Fact-Finding Page5

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Richard A. Kaye, Kaye & Fialkow, 18 Tremont, Boston , Mass. , for defendants-appellants. Rob ert I. Waxman, Richard M. Rob erts, Acting Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, W. Arthur Garrity, Jr., United States Attorney, William B. Duffy, Jr., Assistant United States Attorney, Boston, Mass., for plaintiff-appellee.

Before ALDRICH, Chief Judge, and MCENTEE and COFFIN, Circuit Judges.

Opinion of the Court

MCENTEE, Circuit Judge:

This is an appeal from the granting of the government's motion for summary judgment in an action to foreclose a federal tax lien. The basic issue is whether the district court was right in concluding as a matter of law that a fund in the possession of the defendant, Parlane Sportswear Co., Inc., (Parlane) was the property of the defendant taxpayer, Del Ray Sportswear, Inc., (Del Ray) to which the tax lien would attach.

The essential facts are these. Parlane and a company known as Sherry Hill Sportswear, Inc., (Sherry Hill) not a party to this action, are manufacturers of ladies sportswear. Del Ray does contract work for both companies. Del Ray had tax troubles and on October 2, 1962 the Internal Revenue Service made an assessment against it for an unpaid withholding tax deficiency. On the same day the government also gave notice and made a demand for payment of the assessment. Payment not having been received, a notice of federal tax lien was filed with the Town Clerk of Whitman, Massachusetts, on November 2, 1962, ¹ and a Notice of Levy was served on Parlane or November 8. ² On said date Del Ray had work in process for Parlane and Sherry Hill. The next day it completed the work it was doing for Sherry Hill but was unable to deliver it because of insufficient funds to pay its employees for the work done. Thereupon an arrangement was made between Del Ray and Parlane whereby the latter advanced the necessary payroll funds to Del Ray ³ with the understanding that the money to be received from Sherry Hill would be turned over to Parlane. At the same time Parlane took an assignment of all funds due Del Ray from Sherry Hill for this work. Del Ray's employees having been paid, the goods were delivered to Sherry Hill and later that day (November 9) Sherry Hill's checks for $1,747.27, payable to Del Ray, were delivered to Parlane's attorney who deposited them in his account and made remittance to his client. The record does not show that Parlane had any dealings with Sherry Hill in regard to this matter prior to November 9 when Sherry Hill delivered the checks. Subsequently, the government brought suit against Del Ray, Parlane and its attorney and obtained a default judgment against Del Ray for $12,180.61. It then moved for summary judgment against Parlane and its attorney to foreclose its tax lien against the fund of $1,747.27 held by Parlane.

In granting summary judgment the district court ruled that the government acquired a valid lien against the personal property of Del Ray on November 2, 1962; that the fund in the possession of Parlane is the property or right to property of Del Ray and that the lien of the United States having been duly recorded takes priority over the rights of Parlane. Accordingly, the court ordered that the tax lien be foreclosed against the fund of $1,747.27 and that Parlane turn over this fund to the government in partial satisfaction of its judgment against Del Ray. The defendants Parlane and its attorney appeal from this judgment.

Under Rule 56(c) of the Federal Rules of Civil Procedure summary judgment shall be rendered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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."

In considering the correctness of a summary judgment as we do here, this court must view the case in a light most favorable to the party against whom the motion has been granted. Poller v. Columbia Broadcasting, 368 U. S. 464 (1962); Manganaro v. Delaval Separator Co., 309 F. 2d 389, 391 (1st Cir. 1962). The government based its motion upon the complaint and answer, a deposition of the president of Parlane, affidavits of the District Director of Internal Revenue and an Assistant United States Attorney and a certified copy of the recorded notice of federal tax lien. The defendants filed a counter affidavit made by the president of Parlane, This counter affidavit set forth, amongst other things, that Sherry Hill, Parlane and Del Ray are all members of the new New England Sportswear Manufacturers' Association and as such are parties to an agreement between the association and the union, Section 33 of which reads as follows:

"MANUFACTURER RESPONSIBLE FOR WAGE PAYMENTS: Each Employer member of the Association who employs contractors shall be responsible to the members of the Union for the payment or underpayment of their total wages for work done by them on garments made for the Employer, providing such liability shall be limited to wages or underpayment for one full week and provided further that notice of default is given to the Association or the Employer within ten (10) days after such default."

Defendants maintain that under the above section of the agreement, ⁴ Sherry Hill had an obligation to meet Del Ray's payroll because Del Ray was doing work for Sherry Hill and that this coupled with the events that followed, raised a genuine issue of material fact as to whether the money owed by Sherry Hill was the property or right to property of Del Ray. Thus, they argue, the district court erred in granting summary judgment. In support of its position the defendants advance two alternative contentions under either of which they claim Parlane is entitled to the fund in question. First, they say that since Sherry Hill was obligated to pay Del Ray's employees under Section 33 of the union agreement, when Parlane paid these employees on November 9, it in effect made a loan to Sherry Hill and when Sherry Hill delivered its checks to Parlane's attorney later that day it was actually making payment of this loan. Their second contention rests on the theory of equitable assignment and constructive trust. They argue that since Parlane assumed Sherry Hill's obligation in paying Del Ray's employees, the payment of Sherry Hill to which the government lays claim was due not to Del Ray but to its employees; that Del Ray's only interest in it was as trustee for its employees; that when Parlane paid the employees an equitable assignment was effected in favor of Parlane and the fulfillment of this trust could only occur by delivering the fund to Parlane. Thus, they conclude the government is not entitled to the fund since it acquired no greater interest in it than Del Ray had.

It is difficult to see how defendants can prevail on either of these theories. To begin with, there is nothing in the record to support their underlying contention that an obligation had arisen under Section 33 of the union agreement whereby Sherry Hill was required to pay Del Ray's employees for the work performed. There is no showing that Sherry Hill knew the wages on its work were unpaid or that any notice of default was given to the association or to Sherry Hill as provided in Section 33. It seems to us that such a showing must be made before any such obligation arises under the union contract. Certainly Sherry Hill never requested any such loan from Parlane nor under the facts of this case can any be implied. Furthermore there is no indication that Sherry Hill needed money. On the contrary, Sherry Hill paid what it owned upon receipt of the goods from Del Ray. It is clear that any payment by Sherry Hill here was for goods delivered to it by Del Ray and not for unpaid wages. It is equally clear from the record that the reason for Parlane's advance of payroll funds to Del Ray or to its employees was that Del Ray was doing work for Parlane and not because of Del Ray's work for Sherry Hill. ⁵ On these facts there is no basis for finding that either a loan or a trust in favor of Parlane came into existence as claimed here.

The defendants cite Commissioner v. Court Holding Co. [45-1 USTC ¶9215], 324 U. S. 331 (1954), for the proposition that in tax matters the substance of a transaction will prevail over the form used by the parties. From our examination of the record the substance of the transaction in question here is that Parlane advanced certain funds so that Del Ray could meet its payroll upon the understanding that the money Del Ray received from Sherry Hill would be turned over to Parlane. Pursuant thereto it then took a simple assignment ⁶ of Sherry Hill's debt to Del Ray. This was done after the government's lien had been recorded and notice of levy had been given to Parlane.

We find that as a matter of law the government is entitled to the fund in question and that the district court did not err in granting summary judgment.

Affirmed.

¹ Del Ray, a Massachusetts corporation, had a place of business in Whitman.

² This notice apprised Parlane of Del Ray's tax liability and notified it that all property and rights to property in its possession belonging to Del Ray were being levied upon and seized for satisfaction of this tax liability.

³ In his counter affidavit, the president of Parlane stated that his company advanced these payroll funds by delivering individual checks to the Del Ray employees.

⁴ It is undisputed that Parlane and Sherry Hill are employers and Del Ray is a contractor under this section of the agreement.

⁵ As stated by its president in his deposition, Parlane advanced money to Del Ray for payroll "when Del Ray notified us . . . that they were unable to make their payroll and the work was going to be stopped unless payroll would be paid . . .." When asked what Parlane's interest was in advancing money to Del Ray to meet its payroll, he replied "They had my work in process. I had given them . . . substantial amounts of garments . . .. And once work has begun in a contract shop and it's in process it's practically impossible to take it from that shop and give it to some other shop to finish . . .."

⁶ The president in his deposition and also in his counter affidavit referred to this as an assignment.

 

 

[76-2 USTC ¶9674] United States of America , Plaintiff v. Berchal Wendell Denny, et al., Defendants

U. S. District Court, So. Dist. Ill. , No. Div., No. P-CIV-75-58, 9/7/76

[Code Secs. 6323 and 7403]

Tax lien: Enforcement: Foreclosure: Notice requirement.--The District Court held that the government could not foreclose on a tax lien against real estate unless all persons (not just the taxpayer) having liens or claiming interest are made parties to the proceedings. Therefore, the Government's motion for summary judgment was allowed as to the taxpayer's liability, since it was clearly established that taxpayer was responsible for collecting and paying over withholding and F. I. C. A. taxes.

Rob ert J. Kauffman, Assistant United States Attorney, Peoria, Ill., John Tjaden, Department of Justice, Washington, D. C. 20530, for plaintiff. Elmo E. Koos, 1122 Jefferson Bldg., Peoria , Ill. , for defendants.

Decision and Order

MORGAN, District Judge:

The United States of America seeks to reduce an alleged tax assessment to judgment and foreclose a tax lien against certain described real estate, pursuant to Sections 7402 and 7403 of the Internal Revenue Code of 1954, as amended, 26 U. S. C. §§ 7402, 7403. The complaint alleges that the action is authorized by the Secretary of the Treasury and is directed by the Attorney General, as is required by Section 7401. Named as defendants are Berchal W. Denny, as the taxpayer, Milburn and Inez Riddle, as the alleged record owners of the real estate, Joe Wayne Denny, Gerald Lee Denny, and Mackinaw Savings and Loan, as possible claimants to some interest in the real estate. All individual defendants appeared through the same counsel and moved to dismiss. The motion was denied on September 9, 1975 , and those defendants thereafter answered on September 19, 1975 . Both the Government and the individual defendants have now moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.

The Government claims right to summary judgment on the issues of liability, amounts due, and foreclosure of the lien; and the defendants claim right to judgment on the ground that the action is barred by the applicable statute of limitations. The Government argues that the taxpayer, Berchal Denny, has admitted facts in interrogatories propounded to him that would support a judgment of liability, and that the amount of the assessment is supported by affidavit. Defendants argue that the action is barred for the reason that the assessments were made more than six years ago. The Government responds that the defendants waived this defense, and even if there was not a waiver, the running of the period of limitations was tolled by the offers in compromise.

Defendants have raised the defense of limitations for the first time in their motion for summary judgment. A plea of limitations is an affirmative defense required to be raised in the responsive pleading. Rule 8(c), F. R. Civ. P. Failure to do so amounts to waiver of the defense. Roe v. Sears, Roebuck & Co., 132 F. 2d 829 (7th Cir. 1943); Baker v. Chicago , Fire and Burglary Detection, Inc., 489 F. 2d 953 (7th Cir. 1973). The default might possibly have been cured by amendment under Rule 15, F. R. Civ. P., but there has been no request for leave to amend.

Even if the court could now consider the statute of limitations as a defense, the running of the period was clearly tolled as to Berchal Denny by the offers in compromise made and signed by him. Section 6502 of the Internal Revenue Code provides that a proceeding to collect an assessment must be brought within six years, but the period may be extended by agreement. Attached to the Government's brief in opposition to defendants' motion are three offers in compromise. One of the offers is dated as accepting a waiver of the statute of limitations on November 14, 1966 . Berchal Denny agreed to suspend the running of the statute for the pendency of the offer and one year thereafter. The offer was withdrawn on April 28, 1971 . The statute was therefore tolled from November 14, 1966 to April 28, 1972 . The assessments were made for the last quarter of 1964 and the first quarter of 1965 on May 21, 1965 , and for the second quarter of 1965 on July 14, 1965 . This action was brought on July 1, 1975 , and is therefore within the six-year period.

Upon consideration of the pleadings, answers to interrogatories, and affidavits on file, the court finds that there is no genuine issue of material fact as to the liability and amount owed by Berchal Denny to the Government. Denny has admitted sufficient facts to make him responsible for amounts of withholding taxes and taxes imposed against him under the Federal Insurance Contributions Act. Denny admitted that he operated a business as a sole proprietor, kept and maintained all records, prepared the payroll and tax returns, and was aware that taxes were not being paid over to the Government. The Government has submitted the affidavit of Ira S. Loeb, District Director of Internal Revenue, to support the submitted amount. Berchal Denny has not submitted any opposing affidavit and only states in his answers to interrogatories that he does not know the unpaid balance. Loeb's affidavit purports to list all payments made by Denny and a resulting unpaid balance of taxes, interest, and penalties as of April 30, 1976 , of $84,727.63, with a daily accrual of interest thereafter of $10.98, for a total of $86,034.25 as of August 27, 1976 .

The Government asks that the court enter judgment of foreclosure and order a sale of the property described in the complaint and a distribution of Berchal Denny's one-half interest, to satisfy the lines of the United States and the liability of Denny. Notices of the tax liens on the assessments of the last quarter of 1964 and the first quarter of 1965 were filed on June 22, 1965 , and refiled July 9, 1970 in Tazewell County , where the property is located. The notice of the tax lien for the second quarter of 1965 was filed July 21, 1965 , and refiled October 20, 1970 . Milburn and Inez Riddle obtained an interest in the subject property by a deed dated July 3, 1965 , and recorded July 6, 1965 in Tazewell County . The Riddles have paid the real estate taxes and mortgage payments since that time. They took title subject to the tax liens filed on June 22, 1965 , and free from the lien filed July 21, 1965 . 26 U. S. C. §6323(a). Though the Riddles claimed an interest in their answers to interrogatories, the final pretrial memorandum submitted on behalf of the individual defendants states that the Riddles have conveyed the property to their grandchildren, Joe Wayne Denny and Gerald Lee Denny.

What interest Mackinaw Savings and Loan may claim has not been shown. While served with summons and copy of the complaint, they have not answered. They may, of course, hold a sound first mortgage lien.

Defendants oppose the prayers for judgment of foreclosure and order for sale of the subject property on the ground that Berchal Denny's wife, Doris, had an individual one-half interest in the property, which is not subject to sale. Section 7403(a) of the Internal Revenue Code authorizes suits "to enforce the lien of the United States . . . or to subject any property of whatever nature, of the delinquent, or in which he has any right, title or interest, to the payment of such tax or liability." This provision has been interpreted to allow sale of not only the interest of the taxpayer but also the property itself in which others may have an interest. See United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699 (7th Cir. 1964), where the sale of joint tenancy property was upheld, rather than merely the taxpayer's interest.

The court interprets the Government prayer for an order for sale as directed to the entire property and not just the taxpayer's or his grantee's interest. Section 7403 requires, however, that all persons having liens or claiming an interest in the property be made parties. 26 U. S. C. §7403(b). The issue of whether Doris Denny does have an interest in the property now raised by defendants in their memorandum in opposition to the Government's motion, may not be ignored. No sworn material or documents having been presented on this issue, or on the true interests, if any, of Joe Wayne Denny and Gerald Lee Denny and Mackinaw Savings and Loan, summary judgment to foreclose the tax liens and order a sale of the property simply cannot be granted. If the government does seek to sell the property itself, which would seem the only practical course, Doris Denny must be made a party. Only then can the court make findings as to the true present interests in the property and order distribution of the proceeds of a sale pursuant to Section 7403(c) of the Internal Revenue Code.

Accordingly, IT IS ORDERED that defendants' motion for summary judgment is DENIED, the Government's motion for summary judgment is ALLOWED as to the defendant Berchal Denny's liability and the amount thereof, and judgment is entered for the Government and against the defendant Berchall Denny in the amount of $86,034.63.

IT IS FURTHER ORDERED that genuine issues of material fact exist as to the interests in the subject property, and the Government's motion for summary judgment to foreclose the tax lien and to order a sale of the property is DENIED.

 

 

[64-1 USTC ¶9365] United States of America , Plaintiff v. Lyle E. Stewart, et al., Defendants

U. S. District Court, No. Dist. Ill. , West. Div., Civil No. 62 C 53, 12/12/63

Tax liens: Priority: Judgment creditors: Sellers.--Federal tax liens filed on September 2, 1955 against real estate of a delinquent taxpayer were subordinate to the claims of the sellers of the real estate in an agreement for deed originally recorded April 13, 1953, but were superior to a judgment lien arising July 18, 1956. Federal tax liens filed August 30, 1956 were subordinate to the judgment lien arising July 18, 1956, but were superior to a judgment lien arising November 24, 1958.

J. Crawford, Assistant U. S. Attorney, U. S. Court House, Chicago , Ill. , for plaintiff. R. Canfield, Rockford, Ill., for L. & M. Stewart; J. C. Saladino, South Beloit, Ill., for H. & D. Raehl; Reno, Zahn, Folgate & Skolrood, Rockford, Ill., for P. Latham; P. Appel, Assistant Attorney General, Chicago, Ill., for Dir. of Labor, State of Ill.; R. Yalden, Rockford, Ill., for Acme Redi-Mix Concrete Co.; Pedderson, Menzimer & Conde, Rockford, Ill., for City Lumber & Supply, defendants.

Findings of Fact and Conclusions of Law

DECKER, District Judge:

This cause having been tried before this Court on October 29, 1963, on the issues raised by the Complaint of the United States of America and the answers of defendants Harley and Della Raehl, City Lumber and Supply Company and Acme Ready Mix Concrete Company, all of which parties were represented at trial by counsel; the other defendants filing answers in this action and having claimed liens against the real estate described in the Complaint of the United States not having appeared at trial and the Court having considered the evidence and the stipulation entered into by and between the United States and defendant-taxpayer Lyle Stewart and his wife, defendant Maxine Stewart, makes the following findings of fact and conclusions of law:

1. The real estate described in paragraph VIII of the Complaint of the United States was purchased by defendants Lyle E. and Maxine M. Stewart from defendants Harley and Della Raehl on April 13, 1953, pursuant to an agreement for deed duly filed with the Recorder of Winnebago County, Illinois, on April 13, 1953.

2. A second agreement for deed between Harley and Della Raehl, as vendors, and Maxine M. Stewart, as purchaser was entered into on October 26, 1955, in the amount of the balance due under the agreement for deed dated April 13, 1953, and was duly filed with the Recorder of Winnebago County, Illinois, on November 30, 1955.

3. The amount due Harley and Della Raehl under the agreement for deed dated October 26, 1955, is $8,096.16.

4. Maxine M. Stewart has entered into a stipulation in this cause stating that she makes no claim to and has no interest in the real estate described in paragraph VIII of the Complaint.

5. Lyle E. Stewart has been assessed by the United States for unpaid withheld F. I. C. A. and withheld income taxes plus interest for which notice of tax liens were filed with the Recorder of Winnebago County, Illinois, as follows:

                                                                    Notice         Notice of

                                                  Date of              and          Tax Lien

Tax Period                      Amount         Assessment           Demand             Filed

6-30-53 .......               $ 768.71            5-28-54           6-2-54            9-2-55

9-30-53 .......               2,829.28            5-28-54           6-2-54            9-2-55

12-31-53 ......                 874.13            5-28-54           6-2-54            9-2-55

9-30-54
 .......               2,923.48           
12-23-54
          
1-11-55
            
9-2-55

12-31-54
 ......               1,773.01            
4-29-55
          
5-11-55
            
9-2-55

12-31-54
 ......                 328.23            
9-23-55
          
9-26-55
           
8-30-56

3-31-55
 .......               3,716.32            
9-29-55
         
10-13-55
           
8-30-56

                            $13,213.16

                        plus statutory

                              interest

 

6. On July 18, 1956 , Judgment for the plaintiff in the amount of $3,415.41 was entered by the Circuit Court of Winnebago County, Illinois, in a case entitled Acme Ready Mix Concrete Co., plaintiff v. Lyle E. Stewart and Maxine M. Stewart, defendants.

7. On July 18, 1963 , execution was issued on the Judgment described above.

8. On June 18, 1963, a Judgment reviving the Judgment of July 18, 1956, was entered in favor of Acme Ready Mix Concrete Co., plaintiff, and against Lyle E. Stewart and Maxine M. Stewart, defendants, in the amount of $3,599.33 which amount reflects payments made and interest accrued on the original judgment.

9. On October 9, 1963 , execution was issued on the revived judgment entered in favor of Acme Ready Mix Concrete Co.

10. On November 24, 1958, judgment for the plaintiff in the amount of $2,016.20 was entered by the Circuit Court of Winnebago County, Illinois, in a case entitled City Lumber & Supply Co., plaintiff v. Lyle E. Stewart, defendant.

11. On February 20, 1959 , execution was issued on the judgment entered in favor of City Lumber & Supply Co.

12. Defendants Harley and Della Raehl, legal titleholders to the real estate described in the Complaint, have consented, by their attorney in open Court, to the judicial sale of the real estate free and clear of their lien.

Conclusions of Law

1. This Court has jurisdiction of the subject matter of the action brought by the United States and the parties named therein.

2. Each defendant named in the Complaint of the United States other than Lyle E. and Maxine M. Stewart, Harley and Della Raehl, Acme Ready Mix Concrete Co., and City Lumber & Supply Co., are defaulted for failure to appear and offer evidence in support of their respective positions and a judgment order will issue accordingly.

3. Lyle Stewart is indebted to the United States in the amount of $13,213.16 plus interest allowed by law.

4. The purchaser's interest in the real estate described in the Complaint, acquired in the name of Lyle Stewart and Maxine Stewart on April 13, 1953 , through the agreement for deed, is the property of Lyle Stewart only.

5. Following are the valid and subsisting liens against the real estate described in the Complaint in the order of priority:

(a) First, the claim of defendants Harley and Della Raehl in the agreement for deed originally recorded on April 13, 1953 , and due thereon the amount of $8,096.16 as of October 29, 1963 .

(b) Second, the federal tax lien of the United States filed on September 2, 1955 , in the amount of $9,168.61 plus 6% per annum statutory interest from September 2, 1955 .

(c) Third, the judgment lien arising July 18, 1956, in favor of Acme Ready Mix Concrete Co., in the amount of $3,599.33 plus 5% per annum statutory interest from June 18, 1963.

(d) Fourth, the federal tax lien of the United States filed on August 30, 1956 , in the amount of $4,044.55 plus 6% per annum statutory interest from August 30, 1956 .

(e) Fifth, the judgment lien arising November 24, 1958, in favor of City Lumber & Supply Co., in the amount of $2,016.20 plus 5% per annum statutory interest from November 24, 1958.

6. The Court concludes that the real property described in the Complaint should be sold and the proceeds distributed in accordance with the priorities stated above.

 

 

[61-2 USTC ¶9600]Dean Morgensen and D. J. Morgensen, dba Morgensen Lumber Company, Plaintiffs v. Ralph Wright, dba W & L Construction Company, et al., Defendants

District Court, Oklahoma County , Okla. , No. 144,800, 4/12/61

[1954 Code Sec. 6323]

Collection of taxes: Priority of liens: Accounts receivable: Fact finding.--A default judgment was entered against the taxpayer who failed to appear after being summoned. On the basis of evidence presented by the Government and creditors of the taxpayer, the court determined the order of priority which existed on a sum of money paid into the court by the defendant, a debtor of the taxpayer. The court then ordered disbursement of the money in the order of priority, and awarded judgments to the Government and a creditor against the taxpayer.

James E. Work, Withington, Shirk, Nichols & Work, Colcord Bldg., Oklahoma City, Okla., for plaintiffs. Leonard L. Ralston, Federal Bldg., Oklahoma City , Okla. , for intervenor plaintiff. David C. Johnston, Lytle, Johnston & Soule, Commerce Exchange Bldg., Oklahoma City, Okla., for defendant.

Journal Entry of Judgment

MILLS, District Judge:

The above entitled action comes on regularly for trial on the 6th day of April, 1961, plaintiffs appearing by their attorneys, Withington, Shirk, Nichols & Work; intervenor plaintiff, United States of America, appearing by Leonard L. Ralston, Assistant United States Attorney; intervenor, International Paper Company, appearing by its attorneys, Lytle. Johnston & Soule; and defendant, Merl Tufford, Jr., although being three times called in open court, failing to appear in person or by counsel.

All parties present announce ready for trial and having waived a trial by jury, present the matter to the court for determination.

The court finds that the defendant, Merl Tufford, Jr., was personally served with summons on August 12, 1958, and that said defendant has failed to plead, demur or answer to the petition of plaintiff or the petition in intervention of the United States of America and International Paper Company, and is hereby adjudged to be in default and all allegations therein against him taken as confessed.

[Fact Finding]

The parties present introduce their evidence and rest, and the court having heard the evidence and argument of counsel, having examined the pleadings and files and being fully advised in the premises, finds:

1. That as of the date of commencement of this action the defendant, Ralph Wright, dba W & L Construction Company, was indebted to defendant, Merl Tufford, Jr., doing business as Tufford Drywall Company, in the sum of Five Thousand Eight Hundred Ninety-nine and 51/100 Dollars ($5,899.51); that pursuant to an order entered herein on the 24th day of February, 1961, said defendant, Ralph Wright, dba W & L Construction Company, deposited with the Clerk of this Court the sum of Five Thousand Five Hundred Forty-nine and 51/100 Dollars ($5,549.51), representing the amount due defendant, Merl Tufford, Jr., less the sum of Three Hundred Fifty Dollars ($350.00) allowed by this court to defendant, Ralph Wright, dba W & L Construction Company, as and for reasonable and necessary attorneys' fees incurred by said defendant in this cause, and that said defendant was absolved from any and all liability arising out of the transactions involved in this action.

2. That the deposit of Five Thousand Five Hundred Forty-nine and 51/100 Dollars ($5,549.51) made with the Clerk of this Court by defendant, Ralph Wright, dba W & L Construction Company, shall be applied in satisfaction of the costs of this action and to the extent possible in satisfaction of the claims of the parties herein in accordance with the priorities herein established, and that the parties not receiving payment in full shall have judgment against defendant, Merl Tufford, Jr., for the balance remaining due.

3. Defendant, Merl Tufford, Jr., is indebted to the United States of America in the sum of Two Thousand Three Hundred Twenty-eight and 74/100 Dollars ($2,328.74), as evidenced by a tax lien filed December, 1957, and that the claim of the United States of America for said amount shall be given priority No. 1; that defendant, Merl Tufford, Jr., is indebted to International Paper Company in the amount of Three Thousand Forty-two and 10/100 Dollars ($3,042.10), and that said claim of International Paper Company in said amount shall be given priority No. 2; that defendant, Merl Tufford, Jr., is indebted to the United States of America in the amount of Three Thousand Three Hundred Eleven and 45/100 Dollars ($3,311.45), as evidenced by a tax lien filed June, 1958, and that the claim of the United States of America for said amount shall be given priority No. 3; that defendant, Merl Tufford, Jr., is indebted to Dean Morgensen and D. J. Morgensen, dba Morgensen Lumber Company, in the amount of Seven Thousand Four Hundred Seventy-seven and 55/100 Dollars ($7,477.55), together with interest at eight percent (8%) per annum from June 1, 1958, and that the claim of said Dean Morgensen and D. J. Morgensen, dba Morgensen Lumber Company, for said amount shall be given priority No. 4.

[Determination of Priorities]

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED as follows:

1. The Clerk of this Court shall disburse the deposit of Five Thousand Five Hundred Forty-nine and 51/100 Dollars ($5,549.51) made by Ralph Wright, dba W & L Construction Company, as follows:

a. In payment of all costs of this action, accrued and accruing.

b. To the United States of America Two Thousand Three Hundred Twenty-eight and 74/100 Dollars ($2,328.74).

c. To International Paper Company, a corporation, Three Thousand Forty-two and 10/100 Dollars ($3,042.10).

d. To the United States of America the balance remaining for application as a credit on the tax lien in the amount of Three Thousand Three Hundred Eleven and 45/100 Dollars ($3,311.45).

2. Defendant, the United States of America, shall have and recover a judgment against defendant, Merl Tufford, Jr., for the sum of Three Thousand Three Hundred Eleven and 45/100 Dollars ($3,311.45), together with interest thereon as by law provided, less such amount as shall be paid to the United States of America by virtue of paragraph d above.

3. Plaintiffs, Dean Morgensen and D. J. Morgensen, dba Morgensen Lumber Company, shall have and recover a judgment against defendant, Merl Tufford, Jr., in the amount of Seven Thousand Four Hundred Seventy-seven and 55/100 Dollars ($7,477.55), together with interest at eight percent (8%) per annum from June 1, 1958, until paid.

4. Ralph Wright, dba W & L Construction Company, be and he is hereby discharged without cost from any further liability herein.

 

 

[65-1 USTC ¶9344] United States of America v. Emzy T. Barker et al.

U. S. District Court, West. Dist. Tex. , Austin Div., Civil No. 1419, 2/5/65

[1954 Code Sec. 6323]

Tax liens: Priorities.--Two tracts of land owned by delinquent taxpayers were found not to constitute their homestead. The court, therefore, assigned the order of priority of liens, including liens for federal income, withholding and unemployment taxes, against such property on the basis of the dates such liens were perfected.

Ernest Morgan, United States Attorney, Federal Bldg., San Antonio, Tex., for plaintiff. C. W. Trueheart, Trueheart, McMillan & Russell, Bank of Commerce Bldg., San Antonio, Tex., James L. Cutcher, Barkley & Cutcher, Box 751, Taylor, Tex., Thomas M. Bullion, Melasky & Bullion, 121 E. Second, Box 1068, Taylor, Tex., J. R. Owen, County Attorney, P. O. Box 46, Georgetown, Tex., for defendants.

Findings of Fact and Conclusions of Law

A. Findings of Fact

FISHER, District Judge:

The facts established by pleadings, exhibits, stipulations, admissions and evidence are:

(1) This suit is commenced at the direction of the Attorney General of the United States , with the authorization of and at the request of the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury of the United States , and is brought by virtue of Sections 7401, 7402 and 7403 of the Internal Revenue Code. This Court has jurisdiction under 28 United States Code, 1345.

(2) James L. Cutcher, Dudley Barker, Emzy Barker, Ruth Barker and Mahon B. Garry reside in Williamson County , Texas .

[Vendors' Liens]

(3) On or about June 16, 1955, Emzy T. Barker, defendant herein, acquired by warranty deed from John O. Tarr, approximately 103.07 acres of land in Williamson County, Texas. The land so conveyed is fully described in the warranty deed from Mr. Tarr to Mr. Barker, a copy of which is attached to the complaint as "Exhibit A", and incorporated therein by reference as if fully set out herein. Said deed having been recorded in Volume 406, Page 176 of the Deed Records of Williamson County, Texas. A vendor's lien in favor of Mahon B. Garry, Guardian, defendant herein, was retained in said deed, which said vendor's lien is the first and superior lien on said 103.07 acre tract. That as alleged in paragraph III of this defendant's cross-action, notes 5-10 of said series in the sum of $2,000 each are due, owing and unpaid. That the total principal and interest due and owing on said notes as of June 24, 1964, amount to $12,289.45; that interest on the principal accrues at the rate of $1.64 per day and that said notes provide for attorneys' fees in the amount of 10% of the principal and interest due and owing on the same.

(4) On or about September 1, 1956, Emzy T. Barker, defendant herein, acquired by warranty deed from C. M. Partain and wife, Dora Partain, and T. J. Partain, two tracts of land totaling approximately 95.59 acres in Williamson County, Texas. The land so conveyed is fully described in the warranty deed from C. M. Partain and wife, Dora Partain, and T. J. Partain, to Emzy T. Barker, a copy of which is attached to the complaint as "Exhibit B." Said deed was recorded in Volume 419, Page 172, Deed Records of Williamson County, Texas. A vendor's lien was retained in said deed and is further evidenced by Deed of Trust filed for record and recorded in Volume 110, Page 581 of the Deed of Trust Records of Williamson County, Texas. A copy of said Deed of Trust is attached to the complaint as "Exhibit C." W. W. Barker subsequently acquired the vendor's lien evidenced by "Exhibit B" and "Exhibit C" and Emzy Barker and wife, Ruth Barker, on or about May 18, 1961, executed their Deed of Trust evidencing this transaction, said deed of trust being recorded in Volume 117, Page 344 of the Deed of Trust Records of Williamson County, Texas. A copy of said Deed of Trust being attached to the complaint as "Exhibit D", which indebtedness and lien was in renewal and extension of the original vendor's lien and is the first and superior lien on said property. On or about October 5, 1963 , W. W. Barker transferred the vendor's lien on the property evidenced by "Exhibit B" attached to the complaint, to Dudley Barker. That the total balance due to Dudley Barker under said lien is $7,048.24 principal and interest as of June 24, 1964 . The note provides for 10% attorneys' fees, and interest on the said principal accrues at the rate of $1.96 per day, all of which said defendant and cross-plaintiff is entitled to recover from defendant Emzy T. Barker.

[Government's Liens]

(5) Defendants Emzy T. Barker and Ruth Barker are indebted to the United States of America for Federal Income and Withholding and Unemployment Taxes in the following amounts and the assessments were made and recorded all as follows:

                                                               Date Tax Liens

                                                                     filed in

                                                    Date of        Williamson

                    Period        Amount         Assessment            County

Income ....           1955    $ 6,325.98             
4-3-59
            
4-9-59

Income ....           1956      4,856.83             
4-3-59
           
4-29-59

Income ....           1957      1,940.46             
8-1-58
            
9-3-58

WFT .......         4Q1961        704.43            
3-16-62
           
6-19-62

WFT .......         1Q1962        779.50            
5-11-62
           
6-19-62

WFT .......         3Q1962        311.86            
4-12-63
            
5-7-63

WFT .......           1962        601.72            
4-19-63
           
5-28-63

FUT .......           1961      1,643.53            
3-23-62
            
5-2-62

FUT .......           1962         92.72            
1-25-63
           
3-15-63

                              $17,257.03

[Judgment Lien]

(6) Ferguson Truck and Trailer Leasing, Inc., obtained a judgment in the 45th District Court of Bexar County , Texas , on September 15, 1958 , in Cause No. F-115,745, styled Ferguson Truck and Trailer Leasing, Inc., v. Emzy Barker and Emzy Barker Truck Lines in the amount alleged in paragraph II of Ferguson Truck and Trailer Leasing, Inc.'s cross-action. On October 17, 1958 , abstract of said judgment was duly filed and duly recorded in the office of the County Clerk of Williamson County , Texas . Said judgment has never been satisfied, and Ferguson Truck and Trailer Leasing, Inc. is still the owner and holder of said claim and lien. The amount of the judgment recovered by cross-acting plaintiff, Ferguson Truck and Leasing, Inc., against the defendant Emzy T. Barker and Emzy Barker Truck Lines, Inc., jointly and severally, on September 15th, 1958 , was $61,880.22, with $10,000 attorneys' fees, and interest on both of said amounts from that date at the rate of 6% per annum.

[Property Tax Liens]

(7) Defendant and cross-plaintiff Jack Gillum and the taxing units represented by him as alleged in his cross-action have a valid and subsisting lien for taxes for the years 1961, 1962 and 1963 against the 95.59 acre tract with the total sum due of $423.00 and against the 103.07 acre tract $704.59 due and such liens became effective and affixed on January 1 of each of said years.

[ Homestead Not Involved]

(8) The property in question (being the 95.59 acre tract to the west of the 1101/2 acre tract on which the defendants Emzy T. Barker and wife, Ruth Barker, have lived continuously since 1951, and the 103.07 acre tract to the south of said 95.59 acre tract) have not at any time since the filing and recording of Ferguson Truck & Leasing, Inc.'s abstract of judgment lien in Williamson County on October 17, 1958, constituted the homestead of said defendants on account of these things:

(a) The Barkers (husband and wife and younger unmarried son, B. B. Barker), have lived in the house, so marked on the deposition plat, located on the 1101/2 acre tract, ever since December, 1951, and this younger son (B. B. Barker) has farmed the south 55 acres of this 1101/2 acre tract, the Barkers having, since their deed of July 28, 1958, to Emzy's brother, Dudley Barker, occupied and used this 1101/2 acre tract under a verbal arrangement with the latter that they would pay the taxes and pay him $1,000 a year;

(b) Though neither one of the two tracts involved (the 103.07 acre and the 95.59 acre tract) was bought for the purpose at the time of making them a home place yet later he decided to build on the south 3 acres of the 103.07 acre tract and worked a bulldozer there for two days, clearing it in 1958, but has never done anything since then for want of financing, and the photographs show no signs of a home, and the tax collector's certificate shows no claim of homestead through 1962 on these tracts and sworn exemption claim on the 1101/2 acre tract in 1956 and 1958;

(c) The Barkers have never lived on the 103.07 acre or the 95.59 acre tracts, nor used them (except as shown in (b) above) and the last time he did any farming on these tracts was about 1960, and they did not construct any improvements on these tracts and did not even have a garden there, and these two tracts are farmed by their son, E. T. Barker, III, who is married, has a family, and lives at Dell Valley, and he does not do this on a cropper or sharing basis, though Emzy Barker sometimes works for his son and is paid like any other hand;

(d) The Barkers, for some undefined time, kept nine cows on the pasture indicated on the 95.59 acre tract, and later, for some undefined time, kept some nine cows for neighbors there, but these two tracts were all fields with the exception of right around the house, and there was never any fence between the two tracts, and the only fence between the 95.59 acre tract and the 1101/2 acre tract was way up on the pasture and only down to where the hen brake is, and the 95.59 acre tract was conveyed to the Barkers on September 1, 1956, subject to a life estate in the grantors, G. M., Dora and T. J. Partain, "in the home [on that tract], chicken yard and chicken house, and the right of ingress and egress for as long as either one of them shall live."

(e) Plaintiff's complaint in paragraph VIII alleges that the defendant Capitol Feed & Milling Co., Inc., claims title to both of the two tracts involved under an unrecorded conveyance dated February 11, 1963, and Emzy Barker, on inquiry about this, testified that he gave this deed as collateral, just for security, on account of the money this concern furnished him the last year he farmed, and said deed was given only to secure that concern in an indebtedness, and was not intended to actually convey title to the land, this matter being handled by his attorney, Mr. Cutcher.

(9) At no time has Emzy Barker or his wife ever filed or made any statutory form of declaration of any property as their homestead and the records of the tax assessor and collector of Williamson County reflect a sworn claim of homestead tax exemption by Emzy Barket on the 1101/2 acre tract in 1956 and 1958, and no such claim was made by either of them with respect to the two tracts of 103.07 acres and 95.59 acres until 1963.

B. Conclusions of Law

[Order of Priority of Liens]

(1) As a matter of law, the property in question, being two tracts of 95.59 acres (Tract A), and 103.07 (Tract B), has not at any time in question since October 17, 1958 (the date of the filing and recording of cross-acting defendant Ferguson Truck and Leasing, Inc.'s judgment) constituted the homestead of Emzy T. Barker and Ruth Barker.

(2) The holders of the vendor's lien notes (cross-acting plaintiffs Mahon B. Garry, Guardian, and Dudley Barker) take priority over all parties with respect to such lien indebtedness, including 10% attorneys' fees, since such attorneys' fees are specified in amount. The claim of plaintiff for income tax indebtedness on the part of the defendants Emzy T. Barker and wife, Ruth Barker, for the year 1957 in the sum of $1,940.46, assessed on August 1, 1958, on which the tax lien was duly filed on September 3, 1958, takes priority over the judgment lien debt of cross-acting plaintiff Ferguson Truck and Trailer Leasing, Inc., which was duly recorded on October 17, 1958, as well as priority over the tax lien indebtedness due cross-acting plaintiff, Gillum, and otherwise the claim of cross-acting plaintiff Ferguson Truck and Leasing, Inc. takes priority over the balance of the claim on the part of plaintiff United States of America, though subsequent to the tax lien indebtedness due cross-acting plaintiff Gillum.

 

 

[66-2 USTC ¶9721]United States of America to the use of James R. Undlin, doing business as Pioneer Fixture Company, Plaintiff v. Roscoe-Ajax Construction Co., Inc., etc., et al., Defendants Murray Mill & Manufacturing Co., Inc., Third Party Plaintiff v. R. L. Stephenson Factors, et al., Third Party Defendants. United States of America , Intervenor

U. S. District Court, No. Dist. Calif. , So. Div., Civil No. 42792, 10/30/66

[1954 Code Sec. 6323]

Lien for taxes: Agreement among creditors: Distribution of proceeds: Interpleader.--A stipulation between the U. S. and a factor that the U. S. was entitled to $2,014.69, the amount of tax liens against property of a creditor from whom the factor purchased invoices, and that the factor was entitled to the remaining $5,739.86 out of the total fund held by the debtor of $7,754.55 was confirmed. Each of the parties was entitled to the stipulated amounts. Further held, that the debtor owed the creditor nothing from the fund of $7,754.55 which he originally owed the creditor.

Arguello, Giometti & McCarthy, Keil Bldg., 244 Kearny St. , San Francisco , Calif. , for plaintiff. Attorney General, 6000 State Bldg., San Francisco, Calif., for lien claimant; Oakes & Horton, 935 Bank of America Bldg. San Diego, Calif., for Murray Mill & Mfg. Co., Inc.; Thelen, Marrin, Johnson & Bridges, 19th Floor, 111 Sutter St., San Francisco, Calif.; J. W. Ehrlich, 333 Montgomery, San Francisco, Calif.; Surrey, Karaski, Gould & Greene, Woodward Bldg., Washington, D. C.; Oakes & Horton, 935 Bank of America Bldg., San Diego, Calif., for St. Paul Fire & Marine Ins. Co.; for third party defendants. Cecil F. Poole, United States Attorney, San Francisco , Calif. , for U. S.

Findings of Fact and Conclusions of Law

MATHER, District Judge:

This cause having come before the Court upon the motions of third party defendant R. L. Stephenson Factors, filed May 25, 1966, and of intervenor United States of America, filed July 6, 1966, for summary judgment upon the Counterclaim for Interpleader of defendant and third party plaintiff Murray Mill & Manufacturing, Inc., filed January 25, 1965; and the motions having been ordered submitted for decision upon the papers and memorandums of file, the Court makes its Findings of Fact as follows:

Findings of Fact

It is true that:

1. Defendant and third party plaintiff Murray Mill & Manufacturing Inc. (hereafter called Murray Mill) became indebted to use-plaintiff James R. Undlin d/b/a "Pioneer Fixture Co." (hereafter called Undlin) in an amount not less than $7,754.55 under those certain contracts executed on October 10, 1963, and February 24, 1964, and referred to in the first cause of action of Undlin's complaint herein. Said sum is presently being held by Murray Mill pending resolution of its Counterclaim in Interpleader.

2. On January 15, February 7, February 18 and February 21, 1964, pursuant to the terms of a Factoring Agreement between third party defendant R. L. Stephenson Factors (hereafter called Factors) and Undlin dated November 15, 1962, and recorded on November 19, 1962, Factors purchased from Undlin certain invoices in the face amount of $12,945.45, representing amounts due or to become due to Undlin from Murray Mill for work and labor performed. There is presently due and owing to Factors on said invoices the sum of $10,500.00, none of which has been paid.

3. Pursuant to Paragraph 11a of said Factoring Agreement, Factors reserved from the payments made to Undlin for the Murray Mill invoices the sum of $2,100.00. After crediting Undlin with that amount, there remains due and owing to Factors on said invoices the sum of $8,400.00.

4. On March 23, 1964 , both Undlin and Factors informed Murray Mill by letter that Factors was entitled to the said sum of $8,400.00, out of the moneys owing to Undlin from Murray Mill pursuant to said Factoring Agreement.

5. On June 7, 1963 and August 9, 1963 , the District Director of Internal Revenue made certain assessments in respect of unpaid withholding taxes against Undlin, as set forth in the Affidavit of Joseph M. Cullen, attached to the Motion for Partial Summary Judgment of intervenor United States of America . With respect to said assessments, Notices of Federal Tax Liens were filed in accordance with law prior to January 15, 1964, and there exists outstanding and unpaid by Undlin the total amount of $1,686.28 in principal assessments, plus $328.41 in interest accrued thereon to September 30, 1966. Said assessments constitute only a part of the total claims for unpaid taxes asserted by the United States of America against Undlin in this action, and such remaining assessments are not in issue before the Court on the present motions for summary judgment.

6. Pursuant to Stipulation of Facts filed May 16, 1966, Factors and intervenor United States of America have agreed that with respect to the fund of $7,754.55 presently held by Murray Mill as set forth above, the United States of America is entitled to recover the sum of $2,014.69, and Factors is entitled to the balance of said fund $5,739.86.

7. The following Conclusions of Law, insofar as they may be considered part of this Court's Findings of Fact, are so found by this Court to be true in all respects. From the foregoing facts the Court concludes:

Conclusions of Law

1. By virtue of Factors' execution of the Factoring Agreement with Undlin and the subsequent purchase of Murray Mill invoices pursuant to the terms of that agreement, Factors became legally entitled, as against Undlin, to receive and retain from Murray Mill the total sum of $8,400.00 out of the moneys owing to Undlin by Murray Mill for work and labor performed by Undlin under those contracts referred to in the First Cause of Action of Undlin's complaint herein.

2. By virtue of the assessments made on June 7, 1963 and August 9, 1963, against Undlin for unpaid withholding taxes, the United States of America has valid and subsisting tax liens upon all property and rights to property belonging to Undlin and is legally entitled, as against Undlin, to receive and retain from Murray Mill the total sum of $2,014.69 out of the moneys owing to Undlin by Murray Mill for work and labor performed by Undlin under those contracts referred to in the First Cause of Action of Undlin's complaint herein.

3. By virtue of the Stipulation of Facts entered into between Factors and United States of America, out of the total sum of $7,754.55 held by Murray Mill under its Counterclaim for Interpleader, and represented by Murray Mill to be the total sum owing to Undlin by Murray Mill under said contracts, Factors is legally entitled to receive, retain and have judgment for the sum of $5,739.86, and United States of America is legally entitled to receive, retain and have judgment for the sum of $2,014.69.

4. By virtue of Factors' execution of the Factoring Agreement with Undlin and the subsequent purchase of Murray Mill invoices pursuant to the terms of that agreement, and by virtue of the assessments made by the United States of America against Undlin for unpaid withholding taxes, Murray Mill is not obligated to nor does it owe to Undlin, all or any part of the sum of $7,754.55 originally owing to Undlin under those contracts referred to in the First Cause of Action of Undlin's complaint herein.

5. Nothing hereinabove set forth shall in any manner be construed to have determined, adjudged or foreclosed any issues of fact or law remaining in this action which have not hereinabove been specifically found or concluded, and any party in this action may hereafter proceed in regular course to bring on any such remaining issues for hearing, trial and adjudication.

Let judgment be entered accordingly.

 

 

[71-2 USTC ¶9581]Norcal Escrow Company, a California corporation, Plaintiff v. Leonard G. Plato, et al., Defendants

U. S. District Court, No. Dist. Calif., No. 70-773-SC, 6/1/71

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

Tax liens: Priority: Fact finding.--The court assigned the order of priority to claims, including liens for unpaid withholding and F. I. C. A. taxes, against the amount placed in escrow by the purchaser of taxpayer's business.

Currie, Lebsack, Hannig & Ferrari, 525 Marshall St. , Redwood City , Calif. , for plaintiff. Martin Schainbaum, United States Attorney, San Francisco , Calif. , for defendants.

Findings of Fact and Conclusions of Law Findings of Fact

CONTI, District Judge:

1. On or about December 4, 1969 , defendant Leonard G. Plato, dba Plato's Texaco, aka Plato's Texaco Service (hereinafter referred to as Plato) and defendant Fred D. Manley, entered into a written agreement for the sale and purchase of cetrain assets. (Complaint, ¶III.)

2. The aforesaid sale was to take place on or after January 5, 1970 , at 10:00 a. m. at the offices of Norcal Escrow Company, 1627 Irving Street , San Francisco , California , under Norcal's escrow number, SF-1392. (Complaint, ¶IV.)

3. In accordance with certain terms of the agreement, Fred D. Manley deposited with Norcal Escrow Company pursuant to the terms of said agreement the sum of $1,587.63. (Complaint, ¶IV.)

4. Plaintiff holds said sum of $1,587.63, which amount plaintiff has deposited with the Clerk of this Court contemporaneously with the filing of this action. (Complaint, ¶IX.)

5. The claims for internal revenue taxes made by the defendant United States upon the defendant Leonard G. Plato, whose addresses are 1447 Taraval Street, San Francisco, California, and 2090 Scott Boulevard, Santa Clara, California, are set forth in documents constituting notices of federal tax liens filed in behalf of the District Director of Internal Revenue, San Francisco, California, with the San Francisco City and County Recorder and with the Santa Clara County Recorder on February 18, 1970, May 13, 1970 and June 5, 1970. (Stipulation between plaintiff and the United States filed August 7, 1970.)

6. The Internal Revenue Service filed a notice of tax lien with the San Francisco City and County Recorder on February 18, 1970, for unpaid withholding and F. I. C. A. taxes for the quarter ended June 30, 1968, assessed on April 4, 1969, in the amount of $117.67; and for the quarter ended June 30, 1969, assessed on November 14, 1969, in the amount of $118.48, for a total amount due and owing of $236.15, plus interest, penalties and costs as allowed by law. (Stipulation between plaintiff and the United States filed on August 7, 1970.)

7. The Internal Revenue Service filed a notice of tax lien on May 13, 1970, with the San Francisco City and County Recorder for unpaid withholding and F. I. C. A. taxes for the quarter ended December 31, 1969, assessed on March 27, 1970, for a total amount due and owing of $787.27, plus interest, penalties and costs as allowed by law. (Stipulation between plaintiff and the United States filed on August 7, 1970.)

8. The Internal Revenue Service filed a notice of tax lien on June 5, 1970, with the Santa Clara County Recorder's office for unpaid withholding and F. I. C. A. taxes for the quarter ended September 30, 1969, assessed on April 10, 1970, in the amount of $4,488.84; and for unpaid F. U. T. A. taxes for the period ended December 31, 1969, assessed on March 13, 1970, in the amount of $111.79 for a total amount due and owing of $4,600.63, plus interest, penalties and costs as allowed by law. (Stipulation between plaintiff and the United States filed on August 7, 1970.)

9. The California State Board of Equalization recorded Certificates of Amount of Tax, Interest and Penalties Due with the Lake County Recorder's Office on February 13, 1970, the San Francisco City and County Recorder's Office on February 13, 1970, the Sonoma County Recorder's Office on February 13, 1970 and the Secretary of State's Office on February 16, 1970, for unpaid sales and use taxes per return filed by Leonard G. Plato, dba Plato's Texaco, for the third quarter of 1969, in the sum of $1,126.77, with interest and penalties thereon.

10. The California State Board of Equalization recorded Certificates of Amount of Tax, Interest and Penalties Due with the San Mateo County Recorder's Office on April 9, 1970; the Lake County Recorder's Office on April 9, 1970, the San Francisco City and County Recorder's Office on April 9, 1970, and the Sonoma County Recorder's Office on April 10, 1970, for unpaid sales and use tax deficiencies for the period from October 1, 1969 to November 27, 1969, in the sum of $772.52, with interest and penalties thereon.

11. With respect to the parties who have appeared in this action and are not in default, the following priorities are found as a fact:

(a) The United States has first priority for unpaid withholding and F. I. C. A. taxes assessed on April 4, 1969 and November 14, 1969, which have remaining unpaid respective balances of $117.67 and $118.48, plus interest as allowed by law;

(b) Second priority goes to the California State Board of Equalization based on its tax lien in the amount of $1,111.89, recorded on February 13, 1970 , plus interest and costs;

(c) Third priority is given to the United States for its unpaid taxes as follows:

(i) F. U. T. A. taxes for the period ended December 31, 1969 , assessed on March 13, 1970 , in the amount of $111.79;

(ii) Withholding and F. I. C. A. taxes for the quarter ended December 31, 1969, assessed on March 27, 1970, for a total amount due and owing of $785.27, plus interest, penalties and costs as allowed by law;

(d) The California State Board of Equalization has fourth priority based on its tax lien in the amount of $772.52, recorded on April 9, 1970 , plus interest and costs.

Conclusions of Law

1. Any of the foregoing findings of fact which might be deemed conclusions of law are hereby made conclusions of law.

2. The Court has jurisdiction of the subject matter and of the parties in this action. 28 U. S. C. §1397 and 2410.

3. Priority of federal tax liens over competing liens is a matter of federal law. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213 (1955); United States v. Equitable Life Ass. Soc. of the U. S. [66-1 USTC ¶9444], 384 U. S. 323 (1966); United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 88-89, (1963); United States v. Truss Tite, Inc. [68-1 USTC ¶9296], 285 F. Supp. 88, 91 (Tex. 1968); United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964); Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (C. A. 5, 1964).

4. Section 6321 of the Internal Revenue Code of 1954 provides for the imposition of a tax lien upon all property and rights to property in which the delinquent taxpayer has an interest. It arises as a secret lien, effective from the date of the assessment of the tax. However, Congress, in §6323, has provided certain groups with an added degree of protection. Said section requires that the government file notice of its lien before it is valid against purchasers, holders of security interests, mechanics lienors or judgment lien creditors.

In determining the priority of federal tax liens and non-federal liens, the common law rule of "first in time is the first in right" controls. United States v. Equitable Life Ass. Soc. of U. S. , supra. "However, in determining the priority of liens against a government tax lien, the one which is first in time will be deemed first in right if, and only if, the one first in time is specific and perfected in the federal sense." U. S. v. Truss Tite, Inc., supra.

"A lien in not choate or perfected in the federal sense, unless, inter alia, (1) it has at least complied with all state requirements for perfection; (2) the identity of the lienor is known; (3) the property subject to the lien is established; and (4) the amount of the lien is established." U. S. v. Trust Tite, Inc., supra; U. S. v. Pioneer American Ins. Co., supra.

5. None of the liens competing with the federal tax liens come within the protection of 26 U. S. C. §6323. Therefore, for the purposes of determining priorities, the federal tax liens were perfected at the time that each federal tax was assessed.

6. The tax liens of the California State Board of Equalization were perfected in the federal sense at the time each was recorded. Therefore, the State Board's liens have priority over subsequently arising federal tax liens. United States v. Vermont, supra.

7. Defendant Division of Labor Law Enforcement also claims to have a preferred lien on the fund in question, pursuant to §1205 of the California Code of Civil Procedure. This lien, however, has not been perfected in the federal sense and cannot claim priority over subsequently arising federal tax liens.

Judgment will be entered according to the above Findings of Fact and Conclusions of Law. Motions for amendment of the court's findings will not be considered unless made within ten days after entry of judgment.

 

 

[61-1 USTC ¶9178]Whitney C. Randall, Plaintiff v. Eli F. Colby and John Eli Colby, d/b/a Eli Colby Company; Iowa Builders, Inc.; United Home Bank & Trust Company; and Standard Glass & Paint Co., Defendants Eli F. Colby and John Eli Colby, d/b/a Eli Colby Company, Cross-Petitioners v. United Home Bank & Trust Company; Standard Glass & Paint Co.; Whitney C. Randall; and The United States of America, Defendants to Cross Petition

U. S. District Court, No. Dist. Ia., Central Div., No. 741 Civil, 190 FSupp 319, 1/10/61

[1954 Code Sec. 6323(a)]

Lien for taxes: Priority: Mechanic's lien: State law: Assignee of rights.--The owner of real estate entered into a contract with a contractor to construct a warehouse. The owner claimed that the contractor failed to fulfill the terms of the contract and sought damages. The Government filed a tax lien against the contractor. Subcontractor R filed a mechanic's lien. The contractor filed a mechanic's lien and assigned its rights to a bank from which it had borrowed money. Subcontractor S filed a mechanic's lien. The court held that the contractor was indebted to the owner for damages in an amount which was less than the payments which the owner withheld. The court held that subcontractor R had prior claim on the remainder of the money withheld under state law as against the Government, which had a prior claim over subcontractor S who filed a late lien and the bank, which was not a purchaser or a pledgee under Sec. 6323.

Flovd E. Ensign, Northwood , Ia. , for Whitney C. Randall. Dennis G. Drugswall, Lake Mills, Ia., Alan Loth, Fort Dodge, Ia., for Eli F. Colby and John Eli Colby. William B. Danforth, Mason City , Ia. , for United Home Bank & Trust Company. F. E. Van Alstine, United States Attorney, Philip C. Lovrien, William R. Crary, Assistant United States Attorneys, Sioux City, Ia., for The United States of America. David J. Butler, Mason City , Ia. , for Standard Glass & Paint Co.

Opinion and Rulings

GRAVEN, District Judge:

In the present case a partnership which was the owner of a tract of land entered into a contract with a building contractor, a corporation, to construct a warehouse thereon. The building contractor subsequently made an assignment to a bank of the sum due it under the contract as security for a loan. The building contractor failed to pay two subcontractors who had furnished material used in the construction of the warehouse and they filed mechanic's liens against the property of the owner. The building contractor was in default in the payment of taxes owing to the United States and two tax liens resulted. The action involves several controversies which will be later referred to.

[The Owner and Contractor]

Eli F. Colby and John Eli Colby are co-partners doing business under the firm name of Eli Colby Company. The office of the partnership is in Worth County , Iowa . The partnership will hereinafter be referred to as the Owner. The partnership had purchased a tract of land in Winnebago County , Iowa , from the Chicago and Northwestern Railroad Company. The Iowa Builders, Inc. is an Iowa corporation with its principal place of business at Mason City , Cerro Gordo County , Iowa . It was engaged in the business of constructing buildings. It will hereinafter be referred to as the Contractor. On June 29, 1955 , the Owner and the Contractor entered into a written contract under which the Contractor agreed to furnish all the materials and labor necessary to construct a steel warehouse on the tract of land referred to. The specified contract price was $13,400. The contract provided for the payment of $3000 upon the execution of the contract; the sum of $2400 when the concrete work was done and steel was on the site; $7000 from the First National Bank as soon as the Chicago and Northwestern Railroad Company furnished complete title to the Owner to the tract upon which the building was to be completed and $1000 upon completion of the building. The contract specified that the Contractor was to complete the building in accord with the specifications and in complete conformance with good building practices, and that the work should be done in a workmanlike manner.

The contract specified that the Contractor was to complete the building not later than August 8, 1955 . The Contractor commenced construction of the building promptly following the execution of the contract. On August 4, 1955 , the Owner and the Contractor entered into another written contract for extra work and materials to be furnished by the Contractor in connection with the construction of the building. The amount specified to be paid for such extra work and materials was $446.76. The Owner paid the Contractor the $3000 due on the execution of the contract and the $2400 due when the concrete work was done and steel was on the site. On November 4, 1955 , the Owner paid to the Iowa Steel Erectors, Inc. the sum of $1446.76 for materials furnished in connection with the building. All of the parties are agreed that the Owner is entitled to credit for that amount on the contract price. The Owner has made no payments upon the contract price other than the sums of $3000, $2400 and $1446.76 just referred to. The two contracts referred to will hereinafter be referred to as the Construction Contract. The Contractor furnished the last of the work and materials for the building on October 12, 1955 . It is the claim of the Contractor that it had completed the building in accordance with its contract on that date. It is the claim of the Owner that the Contractor never did complete the building in accordance with its contract. The Owner asserted and in this action asserts a claim for unliquidated damages to be set off against the contract price for breaches of contract on the part of the Contractor.

[The Other Parties]

On or about July 1, 1955 , the Contractor entered into an oral contract with Whitney C. Randall, hereinafter referred to as Randall, under which Randall was to furnish materials to be used in constructing the building. Randall furnished the first of the materials on July 11, 1955 . He furnished the last item of material on August 24, 1955 . There is undisputedly owing Randall for the materials so furnished the sum of $3233.64 with interest at five per cent from August 24, 1955 , no part of which has been paid.

On August 15, 1955 , the Commissioner of Internal Revenue duly assessed federal withholding and federal insurance contribution taxes for the second quarter of 1955 against the Contractor in the principal sum of $9231.13. On August 16, 1955 , notice of that assessment and demand for the payment was served upon the Contractor.

On September 19, 1955 , the Contractor secured a loan of $3000 from the United Home Bank & Trust Company of Mason City , Iowa , evidenced by a promissory note. The Contractor on the same date executed and delivered to that Bank a written assignment of the monies due it under the construction contract with the Owner. The United Home Bank & Trust Company will hereinafter be referred to as the Bank. On September 26, 1955 , the Bank served notice of its assignment upon the Owner. There is undisputedly owing to the Bank on that loan the sum of $3000 with interest at six per cent from September 19, 1955 .

On or about September 6, 1955 , the Contractor entered into an oral contract with the Standard Glass & Paint Company for the furnishing of certain materials to be used in connection with the building. The first of those materials was furnished on September 6, 1955 , and the last of them on September 24, 1955 . The Standard Glass & Paint Company will hereinafter be referred to as Standard. There is undisputedly due Standard for the materials so furnished the sum of $69.41, with interest at the rate of five per cent from September 24, 1955, no part of which has been paid.

[The Liens]

On November 8, 1955 , the United States filed notice of its tax lien in the office of the County Recorder of Cerro Gordo County , Iowa , for the federal taxes due from the Contractor for the second quarter of 1955 which had been assessed by the Commissioner of Internal Revenue on August 15, 1955 . On November 15, 1955 , the Commissioner of Internal Revenue assessed federal withholding and federal insurance contributions taxes against the Contractor for the third quarter of 1955 in the principal sum of $9302.56. On November 13, 1955 , the Government served notice of levy upon the Owner for the tax assessments against the Contractor for both the second and third quarters of 1955. On November 15, 1955 , notice of the assessment of the assessments against it for the third quarter of 1955 was served upon the Contractor. On January 12, 1956 , the Government filed notice of its tax lien for the federal taxes of the Contractor for the third quarter of 1955 in the office of the County Recorder of Cerro Gordo County , Iowa . It will hereinafter appear that the amount claimed by the Government on its first tax lien is in excess of any possible amount it may recover herein. Therefore, only that lien will be hereinafter referred to, and it will be referred to as the Government's tax lien.

On November 29, 1955 , Randall filed a mechanic's lien against the property of the Owner in the office of the Clerk of Court of Winnebago County, Iowa, in the principal sum of $3233.64. On the same day he gave the Owner written notice of the filing of the lien. On December 16, 1955 , Standard filed a mechanic's lien against the property of the Owner in the office of the Clerk of Court of Winnebago County, Iowa, in the principal sum of $69.41. On December 30, 1955 , Standard gave the Owner written notice of the filing of the lien.

On November 29, 1955 , Randall commenced an action in the District Court of Iowa in and for Winnebago County for the foreclosure of his mechanic's lien. The original defendants to that action were the Owner, the Contractor, the Bank, and Standard. By cross-petition (complaint) the United States became a party to the action. Upon being made a party, the United States removed the action to this Court. The United States will hereinafter be referred to as the Government.

On December 3, 1955 , the Contractor filed a mechanic's lien against the property of the Owner in the office of the Clerk of Court of Winnebago County, Iowa, in the principal sum of $6846.76. On December 6, 1955 , the Contractor executed an assignment of that lien to the Bank. That assignment was filed for record in the office of that Clerk on December 8, 1955 .

There is a controversy between the Government, the Bank and the mechanic's lienholders as to their rights in and to the balance alleged to be due on the contract price from the Owner. There is related to that controversy a controversy as to the claimed breaches of contract on the part of the Contractor and damages for such breaches. There is also a controversy between the Owner and the mechanic's lienholder, Randall. It is the claim of the latter that he postponed the filing of his mechanic's lien at the request of the Owner. That controversy also enters into the controversy as to the rights of the parties in and to the alleged balance due on the contract price from the Owner.

[Contract Not Fulfilled]

The first matter to be passed upon is the matter of the claimed breaches of the contract on the part of the Contractor and the claim of the Owner for damages in connection therewith. As hereinafter noted, it is the claim of the Owner that the Contractor never did complete its contract in accord with the terms thereof. It is the claim of the Owner that the breaches of contract on the part of the Contractor required the former to make the following expenditures:

                       Wendte Hardware, 
Lake

Aug. 31, 1955
          Mills, 

Iowa

 ..................         $ 3.05

                       Randall Transit Mix,

Sept. 19, 1955
         

Northwood
, 
Iowa

 ..............         158.88

                       Culver-Hahn Electric

                       Company, 

Mason City

,

Oct. 6, 1955
           

Iowa

 .........................          16.67

                       

S.
 
G.
 
Rierson
 
Building

Oct. 26, 1955
          Supplies .....................         460.17

                       Lake Mills Lumber Co.,

Nov. 3, 1955
           

Lake Mills
, 
Iowa

 .............          30.28

                       Kelly-Howe-Thompson

Nov. 14, 1955
          Co., 

Duluth
, 
Minnesota

 .......         347.72

Nov. 21, 1955
          Iowa Steel Erectors, Inc. ....         173.76

                       A. A. Saxerud & Son,

Dec. 1, 1955
           

Lake Mills
, 
Iowa

 .............          16.30

                       Nelson Welding Shop,

Dec. 26, 1955
          

Lake Mills
, 
Iowa

 .............          25.60

The plaintiff also claims damages in the sum of $175 for a claimed defective door. The total amount of unliquidated damages claimed by the Owner is $1,407.43.

The Court finds that the Contractor did commit breaches of its contract with the Owner. The Court finds that because of the said breaches the Owner is entitled to the damages next referred to. The Court finds that the Owner is entitled to damages for all of the items of expenditure above set forth, except for the item of $158.88 paid to the Randall Transit Mix on September 19th, 1955 , and the item of $16.67 paid to Culver-Hahn Electric Company on October 6th, 1955 . The Court further finds that the Owner is entitled to damages for the defective door in the sum of $125 instead of the $175 claimed. The total amount of damages to which the Owner is entitled is the sum of $1,181.88. It was heretofore noted that the specified contract price was the sum of $13,846.76 and the payments made thereon by the Owner amounted to $6,846.76. This left a prima facie of $7,000 due on the contract. That balance was subject to the claims of the Owner for damages for breaches of contract which this Court has now determined to be in the amount of $1,181.88. Deducting the sum of $1,181.88 from the $7,000 leaves a balance of $5,818.12, which is the amount in controversy.

[Mechanic's Lien on Real Estate]

The next matter to be considered is the matter of the filing of Randall's mechanic's lien. As heretofore noted, he furnished the last of the material for the building on August 24th, 1955 , and filed his mechanic's lien on November 29th, 1955 , which was more than sixty days after the furnishing of the last material. In that connection it is necessary to consider several Iowa statutes relating to mechanic's liens.

Section 572.2, Code of Iowa 1958, provides, in part, as follows:

"Every person who shall furnish any material or labor for * * * any building * * * shall have a lien upon such building * * * and land belonging to the owner on which the same is situated * * *."

Under Section 572.8, Code of Iowa 1958, a related statute, it is required that one who wishes to avail himself of a mechanic's lien shall file a verified statement or account and a description of the property against which the lien is asserted in the office of the Clerk of Court.

Section 572.9, Code of Iowa 1958, provides, in part, as follows:

"The statement or account required by section 572.8 shall be filed by a principal contractor within ninety days, and by a subcontractor within sixty days, from the date on which the last of the material was furnished or the last of the labor was performed. * * *"

Sections 572.10 and 572.11 relate to the perfecting of mechanic's liens after sixty days, and Sections 572.13 and 572.14 relate to the liability of the owner in regard to payments to the principal contractor and will be later referred to.

As heretofore noted, Randall furnished the last of his materials for the building on August 24th, 1955 . Therefore, the sixty-day filing period provided for in Section 572.9, above referred to, would expire on October 24th, 1955 . It was heretofore noted under the contract between the Owner and the Contractor that $7,000 was to be paid the Contractor from the First National Bank as soon as the Chicago and Northwestern Railroad Company, the Owner's vendor, furnished complete title to the Owner.

Shortly after Randall commenced to furnish the materials he was informed by the Contractor that the Owner was arranging for a loan with the First National Bank of Mason City upon the property in question, the proceeds of which were to be applied upon the contract price. The Contractor directed Randall to furnish copies of his statements to both it and the First National Bank. Both before and after Randall had furnished all of the materials, he sent copies of his statements to the First National Bank as directed. He did not receive any payments in response to his statements. After he had completed the furnishing of all the materials, he made inquiry of the First National Bank as to the matter of payment and was informed that the title difficulty had not as yet been straightened out. Soon after Randall had completed the furnishing of the materials, he consulted with the late O. J. Wardwell, an attorney at Northwood , Iowa . Mr. Wardwell advised him as to the sixty-day period for the filing of mechanic's liens by materialmen under the Iowa Mechanic's Lien Act. Mr. Wardwell prepared a statement for a mechanic's lien and advised that it be filed. On October 14th, 1955 , which was shortly before the expiration of the sixty-day period, Randall called Mr. Eli Colby, one of the partners, by telephone. Randall told him he had not been paid and that he was about to file a mechanic's lien. Mr. Colby told him that the filing of the lien "would really upset things" and "would blemish the title" so that the First National Bank would not complete the loan. Mr. Colby requested him to withhold the filing of a mechanic's lien. In response to that request Randall directed Mr. Wardwell to withhold the filing of the lien, and the filing of the lien was withheld beyond the sixty-day period pursuant to the request of Mr. Colby. On November 25th, 1955 , which was after the expiration of the sixty-day period, Mr. Randall again talked to Mr. Colby by telephone. Mr. Colby told him he was confident that Randall's claim would be paid within a few days and that the filing of a mechanic's lien would "upset things." Randall, not receiving payment within the next few days, filed his mechanic's lien on November 29th, 1955 , and on the same day gave the Owner written notice of such filing. It seems clear and the Court finds that Randall was about to file a mechanic's lien against the premises of the Owner within the sixty-day period but withheld the filing of the same past the sixty-day period by reason of the request of the Owner. It is the holding of the Court that the Owner is estopped from asserting that Randall's mechanic's lien against the premises was impaired or the amount of his claim was subject to being diminished because it was not filed within the sixty-day period. See Cedar Rapids Sash & Door Company v. Heinbaugh (1918), 183 Iowa 1236, 168 N. W. 270, 274.

It appears that the First National Bank did not complete the loan to the Owner. It is not claimed that the non-completion of the loan was due to fault on the part of the Owner.

In view of the holding of the Court on the issue of estoppel, the situation is that, as between the Owner and Randall, the latter has a valid first lien against the premises of the Owner for the full amount of his claim and is entitled to the foreclosure of his lien. Since his lien is apparently a first lien against the premises, and the property has a value apparently well in excess of the amount of his lien, he would not necessarily be further concerned. However, it is a matter of concern to the Owner as to whether he may discharge the lien out of the unpaid contract balance. It is also a matter of concern to the Government and the Bank whether the Owner may do so.

[The Tax Liens]

The situation as between the Owner, the Government and the Bank has to be considered. The situation as between the Owner and the Government will be the first situation considered. -- situation requires the consideration of several rules of law relating to Federal tax liens.

This Court considered certain phases of Federal tax liens in the cases of Wolverine Insurance Company v. Phillips (1958) [58-2 USTC ¶9765], 165 F. Supp. 335; Noltze Motor Company v. Burrows-Moore Pontiac (1958) [58-1 USTC ¶9209], 157 F. Supp. 593; Beeghly v. Wilson (1957) [57-2 USTC ¶9808], 152 F. Supp. 726; and Mason City and Clear Lake Railroad Company v. Imperial Seed Company (1957) [57-2 USTC ¶9736], 152 F. Supp. 145.

Section 6321, Title 26, U. S. C. A., relating to Federal taxes, provides, in part, as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

Section 6322, Title 26, U. S. C. A., provides as follows:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time."

The lien given by Section 6321 is very broad and comprehensive. It attaches to all property and rights to property which are subject to ownership and which can be transferred and which can be brought under the dominion of the Court by its usual processes; it attaches not only to land and tangible personal property but also to claims, demands, and causes of action which the taxpayer can assert against third persons. Bank of Nevada v. United States (9th Cir. 1958) [58-1 USTC ¶9228], 251 F. 2d 820, certiorari denied (1958), 356 U. S. 938, 78 S. Ct. 780, 2 L. Ed. 2d 813; United States v. Barndollar & Crosbie (10th Cir. 1948) [48-1 USTC ¶9203], 166 F. 2d 793; Citizens State Bank v. Vidal (10th Cir. 1940) [40-2 USTC ¶9603], 114 F. 2d 380, 382, 383. See also cases cited in Beeghly v. Wilson (D. C. N. D. Iowa 1957) [57-2 USTC ¶9808], 152 F. Supp. 726, 729, 730. The lien is a continuing liability and will attach to obligations which come into existence thereafter. Glass City Bank v. United States (1945) [45-2 USTC ¶9449], 326 U. S. 265, 66 S. Ct. 108, 90 L. Ed. 56.

[The Tax Lien on Withheld Payments]

There is not involved in this case the question of competition between a mechanic's lien and Federal tax lien as to the real estate of the Owner. That subject is discussed in the case of Wolverine Insurance Company v. Phillips (D. C. N. D. Iowa 1958) [58-2 USTC ¶9765], 165 F. Supp. 335, 344, 345. In the present case the Government claims no lien against the real estate of the Owner. The Government claims a prior lien upon the unpaid balance on the Construction Contract which has been determined herein to be the sum of $5,818.12.

It is not uncommon for a contractor who has entered into a construction contract to default in the performance of that contract. In such a situation it is not uncommon for the contractor to have left unpaid those who have furnished labor and materials for the project which was the subject matter of the contract. In many defaulted construction contracts there is present the feature of the contractor having furnished a bond with surety in connection with the contract. Where a contractor defaults in the performance of his contract, there is commonly present the feature of the contractor having failed to pay his Federal taxes and of the Government asserting a lien against the unpaid balance due under the contract. There has been much litigation in connection with the status of Federal tax liens in connection with the unpaid balance due under a defaulted construction contract. Very frequently the litigation is between the Government and the surety on the contractor's bond occasioned by the payments made by the surety in connection with the defaulted contract. In such litigation both the Government and the surety make conflicting claims to the balance due on the defaulted contract. The surety's claim to such balance may be based upon several theories. The case of Wolverine Insurance Company v. Phillips, supra, had to do with the conflicting claims of the Government and the surety on the bond of a defaulting contractor as to the unpaid balance on the contract.

[Pertinent Decisions]

In the present case the only property of the Contractor to which the Government's lien could attach was the contractual obligation of the Owner to the Contractor. On June 20th, 1960 , the United States Supreme Court rendered two decisions which were of great importance in this field of the law. Those decisions were rendered in the cases of Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365, and United States v. Durham Lumber Company [60-2 USTC ¶9539], 363 U. S. 522, 80 S. Ct. 1282, 4 L. Ed. 2d 1371. The first case will hereinafter be referred to as the Aquilino case and the second case as the Durham case. The situation in the Aquilino case was as next stated.

In December, 1951, and March, 1952, the Director of Internal Revenue entered assessments against a contractor for delinquent Federal taxes. On October 31st, 1952 , the Director filed notice of tax liens in the office of the City Clerk in the city wherein the contractor maintained its principal place of business. In July or August, 1952, the contractor entered into a contract to remodel a restaurant for an owner. The contractor entered into contract with subcontractors for the furnishing of labor and materials for the remodeling. The subcontractors completed their contracts but were not fully compensated. They then filed mechanic's liens against the owner's premises and commenced actions to foreclose those liens. There was a balance owing by the owner on the construction contract. That balance was paid into court. The Government claimed that balance by virtue of its tax lien. The New York Court of Appeals held the Government had priority as to that balance over the subcontractors by virtue of its tax lien. The United States Supreme Court granted certiorari and reviewed the case. On review that Court vacated the judgment of the New York Court of Appeals. That Court stated (pp. 512-516 U. S.):

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.' Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82. Thus, as we held only two Terms ago, Section 3670 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law. . . .' United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55. However, once the tax lien has attached to the taxpayer's statecreated interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.' * * *

"Petitioners contend that the New York Court of Appeals did not make its determination in the light of these settled principles. Relying upon the express language of Section 36-a of the Lien Law and upon a number of lower New York court decisions interpreting that statute, petitioners conclude that the money actually received by the contractor-taxpayer and his right to collect amounts still due under the construction contract constitute a direct trust for the benefit of subcontractors, and that the only property rights which the contractor-taxpayer has in the trust are bare legal title to any money actually received and a beneficial interest in so much of the trust proceeds as remain after the claims of subcontractors have been settled. The Government, on the other hand, claims that Section 36-a merely gives the subcontractors an ordinary lien, and that the contractor-taxpayer's property rights encompass the entire indebtedness of the owner under the construction contract.

"This conflict should not be resolved by this Court, but by the highest court of the State of New York . We cannot say from the opinion of the Court of Appeals that it has been satisfactorily resolved. We find no discussion in the court's opinion to indicate the nature of the property rights possessed by the taxpayer under state law. Nor is the application to be made of federal law clearly defined. We believe that it is in the interests of all concerned to have these questions decided by the state courts of New York . We therefore vacate the judgment of the Court of Appeals, and remand the case to that court so that it may ascertain the property interests of the taxpayer under state law and then dispose of the case according to established principles of law."

The Durham case will be next considered. In that case a contractor early in 1954 entered into a contract to construct buildings. The work was completed on July 15th, 1954 . Because the owners disputed the amount due under the contract, payment to the contractor was delayed. The contractor, in constructing the buildings, had secured labor and material from subcontractors. The contractor failed to pay them. On August 13th, 1954 , the Government made an assessment against the contractor for unpaid Federal taxes. Such assessment gave the Government a lien against the contractor. The contractor subsequently went into bankruptcy. The owner then paid the balance due under the construction contract into court. The Government and the subcontractors made conflicting claims to that balance. The United States Court of Appeals for the Fouth Circuit held that the subcontractors were entitled to payment of their claims out of that balance before the Government could satisfy its tax lien. The United States Supreme Court granted certiorari and reviewed the case and affirmed the decision of the Court of Appeals. That Court stated (pp. 524-527 U. S.):

"In affirming the judgment of the District Court, the Court of Appeals stated that the nature and extent of the general contractors' property rights, to which the tax lien attached, must be ascertained under state law. The court then undertook an extensive analysis of the relevant North Carolina statutes and cases. It found that the North Carolina law provides as follows: Subcontractors who have not been paid by the general contractor have a direct, independent cause of action against the owner to the extent of any amount due under the general construction contract, and any money owed by the owner under the construction contract must first be used to satisfy subcontractors' claims of which the owner has notice. Moreover, to insure that the owner will receive notice of outstanding subcontractors' claims, the North Carolina statute, N. C. Gen. Stat., 1950, §44-8, requires the general contractor, before receiving any payment, to furnish the owner with a statement of all sums due subcontractors, and if the general contractor fails to supply the required statement, he is guilty of a misdemeanor. N. C. Gen. Stat., 1950, §44-12. Finally, the court found further evidence of the direct and independent nature of the subcontractors' claims against the owner in N. C. Gen. Stat., 1950, §44-9, which provides that should the owner pay the general contractor after receiving notice of a subcontractor's claim, he will nevertheless be liable to the subcontractor to the extent of the amount which was due under the construction contract at the time notice was received.

"Based upon these considerations, the Court of Appeals held that, under North Carolina law, the general contractor did not have a property interest in the face amount, as such, of the general construction contract. Specifically, the court said that 'except to the extent the claim of the general contractor exceeds the aggregate of the claims of the subcontractors, the general contractor has no right which is subject to seizure under the tax lien.' Id. , at 574. Therefore, concluded the court, since under North Carolina law the taxpayers possessed merely a right to the residue of the fund, and since the Government's tax lien attached to the property interests of the taxpayers as defined by state law, the Government can recover only 'so much of the construction price as will remain unpaid after the owners have deducted a sum sufficient to pay the subcontractors.' Id. , at 575.

"The Court of Appeals was correct in asserting that the Government's tax lien attached to the taxpayers' property interests in the fund as defined by North Carolina law. Aquilino v. United States, ante, pp. 509, 513; United States v. Bess [58-2 USTC ¶9595], 357 U. S. 518 55; cf. Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82. It is suggested that the courts of North Carolina have never specifically described the nature of the property rights created by the North Carolina statutes involved in this case, and that the Court of Appeals' interpretation of those statutes is probably incorrect. However, where '[t]he precise issue of state law involved . . . is one which has not been decided by the . . . [state] courts,' this Court has said that, '[i]n dealing with issues of state law that enter into judgments of federal courts, we are hesitant to overrule decisions by federal courts skilled in the law of particular states unless their conclusions are shown to be unreasonable.' Proper v. Clark, 337 U. S. 472, 486-487. Since the Court of Appeals is much closer to North Carolina law than we are, and since we cannot say that the court's characterization of the taxpayers' property interests under that law is clearly erroneous or unreasonable, the judgment is Affirmed."

In footnote 4 the Court stated:

"This case points up the distinction we drew in Aquilino. The facts here show how it simply begs the question to suggest that the principle of the lien-priority cases is somehow subverted or evaded by recognizing that what constitutes the taxpayer's property in the first place is a question of state law. The facts show, too, that it does not promote clarity to substitute, for the property interests created by state law, a rule of federal property law, the main feature of which seems to be an inquiry into what the consequences would be if state law were different from what it in fact is. It is said that we should regard the subcontractor's interest as equivalent to a lien on the general contractor's claim against the owner, overlooking the fact that the law of North Carolina , as interpreted by the Court of Appeals, indicates that there is no such claim. If we are to equate the subcontractor's interest with something it is not, it would be much more appropriate, in terms of similarity, to equate it with the usual mechanic's lien of a subcontractor on the owner's property being improved--which of course is not the general contractor's property, and which could not be taken by the United States under a lien against the general contractor. This only points up the lack of precision and content in the proposed federal definition of property. See also Fidelity & Deposit Co. of Md. v. New York City Housing Auth. [57-1 USTC ¶9410], 241 F. 2d 142 (C. A. 2d Cir.), cited with approval in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55."

It would seem that in a case involving controversies relating to Federal tax liens where a Federal Court has to ascertain the nature and extent of property rights under state law, it has a duty similar to that imposed upon it in a Federal Court case in which jurisdiction is based upon diversity of citizenship.

[The "Residue" Rule]

Under the teaching of the two cases just discussed, it seems clear that where the Government has a tax lien against a delinquent contractor-taxpayer that lien only attaches to that part of the unpaid portion of the contract price to which the tax-delinquent contractor would be entitled under the applicable state law. In the Durham case the word "residue" is used. It seems clear that the two cases discussed establish the so-called "residue" rule. That rule would seem to be that a Federal tax lien only attaches to the residue or the net amount of the unpaid balance under the contract to which the delinquent contractor-taxpayer would have had an enforceable claim, except for the lien.

Certain phases of the situation as between the Owner and the Contractor will next be considered. The Government's tax lien came into existence on August 15th, 1955 . The assignment by the Contractor to the Bank of the amounts due him under the contract was made on September 19th, 1955 . On both dates the building was still under construction and the amount payable to the Contractor was undetermined. The Contractor committed breaches of his contract for which the Owner asserted and asserts a claim for unliquidated damages. The amount of those damages when determined would go to the reduction of the contract price. The Government and the Bank controverted the Owner's claim for damages. However, neither contends that the amount of such damages when determined is not properly chargeable by the Owner against the unpaid balance. In the present case the Contractor never did complete the building in accordance with the provisions of its contract. However, under the Iowa law, the Contractor, having substantially performed its contract, would be entitled to recover the balance of the contract price less the value of defects in performance. Farrington v. Freeman ( Iowa 1959), 99 N. W. 2d 388, 391.

If a contractor who has contracted to build a building neglects to pay the subcontractors for labor and materials supplied by them in connection with the construction of the building, and such subcontractors acquire valid liens against the property of the owner, the owner may properly, as against the contractor, apply the unpaid balance under the contract to the discharge of such liens even though there may be an outstanding Federal tax lien against the contractor, Wolverine Insurance Company v. Phillips (D. C. N. D. Iowa 1958) [58-2 USTC ¶9765], 165 F. Supp. 335, 343; the reason being that the owner is not compelled to stand by and see his property sold under liens which it was the duty of the contractor to pay.

[State Statutes]

One of the controversies in this case arises because the two mechanic's lienholders here involved did not file their liens within sixty days. It was heretofore noted that the Owner is held to be estopped as against the mechanic's lienholder Randall from attacking the lien on that ground and that Randall was entitled to foreclose his lien. So the result to the Owner is the same as though the lien had been filed within the sixty-day period. He is now faced with the threat of foreclosure on a claim and lien that should have been paid by the Contractor. It would seem clear that neither the Government nor the Bank is in any different situation than it would have been had the Owner not secured a postponement of the filing of the lien until after the sixty-day period, because if the Owner had not secured such postponement Randall would have filed the lien within the sixty-day period and the Owner, under the rule previously stated, would be entitled to discharge the lien out of the unpaid balance. So, therefore, neither the Government nor the Bank can successfully assert that the Owner, by securing postponement of the filing of the lien, impaired their situation.

In the case of Randall there is an additional feature which is of importance. While Randall did not file his mechanic's lien within sixty days after he furnished the last of the materials, he did file and perfect it within sixty days after October 12th, 1955 . The Contractor in the mechanic's lien filed by it stated that it completed the building on October 12th, 1955 . Under the Iowa Mechanic's Lien Act, a subcontractor who has not filed his lien within sixty days from the date he furnished the last of the material does not lose the right to file a mechanic's lien against the property of the owner. Section 572.10, Code of Iowa 1958, provides, in part, as follows:

"After the lapse of the sixty days prescribed in section 572.9, a subcontractor may perfect a mechanic's lien by filing his claim with the clerk of the district court and giving written notice thereof to the owner * * *"

Section 572.11, Code of Iowa 1958, provides, in part, as follows:

"Liens perfected under section 572.10 shall be enforced against the property * * * only to the extent of the balance due from the owner to the contractor at the time of the service of such notice * * *."

Section 572.13, Code of Iowa 1958, provides as follows:

"No owner of any building, land, or improvement upon which a mechanic's lien of a subcontractor may be filed, shall be required to pay the original contractor for compensation for work done or material furnished for said building, land, or improvement until the expiration of sixty days from the completion of said building, or improvement unless the original contractor shall furnish to the owner:

1. Receipts and waivers of claims for mechanics' liens, signed by all persons who furnished any material or performed any labor for said building, land, or improvement, or

2. A good and sufficient bond to be approved by said owner, conditioned that said owner shall be held harmless from any loss which he may sustain by reason of the filing of mechanics' liens by subcontractors."

There is some question as to just when the building in question was completed within the purview of Section 572.13 just set out. It was and is the claim of the Owner that the Contractor never did complete the building in accord with the provisions of the contract. It appears that the last items of work and materials were furnished by the Contractor on October 12th, 1955 , and that it claims the building was completed at that time. At least at that time the building was completed so far as any further activity on the part of the Contractor was concerned, which might give rise to mechanic's liens in favor of subcontractors. Thus the date of October 12th, 1955 , will be taken as the date for the completion of the building within the purview of Section 572.13.

Under the provisions of the Iowa Mechanic's Lien Act there are two sixty-day periods which are of significance. A subcontractor has sixty days after he has furnished the last of his material in which to file his mechanic's lien. The owner is authorized by law to withhold payment from the contractor sixty days after the completion of the building. If a subcontractor has not filed his lien within sixty days after he furnished the last of his material, he may nevertheless perfect a mechanic's lien against the owner's premises to the extent that the owner has withheld payment of the contract price from the contractor. If the owner exercises the right given him by statute to withhold payment from the contractor for sixty days after the completion of the building in an amount equal to or in excess of the amount of the subcontractor's lien, the subcontractor has a lien against the owner's premises to the full amount of his lien.

[Status of Subcontractors]

It seems clear that under the Iowa Mechanic's Lien statutes referred to, even apart from the issue of estoppel, the claim of Randall based upon his mechanic's lien is properly payable by the Owner out of the balance of the contract price ahead of the Government and this Court so holds.

It was heretofore noted that Standard did not file its mechanic's lien until December 16th, 1955, and did not perfect its claim to a mechanic's lien by giving written notice to the Owner until December 30th, 1955, both of which dates were subsequent to the sixty-day period following the completion of the building. Under Section 572.27, Code of Iowa 1958, there is a two-year statute of limitations applicable to the foreclosure of mechanic's liens; that period to begin upon the expiration of the sixty or ninety-day period for filing liens under Section 572.9. Therefore, Standard, as a subcontractor, could file a mechanic's lien within two years of September 24th, 1955 , the date on which it furnished the last of the materials. The question is then presented as to what is the situation where a mechanic's lien is filed within the limitation period but after the sixty days following the completion of the building where the owner has not paid the full balance of the contract price and the Government is the holder of a tax lien against the contractor. Under the rule laid down in the Aquilino and Durham cases, the nature of the contractual obligation existing between the owner and the contractor is determined by state law, but the legal consequences arising out of the intervention of a Federal tax lien against the contractor is determined by Federal law. The contentions of Standard and the Government require a consideration of certain cases. For some time prior to the decisions of the United States Supreme Court in the Aquilino and Durham cases, a number of courts, in passing upon questions growing out of a Federal tax lien assessment and a tax-delinquent contractor, adopted and followed what is referred to as the "no debt" rule. See cases cited in Wolverine Insurance Company v. Phillips (D. C. N. D. Iowa 1958) [58-2 USTC ¶9765], 165 F. Supp. 335, 348, 349. See also Central Surety and Insurance Corporation v. Martin Infante Company, Inc. (3rd Cir. 1959) [59-2 USTC ¶9736], 272 F. 2d 231; Atlantic Refining Company v. Continental Casualty Company (D. C. 1960) [60-1 USTC ¶9413], 183 F. Supp. 478; First National Bank in Yonkers v. City of New York (D. C. 1959) [59-2 USTC ¶9639], 177 F. Supp. 175; General Insurance Company of America v. The Price Construction Company (D. C. 1959) [59-2 USTC ¶9568], 175 F. Supp. 261. The leading case supporting the "no debt" rule is the case of Fidelity & Deposit Company v. New York City Housing Authority (2d Cir. 1957) [57-1 USTC ¶9410], 241 F. 2d 142. In footnote 4 of the opinion in the Durham case there appears this statement: "See also Fidelity & Deposit Co. of Md. v. New York City Housing Auth. [57-1 USTC ¶9410], 241 F. 2d 142 (C. A. 2d Cir.), cited with approval in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55." While the United States Supreme Court in the Aquilino and Durham cases does not make use of the term "no debt," the teaching in those cases encompasses the "no debt" rule. In the Durham case the Court affirmed the decision of the United States Court of Appeals, 257 F. 2d 570. That Court of Appeals stated (p. 574):

"* * * To the extent that the owners may be allowed to take credit for the amount of their [subcontractors'] claims in any settlement with the general contractor, the existence of the claims are relevant to an appraisal of the worth of the claim of the general contractor. * * *"

Standard relies strongly upon the fairly recent case of Beane Plumbing & Heating Company v. D-X Sunray Oil Company (1958) [58-2 USTC ¶9916], 249 Iowa 1364, 92 N. W. 2d 638, commented on in 44 Iowa Law Review 814 (1959). In that case on March 25th, 1955 , a contractor entered into a contract with an oil company, as owner, for the completion of a service station at Sioux City , Iowa . The service station was completed in October, 1955. Prior to January 1st, 1956 , the owner paid the contractor all but the sum of $3442 on the contract price. On February 15th, 1956 , an assessment was made and a lien credited against the contractor for unpaid Federal taxes. The contractor failed to pay a number of subcontractors. They filed mechanic's liens against the premises of the owner. All of the liens were filed more than sixty days after the last material had been furnished and more than sixty days after the building had been completed. One of the mechanic's lienholders commenced foreclosure of its mechanic's lien and a number of other mechanic's lienholders were made made parties to that action. One of the issues in the case was the status of the Government's tax lien as to the unpaid balance. The Government was not a party to the action. The unpaid balance was sufficient to pay the claims of the mechanic's lienholders who were parties to the action but it was not sufficient to pay both those claims and the Government's tax lien. The decree of the trial court in that case covered a number of matters. It decreed that the Government lien was inferior to the claims of two of the mechanic's lienholders but superior to the claims of the other two mechanic's lienholders. On appeal the portion of the decree giving the Government's lien priority over the claims of two of the mechanic's lienholders was reversed, and those claims were given priority over the Government's lien. The Iowa Supreme Court discussed at some length the "no debt" rule in relation to tax liens against tax-delinquent contractors and purported to apply that rule. It was heretofore noted that subcontractors may file and perfect their liens within a two-year period but that any liens filed and perfected after the expiration of sixty days from the furnishing of the material are, under Section 572.11, liens against the premises of the owner "only to the extent of the balance due" from the owner to the contractor at the time the lien is perfected. In the case of Beane Plumbing & Heating Company v. D-X Sunray Oil Company, supra, the Iowa Supreme Court stated (p. 642 N. W. 2d): "Interpretation of Section 572.11 as to meaning of words 'balance due' creates a question of first impression." In that case, apart from the intervention of the Government tax lien, there being a balance due the contractor at the time the mechanic's liens in question were filed, it is clear that the lienholders would have had the right to be paid out of the balance due and the owner would have had the right to pay them out of the balance due. However, in that case a Government tax lien did come into evidence before the mechanic's liens were filed. Under the Federal law, in order for a Federal tax lien to attach to any portion of the balance on the contract, there must have been at some time a right on the part of the contractor to demand and receive such portion.

It sometimes happens that even though the sixty-day period following the completion of a building has expired and no mechanic's liens are on file the owner does not make final settlement with the contractor. This may be due to the owner asserting a claim for damages against the contractor, the inability of the owner to raise the necessary funds, or because of conflicting claims to the balance due on the contract. In the case of Beane Plumbing & Heating Company v. D-X Sunray Oil Company, supra, no mechanic's liens were on file at the expiration of sixty days following the completion of the Sioux City building. The owner did not make payment of the balance due on the Sioux City contract following the end of that period apparently because of a controversy growing out of another contract. The contractor had completed a building at Logan , Iowa , under another contract and there were unpaid mechanic's liens in connection with that building. The owner claimed the right to apply the balance due on the Sioux City contract on the mechanic's liens against the Logan property. The Iowa Supreme Court held that it could not so do. Thus, the situation, in reality, was that at the end of the sixty-day period following the completion of the building no mechanic's liens were on file and there was apparently a balance due the contractor on the contract price.

In the present case at the expiration of the sixty-day period following the completion of the building, only one mechanic's lien was on file, that of Randall. This Court has heretofore held that the Owner was entitled to credit upon the contract price for the amount of the Randall lien and for its damages for breach of contract. However, after allowing credit for those items, there was still a balance remaining unpaid on the contract price. In the present case, so far as the claim of Standard is concerned, and in the Beane Plumbing & Heating Company case, so far as the mechanic's liens were concerned, there is the same question involved. That question is as follows: Where a contractor has completed the construction of a building under a contract with the owner and more than sixty days have elapsed since completion, and no mechanic's liens are on file, does the contractor have the right to demand and receive the balance due on the contract? If the contractor does have such right, then, of course, the owner could pay such balance without incurring liability to subcontractors who might file mechanic's liens after the payment had been made.

[State and Federal Relationship]

It seems clear that under the Federal law once a right arises in favor of a contractor against whom a Federal tax lien is outstanding to a portion of the contract price, the tax lien attaches to that portion immediately. It would also seem clear that once a Federal tax lien has attached to such a portion it is no longer a part of the balance "due" the contractor but is "due" to the Government. Under the rule of the Aquilino and Durham cases, in order for a Federal tax lien against a contractor to attach to the contract price there must have been a time at which the owner is not entitled to take credit on the contract price for the claims of the subcontractors. On the other hand, if there was a time when the owner was not entitled to take credit for claims of subcontractors out of the contract price and the contractor against whom a tax lien was outstanding would have had the right, save for the tax lien, to demand and receive payment of the balance of the contract price, then the tax lien would attach to the balance due on the contract price.

There inheres in this phase of the present case the question of the rights, if any, of a subcontractor who has furnished materials for a building but who has not filed a mechanic's lien within the sixty-day period following the completion of the building but files it subsequent to the time the owner has made payment to the contractor following the expiration of the sixty-day period. Under Section 572.11, the lien would only be a lien against the owner's property for the "balance due" to contractor. Since, in the situation just stated, there would be no balance due the contractor at the time the lien was filed, it would seem that the lien would be of no efficacy. Under Section 572.13, the owner is not required to pay the contractor until sixty days after the completion of the building. That Section would seem to imply that after the expiration of the sixty-day period the owner could properly pay the contractor the balance due on the contract price if no mechanic's liens were on file.

[State Decisions]

Some lack of clarity has arisen in connection with the questions just discussed because of the decision of the Iowa Supreme Court in the case of Beane Plumbing & Heating Company v. D-X Sunray Oil Company, supra. In that case the Iowa Supreme Court held that mechanic's liens of subcontractors filed more than sixty days after the completion of the building were superior to the claim of the Government on a tax lien which came into existence after the expiration of the sixty-day period following the completion of the building and before the filing of mechanic's liens by the subcontractors.

Under the Aquilino and Durham cases, the Federal Courts, in cases involving Federal tax liens, are required to follow local state law as to the property rights created under that law, but such Courts are not required to follow local state law as to the legal consequences of federal laws when applied to those rights. One of the legal consequences would relate to the matter of priority between those liens and competing state created claims. In the case of Beane Plumbing & Heating Company v. D-X Sunray Oil Company, supra, the Iowa Supreme Court does not discuss or state just what rights, if any, a subcontractor would have who furnished materials for a building, but who did not file a mechanic's lien within the sixty-day period following the completion of the building, but filed it subsequent to the time the owner has made payment to the contractor following the expiration of the sixty-day period. This is the pivotal question in this case so far as priority between the Government's tax lien and Standard's mechanic's lien.

The earlier Iowa case of Cedar Rapids Sash & Door Company v. Heinbaugh (1918), 183 Iowa 1236, 168 N. W. 270, is of interest in this connection. In that case a subcontractor furnished material for a contractor who had constructed a building for the owner. At that time the Iowa Mechanic's Lien Act required a subcontractor to file his mechanic's lien within thirty days after the last item of material was furnished. The Act also provided that a subcontractor, in order to preserve his lien against the owner, was required to serve notice upon the owner within thirty days after the completion of the building. The subcontractor did not file his mechanic's lien within thirty days following the furnishing of the last of the material nor serve notice upon the owner within thirty days after completion of the building. Following the expiration of the thirty-day period following the completion of the building, the owner made final settlement with the contractor. At the time of the settlement the owner knew the subcontractor had furnished material for the building and had not been paid. Following the final settlement, the contractor sought to foreclose a mechanic's lien against the owner's property. The lower court dismissed the foreclosure and on appeal the Iowa Supreme Court affirmed. It stated (p. 271 N. W.):

"* * * Therefore it would seem that after the 30 days no written notice having been served upon the other as required by section 3093, the owner is at liberty to settle with the principal contractor, or to dispose of the contract money in any lawful way, without regard to the claims of the subcontractor. * * *"

The Court held that the situation was not changed by the fact that the owner at the time he had made full settlement with the contractor knew that the subcontractor had furnished materials for the building and that he had not been paid. The Court stated (p. 272 N. W.):

"The statute requires that the subcontractor serve the owner with written notice. This is explicit. Oral notice or constructive notice cannot be substituted for the plan requirements of the statute. * * *"

The Iowa Supreme Court, however, in the case of Beane Plumbing & Heating Company v. D-X Sunray Oil Company, supra, did hold that the belatedly filed mechanic's liens did have priority over the Government's pre-existing tax lien. As heretofore noted, the Government was not a party to that litigation and, therefore, the Government was not heard on the question of the priority of its tax lien. At the time of that decision, the United States Supreme Court had not decided the Aquilino and Durham cases. The decisions in those cases clarified the situation as to the interrelation between Federal tax liens and state created rights. It would seem under the decisions in those cases that, in cases involving competition between a Federal tax lien and competing claims of subcontractors, if, following the coming into existence of a tax lien, there is an open period during which the owner cannot take credit for the claims of the subcontractors against the contract price, the Federal tax lien attaches at that time ahead of the claim of the subcontractors. Under the Iowa law it would seem that, where more than sixty days have elapsed since the completion of a building and no mechanic's liens of subcontractors are on file, there would be an open period at which time a pre-existing Federal tax lien against the Contractor would attach to the balance due, and that having so attached it would have priority over subcontractors' mechanic's liens subsequently filed. Since the Iowa Supreme Court did not discuss or point out any rights on the part of the subcontractors which would bridge over that open period, it is the view of this Court that the decision of the Iowa Supreme Court, in substance, relates to the priority of a Federal tax lien. In the recent case of United States v. Brosnan (1960) [60-2 USTC ¶9516], 363 U. S. 237, 80 S. Ct. 1108, 4 L. Ed. 2d 1192, the Court stated (p. 240 U. S.):

"Federal tax liens are wholly creatures of federal statute. * * * Consequently, matters directly affecting the nature or operation of such liens are federal questions, regardless of whether the federal statutory scheme specifically deals with them or not. * * *"

In the present case, it is the view of the Court that under the Aquilino and Durham cases the claim of the Government against the balance due on the contract under its tax lien in this case is prior to the claim of Standard under its belatedly filed mechanic's lien. This Court is unable to ascertain any right on the part of Standard which bridged over the gap between December 13th, 1955, when the sixty-day period following the completion of the building expired and December 30th, 1955, when Standard perfected its mechanic's lien which would present the Contractor from demanding and receiving and the Owner paying it the balance due during that gap.

Federal tax liens are the subject of two recent articles in the Drake Law Review. Those articles are Federal Tax Liens: Their Priority and Enforcement, by Harold W. Felton, 10 Drake Law Review 3 (1960), and Title Problems in Connection with Federal Tax Liens, by Jesse E. Marshall, 10 Drake Law Review 28 (1960). The priority of mechanic's liens in Iowa as related to Federal tax liens is discussed in a note in 45 Iowa Review 813 (1960).

[Status of the Bank]

There is yet to be considered the controversy between the Bank under its assignment and the Government under its tax lien as to the residue or net amount due the Contractor on December 13th, 1955, following the expiration of the sixty-day period following the completion of the building, which residue or net amount this Court has determined to be the amount remaining on the contract price after satisfying the claim of the Owner for damages and the Randall lien.

The Government's tax lien in this case came into existence on August 15th, 1955 , when the Commissioner of Internal Revenue made the tax assessment against the Contractor. The Government filed notice of its lien in the office of the County Recorder of Cerro Gordo County , Iowa , on November 8th, 1955 . It was stipulated that neither the Owner nor the Bank nor the mechanic's lienholders had any actual knowledge of the Government's tax lien until after November 12th, 1955 . Therefore, as to the Bank, the Government's tax lien was a secret lien from August 15th, 1955 , until November 8th, 1955 . On September 19th, 1955 , while the Government's lien was still a secret lien, the Bank, as heretofore noted, loaned the Contractor the sum of $3000 secured by an assignment of all "monies due" the Contractor under its contract with the Owner.

Since the Government's tax lien was prior in time to the assignment made to the Bank, the Government would prima facie be entitled to priority over the Bank as to the balance of the contract price here involved. However, the Bank claims that the Government's lien did not become effective until it was filed of record on November 8th, 1955 , and therefore it has a prior claim to that balance. That claim requires a consideration of another phase of the law relating to Federal tax liens.

The priority statute, Section 6321, Title 26, U. S. C. A., was originally enacted in 1866. 14 Stat. 107 (1866). Subsequently Congress enacted a statute which now appears as Section 6323, Title 26, U. S. C. A., which provides, in part, as follows:

"(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated as office within the State or Territory for the filing of such notice * * *"

That statute was intended to afford protection to those named in it against secret tax liens in favor of the Government.

Section 335.11, Code of Iowa 1958, provides as follows:

"The notice of a lien for any tax in favor of the government of the United States , or any release of such lien, may be filed and recorded in the office of the county recorder in any county within which the property subject to the lien is situated. Such county recorder shall file, record, and index any such notice of lien or any release of the same without fee."

[The Ball Decision]

One of the most cited and discussed cases relating to the coverage of Section 6323(a) is the case of United States v. R. F. Ball Construction Company, Inc. (1958) [58-1 USTC ¶9327], 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 2d 10. In that case Ball procured a housing project in San Antonio and subcontracted the painting and decorating to Jacobs. On July 21st, 1951 , Jacobs made application to a bonding company for a performance bond. As security for the protection of the bonding company, Jacobs made an assignment to it of all percentages returned by Ball under the subcontract. The assignment was made as security not only for possible losses growing out of the San Antonio job but also for payment of any indebtedness or liability "whether heretofore or hereafter incurred." On April 4th, 1952 , Jacobs obtained a similar bond with the same company on a different subcontract in Louisville , Kentucky . On April 30th, 1953 , the retained percentage on the San Antonio job was determined to be $13,228.15. In May, June and September, 1953, the Government filed tax liens against Jacobs amounting to around $17,000. Thereafter the bonding company had to pay around $13,000 under its bond covering the Louisville job. The bonding company and the Government both claimed priority as to the retained percentage on the San Antonio job. The bonding company claimed that it had the status of a "mortgagee or pledgee or purchaser" within the purview of Section 3672 of the Internal Revenue Code of 1939 [currently Sec. 6323(a), Title 26, U. S. C. A.]. The District Court held that the bonding company had priority. R. F. Ball Construction Company v. Jacobs (D. C. 1956) [56-1 USTC ¶9514], 140 F. Supp. 60. In passing upon the contention of the bonding company that it should be classified as a pledgee, that Court stated (p. 64): "In may opinion * * * the Bonding Company in this instance more nearly comes within the classification of a 'mortgagee' under the Texas law * * *."

The Court further stated (p. 65):

"The Government argues that if an attachment or other judicial lien is not sufficiently 'choate' or complete 'to defeat a subsequent tax lien' then a mortgage to secure future indebtedness should likewise be inferior to a subsequent tax lien. Congress has in effect stated in Section 3672 that before an attaching, or other similar statutory lienor, could claim priority over the Government, his claim had to ripen into a final judgment. * * * No such qualification was placed by Congress on the contractual lien of a 'mortgagee'. * * * I therefore hold that the Bonding Company under its assignment as collateral security, became a 'mortgagee' within the meaning of 3672 and was, therefore, not affected by the tax liens which were subsequent in time."

On appeal the United States Court of Appeals for the Fifth Circuit affirmed on the opinion of the District Court (239 F. 2d 384). The United States Supreme Court, with four Justices dissenting, stated (pp. 587, 588 U. S.):

"The judgment is reversed. The instrument involved being inchoate and unperfected, the provisions of [the predecessor of Section 6323(a)] §3672(a), Revenue Act of 1939, 53 Stat. 449, as amended, 53 Stat. 882, 56 Stat. 957, do not apply. See United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47; United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 86-87. * * *"

The scope and extent of the decision of the United States Supreme Court in that case is not clear. See Note, 43 Minnesota Law Review 755 (1959); Comment, 44 Iowa Law Review 814, 816 (footnote 13) and Heron, Federal Tax Claims Again, or Devastation Revisited, 26 Insurance Counsel Journal 112 (1959). The scope and effect of that decision as to several matters has to be largely surmised or implied from the decision of the District Court which was reversed and from the dissenting opinion written by Mr. Justice Whittaker. The holding of the District Court that the assignee may have had the status of a mortgagee under the Texas law within the provisions of Section 6323(a) was reversed. From that reversal it could be implied that the fact that an assignment may be classified as a mortgage under the state law is not determinative of its status in connection with Section 6323(a). In the dissenting opinion, Mr. Justice Whittaker stated (pp. 593-594 U. S.):

"* * * under the law and the facts in this record, the 'assignment' was in legal effect a "mortgage," and inasmuch as it antedated the filing of the federal tax liens it was superior to them under the expressed terms of §3672(a) [Sec. 6323(a), Title 26, U. S. C. A.]. * * * The fact that the assignment was of property to be afterwards acquired did not affect its validity as a 'mortgage,' * * * The questioned assignment conveyed to the surety all sums then due and thereafter to become due * * * as security for the payment * * * [T]he assignment was in legal effect a mortgage * * * perfected on its date, in all respects choate * * * [and it] antedated * * * the federal tax liens [and hence is] * * * superior to those liens * * *."

However, the per curiam majority opinion definitely and clearly holds that the assignment there involved did not come within the protection of Section 6323(a). In the case of Aetna Casualty & Surety Company v. Port of New York Authority (D. C. 1960) [60-1 USTC ¶9372], 182 F. Supp. 671, the Court, in referring to the Ball case, stated (p. 673):

"* * * In the Ball case, the plaintiff did not sue as completing 'surety' but as 'assignee,' a status which it contended, under applicable state law as to assignments and mortgages, constituted it a 'mortgagee' under section 3672(a) [Sec. 6323(a), Title 26, U. S. C. A.] * * * and thus entitled to priority. The Supreme Court held the assignment to Ball did not constitute it a 'mortgagee' within the meaning of the code provision. * * *"

In the dissenting opinion of Mr. Justice Harlan in the Aquilino and Durham cases, supra, he stated (p. 516 U. S.) that the majority of the Court had sanctioned a result which had been consistently prohibited by previous decisions of the Court. Among the cases cited by Mr. Justice Harlan as prohibiting the result reached in those cases was the Ball case. In the case of Union Central Life Insurance Company v. Peters (Michigan 1960) [60-2 USTC ¶9697], -- Mich. --, 105 N. W. 2d 196, the Michigan Supreme Court, in a case involving a federal tax lien, stated (p. 200 N. W. 2d):

"* * * In Aquilino and Durham the Supreme Court hints circumstantially that it may be ready to qualify the mentioned test of 'choateness.' The hint, however, is neither loud nor clear * * *."

While the decision in the Ball case was a 5 to 4 decision and while some are of the view that the holding in that case is, to some extent at least, undermined by the Aquilino and Durham excisions, it would seem that the holding in the Ball case is still authoritative.

In the Ball case the assignment was made to secure against future liability. In the present case the assignment was made to secure a loan made concurrently with the assignment. In the case of First State Bank of Medford v. United States (D. C. 1958) [58-2 USTC ¶9758], 166 F. Supp. 204, a bank made a loan to a contractor upon the strength of a purported oral assignment of the amounts due under a construction contract. Following the assignment a tax lien came into existence against the contractor. The Government did not file its notice of lien. The bank claimed that it was a mortgagee within the provisions of Section 6323(a). In the litigation between the bank and the Government as to priority as to the balance due, the question arose as to the meaning of the decision in the Ball case. In that connection the Court, after referring to the language in the per curiam opinion in that case, stated (p. 209):

"This language clearly shows that the majority of the Court regarded the assignment as an inchoate and unperfected lien. The Bank here, however, points out that the assignment in the Ball case was made to secure a contingent or future indebtedness and that the assignment under consideration by this Court was given to secure a present and ascertained indebtedness. Admittedly, this is a distinguishing characteristic, but the distinction does not perfect an unperfected lien. * * *"

The situation is not changed by the fact that the assignment is given for full present consideration. Arthur Company v. Chicago Paints, Inc. (D. C. 1959) [59-2 USTC ¶9689], 175 F. Supp. 50.

It is the holding of this Court that the Bank did not have the status of a "mortgagee" within the provisions of Section 6323(a).

[Code Provisions]

It is the claim of the Bank that it had the status of a "purchaser" within the provisions of Section 6323(a). In the case of United States v. Scovil (1954) [55-1 USTC ¶9137], 348 U. S. 218, 75 S. Ct. 244, 99 L. Ed. 271, the Court stated (p. 221 U. S.):

"* * * A purchaser within the meaning of §3672 [Section 6323(a)] usually means one who acquires title for a valuable consideration in the manner of vendor and vendee. * * *."

If a transaction is a security transaction rather than a sale, the parties have the relation of lender and borrower rather than vendor and vendee. United States v. Chapman (10th Cir. 1960) [60-2 USTC ¶9667], 281 F. 2d 862, 868. See also Arthur Company v. Chicago Paints, Inc. (D. C. 1959) [59-2 USTC ¶9689], 175 F. Supp. 50, 53.

It seems clear that in the present case the transaction between the Bank and the Contractor was a security transaction and that the Bank did not have the status of a "purchaser" within the provisions of Section 6323(a).

It is the claim of the Bank that it had the status of a "pledgee" within the provisions of Section 6323(a).

In the note executed to the Bank it is stated that the maker of the note had deposited therewith and "pledged as collateral security to the holder thereof for the payment of the above note, the following property, to-wit: Assignment Eli Colby Co. Contract." The assignment was as follows:

"ASSIGNMENT

FOR VALUE RECEIVED, The Iowa Builders, Inc., by Carl P. Rinard, President, does hereby transfer and assign all its right, title and interest in and to all monies due the Iowa Builders, Inc., by virtue of the performance of a certain contract dated June 29, 1955, by and between the Eli Colby Company of Hanlontown, Iowa, and the Iowa Builders, Inc. covering the erection of a Stran-Steel Quonset Type A Building erected at Lake Mills, Iowa, to the United Home Bank & Trust Co., a banking corporation, of Mason City, Iowa, as collateral and security for monies advanced this 19th day of September, A. D. 1955, to the Iowa Builders, Inc.

Dated at Mason City , Iowa this 19th day of September, A. D. 1955

IOWA BUILDERS, INC.

By /s/ Carl P. Rinard

Carl P. Rinard, President

Notice of the Assignment of said Contract by and between the Iowa Builders, Inc. and the Eli Colby Company is hereby accepted this 26th day of September, A. D. 1955.

ELI COLBY COMPANY

By /s/ Eli F. Colby

Partner."

At the time the Contractor made the assignment to the Bank it had not completed the construction of the building under its contract. The assignment had to do with monies that would become due in the future under an executory contract. The right of the Contractor to those monies under the contract constituted a chose in action. The legal effect of a pledge is to give the pledgee a lien upon the property pledged. Therefore, under the pledge theory, what the Bank obtained by the assignment was a lien upon a chose in action. It would have a lien upon that chose in action by virtue of instruments executed by the Contractor to it without resort to the pledge theory. Whether the Bank be regarded as having a lien on the chose in action under the pledge theory or some other theory, its lien would still have to meet the requirements prescribed by the United States Supreme Court in the Ball case, i. e., its lien must have been choate and perfected in order to come within the provisions of Section 6323(a). The lien of the Bank under the instruments executed to it by the Contractor would not become choate or perfected by regarding those instruments as having resulted in a pledge of the chose in action.

It is the holding of the Court that the Bank does not have the status a of a pledgee within the provisions of Section 6323(a).

It was heretofore noted that the Government's tax lien on the chose in action was prior to time to the lien of the Bank on the same chose in action. Therefore, in order for the Bank to have priority over the Government under its tax lien as to the balance of the contract price here involved, it had to come within the provisions of Section 6323(a).

It is the holding of the Court that the Bank does not come within the provisions of Section 6323(a) and that the Government under its tax lien has priority as to the balance of the contract price here involved.

The Bank asserts, and correctly so, that its transaction with the Contractor was an ordinary and normal bank loan transaction. It further asserts that if the Government is given priority by virtue of its tax lien it has been deprived of all the security given it in connection with that transaction by a secret lien. It further asserts that it was the intention of Congress in enacting Section 6323(a) to give those engaged in normal and usual security transactions protection against secret tax liens. However, it seems clear that, as presently interpreted by the United States Supreme Court, Section 6323(a) does not afford protection to the Bank in this case.

The foregoing shall constitute the Findings of Fact and Conclusions of Law under Rule 52(a) of the Federal Rules of Civil Procedure.

IT IS HEREBY ORDERED that judgment shall be entered in accordance with these Findings and Conclusions.

 

 

[64-2 USTC ¶9521]Berns Construction Company, Inc., Plaintiff-Appellee v. Herman H. Highley, Thelma G. Highley, Helen L. Nickelsen, Helen L. Nickelsen, Administratrix of the Estate of John M. Nickelsen, deceased, Charles A. Pratt, Trustee in Bankruptcy of the Estate of Herman H. Highley, Defendants-Appellees and United States of America, Intervenor-Appellant J. L. Wilson, Plaintiff-Appellee v. Herman H. Highley, Thelma G. Highley, Helen L. Nickelsen, Helen L. Nickelsen, Administratrix of the Estate of John M. Nickelsen, deceased, Charles A. Pratt, Trustee in Bankruptcy of the Estate of Herman H. Highley, Defendants-Appellees and United States of America, Intervenor-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, Nos. 14452, 14453, 5/26/64, Affirming District Court, 64-1 USTC ¶9124

[1954 Code Sec. 6323]

Tax liens: Proceeds from sale of dirt and gravel: Rents and profits v. waste.--The severance and sale of dirt and gravel by the delinquent mortgagor, without the knowledge or consent of the mortgagees, was a sale of part of the realty which was security to the mortgagees and constituted waste. Thus, the proceeds from the sale were not rents and profits belonging to the mortgagor in possession, which could be subject to the government's tax lien. District Court affirmed.

Frank W. Campbell, 149 S. Ninth St. , Noblesville , Ind. , James J. Stewart, 1220 Merchants Bank Bldg., Indianapolis , Ind. , for plaintiffs-appellees. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Martin B. Cowan, Department of Justice, Washington, D. C. 20530, for intervenor-appellant.

Before HASTINGS, Chief Judge, and KNOCH and CASTLE, Circuit Judges.

HASTINGS, Chief Judge:

Plaintiffs, Berns Construction Company, Inc. (Berns), and J. L. Wilson ( Wilson ), brought these interpleader actions against defendants, inter alia, Helen L. Nickelsen, individually and as admin istratrix of the estate of John M. Nickelsen, deceased (mortgagees), and the United States . ¹ The Government was dismissed from both cases due to sovereign immunity. The Government thereafter intervened and the two cases were consolidated for trial.

From a judgment in favor of the mortgagees, the Government appealed.

The following is a summary of the facts, which were stipulated, giving rise to the legal questions in issue.

On or about June 26, 1956 , Herman H. Highley and Thelma G. Highley, executed a promissory note to the mortgagees, secured by a first mortgage on the Highleys' property, which was located in Indiana . This mortgage was recorded on or about March 28, 1957 .

On March 28, 1960 , plaintiff Berns entered into a contract with Herman Highley, without the knowledge or consent of the mortgagees. This contract provided that Berns could remove dirt and gravel from the mortgaged property for an agreed sum per cubic yard. Berns agreed to replace all topsoil. The dirt and gravel were to be used in the construction of an Indiana state highway nearby.

Plaintiff Wilson entered into a similar contract with Herman Highley. This contract contained an additional provision that the property would be left in a satisfactory drainage condition.

On May 6, 1960 , the District Director of Internal Revenue made an assessment against the Highleys for income tax deficiencies for the years 1955 through 1958.

On June 16, 1960, the mortgagees notified plaintiffs that they would be held liable for damages resulting from removal of the "topsoil." ² Although on such notice, plaintiffs continued removing dirt and gravel but advised the mortgagees that all sums due and owing to the Highleys would be held pending final determination of the rights of the mortgagees.

On or about July 29, 1960 , the note and mortgage were reduced to judgment through foreclosure by the mortgagees, in the Circuit Court, Hamilton County , Indiana .

On August 21, 1960 , the Government filed and recorded tax liens with respect to the May 6, 1960 assessment against all property and rights to property of the Highleys.

On September 1, 1960 , the Hamilton County Circuit Court issued execution on its judgment of foreclosure.