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And from these facts it is recommended as follows:

Conclusions of Law

I

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

II

The United States of America acquired liens on all property and all rights to property of the Pacific Islands Navigation Company, including the M. V. MARQUESA, on June 7, 1957 in the sum of $2,387.95 together with penalties and interest, and on October 30, 1957 in the sum of $231.96 plus interest.

III

The assessments of taxes due the City of Long Beach and County of Los Angeles from the Pacific Islands Navigation Company did not become fixed and choate in amount before the third Monday in July of 1957.

IV

Any liens which either the County of Los Angeles or City of Long Beach might have acquired by their seizure of June 12, 1957, of the vessel Marquesa, were relinquished by them on August 26 and October 15, 1957. This Court did not enter any order preserving the lien of said parties without the possession of the vessel.

V

The claims of the three parties hereto relate to taxes and none is maritime in nature. Therefore, among said claimants, the order of priority with respect to perfected and choate liens, is "first in time, first in right." Inchoate liens or claims are entitled to share pro rata in the proceeds after satisfaction of the choate liens.

VI

It is hereby recommended that the following distribution be made:

1. There first be paid to the City of Long Beach the sum of $285.20, pursuant to stipulation and order, in settlement of its claim for wharfage;

2. There next be paid to the United States the full amount of its two assessments of taxes, the sum of $2,488.57 together with interest at the rate of 38¢ per day on its lien for Withholding and Social Security taxes for the first quarter, 1957, and the sum of $240.06 with respect to said taxes for the second quarter, 1957, with interest at the rate of 4¢ per day, all interest computed from January 9, 1958;

3. That the sum of $44.60 be paid to Ruth M. Albers in full payment for Reporter's fees; and that the sum of $ . . . . be paid to Barbara Warner, Special Master.

4. That any amount remaining after making the foregoing payments be divided between the City of Long Beach and the County of Los Angeles in the proportion that the unpaid assessment of each bears to the sum of the unpaid assessments of the two of them and that distribution in such proportion be made to them.

Order Approving Commissioner's Supplemental Report on Relative Priorities of the City of Long Beach , County of Los Angeles and United States of America .

The supplemental Report of the Commissioner having been filed, and a hearing upon objections thereto having been heard,

IT IS HEREBY ORDERED, ADJUDGED AND DECREED:

I

That the Commissioner's Supplemental Report on relative priorities of the City of Long Beach , County of Los Angeles , and United States of America is approved.

II

That the sum of $285.20 be paid to the City of Long Beach in settlement of its claim for wharfage.

III

That the United States of America be paid the full amount of its two assessments of taxes, the sum of $2,488.57, together with interest at the rate of $.38 per day on its lien for withholding and Social Security taxes for the first quarter, 1957, and the sum of $240.06 with respect to said taxes for the second quarter 1957, with interest at the rate of $.04 per day, all interest computed from January 1958.

IV

That the sum of $44.60 be paid to Ruth M. Albers in full payment for reporters' fees.

V

That the sum of $175.00 be paid to Barbara Warner, Special Commissioner, for Commissioner's fees.

VI

That the amounts remaining after making the foregoing payments be divided between the City of Long Beach and the County of Los Angeles in the proportion that the unpaid assessment of each bears to the sum of the unpaid assessments of the two of them and that distribution in such proportion be made to them.

 

 

[56-2 USTC ¶9939] United States of America , Plaintiff v. S. Alexander Company, Inc., a Corporation, et al., Defendants

U. S. District Court, for the So. Dist. Calif., Cen. Div., Civil No. 16896-TC, 7/20/56

[1939 Code Sec. 3672--corresponding to 1954 Code Sec. 6323]

Priority of liens: Priority of state taxes.--General and special Los Angeles County and City of Los Angeles taxes for 1946-1949, levied against real property owned by taxpayer, became choate liens before January 3, 1949, the date of assessment of federal withholding and federal insurance contributions taxes against the taxpayer. The taxes, penalties and interest owed the county and city amounted to $372.86; those owed the federal government amounted to $16,413.74 taxes and $23,550.57 penalties, interest and lien fees. A tax sale of the property in 1952 by the County Tax Collector to Publix Title Co. for $970 was void. The property is ordered to be sold at public auction, the proceeds to be applied first to the marshal's fees and expenses of sale, second to the costs incurred in this action by the Publix Title Co., third to the Publix Title Co. for $372.86, fourth to the costs incurred in this action by the United States, and fifth to the United States for its claim for taxes, penalties, etc., any remainder to be paid into the court to await proper disposition by the court.

Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, 808 Federal Building, Los Angeles 12, Calif., for plaintiff. Leo Goodman, Gizella L. Allen, for Publix Title Co. Harold W. Kennedy, County Counsel, Andrew O. Porter, Deputy County Counsel, for County of Los Angeles.

Findings of Fact, Conclusions of Law and Judgment and Order of Sale

CLARKE, District Judge:

The above case came on for trial on February 16, 1956, and again on March 2, 1956, before the Honorable Thurmond Clarke, United States District Judge, sitting without a jury, presiding, the plaintiff represented by Laughlin E. Waters, United States Attorney for the Sourthern District of California, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, the defendant Publix Title Company by its attorneys, Leo Goodman and Gizella L. Allen, the defendant County of Los Angeles by its attorneys, Harold W. Kennedy, County Counsel, and Andrew O. Porter, Deputy County Counsel, the defendants Al Fletcher and M. C. Fletcher, doing business under the fictitious firm name and style of Al Fletcher Collection Service, having filed an answer but not having appeared, the State of California and City of Los Angeles having disclaimed, and the dismissals having been entered of all fictitious defendants and of defendant Mae Liddy, and the defaults having been entered of the defendants A. Noah Borah, Title Insurance and Trust Company, a corporation, Creditors House, a corporation, Velvatone Stucco Products Co., Inc., a corporation, The Doctors Business Bureau, Samuel Bucholtz, S. Alexander Company, Inc., a corporation, Buddy Centman, Frances Centman, and E. B. Grant, and the defendant, R. A. Riddell, District Director of Internal Revenue, having filed a disclaimer herein, and a notice of lis pendens having been recorded with the County Recorder of Los Angeles County on July 6, 1954, the Court having considered the evidence, the pleadings, the stipulations of the parties, now makes its findings of fact and conclusions of law as follows:

Findings of Fact

I. The plaintiff is a corporate and sovereign body politic.

II. This is an action for the collection of Internal Revenue taxes brought at the request of the Attorney General of the United States and authorized and sanctioned by the United States Commissioner of Internal Revenue.

III. The defendant S. Alexander Company, Inc., is a corporation organized and existing under and by virtue of the laws of the State of California; the defendants City of Los Angeles, California; County of Los Angeles, California; Los Angeles County Flood Control District; and State of California are corporate bodies politic.

IV. The defendant Builders' Finance Service, a co-partnership, is a co-partnership composed of Sam Mesler and A. Noah Borah, with a place of business in the City and County of Los Angeles , State of California .

V. Defendants Sam Mesler, A. Noah Borah, Buddy Centman, Frances Centman, Samuel Bucholtz, and Edward Martin, are residents of the County of Los Angeles , State of California .

VI. The defendant Creditors House is a corporation organized and existing under and by virtue of the laws of the State of California , and has a place of business in the City and County of Los Angeles , California .

VII. The defendant The Doctors Business Bureau is a co-partnership composed of J. A. Slaughter and A. S. Trigg with a place of business in the City and County of Los Angeles , State of California .

VIII. The defendant Title Insurance and Trust Company, a corporation, is a corporation organized and existing under and by virtue of the laws of the State of California and maintains its principal place of business in the City of Los Angeles, California.

IX. The defendant Velvatone Stucco Products Co., Inc., a corporation, is a corporation which plaintiff is informed and believes is organized under the laws of the State of California .

X. At all times from June 3, 1947 , to May 1, 1950 , S. Alexander Company, Inc., a corporation, was the owner and was in possession of the following described real property located in the County and City of Los Angeles , State of California :

PARCEL 1: Lot 7 in block 30 of Tract No. 6478, in the City and County of Los Angeles , State of California , as per map recorded in book 68 pages 93 to 99 inclusive of Maps, in the office of the county recorder of said county.

EXCEPT that portion described as follows: Beginning at the northwesterly corner of said lot 7; thence southerly in a direct line to a point in the southerly line of said lot, distant 5.00 feet easterly from the southwest corner of said lot, containing 63 square feet of land, more or less, as condemned for flood Control purposes by decree of condemnation recorded in book 40075 page 304, Official Records.

XI. The Commissioner of Internal Revenue assessed the following federal withholding and federal insurance contributions taxes against the defendant, S. Alexander Company, Inc.:

XII. The Commissioner's several assessment lists carrying the assessment of said withholding and federal insurance contributions taxes were received in the office of the Collector of Internal Revenue on the dates set forth in the paragraph of these findings next preceding. The Collector of Internal Revenue issued notices and demands for payment of said taxes to the taxpayer S. Alexander Company, Inc., on the dates set forth in said paragraph, but that notwithstanding said notices and demands for payment no part of said taxes nor the interest thereon has been paid.

XIII. On May 1, 1950 , there was recorded in the Official Records of Los Angeles County as deed No. 3168, a deed of said real property by S. Alexander Company, Inc., a corporation, to Builders' Finance Service, a co-partnership.

XIV. There was recorded in the Official Records of Los Angeles County on July 25, 1950 , as deed No. 3517, a conveyance by Builders' Finance Service, a co-partnership, by Sam Mesler and A. Noah Borah to R. A. Riddell, Collector of Internal Revenue.

XV. A Notice of Pendency of the above-entitled action was recorded in the Official Records of Los Angeles County on July 6, 1954 .

XVI. General and special Los Angeles County and City of Los Angeles taxes were levied against said real property for the fiscal years 1946-1947, 1947-1948, and 1948-1949, and were assessed to S. Alexander Company, Inc.; said levies became choate liens upon said real property before the third day of January, 1949; said texes were not then paid and became delinquent; the total amount of taxes, penalties and interest to and including March, 1956, assessed against said real property is $372.86.

XVII. H. L. Byram, County Tax Collector , in each year following said delinquencies, and at the times prescribed by law, took those steps necessary to effect a sale by operation of California statutory law [Section 3436 of the Rev. and Tax. Code] to the State. More than five years thereafter, that is, July 1, 1952 , the tax collector, pursuant to Rev. and Tax. Code §3511, executed a deed of said property to the State of California, which deed was recorded on the 5th day of September, 1952, in the office of the County Recorder, Los Angeles County, California, in Book 39803, Page 65.

XVIII. On the 31st day of March, 1954, pursuant to the provisions of the state tax statutes, H. L. Byram, Tax Collector of Los Angeles County, sold at public auction said real property to the defendant, Publix Title Company, for the sum of $970.00, and on March 31, 1954, H. L. Byram, Tax Collector of Los Angeles County, executed a tax deed dated March 31, 1954, conveying said real property to Publix Title Company; said deed was recorded April 30, 1954, in Book 44469, Page 84, of the Official Records of Los Angeles County.

XIX. The following persons filed in the Clerk's Office of the County of Los Angeles, California, a Certificate of Fictitious Name on November 16, 1949 , as Number 160324, which disclosed that Buddy Centman, E. D. Grant, A. Noah Borah, Sam Mesler, Samuel Bucholtz and Edward Martin were doing business under the name of Builders' Finance Service.

XX. On July 14, 1950 , Builders' Finance Service, a co-partnership by Sam Mesler and A. Noah Borah, executed a deed of said property to R. A. Riddell, Collector of Internal Revenue. Said deed was on the same day acknowledged and was recorded on July 25, 1950 , in Book 33782, page 225 of the Official Records of Los Angeles County, California; said deed was recorded at the request of Builders' Finance Service.

XXI. Defendants Al Fletcher and M. C. Fletcher, doing business under the fictitious firm name and style of Al Fletcher Collection Service, secured a judgment in the Municipal Court of Los Angeles, Judicial District of the Court of Los Angeles, State of California in Action No. 993660 in the sum of $133.60 against the defendant S. Alexander Company, Inc., a corporation; an abstract of said judgment was recorded September 6, 1950, with the County Recorder of Los Angeles County in Official Records in Book 34226, page 187; there remains due, owing and unpaid to said defendants from the S. Alexander Company, Inc., the sum of $182.80, plus interest as provided by law.

XXII. The correct amount of taxes, penalties and costs that should be paid upon redemption, to discharge the tax and assessment liens of all taxing agencies and revenue districts, had not the purported sale been held, is the sum of $372.86.

And from these facts, the Court concludes as follows:

Conclusions of Law

I. The Court has jurisdiction of this action and the parties hereto.

II. General and special Los Angeles County and City fo Los Angeles taxes levied against said real property for the fiscal years 1946-1947, 1947-1948, and 1948-1949, in the total amount of $372.86, taxes, penalty, and interest became choate liens before the third day of January, 1949, and, therefore, are first in order of time and priority.

III. Liens of the United States against the S. Alexander Company, Inc., first arose on January 3, 1949 , on the date the assessment lists signed by the Commissioner were received by the Collector of Internal Revenue at Los Angeles , California . Internal Revenue Code of 1939, §3670. Said liens totaled the sum of $16,413.74, together with penalties and interest and are second in order of priority and in time against the real property.

IV. On May 1, 1950 , defendant S. Alexander Company, Inc., a corporation, conveyed said real property to Builders' Finance Service, a co-partnership. On July 14, 1950 , Builders' Finance Service, a co-partnership, conveyed said real property to R. A. Riddell, Collector of Internal Revenue, as further security for the tax indebtedness of S. Alexander Company, Inc., to the Government.

V. The deed by H. L. Byram, County Tax Collector, to the State of California which was executed on July 1, 1952, and recorded on September 5, 1952, was void and ineffective because at that time the United States of America had acquired tax liens against the property, and, furthermore, the title to the property had been conveyed to its agent, R. A. Riddell, Collector of Internal Revenue. For the same reason, purported sale on March 31, 1954, of the parcel of property to the defendant Publix Title Company was void and ineffective and did not convey and right, title or interest in said property to Publix Title Company.

VI. Said tax deed and tax sale having been void, the defendant Publix Title Company is subrogated to the rights of the County and City of Los Angeles under the tax assessments for the fiscal years 1946-1947, 1947-1948, and 1948-1949.

Judgment and Order of Sale

In accordance with the foregoing findings of fact and conclusions of law, it is ordered, adjudged and decreed:

1. The County of Los Angeles and the City of Los Angeles had first and prior liens against the following described real property located in the County and City of Los Angeles , State of California :

PARCEL 1: Lot 7 in block 30 of Tract No. 6478, in the City and County of Los Angeles , State of California , as per map recorded in book 68 pages 93 to 99 inclusive of Maps, in the office of the county recorder of said county.

EXCEPT that portion described as follows:

Beginning at the northwesterly corner of said lot 7; thence southerly in a direct line to a point in the southerly line of said lot, distant 5.00 feet easterly from the southwest corner of said lot, containing 63 square feet of land, more or less, as condemned for flood Control purposes by decree of condemnation recorded in book 40075 page 304, Official Records,

in the total amount of $372.86, for taxes, penalties and interest, after payment of which to the County and City, the defendant Publix Title Company, became subrogated to their priority. Said amount is first to be satisfied out of the proceeds of the sale of the said real property;

2. The tax deed heretofore issued by the Tax Collector of the County of Los Angeles, State of California, to Publix Title Company, a corporation, defendant herein, dated July 1, 1952, and recorded in Book 39803, page 65, Official Records, County of Los Angeles, California, with respect to the property described in paragraph 1, is void and said deed is set aside;

3. The plaintiff, United States of America, has liens upon the real property described in the complaint for taxes due the United States in the sum of $16,413.74, together with penalties, interest, and lien fees, in the sum of $23,550.57, which lien is prior and superior to the liens of all other parties hereto, except Publix Title Company, set forth in paragraph 1 hereinabove;

4. That said real property or so much thereof as may be necessary to sell be, and the same is hereby, ordered to be sold by the United States Marshal at public auction pursuant to Title 28, U. S. C., Section 2001, et seq., and the proceeds of sale be paid, as follows:

First: To the payment of Marshal's fees, disbursements, and expenses of sale;

Second: To the costs incurred in this action and by the defendant Publix Title Company, taxed by the Clerk of this Court, in the sum of $.....;

Third: To the defendant Publix Title Company, the sum of $372.86;

Fourth: To the costs incurred in this action by the plaintiff United States of America , taxed by the Clerk of this Court in the sum of $90.40;

Fifth: To the United States of America the sum of $23,550.57, together with interest thereon at the rate of six per cent per annum until paid;

Sixth: Any surplus remaining thereafter to be paid into Court to await proper distribution by the Court.

5. That at such sale any of the parties hereto shall be allowed to bid for such real property, and that defendant Publix Title Company shall be allowed a credit on its bid in the amount of its first and prior lien;

6. That upon such sale, said Marshal shall issue his Certificate of Sale of said property to purchaser at said sale; that upon the sale of said property and delivery of deed as aforesaid, by the Marshal of this Court to the purchaser at said sale after the expiration of the periods of redemption, the plaintiff, the defendants, and all persons claiming or to claim from or under them, and all persons having liens subsequent to the first and prior liens of the Publix Title Company, by judgment or decree upon the land described therein, and their personal representatives, and all persons having any lien claimed by or under such subsequent judgment or decree, and their heirs or personal representatives, and all persons claiming under them, and all persons claiming to have acquired any estate or interest in said premises subsequent to the filing of notice of pendency of this action with the Court, be forever barred and foreclosed of and from all equity of redemption in claim of, in, and to said premises and every part and parcel thereof; that if any of the parties to this action, who may be in possession of said premises, or in any part thereof, or any person who, since the commencement of this action, has come into possession thereof, to such purchaser or purchasers upon the production of the Marshal's deed for such premises, or any part thereof, a writ of assistance may, without further notice, be issued to compel such delivery to the purchaser or purchasers;

7. That the United States Marshal is hereby ordered and directed to sell the real property pursuant to the foregoing judgment and to make a return of sale to this Court, and the Clerk of the Court is ordered to transmit to the Marshal a copy of this judgment.

 

 

[57-2 USTC ¶9925]Jefferson Standard Life Insurance Company, a Corporation, Appellant v. United States of America, H. L. Byram, County Tax Collector of Los Angeles County, and George T. Goggin, Trustee of Stockholders Publishing Company, Inc., a Corporation, Bankrupt, Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 15,349, 247 F2d 777, 8/21/57, Reversing and remanding unreported District Court decision

[1954 Code Sec. 6323(a)]

Lien for taxes: Priority as to mortgage lien on bankrupt's property.--At the time the bankrupt corporation filed its petition in bankruptcy, the Jefferson Standard Life Insurance Co., the United States and the Los Angeles County Tax Collector had liens upon its property. These liens attached to the proceeds of the sale of its property by the referee in bankruptcy. It was conceded that as between Jefferson Standard's prior mortgage lien and the Government's subsequent lien for taxes, Jefferson Standard had priority by virtue of 1954 Code Sec. 6323(a). The court held that the lien of Jefferson Standard had priority over that of the Los Angeles County Tax Collector and that Jefferson Standard was entitled to post-bankruptcy interest.

Honorable William M. Byrne, District Judge, Meserve, Mumper & Hughes, Leo E. Anderson, Los Angeles, Calif., for appellant. Charles K. Rice, Assistant Attorney General, A. F. Prescott, Karl Schmeidler, Attorneys, Department of Justice, Washington, D. C., Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Los Angeles, Calif.; Andrew O. Porter, Deputy County Counsel, Harold W. Kennedy, County Counsel, County of Los Angeles; Craig, Weller & Laugharn, Los Angeles, Calif., for appellees.

Before STEPHENS, Chief Judge, and DENMAN and POPE, Circuit Judges.

[Opinion in Full Text]

POPE, Circuit Judge:

This is an appeal from an order affirming the order of a referee in bankruptcy fixing and determining the respective rights and priorities of the appellant Jefferson Standard Life Insurance Company, the United States, and the Los Angeles County Tax Collector, in and to the proceeds of a trustee's sale of all the assets of Stockholders Publishing Company, Inc., the bankrupt.

On December 31, 1954 , the date of the petition in bankruptcy, the three priority claimants mentioned had liens upon all of the property, real and personal, of the named bankrupt. The lien which first attached was that of Jefferson Standard. On the date of the bankruptcy there was owing to it $351,223.74 secured by deed of trust and chattel mortgage upon all of the bankrupt's property, which instruments were executed, filed and recorded December 1, 1945 .

The lien next attaching was that of the United States for corporate income and excess profits taxes for the years 1945-44-45, with interest and penalties, in the sum of $288,608.58. This lien attached on March 14, 1952 , when the local collector received the Commissioner's assessment list.

Third in order of time was the claim of Los Angeles County for real and personal property taxes for the year 1954-1955 which became a lien on the bankrupt's real estate on March 1, 1954 . The amount owing on these taxes on the date of bankruptcy was $15,384.10.

In the course of the bankruptcy proceedings, the trustee, pursuant to authority granted him, sold all of the real and personal property assets of the bankrupt estate free and clear of all liens, such liens upon said property being transferred to the proceeds of sale without impairment. The proceeds of sale amounted to $382,500, and since the sum thus realized was insufficient to pay the three lien claimants in full, the trustee petitioned the referee for a determination of the nature, extent, amount, validity, priority and right to participate in the sales proceeds of the three lien claimants mentioned.

[Referee's Ruling]

Upon hearing, the Referee held that the sum of $351,223.74 owing to Jefferson Standard upon its mortgage and deed of trust had priority over the claim and lien of the United States for taxes due it; and that the sum last mentioned should first be set aside for Jefferson Standard, the balance of the proceeds of the sale to be paid to the United States for application upon the taxes due it. However, it was ordered that from the sum of $351,223.74, thus set aside for Jefferson Standard, the sum of $15,384.10, the amount of the County's claim, should be paid to the County Tax Collector .

Here, upon appeal from the district court's affirmance of this order, Jefferson Standard makes two principal points: first, that the orders erred in giving priority to the County's lien; and second, that the Referee's order erroneously denied the appellant's claim for post-bankruptcy interest upon its indebtedness computed to the dates of payment. ¹

As between Jefferson Standard's prior mortgage lien and the Government's subsequent lien for taxes, it is conceded here that Jefferson Standard has priority. (Title 26 U. S. C. A. §6323(a)). ² The Referee's order that the amount owing to the County should be paid out of funds found due and tentatively set aside for Jefferson Standard was based upon his determination that "the lien of the County of Los Angeles , by California law, is superior to the lien of Jefferson ." We are of the opinion that this is not a correct statement of the California law, and that in consequence, the order directing payment of the county taxes out of sums which otherwise would be available for payment of the debt owing to Jefferson Standard must be reversed.

The Referee cited as authority for his version of the California law the cases of Dougherty v. Henarie, 47 Cal. 9, and Courtney v. Byram, 54 Cal. App. 2d 769, 129 P. 2d 721. Neither case is in point here. Although each case contains language which seems to suggest approval of a general rule that a tax lien in California is Superior to a prior mortgage or other contract lien, neither of those cases involved any such question. Later California cases have completely negatived the suggestions made in the dicta in the cases relied on by the Referee. In the Dougherty case, the sole question presented was whether a tax deed issued upon a sale for state and county taxes conveyed a superior title free of the liens of a street assessment bond. The court's decision that the tax deed gave clear title was based upon the explicit language of a California statute which declared that a tax deed "shall convey to the grantee absolute title to land described . . . free and clear of all encumbrances . . . whatever . . ." It will be noted that the language here quoted referred to the effect of a tax deed. It is true that by way of dictum the opinion of the court referred to "the necessity of collecting revenue for the support of the Government", and said that this "imperatively requires that the lien for taxes shall take precedence over all other liens". But it is well established that California does not go along with any such broad rule, sometimes recognized in other jurisdictions, that a lien for taxes is superior to all other liens, ex proprio vigore, even in the absence of a statute so declaring, or because of some principle that tax liens are liens of a "superior dignity".

In Home Owners Loan Corporation v. Hansen, 38 Cal. App. 2d 748, 102 P. 2d 417, 419, the court reviewed the California cases, including the Dougherty case, and pointed out that later California decisions disclose that the dictum of the Dougherty case was not California law, saying (p. 420): "The decisions in both the Guinn and Bolton cases dispel any doubt as to whether California follows the rule of law that tax liens are ex proprio vigore superior to a pre-existing mortgage or other contract liens. These cases definitely hold that a paramount lien for unpaid taxes depends solely upon legislative enactment. We are of the opinion that these last-mentioned cases correctly state the law and that a specific expression of the legislative intent is necessary for tax liens to take precedence over pre-existing mortgage or other contract liens."

The Referee's opinion quotes from Courtney v. Byram, supra, a statement somewhat similar to that in the Dougherty case suggesting that the lien of taxes is superior to the obligations of private debts. The case involved no such question. In Fresno County v. Commodity Credit Corporation, 9 Cir., 112 Fed. (2d) 639, this court was presented with an argument that a California county's lien for unpaid taxes was superior to the prior lien of the Commodity Credit Corporation upon certain cotton situated in the county. The argument, similar to the dictum in the Courtney case, was that a tax obligation in California was entitled to priority in payment regardless of whether it had been given any such preference by statute. We there reviewed the California cases and rejected the argument that the California courts have adopted a "superior dignity" rule which would give a claim for taxes some inherent priority over ordinary obligations whether secured or unsecured, and whether they existed before or after the tax obligation arose. We there said (p. 641): "Whatever may have been said concerning the 'superior dignity' principle in earlier cases on liens on real property is overruled by the holding in Guinn v. McReynolds, 177 Cal. 230, 232, 170 P. 421, 422, where a real estate mortgage lien was held superior to a subsequently created tax lien on the same property, not expressly made a first lien, for expenditures for eradication of disease and pests in orchards and elsewhere. . . . But the authorities declare, virtually without dissent, that even a tax lien is not entitled to rank ahead of a pre-existing mortgage, or other contract lien, unless the legislative enactment creating the tax lien has given it priority."

[Property Mortgage Has Priority Over Tax Lien]

It is thus apparent that contrary to the view taken by the Referee, the law in California is that "even a tax lien is not entitled to rank ahead of a pre-existing mortgage, or other contract lien, unless the legislative enactment creating the tax lien has given it priority." Smith v. Addiego, 54 Cal. App. 2d 230, 129 P. 2d 953, 957.

An examination of the California statutes readily discloses that there is no legislative enactment which gives Los Angeles County 's claim for the taxes involved in this case any priority over Jefferson Standard's prior mortgage. As stated in the leading case of Guinn v. McReynolds, 177 Cal. 230, 170 P. 421, 422: "The general rule for fixing the relative rank of liens is declared by §2897 of the Civil Code, which declares that: 'Other things being equal, different liens upon the same property have priority according to the time of their creation, except in cases of bottomry and respondentia.' This rule will govern unless, in any given case, the statute prescribes otherwise."

§3712 of the California Revenue and Taxation Code expressly provides that with respect to a sale of tax-deeded property by the Tax Collector, that "the deed conveys title to the purchaser free of all encumbrances of any kind existing before the sale", with certain exceptions not here relevant. That statute, it will be noted, has reference only to the effect of such tax deeds. The cases applying it are cited in Helvey v. Sax, 38 Cal. 2d 21, 24, 237 P. 2d 269, 271. There is no similar statute giving priority to liens such as that of Los Angeles County . It follows therefore that Jefferson Standard's mortgage has priority as provided in Civil Code §2897, quoted in the Guinn case, supra. The court below was in error in affirming the Referee's order for payment to the Los Angeles County Tax Collector from funds which otherwise would have been payable to Jefferson Standard.

This brings us to the question of the right of the appellant to post-bankruptcy interest. The Referee and the trial court in denying appellant's claim for such interest relied upon this court's decision in Beecher v. Leavenworth State Bank, 192 Fed. (2d) 10. This court has now held in Palo Alto Mutual Savings & Loan v. Williams, Trustee, (-- Fed. (2d) --), (decided May 20, 1957 ), that a secured creditor in the position of Jefferson Standard is entitled to post-bankruptcy interest. While in the Palo Alto case such interest was allowed to the date of sale, the reasoning of that decision would require that in this case Jefferson Standard be allowed post-bankruptcy interest calculated to the dates of payment.

The order of the district court is reversed and the cause is remanded with directions to vacate the order of the Referee and to grant the prayer of the appellant's petition for review.

¹ Appellant was paid $335,839.64 on September 1, 1955 , during the pendency of the proceedings before the Referee. The $15,384.10 was held in the custody of the court pending the outcome of these proceedings.

² "§6323(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by §6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--* * *."

 

 

[63-1 USTC ¶9240] United States of America , Appellant v. Frank J. Fahrenkamp, and Fierina G. Fahrenkamp, and Bob Taylor, Collector of Delinquent Personal Property Taxes for Polk County , Arkansas , Appellees

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 17,119, 2/1/63

[1954 Code Sec. 6323]

Priority of liens: Chattel mortgage lien: Dragnet clause: Subrogation.--The court reversed the judgment of the trial court in dismissing the intervention of the Government in asserting a tax lien. The trial court had found that property not specifically described in a chattel mortgage was covered by a "dragnet" clause and that the chattel mortgage was superior to the Government's lien. However, the case was remanded for additional consideration on the issue of subrogation by assignment of the chattel mortgagee.

[1954 Code Sec. 6323]

Priority of liens: State property taxes.--The trial court held that a county was entitled to recover property taxes in a foreclosure proceeding. This was reversed in the absence of any evidence establishing the existence or priority of the property tax lien.

Norman Sepenuk, Department of Justice, Washington 25, D. C. (John R. Jones, Jr., Acting Assistant Attorney General, Lee A. Jackson, David O. Walter, Department of Justice, Washington 25, D. C., Charles M. Conway, United States Attorney, Rob ert C. Johnson, Assistant United States Attorney, Fort Smith, Ark., on brief), for appellant. Joe H. Hardegree, Philpot Bldg., Mena, Ark., Ben Core, P. O. Box 530, De Queen, Ark. (Frank Fahrenkamp, Fierina Fahrenkamp, pro se, on brief), for appellees.

Before SANBORN, VAN OOSTERHOUT and MATTHES, Circuit Judges.

MATTHES, Circuit Judge:

The principal question for determination on this appeal is whether certain personal property not specifically described in a chattel mortgage executed by Duncan, Dieckman and Duncan Mining Company, a corporation (Duncan), was nevertheless covered by the lien of the mortgage because of the so-called "dragnet" clause contained therein. ¹ The chattel mortgage, executed on March 4, 1959 , was recorded on March 23, 1959 , and concededly the lien as to all property specifically described in the mortgage was superior to the lien of the United States Government against Duncan for unpaid withheld taxes. The trial court held that the undescribed property was also covered by the mortgage, and hence, in practical effect, the Government's claim was destroyed. For the purpose of this appeal by the Government, the facts, as fully set forth in the opinion of the trial court, W. D. Ark., [62-1 USTC ¶9411] 205 F. Supp. 921 (1962), will suffice, and since the facts are in the main undisputed, they need only be briefly summarized here.

The chattel mortgage conditionally conveyed to C. C. Bell, for the purpose of securing a loan to Duncan in the amount of $15,000: one Manganese Mill complete, building, motors, jigs and water pump; one set of scales, six jack hammers; three compressors; and seven trucks, all of which was specifically described. At the time the mortgage was executed, Duncan was the conditional owner and in possession of one Ford Loader and two Caterpillar Loaders. As security for the unpaid purchase prices of the respective loaders, the Merchants National Bank of Fort Smith , Arkansas , held the conditional sales contract to the Ford Loader, and C. I. T. Credit Corporation held the conditional sales contract to the two Caterpillar Loaders. None of the three loaders was described in or referred to in the chattel mortgage nor covered by the mortgage lien unless it was the intention of the parties that the loaders should be encompassed within the mortgage by virtue of the "dragnet" clause.

Fierina G. Fahrenkamp, wife of Frank J. Fahrenkamp, appellees herein, acquired the chattel mortgage from C. C. Bell on March 6, 1959 . At the request of Duncan, on August 21, 1959, Frank J. Fahrenkamp, an officer and a stockholder in Duncan, paid the balance due Merchants National Bank ($617) and the balance due C. I. T. ($2,561.14) on the conditional sales contracts. Fahrenkamp purchased drafts payable to these creditors, and forwarded the drafts to Duncan, who delivered them to the Bank and C. I. T. and obtained the conditional sales contracts in return.

[Suit For Personal Judgment]

In May, 1961, when Duncan was being pressed by its creditors, the Fahrenkamps filed an action in the Chancery Court of Polk County, Arkansas, against the Duncan Corporation, seeking a personal judgment for the balance due them both under the mortgage lien and the conditional sales contracts, and for an order directing the sale of all of the personal property above referred to. The Government, as a creditor of Duncan , intervened in that action and thereafter removed the cause to the United States District Court. None of Duncan's other creditors intervened in the action except the tax collector for Polk County, Arkansas, who filed a claim for alleged unpaid county taxes due from Duncan for the years 1959 and 1960.

Pending the trial, the court directed that all of the personal property be sold and appointed a special commissioner to conduct the sale. The three loaders were sold for a total of $6,500, which, together with the proceeds from the sale of the property described in the mortgage, was deposited in the registry of the court.

The court rendered judgment in favor of the Fahrenkamps and against Duncan for the balance due them; held that the chattel mortgage covered the three loaders by virtue of the "dragnet" clause, and dismissed the Government's intervention; directed that the sum of $321.34 be paid out of the proceeds to Polk County, Arkansas; and further directed that the remainder of the fund, after payment of certain expenses, be paid to the Fahrenkamps to apply upon their judgment against Duncan.

There is no controversy on this appeal as to the personal judgment against Duncan , and since the Government concedes that the lien of the chattel mortgage antedated and is superior to its lien, it makes no claim to the proceeds from the sale of the specifically described property. The issues are: (1) whether the lien of the mortgage extended to the three loaders so that the Fahrenkamps are entitled to the $6,500 derived therefrom: (2) if not, whether the Fahrenkamps were subrogated to the rights of the Bank and C. I. T. so as to be entitled to be paid $3,178.24 out of the $6,500; and (3) whether the court erred in holding that a lien existed in favor of Polk County, Arkansas, on the personal property which was the subject of the foreclosure action, and that such lien was superior to the Government's lien.

["Dragnet" Clause]

The trial court, predicating its decision upon the theory that the "dragnet" clause of the mortgage covered the three loaders in question, apparently was of the opinion that the loaders did not become the property of Duncan Corporation until August 21, 1959, the day on which Fahrenkamp paid off the existing indebtedness on them; that then, as after-acquired property, the loaders became subject to the original mortgage; and thus, that the Fahrenkamps' claim to the loaders based upon the mortgage (recorded March 23, 1959) had priority over the Government's claim first filed on August 13, 1959.

Inasmuch as the loaders were conditionally owned by Duncan and in its possession when the mortgage was executed, we seriously doubt that merely because absolute title thereto was not in Duncan at that time, the loaders were, for the purpose of the mortgage, after-acquired property. ² But whether such property be viewed as an antecedent or a subsequent acquisition, we are satisfied that it was not covered by the mortgage. Under Arkansas law, it is clear that "dragnet" provisions are not favored and are construed rather strictly. National Bank of Eastern Arkansas v. Blankenship, E. D. Ark., 177 F. Supp. 667, 673 (1959), aff'd, 8 Cir., 283 F. 2d 574 (1960); Berger v. Fuller, 180 Ark. 372, 377, 21 S. W. 2d 419, 421 (1929). The Arkansas rule as to whether "other indebtedness" is secured by a chattel mortgage by virtue of the "dragnet" clause, is concisely stated as follows:

"Where a mortgage is given to secure a specific debt named, the security will not be extended as to antecedent debts unless the instrument so provides and identifies those intended to be secured in clear terms, and, to be extended to cover debts subsequently incurred, these must be of the same class and so related to the primary debt secured that the assent of the mortgagor will be inferred. The reason is that mortgages, by the use of general terms, ought never to be so extended as to secure debts which the debtor did not contemplate." Hendrickson v. Farmers Bank & Trust Company, 189 Ark. 423, 434, 73 S. W. 2d 725, 729 (1934).

["Other Property"]

No sound reason appears why the same rule should not apply to "other property," and indeed, the rule as to after-acquired property has been so applied. Holt v. Gregory, 219 Ark. 798, 244 S. W. 2d 951 (1952). Thus, if it be assumed that the undescribed loaders in controversy were antecedent property, the mortgage did not apply thereto since the mortgage not only failed to clearly identify the loaders, but also failed to include even the slightest reference to them. National Bank of Eastern Arkansas v. Blankenship, supra, 177 F. Supp. 667, aff'd, 283 F. 2d 574; Hendrickson v. Farmers Bank & Trust Company, supra, 73 S. W. 2d 725.

If, as the trial judge apparently concluded, the loaders were subsequently-acquired property, in order to be covered by the "dragnet" clause they would have to be of the same class as the property specifically listed and so related to it that the consent of the parties to its inclusion might be inferred. National Bank of Eastern Arkansas v. Blankenship, supra, 177 F. Supp. 667, aff'd, 283 F. 2d 574. It is the province of the court to declare the rights of the parties in conjunction with their expressed intention, interpreting each mortgage according to its particular language in the light of the surrounding circumstances. Hollan v. American Bank of Commerce & Trust Company, 168 Ark. 939, 272 S. W. 654 (1925). See also American Bank & Trust Co. v. First Nat. Bank of Paris , 184 Ark. 689, 43 S. W. 2d 248 (1931). We believe that the loaders are of the same class as the other mining equipment specifically denominated in the mortgage, but cannot agree with the lower court on the crucial question relating to the intention of the parties. Fully cognizant of this Court's hesitancy to reverse a federal district judge on a question pertaining to the application of local law, National Bank of Eastern Arkansas v. General Mills, Inc., supra, 283 F. 2d 574, 576-577; Homolla v. Gluck, 8 Cir., 248 F. 2d 731 (1957), under the circumstances of this case, we nevertheless feel compelled to differ with the trial court's interpretation of the mortgage agreement to which the Arkansas law was applied. A survey of the record reveals nothing from which it can be inferred that the parties intended the mortgage to encompass subsequently-acquired equipment not listed in the agreement. In fact, in the complaint, the Fahrenkamps' sole claim to the loaders was based upon the allegation that Frank J. Fahrenkamp had assumed the security instruments covering the loaders at the time he paid the balance that Duncan Corporation owed on the loaders to the holders of the conditional sales contracts. In the reply to the Government's complaint in intervention, the Fahrenkamps reiterated their allegation that they had a lien on the loaders "by virtue of the assumption of the conditional sales contracts theretofore held by creditors of the Defendant Corporation," and again, there was no assertion whatsoever that the loaders were covered by the original mortgage agreement. As to this property, the trial proceedings remained focused upon the question whether Frank J. Fahrenkamp was entitled to be subrogated to the rights of the previous holders of the conditional sales contracts until near the completion of the trial when the Court, sua sponte, interjected the "dragnet" clause theory.

[Testimony Reviewed]

C. C. Bell, the original mortgagee, was not called upon to testify as to the intention of the original parties to extend the lien of the mortgage to subsequently-acquired property, and the Fahrenkamps presented no evidence on which to base such an inference. In fact, the testimony of both Donald Duncan, an officer of Duncan Corporation, and Frank J. Fahrenkamp is utterly inconsistent with the conclusion that the loaders were covered by the "dragnet" clause. The following direct examination of Duncan is particularly enlightening:

"Q. Did that mortgage cover all of the property, the personal property that we owned by Duncan, Dieckman and Duncan Mining Company?

"A. No, sir.

"Q. Now, you also are familiar, I believe, with these three loarders in question here, being a Ford Loader and two Caterpillar Loaders, are you not?

"A. Yes.

"Q. Now, were those covered under that mortgage?

"A. To my knowledge they wasn't."

During direct examination Fahrenkamp responded in a similar manner:

"Q. All right. Mr. Fahrenkamp, the mortgage which you came to be the holder of, the chattel mortgage from Duncan, Dieckman and Duncan Mining Company describes certain property that was legally owned by the corporation. Now, then, did the corporation have any equipment or property which was not covered by that mortgage?

"A. Yes, I believe the loaders and the compressors that I loaned them some money on to pay--that I paid off, sent checks down to pay off was equipment that wasn't in the original mortgage."

Although it might be argued that these statements merely refer to the fact that the loaders were not specifically denominated in the original mortgage, neither this testimony nor any other evidence in the record, affirmatively demonstrate an intention for the original mortgage lien to be extended to cover the loaders in question.

However, we believe that the Fahrenkamps are entitled to further consideration on their original theory of subrogation. Although this issue was pleaded and actually litigated, in view of the conclusion reached by it, the trial court did not expressly determine the subrogation issue. While there was evidence relating thereto, we make no determination as to the sufficiency of the evidence to establish subrogation by assignment, nor do we decide whether under the facts and circumstances Frank J. Fahrenkamp is entitled to be subrogated under legal or equitable principles. This determination should in the first instance be made by the trial court.

As previously indicated, the court also found that Polk County, Arkansas, was entitled to recover $321.34 for taxes due on the property of Duncan Corporation and ordered that amount paid to it out of the funds in the registry of the court. But the record is barren of any evidence to establish the existence or priority of the county's lien, United States v. Buffalo Savings Bank (U. S. Sup Ct. Jan. 7, 1963) [63-1 USTC ¶9166]; United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954), and no one appeared on behalf of the county at either the trial or on this appeal. Accordingly, we cannot allow the judgment in favor of Polk County to stand.

The judgment of the court dismissing the intervention of the Government and ordering the full amount of $6,50 to be paid to the Fahrenkamps is reversed, and the cause is remanded for additional consideration by the court solely on the subrogation issue, with the right of the interested parties to present additional evidence if the trial court deems such presentation necessary. The judgment in favor of Polk County , Arkansas , is reversed. In all other respects the judgment is affirmed.

¹ The pertinent part of the "dragnet" clause is "* * * together with all equipment of any kind and character used in connection therewith, and all additions, betterments and repairs made or to be made to or upon said property, * * *."

² At the time the mortgage was executed Duncan had possession of the loaders, had considerable equity in them, and could have specifically included them within the mortgage, subject to the conditional sales contracts. A purchaser of property under a conditional sales contract has such an interest in the property that he may mortgage it. Roachell v. Gates, 185 Ark. 350, 47 S. W. 2d 35 (1932); Howell v. Thew Shovel Co., 184 Ark. 777, 43 S. W. 2d 366 (1931); Loden v. Paris Auto Co., 174 Ark. 720, 296 S. W. 78 (1927); Thornton v. Findley, 97 Ark. 432, 134 S. W. 627 (1911). See also Cloud Oak Flooring Co. v. J. A. Riggs Tractor Co., 223 Ark. 447, 266 S. W. 2d 284 (1954).

 

 

[72-1 USTC ¶9193] United States of America , Plaintiff v. City of Los Angeles , California , Defendant Counterclaimant v. State of California , Franchise Tax Board, Defendant to Counterclaim

U. S. District Court, Central Dist. Calif., Civil No. 70-2860-AAH, 1/18/72, 336 F. Supp. 1014)

[Code Secs. 6323 and 6332]

Lien for taxes: Priority of liens: Federal excise taxes: California state income taxes: State as judgment creditor: Interest on fund.--A lien for Federal excise taxes had priority over an unrecorded California lien for state income taxes, since the State did not by reason of its lien become a judgment creditor. The city which held the fund to which the lien attached was not liable for interest from the date of its refusal to pay the fund to the Government, since it was awaiting a determination of the priority of the liens.

Rob ert L. Meyer, United States Attorney, Charles H. Magnuson, Lawrence V. Brookes, Assistant United States Attorneys, Los Angeles, Calif., for plaintiff. Roger Arneberg, City Attorney, John A. Daly, Assistant City Attorney, Ronald Tuller, Deputy City Attorney, Los Angeles, Calif., for defendant and counterclaimant. Evelle J. Younger, Attorney General, Philip C. Griffin, Mark W. Jordan, Deputy Attorneys General, for defendant to counterclaim.

Decision, Findings of Fact and Conclusions of Law, and Order For Judgment For Plaintiff

HAUK, District Judge:

Rob ert L. Meyer, United States Attorney, Los Angeles, Charles H. Magnuson, Assistant United States Attorney, Chief, Tax Division, Los Angeles, and Lawrence V. Brookes, Assistant United States Attorney, Los Angeles, attorneys for Plaintiff.

Roger Arneberg, City Attorney, Los Angeles, John A. Daly, Assistant City Attorney, Los Angeles, and Ronald Tuller, Deputy City Attorney, Los Angeles, attorneys for Defendant and Counterclaimant.

Evelle J. Younger, Attorney General of the State of California, Philip C. Griffin and Mark W. Jordan, Deputy Attorneys General for the State of California, attorneys for Defendant to Counterclaim.

This is an action for enforcement of Internal Revenue levy and for collection of Internal Revenue taxes for failure to honor levy. Jurisdiction is conferred upon this Court by 28 U. S. C. Sections 1340 and 1345 and 26 U. S. C. Section 740. The specific question posed is whether a tax lien of the United States, hereafter the Government, perfected prior to and superior to a State tax lien is subordinated by the State lien under the State's theory that their lien is that of a judgment creditor which under Federal law, takes priority over a Government lien which has not been filed.

[Facts]

The facts are not in dispute. On March 4, 1970 , the Los Angeles Police Department arrested Ronald Holman and pursuant to a valid search warrant seized from him $13,320.03 in United States currency. At the time of his arrest, Ronald Holman had in his possession ten pounds of hashish and marihuana. On March 5, 1970 , before 3:30 p. m., the United States Internal Revenue Service made a jeopardy assessment for excise tax (marihuana) in the amount of $16,000.00 and on the same day left a notice and demand at his last known address. On March 5, 1970, the California Franchise Tax Board issued a jeopardy assessment for personal income taxes in the amount of $14,500.00 and on the same day, sent a notice of assessment to the last known address of Ronald Holman.

On March 5, 1970, at 3:30 p. m., the California Franchise Tax Board served the Los Angeles Police Department with an Order to Withhold Tax in the amount of $14,500.00 based on its jeopardy assessment, and at 5:18 p. m., the United States Internal Revenue Service served them with a Notice of Levy in the amount of $16,000.00 based on its jeopardy assessment.

On March 6, 1970 , at 8:20 a. m., the Internal Revenue Service filed its Notice of Federal Tax Lien with the Los Angeles County Recorder and on March 25, 1970 , final demand for payment of levy was served upon the Los Angeles Police Department. Subsequently, the Government filed this action against the City of Los Angeles alleging that the City had refused to honor the levy and was continuing to refuse to surrender to the Government the currency which they had seized at the time of Holman's arrest. The City counterclaimed against the State of California , Franchise Tax Board, and requested the Court to order the Government and the State of California , Franchise Tax Board to interplead their respective claims.

On April 23, 1971, the Court entered an Order making the State of California, Franchise Tax Board, a Defendant to the Counterclaim; requiring it and the Plaintiff to interplead their respective claims; directing the City to pay into Court the sum of money it had seized from Holman; and discharging the City from all further liability with respect thereto.

[Priority of Liens]

The parties stipulated to all facts material to this action, filed briefs on the relevant issues and thereupon submitted the case on the briefs. As is readily apparent, the basic question to be decided here is whether the fund deposited in the registry of the Court by the City of Los Angeles should be paid to the Government pursuant to the lien created by the Federal jeopardy assessment ¹ or to the State of California, Franchise Tax Board, pursuant to the lien created by the State Order to Withhold Tax. ²

When a Federal tax lien is at issue, problems of priority of liens must be determined under Federal law. United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950); United States v. Division of Labor Law Enforcement [53-1 USTC ¶9219], 201 F. 2d 857, 859 (9th Cir. 1953). Of course, in determining the priority of the liens involved, we must apply the "cardinal rule" which was originally laid down by Chief Justice Marshall in Rankin & Schatzell v. Scott, 25 U. S. 177 (1827): "The principle is believed to be universal that a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds. . . ." 25 U. S. at 179. Thus, the lien which is first in time is first in right. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954); United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964). Since the parties have stipulated to the fact that the assessment which created the Federal lien was made prior to the service of the Order to Withhold Tax which created the State lien, it would seem that the issue is easily resolved, since the lien of the Government is unquestionably the "first in time."

[State as a Judgment Lien Creditor]

However, while admitting that Internal Revenue Code of 1954, §6322 gives the Government a lien on all the property of a taxpayer upon assessment, the State contends that under §6323(a) of the Internal Revenue Code of 1954, ³ the validity of the Government's lien is suspended as against a judgment lien creditor until notice is duly filed by the Government. The State argues that since the Order to Withhold Tax confers upon the State the power to execute on the created lien without resort to any legal or equitable action in a court of law or equity, ⁴ the State has become a judgment creditor and is thus qualified to come within the preferential class of §6323(a) of the Internal Revenue Code of 1954. Consequently, the State argues, in order for the United States to defeat the State as a judgment creditor, the State must have notice, and notice can only be given by the Government filing its lien. Since notice of the Government's lien was not filed until the day after the California Franchise Tax Board levied upon the funds held by the City, the State contends that the lien of the Government was subsequent to the lien of the State and thus ineffectual.

In order to resolve the issue in the manner postulated by the State, we must first accept the premise that the State is a judgment lien creditor under §6323(a) of the Internal Revenue Code of 1954. It is at this foundational point that the State's case falls short, for under Federal law, which we must follow, the mere Order to Withhold Tax does not raise the State to the level of a judgment creditor. This is especially true in light of the policy of the Federal Courts to "closely scrutinize State-created claims to find any possible imperfection which would permit seniority of the Federal lien." State of New Jersey v. Moriarity, 268 F. Supp. 546, 562 (D. N. J. 1967). In this case it is not even necessary to "closely scrutinize" the State claim for an imperfection since under many Federal court decisions the contention that the State's Order to Withhold Tax created in the State the rights of a judgment creditor is plainly without merit. ⁵

[Judgment Creditor Defined]

In determining who is a judgment creditor under Federal law we can look to the definition contained in Treas. Reg. 301.6323-1(2)(b)(1967); 26 C. F. R. §301. 6323-1(2)(b)(1971), which defines a judgment creditor as used in Section 6323(a) of the Internal Revenue Code of 1954:

"(b) The term 'judgment creditor' means a person who has obtained a valid judgment in a court of record and of competent jurisdiction for the recovery of specifically designated property or for a certain sum of money and, in the case of a judgment for the recovery of a certain sum of money, who has a perfected lien under such judgment on the property involved.

The term 'judgment' does not include an inchoate lien, such as an attachment lien, unless and until such lien has ripened into a judgment. United States v. Security Trust and Savings Bank (1950) [50-2 USTC ¶9492] 340 U. S. 47. Nor does the term 'judgment' include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity, such as, for example, the action of State taxing authorities. United States v. Gilbert Associates (1953) [53-1 USTC ¶9291] 345 U. S. 361; and United States v. City of New Britain (1954) [54-1 USTC ¶9191] 347 U. S. 81."

Assuredly, or even greater influence in our decision is the case of United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361, 364 (1953) in which the Supreme Court laid down the guidelines which Federal Courts must follow in determining whether an entity is a judgment creditor under the Internal Revenue Code. An essential principle of Congress in its tax scheme being uniformity, Mr. Justice Minton finds accordingly that the term "judgment creditor" must be used in the "usual, conventional sense of a judgment of a court of record, since all states have such courts." 345 U. S. at 364. Thereupon the Justice specifically excludes from the ranks of judgment creditors, entities whose rights are created by actions of State taxing authorities where the end result is merely "something in the nature of a judgment." Thus, since there has been no judgment whatsoever by a court of record concerning the State's alleged lien, and since the procedure effectuated by the State taxing authority can only be classified as "something in the nature of a judgment", it would be most imprudent for this Court to elevate the State to the status of a judgment creditor. Fortifying the Court in its decision that the lien arising from the State's Order to Withhold Tax is not the lien of a "judgment creditor" is the decision of our esteemed Brother of the Central District of California, Hon. Pierson M. Hall, in the case of U. S. v. Zuetell [56-1 USTC ¶9411], 138 F. Supp. 857 (S. D. Cal. 1956). In that case, Judge Hall, citing the phraseology of Gilbert, supra, held that a California lien for State income taxes which arose by recordation was not the lien of a "judgment creditor" under the Internal Revenue Code, and was therefore not prior to a Federal tax lien. Surely here, where the State has not recorded its lien, much less gone through a court determination, it cannot conceivably be considered a judgment creditor.

[Effect of State's Claim]

To follow the route proposed by the State would make a complete mullity of the Federal priority in tax matters established by Congress. Each State could enact a procedure that would destroy this priority by providing for an immediate and nonjudicial seizure of property which would instantly create in the State the rights of a judgment creditor, but which could be effected by the State after learning of the Federal lien and before the Federal authorities could file the necessary notice. If we were to construe the use of this summary type of procedure as creating a true judgment creditor, we would have to read into the law a self-stultifying intent of Congress to set up a priority of Federal liens while at the same time permitting the States the opportunity of devising a simple and self-serving method of subordinating and subverting these liens. This we cannot and will not do.

[Interest on Fund]

The United States is also seeking interest on the fund against the City of Los Angeles from the original date of the levy until the date the levy is satisfied, upon the theory that the City's failure to pay over the fund upon notice of levy made it liable for interest pursuant to Internal Revenue Code of 1954, §6332(c)(1) which provides that: "any person who fails or refuses to surrender any property . . . subject to levy, upon demand . . . shall be liable in his own person and estate to the United States in a sum equal to the value of the property . . . together with costs of interest on such sum . . . from the date of levy." However, as simple and straightforward as this statute appears, we do not feel that it was intended to cover the situation at bar. It would be inequitable and unjust to exact interest in a situation such as this, where the City was merely an innocent stakeholder which properly came to the Court for assistance by way of interpleader. The City would not turn over the funds to one taxing authority without becoming liable to the other. It was in the unenviable position of being caught between the rock and the whirlpool: if it had turned the money over to the State it would have been liable to the Government under the Internal Revenue Code of 1954, §6332(c) ⁶; and if it had turned the money over to the Government, it would have been liable to the State under Cal. Rev. and Tax Code, §18808 (West 1970). ⁷ It was for this reason that we originally directed the City to pay the fund into the registry of the Court and discharged it from any and all further liability while requiring the State and the United States to interplead their claims. And it is for this same reason that the Court now denies the claim of the Government for interest from the City.

[Orders]

Pursuant to the foregoing which shall constitute findings of fact and conclusions of law as required by F. R. Civ. P. 52, it is hereby ordered that:

1. Judgment be entered for the Plaintiff United States in the amount of $13,320.03, which sum was heretofore deposited in the registry of the Court and shall be paid forthwith to Plaintiff by the Clerk.

2. The Defendant, City of Los Angeles , and the Defendant to the Counterclaim, California Franchise Tax Board, shall take nothing herein but shall be discharged from any and all further liability with respect to the claims and allegations set forth in the complaint and counterclaim herein.

3. The Plaintiff prepare and lodge with the Court a separate proposed judgment in conformance with the foregoing decision.

¹ §6321. Lien for taxes.

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

Int. Rev. Code of 1954, §6321.

§6322. Period of lien.

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

Int. Rev. Code of 1954 §6322.

² §18807. Withhold notice; service; duty of recipient.

The Franchise Tax Board may by notice, served personally or by registered mail, require any person, officer or department of the State, political subdivision or agency of the State, city organized under a freeholder's charter, or political body not a subdivision or agency of the State, having in their possession, or under their control, any credits or other personal property or other things of value, belonging to a taxpayer or to a person who has failed to withhold and transmit amounts due pursuant to Sections 18806 and 18808, to withhold, from such credits or other personal property or other things of value, the amount of any tax, interest or penalties due from the taxpayer or the amount of any liability incurred by such person for failure to withhold and transmit amounts due from a taxpayer under this part and to transmit the amount withheld to the Franchise Tax Board at such times as it may designate.

Cal. Rev. and Tax Code §18807 (West 1970).

³ §6323. Validity and priority against certain persons.

(a) Purchases, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 9321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

Int. Rev. Code of 1954 §6323(a).

⁴ §18809. Withhold notice; compliance without recourse to court; nonliability to taxpayer.

Any person required to withhold and transmit any amount pursuant to this article shall comply with the requirement without resort to any legal or equitable action in a court of law or equity. Any person paying to the Franchise Tax Board any amount required by it to be withheld is not liable therefor to the person from whom withheld unless the amount withheld is refunded to the withholding agent.

Cal. Rev. & Tax Code §18809 (West 1970).

⁵ United States v. Acri [53-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Liverpool etc. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218 (1955); United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954); United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361 (1953); United States v. England [55-2 USTC ¶9693], 226 F. 2d 205 (9th Cir. 1955); California State Department of Employment v. United States [54-1 USTC ¶9218], 210 F. 2d 242 (9th Cir. 1954).

⁶ §6332. Surrender of property subject to levy.

(c) Enforcement of levy.--

(1) Extent of personal liability.--Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary or his delegate, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made, together with costs and interest on such sum at the rate of 6 per cent per annum from the date of such levy. Any amount (other than costs) recovered under this paragraph shall be credited against the tax liability for the collection of which such levy was made.

(2) Penalty for violation.--In addition to the personal liability imposed by paragraph (1), if any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount recoverable under paragraph (1). No part of such penalty shall be credited against the tax liability for the collection of which such levy was made.

Int. Rev. Code of 1954 §6332(c).

⁷ §18808. Withhold notice; liability on failure to comply.

Any person failing to withhold the amount due from any taxpayer and to transmit the same to the Franchise Tax Board after service of a notice pursuant to Section 18807 is liable for such amounts.

(Added by Stats. 1943, c. 659, p. 2403, §1. Amended by Stats. 1951, c. 70, p. 257, §1; Stats. 1951, c. 215, p. 465, §2.)

Cal. Rev. and Tax Code §18808 (West 1970)

 

 

[56-1 USTC ¶9411] United States of America , Plaintiff v. William R. Zuetell, et al., Defendants

In the United States District Court, Southern District of California, Central Division, No. 17157-PH, March 15, 1956

[1939 Code Secs. 3670 and 3671--Similar to 1954 Code Secs. 6321 and 6322 respectively; 1939 Code Sec. 3672(a)--Changed in 1954 Code Sec. 6323(a)]

Assessment and collection: Lien for taxes; Priority.--The liens of the United States for income taxes have priority over the lien of the State of California for funds of the taxpayer held in escrow where the U. S. liens were assessed prior to the date the state lien was recorded even though the U. S. liens were not filed with the County Recorder for Los Angeles County until after the California lien was recorded. The provision of the California law making the California lien a judgment lien did not make the state a judgment creditor under the provision of the Internal Revenue Code which states that U. S. liens shall not be valid as against judgment creditors until filed.

Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief Tax Division, Rob ert H. Wyshak, Assistant United States Attorney, 600 Federal Building, Los Angeles 12, Calif., for plaintiff. Edward Sumner, Deputy Attorney General, 600 State Building, Los Angeles 12, Calif. , for State of California . William R. Zuetell and Harriett J. Zuetell, Propria Persona.

Memorandum for Judgment

HALL, District Judge:

The Second Cause of Action was submitted for final judgment on stipulation of facts.

That cause of action concerns only the priority as between the liens of the United States under Sections 3670 and 3671 of the 1939 Revenue Code [now 26 USCA 6321 and 6322] and the lien of the State of California which may have arisen by recordation of a Certificate of Lien with the County Recorder of Los Angeles County, to secure unpaid California income taxes of the defendant taxpayers herein, under and pursuant to Sections 18,881 and 18,882 of the Revenue and Taxation Code of the State of California.

By the terms of Sections 3670 and 3671 of the 1939 Revenue Code, the liens of the United States arose prior to the date of the recordation on November 19, 1951 , of the above-mentioned Certificate of Lien by the State. Under the California Revenue and Taxation Code, Section 18,882, the Certificate when filed for recordation, "has the force, effect, and priority of a judgment lien."

The question is whether or not such lien of the State is the lien of a "judgment creditor," under the terms of Section 3672(a) of the 1939 Revenue Code [now 26 USCA 6323(a)], and thus prior to the above-mentioned liens of the United States. Section 3672(a), in its material part, provides that the lien provided for in Sections 3670 and 3671 [26 USCA 6321 and 6322] "shall not be valid as against any * * * judgment creditor."

The matter is clearly settled by United States v. Gilbert Associates, (1953) 345 U. S. 361 [53-1 USTC ¶9291], construing a New Hampshire statute which provided that tax assessments were "in the nature of a judgment." The court held that the meaning and application of the phrase "judgment creditor" in Section 3672 was a Federal question. It also held that the words "judgment creditor," as used in Section 3672, were to be construed to give uniformity to them in all States, and that: "In this instance, we think Congress used the words 'judgment creditor' in Section 3672 in the usual, conventional sense of a judgment of a court of record, since all States have such courts." See also: United States v. Acri et al., (1955) 347 [348] U. S. 211 [55-1 USTC ¶9138]; United States v. Liverpool etc., (1955) 348 U. S. 215 [55-1 USTC ¶9136]; United States v. Scovil, (1955) 348 U. S. 218 [55-1 USTC ¶9137]; and United States v. England, (9 Cir. 1955) 226 Fed. (2d) 205 [55-2 USTC ¶9693].

The slight difference in language between the New Hampshire statute and the California statute can make no difference in the meaning of the phrase "judgment creditor," as used in the Federal statutes.

The plaintiff is entitled to a judgment, and will prepare and submit the same.

Findings of Fact, Conclusions of Law and Order for Distribution

The second cause of action only having come on for hearing on February 27, 1956, before the Honorable Peirson M. Hall, Judge, presiding without the intervention of a jury, in order to determine the priorities of the plaintiff, United States of America and defendant, State of California in and to the escrowed fund of $1,759.73; the plaintiff, United States of America appearing by its counsel; Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief Tax Division, Rob ert H. Wyshak, Assistant United States Attorney, and the State of California, by its counsel Edmund G. Brown, Attorney General, State of California, Edward Sumner, Deputy Attorney General, and the court having considered the stipulations of fact and arguments of counsel makes the following Findings of Fact and Conclusions of Law with respect to the second cause of action, there being no just reason for delay.

Findings of Fact

I. This is an action for foreclosure of Internal Revenue tax liens brought pursuant to 26 U. S. C. Section 7401, 7403 (1954), by direction of the Attorney General of the United States at the request of the Commissioner of Internal Revenue.

II. On July 21, 1953, certain real estate owned by William R. and Harriett J. Zuetell at all times here pertinent was sold by them and by agreement entered into between them, the plaintiff United States of America, and defendant State of California, the net proceeds of the sale in the amount of $1,759.73 were retained in escrow by the Pasadena Escrow and Safe Deposit Company of Pasadena, California, subject to and impressed with all the rights and liens of the plaintiff and said defendant State of California against the Zuetells' property, to be paid by such escrow agent as determined by a court of competent jurisdiction.

III. On December 22, 1948, the Commissioner of Internal Revenue assessed against the defendant, William R. Zuetell, additional income taxes for the year 1944 in the amount of $785.82, plus $177.17 interest, of which $919.10 has been paid, leaving an outstanding balance of $43.89, and additional income taxes for the year 1945 in the amount of $15,701.39, plus $2,608.80 interest, of which $3,468.97 has been paid, leaving a balance of $14,841.22 outstanding, or a total for both years of $14,885.11.

The assessment lists showing the aforesaid assessments were scheduled to and received by the Collector of Internal Revenue on December 28, 1948 .

Notices of assessment of the taxes were given and demands for the payment thereof were made by the Collector of Internal Revenue upon the defendant on December 28, 1948, but no part of said taxes and interest so assessed has been paid except as hereinabove set forth.

IV. (a) On July 15, 1949, the Commissioner of Internal Revenue assessed against Harriett J. Zuetell $785.82 as additional income taxes owing for the year 1944, plus $204.31 interest, a total of $990.13 and $13,635.39 as additional income taxes for the year 1945, plus $2,727.08 interest, a total of $16,362.47.

The assessment lists showing the aforesaid assessments were scheduled to and received by the Collector of Internal Revenue on July 18, 1949 .

Notices of Assessment of the taxes were given and demands for the payment thereof were made by the Collector of Internal Revenue upon said defendant on July 20, 1949 , but no part of the taxes and interest so assessed has been paid.

(b) On August 26, 1949 , the Commissioner of Internal Revenue assessed against the defendant, Harriett J. Zuetell, $1,508.74 as income taxes owing for the year 1945. The assessment list showing the aforesaid assessment was scheduled to and received by the Collector of Internal Revenue on August 29, 1949 . Notice of assessment of the tax was given and demand for the payment thereof was made by the Collector of Internal Revenue upon said defendant on September 6, 1949 , but no part of the taxes so assessed has been paid.

(c) On February 18, 1949 , the Commissioner of Internal Revenue assessed against the defendant, Harriett J. Zuetell, $1,931.00 as additional income taxes owing for the year 1945, plus $338.88 interest, a total of $2,269.88, of which $1,760.48 has been paid, leaving a balance outstanding of $509.40. The assessment list showing the aforesaid assessment was scheduled to and received by the Collector of Internal Revenue on February 21, 1949 . Notice of assessment of the tax was given and demand for the payment thereof was made by the Collector of Internal Revenue upon said defendant, but no part of the taxes and interest so assessed has been paid, except as hereinabove set forth.

V. On July 8, 1953 , notices of tax lien were filed with the County Recorder for the County of Los Angeles, California, wherein liens are claimed in favor of the United States in the amounts of above assessments upon all property and rights to property of William R. and Harriett J. Zuetell.

VI. The total amount of taxes as hereinabove set forth, due and owing plaintiff from defendant William R. Zuetell or defendant Harriett J. Zuetell, or both of them, together with interest, is, as of September 1, 1954, a sum in excess of $1,759.73, for which said defendants are liable.

VII. On November 19, 1951, the Franchise Tax Board, an agency of the State of California, recorded a Certificate of Lien with the County Recorder of Los Angeles County pursuant to the provisions of Section 18882 of the Revenue and Taxation Code of the State of California to secure payment of tax, interest and penalty due the State of California from the defendants, William R. and Harriett J. Zuetell under the California Personal Income Tax law for the taxable years 1944, 1945 and 1946 in the sum of $3,679.39 with interest thereafter at the rate of six per cent per annum on said sum from November 1951 to date of payment.

Conclusions of Law

I. The Court has jurisdiction of the subject matter and of the parties hereto.

II. The liens of the United States of America arose on the dates on which the assessment lists were received pursuant to Sections 3670 and 3671 of the Internal Revenue Code of 1939 and are prior to the lien of the State of California which did not arise until the Certificate of Lien was filed on November 19, 1951 with the County Recorder.

III. The lien of the Franchise Tax Board of the State of California for individual personal income taxes, although characterized by Sections 18881 and 18882 of the Revenue and Taxation Code of the State of California as having the force, effect and priority of a judgment lien, does not give the Franchise Tax Board the status of a "judgment creditor" within the meaning of Section 3672(a) of the Internal Revenue Code of 1939.

U. S. v. Gilbert Associates, Inc., 345, 361, 364 (1953) [53-1 USTC ¶9291]; U. S. v. Security Trust and Savings Bank of San Diego, 340 U. S. 47, 52 (1950)[50-2 USTC ¶9492]; U. S. v. England, -- Fed. (2d) -- (9th Cir., October 5, 1955 ) [55-2 USTC ¶9693].

IV. Congress used the words "judgment creditor" in Sec. 3672 in the usual, conventional sense of a judgment of a court of record.

V. The plaintiff, United States of America , is entitled to the escrowed fund of $1,759.73 to be applied to the delinquent federal tax of the defendants Zuetell.

Order of Distribution

In accordance with the foregoing Findings of Fact and Conclusions of Law, it is hereby ordered, adjudged and decreed with respect to the second cause of action only, there being no just reason for delay: that the liens of the plaintiff, United States of America, are prior to the liens of the Franchise Tax Board of the State of California; that the United States of America is entitled to the escrowed fund of $1,759.73 held by the Pasadena Escrow & Safe Deposit Company of Pasadena, California, to be applied to the delinquent Federal income taxes of the defendants Zuetell; that the plaintiff, United States of America, may apply to this court for further process in the enforcement of this judgment, if necessary.

 

 

[50-2 USTC ¶9451]United States of America, Plaintiff v. R. F. Fisher, W. F. Minehan, A. G. Magnuson, d/b/a East Bay Ship Service, California Employment Stabilization Commission, Curtola Company, Marine Ways, Howard P. Gleason, Sheriff of Alameda County, California, Defendants Howard P. Gleason, Sheriff of Alameda County, State of California, Cross-Complainant, v. United States of America, R. F. Fisher, W. F. Minehan, A. G. Magnuson, d/b/a East Bay Ship Service, California Employment Stabilization Commission, Curtola Company, Marine Ways, The Rix Company, Inc. and Wholesalers Adjustment Bureau of San Francisco, Cross-Defendants

In the District Court of the United States for the Northern District of California, Southern Division, No. 26263 S, 93 FSupp 73, September 7, 1948

Lien for taxes: Priority of State taxes.--The California liens for delinquent unemployment insurance contributions were obtained by virtue of the issuance of warrants which put the State in the position of a judgment creditor perfecting its claim against taxpayers' personal property by the equivalent of execution. The State lien was prior in time to the lien of the United States for unpaid withholding and social security taxes and was entitled to satisfaction prior to that of the United States . The lien of the United States had priority over that of a creditor which was not a judgment creditor prior to the time the United States filed notice of its lien.

Frank J. Hennessy, United States Attorney, San Francisco , California , for plaintiff. George V. Curtis, 405 Montgomery Street, San Francisco, California, Snook & Chase, Central Bank Bldg., Oakland, California, for defendants. Ralph E. Hoyt and Archie A. Smith, 1225 Fallon Street , Oakland , California , for cross-complainant. George Lieberman, 58 Sutter Street , San Francisco , California , for Rix Company, cross-defendant. Seaman & Jackson, 703 Market Street and Joseph L. Alioto, 111 Sutter Street, both of San Francisco, California, Fred N. Howser, Attorney General, State of California, Sacramento, California, for cross-defendants.

Opinion and Order

LEMMON, District Judge:

This suit was brought by plaintiff to recover certain unpaid federal insurance contribution taxes and to collect certain withholding taxes assessed against R. F. Fisher, W. F. Minehan and A. G. Magnuson, doing business as East Bay Ship Service, hereinafter called "taxpayers", the defendants. The California Employment Stabilization Commission seeks to enforce liens for delinquent unemployment insurance contributions, and the Rix Company seeks to enforce a lien of attachment and execution. The fund upon which these asserted liens are sought to be impressed was derived from money owing to taxpayers from the Curtola Company, arising out of transactions between them as contractor and subcontractor. This fund amounts to $14,513.24 and is impounded in the registry of the court pending the outcome of this action.

The parties hereto in their briefs agree that the statement of facts contained in plaintiff's brief is fair and the following is a brief summary thereof.

[Lien for Taxes]

On October 5, 1945 defendant, The Rix Company, Inc., brought action against taxpayers in the Superior Court of the State of California to recover $3,566.40 with interest and costs. On the same day a writ of attachment was issued and was levied upon Curtola Company on October 6, 1945 . October 20, 1945 the sum of $3,566.40 was received by the Sheriff of Alameda County, California, from Curtola Company in obedience to the writ. March 8, 1946 the Superior Court of the State of California , in and for the City and County of San Francisco , entered its judgment in that action in favor of the Rix Company, Inc., against taxpayers for the sum of $3,566.40 with interests and costs. On March 13, 1946 a writ of execution was issued in that action for the sum of $3,601.90 and was levied by the Sheriff who then declined to pay the Rix Company the $3,566.40 because of intervening claims thereto of plaintiff and the State of California hereinafter set forth. The lien of the writ of attachment had never been released or discharged prior to the levy of the writ of execution.

December 14, 1945 , certificate No. 0270 in the amount of $5,748.06 and certificate No. 0271 in the amount of $233.52 for delinquent unemployment insurance contributions, were issued by the California Employment Stabilization Commission against taxpayers. On the same day the Commission issued warrants Nos. 053 and 054 against taxpayers. The warrants were delivered to the Sheriff of Alameda County on December 17, 1945 with instructions to levy on all accounts receivable in the hands of Curtola Company and belonging to taxpayers. The certificates were recorded and the warrants levied on the same day.

The Commissioner of Internal Revenue December 20, 1945 assessed federal withholding taxes for the 3rd quarter of 1945 against taxpayers in the sum of $9,517.02, after allowing a credit for the 4th quarter of 1945 in the sum of $1,019.10. The assessment list covering the total of these sums was received in the office of the Collector of Internal Revenue at San Francisco, California, December 26, 1945 and the Collector issued Notice of Demand December 28, 1945.

January 15, 1946 Commissioner of Internal Revenue assessed federal insurance contribution taxes against taxpayers for the 3rd quarter of 1945 in the sum of $257.78, after a credit allowance. On July 12, 1946 the Commissioner made a similar assessment in the amount of $10.81, after credit allowance. January 24, 1946 the assessment list for these 3rd quarter of 1945 taxes was received by the Collector of Internal Revenue in San Francisco , California , who issued Notice of Demands to taxpayers on the same date.

Again March 29, 1946 the Commissioner assessed federal insurance contribution taxes against the taxpayers in the sum of $275.05; the assessment list therefor was received in San Francisco April 10, 1946 and Notice and Demand issued the same day.

California Employment Stabilization Commission issued on February 4th, 1946 certificate No. 0455 for delinquent unemployment insurance contributions for the 4th quarter of 1945 in the amount of $559.48; said certificate was recorded in Alameda County February 9, 1946, and a warrant, No. 069, was delivered to the Sheriff who levied on the funds owing taxpayers by Curtola Company February 13, 1946. On December 11, 1946 warrants Nos. 053-A and 054-A were delivered to the Sheriff of Alameda County with instructions to levy on the fund then in his possession (the money heretofore received from Curtola Company as taxpayers' money), and said warrants were levied.

The interested parties hereto stipulated that the $14,513.24 in question here was due and owing the taxpayers by Curtola Company on October 5, 1945 , the date the Rix Company sued taxpayers in the Superior Court.

[Issues]

The questions involved are: (1) Have liens been created on said fund in favor of each of the three claimants, the United States for unpaid withholding and social security taxes, the State of California for unemployment taxes and the claim of the Rix Company created by attachment and later by judgment and execution; (2) The priority of said liens to the fund heretofore owing by Curtola Company to taxpayers and now in the registry of this court.

The liens considered herein are all of statutory origin, and, unless a preference is specifically granted by statute priority would be governed entirely by the time of their creation. California Civil Code, Sec. 2897.

[U. S. Lien]

By statute the United States is given a lien on all property and rights to property belonging to a taxpayer who has not paid after demand a tax due it. 26 U. S. C. A. 3670. The lien arises at the time the assessment list is received by the Collector of Internal Revenue unless a specific date is set by law, 26 U. S. C. A. 3671, and no specific date is set by statute as to the tax liens claimed by plaintiff.

[Creditor's Lien]

The claim of lien made by the Rix Company sets forth the proposition that when it obtained an execution and levy upon the money due taxpayers from Curtola Co. a lien was perfected in its favor and that this lien related back as a matter of time to the date the attachment was levied.

The California Civil Code Sec. 2872 provides: "A lien is a charge imposed in some mode other than by a transfer in trust upon specific property by which it is made security for the performance of an act." Section 2881 states: "A lien is created: 1. By contract of the parties; or 2. By operation of law."

At common law, and as a matter of technical nicety, an attachment does not create a true lien, but through statute and modern interpretation it has apparently been given the efficacy of a lien. In California to create a lien by attachment on personal property, if it is capable of manual delivery, possession is required. California Code of Civil Procedure Sec. 542(3). Debts and credits must be attached by leaving a copy of the writ of attachment with the person owing the defendant the debt. California Code of Civil Procedure Sec. 542(6).

The Rix Company on October 6, 1945 by virtue of the levy of the writ of attachment by the Sheriff on Curtola Company obtained a lien against the credit owing taxpayers by Curtola Company, and on October 20th when the sum of $3,566.40 was delivered to the Sheriff by Curtola Company in response to the Writ, the Sheriff had a special lien on said sum dependent on possession. C. C. 3057. This lien inured to the benefit of the Rix Co. for which the Sheriff was acting.

On December 17, 1945 while the Rix Co. was looking to its attached fund of $3,566.40 for payment of its claim against taxpayers, the Sheriff levied against the sum of $10,946.84 remaining due taxpayers from Curtola Co. by virtue of Warrants 053 and 054 issued by the State of California in the sums of $5,748.06 and $233.52.

[Lien of State of California ]

A lien was created in favor of the State of California against the fund of $10,946.84, C. C. P. 542(6) and Sec. 688, as the California Unemployment Insurance Act, Deering's General Laws 1947, Supplement, Section 45.10b, provides that a warrant may be issued after a certificate is recorded, for the collection of any amount required to be paid by the Act; the warrant to have the same effect as a writ of execution.

At the time the State of California obtained said lien, The Rix Co. was looking to its special lien created by attachment on the $3,566.40 and held by the Sheriff. Thus two separate and distinct liens were created on two separate and distinct funds. No question of priority between Rix Co. and the State of California existed on December 26, 1948 when the United States enters as a claimant.

[Priority of Liens]

The State of California had the status of a judgment creditor who has obtained an execution based upon a judgment when the Sheriff executed its warrants. The Internal Revenue Code, 26 U. S. C. A. 3672 provides that the United States ' lien for taxes shall be invalid against a "judgment creditor" until notice of the lien has been filed by the collector. The State's lien on the $10,946.84 fund is therefore superior to that of the United States .

The State of California obtained a lien by virtue of the execution of the warrants on $5,748.06 and $233.52 of the funds obtained by the Sheriff from Curtola Co. and belonging to taxpayers which is prior in time and therefore in right to the claims of plaintiff herein.

While normally the Rix Company would have by its attachment what is tantamount to a lien in modern jurisprudence, the Internal Revenue Code (26 U. S. C. A. 3672) gives the lien of the United States priority over all liens except in the case of a mortgagee, pledgee, purchaser, or judgment creditor, and against those classes if later in time to the filing of notice of lien of the United States.

This section of the Internal Revenue Code has been given a strict construction by the courts, and the mere fact that an attachment is prior in time to the lien of the United States for taxes is not sufficient to give the attaching creditor a preference as against the United States . Miller v. Bank of America , N. T. & S. A., et al., 166 Fed. (2d) 415; MacKenzie v. U. S. , 109 Fed. (2d) 540. The creditor must have obtained his judgment and in the case of personal property have execution levied thereon before a lien capable of priority over that of the United States for taxes could be created. Execution was not had by Rix Company until March 13, 1946 . Rix Company takes by attachment only the title held by its creditor and must necessarily be subject to the tax lien of the United States .

Therefore the lien of the Rix Company is junior to any lien of the United States for taxes created prior to judgment and execution by the company.

Since the Rix Company had a special lien by virtue of the seizure by the Sheriff of $3,566.40 under the Rix attachment there is no right in the Rix Company to a general lien against taxpayers' property. The State of California likewise holds a special lien by virtue of the levy of the warrants Nos. 053 and 054 to $5,748.06 and $233.52. Each party is limited to the special fund that has been set aside by virtue of the attachment and levy of the warrants.

The Rix Company not being a judgment creditor in the light of 26 U. S. C. A. 3672 is junior to the claim of the United States on December 26, 1945 when the assessment list was filed by the Commissioner and to the lien of the United States for $9,517.02 and $1,019.10 of the taxpayers' money.

The State of California being in the nature of a judgment creditor perfecting its claim against taxpayers' personal property by the equivalent of execution and being prior in time to the lien of the United States for taxes and having execution on a fund other than that sought by the Rix Company is entitled to preference to the taxpayers' money in the amount of $5,748.06 and $233.52.

For the reasons set forth above, the fund of $14,513.24 impounded in the registry of this court should be disposed of as follows:

1. The State of California to receive the sums of $5,748.06 and $233.52, a total of $5,981.58.

2. Plaintiff is entitled to the remainder of the sum, $8,531.66.

It is unnecessary for me to proceed further in the determination of the priority of the various other liens alleged herein, inasmuch as the fund which is the subject of this action has been thus entirely disposed of.

Plaintiff to prepare findings of fact and conclusions of law in accordance with the local rule. Each party to bear its own costs.