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Prior Law Page11

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

  17. Notices of federal tax liens were filed in Jeff Davis County against all property or rights to
 property of Mr. and Mrs. Hunsaker, pursuant to Section 3672 of the Internal Revenue Code of 
1939 on May 29, 1952, prior to the time when Sol Mayer recorded his chattel mortgages against 
the personal property located on the Jeff Davis County Ranch, and therefore held the prior lien
 against that property.

18. The receiver recommended to the Court sale of the Reeves County Farm to Sol Mayer for $27,500, to be paid in the following manner:

Cash to be applied toward the payment of expenses of receivership                    $ 1,500.00

Taxes owed on the Reeves County Farm to the State of 

Texas

, Reeves

County, 
Pecos
 
Independent
 
School District
 and Reeves 

County
 
Water



Improvement District #1, which were entitled to priority over Sol

Mayer's claim under 

Texas

 law.                                                         1,765.28

To be deducted from the outstanding balance of the indebtedness of

Mr. and Mrs. Hunsaker to Sol Mayer, with respect to which he had

been granted priority of payment out of the proceeds of the sale of the

Reeves 

County
 
Farm

.                                                                   24,234.72

TOTAL                                                                                $27,500.00


Sale of the Reeves County Farm to Sol Mayer according to these terms was confirmed on April 7, 1954, and Sol Mayer has deposited into the Registry of the Court the sums of $1,500 and $1,765.28, respectively.

19. The receiver recommended to the Court sale of the steel barn located on the Reeves County Farm to Sol Mayer for $2,500 cash, which sale was confirmed on April 7, 1955, and the proceeds have been deposited in the Registry of this Court.

20. The receiver recommended to the Court sale of the Jeff Davis County Ranch to Sol Mayer for the balance of the Hunsakers' indebtedness to him (including interest, costs and attorneys' fees) remaining after deducting the $24,234.72 referred to in paragraph 19, plus sufficient to satisfy the balance of expenses of receivership and taxes owed on the Jeff Davis County Farm (sic) which had priority over his claim under Texas law, which amounts were computed to be as follows:

Balance of secured indebtedness of

Mr. and Mrs. Hunsaker owed to Sol

Mayer (including interest, costs, and

attorney's fees).                                     $74,485.35

Remaining expenses of receivership.                     3,938.41

Taxes owed on the 

Jeff
 
Davis
 
County



Ranch to the State of 

Texas

, Jeff


Davis
 
County
, and 

Fort
 
Davis

 Independent


School District
.                                          740.67


Sale of the Jeff Davis County Ranch to Sol Mayer according to these terms was confirmed on May 19, 1954, and Sol Mayer has deposited into the Registry of the Court the sums of $3,938.41 and $740.67, respectively.

21. The receiver recommended to the Court sale of the personal property located at the Jeff Davis County Ranch to Sol Mayer for $6,500, which sale was confirmed on May 19, 1954, and the proceeds have been deposited in the Registry of this Court.

22. All expenses of the receivership (including receiver's fees, receiver's attorney's fees, caretaker's fee and miscellaneous expenses) have been paid out of the funds deposited into the Registry of the Court for that purpose by Sol Mayer and the receiver has been discharged.

23. There remain on deposit the sums of $1,765.28 and $740.67, representing taxes assessed against the Reeves County Farm and the Jeff Davis Ranch by various local taxing authorities for the years 1952 and 1953. The United States moved for summary judgment against the State of Texas, Reeves County, Jeff Davis County, Pecos Independent School District and Fort Davis Independent School District on the theory that, although such taxes might be granted priority over the deeds of trust held by Sol Mayer under Texas law, notices of federal tax liens had been recorded against the Farm and the Ranch before the local taxes were assessed and, therefore, were entitled to priority under the decision of the United States Supreme Court in United States v. New Britain , 347 U. S. 81 [54-1 USTC 9191]. The Government also moved for default judgment against Reeves County Water Improvement District No. 1, which had not filed an answer to the Government's claim against it. On February 21, 1955, summary and default judgments were entered, as prayed for by the Government, there being no opposition to the entry of such judgments.

24. The following table shows the present status of the Government's income tax claims against Mr. and Mrs. Hunsaker:

                                                       Unpaid         Payments Made

                                 Taxable         Balance of           on Accruing         Date of

Taxpayer                            Year         Assessment              Interest          Demand

E. L. Hunsaker .........            1944         $21,250.75             $6,781.04         8/14/47

Mrs. E. L. Hunsaker ....            1944          21,796.05              6,512.22         8/14/47

E. L. Hunsaker .........            1946           5,526.31              1,609.87         9/29/47

Mrs. E. L. Hunsaker ....            1946           5,770.95                 96.87         9/29/47

TOTAL ..................                         $54,344.06


Mr. and Mrs. Hunsaker are presently indebted to the United States for the amounts of the unpaid balances of each of the assessments, as set forth above, together with 6% interest from the respective dates of notice and demand (less the amounts of interest already paid, as noted above), and costs of this suit.

Conclusions of Law

1. The United States is entitled to the priority of payment granted to it in Revised Statutes, Section 3466 (31 U. S. C., Sec. 191).

2. That priority attached, with respect to the real property, when the receiver was appointed for the property of Mr. and Mrs. E. L. Hunsaker in this case on December 30, 1953, which was after Sol Mayer had recorded deeds of trust against the Reeves County Farm and the Jeff Davis County Ranch.

3. The claims of Sol Mayer, secured by deeds of trust, are entitled to be first satisfied out of the proceeds of the sale of the Reeves County Farm and the Jeff Davis County Ranch.

4. Because of its prior recorded notices of tax liens, the United States is entitled to priority of payment out of the proceeds of the personal property located at the Jeff Davis County Ranch.

5. Although the Jeff Davis County Ranch House and 200 acres surrounding it constituted the homestead of the Hunsakers, since the Hunsakers do not, in this proceeding, claim the benefit of the homestead exemption under Texas laws, the United States may not claim that exemption for them and may not claim the right to have its tax liens enforced against what otherwise would be exempt homestead property.

Final Judgment

On the basis of the foregoing Findings of Fact, Conclusions of Law, and all the pleadings, stipulations and evidence in this case, it is ordered and adjudged and decreed as follows:

1. The United States shall have judgment for its tax claims against E. L. Hunsaker for $21,250.75, together with interest at 6% from August 14, 1947 to date of payment (less $6,781.04 already paid on interest), and for $5,526.31, together with interest at 6% from September 29, 1947 to date of payment (less $1,609.87 already paid on interest) and costs of this proceeding;

2. The United States shall have judgment for its tax claims against Mrs. E. L. Hunsaker for $21,796.05, together with interest at 6% from August 14, 1947 to date of payment (less $6,512.22 already paid on interest) and for $5,770.95 together with interest at 6% from September 29, 1947 to date of payment (less $96.87 already paid on interest) and costs of this proceeding;

3. The United States (acting through the admin istrator of the Farmers Home Administration) shall have judgment against Mr. and Mrs. E. L. Hunsaker in the amount of $13,672.24, with interest at 3% per annum from April 4, 1952 to the date of this judgment and with interest on the whole amount at the usual rate from the date of this judgment to the date of payment;

4. The United States (acting through the Commodity Credit Corporation) shall have judgment against Mr. and Mrs. E. L. Hunsaker in the amount of $3,893, with interest at 4% per annum from January 31, 1952 to the date of this judgment and with interest at the usual rate from the date of this judgment to the date of payment;

5. The Clerk of the Court shall distribute to the United States, for application on its tax claims, the sum of $6,500 on deposit in the Registry of the Court as a result of the sale of the personal property located at the Jeff Davis County Ranch, and the sums of $1,765.28 and $740.67, deposited in the Registry of the Court in connection with the sale of the Reeves County Farm and Jeff Davis County Ranch to Sol Mayer.

6. The Clerk of the Court shall distribute to the United States for application on the Commodity Credit Corporation's chattel mortgage claims, the $2,500 deposited in the Registry of the Court as a result of the sale of the steel barn located on the Reeves County Farm;

7. The relative priorities of the parties with respect to the Reeves County Farm, the Jeff Davis County Ranch, and the personal property located at the Jeff Davis County Ranch, as determined at the hearing on March 3, 1954 , and as set forth in Paragraphs 15-17 of the Findings of Fact, are hereby confirmed.

8. The oil and gas leasehold estate owned and held by American Trading and Production Corporation on the Reeves County Farm, sold to Sol Mayer, is in all things valid and in full force and effect.

 

 

[55-2 USTC 9558]In the Matter of Ridgecrest Development Company, Bankrupt

In the United States District Court for the Southern District of California Northern Division, No. 6354, 129 FSupp 708, March 31, 1950

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

Lien for taxes: Bankruptcy: Interest on taxes included in tax liens.--The bankrupt estate was charged with the tax liens of the United States which had been perfected under State law prior to the filing of the petition in bankruptcy. The tax liens included interest on the delinquent taxes from the date of the filing of the petition in bankruptcy to the date of payment.

Ernest A. Tolin, United States Attorney, E. H. Mitchell, Edward R. McHale, Assistant United States Attorneys, Eugene Harpole, James D. Pettus, Special Attorneys, Bureau of Internal Revenue, for petitioner, United States. Johnson, Baker, and Palmer and Craig, Weller and Laugharn (Hubert F. Laugharn, of counsel), for respondent, Paul W. Sampsell, trustee in bankruptcy.

Findings of Fact, Conclusions of Law, and Order, Reversing Referee's Order of December 12, 1949

HALL, District Judge:

This matter came on regularly for hearing before the United States District Court at Los Angeles, California, the Honorable Peirson M. Hall, Judge, presiding, at 10:00 a. m. on March 13, 1950, upon a petition by the United States to review an Order of the Honorable William A. McGugin, Referee in Bankruptcy, dated December 12, 1949, disallowing the claim of the United States against the bankrupt estate for interest to the date of payment. the petitioner, the United States, appeared by Ernest A. Tolin, United States Attorney for the Southern District of California; E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys for said District; Eugene Harpole and James D. Pettus, Special Attorneys, Bureau of Internal Revenue, its counsel. The respondent, Paul W. Sampsell, Trustee in Bankruptcy, appeared by Johnson, Baker, and Palmer and Craig, Weller and Laugharn, by Hubert F. Laugharn, of counsel.

The Referee's Certificate on Review and briefs of counsel having been filed, and the Court having considered such Certificates, briefs, and the Referee's Opinion, the Court hereby makes the following:

Findings of Fact

I. That Ridgecrest Development Company, a corporation, Kern County , California , pursuant to a resolution passed by its board of directors, filed its voluntary petition in bankruptcy and was adjudged bankrupt on May 12, 1947 .

II. That on June 6, 1947, the first meeting of creditors was held, and Paul W. Sampsell was elected trustee in bankruptcy, and at all times since that date has been in possession of the assets of the bankrupt corporation.

III. That on November 14, 1947, a claim for Federal taxes due and owing by the bankrupt was filed in this proceeding by the Collector of Internal Revenue for the Sixth Collection District of California, covering Federal insurance contributions, unemployment, withholding and admissions taxes in the principal sum of $14,728.44, together with assessed penalty of $781.97, assessed interest of $139.14, delinquency penalty of $695.71, and accrued interest of $793.66, computed to November 30, 1947, or $2.55 per day until payment.

IV. That except for three items, totaling $1,690.81, the entire claim of the Collector of Internal Revenue was secured by liens which arose and were recorded in the office of the County Recorder , Kern County , California , prior to the date on which the bankrupt corporation filed its petition in bankruptcy.

V. That by an order dated December 12, 1949, the Referee in Bankruptcy, William A. McGugin, allowed the claim of the Collector of Internal Revenue in the amount claimed for taxes, penalties, and interest accruing prior to the date the bankrupt corporation filed its petition in bankruptcy, but disallowed and rejected the claim of the Collector of Internal Revenue for interest accruing from the date of the filing of the petition in bankruptcy to the date of payment of said claim on those items secured by liens which arose and were recorded prior to bankruptcy.

From the foregoing the Court makes the following:

Conclusions of Law

I. That by virtue of Sections 3670-3672 of the Internal Revenue Code, the liens of the United States attached to all property, whether real or personal, of the bankrupt corporation.

II. That the liens of the United States upon all the property of the bankrupt corporation are security not only for the principal tax obligations of the bankrupt, but for the interest accruing thereon as a part of the tax obligation.

III. That the entire estate of the bankrupt corporation came into the hands of the duly appointed trustee in bankruptcy charged with the liens of the United States .

IV. That Federal tax claims secured by liens perfected under State Law before bankruptcy bear interest as provided by law after the date the petition in bankruptcy is filed and until payment.

NOW, THEREFORE, IT IS HEREBY ORDERED: That the Order of the Referee dated December 12, 1949, be and the same is hereby reversed, and that the Federal tax claim secured by lien shall bear interest at 6% per annum, as provided by law, accruing subsequent to the date of the filing of the petition in bankruptcy until the claim is paid.

 

 

[55-1 USTC 9383] United States of America v. Bruce Machine Company, Inc., et al.

In the United States District Court for the District of Massachusetts, Civil Action No. 54-256-A, 132 FSupp 525, April 15, 1955

[1939 Code Secs. 3670 and 3672--similar to 1954 Code Secs. 6321 and 6323]

Priority of federal tax lien: Mortgage v. assignment for benefit of creditors: Withholding taxes.--Taxpayer on April 2, 1947 executed a chattel mortgage of its personal property, including inventories, to trustees for benefit of certain of its creditors, which mortgage was forclosed in December 1947. Before and during the existence of the mortgage taxpayer owed taxes under the Federal Unemployment Tax Act, on account of withholding under the Federal Insurance Contributions Act and for employees' income taxes. The mortgage was in some respects an assignment for benefit of creditors, since there was no possible equity of redemption and the mortgagees could expect the right to foreclose within a month. Moreover, the property foreclosed included after-acquired property as permitted by the mortgage. It was held that, by reason of the character of the withheld taxes as a special fund and trust for the United States , such taxes had priority of lien for payment over the holders of the mortgage who, under the circumstances, could have had actual or constructive notice thereof when payments were made to them under the mortgage note.

Francis J. DiMento, Assistant United States Attorney, for plaintiff. Alfred Sigel, 11 Beacon Street , Boston , Mass. , for defendants Harry Olins, Paul J. Goldstein and Alfred Sigel, individually and as trustees.

Opinion

ALDRICH, District Judge:

On defendants' motion for summary judgment the complainant alleges that Bruce Machine Company, a dissolved Massachusetts corporation no longer subject to suit, did on April 2, 1947 execute a chattel mortgage of all its personal property, including inventories, to the defendants as trustees for certain creditors; that the mortgage was foreclosed in December, 1947, at which time certain taxes were owed to the plaintiff under the Federal Unemployment Tax Act, and on account of withholding under the Federal Insurance Contributions Act, and for employees' income taxes; Internal Revenue Code, Chapter 9, subchapters A, C, and D; that some of these taxes were already owed on April 2nd, although not yet due, and that assessment as to some others was made before the foreclosure sale. Affidavits have been presented tending to support these allegations, and also that the company was unable to meet its obligations as they accrued, and insolvent, on April 2nd. The mortgage was similar in form to the one in United States v. Gargill, 1 Cir., 218 Fed. (2d) 556 [55-1 USTC 9164]. It further appears that between the dates of May 6th and August 29th the company paid the defendants $3,500 on the mortgage note, but not pursuant to its terms, the note and mortgage having been in default from the date of the first monthly payment due thereunder. The company ceased business altogether in October.

[Mortgage as Assignment]

The defendants' motion for summary judgment is bottomed upon the contention that the Gargill case establishes as matter of law that the mortgage is valid. In my opinion the facts previously mentioned, if established, and the inferences that might be draw therefrom, do not necessitate the conclusion that it was valid, at least in every respect. The first question is, could it be construed in any way as an assignment for creditors subject to governmental preference within the meaning of 31 U. S. C. 191 (R. S. 3466)? Apart from the fact that Gargill held that 191 would not apply in a bankruptcy case, the court there had a finding of fact by the referee that the mortgage was a valid one and not to be regarded as an assignment. In affirming, the court said, at p. 560, "The cases . . . cited by the government . . . involved instruments labelled 'mortgagees' but where the equity of redemption was a sham and where the 'mortgaged' property of the debtor was intended to be acquired immediately after execution by the purported mortgagee who within a short time thereafter would commence to liquidate the property and transfer the proceeds thereof to the debtor's creditors. Here the mortgagor remained in actual possession of the property and carried on its business for almost one year. . . . There is nothing in this transaction which casts any substantial doubt on the possession by this mortgagor of a substantial equity of redemption."

In the case at bar, on the figures shown in the government's affidavits, there was no possible equity of redemption, and the mortgagees could well have expected the right to foreclose to arise within a month, to be exercisable thereafter at will; the consequences of the mortgage being to permit the company to continue in business primarily for the benefit of the mortgagees, and, if it did not pay its taxes, at the expense of the government. I need not and do not decide on this motion whether the Gargill case can be distinguished in this respect, however, because there is another, and clearer ground.

[After-acquired Property]

The property foreclosed for the benefit of the defendants included, presumably, property acquired subsequent to the mortgage, by virtue of an after-acquired clause in the mortgage. The validity of this clause was not passed on the Gargill, and is open to serious question . Taylor v. Barton Child Co., 228 Mass. 126. I will not hold, particularly under the circumstances previously outlined, that the defendants could sweep up at the time of liquidation all assets acquired since the mortgage, free and clear of intervening taxes. While the Taylor case has not been applied to "single transactions" even if the future portion thereof may be rather indefinite, cf. Claycraft Co. v. John Bowen Co., 287 Mass. 225; Graustein v. H. P. Hood & Sons, Inc., 293 Mass. 207, "all furniture, fixtures, equipment, goods, wares, merchandise, supplies and all other personal property of every kind, nature and description hereafter acquired . . ., whether by way of addition, renewal or substitution" by a manufacturing concern goes far beyond any such concept. The most that can be said, on a perhaps supportable theory of equitable assignment, appears in Petition of Post, 1 Cir., 17 Fed. (2d) 555, at 556-7,

"Under the law of Massachusetts , however, a mortgage of after-acquired property is valid, although the mortgagor retains possession, and the mortgagee, who takes possession before rights of third parties have intervened and before the filing of a petition in bankruptcy, has a valid title to such property."

On that basis, as the court stated, intervening rights must be recognized. At least some of the taxes here sued for would appear to fall within that description.

I do not now decide whether the mortgage gave the defendants even as much right in the after-acquired property as the above quoted language suggests, or whether 191 has some special application to whatever title the defendants may have obtained therein on foreclosure.

Secondly, I believe that taxes withheld, which under 26 U. S. C. 3661 are "a special fund and trust for the United States," constituted a trust fund which may very well be traceable into the mortgagees, who may have had actual or constructive notice under the circumstances aforesaid that they were receiving such funds in breach of trust when payments were made to them on the note.

The motion for summary judgment will be denied.

 

 

[55-1 USTC 9354] United States of America v. Nathan Levin, et al.

In the United States District Court for the District of Maryland, Civil No. 6916, 128 FSupp 465, February 18, 1955

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

Priorities: Tax liens: Issuance of execution by judgment creditor: Mortgage liens: Enforcement of tax lien: Effect of state law.--Although a judgment is not, under the laws of Maryland, a lien on personal property until an execution has been issued thereon, that rule does not apply to liens for federal taxes. Accordingly, where such a tax lien was filed in the office of the Clerk of the Superior Court of Baltimore, it was superior to the lien of a judgment obtained by a creditor before the filing of the tax lien but on which no execution was issued. The tax lien is also superior to the judgment of a creditor entered after the filing of the tax lien even though no action was taken by the Government to enforce its lien. Further, the Government's lien had priority over a chattel mortgage recorded after the filing of the tax lien but before any other action was taken by the Government.

George Cochran Doub, United States Attorney, for plaintiff. Defendant was not represented by counsel.

THOMSEN, District Judge:

This case raises the question whether a lien for federal income taxes, filed as required by Sec. 3672, I. R. C., is superior, so far as personal property of the taxpayer is concerned, to: (1) a judgment of a Maryland court entered before such filing, but on which the judgment creditor had not theretofore caused an execution to be issued or levied on the personal property; (2) a chattel mortgage, duly executed and recorded after such filing, but before any other action had been taken by the government to enforce its lien; (3) a judgment, entered after such filing, but before any other action by the government.

Findings of Fact

The Commissioner of Internal Revenue made assessments of taxes on the income of the defendant Nathan Levin for each of the years 1945-1948. The assessment lists were received by the then Collector of Internal Revenue at Baltimore , on October 25, 1948 (for the years 1945-47) and on May 13, 1949 (for the year 1948). The Collector filed a notice of each tax lien in the office of the Clerk of the Superior Court of Baltimore City . The taxable periods, the dates of the making of the assessments, the dates of the filing of the lien notices, the amounts of taxes and interest assessed and the totals thereof, are as follows:

                         Date of         Notice of Lien

                      Assessment             filed with

                  (List received               Clerk of

Year                by Collector         Superior Court            Taxes         Interest               Totals

1945 ....       
Oct. 25, 1948
          
Jan. 17, 1949
            $ 522.01           $76.55            *$ 598.56

1946 ....       Oct. 25, 1948          Jan. 17, 1949              269.00            23.31               292.31

1947 ....       Oct. 25, 1948          Jan. 17, 1949             2787.89            74.27              2862.16

1948 ....       May 13, 1949           Aug. 11, 1949              514.00             4.68               518.68


* The taxpayer is entitled to a credit for the year 1945 of $25.00.

On the dates when the notices of lien were filed, as aforesaid, the taxpayer owned certain equipment and fixtures used in a business which he operated at 1300 North Washington Street , Baltimore , Maryland .

On January 24, 1950, the defendant Leah Levine, formerly Leah Levin, wife of the taxpayer, purchased said equipment and fixtures from the taxpayer. In order to finance the transaction, Leah Levin borrowed $12,000 from the defendant Max Cohen; and, as security for the loan, Leah Levin and her husband, the taxpayer, executed a chattel mortgage to Max Cohen on the equipment and fixtures. The loan was made and the mortgage was executed and placed on record on January 24, 1950.

On November 24, 1948 , the defendant Samuel Singer obtained a judgment for $4,016.00, and costs, against Nathan Levin in the Superior Court of Baltimore City . Samuel Singer did not cause any execution to be issued or levied on any of the personal property of the defendant Nathan Levin.

[Claims of Lien Holders]

On July 19, 1950, the defendants George Calvin Jones and Thomas DeBoufre secured a judgment against Nathan Levin, on which a balance of $291.99, with interest and costs, remains unpaid.

On October 6, 1953, the government filed its complaint against the above named defendants, and others who have since been dismissed from the case, alleging most of the foregoing facts, listing the personal property covered by the government's lien, and praying: (1) for judgment against the defendant Nathan Levin for $4,271.71, with interest and costs; (2) for an adjudication that the government has a valid lien in and upon said personal property for the income taxes assessed, and that said lien is prior in right to any and all claims of any and all other parties to this suit; (3) for the sale of said property by an officer of this court and an order that the proceeds received from such sale, or so much thereof as may be necessary to satisfy the money judgment, with interest, be applied on said judgment after payment of all costs; and (4) for other and further relief. Nathan Levin did not appear, and a judgment for $4,271.71, with interest according to law, and costs, was entered against him on December 2, 1954 . The other defendants have filed answers, demanding their respective shares of the proceeds of any sale in accordance with their alleged claims and priorities.

The Statutes Involved

Internal Revenue Code of 1939:

"Sec. 3670. PROPERTY SUBJECT TO LIEN.

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest * * *) 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. (26 U. S. C. A., 1952 ed., Sec. 3670)

"Sec. 3671. PERIOD OF LIEN.

Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time. (26 U. S. C. A., 1952 ed., Sec. 3671).

"Sec. 3672 (As amended by Sec. 401, Revenue Act of 1939, c. 247, 53 Stat. 862, and Sec. 505, Revenue Act of 1942, c. 619, 56 Stat. 798). VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT CREDITORS.

(a) Invalidity of Lien without Notice.--Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

(1) United State or Territorial laws.--In the office in which the filing of such notice is authorized by the law of the State * * *" (26 U. S. C. A., 1952 ed., Sec. 3672)

Annotated Code of Maryland (1951 Ed.), Article 17, Sec. 12 (being part of the Uniform Federal Tax Lien Registration Act):

"12. Notices of liens for taxes payable to the United States of America and Certificates discharging such liens shall be filed in the office of the Clerk of the Circuit Court of the county, and the Clerk of the Superior Court of Baltimore City , within which the property subject to such lien is situated."

Conclusions of Law

1. In Maryland a judgment is a lien on real property and leasehold interests in the county (or Baltimore City) in which the judgment is rendered or recorded under Article 26, Sec. 20, of the Annotated Code of Maryland; but it is not a lien on personal property until an execution has been issued. "A lien fastens upon personal property from the time of the delivery of the writ of fi. fa to the sheriff." Prentiss Co. v. Whitman & Barnes Co., 88 Md. 240, at 243. See also In re Day, (D. C. Md.), 22 Fed. Supp. 946, at 949. Singer's judgment never became a lien on the personal property involved in this case because he never caused an execution to be issued.

[Judgment Creditors]

Therefore, unless Sec. 3672(a) is to be literally construed to give priority to any judgment creditor of the taxpayer, whether he has a lien or not, and wherever the judgment may have been rendered, the government's tax lien must prevail over Singer's judgment. The point has been flatly decided by the Court of Appeals for the 9th Circuit in Miller v. Bank of America , N. T. & S. A., 166 Fed. (2d) 415 [48-1 USTC 9185], in which the court held that since there had been no levy of execution by the appellant-judgment creditor the tax lien of the government was paramount and superior. The court said:

"Appellant asserts that the above federal statutes should be literally construed and since the word 'lien' is omitted in connection with the term 'judgment creditor' as used therein, that it was not necessary for him to take any further action to perfect his right to the fund on deposit with the Bank of America; that the entry and docketing of the judgment was sufficient to entitle him to priority over the perfected lien of the Government in said fund.

* * *

"While the interpretation of the statute insisted upon by the appellant probably would not have absurd or shocking results, it would clearly defeat the object intended by Congress. Moreover, it would be unreasonable to conclude that the Government intended to place itself at a disadvantage in procuring a tax lien when the decisions of the courts and the very history of the legislation in question show that before the enactment of the above statutes no lien whatever existed in favor of any class or classes of creditors." (166 Fed. (2d) at 417)

Before what is now Sec. 3672 was amended in 1913, Sec. 3186 of the Revised Statutes gave the government a valid and binding lien on all property of the taxpayer everywhere, even against a bona fide purchaser or encumbrancer in good faith for value, without knowledge or notice of the existence of such a lien. United States v. Snyder, 149 U. S. 210. The legislative history referred to in the Miller case includes the report of the House Judiciary Committee, known as H. Rep. No. 1018, 62d Congress, 2d Sess. The purpose of the amendment as shown by that report was to make the lien valid against purchasers, mortgagees and judgment creditors only after notice thereof has been filed by the Collector in accordance with the statute. It was not the purpose of the amendment to give any new and unheard of preference to a judgment creditor who has not perfected his lien. Such a construction would produce absurd results; for example, in this case, if Sec. 3672 should be construed to make Singer's judgment superior to the federal tax lien, we would have a situation where Singer's judgment is superior to the federal lien, the federal lien is superior to Cohen's mortgage, but Cohen's mortgage under Maryland law is superior to Singer's judgment. Such an absurdity is avoided by following the construction of Sec. 3672 adopted by the 9th Circuit in Miller v. Bank of America , supra.

[Mortgage Lien]

2. The tax lien was filed before the Cohen mortgage was executed and before Singer's judgment was entered and is, therefore, superior to them under the principle of first in time, first in right, which is applicable here. United States v. City of Greenville , (4th Cir.) 118 Fed. (2d) 963 [41-1 USTC 9381].

Leah Levin and Max Cohen, however, contend that because under the Maryland law a judgment is not a lien on personal property until an execution is issued, the same rule should apply to a federal tax lien. They cite no authority to support this proposition, except Erie Railroad Co. v. Tompkins, 304 U. S. 64. But the doctrine of that case has no application here. The relative priority of the lien of the United States for unpaid taxes is always a federal question to be determined finally by the federal courts. United States v. Acri, 348 U. S. 211, 23 LW 4055 [55-1 USTC 9138]; United States v. Security Trust & Savings Bank, 340 U. S. 47, 49 [50-2 USTC 9492]. The state's characterization of its liens, while good for all state purposes, does not necessarily bind a federal court. United States v. Acri, supra; United States v. Gilbert Associates, Inc., 345 U. S. 361 [53-1 USTC 9291]. Neither Sec. 3670 nor the courts make any distinction between real and personal property with respect to the lien created by 29 U. S. C. A. Sec. 3670. Glass City Bank v. United States, 326 U. S. 265, at 267 [45-2 USTC 9449]; United States v. Acri, supra; Miller v. Bank of America , supra.

[Conclusion]

I find that the government has a valid lien in and upon the personal property referred to in the complaint for the income taxes assessed, together with interest thereon, and that said lien is prior in right to any and all claims of any and all other parties to this suit.

I will enter an order (which should be prepared by the U. S. Attorney) for the sale of said property by an officer of this court, the proceeds received from such sale, or so much thereof as may be necessary to satisfy the money judgment heretofore rendered against Nathan Levin herein, together with interest thereon, to be applied on said judgment after the payment of all costs. Any balance of the proceeds of such sale remaining thereafter shall be allocated among the other persons having liens on said property in accordance with their respective priorities, such priorities to be determined in the first instance by the auditor to whom the papers will be referred to state an account.

 

 

[55-1 USTC 9312]In the Matter of Freeze-In Manufacturing Corporation, a Michigan corporation, Bankrupt

In the District Court of the United States for the Eastern District of Michigan, Southern Division, No. 33400, January 10, 1955

[1939 Code Sec. 3670--substantially similar to 1954 Code Sec. 6321]

Priority of U. S. tax liens: Bankruptcy Act: Personal property taxes: General rule of priority in time applied.--The priority given to liens for taxes owed to the United States by an insolvent debtor applies as well in bankruptcy matters. They are not subordinated to the express superiority given liens under local law which establishes a city's tax as a first and prior lien. Accordingly, tax liens of the United States , which were also prior in time to the liens asserted by the City of Detroit for personal property taxes, were properly ordered first satisfied out of the bankrupt's assets after payment of admin istration expenses. In the absence of express provisions in the Bankruptcy Act, the general rule of "first in time, first in right" applies in this case without reference to the 1952 amendment to that Act.

William Warren, 885 East Grand Boulevard , Detroit 7, Mich. , for petitioner. McKenzie and Katcher, referees. Louis F. Davis, trustee.

Opinion

LEVIN, District Judge:

The City of Detroit has filed a petition to review the referee's amended order of distribution, based upon his ruling that in the absence of an express statutory provision in the Bankruptcy Act for the order of satisfaction of tax liens, such liens were to be satisfied in the order of time at which they became effective.

[The Facts]

The tax liens of the United States arise under 26 U. S. C. 3670, (1952) (now 26 U. S. C. 6321 (1954)). The liens of the City of Detroit for unpaid personal property taxes arise under Sections 1 and 26 of Chapter IV of Title VI of the Charter of the City of Detroit . These liens were not accompanied by possession of the personal property and were, therefore, postponed under 67(c)(1) of the Bankruptcy Act (11 U. S. C. 107(c)(1)) in payment to the debts specified under clauses (1) and (2) of 64(a) of the Act, (11 U. S. C. 104(a)).

After the payment of admin istrative expenses and wages, $633.51 of the bankrupt's assets remained to be applied in satisfaction of liens of taxing authorities. Liens of the United States in the amount of $535.39 were prior in time to any lien asserted by the City of Detroit . These liens were ordered first satisfied. The remaining assets of the bankrupt, $98.12, were ordered paid in satisfaction of the 1950 personal property tax lien of the City of Detroit , the next effective lien in time.

[Opinion]

The applicable Michigan statute provides:

". . . The personal property taxes hereafter levied or assessed by any city or village shall be a first lien, prior, superior and paramount to any other claims, liens and encumbrances whatsoever upon the personal property assessed as herein provided . . ." (C. L. 1948 211.40; M. S. A. 7.81).

It is the City's first contention that the specific language of the State statute is effective to give priority of payment in bankruptcy to the City's lien, notwithstanding the existence of earlier Federal tax liens. The City argues that the principle of "first in time, first in right" as followed in United States v. City of New Britain et al., 347 U. S. 81 [54-1 USTC 9191], (not a bankruptcy case), does not apply to bankruptcy proceedings.

In support of this contention the City asserts that R. S. 3466 (31 U. S. C. 191), giving absolute priority to the payment of indebtedness owed to the United States by an insolvent debtor, does not apply in bankruptcy matters. The City infers that the priorities given liens of the Federal government under 26 U. S. C. 3670, United States v. Security Trust & Savings Bank, Executor, et al., 340 U. S. 47 [50-2 USTC 9492], are also to be disregarded in bankruptcy, or at least in the absence of express provisions in the Bankruptcy Act are to be subordinated to the express superiority given State liens under State lien law. The City concludes by asserting that, since the Bankruptcy Act is silent as to the order of satisfaction of tax liens, the Court must look to the applicable State law. The Court is therefore urged to apply the State statute, cited above, which establishes the City's tax lien as ". . . a first lien, prior, superior and paramount . . ."

[Time of Effect of Lien]

I take the view that the principle asserted by the United States and adopted by the referee is correct. The United States , conceding at least for the purpose of this case that the liens are of equal dignity, contends only that such liens should be satisfied in the order of their time of effect.

In United States v. City of New Britain et al., supra, the Supreme Court stated:

"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, 10(b). 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."

The principle of that case should apply here. In the absence of express provisions in the Bankruptcy Act for the order of satisfaction of liens, the rule of "first in time, first in right" should apply. Congress no doubt had this cardinal principle in mind. See United States v. Sampsell et al., 153 Fed. (2d) 731 [46-1 USTC 9186].

The argument asserted by the City would permit, by force of a State statute, the City's lien to displace a prior existing Federal lien. As stated in the New Britain case, supra:

"Obviously, the State cannot on behalf of the City impair the standing of the federal liens, without the consent of Congress. Michigan v. United States, 317 U. S. 338, 340 [43-1 USTC 9225]; United States v. Oklahoma, 261 U. S. 253, 260; United States v. Snyder, 149 U. S. 210, 214."

[Bankruptcy Act Amendment]

The United States urges that under the provisions of the 1952 amendment to the Bankruptcy Act, 67(c)(2) (66 Stat. 427; 11 U. S. C. 107(c)(2)) the entire assets of the bankrupt should be paid to satisfy Federal tax liens. The amendment provides as follows:

". . . and (2) the provisions of subdivision b of this section to the contrary notwithstanding, 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 . . ."

I am of the opinion that the order of distribution in this case should be properly entered without reference to the 1952 amendatory provision. The petition for bankruptcy was filed April 3, 1951 . The amendatory act became effective October 7, 1952 (66 Stat. 438). The statutory liens for taxes had become effective and vested prior to that date. The amendatory provision should not be construed to have retrospective effect unless such is compelled by the express language of the statute. In Ginsberg, et al. v. Lindel, 107 Fed. (2d) 721, an analogous case was presented to the Eighth Circuit Court of Appeals. The issue therein involved the applicability of the 1938 amendment to the Bankruptcy Act. In determining whether section 64a of the amendatory act should be construed to apply retrospectively, the Court stated:

"There is nothing contained in the Chandler Act to indicate that Congress intended that section 64, sub. a, should be construed retrospectively; and in the absence of explicit language requiring such construction we are not disposed so to construe it, especially when to do so would result in depriving a citizen of a vested right. It is the general rule that a retrospective operation will not be given to a statute which interferes with antecedent rights, unless such be the unequivocal and inflexible import of its terms and the manifest intention of the legislature. U. S. Fidelity & Guaranty Co. v. United States, to Use of Struthers Wells Co., 209 U. S. 306, 314, 28 S. Ct. 537, 52 L. Ed. 804; Louisville Woolen Mills v. Johnson, 6 Cir., 228 Fed. 606; Holt v. Hendley, 232 U. S. 637, 34 S. Ct. 459, 58 L. Ed. 767; Jones v. Fidelity & Columbia Trust Company, 6 Cir. 73 Fed. (2d) 446; Western Pacific R. Corp. v. Baldwin, 8 Cir., 89 Fed. (2d) 269; Home Indemnity Company v. State of Missouri , 8 Cir., 78 Fed. (2d) 391."

It should be noted that the provision regarding the effect of the 1952 amendatory act, Sec. 56 (66 Stat. 438), is worded without material difference from the comparable provision of the 1938 amendment, Sec. 6 (52 Stat. 940). We think that the reasoning of the above-cited case applies with equal validity to the present case. See also 4 Collier on Bankruptcy, 14 Ed., 67.20(7); In re Brown, 27 Fed. Supp. 807; In re Edmunds, 27 Fed. Supp. 196.

The amended order of distribution of the referee is affirmed.

 

 

[55-1 USTC 9294]In the Matter of Pollard Bros., Ltd., a corporation, Debtor

In the United States District Court for the Southern District of California, Northern Division, No. 7069-ND-Bkcy, 128 FSupp 818, January 14, 1955

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

Lien for taxes: Validity against third parties: Bankruptcy.--In this Chapter X proceeding under the Bankruptcy Act the United States filed a claim for taxes and for interest thereon to the date of payment and for penalties. Referee allowed the claim with interest thereon and penalties to the date of bankruptcy and disallowed interest and penalties thereafter. The Court directed that the referee's order be modified, because the taxes had become a lien, so that interest and penalties accruing after bankruptcy would be allowed to the extent that the estate is fully solvent after the allowance of exemptions and the payment of the principal amount of all claims.

Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, 600 Federal Building, Los Angeles 12, Calif., for petitioner, United States. Davis , Guerard & Barrett, 1110 Security Bank Building , Fresno 21, Calif. , for respondent, trustee.

Memorandum on Review of Order of Referee Disallowing Interest

HALL, District Judge:

In this Chapter X proceeding under the Bankruptcy Act, the United States filed a claim for taxes and for interest thereon to the date of payment and for penalties. The Referee allowed the claim with interest thereon and penalties to the date of bankruptcy and disallowed interest thereafter and the penalties included in the claim.

The same rule applies to tax claims under Chapter X proceedings as applies in general bankruptcy proceedings. U. S. v. Edens (4th Cir.) 189 Fed. (2d) 876 [51-1 USTC 9344], affirmed per curiam 342 U. S. 912 [52-1 USTC 9139].

The United States relies principally upon an opinion of this court filed March 31, 1950 in the Matter of Ridgecrest Development Company, Bankrupt, Docket No. 6354-ND, (S. D. Calif., 1950), 1951 CCH Standard Federal Tax Reporter, Par. 9242; 1951 P-H Federal Tax Service, Par. 72,384, wherein I, as judge of this court, allowed interest on the lien claim of taxes to the United States subsequent to bankruptcy. At that time City of New York v. Saper, 336 U. S. 328 [49-1 USTC 9198] was before me. It holds that interest on the tax claims terminates at the date of bankruptcy but nowhere in the opinion of the Supreme Court or of the lower courts does it appear that the claim for taxes had proceeded to the point of becoming a lien under 3670-3671 of Title 26 USCA or that the tax lien of the United States had been recorded under any state law as permitted by Section 3672, Title 26 USCA subsection (1). 1

In the Ridgecrest Development Company case the lien had been perfected as provided in 26 USCA 3670 and 3671 2 and had been recorded under the terms of 26 USCA 3672 and California Government Code Section 27330. 3

It therefore appeared to me that the Ridgecrest case was to be distinguished from the facts in the Saper case, supra, in that in the Ridgecrest case there was a lien and it had been perfected under both state and federal law.

In the instant case the same situation prevails; compliance has been had with 26 USCA 3670, 3671 and 3672 and California Government Code 27330.

[ Beecher Followed]

Since the decision in the Ridgecrest case the Ninth Circuit decided the case of Beecher v. Leavenworth State Bank (1951) 192 Fed. (2d) 10, certiorari denied 343 U. S. 953. In that case Chelan County , Washington , had a claim based on unpaid taxes and assessments which by Washington statute became a lien on the assessed property of the debtor. Interest until date of payment of that claim of lien was allowed by the district court. The Ninth Circuit, after reviewing the history of the disallowance of interest on secured debts, disallowed the interest after bankruptcy, conditionally. Its conclusion on the subject was that the lien claim of Chelan County for interest after bankruptcy was allowed "to the extent that the estate is fully solvent after the allowance of exemptions and payment of the principal amount of all claims."

The lien of the United States for taxes in the instant proceeding has no greater dignity than the lien for taxes of Chelan County in the Beecher case, supra.

While the Beecher case, supra, was a farmer-debtor proceeding, that is no reason for applying a different rule as to tax liens therein than in general bankruptcy proceedings or Chapter X proceedings. This is particularly so in view of the fact that the rule is also applied to Chapter XI proceedings. U. S. v. General Engineering and Manufacturing Co. 8th Cir. 1951) 188 Fed. (2d) 80 [51-1 USTC 9262], affirmed 342 U. S. 912 [52-1 USTC 9139].

It is noted that the referee disallowed not only the interest but the penalties. The same reasoning that supports the cutting off of interest at the date of bankruptcy would apply with equal force to penalties accruing after the date of bankruptcy. This is so for two reasons: first, because by Section 3670 Title 26 USCA, interest and penalties become a part of the tax; secondly, because the scheme of priority set forth in Section 104 of Title 11 USCA segregates taxes owing the United States , or any state or any subdivision thereof, from all other types of debts. Hence neither penalties nor interest accruing on a tax lien of the United States subsequent to bankruptcy is entitled to consideration under subdivision 5 of Section 104 of Title 11 USCA allowing as the fifth priority "debts owing to any person, including the United States, who by the laws of the United States is entitled to priority * * *." As said in Missouri v. Ross (1936) 299 U. S. 72 at page 76 "The contention is that unpaid taxes constitute debts, and therefore fall within the seventh paragraph. But this conclusion must be rejected; for conceding that texes are debts, they are carved out of the general provisions of paragraph (7) and put in a special class under paragraph (6) and thus fall within the rule that special provisions prevail over general ones which, in the absence of the special provisions, would control." 4

[ Ridgecrest Overruled]

For the foregoing reasons I consider the doctrine which I adopted and followed in the Ridgecrest Development case, supra, as overruled, and direct that the order of the referee be modified so that interest and penalties accruing after bankruptcy are disallowed except as to the extent that the estate is fully solvent after the allowance of exemptions and the payment of the principal amount of the claims, and as so modified the decision of the referee is affirmed.

This rule seems to be in accord with rulings from the other circuits. Sword Line, Inc. v. Industrial Commissioner of New York (2nd Cir. 1954) 212 Fed. (2d) 865, page 870; In re Industrial Machine & Supply Co. (3rd Cir. 1953 W. D. Pa.) 112 Fed. Supp. 261; Commonwealth of Massachusetts v. Thompson (1st Cir. 1951) 190 Fed. (2d) 10, Certiorari denied 342 U. S. 918.

Order Modifying Order of Referee Disallowing Interest and Penalties (March 1, 1955)

The above-entitled matter having come on for hearing on December 14, 1954, on a Petition for Review by the United States of America, Laughlin E. Waters, United States Attorney for the Southern District of California, and Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, for Petitioner and Davis, Guerard & Barrett, attorneys for Respondent Trustee, the matter having been briefed, argued, and submitted, and the Court having considered the same, and having on January 14, 1955, filed its Memorandum on Review of Order of Referee Disallowing Interest, now therefore,

IT IS HEREBY ORDERED, ADJUDGED, and DECREED that the Order of Referee of January 8, 1953 fixing the Amount of the Claim of the Director of Internal Revenue is affirmed or modified in the following respects:

1) The Fifth Amended Claim of the United States of America for taxes, Penalties and Interest, is allowed to the extent of $35,245.85, and

2) That of the said Fifth Amended Claim in the amount of $36,873.90, the disallowance by the Referee of the following is affirmed:

(a) The amount of an overassessment as per letter from the Commissioner of Internal Revenue submitted in evidence at the aforesaid hearing in the amount of $171.73;

(b) Additional overassessment in the amount of $174.19.

3) That interest and penalties, included in said claim of $36,873.90, accruing after bankruptcy are disallowed, except as to the extent that the estate is fully solvent after the allowance of exemptions and the payment of the principal amount of all claims, and such conditionally allowed items are as follows:

(a) Interest on tax accounts

secured by liens from October 25,

1950 to August 15, 1952 on tax

of $9,447.34 and on penalty of

$470.78, in the total amount of ......         $1,023.70

(b) Penalties accruing after

bankruptcy ...........................              None

                                               $1,023.70

 

4) That the Order of the Referee in these respects is modified and the following claims of Petitioner, United States of America , are allowed:

1) Penalties secured by tax

liens filed prior to bankruptcy ...........         $ 470.78

2) Interest up to date of bankruptcy,

October 25, 1950, on

claims secured by tax liens ...............           505.84

Total--additionally allowed

claims ....................................         $ 976.62

 

5) That the claims of Petitioner, United States of America, additionally allowed in paragraph 4, herein, in the amount of $976.62, be paid forthwith by the Trustee.

1 Sec. 3672 "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

(1) In the office in which the filing of such notice is authorized by the law of the State * * * in which the property subject to the lien is situated, whenever the State * * * has by law authorized the filing of such notice in an office within the State * * *"

2 Sec. 3670 "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."

Sec. 3671 "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

3 "Notice of liens for Internal Revenue Taxes. Notice of liens for Internal Revenue Taxes payable to the United States and certificates discharging such liens may be filed in the office of the County Recorder of the County within which the property subject to the lien is situated."

4 Since the decision in that case the applicable section of the Bankruptcy Act (11 USCA 104) has been amended so that what was paragraph 7 thereof at that time is now paragraph 5 relating to debts entitled to priority, and what was paragraph 6 at that time is now paragraph 4 relating to taxes.

 

 

[55-1 USTC 9291]In the Matter of John Urmos and Julia Urmos, individually and as copartners trading as Urmos Cleaners and Tailors, Bankrupt

In the United States District Court for the Eastern District of Michigan, Southern Division, In bankruptcy. No. 33,099, 129 FSupp 298, February 9, 1955

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

Lien for taxes: Bankruptcy: Penalties.--The referee in bankruptcy disallowed delinquency penalties which were assessed and included in tax liens perfected and filed prior to bankruptcy. Upon the Government's petition the Court held that such penalties were allowable under Sec. 57j of the Bankruptcy Act as amended, the 1952 amendment having effected no substantive change in prior law.

John McNeil Burns, Penobscot Building , Detroit 26, Mich. , for petitioner. Joseph J. Oldain, for trustee. McKenzie & Katcher, for referee.

Opinion

PICARD, District Judge:

This petition is filed by the United States to review an order of the Referee in Bankruptcy which disallowed delinquency penalties properly assessed and included in a valid lien perfected and filed prior to bankruptcy.

Findings of Fact

The facts are uncontroverted.

On June 16, 1950 and September 15, 1950 , petitioner, pursuant to Title 26 U. S. C., Sections 3670, 3671, and 3672 perfected tax liens 54000 and 55009, respectively, against real property of bankrupts securing taxes and penalties as follows:

(a) Withholding taxes and interest for third and fourth quarters of 1948, and first, second, third, and fourth quarters of 1949, plus penalties thereon in the amount of $572.41; and

(6) Employment taxes and interest for the fourth quarter of 1948, first, second, third, and fourth quarters of 1949, plus penalties thereon in the amount of $148.93.

Total penalties $721.34.

Later, October 20, 1950 , an involuntary petition in bankruptcy was filed against bankrupts, individually and as copartners, and order of adjudication entered June 11, 1951 .

The only question before this court relates to the above penalties of $721.34, which the Referee held were not allowable because of Section 57j of the Bankruptcy Act as amended. To this order, petitioner objects.

Conclusions of Law

Title 26 USC 3612(d) covers "penalties" and upon failure of a taxpayer to file a return as prescribed by law the Commissioner must impose the penalty. National Contracting Co. v. Commissioner of Internal Revenue, 105 Fed. (2d) 488 [39-2 USTC 9614]. Thus penalty additions to the bankrupts' taxes so imposed must be allowed unless precluded by 57j of the Bankruptcy Act.

The controversy is not novel. The precise question was decided in Commonwealth of Kentucky v. Farmers Bank & Trust Co., 139 Fed. (2d) 266 and In Re Knox-Powell-Stockton Co., 100 Fed. (2d) 979 [39-1 USTC 9277]. In both cases the court held that Section 57j did not preclude inclusion of tax penalties where a lien existed to support and include the penalty at the time of adjudication. But 57j has been amended since the above cases were decided and it was because of the amendment that the Referee held that Congress had manifested a clear intent to exclude tax penalties as allowable against the estate of a bankrupt taxpayer.

Let us examine 57j as "it was" and as "it is" today.

Prior to the 1952 amendment Section 57j read as follows:

"Debts owing to the United States or any State or 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 thereon according to law." (Italics supplied.)

After amendment the section reads:

"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." (Italics supplied.)

[No Change Made by 1952 Amendment]

After careful consideration and thorough scrutiny of Section 57j, we conclude that the 1952 amendment does not manifest a clear congressional intent to make a substantial change. It merely clarifies what had been written before since the substitution of the phrase "on the amount of such loss" for the word "thereon" now makes it more clear that interest is to be allowed only on the amount of the loss sustained as a result of the taxpayer's delinquency. Under these facts part of the "loss sustained" is the penalty. No doubt Congress was mindful of the construction placed on Section 57j by In Re Knox-Powell-Stockton Co. and Commonwealth of Kentucky v. Farmers Bank & Trust Co., supra, which did not bar penalties supported by liens perfected prior to bankruptcy. This conclusion is strengthened by Grimland v. United States, 206 Fed. (2d) 599 [53-2 USTC 9537], decided after the 1952 amendment, where at page 601, the court said:

"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."

New York v. Saper, 336 U. S. 328 [49-1 USTC 9198], decided in 1949, and also relied upon by the Referee is not in point. In that case the Supreme Court merely indicated that under 57j, losses sustained and interest accrued thereon, are allowed only to the day of bankruptcy. In the case at bar, petitioner does not seek allowance of any penalty or interest accruing subsequent to bankruptcy. Therefore, New York v. Saper, supra, is not controlling but may be said to be in complete harmony with the interpretation placed on Section 57j by our own Court of Appeals in Commonwealth of Kentucky v. Farmers Bank & Trust Co., supra. That decision is binding on this court. If Congress had not been satisfied with the interpretation placed in section 57j as enunciated by the court at the time it amended 57j, undoubtedly Congress would have said so. The amendment has nothing to do with such interpretation.

Petition granted and order in conformity with this decision will be issued.

 

 

[55-1 USTC 9187]In the Matter of Harry G. Litt, Individually and Trading as People's Market, Bankrupt

In the United States District Court for the Eastern District of Pennsylvania, In Bankruptcy Cause No. 23458, 128 FSupp 34, January 27, 1955

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

Tax liens: Priority over landlord's distraint.--The Government's lien for taxes had priority over a landlord's distraint under Pennsylvania law. The landlord was held to be neither a purchaser nor a judgment creditor within the meaning of 1939 Code Sec. 3672(a). U. S. v. R. P. Scovil, Sup. Ct. , 55-1 USTC 9137, followed.

W. Wilson White , United States Attorney, Francis Ballard, Assistant United States Attorney, for United States . Benjamin H. Levintow, 1413 Market Street National Bank Building, Philadelphia 7, Pa. , for landlord.

Opinion

CLARY, District Judge:

Harry G. Litt, bankrupt herein, trading as People's Market, conducted a retail food store at premises 7145-47 Germantown Avenue , Philadelphia , Pennsylvania , under the terms of a written lease dated August 1, 1947 , providing for a yearly rental of $5,500, payable in monthly sums of $458.33 in advance on the 1st day of each month. As of April 30, 1951 the bankrupt was in arrears in rent for three full months, being the rent due February 1, 1951 , March 1, 1951 and April 1, 1951 , in a total amount of $1,374.99. On that date, April 30, 1951 , the landlord caused a distraint to be made, the Constable distrained and levied upon and seized all of the goods and chattels on the demised premises. On May 5, 1951, following the distraint, the bankrupt paid the landlord, on account, one month's rent, which was credited against the distrained amount and reduced the said amount to $916.66. The distraint remained in force and effect until a petition in bankruptcy was filed on May 14, 1951 , after which time the goods and chattels came into the possession of the Bankruptcy Court. In the bankruptcy proceedings the landlord claimed a preference for the amount of the distraint and was supported in his claim by the Referee. The United States brought a Certificate of Review challenging the correctness of the award and claimed it was entitled to preference over the landlord's claim on its claim for unpaid taxes, which claim was disallowed by the Referee.

The bankrupt, in the year previous to bankruptcy, fell in arrears in the payment of certain income withholding and Federal insurance contributions due for the third quarter of 1950. When these taxes became delinquent the Commissioner included them in an assessment list which was received at the office of the Collector (now Director) of Internal Revenue for the First Collection District of Pennsylvania on December 26, 1950 . The amount assessed was $3,286.23, subsequently reduced by payment on account to $3,161.23. After receiving the assessment list, the Collector's office sent its first notice (Form 17) to the bankrupt by mail on January 5, 1951 ; the second notice (Form 21) was mailed to the bankrupt by the Collector on February 9, 1951 , and a warrant of distraint (Form 69) was issued on March 7, 1951 . The undisputed facts indicate that the last document, the warrant of distraint, was never served. The balance of the fund realized from the public sale of the assets by the Receiver in bankruptcy is not sufficient to pay and discharge both the claim of the landlord and the claim of the Government, the amount available for that purpose being approximately $3,000.

[Referee Holds for Landlord]

The contention of the landlord before the Referee was that under the Internal Revenue laws and under the laws of the Commonwealth of Pennsylvania he had obtained a lien prior to bankruptcy against specific goods and chattels of the bankrupt (a specific lien) to which lien the claim of the Director of Internal Revenue (a general lien holder) was subordinated; further, that since he had distrained prior to bankruptcy, he should also be considered a judgment creditor or a purchaser and thus fall within the protection of Section 3672(a) of the Internal Revenue Code. Despite vigorous opposition on the part of the United States Attorney, the Referee sustained all contentions of the landlord and awarded the landlord his claimed preference over the claim of the United States . It should be stated at this point that the award made by the Referee was prior to the decision of the United States Supreme Court in the case of United States of America v. R. P. Scovil, et al., No. 35, October Term, 1954, 23 U. S. Law Week 26, 348 U. S. 218, decided January 10, 1955 [55-1 USTC 9137], and hereafter referred to.

The applicable provisions of the Internal Revenue Code under which this case must be decided are Sections 3670, 3671 and 3672(a) 1 which read as follows:

"3670. Property subject to lien.

"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."

"3671. Period of lien.

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

"3672(a). Invalidity of lien without notice.

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

"(1) Under State or Territorial laws.

"In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice; * * *"

As stated by the Referee in his opinion, this precise question had, at the time he filed the opinion, never been passed upon in any reported Federal case, either in this district or elsewhere. Giving effect to the general principles of law covering priority of liens, namely, that a specific lien is superior to a general lien, he concluded that the claimed preference of the landlord should be granted. He held, in effect, that since there was a valid distraint outstanding at the time of bankruptcy, the amount due under the distraint never actually came into the legal possession of the trustee in bankruptcy. Another basis of the Referee's decision was that under common law and the landlord and tenant law of Pennsylvania a landlord who distrains on the goods of a tenant and no action is taken by the tenant within five days to replevy the goods is permitted to expose the goods to public sale. Such sale carries good title under Pennsylvania law in the same degree that a sale under judicial process would carry good title. To that extent, at least, since the rights of the landlord approximate the rights of the judgment creditor, the Referee concluded that the landlord could be considered a judgment creditor.

[Scovil Case Analyzed]

The precise question involved in this case has been settled by the Supreme Court of the United States . The facts of the Scovil case, supra, which are very similar to the facts of the instant case, are reported at -- S. C. --, 78 S. E. (2d) 277 (1954) [53-2 USTC 9605]. The case involved a distress under South Carolina law by a landlord on a corporate tenant's assets for arrearages in rent of an insolvent tenant made before the appointment of a receiver because of insolvency. The lower court held that the landlord's lien was perfected under the laws of South Carolina , that the amount specified in the distraint was not available to the receiver to pay other debts of the tenant, and rejected the Government's claim of preference. The chronological sequence in that case was as follows. The assessment lists involving the claimed taxes of the Government were received by the Collector on March 19, 1951 , May 24, 1951 , August 29, 1951 , December 3, 1951 , February 23, 1952 and February 28, 1952 . The landlord's distress was filed on April 7, 1952 in the Courts of Common Pleas, South Carolina . The next day a Receiver was appointed for the business and on April 10, 1952 the Collector filed the aforesaid liens in the proper office for the recording of liens in the State Court of Greenville County, South Carolina, the business situs of the bankrupt. The Supreme Court of South Carolina held that since the lien had been perfected under State law, the Government could have no greater right in the property in the hands of the Receiver than the insolvent. It further held that the Government liens were not valid as against the landlord until properly recorded under the provisions of Section 3672(a). The United States Supreme Court rejected these contentions and reversed.

The only difference to be noted in the facts of the Scovil case, supra, as compared with those in the instant case is that under South Carolina law the tenant had a five day period to recover the proeprty by posting bond in the amount of the distraint. The decision of Mr. Justice Minton noted these facts and concluded that the claimed lien actually was in the nature of a caveat of a more perfected lien to come, since the tenant had the five day period from April 7 to enter the bond, which period had not expired when the Collector recorded his liens. The law of Pennsylvania has no comparable provision although it does provide that within five days from a distraint the tenant may, under the common law writ of replevin, recapture his goods by posting bond. 68 P. S. 250,306, Act of April 6, 1951 , P. L. 69, Art. III, Sec. 306. Also, in the instant case, there is no showing that the Collector ever recorded the liens in the Courts of Common Pleas of Philadelphia County. Upon careful analysis of the Scovil case, however, I do not consider that these differences in fact are controlling and a different result warranted.

[Landlord Was Not Purchaser or Judgment Creditor]

The problems faced by the landlord in this case, as properly suggested in the Government's brief, are that he must either show that the exception clause of Section 3672(a) is broader than it appears on a literal reading of the section or that, as a distraining landlord, he falls within one of the four categories there listed. An examination of the legislative history of Sections 3670, 3671 and 3672 makes it clear that Congress originally intended the lien of the government for unpaid taxes to be paramount upon all property and rights to property, real or personal, belonging to the taxpayer in default. The earliest tax lien Act was that of July 13, 1866 , 14 Stat. 107, amended by the Act of March 1, 1879 , 20 Stat. 331. That Act fixed the time of the lien as the time when the assessment list was received by the Collector of the district. The decision of the Supreme Court of the United States in United States v. Snyder, 149 U. S. 210 (1892), interpreted the aforementioned section, R. S. 3186, and held that the Federal tax lien was so broad as to continue to attach to property even in the hands of a bona fide purchaser who had no notice of the existence of the lien. To remedy this obviously harsh and unfair situation, Congress on March 4, 1913 , at 37 Stat. 1016, amended the section by providing that the lien should not be valid against any mortgagee, purchaser or judgment creditor until notice thereof had been filed in accordance with other provisions of the amendment. It was not until the Act of June 29, 1939, 53 Stat. 882, that the word "pledgee" was included among those protected to relieve another obviously unfair situation; see the concurring opinion of Mr. Justice Jackson in United States of America v. Security Trust and Savings Bank, 340 U. S. 47, 51 (1950) [50-2 USTC 9492]. It is clear, therefore, that the protective provisions of Section 3672(a) are to be strictly, rather than liberally construed as contended for by the landlord in this case. It is equally clear that in order to be protected, the claimant must show that he is within the protection of one of the four classes named, Filipowicz v. Rothensies, 43 Fed. Supp. 619 (D. C. E. D. Pa.) (1942) [42-1 USTC 9300].

With respect to the contention that the landlord in this case can be considered a judgment creditor, the case of United States v. Gilbert Associates, Inc., 345 U. S. 361 (1952) [53-1 USTC 9291], is controlling. In that case, a New Hampshire town had filed a tax assessment under New Hampshire law against certain property which assessment under New Hampshire law was "in the nature of a judgment". The court held that the words "judgment creditor" in Section 3672(a) were used by Congress in the usual conventional sense of a judgment of a court of record. I can see no difference in the position of the landlord in this case and the claimant in the Gilbert Associates, Inc. case, supra. The landlord in this case was not a judgment creditor in the usual conventional sense of a judgment of a court of record.

As to the contention that the landlord in this case might be "a purchaser" under the facts of this case, which contention seems to have been given considerable weight by the Referee in his opinion, the opinion of Mr. Justice Minton in the Scovil case, supra, is completely dispositive. There, as here, the lower court substantially adopted that position. Mr. Justice Minton interpreted the word "purchaser" within the meaning of Section 3672(a) as one who acquires title for a valuable consideration in the manner of vendor and vendee and that the landlord in that case, who had--as here--distrained for rent, was not and could not be a purchaser under the terms of that section. It is not contended in this case that the landlord is either mortgagee or pledgee. Consequently, the landlord's lien must be held subordinate to the general lien of the United States obtained under the provisions of Section 3670. It follows, therefore, that the award of the preference to the landlord over the Government's claim must be set aside and the action of the Referee reversed.

An appropriate order will be entered.

1 Sections 3670, 3671 and 3672(a) were reenacted as Sections 6321, 6322 and 6323(a) of the Internal Revenue Code of 1954, Public Law 591, approved August 16, 1954 .

 

 

[54-2 USTC 9705]In the Matter of Ben Green, Bankrupt

In the United States District Court for the Northern District of Alabama, Southern Division. In Bankruptcy, No. 36385, 124 FSupp 481, September 30, 1954

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

Lien for taxes: Priority of lien: Trustee in bankruptcy.--

A trustee in bankruptcy is not a judgment creditor within the meaning of Sec. 3672(a), and, therefore, the lien for federal taxes is valid even though notice thereof had not been filed by the Collector.

Hogan & Calloway, Comer Bldg., and Parsons, Wheeler & Rose, Massey Bldg., Birmingham , Alabama , attorneys for bankrupt. McGowan & McGowan, Massey Bldg., Birmingham , Alabama , attorneys for trustee. A. B. Cousins, asst. counsel Internal Revenue Service, Birmingham , Alabama , for the United States .

Opinion

LYNNE, Chief Judge:

Here for review on his certificate is an order of Honorable Stephen B. Coleman, Referee in Bankruptcy, dated June 17, 1953 , pertaining to the distribution of funds of the bankrupt estate to apply on recorded tax liens in favor of State Department of Industrial Relations of Alabama . Insisting that the referee erred in avoiding its lien for taxes, established by 26 U. S. C. A. 3670, the United States stands squarely on the position that a trustee in bankruptcy is not a judgment creditor within the meaning of 26 U. S. C. A. 3672(a). Without attempting either to review or to analyze the opinions of both trial and appellate courts which are in irreconcilable conflict, this court is of the opinion that the United States is right in its contention.

Judicial gloss placed upon the words "judgment creditor" as employed by Congress in Section 3672 conclusively establishes that such words were used "in the usual, conventional sense of a judgment of a court of record." United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC 9291], at page 364. See concurring opinion of Mr. Justice Jackson in United States v. Security Trust and Savings Bank, 340 U. S. 47 [50-2 USTC 9492], at pase 52.

Concededly, neither of these cases was dealing with bankruptcy. If the trustee in bankruptcy in the instant proceeding (wherein there is no conventional judgment creditor to whose rights the trustee would succeed by operation of Section 70(e) of the Act) is endowed with the status of a judgment creditor, it must be because of the provisions of Section 70(c) of the Bankruptcy Act (11 U. S. C. A. 110(c)), which read as follows:

"The trustee may have the benefit of all defenses available to the bankrupt as against third persons, including statutes of limitation, statutes of frauds, usury, and other personal defenses; and a waiver of any such defense by the bankrupt after bankruptcy shall not bind the trustee. The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as of such date with all the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists."

No one may doubt the authority of Congress to constitute a trustee in bankruptcy a judgment creditor with reference to federal tax laws. Clear and appropriate language to that end might have been included in Section 70(c) of the Act, but obviously was not. Or, Congress might have added trustees in bankruptcy to the categories of persons described in 26 U. S. C. A. 3672(a), as against whom the lien created by 26 U. S. C. A. 3670 is invalid until notice thereof has been filed by the collector as required by law, but it did not. Nor did it include the trustee in bankruptcy in the corresponding section 6323 of the Internal Revenue Code of 1954, 68A Stat. 779.

Nothing herein is intended to say that a trustee in bankruptcy does not occupy the fictitious position of judgment creditor in opposing the claims of conditional vendors and other creditors holding improperly filed or unfiled instruments of security. The holding there is circumscribed by the point for review and is confined to the proposition that a bankruptcy trustee is not a "judgment creditor" within the purview of 26 U. S. C. A. 3672.

Sociological and economic problems of tremendous scope immediately suggest themselves if this position be sound. However, they address themselves to Congress, and to the legislative process is committed the task of deciding whether in many bankruptcy cases all of the asseets of the estate are to be distributed to federal and state taxing authorities to the exclusion of practically all other creditors, including wage earners (where real estate is involved).

An order will be entered remanding this cause to the Referee in Bankruptcy for further proceedings herein not inconsistent with this opinion.

 

 

[54-2 USTC 9671]Kel Weatherstrip Company Inc., a Corporation, Plaintiff v. Gordon Rankin, Gloria Rankin, The First National Bank of Anchorage, and The United States of America, Defendants

In the United States District Court for the District of Alaska, Division Number Three, at Anchorage , No. A-9450, 124 FSupp 555, October 5, 1954

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

Liens: Priority of creditors: Mechanic's lien.--Where notice of claim of a mechanic's lien was filed July 8, and the claim of lien of the government for unpaid income taxes was filed June 15, the government's lien had priority. Until the claim was filed, the mechanic's lien was inchoate and inferior.

Boyko & Martin for Rankins. Cuddy, Cuddy & Dunn for First National Bank of Anchorage . William Plummer, United States Attorney, and Clifford J. Groh, Asst. United States Attorney, for United States of America .

Opinion

FOLTA, District Judge:

This is a suit for the foreclosure of a mechanic's lien under Secs. 26-1-1 et seq., A. C. L. A. 1949, for labor and material furnished for the modernization of the defendants Rankin's home, in the sum of $1397.67, and to recover the sums of $500 allegedly due under the contract pursuant to which such labor and materials were furnished, and $550.70 which the plaintiff paid as an indorser of the note executed by the Rankins to the plaintiff concurrently with the execution of the contract.

It has been stipulated that the mortgage lien of the defendant First National Bank is entitled to priority. The lien of the defendant, United States , for unpaid income taxes of the Rankins for the year 1951, however, remains for adjudication. The Rankins contend that since the plaintiff is only secondarily liable on the note, its payment of $550.70 was as a volunteer and that hence they are not liable to the plaintiff. By way of counterclaims, they allege that the plaintiff defaulted in the performance of the work agreed to be done, to their damage in the sums of $1000, the estimated cost of completion, $2100 for loss of rentals as a direct result of the alleged failure to complete the job, and $1875 for unpaid wages.

On April 27, 1953 , the plaintiff and the Rankins entered into a contract for the modernization of the Rankin home in consideration of the payment of $3000. The contract recites the payment of $500 down and requires a payment of monthly installments of $79.85. The job is laconically described as furnish labor (and) material to repair sidewall and foundation of structure of present building. For the purpose of obtaining the loan of $2500, a note was executed by the Rankins. Following default in payment thereof, the plaintiff paid $550.70.

[Irreconcilable Testimony]

The testimony is in irreconcilable conflict on every point. No useful purpose could be served by attempting to review it.

The Rankins contend that, contrary to its express terms, the contract was for $2500, the amount of the FHA loan, and that the recital of the payment down of the sum of $500 is false and was made at the behest of the plaintiff to enable them to qualify on paper for the loan. The plaintiff admits that no payment down was made, but contends that it was never intended to relieve the defendants of the payment of the entire sum of $3000. The "repair" of the "sidewall" was to consist of sheathing the exterior walls, and the "repair" of the foundation was to consist of the erection of basement walls of concrete blocks. It appears that the parties construed this written contract to require the plaintiff to furnish labor and material for the sidewall job and material only for the foundation. When the borrowed funds were exhausted before the job was completed, an oral contract was entered into, the terms of which not only appear to be interwoven with those of the written contract, but are in sharp conflict. The plaintiff contends that so far as the basement job is concerned, it was to supply material under the written contract for the foundation only, and that all materials and labor for all other jobs in the basement, consisting of laying a concrete floor and restoring the apartment to its previously tenantable condition, were to be furnished under the oral contract; whereas the Rankins assert that, so far as the basement job is concerned, including the foundation, the plaintiff, under the written contract, was to supply all the material required to complete that job, and under the oral contract was to supply all the labor in consideration of the defendant Gordon Rankins' entering its employ as a plumber, and agreeing to the deduction from his wages of 60% to apply on the contract.

I find that under the oral contract the plaintiff was to furnish labor to complete the basement walls, to lay a concrete floor, and furnish materials and labor to restore the basement apartment to its previously tenantable condition, and the defendant Gordon Rankin was to enter plaintiff's employ as a plumber because it was deemed more advantageous to the parties to have Rankin work as a plumber than as a laborer in his own basement.

I find that the plaintiff did not abandon his job until after Rankin had quit; that the promises under the oral contract were mutually dependent; that Gordon Rankin was an employee rather than a plumbing subcontractor; that he worked 367 hours as plumber; that the prevailing rate of pay was $3.86 an hour; and that he has not been paid; that the reasonable value of the labor and material furnished to the plaintiff under the oral contract was $1897.67, from which there should be deducted $1416.62 due the defendant Gordon Rankin for his services as a plumber, leaving a balance of $481.05, for which plaintiff is entitled to a lien.

The defendant also contends that the plaintiff is not entitled to recover on his counter-claim for $550.70 because, he asserts, an indorser of a note may not recover from the maker a partial payment. Although the matter is not free from doubt, it would appear that the authorities support the proposition that such a payment may be recovered. Wright v. Butler , 6 Wend. 284, 21 Am. Dec. 323, Clark v. Northern Pacific Railway Co., 214 N. W. 33, Rawlings v. Poindexter, 53 Am. Dec. 125, Dittmar v. Frye & Co., 93 Pac. (2d) 717, Whitten v. Kroeger, 82 Pac. (2d) 668.

I conclude, therefore, that the plaintiff is entitled to reimbursement for the $550.70 paid on the Rankin note and credited thereto by the FHA.

The plaintiff urges the inclusion of a order in the judgment holding it harmless on its indorser's obligation on the note. No authority is cited or theory stated upon which such a provision could be based. If the plaintiff has in mind something in the nature of a bill quia timet, the answer is that there is apparently no authority for extending that remedy to the field of negotiable instruments. The Rankins insist that the parties should be held in pari delicto for participating in the fabrication of documentary evidence of the down payment, and the completion of the job. Since, however, the written contract has been fully executed and no evidence was introduced for the purpose of showing that fraud was actually perpetrated on the FHA, there is an insufficient basis for the application of the rule.

Priority of Liens

The question of priority as between the plaintiff's lien and that of the defendant United States arises under the cross-claim of the United States for income taxes. On July 8, 1953 , the plaintiff filed its claim of lien under Sec. 26-1-1 et seq., A. C. L. A. 1949. In conformity with the provisions of 26 USCA 3670, the United States filed its claim of lien on June 15, 1953, Sec. 3671, Title 26, USCA, provides that such lien shall arise at the time the assessment list is received by the Collector of Internal Revenue, and Sec. 3672 provides that the lien is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice has been filed by the Collector.

Since the foregoing federal statutes and the insolvency statute, R. S. 3466, 31 USCA 191, have undergone a strikingly parallel development, culminating in United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC 9492], it would seem that some discussion on the insolvency statute, in the light of the decisions construing it, may be profitable here. An examination of the cases reveals an increasing tendency to favor federal liens. As was pointed out in Bank of Wrangell v. Alaska Asiatic Lumber Mills, 84 Fed. Supp. 1 [49-1 USTC 9312], although the Supreme Court has never squarely held that an antecedent lien will defeat priority under Sec. 3466, state and local federal court decisions have given effect to the implications of the repeated failure of the Supreme Court to so hold. Cf. United States v. Guarantee Trust Company, 33 Fed. (2d) 533 (8th Cir.); affirmed on other grounds 280 U. S. 478.

However in 1929 a new doctrine was interjected into the settled interpretation of Sec. 3466 by Spokane County v. United States, 279 U. S. 80 [1 USTC 387], holding that the Federal Government was entitled to priority over a county tax lien which was not specific and not completed by distraint. This doctrine subordinates the inchoate general lien, although prior in time, to the federal tax lien. This distinction between a choate and inchoate lien was given effect in New York v. MacLay, 288 U. S. 290, to give priority to a federal tax lien over a state tax lien which had not resulted in a change of title or possession; as well as in United States v. Texas, 314 U. S. 480, where the Court relied on Sec. 3466 to give the Federal Government priority over a state lien for gasoline taxes. In the case last cited, the Court characterized the lien of the state as "nothing more than an inchoate general lien" and added "certainly it did not of its own force divest the taxpayer of either title or possession".

It is abundantly clear, therefore, that one of the essentials is that, as against the United States , the lien must be specific. What is a specific lien is of course a federal question, United States v. Waddill, Holland & Flinn, Inc., 323 U. S. 353, 356 [45-1 USTC 9126]. In Illinois v. Campbell, 329 U. S. 362, in denying priority to a recorded state lien, the Court said:

"It is true the filing of a notice of lien determined the amount of the lien although the state may have computed wrongly the amount of taxes owed it. But it is not enough that the amount of the lien be known. The lien must attach to specific property of the debtor."

Recently the Court held that a lien is not specific until the lienor reduces it to possession, United States v. Gilbert Associates, 345 U. S. 361, [53-1 USTC 9291], saying, p. 365-6:

"As is usual in cases like this, the town asserts that its lien is a perfected and specific lien which is impliedly excepted from this statute (Sec. 3466) . . .

"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 property no longer in the possession of the debtor . . . Until such possession, it remains a general lien."

[Question Avoided]

Thus it is noteworthy that the judicial history of Sec. 3466 has been one of continued avoidance of the question whether a perfected specific lien is superior to a claim under that section, by the process of finding, is case after case, that the competing lien was not perfected and specific. This judicial reluctance is important in the instant case because in cases in which priority is asserted, the courts have increasingly drawn upon decisions construing Sec. 3466 as authority in the determination of the question as to when a lien is sufficiently choate and specific to be entitled to priority over federal tax liens. In United States v. Snyder, 149 U. S. 210, it was held that the Government's tax lien, although not filed in conformity with the local statute, was enforcible against a bona fide purchaser of the property. By subsequent amendments to 26 USCA 3672, protection against the secret lien of the Federal Government was given to mortgagees, pledgees, purchasers, and judgment creditors, who acquire their interests before the Government records its tax lien. Later this protection was extended to mortgagees, pledgees, and purchasers of securities without actual notice. Until recently the courts have not distinguished choate from inchoate liens under Sec. 3670 and have awarded priority to antecedent liens. Prof. Kennedy, Federal Priorities, 63 Yale Law Journal 905 (1954) cites 30 cases in State and Lower Federal Courts where the tax lien has been denied supremacy over antecedent rival lines without any inquiry into inchoateness. Notwithstanding this seemingly settled interpretation, the Supreme Court, in a 1950 decision, elected to apply the test developed under Sec. 3466 and held that a federal tax lien, recorded subsequently to the date of an attachment lien but prior to judgment, was entitled to priority, United States v. Security Trust & Savings Bank, supra. Although in the case last cited, local law declared that the attachment was to be a lien upon all real property attached for a period of three years, unless sooner discharged, the Court characterized the lien as contingent and inchoate, saying, page 50:

"Nor can the doctrine of relationship 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."

The apparent harshness of this decision has led some courts to construe their statutes so as to place the lienholder in one of the protected categories of Sec. 3672, Hawkins v. Savage, 110 Fed. Supp. 615 [53-1 USTC 9343]. But the language of Sec. 26-1-1 et seq. A. C. L. A. 1949, is not susceptible of such construction. However, United States v. New Britain, 347 U. S. 81, [54-1 USTC 9191] involving a mortgage foreclosure and sale, indicates that although the doctrine of inchoate general lien will be applied in tax lien cases, the standard of perfection is not quite so unattainable as it has proven in Sec. 3466 cases. In that case, the City and the Federal Government asserted claims against the proceeds of the sale. The question presented was whether priority should be given to the federal tax lien or to the state's property tax and water-rent liens. The liens for the real estate taxes attached as of the assessment date of the prior year and the water rent liens arose upon failure to pay. Some of the liens had, under local statutory provisions, attached prior to the origin of the government's tax lien. The state court, deeming the state's liens specific and protected, awarded priority to the City. Upon appeal by the United States , the Supreme Court, while recognizing the application of Sec. 3466 cases and inchoate general lien doctrine to tax lien cases, said of those cases, p. 86:

"We do not think they are inconsistent with our decision in this case . . ." and,

"In the instant case certain of the City's tax and water-rent liens apparently attached to the specific property and became choate prior to the attachment of the federal tax liens,"

and remanded the case to the State Court for determination of priority in accordance with its opinion--that the first in time prevails.

[Conclusions]

Turning now to the instant case, I am constrained to hold, upon the authority of the Security Bank and New Britain cases, supra, that plaintiff's mechanic lien was not sufficiently perfected at the time the assessment list was received by the Collector to be entitled to priority. Plaintiff's lien arises under Title 26, A. C. L. A. 1949, Sec. 26-1-3, of which declares that the lien created there under shall have "preference over all liens, mortgages, or other incumbrances which may have attached to the land . . . subsequent to the time when the building . . . or repair thereof was commenced." Sec. 26-1-5 ibid, requires the filing of a notice of the claim within 90 days after the completion of the contract or the alteration or repair or after labor has ceased. Although the exact time the lien arises is not spelled out, the clear import of the statute is that after the mechanics claim is filed, a lien arises which dates back to the commencement of the work and is to be given preference over any incumbrance or lien attaching after work commences. Under the facts of the instant case, work commenced May 14, the Government's lien arose June 15, and plaintiff filed notice of his claim of lien July 8. It is my opinion that neither under the doctrine of the Security Bank case nor as modified by the New Britain case, can this lien be considered sufficiently choate on June 15 to be entitled to priority over the Government's tax lien. Unquestionably there is much in the case of In re Taylorcraft 168 Fed. (2d) 808 (6th Cir.) [48-1 USTC 9288] that appeals to reason and justice but it should be noted that subsequently to that decision, the Supreme Court, in the Security Bank case, supra, laid down the essentials for the perfection of liens before they may be accorded superiority over a federal tax lien. Those requirements have not been met in this case. This brings us to the question whether the application of the inchoate lien doctrine to tax lien cases by the Supreme Court requires the holding that a mechanic's lien, not perfected at the time the tax lien attaches, is inferior to the Government lien. This situation was presented in the case of United States v. Eisinger Mill & Lumber Co., 98 Atl. (2d) 81, (Md. 1953) [53-2 USTC 9504], where the Court, in a well reasoned opinion, pointed out what degree of perfection is necessary to rank the federal tax lien and held, following the Security Bank case, that the mechanic's lien was inchoate when the federal lien attached and awarded priority to the tax lien.

I conclude, therefore, that the lien of the United States is entitled to priority over the mechanic's lien of the plaintiff.

 

 

[54-2 USTC 9642]United States of America , Plaintiff v. Kenneth S. Ryan , Minnesota Savings and Loan Association, Ralph D. Peltz, Edward C. Engdahl and the City of St. Paul , Defendants

In the United States District Court for the District of Minnesota, Third Division, Civil No. 2400, 124 FSupp 1, September 29, 1954

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

Lien for tax: Filing of notice: State requirements.--Lien of the Government for taxes was not valid as against a prior mortgage where, in filing its lien, the United States did not comply with Minnesota law requiring notices of lien to be filed with the registrar of titles and noted as a memorial on the certificate of title.

George T. Rita, Special Assistant to the Attorney General, George E. MacKinnon, United States Attorney for the State of Minnesota, for the plaintiff. John B. Burke of Scott, Burke, and Scott, for the defendant, Minnesota Federal Savings and Loan Association. Moritz J. Blomquist of Randall, Smith, Blomquist and Krawetz, for the defendants, Ralph D. Peltz and Edward C. Engdahl.

Opinion

BELL , District Judge:

This suit involves real estate registered under the Torrens System of land registration in Minnesota . It is to establish and enforce certain liens and claims, for the foreclosure thereof and to obtain a judgment and decree of this Court that the Defendants Ralph D. Peltz and Edward C. Engdahl purchased the real estate subject to the lien claimed by the United States .

Answers were interposed on behalf of the Defendants Minnesota Federal Savings and Loan Association, Peltz and Engdahl. Defendants Kenneth S. Ryan and the City of St. Paul are in default for failure to answer or otherwise appear in the action. The Plaintiff and answering Defendants filed motions for a summary judgment.

Mr. George T. Rita, Special Assistant to the Attorney General, and Mr. George E. MacKinnon, United States Attorney for the State of Minnesota , appeared for the Plaintiff.

Mr. John B. Burke of Messrs. Scott, Burke, and Scott appeared for the Defendant, Minnesota Federal Savings and Loan Association.

Mr. Moritz J. Blomquist of Messrs. Randall, Smith, Blomquist and Krawetz appeared for the Defendants Ralph D. Peltz and Edward C. Engdahl.

A stipulation of the facts was made by the Plaintiff and the answering Defendants and it follows that there can be no error in this case in entering summary judgment. Rule 56-b Rules of Civil Procedure, Elgin J & E Ry. v. Burley, 325 U. S. 711.

The only issues remaining for determination by the Court involve questions of law. The ultimate issue can be resolved into a single question, Does Plaintiff have a lien against the property?

[Failure to Perfect Lien]

It is the claim of the Defendants that the Plaintiff, in the first instance, did not take proper steps to perfect a lien as required by the laws of the United States and the State of Minnesota, and that, because of its failure property to file notice of its alleged lien, the Plaintiff did not acquire a lien against the property. It is also the claim of the Defendants that by virtue of the foreclosure of the prior mortgage held by Minnesota Federal Savings and Loan Association, followed by a decree of the State District Court directing the issuance of a new certificate of title, the Plaintiff has lost its right to perfect a claim of lien and is estopped from asserting any interest in the property.

Plaintiff contends that the filing of a notice of tax lien, by name only, in the office of the register of deeds was sufficient to create a lien against property registered under the Torrens System.

As this action involves the title to property registered under the Torrens System of land registration, adopted by the State of Minnesota in 1901 (Chapter 237, Laws of Minnesota, 1901), and amendments thereof, now Chapter 508, Minnesota Statutes Annotated, a brief history of the Torrens System and its purpose is deemed necessary and in order.

The Torrens System, so called, is a result of an idea and the work of Sir Rob ert Richard Torrens, born in Ireland in 1814, educated in Trinity College , Dublin , collector of customs at Adelaide in 1841, and afterwards the first premier of South Australia . His idea was to apply the principles of registration of ownership in ships under the English law known as the "Merchants Shipping Act" to registration of title to lands. That is, to have land ownership conclusively evidenced by certificate and thereby made determinable and transferable quickly, cheaply and safely.

The idea gained favor in Australia , resulting in the framing of what became known as the Torrens Act and the adoption of the system in practically all Australia not later than 1870.

[Law Modified]

The Torrens Law, as originally drafted, has been greatly modified in the statutes enacted in the United States , but the salient feature of registration by certificate has been retained, and the law is usually referred to as the Torrens Law wherever statutes providing for registration of title to land have been enacted in this country. Statutes embodying the basis principles of the Torrens System of land registration by certificate has been enacted in nineteen states of the United States .

The registration of the title to property results in the transferring of a title from the recording act system to the certificate system, provided by the Torrens Law, by a judicial proceeding in the nature of a suit to quiet title against all persons, both known and unknown, who could by any possibility assert an adverse interest. In the State of Minnesota the registration of titles is under the jurisdiction of the District Court. The original registration, and all subsequent involuntary transfers of title, is accomplished by obtaining a decree of the Court followed by the issuance of a certificate of title thereunder.

"The official certificate will always show the state of the title and the person in whom it is vested. The basic principle of the system is the registration of the title to the land, instead of registering, as under the old system, the evidence of such title." In re Bickle, 301 Ill. 484, 134 N. W. 76.

In the case of an involuntary transfer, such as a mortgage foreclosure, there is a radical difference from the procedure which applies to a voluntary transfer in that the registrar cannot, upon the filing with him of documents purporting to make an involuntary transfer, recognize any such transfer unless and until he receives an order of court directing the action which he shall take. These orders are all based upon a final adjudication determining the rights of all parties involved. The conclusiveness of the certificate is based upon an order or decree of court and upon statutes of limitation (M. S. A. Sections 508.26 and 508.28). It is clearly evident that, when a certificate of title has been issued by the registrar of title to a decree of the District Court the decree is binding upon the entire world, subject only to the right of appeal allowed for a period of six months by M. S. A. Sec. 508.28.

The purpose of the Torrens Law is to establish an indefeasible title free from any and all rights or claims not registered with the registrar of titles, with certain exceptions not important here (M. S. A. Sec. 508.25), to the end that anyone may deal with such property with the assurance that the only rights or claims of which he need take notice are those registered. The law was framed to accomplish that purpose, and it establishes rules in respect to registered land which differ widely from those which apply in case of unregistered land. It provides that the holder of a certificate of title to registered land "shall hold the same free from all encumbrances, and adverse claims", excepting only those noted on the last certificate of title.

[Validity of Lien]

At the outset it should be pointed out that under 26 U. S. C. A. 3672, as amended in 1942, it is provided that a federal tax lien shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed by the Collector. The pertinent part of this section is:

"A. INVALIDITY OF LIEN WITHOUT NOTICE. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

"(1) ..... In the office in which the filing of such notice is authorized by the laws of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory".

The State of Minnesota has by statute authorized the filing of such notices, and the laws of the State of Minnesota must be complied with if a valid lien is to be obtained in any case. Because the property involved in this action is registered property, the laws of the State of Minnesota which deal with registered property have application and are controlling here.

M. S. A. Sec. 272.48, provides as follows:

"The filing and recording in the office of the register of deeds of any county in this state of notices of liens for taxes due the United States and discharges and releases of such liens is hereby authorized".

M. S. A. Sec. 508.48, provides as follows:

"Every conveyance, lien, attachment, order decree, or judgment, or other instrument or proceeding, which would affect the title to unregistered land under existing laws, if recorded, or filed with the register of deeds, shall, in like manner, affect the title to registered land if filed and registered with the register in the county where the real estate is situated, and shall be notice to all persons from the time of such registering or filing".

M. S. A. Sec. 508.64, provides as follows:

"Attachments and liens of every description upon registered land shall be continued, reduced, discharged, and dissolved by any method sufficient therefor in the case of unregistered land. All certificates, writings, or other instruments permitted or required by law to be filed or recorded to give effect to the enforcement, continuance, reduction, discharge, or dissolution of attachments, or other liens upon unregistered land or to give notice of the same, shall, in the case of like liens upon registered land, be filed with the registrar".

M. S. A. Sec. 508.30, provides as follows:

"Registers of deeds shall be the registrars of titles in their respective counties".

The form of certificate of title prescribed by M. S. A. Sec. 508.25, contains six exceptions. The plaintiff contends that one of the exceptions applies to the issue involved herein. That exception reads as follows:

"(1) Liens, claims, or rights arising or existing under the laws or the constitution of the United States , which this state cannot require to appear of record".

However, the claim of lien involved in this action is not such a lien or claims, in that 26 U. S. C. A. 3672, provides a method by which the State may require that it be made a matter of local record and if this is not done a federal tax lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor, namely not unless nor until notice thereof has been filed by the collector in accordance with the laws of the State.

[Designation of Land]

Under said statutes, M. S. A. 508.48 and 508.64, in order to effect the registration by memorial upon a certificate of title the lien instrument must designate the land affected by the lien or claim of lien, such as is possible in the case of mechanics lien claims and judgment entries creating specific liens on described real estate, or the party filing a claim of general lien, such as a personal judgment, or a federal tax lien, must designate the land upon which it is claimed so that the registrar may know the certificate of title upon which it can be memorialized. The mere filing of a notice, by debtor's name only, in the office of the register of deeds cannot, and does not, create a lien on registered land. It is plainly evident to this Court that the liens authorized by M. S. A. Sec. 272.48, to be filed with the register of deeds, must, in the case of registered property, be filed with the register of deeds in his capacity as registrar of titles, and to be effective, they must be noted as memorials on the certificate of title covering the specific parcel of registered land intended to be affected by such filing, M. S. A. Sections 508.48 and 508.64.

The office of the register of deeds, in Minnesota , is made up of two component parts. The office of the register of deeds as originally created by Chapter 21, Sec. 1, laws of Minnesota, 1849, which has to do with the recording of all instruments affecting unregistered property, and the office of the registrar of titles created by Chapter 237, laws of Minnesota, 1901, which is part and parcel of the original office, but which office has special functions to perform in connection with property registered under the Torrens System. It must be remembered that the register of deeds is by statute, M. S. A. Sec. 508.30, the registrar of titles in his county. When a statute authorizes the recordation of an instrument in the office of the register of deeds it can only be interpreted as meaning that as to all properties unregistered the recording can be accomplished by simply filing the document with the register of deeds in his capacity as such, but if the property is registered, it must be filed with the register of deeds in his capacity as registrar of titles, and to effect a lien thereby, the instrument must be noted as a memorial on the specific certificate of title outstanding for the property intended to be affected, otherwise the filing of the instrument does not create a lien. The method of filing documents intended to affect registered property was, by statute, made definite and certain. No new or separate office was created for the handling of instruments affecting registered property. The laws of 1901 simply created a new branch in the office of the register of deeds and established certain specific requirements with reference to registered properties. The register of deeds assumed additional duties, and certain additional requirements for the filing of instruments affecting registered property were enacted into law. Since 1901 the register of deeds has been functioning both as register of deeds and as registrar of titles.

[Filing of Notice]

In 1949, the legislature of the State of Minnesota in providing for the recording of federal tax liens in the office of the register of deeds, made it necessary, in order to obtain a valid lien against registered property, that the notice be filed as required by M. S. A. Sections 272.48, 508.48 and 508.64. This is because the conformity act of the State of Minnesota in relation to federal statute 26 U. S. C. A. 3672, insofar as it concerned registered land, was embraced in these three separate sections of the state code. For the purpose of embodying the conformity act into one section, the 1953 Legislature enacted Chapter 488, Laws 1953, which amended the original M. S. A. 272.48, by adding thereto the pertinent portions of said Sections 508.48 and 508.64, as follows:

". . ., or together with a written statement containing a description of each parcel of land upon which the lien is claimed and a proper reference to the certificate or certificates of title to such land, in the office of the registrar of titles,".

An identical situation is presented in Minnesota in connection with old age assistance liens. M. S. A. Sec. 256.26, provided (sub. 5) for the filing of these liens in the office of the register of deeds. In 1953, by Chapter 487, the Legislature amended this section in a manner similar to the amendment of Sec. 272.48. In 1939 the Attorney General of Minnesota in his opinion, No. 250, Report of the Attorney General, had concluded that purchasers of registered land are not bound by the recordation of the lien statement filed, by name only, with the register of deeds.

The same situation exists with reference to the Minnesota Statutes dealing with mechanics liens, M. S. A. Sections 514.08 and 514.12. These sections mention filing the lien notice in the office of the register of deeds. Nevertheless as to registered property the filing would be of no value unless the lien statement was filed with the registrar of titles and noted as a memorial on the certificate of title. For this Court to arrive at any other conclusion would render the state statutes dealing with registered property meaningless.

That the foregoing use of M. S. A. Sections 508.48 and 508.64 is proper and necessary in construing M. S. A. Sec. 272.48 is emphasized in the words of the court in United States v. Beaver Run Coal Co., 99 Fed. (2d) 610, [38-2 USTC 9540] as follows:

"If an apparently unambiguous statute contains hidden ambiguities, or if a literal construction would clearly defeat the object intended (by Congress), or if a literal construction would result in absurdities so gross 'as to shock the general moral sense', then the courts may be entitled to depart from the strict wording in order to give the statute a reasonable construction".

Plaintiff contends "Minnesota cannot require the United States to memorialize notice of federal tax lien on a certificate of title", and that, "it can do no more than designate in what office the notice of lien shall be filed". As hereinbefore pointed out Minnesota has designated the office in which the notice shall be filed, and, by virtue of the statutory procedure relative to the operation of that office in respect to registered titles, the notice must contain a description of the land on which the lien is claimed, and the only method for filing it is by memorializing it on the certificate of title.

[Unregistered Titles]

The same situation exists in the State of Michigan in respect to its unregistered titles. 1 A Michigan statute was held to be constitutional which required that notice of federal tax lien to be effective must contain a description of the land upon which the lien is claimed. In Youngblood v. United States , 141 Fed. (2d) 912 [44-1 USTC 9314], the notice of lien filed did not contain a description of the property and the Court held that the filing of the notice did not create a lien. The Court said:

"A state's right to safeguard muniments of title to land within its borders should not be lightly denied upon a strained assumption that Congress meant to impeach that right. The Amendment contained in the Revenue Act of 1942 evidences no change of attitude on the part of Congress in its recognition of the right of a state to regulate the filing of federal tax lien notices. Under the existing enactment the notice must be filed in an office authorized by the state; or, if no such office has been designated, then in the office of the United States District Court Clerk. Michigan has designated an office, that of the register of deeds, but has not authorized the filing of the notice in the form presented by the collector. In the lien notice under present consideration, an essential ingredient is missing. The land is not described. Mere inconvenience to federal tax officials in procuring and filing descriptions of land owned by delinquent taxpayers supplies no sound basis for the issuance of peremptory writ of mandamus by a federal court, directing a state ministerial officer to violate his obvious duty of compliance with the state law under which he acts.

"We adhere to the view, plainly indicated in our approval of the opinion of District Judge Raymond in the case of United States v. Maniaci, 36 Fed. Supp. 293 [39-1 USTC 9307], that there is nothing unreasonable in the requirements of the Michigan statute that a lien notice shall contain a description of the land upon which the lien is claimed in order to enable such lien to affect the rights of third parties; and that confusion commonly resulting from indices of the names of persons is avoided and reasonable certainty attained by identifying the land upon which the lien is claimed."

Where the government fails to file a tax lien as required by statute, is is not a valid lien. See Miners Savings Bank v. Joyce, 97 Fed. (2d) 973, see also, 174 A. L. R. 1388.

In the case of United States v. Hutcherson, 188 Fed. (2d) 326 [51-1 USTC 9249], in holding that the government did not have a lien against the property involved, the Court said:

"We are invited to depart from this rule of property in Missouri because the existence of the rule and its application to tax liens may make the collection of delinquent tax claims more difficult. We do not conceive it to be an appropriate exercise of the powers and authority of a federal court to strike down a rule of property, not repugnant to any law of the United States , long established in the state, and upon which many valuable property rights are based."

And the Court in Warburton v. White, 176 U. S. 484, said:

"Where state decisions have interpreted state laws governing real property or controlling relations which are essentially of a domestic and state nature, in other words, where the state decisions establish a rule of property, this court when called upon to interpret the state law will, if it is possible to do so, in the discharge of its duty, adopt and follow the settled rule of construction affixed by the state court of last resort to the statutes of the state, and thus conform to the rule of property within the state."

In Tyler v. United States, 281 U. S. 497 [2 USTC 532] (loc. cit. 501), the above is reiterated in the following language:

"The decisions of the courts of Maryland and Pennsylvania follow the common law, and are in accord in respect to the character and incidents of tenancy by the entirety. . . . These decisions establish a state rule of property, by which, of course, this court is bound."

See also, Schwarz v. United States, 191 Fed. (2d) 618 [51-2 USTC 9444].

[Validity of Title]

The Supreme Court of the State of Minnesota has taken a very definite stand in upholding the validity of titles registered under the Torrens System, and in particular with reference to the necessity for filing notices of claims of lien with the registrar of titles.

"A memorial of a mortgage, lien, or other charge against registered land, entered by the registrar of titles upon the original certificate of title in his office and upon the owner's duplicate, becomes a part of the certificate of title and is made conclusive evidence of the matters therein contained." Horgan v. Sargent, 182 Minn. 100, 233 N. W. 866.

"Unregistered deeds or contracts do not affect Torrens titles nor create any interest in land. The Torrens law intends that all titles registered thereunder shall be free from all unregistered rights or claims except those specifically named.

"The purpose of the Torrens law is to establish an indefeasible title free from any and all rights or claims not registered with the registrar of titles, with certain unimportant exceptions, to the end that anyone may deal with such property with the assurance that the only rights or claims of which he need take notice are those so registered. The law was framed to accomplish that purpose, and it establishes rules in respect to registered land which differ widely from those which apply in the case of unregistered land. It provides that the holder of a certificate of title to registered land 'shall hold the same free from all encumbrances, and adverse claims', excepting only 'those noted on the last certificate of title', and certain other specified rights or claims not important here.

" Torrens law abrogates doctrine of constructive notice, except as to matters noted on the certificate". In re Juran, 178 Minn. 55, 226 N. W. 201. See also, Cook v. Luetich, 191 Minn. 68, 252 N. W. 640, and Carl v. DeToffell, 25 N. W. 2d 479.

In Douglas v. Westfall, 85 Minn. 437, 89 N. W. 175 the Court held that the laws, 1901, C. 237, providing for the Torrens System of registering land titles, is not unconstitutional in that it is special legislation; nor that it deprives the owner of his interest in land without due process of law, in violation of both state and federal constitutions. In this case the Court said:

"Any person who has any interest in the land, and who has not actually been served or notified of the filing of the application, may at any time within sixty days from the entry of such decree appear, and file his sworn answer, providing no innocent purchaser for value has acquired an interest. If there is any such purchaser, the decree of registration remains in full force forever, subject only to the right of appeal, . . . Every person receiving a certificate of title and every subsequent purchaser in good faith takes the same free from all encumbrances, except such as are noted thereon".

In Kane v. State, 55 N. W. 2d 333 ( Minn. ), the Court held that a purchaser was not bound by restrictions which were not noted on the certificate of title. The Court said:

"The question before us is whether a good-faith purchaser, for value, of registered land obtains such land free and clear of a restrictive covenant or encumbrance which is not referred to in the certificate of title under the memorial of estates, easements, or charges on the land described. In other words, must a purchaser of registered land, in addition to being charged with notice of estates, mortgages, liens, charges, and interests noted on the previous owner's certificate of title, also go directly to the plat to ascertain whether there may be any restrictive covenants or encumbrances noted on the plat which are not shown on the certificate of title! Under 508.25, it is our opinion that he is not required to do so. It seems to us that if we were to hold otherwise, under the facts and circumstances of the instant case, it would tend to create confusion which would jeopardize the stability and purpose of the Torrens system, as stated in 3 Devlin, Real Estate, Deeds (3rd) page 1439, is--'first to secure by a decree of the court, or other similar proceedings, a title which will be impregnable against attack, and, when this title is once determined, to provide that all subsequent transfers, encumbrances, or proceedings affecting the title shall be placed on a page of the register and marked on the memorial of title. A purchaser may accept this memorial as truly stating the title, and may disregard any claim not so appearing'".

[U. S. Not Exempt]

The United States is not exempt from the provisions of the state statutes. The laws of the United States definitely provide that the tax lien here asserted will not become a valid lien unless notice thereof is filed as by state law prescribed. A state law affecting the title to property must be followed, and is binding upon the United States . See Custer v. McCutcheon, 283 U. S. 514.

It is clearly evident that the Supreme Court of the State of Minnesota regards a Torrens title as an indefeasible title, good as against any and all unregistered claims, and that the only instruments which can possibly affect a registered title are those which are filed with the registrar of titles and noted as memorials on the certificate of title. The state laws definitely require the filing of all notices of claim or contract with the registrar. The state decisions support the statutes. Plaintiff did not file its notice of lien as required by the laws of the United States and of the State of Minnesota and therefore does not have a lien against the property involved in this action.

At any time, however, up to the time of the foreclosure of the prior mortgage held by Minnesota Federal Savings and Loan Association, the plaintiff could have perfected its lien by filing the notice as by statute required. The foreclosure of the mortgage and the expiration of the period of redemption has now precluded plaintiff from so doing. The mortgage contained a power of sale. Under the laws of the State of Minnesota , a mortgage containing a power of sale may be foreclosed by advertisement. There is nothing in the United States Code which precludes a foreclosure by advertisement. 28 U. S. C. A. 2410 provides that in any action to foreclose a mortgage the United States may be joined as a party defendant. But there is nothing in this section, or in any section of the United States Code, which prohibits a foreclosure under a power of sale or which provides that the United States will not be bound thereby. The Minnesota Federal Savings and Loan Association was entitled to foreclose by advertisement, and the plaintiff, and all other parties interested in the property, is bound by the foreclosure. This exact question was before the Court in the case of Trust Co. of Texas v. United States, 3 Fed. Supp. 683 [1933 CCH 9486], and the Court held that a mortgage foreclosure under power of sale extinguishes not only the rights of the owner in the property sold, but all subsequent and inferior liens thereon, including the lien of the United States. Therefore, in the instant case, the foreclosure divested the interest of the registered owner, Kenneth Ryan, and the rights of all parties claiming under or through him, including the plaintiff herein.

The decree of the State District Court entered June 6, 1951, directing the registrar to cancel the then outstanding certificate of title and to issue a new certificate showing Minnesota Federal Savings and Loan Association to be the fee owner of the property, subject only to the contract to Peltz and Engdahl, operates as an estoppel at law, and plaintiff, for this additional reason, cannot now claim any interest in the property. No appeal was taken within six months from the date thereof and this decree cannot now be set aside. In the absence of fraud a decree in a registration proceeding binds the entire world.

M. S. A. Sec. 508.22 provides for the entering of a decree of registration if, after a hearing, the court finds the applicant has a title proper for registration, and that the decree shall forever quiet the title and be forever binding upon all persons.

[Filing of Petition]

M. S. A. Sec. 508.26 provides that any person upon whom the summons has not been actually served, and who had no notice or knowledge of the filing of the application, may at any time within 60 days after the entry of such decree, and not afterwards, file a petition setting forth such facts and praying for leave to file his answer therein.

M. S. A. 508.28 provides that no action or proceeding for the recovery of any right, title, interest, or estate in registered land, adverse to the title established by a decree of registration, shall be maintained unless such action is commenced within six months from the date of such decree.

M. S. A. Sec. 508.57 provides that mortgages upon registered land may be foreclosed in the same manner as mortgages upon unregistered land, except that in the case of mortgages upon registered land a notice of the pendency of any suit or proceeding to enforce or foreclose the mortgage shall be filed with the registrar at the time of or prior to the commencement of such action or proceeding. In the instant case, Minnesota Federal Savings and Loan Association, filed a notice of foreclosure at the time the proceedings were commenced.

M. S. A. Sec. 508.58 provides that any person who has become the owner of registered land by foreclosure of a mortgage or other lien may have his title registered by applying to the Court for a new certificate of title.

Pursuant to the above sections of the state code, Minnesota Federal Savings and Loan Association petitioned for and received a new certificate of title. The decree directing the issuance of this certificate, dated June 6, 1951 , cannot now be attacked by plaintiff. In Lamprey v. American Hoist & Derrick Co., 197 Minn. 112, 266 N. W. 434, the Court said:

"It is expressly provided that no decree of registration shall be adjudged invalid or set aside unless the action to set it aside be commenced within six months from the entry of such decree, . . . The plaintiffs contend that under Mason Minn. Statutes, 1927, par. 9405, they had an absolute right to bring this action at any time within three years after discovery of the fraud claimed. That section is not a part of the title registration statute. It provides that an action to set aside a judgment obtained in a court of record on the ground of perjury or fraud may be set aside in an action for that purpose brought within three years after discovery of such perjury or fraud. That statute was enacted and in force long before there was any registration of title law, L. 1877, C. 131. If it had been intended that this statute should apply to decrees registering titles under the registration law adopted in 1901, then the registration law, par. 8274 (now 508.28 M. S. A.--supplied) would seem to serve no useful purpose. The registration act is a complete law covering the proceedings, the relief to be had, and the effect of a decree entered thereunder. Containing within itself a specific statute of limitations, we are not permitted to look to some prior statute for a different period of limitations."

In Harrington v. Linkert, 203 Minn. 575, 282 N. W. 461, the Court said:

"A decree registering title is somewhat more conclusive and better protected from attack or opening up than an ordinary judgment. The decree shall forever quiet the title and be forever conclusive upon all persons named in the summons or proceeded against as parties unknown, and shall not be opened or vacated except as provided in the registration law. It is expressly provided that no decree of registration shall be adjudged invalid or set aside unless the action to set it aside be commenced within six months from the entry of such decree".

In Murphy v. Borgen, 148 Minn. 375, 182 N. W. 499, an attempt was made to vacate a decree of registration after the time for answering had expired. The Court in denying the relief prayed for said:

"If the statute were construed to grant the authority to the court, the finality of the decree, the fundamental basis, as well as the capstone of the Torrens system of perfecting land titles would disappear, for just what a court may do to the Torrens judgment on applicatior addressed to its equitable powers will find a limit only in the ingenuity of counsel in searching for and devising methods of attack.

"Section 6895 (now 508.28 M. S. A.--supplied) of the act is one of limitations, and cannot be construed as in effect granting the relief which under section 6889 (now 508.22 M. S. A.--supplied) in express language withholds".

[Indefeasible Title]

The Supreme Court of the State of Minnesota has very definitely decided that a Torrens title is an indefeasible title; that it is good as against the entire world; that a decree in an original proceeding or in a proceeding subsequent, cannot be attacked after six months have elapsed; that the owner of a certificate of title, or a purchaser of registered property, need not go behind the certificate to ascertain if there are any claims which do not appear upon the certificate; that the property can be purchased in full reliance upon the certificate of title; and that, unless a lien or claim is noted as a memorial on the certificate, it is not a lien against the registered interest of the owner. These decisions establish a rule of property by which this Court is bound.

For more than fifty years the people of the State of Minnesota have been buying and selling properties registered under the Torrens System with full and complete reliance upon the certificate of title and in the firm belief that the certificate of title disclosed the true nature of the status of the title, and that they were amply and fully protected under the laws of the State of Minnesota. A judgment in this action, in favor of the plaintiff, having as it does a claim of lien which was not filed in accordance with the laws of the State of Minnesota, and which claim of lien was never at any time filed with the registrar of titles and noted as a memorial on the certificate of title, would completely defeat what has been a permanent rule of property in Minnesota for more than half a century.

To sustain the Torrens System of registration in Minnesota will not burden the United States . It could have established a lien on the land involved by merely following the plain and simple requirements of the applicable federal and state statutes. This it did not do.

The Court, therefore, concludes that the Defendants Minnesota Federal Savings and Loan Association, Ralph D. Peltz and Edward C. Engdahl are entitled to a summary judgment of dismissal, and that the motion of the plaintiff for a summary judgment should be denied. It is so ordered.

1 Torrens System not in effect in Michigan                                                                                                

 

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