¶50,739] In re Richard F. Morgan, Mary A. Morgan, Debtors. The First
National Bank of Mt. Dora, Florida, Plaintiff v. V. John Brook, Jr.,
Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan and Joseph Morgan,
Defendants. United States of America, Intervenor and Richard E. and Mary
A. Morgan, Cross-Plaintiffs v. United States of America,
Cross-Defendants and United States of America, Cross-Plaintiffs v. V.
John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan
and Joseph Morgan, Cross-Defendants and V. John Brook, Chapter 7
Trustee, Cross-Plaintiff v. Richard Morgan a/k/a Richard E. Morgan, Mary
A. Morgan and Joseph Morgan, Cross-Defendants
Bankruptcy Court, Mid. Dist. Fla., Tampa Div., 95-4824-8P7, 6/6/97
Tax liens: Validity: Priority: Bankruptcy: Trustee: Garnishment lien:
The IRS had a valid, enforceable tax lien, superior to the claim of a
bankruptcy trustee, on funds that had been held in a bank account
belonging to the debtors but that were placed in a court registry
following the bank's interpleader action. The IRS had assessed the
taxes, the debtors refused to make payment, and a tax lien arose against
all of their properties, including their bank deposits. Furthermore,
since the debtors failed to timely challenge the IRS's deficiency
determination by filing a petition with the Tax Court, the deficiency
became assessable. Finally, the trustee acquired a valid garnishment
lien for attorneys' fees incurred with respect to the debtors on the
funds in the registry that was junior to the tax lien.
P.O. Box 1102
, for plaintiff. Alan C. Watkins, 1509 Swann Ave., Tampa, Fla. 33606,
David B. McEwen, Schneikart & McEwen, 150 Second Ave., N., St.
Petersburg, Fla. 33701, for defendant V. John Brook. Brian L. Schwalb,
Department of Justice,
, for intervenor
ON MOTIONS FOR SUMMARY JUDGMENT
THIS IS a
Chapter 7 liquidation case and the matters under consideration are three
Motions for Summary Judgment filed by the United States of America
(Government); V. John Brook (Trustee); and Richard E. Morgan and Mary A
Morgan (Debtors), respectively. In order to place the Motions in their
proper perspective, it is helpful to briefly recap the procedural
background of this adversary proceeding, originally styled, The First
National Bank of
(Bank) v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary
A. Morgan, and Joseph Morgan, Defendants. On
July 6, 1995
, the Bank filed its Complaint for Interpleader. On
August 9, 1996
, this Court entered an Order granting leave to the Government to
intervene. The Order was entered on
October 16, 1996
, after this Court overruled the Debtor's objection to the intervention
by the Government. The Order also granted thirty days to the Government
to file cross-claims against the Debtors and the Trustee, and thirty
days to the Debtors to file a cross-claim against the Trustee and the
October 30, 1996
, the Debtors filed their Cross-Claim against the Government. On
November 13, 1996
, the Government filed its Cross-Claim against the Trustee and the
November 15, 1996
, the Trustee filed his Cross-Claim against the Debtors. On
November 30, 1996
, the Bank deposited the funds in controversy in the Registry of this
Court pursuant to an Order entered by this Court on
July 31, 1995
, granting partial summary judgment of interpleader in favor of the
Bank. Thus, left for consideration are the competing claims to the funds
in the Registry by the Government, the Trustee, and the Debtors.
controversy presented for this Court's consideration is the three
Motions for Summary Judgment described earlier, in which each of the
Movants contend that there are no genuine issues of material fact and
that each is entitled to a judgment in their respective favors as a
matter of law. In its Motion, the Government contends that the Debtors
are indebted to the Government for unpaid, assessed income tax
liabilities for the years 1992 up to and including 1995; that as a
matter of law, the Government has a lien on all assets of the Debtors,
including the funds held by them in the Bank which are now deposited in
the Registry; and that the controlling facts are not in dispute.
Therefore, the Government contends that its Motion should be granted as
a matter of law. In his Motion, the Trustee contends that he and his
wife obtained judgment against the Debtor, Richard Morgan, for slander
of title; that in aid of execution of this judgment he garnished the
funds which are in the Registry; that he has an agreement with the
Government as to the respective priorities of the Trustee and the
Government; and that based on the undisputed facts he acquired a valid
lien on the funds vis-a-vis the Debtors. Therefore, the Trustee contends
that his Motion for Summary Judgment should be granted.
Debtors, in their Motion consisting of fifteen separate paragraphs,
contend inter alia that this Court erred in permitting the
Government to intervene due to "lack of knowledge"; that there
is no such entity as the "Internal Revenue Service" set forth
in the Constitution nor in any law written by Congress; that the
assessment was improper because it was not signed by an "assessment
officer"; that the Government lost all of its immunity (or
sovereignty) when it filed a claim in the Bankruptcy Court; that the
Proof of Claim filed contains an illegible signature; that the Proof of
Claim is not supported by any documents; that the "United States of
America nor the Internal Revenue Service" addressed the proof to a
Table of Authorities provided by the Debtor; and that the Government
successfully convinced the Court that it acquired a new client, the
Southern Bank, even though "the Southern Bank sent no
representative to a hearing." In addition to the foregoing, the
Debtors also set forth various and sundry statements, none of which are
remotely relevant to their Motion for Summary Judgment. Therefore, it is
unnecessary to either recite or paraphrase them.
The Debtors in
the Wherefore Clause of their Motion request the following relief:
1. Order the
monies in the Registry to be paid over to the Debtors.
2. Order any
monies held in the estate to be paid over to the Debtors.
3. Order the
sanction of the
United States of America
for representing the Southern Bank of
4. Order the
non-existent "Internal Revenue Service" sanctioned for its
entry of a non-perfect document described as "Form 10."
5. Order an
award of justicable (sic) money to the Debtors for the Department of the
Treasury/Internal Revenue Service; as described by Title 18 United
States Code; Sections 152 and 3571; for the violation in not submitting
assessment forms signed by an "assessment officer" with
properly delegated (published in the Federal Register) authority to sign
such a documents.
6. Issue any
other orders deemed justicable (sic).
the Debtors also filed a document entitled, "Objections to the
Government's and Brook's Motions for Summary Judgment." Neither the
Rules which govern adversary proceedings nor any other rule of procedure
provide for an "objection to summary judgment." Nevertheless,
this Court considers the same as a response and written argument against
the Motions filed by the Government and the Trustee. Stripping the
document of largely meaningless and irrelevant rhetoric, the Debtors'
argument presents nothing new and is, in essence, a rehash of the matter
set forth in their Motion for Summary Judgment, reiterating a
twenty-five page document with some reprint from the Internal Revenue
manual and citations which are claimed to support the proposition urged
by the Debtors. It shall suffice to note that the foregoing contentions
of the Debtors are merely restatements of the old refrain that the
Internal Revenue Service (IRS) does not exist; that there is no
obligation to pay income tax; that the system is voluntary; that there
is nothing in the Internal Revenue Code providing that any part of
earnings known as wages and commissions is regulated; that no one has an
obligation to file Form 1040; and that there was no valid assessment of
unpaid taxes against the Debtors.
The one and
only issue involves the validity, vel non, of the tax and the
garnishment liens claimed by the Government and the Trustee
respectively. The facts relevant to this issue as they appear from the
record can be summarized as follows.
It is without
dispute that the Debtors did not file an income tax return (Form 1040)
for the tax years of 1993, 1994, and 1995. On
April 10, 1995
, the IRS addressed a request to Richard Morgan urging him to file his
tax return for the tax year ending
December 31, 1993
March 18, 1996
, the IRS informed Mary E. Morgan that she failed to file her tax
returns for 1993, 1994, and 1995, and urged her to file her tax returns.
June 3, 1996
, the IRS requested that both Debtors contact the IRS within ten days
and stated that if they failed to do so, the IRS would proceed with
other action to bring them into compliance with the tax laws. (Govt.
June 10, 1996
, Richard Morgan wrote to N. Kenyon, Tax Auditor, an employee of the
IRS, and informed Mr. Kenyon that he does not meet the definition of a
person who is required to file any Form 1040. Mr. Morgan also demanded
that the IRS furnish him with an authoritative regulation to show that
he is required to file a tax return, and send him any information the
IRS had as to what his gross or taxable income was for the years in
question and from what source derived, plus additional documentation to
show Mr. Kenyon's authority to send the letters (Govt. Exh. 8). Mrs.
Morgan sent an identical letter to Mr. Kenyon.
concluding the audit, the IRS made a jeopardy assessment of the federal
income tax liabilities of Mr. Morgan for the years 1993, 1994, and 1995
in the total amount of $138,286.97 (Certificate of Assessment and
Payments) (Govt. Exh. 9). On
July 24, 1996
, the IRS made a jeopardy assessment of Mrs. Morgan's federal income tax
liability for the years 1993, 1994, and 1995 in the total amount of
$97,703.60 (Certificate of Assessment and Payments, Govt. Exh. 10). On
July 24, 1996
, the IRS mailed a Notice of Jeopardy Assessment and Right to Appeal
(Govt. Exhs. 11, 12). The Notice was sent to both Mr. and Mrs. Morgan.
July 14, 1996
, the IRS filed a Notice of Federal Tax Lien (Form 668(Y)) in the amount
of $138,286.97 based-on the tax liability assessed against Mr. Morgan.
The Notice was filed in the Office of the
. (Govt. Exh. 13). In addition, on
July 14, 1996
, the IRS served Notices of Levy upon the Clerk of the Bankruptcy Court,
one concerning the tax liability of Mr. Morgan, the other of Mrs. Morgan
(Govt. Exh. 14).
May 18, 1995
, the Debtors filed their joint Petition for Relief under Chapter 7 of
the Bankruptcy Code. (Doc. No. 1). On their Schedule of Assets, the
Debtors listed a joint checking account at the First National Bank of
Mount Dora, Florida (Bank), stating a balance of $100,000.00. It is
without dispute that on the date the Debtors filed their Petition they
had three separate accounts in the same Bank: Accounts Numbers
0220338453, 02220338024, and 220338013, respectively. At the time the
Debtors filed their Petition, Mr. and Mrs. Morgan were the only
signatories on these accounts. (Govt. Exh. 2). On
June 19, 1996
, after the commencement of the case, the Debtors amended their
signature cards and added Joseph M. Morgan, their son, as an additional
signatory. (Govt. Exh. 3). There is nothing in this record and it is not
contended by the Debtors that Joseph Morgan contributed to the funds on
deposit in the Bank.
In due course,
V. John Brook was appointed as Chapter 7 Trustee and placed in charge of
istration of the estate of the Debtors. On
June 28, 1995
, the Trustee made a written demand on the Bank to turn over all funds
in the accounts maintained by the Debtors. (Govt. Exh. 4). On
July 5, 1995
, Joseph Morgan made a written demand on the Bank and requested that the
funds in the accounts be wire-transferred to the Bank of Mississippi,
, Routing No. 0653-00486, Account Number 22379440. (Govt. Exh. 5). Faced
with the two competing claims to the funds in the three accounts, the
Bank filed its Complaint for Interpleader. (Doc. No 11). The Government
was not named initially by the Bank as a defendant. On
July 31, 1995
, this Court entered a Partial Final Judgment in favor of the Bank,
directing the Bank to deposit in the Registry all funds in the three
bank accounts. (Doc. No. 23). On
August 17, 1995
, the Bank deposited in the Registry in the amount of $125,943.49 in
compliance with the Partial Final Judgment. (Adv. Doc. No. 26).
July 27, 1995
, the Debtors converted their Chapter 7 case to a Chapter 13 case, (Doc.
No. 12), but on
September 12, 1995
, the Chapter 13 case was reconverted to a Chapter 7 case on the motion
filed by the Trustee (Doc. No. 53).
August 28, 1995
, the IRS filed a Proof of Claim in the amount of $60,322.27. (Govt.
Exh. 6). The Proof of Claim was filed as secured based on the federal
tax liens for assessed and unpaid income tax liability for the years
1990 through 1992, inclusive. On
November 6, 1995
, this Court dismissed the Debtor's Chapter 7 case, retaining
jurisdiction to determine fees and costs and to order the disbursement
of the funds being held by the Clerk of the Bankruptcy Court.
Furthermore, it is understood by all parties that the Court reserved
jurisdiction to determine the respective right of the claimants to the
funds deposited by the Bank in the Court's Registry. (Doc. No. 69).
May 8, 1996
, after the case had been dismissed, the Debtors filed an objection to
the Proof of Claim filed by the IRS. On May 22, 1996, this Court
overruled the objection and after the IRS collected the assessed income
tax liabilities of the Debtors for years 1990 through 1991, this Court
allowed the Government's claim against Mr. Morgan in the amount of
$886.70, and against Mrs. Morgan in the amount of $17,715.23. (Doc. No.
October 16, 1996
, this Court granted leave to the Government to intervene in the
interpleader filed by the Bank. The Government filed its Motion to
Intervene, (Adv. Doc. No. 42), coupled with a Cross-Claim, (Adv. Doc.
No. 44), as well as a response to the Cross-Claim filed by the Debtors,
(Adv. Doc. No 43). On
January 31, 1997
, this Court granted the Government's Motion to Intervene. (Adv.Doc. No.
53). Although this Court granted leave to Joseph Morgan to file a
cross-claim asserting his claim against the fund in the Registry, he
failed to file a cross-claim within the time fixed by this Court.
Consequently, Joseph Morgan no longer has any claim against the funds in
the Registry. The Government in its Cross-Claim asserted that the
Government has a valid tax lien securing the Debtor's unpaid assessed
federal income tax liability for the tax years of 1993, 1994, and 1995
in the total amount of $254,000.00, made up of the amount of the
liability of Mr. Morgan and the amount of the liability of Mrs. Morgan
in the amount of $103,539.95, plus interest and statutory additions.
and his wife are the fee simple owners of their homestead, located in
. There is no question that the Debtor was aware that the Trustee's
was his properly established homestead. Notwithstanding, Mr. Morgan
recorded in the Office of the Clerk of the Circuit Court of Pinellas
County, in O.R.Book 9190, Page 1845, an instrument dated December 12,
1995, claiming a "common law" lien, or a "commercial
lien" on the Trustee's homestead.
In order to
remove this cloud on the title on his homestead, the Trustee engaged the
services of an attorney who filed a writ against Mr. Morgan to quiet
title, for slander of title and also sought injunctive relief. On July
3, 1996, the Circuit Court in and for Pinellas County, Florida, entered
its order on the Trustee's Motion for Summary Judgment, finding that the
property involved was in fact the homestead of the Trustee, that the
Notice of Lis Pendens recorded in the Public Records of Pinellas County
is a cloud on the Trustee's title and shall be expunged. Furthermore,
based on Fla. Stat: §57.105, the Court entered a judgment in favor of
the Trustee and against the Debtor, Mr. Morgan, for $1,950 together with
taxable cost in the amount of $210.50, or a total of $2,160.50 bearing a
rate of interest at 12% per annum.
As the Debtor
had not satisfied the Judgment within the time ordered by the Court, the
Trustee filed a Motion for Writ of Garnishment on
July 15, 1996
July 18, 1996
, the Clerk of the Circuit Court issued the Writ which was served on the
Clerk of the Bankruptcy Court on
July 14, 1996
. In due course, the Government filed an Answer to the Writ on behalf of
the Government and the Clerk of the Bankruptcy Court. In its Answer, the
Government stated on behalf of the Clerk that the Clerk is not indebted
to Mr. Morgan, who is merely a stakeholder of the funds. On
December 16, 1996
, Christine R. Brook, the Trustee's spouse, assigned her interest in the
Judgment to the Trustee (State Court Exhibit C). The Government and the
Trustee agreed as to the respective priority of their claims to the
fund. This leaves for consideration the dispute between the Government,
the Trustee, and the Debtors.
PRINCIPLES GOVERNING SUMMARY JUDGMENTS
summary judgment are governed in adversary proceedings by F.R.B.P 7056,
which adopted Fed.R.Civ.P. 56. Fed.R.Civ.P. 56 is an integral part of
federal practice and was designed to secure a just, speedy, and
inexpensive determination of controversies where the relevant facts are
not in dispute. Celotex Corp. v. Catrett, 477
317 (1986). It is well established that it is appropriate to dispose of
pleadings, depositions, answers to interrogatories, and admissions on
file, together with affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.
v. Liberty Lobby, Inc., 477
242, 247 (1986).
It is clear
that the moving party has the burden to establish not only the absence
of any genuine issue of material fact, but also that the controlling law
supports, the claim and the relief sought. Celotex Catrett,
supra; Adickes v. S. H. Kress & Co., 398
144, 157 (1970); Sweat v. Miller Brewing Co., 708 F.2d 655 (11th
Cir. 1983). To assure that the non-moving party receives a fair
consideration of its position and especially its right to a plenary
disposition of the controversy if there are genuine issues of material
facts, the underlying facts and all reasonable inferences must be viewed
in a light most favorable to the non-moving parties. Matsushita
Electrical Industrial Co. v. Zenith Radio Corp., 475
574 (1986). It is equally clear, however, that the non-moving party may
not rely on mere allegations or denials in the pleadings. Instead, it
must set forth specific facts in affidavits or through competent
evidence that there are genuine issues of material facts which require a
resolution by trial.
This Court is
satisfied that there are no disputed facts which would prevent the
disposition of the conflicting claims of the Government and the Debtors
by summary judgment. The Government made repeated efforts to secure the
tax returns for the years in question and the Debtors did not file the
tax returns for the years in question. It is equally without dispute
that the Government sent and the Debtors received the notices of the
deficiency and the notice of assessments and demand for payment; that
they failed and refused to pay the amount found to be due and assessed
for the years in question; that the Government made a jeopardy
assessment against Mr. Morgan for the years 1993, 1994, and 1995 in the
total amount of $138,286.97 and made a jeopardy assessment against Mrs.
Morgan for the unpaid taxes for the same years in the amount of
$97,793.60; and that the Notice of Jeopardy Assessment and Right to
Appeal, along with an explanation of the income tax determination and
demand for payment, were sent to both Debtors.
It is clear
that the moment the assessment is made a federal tax lien arises, and
shall continue until the liability for the tax assessed is satisfied or
becomes unenforceable due to lapse of time. 26 U.S.C. §6322. The tax
lien as a matter of law becomes a valid charge on all properties of the
who do not deny the material facts and albeit do not expressly concede
the absence of any genuine issues of material fact basically dispute
that: (1) they are required to pay income tax; (2) the IRS is an
existing entity with power to make the assessment; and (3) that there is
a valid easement because there is nothing in this record to show an
assessment signed by an "assessment officer." The Debtors,
therefore, contend that the Government never acquired any valid
enforceable tax lien on the funds which were on deposit in the Bank, and
that the Debtors are entitled to all the funds in the Registry.
of the Internal Revenue Code authorizes the Secretary of Treasury, or
his delegate, to assess all taxes, including interest and additional
taxes imposed by the Code. The assessment is made by "recording the
liability of the taxpayer in the Office of the Secretary in accordance
with the rules and regulations prescribed by the Secretary." 26
U.S.C 6203. While it is true that in the present instance the actual
assessments are not part of this record, the Government filed a
Certificate of Assessment and Payments. It is recognized that such a
certificate is presumptive proof of a valid assessment. United States
v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989), quoting
[87-2 USTC ¶9485], 672 F.Supp. 503, 505 (M.D.Ala. 1987) aff'd,
849 F.2d 1478 (11th Cir. 1988). See also Freck v. Internal Revenue
Service [94-2 USTC ¶50,518], 37 F.3d 986, 991-92 n.8 (3d Cir. 1994)
[92-2 USTC ¶50,431], 972 F.2d 1174, 1181 (10th Cir. 1992).
Moreover, the Debtors failed to challenge the IRS's determination of
their tax liability before it was assessed by filing a timely petition
with the U.S. Tax Court. 26 U.S.C. §6213. Therefore, the assessment was
timely made. The Debtors had a right to challenge the correctness of the
notice of deficiency issued after the jeopardy assessment of their 1993,
1994, and 1995 tax liabilities by filing a timely petition in the U.S.
Tax Court. 26 U.S.C. §6961(b). While they did challenge the jeopardy
assessment in the U.S. District Court, the jurisdiction of the District
Court is limited to a review of the reasonableness of the assessment.
Because they did not file a petition in the Tax Court within ninety days
of the receipt of the notice of deficiency, the deficiency became
assessable, 26 U.S.C. §6213(c), regardless of the jeopardy assessment
procedure. Humphreys v.
, 62 F.3d 667 (5th Cir. 1995). Lastly, while the Government may be
named as a party in an interpleader action, the taxpayer cannot
challenge the underlying tax assessment. Stoecklin v. United States,
943 F.2d 42, 43 (11th Cir. 1991);
inson v. U.S. [91-1 USTC ¶50,001], 920 F.2d 1157, 1161 (3d Cir.
1990); Schmidt v. King [90-2 USTC ¶50,487], 913 F.2d 837, 839
(10th Cir. 1990). The only litigation which may be brought under 28
U.S.C. §2410 is to challenge the procedural validity of the federal tax
lien and the taxpayer may not attack the merits of the underlying
Based on the
foregoing, this Court is satisfied that there is no dispute that the
assessment has been made; that the Debtors failed and refused to pay the
taxes assessed; and that as a result a tax lien arose against all
properties of the Debtors, including the funds which were on deposit in
the Bank. There being no genuine issues of the material fact, the
Government is entitled to an Order granting its Motion for Summary
Judgment vis-a-vis the Debtors, and based on the stipulation by the
Trustee, its tax lien is superior to the claim of the Trustee, but only
to the extent and consistent with the stipulation.
FOR SUMMARY JUDGMENT BY THE TRUSTEE
relevant to the Trustee's Motion are equally without dispute. The
validity of the Judgment obtained by the Trustee in the State Circuit
Court is not in dispute and neither is the fact that the Trustee
obtained a Writ of Execution which was served on the Clerk of the
Bankruptcy Court. The only question remaining is whether the garnishment
lien did attach to the funds while the funds were in custodia legis.
In light of
the fact that the Chapter 7 case has been dismissed, and although
ordinarily any property remaining would be returned to the Debtor, the
estate as such has no further interest in the property. However, because
it is understood that this Court retained jurisdiction over the
adversary proceedings in which competing claims to the funds deposited
in the Court's Registry have been asserted by all parties in interest,
this Court is satisfied that it is appropriate to consider the validity
of the garnishment lien asserted by the Trustee. Based on the foregoing,
undisputed record this Court is satisfied that the Trustee acquired a
garnishment lien on the funds in the Registry, albeit junior to the tax
lien of the Government. Since there are no genuine issues of material
fact, the Trustee's Motion for Summary Judgment should be granted.
ADJUDGED AND DECREED that Motion for Summary Judgment filed by the
Government be, and the same is hereby, granted.
It is further
ADJUDGED AND DECREED that the Motion for Summary Judgement filed by
the Trustee be, and the same is hereby, granted.
It is further
ADJUDGED AND DECREED that the Motion for Summary Judgment filed by
the Debtors be, and the same is hereby, denied.
final judgment will be entered in accordance with the foregoing.
¶9624]American Hospital Supply Corporation et al. v. Farmers State Bank
of Brookshire, Garnishee v.
United States of America
Court, Harris County, Tex, 125th Judicial District, No. 706,029-A,
[Code Sec. 6323]
Priority of liens: Garnishment by creditor: Claims not reduced to
judgment before filing of tax lien.--The lien of a writ of
garnishment filed on behalf of a litigating creditor for purposes of
attaching to funds placed in the Registry of the Court by the garnishee
was not superior to the Government's tax lien since the litigating
creditor claim had not been reduced to judgment before the filing of the
Federal tax lien. Also, the Federal tax lien had priority over any claim
by the interpleader for attorney's fees.
ert J. Newton, Urgan, Coolidge, Pennington & Heard, 606 Houston
First Savings Bldg., Houston, Tex., for American Hospital Supply Corp.
Oliver S. Kitzman, Brookshire, Tex., for Farmers State Bank of
Brookshire, Joel P. Kay, Ass't U. S. Attorney, Houston, Tex., for U. S.
came on regularly for hearing before the Court on June 3, 1968, on the
United States' motion for summary judgment, the United States by Joel P.
Kay, Assistant United States Attorney, and American Hospital Supply
Corporation by its attorney,
ert J. Newton, having announced ready, and the garnishee, Farmers State
Bank of Brookshire, by its counsel Oliver S. Kitzman, appearing not, and
the Court having heard the representations of the parties present and
considered the pleadings filed by all parties to this proceeding and
thereafter the Court having directed that the United States' motion for
summary judgment be granted, now, therefore by reason of the
It is hereby
ORDERED, ADJUDGED and DECREED:
Tri-County Nursing Home, Inc., is indebted to the United States of
America in the amount of $2,556.21, plus interest as provided by law,
for federal employment taxes for the fourth quarter of 1965 and the
first three quarters of 1966, and that such liabilities are secured by
federal tax liens in the amounts thereof; that the fund of money in the
amount of $1,073.73 heretofore placed in the Registry of the Court by
the garnishee, Farmers State Bank of Brookshire, constitutes the
property and rights to property of Tri-County Nursing Home, Inc., which
is duly encumbered by the federal tax liens heretofore stated.
2. That by
virtue of the judgment heretofore entered in Cause No. 706,029 in this
Court in March of 1967 Tri-County Nursing Home, Inc., is indebted to
American Hospital Supply Corporation in the amount of $6,166.79, plus
court costs and interest as provided by law.
3. That the
federal tax liens asserted by the
in this proceeding have priority to the claim asserted by the American
Hospital Supply Corporation as to the fund of money in the amount of
$1,073.73 in the Registry of the Court.
4. The sum of
money in the amount of $1,073.73 now in the Registry of the Court be
disbursed by the Clerk of the Court as follows:
The sum of $48.00 to the garnishee, Farmers State Bank of Brookshire,
for its cost of court, by the Clerk of this Court issuing his check to
the said Farmers State Bank of Brookshire and forwarding same to its
attorney of record, Oliver S. Kitzman, P. O. Box 336, Brookshire, Texas;
The remainder of said fund in the amount of $1,025.73 to the United
States for application to the heretofore stated federal employment taxes
of Tri-County Nursing Home, Inc., by the Clerk of this Court issuing his
check to the Treasurer of the United States in the said amount of
$1,025.73 and forwarding same to its attorney of record, Morton L.
Susman, United States Attorney, P. O. Box 61129, Houston, Texas 77061,
to the attention of Joel P. Kay, Assistant United States Attorney.
5. That all
relief sought by each party to the above numbered and entitled
garnishment proceeding not herein specifically granted is denied.
of Law in Support of the United State's Motion for Summary Judgment
This suit was
instituted by the AMERICAN HOSPITAL SUPPLY CORPORATION in order to
garnish certain funds held by the FARMERS STATE BANK OF BROOKSHIRE for
the Tri-County Nursing Home, Inc. Said garnishment was initiated prior
to the AMERICAN HOSPITAL SUPPLY CORPORATION'S judgment against the
Tri-County Nursing Home, Inc.
garnishment herein was initiated by AMERICAN HOSPITAL SUPPLY CORPORATION
July 1, 1966
November 18, 1966
UNITED STATES OF AMERICA
filed a Notice of Federal Tax Lien against the taxpayer, Tri-County
Nursing Home, Inc., showing an indebtedness to the
UNITED STATES OF AMERICA
on certain unpaid taxes in the amount of $2,556.21. A certified copy of
said Notice of Federal Tax Lien is attached to the Motion for Summary
Judgment as Exhibit 2. An affidavit of the District Director of Internal
Revenue Service is also attached to the motion, certifying the validity
of the assessment for the taxes for which the Notice of Tax Lien was
. No judgment was obtained against the Tri-County Nursing Home, Inc., by
AMERICAN HOSPITAL SUPPLY CORPORATION until March 1967. The AMERICAM
HOSPITAL SUPPLY CORPORATION admits that at the time of the filing of the
Notice of Tax Lien in
, by the
UNITED STATES OF AMERICA
November 18, 1966
, that no judgment had been rendered in this cause in the District Court
of Harris County, Texas.
AMERICAN HOSPITAL SUPPLY CORPORATION'S claim against Tri-County Nursing
Home, Inc., was not reduced to judgment prior to the filing of the
Federal Tax Lien, the Federal Tax Lien takes priority over the claim of
AMERICAN HOSPITAL SUPPLY CORPORATION. United States v. Liverpool
& London & Globe Insurance Co. [55-1 USTC ¶9136], 348
215. The Federal Tax Lien herein is likewise prior to any claim by the
interpleader for attorneys' fees. United States v. R. F. Ball
Construction Co., Inc., et al. [58-1 USTC ¶9327], 355
UNITED STATES OF AMERICA
prays that the garnished fund be paid to the
UNITED STATES OF AMERICA
, and that costs of this proceeding be charged against the plaintiff,
AMERICAN HOSPITAL SUPPLY CORPORATION.
¶9487]Lorren J. Kuffel, Appellant v.
United States of America
Supreme Court, No. 8422, 441 P2d 771, 5/29/68
[1954 Code Sec. 6323(a)]
Lien for taxes: Priorities: Arizona law: Garnishor as purchaser.--Under
Arizona law, filing and service of a writ of garnishment by the
garnishor do not amount to an equitable assignment to the garnishor of
the debt owed by the garnishee to the delinquent taxpayer. Accordingly
the garnishor did not become a purchaser under Sec. 6323(a) entitled to
record notice of the federal tax lien.
[1954 Code Sec. 6323(a)(1), prior to enactment of P. L. 89-719]
Lien for taxes: Notice of lien: Personalty: Place of filing.--In
a case involving intangible personal property (a debt owed to delinquent
taxpayer), notice of federal tax lien was properly filed with the county
recorder in the county where the delinquent taxpayer resided.
[1954 Code Sec. 6323, prior to enactment of P. L. 89-719]
Lien for taxes: Priorities: Garnishment proceedings: Attorney's
fees.--Where the Government's tax lien was entitled to priority over
a garnishment lien, it was also prior to the garnishor's claim for
reasonable attorney's fees.
Dietle, II, Stockton & Hing,
234 N. Central Ave.
, for appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A.
Jackson, Joseph Kovner, J. Edward Shillingburg, Department of Justice,
Washington, D. C. 20530, Jo Ann D. Diamos, United States Attorney,
Tucson, Ariz., Richard C. Gormley, Assistant United States Attorney,
Tucson, Ariz., for appellee.
Lorren J. Kuffel appeals from a judgment rendered in favor of appellee
United States of America who was an intervenor below in the garnishment
proceedings instituted by appellant against Stephen M. A. Young,
defendant-debtor. Appellant contends the lower court erred in holding
that a federal tax lien was prior to Kuffel's garnishment lien and
refusing to set any part of the garnisheed funds aside as attorney's
fees for Kuffel's attorney.
The facts of
this case are undisputed. Kuffel was a resident of
, and was in the business of selling truck and automobile parts and
supplies. Stephen M. A. Young, hereinafter called Young, was a resident
doing business individually, and as Western Cut Rate Lumber Co.,
hereinafter designated as Western, and as Edison Trucking Co.,
hereinafter designated as
. As of
April 15, 1956
, Young was indebted to Kuffel for a purchase of tires, truck parts, and
other merchandise in the amount of $5,170.02, and on that date Young
delivered to Kuffel an installment note for that amount. Young made only
one payment for $561.67 on the note in June of 1956. Subsequent to
April 15, 1956
, Kuffel sold to Young additional merchandise in the amount of $4,915.72
in excess of payments made by Young on the open account at different
times. Kuffel made demands for payment of that sum, but Young failed to
pay the amount owing.
April 18, 1958
, federal excise taxes in the amount of $11,972.17 were assessed against
, and, on
May 22, 1958
, the District Director of Internal Revenue,
, filed a notice of lien for those assessed taxes with the
, which was the place of residence of taxpayer Young.
On August 1,
1958, Kuffel commenced action against Young, individually, dba Western
and dba Edison, in the Superior Court of Maricopa County, Arizona, based
on Young's indebtedness to him. In accordance with
statutes, Kuffel, as garnishor, caused writs of garnishment to issue,
and to be served upon Ray Lumber Co., hereinafter designated Ray, and
upon United Wholesale Distributors, hereinafter designated Distributors.
August 8, 1958
, garnishee Ray answered the writ of garnishment, stating that it was
not indebted to defendant Young. Three days later the other garnishee,
Distributors, answered that it was not indebted to any of the named
defendants, but that it was indebted to K. A. Spears Lumber Co.,
hereinafter called Spears, in the amount of $8,753.60 by reason of
orders for lumber placed by Distributors with Spears which were invoiced
to Distributors upon the invoices of Western, and that it was informed
that Western was not owned by Young.
October 27, 1958
through the District Director served on the garnishee-Distributors a
notice of levy which notified Distributors that all sums of money or
other obligations in its possession and belonging or owing to Young were
levied upon, seized, and demanded for satisfaction of Young's tax
liability. Also, the
government served a final demand on Distributors on
March 23, 1959
April 6, 1959
filed notices of a lien for taxes assessed on
April 18, 1958
, with the
of Maricopa and
June 23, 1961
' motion to intervene was granted, and its complaint filed. The
government claimed that its lien for taxes, based on the 1958
assessments, was prior to rights of Kuffel that were created by the
In July of
1961 Distributors amended its answer to the Writ of Garnishment, and
stated that at the time of the service of the writ and at the time of
answering said writ it was indebted to defendant Young, individually,
dba Western and dba
, in the sum of $8,573.60. Default was taken against Young,
individually, dba Western, dba
August 2, 1961
moved for summary judgment based upon the priority of its existing lien
for taxes. On
February 4, 1964
, the trial court granted the
government's motion for summary judgment in the total amount of
$8,573.60 against Young, individually, dba Western and dba Edison;
Kuffel; and Distributors, which sum was being held by Distributors as
garnishee. The court held that the government liens were prior and
superior to all other liens, claims and interests of all the other
parties in the action, thereby refusing to allow Kuffel the reasonable
value for the services of his attorneys.
contends his filing and service of the writ of garnishment constituted
an equitable assignment to him as the garnishor of the debt owed by
Distributors to Young, and hence as garnishor he became a
"purchaser" within the meaning of Section 6323(a) of the
Internal Revenue Code of 1954 which entitled him to record notice of the
tax lien. Kuffel further argues that he did not receive the requisite
notice for the reason that notice of the tax lien was not filed in
until after the garnishment proceedings were instituted in
, although notice of the tax lien was filed in
prior to the filing and service of the writ of garnishment in
6322, and 6323 of the Internal Revenue Code of 1954 set forth the
provisions bearing on this case. 1
tax lien is created by Section 6321 of the Internal Revenue Code of
1954, and it attaches to "all property and rights to property,
whether real or personal, belonging" to the delinquent taxpayer.
The lien attaches not only to all property held by the taxpayer on the
date the lien arose, but also to after-acquired property. Glass City
Bank v. United States [45-2 USTC ¶9449], 326
265, 66 S. Ct. 108, 90 L. Ed. 56. The lien arises "at the time the
assessment is made." Section 6322, Internal Revenue Code of 1954.
The federal lien is perfected and choate at the time it arises.
[54-1 USTC ¶9191], 347
81, 74 S. Ct. 367, 98 L. Ed. 520.
of a federal tax lien as against other interests created under state law
is expressly governed in part by statute. Section 6323(a) of the 1954
Code--the provision relied upon by the garnishor, Kuffel--provides that,
as against a holder of certain enumerated interests, including that of a
purchaser, the tax lien is not valid until notice has been filed. The
question then is: Did Kuffel become a purchaser within the meaning of
federal law when he commenced the garnishment proceedings? We hold that
he did not. The determination of those to whom Section 6323 is
applicable is a federal question. United States v. L. R. Foy
Construction Co., Inc. [62-1 USTC ¶9325], 300 F. 2d 207 (C. A.
States of America v. Liverpool & London & Globe Insurance
Company [55-1 USTC ¶9136], 348 U. S. 215, 99 L. Ed. 268, 75 S. Ct.
247, in discussing priorities of a tax lien over writs of garnishment
issued and served and attorney's fees, the court said:
question of priorities is identical with that of Acri, No. 33, this day
v. Security Trust & Sav. Bank [50-2 USTC ¶9492], 340 U.S.
47, 95 L. ed. 53, 71 S. Ct. 111. On the authority of those cases we hold
the tax liens of the
superior to the lien of the garnisher.
to the attorney's fee allowed the garnishee insurance company, Rule 677,
Vernon's Texas Rules of Civil Procedure, provides:
the garnishee is discharged upon his answer, the costs of the
proceeding, including a reasonable compensation to the garnishee, shall
be taxed against the plaintiff; where the answer of the garnishee has
not been controverted and the garnishee is held thereon, such costs
shall be taxed against the defendant and included in the execution
provided for in this section; where the answer is contested, the costs
shall abide the issue of such contest."
District Court evidently found there was no contest between the
insurance company and the other parties, and that the insurance company
should be discharged with costs and allowance of a reasonable attorney's
fee of $500. It, therefore, ordered the clerk to issue a check to the
insurance company, payable out of the funds paid into the court by it.
the garnishment lien is not prior to the Government liens, and we have
held that it is not, certainly fees allowed in that proceeding are not
prior to the Government liens, and the authorization of the payment of
the attorney's fees prior to the Government liens was error. The costs
and fees should be adjudged against the defendant, as provided by Rule
contends the effect of Section 12-1585, A. R. S. 2,
is to make an equitable assignment by law from Young to him of the debt
owed by the garnishee-distributor.
It did not
appear from the garnishee-Distributors' answer that it was indebted to
Young until after the government had intervened when Distributors
amended its answer admitting its indebtedness. Furthermore, the only
conceivable argument tending to support this claim would be that
immediately upon service of the writ of garnishment Kuffel obtained a
perfected, choate lien against Distributors' debt to Young which became
Land & Irrigation Co. v. Jones, 63
535, 164 P. 2d 456, we said:
". . .
from the date of service of the writ of garnishment any amount due or
found to be due from the garnishee to the defendant is in control of the
court and held by the court in abeyance until the hearing has been
concluded, and cannot be paid to any person except on judgment of the
effect of the writ of garnishment is, therefore, to impound any asset or
property of defendant which is found in the hands of the garnishee
pending the resolution of the merits of the garnishor's claim. The writ
itself constitutes, at most, a lis pendens notice that a right to
perfect a lien on the garnisheed property exists, but such perfection
must await judicial action.
Any amount due
from the garnishee to the debtor at the date of service of the writ is
subject to the impounding effect of the writ. Weir v. Galbraith,
279, 376 P. 2d 396. The most garnishor Kuffel had after service of the
writ of garnishment was an inchoate garnishment lien which could not
have been perfected until the time judgment was rendered. At that time
Kuffel did not have an absolute right to the funds impounded, but did
have a right to have his claim heard without fear that the funds would
be dissipated pending judgment. Under our state law Kuffel therefore had
no assignment to him of Distributors' debt to Young. Furthermore, under
federal law Kuffel did not become a "purchaser" within the
meaning of Section 6323 Internal Revenue Code of 1954 upon service of
the writ of garnishment, and he cannot claim the benefit of that section
which requires that the
give notice of its tax lien. United States v. L. R. Foy Construction
Co., supra; United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d
517 (C. A. 9th).
government took the necessary steps to perfect its lien. Even if Kuffel
would have been entitled to record notice, which he wasn't, he did in
fact receive such notice before he filed his writ of garnishment.
Section 6323(a) of the 1954 Code provides that the federal tax lien is
not valid as against any mortgagee, pledgee, purchaser, or judgment
creditor until notice thereof has been filed by the Secretary of the
Treasury or his delegate "In the office designated by the
law of the State or Territory in which the property is situated"
when the State or Territory had designated an office for the filing of
such notice. The property which is the subject of this case--the
Distributors debt--was personal property and the situs of such property
was in the state of residence and domicile of the taxpayer Young. In Re
De Angelis [67-1 USTC ¶9290], 373 F. 2d 755 (C. A. 3d); Walker
v. Paramount Engineering Co. [66-1 USTC ¶9106], 353 F. 2d 445 (C.
A. 6th); United States v. Goldberg [66-2 USTC ¶9523], 362 F. 2d
575 (C. A. 3d); Marteney v. United States [57-1 USTC ¶9670], 245
F. 2d 135 (C. A. 10th); Investment & Securities Co. v. United
States [44-1 USTC ¶9210], 140 F. 2d 894 (C. A. 9th).
Young was a
resident of the State of
and the law of that state required that notice of a federal tax lien be
filed in the office of the county recorder of the county within which
the property subject to the lien was situated. Government Code, 34
Codes, Section 27330. On
May 22, 1958
, the District Director of Internal Revenue filed a notice of tax lien
, the place of residence of Young, more than two months before the
garnishor instituted his action and filed his writ of garnishment in the
court below on
August 1, 1958
. Consequently, the fact that the
, through the District Director, did not file notices of lien in the
April 6, 1959
, was irrelevant to the Superior Court's resolution of the relative
priorities of the tax lien and the garnishment lien.
This result is
in accord with the practicalities of this case. To require the
government to file notices of tax lien in every place where a delinquent
taxpayer has personal property would impose an awesome
istrative burden on it, particularly with respect to intangible and
transitory personal property. See Grand Prairie State Bank v. United
States [53-2 USTC ¶9481], 206 F. 2d 217 (C. A. 5th). On the other
hand, the requirement that the government file its notice of lien where
the taxpayer resides has the advantage of centralizing the place where
the government must file its notice and where creditors of the taxpayer
who are entitled to notice under Section 6323 may quickly ascertain what
tax liens, if any, are outstanding against their debtor.
contends that even if the tax lien be held superior to the claim he
asserts, the trial court erred in refusing to set aside out of the
garnisheed funds an amount to compensate his attorneys for services
which they rendered in creating and protecting that fund up to the time
the United States government intervened in the proceeding below. The
amount sought for the reasonable value of attorney's fees is $2,500.00.
Kuffel did enter into a contingent-fee arrangement with his attorneys
based on thirty-three and a third percent of the amount recovered. It
appears that the amount claimed ($2,500.00) is close to the full amount
which counsel would have received under their contingent-fee arrangement
had they been successful. Kuffel would have the
, the senior lienor, pay for its opponents' attorneys in addition to its
priority of a
government lien for unpaid taxes is a federal question. United States
v. Equitable Life Assurance Society of the United States [66-1 USTC
323, 86 S. Ct. 1561, 16 L. Ed. 2d 593: United States v. Acri
[55-1 USTC ¶9138], 348
211, 75 S. Ct. 239, 99 L. Ed. 283. The general rule in courts of the
is that each party to the litigation bears the expense of its respective
counsel. However, one exception to this rule was noted in Trustees v.
527, 26 L. Ed. 1157. In that case, a holder of certain bonds brought
suit against the trustees of the state improvement fund alleging
mismanagement and waste of the fund which was to secure the bonds and
asking that his claim be allowed, that the fund be charged with the
payment thereof, and that an accounting be had. The relief was granted,
valuable property was reclaimed to the fund, and agents were appointed
for the sale of the property of the fund for the purposes of
liquidation. During the liquidation, the holder of the bonds who had
initiated the proceedings filed a petition for an allowance from the
fund of his expenses, including attorney's fees. The court approved the
allowance of attorney's fees, holding that where a bondholder, in good
faith, filed a bill to secure the correct application of a fund and
succeeded in bringing it under the control of the court for the common
benefit of the bondholders, he is entitled to be paid for his costs and
counsel fees before distribution. See also Sprague v. Titonic Bank,
161, 59 S. Ct. 777, 83 L. Ed. 1184. However, the principle announced in
the Greenough case has no application to the instant case where counsel
for the garnishor, Kuffel, neither created nor protected the debt for
the government. It is plain that Kuffel's attorneys did not create an
asset where there was none before; they did not reduce a mere cause of
action to judgment and thereby create a fund in which the
government seeks to share.
contention is analogous to that which the Supreme Court of the United
States considered in United States v. Pioneer American Ins. Co.
[63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770. In
that case, a foreclosure proceeding, the mortgagee, whose interest was
senior to the tax claims of the
government, contended that it was entitled to a reasonable attorney's
fee ahead of the tax claims under the equitable rules against unjust
enrichment. The court rejected this contention as being without merit.
It noted that the services rendered by the mortgagee's attorney were
rendered for the benefit of the mortgagee to protect his own interest in
the property; the
government, the holder of an adverse interest, received no such benefit
from them that its interest was to be charged for them. See also:
v. Equitable life Assurance Society of
In the United
States Supreme Court case of United States v. Liverpool & London
& Globe Insurance Company, supra, it was held that a tax lien of
the United States government was prior in right over a garnishment lien
obtained by a creditor of the taxpayer in an action on an open account
where the tax lien arose and was filed prior to the date the garnishor
obtained judgment against the taxpayer, but subsequent to the date of
the garnishment lien. The situation in that case is similar to the one
in the instant case, and in that case the Court further held that if a
garnishment lien is not prior to a federal tax lien the attorney's fees
allowed to the garnishee in the garnishment proceedings are not
prior to the tax lien. In that case the attorney's fees were denied to
even the garnishee. See also: Nason v.
347, 221 N. E. 2d 400.
States Supreme Court has even held where there is a statutory lien under
state law it does not take priority over the lien of the
government for unpaid taxes--that the validity of the lien is a federal
question. In United States v. Pay-O-Matic Corp. [58-2 USTC ¶9533],
162 F. Supp. 154, the court held:
Section 475 of the N. Y. Judiciary Law an attorney's lien is more than
mere security; it is enforceable by remedy in the nature of foreclosure
and may not be extinguished by action of the parties. Here Goldstein's
lien arose at the commencement of the suit in condemnation and attached
to the award finally made. Reisman v. Independence Realty Corp.,
195 Misc. 260, 89 N. Y. S. 2d 763, affirmed 277 App. Div. 1020, 100 N.
Y. S. 2d 407; In re Cross Island Pkwy., Nassau County, 171 Misc.
652, 14 N. Y. S. 2d 238. However, 'the relative priority of the lien of
the United States for unpaid taxes is, as we said in United States v.
Waddill Co. [45-1 USTC ¶9126], 323 U. S. 353, 356, 357, 65 S. Ct.
304, 306, 89 L. Ed. 294; * * * always a federal question to be
determined finally by the federal courts. The state's characterization
of its liens, while good for all state purposes, does not necessarily
bind this court.' United States v. Acri [55-1 USTC ¶9138], 348
211, 213, 75 S. Ct. 239, 241, 99 L. Ed. 264. Whether attorney
Goldstein's lein by state tests would be held to be choate, it is clear
that under federal tests it is as compared to that of the Government
inchoate. It was not established for the amount of the lien was
contingent on the outcome of a trial in the state condemnation court to
fix the amount of the award to be made to Pay-O-Matic for the property
condemned. It was but a 'caveat of a more perfect lien to come' (United
States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218, 220, 75 S. Ct.
244, 246, 99 L. Ed. 271) and is therefore subordinate to the federal tax
lien; United States v. City of New Britain [54-1 USTC ¶9191],
347 U. S. 81, 84, 74 S. Ct. 367, 370, 98 L. Ed. 520."
In the instant
case there is no doubt the claim for attorney's fees is inchoate under
federal interpretation; this Court must follow the holdings of the
United States Supreme Court in determining the validity of the claim for
attorney's fees. Accordingly, we hold that the lower court properly held
government lien was prior to both Kuffel's garnishment lien and any
claim for reasonable attorney's fees.
JR., and LOCKWOOD, Justices, concurring.
"Sec. 6321. LIEN FOR TAXES.
person liable to pay any tax neglects to pay the same after demand, the
amount (including any interest, additional amount, addition to tax, or
assessable penalty, together with any costs that may accrue in addition
thereto) shall be a lien in favor of the United States upon all property
rights to property, whether real or personal, belonging to such
person." 26 U. S. C. 1958 ed. Sec. 6321.
6322. FERIOD OF LIEN.
another date is specifically fixed by law, the lien imposed by section
6321 shall arise at the time the assessment is made and shall continue
until the liability for the amount so assessed is satisfled or becomes
unenforceable by reason of lapse of time." 26 U. S. C. 1958 ed.
6323. VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT
of Lien Without Notice.--Except as otherwise provided in subsection
(c), the lien imposed by section 6321 shall not be valid as against any
mortgagee, pledgee, purchaser, or judgment creditor until notice thereof
has been filed by the Secretary or his delegate--
state or territorial laws.--In the office designated by the law of
the State or Territory in which the property subject to the lien is
situated, whenever the State or Territory has by law designated an
office within the State or Territory for the filing of such notice; or .
. ." 26 U. S. C. 1958 ed., Sec. 6323.
"§12-1585. Judgment against garnishee.
appears from the answer of the garnishee, or otherwise, that the
garnishee is indebted to the defendant in any amount or was so indebted
when the writ was served, the court shall give judgment for plaintiff
against the garnishee for the amount so admitted or found to be due
defendant from the garnishee unless the amount exceeds plaintiff's
judgment against defendant in which case it shall be for the amount of
¶9398]Lorren J. Kuffel, Plaintiff v. Stephen Monroe Andrew Young,
individually Doing business as Western Cut-Rate Lumber Co. and doing
business as Edison Trucking Co., Defendant v. Ray Lumber Co., a
corporation, and United Wholesale Distributors, a corporation, Garnishee
Defendants, United States of America, Intervenor
Superior Court, County of Maricopa, No. 101434, 2/4/64
[1954 Code Sec. 6323]
Lien for taxes: Priority: Government as intervenor: Validity against
garnishee and judgment creditor: Legal fees.--The Government's tax
lien was found to be prior and superior to an amount held by a garnishee
defendant, and to that of the plaintiff, an attorney who initiated the
garnishment action, for services rendered to the delinquent taxpayer.
The plaintiff attorney's lien was inchoate since the amount, the
identity, and the specific property subject to tax had not been
Stockton, 234 N. Central Ave., Lorren J. Kuffel, 507 Security Bldg.,
Phoenix, Ariz., for plaintiff. Gordon A. Olsson, 1122 H. St., Modesto,
Calif., William J. Knudsen, Assistant United States Attorney, Federal
Bldg., Phoenix, Ariz., for defendant. James C. Engdahl, Security Bldg.,
, for garnishee defendant.
for Intervenor Against Plaintiff, Defendant, and Garnishee Defendants
coming on for a hearing before the Court on the 21st day of November,
1963, on a motion for summary judgment by intervenor, the United States
of America, with William J. Knudsen, Jr., Assistant United States
Attorney for the District of Arizona, representing intervenor; James R.
Cropper appearing as attorney for plaintiff; and no appearance being
made by the defendant Stephen Monroe Andrew Young, individually and
doing business as Western Cut-Rate Lumber Co. and Edison Trucking Co.,
or counsel for the garnishee defendants Ray Lumber Co., a corporation,
and United Wholesale Distributors, a corporation; and it appearing to
the satisfaction of the Court that the defendant, and counsel for the
plaintiff, and the garnishee defendants were each duly served with a
copy of this motion and accompanying papers, and it further appearing to
the Court that there is no genuine issue as to any material fact with
respect to the matters raised by this motion and that intervenor is
entitled to judgment as a matter of law for the relief demanded in its
complaint against the aforesaid plaintiff and garnishee defendant,
United Wholesale Distributors, and against defendant on an in rem basis,
as follows: That the taxpayer-defendant Stephen Monroe Andrew Young,
individually and doing business as Western Cut-Rate Lumber Co. and
Edison Trucking Co., is liable to the United States of America for
unpaid taxes with penalties and interest, plus accrued interest at the
rate of six (6%) per cent per annum from April 23, 1958, to the date of
this judgment in the total amount of $8,573.60; that the United States
of America has valid and subsisting liens for said unpaid taxes,
penalties, and interest plus accruing interest on the amounting of
$8,573.60, which sum is presently being held by garnishee defendant,
United Wholesale Distributors, and which is presently due and owing by
the said United Wholesale Distributors to defendant, Stephen Monroe
Andrew Young, individually and doing business as Western Cut-Rate Lumber
Co. and Edison Trucking Co.; and that such liens of the United States of
America are prior and superior to any liens, claims and/or interests of
all of the other parties herein, and each of them, on such sum,
including the said United Wholesale Distributors;
THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED that intervenor, United
States of America, have judgment against the defendant Stephen Monroe
Andrew Young, individually and doing business as Western Cut-Rate Lumber
Co. and Edison Trucking Co., in the amount of $8,573.60; that the United
States of America has valid and subsisting liens for said unpaid taxes,
penalties and interest plus accruing interest on said amount of
$8,573.60, being held by garnishee defendant United Wholesale
Distributors; that such liens of the United States of America are prior
and superior to any liens, claims and/or interests of all of the other
parties herein, and each of them, on such sum, including the said United
Wholesale Distributors; and that said garnishee defendant, United
Wholesale Distributors, is hereby ordered to pay over to the United
States of America the sum of $8,573.60.
November 21, 1963
, the Court suggested additional memoranda from counsel for plaintiff
outlining the facts and law in brief. The following statement of facts
is intended to supplement and not to substitute for the statement of
facts set forth in the Government's "Memorandum of Points and
Authorities in Support of Motion for Summary Judgment" filed with
this Court on
June 12, 1963
against Stephen M. A. Young
Apr. 18, 1958
for $11,972.17 plus interest.
Notice of tax lien filed by United
May 22, 1958
, Mr. Young's residence.
Aug. 1, 1958
Plaintiff initiated this action.
Plaintiff garnisheed United
Wholesale Distributors and Ray
Aug. 1, 1958
United Wholesale Distributors
answered admitting an indebtedness
of $8,753.60 to Western
Aug. 11, 1958
Cut-Rate Lumber Co.
Notice of levy served by United
States on United Wholesale
Oct. 27, 1958
Bankruptcy petition on behalf
of Stephen M. A. Young filed
Mar. 20, 1959
in Northern District of California.
Final demand by
Mar. 23, 1959
made on United Wholesale Distributors.
Notices of lien filed by the
in Maricopa and
Apr. 6, 1959
will confine itself to argument concerning the relative priorities of
the Government's unpaid tax lien and plaintiff's attorney's fees. At the
outset it should be borne in mind that the attorney for plaintiff in
this action did not create a fund. As a consequence, any cases involving
the creation of a fund are immaterial (It should be noted, however, that
there are numerous cases denying recovery to an attorney for his
services even in those instances where he has created a fund. No
citations will be given here since the facts do not warrant it).
On April 18,
1958, the date of assessment, the United States secured a lien on all
property and rights to property of Mr. Young as against him and the
entire world, except for the four classes set forth in 26 U. S. C.
6323(a), namely, mortgagees, pledgees, purchasers and judgment
creditors. It is obvious that plaintiff's attorney does not fall in any
one of these classifications.
It is clear
that federal law and federal law only applies to this case. Plaintiff's
attorney relies almost exclusively on In Re Washington Square Slum
Clearance (1959) 5 N. Y. 2d 300, 157 N. E. 2d 587. It is submitted
that this case is not in point since the assignment by the plaintiff to
the attorneys in that case of 20% of the award to the attorneys for
services to be rendered was made more than one year before the
Government assessed a tax against the plaintiff taxpayer. In our case
there is no dispute that the assessment by the
against Young was made some three and one-half months prior to
the initiation of the lawsuit. Further, when, if ever, the plaintiff in
this action made an assignment to his attorney of part of his recovery
has not been indicated. Finally, in the
case the plaintiff did recover an award. In this case it would appear
that there is no real dispute over the relative priorities between the
plaintiff himself and the
. As a consequence, if the plaintiff in this action recovers nothing, it
is extremely difficult to see how plaintiff's attorney can have an
assignment of something which never comes into existence.
believes that United States v. Pay-O-Matic Corp. (S. D., N. Y.
1958) [58-2 USTC ¶9533] 162 F. Supp. 154, is conclusive on the question
before us. In this case Judge Ryan of the Southern District of New York
ruled in a fact situation almost identical with the Washington Square
case and incidentally involving the same attorney's lien statute in New
York that the United States tax lien was prior to the attorney's lien
since under federal tests the attorney's lien was inchoate. In
view of the fact that the United States Supreme Court has ruled time and
again that a lien under federal standards cannot be deemed choate unless
(1) the amount, (2) the identity of the lienor, and (3) the specific
property subject thereto, have been determined, a lien cannot be
considered choate. In the case at bar certainly the amount of the
attorney's lien, if any, does not possess the definiteness required by