Fire Insurance Proceeds Page2

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3. On or about June 1, 1956 , the Bank agreed to extend credit to Genie Craft, to be secured in part by the pledge and delivery to the Bank of purchase contracts and notes and in part by certificates of deposit in the aggregate amount of $95,000 issued to various individuals who made time deposits in the Bank. With the exception of William B. Pinson, who deposited $20,000, and Edward A. Terres, who deposited $6,000, the depositors assigned their residual rights in the deposits to Genie Craft. Because of the expense and difficulty of collecting the balance due on the contracts and notes, the Bank placed a percentage limit on such loans.

4. On April 18, 1957 , Genie Craft executed and delivered to the Bank a pledge agreement under which it pledged to the Bank all its property as security for all outstanding loans, discounts, financial credits and accommodations theretofore extended or thereafter to be extended to Genie Craft by the Bank.

5. By August 1, 1957, the limit set by the Bank on the loans referred to in Finding 3, above, had been reached, and the Bank declined to make a further loan of $22,500, which Genie Craft had requested, unless it was given additional collateral security. Accordingly, on August 2, 1957, Genie Craft pledged as security for a $22,500 note which it executed and delivered on that day warehouse receipts of Lawrence Warehouse Company, Nos. 122926-40, dated August 1, 1957, issued to the Bank, showing that merchandise valued at a total of $37,997.09 had been placed by Genie Craft in a field warehouse at 11 North Howard Street, Baltimore, Maryland, on the top floor of the premises occupied by Genie Craft in Baltimore. The warehouse receipts stated on their face: "not insured".

6. On February 1, 1957, Michigan Fire and Marine Insurance Company had issued a policy of insurance insuring "Michael A. and Ada T. Lombardi, t/a Home Sewing Machine Company (co-ownership) and Lawrence Warehouse Company, and General Electric Credit Corporation, as their interests may appear", against loss and damage by fire to certain personal property located at Nos. 9 and 11-13 North Howard Street, and 327 West Baltimore Street, both in Baltimore, Maryland.

7. Customarily, when a bank makes a loan secured by warehouse receipts as collateral it obtains a certificate of insurance showing that the bank has been made a loss payee under the fire policy. When the Bank made the $22,500 loan on August 2, 1957 , its officers knew of that custom, but had no express understanding with Genie Craft that the Bank would be made a loss payee. A few days after the loan was made, the Bank learned that Lawrence Warehouse Company was a loss payee of the existing policy, which covered the merchandise in the warehouse along with other goods of Genie Craft. The Bank also knew that the warehouse company was holding some of the merchandise for General Electric Credit Corporation. The Bank took no action to see that it was made a loss payee, beyond asking one of Genie Craft's officers to obtain a certificate of insurance, which the officer promised to do, without specifying what the certificate would show. No certificate was ever furnished.

8. By an endorsement effective October 21, 1957, the name of the insured under the policy was changed from "Michael A. and Ada T. Lombardi, t/a Home Sewing Machine Company (co-ownership) and Lawrence Warehouse Company, and General Electric Credit Corporation, as their interests may appear", to "Genie Craft Corporation, Home Company Division". No loss payee clause was added making the warehouse company or anyone else a loss payee. At the time of the fire there was no loss payee clause.

9. In September and October 1957 Genie Craft made a public offering of $200,000 of its stock, of which only $15,000 to $20,000 was sold. The failure to sell more stock gave the Bank considerable concern. In October 1957 the Bank received a statement from the warehouse company showing that Genie Craft's warehouse charges for prior months were past due. In November 1957 the Bank knew that efforts had been made to sell the business to the Dalton Finance Company in order to salvage as much as possible but that Dalton was unwilling to take it over. On December 5, 1957 , after refusing to make any further loans to Genie Craft, the Bank loaned $25,000 to five of the officers and directors of Genie Craft, who immediately deposited the funds to Genie Craft's account in the Bank. This entry was dated November 30, 1957 , on Genie Craft's bank deposit book and on its cash receipts Ledger to make it appear that the account was not overdrawn. Later in December 1957 the Bank was informed that Genie Craft did not have enough money to keep its collection force going. The Bank knew that if the collections were not made, the accounts of Genie Craft which the Bank held as collateral for its loans would become stale and lose much of their value.

10. Genie Craft became insolvent on December 15, 1957 , and remained so until it was adjudicated bankrupt on February 4, 1958 .

11. On December 26, 1957 , a fire occurred at 11 North Howard Street which destroyed substantially all the goods covered by the pledged warehouse receipts, as well as other property of Genie Craft. Before the fire, a portion of the goods represented by the warehouse receipts pledged to the Bank had been released to Genie Craft, with the consent of the Bank; the value of the remaining goods covered by the pledged receipts was $30,050.91.

The Bank learned of the fire on December 27, 1957 , and on or before that day the Bank knew or had reasonable cause to believe that Genie Craft was insolvent.

13. On December 31, 1957 , Genie Craft executed and tendered to the Bank a written assignment of the first $22,500 payable by the insurance company on account of the fire loss. The assignment was intended to replace the security which the Bank had lost by reason of the fire. The form of the assignment was not acceptable to the Bank, so on January 3, 1958 , Genie Craft executed and delivered to the Bank another assignment, which recited the Bank's version of the pledge transactions and stated that, inadvertently, the Bank had not been made a loss payee under the policy. The Bank mailed the second assignment to the Springfield Fire and Marine Group, and Empire State Insurance Company, which had reinsured Michigan Fire, accepted the assignment on January 14, 1958 . For details, see 195 F. Supp. at 228, n. 1, and 226. See also discussion in 183 F. Supp. at 535, 536. It is now conceded that Empire acted as agent of Michigan in accepting the assignment.

14. Each of the assignments referred to in Finding 13, given by Genie Craft to the Bank, was (1) a transfer of its property, (2) to or for the benefit of the Bank, its creditor, (3) for and on account of an antecedent debt, (4) at a time when Genie Craft was insolvent, (5) within four months of bankruptcy, and (6) which would enable the Bank to obtain a greater percentage of its debt than some other creditor of the same class.

15. On January 24, 1958 , the Bank sold the accounts receivable of Genie Craft which had been pledged to it. See Finding 3. After applying against Genie Craft's loans (1) the proceeds of that sale and (2) the security deposits in which residual rights had been assigned to Genie Craft, the balance due the Bank on the Genie Craft loans was $25,866.24, which has not been paid to the Bank.

16. Against this balance the Bank still holds as security the proceeds of the time certificates of deposit made by Pinson ($20,000) and Terres ($6,000) and $478.36 belonging to Genie Craft, $26,478.36 in all. The Bank decided not to apply the proceeds of these certificates to the indebtedness of Genie Craft. Instead, the certificates of deposit of Pinson and Terres were cashed and are now held by the Bank in a special account entitled "Genie Craft Corp. Loan Account". There is no agreement between the Bank and Pinson and Terres with respect to what will happen to their security deposits of $26,000 held by the Bank in the event the Bank's claim for $22,500 in this interpleader case is unsuccessful. ²

Conclusions of Law and Discussion

A. The pledge of the warehouse receipts was in legal effect a perfected, choate pledge of the merchandise covered by the warehouse receipts issued to the Bank. 56 Am. Jur. (Warehouses §72) p. 355; In re P. J. Sullivan Co., S. D. N. Y., 247 Fed. 139, 155, aff'd, 2 Cir., 254 Fed. 660 (1918). Cf. In re Spanish American Cork Products Co., 4 Cir., 2 Fed. 2d 203, 204 (1924), cert. den. 266 U. S. 634; and Barry v. Lawrence Warehouse Co., 9 Cir., 190 F. 2d 433, 435 (1951).

B. The lien created by that pledge was superior to the federal tax lien assessed against Genie Craft on November 22, 1957 , and recorded in the District of Columbia on February 11, 1958 . United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 87 et seq. (1963).

In any event, a prior tax lien would merely take precedence over junior liens, and would not enable the Trustee in Bankruptcy to avoid otherwise valid and choate junior liens. See discussion in 183 F. Supp. at 536, 537. The validity of that ruling is not altered by later cases cited by the Trustee.

C. The lien created by the pledge, however, did not become an equitable lien on the proceeds to the policy of insurance enforecable against the Trustee in Bankruptcy of Genie Craft. Sec. 60a(6) of the Bankruptcy Act, as amended in 1950, 11 U. S. C. A. 96a(6), discussed below. For a full discussion of the 1938 and 1950 amendments, see Collier on Bankruptcy, 14th ed., vol. 3, par. 60.50, p. 972 et seq.

The authorities cited by the Bank indicate that if bankruptcy had not intervened, the lien would ordinarily be considered to have been transferred to the proceeds of the policy as an equitable lien. California Ins. Co. v. Union Compress Co., 133 U. S. 387, 10 S. Ct. 365 (1890); Ferro v. Citizens' National Trust & Savings Bank, 44 Cal. 2d 401, 282 P. 2d 849, 852-54 (1955). And if the proceeds had come into the hands of the warehouse company as a loss payee, it would have held the proceeds in trust for the Bank, as it had held the merchandise. Century Insurance Company v. First Nat. Bank, 5 Cir., 102 F. 2d 726, 728-29 (1939); American Eagle Fire Ins. Co. v. Gayle, 6 Cir., 108 F. 2d 116, 119 (1939); In re Podolsky, 3 Cir., 115 F. 2d 965, 967 (1940); and United States v. Globe & Rutgers Fire Ins. Co., N. D. Tex., 104 F. Supp. 632, 635 (1952), aff'd, 5 Cir., 202 F. 2d 696 (1953).

But since the 1938 and 1950 amendments to Sec. 60 of the Bankruptcy Act, such an equitable lien as the Bank contends that it has on the proceeds of the insurance policy cannot be enforced against the Trustee in Bankruptcy, where its enforcement would result in a preference to the Bank. Sec. 60a(6), 11 U. S. C. A. 96a(6), now states: "The recognition of equitable liens where available means of perfecting legal liens have not been employed is hereby declared to be contrary to the policy of this section."

Cases decided since 1950 indicate that the statute means what it says. Eberly v. Dudley, 9 Cir., 314 F. 2d 8, 14 (1962); Republic National Bank of Dallas v. Vial, 5 Cir., 232 F. 2d 785 (1956); Cumberland Portland Cement Co. v. R. F. C., 140 F. Supp. 739, 753 (1953), aff'd sub nom. Ralph Rogers & Co. v. R. F. C., 6 Cir., 232 F. 2d 930. So does the legislative history. U. S. Code & Cong. Serv., 81st Cong., 2d Sess., 1950, Vol. 2, pp. 1985, 1989.

The decisions which have allowed equitable liens on the ground that no means of perfecting legal liens were available only serve to emphasize the rule. In re William P. Bray Co., D. Conn. , 127 F. Supp. 62, (1954); Danais v. M. De Matteo Const. Co., D. N. H., 102 F. Supp. 874 (1952). Joseph F. Hughes Co. v. Machen, 4 Cir., 164 F. 2d 983 (1947), dealt with a right of setoff, an entirely different matter.

In the instant case the Bank had "available means" of perfecting a legal lien--by requiring that the Bank be made a loss payee under the policy. Through carelessness on the part of the Bank those means were not employed. See Findings of Facts Nos. 7 and 8. Whether the failure of Genie Craft to have the Bank made a loss payee was inadvertent or not, is unimportant. There were means available to the Bank to secure a legal lien on the proceeds before it knew of the insolvency of Genie Craft.

No doubt, as the Bank argues, ³ the assignments prepared after the fire were given to replace the security which the Bank had lost. But they were given only one month before bankruptcy, after the fire, when the Bank knew Genie Craft was insolvent.

The cases decided before 1938, cited by the Bank, are no longer controlling. Collier, op. cit., par. 60.50, at p. 975 et seq.

D. The assignments dated December 31, 1957, and January 3, 1958, given by Genie Craft to the Bank, where preferential transfers made within four months of bankruptcy, at a time when the Bank knew or was reasonable chargeable with knowledge that Genie Craft was insolvent, and are therefore voidable by the Trustee in Bankruptcy.

All the elements of a voidable preference exist. The Court is satisfied that the Bank not only had reasonable cause to believe that Genie Craft was insolvent on December 29, 1957, and January 3, 1958, but that it actually knew Genie Craft was insolvent not later than December 27, 1957, and probably some weeks earlier. The Bank's principal argument, that the assignment was not given "for or on account of antecedent debt", is answered by the facts and by the discussion under Conclusion C, above.

E. The Trustee contends that Pinson and Terres are the real parties in interest, not the Bank. The evidence shows that the Bank still holds the deposits of Pinson and Terres in the amount of $26,000, as collateral security for the balance of $25,866.24 due the Bank from Genie Craft, for which the Bank has a general claim against Genie Craft's bankrupt estate. If the Bank applies the deposits to the satisfaction of the claim, Pinson and Terres would take over the Bank's claim. Equitably, one general claim for the balance due the Bank is allowable. If the Court had held that the assignment was not a voidable preference and that the Bank had a lien on the proceeds of the policy as collateral security for its debt, a question of marshaling might have arisen, which does not now exist.

F. The Bank's alternative argument, based on the broad pledge agreement of April 18, 1957, see Finding of Fact No. 4, is answered by the 1938 and 1950 amendments to Sec. 60, 11 U. S. C. A. 96, discussed under Conclusion C, above.

Settle order within ten days.

¹ Union Trust Company is the successor to Munsey Trust Company, of Washington ; they will be referred to herein collectively as "the Bank."

² Counsel appearing for the Bank were retained by Pinson and Terres, with whom they have a fee arrangement. Counsel have no arrangement concerning either fee or costs with the Bank.

³ Brief, pp. 17, 18.

 

 

[62-2 USTC ¶9795]Lumbermen's Underwriting Alliance, a Reciprocal Inter-Insurance Exchange, Plaintiff v. Fall Creek Box & Manufacturing Co., a corporation; The First National Bank of Kemmerer, a National Banking Association; The Portland Machinery Company, a corporation; et al., Defendants, and The United States of America, Intervenor

U. S. District Court, Dist. Ore., Civil No. 61-502, 10/16/62

[1954 Code Sec. 6323]

Federal tax liens: Fire insurance fund: Validity against conditional vendor and--The District Court held that the government's tax lien on fire insurance proceeds ranked third in order to the equitable lien of a conditional vendor and the mortgagee lien of a bank. The equitable lien of the conditional vendor upon the insurance fund was in lieu of its reserved legal title to machinery sold to the deficient taxpayer under the conditional sales contract, and this lien was superior to that of both the bank and the government. The bank's mortgage lien was superior to the government's tax lien and included all expenses reasonably and necessarily incurred as attorney's fees and costs in obtaining satisfaction of the taxpayer's indebtedness to the bank.

Stephen W. Matthieu, M. E. Tarshis, 308 Pacific Bldg., Mautz, Souther, Spaulding, Kinsey & Williamson, Kenneth E. Rob erts, Tenth Floor, Board of Trade Bldg., Portland 4, Ore., for plaintiff. Darling, Vonderheit & Hershner, James L. Hershner, 260 East 11th Ave., Eugene, Ore., Clarence R. Wicks, Hart, Rockwood, Davies, Biggs and Strayer, 1410 Yeon Bldg., Portland 4, Ore., Loomis, Lazear & Wilson, Edward T. Lazear, 202 East 18th St., Cheyenne, Wyo., for defendants. Sidney I. Lezak, Acting United States Attorney, Roger G. Rose, Assistant United States Attorney, United States Courthouse, Portland 7, Ore. , for intervenor.

Opinion

Basis of Bank's Claim

EAST, Judge:

The defendant Fall Creek Box & Manufacturing Co. (Fall Creek), being the owner of certain sawmill properties situate in Lincoln and Sublette Counties, Wyoming, on March 19, 1960 mortgaged the same to the defendant The First National Bank of Kemmerer (Bank), of Kemmerer, Wyoming, to secure the payment of Fall Creek's promissory note to the Bank in the amount of $200,000, together with interest thereon at the rate of 51/2 per cent per annum on 90% of such unpaid principal, payable in installments until fully paid. Among other things, Fall Creek agreed in said mortgage to "continuously keep in full force and effect in reliable insurance companies . . . fully covered fire insurance with loss payable clause in favor of the mortgagee . . ." and accordingly secured from the plaintiff Lumbermen's Underwriting Alliance such fire insurance in the amount of $251,000 for a three-year period from January 7, 1960. The mentioned policy carried loss payable caluse in favor of the Bank as mortgagee. In connection with the Bank's position, it is important to note that Fall Creek's promissory note provided, inter alia:

"The term 'indebtedness' as used herein shall mean the indebtedness evidenced by this Note, including the principal, interest, and expenses, whether contingent, now due or hereafter to become due. . . ." [Italics supplied.]

and further, that Fall Creek

"shall pay all expenses of any nature, whether incurred in or out of court, and whether incurred before or after this Note . . ., including but not limited to reasonable attorney's fees and costs, which payee may deem reasonable or proper in connection with the satisfaction of the indebtedness. . . ."

On or about September 17, 1961 , a substantial portion of the property insured under the above-mentioned policy and mortgaged to the Bank and all of the property sold to Fall Creek under the later described conditional sales contract by Machinery, was destroyed by fire. Thereafter, the loss resulting from the fire was adjusted between the plaintiff and Fall Creek to be $195,000, with an unearned returnable premium to Fall Creek in the amount of $931.05. Plaintiff has interpleaded the aggregate of said amounts in these proceedings.

Basis of Machinery's Claim

On June 7, 1960, the defendant The Portland Machinery Company (Machinery) sold to Fall Creek certain power lathe machinery, pursuant to a conditional sales contract, for the total purchase price of $6,228, payable with a down payment of $2,048 and the balance in installments. Said contract provided, inter alia, that legal title to the property should remain in Machinery until the full payment of the purchase price and that Fall Creek

"shall keep the same insured against fire, . . . to the extent of (Machinery's) claim . . ., with loss payable clause in favor of (Machinery)."

Upon delivery of the machinery, Fall Creek installed the same in its sawmill. On August 8, 1960 , Fall Creek made a payment to Machinery in the amount of $2,048, which Machinery claims to have been applied towards the payment of its open account with Fall Creek rather than towards the payment of the purchase price under the conditional sales contract. No further payments were made by Fall Creek to Machinery. The above-mentioned policy of fire insurance did not carry a loss-payable clause in favor of Machinery.

Basis of Government's Claim

The intervenor, United States of America (Government), through the District Director of Internal Revenue, made assessment against Fall Creek for various items of unpaid federal revenue in the aggregate of $24,588.69, and the Government's lien for such unpaid taxes was perfected as of October 6, 1961 .

Issues to Be Determined

The claims of all claimants to the interpleaded fund, except as to the Bank, Machinery and Government, have been settled and various sums have been paid out of the fund as costs and attorney's fees for plaintiff and an advancement towards the Bank's claim, with which we are not concerned, and there remains in the fund $33,374.20. The Bank and Machinery concede that the Government has, under its tax lien, the prior claim to $931.05 (return of unused premium) of the fund. There is to be determined the order of priority of the liens of Machinery, Bank, and Government, respectively, upon the fund.

Machinery's Contention

Machinery contends it has the prior and superior lien upon the balance of the fund for the full amount of the unpaid purchase price on its contract in the aggregate of $7,082.61.

Bank's Contention

The Bank contends it has the prior and superior lien upon the fund for the unpaid principal of the Note in the amount of $22,519.33, together with interest aforesaid, from June 13, 1962 , also, for such sum as the Court shall adjudge as reasonable attorney's fees for establishing its claim against the fund, together with its costs in these proceedings.

Government's Contention

The Government contends that its lien is inferior to the lien of the Bank for unpaid interest and principal upon the mortgage, but contends it is superior to the Bank's claim for attorney's fees and costs and to Machinery's lien, if any.

Adjudication of Machinery's Claim

This Court is of the opinion from the evidence that:

(a) When Fall Creek made the $2,048 payment to Machinery, it gave no direction as to which of its accounts of indebtedness to Machinery the payment should be applied.

(b) Machinery did factually and rightfully under the prerogative of a creditor in the absence of any direction by the debtor, forthwith upon receipt of the $2,048 payment, apply it upon its books of accounts toward the payment of its open account for goods sold to Fall Creek rather than towards the payment of the purchase price under the conditional sales contract. Fatland v. Wentworth & Irwin, 149 Or. 77.

(c) There was unpaid upon the sales contract $7,082.61 at the time of trial, and the fair, reasonable installed market value of the power lathe machinery sold under the conditional sales contract and destroyed by the fire was in an amount of not less than the amounts unpaid said contract.

(d) The power lathe machinery covered by the conditional sales contract was considered by the fire loss adjuster for the plaintiff and its reasonable, installed market value was included and a part of the adjuster's determination of the aggregate value of Fall Creek's property destroyed by fire and that the agreed adjustment and insurance moneys payable by plaintiff and interpleaded herein included such value.

Therefrom, and by reason of Fall Creek's promise to Machinery to keep the property sold insured against loss by fire, the Court concludes that Machinery has an equitable lien upon the fund interpleaded herein to the extent of its loss.

It would seem that Fall Creek's initial right, title and interest in the power lathe property was subject to Machinery's reserved legal title and that neither Bank nor Government can acquire any greater rights than Fall Creek enjoyed just because a cash fund stands in lieu of the destroyed property.

Under this doctrine, the equitable lien upon the insurance fund stands in lieu of Machinery's legal title to the power lathe machinery as security for the payment of the amounts due under its contract aforesaid, retains the same priority, and is superior and prior to both the Bank's mortgage lien and the Government's tax lien. 5 Appleman, Insurance Law and Practice, 489; ann. 92 A. L. R. 559; United States v. Anders Contracting Co. [53-1 USTC ¶9412], 111 F. Supp. 700 (D. S. C. 1953).

Adjudication of Bank's Claim

What has been said and concluded in establishing Machinery's lien as superior, can also be said and concluded in like fashion and rationale to establish that Bank's mortgage lien is superior to Government's tax lien upon the fund. The question is, what items, in addition to the conceded unpaid principal and interest, to to make up the amount of Fall Creek's indebtedness that is secured by Bank's superior mortgage lien? It seems undeniable that it has been necessary for the Bank to incur some "expenses . . . including but not limited to reasonable attorney's fees and costs . . ." in order to obtain "satisfaction of the indebtedness" secured by its mortgage lien in these proceedings. This was the agreed measure of establishing Fall Creek's ultimate liability to the Bank upon the promissory note before as well as after the fire, and before the perfection of Government's tax lien. The Government is bound by that measure. Rushing v. Saboe, 130 Ore. 522, 529. It is only because of the Government's fixity in its position and claim that the Bank's "expenses" for attorney's fees go from normal to full dress proportions.

With apparent division with the Second Circuit (In Re New Haven Clock & Watch Co. [58-1 USTC ¶9458], 253 F. 2d 577 (1958)) and the Fourth Circuit (United States v. Bond [¶60-2 USTC ¶9532], 279 F. 2d 837 (1960)), the present rule on the question in the Ninth Circuit can best be expressed in the language of United States v. Sampsell [46-1 USTC ¶9186], 153 F. 2d 731 (9th Cir. 1946), as follows, at p. 736:

"The government contends that the United States tax liens were not to be subordinated to the attorney's fees awarded to the mortgagee. Attorney's fees are a part of the secured debt and are entitled to be collected as such. There is no claim that the fees in question are not made a part of the debt or that they are not secured by the same lien, but only that the principal then due on the mortgage at the time the government lien attached may not be increased by attorney's fees for services to be performed in the future by any doctrine of 'relation back.' There is no need, however, for such a doctrine to support a lien for attorney's fees. Attorney's fees as well as interest are provided for in the obligation and the reasoning which supports the interest claim applies in the provision for attorney's fees. In Security Mortgage Co. v. Powers, 1928, 278 U. S. 149, 156, 49 S. Ct. 84, 86, 73 L. Ed. 236, the attorney's fees were held to be a part of a mortgage debt even though they accrued after adjudication, the court saying, 'The contingent obligation to pay attorney's fees was a part of the original transaction.'" See also, United States v. Halton Tractor Co. [58-2 USTC ¶9774], 258 F. 2d 612 (9th Cir. 1958).

In Sampsell, the mortgage indebtedness had matured and the mortgagee had been adjudicated a bankrupt prior to the perfection of the Government's tax lien. The trustee in bankruptcy, in conformity with the agreement of all lien claimants, sold the assets of the bankrupt and the claims of lien with their respective priorities were reserved against the proceeds of the sale. The attorney's fees ultimately allowed were incurred after the attachment of the government's lien. The rationale of Sampsell applies with equal force to the conversion of the mortgaged property to cash by fire insurance, as distinguished from judicial sale.

The District Court for the District of Montana relies upon and follows Sampsell. Streeter Bros. v. Overfelt [62-1 USTC ¶9270], 202 F. Supp. 143 (1962). Two courts postdating Bond and New Haven Clock, supra, applying the Sampsell rule, are United States v. Pioneer American Insurance Co., 357 S. W. 2d 653 (Ark. 1962) and United States, Intervenor v. Costas, 142 So. 2d 699 ( Ala. 1962). See also Commercial State Bank v. Curtis, 109 P. 2d 558, 7 Wash. 2d 296 (1941); White v. Blair, 234 Ala. 119, 173 So. 493 (1937).

The Court concludes that the indebtedness evidenced by Fall Creek's promissory note and secured by Bank's mortgage lien includes as a part thereof all expenses reasonably and necessarily incurred as attorney's fees and costs in obtaining satisfaction of that indebtedness and therefore the Bank's mortgage lien is superior to the Government's tax lien.

Adjudication of Government's Claim

It follows from the foregoing, and the Court concludes, that the Government's tax lien ranks third in order to Machinery's equitable lien and Bank's mortgage lien, respectively, in that order.

Counsel for the parties are requested to submit to the Court on or before 15 days from the date hereof findings, conclusions and order of payment consistent with the foregoing determination of the order of priorities of the three claims, in form agreeable among them.

 

 

[63-1 USTC ¶9235]The Home Insurance Company, and American Central Insurance Company, Plaintiffs v. B. B. Rider Corporation, H M T Corporation, Austin Nichols & Co Incorporated, M. Dietz & Sons, Inc., Majestic Wine & Spirits, Inc., General Home Service Association, Ira J. Sarasohn, Roy N. Sarasohn and David E. Friedman Individually and T/A Sarasohn & Co., Michael J. Allone, Joseph Rilli, Gordon Bass, Samuel Ehrenkranz and the United States of America, Defendants

U. S. District Court, Dist. N. J., Civil Action 261-61, 212 FSupp 457, 1/14/63

[1954 Code Sec. 6323]

Lien for taxes: Priority over other liens: Bankrupt taxpayer: Fire insurance proceeds.--The Government's lien for taxes was perfected before the taxpayer's bankruptcy and prior to the liens of other claimants to the proceeds of a fire insurance policy. Since the Government's lien was for more than the amount of the insurance proceeds it was unnecessary to establish the priority rights of those with inferior claims.

Harold D. Feuerstein, 60 Park Place , Newark 2, N. J., for plaintiff. David M. Satz, Jr., United States Attorney, by F. Michael Caruso, Assistant United States Attorney, Newark, N. J., Arnold Miller, Department of Justice, Washington 25, D. C., for United States of America; Sheldon Schachter, 1180 Raymond Blvd., Newark, N. J., for Paul R. Kleinberg, Trustee in Bankruptcy of H M T Corp.; Benjamin Coe, 24 Commerce St., Newark, N. J., for Sarasohn & Co., et al.; Michael G. Alenick, 744 Broad St., Newark, N. J., for Austin Nichols & Co., Inc.; Jacob Lubetkin, by Sherwin Drobner, 9 Clinton St., Newark, N. J., for M. Dietz & Sons, Inc.; James Del Mauro, by Joseph Pecora, 195 Clifton Ave., Newark, N. J., for General Home Service Assn.; Doyle & Galvin, by Joseph Cullen, for B. B. Rider Corp.; Arthur W. Herrigel, 1060 Broad St., Newark, N. J., for Gordon Bass.

Opinion

WORTENDYKE, District Judge:

The complaint in this action brings it within the jurisdiction conferred upon this Court by the provisions of 28 U. S. C. §1335.

Some time prior to January 1, 1960 each of the two plaintiff fire insurance companies (Home and American Central) issued a fire insurance policy to H M T Corp. (T/A Jada Club).

A fire occurred on January 1, 1960 in the insured property, and the loss under each of the two fire policies was ultimately adjusted to the respective amounts of $16,250.33 under the Home policy, and $8,152.73 under the American Central policy, a total of $24,403.06.

Because of claims made by the respective defendants to these funds, the plaintiffs instituted this section for interpleader on April 7, 1961 , making the insured named in the policy, and other claimants, parties defendant. The United States of America , by reason of its tax claims, intervened. Defendant H M T Corp., the insured tax payer, was adjudicated a bankrupt on May 1, 1961 and by order of May 2, 1962 , its Trustee in bankruptcy was admitted as a claimant-defendant.

By this Court's order of October 25, 1961 , filed on October 27, 1961 , plaintiffs were authorized to deposit the adjusted amounts due under their two policies with the Clerk of this Court, and a counsel fee of $350 plus $57.30 costs were allowed to their attorney. There remains in the Registry of this Court the net sum of $23,995.76.

By written instrument dated January 5, 1960, signed by the President of the insured bankrupt corporation, the services of Sarasohn & Company (Ira J. Sarasohn, Roy N. Sarasohn and David E. Friedman) were retained to adjust the fire loss in consideration of an agreement by the insured to pay to said adjusters 10% of the amount of the adjusted loss when paid by the insurers. These adjusters claim a prior lien upon the insurance proceeds in the amount of $2,440.30 for their services and expenses, upon the theory that such services created the fund which is the subject of the present interpleader.

[Claims Asserted]

M. Dietz & Sons, Inc. claims as a conditional vendor of chattels to the insured, under a contract recorded April 16, 1959 , by virtue of which it asserts an equitable lien against the fund in the amount of $176.00.

Defendant B. B. Rider Corp. claims priority upon the fund by virtue of its conditional sale to the insured of air conditioning equipment under contract dated June 8, 1959, upon which it occured a judgment on June 16, 1960. That claim amounts to $3,071.87.

Defendant Austin Nichols & Co., Inc. makes claim against the fund for $1,090.22 on its judgment recovered against the insured on April 7, 1960 , and levy thereunder on April 8, 1960 .

Defendant General Home Service Association bases its claim upon a chattel mortgage for $1,800.00 dated December 10, 1959 . This claimant alleges that its interest in the fund is predicated upon an alleged "losspayable endorsement" upon the fire insurance policies to the extent of the lien of its chattel mortgage; endorsements and chattel mortgage bearing same date.

Defendant Gordon Bass claims upon a judgment entered October 17, 1960 , and execution thereunder, in the amount of $736.58.

Although an answer was filed on behalf of defendant Joseph Rilli, in which he asserts a claim in the amount of $1,750.00, for which amount the H M T Corp. executed an assignment on January 29, 1960 of the moneys due or to become due to it under the fire insurance policies, no appearance in behalf of this claimant was made when the case was moved to trial.

So also in the case of defendant Michael J. Allone, in whose answer he claims to have recovered a judgment on April 8, 1960 in the amount of $2,195.67 including costs, on which execution issued. No appearance was made in behalf of this claimant at the trial.

We need not consider defendants Samuel Ehrenkranz or Majestic Wine & Spirits, Inc., named in the complaint, as they failed to appear in the cause, no answer being filed in behalf of either.

[Tax Lien]

The Government claims priority against the fund with respect to its claims for withholding, and excise taxes, aggregating $51,659.57, assessed on and prior to August 28, 1959, and has moved the Court for summary judgment to that effect, in that amount. This motion was opposed by the Trustee in Bankruptcy of taxpayer-debtor, H M T Corp., as well as by Austin Nichols, B. B. Rider, Dietz, General Home Service and Sarasohn. Because of the imminence of the trial date (scheduled for the day next succeeding that on which oral argument was heard on the motion) and because of the challenges to the amount of the Government lien, I determined that the case was appropriate for plenary trial, which was held on the appointed date.

The transcript of the pretrial conference held in this case on June 12, 1962 discloses that the only question to be decided is the "validity of the Government's priority rights."

In support of its motion for summary judgment, the Government annexed to its moving papers an affidavit by the Acting Director of Internal Revenue in Newark, New Jersey, certifying, as of October 25, 1962, the following schedules of tax notices, payments and credits, filings of tax lien notices, and balances due, viz.:

                                    Withholding                 Excise                  Excise

                                        Taxes                  Taxes                   Taxes

                                      4th 1/4

Taxable period ..........                1955         5/1/54-4/30/58         5/1/58-12/31/58

Date of assessment ......             2/29/56                8/28/59                 8/28/59

Date first notice .......             3/20/56                 9/4/59                  9/4/59

Payments and Credits ....           $1,105.00

Notice of Lien filed ....             10/5/56                11/9/59                 11/9/59

Balance Due .............             $ 70.29             $45,404.92               $5,284.64

 

26 U. S. C. §6321 (1954 Code) provides that the amount of any tax not paid, after demand, by a person liable to pay the same, becomes a lien in favor of the United States upon all property and rights to property belonging to the taxpayer. The following section of the Code (§6322) provides that the tax lien arises at the time the assessment is made, but §6323 provides that such lien shall not be valid against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed.

The Trustee in Bankruptcy of the H M T Corp. contests the amount of the Government liens as reflected in the District Director's affidavit, to which reference has been made. It should be noted that the affidavit referred to was filed in this Court in support of the Government's motion for summary judgment, and, therefore, is not probative in the case as it stands in this posture. Nor did the Government introduce any official records to establish the amount of the Government liens. However, the Government, upon the trial, called one, Kaplan, an Excise Tax Agent, who conducted the investigation as a result of which the assessments were made. It is my opinion that his testimony establishes the Government lien in the amount of $45,404.92. ¹ Mr. Kaplan further testified that in the course of the investigation he had various conversations with Jerry Dimeola, an officer of H M T, who was also the manager of the Jada Club, who informed him that during the period for which the taxes were assessed the Club employed certain entertainers. From these conversations he was able to develop a picture of how the Club operated; and he used this information in conjunction with the records furnished by the accountant for the corporation in arriving at a tax assessment. It was his opinion that the entertainment utilized subjected the corporation to the 20% excise tax on such establishments, in effect during that period. Subsequently, he filled out an income tax return which Mr. Dimeola signed without objection. The trustee argues here that the presumption of validity which attaches to a tax assessment has been dissipated by the Agent's testimony, and that the Government has failed to establish its claim. Although it is true that by adducing oral testimony disclosing the manner in which the assessment was arrived at, the Government may lose the benefit of the presumption, In re Swan, 2 Cir. 1936, [36-1 USTC ¶9120] 82 F. 2d 160, the evidence in this case does not impel me to that conclusion. The Trustee relies upon the case of In re Oxford Associates, D. C. N. J. 1962, [62-2 USTC ¶9740] 209 F. Supp. 242, in which the Referee refused to allow a Government tax lien in the amount of $72,500 which refusal was affirmed by Judge Augelli of this Court. There the bankrupt was a builder who constructed an apartment house, and it was the information obtained and relied upon by the Government in determining Oxford 's profit as a result of this job, that the Court found inadequate. The Agent there discovered that a building permit estimated the cost of construction of the apartment house to be a million dollars. The Government considered this amount to be that which the builder received for his services, 15% of which it estimated to be net profit, resulting in an estimated net cost of construction of $850,000. The Agent testified that he had no knowledge of construction costs, and that his use of the 15% profit factor "was predicated on his 'past experience as a Revenue Agent in ascertaining what might be the gross profit or net profit to be derived from a one job construction of this type.'" p. 244. In that case, as in ours, an absence of records handicapped the Government authorities (in the case at bar the books of the taxpayer were lost in an earlier fire in December, 1958), but the Court in Oxford went on to mention a number of other avenues of investigation that might have been utilized in order to arrive at a more accurate and equitable computation. In the case at bar, it is my opinion that the Government used the best means available to it in ascertaining H M T's tax liability.

[Government's Argument]

The Government relies for support of its asserted priority upon United States v. Eiland, 4 Cir. 1955, [55-1 USTC ¶9487] 223 F. 2d 118. The lien in that case was claimed upon an indebtedness owed to the taxpayer by a third party for which levy was made upon the debtor. The taxpayer was adjudicated in bankruptcy, and the debtor paid the indebtedness to the trustee. Two questions were presented: (1) was the Government's lien claim defeated by failure to file notice with the County Clerk ; and (2) was the Government's claim postponed to admin istration and wage claims in the bankruptcy. Each question was answered in the negative. The Court held that the levy made by the Government under its tax claim upon the money owed to the taxpayer by the bankrupt's debtor effected (p. 121) "what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt."

What was the right, title and interest, if any, of the insured taxpayer in the presently involved insurance policies and their proceeds prior to the fire which occurred on January 1, 1960 ? Each policy was a contract by the terms of which, in consideration of the premium paid by the insured, the insurer agreed to indemnify the insured against loss by fire within the period fixed by the policy. Such a loss might never have occurred; in which event there would have been no policy proceeds to which the insured might assert any right, title or interest. The taxes in question here were assessed and the notices thereof filed prior to the occurrence of the fire. The claims of Rider and Dietz, under their respective conditional sales contracts, and of General Home under its chattel mortgage, arose prior to the fire, and the interest of General Home was allegedly recognized by the insurers by endorsements upon the policies.

In construing §6321 of Title 26, In re Halprin, 3 Cir. 1960, [60-2 USTC ¶9564] 280 F. 2d 407, held that prior to the time when a party to a bilateral contract performs his undertaking and thereby subjects the other party to an obligation to pay for that performance as agreed, the contract is wholly executory and the promise to pay is contingent upon whatever performance was bargained for in exchange. Only by conferring an agreed equivalent benefit can the promisee acquire an enforceable right to the promised payment. Where the is entirely uncertain whether the conditional promise to pay will ever become unqualified and enforecable, the interest of a party to the contract is purely contingent, and therefore not "property and rights to property" to which a tax lien under §6321 could attach. United States v. Long Island Drug Co., 2 Cir. 1940, [41-1 USTC ¶9140] 115 F. 2d 983. Until the fire occurred no lien could arise in favor either of the Government or of any other claimant upon the interest, whatever it was, of the taxpayer in either of the fire insurance policies.

[Property Rights]

The tax lien statute does not create property rights, but merely provides for the attachment of the lien to rights created under applicable State law. United States v. Bess, 1958, [58-2 USTC ¶9595] 357 U. S. 51; Wolverine Insurance Co. v. Phillips, D. C. Iowa, 1958, [58-2 USTC ¶9765] 165 F. Supp. 335, 353. The fire insurance policies were merely promises to indemnify upon the possible happening of a future event. No chose in action arose in favor of the insured until the fire occurred. However, prior to the fire, and while the insurance was in force, the Government had taken all steps necessary to perfect a tax lien upon all property of the insured. The moment the fire occurred, the agreement to indemnify embodied in the policies ripened into a chose in action in favor of the insured, which constituted "property or right to property" to which the previously inchoate tax lien immediately attached. Citizens National Trust & Savings Bank of Los Angeles v. United States , 9 Cir. 1943 [43-1 USTC ¶9426], 135 F. 2d 527.

Defendant General Home Service Association held a chattel mortgage to secure the payment of $4,800.00 on personal property of the insured which was destroyed by the fire, and it is claimed that each of the fire insurance policies bore an appropriate endorsement committing the insurer to pay, in the event of destruction by fire, proceeds of the policies to the mortgagee to the extent of its interest therein. These "loss-payable endorsements", if they existed, might constitute evidence that the fire insurance policy contracts were made, not only for the benefit of the named insured, but as well for the benefit of the chattel-mortgagee, who, when the fire occurred, would acquire a chose in action for so much of the proceeds of the policies as represented the values of the chattels constituting the security described in the mortgage. Rent-a-Car Co. v. Globe & Rutgers Fire Ins. Co., 148 A. 252, 158 Md. 169; Aetna Ins. Co. v. Thompson, 40 A. 396, 68 N. H. 20. The critical issue between the Government and the mortgagee is whether the entire insurance proceeds constituted property of the insured, within the definition of 26 U. S. C. §6321, or whether the alleged endorsements on the policies in favor of the chattel mortgagee have the effect of reducing the property rights of the insured, pro tanto. It is apparent that a debtor-taxpayer may prevent the attachment of Government liens by divesting himself of contingent rights to property before they actually vest, for no Government lien attaches to such contingent rights. See In re Halprin, supra, and United States v. Long Island Drug Co., supra. There appears in the New Jersey decisions, a distinction between the rights acquired by a mortgagee dependent upon a difference in insurance policy endorsement language. In Martin v. Franklin Fire Insurance Co., 1875, 38 N. J. L. 140, the Court had before it a policy of fire insurance which had written on its face, as revealed in defendants' declaration, "Loss if any, payable to Garrett G. Vreeland as mortgagee." The particular question confronting the Court was whether or not the law suit could be maintained by the mortgagor, the owner of the policy, in view of the endorsement. The Court answered in the affirmative, notwithstanding the fact that (p. 142) "the person to whom the loss is made payable be a mortgagee, (because) the contract * * * is with the owner, for the insurance of his property, and not with the mortgagee for the insurance of his interest. * * * The direction to pay the sum in which the insurance was effected to the mortgagee, in case of a loss, is collateral to the principal contract and is not an assignment of the policy.

"The legal effect of such a clause in favor of a third person in a policy, in terms between the insurer and the owner, is that of a direction in advance as to the mode of payment, which when made, is performance of the contract in the manner assented to by the insured, and discharges the obligation pro tanto."

In Reed v. Firemen's Insurance Co., E & A 1911, 81 N. J. L. 523, there was before the Court an insurance policy containing the language "Loss, if any, payable to David F. and James A. Reed, mortgagees, mortgage clause attached." The Court there held: "The mortgagee clause is the contract between the insurer, and the mortgagee, quite separate from the policy, yet ingrafted upon it, and to be understood by reference to the policy which renders it certain and complete."

We are left in ignorance of the language of the mortgagee clause in either of the policies here in question, because the policies are not before the Court, nor has any secondary evidence of the terms thereof been presented. The record being devoid of proof of the language employed to describe its interest in either policy, we are unable to grant priority to the chattel mortgagee, General Home Service Association, in the policy proceeds. Accordingly, the entire proceds of the insurance policies must be considered as vesting, at least momentarily, in the insured, at which time the Government's hovering liens immediately attached thereto.

On April 14, 1959 defendant-claimant M. Dietz & Sons, Inc. sold to insured-taxpayer certain store fixtures under a conditional bill of sale, by the terms of which the conditional vendee agreed to keep the chattels insured against destruction by fire. At the time of the fire, there was a balance due of $176.00 on account of the sale price, and the chattels immediately prior to their destruction were worth approximately $400.00.

On June 8, 1959 , defendant-claimant B. B. Rider Corp. sold to taxpayer-insured, under a conditional bill of sale, certain air conditioning equipment, which it installed in the premises described in the insurance policies. By the terms of the conditional sale agreement, title to the property described remained in the conditional vendor until the price had been completely paid, and the vendee agreed to insure the property against loss by fire at its own expense, but in the name of the vendor. At the time of the fire there was a balance due of $3,081.87 on this conditional sale, for which B. B. Rider recovered judgment against the conditional vendee on June 16, 1960 .

[Conditional Vendors]

As to these conditional vendors, whose property was destroyed by fire, their priority is precluded by application of the doctrine that in order to defeat a Government tax lien, one must be both prior in time and have a perfected, choate lien. In United States v. New Britain , 1954, [54-1 USTC ¶9191] 347 U. S. 81, 84, the Court enunciated the principle that a choate lien arises "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." The conditional vendors have no such perfected liens against the insurance proceeds where the property, title to which they retained pending payment was destroyed. See In re Cecire, 9 N. J. Misc. 977, where the Court held that insurance proceeds do not replace the property destroyed so as to maintain a creditor's priority established as to such property. B. B. Rider contends, however, that it has an equitable lien which arose upon the sale of its property to the insured, at which time the vendee agreed to carry fire insurance on the property in question. Assuming the existence of such lien, it is not entitled to priority over that of the Government. United States v. Morrison, 5 Cir. 1957, [57-2 USTC ¶9801] 247 F. 2d 285. B. B. Rider additionally argues that it falls within the rule of law enunciated in Insurance Company of North America v. Putney, E. D. Va. 1955, [55-2 USTC ¶9704] 136 F. Supp. 894. In that case, as in the one before me, the proceeds of two fire insurance policies were deposited with the Court pending resolution of the rights of the various parties interested therein. One policy was issued on January 8, 1952 , payable to Putney and Carreras t/a Auto Parts Warehouse, and covered the interest of the insured in all stock in trade in a specified° warehouse. That warehouse was destroyed, with all of the goods stored therein, on July 1, 1952 . The goods stored in the warehouse were not owned by the insured, but were there on consignment, and the parties had agreed that the consignee would insure the goods. In considering the respective rights to the insurance proceeds, as between the Government's tax lien (the date of which is not disclosed in the opinion) and that of the consignor, the Court held the lien of the latter to be superior, upon the ground that as between Carreras and the consignor the latter would prevail, because the Government stood "in the shoes of" Carreras. Although the last cited case is factually suggestive of that at bar, its factual differences impel me to a different legal conclusion than that reached by the Court in the Putney case.

Defendant-claimants Austin, Nichols & Co. Inc. and Gordon Bass recovered judgments against the taxpayer-insured on April 7 and October 17, 1960 , respectively, and execution was issued and levy made under each judgment upon the insured's right, title and interest in the proceeds of the fire insurance policies. These claimants are unable to achieve priority because of the well-established rule "the first in time is the first in right." United States v. New Britain, supra, at p. 85.

The lien of the United States , having attained perfection prior to the debtors' ensuing bankruptcy, does not clothe the Trustee with rights superior to those of the United States . United States v. Eiland, supra.

[Public Adjusters]

In the course of asserting its claim against the insurers upon the policies, the insured employed the services of Messrs. Sarasohn and Friedman, public adjusters, and, on January 5, 1960 , agreed to pay, for their services in adjusting the loss, 10% of the amount recovered. Clearly, at the time these adjusters were employed, the insured had already lost any right over the policy proceeds inasmuch as the Government's lien had attached thereto. However, the adjusters argue that because it was through their efforts that the fund was created, they are entitled to first priority, citing Filipowicz v. Rothensies, E. D. Pa. 1942, [42-1 USTC ¶9300] 43 F. Supp. 619, 624. In that case, an attorney's lien was given priority over a federal tax lien upon a fund "upon the well recognized principle that an attorney has a lien on a fund which has been created as a result of his efforts in litigation." (Citing Sprague v. Ticonic Bank, 307 U. S. 161.) In Filipowicz, the attorney had filed proof of claim in favor of taxpayer in bankruptcy proceedings involving taxpayer's debtor. Three dividends in the bankruptcy proceedings were received by the attorney, and upon them the Collector made levy under its lien for taxes due from the attorney's client, the creditor of the bankrupt. This case is distinguishable upon the ground that Sarasohn & Company obtained no lien, but merely a contract right. A debtor may not impair the rights of the United States established through perfection of a tax lien which has already attached to the debtor's property, by undertaking performance of a contractual obligation.

The Government having established its priority right to an amount in excess of the total on deposit in the Registry of this Court, i.e., $45,404.92 (footnote 1 supra), it is entitled to judgment in the amount of the fund. This obviates the necessity of establishing priority rights of the inferior claimants.

An order in accordance with the views herein expressed may be submitted.

¹ "MR. MILLER (Government attorney): I show you an affidavit attached to the Government motion which indicates that for the years May 1, 1954 to April 30, 1958 a total of $45,404.92 was assessed for excise taxes. Do you recall working on this case?

"MR. KAPLAN: Yes.

"MR. MILLER: Can you recall how you computed that $45,000 figure?

"MR. KAPLAN: Well, I know that I computed it on figures supplied by the taxpayer's accountant."

 

 

[64-1 USTC ¶9312]Southold Savings Bank, Plaintiff v. Minnie Finkelstein, individually and as Executrix of the Estate of Hyman B. Finkelstein, Deceased, et al., Defendants

N. Y. County Court , Nassau County , 9/25/63 , (243 N. Y. S. 2d 397)

[1954 Code Sec. 6323]

Federal tax liens: Priority: Fire insurance premium advances: Local realty taxes.--Federal tax liens had priority over subsequently accrued fire insurance premium advances and local realty taxes. The Court would not permit the "first in time, first in right" maxim to be circumvented by the device of adding the fire insurance premium advances on to the prior mortgage debt.

James W. Andrews, 161-10 Jamaica 32, N. Y., for plaintiff. Joseph P. Hoey, 271 Washington St., A. I. Madison, Lila Turner, 186 Joralemon St., Brooklyn 1, N. Y., Leo A. Larkin, Municipal Bldg., New York 7, N. Y., for defendant.

[Memorandum]

GOLDSTEIN, County Judge :

This is an action to foreclose a mortgage on real property in Nassau County . A referee to compute and report was appointed and on July 2, 1963 he rendered a report indicating that the amount due to the plaintiff was $12,345.18 which sum includes $157.42 advanced by the plaintiff for fire insurance premiums.

The United States was joined as a defendant to the foreclosure proceedings as a result of four Federal tax liens having been filed against the mortgaged premises, the earliest of which was filed March 2, 1961 with the Clerk of the County of Nassau .

The proposed order would permit the plaintiffs, Southold Savings Bank, to sell the premises at foreclosure subject to accrued local taxes and would direct a payment of a sum of money to the plaintiff for reimbursement of the fire insurance premiums advanced. The United States has interposed objection to the form of the Judgment of the Foreclosure, dealing in particular with the issue of reimbursement for fire insurance premiums and the local taxes which accrued subsequent to the date of the Federal Liens.

The sole question to resolve concerning the final form of judgment of foreclosure is whether the plaintiff be given priority for the insurance premiums advanced which accrued subsequent to the Federal Liens, and whether the premises are to be sold subject to subsequently accrued local taxes.

The priority of federal tax liens provided by 26 U. S. C., section 6321 as against liens created under State Law, is governed by the common law rule--"The first in time is the first in right" (United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85-86.)

The tax lien arises, according to section 6322, when the tax is assessed but as against specific interests mentioned in section 6323-A--mortgages, pledges, purchasers and judgment creditors--it is not valid until placed on public record.

The priority of a lien created by state law depends "on the time it attaches to the property and becomes choate". ( United States v. New Britain, supra, at 86; United States v. Security Trust and Savings Bank [50-2 USTC ¶9492], 340 U. S. 47). Choate state created liens take priority over later federal liens ( United States v. New Britain, supra; Crest Finance Co. v. United States [62-1 USTC ¶9105] 368, U. S. 347) while inchoate liens do not (see United States v. Liverpool and London, Ins. Co. [55-1 USTC ¶9136], 345 U. S. 215; United States v. Scovill [55-1 USTC ¶9137], 348