Fact-Finding Page6

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On September 13, 1960 , the Government served a notice of levy on Berns, demanding payment of the debt owed the Highleys.

On November 10, 1960 , the mortgaged property was sold to the mortgagees for $38,000, leaving $30,873.71 unpaid on their judgment. The Government makes no claim to this amount, since the mortgagees were judgment creditors prior to the time the Government filed and recorded the tax lien. Cf. U. S. v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963).

The dispute concerns the proceeds from the sale of dirt and gravel in the amount of $3623.50. The district court entered judgment awarding these proceeds to the mortgagees, less costs of the action and fees for plaintiffs' attorney totaling $750.

Both parties agree that Indiana law is controlling, Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-513 (1960); that under Indiana law a mortgagee has no interest in rents and profits until he ousts the mortgagor in possession; and that a mortgagor may not commit waste upon the land. Knarr v. Conaway, et al., 42 Ind. 260, 265 (1873).

[Rents and Profits v. Waste]

The main issue to be decided is whether the severance and sale of dirt and gravel, without the knowledge or consent of the mortgagees, is a sale of part of the realty which is security to the mortgagees and constitutes waste; or, whether such dirt and gravel and the proceeds therefrom are rents and profits which belong to the mortgagor in possession, thus subjecting such proceeds to the Government's tax lien.

The distinction between rents and profits and waste is generally said to be that rents and profits pertain to annual income from the property, see 36A Words and Phrases, Rent and Profit, 694-695 (1962), while waste is any act which does lasting damage to the freehold. See 44A Words and Phrases, Waste, 663-669 (1962).

"Although a mortgagor in possession is regarded for most purposes as the owner of the land, and as such entitled to the temporary annual rents and profits; yet, inasmuch as the very purpose of the mortgage would be defeated by any acts affecting the permanent value of the property, no point of law is better settled than that a court of equity will grant an injunction to restrain waste by the mortgagor or those claiming under him, when it is such as may render unsafe the debt secured by the mortgage." (Italics added.) Knarr v. Conaway, et al., 42 Ind. at 265.

The Government contends that the district court erred in holding the removal of the dirt and gravel constituted waste, since there was no proof that such removal damaged or reduced the value of the land. The Government argues that "the only acceptable evidence here would have been direct and competent testimony, as to the value of the land before and after the removal of the dirt fill."

This argument fails to recognize that dirt and gravel are part of the corpus of the land. Land "includes, not only the face of the earth, but everything under it." 73 C. J. S. Property §7(b) at 163 (1951).

It appears that in Indiana proof of reduction in value of the land is immaterial when a part of the corpus of the land is being removed. In Sunnyside Coal & Coke Co. v. Reitz, 14 Ind. App. 478, 39 N. E. 541 (1895), plaintiff sought $10,000 from defendant for coal which defendant had allegedly dug and removed from plaintiff's property. On petition for rehearing, 14 Ind. App. 487, 43 N. E. 46 (1895), defendant argued that the trial court had erred in sustaining an objection to evidence which would attempt to establish `that the difference between the market value of the real estate without any coal having been taken from it by the defendant, and with the coal having been taken from it by the defendant, is not more than $75.'" 14 Ind. App. at 488, 43 N. E. at 47. The court held that excluding this evidence was not error and stated: "The coal as it lay in place in the vein was a part of the realty; when it was severed it became a chattel. The severance did not change its ownership. The owner of the land was still the owner of the coal. When it was carried away and converted, the owner was entitled to recover its value as a chattel. For this injury the defendant must respond independently of any question as to the injury or damages done to the land." 14 Ind. App. at 490, 43 N. E. at 48. See also, Richmond Natural Gas Co. v. Davenport, 37 Ind. App. 25, 76 N. E. 525 (1905).

The instant case is to be distinguished from cases where a well, mine or quarry is opened prior to the execution of a mortgage or commencement of a life estate. In such cases, the taking of oil, gas and minerals by the person in possession is not waste. Richmond Natural Gas Co. v. Davenport, 37 Ind. App. at 31, 76 N. E. at 527 (dictum); Andrews v. Andrews, 31 Ind. App. 189, 67 N. E. 461 (1903).

We hold that the sale of dirt and gravel by the mortgagor in possession was waste, regardless of the provisions in the contracts for replacement of topsoil and satisfactory drainage conditions. Potomac Dredging Co. v. Smoot, 108 Md. 54, 69 A. 507, 510 (1908); Fawn Lake Ranch Co. v. Cumbow, 102 Neb. 288, 167 N. W. 75, 76 (1918) (dictum); Cosgriff v. Dewey, 163 N. Y. 1, 58 N. E. 1 (1900).

Finally, we are presented with the issue of whether, assuming the sale of dirt and gravel was waste, the mortgagees have the right to recover the proceeds of such sale. We hold that under Indiana law and the law generally, mortgagees have this right. See Knarr v. Conaway, et al., 42 Ind. 260, 265 (1873); Sunnyside Coal & Coke Co. v. Reitz, 14 Ind. App. 478, 39 N. E. 541 (1895); and 36 Am. Jur. Mortgages §§ 363-367 (1941).

Since the Government concedes that if we affirm the judgment below with respect to the rights of the mortgagees in the interpleaded funds, it will necessarily follow that the Government will have no objection to the allowance of attorneys' fees to plaintiffs, we hold that the district court did not err in making such allowance.

[Judgment of Court]

The judgment of the district court is affirmed.

AFFIRMED.

¹ Also named as defendants were Herman H. Highley, Thelma G. Highley and Charles A. Pratt, trustee in bankruptcy of the estate of Herman H. Highley.

² While the letter from the mortgagees to plaintiffs used the word "topsoil," this suit is for the proceeds from the sale of dirt and gravel.

 

 

[85-2 USTC ¶9629]In re Gary Krag McAllister & Paula Deana McAllister, d/b/a Cherokee Park Medical Center, Ringgold I., f/d/b/a Cleveland Racketball Club & Fitness Center, Debtors Gary Krag McAllister & Paula Deana McAllister, Plaintiffs v. Cherokee Valley Federal Savings & Loan Association Glen Marsh Byers, Chalmer Chastain, Jr., First Tennessee Bank of Chattanooga, N. A., & The United States of America for the use and benefit of the Internal Revenue Service, Defendant

U. S. Bankruptcy Court, East. Dist. Tenn., No. 1-83-00529, 52 BR 293, 8/21/85

[Code Sec. 6323]

Lien for taxes: Property subject to: Priority: Tennessee.--

The debtor/taxpayer and two other defendants owned an office building as partners, but the recorded deeds named them as grantees, which made them tenants in common. The recorded deeds were sufficient to make the building partnership property. A bank acquired a security interest in the debtor's interest in the partnership, pursuant to an "option and put" agreement as security for the debt. The security interest was personal property. The bank also relied on the recordered memorandum of leases as revealing that the debtor and the other two defendants owned the building an partners. The bank perfected the security interest by filing a financing statement with the Tennessee Secretary of State. The IRS was held to knowledge that the recorded deeds were sufficient under Tennessee law to make the building property of the debtor and the other defendants as a partnership, and the memorandum of leases was record notice to the IRS that the parties intended to own the building as partners. Thus, the IRS could not rely on the recorded deeds as making the debtor a tenant in common rather than a tenant in partnership, and the IRS did not acquire a lien on the building itself as specific partnership property to secure the debtor's personal debt for unpaid taxes. As a result, the IRS did not have a lien on the building itself that would come ahead of a previously perfected security interest in the debtor's interest in the partnership, but the IRS did have a perfected tax lien on the debtor's interest in the partnership. Although both the bank and the IRS each had a perfected lien on the debtor's interest in the partnership, the bank's lien had priority because it was perfected first. Furthermore, because the bank's security interest was perfected first, the bank had the right ahead of the IRS's tax lien to sell the debtor's interest to the other two partners under the option and put agreement.

Thomas E. Ray, Ray & North, 914 First Tennessee Bank Bldg., Chattanooga, Tenn. 37402, for plaintiffs. Rob ert W. Varnell, Jr., Elliott, Goodee & Varnell, 65 2nd St., Cleveland, Tenn., for Cherokee Valley Federal Savings Bank, Brian C. Smith, Thomas, Mann & Gossett, 701 Market St., Chattanooga, Tenn. 37402-4855, for First Tennessee Bank, Betsy Burke, Department of Justice, Washington, D. C. 20530, for IRS, James L. Golden, Leitner, Warner, Moffitt, Williams & Dooley, Pioneer Bank Bldg., Chattanooga, Tenn. 37402, for defendants Glen Byers and Chalmer Chastain, Jr.

Memorandum

KELLEY, Bankruptcy Judge:

The remaining dispute in this adversary proceeding is between First Tennessee Bank (the Bank) and the Internal Revenue Service (the IRS).

The debtor, Gary McAllister, and the defendants, Byers and Chastain, owned an office building as partners, but the recorded deeds simply named them as grantees, which would make them tenants in common. The Bank acquired a security interest in McAllister's interest in the partnership, which was personal property, and perfected the security interest by filing a financing statement (UCC-1) with the Tennessee Secretary of State. The IRS acquired tax liens against McAllister and filed notices in the register's office. The IRS contends that even though McAllister, Byers, and Chastain owned the property as partners, it could rely on the recorded deeds showing them as tenants in common, and as a result, its tax liens are perfected against the building itself and come ahead of the Bank's security interest in McAllister's interest in the partnership. The Bank contends that the IRS could not rely on the recorded deeds as making McAllister a tenant in common because the real estate records when the IRS filed its notices also contained a memorandum of leases showing that McAllister, Byers, and Chastain owned the building as partners.

The facts in more detail are as follows.

McAllister acquired an interest in the building when it was conveyed to him and four other persons. They were partners, but the deed did not identify them as partners. The deed was recorded.

Two of the partners decided to withdraw. They conveyed their interest in the property to McAllister and the other remaining partners, the defendants Byers and Chastain. The quitclaim deed was recorded. It did not identify McAllister, Byers, and Chastain as partners.

McAllister, Byers, Chastain, and their wives executed a deed of trust of the property to secure a debt to Cherokee Valley Federal Savings and Loan Association. The deed of trust was recorded. The Bank and the IRS admit that the lien of the deed of trust is superior to their liens.

McAllister, Byers, and Chastain executed a new partnership agreement under which their interests in the building were contributed to the partnership. The new partnership was known as Cherokee Medical Center , apparently to distinguish it from the prior five member partnership that was known as Cherokee Medical Building . They did not execute a deed of the property to the partnership.

The partnership leased space to each of the partners. The leases were not recorded, but a "Memorandum of Leases and Assignments Thereof" was recorded.

The memorandum identifies the lessor as a partnership composed of McAllister, Byers and Chastain and known as Cherokee Medical Center . The leased premises are described as professional suites in Cherokee Medical Center , also known as Cherokee Medical Building . The memorandum then gives a legal description of the property where the building is located. The memorandum states that the leases were assigned to Cherokee Valley Federal Savings and Loan Association as security for the debt secured by the recorded deed of trust.

The memorandum itself was recorded and indexed in the name of the partnership and each partner, including McAllister.

The quitclaim deed from the withdrawing partners to McAllister, Byers, and Chastain, the new partnership agreement, and the deed of trust to Cherokee Valley Federal Savings and Loan Association, were executed within a period of a few days in April, 1976. The quitclaim deed and the deed of trust were recorded immediately.

The memorandum of leases appears to have been executed in June, 1976 and recorded in July, even though it is dated April 21, 1976 .

In 1979 the Bank made a business loan to McAllister as sole stockholder in Cleveland Racketball Club, Inc. McAllister personally guaranteed the debt. As security for the debt, McAllister, Byers, and Chastain executed for the Bank's benefit an "option and put" agreement. The Bank filed a financing statement (UCC-1) with the Tennessee Secretary of State showing that it had a security interest in McAllister's partnership interest in Cherokee Medical Center , a partnership composed of McAllister, Byers, and Chastain.

In 1981, and again in 1982, the IRS assessed unpaid income taxes against the debtor. It filed notices of tax liens in the register's office in January, 1983.

Discussion

The parties do not seriously dispute that between Byers, McAllister, and Chastain the building was partnership property. The court concludes that it was.

Since the building was partnership property, McAllister by himself could not give the Bank a lien on the building to secure his personal debt. Tenn. Code Ann. §61-1-124. He could deal with the building itself only for partnership purposes. Tenn. Code Ann. §61-1-124. McAllister could, however, encumber his "interest in the partnership" to secure his personal debt to the Bank. Tenn. Code Ann. §§ 61-1-125 & 61-1-126. His interest in the partnership was his right to share in the profits and surplus and was personal property. Tenn. Code Ann. §61-1-125. The Bank argues that the option and put agreement gave it a security interest in McAllister's interest in the partnership and that it perfected the security interest by filing the financing statement.

As a general rule, the IRS could not have acquired a lien on the building itself to secure McAllister's personal debt because the building was partnership property. Tenn. Code Ann. §61-1-124. The IRS, however, argues that it could rely on the recorded deeds as making McAllister a tenant in common, and so its lien attached to the building itself as if McAllister were in fact a tenant in common. Collner v. Greig, 137 Pa. 606, 20 A. 2d 938 (1890); 60 Am. Jur. 2d, Partnership §91 (1972). The IRS's lien on the building itself would come ahead of the Bank's lien on McAllister's interest in the partnership.

The IRS relies on the Tennessee statute that provides that an unrecorded deed is ineffective as to a creditor of the grantor or a bona fide purchaser from the grantor without notice. Tenn. Code Ann. §66-26-103.

The argument is out of place on the facts of this case. The recorded deeds were sufficient to make the building partnership property between McAllister, Byers, and Chastain. Tenn. Code Ann. §§ 61-1-107 & 61-1-109; Cultra v. Cultra, 188 Tenn. 506, 221 S. W. 2d 533 (1949); 60 Am. Jur. 2d Partnership §88 (1972). A deed from them to the partnership or to themselves as partners was not required to make the building partnership property. Apparently there was no such deed. The Bank is not relying on an unrecorded deed to the partnership. It is relying on the recorded memorandum of leases as revealing that McAllister, Byers, and Chastain owned the building as partners.

The IRS could argue that the memorandum of leases would only give notice of an unrecorded deed to the partnership, but this argument must also be rejected for the reasons already given.

The IRS must be held to knowledge that the recorded deeds were sufficient under Tennessee law to make the building property of McAllister, Byers, and Chastain as a partnership.

The memorandum of leases was record notice to the IRS that McAllister, Byers, and Chastain intended to own the building as partners. The memorandum of leases cannot be read any other way. Tenn. Code Ann. §66-26-102; Phoenix Mutual Life Ins. Co. v. Kingston Bank & Trust Co., 172 Tenn. 335, 112 S. W. 2d 381 (1938); see also Groves v. Witherspoon, 399 F. Supp. 456 (E. D. Tenn. 1975). The IRS could not rely on the recorded deeds as making McAllister a tenant in common rather than a tenant in partnership. Thus, the IRS did not acquire a lien on the building itself as specific partnership property to secure McAllister's personal debt for unpaid taxes. Tenn. Code Ann. §61-1-124(b)(3).

The result is that the IRS does not have a lien on the building itself that would come ahead of a previously perfected security interest in McAllister's interest in the partnership.

The IRS does have a tax lien on McAllister's interest in the partnership. It was perfected when the lien notices were filed. Tenn. Code Ann. §§ 61-1-127 & 66-21-201; Howard v. United States , 566 S. W. 2d 521 ( Tenn. 1978); 35 Am. Jur. 2d, Federal Tax Enforcement §§ 8 & 10 (1967). Thus, it appears that the Bank and the IRS each has a perfected lien on McAllister's interest in the partnership and that the Bank's lien has priority because perfected first. There is a problem with the priority conclusion because of the odd nature of the Bank's rights under the option and put agreement. The agreement created a security interest within the Uniform Commercial Code's definition of security interest. Tenn. Code Ann. §47-1-201(37). But it did not give the Bank the right to dispose of McAllister's interest in the partnership by foreclosure under Article 9 of the Uniform Commercial Code. Tenn. Code Ann. §47-9-501 et seq. It also was not a general assignment of McAllister's interest in the partnership. Tenn. Code Ann. §61-1-126. The Bank's security interest apparently gave it only the right to sell McAllister's interest in the partnership to Byers or Chastain, without specifically giving it the right to share in the surplus or profits of the partnership other than by selling the partnership interest. Nevertheless, the bank took the correct steps to perfect its security interest. Tenn. Code Ann. §§ 47-9-106 & 47-9-301. And the Bank's security interest having been perfected first gives it the right ahead of the IRS's tax lien to sell McAllister's interest to Byers or Chastain under the option and put agreement.

This memorandum constitutes findings of fact and conclusions of law. Bankruptcy Rule 7052.

Order

In accordance with the court's memorandum opinion of this date, it is ordered that the right of the defendant, First Tennessee Bank, to sell Gary Krag McAllister's interest in the partnership known as Cherokee Medical Center to the defendants, Glen M. Byers and Chalmer Chastain, Jr., is a security interest with priority over and enforceable ahead of the tax liens of the United States of America acquired through the actions of the Internal Revenue Service.

It is further ordered that the remaining issues in this proceeding will be heard and decided on motion of an interested party.

 

 

[77-2 USTC ¶9759] United States of America , Plaintiff v. Leonard M. and Alene Conry, Defendants

U. S. District Court, No. Dist. Calif. , No. C-75-2777 SC, No. C-77-0450 SC, 9/27/77

[Code Sec. 6335]

Collection of taxes: Sale of seized property.--Upon the taxpayers' failure to present evidence disputing the Commissioner's determination, the District Court upheld deficiencies, interest and penalties as assessed against the taxpayers for failure to pay income, FICA, and FUTA taxes. The Court thereupon assigned the order of priority to be given to the government's tax liens and to claims by third parties, and ordered a parcel of the taxpayers' real property to be sold to satisfy the tax liens.

James L. Browning, United States Attorney, Richard J. Sideman, Assistant United States Attorney, Tax Division, 450 Golden Gate Ave., San Francisco, Calif. 94102 for plaintiff. Richard Daly, 100 Wilshire Blvd., Santa Monica, Calif. 90401 for defendants Leonard M. Conry, Edward P. Traverse, and Alene Conry and Timothy Laddish, Deputy Attorney General, 6000 State Bldg., San Francisco, Calif. 94102. Dennis M. Talbott, 1 Embarcadero Center, San Francisco , Calif. 94111 for Crocker National Bank. Charles P. Selden, Deputy County Counsel, Humboldt County Courthouse, Eureka , Calif. 95501 for Humboldt County Tax Collector. Rob ert A. Padway, George M. Duff and Theodore Sachman, 555 California St., San Francisco, Calif. 94137 for Bank of America National Trust and Savings Association and Continental Auxiliary Co.

Findings of Fact and Conclusions of Law Findings of Fact

CONTI, District Judge:

1. This is a civil action for the collection of federal income taxes, F. I. C. A., and F. U. T. A. taxes. Actions numbers C-75-2777 and C-77-0450 were consolidated for trial.

2. The years and quarterly periods at issue are 1956, 1958, 1970, 1971, 1972, 1973, 1974 and 1975, and the quarterly periods ending on September 30, 1974, December 31, 1974, and March 31, 1975.

3. The defendant, Leonard Conry, was assessed income tax liabilities for 1956 and 1958 on August 23, 1963 , in the following amounts: (Government Exhibit No. 1)

                                       Assessed

Year                  Taxes          Interest         Penalties

1956 ....         $8,013.64         $3,055.72       [TEH] * $496.62

1958 ....          6,401.80          1,692.89            320.09

* Penalties for negligence and failure to pay estimated income taxes.

4. As of August 22, 1977 , Leonard Conry's assessed income tax liabilities for 1956 and 1958, after recognizing all payments, credits, and abatements, is as follows:

1956 ....         $18,647.65

1958 ....         $12,901.92

Statutory interest continues to run on the aforementioned liabilities. (Witness: Michael Ecsi)

5. The defendants, Leonard and Alene Conry, were assessed income tax liabilities for the years 1970 through 1974 as follows:

                    Assessment                      Assessed     Penalties

Year                    Date          Tax         Interest      [TEH] * 

1970 ....            
5/28/71
    $3,057.73           $21.82       $141.15

1971 ....            
4/20/72
     1,929.45              .95         71.25

1972 ....            
5/10/73
     3,926.59            15.49

1973 ....            
9/23/74
     5,766.00            34.91         35.32

1974 ....            
5/26/75
     5,229.00            34.92        223.29

* Penalties for filing and collection fees, failure to pay estimated income tax penalties and failure to pay income tax penalties. (See Government Exhibit No. 2)

6. As of August 22, 1977 , Leonard and Alene Conry's assessed income tax liabilities for 1970 through 1974, after recognizing all payments, credits, and abatements, was as follows:

Year              Total Liabilities

1970 ....                 $3,119.44

1971 ....                  3,182.04

1972 ....                  1,423.36

1973 ....                     35.23

1974 ....                  1,603.28

Statutory interest (7% per year) continues to run on the aforementioned liabilities.

7. The defendant, Leonard Conry, was assessed a liability for withheld federal F. I. C. A. and F. U. T. A. taxes as follows:

Quarterly Period Ending--              Assessment                          Penalty         Assessed

and Type of Tax                             Date             Tax         [TEH] *          Interest

9/30/74
--F. I. C. A. .........            
1/13/75
         $534.25           $81.16            $6.59

12/31/74
--F. I. C. A. ........            
3/10/75
          548.02            29.75             3.37

3/1/75
--F. I. C. A. ..........             
6/2/75
          578.88            31.09             3.18

* Penalties for delinquent filings, failure to file depository receipts, failure to pay, and filing and collection costs. (See Government Exhibit No. 4)

8. As of August 22, 1977 , Leonard Conry's assessed F. I. C. A. and F. U. T. A. withholding tax liabilities, after recognizing all payments, credits, and abatements, was as follows:

Quarterly Period Ending--                    Total

and Type of Tax                       Liabilities

9/30/74
--F. I. C. A. .........             $146.78

12/31/74
--F. I. C. A. ........              118.55

3/31/75
--F. I. C. A. .........              107.57

Statutory interest continues to run on the aforementioned liabilities.

9. The defendants, Leonard and Alene Conry, own a residence at 6751 Bret Barte Lane , Eureka , California . Formerly, they lived at 3107 Trinity Street , Eureka , California .

10. With respect to the assessed liabilities that are described in paragraphs 3, 5, and 7 of these findings of fact, the Internal Revenue Service filed Notices of Federal Tax Liens against the residence of the defendants in Eureka, California, with the County Recorder of Humboldt County, State of California, as follows:

Period                    Date of                     Date of          Date of

Involved                   Filing                   Discharge         Refiling

                                        
1/16/65

                                        (due to sale

                                        of old residence on

                                        Trinity

                                        Street and

                                        purchase

                                        of new

                                        home on

                                        Bret Harte

1956 ...........       
1/27/58
          Lane)                         
10/31/67

                       10/18/63                                        5/19/69

                                                                       
9/21/75

1958 ...........       10/13/63         1/16/65                        5/19/69

                                                                       
9/21/75

1970 ...........       
10/07/71

1971 ...........       
5/20/72

1972 ...........       
6/04/73

QPE 
9/30/74

(F. I. C. A.) ..       
4/09/75

QPE 
12/31/74

(F. U. T. A.) ..       
4/09/75

QPE 
12/31/74

(F. I. C. A.) ..       
5/24/75

QPE 
3/31/75

(F. I. C. A.) ..       
6/19/75

1974 ...........       
6/21/75

 

11. Among the lien claimants against the defendants, Leonard and Alene Conry, is the State of California, Franchise Tax Board, which filed a "Certificate of Amounts of Tax, Interest, and Penalties Due" with the County Recorder of Humboldt County, State of California, as follows:

Date of

filing                                                          Amount Claimed

2/07/73
 ......................................          $ 794.52 plus interest

(This is junior to 

U. S. A.

 priority No. 3,

but

superior to priority No. 5--see Finding No. 15)

6/19/76
 ......................................         $1,920.38 plus interest

(This is junior to the 

U. S. A.

 claims)

 

12. The Bank of America is the beneficiary of a deed of trust that was filed on March 29, 1962 with the County Recorder of Humboldt County , California . The deed of trust was against the real property owned by the defendants. The outstanding principal secured by the deed is $12,678.29, as of August 19, 1977 .

13. Furthermore, the real property is subject to a deed of trust in favor of J. C. and Helen M. Jolliff. Said deed of trust, dated January 14, 1963 was duly recorded on January 18, 1963 , secures payment of a promissory note in the face amount of $3,927.09.

14. The defendants, Leonard and Alene Conry, have offered no evidence to dispute their liabilities for the federal income taxes, penalties, and interest, that are set forth in these findings of fact.

15. The priority of lien holders is as follows:

First priority: Bank of America , NT&SA--1st Deed of Trust.

Second priority: J. C. and Helen Jolliff--2nd Deed of Trust.

Third priority: U. S. A. --for the sum of $37,851.05, plus interest and penalty thereon.

Fourth priority: State of California --for the sum of $794.52, plus interest.

Fifth priority: U. S. A. for balance of amount owing, to wit: $3,990.17, as of Aug. 22, 1977 , plus interest and penalty thereon on amounts unpaid since August 22, 1977 .

16. All waivers executed by the parties, wherein the statute of limitations was extended, were non-conditional--the defendant duly executed extensions of the Statute of Limitations.

Conclusions of Law

1. This court has jurisdiction over the subject matter and the parties in this action. 26 U. S. C. §§ 7402 and 7403; 28 U. S. C. §§ 1340 and 1345.

2. The complaint by the United States is duly authorized at the directive of a delegate of the Attorney General of the United States upon the request and authorization of a delegate of the Secretary of the Treasury of the United States, in accordance with 26 U. S. C. §§ 7401 and 7403(a).

3. This is a civil action for the collection of certain assessed and unpaid federal tax liabilities of Leonard M. Conry, individually, and Leonard M. and Alene Conry, jointly and severally and to enforce subsisting federal tax liens against certain real property belonging to said defendants.

4. Set forth in the Findings of Fact are schedules that recite the assessments of liabilities and the filing of notices of liens by the Internal Revenue Service. These assessments and filings were timely and duly authorized as a matter of law, and are presumptively correct.

5. The defendants, Leonard M. Conry and Alene Conry, bear the burden of overcoming the presumptive correctness of the liabilities assessed by the Internal Revenue Service.

6. The defendants, Leonard M. Conry and Alene Conry, have failed to carry the burden of proof described in paragraph 5 of these Conclusions of Law.

7. The assessments described in the Findings of Fact created valid and subsisting liens in favor of the United States upon all real, personal, tangible, untangible, legal, and equitable property and interests belonging to the defendants, Leonard M. and Alene Conry, including their rights to title and interest in the property located at 6751 Bret Harte Lane , Eureka , California . 26 U. S. C. §§ 6321 and 6322.

8. The filings of notices of tax liens by the Internal Revenue Service perfected said tax liens against all adverse parties claiming against the property located at 6751 Bret Harte Lane, Eureka, California, and are prior in time and prior in right to each and every interest claimed by all other defendants joined herein, except to the extent that the "Certificate of Amounts of Tax, Penalties and Interest" which was filed by the State of California Franchise Tax Board preceded any assessment by the Internal Revenue Service, 28 U. S. C. §§ 6321 and 6322, and except to the extent of a prior claim of the Bank of America in the amount of $12,678.29 and a prior claim in favor of J. C. and Helen M. Jolliff in the face amount of $3,927.09; that the other of aforesaid priorities are as follows:

(1) Bank of America , NT&SA--1st Deed of Trust ($12,678.29 as of August 19, 1977 );

(2) J. C. and Helen M. Jolliff--2nd Deed of Trust;

(3) U. S. for the sum of $37,851.05;

(4) State of California for the sum of $794.52 plus interest;

(5) United States for the balance of amount of interest herein--$3,990.17 as of August 22, 1977 , plus interest and penalties on amounts unpaid since August 22, 1977 .

9. The federal tax liabilities described herein have not been paid or satisfied, and remain outstanding, due, and owing by the defendants, Leonard M. Conry and Alene Conry, to the plaintiff.

10. A judgment shall be prepared, declaring that the federal tax liabilities of the defendants, Leonard M. Conry and Alene Conry, are to be satisfied by a judicial sale of the residence located at 6751 Bret Harte Lane , Eureka , California , to be conducted by the United States Marshal.

11. In addition, the terms of the judgment shall be that the proceeds arising from the sale of the property located at 6751 Bret Harte Lane, Eureka, California, are to be distributed to the United States, except to the extent that the filed claims by the State of California Franchise Tax Board, precede in time the assessment dates of the defendants' federal tax liabilities by the Internal Revenue Service, and the priorities recited in paragraph 8.

12. Finally, the judgment shall also order that when the proceeds arising from the sale of the property located at 6751 Bret Harte Lane, Eureka, California, have been distributed in accordance with these Findings of Fact and Conclusions of Law, all claims and liens by the parties claiming against such property shall be foreclosed forever against such property.

Judgment, Decree of Foreclosure, Seizure, and Order of Sale

These consolidated actions were tried before the Court, sitting without a jury. On August 29, 1977 , after a thorough examination of the evidence and upon consideration of the credibility of the witnesses and the arguments of counsel, the Court made its Findings of Fact and Conclusions of Law. Pursuant to its Findings of Fact and Conclusions of Law, the Court, being fully advised in the premises, HEREBY FINDS, DETERMINES, AND ADJUDGES as follows:

1. The defendants, Leonard M. and Alene Conry, are truly and justly indebted to the United States of America for income, Federal Insurance Contributions Act, and Federal Unemployment Tax Act taxes, penalties and interest, for the calendar years of 1956, 1958, 1970 through 1974, and the third and fourth quarters of 1974 and the first quarter of 1975, in the total amount of $41,841.22, plus additional amounts as prescribed by the Internal Revenue Code.

THEREFORE, it is ORDERED, ADJUDGED AND DECREED that the United States of America do have and recover a judgment against Leonard M. and Alene Conry for the unpaid, assessed, liabilities in the amount of $41,841.22, plus additional amounts as prescribed by the Internal Revenue Code.

2. Liens in favor of the United States of America arising out of the unpaid federal tax liability attach to all of the property and rights to property of Leonard M. and Alene Conry, including a parcel of real property, and the buildings thereon, located at 6751 Bret Harte Lane, Eureka, California.

THEREFORE, it is ORDERED, ADJUDGED AND DECREED that the federal tax liens attaching to the above-described realty be foreclosed.

3. The above-described real property, together with the buildings thereon, shall be seized by the United States Marshal and sold at public auction in Humboldt County, California, pursuant to 28 U. S. C. §§ 2001 and 2002. The Marshal shall give public notice within Humboldt County, California, of the time and place of the sale according to law, by advertising a description of the property and the time and place of the sale in a daily newspaper regularly issued and of general circulation in Humboldt County, California, at least once each week for four consecutive weeks preceding the date fixed for the sale; and by such other notice within the Northern District of California as the United States Marshal, in his discretion, shall deem appropriate; that no bid (except as to the United States) shall be accepted unless such bid is accompanied by a certified check or cash deposit of at least ten percent (10%) of the amount of the bid; that the balance of the purchase price shall be tendered to the Marshal by the successful bidder within thirty (30) days following the date of sale in the form of a certified check or cash; that in the event the successful bidder fails to fulfill this requirement, his bid shall be in default and the deposit made by him shall be forfeited and be retained by the Marshal as part of the proceeds of sale, and the property shall again be noticed for sale in the same manner as set forth above. The property shall be offered for sale subject to confirmation by the Court; upon confirmation and receipt of the balance of the purchaser at said price a quit claim deed to the property sold.

The Marshal or his deputy, on receiving the proceeds of said sale, shall forthwith deposit them to the credit of this action in an account which the Marshal maintains for such purposes, subject to the claims of the parties set forth below; that thereafter, the Marshal shall first pay from the proceeds of the sale the costs and expenses of the sale; that the balance of the fund shall be distributed in accordance with the following provisions of this Order:

FIRST: To the defendants Bank of America National Trust and Savings Association and Continental Auxiliary Company in satisfaction of the outstanding balance, plus interest, due upon a mortgage given to Leonard M. and Alene Conry, as secured by a deed of trust that was filed on March 29, 1962, with the County Recorder of Humboldt County, California, the sum of $12,678.29;

SECOND: To the defendants J. C. and Helen H. Jolliff, in the satisfaction of a loan that is secured by a second deed of trust that was filed on January 18, 1963, with the County Recorder, Humboldt County, California, the sum of $9,863.63, together with interest at the rate of $1.78 per day after August 26, 1977;

THIRD: To the United States of America in partial satisfaction of its outstanding lien for unpaid federal taxes, the sum of $37,851.05, together with statutory interest under 26 U. S. C. §6621 after August 22, 1977;

FOURTH: To the State of California in partial satisfaction of the outstanding liens of the California Franchise Tax Board, the sum of $1,147.87, together with interest at the rate of $.26 per day after August 29, 1977;

FIFTH: To the United States of America in partial or complete satisfaction of its outstanding lien for unpaid federal taxes, the sum of $3,990.18, together with statutory interest under 26 U. S. C. §6621, after August 22, 1977;

SIXTH: To the State of California in partial or complete satisfaction of the outstanding liens of the California Franchise Tax Board, the sum of $1,944.37, together with interest at the rate of $.50 per day after August 29, 1977.

IT IS FINALLY ORDERED AND ADJUDGED that when the Marshal issues the quit claim deed to the aforementioned property to a final purchaser pursuant to this Judgment, all claims and liens by any party against such property shall be foreclosed, dissolved and barred forever against such property.

 

 

[71-2 USTC ¶9654]In the Matter of the General Assignment for the Benefit of Creditors of Holly Knitwear, Inc., a New Jersey Corporation, Assignor v. Rob ert S. Solomon, Assignee

Essex County Court, Probate Div., Docket No. 8644-Z, 7-27/71

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

Lien for taxes: Priority: Assignment to creditors: Federal tax lien: Secured creditors and landlord's rent claim: State law.--A Federal tax lien for unpaid withholding taxes did not have priority over a purchase money security interest; a valid and existing secured lien on assets arising out of a security agreement; or a landlord's lien for rent which had been perfected before the date of an assignment for the benefit of creditors. The Federal tax lien did have priority over a landlord's state created lien. Under New Jersey distress law a debtor-tenant is granted a grace period of 10 days within which he may commence an action to regain goods. Since the landlord's distraint action occurred on December 15, 1970 , and the assignment for the benefit of creditors took place on December 16, 1970 , nine days remained before the lien reached fruition. Thus, the landlord did not have, at the date of the assignment for the benefit of creditors, a claim sufficient to defeat the Federal lien priority. Also, the Federal tax lien had priority over: (1) unperfected wage claims; (2) state's claim for personal property taxes; and (3) attorney fees.

Rob ert S. Solomon, Kirsten, Solomon & Friedman, 744 Broad St. , Newark , N. J., for the assignee. Arnold Samuels, Hein, Smith, Mooney & Berezin, 25 E. Salem St., Hacken-sack, N. J., for claimant J. Logan. Richard W. Hill, Assistant U. S. Attorney, 970 Broad St., Newark, N. J., for claimant District Director of Internal Revenue. Philip Kagan, State House Annex, Trenton, N. J., for claimant State of New Jersey. Sidney Reitman, Kapelsohn, Lerner, Leuchter, Reitman & Masiel, 24 Commerce St., Newark, N. J., for wage claimants. Daniel Fox, Fox & Fox, 570 Broad St., Newark, N. J., for claimant Northern Financial Corp. Neil A. Kleinberg, Kleinberg, Moroney, Masterson & Schachter, 1180 Raymond Blvd., Newark, N. J., for claimant Textile Financial Corp.

Opinion

JOHNSON, Judge:

On December 16, 1970 the assignor corporation Holly Knitwear Inc. which was engaged in the manufacture of knitted fabrics effected an assignment for the benefit of creditors. Shortly thereafter, on January 15, 1971 a public auction sale of the assets of the assignor corporation was held, which sale was confirmed by order of the Probate Court of February 8, 1971 . The amount realized pursuant to said sale, $73,395, was inclusive of all machinery, equipment, and inventory held by the assignor with the sole exception of an automobile for which the additional value of $2400 was received.

[Claimants]

Subsequently this matter came before this court by means of a petition and order to show cause entered on behalf of the assignee for instructions with regard to a determination as to the priority of the various claims to the funds resulting from the sale of the assets of the said assignor. Involved herein, in addition to the assignee's request for admin istration expenses, are the following claimants:

(1) United States of America : The federal government has claimed taxes due to the Internal Revenue Service in the amount of $40,601.34 for Social Security and Withholding Taxes and for Federal Unemployment Insurance Contributions. However, the proofs indicate that all of the claims arose subsequent to the filing of these proceedings with the exception of claims for the tax quarter ending June 30, 1970 upon which an assessment was made on November 27, 1970 in the amount of $3,868.29.

(2) Jonathon Logan Inc. (hereinafter referred to as Logan ): Its claim arising out of a purchase money security interest in two sewing machines for which financing statements were filed on June 10, 1970 is in the amount of $7500. In addition, attorneys' fees are sought.

(3) Northern Financial Corp. and/or Northern Commercial Corp. (hereinafter referred to as Northern): This claim of $8,939.32 is also predicated on a purchase money security interest which was appropriately filed with the Secretary of State of New Jersey on April 7, 1969 . It too asks for reasonable attorneys' fees.

(4) Textile Financial Corp. (hereinafter referred to as Textile): This party contends it has a valid and existing secured lien on assets in an amount equal to $23,870. This interest arose out of the security agreement entered into between Textile and the assignor to secure a loan to the assignor of $124,000. Said agreement was to serve as security for all future advances made by the creditor and was also intended to provide the creditor with a secured interest in all of the assignor's after acquired property. Financing statements were filed October 3, 1967 and July 24, 1970 . Attorneys' fees are also asked.

(5) Feldwin Realty Co.: This party asserts a landlord's lien of $13,991.04 for rents due and for which it allegedly made a distraint on December 15, 1970 .

(6) State of New Jersey : The State claims priority for taxes due and owing the Business Personal Property Section in the amount of $4,652.04 in addition to some $1,339.80 due and owing the Division of Employment Security.

(7) Employees of the Assignor: These individuals seek sums totaling approximately $22,000 as wages to which they were entitled at the time of the assignment.

[Status of Amounts Received by Assignee]

I. The intial question to be determined in this matter is whether within the meaning of N. J. S. A. 2A:19-43 "all sums received by said assignee" constitutes value received for sale of collateral secured prior to the date of the assignment by purchase money security interests as defined in N. J. S. A. 12A:9-107 and by general security liens all of which were filed and perfected in accordance with N. J. S. A. 12A:9-101 et seq.

Essentially, the secured parties in question contend that their respective liens should not be included in an accounting of the general assets of the assignor's estate and hence should not be charged with any part of the assignee's request for compensation or expenses incurred during the admin istration of said estate. The facts, which are virtually uncontroverted, reveal that the parties holding these security interests agreed to a sale of the collateral on which they held valid liens solely on the understanding that if a profit resulted such would redound to the benefit of the estate and that the secured parties would receive full satisfaction to the extent of their outstanding claims. A profit was realized and accordingly these parties in interest assert their reliance on this agreement in advancing their contentions.

As authority, Logan and Northern have cited cases wherein the courts dealt with questions of an assignees' status as a general lien creditor as defined in N. J. S. A. 12A:9-301. However these references are inapposite for our purposes here. Presently at bar is not the issue of whether the funds should revert to the general assets of the estate but whether the assignee should in fact be recompensed by the security creditors for his services and expenses. It should be recognized that the assignee is not attempting to assert his statutory role as lien creditor under N. J. S. A. 2A:19-14 and 12A:9-301(3) in an effort to wrest from lesser claimants asserts which by right should belong to the general estate. Rather, such assets, as determined by the efficacy of the liens outstanding, have already been conceded to these creditors in t