Fact-Finding Page3

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 (o) At the time of the institution of these actions the defendant, Beatrice S. Chamblee, held the record title to Tract 18 referred to in Findings of Fact and Conclusions of Law II(a). Since said time said defendant died testate in Guilford County , North Carolina . Security National Bank of Greensboro , North Carolina , is the named, duly qualified, and acting executor of her estate. Said estate of Beatrice S. Chamblee is solvent and the defendant, Security National Bank, Executor of the Estate of Beatrice S. Chamblee, has been made a party to these actions and has been duly and properly served with process. Without prejudice to the legatee and the heirs at law of Beatrice S. Chamblee, said executor consents to this decree adjudging that it, as executor, has no interest in said tract of real property.

(p) At the time of the institution of these actions the defendant, Beatrice S. Chamblee, held the record title to Tract 18 as referred to in Findings of Fact and Conclusions of Law II(a), as nominee of and for the defendant, Francis Duval Smith. In her will said defendant purported to will said tract of real property to the defendant, S. B. Kinser, Jr., alias S. B. Kinzer, Jr. Said S. B. Kinser, Jr., alias S. B. Kinzer, Jr., has been made a party to these actions and has been duly and properly served with process and is before the Court. He has filed no answer herein. Subsequent to the death of the defendant, Beatrice S. Chamblee, an answer, which she had verified just prior to her death, was filed or deposited with the Clerk of this Court. In this verified answer, the defendant, Beatrice S. Chamblee, acknowledged that she was not the owner of said tract of land, and had no rights or claims thereto, but alleged that she had purchased same for the defendant, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar. From this admission and from testimony of the defendants, Francis Duval Smith and Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, and from other evidence, the Court finds that said Tract 18 was not the property of Beatrice S. Chamblee at the time of her death, and that the defendant, S. B. Kinser, Jr., alias S. B. Kinzer, Jr., does not own and has and holds no right, title, or interest, legal or equitable, in and to said Tract 18, and that, as found in Findings of Fact and Conclusions of Law II(a), the defendant Francis Duval Smith was and is the real, actual, and sole owner of said tract of real property.

[Property Owned by Taxpayer's Nominees]

III. The Court finds the real properties conveyed by the record title holder to the receiver without prejudice to the rights of other parties are the property of the defendant, Francis Duval Smith, with title now vested in the receiver:

(a) The record title to Tract 19 referred to in Findings of Fact and Conclusions of Law II(a) was held in the name of the defendant, J. B. Webster, Jr., as nominee of and for the defendant, Francis Duval Smith. Pursuant to the mandate of a former order of the Court heretofore entered on August 28, 1958, the defendants, J. B. Webster, Jr., and his wife Helen S. Webster, have conveyed all of their right, title, and interest in this tract, by deed without warranties, to the receiver. The defendants, J. B. Webster, Jr., and wife, Helen S. Webster, have no further rights or interest in the issues or subject matter of these actions.

(b) The record title to Tract 21 referred to in Findings of Fact and Conclusions of Law II(a) was held in the name of J. Bryan Webster, Sr., as nominee of and for the defendant, Francis Duval Smith. Pursuant to the mandate of a former order of the Court heretofore entered on August 28, 1958, the defendants, J. Bryan Webster, Sr., and his wife, Eula E. Webster, have conveyed all of their right, title, and interest in this tract, by deed without warranties, to the receiver. The defendants, J. Bryan Webster, Sr., and wife, Eula E. Webster, have no further right or interest in the issues or subject matter of these actions.

(c) The record title to Tract 20 referred to in Findings of Fact and Conclusions of Law II(a) was held in the name of the defendant, Elva Noggle, now Elva Noggle Jennings (unmarried). The defendant, Elva Noggle Jennings, has conveyed all of her right, title, and interest in this tract, by deed without warranties, to the receiver. The defendant, Elva Noggle Jennings, has no further rights or interest in the issues or subject matter of these actions.

[Ownership of Property Determined]

IV. The Court finds and concludes as a matter of law the following relative to the title and ownership, or lack thereof, of the defendant, Francis Duval Smith, in special property and property rights, and the rights and remedies of the parties and the receiver in connection therewith:

(a) Real property known as 1429 Moore Street , Richmond , Virginia , was the property of the defendant, Francis Duval Smith, the same having been conveyed to him under the name of "Frances Duval Smith". Heretofore said property has been condemned and taken by The Richmond Redevelopment and Housing Authority. The value of said property was fixed by the Chancery Court of the City of Richmond, Virginia, in said condemnation proceeding at THREE THOUSAND DOLLARS ($3,000.00), and this sum has been paid into the office of A. T. August, Clerk of Chancery Court of the City of Richmond, State of Virginia, to be by said Clerk paid to the party or parties lawfully entitled thereto. A. T. August, as Clerk of Chancery Court of the City of Richmond , State of Virginia , The Richmond Redevelopment and Housing Authority, and Frederick A. Fay, its executive director, have been made parties to these actions and have been duly and properly served with process. Said defendants have filed no answer. The defendants, Francis Duval Smith, Frances S. Lacefield, and Joe Morris Lacefield, who were parties to the aforesaid condemnation proceeding, all agree that the fund of THREE THOUSAND DOLLARS ($3,000.00) representing the value of said property taken by condemnation, is the sole property and asset of the defendant, Francis Duval Smith, and said defendants have further agreed to execute such bill of sale, assignment, or other transfer instrument as shall be necessary to transfer to the receiver all of their right, title, and interest, legal and equitable, in and to said fund of THREE THOUSAND DOLLARS ($3,000.00).

(b) Real property known as 1601 W. Cary Street , Richmond , Virginia , was the property of the defendant, Francis Duval Smith, the same having been conveyed to him under the name of "Francis Smith". Heretofore said property was conveyed for a full and valuable consideration to Alfred D. Price, Jr., and wife, Marie Price. A part of the consideration of this sale was a note of said purchasers in the original sum of TWO THOUSAND DOLLARS ($2,000.00), payable to the defendant, Frances S. Lacefield, and secured by a deed of trust upon said property to the defendant, Thomas N. Parker, as trustee. Said Alfred D. Price, Jr., Marie Price, and Thomas N. Parker, Trustee, have been made parties to these actions and have been duly and properly served with process. They have filed no answer. The defendants, Alfred D. Price, Jr., and Marie Price, are bona fide purchasers of said property, for value, without notice of the liens of the cross-claimant, and are owners of the same in fee simple, subject to encumbrances of record, and specifically subject to the aforesaid purchase money deed of trust. At the time of service of process upon the defendants, Alfred D. Price, Jr., and wife, Marie Price, the balance due by them upon the aforesaid Two Thousand Dollar note was NINE HUNDRED DOLLARS ($900.00). No part of said indebtedness has been paid and said balance of NINE HUNDRED DOLLARS ($900.00), with interest as provided by the terms of said note, is still due and owing. The defendants, Francis Duval Smith, Frances Smith Lacefield, and Joe Morris Lacefield, agree that said balance due upon said note, together with interest, secured by said deed of trust, is the sole property and asset of the defendant, Francis Duval Smith, and said defendants further agree to execute such assignments, endorsements, or other transfer instruments as shall be necessary to transfer to the receiver all of their right, title, and interest, legal and equitable, in and to said note and deed of trust.

(c) On December 2, 1948, Frank P. Meier executed and delivered to Basil W. Carney and wife, Evelyn S. Carney, a note in the principal sum of TWO THOUSAND DOLLARS ($2,000.00) and secured the same by a mortgage deed on real property known as 3614 S. Clark Street, Tampa, Florida, which said mortgage deed is duly recorded in Book of Mortgages 805, at page 510, Hillsborough County Public Registry. On or about October 7, 1949 , Basil W. Carney and wife executed an assignment of said mortgage deed and the notes it secured to Fred T. Saussy, Jr., as Trustee for Frances E. Smith, now the defendant, Frances Smith Lacefield. Frank P. Meier is now deceased, and the defendant, Estelle Meier, claims to be the sole owner of said real estate, subject to recorded encumbrances and, in particular, subject to the lien of the mortgage deed aforesaid. Estelle Meier and Fred T. Saussy. Jr., Trustee, have been duly and properly served with process, and they have filed no answer. At the time of service of process upon the defendant, Estelle Meier, the balance due upon said note secured by said mortgage deed was TWO THOUSAND DOLLARS ($2,000.00). In a deposition of the defendant, Estelle, Meier, she admitted the indebtedness due on said note. The defendants, Francis Duval Smith, Frances Smith Lacefield, and Joe Morris Lacefield, agree that the balance due upon said note, together with interest, and secured by said mortgage deed, is the sole property and asset of the defendant, Francis Duval Smith, and said defendants further agree to execute such assignment, endorsement, or other transfer instrument as shall be necessary to convey to the receiver all of their right, title, and interest, legal and equitable, in and to said note and said mortgage deed.

(d) On March 29, 1943, C. H. Bowen and wife conveyed to J. C. Coats 361/2 acres of land in Cumberland County , North Carolina , by deed duly recorded in the office of the Register of Deeds of Cumberland County, North Carolina, in Book 456 at page 222. This property is a part of Tract No. 16 referred to in Findings of Fact and Conclusions of Law II(a). Simultaneously, J. C. Coats gave a note to C. H. Bowen for TWENTY-ONE HUNDRED DOLLARS ($2,100.00), as a part of the purchase price, and secured said note by a deed of trust to Malcolm McQueen as trustee for C. H. Bowen, the same being recorded in the office of the Register of Deeds of Cumberland County, North Carolina, in Book 460 at page 488. On February 29, 1943, C. H. Bowen and wife conveyed to J. C. Coats an adjoining four-acre tract, the deed for same being recorded in the office of the Register of Deeds of Cumberland County, North Carolina, in Book 461, page 276. On July 28, 1944 , J. C. Coats and wife conveyed both tracts, the same constituting all of the property referred to as Tract 16 in Findings of Fact and Conclusions of Law II(a) to the defendant, Sourtheastern Bonding Company, subject to the aforesaid note and deed of trust upon the 361/2 acre tract. All of Tract 16 is the property of the defendant, Francis Duval Smith, and said deed conveyed only the record title to the defendant, Southeastern Bonding Company as nominee of and for the defendant, Francis Duval Smith. On or about the 2nd day of April, 1949, the trustee in said deed of trust, Malcolm McQueen, resigned and J. O. Talley, Jr., was designated substitute trustee by an instrument dated April 2, 1949 , and recorded in the office of the Register of Deeds of Cumberland County, North Carolina, in Book 528 at page 174. Subsequently, and while said deed of trust was being foreclosed because of the default in the payment of the said note, Malcolm McQueen, acting as attorney and agent for the defendant, Francis Duval Smith, caused the full balance due by the terms of the note secured by said deed of trust to be paid to J. O. Talley, Jr., as trustee and as attorney, agent, and representative of C. H. Bowen, the holder of said note. But said deed of trust has never been cancelled of record, and the same, together with the note secured by it, cannot be found by the receiver. Payment in full of said indebtedness was received by the trustee, J. O. Talley, Jr., at a time when the note and deed of trust were in his possession for foreclosure and collection. J. O. Talley, Jr., trustee, has been made a party to these actions and has been duly and properly served with process. Said trustee should immediately cancel the aforesaid deed of trust of record.

(e) The furniture, fixtures, and other personal property assets of the Sawdust Trail Bar, 113 E. Zack Street , Tampa , Florida , were the property of the defendant, Francis Duval Smith. The record title to the same was held in the name of his relative, Richard Reynolds, as his nominee. During the ownership of said property by the defendant, Francis Duval Smith, he caused the same to be conveyed and sold to one Rob ert Levine and, as a part of the consideration of said sale, received a note of the purchaser dated May 16, 1952, in the amount of FOUR THOUSAND ONE HUNDRED SEVENTY-SIX AND 88/100 DOLLARS ($4,176.88) which he caused to be made payable to Richard Reynolds and thereafter to be assigned to the defendant, Frances Smith Lacefield, as his nominee. This note was secured by a chattel mortgage upon all of the assets of Sawdust Trail Bar. During the pendency of these actions, and prior to notice, said note was paid in full to Fred P. Saussy, Jr., acting as trustee and as attorney and agent for the defendant, Frances Smith Lacefield. Thereafter, Fred P. Saussy, Jr., caused to be paid into the office of the District Director of Internal Revenue, Jacksonville, Florida, the full amount which had been paid to him upon such note, which sum was received and credited upon the tax claim of the cross-claimant against the defendant, Francis Duval Smith, and is included in calculating the recovery herein granted against said defendant. Fred P. Saussy, Jr., has been made a party to these actions and has been duly and property served with process. He has paid to the cross-claimant all funds received on thise note and no longer has any interest, rights or liability in the matters at issue in these actions, and these actions should be dismissed as to Fred P. Saussy, Jr., without court costs.

V. The Court finds and concludes as a matter of law that the following property and property rights do not belong to the defendant, Francis Duval Smith:

(a) The record title to Tract 23 referred to in the cross-claim and amended cross-claim of United States of America was held in the name Frances Smith Lacefield as the nominee of and for the defendant, Francis Duval Smith. The title and ownership of the defendants, Francis Duval Smith and Frances Smith Lacefield, in said real property has heretofore been defeated and divested by virtue of a legal and proper ad valorem property tax foreclosure sale of said real property by the Borough of Monmouth Beach, New Jersey.

(b) The defendant, Francis Duval Smith, is not the owner of Tracts 1 and 2 as described in the cross-claim and the amended cross-claim of United States of America and as hereinafter more specifically described in this decree. Said property is free of the tax claims of the plaintiff, and the cross-claimant as decreed herein and is free of any lien by reason thereof.

(c) The defendants, Francis Duval Smith, and Southeastern Bonding Company, are not the owner or owners of Tract 17 as described in the cross-claim and the amended cross-claim of United States of America and hereinafter more specifically described in this decree. The defendant, Sourtheastern Bonding Company, held the record title to said real property as nominee of and for Malcolm McQueen. Malcolm McQueen is now dead, having died intestate, leaving a widow, Mary M. McQueen, and one child Virginia McQueen McFadyen, as his sole heir.

(d) On May 1, 1948, John F. Sanderford conveyed to the defendant, Southeastern Bonding Company, Lots Nos. 61 through 66, inclusive, of Carver's Creek Township property in Cumberland County, North Carolina, by deed recorded in the office of the Register of Deeds of Cumberland County, North Carolina, in Book 520 at page 414, the same being Tract 15 referred to in Findings of Fact and Conclusions of Law II(a). While the record title to said property was in Southeastern Bonding Company, and before lis pendens which was filed by the plaintiff against said tract of property was properly indexed as to and in the name of Southeastern Bonding Company, and before the tax lien or liens of the cross-claimant United States of America attached to said Tract 15, the defendant, Southeastern Bonding Company, conveyed approximately one-half of said Tract 15 to A. B. Carr by deed dated November 15, 1950, and recorded in the Office of the Register of Deeds of Cumberland County, North Carolina, in Book 565, page 186. A. B. Carr is a purchaser for value without notice, who paid full consideration for said property, and A. B. Carr is the owner of the property described in the aforesaid deed to him free and clear of all right, title, claim, and interest of the defendants, Francis Duval Smith and Southeastern Bonding Company, and is likewise the owner of said property free and clear of all liens decreed herein, including those of the plaintiff and the cross-claimant. Said A. B. Carr and his wife, Esther Carr, were made parties to these actions and were duly and properly served with process. By reason of their ownership of the aforesaid part of Tract 15, free of the claims of any other party to these actions as aforesaid, they are no longer interested in the issues and subject matter of this litigation and same should be dismissed as to them without court cost.

[Priority of Liens]

VI. The Court finds and concludes as a matter of law the following as to certain general liens and specific liens against properties of the defendant, Francis Duval Smith, and as to the relative rights and priorities incident thereto:

(a) The tax liens of the plaintiff were filed in the office of the Clerk of the Superior Court of Guilford County , Forsyth County , Cumberland County , and New Hanover County , North Carolina , on April 5, 1949 , and are recorded in judgment dockets of said counties. At that time, plaintiff's tax lien became a general lien upon all property of the defendant, Francis Duval Smith, in said counties, including that herein decreed to be his property. The plaintiff filed notices of lis pendens on August 24, 1950, in the office of the Clerk of the Superior Court of the county of situs of each tract of property in North Carolina herein decreed to be the property of the defendant, Francis Duval Smith, and commenced these actions in the Superior Court of Guilford County, North Carolina, to enforce and to foreclose its liens upon those specific properties on or before August 24, 1950. On August 24, 1950 , the tax liens of plaintiff became and now are a specific and perfected lien upon all property in North Carolina described in plaintiff's complaints and herein decreed to be property of the defendant, Francis Duval Smith. The tax liens of the cross-claimant, United States of America , were filed in the office of the Register of Deeds of Guilford County, Forsyth County , Cumberland County , and New Hanover County on November 23, 1953 , December 8, 1953 , and February 2, 1954 . At the time of the filing of said liens as aforesaid, said tax liens became a specific and perfected lien upon all property of the defendant, Francis Duval Smith, in North Carolina , including the specific property herein decreed to be property of the defendant, Francis Duval Smith. These specific and perfected liens of the plaintiff and the cross-claimant are both superior to all general liens against property of the defendant, Francis Duval Smith, including the liens referred to in Findings of Fact and Conclusions of Law VI(b) and VI(c).

(b) There are three (3) judgments in favor of the State of North Carolina for court costs and a fine adjudged in criminal cases against the defendant, Francis Duval Smith, all docketed in the office of the Clerk of Superior Court of Guilford County, North Carolina, on February 10, 1953, as follows:

Judgment Docket 61 Page 38 (File Number C-21294), Court Costs $42.90

Judgment Docket 61 Page 39 (File Number C-21295), Court Costs $187.55

Judgment Docket 61 Page 38 (File Number C-20616), Fine $25,000.00

By North Carolina law these judgments, though in favor of the State of North Carolina, are for the benefit of the defendant, Joseph P. Shore, as Clerk of the Superior Court of Guilford County, North Carolina, and the defendants, Howard E. Carr, Ed. T. Coble, John R. Peacock, Zack L. Whitaker, and Mrs. E. M. Burke, as members of the Guilford County, North Carolina, Board of Education. The aforesaid parties are the real parties in interest as to the liens of said judgments, and together with the State of North Carolina , have all been made parties to these actions by reason of said judgments and have been duly and properly served with process. Said criminal judgments for court costs and fine are liens upon all real property in Guilford County , North Carolina , of the defendant, Francis Duval Smith as of February 10, 1953 , the date same was docketed. As to real property in Guilford County , North Carolina , the tax claim herein recovered by the State of North Carolina has priority superior to all other claims and the aforesaid judgments for court costs and fine has second priority. The tax claim judgments herein recovered by the cross-claimant, the United States of America , has third priority. As to personal property the tax claim judgment of North Carolina has first priority and the tax claim judgments of the cross-claimant, United States of America , has second priority.

(c) At the February, 1954, Civil Term of the Superior Court of Guilford County, North Carolina, a judgment for $20,000.00 was rendered in favor of V. G. Rainey, Administrator of the estate of George Henry Rainey, deceased, against the defendant, Francis Duval Smith, together with Court costs amounting to $72.05, which judgment was duly docketed at said term in the office of the Clerk of Superior Court of Guilford County, North Carolina, in Judgment Docket 61 at page 61. Thereafter, on March 15, 1956 , said judgment was duly assigned by the plaintiff, one-half to V. G. Rainey, individually, and one-half to Frances Betty Rainey. Said judgment remains wholly unsatisfied. The plaintiff therein and the assignee of said judgment have been made parties to these actions and have been duly and properly served with process. This judgment became at the time of its filing, in February, 1954, and still is a lien upon all real estate of the defendant Francis Duval Smith in Guilford County , North Carolina . As to all real estate of the defendant, Francis Duval Smith, in Guilford County, North Carolina, this judgment is inferior to the liens of the plaintiff, State of North Carolina, the cross-claimant, United States of America, and the judgments for court costs and fine set forth in subparagraph (b) above.

(d) On May 20, 1946 , Rob ert Savage borrowed from Shenandoah Life Insurance Company, Inc., the sum of $8,000.00, for which he gave to it his note in said sum payable $50.62 on June 1, 1946 , and a like amount on the first day of each month thereafter to and including May 1, 1966 . To secure said note Rob ert Savage executed and delivered to the defendants, A. G. Decker, R. S. Leftwich, and N. D. McNairy, as trustees for Shenandoah Life Insurance Company, Inc., a deed of trust upon certain real property referred to as Tract 12 in Findings of Fact and Conclusions of Law II(a). Said deed of trust was duly recorded in the office of the Register of Deeds of Guilford County, North Carolina, on June 1, 1946 , in Book 1118, page 326. Thereafter, on August 7, 1947 , Rob ert Savage conveyed Tract 12 to the defendant, Southeastern Bonding Company, by deed recorded August 8, 1947 , in the office of the Register of Deeds of Guilford County, North Carolina, in Book 1186 at page 40. Tract 12 is the property of the defendant, Francis Duval Smith, and said deed conveyed only the record title to the defendant, Southeastern Bonding Company, as nominee of and for the defendant, Francis Duval Smith. The aforesaid note, secured by the aforesaid deed of trust upon Tract 12, has not been paid in full, but the receiver appointed herein has been paying the monthly payments provided by the terms of said note from rental income received from the renting of Tract 12, including the payment due September 1, 1959 . The balance due upon said note is a valid and subsisting claim and is a specific lien upon Tract 12, superior to all liens herein decreed, including those in favor of the plaintiff, James S. Currie, Commissioner of Revenue of the State of North Carolina, and the cross-claimant, United States of America, and is also superior to the lien upon said property of the expenses of the receivership and the court costs of these actions.

(e) On December 2, 1946, the defendants, J. B. Webster, Jr., and wife, Helen S. Webster, executed and delivered to E. C. Sutton and wife, Nancy Louvenia Sutton, six (6) certain promissory notes totalling ONE HUNDRED THOUSAND DOLLARS ($100,000.00), the sixth note being in the sum of SEVENTEEN THOUSAND DOLLARS ($17,000.00) payable January 10, 1950, and bearing interest from date at the rate of six per cent (6%) per annum. To secure said notes said defendants executed and delivered to Huger S. King, trustee, a deed of trust upon real property referred to in Findings of Fact and Conclusions of Law II(a) as Tract 19, which deed of trust was duly recorded in the office of the Register of Deeds of Guilford County, North Carolina, on December 9, 1946, in Book 1150 at page 241. Said deed of trust is a bona fide valid and subsisting specific lien upon Tract 19 and is superior to all liens decreed herein, including those in favor of the plaintiff and the cross-claimant, and including the liens for expenses of the receivership and the court costs in these actions, and also the liens of the judgment creditors referred to in Findings of Fact and Conclusions of Law VI(b) and VI(c). On July 22, 1953 , all of said notes had been paid and satisfied in full except the aforesaid sixth note in the principal sum of $17,000.00, which, with interest to said date, totalled $18,808.83. At said time these actions were pending in the Superior Court of Guilford County, North Carolina, and Perry C. Henson and E. E. Boone, Jr., were State Court Receivers duly appointed, qualified, and acting as to Tract 19. By order of Court entered by the Superior Court of Guilford County, the State Court Receivers borrowed from one Reuben B. Arthur the sum of $18,808.83 for which loan they executed to him, as receivers, a demand note in said sum, and pursuant to said order, they secured said note by an assignment of the aforesaid sixth note in the sum of $17,000.00 due January 10, 1950. Since said date, the said Reuben B. Arthur has received certain payments upon interest which have been duly credited upon said note, but no part of the principal of said note has been paid and the interest has not been paid in full. The total indebtedness due Reuben B. Arthur by reason of the aforesaid receivers' note is entitled to the same priorities as the aforesaid sixth note and the deed of trust upon Tract 19 securing it, held as collateral security for said receivers' note. IT IS CONSIDERED, ORDERED, ADJUDGED, AND DECREED, as follows:

I. (a) That the plaintiff, James S. Currie, Commissioner of Revenue of the State of North Carolina, have and recover of the defendant, Francis Duval Smith, the sum of $811,554.18, for income taxes, penalties and interest thereon to the 15th day of August, 1959, due for the years 1943 to 1947, inclusive, with interest on the sum of $289,309.44 from the 15th day of August, 1959, until paid, at the rate of six per cent per annum.

(b) That the judgment of the plaintiff, James S. Currie, Commissioner of Revenue of the State of North Carolina, against the defendant, Francis Duval Smith, as aforesaid, be and the same is hereby adjudged to be a specific and perfected lien against all properties and rights of properties, real and personal, of said defendant located in the State of North Carolina and herein adjudicated to be property belonging to Francis Duval Smith, or in which he has any interest.

(c) That the cross-claimant, United States of America, have and recover of the defendant, Francis Duval Smith, the sum of $496,614.06 for income tax, penalties, and assessed interest thereon for the years 1944 to 1949, inclusive, and 1952 and 1953, with interest to the 15th day of August, 1959, in the amount of $175,936.85, totalling $672,550.91, with interest on the sum of $496,614.06 from the 15th day of August, 1959, until paid, at the rate of six per cent per annum.

(d) That the cross-claimant, United States of America, have and recover of the defendants, Francis Duval Smith and Mrs. F. D. Smith, alias Dorothy Lee Smith, now Dorothy Lee Smith Newbraugh, jointly and severally, the sum of $22,293.06, for income taxes, penalties and assessed interest thereon, for the years 1950 and 1951, with interest to the 15th day of August, 1959, in the amount of $8,027.03, totalling $30,320.09, with interest on the sum of $22,293.06 from the 15th day of August, 1959, until paid, at the rate of six per cent per annum.

(e) That the cross-claimant, United States of America, have and recover of the defendant, Francis Duval Smith, the sum of $6,117.09 for wagering taxes, penalties, and assessed interest for the period covering November 1, 1951, through June 30, 1953, with interest to the 15th day of August, 1959, on the amount of $2,098.78 and for a non-payment penalty of $305.86, totalling $8,521.73, with interest on the sum of $6,117.09 from the 15th day of August, 1959, until paid, at the rate of six per cent per annum.

(f) That the judgments of the cross-claimant. United States of America , against the defendants. Francis Duval Smith and Mrs. F. D. Smith, alias Dorothy Lee Smith, now Dorothy Lee Smith Newbraugh, as aforesaid, be and the same are hereby adjudged to be specific and perfected liens against all properties and rights of properties of said Francis Duval Smith wherever the same may be situate and herein adjudged to be property belonging to Francis Duval Smith, or in which he has any interest.

[Properties Described]

II. (a) That Francis Duval Smith is the real, actual, and sole owner of the real property described in the cross-claim and amended cross-claim of the United States of America as Tracts Nos. 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15 less that tract conveyed as hereinafter set forth, 16, 18, 19, 20, 21, and 22, said property being more particularly described as follows, to-wit:

Tract No. 3

Location of Property-- 1939 Wrightsville Avenue , Wilmington , N. C.

[Description omitted.--CCH]

Tract No. 4

Location of Property-- 2060 Queen Street , Winston-Salem , N. C. ( Forsyth County )

[Description omitted.--CCH]

Tract No. 5

Location of Property--4310, 43101/2, 4312 Wrightsville Avenue, New Hanover County, Wilmington, North Carolina.

[Description omitted.--CCH]

Tract No. 6

Location of Property--70 North Channel Drive, New Hanover County, Wilmington, North Carolina.

[Description omitted.--CCH]

Tract No. 7

Location of Property--608 North Channel Drive, New Hanover County, Wilmington, North Carolina.

[Description omitted.--CCH]

Tract No. 8

Location of Property-- 917 Marstella Street (also known as 917 Marsteller Street ), New Hanover County , Wilmington , North Carolina .

[Description omitted.--CCH]

Tract No. 9

Location of Property--Vacant lot corner Friendly Road and W. Avondale Street , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 10

Location of Property--Vacant Lot No. 165A, Lindley Park , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 11

Location of Property--Old Rural Hall Road , Winston-Salem , North Carolina ( Forsyth County ).

[Description omitted.--CCH]

Tract No. 12

Location of Property-- 204 Mayflower Drive , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 13

Location of Property--231/2 acres of land and two-story frame house opposite Greensboro-High Point Airport , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 14

Location of Property-- 2602 Woodleigh Street , Winston-Salem , North Carolina ( Forsyth County ).

[Description omitted.--CCH]

Tract No. 15

Location of Property--Lots 61 to 66, inclusive, Carver's Creek Township , Cumberland County , Fayetteville , North Carolina .

[Description omitted.--CCH]

Tract No. 16

Location of Property--401/2 acres W. T. Bowen property, Cumberland County , Fayetteville , North Carolina .

[Description omitted.--CCH]

Tract No. 18

Location of Property-- Friendly Road , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 19

Location of Property--Sutton Florist Property, High Point Road , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 20

Location of Property-- High Point Road , Greensboro , North Carolina .

[Description omitted.--CCH]

Tract No. 21

Location of Property-- 805 Madison Avenue , Winston-Salem , North Carolina ( Forsyth County ).

[Description omitted.--CCH]

Tract No. 22

Location of Property-- 915 East 21st Street , Winston-Salem , North Carolina ( Forsyth County ).

[Description omitted.--CCH]

(b) That the defendants, Florence Smith Profenius, H. C. Profenius, Frances Smith Lacefield, Joe Morris Lacefield, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, Mrs. F. D. Smith, alias Dorothy Lee Smith, now Dorothy Lee Smith Newbraugh, Southeastern Bonding Company, Mrs. S. G. Scott, Security National Bank of Greensboro, North Carolina, Executor of the Estate of Beatrice S. Chamblee, deceased, and S. B. Kinser, Jr., alias S. B. Kinzer, Jr., do not own and have no right title, and interest in and to any of the above described tracts of real property.

(c) That the defendant, Francis Duval Smith, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, a deed, or deeds, without warranties, conveying to the receiver all of his right, title, and interest, legal and equitable, in and to the foregoing described tracts of real property.

(d) That the defendant, Francis Duval Smith, is the real, actual, and sole owner of the tangible and intangible personal property as described in the cross-claim and amended cross-claim of the United States of America, as follows, to-wit:

(1) That certain cashier's check No. N7580 payable to Frances Smith, dated June 11, 1952 , for the sum of $5516.50, and issued by the Commercial National Bank of Charlotte , North Carolina .

(2) All shares of capital stock issued or subscribed for in the defendant, Southeastern Bonding Company.

(3) All shares of capital stock issued or subscribed for in Sutton's Florist, Inc.

(4) All those certain automobiles seized by the Sheriff of Guilford County, now in the possession of Hubert E. Seymour, Jr., Receiver, and referred to in the cross-claim filed by the United States .

(5) All personal property stored in and used in the operation of Sutton's Florist, Inc., greenhouses.

(6) The debt and note dated December 2, 1958, in the original principal sum of $2,000.00, secured by a mortgage deed executed by Frank P. Meier to Basil W. Carney, which is recorded in the Public Registry of Hillsborough County, Florida, in Mortgage Book 805, at page 510, and thereafter on October 7, 1949, was assigned by Basil W. Carney and wife to Fred T. Saussy, Jr., trustee for Frances E. Smith, now Frances Smith Lacefield, which mortgage deed conveyed real property known as 3614 S. Clark Street, Tampa, Florida.

(7) The debt and note in the original principal sum of $2,000.00, secured by a deed of trust executed by A. D. Price, Jr., to Thomas N. Parket, trustee for Frances Smith Lacefield, conveying real property located at 1601 W. Cary Street , Richmond , Virginia .

(8) The fund in the sum of $3,000.00 in the hands of A. T. August, Clerk of Chancery Court, Richmond , Virginia , or his successor in office, and being the proceeds of a condemnation of property located at 1429 Moore Street , Richmond , Virginia .

(9) All cash received by Hubert E. Seymour, Jr., receiver, from all properties and assets, real and personal, including rents thereon, coming into his possession by reason of his appointment as receiver in said litigation.

(e) That the defendants, Florence Smith Profenius, H. C. Profenius, Frances Smith Lacefield, Joe Morris Lacefield, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, Mrs. F. D. Smith, alias Dorothy Lee Smith, now Dorothy Lee Smith Newbraugh, Southeastern Bonding Company, Mrs. S. G. Scott, Security National Bank of Greensboro, North Carolina, Executor of the Estate of Beatrice S. Chamblee, deceased, and S. B. Kinser, Jr., alias S. B. Kinzer, Jr., do not own and have no right, title, and interest in and to any of the items of tangible and intangible personal property referred to in Item II(d) of this judgment.

(f) That the defendant, Francis Duval Smith, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, bill or bills of sale, assignments, endorsements and other transfer instruments as shall be necessary to transfer to said receiver all of his right, title, and interest, legal and equitable, in and to the items of tangible and intangible personal property referred to in Item II(d) of this judgment.

(g) That the defendant, Florence Smith Profenius, owns no interest in the real property heretofore described as Tracts 9, 10, and 11 in Item II(a) of this judgment, but does hold the record title to the same as nominee of and for the defendant, Francis Duval Smith, the actual owner, and the said defendants, Florence Smith Profenius and husband, H. C. Profenius, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, a deed, or deeds, without warranties, conveying to said receiver all of their right, title, and interest, legal and equitable, in and to said tracts of real property.

(h) That the defendants, Florence Smith Profenius and her husband, H. C. Profenius, own no interest in the personal property heretofore described in Item II(d) of this judgment, and if they hold any interest or title whatsoever, in fact or by inference, such claim of title is only as nominee of and for the defendant, Francis Duval Smith, the actual owner, and said defendants, Florence Smith Profenius and husband, H. C. Profenius, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, bill or bills of sale, assignments, endorsements and other transfer instruments as shall be necessary to transfer to said receiver all of their right, title, and interest, legal and equitable, in and to said tangible and intangible personal property.

(i) That the defendant, Frances Smith Lacefield, owns no interest in real property heretofore described as Tracts 5, 6, 7, and 8 in Item II(a) of this judgment, but does hold the record title to the same as nominee of and for the defendant, Francis Duval Smith, the actual owner, and the said Frances Smith Lacefield and husband, Joe Morris Lacefield, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, a deed, or deeds, without warranties, conveying to said receiver all of their right, title, and interest, legal and equitable, in and to said tracts of real property.

(j) That the defendants, Frances Smith Lacefield and her husband, Joe Morris Lacefield, own no interest in the personal property heretofore described in Item II(d) of this judgment, and if they hold any interest or title whatsoever in fact or by inference, such claim of title is only as nominee of and for the defendant, Francis Duval Smith, the actual owner, and said defendants, Frances Smith Lacefield and husband, Joe Morris Lacefield, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, bill or bills of sale, assignments, endorsements and other transfer instruments as shall be necessary to transfer to said receiver all of their right, title, and interest, legal and equitable, in and to said tangible and intangible personal property.

(k) That the defendant, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, and her husband, Leo Lazar, and the defendant, Mrs. F. D. Smith, alias Dorothy Lee Smith, now Dorothy Lee Smith Newbraugh, own no interest in real property hereinbefore described as Tracts 3 and 4 in Items II(a) of this judgment, and such record title as either or both may hold to either or both of said tracts of real property is held by said parties as nominee of and for the defendant, Francis Duval Smith, the actual owner of the same, and the said defendant, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, and her husband, Leo Lazar, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, deed or deeds without warranties conveying to said receiver all of their right, title and interest, legal and equitable, in and to said tracts of real property. And the conveyance of said tracts of property by the defendant, Francis Duval Smith, to the receiver as provided by the terms of this judgment shall convey the same to the receiver in fee simple, free and clear of any title or interest on the part of the above parties mentioned in this item.

(l) That the defendant, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, and her husband, Leo Lazar, own no interest in the personal property hereinbefore described in Item II(d) of this judgment, and if they hold any interest or title whatsoever, in fact or by inference, such claim of title is only as nominee of and for the defendant, Francis Duval Smith, the actual owner, and said defendants, Nella Smith Lazar and husband, Leo Lazar, shall immediately following the entry of this judgment execute and deliver to Hubert E. Seymour, Jr., receiver, as grantee, bill or bills of sale, assignments, endorsements and other transfer instruments as shall be necessary to transfer to said receiver all of their right, title, and interest, legal and equitable, in and to said tangible and intangible personal property.

(m) That Mrs. S. G. Scott is not a person in being, but is a fictitious name or alias used by the defendant, Francis Duval Smith, that Mrs. S. G. Scott owns no interest in real property heretofore described as Tract 22 in Item II(a) of this judgment, and the legal title to same is held in said fictitious name as an alias of Francis Duval Smith, the actual owner of same, as hereinbefore decreed, and his conveyance of the same to the receiver in the manner hereinbefore decreed shall vest the absolute fee simple title to said property in the receiver.

(n) That the defendant, Southeastern Bonding Company, the stock of which is owned solely by the defendant, Francis Duval Smith, as hereinbefore decreed in Item II(d) of this judgment, does not own any interest in real property hereinbefore described as Tracts 12, 13, 14, 15, and 16 in Item II(a) of this judgment, but does hold record title to the same as nominee of and for the defendant, Francis Duval Smith, the actual owner, and the said Francis Duval Smith is hereby declared to be the actual sole owner of said property and his conveyance of the same to the receiver in the manner hereinbefore decreed shall vest absolute fee simple title to said property in the receiver.

(o) That the defendant, Security National Bank of Greensboro, North Carolina, Executor of the Estate of Beatrice S. Chamblee, deceased, has no interest in nor claim on real estate described as Tract 18 in Item II(a) of this judgment; and that said defendant, Security National Bank, Executor of the Estate of Beatrice S. Chamblee, deceased, therefore has no rights or interest in these actions and the same are hereby dismissed as to it without court costs.

(p) That the defendant, S. B. Kinser, Jr., alias S. B. Kinzer, Jr., owns no interest in aforesaid real property described as Tract 18 in Item II(a) of this judgment as devisee of the defendant, Beatrice S. Chamblee, now deceased. The said Beatrice S. Chamblee, at the time of her death, owned no interest in said property, legal or equitable, but held the record title to the same as nominee of and for the defendant, Francis Duval Smith, the actual owner, and the attempted and purported devise of said tract of real property by the defendant, Beatrice S. Chamblee to the defendant, S. B. Kinser, Jr., alias S. B. Kinzer, Jr., is null, void, and conveys and vests no right, title and interest in said tract of real property to and in the defendant, S. B. Kinser, Jr., alias S. B. Kinzer, Jr. And the conveyance of said tract of property by the defendant, Francis Duval Smith, to the receiver, as hereinbefore decreed, conveys the fee simple title to said property to said receiver.

III. (a) That the defendants, J. B. Webster, Jr., and wife, Helen S. Webster, do not own any interest in the real property hereinbefore described as Tract 19 in Item II(a) of this judgment, but at the time of the institution of these actions held the record title to the same as nominee of and for the defendant, Francis Duval Smith, the actual owner, that pursuant to a former order of this Court entered August 28, 1958, said defendants have executed and delivered to Hubert E. Seymour, Jr., receiver, as grantee, a deed without warranties, conveying to said receiver all of their right, title, and interest, legal and equitable, in and to said tract of real property and that said defendants, J. B. Webster, Jr., and wife, Helen S. Webster, now have no interest in these actions and the same are hereby dismissed as to them without court costs.

(b) That the defendants, J. Bryan Webster, Sr., and wife, Eula E. Webster, do not own any interest in the real property hereinbefore described as Tract 21 in Item II(a) of this judgment, but at the time of the institution of these actions held the record title to same as nominee of and for the benefit of the defendant, Francis Duval Smith, the actual owner, and pursuant to a former order of this Court entered August 28, 1958, said defendants have executed and delivered to Hubert E. Seymour, Jr., receiver, as grantee, a deed without warranties, conveying to said receiver all of their right, title, and interest, legal and equitable, in and to said tract of real property and that said defendants, J. Bryan Webster, Sr., and wife, Eula E. Webster, now have no interest in these actions and the same are hereby dismissed as to them without court costs.

(c) That the defendant, Elva Noggle Jennings, now unmarried, owns no interest in real property hereinbefore described as Tract 20 in Item II(a) of this judgment, but at the time of the institution of these actions held the record title to same as nominee of and for the defendant, Francis Duval Smith, the actual owner. Said defendant, Elva Noggle Jennings, has executed and delivered to Hubert E. Seymour, Jr., receiver, as grantee, a deed without warranty conveying to said receiver all of her right, title, and interest, legal and equitable, in and to said tract of real property and that said defendant, Elva Noggle Jennings, now has no interest in these actions and the same are hereby dismissed as to her without court costs.

IV. (a) That the cross-claimant, United States of America, have and recover of the defendants, A. T. August, Clerk of Chancery Court of the City of Richmond, State of Virginia, or his successor in office, The Richmond Redevelopment and Housing Authority, and Frederick A. Fay, Executive Director of The Richmond Redevelopment and Housing Authority, or his successor in office, the fund in the sum of $3,000.00 held by the defendant, A. T. August, as the Clerk of Chancery Court of the City of Richmond, State of Virginia, or his successor in office, and being the proceeds of a condemnation of real property located at 1429 Moore Street, Richmond, Virginia, and therein adjudicated to be the value of said property; this judgment shall be discharged and satisfied as to the defendants named in this paragraph by the payment of or delivery of said fund of $3,000.00 to Hubert E. Seymour, Jr., receiver, and upon payment and delivery of said $3,000.00 said defendants named in this paragraph be and they are thereby discharged and released from this judgment without court costs.

(b) That the cross-claimant, United States of America, have and recover of the defendants, Alfred D. Price, Jr., and wife. Marie Price, and Thomas N. Parker, trustee, all rights and remedies of the defendants, Francis Duval Smith, Frances Smith Lacefield and her husband, Joe Morris Lacefield, in and to a note in the original principal sum of $2,000.00 payable to Frances Smith Lacefield and secured by a deed of trust from the defendants, Alfred D. Price, Jr., and wife, Marie Price, to the defendant, Thomas N. Parker, as trustee for Frances Smith Lacefield, conveying real property located at 1601 West Cary Street, Richmond, Virginia, as security for said note; this judgment shall be discharged and satisfied as to the defendants named in this paragraph upon payment to Hubert E. Seymour, Jr., receiver, of the full balance due on said note at the time said defendants were made parties to these actions, with interest, and upon such payment in full with interest said defendants are thereupon discharged and released from this judgment without the payment of court costs. The full balance of said note is now past due and payable with interest. Upon failure of the defendants, Alfred D. Price, Jr., and wife, Marie Price, to forthwith and immediately pay and discharge the full balance due upon said note as herein decreed, said receiver shall forthwith and immediately demand foreclosure of said deed of trust, and the defendant, Thomas N. Parker, Trustee, shall foreclose the same and the cost of such foreclosure, together with reasonable expenses of the trustee, the receiver and his attorneys' fees incident thereto, are taxed as foreclosure costs and expenses against the property described in said deed of trust, and the proceeds of its foreclosure sale.

(c) That the cross-claimant, United States of America, have and recover of the defendants, Fred T. Saussy, Jr., trustee, Frances Smith Lacefield, and Francis Duval Smith, the full and complete ownership, together with all sums due thereon, in and to that certain note in the original principal sum of $2,000.00 executed on December 2, 1948, by Frank P. Meier to Basil W. Carney and wife, and that said mortgage deed securing said note executed simultaneously therewith by said Frank P. Meier to said Basil W. Carney and wife and conveying real property located at 3605 South Clark Street, Tampa, Florida, as security for said note and recorded in Book of Mortgages 805 at page 510, in the office of the Public Registry of Hillsborough County, Florida, together with that certain assignment instrument dated October 7, 1949, conveying said note and mortgage deed to the defendant Fred T. Saussy, Jr., trustee for the defendant, Frances Smith Lacefield and that the cross-claimant, United States of America, have and recover of the defendant, Estelle Meier (who now owns and is in possession of the property covered by the terms of the aforesaid mortgage deed and acquired the same subject to said mortgage deed), and of the defendant, Fred T. Saussy, Jr., (holds title as trustee under the aforesaid assignment of said note and mortgage deed) the full balance due on said note, together with the interest as therein provided. This judgment as to the defendants, Estelle Meier and Fred T. Saussy, Jr., to be discharged and satisfied upon the immediate payment by the defendant, Estelle Meier, to Hubert E. Seymour, Jr., receiver, of the said full balance of the principal and interest due on said note at the time said defendant, Estelle Meier, was made a party to these actions, and upon such payment in full with interest, said defendants, Estelle Meier and Fred T. Saussy, Jr., trustee, are thereupon discharged and released from this judgment without payment of court costs. Upon failure of the defendant, Estelle Meier, to forthwith and immediately pay and discharge the full principal balance due upon said note with interest as provided by the terms of said note, the receiver shall forthwith and immediately demand a foreclosure of said mortgage deed by the assignee thereof, Fred T. Saussy, Jr., trustee, and the defendant, Fred T. Saussy, Jr., trustee, shall thereupon immediately foreclose the same and the cost of such foreclosure, together with reasonable expenses of the trustee, the receiver and his attorneys' fees incident thereto, are taxed as a foreclosure cost and expense against the property described in said mortgage deed and the proceeds of its foreclosure sale.

(d) That that certain note in the sum of $2,100.00, dated March 29, 1949, executed by J. C. Coats and wife to C. H. Bowen, and secured by a deed of trust of even date from J. C. Coats and wife to Malcolm McQueen, as trustee for C. H. Bowen, recorded in the office of the Cumberland County, North Carolina, Public Registry in Book 469 at page 488, conveying a part of Tract No. 16 referred to in Findings of Fact and Conclusions of Law II(a) is hereby adjudged and decreed paid, discharged, and satisfied in full, and is further adjudged and decreed to be not a valid, subsisting lien upon the property therein described, and the same should be satisfied and cancelled of record. And J. O. Talley, Jr., trustee, be and he is hereby ordered and directed to forthwith and immediately cancel said deed of trust of record in the office of the Register of Deeds of Cumberland County, North Carolina, and upon such cancellation of record by said trustee these actions shall thereupon terminate as to the defendants, C. H. Bowen and J. O. Talley, Jr., trustee, without court costs.

(e) That the note and chattel mortgage executed by Rob ert Levin to Richard Reynolds in the amount of $4,176.86 dated May 16, 1952 and assigned to the defendant, Frances Smith Lacefield, as the nominee of and for the defendant, Francis Duval Smith, is hereby adjudged and decreed to have been paid, satisfied, and discharged in full, and the funds in payment thereof, since the institution of these actions, have been paid to the cross-claimant, United States of America; that these actions be and the same are dismissed as to all the defendants named in Findings of Fact and Conclusions of Law IV(e) insofar as the same relate to said note and chattel mortgage and any sums collected thereon, without court costs.

V. (a) That Hubert E. Seymour, Jr., receiver, be and he is hereby ordered and directed to abandon any and all further efforts to recover real property described in the cross-claim and amended cross-claim of the United States of America as Tract 23, the same being property located in Nonmouth Beach, New Jersey, and the cross-claim and amended cross-claim of the United States of America, as to said tract of real property, be and the same is hereby dismissed without prejudice to the rights of the United States of America.

(b) That the defendant, Francis Duval Smith, is not the owner of real property described as Tracts 1 and 2 in the cross-claim and amended cross-claim of the United States of America and hereinafter more fully described. And these actions, insofar as they relate to said tracts of real property, be and the same are hereby dismissed without cost. This property is more fully described as follows:

Tract No. 1

[Description omitted.--CCH]

Tract No. 2

[Description omitted.--CCH]

(c) That that certain real property referred to as Tract 17 in the cross-claim and amended cross-claim of the United States of America is the property of Virginia McQueen McFayden, subject to the vested dower right of her mother, Mary M. McQueen, widow of Malcolm McQueen, which tract of land is more particularly described as follows:

Tract No. 17

Location of Property--300 acres, more or less, Bladen County , North Carolina .

[Description omitted.--CCH]

That the defendant, Francis Duval Smith, does not have, and has never had, any right, title, and interest in said tract of real property and that these actions, insofar as they relate to said tract of real property, be and the same are hereby dismissed without cost.

(d) That A. B. Carr is the bona fide purchaser for value and owner of that certain part of real property referred to as Tract 15 in Item II(a) of this judgment, as is described in that certain deed from Southeastern Bonding Company to A. B. Carr, dated November 15, 1950, and recorded in the office of the Cumberland County Public Registry in Book 565, at page 186, that the defendant, Francis Duval Smith, is not the owner of so much of Tract 15 as is described in said deed to A. B. Carr, and that these actions are hereby dismissed as to the defendants, A. B. Carr and wife, Esther Carr, and as to aforesaid property conveyed to A. B. Carr, without court costs.

VI. (a) That the tax lien judgment, hereinbefore decreed in favor of the plaintiff, James S. Currie, Commissioner of Revenue of the State of North Carolina, is hereby adjudged and decreed to be a specific and perfected lien upon all property herein decreed to be the property of the defendant, Francis Duval Smith, or in which he has an interest, and lying and being within the State of North Carolina, both real and personal, as of August 24, 1950; and that the tax lien judgments, hereinbefore decreed in favor of the cross-claimant, United States of America, is hereby adjudged and decreed to be a specific and perfected lien upon all property herein decreed to be property of the defendant, Francis Duval Smith, or in which he has an interest, wherever the same may be located, both within and without the State of North Carolina, as of November 23, 1953, as to all of said tax claims (except $32,386.82 of the total tax claim found in Findings of Fact and Conclusions of Law Number I(c)) and as to this $32,386.82 as of February 2, 1954.

(b) That those certain judgments in criminal cases recorded in the office of the Clerk of the Superior Court of Guilford County, North Carolina, (and hereinbefore specifically described and identified in Findings of Fact and Conclusions of Law VI(b)) are hereby declared and decreed to be liens against all real property owned by the defendant, Francis Duval Smith, or in which he had an interest in Guilford County, North Carolina, as of the 10th day of February, 1953, said lien being superior to the lien herein declared in favor of cross-claimant, United States of America, but being subject to and inferior to the lien herein declared in favor of the plaintiff, State of North Carolina.

(c) That that certain judgment entitled "V. G. Rainey, Administrator of the Estate of George Henry Rainey, vs. Francis Duval Smith", for $20,000.00 and court costs, docketed at the February, 1954, Civil Term of Guilford County Superior Court and recorded in the office of the Clerk of Superior Court of said County in judgment Docket 61 at page 61, is hereby adjudged and decreed to be a lien upon real property decreed to be the property of the defendant, Francis Duval Smith, or in which he has an interest, and lying within Guilford County, North Carolina, as of the end of said February, 1954, term of Court, but said lien is inferior to the lien herein decreed in favor of the plaintiff, State of North Carolina, and cross-claimant, United States of America, and is likewise inferior to the lien herein decreed in favor of the State of North Carolina, and the Guilford County, North Carolina, School Board by reason of its judgment of court costs and fine.

(d) That that certain note in the original principal sum of $8,000.00 dated June 1, 1946, and executed by Rob ert Savage to the defendant, Shenandoah Life Insurance Company, Inc., which is secured by a deed of trust of even date from Rob ert Savage to the defendants, A. G. Decker, R. S. Leftwich, and N. D. McNairy, trustees, conveying real property described as Tract 12 in Item II(a) of this judgment, is hereby adjudged and decreed to be a valid and subsisting, specific and perfected lien against said tract of property as of June 1, 1946. It is further adjudged and decreed that the full balance due upon said note with interest is a prior specific and periected lien superior to the specific and perfected lien decreed herein in favor of the plaintiff, James S. Currie, Commissioner of Revenue of North Carolina, and of the cross-claimant, United States of America, and is likewise prior and superior to the general liens herein decreed in favor of the defendants, State of North Carolina, Joseph P. Shore, Clerk of the Superior Court of Guilford County, Howard E. Carr, Ed. T. Coble, John R. Peacock, Zack L. Whitaker, and Mrs. E. M. Burke, as members of the Guilford County, North Carolina, Board of Education, and V. G. Rainey, Administrator, V. G. Rainey, individually, and Frances Betty Rainey. It is further adjudged and decreed that the receiver, Hubert E. Seymour, Jr., be and he is hereby authorized, empowered and directed to pay the monthly installments provided by the terms of the said note, and to pay and discharge the same in full from the proceeds of the sale of the said tract of real property, as and when the sale of the same shall be completed in the manner herein decreed.

(e) That the certain deed of trust executed by the defendants, J. B. Webster, Jr., and wife, Helen S. Webster, to the defendant, Huger S. King, trustee, conveying real property described as Tract 10 in Item II(a) of this judgment to secure notes totalling $100,000.00 is hereby adjudged and decreed to be a bona fide, valid, subsisting specific and perfected lien upon said property as to the final note of $17,000.00, due by its terms on January 10, 1950, together with the interest thereon as of December 9, 1946. It is further adjudged and decreed that the full balance due thereon is a prior, specific, and perfected lien, superior to all liens decreed herein, including the specific and perfected liens in favor of the plaintiff, James S. Currie, Commissioner of Revenue of the State of North Carolina, the cross-claimant, United States of America, and the expenses of the receivership and costs of these actions to enforce and foreclose the liens of the plaintiff and cross-claimant, and the general liens herein decreed. It is further adjudged and decreed that the note of Perry C. Henson and E. E. Boone, Jr., State Court Receivers in these actions, dated July 22, 1953, in the sum of $18,808.83, with interest from date as therein provided and payable to Reuben B. Arthur, is a valid and subsisting receivership obligation which extends the indebtedness of and is secured by the aforesaid deed of trust to the defendant, Huger S. King, trustees, and said receivers' note, together with its security, is a bona fide, valid, subsisting, specific and perfected lien upon the property described in said deed of trust entitled to all of the priorities of said deed of trust. It is further adjudged and decreed that the payment of said note, prior to the entry of this judgment, by the receiver, Hubert E. Seymour, Jr., is in all respects confirmed and approved as a proper distribution and payment of the proceeds of the sale of said tract of real property.

[VII.] (a) That the defendants, Florence Smith Profenius and husband, H. C. Profenius, Florence Smith Lacefield and husband, Joe Morris Lacefield, And Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar (and her husband, Leo Lazar, not a party to these actions), upon the execution and delivery of the deeds, bills of sale, assignments, endorsements and other transfer instruments required of them by the specific decrees of this judgment, be and they are thereupon released and fully discharged of any and all transferee liability for income tax liabilities of the defendant, Francis Duval Smith to the cross-claimant, United States of America, as herein specifically decreed; that all assessments against them as transferees of the defendant, Francis Duval Smith, upon full compliance with the decrees of this judgment, thereupon shall be forthwith and immediately cancelled by the District Director of Internal Revenue, Greensboro, North Carolina, and said defendants, together with Leo Lazar, are thereupon released of any and all further claims as transferees of the defendant, Francis Duval Smith, for the income taxes covered by Items I(c), (d), and (e) of this judgment as nominees of the defendant, Francis Duval Smith, and covering the specific property set forth in the cross-claim and amended cross-claim of the United States of America, and said defendants are, upon such compliance, further released and discharged of all court costs in this action.

(b) That Count Two of the amended cross-claim of the United States of America against the defendant, Nella Smith, alias Gwendolyn Novella Smith, now Nella Smith Lazar, be and the same is hereby dismissed, without court costs as to said defendant.

(c) That Count Three of the amended cross-claim of the United States of America against the defendants, Frances Smith Lacefield and Joe Morris Lacefield be and the same is hereby dismissed without court costs as to said defendants.

(d) That Count Four of the cross-claim and amended cross-claim of the United States of America against the defendants, Florence Smith Profenius and husband, H. C. Profenius, be and the same is hereby dismissed without court costs, as to said defendants.

VIII. Hubert E. Seymour, Jr., receiver, is hereby ordered and directed to enforce the liens of the plaintiff and the cross-claimant as decreed herein, and to this end said receiver is hereby ordered and directed to sell and liquidate all property, and rights of property, both real and personal, herein decreed to be properties of the defendant, Francis Duval Smith, or in which he has an interest, either at public or private sale, subject to confirmation and approval by this court, and in accordance with the provisions of 28 USC Secs. 2001, 2002, and 2004, and, after selling said property, to pay the expenses of the sale and make such other disbursements and distribution of the proceeds of said sales as shall be allowed, ordered, and directed by this court. All distributions to the plaintiff, the State of North Carolina, and cross-claimant, United States of America, are to be made according to further orders of this court consistent with and in accordance with the settlement entered into by and between the United States of America, cross-claimant, and the State of North Carolina, as approved by the United States Attorney General on October 3, 1956.

IX. The cost of these actions, including the expenses and cost of the receivership, are taxed against the defendants, Francis Duval Smith and Mrs. F. D. Smith, alias Dorothy Lee Smith (now Dorothy Smith Newbraugh), and each of them jointly and severally.

X. That this cause is retained for further orders of the court.

 

 

[58-2 USTC ¶9964]James E. Kennedy, Receiver, Plaintiff v. Puritan Church--The Church of America, an Illinois Corporation, et al., Defendants

U. S. District Court, Dist. of Col., Civil Action No. 4415-54, 11/13/58

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

Tax lien: Priority over receiver: Burden of proof.--Plaintiff, the receiver of the assets of a church for the benefit of contestants who had contributed money in connection with a puzzle contest run by the church, failed to sustain his burden of showing what part, if any, of the purchase price of property purchased by the church and later sold at a public sale for payment of Federal taxes, originated with the contributions of the puzzle contestants. The liens of the government were valid.

Henry H. Brylawski, Coleman L. Diamond, 1030 Woodward Building , Washington , D. C., for plaintiff. Everett L. Edmond, 1510 9th Street, N. W. , Washington , D. C., for defendants.

Findings of Fact and Conclusions of Law

HART, District Judge:

This case having been tried by the Court without a jury and the Court having considered the pleadings, exhibits and testimony makes the following findings of fact and conclusions of law:

Findings of Fact

1. Plaintiff is a Receiver appointed under a decree dated November 4, 1949 , by the Circuit Court of Cook County, Illinois.

2. Defendants, Harrison Parker and Edith S. Parker, are trustees of the Puritan Church --The Church of America and trustees of The Puritan Church of Washington, D. C.

3. Defendant George M. Humphrey is no longer the Secretary of the Treasury and has not served in that capacity in the past six months.

4. Under the decree entered on November 4, 1949, by the Circuit Court of Cook County, all money contributed by the puzzle contestants to the Puritan Church--The Church of America were impressed with a constructive trust and plaintiff was empowered and directed to collect the assets of the Puritan Church--The Church of America under said trust for the benefit of the contestants.

5. By deed dated September 17, 1948 , and recorded September 23, 1948 , Among the land records of the District of Columbia , the Trustees of the Puritan Church of Washington, D. C. took title to a certain parcel of land known as Parcel 57/33.

6. Although the purchase money for Parcel 57/33 came from the Puritan Church --The Church of America, plaintiff has failed to show what part, if any, of such funds originated from the puzzle contestants referred to in Finding 4.

7. On July 13, 1951 , the United States of America filed a notice of tax lien (No. 22592) in this Court against the Puritan Church of Washington, D. C., and on September 19, 1951 , it filed a similar notice (No. 23350) against the Trustees of the Puritan Church .

8. On September 29, 1954 , notice of sale of Parcel 57/33 in the District of Columbia was published by the District Director of Internal Revenue pursuant to Section 3701 of the Internal Revenue Code of 1939.

9. The United States of America bid in Parcel 57/33 for $17,500 at public sale on October 21, 1954 , in partial satisfaction of the tax liens referred to in Finding 7.

Conclusions of Law

1. This suit may not be maintained against defendant George M. Humphrey, by virtue of Rule 25(d) of the Federal Rules of Civil Procedure.

2. Plaintiff had the burden of proof to show what part of the purchase price for Parcel 57/33 originated with the puzzle contestants of the Puritan Church --The Church of America. Plaintiff has failed to sustain this burden of proof.

3. The tax liens of the United States against the Puritan Church of Washington, D. C. and the Trustees of the Puritan Church of Washington, D. C. were valid liens as reflected in the notices filed in this Court on July 13 and September 19, 1951 , respectively.

 

 

[91-1 USTC ¶50,169] ICM Mortgage Corporation, Plaintiff v. Walter Herring, Verna Ann Briggs-Herring a/k/a Ann B. Herring, The United States, Countryside Homeowners Association and Ethel M. Puckett as Public Trustee of Jefferson County, Colorado, Defendants

U.S. District Court, Dist. Colo. , Civ. 90-B-0195, 3/15/91 , 758 FSupp 1425

[Code Sec. 6323 ]

Lien for taxes: Priority: Refinanced loan.--A perfected security interest in real property was not extinguished when the loan used to purchase the real property was refinanced and accompanied by a second perfected security interest in the same property. The second security interest was treated as an uninterrupted continuation of the first, since the second loan and second security interest were to replace the first loan and first security interest. In consequence, an IRS tax lien that was filed after the first security interest but before the second did not have priority over either security interest.

MEMORANDUM OPINION AND ORDER

BABCOCK, District Judge:

Before me are cross motions for summary judgment filed by defendant United States and plaintiff ICM Mortgage Corporation (ICM) on ICM's complaint and the United States ' counterclaim. This dispute arises over the relative priority of competing liens held by ICM and the Internal Revenue Service (IRS) against certain real property. ICM asks that I declare its lien senior or invoke equity to restore the priority of its lien over that of the IRS. Because ICM's lien is superior to the United States ' lien, I deny the United States ' motion for summary judgment and grant ICM's motion for summary judgment.

Defendants Walter Herring and his wife Verna Ann Herring (the Herrings) have failed to answer the complaint and the United States ' cross-claim. Notices of default have entered against them. Defendant Public Trustee of Jefferson County, Colorado filed a disclaimer to any rights in the property. Consequently, the IRS and ICM remain as the sole competitors for lien priority.

According to the stipulated pretrial order, on June 28, 1984 , the Herrings borrowed money from ICM to buy the property. The loan was evidenced by a note secured by a deed of trust dated June 28, 1984 . The deed of trust was duly recorded. I refer to this document as the first deed of trust.

In April, 1988, the Herrings applied to refinance their loan through the Federal Housing Authority's (FHA) Streamline Refinance Program. To participate in the program, the insured loan must be secured by a first lien against the real property. The Herrings' application met FHA criteria and ICM gave its approval.

On April 29, 1988 , as a part of the refinancing, the Herrings executed a second note and executed a second deed of trust in favor of ICM encumbering the property. Failure to notary the second deed of trust, however, caused delay in recording the document. On May 10, 1988 , ICM recorded the notarized second deed of trust. I refer to this document as the second deed of trust. No additional funds were loaned under the second deed of trust. On May 23, 1988 , ICM recorded the release of the first deed of trust.

On May 5, 1988 , before the first deed of trust was released but before the second deed of trust was recorded, the IRS recorded a tax lien against the Herrings. Priority is important here because the current fair market value of the property is insufficient to satisfy both liens.

The United States contends that when it filed its lien, it was junior only to ICM's first deed of trust. Consequently, the United States argues, when ICM released the first deed of trust, the IRS lien became first in priority. ICM contends that its second deed of trust replaced its first. Consequently, ICM argues, its second deed of trust inherited the priority of its first deed of trust. ICM also argues that under Colorado law it has an equitable interest that is superior to the federal tax lien.

Federal Rule of Civil Procedure 56 provides that summary judgment shall be granted if the evidence shows that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P 56(c). Summary judgment is appropriate against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The priority of a federal tax lien is a matter of federal law. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983); United States v. State of Colorado [89-1 USTC ¶9260 ], 872 F.2d 338, 339 (10th Cir. 1989); United States v. Wingfield [88-1 USTC ¶9367 ], 822 F.2d 1472-73 (10th Cir. 1987), cert. dismissed sub nom., County of Boulder v. United States, 486 U.S. 1019 (1988). Under federal law, the priority of a federal lien is governed by the first-in-time, first-in-right rule. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954); United States v. Central Bank [88-1 USTC ¶9256 ], 843 F.2d 1300, 1306 (10th Cir. 1988). The priority of a lien created by state law, such as the lien held by ICM, depends on the time the lien attached to the property in question and became choate. United States v. Bell Credit Union [88-2 USTC ¶9564 ], 860 F.2d 365, 371 (10th Cir. 1988); Central Bank [88-1 USTC ¶9256 ], 843 F.2d at 1307.

Thus, to prevail, ICM must show that it is a holder of a security interest in the property that attached before the filing of the notice of the federal tax lien. See Internal Revenue Code, 26 U.S.C. §6323(h)(1) . The point at which a state created security interest attaches is a matter of state law. See Security Pac. Mortgage Corp. v. Choate [90-1 USTC ¶50,143 ], 897 F.2d 1057, 1058-59 (10th Cir. 1990); United States v. Guinn, 751 F.Supp. 953 (D. Utah 1990); Peterson v. United States [81-1 USTC ¶9469 ], 511 F.Supp. 250 (D. Utah 1981).

Standing alone, the second deed of trust now appears second in priority to the federal tax lien. But, when the federal tax lien was filed the tax lien was second in priority to the first deed of trust. ICM argues that the second deed of trust was to replace the first deed of trust and that the security interest created by the first deed of trust was never extinguished.

Under Colorado law, whether this refinancing extinguished the security interest perfected through the first is resolved by looking to the intent of the Herrings and ICM. See In re Billings , 838 F.2d 405, 407 & 409 (10th Cir. 1988); Haley v. Austin , 223 P. 43, 45 ( Colo. 1924). ICM argues that it intended to retain the security interest that attached under the first deed of trust. The United States admits that under Colorado law, a refinancing does not necessarily extinguish the prior security interest, but argues that ICM intended to extinguish the security interest.

There is no dispute as to the evidence, only as to the conclusions each party draws from it. I hold that the undisputed evidence establishes as a matter of law that the second deed of trust renewed the prior obligation and did not function to extinguish the security interest.

The United States provides undisputed deposition testimony that the first deed of trust note was satisfied by the second deed of trust note and the second deed of trust note was secured by the second deed of trust. The United States further notes that the second deed of trust did not explicitly refer to the first deed of trust, nor does the first deed of trust explicitly state an intent to continue the security interest. From this, the United States argues that ICM intended to extinguish its security interest. See Peterson [81-1 USTC ¶9469 ], 511 F.Supp. at 254-56 (applying Utah law). But see Guinn, 751 F.Supp. at 955-56 (applying Utah law and disagreeing with Peterson). The evidence on which the United States relies shows at most that this arrangement is as consistent with an intent to renew the security interest as it is with an intent to extinguish the interest. The nature of this paper work casts but dim elucidation upon ICM's intent.

The parties agree that ICM intended to refinance its loan to the Herrings through the second deed of trust. Furthermore, the United States conceded at oral argument that ICM "wanted" to maintain its first priority security interest via the refinancing.

It is undisputed that the refinancing was pursuant to the FHA's Streamline Refinancing Program which requires that the refinanced loan be secured by a first lien against the real property. ICM obtained a title commitment from a title company to secure its prior lien position before closing the refinancing. Refinancing under this program would not have occurred in this case unless ICM maintained first priority on its lien. Affidavit of Judith Cerny ¶14. The parties also agree that the second deed of trust involved the same property, the same parties and the same consideration as did the first deed of trust.

Based on this undisputed evidence of intent, I conclude that ICM meets its summary judgment burden and the United States does not. The only reasonable conclusion a trier of fact can reach on the undisputed evidence is that ICM intended to retain its security interest through the refinancing. Thus, ICM's lien is senior.

Because I grant ICM's motion on this basis, I need not address ICM's remaining equity argument.

Accordingly, IT IS ORDERED THAT

(1) plaintiff ICM Mortgage Corporation's Motion for Summary Judgment is GRANTED;

(2) defendant United States ' Motion for Summary Judgment is DENIED;

(3) plaintiff ICM Mortgage Corporation has a lien senior to the United States on the property described as Lot 14, Block 9, Countryside Subdivision Filing No. 10, County of Jefferson, State of Colorado, known and numbered as 10287 Quail Way, Westminster, Colorado 80020;

(4) final judgment shall enter.

 

 

[90-1 USTC ¶50,065] Atlantic States Construction, Inc., Plaintiff v. Hand, Arendall, Bedsole, Greaves and Johnston, et al., Defendants Colonial Bank, Defendant-Appellant v. Internal Revenue Service , United States of America , Defendant-Appellee

(CA-11), U.S. Court of Appeals, 11th Circuit, 88-7592, 1/29/90 , 892 F2d 1530, 892 F2d 1530. Reversing and remanding an unreported District Court decision

[Code Sec. 6323 ]

Tax lien: Priority of lien.--A security interest in a subcontractor's accounts had priority over a federal tax lien with respect to the proceeds of a subcontractor's delay damages claim because the proceeds constituted an "account" and the account arose before the IRS filed its lien. In the prime contract, the ultimate customer agreed to pay any additional costs incurred by reason of any delay that it caused. The subcontract incorporated this delay damages provision but exculpated the contractor from liability in the event that it was unable to collect damages from the ultimate customer. An unreasonable delay which caused the subcontractor to incur additional performance costs resulted from a work suspension directive issued by the ultimate customer. Given that the subcontractor possessed the contractual right to receive payment for additional expenses incurred by reason of the delay, and this right was determined not to be impaired by the exculpatory clause in the subcontract, the funds at issue constituted an account. The account came into existence at the very latest when the subcontractor completed the project and was entitled to an adjustment in its contractual payments. Since the government's first tax lien against the subcontractor was not filed until almost a year after the previous security interest was perfected, such security interest took priority over the federal tax lien.

Before KRAVITCH, JOHNSON and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

Against the backdrop of the Federal Tax Lien Act of 1966, we are confronted in this case with the issue of whether a subcontractor participating in a federal government contract possessed a contractual right to receive an equitable adjustment for delay expenses such that the subcontractor's performance of its responsibilities under the subcontract gave rise to an account as defined under Alabama law. Concluding that the district court erred in failing to accord the provisions of the subcontract the specialized construction developed under the law governing federal contract claims and that this error led the district court to mistakenly conclude that the federal government's tax liens had priority over a bank's security interest in the subcontractor's accounts, we reverse the judgment of the district court.

I. BACKGROUND

A. Creation of the Fund

The facts of this case are undisputed. On June 30, 1980, Atlantic States Construction, Inc. ("Atlantic States"), ¹ became the prime contractor on a United States Department of the Navy contract for construction at the Oil Spill Prevention Facility in Portsmouth, Virginia. Among other things, this contract had a suspension of work clause that provided for an equitable adjustment to the contract price in the event that the government unreasonably delayed the performance of the contract. ²

On October 15, 1980 , Process and Systems Engineering Company, Inc. ("P&S") and Atlantic States entered into a subcontract agreement, whereby P&S agreed to perform a certain portion of Atlantic States's work under the Navy contract. Of particular relevance to this appeal, this contract had an "exculpatory clause" which provided that P&S would not hold Atlantic States liable for damages resulting from any delays in performance of the contract, including those caused by the federal government; the exculpatory clause did provide, however, that Atlantic States "shall cooperate" with P&S to enforce any claim arising from delay against the federal government. ³ In addition, the subcontract incorporated the "suspension of work" provision of the contract between the Navy and Atlantic States .

Work under the contract was suspended by the Navy's contracting officer from April 2, 1981 to January 11, 1982 . At that time the work suspension was lifted, P&S resumed work and completed the project on March 4, 1982 .

Because it had incurred increased costs in the fulfillment of its contractual responsibilities due to the issuance of the suspension of work directive, P&S submitted a certified claim to Atlantic States seeking additional compensation for its increased expenses on September 7, 1982 . Atlantic States in turn submitted the P&S claim to the Department of the Navy seeking an equitable adjustment to its contract to compensate P&S for the increased expenses.

On August 2, 1984 , the Navy agreed that an adjustment should be made to the contract to compensate P&S for the increased costs associated with the work suspension. After subsequent negotiations, the Navy and P&S agreed that the Navy would pay Atlantic States $43,888 as an equitable adjustment to the final contract price. It was further agreed that P&S was to receive $41,631.00 as an equitable adjustment to compensate it for its delay costs. On June 9, 1986 , the Navy issued a check payable to Atlantic States for the additional contract price.

B. The Claims for P&S's Additional Payment

Upon receipt of the Navy's check, Atlantic States was confronted by three independent parties, Colonial Bank ("Colonial"), the Internal Revenue Service ("IRS"), and the law firm of Hand, Arendall, Bedsole, Greaves & Johnson ("Hand, Arendall"), each claiming an interest in P&S's portion of the delay expenses. Colonial Bank premised its claim on the basis of a perfected security interest "in all accounts, contract rights and rights to payment of every kind now or at any time hereafter arising out of the business of [P&S]." This security interest had originally been granted to the First National Bank of Fort Worth , which had perfected its security interest on March 25, 1982 , and had later assigned its security interest to Colonial. ⁴ On October 28, 1985 , Colonial informed Atlantic States that it was entitled to $26,401.32 of P&S's proceeds.

The IRS's interest was premised upon the fact that P&S had failed to pay payroll taxes in 1982 and 1983. Consequently, in early 1983 and continuing until June 21, 1985, the IRS filed seven separate tax liens with the Probate Judge of Mobile County, thereby perfecting its tax liens against P&S. ⁵ On July 25, 1985, the IRS filed a Notice of Levy on Atlantic States claiming a total of $21,603.54 in taxes plus statutory additions.

Finally, on October 30, 1985, Hand, Arendall informed Atlantic States that it was entitled to $16,000 of P&S's contractual proceeds by virtue of an existing attorney's lien.

C. Procedural History

Atlantic States initiated this lawsuit by filing a complaint in interpleader, in which it sought to determine entitlement to the $41,631.00 that the Navy had agreed to pay P&S as compensation for delays and work suspensions on the Oil Spill Prevention facility. Atlantic States named four defendants to the action: (1) Hand, Arendall; (2) Colonial; (3) the IRS; and (4) P&S. ⁶

On October 21, 1987 , the district court, pursuant to a stipulation by the parties, entered a judgment in favor of Hand, Arendall in the amount of $16,143.60. That judgment has not been appealed by any party and is not at issue here.

On January 7, 1988 , the district court issued an order ruling in favor of the United States on cross-motions for summary judgment filed by the United States and Colonial, the only two remaining parties contesting entitlement to the funds. Later however, the district court granted Colonial leave to file a second motion for summary judgment. Finally, on June 17, 1988 , the district court entered a second order denying Colonial's second motion for summary judgment, and granting sua sponte summary judgment in favor of the United States . In its order, the court held that by virtue of the exculpatory clause in P&S's subcontract agreement with Atlantic States, P&S had no right to payment for delay expenses. Inasmuch as P&S had no right to payment, the district court concluded that the funds at issue could not be considered an account of P&S under 1975 Ala.Code §7 -9-106 until such time that the Navy paid Atlantic States for delay expenses. Because the United States had completed perfection by filing its last Notices of Liens almost a year before the Navy finally made payment, the district court determined that the United States 's liens had priority over Colonial's security interest. Upon entry of a final judgment by the district court, notice of appeal was timely filed. Fed.R.App.P. 4(a)(1).

II. DISCUSSION

On appeal, Colonial argues that the district court misconstrued P&S's contractual rights under the subcontract by giving an overly broad reading of the subcontract's exculpatory clause. Colonial contends that, notwithstanding the exculpatory clause, the subcontract gave P&S a contractual right to an equitable adjustment of its costs of performance should the Navy unreasonably delay its performance of the subcontract. Because the Navy did suspend construction at the Oil Spill Prevention Facility for an unreasonable length of time, Colonial maintains that when, after the suspension of work order was lifted, P&S resumed and completed performance of its obligations under the subcontract, an account for the proceeds at issue here was created. P&S completed its work on March 4, 1982 . As of that date, the relevant federal tax liens had not yet been filed. Accordingly, Colonial concludes that its security interest in the funds is senior to the federal government's tax liens.

A. Setting the Background: The Federal Tax Lien Act of 1966

In both Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565 (5th Cir.1980) ⁷ and Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040 (5th Cir. 1972), cert. denied sub nom. Pecos County State Bank v. United States, 410 U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973), this court engaged in lengthy discourses on the interaction between competing federal tax liens and private liens and the manner in which priority is to be determined. Because, as the parties agree, the tax code provisions merely provide the backdrop for what ultimately is an interpretation of federal contract law and state law, only a brief discussion of the tax code is necessary here.

[1] Under section 6321 of the Internal Revenue Code, ⁸ the failure of a taxpayer to pay taxes after demand gives rise to a tax lien in favor of the United States which attaches to all property and rights to property, whether real or personal, belonging to such a person. Moreover, property acquired after the tax lien arises is reached by the lien. Since a federal tax lien is wholly a creature of federal law, the consequences of a lien that attaches to property interests, e.g., priority determinations, are matters of federal law. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983); United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88, 83 S.Ct. 1651, 1655, 10 L.Ed.2d 770 (1963).

Traditionally, under federal tax law, two basic principles governed the adjudication of priority of competing liens: (i) "the first in time is the first in right"; and (ii) a federal tax lien is superior to a nonfederal lien that is inchoate. ⁹ United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86, 74 S.Ct. 367, 370-71, 98 L.Ed. 520 (1954). See generally Texas Oil & Gas Corp., 466 F.2d at 1044-46.

However, "[t]he Federal Tax Lien Act of 1966, 80 Stat. 1125, as amended, 26 U.S.C. §6323 , . . . modified the Federal Government's preferred position under the choateness and first-in-time doctrines and recognized the priority of many state claims over federal tax liens." United States v. Kimbell Foods, Inc., 440 U.S. 715, 738, 99 S.Ct. 1448, 1463, 59 L.Ed.2d 711 (1979) (footnote omitted). As recognized by our earlier cases, in enacting the Federal Tax Lien Act of 1966, Congress sought "to conform the lien provisions of the Internal Revenue Code to the concepts developed in the Uniform Commercial Code" and "to provide some limited but specific relief from the harshness of the choateness rule. . . ." Rice Investment Co., 625 F.2d at 569. Among its various provisions, the Act provided certain conditions and limitations on the validity and priority of federal tax liens as against individuals holding security interests in property which is the subject of such a lien. For example, the Act's amendments to §6323 provided a statutory mechanism by which, under certain circumstances, individuals holding perfected security interests under the U.C.C. provisions of state law prior to the filing of a federal tax lien were entitled to priority over the federal liens, regardless of what result might have been otherwise dictated by federal common law. See, e.g., Aetna Insurance Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir.1979) (per curiam) (Federal Tax Lien Act, as codified at 26 U.S.C. §6323 , supplants application of the choateness doctrine with respect to tax lien priority questions as to which that statute provides an unambiguous federal law answer). ¹⁰

In cases in which the priority of a security interest and a federal tax lien are contested, the Act identifies two distinct situations in which a security interest may have priority over a federal tax lien: when the security interest exists prior to the Internal Revenue Service's filing of notice of the tax lien, 26 U.S.C.A. §6323(a) , and when the security interest arises after the filing of the tax lien but within forty-six days of the date of filing, 26 U.S.C.A. §6323(c) . See Passamano, Questions of Priority: Secured Lender Versus A Federal Tax Lien, 93 Com.L.J. 361 (1988). See generally, Rice Investment Co., 625 F.2d at 570-72; Texas Oil & Gas Corp., 466 F.2d at 1047-49.

Colonial argues that because as of the date of the tax lien filings (i) it possessed a perfected security interest in P&S's accounts and contract rights, and (ii) P&S's account receivable in the contested funds had come into existence, the rules governing the former situation are applicable here. Under 26 U.S.C.A. §6323(a) , a federal tax lien "shall not be valid as against any purchaser, holder of security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." ¹¹ In order to come within the protections of this statute, a holder of a security interest must establish four conditions: (1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money's worth. 26 U.S.C.A. §6323(h)(1) . ¹²

The government concedes that Colonial established three of these four elements, but challenges Colonial's assertion as to the date that P&S's account in the delay expenses came into existence. ¹³ According to the government, the P&S account for which the contested funds are proceeds only came into existence when the Navy paid Atlantic States the equitable adjustment to the prime contract in June, 1986.

B. Identifying the Issue: What Is an Account?

The issue thus boils down to when P&S's account originally came into existence, or phrased another way, when did P&S first have a right to obtain the funds at issue in this case. See Coogan, The Effect of the Federal Tax Lien Act of 1966 upon Security Interests Created Under the Commercial Code, 81 Harv.L.Rev. 1369, 1383-86 (1968); Creedon, Assignments for Security and Federal Tax Liens, 37 Fordham L.Rev. 535, 562-63 (1969). Both parties agree that the definition of the underlying property interest is left to state law and that Alabama law is applicable in this case. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983) ("although the definition of underlying property interests is left to state law, the consequences that attach to those interests is a matter of federal law"); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280-81, 4 L.Ed.2d 1365 (1960) (state law controls the nature of the legal interest which the taxpayer had in the property, but federal law determines the priority of competing liens). See also Aetna Insurance Co. v. Texas Thermal Industries, Inc., 591 F.2d at 1038-39.

Under Alabama 's version of the Uniform Commercial Code, an account is "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper." 1975 Ala. Code §7 -9-106. ¹⁴ Our recent opinion in Merchants National Bank of Mobile v. Ching, 681 F.2d 1383 (11th Cir.1982), provides a helpful background in delineating the boundaries of what constitutes an account. In Merchants National Bank, as in the present case, we were confronted with the question whether certain claims by a contractor constituted an account under Alabama law for purposes of a security interest held by a bank. In finding that one claim was an account, while three others were not, we drew a distinction between a claim for payment that was specifically covered and incorporated in the contractual agreement and those claims for which no contractual provision existed. For example, we found that the contractor's claims for items not listed in the contract or for actions that were taken as a result of the owner's breach of contract did not constitute an account. Id. , at 1388-89. In contrast, however, we found that the contractor's claim for payment for rework caused by the owner's actions was an account because the contract authorized that the contractor "shall be entitled to an equitable adjustment in the event that rework is caused by the actions of others." Id. , at 1386-87. We also held that the determination of when an account comes into existence is not dependent upon whether an exact amount of payment claimed is known; instead, we determined that the relevant inquiry is whether the payment is for services rendered. Id. , at 1387.

Consequently, in order to determine both whether P&S had an account and when that account arose, we must turn to P&S's contractual agreement with Atlantic States.

C. P&S's Rights under the Subcontract

In order to assess P&S's contractual rights, a brief explanation of the role of several of the contractual provisions at issue is in order. First, Section 17 of the prime contract, see supra n.2, is a traditional federal contract suspension of work clause. This clause was developed to provide additional contractual remedies to contractors with the federal government by providing them with a contractual right to reimbursement for any additional expenses or losses incurred by the government's unreasonable delay. See Merritt-Chapman & Scott Corp. v. United States, 208 Ct.Cl. 639, 528 F.2d 1392, 1396-98 (1976) (discussing the history behind and purpose underlying the inclusion of suspension of work clauses in federal contracts). See also Note, "No Damage" Clause in Construction Contracts: A Critique, 53 Wash.L. Rev. 471, 489-90 (1978). "The suspension clause converts an action for damages into a matter properly for determination and payment under and pursuant to the contract in the form of an equitable adjustment." Cannon Construction Co. v. United States , 162 Ct.Cl. 94, 319 F.2d 173, 179 (1963). See Merritt-Chapman & Scott Corp. v. United States , 194 Ct.Cl. 461, 439 F.2d 185, 192-93 (1971). In other words, the suspension of work clause obligates the federal government, having unreasonably delayed the contract, to adjust the contract price to compensate the contractor for losses incurred by the delay. Thus, in this case, once the Navy created an unreasonable delay by suspending construction work at the Oil Spill Prevention Facility, Atlantic States became contractually entitled to an adjustment for any additional costs incurred in performing the contract that resulted from the delay. Cf. Merchants National Bank of Mobile , 681 F.2d at 1387.

Also of relevance are two provisions in the subcontract: the "incorporation" provision and the "exculpatory clause." The subcontract between Atlantic States and P&S explicitly incorporated the terms of the general contract between Atlantic States and the Navy. ¹⁵ As the district court observed, by virtue of the incorporation provision, P&S was to be entitled to an equitable adjustment for delay expenses from Atlantic States on the same basis that Atlantic States was entitled to an equitable adjustment for delay expenses from the Navy. See United States ex rel. Aetna Drywall Contractors, Inc. v. Aetna Casualty and Surety Co., 725 F.2d 650, 651 (11th Cir.1984) (in suit by subcontractor against prime contractor, subcontractor need not apportion damages on basis of whether change orders or other delays were fault of contractor or federal government where subcontract incorporated provisions of general contract between contractor and the federal government and one incorporated provision in the general contract contained equitable adjustment clause making federal government liable to contractor for any increased costs resulting from change orders); United States ex rel. Gray-Bar Electric Co. v. J.H. Copeland & Sons Construction, Inc., 568 F.2d 1159, 1162 & n.5 (5th Cir.) (same), cert. denied sub nom. Reliance Insurance Co. v. F&D Electrical Contractors, Inc., 436 U.S. 957, 98 S.Ct. 3072, 57 L.Ed.2d 1123 (1978). See also McDaniel v. Ashton-Mardian Co., 357 F.2d 511, 516-17 (9th Cir.1966) (where prime contract provision incorporated into subcontract allowed only limited relief not including delay damages to prime contractor from federal government for delays or changes caused by the federal government, subcontractor is not entitled to recover delay damages from prime contractor).

However, the district court found merit in the federal government's argument that the subcontract's "exculpatory" clause negated P&S's right to delay damages from Atlantic States. This clause provided that:

Contractor shall not be liable to the Subcontractor for delay to Subcontractor's work by the act, neglect or default of the Owner, or the Architect, or by reason of fire or other casualty, or on account of riots, or of strikes, or other combined action of the workmen or others, or on account of any acts of God, or any other cause, beyond Contractor's control, or on account of any circumstances caused or contributed to by the Subcontractor; but Contractor shall cooperate with Subcontractor to enforce any just claim against the Owner or Architect for delay.

The district court reasoned that, as a result of this provision, "P&S had no right to payment for delay expenses sufficient to constitute an account prior to [Atlantic States]'s receipt of equitable adjustment funds from the Navy in June 1986." District Court's Order, at 7.

In order to evaluate the district court's assessment of the effect of the subcontract's exculpatory clause, some background as to the clause's purpose is in order. An exculpatory clause, such as the one found here, is not an uncommon occurrence in instances in which a prime contractor with the federal government establishes a subcontractual relationship with other companies. The exculpatory clause serves the purpose of insulating the general contractor itself from the possibility of being (1) liable to the subcontractor for delay caused by the government, yet (2) unable to recover from the government. Seger v. United States , 199 Ct.Cl. 766, 469 F.2d 292, 300 (1972); Blount Brothers Construction Co. v. United States , 348 F.2d 471, 474 (1965).

In Blount Brothers Construction Co., the Court of Claims addressed the function of an exculpatory provision virtually identical to the one at issue in this case. ¹⁶ At issue in the case was whether the prime contractor had standing to assert certain claims against the government on behalf of its subcontractors. The government argued that the prime contractor was precluded from bringing the action because the exculpatory clause relieved the prime contractor of any liability to its subcontractor for having incurred additional costs resulting from a hold order issued by the Navy. ¹⁷ The plaintiff countered the government's contention with the argument that the exculpatory clause related solely to breaches of contract and not to claims of equitable adjustment that come within the terms of the contract. Agreeing with the plaintiff, the Court of Claims held that while the exculpatory clause as properly construed protects the contractor from being placed in a position in which it might be held liable to its subcontractor for breach of contract as a result of delays caused by the government without being able to recover from the government, "the exculpatory clause did not affect plaintiff's liability to its subcontractor insofar as claims under the prime contract were concerned." 348 F.2d at 474 (emphasis in original). Accord Umpqua River Navigation Co. v. Crescent City Harbor District, 618 F.2d 588, 594 (9th Cir. 1980). In other words, notwithstanding the exculpatory clause, the prime contractor remained liable under the subcontract to its subcontractor to the same extent that the federal government was liable to the prime contractor under the prime contract.

Although the result reached in Blount Brothers Construction Co. has been the subject of some criticism, see generally Note, Facilitating Subcontractors' Claims Against the Government through the Prime Contractor as the Real Party in Interest, 52 Geo.Wash.L.Rev. 146 (1983), three arguments favor following its result in this case. First, the exculpatory clause also had language requiring Atlantic States to cooperate with P&S in bringing its claim for equitable adjustment. ¹⁸ This cooperation clause indicates that Atlantic States was not absolved from responsibility to P&S by virtue of the exculpatory clause; rather, Atlantic States had an obligation to go forward with P&S's claim. ¹⁹ See Keydata Corporation v. United States, 205 Ct.Cl. 467, 504 F.2d 1115, 1121 & n.10 (1974). Second, we cannot ignore the fact that Blount Brothers Construction Co. was a part of the legal landscape at the time that the subcontract was entered into. Given that the subcontract in this case utilizes language virtually identical to the language at issue in Blount Brothers Construction Co., we believe that, at least in the absence of any evidence of intent to the contrary, we would be remiss in not construing the subcontract's provisions in a manner consistent with what must have been the understanding of the participants to the subcontract at its time of formation. And finally, this interpretation of the combined effect of the contract's incorporation provision and exculpatory clause--i.e., that the prime contractor is liable to the subcontractor for an equitable adjustment to the contract for additional performance costs incurred because of the delay to the extent that the federal government is liable to the prime contractor--comports with a common-sense reading of the contract as a whole.

D. When P&S's Account Arose

Our conclusion that the district court erred in construing the function of the exculpatory clause does not, in and of itself, however, answer the ultimate question: namely, whether the contested funds in this case constituted an "account" to which Colonial had a protected security interest under §6323 .

As discussed in the previous section, the prime contract between Atlantic States and the Navy explicitly provided Atlantic States with a contractual right to receive an adjustment for "any increase in the cost of performance" of the contract caused by the Navy's unreasonable suspension or delay. Via the incorporation provision, P&S possessed the same right to an adjustment as did Atlantic States, and this right was not impaired by the exculpatory clause found in the subcontract. Consequently, the funds at issue represent payments to which P&S is contractually entitled for having incurred additional expenses in completing its contract with Atlantic States--that is, the funds represent a P&S account.

Turning finally to the ultimate issue, we conclude that there is little question that P&S's account came into existence prior to government's filing of the tax liens. An unreasonable delay resulted from the Navy's suspension of work directive, which was in effect from April 2, 1981 to January 11, 1982 . Once the suspension of work directive was lifted, P&S continued to perform its contractual obligations under the subcontract until March 4, 1982 , when it had completed its part of the project. As of that time, P&S was entitled to an adjustment in its contractual payments to offset the additional costs of performance. Thus, the very latest that it could have been said that P&S's account arose is March 4, 1982 , even though the amount of money to which P&S was entitled had not yet been fixed. Merchants National Bank of Mobile v. Ching, 681 F.2d at 1387.

III. CONCLUSION

For the reasons stated, the P&S account was in existence at least by March 4, 1982 . Colonial's security interest was perfected on March 25, 1982 . The federal government's first tax lien against P&S was not filed until March 15, 1983 , almost a year after Colonial had a perfected security interest in the existing P&S account. Thus, under §6323(a) and §6323(h)(1) of the Revenue Code, Colonial's security interest takes precedence over the tax lien. ²⁰ See, e.g., Trust Co. of Columbia v. United States [84-2 USTC ¶9614 ], 735 F.2d 447, 448 (11th Cir.1984); Aetna Insurance Co. v. Texas Thermal Industries [79-1 USTC ¶9287 ], 591 F.2d 1035 (5th Cir.1979) (per curiam).

Accordingly, the district court's grant of summary judgment to the federal government is REVERSED, and this case is REMANDED to the district court with instructions that judgment be entered in favor of Colonial.

¹ The original contract was entered into by McDonough Construction Company. Sometime thereafter Atlantic States succeeded to McDonough's rights and duties under the Navy contract. For the sake of simplicity, and because the identity of the prime contractor is relevant for background purposes only, we shall refer to any actions taken by McDonough Construction Company prior to the succession of rights and duties by Atlantic States as having been taken by Atlantic States.

² The "suspension of work" provisions can be found in Section 17 of the General Provisions of the Construction Contract which, in pertinent part, provides:

(a) The Contracting Officer may order the Contractor in writing to suspend, delay, or interrupt all or any part of the work for such period of time as he may determine to be appropriate for the convenience of the Government.

(b) If the performance of all or any part of the work is, for an unreasonable period of time, suspended, delayed, or interrupted by an act of the Contracting Officer in the admin istration of this contract, or by his failure to act within the time specified in this contract (or if no time is specified, within a reasonable time), an adjustment shall be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by such unreasonable suspension, delay, or interruption and the contract modified in writing accordingly. However, no adjustment shall be made under this clause for any suspension, delay, or interruption to the extent (1) that performance would have been so suspended, delayed or interrupted by any other cause, including the fault or negligence of the Contractor, or (2) for which an equitable adjustment is provided for or excluded under any other provision of this contract.

³ Article III(c) of the subcontract agreement between Atlantic States Company and P&S reads as follows:

(c)Contractor shall not be liable to the Subcontractor for delay to Subcontractor's work by the act, neglect or default of the Owner, or the Architect, or by reason of fire or other casualty, or on account of riots, or of strikes, or other combined action of the workmen or others, or on account of any acts of God, or any other cause, beyond Contractor's control, or on account of any circumstances caused or contributed to by the Subcontractor; but Contractor shall cooperate with Subcontractor to enforce any just claim against the Owner or Architect for delay.

⁴ It is uncontested that the security interest has been continuously perfected since March 25, 1982 .

⁵ The IRS also filed notice of a tax lien against P&S with the Probate Judge of Mobile County on January 8, 1982 . The parties agree that this lien has been satisfied and is therefore not relevant to this appeal.

⁶ P&S has never claimed an independent entitlement to any portion of the fund involved in this case, but has instead, supported Colonial Bank's claims of entitlement.

⁷ This case was decided prior to the close of business on September 30, 1981, and is binding precedent under Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981).

⁸ All issues of relevance take place prior to 1986; consequently, although the Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2085, redesignated the Internal Revenue Code of 1954 as the Internal Revenue Code of 1986, all references to the Code in this opinion will be to the Internal Revenue Code of 1954 as amended.

⁹ For a nonfederal lien to be considered choate, "the identity of the lienor, the property subject to the lien and the amount of the lien must be established beyond any possibility of change or dispute." Rice Investment Co., 625 F.2d at 568.

¹⁰ See infra n.20.

¹¹ Subsection (f) of 26 U.S.C.A. §6323 governs the manner and place in which notice of a tax lien must be filed.

¹² Section 6323(h)(1) provides that:

The term 'security interest' means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. 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.

¹³ As the government cogently sets forth the issue in its brief:

The issue in this case is whether the delay expenses of the subcontractor [P&S] constituted an "account" to which the bank's security interest attached before. . .the filing of the federal tax liens. There is no dispute that the bank held a security interest in then-existing accounts receivable of the subcontractor pursuant to the assignment (from another bank) of a security interest therein, which was perfected under Alabama law on March 25, 1982. Nor is there any dispute that the tax liens were filed after the bank's security interest (in any extant accounts receivable) had been perfected (the tax liens were filed on March 15, 1983 , June 21, 1983 , July 13, 1983 , June 5, 1984 , and June 21, 1985 ). Nevertheless, the fact that the bank had perfected its security interest in the subcontractor's then-existing "accounts" prior to the Government's filing of the tax liens is not dispositive of the question of the bank's entitlement to priority over the federal tax liens with regard to the "fund" at issue here. Rather, the question of priority hinges on whether that fund constitutes the proceeds of an "account" that existed in January, 1982, as contended by the bank, or that did not come into existence until June, 1986--well after the tax lien notices had been filed--as determined by the District Court.

Brief for the United States , at 18-19.

¹⁴ In its entirety, 1975 Ala. Code §7 -9-106 provides that:

"Account" means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. "General intangibles" means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments and money. All rights to payment earned or unearned under a charter or other contract involving the use or hire of a vessel and all rights incident to the charter or contract are accounts.

This statutory definition of an account, while broader than the definition found in the 1962 version of the Uniform Commercial Code, see Official Comment under §7 -9-106, is not so unlimited in scope so as to include all contractual rights to receive payments; rather, by definition, it only includes those rights for payment that will arise or have already arisen from the sale or lease of goods or the rendering of services. Coogan and McDonnell, 1B Bender's Uniform Commercial Code Service: Secured Transactions under the Uniform Commercial Code §15.04, at 15-17 (1988 Cum.Supp.).

Because the account in the instant case was created by performance before the relevant tax liens were filed, this change in the law is of no consequence here.

¹⁵ R-1-37-9.

¹⁶ The exculpatory provision in Blount Brothers Construction Co., provided that:

Contractor shall not be liable to the Sub-Contractor for delay to Sub-Contractor's work by the act, neglect or default of the Owner, * * * or on account of any acts of God, or any other cause, beyond the Contractor's control; but Contractor will cooperate with Sub-Contractor to enforce any just claim against the Owner or Architect for delay.

348 F.2d at 472 n.2.

¹⁷ The government's argument was premised upon the doctrine established in Severin v. United States, 99 Ct.Cl. 435 (1943), cert. denied, 322 U.S. 733, 64 S.Ct. 1045, 88 L.Ed.2d 1567 (1944), which to some extent limited the ability of prime contractors to bring damages claims on behalf of its subcontractors. As described by the Court of Claims, the Severin doctrine provides that:

* * * a prime contractor may sue the Government for damages incurred by one of its subcontractors through the fault of the Government * * * only when the prime contractor has reimbursed its subcontractor for the latter's damages or remains liable for such reimbursement in the future. These are the only ways in which the damages of the subcontractor can become, in turn, the damages of the prime contractor, for which recovery may be had against the Government.

Blount Brothers Construction Co., 348 F.2d at 471, quoting J.L. Simmons Co. v. United States, 158 Ct.Cl. 393, 397, 304 F.2d 886, 888 (1962).

¹⁸ This clause was necessary in light of Supreme Court rulings precluding a subcontractor from recovering claims against the United States in the absence of an express or implied contract between the subcontractor and the federal government. See, e.g., United States v. Blair, 321 U.S. 730, 737, 64 S.Ct. 820, 824, 88 L.Ed. 1039 (1944); Merritt v. United States , 267 U.S. 338, 45 S.Ct. 278, 69 L.Ed. 643 (1925).

¹⁹ Indeed, at oral argument, the government conceded that P&S had an enforceable contractual right to Atlantic State 's cooperation in seeking and obtaining an equitable adjustment to the contract from the Navy.

²⁰ We note that the government has not argued in this case that its tax lien takes priority over Colonial's security interest because the account attached by the security interest did not represent a liquidated sum until such time as an agreement was reached with the Navy as to the sum of the equitable adjustment due to P&S. In other words, the government has not contended that, while the calculation of an exact sum due may not be relevant to the determination as to when an account exists as a matter of state law, such a calculation is necessary under federal law if Colonial's security interest is to take priority over the tax liens. See United States v. Rodgers, 461 U.S. at 683, 103 S.Ct. at 2137 (although definition of property interest is matter of state law, the consequences that attach to those interests is determined by federal law). Such an argument, of course, would be an argument that the federal tax lien should take priority over Colonial's security interest because the latter was not sufficiently choate at the time the government's lien attached. See, e.g., United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963); United States v. R.F. Ball Construction Co. [58-1 USTC ¶9327 ], 355 U.S. 587, 78 S.Ct. 442, 2 L.Ed.2d 510 (1958) (per curiam).

We think the government's decision not to argue that the choateness doctrine should be applied in this case was sound. As an initial observation, it is not clear after Crest Finance Co. v. United States [62-1 USTC ¶9105 ], 368 U.S. 347, 82 S.Ct. 384, 7 L.Ed.2d 342 (1961) (per curiam), rev'g [61-1 USTC ¶9460 ] 291 F.2d 1 (7th Cir.1961), that the security interest at issue was not sufficiently choate under federal law so as to be superior to the subsequent tax liens. We need not pursue this rather ephemeral inquiry, however, in light of Congress's enactment of the Federal Tax Lien Act of 1966. Although some courts, particularly the Seventh Circuit, have applied the choateness test in addition to the tests formulated by the Federal Tax Lien Act, see, e.g., J.D. Court, Inc. v. United States, 712 F.2d 258, 261-64 (7th Cir.1983), cert. denied, 466 U.S. 927, 104 S.Ct. 1708, 80 L.Ed.2d 182 (1984); Sgro v. United States, 609 F.2d 1259, 1261 (7th Cir.1979); see generally Note, The Continuing Use of the Choateness Doctrine in Determining the Priority of Federal Tax Liens, 12 Tex.Tech.L.Rev. 959, 975-978 (1981) (discussing other federal cases), and there exists dicta in one case in this circuit to similar effect, Texas Oil & Gas Corp. v. United States, 466 F.2d at 1053, our case law has clearly established that the choateness doctrine has "been supplanted by the provisions of §6323 with respect to tax lien priority questions as to which that statute provides an unambiguous answer." Aetna Insurance Co., 591 F.2d at 1038. See also Rice Investment Co., 625 F.2d at 571. Accord State Bank of Fraser v. United States , 861 F.2d 954 (6th Cir. 1988); United States v. Bell Credit Union [88-2 USTC ¶9564 ], 860 F.2d 365, 371 (10th Cir.1988). Thus, as the government implicitly recognized, notions of choateness are irrelevant when, as here, the determination of relative priority between a federal tax lien and a security interest created by contract can be determined by looking to the Federal Tax Lien Act.

 

 

[86-1 USTC ¶9337] United States of America , Plaintiff v. Bell Credit Union, Defendant United States of America , Plaintiff v. Golden Plains Credit Union, Defendant

U.S. District Court, Dist. Kan., 84-1024, 3/18/86 , 635 FSupp 501, (635 FSupp 501.)

[Code Secs. 6232 and 6332 ]

Levy and distraint: Competing liens: Penalties, civil: Failure to honor tax levy.--Neither state law nor contractual rights entitled two credit unions to disregard tax levies served upon them by the IRS and use funds in their possession to set off claims against their debtors. Moreover, in the absence of a bona fide dispute regarding the legal effectiveness of the levy, their delay in turning over the funds to the government justified an award of the 50-percent penalty.

OPINION AND ORDER

THEIS, District Judge:

These companion cases present the question of competing claims between the Internal Revenue Service and the respective credit unions to funds on deposit in the credit unions. They are before the Court on the defendants' motions for Summary Judgment, and the United States ' cross motions for Summary Judgment.

There is no dispute as to the material facts. In April of 1983 the credit unions were served with Internal Revenue Service Notices of Levy upon the deposits of Derald and Charlene Thomas (Thomas) and upon Lawrence Black Jr. and/or B & B Trucking (Black). Thomas had funds on deposit in the Bell Credit Union, and loans outstanding though not in default with it. Black had funds on deposit with the Golden Plains Credit Union, and outstanding, delinquent loans with it. This action by the Internal Revenue Service notices of Levy apparently prompted both credit unions to thereafter declare default on the loans and apply the shares of Thomas and Black to the loan balances. Until the credit unions applied the shares to the loans, in the absence of some additional factor coming to the credit unions' attention respecting ability to pay or impairment of security Thomas and Black would have been able to withdraw the shares from the credit unions without objection. After the shares were applied to the loans, no funds were left to satisfy the levy. The United States brought these actions for failure to honor the levies and to recover from the defendants the amount of the levied funds in their possession at the time the levies were served. In addition, the United States seeks imposition of a 50 percent penalty against the credit unions pursuant to 26 U.S.C. §6332(c)(2) .

The defendant credit unions oppose the action, and have filed a joint motion for summary judgment against the United States for a determination that they have no liability to the United States . They also seek costs against the United States . The United States opposes the joint motions, and has filed a cross motion for summary judgment against the credit unions as to both the levied amounts and the 50 percent penalty.

The Court is familiar with the standards governing the consideration of motions for summary judgment. Summary judgment is a drastic remedy to be applied with caution in order to preserve a litigant's right to trial. Machinery Center, Inc. v. Anchor Nat'l Life Ins. Co., 434 F.2d 1, 6 (10th Cir. 1970). To rule favorably on a motion for summary judgment, the Court must first determine that the matters on file regarding the motion "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The Court must look at the record in the light most favorable to the non-moving party. Lindley v. Amoco Production Co., 636 F.2d 671, 672 (10th Cir. 1981). Before summary judgment may be granted, the moving party must establish its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir. 1985). Pleadings and documentary evidence must be liberally construed in favor of the party opposing the motion. Harmon v. Diversified Medical Investments Corp., 488 F.2d 111, 113 (10th Cir. 1973), cert. denied, 425 U.S. 951 (1976). If the facts support an inference that would permit the non-movant to prevail, summary judgment is inappropriate. Thomas v. United States Dep't of Energy, 719 F.2d 342, 344 (10th Cir. 1983). A party resisting a motion for summary judgment, however, must set forth specific facts showing that there is a genuine issue for trial. Dart Industries, Inc. v. Plunkett Company of Oklahoma, Inc., 704 F.2d 496, 498 (10th Cir. 1983).

Defendants support their motion for summary judgment on the basis that they were the holder of a security interest superior to that of the IRS. It is well settled that a bank that exercises its right of setoff after receiving notice of a tax lien will lose to the IRS as to the levied/setoff funds. See B. Clark, The Law of Bank Deposits, Collections and Credit Cards, ¶11.11 (1981). The defendants would argue that they did not exercise a right of setoff but foreclosed a valid and prior lien against the shares of levied taxpayers. Unlike banks, credit unions do not receive "deposits" creating a debtor/creditor relationship. Instead credit union "shares" are part of the capital stock of the credit union, and such shares become liens against any outstanding loans. Defendants argue that this lien is both statutory and contractual in nature. For this they rely on K.S.A. §17-2212 which reads in part "[a] credit union shall have a lien and right of setoff on the shares of any member . . . for and to the extent of any obligation of the member." They also rely on certain loan documents creating a contractual lien. As such, defendants would assert a prior interest to the tax levy, citing The Trust Company of Columbus v. United States [84-2 USTC ¶9614 ], 735 F.2d 447 (11th Cir. 1984) to give them a superior right to the funds in question.

The Court is not persuaded by defendants statutory arguments. Although a cursory reading of the statutes would seem to support their argument distinguishing credit unions rights and remedies from those of banks, the Court finds the differences here in issue to be more apparent than real. Moreover, the United States has directed the Court's attention to Stann v. Mid American Credit Union, 39 BR 246 (D. Kan. 1984), where Judge Crow of this District, addressing the same statutory provision, held "[a]lthough the statute refers to 'lien,' the right conferred by the statute is an equitable right of setoff." Id. at 248. This ruling, which this judge considers salutory and precedential, vitiates defendants' carefully drawn distinction between credit unions and banks regarding setoff.

Parenthetically, the Court would note that it is troubled by the failure of defendant's attorney to draw the Court's attention to this case, or to otherwise address it. The duty of an attorney to direct the Court's attention to contrary holdings is well known. While the Court usually is willing to assume that an adversary's failure to address such authority is mere oversight, it is more difficult to make such an assumption in a case such as this one where the ruling goes directly to the issue at hand, was handed down by another judge of the same District Court that the instant case is before, was only a year and a half before the briefs in the instant case were filed, and most importantly was handed down in a case in which the defendant's attorney was the same man as defendant's attorney here.

The Court likewise is not persuaded by defendants' contractual arguments. The Court has been provided with documentary evidence as to the existence of a contractual lien on the taxpayers' accounts as defendants allege. The Court is willing to assume for these purposes that such a contractual lien existed. But the inquiry does not stop there. The question of property or property rights to which a federal tax levy can attach is a question of state law, but the question of when a state created lien is substantially perfected that it can defeat a federal tax lien is a question of federal law. United States v. Hunt [75-1 USTC ¶932], 513 F.2d 129, 133 (10th Cir. 1975). So assuming a valid lien on the credit union accounts the question becomes one of its priority vis-a-vis the tax levy.

It is well settled that in order for a state created lien to be superior to a federal tax levy, it must be both choate and first in time. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88; 83 S.Ct. 1651, 1655 (1963). To be choate, the lien must be perfected so that there is nothing more to be done, that the identity of the lienor, the property subject to the lien, and the amount of the lien are established. United States v. New Britain , 347 U.S. 81, 84-86, 74 S.Ct. 367, 369-71 (1954); Priest v. Progressive Savings & Loan Assoc., 712 F.2d 1326, 1327-28 (9th Cir. 1983); New York City Transit Authority v. Paradise Guard Dogs, Inc., 565 F.Supp. 388, 390 (E.D.N.Y. 1983). These requirements of first in time and choateness given federal tax liens an extraordinary priority, justifiable only by the importance of securing adequate revenues to discharge national obligations, and limited therefore to tax liens. United States v. Kimbell Foods, Inc., 440 U.S. 715, 734, 99 S.Ct. 1444, 1461-62 (1979).

The liens relied on by the defendant credit unions are simply not choate liens, if for no other reason than that the property subject to the lien is clearly not established and isolated. Defendants have admitted that prior to the filing of the tax levy and the subsequent setoff, the depositors were free to withdraw any or all of the amounts in their accounts. Therefore, the defendants' interest is inferior to that of the IRS' interest.

In passing, the Court would also note that even if the defendant credit unions had a prior lien in the accounts in question, a prior lien is not a defense to a federal tax levy. Instead, the proper procedure in contesting the levy is to surrender the funds and then litigate the priority of the liens. This the credit unions failed to do, despite the fact that even The Trust Company of Columbus which defendants themselves cited for their "valid and senior security interest" argument so holds. While noting that the court there decided that a holder of a senior lien would prevail over the government's levy, they failed to note that The Trust Company followed the proper procedure of surrendering the funds and then litigating the priority. 735 F.2d at 449. Although defendants likewise argued senior lien here, they did not choose to first surrender the funds.

The United States seeks also a penalty equal to 50 percent of the amount of liability recoverable from the credit unions, pursuant to 26 U.S.C. §6332(c)(2) . That statute authorizes such a penalty if "any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause" (emphasis added). The Court views the imposition of the penalty as a serious punishment, one to be imposed only after careful consideration. The penalty should in no way be imposed as the price of making a merely unsuccessful argument, nor should it be imposed in any way which would discourage the free access to courts to litigate matters of dispute. But the importance of the collection of tax revenues dictates that the penalty is appropriate when frivolous arguments are made merely to delay the collection of monies legally due the IRS. The court would be reluctant to impose the penalty if any legal dispute existed in any facet of the controversy, but is compelled by law to order its imposition if no reasonable argument was made.

In this instance, the Court must consider the arguments that defendants made. They argued that state law gave them a prior lien to their deposits as opposed to a right of setoff, but they failed to disclose that their attorney had already made this argument once to this District, and had been unsuccessful. They argued that they also had a prior contractual lien superior to the tax levy, but they failed to demonstrate how such a contractual lien was choate and first in time, giving it priority over the tax levy. Indeed, they failed to discuss the pivotal doctrine of choateness at all. And, in fact, their lien was not choate, and therfore was not superior to the tax levy. Finally, while arguing that their liens were prior, they failed to either note or follow the proper procedure in contesting a tax levy. Case law is clear that claim of a prior lien may not be interposed as a defense to a tax levy. United States v. Citizens & Southern Nat. Bank, 538 F.2d 1101, 1106 (5th Cir. 1976). United States v. Trans-World Bank [74-2 USTC ¶9632 ], 382 F. Supp. 1100, 1105 (C.D. Cal. 1974). Instead, as The Trust Co. of Columbus explains, the proper procedure is to surrender the funds, and then litigate the priority of the lien. 735 F.2d at 449. See also 26 U.S.C. §7426 .

Defendants oppose the imposition of the 50 percent penalty on the grounds that there was a bona fide dispute regarding the legal effectiveness of the levy. The Court does not see any reasonable, bona fide dispute. The Court finds the law of this matter to be clear, and notes that defendants constructed their arguments completely apart from the controlling doctrines. Therefore the Court finds no other alternative but to impose the statutorily prescribed penalty.

IT IS THEREFORE ORDERED that defendants Bell Credit Union's and Golden Plains Credit Union's joint motion for summary judgment against the United States is hereby denied.

IT IS FURTHER ORDERED that plaintiff United States of America 's cross-motion for summary judgment is hereby granted, and the defendant credit unions are ordered to pay to the United States the amount of the original tax levies, together with interest.

IT IS FURTHER ORDERED that plaintiff's motion for summary judgment on defendants' liability for the 50 percent penalty pursuant to 26 U.S.C. §6332(c)(2) is hereby granted.

IT IS FURTHER ORDERED that the United States prepare a journal entry of judgment setting out the precise amounts due pursuant to this order, circulate it for approval among the attorneys for the parties, and present it to this Court by March 31, 1986.

 

 

[70-2 USTC ¶9557]Jackson Manufacturing Company of Mississippi, Inc., Plaintiff-Appellee v. United States of America, et al., Defendants-Appellees, D. V. Patridge, Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 28264, 434 F2d 1027, 6/10/70, Rev'g and in part rem'g a District Court decision, 69-1 USTC, ¶9383

[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]

Tax lien: Interpleader fund: Priorities: Real party in interest.--Under Rule 17(a) of the Federal Rules of Civil Procedure one of the parties in an interpleader action in which the government held a lien for unpaid taxes as a "real part in interest" clearly had standing to bring a claim for the total amount due in his own name and for his own benefit and that of two other persons not parties to the litigation for whose benefit he had acted.

John C. Satterfield, Box 466 , Yazoo City , Miss. , for plaintiff-appellee. Armis E. Hawkins, Houston, Miss., L. G. Fant, Jr., Holly Springs, Miss., H. M. Ray, United States Attorney, Oxford, Miss., Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Leonard J. Henzke, Jr., Department of Justice, Washington, D. C. 20530, for defendants-appellees.

Before BELL , AINSWORTH and GODBOLD, Circuit Judges.

AINSWORTH, Circuit Judge:

Jackson Manufacturing Company of Mississippi, Inc., a judgment debtor of Vardaman Manufacturing Company, Inc., filed this interpleader action pursuant to 28 U. S. C. §1335, and paid the sum of $63,745.91 into the registry of the District Court, thus initiating what eventually became a many-sided controversy among various litigants. D. V. Patridge, appellant, one of the defendants in the interpleader suit, filed answer claiming the sum of $11,000, plus interest. After lengthy proceedings, the District Court distributed the impleaded funds to Vardaman's creditors. Awards were made to five creditors, whose rights admittedly were superior to those of Patridge, and the balance of the fund was distributed as follows:

6. D. V. Patridge ...............         $4,850.00

7. 

United States

 [tax lien] .....          4,197.41

8. J. H. Tabb

[judgment lien holder] ..........          3,787.48

9. William P. Hamilton

[judgment lien holder] ..........            285.08

 

The only issue before us relates to the sufficiency of the award to Patridge. All other issues have been resolved through stipulation, the pretrial order and the eventual distribution of the interpleaded fund. ¹

Patridge's claim of $11,000, plus interest, arose out of a loan to Vardaman by Patridge and two others--Brooks and King--in consideration of the execution by Vardaman of a deed of trust and an "Assignment as Collateral Security." For convenience sake, however, the attorney who handled the transaction used Patridge's name only in preparing the deed and assignment. When the interpleader suit was later filed, of the three, only Patridge filed answer.

The Court found that neither King nor Brooks was a party to the suit and consequently their rights could not be adjudicated. After the Court orally announced its decision, counsel for King and Brooks (who also represents Patridge) moved to reopen the case in order to permit them to intervene and adopt the pleadings, proceedings and evidence introduced in behalf of Patridge. Counsel indicated his reliance on Rule 17(a) as obviating the necessity of bringing claims in any name other than that of Patridge, who as a "real party in interest" had a right to represent himself and others for whose benefit he acted. The Court denied the motion to intervene as untimely made.

Patridge, acting in his own behalf and that of King and Brooks, has appealed from the final judgment of the District Court. He seeks judgment against the United States , J. H. Tabb and William P. Hamilton, for the respective amounts awarded these three appellees whose claims have been adjudged inferior to the Patridge claim. The United States concedes the validity of the total Patridge claim and urges our recognition thereof. Tabb and Hamilton, however, oppose on the theory that Patridge, having been awarded the amount which he advanced, has not been aggrieved by the interpleader judgment and consequently has no standing to appeal.

On the basis of the evidence before us we find that the loan made by Patridge, Brooks and King, and secured by the assignment and deed of trust, constitutes a valid claim. The District Court found as a fact from the uncontradicted evidence that Patridge, Brooks and King had each advanced $4,000 to Vardaman, but that as laymen they entrusted to their counsel the business of working out a proper arrangement for them.

Under the liberal principles of Rule 15(b) of the Federal Rules of Civil Procedure providing for amendments necessary to cause the pleadings to "conform to the evidence," the District Court would have been empowered to join Brooks and King. Nevertheless, resort need not be made to Rule 15 because of the language of Rule 17(a) of the Federal Rules of Civil Procedure which provides in pertinent part:

"Real Party in Interest. Every action shall be prosecuted in the name of the real party in interest . . . a party with whom or in whose name a contract has been made for the benefit of another . . . may sue in his own name without joining with him the party for whose benefit the action is brought. . . . No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest."

Under Rule 17(a) Patridge, as the "real party in interest," clearly had standing to bring the claim for the total amount in his own name for his own benefit and that of Brooks and King.

No conflict with state law is encountered. Brooks and King, as third-party beneficiaries to Mississippi contracts, would be entitled to enforce such contracts under the substative law of that state. Burns v. Washington Savings, 251 Miss. 789, 171 So. 2d 322 (1965); Ackerman v. Cook, 34 Miss. 262 (1857).

We have considered the contentions of appellees Hamilton and Tabb but find them to be without merit. Both law and equity uphold the position taken by Patridge in his representative capacity and by the Government in support thereof. Accordingly, we reverse the District Court insofar as the claim of Patridge is concerned, and remand for an appropriate order granting an award to Patridge in the full amount claimed, that is, the sum of $11,000 plus whatever interest is due on that amount.

REVERSED and REMANDED.

¹ Pursuant to Rule 18 of the Rules of this Court, we have concluded on the merits that this case is of such character as not to justify oral argument and have directed the Clerk to place the case on the Summary Calendar and to notify the parties in writing. See Murphy v. Houma Well Service, 5 Cir., 1969, 409 F. 2d 804, Part I; and Huth v. Southern Pacific Company, 5 Cir., 1969, 417 F. 2d 526, Part I.

 

 

[69-1 USTC ¶9184]The Youngstown Sheet and Tube Company, Appellant v. Lucey Products Company et al., Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 25140, 10/22/68, Rev'g and rem'g unreported District Court decision

[Code Sec. 6323]

Lien for taxes: Priority of creditors: Sufficiency of claims: Filing of notice: Proof.--The trial court's failure to require the wage claimants and the Government to present proof of their liens and their proper recordation was not grounds for reversal where the appellant (garnisher-creditor) failed to deny the asserted lien claims or the allegation in the Government's complaint in intervention that its notice of lien had been timely filed. Remanded for the submission of such proof. For the same reasons, mechanics' and materialmen's lien claimants will be entitled to prove their liens on remand.

[Code Sec. 6323]

Lien for taxes: Priority of creditors: Texas law applicable: Absence of federal controversy: Garnisher v. mechanic's lienor.--Under Texas law, a garnisher who had reduced his claim to judgment was not entitled to priority over the holder of a mechanic's lien. Where the materials furnished the debtor were delivered before the date that the writ of garnishment was issued against the garnishee, and the mechanic's lienor satisfied state law filing requirements, his lien was superior to the garnishment writ. Since federal priority of liens was not involved, priority had to be determined only under Texas law.

Before RIVES, BELL and GOLDBERG, Circuit Judges.

GOLDBERG, Circuit Judge:

The present controversy between rival creditors and lien claimants was brought into the federal courts by way of interpleader, and there battle was joined over the proper distribution and allocation of a sum of money deposited with the court. All of the original claimants, however, are not now involved in this appeal. Some departed their battle stations prior to the district court's rendition of judgment, and we therefore deal only with those stalwarts who still remain. These include: 1) wage claimants; 2) mechanics and materialmen lienholders; 3) the United States ; and 4) Youngstown Sheet and Tube Company, garnisher-creditor.

[Facts]

We begin with the chronology and logistics of this lien warfare. On July 3, 1965, Youngstown Sheet and Tube Company (Youngstown), appellant in the case at bar, instituted two actions in the state court in Dallas County, Texas, one for debt against Gould Drilling Company (Gould) and one for writ of garnishment against Texaco, Inc. (Texaco). Texaco was then indebted to Gould in the sum of $20,291.44 for drilling services performed by Gould on Texaco's P. L. Fuller lease in Scurry County , Texas , and Youngstown , as Gould's creditor, wished to garnish the Texaco debt. The writ of garnishment on Texaco was duly served on July 7, 1965 , and sometime later, on November 4, 1966 , judgment was entered in the state court establishing Youngstown 's debt against Gould. This debt was determined to be in the sum of $15,444.98 plus attorneys' fees and court costs. On this basis Youngstown claimed to be a holder of a first and prior lien on the sum owed by Texaco to Gould.

While these events were moving toward fruition in the state courts, Texaco filed on July 23, 1965 a complaint and bill of interpleader in the United States District Court for the Western District of Texas. The complaint and bill of interpleader were filed pursuant to 28 U. S. C. A. §1335 and §2361 and named as defendants numerous parties not including the United States who were asserting the right to payment from the funds owing by Texaco to Gould. Texaco was then dismissed from the action on the motion of all parties, but left on deposit with the district court the sum of $18,328.57 after allowable disbursements.

At this point in the proceedings claimants already present were joined by the United States . The government had filed its complaint in intervention asserting a claim of $6,389.31 against the taxpayer-debtor for unpaid federal employment taxes. However, since the fund left on deposit with the district court was now no longer sufficient to satisfy all these claimants, the district court's determination of lien priorities gave some of the combatants real and others only pyrrhic victories. That determination thereby precipitated this appeal.

[District Court's Judgment]

Turning to the district court's judgment, we note that it awarded first priority to the wage claimants for a total of $2,260.75; ¹ second priority to those holding mechanics' and materialmen's liens in the sum of $12,579.90; ² and the remainder of the fund totaling $3,077.92 to the United States. ³ The Court then went on to allow the claim of Youngstown in the sum of $13,925.11, but noted that there were no funds available in satisfaction of such claim. Two other claims totaling $12,432.12 were likewise allowed with no funds available.