Distribution of
Proceeds

[84-2 USTC
¶9928]In the Matter of: Tom LeDuc Enterprises, Inc., Debtor, Tom LeDuc
Enterprises, Inc., Appellant v.
United States of America
, Appellee
U.
S. District Court, West. Dist. Mo., West Div., No. 83-1213-CV-W-4, 47 BR
900, 9/10/84
[Code Sec. 6323]
Lien for taxes: Priority: Release by other creditors.--The order
of the U. S. Bankruptcy Court granting a debtor's amended application
for authority to make disbursement to priority creditors was reinstated.
The agreement between the IRS and the debtor was clear and well
documented, and the IRS was not required to seize property or take any
court action. Where there was no seizure of property or money as in a
levy, the debtor's payment to the IRS was voluntary and should be
applied as the debtor directed.
Donald B.
Steele, James C. Mordy, David T. Holt, Morrison, Hecker, Curtis, Kuder
& Parrish, 1102 Grand Avenue, Kansas City, Missouri 64106, for
appellant.
Rob
ert G. Ulrich, United States Attorney,
Kansas City
,
Missouri
64102
, for appellee.
Order
CLARK, Chief
Judge:
Plaintiff/debtor
seeks review of an order entered on
September 21, 1983
, by the United States Bankruptcy Court for the Western District of
Missouri, Western Division. Plaintiff seeks to have the
August 26, 1983
, order granting debtor's amended application for authority to make
disbursement to priority creditors reinstated. Plaintiff request for
reinstatement of the
August 26, 1983
, order will be granted.
Background
On
April 2, 1980
, LeDuc Enterprises, Inc., filed a petition with the United States
Bankruptcy Court for the Western District of Missouri under Chapter 11
of the Bankruptcy Code. 11 U. S. C. §§ 1101 et seq., 1129. After all
assets of the debtor had been liquidated, and all disputed claims had
been determined, there was a balance of $15,460.00. Although there were
no class 1 or class 2 claims, there were $62,443.64 in class 3 tax
claims alleged by a variety of taxing authorities. The IRS's claim
against the debtor was for $51,473.04 in withholding taxes. Of those
$34,517.70 represented the trust fund portion of the withholding tax
liability. Of the balance of assets which remained to be distributed
($15,460.00), the IRS was limited to a prorated recovery of $12,743.86.
The debtor filed an amended application for authority to make
disbursements to priority creditors on
August 25, 1983
. The bankruptcy court entered its order granting debtor's amended
application on
August 26, 1983
. The amended application provided that the payment of $12,743.86 was to
be applied to the trust fund portion of the corporation's outstanding
withholding tax liability. In communications between the debtor and the
IRS between
July 1, 1983
, and
August 24, 1983
, an agreement had been reached between the IRS and the debtor
concerning the corporation's trust fund liability. The IRS agreed to
apply its pro rata share of the balance of the assets of the corporation
($12,743.86) to the trust fund portion of the corporation's liability,
if the debtor would pay the balance which was owned to the trust fund
($21,774.70). In final negotiations on
August 24, 1983
, Wanda Gilbert, a collection agent of the IRS, informed the debtor that
in order for the corporation's funds to be applied to the trust fund
portion of the tax liability there must be a court order authorizing the
corporation to do so. Therefore, the debtor's attorneys filed the
debtor's amended application for authority to make disbursement to
priority creditors which the court granted on
August 26, 1983
. On that date in a meeting between the IRS and the debtor, a personal
check for $21,772.84 along with a check, as authorized by court order,
from the corporation for $12,743.86 and a letter outlining the details
of the agreement between the IRS and the debtor were presented to the
IRS. After cashing both the personal check and the check from LeDuc
Enterprises, the IRS requested that the portion of the order of
August 26, 1983
, which required the IRS to apply the payment from the corporation to
the trust fund portion be deleted. Bankruptcy court granted the IRS's
request on
September 21, 1983
.
Discussion
If voluntary
tax payments are made in the absence of any agreement then the IRS can
apply the payments received to any lien or any amount owed. In Re
Frost, 19 B. R. 804, 808 (Bankr. D.
Kan.
1982). However, when the taxpayer specifically directs the IRS to apply
the payments to individual liens or amounts owed, then payments should
apply, and the directives must be followed by the IRS.
Id.
at 808. When payments are involuntary, the IRS and not the taxpayer has
the right to decide how to apply those payments. In Re Obie Elia
Wrecking Company, Inc., 35 B. R. 114 (Bankr. N. D. Ohio 1983). Thus,
the question before this Court is whether or not the payments made as a
result of the
August 26, 1983
, disbursement order are voluntary or involuntary.
In order to
determine whether or not the payments to the IRS are voluntary or
involuntary, it must be determined whether or not the payment "was
received through court or
admin
istrative action which resulted in actual seizure of property or money
such as in a levy. This inquiry requires an examination of the specific
facts of each case not just an examination of whether or not the payment
was made while the payee was in bankruptcy." In Re Avildsen
Tools and Machines, 30 B. R. 911, 917 (Bankr. N. D. Ill. 1983). The
facts in Avildsen are similar to the ones before this Court
today. In that situation the IRS did not have to take any specific court
action in order to collect the monies which it was owed, unlike the
situation in O'Dell v. United States, 326 F. 2d 451 (10th Cir.
1964), where the IRS was forced to seize and offer for sale certain real
property owned by the debtor. In O'Dell, court action and seizure
was required and the court ruled that the payment was involuntary. In Avildsen,
since there was no seizure of the property or money such as in a levy,
the debtor's payment to the IRS was "voluntary in every sense of
the word and thus should have been applied as the debtor directed."
Avildsen at 917.
In addition
the Avildsen court pointed out that unlike the situation in In
Re Pan American Educational Institute, No. 81-03917-3-11 (Bankr. W.
D.
Mo.
July 28, 1983
), where no agreement existed, an agreement existed between IRS and the
debtor to apply the funds in the manner directed. The agreement in Avildsen
was nothing more than a restrictively endorsed check to the IRS
directing that the funds be applied in a specific manner. The Court in Avildsen
held that when the IRS accepted the debtor's restrictively endorsed
check, gave receipts for the check and applied the funds as directed by
the debtor, then the IRS had accepted the debtor's offer and engaged in
conduct in which the debtor may reasonably have relied and therefore
"the IRS should not be allowed to reject the debtor's offer and
reapply the funds as it so desires . . . after acceptance." Avildsen
at 917. The agreement between the IRS and the plaintiff is clear and
well documented, nor was the IRS required to seize property or take any
court action. Therefore, for the above-stated reasons, it is hereby
ORDERED that
the bankruptcy court's order granting debtor's amended application for
authority to make disbursement to priority creditors entered on
August 26, 1983
be reinstated.
[67-1 USTC
¶9394]Afco, Inc., Interpleading Plaintiff v. Eldorado Manufacturing
Corp., Continental Casualty Company, Lyons, Weber & Co., Alexander
Langsam, Hardboard Fabricators Corp. and Nathaniel Rothstein,
Interpleaded Defendants
United States of America
, Plaintiff-in-Intervention v. Afco, Inc., Eldorado Manufacturing Corp.,
Continental Casualty Company, Lyons, Weber & Co., Alexander Langsam,
Hardboard Fabricators Corp. and Nathaniel Rothstein,
Defendants-in-Intervention
U.
S. District Court, So. Dist. N. Y., 65 Civ. 3001, 4/17/67
[1954 Code Sec. 6323]
Lien for taxes: Priority of creditors: Settlement among creditors.--A
distribution of insurance proceeds was ordered in accordance with the
terms of a settlement agreed upon by the United States and other
creditors. The objections of an interpleader to the proposed
distribution were overruled because the
United States
had a superior lien which would have exhausted the entire amount on
deposit.
Rob
ert M. Morgenthau, United States Attorney, New York, N. Y., for U. S.
Max J. Gwertzman, 116 John St., New York, N. Y., Nathaniel Rothstein, 11
E. 44th St., New York, N. Y., for defendants-in-intervention.
Memorandum
BRYAN,
District Judge:
The
interpleaded defendants and defendants-in-intervention, Eldorado
Manufacturing Corp. (Eldorado), Continental Casualty Company
(Continental), Lyons, Weber 3 Co. (Lyons) and Nathaniel Rothstein, move
for an order directing distribution of the sum of $4,000 now on deposit
with the Clerk of this Court to the credit of this action.
Plaintiff-in-intervention, the
United States
, supports the motion and the distribution as proposed, reserving,
however, its rights in these actions against Eldorado.
This fund to
be distributed was deposited by the interpleading plaintiff Afco
pursuant to an order of Judge McLean dated
June 14, 1966
. This fund was the proceeds of the settlement of an action in the New
York Supreme Court brought by Eldorado against Afco to recover for fire
loss sustained by Eldorado. Eldorado brought the suit as trustee of an
express trust for the benefit of Continental and
Lyons
under a deed of trust dated
September 21, 1960
, by the terms of which Eldorado agreed to pay over the first $12,000 of
any amount recovered from Afco and other insurers, 5/6ths to Continental
and 1/6th to
Lyons
.
The
distribution proposed, pursuant to agreement between the moving parties
and the United States, in settlement of their various claims against the
fund on deposit, is as follows: $950 to the United States in partial
satisfaction of a tax lien against Eldorado; $200 to Max J. Gwertzman,
Esq., in payment of fees for services rendered in this interpleader
action; $1,365.83 to Nathaniel Rothstein, Esq., in payment of his fees
for services and disbursements in the action of Eldorado against Afco,
which was settled by the payment of the $4,000 on deposit; $1,236.81 to
Continental and $247.36 to Lyons, representing respectively 5/6th and
1/6ths distributions under the trust agreement.
The only
objection to the proposed distribution is raised by interpleaded
defendant and defendant-in-intervention Hardboard Fabricators Corp.
(Hardboard) which has a judgment of $276.80 against Eldorado filed in
the
Justice
Court
of
Suffolk
County
on
April 6, 1961
, and on which execution has been levied. Hardboard claims the right to
have its judgment paid out of the fund.
The claim of
the
United States
to the fund on deposit is based upon notice of tax lien against Eldorado
amounting to $3,918.85 when it was filed with the Town Clerk, Town of
Babylon
on
November 17, 1960
. The notice of lien was filed long before the Hardboard judgment
against Eldorado was entered, and with interest would fully consume the
entire fund on deposit. Hardboard concedes that the lien of the
United States
is superior to any lien which might arise from its judgment. The claims
of Continental and Lyons to the fund arise out of the trust agreement of
September 21, 1960
, which also considerably antedates the Hardboard judgment.
In the light
of these facts Hardboard has no right to share in the fund on deposit.
The lien of the
United States
, concededly prior to any lien of Hardboard, would consume the entire
fund to the exclusion of Hardboard. The United States, recognizing, no
doubt for good reasons, that there were questions as to whether the
rights of Continental and Lyons under the trust agreement of September
21, 1960, might be held to be superior to its tax lien first filed on
November 17, 1960, has agreed to settle with Continental and Lyons by
distributing the fund as proposed on this motion.
It is
unnecessary here to determine whether or not the claims of Continental
and Lyons are superior to those of the
United States
or indeed to the claim arising out of the Hardboard judgment since the
United States
would plainly be entitled to the entire fund to the exclusion of
Hardboard. Since this is so the
United States
has the right to agree to a distribution of the fund on deposit in
accordance with the settlement which it made with Continental and Lyons.
The motion for
distribution of the fund as proposed is granted. However, the order to
be entered will contain appropriate provisions for preserving any
further rights which the
United States
may have against Eldorado in these proceedings.
Settle order
on notice.
[67-1 USTC
¶9349]Regal Finance Corp. et al., Appellants v. United States of
America et al., Appellees
(CA-1),
U. S. Court of Appeals, 1st Circuit, No. 6816, 375 F2d 109, 3/20/67,
Aff'g an unreported District Court decision
[1954 Code Sec. 6323]
Liens for taxes: Priority: Appeal: Compromise settlement reduced to
judgment.--In an action to determine the size and priority of liens
against a fund deposited in court, there was no merit in an appeal on
the ground that the government had taken too long to accept a proposed
settlement after it had repended into the offered judgment.
Israel
Bernstein,
Boston
,
Mass.
, for appellants.
Rob
ert H. Solomon, Mitchell Rogovin, Assistant Attorney General, Lee A.
Jackson, David O. Walter, Department of Justice, Washington, D. C.
20530, Paul F. Markham, United States Attorney, Joseph A. Lena,
Assistant United States Attorney, Boston, Mass., Lewis P. Aronson,
Ravech & Sherman, 89 State, Boston, Mass., Henry V. Atherton,
Herrick, Smith, Donald, Farley & Ketchum, 294 Washington St.,
Boston, Mass., for appellees.
Before
ALDRICH, Chief Judge, WOODBURY, Senior Judge, and COFFIN, Circuit Judge.
PER CURIAM:
This is an
action to determine the size and order of priority of certain lien
claims, by the government and others, against a fund deposited in court.
At a pretrial conference on
May 18, 1966
, a proposed settlement was worked out and then entered of record with
the approval of the court. There were certain loose ends. Counsel for
the government stated that he must obtain approval from
Washington
. Counsel for appellants accepted the suggestion that he attempt to
persuade another party, who was absent that particular day, to decrease
the amount of his claim. If the attempt succeeded the decrease would be
shared proportionally among all the claimants after deducting a small
amount claimed by counsel for appellants personally. However,
notwithstanding these loose ends, counsel for appellants stated that he
was authorized to agree to the amounts presently allocated in the
agreement to himself and his clients. The court, having previously
evinced a desire to try the case unless it were settled, stated that it
wanted to hear from the government within three weeks.
On June 22,
not having heard from the government, and having telephoned to
government counsel's office without reaching him, counsel for appellants
wrote the clerk requesting that the case be placed on the trial list.
Nothing further was done until
September 8, 1966
, when the court entered a final decree, assented to by the government,
disposing of the funds on the basis of the division stated at the
hearing on May 18. From this judgment the present appeal was taken.
We find no
merit in the appeal. Looking at the agreement made on May 18 most
favorably to appellants, it was an offer to be accepted by the
government, such matters being notoriously elastic, within a reasonable
time. The three weeks notification was a demand made by the court, not a
maximum period stated by the parties within which the government must
accept. If appellants were impatient with the delay, their minimum
obligation was to notify the government. This was not fulfilled by an
incompleted telephone call. Even the letter to the clerk was sent
without copies to counsel. After the proposed settlement had ripened
into the offered judgment it was too late to inform the government it
had taken too long.
Affirmed.
[61-2 USTC
¶9676]The Board of Education of the City of Pleasantville, in the
County of Atlantic and State of New Jersey, Plaintiff v. Earle R. Aiken,
trading as Aiken's Upholstering Co.; Hartford Accident and Indemnity
Company, a corporation; Reinhart Inc., a corporation of the State of
Pennsylvania; William J. Lichtenberger, trading as W. J. Lichtenberger
Co.; Rose Bedding Co., Inc., a corporation of a State of New Jersey;
Empire Textile Corporation, a corporation; National Textiles Inc., a
corporation; Samuel G. Schiffer; Atlantic County District Court; Louis
DeFeo, Sergeant-at-Arms, Atlantic County District Court, and the United
States of America, Defendants
Superior
Court N. J., Chancery Div.,
Atlantic
County
, Docket No. C-294-58, 193 A2d 527, 8/2/61
[1954 Code Sec. 6321]
Federal tax liens: Priority: Materialman: Indemnity company:
Application of state law to determine property rights.--The Federal
Government's tax lien for unpaid withholding taxes against a fund due
the taxpayer under a contract with a Board of Education was superior to
the claims of an indemnity company, a materialman, and five judgment
creditors, where (1) the tax lien was filed with the appropriate county
well before the rights of the others to the fund arose, (2) the
indemnity company's right of subrogation arose through payments to the
materialman on behalf of the taxpayer-contractor who had not defaulted
on his contract with the Board of Education, (3) the materialman not
only failed to file a mechanic's lien, as required under state law, but
notice of assignment from taxpayer, of a portion of the fund, was filed
subsequent to the tax lien, (4) the "equitable trust" doctrine
in New Jersey was not applicable to impress a trust on the fund in favor
of the materialman in view of the fact that the fund is applicable to
money raised by public agencies from special appropriations, the fund in
this case coming from general appropriations, (5) there was no judgment
lien, in the case of the judgment creditors, under New Jersey law, until
delivery of a writ of execution to the sheriff, and this did not occur
until after the tax lien was filed, and (6) under all these facts the
fund belonged to the taxpayer and it is against his existing rights to
the fund that the tax lien is impressed.
Chester A.
Weidenburner, United States Attorney, Newark, N. J., by Frank J. Ferry,
Assistant United States Attorney, for the United States of America, by
intervention.
Rob
ert Neustadter (Perskie & Perskie), 1421 Atlantic Ave., Atlantic
City, N. J., for defendant, Reinhart, Inc. I. Charles Lifland, for
defendant, Hartford Accident & Indemnity Co. Harry Miller, 321
Commerce Bldg., 1200 Atlantic Ave., Saul C. Gorson, 216 Central Bldg.,
James N. Butler (Moore & Butler), 141 Atlantic Ave., Atlantic City,
N. J., for Judgment Creditor.
Concludions
WICK, Justice
of Supreme Court:
This matter
comes before the Court for determination of priorities as to funds now
held by the Clerk of this Court, resulting from an interpleader action
by plaintiff.
[Unpaid
Withholding Taxes]
On
January 31, 1958
, the
United States
assessed Earl R. Aiken, trading as Aiken's Upholstering Company, in the
sum of $3,383.91 for arrearages on unpaid withholding taxes for the
years 1955, 1956, and 1957. After making three unsuccessful demands upon
Aiken for payment, a federal tax lien was filed with the Clerk of
Atlantic County on
March 21, 1958
.
[Funds
Due Under Contract]
On June 21,
1958, Aiken contracted with the Board of Education of the City of
Pleasantville for the manufacture, repair and cleaning of drapes to be
used in the auditorium of the Senior High School. Pursuant to the
requirements of N. J. S. A. 2A:44-143 et seq., Aiken and the
Hartford Accident and Indemnity Co. (hereinafter referred to as
Hartford) executed a surety bond in favor of the Board of Education,
materialmen, and laborers under the contract. Reinhart, Inc. (hereafter
referred to as Reinhart) supplied Aiken with material necessary for this
contract. As security for these materials, Aiken executed to Reinhart an
assignment of $1350.00 due him from the Board of Education upon
completion of this contract. This assignment was subsequently filed with
the Secretary of the Board of Education on
August 9, 1958
. However, despite the advance of Reinhart, Aiken was still unable to
complete the contract with his own resources. Upon notice from the Board
of Education of his imminent default,
Hartford
, on
August 29, 1958
, advanced the sum of $425.00 by draft payable jointly to Aiken and
Hygienic Satitation Co., Inc., a materialman, to enable the contract to
be completed. The completed work was then accepted by the Board of
Education on
September 2, 1958
. However, prior to this acceptance, five judgment creditors of Aiken
had, on August 4th and
August 25, 1958
, attempted to make executions under their respective judgments upon the
Board of Education. The claims upon which these judgments were rendered
did not arise from the performance of the contract between Aiken and the
Board of Education.
Upon
acceptance of this work on
September 2, 1958
, the Board of Education, after deduction of part payments, owed Aiken
the sum of $3,350.00. Then, on
September 5, 1958
, the
United States
served a levy under its federal tax lien against Aiken upon the Board
for these funds. The Board of Education, because of these various claims
filed with it for these funds, filed a complaint in interpleader, and as
a result of an order entered therein, these funds were deposited with
the Clerk of this Court.
All the
claimants to these funds, with the exception of the
United States
which has intervened, are parties defendants to this action.
[Taxpayer's
Right to the Fund]
Not only do
Reinhart,
Hartford
, and the five execution creditors each claim priority, but likewise
does the
United States
. The
United States
contends that it is entitled to priority under 26
U. S.
C. A. §6321 (Internal Revenue Code of 1954) which
provides:
"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." (Italics added)
The problem of
determining the priorities between federal tax liens and other claims
made under state law against the taxpayer has long been troublesome. It
must be recognized that the rights of the
United States
under §6321 cannot extend beyond those of the taxpayer whose alleged
right to property is sought to be levied. The lien of the
United States
is no greater than the right of Aiken to these funds. Bankers Title
and Abstract Co. v. Ferber Co., 15 N. J. 433 (1954); D'Amato v.
Leonc Construction Co., 41 N. J. Super. 366 (App. Div. 1956).
Therefore a basic issue herein is whether Aiken had any
"property" or "rights to property" in these funds.
["Choice
of Law" Criteria]
In regard to
this issue the United States Supreme Court has in recent decisions
established the "choice of law" criteria to be used in making
this determination. In Aquilino v. United States [60-2 USTC ¶9538],
363
U. S.
509, 80
S. Ct.
1277, 4 L. Ed. 2d, 1365, (1960), the Court, at pages 512-514, stated:
"The
threshold question in this case, as in all cases where the Federal
Government asserts its tax lien, is whether and to what extent the
taxpayer had 'property' or 'rights to property' to which the tax lien
could attach. In answering that question, both federal and state courts
must look to state law, for it has long been the rule that 'in the
application of a federal revenue act, state law controls in determining
the nature of the legal interest which the taxpayer had in the property
. . . sought to be reached by the state." . . . The application of
state law in ascertaining the taxpayer's property rights and of federal
law in reconciling the claim of competing lienors is based both upon
logic and sound legal principles. This approach strikes a proper balance
between the legitimate and traditional interest which the State has in
creating and defining the property interest of its citizens, and the
necessity for a uniform
admin
istration of the federal revenue statutes."
See
also United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363
U. S.
522, 80 S. Ct. 1282, 4 L. Ed. 2d 1371 (1960); United States v. Bess
[58-2 USTC ¶9595], 357
U. S.
51, 78
S. Ct.
1054, 2 L. Ed. 2d, 1135 (1958).
[Indemnity Company's Right of Subrogation]
Thus it is
necessary to examine the law of
New Jersey
to resolve the question of priorities herein.
Hartford
, the surety company, claims to be subrogated to both the rights of
Hygienic Sanitation Co., Inc., and the Board of Education to the funds
in question. As counsel has correctly stated in his brief, the right of
subrogation of the surety exists where it has paid claims guaranteed by
it on behalf of the contractor. Key Agency v. Continental Casualty
Co., 55 N. J. Super. 58, (Ch. Div. 1959), affirmed 31 N. J. 98
(1959); Stulz-Sickles Co. v. Fredburn Construction Corp., 114 N.
J. Eq. 475 (
Ch.
1933). On
August 29, 1958
Hartford
made a payment of $425.00 to Aiken and Hygienic Sanitation Co., Inc.,
jointly. (Hygienic Sanitation Co., Inc. was a materialman under the
contract herein). By virtue of that payment,
Hartford
stands in the position of the materialman. Hygienic Sanitation Co., Inc.
However,
Hartford
has made no payments to the Board of Education nor has the Board made
any claims for any such payment. Aiken did not default under his
contract with the Board, but in fact did fulfill his obligations to the
satisfaction of the Board. If Aiken had defaulted and
Hartford
was required to pay the Board directly for the default, then
Hartford
would be subrogated to the rights of the Board. In absence of such
facts, the Board has no claims against this fund which can be subrogated
to
Hartford
; therefore,
Hartford
's claim herein is solely that of a materialman.
[Materialman's
Assignment Subsequent to Lien]
Although the
United States
contends that Reinhart has made no claim as a materialman, the Court is
satisfied that the pleadings do sufficiently reflect Reinhart's position
as a materialman. In addition, Reinhart also took an assignment of
$1350.00 of the funds to become due Aiken from the Board upon the
acceptance of the work. This assignment was not executed until
August 9, 1958
. The federal tax lien had been filed on
March 21, 1958
, some four months prior. In Bankers Title and Abstract Co. v. Ferber
Co., supra, involving facts similar to those herein, the Supreme
Court of New Jersey held that a federal Court of filed before an
assignment was made is entitled to priority over the assignment. In that
case, as herein, the monies were not yet earned at the date of the lien
or the assignment. In view of the result reached by the Supreme Court in
the Bankers Title case, this Court must hold that Reinhart, as
assignee, cannot be given priority over the
United States
.
[Failure
to File Notice of Mechanic's Lien]
The claim of
Reinhart and
Hartford
as unpaid materialmen is much more difficult to adjudicate. Neither has
filed a notice of lien claim as provided by the Municipal Mechanic Lien
Law (N. J. S. A. 2A:44-125 et seq.) However, both contend that
these monies constitute an equitable trust fund from which all unpaid
materialmen must be paid before these monies can be used for any other
purpose. Until these claims are paid, according to this theory, Aiken
bas no right to claim these monies; and since the rights of the United
States, whose lien attaches to only the property of Aiken, cannot extent
beyond those of Aiken, the materialmen must be given priority.
["Equitable
Trust" Doctrine]
Several cases
are cited as showing the application of such a theory by the courts of
this state. In Goodwillie v. City of Bayonne, 2 N. Y. 88 (1949),
the plaintiffs brought an action against the City of Bayonne on assigned
claims for services rendered to the general contractor under a municipal
contract.
Bayonne
and the general contractor had entered into an agreement for
construction of certain buildings, the cost of which were to be financed
"through a United States PWA outright grant of $1,785,000.00 and a
municipal bond issue for $2,430,000.00". The City sought to offset
other claims not related to this contract against the amount due the
contractor. The Supreme Court held that the City could not avoid payment
of the assigned claims arising out of this construction contract by
applying funds to the City's claims against the contractor which did not
arise out of the construction. However, in so holding, Justice
Wachenfeld, speaking for the Court, noted at page 90, as follows:
"The
city in return agreed to devote all moneys received from the grant and
bond issue to the construction of the terminal and to deposit them in a
special 'Construction Account' and to pay therefrom all the legal and
engineering services,
admin
istrative and overhead expenses incurred by the company."
On
page 92, he concluded that:
"The
contract under which the federal funds became available provided that
the grant, as well as the proceeds of the city's own bond issue, was
required to be placed in a special 'Construction Account' to be used
solely for the construction of the terminal. These funds were received
and set aside by the city for specific purposes. When accepted by the
city, they became earmarked and impressed with a trust obligating the
city to expend them for the designated uses.
Hoboken
v. Ivison, 29 N. J. L. 65 (Sup.
Ct.
1860); Maurello v. Broadway Bank & Trust Co., 114 N. J. L.
167 (E. & A. 1935); Deal v.
Asbury Park
and Ocean Grove Bank, 118 N. J. Eq. 297 (E. & A. 1935); Hopper
v. New Jersey Title Guarantee & Trust Co., 127 N. J. Eq. 1 (E.
& A. 1940)."
In National
Surety Corp. v. Barth, 20 N. J. Super. 100, (Ch. Div. 1952),
affirmed 11 N. J. 506 (1953), the contractor defaulted on public housing
contracts, and thus the surety on his performance bonds was required to
arrange for the completion of these contracts. The surety then brought
an action in the Chancery Division seeking to obtain exoneration to the
extent that the contractual proceeds still held by the Administrator of
the Public Housing and Development Authority of the State of New Jersey
might be applied to the demands of unpaid materialmen and subrogation to
the extent that it had paid certain claims against the defaulted
contractor. The
United States
intervened, filing a claim for unpaid withholding taxes. The State of
New Jersey
sought to offset its claim against the defaulted contractor for unpaid
unemployment and disability tax obligations against the funds still
retained by the Administrator. Judge Stanton, in the Chancery Division,
held that the claim of the
United States
was no greater than that of the defaulted contractor and thus was
subordinated to the claims of the materialmen and laborers, except to
the sums retained by the contractor as withholding of wages for labor
performed under this contract with the State of
New Jersey
. The Court refused to permit any setoff by the State of
New Jersey
, holding that the funds in question "is a trust fund for the
benefit of those whose work, material and equipment have made it
payable." (20 N. J. Super. at page 108.)
Only the State
of
New Jersey
appealed, contending that no trust should be imposed upon the funds
still retained by the Administrator. The Supreme Court, at 11 N. J. 506,
affirmed the Chancery Judge's decision. In so holding, Chief Justice
Vanderbilt, after examining the policy of the legislation authorizing
the Administrator to enter into such contracts and the sources of funds
to be used therein, said at page 513 as follows:
"Thus
there are three sources from which these funds for public housing
improvements arise--namely federal government appropriations, state
appropriations out of the general state fund, and moneys to be raised
from a bond issue. On public referendum a bond issue was approved. Chapter
324 of the Laws of 1946, pages 1363-1372, N. J. S. A.
55:14G-23 note, adopted at the general election provided in part:
'11.
The proceeds from the sale of the bonds, exclusive of accrued interest
and premiums, and all interest on deposits received from depositories,
shall be paid to the State Treasurer and be held by him in a separate
fund, and be deposited in such depositories as may be selected by
him to the credit of the fund, which fund shall be known as the
"State Housing Fund". All accrued interest and premiums from
the sale of bonds except as provided in section fourteen hereof,
together with interest received from depositories of such funds, shall
be held by the State Treasurer to the credit of the said State Housing
Fund.
'12.
The moneys in the said State Housing Fund are hereby specifically dedicated
to providing housing for veterans of World War II and other people of
the State and shall be disposed of in accordance with this act through
such agencies or by such means as the Legislature may by act provide for
such purpose. Such fund shall be held for the demand of the Commissioner
of Economic Development, or his successor, and shall be drawn upon and
disbursed on his order, as other funds are now disbursed from the State
Treasury. At any time prior to the issuance and sale of bonds under this
act the State Treasurer is hereby authorized to transfer from any
available money in the treasury of the State to the credit of the State
Housing Fund such sum as may be deemed necessary for the purposes of
this act by the Commissioner of Economic Development, which said sum so
transferred shall be returned to the treasury of this State by the
treasurer thereof from the proceeds of the sale of the first issue of
bonds.' (Italics added.)
"The
Legislature clearly intended to set aside all moneys received from these
three sources and to earmark them for the purposes of public housing.
The money was not available for any use except in furtherance of the
policies of the act."
The
Chief Justice continued, on page 514:
"Although
these cases did not involve funds held by the State the principle is
still the same. Clearly funds have been appropriated and dedicated for a
specific purpose by the United States Congress, the New Jersey
Legislature, and the voters of the State of
New Jersey
. A special fund labelled 'State Housing Fund' has been established and
all moneys deposited therein are earmarked for the purposes of emergency
housing. Withdrawals can be made only upon the signature of the State
Commissioner of Taxation and Finance on vouchers certified or approved
by the Administrator. The materialmen and laborers, and therefore
National Surety Corporation in view of its subrogation rights, have an
equitable interest in these funds. Such an interest cannot be defeated
by the State by the exercise of a setoff based upon the personal debt of
the contractor totally unrelated to the work performed in furtherance of
the purposes for which the fund was created."
A third case
cited for the "equitable trust" doctrine is Picker v.
Bayonne, 60 N. J. Super. 251 (App. Div. 1960), affirmed 33 N. J. 390
(1960). The City of
Bayonne
had adopted an ordinance for the construction of a swimming pool which
was to be financed through sale of municipal bonds, cash loans from the
city's capital account, and private cash contributions. The contractor
originally hired to do the work defaulted; the city then rescinded the
agreement with the contractor, and invoked the performance bond.
However, in the interest of speeding construction and avoiding
litigation on the bond, the city agreed to renew the contract with the
contractor pursuant to the understanding that Drogin, a member of the
city's law department, was to receive payments under the contract and to
disburse these funds to the unpaid suppliers and laborers of the
contractor. Picker, a holder of a judgment based upon an antecedent debt
of the contractor having no connection with the latter's contract with
the city, then sought to satisfy his judgment out of funds retained by
the city as security for the contractor's guarantee of the work for a
period of one year. Carpenter, an unpaid creditor who supplied equipment
necessary to complete the contract after the contract was reinstated by
the city, also claims priority to these funds. The Appellate Division,
at 60 N. J. Super. 252, held that these funds constitute an equitable
trust for the benefit of the laborers and materialmen on this project.
The Court noted the city financial records showed these funds to
constitute a separate appropriation account; and also that a major
portion of the funds allocated for this project were raised by municipal
bond anticipation notes. In regard to these funds, the Court said, at
page 256, that:
.
. . "dominant effect must be accorded the statutory directive that:
'The proceeds of the sale of any obligations issued under this article
shall be applied only to the purposes for which such obligations are
authorized . . .' N. J. S. A. 40:1-85."
Despite
those facts, Judge (now Justice) Haneman strongly dissented, contending
that the majority's conclusion has in effect rendered the various
remedial legislation for the protection of materialmen nugatory.
The Supreme
Court, by a per curiam opinion at 33 N. J. 390, affirmed the
Appellate Division's conclusion. However, in so affirming, the Supreme
Court did not adopt the "equitable trust" theory used by the
Appellate Division, but instead held that the agreement between the city
and the contractor upon reinstatement of the contract constituted an
informal oral agreement of express trust between the city and the
contractor for the benefit of the materialmen and laborers on this
project. In conclusion, the Court at page 393 stated:
"We
therefore do not reach the matter of an equitable trust derived from
some allocation of the project moneys on the city's books, on which the
majority of the Appellate Division based its decision, and express no
opinion thereon."
Reinhart and
Hartford
, as materialmen, urged that the Court herein is bound by the three
above discussed decisions to conclude that the monies constitute an
equitable trust fund for their benefit. The Court does not agree. There
are several very important factual distinctions between those cases and
the case presently under consideration. First of all, in both the Goodwillie
and the National Surety cases, the funds in question were
actually physically segregated from the general municipal funds. As the
Court in both cases pointed out, special bank accounts were created and
the funds to pay for the contemplated improvements were deposited
therein. The affidavit of one John F. Gibson, Secretary of the Board of
Education of the City of
Pleasantville
reveals that there was no such segregation of the funds herein. Gibson
only stated that, after the award of this contract to Aiken, an entry
committing these funds to Aiken was made on the Board's books; and
thereafter these funds could not be used for any other purpose. A mere
book entry certainly must be considered to be far less evidential of a
trust than the actual physical segregation of funds. Such a book entry
allocating funds to a specific project would seem to be the necessary
procedure to be followed in every instance of municipal improvement; and
good municipal budgeting furthermore would dictate that these funds only
be used for this contract. In the Picker case, however, the
Appellate Division did hold that such an allocation of a project's
monies on the city's books creates an equitable trust. But the Supreme
Court significantly chose to affirm that result upon an express trust
theory, and in so affirming, refused to comment upon the equitable trust
basis of the Appellate Division's opinion. There is no question that the
funds herein are not the subject of an agreement of express trust as the
Supreme Court found in the Picker case because there is no
agreement, either oral or written, between the various parties herein
that these funds were to be used for payment of labor and materials as
in Picker. But, even ignoring the
Supeme Court
's opinion, the Picker case is still distinguishable from the
facts herein.
[Funds
Raised by Public Agencies]
In each of the
above cases the source of the funds involved was an important, if not
the determining, factor used by the Courts to find an equitable trust.
All the funds in the Goodwillie and the National Surety
cases, and almost all in the Picker case, were raised by the
public agencies through either contributions from the Federal Government
or the State of
New Jersey
, or through the sale of bonds. In each instance, the Courts found that
these funds, because of their origin, could only be disbursed for the
designated purpose for which they were obtained; and as shown by the
excerpts quoted above, the Courts expressly relied upon these
restrictions as a basis for the creation of a trust in those cases.
However, there is nothing in the origin of the funds herein to indicate
such a limitation. Gibson in his affidavit states that these funds were
part of the Board of Education's appropriations under the general
designation "Contract Service." There are no proofs indicating
that those funds, when received by the Board, were in fact designated to
be used for a specific purpose, and that purpose only. In short, these
funds were part of a general appropriation to the Board of Education to
be spent for the purposes as the Board itself felt needed.
In addition,
Hartford
cites D'Amato v. Leone Construction Co., supra, and Central
Surety & Insurance Co. v. Martin Infante Co. [39-2 USTC ¶9736],
272 F. 2d 231 (3d Cir. 1959) in support of its claim. These cases are
likewise distinguishable from that subjudice. Both cases hold
that a surety, who has completed construction after the contractor has
defaulted, has priority over a federal tax lien against the contractor
in regard to the contract proceeds. After the contractor has defaulted,
he, under general contract law, has no legal rights to the contract
price to which the federal lien could attach. The crucial factor to
those decisions was the default by the contractor; herein, instead of a
default, there was complete performance by Aiken and, therefore, under
general contract principles, he is entitled to recover the contract
price from the Board of Education.
Materialmen's
liens, originally unknown to the common law, are exclusively statutory
in origin. Friedman v. Stein, 4 N. J. 34 (1950); Fidelity,
etc.,
Maryland
v. McClintic-Marshall Corp., 115 N. J. Eq. 470 (
Ch.
1934). The materialmen herein have failed to invoke the statutory
procedure provided to protect such claims. The
United States
contends that this failure is fatal to their claims. The Court must
agree. In Bankers Title and Abstract Co. v. Ferber Co., supra,
the Supreme Court held that materialmen who have filed stop notices
before the funds are distributed by the owner to the general contractor
have priority over the claim of the United States under a federal tax
lien against the contractor. However, in regard to the claims of one
materialman who did not file his notice properly time wise, the Court
held that the property right of the general contractor had matured, even
to those funds still remaining in escrow, and therefore, the federal tax
lien must be given priority over the claim.
The
materialmen contend the Bankers Title case is distinguishable
from the case at bar because no public contract was involved there.
Since a public contract is involved herein, the materialmen suggest that
they should still be protected even though they have filed no lien
claim. Apart from an equitable trust theory (which this Court has
previously discussed and found not to be applicable to the facts herein)
this distinction cannot be well taken. The Legislature has, by adopting
the "Municipal Mechanics Lien Law" (N. J. S. A. 2A:44-125 et
seq.) made a policy determination that materialmen on public
contracts should likewise file notices of lien claims if they seek a
lien on the contractual proceeds. This legislation must be assumed to
have a purpose. Unfortunately, the materialmen herein did not take
advantage of this statutory procedure; therefore, they must suffer the
legal consequences of their omissions.
The
materialmen further argue the general equitable merits of their claims.
There is no question that the funds in question arose solely through the
efforts and financial advances made by these claimants. Now the
United States
claims the entire fund resulting from the materialmen's investment.
However, these same factors were present in the Bankers Title
case, but the Supreme Court still held it was necessary for a
materialman to file a proper lien claim to prevail over a federal tax
lien.
Undoubtedly if
these funds were paid to Aiken instead of interpleaded into this Court,
the funds would, under the Public Trust Act (N. J. S. A. 2A:44-147 which
should be cited as 2A:44-148) would constitute a trust for payment of
all unpaid materialmen and laborers. The materialmen herein thus contend
that the funds should, on deposit with this Court, still constitute a
trust fund for the payment of their claims. However, the specific
language of the Public Trust Act limits its effect to monies paid
by the governmental body to the contractor. See National Surety Corp.
v. Barth, supra, wherein it was held that this Act does not impress
a trust upon funds still in possession of the State and not yet paid to
the contractor. Admittedly, in this instance, the Legislature, by this
limitation, has created a hiatus as far as the rights of these
materialmen are concerned; however, to so do is legislative prerogative
which cannot be usurped by this Court. Furthermore the materialmen
themselves could have avoided this situation if they had protected their
claims by filing proper notices of lien claims.
[U.
S. Claim
Superior
]
The Court must
conclude the funds interpleaded into this Court became the property of
Aiken in the absence of properly filed notices of lien claims by the
materialmen. As the property of Aiken, the claim of the
United States
under its federal tax lien must be given priority over the claims of
these materialmen.
The
United States
must also be given priority over the various judgment creditors of
Aiken, who attempted to levy on these funds. There was no judgment lien
on these funds until delivery of a writ of execution to the sheriff or
his legally appointed assistants. N. J. S. A. 2A:17-10. Prior to that,
the
United States
had made the delinquent tax assessment against Aiken and filed its lien
with the Clerk of Atlantic County; therefore, the claim of the
United States
, being prior in time, is entitled to priority over the claim of these
judgment creditors.
Since the
claim of the
United States
exceeds the total amount of funds interpleaded, it is unnecessary for
the Court to determine the priorities between these materialmen and the
unpaid judgment creditors.
A judgment may
be presented in accordance with these views.
[81-1 USTC
¶9290]Ralston Bank, Plaintiff v.
United States of America
, Defendant
U.
S. District Court, Dist. Neb., CV79-0-124, 2/26/81
[Code Sec. 6323]
Lien for taxes: Priority of creditors: Security interest claimed by
bank: Distribution of proceeds: Loan v. future advance.--Under the
general principle of first in time, first in right, the Federal
government's tax lien for unpaid employment taxes against a fund
containing the proceeds of the sale of the taxpayer's property was
superior to the claim of a bank's competing security interest that arose
out of the third in a series of loans extended to the taxpayer. The date
of the third loan was subsequent to the date of filing of the notice of
tax lien. The third loan was not an advance on the first two loans but,
rather, was a separate loan not related to its predecessors.
Michael G.
Helms, Schmid, Ford, Mooney & Frederick, 1800 First National Center,
Omaha, Neb. 68102, for plaintiff. Ludwig Adams, Bruce Crocker,
Department of Justice,
Washington
, D. C. 20530, for defendant.
Magistrate's
Findings and Recommendations
PECK,
Magistrate:
Pursuant to
the provisions of 28 U. S. C. 636 there has been referred to the
undersigned United States Magistrate, for submission of findings and
recommendations, the cross motions (filings 8 and 9) of the parties for
summary judgment.
The ultimate
issue for determination in this case is the relative priorities to be
accorded between a security interest claimed by plaintiff Bank and tax
liens claimed by the United States as to proceeds from sale of a truck
and backhoe formerly owned by Miller Brothers Plumbing, Inc., which now
constitute a fund as described in 26 U. S. C. 7426(a)(3). The salient
facts have been stipulated (see filing 7).
On
June 2, 1976
, the Bank made a $4,000 loan to Miller Brothers and on
June 16, 1976
, as security therefor, perfected a security interest in a certain
flatbed truck. The unpaid principal balance on this loan is
approximately $625.
On
June 11, 1976
, the Bank made a second loan to Miller Brothers in the sum of $11,500
and, as security therefor, perfected a security interest in a John Deere
backhoe and a diesel loader on
June 18, 1976
. The unpaid principal balance on this loan is approximately $4,000.
On
July 2, 1977
, the Bank made a third loan to Miller Brothers in the sum of $10,000
and was granted a security interest in all of the borrower's accounts
receivable. The due date of that loan was extended on
November 21, 1977
, again on
May 15, 1978
, and finally on
October 19, 1978
. The entire principal balance of this loan remains unpaid.
On
May 8, 1978
, the
United States
filed a notice of lien against Miller Brothers for unpaid employment
taxes in the amount of $9,288.96, and on
August 16, 1978
filed a second such notice of tax lien in the additional amount of
$11,654.75. Subsequently, two other notices of tax liens were filed but,
by reason of the amount derived from the proceeds of the sale
hereinafter described, those notices are of no consequence in
determination of the issue here presented.
After seizure
of Miller Brothers' flatbed truck and the backhoe by the Internal
Revenue Service, the Bank and the United States entered into an
agreement as provided for in 26 U. S. C. 6325(b)(3). Pursuant thereto,
the property was sold for the sum of $14,900 and the proceeds placed in
an interest bearing account subject to the claims of the Bank and the
United States in the same amount and in the same priority as each party
had with respect to the property.
The Bank
brings this action pursuant to 26
U. S.
C. 7426(a)(3) and the court has jurisdiction under the provisions of 28
U. S.
C. 1340.
The parties
agree that from the proceeds of the sale, the Bank is entitled to an
amount equal to the unpaid balances due on the first and second loans
described above. The dispute as to the balance of the fund centers upon
the priority properly attributable to the tax liens vis-a-vis
such lien as the Bank may have by reason of its third loan. That
question is one to be resolved as a matter of law. The parties have,
therefore, properly sought determination by cross motions for summary
judgment as authorized by Rule 56, F. R. Cv. P. There are no material
factual matters in dispute.
Consideration
of the issue presented must commence with recognition of the rule that
the relative priority between a federal tax lien and a competing claim
is governed by federal law and the general principle to be applied is
first in time, first in right. Aquilino v. United States [60-2
USTC ¶9538], 363
U. S.
509 (1960); United States v. Britain, 347
U. S.
81 (1954). Having met the requirement of 26 U. S. C. 6323(a) that, to be
effective against the holder of a security interest, a notice of tax
lien must be filed, the applicable "time" for each of the two
tax liens here involved is respectively May 8, 1978 and August 16, 1978.
The standard
to be applied in fixing the "time" for the Bank's competing
security interest is set forth in 26 U. S. C. 6323(h)(1), the pertinent
provisions of which are:
A security
interest exists at any time (A) if, at such time, the property is in
existence and the interest has become protected under local law against
a subsequent judgment lien arising out of an unsecured obligation, and
(B) to the extent that, at such time, the holder has parted with money
or money's worth.
The first
document which incorporates a specific pledge of the truck and the
backhoe as collateral for the Bank's third loan to Miller Brothers is a
new note and financing statement executed on October 10, 1978 which, it
is stipulated, was the last extension made of the due date for payment
of the third loan made originally on July 2, 1977. Obviously, the date
of that instrument is subsequent to the dates of filing of the notices
of tax liens. At first blush it would appear, therefore, that the claim
of priority asserted by the
United States
must prevail.
However, the
Bank contends that its priority to the proceeds of the sale is
established by provisions in the security agreements executed when the
first two loans were made on June 2, 1976 and June 11, 1976. Together
these two agreements specifically pledged the truck and the backhoe as
security for payment of the promissory notes executed by the borrower on
those two dates. Each agreement also included the following provision:
This
and all allied instruments are executed to secure payment of the
indebtedness evidenced by this certain promissory note . . . of even
date herewith payable to Secured Party, together with the covenants in
this agreement, such additional sums as may at the option of the Secured
Party be advanced to Debtor, such advances as shall be made by Secured
Party under this agreement for the protection of the Collateral, and all
other amounts as shall in any manner be due from Debtor to Secured Party
and all costs and expenses incurred in the collection of same and
enforcement of rights of Secured Party hereunder, all of the foregoing
being collectively called the Obligations.
It
is the Bank's position that the third loan was a future advance covered
by this provision and thus the truck and backhoe automatically became
collateral for the third loan made on July 2, 1977 (a date well prior to
filing of the notices of tax liens), and this is so even though the only
specific pledge of collateral made in the July 2, 1977 documents was
"all accounts receivable of debtor now existing or hereafter
arising."
The attack of
the
United States
upon this contention is two-pronged. First, that the provision relied
upon by the Bank, which the
United States
characterizes as a "boiler plate dragnet clause", is not
effective against a subsequent third-party lienholder beyond a limit to
be stated in the security agreement. Secondly, that the Bank's third
loan was simply that and was not an advance on the first and second
loans. Both sides urge, and the court agrees, that resolution of these
contentions must be made upon
Nebraska
law.
The
United States
cites no decision by the Nebraska Supreme Court determinative of its
first proposition but does make an appealing argument principally
bottomed in a conclusion reached by one
Nebraska
commentator, and the analysis made in a recognized treatise on the
subject of security interest. [See, Reddish, Open-End Mortgages in
Nebraska
, 38
Neb.
L. Rev. 172 (1959) and Gilmore, Security Interests In Personal
Property, Chapt. 35]. I find, however, that for the reasons set
forth following, the court need not make a determination as to whether
or not, under Nebraska law, the clause relied upon the Bank is per se
an unenforceable one.
Future advance
clauses are recognized by the Nebraska Uniform Commercial Code. Section
9-204(5) provides:
Obligations
covered by a security agreement may include future advances or other
value whether or not the advances or value are given pursuant to
commitment.
The
official comment applicable to this subsection recites:
Under
subsection (5) collateral may secure future as well as present advances
when the security agreement so provides. At common law and under chattel
mortgage statutes there seems to have been a vaguely articulated
prejudice against future advance agreements comparable to the prejudice
against after-acquired property interests. Although only a very few
jurisdictions went to the length of invalidating interests claimed by
virtue of future advances, judicial limitations severely restricted the
usefulness of such arrangements. A common limitation was that an
interest claimed in collateral existing at the time the security
transaction was entered into for advances made thereafter was good only
to the extent that the original security agreement specified the amount
of such later advances and even the times at which they should be made.
In line with the policy of this article toward after-acquired property
interests this subsection validates the future advance interest,
provided only that the obligation be covered by the security agreement.
This is a special case of the more general provision of subsection (3).
It
is obvious that the instant case does not involve an after-acquired
property interest but rather property already existent at the time the
first and second loans were made.
Somewhat
surprisingly, there apparently exists little reported decisional law
construing the reach of future advance clauses similar to the one here
in controversy. The parties cite no decisions of the Nebraska Supreme
Court definitive of the question. In that circumstance, the duty of this
court is to attempt what the
Nebraska
court would do if the case were before it.
Those courts
in other jurisdictions which have been confronted by similar future
advance clauses have held that they are to be narrowly construed and
that, to effect coverage of future obligations, the future obligations
must be of the same class as their predecessors, must bear a significant
relationship to the earlier loans, and must be of a nature clearly
contemplated by the parties at the time of execution of the agreement.
See, National Bank of Eastern Arkansas v. Blankenship, 177 F.
Supp. 667 (E. D. Ark. 1959), aff'd sub, nom. National Bank of Eastern
Arkansas v. General Mills, Inc., 283 F. 2d 574 (8 Cir. 1960); John
Miller Supply, Inc. v. Western State Bank, 199 N. W. 2d 161 (Wisc.
1972); In Re White Plumbing & Heating Co., Inc., 6 U. C. C.
R. S. 467 (E. D. Tenn. Referee in Bankruptcy 1969), where advances were
found to be related; and In Re Eshleman, 10 U. C. C. R. S. 750
(E. D. Pa. Referee in Bankruptcy 1972). See also Gilmore, Security
Interests In Personal Property, Chapt. 35.
In
Blankenship, supra, Judge Henley considered in some detail each
loan there involved and, at p. 674 of his opinion, accepted as a
controlling principle the following quotation from a previous decision
of the
Arkansas
court in a case involving financial arrangements between a bank and an
automobile dealer:
"We think
the proper interpretation of the clause for advances in the several
mortgages, was to secure any additional advances which appellee might
make on any particular shipment, and not to secure independent loans
secured by other mortgages on independent shipments. The clause was not
intended to cover loans secured by separate mortgages on entirely
different property, but to secure advances related and incident to each
particular contract and shipment."
On
appeal as General Mills, supra, Judge Van Oosterhout said at page
578 of his opinion:
There
is also substantial evidence to support the trial court's conclusion
that the notes for subsequent advances were not of the same class as the
individual loans secured by the respective trust deeds and bore no
significant relationship to the loans so secured.
In John
Miller Supply, supra, the Supreme Court of Wisconsin at pp. 164 and
165 of the Northwestern Reporter quoted and accepted the analysis of the
U. C. C. provision for future advances as made by Professor Gilmore in
his treatise as follows:
"However
'covered by the security agreement' is to be read, sec. 9-204(5) should
certainly not be taken to overrule the so-called 'dragnet' cases under
pre-Code law. Legitimate future advance arrangements are validated under
the Code, as indeed they generally were under pre-Code law. This useful
device can, however, be abused; it is abused when a lender, relying on a
broadly drafted clause, seeks to bring within the shelter of his
security arrangement claims against the debtor which are unrelated to
the course of financing that was contemplated by the parties. In the
dragnet cases, the courts have regularly curbed such abuses: no matter
how the clause is drafted, the future advances, to be covered, must 'be
of the same class as the primary obligation . . . and so related to it
that the consent of the debtor to its inclusion may be inferred.' The
same tests of 'similarity' and 'relatedness,' vague but useful, should
be applied to sec. 9-204(5)."
I accept the
reasoning advanced in the above cited authorities and believe that the
Nebraska Supreme Court, if confronted with the question, would find the
Nebraska law to be that a future advances clause is effective against a
perfected third party lien only as to subsequent obligations which are
of the same class and which are significantly related to the prior loan
and which can be reasonably inferred as being within the intent of the
parties at the time of execution of their agreement.
In the instant
case, the first loan was in the sum of $4,000 and there was granted to
the Bank a security interest in a described flatbed truck. The second
loan was in the amount of $11,500 and the Bank took a security interest
in a described backhoe and other equipment. The third loan, made more
than one year later, was in the sum of $10,000 and the Bank took a
security interest in accounts receivable with no mention of other
security and no indication of the purpose of the loan or that this loan
was in any way an advance on the prior loan transactions or was a
refinancing of those transactions.
In this
circumstance, I cannot find that the third loan made on
July 2, 1977
was of the same class as its predecessors, nor that it was significantly
related to its predecessors, nor that it was contemplated by the parties
when the security agreements for the first two loans were executed. I
find that the third loan was exactly that, secured only by the pledge of
accounts receivable as collateral, and was not a future advance secured
by the truck and the backhoe identified in the promissory notes and
security agreements executed respectively on June 2 and 11, 1976. I
further find that, as to proceeds from sale of this property, the
plaintiff Bank possesses first priority to the extent only of the
balances remaining due on the first and second loans and that as to the
balance remaining after payment of those two sums, the defendant United
States possesses strict priority for payment upon its tax liens of May
18 and August 16, 1978.
IT IS
THEREFORE RECOMMENDED to District Judge Albert G. Schatz that an order
be entered:
1. Granting
plaintiff's motion for summary judgment to the extent only of
entitlement to payment of the balances due on its loans dated
June 2, 1976
and