Assignment of Funds Page 3

---

 

8. Notice of Federal Tax Lien No. B-1018, embracing and covering the taxes assessed against said Michael J. Smith under the Federal Unemployment Tax Act for the years 1951 and 1952 was filed by the United States of America in the office of the Recorder of Deeds, 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. Said Notice of Federal Tax Lien reads as does Notice of Federal Tax Lien No. B-1019, noted in part in paragraph 5 herein above.

[Lien for Withholding Taxes]

9. The said withholding taxes due for the fourth quarter of 1953 and the first quarter of 1954 from said Michael J. Smith to the United States of America were assessed against said Michael J. Smith on December 15, 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 fourth quarter of 1953 is $574.89 in taxes, $143.72 in penalties, and $64.56 in interest, totaling $783.17. At the time of trial, the additional sum of $18.37, as interest, was due upon this assessment.

The amount of the assessment for the first quarter of 1954 is $444.91 in taxes, $111.23 in penalties, and $43.36 in interest, totaling $599.50. At the time of trial, the additional sum of $14.06, as interest, was due upon this assessment.

10. The said assessments of and for withholding taxes were based upon withholding tax returns, and the liabilities shown to be due thereupon, prepared by said Michael J. Smith and handed to Bennie LaPresta, Collection Officer of the Office of the District Director of Internal Revenue, St. Louis, Missouri, on December 9, 1955, by said Michael J. Smith for filing. No payment accompanied either of said returns.

11. At the time of giving these withholding tax returns to Bennie LaPresta, said Michael J. Smith knew that the Office of the District Director of Internal Revenue, St. Louis, Missouri, intended to and contemplated the filing of a Notice of Levy upon this plaintiff; and said Michael J. Smith, when he gave said returns to Bennie LaPresta, requested that the Notice of Levy include the withholding tax liabilities shown to be due on the said withholding tax returns.

12. Notice of Federal Tax Lien B-1112, embracing and covering said withholding tax assessments for the fourth quarter of 1953 and the first quarter of 1954 was filed by the United States of America in the Offices of the Recorder of Deeds for the City of St. Louis and for St. Louis County , Missouri , on December 20, 1955 .

[Defendant's Claim]

13. On December 17, 1955 the plaintiff received, by registered mail, a letter, dated December 16, 1955 , from the defendant Galt, said letter reading as follows:

" December 16, 1955

Joseph A. Sheehan Plumbing Company 4351 Delmar Blvd. St. Louis , Missouri

Gentlemen:

Enclosed please find copy of a written agreement between Michael J. Smith and the undersigned, dated September 1, 1955 , which I understand you have known about for some time. This copy is for your file record and is furnished to you so that you will have accurate knowledge of the contents thereof.

Under and by virtue of the terms of this agreement, Mr. Smith is now indebted to me for a balance of money advanced for his payroll on your job in the sum of $4042.00 and for which I expect to be reimbursed as per this agreement.

Therefore, demand is hereby made upon you to pay me the sum of $4042.00 out of any moneys or balances that may be due and owing to Michael J. Smith on account of the work he is now doing for you. As I understand it, the moneys herein advanced and so demanded by me to Mr. Smith were actually entered into the construction of the work he has been doing for you as a sub-contractor and was used to meet his payrolls thereon.

Thanking you in advance for your kind cooperation, I remain

Very truly yours,

/s/ Martin E. Galt, Jr.

Martin E. Galt

MEG/jw

Encl."

14. Attached to said registered letter and received with it by the plaintiff on December 17, 1955 , is a copy of an Agreement For Financing Payroll dated September 1, 1955 , entered into by said Michael J. Smith and the defendant Galt within the State of Missouri . The said Agreement reads as follows:

" September 1, 1955

For and in consideration of the promise and agreement of Martin E. Galt to advance a total sum of money not to exceed $4,700.00 from time to time as needed to meet necessary payroll expenses on a sewer construction job on the Riverview Gardens High School under sub-contract with J. A. Sheehan Plumbing Company, I the undersigned Michael J. Smith do hereby contract, agree and promise to repay the sum of money so advanced for payroll within 90 days from this date with interest at rate of 8% per annum.

It is further understood and agreed by the undersigned that in the event that payments are not made to the lender as above provided then that this agreement shall be and constitute an assignment of all and retained moneys or percentages of money due and payable to the undersigned by the J. A. Sheehan Plumbing Company on said construction work.

Michael J. Smith"

15. Plaintiff did not, prior to December 17, 1955 , and its receipt of the registered letter and accompanying copy of the Agreement between said Michael J. Smith and defendant Galt, receive any notice of said Agreement of September 1, 1955 .

16. Under his agreement with said Michael J. Smith, defendant Galt advanced said Smith the sum of $1,500.00 on September 2, 1955; the sum of $580.00 on September 13, 1955; the sum of $335.00 on September 21, 1955; the sum of $475.00 on September 26, 1955; the sum of 500.00 on September 29, 1955; the sum of $350.00 on October 4, 1955 and again on October 6, 1955; the sum of $790.00 on October 25, 1955, and the sum of $620.00 on November 2, 1955. Said Smith made the following payments on and against said advancements: $500.00 on September 30, 1955 and $1,900.00 on October 19, 1955 .

17. The Michael J. Smith who entered into said agreement of September 1, 1955 with the defendant Galt is the same person as the Michael J. Smith against whom the United States of America assessed taxes, as found in paragraphs 3, 4, 6, and 9 herein above.

18. On May 18, 1955 , this same Michael J. Smith entered into a contract with the plaintiff, said Smith agreeing and promising therein to construct sanitary and storm sewers on the Riverview Gardens High School job as subcontractor for the plaintiff.

19. When the plaintiff was served with the Notice of Levy by the United States of America on December 15, 1955 , plaintiff was indebted to said Michael J. Smith on account of services performed by him under said subcontract in the sum of $5,494.87, which said sum the plaintiff has deposited in the registry of this Court. Plaintiff also owed this said sum to said Michael J. Smith on December 17, 1955 , when the plaintiff received the registered letter, and attachment thereto, from defendant Galt, as found in paragraphs 13 and 14 herein above.

[Intervenor Had No Evidence]

20. No admissible evidence was adduced by the intervenor, Division of Employment Security, State of Missouri , in support of its alleged and pleaded claim to the sum of money deposited by the plaintiff in the registry of this Court.

21. Reasonable allowance to the plaintiff as and for attorney's fees in this case is the sum of $350.00.

Conclusions of Law

1. This Court has jurisdiction of the parties and of the complaint.

2. Plaintiff is entitled to a reasonable allowance of $350.00, as and for its attorney's fees to be paid out of the sum of money deposited by it in the registry of this Court; it is also entitled to recover out of said sum the sum of $35.08, which it has expended as and for taxable court costs in this proceeding.

[Intervenor Gets Nothing]

3. Intervenor, Division of Employment Security, State of Missouri , is not entitled to any part of the sum of money deposited by the plaintiff in the registry of this Court.

4. The Agreement between defendant Galt and Michael J. Smith of September 1, 1955 constitutes, among other things, an assignment to said defendant Galt by said Smith of all earned and retained moneys or percentages of money due and payable to said Smith by the plaintiff on account of and under the subcontract entered into by and between the plaintiff and said Smith on or about May 18, 1955.

5. The said assignment comes within the provisions of Chapter 410 of the Revised Statutes of the State of Missouri .

6. By reason of Section 410.020, R. S. Mo., 1949, V. A. M. S., and the failure of defendant Galt to give to the plaintiff notice at any time sooner, the said assignment to said defendant Galt was not good as to creditors of said Smith including the United States of America, until December 17, 1955, when notice of the said assignment was given to the plaintiff by defendant Galt by registered mail.

7. Notice of the assessment having been given, and demand having been made for its payment by the United States of America to Michael J. Smith, under and by reason of the provisions of Sections 6321 and 6322, Title 26, USCA (Internal Revenue Code 1954), the United States of America acquired a lien for assessed Individual Income Taxes due for the year 1954 on May 31, 1955, on and against the indebtedness of the plaintiff to said Michael J. Smith under the subcontract then in existence by and between the plaintiff and said Smith.

8. Notice of the assessment having been given, and demand having been made for its payment by the United States of America to Michael J. Smith, under and by reason of the provisions of Sections 6321 and 6322, Title 26, USCA (Internal Revenue Code 1954), the United States of America acquired a lien for assessed Individual Income Taxes due for the year 1952 on July 8, 1955, on and against the indebtedness of the plaintiff to said Michael J. Smith under the subcontract then in existence by and between the plaintiff and said Smith.

9. Notice of the assessment having been given, and demand having been made for its payment by the United States of America to Michael J. Smith, under and by reason of the provisions of Sections 6321 and 6322, Title 26, USCA (Internal Revenue Code 1954), the United States of America acquired a lien for assessed Federal Unemployment Taxes due for the years 1951 and 1952 on August 31, 1955.

10. Said Michael J. Smith was a resident of the County of St. Louis, Missouri all during the months of July through December of the year 1955.

11. Under and by virtue of the provisions of Section 6323, Title 26, USCA (Internal Revenue Code 1954), and Section 14.010 R. S. Mo., 1949, B. A. M. S., these said liens, referred to in paragraphs 7, 8 and 9 herein above, of the United States of America were good as to defendant Galt on November 14, 1955, when the United States of America filed notice of Federal Tax Lien B-1019 and notice of Federal Tax Lien B-1018 in the office of the Recorder of Deeds of and for the County of St. Louis, Missouri.

12. By reason of the said filing of said notices of Federal Tax Lien, B-1019 and B-1018, on November 14, 1955, these said tax liens of the United States of America are entitled to priority of payment from and out of the sum of money deposited by the plaintiff in the registry of this Court ahead of any claim to said sum by defendant Galt arising by reason of his agreement with said Michael J. Smith of September 1, 1955.

13. Under and by reason of the provisions of Sections 6321 and 6322, Title 26 USCA (Internal Revenue Code 1954), the United States of America acquired a lien for assessed Withholding Taxes for the fourth quarter of 1953 and the first quarter of 1954 on December 15, 1955 .

14. These said liens for Withholding Taxes were good and perfected as against defendant Galt on December 15, 1955 , when the United States of America served a Notice of Levy embracing the Withholding Taxes, and other taxes as to which liens existed, upon the plaintiff.

15. By the said service of the Notice of Levy upon the plaintiff on December 15, 1955, the United States of America seized, and reduced to its constructive possession, the indebtedness of the plaintiff to said Michael J. Smith under the subcontract between them of May 18, 1955, which indebtedness at said time was sufficient to satisfy the taxes shown to be due in said Notice of Levy.

[Service of Notice of Levy Not Premature]

16. The service of the Notice of Levy, as it covered and embraced the assessed withholding taxes due for the fourth quarter of 1953 and the first quarter of 1954, upon the plaintiff on December 15, 1955, was authorized, and was not premature, notwithstanding the provisions of Section 6331, Title 26, USCA, since Michael J. Smith, for whose benefit the provisions relating to notice and demand which are contained in said section are made, waived the notice and demand provisions and requirements of that said section by requesting that the United States of America include his withholding tax liabilities for these quarters in the Notice of Levy served upon the plaintiff, and by filing his returns for these said tax periods when he did unaccompanied by any remittances.

17. By reason of the service of the Notice of Levy on December 15, 1955 upon the plaintiff, the tax liens of the United States of America which arose on account of the assessed withholding taxes due by Michael J. Smith for the fourth quarter of 1953 and the first quarter of 1954 are entitled to priority of payment from and out of the sum of money deposited by the plaintiff in the registry of this Court before and ahead of payment of any sum to said defendant Galt on account of his claim arising under his Agreement with said Michael J. Smith of September 1, 1955.

18. The United States of America is entitled to a judgment to recover the sum of money deposited by the plaintiff in the registry of this Court, less the sum of $350.00 awarded to the plaintiff as an allowance for its attorney's fee, and, further, less the sum of $35.08, to be reimbursed to the plaintiff, on account of moneys it has expended as and for taxable court costs.

19. The United States of America is entitled to recover its taxable court costs in the sum of $81.20 from defendant Galt.

 

 

[57-1 USTC ¶9226]Three Mountaineers, Inc., Plaintiff v. G. H. Ramsey, Max M. Dalton, W. H. Howze, Graybar Electric Company, Incorporated, and The United States Government, Defendant

U. S. District Court, West. Dist. N. C., Asheville Div., Civil No. 1561, 143 FSupp 888, 9/13/56

[1954 Code Sec. 6323]

Priority of federal tax lien: Funds allegedly assigned to creditor.--An electrical contractor wished to acquire from a supplier various materials it needed in order to fill a contract for a customer. Because the supplier did not wish to extend the contractor further credit, it was agreed that payments by the customer for the work should be made through checks made payable jointly to the contractor and the supplier until the latter was reimbursed for the materials furnished. The court holds that this was not a valid assignment of funds, and that the federal tax lien against the contractor for withholding taxes, social security taxes, and insurance contributions had priority.

Uzzell and DuMont, Asheville , N. C., for plaintiff. Joel B. Adams, Asheville, N. C., for Graybar Electric Company, Inc. J. M. Baley, Jr., United States District Attorney, Hugh Monteith, First Assistant United States District Attorney, Asheville, N. C., for United States Government.

Memorandum Opinion

WARLICK, District Judge:

This is an Inter-pleader Action instituted under 28 USCA 1335 and has to do with certain claims made to a fund now on deposit with the Clerk of this court. Plaintiff having paid into the Registry of this court $1,219.48; This sum represents the balance due under the contract by plaintiff for work done for it by the Asheville Electric Company. Jurisdiction is vested in the court under 28 USCA 2410. The amount involved is $500 or more. The essential facts are not disputed, and two questions apparently are involved:

1. "Was a valid assignment made by the Asheville Electric Company to Graybar Electric Company of money to become due to the Asheville Electric Company under their contract with plaintiff?"

2. "Does such assignment, if valid, take priority over the tax liens of the United States ?"

Plaintiff is a North Carolina corporation having its principal place of business at Asheville , and is engaged in the manufacture of fine wood products.

[Financing Arrangement]

G. H. Ramsey and Max M. Dalton were partners and did business as the Asheville Electric Company, engaged primarily in general electric work, and as such were awarded a contract based on a valuable consideration to supply the materials, labor, etc., and complete the work that plaintiff desired done in renovating its business and manufacturing properties in Asheville. After securing such contract from plaintiff, and during the month of September, 1955, G. H. Ramsey, representing the Asheville Electric Company, approached a representative of the defendant, Graybar Electric Company, seeking to effect some means by which he and his associate could secure the various electrical supplies that would be needed by them in performing their contract with the plaintiff.

Graybar Electric Company, Inc., is a New York corporation and maintains a place of business in Asheville , in the Western District of North Carolina. W. H. Howze, who originally made claim to the fund, or a part thereof, and filed answer, had withdrawn his claim before the trial of the issues involved and is not now a party thereto.

At that time the Asheville Electric Company was in default with Graybar in the approximate amount of $6,000.00 which had been temporarily adjusted by the execution of notes to be paid every fifteen days at the rate of $500 at each pay period. Asheville Electric had no open account credit with Graybar at this particular time, and for the purpose of finding the actual facts without prejudice I am inserting the evidence, stenographically reported at the trial, so that a determination of the status of the contract can best be known. The controversy hinges on this evidence. (Testimony of John E. David.)

"Q. Did anyone from the Asheville Electric Company approach you in September or October, 1955, with regard to a job at a plant being constructed by the Three Mountaineers?

"A. They did.

"Q. Who approached you, Mr. David?

"A. Mr. Ramsey.

"Q. Is that the Mr. Ramsey who is here in the courtroom?

"A. It is.

"Q. Tell us as well as you can rememper when this happened and what, if anything, was said between you and Mr. Ramsey.

"A. I have it in my files. I immediately put it on paper at the time I talked with him. He said he had a job--

"Q. When was that?

"A. This was on September 27th. To be specific, 1955.

"Q. 1955?

"A. Yes. Said he had a job that would run approximately $5,500.00. That he needed $3,000.00 in material, roughly, to complete it, and they wanted to know if we could possibly work out any arrangement to handle it; and I, of course, told him at the time that we could not give you open account credit in view of your present status with us, and I was also aware of other outstanding indebtednesses, and that the only way we could possibly consider handling it would be on a guarantee basis from Three Mountaineers, and that a double endorsement basis would be acceptable provided the check was drawn for double endorsement.

"I received a letter from Mr. Lashley on that same day acknowledging this and said the check would be drawn for double endorsement. I, in turn, acknowledged his letter and asked that the check be sent to the attention of Mr. Coyner, of our Ashesville office. And I believe that about covers it."

During the trial Graybar introduced Exhibits 1, 2 and 3 which have to do with the alleged assignment which I incorporate herein as relevant facts, tending to show the exact status of the purported agreement.

"THREE MOUNTAINEERS, INC.

Post Office Box 5066 Asheville , North Carolina

For identification:

Defendant Graybar's Exhibit No. 1

* * *

September 27, 1955

"Graybar Electric Co. 221 Patton Ave. Asheville N. C.

Attention: Mr. John English.

"Gentlemen:

"We have given the contract for electric wiring in our new plant buildings to Ashville Electric Company, and Mr. G. Henry Ramsey has asked us to tell you that he has requested all checks and payments for work done on this contract be made payable jointly to Graybar Electric Co., and Asheville Electric Company for double endorsement.

"We understand Mr. Ramsey has discussed this with you and we suggest you make proper notation on your records.

"Cordially yours,

"THREE MOUNTAINEERS, INC.

By: W. H. Lashley (s)

W. H. Lashley

"WHL/bb

cc to Asheville Electric Co."

"CC: H. S. Corey, Jr.

K. H. Coyner

C. T. Alley

For identification:

Defendant Graybar's Exhibit #2

October 3, 1955

"Mr. W. H. Lashley Three Mountaineers, Inc. P. O. Box 5066 Asheville , N. C.

Re: Asheville Electric Co.

"Dear Mr. Lashley:

"We wish to acknowledge with thanks your letter of September 27th addressed to the attention of Mr. John English with our Asheville office in which you state that all future payments made to the Asheville Electric Company will be drawn jointly in the name of Graybar Electric Company.

"Please send these checks to our Asheville office to the attention of Mr. Coyner who will be able to expedite endorsements for all parties concerned.

"Thank you for your cooperation.

"Yours very truly,

"Credit Manager

"JEDavid/mhn

"CC: Asheville Electric Co."

* * *

"THREE MOUNTAINEERS, INC.

Post Office Box 5066 Asheville , North Carolina

For identification:

Defendant Graybar's Exhibit No. 3

* * *

October 6, 1955

"Graybar Electric Company, Inc. 120 West Morehead Street Charlotte 1, N. C.

Attention: Mr. J. E. David

"Dear Mr. David:

"Judgment from your letter of October 3, I am inclined to think that my letter of September 27 was not quite clear.

"I did not say that all future payments to the Asheville Electric Company would be made payable jointly with Graybar Electric Company, Inc. I believe you will find that I said, payments to Asheville Electric Company for work done on our new plant buildings would be drawn jointly.

"Cordially yours,

"THREE MOUNTAINEERS, INC.

By: /s/ W. H. Lashley

W. H. Lashley

"WHL/bb

cc to Asheville Electric Company"

On Graybar's approval of this plan various electrical supplies were furnished by it as requested by Asheville Electric and were accordingly billed to Asheville Electric Company, with a notation in the upper left hand corner "Three Mountaineers Joo". The first material was delivered on September 28, 1955 , and the last was billed out to Asheville Electric on February 6, 1956 . The total costs of the supplies furnished by Graybar to Asheville Electric being $3,928.85. There is a balance now due Graybar on account of the supplies purchased from it and delivered to Asheville Electric in the sum of $1,664.94. Three payments were made on the supplies furnished, one for October for $495.99, another for the amount furnished during November and December in the sum of $390.52, and the last payment being on January 6, 1956, for $1,335.72. Cash discounts taken account for the difference in the amount shown.

Before each payment was received from plaintiff, Ramsey, representing the Asheville Electric would go to the office of Graybar and would be given the amount due for supplies furnished to that date, and on getting the bill therefor, would take it to the Three Mountaineers who would then issue check for that amount, less the cash discount,--making the checks payable to Asheville Electric and Graybar Electric Company as joint payees. Ramsey would then take the check to the office of Graybar Electric Company, endorse, it, and would leave the check with Graybar and credit would be accordingly given for the previous purchases. Each check received was in full for the amount then due to Graybar, so that on January 12, when the check for $1,335.72 was endorsed by Asheville Electric and delivered to Graybar, the account at that time was paid in full, with the possible exception of an item of $40 which evidently had been overlooked. The amount now claimed by Graybar is for electrical supplies furnished to Ashville Electric after January 12, 1956 .

During the period involved Graybar agreed with Asheville Electric that $1,000 could be paid by Three Mountaineers to it so that certain amounts due by it for labor could be paid. Accordingly two checks were drawn by Three Mountaineers, each payable to Asheville Electric Company and delivered to it for the purposes intended. One check was for $600; another for $400. These two checks were given on different occasions. At the time each was delivered Asheville Electric had fully paid Graybar for all supplies previously furnished to it.

[Federal Tax Liens]

The United States lays claim to the fund on deposit on account of certain federal tax liens covering withholding taxes, social security taxes, and insurance contributions due it from Asheville Electric Company, which at the time of this trial amounted to $1,381.61, with interest from July 15, 1956. This is a balance due on the first quarter of 1955 for $287.56, assessed on June 23, 1955, and recorded in the office of the Register of Deeds of Buncombe County, on September 9, 1955, and an additional balance for the second quarter of 1955 of $1,094.05, assessed on September 15, 1955, the assessment being recorded in the Registry of Buncombe County on November 4, 1955.

On February 13, 1956 , agents representing the Internal Revenue Department seized the business and all of the assets of the Asheville Electric Company and every of the obligations due to it. Among the accounts levied on was the account of Three Mountaineers, as it was among those named by Mr. Ramsey as being obligated for materials furnished and work done.

Graybar contends that it is entitled to have the fund on deposit determined as its property for that it holds a valid assignment, and that no part of the fund was ever at any time the property of the Asheville Electric Company.

The government contends that no such assignment existed and that the amount paid into the Registry was property which at all times belonged to the Asheville Electric Company and that its liens are such that it is entitled to have paid to it the full amount herein.

The liens asserted by the United States stem from 26 USCA, Sections 6321, 6322 and 6323. Section 6321 provides:

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

Section 6322 provides that the lien imposed by Section 6321 arises at the time the assessment is made and continues until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time.

Section 6323 provides that the lien shall not be valid 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 in which the property subject to lien is situated or may be found. It is therefore obvious under Section 6321 that the lien of the United States takes effect upon all property and rights of property belonging to the person liable for said tax.

The statutes covering collection of taxes are broad and comprehensive and Congress intended to subject all of a taxpayer's property except that specifically exempt to the payment of taxes. Bank v. Vidal, 114 Fed. (2d) 382.

[Was the Fund Assigned?]

The claim of Graybar Electric Company arises wholly from an alleged assignment to it by the Asheville Electric Company, of the fund formerly due by Mountaineers and now lodged in the registry of this court. In that narrow sphere the rights of the parties must be determined.

What constitutes an assignment and its validity involves the law of North Carolina , and the decisions of its Supreme Court. Erie R. Co. v. Tompkins, 304 U. S. 817.

The question of priority and the force and effect of liens of the United States for unpaid taxes and the validity thereof, is always a federal question to be finally determined by the courts of the United States . U. S. v. Acri, 348 U. S. 239 [211] [55-1 USTC ¶9138].

The Supreme Court of North Carolina has often dealt with the question of an assignment, and it is firmly established that unless expressly prohibited by statute or in contravention of some principle of public policy, all ordinary business contracts are assignable, and that a contract for money to become due in the future may be assigned. Chemical Co. v. McNair, 139 N. C. 326, 51 S. E., 949; Trust Co. v. Williams, 201 N. C. 464, 160 S. E. 484; Fertilizer Works v. Newbern 210 N. C. 9, 185 S. E. 471; Bank v. Jackson , 214 N. C. 582, 586.

In Motz v. Stowe 83 N. C. 434, 439, the court applied the general principle that anything written, said, or done for value in pursuance of an agreement to place a fund out of the owner's control and to appropriate it for the benefit of another, constitutes an equitable assignment. Trust Co. v. Construction Co., 191 N. C. 664, 667.

"In equity a present assignment of money having a potential existence but not yet due will operate on the fund as soon as it is acquired." Mike v. Guaranty Co., 299 N. C. 370, 372.

It can thus be seen that such claim to the fund herein as is asserted by Graybar Electric could be the subject of a valid assignment under the laws of North Carolina . Inquiry therefore, is directed to the thought whether the parties in their contract actually effected a valid assignment. It would seem from a careful analysis of the evidence, which is specifically brought forward in this decision, that the most the parties agreed to when the Asheville Electric made application for an extension of credit by Graybar Electric was that Graybar was agreeable to furnish the needed supplies to Asheville if Three Mountaineers would be found willing to execute its checks for the work done under its contract with Asheville Electric, to Asheville Electric and Graybar Electric, as joint payees. This seems to have met the requirements of Graybar and evidently was acceptable to the Three Mountaineers and afforded at least a convenient and well high certain means of payment for the supplies furnished. It, however, did not take into consideration intervening liens which could be filed by interested parties. Rising no higher than that source I am of the opinion that this purported contract did not constitute a valid assignment, in law or in equity, and that the fund paid into the registry by Three Mountaineers was subject to being impressed by the lien filed by the United States.

Having thus held, it would appear unnecessary to discuss further the several very interesting points which are set out in the brief of the government as reasons assigned for its right to the fund. I consequently forego that discussion.

Counsel will submit decree carrying into effect the government's right to recover the amount deposited with the court.

The cost of this action is to be deducted by the Clerk before paying out the fund to the proper authorities.

 

 

[54-2 USTC ¶9516]Alfred G. Tate, doing business as T & L Construction Company, and Aaron Karchmer and Gertrude Karchmer, Partners, doing business as Karchmer Pipe and Supply Company, Plaintiffs v. Sohio Petroleum Company, a corporation, Defendant

In the United States District Court for the Eastern District of Illinois, Civil action No. 2463, June 23, 1954

Lien for taxes: Priority of tax lien to assignment.--Taxpayers were owed funds for the construction of a pipeline. Taxpayers assigned their rights under the construction contract to third parties. Taxpayers also owed taxes to the federal government. The District Court decided, in a proceeding for the balance of the funds due to taxpayer, that the government's lien for taxes was superior to that of the assignee.

Murray & Stephens, Old National Bank Building , Centralia , Ill. , for plaintiffs. Kramer, Campbell, Costello & Wiechert, First National Bank Building, East St. Louis, Ill., Fordyce, Mayne, Hartman, Renard & Stribling, 506 Olive Street, St. Louis, Mo., for defendant.

Findings of Fact and Conclusions of Law

PLATT, District Judge:

The plaintiffs Aaron Karchmer and Gertrude Karchmer and Alfred G. Tate having filed a Bill of Complaint; the Court having stayed this cause pending arbitration; the parties having agreed to waive this stay order and arbitration; the United States of America, intervenor, having filed an intervening complaint; the Eck Miller Contract Company having intervened by the consent of the parties and order of the Court; the defendant Sohio Petroleum Company having filed its answer to the Bill of Complaint; and the plaintiffs Aaron Karchmer, Gertrude Karchmer and Alfred G. Tate having filed their reply to the answer of defendant Sohio Petroleum Company, the Court hereby finds the facts and states the conclusions of law as follows:

Findings of Fact

1. That on September 12, 1951 , the defendant Sohio Petroleum Company entered into a written contract with Plaintiff Alfred G. Tate, d/b/a T & L Construction Company, for the construction of a pipeline near Cloverport , Kentucky , all as more fully set out in plaintiffs' Bill of Complaint, marked Exhibit "A".

2. That the defendant Sohio Petroleum Company has admitted by its answer that it is now indebted under the terms of said contract in the amount of Twelve thousand five hundred ninety and 07/100 ($12,590.07) Dollars for work performed by Alfred G. Tate under said contract.

3. That by reason of an assignment by the said Alfred G. Tate to Aaron Karchmer and Gertrude Karchmer of an amount payable to Alfred G. Tate under the terms of said contract, the defendant Sohio Petroleum Company is indebted to Aaron Karchmer and Gertrude Karchmer, assignees and plaintiffs in this case, in the amount of Nine thousand six hundred one and 93/100 ($9,601.93) Dollars, and that said assignment in the total amount of Nine thousand six hundred one and 93/100 ($9,601.93) Dollars is superior and prior to the liens, attachments and distraints of intervenor United States of America, who heretofore filed an intervening complaint and liens against funds in the hands of defendant Sohio Petroleum Company and held by it for the account of Alfred G. Tate.

4. That the said liens, attachments and distraints of the intervenor United States of America in the amount of Four hundred eighty-eight and 14/100 ($488.14) Dollars are superior and prior to said assignment to plaintiffs Aaron Karchmer and Gertrude Karchmer, and that defendant Sohio Petroleum Company is therefore indebted to the United States of America in that amount by reason of said intervenor's liens, attachments and distraints.

5. That the said garnishment of the Eck Miller Contract Company, intervenor, as set out in defendant's answer, in the amount of Two thousand five hundred and no/100 ($2,500.00) Dollars is superior and prior to said assignment to plaintiffs Aaron Karchmer and Gertrude Karchmer, and that defendant Sohio Petroleum Company is therefore indebted to the Eck Miller Contract Company in the amount of Two thousand five hundred and no/100 ($2,500.00) Dollars by reason of said garnishment.

6. That the defendant Sohio Petroleum Company is in no way, manner, or form, indebted to plaintiff Alfred G. Tate.

7. That this Court has jurisdiction of the subject matter and of the persons of defendant Sohio Petroleum Company and plaintiffs Alfred G. Tate and Aaron Karchmer and Gertrude Karchmer, the United States of America, and the Eck Miller Contract Company.

Conclusions of Law

1. By reason of said indebtedness of Sohio Petroleum Company to the plaintiffs Aaron Karchmer and Gertrude Karchmer, IT IS ORDERED that a judgment should be entered on plaintiffs' Complaint in the amount of Nine thousand six hundred one and93/100 ($9,601.93) Dollars in favor of plaintiffs Aaron Karchmer and Gertrude Karchmer and against defendant Sohio Petroleum Company.

2. That by reason of said indebtedness of the defendant Sohio Petroleum Company to the intervenor the United States of America, IT IS ORDERED that judgment should be entered on the intervenor United States of America's intervening complaint in the amount of Four hundred eighty-eight and 14/100 ($488.14) Dollars in favor of said intervenor and against defendant Sohio Petroleum Company.

3. That by reason of said indebtedness of the defendant Sohio Petroleum Company to the intervenor Eck Miller Contract Company, IT IS ORDERED that a judgment should be entered on the Eck Miller Contract Company's garnishment in the amount of Two thousand five hundred and no/100 ($2,500.00) Dollars in favor of said Eck Miller Contract Company and against defendant Sohio Petroleum Company.

4. That the indebtedness of defendant Sohio Petroleum Company to Aaron Karchmer and Gertrude Karchmer in the amount of Nine thousand six hundred and one and 93/100 ($9,601.93) Dollars, arising by virtue of said construction contract with Alfred G. Tate and said assignment from Alfred G. Tate to Aaron Karchmer and Gertrude Karchmer is the entire amount owed by defendant Sohio Petroleum Company on account of said contract and said assignment either to plaintiffs Aaron Karchmer and Gertrude Karchmer or Alfred G. Tate, and that upon payment of said amount by Sohio Petroleum Company to Aaron Karchmer and Gertrude Karchmer, said Sohio Petroleum Company will be released and discharged from all claims, liens, demands, actions and causes of action arising out of or in any way based upon said contract or said assignment and which have been or may be asserted by any person, firm, or corporation.

5. That the indebtedness of defendant Sohio Petroleum Company to the intervenor the United States of America in the amount of Four hundred eighty-eight and 14/100 ($488.14) Dollars is the entire amount owed by said Sohio Petroleum Company to the United States of America by virtue of the liens, attachments and distraints of the said United States of America against funds held by Sohio Petroleum Company for the account of Alfred G. Tate, and that upon payment of said amount by defendant Sohio Petroleum Company to the United States of America, said defendant will be released and discharged from any and all claims, liens, demands and causes of action of the United States of America arising out of said liens, distraints and attachments, and said liens, distraints and attachments will be released and discharged forthwith.

6. That the indebtedness of defendant Sohio Petroleum Co. to the intervenor Eck Miller Contract Company in the amount of Two thousand five hundred and no/100 ($2,500.00) Dollars is the entire amount owed by Sohio Petroleum Company to the Eck Miller Contract Company by virtue of the garnishment filed by the Eck Miller Contract Company against funds held by Sohio Petroleum Company for the account of Alfred G. Tate, and that upon payment of said amount by defendant Sohio Petroleum Company to the Eck Miller Contract Company, Sohio Petroleum Company will be released and discharged from any and all claims, liens, demands, and causes of action of the Eck Miller Contract Company arising out of said garnishment and attachment, and said defendant will be released and discharged forthwith.

IT IS SO ORDERED this 23rd day of June, 1954, and counsel will submit appropriate judgment in accordance therewith.

 

 

[60-2 USTC ¶9567]F. B. Kozak, Plaintiff v. John T. Mead, d/b/a John T. Mead Construction Company, Lois J. Mead, Jefferson Oil Company, Bordens Sani Seal Dairy, Quality Door and Lumber Company, Firestone Stores, Cernek Brothers, Dunn Tile, Block and Supply Company, Peter Bender, Herbert A. Moe, parent, and Gary Moe, minor, and District Director of the Internal Revenue Service, Detroit, Michigan, Defendants

Mich. Circuit Court, Saginaw Cty., Chancery, No. 33167, 12/3/59

[1954 Code Sec. 6323]

Lien for taxes: Priority of liens: Judgment creditor's lien not perfected.--Service of summons by a judgment creditor on January 15, 1958, in a garnishment action, was invalid under the state statute. Therefore, the tax lien of the Federal Government filed January 28, 1958 , took priority.

[1954 Code Sec. 6323]

Lien for taxes: Priority of liens: Assignment for past due consideration.--Claim based on an assignment for a past due consideration was subordinate to a Federal tax lien.

Doozan, Scorsone & Trogan, 827 North Michigan Avenue , Saginaw , Mich. , for plaintiff. Daniel E. Clark and Howard A. Maturen, Jr., Assistant Prosecuting Attorneys, Saginaw, Mich., for Bordens Sani Seal Dairy. Elmer L. Pfeifle, Jr., Assistant United States Attorney, 807 Federal Bldg., Detroit 26, Mich. , for District Director of Internal Revenue and Intervening plaintiff. Rob ert R. Day, 802 Court Street, Saginaw, Mich., for Dunn Tile Block & Supply Co. Rob ert E. Bright, Merrill Bldg., Saginaw, Mich., for Cernek Brothers. Joseph L. Scorsone, Second National Bank Bldg., Saginaw , Mich. , for Firestone Stores.

Opinion of the Court

HUFF, District Judge:

This case involves a bill of interpleader in which petitioner asks the Court to decide which of several claimants are entitled to certain money that he holds in his possession and is willing to pay as ordered by the Court for services performed by one John T. Mead, and that upon such payment petitioner be relieved from further liability to the said John T. Mead and his various creditors.

Of course, the money thus to be disposed of in this proceeding is not sufficient to satisfy all the creditors of the said John T. Mead and as a consequence it becomes necessary for this Court to determine the priority in which the various creditors shall be paid from the funds available.

At a hearing upon a proposed decree in this matter, a number of interested parties appeared and presented to the Court their claims to the money held by petitioner and admittedly subject to the order of this Court for distribution. Since that time only the intervening plaintiff petitioner, United States of America, and the intervening Firestone Stores have filed anything further in support of their respective contentions, and it now appears that none of the other creditors of the said John T. Mead are able to establish a legal right to the balance of the funds involved in this particular action.

The intervening petitioner, United States of America , insists that under notices of tax liens against John T. Mead, filed January 28, 1958 , it is entitled to receive $250.45 for 1956 taxes with an assessment date of June 6, 1957 , and $309.51 for 1956 taxes with an assessment date of November 8, 1957 . The intervening Firestone Stores, however, claims that it is entitled to a prior payment of $193.49 from the remaining money subject to the jurisdiction of the Court because of a judgment which it obtained against John T. Mead on March 22, 1957 , and subsequent garnishment actions commenced to collect such judgment on January 15, 1958 and February 7, 1958 .

Under the provisions of section 6323 of the Internal Revenue Code, the United States Government tax lien became effective against such "judgment creditors" as the intervenor Firestone Stores when it was filed on January 28, 1958 . For the purposes of this suit, the intervening Firestone Stores lien against the personal property which is the subject of this suit became effective upon the institution of valid garnishment proceedings against the present petitioner F. S. Kozak. If the Firestone Stores garnishment action of January 15, 1958 was valid, it preceded the United States of America 's notice of tax lien filed January 28, 1958 ; if invalid, the United States notice of tax lien of January 28, 1958 obviously has priority over Firestone Stores garnishment action of February 7, 1958 . In other words, a controlling question for this Court to determine here is the validity of the Firestone Stores garnishment proceedings of January 15, 1958 in the Saginaw Municipal Court against John T. Mead as the principal defendant and F. S. Kozak as the garnishee defendant.

Inasmuch as it appears from the stipulation of material facts recently filed in this case by the interested parties that service of summons in the Saginaw Municipal Court garnishment action of January 15, 1958 was improperly made on "Rev." Weindjewski rather than the party petitioner, F. S. Kozak, who was the proper garnishee defendant, and that there was no showing of a compliance with the statute for substituted service on "some one in the family," as provided by law (Michigan Statutes Annotated 27.3199), service was defective. The Court therefore acquired no jurisdiction and no valid lien of garnishment was created (Laidlaw v. Morrow, 44 Mich. 547, headnote 2; Kerchieff v. Copening, 335 Mich. 153). That particular action in garnishment also was defective in that it was made returnable on the same day it issued and so was not in conformity with the statute requiring a "summons returnable in not less than four days." The effort to correct these defects by the second garnishment proceeding of February, 1958 clearly came too late to overcome the Federal tax lien which had become effective when filed on January 28, 1958 . The intervening Firestone Stores, therefore, established no valid lien of garnishment through its proceedings of January 15, 1958 in the Saginaw Municipal Court. As a consequence, the intervening plaintiff, United States of America , is entitled to receive from the funds still available in this court, through the present action of interpleader, the sums secured by its notice of tax liens filed January 28, 1958 prior to payment to the intervening Firestone Stores under its garnishment of February 7, 1958 .

It now appears undisputed that the claim of the defendant Cernek Brothers is based upon an assignment from John T. Mead for a past due consideration and is therefore subordinate to the tax lien of the United States Government (section 6323, Internal Revenue Code; Filipowicz v. Rothensies, 43 F. Supp. 619 [42-1 USTC ¶9300]).

A decree may be entered in accordance with the proceedings heretofore taken in this matter as amplified by this opinion.

 

 

[77-1 USTC ¶9426]Lee Chagra v. United States of America

U. S. Dist. Court, West . Dist. Tex. , El Paso Div., EP-74-CA-29, 3/4/77

[Code Secs. 6321-6323--result unchanged under '76 Tax Reform Act]

Lien for taxes: Taxpayer's attorney-creditor: Validity of lien: Notice of lien: Creditor as "purchaser."--Inasmuch as an assignment of tangible personal property as overdue payment of compensation to a tax debtor's attorney postdated a federal tax lien, the government's tax claim took precedence over the assignee's interest in the property, which the government properly levied on and sold. The tax lien would have been invalid, for omission to file notice of the lien, with respect to a purchaser from the taxpayer. In the instant case, however, the assignment was not for present consideration and the assignee was therefore not a purchaser. Franklin Federal Savings & Loan Association, DC, 56-1 USTC ¶9495, 140 F. Supp. 286, followed.

Towner Leeper, 444 Executive Center Blvd., Suite 112 , El Paso , Tex. 79902 , for plaintiff-appellant. Frank Walker, Assistant United States Attorney, El Paso , Tex. , for defendant-appellee.

Findings of Fact and Conclusions of Law Findings of Fact

WOOD, Jr., District Judge:

1. This Court enters as Findings of Fact those facts stipulated to by agreement of the parties filed on June 4, 1974 , and August 1, 1974 , with the exception of Stipulation of Fact No. 3 of the set of Stipulations filed on August 1, 1974 , which is modified as designated in Finding of Fact No. 2, infra.

2. Mr. and Mrs. Johnson were indebted to plaintiff for legal services in an amount in excess of $8,000.00 and, on November 22, 1974, Mrs. Johnson transferred her contractual interest in one 1974 Cadillac purchased from Bailey Cadillac. A copy of Mrs. Johnson's assignment is attached hereto as Court's Exhibit "A". Bailey Cadillac, Inc. was notified of the transfer.

Conclusions of Law

1. Regardless of the Stipulation of parties to the contrary, the Court must view all matters contained in the record and determine the effective date of transfer from the date of the instrument pertaining thereto, i. e., November 2, 1974 .

2. The United States Government acquired a valid tax lien upon the property of the tax debtor at the time of the assessment, November 21, 1973 . 26 U. S. C., Sec. 6322.

3. The tax lien imposed by Section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lien or judgment lien creditor until notice thereof which meets the requirements of Subsection (f) has been filed by the Secretary or his delegate. 26 U. S. C., Section 6323(a). Nowhere in the record does it appear that Notice of the tax lien as required by the aforementioned Section has been filed.

4. The assignment by the taxpayer to plaintiff in the instant case was for past due consideration and, accordingly, the assignee could not be considered a purchaser for purposes of Section 6323 providing that the Government's lien for taxes shall not be valid as against any purchaser until notice thereof has been filed by the Collector. U. S. v. Franklin Federal Savings & Loan Association [56-1 USTC ¶9495], 140 F. Supp. 286 (D. C. Pennsylvania, 1956).

5. The United States Government, pursuant to the Federal tax lien, had a superior claim to the automobile as the assignment occurred after the initiation of the Federal tax lien and, accordingly, levy and sale by the United States Government was proper.

6. Pursuant to the above, Judgment should be entered with costs in favor of the United States Government.

Judgment

On this the 2nd day of March, 1977, came on for consideration the above styled and numbered cause upon Stipulations of Fact agreed to by the respective parties and dated June 4, 1974 , and August 1, 1974 .

After carefully considering the aforementioned Stipulations and in accordance with the Findings of Fact and Conclusions of Law entered pursuant thereto, it is hereby ORDERED, ADJUDGED AND DECREED that the plaintiff take nothing; that the action be DISMISSED on the merits and that the defendant, United States of America, recover of and from the plaintiff, Lee Chagra, its costs of action.

 

 

[56-1 USTC ¶9495] United States of America , Plaintiff v. Franklin Federal Savings and Loan Association, Sidney Kirschner, Rob erta Kirschner, Defendants, Luzerne Lumber Company, Inc., Intervening Defendant

In the United States District Court for the Middle District of Pennsylvania, Civil Action No. 4776, 140 FSupp 286, April 30, 1956

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321; 1939 Code Secs. 3671-3672--changed in 1954 Code Secs. 6322-6323; 1939 Code Sec. 3710-- similar to 1954 Code Sec. 6332]

Validity of tax liens against mortgagees, etc.: Assignment for past due consideration: Summary judgment.--On January 11, 1952, taxpayer-debtor assigned certain credits or funds owing to him by defendants A and B for the purpose of securing a pre-existing indebtedness owing to C, the intervenor-creditor, for building materials previously sold to taxpayer on credit. On May 22, 1952 , a warrant for restraint for collection of income taxes against taxpayer was issued. On June 11, 1952, notices of lien and levy were served on A and B who contended that they were not indebted to taxpayer on May 22, 1952, by reason of the assignment to C, although they were still in possession of the funds. It was held that the Government's lien dated from the date the assessment list was received by the Collector, which date was prior to taxpayer's assignment. Since the assignment was not for any present consideration, C, as assignee, could not be considered a purchaser within the recording acts. Summary judgment was allowed in favor of the Government against A and B by reason of their failure to surrender the fund as required by 1939 Code Sec. 3710.

J. Julius Levy , United States Attorney, Federal Building , Scranton , Pa. , for plaintiff. Joseph J. Saintz , Miners Bank Building , Wilkes-Barre , Pa. , for defendants. Al J. Kane, Brooks Building , Wilkes-Barre , Pa. , for intervening defendant.

Opinion

WATSON, District Judge:

In this action the government requests judgment against the defendants, the Franklin Federal Savings and Loan Association and Sidney Kirschner and Rob erta Kirschner, in the amount of $2736.00 with interest from July 11, 1952. The government's claim is based upon Section 3710 of the Internal Revenue Code of 1939, 26 U. S. C. A. §3710, which provides:

"(a) Requirement. Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process.

(b) Penalty for violation. Any person who fails or refuses to so surrender any of such property or rights shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy."

[The Facts]

The Commissioner of Internal Revenue duly assessed certain taxes against one Lewis H. Dixon and assessment lists containing these assessments were received by the Collector of Internal Revenue. On May 22, 1952, a warrant for distraint for the collection of taxes assessed against Dixon was issued, and on June 11, 1952, notices of lien and levy were served on the defendants, the Franklin Federal Savings and Loan Association and Sidney and Rob erta Kirschner, who were indebted to Dixon in the sum of $2736.00. The defendants contend that on May 22, 1952, when the warrant for distraint was issued, they were not indebted to Dixon for the reason that on January 11, 1952 Dixon assigned credits in the sum of $2700.00 against the Franklin Federal Savings and Loan Association and the Kirschners to the Luzerne Lumber Company, Inc.

On March 31, 1954, an order was entered by this Court permitting the Luzerne Lumber Company, Inc. to intervene as a defendant. On the same date the intervening defendant filed its motion for summary judgment, which is now before the Court for disposition.

Paragraphs 8 and 9 of intervening defendant's motion for summary judgment admit that the sum of $2736.00 is still in the possession of the Franklin Federal Savings and Loan Association, and had not been turned over to the intervening defendant, Luzerne Lumber Company, Inc., on June 11, 1952, when notice of lien and levy was served on the association and the Kirschners. Attached to the intervening defendant's motion, and identified as "Intervening Defendant's Exhibit #1", is a photostatic copy of the assignment dated January 11, 1952 . It should be noted that the assignment states that Lewis H. Dixon, "in consideration of the sum of $2700.00 now justly due and owing by me to the Luzerne Lumber Company . . . for lumber and building materials furnished to and used by me in the erection and construction of that certain dwelling or building for Sidney Kirschner and Rob erta Kirschner . . . and for better securing of the said sum to the said Luzerne Lumber Company . . ." assigns to the Luzerne Lumber Company the sum of $2700.00 "to be paid out of the balance now due and owing to me" by the Kirschners "for carpenter labor and materials furnished by me" to the Kirschners. This instrument of assignment clearly indicates by its language that the assignment was not made for any present consideration but for the securing of the payment of a preexisting indebtedness between Dixon and the Luzerne Lumber Company, for lumber and building materials previously sold by the Luzerne Lumber Company to the taxpayer Dixon on credit.

At the hearing on the motion for summary judgment, the United States Attorney presented pertinent assessment lists, showing the dates on which the assessments against Dixon were made by the Commissioner of Internal Revenue, the dates on which the assessment lists were received by the Collector of Internal Revenue for the Twelfth Collection District, the amount of the assessments, and the present balance. It should be noted that the remaining assessments total in excess of $2736.00, the sum owed by the Kirschners to Dixon and presently being held by the Franklin Federal Savings and Loan Association.

[Opinion]

The intervening defendant contends that since notice of lien and levy was not served on the defendants until after the date of the assignment by Dixon to it, it has prior right to the fund, the assignment being effective under Pennsylvania law as to subsequent execution or attaching creditors. The government takes the position that its lien dates from the date the respective assessment lists were received by the Collector, which was prior to the assignment. The defendants were, therefore, obliged upon demand to turn the fund over to the Collector of Internal Revenue, and having failed to do so are liable to the extent of the fund, plus interest and costs, in accordance with 26 U. S. C. A. §3710.

Section 3670 of the Internal Revenue Code, 26 U. S. C. A. §3670, provides:

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

Section 3671 of the Internal Revenue Code, 26 U. S. C. A. §3671, provides:

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

This latter section specifically provides that the Government's lien arises at the time the assessment list is received by the Collector, "unless another date is specifically fixed by law . . ." Section 3672 of the Code, 26 U. S. C. A. §3672, does fix another date as to certain types of security interests. It provides:

"(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--(1) Under State or Territorial laws. In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory;"

[Status of Assignee]

The burden is upon the intervening defendant to prove that he comes within the class of "mortgagee, pledgee, purchaser, or judgment creditor". MacKenzie v. United States , 109 Fed. (2d) 340 [40-1 USTC ¶9229]; Filipowicz v. Rothensies, 43 Fed. Supp. 619 [42-1 USTC ¶9300].

The assignee does not, in the instant case, come within any of the categories described in Section 3672(a). The assignment in January, 1952, was for a past due consideration, and, consequently, the assignee would not be considered a purchaser within the recording acts. Filipowicz v. Rothensies, supra. Therefore, Section 3671 is applicable, and the government's lien was effective from the date the assessment lists were received by the collector, which was prior to the assignment. Intervening defendant's motion for summary judgment must be denied.

There remains the further question as to the proper disposition of the case, since the government has not made a cross-motion for summary judgment. If the plaintiff had made such a motion, it is clear that it would be entitled to summary judgment. As the purpose of the summary judgment procedure under Rule 56 of the Federal Rules of Civil Procedure is to expedite the disposition of cases in which there is no genuine issue as to any material fact requiring trial, the Court may properly enter summary judgment in favor of the party entitled to it. Northland Greyhound Lines v. Amalgamated Ass'n of St. Elec. Ry. and Motor Coach Emp. of America Division 1130, D. C. Minn. 1946, 66 Fed. Supp. 431.

Summary judgment will be entered for the plaintiff in the sum of $2736.00 with interest as provided by law.

An appropriate order will be entered herewith.

 

 

[86-2 USTC ¶9742] In re: Don Howard Major, Debtor. Liberty National Bank, et al., Plaintiffs v. Don Major, et al., Defendants

U.S. Bankruptcy Court, West. Dist. Ky., 3-84-02143, 9/29/86

[Code Secs. 6321 and 6323 ]

Assessment: Deficiency: Bankruptcy: Lien for taxes: Validity and priority against third parties: Partnership interest.--

A bankruptcy court determined that a Federal tax lien filed by the IRS against a debtor-attorney's fees generated from his law practice was superior to that of his former wife's claim for delinquent child support and maintenance payments and was also superior to that of a bank's lien based on the debtor's irrevocable assignment of such fees. In reviewing the competing claims the court initially rejected the former wife's claim to the fund, since her claim was not perfected under the applicable state law. Secondly, with respect to the bank's claim the court concluded that the IRS's tax lien attached before the purported assignments and had priority over such lien since they were first in time. Moreover, the court did not accept the debtor's assertion that such funds were assets of the bankrupt estate and were necessary for his reorganization, because the court reasoned that the IRS was a secured creditor and had priority. However, in response to the debtor's contention that the federal tax lien was not perfected since it was recorded at the wrong location and, thereby, failed to satisfy the requirements of Code Sec. 6232 , the court ruled for a separate order to be entered setting the case for an evidentiary hearing on this factual issue.

John A. Majors, Morgan & Pottinger, 601 West Main Street , Louisville , Ky. 40202 , for plaintiffs. Joseph J. Golden, 110 Professional Arts Building, 730 West Market Street , Louisville , Ky. 40202 , for debtor/defendant. Stephen M. George, 700 Republic Building, Louisville , Ky. 40202 , for defendants. Suzanne Major, Jane Gilbert, Assistant United States Attorneys, Louisville, Ky. 40202, Charles A. Baer, Department of Justice, Assistant Attorney General of the United States, Washington, D.C. 20530, for Internal Revenue Service.

MEMORANDUM-OPINION

BROWN, Bankruptcy Judge:

This matter comes before the Court on Motions for Summary Judgment by the defendant, Internal Revenue Service, and by the plaintiffs, First National Bank of Louisville, Liberty National Bank & Trust Company, and Credithrift of America, Inc. (the "banks"). The banks' Complaint alleges an interest in certain funds now being held by the Receiver of the Jefferson Circuit Court by virtue of irrevocable assignments executed by the debtor. The defendant, Suzanne Major, the former wife of the debtor, claims the money as a result of certain orders relating to maintenance and child support entered by the Jefferson Circuit Court. The Internal Revenue Service ("IRS") claims the money by virtue of its filed tax liens. The debtor asserts that the money is property of his estate and is necessary for his rehabilitation.

In order to resolve who has priority to these funds, it is first necessary to outline the chronology of when the competing interests came into being.

Suzanne Major's interest is premised upon certain orders emanating from the Jefferson Circuit Court dissolution action. The first of such orders, dated November 12, 1979 , awarded Ms. Major certain child support arrearage, school tuition, past due mortgage payments, and a monthly sum for current child support. It further provided that the debtor's former law partnership pay to Suzanne Major, the child support " . . . from the Respondent's proceeds as a result of his sale of his interest in the civil law practice". The Order dated January 21, 1980 provided that the debtor's former law firm withhold from any proceeds due the debtor, " . . . as a result of his interest in any cases, an amount equal to all judgments awarded by this Court to the Petitioner against the Respondent now in existence, or which may come into existence". The February 4, 1980 Order provided that the same law firm withhold from any proceeds due the debtor, " . . . as a result of his sale of any interest in the partnership, or any of his interests in the building located at 440 South Seventh Street, Louisville, Kentucky 40203 an amount equal to all judgments awarded by this Court to the Petitioner against the Respondent, . . .". The March 2, 1981 Order awarded Suzanne Major a judgment in the amount of $15,786.00 for child support arrearage, maintenance arrearage, delinquent house payments, and school tuition. On January 31, 1984 , the parties entered into an Agreed Order wherein Ms. Major was given an additional judgment of $15,000.00, and it further provided that no additional interest would accumulate on the previous judgments if they were satisfied within one year.

The banks are the holders of irrevocable assignments from the debtor of fees due the debtor from his former law firm. The debtor made the following assignments to the banks on March 15, 1983:

1. Liberty National Bank & Trust Company was to receive $13,235.00 plus interest.

2. First National Bank of Louisville was to receive $2,198.91 plus interest.

3. Credithrift of America, Inc. was to receive $3,299.00 plus interest.

The assignments state in part as follows:

The undersigned, Don H. Major, . . . hereby irrevocably assigns and transfers to Bank, to the extent necessary to satisfy the aforesaid sum, any and all right, title and interest in and to all fees, accounts, contract rights, interests, choses in action, other property in the form of pending cases, fees or other money due or about to become due or due in the future resulting from fees for legal work due from the law firm of Mulhall, Major, Turner, Taylor & Hoffman.

The IRS made the following assessments and filed "Notice of Federal Tax Lien under Internal Revenue Laws" pursuant to I.R.C. 6321, 6322, and 6323:

1. Notice filed in Jefferson County Clerk's Office January 22, 1981 for the tax period ending December, 1979 and assessed on January 6, 1981.

2. Notice filed in Jefferson County Clerk's Office August 26, 1981 for the tax period ending December, 1978 and assessed on July 13, 1981.

Following the debtor's filing of this Chapter 11, his former law partners paid over to the Receiver of the Jefferson Circuit Court in the above-referenced dissolution action, the sum of $54,234.00, which had been generated by cases in which the debtor had had an interest during the term of the partnership. It is this fund which now forms the basis of the present dispute as to priority.

The standard for summary judgment is that the moving party is entitled to summary judgment only if there are no genuine issues of material fact to be decided at trial. Fed. R. Civ. P. 56; Bankruptcy Rules 7056. The burden of showing the absence of a genuine issue of material fact is on the moving party. Weinberger v. Hynson, 412 U.S. 609, 622 (1973). In making a determination as to whether this burden has been met, all inferences drawn from underlying facts contained in materials submitted to the Court must be viewed in the light most favorable to the party opposing the motion. Bohn Aluminum & Brass Corp. v. Storm King Corp., 303 F.2d 425, 427 (6th Cir. 1962).

The plaintiffs' Complaint alleges that by virtue of its assignments, these funds are not property of the debtor's estate. Section 541 provides that property of the estate includes all legal or equitable interest of the debtor in property as of the commencement of the case. The banks' assignment covered "money due or about to become due or due in the future". Clearly, the debtor has an equitable interest in this fund, even if no property transfer occurred by the assignment as to the future claims.

We will consider first the Motion for Summary Judgment by the IRS. The IRS asserts that its Federal tax liens are entitled to priority over the banks' claim and that of Ms. Majors.

In reviewing the chronology of competing interests, it appears that Suzanne Major's claim based on her circuit court judgments arose in time prior to any of the other competing interests. Ms. Major cites K.R.S. 205.792 in support of her position that she is entitled to priority as to this fund. That statute deals with wage assignments made on petition of the Commonwealth in public assistance cases. There has been no assertion that public assistance has been paid in this case, and accordingly, that statute is not applicable. Ms. Major also argues that as an officer of the Internal Revenue Service allegedly knew of Ms. Major's judgment, the United States cannot now claim priority over her for her failure to perfect her claim. We find no proof in the record in support of this allegation.

As stated by the IRS, the correct issue is whether a hypothetical judgment lien creditor, without knowledge, would take priority over a state law lien. Dragstrem v. Obermeyer [77-1 USTC ¶9301 ], 549 F.2d 20, 25-26 (7th Cir. 1977); Borg Warner Acceptance, v. First National Bank [79-1 USTC ¶9208 ], 577 S.W.2d 29 (Ky. App. 1979). Ms. Major argues that her lien was choate even though she had not served her attachment. In order for a state lien to be choate, "it must be specific and perfected, that is when nothing further needs to be done to make it enforceable or when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." In re Ike Martin Co., Inc. [85-1 USTC ¶9169 ]. 49 B.R. 13 (Bkrtcy. D. Kan. 1985).

In this case, Suzanne Major has not perfected her claim as required by state law. W. E. Stephens Manufacturing Co. v. Miller, 429 S.W.2d 384, 386 ( Ky. App. 1968). The property subject to her claim has not been established, and her claim could be primed by a perfected state law judgment. Ike Martin, supra, supports the position that Ms. Major's claim is inchoate, and that the federal tax liens must prevail over it.

As between the claim of the I.R.S. and that of the banks, the IRS lien is prior in time, its liens being filed in 1981, and the banks' assignments being executed in 1983. The banks argue that their lien became choate in 1978, at the time that the debtor commenced legal services for the clients which generated the fees later assigned to the banks. We find this argument to be without merit. The debtor may have had a lien for his services as an attorney in 1978; however, any such lien was an inchoate lien in 1978. Brooks v. United States [67-2 USTC ¶9624 ], 271 F.Supp. 671 (E.D.Ky. 1967). Nor could an unrecorded attorney's lien take priority over a recorded tax lien asserted by the United States . Brooks v. U.S., supra, at 674. Accordingly, the federal tax liens attached before the purported assignments and have priority over them under the "first in time is first in right" rule. In re Ike Martin Co., Inc., supra at 15.

Lastly, we address the debtor's argument that United States v. Whiting Pools, Inc. [83-1 USTC ¶9394 ], 462 U.S. 198 (1983) is dispositive of the issue of entitlement of the money as between the IRS and the debtor. The debtor also asserts that the funds are needed for his reorganization. However, we do not find the IRS claim of a lien interest in the funds at conflict with debtor's assertion that they are property of the estate. The IRS is asserting that it is a secured creditor by virtue of its tax liens, and further that its liens have priority.

We find Whiting Pools, supra, to be inapposite to this case. Whiting Pools did not involve any question of the validity or priority of a federal tax lien. Rather, it involved the issue of whether a pre-petition seizure of tangible personal property pursuant to a notice of levy was, by itself, sufficient to transfer title of the seized property to the United States . Whiting Pools, supra, 462 U.S. 198, 200, 209-211. The Court in Whiting Pools explicitly recognized that the federal tax lien gave the United States the status of a secured creditor. Id. , 462 U.S. at 211.

The debtor raises the issue of whether in fact the IRS has a perfected lien pursuant to Section 6323 of the Internal Revenue Code. The debtor claims that the federal tax lien was recorded at the wrong location. The tax liens were filed in Louisville , Jefferson County , Kentucky . The debtor asserts that he was not a resident of Louisville between September, 1980 and January, 1983, but resided in Tennessee during that time. An affidavit by the Revenue Officer in charge of the debtor's case states that the debtor told him, in the Fall of 1981, that he was only temporarily residing in Nashville ; further, that the delinquent assessments should not be transferred to the Nashville District in that he would be shortly returning to Louisville .

Section 6323(f) provides that in the case of personal property, it is deemed to be situated at the residence of the taxpayer at the time the notice of lien is filed. The debtor's residence on January 22, 1981 and August 26, 1981 (the dates of filing the tax liens) is a material question of fact to be determined and precludes the granting of summary judgment in favor of the IRS. Corwin Consult., Inc. v. Interpublic Group of Cos., Inc. [75-1 USTC ¶9299 ], 512 F.2d 605, 609 (2d Cir. 1975).

The above constitutes Findings of Fact and Conclusions of Law pursuant to Rules of Bankruptcy Procedure 7052. A separate order will be entered this date setting this case for an evidentiary hearing on the factual issue of the debtor's residence at the time of filing the tax liens.

A copy of the foregoing was mailed to John A. Majors, 601 West Main Street, Louisville, Kentucky 40202, counsel for plaintiffs; to Joseph J. Golden, 110 Professional Arts Building, 730 West Market Street, Louisville, Kentucky 40202, counsel for debtor/defendant; to Stephen M. George, 700 Republic Building, Louisville, Kentucky 40202, counsel for defendant, Suzanne Major; and to Jane Gilbert, Assistant United States Attorney, U.S. Courthouse, Second Floor, 601 West Broadway, Louisville, Kentucky 40202; Charles A. Baer, Trial Attorney, Tax Division, U.S. Department of Justice, P.O. Box 227, Ben Franklin Station, Washington, D.C. 20044; and Attorney General of the United States, Washington, D.C. 20530, counsel for defendant, Internal Revenue Service.

ORDER

Pursuant to the attached Memorandum-Opinion,

IT IS HEREBY ORDERED that the plaintiffs' Motion for Summary Judgment be and it is hereby overruled.

IT IS FURTHER ORDERED that the defendant, United States of America 's Motion for Summary Judgment be and is hereby overruled.

IT IS FURTHER ORDERED that this case is set for an evidentiary hearing on the factual issue of the debtor's residence at the time of filing the tax liens on the 4th day of November, 1986 at 1:30 P.M. at 413 U.S. Courthouse, Louisville , Kentucky .

This is not a final or appealable Order.

 

 

[66-1 USTC ¶9234]Grocers Wholesale Cooperative, Inc., Plaintiff v. Orin K. Goodrich, et al., Defendants, United States of America, Intervenor

U. S. District Court, So. Dist. Iowa, Central Div., Civil No. 6-1655-C-1, 251 FSupp 751, 1/21/66

[1954 Code Sec. 6323]

Tax liens: Iowa tax liens: Assignee: Priority.--Government's lien for taxes, assessed against the delinquent taxpayers on February 12, 1965, was superior to the liens of the subsequently assessed Iowa sales taxes and Shelby County personal property taxes. The tax lien was also superior to the claim of the assignee-bank, since the assignment was made after the tax was assessed and the bank was not a mortgagee, pledgee, purchaser, or judgment creditor.

James M. Stewart, Joseph B. Joyce, 707 Central Nat'l Bldg., Des Moines , Iowa , for plaintiff. William O. Lewis, Harlan, Iowa, for The Harlan Nat'l Bank; L. R. Voigts, Parrish, Guthrie, Colflesh & O'Brien, 900 Register & Tribune Bldg., Des Moines, Iowa, Joseph A. Greaves, Socrates Shukas, 221 N. LaSalle St., Chicago, Ill., for Borden Co.; Ralph H. Henderson, Shelby County Court House, Harlan, Iowa, for Shelby County, Iowa; Harold W. Bracewell, Assistant Attorney General, Des Moines, Iowa, for State of Iowa, defendants. D. M. Statton, United States Attorney, Jerry E. Williams, Assistant United States Attorney, Des Moines, Iowa, for intervenor and party plaintiff.

Memorandum

STEPHENSON, Chief Judge:

The matter now before the Court involves a determination of the priority of various claims to funds deposited herein under a decree of interpleader.

Plaintiff, Grocers Wholesale Cooperative, Inc., forclosed its chattel mortgage upon the merchndise, stock in trade, and furniture and fixtures, of mortgagors, defendants, Orin K. Goodrich and Donald C. Goodrich (Goodrich's) on February 21, 1965 . A private sale was held at the time resulting in an excess of $5,894.05 over and above the indebtedness of said mortgagors. Various claims were made to these excess funds and plaintiff then filed a complaint in interpleader asking the court to determine the respective rights of the various claimants and to discharge plaintiff from all liability. ¹ Thereafter various motions were heard by the Court in connection with the interpleader action itself. Ultimately a decree of interpleader was entered by the Court discharging plaintiff from further liability and allowing certain attorney fees and costs to plaintiff. There now remains for distribution the sum of $4,936.93 to those defendants or intervenor determined to be entitled thereto.

After a pretrial conference it was determined and Ordered that "the only issues remaining relate to the matter of priority by the United States of America, State of Iowa, Harlan National Bank and Shelby County." ² Thus, the Court will now confine its findings with respect to the four claimants mentioned. The facts have been stipulated.

[Assignee]

Defendant, The Harlan National Bank (the bank) claims it has priority by virtue of an assignment dated February 26, 1965 , wherein defendants, Orin K. and Donald C. Goodrich assigned to the bank all funds due the assignors from the plaintiff "as will satisfy the debt of Harlan National Bank, Harlan , Iowa ." The assignment was to secure a previous indebtedness due from assignors to the bank which exceeded the sum in the hands of the plaintiff and now available for distribution by the Court. If the bank prevails, all of the funds herein would be awarded the bank.

Intervenor , United States of America , claims priority by virtue of an assessment made against the defendants, Goodrichs, on February 12, 1965, by a delegate of the Secretary of the Treasury in the amount of $1,214.02, including penalty and interest. The notice of tax lien for said assessment was properly filed in the Recorder's office, Shelby County, Iowa, on April 9, 1965. ³

[ Iowa Tax Liens]

Defendant, State Tax Commission of Iowa ( Iowa ) claims priority by virtue of assessments made against defendants, Goodrichs, for unpaid retail sales taxes in the total amount of $3,849.15 by the Commission on March 11, 1956, notice of which liens were properly filed in the Recorder's Office, Shelby County, Iowa, on March 12, 1965. Although the assessments were made March 11, 1965, Iowa claims that out of the foregoing total assessments it had a statutory lien on January 31, 1965, in the amount of $2,677.44 for sales taxes for the period October 1--December 31, 1964, due and payable January 31, 1965.

Defendant, Shelby County claims priority by virtue of a claim for personal property taxes in the amount of $1,041.44 against the defendant, Goodrichs. However, it is conceded that pursuant to Section 444.9 Code of Iowa 1962, said personal property tax claim could not be determined or levied until on or after September 1, 1965. However, Shelby County claims that by virtue of Section 445.29 Code of Iowa, 1962, its lien dates back to January 1, 1965.

The federal tax assessment was made on February 12, 1965, and under the provisions of 26 U. S. C. A. §6321, 6322, the federal government had a perfected and choate lien upon Goodrichs' property from that date on. Since Iowa did not assess its sales tax liens until March 11, 1965, the federal liens, being first in time, are prior in right. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). The fact that the notice of the federal liens was not filed until April 9, 1965, does not defeat the priority. The Iowa liens do not come within the exceptions set out in 26 U. S. C. §6323. It cannot be classified as a mortgagee, pledgee, purchaser or judgment creditor. See United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U. S. 361 (1953); United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). The lien of the United States in the amount of $1,214.02 is therefore prior to any liens of Iowa . The Iowa sales tax liens were not perfected and choate as to the United States liens until March 11, 1965 , when the same was assessed. United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964). As of said date Iowa 's liens were sufficiently choate to warrant priority over federal assessments made in April. ⁴

As between the federal government and Shelby County , the federal lien prevails. Under the provision of Section 444.9 Code of Iowa 1962, the personal property tax claim could not be determined or levied until September 1, 1965 . The fact that under Section 445.29 Code of Iowa 1962 the tax liens are deemed to relate back to January 1 of the year in which assessed, does not cut off a perfected federal tax lien. United States v. Security Trust & Savings Bank, supra, at p. 50.

Since the federal government tax assessment was prior in time to the assignment made to the bank it will prevail unless the bank comes within the four interests set out in 26 U. S. C. A. §6323 "mortgagee, pledgee, purchaser, or judgment creditor." Randall v. Colby [61-1 USTC ¶9178], 190 F. Supp. 319, 337-41 (N. D. Iowa 1961). At the most the assignment to the bank was additional security for a pre-existing indebtedness. See United States v. Franklin Federal Savings & Loan Ass'n [56-1 USTC ¶9495], 140 F. Supp. 286 (M. D. Pa. 1956). The Court finds the bank is not a mortgagee, pledgee, purchaser, or judgment creditor.

Insofar as the intervenor is concerned, the Court holds that the United States of America is entitled to first priority and judgment will be entered accordingly in the amount of $1,214.02, plus interest.

The Court must next determine the priority of Iowa 's tax liens over the claims of the bank and of Shelby County . The sales tax for the last quarter of 1964 in the amount of $2,627.44 became due on the last day of January 1965 (Section 422.52 Code of Iowa 1962) and by statute a lien was then imposed for said tax in favor of the state (Code of Iowa 1962 §422.26). The lien is stated to be prior and paramount over all subsequent liens upon any personal property within the state without the necessity of recording (Code of Iowa 1962 §422.56). However, under Iowa law it is provided:

"In order to preserve the aforesaid lien against subsequent mortgagees, purchasers or judgment creditors, for value and without notice of the lien, on any property situated in a county, the commission shall file with the recorder of the county, in which said property is located, a notice of said lien."

Thus if the bank is a mortgagee, purchaser or judgment creditor for value it must prevail because Iowa 's lien was not recorded until after the assignment to the bank was made. There are no decisions under the Iowa tax lien statute. However, under Iowa recording statutes pertaining to personal property it is clear that one acquiring a pledge as security for pre-existing indebtedness is not a subsequent purchaser under the statute (§556.3 Code of Iowa 1962). Soehren v. Hein, 214 Iowa 1060, 243 N. W. 330 (1932). It is recognized that the instant assignment need not be recorded as required by Section 556.3. Briley v. Madrid Improvement Co., 255 Iowa 388 (1963). However, we are concerned with determining whether the bank was a subsequent purchaser for value. It is clear from the record that the bank parted with nothing of value when it took the assignment from Goodrichs. The assignment was additional security for a pre-existing debt. ⁵

The Court concludes that Iowa has priority over the bank.

This leaves the question of whether Iowa prevails over Shelby County . It is abundantly clear the Iowa lien was perfected prior to the personal property tax being determined. The doctrine of relating back cannot defeat the perfected lien of Iowa .

The foregoing shall constitute the Court's findings of fact and conclusions of law.

[Judgment of Court]

Judgment will enter for the United States as previously indicated herein. Judgment for the balance of the funds remaining in the registry of the Court will be awarded the State Tax Commission of the State of Iowa . Counsel for intervenor will submit an appropriate form of judgment.

¹ Plaintiff deposited the sum of $5,894.05 into the registry of the Court.

² This was conditioned upon the decree of interpleader being entered as prayed, which was thereafter done.

³ Additional tax assessments were made by the United States on April 9, 1965 , which intervenor concedes are subordinate to sales tax liens of the State of Iowa . So, therefore, these assessments will not be set out herein.

⁴ See n. 3, supra.

⁵ It should also be noted the record indicates the bank reduced Goodrichs' indebtedness to it by a voluntary offset made by the bank against Olsen's A. G. account held in said bank in the amount of $5,849.05. The validity of this offset is being contested by Olsen in a State Court action.

 

 

[59-1 USTC ¶9347]Textile Products, a corporation of New Jersey, Plaintiff v. Shari Steckler Feldan and David Schwartz, individually and trading as Shari Steckler Co., Defendants, United States of America, Intervenor

Superior Court of N. J., Chancery Civ., Essex County , Docket No. C-714-57, 148 A2d 741, 2/27/59

[1954 Code Sec. 6323]

Priority of liens: Attorney's fees.--The Government's tax lien, notice of which was filed prior to the assignment of a claim against the defendant by the taxpayer, was entitled to priority over the claim of the plaintiff-assignee. Allowance of defendant's attorney and court costs out of the sum he owed to the taxpayer denied, since the entire sum assigned was subject to the lien and to allow the costs would reduce the amount subject to the lien.

Rob ert Inlander, 972 Broad Street , Newark 2, N. J., for Plaintiff. Greenbaum & Greenbaum, 60 Park Place , Newark 2, N. J., Arthur M. Greenbaum, for Defendants. Chester A. Weidenburner, United States Attorney, Federal Building, Newark 1, N. J., Stewart G. Pollock, Assistant United States Attorney, for Intervenor.

Opinion

SCHERER, Judge, Superior Court:

Suit was instituted in the Essex County District Court on October 2, 1957 by Textile Products against the defendants, Feldan and Schwartz, individually and trading as Shari Steckler Co., for the sum of $728.30. An answer and counterclaim raising equitable issues was filed by the defendants, and the matter was transferred to this Court by order of the District Court dated November 1, 1957. While this order is of doubtful validity (R. R. 7:6-1), subsequent proceedings in this Court have rectified any error in the original order of transfer.

Plaintiff sued as an assignee of New Jersey Quilting Company, Inc. for goods sold and delivered. The answer admitted the debt, but by way of counterclaim alleged that on September 17, 1957, fifteen days before the District Court suit was started, a levy had been made by the United States of America upon the defendants for all moneys due from them to New Jersey Quilting Company, Inc. The defendants tendered themselves ready to pay the sum involved, but alleged that they did not know to whom it should be paid, in view of the tax levy. By way of amended answer, they alleged that they had paid $250.00 on account to the plaintiff on September 16, 1957.

When the proceedings were transferred to this Court, a motion was made by the defendant-counterclaimants to join the United States and New Jersey Quilting Company, Inc. as parties defendant to the counterclaim. An order was entered permitting such joinder, but that order, on motion of the United States, was subsequently vacated as to it, and it was given leave, pursuant to R. R. 4:37, to assert its claim by way of a complaint in intervention. This, the government did, and the matter came on for a pretrial conference.

At that time, it was stipulated and agreed that the case be heard on the pleadings and briefs, since there was no dispute as to any material fact, and the question was one of law only. It was conceded that, of the $728.30 originally owed by the defendants to New Jersey Quilting Company, Inc., $250.00 had been paid before the levy, leaving a balance of $478.30 in the hands of the defendants. The government, in its claim for intervention, alleged that it was entitled to the full sum of $728.30-250.00 from Textile Products, representing the money it received from the defendants, and $478.30 from the defendants. The government's theory was that the filing of its lien on October 21, 1955 against New Jersey Quilting Company, Inc., in a sum in excess of $6,300, established its priority under 26 U. S. C. A., Secs. 6321-6323, and was a lien on all of New Jersey Quilting Company's account at the time the $250.00 was paid.

At the pretrial conference, I directed the defendants to pay into court the sum of $478.30 and allowed a counsel fee of $100.00 to counsel for the defendant-counterclaimants, together with taxed costs. This allowance was objected to by the United States and, after examining the law, I am convinced that the allowance was erroneous and must be reversed.

I. THE CLAIM OF THE UNITED STATES

There is no dispute that the claim of the Internal Revenue Service was properly filed on October 21, 1955, as required by 26 U. S. C. A. Sec. 6323. The assignment by New Jersey Quilting Company, Inc. to the plaintiff of the account payable by the defendants, in the sum of $728.30, occurred July 16, 1957.

A federal lien arises on property of a taxpayer when his taxes are unpaid and a demand for payment has been made. 26 U. S. C. A., Sec. 6321. It is valid as against subsequent mortgagees, pledgees, purchasers or judgment creditors, after filing, under Section 6323. The Textile Products' assignment, therefore, is subject to the lien of the government. See Beeghly v. Wilson, 152 Fed. Supp. 726 (D. C., Iowa 1957) [57-2 USTC ¶9808]; Bank of Nevada v. United States, 251 Fed. (2d) 820 (9 Cir. 1957) [58-1 USTC ¶9228]. The claim of Textile Products is subordinate to the government's lien whether or not Textile paid a valuable consideration for the assignment. In re Cle-Land Co., 157 Fed. Supp. 859 (D. C., Mass. 1957) [58-1 USTC ¶9185]; United States v. Phillips, 198 Fed. (2d) 634 (5 Cir. 1952) [52-2 USTC ¶9421].

A judgment will be entered, therefore, directing that Textile Products pay to the government the $250.00 it received on the New Jersey Quilting Company account and that the defendants pay to the government the sum of $478.30, being the balance due from them to New Jersey Quilting Company, Inc. prior to plaintiff's assignment.

II. COUNSEL FEE AND TAXED COSTS

The allowance of the counsel fee and taxed costs to the defendants, as stated above, must be set aside.

In United States v. Liverpool & L. & G. Ins. Co., 348 U. S. 215, 99 L. Ed. 268 (1955) [55-1 USTC ¶9136], the court approved the disallowance of an attorney's fee in a garnishment proceeding on the ground that, the government's lien being prior to the garnishment lien, no fees could be properly paid to the attorney prosecuting the garnishment lien because to do so would have the effect of putting that part of the lien ahead of the government's claim, since the latter claim would be reduced by the payment of the fee.

United States v. Worley, 281 U. S. 339, 74 L. Ed. 887 (1930), while not in point here because a federal statute was involved, contains an interesting discussion of the problem. See also, United States v. Ball Constr. Co., 355 U. S. 587, 2 L. Ed. 2d 510 (1958) [58-1 USTC ¶9327], rehearing den. 356 U. S. 934, 2 L. Ed. 2d 763.

In United States v. Bess, 357 U. S. 51, 2 L. Ed. 2d 1135 (1958) [58-2 USTC ¶9595], the court held that the transfer of property subject to a federal lien does not affect the lien, it being the very essence of the lien that the property, no matter who holds it, passes cum onere.

Applying these rules, the funds in the hands of the defendants were always subject to the lien of the United States, which was prior to Textile's assignment, and New Jersey Quilting Company, Inc. could not transfer this account, except as encumbered by the lien. Thus, to allow a counsel fee and costs out of the fund is to whittle away that part of the lien which is equal to the amount of the counsel fee and costs. This is interdicted by the cases above cited.

While the result in this case may seem to be unfair to the plaintiff and defendants, since all appear to have acted in good faith, the remedy is in a change in the federal lien statute. This Court must follow the law as enunciated by the United States Supreme Court. In matters of federal taxes, the federal law is supreme, and state law cannot interfere. United States v. Snyder, 149 U. S. 210, 37 L. Ed. 705 (1893).

The judgment, therefore, should contain a provision amending the pretrial order dated February 9, 1959 by deleting therefrom the provisions of paragraph 8.

A judgment should be presented in accordance with these conclusions.

 

 

[54-2 USTC ¶9459]Bankers Title and Abstract Company, a corporation of the State of New Jersey, Elmwood Stores, Inc., a corporation of the State of New Jersey, Plaintiffs-Respondents v. The Ferber Company, Campbell-Morrell Supply Co., Max Platt, Inc., Zaro Concrete Co., Inc., Peoples Trust Company of Bergen County, Construction Specialties, Inc., all corporations of the State of New Jersey, Defendants-Respondents, and Union Building and Investment Co., and United States of America, Defendants-Appellants Max Platt, Inc., a corporation of the State of New Jersey, Plaintiff v. Elmwood Stores, Inc., a corporation of the State of New Jersey, Defendant

In the Supreme Court of New Jersey , No. A126. September Term, 1953, May 17, 1954

On appeal from Superior Court, Chancery Division.

Collection of taxes: Priority of tax liens over mechanics' liens.--Taxpayer, a subcontractor, owed the United States large sums in taxes. The owner of the building on which taxpayer was working owed the contractor large amounts, the contractor owed taxpayer, and taxpayer owed large amounts to subcontractors for work on the same building. When taxpayer failed to meet payments to the subcontractors, the subcontractors filed stop notices, which under the New Jersey law gave the subcontractors a mechanics' lien on funds of the owner due the contractor. The Commissioner perfected his lien against the funds in the owner's hands after two subcontractors had perfected their liens and before a third subcontractor had perfected his lien. The Supreme Court of New Jersey held that the claim of the United States was not prior to the claims of the two prior subcontractors, but that the claim of the United States was prior to that of the third subcontractor.

Collection of taxes: Priority of tax lien over assignment.--Taxpayer executed a general assignment of funds due it on a contracting job to an investment company on May 23, 1951 . On June 16, 1950 , after having made proper assessment and demand, the Commissioner recorded tax liens against the taxpayer. The Supreme Court of New Jersey held that the government's liens were prior to the assignment as they were perfected before the assignment was made.

Charles H. Hoens, Jr., 810 Broad Street , Newark , N. J., William F. Tompkins, United States Attorney, for United States . Hugh C. Spernow, 119 Ellison Street, Paterson, N. J., Wallisch & Wallisch, 181 Prospect Street, Passaic, N. J., for Union Building and Investment Co. Charles Rubenstein, 921 Bergen Avenue, Jersey City, N. J., for Max Platt, Inc., Campbell-Morrell Supply Co., and Construction Specialties, Inc. Leslie P. Glick was on brief. Rubenstein and Glick, attorneys for Max Platt, Inc. Werksman, Saffron & Cohen, 89 Central Avenue, Clifton, N. J., attorneys for Campbell-Morrell Supply Co. Arnold M. Smith, 5 Colt Street, Paterson, N. J., attorney for Construction Specialties, Inc.

[Procedure and Nomenclature]

BURLING, Justice:

This appeal stems from an action of interpleader by Bankers Title and Abstract Company (hereinafter called Bankers Title), a New Jersey corporation, plaintiff, in which Elmwood Stores, Inc., (hereinafter called Elmwood), a New Jersey corporation, subsequently was joined as a party plaintiff, filed on August 18, 1952 in the Superior Court, Chancery Division. Judgment of interpleader was entered on February 17, 1953 requiring the plaintiffs to pay into the Superior Court the sum of $18,737.45, allowing them taxed costs and a counsel fee, to be paid to them by the Clerk of the court out of the fund so deposited, and exonerating them from any liability to the defendants, namely The Ferber Company (hereinafter called Ferber), Campbell-Morrell Supply Co., (hereinafter called Campbell), Union Building and Investment Co., (hereinafter called Union), Max Platt, Inc., (hereinafter called Platt), Construction Specialties, Inc., (hereinafter called Specialties), Peoples Trust Company of Bergen County, (hereinafter called Peoples Trust), Zero Concrete Co., Inc., (hereinafter called Zaro) and The United States of America, (hereinafter called the United States). The judgment of interpleader also dismissed the action as against defendants Ferber and Zaro by virtue of their denial of interest in the fund. The several remaining defendants above named were required by the judgment to interplead their repective claims to the fund, namely the $18,737.45 deposited in court, less the taxed costs and $1000 counsel fee adjudged in favor of the plaintiffs Elmwood and Bankers Title. Subsequently final judgment was entered in the Superior Court, Chancery Division, on October 13, 1953 settling the respective rights of the interpleading defendants to the balance of the fund in question. It is from this final judgment that the present appeals were taken by the United States and by Union . The appeals were addressed to the Superior Court, Appellate Division, but prior to hearing there were consolidated and were certified on our own motion.

[Facts]

The facts in this matter were settled by stipulation and the interpleading defendants expressly agreed that the pretrial order supersede the pleadings insofar as their contentions concerning their respective claims to the fund were in issue.

The factual situation developed in the stipulation of the parties is complex. Elmwood, owner of the land in East Paterson, Bergen County , New Jersey , on August 30, 1950 entered into a written contract with Ferber, as general contractor, for the erection and construction of a shopping center on Elmwood's land. Prior to the inception of work, the building contract with a copy of the specifications was filed, September 6, 1950, in the office of the Clerk of Bergen County. Zaro entered into a subcontract (for concrete and other work) with Ferber. Zaro then entered into agreements with Platt, Campbell , Specialities and Union to furnish "materials, etc.," which were used in connection with the erection and construction of the shopping center for Elmwood.

On May 23, 1951 , Zaro executed an assignment to Union of all Zaro's interest to the extent of $10,154.04 in moneys due or to become due to Zaro from Ferber under the subcontract hereinbefore mentioned. And on September 27, 1951 , Zaro executed a comparable assignment to the extent of $768.45 to Peoples Trust. Copies of these assignments were served on Ferber, and the latter acknowledged receipt thereof.

Platt, Campbell and Specialties performed their respective agreements, and there became due and owing to them from Zaro under these agreements the following sums: Platt, $7778.20; Campbell , $525; and Specialities, $691.19. They made demand on Zaro for payment, which was refused.

Thereupon Campbell filed a stop notice against Elmwood on February 19, 1952 , and Platt filed a stop notice against Elmwood on March 21, 1952 . Copies of these stop notices were duly served upon Elmwood, Ferber and Zaro.

On May 6, 1952 , a final sum of $202,776.09 became due and owing from Elmwood to Ferber under the construction contract of August 30, 1950 hereinabove mentioned. It was also stipulated that on the same day, May 6, 1952 , there became due and owing from Ferber to Zaro, under their subcontract, the sum of $18,737.45.

Elmwood, on May 7, 1952, paid Ferber $184,038.64 and retained $18,737.45 which sum on the same day, Elmwood, with Zaro's consent, deposited with Bankers Title as Elmwood's escrow holder, reciting the fact that claims thereto had been made by the United States, Campbell, Platt and Union.

On July 3, 1952 Platt instituted an action in the Superior Court, Law Division, against Elmwood, on the claim represented by its stop notice, ante.

Specialities subsequently, on August 7, 1952 , filed a stop notice against Elmwood, and copies were served on Elmwood, Ferber and Zaro.

[Undisputed Amounts Unpaid]

It is observed that it was stipulated by all parties that the claims of Platt, Campbell and Specialties hereinbefore adverted to were undisputed in amount, and unpaid. Zaro admitted that the amount due Union was $10,154.04 and admitted that the amount due Peoples Trust was $768.45. Zaro further admitted in the stipulation of facts and pretrial order in the present matter that at the time thereof there was due from Zaro to the United States the sum of $52,152.43.

[Tax Claims of the United States ]

Insofar as the claims of the United States are concerned, it was stipulated by all parties to the present action that these claims consisted of assessments against Zaro for unpaid income, federal insurance contributions, federal unemployment and federal withholding taxes, notices of unpaid assessments thereon having been filed in the Bergen County Clerk's office on various dates since May 21, 1949. A levy on certain of these assessments (specific identification is not disclosed by the stipulation) was made on Ferber, in the amount of $37,328.43, on January 31, 1952 . A list of assessments and dates of recording thereof was incorporated in the pretrial order and stipulation of facts (examination of the assessments listed demonstrates that Zaro as of August 7, 1952 , owed the United States upwards of $110,000. in unpaid assessments. An amendment to the pretrial order eliminated some of these assessments as claims herein, but more than $80,000 in unpaid assessments, one of which was for $25,933.48 and had been recorded June 16, 1950 remainded outstanding.

Bankers Title filed the complaint in interpleader, in the Superior Court, Chancery Division, on August 18, 1952 , making Elmwood, Ferber, Zaro and the respective creditors of Zaro hereinbefore mentioned, parties defendant. During the course of proceedings subsequent thereto orders were entered in the Chancery Division consolidating Platt's Law Division action against Elmwood with the interpleader action in the Chancery Division, and joining Elmwood as a party plaintiff, and eliminating Elmwood as a party defendant in the latter action.

The stipulation of fact and pretrial order hereinbefore discussed having been filed, judgment of interpleader was subsequently entered in the Superior Court, Chancery Division, on February 17, 1953 requiring Bankers Title to deposit the sum of $18,737.45 in the Superior Court, allowing taxed costs including a counsel fee of $1000. to Elmwood and Bankers Title as plaintiffs, exonerating them from liability to the defendants, and dismissing the action of interpleader as to defendants Ferber and Zaro who claimed no interest in the deposited funds. Campbell , Platt, Specialities, Union, Peoples Trust and the United States then interpleaded their claims to the fund. The final judgment of the Superior Court, Chancery Division, entered October 13, 1953, adjudged that the stop notice claims of Campbell, Platt and Specialties were entitled to priority over the other claimants, adjudged that the United States' tax claims were entitled to priority over Union and Peoples Trust, who claimed by way of assignment, allowed taxed costs and counsel fees to Campbell, Platt and Specialties, and allowed counsel fees to defendants Zaro, Union and Peoples Trust. The judgment ordered the Clerk of the Superior Court to make the distribution adjudged.

The United States and Union filed appeals to the Superior Court, Appellate Division. Prior to hearing there these appeals, which were consolidated, were certified on our own motion. It is noted that Elmwood, Bankers Title, Ferber, Zaro and Peoples Trust have not joined as appellants or appeared as respondents in this appeal.

The question involved in the appeal of the United States is whether it has priority over the respective stop notice claimants and assignees.

The questions involved in Union's appeal are (1) whether it as a bona fide assignee has a claim prior to that of the United States , and (2) whether costs and counsel fees allowed should be borne proportionately by those entitled to the fund.

[Campbell and Platt Stop Notices Prior to Tax Liens]

I. The principal question involved in these appeals is whether the stop notice claimants, Campbell, Platt, and Specialties, or any of them, were properly adjudged to have priority over the United States in the distribution of the fund deposited in court. We are of the opinion that the claims of Campbell and Platt were entitled to the priority adjudged but that the claim of Specialties was not entitled to such priority.

The United States claims priority over the stop notice claimants by virtue of 53 Stat. 448, 26 U. S. C. A. sec. 3670, and 53 Stat. 449, 26 U. S. C. A. sec. 3671. These two statutory provisions read as follows:

26 U. S. C. A. sec. 3670. "Property subject to lien. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to such person. 53 Stat. 448."

26 U. S. C. A. sec. 3671. "Period of lien. Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time. 53 Stat. 449."

There is no question raised in this matter as to the existence or sufficiency of demand under 26 U. S. C. A. sec. 3670, supra. The principal issue is whether the federal tax lien reaches the funds required for payment of the materialmen's claims where the materialmen have filed timely stop notices under the New Jersey mechanics lien law.

The United States appears to contend that stop notice claimants acquire only an inchoate right in the fund, and not a lien, within the purview of United States v. Security Trust & Sav., 340 U. S. 47, 50-51, 95 L. ed. 53, 56-57 (1950)[50-2 USTC ¶9492]. In the Security Trust case, supra, the federal tax lien and an attachment under a state statute were applicable to the same property. The state appellate courts had determined such an attachment to create merely an inchoate right and not a lien. The United States Supreme Court approved and adhered to this conclusion and determined that under those circumstances the federal lien, which was a perfected lien, was entitled to priority over the attachment. Cf. United States v. Albert Holman Lumber Co., 208 Fed. (2d) 113 (5th Cir. 1953) [53-2 USTC ¶9609]. Compare Samms v. Chicago Title & Trust Co., 349 Ill. App. 413, 111 N. E. (2d) 172 (App. Ct. Ill., 1st Dist. 1953).

[Security Trust and Holman Distinguished]

The situation in the matter before us is not comparable to the circumstances obtaining in either the Security Trust case, supra or the Albert Holman Lumber Co. case, supra. In the present case the United States has a lien, if at all, on only the funds to which the subcontractor, Zaro, may be entitled. The federal lien attaches only to the property of Zaro. The ruling principle in this respect, expressed in the federal courts, is that the rights of the United States (i.e., the Collector of Internal Revenue or his counterpart) do not extend beyond those of the taxpayer whose right to property is sought to be levied on. United States v. Graham, 96 Fed. Supp. 318, 321 (U. S. Dist. Co., Calif. 1951) affirmed per curiam, 195 Fed. (2d) 530 (Case 4) (9th Cir. 1952), cert. den. 344 U. S. 831, 97 L. ed. 647 (1952); Karno-Smith Co. v. Maloney, 112 Fed. (2d) 690 (3rd Cir. 1949) [40-2 USTC ¶9533]; F. H. McGraw & Co. v. Sherman Plastering Co., 60 Fed. Supp. 504 (U. S. Dist. Ct. Conn. 1943), affirmed 149 Fed. (2d) 301 (2nd Cir. 1945), cert. den. 326 U. S. 753, 90 L. ed. 452 (1945). Cf.United States v. Kaufman, 267 U. S. 408, 69 L. ed. 685, 688-689 (1925) [1 USTC ¶116].

In Meyer v. Standard Accident Insurance Co., 114 N. J. L. 486 (E. & A. 1935) the former Court of Errors and Appeals held in an opinion written by Judge Wells:

". . . under the sixth section (now N. J. S. 2A:44-86) of the Mechanics' Lien act a stop-notice materialman had priority over an assignee or person having an order . . . the money was still for all practical purposes in the hands of the owner who could not disregard the stop-notice and pay subcontractors who had orders or assignments."

Judge Wells further wrote in the Meyer case,supra (114 N. J. L. at pp. 487-488):

"When a building contract, with the specifications, is duly filed with the clerk of the county in which the building or land is situate, the owner is then liable to the contractor alone for the work done and materials furnished. 3 Comp. Stat. p. 3293, §2.

"When the contract and specifications are so filed, laborers and materialmen have inchoate liens against the owner for the amounts due them for the labor performed and materials furnished. 3 Comp. Stat., p. 3298, §5. These inchoate liens can be perfected only taking the necessary steps provided by section 3 of said act. Cum. Supp. Comp. Stat. (1925-1930, 126-3, p. 951, §3, &c., Bayonne Building Association v. Williams, 59 N. J. Eq. 617. When such a lien is so perfected, it gives the stop-notice claimant preference over holders of assignments or orders from the contractor, whether or not the same were submitted to the owner before or after the filing of the stop-notice. Cum. Supp. Comp. Stat. 1925-1930, 126-6, p. 954; Leary v. Lamont, 42 Atl. Rep. 97 (N. J. Eq.); Pinsky, &c. v. Wike, 101 N. J. Eq. 45; affirmed, 103 Id. 18). Such stop-notice operates on sums due from the owner to the contractor, sums to grow due, and sums still unpaid after maturity of the payment date. Bowden v. Baier, 99 N. J. L. 361; Decker, &c., Co. v. Meyer supra.

"After a stop-notice has been filed, the owner is required to withhold payments to the contractor until the stop-notice claimant is satisfied up to the amount due or to grow due on the contract. Section 3, supra. Such duty cannot be avoided either by making payment to the contractor (Section 5, supra) by acceptance of an order or assignment of the contractor (Pinsky, &c. v. Wike, supra), or by making payments in advance of the requirements of the contract." (Italics supplied.)

The Decker case adverted to in the opinion of the former Court of Errors and Appeals in the Meyer case,supra, and an earlier decision in the same series of litigation, was Decker Bldg. Material Co. v. Meyer, 109 N. J. L. 408, 409-410 (E. & A. 1932). It was determined therein that a stop notice materialman had priority over a subcontractor's assignee or a person having an order. There appears to have been doubt in the Decker case, supra, as to whether the buildings to be erected under the filed general contract had been completed, but the former Court of Errors and Appeals held "the money was still for all practical purposes in the hands of the owner who could not disregard the stop-notice and pay subcontractors who had orders or assignments." Cf. Arrow Builders Supply Corp. v. Hudson Terrace Apartments Inc., 15 N. J. 418 (1954). See also N. J. S. 2A:44-85.

[Conclusion As to Two Prior Mechanics' Liens]

The conclusion necessarily follows that where the stop notice is filed and served upon the owner before the general contract funds are distributed by the owner, the remaining funds in the hands of the owner must be retained by him for the payment of the stop notice materialman or supplier of labor. Compare National Surety Corp. v. Barth, 11 N. J. 506, 511-515 (1953). This results in the conclusion that the contractor (or, in this case, the subcontractor Zaro) has no property right in so much of the fund in the hands of the owner as is necessary for payment of the claim of the one who filed the stop notice. His (Zaro's) property right under his contract is "inchoate". Compare United States v. Security Trust & Sav., supra. Although the federal tax lien attaches to that "inchoate" right, it is not sufficient to enlarge it. The lien of the government can rise no higher than the right of the contractor (in the present matter, Zaro). Cf. Rob ertson v. Huntley & Blazier Co., 351 Ill. App. 378, 115 N. E. (2d) 533, 535-537 (App. Ct. Ill., 4th Dist., 1953).

We reiterate that Campbell and Platt were correctly adjudged to have priority of claim over the federal tax liens against Zaro under the circumstances of this case.

[Tax Lien Prior to Specialties' Claim]

The claim pressed by Specialties, however, is not so easily disposed of. Specialties filed its stop notice after the contract price had been paid over by Elmwood, the owner. The final sums due the general contractor Ferber had been paid to Ferber and to Bankers Title, the latter holding the amount due Zaro, $18,737.45, in escrow for the payment of Campbell, Platt, Union and the United States according to the priorities of their claims thereto. It was stipulated that this occurred May 7, 1952 , and Specialties filed its stop notice one month later.

Application of the principles hereinbefore discussed to these circumstances shows that Zaro's property right to funds other than those placed in escrow for payment to Campbell and Platt matured on May 7, 1952 . On this date he or his assignees would have been paid had not the federal tax lien induced Elmwood to deposit the balance of the fund in escrow. The property right in the funds thus maturing, the federal lien could and did attach thereto, to the exclusion of the stop notice filed a month later by Specialties. Elmwood was protected by the distribution in this respect by virtue of the mechanics lien law. See N. J. S. 2A:44-77, 78, 81.

[Priority of Tax Lien over Assignee]

II. The second of the principal questions involved is whether Union , as assignee of Zaro, is entitled to priority over the federal tax lien against Zaro. The federal tax lien in the amount of $25,933.48 against Zaro hereinbefore noted was recorded June 16, 1950 . The assessment thereof was received by the Collector of Internal Revenue on March 9, 1950 and demand was made by the Collector on March 10, 1950 . Therefore the lien attached to all rights of Zaro, including rights maturing subsequently, no later than June 16, 1950 . 26 U. S. C. A. 3670, 3671 and 3672. Union 's assignment was not executed by Zaro until May 23, 1951 . Under these circumstances the federal tax lien was clearly superior to and entitled to priority over Union 's assignment. It is observed without particularization that other federal tax liens still outstnading against Zaro, insofar as these facts appear in the record, were likewise entitled to priority over Union 's assignment. Citizens State Bank of Barstow , Texas , v. Vidal, 114 Fed. (2d) 380 (10th Cir. 1940) [40-2 USTC ¶9603].

III. Union has questioned the allowances of costs and counsel fees made by the Superior Court, Chancery Division. No appeal in this respect is asserted by the United States . Under these circumstances this question involved is moot since Union has no rights in the fund. We see no occasion to disturb the allowances of costs and counsel fees made by the Superior Court, Chancery Division.

Costs of all parties to this appeal shall be paid out of the fund in court.

Conclusion

For the reasons expressed in this opinion the judgment of the Superior Court, Chancery Division, will be modified by exscinding therefrom the award to Construction Specialties, Inc., of $691.19 and interest thereon. As so modified the judgment of the Superior Court, Chancery Division, is affirmed. Costs are allowed in accordance with this opinion.

 

 

[55-1 USTC ¶9112] United States of America , Appellant v. Crosland Construction Company, Inc., Pacific Employers Insurance Company, and American Indemnity Company, Appellees

(CA-4), In the United States Court of Appeals for the Fourth Circuit, No. 6891, 217 F2d 275, December 1, 1954

Appeal from the United States District Court for the Eastern District of South Carolina, at Columbia.

[1939 Code Sec. 3672(a)--similar to 1954 Sec. 6323(a)]

Collection of taxes: Liability of sureties.--The sureties on a bond conditioned that "the principal shall promptly make payment to all persons supplying labor and material in the prosecution of the work provided for in" a contract between a contractor and a hospital for certain construction work were not liable to the United States under that bond for federal income withholding taxes and Federal Insurance Contributions Act taxes, which were deducted and withheld by the contractor from wages paid to employees engaged in the performance of said contract, but not paid over to the Government.

Fred E. Youngman, Special Assistant to the Attorney General (H. Brian Holland, Assistant Attorney General, Ellis N. Slack and A. F. Prescott, Special Assistants to the Attorney General, N. Welch Morrisette, Jr., United States Attorney, and Irvine F. Belser, Jr., Assistant United States Attorney, on brief), for appellant. Thomas E. McCutchen (Whaley and McCutchen and Hoover C. Blanton, on brief), for appellees Pacific Employers Insurance Company and American Indemnity Company.

Before PARKER, Chief Judge, SOPER, Circuit Judge, and THOMSEN, District Judge.

THOMSEN, District Judge:

The only question presented by this appeal is whether the sureties on a bond ¹ conditioned that "the principal shall promptly make payment to all persons supplying labor and material in the prosecution of the work provided for in" a contract between the Crosland Construction Company, Inc. (the principal) and the Newberry County Memorial Hospital of Newberry, South Carolina (the obligee) for the construction of certain alterations and additions to said hospital, are liable to the United States under that bond for federal income withholding taxes under Sec. 1622, et seq., I. R. C. (Title 26, U. S. C. A.) and Federal Insurance Contributions Act taxes under Sec. 1400, et seq., I. R. C., which were deducted and withheld by the principal from wages paid to employees engaged in the performance of said contract, but not paid over to the Government as required by law.

Other claims in addition to the one pressed on this appeal were made against the principal and the sureties in the amended complaint filed by the Government in the district court. The sureties moved for an order dismissing that complaint as to them on the ground that it failed to state a claim upon which relief could be granted. The district judge treated that motion as a motion for summary judgment, under Rule 12(b), Fed. R. Civ. P., heard arguments based on the pleadings and affidavits submitted by the parties, and filed an opinion and order entering judgment in favor of the sureties. U. S. v. Crosland Construction Co., Inc., et al., 120 Fed. Supp. 792 [54-1 USTC ¶9404]. From that order and judgment the Government has appealed, but is pressing only the question stated above.

The parties do not contend that the language of the bond is extended or limited by any contract provision or statute. The question is simply whether the Government's claim is covered by the terms of the bond, quoted above.

[Tax Liability Not Covered by Bond]

The relevant statutes and regulations are set out in the note below. ² From a consideration of all of them, we conclude, as did the majority of the Tenth Circuit in United States Fidelity & Guaranty Co. v. U. S., 201 Fed. (2d) 118 [53-1 USTC ¶9249]:

"* * * that when an employer withholds the tax from an employee's wage and pays him the balance the employee has been paid in full. He has received his full wage. Part of it has gone to pay his withholding tax and the balance he has. The employer has discharged his contractual obligation to pay the full wage. Thereafter there remains only his liability for the tax which he has collected. That is a tax liability for which he alone is liable to the Government as for any other taxes which he may owe." 201 Fed. (2d) at 120.

That decision was adhered to by the Tenth Circuit in U. S. v. Zschach Construction Co., 209 Fed. (2d) 347 [54-1 USTC ¶9164], and followed by the Ninth Circuit in Westover v. William Simpson Construction Co., 209 Fed. (2d) 908 [54-1 USTC ¶49,022], and Firemen's Fund Indemnity Co. v. U. S., 210 Fed. (2d) 472 [54-1 USTC ¶49,026], and by the Fifth Circuit in General Casualty Co. of America v. U. S., 205 Fed. (2d) 753 [53-2 USTC ¶9483]. It is supported by Central Bank v. U. S., 345 U. S. 639 [53-1 USTC ¶9408], in which it was held that the Government's claim against the contractor for amounts withheld could not be set off against amounts due the contractor's assignee because of the provision of the Assignment of Claims Act (54 Stat. 1029), that "such payments shall not be subject to reduction or set-off for any indebtedness of the assignor to the United States arising independently of such contract." The Supreme Court said:

"The requirement that Graham withhold taxes from the 'payment of wages' to its employees and pay the same over to the United States did not arise from the contract. The requirement is squarely imposed by §§ 1401 and 1622 of the Internal Revenue Code. Without a government contract Graham would owe the statutory duty to pay over the taxes due, just as it would to pay its income tax on profits earned. Graham's embezzlement lay neither in execution nor in breach of the contract. It arose from the conversion of the withheld taxes which Graham held as trustee for the United States pursuant to §3661 of the Code. Assignor Graham's indebtedness to the United States arose, we think, 'independently' of the contract." 345 U. S. at 645, 646.

We agree with the Fifth Circuit: "Though measured by the amount of wages, the money due the United States was owing as taxes and not as wages." General Casualty Co. of America v. U. S., 205 Fed. (2d) at 755. Such a claim is not covered by the bond in this case. The judgment of the District Court must be affirmed.

¹ There were two bonds given by the principal and the sureties to the obligee--one a performance bond in the usual form, the other a payment bond conditioned as set out above. The performance bond was involved in some of the questions discussed in the district court; the claim pressed on this appeal is under the payment bond.

² Internal Revenue Code of 1939, as amended, Title 26 U. S. C. A., Sec. 35 (57 Stat. 126), Sec. 322(a)(2) (58 Stat. 231), Sec. 1400 et seq. (61 Stat. 793, 64 Stat. 477), esp. Secs. 1401, 1402, 1427, 1430, Sec. 1608 (53 Stat. 188), Sec. 1622 et seq. (57 Stat. 126, 62 Stat. 110, 64 Stat. 906), esp. Secs. 1622(a)(d)(e), 1623, 1627. Sec. 3661 (52 Stat. 448). T. R. 116, Sec. 405.301. T. R. 128, Sec. 408.304.

 

 

[54-1 USTC ¶9404] United States of America , Plaintiff v. Crosland Construction Company, Inc., Pacific Employers Insurance Company and American Indemnity Company, Defendants

In the United States District Court for the Eastern District of South Carolina, Columbia Division, C. A. 3580, 120 FSupp 792, April 30, 1954

Collection of taxes: Liens: Priority of surety's interest.--Sureties of taxpayer paid the sub-contractors whom taxpayer had not fully compensated. The court held that surety's liens thus arising on amounts due the taxpayer on the indemnified contract relate back to the date of the contract between the contractor and the hospital, as the surety has all the rights of his principal. Such lien was prior in time over the government's tax lien which was perfected after the contract had been performed..

Collection of taxes: Liens: Priority to assigned funds.--Sureties, holding an assignment from the taxpayer for amounts due to the taxpayer on a contract which sureties indemnified, have priority over the government's tax lien by reason of the assignment, which was delivered according to the provisions of the application for the contract bond.

Collection of taxes: Federal Priority Statute.--Taxpayer's sureties, who had paid off taxpayer's obligations to sub-contractors, are not subject to the Federal Priority Statute, R. S. 3466, as taxpayer must be in bankruptcy proceedings for that statute to apply. Here the taxpayer was insolvent but not in bankruptcy.

Collection of taxes: Liens: Liability of sureties.--Sureties were held not to have insured the collection of taxes owing by taxpayer, when they indemnified "wages" to be collected from taxpayer. Sums withheld from wages of employees of taxpayer do not constitute "wages" within the meaning of the surety contract.

N. Welch Morrisette, Jr. for plaintiff. Cooper, Gary , Whaley and McCutchen, Columbia , S. C., for defendants.

Opinion and Order

WYCHE, District Judge:

This action was instituted on February 24, 1953, by the United States of America for unpaid taxes due it by the defendant Crosland Construction Company, Inc. for income withholding taxes for the third and fourth quarter-year periods (periods ending September 30th and December 31st) of 1950, for all four quarter-year periods of 1951, for federal insurance contributions taxes for the third quarter-year period (period ending September 30th) of 1950, and for federal unemployment taxes for the years 1949, and 1950. The total amount of taxes claimed to be owing the Government by the taxpayer, including interest and penalties, is Thirty-Seven Thousand, Three Hundred Ninety and 41/100 ($37,390.41) Dollars. By its amended answer, the taxpayer denies any tax liability in excess of Thirty-Two Thousand, Three Hundred, Eighty-Two and 95/100 ($32.382.95) Dollars, including interest and penalties. The defendants Pacific Employers Insurance Company and American Indemnity Company are sureties on the taxpayer's performance bond issued pursuant to a construction contract between taxpayer and the Newberry County Memorial Hospital , Newberry , South Carolina . The construction contract was entered into June 10, 1949 , in the amount of Two Hundred, Twenty-Four Thousand, Seven Hundred One and no/100 ($224,701.00) Dollars. The taxpayer and the sureties entered into a performance bond bearing date of June 29, 1949 . The taxpayer's application for contract bond bears date of July 6, 1949 . Of the total taxes due the Government, only Two Thousand, Four Hundred Eighty-Four and 31/100 ($2,484.31) Dollars, arise from performance of the hospital contract; the remainder is from other construction contracts performed by the taxpayer during the same or at about the same time as the hospital contract.

It does not appear that the sureties were involved in any job other than the Newberry Hospital . The taxpayer answered the complaint and subsequently filed an amended answer which admits its liability for taxes in the amount of Thirty-Two Thousand, Three Hundred Eighty-Two and 95/100 ($32,382.95) Dollars, but denies liability for any amount in excess of that sum. Taxpayer further denies any liability on the part of the sureties for any taxpayer's unpaid taxes, on their performance bond or otherwise.

The sureties served notice of a motion for an order dismissing the complaint as to them on the ground that it failed to state a claim upon which relief could be granted. Subsequently, the Government moved for leave to amend its complaint, which motion was granted in an order of the court dated December 2, 1953 , with leave to the defendants to file amended answers, motions, or to otherwise plead to the complaint as amended. Thereafter the sureties amended their previous motion to dismiss by filing an amendment thereto.

The case is now before me upon the amended motion of the sureties to dismiss. Arguments were based on the pleadings and affidavits submitted by the parties. The affidavits having been made a part of the record and having been considered by the court, I stated that the motion to dismiss on behalf of the sureties would be treated as a motion for summary judgment under Rule 12(b); no objection was made thereto by any party and the motion will be so treated.

The Collector of Internal Revenue received the assessment lists for withholding taxes as follows:

                       Assessment             Notice

Period Ended           List Rec'd         and Demand

9-30-50
                  
12-14-50
           
12-27-50

12-31-50
                  
4-16-51
            
4-20-51

3-31-51
                   
5-17-51
             
6-6-51

6-30-51
                   
9-19-51
            
9-25-51

9-30-51
                    
1-3-52
             
1-3-52

12-31-51
                  
3-13-52
            
3-14-52

 

The Collector of Internal Revenue received the assessment list for federal insurance contributions taxes on December 14, 1950 , notice and demand for payment being made on December 27, 1950 .

The Collector of Internal Revenue received the assessment lists for federal unemployment taxes for 1949, on March 19, 1951 , and for 1950, on April 7 1952 .

The Government filed notices of tax liens for the unpaid taxes on July 20, 1951 (for $29,782.72) and January 9, 1952 , (for $8,501.65) in the offices of the Clerk of Court, Richland County , Columbia , South Carolina , and the Clerk of Court, United States District Court, Eastern District of South Carolina, Charleston , South Carolina .

On January 5, 1952, and long after construction on the hospital contract had been completed, the taxpayer executed a written assignment to the sureties of retained percentages or sums due taxpayer on the hospital contract, in consideration of the sureties' payment of certain outstanding claims of materialmen and sub-contractors against the taxpayer incurred in the performance of the hospital contract. These claims were paid by the sureties, which they were obligated to do under their bond, and they suffered losses thereby in excess of Three Thousand ($3,000.00) Dollars, over and above the amount of the retainage. All work had been completed on the Newberry Hospital before January 5, 1952 ; the sureties did not supervise any work or complete the same.

On January 10, 1952 , the Government served a levy on the Newberry County Memorial Hospital for payment of Forty Thousand, One Hundred Ninety-Eight and 63/100 ($40,198.63) Dollars, in taxes claimed due by taxpayer. The total amount then remaining unpaid under the construction contract was Twenty-Four Thousand, One Hundred, Eighty-Seven and 35/100 ($24,187.35) Dollars. This amount was paid to the sureties by the hospital on November 6, 1952 , by reason of the assignment of January 5, 1952 .

The Government claims it has a lien under Title 26 USCA Sections 3670, 3671, 3672 and related sections, on the Twenty-Four Thousand, One Hundred, Eighty-Seven and 35/100 ($24,187.35) Dollars, assigned to the sureties by taxpayer and paid to them by the hospital, superior to the written assignment or any lien or claim of the sureties to this sum. The Government also asserts that even without a prior and superior lien under the statutes, it is entitled to priority in payment over the sureties by reason of the so-called "priority" statute (Section 3466 R. S., 31 USCA Section 191). In addition, the Government claims the sureties are liable on their performance bond in the amount of Two Thousand, Four Hundred, Eighty-Four and 31/100 ($2,484.31) Dollars, for the taxes owed by taxpayer from performance of the hospital contract.

The Government has a lien on all property of the taxpayer by statute. 26 USCA 3670. The lien arose at the time the assessment lists were received by the Collector. 26 USCA 3671. The first assessment lists received by the Collector were those received on December 14, 1950 .

By paying the materialmen and sub-contractors on the hospital contract, upon the taxpayer's inability to pay, the sureties did what they were required to do under their performance bond. The assignment of January 5, 1952 , was executed and thereafter the sureties paid the materialmen and sub-contractors. But even without the assignment of January 5, 1952 , the sureties were required to satisfy the claims of these unpaid materialmen and sub-contractors under the terms of the performance bond.

Upon the sureties' performance under their bond obligation, they acquired an equitable lien against any sum remaining in the hands of the one for whose protection the bond was given. This lien relates back to the date of the contract and is superior to any lien arising thereafter. Prairie State Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412; Henningsen v. U. S. Fidelity & Guaranty Co., 208 U. S. 404, 28 S. Ct. 389, 52 L. Ed. 547; Town of River Junction v. Maryland Casualty Co., (C. A. 5) 110 Fed. (2d) 278, Cert. den. 60 S. Ct. 1077; Standard Acc. Ins. Co. v. Federal Nat. Bank, (C. A. 10) 112 Fed. (2d) 692, affirmed on rehearing, 115 Fed. (2d) 34; Exchange State Bank v. Federal Surety Co., (C. A. 8) 28 Fed. (2d) 485, 488; Claiborne Parish Sch. Bd. v. Fidelity & Deposit Co. of Maryland, (C. A. 5) 40 Fed. (2d) 577, 579; Maryland Casualty Co. v. Dulaney Lumber Co., (C. A. 5) 23 Fed. (2d) 378, 380; Fidelity & Deposit Co. v. Union State Bank, (D. C. Minn.) 21 Fed. (2d) 102, 104; In re Van Winkle, (D. C. Ky.) 49 Fed. Supp. 711; United States F. & Guaranty Co. v. John R. Alley & Co., (D. C. Okla.) 34 Fed. Supp. 604; Southern Surety Co. v. J. R. Holden Land & Lumber Co., (C. A. 8) 14 Fed. (2d) 411, 413; American Fidelity Co. v. Delaney, (D. C. Vt.) 114 Fed. Supp. 702. It is superior to the Government's lien for unpaid taxes. American Surety Co. v. City of Louisville M. H. Comn. (D. C. Ky. ) 63 Fed. Supp. 486, affirmed 160 Fed. (2d) 977 [47-1 USTC ¶9220]; Glenn v. American Surety Co., (C. A. 6) 160 Fed. (2d) 977 [47-1 USTC ¶9220]; United States Fidelity & Guaranty Co. v. United States, (C. A. 10) 201 Fed. (2d) 118 [53-1 USTC ¶9249]; New York Casualty Co. v. Zwerner, (D. C. Ill.) 58 Fed. Supp. 473 [45-1 USTC ¶9140]; American Fidelity Co. v. Delaney, (D. C. Vt.) 114 Fed. Supp. 702 [53-2 USTC ¶9620]. The performance bond was executed on June 29, 1949 ; therefore, the sureties' lien is superior to any lien arising thereafter, including the Government's lien for taxes which dates from December 14, 1950 .

In addition to an equitable lien, the sureties have a written assignment of any funds remaining in the possession of the hospital under the provisions of the application for contract bond. Such a provision is valid and enforceable. Lacy v. Maryland Casualty Co., (CA 4) 32 Fed. (2d) 48. Accordingly, the rights of the sureties to the funds remaining in the hands of the hospital were not determined solely by the assignment of January 5, 1952, but by bond and application therefor (in view of the sureties' performance under the bond) and by the sureties' equitable lien.

The Government's rights to the funds in the hands of the hospital are no greater than the rights of the taxpayer. F. H. McGraw & Co. v. Sherman Plastering Co., (D. C. Conn.) 60 Fed. Supp. 504, affirmed, 149 Fed. (2d) 301, cert. den. 326 U. S. 753, 66 S. Ct. 92, 90 L. Ed. 452; United States Fidelity & Guaranty Co. v. United States , (CA 10) 201 Fed. (2d) 118 [53-1 USTC ¶9249].

Upon performance under its bond, a surety is subrogated to the rights of the obligee to any funds remaining in possession of the latter which were retained under the contract with the principal. Farmer's Bank v. Hayes, (CA 6) 58 Fed. (2d) 34; Lacy v. Maryland Casualty Co., supra. See, Amer. Surety Co. v. Bethlehem Bank, 314 U. S. 314, 62 S. Ct. 226, 68 L. Ed. 214; In re Baltimore Pearl Hominy Co., (CA 4) 5 Fed. (2d) 553 [1 USTC ¶130].

The Government's claim of priority over the sureties to the funds retained by the hospital is based on Section 191, 31 USCA, which gives the United States priority in payment of funds of an insolvent under certain conditions. It is claimed that the taxpayer was without sufficient assets to meet its obligations and was therefore insolvent at the time of the assignment of January 5, 1952 . It is admitted by the taxpayer that it was without assets sufficient to meet its obligations sometime prior to this assignment. In that sense the taxpayer is and was insolvent. However, the taxpayer continued in business after this assignment and, in fact, still is in business. No claim is made that the taxpayer has been adjudged a bankrupt or that receivership or bankruptcy proceedings have been brought against it or that it has made a general assignment for the benefit of creditors.

The "priority" statute applies only to cases involving some type of insolvency court proceedings disposing of an insolvent's estate. Conard v. The Atlantic Insurance Co., 1 Pet. 386, 7 L. Ed. 189; United States v. Oklahoma, 261 U. S. 253, 43 S. Ct. 295, 67 L. Ed. 638; Bramwell v. U. S. Fidelity Co., 269 U. S. 483, 46 S. Ct. 176, 70 L. Ed. 368; Glenn v. American Surety Co., (C. A. 6) 160 Fed. (2d) 977 [47-1 USTC ¶9220]; Davis v. Pringle, (CA 4) 1 Fed. (2d) 860, affirmed 268 U. S. 315, 45 S. Ct. 549, 69 L. Ed. 974; Davis v. Miller-Link Lumber Co., (CA 5) 296 Fed. 649; United States v. The Pomare (D. C. Hawaii), 92 Fed. Supp. 185; American Surety Co. v. City of Louisville M. H. Comn., (D. C. Ky.) 63 Fed. Supp. 486, affirmed, 160 Fed. (2d) 977 [47-1 USTC ¶9220]; New York Casualty Co. v. Zwerner, (D. C. Ill.) 58 Fed. Supp. 473 [45-1 USTC ¶9140]; United States v. Woodside, (D. C. S. C.) 34 Fed. Supp. 281. See also, United States v. Hooe, 3 Cranch 73, 2 L. Ed. 375; Prince v. Bartlett, 8 Cranch (12 U. S.) 431, 434, 3 L. Ed. 614; Brent v. Bank of Washington, 10 Pet. 596, 611, 9 L. Ed. 547; Beaston v. The Farmers' Bank of Delaware , 12 Pet. 102, 132, 9 L. Ed. 1017; and In re Baltimore Pearl Hominy Co., (D. C. Md.) 294 Fed. 921 [1924 CCH ¶2861], reversed on other grounds, (CA 4) 5 Fed. (2d) 553 [1 USTC ¶130]. This is not a proceeding involving the disposition of an insolvent's estate; therefore, the "priority" statute has no application.

Whether the sureties are liable on their bond for the taxpayer's taxes resulting from performance of the hospital contract will now be determined. Taxes owed by the taxpayer are owed by virtue of law and not because of any contractual relationship. Central Bank v. United States, 345 U. S. 639, 73 S. Ct. 917, -- L. Ed. -- [53-1 USTC ¶9408]; United States Fidelity & Guaranty Co. v. United States, (CA 10) 201 Fed. (2d) 118 [53-1 USTC ¶9249]. See, American Fidelity Co. v. Delaney, (D. C. Vt.) 114 Fed. Supp. 702; New York Casualty Co. v. Zwerner, (D. C. Ill.) 58 Fed. Supp. 473 [45-1 USTC ¶9140]; Westover v. William Simpson Construction Co., (CA 9) 22 L. W. 2384 ( 1-28-54 ) [54-1 USTC ¶49,022].

Sums withheld by the taxpayer from the wages of its employees do not constitute "wages" within the terms of a surety's bond for wages. United States Fidelity & Guaranty Co. v. United States, supra; United States v. Zschach Const. Co., (D. C. Okla.) 110 Fed. Supp. 551 [53-2 USTC ¶9529] (holding that a surety's bond is to indemnify the owner and not the United States for taxes). The sums retained by the hospital and assigned by the taxpayer to the sureties were for payment of materialmen and sub-contractors and no part of this sum was used to pay wages of employees of the taxpayer. But even if the sureties had paid wages owing to the employees of the taxpayer, the sureties still would not be liable for the taxes in this case. See, United States Fidelity & Guaranty Co. v. United States , supra; American Fidelity Co. v. Delaney, supra; Westover v. William Simpson Construction Co., supra. It follows that the sureties are not liable on their bond for the taxpayer's unpaid taxes arising from the hospital contract.

Accordingly,

IT IS ORDERED, That the defendants Pacific Employers Insurance Company and American Indemnity Company, sureties, have judgment entered in their favor, and

IT IS SO ORDERED.

 

 

[57-1 USTC ¶9604]Iron and Glass Dollar Savings Bank, a corporation, Plaintiff v. Siesal Construction Company, a corporation, Defendant

Court of Common Pleas, Allegheny Co., Pa., No. 1127, July Term, 1954-C, 2/15/57

[1954 Code Secs. 6321-6323--similar to 1939 Code Secs. 3670-3672]

Lien for taxes: Notice filed: Effectiveness as against assignee of invoices.--After the Government had filed a notice of a lien for taxes owed by a subcontractor, the latter rendered an invoice to the contractor to which it had furnished labor and materials. The contractor approved the invoice for payment, and the subcontractor assigned it to a bank. Both the bank and the Government claimed the funds, which the contractor paid into court. The bank claimed that since it did not have actual notice of the lien, the lien was not effective as against it under 1954 Code Sec. 6323, which provides that the lien is invalid as against a mortgagee, pledgee or purchaser of a "security." The court held that the invoice was not a "security." It construed the law as relating only to securities, in the commonly-accepted use of that term, which are freely transferable in the ordinary course of business.

James L. Poth, 2620 Grant Bldg., Pittsburgh 19, Pa. , for plaintiff. Metz , McClure, Hanna and MacAlister, 3600 Grant Bldg., Pittsburgh 19, Pa. , for defendant.

Before THOMPSON, SMART and DUFF, Judges.

Opinion

DUFF, Judge:

This proceeding grows out of an action in assumpsit brought by the Bank against the Siesal Construction Company to recover the sum of $5,654.60. The defendant filed a petition for interpleader setting forth that notices had been served upon it by the United States of America claiming the said sum for delinquent internal revenue taxes owing by N. T. Courtney, otherwise referred to as Nicholas T. Courtney.

The said Courtney, as a sub-contractor, had furnished labor and materials to the Siesal Construction Company in a certain project then under construction by it, for which said Courtney rendered an invoice dated November 24, 1953 to the Siesal Construction Company, which was duly certified correct and approved for payment by that company. On the same day Courtney assigned the invoice to the Bank as security for a loan to him in the amount of $4,500.00 and notice thereof was given to and accepted by the construction company with an acknowledgment that the moneys represented by the invoice were due and owing.

[Notice of Lien Filed]

On November 17, 1953, a few days prior to the assignment to the Bank of the said invoice, the United States of America had filed with the Prothonotary of this Court a notice of an Internal Revenue Lien against the said Courtney for $7,886.68, which notice was duly indexed by the Prothonotary. On February 12, 1954, the United States of America made a levy on all property, moneys and credits then in the Siesal Construction Company's possession to the credit of, belonging to, or owned by the said Courtney.

After certain proceedings, the petition for interpleader was granted and the United States of America was made a party. On April 4, 1956, an Order was entered by consent of the parties, providing, inter alia, that the Siesal Construction Company pay into Court the sum of $4,500.00 to await determination in the Interpleader and, further, providing that the sum of $250.00 be paid from said fund to counsel for the Construction Company. The said amount was thereafter duly paid into Court by that company and the issue now remains solely between the United States of America and the Bank.

The question as stated by the Bank in support of its motion for judgment on the pleadings is:

As against a person having no actual knowledge that an internal revenue lien has been filed and where there has been no levy by reason of such lien, has the United States a lien on personal property with priority over the claim of such person as an assignee, for value, of a chose in action?

[Invoice and Assignment as "Securities"]

The Bank contends that the invoice and assignment constitute evidence of indebtedness issued by a corporation within the meaning of Sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954. These sections provide as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall . . . be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

"Even though notice of a lien, provided in Section 6321, has been filed in the manner prescribed . . . the lien shall not be valid with respect to a security as defined in Paragraph 2 of this sub-section as against any mortgagee, pledgee, or purchaser of such security, for an adequate and full consideration in money or money's worth if, at the time of such mortgage, pledge, or purchase, such mortgagee, pledgee or purchaser is without notice or knowledge of the existence of such lien.

"As used in this sub-section, the term 'security' means any bond, debenture, note, or certificate, or other evidence of indebtedness issued by any corporation (including one issued by a government or political sub-division 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 . . ."

The legislative history of these sections, which were known as Sections 3670, 3671 and 3672 in earlier Internal Revenue Codes, makes it clear that Congress originally intended the lien of the Government for unpaid taxes to be paramount on all property rights to property, real and personal, belonging to the taxpayer in default. Thus, originally, no exceptions were listed. One by one, however, as particular cases called attention to hardships caused by this arbitrary priority, exceptions were made until the list thereof now includes four classes, as stated in the 1954 Code. The Courts, citing the history of the legislation, have stated with regard to these exceptions that obviously the protective provisions are to be strictly, rather than liberally, construed: In Re Litt, 128 Fed. Supp. 34, 37 [55-1 USTC ¶9187]. The Courts have also generally held that it is equally clear that, in order to be protected, the claimant must prove that he comes within the class of "mortgagee, pledgee, purchaser or judgment creditor": Filipowicz v. Rothensies, 43 Fed. Supp. 619, 624 [42-1 USTC ¶9300].

[Law Construed]

The statutory provisions cited clearly indicate to our mind that the types of securities entitled to the protection of the Act are instruments which have certain pecuniary values and are intended to be and are freely transferable in the ordinary course of business. Transactions in securities of this character make up an extensive volume of business in banks, stock exchanges and other financial institutions. By the express terms of the statute, security means "any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation . . . with interest coupons or in registered form." From its classification in the statute with bonds, debentures and notes, it is apparent that Congress limited the term to instruments possessing the quality of free negotiation. Hence we conclude that an invoice such as is the basis of the Bank's claim is not such a security as to bring the Bank within the protection afforded by the statute.

The motion of the Bank for judgment on the pleadings will be dismissed and judgment entered for the United States of America .

Order of Court

And now, to-wit, February 15, 1957 this case having come on to be heard by the Court en banc and, upon due consideration thereof, it is hereby ordered, adjudged and decreed that the motion of the Iron and Glass Dollar Savings Bank, plaintiff, for judgment on the pleadings is denied and that judgment be entered for the United States of America.

It is further ordered that the Prothonotary of this Court shall pay over the sum of $4,250.00, presently in his hands, in accordance with this Court's order of April 4, 1956 , to the Treasurer of the United States of America .

Order of Court ( 2/21/57 )

And now, to-wit, this 21st day of February, 1957, it appearing to the Court that by Order dated April 4, 1956, that the defendant, Siesal Construction Company, a corporation, was discharged of liability to the United States of America and to Iron and Glass Dollar Savings Bank, a corporation, and it further appearing to the Court that in accordance with its Order dated February 15, 1957, a judgment was entered in favor of the United States of America and against Siesal Construction Company,

NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the judgment entered of record in the office of the Prothonotary of this Court, in favor of the United States of America and against Siesal Construction Company, a corporation, be and is hereby ordered stricken.