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Prior Law Page10

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The liability of an officer under N. J. S. A. 14:8-10 (formerly section 48 of the New Jersey Corporation Law) is substantially identical with that of an officer under section 59 of the New York Corporation Law. Hence, an application of the New Jersey statute of limitations to the liability of an officer of a New Jersey corporation would have the same result as its application to the liability of an officer of a corporation under the New York laws, by virtue of the proceedings being brought in the forum of a federal court in New Jersey, though the cause of action arose in New York. Therefore the defendant admin istratrix cannot have the benefit of insulation against the claimed liability of her decedent as an officer of a New York corporation, to the extent of unpaid loans made to a stockholder of the corporation with his assent, by virtue of any provisions of the New Jersey statute of limitations, held herein to be the applicable statute. Her motion for summary judgment must be denied on this score.

Since the determination of this motion does not dispose of the case, it will be placed on the next pre-trial conference calendar and proceed regularly to trial.

An order in conformity with the above should be submitted by plaintiff on notice to defendant.

1 "It is hereby stipulated by and between the parties hereto by their respective attorneys:

"1. Michael S. Jacobs died a resident of Monmouth County , New Jersey , on January 24, 1953. His estate is now the subject of probate proceedings pending in the Monmouth County Surrogate Court , Josephine E. Jacobs is the duly qualified and acting admin istratrix of the said estate.

"2. For many years prior to his death, and at all times mentioned herein, Michael S. Jacobs was an officer, director and shareholder of the defendant Twentieth Century Sporting Club, Inc., which is duly incorporated under the laws of the State of New York .

"3. The records of Twentieth Century Sporting Club, Inc., contain a sheet, a copy of which is annexed hereto and marked Exhibit "A". Entries on the said sheet show debits to Michael S. Jacobs in the amount of $170,000 and credits to Michael S. Jacobs in the amount of $19,000, leaving a net debit balance in the total amount of $151,000.

"4. Twentieth Century Sporting Club, Inc., issued 16 checks on the dates and in the amounts set forth in the "debit" column of Exhibit "A". Copies of the said 16 checks are annexed hereto and are marked Exhibits "B-1" to "B-16", inclusive.

"5. Michael S. Jacobs endorsed and delivered to Twentieth Century Sporting Club, Inc., 2 checks on the date and in the aggregate amount set forth in the first entry of the "credits" column of Exhibit "A" and 6 checks on the dates and in the amounts of the next six items in the "credits" column of Exhibit "A". The said 8 checks are annexed hereto and marked Exhibits "C-1" to "B-8", inclusive.

"6. On or about April 22, 1947, Twentieth Century Sporting Club, Inc., declared a dividend payable to Michael S. Jacobs in the sum of $24,000. Of this amount, it paid him $11,555.60 by a check, a copy of which is annexed hereto and marked Exhibit "D". The balance of the said $24,000 was credited as the final entry in the credits" column of Exhibit "A".

"7. In addition to the net debit of $151,000, as reflected in Exhibit "A", it is the contention of the plaintiff that there was reflected in the records of the Twentieth Century Sporting Club, Inc., a similar debit for the period prior to 1943 in the amount of $9,436.76. In addition to the above amounts, Twentieth Century Sporting Club, Inc., issued to the order of Michael S. Jacobs on or about March 16, 1944, a check in the total amount of $13,265.05, a copy of which is annexed hereto and marked Exhibit "E". It is the contention of the plaintiff that Michael S. Jacobs was, therefore, indebted to Twentieth Century Sporting Club, Inc., in the total amount of $173,701.71 and that none of the said amount has been repaid.

"8. In accordance with the understanding reached at the pretrial conference and solely for the purposes of a motion for summary judgment to be filed by the defendants, it is assumed that the amounts shown in the "debit" column of Exhibit "A" were borrowed by Michael S. Jacobs from Twentieth Century Sporting Club, Inc., on the dates recorded in Exhibit "A". Solely for this same purpose, it is assumed that the amounts shown in the "credits" column of Exhibit "A" were repaid by Michael S. Jacobs to Twentieth Century Sporting Club, Inc. It is agreed that nothing contained in this stipulation is intended to, or shall be interpreted as a waiver of defendants' right to contend, upon the trial of this action, that the decedent, Michael S. Jacobs, was not indebted to defendant, Twentieth Century Sporting Club, Inc. It is further specifically agreed that the assumptions made above, for purposes of a motion for summary judgment shall not constitute, for purposes of trial, an acknowledgment of any debt alleged to be outstanding from Michael S. Jacobs to Twentieth Century Sporting Club, Inc.

"9. The records of Twentieth Century Sporting Club, Inc., and of Michael S. Jacobs, deceased, do not contain any pertinent information with respect to the transactions recorded in Exhibit "A" other than the information actually contained in the said Exhibit "A", and the other annexed exhibits.

"10. In July, 1952, and February, 1953, the Commissioner of Internal Revenue made assessments against the defendant Twentieth Century Sporting Club, Inc., for income, excess profits and declared value excess profits taxes, plus interest thereon, in the following amounts and for the following years:

Fiscal Year Ended                   Amount

2-28-46 ..............         $ 21,086.92

2-28-46 ..............          100,118.83

2-28-48 ..............           13,500.87

Total ................         $134,706.62

 

"11. The above mentioned assessment lists were duly received by the District Director of Internal Revenue for the Upper District of Manhattan on July 11, 1952, and on March 23, 1953.

"12. The District Director of Internal Revenue promptly notified the defendant Twentieth Century Sporting Club, Inc., of the assessments and demanded payment thereof.

"13. Notices of tax liens in favor of the United States were filed with the Register of the City of New York and with the Clerk of the United States District Court for the Southern District of New York on January 30, 1953, and with the County Clerk , Monmouth County , Freehold, New Jersey , on April 11, 1953.

"14. By means of execution on a levy, the United States has received and credited against the above assessments the total amount of $39,973.05, leaving unpaid, due, and owing on the said assessments the total amount of $94,733.57 together with statutory interest.

"15. Defendant, Twentieth Century Sporting Club, Inc., filed federal income tax and excess profits tax returns, as required, for its fiscal years ending February 28, 1946, 1948, 1949 and 1950. Photostatic copies of the returns filed for those years are annexed hereto and marked Exhibits G, H, I, and J, respectively. No inference shall be drawn from the mere presence or absence, among the annexed exhibits, of returns for any particular year or years."

2 "48. Actions to be commenced within six years.

"The following actions must be commenced within six years after the cause of action has accrued.

"1. An action upon a contract obligation or liability express or implied * * *.

"2. An action to recover upon a liability created by statute * * *."

3 ",2A:14-1

"Every action at law for * * * recovery upon a contractual claim or liability, * * * not under seal * * * shall be commenced within 6 years next after the cause of any such action shall have accrued."

4 "Section 59. Liability of directors for loans to stockholders.

"No loan of moneys shall be made by any stock corporation, except a moneyed corporation, or by any officer thereof out of its funds to any stockholder therein, nor, shall any such corporation or officer discount any note or other evidence of debt, or receive the same in payment of any instalment or any part thereof due or to become due on any stock in such corporation, or receive or discount any note, or other evidence of debt, to enable any stockholder to withdraw any part of the money paid in by him on his stock. In case of the violation of any provision of this section, the officers or directors making such loan, or assenting thereto, or receiving or discounting such notes or other evidences of debt, shall, jointly and severally be personally liable to the extent of such loan and interest, for all the debts of the corporation contracted before the repayment of the sum loaned and to the full amount of the notes or other evidences of debt so received or discounted, with interest from the time of such liability accrued." (Italics supplied.)

5 N. J. S. A. 2A:14-4. "16 years; actions on lease, specialty or award; effect of payments made.

"Every action at law for rent or arrears of rent, founded upon a lease under seal, every action at law upon a single or penal bill under seal, for the payment of money only, upon an obligation under seal conditioned for the payment of money only, upon a recognizance or upon an award under the hands and seals of arbitrators for the payment of money only shall be commenced within 16 years next after the cause of any such action shall have accrued. If, however, any payment is made on any such lease, specialty, recognizance or award within or after such period of 16 years, an action thereon may be commenced within 16 years next after such payment, and not thereafter."

6 "* * * Stated generally, it is not unlawful for corporate officers to make loans of corporate funds, but by statute the legislature has forbidden such loans to be made to stockholders and has said that disregard of such prohibition will expose the officers making or assenting to such loans, to a civil liability for such portion of the loans as may be found necessary to protect creditors."

 

 

[57-2 USTC 9778]Myer B. Chidakel et al., Plaintiffs v. Carlton G. Beall, United States Marshal for the District of Columbia, Defendant United States of America, Intervenor v. Universal Enterprises, Inc., trading as the Universal Co., Third-Party Defendant

U. S. District Court, District of Columbia , Civ. Action No. 3301-56, 5/21/57

Lien for taxes.--The government's motion for summary judgment, in a case involving the priority of the government's lien for taxes, was granted.

Albert Ginsberg and Joseph Schneider, 602 7th St., N. W. , Washington , D. C., for plaintiff. Oliver Gasch, E. Riley Casey, Edward P. Troxell, and Joseph M. Ryan, United States Attorney's office, for defendant.

Memorandum to the Clerk

MCGUIRE, District Judge:

Intervenor Government's motion for summary judgment granted. U. S. v. Security Trust [and Savings Bank of San Diego, Exr.], 340 U. S. 47 [50-2 USTC 9492], and in case there is any doubt about the matter, the concurring opinion of Mr. Justice Jackson in the same case, p. 52, wherein he states: "The history of this tax lien statute indicates that only a creditor in the conventional sense is protected."

Order accordingly.

 

 

[57-2 USTC 9741]Merchants Loan Company, a Corporation, Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. Ariz., Civil No. 914-Tucson, 169 FSupp 227, 5/27/57

Lien for taxes: Notice of lien filed: Priority over later chattel mortgages.--After the United States had filed notice of tax liens in the county recorder's office, a loan company loaned money to the delinquent taxpayers and took chattel mortgages on motor vehicles as security, filing the mortgages with the State Division of Motor Vehicles. The tax liens were entitled to priority, even though state law required liens against motor vehicles to be filed with the Division of Motor Vehicles.

Elmer W. Courtland, 305 Fiber Bldg., Tucson , Ariz. , for plaintiff. Rob ert O. Roylston, Assistant United States Attorney, P. O. Box 1951, Tucson, Ariz., and David W. Richter, Trial Attorney, Tax Division, Department of Justice, Washington, D. C., for defendant.

Findings of Fact and Conclusions of Law

WALSH, District Judge:

The above-entitled came on for trial on May 8, 1957 , before the Court without a jury, and the Court having considered the Stipulation entered into by the parties, together with all of the pleadings, and being fully advised in the premises, now finds as follows:

Findings of Fact

1. This is an action brought pursuant to Section 2410 of the Judicial Code (Title 28, U. S. Code, Section 2410) to determine whether defendant's federal tax lien against certain personal property has priority over any interest or claim of the plaintiff therein;

2. Plaintiff is a corporation incorporated under the laws of the State of Arizona and is duly licensed in the State of Arizona to engage in the small loan business;

3. Defendant, through the duly designated delegate of the Secretary of the Treasury, at various times prior to July 16, 1956, duly assessed against Cleveland and Hattie Garrett, Joseph Molinsky and Leo B. and Lucille Karr certain Income, FICA and Witholding taxes; the said tax assessments against each of these individuals were in excess of $600.00;

4. The defendant, after due notice and demand on each of the above taxpayers for the payment of said taxes and the failure or refusal of each of them to pay, filed notices of Federal tax liens against each of them with the Pima County, Arizona, Recorder's Office, pursuant to Section 6323(a)(1) of the Internal Revenue Code of 1954, and Section 11-464 of the Arizona Revised Statutes; said notices were filed against each of the taxpayers prior to July 16, 1956, and were, as against each taxpayer, in a sum in excess of $600.00;

5. Plaintiff without actual knowledge of said tax liens on July 16, 1956 , made a loan to Cleveland Garrett and Hattie Garett, his wife, in the principal sum of $600.00. To secure said loan there was delivered to plaintiff a chattel mortgage on a 1949 Buick 4-door Sedan, Motor No. 55357495, Serial No. 24331645, and that on or before July 26, 1956, plaintiff filed said chattel mortgage with the Arizona Division of Motor Vehicles, pursuant to Section 28-325 Arizona Revised Statutes;

6. Plaintiff without actual knowledge of said tax liens, set forth above, on July 31, 1956 , made a loan to Joseph Molinsky in the principal sum of $600.00. To secure said loan there was delivered to plaintiff a chattel mortgage on a 1950 Studebaker Pickup Truck, Motor No. 1R70139, Serial No. R5-48085, and that on or before August 9, 1956 , plaintiff filed said chattel mortgage with the Arizona Division of Motor Vehicles, pursuant to Section 28-325 of the Arizona Revised Statutes;

7. Plaintiff without actual knowledge of said tax liens, set forth above, on August 11, 1955 , made a loan to Leo B. Karr and Lucille Karr, his wife, in the principal sum of $600.00. To secure said loan there was delivered to plaintiff a chattel mortgage on a 1952 GMC Pickup Truck, Motor No. A228444469, Serial No. C11033, and that on or before August 20, 1956 , plaintiff filed said chattel mortgage with the Arizona Division of Motor Vehicles, pursuant to Section 28-325 of the Arizona Revised Statutes;

8. Subsequently, defendant in reliance upon its federal tax liens seized the vehicles described in Paragraphs 5, 6 and 7 of these Findings of Fact;

9. At all times material to this law suit the vehicles described in Paragraphs 5, 6 and 7 of these Findings of Fact were situated in Tucson , Pima County , Arizona .

Conclusions of Law

1. This Court has jurisdiction of this controversy and the parties hereto;

2. Sections 6321 through 6323 of the Internal Revenue Code of 1954, and Sections 11-464 and 28-325 of the Arizona Revised Statutes are all applicable to this litigation;

3. The filing, by defendant prior to July 16, 1956, of its notices of Federal tax liens in the Pima County, Arizona Recorder's Office, against Cleveland and Hattie Garrett, Joseph Molinsky and Leo B. and Lucille Karr was in conformity with, and pursuant to, Section 11-464 of the Arizona Revised Statutes, and Section 6323 of the Internal Revenue Code of 1954;

4. This filing gave to defendant liens which are superior to any lien or claim of plaintiff as a subsequent mortgagee or pledgee of the motor vehicles set forth in Paragraphs 5, 6 and 7 of these Findings of Fact, even though defendant did not file notice of its Federal tax liens or the instruments creating such liens, with the Arizona Division of Motor Vehicles pursuant to Section 28-325 of the Arizona Revised Statutes;

5. Defendant may sell, pursuant to Sections 6331 to 6339 of the Internal Revenue Code of 1954, the motor vehicles described in Paragraphs 5, 6 and 7 of these Findings of Fact, which it has in its possession, free and clear of any claim of the plaintiff herein against said motor vehicles;

6. Defendant is entitled to judgment dismissing plaintiff's Complaint.

 

 

[57-2 USTC 9751]In the Matter of Lieb Bros., Inc., a New Jersey Corporation, Debtor

U. S. District Court, Dist. N. J., Docket No. B539-55, 150 FSupp 68, 3/29/57

[1954 Code Sec. 6323]

Lien for taxes: Priority: First in time is first in right.--A referee in bankruptcy, as the result of hearings on a petition for an arrangement under Chapter XI of the Bankruptcy Act, where there was no finding of insolvency, determined the order of priority of claims on the basis of the order of time. A $26,000 mortgage was to be paid first, then a lien for federal taxes, perfected in 1952, third, a tax lien of the city of Newark , and fourth, a further federal tax lien perfected later in 1953, to the extent of available funds. Other tax liens of the city of Newark were not payable except out of any funds remaining after the above payments. At a tax sale in 1955, municipal tax certificates bearing 8% interest were purchased from the city of Newark by a subsidiary of the mortgage holder, which assigned the certificates to the mortgage holder. Under the terms of the bond secured by the mortgage, the holder of the mortgage could pay the mortgagor's tax in arrears and add the payment to the principal of the bond. On an appeal from the referee's findings, the mortgage holder claimed that by reason of its purchase of the City of Newark tax certificates, the city taxes so paid by it should be added to the mortgage and have priority over the federal tax lien. The court holds that the acquisition of the tax certificates was an investment and not a payment of taxes, and that, furthermore, the tax certificates were purchased after the tax sale of the premises and after the filing of the petition for an arrangement under Chapter XI, and the priority of the claims must be fixed as of the date of such filing.

Edward R. McGlynn, for Borwac Realty Co. Chester A. Weidenburner, United States Attorney, Jerome D. Schwitzer, Assistant United States Attorney, for United States . Sanford Silverman, for Trustee. Vincent P. Torppey, for City of Newark .

Opinion

MEANEY, District Judge:

This matter comes before the court by way of an appeal from the findings of the Referee in Bankruptcy made as a result of hearings held before him after the filing of a petition for an arrangement under Chapter XI of the Bankruptcy Act.

[Distribution of Sale Proceeds Among Creditors]

The debtor, Lieb Bros., Inc., owned a piece of property in Newark , N. J., which was sold by order of the Referee. The sum of $125,000.00 was realized at the sale and there arose the question of the distribution of this sum among creditors. Referee Tallyn found that the following claims had been proven. They are listed in chronological order. {laimantDate of lien Amount $q1. Borwac Realty Co. $c(Mortgage)$j6-16-51$y$ 26,000.00 $q2. United States , tax $clien$j2-11-52$y25,689.04 $q3. City of Newark , $ctax lien$j1-1-53$y7,610.83 $q4. United States , tax $clien$j1-21-53$y112,746.77 $q5. City of Newark , $ctax lien$j1-1-54$y8,353.35 $q6. City of Newark , $ctax lien$j1-1-55$y8,275.19 $q7. City of Newark , $ctax lien$j1-1-56$y4,137.60$x

[Order of Priority]

The Referee determined that the order of priority which obtained among these claimants was as follows. This listing is predicated on the fact that there had been no finding of insolvency.

1. Borwac Realty Co.--$26,000.00 on account of its mortgage.

2. United States--$25,689.04 plus accrued interest on its tax lien.

3. City of Newark--$7,610.83 plus interest representing municipal taxes for the year 1953, which became a lien Jan. 1, 1953, but payable to Walnut Realty Co. by virtue of a tax sale certificate which it holds.

4. Whatever balance remains is for application to the federal tax lien of $112,746.77 assessed on Jan. 21, 1953.

The distribution outlined above was to be carried out as follows: Borwac Realty Co.'s $26,000.00 was to be paid first. This money is to be set aside in a fund. Then, the United States receives $25,689.04 plus accrued interest. Next, the municipal tax lien of the City of Newark for the year 1955 and the first half of 1956, in the total amount of $12,412.79, at 8% per annum, is to be paid. This last sum is to be deducted from the fund set aside to pay Borwac Realty Co. Then, Walnut Realty Co., which holds the municipal tax sale certificates for 1953 in the amount of $7,610.83, plus 8% interest, is to be paid. Lastly, the United States is entitled to whatever amount remains in payment of its federal tax lien.

In arriving at the order and method of distribution the Referee followed the sequence set forth in the case of United States v. City of New Britain, 347 U. S. 81 [54-1 USTC 9191], which resolved the confusion arising out of conflicting federal and state statutes establishing priorities of liens. This problem of circuity of liens develops when, as in the instant case, the federal statute sets up the mortgage lien as superior to the federal claim, and under state law (N. J. S. A. 54:5-9), municipal tax liens take precedence over mortgagee's claims. Justice Minton, speaking for a unanimous court, held that the mortgage claim must come first and thereafter claims are to be validated in accordance with the principle, "first in time is the first in right" where there is no question of insolvency. Of course where the debtor is insolvent, there is an absolute priority given to payment of indebtedness owing to the United States whether secured by lien or otherwise. There would seem to be no doubt that the Referee conformed to the rule of the New Britain case (supra).

[Mortgagee Purchased City Tax Certificates]

At a tax sale on December 6, 1955, Walnut Realty Co. purchased the municipal tax certificate for 1953 from the City of Newark. The certificate represents $7,610.83 in municipal taxes. The certificate bears 8% interest on the principal sum. This purchase also included the 1954 municipal taxes in the amount of $8,353.35.

At the 1956 hearing before Referee Tallyn, Borwac offered to prove that it had secured an assignment to itself of Walnut Realty's tax certificate. Borwac also made an offer of proof that Walnut Realty was in reality Borwac's wholly owned subsidiary.

Because it then held the tax certificate assigned to it by Walnut, Borwac contended that it had made a "payment of taxes" under the terms of the bond secured by the mortgage Borwac held on the property sold. So, a new element was injected into the situation by the insistence of Borwac that in addition to the sum due on its mortgage, it was now entitled to add thereto the amount showing on the face of the Newark City tax certificate for 1953 and 1954 which it had received from Walnut. This contention is based on the terms of the bond which stated that the obligee (Borwac) might, at its option, pay such tax, assessment, or water rent in arrear and that such amount would be added to obligee's principal. The principal sum so stated is held at 6% per annum interest.

There are two vices affecting this theory as advanced by Borwac. In the first place, purchase of a tax certificate, which is usually a transaction in the nature of an investment (the certificate bears interest at 8%), does not constitute payment of the tax within the contemplation of the bond. In the second place, the tax certificate purchased by Walnut on November 15, 1955, was purchased by Borwac in November, 1956, after sale of the premises in question and confirmation thereof. As the Referee suggests with propriety in the conclusions of law in his certificate of review, it was too late for Borwac to enhance the amount of its claim by purchase of a tax sale certificate when it did.

[Purchase Was Too Late]

Further, this court feels that claims in a proceeding under Chapter XI are fixed as of the date of the filing of the petition for an arrangement under Chapter XI as it is in a bankruptcy proceeding under Chapter X of the Act. Thus, Chapter XI, section 352, of the Bankruptcy Act states:

"Where not inconsistent with the provisions of this chapter, the rights, duties, and liabilities of creditors and of all other persons with respect to the property of the debtor shall be the same, where a petition is filed under section 321 of this Act and a decree of adjudication has not been entered in the pending bankruptcy proceeding, as if a decree of adjudication had been entered in such bankruptcy proceeding at the time the petition under this chapter was filed, or, where a petition is filed under section 322 of this Act, as if a voluntary petition for adjudication in bankruptcy had been filed and a decree of adjudication had been entered at the time the petition under this chapter was filed." (Italics supplied.)

All rights, therefore, may be said to have vested at the time of the filing of the petition September 30, 1955. See Goggin v. California Labor Division, 336 U. S. 118 [49-1 USTC 9142]; In re Hansen Bakeries (C. C. A. 3, 1939), 103 Fed. (2d) 665; In re Weil (D. C. M. D. Pa.), 39 Fed. Supp. 618.

Borwac's insistence that its purchase in November, 1956, of Walnut's tax certificate fulfills the condition of the bond in regard to the payment of tax, emphasizes the error of its position. Any attempt by Borwac, as here, to purchase tax certificates from Walnut would be effective only as an assignment of Walnut's rights as an investor and would not serve to merge Walnut's claims in Borwac's principal sum as mortgagee with first priority, because Walnut had only those rights which existed at the time petition was filed.

The problems presented to the court, namely, circuity of liens, efficacy of Walnut's transfer by sale to Borwac of tax certificate after the petition in bankruptcy was filed, and the question of the exercise of sound discretion by the Referee in following the distribution formula outlined in United States v. New Britain, supra, are disposed of by the foregoing.

The court reaches the following conclusions regarding Referee Tallyn's findings:

1. The Referee exercised sound discretion in refusing to reopen the matter.

2. Borwac Realty Co. did not pay taxes in terms of the bond but only purchased a tax certificate from Walnut Realty Co., which left the tax still imposed on the property.

3. The State by its statutes may not negate the provisions of the federal statute applicable in bankruptcy.

4. The Referee, then, properly applied the priority established by state law where it did not conflict with federal law.

The findings of the Referee are affirmed

Let an order be submitted.

 

 

[57-1 USTC 9484]In the Matter of Pollard Bros., Ltd., a Corporation, Debtor

U. S. District Court, So. Dist. Calif. , No. Div., Bkcy. No. 7069-ND, 8/20/56

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

Priorities: Claim for interest and penalties against bankrupt estate.--This court previously held that interest and penalties accruing on a tak lien of the United States after bankruptcy of the taxpayer were allowable to the extent that the estate was solvent after allowance of exemptions and payment of the principal amount of all claims. Matter of Pollard Bros., Ltd., 55-1 USTC 9294, 128 Fed. Supp. 818. In this proceeding it ordered that there be paid from the sum deposited in the Registry of the Court the amounts of post-bankruptcy interest and penalties, as well as pre-bankruptcy interest and penalties, set forth in its previous order, since it appeared that after the claims of creditors had been satisfied the debtor had become solvent as to the United States at the time the reorganization plan was approved.

Laughlin E. Waters, United States Attorney, Edward R. McHale, Chief, Tax Division, Rob ert H. Wyshak, Assistant United States Attorneys, 808 Federal Building, Los Angeles 12, Calif., for petitioner. James F. Wagner, Davis, Guerard, Barrett, for debtor.

Order of Disbursement of Funds Held in Registry of Court

JERTBERG, District Judge:

The above matter came on for hearing on August 6, 1956, at the hour of 10:00 o'clock A. M., before the Court, the Honorable Gilbert H. Jertberg, the Northern Division of said District at Fresno, California, the petitioner, the United States of America, appearing through its States of America, appearing through its attorneys Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, and Rob ert H. Wyshak, Assistant United States Attorney, the debtor appearing through its attorneys Davis, Guerard, and Barrett, and it appearing that notice of hearing having been duly given, and the Court having considered the files, the petition, the arguments of counsel, and upon just cause therefor.

IT IS HEREBY ORDERED, ADJUDGED AND DECREED that of the sum of $2,604.67 held in the Registry of the Court the parties hereto are entitled to disbursement of the fund pursuant to the final order of Court modifying order of referee disallowing interest and penalties heretofore filed March 1, 1955 [55-1 USTC 9294], as follows:

1. The United States of America is entitled to the payment of the sum of $976.62 pursuant to paragraph 5 of said order.

2. It appearing that the second amended plan of reorganization having heretofore been approved by the Court and the claims of the creditors having been thereby satisfied, that the debtor having become fully solvent for the purposes of this proceeding at the time of the confirmation of the plan, as to the United States, that said petitioner, United States, is entitled to those amounts set forth in paragraph 3 of the final Order Modifying Order of Referee Disallowing Interest and Penalties filed herein on March 1, 1955, to wit, the sum of $1,023.70.

3. That the Clerk of the Court is hereby ordered to pay out of the deposit held in the Registry of the Court to the United States of America the amounts directed in paragraphs 1 and 2 hereinabove by making his check in the sum of $2,000.32 payable to the Treasurer of the United States and delivering it to the attorneys of record for the petitioner.

4. That the Clerk of the Court is hereby ordered to make out his check for the balance remaining in the Court's Registry in the sum of $604.35 payable to Pollard Bros., Ltd. (successor in interest to Pollard Bros., Ltd., debtor and assignee of the right, title and interest of said debtor) and to Davis, Guerard & Barrett, its attorneys.

 

 

[57-1 USTC 9266]In the Matter of Gardner Supply Co., a corporation, Debtor

U. S. District Court, Nev. , No. A-64-A, 10/24/56

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

Lien for taxes: Validity against mortgages.--A tax lien was subordinate to the rights of holders of first and second deeds of trust which were recorded prior to recordation of the tax lien.

Franklin B. Rittenhouse, United States Attorney, Post Office Building, Goldwater, Taber & Hill, 206 North Virginia Street, Stewart & Horton, 131 West Second Street, Vargas, Dillon and Bartlett, 220 South Virginia Street, and H. W. Edwards, Special Master, 43 North Sierra Street, Reno, Nev., and Worthington, Park & Worthington, Russ Building, San Francisco, Calif., attorneys of record.

In Proceedings for the Reorganization of a Corporation

FOLEY, District Judge:

Copy of Paragraph 2 of order signed by the Court on October 24, 1956 . Honorable Roger T. Foley, Judge.

"2. That the objections of the United States of America on the ground 'that the Report of the Special Master's recommendations for the distribution of the proceeds fail to accord the proper priority to be accorded the claim of the District Director of the Internal Revenue, District of Nevada', be and the same are hereby overruled on the ground and for the reason that the claim and lien of the United States of America is junior in right to the claim of Trans American Corporation, a successor in interests to the Farmers Bank of Carson Valley, as holder of the first Deed of Trust and Note in the sum of $7,644.54, and of the Continental Casualty Company, the holder of the second Deed of Trust and Note, dated April 9, 1952, the tax lien having been recorded subsequent to the recordation of the said trust deeds."

 

 

[56-2 USTC 9976]In the Matter of John S. Goff, Inc., Bankrupt

U. S. District Court, Dist. Maine , So. Div., In Bankruptcy No. 24,261, 141 FSupp 862, 9/8/55

[1939 Code Secs. 274(a) and 1015(a)--similar to 1954 Code Sec. 6871; 1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]

Tax penalties: Lien arising prior to bankruptcy proceedings.--Where a notice of tax lien is properly recorded prior to the filing of a bankruptcy petition against the taxpayer, the Bankruptcy Act does not preclude allowance of a claim for penalties.

Silas Jacobson, trusteeship, Herbert H. Sawyer, 119 Exchange Street , Portland , Me. , for trustee. Peter Mills, United States Attorney, 156 Federal Street, Portland, Me., John M. Doukas, Assistant Regional Counsel, Internal Revenue Division, Boston, Mass., John T. Burke, Jr., Chief of Special Proceedings, Office of District Director of Internal Revenue, Augusta, Me., for United States.

Opinion and Order

CLIFFORD, District Judge:

This action comes before this Court upon a petition filed by the Trustee to review an order of the Referee in Bankruptcy, which allowed delinquent tax penalties properly assessed and included in a valid lien perfected and filed prior to bankruptcy. The facts are undisputed. On January 12, 1954 , the Director of Internal Revenue for the District of Maine, filed a proof of claim in the bankruptcy proceedings of John S. Goff, Inc., for withholding and employment taxes for the quarters ending June 30, 1953 , and September 30, 1953 . The total amount of the claim is $6,447.93. This amount is made up of $5,548.65 tax, $833.40 penalties and $65.88 interest. It was conceded by stipulation between the parties that a notice of tax lien was properly recorded in the appropriate registry of deeds prior to the date the bankruptcy petition was filed.

The sole question presented before this Court is whether a claim for tax penalties seasonably filed by the Director of Internal Revenue is allowable where the notice of tax lien was properly recorded prior to the filing of the bankruptcy petition.

Section 57 J of the Bankruptcy Act, 11 USCA, Sec. 93, Sub. J provides that:

"Debts owing to the United States or to any State or any subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued on the amount of such loss according to law."

The Trustee, in filing objections to so much of the claim as related to penalties, contends that Sec. 57 J applies and precludes the allowance of a claim for penalties.

[Conflicting Decisions]

The precise question, although of novel impression in this Court, was considered in In re Knox-Powell-Stockton Co., 1939, 9 Cir., 100 Fed. (2d) 979 [39-1 USTC 9277] and in Commonwealth of Kentucky v. Farmers Bank and Trust Co., 1943, 6 Cir., 139 Fed. (2d) 266. In both cases the court held that even though Sec. 57 J of the Bankruptcy Act precludes the allowance of a claim for penalties, adjudication in bankruptcy does not affect a valid and existing lien, consequently where a lien exists to support a penalty at the time of adjudication, Sec. 57 J does not come into operation. The holding of the Knox-Powell-Stockton case, supra, is based upon the principle that adjudication in bankruptcy does not interfere with existing valid liens and that the Trustee takes the property of the bankrupt subject to all such liens as would have been enforceable against it in the hands of the bankrupt itself. The Ninth Circuit in this instance stated that this principle was made clear by Sec. 67 D of the Bankruptcy Act of 1898, 11 USCA Sec. 107, Sub. D.

In the case of In Re Burch, 1948, DC Kan, 89 Fed. Supp. 249 [50-2 USTC 9406]. The court disagreed with the holding in Knox-Powell-Stockton, Sec. 57 J of the Bankruptcy Act does not apply where a penalty is secured by a lien which arose prior to the institution of a bankruptcy proceeding and held that Sec. 57 J does apply to prevent the enforcement of a federal tax lien securing a penalty. In this decision the court states that the Knox-Powell-Stockton case was based primarily on the provisions of Sec. 67 D of the Bankruptcy Act of 1898, and points out that since Sec. 67 D was repealed by the Chandler Act, the effect of the opinion in Knox-Powell-Stockton is nullified. Another case expressly disagreeing with Knox-Powell-Stockton is In Re Hankey Banking Co., 1954, DC PA, 125 Fed. Supp. 693 [54-2 USTC 9684].

This Court believes that the judicial construction placed on Sec. 57 by the Knox-Powell-Stockton decision more closely indicates the Intention of the Congress. In support of this conclusion there is noted the case of Goggin, Trustee in Bankruptcy v. Division of Labor Law Enforcement of California, 1949, 336 U. S. 118, 126, 69 S. Ct. 469 [49-1 USTC 9142], 93 L. Ed. 543, a decision rendered since the Chandler Act, wherein it was stated that liens perfected before bankruptcy are safeguarded by the Bankruptcy Act and to support this statement, the Court cites the Knox-Powell-Stockton case with evident approval.

Furthermore, it is believed that the substance of the provisions of Sec. 67 D, have been incorporated in the redraft Sections 60, 67 and 70 of the Act. This view was recognized in the case of Oppenheimer v. Oldham, 1949, 5 Cir. 178 Fed. (2d) 386 wherein it was stated:

"It has always been a fundamental principle of the bankruptcy law that the property rights and interests designated as liens and pledges, when valid in bankruptcy, shall not be impaired in the admin istration of a bankrupt estate. The Chandler Act manifests no intent to deviate from that principle. It is true that in the revision of Sec. 67, Sub. D the Chandler Act did not retain the old language saying expressly that liens valid in bankruptcy shall 'not be affected by anything herein', but that provision was simply declaratory of the obvious import reflected, and still reflected, frequently in the substantive terms of the law, and the omission of such redundancy is not significant."

The Tenth Circuit considering the same issue in Grimland v. United States, 1953, 10 Cir. 206 Fed. (2d) 599 [53-2 USTC 9537], a case decided after the 1952 amendment to Sec. 57 J, followed the reasoning of the Knox-Powell-Stockton case stating at page 601:

"It may well be that Congress had in mind that claims for tax penalties should not be allowed in bankruptcy, even though a lien has been perfected before adjudication, but the language of 57, Sub. J does not adequately express that intent."

[Interpretation of Statutes]

This Court's conclusion in this case is strengthened when the 1952 amendnent to Sec. 57 J of the Bankruptcy Act is examined. No doubt Congress was mindful of the construction placed on Sec. 57 J by In Re Knox-Powell-Stockton Co. and Commonwealth of Kentucky v. Farmer's Bank and Trust Co., supra, which did not bar penalties supported by liens perfected prior to bankruptcy. In examining whether Congress intended to spell out a contrary purpose in the amended section, this Court adheres to the rule that as an aid in the construction of a statute, it is to be assumed or presumed that the Legislature was acquainted with, and had in mind the judicial construction of former statutes on the subject, and that the statute was enacted in the light of the judicial construction that the prior enactment had received, or in the light of such existing judicial decisions as have a direct bearing upon it. Such earlier decisions must accordingly be taken into consideration. Thus, in the interpretation of statutory law after an amendment thereof, the courts may take into consideration the construction by earlier decisions of the statute before its amendment. Trullinger v. Rosenblum, 1954, DC Ark. 125 Fed. Supp. 758, 768. Accordingly, if the Congress at the time it amended Sec. 57 J had not been satisfied with the interpretation placed upon it by Knox-Powell-Stockton and cases following it, undoubtedly Congress would have said so. The amendment, however, does not in any respect affect that interpretation. In Re Urmos, 1955, DC Mich. , 129 Fed. Supp. 298 [55-1 USTC 9291].

It is therefore ORDERED, ADJUDGED, and DECREED that the Order of the Referee be and hereby is affirmed.

 

 

[56-2 USTC 9621]Ersa, Inc. v. H. A. Dudley, Director of Internal Revenue, Appellant

(CA-3), U. S. Court of Appeals, 3d Circuit, No. 11,718, 234 F2d 178, 5/29/56 , Reversing and remanding District Court, 55-2 USTC 9690, 134 Fed. Supp. 627

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

Lien for taxes: Priority of federal tax liens over state tax liens: Pennsylvania law.--The federal tax liens were prior in time and, therefore, were superior to the tax lien of the State of Pennsylvania where the latter was filed on May 5, 1950, and reduced to judgment on June 12, 1950, and a writ of fieri facias was issued on September 17, 1954, and the notices of the federal tax liens were filed on January 7, 1952, and September 2, 1954. Under Pennsylvania law the state tax lien was not perfected until the writ of fieri facias had been issued.

Frederick G. Rita, Esq., Dept. of Justice , Washington 25, D. C., for appellant. William H. Higgins, Esq., 610 Masonic Bldg., Erie , Pa. , for appellee.

Before MARIS, STALEY and HASTIE, Circuit Judges.

Opinion of the Court

By MARIS, Circuit Judge:

This is an appeal by the District Director of Internal Revenue at Pittsburgh, Pennsylvania, from an order of the United States District Court for the Western District of Pennsylvania quashing a warrant of distraint issued by the District Director distraining upon certain personal property held by Ersa, Inc., against which the United States asserted liens for unpaid taxes, and decreeing that Ersa holds title free of the claims of the United States.

James Manos, trading as Manos Restaurant in Erie , Pennsylvania , owed unemployment compensation contributions to the Commonwealth of Pennsylvania and withholding and social security taxes to the United States . On May 5, 1950 the Commonwealth of Pennsylvania filed in the office of the Prothonotary of Erie County its lien for the unpaid unemployment compensation contributions due to the Pennsylvania Unemployment Compensation Fund in the sum of $223.56, which on June 12, 1950 was reduced to judgment. Subsequently assessments for unpaid federal taxes were made against James Manos and on January 7, 1952 and September 2, 1954 , notices of liens for the unpaid federal taxes were filed with the Prothonotary of Erie County in the respective amounts of $937.05 and $2,294.00. Shortly thereafter, on September 17, 1954, a writ of fieri facias was issued at the instance of the Commonwealth of Pennsylvania on its judgment which had been entered on June 12, 1950 as well as on other judgments entered subsequently to the first federal tax liens. Pursuant to the writ the Sheriff of Erie County levied upon Manos' restaurant equipment and on October 25, 1954 it was sold for $176.87, the amount of the costs, to the Commonwealth of Pennsylvania, which in turn sold it to Ersa for $1,436.68. During the course of removal of the property by Ersa, it was notified by the District Director of Internal Revenue of the claims against the property for delinquent federal taxes. On May 18, 1955 the District Director posted notices of levy on the premises and upon the property. Ersa then brought the present suit in the District Court for the Western District of Pennsylvania by filing a motion to strike the levy, in which it claimed ownership of the property levied upon and that the federal distraint, levy and liens had been improperly effected. The district court thereupon granted an order restraining the District Director from further proceedings on the levy pending a hearing. After hearing, the district court set aside the warrant of distraint and levy on the ground that title was vested in Ersa free of any claim of the United States for delinquent taxes. 134 Fed. Supp. 627 [55-2 USTC 9690]. This appeal by the District Director followed.

The District Director contends that the district court lacked jurisdiction under Section 7421 of the Internal Revenue Code of 1954 to decide whether the property in the possession of Ersa was free and clear of the federal liens. He contends that the only remedy available to Ersa was to pay the tax and sue for a refund, relying for this proposition upon Ralston v. Heiner, 3 Cir., 1928, 24 Fed. (2d) 416 [1928 CCH D-8219], cert. den. 277 U. S. 608. We agree that this remedy would have been available to Ersa and we have so held. Karno-Smith Co. v. Maloney 1940, 112 Fed. (2d) 690 [40-2 USTC 9533]. But this court has also held that the district court of the district in which the property is located has jurisdiction in a proceeding such as this to determine whether a levy for federal taxes was illegally made upon property belonging to one other than the indebted taxpayer. Rothensies v. Ullman, 1940, 110 Fed. (2d) 590 [40-1 USTC 9308]; Raffaele v. Granger, 1952, 196 Fed. (2d) 620 [52-1 USTC 9321]. As pointed out in those cases that jurisdiction is derived from sections 1340 and 2463 of title 28, United States Code, 1 which give to the appropriate district court power to make orders and decrees with respect to property taken or detained under the federal revenue laws. The Ralston case, upon which the District Director relies, is distinguishable. For it involved a bill in equity to restrain the defendant collector of internal revenue from collecting taxes by distraint, a restraint expressly prohibited by section 3224 of the Revised Statutes. 2 We accordingly turn to the merits of the appeal.

[Priority of Liens]

The priority, relative to other liens, of a lien of the United States for unpaid taxes always involves a federal question which is to be determined by the federal courts. United States v. Security Trust & Savings Bank, 1950, 340 U. S. 47, 49-50. Under section 3670 of the Internal Revenue Code of 1939 3 the assessment of a federal tax, coupled with neglect or refusal to pay it after demand, created a choate and perfected federal lien on the personal property belonging to the taxpayer, valid against any mortgagee, pledgee, purchaser or judgment creditor from the time notice of the lien was filed pursuant to section 3672 of the Internal Revenue Code of 1939, 4 in the proper office 5 in the filing district in which the property was situated, which lien continued until the tax liability was satisfied or became unenforceable by lapse of time. Glass City Bank v. U. S., 1945, 326 U. S. 265, 267 [45-2 USTC 9449]. But under section 3670 Congress did not confer any priority upon the federal tax lien. 6 United States v. New Britain, 1954, 347 U. S. 81, 84-85 [54-1 USTC 9191]. In the New Britain case the Supreme Court said (347 U. S. at pp. 85-86):

"It does not follow, however, that the City's liens must receive priority as a whole. We believe that priority of these statutory liens is determined by another principle of law, namely, 'the first in time is the first in right.' As stated by Chief Justice Marshall in Rankin v. Scott, supra:

`The principle is believed to be universal, that a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds, unless the lien be intrinsically defective, or be displaced by some act of the party holding it, which shall postpone him in a Court of law or equity to a subsequent claimant.' 12 Wheat., at 179.

"This principle is widely accepted and applied, in the absence of legislation to the contrary. 33 Am. Jur., Liens, 33; 53 C. J. S., Liens, 10b. We think that Congress had this cardinal rule in mind when it enacted 3670, a schedule of priority not being set forth therein. Thus, the priority of each statutory lien contested here must depend on the time it attached to the property in question and became choate."

We must, therefore, determine whether the federal tax liens were prior in time to that of Pennsylvania's lien. As we have seen, the federal tax liens attached to the property on January 7, 1952 and September 2, 1954, respectively. But when did the lien of the judgment of the Commonwealth of Pennsylvania attach? To answer this question we must consider the Pennsylvania law in respect to liens for unpaid contributions to the Unemployment Compensation Fund. In doing so we must bear in mind that the Supreme Court of the United States has laid down the rule that while in federal tax cases a state court's characterization of a lien as choate and perfected is not binding on the federal courts, the characterization by a state court of a lien as inchoate is conclusive on the federal courts. Spokane County v. United States, 1929, 279 U. S. 80, 95 [1 USTC 387]; United States v. Knott, 1936, 298 U. S. 544, 548-549; Illinois v. Campbell, 1946, 329 U. S. 362, 371; U. S. v. Security Tr. & Sav. Bk., 1950, 340 U. S. 47, 50 [50-2 USTC 9492]; United States v. Acri, 1955, 348 U. S. 211 [55-1 USTC 9138]; U. S. v. Liverpool & London Ins. Co., 1955, 348 U. S. 215 [55-1 USTC 9136]; United States v. Scovil, 1955, 348 U. S. 218 [55-1 USTC 9137]; United States v. Colotta, 1955, 350 U. S. 808 [55-2 USTC 9680]; United States v. White Bear Brewing Co., Inc., 1956, 350 U. S. 1010 [56-1 USTC 9440].

[Pennsylvania Law]

The statutes of Pennsylvania provide that the lien of a judgment attaches to personal property only from the time that a writ of fieri facias, or other writ of execution, is delivered to the sheriff to be executed. 7 Section 308.1 of the Pennsylvania Unemployment Compensation Law provides as follows:

"All contributions and the interest and penalties thereon due and payable by an employer under the provisions of this act shall be a lien upon the franchises and property, both real and personal, of the employer liable therefor, from the date a lien for such contributions, interest and penalties is entered of record in the manner hereinafter provided. Whenever the franchises or property of an employer is sold at a judicial sale, all contributions and the interest and penalties thereon thus entered of record shall first be allowed and paid out of the proceeds of such sale in the same manner and to the same extent that State taxes are paid: Provided, however, That the lien hereby created shall not be prior to pre-existing duly recorded real estate mortgages. The department may at any time transmit to the prothonotaries of the respective counties of the Commonwealth, to be by them entered of record, certified copies of all liens for unpaid contributions, interest and penalties which may now exist or hereafter arise, upon which record it shall be lawful for writs of scire facias to issue and be prosecuted to judgment and execution in the same manner as such writs are ordinarily employed. . . ." 8

In Commonwealth, to use of Unemployment Compensation Fund v. Lombardo, 1947, 356 Pa. 597, 52 A. (2d) 657, the question was squarely presented as to whether under section 308.1 of the Pennsylvania Unemployment Compensation Law the lien for unpaid contributions attaches to personal property of the delinquent employer from the date it is entered in the prothonotary's office or not until the lien has been reduced to judgment and a writ of fieri facias has been issued and delivered to the sheriff for execution. The question had been discussed in a comprehensive opinion by the court of common pleas which the Supreme Court adopted in affirming its decree. The court noted that the last sentence of the portion of Section 308.1 above quoted appeared to provide that the lien of the Commonwealth, after reduction to judgment by writ of scire facias, was to be "executed in the same manner as such writs are ordinarily employed," that is, by writ of fieri facias, and it pointed out that to this extent the statute was ambiguous in that this sentence was inconsistent with the first sentence of the section. For under the first sentence the lien would attach to personal property upon its entry while under the last sentence personal property would not be bound by the lien until a writ of fieri facias issued on a judgment entered on the lien had been delivered to the sheriff for execution. The court rejected the Commonwealth's contention that the first sentence controlled, saying (356 Pa. at p. 604; 52 A. (2d) at p. 657):

"So far as the last sentence of section 308.1 is in conflict with the first sentence of the section, it must prevail. Since writs of execution against personal property are ordinarily employed as provided by the Act of 1836, they become effective only as provided in that Act, that is, from the time the fi. fa. is delivered into the hands of the sheriff the 'goods are bound'."

The court accordingly held that the lien of the Commonwealth under section 308.1 of the Unemployment Compensation Law, even though reduced to judgment, did not bind personal property of a delinquent employer which he had transferred to a third person before the Commonwealth issued its writ of fieri facias. It thus appears that the mere filing of the lien for unpaid contributions to the Pennsylvania Unemployment Compensation Fund and its reduction to judgment does not create a perfected lien upon the delinquent employer's personal property. The filing of the lien is "only a caveat of a more perfect lien to come". New York v. Maclay, 1933, 288 U. S. 290, 294. It is not actually perfected as a choate lien on personal property until the writ of fieri facias has been issued and delivered to the sheriff for execution. Since in the present case this did not occur until fifteen days after the second federal tax lien notice was filed, the federal tax liens were prior to the lien of the Commonwealth's judgment, which was then inchoate and unperfected, so far as concerns the property here involved. U. S. v. Security Tr. & Sav. Bk., 1950, 340 U. S. 47, 51 [50-2 USTC 9492]. The district court accordingly erred in finding that the lien of the Commonwealth of Pennsylvania was first in time and, therefore, first in right. Under the Internal Revenue Code the federal liens continued upon the property in the hands of the purchaser, Ersa, which bought it after they had been filed in the prothonotary's office. United States v. Snyder, 1893, 149 U. S. 210. The liens are, therefore, enforceable against the property in Ersa's hands.

The judgment of the district court will be reversed and the cause remanded with directions to set aside the order quashing the warrant of distraint and levy.

1 Formerly Title 28, U. S. C., 1946 Ed., 41(5) and 747.

2 Now Internal Revenue Code of 1954, 7421(a).

3 Now Internal Revenue Code of 1954, 6321.

4 Now Internal Revenue Code of 1954, 6323.

5 In this case the prothonotary's office of Erie County, Pennsylvania.

6 Section 3466 of the Revised Statutes, 31 U. S. C. A. 191, which is an express enactment of priority for debts owing the United States whenever the debtor is insolvent, is not here involved.

7 "No writ of fieri facias, or other writ of execution, shall bind the property or the goods of the person against whom such writ of execution is sued forth, but from the time such writ shall be delivered to the sheriff, under-sheriff, or coroner, to be executed." Act of June 16, 1836, P. L. 755, 39, 12 P. S. (Pa.) 2291.

8 43 P. S. (Pa.) 788.1.

 

 

[56-1 USTC 9439]United States of America, Plaintiff v. T. H. Williams, Alice M. Williams, Individually and as Partners Trading as Williams Motor Company; State of North Carolina , The Northwestern Bank of Wilkes County , S. V. Tomlinson, R. L. Woodies, Ward Kenerly, Mildred Kenerly and G. W. Badgett

In the United States District Court for the Middle District of North Carolina, Civil Action No. 186-W. Wilkesboro Division, 139 FSupp 94, March 10, 1956

[1939 Code Sec. 3672--changed in 1954 Code Sec. 6323]

Priority of U. S. tax liens: State taxes: Insolvent debtor: Application of Sec. 3466.--Where the tax lien filed by the State of North Carolina and the tax lien filed by the United States were general liens, it was held that Sec. 3466 of Rev. Stat., 31 U. S. C. A. No. 191 awards priority for payment to the United States from surplus funds held in a foreclosure sale, it appearing that taxpayer-debtors were insolvent and while in that condition suffered or permitted a creditor to obtain a lien upon their property by a docketed judgment and thereby committed an act of bankruptcy.

H. Brian Holland, Assistant Attorney General, Andrew D. Sharpe, Carrington Williams, Special Assistants to Attorney General, Washington, D. C., Edwin M. Stanley, United States Attorney, Greensboro, N. C., for plaintiff. Trivette, Holshouser and Mitchell, North Wilkesboro , N. C., for State of North Carolina . Wicker and Wicker, North Wilkesboro, N. C., Woltz and Barber, Mt. Airy, N. C., for defendants other than State of North Carolina.

Memorandum Opinion

WARLICK, District Judge:

This is an action in which plaintiff seeks a recovery for income taxes, penalties, and interest, allegedly owed by T. H. Williams individually for the years 1944 through 1947, in the sum of $14,859.94, and against Alice M. Williams, his wife, in the sum of $15,544.29 for the same years, and against both T. H. Williams and Alice M. Williams, jointly, for the sum of $1,276.55, due for the year 1943, and for federal unemployment taxes additionally due by the Williams Motor Company, a partnership, composed of T. H. Williams and Alice M. Williams, for the years 1951 and 1952, in the sum of $659.94. The taxpayers do not contest their tax liability to the plaintiff and the cause is to be determined and the answer found from the claims filed, their priority and validity in and to a certain sum of money, a surplus from a trustee's sale of the property of the taxpayers.

[The Facts]

In 1945 and again in 1947 T. H. Williams and wife, Alice M. Williams, sole partners in the Williams Motor Company, executed two certain deeds of trust conveying all of their real and personal property, other than some household and kitchen furniture of small value, to certain trustees named in the instruments; to secure a certain indebtedness of $32,000, then due to the Northwestern Bank, a North Carolina banking institution, and one of the defendants herein. These deeds of trust were properly placed to record in the public registry of Wilkes County , North Carolina , where the lands were situated and where the personal property was located. Both deeds of trust were prior in time and recordation to any alleged lien herein considered.

On December 3, 1947, the State of North Carolina recorded two certificates of income tax liability; one for $1,997.26 against Alice M. Williams, representing income tax penalties and interest for the years 1943 to 1946, inclusive, and another for $1,690.00 against T. H. Williams for the same years, 1943 to 1946, inclusive, with the Clerk of the Superior Court of Wilkes County, and again on November 2, 1950, an additional sales tax liability against Williams and wife for $4,324.82 was filed by the State, this amount being for sales tax from October 1, 1947 to September 30, 1950.

On May 10, 1950, Williams and wife executed and delivered to S. V. Tomlinson an additional deed of trust in the sum of $507.74 on certain of the real estate which was embraced in the prior deeds of trust to the Northwestern Bank. This deed of trust was properly filed and recorded.

On July 19, 1952, a judgment for $2,000 was docketed against T. H. Williams and wife by C. W. Badgett, in the office of the Clerk of the Superior Court of Wilkes County.

That on or before November 19, 1952, and on succeeding dates thereafter during 1952, certain assessments were levied for taxes due plaintiff by defendants Williams and wife. Notice of these liens were forwarded and were duly decorded in the office of the Register of Deeds for Wilkes County, being placed to record for that Williams and wife had failed to pay on proper demand being made.

During July, 1953, all and every of the personal property used by Williams and wife in the operation of the Williams Motor Company was levied upon by the Sheriff of Wilkes County under a legally issued process by the Clerk of the Superior Court under a judgment docketed against them, and on being exposed to public sale was sold and delivered to the high bidder, the defendant, Mildred Kenerly.

In February, 1954, the two deeds of trust executed by Williams and wife to the Northwestern Bank were foreclosed and all of their property with the exception of the household and kitchen furniture, was sold and delivered to the purchasers thereof. Resulting from such foreclosure sale and after payment of all costs and other expenses, the trustee for the Northwestern Bank held a surplus of $6,625.23 and being unable to determine to whom this surplus belonged, paid it to the Clerk of the Superior Court of Wilkes County. The State of North Carolina then brought a Special Proceeding under General Statutes, Sec. 45-21.32 of North Carolina, to have it legally determined which of the creditors holding the recorded liens were entitled to the remaining assets. The United States was not a party to this proceeding, and though it offered suggestions on the receipt of a letter from the Trustee, it took no part therein and was not bound thereby. In said hearing the Clerk of the Superior Court ordered that the sum of $677.61 be paid to the defendant Tomlinson in view of the unpaid amount under that deed of trust. That the remainder of said fund in the sum of $5,940.58 be paid to the State of North Carolina, on its tax claims.

[Foreclosure Proceeding]

Thereafter on August 17, 1954, this action was instituted and though it originally sought a lien foreclosure action, on being advised that the property had actually been sold, plaintiff moved to amend its complaint so that the liens of the plaintiff could be transferred to the proceeds thereof and if such proceeds had been distributed, that such defendant receiving said surplus be decreed a holder of said funds in trust. This motion was granted.

R. L. Woodies, a defendant, made no appearance, either personally or through counsel.

The State of North Carolina filed its tax certificates as is provided for in the General Statutes of North Carolina, Sec. 105-242, sub. sec. 3.

The plaintiff filed its tax liability claim under 26 U. S. C. A. Section 3672 of the Internal Revenue Code.

For quite a number of years the Commissioner of Revenue for North Carolina, acting pursuant to General Statutes, Sec. 105-417-1, had entered into agreements with the plaintiff for the purpose of coordinating the admin istration and collection of taxes imposed by the plaintiff and by the defendant, State of North Carolina, and in consequence of said agreement had notified the plaintiff of the tax deficiency of Williams and wife, and such information resulted in the tax liability certificates being filed by the plaintiff herein. Very often plaintiff reciprocated and accordingly gave the Revenue Department of North Carolina information of a like nature.

The plaintiff contends it is entitled to recover the amount which was paid to the State of North Carolina under the judgment of the Clerk of Court of Wilkes County. That its claim amounts to $32,340.72 plus interest and penalties. That its liens filed are valid. The defendants Williams and wife, were insolvent at the time of the matters herein found, and that in addition thereto each committed an act of bankruptcy. That the tax liens of the defendant, the State of North Carolina, though prior in time of recordation, were not specific and did not constitute the State a judgment creditor under 26 U. S. C. A. 3672. That Section 3466 of the Revised Statutes 31 U. S. C. A. No. 191 gives priority to its claim over the recorded tax liabilities due the State of North Carolina.

North Carolina contends that its tax certificates were filed and recorded prior in time to the tax liens of plaintiff; that under the North Carolina law these tax certificates, being filed with the Clerk of the Superior Court and cross indexed, became judgments of the Superior Court and rose to the dignity of a specific lien on all property owned by Williams and wife and that such lien was plenary to the extent that it fulfilled every requirement of a judgment creditor and that full faith and credit be accorded such record.

[Debtor's Insolvency]

And further, but for its giving information under the agreement theretofore had, plaintiff likely would never have learned of the financial status of Williams and wife and would not have filed its tax certificate lien. That the taxpayers were not insolvent and had not committed an act of bankruptcy; that Sec. 3466 of the Revised Statutes does not apply; and that it should be permitted to retain that which it now holds under the judgment of the Clerk of the Superior Court of Wilkes County, in partial satisfaction of the tax deficiency of taxpayers; and the finally it would not be decreed a trustee of said fund for the use and benefit of plaintiff.

It was stipulated by counsel that the taxpayers had no property after the sales were had and the payments made, other than a small amount of household and kitchen furniture, and that the appraised value thereof was less than the North Carolina constitutional exemptions on personal property; that the taxpayers' liabilities exceeded their assets. That the two deeds of trust to the Northwestern Bank were valid and the sales held thereunder conveyed a good and indefeasible title; that the surplus of $6,625.33 was correct; that the sale of the personal property under the execution in the hands of the Sheriff was regular and valid. That the docketed judgment of Badgett is in all respects a valid and proper lien.

It is further stipulated:

"That the only issue to be determined by the court in this action is to determine what party is entitled to the surplus funds from the previous foreclosure sale, now held by the State of North Carolina."

I find that at the time of the sales herein the liability of the taxpayers exceeded their assets by more than $40,000.00.

Conclusions of Law

This case would present little if any difficulty, but for Sec. 3466 of the Rev. Stat., 31 U. S. C. A. No. 191, which plaintiff contends applies; for otherwise the lien of the defendant, the State of North Carolina being docketed prior in point of time to that of plaintiff, would stand first for payment under the interpretations which place liens of the federal government and liens of the State on an equal basis for the application of the principle, first in time, first in right. Rankin v. Scott 12 Wheat. 177, 179, 6 L. Ed. 592; U. S. v. City of Greenville, 118 Fed. (2d) 963 [41-1 USTC 9381].

I am of the opinion that Sec. 3466 applies to the facts in this case,--for that in order to give the priority specified in Sec. 3466 there must be a case of an insolvent debtor * * * or a case in which an act of bankruptcy is committed. Sec. 3466 provides:

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority hereby established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."

The claim of the United States to the asserted priority rests exclusively upon the statute. No lien is created by it. It does not overreach or supersede any bona fide transfer of property in the ordinary course of business. It established priority which is limited to the particular state of things specified. U. S. v. Oklahoma, 261 U. S. 253, 43 Sup. Ct. page 295.

Subsection 3 of Bankruptcy is as follows:

"(3) suffered or permitted, while insolvent, any creditor to obtain a lien upon any of his property through legal proceedings or distraint and not having vacated or discharged such liens within thirty days from the date thereof or at least five days before the date set for any sale or other disposition of such property." Title II, Chap. 3, Sec. 21, U. S. C. A.

The word "insolvent" is used in many different senses. Sec. 3466 makes it apply to cases of an insolvent debtor,--"not having sufficient property to pay all his debts, * * *", who has committed an act of bankruptcy.

"A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed or removed, or permitted to be concealed or removed, with intent to defraud, hinder, or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts."

and,

"Independent of statute, it may generally be said that insolvency, when applied to a person, firm, or corporation engaged in trade, means inability to pay debts as they become due in the usual course of business. The definition is one generally accepted by both the State and federal courts." Oklahoma Moline Plow Co. v. Smith, 41 Okl. 498, 503, 139 Pac. 285, 287. U. S. v. State of Oklahoma, 261 U. S. 253, 43 Sup. Ct. 295. U. S. v. State of Texas et al., 314 U. S. 480 [42-1 USTC 9162].

I therefore reach the conclusion that Williams and wife, the taxpayers, were hopelessly insolvent and that while in that condition suffered or permitted a creditor to obtain a lien upon their property by a docketed judgment and thereby committed an act of bankruptcy.

Taking up the words of Sec. 3466 we find "they are broad and sweeping and, on their face, admit of no exception to the priority of claims of the United States . Thelusson v. Smith, 2 Wheat. 396, 425, 4 L. Ed. 271; United States v. Texas , supra, 314 U. S. at page 484, 62 S. Ct. at page 352, 86 L. Ed. 356. But this Court in the past has recognized that certain exceptions could be read into this statute. The question has not been expressly decided, however, as to whether the priority of the United States might be defeated by a specific and perfected lien upon the property at the time of the insolvency or voluntary assignment." U. S. v. Waddill, Holland & Flinn, Inc., et al., 323 U. S. 353 [45-1 USTC 9126]. Though the point has been raised in a large number of cases through the hundred years or more that this statute has been a part of our law, the Supreme Court has consistently failed to write into the decisions the answers to that question. As late as the decision of U. S. v. Gilbert Associates, Inc., 345 U. S. 361, decided April 6, 1953 [53-1 USTC 9291], this doctrine has been adhered to, for there it is held:

"In claims of this type 'specificity' requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against the property no longer in the possession of the debtor. Thelusson v. Smith, 2 Wheat, 396, 4 L. Ed. 271. Until such possession it remains a general lien."

[Conclusion]

I conclude that the tax lien filed by the State of North Carolina under Section 105-242, subsec. 3, of the General Statutes is no more than a general lien and when it and the lien of the federal government are both general, and the taxpayer being insolvent, that Sec. 3466 clearly awards priority for payment to the United States .

I, therefore, hold that the plaintiff is entitled to prevail and that it should have and receive that sum heretofore paid to the State of North Carolina by the judgment of the Clerk of the Superior Court of Wilkes County .

Counsel will present decree.

 

 

[56-1 USTC 9263]In the Matter of National Insul-Fluf, Inc., Bankrupt

In the United States District Court for the Southern District of California, Northern Division, In Bankruptcy No. 6402, January 5, 1956

[1939 Code Secs. 3670 and 3672(a)--substantially unchanged in 1954 Code Secs. 6321 and 6323(a), respectively]

Priority of liens: Government v. trustee in bankruptcy.--The government secured its claim for income tax liability against a bankrupt corporation by obtaining a tax lien against the trustee in bankruptcy upon all of the said corporation's property. The lien was filed prior to the time that the taxpayer filed his voluntary petition in bankruptcy. The trustee contended that the lien was not entitled to priority as no notice of Federal tax lien was filed. The court held that the trustee in bankruptcy was not a "judgment creditor" within the meaning of Sec. 3672(a) of the 1939 Code. Therefore the filing of a Notice of Tax Lien was unnecessary to establish the priority of the lien.

Joseph L. Joy, for trustee. Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Bruce I. Hochman, Rembert T. Brown, Assistant United States Attorneys, 600 Federal Building, Los Angeles 12, Calif., for respondent.

Stipulation for Judgment and Judgment

JERTBERG, District Judge:

IT IS HEREBY STIPULATED, by and between Arthur C. Wahlberg, Trustee in Bankruptcy, through his attorney, Joseph L. Joy, and the United States of America, Director of Internal Revenue, through its attorneys, Laughlin E. Waters, United States Attorney for the Southern District of California, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Bruce I. Hochman and Rembert T. Brown, Assistant United States Attorneys, that an order, decree or judgment may be entered by this court as follows:

1. That under the provisions of Sections 3670 and 3672 of the Internal Revenue Code of 1939 the United States of America obtained as against the Trustee in Bankruptcy valid tax liens upon all property and rights to property of National Insul-Fluf, Inc., upon the receipt of the assessment lists by the Director of Internal Revenue and the subsequent failure to pay, after notice and demand, the taxes due in amount of $9,709.92, said liens arising prior to time taxpayer filed his voluntary petition in bankruptcy.

2. That the liens of the United States of America are entitled to the protection of Sections 67b and 67c of the Bankruptcy Act, as amended.

3. That the liens of the United States of America are entitled to priority over any of the claims listed in Sec. 64a4 of the Bankruptcy Act, as amended.

4. That the Trustee in Bankruptcy is not a "judgment creditor" within the meaning of Section 3672(a) of the Internal Revenue Code of 1939, and that the filing of a Notice of Tax Lien as provided under Section 3672, prior to the filing of the petition in bankruptcy is not necessary to constitute a lien against the Trustee in Bankruptcy under the provisions of Section 70c of the Bankruptcy Act, as amended, having been so held by the Court of Appeals for the Ninth Circuit in the recent case of United States v. England, -- Fed. (2d) -- [55-2 USTC 9693], 1955 PH Federal Tax Service, Paragraph 72,971.

5. That the order of the Referee in Bankruptcy entered October 21, 1953 , denying the liens of the United States of America priority under Sections 67b and 67c of the Bankruptcy Act, as amended, may be reversed.

IT IS HEREBY ORDERED that the order of the Referee in Bankruptcy entered October 21, 1953, denying the lien of the United States of America priority under Sections 67b and 67c of the Bankruptcy Act, as amended, may be and is reversed.

 

 

[56-1 USTC 9212]Barrett & Hilp, a corporation, Plaintiff, v. Arthur H. Samish, United States, et al., Defendants

In the United States District Court for the Southern District of California, Central Division, No. 16609-HW, December 2, 1955

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

Lien for taxes: Priority.--Lien of the United States for taxes had priority over a mechanics lien which had not been perfected by judgment before the date of recording of the lien for taxes. A mechanics lien claimant is neither a mortgagee, pledgee, purchaser nor judgment creditor within the meaning of the Federal tax laws. The claim of the United States for taxes, therefore, is prior to that of all other creditors with respect to the undivided one-third interest in certain real estate held by the taxpayer-husband with two other owners as tenant in common and not in partnership. This one-third interest was held by him as community property with his wife. The order of priority of the claims of other creditors is determined.

Livingston & Feldman (by Lawrence Livingston), for plaintiff. Benjamin W. Henderson, for defendants, Arthur H. and Merced Samish. Saul Ruskin, for defendants, Walter D. and Dorothy Glatter. Edmund G. Brown, Attorney General, and Edward Sumner, Deputy Attorney General, for defendant, State of California . Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, and Rob ert H. Wyshak, Assistant United States Attorney, for defendant, United States. Geng, Kopp & Tyre, for defendant, Clybourn Corporation.

Findings of Fact and Conclusions of Law

Findings of Fact

WESTOVER, District Judge:

I. The plaintiff and defendant, The Clybourn Corporation, at all times herein pertinent are and were, respectively, corporations organized and existing under the laws of the State of California, plaintiff having its principal place of business in San Francisco, California, and said defendant having its principal place of business in Los Angeles, California.

II. Defendants Arthur H. Samish and Merced Samish, Rob ert H. F. Smith and Barbara Smith, and Walter D. Glatter and Dorothy Glatter, at all times here pertinent were husband and wife.

III. Jurisdiction is conferred on this Court and over the United States under the provisions of 28 U. S. C., Section 2410, as amended.

IV. This action was removed by the United States from the Superior Court of the State of California, in and for the County of Riverside, under the provisions of 28 U. S. C., Section 1444.

V. The State of California is sued herein, pursuant to the provisions of Section 2931(a) of the Civil Code of California and the provisions of the Revenue and Taxation Code of the State of California.

[Federal Tax Liens]

VI. The Commissioner of Internal Revenue assessed against defendant and taxpayer Arthur H. Samish, Federal internal revenue taxes of the type set forth below, for the taxable period shown below, in the amounts shown below. The Director of Internal Revenue for the San Francisco District of California received the respective assessment lists showing the assessments of the aforesaid taxes on the dates shown below, on which dates liens of the United States of America arose against all property and rights to property of the taxpayer, as provided in Sections 3670, 3671 of the Internal Revenue Code. On April 27, 1953, notice of each tax assessed was given to the taxpayer and demand was made upon him for the payment of each tax so assessed. The taxpayer, after notice and demand, paid, if any, only those amounts shown in the table below and no more, and remains indebted to the United States of America for the balance. On the dates specified, notices of tax lien were filed in the office of the County Recorder of Riverside County, California, pursuant to Section 3672 of the Internal Revenue Code, and there show the lien number set forth below. There remains due, owing and unpaid to the United States of America on each lien the sum shown in the last column, which represents the balance of the assessed tax plus subsequently accruing penalties and interest computed through March 17, 1955, and further interest accumulates on the total balance of assessed taxes, penalties and interest from March 17, 1955, at the statutory rate of six per cent (6%) per annum, which amounts to Forty and 88/100 Dollars ($40.88) per day until paid.

Lien filing fees of $1.00 have been incurred.

VII. The Commissioner of Internal Revenue assessed against defendant and taxpayer Merced Samish, Federal internal revenue taxes of the type set forth below, for the taxable period shown below, in the amounts shown below. The Director of Internal Revenue for the San Francisco District of California received the respective assessment lists showing the assessments of the aforesaid taxes on the dates shown below, on which dates liens of the United States of America arose against all property and rights to property of the taxpayer, as provided in Sections 3670 and 3671 of the Internal Revenue Code. On April 27, 1953, notice of each tax assessed was given to the taxpayer and demand was made upon her for the payment of each tax so assessed. The taxpayer, after notice and demand, paid, if any, only those amounts shown in the table below and no more, and remains indebted to the United States of America for the balance. On the dates specified, notices of tax lien were filed in the office of the County Recorder of Riverside County, California, pursuant to Section 3672 of the Internal Revenue Code, and there show the lien number set forth below. There remains due, owing and unpaid to the United States of America on each lien the sum shown in the last column, which represents the balance of the assessed tax plus subsequently accruing penalties and interest computed through March 17, 1955, and further interest accumulates on the total balance of assessed taxes, penalties and interest from March 17, 1955, at the statutory rate of six per cent (6%) per annum, which amounts to Forty-Five and 75/100 Dollars ($45.75) per day until paid.

                                                                                                                                               

Lien filing fees of $1.00 have been incurred.

VIII. The Commissioner of Internal Revenue assessed against defendants and taxpayers Mr. and Mrs. Arthur H. Samish, Federal internal revenue taxes of the type set forth below, for the taxable period shown below, in the amounts shown below. The Director of Internal Revenue for the San Francisco District of California received the respective assessment lists showing the assessments of the aforesaid taxes on the dates shown below, on which dates liens of the United States of America arose against all property and rights to property of the taxpayers, as provided in Sections 3670 and 3671 of the Internal Revenue Code. On April 27, 1953, notice of each tax assessed was given to the taxpayers and demand was made upon them for the payment of each tax so assessed. The taxpayers, after notice and demand, paid, if any, only those amounts shown in the table below and no more, and remain indebted to the United States of America for the balance. On the dates specified, notices of tax lien were filed in the office of the County Recorder of Riverside County, California, pursuant to Section 3672 of the Internal Revenue Code, and there show the lien number set forth below. There remains due, owing and unpaid to the United States of America on each lien the sum shown in the last column, which represents the balance of the assessed tax plus subsequently accruing penalties and interest computed through March 17, 1955, and further interest accumulates on the total balance of assessed taxes, penalties and interest from March 17, 1955, at the statutory rate of six per cent (6%) per annum, which amounts to Forty-Nine and 10/100 Dollars ($49.10) per day until paid.

                                                                                                                                              
 

Lien filing fees of $1.00 have been incurred.

IX. On June 5, 1953, the State of California recorded a certificate of the amount of tax, interest and penalties due against Arthur H. Samish and Merced Samish with the office of the County Recorder of Riverside County, in the sum of Ninety-Three Thousand, Nineteen Hundred and 39/100 Dollars ($93,019.93), with interest accruing at the rate of Five and 95/100 Dollars ($5.95) per day subsequent to March 18, 1954, until paid.

[Tenancy in Common]

X. As the result of a deed dated and acknowledged March 21, 1952, and recorded with the County Recorder of Riverside County on May 9, 1952, Arthur H. Samish, Rob ert H. F. Smith and Walter D. Glatter received title to the following described property as tenants in common, an undivided one-third interest in each:

"In the City of Palm Springs, Citrous Pest Control District No. 2, County of Riverside, State of California, and described as follows:

"Lot 7, the Southerly 25 feet of the Easterly 110 feet and the Southerly 20 feet of the Westerly 37.10 feet of Lot 8, and that portion of Lot 6 and of the Southerly 20 feet of Lot 5 in Block O of Las Palmos Estates as shown by Map on file in Book 15, pages 15 and 16 of Maps, records of Riverside County, California, lying Easterly of the following described line:

"Beginning at a point on the Southerly line of said Lot 6, a distance of 19.49 feet Westerly of the Southeasterly corner thereof;

Thence North 0006' East, 71.61 feet;

Thence South 8930' West, 10.20 feet;

Thence North 0008' East, 59.56 feet to the Northerly line of the Southerly 20 feet of said Lot 5."

XI. At all times herein pertinent plaintiff has been engaged in the business and acting in the capacity of a contractor within the State of California, as defined in Section 7026 of the Business and Professions Code of the State of California, and has been duly licensed as such contractor. Pursuant to written contract, plaintiff furnished labor and materials for the repair, alteration and construction of buildings and improvements upon the real property herein described, for which defendants Arthur H. Samish, Rob ert H. F. Smith (acting for himself and others), and Walter D. Glatter promised and agreed to pay to plaintiff the cost and value of said labor and materials, plus a profit thereon of 10% of the aggregate amount of such labor and materials. Pursuant to said agreement, plaintiff commenced the work of repair, alteration and construction on or about the 17th day of May, 1952, and finished the same on or about the 10th day of April, 1953, and said work was accepted by said defendants. By agreement of the parties to this action at the time of acceptance, the aggregate unpaid cost of labor and materials, plus an allowance for profit to plaintiff, has been fixed at the sum of Two Hundred Twenty-Two Thousand, Six Hundred Forty-Four and 55/100 Dollars ($222,644.55), no part of which has been paid. On April 28, 1953, plaintiff recorded a valid and duly verified claim for mechanic's lien in the sum of Three Hundred Fifty-Six Thousand, Four Hundred Eighty-Eight and 54/100 Dollars ($356,488.54) in the office of the County Recorder of Riverside County. The whole of the real property herein described is required for the convenient use and occupation of the structures and improvements repaired, altered and constructed and now located thereon.

XII. Defendant Arthur H. Samish at all times herein pertinent was and is a tenant in common of the land herein described with the other parties in interest therein, holding an undivided one-third interest. The documents and the oral testimony did not establish that there was a partnership in said land. As to any and all buildings on said land, the same were, at all times pertinent herein, held by the parties interested as tenants in common, and defendant Arthur H. Samish was and is a tenant in common, holding an undivided one-third interest in said buildings. The documents and oral testimony adduced in evidence do not establish that there was a partnership in the buildings. The Court holds that Samish, Glatter and Smith took title to the land as tenants in common and they are still such tenants in common. When the parties constructed the buildings on the land they were still tenants in common and have continued to be tenants in common because the documents and the oral testimony do not establish that there was a partnership in the buildings. Any intent of Samish's which was not disclosed to the other parties, or any of them, in writing or orally, is immaterial, and therefore no finding is made as to any such intent.

XIII. The plaintiff has not sustained its burden of overcoming the presumption of Section 686 of the Civil Code of the State of California that the interest of Arthur H. Samish in said real property is that of a tenant in common.

[Real Estate Subject to Lease]

XIV. Rob ert H. F. Smith, Barbara Smith, his wife, Arthur H. Samish and Walter D. Glatter, as lessors, and The Clybourn Corporation, as lessee, entered into a certain lease agreement, dated October 1, 1952, amended by agreement, dated November 3, 1952, whereby said leasors leased a portion of the building located on the real property described in paragraph X, as more particularly described in said lease, to The Clybourn Corporation for a period of 20 years commencing from the date The Clybourn Corporation began public operation of its restaurant on said premises, and upon the terms and conditions set forth in said lease. A memorandum of said lease was recorded in the office of the County Recorder of the County of Riverside, State of California, on March 11, 1953, in Book 1449, page 185, of Official Records.

Conclusions of Law

I. The interest of Arthur H. Samish in the real property described in Paragraph X of the Findings of Fact is that of a tenant in common with an undivided one-third interest held as community property with his wife.

II. At no time here pertinent has Arthur H. Samish been a partner of any of the other parties interested in said real property.

[Priority of Federal Tax Lien]

III. The United States has valid and subsisting tax liens against the interest of Arthur H. Samish and Merced Samish in said real property, as set forth in paragraphs VI, VII, and VIII of the Findings of Fact, which are prior and paramount to the claims of all the world against said interest, except, however, that in accordance with said stipulation of The Clybourn Corporation and the order of the District Judge thereon, the claim and interest of defendant The Clybourn Corporation under said lease, stipulation and order shall remain in full force and effect as against the purchaser of said property at any foreclosure sale, whether under said tax lien of the United States or under the mechanic's lien referred to in Paragraph IX hereinbelow, provided that The Clybourn Corporation attorns to said purchaser in accordance with said stipulation.

IV. A lien for delinquent Federal taxes arises on the date on which the assessment list is received by the Director of Internal Revenue.

Internal Revenue Code (1939), Secs. 3670-3672.

V. Prior to notice of filing thereof, a Federal tax lien is entitled to priority except as to those liens which are perfected at the time the tax lien arises. U. S. v. City of New Britain, 347 U. S. 81 (1954) [54-1 USTC 9191]; U. S. v. Acri, 348 U. S. 211 (1955) [55-1 USTC 9138]; U. S. v. Scovil, 348 U. S. 218 (1955) [55-1 USTC 9137].

VI. A determination of whether a lien is perfected is a matter of Federal law, despite the State's characterization of its lien. U. S. v. Acri, supra; U. S. v. Scovil, supra; U. S. v. Gilbert Associates, 345 U. S. 361 (1953) [53-1 USTC 9291].

VII. At the time of recording a claim therefor, a mechanic's lien is for Federal tax purposes an inchoate, unperfected lien, because the effect and amount of the lien are contingent upon the outcome of the suit for foreclosure thereof. U. S. v. Acri, supra; U. S. v. Scovil, supra; U. S. v. Kings County Iron Works, (2d Cir. June 29, 1955) [55-2 USTC 9536].

VIII. A mechanic's lien claimant is neither a mortgagee, pledgee, purchaser nor judgment creditor within the meaning of the Federal tax laws, and cannot be accorded the protection of Section 3672 of the 1939 Internal Revenue Code until he has reduced his claim to judgment and recorded an abstract of judgment with the County Recorder. U. S. v. Acri, supra; U. S. v. Scovil, supra; U. S. v. Gilbert Associates, supra; U. S. v. Kings County Iron Works, supra.

IX. Plaintiff has a valid and existing mechanic's lien against said real property in the sum of $222,644.55, with legal interest, subject to the aforesaid liens fo the United States for delinquent Federal income taxes with respect to the one-third interest of Arthur H. Samish in said real property, but said mechanic's lien as to said one-third interest of Arthur H. Samish is prior and paramount to the claims of all of the defendants, excepting defendant United States and defendant The Clybourn Corporation, to the extent hereinafter set forth. As to the remaining two-thirds interest in said property, said mechanic's lien is prior and paramount to the claim of all of the defendants, except defendant The Clybourn Corporation, to the extent hereinafter set forth. As to defendant The Clybourn Corporation, the lease above mentioned shall remain in full force and effect as against the purchaser of said property at any foreclosure sale in accordance with the above said stipulation and order, provided that The Clybourn Corporation attorns to said purchaser in accordance with said stipulation.

X. Plaintiff had not perfected its lien at the time the Federal tax liens arose on April 24, 1953, within the meaning of the Federal tax laws.

XI. The State of California has a valid and subsisting tax lien as set forth in Paragraph XI of the Findings of Fact upon the one-third interest of Arthur H. Samish in said real property, but the same is subsequent and subordinate to the liens of the United States and of plaintiff herein, and is applicable to only said one-third interest and no more.

[Sale of Realty Ordered]

XII. The real property described in the complaint herein shall be sold by the Marshal of this Court, pursuant to 28 U. S. C., Section 2001, in the manner prescribed by the laws of the State of California and according to the rules and practice of this Court. Such sale shall be subject and subordinate to the interests of the United States as to an undivided one-third interest in and to said property, as set forth above, and the rights of The Clybourn Corporation, as set forth in said lease, stipulation and order, provided that The Clybourn Corporation attorns to said purchaser in accordance with said stipulation and order. At said sale any of the parties hereto shall be allowed to bid and purchase, and plaintiff shall be allowed credit on its bid for the amount of its lien, with legal interest thereon according to the laws of the State of California . Said Marshal shall execute and deliver for recordation his certificate of sale to the highest bidder in the manner provided by the laws of the State of California and, after the time allowed by law for redemption has expired, said Marshal shall execute his deed to said property to the purchaser thereof at said sale, subject to the prior liens of the United States as to said one-third interest, and said rights of The Clybourn Corporation. Thereupon and subject to the foregoing, plaintiff and defendants and all persons claiming under them or any of them, having liens subsequent to the lien of plaintiff, and their personal representatives and all persons claiming under them, shall be forever barred and foreclosed of and from all equity of redemption and claim in, of or to said property from and after the delivery of said Marshal's deed; said purchaser shall be entitled to the possession of said property subject to said liens of the United States upon said one-third interest and said rights of The Clybourn Corporation under said lease, stipulation and order, and shall be entitled to such assistance of this Court as may be necessary or proper to enforce his said rights. If any parties to this action, other than The Clybourn Corporation, under said lease, stipulation and order, or the United States under its prior lien, shall be in possession of said premises or any part thereof, or if any other person shall have come into possession thereof or any part thereof subsequent to the commencement of this action, such party or person shall deliver said possession of said premises or such part thereof to such purchaser or purchasers upon the production of said Marshal's certificate of sale of said premises, and a writ of assistance may without further notice be issued to compel such delivery to the purchaser or purchasers; provided, however, that defendant The Clybourn Corporation, as lessee under that certain lease agreement dated October 1, 1952, as amended by agreement dated November 3, 1952, shall not be required to deliver up possession of said premises to said purchaser or purchasers, but shall hold the portion of the property leased to it in accordance with its said lease, on condition that said corporation shall attorn to said purchaser or purchasers and execute such documents as may be necessary or proper to evidence such attornment; however, if said The Clybourn Corporation and said purchaser or purchasers are unable to agree as to the form of such documents, such form shall be determined by this Court. Said United States Marshal is hereby ordered and directed to sell said real property pursuant to the decree herein and to make his return of sale to this Court; the Clerk of this Court is ordered to transmit to said Marshal a certified copy of the decree and order of sale herein. Should the proceeds of such sale be insufficient to satisfy the amount secured by said mechanic's lien as aforesaid, the same shall be shown on said return and judgment for said deficiency, with legal interest thereon entered in favor of plaintiff against defendants Samish, Glatter and Smith. Before any sale of any interest of said real property under this decree shall be held, notice of the time and place of said sale shall be served upon defendant United States by service upon the United States attorney for the Southern District of California, 600 Federal Building, Los Angeles 12, California, and shall be served upon the other parties to this action by serving their respective attorneys. Any such notices must be served not less than ten days prior to the date of sale.

 

 

[56-1 USTC 9174] United States of America , Plaintiff v. The Canister Company, Inc., Rolfe T. Gwathmey, Canister Company, The Town of Phillipsburg , New Jersey , Defendants

In the United States District Court for the District of New Jersey, Civil Action No. 548-54, October 27, 1954

[1939 Code Secs. 3670-3672--substantially unchanged in 1954 Code Secs. 6321-6323]

Priority of creditors: Government tax lien v. employees' claim for wages.--Government tax liens had been secured by mortgages on specific property of defendant company, and the Government foreclosed on the mortgages. Certain labor unions and class representatives of all former employees of defendant company made a motion to intervene in the foreclosure action claiming a lien on the defendant's property for vacation pay due them under its union contracts. The Court denied the motion, and held that the Government's right of foreclosure of the mortgages recorded prior to the date of the claims for wages was paramount.

McCarter, English & Studer, 11 Commerce Street , Newark , N. J., for defendants. Howard W. Swick, attorney of applicants for intervention, for the motion. Herman Scott, Assistant United States Attorney, for plaintiff, contra. United States Attorney, Federal Building, Newark, N. J., for plaintiff.

On Motion to Intervene

[Wage Earners' Application for Intervention]

FORMAN, Chief Judge:

This is an application for intervention of right pursuant to Rule 24(a) of the Federal Rules of Civil Procedure, filed by Twin City Lodge No. 1247, I. A. M., A. F. L.; A. F. L. No. 22480; Walter J. Metcalf; Earl Pisle, William Hoadley and John Sauerhofer, the labor unions and the class representatives of all former employees of The Canister Company, Inc., their contention being that a prospective foreclosure and sale of property in the custody of, or under the control of, this Court will adversely affect their rights as creditors. Specifically, applicants for intervention allege that the said company is indebted to its employees for vacation pay due under its union contracts, and apply for intervention in the foreclosure action, claiming a lien on the property of The Canister Company, Inc., under the provisions of N.J. S. A. 2A:44-86.

[Tax Liens Secured by Mortgages]

The history of the case shows that on May 24, 1949, the Government acquired liens for unpaid income taxes for the year ending February 29, 1944, said liens being acquired pursuant to 3670 and 3671 of the Internal Revenue Code and attached to all interests in property, both real and personal, held by the defendant company. Notice of these liens was filed on September 29, 1951 , pursuant to 3672. On January 24, 1952 , the defendant company gave to the Government a real estate and chattel mortgage in order to secure said tax liens. This mortgage was recorded on January 24, 1952 . Another mortgage had been given to the Government by defendant company to secure payment of unpaid excessive profits and had been recorded on January 10, 1952. On June 29, 1954, the Government filed a complaint in this court to foreclose said mortgages and tax liens, and as a result thereof, the property of the defendant Canister Company was sold pursuant to a final decree of foreclosure on September 21, 1954.

[Priority of Wage Liens]

The applicants cite as authority several cases, which will be considered now.

J. W. Pierson Co. v. West Orange-Verona Building Co., 1933, 112 N. J. Eq. 426, merely holds that wage liens have priority over mechanics' liens upon the assets of an insolvent corporation. It is clearly stated in the opinion that a recorded mortgage would not be subordinated to wage liens.

Michael DeMasi v. F. W. Bowden Co., 1926, 99 N. J. Eq. 70, also falls under the New Jersey Mechanics' Lien Law and states that labor is entitled to a preferential payment within the scope of that law. However, N. J. S. A. 2A:44-87 provides that mortgages shall have priority over any lien established by virtue of the Mechanics' Lien Law.

[Priority of Other Liens]

Although Exchange National Bank of Tulsa v. Davy, D. C. Okla. 1936, 13 Fed. Supp. 226 [36-1 USTC 9053], states that a federal tax lien attaches to a taxpayer's property subject to existing rights in third persons, it is distinguishable from the case at bar, for in that case the plaintiff bank had taken an assignment of a beneficiary's interest in a trust estate and later exchanged it for a mortgage, upon the revocation of the trust. The notice of the tax lien was filed subsequent to the assignment but prior to the mortgage and was held to be subordinate to the claim of the bank. In the instant case the tax liens have been secured by mortgages on specific property and were prior in time to the wage claims of the applicants, which have not been secured or perfected in any way whatsoever.

In City of Winston-Salem v. Powell Paving Co. of North Carolina, D. C. N. C., 1934, 7 Fed. Supp. 424 [4USTC 1309], a federal tax lien was held to be a general lien having no priority over other tax liens of the city and county since it was not fastened to any specific property. However, in the case at hand the liens were secured by mortgages which attached to certain property of the defendant company.

In re Wyley Co., D. C. Ga. 1923, 292 Fed. 900[1924 CCH 2252], and In re Caswell Construction Co. , D. C. N. Y. 1926, 13 Fed. (2d) 667 [1 USTC 189], also refer to tax liens which have not been secured. Furthermore these cases were decided under the Bankruptcy Act while the instant proceedings involve judicial sale by virtue of a mortgage foreclosure.

In re Holmes' Estate, 1938, 16 N. J. Misc. 402, merely holds that the burial expenses of a decedent are a charge on the estate rather than a debt, and as such have an absolute priority over tax liens.

There is no analogy between any of the cases relied on by applicants for intervention and the case at hand. This is not a bankruptcy proceeding, but involves a mortgage foreclosure and judicial sale. The Government has tax liens which have been secured by mortgages on specific property, while applicants at most, have an unsecured claim for wages. No statute, either state or federal, establishes a right in wage earners to pre-empt a mortgagee's right to foreclosure of mortgages recorded prior to the date of the claims for wages, nor can any authority for such a proposition be found in the cases.

The motion is denied and an order shall be submitted accordingly.

 

 

[55-2 USTC 9777]In the Matter of Chatsworth Investment, Inc., a corporation, Bankrupt

In the United States District Court for the Southern District of California, Central Division, No. 56920-T, October 28, 1955

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

Tax liens: Priority: Mechanics' liens.--The lien of the government for taxes is valid as against the mechanics' liens which had been recorded prior thereto, but which had not been reduced to judgment status.

Quittner & Stutman, 639 South Spring Street, Suite 1125 , Los Angeles 14, Calif. , for Chatsworth Investment, Inc.

[Issue and Facts]

RIFKIND, Referee in Bankruptcy:

The question involved is the priority between the lien of the government for withholding taxes and sixty prior recorded mechanics' liens. The matter is presented to the court upon a stipulation of facts. The facts set forth in the stipulation briefly are (1) that the materials were furnished and the labor performed as set forth in the respective liens, (2) that the mechanics' liens were duly prepared and recorded within the time and manner provided by law, (3) that the tax lien of the government was filed and recorded after the mechanics' liens had been recorded, and (4) that actions had not been instituted nor had judgments been recovered based upon said mechanics' liens at the time that the government filed and recorded its liens.

[Statutory Sections]

Section 3670 of the Internal Revenue Code (now section 6321) provides as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person," and subdivision (a) of section 3672 (now section 6323) provides as follows:

"Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector."

It is of course apparent that mechanics' liens are not among the excepted class enumerated in section 3672(a) of the Internal Revenue Code. The matter therefore becomes a problem of statutory construction to determine if mechanics' liens can upon any legal or equitable theory be included within the excepted class. The thorough job of research and the excellent briefs of counsel have been of inestimable help to the court in deciding this important question.

[Cited Cases]

The court, in the case of Winther v. Morrison, 93 Cal. App. 2d 608 [49-2 USTC 9442], in construing the priority between a government tax lien and a prior attachment lien which is also not within the excepted class, held that the government tax lien was subordinate to a previously levied attachment lien on the ground that any subsequent judgment lien related back to the date of the attachment lien upon the property. The court, on page 611, states as follows:

"Since it is conceded that the attachment lien herein was properly issued and properly levied upon the property, it is evident that Morrison perfected a lien thereon, which secured and insured the payment to him of any judgment that was recovered by him in the action, insofar as the property attached could be applied to the judgment. The lien attached immediately upon the levy of the attachment."

and on page 613, the court further states:

"The liens created by sections 3670 and 3671 of the Internal Revenue Code are general and not priority liens. There is no provision in either section indicating that the liens for taxes have a priority over attachment liens placed on the property prior to the time when the tax liens arise."

and the court concludes on page 615 by saying as follows:

"Whatever rights the taxpayer had in the real property involved were subject to the valid subsisting attachment lien of Morrison and the tax lien of the United States was not entitled to priority over it."

The United States Supreme Court, in reversing the case of Winther v. Morrison, supra, in the case of the United States v. Security Trust and Savings Bank, 340 U. S. 47 [50-2 USTC 9492], the court states on page 50 as follows:

"Nor can the doctrine of relation back, which, by a process of judicial reasoning, merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment, operate to destroy the realities of the situation."

and the late Justice Jackson, in his concurring opinion, made the following observations:

"My conclusion from this history is that the statute excludes from the provisions of this secret lien those types of interest which it specifically included in the statute and no others." . . .

"I am persuaded that we are required to hold the tax lien of the government superior to the California Statute. While we should accept the law of California as its court has declared it, the Federal question remains whether it is in conflict with 26 U. S. C. 3670-72, 26 U. S. C. A. Sec. 3670-72, 53 Stat. 448, as amended 53 Stat. 882. The history of this tax lien statute indicates that only a judgment creditor in the conventional sense is protected."

See also the case of United States v. New Britain , 347 U. S. 81 [54-1 USTC 9191] and Kel Weatherstrip v. United States [54-2 USTC 9671] (1954 P-H Tax Service, section 72, 795). In the case of United States v. Heffron, et al. (CCA 9) 158 Fed. (2d) 657 [47-1 USTC 9194], the court held that a Federal tax lien had priority over a prior recorded Declaration of Homestead.

The United States District Court for the District of Alaska, in the case of Kel Weatherstrip v. United States, supra, in which district the mechanic's lien law is very similar to our own State, in construing the priority between a government tax lien and a mechanic's lien, basing its decision on the case of United States v. Security Trust and Savings Bank, supra, and United States v. New Britain, supra, in an excellent opinion holds that mechanic's liens are not in the excepted class and have no priority over tax liens.

There is much in the argument of counsel for the trustee in bankruptcy that appeals to the reason and justice of his contention. It may be true that if the government's tax lien be held to take priority over mechanics' liens, that the government is obtaining a lien not only upon the taxpayer's interest in the property, but also upon the labor and material which the mechanic lien claimants have contributed thereto. The remedy for this injustice, if indeed it be an injustice, rests with Congress and not with the courts. The statute and decisions are clear and this court is in duty bound to follow them.

[Conclusion]

It is therefore the opinion of the court that the lien of the government for taxes is valid as against the mechanics' liens which had been recorded prior thereto, but which had not been reduced to judgment status.

The attorney for the trustee in bankruptcy will prepare, file and serve an order in accordance with the District Court Rule No. 7.

 

 

[55-2 USTC 9772]In the Matter of Milo O. Frank, Bankrupt

In the District Court of the United States for the Southern District of California Central Division, In Bankruptcy No. 59,574-PH, September 20, 1955

[1939 Code Sec. 3672(b)--substantially unchanged in 1954 Code Sec. 6323(c)]

Priority in payment of claims: Government tax lien v. other claims.--Where levy and distraint were made by the government against certain stock certificates belonging to the bankrupt, but actual possession had not been taken of the said certificates by the government at the time the bankruptcy petition was filed, the court held the payment of the government tax lien must be postponed as provided in the Bankruptcy Act Sec. 67(c) 1.

William J. Tiernan, Suite 1314 , 215 West Seventh Street , Los Angeles 14, Calif. , for trustee, petitioner. Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Eugene Harpole & Godfrey L. Munter, Jr., Internal Revenue Service, 600 Federal Building, Los Angeles 12, Calif., for United States, respondent.

Memorandum in Re Tax Lien of the United States

BRINK, Referee in Bankruptcy:

We have here the matter of the application of section 67(c) 1 of the Bankruptcy Act, which provides that certain liens, including liens for taxes or debts owing to the United States on personal property, not accompanied by possession of such property shall be postponed in payment to expenses of admin istration and prior labor claims.

[Facts]

The subject matter of the controversy consists of certain stock certificates belonging to the bankrupt which were at one time contained in a safe deposit box and which have now been sold, by stipulation, the proceeds being impounded by the trustee awaiting a decision in this matter as to the extent of a lien which the District Director of Internal Revenue asserts he had on the said certificates at the date of bankruptcy in this proceeding.

It is stipulated that notices of federal tax liens against the bankrupt were filed in the office of the county recorder on June 29, 1951; that on October 24, 1951 a levy was made upon the Union Bank and Trust Company, by serving on the said bank a copy of a Warrant for Distraint, a copy of the notice of liens and an original document entitled "Levy", advising that all property and rights to property of the bankrupt and of Iren W. Frank were seized and levied upon and further demanding all of their property and rights of property; that the bank on October 26, 1951, issued its check in the sum of $212.50 representing funds from the account of the bankrupt and the said Iren W. Frank, and that it advised that it was holding a safe deposit box in the name of Iren W. Frank; and that the contents of the box consisted of the stock certificates which are here involved. It also appears that on May 14, 1953 the bank terminated the rental agreement under which the aforesaid box was held and that it removed the certificates therefrom, and thereafter held the same in its possession until they were delivered to the trustee for sale, as aforesaid.

[Contention of Director]

It is the contention of the Director that he acquired possession of the certificates by the simple process of serving the aforesaid papers on the bank on October 24, 1951, and that he still had such possession on January 28, 1954, the date of bankruptcy herein. He relies principally on the decision in the matter of Martin Woodcraft Corporation Bankrupt, Apr. 12, 1955, D. C. E. D. N. Y. 130 P. S. 443 [55-2 USTC 9616]. That case involved tangible personal property upon which the Director made a levy on December 7, 1954, but which he did not remove from the premises where it was located. The property was still on the said premises when a petition in bankruptcy was filed on December 17, 1954, and the Court held that the Director had possession on the said date, and that Section 67(c) 1 did not apply. It cannot be determined from the decision, if the Director had actual possession, or if he simply left the property on the premises after the levy had been made. However, it seems that the Court must have concluded that actual possession existed for it referred with approval to City of New York v. Hall, 1944, CCA 2, 139 Fed. (2d) 935, in which the Court ruled that constructive possession was not sufficient to exclude a tax lien from the effect of section 67(c) 1. In discussing the matter the Court said:

"The word 'possession' drips with ambiguity. It is not a single purpose word and must be contextually construed. That for some purposes, under some sections of the act, it may include 'constructive' possession gives us no answer to our question. We are convinced that Section 67, sub. c, meant something more. The aim of that amendment is well discussed in 4 Moore's Collier on Bankruptcy (14th Ed.) 163-164: 'As a result of long inaction of tax authorities, liens for taxes which accumulated over a number of years often consumed a bankrupt's entire estate, even to the exclusion of costs and expenses of the bankruptcy proceedings'. The facts here are illustrative: the City's claims are for taxes which had accumulated for seven or eight years respectively. Notwithstanding the admonition of Section 67, sub. c, the City chose to slumber on its rights. Congress intended to penalize such somnolence."

The aforesaid case is squarely in point. There, as here, the levy was made prior to bankruptcy, but actual possession had not been taken at the time the bankruptcy petition was filed. However, the Hall case dealt with tangible personal property, and in our case we have securities, to-wit: certificates of stock. No case under section 67(c) 1 relating to securities has been called to my attention, but I have noted the decision in United States v. Eiland, May 23, 1955, C. C. A. 4, 223 Fed. (2d) 118 [55-1 USTC 9487], in which it was held that the United States takes possession of an indebtedness owing to a taxpayer by levy thereon, and by notice of the levy to the taxpayer's debtor. In that case the Court said:

"That section (67(c) 1) also manifestly has reference to tangible property which can be taken into possession, not to indebtedness which has been levied upon with notice to the debtor so that it is to all intents and purposes assigned to the United States. City of New York v. Hall, 2 Cir., 139 Fed. (2d) 935, upon which the trustee relies, dealt with tangible property. If the statute be construed to apply to indebtedness, however, then what was done by the United States here must be construed as taking into possession within the meaning of the statute. The United States had done everything that it could do to assert dominion over the indebtedness and by the levy and notice had made it impossible for the debtor to secure a discharge thereof by payment to any one other than the United States. We may say of the action taken by the United States here what was said by the Supreme Court of ordinary garnishment in Miller v. United States, supra, 11 Wall. 268, 279, 20 L. Ed. 135, viz: It arrests the property in the hands of the garnishee, interferes with the owner's or creditor's control over it, subjects it to the judgment of the court (here the payment of the tax), and therefore has the effect of a seizure.'" (Italics supplied.)

It will be noted that in the Eiland case the Court strongly suggested that section 67(c) 1 may relate only to tangible personal property. If that be the fact, I would have considerable difficulty in determining if, for the purpose of section 67(c)1, securities such as our certificates of stock, should be classified as tangible or intangible property, if in my judgment it was necessary to decide that question. Furthermore, I would not be entirely convinced as to the sufficiency of the service which was made by the Director, since the levy and the Warrant of Distraint were not served upon the corporation which had issued the certificates here involved. Also, the decision might be affected by section 3672b of the Internal Revenue Code of 1939 (section 6323c of 1954 Code) which provides that a lien of the United States for taxes shall not be valid with respect to a security as against any mortgagee, pledgee or purchaser of such security for an adequate and full consideration, if at the time of such mortgage, pledge or purchase such mortgagee, pledgee or purchaser is without notice or knowledge of the existence of such lien.

[Tangible or Intangible Property]

While, as stated, I would have difficulty in determining if securities should be classified as tangible or intangible property in matters arising under section 67(c) 1, I am entirely convinced that it is unnecessary to decide that question in our case for the reason that I am completely satisfied that the Director cannot prevail in the controversy now before the Court for decision.

The Director relies solely on the service on the Bank, of a copy of the Warrant for Distraint, a copy of the Notice of Federal Tax Lien, and an original document entitled "Levy" advising that all property and rights to property of the bankrupt were seized and levied upon, and demanding all property and rights to property of the bankrupt.

[Conclusion]

The very language of section 67(c) demonstrates, beyond a question of a doubt, that "levy and distraint" are not equivalent to "possession", and, therefore, it must be held that the Director did not have possession in our case. Here is the substance of the section as it concerns our proceeding.

"Where not enforced by sale . . . (1) though valid against the trustee . . . statutory liens, including liens for taxes or debts owing to the United States . . . on personal property not accompanied by possession of such property . . . shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 64 of this Act . . .; and (2) . . . statutory liens created or recognized by the laws of any state for debts owing to any person, including any state or any subdivision thereof, on personal property not accompanied by possession of or by levy upon or by sequestration or distraint of such property shall not be valid against the trustee." (Italics supplied.)

Under clause (1) the sole test is "possession"; under clause (2) there are four alternative tests, "possession", "levy", "sequestration", or "distraint", and since "possession" is one of the alternatives, it is abundantly clear that the "possession" which is required in clause (1) must be something more than "levy" or "distraint".

The decision is that the lien of the Director must be postponed in payment as provided in section 67(c) 1.

Counsel for the Trustee will prepare an appropriate order; if Findings of Fact and Conclusions of Law are desired, counsel for the Director will so notify counsel for the Trustee in writing, with copy to this office, within 10 days from the date hereof, and in such event findings and conclusions shall be incorporated in the order.

The original and one copy of such instrument as may be prepared shall be deposited with the Referee, and a copy served on counsel for the Director at the address appearing on the papers on file. An extra copy shall be transmitted to Eugene Harpole, 417 South Hill Street , Los Angeles , California ; the original will be held by the Referee for 5 days before action is taken thereon.

 

 

[55-2 USTC 9724]United States of America, Plaintiff v. E. L. Hunsaker, Mrs. E. L. (Fay) Hunsaker, Sol Mayer, Anderson, Clayton & Co., C. R. Shannon, Inc., Ralph Burkholder, John Burkholder and Walter Burkholder, d/b/a Burkholder Bros., First National Bank of Pecos, Texas, Sears, Roebuck & Co., American Trading and Production Co., A. Harris & Co., Will G. Knox, Receiver of Texas Fire & Casualty Underwriters, State of Texas, Reeves County, Texas, Jeff Davis County, Texas, Reeves County Water Improvement District No. 1, Pecos Independent School District, Fort Davis Independent School District, Defendants

In the United States District Court for the Western District of Texas, Pecos Division, Civil Action No. 1845, May 10, 1955

[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]

Tax liens: Priority over third parties.--Out of the proceeds of the sale of delinquent taxpayers' real and personal property, which was subject to liens of the United States for unpaid taxes, judgment creditors, and claims of interested parties, the following order of priority was established: first, the claims of Sol Mayer, secured by deeds of trust recorded before the priority of the United States attached, to be satisfied out of the proceeds of the sale of the Reeves County Ranch, next, the tax claims of the United States based on the notices of tax liens and the priority given to it by virtue of the Revised Statutes, Section 3466 (31 U. S. C., Sec. 191), and finally, the various judgment liens and state tax liens remaining against taxpayers. The United States was not allowed to claim the right to have its tax liens enforced against what would otherwise be exempt homestead property under Texas laws, since the taxpayers did not claim the benefit of the homestead exemption in regard to the Jeff Davis County Ranch House and surrounding property which was their actual homestead.

Edward W. Rothe, Special Assistant to the Attorney General, Washington, D. C., Charles Herring, United States Attorney, Western District of Texas, Austin, Tex., Francis C. Broaddus, Jr., Assistant United States Attorney, El Paso, Tex., Russell B. Wine, United States Attorney, Western District of Texas, San Antonio, Tex., William Monroe Kerr, Assistant United States Attorney, Western District of Texas, El Paso, Tex., for plaintiff. Parker C. Fielder, Midland , Tex. (later withdrew), for defendants, Hunsakers. John Tomlin, Pecos, Tex., for defendants, Sol Mayer and The First National Bank of Pecos, Tex. Henry Russel, Pecos, Tex., for the receiver. (Alton B. Hughes was appointed Receiver by the Court.)

Findings of Fact, Conclusions of Law and Final Judgment

Findings of Fact

THOMASON, District Judge:

1. The United States of America commenced this action on August 3, 1953 , for the purpose of collecting outstanding balances on income tax assessments against Mr. and Mrs. E. L. Hunsaker, for the years 1944 and 1946 totalling $54,344.06 (plus unpaid statutory interest and costs).

2. The complaint prayed for judgment against Mr. and Mrs. Hunsaker for the amounts of taxes and interest remaining unpaid, and enforcement of federal tax liens against certain described real property belonging to Mr. and Mrs. Hunsaker.

3. On the Government's application, a temporary receiver, with all the powers of a receiver in equity, was appointed on December 30, 1953 for the real property, referred to herein for convenience as the Reeves County Farm and the Jeff Davis County Ranch. Subsequently, the receivership was expanded to include all of the personal property located on the Jeff Davis County Ranch.

4. After a hearing on March 3, 1954, the receiver was made permanent by the Court's order dated March 8, 1954.

5. The Government filed an amended complaint alleging that the Hunsakers were insolvent and praying for priority, with respect to the assets in the hands of the receiver, according to Section 3466 of the Revised Statutes (31 U. S. C., Sec. 191), as well as for enforcement of tax liens and determination of the relative priorities of various parties claiming liens on or interests in the property.

6. By virtue of amended complaints and court orders, the following have been made parties to this action and duly served with citations and copies of the complaints making them parties, on the theory that they might have or might claim some interest in the property in the receiver's hands:

E. L. HUNSAKER,

MRS. E. L. (FAY) HUNSAKER,

SOL MAYER,

FRANKLIN LIFE INSURANCE COMPANY,

WESTERN COTTON OIL COMPANY,

ANDERSON, CLAYTON & CO.,

C. R. SHANNON, INC.,

RALPH BURKHOLDER, JOHN BURKHOLDER and WALTER BURKHOLDER, d/b/a BURKHOLDER BROS.,

FIRST NATIONAL BANK OF PECOS, TEXAS,

*SEARS, ROEBUCK & CO.,

AMERICAN TRADING AND PRODUCTION CO.,

*A. HARRIS & CO.,

*WILL G. KNOX, RECEIVER OF TEXAS FIRE & CASUALTY UNDERWRITERS,

STATE OF TEXAS,

REEVES COUNTY, TEXAS,

JEFF DAVIS COUNTY , TEXAS ,

REEVES COUNTY WATER IMPROVEMENT DISTRICT NO. 1,

PECOS INDEPENDENT SCHOOL DISTRICT ,

FORT DAVIS INDEPENDENT SCHOOL DISTRICT.

No answers were filed or appearances made on behalf of the parties before whose names asterisks appear in the above list and default judgment were orally rendered against them on March 3, 1954. Franklin Life Insurance Company and Western Cotton Oil Company filed disclaimers of any interest in the property. The Farm Home Administration and the Commodity Credit Corporation (both agencies of the United States Government) filed interventions to assert claims against some of the property in question.

7. The following table shows the duly recorded instruments, reflecting the claims of parties who filed answers or otherwise appeared, affecting title to the Jeff Davis County Ranch:

8. The following table shows the duly recorded instruments, reflecting the claims of parties who filed answers or otherwise appeared, affecting title to the Reeves County Farm:

                                                                                                        
* Also secured by liens against Jeff Davis County Ranch.

9. The only claims against the personal property located on the Jeff Davis County Ranch were those of the United States, claiming under notices of tax liens recorded in Jeff Davis County on May 29, 1952, and Sol Mayer, claiming under chattel mortgages recorded in August of 1952 and November 1953.

10. As noted in the table above, notices of federal tax liens were recorded against the Reeves County Farm on January 25, 1952. Notices of federal tax liens to secure the same assessments had also been filed in Reeves County on July 26, 1948, but a certificate of partial discharge of property from the federal tax liens (covering the Reeves County Farm) was filed on December 27, 1948. The Government claimed the certificate of partial discharge was void because it had been procured through mistake, fraud, or misrepresentation, and, therefore, that its notices of tax liens filed on July 26, 1948 should be declared effective.

11. Sometime during 1946, Mr. and Mrs. Hunsaker moved to the Jeff Davis County Ranch, which has ever since that time remained their homestead. Such homestead consisted of the ranch house and approximately 200 acres immediately surrounding the ranch house.

[Hearing]

12. A hearing was held on March 3, 1954, for the purpose of determining the relative priorities of the claims of the parties to the property in the receiver's hands.

13. At that hearing, considering the pleadings, oral stipulations of the parties, evidence introduced at the hearing, and briefs filed by some of the parties, the Court found the following facts:

(a) The certificate of partial discharge of the Reeves County Farm from the federal tax liens, filed December 27, 1948, was not procured through mistake, fraud or misrepresentation. Accordingly, the notices of federal tax liens which had been filed on July 26, 1948, were validly released, in so far as they related to the Reeves County Farm;

(b) Although the Jeff Davis County Ranch House and the surrounding 200 acres did constitute the homestead of Mr. and Mrs. Hunsaker since 1946, they did not claim the benefit of any homestead exemption under Texas law;

(c) A steel barn located on the Reeves County Farm did not constitute a part of the realty, but, rather, was personal property against which the only claim was that of Commodity Credit Corporation, under chattel mortgages.

(d) Mr. and Mrs. Hunsaker are insolvent and substantially all of their assets are in the custody of the receiver for admin istration for the benefit of creditors in the proper order of their priorities, so that the provisions of Section 3466 of the Revised Statutes (31 U. S. C., Sec. 191) applied.

(e) American Trading and Production Company has a valid oil and gas lease on the Reeves County Farm (recorded June 27, 1951), since all prior claimants had subordinated their interests at the time the lease was given.

14. In an order dated March 8, 1954, the Court ordered the receiver to sell the Reeves County Farm, the steel barn located thereon, the Jeff Davis County Ranch, and all personal property located thereon.

15. As a result of the March 3, 1954, hearing, the Court determined that the proceeds of the sale of the Reeves County Farm should be distributed according to the following order of priority.                                                                                                                   

 

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