Prior
Law Page11
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
