate hours spent on behalf of the
Fletchers individually. However, Fletcher testified that he believed
that he was personally liable to Helmsing for any debt incurred for
legal services. The evidence also shows that much of the legal work that
Helmsing performed for Fletcher Oil was related to Fletcher's personal
liability. It is apparent from Fletcher's testimony that he did not make
a distinction between Helmsing's time spent on matters for Fletcher Oil
and time spent on the Fletchers individually.
The billing
records submitted by Helmsing showed total fees of approximately
$79,784.61 for legal work performed on behalf of the Fletchers and
Fletcher Oil. In addition, Fletcher agreed to a fixed fee of $75,000.00
for Helmsing's representation related to the criminal indictment.
Helmsing testified that he did not keep detailed time records for cases
involving fixed fees, which the Court acknowledges is a common practice
among attorneys for such cases. He further testified to the complex
nature of the defense of the criminal indictment. Fletcher testified
that he believed that he owed Helmsing approximately $75,000.00 for
services related to the civil matters, and $75,000.00 for the criminal
case. The Court finds that Helmsing gave "money's worth" under
§6323(h)(1), and thus proved a valid security interest under the
statute.
Having found
that Helmsing is a "holder of a security interest" under §6323(a),
the Court further finds that the IRS's lien for taxes for 1987, 1988 and
1989 does not have priority over Helmsing's previously recorded
mortgage. As the facts clearly indicate, Helmsing recorded his mortgage
in April 1997, while the IRS did not file its notice of tax lien until
February 1998. Under 26 U.S.C. §6323(a) and its interpretation in Haas,
the Court finds that the Helmsing mortgage has priority over the
subsequently filed IRS tax lien. Based on the foregoing, it is hereby
ORDERED
that the mortgage held by Helmsing has priority over the tax lien of the
IRS for tax years 1987, 1988 and 1989.
MOTION
TO DISMISS
Defendant,
HELMSING, SIMS & LEACH, moves this Court to dismiss this Complaint
on the grounds that the Internal Revenue Service has no standing to
bring this proceeding for that the lien of the Internal Revenue Service
is voidable on its face as a preferential transfer under 11 U.S.C.
§547 in that the allegations of the Complaint establish that the United
States's alleged tax liens are based upon unpaid tax liabilities for the
years 1987, 1988, and 1989, that those tax liabilities were assessed on
June 16, 1995, that the Notices of Federal Tax Liens for those tax
liabilities were filed on February 25, 1998 and March 17, 1998 and that
the Debtor's Petition for Relief was filed on March 27, 1998 within
ninety (90) days of the filing of said tax liens.
1
These amounts were taken from the notices of federal tax liens and
include interest accrued through
February 23, 1998
. The amounts assessed in 1995 would have been less.
2
Helmsing testified that he did not keep a record of hours in cases
involving a flat fee; therefore, there were no billing records kept for
his work on Fletcher's criminal case.
3
Assuming that Helmsing's actual knowledge was relevant to his status as
holder of a "security interest" under §6323(h)(1), the Court
finds that the IRS did not prove that Helmsing had actual knowledge of
the unpaid tax lien. While it is true that Helmsing knew about the
assessment of the taxes in 1995, there was no evidence that Helmsing
knew that the assessed taxes remained unpaid in April 1997 at the time
that he recorded the mortgage. According to Helmsing's testimony, he
believed that the assessed taxes had been paid from inheritance funds
received by Fletcher. The IRS presented no evidence to refute Helmsing's
testimony, nor did it present evidence of any notice or tax bill to
Fletcher or Helmsing prior the filing of the notices in February and
March 1998. Based on the evidence presented, the Court finds that
Helmsing did not have actual knowledge of the IRS's tax lien prior to
recording his mortgage.
[56-2 USTC
¶9605]M. H. Brock, Plaintiff v. Julius M. Slater et al., Defendants
U.
S. District Court, No. Dist., Ala., Middle Div., Civil Action No. 912,
5/14/56
[1939 Code Sec. 3672(a)--substantially unchanged in 1954 Code Sec.
6323(a)]
Priority of liens: Federal law v. state law: Federal tax, state tax,
mortgage and landlord's lien.--On the sale of the property of a
taxpayer in default, the amount due on a mortgage was, by federal law,
not subject to federal or Alabama tax claims. However, that amount was
subject to a landlord's lien under
Alabama
law and was held payable to the landlord, in spite of the fact that,
under federal law, a landlord's lien is inferior both to mortgages and
to federal and state taxes.
W. M. Beck, J.
C. Kellett, Charles A. Wolfes, Ft. Payne, Ala., and
Rob
erts & Smith, Gadsden, Ala., for plaintiff. J. Eugene Foster,
Intervenor. Frank M. Johnson, Jr., U. S. Attorney, W. L. Longshore, U.
S. Attorney, Fred S. Weaver, Ass't U. S. Attorney, Birmingham, Ala., for
defendant.
Before
Seybourn H. Lynne, District Judge.
Final
Decree
This cause
coming on to be heard in Birmingham, Alabama, on Thursday, May 10, 1956,
and counsel having agreed in open Court that the facts are as stated in
the Decree of Sale heretofore rendered in this cause.
Findings
of Fact
The Court
finds that the facts in this case are as stated in the Decree of Sale
heretofore rendered by the Court on
November 28, 1955
.
Conclusions
of Law
1. This Court
has jurisdiction of this cause of action and of the parties thereto.
2. The costs
of Court and the Marshal's fee should first be paid from the proceeds
derived from the sale of the property constituting the subject of this
litigation.
3. The Court
concludes that under Federal Law the sum of $1250.00, representing the
amount due and payable on the mortgage, held by the People's Bank of
Collinsville, Alabama, should be first set aside for determination of
priority as between the landlord's lien of the plaintiff, M. H. Brock,
and the mortgage lien of the defendant, People's Bank of Collinsville,
Alabama, as will be hereinafter set forth. Such fund is free and clear
of the tax liens of the
United States of America
and the State of
Alabama
.
4. The Court
concludes that the tax liens of the Federal Government and of the State
of Alabama are superior by virtue of the provisions of Title 26, U. S.
C. A. Sec. 3672 (Sec. 6323, Int. Rev. Code of 1954), and Title 31, Code
of Alabama of 1940, Sec. 29, over the landlord's lien of the plaintiff,
M. H. Brock.
5. After
setting aside the first $1250.00 of the proceeds of sale, after payment
of costs, the Court further concludes that the
United States of America
is entitled to priority in the payment of $1010.77, due on its tax
assessment lien for wage and excise for the fourth quarter of 1953 from
any proceeds remaining. Since the Government's tax lien for the fourth
quarter of 1953 attached on May 21, 1954, and subsequently recorded in
the Probate Office of DeKalb County, Alabama, on November 2, 1954, the
Court further concludes that the tax lien of the United States for this
quarter is superior to and entitled to priority over the tax lien of the
State of Alabama. The Court also concludes, however, that the State of
Alabama
is entitled to priority over the tax lien of the
United States
for the first and second quarters of 1954. Therefore, the State of
Alabama
should receive the balance of the proceeds remaining after the above
disbursements are made in satisfaction of its tax lien in the amount of
$939.38, which was recorded in the Probate Office of DeKalb County,
Alabama, on
December 16, 1954
.
6. Of the
$1250.00, first set aside from the proceeds of sale, after payment of
costs, the Court concludes that the plaintiff, M. H. Brock, the
landlord, is entitled to priority under the law of
Alabama
over the recorded mortgage lien of the People's Bank of Collinsville,
Alabama.
Decree
It is,
therefore, ORDERED, by this Court, that the Clerk of the Court make the
following disbursements from the proceeds of the sale of the property,
which constitutes the subject of this litigation, as follows:
Check to the
Clerk of the United States District Court in the amount of $15.00. No
attorney's docket fee is to be taxed or collected.
Check in the
amount of $52.80, payable to the order of the Circuit Court of DeKalb
County, Alabama, in Equity.
Check in the
amount of $207.03, to the
U. S.
Marshal for payment of expenses as set forth in the Marshal's Report of
Sale.
Check in the
amount of $1250.00, payable to W. M. Beck, attorney for M. H. Brock.
Check in the amount of $1010.77, payable to the Treasurer of the
United States
, which check should be delivered to the United States Attorney.
Check for the
entire balance of the fund remaining payable to the order of the
Treasurer of the State of
Alabama
, in the amount of $464.40.
It being made
known to the Court that The First National Bank of Attalla, Alabama, is
a party to this cause, and the Court having heretofore found the
defendant, First National Bank of Attalla, to be in default, it is the
further ORDER, of this Court, that the defendant, The First National
Bank of Attalla, shall have and recover nothing in this proceeding.
It is further
ORDERED, ADJUDGED, and DECREED, by this Court, that this decree shall be
without prejudice as to the rights of any of the parties to this
litigation to proceed against the defendants, Lyn Slay Mills, Inc.,
Julius M. Slater, and Marion M. Lynch in other litigation for the
purpose of obtaining deficiency judgments on any sums that they have
failed to realize or collect in this proceeding.
[53-2 USTC
¶9545]
United States of America
, Appellant v. Albert Holman Lumber Company, et al., Appellees
(CA-5),
In the United States Court of Appeals for the Fifth Circuit, No. 14310,
206 F2d 685, August 25, 1953
Appeal from the United States District Court for the Northern District
of Alabama.
Priority of liens: Tax liens v. materialmen's liens.--Materialmen's
liens filed prior to the filing of the notice of the tax lien by the
United States
are held to be superior to the tax lien of the
United States
.
Harvey M.
Spear, Special Assistant to Attorney General, Charles S. Lyon, Acting
Assistant to Attorney General, Ellis N. Slack, Fred E. Youngman, A. F.
Prescott, Special Assistants to Attorney General, Department of Justice,
Washington, D. C., John D. Hill, United States Attorney, W. R. Bradford,
Assistant United States Attorney, Birmingham, Alabama, for appellant.
Henry Holman Mize, Joseph G. Burns,
Tuscaloosa
,
Alabama
, for appellees.
Before
HUTCHESON, Chief Judge, and BORAH and RUSSELL, Circuit Judges.
BORAH, Circuit
Judge:
This is an
appeal from a final judgment of the United States District Court for the
Northern District of Alabama holding that appellees had materialmen's
liens upon the estate of A. M. Price, deceased, which were superior to
federal income tax liens claimed by the United States of America,
appellant.
The undisputed
facts are these. In the year 1946, A. M. Price and Margaret L. Price,
husband and wife, purchased a dwelling house and lot in
Tuscaloosa
,
Alabama
, described as lot number 2 of Forest Lake Subdivision Number One. In
connection with the purchase thereof, Price and his wife on
April 16, 1946
, executed a purchase money mortgage to the First Federal Savings and
Loan Association of Tuscaloosa, which mortgage was filed for record in
the Probate Office of Tuscaloosa County on
April 18, 1946
, and is recorded in the mortgage records. Thereafter, on
February 11, 1949
, Price and his wife were divorced and in accordance with the terms of
an agreed property settlement Margaret L. Price conveyed her interest in
the aforementioned property to Price and the latter thereupon became the
sole owner thereof, subject to the mortgage. On
June 5, 1949
, Price married Christine Price and they lived together on the above
described property as their homestead until his death on or about
December 1, 1949
.
[Building
Materials Not Paid For]
During the
period of his second marriage and specifically from September to
November, 1949, Price repaired and renovated the dwelling house in
question. In connection therewith he entered into contracts for building
materials with appellees Albert Holman Lumber Company and Allen &
Jemison Company under the terms of which Price bought and each of them
sold and furnished to him building materials which were used in
improving and repairing the dwelling. No part of the indebtedness which
Price incurred as a result of these contracts was paid at the time of
his death or at any time subsequent thereto, and by reason of his
failure to discharge this indebtedness Albert Holman Lumber Company was
and is entitled to a materialman's lien on the property in the sum of
$757.62 with interest from November 17, 1949, and Allen & Jemison
Company was and is entitled to a like lien in the amount of $857.43 with
interest thereon from October 20, 1949. These liens were claimed
separately and severally as to both the land and the buildings and
improvements thereon in the proceedings hereinafter described.
[Verified
Statements of Liens Filed]
On
January 3, 1950
, Christine Price, the widow, was appointed as
admin
istratrix of the deceased's estate by the
Probate
Court
of
Tuscaloosa
County
and the
admin
istration of the estate is still pending in that court. On February 2,
1950, Allen & Jemison Company in compliance with Alabama law 1
and for the purpose of securing its indebtedness filed a verified
statement of its lien in the office of the judge of probate of
Tuscaloosa County. On
March 9, 1950
, Albert Holman Lumber Company for similar reasons filed in the office
of the judge of probate a verified statement of its lien. On
April 22, 1950
, and within the six months period prescribed by Section 42, Title 33,
Code of Alabama of 1940, Holman Company filed its bill of complaint in
the
Circuit
Court
of
Tuscaloosa
County
against Christine Price individually and as
admin
istratrix, the numerous Price children, and the First Federal Savings
and Loan Association of Tuscaloosa. The relief prayed was for a decree
in its favor and against Christine Price and the Price children for the
amount of the lien with interest; for the condemnation and sale of the
land and improvements; and for an adjudication of the rights and
priorities of Holman Company and the Loan Association. Following the
institution of this suit and on
April 28, 1950
, a suit was filed in the same court by Allen & Jemison Company
against Christine Price individually and as
admin
istratrix. The prayer was for a recognition of its lien, for a personal
decree against respondent in both capacities for the amount of the lien
plus interest, and for the condemnation and sale of the property to
satisfy the lien.
[Notice
of Tax Lien Filed]
On or about
April 9, 1951
, during the pendency of the state court proceedings, jeopardy
assessments were executed by the Commissioner of Internal Revenue
covering income taxes, interests thereon, and fraud penalties which were
assessed against the deceased for the years 1944 to 1947, inclusive. The
assessment lists were received on
April 12, 1951
, by the Collector of Internal Revenue for the District of Alabama and
on
April 17, 1951
, he filed a notice of tax lien in the Probate Office of Tuscaloosa
County in favor of the
United States
in the total sum of $148,595.05. At that time claims had already been
filed in the Probate Court in the total approximate amount of
$44,965.69, excluding real property mortgages, and the estimated net
value of the property belonging to the estate of the deceased was
approximately $50,000.00 over and above the mortgages thereon.
[Suit
Removed to
U. S.
District Court]
This suit is
an outgrowth of the state court proceeding which was instituted by
appellee Albert Holman Lumber Company. By an amendment to its bill of
complaint filed therein, appellee herein named Allen & Jemison
Company and the United States of America as additional parties
respondent on the grounds, among others: (1) that in order that those
entitled to liens on the property shall have the same protection, the Jemison
case should be consolidated with this cause and heard as one, in which
the validity of each alleged lien and the priority, if any, of each can
be determined and adjusted; and (2) that the tax lien of the United
States is inferior to the materialman's lien claimed by the complainant.
The amended prayer for relief asked that the rights and priorities of
complainant and the respondents First Federal Savings and Loan
Association of Tuscaloosa, Allen & Jemison Company, and the
United States
be determined, adjusted, and adjudicated. This amendment was allowed;
process was issued; and the impleaded respondents duly entered an
appearance. Thereafter, the suit was removed to the United States
District Court for the Northern District of Alabama on petition of the
United States
and a trial was had upon the pleadings, evidence, and an agreed written
stipulation of facts. The District Court made fact findings and
concluded that the mortgage of the First Federal Savings and Loan
Association of Tuscaloosa was superior to the materialman's liens and
the alleged tax lien of the
United States
, which is not disputed here. Further, and what is important on this
appeal, the court concluded that under the law of Alabama, the
plaintiff, Albert Holman Lumber Company, and the defendant, Allen &
Jemison Company each had perfected its materialman's lien prior to the
time that the federal tax lien was recorded and that each have a
specific and perfected materialman's lien that is superior to the
Federal tax lien claimed by the United States. Judgment was accordingly
entered in favor of Holman Company and Jemison Company and against
Christine Price as
admin
istratrix of the deceased's estate for the specified amounts due on
their respective liens and a sale of the property was ordered, and the
United States Marshal was directed to deposit the proceeds with the
Clerk for disposition in accordance with the further orders of the
court. From this judgment the
United States
has appealed and the defendant below, Allen & Jemison Company, now
appears as co-appellee with the plaintiff, Albert Holman Lumber Company.
[Statutory
Basis of the Tax Lien]
The tax lien
asserted by the
United States
stems from 53 Stat. 448, 449, 26
U. S.
C. (1946 ed.) §3670, 3671, 3672. Section 3670 provides: "If any
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, penalty, additional amount,
or addition to such tax, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person." Section 3671 provides that unless some other date is
specified by law the lien arises when the assessment lists are received
by the collector, which effective date is here conceded to be
April 12, 1951
. Section 3672 provides that the lien shall not be valid against
mortgagees, pledgees, purchasers or judgment creditors, until notice
thereof has been filed in the office provided by the law of the state
for such filing--in this case, the office of the judge of probate of
Tuscaloosa
County
. The appellees do not claim to be within the classes of persons
specified in §3672, and, accordingly, that section is not material to
our present inquiry. The question here is whether at the time the
Government's lien arose appellees' materialmen's liens possessed
"the characteristics of a specific perfected lien which alone bars
the priority of the
United States
." See
United States
v. Knott, 298
U. S.
544, 56
S. Ct.
902, 905. The issue thus concerns the effect of a lien in relation to a
provision of federal law for the collection of debts owing the
United States
which has always been considered a federal question. Hence the Supreme
Court has consistently held that while a state court's characterization
of a lien as specific and perfected is entitled to weight, it is subject
to reexamination by the federal courts. On the other hand, if the state
court itself describes the lien as inchoate, this classification is
"practically conclusive."
Illinois
v.
Campbell
, 329
U. S.
362, 371.
In this case
the
United States
first argues that under the law of
Alabama
the liens of the appellees were inchoate and that therefore we may
reverse the judgment on this basis. More specifically it argues that no
complete and specific liens attach to the property under the state law
until judgment is entered establishing the liens. Restating the same
argument in different words, the Government asserts that until the court
or the jury finds the existence of a materialman's lien, no right
against or interest in the property has been established. We do not at
all agree.
[Materialmen's
Liens Perfected Under State Law]
Under the law
of Alabama, as expressed by statute and the decisions of its highest
court, the liens of mechanics and materialmen attach from the
commencement of the building or improvement and are expressly conferred
on the land and on building and improvements to the extent in ownership
of all the right, title, and interest therein of the owner or
proprietor. LaVergne v. Evans Bros. Const. Co., 166
Ala.
289, 52 So. 318; Welch v. Porter & Co., 63
Ala.
225. Such liens are subject, however, to be defeated and lost if the
claims are not verified and filed with the judge of probate according to
the statute. There can be no question but that these steps were properly
taken as the
United States
concedes that at the time its lien arose appellees already had filed
timely notices of lien in conformity with the laws of
Alabama
. After verification and filing their liens were complete and, in favor
of the furnishers of materials, dated from the commencement of the work.
Until verified and filed according to the statute, such liens were
inchoate and defeasible. Benson Hardware Co. v. Jones, 233
Ala.
287, 135 So. 441; Jackson v. Farley, 212
Ala.
594, 103 So. 882; Welch v. Porter & Co., supra; Gray v. McKinley,
34 Ala. App. 630, 43 So. 2d 421. Appellant, citing Sturdavant v.
First Ave. Coal & Lumber Co., 219
Ala.
303, 122 So. 178, contends that the lien remains inchoate and is not
perfected until a judgment is obtained. This case, however, is clearly
distinguishable on its facts and we may not assume in the light of the
court's language that "the instant case is within the reason and
principles of * * * Jackson v. Farley, supra", that the
court intended to overturn previous decisions which it cited approvingly
and which pertain to cases where suits were brought to enforce the
perfected lien. The cases to which the court referred were
Jackson
v. Farley, supra; Grimsley v. First Ave. Coal & Lumber Co.,
217
Ala.
159, 115 So. 90; Seibs v. Englehardt, 78
Ala.
508. On this phase of the question the appellees must prevail.
[Perfected
Under Federal Law?]
This brings us
to the second phase of the controversy, whether the liens were specific
and perfected under federal law. In the most recent case, United
States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291], the
general lien held by the Government under 26 U. S. C. (1946 ed.) §3670
was claimed as of August 6, 1948, prior to which date there had arisen
certain "general, unperfected" liens claimed by the Town of
Walpole, New Hampshire. In that case, since the taxpayer was insolvent,
the
United States
claimed the benefit of another statute to give it priority, §3466 of
the Revised Statutes, 31
U. S.
C. (1946 ed.) §191, the pertinent provisions of which are set forth in
the margin. 2
But here the Government does not claim that it is entitled to priority
under §3466, which statute the Government is content to refer to as a
kindred matter, and we think that whether or not appellees' liens were
specific and perfected rather than "general" the claim of
federal priority is not made out. But meeting the appellant on its own
ground, we do not think that the analogous authorities which it cites
and to which we shall presently refer would support a holding that the
liens were not perfected under federal law.
In Illinois
v. Campbell, supra, the Supreme Court reviewed a number of its prior
decisions under §3466 and held that under the long-established rule
there were three essentials which were crucial to determine whether the
lien was specific and perfected, and these are: "(1) the identity
of the lienor, * * * (2) the amount of the lien, * * * and (3) the
property to which it attaches * * *." It was held that the lien was
not specific as to the property at the crucial time because it had not
been definitely ascertained what property of the debtor was devoted to
and used in his business and such property had not severed itself from
the general and free assets of the owner, from which the claims of the
United States were entitled to priority. We think the present case comes
within the established rule. Here, the identity of the lienors was made
certain, before the Government's priority attached, both by the statute
and by the notices of lien. The latter also fixed the amount of the
liens. Furthermore, the notices of lien made definite and certain the
property and segregated it from the debtor's general estate. We
therefore feel justified in acting on the assumption that the Supreme
Court would hold that the priority set up in §3466, supra, would
not divest a specific and perfected materialman's lien, attached to
specific property, whether accompanied by possession, or not. Cf.
Conard v. The Atlantic Insurance Company, 1 Pet. (26
U. S.
) 386, 441-442. To hold otherwise would be violative of the principle of
unjust enrichment, giving the
United States
the enhancement of the value of the property which resulted from the
materials supplied by appellees. In re Taylorcraft Aviation
Corporation, 6 Cir., 168 Fed. (2d) 808 [48-1 USTC ¶9288].
The judgment
was right. It is
AFFIRMED.
1
Section 37, Title 33, Code of Alabama of 1940 provides in pertinent
part:
"Every
mechanic, person, firm, or corporation who shall do or perform any work,
or labor upon, or furnish any material * * * for any building or
improvement on land, or for repairing, altering, or beautifying the same
* * * shall have a lien therefor on such building of improvements and on
the land on which the same is situated, to the extent in ownership of
all the right, title, and interest therein of the owner or proprietor,
and to the extent in the area of the entire lot or parcel of land in a
city, town or village * * *"
Section
41, Title 33, Code of Alabama of 1940 provides in part:
"It shall
be the duty of every person entitled to such lien to file in the office
of the judge of probate of the county in which the property upon which
the lien is sought to be established is situated, a statement in
writing, verified by the oath of the person claiming the lien, or of
some other person having knowledge of the facts, containing the amount
of the demand secured by the lien, after all just credits have been
given, a description of the property on which the lien is claimed in
such a manner that same may be located or identified, a description by
house number, name of street, and name of city, town or village being a
sufficient description where the property is located in a city, town or
village, and the name of the owner or proprietor thereof; but no error
in the amount of the demand or in the name of the owner or proprietor,
shall affect the lien. Unless such statement is so filed the lien shall
be lots. * * *"
Section
42, Title 33, Code of Alabama of 1940 provides:
"The lien
declared in this article shall be deemed lost unless the statement
referred to in the preceding section shall be filed by every original
contractor within six months * * * and any suit for the enforcement
thereof must be commenced within six months after the maturity of the
entire indebtedness secured thereby * * *."
2
R. S. §3466. "Whenever any person indebted to the United States is
insolvent, or whenever the estate of any deceased debtor, in the hands
of the executors or
admin
istrators, is insufficient to pay all the debts due from the deceased,
the debts due to the United States shall be first satisfied * * *."
[53-2 USTC
¶9545]
United States of America
, Appellant v. Albert Holman Lumber Company, et al., Appellees
(CA-5),
In the United States Court of Appeals for the Fifth Circuit, No. 14310,
206 F2d 685, August 25, 1953
Appeal from the United States District Court for the Northern District
of Alabama.
Priority of liens: Tax liens v. materialmen's liens.--Materialmen's
liens filed prior to the filing of the notice of the tax lien by the
United States
are held to be superior to the tax lien of the
United States
.
Harvey M.
Spear, Special Assistant to Attorney General, Charles S. Lyon, Acting
Assistant to Attorney General, Ellis N. Slack, Fred E. Youngman, A. F.
Prescott, Special Assistants to Attorney General, Department of Justice,
Washington, D. C., John D. Hill, United States Attorney, W. R. Bradford,
Assistant United States Attorney, Birmingham, Alabama, for appellant.
Henry Holman Mize, Joseph G. Burns,
Tuscaloosa
,
Alabama
, for appellees.
Before
HUTCHESON, Chief Judge, and BORAH and RUSSELL, Circuit Judges.
BORAH, Circuit
Judge:
This is an
appeal from a final judgment of the United States District Court for the
Northern District of Alabama holding that appellees had materialmen's
liens upon the estate of A. M. Price, deceased, which were superior to
federal income tax liens claimed by the United States of America,
appellant.
The undisputed
facts are these. In the year 1946, A. M. Price and Margaret L. Price,
husband and wife, purchased a dwelling house and lot in
Tuscaloosa
,
Alabama
, described as lot number 2 of Forest Lake Subdivision Number One. In
connection with the purchase thereof, Price and his wife on
April 16, 1946
, executed a purchase money mortgage to the First Federal Savings and
Loan Association of Tuscaloosa, which mortgage was filed for record in
the Probate Office of Tuscaloosa County on
April 18, 1946
, and is recorded in the mortgage records. Thereafter, on
February 11, 1949
, Price and his wife were divorced and in accordance with the terms of
an agreed property settlement Margaret L. Price conveyed her interest in
the aforementioned property to Price and the latter thereupon became the
sole owner thereof, subject to the mortgage. On
June 5, 1949
, Price married Christine Price and they lived together on the above
described property as their homestead until his death on or about
December 1, 1949
.
[Building
Materials Not Paid For]
During the
period of his second marriage and specifically from September to
November, 1949, Price repaired and renovated the dwelling house in
question. In connection therewith he entered into contracts for building
materials with appellees Albert Holman Lumber Company and Allen &
Jemison Company under the terms of which Price bought and each of them
sold and furnished to him building materials which were used in
improving and repairing the dwelling. No part of the indebtedness which
Price incurred as a result of these contracts was paid at the time of
his death or at any time subsequent thereto, and by reason of his
failure to discharge this indebtedness Albert Holman Lumber Company was
and is entitled to a materialman's lien on the property in the sum of
$757.62 with interest from November 17, 1949, and Allen & Jemison
Company was and is entitled to a like lien in the amount of $857.43 with
interest thereon from October 20, 1949. These liens were claimed
separately and severally as to both the land and the buildings and
improvements thereon in the proceedings hereinafter described.
[Verified
Statements of Liens Filed]
On
January 3, 1950
, Christine Price, the widow, was appointed as
admin
istratrix of the deceased's estate by the
Probate
Court
of
Tuscaloosa
County
and the
admin
istration of the estate is still pending in that court. On February 2,
1950, Allen & Jemison Company in compliance with Alabama law 1
and for the purpose of securing its indebtedness filed a verified
statement of its lien in the office of the judge of probate of
Tuscaloosa County. On
March 9, 1950
, Albert Holman Lumber Company for similar reasons filed in the office
of the judge of probate a verified statement of its lien. On
April 22, 1950
, and within the six months period prescribed by Section 42, Title 33,
Code of Alabama of 1940, Holman Company filed its bill of complaint in
the
Circuit
Court
of
Tuscaloosa
County
against Christine Price individually and as
admin
istratrix, the numerous Price children, and the First Federal Savings
and Loan Association of Tuscaloosa. The relief prayed was for a decree
in its favor and against Christine Price and the Price children for the
amount of the lien with interest; for the condemnation and sale of the
land and improvements; and for an adjudication of the rights and
priorities of Holman Company and the Loan Association. Following the
institution of this suit and on
April 28, 1950
, a suit was filed in the same court by Allen & Jemison Company
against Christine Price individually and as
admin
istratrix. The prayer was for a recognition of its lien, for a personal
decree against respondent in both capacities for the amount of the lien
plus interest, and for the condemnation and sale of the property to
satisfy the lien.
[Notice
of Tax Lien Filed]
On or about
April 9, 1951
, during the pendency of the state court proceedings, jeopardy
assessments were executed by the Commissioner of Internal Revenue
covering income taxes, interests thereon, and fraud penalties which were
assessed against the deceased for the years 1944 to 1947, inclusive. The
assessment lists were received on
April 12, 1951
, by the Collector of Internal Revenue for the District of Alabama and
on
April 17, 1951
, he filed a notice of tax lien in the Probate Office of Tuscaloosa
County in favor of the
United States
in the total sum of $148,595.05. At that time claims had already been
filed in the Probate Court in the total approximate amount of
$44,965.69, excluding real property mortgages, and the estimated net
value of the property belonging to the estate of the deceased was
approximately $50,000.00 over and above the mortgages thereon.
[Suit
Removed to
U. S.
District Court]
This suit is
an outgrowth of the state court proceeding which was instituted by
appellee Albert Holman Lumber Company. By an amendment to its bill of
complaint filed therein, appellee herein named Allen & Jemison
Company and the United States of America as additional parties
respondent on the grounds, among others: (1) that in order that those
entitled to liens on the property shall have the same protection, the Jemison
case should be consolidated with this cause and heard as one, in which
the validity of each alleged lien and the priority, if any, of each can
be determined and adjusted; and (2) that the tax lien of the United
States is inferior to the materialman's lien claimed by the complainant.
The amended prayer for relief asked that the rights and priorities of
complainant and the respondents First Federal Savings and Loan
Association of Tuscaloosa, Allen & Jemison Company, and the
United States
be determined, adjusted, and adjudicated. This amendment was allowed;
process was issued; and the impleaded respondents duly entered an
appearance. Thereafter, the suit was removed to the United States
District Court for the Northern District of Alabama on petition of the
United States
and a trial was had upon the pleadings, evidence, and an agreed written
stipulation of facts. The District Court made fact findings and
concluded that the mortgage of the First Federal Savings and Loan
Association of Tuscaloosa was superior to the materialman's liens and
the alleged tax lien of the
United States
, which is not disputed here. Further, and what is important on this
appeal, the court concluded that under the law of Alabama, the
plaintiff, Albert Holman Lumber Company, and the defendant, Allen &
Jemison Company each had perfected its materialman's lien prior to the
time that the federal tax lien was recorded and that each have a
specific and perfected materialman's lien that is superior to the
Federal tax lien claimed by the United States. Judgment was accordingly
entered in favor of Holman Company and Jemison Company and against
Christine Price as
admin
istratrix of the deceased's estate for the specified amounts due on
their respective liens and a sale of the property was ordered, and the
United States Marshal was directed to deposit the proceeds with the
Clerk for disposition in accordance with the further orders of the
court. From this judgment the
United States
has appealed and the defendant below, Allen & Jemison Company, now
appears as co-appellee with the plaintiff, Albert Holman Lumber Company.
[Statutory
Basis of the Tax Lien]
The tax lien
asserted by the
United States
stems from 53 Stat. 448, 449, 26
U. S.
C. (1946 ed.) §3670, 3671, 3672. Section 3670 provides: "If any
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, penalty, additional amount,
or addition to such tax, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person." Section 3671 provides that unless some other date is
specified by law the lien arises when the assessment lists are received
by the collector, which effective date is here conceded to be
April 12, 1951
. Section 3672 provides that the lien shall not be valid against
mortgagees, pledgees, purchasers or judgment creditors, until notice
thereof has been filed in the office provided by the law of the state
for such filing--in this case, the office of the judge of probate of
Tuscaloosa
County
. The appellees do not claim to be within the classes of persons
specified in §3672, and, accordingly, that section is not material to
our present inquiry. The question here is whether at the time the
Government's lien arose appellees' materialmen's liens possessed
"the characteristics of a specific perfected lien which alone bars
the priority of the
United States
." See
United States
v. Knott, 298
U. S.
544, 56
S. Ct.
902, 905. The issue thus concerns the effect of a lien in relation to a
provision of federal law for the collection of debts owing the
United States
which has always been considered a federal question. Hence the Supreme
Court has consistently held that while a state court's characterization
of a lien as specific and perfected is entitled to weight, it is subject
to reexamination by the federal courts. On the other hand, if the state
court itself describes the lien as inchoate, this classification is
"practically conclusive."
Illinois
v.
Campbell
, 329
U. S.
362, 371.
In this case
the
United States
first argues that under the law of
Alabama
the liens of the appellees were inchoate and that therefore we may
reverse the judgment on this basis. More specifically it argues that no
complete and specific liens attach to the property under the state law
until judgment is entered establishing the liens. Restating the same
argument in different words, the Government asserts that until the court
or the jury finds the existence of a materialman's lien, no right
against or interest in the property has been established. We do not at
all agree.
[Materialmen's
Liens Perfected Under State Law]
Under the law
of Alabama, as expressed by statute and the decisions of its highest
court, the liens of mechanics and materialmen attach from the
commencement of the building or improvement and are expressly conferred
on the land and on building and improvements to the extent in ownership
of all the right, title, and interest therein of the owner or
proprietor. LaVergne v. Evans Bros. Const. Co., 166
Ala.
289, 52 So. 318; Welch v. Porter & Co., 63
Ala.
225. Such liens are subject, however, to be defeated and lost if the
claims are not verified and filed with the judge of probate according to
the statute. There can be no question but that these steps were properly
taken as the
United States
concedes that at the time its lien arose appellees already had filed
timely notices of lien in conformity with the laws of
Alabama
. After verification and filing their liens were complete and, in favor
of the furnishers of materials, dated from the commencement of the work.
Until verified and filed according to the statute, such liens were
inchoate and defeasible. Benson Hardware Co. v. Jones, 233
Ala.
287, 135 So. 441; Jackson v. Farley, 212
Ala.
594, 103 So. 882; Welch v. Porter & Co., supra; Gray v. McKinley,
34 Ala. App. 630, 43 So. 2d 421. Appellant, citing Sturdavant v.
First Ave. Coal & Lumber Co., 219
Ala.
303, 122 So. 178, contends that the lien remains inchoate and is not
perfected until a judgment is obtained. This case, however, is clearly
distinguishable on its facts and we may not assume in the light of the
court's language that "the instant case is within the reason and
principles of * * * Jackson v. Farley, supra", that the
court intended to overturn previous decisions which it cited approvingly
and which pertain to cases where suits were brought to enforce the
perfected lien. The cases to which the court referred were
Jackson
v. Farley, supra; Grimsley v. First Ave. Coal & Lumber Co.,
217
Ala.
159, 115 So. 90; Seibs v. Englehardt, 78
Ala.
508. On this phase of the question the appellees must prevail.
[Perfected
Under Federal Law?]
This brings us
to the second phase of the controversy, whether the liens were specific
and perfected under federal law. In the most recent case, United
States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291], the
general lien held by the Government under 26 U. S. C. (1946 ed.) §3670
was claimed as of August 6, 1948, prior to which date there had arisen
certain "general, unperfected" liens claimed by the Town of
Walpole, New Hampshire. In that case, since the taxpayer was insolvent,
the
United States
claimed the benefit of another statute to give it priority, §3466 of
the Revised Statutes, 31
U. S.
C. (1946 ed.) §191, the pertinent provisions of which are set forth in
the margin.
