Prior Law Page12

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[54-2 USTC ¶9512] U. S. A. v. Ruby Luggage Corp. et al.

In the United States District Court for the Southern District of New York, Docket C76-37, 142 FSupp 701, June 21, 1954

Liens: Priority of tax lien: State law requirements as to filing of notice.--The Commissioner filed tax liens against "Ruby Luggage Corporation" at the New York County Court. New York law requires that the lien be filed in the docket volume corresponding to the first initial of the corporate name. Taxpayer's corporate name is "S. Ruby Luggage Co." Therefore the government's notice was held invalid against creditors who perfected judgment liens before the governments served notice of levy and distraint.

Liens: Priority of tax lien over that of later judgment creditor.--The government served notice of levy and warrant for distraint on taxpayer before judgment was entered against taxpayer by a creditor. Since the government perfected its lien first, the government's lien was given priority.

J. Edward Lumbard, United States Attorney, United States District Courthouse, Southern District, Foley Square, N. Y., for U. S. A. Powers, Kaplan & Berger, 90 John Street, New York, N. Y., Schwaber & Berman, 40 Broadway, New York, N. Y., for Ruby Luggage Corp. et al.

RYAN, District Judge:

This suit for unpaid assessed income taxes is before me on cross-motions for summary judgment. The parties, by stipulation, have removed all factual issues, and I am asked to determine the priority rights between the Government and judgment creditors in a fund deposited into court by defendants Caledonian Ins. Co. and Fire Asso.

Sec. 3672(a) which provides that the federal tax lien shall not be valid as against a judgment creditor until notice has been filed with the clerk of the district court and as provided by local law, was enacted to mitigate the effects of the judicial determination that a secret federal tax lien was valid against a bona fide purchaser from the taxpayer after the federal lien had been perfected. United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291].

The manner in which the Government filed its lien here is insufficient to secure to it rights superior to judgment creditors who extended credit to the taxpayer subsequent to filing and who perfected their liens against the taxpayer based upon those extensions of credit before the Government perfected its lien.

By Section 3672 the Government is required to file its lien (1) "in the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated . . ." Section 922 of the New York County Law (11 McKinney's Cons. Laws) provides that the County Clerk of New York County shall maintain judgment dockets which "must have a separate volume or volumes for each letter of the alphabet."

"A judgment is not docketed against any particular property, but solely against a name, and if that name is incorrectly set forth, a purchaser in good faith should not be the one to suffer; but rather the creditor who should see to it that the docketing is in the correct name of the debtor, if it is to be notice to subsequent purchasers." Grygorewicz v. Domestic and Foreign Discount Corp., 179 Misc. 1017.

Filing as the Government did herein a lien against "Ruby Luggage Corporation" did not give notice of a lien against "S. Ruby Luggage Corporation". Sec. 922 requires that liens against corporations be filed in the docket volume corresponding to the first letter or initial of the corporate name. The defendants are not charged with notice of what would be disclosed by a search of the "R" volume; the corporate name is "S Ruby, etc." and under this section it was required that liens be filed under "S."--the first initial of the corporate name. Since the lien of a tax assessment is entirely statutory, the procedure dictated by the statute must be strictly followed to ensure priority against subsequent judgment creditors with perfected liens. As to defendants Lefkowitz, Hallman and Hamburg, who perfected their judgment liens by serving subpoenae in supplementary proceedings before the Government served notice of levy and warrants for distraint on the defendants Caledonian and Fire Association, the federal lien is invalid for lack of notice.

The situation is different as to defendant Hochhauser. Here the Government served notice of levy and warrant for distraint on defendants Caledonian and Fire Association before judgment was entered against taxpayer in favor of defendant Hochhauser. This amounts to an actual levy by the Collector upon the property of the taxpayer and as such is paramount to the judgment creditor's claim. Sport-Craft Inc. v. Lasker, 177 Misc. 872. It is clear upon a reading of Secs. 3670 through 3672 that it is the lien created by the claim of the judgment creditor which is contemplated and not the claim alone. Miller v. Bank, 166 Fed. (2d) 415 [48-1 USTC ¶9185]. In New York , if personal property belonging to a judgment debtor is in the hands of a third party, the lien of the judgment creditor is perfected only from the date that a subpoena has been served in supplementary proceedings to enforce the judgment. Wickwire v. Kermit, 292 N. Y. 139. Since the Government perfected its lien through distraint and levy prior to the time defendant Hochhauser obtained judgment in its suit against the taxpayer, its rights are superior to those of Hochhauser. Motion granted as to defendant Hochhauser; denied as to other defendants. An order may be settled on notice to give effect to the foregoing.

 

 

[54-1 USTC ¶9208]United States of America, Plaintiff v. Arizona Fibre Products Co., Inc., O'Malley Lumber Company, and C. A. Clements, assignee of Arizona Fibre Board Corporation, Defendants

In the District Court of the United States for the District of Arizona, Civil No. 1858-PHX, November 27, 1953

Priority of liens: Garnishment.--A tax lien was held superior to a writ of garnishment where no judgment had been rendered in the case out of which the garnishment was issued.

Jack D. H. Hayes, United States Attorney, U. S. Courthouse, Phoenix , Ariz. , for plaintiff. Snell & Wilmer, Heard Bldg., Phoenix , Ariz. , for defendants.

Judgment

LING, District Judge:

This cause coming on regularly to be heard, upon plaintiff's motion for judgment on the pleading, on the 14th day of September, 1953, before the Honorable Dave W. Ling, Judge of the above-entitled Court, sitting at Phoenix:

That by the 20th day of March, 1953, all of the defendants named in this action, had been served: that answer of the defendants, O'Malley Lumber Company, and C. A. Clements, assignee of Arizona Fibre Board Corporation, was filed on or about the 28th day of April, 1953: that said answer alleges that defendant O'Malley Lumber Company, owing $1,563.84 to the principal defendant, Arizona Fibre Products Company, has been served with a writ of garnishment upon an obligation owed by the said Arizona Fibre Products Company to the defendant, C. A. Clements, as assignee of the Arizona Fibre Board Corporation: that said answer admitted that no judgment had been rendered in the case out of which the garnishment was issued, upon the 20th day of February, 1952, when notices of tax liens and a copy of warrant for distraint, was duly served upon all defendants, including O'Malley Lumber Company: the answer, therefore, is insufficient in law and the plaintiff shall have judgment on the pleadings filed in this case:

The defendant, Arizona Fibre Products, Inc., was obligated to pay to plaintiff, the United States of America, the sum of $1,546.99, on April 17, 1953, together with interest thereon at the rate of six per centum per annum on $1,381.25 thereof, from the 15th day of April, 1953 until paid; that assessment lists had been received by the Collector of Internal Revenue, in this regard, on the 20th day of February, 1952, upon which date notice of tax liens was served on the principal obligor, and recorded in the Office of the County Recorder of Maricopa County, as by law provided: that in this regard a warrant of distraint together with a copy of said notice, was served upon the defendant, O'Malley Lumber Company, in the sum of $1,450.31:

It is therefore ORDERED, ADJUDGED and DECREED that plaintiff's motion for judgment on the pleadings be and the same is hereby granted, and the Clerk of this Court is hereby directed to enter judgment in favor of the plaintiffs and against the defendant, O'Malley Lumber Company, for the sum of $1,522.24 together with plaintiff's costs herein, when the same are taxed, in the sum of $39.50; that the defendant, principal obligor, taxpayer, Arizona Fibre Products Company, is to be credited, upon its tax liability, in the sum of $1,522.24; that the lien, alleged, of C. A. Clements, assignee of Arizona Fibre Board Corporation, is subsequent and/or inferior to the lien by warrant of distraint, above mentioned, and the said defendant, assignee of Arizona Fibre Board Corporation, is foreclosed of any right to said sum of money under warrant of distraint.

 

 

[53-2 USTC ¶9510]In the Matter of Hardy Plastics & Chemical Corp., Debtor

In the United States District Court for the Eastern District of New York, Bankruptcy No. 49876, 112 FSupp 878, June 9, 1953

Liens for taxes: Bankruptcy: Arrangements confirmed under Chapter XI of the Bankruptcy Act: Priority of referees' fees and expenses.--Under the debtor's plan of arrangement approved by court order under Chapter XI of the Bankruptcy Act, the statutory lien existing in favor of the Government's tax claims was not waived. Accordingly, the Government cannot be regarded as an "unsecured creditor" within the meaning of Sec. 40c(2) of the Bankruptcy Act. Therefore, the referee is not entitled to a fee of 11/2% of the amount of the Government's tax lien, and this fee should be refunded to the debtor.

Louis P. Rosenberg, for debtor. Frank J. Parker, United States Attorney, Nathan Borock, Assistant United States Attorney, Warren E. Burger, Assistant Attorney General, Paul A. Sweeney, T. S. L. Perlman, Department of Justice.

GALSTON, District Judge:

This is a petition by the debtor for review of the supplemental opinion and order of the referee in bankruptcy, entered in this proceeding on December 31, 1952 . The proceeding is one under Chapter XI of the Bankruptcy Act, 11 U. S. C. A. 701 et seq., for an arrangement.

The debtor filed its petition under Chapter XI on January 23, 1952 . Its plan of arrangement was confirmed by the court on May 27, 1952 , in an order reserving the question presented by this petition for review. That question arose under the following facts:--In the arrangement proceeding the Director of Internal Revenue filed proofs of debt for federal taxes amounting to $83,108.12. On January 14 and 15, 1952, before the debtor's petition for arrangement was filed, the Director had perfected and filed notices of tax liens for $58,473.42. Notices of the tax liens were filed in the Clerk's office both in the Eastern and Southern Districts of New York. They were filed also in the Register's Office in Kings, New York and Queens Counties . On January 18, 1952 , certain promissory notes and trade acceptances in the debtor's favor were delivered to the Director. On the same day, the Government's lien was asserted against certain accounts receivable by the mailing of a notice of tax claim to the corporation owing the accounts receivable. The Director secured payments on these notes, trade acceptances and accounts receivable totaling $9,026.16.

The debtor's plan of arrangement provided that the admin istration expenses and priority claims be paid in full, and that unsecured creditors should receive 25% of their claims. Prior to the confirmation of the plan of arrangement, the Director of Internal Revenue and the debtor entered into a stipulation, outside the plan of arrangement, whereby the tax claim was to be allowed in full; the terms of the stipulated agreement calling for the payment of $10,000 in cash and the balance of the claim in monthly installments, secured by a chattel mortgage covering all of the machinery, fixtures and equipment of the debtor. The agreement stipulated to by the parties was approved by the referee and by order of the court. The terms of the agreement were incorporated into an order providing that the agreement "be incorporated in and made part of the order confirming the plan."

[Debtor Charged With Administrative Fees and Expenses Based on Tax Claim]

Among other costs of admin istering the estate, the referee charged the debtor with 11/2% of the $83,108.12 tax claim, or $1,246.62, as statutory fees for the Referees' Salary Fund and for the Referees' Expense Fund. In ordering the payment of the $1,246.62 as fees, the referee held that the entire $83,108.12 tax claim should be treated as an amount payable to an unsecured creditor within the meaning of Section 40c(2) of the Bankruptcy Act, 11 U. S. C. A. 68(c)(2). The debtor objected, claiming that the tax claim could not properly be treated as an unsecured claim. Upon review, the referee decided that the $9,026.16 obtained by the Director in actual payments should not be charged or computed as an amount payable to an unsecured creditor under Sec. 40c(2). Therefore, he ordered that the debtor should receive a credit and refund, but only in the sum of $135.39 (11/2% of $9,026.16).

It is the debtor's contention on this petition for review that the tax claim of $58,473.42, for which notices of tax liens had been filed prior to filing of the petition for arrangement, should not have been classified as an unsecured debt within the meaning of Sec. 40c(2). The debtor seeks, therefore, to modify the referee's order further so as to allow a refund of $877.09 (11/2% of $58,473.42) in addition to the sum of $135.39, as directed by the referee.

Sec. 40c(2) of the Bankruptcy Act provides, in pertinent part, as follows:

"Additional fees for the referees' salary fund and for the referees' expense fund shall be charged, in accordance with the schedules fixed by the conference (a) * * *; (b) against each case in an arrangement confirmed under Chapter XI of this Act, and be computed upon the amount to be paid to the unsecured creditors upon confirmation of the arrangement and thereafter, pursuant to the terms of the arrangement * * *." 11 U. S. C. A. 68(c)(2).

A tax claim in favor of the United States is constituted a lien upon the property of the taxpayer by virtue of Sections 3670-3672 of the Internal Revenue Code. Section 3670 provides:

"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." 26 U. S. C. A. 3670

Section 3672 of the Code reads as follows:

"(a) 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. * * *

"(2) With clerk of district court. * * *." 26 U. S. C. A. 3672

[Referee Held Government's Claims Were Unsecured Claims]

The referee recognized the Government's tax claims as being "statutory lien claims". However, he held that the claims were not secured claims and therefore subject to the assessment and charge provided for in Section 40c(2) of the Bankruptcy Act. The referee reached his conclusion by interpreting Section 67c of the Bankruptcy Act, 11 U. S. C. A. 107(c), as affecting the status of a claim as being secured or unsecured under Section 40c(2). He concluded that since the Director's claims for taxes were not accompanied by possession of the taxpayer's property before bankruptcy, and since under Section 67c, such claims, even though considered as statutory liens, must be postponed in payment to the debts specified in clauses (1) and (2) of Section 64a of the Bankruptcy Act (which include fees for the referees' salary and expense funds) it was proper to include the tax claims in computing the required charges and assessments under Section 40c(2).

The Government appears in this proceeding on behalf of the Referees' Salary and Expense Funds. It does not contend, however, that the tax claims constitute unsecured debts. It takes the view that the tax lien granted by statute gives the tax claims many characteristics of a secured claim, but that the application of the postponement provisions of Section 67c deprives the claims of some of the characteristics of a secured claim. Moreover, it professes to take "no position on the result to be reached, leaving it to the Court's determination whether the referee's order should be affirmed or set aside."

[Generally, Where There Is a Valid Lien, Claim Is Secured]

A lien for taxes is by way of security against particular property or assets. Generally speaking, where there is a valid lien, the tax claim is a secured one payable from the value of the property to which it attaches. 6 Remington on Bankruptcy, Sec. 2824 (5th ed. 1952). In Goggin v. California Labor Division, 336 U. S. 118 [49-1 USTC ¶9142], there is language indicating that tax liens are to be distinguished from unsecured claims. There, at page 127, the Supreme Court stated:

"While Section 64 as amended somewhat readjusts priorities among unsecured claims, Section 67 continues to recognize the validity of liens perfected before bankruptcy as against unsecured claims. * * * * Section 67c, as amended, in 1938, does, however, introduce a new postponement in the payment of certain claims secured by liens to the payment of other claims specified in clauses (1) (for certain admin istrative expenses, etc.) * * *. This subordination is, however, sharply limited."

[Effect of Sec. 67c of Bankruptcy Act]

An examination of Section 67c shows that it deals with the question of priority in the payment of certain designated claims. The terms thereof do not purport to alter the status of claims which are otherwise to be regarded as secured or unsecured claims. Where the assets of the debtor are not sufficient to pay a statutory tax lien after the payment of admin istrative expenses and wage claims, the practical effect of Section 67c may make the statutory tax lien less "secure" in respect to payment. Even assuming that Section 67c may affect the security afforded the tax claims by virtue of the statutory lien, at most it takes away some of the characteristics of a secured claim. It subordinates payment to the specified claims, but it does not relegate the Director to the position of having to share the remaining assets, in payment of his claims, with the general unsecured creditors.

The situation discussed above is only hypothetical in the instant case, however, for there is no question that the Director's tax claims will be paid in full. In respect to the installment payments, it was stated during the hearing on this petition for review that the chattel mortgage given was more than adequate as security for the balance due. Moreover, included in the terms and conditions of the stipulation between the Director and the debtor are the following pertinent provisions:

* * *

"4. No action shall be taken for the purpose of enforcing the liens of the United States , notices of which have heretofore been filed, unless and until there shall be a default in the installment payments herein provided for."

* * *

"6. That time is of the essence in connection with the deferred payments, and in the event of default in making any of the deferred payments of Federal taxes as provided herein, * * * the United States of American or the Collector of Internal Revenue, or both, shall have the right to declare the outstanding balance * * * due and payable, and shall have the right to collect the outstanding balance by distraint proceedings or by any other proceeding authorized by law * * *."

"7. That so long as the Federal tax liabilities claimed in this proceeding remain outstanding and unpaid, the debtor shall not create any mortgage, lien, or encumbrance upon, or pledge any of the properties now owned by the debtor, except as herein provided, without first obtaining the written consent of the Collector of Internal Revenue, First District of New York, nor shall the debtor sell or otherwise dispose of its assets other than in the ordinary course of business without first obtaining written permission of the said Collector."

[Statutory Lien Was Not Waived by Bankruptcy Arrangement]

It is apparent from these terms and conditions that the Director has not waived the statutory lien existing in favor of the Government's tax claims.

In Strom v. Peikes, 123 Fed. (2d) 1003, 1005, the Court of Appeals of this Circuit pointed out that there is an important distinction to be drawn between statutes creating priority of distribution and statutes providing security for a creditor by awarding him a lien. It would appear that there has been a failure to distinguish between the question of the priority of claims and the question of whether a claim is to be regarded as secured or unsecured in the instant case too.

Moreover, there is some confusion between when a certain claim is entitled to payment, and the right to compute a payment as part of the claim entitled to preference in payment. Admittedly, admin istrative expenses, including referees' fees and expenses, are entitled to payment ahead of all statutory liens for taxes under Section 67c. It doesn't necessarily follow, however, that amounts to be paid under a statutory tax lien are subject to a charge for referees' fees and expenses solely because it is thus subordinated in payment. The test to apply under Section 40c(2) is whether the payments to be made in satisfaction of the tax claims protected by the perfected statutory lien can be regarded as being included within "the amount to be paid to the unsecured creditors upon confirmation of the arrangement and thereafter, pursuant to the terms of the arrangement."

[Conclusion]

In view of the foregoing it must be concluded that in the circumstances of this case the Government cannot be regarded as an "unsecured creditor" within the meaning of Section 40c(2). Therefore, the debtor's petition to modify the referee's order so as to allow a refund of 11/2% of $58,473.42 is granted.

 

 

[53-1 USTC ¶9404]Liberty Building Company, a corporation, Plaintiff v. Rob ert A. Riddell et al., Defendants

In the United States District Court for the Southern District of California, Central Division, No. 14,640-WB, February 13, 1953

Lien priority: Withholding and employment taxes: Purchased chattel mortgage.--A lien for payment of withholding and employment taxes filed by the United States had priority of claim against plaintiff, holder of a chattel mortgage on certain motor vehicles, which chattel mortgage was executed and recorded pursuant to state law after the filing of the tax lien against the mortgagor, and was later sold to plaintiff who also acquired the certificates of title to the vehicles. On motion, the petition to enjoin distraint sale of vehicles for taxes was dismissed.

Samuel A. Miller, 700 Lane Mortgage Building, Los Angeles 14, Calif. , for plaintiff. Walter S. Binns, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, Eugene Harpole and Frank W. Mahoney, Special Attorneys, Bureau of Internal Revenue, 600 Federal Building, Los Angeles 21, Calif., for government.

Findings of Fact and Conclusions of Law re Motion for Preliminary Injunction

BYRNE, District Judge:

The motion of plaintiff for a preliminary injunction came on regularly to be heard, the Honorable William M. Byrne, United States District Judge presiding; the plaintiff was represented by Samuel A. Miller, and the defendant Rob ert A. Riddell, Collector of Internal Revenue for the Sixth District of California, by Walter S. Binns, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant U. S. Attorneys, and Eugene Harpole and Frank W. Mahoney, Special Attorneys, Bureau of Internal Revenue; and the Court having read the complaint and affidavits on file and being duly advised, now makes the following:

Findings of Fact

I. That on the 7th day of September, 1951, defendant Fred E. Rob inson, a resident of Los Angeles County , was the owner of the following described motor vehicles:

                Trade                                                       Serial         New or           No.

Year             Name               Body Type             Motor No.            No.           Used         Cyls.

1948         Dodge          3/4 ton pickup          T-14251098                           Used              6

                            1 1/2 ton

1947         Int'l          Stake Truck             GRD214-109923         26643          Used              6

                            DeLux Club

1948         DeSoto         Coupe                   S-1115885                                              6

 

II. That on September 7, 1951, the Collector of Internal Revenue for the Sixth Collection District of California caused to be filed in the office of the County Recorder of Los Angeles County, California, a notice of tax lien securing payment of withholding and employment taxes assessed against Fred S. Rob inson, doing business as Los Angeles Tile Company, in the sum of $5,373.65.

III. That on October 17, 1951 , Fred E. Rob inson executed a chattel mortgage on the motor vehicles described in Paragraph I of these Findings to Wheeling Tile Company as security for payment of $4,163.08. Said mortgage was recorded with the Department of Motor Vehicles, Sacramento , California , as provided by California Vehicle Code section 185.

IV. That on May 9, 1952 , plaintiff purchased said chattel mortgage from the Wheeling Tile Company and the certificates of title of said motor vehicles were endorsed to plaintiff.

V. That Section 185 of the California Vehicle Code is silent upon the necessity for the requirement of the filing of notice of Federal tax lien in the office of the Motor Vehicle Department of the State of California .

Conclusions of Law

I. That on September 7, 1951 , the United States of America acquired a valid lien upon all the property or rights to property of defendant Fred E. Rob inson, including the motor vehicles described in Paragraph I of the Findings of Fact.

II. That by virtue of Internal Revenue Code section 3672 and California Government Code Section 27330, the United States acquired a lien upon the motor vehicles in question on September 7, 1951 .

III. That by virtue of said lien of the United States , the Collector of Internal Revenue, defendant herein, may sell said motor vehicles at a distraint sale pursuant to the provisions of Sections 3690-3697 of the Internal Revenue Code.

IV. That the motion for preliminary injunction should be denied.

Order Denying Preliminary Injunction (February 13, 1953)

The Motion of the plaintiff for a preliminary injunction came on regularly to be heard before the Honorable William M. Byrne, United States District Judge presiding, the plaintiff was represented by Samuel A. Miller, its counsel, and the defendant Rob ert A. Riddell, Collector of Internal Revenue for the Sixth Collection District of California, was represented by Walter S. Binns, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, and Eugene Harpole and Frank W. Mahoney, Special Attorneys, Bureau of Internal Revenue, his attorneys; and the Court having read the complaint and the affidavits on file, and being duly advised and having heretofore made its Findings of Fact and Conclusions of Law, and it appearing that said motion for a preliminary injunction restraining the sale of certain motor vehicles described as follows:

                Trade                                                       Serial         New or           No.

Year             Name               Body Type             Motor No.            No.           Used         Cyls.

1948         Dodge          3/4 ton pickup          T-14251098                           Used              6

                            1 1/2 ton

1947         Int'l          Stake truck             GRD214-109923         26643          Used              6

                            DeLux Club

1948         DeSoto         Coupe                   S-1115885                                              6

should be denied.

IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED that the motion of plaintiff for a preliminary injunction enjoining the sale of certain motor vehicles be, and is, hereby denied.

Order Dismissing Action (April 21, 1953)

The defendant's motion to dismiss the above entitled action upon the ground that the complaint fails to state a claim upon which relief can be granted came on regularly for hearing before the Court at Los Angeles, California, on March 23, 1953, before the Honorable William M. Byrne, Judge; plaintiff appeared by Samuel A. Miller, its attorney, and the defendant appeared by Walter S. Binns, United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, and Eugene Harpole and Frank W. Mahoney, Special Attorneys, Bureau of Internal Revenue. Memoranda of points and authorities were filed on behalf of each of the parties and the motion submitted upon said memoranda. The Court, after having considered the memoranda of points and authorities and the complaint on file herein, finds and concludes that the complaint fails to state a claim upon which relief can be granted.

NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED:

(1) That the temporary restraining order made herein on the 28th day of October, 1952, be, and the same is, hereby dissolved;

(2) That the defendant shall have the right to apply for the assessment of damages against the plaintiff and the surety upon its injunction bond in the manner provided by Section 65(c) of Rules of Civil Procedure for the District Court;

(3) That the defendant have judgment for the dismissal of this action; and for his costs to be taxed by the Clerk in the sum of $20.00.

 

 

[53-1 USTC ¶9386]In the Matter of T. W. Smith Plumbing & Appliance Company, Inc. Bankrupt

In the United States District Court for the Northern District of Alabama, Southern Division, In Bankruptcy. No. 57003, February 6, 1952

Tax liens: Validity against trustee in bankruptcy.--The State of Alabama petitioned for review of an order of the referee in bankruptcy on the claims and their priorities. In his report to the District Court the referee stated that the question involved was the priority between the United States , the State of Alabama and the State Department of Industrial Relations. Having examined the decisions of the federal courts, he concluded that the courts were in conflict as to whether the trustee in bankruptcy was placed in the shoes of a "judgment creditor." However, he felt that since the tax liens of the State of Alabama were not recorded, they were ineffective as against the trustee in bankruptcy.

H. Grady Tiller, Department of Revenue, Montgomery , Ala. , for the State of Alabama . Homer R. Miller, Room 4625, Department of Justice Building , Washington , D. C., for the Collector of Internal Revenue. Eugene Foster, Department of Industrial Relations, Montgomery, Ala., for the Alabama Department of Industrial Relations. George I. Case, Jr., Massey Building , Birmingham , Ala. , for trustee. Irvine Porter, Comer Building , Birmingham , Ala. , for the bankrupt.

TO HONORABLE CLARENCE MULLINS and HONORABLE SEYBOURN H. LYNNE, UNITED STATES DISTRICT JUDGES:

I, Stephen B. Coleman, Referee in Bankruptcy in charge of this proceeding, do hereby certify that in the course of such proceeding an order was entered on the 10th day of December, 1951, on the prior and secured claims and their relative rights and priorities, the original of said order being set up with this report.

That on December 19th, 1951 , The State of Alabama , Department of Revenue, feeling aggrieved at said order filed a petition for review, which was granted.

The referee herewith undertakes to set out for the convenience of the court a statement of the questions which he conceives to be involved in the review.

[Question of Priority Between Creditors]

This case was submitted on an agreed statement of facts by the United States , the State of Alabama , and the State Department of Industrial Relations, and raises a question of priority between the named creditors.

The legal question raised by the State of Alabama has not been definitely settled and no case directly in point has been cited by any of the parties.

[Secs. 67b and 70c of the Bankruptcy Act]

In 1938 Section 67b of the Bankruptcy Act (11 U. S. C. A. 107b) was amended so as to provide as follows:

". . . and statutory liens for taxes and debts owing to the United States or any State or subdivision thereof, created or recognized by the laws of the United States or of any State, may be valid. . . . Whereby such laws such liens are required by be perfected and arise but are not perfected before bankruptcy, they may nevertheless be valid, if perfected within the time permitted by and in accordance with the requirements of such laws, . . ."

The State urges that there is an apparent conflict between Section 67b and Section 70c.

Section 70c, as to the part pertinent here, provides:

". . . The trustee, as to all property of the bankrupt at the date of bankrupt whether or not coming into possession or control of the court, shall be deemed vested as of the date of bankruptcy with all the rights, remedies, and powers of a creditor then holding a lien thereon by legal or equitable proceedings, whether or not such a creditor actually exists . . ."

Section 70c, as now amended, was adopted March 18th, 1950 . This case was filed May 20th, 1950 , and the title of the trustee is controlled by the new amendment to Section 70c.

This Section is commonly called the "strong arm clause" because it was construed by the courts to give the trustee powers to set aside and avoid conveyances, mortgages and transfers, which the bankrupt did not have in his own right. This Section was originally added as 47a (2) by amendment of June 25th, 1910 to meet the decision in York v. Cassell, 201 U. S. 344, 26 Supreme Court 481. Judge Grubb in In re Calhoun Supply Co., 189 Fed. 537, decided soon after the amendment that the trustee was a "judgment creditor" with a lien with the power to avoid unrecorded conditional sales under the Alabama Law. From the amendment in 1910 down through the Chandler Act in 1938 and up to the last amendment of the Act on March 18th, 1950 , a majority of the cases almost without exception placed the trustee in the shoes of a "judgment creditor with a lien" as to all property in the possession of the bankrupt.

[The Congressional Purpose of Sec. 70c]

In House Report No. 1293 on Senate Bill 88, 81st Congress, it was declared that the purpose of the 1950 amendment to Section 70c was to strengthen the trustee's title and not to weaken it. Page 4 reads:

"Section 2 of the bill amends section 70c of the Bankruptcy Act, dealing with the general rights of a trustee in bankruptcy, and is essentially correlative to the amendment to section 60a, effected by section 1 of the bill. Under existing law, a trustee, as to all property in the possession or under the control of the bankrupt at the date of bankruptcy, is deemed vested, as of the date of bankruptcy, with all of the rights of a creditor then holding a lien by legal or equitable proceedings, and, as to all other property, with the rights of a judgment creditor then holding an unsatisfied execution.

"In view of the amendment made to section 60a, as well as intrinsically, it is deemed wise to place the trustee in bankruptcy in the position of a lien creditor with respect to all of the bankrupt's property, and section 2 of the bill so amends section 70c."

Page 7 reads:

"Section 2 is the amendment to section 70c of the act above referred to, which has been placed in the bill for the protection of trustees in bankruptcy as correlative to the amendment to section 60, and also to simplify, and to some extent expand, the general expression of the rights of trustees in bankruptcy."

The act never contained the words "judgment creditor" but rather read ". . . shall be deemed with the powers of a creditor then holding a lien thereon by legal or equitable proceeding, whether or not such a creditor actually exists."

These words which of course are of federal origin and federal construction (Commercial Credit Co. v. Davidson, 112 Fed. (2d) 54) came to be construed as giving the trustee the most favored lien a creditor could have under the laws of each state. He was sometimes referred to as the "ideal creditor" possessing every possible right or lien a creditor could have by legal or equitable proceedings.

[Tax Liens of the State Not Recorded]

Conceding that the trustee in this case was a judgment creditor on May 20th, 1950, when the bankruptcy case was filed, and that section 883 of title 51, required the State to record its liens to make them effective against a judgment creditor, since the tax liens claimed by the State of Alabama were not recorded, they were ineffective as to the trustee. Under the bankruptcy act (section 67b) State tax liens must be perfected within the time permitted by state law. Section 883 of title 51, Code of Alabama would be the only statute, if any, preventing perfection. Nothing in the bankruptcy act would prevent it, except as to its reference to state law.

[Is Trustee a Judgment Creditor?]

The whole question then resolves itself as to the status of the trustee. Is he a "judgment creditor" as named in section 883.

It has long been held that it was the purpose of the bankruptcy act to "fix a line of cleavage" as to the rights of creditors on the date of bankruptcy.

"This general point of view in interpreting the Bankruptcy Act is one of long standing. In Everett v. Judson, 228 U. S. 474, 479, 33 S. Ct. 568, 569, 57 L. Ed. 927, 46 L. R. A., N. S. 154, this court said:

'We think that the purpose of the law was to fix the line of cleavage with reference to the condition as of the time at which the petition was filed and that the property which vests in the trustee at the time of adjudication is that which the bankrupt owned at the time of the filing of the petition.'

"See also, Myers v. Matley, 318 U. S. 622, 626, 63 S. Ct. 780, 783, 87 L. Ed. 1043, 145 A. L. R. 498; United States v. Marxen, 307 U. S. 200, 207, 208, 59 S. Ct. 811, 815, 83 L. Ed. 1222; Acme Harvester Co. v. Beekman Lumber Co., 222 U. S. 300, 307, 32 S. Ct. 96, 99, 56 L. Ed. 208.

"While Sec. 67, sub. c was added to the Bankruptcy Act by the Chandler Act in 1938, we find nothing in it or in its legislative history to suggest an abandonment of the underlying point of view as to the time as of which it speaks and the general purpose of Congress to continue to safeguard interests under liens perfected before bankruptcy. City of Richmond v. Bird, 249 U. S. 174, 39 S. Ct. 186, 63 L. Ed. 543; In re Knox-Powell-Stockton Co., 9 Cir. 100 Fed. (2d) 979 [39-1 USTC ¶9277]; In re Van Winkle, D. C. 49 Fed. Supp. 711. While Sec. 64, as amended, somewhat readjusts priorities among unsecured claims, Sec. 67 continues to recognize the validity of liens perfected before bankruptcy as against unsecured claims. Section 67, sub. b has clarified the validity of statutory liens, including those for taxes, even though arising or perfected while the debtor is insolvent and within four months of the filing of the petition in bankruptcy. It expressly recognizes that the validity of liens existing at the time of filing a petition in bankruptcy may be perfected under some circumstances after bankruptcy."

Goggin v. Division of Labor Law Enforcement of Cal. , 69 Sup. Ct. 473 [49-1 USTC ¶9142].

Although the Goggin case really involved an interpretation of section 67c, the reference to section 67b serves to show that 67b was not to give an unqualified or unbridled right to perfect tax liens after bankruptcy.

If the trustee's rights as a conventional, actual, or "ideal" judgment creditor with a lien intervened before perfection of a tax lien by recording as required by state law, it is difficult to see how such liens could be perfected under and in accordance with state law thereafter.

It was stated in In re Taylorcraft Aviation Corporation, 168 Fed. (2d) 808 [48-1 USTC ¶9288] that the trustee in reorganization under Chapter X was not a "judgment creditor" within the meaning of title 26 U. S. C. A. 3672. No cases are cited and Judge Allen does not discuss the question. However, the opinion states that "Several hours prior to the filing of the petition for re-organization, on Nov. 8, 1946, the Government filed with the recorder of Stark County, Ohio, notice of a lien for taxes, as required by section 3672(a)(2), Title 26, U. S. C. A." In view of this fact, whether the trustee became vested with the rights of a judgment creditor thereafter would seem entirely irrelevant. Attention is called further to the fact that there was no question of state taxes involved. The case involved a mechanic's lien, which lien antedated federal taxes and the case so holds. This case, except for the dicta that the trustee is not a judgment creditor is not an authority for the State's position in the T. W. Smith case.

In Adams v. O'Malley, 182 Fed. (2d) 925 [50-2 USTC ¶9349], Judge Sanborn held that section 3466, 31 U. S. C. A. 191 did not apply in bankruptcy. He therefore held all State and Federal tax liens to be on a parity. The question of recording or perfecting liens was not discussed, and apparently all litigants conceded the validity of all liens as against the trustee.

In United States v. Sampsell, 153 Fed. (2d) 731 [46-1 USTC ¶9186], Judge Stephens held that section 3672 was not applicable to that case.

"There is nothing in the Internal Revenue Code, Sections 3670-3672, 26 U. S. C. A. Int. Rev. Code, Sections 3670-3672, providing for government priority over inchoate liens which antedate its own liens.

"We are of the opinion that the requirements of recordation in the Internal Revenue Code, Sec. 3672, are not applicable in the instant case. The true purpose of a recording provision is to give protection for the future rather than over events which have already taken place in the past".

The case presents another attempt by Government lawyers to gain priority over State taxes by trying to inject section 3466 into bankruptcy proceedings. This was as usual ruled out and section 3466 held inapplicable to bankruptcy.

The Sampsell case involved the rights of three lien creditors:

1. Corporate franchise taxes due California .

2. A mortgage executed and delivered on January 19, 1941 and recorded May 3, 1941 .

3. Gasoline taxes due United States.

California law made the franchise taxes a lien to have the same force and effect as a judgment on the first day of each taxable year. No recording was required.

The United States taxes became a lien by virtue of 3670 and 3672 of title 26, U. S. C. A. No notice of lien was recorded.

The Circuit Court affirmed the District Court's decree paying first the mortgage and applying the balance of the funds to the State. Since the assets were insufficient to pay both of these in full, "the legality of the United States claim, aside from the priority phase was not passed upon".

It was not necessary to determine the question of recording as priority did not depend on that question, since there was no state law requiring the State to record. However, Judge Stephens does state that the Government did not have to record in order to have a lien as against the trustee.

Concededly, the Sixth Circuit and the Tenth Circuit would hold that the United States would not have to record its liens prior to bankruptcy under section 3672 of the Internal Revenue Code. They have not so ruled as to State recording Statutes. No Alabama case has been cited construing section 883. However, it follows substantially the wording of section 3672, and seems to be modeled thereon.

[The Position of the Second Circuit]

In the case of United States v. Sands, 174 Fed. (2d) 384 [49-1 USTC ¶9264] Judge Clark, of the Second Circuit, in holding that a levy of distraint and reduction of property to possession prior to bankruptcy gave the Government rights prior to the trustee, at the same time set aside as misleading and confusing the suggestion in In re Taylorcraft Aviation Corp., 168 Fed. (2d) 808 [48-1 USTC ¶9288], that the trustee was not a judgment creditor:

". . . While we agree with the contention of the Government, we put to one side as only confusing and misleading a suggestion accepted below and partially urged here, in reliance upon a dictum of In re Taylorcraft Aviation Corp., 6 Cir., 168 Fed. (2d) 808, 810 [48-1 USTC ¶9288], that "an unrecorded tax lien of the collector was good against a trustee because a trustee was not a judgment creditor." We do not see how this dictum can be followed in view of the express provision to the contrary in Bankruptcy Act. Sec. 70, sub. c, 11 U. S. C. A. Sec. 110, sub. c, and the frequent decisions upholding the rights of a bankruptcy trustee over conditional vendors and other creditors holding improperly filed instruments of security. Thus see Empire State Chair Co. v. Beldock, 2 Cir., 140 Fed. (2d) 587, 589, certiorari denied 322 U. S. 760, 64 S. Ct. 1278, 88 L. Ed. 1587, citing cases. As a matter of fact the view we regard as necessarily correct was followed in the Taylorcraft case below, D. C. N. D. Ohio, 76 Fed. Supp. 81, 85 [48-1 USTC ¶9104]. . . ."

(174 Fed. (2d) 384)

[Authorities in Conflict]

This is an apparent conflict between the opinions of the Tenth and Sixth Circuits and of some District Courts on the one hand and of the Second Circuit and a legion of District Courts, Text Writers, and State Court decisions on the other. This is on the question of whether under the recording provision of section 3672 the trustee is a "judgment creditor" as named therein.

In the recent Supreme Court Decision of United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492], 95 L. Ed. 53 Mr. Justice Jackson says that the words "judgment creditor" mean a "conventional judgment creditor".

Therefore, there is an apparent division of opinion whether the trustee by section 70c under the more recent authorities is now to be placed in the shoes of a "judgment creditor". If not, there will be great confusion in babkruptcy proceedings because recording will be immaterial in most instances and the effect would be to disregard recording statutes, reinstate secret liens, and return to the situation prior to 1910 and the York v. Cassell case.

[Congressional Intent Uncertain]

The amendment added in 1938 as section 67b may be a congressional expression of a desire to preserve tax liens (and other statutory liens) in bankruptcy without regard to recording. How uncertain this intent is is well expressed in Collier on Bankruptcy Vol. 4 Page 228.

"The general rule in bankruptcy is that the filing of the petition freezes the rights of all parties interested in the bankrupt estate. Exceptions only emphasize the rule. Whatever disagreement in opinion there may have been on the matter prior to the Act of 1938, (2) it is now clear that statutory liens may be valid if they arise before bankruptcy although they are perfected after bankruptcy, if the perfection is within the time permitted by and in accordance with the requirements of applicable. (3) Subdivision b adopts the theory that the local law should determine the susceptibility of such liens to perfection after bankruptcy . . ."

Also page 232 of the same text:

"A matter that Sec. 67b does not clearly cope with is suggested by two cases construing the Georgia statute dealt with in Henderson v. Mayer. (16) Thus, where by applicable lien law a creditor holding a lien by judicial proceedings prevails over a creditor with an unperfected statutory lien, may be the statutory lienor nevertheless prevail as against the powers of the bankruptcy trustee under Sec. 70c, by perfecting his lien after the commencement of bankruptcy proceedings? Section 70c is unequivocal in declaring that

`The trustee, as to all property in the possession or under the control of the bankrupt at the date of bankruptcy court, shall be deemed vested as of the date of bankruptcy with all the rights, remedies, and powers of a creditor then holding a lien thereon by legal or equitable proceedings, whether or not such a creditor actually exists; and, as to all other property, the trustee shall be deemed vested as of the date of bankruptcy with all the rights, remedies, and powers of a judgment creditor then holding an execution duly returned unsatisfied, whether or not such a creditor actually exists.'" (17)

"Section 67b is less clear and less positive. Thus, while it proclaims at the outset the inapplicability of Sec. 60 to statutory liens, it does not mention Sec. 70. The language of the first sentence of Sec. 67b is furthermore not mandatory: '. . . statutory liens . . . may be valid against the trustee.' The deliberate use of such phraseology seems to leave the way open for the application of local lien law to permit the trustee to prevail under Sec. 70c in proper cases. (18) Finally, in the second and concluding sentence of Sec. 67b, which contains the provision permitting perfection of statutory liens after bankruptcy, the prepositional phrase, 'against the trustee,' is omitted. (19) Under ordinary rules of grammatical construction it might well be said that the words 'against the trustee' should be supplied. In view, however, of the fact that Sec. 67b expressly makes Sec. 60 inapplicable to statutory liens may--not shall--be valid, it is proper to conclude that Section 67b does not engraft any exception on the otherwise unqualified language of the 'strong-arm' provisions of Sec. 70c. It is not admissible to say that the applicable lien law shall be disregarded either under Sec. 67b or Sec. 70c. (20) In Sec. 67b's present form, it is believed that it does not avail the holder of any statutory lien to perfect his right after bankruptcy commences unless the applicable local law gives him a better title than that given the trustee by Sec. 70c. (21) Such an interpretation is neither a result of strict construction nor at war with the fundamental purpose and spirit of the Bankruptcy Act."

"(All footnotes are omitted)."

It is hard to see why Congress would exempt all statutory liens from recording, regardless of whether recording is a step in perfection of the lien, and at the same time annul and avoid mortgages, conditional sales and all other conventional forms of security, for failure to record. As footnote #20 on page 233 of COLLIER states, it is a matter of State Law. If the State law requires recording to be effective, then the bankruptcy act follows the State law. If it is too late after bankruptcy, provided the trustee is in the place of a judgment creditor and has his power to annul and avoid for failure to record.

Under the long-settled construction of section 3672 of the Internal Revenue Code, recording as to judgment creditor is a step in "perfection" of the lien. Perhaps the same construction should be given section 883 of Title 51, Alabama Code, if it is modeled on the Federal Statute and is adopted from it.

The referee hands up herewith for the consideration of the Court the following papers:

(1) Stipulation as to facts as filed by the parties on December 5, 1951 .

(2) Order of the referee dated December 10th, 1951 with reference to claims and distribution of funds.

(3) Petition for review filed by State of Alabama , Department of Revenue, filed on December 19, 1951 .

 

 

[53-1 USTC ¶9360]In the Matter of Wright Industries, Inc., Bankrupt

In the District Court of the United States for the Northern District of Ohio, Eastern Division, In Bankruptcy. No. 65749, 112 FSupp 445, April 13, 1953

Priority of U. S. tax claims against a bankrupt: Effect of court order of subrogation.--The right of priority over claims of general creditors given by Sec. 64a(4) of the Bankruptcy Act to a valid claim for taxes owing by a bankruptcy to the United States is not invalidated by an order of subrogation of such right granted by Bankruptcy Court to trustee in bankruptcy.

John J. Kane, Jr., District Attorney, Rob ert C. Grisanti, Assistant United States Attorney, and C. B. Watkins, District Clerk, Federal Building, Cleveland, Ohio, for the government. Murray A. Nadler, 901 Wick Building, Youngstown , Ohio , for trustee.

Memorandum

WILLIAM B. WOODS, Referee in Bankruptcy:

Graham Kearney, Trustee in Bankruptcy, filed objections to the allowance of the second amended claim of Thomas M. Carey, Collector of Internal Revenue for the United States of America , for $34,242.02, on two grounds: (1) as to the amount of the claim, and (2) as to the right of priority of any tax claim due to the United States .

When the Collector failed to answer or appear, the Trustee asked an order of subrogation, and after notice, an order was entered on April 9, 1952 , preserving liens for the benefit of the estate. The Trustee thereafter now claims that by reason of such order, the tax claim of the United States lost its priority.

The District Attorney then filed this motion to vacate the order of subrogation and hearing was had upon the motion to vacate and as to the amount of the Government claim. Upon such hearing by stipulation the amount of the Government claim was reduced to $28,375.14 and briefs were submitted on the question of subrogation.

The claim of the Trustee, because of the order of subrogation that the tax claim of the Government loses its priority by reason of subrogation, to say the least, is unique. An elaborate brief was filed by counsel for the Trustee with much reliance upon the equity powers of the Bankruptcy Court, and claiming a new rule was to be applied since the 1952 Amendments to the Bankruptcy Act.

First to be considered are the sections of the Bankruptcy Law, which appear applicable to this situation. Trustee relies upon the fact that two chattel mortgages were heretofore found fraudulent, Re: Wright Industries, Inc., 93 Fed. Supp. 58, and any liens arising therefrom invalid, and because of this subrogation is claimed under Sec. 67(d)-6. The Amendment of 1952 adds provisions giving trustee the right to avoid transfers (by subrogation) and preserve liens for the benefit of the trustee. This is claimed to be similar to the situation under Sec. 60(a) now by amendment. See also Sec. 70(e) 2.

[Question as to Whether Court by Order of Subrogation Can Invalidate Priority of U. S. Tax Claim]

The question raised by the Trustee's argument is:--may the Court by Order of Subrogation make invalid the priority of the tax claim? As before indicated, this claim of the trustee is unique and there seems to be no authority to be found in the books on this exact point. At many places in the brief of the Trustee, there is mention of "preservation of lien for the benefit of the estate". The answer to this appears to be that such language can only apply where there is a transfer of a prior lien from one lien to another subsequent lien. In the case at bar, there never was a lien to the United States Government, but there remains the priority of tax claims and wage claims, if any had been filed.

Under Section 64(a)-4 tax claims are given the right to priority, which cannot be denied or sidestepped to the benefit of general creditors of the estate. So far as the text books are concerned, in Collier on Bankruptcy, Vol. 3, p. 2117, there is the statement that the tax claim which was entitled to be secured as a lien, but was not perfected by statutory procedure, may still be a tax claim with priority under Sec. 64(a)-4. There are also the following cases which might be considered but are hardly in point. See Re: Smith & Co., 289 Fed. 524, 1 ABR ns 119 (Fla. D. C.), Re: Brannon, 62 Fed. (2d) 959 (5 CC 1933) 22 ABR ns 378, Re: Lambertville Rubber Co. Inc., 111 Fed. (2d) 45, 42 ABR ns 697 (3 CC 1940).

[The Court's Decision]

There is no point in vacating the order authorizing subrogation, since the doctrine of subrogation is not to be applied to deny priority of a tax lien. So this finding is that the motion of the Government attorney to vacate the order of April 9, 1952 , is denied; the claim of the Collector of Internal Revenue is allowed for $28,375.14 and is found to be a valid tax claim under Sec. 64(a)-4, entitled to priority.

 

 

[53-1 USTC ¶9353]Joe M. Hunt, Violet Hunt, Plaintiffs v. Edward J. O'Connor et al., Defendants, and United States of America, Intervenor

In the United States District Court for the District of Arizona, Civil No. 1769 Phx., April 21, 1953

Priority of tax lien: Interpleader suit.--In an interpleader suit filed by the maker of a note, it was held that the United States was entitled to satisfaction of its lien for income taxes out of the proceeds of the note given to the taxpayer-payee, which note had, prior to the filing of the tax lien, been assigned to his attorney to be used in payment of the tax and the balance retained as attorney's fees.

Jennings , Strouss, Salmon & Trask, Title and Trust Bldg., Phoenix , Ariz. for plaintiffs. O'Connor & O'Connor, 530 West Sixth St., Los Angeles, Calif., for Edward J. O'Connor et al. Edward W. Scruggs, U. S. Attorney, and E. R. Thurman, Assistant U. S. Attorney, both of Phoenix, Ariz., for the United States.

Findings of Fact and Conclusions of Law

LING, District Judge:

The above entitled cause came on regularly for trial on the 23rd day of December, 1952, before the court, sitting without a jury. O. M. Trask, Esq., appeared for the plaintiffs; Darrell R. Parker, Esq., appeared for Edwin E. Warwick; Frank E. Flynn, United States Attorney, H. E. McDermott, Special Assistant United States Attorney, and E. R. Thurman, Assistant United States Attorney, appeared for the United States of America; Douglas H. Clark and Edward J. O'Connor appeared for and on behalf of Edward J. O'Connor and William V. O'Connor; and evidence, both oral and documentary, having been introduced and the cause submitted for decision, the court now makes its Findings of Fact as follows:

Findings of Fact

(1) That Joe M. Hunt and Violet Hunt are residents and citizens of the State of Arizona; that Edward J. O'Connor and William V. O'Connor are actively engaged in the practice of law in the City of Los Angeles and that Edward J. O'Connor specializes in income tax proceedings; that they are residents and citizens of the City of Los Angeles, State of California; that Edwin E. Warwick is a resident and citizen of the State of California; that Wayne Hubbs, Assistant Collector of Internal Revenue, is a resident and citizen of the State of Arizona.

(2) That Joe M. Hunt and Violet Hunt, on December 26, 1951, as part payment for the purchase of property owned by Clarence E. Baldwin, executed and delivered to him a promissory note, dated December 26, 1951 in the amount of $75,000.00 and payable in semi-annual instalments of $12,500.00, plus interest at 4% per annum. The first instalment became due and payable on July 2, 1952 . The said first instalment was paid to the Clerk of the above entitled court and the subsequent instalments, as they became due and payable, have likewise become payable to the Clerk of the United States District Court as the custodian of these funds, pending judgment and order of the Court. There is at the present time approximately $27,000.00 on deposit with the Clerk of the above entitled Court.

(3) That the defendant, Wayne Hubbs, as the Assistant Collector of Internal Revenue, served a levy on January 24, 1952 for the proceeds of the said note to satisfy internal revenue tax lien in the amount of $98,319.66, filed on January 16, 1952, in the City of Phoenix, State of Arizona; that on July 14, 1948 and on May 23, 1952 Clarence E. Baldwin had filed a Petition to the Tax Court of the United States for a redetermination of the said tax and by judgment of the Tax Court entered on September 25 and October 7, 1952 this amount was redetermined to be $32,673.18 in place of $98,319.66; that Edwin E. Warwick served a Writ of Garnishment on the plaintiffs on May 8, 1952 on a judgment lien recorded April 18, 1952 and Edward J. O'Connor made demand for payment of the proceeds of the said note on the grounds that it had been endorsed and transferred to him for full and adequate consideration on January 9, 1952; that in view of the separate demands for payment of the proceeds of the said note, the plaintiffs filed a complaint in interpleader, requesting that each of the said three parties present the basis for their claims to the proceeds of the said note. The United States of America , being the proper party in interest, was substituted in place of Wayne Hubbs, as Assistant Collector of Internal Revenue.

[Services of Attorney]

(4) That on January 9, 1952 the said promissory note was endorsed and transferred to Edward J. O'Connor by Clarence E. Baldwin for full and adequate consideration; that on January 18, 1948 Edward J. O'Connor was retained by Clarence E. Baldwin to represent him on income tax proceedings then pending before the United States Treasury Department for the calendar years 1940 to 1946, inclusive; that on January 30, 1948, by letters, the Bureau of Internal Revenue at its offices in San Francisco, Los Angeles and Phoenix, Arizona, was advised of such representation and by letter dated February 3, 1948 from the Bureau of Internal Revenue office in San Francisco, receipt and acknowledgment of such representation was made; that Edward J. O'Connor rendered services continuously from that date until December, 1951 on income tax proceedings, principally contemplated criminal action for income tax evasion, for the said period; that Clarence E. Baldwin operated three separate establishments in the State of Arizona pursuant to a state liquor and beverage license, and that a conviction of an offense would cause the said liquor licenses to be revoked and the establishments rendered worthless. For this reason and the other injuries of a criminal proceeding, the services rendered were consistent, through [sic] and valuable to Clarence E. Baldwin. That in December, 1951 Edward J. O'Connor advised Clarence E. Baldwin that the services in connection with the contemplated criminal action for the said years had been successfully completed for Clarence E. Baldwin and in December, 1951 an agreement was made between Edward J. O'Connor and Clarence E. Baldwin whereby the said promissory note was endorsed and transferred to Edward J. O'Connor to pay income tax deficiencies to be determined by the Tax Court of the United States for the calendar years 1940 to 1946, inclusive, and the balance, after payment of the said sum as determined by the Tax Court of the United States, to be paid to Edward J. O'Connor for legal services rendered; that by judgment of the Tax Court of the United States, entered September 25 and October 7, 1952, the said taxes were adjudged to be $32,673.18.

[Purpose of Note Assignment]

(5) That on January 9, 1952 the date the said promissory note was endorsed and transferred to Edward J. O'Connor, there were no other liens outstanding against Clarence E. Baldwin, either in favor of the United States of America or any other creditor; that there had been no notice of lien filed by any other creditor; that on January 9, 1952 Clarence E. Baldwin owned other assets valued at $165,000.00; that on the said date Edward J. O'Connor and Clarence E. Baldwin knew there would be a tax deficiency for the taxable period from 1940 to 1946, and estimated it to be approximately $40,000.00; that such estimate was approximately correct, in that the tax deficiency for the said period was determined by the Tax Court of the United States to be $32,673.18, and that both parties knew Clarence E. Baldwin had assets in excess of an amount necessary to pay the said tax deficiency; that Clarence E. Baldwin had received, prior to January 9, 1952, and had in his possession a letter from Darrell R. Parker offering to settle the claim of Edwin E. Warwick for $3,500.00; that Edward J. O'Connor did not know of the claim asserted by Edwin E. Warwick; that Edward J. O'Connor took the said promissory note as a bona fide holder in due course and for full and adequate consideration; that no evidence was offered by the United States of America, except a stipulation as to the amount of taxes assessed against Clarence E. Baldwin for the said period from 1940 to 1946, inclusive and that another deficiency in taxes has been proposed against Clarence E. Baldwin for the period from 1948 to 1951 and a notice of lien filed on September 15, 1952; that a Petition is now pending before the Tax Court for a redetermination of such proposed deficiency and that on May 12, 1952 another tax deficiency was proposed for the calendar year 1952; that such proposal has not been finally determined as yet; that these proposed assessments are high and will be determined by the Tax Court of the United States; that no evidence was offered by Edwin E. Warwick and that on or about December 19, 1952, by letter addressed to William H. Loveless, Clerk of the United States District Court, Darrell R. Parker, attorney for Edwin E. Warwick, advised that Mr. Warwick no longer had any immediate interest in the controversy because the government's lien was prior to that filed by Edwin E. Warwick and consented that the case be tried without Warwick's presence; that Edward J. O'Connor took the said promissory note with the agreement that he would apply the proceeds on the payment of taxes owing by Clarence E. Baldwin for the period from 1940 to 1946 as it was to be determined by the Tax Court of the United States, and the balance to be paid to him in payment of legal services rendered for the period from January 18, 1948 to December, 1951; that there was no other payment for legal services by Clarence E. Baldwin to Edward J. O'Connor during the said period.

(6) That the plaintiffs have no interest in the proceeds of the said note, other than to have it determined which of the three claimants is entitled to receive the payments to be made pursuant to the terms of the said promissory note.

Conclusions of Law

And as Conclusions of Law from the foregoing facts, the Court finds:

(1) That the plaintiffs have no interest in the rights of the intervening parties to the proceeds payable pursuant to the terms of the said promissory note.

(2) That the promissory note was endorsed and transferred to Edward J. O'Connor on January 9, 1952 to pay income taxes owing by Clarence E. Baldwin for the taxable periods from 1940 to 1946, inclusive, in the amount of $32,673.18, and that Edward J. O'Connor is entitled to receive the balance of the proceeds received from the payments made pursuant to the terms of the said promissory note, together with his costs of suit.

(3) That the United States of America is entitled to receive $32,673.18 from the payments made pursuant to the terms of the said promissory note for taxes owing by Clarence E. Baldwin for the taxable periods from 1940 to 1946, inclusive.

Judgment is hereby ordered to be entered accordingly.

 

 

[52-2 USTC ¶9508]In the Matter of L. P. DePratu, Bankrupt

In the District Court of the United States, for the District of Montana, Great Falls Division, No. 3793

Property seized for tax deficiency: Taxpayer bankrupt: Suits enjoining sale.--Prior to the taxpayer's being adjudicated a bankrupt, the Collector seized certain real and personal property to enforce penalties assessed for non-payment of taxes. In a summary proceeding, a creditor of the taxpayer attempted to restrain the sale of this property by the Collector, but the court stated that the Collector had an apparent prior lien, since possession was established prior to the bankruptcy proceedings. It held that where an adverse claimant (the Government) is in full and undisputed possession of the property, in order to establish the party entitled to the property, a plenary action, not a summary proceeding is proper. Therefore, the case was dismissed.

Charles Davidson, First National Bank Building, Great Falls , Montana , was attorney for Mr. DePratu. Thomas F. Kiely, Butte , Montana , was the referee in bankruptcy. Walter E. Tynes, 806 Third Ave. S. W. , Great Falls , Montana , was the trustee in bankruptcy.

Petition

COMES NOW NATHAN S. YOUNG and respectfully makes known and represents to the Court as follows:

That your petitioner is and was at all times herein mentioned an individual doing business as NORTHWESTERN ROOFING & SHEET METAL WORKERS;

That after proceedings in that regard duly had, this Honorable Court duly made and entered, on the 31st day of August, 1948, an Order adjudicating the said L. P. DePratu a bankrupt person;

That prior to said date said L. P. DePratu became indebted to your petitioner in the amount of Three Hundred Twenty-four and no/100 Dollars ($324.00), being the agreed and reasonable value of labor and materials furnished by petitioner to said L. P. DePratu at his instance and request. That petitioner has received payment for no part of said indebtedness, which is now due and owing.

That the United States Government, acting by and through its agent, Paul R. Harner, Deputy Collector of Internal Revenue, District of Montana, has seized and taken possession of certain real and personal property belonging to said bankrupt, to-wit:

1. Tract of land in Lot 6 (known as NW1/4SE1/4) of Sec. 2, T 20 N, R 3 E:

2. Tract of land in S1/2SE1/4 of Sec. 35, T 21 N, R 3 E;

3. Furniture and fixtures located on the premises of the Stockman's Club, 619 3rd St. N. W. , Great Falls , Mont.

That said United States Government, acting by and through its agent aforesaid, has threatened and intends to sell, and unless restrained, will sell on the 22nd day of September, 1948, said property of said bankrupt for the enforcement of asserted penalties against the said bankrupt for the alleged non-payment of certain taxes.

That if said property is sold and transferred, as threatened, great and irreparable damage will be done thereby to your petitioner for which he has no adequate remedy at law.

WHEREFORE, Petitioner prays that this Court issue a temporary restraining order restraining the United States Collector of Internal Revenue, District of Montana, his servants and agents, from the acts hereinabove set out, until the hearing upon an order to show cause why a temporary injunction should not issue be had.

Order to Show Cause and Temporary Restraining Order

PRAY, District Judge:

Upon reading and filing the verified Petition of Nathan S. Young, doing business as NORTHWESTERN ROOFING & SHEET METAL WORKERS, a creditor of the above named bankrupt, and it appearing to the satisfaction of the Court therefrom that this is a proper case for granting a temporary restraining order, and that unless the temporary restraining order prayed for in said petition be granted great injury will result to the petitioner before the matter can be heard on notice; now, therefore,

IT IS HEREBY ORDERED That the United States Collector of Internal Revenue, District of Montana, be and appear before this Court in the courtroom thereof at the hour of 10:00 o'clock A. M., on the 28 day of September, 1948, then and there to show cause, if any he has, why he, his agents, servants, employees and attorneys, should not be enjoined and restrained during the pendency of the above entitled bankruptcy proceedings from selling, transferring or otherwise disposing of any of the said bankrupt's property.

IT IS FURTHER ORDERED, That pending the hearing of this order to show cause that the United States Collector of Internal Revenue, his agents, servants, employees and attorneys, be, and they are, enjoined and restrained from selling, transferring or otherwise disposing of any of the said bankrupt's property.

IT IS FURTHER ORDERED, That a copy of the Petition of Nathan S. Young be served on said Collector not later than the 22 day of September, 1948.

[Opinion Following Orders]

PRAY, District Judge:

The petition of Nathan S. Young, a creditor of the above bankrupt, called for the issuance of an order to show cause and restraining order, directed to the United States Collector of Internal Revenue to prevent the disposal and sale of the property of the said bankrupt under distraint proceedings for the collection of taxes due the government. Such orders were issued accordingly. The collector seized both personal and real property of the bankrupt on August 4th and 10th, 1948, and such property has been, and is now, in possession of the government. Before the bankruptcy petition was filed the collector had made the levy and taken the property into possession.

Under Title 11, Section 107, U. S. C. A. it would appear that the government could proceed with the sale of the property, irrespective of the bankruptcy petition which was not filed until after the collector had taken the steps above stated. Possession seems to be a principal determinative factor, and that having been accomplished before bankruptcy, the government would seem to have priority under its asserted lien. City of New York v. Hall, 139 Fed. (2d) 935. Where an adverse claimant, as here, is in full and undisputed possession of the property it would seem to be well established by the authorities that in order to determine who is really entitled to the property, the trustee must resort to plenary action and not try to settle the question by a summary proceeding. Cline, Trustee, etc., v. Kaplan, 323 U. S. 97.

The authorities cited in the briefs are sufficient to convince the court that a summary proceeding under the facts found in this case, is not the proper course to pursue, and therefore the order to show cause should be dismissed, and the temporary restraining order dissolved, and such is the order of court herein. Other questions have been raised by counsel but they do not appear to be of such importance or materiality as to alter the result found by the court.

 

 

[52-2 USTC ¶9448]Gulf Coast Marine Ways, Inc., Libelant v. The Trawler, "J. R. Hardee", her motors, etc., and Gibson Collins, Respondents

In the United States District Court for the Southern District of Texas, Brownsville Division, Admiralty No. 117, 107 FSupp 379, May 6, 1952

Priority of federal tax lien over mortgage and maritime liens.--Notice of a federal tax lien which was not filed in the place specified by state law did not create a lien or give the Government priority. A mortgage which was filed before the Government properly filed notice of lien was entitled to priority, and claimants who were subrogated to the mortgagee were also entitled to priority. Further, the tax lien being non-maritime, it has no priority, even though notice is filed pursuant to state statute, over maritime liens in general or at least not over preferred maritime liens.

Kleberg, Mobley, Lockett & Weil, Corpus Christi , Texas , for Libelant. C. S. Eidman, Jr., Brownsville, Texas, for intervening libelants, W. W. Zimmerman, d/b/a Humble Marine Station and Marine Mart, Inc. Sharpe, Cunningham & Garza, Brownsville, Texas, for intervening libelants, Pleason and Sanchez. Brian S. Odem, U. S. Attorney, E. H. Patton, Jr., Assistant U. S. Attorney, Houston, Texas, for intervening libelant, United States of America. Rentfro, Rentfro & Vivier, Brownsville, Texas, for intervening libelants, Coastal Iron Works, Brownsville Navigation District and Oran Neck, d/b/a Precise Electric Co. Crawford Cofer, Brownsville, Texas, for respondents.

Before JAMES V. ALLRED, District Judge.

Findings of Fact and Conclusions of Law

Original libel filed November 5th, 1951 , by Gulf Coast Marine Ways, Inc. (hereinafter called Gulf Coast ), against the "Hardee" in rem and against the owner, Gibson Collins, in personam. The vessel was seized by the Marshal and sold under orders of the court for $6,300.00, now in the registry of the court.

Meantime the other libelants named above were permitted to intervene, setting up claims totaling more than $28,000.00. After payment of costs, only about $5,300.00 will be left for distribution among the claimants. The question before the court is, of course, one of priorities and distribution.

[Claims Described]

Gulf Coast 's claim was for repairs to the vessel in December 1950. This was tried separately and interlocutory decree heretofore rendered for a balance of $1,530.44, plus costs and interest.

Pan American State Bank (hereafter called the Bank) claims a balance of $3,236.00 due on a preferred ship's mortgage for $8,000.00 on the Hardee, executed by the owner (Collins), dated August 9th, 1950 and filed with the Collector of Customs at Brownsville August 22nd, 1950 . The facts concerning this mortgage, its recording, etc., will be stated in detail hereafter. The Bank contends that its mortgage lien is superior to all others.

Intervenors, W. W. Zimmerman, Marine Mart, Coastal Iron Works and Oran Neck, furnished various supplies to the Hardee, some before, some after the Bank's mortgage was filed for record at Brownsville . The details will be stated as the claims are disposed of.

Pleason and Sanchez claim subrogation to the rights of the Bank, under its preferred ship's mortgage, to the extent of $2,400.00 by reason of payments made by them to the Bank on the note and mortgage on September 5th and October 10th, 1951, under an agreement with the Bank and the owner.

Brownsville Navigation District claims $141.65 for dockage prior to the seizure and $81.00 after the seizure.

The Government's claim is for income taxes assessed against the owner, Collins and his wife, for the year 1943, in the sum of $17,858.32. The Government claims its lien is superior to all the maritime liens asserted by the other claimants. Since this contention, if sustained, would exhaust all the proceeds of the sale it will be discussed first.

The Hardee, (a shrimp boat), was built at St. Augustine , Florida , in 1939. Later its home port was transferred to New Orleans by John R. Hardee, Jr., the owner, who sold it to the Wild Life Service of the Interior Department in December 1940, Collins, the present owner, acquired the vessel in 1944. He sold it the same year to one Toups but re-acquired it in 1945. Collins and his wife were residents of Thibodaux , Louisiana , in Lafourche Parish, but the home port of the vessel was New Orleans .

The Government's assessment for income taxes was received by the Internal Revenue Collector at New Orleans on April 16th, 1949 and mailed to Collins and his wife. Notice of the tax lien "was filed with the Clerk, Parish of Lafourche, at Thibodaux , Louisiana ", where Collins lived, in 1949.

The Hardee, a shrimping vessel, was being used by Collins in the shrimping trade prior to and during August 1950, in the Brownsville area. Its home port was transferred from New Orleans to Brownsville , Texas , on July 18th, 1950 .

On August 9th, 1950 , Collins executed a preferred ship's mortgage in favor of the Bank at Brownsville , to secure a note for $8,000.00, payable in monthly installments. The Bank secured an abstract of the ship's title from the collector at New Orleans , which showed that the vessel was clear of all liens and claims of record in that office; and, on August 22nd, 1950 , the preferred mortgage was duly filed with the office of the Collector of Customs at Brownsville , Texas . Thereafter, at all pertinent periods, Brownsville remained the home port of the Hardee. On January 24th, 1952 , a balance of $3,236.60 was due on the mortgage (including interest and attorney's fees as provided in the note and mortgage).

On September 29th, 1951 , the Government filed another notice of its tax lien against Collins and wife in the office of the County Clerk of Cameron County , at Brownsville , Texas . Notice of the tax lien was attempted to be filed with the U. S. Customs office at Brownsville , November 7th, 1951 , but was rejected by the Customs office because the required affidavit was not attached and the official number and description of the Hardee was not shown.

[Priority of Tax Lien]

The Government contends that since its tax lien is not maritime, its priority is not controlled by the Ship Mortgage Act (46 U. S. C. 911-953) and, therefore, is superior to the Bank's and all other maritime liens asserted in this proceeding. All parties concede that the Government's tax lien is not maritime so no discussion of the question is necessary.

The lien and priority claim of the United States is based upon 26 U. S. C. A. 3670-3672. In substance these sections provide that when a tax (due the United States) is not paid, it becomes a lien upon all property of the taxpayer, effective at the time the assessment list is received by the collector and continuing until the liability is satisfied; but that the lien shall not be valid against a mortgagee, pledgee, purchaser or judgment creditor until notice of the lien is filed in the office in which the filing of such notice is authorized by the law of the state in which the property is situated, when the state has by law provided for the filing of such notice; or, if the state has not so provided, until notice is filed with the clerk of the United States district court for the judicial district in which the property is located. ¹

Louisiana has adopted the Uniform Federal Tax Lien Statute which requires notice to be filed with the recorder of mortgages of the Parish where the property sought to be subjected to the lien is located. ² Such statutes, where they are clear and unambiguous, must be construed literally ³ and where they are not substantially complied with, the Government's tax lien is not effective against mortgagees, pledgees, purchasers, etc. ⁴

Here it is undisputed that while the Government filed its notice in 1949 with the Clerk of the Louisiana Parish in which Collins lived, it did not file it in Orleans Parish where the Hardee was located (since New Orleans is its home port). Therefore, the Government obtained neither lien nor priority as to the vessel by the filing in Lafourche Parish. ⁵ Since the Bank filed its preferred mortgage with the Collector of Customs at Brownsville August 22nd, 1950 , and the Government did not file its tax lien with the County Clerk there until September 29th, 1951 , clearly the Bank's claim is superior to that of the Government.

Texas has not enacted the Uniform Federal Lien Statute but has provided for the filing of such liens with the county clerk, Art. 6644, Vernon 's Texas Civil Statutes. ⁶ There arises, therefore, the question as to the superiority or priority of the Government's lien, fixed on September 29th, 1951 , and the claims of the other intervenors. These are the classes: (a) the subrogation claim of Pleason and Sanchez for payments made to the Bank on September 5th ($1,700.00) and October 10th, 1951 ($700.00); (b) the claims for supplies furnished the vessel before and after September 29th, 1951 ; and (c) the claim of Gulf Coast for repairs made to the vessel after a collision in 1950.

[Claims of Subrogees]

The note of Collins, secured by the preferred mortgage on the Hardee, was payable in monthly installments of $400.00 for 11 months and a final payment of $3,600.00 due on August 9th, 1951, Collins was delinquent on the final due date to the extent of $5,200.00. On September 5th, 1951, Pleason and Sanchez (d.b.a. Brownsville Shrimp Exchange), deposited $1,700.00 of their own money in the Bank in the name of the Exchange as "Trustee for Gibson Collins, owner of Shrimp Boat J. R. Hardee", pursuant to a written agreement with Collins, addressed to and accepted by the Bank. This agreement recited the fact of the preferred mortgage and the delinquency on the note, the opening of the account and an obligation on the part of Pleason and Sanchez to deposit a minimum of $700.00 additional each month for six successive months, plus interest. If at any time the Bank felt insecure, it was given the right to apply the sums on deposit to payment of the note. The last paragraph of the agreement reads as follows:

"You are also directed not to release said preferred ship's mortgage upon receiving in full principal plus interest on the above described note until you are duly notified by Brownsville Shrimp Exchange and Gibson Collins of the exact amount, if any, paid on said note out of funds solely belonging to Brownsville Shrimp Exchange, and upon being so notified you are hereby directed to assign such portion of said note and mortgage to the Brownsville Shrimp Exchange to secure any such sums which have been advanced in payment of note plus interest by the Brownsville Shrimp Exchange".

On October 10th, 1951 , in compliance with the agreement, Pleason and Sanchez deposited an additional $700.00, making a total of $2,400.00 deposited as security for and to be applied on the note and mortgage at the Bank's discretion. On October 11th, 1951 , the Bank, deeming itself insecure, applied the $2,400.00 on the note and mortgage.

It is clear from the written agreement that Pleason and Sanchez advanced this money on the credit of the vessel since they stipulated for and were granted a right to an assignment of the preferred mortgage from the Bank "to secure any such sums which have been advanced in payment of note plus interest;" and the bank was not to release the vessel until such amount was determined, at which time Pleason and Sanchez were to have an assignment of the mortgage to that extent. If the funds of Pleason and Sanchez had not been applied to the mortgage, the Bank would have been entitled to claim the additional amount, secured by its mortgage lien. So the entire amount due the Bank should and would have been paid out of the proceeds from the sale of the vessel.

Money advanced upon the credit of a vessel to pay maritime claims and used for that purpose, as here, entitles the person advancing it to a lien of equal dignity. ⁷ There can be no question, therefore, that Pleason and Sanchez are entitled to subrogation to the Bank's rights under the preferred mortgage as to the $1,700.00 deposited on September 5th, 1951, before the Government filed its notice with the County Clerk at Brownsville; and, since the obligation to deposit the additional sums was imposed upon them on the same date, I think their rights relate back to that date, as to the $700.00 deposited on October 10th and that such claim is on an equal footing with the Bank.

[General Maritime Liens]

The allowance of the priority liens of the Bank and of Pleason and Sanchez will exhaust the money left in the registry after payment of court costs, etc. If I am correct in the disposition of these matters, it would seem to eliminate necessity for discussion of the most hotly briefed question--whether the Government's tax claim, if preferred by proper notice under state law prior to the mortgage, is superior to it and the maritime liens asserted by the other parties.

The foregoing discussion and holding has been upon the assumption that the tax lien so perfected would give it priority over general maritime liens and even preferred mortgage liens upon a vessel. This is earnestly contested by all the libelants. The importance of the question, as well as the possibility that I may be wrong in allowing priority to that part of the claim of Pleason and Sanchez for the $700.00 deposited after the filing of the tax lien with the county clerk at Brownsville , requires discussion of the problem.

The provisions of 26 U. S. C. 3670-72 giving the Government a lien upon all property of the taxpayer upon filing of notice under state law have been set out. Generally, of course, liens have priority according to the time when they are filed. But does this mean that such a lien gives priority over favored and time honored maritime liens upon a ship, designed to keep the vessel going? Does it mean that such a tax lien is prior to the perferred liens defined in the Ship Mortgage Act, (46 U. S. C. A. 953), enacted by Congress to encourage investments in shipping and to foster the Merchant Marine? ⁸

It was held in The Melissa Trask (D. C. Mass.) 285 F. (2d) 781, that the tax lien statute, construed "with due regard to . . . Rev. Stat. s. 3466", (31 U. S. C. 191), ⁹ gave priority over a preferred mortgage prior in time to the tax levy, although it was conceded that the question was not free from doubt. The Melissa Trask has been criticized as unsound, Rob inson on Admiralty, Hornbook Series, pp. 455-457.

In Colonna's Ship Yard v. Rowe, 4th Cir., 14 F. (2d) 267, state tax liens were held superior to ordinary maritime liens; but there was no discussion of the question of the preferred maritime liens defined in 46 U. S. C. 153; or of the fact that while admiralty courts will recognize and enforce state created admiralty liens, it will not grant them the priority granted by the state statute.

On the other hand, The River Queen (D. C. Va.) S. F. (2d) 426 is the leading case for the superiority of maritime over Government tax liens. While there is no showing in that case that notice had been filed, yet a levy had been made by the collector before the libels were filed and the vessel was "at least constructively in the possession of the United States ." Judge Groner recognizes "a peculiar quality to the liens of seamen and materialmen" and says:

"It is undoubtedly true that a maritime lien stands upon a higher foundation and upon broader principles than those which underlie mechanic's and materialman's liens on houses. It is a debt against the vessel itself and vests in the creditor a special property in her which subsists from the moment the debt arises, and follows the ship even in the hands of an innocent purchaser for value".

Congress, in enacting the Ship Mortgage Act, recognized this peculiar quality of maritime claims and gives them a preferred status (Section 953(b) of Title 46); and created a preferred status also for mortgages, second only to the preferred maritime liens defined in Section (a) and to court costs. Section 953 of Title 46 reads as follows:

"(a) When used hereinafter in this chapter, the term 'preferred maritime liens' mean (1) a lien arising prior in time to the recording and indorsement of a preferred mortgage in accordance with the provisions of this chapter; or (2) a lien for damages arising out of tort, for wages of a stevedore when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for wages of the crew of the vessel, for general average, and for salvage, including contract salvage.

"(b) Upon the sale of any mortgaged vessel by order of a district court of the United States in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all preexisting claims in the vessel, including any possessory common-law liens of which a lienor is deprived under the provisions of section 952 of this title, shall be held terminated and shall thereafter attach, in like amount and in accordance with their respective priorities, to the proceeds of the sale; except that the preferred mortgage lien shall have priority over all claims against the vessel, except (1) preferred maritime liens, and (2) expenses and fees allowed and costs taxed by the court, June 5, 1920, c. 250, s. 30, Subsec. M, 41 Stat. 1004." (Italics supplied.)

The preferred "lien arising prior in time to the recording and indorsement of a preferred mortgage" defined in Section (a)(1) above unquestionably means a maritime lien. Since the Government's tax lien is nonmaritime, I do not believe that it has priority, even though notice is filed pursuant to a state statute, over maritime liens in general, certainly not over the preferred maritime liens created under the Ship Mortgage Act. Congress has evidenced no clear intention to give it such status. Maritime liens and proceedings are as much "of such a specialized nature" as the Bankruptcy laws ¹⁰ and Congress evidently intended that field of law (Maritime) to govern exclusively.

There remains the question of priorities as between the Bank and Pleason and Sanchez on the one hand and the remaining maritime claimants on the other. The Bank intervened on January 2nd, 1952 , attaching a photostatic copy of the mortgage and supporting affidavit. Other interventions were allowed from time to time. On January 17th, 1952 , at a hearing before the court at which all intervenors and would-be intervenors were represented, the court ordered sworn proofs of claims to be filed by February 4th and objections to claims to be filed by February 11th; and that a hearing be held thereon on February 15th.

The Bank filed proof of its claim on January 29th, including again a photostatic copy of the mortgage and supporting affidavit. Objections and opposition were filed to various claims but none questioned validity of the Bank's mortgage or the sufficiency of the supporting affidavit. The hearing was held, as ordered, in Corpus Christi , on February 15th, at which time all parties were given opportunity to offer evidence, make objections, etc., in addition to the objections filed. The court then ordered original briefs to be filed by March 3rd and reply briefs by March 17th.

Again, in the original briefs, no question was raised by any party as to the validity of the mortgage or sufficiency of the supporting affidavit. Indeed, the validity of the mortgage had been conceded by all parties. Intervenor, Coastal Iron Works, Inc., filed neither objections nor an original brief; BUT, in a reply brief, for the first time, Coastal questions the sufficiency of the affidavit supporting the Bank's mortgage.

46 U. S. C. A. 922(a) gives preferred status to a valid mortgage as of the date of compliance with all of the provisions of that section if, among other things:

"(3) an affidavit is filed with the record of such mortgage to the effect that the mortgage is made in good faith and without any design to hinder, delay or defraud any existing or future creditor of the Mortgagor or any lienor of the mortgaged vessel". (Italics supplied.)

Collins' affidavit, filed with the Bank's mortgage, recites that the mortgage is made "in good faith, without any design to hinder, delay or defraud any interests of future creditors or lienors of the Mortgaged vessel".

Coastal's belated objection is that since the affidavit fails to aver that the mortgage was made without any design to hinder, etc. any existing creditor of the mortgager, it does not comply with the statute; and that, therefore, the mortgage is invalid, citing cases dealing with failure to record the mortgage in the proper customs office, failure to endorse the mortgage on the ship's papers, etc.

Coastal's objection at this late ¹¹ hour will be overruled, because:

First: Coastal and all other parties waived the irregularity by failing to object and point out the error within the time fixed by the court, under all the circumstances enumerated above. It is apparent that the omission of the words "existing" and "mortgagor" from the affidavit is due to error--probably in the transcription of the stenographer's notes to the typewritten copy. Coastal would have the court apply a technical and literal yardstick to the Bank's omission but overlook its own oversight in failing timely to object. The rule that a party failing to object at the proper time will not be permitted later to raise the question is applied constantly to the courts.

Second: Coastal's claim is for labor, materials and services rendered and furnished between March and October 1951, long after the mortgage was filed. Coastal does not claim that it did not know of the lien, or was misled in any way. The affidavit sets out that the mortgage was without design to hinder, delay or defraud future creditors, or lienors of the vessel. Coastal was not an existing creditor of the mortgager at the time of the mortgage and affidavit. Its libel is against the vessel, its engines, etc., solely--not against the mortgager. So I fail to see how Coastal can complain of the failure of the affidavit to negative the existing claims of a mortgagor.

Third: It is undisputed that the mortgage was in good faith and for the benefit of the vessel, to keep it going in the shrimp trade. In the absence of fraud, I think the statute should be liberally construed. In any event, so far as Coastal, the only complaining party, is concerned, the affidavit was in substantial compliance with the statute. ¹²

Now as to the claim of Marine Mart and Oran Neck: under 46 U. S. C. 953, supra, the repairs on and supplies furnished to the vessel prior to August 22nd, 1950, (when the mortgage was filed), are entitled to priority unless waived. ¹³ While the Bank states it has no objection to the allowance of these portions of the claims, it is conditioned upon a finding of no waiver and without consideration of the rights of Pleason and Sanchez who are entitled to share upon an equal basis with the Bank. Too, to allow the claims runs counter to what has heretofore been considered the maritime rule that in fixing priorities within a class, the last in time outranks the first.

The record shows that Marine Mart furnished supplies, etc., from February 9th to May 17th, 1950, before the mortgage; and Neck from January 28th to July 31st; that each continued to furnish supplies, etc., after the mortgage through January and May, 1951, respectively. So far as the record shows, Marine Mart was not paid a penny on its account and the last payment to Neck was October 29th, 1950 , more than a year before the original libel was filed. Neither Marine Mart nor Neck took any steps to libel the vessel until January 1951 and then they did not allege a preferred lien. They must have known of the mortgage after it was filed with the collector; in law they are charged with notice after its recording. I hold them guilty of laches by virtue of the long delay in asserting their claims, if, indeed, they did not waive them.

A decree will be entered providing for distribution of the proceeds of the sale now in the registry in the following order:

(1) All court costs, including sums advanced by the parties, respectively.

(2) The Navigation District's claim for dockage in the sum of $81.00. The Poznan , 274 U. S. 117; Stewart & Stevenson et al. v. Yhr "Lulu", Ad. 48 et seq., Brownsville Division, (unreported).

(3) The claim of Gulf Coast for $125.00 salvage.

(4) The claims of the Bank and Pleason and Sanchez, pro rata, in the balance.

(5) A pro rata distribution of the remainder (if any) between the other intervenors (excepting the Government) holding maritime liens for any materials, labor, etc., within 12 months preceding the libel.

The clerk will notify counsel to submit a decree accordingly.

¹ The provision for filing notice of government tax liens was added by amendment of March 4, 1913 , 37 Stat. 1016. Before the amendment the Supreme Court had held in U. S. v. Snyder, 149 U. S. 210, that the Government was not then subject to state laws requiring registration; and, in the absence of a federal statute requiring government tax liens to be recorded, they were superior to subsequent mortgages. Under the statute as amended there is no lien and no notice can be recorded until there has been a demand by the collector and a refusal to pay it by the taxpayer. Detroit Bank v. U. S., 317 U. S. 329, 335 [43-1 USTC ¶9224]. This case, however, involved a Government lien for estate taxes which attaches at death and is not required to be filed under 26 U. S. C. A. 3672.

² West's Louisiana Statutes, Ann., Vol. 28, Title 52, Ch. 2, Sec. 51.

³ Miller v. Bank of America, N. T. S. A. 9th Cir., 166 F. (2d) 415 and authorities therein cited.

⁴ U. S. v. Beaver Run Coal Co., 3rd Cir., 99 F. (2d) 610 [38-2 USTC ¶9840]; Youngblood v. U. S., 6th Cir., 141 F. (2d) 912 [44-1 USTC ¶9314]; see also cases collected in 174 A. L. R. 1388; Cf. U. S. v. The Pamore (D. C. Ha.) 92 F. Supp. 185.

⁵ The Government concedes this since the filing of its brief which was based upon the provisions of a prior Louisiana recording statute, Chap. IV, Sec. 5016, Dart's General Statutes of Louisiana . The Government had cited the far reaching decision in Investment & Securities Co. v. U. S., 9th Cir., 140 F. (2d) 894 [44-1 USTC ¶9210], holding that a Government lien for income taxes, filed in Wisconsin, the residence of the delinquent taxpayer, was good against personal assets pledged in Washington though no notice had been filed in the latter state. In view of the implications of that decision, I observe: (1) The notice was sufficient under the Wisconsin laws; (2) the assignment of the pledged assets was made expressly subject to the Government's tax claim; (3) the statute did not protect "pledgees" at the time of the assignment in 1937; "pledgee" was added by amendment in 1939. I cannot subscribe to the theory that notice filed in one state is sufficient to secure the lien against mortgages, etc., everywhere. Quite the contrary is clear to me from the provisions of 226 U. S. C. A. 3672 requiring notice to be filed in the state or territory "in which the property subject to the lien is situated".

⁶ The Texas statute is silent as to what County Clerk the notice must be filed with. Presumably, however, it would be in the county where the property sought to be subjected to the lien is located, in conformity with the state's general registration laws.

⁷ Rob inson on Admiralty, Hornbook Series, p. 433 and cases therein cited; 55 C. J. S. 756, Sec. 53; The Little Charley (D. C. Md.), 31 F. (2d) 120. Gulf Coast , while adopting the Bank's contention as to the priority of its lien over the Government's claim, opposes the allowance of the Pleason and Sanchez claim, making a number of allegations as to matters not in evidence.

⁸ The Thomas Barlum, 293 U. S. 21; Rob inson on Admiralty, Hornbook Series, pp. 441-442; The Favorite (D. C. N. Y.) 34 F. Supp. 324, affirmed 2nd Cir. 120 F. (2d) 899; The Emma Giles (D. C. Md.) 15 F. Supp. 502; Collier Adv. Service v. Hudson River Day Line (D. C. N. Y.) 14 F. Supp. 335.

⁹ The cited section 3466, 31 U. S. C. 191, gives priority to U. S. tax liens where a person indebted to the United States is insolvent, or where an insolvent estate is in admin istration. * * *

¹⁰ I doubt that Congress in enacting 26 U. S. C. 3670-72 (the tax lien and notice statute) intended that it should cover vessels. State recording statutes, so far as I can find, make no provision for recording notice of tax liens against vessels. It may well be, since the states have not expressly provided for filing of notice of tax liens as to vessels, that the alternate provision of Sec. 3672 would require notice to be filed with the Clerk of the United States District Court in the District where the vessel is located.

Congress has provided for recording notices of claimed liens against a mortgaged vessel (46 U. S. C. 925); but the Customs Collector will not record notice under the statute if the vessel is not already covered by a mortgage. (C. R. Sec. 3.38(g)). Thus an anomalous situation exists where the Government can record notice of its tax lien with the Collector of Customs, if the vessel is mortgaged, but cannot file such notice if the vessel is not mortgaged. Undoubtedly clarifying legislation is needed.

Normally, persons dealing with a ship check with the customs' office at the vessel's home port. Are they required also to check the records of the county clerks to determine whether a tax lien has been filed? If so, how far back should they go? Ownership of a vessel may have changed hands several times. A tax lien may have been filed against an owner several times removed from the last transaction and no other steps taken by the Government. Surely since the customs collector furnishes an abstract of title on the vessel, that should be the logical office in which to record a lien even though the vessel is not mortgaged.

¹¹ The court had read the record, the original briefs and a host of cases on many other points before being apprised that Coastal had questioned the validity of the mortgage in its reply brief.

¹² The Nan B (D. C. Alaska) 78 F. Supp. 748.

¹³ The Eastern Shore (D. C. Md.) 31 F. Supp. 964, 966.

 

 

[52-2 USTC ¶9426]In the Matter of Mannington Pottery Company, A Corporation, Bankrupt

In the United States District Court for the Northern District of West Virginia, No. 232-F, April 17, 1952

Collection: Lien for taxes: Bankruptcy: Priority of claim.--A lien for federal taxes was given priority over another claim in bankruptcy since it was duly recorded prior to the perfection of the other claim, even though the referee in his original order inadvertently failed to give lien status to the claim for taxes. The referee had a right to amend his order to reflect the priority of the tax lien, especially since the other claimant, prior to the entry of the referee's original order, had actual knowledge of the priority of the tax lien.

Tusca Morris, of Fairmont , West Virginia , for Reconstruction Finance Corporation. William P. Lehman, of Fairmont , West Virginia , for New York Terminal Warehouse, Inc. Thomas A. Hite, of Mannington , West Virginia , for William T. Nutter, Trustee. Earl S. Goodwin, of Fairmont , West Virginia , for Automatic Sprinkler Company, Sutter Roofing Company and Moore Electric Company. George W. May, of Fairmont , West Virginia , for Pritchard Supply Company. Howard Caplan, United States Attorney, of Fairmont , West Virginia , for F. Roy Yoke, Collector of Internal Revenue.

WATKINS, District Judge:

This case is before me upon petition for review of an order of the referee entered herein on the 16th day of May, 1951, in the bankruptcy proceeding of Mannington Pottery Company, a corporation.

Mannington Pottery Company was a large manufacturer of sanitary bowls and tanks at Mannington, W. Va. The pottery plant had operated successfully for many years but its equipment had become obsolete and inefficient. In the early part of 1949 two new modern kilns were installed which were paid for by borrowing $250,000 from the Reconstruction Finance Corporation, hereinafter referred to as petitioner. This loan was secured by a deed of trust lien upon the plant and equipment. From these new kilns, the company was able to get only a small percentage of grade A ware. The bowls would crack or otherwise become defective in going through the kilns. Substantial losses followed, and on April 14, 1949 , the company filed a petition for reorganization under Chapter X of the Bankruptcy Act in this court. Petitioner had much money invested in the plant and was anxious to get it in operation promptly in order to get the kilns adjusted so that grade A ware could be produced. Petitioner loaned the trustees $150,000 as working capital, taking trustee certificates as security. The trustees operated the plant, but neither the trustees nor the manufacturer of the kilns were able to find the trouble. The production of defective ware continued and it was necessary for petitioner to advance an additional $25,000 to the trustees as working capital. Losses continued, and on November 17, 1949 , the debtor was adjudicated a bankrupt and the case was referred to the referee for liquidation. The plant was purchased by petitioner for $413,000. Petitioner was allowed to apply its liens against the purchase price and required to pay only prior liens and its proportionate part of the costs. Petitioner is not satisfied with the priority of liens and method of allocation of proceeds of sale as ordered by the referee and filed a petition for review alleging 22 points of error. At the time of argument on the review before the District Judge, counsel for the petitioner stated that it now relied on only 4 points of error. The facts and the law as I find them upon each of these four subjects follow:

Warehouseman's Lien

* * *

[This portion of the opinion is omitted since it has no relation to a federal tax issue.--CCH.]

Internal Revenue Lien

On March 15, 1949 , prior to the filing of the petition for reorganization on April 14, 1949 , the Collector of Internal Revenue filed a notice of tax lien in the office of the Clerk of the County Court of Marion County, West Virginia, against Mannington Pottery Company in the amount of $11,879.23. Thereby the government obtained a lien upon all property and rights to property, both real and personal, owned on March 15, 1949 , by Mannington Pottery. Title 26 U. S. C. A., Secs. 3670-3679; West Virginia Code , Ch. 38, Art. 10, Sec. 1; In re Dartmont Coal Co., 4 Cir., ( W. Va. ) 46 Fed. (2d) 455 [2 USTC ¶649]. On May 24, 1949 , within the time permitted, the Collector timely filed a proof of claim of $66,764.30 for taxes in the Clerk's office of the Federal Court in the reorganization proceeding. Included in this claim was the amount of $11,879.23 mentioned above. While this proof of claim did not set forth the notice of tax lien mentioned above, it stated that the United States did not hold any security for the debt "except statutory liens". The government urges, and I think properly, that these words called attention to the trustee and the referee that there were statutory liens to consider with reference to this particular claim. The recorded tax lien is itself sufficient knowledge and notice to the trustee in bankruptcy. A Collector of Internal Revenue may rely upon the recorded tax lien and no actual filing of the claim is necessary to protect the interest of the United States . It is the trustee's duty to search for tax liens, because the assets pass to him subject to such liens. The Chandler Act of 1938 changed the 1898 Act by providing that tax claims, as distinguished from tax liens, must be proved and filed in order to participate in the distribution of the bankrupt estate to unsecured creditors. But the filing of a formal claim in bankruptcy is still not essential to the preservation of a lien. Bolling v. Bowen, 4 Cir., 118 Fed. (2d) 59, 62; De Laney v. Denver , 10 Cir., 185 Fed. (2d) 246; Lockhart v. Garden City Bank & Trust Co., 2 Cir., 116 Fed. (2d) 658; Reconstruction Finance Corporation v. Cohen, 10 Cir., 179 Fed. (2d) 773, 776; Merchants' and Mechanics' Bank v. Sewell, 5 Cir., 61 Fed. (2d) 814; Collier on Bankruptcy, 14th Ed., Vol. 4, Par. 67.20, p. 157; Remington on Bankruptcy, 4th Ed. Supp., Vol. 6, Sec. 2808. Only with respect to sharing in the general assets as to unsecured balance of the claim is it necessary to file a proof of claim.

[Tax Lien Given Priority]

In some unexplained manner, the trustee and the referee inadvertently overlooked "statutory liens", mentioned by the Collector in his proof of claim, and on the 9th day of March, 1950, the referee entered an order fixing the priority of liens without giving lien status to this tax lien. The government was not then represented by counsel in this proceeding. There was no consideration given to the matter by the referee, but the lien status of the claim was simply overlooked. On March 10, 1950 , R. F. C. became the purchaser of the plant and equipment for the sum of $413,000. Nothing was done by anyone about the matter until November 8, 1950 , when the trustee in bankruptcy discovered the recorded tax lien and called the error to the attention of the referee. In a written report, the trustee asked that the error be corrected and that the federal tax lien be given its proper priority. Shortly thereafter the Collector of Internal Revenue who had been handling the matter himself asked the United States Attorney to appear in the proceeding. An amended and supplemental proof of claim was then filed with the referee on February 14, 1951 . This supplemental proof of claim made no additional claim as to the amount of tax indebtedness and added no new items. It merely set forth the tax items, proof of which had previously been made, and pointed out that $11,879.23 of the taxes were duly recorded as a tax lien. A certified copy of the notice of tax lien filed in the Marion County Clerk's office was attached. On May 16, 1951, prior to any distribution of proceeds of sale, the referee, on his own motion, and on the motion of the trustee (and not upon the motion of the government) modified his decree of March 9, 1950, insofar only as to give proper lien priority and status to this tax claim and insofar as said order failed to fix the proper priority of lien debts subsequent to such tax lien. The referee correctly hold that the amended proof of claim filed on February 14 constituted such amendment to its proof of claim theretofore timely filed as could be made after the expiration of the six-months' period for filing claims. See Collier on Bankruptcy, 14 Ed., Sec. 57.11 as follows: "Amendments are allowed in the discretion of the court, as the justice of the case demands. * * * It is well settled that if there is upon the record in the bankruptcy proceeding, within the sixmonths' period prescribed by Section 57n, anything sufficient to show the existence, nature and amount of claim, it may be amended even after the expiration of the period. Globe Indemnity Company, etc., v. Keeble, 4th Cir., 20 Fed. (2d) 84."

[Tax Lien Not Waived]

Here the referee correctly held that the amended claim was not a new or a different claim, and that the government did not waive its security by its neglect to show that notice of the tax lien had been duly docketed in Marion County; that since the estate had not been admin istered and the funds disbursed, the doctrine of laches did not apply; that under Section 2a(2) of the Bankruptcy Act (U. S. C. A. Title 11, Sec. 11(2)), the referee had the right, of his own motion, to correct this mistake and error; and that it was the duty of the bankruptcy court to do equity by reconsidering such claim and giving it its undisputed lien priority. There is no merit in the argument of the petitioner that the government waived its tax lien. Under the circumstances related above, including the reference to the statutory lien in the original proof of claim, there was no waiver of the security. Where no reference is made in the proof of claim to "statutory liens", as was done here, and where the proof as an unsecured claim is made inadvertently (Hartford Accident & Indemnity Co. v. Goggin, 4 Cir., 78 Fed. (2d) 471) or in excusable ignorance of either facts or law and without fraudulent intent, the courts will not imply an intent to surrender or waive the security, but allow the creditor to amend his proof, to have the value of the security determined and to prove the excess only. In re Prindible, 3 Cir., 115 Fed. (2d) 21, "The decision whether or not a creditor should be granted relief and allowed to change his position is largely a matter of judicial discretion." Collier on Bankruptcy, 14th Ed., Sec. 57.07. See also the case of Maxwell v. McDaniels, 4 Cir., 195 Fed. 426.

[Referee's Right to Correct Error]

It is strongly urged that the referee did not have the right to correct his former decree, and with that view I am unable to agree. A referee has inherent right, upon his own motion to correct a former decree made inadvertently. The referee has the same power as any other court to reconsider and amend his orders entered through mistake or inadvertence. Matter of Pottasch Brothers Co., Inc., 2 Cir., 79 Fed. (2d) 613. Collier on Bankruptcy, 14th Ed., Sec. 38.09. Rule 60(b) of the Federal Rules of Civil Procedure which gives the Court authority to relieve a party from a judgment or order taken against him through mistake or inadvertence or excusable neglect has been held to apply on motion before a referee for the vacation of an order made by him. LaBarbera v. Grubard, 2 Cir., 112 Fed. (2d) 738.

Under General Order 21(6), when a creditor's claim has been disallowed by the referee, such creditor may not petition the referee for reconsideration but may petition for a review by the judge. Here the claim of the government was not disallowed but because of an oversight or mistake its proper priority was overlooked. It was not a case where the referee considered the tax lien claim, and, after hearing and considering the lien claim upon its merits, decided to disallow it. It was simply overlooked and its true priority as established by uncontradicted facts never considered by the referee. Lien priority (by reason of the notice of tax lien filed in the clerk's office) was not disallowed. In failing to give it its proper priority as a tax lien in the order of March 9, 1950 , the referee did not understand that such notice of tax lien was on record in the clerk's office, or that tax lien priority was claimed.

The original proof of claim was filed by the Collector by mailing same to the clerk of this court at a time when he was not represented by counsel in this proceeding. It was filed by the Collector in a reorganization proceeding under Chapter X, and not in an ordinary bankruptcy liquidation proceeding. When the company was unable to reorganize after efforts to operate the plant at a profit had failed, it was adjudicated a bankrupt. The referee did not require the creditors to file new proofs of claim in the liquidation proceeding before him, but used the proofs of claim previously filed in the reorganization proceeding. Some creditors filed new or amended claims, but others did not.

It was not a case where the creditor petitioned for a reconsideration of his claim, but where the referee, of his own motion, corrected what he believed to be, and undoubtedly was, an error and oversight, concerning a matter not previously considered on its merits because of such mistake and inadvertence.

Petitioner does not deny that a notice of a federal tax lien in the amount of $11,879.23 was recorded in the proper county clerk's office. It does not deny that at and prior to the entry of the referee's order on March 9, 1950 , the government had a valid tax lien. It does not deny that it had constructive notice of such lien by virtue of such recordation, such as to make any lien subsequently acquired by it inferior thereto. It does not deny that on and prior to March 9, 1950 , it had actual knowledge of the existence and amount and priority of such tax lien. Yet, if the RFC is successful in defeating the proper priority of the tax lien, because of this mistake, it will have the effect of placing a subsequently acquired lien ahead of the tax lien.

Petitioner also complains that no petition was filed by the claimant to amend the claim; that no notice was given to it and that it had no opportunity to resist such amended claim. I find no merit in these contentions. It was not necessary for the claimant to file a petition because the action was taken by the referee on his own motion, The referee found, and the record supports the fact, that counsel for petitioner did have notice of the filing of the amended claim; did file on April 7, 1951, prior to the allowance of such amended claim, written objections and argument against such amended claim; and that a copy of the proposed order of May 16, 1951, allowing such amended claim was exhibited to counsel for petitioner prior to the entry thereof. For the reasons stated above the action of the referee with reference to the tax lien must be affirmed.

Trustees' Certificates

* * *

[This portion of the opinion is omitted since it has no relation to a federal tax issue.--CCH.]

Method of Allocating Proceeds of Sale and Costs

* * *

[This portion of the opinion is omitted since it has no relation to a federal tax issue.--CCH.]

 

 

[51-1 USTC ¶9349]In the Matter of Krieger Steel Sections, Inc., Bankrupt

In the United States District Court for the Eastern District of New York, No. 48012, 103 FSupp 351, June 1, 1951

Suits for recovery of erroneous refunds: Bankruptcy cases: Priority in the case of federal and state tax claims.--Where, at the time of payment by the Treasurer of the United States of a refund for interest on over-assessments to the trustee of the bankrupt taxpayer, taxes were due to the United States, the portion of the refund equal to the amount of such taxes was erroneously paid, and repayment thereof must be made to the United States prior to satisfaction of state and municipal tax claims.

Benjamin Weintraub, for trustee. Frank J. Parker, United States Attorney for the Eastern District of New York, by Nathan Borock, Assistant United States Attorney, Henry C. Clark, Special Assistant to Chief Counsel Bureau of Internal Revenue, New York, Lloyd C. Hooks, Assistant to Chief Counsel, Bureau of Internal Revenue, Washington, D. C., for the United States. Nathaniel L. Goldstein, Attorney General, State of New York , by Samuel Stern, Assistant Attorney General for Industrial Commissioner, State of New York . Nathaniel L. Goldstein, Attorney General, State of New York , by Anthony P. Ludden, Assistant Attorney General for State Tax Commission, New York . Moses & Singer by Arnold J. Jaffe, for White and Funk, attorneys-at-law asserting lien. Bachrach and Bisgyer by Samuel Bisgyer for James A. Watson, owner of real property formerly owned by the bankrupt.

CASTELLANO, Referee in Bankruptcy:

The final account of the trustee filed February 2, 1951 was considered at a meeting of creditors held on February 19, 1951 . The account discloses the receipt and deposit by the trustee of six checks received by him as refunds from the Treasurer of the United States on or about February 8, 1950 , which total $35,373.43. Upon examination by the Referee of Federal tax claims on file it appeared that the Collector of Internal Revenue, First District of New York, filed an amended claim on October 30, 1950 for Federal Taxes due in the sum of $24,383.71. This claim amended and superseded the Collector's prior claims, one of which was filed on May 10, 1949 in the sum of approximately $246,000.00. The account discloses that the trustee has a cash balance on hand of $54,523.78 which includes the moneys refunded to the trustee by the Treasurer of the United States on February 8, 1950, at which time it appeared that the United States had a claim for taxes due it from the bankrupt and this estate.

Upon such facts appearing of record, the Referee suggested to the attorneys for the trustee to give notice to the United States Attorney as to the refunds received by the trustee after the filing of the Government's claims for taxes, which were reduced by the amended claim to $24,383.71. Such notice was given under the order to show cause dated March 2, 1951 . Notice was also given to the State of New York and City of New York as both had filed tax claims; and to the parties asserting an attorney's lien on the refunds, for services rendered prior to the bankruptcy.

[Unpaid Tax Claims]

The trustee's petition and the order to show cause of March 2, 1951 discloses the facts aforesaid and recites that the following unpaid tax claims are on file:

Collector of Internal Revenue, Federal

Taxes ........................................         $24,383.71

State Tax Commission, 

New York

,

Franchise Taxes ..............................          30,244.77

New York State Department of Labor,

Division of Placement and Unemployment

Insurance ....................................           3,777.56

City of 

New York

, sales & Business

taxes ........................................           5,500.00

Total Tax Claims .............................         $63,906.04

In addition, the petition discloses

there are other claims and 
admin
istration

expenses which are unpaid:

Wage claims entitled to priority .............           3,734.53

One rent claim, 
admin
istration claim .........             400.00

Attorneys Aaron J. Funk and Harold

B. White assert a lien for services

in connection with the refunds paid

to the estate ................................           7,500.00

Administration expenses for services

of attorneys for trustee, accountant

and trustee remain to be fixed and

allowed

Funds on hand are insufficient to pay

tax claims in full.

 

The trustee now seeks an order determining the rights of the parties in interest as to the funds in the hands of the trustee which include the refunds of $35,373.42 paid to the estate by the United States at a time when there was due to the United States from the bankrupt and this estate certain amounts for unpaid taxes. The attorneys for the trustee ask that all funds in the trustee's possession be kept by the trustee and distributed in accordance with the order of priorities under Section 64 of the Bankruptcy Act. They urge that the United States waived its existing right to set off when the payments were made to the trustee.

[Contentions of the Parties]

Upon the hearings held on March 14, 1951 and April 18, and 25, 1951, the State of New York and the attorneys asserting a lien on the total of the refunds joined in the position taken by the trustee. The parties concede that prior to the time of payment of the refunds of interest on overassessments of $35,373.43 the United States had the right to deduct therefrom the amount due it for taxes in the sum of $24,383.71 and remit the balance to the estate as refund of interest on overassessments. It is argued that when payment was made, the United States waived its right to set off the amount due the United States for taxes.

The United States urges that the payments to the estate as refunds for interest on overassessments were erroneous payments, and seeks to recover from the trustee an amount payable out of the refunds, equal to the amount set forth in its amended proof of claim for taxes due it, in the sum of $24,383.71.

[State Tax Claims]

The adverse parties herein are mainly the taxing agencies of the City of New York and State of New York and the trustee. The attorneys asserting a lien of $7500.00 on the refunds as being procured through their services have an application pending to fix their lien at $7500.00 on consent of the trustee, which agreement has not been approved by the Court. The funds of the estate are ample to protect them for any amount the Court may determine to be the reasonable value of their services. The claim made at the hearing on behalf of James A. Watson owner of the realty formerly owned by the bankrupt who voluntarily appeared at the hearing, that in the event the trustee refunds the $24,383.71 to the United States, the State will receive less in dividends on its claim for Franchise taxes, and he will be obliged to pay the balance due the State for Franchise taxes, as the same are a lien on his real property. This claim, if it has merit, may be considered on any application he makes to this Court in connection with his payment of $7500.00 to the estate in settlement of the law suit instituted by the trustee against him. Inspection of the claims on file would disclose that long prior to the payment of refunds to the trustee the United States had filed claims herein for taxes in substantial amounts.

[Findings of Fact]

Upon the record of the hearings, the testimony and the exhibits received in evidence, I find that on February 8, 1950 the Commissioner of Internal Revenue forwarded to the trustee in bankruptcy six checks payable to the trustee of this estate which totalled the sum of $35,373.43 which were deposited by the trustee in his trustee's account and that the proceeds thereof are still in the possession of the trustee. The checks were accompanied by letters (trustee's ex. 1) showing that the payments were made for refunds of interest on overassessments. The taxpayer, the bankrupt herein, received credit for the amounts allowed for overassessments.

I find that the Collector of Internal Revenue filed an amended claim for taxes due the United States in the sum of $24,383.71, and that this amount was due the United States from the bankrupt herein prior to February 8, 1950, when the refunds for interest were paid to the trustee. This claim supersedes prior claims of the United States including a prior claim for taxes due the United States filed May 10, 1949 in the sum of $247,406.14.

I find that it is an established practice of the Bureau of Internal Revenue in bankruptcy cases to off-set all outstanding Federal taxes due the United States against any amount found payable to the taxpayer or his trustee in bankruptcy in accordance with the rights of the United States under existing laws. This practice was not followed in the case at bar. The Bureau on or about February 8, 1950, through inadvertance failed to deduct the amount then due the United States in the sum of $24,383.71 and erroneously remitted to the trustee the sum of $35,373.43, the amount of refunds for interest on overassessments computed as due to the bankrupt. I find that this amount was not payable to the estate because the outstanding Federal taxes due to the United States at that time must be deducted under the existing rights of the United States . I find that the only sum payable to the trustee at the time of payment of refunds for interest was the difference between the computation of interest $35,373.43 and the outstanding taxes due to the United States of $24,383.71, to wit, the sum of $10,989.72.

In conclusion, I am of the opinion that the trustee has in his possession the sum of $24,383.71 belonging to the United States which must be refunded. An order will be entered directing the trustee to pay to the Collector of Internal Revenue, First District , New York , the sum of $24,383.71 out of the funds received by the trustee from the Treasurer of the United States in the sum of $35,373.43 on or about February 8, 1950 . Talcott v. U. S. , 23 Fed. (2d) 897 [1 USTC ¶279], cert. denied 277 U. S. 604; Wilber National Bank of Oneonta, Admin., v. U. S., 294 U. S. 120; U. S. v. St. Paul M. & M. Ry. Co., 247 U. S. 310.

That upon making such payment by the trustee, the amended proof of claim filed by the Collector of Internal Revenue in the sum of $24,383.71 and all other preceding proofs of claims filed herein by the United States for taxes due will be expunged and disallowed. Distribution of the remaining funds of this estate may thereafter be ordered pursuant to Section 64 of the Bankruptcy Act.

Settle order on notice.

 

 

[50-2 USTC ¶9406]In the Matter of W. A. Burch, Bankrupt

In the District Court of the United States for the District of Kansas, No. 5239, 89 FSupp 249, January 2, 1948

Lien for taxes: Validity against mortgagees: Bankruptcy.--Aside from a first and prior mortgage lien of a bank, the tax lien of the United States, assessment of which was received by the Collector prior to the filing of a petition in bankruptcy in Kansas and thereafter perfected by filing notice with the register of deeds was valid against a trustee in bankruptcy on all property except personalty.

Lien for taxes: Validity against mortgagees: Allowance of interest and penalties after bankruptcy.--Interest is allowed the Government on a tax lien to date of payment though the taxpayer has gone into bankruptcy. [Note: This case was decided prior to the time the Supreme Court handed down its opinion in City of New York v. Saper, 49-1 USTC ¶9198, 336 U. S. 328, to the effect that interest on delinquent taxes of a bankrupt runs only to the date of bankruptcy.] Delinquency penalties are not, however, allowed even though they are a part of an established lien, since to do so would destroy the equitable division of the estate among creditors. The bankruptcy court may, under Section 57(j) of the Bankruptcy Act, look behind the lien and determine whether the claim includes a penalty.

Lien for taxes: Validity against mortgagees: Bankruptcy: Claim filed out of time.--Claims for taxes accruing as a consequence of the operation of the business by the owner, receiver and trustee are expenses of admin istration and are not provable debts. The limitation on the United States for filing claims being six months after the date of the first meeting of the creditors, a claim filed within the limitation was not out of time.

Lien for taxes: Validity against mortgagees: Bankruptcy: Allocation of refund to payment of taxes.--Where the trustee did not exercise its privilege of allocating a refund to the payment of taxes of its own choosing at the time of payment, it lost that right and the United States may apply the payment at its own discretion.

Philip A. Dergance, former Assistant United States Attorney, Topeka , Kansas , for the government. Harold A. Zelinkoff, Central Bldg., H. W. Goodwin, 200 Insurance Bldg., both of Wichita, Kansas, for trustee.

Memorandum Opinion and Order in Claims of the United States, Nos. 13, 52 and 216, the State of Missouri, No. 137, and the State of Kansas, No. 157

SLOAN, Referee in Bankruptcy:

These claims were submitted to the court on agreed statement of fact on October 27, 1947 , and each of the parties given time to file briefs. Briefs have been filed.

[Liens Against Bankrupt for Unpaid Taxes]

The United States has filed three proofs of claim, No. 13 filed July 11, 1946 , No. 52 filed September 11, 1946 , and No. 216 filed May 9, 1947 . These claims are for unpaid federal taxes as follows:

"(a) Federal Insurance Contributions demanded and assessed under 26 U. S. C. 1400 et seq. for the third and fourth quarters of 1945, the first quarter of 1946, and for the period from April 1 to and including June 4, 1946 .

"(b) Federal Unemployment Taxes demanded and assessed under 26 U. S. C. 1600 et seq. for the years 1944, 1945, and 1946.

"(c) Income Taxes Withheld at the Source (withholding taxes) demanded and assessed under 26 U. S. C. 1621 et seq. for the third and fourth quarters of 1945, the first quarter of 1946, and for the period from April 1 to and including June 4, 1946 .

"(d) Transportation of Property Taxes demanded and assessed under 26 U. S. C. 3475 for the months of February, March of 1946, the months of September, October, November and December of 1945, and May of 1946, and for the period from June 1 to and including June 4, of 1946."

An agreed statement of fact has been entered into between the trustee and the United States , which sets forth in detail the nature of the tax, the principal amount, penalties and interest, together with the dates the assessments were made and the date the notice of tax lien was filed with the Register of Deeds.

The total amount claimed is $45,024.87, with interest from divers dates. It is conceded, however, that the trustee is entitled to a credit on this claim by reason of the over-payment by the bankrupt of his personal income tax for the year 1943, reducing the claim to $30,904.36, which includes certain penalties and certain interest charges, and that such sum should bear interest to the date of payment.

The State of Missouri Division of Employment Security has filed herein Claim No. 137, and it is agreed:

"(a) State unemployment compensation taxes demanded and assessed for the third and fourth quarters of 1943, the years of 1944 and 1945, the first quarter of 1946 and for the period from April 1 to and including June 10, 1946 .

"(b) The amount of said unemployment compensation tax including interest as now claimed by the State of Missouri Division of Employment Security from the estate of the bankrupt is more particularly set forth in paragraph 3 of this stipulation."

There is nothing in the stipulated facts to indicate that the State of Missouri claims a lien, consequently this claim is necessrily assigned to the classification defined in subdivision 4, 11 USCA 104, subject nevertheless to the stipulation that the amount of these taxes shall be adjusted in accordance with the formula approved by the Supreme Court in United States v. New York , 315 U. S. 510.

The State of Kansas has filed proof of claim No. 157 and includes the following taxes:

"(a) State unemployment compensation taxes demanded and assessed under G. S. 1945 Supp. 44-701 et seq. for the fourth quarter of 1945, the first quarter of 1946, and the period from April 1 to and including June 10, 1946 and the period from June 11, 1946 to and including June 30, 1946, the third quarter of 1946 and the period from October 1, 1946, to and including October 22, 1946.

"(b) The amount of said tax including interest as now claimed by the Kansas State Labor Department, Employment Security Division from the estate of the bankrupt is more particularly set forth in paragraphs 4 and 5 of this stipulation."

The State of Kansas claims a lien by virtue of G. S. 1945 Supp. 44-717(e) and the facts show that the lien statement required by the statute was filed July 2, 1946 . No date is given as to when demand was made, which is a necessary step under the state statute to initiate the lien.

It is admitted by all parties that no sale or seizure was made of any property of the bankrupt prior to the filing of the petition.

The debtor filed his petition under Chapter XI on June 10, 1946 . The first meeting of the creditors was held July 8, 1946 , and the debtor continued in possession of the property. A receiver was appointed October 23, 1946 , and the debtor adjudged a bankrupt October 8, 1946 , and at the regular called meeting of the creditors on November 11, 1946 , trustees were elected. The owner, the receiver and the trustee, during the respective time they were in charge of the property, operated the business to May 10, 1947 .

[Contentions of Parties]

It is conceded by all parties that the Riverview State Bank of Kansas City is the holder of a first and prior mortgage lien superior to any of the claims under consideration herein.

The United States contends that it has a valid and subsisting tax lien superior to all other claims, except the mortgage of the Riverview State Bank.

The State of Kansas contends that it has a valid lien for the amount of the taxes agreed upon and to be determined. The State of Missouri claims only taxes.

On the other hand, the trustee contends that the liens of the claimants, if any they have, are postponed in payment to the debts specified in clauses 1 and 2 of 11 USCA 104; that the claimants should not be allowed penalties and are entitled to interest only to the date of the filing of the petition, that proof of claim No. 216 was filed out of time and that the trustee has the right to determine where the credit will be made by the overpayment of taxes for the year 1943.

The answer to these problems must be found within the purview of the following statutes:

"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 persons." 26 USCA 3670.

"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 USCA 3671.

"(a) 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 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; or" 26 USCA 3672.

"That notices of tax liens under the internal revenue laws of the United States, and certificates of discharge thereof, may be filed in the office of the register of deeds in any county in the state of Kansas, and when so filed shall be notice to all persons claiming an interest in the property of the person or persons against whom filed: Provided, That such notices of tax liens and certificates of discharge thereof need not be proved, acknowledged or certified other than in accordance with the laws of the United States pertaining thereto." G. S. of Kansas , 79-2605.

"b. The provisions of section 60 of this Act to the contrary notwithstanding, . . . statutory liens for taxes . . . created or recognized by the laws of the United States or of any State, may be valid against the trustee, even though arising or perfected while the debtor is insolvent and within four months prior to the filing of the petition . . . Where by such laws such liens are required to be perfected and arise but are not perfected before bankruptcy, they may nevertheless be valid, if perfected within the time permitted by and in accordance with the requirements of such laws, except that if such laws require the liens to be perfected by the seizure of property, they shall instead be perfected by filing notice thereof with the court.

"c. Where not enforced by sale before the filing of a petition . . . though valid under subdivision b of this section, statutory liens, including liens for taxes . . . on personal property not accompanied by possession of such property, . . . shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 . . ." 11 USCA 107.

"J. 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 proceedings 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." 11 USCA 93.

"c. The trustee, as to all property in the possession or under the control of the bankrupt at the date of bankruptcy or otherwise coming into the possession of the bankruptcy court, shall be deemed vested as of the date of bankruptcy with all the rights, remedies, and powers of a creditor then holding a lien thereon by legal or equitable proceedings, whether or not such a creditor actually exists; and, as to all other property, the trustee shall be deemed vested as of the date of bankruptcy with all the rights, remedies, and powers of a judgment creditor then holding an execution duly returned unsatisfied, whether or not such a creditor actually exists." 11 USCA 110.

The trustee, upon his appointment and qualification, takes the title to the property of the bankrupt, subject to valid and subsisting liens that are not affected by the adjudication. ( U. S. v. Sampsell, 153 Fed. (2d) 731 [46-1 USTC ¶9186]; In Re; Erie Ry. Co., 37 Fed. Supp. 237; Commercial Credit Co., v. Davidson, 112 Fed. (2d) 54) The court is controlled by Federal law in determining what liens are preserved in bankruptcy; what character of title to the debtor's property is vested in the trustee in bankruptcy and as to such property, what rights, remedies and powers are deemed vested in the trustee. We look to state law and appropriate federal law to ascertain what property the debtor owned immediately preceding the time of bankruptcy; what liens thereon, if any, then existing, the character thereof and the order of priority among the creditors holding such liens.

11 USCA 107c came into the Bankruptcy Act through the Chandler Act. It is all inclusive and had for its purpose the postponement in payment of all statutory liens, including liens for taxes or debts owing the United States or any state on personal property not enforced by sale or seizure before the filing of the petition. There is no room for doubt in the construction of this statute. The courts have commented on it in the following cases: City of New Orleans v. Harrell, 134 Fed. (2d) 99; In Re: Empire Granite Company, 42 Fed. Supp. 450; Commercial Credit Co v. Davidson, 112 Fed. (2d) 54; City of New York v. Hall, 139 Fed. (2d) 935; In re: Pennsylvania Central Brewing Co. , 114 Fed. (2d) 1010.