Distribution of Proceeds

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[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