California2
Page1

[83-2 USTC
¶9530]In re Albert Priest, Jr., Debtor, Albert Priest, Jr., Plaintiff
v. Progressive Savings & Loan Association, a corporation; Trusten E.
Apperson and Janet J. Apperson, husband and wife; West Whittier Paint
Co.; Western Medical Commercial Exchange, Inc., a corporation, State of
California, State Board of Equalization; Guadalupe Priest, wife of
plaintiff herein; Curtis B. Danning, interim trustee, Defendants.
Internal Revenue Service, United States of America, Defendant-Appellant,
State of California, Employment Development Department,
Defendant-Appellee Professional Escrow Services, a California
corporation, Plaintiff, v. Esther B. Mendelsohn,
Rob
ert Muchnikoff, Anita R. Muchnikoff,
Rob
ert Muchnikoff and Anita Muchnikoff dba Bob's Luncheonette and Does 1
through 10, inclusive, Defendants. State of
California
, Employment Development Department, Defendant-Appellee, Internal
Revenue Service, Defendant-Appellant
(CA-9),
U. S. Court of Appeals, 9th Circuit, No. 82-5321, 82-5392, 725 FSupp
477, 8/10/83, Reversing and remanding unreported District Court and
Bankruptcy Court
[Code Sec. 6323]
Liens: Priority of federal v. state liens: Inchoateness.--Federal
tax liens on the taxpayers' assets took precedence over state liens on
their assets, because the state liens were inchoate, identifying neither
the lienor, the property subject to the lien nor the amount due under
the lien. Under
California
law, a tax lien arose when a taxpayer failed to file a timely
unemployment tax return. The state claimed that the liens became choate
when the taxpayers filed their late returns, because all necessary
identification information was contained in the returns. But the court
disagreed, stating that a choate lien could not arise merely by the
passage of a due date or filing of a return. Administrative steps to
establish the lien had not been taken. Once a return was filed, the
amount of the deficiency, interest and penalties had yet to be
determined, and possible delays in mail delivery and
admin
istrative procedure created further uncertainty.
Gayle P.
Miller, Department of Justice,
Washington
, D. C. 20530, for appellant-petitioner. Diane M. Spencer,
Los Angeles
,
Calif.
, for appellee-respondent.
Before
CHAMBERS, HUG and CANBY, Circuit Judges.
Opinion
CHAMBERS,
Circuit Judge:
These cases
present a single issue of law--that of the relative priority of Internal
Revenue Service liens, which arise upon assessment under 26 U. S. C. §6322,
and California unemployment tax liens, which are said to arise when the
delinquent tax return is filed, under Section 1703 of the California
Unemployment Insurance Code. In each case, the
California
taxpayer filed the State tax return after the date it was due.
Thereafter, the Internal Revenue Service assessment was made and notice
of federal tax lien was recorded with the county recorder. At some later
date,
California
filed its notice of State tax lien and recorded it with the county
recorder.
In Professional
Escrow Services v. I. R. S. (a State interpleader action that was
removed to District Court), the district judge held that the
California
lien was sufficiently choate to take priority over the federal lien. In In
re Priest (an adversary proceeding in Bankruptcy Court) 1
the bankruptcy judge would have recognized the priority of the federal
lien, but he considered himself estopped by the judgment of the district
court in Professional Escrow Services, and thus granted judgment
for the State. 2
U. S.
81, 84-85, 745 Ct. 767, 369-70, 98 L. Ed. 520, (1954), the priority of
statutory liens is determined by the principle of "the first in
time is the first in right," but the lien that is competing with
the federal lien must be 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 State
statute in question is Section 1703 of the California Unemployment
Insurance Code which, immediately prior to its amendment effective in
1979, stated that a tax lien arose when the unemployment tax return was
"due and payable." This was defined as "the date a return
is required to be filed, without regard to any extension of time,
without payment of the amount due . . .." Mere passage of the due
date, under the statute as it was then worded, was intended to give rise
to an enforceable lien on all of the taxpayer's property.
Section 1703,
as amended in 1979, stated:
(a)
If any employing unit or other person fails to pay any amount imposed
under this division at the time that it becomes due and payable, the
amount thereof, including penalties and interest, together with any
costs in addition thereto, shall thereupon be a perfected and
enforceable state tax lien . . .
(b)
For the purposes of this section, amounts are "due and
payable" on the following dates:
(1)
For amounts disclosed on a return received by the director before the
date the return is delinquent, the date the return would have been
delinquent;
(2)
For amounts disclosed on a return filed on or after the date the return
is delinquent, the date the return is received by the director;
(3)
For all other amounts, the date the assessment is final.
California
concedes, as it must, that the wording of the pre-1979 statute is
insufficient to create a choate lien under the rule of
New Britain
. The mere passing of the date when the tax return should have
been filed does not identify the lienor, the property, or the amount
due. It is the State's argument, however, that in both cases now before
us its liens became choate at the moment the taxpayers actually filed
their delinquent returns. Thus, regardless of the fact that one or more
of the liens here in question was governed by the pre-1979 wording of
Section 1703, the State is putting into issue (as to all of the liens in
these cases) the standard of choateness set forth in the California
statute, as it was amended in 1979.
California
characterizes the effect of filing the delinquent State return as
"self assessment" and contends that this admission of
liability by the taxpayer fulfills the
New Britain
requirements for choateness. The district judge in Professional
Escrow Services agreed with the State and concluded that there was
"assessment on the date of receipt of the tax return." It was
his view that the identity of the lienor (the State) was now fixed, the
property subject to the lien (all of the taxpayer's property, according
to the statute) was fixed, and the amount of the lien (the sum admitted
to be owing by the taxpayer) was fixed. Relying on Thriftway Auto
Rental Corp. v. Herzog [72-1 USTC ¶9311], 457 F. 2d 409 (2nd Cir.
1972), the district judge stressed that the issue was whether the State
statute gave rise to an enforceable lien, and not whether the State
statute was sufficiently similar to the federal statute.
The Internal
Revenue Service has not argued, on these appeals, that the State lien
statute must be identical with the federal lien statute. The Service
does argue that there cannot be a choate lien, under the
New Britain
requirement of choatness, without some activity by the State to fix the
taxpayer's liability. The Service argues that Thriftway is not
support for
California
's claim that its liens are choate, correctly noting that in Thriftway
there had been an assessment and a warrant had been issued with the
county clerk. Thriftway was not a case, such as those under
consideration here, where the State claims a choate lien may arise
without any activity, whatsoever, on its part.
We are
persuaded that Section 1703(b)(2) (1979), cannot be deemed to create
liens that are sufficiently choate under the test of
New Britain
. We agree with the bankruptcy judge in Priest that
"a lien cannot arise prior to the taking of any
admin
istrative steps to establish the lien." The mere receipt of a
delinquent State tax return is too vague and indefinite a standard by
which to establish a lien that is capable of taking priority over a
federal lien. The uncertainty of postal delivery, the uncertainty of the
length of time it might remain on someone's desk, and the uncertainty of
the time that might be consumed in processing the return through the
admin
istrative machinery, are realities to be considered. Significant delays
might well occur before there was even any acknowledgment of the
director's receipt of the delinquent return, or any
admin
istrative act by which the State acknowledged in its own accounts that
the taxpayer is liable for unpaid taxes, or the precise amount of that
delinquency, and the amount of penalty, interest and fees.
The lien
created by Section 1703(a) is for the amount of the tax delinquency
"including penalties and interest, together with any costs in
addition thereto." Under the rule of New Britain a lien is
not choate unless "there is nothing more to be done" and
"the amount of the lien" is established, 374 U. S. at 84, 74
S. Ct. at 369. In the cases before us the total amount of the lien could
not be known until the Director computed the interest, penalties and
fees. These amounts were not established when the return is received by
the Director; they were established thereafter. On the records before
us, it appears that the taxpayers had no advice from the State, as to
the computation of tax liability, interest, penalties, and fees, until
the notices of tax lien were filed.
Clearly, the
State lien statute need not be identical with the federal statutory
scheme.
United States
v.
Vermont
, 377
U. S.
351 (1964). But for there to be priority over the federal lien, the
State lien statute must encompass a scheme that provides sufficient
choateness under the rationale and rule of
New Britain
. Section 1703 of the California Unemployment Insurance Code as
it was worded prior to 1970, and Section 1703(b)(2) after the 1979
amendment provides insufficient choateness to permit the State lien to
take priority over the federal lien.
Reversed and
remanded with directions to enter judgment in favor of the Internal
Revenue Service in both cases.
1
We have jurisdiction over the appeal from the Bankruptcy Court despite Northern
Pipeline Const. Co. v. Marathon Pipe Line Co., -- U. S. --, 102 S.
Ct. 2858, 73 L. Ed. 2d 598, (1982), as the holding in that decision is
prospective only and the decision in Priest predated Northern
Pipeline. See Buckley v. Valeo [76-1 USTC ¶9189], 424
U. S.
1, 142, 96 S. Ct. 612, 693, 46 L. Ed. 2d 659 (1976).
2
The parties dispute the validity of the bankruptcy judge's conclusion
that he was collaterally estopped by the judgment in Professional
Escrow. As both cases are consolidated here, we will address the
underlying issue presented by both. As indicated infra we rely in
part on the bankruptcy judge's reasoning in coming to our decision in
these cases.
[77-2 USTC
¶9670]William Little, Plaintiff v.
United States of America
, Defendant
U.
S. District Court, Cen. Dist. Calif., CV 77-1235-WMB, 6/2/77
[Code Sec. 7425--Result unchanged under '76 Tax Reform Act]
Lien for taxes: Discharge of lien: Notice.--The taxpayer, who
purchased property at a nonjudicial sale, took the property subject to
two tax liens because notice of the sale was not given to the IRS. The
IRS had properly filed notice of these two liens more than 30 days prior
to the sale. However, because notice of a third lien was not filed
within 30 days of the sale, the purchaser was not subject to the third
lien.
[Code Sec. 6323--Result unchanged under '76 Tax Reform Act]
Lien for taxes: Priority of state taxes: State claim discharged:
Subrogation.--The taxpayer-purchaser was entitled to the priority of
the state's senior claim and thus was entitled to his purchase price
from the IRS sale proceeds. The purchaser had discharged the state's
claim when he purchased the property at the nonjudicial sale.
William
Little, 6161 Temple Hill Dr., Los Angeles, Calif. pro per.
Rob
ert O. Harker, 420 N. Brand Blvd., Glendale, Calif. 91203, for
deefendant.
Findings
of Fact and Conclusions of Law
BYRNE, Jr.,
District Judge:
This matter
was tried without a jury before the Honorable Wm. Matthew Byrne, Jr.,
the plaintiff appeared through his attorney,
Rob
ert O. Harker, and the defendant was represented by its attorney,
William D. Keller, United States Attorney, and Mason C. Lewis, Assistant
United States Attorney.
The cause was
tried upon the Complaint for wrongful Internal Revenue levy and
Injunctive Relief, Defendant's Response, Stipulation of Facts and
Issues, and all exhibits attached thereto. The cause having been argued
and submitted for decision, and the court, being fully advised in the
premises, now makes its Findings of Fact and Conclusions of Law.
Findings
of Fact
1. The real
property which is the subject of these proceedings is described as:
"Lots 740
and 741 of the Forthmann Tract, in the City of Los Angeles, County of
Los Angeles, State of California, as per map recorded in Book 7, Pages
158 and 159 of Maps, in the office of the County Recorder of said
County, more commonly known as 10524 and 10526 Juniper Street, Los
Angeles, California."
2. Plaintiff,
William Little, purchased this property for $4,500.00 on
February 4, 1976
, from the Los Angeles County Tax Collector at a public auction sale.
The property previously had been sold and conveyed under California
Revenue and Taxation Code Sections 3436 and 3511 to the State of
California
for nonpayment of real property taxes. These taxes had been legally
levied and were a proper lien upon said property. Plaintiff's purchase
was confirmed by a tax deed from the Tax Collector of the
County
of
Los Angeles
to Plaintiff, dated
February 11, 1976
, recorded
February 20, 1976
as Document No. 3601, in Book D6976, Page 908, Official Records of Los
Angeles County.
3. The said
real property taxes are taxes of general application levied by the
County
of
Los Angeles
, based upon the value of said real property.
4. At the time
of the public auction on
February 4, 1976
, the Tax Collector of the
County
of
Los Angeles
would have required for redemption of the property a payment of
$4,844.56.
5. The
United States
Department of the Treasury, Internal Revenue Service, recorded a Notice
of Federal Tax Lien on
February 7, 1973
, as Document No. 1596, in Official Records of Los Angeles County,
reflecting the $1,212.04 was due and owing from LEE VAN HARRIS and HELEN
HARRIS for unpaid federal taxes. This lien was filed more than 30 days
before the sale of the subject property at the County Tax Sale on
February 4, 1976
.
6. The
United States
Department of the Treasury, Internal Revenue Service, recorded a Notice
of Federal Tax Lien on
March 14, 1973
, as Document No. 2436, in Official Records of Los Angeles County,
reflecting that $1,415.57 was due and owing from LEE VAN HARRIS and
HELEN HARRIS for unpaid federal taxes. This lien was filed more than 30
days before the sale of the subject property at the County Tax Sale on
February 4, 1976
.
7. The
United States
Department of the Treasury, Internal Revenue Service, recorded a Notice
of Federal Tax Lien on
February 2, 1976
, as Document No. 1945, in Official Records of Los Angeles County,
reflecting that $4,407.05 was due and owing from LEE VAN HARRIS and
HELEN HARRIS for unpaid federal taxes. This lien was not filed within 30
days of the County Tax Sale on
February 4, 1976
.
8. The
taxpayers named in the Federal Tax Lien Notices, LEE VAN HARRIS and
HELEN HARRIS, had an interest in the real property at some point in time
before said property was sold and conveyed to the State of
California
for non-payment of real property taxes.
9. Notice of
the
February 4, 1976
, public auction sale of the property was not given pursuant to the
requirements of 26
U. S.
C. §7425(c)(1). However, the Internal Revenue Officer to whom the
Harris account had been assigned had become aware of the State's
scheduled sale through conversations with the taxpayer some 25-30 days
prior to the sale. The Internal Revenue Service did not participate in
any manner in the Tax Collector's
February 4, 1976
sale of the subject property.
10. With
respect to the February 4, 1976 Tax Collector's sale, the County Tax
Collector published and distributed a sheet entitled "General
Information on Public Auction Sales of Tax Delinquent Real Property in
the County of Los Angeles." Among other items, this sheet includes
the following:
"If
property is encumbered with improvement bonds, irrigation taxes,
Internal Revenue liens, etc., a tax deed may not discharge these
obligations."
11. There is
no evidence that Plaintiff had actual knowledge of the existence of the
Internal Revenue Service liens on the subject property.
12. On
December 10, 1976
, Defendant United States of
America
through its Internal Revenue Service, made a levy and seizure of the
subject real property for non-payment of Internal Revenue taxes due from
LEE VAN HARRIS and HELEN HARRIS.
13. On
March 25, 1977
, the Internal Revenue Service advertised in accordance with law a
sealed bid sale of said real property for
April 6, 1977
. Pursuant to agreement of the parties and pending final disposition of
this matter, the sale was indefinitely postponed and Plaintiff agreed
not to convey, encumber, or in any way effect the title to the property.
14. Plaintiff
estimates the current fair market value of such property, independent of
any potential encumbrances upon title at between $10,000 and $12,000.
Based upon the
Los Angeles
County
tax assessment, the Internal Revenue Service estimates the current fair
market value of the property to be $18,000.
15. Any
Conclusions of Law to the extent that they are deemed to be Findings of
Fact are incorporated into these Findings of Fact.
Conclusions
of Law
1.
Jurisdiction over the subject matter is conferred in this court by 28
U. S.
C. §1340.
II.
Pertinent Statutes and Regulations
At all times
relevant to the matters herein, the following applicable statutes and
regulations provided in pertinent part:
1.
CAL. REV. & TAX. CODE §2192.1:
Every
tax declared in this chapter to be a lien on real property, and the lien
of taxes and assessments upon real property of all taxing agencies as
set forth in Section 3900 of this code, have priority over all other
liens on the real property, regardless of the time of their creation.
2.
26 U. S. C. §6323(b)(6):
Even
though notice of a lien imposed by §6321 has been filed, such lien
shall not be valid . . . (6) With respect to real property, as against
the holder of a lien upon such property, if such lien is entitled under
local law to priority over security interests in such property which are
prior in time, and such lien secures payment of (A) a tax of general
application levied by any taxing authority based upon the value of such
property . . .
3.
26 U. S. C. §7425(b):
.
. . a sale of property on which the United States has or claims a lien .
. . (1) shall, except as otherwise provided, be made subject to and
without disturbing such lien . . . if notice of such lien was filed in
the place provided by law for such filing . . . more than 30 days before
such sale and the United States is not given notice of such sale in the
manner prescribed in subsection (c)(1).
4.
26 U. S. C. §7425(c)(1):
Notice
of a sale to which subsection (b) applies shall be given . . . in
writing, by registered or certified mail, or by personal service, not
less than 25 days prior to such sale, to the Secretary or his delegate.
5.
TREAS. REG. §301.7425(3)(c) example (5):
For
purpose of this section, this public sale is considered to be a
nonjudicial sale described in §7425(b) because the sale is made
pursuant to a statutory lien on the property sold.
6.
26 U. S. C. §6323(i)(2):
Where,
under local law, one person is subrogated to the rights of another with
respect to a lien or interest, such person shall be subrogated to such
rights for purposes of any lien imposed by §§ 6321 or 6324.
III.
Application of Pertinent Statutes and Regulations:
1. Pursuant to
California Revenue & Taxation Code Section 2192.1, the lien for real
property taxes levied by the
County
of
Los Angeles
is entitled to priority over security interests in said property which
are prior in time.
2. The County
of Los Angeles's lien with respect to real property taxes is of the type
contemplated by 26 U. S. C. §6323(b)(6).
3. Section
7425(b) of Title 26, United States Code, applies to a sale by a County
pursuant to its lien for real property taxes. The statute requires that
the
United States
file notice of their lien more than 30 days before the sale of property
upon which the
United States
claims a lien in order for the sale of the property to be made subject
to the lien of the
United States
.
4. The
United States
complied with the requirements of 26
U. S.
C. §7425(b) with respect to the two 1973 Internal Revenue Service
liens.
5. The 1976
Internal Revenue Service lien was not filed within 30 days of the county
tax sale. Pursuant to 26
U. S.
C. §7425(b), the property purchased by Plaintiff was not subject to the
1976 Internal Revenue Service lien.
6. Notice of
the February 4, 1976 public auction was not given to the Internal
Revenue Service pursuant to the requirements of 26 U. S. C. §7425(c)(1),
and thus the purchaser took the property subject to the two 1973
Internal Revenue Service liens which were properly and timely filed. Puls
v. United States [74-1 USTC ¶9322], 387 F. Supp. 760 (N. D. Cal.
1974); United States v. Rosen, 77-1 USTC ¶9355 (D. Md.
12/20/76
).
7. The County
of Los Angeles' lien for real property taxes was senior to the liens of
the Internal Revenue Service in accordance with 26 U. S. C. §6323(b)(6).
When Plaintiff purchased the property, he discharged the senior claim
held by the
County
of
Los Angeles
, and is therefore subrogated and equitably entitled to the amount of
his purchase price of $4,500.00.
Gallup
v.
United States
, 358 F. Supp. 776, 780 (D.
Neb.
1973). Plaintiff should therefore have first claim to any Internal
Revenue Service sale proceeds to the extent of $4,500.00.
8. Any
Findings of Fact to the extent that they are deemed to be Conclusions of
Law are incorporated into these Conclusions of Law.
[69-1 USTC
¶9437]In the Matter of Webbell Marine Manufacturing
Co.
, Bankrupt
U.
S. District Court, Central Dist. Calif., Bankruptcy No. 20,442, 5/13/69
[Code Secs. 6321-6323]
Lien for taxes: Bankruptcy: California state tax lien: Circular
priority.--A federal tax lien had priority over a California state
tax lien for unpaid unemployment taxes, but was subordinate to the
security interest of the trustee in bankruptcy. Further, the trustee was
a purchaser for value under
California
law, and since he did not have actual knowledge of the unpaid state tax
lien, his interest had priority over the state's lien created under the
recorded tax certificate.
Marvin Neben,
730 N. Euclid St.
,
Anaheim
,
Calif.
, for debtor.
Memorandum
Opinion and Order
PHELPS,
Referee:
This matter
involves the priority of liens upon a fund created by a foreclosure
sale, as between three claimants; the Department of Employment of the
State of California, the Internal Revenue Service, and the trustee of
the estate of the above-named bankrupt.
The common
debtor was Orange County Recreation Enterprises, Inc., which became a
customer and debtor of the above-named bankrupt during an operating
proceedings. That debtor organization is now defunct, but no bankruptcy
proceedings have been filed by or against it. It was engaged in the
pleasure boat sales business, and in such business had encumbered its
personal property by a duly filed security agreement and financing
statement in favor of Western Funding, Inc. All parties concede the
priority of this lien, and it has been paid in full and is no longer of
concern here.
Next in time,
the Internal Revenue Service made an assessment under §6321 of Title
26, U. S. C. A., for unpaid taxes of $5,981.15 in May, 1968. Then on
June 26, 1968, the Department of Employment of the State of California
recorded in the County Recorder's office a tax certificate for $968.81
unpaid employment taxes pursuant to the provisions of §1703 of the
Unemployment Insurance Code.
On the
following day, the trustee of the estate of Webbell Marine Manufacturing
Co. recovered a judgment for $4,470.00 against the common debtor and on
the same day caused a writ of execution to be issued and a levy made
upon the goods of the judgment debtor and caused a keeper to be placed
in possession of its business premises. Immediately thereafter,
negotiations commenced between the trustee in bankruptcy (the judgment
creditor) and the judgment debtor, and settlement was soon reached.
Pursuant to the settlement the lien of the execution was released, the
keeper was removed from the business premises of the judgment debtor,
the judgment debtor executed a financing statement and security
agreement covering its goods and agreed to pay the $4,470.00 plus
interest and costs to the trustee, and the trustee extended the time for
payment approximately six months.
The Court must
find that the trustee released the lien of the execution and acquired
his contractual lien without having actual knowledge of the recorded tax
certificate of the Department of Employment. This point is not
stipulated to by the Department of Employment but the evidence on the
point is convincing and is not contradicted.
Thereafter the
debtor violated the terms of the security agreement, and the trustee in
bankruptcy then took peaceful possession of the goods described in the
security agreement. An auctioneer was thereafter employed to auction the
goods in foreclosure of the security agreement held by the trustee.
After the auction sale the Internal Revenue Service made a levy upon the
funds in the hands of the auctioneer, being $8,245.36 after payment of
expenses of sale and the first lien. All parties agree that the
assessment lien, not being recorded in the
County
Recorder
's office, is subordinate to the security interest of the trustee in
bankruptcy, and all parties agree that the assessment lien has priority
ahead of the recorded lien of the Department of Employment. The
Department asserts priority over the trustee thus creating a circuity
problem, but the trustee contests the Department's claim of priority.
Prior to the
1957 amendment to §1703 of the Unemployment Insurance Code, the lien
created by the recording of a tax certificate under that section
affected only real property. By the amendment of 1957 the lien for
unpaid taxes is imposed upon both real and personal property
"except that with respect to personal property the lien shall not
be valid against a purchaser for value without actual notice of the
lien."
The Department
of Employment argues for an exceedingly narrow interpretation of the new
language, and concedes only that the lien on personal property would not
be good as against purchasers for value without actual knowledge of the
lien where the certificate was defective in some manner or where it was
defectively recorded. The Department asserts that knowledge is
conclusively presumed from the recording, and that therefore, the phrase
"without actual knowledge of the lien" means
"without actual knowledge or constructive notice of
the lien."
The Department
cites Cowden v. Cress, 202 Cal. App. 2nd 1; Wheaton v. Nolan,
3 Cal. App. 2nd 401; Lady Washington Consolidated Company v. Wood,
113 Cal. 492; Consolidated Reservoir and Power Co. v. Scarborough,
216 Cal. 698; and Wood v. Carpenter, 101 U. S. 135. In the Cowden
case the plaintiff sought to quiet title and had a recorded deed. The
defendant purchaser had had the title checked by a title company but the
title company had, through an error, missed the recorded deed to
plaintiff. The court stated, among other things, "means of
knowledge, such as recording in public records . . . is deemed, in law,
to be knowledge."
In the
Wheaton
case, plaintiff sued his attorney for negligence in delaying attachment
of property of the defendant in a law suit until other creditors had
attached all of the defendant's property, thereby exhausting potential
security. The plaintiff sought to avoid the bar of the statute of
limitations by asserting he had no knowledge of the negligence. The
court held the action was barred by the statute saying that "means
of knowledge, especially where it consists of public records, is deemed
in law to be knowledge."
The Lady
Washington case, the
Scarborough
case and the Carpenter case all involved actions for fraud in
which the plaintiff sought to avoid the bar of the statute of
limitations by alleging that the plaintiff did not have knowledge of the
fraud within the statutory period. In each case the court held that the
plaintiffs' complaints were defective and stated that the means of
knowledge, especially where it consists of public records, is deemed in
law to be knowledge.
The cases
cited by the Department are not controlling here. None of them deal with
the problem of statutory construction, and all are readily
distinguishable from the case at bar.
The state
legislature had a very practical problem in mind when the statute was
amended, and that is, whether a purchaser of personal property should be
required to make an investigation of public records as to tax liens
prior to making his purchase. The legislature did not contemplate that
each purchaser or each boat sold by the debtor should go to the
County
Recorder
's office to check the county records for liens. Instead, the
legislature contemplated that purchasers of merchandise from the
businessman would acquire title free and clear of the recorded tax lien.
If the language is interpreted exactly as it reads, its application will
not do violence to usual business practices; and all the people who deal
with merchants can do so with safety, without the trouble, the expense,
the delay and the risk of investigating public records before they make
purchases.
The trustee
contends that when he gave up the security of the lien under his writ of
execution, and made the agreement extending time for payment, and was
granted a security interest in the debtor's goods, that he, the trustee,
thereby became a purchaser for value within the meaning of §1703. At 59
C. J. S. §241, the text discusses the giving of an encumbrance of real
property to secure a pre-existing debt as constituting a purchase for
value, and also discusses extension of time and the surrender of prior
security in relation to the problem. The text sets forth the general
rule that an encumbrancer, even for a preexisting debt, who extends
additional time and surrenders prior security is a purchaser for value.
California
cases agree with the general text statement. Phelps v. American
Mortgage Company, 40
Cal.
App. 2nd 361, holds that a beneficiary under a deed of trust is a bona
fide purchaser. Eckman v. Pulums County Bank, 215
Cal.
671, holds that a beneficiary of a deed of trust given to secure an
antecedent debt is a purchaser for value. Tripler v. MacDonald Lumber
Co., 163
Cal.
144, holds that the extension of time for payment of a pre-existing debt
is sufficient consideration to make a mortgagee a purchaser for value.
The cases and
the text cited by the trustee all deal with a "purchaser for
value" in the real property context. Should the same interpretation
be given to the words in the statute dealing with liens on personal
property? It should be noted that the statute does not define the term.
Section
1201(44)b of the California Commercial Code defines "value" as
including the taking as security for a pre-existing debt. Section
1201(32) and (33) define a purchaser as including one who takes by
mortgage or lien. It should be noted that §1201(9) defines "buyer
in ordinary course of business" much more restrictively than a
purchaser for value by excluding a transfer in bulk or as security for
or in satisfaction of a pre-existing debt. The California Commercial
Code was adopted in 1963, six years after the 1957 amendment to the tax
statute.
But preceding
the adoption of the Commercial Code,
California
had at least four statutes closely related to the point. In 1935
California
adopted the Uniform Trust Receipts Act, which defines a purchaser as
including a mortgagee or pledgee and states that a mortgagee "is a
purchaser and not a creditor," and defines value as includig the
taking as security for a pre-existing debt. Former §3013(10), (11) and
(15) of Civil Code. In the Uniform Bill of Lading Act (former §2132b of
Civil Code) and in the Uniform Warehouse Receipts Act (former §1858.4
of Civil Code), and in the Uniform Sales Act (former §1796 of Civil
Code), the terms are similarly defined.
I hold that
the trustee is a purchaser for value within the meaning of the statute,
and since he did not have actual knowledge of the unpaid tax lien, he
takes his interest free of the lien under the recorded tax certificate.
This Court has
no jurisdiction to direct the disposition of the funds remaining in the
hands of the auctioneer after paying the trustee's claim. The auctioneer
was not an agent of the trustee to conduct a general liquidation sale.
The assets of the debtor were not before this Court for
admin
istration and liquidation as in the usual bankruptcy case. The authority
given to the auctioneer by order of this Court authorizing his
employment should extend only to the extent necessary to pay the debt of
the secured party, i.e. the trustee, together with the expenses
of sale. Any auction sale beyond that extent should not be directed by
this Court, and therefore, the proceeds derived from such additional
activities should be beyond the reach of this Court.
This
Memorandum Opinion shall be deemed to be Findings of Fact and
Conclusions of Law.
[Order]
It is ordered
that Harry Engelson pay to
Rob
ert H. Stopher, as trustee of the estate of said bankrupt, the sum of
$4,470.00 with interest thereon at 7 percent per annum from
June 28, 1968
, together with $892.61 as costs of the foreclosure advanced.
[67-1 USTC
¶9291]Publix Title Company, a corporation; Myer Silverman; Albert E.
Greer; and Bertha S. Waldman, Plaintiffs v. United States of America,
Defendant Third-Party Plaintiff v. The
County
of
Los Angeles
, Third-Party Defendant
U.
S. District Court, Central Dist. Calif., No. 64-865-S Civil, 1/4/67
[1954 Code Sec. 6323]
Tax liens: Priority: California state taxes.--The tax liens of
the United States did not attach to any of the proceeds realized by the
State of California from the sale of certain real estate where the state
liens for city and county ad valorem taxes on the property became choate
and were prior in time and right to the liens of the United States. The
deed of the real estate to the state and the subsequent sale by the
state both conveyed title free and clear of any liens or claims of the
United States
.
Rob
ert E. Rosskopf, 4519 Admiralty Way, Suite 200, Marina del Rey, Calif.,
for plaintiffs. Francis C. Whelan, Manuel L. Real, John K. Van de Kamp,
United States Attorneys, Loyal E. Keir, Arthur M. Greenwald, James S.
Bay, Assistant United States Attorneys, Los Angeles, Calif., for
defendant and third-party plaintiff. Harold W. Kennedy, County Counsel,
Irvin C. Taplin, Jean Louise Tarr, Deputy County Counsels, 648 Hall of
Administration, Los Angeles, Calif., for third-party defendant.
Findings
of Fact and Conclusions of Law
STEPHENS, JR.,
District Judge:
The above
entitled matter came on regularly for hearing in the above entitled
Court on October 19, 1965, before the Honorable Albert Lee Stephens,
Jr., Judge presiding;
Rob
t. E. Rosskopf, Esquire, appearing on behalf of plaintiffs PUBLIX TITLE
COMPANY, a corporation, MYER SILVERMAN, ALBERT E. GREER, and BERTHA S.
WALDMAN; Messrs. Manual L. Real, United States Attorney, Loyal E. Keir,
Assistant United States Attorney, and Arthur M. Greenwald, Assistant
United States Attorney, by Arthur M. Greenwald, Esquire, appearing on
behalf of defendant and third-party plaintiff UNITED STATES OF AMERICA;
Messrs. Harold W. Kennedy, County Counsel, Irvin C. Taplin, Deputy
County Counsel, and Jean Louise Tarr, Deputy County Counsel, by Jean
Louise Tarr, Esquire, appearing on behalf of third party defendant THE
COUNTY OF LOS ANGELES; and it appearing that a Disclaimer has been filed
by defendant STATE OF CALIFORNIA; and said matter having been submitted
to the Court upon the facts contained in the Pretrial Conference Order
and upon written briefs to be thereafter submitted by the parties; and
briefs having been filed by and on behalf of the parties hereto, and
having been fully considered by the Court, and the Court having reached
a determination thereof, makes its Findings of Fact and Conclusions of
Law, as follows:
Findings
of Fact
The Court
finds:
I The Court
has jurisdiction of this action by virtue of the provisions of Title 28,
United States Code, Sections 1345 and 1346(a)(s).
II The real
property involved in this action is improved with a factory building
located at
1650 Tarleton Street
,
Los Angeles
,
California
, and is legally described as:
The
Northwesterly 110 feet of Lot 26 of the J. G. McDonald Tract, as per map
recorded in Book 70, page 20 of Miscellaneous Records, in the office of
the
County
Recorder
of
Los Angeles County
,
California
.
III On the
first Monday in March, 1952, B. W. Minsky was the owner of record of
said real property.
IV On the
first Monday of March of each of the years hereinafter set forth, said
real property was assessed under the provisions of the Revenue and
Taxation Code of the State of California for Los Angeles City and Los
Angeles County ad valorem property taxes; and on or about September 1st
of each of said years, the tax rolls of the County of Los Angeles were
equalized and assessments were levied against said real property for
said respective years in the following amounts, to-wit:
1952 .... $ 9i.17
1953 .... 81.28
1954 .... 83.57
1955 .... 126.33
1956 .... 419.12
1957 .... 498.65
1958 .... 679.56
V None of said
taxes as listed in Finding IV hereof were paid. On
June 30, 1953
said real property was sold to the State of
California
for delinquent 1952 taxes, pursuant to the provisions of Section 3436 of
the Revenue and Taxation Code of the State of
California
.
VI On
July 1, 1958
said real property was deeded to the State of
California
pursuant to the provisions of Section 3511 of the Revenue and Taxation
Code of the State of
California
.
VII On
February 23, 1960
said real property was sold at public auction by the Tax Collector of
Los Angeles County, pursuant to the provisions of Sections 3691 through
3731, inclusive, of the Revenue and Taxation Code of the State of
California
. Said property was purchased for the sum of $10,600.00 in cash, which
was paid to said Tax Collector by plaintiffs' predecessors in title. A
deed to said purchasers, from the State of
California
, was issued by said Tax Collector and was recorded in the office of the
County
Recorder
of
Los Angeles County
,
California
, on
March 22nd, 1960
, in Book D789 at page 91, Official Records of Los Angeles County,
California. Plaintiffs are the present owners by mesne conveyances from
said purchasers of all of the title conveyed by said deed from the State
of
California
.
VIII That
during the year 1960, pursuant to the provisions of Section 4673 of the
Revenue and Taxation Code of the State of
California
, the Tax Collector of Los Angeles County disbursed said amount of
$10,600.00 to the taxing agencies for whom said Tax Collector was acting
as the collecting agent.
IX On February
23, 1960 the amounts which would have been required to redeem said
property from the sale and deed to the State, as computed pursuant to
Sections 4102, 4103 and 4104 Revenue and Taxation Code of the State of
California, were as follows:
Tax of 1952 Book 5 Page 48 Par./Asmt.
No. 39449 ................................ $ 92.17
Penalty for Delinquency .................. 5.53
Costs .................................... 1.00
Sold to State for ........................ $ 98.70
Redemption Penalty 46% ................... 42.39
Tax of 1953 Book 5 page 88 Par./Asmt.
No. 39086 ................................ 81.28
Redemption Penalty 40% ................... 32.51
Tax of 1954 Book 6 Page 16 Par./Asmt.
No. 39115 ................................ 83.57
Redemption Penalty 34% ................... 28.41
Tax of 1955 Book 4 Page 195 Par./Asmt.
No. 36510 ................................ 126.33
Redemption Penalty 28% ................... 35.37
Tax of 1956 Book 15 Page 171
Par./Asmt. No. 147087 .................... 419.12
Redemption Penalty 22% ................... 92.20
Tax of 1957 Book 15 Page 43 Par./Asmt.
No. 138372 ............................... 498.65
Redemption Penalty 16% ................... 79.78
Tax of 1958 Book 6 Page 251 Par./Asmt.
No. 133029 ............................... 679.56
Redemption Penalty 8% .................... 54.36
Tax of 1959 Unassessed ................... 594.71
Redemption Penalty ....................... 17.84
Code Area 4 State Redemption Fee ......... 1.50
Total amount necessary to redeem
on or before
2-23-60
..................... $2,966.28
X By deed
dated
August 12, 1955
, and recorded
October 6, 1955
, B. W. Minsky conveyed the fee title of said property to Fred Saldana,
subject to then existing County and City ad valorem property tax liens.
XI The U. S.
Director of Internal Revenue, a delegate of the Secretary of the
Treasury, made the following assessments for unpaid Federal Withholding
and Federal Insurance Contributions Act against taxpayers Fred Saldana,
Ralph J. Saldana, Frank Solis, Edward Jiminez and Arthur Arellanes, dba
Solis Foundary Company, notices and demands for payment of which were
made upon said taxpayers; notices of which were filed with the Los
Angeles County Recorder; and the unpaid balances of which are as
follows, to-wit:
(T) Taxes
(I) Interest
* Plus interest thereon as provided by law
** Filed with the County Recorder, Los Angeles County, California
Ralph Saldana, Fred Saldana, Arthur Arellanes, Edward Jiminez and Frank Solis,
d/b/a Solis Foundary Co.,
filed on September 25, 1956, individual petitions in bankruptcy.
Said bankruptcy proceeding was closed on
January 13, 1958
. On
February 28, 1962
,
Ralph Saldana executed tax collection waivers extending the
statutory period of collection to
August 10, 1973
. On
April 2, 1962
, Arthur
Arellanes executed tax collection waivers extending the period of collection to
August 10, 1973
. On
May 21, 1962
, Fred Saldana, Edward Jiminez and Frank
Solis executed tax collection waivers extending the statutory period of collection to
August 10, 1973
.
XII On or
about
September 13, 1963
, the
United States
seized said property under the provisions of Section 6331 United States
Internal Revenue Code, and has retained control over said property since
that date.
XIII Since the
sale of said property to plaintiff's predecessors, said property has
been assessed and ad valorem property taxes levied thereon by the Tax
Collector of Los Angeles County for the following years in the following
amounts, to-wit:
1960 .... $595.08
1961 .... 614.78
1962 .... 614.47
1963 .... 641.30
1964 .... 675.00
1965 .... (unknown)
That none of said taxes have been paid, and on
June 30, 1961
, said property was sold to the State of
California
for delinquent 1960 taxes.
XIV On or
about
March 13, 1964
, the
United States
filed a claim with the Los Angeles County Board of Supervisors for the
sales proceeds received by
Los Angeles
County
on
February 23, 1960
. On
February 4, 1965
, the District Director of Internal Revenue served upon the authorized
representative of the Board of Supervisors a Notice of Levy as to these
proceeds. On
February 9, 1965
, the Board of Supervisors formally adopted an order rejecting the claim
of the
United States
, conveying said rejection to the
United States
by letter dated
February 14, 1965
. On
February 15, 1965
, a final demand for payment was served upon the
County
of
Los Angeles
, which has not been honored. No portion of said proceeds has been paid
to the
United States
.
Conclusions
of Law
Based on the
foregoing Findings of Fact, the Court concludes:
I That
plaintiff PUBLIX TITLE COMPANY, a corporation, is the owner of an
undivided one-third interest; that plaintiff MYER SILVERMAN is the owner
of an undivided two-ninths interest; that plaintiff BERTHA S. WALDMAN is
the owner of an undivided two-ninths interest; and plaintiff ALBERT E.
GREER is the owner of an undivided two-ninths interest, in and to all
that certain real property in the City of Los Angeles, County of Los
Angeles, State of California, described as follows:
The
Northwesterly 110 feet of Lot 26 of the J. G. McDonald Tract, in the
City of
Los Angeles
,
County
of
Los Angeles
, State of
California
, as per map recorded in Book 70 page 20 of Miscellaneous Records, in
the office of the
County
Recorder
of said County.
II That
defendant and third-party plaintiff
UNITED STATES OF AMERICA
, and
defendant
STATE
OF CALIFORNIA, have no right, title, interest, lien or estate in or to
said real property.
III That
third-party
defendant
COUNTY
OF LOS ANGELES is a proper third-party defendant in the above entitled
action.
IV That the
liens of the STATE OF CALIFORNIA for the years 1952, 1953, 1954 and 1955
for City and County ad valorem taxes levied and assessed against said
real property as described in Finding IV hereof became choate, and were
prior in time and prior in right to the liens of the UNITED STATES OF
AMERICA, as described in Finding XI hereof.
V The deed of
said real property to the STATE OF
CALIFORNIA
on
July 1st, 1958
conveyed said real property to the STATE OF
CALIFORNIA
free and clear of any liens or claims by the
UNITED STATES OF AMERICA
, subject, however, to a right of redemption by the owners or any
persons interested in said real property.
VI The sale of
said real property by the STATE OF
CALIFORNIA
on
February 23rd, 1960
to plaintiffs' predecessors in title terminated the right of redemption
and conveyed title to said purchasers free and clear of any liens or
claims of the
UNITED STATES OF AMERICA
.
VII The liens
and claims of the
UNITED STATES OF AMERICA
did not attach to any of the proceeds realized by the STATE OF
CALIFORNIA
from the sale of said real property.
Let Judgment
be entered accordingly.
[46-1 USTC
¶9186]United States of America, Appellant, v. Paul W. Sampsell, Trustee
in Bankruptcy of the Estate of El Camino Refining Company, State of
California and Universal Consolidated Oil Company, Appellees
(CA-9),
United States Circuit Court of Appeals for the Ninth Circuit, No.
10,932, 153 F2d 731, February 15, 1946
Upon appeal from the District Court of the United States for the
Southern District of California, Central Division.
Lien for taxes: Validity against mortgagees: Federal v. state
taxes.--There is nothing in Code Secs. 3670-3672 providing for
Government priority over inchoate liens which antedate its own liens.
Under Sec. 67 of the Bankruptcy Act, the liens of the
United States
for gasoline taxes were not entitled to priority in payment over the
inchoate general liens of the State of
California
for franchise taxes.
Lien for taxes: Validity against mortgagees: Interest accrued after
adjudication: Legal expenses of mortgagee.--Where the property given
as security for a debt was sufficient to pay, in addition to the
principal amount, interest accrued after adjudication, and attorney's
fees performed for the mortgagee in connection with the mortgage and
bankruptcy proceedings, the tax liens of the United States were
subordinated to the payment of such interest and attorney's fees.
Affirming a District Court opinion.
Samuel O.
Clark, Jr., Assistant Attorney General, Sewall Key, A. F. Prescott,
Leonard Sarner, Muriel S. Paul, Special Assistants to the Attorney
General, Washington, D. C.; Charles H. Carr, U. S. Attorney, E. H.
Mitchell, Assistant U. S. Attorney, Eugene Harpole, Special Assistant to
Chief Counsel, Bureau of Internal Revenue, Los Angeles, Calif., for
appellant. Grainger and Hunt,
Los Angeles
,
Calif.
, for appellee, Paul W. Sampsell.
Rob
ert W. Kenny, Attorney General, State of California, John L. Nourse,
Deputy Attorney General, San Francisco, Calif., for appellee, State of
California. C. E. McDowell, McIntyre Faries, Allan M. Carson,
Los Angeles
,
Calif.
, for appellee, Universal Consolidated Oil.
Before:
STEPHENS, BONE and ORR, Circuit Judges.
STEPHENS,
Circuit Judge:
The United
States, deeming itself aggrieved by a judgment of the United States
District Court adverse to its claim of priority as a lien holder upon a
sum of money held in the Bankruptcy court, appeals.
[The
Facts]
The El Camino
Refining Company, a corporation, filed a petition for reorganization on
May 12, 1942, under Chapter X of the Bankruptcy Act of 1898, c. 541, 30
Stat. 544, as amended by the Act of June 22, 1938, c. 575, 52 Stat. 840,
883. It was adjudicated a bankrupt on
March 27, 1943
, and Paul W. Sampsell was appointed trustee in bankruptcy of the state
on
March 27, 1943
. On
March 31, 1943
, he was qualified and assumed the duties of that office. In conformity
with the agreement of all lien claimants and the court, the assets of
the bankrupt were sold and the net proceeds received in the sum of
$19,927.85. In further conformity with the agreement in which all lien
claimants joined, all claims of liens together with their priority as
they existed before the sale were transferred to the fund realized,
subject to the expenses of
admin
istration to be fixed by the court.
There are
three lien claimants, whose claims together exceed the value of the
assets of the estate.
(1) The State
of
California
, by and through the California State Franchise Tax Commissioner, filed
a claim for
April 3, 1943
, for corporate franchise taxes in the sum of $3,071.35 plus interest at
6% per annum from
January 15, 1944
, until paid. The taxes were for the years 1939 and 1940 accruing
January 1, 1939
, and
January 1, 1940
, respectively. The exact amount of the taxes was not fixed prior to the
date of the commencement of these bankruptcy proceedings. The California
law provides that such taxes (imposed by the Bank and Corporation Tax
Act of the State of California [Deering, California General Laws (1939
Supp.), Act 8488]) shall constitute a lien upon the real property of the
taxpayer, the lien to have the same force, effect and priority as a
judgment lien, and shall attach on the first day of the taxable year.
(2) The
Universal Consolidated Oil Company, a corporation, filed a claim for
$11,234.78 plus interest based upon real property mortgage given as
security for a promissory note, which was executed and delivered on
January 19, 1941
. The obligation of the note is for the principal sum of $8,444.08 with
interest at the rate of 5% per annum from
March 15, 1943
, until paid, together with the provision for attorney fees. On
May 10, 1943
, the Referee made an order allowing to the mortgagee a secured claim
upon the real property so mortgaged to the extent of the total
indebtedness. The mortgage was recorded on
May 3, 1941
, in the Official Records of Orange County, California. The balance due
upon the said note and mortgage, principal and interest, exclusive of
attorney's fees, is the sum of $10,484.78 plus interest thereon
thereafter at the rate of 5% per annum until paid. The c