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
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