Assignment of Funds Page 4

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[55-2 USTC ¶9622]The Northern National Bank of Bemidji, Appellant v. Northern Minnesota National Bank of Duluth, Standard Oil Company, County of Beltrami, Minnesota, Claude Asp, an individual d.b.a. A. & B. Motor Sales; The United States of America, Respondents, State of Minnesota, intervening defendant, Respondent

In the Supreme Court of Minnesota , No. 36311, 70 NW2d 118, March 25, 1955

Appeal from the District Court, St. Louis County , Minnesota .

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

Lien for taxes: Priority of lien: Third party beneficiary contract: Insolvency of debtor.--After a finding that no third party beneficiary contract (for the benefit of the U. S. and others) was executed between the promisor and the now insolvent partnership promisee, the Court held that an assignment whereby the partnership assigned to a bank its rights to payment from the promisor was a valid assignment for adequate consideration. Furthermore, the claim or lien of the U. S. for taxes did not arise until the assessment list was received by the Collector, which was sometime after the assignment had been made between the partnership and the bank. At the time of such assignment, the partnership was not formally insolvent since there had been no bankruptcy proceeding, receivership, or assignment for the benefit of creditors. Hence, the U. S. lien was not entitled to priority either over the claim of the assignee or over those claims of various other creditors. Since the bank's right, as assignee, was acquired before any subsequent liens attached, it was entitled to first satisfaction.

George L. Bargen, Bemidji, Minn., Briggs, Gilbert, Morton, Kyle & Macartney, and B. C. Hart, W. 2162 1st National Bank Building, St. Paul 1, Minn., for appellant. Nye, Montague, Sullivan, Atmore & McMillan, 1200 Alworth Building, Duluth, Minn., for Minnesota National Bank of Duluth. Smythe & Lindquist, 606 1st National Bank, Duluth, Minn., for Standard Oil Co. and Claude Asp. Herbert E. Olson, County Attorney , Bemidji , Minn. , for County of Beltrami . George E. MacKinnon, United States Attorney, Clifford F. Hansen, Assistant United States Attorney, Federal Courts Building, St. Paul 2, Minn., for the United States. K. D. Stalland, Assistant Attorney General, George W. Olson, 369 Cedar Street, St. Paul 1, Minn., for the State.

Syllabus

1. It was error for the trial court to conclude that defendants had acquired rights under a contract to which they were not parties. As a general rule, strangers to a contract acquire no rights under such a contract. A well-recognized exception to this rule has grown up under our law known as the doctrine of third-party beneficiary contracts. The general rule is that a third person may enforce a promise made for his benefit even though he is a stranger both to the contract and the consideration. To come within the rule, a third party must be either a donee beneficiary or a creditor beneficiary. We are not concerned here with the former type of beneficiary. A creditor beneficiary is defined as one to whom the promisee owes or is believed to owe a duty which is discharged by the promisor's performance. Held, that there is nothing in the record here that Anderson promised the partnership that it would pay claims such as defendants have against the partnership.

[Fair Consideration]

2. M. S. A. 513.23 provides that the only assignments from insolvents which are invalid as to creditors are those made without fair consideration. Section 513.22 provides that fair consideration is given for property or obligation (a) when in exchange for such property or obligation, as a fair equivalent therefor and in good faith, property is conveyed or an antecedent debt is satisfied, or (b) when such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation. Held, that the assignments under consideration here were valid ones for which a fair consideration was given.

3. Held, under the record here, that none of the defendants have a prior right over plaintiff to the funds in Northern Minnesota National Bank of Duluth .

Reversed with directions.

Opinion

GALLAGHER, Justice:

Appeal from a judgment in favor of defendants.

It appears from the record that on December 1, 1949, Lakehead Pipe Line Company, Inc., referred to hereinafter as Lakehead, entered into a contract with Anderson Brothers Corporation, referred to hereinafter as Anderson. This contract essentially was one whereby Anderson agreed with Lakehead to build a pipe line across the northern part of Minnesota . The contract provides, among other things, that Anderson shall be responsible for all materials and finished work to the full amount of payment made thereon and will be required to make good, without additional cost to Lakehead, any injury or damage which the materials or work may sustain from any cause before final acceptance by Lakehead, with certain exceptions. It further provides that, when the final estimate has been accepted by Lakehead and the time for filing liens in connection with such work has expired, Lakehead shall pay Anderson the remaining amount due within ten days, with certain optional provisions with reference to earlier payments without releasing Anderson or his bond from liability during the lien period. It also provides that, during the performance of the work, Anderson shall comply with all applicable laws, rules, and regulations of any board, commission, or regulatory body. Anderson further agreed to accept full and exclusive liability for the payment of any and all contributions and taxes for unemployment compensation insurance, old age pensions, and annuities imposed by any federal or state government which are imposed with respect to or measured by wages, salaries, et cetera, paid to employees and to indemnify and save Lakehead harmless against liability. Anderson also agreed to meet requirements specified under the rules and regulations of the admin istrative officials or boards charged with the enforcement of state and federal acts in the matter.

[Partnership Agreement]

On February 28, 1950 , Anderson entered into a contract with Gordon Braid, Philip LeBrun, and Joe D. McKinnon, referred to hereinafter as the partnership. This contract essentially was one under which the partnership agreed to clear the right of way for the laying of pipe and to do the backfilling after the pipe had been laid. The contract provided in part:

"Payments shall be made to SUBCONTRACTORS (the partnership) as of the First (1st) and Fifteenth (15th) day of each month for all of SUBCONTRACTORS operations * * *. SUBCONTRACTORS shall receive Eighty-Five (85%) Percent of the total statements submitted. The balance of Fifteen (15%) Percent to be withheld by ANDERSON as retainage and to be paid by ANDERSON to SUBCONTRACTORS upon receipt by ANDERSON of its retainage from PIPELINE COMPANY. In addition, ANDERSON shall withhold the payment of said retainage until SUBCONTRACTORS furnish proof satisfactory to ANDERSON that all claims for damages of any kind or character and for labor, equipment, material and supplies which SUBCONTRACTORS are required to furnish hereunder have been paid, settled and satisfied by SUBCONTRACTORS.

"* * * ANDERSON in hereby authorized to retain in its hands until the final disposition of all claims which may be made against it and/or SUBCONTRACTORS and for which SUBCONTRACTORS are or are claimed to be liable hereunder, a sufficient portion of the contract price to protect the company for and against all and any such claims and from any loss, costs, liability, damage or expenses arising therefrom or in connection therewith.

"* * *

"SUBCONTRACTORS further agree to obtain at their own cost all permits and licenses necessary to do business in the States of North Dakota, Minnesota and Wisconsin, and to accept full and exclusive liability for the payment of any and all contributions or taxes for employment insurance, old age retirement benefits, income taxes, pensions or annuities, now or hereafter imposed by the Government of the United States and/or by the States of North Dakota, Minnesota and Wisconsin, which are measured by the wages, salaries or other compensation paid to the employees of SUBCONTRACTORS for work performed under the terms of this Agreement.

"The parties further agree that all the terms, provisions and agreements contained in the ANDERSON-PIPELINE COMPANY'S Contract, together with all of its exhibits, documents, plans, specifications, general conditions and clauses are part and parcel of this Agreement and that SUBCONTRACTORS are completely subject to the contract between ANDERSON and the PIPELINE COMPANY. That it is not the intention of this contract to in any manner minimize or require less of SUBCONTRACTORS in their service to ANDERSON than is required of ANDERSON in its service to the PIPELINE COMPANY. That if there is any variance in this contract with the PIPELINE COMPANY'S Contract that the purpose of this variance is to increase SUBCONTRACTORS' obligations to ANDERSON over and above ANDERSON'S obligations to the PIPELINE COMPANY."

According to the testimony of John A. Forester, vice president and cashier of plaintiff bank at the time the transactions involved in this lawsuit took place, he met Braid and LeBrun for the first time in the early part of 1950, but he had known McKinnon for a number of years. After Braid got into the partnership, it opened an account with plaintiff bank, and shortly afterward the partnership asked the bank for a line of credit. That request was granted, and by July 1, 1950 , the partnership owed the bank $25,000 for advances and approximately $40,000 on checks which were held as cash.

[Assignment to Bank]

On July 22, 1950 , the partnership sold, assigned, transferred, and set over to plaintiff bank all sums of money then due or to become due under its contract with Anderson . This assignment included all estimates, invoices, orders, or other instruments evidencing payments due or to be made under the contract and also all amounts retained by Anderson as retainage. On July 31 the above assignment was accepted by Anderson, who agreed to pay directly to plaintiff bank any and all moneys then due and payable or to become due the partnership, including any and all amounts held by Anderson as retainage under the terms of their contract with the partnership. On the date of the assignment to plaintiff bank, the total indebtedness of the partnership to the bank was $77,000. This amount was made up of $25,000 in notes and approximately $52,000 in cash items of unpaid checks. On December 31, 1950 , the total indebtedness of the partnership to the bank had grown to $255,000.

The work under the contract between the partnership and Anderson was completed about January 5, 1951 . About this time a dispute arose between the partnership and Anderson over the amount due under the contract, and on January 25, 1951 , the partnership filed a lien against the pipe line. This lien was assigned to plaintiff bank on February 3, 1951 , and was filed with the secretary of state of Minnesota on February 27, 1951 .

An action to foreclose the mechanic's lien was commenced in Hubbard county district court and then transferred to the United States district court. However, that action was dismissed pursuant to a stipulation by which it was agreed that the amount due and unpaid on the contract between Anderson and the partnership was $160,000. It was further agreed under that stipulation that Anderson would pay plaintiff the sum of $160,000. However, $40,000 of that amount was to be placed in escrow with Northern Minnesota National Bank of Duluth . The stipulation further provided that the $40,000 should remain in escrow and be released and disbursed in the following manner:

"It may be disbursed pursuant to a final judgment of a court of competent jurisdiction in a proceeding determining ownership of said monies or the relative priorities of the various claimants thereto, provided that all of said claimants are made parties to such proceeding."

[Claims]

Plaintiff bank then brought this action to determine the ownership of the $40,000 against defendants. The claims with respect to the various defendants are as follows:

(1) The claim of the United States of America is based upon its determination that as of April 14, 1953 , there was due from the partnership the sum of $29,993.33, which sum includes all taxes, interest, penalties, and other items due as taxes or as a result of the failure of the partnership to pay the same promptly.

(2) The state of Minnesota claims a part of the amount due the United States Government in the sum of $3,780.67 as liability for the payment of contributions of the Minnesota unemployment compensation fund.

(3) The claim of Beltrami county is for personal property taxes of the partnership due for the years 1950 and 1951.

(4) The claims of Standard Oil Company are based upon purchases of oils, gasoline, and similar materials by the partnership and used by the machinery in construction of the pipe line and in the performance of the contract between Anderson and the partnership.

(5) The claim of Claude Asp, an individual doing business as A. & B. Motor Sales, is based upon repair parts and certain labor performed in repairing the machinery used by the partnership.

The district court concluded that certain sums should be paid out of the $40,000 fund held by Northern Minnesota National Bank of Duluth in the following order:

(1) $275 to Northern Minnesota National Bank of Duluth as reimbursement for the necessary fees for legal services in performing its duties and services in admin istering the escrow and trust fund.

(2) $26,590.73 (the same being $29,993.33 less $3,402.60) to the United States of America , department of internal revenue.

(3) $3,402.60 to the state of Minnesota , department of employment security.

(4) $1,504.70 to the county of Beltrami for personal property taxes for the year 1950. (The court determined that Beltrami county was not entitled to any moneys from the fund for taxes for the year 1951.)

(5) $8,118.78 to Standard Oil Company.

(6) $108.19 to Claude Asp, the balance of the $40,000 fund, to apply upon his judgment of $569.57.

[Opinion of the Trial Court]

1. The trial court's view of the case is found in its memorandum, which states in part:

"The Court is of the opinion that if defendants may recover at all they are entitled to recover upon the contractual provisions existing between the Pipe Line Company and Anderson Brothers Corporation and the contract between Anderson Brothers Corporation and the co-partnership, and upon the further ground that when the co-partnership assigned the money due it from Anderson Brothers Corporation to the plaintiff bank, the plaintiff book said assignment subject to the terms and provisions and conditions of said contracts."

[No Third Party Beneficiary Contract]

It is clear from the court's memorandum that it concluded as it did because it thought that defendants had acquired rights under a contract to which they were not parties. In our opinion it was error for the trial court to so conclude. As a general rule, strangers to a contract acquire no rights under such a contract. 4 Dunnell, Dig. (3 ed.) §1733; 12 Am. Jur., Contracts, §277; La Mourea v. Rhude, 209 Minn. 53, 295 N. W. 304. A well-recognized exception to this rule has grown up under our law known as the doctrine of third-party beneficiary contracts. The nature of this doctrine is that the promisor engages to the promisee to render some performance to a third person. 2 Williston, Contracts (Rev. ed.) §347. Stated differently, the general rule is that a third person may enforce a promise made for his benefit even though he is a stranger both to the contract and the consideration. 12 Am. Jur., Contracts, §277. Therefore, it is clear that the contractual right which third-party beneficiaries acquire under the doctrine is to enforce a promise made for their benefit which they otherwise would not be able to enforce. To come within the rule, a third party must be either a donee beneficiary or a creditor beneficiary. La Mourea v. Rhude, supra. A creditor beneficiary is defined as one to whom the premisee owes or is believed to owe a duty which is discharged by the promisor's performance. A donee beneficiary is one to whom the promisee intends to make a gift of the performance by the promisor. Restatement, Contracts §133(1)(a, b); 2 Williston, Contracts (Rev. ed.) §§ 356, 361.

Here we are not concerned with the rule applicable to donee beneficiaries, since there is no evidence in the record from which it could be inferred that any of the parties intended to make a gift to defendants. Defendants, however, are all creditors of the partnership to whom a duty is owed by the partnership.

Thus, the only relevant question with respect to the application of the doctrine in this case is whether or not Anderson (promisor) had made a promise to the partnership (promisee) to pay defendants and thereby give defendants a right to force payment of the $40,000 to them rather than to plaintiff bank. If that was the case, then defendants could claim a right to the $40,000 which would be prior to the rights of plaintiff bank by reason of the contract between Anderson and the partnership. We have reviewed the contracts thoroughly, and at no place do we find Anderson promising the partnership that it would pay claims such as these defendants have against the partnership.

[Fair Consideration for Assignment]

2. The next issue pertains to whether or not the assignment made to Northern National Bank of Bemidji was valid.

Defendants strenuously contend that this case comes within M. S. A. 513.23, which reads:

"Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration."

Plaintiff takes the position (1) that §521.02, dealing with the perfection of assignments, has superseded §513.23; (2) that the lower court's finding that the partnership was insolvent at the time of the assignment is not supported by the evidence; and (3) that even if the partnership was insolvent the assignments were given for fair consideration and that is all that is required by §513.23.

We do not deem it necessary to pass on any of the contentions except the one concerning whether or not the assignment was given for fair consideration. As can readily be seen from §513.23, the only assignments from insolvents which are invalid as to creditors are those where the conveyance is made or the obligation is incurred without fair consideration. The words "fair consideration" are defined in §513.22, which reads:

"Fair consideration is given for property, or obligation,

"(1) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or

"(2) When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained."

In the case at bar, when the assignment was given, the partnership was indebted to plaintiff bank in the sum of $77,000. After the assignment was given the bank continued to extend credit to the partnership. While the total amount paid by Anderson amounted to slightly over $485,000, the partnership will still be indebted to plaintiff for over $120,000 even if plaintiff prevails and collects the $40,000 which represents the last money to be paid out under the contract.

Our court has held that a promise to furnish labor and materials in the future is fair consideration for an assignment. Schlecht v. Schlecht, 168 Minn. 168, 209 N. W. 883. We see no valid distinction between the furnishing of labor and materials and the furnishing of money to this partnership because, if the money had not been furnished, the contract could not have been completed. Therefore, in our opinion it was a valid assignment for which fair consideration was given.

3. The last issue to be decided is whether, in spite of the validity of the assignment, any of the defendants have a prior right to the funds in Northern Minnesota National Bank of Duluth .

[Lien for Taxes]

In regard to the claim of the United States of America, it appears that on October 31, 1950, some time after the assignment was given, there was due from the partnership to the United States only $75.67. This was due to an error in a previous return. From that time the amount due the United States increased a great deal. Assessment lists for taxes due by the partnership were received by the then collector of internal revenue on the following dates: April 16, 1951 , June 15, 1951 , August 27, 1951 . On October 16, 1951 , the United States government filed a notice of tax lien with the register of deeds of Beltrami county in the amount of $20,399.21. The United States claims that under 31 USCA, §191, it has priority over claims of other creditors by reason of the insolvency of the partnership. As far as is pertinent here, §191 reads:

"Whenever any person indebted to the United States is insolvent, * * * the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."

On the other hand, plaintiff bank contends that, under 26 USCA, §§ 3670 and 3671, the United States did not acquire a lien on all property and rights to property of the partnership until the assessment lists were received by the collector. These sections read as follows:

§3670. "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."

§3671. "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."

[Formal Insolvency Required]

We agree with plaintiff on this issue. In Maryland Cas. Co. v. United States , (Ct. Cls.) 53 Fed. Supp. 436 [44-1 USTC ¶9133], the plaintiff contended that 31 USCA, §191, was not applicable except where, in the case of a living debtor, his insolvency is a formal one evidenced by a bankruptcy, receivership, or assignment for the benefit of creditors. The court in that case stated (53 Fed. Supp. 439):

"We agree with the plaintiff as to the construction of R. S. §3466 [31 USCA, §191]. A provision in similar language has been in the statutes since 1797 and has always been construed as plaintiff would have us construe it."

See , United States v. Oklahoma , 261 U. S. 253, 43 S. Ct. 295, 67 L. ed. 638; Board of Sup'rs v. Hart, 210 La. 78, 26 So. (2d) 361 [46-1 USTC ¶9245], 174 A. L. R. 1366.

In the case at bar, there has been no bankruptcy proceeding, receivership, or assignment for the benefit of creditors; therefore, 31 USCA, §191, is not applicable here. Plaintiff's right to the fund was prior to that of the United States because the lien acquired by plaintiff arose before the assessment lists were received by the collector.

[Other Claims]

With respect to Beltrami county, its claims are based upon 1950 personal property taxes due it from the partnership. However, neither the Anderson account nor the escrow fund were included in the tax assessment. In Land O' Lakes Dairy Co. v. County of Wadena, 229 Minn. 263, 39 N. W. (2d) 164, we took the position that, even though personal property taxes are imposed upon the owner thereof in personam, under M. S. A. 272.50 such taxes are a lien on the property because of which the owner is taxed. Beltrami county concedes that this is contrary to its position in the case at bar but contends that our position in the Land O' Lakes case is due to a misconstruction of the statutes. We have, in the light of this objection, reconsidered §272.50 and conclude that our rule in the Land O' Lakes case should stand.

In regard to the claims of Claude Asp and Standard Oil Company, it appears that garnishments were served on Anderson by these defendants on December 11, 1951 , and October 10, 1951 , respectively. The rule with respect to garnishments which is applicable here is that these defendants could occupy no better position against Anderson than would the partnership in a suit by it against Anderson . Bacon v. Felthous, 103 Minn. 387, 115 N. W. 205; Gilbert v. Pioneer Nat. Bank, 206 Minn. 213, 288 N. W. 153. It is also clear that the lien acquired by the service of a garnishment summons does not attach to debts assigned by the defendant prior to such service. 8 Dunnell, Dig. (3 ed.) §3957; see, First State Bank v. Woehler, 140 Minn. 32, 167 N. W. 276; Nash v. S. M. Braman Co., 210 Minn. 196, 297 N. W. 755.

In the case at bar the garnishment summons was served more than one year after the first assignment from the partnership to plaintiff bank. It is thus clear that Standard Oil Company and Claude Asp received no rights prior to those of plaintiff to the $40,000 escrow fund.

We have examined the various other contentions raised by defendants and find them to be without merit.

Reversed with directions to Northern Minnesota National Bank of Duluth that, after deducting $275 fees allowed by the district court for services in performing its duties in admin istering the escrow and trust fund, it pay the balance of $40,000 to plaintiff bank.

 

 

[71-1 USTC ¶9204] United States of America v. Josephine Moran, Eugene J. Moran et al., Defendants

U. S. District Court, East. Dist. N. Y., 68 C 1171, 1/5/71

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

Lien for taxes: Priorities: Foreclosure: Assignment of mortgage.--The Government's lien in an action to assess and foreclose on the house of a deceased taxpayer was subject to the interest of an assignee (taxpayer's son) who purchased the mortgage on the house from his own funds after the Tax Court's decision was rendered assessing the deficiencies and additions to tax.

[Code Sec. 6502--Result unchanged by '69 Tax Reform Act]

Suit to collect tax: Statute of limitations: Collection after assessment: Delay in service of summons.--In an action to collect tax on an assessment, the timely filing of the complaint by the Government was the commencement of the action within the limitation period, and diligence in the service of the summons was not required to validate commencement of the action. Further, the defense of laches was rejected because there was no showing of prejudice resulting from the delay.

Cyril Hyman, Edward R. Neaher, United States Attorneys, Brooklyn , N. Y., for the plaintiff. Eugene J. Moran, Moran & Moran, 150 Broadway, New York , N. Y., for the defendants.

Memorandum Incorporating Findings of Fact

DOOLING, District Judge:

Plaintiff sues to collect an assessment of income tax, penalties and interest, to establish the lien of the assessment against a dwelling at 545 8th Street , Brooklyn , New York , title to which is in the defendant Josephine Moran, and to foreclose the federal tax lien against the dwelling. Plaintiff contends further that its lien should be found superior to the lien of a first mortgage on the premises now allegedly owned by defendant Eugene J. Moran.

The validity of the assessment cannot be contested in this case. It was finally adjudicated by the Tax Court in its decision of July 17, 1962 , 21 T. C. M. 416; see 236 F. 2d 361. The decision determined that the deficiencies in income tax and in additions to the tax for the year 1948 of James J. Moran (now deceased) and defendant Josephine Moran were--

Income tax ..............         $54,168.76

Sec. 293(b) addition ....          27,084.38

Sec. 294(b) addition ....           4,911.54

 

The tax and additions were assessed, in pursuance of the Tax Court decision on November 16, 1962 , together with interest on the principal amount of tax in the amount of $43,614.75; the total assessment was $129,779.43. Small payments were made ($223.08) in 1963 and 1967.

Plaintiff filed its notice of federal tax lien in the office of the Register of City of New York in Kings County on January 22, 1963 , in the amount of $129,779.43, giving the names of the taxpayers, James J. Moran and defendant Josephine Moran, and their address at 545 8th Street , Brooklyn , New York . The Notice of Federal Tax Lien was refiled on August 28, 1968 (26 U. S. C. §6323(g)(A)).

James J. Moran died January 5, 1968 .

The complaint in the present action was filed on November 15, 1968 . The summons was issued on the same day, and it was received by the Marshal of the Eastern District of New York on the same day. The summons and complaint were served on the defendant Josephine Moran on January 11, 1969 . The summons was received by the Marshal of the Southern District of New York on January 15, 1963 , and the summons and complaint were served on the defendant Eugene J. Moran in the Southern District on January 23, 1969 .

The return of tax of James J. Moran and Josephine Moran for the calendar year 1948 was a joint return signed by both taxpayers as husband and wife; both James J. Moran and Josephine Moran joined in signing and filing the petition to the Tax Court for a redetermination of the deficiencies and additions to tax asserted against them by the Commissioner of Internal Revenue for the calendar year 1948, and the decision of the Tax Court determined the deficiencies in tax and the additions to tax against both James J. Moran and Josephine Moran.

The parties are in agreement that James J. Moran and Josephine Moran had owned the "subject premises" at 545 Eighth Street , Brooklyn , described in paragraph XI of the complaint, from about 1941 until July 1962. The property was owned subject to a first mortgage to South Brooklyn Savings Institution (later named South Brooklyn Savings Bank) originally made in 1928, and in May 1953 extended, and consolidated with a new mortgage loan, contracted by James J. Moran and defendant Josephine Moran, which loan was to become due September 1, 1968 . In July 1962 (after the Tax Court memorandum opinion was issued) James J. Moran and defendant Josephine Moran conveyed the subject premises to Eileen Moran, their daughter. On or about April 5, 1965, defendant Eugene J. Moran paid from his own professional earnings $2,376.43 to South Brooklyn Savings Bank and received from it an assignment of the consolidated mortgage on the subject premises; the amount defendant Eugene Moran paid comprised--

Unpaid principal on bond and mortgage ....         $2,288.38

Interest 
9/1/64
 to 
3/26/65
 ...............             65.17

"Consideration for prepayment prior

to maturity" ............................             22.88

Interest March 22 to April 5(?) ..........              3.52

Total ....................................         $2,379.95

The prepayment charge appears to relate to paragraph 26 of the mortgage consolidation agreement of 1953, which gave the owner of the mortgaged premises the privilege of prepaying the principal on any interest date upon payment of 1% of the then unpaid principal. Defendant Eugene Moran knew, when he made the payment to the Bank and received the assignment, of the Tax Court decision, and of the tax lien, and that his parents had transferred the subject premises to his sister. His parents knew when they transferred the subject premises to Eileen Moran that the adverse Tax Court decision had been rendered. The Commissioner of Internal Revenue asserted a transferee liability against Eileen Moran, and on March 9, 1966, the Tax Court ordered and decided that there was a liability in the amount of $12,667.78 plus interest from July 2, 1962, due from Eileen Moran as a transferee of assets of James J. Moran and Josephine Moran, transferors, for income taxes and additions to taxes due from said transferors for the taxable years 1948, 1949, and 1950. On or about October 24, 1966 , Eileen Moran reconveyed the subject premises to James J. Moran and Josephine Moran as tenants by the entirety. At all the times in question defendant Josephine Moran has resided in the subject premises, as did James J. Moran until his death. No interest or principal payments have been made on the bond and mortgage since defendant Eugene Moran received the assignment of mortgage, and they have been in default since April 1965.

The 1962 Tax Court decision determined the liability of both husband and wife for the tax and additions to tax, and determined also that the statute of limitations did not bar assessment of the tax. The assessment of November 11, 1962 , was, therefore, unimpeachable when it was made. The only limitations issue relates to the timeliness of the present action on the assessment. The complaint was filed seasonably. Did the delay in the service of the summons and complaint divest the Government of the right to rely on the timely filing of the complaint? Rule 3 makes the filing of the complaint the commencement of the suit, and diligence in the service of process is not required to validate the fact of "commencement." Moore Co. v. Sid Richardson Carbon & Gasoline Co., 8th Cir. 1965, 347 F. 2d 921; Sylvester v. Warner & Swasey Co., 2d Cir. 1968, 398 F. 2d 598, 604-606; United States v. Harris, S. D. Fla. 1963, [64-1 USTC ¶9276] 223 F. Supp. 309, aff'd 5th Cir. 1964 [64-2 USTC ¶9838], 337 F. 2d 856; Lippa & Co. v. Lenox Inc., D. Vt. 1969, 305 F. Supp. 175, 181. Defendants argue laches, but that defense requires a showing of prejudice arising from delay, which cannot be shown here: the death of James J. Moran denies no useful evidence to the defense, for the action on the assessment, really an action to enforce the judgment of the Tax Court in its admin istrative translation, if timely commenced, by its nature admitted of no defense. See United States v. Manufacturers Hanover Trust Co., S. D. N. Y. 1964, 229 F. Supp. 544, 546. Moreover, laches, on important policy grounds, is not a defense against a statutory claim of the government. United States v. Kirkpatrick, 1824, 22 U. S. (8 Wheat.) 720, 735; United States v. Mack, 1935, 295 U. S. 480, 489.

Plaintiff argues that its tax lien is, or should be made, superior to the mortgage of which defendant Eugene Moran holds an assignment. It urges that, in substance, Eugene Moran paid off the mortgage as a gift to his parents (since he did not mean to enforce it against them and has not done so), and took an assignment of it, rather than satisfied it of record, as a device to deter the plaintiff from enforcing the lien against the subject premises. The argument must be rejected. The federal tax lien extended only to the taxpayers' interests in the subject premises, and at no time after 1953 did they have an interest superior to the mortgage interest of the bank. If the bank had foreborne collection of interest and principal, and waited for the Government to foreclose its lien and put the property in hands able to pay the bank its mortgage arrears and resume the interest and amortization payments, the Government could not complain. The case is no different because it is defendant Eugene Moran who pursues that course. He was not under a duty to enlarge the Government's rights simply because he was willing to buy the mortgage and to forbear enforcement for as long as his parents lived in the house and needed his forbearance. What he has done does not spell out a gift to his parents of an enlarged equity in the subject premises; to have done that would obviously accomplish nothing except in effect to enable plaintiff to collect that much of his parents' tax debt out of defendant Eugene Moran's own professional earnings; hence Eugene Moran was within his rights in buying the mortgage and keeping it alive as against the plaintiff's junior lien. ^* After the government foreclosure, he will, perhaps, have a fairly secure investment; it will then be evident that he made no gift to his parents except one of forbearance for a limited time. How the matter will be after April 5, 1971 , if there is no foreclosure is another matter not now raised for decision.

Settle final order establishing the tax debt, and directing foreclosure subject to the Eugene Moran mortgage on five days notice.

^* That does not imply that defendant Eugene Moran enjoys a priority for unpaid interest accruing after April 5, 1965 .

 

 

[91-1 USTC ¶50,158] United States of America , Plaintiff-Appellee v. General Motors Corporation, Defendant-Appellant

(CA-6), U.S. Court of Appeals, 6th Circuit, 89-1423, 4/1/91, Reversing and remanding an unreported District Court decision

[Code Secs. 6323 and 6332 ]

Lien for taxes: Assignment of property.--An automobile manufacturer that owed funds to an engineering company and made payment to the company's assignee was not liable for failing to honor an IRS lien on the same funds for unpaid taxes of the engineering company. According to state ( Michigan ) law, when the engineering company assigned accounts receivables that were due from the automobile manufacturer and others to a bank, all of the company's rights in the receivables were transferred to the assignee-bank. Thus, at the time the automobile manufacturer received notice of the subsequent IRS levy, it was not in possession of funds that the engineering company had any property interest in and that could be levied upon. Furthermore, a valid tax lien could not attach to receivables that were the subject of a prior assignment.

Before RYAN and NORRIS, Circuit Judges; and ALLEN, Senior District Judge. ^*

RYAN, Circuit Judge:

The government filed this action against General Motors Corporation ("GM"), pursuant to 26 U.S.C. §6332(c) , alleging that GM failed to honor an Internal Revenue Service ("IRS") levy upon property in its possession that belonged to another taxpayer and was encumbered by federal tax liens. The district court entered summary judgment for the government. We are asked to decide whether, as the district court held, GM is liable under I.R.C. §6332(d)(1) for failing to honor the levy. We conclude that it is not.

Specifically, we hold that the district court erred in granting the government's motion for summary judgment because GM was not, at the time it received notice of the levy, in possession of property subject to the levy. We shall, therefore, set aside the summary judgment and direct that judgment be entered for GM.

I.

In 1975, Oakwood Engineering and Experimental, Inc. ("Oakwood") and GM entered into a design agreement under which Oakwood was to perform certain engineering and related services for GM. GM agreed to pay for the services upon the terms and conditions set forth in the design agreement. The contractual relationship continued for a number of years. In February 1980, Oakwood negotiated a bank loan from NBD Troy Bank, N.A. for $75,000 and gave as security an assignment to the Bank of its "present and future" account receivables. On July 28, 1981 , GM sent purchase order No. GEN 33534 to Oakwood calling for certain design services. Oakwood performed the requested services and between January 25 and February 2, 1982 , submitted six invoices to GM in the total amount of $53,876.76.

On February 19, 1982 , GM was notified by NBD Troy Bank, N.A. that Oakwood had assigned all its account receivables to the Bank and that, as a result, any money GM owed to Oakwood should be paid to the Bank.

However, on February 24, and again on March 2, 1982, the IRS served notices of levy upon GM directing GM to pay the IRS all property or rights to property in GM's possession which belonged to Oakwood, up to $87,175.02, Oakwood's outstanding federal tax liability.

On February 26, 1982 , GM, in response to the Bank's February 19th notice, paid $53,876.76 to NBD Troy Bank, N.A., the amount owed to Oakwood for work performed under purchase order No. GEN 33534.

Because GM made no payments to the government pursuant to either of the levy notices, the IRS filed this action in the United States District Court for the Eastern District of Michigan to recover $53,876.76. The suit was brought pursuant to I.R.C. §6332(c) , on the theory that GM was obligated to honor the levy upon property in its possession which was encumbered by federal tax liens. The government claims, as it did below, that GM was in possession of funds it owed to Oakwood and refused to surrender the property to the IRS after notice of levy and final demand for payment.

GM claims that under Michigan law, by assigning its account receivables to the Bank in 1980, Oakwood transferred its entire interest in the accounts to the Bank and contends that under M.C.L. §440.9318(3), when GM received notice of the assignment from the Bank, Oakwood had no property interests whatever in the funds, and GM could no longer pay the account receivables over to Oakwood. Thus, GM argues, when it received the notice of levy, it was not in possession of any property or rights to property subject to levy. GM contends that the Bank had a superior interest to that of the government in the account receivables, and that the government did not have a lien on the account receivables at all.

The government and GM filed cross motions for summary judgment in the district court. The court found for the government, stating:

it is clear that under the Design Agreement and purchase order GEN 33534, Oakwood had a contractual property interest in the Funds for work performed. The fact that the Funds may have been subject to the Bank's lien, does not change the fact that Oakwood had a property interest in the funds.

The district court also found that GM's argument that the Bank had a superior security interest in the funds was without merit. The court held that "[l]ien priority is not a defense to an action to enforce a levy." The district court found that the "appropriate remedy for a person claiming a superior interest in the property is to bring an action for wrongful levy."

II.

A. Levy Theory

The dispositive issue in this case is whether, at the time the IRS levy was received, GM was the custodian of the property or a property interest to which the tax lien could attach.

Under 26 U.S.C. §6321 , a lien arises when a taxpayer fails or refuses to pay his taxes after assessment, notice and demand. See I.R.C. §§6321 and 6322 (1982). "This lien arises upon assessment and attaches to 'all property and rights to property, whether real or personal, belonging to [the taxpayer]' including property which the taxpayer subsequently acquires." United States v. Safeco Ins. Co. of Am., Inc., 870 F.2d 338, 340 (6th Cir. 1989) (quoting 26 U.S.C. §6321 ). Section 6321 is construed broadly because the language of the statute "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720 (1985).

If the tax remains unpaid, within ten days after notice and demand, the IRS may collect the tax by levy. 26 U.S.C. §6331 . When a taxpayer's property is held by another, the IRS customarily serves a notice of levy upon that party, pursuant to 26 U.S.C. §6332(a) . This notice of levy "gives the IRS the right to all property levied upon, and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 720 (citations omitted).

In National Bank of Commerce, the Supreme Court compared the admin istrative levy under 26 U.S.C. §6332 to a lien foreclosure suit under 26 U.S.C. §7403 . The Court noted that the admin istrative levy protects the government "against diversion or loss while such claims are being resolved." 472 U.S. at 721. The Court specifically held that the IRS had a right to levy on the taxpayer's joint bank accounts pursuant to 26 U.S.C. §§6331 and 6332 for delinquent federal income taxes even though the accounts were in joint names because the taxpayer had an absolute right under state law and under his contract with the bank to compel the payment of the outstanding balances in the accounts. Id. at 725-26.

Under 26 U.S.C. §6332(d) , if the custodian of the taxpayer's property honors the levy, the custodian is "discharged from any obligation or liability to the delinquent taxpayer with respect to such property or rights to property arising from such surrender or payment." However, if the custodian refuses to surrender the property in response to the levy, he is personally liable to the government in an amount equal to the value of the property not surrendered. 26 U.S.C. §6332(c)(1) . The custodian has two defenses for failure to comply with a tax levy: 1) the custodian is not in possession of the taxpayer's property; or, 2) the property is subject to a prior judicial attachment or execution. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 721-22; State Bank of Fraser v. United States [88-2 USTC ¶9592 ], 861 F.2d 954, 958 (6th Cir. 1988).

Because GM does not claim that the account receivables were subject to a prior judicial attachment or execution, the question is whether, at the time the notice of levy was received, GM held property in which Oakwood had any interest subject to levy. If it did, then it is personally liable under section 6332(c)(1) for the amount the government would have collected by the levy.

In determining whether the account receivables were subject to levy, state law determines "the nature of the legal interest which the taxpayer had in the property." National Bank of Commerce, 472 U.S. at 722. The government claims that at the time the notice of levy was served, GM clearly had property or rights to property that were subject to levy for Oakwood's tax liability. The government argues that account receivables are property or rights to property of a taxpayer that may be levied upon, citing United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 167 (6th Cir. 1983); United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612 (6th Cir. 1979), cert. denied, 447 U.S. 905 (1980).

We think the Celina and Weintraub cases cited by the government can be distinguished from the case at bar. Celina was a bank deposit setoff case which held that the tax assessment giving rise to the tax lien attached before the account receivables were transferred to the bank. Weintraub was a statute of limitations case which held that because a sovereign is exempt from operation of the statute of limitations, the fact that the IRS did not sue the defendant to collect on its attachment for 13 years did not preclude imposition of the liability. Id. at 621.

GM argues that it was not in possession of property or an interest in property belonging to Oakwood at the time of the levy. It claims that once the Bank notified GM that under the terms of the assignment contained in Oakwood's security agreement with the Bank, GM should pay the Bank the account receivables, Oakwood no longer had a property interest in those account receivables.

Under Michigan law, an assignment is defined as a

transfer or setting over of property, or of some right or interest therein, from one person to another, and unless in some way qualified, it is properly the transfer of one's whole interest in the estate, or chattel or other thing. It is the act by which one person transfers to another or causes to vest in another, his right to property or interest therein.

Allardyce v. Dart, 291 Mich. 642, 644, 289 N.W. 281 (1939) (emphasis added).

The Michigan Court of Appeals, citing Allardyce, defined an assignment as a "transfer or setting over of property from one person or entity to another and, unless in some way qualified, transfers one's whole interest." Moore v. Baugh, 106 Mich. App. 815, 819, 308 N.W.2d 698 (1981). Moore concerned the assignment of a judgment and the court found that "once a judgment is assigned, the assignor is completely disassociated from the rest except to the extent that his obligor may have rights against him which would then be assertable [sic] against the assignee." Id.

Moreover, M.C.L. §440.9318(3) provides that: "the account debtor [GM] is authorized to pay the assignor [Oakwood] until the account debtor receives notification that the amount due or to become due has been assigned and that payment is to be made to the assignee [Bank]." Thus, the rights of the assignor and the assignee are fixed at the time of notification of the assignment.

It is not disputed that Oakwood assigned its account receivables and contract rights to the Bank. The effect of the assignment under Michigan law was that all of Oakwood's contract rights in its account receivables were transferred to the Bank when Oakwood's account debtors were notified of the assignment. This post-default notice of assignment on February 19, 1982 , divested Oakwood of legal and equitable title to the funds and deprived Oakwood of the right to sue for their recovery. Therefore, when GM received notice of the assignment, it was obligated to pay the Bank and could not pay the debt to Oakwood.

Because the IRS "steps into the taxpayer's shoes" and acquires whatever rights the taxpayer has with respect to the property, the IRS can succeed to rights no greater than those the taxpayer possesses. Thus, when money or property held by a third party is not the taxpayer's because it was assigned to another before the levy, it is no longer subject to the levy. At the time of the levy on February 24, 1982 , the Bank, not Oakwood, owned the funds the IRS sought.

Therefore, we conclude that because of the assignment on February 19, 1982 , Oakwood no longer possessed any property right in the disputed funds. Michigan law does not support the trial court's conclusion that some right to the funds remained in Oakwood on February 24, 1982 , which would permit Oakwood to control payment of the funds. The Supreme Court has stated: "It would indeed be anomalous to say that the taxpayer's 'property and rights to the property' include property in which under the relevant state law, he had no property interest at all." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 n.3 (1960).

Thus, because section 6332(a) cannot resurrect a taxpayer's property rights that were previously completely extinguished, we hold that the lower court erred in concluding that Oakwood had sufficient property rights upon which the government could levy.

B. Lien Theory

Even if we were to decide that on the day it received notice of the levy, GM held property in which Oakwood had some interest, we would then have to decide whether the government had a valid lien in Oakwood's property. The government claims that the Bank possessed only a security interest in the account receivables and that the government's lien is superior to that of the Bank's. The government argues that GM mistakenly acted on the belief that the Bank had a superior lien in the account receivables when it paid the Bank instead of the IRS. GM argues, on the other hand, that the government's lien theory is without merit because the tax lien did not attach to the account receivables.

Federal tax liens arise when unpaid taxes are assessed and continue until the resulting liability is either satisfied or becomes unenforceable through the lapse of time. 26 U.S.C. §6322 . The government's argument assumes that the account receivables in this case were impressed with a federal tax lien. However, a tax lien cannot attach to property which has been previously assigned or transferred by the taxpayer at the time the assessment is made. Assignments made prior to a tax assessment preclude lien attachment.

In this case, Oakwood assigned its right to its account receivables to the Bank on February 6, 1980 . The assessment made against Oakwood for unpaid withholding and Federal Insurance Contribution Act taxes occurred March 9, 1981 , well after Oakwood assigned its account receivables to the Bank. The assignment extinguished any property rights in those receivables to which the subsequent federal tax lien might have attached.

As noted previously, state law determines the nature of the property right. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722. Under Michigan law, an assignment of after-acquired account receivables defeats the property interest of other creditors. In re United Fuel & Supply Co., 250 Mich. 325, 230 N.W. 164 (1930). Even though the assignment grants the assignor, as agent of the assignee, a revocable license to collect the accounts in the usual course of business, it does not impair the absolute nature of the assignment. Id. at 330-32. This court has recognized that under Michigan law, an assignment of future account receivables is effective when made, not when the specific account comes into existence. Union Trust Co. v. Bulkeley, 150 F. 510 (6th Cir. 1907). Thus, it is clear that the assignment by Oakwood of future account receivables was absolute as of February 6, 1980 , and left Oakwood with no property rights to which the lien could attach.

III.

For the reasons stated, we REVERSE the judgment of the district court, REMAND the matter, and direct that summary judgment be entered for the defendant.

^* The Honorable Charles M. Allen, Senior District Judge of the United States District Court for the Western District of Kentucky, sitting by designation.

 

 

[62-1 USTC ¶9433]Town of Bay Harbor Islands, a municipal corporation, Plaintiff v. Leo Ackerman, Harry Lasser, and Fidelity & Deposit Company of Maryland, Defendants. United States of America , Intervening Plaintiff

Fla. Circuit Court, 11th Judicial Circuit, Dade County, Fla., No. 59C 10394, 3/6/62

[1954 Code Sec. 6323]

Tax liens: Priority: Validity against assignee.--Where the delinquent taxpayer made a valid assignment of payments due him under a contract prior to the filing of Federal tax liens for withholding taxes, the assignee was entitled to priority.

Lewis Horwitz, 420 Lincoln Rd., Miami Beach, Edmond J. Gong, United States Attorney's Office, P. O. Box 1070, Miami 1, Fla., for plaintiff. Feibelman, Friedman, Hyman & Durant, 228 N. E. 2nd Ave., Dixon, DeJarnette, Bradford, et al., Dade Federal Bldg., Miami, Fla., for defendant.

Findings of Fact, Conclusions of Law and Final Decree

CANNON, Circuit Judge:

This cause came on to be heard on Final Hearing, and after consideration of the entire record, the Court makes the following findings of fact, conclusions of law and enters the following Final Decree:

Findings of Fact

1. On or about the 9th day of August, 1954, a contract was entered into between Harry Lasser, doing business as Lasser Garbage and Waste Service, and Bay Harbor Islands , Florida , a municipal corporation, whereby, for the consideration therein, the said Harry Lasser was to provide certain garbage and waste service for such municipality.

2. On or about July 6, 1956 , the said Harry Lasser assigned the payments due under the contract to Leo Ackerman, and directed that all payments be made to the said Leo Ackerman until further notice.

3. On or about July 15, 1959 , Raymond J. Wolf, as attorney for Harry Lasser, notified the Town of Bay Harbor Islands that the assignment to Ackerman was terminated.

4. On April 10, 1959, the District Director of Internal Revenue at Jacksonville, Florida, made a 100% penalty (FICA) assessment against the defendant, Harry Lasser for the quarters ended March 31, 1958 and June 30, 1958, and on April 10, 1959, the District Director gave the Defendant, Harry Lasser, notice of said assessment stating the amount and demanding payment thereof; and on May 27, 1959, the District Director filed a notice of federal tax lien for said assessment with the Clerk of the Circuit Court, Dade County, Miami, Florida.

5. On February 27, 1959, the District Director of Internal Revenue at Jacksonville, Florida, made an