Assignment of Funds Page 2

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Under the federal revenue statute, federal law determines the rights of priority among competing lienors; however, state law controls in determining the nature of a taxpayer's interest in property. SEC v. Levine, 881 F.2d 1165, 1175 (2d Cir. 1989); see also National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722; Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960). "[W]hether the [federal] tax lien has attached depends on the state law question of ownership, since the lien can only attach to property that the taxpayer owns." United States v. Fontana [82-1 USTC ¶9237 ], 528 F.Supp. 137, 143 (S.D.N.Y. 1981). "This follows from the fact that the federal statute 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' " National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722 (quoting United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958)). Thus, we must look initially to the nature of Thomas' interest in the property under New York law.

Thomas purported to assign to Gidron a portion of his interest in income to be earned some time in the future. Under New York law, income to be earned in the future may be assigned. "[T]he right to receive [such income], though liable to be defeated, is vested, and, in the absence of [a statutory restriction], . . . is assignable." 6 N.Y. Jur. 2d Assignments §23 , at 260 (1980). However, like the assignment of accounts receivable where the assignor has no existing contract under which such accounts are to arise, the assignment of a right to receive income contingent upon the occurrence of a future event, does not convey a present interest to the assignee. See Central State Bank v. New York , 73 Misc. 2d 128, 129, 341 N.Y.S.2d 322, 324 (Ct. Cl. 1973); see also Stathos v. Murphy, 26 A.D.2d 500, 503, 276 N.Y.S.2d 727, 730 (1st Dep't 1966 ) ("There is no doubt that the assignment of a truly future . . . interest does not work a present transfer of property. It does not because it cannot; no property yet exists."), aff'd, 19 N.Y.2d 883, 227 N.E.2d 880, 281 N.Y.S.2d 81 (1967). Rather, the rights that Gidron acquired, contingent upon the occurrence of a prizefight at some unspecified time in the future, were "truly future interests." See In re Estate of Rosenberg, 62 Misc. 2d 12, 17, 308 N.Y.S.2d 51, 58 (Sur. Ct. 1970) ("An assignment of a future 'contingent' interest . . . is an assignment of a truly future interest, not an assignment of present rights."); see also In re Holt, 28 A.D.2d 201, 205, 284 N.Y.S.2d 208, 212 (3d Dep't 1967) (" 'future rights' . . . are those rights which arise in the future; or, more aptly stated in its most precise definition, a right which the assignor does not have at the time of the assignment but which he expects to have under some arrangements he is about to enter." (emphasis in original)). These rights could not ripen into present rights or interests until the occurrence of the third fight. See Central State Bank, 73 Misc. 2d at 129, 341 N.Y.S.2d at 324; City of Utica v. Gold Metal Packing Corp., 54 Misc. 2d 708, 710, 283 N.Y.S.2d 611, 613 (Sup. Ct. 1967) ("The courts recognize equitable assignments of future interests which will create a lien between the parties at the time the property comes into existence"); 6 N.Y. Jur. 2d Assignments §20, at 256 ("the assignment of contingent interests . . . , although resting in a mere possibility, is recognized and takes effect when the thing . . . assigned comes into existence.").

The government's liens attached when the assessments were made in 1987 and 1988, but Gidron only acquired a future interest in the prizefight purses on December 11, 1985 by virtue of his assignment. Cf. United States v. Colby Academy [82-2 USTC ¶9450 ], 524 F.Supp. 931, 934 (E.D.N.Y. 1981). At that time, Gidron's interest was inchoate. Although the identity of the lienor was known and the amount of the lien was established, the property subject to the lien was not in existence at the time the government's lien arose. See Lerner [87-1 USTC ¶9339 ], 637 F.Supp. at 681 (court held that "lien remains inchoate until the underlying debt becomes due." (citation omitted)); MDC Leasing Corp. v. New York Property Ins. Underwriting Ass'n [79-1 USTC ¶9122 ], 450 F.Supp. 179, 181 (S.D.N.Y. 1978), aff'd mem., 603 F.2d 213 (1979). Therefore, under applicable federal law, the government had priority over Gidron. See United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963).

Gidron contends that the district court erred in determining that Jones' claim to interpleader funds had priority over his claim because his stipulation of settlement, dated December 11, 1985 , was prior in time to Jones' judgment of filiation and order for support. Noting that "[u]nder New York law, the legislature has given priority to child support orders over wage assignments and garnishments," the district court found Jones' claim to have priority over Gidron's claim. 749 F.Supp. at 85.

Gidron argues that Thomas' assignment to him is not a wage assignment or garnishment and, therefore, the district court erred in subordinating his claim to Jones' claim. He contends that the transaction constituted a valid present transfer of property rights from Thomas to King to be paid to Gidron, thereby divesting Thomas of any rights in the specified prizefight purses. Gidron's defeat in his fight against the government, however, precludes him from arguing (successfully) in his fight against Jones that he was assigned a present interest in 1985.

There is another reason why Gidron's argument must fail. Section 5241 of the New York Civil Practice Laws and Rules, entitled "Income execution for support enforcement," provides that a "levy pursuant to this section or an income deduction order pursuant to section 5242 of this chapter shall take priority over any other assignment, levy or proccess." N.Y. Civ. Prac. L. & R. §5241(h) (McKinney Supp. 1991) (emphasis added); see also id. §5242(c) McKinney Supp. 1991). "[T]he intent and purpose of the[se] enforcement statutes is to enable a former spouse to enforce a support judgment against 'income,' in a priority basis over the income execution of a normal judgment creditor." Dawson v. Krolikowski, 140 Misc. 2d 343, 346, 530 N.Y.S.2d 931, 934 (Sup. Ct. 1988); see also Long Island Trust Co. v. United States Postal Serv., 647 F.2d 336, 339 (2d Cir. 1981). Under the statute, "income" includes "any earned, unearned, taxable or non-taxable income." N.Y. Civ. Prac. L. & R. §5241(a)(6) .

Clearly, the monies to be paid to Thomas by DKP for Thomas' participation in the boxing match fall within the meaning of "income" under section 5241 . Therefore, it is immaterial whether the assignment embodied in the stipulation of settlement is called a wage assignment or any other kind of assignment. The statute gives priority to orders for support over "any other assignment." Id. §5241(h) . It subordinates all normal judgment creditors to the former spouse who has a support judgment. See id. Thus, even if Gidron were considered to be a judgment creditor, his claim must be found to be subordinate to Jones' judgment of filiation and order for child support.

CONCLUSION

The judgment of the district court is reversed insofar as it establishes the priority between Gidron's claim over the government's federal tax liens. The portion of the judgment establishing the priority of the claim of Althea Jones over the claims of both the government and Gidron is affirmed. The order of priority of claims to the interpleaded funds is fixed as follows: 1) child support (Jones); 2) federal tax liens (government); and 3) claim based on stipulation (Gidron).

 

 

[54-1 USTC ¶9375]Aubrey E. Bain and Alfred W. Dovel, etc. v. Caruso-Sturcey Corporation, et al. Aubrey E. Bain and Alfred W. Dovel, etc. v. Caruso-Sturcey Corporation, et al.

In the New York Supreme Court, Nassau County, Index #1983, 1983A 1952, 134 NYS2d 246, November 10, 1953

Liens: Lien not perfected until notice given: Funds assigned by debtor to holders of mechanics' liens.--A tax lien arose on September 20, 1950 against contractor, but notice was not given until September 27, 1951. Sub-contractors, who perfected claims against contractor before notice of tax lien was given, were held to have priority over the government. Contractor executed an assignment for the benefit of creditors, and the government was denied priority over mechanics' liens perfected before the assignment.

Alfred J. Loew, by Alfred P. Barrett for Bain. Adolph G. Kraus for Caruso-Sturcey.

LOCKWOOD, Official Referee:

These are two actions tried together, brought by plaintiffs to foreclose mechanics' liens on two separate public improvements of two school districts in Nassau County .

They were referred to hear and determine by order made and entered March 16, 1953 . The briefs did not reach the Court until October, 1953.

Plaintiffs, as sub-contractors, furnished labor and materials for the improvements.

The facts are not in dispute. Defendant, Caruso-Sturcey Corporation, hereinafter referred to as contractor, entered into contracts with the school districts to do certain heating and ventilating work. The plaintiffs and defendant, Minneapolis Honeywell Regulator Company, together hereinafter referred to as sub-contractors, furnished labor and materials to the contractor. Both filed notices of lien with the public authorities on and prior to June 7, 1951 and under such circumstances as would concededly entitle them to liens on the balances due from the school districts to the contractor, except for the circumstances hereinafter set forth.

[Government's Lien Created]

The contractor was in financial difficulties and owed taxes to the United States in excess of $11,000. The assessment list for such unpaid taxes was received by the Collector of Internal Revenue of the proper district on September 20, 1950 and he gave notice and made demand for payment against the contractor on September 20, 1950 . A lien in favor of the United States arose on that day. (In re:Capital Foundry Corp., 64 Fed. Supp. 885 E. D., N. Y.;Glass City Bank, etc. v. U. S. , 146 Fed. (2d) 831 C. A. 3rd [45-1 USTC ¶9157].) However, notice of lien for unpaid taxes was not filed by the Collector with the County Clerk of Nassau County until September 27, 1951 , or considerably after the filing of the notice of lien by the sub-contractors. The United States claims priority and in its counterclaims asks that all sums which would have been due to the contractor be paid to it on account of its tax lien.

There is a further complication in that the contractor, on September 17, 1951 , made a general assignment for the benefit of creditors. This was after the filing of notice of the subcontractors' liens and before the filing of notice of the tax lien.

The Court is to determine the rights of the various parties in and to the balances due from the school districts and which they are willing to pay to those entitled thereto. School District #5 holds a balance of $2,603.74 and School District #23 holds a balance of $2,867.37, which funds are, of course, insufficient to satisfy all claims.

[Government's Claim to Priority]

The claim to priority by the United States is asserted under United States Internal Revenue Code (26 U. S. C., 1946 ed.), Sections 3670, 3971, and 3672. Under Sections 3670 and 3671, there is a tax lien created upon nonpayment after demand "upon all property and rights to property" belonging to the taxpayer which attaches from the time the assessment list is received by the Collector. The assesssment lists involved here were received at and prior to September 20, 1950 ; thus if it were not for the provisions of Section 3672, this tax lien would clearly have priority. Section 3672 (as amended) provides that the lien "shall not be valid as against any mortgage, pledgee, purchaser, or judgment-creditor until notice thereof has been filed by the Collector" in certain designated offices. It is conceded that was not filed until September 27, 1951 .

The attorneys for the United States contend that the sub-contractors do not come under the exceptions of Section 3672. The attorneys for the sub-contractors, on the other hand, contend that their lien is covered by Section 3672 and, hence, is prior to the tax lien, notice of which was filed subsequent to their notices of mechanics' liens.

A similar situation was considered by the Court inCranford Co. v. Leopold & Co., 189 Misc. 388 (aff'd 273 App. Div. 754; aff'd 298 N. Y. 676). There it was held that moneys paid for a public improvement are a trust fund for the payment of the proper expenses of construction and that a statutory notice of mechanics' lien attaches to the debt, and that the lienor, to the extent of his interest, is a statutory assignee and protected unless and until notice of the tax lien of the United States is filed. Anderson v. Hayes Construction Co., 243 N. Y. 140; Matter of Weston, 68 Fed. (2d) 913 (C. A. 2nd) are cited by the Court in theCranford case, supra, in support of its position. The brief on behalf of the United States relies considerably upon Matter of Capital Foundry, 64 Fed. Supp. 885 and attempts to distinguish the Cranford case, supra. However, in the Capital Foundry case the notice of tax lien was filed on February 21, 1945 and the notice of mechanics' lien was filed on March 27, 1945, and hence, of course, was subject to the lien of the Federal tax. Furthermore, the Capital Foundry case involved a private improvement.

It is clearly distinguishable from the facts in the instant case and certainly not controlling.

The brief filed on behalf of the United States attempts to distinguish the Cranford case, supra, "since in that case the plaintiff is an assignor by operation of law and as such a purchaser." However, in the present case, the plaintiffs and their sub-contractors, after filing their notice of lien with the public authorities, became equally "assignors by operation of law." Their claim, likewise, attached to the debt due from the municipal corporation and was an "assignment by operation of law."

[Assignment to Creditors]

There remains the additional contention urged by the United States that under Section 3466 of the Revised Statutes (31 U. S. C. 1946 ed. Sec. 191) the United States is granted priority over all claims where the corporation debtor makes a general assignment for the benefit of creditors and, hence, the tax claim is entitled to priority over claims of the sub-contractors. That contention cannot be sustained; it disregards the fact that a valid lien and assignment by operation of law had been created in favor of the filing sub-contractors prior to the assignment for the benefit of creditors. The claim to priority is valid only as to the surplus remaining in the hands of School District #5 after payment of the amount due to plaintiff in that case, it appearing that there will be a surplus.

Submit on notice proposed findings and judgment in each case in accordance with this determination.

 

 

[60-2 USTC ¶9700]Big Farm Tire Corporation, Plaintiff v. J. L. Boland, et al., Defendants

U. S. District Court, East. Dist. Va. , Richmond Div., Civil Action No. 2998, 9/19/60

[1954 Code Sec. 6323]

Tax lien: Priority of claims: Assignee of note: City.--A payee of a note assigned part of the value of the note and delivered the note for collection to a trust company. Subsequently, the U. S. assessed and filed notice of a tax deficiency against the payee. The payee then assigned the remaining value of the note of a bank. A city later claimed a tax deficiency against the payee. The court held that the U. S. had priority over all other claimants but the trust company since the claims of the bank and city arose subsequently to the notice of the federal tax lien.

J. M. Weinberg, Central National Bank Bldg., Richmond , Va. , for plaintiff. John M. Hollis, United States Attorney, Richmond , Va. , for Government. John W. Riely, Electric Bldg., Richmond , Va. , for Central National Bank. W. Jerry Rob erts, 721 E. Main Street , Richmond , Va. , for Boland and Troy . Sam B. Witt, Jr., Insurance Bldg., Richmond, Va., for Virginia Trust Co. George W. Sadler, Central National Bank Bldg., Richmond, Va., for Trustees. James A. Eichner, Assistant City Attorney, City of Richmond, Richmond, Va., for City of Richmond.

Findings of Fact

BRYAN, District Judge:

The above styled action was tried by the Court without a jury on March 10, 1960 , and the Court, after considering the pleadings, the evidence, and the arguments of counsel, makes the following findings:

1. By deed dated May 10, 1956 , and recorded May 18, 1956 , in the Clerk's Office of the Circuit Court of Hanover County, Virginia, the plaintiff, Big Farm Tire Corporation, formerly Overseas Tire Corporation, purchased from the defendants, J. L. Boland and Vernice L. Boland, his wife, approximately one hundred eighty-one (181) acres of real estate in Hanover County , Virginia . To secure payment of the purchase price the plaintiff conveyed the property to Alan G. Fleischer and R. F. Kenny, Jr., Trustees, to secure the sum of $29,259.40, and interest. This deed of trust was recorded May 18, 1956 , in Deed Book 172, page 140, in the aforesaid Clerk's office. This sum was evidenced by three bearer notes all of which were paid except the last note, dated May 16, 1956 , in the principal sum of $10,759.40.

[Trust Company]

2. On March 19, 1959 , J. L. Boland assigned the aforesaid note, to the extent of $5,000.00, to the Virginia Trust Company. Administrator D. N. B. C. T. A. of the Estate of M. Luther Terry, deceased, for a present consideration, and notice of this assignment was given to the plaintiff. The note itself was delivered to the Virginia Trust Company for collection.

[Notice of Tax Deficiency]

3. On March 24, 1959 , the United States of America , intervening plaintiff, acting through the District Director of Internal Revenue, made jeopardy assessments against J. L. Boland for tax liabilities and penalties for the years 1956 and 1957 in the respective amounts of $14,863.41 and $1,130.42. On the same date the District Director made demand for payment on J. L. Boland and filed notices of liens for the assessments with the proper court. On the same date the United States of America served a notice of levy on the plaintiff in the amount of $15,994.58, the amount of its claims against the defendant, J. L. Boland, for unpaid taxes.

[The Bank]

4. On April 14, 1959, the defendant, J. L. Boland, assigned to the extent of $6,000.00 his interest in the deed of trust note above described to the Central National Bank of Richmond, Virginia, to be applied as a credit on a note the bank holds for collection for the account of Samuel Z. Troy and others, and authorized Samuel Z. Troy in his own name to sue for and take all legal steps deemed proper or necessary in connection with this assignment. Notice in writing of this assignment was given to the Virginia Trust Company, but not to the Central National Bank of Richmond .

[The City]

5. Also on April 14, 1959 , a deputy tax collector of the City of Richmond, Virginia, served on the Virginia Trust Company an application for payment to the City out of funds of J. L. Boland held by the trust company, of an indebtedness of J. L. Boland to the City for real estate taxes in the amount of $1,303.73. This application stated that under the provisions of Section 58-1010, Code of Virginia, the City claimed a lien on said funds. On July 168 1959, the City served a similar application on the plaintiff for real estate taxes in the amount of $1,316.99.

6. The Taxpayer, J. L. Boland, has instituted a proceeding in the Tax Court of the United States of adjudication of his federal tax liability for the years 1959 and 1957, styled Jesse Lee Boland v. Commissioner of Internal Revenue, Docket No. 81,405, which proceeding is still pending.

Conclusions of Law

1. The Court has jurisdiction of the parties and of the subject matter of this action.

[Priority of Claims]

2. The assignment to the Virginia Trust Company of said note to the extent of $5,000.00 on March 19, 1959 , was superior to the rights of all other parties.

3. The federal tax lien of the United States arose on March 24, 1959, and is superior to all rights arising subsequently thereto save that of a "mortgagee, pledgee or purchaser" of a "security" without notice. 26 U. S. C. A. 6321, 6322 and 6323.

4. The claim of the City of Richmond, Virginia, arose subsequently, on April 14, 1959 , when application was made to the Virginia Trust Company. Since the City is neither a mortgagee, pledgee or purchaser, its claim is inferior to that of the United States .

5. The assignment to the Central National Bank for the account of Samuel Z. Troy did not constitute either the Bank or Troy a mortgagee or purchaser, since the assignment was not for a present consideration. If either of them constituted a pledgee, he was not a pledgee of a security, and the general filing of the tax lien with the proper court was sufficient notice as to them. 26 U. S. C. A. 6323(c)(1); U. S. v. Ball Construction Co., 355 U. S. 587 (1958) [58-1 USTC ¶9327].

6. What was pledged was not a security but merely an equity in a note, since the pledgor had delivered the note to Virginia Trust Company, and the note could only be pledged by transfer of it, 1950 Va. Code 6-382, and Boland was not then the holder so as to transfer it. Id. 6-544; Fleshman v. Bibb, 118 Va. 582, 88 S. W. 64 (1916).

7. The tax lien of the United States is superior to competing claims, including that of the interpleader for its costs; and, therefore, the entire sum on deposit in the registry of the court will be awarded to the United States .

[Tax Liability Undertermined]

8. Inasmuch as the tax liability of J. L. Boland for the years 1956 and 1957 is presently the subject of litigation in the Tax Court of the United States , disbursement of the moneys in the custody of the court should be held in abeyance pending the outcome of that proceeding.

9. The plaintiff is entitled to recover from the City of Richmond and Samuel Z. Troy, jointly and severally, its statutory costs, plus an attorney's fee of $150.00.

Order

This cause, having come on for trial, and having been heard by the Court on the pleadings and proof of all parties, oral arguments of counsel for all parties having been heard by the Court and briefs filed by those parties desiring to do so, the Court having given due consideration thereto, and findings of fact and conclusions of law having been made by the Court and entered herein;

It is hereby ADJUDGED and DECREED that the respective priorities of the claimants to the fund is as follows: first, the lien of the United States for taxes; second, the claim of the City of Richmond for its taxes; third, the claim of Samuel Z. Troy.

This cause is continued on the docket pending final adjudication of the proceeding pending in the Tax Court of the United States under the style of Jesse Lee Boland v. Commissioner of Internal Revenue, Docket No. 81,405, with leave to the above parties to apply to the Court for distribution of the fund at that time in accordance with the priorities set forth herein.

It is hereby ORDERED that the Clerk of this Court, or one of his duly authorized deputies, deposit the funds deposited to the credit of the Court in this cause in an interest-bearing account with a commercial bank pendente lite.

It is further ORDERED, ADJUDGED and DECREED that the plaintiff, Big Farm Tire Corporation, have and recover of the City of Richmond, Virginia, and Samuel Z. Troy, jointly and severally, an attorney's fee in the sum of $150.00, together with the costs of this action to be taxed by the Clerk of this Court.

 

 

[58-1 USTC ¶9458]In the Matter of The New Haven Clock & Watch Company, Debtor The First National Bank of Chicago, Petitioner-Appellee-Appellant v. Arthur B. O'Keefe, Jr., Trustee, Appellant, and The United States of America, Appellant

(CA-2), U. S. Court of Appeals, 2d Circuit, Docket No. 24767, 253 F2d 577, 3/28/58, Affirming in part, reversing in part and remanding to the District Court. The District Court decision is unreported

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

Tax lien: Reorganization proceedings under Chapter X of the Bankruptcy Act: Priority of lien for taxes: Validity of assignment to bank of accounts receivable as security: Priority of claim for attorney's fees paid when amount not known.--In 1956 a debtor corporation, which since 1947 had been continuously borrowing large sums of money from a bank, secured by assignments of accounts receivable, in the ratio of 4 to 3, filed a petition for reorganization under Chapter X of the Bankruptcy Act. The trial court ordered the trustee to pay to the bank the amount of its indebtedness, but disallowed an additional amount claimed by the bank on cross-appeal on account of attorney's fees paid. The principal issue involved was whether the assignment of the accounts receivable to the bank was invalid and fraudulent under Sec. 70(e) of the Bankruptcy Act because of the alleged "reservation of dominion" by the debtor corporation over the assigned accounts. The appeal court, upholding the trial court in this respect, held that the bank had sufficiently "policed" the receivables and that its lien as to the assigned accounts was therefore valid, notwithstanding the debtor corporation had been allowed to substitute some accounts for those previously assigned. Nor did the Court find merit in the further contention made that the bank's security interest was a "statutory lien" within the meaning of Sec. 67(c)(2) of the Bankruptcy Act and not "fully perfected" within the meaning of applicable Connecticut statutory requirements, so that the bank could not be held to have had "possession of" the assigned accounts receivable, as required by Sec. 67(c)(2) of the Bankruptcy Act. However, as to the issue of the additional claim made by the bank on cross-appeal for attorney's fees expended, the appeal court, although it found notice of the bank's cross-appeal to have been filed within the time allowed by Sec. 25 of the Bankruptcy Act, reversed the trial court's order disallowing such attorney's fees and remanded the case back to that court, because of the incompleteness of the record as to this issue, and directed that court to determine whether the Government had perfected its lien as required by 1939 Code Secs. 3670-3672 and corresponding 1954 Code Secs. 6321-6323.

Schwartz & Knight, New Haven, Conn. (J. Stephen Knight, of counsel, Charles D. Isaac, on the brief, New Haven, Conn.), for petitioner-appellee-appellant. Curtiss K. Thompson, New Haven , Conn. , for Arthur B. O'Keefe, Jr., Trustee. Charles K. Rice, Assistant Attorney General, Lee A. Jackson, I. Henry Kutz (Marvin W. Weinstein, of counsel), Department of Justice, Washington, D. C., Simon S. Cohen, United States Attorney, W. Paul Flynn, Assistant United States Attorney, New Haven, Conn., for The United States of America.

Before MEDINA and MOORE , Circuit Judges, and GALSTON, District Judge.

[Opinion in Full Text]

MEDINA , Circuit Judge:

The New Haven Clock & Watch Company, a debtor which on December 7, 1956 filed a petition for reorganization under Chapter X of the Bankruptcy Act, had, since 1947, been borrowing large sums of money from The First National Bank of Chicago . This debt was secured by the assignment to the Bank of accounts receivable owing to the Clock Company. The principal issues on this appeal from the order below directing the Trustee to pay to the Bank the amount of the Clock Company's debt involve the validity and priority of the Bank's security upheld by the court below, under the financing arrangement used by the Bank in lending large sums to the Clock Company.

The United States , a substantial creditor of the Clock Company, asserts that the assignment of the accounts receivable to the Bank was fraudulent in law because the Clock Company allegedly reserved the right to dispose of the proceeds of the accounts, and thus the transfers to the Bank were void under Section 70(e) of the Bankruptcy Act. ¹ The principle that the "reservation of dominion" by the debtor over property transferred to secure a loan voids the creditor's security interest in that property was applied by the Supreme Court to financing by the assignment of accounts receivable in Benedict v. Ratner, 268 U. S. 353.

It is against the rule set forth by the Supreme Court in Benedict v. Ratner, requiring the creditor to so "police" the assigned accounts that the debtor does not reserve dominion over them, that we must test the validity of the Bank's security. Assuming arguendo, as the Government contends, that this rule is applicable to every security transaction involving the assignment of accounts regardless of state law relating specifically to such assignments, it is nevertheless clear that, since, in the case at bar, the Bank effectively "policed" the receivables assigned to it, the transfers to the Bank were not fraudulent and thus not void under the Bankruptcy Act.

[Financing Statement]

The financing agreement entered into by the Bank and the Clock Company, and the control over the assigned accounts exercised by the Bank acting pursuant thereto, are readily distinguishable from the security transaction involved in Benedict v. Ratner. In that case the only tangible evidence of the assignment was a list of the assigned accounts sent by the debtor to the creditor. Although the creditor was given the right to demand that these accounts be used in repayment of the loan, he did not do so, but rather "the Company (debtor) was not required to apply any of the collections to the repayment of * * * (the) loan. It was not required to replace accounts collected by other collateral of equal value. It was not required to account in any way to * * * (the creditor). It was at liberty to use the proceeds of all accounts collected as it might see fit. * * * The business was to be conducted as * * * (before the loan had been negotiated). Indebtedness was to be incurred, as usual, for the purchase of merchandise and otherwise in the ordinary course of business." 268 U. S. at 360. Thus, the security transaction in Benedict v. Ratner was an assignment of accounts in name only, while, in the case at bar, the actual conduct of the Bank in controlling the receivables assigned to it was the presise opposite of what occurred in Benedict v. Ratner, and shows beyond doubt that the debtor did not, in fact, reserve dominion over the assigned accounts.

[Demand Collateral Notes]

It was the practice of the Bank to lend to the Clock Company in exchange for demand collateral notes in the amount of each loan no more than seventy-five per cent of the face amount of the accounts assigned to it to secure the loan, and this ratio of debt to collateral was continuously maintained by the Bank in its dealings with the Clock Company. Along with each schedule of accounts assigned to the Bank there was an assignment contract which obligated the Clock Company to: (1) transmit to the Bank all proceeds received on the assigned accounts, so endorsed that the Bank could collect on them; (2) keep the proceeds of the assigned accounts separate from its own funds and expressly in trust for the Bank; (3) record on all of its pertinent records and books of account a notation showing that these accounts were assigned; (4) allow the Bank to examine and make extracts from its records; (5) notify the Bank immediately in case of the return of merchandise by the debtor of an assigned account, segregate and label the returned goods, and within ten days forward new accounts to cover the value of the returns. The assignment contract also provided that all funds collected or received by the Bank from the debtors of the assigned receivables were to be deposited in a special account in the Bank. This account was to be held by the Bank as collateral security for the payment of any indebtedness to it, and the Clock Company had no control over, nor could it withdraw any money from this account.

This special collateral account was opened and maintained by the Bank as provided in the agreement, and most of the other provisions of the assignment contract were also carried out by the parties. In addition, the Bank, acting pursuant to another provision in the contract, appointed an employee of the Clock Company as its special agent, who received in its behalf all payments from the debtors of assigned accounts and transmitted them to the Bank, and this employee was subject exclusively to orders from the Bank in the handling of these receipts.

[Control Over Assigned Receivables]

Additional evidence of the exercise by the Bank of control over the assigned receivables is afforded by other records of these assignments kept up to date by the Clock Company. For each account assigned the Clock Company prepared an electronic punch card and an invoice in duplicate. Each of these invoices was stamped on the back directing the account debtor to pay the amount due thereon to the Bank, without inquiry, in full satisfaction of the Clock Company's interest in that account. The Clock Company retained one of these stamped invoices along with the electronic punch card for that account and sent the duplicate invoice to the Bank. Thus, in the Clock Company's office, the records of the assigned accounts consisted of the punch cards, the stamped invoices and the customers' ledger card which was stamped to indicate the assignment.

Against this background of the Bank's control and "policing" of the assigned receivables, the Government argues that the Clock Company actually reserved dominion over the accounts because it was allowed by the Bank to substitute new accounts for some of those previously assigned. However, this contention is untenable because the value of these substituted accounts was less than two per cent of the amount of money loaned, and also because there were sound financial reasons for these substitutions. Some assigned accounts had deteriorated in collateral value, and the Bank on at least one occasion notified the Company that if the deterioration of assigned receivables continued the Bank would require a greater ratio of collateral to secure the loans. Fresh accounts were also substituted when an assigned account had become stale or uncollectible, or when the account debtor returned merchandise or received a credit. Likewise, the Government's attack on the security transactions because of the Clock Company's failure to segregate and label returned merchandise is without merit since new receivables were assigned by the Company to cover those accounts against which merchandise had been returned.

Thus, although the Clock Company often substituted, without the Bank's direction, fresh accounts for old ones which had previously been assigned, and the Clock Company's customers' ledger was not always stamped up to date as the Company was required by the terms of the agreement to do, we hold that the continuous maintenance by the Bank of the four-to-three collateral to debt ratio in the form of assigned receivables and/or money in the collateral account, the Bank's hiring of its own agent in the Clock Company to handle and forward to it collections on the assigned accounts, and the keeping of an up-to-date record of the assignments on a set of electronic punch cards and duplicate invoices, all show sufficient "policing" to sustain the validity of the Bank's security interest. In other words, on the basis of the facts in the case at bar there is no ground for the imputation of fraud in the security transaction as there was in Benedict v. Ratner, where, in spite of the assignment of the receivables, business was conducted, and indebtedness incurred, by the debtor as though the assignment had not been made.

[Control Over Security Interest]

Although the Bank's control over its security interest thus adequately fulfilled the "policing" requirements under the rule of Benedict v. Ratner, an alternative ground for rejecting the Government's argument lies in the obvious validity of the assignments under the applicable and controlling Connecticut statutes, ² to be discussed later in this opinion. The Supreme Court did not decide Benedict v. Ratner on the basis of general "applicable legal principles," but rather it derived the rule for its decision from an examination of the relevant state cases. See 268 U. S. at 362; also Security Mortgage Co. v. Powers, 278 U. S. 149, 153-54. Nothing could make this more certain than the language of the Court itself:

"The rights of the parties depend primarily upon the law of New York . * * * (I)t is clear that, if the original assignment was a valid one under the law of New York , the Bankruptcy Act did not invalidate the subsequent dealings of the parties." 268 U. S. at 359.

Since there is no doubt that the Clock Company's assignments were valid under Connecticut law, the Bank's security is not void under Section 70(e) of the Bankruptcy Act.

[Validity of Assignments]

The Trustee questions the validity of the assignments by a more involved and devious argument than that urged by the Government. The Trustee argues that, since there is the possibility of an adjudication of bankruptcy in this case, we must test the Bank's security interest against the provisions of Section 67(c)(2) of the Bankruptcy Act, ³ and that, under those provisions, the assignments are not valid against the Trustee.

Assuming arguendo that we should ignore the fact that the proceeding below involved reorganization and not bankruptcy, we shall now consider the merits of the Trustee's contentions. The Trustee argues that the Bank's security interest was a "statutory lien" within the meaning of Section 67(c)(2) and not "fully perfected" within the meaning of the Connecticut General Statutes §6719, and hence, the argument runs, the Bank did not have "possession of" the accounts receivable as required by Section 67(c) for the validity of "statutory liens" on personal property as against the interest of the Trustee. We think this argument unsound on all points. The Bank's lien on the proceeds of the assigned receivables is not a statutory lien since it did not arise "primarily from an economic relationship defined by the legislature" but rather it arose "from the terms of a contract providing for security." 4 Collier on Bankruptcy (14th ed.) 184; In re Tele-Tone Radio Corp., D. N. J., 133 Fed. Supp. 739, 746-48 [55-2 USTC ¶9590]. In other words, the Bank is asserting a consensual common law lien which arose not because of the terms of a statute so providing, but rather as the result of the assignment itself. In addition, and irrespective of the Trustee's contention that the assignments were not "fully perfected" under Connecticut law, even if the Bank's interest were based on a "statutory lien" the Bank had "possession" of the receivables sufficient to satisfy Section 67(c)(2), since its agent collected and transmitted to it all the payments made by the account debtors.

[Assignments Perfected]

Similarly, the Trustee's claim that the assignments were not "fully perfected" prior to notification of the debtors is untenable, since it is contrary to the precise statutory provision that "(a)n assignment of an account * * * shall be valid and fully perfected as of the date it is made * * * whether or not notice of the assignment is given to the account debtor * * *." Conn. Gen. Stats. (Rev. 1949) §6719. Although the statement in another part of this section that an otherwise valid assignment "shall transfer from the date of its making all rights which the assignor has power to transfer" may be somewhat inconsistent with the provisions of Section 6720 designating several means other than payment to the assignee by which an account debtor, who was not notified of the assignment, can discharge his liability on the account, we must, in the absence of other Connecticut authority, interpret the statutory provisions in a reasonable manner, consistent with the legislative intent. The reasonable view, which is consistent with the obvious intent of the legislature, is to interpret the statutes as providing for valid and "fully perfected" assignments, without notification of the account debtors, and thus without the consequent deleterious effect such notification would have on the borrower's business position. See Corn Exchange Bank v. Klauder, 318 U. S. 434, 439-40. Thus the Bank's security interest is valid under Section 67(c)(2) as against the contentions advanced by the Trustee.

The Trustee's further argument that the Bank's interest should, by virtue of Section 67(c)(1), be subordinated to the priorities set forth in Section 64 of the Bankruptcy Act rests on the same arguments used in support of his position that the assignments were not valid as against him. Accordingly, for the reasons already stated above we reject this contention of the Trustee as without merit. Likewise, there is nothing in the record to support the Trustee's last argument that the rights of the Bank are subject to modification in the final plan of reorganization. There is no evidence of the existence of any creditor, other than the Bank, with a security interest in the assigned receivables. See also In re Third Avenue Transit Corp., 2 Cir., 198 Fed. (2d) 703.

[Cross-Appeal]

Turning to the Bank's cross-appeal from the refusal of the court below to order the Trustee to pay the Bank reasonable attorney's fees, we must first consider the Government's motion to dismiss this appeal on the ground that the notice of appeal was not filed within the time allowed by Section 25 of the Bankruptcy Act. ⁴

The notice of the Bank's appeal was filed thirty-eight days after entry of the order below, and the only question raised by the Government's motion is whether the thirty day or the forty day time limit in Section 25 is applicable. In spite of the fact that, as required by the express provisions of Section 25 for the reduction of the time limit to thirty days, no notice of entry of the judgment was served on the Bank, and no proof of notice was ever filed with the District Court, the United States argues that the Bank was subject to the thirty day time limit because notice of entry of the judgment was mailed to it by the Clerk. This construction of Section 25 is contrary to the plain meaning of the statute, and, in addition, has been considered proviously and rejected by this Court. Hammer v. Tuffy, 145 Fed. (2d) 447, 451; Siegel v. Margiotta, 102 Fed. (2d) 525. Accordingly, the motion to dismiss the Bank's appeal is denied.

[Merit of Bank's Appeal]

Consideration of the merits of the Bank's appeal, however, raises a serious question regarding the completeness of the record on this appeal. The Bank sought an order in the District Court including an award of reasonable attorney's fees because the Clock Company, in the assignment contract, agreed "to reimburse the Bank for any and all legal and other expenses incurred in and about the checking, handling and collection of the accounts hereby assigned to the Bank and the preparation and enforcement of any agreement relating thereto." The Government, in its oral argument before this Court and in its brief, opposed this claim on the ground that the United States, acting pursuant to Sections 3670 and 3671 of the Internal Revenue Code of 1939, and Sections 6321 and 6322 of the Internal Revenue Code of 1954, 26 U. S. C. §§ 6321, 6322, had a tax lien on the proceeds of the assigned accounts which was prior to the "inchoate" lien of the Bank. Since the amount of the Bank's lien for attorney's fees was unknown at the time of the Clock Company's petition for reorganization, this lien was "inchoate" in the sense used to determine its priority as against a United States tax lien. United States v. New Britain , 347 U. S. 81, 84 [54-1 USTC ¶9191]. Thus, the Government's lien is superior to the claim for attorney's fees if the United States has complied with the aforementioned provisions of the Internal Revenue Codes and in addition has filed the notice of the lien as required by Section 3672 of the Internal Revenue Code of 1939, and Section 6323 of the Internal Revenue Code of 1954, 23 U. S. C. §6323, to protect the validity of the lien against the claim of a pledgee such as the Bank. The record on appeal, however, is devoid of any evidence concerning the action taken by the Government to perfect its lien, and the opinion below states no reason for the refusal to grant attorney's fees.

[Ruling]

Therefore, since we cannot decide the merits of the Bank's appeal because of the incomplete state of the record, this case is remanded to the District Court for determination of the issues of law and fact arising out of the application of the Bank for attorney's fees and the order below is otherwise affirmed.

¹ Bankruptcy Act §70(e)(1), 11 U. S. C. §110(e)(1):

A transfer made or suffered or obligation incurred by a debtor adjudged a bankrupt under this title which, under any Federal or State law applicable thereto, is fraudulent as against or voidable for any other reason by any creditor of the debtor, having a claim provable under this title, shall be null and void as against the trustee of such debtor.

² Connecticut General Statutes (1949 Rev.):

Section 6719. Assignment valid when made. An assignment of an account shall transfer from the date of its making all rights which the assignor has power to transfer and shall be valid and fully perfected as of the date it is made (a) if it is in writing; (b) if the assignee has given value therefor; (c) if the assignee takes the assignment in good faith; and (d) whether or not notice of the assignment is given to the account debtor or the account debtor assents to such assignment. After the making of such an assignment no existing or future creditor of the assignor and no subsequent assignee shall acquire any right, title, lien or interest in or to such account, or any proceeds thereof, or any judgment, instrument, token or writing given as evidence thereof or in substitution therefor, equal or superior to or in diminution of the rights of the assignee under such assignment.

Section 6720. Rights of account debtor. Whenever, prior to notice to him of an assignment of an account, the account debtor has, while acting in good faith (a) made payment of the account, in whole or in part; or (b) given a negotiable instrument in payment or as evidence, in whole or in part thereof; or (c) effected a novation in respect thereto; or (d) become liable upon a final judgment thereon, such payment or the assumption or suffering of such substitute liability shall, to the extent thereof, be a valid discharge of the account debtor's liability upon such account. Nothing in this chapter shall deprive the account debtor of any valid defense to which he would otherwise be entitled or any valid right existing under the contract from which the assigned account arose or of any right of set-off or counterclaim against the assignor existing at the time the account debtor receives notice of the assignment.

³ Bankruptcy Act §67(c), 11 U. S. C. §107:

Where not enforced by sale before the filing of a petition initiating a proceeding under this title, and except where the estate of the bankrupt is solvent: (1) though valid against the trustee under subdivision (b) of this section, statutory liens, including liens for taxes or debts owing to the United States or to any State or any subdivision thereof, on personal property not accompanied by possession of such property, and liens, whether statutory or not, of distress for rent shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 104 of this title and such liens for wages or for rent shall be restricted in the amount of their payment to the same extent as provided for wages and rent respectively in subdivision (a) of section 104 of this title; and (2) the provisions of subdivision (b) of this section to the contrary notwithstanding, statutory liens created or recognized by the laws of any State for debts owing to any person, including any State or any subdivision thereof, on personal property not accompanied by possession of, or by levy upon or by sequestration or distraint of, such property, shall not be valid against the trustee: Provided, however, That so much of clause (1) of this subdivision as restricts liens for wages and rent and clause (2) of this subdivision shall not apply in proceedings under chapter 10 of this title, unless an order shall be entered therein directing that bankruptcy be proceeded with, or in proceedings under section 205 of this title. The court may on due notice order so much of any lien in excess of the restricted amount under clause (1) of this subdivision and any lien invalid under clause (2) of this subdivision to be preserved for the benefit of the estate and, in any such event, such lien for the excess and such invalid lien, as the case may be, shall pass to the trustee.

⁴ Bankruptcy Act §25(a), 11 U. S. C. §48(a):

Appeals under this title to the United States courts of appeals shall be taken within thirty days after written notice to the aggrieved party of the entry of the judgment, order or decree complained of, proof of which notice shall be filed within five days after service or, if such notice be not served and filed, then within forty days from such entry.

 

 

[59-2 USTC ¶9664]Albert G. Evans, Plaintiff v. Bank of America, N. T. & S. A., et al., Defendants Bank of America, N. T. & S. A., et al., Cross-Complainants v. Albert G. Evans, et al., Cross-Defendants Division of Labor Law Enforcement, Department of Industrial Relations, State of California, Cross-Defendant and Cross-Complainant v. Albert G. Evans, et al., Cross-Defendants

Superior Court of Calif., County of San Francisco, No. 482800, 7/28/59

[1954 Code Sec. 6323]

Lien of taxes: Priority: Assignment by bankrupt.--The United States has priority over the claims of an attorney for legal fees, the Division of Labor Law Enforcement, State of California, and the Bank of America, which instituted action to quiet title to funds held by it but claimed by others. Since the tax claims of the United States exceed in amount the $41,000 held by the bank for the account of the bankrupt taxpayers, the entire $41,000 is payable to the United States and nothing is payable to the other claimants. The taxpayer committed an act of bankruptcy when it assigned part of the funds to the state.

Rob ert A. Borgen for plaintiff and cross-defendant, Albert G. Evans, defendants and cross-defendants, Hans Wachsmuth, Jr. and Four Companies, Inc.; Samuel B. Stewart, Rob ert T. Shinkle, Theodore Sachsman for defendant, cross-defendant and cross-complainant, Bank of America, N. T. and S. A.; Lynn J. Gillard, United States Attorney, Charles Elmer Collett, Assistant United States Attorney, Joseph O. Greaves, Office of Regional Counsel, Internal Revenue Service, for cross-defendant United States of America; Samuel S. Berman, Irving Shore, Leon Gold, for cross-defendant and cross-complainant, Division of Labor Law Enforcement, Department of Industrial Relations, State of Calif.

Findings of Fact

Conclusions of Law and Judgment

SCHONFELD, Superior Judge:

The above-entitled action was tried on June 18, 19, 22, 23, 24, 25, 26, 29 and 30, 1959, before this court sitting without a jury, Rob ert A. Borgen appearing for the plaintiff and cross-defendant, Albert G. Evans, and defendants and cross-defendants Hans Wachsmuth, Jr. and Four Companies, Inc.; Samuel B. Stewart, Rob ert T. Shinkle and Theodore Sachsman appearing for the defendant cross-defendant and cross-complainant Bank of America, N. T. and S. A.; Lynn J. Gillard, United States Attorney, Charles Elmer Collett, Assistant United States Attorney, and Joseph O. Greaves, attorney, Office of Regional Counsel, Internal Revenue Service, appearing for the cross-defendant United States of America; Samuel S. Berman, Irving Shore and Leon Gold, appearing for the cross-defendant cross-complainant Division of Labor Law Enforcement, Department of Industrial Relations, State of California. The defaults of the defendants Four Companies, Inc., and Hans Wachsmuth, Jr., were previously taken.

Documentary evidence and oral testimony having been introduced, the court, having heard arguments by counsel, having considered the briefs, and now being sufficiently advised and informed in the premises, makes the following findings of fact and draws the following conclusions of law:

Findings of Fact

1. This action was commenced by Albert G. Evans on September 26, 1958 , against Bank of America N. T. & S. A., Four Companies, Inc. and Hans Wachsmuth, Jr., to recover $10,250 and costs from the Bank of America.

2. The Bank of America answered the complaint of Evans and cross-complained instituting an action to quiet title to $41,000 held by it but claimed by the cross-defendants Albert Evans, United States of America and Division of Labor Law Enforcement, Department of Industrial Relations, State of California (hereinafter called Division of Labor Law Enforcement).

[ United States ' Claim for Taxes]

3. The United States of America answered the cross-complaint of the Bank of America, claiming the entire $41,000 by reason of delinquent taxes of Four Companies, Inc., and Hans Wachsmuth, Jr. and Four Companies, Inc., also answered the cross-complaint.

[Other Claims]

4. The Division of Labor Law Enforcement answered and cross-complained, claiming $9,776.73 by reason of work performed by certain people for Four Companies, Inc., and by reason of an assignment from Four Companies, Inc., to the Division of Labor Law Enforcement.

5. Albert G. Evans answered the cross-complaint of the Bank of America, claiming $10,250 for services performed for Four Companies, Inc., and Hans Wachsmuth, Jr. and by reason of an alleged assignment from Four Companies, Inc., to himself.

6. Pre-trial and trial was had on all complaints, cross-complaints and answers in the above action.

7. On August 25, 1955 and September 2, 1955, a contract was entered into between the defendant cross-defendant Four Companies, Inc., Concord Hospital District, Community Facilities Corporation and Concord Improvement Association whereby said Four Companies, Inc., was to construct a hospital for said Concord Improvement Association and which completed hospital was to be leased to the Concord Hospital District.

8. On March 11, 1958, the contract referred to in paragraph 7 herein was assigned by Four Companies, Inc., to Stolte, Inc., and on August 21, 1958, pursuant to said assignment, Stolte, Inc. paid the sum of $41,000 by check payable jointly to the Bank of America and Four Companies and which money is admittedly held by the Bank of America.

[Lien for Taxes]

9. The defendant Four Companies, Inc., is indebted to the United States of America by reason of assessments for delinquent taxes, as follows:

                                  Notice of Lien

Date of                       Filed Contra Costa             Amount

Assessment              

County
 
Recorder

's Office                Due

6-8-56
 ........                          
8-15-58
         $13,704.37

8-15-56
 .......                           
9-5-56
          14,715.74

11-15-56
 ......                          
2-15-57
           2,762.89

12-31-56
 ......                          
2-15-57
             353.82

2-8-57
 ........                          
8-13-57
           1,253.56

3-8-57
 ........                          
8-13-57
             632.56

4-30-57
 .......                          
8-13-57
              82.68

3-21-58
 .......                           
5-5-58
           3,264.83

7-23-58
 .......                                               37.44

The foregoing amounts, although demanded, are due and owing, together with accrued interest as provided by law, and said indebtedness of Four Companies, Inc., to the United States is in excess of $41,000.

[Other Indebtedness]

10. On May 3, 1957 , Four Companies, Inc., assigned to the Bank of America any and all proceeds to be received by it by reason of the contract, or assignment thereof, referred to in paragraph 7 herein. Said assignment was to secure the indebtedness of Four Companies, Inc., to the Bank of America, which indebtedness is in excess of $41,000.

[Priority]

11. The Bank of America admits the United States is entitled to priority of payment for taxes assessed June 8, 1956 , August 15, 1956 , November 15, 1956 and December 31, 1956 , together with accrued interest thereon.

12. On July 9, 1958 , the defendant Four Companies, Inc., executed two assignments and orders in favor of the Division of Labor Law Enforcement directing payment addressed to Bank of America, in the amounts of $4,176.73 and $5,600.00. That said assignments and orders directing payment were transmitted to the Bank of America on July 9, 1958 . That notices of said assignments and orders directing payment were recorded with the County Recorder of Contra Costa County , State of California , on July 11, 1958 . Said assignments were by reason of work performed by the following persons for Four Companies, Inc.:

Name                               Date Work Performed         Amount of Claim

Rob
ert W. Titherington ...       
6-4-56
 to 11-56                     $2,879.94

Art W. Strouse ...........       
5-28-56
 to 
7-29-56
                     500.00

Ore

 W. Waller ............       
7-10-56
 to 
8-20-56
                     460.00

Troy J. Golding ..........       
7-10-56
 to 
8-20-56
                     336.79

Mabel Wachsmuth ..........       
5-20-56
 to 
12-31-56
                  1,600.00

Hans Wachsmuth, Sr. ......       
5-20-56
 to 
12-31-56
                  4,000.00

                                                                     $9,776.73

[Lawyer's Fees]

13. On or about May or June, 1956, Albert G. Evans was retained as attorney for Four Companies and pursuant to said employment Albert Evans represented Four Companies, Inc., in various legal actions.

14. Albert G. Evans did not obtain any legal interest in or receive an assignment in June 1956 or any time before or thereafter of the contract referred to in paragraph 7 herein or the proceeds therefrom.

15. On October 31, 1958 , a default judgment in the amount of $10,250 was entered in this action against Hans Wachsmuth, Jr., and Four Companies, Inc., in favor of Albert Evans.

[Taxpayer Is Bankrupt]

16. On March 31, 1956 , and at all times thereafter Four Companies was insolvent in that its liabilities exceeded its assets and further that said Four Companies was unable to pay its debts as they matured.

17. The assignment to the Bank of America, referred to in paragraph 10 was at a time when Four Companies was insolvent, and said assignment constituted a preference and was an act of bankruptcy, and the assignments referred to in paragraph 12 likewise constituted an act of bankruptcy as a preference of creditors.

Conclusions of Law

1. The United States of America obtained a lien upon all property and rights to property belonging to Four Companies, Inc., when taxes were assessed against it and not paid upon demand.

2. The lien in favor of the United States was for the amount of the unpaid taxes plus accrued interest.

3. The lien in favor of the United States attached to Four Companies' interest in the contract to construct the hospital and to the proceeds of the assignment of said contract, which was $41,000.

[Priority]

4. The lien in favor of the United States , in an amount in excess of $41,000, is superior to the claims of Albert Evans and the Division of Labor Law Enforcement.

5. The lien in favor of the United States for taxes assessed June 8, 1956 , August 15, 1956 , November 15, 1956 and December 31, 1956 , plus accrued interest, is superior to any claim of the Bank of America.

6. The provisions of Revised Statutes, Sec. 3466 (31 U. S. C. 191) are applicable by reason of Four Companies, Inc., committing any act of bankruptcy at a time when it was insolvent.

7. The United States ' claim for taxes, which is in excess of $41,000, is entitled to priority of payment over all other claims in this case by reason of Revised Statutes, Sec. 3466.

8. Bank of America and Division of Labor Law Enforcement are entitled to nothing by reason of their cross-complaints, and Albert G. Evans is entitled to nothing against the Bank of America by reason of his complaint.

9. The United States of America is entitled to the $41,000 held by the Bank of America.

Judgment

In accordance with the foregoing Findings of Fact and Conclusions of Law, it is ORDERED, ADJUDGED AND DECREED:

1. Albert G. Evans take nothing from the Bank of America by reason of his complaint.

2. The Bank of America take nothing by reason of its cross-complaint to quiet title.

3. The Division of Labor Law Enforcement take nothing by reason of its cross-complaint.

4. The $41,000 held by the Bank of America is to be paid to the cross-defendant United States of America .

5. Each party to bear its own costs.

 

 

[71-1 USTC ¶9425]Dolores Fritz, Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. Minn., Sixth Div., 6-68-Civil-5, 328 FSupp 1343, 5/6/71

[Code Sec. 6323(b)--Result unchanged by '69 Tax Reform Act]

Tax liens: Priority: Fund: Subsequent assignee without knowledge: Assignee as security interest holder.--Because the Government filed notice of a tax lien against one Fritz before a fund representing his wages and bonuses payable was assigned to his wife, the Government was entitled to priority to the fund. Although the wife did not know of the lien at the time of the assignment, she was not a purchaser of a security or a holder of a security interest in a security since her agreement to allow her husband to be released from custody did not constitute full consideration for the fund or a parting with money or money's worth.

David F. Lundeen, Field, Arvesen, Donoho & Lundeen, Fergus Falls Nat'l Bank Bldg., Fergus Falls , Minn. , for plaintiff. Rob ert G. Renner, United States Attorney, J. Earl Cudd, Assistant United States Attorney, Minneapolis, Minn., Jeffrey Snow, Department of Justice, Washington, D. C. 20530, for defendant.

Memorandum & Order

DEVITT, District Judge:

This is an interpleader action. The original defendant National Surety Corporation has deposited $2,380 with the Court and admits the fund belongs to either Dolores Fritz (the plaintiff) or the United States (the interpleaded defendant). The fund represents retained wages and bonuses payable to James E. Fritz, plaintiff's former husband, by reason of his employment with National Surety.

The parties have filed a 7-page stipulation of facts with 6 attached exhibits. Briefs have been lodged. The parties have waived oral argument.

Each party claims priority as a matter of law to the accrued fund.

[Claims]

Plaintiff's claim to the fund is based on an assignment of the fund to her by her former husband pursuant to a stipulation in a divorce related action in District Court for Otter Tail County , Minnesota . Oral assignment of the fund was made on October 27, 1967 , and confirmed by a written assignment signed on October 30, 1967 . In consideration for the assignment, Mrs. Fritz agreed that her former husband be released from the Otter Tail County Jail where he had been being held in custody on a writ of ne exeat. The writ had been obtained by Mrs. Fritz to prevent her former husband from leaving the country and defeating her claim against him for delinquent alimony and child support. (Stip. ¶¶ 8 through 14).

The government's claim to the fund arises by reason of taxes assessed against James E. Fritz on May 6, 1966 and June 24, 1966 , which exceed the amount of the fund. A notice of federal tax lien relating thereto was filed against Mr. Fritz with the Register of Deeds of Richland County, Wahpeton, North Dakota , on January 18, 1967 . A notice of levy, pertaining to the fund at issue, was served on National Surety on November 1, 1967 . On November 29, 1967 , the Internal Revenue Service served a final demand on National Surety claiming the fund held by the corporation. (Stip. ¶¶ 15, 17, 18, and 20).

[Issue]

The question for determination is whether the federal government's tax lien is entitled to prority over the subsequent assignment to Mrs. Fritz where she, as the assignee, did not have actual notice or knowledge of the existence of the outstanding tax lien when the assignment was made. (Stip. ¶23).

[The Law]

Notice of the federal tax lien was properly filed in Wahpeton, North Dakota , the residence of the deficient taxpayer, Mr. Fritz, at the time of the filing. 26 U. S. C. §6323(f). (Stip. ¶¶ 5 and 5A). Consequently, the tax lien is valid and entitled to priority under the test of "first in time, first in right" enunciated by the Supreme Court in United States v. City of New Britian, 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954), unless Mrs. Fritz's interest in the fund is encompassed by Section 6323 of the Internal Revenue Code which provides for certain exceptions to this general rule.

Plaintiff contends that, inasmuch as she did not have actual knowledge of the preexisting tax lien at the time of the assignment, her interest is in fact protected by Section 6323(b).

"(b) Protection for certain interests even though notice filed.--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

(1) Securities.--With respect to a security (as defined in subsection (h)(4))--

(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien; and

(B) as against a holder of a security interest in such security who, at the time such interest came into existence, did not have actual notice or knowledge of the existence of such lien." 26 U. S. C. §6323(b).

She argues that she is the "purchaser of a security" or in the alternative the "holder of a security interest in a security" because of the assignment by her former husband and thus entitled to priority.

The crucial terms, "security", "security interest", and "purchaser", are defined in Section 6323(h).

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

"(4) Security.--The term "security" means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe to or purchase, any of the foregoing; negotiable instrument, or money."

"(6) Purchaser.--The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. . . ." (Emphasis added.) 26 U. S. C. §6323(h).

[Inadequate Consideration]

Mrs. Fritz's agreement to release Mr. Fritz from custody where he was being held on a writ of ne exeat in return for the assignment of the fund does not constitute adequate and full consideration in money or money's worth (required by the definition of purchaser) nor a parting with money or money's worth (required by the definition of security interest) as those phrases were intended and have been interpreted. See United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218, 75 S. Ct. 244, 99 L. Ed. 271; Morrison Flying Service v. Deming National Bank [68-2 USTC ¶9465], 404 F. 2d 856 (10th Cir. 1968); Senate Report No. 1708, 1966 U. S. Code Cong. & Admin. News 3722, 3734-35. Her claim is not to be accorded priority over the federal tax lien under Section 6323(b). See United States v. Lewis [67-2 USTC ¶9693], 272 F. Supp. 993 (N. D. Ill. 1967).

IT IS ORDERED That the fund now on deposit with the Clerk of the Court be paid to the United States of America .

 

 

[70-1 USTC ¶9259] United States of America , Plaintiff v. Rob ert J. Welsh, Springfield Freight Lines, Inc., Arthur M. Marshall, Hennis Freight Lines, Inc., Joseph R. Savoy, and Leonard S. Michelman, Defendants

U. S. District Court, Dist. Mass., Civil Action No. 66-797-J, 10/15/69

[Code Sec. 6672]

Withholding of taxes on wages: Failure to collect and pay over payroll taxes: Responsible officer: Corporate president and sole shareholder.--The government's assessments against taxpayer, the sole shareholder and president of an express company, as the responsible officer of the company who was required to withhold and pay over payroll taxes were validly made.

[Code Sec. 6501]

Statute of limitations: Waiver: Validity.--Waivers executed by the taxpayer were valid and effectively extended the statute of limitations as to each assessment by the government for unpaid payroll taxes.

[Code Secs. 6323 and 7403]

Liens for taxes: Priority: Assigned commissions: Attorney's liens: Funds in hands of third party: Action to enforce lien.--Federal tax liabilities assessed against taxpayer were reduced to judgment and liens against brokerage commissions owed to the taxpayer by two other parties and assigned by him to a third party were foreclosed. The liens were made in accordance with law and before taxpayer made the assignments. Other parties did not have valid liens against certain funds in the hands of another third party, either for costs, expenses or counsel fees incurred in the present litigation.

Herbert F. Travers, Jr., United States Attorney, Joseph A. Lena, Assistant United States Attorney, Boston , Mass. , for plaintiffs. David Marshall, 135 State St., Springfield, Mass., Leonard S. Michelman, 1333 E. Columbus Ave., Springfield, Mass., Fernand R. Ducharme, 300 High St., Holyoke, Mass., David Burres, 95 State St., Springfield, Mass., for defendants.

Opinion

JULIAN, District Judge:

This is a civil action in which the United States, plaintiff, seeks to reduce to judgment certain federal tax liabilities assessed against the defendant Rob ert J. Welsh, and to foreclose federal tax liens against certain brokerage commissions owed to the defendant Welsh by the defendant Springfield Freight Lines, Inc. ("Springfield") and the defendant Hennis Freight Lines, Inc. ("Hennis").

The action is brought pursuant to Sections 7401 and 7403 of the Internal Revenue Code of 1954, 26 U. S. C. §§ 7401 and 7403.

This Court has jurisdiction under the provisions of 28 U. S. C. §1340 and 26 U. S. C. §7402(a).

The defendant Joseph R. Savoy lays claim to the same commissions by virtue of two assignments made to him by the defendant Welsh.

The defendant Hennis and its attorney, the defendant Arthur M. Marshall, assert a lien for costs and counsel fees in a fund of $6,000 now in the possession of Marshall constituting the commission owed by Hennis to Welsh.

The defendant Leonard S. Michelman, formerly counsel for Savoy , claims attorney's liens in the fund of $6,000 held by Marshall , and in the fund of $7,000, now in the hands of Savoy , which constitutes the commission owed by Springfield to Welsh.

The case was tried to the Court sitting without a jury.

On the basis of the evidence and of the stipulation of facts (Exh. 1) filed by the parties, I find the following facts:

On November 3, 1958, pursuant to Section 6672 of the Internal Revenue Code of 1954, 26 U. S. C. §6672, ¹ a delegate of the Secretary of the Treasury made assessments in the total sum of $14,366.53 ² against the defendant Welsh as the responsible officer of Thru-Way Express, Inc., for willfully failing to collect, truthfully account for, and pay over to the plaintiff certain withholding and transportation excise taxes owed by Thru-Way Express, Inc., to the plaintiff. On the same date notice of the assessments was given to Welsh and demand made upon him for payment. The sum of $416.70 has been paid or credited on the assessments, leaving an unpaid balance of $13,949.83.

On June 2, 1960, notices of federal tax liens covering the assessments were filed with the Town Clerk of Longmeadow, Massachusetts--where Welsh has resided at all times pertinent to the issues in this case--and with the Registry of Deeds, Hampden County, the county in which Longmeadow is situated.

During 1963 and 1964 the defendant Welsh engaged in the business of finding sellers and buyers of trucking companies that held ICC certificates of public convenience and necessity. While so engaged he earned broker's commissions in two unrelated transactions involving, respectively, the defendant Springfield Freight Lines, Inc., and the defendant Hennis Freight Lines, Inc. The commissions did not become due until the ICC approved the transfer of the certificates.

On April 15, 1963 , Welsh assigned to the defendant Savoy his right to the broker's commission from Springfield . This commission, however, did not come into existence until some unspecified time after April 15, 1963 .

On July 12, 1964 , Welsh assigned to Savoy ". . . all my accounts receivable that are now due or that will become due including all contractual commissions."

The commission that Welsh earned from Hennis did not come into existence until after July 13, 1964 .

Savoy retained defendant Michelman as his attorney to collect the commissions from Springfield and Hennis. Savoy agreed to pay Michelman one-third of the amounts collected plus expenses. As will hereafter appear in greater detail, Michelman thereupon brought suit to collect the commissions.

The parties have stipulated that Michelman is entitled to an attorney's lien pursuant to General Laws of Massachusetts , chapter 221, section 50, for one-third of the gross amount of the recovery in each case. The parties have further stipulated that Michelman's lien "is prior in right to any money received by the United States Government on account of its lien for federal taxes." ³

The plaintiff caused a notice of levy to be served upon Hennis on March 11, 1965 , and upon the defendant Marshall, the attorney for Hennis, on March 26, 1965 . On April 8, 1965 , the plaintiff served a final demand upon Marshall .

On June 5, 1963 , and January 27, 1965 , the plaintiff served a notice of levy, and on February 3, 1965 , a final demand upon Springfield .

On February 5, 1964 , Welsh signed six documents entitled "Tax Collection Waiver,"--Exhibits 2, 3, 4, 5, 6, and 7--relating to the assessments mentioned above. These documents were also executed on the same date by a duly authorized Revenue Agent in behalf of the District Director of Internal Revenue.

Each said waiver contained the following agreement:

"It is hereby agreed by and between the above-named taxpayer, party of the first part, and the District Director of Internal Revenue, party of the second part, that the unpaid balance of the assessment identified below may be collected (together with such interest, penalties, or other additions as provided for by law which have accrued and which may accrue on the assessment) from said party of the first part by levy or by a proceeding in court begun on or before the date which is shown at the right hereof."

Each waiver also contained the statement "Statute Extended to December 31, 1966 " at the right of the agreement quoted above.

The assessments are identified in the waivers as follows:

                            Class of Tax         Assessment             Account         Unpaid Balance

                              and Period               Date              Number          of Assessment

Exhibit 2 ....          Withheld 
6-30-57
            
11-3-58
         7-59 297506              $1,085.96

Exhibit 3 ....          Withheld 
9-30-57
            
11-3-58
         7-59 297504               2,005.46

Exhibit 4 ....         Withheld 
12-31-57
            
11-3-58
         7-59 297505               4,208.50

Exhibit 5 ....          Withheld 
3-31-58
            
11-3-58
         7-59 297503               3,506.19

Exhibit 6 ....            Excise 
9-30-57
            
11-3-58
         7-59 820000               2,193.09

Exhibit 7 ....            Excise 
3-31-58
            
11-3-58
         7-59 820001               1,367.33

 

The unpaid balances of the assessments listed above totaled $14,366.53.

I find that the defendant Welsh understandingly and voluntarily signed each of the six waivers.

Welsh claims that he signed the waivers extending the statute of limitations only because Revenue Agent Wisnoski represented that the plaintiff would accept the sum of $3,500 in full settlement of what he owed. I find on the basis of the credible evidence that no representation was ever made to Welsh or any other person by Agent Wisnoski or any other agent or employee of the plaintiff that if Welsh signed the waivers extending the statute of limitations the plaintiff would accept in full settlement the sum of $3,500 or any other sum less than the full amount claimed by the plaintiff. I find that Agent Wisnoski, who over a period of several years had repeatedly tried without success to obtain payment from Welsh, explicitly informed him that if he did not sign the waivers the plaintiff would proceed to file suit against him and obtain a judgment.

Savoy , as assignee of Welsh, brought an action in the Hampden County Superior Court against Springfield (case number 110439) and against Hennis (case number 111750) to recover the commissions earned by Welsh. In the latter case Marshall appeared as counsel for Hennis.

Case number 110439, the case against Springfield , terminated with a settlement whereby Springfield paid to Savoy the sum of $7,000. Savoy delivered to Springfield a surety company bond to indemnify Springfield for any payments it might be required to make as a result of being "liened" by the Internal Revenue Service because of Welsh's indebtedness to the plaintiff. Savoy has paid attorney Michelman his out-of-pocket expenses and $1,000 as part of his fee for his services in the case against Springfield . Savoy still owes Michelman a balance of $1,333 for these services.

Case number 111750 against Hennis has been settled for $6,000. Welsh and Savoy , however, have not yet executed and delivered to Hennis or to Marshall, its attorney, the releases required to obtain the $6,000, and no final judgment in the case has been entered by the Superior Court.

Defendants Marshall and Hennis admit in their answer to plaintiff's complaint that defendant Marshall is holding $6,000--the amount of the settlement--for the defendant Welsh and his assignee, the defendant Savoy.

Savoy advanced sums of money to Welsh evidenced by the following:

Note dated March 4, 1963 , in the amount of $100

Note dated March 8, 1963 , in the amount of $1,375

Note dated April 16, 1963 , in the amount of $2,400

Note dated April 22, 1963 , in the amount of $2,500

Note to Third National Bank of Hampden County , $2,500

Note to Third National Bank of Hampden County , $3,500

The total amount of money due Savoy from Welsh is $12,375. The dates of the two notes to the Third National Bank are not disclosed by the stipulation or by the evidence.

On July 13, 1964 , Savoy filed in the Town of Longmeadow and in the Secretary of State's office in Boston a financial statement "covering the assignment" made by Welsh to Savoy on July 12, 1964 . The contents of the financial statement are not otherwise disclosed by the evidence.

Welsh signed the six "Tax Collection Waivers" mentioned above without obtaining the approval of Savoy or Michelman.

Neither Savoy nor Michelman ever signed a "Tax Collection Waiver" or ever approved the extending of the statute of limitations.

Savoy and Michelman have applied to the Internal Revenue Service for the discharge of the liens filed by the Government. The applications have been denied.

Savoy has paid attorney Michelman nothing in connection with case numbered 111750, the case against Hennis. When the settlement was agreed upon Savoy agreed to pay attorney Michelman $2,000 for his services plus $200 to reimburse him for his expenses, or a total of $2,200.

Throughout 1957 and 1958 Welsh was president and general manager of Thru-Way Express, Inc. He owned all its outstanding stock. He was in full charge of its operations and financial affairs. He bought equipment, solicited business, hired and fired employees, issued the corporation's checks in payment of wages and suppliers. He ran the corporation. He did not take orders from anyone. During 1957 and 1958 he was the active executive head of the corporation.

I find (1) that Welsh during 1957 and 1958 was the person in Thru-Way Express, Inc., required to collect, truthfully account for, and pay over the taxes imposed by the Internal Revenue Code, (Title 26 U. S. C.); (2) that the withholding and excise taxes listed in Exhibits 2, 3, 4, 5, 6, and 7 were taxes imposed by the Internal Revenue Code and owed by Thru-Way Express, Inc., to the plaintiff; (3) that Welsh was fully aware that Thru-Way Express, Inc., owed those taxes and that they were not being paid; and (4) that Welsh knowingly, voluntarily, and intentionally failed to collect them, to account for them, and to pay them over to the Government. I further find that such failure on his part was willful.

Conclusions of Law

The assessments made under 26 U. S. C. §6672 against the defendant Welsh as the responsible officer of Thru-Way Express, Inc., were validly made. Flan v. United States , 1964, 7 Cir., [64-1 USTC ¶9180] 326 F. 2d 356; Horwitz v. United States, 1965, 2 Cir., [65-1 USTC ¶9149] 339 F. 2d 877; Datlof v. United States, 1966, E. D. Pa., [66-1 USTC ¶9329] 252 F. Supp. 11, 33, affirmed in [67-1 USTC ¶9167] 370 F. 2d 655, cert. denied, 387 U. S. 906.

The waivers executed by the defendant Welsh were, and are, valid, and effectively extended the statute of limitations to December 31, 1966 , with respect to each assessment.

The defendant Welsh is liable to the plaintiff for the total sum of the assessments ⁴ made against him, namely, $14,366.53, less credits in the amount of $416.70.

The claim of the plaintiff to the two commissions earned by the defendant Welsh is superior to the claim of the defendant Savoy . The assessments and the demand for their payment were made on Welsh and the notices of the federal tax liens were filed in accordance with law, long before Welsh made the assignments to Savoy . Under the applicable statutes ⁵ it is clear that the plaintiff's liens have priority over the assignments to Savoy. United States v. Acri, 1955 [55-1 USTC ¶9138] 348 U. S. 211; United States v. City of New Britain, 1954 [54-1 USTC ¶9191] 347 U. S. 81; United States v. Security Trust and Savings Bank, 1950 [50-2 USTC ¶9492] 340 U. S. 47; Glass City Bank v. United States, 1945 [45-2 USTC ¶9449] 326 U. S. 265; United States v. Graham, 1951, S. D. Cal. [51-1 USTC ¶9218] 96 F. Supp. 318, affirmed per curiam sub nom. State of California v. Unites States, 1952, 9 Cir. [52-2 USTC ¶9425] 195 F. 2d 530.

Pursuant to the stipulation of the parties, defendant Michelman's attorney's lien in the amount of $2,200 in the Hennis case settlement of $6,000, and his attorney's lien in the amount of $2,333 in the Springfield case settlement of $7,000, are declared to have priority over the plaintiff's lien. ⁶

Neither the defendant Hennis nor the defendant Marshall has a lien in the Hennis case settlement of $6,000 now in the hands of Marshall, either for costs, expenses or counsel fees incurred in connection with the case presently before me. Neither of them is entitled to such costs, expenses or counsel fees. United States v. Pioneer American Insurance Co., 1963 [63-2 USTC ¶9532] 374 U. S. 84; United States v. Ball Construction Co., 1958 [58-1 USTC ¶9327] 355 U. S. 587; United States v. Liverpool & London & Globe Insurance Co., 1955 [55-1 USTC ¶9136] 348 U. S. 215.

Accordingly, it is ordered that the following judgments be entered:

(1) Judgment for the plaintiff against the defendant Welsh in the amount of $13,949.83 plus interest from November 3, 1958 , the date on which demand for payment was made upon the defendant Welsh;

(2) A judgment declaring that plaintiff's liens upon the claims of the defendant Welsh against the defendants Hennis and Springfield for commissions earned by the defendant Welsh, and upon the funds resulting from the settlement of said claims, are valid and have priority over any rights that the defendant Savoy may have in the same by virtue of the assignments made to him by the defendant Welsh;

(3) Judgment for the plaintiff against the defendants Hennis and Marshall in the amount of $3,800, and ordering them to pay said amount to the plaintiff forthwith;

(4) Judgment for the plaintiff against the defendants Springfield and Savoy in the amount of $4,667, and ordering them to pay said amount to the plaintiff forthwith;

(5) Judgment for the defendant Michelman against the defendants Savoy and Springfield for $1,333 ⁷ which is the balance of the fee secured by his attorney's lien upon the Springfield case settlement, and ordering them to pay said amount to the defendant Michelman forthwith;

(6) Judgment for the defendant Michelman against the defendants Hennis and Marshall for $2,200 which is the fee secured by his attorney's lien upon the Hennis case settlement;

(7) A judgment declaring that neither the defendant Hennis nor the defendant Marshall is entitled to any part of the Hennis case settlement of $6,000.

The payments received by the plaintiff on the judgments entered herein in its favor shall be applied toward the payment of its judgment against the defendant Welsh.

¹ "Any person required to collect, truthfully account for, and pay over any tax imposed by this title, who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. . . ."

² No evidence was introduced to prove that the amount of the assessments is not correct.

³ In view of this stipulation the Court does not decide the question whether, on the facts found, Michelman's attorney's lien is entitled as a matter of federal law to priority over the Government's tax lien. The Court accepts the stipulation as the law of this case.

⁴ As to the correctness of the assessments, see United States v. Lease, 1965, 2 Cir., [65-2 USTC ¶9478] 346 F. 2d 696.

⁵ 26 U. S. C. §6321. "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

26 U. S. C. §6322: "Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

⁶ The Government reaffirms its position to this effect in its "Memorandum of Law" filed June 5, 1969 , at pp. 3 and 4.

⁷ The parties have stipulated that Savoy has already paid Michelman $1,000 on account of his fee. The total fee was $2,333.

 

 

[68-1 USTC ¶9116]Bolling v. Samples et al.

State of Ga., Court of Appeals, 42977, 159 SE2d 727, 12/5/67

[1954 Code Sec. 6332, prior to amendment by P. L. 89-719]

Levy and collection of tax: Debt subject to levy: Payment to government: Effect of honoring levy.--Payment by a debtor to the government under a levy properly asserted against a debt owed to the delinquent taxpayer is a complete defense to the debtor against any action brought against him on account of the debt.
[1954 Code Sec. 6323(a), prior to amendment by P. L. 89-719]

Lien for taxes: Priorities: Assignee.--The Government's lien for taxes was superior to the rights of an assignee to funds due a delinquent taxpayer.

B. Carl Buice, Rob inson, Thompson, Buice & Harben, 401 First Nat'l Bank Bldg., Gainesville, Ga., for appellant. Leon Bolling, Law Bldg., Cumming , Ga. , for appellee.

POPE, JR., Judge:

H. C. Bolling, as assignee of an account receivable, brought this action on the account against R. D. Samples and Milton Woods.

The parties filed a stipulation showing the following facts: Defendant owed National Landscaping Corporation, the taxpayer, the sum of $2,726.42. On April 11, 1961 , the District Director of Internal Revenue issued a levy on form 668-A directed to the defendants, asserting a lien upon any indebtedness owed by defendants to the taxpayer up to the sum of $3,383.82 and demanding payment to the United States Internal Revenue Service. On May 5, 1961 , before the notice of levy was served, the taxpayer assigned the indebtedness to plaintiff. The notice of levy was served on July 14, 1961 , and defendants thereafter paid the amount of the indebtedness to the Internal Revenue Service pursuant to the levy.

The trial court, sitting without a jury, rendered judgment for defendants on the basis of the stipulated facts.

BELL , Presiding Judge: 26 U. S. C. §6321 provides for a lien on all property and rights to property belonging to a taxpayer who neglects or refuses to pay internal revenue taxes after demand. This lien is effective from the time the assessment is made (26 U. S. C. §6322), and may be enforced by levy pursuant to 26 U. S. C. §6331 upon all property and rights to property belonging to the taxpayer, or on which there is a lien provided, with the exception of specific exemptions provided by 26 U. S. C. §6334, which is not applicable here. 26 U. S. C. §6332(a) provides: "Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process." Anyone failing to comply with the foregoing provision "shall be liable in his own person and estate." 26 U. S. C. §6332(b).

The effect of a levy directed to a debtor of the taxpayer was discussed in United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d (4th Cir.) 118, 121. The court there held: "There can be no question, we think, but that the lien for taxes provided by the statute can be asserted against intangible property such as a debt. . . . And we think it equally clear that the proper way to assert the lien is by levy and notice such as was served here. . . . The effect of the federal taxing statutes is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. There is no necessity for adjudicating the amount of the tax under the statutory proceeding . . . and, consequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt." See also, United States v. Metropolitan Life Ins. Co. [58-2 USTC ¶9630], 256 F. 2d (4th Cir.) 17, 23; Hoye v. United States [60-1 USTC ¶9365], 277 F. 2d (9th Cir.) 116, 120.

The notice of levy in the instant case was executive process, comparable to judicial process, valid on its face against any indebtedness owed by the defendant debtor to the taxpayer as of the date of issuance of the levy, providing the indebtedness had not been paid before service of the notice upon the debtor. Thus the levy was effective against the debt sued for notwithstanding that the taxpayer had transferred all its interest to plaintiff between the date of issuance and the date of service. This is true because 26 U. S. C. §6331 provides for levy not only on property belonging to the taxpayer, but also on property on which a lien is provided by 26 U. S. C. Ch. 64.

While a debtor is protected by compliance with the notice of levy, he may act in definance of the levy only at his own peril, 26 U. S. C. §6332(b). The Internal Revenue Code makes no provision for the debtor to contest the correctness of the assessment or the validity of the lien. Thus these issues are immaterial to him. The judgment therefore was not unauthorized although the stipulated facts failed to show that demand had been made on the taxpayer prerequisite to a valid lien against the obligation owed by defendant.

For the same reason the judgment was not unauthorized although notice of the lien had not been filed pursuant to 26 U. S. C. §6323(a), which provides: "Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate. . . . In the office designated by the law of the State or Territory in which the property subject to the lien is situated. . . ." See Code §67-2601. Moreover, the stipulated facts showed merely that the plaintiff's status in relation to the obligation was that of an assignee. A mere assignee is not within the class of persons protected by 26 U. S. C. §6323(a). Bankhead v. Maryland Casualty Co. [62-1 USTC ¶9229], 197 F. Supp. 879, 882. And this section has reference to liens on tangible property having a situs, not to the levy upon or the transfer of debts. United States v. Eiland, 223 F. 2d 118, 122, supra; United States v. Jacobs [57-2 USTC ¶9918], 155 F. Supp. 182, 190; United States v. Salerno [64-1 USTC ¶9130], 222 F. Supp. 664, 670.

Judgment Affirmed. PANNELL and WHITMAN, Judges, concur.

 

 

[66-2 USTC ¶9496]Jorge Hedderick, Jr., Appellant v. Edgar W. Richards and United States of America , Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 20,123, 362 F2d 553, 5/16/66, Affirming an unreported District Court Decision

[1954 Code Sec. 6323]

Lien for taxes: Priorities: Validity against assignee.--The Government's tax lien, which had been recorded before a note was assigned by the payee against whom deficiency had been assessed, had priority over the claims of the assignee who had not paid adequate consideration for the note.

Neil N. Werb, 8671 Wilshire Blvd. , Beverly Hills , Calif. , for appellant. Lloyd F. Dunn, Suite 35, 1245 Glendon Ave., Los Angeles, Calif., Richard M. Rob erts, Acting Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Anthony Zell Roisman, Department of Justice, Washington, D. C. 20530, Manuel L. Real, United States Attorney, Loyal E. Keir, Assistant United States Attorney, Los Angeles, Calif., for appellees.

Before BARNES and MERRILL, Circuit Judges; and TAYLOR, District Judge.

PER CURIAM:

This action was brought by appellant in the United States District Court for the Southern District of California to collect on a promissory note executed by appellee Richards. The United States was made a party defendant pursuant to 28 U. S. C. §2410(a).

On July 23, 1957 , assessments in substantial amounts for unpaid taxes were made against Henry Albachten, payee of the note. Notices of the liens were filed on July 26, 1957 , in Ashland , Oregon , Albachten's residence, and a notice of the liens was served on Richards on September 13, 1957 .

Prior to the delivery of the note by Richards to Albachten and subsequent to the filing of the tax liens, Albachten assigned all his interest in the note to appellant Hedderick by a separate written document executed in Mexico . On or about December 17, 1957 , Albachten delivered the note to Hedderick in Guadalajara , Mexico . Appellant did not contact Richards in regard to the note until May of 1961, shortly before it came due, at which time Richards advised appellant that he could not pay appellant until the tax liens were satisfied. This action resulted and the United States prevailed.

The controlling issue is whether the prior recording of the tax liens gave the United States priority to the obligation due and owing from Richards to the taxpayer Albachten over appellant as assignee of the obligation who did not pay adequate consideration therefor.

This issue was resolved by the District Judge in his Memorandum Opinion filed April 8, 1964 , and in his Findings of Fact and Conclusions of Law, filed May 20, 1964 , against the appellant and in favor of the United States . The facts as found by the District Court from the evidence are not clearly erroneous.

The District Court concluded that appellant failed to prove that he came within the category of "mortgagee, pledgee, or purchaser" as defined by Section 6323 of the 1954 Internal Revenue Code, and therefore is subordinate to the tax liens which were assessed and filed by the United States.

For the reasons found and concluded by the District Court the judgment is affirmed.

 

 

[66-1 USTC ¶9350] United States of America v. Texas Eastern Transmission Corp. et al.

U. S. District Court, West. Dist. La., Shreveport Div., Civil Action No. 10,046, 254 FSupp 114, 11/24/65

[1954 Code Sec. 6322]

Liens: Priority: Judgment creditor: Assignee of taxpayer.--A federal income tax lien against money due a delinquent taxpayer for the production of oil and gas from his wells was superior to a claim of a judgment creditor. The judgment creditor's lien, being against the taxpayer's real property, did not apply to the payments from oil and gas production, since oil and gas, once produced, lose the character of real property and become personalty. The federal lien was also superior to the claim of a trustee under an assignment of production agreement transferring the taxpayer's production rights in trust for the benefit of certain creditors, since the trustee was not a purchaser of such rights but was merely an assignee who held no rights higher than those of the assignor taxpayer.

Edward L. Shaheen, United States Attorney, Edeard V. Boagni, Assistant United States Attorney, Shreveport, La, for government. Elmon W. Holmes, Hargrove, Guyton, Van Hook & Ramey, 867 Tax. Eastern Bldg., Shreveport, La, Rob ert O. Brown, Earl P. Enos, Post Office Box 1431, Duncan, Okla., Vinson, Elkins, Weems & Searls, First City Nat'l Bank Bldg., Houston, Tex., R. Briscoe King, 300 Petroleum Tower, Corpus Christi, Tex., Roy L. Beard, Stagg, Cady, Johnson & Haygood, 406 Petroleum Tower, Shreveport, La., Ben E. Coleman, Morgan, Baker, Skeels & Coleman, Post Office Box 1662, Shreveport, La., for defendants.

Opinion on Motions for Summary Judgment

[Nature of Action]

DAWKINS, JR., Chief Judge:

This action initially was instituted by the United States to foreclose two tax lien assessed on the property of the Little Giant Oil Company of Texas in the aggregate sum of $3,690.60, the claims arising under the internal revenue laws of the United States. A judgment by default was entered against Little Giant on July 22, 1965 , after it failed to appear or plead.

[Priority Claims]

The property subjected to the tax lien sought to be enforced is a sum of money held by Texas Eastern Transmission Corporation, representing money due Little Giant as payment for the production of oil and gas from its well located in Goliad County, Texas. By its answer, Texas Eastern responded with an interpleader, depositing the sum of $3,308.62 in the registry of the Court. ¹ The other defendants--claimants in interpleader--are Jimmy Clark, d/b/a Clark's Industrial Engine Service, residing in Corpus Christi, Nueces County, Texas, a judgment creditor of Little Giant, W. R. Anderson, trustee for creditors of Little Giant, a resident of Corpus Christi, Texas, and Halliburton Company, a Delaware corporation licensed to do business in Louisiana, with a business office in Shreveport. ²

The dispute here is as to proper priority with respect to the fund held for the credit of Little Giant, apparently one of the last remaining assets of that corporation. It arises out of a complicated series of transactions the resolution of which becomes relatively simple under the internal revenue laws of the United States . ³

Jimmy Clark was awarded a money judgment against Little Giant on September 27, 1961, for the sum of $967.40, plus interest, which was recorded in Nueces County , September 28, 1961, and in Goliad County October 21, 1961. ⁴ Texas Eastern received notice by service of the judgment on it on or about October 3, 1961 . W. R. Anderson was named Trustee under a trust agreement styled an "Assignment of Production" executed March 5, 1962 , filed April 30, 1962 , and recorded May 4, 1962 , transferring all of Little Giant's production rights in trust for the benefit of certain creditors of Little Giant who held prior recorded mechanic's liens. None of the lien holders had prosecuted their claims against Little Giant to judgment, but the debts and the specific amounts thereof were admitted and acknowledged in the "Assignment of Production" of March 5, 1962 .

[Federal Tax Lien]

According to his affidavit, on February 16, 1962 , the District Director of Internal Revenue, R. L. Phinney, assessed against Little Giant withholding taxes, penalties and interest in the amount of $2,938.61 for the fourth quarter of 1960; notice and demand for payment was made on the same day. On March 23, 1962 , he assessed the sum of $751.99 for the first quarter of 1961, notice and demand being made that day. On March 15, 1962, a notice of tax lien in the sum of $2,938.16 was filed with the County Clerk, Nueces County, Texas; on April 6, 1962, a notice of tax lien in the sum of $751.99 was filed in the same County; on April 6, 1962, a notice of tax lien in the sum of $3,690.60 was filed with the County Clerk, Goliad County, Texas. A notice of levy was served on Texas Eastern on August 13, 1963 , and a final demand for payment was served August 27, 1963 .

[Priority Provisions]

The law with respect to priorities between these claimants is easily stated. The priority of the federal tax lien provided by 26 U. S. C. §6321 ⁵ as against liens created under state law is governed by the common law rule--"the first in time is the first in right." United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-86 (1954). It is critical to the resolution of the dispute herein to determine whether the parties in fact had liens attaching to the specific property involved, and, if so, when they came into existence or became valid for the purpose of the rule.

The tax lien arises, according to §6322, when the tax is assessed, but as against the specific persons mentioned in §6323(a)--mortgagees, pledgees, purchasers and judgment creditors--it is not valid until placed of public record. As for a lien created by state law, its priority depends "upon the time it attached to the property in question and became choate." United States v. New Britain , supra; United States v. Security Tr. & Sav. Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950).

It is not disputed that the fund held to the credit of Little Giant was the property of that taxpayer within the meaning of §6321 on February 16, 1962 , when the tax lien for $2,938.61 attached. ⁶ This lien was valid, although secret, upon assessment against all persons except those stated in §6323, above, as to the fund now held in the registry of the Court.

The non-federal claimants, Clark and Anderson, assert the superiority of their claims over that of the United States-- that they hold special interests against the debtor, which, under §6323, should be accorded priority. While each point raised will be treated herein, we feel the parties have missed the crucial issue: whether either of these claimants holds a lien against the specific property involved--a sum of money held to the credit of their debtor by Texas Eastern in Caddo Parish, Louisiana. Determination of the existence of a lien upon specific property requires an examination of each party's claim.

[Judgment Lien Not on Personalty]

Jimmy Clark, d/b/a Clark's Industrial Engine Service, held a judgment against Little Giant, which under Texas law, when recorded in any county where the debtor owned realty, became a lien attaching to any such interest. Vernon 's Texas Civil Statutes, Article 5449. It is immaterial whether the judgment debtor's interest appears of record--whatever interest in "real estate" he actually owns is bound by the lien. See Donley v. Youngstown Sheet & Tube Co., 328 S. W. 2d 192 (Tex. Civ. App. 1959), and cases cited therein. Since an oil and gas leasehold is "real estate," Clark's judgment lien attached to Little Giant's interest in Goliad County . But oil and gas, once it is produced, loses its character as real property and becomes personalty. ⁷ A judgment lien is not, by Article 5449, made a lien on personality. It thus seems well settled that in Texas the lien acquired by recording a judgment cannot attach to oil and gas after severance, or to proceeds resulting from its sale. ⁸

Since it must be concluded that Clark had no lien on the proceeds here in dispute, it is obvious that his claim as a "judgment creditor" under the provisions of §6323 is misplaced. ⁹

[Trustee Merely Assignee]

The claim of Anderson , as transferee of Little Giant of its production rights under the March 5, 1962 , agreement, is as lacking in merit as it is complex. Briefly stated, Anderson asserts: (1) that the agreement of March 5th was absolute and effective without recordation and was executed prior to the filing of the tax liens sometime in April, which filing by the United States was necessary as to him because (2) he was within the exception of §6323--specifically that he was a "purchaser"; and (3) that the agreement of March 5th setting forth (a) the identity of the lienors, (b) the property subject to their previously recorded mechanic's liens, and (c) the amount thereof, had the effect of perfecting and making choate these liens within the rationale of the cases construing priorities between tax liens and creditor's liens. (4) The trustee calls on equitable principles, asserting that should the United States succeed, it would be unjustly enriched at the expense of those persons who were actively engaged in the drilling and maintenance of the well, and that such would be a deprivation of property without due process of law. (5) Lastly, he contends the trustee should prime Clark, who is a mere judgment creditor of the assignor, Little Giant, holding a money judgment ineffective against this particular fund. ¹⁰

The fallacy of Anderson 's first argument is its obvious disregard of §6322, providing attachment of the tax lien of $2,938.61 upon assessment February 16, 1962 . His position would be well taken, however, if he were in fact a "purchaser" under §6323, the substance of his second argument. A purchaser within the meaning of §6323 is "a person who, for a valuable present consideration, acquires property or an interest in property," ¹¹ in the manner of vendor and vendee. ¹² Anderson asserts the consideration in the assignment to him was his promise to pay the debts of Little Giant. In actuality the consideration for the assignment was the promise of a fee payable to the Trustee for his services as collecting and disbursing agent.

In the case of In re Juno [65-1 USTC ¶9159], 237 F. Supp. 203 (S. D. Calif. 1964), an assignee, under an assignment for the benefit of creditors, attempted to characterize himself as a "purchaser." The Court was terse: "The assignee was not a purchaser. A purchaser is one who acquires title for a valuable consideration in the manner of a vendor and vendee." Although Anderson attempts to distinguish this case, we feel it is indicative of the correct rule, and hold that the Assignment of Production here was not an acquisition for a present valuable consideration in the quality of vendor and vendee.

Implicit in the trustee's third argument is the premise that he has a lien upon the fund capable of being perfected or made choate. We believe this premise to be fallacious in that the assignment made him the holder of legal title to the fund, his rights of ownership being equal to those of Little Giant. Anderson has no special right to the proceeds of production higher than his assignor which could constitute a lien upon them capable of being ranked with other liens. ¹³

Anderson 's contentions of unjust enrichment and unconstitutionality are without merit. The tax lien procedure and priority provisions of the internal revenue laws have long been upheld as within the constitutional power of Congress to "lay and collect taxes." See Glass City Bank v. United States , 326 U. S. 338 (1943); Knox v. Great West Life Assur. Co. [54-1 USTC ¶9373], 212 F. 2d 784 (6 Cir. 1954).

[Priorities Established]

The priorities thus established are: first, Halliburton Company, under its assignment of September 1, 1961 ; second, the United States under its tax assessment of February 16, 1962 . No other priorities are established in that the fund held in the registry of the Court is fully depleted. These parties may withdraw the funds in the order of the above priority upon presentation of an appropriate decree.

¹ The United States filed a motion to dismiss the interpleader as to it on the ground it had not consented to such an action. Although the objection seems meritorious it has not been renewed since judgment was entered against Little Giant. In any event Texas Eastern need have no fear of multiple liability.

² The United States has conceded that Halliburton is entitled to priority payment from the fund by reason of an assignment of production rights from Little Giant to secure an indebtedness of $801.90, plus interest, in a Deed of Trust executed September 1, 1961 , and recorded in Goliad County , Texas September 8, 1961 . Thus Halliburton is entitled to withdraw such funds by priority upon presentation of an appropriate order.

³ 26 U. S. C. §6321 et seq.

⁴ It is not apparent upon the face of Clark 's pleadings whether any attempt was made to execute his judgment against Little Giant. In its brief, the United States informs us that two writs of execution were returned "Nulla bona." This is, of course, immaterial to our decision here.

⁵ 26 U. S. C. §6321: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property whether real or personal, belonging to such person."

⁶ It would appear that the assessment of March 23, 1962, did not attach to the fund, as it was assigned to W. R. Anderson, Trustee, on March 5, 1962, and no longer constituted property of the taxpayer within the meaning of §6321. See Logan Planing Mill Co. v. Fidelity & Cas. Co. of New York [63-1 USTC ¶9343], 212 F. Supp. 906 (D. C. W. Va. 1962) (where a contractor assigned contract proceeds to trustee so as to secure indemnitor required by surety on contractor's bond, there was no property of contractor in fund to which federal tax lien could attach); cf. Untied States v. R. F. Ball Const. Co. [58-1 USTC ¶9327], 355 U. S. 587, reh. denied, 356 U. S. 934 (1958) (assignment to secure a future contingent indebtedness).

⁷ Phillips Petroleum Co. v. Mecom, 375 S. W. 2d 335 (Tex. Civ. App. 1964); Tirado v. Tirado, 357 S. W. 2d 468 (Tex. Civ. App. 1962); Lone Star Gas Co. v. Murchison, 353 S. W. 2d 870 (Tex. Civ. App. 1962).

⁸ Donley v. Youngstown Sheet & Tube Co., 328 S. W. 2d 192, 197 (Tex. Civ. App. 1959): "We find no authority for the holding that the appellee's judgment liens can be enforced against the money paid into court by Sohio. Said lien holders did not sue for damages or conversion. There was no garnishment. Their right to said money depends solely upon their judgment liens. The statute that created them provides only that abstracts of judgments shall constitute liens on 'real estate.' Such liens do not attach to personal property." To the same effect see Onyx Refining Co. v. Evans Production Corp., 182 F. Supp. 253 (N. D. Tex. 1959).

⁹ Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5 Cir. 1965) (where a federal tax lien was given priority over a prior recorded personal judgment as the latter under Texas law did not constitute a lien on the taxpayer's personal property and which had not been levied upon at the time of filing of the tax lien). See also Beeghly v. Wilson [57-2 USTC ¶9808], 152 F. Supp. 726 (N. D. Iowa 1957); Miller v. Bank of America [48-1 USTC ¶9185], 166 F. 2d 415 (9 Cir. 1948).

¹⁰ As to priority between Clark and Anderson we intimate no opinion since the superior claims of Halliburton and tax lien of February 16, 1962 , deplete the fund here interpleaded.

¹¹ Fed. Tax Reg. 301.6323-1(a)(2)(i)(a).

¹² See United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218 (1955), holding that a landlord who has a lien for rent arrears created by state law is not a "purchaser."

¹³ The trustee's argument also suggests that the mechanic's liens accorded by Texas law to the creditors he represents should receive some individual consideration. It is well settled, however, that the mechanic's liens held by these parties under Vernon's Texas Civil Statutes, Arts. 5473-79 (1958), attach only to the leasehold and its appurtenances and not to oil and gas produced or its proceeds. Wilkins v. Fecht, 356 S. W. 2D 855 (Tex. Civ. App. 1962) error refused; Crowley v. Adams Bros. & Prince, 262 S. W. 883 (Tex. Civ. App. 1924). See also First Nat'l Bank of Lubbock v. Jenkins, 350 S. W. 2d 52 (Tex. Civ. App. 1961), and cases cited therein.

 

 

[60-2 USTC ¶9502]Big Farm Tire Corporation et al. v. J. L. Boland et al.

U. S. District Court, East. Dist. Va., Richmond, Civil 2998, 6/1/60

[1954 Code Secs. 6321-6323]

Priority of liens: Attorney's fees in interpleader.--A Federal tax lien was entitled to priority over the claim of the city of Richmond and that of an assignee of an equity in a note. The interpleading stakeholder was not entitled to deduct its attorney's fees from the fund, but was given judgment against the city of Richmond and the assignee for its costs and a $150 attorney's fee.

J. M. Weinberg, Central National Bank Bldg., Shanley Keeter, Assistant United States Attorney, Richmond, Va., for plaintiffs. W. Jerry Rob erts, 721 E. Main Street, Jas. A. Eichner, City of Richmond, City Hall, Morton L. Wallerstein, 1108 E. Main Street, and John W. Riely, 1003 Electric Building, Richmond, Va., for defendants.

Memorandum by the Court

BRYAN, District Judge:

With no substantial issue of fact present, the Court is of opinion as follows:

1. The lien of the United States is superior to everyone's save that of a "mortgagee, pledgee or purchaser" of a "security" without notice. 26 U. S. C. A. 6321, 6322 and 6323.

2. Obviously not a mortgagee or purchaser, the City of Richmond also is not within the category of pledgee, for the pledge to the Virginia Trust Company does not inure to the benefit of the City.

3. Treating the assignment to the Central National Bank as an assignment to Samuel Z. Troy, which it is in reality, Bank-Troy was not a mortgagee and, if a pledgee, was not a pledgee of a security, and the general filing of the Federal tax lien was in these circumstances sufficient notice to Bank-Troy. 26 U. S. C. A. 6323(c)(1); U. S. v. Ball Construction Co., 355 U. S. 587 (1958) [58-1 USTC ¶9327].

4. What was pledged to Bank-Troy was not a security, but merely an equity in a note, because pledgor Boland no longer had the note to pledge it--the note could only be pledged by transfer of it, 1950 Va. Code 6-382, and Boland was not then the holder so as to transfer it. Id. 6-544; Fleshman v. Bibb, 118 Va. 582, 88 S. E. 64 (1916).

5. Bank-Troy was not a "pledgee" because the assignment was not for a currently passing consideration, inasmuch as section 6323(c)(1), title 26, U. S. C. A., does not contemplate a past consideration as the basis for such a pledge.

6. The entire sum on deposit in the registry of the court must be awarded to the United States on account of its tax lien.

7. Although this action is in the nature of an interpleader suit, yet in view of U. S. v. Liverpool & London & Globe Ins. Co., 348 U. S. 215, 217 (1955) [55-1 USTC ¶9136], no attorney's fees can be allowed the plaintiff against the rund in the registry. Actually, this is only an academic decision, for if the charge were made, the United States would be entitled to reimbursement from the other claimants. Statutory costs plus an attorney's fee of $150.00 will be decreed in favor of the plaintiff against the City of Richmond and Samuel Z. Troy, jointly and severally. Board of Education v. Winding Gulf Collieries, 152 F. 2d 382, 386 (4 Cir. 1945); Pettus v. Hendricks, 113 Va. 326, 73 S. E. 191, 193 (1912).

Within 20 days let findings of fact and conclusions of law, and order thereon, be presented by the attorneys for the United States , after first submitting them to counsel for the other parties for consideration as to form.

 

 

[59-2 USTC ¶9689]The Arthur Company, a Partnership, 122 Western Avenue, Akron, Ohio, Plaintiff v. Chicago Paints, Inc., 4500 West 14th Street, Chicago, Illinois, Northern Minnesota National Bank of Duluth, Alworth Building, Duluth 2, Minnesota, Northland Paint Company, Inc., 105 Grant Avenue, Eveleth, Minnesota, Defendants, and the United States of America, Intervenor

U. S. District Court, Dist. Minn., 5th Div., No. 5-58 Civil 79, 175 FSupp 50, 8/15/59

[1954 Code Sec. 6323]

Lien for taxes: Priority: Materialmen and bank assignments.--It is held that the lien of the United States for assessed withholding and FICA taxes had priority over the claims of a supplier of materials and bank loans. Although, prior to the assessments, a customer of the taxpayer had issued two checks payable to taxpayer with the understanding that they would go to the supplier of the materials, they were retained by the taxpayer in its bank account, and the supplier neither filed a materialman's lien nor reduced its claim to judgment. The bank had financed the taxpayer, taking assignments of accounts receivable as security for an open line of credit. Although, prior to the assessment date, the bank had a schedule of accounts for work completed and in progress, this assignment was unperfected as a basis for priority, and became subordinate to the tax liens of the United States. The bank was not a "purchaser" or mortgagee. Since the assessed taxes exceeded the amount paid to the court for determination of priority of claims, the United States is entitled to the full amount.

Larson, Loevinger, Lindquist & Fraser, by Gerald E. Magnuson, Midland Bank Building, Minneapolis, Minn., for defendant Chicago Paints, Inc. Nye, Montague, Sullivan & McMillan, by Craig P. Gilbert, 1200 Alworth Building, Duluth 2, Minn., for defendant Northern City National Bank of Duluth (formerly Northern Minnesota National Bank of Duluth). Fallon Kelly, 221 Federal Courts Building , United States Attorney, by William S. Fallon, Assistant United States Attorney, St. Paul 2, Minn. , for The United States of America , Intervenor.

Memorandum Order ( 7/18/59 )

DONOVAN, District Judge:

This proceeding, commenced in the Northern District of Ohio and venue transferred here, is in the nature of a bill of interpleader ¹ to determine which of several claimants are entitled to the sum of $9,071.13 paid by plaintiff into the registry of the Court.

[Priority of Lien for Taxes]

Defendants have answered and each of them claim they are entitled to all or a part of said sum, excepting Northland Paint Company, which alleges the United States has priority. Following joinder of issues and by agreement of the parties the action as to plaintiff was dismissed.

The United States has intervened ² claiming all of the fund deposited as subject to a lien for taxes past due.

The parties, in the order named in the caption, will hereinafter, for brevity, be referred to as Arthur, Chicago , the Bank, Northland and Intervenor, and as the claimants, when referred to collectively.

The basic facts were stipulated by counsel at a pretrial conference held on May 19, 1959 . Brevity will be served by a summary thereof.

It is undisputed that this controversy arises out of the performance of contracts executed in 1956, whereby Northland agreed to paint certain structures in northeastern Minnesota for Arthur, and to sell Arthur a certain quantity of paint therefor. Northland has been paid all sums due in connection therewith except a balance of $9,071.13, which plaintiff Arthur deposited in the registry of this Court after Northland became financially involved. This fund is the bone of contention in the instant case.

[Assignment to Bank as Security for Indebtedness]

Since 1954, the Bank had been financing Northland and taking assignments of accounts receivable from time to time as security for an open line of credit. Notes were executed each time money was borrowed. Under the arrangement Northland had separate accounts at the Bank, a regular and a collateral account. All checks in payment for services performed by Northland were deposited in the collateral account. The regular account contained only sums loaned to Northland by the Bank. At no time were any funds shifted from the collateral account to the regular account.

As general assignments were executed by Northland they were accompanied by lists of work in progress for which customers had not been billed, as well as by accounts receivable. Attached to assignments of October 9, 1956, November 7, 1956, December 31, 1956, and January 31, 1957, were the schedules reflecting the accounts receivable or to become receivable from Arthur. On March 9, 1957 , the Bank notified Arthur that it had "an assignment from Northland as security for indebtedness." The Bank's claim herein is predicated upon this assignment.

[ United States Is Intervenor]

Intervenor bases its rights upon specific tax liens arising from assessments for withholding and F. I. C. A. taxes made against Northland by the District Director of the Internal Revenue Service. Liens were perfected by the assessments made on March 6, 1957 , and April 29, 1957 . Each was followed by notice of assessment and demand for payment issued to the taxpayer. Notices of lien were filed. A balance of $3,963.52 is due on the first assessment and the latter amounting to $22,367.77 is unpaid.

[Material Supplier's Claim]

Chicago , as a supplier of materials, furnished and delivered to Northland between September 28, 1956 , and November 2, 1956 , paint and materials used by Northland in the housing project at Babbitt and Silver Bay , Minnesota , for the agreed price equal to Chicago 's claim of $5,786.40. On December 18, 1956 , and prior to notice by the Bank to Arthur of its assignment, Arthur issued two checks totalling $5,700.00, earmarking one for " Silver Bay material" and the other for "Babbitt material." Said checks were made payable to Northland and deposited in the collateral account at the Bank, although correspondence from Arthur indicated the sums were intended ultimately to go to the material supplier.

[Order of Priority of Claims]

The sole issue for determination in the case at bar is the question of priority as between the three claimants.

The respective priority between the claimants is governed by 26 U. S. C. A., Section 6323(a), Internal Revenue Code of 1954:

"Invalidity of Lien Without Notice--Except as otherwise provided in Subsection (c), the lien imposed by Section 6321 shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed by the Secretary or his delegate."

[Supplier's Claim]

Is the claim of Chicago entitled to priority?

Chicago bottoms its claim to priority on its contention that it was the supplier of the materials that went into the housing project. There is no serious denial that it furnished the material for the particular painting job performed. It also stresses the undenied fact that Arthur earmarked two checks made payable to Northland by Arthur indicating the jobs for which the paint furnished by Chicago was used. This is an indication that Arthur was advising the Bank of its wish to get these two payments ultimately to Chicago . Unfortunately, the Bank was not legally required to pay heed to such writing on the face of the Checks. ³ Chicago could have had recourse to the Minnesota law that would protect it in so far as possible through the filing of a materialman's lien, ⁴ or reducing its claim to judgment against Northland. It did neither.

The cases Chicago cites in support of its contention that Northland had no property right in the portion of the fund sought by Chicago are inapplicable. Nothing in the pleadings ⁵ or facts stipulated herein indicates that Arthur was in any way obligated to Chicago rather than Northland. There is no evidence of a contractual duty imposed upon Arthur that established any prior rights in Chicago . Suffice to say that any equities Chicago has by what it was or did as a supplier are subject to controlling pre-existing liens or property rights. The Court rules Chicago is not entitled to priority and that its equities are secondary to the claims of the Intervenor.

[Bank's Claim]

Did the Bank's arrangement with Northland and its practice and conduct in connection therewith satisfy the exception in the quoted statute and thereby create a choate and perfected right of property superior to that of the Intervenor?

The majority opinion in the case of United States v. Ball Construction Company, 355 U. S. 587 ⁶ [58-1 USTC ¶9327], opposes the Bank's claim that it was first in time and hence first in right. See United States v. New Britain , 347 U. S. 81, 85 [54-1 USTC ¶9191], for a discussion of the ancient principle of "first in time is the first in right." The Bank's claim is based on instruments which remained unperfected as a basis for priority. ⁷ Thus it became subordinate to the Intervenor's tax liens. Counsel for the Bank would distinguish the Ball case from the instant case because it is contended that here "the assignment was for a full valid present consideration." Mr. Justice Whittaker, speaking for the minority, makes obvious that all of this was considered in the conference room of the Court. The dissent at pages 593-594 emphasizes that:

"* * * under the law and the facts in this record, the 'assignment' was in legal effect a 'mortgage' and inasmuch as it antedated the filing of the federal tax liens it was superior to them under the expressed terms of §3672(a). * * * The fact that the assignment was of property to be afterwards acquired did not affect its validity as a 'mortgage,' * * *. The questioned assignment conveyed to the surety all sums then due and thereafter to become due * * * as security for the payment * * *, * * * the assignment was in legal effect a mortgage, * * * perfected on its date, in all respects choate * * * [and it] antedated * * * the federal tax liens [and hence is] superior to those liens. * * *."

In First State Bank of Medford v. United States (D. C. Minn.), 166 F. Supp. 204 [58-2 USTC ¶9758], this Court, by Chief Judge Nordbye in construing the Ball case, held that "an assignment [does not constitute] a mortgage within the meaning of" the notice filing provision.

The Bank insists that it is entitled to the status of "purchaser" by reason of the loan and assignment. The Supreme Court has said that "a purchaser within the meaning of Section 3672 [now 6323(a)] usually means one who acquires title for valuable consideration in the manner of a vendor and a vendee." ⁸

This Court is convinced that the Bank's security transaction has failed to meet the test laid down by law for preference over a federal tax lien. Failure to meet such requirement must result in denial of priority to the competitor. The dissent in the Ball case makes clear that the majority opinion recognized the danger of continuing the "general and unperfected lien" doctrine because of its effect on legitimate commercial transactions.

[Federal Question]

The relative priority of claims, such as those of the instant case, where one is for unpaid taxes due the government, is always a federal question and in the case now before the Court, I hold the claims of Chicago and the Bank as unperfected and inferior to the claim of the United States.

All briefs in chief and in reply submitted as agreed by the parties have been studied by the Court. The references cited therein supporting contentions opposed to the conclusion reached by the Court in this Memorandum are readily distinguished from the instant case.

Intervenor may submit findings of fact, conclusions of law, order for judgment and form of judgment.

Exceptions are allowed.

Findings of Fact, Conclusions of Law and Order for Judgment ( 8/15/59 )

The above cause came on before this Court on May 19, 1959 , at which time the facts were submitted to the Court by written stipulation.

The following appearance were made:

Larson, Loevinger, Lindquist & Fraser by Gerald E. Magnuson, Minneapolis , Minnesota ; attorneys for defendant, Chicago Paints, Inc.;

Nye, Montague, Sullivan & MacMillan, by Craig P. Gilbert, Duluth, Minnesota; attorneys for defendant Northern City National Bank of Duluth (formerly Northern Minnesota National Bank of Duluth);

Fallon Kelly , United States Attorney for the District of Minnesota, by William S. Fallon, Assistant United States Attorney, St. Paul , Minnesota , for the United States of America , Intervenor.

The Court having considered the evidence and the briefs submitted and upon all of the files, records and proceedings herein, in addition to the Findings of Fact, Conclusions of Law, set forth in its Memorandum Order of July 18, 1959 , makes its following:

Findings of Fact

I. This action was commenced in the United States District Court for the Northern District of Ohio by the plaintiff, The Arthur Company, on November 8, 1957; subsequent thereto, on motion of the defendant, Northern City National Bank of Duluth, for change of venue, no objection being made, the action was transferred to this Court, and, subsequent thereto, the United States of America pursuant to leave of Court filed its Complaint of Intervention.

II. This proceeding is authorized by Section 1335, Title 28 United States Code, and is in the nature of a bill of interpleader to determine which of several claimants is entitled to the sum of $9,071.13. Said sum having been deposited in the registry of the Court and upon Stipulation and Order of the Court, The Arthur Company was released and dismissed from the case.

III. This Court has jurisdiction of this action by reason of Title 28 United States Code, Section 1335, and further, by reason of the intervention of the United States of America under Title 28 United States Code, Section 1345.

IV. On or about September 8, 1956, The Arthur Company, hereinafter referred to as Arthur, entered into an agreement with the Northland Paint Company, hereinafter referred to as Northland, whereby Northland agreed to paint certain houses at Babbitt, Minnesota, and Silver Bay, Minnesota. This agreement was later amended to provide for the payment to Northland of the sum of $415 per house painted by Northland. Pursuant to the terms and conditions of the contract, the total amount to be paid Northland by The Arthur Company was $31,125.

V. In October, 1956, Arthur ordered from Northland certain paint at an agreed price of $2,956.20.

VI. At the time this action was commenced, The Arthur Company had paid to Northland $25,010.07 so that the sum of $9,071.13 was remaining due and owing to Northland from Arthur under the contract and for the paint purchased by Arthur, and that that amount has been deposited in the registry of the Court by Arthur and is the subject matter of this lawsuit.

VII. Since 1954 the Northern City National Bank of Duluth, hereinafter referred to as the Bank, had been financing Northland and taking assignments of accounts receivable as security for credit extended by Bank. On May 13, 1954 , and periodically thereafter, Northland borrowed funds from the Bank, executing certain notes for the funds so borrowed which were secured by the assignment by Northland of its accounts receivable. Under this arrangement the Bank maintained three separate accounts for Northland: A collateral account into which all deposits were placed, a regular account into which monies loaned by the bank were placed, and a payroll account into which funds from the regular account were transferred. All monies received by the Bank from Northland were deposited in the collateral account. The only funds in the regular account were sums loaned by the Bank to Northland, and at no time were any funds transferred from the collateral account to the regular account. None of the monies so received by the Bank are involved herein.

VIII. On the occasion of each loan Northland executed an assignment of accounts receivable and attached thereto a list of the accounts receivable and the work then in progress.

IX. (a) On October 9, 1956 , Northland assigned to the Bank all funds then due under its contract with Arthur; there was then due Northland from Arthur on the contract $12,591.

(b) On November 7, 1956 , Northland assigned to the Bank all funds then due under its contract with Arthur; there was then due Northland from Arthur on the contract $21,728.

(c) On December 31, 1956 , Northland assigned to the Bank all funds then due under its contract with Arthur; there was then due Northland from Arthur on the contract $28,900.

(d) On January 31, 1957 , Northland assigned to the Bank all funds then due under its contract with Arthur; there waas then due Northland from Arthur on the contract $20,900.

X. Any right, title, interest or claim in or to the fund of $9,071.13 deposited in the registry of this Court which the Bank may have is and at all times has been inchoate and unperfected.

XI. On March 6, 1957 , an assessment against Northland in the amount of $18,906.78 was made by the United States of America by the District Director, Internal Revenue Service, for withholding taxes and F. I. C. A. taxes, penalties and interest for the taxable period ending December 31, 1956 . Notices of such assessments and demands for payment were duly issued to Northland on March 6, 1957 . Due and proper notice of federal tax lien with respect to this assessment was filed April 9, 1957, with the Clerk, United States District Court, St. Paul, Minnesota. The sum oif $14,943.26 has been paid on this assessment and a balance of $3,963.52 is presently owing.

XII. On April 29, 1957 , a further assessment against Northland in the amount of $22,367.77 was made by the United States of America by the District Director, Internal. Revenue Service, for withholding taxes, F. I. C. A. taxes, penalties and interest for the taxable period ending March 31, 1957 . Notices of such assessment and demands for payment were duly issued to Northland on April 29, 1957 . Due and proper notice of federal tax lien with respect to this assessment was filed May 3, 1957, with the Clerk, United States District Court, St. Paul, Minnesota, and on September 6, 1957, with the Register of Deeds, St. Louis County, Minnesota. The entire amount so assessed remains unpaid.

XIII. Chicago Paints, Inc., hereinafter referred to as Chicago , as a supplier of paints and paint materials, furnished and delivered to Northland between September 28, 1956 , and November 7, 1956 , paint materials of a value of $2,908.70 for the work Northland was doing under its contract with Arthur at Babbitt , Minnesota . None of these materials has been paid for.

XIV. Chicago between September 27, 1956 , and November 6, 1956 , furnished additional materials to Northland of a value of $2,877.70 for work Northland was doing under its contract with Arthur at Silver Bay , Minnesota . None of these materials has been paid for.

XV. Any right, title, interest or claim in or to the fund of $9,071.13 deposited in the registry of this Court which Chicago may have is and at all times has been inchoate and unperfected.

Conclusions of Law

I. This Court has jurisdiction of the present action by reason of Title 28 United States Code, Sections 1335 and 1345.

II. The sum of $9,071.13 deposited by The Arthur Company into the registry of the Court constitutes property or right to property of the Northland Paint Company within the meaning of Section 6321, Title 28 United States Code.

III. Pursuant to Section 6321, Title 26 United States Code, the United States of America by its assessments of taxes, penalties and interest described in Findings Numbers XI and XII obtained and has liens for said taxes, penalties and interest from and after the dates of said assessments, being March 6, 1957, and April 29, 1957, which liens attached to all of the property of the defendant Northland Paint Company including all rights to that sum of $9,071.13 now on deposit in the registry of this Court.

IV. The defendant, Northern City National Bank, at the times the respective tax liens of the United States of America hereinbefore described first arose, was not a mortgagee, pledgee, purchaser or judgment creditor with respect to the fund of $9,071.13 now on deposit in the registry of the Court within the meaning of Title 26, United States Code, Section 6323; and that any right, title, interest or claim of the Northern City National Bank to and in said fund of $9,071.13 was and still is unperfected and inchoate and by reason thereof cannot be afforded priority over the tax liens of the United States of America.

V. The defendant, Chicago Paints, Inc., at the times the respective tax liens of the United States of America hereinbefore described first arose was not a mortgagee, pledgee, purchaser or judgment creditor with respect to the fund of $9,071.13 now on deposit in the registry of the Court within the meaning of Title 26 United States Code, Section 6323, and that any right, title, interest or claim of Chicago Paints, Inc., to and in said fund of $9,071.13 was and still is unperfected and inchoate and by reason thereof cannot be afforded priority over the tax liens of the United States of America, and

IT IS ORDERED: That judgment be entered that the Intervenor, The United States of America, is entitled to the sum of $9,071.13 on deposit in the registry of the Court and the whole thereof; and

IT IS ORDERED: That the Clerk of this Court do pay from the registry of the Court the aforesaid sum of $9,071.13 to the Intervenor, the United States of America .

¹ 28 U. S. C. A., §1335; Standard Surety & Casualty Co. v. Baker, 8 Cir., 105 F. 2d 578.

² 28 U. S. C. A. Rule 24, Federal Rules of Civil Procedure.

³ 10 C. J. S., Bills and Notes, §330(a), pp. 829-831.

⁴ Minnesota Statutes Annotated, §§ 514.01-514.17; Compare: U. S. v. White Bear Brewing Co., 350 U. S. 1010 [56-1 USTC ¶9440], where a mechanic's lien did not prevail even after recordation and filing of suit prior to tax assessment.

⁵ Paragraph V of Chicago's Answer to the Complaint of Intervention admits and alleges that its claim is against "the moneys due and owing from The Arthur Company to Northland Paint Company, Inc."

⁶ The decision of the Court of Appeals, 5 Cir., 239 F. 2d 384, was an appellee's dream, i. e.; "Per Curiam. The facts of this case are well recited and the controlling principles of law are well stated in the opinion of Judge Rice. * * * 140 F. Supp. 60 * * * Affirmed."

⁷ See note: Applicability of the "General and Unperfected Lien" Doctrine to Contractual Liens, 43 Minn. L. R. 755 (1959), for history, analysis and speculation as to the precise holding of the Ball case. The Bank relies upon the conclusion of the author that the Supreme Court has separate tests for contractual and statutory liens and that a contractual lien perfected in the "commercial" sense is entitled to priority. Even though Minnesota Statutes Annotated, §521.02 provides for validity and perfection without recordation of accounts receivable, the author's suggested rule of "commercial" perfection for contractual liens appears to require either taking possession of the secured property or filing of the security interest. The note indicates dissatisfaction with the standard of perfection urged by the Bank in the instant case.

This Court fails to find any intent evinced in the Supreme Court decisions to classify interests such as the undisclosed lien of the Bank herein as perfected in the federal sense enabling them to subordinate subsequently filed federal tax liens.

⁸ United States v. Scovil, 348 U. S. 218, 221 [55-1 USTC ¶9137]; R. F. Ball Construction Company v. Jacobs (D. C., W. D. Tex.) 140 F. Supp. 60, 63-64 [56-1 USTC ¶9514].

 

 

[57-2 USTC ¶10,004]J. Sheehan Plumbing Co., Inc., Plaintiff v. Martin E. Galt, Jr., Defendant, and United States of America and Division of Employment Security, State of Missouri, Intervenors

U. S. District Court, East. Dist. Mo. , East. Div., No. 10579(1), 10/15/57

[1954 Code Secs. 6321, 6322, 6323, and 6331]

Priority of liens: Government liens for taxes v. assignment of funds due from plaintiff.--Held, the government's liens for taxes had priority over the assignment of funds to the defendant since the government had filed notice of its liens and served the plaintiff with notice of levy before the defendant notified the plaintiff of the assignment. Held further, that the part of the notice of levy related to withholding taxes was not premature. Held further, the intervenor, Division of Employment Security, State of Missouri , was not entitled to any of the fund deposited in court by the plaintiff.

Malcolm I. Frank, 419 Olive Street , St. Louis , Mo. , for plaintiff. Forrest M. Hemker, Suite 1212 , 705 Olive Street , St. Louis 1, Mo. , for defendant. Harry Richards, United States Attorney, Rob ert E. Brauer, Assistant United States Attorney, United States Courthouse and Customhouse, 12th & Market Streets, St. Louis 1, Mo., for United States, Intervenor. George Schwartz, State Counsel, A. S. Oliver, District Counsel, 1709 Locust Street, St. Louis, Mo., for Division of Employment Security, State of Missouri, Intervenor.

Findings of Fact and Conclusions of Law

MOORE, District Judge:

This cause having come on for hearing on May 6, 1957; and, the plaintiff being represented by counsel, defendant Galt appearing in person and by counsel, the intervenor, Division of Employment Security, State of Missouri, being represented by counsel, and the intervenor, United States of America being represented by counsel; and, evidence having been introduced by the defendant Galt and by the intervenor, United States of America; and, an objection to evidence proffered by intervenor, Division of Employment Security, State of Missouri, having been sustained and said evidence having been rejected; and, briefs having been filed by the defendant Galt and by the United States of America, and by the plaintiff on the question of attorneys fees; this Court, being duly advised in the premises, hereby makes and enters the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. On December 15, 1955 , at about 3:55 P. M. the United States of America , by and through its Internal Revenue Service, served upon the plaintiff a Notice of Levy, being Government's Exhibit 15, which reads in part as follows:

"You are hereby notified that there is now due, owing, and unpaid from Michael J. Smith, 717 W. Canterbury, University City, Missouri, to the United States of America the sum of five thousand four hundred ninety four and 87/100 Dollars, $5,494.87, for Internal Revenue Taxes, to wit:

Period and                     Date of           Unpaid         Statutory

Type of Tax                 Assessment          Balance         Additions            Total

1951 FUTA .........            8-31-55         $ 798.43            $17.97         $ 816.40

1952 FUTA .........            8-31-55          1137.72             25.61          1163.33

1954IND. ..........            5-31-55           246.18              7.39           253.57

1952 IND. .........             7-8-55          1824.17             54.73          1878.90

12-31-53 W. T. ....           12-15-55           783.17                             783.17

3-31-54 W. T. .....           
12-15-55
           599.50                           599.50"

 

2. Said Notice of Levy embraced and covered the following taxes assessed against Michael J. Smith:

a. Taxes due under the Federal Unemployment Tax Act for the years 1951, or 1951 FUTA taxes, and 1952, or 1952 FUTA taxes.

b. Individual Income Taxes due for the years 1952 and 1954.

c. Withholding Taxes on wages earned by employees of said Michael J. Smith, due for the fourth quarter of 1953 and the first quarter of 1954.

[Lien for Individual Income Taxes]

3. The said Individual Income Taxes due for the year 1954 by said Michael J. Smith were assessed against him on May 31, 1955 . Said assessment was made on that date on an assessment certificate signed on that date by E. P. Dennehy, Assessment Officer of the Office of the District Director of Internal Revenue, St. Louis , Missouri . The amount of the assessment was $246.18. Subsequent to the assessment, a payment of $84.57 was credited thereto, so that, at the trial, Michael J. Smith owed the United States of America on account of this assessment, the sum of $161.61, plus interest of $15.72. Notices of this assessment and demands for the payment of said assessed taxes were mailed by the United States of America to said Michael J. Smith on June 22, 1955 and or July 20, 1955 , and received by him.

4. The said Individual Income Taxes due for the year 1952 by said Michael J. Smith were assessed against him on July 8, 1955 , on an Assessment Certificate signed on that date by E. P. Dennehy, Assessment Officer of the Office of the District Director of Internal Revenue, St. Louis , Missouri . The amount of this assessment was $1,607.30 in taxes, and $216.87 in interest, or a total of $1,824.17. Notices of this assessment and demands for payment of said assessed taxes and interest were mailed to said Michael J. Smith by the United States of America on July 21, 1955 and on August 5, 1955, and were received by him. No payment was made by him on and against these assessed taxes and interest. At the time of trial, an additional sum of $86.58 was due on account of interest.

5. Notice of Federal Tax Lien B-1019, embracing the Individual Income Taxes assessed against said Michael J. Smith for the years 1954 and 1952 was filed by the United States of America in the Office of the Recorder of Deeds of and for St. Louis County, Missouri, on November 14, 1955, and in the Office of the Recorder of Deeds of and for the City of St. Louis, Missouri, on November 10, 1955. On these dates, Michael J. Smith was a resident of St. Louis County , Missouri , residing at 717 W. Canterbury , University City , Missouri . Said Notice of Federal Tax Lien reads in part as follows:

"Pursuant to the provisions of Sections 6321, 6322, and 6323 of the Internal Revenue Code of 1954, notice is hereby given that there have been assessed under the Internal Revenue Laws of the United States against the following-named taxpayers, taxes (including interest and penalties) which after demand for payment thereof remain unpaid, and that by virtue of the above-mentioned statutes the amount of said taxes, together with penalties, interest, and costs that may accrue in addition thereto, is a lien in favor of the United States upon all property and rights to property belonging to said taxpayer, to wit: Michael J. and Doris Smith, 717 W. Canterbury, University City 24, Missouri. . . ."

[Lien under Federal Unemployment Tax Act]

6. The said taxes due under the Federal Unemployment Tax Act for the years 1951 and 1952 by said Michael J. Smith to the United States of America were assessed against him on August 31, 1955 upon an Assessment Certificate signed by E. P. Dennehy, Assessment Officer of the Office of the District Director of Internal Revenue, St. Louis , Missouri . The amount of the assessment for the year 1951 was $545.00 in taxes and $136.25 in penalties, and interest in the sum of $117.18, totaling $798.43. At the time of trial, an additional sum of $32.46, as interest, was due on account of these assessed taxes.

The amount of the assessment for the year 1952 was $809.77 in taxes, $202.44 in penalties, and interest in the sum of $125.51, totaling $1,137.72. At the time of trial, an additional sum of $46.26, as interest, was due on account of this assessment.

7. A notice of the assessed FUTA taxes due for the year 1951 and a demand for their payment were mailed to said Michael J. Smith by the United States of America on or about September 23, 1955 , and received by him. A notice of the assessed FUTA taxes due for the year 1952 and a demand for their payment were mailed to said Michael J. Smith by the United States of America on September 22, 1955 , and received by him.