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 assessment of withholding taxes for the quarter ended December 31, 1958, in the amount of $812.34, plus interest, against defendant, Harry Lasser; that on February 27, 1959, the District Director gave Defendant Harry Lasser notice of said assessment, stating the amount and demanding payment thereof; that on July 15, 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.

6. On May 29, 1959, the District Director of Internal Revenue at Jacksonville, Florida, made an assessment of withholding taxes for the quarter ended March 13, 1959, in the amount of $770.64 plus interest, against Defendant Harry Lasser; and on the same date the District Director gave said Harry Lasser notice of said assessment, stating the amount and demanding payment thereof; that on November 9, 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.

7. On August 28, 1959, the District Director of Internal Revenue at Jacksonville, Florida, made an assessment of withholding taxes for the quarter ended June 30, 1959, in the amount of $415.71 plus interest, against defendant Harry Lasser; and on the same date the District Director gave said Harry Lasser notice of said assessment, stating the amount and demanding payment thereof; that on November 9, 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.

8. On or about June 17, 1959 , said District Director served a notice of levy upon the Town of Bay Harbor Islands, naming defendant Harry Lasser as the taxpayer, and the total amount due to the United States of America for unpaid taxes in the amount of $826.69.

9. The said Town of Bay Harbor Islands is indebted under said contract with Harry Lasser in the sum of $1246.12 covering the amounts payable for the months of June and July, 1959. The amounts due monthly under said contracts were $993.06.

10. There was a breach of said contract on the part of Harry Lasser, but the damages resulting therefrom were deducted by said Town from the total amount of $1,986.12 under said contract leaving a balance of $1,246.12.

Conclusions of Law

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

2. The assignment by Harry Lasser to Leo Ackerman was terminable at the will of Harry Lasser, and was so terminated on July 15, 1959 .

3. The United States of America is entitled to recover of the Town of Bay Harbor Islands, the sum of $496.58, representing the amounts due under said contract for the period from July 16, 1959 through July 31, 1959 .

4. Leo Ackerman is entitled to recover of the Town of Bay Harbor Islands, the sum of $749.54 representing the difference between the total sum of $1,246.12 owed after deducting the amounts to which the United States of America is entitled to.

5. Since all damages due to failure of Harry Lasser to perform under said contract were deducted and retained by the Town of Bay Harbor Islands, there is no liability on the part of Fidelity & Deposit Company of Maryland to the Town or said parties hereto.

6. The Plaintiff, Town of Bay Harbor Islands, is not entitled to recover its costs and attorneys fees herein.

7. The said Harry Lasser has no claim to any of the sums owed by the Town of Bay Harbor Islands under the aforesaid contract.

It is therefore ORDERED, ADJUDGED and DECREED by the Court as follows:

1. That the United States of America , intervening plaintiff herein, be and it is hereby awarded a judgment against the Town of Bay Harbor Islands in the amount of $496.58 for which let execution issue.

2. The Defendant, and Counter-Plaintiff, Leo Ackerman, be and he is hereby awarded a judgment against the Town of Bay Harbor Islands in the sum of $749.54 for which let execution issue.

3. The claim of Town of Bay Harbor Islands as against Fidelity & Deposit Company of Maryland be and the same is hereby dismissed with prejudice.

4. The prayer contained in the Complaint of Plaintiff, Town of Bay Harbor Islands that it be awarded its attorneys fees and costs be and the same is hereby denied.

5. The Counter-claim of Harry Lasser filed herein be and the same is hereby dismissed with prejudice.

 

 

[61-2 USTC ¶9761]In re Marine Midland Trust Co. of N. Y. (Arrowhead Manor, Inc.)

N. Y. Supreme Court, 6/21/61

[1954 Code Sec. 6323]

Tax lien: Priority: Assignment of funds: Validity against assignee.--The delinquent taxpayer made a valid assignment of liquor license refund money held by the state controller. The assignment was made for adequate consideration before the claim or lien of the United States for taxes and the assignee was entitled to priority.

David M. Berenson, 120 Broadway, New York City , N. Y., for plaintiff.

SPECTOR, Judge:

This is a motion in supplementary proceedings to permit and direct the state comptroller to pay to the moving judgment creditor bank funds which he is holding.

The movant on January 18, 1960 , loaned to the judgment debtor money to secure its liquor license. On April 22, 1960 , the judgment debtor surrendered its license and immediately thereafter on the same day assigned the proceeds to the movant. Thereafter on May 24, 1960 , the bank recovered a judgment against the judgment debtor. Other creditors have secured judgments which may be prior liens to that of the movant, if its rights are based on the judgment and not the assignment. The United States Government also claims priority to the movant, as an assignee, but admits that its lien is junior to any judgment creditor which has secured a lien, but senior to any securing a lien after February 10, 1961. This is the date it secured its lien by filing with the Register of the City of New York .

A refund becomes due on the date when the license is surrendered for cancellation and created an obligation on that date whereby the comptroller was then holding the refund for the benefit of the former licensee even though payment is deferred by section 127 of the Alcoholic Beverage Control Law (Strand v. Piser, 291 N. Y. 236). Accordingly, on the date of the assignment, the judgment debtor was the possessor of the fund and could assign it to the bank. It was not the assignment of a fund not in existence creating an equitable lien (Palmer v. Tremaine, 259 App. Div. 951), but a valid assignment of a fund in existence, after which the assignor had no title to the refund money to which liens of subsequently acquired judgments could attach (Ryan v. O'Leary, 266 App. Div. 681).

With regard to the government's claim, 26 U. S. C. A. section 6323(a) provides, "Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--(1) In the office designated by the State or Territory in which the property subject to the lien is situated * * *." Such filing was not done by it until long after the assignment. The bona fides of the assignment are not questioned. The government claims that the bank is not protected as a "purchaser" because the assignment was not for a present consideration. With this view the court is not in accord. A pre-existing liability is good consideration for a new promise and if a debtor gives additional security to his creditor on a pre-existing debt, without new consideration, there is sufficient consideration (17 C. J. S., Contracts, sec. 122, p. 472). Therefore the motion is granted. Settle order.

 

 

[61-1 USTC ¶9248]T. R. Elliott, Virgie M. Elliott, et al., Plaintiffs v. Sioux Oil Company, a corporation, et al. Defendants v. The Youngstown Sheet and Tube Company, an Ohio corporation, and United States of America, Intervenors The Bay Petroleum Corporation, a corporation, Plaintiff v. L. S. Chism, et al., Defendants

U. S. District Court, Dist. of Wyo., No. 4179, 4350 Civil, 191 FSupp 847, 12/9/60

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

Priority of lien: Federal tax lien v. assignment of proceeds of crude oil sales: Assignment treated as a mortgage.--The assignee of a delinquent taxpayer, the assignment involving the proceeds from the sale of crude oil, had a superior lien to the government's lien for taxes because the assignment was filed and recorded in the state of Wyoming before notice of the Federal tax lien was so filed. The assignment of the proceeds of the sales of crude oil constituted a "mortgage" on an interest affecting real property and thus the assignor had a prior mortgage lien under Code Sec. 6323. The fact that the tax lien had been filed earlier in Colorado , the principal place of business of the delinquent taxpayer, was immaterial since the "mortgage" was on an interest in land situated in Wyoming .

Knowles and Shaw, Denver, Colo., and Loomis, Lazear & Wilson, Cheyenne, Wyo., for The Youngstown Sheet & Tube Co., intervenor. John F. Raper, United States Attorney, Cheyenne , Wyo. , for the United States , intervenor.

Judge's Memorandum

KERR, District Judge:

The question here presented relates to the superiority of a federal tax lien over a private lien. The issue of priority of liens is before this Court by the motion by Youngstown Sheet and Tube Company to dismiss the objections of the United States to the Order on Pretrial Conference made and entered by this Court on July 22, 1960 , awarding $19,215.37 to Youngstown Sheet and Tube Company. The order directed also that the United States take nothing by virtue of its claim for taxes due from C. M. & W. Drilling Company in these interpleader actions, but that $1,013.30 be paid to the United States for its landowner's royalty which it interposed for the first time at the pretrial conference on June 3, 1960, in lieu of its claim for unpaid taxes.

Conflicting claims to the fund in the registry of the court are made by the United States Government and by Youngstown Sheet and Tube Company. The Government seeks to be awarded $2,924.33 based on its lien for taxes that accrued prior to January 1958 when the Court assumed control of the assets of the delinquent taxpayer, the C. M. & W. Drilling Company. It is the Government's contention that it is entitled to the funds held by Sioux Oil Company which were payable to C. M. & W. Drilling Company, which funds Sioux Oil Company paid into the registry of this court for proper disbursement.

Youngstown Sheet and Tube Company claims priority to the same funds by virtue of an instrument labeled "Assignment of Proceeds", which instrument it contends brings it within one of the privileged categories of Section 6323 of the Internal Revenue Code of 1954.

[Facts Are Undisputed]

Both claimants rely on Sections 6321 to 6323, inclusive, of the Internal Revenue Code of 1954 and they do not dispute the following facts:

Sioux Oil Company is a corporation organized under the laws of Colorado ;

C. M. & W. Drilling Company, a South Dakota corporation, with its principal place of business in Denver , Colorado , owns and leases property in Wyoming , Colorado and New Mexico ;

The tax assessment by the Director of Internal Revenue for the year 1956 was made on November 19, 1956 ;

Notice of the Federal tax lien was filed in Denver County , Colorado , on January 29, 1957 ;

C. M. & W. Drilling Company executed in Denver , Colorado , an "Assignment of Proceeds" to Black Hills Drilling Company on May 17, 1957 ;

Said Assignment of Proceeds was filed and recorded in Weston County , Wyoming , on May 25, 1957 ;

By letter dated May 31, 1957, Black Hills Drilling Company advised C. M. & W. Drilling Company that payment under the Assignment of Proceeds should be made to Continental Ensco Company, a division of Youngstown Sheet and Tube Company; and

Notice of the Federal tax lien was recorded in Weston County , Wyoming , on August 22, 1957 .

For purposes of brevity, the assignor is referred to as "C. M. & W." and the rival claimant to the United States is referred to as " Youngstown ".

The government's tax lien was created under Section 6321, which provides that a tax lien attaches "in favor of the United States upon all property and rights to property, whether real or personal, belonging" to the delinquent taxpayer. Such lien arises, under Section 6322, "at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of the lapse of time". Goldstein v. Bankers Commercial Corporation, 152 F. Supp. 856, aff'd. 257 F. 2d 48 (N. Y. 1957); Beeghly v. Wilson , 152 F. Supp. 726 ( Iowa 1957). Prior rights, however, of any mortgagee, purchaser, pledgee or judgment creditor, are unaffected by the government tax lien. (Section 6323 of the Internal Revenue Code of 1954.) This section provides that the tax lien is not valid against such creditors "until notice thereof has been filed . . . in the office designated by the law of the state . . . in which the property subject to the lien is situated . . ."

[Application of Statutes]

Applying the statutes to the chronology of events, the United States has a lien on the funds deposited with the court by Sioux Oil Company as of November 19, 1956. The superiority of that claim is contingent upon the status of Youngstown as a mortgagee, purchaser, pledgee or judgment creditor, and upon compliance with the filing requirements of Section 6323. Youngstown derives its rights by assignment from Black Hills Drilling Company, the named assignee in the Assignment of Proceeds.

Under the terms of the Assignment of Proceeds by the delinquent taxpayer, C. M. & W. declared that it owed Black Hills Drilling Company $25,252.05 for material and labor furnished, which amount the assignor "desires to pay out of proceeds due from Sioux Oil Company for crude oil purchased from the above-described leases, and from all other leases in which the undersigned (i.e. the assignor) owns an interest and from which the Sioux Oil Company purchases the oil produced therefrom". C. M. & W. thereupon made the following assignment:

"NOW, THEREFORE, the undersigned, for and in consideration of the oil well drilled and the casing furnished as above stated by the Black Hills Drilling Company, Inc., for the use and benefit of the above-described leases and lands, does hereby assign, transfer and set over unto Black Hills Drilling Company, Inc., of Newcastle, Wyoming, the sum of Twenty-five Thousand Two Hundred Fifty-two Dollars and Five Cents ($25,252.05), payable from proceeds from the sale of crude oil from the above-described leases and lands, and all other leases and lands in which the undersigned owns an interest, and from which Sioux Oil Company purchases the crude oil produced therefrom, which proceeds may now be due, or which may hereafter become due to the undersigned from Sioux Oil Company.

In the event any part of the above stated Twenty-five Thousand Two Hundred Fifty-two Dollars and Five Cents ($25,252.05) is hereafter paid to said Black Hills Drilling Company by any interest owner in the above-described leases or lands, then, and in that event, upon written notice to that effect furnished to Sioux Oil Company, this Agreement shall be decreased and diminished by the total sum of such payments so made.

The undersigned does hereby agree to indemnify and hold Sioux Oil Company harmless for making any payments hereunder and to defend said Sioux Oil Company against any claims or litigation which may arise by virtue of any payments so made."

The language of such instrument would profit from refinement and precision. Its infirmities, however, do not detract from its intent and purpose to give the creditor collateral security for the payment of the assignor's debt.

It is the position of the Government that Youngstown is not a purchaser within the meaning of Section 6323 for the reason that an assignee for past consideration is not a purchaser within the purview of the act and the definition of that term in Federal Tax Regulations, Section 301.6323-1. The Government stresses the applicability of the holding in the case of The United States v. Chapman [60-2 USTC ¶9667], 281 F. 2d 862 (C. A. 10, 1960). In that case the assignee of a security for a loan was held to be a lienor and not a purchaser, and since the lien was inchoate and unperfected, it was not protected by Section 6323. Youngstown contends that it was either a purchaser or mortgagee.

The facts and the law lead me to the conclusion that the controversial instrument was executed as a security for the payment of a debt, and as such it constitutes a mortgage. 6 C. J. S. "Assignments" Sec. 2(8), page 1049; Conrad v. The Atlantic Insurance Company, 26 U. S. (1 Pet.) 386, 447 (1828). I am influenced, also, by the meaning of the terms "mortgagee, pledgee, purchaser, or judgment creditor" as set out in the Federal Tax Regulations, Sec. 301.6323-1(a)(ii) which reads as follows:

"The determination whether a person is a mortgagee, pledgee, purchaser, or judgment creditor, entitled to the protection of Section 6323(a), shall be made by reference to the realities and the facts in a given case rather than to the technical form or terminology used to designate such person. Thus, a person who is in fact and in law a mortgagee, pledgee, or purchaser will be entitled as such to the protection of section 6323(a) even though such person is otherwise designated under the law of a State, such as the Uniform Commercial Code."

The subject of the mortgage thus executed is real property, or, more specifically, is an interest affecting real property. In the case of Stone v. Wright, et al., 75 F. 2d 457 (C. A. 10, 1935), it was held that a lien on the proceeds from the sale of oil produced makes it an instrument affecting the real estate. Holding that the instrument was within the recording requirements, the Court said at page 460:

"It was related to and affected real estate because the fund was to come from mineral extracted from the real estate, and it affected that real estate in many respects."

See also, Continental Supply Company v. Marshall, 152 F. 2d 300, 307 (C. A. 10, 1946); Riverview State Bank v. Ernest, 198 F. 2d 876 (C. A. 10, 1952).

Under the rule pronounced in United States v. R. F. Ball Construction Company [58-1 USTC ¶9327], 355 U. S. 587 (1958), the lien must be perfected in order to be privileged by Section 6323. A claim based upon an unperfected instrument is subordinate to the government's tax liens. Arthur Company v. Chicago Paints, Inc. [59-2 USTC ¶9689], 175 F. Supp. 50, 53 ( Minn. 1959). The proceeds mortgaged by C. M. & W. were to be derived from the sale of oil produced and sold from certain leases and lands in Weston County , Wyoming , and from "all other leases and lands" in which it owned an interest and from which Sioux Oil Company purchased the crude oil produced therefrom. Such property could be located in various counties and in various states. The property rights of the taxpayer and of the third party upon whom the government asserts its tax lien are determined by the state law wherein the property is located, or wherein said rights accrue.

It has been said that the claimant's lien interest must "satisfy the standards imposed by the decisions of the federal courts where the question of priority arises between a government tax lien and a private unperfected lien." First State Bank of Medford v. United States [58-2 USTC ¶9758], 166 F. Supp. 204, 209-210 ( Minn. 1958). It has also been intimated that a lien is not to be construed as perfected until it has been reduced to final judgment. United States v. White Bear Brewing Company [56-1 USTC ¶9440], 350 U. S. 1010 (1956). In the case of United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 84 (1954), the standard by which a lien will be choate was expressed as follows:

"* * * liens under state law were perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established.'"

The universally accepted and time-honored rule, however, is that the question of the existence of property interests is solely a question of state law. It has been expressed by the Supreme Court in the case of Morgan, Executor v. Commissioner of Internal Revenue [40-1 USTC ¶9210], 309 U. S. 78, 80, that "State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed". In the case of Bensinger v. Devidson [57-1 USTC ¶9263], 147 F. Supp. 240, 245 ( Cal. 1956), the court said: "The right of the United States to collect taxes is not subject to state law. But state law may control on what it considers or creates as property." See also Commissioner of Internal Revenue v. Stern [58-2 USTC ¶9594], 357 U. S. 39 (1958); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958); In Re Kobiela [57-2 USTC ¶9948], 152 F. Supp. 489 ( Nebr. 1957).

The fund in the registry of this court to which both parties assert their claims, was channeled there by Sioux Oil Company as the purchase price for oil purchased from the so-called Texas-Elliott lease located in Weston County , Wyoming . Section 34-21, Wyoming Statutes 1957, provides that a recorded instrument affecting an interest in land "shall be notice to and take precedence of any subsequent purchaser or purchasers . . .". When, therefore, the Assignment of Proceeds was recorded in Weston County , Wyoming , the mortgage ofYoungstown was perfected and thereupon protected by Section 6323. This occurred on May 25, 1957 , approximately three months prior to the filing in Weston County , Wyoming , of the notice of tax lien. By the terms of the Assignment of Proceeds and the prompt recording of that instrument in the county where the property was located, the assignor-taxpayer was divested of title and possession, and the lien was perfected. United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361 (1952).

[Notice in Colorado ]

The next question to be determined is whether or not the government's recorded notice on January 29, 1957 , in Denver County , Colorado , takes precedence over the mortgage recorded in Weston County , Wyoming , on May 25, 1957 .

The government attempts to establish its priority on the theory that the assignment was merely an assignment of accounts receivable; and that the assignee's rights thereunder are inchoate and imperfect because the instrument was not filed in Denver County, Colorado, which is the county in which the principal place of business of the assignor is located as required by the Colorado Accounts Receivable Law. Apparently the government concludes that the property to which the federal tax lien attached was located in Colorado and therefore proper notice was given to the assignee of accounts receivable as required by Section 6323. I cannot subscribe to this suggestion.

The position of Youngstown is more tenable. The proceeds of the sale of oil constitute an interest in real property which is located in Weston County , Wyoming . The federal recording law requires that notice of the tax lien be filed in the office designated by the law of the State in which the property subject to the lien is situated. Section 29-111, Wyoming Statutes 1957, requires that federal tax liens be recorded in the office of the County Clerk and Ex-Officio Register of Deeds of the county or counties in the State in which the property is situated. The tax lien, therefore, which was recorded in Denver County , Colorado , on January 29, 1957 , is not valid as against the mortgagee whose mortgage was recorded in Weston County , Wyoming , the situs of the property, on May 25, 1957 . When the notice of the tax lien was recorded in Weston County , Wyoming , on August 22, 1957 , it had notice of the intervening rights of the prior recorded mortgage of Youngstown .

This conclusion is in accord with the purpose of Section 6323 which "is to give notice to would be purchasers of the government's right to collect taxes due from the owners of the property". Pipola v. Chicco [59-1 USTC ¶15,207], 169 F. Supp. 229, 232 (N. Y. 1959). In passing Section 6323, Congress also was provoked to avoid the evils and insidious effect of secret federal tax liens. Marteney v. United States [57-1 USTC ¶9670], 245 F. 2d 135 (C. A. 10, 1957). There can be no logical argument that the filing of a tax lien in Denver County, Colorado, the principal place of business of the delinquent taxpayer, and the residence of the mortgagee, gives notice of such lien on the property located in Weston County, Wyoming, to which it is intended to attach.

[Estoppel Not in Issue]

In view of my decision on the merits of the issues before me, it is not imperative that I pass on the issue of estoppel which was raised in the motion to dismiss. Under the circumstances of the complicated nature of the interpleader actions from which the motion was an outcrop the question of estoppel against the government merits at least a nod of recognition on my part.

Not unmindful of the general rule absolving the government from the defense of estoppel, I reiterate my former comment that I cannot adhere to such an unalterable rule which would jeopardize justice. See City of Sheridan v. Montana-Dakota Utilities Company, 157 F. Supp. 664, 670 (1958). All the proceedings in these cases leading up to and including the pretrial order were predicated on the absence of a prior claim by the government for delinquent taxes. At the pretrial conference the government voluntarily admitted that its tax lien had not been filed according to law; it thereupon asserted a claim for royalty interest payments which was allowed. This award in the sum of $1,013.30 as a landowner's royalty would not have been made had the government not asserted such a claim when it ascertained that it could not claim priority to a tax lien, and had not all the other parties agreed to accept the substitution of claims by the government. The government failed to present the court with its figure for the total amount of money which it claimed against the fund in the registry as ordered by the Court. Youngstown and the other claimants respected the Court's order in this regard. Though the other claimants to the fund were not completely satisfied with their reduced awards, they all acknowledged at the pretrial conference that a formula for the equitable proportionment of the funds in the registry was necessary and desirable under the circumstances. They acceded to the preparation of a formula by which the funds would be or could be distributed proportionately among all the creditors of C. M. & W. Drilling Company.

Because the government failed to change its position until the last day allowed for filing objections to the Order of Distribution, it thereby adversely affected the formula and also precluded the other parties from likewise filing objections to the pretrial order. In my opinion, I can see inequitable results where, as here, the government does not "observe the same rules and standards of fair dealings that are expected of" and exercised by a private citizen. (City of Sheridan , supra, page 670.)

Be that as it may, I find that Youngstown Sheet and Tube Company is protected by the provisions of Section 6323 of the Internal Revenue Code of 1954, and that the lien of the United States for unpaid taxes is inferior to the assignment of proceeds, and that the notice of lien was improperly filed in Colorado and was tardily filed in Weston County, Wyoming. Accordingly, the Motion to Dismiss the Objections is granted.

 

 

[41-1 USTC ¶9164]United States of America, and Dan M. Nee, Collector of Internal Revenue for the Sixth Collection District of Missouri, Plaintiffs, v. Charles V. Carrollo, Caroline Carrollo, Defendants The National Surety Corporation, a corporation, Defendant and Third-Party Plaintiff Interpleader, v. Merchants Bank of Kansas City, Missouri, a corporation, Third-Party Defendant

In the District Court of the United States for the Western District of Missouri, Western Division, No. 606, Filed December 2, 1940

Lien for taxes: Validity against assignee of funds.--Defendant bank loaned money to a criminal defendant who deposited it with his surety on an appearance bond and received back from the surety a receipt for the money which he assigned to the bank. Thereafter, the United States levied on such funds in the hands of the surety on account of income tax allegedly due from the criminal defendant. The Court holds that the assignment to the bank was for a good and sufficient consideration and was binding against the United States .

Richard K. Phelps, Acting U. S. Attorney, for Government. Ringolsky, Boatright, Jacobs and Perry W. Shrader for defendants.

Memorandum, Findings of Fact, Conclusions of Law, Indicated Order

OTIS, J.:

On June 20, 1940 , the United States and the Collector of Internal Revenue instituted this action against Charles V. Carrollo, Caroline Carrollo and The National Surety Corporation on account of income tax alleged to be owing by Charles V. Carrollo. The Surety Corporation was made a party defendant because, it was alleged, it had in its possession $25,000 of the money of the Carrollos, put up with the Surety Corporation in consideration of the signing by that corporation of a criminal appearance bond on which Charles V. Carrollo was principal. The terms of the bond had been satisfied. A notice of levy had been served on the Surety Corporation in October, 1939.

On July 3, 1940 , the Surety Corporation filed answer and cross petition. In the cross petition it was prayed that Merchants Bank of Kansas City be required to interplead its claim. On the same day an order was made requiring the Bank to interplead and granting leave to the Surety Corporation to pay the $25,000 into court. Thereafter, on July 22, 1940 , the Surety Corporation was discharged.

The Merchants Bank alleges that before the levy on the Surety Corporation it had a lien on $10,000 of the $25,000 put up with the Surety Corporation by the Carrollos.

Submission

By oral stipulation of the parties it was agreed in open court that as between plaintiffs and the Merchants Bank of Kansas City the issues should be determined upon the pleadings, the motion of the Merchants Bank for an order directing the payment of $10,000 to it, the oral admissions of counsel for plaintiffs made in open court, the request of the Merchants Bank for admission of facts and the written answers thereto (filed with leave on October 29, 1940, a day subsequent to the hearing), the testimony offered at the hearing, the exhibits introduced and the affidavit of F. A. Brinkman, received in evidence by oral stipulation, in lieu of the testimony of Brinkman. Upon the record so made I make the following formal findings of fact.

Findings of Fact

I. On April 18, 1939, Charles V. Carrollo and Carrle Carrollo (who is the same person as Caroline Carrollo) requested Merchants Bank of Kansas City to advance the sum of $10,000 to be deposited as collateral security with the National Surety Corporation so that the National Surety Corporation would execute an appearance bond of $10,000 in a certain criminal case pending against Charles V. Carrollo. Merchants Bank of Kansas City agreed to advance said $10,000 upon conditions: (a) that Carrie Carrollo and Charles V. Carrollo would execute their note to the bank for $10,000, (b) that they would secure the note by a deed of trust on certain real estate and (c) that they would secure the note also by an assignment of the receipt for $10,000 which would be executed by the National Surety Corporation. The $10,000 in question was then advanced by Merchants Bank to Carrie Carrollo, was turned over by her to the National Surety Corporation as collateral, the receipt of the National Surety Corporation was given to her for the collateral so turned over, and immediately was assigned by Carrie Carrollo to the bank as security on the $10,000 note contemporaneously executed, being so assigned in the presence and with the full knowledge of the agent of the National Surety Corporation. The deed of trust referred to also was given as additional security on the note.

II. The $10,000 referred to in finding of fact No. I is a part of the $25,000 claimed by the plaintiffs in this proceeding by reason of the alleged income tax obligations of Charles V. Carrollo and the notice of levy served on the National Surety Corporation on or about October 19, 1939 .

III. Charles V. Carrollo responded in accordance with the obligations of the appearance bond referred to in finding of fact No. I. That bond was discharged. The note to the Merchants Bank referred to in finding of fact No. I has matured and has not been paid.

Declarations of Law

I declare the law to be (1) that this court has jurisdiction of this case and to pass upon the motion of Merchants Bank for an order directing the payment of $10,000 to it; (2) that the assignment to Merchants Bank by Carrie Carrollo, referred to in finding of fact No. I, was for a good and sufficient consideration, was binding as against the National Surety Corporation, and as against the plaintiffs; (3) the lien of the Merchants Bank to the $10,000 referred to in the receipt described in finding of fact No. I was prior and superior to any lien of the plaintiffs in this case on account of tax claims against Charles V. Carrollo and notice of levy by plaintiffs on the National Surety Corporation at a time subsequent to the date of the assignment; (4) Merchants Bank of Kansas City is entitled to an order directing the clerk of this court to pay over to Merchants Bank the sum of $10,000 out of the amount of $25,000 heretofore deposited with the clerk of this court by the National Surety Corporation.

An exception is allowed plaintiffs as to each declaration of law herein stated.

Indicated Order

Counsel for Merchants Bank will prepare and submit within five days an order appropriate to the findings of fact and conclusions of law announced herein.

 

 

[73-1 USTC ¶9220]Georgia-Pacific Corporation, a corporation, Plaintiff v. Nielsen-Nickels Company, a corporation, et al., Defendants

U. S. District Court, No. Dist. Calif. , No. C-71-211 RPF, 1/29/73

[Code Sec. 6323]

Liens: Priority: Assignee's interest: Account receivable v. General intangible.--An assignment to a corporation constituted an assignment of accounts receivable rather than general intangibles. The assignment, not having been filed with the State or recorded, was invalid and ineffective as against the Government's tax lien.

Ronald R. Rossi, Caputo & Liccardo, 1960 Alameda, San Jose, Calif., for plaintiff. James L. Browning, Jr., United States Attorney, Martin A. Schainbaum, Assistant United States Attorney, San Francisco , Calif. , for defendants.

Order

PECKHAM, District Judge:

Georgia-Pacific (GP) filed an action in the state court against Nielsen-Nickels (NN) for money owing from NN to D & B Painting and Drywall Company (DB) which GP alleged had been assigned to it. As a claimant under a tax lien, the United States intervened in the action and removed it to the federal court pursuant to 28 U. S. C. §1446. NN has been dismissed from this action in interpleader after depositing with the court the amount in controversy, $11,797. The United States now moves for summary judgment on the ground that its tax lien takes priority over GP's assignment.

The United States asserts its lien for unpaid federal taxes accrued in the last two quarters of 1969. Notice of the lien was filed in the debtor's county, in accordance with 26 U. S. C. §6321. Under 26 U. S. C. §6323, the government's lien will not take priority over claims of, inter alia, the holder of a security interest. The term "security interest" as defined in 29 U. S. C. §6323(h)(1) applies to interest which have "become protected under local law against a subsequent judgment lien arising out of an unsecured obligation." Both the United States and GP agree that in order for GP's interest to come within the federal statute, it must have been perfected under California law. The United States argues that no assignment was in fact made, and that, even assuming an assignment, it was not perfected because no security agreement was filed. GP asserts that a valid assignment was made, and that no financing statement was required to perfect GP's interest because the money in question was a "general intangible" within the meaning of the California Commercial Code, assignment of which does not require the filing of a financial statement.

First, the court finds that an assignment was in fact made by DB to GP of monies due under a prior contract with NN. The letter from DB's counsel to NN advising NN to make out joint checks to DB and GP was sufficient description of the assignment under California law. McCown v. Spencer, 8 Cal. App. 3d 216 (2d Dist. 1970). The intent to make an assignment can be inferred from the letter itself, as well as from the affidavit of William Hancock, Western Regional Credit Manager of GP (Plaintiff's Exhibit A, attached to Memorandum in opposition to Summary Judgment). United California Bank v. Behrends, 251 Cal. App. 2d. 720 (2d Dist. 1967).

Second, the court finds that the assignment made by DB to GP was of rights to accounts receivable, GP's interest in which, in order to take priority over the lien of the United States, must have been recorded in accordance with Cal. Comm. Code §§ 9102(1)(a), 9302(1). There is little doubt that DB was assigning accounts and not general intangibles as GP argues. In its complaint to the state court, GP alleges (para. VII):

"That within four years last past, defendants, and each of them, became indebted to plaintiffs' assignor [DB] on an open book account for balance due in the sum of approximately ELEVEN THOUSAND, SEVEN HUNDRED NINETY SEVEN DOLLARS ($11,797.00), plus interest to date, for services rendered and materials furnished to defendants at their special instance and request."

The traditional notion of an account, especially an "open book account," is precisely as described by the plaintiff's complaint above. It is a debt arising out of a sale of goods or rendering of services. Pingree v. Sulmeyer, 315 F. 2d 422, 424 (9th Cir. 1963); Durkin v. Durkin, 133 Cal. App. 2d 283, 290 (1st Dist. 1955). The present definition under the California Connercial Code is the same. Cal. Comm. Code §9106.

GP places heavy reliance upon the decision in Nunnemaker Transportation Co. v. United California Bank, 456 F. 2d 28 (9th Cir. 1972), for the proposition that the rights here in question are "general intangibles." In Nunnemaker, however, the characterization of the rights assigned by the bankrupt was not in issue; all parties, including the court, assumed that they were general intangibles. Id. at 33. This assumption was strenuously opposed by Judge Ely in his dissent. Id. at 37. Yet even in its discussion of the overlap between "accounts" and "general intangibles" in the California Code, the court did not furnish GP with the umbrella it seeks now. Commenting upon the "unique exception" to the filing requirement of the California Commercial Code, the court stated:

"The term of 'general intangibles' includes some rights to payment of money as well as the patents, copyrights, literary property rights, and other nonmonetary rights for which it was intended . . . The Official Comment to U. C. C. §9-106, amended in 1966, now points this our:

'However, in some special case a contract right to receive money crystallizes not into an account but into a general intangible, for in such cases it is a right to payment of money that is not "for goods sold or leased or for services rendered." Examples of such rights are the right to receive payment of a loan not evidenced by an instrument or chattel paper; a right to receive partial refund or purchase prices paid by reason of retroactive volume discounts; rights to receive payment under licenses of patents and copyrights, exhibition contracts, etc.' Uniform Commercial Code §9-106, Comment."

Nunnemaker, supra, at 33 &n.4.

It is clear that the court in no way intended to encroach upon the traditional notion of the account; rights to money for goods sold or services rendered were specifically exempted from the definition of "general intangibles" described in the Comment quoted by the court, supra. See also Judge Ely's dissent, supra.

It appears therefore that the interest asserted by GP in the money on deposit with this court is not a perfected security interest within the meaning of 26 U. S. C. §6323(h)(1). The tax lien of the United States has priority over the claim of GP, and, accordingly, the motion for summary judgment of the United States is GRANTED.

 

 

[80-1 USTC ¶9253]Keystone Bank, Plaintiff, and District Director of Internal Revenue, Additional Plaintiff added by Court Order v. Walter J. Tierney, Defendant

Court of Common Pleas of Allegheny County, Pa. , Civil Div., No. 3145, 1/29/80

[Code Sec. 6323]

Tax liens: Priority: Secured creditors: Estoppel.--The government's tax lien arose and was duly filed before a secured creditor took an assignment of the debtor's interest. Thus, the federal lien had priority. Moreover, the secured creditor could not claim that the government delayed unduly in assessing the tax after liability arose; only the debtor can, in this situation, raise an estoppel argument.

Abraham Fishkin, 104 Lawyers Building, Pittsburgh , Pennsylvania 15219 , for plaintiff. Mark Albert, Department of Justice, Washington , D. C. 20530, for district director. Thomas Welsh, Metz , Cook, Hanna & Kelly, 3600 Grant Building , Pittsburgh , Pennsylvania 15219 , for defendant.

Opinion

WEKSELMAN, Judge:

The instant action, one of interpleader, involves the two plaintiffs' competing interests in a fund of some $6,000.00. Both claim priority and each, having a claim in excess of the fund, seeks the full amount at stake. The facts, as stipulated to by both parties, flow in a simple chronological order. On August 22, 1958 , and on October 10, 1958 , Lawrence J. O'Toole (taxpayer) was assessed of tax liability for his 1952 and u951 tax returns, respectively. Notice of tax liability was filed in the Prothonotary's Office of Allegheny County on December 20, 1958 , and refiled on November 21, 1967 , and February 13, 1973 . On January 17, 1968 , in order to secure a loan from Keystone Bank, taxpayer assigned his one-quarter interest in a partnership to his wife as consideration for her becoming an accommodation maker on the note. In turn, the wife assigned this interest to the Bank. Certain real estate owned by the partnership was sold subsequent to the loan. These proceeds were deposited with defendant, Walter J. Tierney, accountant for the partnership. Upon Keystone's commencement of an action of assumpsit, defendant paid the fund into court and interpleaded the claimants.

The first argument advanced by Keystone would dispose of the matter instantly. It is the position that the lapse of time between the taxable periods and the assessment dates should estop the United States from claiming priority in this situation. In the tax law area, however, there has been a long-standing proposition that only the taxpayer can attack an assessment. U. S. v. Pearson [66-1 USTC ¶9448], 258 F. Supp. 686 (S. D. N. Y., 1966); Falik v. U. S. [65-1 USTC ¶9295], 343 F. 2d 38 (C. A. 2d, 1965); Graham v. U. S. [57-1 USTC ¶9645], 243 F. 2d 919 (C. A. 9th, 1957). Some recent, as yet unreported decisions, have stated this proposition clearly: "[O]nce the line [sic] is assessed, only the taxpayer has the right to question the correctness of the same." U. S. v. Santos, -- F. Supp. --, (D. C. Puerto Rico, 1979); U. S. v. Formige, -- F. Supp. --, (D. C. D. C., 1979).

The inquiry does not end here. Although 26 U. S. C. §6322, provides for the assessment becoming a lien at the time it is assessed, §6323 allows some exceptions. Keystone claims relief under §6323(c)(1)(B). That section states that the United States ' lien shall not be valid against security interests "protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation." It is the Bank's contention that since levy was made subsequent to the assignment they were without notice. First of all, it is not the date of levy but, rather, the date of assessment that activates the priority mechanism. Secondly, the Internal Revenue Code clearly spells out the filing requirements so that notice will be given to subsequent creditors. See §6323(f). The courts have been confronted with these situations and their analysis has led them to give priority to the United States where the liens arose and were duly filed of record prior to the taking of an assignment of a taxpayer's interest. Keystone Mercantile Corp. v. Graham [61-1 USTC ¶9202], 192 F. Supp. 90 (M. D. Pa., 1961).

Keystone lacks standing to argue that laches applies to the United States lien. Nor can it be heard to say it was without notice of the lien and should therefore fall into the exception of §6323(c)(1)(B).

A nonjury decision awarding the interpleaded fund to the United States will be entered.

 

 

[69-2 USTC ¶9646]In the Matter of Farr Western Asphalt Paving, Inc., an Arizona corporation, Bankrupt. Ed Caliendo, Trustee in Bankruptcy of Farr Western Asphalt Paving, Inc., Petitioner v. Mardian Construction Company, an Arizona corporation, et al., Respondents

U. S. District Court, Dist. Ariz. , In Bankruptcy No. B-17972, 6/5/69

[Code Sec. 6323]

Lien for taxes: Priorities: Assignment of accounts receivable: Assignment not filed or recorded.--An assignment by the taxpayer of a portion of accounts receivable due it, record of such assignment not having been filed with the State or recorded, was invalid, ineffective and void as against the Government's tax lien.

Rob ert F. Owens, 3800 N. Central Ave. , Phoenix , Ariz. , for bankrupt. Lester Penterman, 1108 Luhrs Tower , Phoenix , Ariz. , for trustee.

Order Determining Validity and Priority of Liens

MAGGIORE, Referee:

This matter came on for hearing the 4th day of June, 1969, the Trustee, Ed Caliendo, being present, together with his attorney, Lester Penteman, and the claimants Contractors Equipment Supply Company, and the Internal Revenue Service of the United States being represented by their attorneys, Philip W. Marquardt and Harold E. Patterson, respectively, and the Court having before it the petition of the Trustee to determine the validity and priority of the claims of Contractors Equipment Supply Company and the Internal Revenue Service, and the matter having been argued by counsel and a memorandum filed by the Internal Revenue Service, and the Court being fully advised in the premises, makes the following findings of fact and conclusions of law.

Findings of Fact

1. On February 7, 1967 , and thereafter through 1968, Mardian Construction Company was indebted to the bankrupt, Farr Western Asphalt Paving, Inc. in the sum of $2,785.28.

2. On February 7, 1967 , Farr Western Asphalt Paving, Inc. was indebted to Contractors Equipment Supply Company in the amount of $486.82. This same day, Farr Western Asphalt Paving, Inc. assigned to Contractors Equipment Supply Company the sum of $486.82 out of its account receivable due from Mardian Construction Company. This assignment was never filed in the Office of the Secretary of State nor recorded in the State of Arizona .

3. On March 17 and May 28, 1967 , the Internal Revenue Service assessed against the bankrupt, taxes, penalties and interest in the total amount of $19,481.23 which were then due and owing and which had not been paid, although demand therefore had been made. A Notice of Federal Tax Lien in the amount of $9,411.65 was recorded with the County Recorder of Maricopa County , Arizona , against Farr Western Asphalt Paving, Inc. on March 31, 1967 . Additional Notices of Federal Tax Liens against Farr Western Asphalt Paving, Inc. in the amounts of $9,250.04 and $1,718.39 were filed with the same County Recorder on May 1, June 7, and October 20, 1967 .

Conclusions of Law

1. An assignment of an account receivable under the law existing in the State of Arizona in 1967 [A. R. S. 44-804] was required to be filed with the Secretary of State to be effective against present and future creditors of the assignor.

2. An assignment of an account receivable is a mortgage within the purview of A. R. S. 33-412 and must be recorded pursuant to A. R. S. 33-702, or it is void as to subsequent creditors.

3. The Internal Revenue Service of the United States is a creditor within the meaning of the law of Arizona referring to filing of assignments, as it existed in 1967, and recording of mortgages.

4. The Internal Revenue Service has a valid and subsisting lien on all property and property rights of Farr Western Asphalt Paving, Inc. dating from March 17, 1967 for unpaid taxes.

5. The assignment by Farr Western Asphalt Paving, Inc. of a portion of the account receivable due it from Mardian Construction Company on February 7, 1967 is invalid, ineffective, and void as against the lien of the Internal Revenue Service for unpaid taxes.

6. The Internal Revenue Service has a valid and subsisting first lien on the account receivable due from Mardian Construction Company to Farr Western Asphalt Paving, Inc. in the amount of $2,785.28.

WHEREFORE, IT IS ORDERED that the Internal Revenue Service is entitled to the account receivable due from Mardian Construction Company to Farr Western Asphalt Paving, Inc. in the amount of $2,785.28, less reasonable costs of admin istration, and the same shall be paid over to the Internal Revenue Service by the Trustee.

 

 

[81-1 USTC ¶9242]North American Investments, a general partnership, and Van Dyck Estates, a limited partnership, Plaintiffs v. United States of America , et al., Defendants

U. S. District Court, East. Dist. Calif. , No. F79-031EDP, 9/17/80

[Code Sec. 6323]

Lien for taxes: Validity and priority against third parties: Assignee of funds: Failure to perfect security interest.--The failure of an assignee to perfect its security interest in funds due under a contract between the taxpayer and a third party that had been assigned to it rendered its interest in the money inchoate and the taxpayer retained an interest in the funds to which a federal tax lien could attach. The assignment of the contract rights was within the scope of Article 9 of the California Uniform Commercial Code, the assignee was not protected under local law against a subsequent judgment lien and the federal tax lien had priority over the assignee's claim under UCC Secs. 9-301 and 9-302 because of his failure to perfect his security interest by filing a notice of the assignment.

Bruce M. Brown, Wild, Carter, Tipton, Quaschnick & Oliver, 2300 Civic Center Sq. Fresno, Calif. 93721, for plaintiffs. Michael Chun, Department of Justice, Washington, D. C. 20530, George Dekmejian, Attorney General, State of Calif. 555 Capital Mall, Sacramento, Calif. 95814, Alexander B. T. Cobb, Seltzer, Caplan, Wilins & McMahon, 3003 Fourth Ave., San Diego, Calif. 93102, Michael E. James, Central Valley Solar 1999 W. Simpson, Fresno, Calif. 93705, Guy Gurney, Division of Labor Standards Enforcement, 455 Golden Gate Ave., San Francisco, Calif. 94102, for defendant.

Magistrate's Recommendation On Defendants' ( United States of America ) Motion for Summary Judgment or Partial Summary Judgment

CHRISTENSEN , U. S. Magistrate:

The defendant United States of America 's Motion for Summary Judgment, or, in the alternative, Partial Summary Judgment, came on regularly for hearing before the Honorable A. D. Christensen, United States Magistrate. Michael Chun, Trial Attorney, Tax Division, Department of Justice, appeared on behalf of the defendant United States . Alexander B. T. Cobb of the law firm Seltzer, Caplan, Wilkins and McMahon appeared on behalf of defendants Alan Lind and S. W. Hart and Co., Pty. Ltd. dba Solahart-California. Guy Gurney, Esq. appeared on behalf of the intervenor Division of Labor Standards Enforcement, Department of Industrial Relations, State of California . There was no appearance on behalf of the plaintiff/interpleader. Following oral argument, the matter was submitted to the Court for its recommendation.

It is the recommendation of the Court to the Honorable Edward Dean Price, United States District Judge, that the defendant United States of America 's Motion for Summary Judgment be granted.

The facts of this case are as follows: On December 1, 1978, Defendant Entrophy dba Central Valley Solar (Central) assigned to defendant-claimant S. W. Hart and Co., PTY. LTD. dba Solahart-California (Solahart) all monies due or to become due from plaintiff/interpleader North American Investments (N. A. I.) to Central by reason of a certain designated contract between N. A. I. and Central. Although Solahart was not required to render any performance under the N. A. I.-Central contract, the assignment was not for the purpose of collection only. Central's assignment to Solahart constituted a transfer of a significant part of the outstanding contract rights of Central and under the terms of the assignment, N. A. I. was to pay the monies directly to Solahart. N. A. I. received notice of this assignment on December 1, 1978 .

On October 25, 1978 , the United States filed a notice of federal tax lien against Central for payroll taxes in the amount of $9,038.43 with the Fresno County recorder.

On October 30, 1978 , the United States filed the same lien as described in the immediately preceding paragraph with the U. C. C. Division, Secretary of State, Sacramento , California .

On December 27, 1978 , the United States filed a notice of federal tax lien against Central for payroll taxes in the amount of $12,578.18 with the Fresno County recorder.

On February 13, 1979 , the United States filed a notice of federal tax lien against Central for payroll taxes in the amount of $13,084.01, with the U. C. C. Division, Secretary of State, Sacramento , California .

The defendant United States asserts a lien arose against all property and rights to property of Central on the assessment dates for the amounts listed below.

Date of Assessment                  Amount

7- 3-78 ...............         $ 3,043.67

9-11-78
 ...............           5,994.76

12-21-78
 ..............          12,578.18

 

On December 4, 1978 , and December 28, 1978 , the United States served a Notice of Levy on N. A. I.

Pursuant to the tax liens, the United States sought to collect from N. A. I. the monies due and owing Central under the N. A. I.-Central contract.

Since both the United States and Solahart claimed the funds due under the N. A. I.-Central contract, N. A. I. filed an interpleader action in state court on January 10, 1979, said action being removed to federal court on February 9, 1979, wherein N. A. I. named the United States, Central and Solahart as defendants, and deposited the entire amount remaining due under the contract with the Court.

Subsequent to the filing in state court and the removal of this action to federal court, the Division of Labor Standards Enforcement, Department of Industrial Relations, State of California , as assignee of judgments for wages due against Central, was permitted to intervene.

Before discussion of the issues is presented, it should be noted that during oral argument, the attorney for Solahart, Alexander B. T. Cobb, conceded in open court that the law would not support a recovery of that portion of the retained construction payments subject to the IRS tax assessments and liens prior to the assignment of December 1, 1978 . The emphasis of his argument related to the assessment of December 21, 1978 , in the amount of $12,578.18.

The total value of the funds deposited with the Court is $16,166.64.

The issues involved in this action are as follows:

1. Did Central, on December 21, 1978 , possess any property interest in the contract rights assigned to Solahart, sufficient to allow the attaching thereto of a federal tax lien against Central?

2. If a federal tax lien has so attached, is this lien entitled to priority over the claims of the assignee Solahart to such funds?

DISCUSSION: 1. The initial premise: Title 26 §6321, of the United States Code, provides that if a person liable for any tax refuses to pay that tax after demand, the amount thereof, including interest, penalty, or addition to such tax "shall be a lien in favor of the United States upon all 'property' and 'rights to property' belonging to such person". In Aguilino v. United States, [60-2 USTC ¶9538], 363 U. S. 509, 512-514, 80 S. Ct. 1277 (1960), the Supreme Court stated:

"The threshold question in this case, as in all cases where the federal government asserts its tax lien, is whether and to what extent the taxpayer had "property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law . . . However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property' . . . This approach strikes a proper balance between the legitimate and traditional interest which the state has in creating and defining the property interest of its citizens, and the necessity for uniform admin istration of the federal revenue statutes."

In the companion case, United States v. Durham Lumber Co., [60-2 USTC ¶9539], 363 U. S. 522, 80 S. Ct. 1285 (1960), the Court made it clear to that extent, under applicable state law, the taxpayer has no property interest in the funds sought to be subjected to a tax lien, there is nothing to which the lien can attach.

SOLAHART'S ARGUMENT: Solahart urges a traditional point of view. Solahart asserts that at the time of the third assessment and lien, Central was already bound by a prior valid assignment to Solahart of the monies due from N. A. I. (between the parties the assignment is complete the moment it is made). Even though Solahart did not file the assignment as required by UCC §9302 to protect its interest against third party creditors (§9301), the assignment is nevertheless binding between the parties. See §9201 (recording statute is irrelevant regarding perfection of interest against party to the transaction). Therefore, Solahart concludes, Central no longer had any property or rights to property held by N. A. I. and there was nothing upon which the tax lien could attach.

Solahart also argues that the government's reliance on UCC §2326 is misplaced. With this contention, the Court can agree. §2326 relates to consignment sales and rights of creditors and the goods applicable thereto, and is at best, a collateral matter involved with "levy upon goods" and therefore, not pertinent or material to the ultimate resolve of this action.

Solahart finally presents the argument that because Solahart forbore on a claim in consideration of Central's assignment of its rights under the N. A. I.-Central contract, Solahart becomes a purchaser under 26 USC §6323(a) which provides as follows:

"(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. The lien imposed by §6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate."

Solahart asserts that an individual is a purchaser when, in consideration for an assignment, he forbears filing mechanic's liens and/or bringing suit to recover money. Solahart's authority for this proposition is the case of Wadley Nurseries, Inc. v. Mctac Construction Corp., [55-2 USTC ¶9661].

THE GOVERNMENT'S ARGUMENT: The United States develops its argument through the use of the UCC which was adopted in California in 1963 and is contained within West's Annotated California Commercial Code §1101 et seq. First, the government notes that UCC §2326 requires a supplier, who delivers goods to a retailer on consignment, to file according to Division 9 to protect himself from creditors of the retailer. The alleged consignment agreement was not filed. Further, pursuant to §9301 and §9302 of the UCC, a security interest in an account must be filed to be perfected. The government's final argument questions Solahart's qualification as a "purchaser" for two reasons. First, as defined in Treasury regulations on procedure and admin istration (1954 Code), §301.65323(h)-1(a)(3), consideration must be reduced to a "money value". Solahart's contention that the assignment was made in consideration for Solahart's forbearing from filing materialmen's liens, lawsuits and stop notices is not sufficient to satisfy the "money value" requirement.

Second, Solahart failed to file under Division 9, and thus, its interest was unperfected. An unperfected security interest in accounts is subordinate to a subsequent purchaser for value without notice. UCC §9301(1)(d). Thus, as the government argues, Solahart is not a purchaser protected against a federal tax lien in 26 USC §6323, (IRC 1954).

ANALYSIS: Although Article 9 of the UCC and the correlative section of the California Commercial Code §9104(f) does not apply to an assignment of contract rights for the purpose of collection only, or to an assignment of such rights where the assignee is also to perform under the contract, it does apply to:

". . . any transaction (regardless of its form) which is intended to create a security interest in . . . accounts or contract rights:

". . . any sale of accounts, contract rights or chattel paper;

". . . and to security interest created by contract including pledge or assignment . . . intended as security." (UCC §9102(1)(a)(b), (2).)

The court concludes from this language that whether the Solahart assignment is concerning a sale of, or security interest in, the Central accounts or contract rights, the transaction is within the scope of Article 9. See United States v. Trigg, [72-2 USTC ¶9642], 465 F. 2d 1264, 1268 (8th Cir. 1972).

Further, the Court would point to the fact that Article 9 is not concerned with traditional questions of title, but rather, directs its provisions to questions of "rights, obligations and remedies". See UCC §9202. As regards the rights of third parties, UCC §9301(1)(b) provides in relevant part:

"(1) . . . an unperfected security interest is subordinate to the rights of:

"* * *

"(b) the person who becomes a lien creditor after the security interest attaches and before it is perfected unless the security interest is perfected within 10 days after it attaches and a person who becomes a lien creditor before the security interest attaches . . .;"

This provision is the focal point of the Court's recommendation. Under UCC §9302, a financial statement must be appropriately filed to perfect all security interests except in certain specified situations. Since none of the exceptions to filing are applicable to the Solahart assignment, that "security interest" (within the meaning of the UCC) must be considered "unperfected" for purposes of UCC §9301. Under UCC §9301(3), a "lien creditor" is a creditor who "has acquired a lien on the property involved by attachment, levy or the like." This definition is broad enough to include the government once the government filed its assessment against Central in the instant case. See U. S. v. Trigg, supra, at 1268.

From the above statutory interpretation and reasoning, the government is entitled to priority over Solahart under Article 9 of UCC. Whatever the nature of the "property interests" which remained with Central after the assignment but prior to any filing of that assignment by Solahart, that "property interest" was sufficient to allow the attaching of a federal tax lien. See U. S. v. Trigg, supra, at 1269.

The rationale for this conclusion is that the cases cited within this recommendation and others have relied upon the "Choate doctrine" which requires, any lien, in competition with a federal priority or tax lien, to be more fixed = "more specific" or "Choate"--than had been generally supposed necessary.

In 1966, the Federal Tax Lien Act, an effort on the part of Congress to conform the tax lien laws to concepts developed in the UCC, codified much of the "Choate" doctrine.

As had been previously stated, to obtain protection against the lien creditor, the security interest must be filed. See UCC §9301 and §9302. Solahart's failure to perfect its security interest in, or purchase of, the assignment by Central renders said interest inchoate, otherwise unperfected, and allows for the retention of an interest in Central upon which a tax lien may attach. With the government entitled to priority under UCC, whatever "interest in property" is deemed present in Central regarding accounts denoted in the unrecorded Solahart assignment, that interest granted by state law is adequate to negate the argument that the accounts were sufficiently alienated from Central to avoid attachment of the tax liens. See United States v. Trigg, supra, at 1268-1269.

DISCUSSION: 2. The determination of the relative priority of a federal tax lien is to be decided by federal law. See Aguilino v. United States , supra, as has been discussed above.

ANALYSIS: The federal tax lien priority statute 26 USC §6323, now provides that if the "holder of a security interest" is to be protected, the interest must have become "protected under local law against a subsequent judgment lien" at the time the tax lien is filed. Under UCC §9301 and 9302, Solahart's unrecorded assignment was not so perfected at the time of the tax lien filing, and thus is not protected from the tax lien. The result is the same even if Solahart is considered a "purchaser" since substantially identical UCC provisions would be employed to ascertain perfection. (See below.)

The mere attachment of the government's tax lien gives it a fully perfected claim. Bank of Nevada v. U. S. [58-1 USTC ¶9228], 251 F. 2d, 820 (9th Cir. 1958).

Holders of unperfected interests remain subject to the 'first in time is first in right', priority standard. Under that standard, unperfected . . . interests are subordinate to the federal tax lien. United States v. Trigg, supra, at 1270.

It is the first lien to become "Choate" that prevails. Therefore, whether Solahart's unrecorded interest is deemed a purchase of, or a security interest in, accounts and contract rights, it is unperfected and subordinate. Accordingly, the government should be awarded judgment in an amount sufficient to satisfy, so far as the fund deposited by N. A. I. is capable, the remaining tax liability of Central, plus interest as provided by law.

This recommendation was drafted with reliance on Nevada Rock and Sand Co. v. United States [74-2 USTC ¶9617] for language and organization. For greater elaboration on the historical development of the UCC and the "Choate" doctrine, see Nevada Rock, supra.

As a result of the above recommendation, the claim by the Division of Labor Standards Enforcement must suffer summary judgment as well. In U. S. v. Division of Labor Law Enforcement, 201 F. 2d 853 (1953), a case involving the same parties and same issues, the Ninth Circuit held that the federal statute, establishing priority over claims created by a state statute, is supreme, and must be recognized.

In regard to the request by N. A. I.'s attorney for a fee for the reasonable effort in bringing this interpleader action, said request should be denied. See U. S. v. Liverpool and Globe Insurance Co., Lts. et al. [55-1 USTC ¶9136], 348 U. S. 215, 75 S. Ct. 247 (1955).

Order

PRICE, District Judge:

On September 17, 1980 , the United States Magistrate filed a recommendation granting defendant United States of America 's Motion for Summary Judgment.

This court has reviewed the pleadings and concurs with the Magistrate's recommendation.

Therefore, it is hereby ordered, for the reasons set forth in the Magistrate's recommendation, that the defendant's Motion for Summary Judgment is granted.

 

 

[39-1 USTC ¶9242]David M. Schwartz, Plaintiff v. United States of America , Defendant

United States District Court, Southern District of New York, No. 68724, Decided January 7, 1939

Rights of assignee of funds seized by U. S.--Plaintiff, an assignee of funds seized by U. S. officers from an individual arrested for an alleged violation of the liquor law, may maintain an action against the United States for such sum, and his right is not subordinate to a government claim for taxes against the assignor where such tax claim was asserted after the money had been assigned to plaintiff in payment of legal services and after the Government had been given notice of such assignment. It was not necessary for plaintiff to file a claim for refund as a condition precedent to suit.

Alexander M. Inselman, attorney for plaintiff. Lamar Hardy, United States Attorney, by Earle N. Bishopp, Assistant United States Attorney, of counsel.

GODDARD, District Judge:

This is a motion by the defendant, the United States of America, to dismiss the amended complaint in a suit which is brought under the provisions of what is commonly referred to as the Tucker Act (Title 28 U. S. C. §41, subdivision 20), to recover $261 from the United States.

The material facts alleged in the complaint and which, for the purpose of this motion, must be accepted as true, are as follows:

On October 26, 1937 one Joseph Vetrano was arrested in the Southern District of New York by an investigator of the Alcohol Tax Unit of the Bureau of Internal Revenue, for some violation of the law. In Vetrano's pockets were bills and currency amounting to $261 which the investigator took from Vetrano, and on the next day delivered to his superior officer, Walter F. Carroll. On October 28, Vetrano, in payment of legal services, etc. assigned to Mr. Schwartz, the plaintiff in this action, his title to and interest in the $261, which was still withheld by Carroll. On December 30, Mr. Schwartz formally notified Carroll that the money had been assigned to him by Vetrano, and demanded and was refused delivery of it. On the same day, namely--December 30, which was upwards of two months after the money had been taken from Vetrano and its assignment to the plaintiff, the Internal Revenue Collector for this district assessed against Vetrano a tax in the sum of $10,200.33 and a notice of levy of said tax was served on Carroll. The next day, December 31, Carroll turned the $261 over to "the defendant, United States of America , who received and accepted the same and illegally applied or attempted to apply the same towards partial payment" of Vetrano's taxes.

So long as the investigators of the Alcohol Tax Unit themselves withheld the money from the owner, Vetrano or his assignee, as the case might be, had a cause of action against the investigators individually for withholding it, for it is clear that these investigators had no authority under the law to take possession or to retain the money. When the Government, instead of repudiating the acts of the investigators and officers, ratified their acts by accepting the $261 and presuming to apply it toward the payment of Vetrano's taxes, the United States became liable for the money; for the tax had not even been assessed against Vetrano until long after Vetrano had assigned the money to the plaintiff. To recover the money it was proper for the plaintiff to proceed under the Tucker Act. Ferguson v. United States --64 Fed. 88, affirmed 78 Fed. 103.

[Refund Claim Not Required]

The Government urges that even if the money is the property of the plaintiff, the complaint should be dismissed because it fails to state that a claim for a refund of taxes was filed with the Commissioner of Internal Revenue and denied pursuant to §3226 of the Revised Statutes (26 U. S. C. §§ 1672-1673). However, it seems to me this is not a case where a taxpayer is seeking to recover a refund of a tax paid by him which was illegally assessed requiring as a prerequisite to bringing suit the filing of a claim for a refund with the Commissioner of Internal Revenue, for, if I am right, this is simply an instance of an illegal seizure and withholding by the United States of money belonging to a third party, which the Government has chosen to apply toward the payment of taxes due from Vetrano in disregard of the rights of such third party, the real owner.

The motion to dismiss the complaint for failure to state a cause of action is denied.