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[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