Estate Claims

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[86-2 USTC ¶9846] In the Matter of the Estate of Vincent M. Igoe, Respondent v. United States Internal Revenue Service, Appellant

Supreme Court of Mo., No. 68315, 10/14/86

[Code Secs. 6321 and 6323 ]

Lien for taxes: Priority: State law.--Homestead and family allowances allowed under a Missouri state statute took priority over assessed federal tax liens in an insolvent estate. Homestead and family allowances were debts of the estate and not debts of the tax- delinquent decedent. The IRS did not object to the payment of funeral expenses or attorneys' fees incurred in admin istering the estate (expenses that the court stated were similar to homestead and family allowances) and the state statute gave priority to homestead and family allowances over funeral expenses.

Per Curiam

EC: This appeal was first heard in the Missouri Court of Appeals, Eastern District, and decided by an opinion authored by the Honorable Rob ert O. Snyder. The appeal was then transferred to this Court pursuant to Rule 83.02.

The appeal has now been heard in this Court and the Court adopts the opinion of Judge Snyder as its decision.

The United States Internal Revenue Service appeals from a judgment of the Probate Division of the Circuit Court of the City of St. Louis , which gave priority to homestead and family allowances over a federal tax lien in an insolvent estate. The judgment is affirmed.

Vincent M. Igoe died on June 28, 1983 . The decedent had filed a delinquent 1980 federal income tax return in 1981. In 1982, the IRS filed notice of a federal tax lien with respect to the unpaid 1980 tax liability. On January 7, 1983 , the decedent paid $43,989.94 of his delinquent taxes to the IRS. No other payments to the IRS were made prior to decedent's death. After decedent's death, the IRS filed a proof of claim against the estate in the amount of $81,607.40 for the unpaid tax balance, interest and penalties.

Cheryl I. Igoe, the surviving spouse and admin istratrix of the estate filed a petition seeking her homestead allowance of $7,500.00 pursuant to section 474.290, RSMo 1978. In addition, the guardian of the decedent's six minor children from a previous marriage claimed the right to the family allowance authorized by section 474.260. RSMo 1978.

The United States objected to the claims of the surviving spouse and minor children, contending that under section 6321 of the Internal Revenue Code of 1954, the IRS tax lien had priority because it was effective before decedent's death.

On December 6, 1984 , the trial court ruled that the IRS tax lien "does not take priority over costs, expenses of admin istration, exempt property, family and homestead allowances, and funeral expenses under section 473.397 RSMo." The court awarded $7,500.00 to Cheryl A. Igoe, the surviving spouse, less $1,485.00 for business furniture she elected to keep. The court awarded $28,888.00 as a reasonable family allowance for the six surviving minor children. The decedent's estate was insufficient to satisfy both the tax lien and the homestead and family allowances.

The IRS appealed, alleging that as a matter of law the trial court erred by ruling that homestead and family allowances "primed," that is, had priority over, assessed federal tax liens. The point is denied and the trial court's judgment allowing the homestead and family allowances is affirmed.

The trial court based its judgment on section 473.397, RSMo 1978, which classifies and sets forth the priority of claims against a decedent's estate.

Sec. 473.397 CLASSIFICATION OF CLAIMS AND STATUTORY ALLOWANCES

All claims and statutory allowances against the estate of a decedent shall be divided into the following classes:

(1) Costs;

(2) Expenses of admin istration;

(3) Exempt property, family and homestead allowances;

(4) Funeral expenses;

(5) Debts and taxes due to the United States of America ;

(6) Expenses of the last sickness, wages of servants, claims for medicine and medical attendance during the last sickness, and the reasonable cost of a tombstone;

(7) Debts and taxes due the state of Missouri , any county, or any political subdivision of the state of Missouri ;

(8) Judgments rendered against the decedent in his lifetime and judgments rendered upon attachments levied upon property of decedent during his lifetime;

(9) All other claims not barred by section 473.360.

The trial court applied the Missouri statute and ruled that the family and homestead allowances claimed against the decedent's estate had priority over the IRS tax lien.

The priority of a federal tax lien over other claims is a question of federal law. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 56-57 (1958). The case under review, then, requires an interpretation of federal statutes.

Section 6321 of the Internal Revenue Code (26 U.S.C. sec. 6321 (1982)) establishes a lien against the property of a person liable for taxes. It reads:

Sec. 6321 . LIEN FOR TAXES

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

The parties agree that state law determines who owns property. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512[1] (1960). United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55[6] (1958).

The decedent did not own property after his death according to Missouri law. His property passed to his heirs at law inasmuch as he died intestate. §473.260, RSMo 1978. But before it reaches the heirs at law it flows through the estate where the admin istratrix in this case is chargeable with expenses of admin istration, claims, and allowances to the family. South St. Joseph Live Stock Exchange v. St. Joseph Stock Yards Bank, 223 Mo. App. 623, 16 S.W.2d 722, 727 (1929). Because this estate was insolvent, no property ever reached the heirs at law.

Appellant argues that the federal tax lien arose prior to, and was not extinguished by, decedent's death. Therefore, any party who takes possession of the decedent's property takes subject to the pre-existing tax lien. Appellant also supports its argument by relying on I.R.C. sections 6321 and 6323 which create the federal lien for taxes and establish its priority. Section 6323 specifically lists those claims having superiority over the federal tax lien. Because homestead and family allowances are not listed, the IRS argues that they are not to be given priority.

It is doubtful if a lien under I.R.C. section 6321 automatically attaches to property in the estate of a delinquent taxpayer. The IRS lien attaches to the property of the taxpayer only by the plain terms of section 6321 . Because the estate assets are no longer the property of the taxpayer, it is difficult to see how the lien could be effective.

The IRS cites United States v. Bess, supra, for authority that a lien for tax liability attached to the cash surrender value of a life insurance policy after the death of the taxpayer. The case is distinguishable, however, because no probate estate was involved as there is in the case under review.

Weitzner v. United States [62-2 USTC ¶9773 ], 309 F.2d 45, 46-48 (5th Cir. 1962), cert. denied, 372 U.S. 913 (1963), also cited by the IRS, dealt with a homestead provision of the state constitution, a set of facts not similar to those before this court.

The authorities relating to the issue of the priority of federal tax liens are not consistent. Some courts have ruled that claims to homestead rights are superior to federal tax liens while others have held to the contrary. Comparison of cases in this area is made even more difficult because both state statutes and fact patterns differ from case to case.

In Chandler v. Pilley, 5 A.F.T.R.2d 437 (Probate Ct. Tenn, 1959), the court examined the priority of a federal tax lien on a decedent's estate. The decedent's wife filed a petition for a year's support, homestead and dower. The United States filed a claim for unpaid taxes for which a lien was filed prior to decedent's death. The amount of taxes owed exceeded the assets of the estate. Id. at 438.

The widow's petition for a year's support was denied because she failed to comply with the state statute which required her to dissent from her husband's will in open court within nine months after probate of the will. Id. at 430. The widow was granted her homestead right because the court ruled it had vested prior to the liens on her deceased husband's estate. Id. at 441. But see U.S. v. Heasly, 170 F.Supp. 738 (D.C.N.D. 1959). In addition, the Chandler case does not answer the question of whether the court would have granted the year's support had the widow timely filed her petition.

Respondent argues that the government should have proceeded under 31 U.S.C. section 3713 (1982) which provides as follows:

Priority of Government Claims

(a)(1) A claim of the United States Government shall be paid first when--

(A) a person indebted to the Government is insolvent and--

(i) The debtor without enough property to pay all debts makes a voluntary assignment of property;

(ii) Property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed; or

(B) the estate of a deceased debtor, in the custody of the executor or admin istrator, is not enough to pay all debts of the debtor.

(2) This subsection does not apply to a case under title 11.

(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government. [Emphasis supplied].

Respondent argues that this section of the United States Code is applicable because the decedent's estate was insolvent.

A case decided under section 191 and section 192 , forerunners of the current section 3713, held that a claim for one year's support and an exemption for a minor child was not a debt of the decedent and thus took priority over the tax claims of the federal government. In re Carl's Estate, 94 N.E.2d 239, 243 (Ohio Probate Ct. 1950). This case involved the priority given the federal government's claim for income and social security taxes owed by the decedent. The court reasoned that the exemption and year's support were not debts of the decedent but charges on the estate. Id. at 243.

In Martin v. Dennett, 626 P.2d 473 ( Utah 1981), the court held that the state statute granting priority to funeral and admin istrative expenses of an estate over the debts of the deceased is controlling as to claims against the estate. Id. at 475. In Martin, the federal government filed a tax lien prior to decedent's death. The lien was created under I.R.C. section 6321 . The priority of the lien was determined by 31 U.S.C. section 191 (now section 3713). The court ruled that section 191 accords federal priority over only those debts "due from the deceased," and not debts of the estate. The court held that the funeral and admin istrative expenses of an estate have priority over a federal tax lien filed prior to decedent's death. Id. at 475-76[3].

This case is decided by using the Martin rationale that homestead and family allowances are debts of the estate and not debts of the decedent. Homestead and family allowances are similar to funeral expenses and costs of estate admin istration. Section 473.397 gives priority to homestead and family allowances over funeral expenses.

The government did not object to the payment from Mr. Igoe's estate of his funeral expenses nor the attorney's fees incurred in admin istering the estate. These estate debts are not listed in I.R.C. section 6323 . Yet they were allowed without appellant's protest suggestion that section 6323 is not as all inclusive a list as the United States would have this court believe.

The United States sought relief in a Missouri state court and is therefore bound by the same rules which bind and govern other litigants. Pollyea v. Grodsky, 315 S.W.2d 460, 461[1] ( Mo. App. 1958).

The judgment is affirmed.

All concur.

 

 

[65-1 USTC ¶9321]Matter of Fannie Engelhardt, deceased

N. Y. Surrogates Court , Kings County , 12/3/64

[1954 Code Sec. 6323]

Tax liens: Priority: Decedent's estate.--The government's lien for taxes, based upon income tax deficiencies assessed against the deceased taxpayer, was entitled to priority of payment in the admin istration of the decedent's estate before distribution to the distributees.

Joseph P. Hoey, United States Attorney, 271 Washington St., Brooklyn, N. Y., for U. S. Rob ert J. McGinn, National Surety Co., 110 William St., New York, N. Y., for F. Engelhardt.

JUDD, Surrogate:

This is a proceeding instituted by the United States of America, as a creditor, to take and state the account of the admin istrator and direct payment to it of the sum of $8,363.36 with interest computed to May 1, 1964, based upon an assessment of income tax deficiency against the decedent in the sum of $6,852.93 as of April 17, 1959.

The decedent died on May 9, 1948 , survived by her husband and four children as her distributees. Letters of admin istration were granted to the surviving spouse on September 7, 1948 . An order directing the admin istrator to account was served on the clerk of this court, the admin istrator being outside of the country. The admin istrator has since failed to file his account.

The proofs and allegations of the parties were taken before the court in respect of the issues raised and the account as proposed by the United States of America . The proof established that the decedent died possessed of personalty and seized of a parcel of real estate known as 2239 Benson Avenue , Brooklyn , N. Y. The items of personalty consisted of cash in vault, moneys on deposit in banks and four United States savings bonds, aggregating the sum $33,860.39 as of the date of decedent's death, and are correctly reflected in Schedule "A" of the proposed account.

Under caption designated "Real Property Sold" in the said Schedule "A" is reflected $31,000 as the net proceeds of the sale of decedent's real property. A photostat of a deed executed by the surviving spouse and decedent's four surviving children dated June 27, 1958, conveying the decedent's real property to the grantee named therein was received in evidence (petitioner's Exhibit 7). The admin istrator joined in said deed solely in his individual capacity. An admin istrator possesses no authority by virtue of his office to or over a decedent's real property (Matter of Sharp, 140 Misc. 427; Matter of Engel, 140 Misc. 276; O'Brien v. Flynn, 228 App. Div. 704; Mele v. Bonagura, 172 App. Div. 893) as it devolves to the distributees immediately at the moment of death of the decedent (Waxson Realty Corporation v. Rothschild, 255 N. Y. 332, 336; Matter of MacKenzie, 247 App. Div. 317, 321). It may, however, be resorted to by the fiduciary in those cases where personal assets are insufficient to defray admin istration and funeral expenses and debts (Matter of Innella, 256 App. Div. 310; Decedent Estate Law, sec. 13; Surrogate's Court Act, sec. 234). It appearing affirmatively that decedent's personal assets were sufficient to discharge the claims due against the estate, the court will not permit the inclusion in the proposed account of the proceeds of the sale of decedent's real property.

Schedule C of the proposed account covering admin istration and funeral expenses will be amended to include an additional item of $2,065.47 for counsel fees paid to William Bernstein, Esq., pursuant to order of this court dated June 6, 1956, making the total expenditures for legal fees the sum of $4,638.47. The total expense under Schedule C is therefore $8,234.87 and is allowed.

Schedule E-1 of the proposed account, covering estate taxes, will be amended to include an additional item of $96.21 for payment of interest on New York State estate taxes on November 23, 1955 , as appears by filed tax receipt, making the total payments under that schedule of $231.45.

Schedule E of the proposed account, containing a statement of moneys paid and property delivered to decedent's distributees, shows payments of $4,738.78 each to three daughters, the sum of $738.78 to decedent's son, and the sum of $1,977.54 as being retained by the admin istrator-husband as his distributive share, the total of said schedule being the sum of $16,932.64. The sums so listed as having been paid to the distributees have been acknowledged by each of them to the admin istrator and his surety, as indicated by their several separate general releases and receipts (petitioner's exhibit 8). The payments so allegedly made do not, however, reflect the actual sums to which each of the distributees was entitled from this estate. It may well be that there was a family settlement which would be binding upon them.

It appears that the admin istrator's surety acquiesced in the informal distribution of the assets of this estate without requiring the admin istrator to judicially settle his account, a right which it possessed. The surety's acquiescence in such mode of distribution was probably induced by the admin istrator's affidavit (petitioner's exhibit 9), sworn to January 27, 1958, wherein he averred that the estate assets consisted of cash in the sum of $36,775.54 and bonds in the sum of $3,650, which were the amounts reported by the admin istrator in his estate tax return as of the date of death of the decedent. There was no showing by the admin istrator of the amounts of income on the estate assets earned interim the decedent's death on May 9, 1948 , and his affidavit of January 27, 1958 , almost ten years after the decedent's death. Moreover, the true estate assets as of the date of death were the sum of $31,830.39 in cash and bank accounts, and the sum of $2,030 in bonds. The difference between this total and the sum accounted for by the admin istrator in his affidavit of January 27, 1958 , represented Totten Trust bank accounts in the sum of $4,945.15 and U. S. bonds, in the sum of $1,620, payable to designated beneficiaries on the decedent's death. Whether the beneficiaries of those Totten trusts and the designated beneficiaries under the bonds were given their respective bank accounts and bonds or paid the sums due them therefrom, or whether part or all of the benefits to which they were entitled from said trusts and bonds was paid to some or all of them and included in the sums set forth under proposed Schedule E is incapable of determination at this time for lack of proof. The court under such circumstances may not infer that some of the distributees were over-paid their distributive share.

Moreover, the prayer for relief in the citation herein was limited to the surrogate taking and stating the account of the admin istrator, the allowance of the petitioner's claim in the sum of $8,363.36, with interest from May 1, 1964 , and to the judicial settlement of the account as stated. No answer was filed by any of the respondents including the surety on the admin istrator's bond. There is, therefore, no relief sought against the distributees, under the provisions of Surrogate's Court Act, section 267, for any overpayment to them of their distributive shares. To obviate the possibility of the distributees being precluded from establishing the nature of the payments to them under proposed Schedule E of the account, said Schedule E is disallowed without prejudice to further proof respecting such payments in any other appropriate proceeding in which notice will be given to the distributees of their possible liability to the estate for any overpayment to them of their true distributive share. This disallowance of proposed Schedule E is based upon the admin istrator's payment to the distributees at a time when he had knowledge of the existence of the claim of the United States, which was entitled to priority of payment before distribution should have been made to the distributees (Surrogate's Court Act, sec. 208; Matter of Swaab, 40 Misc. 2d 767 and cases cited).

There being no proof with respect to Schedules A-1, A-2, A-3, B, B-1, C-1, D and D-2, they are disallowed, without prejudice to proof in any other appropriate proceeding. Schedule G, statement of property remaining in the hands of the admin istrator, will accordingly be changed to read, cash $25,394.07. The summary statement of the proposed account is accordingly amended to reflect total charges of $33,960.39 and total credits of $8,466.32, leaving a balance of $25,394.07 in the hands of the admin istrator.

The account as proposed by the United States of America is approved as amended and shall be incorporated in the decree herein, which will provide for the payment of the sum of $8,363.36, with interest thereon from May 1, 1964 , to the United States of America , in payment of its claim, which is approved. No directions for the disposition of the then remaining balance, with which the admin istrator is charged, will be made at this time, but the decree shall be without prejudice to the right of any person interested in the estate or fund to institute an appropriate proceeding for such relief respecting said fund as he may be advised. The decree hereon shall be settled upon ten (10) days' notice, by certified mail, to the admin istrator and the distributees other than Bernice Pine at their last known addresses, and to the admin istrator's surety; service upon Bernice Pine, whose address is unknown, is dispensed with.

 

 

[57-1 USTC ¶9255]People v. Phillips

N. Y. Supreme Court, Special Term, Part I, N. Y. County, No. 75, 9/12/56

[1939 Code Sec. 3672--covered in 1954 Code Sec. 6323]

Deficiency: Priority of tax lien.--A suit was brought by the State of New York under Article 23-A of the New York General Business Law to enjoin the taxpayer-defendants from fraudulent practices in stocks and bonds and to appoint a receiver to take possession of their property. The court ordered the seized assets distributed according to the following schedule of priorities: (a) all claims of customers for a particular security where the receiver has in his possession sufficient quantities of that security to do so; (b) admin istration expenses; (c) Federal tax claims; (d) certain preferred wage claims; (e) New York State and New York City tax claims; (f) all claims of customers for whom only a portion of a specific security was found to cover the claims for that security, to the extent of such security; (g) the balance of any claims of customers under (f), claims of customers for whom no specific security was found to cover their claims for that security, and all other claims of customers not otherwise specifically classified; and (h) general creditors.

W. J. Duggan, 32 East 39th St., New York, N. Y., attorney for motion. David W. Kahn, 120 Broadway, New York , N. Y., for petitioners. G. Berkowitz, 320 Broadway, New York , N. Y., for defendant H. Palombo. S. Steinhauser, 186 Joralemon Ave. , Brooklyn , N. Y., for defendants H. S. Cohn and D. Goldberg. E. Henry Shaprio, 141 Broadway, New York , N. Y., for the Stamlers, claimants. S. D. Kurtzman, 1903 South Blvd. , Bronx , N. Y., for defendant A. Nelson. Manfield G. Goreth, 149 Main St. , White Plains , N. Y., for defendants R. and I. L. Eastman. F. B. Merkle, 9-15 Park Place , New York , N. Y., for defendants C. and C. Greenwood. Leboeuf, Lamb & Leiby, 15 Broad St. , New York , N. Y., were on the memorandum in opposition to motion to confirm referee's report.

[Property in Receivership]

HECHT, Justice:

In March, 1954, this action was instituted by the Attorney-General of the State of New York, pursuant to Article 23-A of the General Business Law (known as the "Martin Act"), to enjoin the defendants from engaging in fraudulent practices and for the appointment of a receiver to take possession of property derived by defendants therefrom. At the time of the institution of the action the attorney-general obtained a temporary restraining order which was served upon the defendants, and their business was closed on March 19, 1954 . By a subsequent order, dated April 23, 1954 , the original order was made permanent, and by the provisions of the latter order a receiver was duly appointed.

The receiver thereafter brought on an order to show cause for instructions in connection with the distribution of the assets which came into his possession as a result of his appointment, and his motion raised several questions which resulted in the appointment of a referee to whom those questions were submitted.

[Priorities Requested by Receiver]

The receiver requested that he be permitted to recognize certain priorities and that the order of payment should be as follows: I. Administration expenses; II. Wages--priority not to exceed $600 to each claimant for wages which had been earned within three months before March 19, 1954 ; III. Taxes--Moneys Collected or withheld from employees for taxes due and owing to the United States, or any state or subdivision thereof and all other claims for taxes legally due and owing to the United States, or any state or any subdivision thereof; IV.--Defrauded Customers--Class A--those customers for whom only a portion of a specific security was found to cover their claim for that security. For that portion a claim should be allowed in this class. The balance of the claim should be placed in Defrauded Customers--Class B. V. Defrauded Customers--Class B--those customers for whom no specific security was found to cover their claim for that security. These claims, in addition to those balances referred to in IV (supra), and all other claims of customers not otherwise specifically classified, are to be placed in this classification. VI. General Creditors--All other claims, not otherwise specifically classified, should be in the group of general creditors.

The receiver advanced reasons for his recommendation. As to I: Administration expenses should be paid first, pursuant to Section 23-A of the General Business Law of the State of New York . As to II: The provisions of the Debtor and Creditor Law, section 22, as amended. As to III: Claims for taxes legally due and owing should have next priority pursuant to section 191 of title 31, United States Code. He requested that items I, II and III should be paid out of funds in the categories enumerated in reverse order; that the funds in one category should be exhausted before using the funds in the next category.

As to IV, V and VI the receiver asserted that the purpose of the statute (art. 23-a of the General Business Law) is to prevent fraud in the sale of securities whereby the public might be fraudulently exploited. The customers are the ones whom the statute aims to protect so that no fraud is perpetrated upon them, within the meaning and intent, and in violation of the statute. He further pointed out that customers are to be first considered and preferred after debts having a higher priority are paid.

Accordingly, he had returned, pursuant to the order of this court, all the securities of customers, which securities were registered in the name of a customer or held in safekeeping for a customer, or segregated for the account of a customer. He recommended that he should be authorized and permitted to honor all claims for a particular security in those instances where he has in his possession sufficient quantities of that security to do so.

He also requested that he be permitted not to recognize claims against Ben Guy Phillips and Dorothy Phillips, or either of them, not incurred in the conduct of B. G. Phillips & Company, on the grounds that claims of that type are not contemplated in article 23-a of the General Business Law. He requested other instructions and directions which are not deemed pertinent to this discussion.

[Referee's Priorities]

The referee disagrees with the manner in which the receiver intended to distribute the assets, subject, of course, to the approval of the court. He argues that while defendants here were engaged in fraudulent practices within the contemplation of the Martin Act and obtained property through such fraudulent practices, other property was obtained by the defendants in the regular course of business without taint of fraud and mingled with the property fraudulently obtained. He asserts that all of the customers were, in a larger sense, victims of the defendants' fraudulent practices since it was the misconduct of the defendants that kept them operating and thus in a position to place all its customers in danger of its ultimate insolvency. He contends that it is also clear that the defendants are insolvent and that there are not sufficient assets to pay all claims in full. He, therefore, recommends to the court a method of distributing the assets of the defendant different from that originally suggested by the receiver. The referee argues that under the receiver's plan, customers who dealt with the broker in exactly the same manner would not, upon distribution of the available assets, be treated alike.

The referee concedes that it has been expressed as a judicial principle that the purpose of article 23-a of the General Business Law is that property obtained by fraudulent purposes shall come back, as far as possible, to the persons from whom it was obtained. He notes that the receiver proposes to establish two classes for defrauded customers as hereinabove set forth.

He points out that the receiver proposes, where he has in possession sufficient quantities of a particular security, to honor all claims by customers for that particular security and to distribute those securities in kind to the customers, even though the certificates are not registered in the customers' names nor specifically held in safekeeping for such customers, nor segregated for their accounts. He argues that the receiver, in making his recommendations, has relied on three principal authorities--Gorman v. Littlefield (299 U. S. , 19, 33 S. Ct., 690); Duel v. Hollins (241 U. S. , 523, 36 S. Ct. , 615) and In re J. C. Wilson & Company (252 Fed. 631).

The referee notes these cases, but maintains that the application of the rules enunciated therein operates to create inequity between customers of the stockbroker simply by reason of the accidental fact that the securities on hand at the time of the bankruptcy might have included certain stock issues and not others. He argues that dissatisfaction with the results flowing from the rules set forth in Gorman v. Littlefield (supra) and Duel v. Hollins (supra), led to the inclusion in the Chandler Act of a new subdivision to be added to section 60 of the Bankruptcy Act, which relates only and specifically to the bankruptcy of a stockbroker. He contends that in effect the new subdivision rejects the principles set forth in the aforementioned cases with respect to equitable liens of customers upon securities of like character which have not in fact been segregated for those customers, and that it sets up three basic categories of creditors in a bankruptcy of a stockbroker.

Accordingly, the referee has recommended the order of priorities as follows: (a) Cash customers, as defined in subdivision (e) of section 60 of the Bankruptcy Act, except as modified in his report, who are able to identify specifically their property in the hands of the receiver, in the manner described in paragraph 4 of said subdivision, are entitled to reclaim their property from the receiver; (b) the balance of the assets in the hands of the receiver should be liquidated and shall constitute a single and separate fund for the benefit of all other customers, subject to the following priorities: (1) Administration expenses; (2) federal tax claims; (3) preferred wage claims; that is, claims up to $600 earned within the three-month period preceding March 19, 1954; (4) New York State and New York City tax claims.

He further recommends that, subject to such priorities, all the customers of defendant, except cash customers who have specifically identified their property, as provided in subdivision (e) (supra), will share ratably in this fund, based on the nature of their respective equities as of March 19, 1954. (c) General creditors. He further recommends that the receiver should not recognize claims against Ben Guy Phillips and Dorothy Phillips, or either of them, not incurred in the conduct of the business of the defendant; that March 19, 1954 shall be the controlling date in determining the nature of the equities of the customers, in accordance with the principles of subdivision (e); that where securities not registered in the name of a customer were held in safekeeping for a customer but not segregated for the account of a customer, the receiver shall not make distribution in kind, even though he may have in his possession sufficient quantities of a particular security to honor all claims for a particular security. All such securities should be sold and the proceeds thereof, together with dividends collected thereon, should be placed in a single and separate fund provided for by subdivision (e); that where the receiver has not in his possession sufficient quantities of a particular security to honor all claims for that particular security, such securities should be sold and the proceeds thereof, together with dividends collected thereon, should be placed in the single and separate fund provided for by subdivision (e). He makes other recommendations which, however, need no detailed discussion since the court will adopt them.

[Effect of Federal Law on State Court]

The referee recognizes that the federal statute is not binding upon the state courts but argues that there is no valid reason why the courts of the state should not follow the principle set forth in the Chandler Act for the distribution of the assets of a stock-broker in the hands of a Martin Act receiver.

He asserts that the distribution of the assets in a Martin Act receiver's hands, in line with the principles set forth in the Chandler Act amendment to the Bankruptcy Law will in fact effectuate the basic aims of the Martin Act to give the best possible protection to all customers who have been victims of the fraudulent acts of a stock-broker and do so upon the basis of equity rather than chance.

[Powers of Receiver]

The report of the referee reveals a careful and painstaking analysis of the claims, the questions involved and the law applicable to an equitable distribution of the assets in the receiver's hands. I am of the opinion, however, that if the referee's recommendations with regard to priorities of customers' claims were followed, it would give the receiver powers not authorized by the Martin Act and change established New York rules of substantive law.

It is well settled that "a Martin Act receivership does not contemplate a liquidation for creditors of the bankrupt but for defrauded persons who establish their rights as owners of the property seized by the receiver" (In re Koch, 2 Cir., 116 Fed. (2d) 243, 246, certiorari denied; Hirson v. Koch, 313 U. S. , 565, 61 Sup. Ct. , 941).

The receiver is not given powers of a trustee in bankruptcy nor power over all the property of or in the hands of the defendants. His powers are strictly limited to such property as was either derived from fraudulent purposes or property which has been so commingled with property derived from fraudulent purposes that it cannot be identified in kind.

I recognize the referee's attempt to achieve a most fair and equitable distribution of the assets in the receiver's hands. Nor am I unmindful of the reasons for the change in the Chandler Act. I have no aversion to the molding and changing of the Common Law to keep pace with present-day conditions, and, as the great Chancellor Kent stated, to revise it "without reluctance, rather than to have the character of our law impaired and the beauty and harmony of the system destroyed by the perpetuity of error" (Wood v. Lancet, 303 N. Y., 349). However, the receiver, as has been hereinbefore noted, is acting under and by virtue of a specific statute which limits his powers, and any change such as recommended by the referee should come from the Legislature, not the courts. This is not a situation where the court abdicates its own function in a field peculiarly non-statutory by refusing to reconsider an old and unsatisfactory court-made rule. In Wood v. Lancet (supra) the court recognized that "Perhaps, some kinds of changes in the common law could not safely be made without the kind of factual investigation which the Legislature and not the courts, is equipped for. Other proposed changes require elaborate research and consideration of a variety of possible remedies--such questions are peculiarly appropriate for Law Revision Commission scrutiny * * *."

Consequently, if there are sufficient shares of stock in the hands of the receiver to meet all claims for said stock, the receiver should return the stock to the claimants, in accordance with part of the plan originally advocated by him and which the court hereby approves.

[Court's Order of Priorities]

In this connection it should be noted that with reference to the claim of G. William Bailey, Mr. Justice Irving L. Levey, in an order entered on December 9, 1954, directed the receiver to turn over such of the named securities as may be in his (receiver's) possession or control and under the plan now approved by the court the receiver will carry out the provisions of the aforesaid order, which in any case he would have been required to do. In view of the foregoing, the order of priorities shall be as follows: I. All claims of customers for a particular security where the receiver has in his possession sufficient quantities of that security to do so; II. Administration expenses; III. Federal tax claims; IV. Preferred wage claims: claims up to $600 earned within the three-month period preceding March 19, 1954 ; V. New York State and New York City tax claims; VI. All claims of customers, for whom only a portion of a specific security was found to cover the claims for that security, to the extent of such security; VII. The balance of any claims of customers under VI; claims of customers for whom no specific security was found to cover their claims for that security; and all other claims of customers not otherwise specifically classified; VIII. General creditors.

It should be noted that what I have directed with respect to the priority distribution of specific securities applies with equal force to claims of customers for bonus stock and said claims be similarly treated.

It should also be noted that in furtherance of claims for a particular security where the receiver does not have sufficient quantities of that particular stock to honor all claims therefor, the receiver is directed to sell such securities and honor the claimant's lien for a pro rata share of the proceeds of the sale of said securities, together with all dividends collected thereon by the receiver, under class VI. The balance of the claims should be honored under category VII.

For the purpose of clarity, and in order to avoid any misunderstanding as to the rights of claimants who oppose the referee's recommendations, the disposition by the court of such claims and the claims of customers similarly situated is as follows. David A. and Sylvia L. Stamler. The receiver is in agreement with the report of the referee that the Stamlers failed to trace and identify their alleged cash items. However, in accordance with the plan approved by the court, since there is a quantity of stock in the hands of the receiver of the type ordered by these claimants but insufficient to meet the claims of all the customers, they will share pro rata in the fund to meet such claims, as hereinbefore described under "VI" and the balance of their claims will be in category "VII."

Helen S. Cohn and Dorothy Goldberg. The referee found, and the record supports him, that Helen Cohn has not sustained the burden of establishing herself as a "cash customer" but has "specifically identified" her property in the hands of the receiver. Since the receiver has in his hands a quantity of stock sufficient to meet the claims of all customers for such stock, the receiver is directed to turn over to them the stock which was specifically purchased for them pursuant to their order, in accordance with the original plan of the receiver as approved by the court.

Charles and Charlotte Greenwood, Herman Negler, Sam Goldstein, Abe Nelson, Alphonse Baldarsano and May Steckel. In connection with the claims of each of these customers, since the receiver has in his possession sufficient securities to meet said claims as well as any other claims heretofore made on him for similar securities, he is directed to honor said claims for the reasons hereinbefore set forth.

Louis Gavard. The receiver points out that this claimant in effect attempts to impress a trust to the extent of $10,000 on certain funds in the bank account of the receiver or, in the alternative, to have the court determine that he has a priority to the extent of $10,000 in the liquidation by the receiver of all the assets in his hands. The record discloses that Gavard had turned over to defendants a check payable to them in the sum of $10,000 and that this check was deposited by the defendants in an account in the name of B. A. Phillips & Company at the Grace National Bank. The referee found that Gavard completely failed to trace what he claims to be his property in any bank account of B. A. Phillips & Company, and both receiver and the referee are in agreement with respect to this claim. However, consonant with the determination hereinbefore set forth, this claim is directed to be placed in category "VII."

It should be noted that in each of the instances where the referee is in accord with the original recommendation of the receiver, the court has examined the subject matter thereof and the referee's report in that regard is adopted in all respects.

With the exception of those instances which I have specifically noted, particularly the modifications of the priorities as I have indicated, and unless otherwise inconsistent with my determination herein contained, the report of the referee is adopted as modified. Settle order accordingly.

 

 

[86-2 USTC ¶9765] David C. Carmody, Administrator, D.B.N. (Estate of Anna F. Roessler) v. Arnold Peck, et. al

Superior Court, Judicial Dist., New Haven , Conn. , 240108, 9/9/86

[31 U.S.C. §3713(a)]

Liens for taxes: Federal v. state liens: Priority.--A federal tax lien against a decedent's estate had priority over a tax lien of Connecticut under the Federal Insolvency Statute (31 U.S.C. §3713). The state lien was recorded first, but the property subject to the lien had not been reduced to possession by the state. Therefore, although the state lien may have been perfected under Connecticut law, under section 3713 it was inchoate and inferior to the federal lien.

Stanley Twardy, Jr., United States Attorney, New Haven , Conn. 06504 , for U.S. Albert E. Sheary, Assistant Tax Commissioner, Morris L. Klein, for tax commissioner, Harry M. Lessin, for Slavitt, Connery & Vardamis. Berkowitz, Balbirer, Weisman & Lubell, for Genovese and Massaro, Inc. DiPietro, Kantrovitz & Brownstein, for G. & H. Poultry and Provisions, Inc.

MULCAHY, Judge:

This is an action in the nature of an interpleader seeking a determination regarding priorities in the distribution of monies realized on the sale of real estate from the decedent's estate. Both the United States and the state of Connecticut have substantial claims for unpaid taxes. The action, as initially brought by the admin istrator, d.b.n., named both the state and the internal revenue service of the United States as party claimants. On November 25, 1985 , the court, D. Dorsey, J., dismissed the internal revenue service as a party defendant and granted the government's motion to file a complaint in intervention. Appropriate pleadings in response to that complaint have been filed by the following: David C. Carmody, admin istrator, d.b.n.; the tax commissioner, state of Connecticut; Arnold Peck, successor in interest to a mortgage deed, dated April 2, 1973, orginally held by Connecticut National Bank; and the law firm of Slavitt, Connery and Vardamis (Slavitt), claiming legal fees earned in conjunction with the admin istration of the estate. All other parties have been defaulted.

This dispute has been submitted to the court upon stipulation, brief testimony and a number of joint exhibits. The information before the court establishes the following facts: The decedent, Anna F. Roessler, died intestate February 28, 1969 , and the decedent's son, Fred. C. Roessler, her sole heir, was named the original admin istrator. The decedent's final federal income and estate tax returns were filed July, 1972. At the time, the internal revenue service had assessed the estate for nearly $400,000 in tax obligations. Thereafter, various payments were made in partial satisfaction of the tax indebtedness. On November 13, 1972 , delinquency penalties and interest were further assessed in excess of $192,000.

At the time of her death the decedent had ownership interests in several parcels of real estate. Among those parcels were two properties, 50 Edgehill Road and 324-326 Shelton Avenue , both in the city of New Haven . In 1975, these properties were sold with the authorization of the Probate Court, and the net proceeds from the sale were placed in escrow. On March 12, 1976, Herbert D. Fischer, Acting Judge of Probate for the district of New Haven, brought an interpleader action in the United States District Court seeking a determination regarding entitlement to the escrow fund (approximately $116,000 plus interest) resulting from the sale of these two parcels. Numerous parties were joined in that action including the United States by virtue of its claim for unpaid estate and fiduciary income taxes, the state of Connecticut because of its claim for unpaid succession taxes, and Slavitt with its claim of fees for professional services rendered on behalf of the estate. ¹ Both Slavitt and the government filed motions for summary judgment asserting priority of their respective claims. The Slavitt motion was granted on the basis that its claim was entitled to priority as an admin istration expense. The government's motion was accompanied by its supporting memorandum of law wherein the priority of its claim was asserted on the basis that the estate was insolvent and, therefore, under §§191 (now §3713) and 192 (now 31 U.S.C. §3713[b]) of title 31 of the United States Code, the federal tax claim was entitled to first payment. ² The government's motion was granted by the United States magistrate on December 1, 1980 , "absent objection," and summary judgment was entered by the United States District Court ordering distribution to the United States , from the escrow fund, of the sum of $92,216. ³

Also included in the estate of Anna F. Roessler were three parcels of real property located in Milford : 32 Bristol Terrace, 86 Maple Street , and West River Street . On April 2, 1973, Fred C. Roessler, individually and apparently as sole heir of the intestate estate, had mortgaged the Milford real property to Connecticut National Bank to secure a note payable to the bank in the sum of $309,650 executed by him individually and as president of Roessler Packing Co., Inc. ⁴ On December 9, 1983, Connecticut National Bank assigned its interest in the mortgage to Maple Street Associates, a Connecticut partnership with its principal office in Milford, for $97,500. ⁵ The mortgage had been recorded on the Milford land records on April 3, 1973 . The assignment was recorded January 4, 1984 .

On June 20, 1985 , the three Milford properties were sold by the admin istrator, d.b.n., with authorization of the Probate Court, to Maple Street Associates for $460,000. After the deduction of property taxes and closing costs, the net proceeds to the estate from the sale of the three properties were $302,282.47. As of the date of trial, the then current amount with accrued interest was $325,560.97. By written stipulation executed by all parties, the proceeds of the sale were placed in escrow by E. Michael Hefferman, Judge of Probate Court, pending final judgment in the present action. Pursuant to the stipulation, liens against the realty attached to the escrow fund with their respective priorities.

The following parties were asserting priority claims to the escrow fund: (1) the United States, on the basis of assessment of November 13, 1972, and October 6, 1976, and the outstanding federal tax lien filed June 4, 1979, in the total amount, as of May 20, 1986, of $1,956,797.70; (2) the tax commissioner of the state of Connecticut, on the basis of succession and transfer tax liens recorded December 23, 1974, for an undetermined amount; (3) Arnold Peck, by virtue of the Connecticut National Bank mortgage, recorded April 3, 1973, in the amount, as of the date of trial, of $352,146.47; and (4) Slavitt, for legal fees.

The parties have stipulated on the record to the following pertinent facts: (1) The estate was solvent as of February 28, 1969, the date of the death of Anna F. Roessler; (2) the estate was insolvent as of April 23, 1980, the date of the appointment of the admin istrator, d.b.n.; and, (3) Fred C. Roessler, the son of Anna F. Roessler, was the sole heir to the estate. It is further found, on the basis of the credible testimony presented, that the state of Connecticut never took possession of the Milford real estate during the admin istration of the estate by the admin istrator, d.b.n., and that its lien is inchoate. ⁶

I

Claims of the Administrator, d.b.n., and Slavitt law firm.

Under Connecticut law, the expenses of admin istration are deductible items and are entitled to first priority. General Statutes §§12 -350, 45-204c. ⁷ Here, the admin istrator, d.b.n., is claiming first priority for the expenses of admin istration, taxes to be paid by him to the United States and the state of Connecticut on the escrow fund's earned interest and capital gains, and attorney's fees. Slavitt is claiming reasonable fees for legal services rendered to the estate.

It is hereby found that the claims of the admin istrator, d.b.n., and Slavitt are proper expenses of admin istration, are entitled to first priority, and are to be paid initially from the escrow fund. ⁸

II

Competing Claims of the United States and the State of Connecticut

The federal tax assessments were made on November 13, 1972 and October 10, 1976 . The notice of federal tax liens was recorded with the town clerk of Milford , on June 4, 1979 . The state succession and transfer tax liens were recorded December 23, 1974 . Thus, the state filings were prior in time to those of the federal government.

Generally, the fundamental principle governing priority is that "the first in time is the first in right." United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85, 74 S.Ct. 367, 98 L.Ed. 520 (1954); United States v. Estate of Young [84-2 USTC ¶13,594 ], 592 F.Sup. 1478, 1482 (E.D. Pa. 1984). With respect to the priority of debts due the federal government, however, the general precept enunciated in United States v. New Britain is subject to significant qualification, by statute and otherwise. The government's tax liens are statutorily premised on §§6321 and 6322 of title 26 of the United States Code. ⁹ Under these sections, the government's "general" tax liens arise when assessed and continue until the tax liability is satisfied or becomes unenforceable. The state tax liens, on the other hand, although filed prior in time, remain inferior until they become specific, perfected or choate. United States v. Equitable Life [66-1 USTC ¶9444 ], 384 U.S. 323, 327, 86 S.Ct. 1561, 16 L.Ed.2d 593 (1966); State v. Bucchieri, 176 Conn. 339, 346-47, 407 A.2d 990 (1978). Here, the liens relied on by the United States are general tax liens arising under §6321 . These liens arose at the time of assessment; 31 U.S.C. §6322 ; remain unsatisfied, and have not become "unenforceable by reason of lapse of time" since any period of limitation was extended by agreement to December 31, 1986 . The state's claim that its liens are entitled to priority because the government's liens were special estate tax liens; 26 U.S.C. §6324(a)(1) ; which expired upon the passage of ten years is without merit. ¹⁰

In this case, the government maintains that its general tax liens are entitled to priority over the state liens on the basis of the federal insolvency statute, 31 U.S.C. §3713(a)(1)(B), which provides in pertinent part: "A claim of the United States Government shall be paid first when . . . the estate of a deceased debtor, in the custody of the executor or admin istrator, is not enough to pay all debts of the debtor." ¹¹ As stated, the parties have stipulated that the Roessler estate was insolvent as of the date of appointment of the admin istrator, d.b.n. Clearly, the estate is insufficient "to pay all debts of the debtor (deceased)." The federal tax liability alone is $1,956,797.70, while the total value of the assets is less than $500,000. Tax obligations owing to the United States have long been recognized as "debts" for purposes of §3713. Price v. United States [1 USTC ¶158 ], 269 U.S. 492, 499, 46 S.Ct. 180, 70 L.Ed. 373 (1926). ("The word 'debts' as used in R.S. §3466 includes taxes.") The fact that the estate was solvent at the date of the decedent's death, as here stipulated, does not foreclose either the applicability, or priority effect, of §3713. United States v. Estate of Young, supra, 1484-85.

The state contends that its antecedent succession tax liens are entitled to priority because they were choate, i.e., specific and perfected, prior to the government's recordation of its notice of federal tax liens. The state argues that by recording its liens, it had done all that is required by state law, and nothing more remained to be done to effect a choate lien. United States v. New Britain , supra, 85-87, mandates that as between competing choate liens, priority is governed by the basic rule that "the first in time is the first in right." The determination of when a state interest has become sufficiently choate to defeat later federal tax liens is a matter of federal not state law. State v. Bucchieri, supra, 347. Application of the choateness tests requires that the competing lien of the state be definite in three respects: (1) the identity of the lienor; (2) the property subject to the lien; and (3) the amount of the lien.

Here, as the government points out, the state liens were not specific as to value or amount until after the filing of this action and subsequent to the filing of the federal tax liens.