Employee's Claims

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[56-2 USTC ¶9890]The Morris Plan Company of California, a California Corporation, Plaintiff v. Rob ert A. Riddell, as Director of Internal Revenue for the Sixth Collection District, State of California, United States of America, Rob ert A. Riddell, individually, Greek Theatre Productions, Inc., a California Corporation, Maurice H. Friedman, Donald L. Rose, A. J. Perenchio, Defendants United States of America, Plaintiff in Intervention v. The Morris Plan Company of California, a California Corporation, State of California, Greek Theatre Productions, Inc., a California Corporation, Maurice H. Friedman, Donald L. Rose, A. J. Perenchio, Defendants in Intervention

U. S. District Court, So. Dist. Calif., Central Div., Civil, No. 16276-PH, 6/5/56

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323(a)]

Tax lien: Borrowed funs deposited under collective bargaining agreement: Trustee-creditor's rights superior.--On May 18, 1951, Greek Theatre Productions, Inc., borrowed $30,000 from the Morris Plan Company of California and deposited it with the latter in trust under an agreement whereby the money was pledged to Actors Equity Association for use in payment of any unpaid salaries of employees of the Greek Theatre during 1951. Secondarily, the money was also pledged to the Morris Plan as security for the $30,000 loan. The $30,000 loan was due but unpaid on September 18, 1951 . On September 19, 1951 , a garnishment and notice of levy was served on the Morris Plan for the Greek Theatre's unpaid admission taxes. On June 23, 1952 , Actors Equity Association released its claim to the funds. The Morris Plan's trust and pledge rights were superior to the Government's lien rights.

Ralph Sadler Rosen, Suite 815, 639 South Spring Street, Los Angeles 14, Calif., for plaintiff and a defenant in Intervention, The Morris Plan Company of Calif. Arthur V. Kaufman, for defendants and defendants in Intervention Maurice H. Friedman, Donald L. Rose and Greek Theatre Productions, Inc. Laughlin E. Waters United States Attorney, Rembert Brown, for defendant Rob ert A. Riddell and United States, plaintiff in Intervention.

Findings of Fact and Conclusions of Law

HALL, District Judge:

The above-entitled cause came on regularly for trial before the Honorable Peirson M. Hall, Judge Presiding, on the 8th day of May, 1956, plaintiff and a defendant in Intervention, The Morris Plan Company of California, a California corporation, appearing by its attorney, Ralph Sadler Rosen, and defendants and defendants in intervention, Greek Theatre Productions, Inc., a California corporation, Maurice H. Friedman, and Donald L. Rose, appearing by their attorney, Arthur V. Kaufman, and defendant, Rob ert A. Riddell, individually and as Director of Internal Revenue for the Sixth Collection District and plaintiff in Intervention, United States of America, by United States Attorney, Laughlin E. Waters by Rembert Brown, and the United States of America having by Stipulation and Order been dismissed as a Party defendant, and having filed by consent and order a complaint in Intervention herein, and the State of California having heretofore filed a Disclaimer in said action, and the defendant, A. J. Perenchio having been duly served and not appearing in said action or at the time of trial either by counsel or otherwise, and the court having on motion of plaintiff dismissed Paragraphs XIX and XX of Plaintiff's First cause of action and the entire second cause of action of its First Amended Complaint on the grounds of lack of jurisdiction of this Court, and oral and documentary evidence having been introduced and the evidence and the law having been considered, the Court now makes the following Findings of Fact:

Findings of Fact

I. The first amended complaint arises under Title 28, United States Code Annotated, sections 1340 and 2201 and an actual controversy exists between the parties hereto and within the jurisdiction of this Court; that the Complaint in Intervention has been brought by the United States of America pursuant to Sections 7401 and 7403 of the Internal Revenue Code of 1954.

II. Plaintiff and a defendant in Intervention, The Morris Plan Company of California during the year 1951 and at all times since was and now is a California Corporation authorized to do and engaged in doing business in the State of California under the Industrial Loan Act of the State of California.

III. Defendant and a defendant in Intervention, Greek Theatre Productions, Inc., during the year 1951 was a corporation organized and existing under and by virtue of the laws of the State of California and authorized to do and engage in exhibiting musical productions to the general public at Griffith Park, Los Angeles, California; and defendants and defendants in Intervention, Maurice H. Friedman, Donald L. Rose and A. J. Perenchio were officers and directors of said corporation authorized to act for and on behalf of said corporation.

IV. That Actors Equity Association during the years 1951 and 1952 was the union representing the actors and employees used in connection with defendant, Greek Theatre Productions and prior to May, 1951, before any productions, demanded defendant, Greek Theatre Productions, Inc., to post a bond or other form of security in an amount equivalent to at least two weeks salary of cast members in the sum of $35,000.00 in order that the actors and other employees engaged in the musical productions would be assured of receiving their salaries in the event they were unpaid by defendant, Greek Theatre Productions, Inc.

V. That the plaintiff in intervention, United States of America , is a corporation sovereign and body politic.

VI. That defendant, Rob ert A. Riddell, during the year 1951 and to date was and now is the Director of Internal Revenue for the Sixth Collection District.

VII. Defendant, Greek Theatre Productions, Inc., for the purpose of posting part of the security required by Actors Equity Association on May 11th, 1951 deposited with plaintiff, The Morris Plan Company of California, a California corporation, the sum of $5,000.00 in trust for Actors Equity Association in thrift account No. 11344 in the name of "Greek Theatre Productions-Actors Equity Fund", and an installment investment certificate No. 11344 was duly issued by plaintiff.

VIII. That on May 18th, 1951 defendants, Greek Theatre Productions, Inc., a California corporation, Maurice H. Friedman, Donald L. Rose and A. J. Perenchio for the purpose of posting the balance of security to meet the requirements of Actors Equity Association borrowed the sum of $30,000.00 from plaintiff, The Morris Plan, and duly executed and delivered to The Morris Plan their promissory note due and payable September 18th, 1951 and bearing interest at the rate of ten per cent per annum.

IX. That on May 18th, 1951 the $30,000.00 borrowed by defendant Greek Theatre Productions, Inc., from plaintiff was deposited in thrift account No. 11344 at Morris Plan under the name of "Greek Theatre Productions-Actors Equity Fund" in trust and plaintiff issued its installment investment certificate bearing said name under an understanding and agreement that the monies in said thrift account were pledged to Actors Equity Association for use in payment of any unpaid salaries of actors and other employees of defendant, Greek Theatre Productions, Inc., during their production season of 1951 and secondarily, the monies in said thrift account, with the knowledge of Actors Equity Association, were also pledged to plaintiff, The Morris Plan, as security for the payment of said note.

X. That prior to and on May 18th, 1951 at the time of the deposit, plaintiff, defendant, Greek Theatre Productions, Inc., and Actors Equity Association intended and agreed that defendant Greek Theatre would not withdraw any of the said monies on deposit nor would they have any dominion or control over said monies in said thrift account at any time and that plaintiff, upon proper written demand in the form of an affidavit presented by Actors Equity Association could withdraw any or all of said monies from said account and pay it over to Actors Equity Association in payment of unpaid salaries of actors and employees of Greek Theatre and upon maturity date of said note, to-wit, September 18, 1951, any balance remaining after payment of Actors Equity Association's demands was to be used by plaintiff, Morris Plan, toward payment and satisfaction of said note.

XI. That on May 18th, 1951 and at all times subsequent thereto a bona fide pledge of the monies on deposit in thrift account No. 11344 was made by defendant, Greek Theatre Productions, Inc., to Actors Equity Association as security for the payment of any unpaid salaries of actors and employees of defendant, Greek Theatre Productions, Inc., for the production season of 1951 and on May 18th, 1951 a bona fide pledge was made by defendant, Greek Theatre Productions, Inc., to plaintiff, Morris Plan, of all the monies on deposit in said thrift account unclaimed by Actors Equity Association remaining on deposit in said thrift account as security for the payment of the note.

XII. That on September 14, 1951 , pursuant to written demand in the form of an affidavit by Actors Equity Association, plaintiff withdrew the sum of $5,000.00 from said thrift account and turned the monies over to defendant, Greek Theatre Productions, Inc., for payment of some unpaid salaries of actors and employees of said defendant.

XIII. That on September 18, 1951 the promissory note in the sum of $30,000.00 in favor of plaintiff and executed by defendants, Greek Theatre Productions, Inc., a California Corporation, Maurice H. Friedman, Donald L. Rose and A. J. Perenchio, plus interest that had accrued in the sum of $1,000.00 was wholly due, owing and unpaid by said defendants to plaintiff; that on September 18, 1951 there was on deposit in said thrift account No. 11344 the sum of $30,000.00, plus accrued interest of $87.50.

XIV. That on or about August 1st, 1951, defendant, Greek Theatre Productions, Inc., a California corporation was insolvent and the stock certificates, that had also been pledged to plaintiff as security for the payment of the note by defendants, Friedman, Rose and Perenchio, were worthless; that prior to and after the maturity of the note on September 18, 1951, Actors Equity Association had made demands upon plaintiff and pending the adjustment and settlement of said demands the proceeds in said thrift account were not applied by plaintiff at said time in payment of the note; that on June 23rd, 1952 Actors Equity Association, without plaintiff having had to withdraw any of said monies on deposit in said thrift account and pay Actors Equity Association, released Morris Plan, plaintiff herein, and defendant, Greek Theatre Productions, Inc., of any and all further claims and demands to said monies on deposit in said thrift account.

XV. That on September 4, 1951 the defendant, Rob ert A. Riddell, as Director of Internal Revenue received an assessment list from the United States Commissioner of Internal Revenue showing defendant, Greek Theatre Productions, Inc., tax indebtedness for admission taxes for June, 1951 in the sum of $15,436.34 and on September 5, 1951, the taxes not having been paid, a warrant for distraint was issued against said defendant and thereafter the Director having received a payment of $5,390.34 only filed on September 11th, 1951 in the Los Angeles County Recorder's Office a tax lien for the sum of $10,046.00; that on September 19th, 1951, a garnishment and notice of levy was served on plaintiff by the Director; that plaintiff, The Morris Plan Company of California, did not have notice of said tax claims or levy until September 19th, 1951; that there is a present indebtedness due, owing and unpaid by defendant, taxpayer, Greek Theatre Productions, Inc., to the United States of America, including interest and accrued penalties, in the sum of $12,494.63.

XVI. That defendant, Greek Theatre Productions, Inc., had no interest, control or dominion over the monies in said thrift account No. 11344 from the time the account was created and the monies were deposited in trust and pledged on May 18th, 1951 unless and until beneficiaries of the trust, the first beneficiaries, Actors Equity Association, released plaintiff and defendant, Greek Theatre Productions, Inc., which was done on June 23rd, 1952, and unless and until the plaintiff's note was fully paid and satisfied; that on September 18th, 1951, and before notice of garnishment and levy was served by defendant, Rob ert A. Riddell, as Director of Internal Revenue on plaintiff as to unpaid admission taxes owed by Greek Theatre to the government, Greek Theatre Productions, Inc., owed plaintiff the balance due on said note in the sum of $31,000.00 and at said time defendant, Greek Theatre Productions, Inc., became absolutely liable to pay said note to plaintiff, though there was only the sum of $30,087.50 on deposit on September 18, 1951 in said thrift account No. 11344; that on September 19, 1951 when the notice of garnishment and levy was made by the government upon plaintiff, The Morris Plan, as to said thrift account No. 11344 and the monies on deposit therein and at all times since then, defendant, Greek Theatre Productions, Inc., had no right, title or interest to the monies in said thrift account No. 11344.

XVII. That the Plaintiff, The Morris Plan Company of California, a California corporation, has a prior and paramount right to the monies on deposit in thrift account No. 11344 over the defendants and the United States of America, plaintiff in intervention, and the lien rights of the United States of America are subordinate to the rights of plaintiff herein and plaintiff is entitled to apply all the monies remaining on deposit in said thrift account No. 11344 in payment of the note and the defendants and plaintiff in intervention, United States of America, have no right, title or interest in and to said monies in said thrift account No. 11344 at Morris Plan Company of California.

XVIII. With reference to the particular allegations of the ANSWER OF ROBERT A. RIDDELL, individually and as Director of Internal Revenue for the Sixth Collection District, the court finds:

(1) It is not true as alleged in Paragraph X, page 3, lines 3 to 7 inclusive that the proceeds of the said promissory note were deposited by the taxpayer defendant, Greek Theatre Productions, Inc., to its credit, in the Morris Plan Company of California, plaintiff herein, in an account denominated "Greek Theatre Productions, Inc., Actors Equity Fund"; the court finds that the proceeds of the promissory note were deposited in trust for Actors Equity Association with plaintiff in an account denominated "Greek Theatre Productions--Actors Equity Fund", and subject to a pledge in favor of plaintiff.

(2) It is not true as alleged in Paragraph XXII that Rob ert A. Riddell as Director of Internal Revenue for the Sixth Collection District claims no rights to the funds by reason of the garnishment levied on said thrift account at Morris Plan Company of California , a corporation, plaintiff herein.

XIX. With reference to the particular allegations of the ANSWERS OF GREEK THEATRE PRODUCTIONS, INC., A CALIFORNIA CORPORATION, MAURICE H. FRIEDMAN and DONALD L. ROSE, the court finds:

A. It is not true as alleged in Paragraph II, lines 11 to 15 inclusive that plaintiff on September 18, 1951 or subsequent thereto applied said sum of $30,000.00 in payment of said note and that said promissory note has been paid in full;

B. It is not true as alleged in Paragraph I of the First Affirmative Defense on page 3, lines 18 and 19 inclusive that the Actors Equity Association has made no claim against plaintiff and did on or before September 18, 1951 , so advise plaintiff.

XX. With reference to the particular allegations of the COMPLAINT IN INTERVENTION of the UNITED STATES OF AMERICA , the Court finds:

(a) It is not true as alleged in paragraph 6, page 3, lines 5 to 9 that the proceeds of the promissory note were deposited by the taxpayer-defendant, Greek Theatre Productions, Inc., to its credit, in the Morris Plan Company of California, plaintiff herein, in an account denominated "Greek Theatre Productions-Actors Equity Fund" but the funds were deposited in trust for Actors Equity Association at Morris Plan subject to a pledge also in favor of plaintiff;

It is not as alleged in paragraph 6, page 3, lines 16 and 17 that the Greek Theatre Productions, Inc., season ended on September 8, 1951 but ended on September 15, 1951 ;

It is not true as alleged in Paragraph 6, page 3, lines 23 to 29 that the last of the claims for salaries and wages were paid and settled by Actors Equity Association on June 23, 1951 and on that date Actors Equity Association by letter to plaintiff released all of its interest and rights in the account, but the court finds that the release of all claims for unpaid salaries of actors by letter from Actors Equity Association to plaintiff was not received until June 23, 1952;

(b) It is not true as alleged in Paragraph 8, lines 1 to 8 inclusive, that on and after September 8, 1951 and prior to and until September 18, 1951, when Greek Theatre Productions, Inc., note matured and became due and was unpaid, that the taxpayer defendant, Greek Theatre Productions, Inc., had an interest in the account in the Morris Plan Company of California of the value of not less than $23,000.00; but the court finds that on and after September 8, 1951 and to and including September 18, 1951 when the note matured, the interest, if any, of defendant, Greek Theatre Productions Inc., in and to said thrift account and monies on deposit therein was subordinate to and subject to the prior rights of Actors Equity Association and the plaintiff;

(c) It is not true as alleged in Paragraph 10 that United States of America, as Intervenor, is entitled to payment of its claims and lien for the unpaid internal revenue and interest, aforesaid, together with interest thereon as provided by law, out of the interest belonging to defendant, Greek Theatre Productions, Inc., in the account denominated "Greek Theatre Productions, Inc., Actors Equity Fund" in The Morris Plan Company of California, plaintiff herein, to which interest the tax lien of the United States of America attached from and after September 8, 1951; the court finds that on and after September 8, 1951 whatever interest the defendant, Greek Theatre Productions, Inc., had in said thrift trust account was subject to the prior pledge of Actors Equity Association and plaintiff and that on September 18, 1951, the plaintiff was absolutely entitled to the monies in said thrift account, subject to any then claims of Actors Equity Association, to apply in payment and satisfaction of the note of Greek Theatre Productions, Inc., that matured and became due and unpaid on said date; the court further finds that the lien rights of the United States of America did not become enforceable and effective against plaintiff and the monies on deposit on said thrift account until the notice of garnishment was received by plaintiff on September 19th, 1951 at which time defendant, Greek Theatre Productions, Inc., had no right, title or interest in and to said monies on deposit in said thrift account;

(d) That it is not true as set forth in Paragraph 11 that the claim and lien of the United States of America is entitled to priority of payment out of said funds over all other claimants thereto, including the defendants in intervention; the court finds that the claim and lien of the United States of America is subordinate to the rights of plaintiff and that there is no remaining surplus in said thrift account No. 11344 at The Morris Plan Company of California to which the claim and lien rights of the United States of America could attach;

(e) That it is not true as set forth in Paragraph 12 that plaintiff's right, title and interest in and to said monies on deposit in said thrift account are junior, inferior and subordinate to the tax lien of the United States of America.

From the foregoing FINDINGS OF FACT, the Court makes the following:

Conclusions of Law

1. That plaintiff, The Morris Plan Company of California , a California corporation, is entitled to declaratory relief and to a declaratory judgment as against defendants and Intervenor , United States of America , as follows:

a. That defendant, Rob ert A. Riddell, individually and as Director of Internal Revenue for the Sixth Collection District, and Intervenor, United States of America's lien rights on thrift account No. 11344 entitled "Greek Theatre Productions-Actors Equity Fund" at The Morris Plan Company of California and the proceeds on deposit in said thrift account in the sum of $30,087.50 are junior, inferior and subordinate to the trust and pledge rights of plaintiff in said thrift account to the extent and in the sum of $30,700.00, plus interest at the rate of ten per cent per annum from September 18, 1951 to date and that plaintiff has a prior and paramount right, title and interest to said thrift account and the entire proceeds thereof to be applied in payment of the promissory note executed by defendants, Greek Theatre Productions, Inc., a California corporation, Maurice H. Friedman, Donald L. Rose, and A. J. Perenchio;

b. That defendants and Plaintiff in Intervention, United States of America, are not entitled to recover anything from plaintiff and defendant in Intervention, The Morris Plan Company of California, a California Corporation.