Prior Law Page14

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[38-2 USTC ¶9575]In the Matter of The Banner Brewing Company, a Corporation, Debtor

District Court of the United States for the Eastern District of Michigan, Northern Division, No. 5943, 24 FSupp 675, Decided September 22, 1938

Government priority for taxes.--A bar order by a bankruptcy court, fixing a date by which all claims must be filed, did not preclude the Government, which could not comply with the order, from priority as to undistributed assets in the hands of the trustee, although it has lost its priority as to distributed assets and may not hold the trustee liable therefor.

Sydney DeYoung, of Detroit , Michigan , attorney for trustee. Peter P. Gilbert, Assistant United States Attorney, of Detroit , Michigan , Arnold W. Lungerhausen, Deputy Collector of Internal Revenue, of Detroit , Michigan , of counsel, for petitioner.

Opinion

TUTTLE, District Judge:

On January 3, 1938 , the debtor corporation filed its petition for reorganization under Section 77B of the Bankruptcy Act. This Court, on May 24, 1938 , finding it impossible to reorganize the corporation and that the corporation was insolvent, entered an order directing the trustee to liquidate and distribute the company's assets. The assets have all been liquidated. The proceeds have not been distributed, but are held by the trustee pending proper order of this Court as to distribution. In addition, the order of May 24, 1938, provided that all claims of creditors were to be filed on or before June 23, 1938, and that "any claim of any Federal, State, County or City government agencies for any tax, penalty, or debt due by the debtor shall be filed as hereinbefore stated on or before June 23, 1938, and failure to file such claims shall forever bar said government agencies from their claims against the debtor."

[Taxes Claimed]

It appears that some time prior to the date of entering the aforesaid order, duplicate returns for taxes due from the debtor corporation under Title IX of the Social Security Act for the years 1936 and 1937 were signed by the permanent trustee of the said corporation and filed with a deputy collector of internal revenue for the District of Michigan. It further appears that at that time the said trustee, in response to a demand for payment of the corporation's 1937 capital stock tax assessment, advised that a formal proof of claim therefor should be filed in this proceeding.

[Government Did Not Comply with Bar Order]

The United States did not file its claim for the aforesaid outstanding 1937 capital stock and 1936 and 1937 social security taxes before the date set in the so-called "bar order." It has petitioned this Court to enter an order permitting it to file its claim and be heard on the merits despite the limitation contained in the aforesaid order.

In the able brief filed in support of its petition, counsel for the United States argue that it is not only entitled to the entry of the order petitioned for but that, under the existing facts, it is properly entitled to the entry of an order directing the trustee to pay the aforesaid taxes forthwith. Counsel argue that the trustee's actual knowledge of the taxes claimed was sufficient to charge him with the duty of payment and that the filing of a proof of claim therefor is not a prerequisite, citing In re Servel, 45 F. (2d) 660 [1930 CCH ¶9575], (D.C. E. D. Idaho 1930); In re Chandler Motors of New England Inc., 17 F. (2d) 998 [1 USTC ¶204] (D.C. Mass. 1936); and In re Kallak, 147 Fed. 276, (D.C. N. Dak. 1906).

Notice is taken of the argument without further considering it, inasmuch as the primary question appears to be whether or not the United States is entitled to the entry of an order permitting it to file its late claim and be heard on the merits thereof.

Section 64(a) of the Bankruptcy Act of 1898, as amended (11 U. S. C. A. Sec. 104) provides that:

[The Law]

The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, State, county, district, or municipality, in the order of priority as set forth in paragraph (b) hereof; provided, that no order shall be made for the payment of a tax assessed against real estate of a bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the court. Upon filing the receipts of the proper public officers for such payments the trustee shall be credited with the amounts thereof, and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court.

As a general rule the United States is entitled to file its claim for taxes at any time during the pendency of a bankruptcy proceeding and before distribution of the estate: In re J. Menist and Co., 294 Fed. 532 [1924 CCH ¶2193] (C. C. A. 2d, 1923); United States v. Birmingham Trust and Savings Co., 258 F. 562 (C. C. A. 5th, 1919); In re Prince and Walter, 131 Fed. 546 (1904); and In re Stover, 127 Fed. 394 (1904).

[Theory of the Bar Order]

The "bar order" technique in respect to tax claims was a natural development. It was designed to accomplish two objects, to remedy two weaknesses evident in the application of the general rule, supra. It was developed, first, to permit an uninterrupted expeditious admin istration of a bankrupt's estate, and, second, to protect the trustee of such estate from liability to tax claimants in distributing assets in the course of his admin istration thereof. The technique is an extension of the policy followed in equity receiverships and has been considered in much detail in the Second Circuit. See In re Anderson, 279 Fed. 525 (C. C. A. 2d, 1922); In re Mortenstern & Co., 57 F. (2d) 163 (C. C. A. 2d, 1932), and In re Swan, 82 F. (2d) 160 [36-1 USTC ¶9120], (C. C. A. 2d, 1936).

In the case of United States v. Elliott, 57 F. (2d) 843 [323 CCH ¶9232], (C. C. A. 6th, 1932), the Circuit Court of Appeals for this Circuit discussed the theory as follows:

. . . We do not think that the right of the government to file its claim and have it considered on its merits by the court was unconditionally destroyed by the bar order. Such orders were sustained in In re Anderson, 279 F. 525, 527 (C. C. A. 2) and in In re Stavin, 12 F. (2d) 471, 473 [1 USTC ¶151] (D. C.). They lie in the inherent power of the court. They are analogous to the usual orders in creditors' suits and insolvent proceedings in chancery whereby claimants are required to come in within a limited period or be excluded from participation in assets. Daniels Chancery Practice, 4th American Ed., Vol. II, p. 1204.

But such orders in bankruptcy are within the control of the court until the termination of the case and may be revoked if no one suffers injury thereby. In re Ives, 113 F. 911, 913 (C. C. A. 6); see, also, People v. Hopkins, 18 F. (2d) 731, 733 (C. C. A. 2). We think the circumstances here call for an application of this principle. The fund being in court, the taxes may yet be paid and the trustee have credit therefor, as provided by Section 64a, Bankr. Act. Creditors acquired no vested interest in the fund in virtue of the bar. The order was intended only to hasten the winding up of the estate and to protect the trustee in its distribution. In re Anderson , supra, page 529 of 279 F.; People v. Hopkins , supra. It has been the practice of equity courts to abrogate the time limit for filing claims where a reasonable explanation is offered for failing to comply and to let in claimants upon such terms as might be imposed as long as the fund is in court. Daniels Chy. Pl. & Prac., supra, p. 1205; In the Matter of Howard, 9 Wall. (76 U. S., 175, 184, 19 L. Ed. 634; Johnson v. Waters, 111 U. S. 640, 674, 4 S. Ct. 619, 28 L. Ed. 547; Olcott v. Headrich, 141 U. S. 543, 548, 12 S. Ct. 81, 35 L. Ed. 851; Grinnell v. Merchants' Ins. Co., 16 N. J. Eq. 283, 284; Brooks v. Gibbons, 4 Paige (N. Y.) 374; Burchard v. Phillips, 11 Paige (N. Y.) 66; see, also, Wechsler v. U. S. 27 F. (2d) 850, 851 [1928 CCH ¶D-8335] (C. C. A. 3); U. S. v. Birmingham Trust & Savings Co., 258 F. 562, 564 (C. C. A. 5). We do not think that the government in seeking to collect taxes should be treated with less favor than general creditors.

[Government's Sovereign Rights Not Lost]

In the instant case, the United States was unable to file its claim for taxes within the time provided for in the "bar order." It is unreasonable to hold that its sovereign rights were thus irretrievably lost, inasmuch as no one has been shown to have been injuriously misled by its failure to file and the trustee still has undistributed assets in his possession. The bankruptcy court, it must be remembered, is a court of equity, In re Wolf Mfg. Industries, 56 F. (2d) 64 [323 CCH ¶9094] (C. C. A. 7th, 1932). The language of the applicable statute (Section 64(a) Bankruptcy Act), that "in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court," connotes a hearing on the merits of the government's claim for taxes. In re Sheinman, 14 F. (2d) 323 [1 USTC ¶191], (D.C. E. D. Pa. 1926).

This Court concludes that the entry of the so-called "bar order" in the instant case permitted a continuing admin istration and liquidation without a resulting liability on the part of the trustee to the United States for any distribution made by him during the period between the "bar date" and the date on which its claim for the taxes detailed in its petition may be allowed. Although the United States lost its rights to priority as to assets distributed during the aforesaid period and may not hold the trustee liable therefor, it cannot be denied the right to file its claim for taxes, be heard on the merits thereof and permitted to participate as a preferred creditor in the disposition of the remaining assets to the extent that its claim may be allowed.

An order will be entered allowing the United States to file its claim for taxes in accordance with its petition.

 

 

[47-1 USTC ¶9128]Seaboard Surety Company v. The United States .

In the Court of Claims of the United States., No. 45519., 67 FSupp 969, 10/07/46

Priority of U.S. claim for taxes: Claim in retained percentage.--The Government's statutory right of preference or priority for payment of debts due it when there is a legal insolvency, and also the tax liens acquired by the Government for such debt of the defaulting contractor, supersede the equities of laborers and materialmen and the surety in respect of any balance due under the contract. The act of the Government offsetting the sum due for taxes against a retained percentage held by it was proper.

Bernard J. Gallagher; M. Walton Hendry was on brief, for plaintiff. E.E. Ellison, John F. Sonnett, Assistant Attorney General; Rob ert Burstein was on brief, for defendant.

Plaintiff, as surety on payment and performance bonds dated July 21, 1936 , of a defaulting contractor, seeks to recover $1,862.62, being a part of the amount of $3,703.86 due from defendant under the contract as the balance of the unpaid contract price upon completion thereof by plaintiff on August 17, 1937 . The portion of the contract price sued for was applied by defendant in February 1939 as an offset for taxes due from the original contractor. This offset was made long after the original contractor had defaulted in July 1937, and after plaintiff had completed the work and, in addition, had paid $13,462.83 for unpaid labor and material claims due from the original contractor prior to its default.

[Question]

 

The question presented is whether defendant had the right as against the surety on the payment and performance bonds to use a portion of the contract price unpaid at the time of default, and to which plaintiff subsequently became entitled, in satisfaction of a debt of the original contractor to the Government not arising out of the contract on which plaintiff was surety.

Special Findings of Fact

 

1. Plaintiff is and at all times here involved was a corporation organized under the laws of the State of New York with its principal place of business in New York City and engaged in the business of acting as surety.

2. Peterson Construction Company was at all times here involved a corporation organized and existing under the laws of the State of Minnesota and engaged in the business of construction contracting.

3. On July 14, 1936 , Peterson Construction Company and defendant entered into a contract, designated 12r-6316, in which Peterson Construction Company promised to perform certain work near Calexico , California , on the All-American Canal and a detour at the turnout for the Central Main Canal of the All-American Canal System.

4. On July 21, 1936 , to meet the requirements of the specifications in connection with the making of said contract, the Seaboard Surety Company executed and delivered to defendant two bonds in the penal sums of $28,000 and $27,431.25 respectively. The first, known as a performance bond, was conditioned:

If the principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract during the original term of said contract and any extensions thereof that may be granted by the Government, with or without notice to the surety, and during the life of any guaranty required under the contract, and shall also well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements of any and all duly authorized modifications of said contract that may hereafter be made, notice of which modifications to the surety being hereby waived, then, this obligation to be void; otherwise to remain in full force and virtue.

The second, known as a payment bond, was conditioned:

If the principal shall promptly make payment to all persons supplying labor and material in the prosecution of the work provided for in said contract, and any and all duly authorized modifications of said contract that may hereafter be made, notice of which modifications to the surety being hereby waived, then this obligation to be void; otherwise to remain in full force and virtue.

5. On July 28, 1937 , Peterson Construction Company was declared in default by the defendant under the terms of the contract, at which time it had completed work of a contract value of $55,357.35. Plaintiff surety undertook the completion of the contract work and completed it on August 17, 1937, by the performance of work of the contract value of $903.86, the total value of all contract work performed being $56,261.21. Payments totaling $52,557.35 were made by defendant prior to the default, defendant having retained $2,800 of the amount earned by Peterson Construction Company prior to the default. This amount in addition to the $903.86 for work performed by the Seaboard Surety Company left a balance of $3,703.86 owed by defendant for work under the contract.

6. As a result of the default of Peterson Construction Company, plaintiff was obliged to pay and paid for labor and materials furnished in the performance of said contract, an aggregate sum of $13,462.83. It received on account thereof $7,691.46, leaving an excess of expenditures over receipts in the sum of $5,771.37, no part of which has ever been repaid to it.

7. Because of the unreimbursed expenditures above set forth, plaintiff submitted a claim to the United States for the balance of $3,703.86 owing for the work performed under the contract.

By a settlement dated February 9, 1939, the General Accounting Office applied $1,862.62 of said balance to the liquidation of certain tax indebtedness of Peterson Construction Company to the United States and authorized payment of the remaining $1,841.24 to the plaintiff.

By letter of March 14, 1939 , plaintiff protested the settlement to the Comptroller General and requested a review thereof. The Comptroller General reviewed the settlement and on May 29, 1939, sent his written decision to plaintiff in which it affirmed the settlement of February 9. Thereafter the undisputed balance of $1,841.24 was paid to plaintiff and the $1,862.62 was retained by defendant.

8. The facts as to the said tax indebtedness are as follows:

On October 20, 1937, the contractor received from the Collector of Internal Revenue at St. Paul, Minnesota, formal notice and demand for payment of capital-stock tax for the year ending June 30, 1937, in the amount of $401.62 plus penalties and interest of $19.85.

On February 1, 1938, the Collector filed notice of a tax lien for $421.47 in the office of the Register of Deeds of Hennepin County, Minnesota.

On April 26, 1938, the same Collector mailed to the contractor notice and demand for the payment of $4.46 Social Security tax under title VIII of the Act for the months of January through June 1937.

On May 17, 1938, the Collector gave the contractor notice and demand for payment of $498.43 Social Security tax under title IX of the Act for the calendar year 1937.

On June 30, 1938, the Collector gave the contractor notice and demand for payment of $852.96 Social Security tax for the first quarter of 1938 under title VIII.

On February 21, 1939, the Collector filed notice of a tax lien for $1,355.85, the total of these three Social Security tax items, in the office of the Register of Deeds of Hennepin County, Minnesota.

The total of the Social Security and the capital-stock taxes was $1,772.32. When the General Accounting Office computed the amount of the taxes owed by the contractor additional interest charges of $85.30 were made, bringing the total deducted by the defendant to $1,862.62. The existence and amount of Peterson Construction Company's tax liability are not in dispute.

9. Peterson Construction Company was insolvent at the time defendant asserted its first claim for such taxes in October 1937, but was not concealing its assets. The first of such taxes accrued June 30, 1937. At the time plaintiff executed and delivered the bonds above set forth, said tax liability had not accrued.

On May 10, 1938 , Peterson Construction Company made a formal assignment for the benefit of its creditors.

10. On July 21, 1936, the day on which the payment and performance bonds were executed and delivered, as set forth in finding 4, the Peterson Construction Company executed and delivered to the Seaboard Surety, plaintiff herein, a written assignment under both bonds of any amount, or amounts, due or to become due under the contract, including retained percentages, in the event of default of the principal contractor and the surety should be required to make payment under such bonds for labor and materials or for the cost of completing the contract. This assignment was executed and delivered in furtherance of the objects and requirements of the act of August 24, 1935 (49 Stat. 793), which required a contractor to give such bonds as a condition to the making of the contract to which they related and of which contract the payment and performance bonds became a part.

The above-mentioned assignment of July 21 was duly recorded prior to the date on which defendant declared the contractor in default on July 28, 1937, and prior to the time when any lien or priority in favor of the United States accrued in respect of any of the capital-stock and Social Security taxes, penalties, and interest referred to in findings 7 and 8.

Also prior to July 28, 1937, the contractor had defaulted under the contract and the payment bond in that it had become financially unable and had failed to pay certain laborers and materialmen for labor and materials furnished and used on the contract work, and, pursuant to its obligation under the payment bond, plaintiff, as surety, had paid $9,675.88 on such accrued and unpaid claims for labor and materials. Subsequently, soon after the contractor's further and final default in performance on July 28, 1937 (finding 5), plaintiff was compelled under the payment bond to pay and did pay for additional labor and material claims due from and unpaid by the Peterson Construction Co., prior to such default in the amount of $3,786.95. The total payments so made by plaintiff under the payment bond for labor and materials due to default of the Peterson Construction Company was $13,462.83, as stated in finding 6. With the exception of $6.46 the amount of $7,691.46 received by plaintiff, as stated in the last sentence of finding 6, represented current partial payments made by defendant to the Peterson Company for work performed by it between the date of plaintiff's first payment, supra, of $9,675.88 on account of due and unpaid labor and material claims, and July 28, 1937. The amount of $2,755 of the earned partial payments of $7,685.88 to July 28 was the last partial payment for work performed by the Peterson Company during the month of July 1937. Defendant made this payment to plaintiff by check dated August 12, 1937. The partial or progress payments so made were delivered to and received by plaintiff, as surety, pursuant to a power of attorney executed by the Peterson Company for that purpose and the total amount of $7,691.46 so received from defendant and the Peterson Company was used by plaintiff to pay current payroll and material bills of the Peterson Company to July 28, 1937, and, thereafter, the balance was used for the same purposes between that date and August 17, 1937, in the completion by plaintiff of the unfinished contract work.

11. On December 31, 1938, and at all times thereafter, the trustees under the general assignment by the Peterson Company on May 10, 1938, had more than sufficient cash on hand belonging to the assignor's estate, after payment of the current expenses of admin istering the assignment, to pay and discharge the entire claim of the Government against the Peterson Company for the capital stock and Social Security taxes, interest, and penalties. At the time the defendant, on or about February 9, 1939, withdrew the claim for taxes which it had filed with the trustees of the Peterson Company and offset the amount thereof against the balance of $3,703.86 due from the Government under the completed contract, dated July 14, 1936, the trustees of the Peterson Company had on hand and subject to distribution a cash balance of about $15,000 after payment of all operating expenses.

Conclusion of Law

 

Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is therefore dismissed.

Judgment is rendered against plaintiff for the cost of printing the record herein, the amount thereof to be entered by the clerk and collected by him according to law.

Opinion

 

LITTLETON, Judge, delivered the opinion of the court:

The only question now pressed in this case is whether plaintiff, as surety on a payment bond given pursuant to the act of August 24, 1935 (49 Stat. 793), and the requirements of a contract with defendant, had an equitable lien on the portion of the contract price represented by the retained percentage in the hands of defendant after plaintiff had, by reason of the default of the contractor, paid certain claims of laborers and materialmen and had completed the contract. This question arose by reason of the fact that before defendant made payment of the balance due under the contract, including the retained percentage, the principal contractor, who had been declared in default, became indebted to the Government for certain taxes and had on May 10, 1938, made a general assignment for the benefit of its creditors. Plaintiff claims that it acquired an equitable lien on the retained percentage prior to the general assignment of May 10 which was superior to the preference or priority claimed by defendant under Section 3466 of the Revised Statutes. On February 9, 1939 , the Government under a claim of priority offset the amount of taxes due from the principal contractor against the amount of the retained percentage of $2,800 and paid to plaintiff the balance thereof, including $903.86, final contract balance. The amount of the offset for taxes due was $1,862.62, and plaintiff seeks to recover this amount.

No distraint was issued by defendant for the taxes, but defendant filed a claim with the trustees named in the assignment for the benefit of creditors, which it later withdrew on February 9, 1939 , when it deducted the amount of said taxes from the balance due under the contract with the Peterson Construction Company, as set forth above.

The Peterson Construction Company (hereinafter sometimes referred to as Peterson) and the defendant, acting through the Bureau of Reclamation, Department of the Interior, entered into the contract in suit, No. 12r-6316, dated July 14, 1936. This contract called for performance of certain excavation and earthwork in connection with the All-American Canal System, Boulder Canyon project. The original contract price was $54,862.50, which appears to have been increased to $56,261.21.

In June, or in the early part of July, 1937, Peterson defaulted under the contract and under the payment bond by reason of its inability to pay the amounts due by it for certain claims for labor and material in the amount of $13,462.83. Peterson further defaulted in performance of the contract work, and its right to proceed further under the contract was terminated July 28, 1937 . The plaintiff, as surety on the performance bond, completed the contract on August 17, 1937 , and a contract balance of $3,703.86, which included the retained percentage of $2,800, remained due from defendant under the contract.

On August 8, 1936 , Peterson entered into another and a much larger contract with defendant, No. 12r-6411 (which contract is not here in suit) relating to construction by plaintiff of certain washover chutes, drainage, inlets, and outlets for the All-American Canal System. Peterson also defaulted on this contract and plaintiff, as surety, paid out about $74,000 for labor and material claims thereunder, and also completed this contract. Upon such completion a balance of $26,807.85 remained due under this contract. Payment of the balance due under the contract in suit, No. 12r-6316, was apparently held up to await completion of the other contract, No. 12r-6411.

The payment and performance bonds given under the contract in suit, and on which plaintiff was surety, were required by and given under the provisions of the contract in suit and pursuant to the provisions and requirements of the act of August 24, 1935 , 49 Stat. 793. At the time Peterson defaulted on its payment bond, which was prior to its default in performance, plaintiff was compelled to pay and did pay at that time $9,675.88 on due and unpaid claims of laborers and materialmen against Peterson, and subsequently paid an additional amount of $3,786.95 for such claims. The total of the claims so paid was $13,462.83. After the default of Peterson on its payment bond, certain progress payments thereafter becoming due from the Government to Peterson under the contract in suit for contract work performed by Peterson to date of default in performance on July 28, 1937, were delivered by the defendant to plaintiff, and the total of the progress payments so received by plaintiff was $7,685.00. In addition plaintiff received $4.46 from Peterson. The total of these amounts was used by plaintiff in making payments for Peterson's payroll and for materials to July 28, 1937 , when the Government terminated Peterson's right to proceed, and thereafter plaintiff used the balance for the same purposes in completing the work. As above stated, plaintiff completed the unfinished work on August 17, 1937 , and in doing so earned and in February 1939 received the unpaid balance of $903.86 and, also, $937.38 of the $2,800, retained percentage remaining in the hands of the Government upon completion and acceptance of the contract work. The balance of $1,862.62 of the $2,800, retained percentage, was applied by defendant through the Comptroller General on February 9, 1939, as an offset in satisfaction of that amount due the Government by Peterson for accrued taxes, penalties and interest representing capital stock tax for the fiscal year ending June 30, 1937, and Social Security tax for the calendar year 1937 and the first quarter of 1938.

After payment by plaintiff of labor and materialmen claims against Peterson and after completion of the contract Peterson made a general assignment on May 10, 1938 , for the benefit of creditors, and the properties and assets of Peterson Company thereupon passed into the hands of the trustees.

[Priority Of Tax Lien]

 

Upon the making of this general assignment there arose a statutory preference or priority under R.S. 3466, 31 U.S.C. 191, in favor of the Government in respect of the debt due it by Peterson for the taxes above mentioned. In addition to the statutory priority the Government, by giving notice and demand on October 20, 1937, and April 26, 1938, had acquired a lien under the act of March 4, 1913, 37 Stat. 1016, as to a part of this tax debt, and by further notice and demand acquired such lien as to the balance of the debt on May 17 and June 30, 1938, after the general assignment by Peterson. However, if, as plaintiff contends, the surety, by reason of its having paid the claims of laborers and materialmen under the payment bond, acquired an equitable lien on the retained percentage of $2,800 due under the contract prior to the dates on which the Government's lien attached and also prior to the general assignment of May 10, 1938, such lien of plaintiff would be superior to that of the Government and also superior to the Government's claim of priority. Rob ert Y. Brent, surviving Executor of Rob ert Brent, for the Use of the United States v. The President and Directors of the Bank of Washington, 10 Peters 596. The right of the Government to preference or priority in payment of debts due it is purely statutory. United States v. The State Bank of North Carolina , 6 Peters 29. Such priority does not arise until there is a legal and known insolvency manifested by some notorious act by the debtor pursuant to law. Prince v. Bartlett, 8 Cranch 431; George Beaston, Garnishee of the Elkton Bank of Maryland v. The Farmers' Bank of Delaware , 12 Peters 102; United States v. Oklahoma , 261 U.S. 253. The statute (3466, R.S.) giving the United States priority creates no lien in favor of the United States (George Beaston v. The Farmers' Bank of Delaware , supra).

The United States possesses the general as well as the statutory right (R.S. 236) to apply any sum due by it to the extinguishment, in whole or in part, of any debt due to the United States on any other account by a person to whom the United States is indebted, but this is only the exercise of the common right which belongs to every creditor to apply the unappropriated monies of his debtor, in his hands, in the extinguishment of the debts due to him. Charles Gratiot, 15 Pet. 336. The right of offset does not give the Government a superior legal or equitable claim to the funds in its hands, nor does such right of offset give the admin istrative settlement finality, and, "whether the amount so [ admin istratively] fixed is due, in law and in fact, undoubtedly remains a question to be adjudicated, if properly raised in judicial proceedings, * * *." Illinois Surety Company v. United States to the Use of Peeler et al., Trading as Faith Granite Company, 240 U.S. 214, 219.

[Authorities Cited]

 

In view of the facts in this case we are of opinion, as held in Dewey Schmoll, Successor Assignee for the benefit of creditors of Murch Brothers Construction Company, Inc., and National Surety Corporation v. The United States, 105 C. Cls. 415, that plaintiff, as surety on the payment bond, did not acquire an equitable lien on the $2,800 retained percentage under the contract either by reason of the assignment of July 21, 1936, from Peterson to plaintiff, or by reason of payment by plaintiff of the claims of laborers and materialmen. The assignment of July 21, 1936, under the payment and performance bonds of any amounts becoming due under the contract as security to plaintiff, in event of default by Peterson, would, if valid, have given plaintiff an equitable lien upon the retained percentage, but this assignment cannot be held valid in the circumstances of this case under the decision of the court in Martin v. National Surety Co. et al., 300 U.S. 588, 594-598. The decisions of the U.S. Circuit Courts of Appeals as to the question whether in the absence of a valid assignment or statute, the proceeds of a contract with the Government are chargeable with an equitable lien in favor of laborers and materialmen and a surety who pays such claims, are conflicting. Martin v. National Surety Co., supra, page 593. See, also, Farmers' Bank v. Hayes, et al., 58 Fed. (2d) 34, 37; American Bonding Company v. Central Trust Co., 240 Fed. 400; Lyttle v. National Surety Co., 43 App. D.C. 136; National Surety Co. v. Lane, 45 App. D.C. 176; Philadelphia National Bank v. McKinlay, 63 App. D.C. 296, 72 Fed. (2d) 89; Moran v. Guardian Casualty Co., 64 App. D.C. 188, 76 Fed. (2d) 438; and Pratt Lumber Co., Inc. v. T.H. Gill Co., 278 Fed. 783. But we are of opinion after examining all the authorities on the subject that the rule announced and applied in Schmoll, etc. v. United States , supra, that the surety does not acquire such an equitable lien under its payment bond, is the correct rule. No case has been cited, and we have been unable to find one in which the Supreme Court has held that an equitable lien accrues in favor of laborers and materialmen or to a surety in the event he pays such claims on the balance due under a contract. Cf. Mankin v. United States for the use of Ludowici-Celadon Co., 215 U.S. 533; Title Guaranty & Trust Company of Scranton, Pennsylvania v. Crane Company, 219 U.S. 24; United States v. Ansonia Brass and Copper Company, 218 U.S. 452; Illinois Surety Company v. United States to the use of Peeler et al., 240 U.S. 214; United States Fidelity and Guaranty Company v. United States for the use and benefit of Struthers Wells Company, 209 U.S. 306; U.S. Fidelity & Guaranty Co. v. United States for the use and benefit of Pressed Brick Co., 191 U.S. 416; American Surety Co. v. Westinghouse Electric Mfg. Company, 296 U.S. 133, 138.

As between laborers and materialmen or a surety on a payment bond, and general creditors, including the Government, of the defaulting contractor, the equity of such laborers and materialmen, or the surety, in the balance due under the contract, including the retained percentage, upon completion thereof, would be superior to the equity of such general creditors to such balance. However, we are of opinion that the Government's statutory right of preference or priority for payment of debts due it when there is a legal insolvency, and also the tax liens acquired by the Government for such debt of the defaulting contractor, supersede the equities of laborers and materialmen and the surety in respect of any balance due under the contract.

[Conclusion And Disposition]

 

On the facts in this case and under the authorities cited, the action of the defendant in applying $1,862.62 of the retained percentage due under the contract upon completion thereof by plaintiff, as surety, in liquidation of the tax indebtedness of the Peterson Construction Company to the United States was a legal and proper offset, and plaintiff is not entitled to recover. The petition must, therefore, be dismissed, and it is so ordered.

JONES, Judge; WHITAKER, Judge; and WHALEY, Chief Justice, concur.

MADDEN, Judge, took no part in the decision of this case.

 

 

[69-2 USTC ¶9464]In the Matter of: Autorama Tool & Die Company, Bankrupt, Henry Faulk, Appellant v. United States of America , Appellee

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 18959, 412 F2d 369, 6/16/69, Aff'g unreported District Court decision

[Code Sec. 6323]

Tax liens: Bankruptcy: Priority.--The Government's tax claims for income and withholding taxes which became due and owing in the three years before the taxpayer's bankruptcy were entitled to the priority of payment accorded them by Section 64(a)(4) of the Bankruptcy Act even though there were no tax liens because of the Government's failure to timely file notices of tax liens. But the Government's alleged tax liens for prior years were not entitled to any priority and shared the same status as a claim of a general creditor where the Government filed notice of its tax liens with the clerk of the appropriate District Court rather than with the office designated by state law.

Stephen K. Valentine, Arhur E. Fixel, Fixel & Fixel, 2200 Penobscot Bldg., Detroit, Mich., for appellant. Karl Schmeidler, Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Crombie J. D. Garrett, Stanley L. Ruby, Department of Justice, Washington, D. C. 20530, Rob ert J. Grace, United States Attorney, Detroit, Mich., for appellee.

Before PHILLIPS, CELEBREZZE and PECK, Circuit Judges.

[Facts]

PECK, Circuit Judge.

This is an appeal from the judgment of the District Court affirming an order of the Referee in Bankruptcy which overruled the appellant's objections and allowed a claim by the United States against the bankrupt for federal taxes.

On August 3, 1956 , an involuntary petition in bankruptcy was filed against the bankrupt. Bankruptcy proceedings continued until 1960, when the bankrupt petitioned to have the proceedings transferred to a reorganization program under Chapter X of the Bankruptcy Act. The petition was granted, but the reorganization failed and in 1963 the matter was again referred to the Referee in Bankruptcy for continuation of the bankruptcy proceedings. While the matter was in bankruptcy, the United States filed a claim against the bankrupt estate for unpaid taxes in the amount of $166,070.97. The tax claim was for income taxes for the fiscal years ending October 31, 1951 , 1952 and 1953, and for withholding and Federal Insurance Contribution Act taxes for various quarters of 1953, 1955 and 1956, and for Federal Unemployment Tax Act taxes for 1956.

Appellant, a general creditor of the bankrupt, filed objections to the federal tax claim, asserting that the Government had neither lien status valid against the trustee in bankruptcy nor priority over general creditors because of defective filing of notices of tax lien.

[Priority]

We turn first to the question of priority. It is the Government's position that with respect to the tax claims for the taxes due and owing within the three years immediately prior to bankruptcy, it is entitled to a fourth class priority under §64(a)(4) of the Bankruptcy Act (11 U. S. C. §93) whether or not the tax claims are found to be secured by valid liens. This position is clearly correct. Section 17(a) of the Bankruptcy Act (11 U. S. C. §35) provides that taxes due and owing the United States within three years of bankruptcy are not released by a discharge in bankruptcy. Section 64(a)(4) of the Bankruptcy Act (11 U. S. C. §93) provides that taxes which are due and owing the United States by the bankrupt and which are not released by a discharge in bankruptcy are entitled to a priority over general creditors. The appellant's assertion that the Government is denied this priority by United States v. Speers [66-1 USTC ¶9101], 382 U. S. 266 (1965), is unfounded. The Supreme Court in Speers specifically stated that the Government retained its priority under §64(a)(4) even though it had no lien because of failure to timely file notice of tax lien. Thus the tax claims for the various taxes which became due and owing in the three years from 1953 to 1956 are entitled to the priority of payment accorded them by §64(a)(4) of the Bankruptcy Act.

[Validity]

We turn next to the more difficult question of the validity of the Government's liens for its claims for corporate income taxes for the bankrupt's fiscal years 1951 and 1952.

Section 6321 of the Internal Revenue Code gives the United States a lien on all property, real and personal, belonging to any person who refuses to pay any federal tax after proper demand for payment. ¹ Section 6323(a) of the Code provides that the lien imposed by §6321 is not valid as against a judgment lien creditor ² until a notice of the lien is filed as provided by §6323(f) of the Code. ³ Section 6323(f) requires the notice of lien to be filed in an office designated by state law, and it further provides that if the state has not designated an office for the filing of tax liens, then the filing is to be done in the office of the clerk of the United States District Court for the district in which the property subject to the lien is located. ⁴

At the time the tax lien in question arose, Michigan law regarding the filing of notices of federal tax lien provided for the filing of the notices with the county Register of Deeds in the county where the property subject to the lien was located. ⁵

[Government Contentions]

The Government filed its notices of lien with the clerk of the appropriate District Court but not with the county Register of Deeds. It asserts here that it was justified in so filing for three reasons. The first is that the Michigan statute which required the filing of the notice of lien with the Register of Deeds also required that the notice contain a description of real property subject to the lien, while the standard form notice of tax lien used by the Government contained no provision for the description of real property subject to the lien. Second, the Government contends that it was not required to file a notice of lien with the Register of Deeds because at the time the lien arose an opinion of the Michigan Attorney General stated that the Government's standard form notice of lien was not entitled to recordation because it did not contain a description of real property subject to the lien. ⁶ Finally, the Government contends that the decision by the Court in Youngblood v. United States, 141 F. 2d 912 (6th Cir. 1944), held that a Michigan Register of Deeds was not authorized to accept for filing a notice of federal tax lien which did not contain a description of real property subject to the lien. In sum the Government contends that because of the statutory provision, the Michigan Attorney General's opinion and the Youngblood case, it was clear that the Register of Deeds would not accept the notice of lien for filing and therefore Michigan in effect did not provide an office for the filing of notices of federal tax lien. ⁷

[Personal Property Involved]

The Government's contentions would be more persuasive if it was not for the fact that the bankrupt possessed only personal property at the time of the bankruptcy. Therefore the only liens claimed by the Government in the bankruptcy proceedings were on the bankrupt's personal property. Since there was no real property involved here, neither the provision in the Michigan statute requiring a description of real property nor the Michigan Attorney General's opinion had any application. There is nothing in the record to indicate that the Register of Deeds would have refused to accept a notice of federal tax lien on personal property.

A similar problem was presented to this Court in United States v. Estate of Donnelly, 406 F. 2d 1065 (6th Cir. 1969), aff'g 295 F. Supp. 557 (E. D. Mich. 1967). We there affirmed the judgment of the District Court holding that a federal tax lien was not valid as against a bona fide purchaser of Michigan real estate subject to a federal tax lien where the Government similarly filed notice of the lien with the clerk of the United States District Court rather than with the appropriate Michigan county Register of Deeds.

Although the facts of Donnelly are distinguishable from this case since there the rights of a bona fide purchaser were involved and the Government's filing of its notice of lien took place before the issuance of the Michigan Attorney General's opinion, the situation presented to the Government was the same here as in the Donnelly case. As stated earlier the Government's asserted impediments to filing the notices with the Register of Deeds quickly evanesce in light of the fact that only personal property was involved. As in Donnelly, the Government has advanced no satisfactory reason why it failed to attempt to tender the notice of tax lien on the personal property to the Register of Deeds for filing under the then existing law.

While it is true that the statute gives the Government a broad lien on all of a delinquent taxpayer's property, including after acquired property, ⁸ the statute also requires a filing of a notice of lien to perfect the lien and further provides for separate state filing of notices for real and personal property. Some Government scrutiny of the affairs of delinquent taxpayers sufficient to enable it to know where to properly file notice of lien seems to have been contemplated by this entire statutory scheme. Requiring the Government to investigate the affairs of the delinquent taxpayer to determine to what property the statutory lien attaches and therefore where to properly file the required notice of lien in no way cuts down on the broad scope of the lien.

We therefore hold that since the Government failed to effectively file the required notice of lien, it has no lien interest in the bankrupt's property for the claim for income taxes for the years 1951 and 1952. From all that appears in the record, however, the Government is entitled to share as a general creditor in its claim for the income taxes in question.

The judgment of the District Court with respect to the Government's priority for its claim for the taxes which became due and owing in the three years prior to bankruptcy is affirmed. The judgment of the District Court with respect to the Government's lien for the claim for the income taxes for the years 1951 and 1952 is reversed.

¹ "§6321. Lien for taxes

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Internal Revenue Code of 1954 §6321 (26 U. S. C. §6321).

² It should be noted that the trustee in bankruptcy has, for purposes of this section, at least the rights of a "judgment lien creditor." Section 70(c) of the Bankruptcy Act (11 U. S. C. §110(c)); See United States v. Speers [66-1 USTC ¶9101], 382 U. S. 266 (1965).

³ "§6323. Validity and priority against certain persons

(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate." Internal Revenue Code of 1954 §6323(a) (26 U. S. C. §6323(a)).

⁴ "§6323

(f) Place for filing notice; form.--

(1) Place for filing.--The notice referred to in subsec-(a) shall be filed--

(A) Under State laws.--

(i) Real property.--In the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and

(ii) Personal property.--In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; or

(B) With clerk of district court.--In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A);" Internal Revenue Code of 1954 §6323(f) (26 U. S. C. §6323(f)).

⁵ "Sec. 7.751. U. S. Tax Liens; Filing of Notice, Contents; Register of Deeds, Duty. Section 1. That whenever the collector of internal revenue for any district in the United States, or any tax collecting officers of the United States having charge of the collection of any tax payable to the United States, shall desire to acquire a lien in favor of the United States for any tax payable to the United States against any property, real or personal, within the State of Michigan pursuant to section three thousand one hundred eighty-six of the revised statutes of the United States, he is hereby authorized to file a notice of lien, setting forth the name and the residence or business address of such taxpayer, the nature and the amount of such assessment, (and a description of the land upon which a lien is claimed,) in the office of the register of deeds in and for county or counties in Michigan in which such property subject to such lien is situated;" 6 Mich. Stat. Ann. §7.751 (1963 ed.) Michigan enacted the Uniform Federal Tax Lien Registration Act on August 11, 1956 , after the date of the bankruptcy. 6 Mich. Stat. Ann. §7.753 (1960 ed.)

⁶ The Government contends that the "form" question is substantial because it is entitled to a lien against after acquired property, which is obviously not capable of present description.

⁷ It should be noted that the Supreme Court held in 1961 that the State of Michigan had not provided an office for the filing of notices of federal tax liens because of the requirement of a description of land subject to the lien. United States v. Union Central Life Ins. Co. [62-1 USTC ¶9103], 368 U. S. 291 (1961). However, since this decision was rendered after the occurrence of the facts here, this Court must consider the acts of the parties in relation to the law in existence at that time. United States v. Estate of Donnelly, 406 F. 2d 1065 (6th Cir. 1969), aff'g 295 F. Supp. 557 (E. D. Mich. 1967).

⁸ Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945). It is to be noted that no after acquired property is involved in the present case, and that therefore anything which might be here said as to the Government's rights to such property would be obiter dictum.

Concurring and Dissenting Opinion

PHILLIPS, Circuit Judge. (Concurring in part, dissenting in part.)

I agree that the federal taxes which became due and owing in the three years from 1953 to 1956 would be entitled to priority of payment under §64a(4) of the Bankruptcy Act, if they were not secured by valid tax liens. Accordingly, I concur in that part of the decision which holds that the judgment of the District Court with respect to the priority of the claim of the United States for the taxes which became due and owing in the three years prior to bankruptcy should be affirmed.

I dissent from the majority decision to the extent that it reverses the judgment of the District Court with respect to the Government's liens for the claims in question. The Attorney General of Michigan had ruled that the form of notice of tax liens in use by the Internal Revenue Service should not be accepted for recordation by the county register of deeds of Michigan counties. My understanding is that the same form of notice of lien was used whether real estate or personal property was involved. In the face of the opinion of the Attorney General of Michigan and the practice of county registers of deeds in complying with this opinion, an attempt on the part of the Government to have had the tax liens here in question recorded in the office of the county register of deeds would have been futile. Under these circumstances notices of the liens were filed in the office of the clerk of the United States District Court as provided by 26 U. S. C. §6323. In my opinion this was the proper place to file notice of the tax liens.

I agree with the majority opinion that United States v. Estate of Donnelly, 406 F. 2d 1065 (6th Cir.), affirming 295 F. Supp. 557 (E. D. Mich.), petition for certiorari filed May 10, 1969, 37 U. S. L. W. 3444, is distinguishable from this case since the rights of a bona fide purchaser were involved in that case and the Government's filing of its lien took place before the issuance of the opinion of the Attorney General of Michigan.

I would affirm the judgment of the District Court in all respects.

 

 

[66-2 USTC ¶9523]United States of America, Appellee v. Morris C. Goldberg, a/k/a Moe Goldberg, a/k/a M. C. Goldberg, et al., Rose Satkoff, Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 15677, 362 F2d 575, 7/8/66, Aff'g District Court, 66-1 USTC ¶9321, 245 F. Supp. 251

[1954 Code Sec. 6323]

Validity of liens: Validity against mortgagee: Filing of notice.--Although an unrecorded assignment of a real estate mortgage was a valid assignment under state law (New Jersey), it did not displace a federal tax lien which had been previously filed against the mortgaged property. The Government had filed its tax lien notice in the county in which the mortgagor's principal place of business was located rather than the county in which the real estate was located. However, under state law the mortgage and the assignment thereof were intangible personal property, the situs of which for purposes of the validity of liens was the county in which the mortgagor had its principal place of business.

Marco S. Sonnenschein, Department of Justice, Washington, D. C. 20530, Edwin P. Rome, Blank, Rudenko, Klaus & Rome, Four Penn Center Plaza, Philadelphia, Pa., for E. Breen, S. Weinrott, appellees. Ronald N. Rutenberg, Rutenberg, Rutenberg & Rutenberg, 1320 Two Penn Center Plaza, Philadelphia, Pa., for appellant.

Before KALODNER, GANEY and SMITH, Circuit Judges.

Opinion of the Court

SMITH, Circuit Judge:

This action to enforce a federal tax lien and for the appointment of a receiver was brought under §§ 7403(a) and (d) of the Internal Revenue Code of 1954, 26 U. S. C., §§ 7403(a) and (d), 1954. The present appeal is from the denial of a claim filed by a creditor of the taxpayer during the course of the proceedings. The questions raised in the court below, and now before us for decision, pertain to the validity of a mortgage assignment, the effectiveness of the tax lien, and the order of priority. These questions were submitted to the court below on a stipulation of facts.

The Pennsylvania Laundry Company, a Pennsylvania corporation having its principal place of business in Philadelphia , was the holder of a mortgage on real property located in Atlantic County , New Jersey . The mortgage, given to secure a note, was duly recorded in the said county pursuant to the applicable local statute. An assessment for unpaid income taxes for the years 1954-57, inclusive, was made against the Company on July 12, 1962 , and on the same date a notice of lien was filed in the office of the Prothonotary of Philadelphia County. Approximately five months later one Rose Satkoff, the appellant, purchased a one-fourth interest in the mortgage for the sum of $8,500. This transaction was made the subject of a written assignment which was admittedly not recorded. On May 12, 1964 , a duplicate notice of the federal tax lien was filed in Atlantic County .

Pursuant to an order of the court, entered on the petition of the receivers, the note and mortgage were sold and assigned to one Nicholas A. Canuso for the total sum of $30,000. Thereafter the appellant filed a petition in which she asserted a claim to a proportional share of the proceeds, together with interest thereon. This petition was properly dismissed but on grounds we find to be erroneous. The court below held that (1) under the assignment the appellant acquired an interest in real property, and (2) her failure to record the assignment rendered it void. These holdings are predicated upon an erroneous view of New Jersey law.

Effect of Mortgage Assignment

The nature of the interest acquired by the appellant under the assignment was the same as that held by the Company under the mortgage, and the latter must be determined under local law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512, 513 (1960). Although some of the early New Jersey decisions followed the common law rule that a mortgage on real property was a conditional conveyance of title, this is no longer the law. Sears, Roebuck & Co. v. Camp, 1 A. 2d 425, 428 (Ct. Err. & App. 1938). The historical development of the new rule is discussed in the cited case.

The present rule is stated in the leading case of Camden Trust Co. v. Handle, 26 A. 2d 865, 868 (Ct. Err. & App. 1942) as follows:

"A mortgage does not vest in the mortgagee an immediate estate in the land with the right of immediate possession, defeasible upon the payment of the mortgage money, but merely gives him a right of entry upon breach of the condition, in which even his estate has all the incidents of a common law title, including the right of possession subject to the equity of redemption, and, meanwhile, the mortgagor is deemed the owner of the lands for all purposes. The mortgage is treated as essentially a security for the debt." (Italics supplied.)

The same rule was followed in Tracy v. Costa, 28 A. 2d 523 (Ct. Err. & App. 1942) and Vineland Savings & Loan Ass'n v. Felmey, 79 A. 2d 714 (Super. Ct. 1950).

It is clear that under the present law the mortgage vested in the Company nothing more than a lien which it held as security for the debt due under the note. Absent default and foreclosure, the mortgagor remained the owner of the lands for all purposes. The note and mortgage constituted a unitary obligation which was nothing more than a chose in action.

Effect of Recording Statutes

It is provided by statute, N. J. S. A. 46:16-1, as amended, that deeds and instruments "affecting the title to real estate," including mortgage assignments, may be recorded. It is similarly provided, N. J. S. A. 46:22-1, that such deeds and instruments shall, unless recorded, be void against "subsequent judgment creditors without notice." These provisions were taken without substantial change from §§ 21 and 54 of the Conveyance Act of 1898 as amended. 2 Comp. St. 1910, pp. 1532 and 1553. It has been held that §54 of the said Act, the counterpart of §46:22-1, as properly construed, was not applicable to the assignments of mortgages on real property. Leonard v. Leonia Heights Land Co., 87 Atl. 645, 648 (Ct. Err. & App. 1913); Rose v. Rein, 172 Atl. 510, 512 (Ct. Err. & App. 1934).

An assignment of a "mortgage upon real estate" may be recorded pursuant to N. J. S. A. 46:18-3. The related section which follows, N. J. S. A. 46:18-4, provides that such an assignmemt, duly recorded, shall "be notice to all persons concerned that [the] mortgage is so assigned." Section 46:22-4 N. J. S. A., provides as follows: "If an assignment of any mortgage upon real estate is not recorded . . ., any payments made to the assignor in good faith and without actual notice of such assignment, . . . shall be valid as if such mortgage had not been assigned." The cited sections are in substance re-enactments of §§ 31, 32 and 34 of an Act Concerning Mortgages, 3 Comp. Stat. 1910, pp. 3418 and 3419.

It was held in Rose v. Rein, supra, that §§ 32 and 34 of the said Act, the counterparts of existing provisions, were applicable in the case of an unrecorded assignment of a real property mortgage. It was further held in the same case that the sections afforded protection only to "persons who deal with the assignor as if he was still the holder of the mortgage, by making payments for the release of . . . mortgaged premises or any part thereof."

Federal Questions

The mortgage assignment must be regarded as valid notwithstanding the apellant's failure to record it. However, it does not follow that the appellant is entitled to prevail on this appeal. There remains for determination the questions concerning the effectiveness of the federal tax lien and the order of priority, and these must be decided under federal law. United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 240 (1960).

The notice of tax lien was filed in Philadelphia County pursuant to §141 of 74 P. S., which provides that such notices "shall be filed . . . in the office of the prothonotary of the county or counties in this State within which the property subject to . . . lien is situated." The appellant here contends that this filing was ineffective as to her. This contention is clearly without merit; it is predicated upon a premise hereinabove rejected as erroneous.

As a chose in action the note and mortgage were intangible personal property the situs of which, for the purposes of §6323 of Title 26 U. S. C. A. (1954), was in Philadelphia County , the Company's principal place of business. Walker v. Paramount Engineering Company [66-1 USTC ¶9106], 353 F. 2d 445 (6th Cir. 1965); Marteney v. United States [57-1 USTC ¶9670], 245 F. 2d 135 (10th Cir. 1957); Grand Prairie State Bank v. United States [53-2 USTC ¶9481], 206 F. 2d 217 (5th Cir. 1953); Investment & Securities Co. v. United States [44-1 USTC ¶9210], 140 F. 2d 894 (9th Cir. 1944); MERTENS, LAW OF FEDERAL INCOME TAXATION, §54.42. The Federal tax lien attached to the note and mortgage when the taxes were assessed. 26 U. S. C. A. §6322 (1944). It became effective against any pledgee of purchaser who acquired an interest after the notice had been filed. 26 U. S. C. A. 6323 (1954). Ibid.

The subsequent transfer of an interest in the note and mortgage to the appellant could not displace or diminish the tax lien. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 57 (1958); United States v. Leventhal [63-1 USTC ¶9225], 316 F. 2d 341 (D. C. Cir. 1963); Seaboard Surety Company v. United States [62-2 USTC ¶9653], 306 F. 2d 855 (9th Cir. 1962), and the other cases cited in the preceding paragraph. Whether we follow the statutory scheme of priority or the common law rule approved in United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 87 (1963), the tax lien was superior to any claim that the appellant might have had as a subsequent purchaser of an interest in the note and mortgage.

The order of the court below will be affirmed.

 

 

[65-2 USTC ¶9710] United States of America , Appellant v. Walter E. Fulford, Trustee, etc., Re Mesa Steel Corp., Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 19622, 6/10/65, Affirming District Court, 64-2 USTC ¶9706

[1954 Code Sec. 6321]

Tax lien: Priority: Bankruptcy.--The district court is affirmed in granting secured-credit status to a federal tax lien against funds held by a trustee in bankruptcy from the sale of real property, secondary only to a claim arising from a prior but unrecorded mortgage against such property.

William P. Copple, United States Attorney, Federal Bldg., Phoenix, Ariz., John P. Jones, Acting Assistant Attorney General, Tax Division, Department of Justice, Washington, D. C. 20530, for appellant. James Riggs, 725 1st Nat'l Bank Bldg., Phoenix, Ariz., Kramer, Roche, Burch & Streich, 567 1st Nat'l Bank Bldg., Phoenix, Ariz., Snell & Wilmer, Security Bldg., Rm. 400, Phoenix, Ariz., for appellee.

Before BARNES, MERRILL and BROWNING, Circuit Judges.

The Judgment of the District Court is affirmed.

Phoenix Title and Trust Company v. Stewart, [65-1 USTC ¶9206], 337 F. 2d 978 (1964).

 

 

[65-1 USTC ¶9431]Peninsula State Bank, Appellant v. Thompson-Copeland, Inc., et al., Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 21377, 5/20/65, Aff'g unreported District Court opinion

[1954 Code Secs. 6321-6323]

Lien for taxes: Accounts receivable: Notice of assignment: Florida law.--Notice of a subcontractor's assignment of accounts receivable was filed pursuant to Florida law, but no renewal thereof within one year, as required by state law, was filed. Therefore, the notice was not effective, after the expiration of one year, as against claims, including liens for federal taxes, which arose after the assignment, even though they arose within the one-year period.

William Terrell Hodges, Exchange Nat'l Bank Bldg., Tampa, Fla., Harold L. Mittle, Marine Bank Bldg., Tampa, Fla., for appellant. Donald Williamson, Joseph Kovner, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Department of Justice, Washington, D. C. 20530, Maynard Ramsey, Rob ert Gorman Alexander, 512 Barnett Nat'l Bank Bldg., Jacksonville, Fla., Edward F. Boardman, United States Attorney, Arnold D. Levine, Assistant United States Attorney, Tampa, Fla., for appellees.

Before TUTTLE, Chief Judge, RIVES, Circuit Judge, and DYER, District Judge.

RIVES, Circuit Judge:

This appeal is from a judgment of distribution of the sum of $16,623.69 deposited in court by Henry C. Beck Company (Beck) on its counterclaim for interpleader. The court allowed Beck's attorney a fee for filing the interpleader of $250.00 which is not contested. Out of the balance the court ordered paid the claim of Thompson-Copeland, Inc. in the then amount of $3,521.73, and the remainder to be paid to the United States in partial liquidation of its indebtedness. It further ordered that the Peninsula State Bank (the Bank) is not entitled to receive any part of the fund. The Bank appeals.

The district court made full findings of fact and conclusions of law, no part of which is attacked except the conclusion that "failure to comply with the requirements of Section 524.03, Florida Statutes, 1961, requiring renewal of a notice of assignment of accounts receivable after the expiration of one year from the date of initial filing of such notice, causes the original notice of assignment to lose its efficacy," even as to intervening claimants whose liens attached within the one year after the date of initial filing.

To understand this decision it will suffice to briefly capsule the full findings of the district court. A subcontractor under the "Miller Act," 40 U. S. C. §§ 270(a), et seq., assigned to Dickey Investment Company (Dickey) all of its right, title and interest in and to the payments to be received by it under its subcontract. Dickey duly filed written notice of the assignment with the Secretary of State of the State of Florida as required by the Florida Assignment of Accounts Receivable Act, but no renewal of such notice of assignment of accounts receivable was thereafter filed. Dickey duly assigned to the Bank all of his right, title and interest in and to any payments to be received from the subcontractor. The Bank never filed notice of its assignment from Dickey with the Secretary of State or notice of renewal.

The Bank took the position in the district court that it stood in the shoes of its assignor Dickey on the question of priority, and that position was not challenged. The district court properly held that "the Bank having failed to file notice with the Secretary of State of the State of Florida of its assignment from Dickey, its relative position by priority as to the fund in question is to be determined by the relative position of priority, if any, that Dickey has as to such fund.

Thompson-Copeland, Inc. recovered its judgment and had a writ of garnishment served upon the prime contractor within one year after the filing of the assignment to Dickey. Also within that year the United States assessed its taxes and filed notice of its tax lien for the larger part of the sum for which it holds tax liens. Neither Thompson-Copeland, Inc. nor the United States undertook collection until after the year had expired.

Determination of the priorities depends upon the proper construction of the Florida Accounts Receivable Act, and particularly of Section 524.03, F. S. A.:

"524.03 One year period; renewal; affidavit of continuance

"(1) Unless sooner cancelled, a notice of assignment shall be effective for one year after the filing of the last renewal thereof, or, if no renewal, after the filing of the notice.

(2) A filing assignee may, at any time during the effective period of his notice of assignment, file a notice of renewal, signed by the assignee and assignor, in the following form or in any other form containing substantially the same information:

RENEWAL OF NOTICE OF ASSIGNMENT OF ACCOUNTS RECEIVABLE

The notice of assignment of accounts receivable, file No. ..... filed ....., (date) designating ..... (name and address) as assignor and ..... (name and address) as assignee is hereby renewed.

"(3) A filing assignee may during the effective period of his notice file an affidavit of continuance that he legally holds one or more outstanding protected assignments, which affidavit shall be effective for one year from filing but may be renewed from time to time. Such affidavit need not specify what protected assignments are outstanding."

Section 524.04(4), also pertinent, provides:

"(4) A protected assignment remains protected while a notice of assignment, a renewal thereof, or an affidavit of continuance is effective."

This Court has held that "the statute establishes a mandatory, exclusive system of perfecting assignments of accounts receivable." Miami National Bank v. Knudsen, 5 Cir. 1962, 300 F. 2d 289. In that case actual notice had been given the account debtors. After full consideration, the court concluded its opinion as follows:

"Considering the background of the Florida Accounts Receivable Act, the legislative purpose, and the sense of the statute, we hold that Chapter 524 is a mandatory recording law. The Miami National Bank's failure to file the requisite notice with the Secretary of State of Florida prevented perfection of the assignment." 300 F. 2d at 296.

The bank relies principally upon cases construing statutes which require chattel mortgages and conditional sales contracts to be recorded in order to be valid as against third parties. The construction of those statutes which are markedly different in purpose and terms from that here under consideration is only remotely relevant. Absent any authoritative construction of this statute by the Florida state courts, it became the duty of the district court to construe and apply the statute in the light of its language and of the legislative purpose. The statute provides for a very simple notice to be filed to be effective for one year, and for the filing of an equally simple notice of renewal or affidavit of continuance. It expressly limits the period during which the notice of assignment shall be effective to one year after its filing or the filing of the last renewal or of an an affidavit of continuance. The simplest and most reasonable interpretation of the statute and the one avoiding complicated questions of a circularity of claims, seems to us that an assignee of accounts receivable has a protected assignment as against another creditor laying claim to the fund only if he has complied with the filing requirements. That construction seems to us also to be more in accord with the rationale of the Miami National Bank case, supra. We therefore agree with the district court's conclusion of law here under attack, and hold that when there was no longer an effective notice of assignment or renewal thereof, the Bank was not a "protected assignee" under the statute and the accounts receivable were subject to the claims asserted by other creditors. The judgment is

AFFIRMED.

 

[65-1 USTC ¶9402] United States of America , Plaintiff-Appellee v. Parker House Sausage Company, an Illinois Corporation, Defendant-Appellant

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 16035, 344 F2d 787, 5/10/65, Affirming District Court, 64-1 USTC ¶9352

[1954 Code Secs. 6323 and 6502]

Lien for taxes: Validity against third party: State statute of limitations.--The United States, as third party beneficiary of a contract between a taxpayer and a second party, who agreed to pay outstanding tax liens against the taxpayer's property, was not barred by a state statute of limitations in an action brought to enforce its claim.

Lawrence B. Silver, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Department of Justice, Washington, D. C. 20530, Lawrence Gubow, United States Attorney, Rob ert F. Ritzenhein, Assistant United States Attorney, 815 Federal Bldg., Detroit, Mich., for plaintiff-appellee. George E. Lee, 2230 First National Bldg., Detroit , Mich. , for defendant-appellant.

Before WEICK, Chief Judge, and MILLER and EDWARDS, Circuit Judges.

PER CURIAM:

On July 1, 1953 , the defendant, Parker House Sausage Co., Novak Sales & Service, Inc., and Leo and Kathryn Novak entered into a contract under which the defendant purchased from Novak Sales & Service, Inc. and Leo and Kathryn Novak certain real estate described in the agreement, subject to certain liens outstanding against it.

The consideration for the purchase was a cash payment of $5,717.68 and the defendant's promise to assume and pay said outstanding liens against the property, including liens in the principal amount of $5,523.39 filed by the United States for past due and unpaid withholding taxes for the years 1951 and 1952. The real estate was conveyed to the defendant, which made the cash payment and also a payment of $16,478.84 in satisfaction of a first mortgage lien against the property. For reasons unnecessary to review here, the defendant did not pay the tax liens of the Government. In a suit filed by Leo and Kathryn Novak in the Circuit Court of Wayne County, Michigan, against Parker House Sausage Company the Court held that there was a binding obligation upon Parker House to pay the taxes plus interest and penalties to the United States , and directed Parker House to do so.

The United States filed this action in the United States District Court [64-1 USTC ¶9352] against the taxpayer, Novak Sales & Service, Inc., and the defendant, Parker House Sausage Company, setting out the foregoing facts and praying that the Court determine that the Parker House Sausage Company was indebted to it in said principal amount of $5,523.39 plus interest, and that it have judgment for said liability.

The defendant pleaded the Michigan Statute of Limitations of six years, which, if applicable, was a bar to the prosecution of the action. The District Judge ruled that it was not applicable and entered judgment for the United States , from which this appeal was taken.

The United States acquired the right which it sought to enforce by this action as the third party beneficiary of the contract of July 1, 1953 , between the taxpayer and the Parker House Sausage Co., Section 26.1231, Michigan Statutes, Annotated. Defendant contends that therefore this action does not seek to enforce a tax liability against it (it not being the taxpayer), but is a civil action for damages by reason of defendant's alleged breach of contract and, as such, is subject to the State Statute of Limitations.

We are of the opinion that this contention is unsound and that the District Judge was correct in his ruling. The United States is not barred in an action brought to enforce its claim by a state statute of limitations. United States v. Summerlin [40-2 USTC ¶9633], 310 U. S. 414, 416; Davis v. Corona Coal Co., 265 U. S. 219, 222; Engel v. United States, 258 F (2) 50, 53, C. A. 6th; United States v. Frank B. Killian Company, 269 F (2) 491, 494, C. A. 6th.

The judgment is affirmed.

 

 

[61-1 USTC ¶9111] County of Clark , State of Nevada , Appellant v. United States of America , Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 16,739, 284 F2d 885, 11/28/60, Affirming unreported District Court

[11 U. S. C. 107]

Bankruptcy: Priority of liens: Preservation of bankrupt estate.--The Federal Government held a perfected tax lien on property which was later sold in bankruptcy proceedings. The fund, which was created by the sale of the property, was not reduced by local taxes accruing during the bankruptcy proceedings which taxes the local government claimed were for the admin istration and preservation of the bankrupt's estate and should have precedence over the claim of the Federal Government.

George M. Dickerson, Gordon L. Hawkins, Las Vegas , Nev. , for appellant. Howard A. Heffron, Acting Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Helen A. Buckley, Department of Justice, Washington 25, D. C., Howard W. Babcock, United States Attorney, Las Vegas, Nev., for appellee.

Before CHAMBERS and MERRILL, Circuit Judges, and BOWEN, District Judge.

PER CURIAM:

The parties assert opposing claims to a fund in the amount of $52,000.00 now in the hands of the District Court for the District of Nevada and created by the District Court in connection with bankruptcy proceedings. Each claim is based upon tax obligations of the bankrupt estate. The United States claim is founded upon a perfected tax lien for sums due prior to adjudication in bankruptcy. The County claim is based upon taxes accruing during the pendency of the bankruptcy proceedings. The County contends that these sums constitute costs of admin istration and preservation of the estate and should have precedence over the secured claim of the United States. From decision of the District Court awarding the fund in its entirety to the United States the County has taken this appeal.

[Facts]

On July 16, 1959, in its order for the sale of assets of the bankrupt, Properties Moulin Rouge, Inc., a corporation, the District Court provided that the sale should be subject to certain listed encumbrances, the first of which was for federal, state, county and city taxes, "but in a total amount not in excess of the total sum of $52,000.00 * * *." It directed the referee to "determine and fix the nature, order, rank, priority and amount of the respective portions of the said $52,000.00 to which each of the aforesaid tax claims are or may be entitled * * *." It provided that except for taxes in the specified sum the sale of assets was to be free and clear of all taxes and tax liens. No appeal has been taken from this order. $52,000.00 subsequently was deposited with the clerk of the court and by court order the liens of the tax claimants were transferred to this fund.

The referee determined that the government's lien became choate before bankruptcy. He concluded, however, that the sale of the property by the District Court had resulted in a material benefit to the United States and that it would be unfair and inequitable not to permit a reasonable sum to be allowed the County for the payment of real estate taxes as costs of admin istration and preservation accruing during the time that the trustee was in possession. The fund was allocated to the United States in the sum of $32,414.38 and to Clark County in the sum of $19,585.62. Both parties petitioned the District Court for review.

Upon review the District Court held that the United States was entitled to the entire amount of the fund. In our view, this ruling was correct.

[Bankruptcy Priority]

Secured lien claims are governed by §67 of the Bankruptcy Act, 11 U. S. C. §107. The tax claim of the United States constitutes a secured statutory lien upon real property valid under the provisions of §67(b) and is not by statute rendered subject to costs of admin istration and preservation.

The County contends that irrespective of statute law the courts have recognized the equitable principle that encumbered property should be charged with the cost of such services as have been rendered to preserve and protect it or to benefit the secured creditors. The payment of local taxes, however, is of no benefit to the United States , and the share of the estate to which the government otherwise is entitled is not subject to reduction because of such payment. United States v. Wasserman, 1 Cir., 1958 [58-2 USTC ¶9718], 257 F. 2d 491.

The County contends that the Wasserman case is not applicable under the facts before us. It points out that in this case certain secured creditors held claims prior to that of the United States , which claims, it asserts, were equitably subject to local taxes. It contends that application of the Wasserman rule, under these circumstances, is prejudicial to the County as it is tantamount to giving the United States tax lien a priority to which it is not entitled. The County contends that the United States lien should be held subject to local taxes, at least to the extent that prior lienholders were so subject. It points out that in the Wasserman case, while the claim of the government was not reduced in amount, the prior liens did retain their priority, subject only to the reductions allowed for local taxes.

The difficulty with this contention is that no prior lienholders share in the fifty-two thousand dollar fund and there is no share against which the local taxes can be charged. The dispute is limited to the respective priorities of the government lien and the claim of the County. The County's contention in this respect would appear to amount to an attack against the order of sale which directed the creation of this fund. As we have noted, there was no appeal from that order and the manner in which the fund was established and the propriety of its purpose are not subject to question.

Affirmed.

 

 

[60-2 USTC ¶9532] United States of America , Appellant v. V. F. Bond, Audrey A. Bond, et al., Appellees

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 7987, 279 F2d 837, 5/31/60, Rev'g and rem'g Dist. Ct., 59-2 USTC ¶9605, 172 F. Supp. 759

[1954 Code Secs. 6321-6323 and 7403]

Lien for taxes: Priority of claim for real estate taxes paid by mortgagee: Attorney's fee.--The lien of the United States for taxes owed by an insolvent mortgagor-taxpayer had priority over a mortgagee's lien for real estate taxes which it had paid, pursuant to the terms of a prior recorded mortgage, on the mortgaged property where the local (Virginia) taxes accrued and were paid after notice of the federal tax lien had been recorded. The federal tax lien was also superior to the attorney's fee paid by the mortgagee in liquidating the mortgage.

One dissent.

David O. Walter, Department of Justice, Washington, D. C. (Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Department of Justice, Washington, D. C., John M. Hollis, National Bank of Commerce Building, Norfolk, Va., Henry St. J. FitzGerald, Assistant United States Attorney, Post Office Building, Alexandria, Va., on brief), for appellant. Dillard C. Laughlin (Jesse, Phillips, Klinge & Kendrick on brief), for appellees.

Before SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.

BOREMAN, Circuit Judge:

The principal question for decision is whether a tax lien of the United States is prior in right to payments of real estate taxes made by the mortgagee under a prior recorded mortgage, the taxes having accrued and the payments having been made subsequent to the recordation of the notice of federal tax lien. In addition, there is a question of priority as between the federal tax lien and an attorney fee allowed by the District Court for payment to the mortgagee out of the proceeds of the sale of the mortgaged property.

The United States brought this action in the United States District Court for the Eastern District of Virginia on October 29, 1957 , for the foreclosure of tax liens upon property and rights to property of appellees, the taxpayers.

There is no dispute as to pertinent facts. On December 20, 1955 , deficiencies were assessed against the taxpayers for the years 1943 through 1947, totaling $318,832.84, and on the same day deficiencies were assessed against taxpayer, V. F. Bond, for the year 1942 in the amount of something over $18,000.00. On or about December 20, 1955 , notices of such assessments were served upon the taxpayers and demand for payment was made but taxpayers refused to pay.

On December 21, 1955, notice of lien for each assessment was recorded in the proper county and municipal offices pursuant to 26 U. S. C. A. §6323(a)(1). On July 2, 1957 , the assessments had been reduced to judgment.

The complaint listed various properties owned by the taxpayers, among them being the Arlington Hotel, at Arlington , Virginia , the property and the proceeds of sale thereof involved in controversy before this court. The United States requested the appointment of a Receiver to take charge of, marshal and liquidate the properties, and prayed inter alia that the court determine the validity and priority of all liens and claims and order a foreclosure of the liens of the United States and a sale of the properties.

On November 27, 1957 , the District Court found that the United States had valid liens in the principal sum of $357,484.18, plus interest, for the years involved, and that the taxpayers were insolvent. The court then appointed a Custodial Receiver to take charge of the properties of the taxpayers and appointed a Special Master to ascertain and report to the court the claims against the taxpayers, the value of their properties and the validity and priority of liens on such properties. Pursuant to the recommendations of the Receiver, the Arlington Hotel property was sold for $172,500.00.

The Arlington Hotel property was subject to a mortgage, ¹ executed by taxpayers as mortgagors, securing a loan in the original principal sum of $100,000.00 made by Perpetual Building Association, hereinafter called "Perpetual". This mortgage was recorded on July 15, 1955 , some six months prior to the recordation of the notice of federal tax lien. Monthly payments were made by the mortgagors until October 4, 1956 , after which no further payments were received by Perpetual.

Under the mortgage each monthly payment was allocated not only to the payment of principal and interest, but a portion, $331.00, was also set aside in a fund for the payment of taxes accruing against the mortgaged property. The mortgage contained other provisions as follows:

"It Is Hereby Covenanted: * * * (2) that any and all taxes and assessments, general or special, now or hereafter assessed against said realty shall be paid when due, * * * (7) that the title to said realty and the record of said title shall be kept free of litigation, infirmity and lien, * * * (10) that any and all disbursements made by the Treasurer [of Perpetual] because of the failure of the grantor to make any payment or do any act required to be made or done, with interest thereon at six percent (6%) per annum, shall be demandable at any time by the Treasurer and, until repaid to the Treasurer, shall be deemed to be secured by this Deed of Trust, and (11) that if there shall be any default in the performance of any of the foregoing covenants the Treasurer shall have the right and power to do any one or more of the following: (a) do any act or make any disbursement, in his name or the name of the grantor, which he may deem necessary or proper to protect the lien of this Deed of Trust, * * *."

After default by the mortgagors, Perpetual paid the local real estate taxes assessed for the years 1957 and 1958 which had accrued and had been assessed subsequent to the recordation of the notice of federal tax liens. While a portion of the payment made for 1957 taxes came from the accumulated fund paid and held for this purpose, Perpetual paid from its own funds on August 16, 1957 , $4,759.16 for the year 1957 and on August 11, 1958 , $4,787.16 for the year 1958. Perpetual claims that it has a lien for those amounts, with interest by virtue of the provisions of the mortgage, and that such lien is prior to the federal tax liens.

The District Court (United States v. Bond, 172 F. Supp. 759 [59-2 USTC ¶9605]) held that Perpetual was entitled to be reimbursed for the real estate taxes paid by it, prior to the lien for federal taxes. In a separate unreported memorandum opinion, the court allowed an attorney fee of $1,000.00, payable to Perpetual from the proceeds of sale as a cost of liquidating the mortgage, the attorney fee to take priority also over the federal tax liens. From these decisions United States appeals.

The United States contends that in determining priorities, where a federal tax lien is involved, the "inchoate lien test" is applied so as to defeat the competing lien if it be shown that the competing lien was uncertain and inchoate at the time of the recordation of the federal tax liens. Therefore, it is urged that since both the necessity and amount of the local real estate taxes and attorney fee were uncertain at the time the federal tax liens were recorded, both must necessarily be inferior and junior in priority to the federal tax liens. Perpetual, on the other hand, contends that 26 U. S. C. A. §6323(a) gives priority to a prior recorded mortgage over a federal tax lien not only as to the mortgage debt but also as to the covenants and provisions contained in the mortgage and payments made by mortgagee thereunder; and that the inchoate lien test is not applicable here.

The federal tax lien was created by statute many years ago and present enactments are identified as §6321 ² and §6322 ³ of the Internal Revenue Code of 1954. For the lien to become valid and effective under these sections, notice, filing or recording are not required. Section 6322, originally Act of July 13, 1866, ch. 184, 14 Stat. 107, was considered in United States v. Snyder, 149 U. S. 210 (1893), wherein the Supreme Court of the United States held that an unrecorded tax lien was valid against a purchaser without notice thereof. This decision prompted Congress to at least partially abrogate the effect of the secret, unrecorded lien, and by Act of March 4, 1913 , ch. 166, 37 Stat. 1016, the tax lien statute was supplemented by requiring recordation of the federal tax lien to render it valid as against mortgagees, pledgees, purchasers and judgment creditors. Under the Internal Revenue Act of 1954, this is designated §6323(a). ⁴ While §6323(a) is not a priority statute as such, if it is to have any meaning its necessary effect is to give priority to the interests mentioned therein.

31 U. S. C. A. §191, R. S. 3466, ⁵ is a statute which purports to fix priority of debts due the United States where the debtor is insolvent. While the priority of such debts mentioned in this statute would appear to be absolute, it was held in Brent v. Bank of Washington, 10 Peters, 596 (1836), that this priority in insolvency cases is not to supersede prior encumbrances, including mortgages. The court there said that it had never been decided that the preference given the United States would affect any lien, general or specific, existing "when the event took place which gave the United States a claim of priority". In the instant case, even though the court found insolvency of taxpayers, the United States did not present, before the District Court, any claim of priority under this insolvency priority statute and, for that reason, it is precluded from first raising the point here. 36 C. J. S. Federal Courts §292(b)(1) (1943).

Several cases have been decided by the Supreme Court of the United States involving the application of the insolvency priority statute, 31 U. S. C. A. §191, and while a discussion thereof may serve no real purpose here, we note them to indicate that, in insolvency cases, the Supreme Court considered and determined the question as to whether state created liens were so specific, perfected and choate as to be accorded priority over federal tax liens. In establishing the "choate lien test", these cases have developed exacting requirements, the substance of which is to require that the state created liens be specific to the point that nothing further need be done to make the lien enforceable. See United States v. Gilbert Associates, 345 U. S. 361 (1953) [53-1 USTC ¶9291]; United States v. Waddill Co., 323 U. S. 353 (1945) [45-1 USTC ¶9126]; United States v. Texas, 314 U. S. 480 (1941) [42-1 USTC ¶9162]; New York v. Maclay, 288 U. S. 290 (1933) [3 USTC ¶1044].

United States v. Security Trust & Sav. Bank, 340 U. S. 47 (1950) [50-2 USTC ¶9492], extended the application of the choate lien test to a statutory attachment lien on property in California obtained under California law. No insolvency question was presented. The court said that in cases involving federal priority under the insolvency statute, 31 U. S. C. A. §191, R. S. §3466.

"* * * it has never been held sufficient to defeat the federal priority merely to show a lien effective to protect the lienor against others than the Government, but contingent upon taking subsequent steps for enforcing it. * * * If the purpose of the federal tax lien statute to insure prompt and certain collection of taxes due the United States from tax delinquents is to be fulfilled, a similar rule must prevail here. * * *" (Italics supplied).

The court held that the federal tax lien was superior to the inchoate attachment lien. In a concurring opinion, Mr. Justice Jackson expressed the view that the statute (§6323(a)) excludes from the operation of the secret lien those types of interests which are specifically set forth in the statute and and others.

United States v. New Britain , 347 U. S. 81 (1954) [54-1 USTC ¶9191], brought before the Supreme Court the question of the "relative priority of statutory federal and municipal liens to the proceeds of a mortgage foreclosure sale of the property to which the liens attached". There, two mortgages on the real estate of a corporation located in the City of New Britain, Connecticut, were foreclosed by judgment sale. Against the fund thus created were the claims of the two mortgages, a judgment of record and various statutory liens asserted by the City and by the United States . The Connecticut state court gave priority to the City's liens, the mortgages, the judgment lien and the federal tax liens in that order. The United States appealed from the judgment insofar as the statutory liens of the City were given priority over those of the United States . The record did not disclose insolvency of taxpayer. Since the holding in that case represents an important step in the development of the law by which we find ourselves now controlled, careful analysis is warranted.

In New Britain , the federal tax liens resulting from unpaid withholding and unemployment taxes and insurance contributions, arose on various dates between April 1948 and September 1950. The City's liens, which attached to the specific real estate sold, were for delinquent real estate taxes and water rents which became due and which attached on various dates between 1947 and 1951. Certain of the City's liens were specific and became choate prior to the attachment of some of the federal tax liens. At 347 U. S. , pages 84 and 85 (we omit footnote reference), the court said:

"* * * However, we accept the holding as to the specificity of the City's liens since they attached to specific pieces of real property for the taxes assessed and water rent due. The liens may also be perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subjected to the lien, and the amount of the lien are established. The federal tax liens are general and, in the sense above indicated, perfected. But the fact that one group of liens is specific and the other general in and of itself is of no significance in these cases involving statutory liens on real estate only. * * *

"Thus, the general statutory liens of the United States are as binding as the specific statutory liens of the City. The City gains no priority by the fact that its liens are specific while the United States ' liens are general. Obviously, the State cannot on behalf of the City impair the standing of the federal liens, without the consent of Congress. [Cases cited]. On the other hand, the federal statutes do not attempt to give priority in all cases to liens created under the paramount authority of the United States . The statute creating the federal liens here involved, I. R. C., §3670, [now 26 U. S. C. A. §6321] does not in terms confer priority upon them.

"When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing the United States , whether secured by liens or ohterwise, by §3466 of the Revised Statutes, 31 U. S. C. (1946 ed.) §191. * * * Where the debtor is not insolvent, Congress has failed to expressly provide for federal priority, with certain exceptions not relevant here, although the United States is free to pursue the whole of the debtor's property wherever situated. * * *

"It does not follow, however, that the City's liens must receive priority as a whole. We believe that priority of these statutory liens is determined by another principle of law, namely, 'the first in time is the first in right'."

Continuing on page 86 of 347 U. S. , the court referred to the inchoate attachment lien involved in United States v. Security Trust & Sav. Bank, surpa, and said:

"* * * Such inchoate liens may become certain as to amount, identity of the lienor, or the property subject thereto only at some time subsequent to the date the federal liens attach and cannot then be permitted to displace such federal liens. Otherwise, a State could affect the standing of federal liens, contrary to the established doctrine, simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment, etc., is determined. Accordingly, we concluded in Security Trust 'that the tax liens of the United States are superior to the inchoate attachment lien * * *'. * * * In the instant case, certain of the City's tax and water-rent liens apparently attached to the specific property and became choate prior to the attachment of the federal tax liens."

The Connecticut court, from which the appeal was taken in New Britain, suggested that the mortgagee could have paid the delinquent real estate taxes and water rents; that the amount so paid would become part of the mortgage debt covered by the mortgage lien; and that the federal tax lien would, therefore, be invalid as to such amount by virtue of then §3672, now 26 U. S. C. A. §6323(a). While the Supreme Court declined to pass upon the merits of these suggestions since there had been no payment of City taxes and water rents by the mortgagee, it had this to pay at page 88 of 347 U. S. :

"The United States is not interested in whether the State receives its taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien. There is nothing in the language of §3672 [now §6323] to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein, and the legislative history lends support to this impression."

The case was remanded to the Connecticut court for a redetermination of the order of priority of the various liens asserted.

In the instant case, Perpetual contends that the court, in United States v. New Britain, supra, abandons the choate lien test in noninsolvency cases but we reject this contention because it is clear that it did not do so; it merely held that not only must the competing lien be first in point of time, but it must also be choate.

Consistent with its prior position, the Supreme Court of the United States , in three opinions by Mr. Justice Minton, held that federal tax liens were entitled to priority over the following:

(1) "An attachment lien under the laws of Ohio upon which judgment was not rendered until after recordation of the federal tax lien, United States v. Acri, 348 U. S. 211 (1955) [55-1 USTC ¶9138];

"(2) "A garnishment lien under the laws of Texas upon which judgment was not rendered until after recordation of the federal tax lien, United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 (1955) [55-1 USTC ¶9136]; and

(3) "A landlord's distress lien obtained after the attachment of the federal tax lien but before it was recorded, United States v. Scovil, 348 U. S. 218 (1955) [55-1 USTC ¶9137]."

In all of these cases, the competing liens were recorded prior in time to the federal tax lien, but they did not meet the other requisite established by the Supreme Court in New Britain, namely, that the lien must also be choate. As a basis for its conclusion in Acri and Liverpool & London & Globe Ins. Co., the Court simply refused to accept the state court's characterization of the lien as perfected and choate, and in Scovil it was held that a landlord is not a "purchaser" within the meaning of §6323(a) (then §3672) so as to be accorded priority.

Following the decision in United States v. Scovil, supra, the majority of the Supreme Court has spoken on this subject only five times and in each case by per curiam opinion. Three of these five opinions are neither enlightening nor helpful here. In United States v. Colotta, 350 U. S. 808 (1955) [55-2 USTC ¶9680], and United States v. Vorreiter, 355 U. S. 15 (1957) [57-2 USTC ¶9956], the court subordinated mechanics' liens to federal tax liens, and in United States v. Hulley, 358 U. S. 66 (1958) [58-2 USTC ¶9926], subordinated a prior recorded materialman's lien to federal tax liens. Since the Supreme Court did not clearly indicate its reason for such subordination, we are left to surmise and conjecture. However, it would seem that the cases could have turned on one or both of two theories: (1) The subordinated liens did not meet both the prior in time and choate tests; or (2) such liens are not protected interests under §6323(a).

Dissenting opinions were filed in the other two cases decided by the Supreme Court since the decision in United States v. Scovil and thus some discussion is merited. In the first of these cases, United States v. White Bear Brewing Co., 350 U. S. 1010 (1956) [56-1 USTC ¶9440], the court summarily, and without citation of authority, reversed a decision of the United States Court of Appeals for the Seventh Circuit and held that a federal tax lien had priority over a recorded mechanics' lien, specific in amount, and on which a suit for enforcement had been instituted before the federal tax lien arose. There the only thing remaining to be done was the granting of a final judgment enforcing the lien. Mr. Justice Douglas dissented on the theory that the mechanics' lien was specific and perfected insofar as it could be under state law and said that, under the majority opinion, it would be impossible for a competing lien to ever prevail against a subsequent federal tax lien, short of reducing the competing lien to final judgment. He felt that the holding of the majority was not warranted by prior decisions and was supportable only if United States v. New Britain were overruled. We venture to suggest our impression that the conflict between the majority and dissenters in United States v. White Bear may have arisen from a difference in interpretation of "choate lien" and not, as Perpetual suggests, that the real test is "prior in point of time" as opposed to "choate lien". At no place in either the majority or dissenting opinions is it suggested that a mechanics' lien was not a protected interest under §6323(a).

The second of the cases (in which there was a dissenting opinion) decided since United States v. Scovil, namely, United States v. R. F. Ball Constr. Co., 355 U. S. 587 (1958) [58-1 USTC ¶9327], for the first time presented to the Supreme Court, for decision, the question of priority between a nonstatutory contractual lien and a federal tax lien. There a subcontractor was required to furnish a surety bond. To induce the surety company to issue the bond, the subcontractor assigned all sums due or to become due under the subcontract as collateral security for any liability the surety company might incur through non-performance of the subcontract, and for the payment of other indebtedness for liability of the subcontractor to the surety company whether theretofore or thereafter incurred, not exceeding the penalty of the bond. Subsequently, the subcontractor incurred indebtedness to the surety company, independent of the subcontract. Certain funds became due the sub-contractor but payment was withheld because of outstanding claims of materialmen against the subcontractor. Thereafter the United States filed federal tax liens against the subcontractor and the question was whether the assignment to the surety company made it a "mortgagee" within the meaning of §3672(a) (now §6323(a)). The majority of the court relied upon United States v. Security Trust & Sav. Bank, supra, and United States v. New Britain, supra, and held that since the assignment, the instrument involved, was inchoate and unperfected, the provisions of §3672(a) did not apply. Mr. Justice Whittaker vigorously dissented and was joined by Justices Douglas, Burton and Harlan. It was their view that neither Security Trust nor New Britain was applicable because neither was primarily concerned with §3672(a). Therefore, they were of the opinion that the assignment was, in legal effect, a mortgage and that inasmuch as it antedated the filing of the federal tax liens, it was superior to them under the express terms of §3672(a). In summarizing the position of the dissenters, Mr. Justice Whittaker said:

"* * * I think it is clear that the assignment was in legal effect a mortgage, completely perfected on its date, in all respects choate, and valid between the parties; and inasmuch as it antedated the filing of the federal tax liens it was expressly made superior to those liens by the terms of §3672(a)."

Perpetual urges that the opinion of the majority in the Ball Construction Co. case could be supported only by a finding that the assignment was not a mortgage; and if the majority had determined that the protected interests mentioned in §3672(a) should be subject to the choate lien test, there would certainly have been a full opinion announcing a decision of such moment. Perpetual's argument is unacceptable to us. The per curiam opinion in Ball Construction Co. clearly states the reason upon which the decision is based, namely, that the instrument is inchoate and unperfected. Both of the cases cited by the majority, Security Trust and New Britain , set forth the choate lien test, a further indication of the basis of the court's opinion. Here again, as in United States v. White Bear Brewing Co., we venture to suggest a conflict between the majority and the minority as to the interpretation of "choate lien". However, we do not perceive any real conflict of opinion as to the applicable rule of law.

We have derived an indelible impression from the cases (involving determination of priority of federal tax liens over competing liens) decided by the Supreme Court, which reveal the persistent application of the choate lien test, first in insolvency cases, then in statutory lien cases, and finally in nonstatutory contractual lien cases.

The United States places great reliance upon the recent case, United States v. Christensen, 269 F. 2d 624 (9th Cir. 1959) [59-2 USTC ¶9621]. In that case, a mortgage had been executed on November 22, 1943 , covering certain real property owned by the taxpayer. On January 19, 1950 , federal tax liens were filed against mortgagor, taxpayer. On December 12, 1955 , the United States instituted an action for the collection of the taxes and sought to foreclose its lien against the mortgaged property. On January 3, 1956 , mortgagee redeemed a tax sale certificate for local real estate taxes on the mortgaged property and, on the same day, paid delinquent taxes on the same property. The District Court entered judgment which, though generally favoring the United States , gave the mortgagee priority over the federal tax lien for the amount remaining due under the mortgage and for the real estate taxes which mortgagee had paid. The United States appealed from that portion of the order which allowed priority of the real estate taxes paid after the federal tax liens were recorded, and the Court of Appeals reversed, relying primarily upon the case of United States v. New Britain , supra.

Although in its brief Perpetual contends that the Christensen case is distinguishable on its facts from the case at bar, during oral argument counsel conceded that an examination of the record discloses factual similarity. In undertaking to discourage our acceptance of the Christensen decision, Perpetual presents the following argument: (1) "although the case recites that the mortgagee contended for a contractual right to priority, the decision appears to have gone off on the questions of whether the priority of a federal tax lien is a federal question and whether the mortgagee, becoming subrogated to the right of the local taxing authority, might prevail over the federal tax lien"; and (2) "further, the mortgagee in Christensen does not appear to have argued the effect of §6323(a) on the priority of lien question presented".

We believe these arguments to be without merit. First, while the court in Christensen did discuss the well settled principle that the priority of a federal tax lien is a federal question, it dismissed the mortgagee's contention of priority by subrogation to the rights of the local taxing authority and based its decision on the test set forth in United States v. New Britain . Although the opinion does not disclose that the mortgagee argued the effect of §6323(a), the court did note that section and then applied the New Britain rule that the priority of the competing lien must depend upon the time it attached and became choate. As before stated, this rule was extended by the Supreme Court to nonstatutory contractual liens in United States v. R. F. Ball Constr. Co. [355 U. S. 587 (1958) [58-1 USTC ¶9327]]. Therefore, in view of the presistent application of the "choate lien test" by the Supreme Court, which doctrine was recognized and followed by the Ninth Circuit in United States v. Christensen, supra, we reach the conclusion in the instant case that the claimed priority for payment of the real estate taxes accruing after recordation of the federal tax liens, even though made pursuant to an authorized provision of a prior recorded mortgage, must be subordinated to the federal tax lien because such lien so acquired by the mortgagee was unperfected and inchoate at the time the federal tax liens were recorded.

For the same reasons, we must subordinate to priority of the federal tax liens the claim for an attorney fee paid by Perpetual in protection of the lien of its mortgage. The fee was incurred long after the attachment of the federal tax lien; and at the time of the execution of the mortgage and the creation of the debt secured thereby, the future existence or amount of such attorney fee was, at best, speculative and uncertain.

As to Perpetual's claim to reimbursement for its payment of an attorney fee, we are cited to United States v. Seaboard Citizens Nat'l Bank, 206 F. 2d 62 (4th Cir. 1953). Therein, an automobile that was subject to a mortgage was seized and forfeited by the United States for violation of the Internal Revenue laws (liquor). The mortgagee filed its petition asking for remission of the forfeiture to the extent of its mortgage interest pursuant to the provisions of 18 U. S. C. A. §3617. ⁶ The District Court granted such petition and allowed, as a part of the secured mortgage debt, a fifteen per cent attorney's fee, provision for which was specifically made in the default provison of the mortgage. This court affirmed the District Court stating that: "The contingent liability for attorney's fees having become absolute, there was no reason why the remission should not extend to this as well as to the other parts of the obligation secured." Earlier in the opinion, the court considered and accepted as authority Security Mortgage Co. v. Powers, 278 U. S. 149, 49 S. Ct. 86 (1928). In neither Seaboard nor Security Mortgage v. Powers was a lien for delinquent federal taxes involved. The opinion in Seaboard does not disclose whether default in the payment of the mortgage occurred prior or subsequent to seizure and forfeiture of the mortgaged property.

In Seaboard it was stated:

"The argument that the government will be burdened by allowing such fees to be included in the lien as to which remission is granted is without foundation. The government does not pay the fees. They are paid out of the proceeds of the property condemned. * * *"

In the instant case, the amount derived from the sale of the property was far from sufficient to pay the mortgagee's principal debt, interest, unpaid and delinquent real estate taxes, an attorney fee and the Government's claim for unpaid taxes as represented by its recorded liens. The amount to be received by the Government from the proceeds of sale is correspondingly reduced by all prior payments from the available fund, and thus the direction of payment of an attorney fee prior to payment of federal taxes is the equivalent of a direction to pay such fee out of the federal treasury. In the Seaboard case, any amount received by the United States from sale of seized property was unanticipated revenue, a windfall, not to be credited as a payment on a fixed indebtedness.

It is important to note the legislative purpose in enacting the statutes involved in the case at bar and in the Seaboard case. As was indicated in United States v. Security Trust & Sav. Bank, supra, the purpose of the federal tax lien statute is to insure prompt and certain collection of taxes due the United States from tax delinquents. The courts have consistently held that the property of a delinquent taxpayer must be first applied to the satisfaction of the claims for federal taxes except in the specific instances listed in §6323(a). On the other hand, the plain intention of the Congress in enacting laws providing for seizure, forfeiture and disposition of property used in violation of the Internal Revenue laws, particularly 18 U. S. C. A. §§ 3615 and 3616, was not to secure to the United States any claim for indebtedness already determined, but was to exact a penalty for violating the law. Therefore, the zealous protection of the revenues of the United States would not appear to be of paramount importance in the enactment of the seizure and forfeiture statutes as in the enactment of the federal tax lien laws. Section 3617 of 18 U. S. C. A. prevents the forfeiture claim of the United States from being absolute and provides that the court may decree remission of the forfeited vehicle if, upon proof of good faith, it is satisfied that an innocent creditor would otherwise be deprived of his right to security. Since no strict test has been evolved under this statute to determine the extent of the security of the mortgage as against the forfeiture claimant, this court, in the Seaboard case, gave effect to the Virginia law which allowed an attorney fee as a part of the secured interest. But, from the cases hereinbefore cited, we find the federal courts refusing, in cases involving a determination of priority of federal tax liens, to accept the characterization and classification, by state courts, of liens created and asserted under state law. Here, we are governed by the well established principles laid down by the Supreme Court in cases determining priorities of federal tax liens under §§ 6321, 6322 and 6323 of 26 U. S. C. A. wherein the court has assiduously protected the tax claims of the government. Although our decision under the facts and circumstances of the instant case cannot be construed as overruling United States v. Seaboard Citizens Nat'l Bank, supra, we cannot here accept the case as supporting Perpetual's claim to allowance of a reasonable attorney fee prior to the tax liens of the United States .

Accordingly, judgment of the District Court will be reversed and the case remanded for further proceedings consistent with the views herein expressed.

Reversed and remanded.

¹ The instrument was actually a deed of trust, but there is no dispute that it qualified as a "mortgage" within the meaning of 26 U. S. C. A. §6323(a). See Fn. 4.

² 26 U. S. C. A. §6321. Lien for taxes

"If any person liable to pay any tax neglects or refuse to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

³ 26 U. S. C. A. §6322. Period of lien

"Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time."

⁴ 26 U. S. C. A. §6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

"(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filling of such notice; * * *"

⁵ 31 U. S. C. A. §191. Priority established

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes, a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed. R. S. §3466."

⁶ "§3617. Remission or mitigation of forfeitures under liquor laws; possession pending trial--(a) jurisdiction of court

"Whenever, in any proceeding in court for the forfeiture, under the internal-revenue laws, of any vehicle or aircraft seized for a violation of the internal-revenue laws relating to liquors, such forfeiture is decreed, the court shall have exclusive jurisdiction to remit or mitigate the forfeiture.

"(b) * * *

"(c) * * *

"(d) * * *"

[Dissenting Opinion]

HAYNSWORTH, Circuit Judge, dissenting:

There are implications in the decisions of the Supreme Court which support the view of my brothers, but I find in those decisions no clear command which governs us here. Since we enter upon a new, judicially-untilled field over which Congress has exercised its right of control, it seems appropriate to consider the meaning of the statute which directs us to prefer prior mortgagees to the United States claiming under a tax lien. ¹ If the question be not foreclosed by decisions of the Supreme Court, and I think it is not, we should not transplant rules developed for the classification of interests which enjoy no statutory preference into a new field to restrict recognition of the preference of interests that do, unless, of course, there is reason to attribute to Congress an intention that the preferred and unpreferred interests should be classified under the same rules in order to determine their standing in relation to the tax lien.

When the Supreme Court adopted the rule of "the first in time is the first in right" ² for the purpose of classifying liens competing, without the benefit of a statutory preference, with the tax lien, substantial qualification was essential if the tax lien was not to be emasculated. Among the many liens and priorities recognized by the laws of the states, most were far from the standing of those interests which Congress had selected for preferential treatment. Without substantial qualification of a simple rule of priority in time and a reserved right of federal classification, such interests, created and controlled by the states, would threaten frustration of the tax lien.

A state's provisional remedies may provide a number of interlocutory liens, but the possessor of such a lien need not be classified with the judgment creditor whom the statute prefers. The litigant who commences his action by attachment entertains some hope of becoming a judgment creditor, but he may encounter many a pitfall along the way. As a judgment creditor, he is in the embryonic stage. His attachment may be perfected in itself, but, viewed as a first step toward ascent to the preferential status of a judgment creditor, it is neither perfected nor completed.

The Supreme Court might have said, as Mr. Justice Jackson did say, ³ that all interests should be deferred to the tax lien save only those which Congress chose to prefer. Resort to the inchoate test, applied to the competing lien, ⁴ approached the same result. At least, it avoided the necessity of treating the lien products of a state's provisional remedies as judgments. ⁵

In a series of cases, ⁶ the Supreme Court held that antecedent mechanic's liens, which are supported by no statutory preference, were deferred to the tax lien. We may infer that a majority of that Court regarded the mechanic's liens as inchoate within the meaning of the rule developed for the classification of deferred interests. It is difficult to understand how a mechanic's lien, duly filed and recorded and presently in the process of being foreclosed, a specific lien against specific property for a specific amount, may be said to be inchoate, unless it is viewed as an interim step in the lienor's progress toward the status of a judgment creditor and the foreclosure of all possible defenses to his claim. Such a view may not be inappropriate, however, in light of the fact that Congress has selected certain interests for preferential treatment, among them those of a judgment creditor, not those of a mechanic's lienor. ⁷ In such a view, there is apparent analogy between the mechanic's lien and the lien product of provisional remedies. ⁸

In only two cases in the Supreme Court is there any intimation that the inchoate test has any place in the classification of preferred interests.

In New Britain, ⁹ the immediate conflict was between the tax lien and a municipality's liens for ad valorem taxes and water rents. There was no statutory basis for preferment of the municipality's claims, but the Supreme Court held those which were fully accrued when the tax lien attached should be preferred while those which were not then accrued were inchoate and should be deferred. In its rule of distribution, however, funds allocable to a mortgate debt were directed to be applied first to those claims of the municipality which were deferred to the tax lien but, under state law, preferred to the mortgage lien. The result of the rule of distribution was a recognition of the preference of the mortgage lien, but only secondarily for the benefit of the mortgagee, to whom the statutory preference is granted, and primarily for the benefit of a lienor having no statutory claim to preferment.

If it may be said that New Britain 's rule of distribution withholds full recognition of the mortgagee's statutory preference, there is no answer to the problem which would not be open to similar criticism. If the claims for accruing taxes and water rents had been subordinated to the mortgage debt, they would have been deprived of recognition of the priority to which they were entitled under state law. If they had been preferred over the tax lien, the tax lien would have been denied the priority which the Supreme Court had held it to have. There was inconsistency in the relative priorities of the multiple claims which no rule of distribution could eliminate.

That the Supreme Court made the choice it did, under those circumstances, does not lead to the conclusion that, under other circumstances, in which there is no necessity for arbitrary selection, it would narrowly construe the congressional command or restrict it by the importation of judicially developed rules for the classification of unpreferred interests.

In New Britain , reference was made to the situation with which we now deal, but decision upon it was expressly reserved. The reservation, in light of the dissimilarity of the problem in New Britain , leads to the conclusion that the decision in New Britain no way settles the question here.

In Ball Construction Company, ¹⁰ it is clear that the lower courts ¹¹ and the four dissenters regarded the assignment, as collateral security for the payment of future indebtedness, of the account receivable as tantamount to a mortgage and were of the opinion that the assignee should be treated as a mortgagee within the meaning of the preference statute. I understand my brothers to attribute the same opinion to the majority and to construe Ball Construction as a holding that a mortgagee is not entitled to the preferential treatment the statute commands to the extent the mortgage debt is inchoate when the tax lien is recorded.

Theirs is a not unreasonable interpretation of the brief per curiam opinion. A different interpretation, however, seems equally reasonable and more likely. The very fact that the views of the majority were unelaborated in their summary disposition of the issue suggests an absence of an intention to effect a novel extension of a particular rule devised to meet dissimilar conditions. One would suppose that, had the majority intended to decide an important question never before considered by the Supreme Court, it would have stated the considerations which led to its resolution of the issue.

It seems more likely than not that the majority in Ball Construction were of the opinion that the assignee was not a mortgagee within the meaning of the statute. While it was contended that, under the laws of Texas , the assignee was a mortgagee, a similar contention had been rejected in Gilbert Associates. ¹² There, the Town had contended that its liens, under the law of New Hampshire , gave it the status of a judgment creditor. The court held, however, that the words of the statute should be given their ordinary, common-law meaning. It concluded that one who held no judgment was not a judgment creditor, within the meaning of the statute, though, under state law, he had the rights of one. So, the majority in Ball Construction may well have been of the opinion that an assignee, as collateral security, of an account receivable is not a mortgagee within the meaning of the statute, though, under state law, the assignee has the rights of a mortgagee.

The majority in Ball Construction did not characterize the assignment as a mortgage. It simply said that the "instrument" being inchoate, the statute preferring specific claimants did not apply.

This is consistent with the entire course of decision in the Supreme Court. Attachment liens, mechanic's liens and other liens, in themselves perfected and complete, had consistently been characterized as inchoate because they had not matured into judgments, and, therefore, had not been brought within the protection of a statute granting a preference to judgment creditors. If the conditional assignee of a receivable is not a "mortgagee" within the ordinary, common-law meaning of that word, he held a security interest which might have ripened into a judgment. In this view, it was appropriate for the majority to say that the unripened interest was inchoate and beyond the protection of a statute preferring judgment creditors.

The supporting citations ¹³ have nothing to do with the question whether rules devised for the classification of congressionally unpreferred interests should be applied to defer congressionally preferred interests. Each of the two cited cases dealt with congressionally unpreferred interests. Their citation suggests the majority thought the interest of the assignee comparable to that of the attaching creditor and the municipal lienor, whose only claim to statutory preferment was that their interests, in the future, might ripen into judgments.

If the decision in Ball Construction has not foreclosed the present question, and it seems to me far from certain that it has, it is incumbent upon us to focus our attention upon the statute which confers a preference upon a "mortgagee" and to inquire whether the statute should be so construed as to withhold preferential treatment from one, indisputably a mortgagee, to the extent the mortgage debt is uncertain in amount or not fully accrued when the tax lien is recorded.

This, the crucial question, need not detain us long. If our view of the statute be not obscured by rules developed for the deferment of unpreferred interests, it seems clear that the words of the statute were used in their "usual, conventional sense." ¹⁴ The Congress did not prefer the principal of the mortgage debt; it preferred the mortgagee. If the word is to be given its usual meaning the preference cannot be limited to the mortgagee's right to repayment of the principal of the mortgage debt. It extends to all those rights which the Congress must have known the mortgagee commonly and usually possesses.

Provisions in mortgages requiring or permitting the mortgagee to discharge ad valorem tax liens and extending the mortgage lien to such disbursements, as well as to the expense of enforcement of the mortgagee's rights, are commonplace. There is nothing novel in recognition of the fact that the protection of the mortgage lien extends to such disbursements and expenses, made pursuant to such provisions, as fully as to the principal of the mortgage debt itself. It is a usual and conventional right of a mortgagee. When Congress created the preference, such rights of the mortgagee were generally recognized in commerce and in law. If we are to give the language of the statute its usual and ordinary meaning, we cannot deny to the mortgagee his usual and ordinary rights. Since the statute confers the preference upon the mortgagee, it seems to require us to recognize the preference, at the least, to the extent that his preference has been traditionally and commonly recognized in the state courts. I see no reason to suppose that Congress intended the preference it commanded to differ in kind and quality from the preference the selected classes have enjoyed historically and, in commercial circles, are generally thought to have.

While the question is novel in this court, and, I believe, open in the Supreme Court, there are analogies that bear mention.

A mortgagee's collection out of the security of attorney's fees incurred after the mortgagor's adjudication in bankruptcy was resisted upon the ground that the claim was contingent at the time of adjudication and, therefore, not provable. The Supreme Court held there was no need to prove the claim for the right to attorney's fees was fully protected by the mortgage lien from the time that lien first attached. ¹⁵ In the opinion it was said, "The lien was not inchoate at the time of the adjudication."

This Court dealt with a similar problem when attorney's fees were incurred by a mortgagee after forfeiture of the mortgaged vehicle to the United States . ¹⁶ We held the right to attorney's fees fully protected from the date the mortgage lien attached, saying, "The lien for attorney's fees was not inchoate at the time of the offense."

As the rules have been developed in the tax lien cases, the claim for attorney's fees was inchoate when the tax lien attached. Perhaps we may say as the Supreme Court said in the bankruptcy case that the lien which supports the claim was not inchoate. Whether we do or not, we should reach a similar result here, for no valid reason appears for reading limitations into the preference statute which the language of the statute does not contemplate.

The specific question has arisen in other courts.

The mortgage has been held preferred with respect to attorney's fees and similar expenses incurred after the tax lien was recorded, ¹⁷ and with respect to state taxes paid by the mortgagee. ¹⁸ The mortgagee's preference with respect to accruing interest has been generally recognized. ¹⁹ Perhaps the right to interest accruing at an agreed rate could pass the inchoate test, but to a substantive recognition of the mortgagee's preference, his right to be secure in his income is hardly so important as his right to be secure in making disbursements necessary for the protection or preservation of the mortgage lien and for the collection of the principal of the mortgage debt.

Believing, as I do, that the statute should govern our decision and that it requires a recognition of the preference the mortgagee has enjoyed generally and historically, I would affirm.

¹ 26 USCA §6323(a).

² United States v. City of New Britain, 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191].

³ United States v. Security Trust & Sav. Bank, 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492].

⁴ The test seems never to have been directed to the tax lien. Here the tax lien was recorded when the taxpayer's substantive tax liabilities were being litigated in this Court. See Bond v. Commissioner, 4 Cir., 232 F. 2d 822 [56-1 USTC ¶9471]. It may issue upon a jeopardy assessment long before a determination of the substantive tax liability. 26 USCA §6861.

⁵ United States v. Security Trust & Sav. Bank, 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]; United States v. Acri, 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 264 [55-1 USTC ¶9138]; United States v. Liverpool & London & Globe Insurance Co., Ltd., 348 U. S. 215, 75 S. Ct. 247, 99 L. Ed. 268 [55-1 USTC ¶9136]; United States v. Scovil, 348 U. S. 218, 75 S. Ct. 244, 99 L. Ed. 271 [55-1 USTC ¶9137].

⁶ United States v. Colotta, 350 U. S. 808, 76 S. Ct. 89, 100 L. Ed. 725 [55-2 USTC ¶9680]; United States v. White Bear Brewing Co., 350 U. S. 1010, 76 S. Ct. 646, 100 L. Ed. 871 [56-1 USTC ¶9440]; United States v. Vorreiter, 355 U. S. 15, 78 S. Ct. 19, 2 L. Ed. 2d 23 [57-2 USTC ¶9956].

⁷ In this sense, the tax lien would appear to be always inchoate. It is not self-enforcing. It protects and fixes the property rights of the United States , but is enforceable by a civil action. See 26 USCA §7403.

⁸ What is most troublesome about the mechanic's lien cases is really a different question: Whether Congress ever intended the tax lien to appropriate, without compensation, the property and interests of others than the taxpayer, others who have no legal or moral obligation to pay the tax debt. When the tax lien seizes property, the real value of which has been largely enhanced by the lienor's labor and materials, it appropriates values which the mechanic had created and which are his, in an economic sense, until he is compensated and his lien or right to a lien is discharged. The seizure of such values seems an unjust enrichment of the United States at the expense of the mechanic, not that of the taxpayer.

As suggested, this is a different question. Its answer perhaps should come from the Congress. In any event, the mechanic's lien cases in no way suggest that the rule applied in the classification of deferred interests should be employed to classify preferred interests.

⁹ United States v. New Britain , 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191].

¹⁰ United States v. Ball Construction Co., 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 2d 510 [58-1 USTC ¶9327].

¹¹ Ball Construction Company v. Jacobs, D. C. W. D. Texas, 140 F. Supp. 60 [56-1 USTC ¶9514], aff'd sub nom. United States v. Ball Construction Company, 5 Cir., 239 F. 2d 384 [57-1 USTC ¶9269].

¹² United States v. Gilbert Associates, Inc., 345 U. S. 361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291].

¹³ United States v. Security Trust & Sav. Bank, 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]; United States v. City of New Britain, 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191].

¹⁴ United States v. Gilbert Associates, Inc., 345 U. S. 361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291].

¹⁵ Security Mortgage Co. v. Powers, 278 U. S. 149, 49 S. Ct. 84, 73 L. Ed. 236.

¹⁶ United States v. Seaboard Citizens Nat. Bank of Norfolk , 4 Cir., 206 F. 2d 62.

¹⁷ United States v. Halton Tractor Company, 9 Cir., 258 F. 2d 612 [58-2 USTC ¶9774]; United States v. Sampsell, 9 Cir., 153 F. 2d 731 [46-1 USTC ¶9186]; Smith v. United States, D. C. Hawaii, 113 F. Supp. 702 [53-2 USTC ¶9533]; Bank of America Nat. Trust & Savings Ass'n. v. United States, D. C. S. D. Cal., 84 F. Supp. 387; Ormsbee v. United States, S. D. Fla., 23 F. 2d 926 [1928 CCH D-8092]; cf. In re New Haven Clock & Watch Company, 2 Cir., 253 F. 2d 577 [58-1 USTC ¶9458], in which the inchoate test was used to deny priority for a similar disbursement.

¹⁸ United States v. Miller, D. C. S. D. Fla., 55-1 USTC ¶9484; cf. United States v. Christensen, 9 Cir., 269 F. 2d 624 [59-2 USTC ¶9621] and United States v. Lord, D. C. N. H., 155 F. Supp. 105. The result in Christensen, preferring the tax lien to the extent the mortgage secured disbursements for state taxes, was reached on the basis of a generalized notion of federal supremacy. Such a notion seems out of place when Congress, itself, has decided to prefer the mortgagee over the United States claiming under its tax lien.

See also, Peoples Bank v. United States, D. C. N. D. Ga., 98 F. Supp. 874 [51-1 USTC ¶9296], extending the priority of the mortgagee to subsequent advances under an open-end mortgage, reversed upon the ground that the subsequent advance was a separate transaction unsecured by the lien of the first mortgage. United States v. Peoples Bank, 5 Cir., 197 F. 2d 898 [52-2 USTC ¶9407].

¹⁹ United States v. Halton Tractor Company, 9 Cir., 258 F. 2d 612 [58-2 USTC ¶9774]; Jefferson Standard Life Insurance Company v. United States, 9 Cir., 247 F. 2d 777 [57-2 USTC ¶9925]; United States v. Sampsell, 9 Cir., 153 F. 2d 731 [46-1 USTC ¶9186]; Glenn v. American Surety Co., 6 Cir., 160 F. 2d 977 [47-1 USTC ¶9220]; United States v. Lord, D. C. N. H., 155 F. Supp. 105 [58-1 USTC ¶9181]; Bnak of America Nat. Trust & Savings Ass'n v. United States, D. C. S. D. Cal., 84 F. Supp. 387; Ormsbee v. United States, S. D. Fla., 23 F. 2d 926 [1928 CCH D-8092].

 

 

[60-1 USTC ¶9446]In the Matter of Fidelity Tube Corporation, Bankrupt. Borough of East Newark and Raymond J. Otis, as Trustee in Bankruptcy of Fidelity Tube Corporation, Appellants

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 12,837, 278 F2d 776, 5/3/60, Affirming unreported District Court decision

[1939 Code Secs. 3670-3972--similar to 1954 Code Secs. 6321-6323]

Lien for taxes: Post-bankruptcy demand for payment: Trustee in bankruptcy as judgment creditor.--The District Director's filing of claims for taxes with the referee in bankruptcy relates back to the date of the assessment against the bankrupt and satisfies the statutory requirement that there be a "demand" for payment in order for a tax lien to arise. A trustee in bankruptcy is not, by virtue of Section 70c of the Bankruptcy Act, a "judgment creditor" within the meaning of the Internal Revenue Code provisions making the filing of notice of a tax lien a prerequisite to its validity as against judgment creditors. Therefore, where the assessments were made prior to the adjudication in bankruptcy, the tax liens were valid as against the trustee even though notice of lien had not been filed, and were entitled to priority over claims for local taxes.

Allan L. Tumarkin, 9 Clinton Street, and James E. Masterson, 1180 Raymond Boulevard, Newark 2, N. J., for appellants. Richard M. Rob erts, Department of Justice, Washington 25, D. C., for appellee.

Before BIGGS, Chief Judge, and GOODRICH, MCLAUGHLIN, KALODNER, STALEY, HASTIE, FORMAN, Circuit Judges.

Opinion of the Court on Rehearing

BIGGS, Chief Judge:

After attempting unsuccessfully to make an arrangement under Chapter XI of the Bankruptcy Act, as amended, 11 U. S. C. A. §701 et seq., Fidelity Tube Corporation was adjudicated a bankrupt on February 9, 1954. In the ensuing proceedings the United States filed a claim covering taxes in three categories ¹ alleged. One category consisted of claims in respect to which assessments and demands had been made prior to the adjudication. The second category consisted of claims in respect to which assessments had been made prior to bankruptcy but as to which demands, if any, were made after the adjudication. The third category consists of claims in respect to which assessments and demands were made after adjudication. The United States concedes that it does not have a lien as to the claims described in the third category set out above. As to the claims in the first and second categories, the United States asserts that it is a lien creditor for reasons stated hereinafter. The trustee contends as to the claims in categories one and two as stated above that they were not claims secured by liens but were entitled to priority only under Section 64a(4) of the Bankruptcy Act, 11 U. S. C. A. §104(a)(4).

The Referee held that the trustee was a "judgment creditor" within the purview of Section 3672 of the Internal Revenue Code of 1939 ² and that therefore recording of notice was a prerequisite if the claims of the United States were to be accorded liens valid against the trustee. It was conceded by the United States that no notice was filed as required by Section 3672 and the Referee accordingly gave the claims of the United States, as stated above, priority only under Section 64a(4) of the Bankruptcy Act. A petition for review was filed by the United States . The court below reversed the Referee. See 167 F. Supp. 402 (1958) [59-1 USTC ¶9216]. The trustee has appealed.

[Code Provisions for Tax Liens]

Section 3670 of the Internal Revenue Code of 1939 provides that the United States shall have a lien on all property and rights to property belonging to any person liable to pay any tax who refuses to pay such tax on demand. Section 3671 states that the lien shall arise at the time of the assessment and shall continue until the liability is satisfied or becomes unenforceable by reason of lapse of time.

Section 3672(a) provides for the filing of notice if liens are to be valid as against mortgagees, pledgees, purchasers, or judgment creditors. ³

The trustee contends that Section 70c of of the Bankruptcy Act, 11 U. S. C. A. §110(c), gives the trustee a status equivalent to that of a judgment creditor, i. e., a creditor who has obtained a judgment in a court of record. ⁴ The United States contends that under Section 70c the trustee is a "fictitious" judgment creditor, not the equivalent of one who has obtained a judgment in a court of record and therefore the trustee is not entitled to prevail against the United States .

We are confronted, therefore, in respect to the claims in category one, with a conflict between two federal policies. On one side there is the congressional intent to give the United States maximum assistance in collecting revenues. This intent is embodied in the lien laws set out in Sections 3670-3672 of the Internal Revenue Act of 1939. Opposing this is the policy of increasing the size of a bankrupt's estate available to unsecured creditors as expressed by Section 70c and other sections of the Bankruptcy Act. The court below concluded that United States v. Gilbert Associates, 345 U. S. 361 (1953) [53-1 USTC ¶9291], and other authorities required this conflict to be resolved in favor of the United States . ⁵ The appeal at bar followed. But aside from the issue as to the trustee's status as a judgment creditor there is another question which must be determined: viz., whether the claims of the United States falling in category two are secured by liens. This question is whether the fact that the District Director filed claims with the Referee can be considered compliance with the demand requirement of Section 3670 of the Internal Revenue Code. ⁶ We will deal with this question first.

[Demand for Payment]

The Referee in his decision, under the heading "Finding of Fact", stated the following: "The United States Treasury Department also proved that its claims have a lien status under 26 U. S. C. 6321 and 6322, ⁷ but such claims were not filed or recorded as required by 26 U. S. C. 6323 in order to make them effective as against judgment creditors." This is not a finding of fact but is a conclusion of law. The Referee did not pass specifically on the issue of whether the United States made demand for payment though perhaps the decision of this issue was inherent in his order. Under the Referee's view of the law it was not necessary that he discuss this question for if the trustee had the status of a creditor who had procured a judgment, the claims of the United States were not entitled to prevail against the trustee.

It is apparent that the issue of demand for payment was argued before the Referee since it was discussed in the briefs of the parties. The Trustee and the Borough of East Newark did not seek a review of the decision of the Referee on this point and therefore the finding of the Referee reached the court below unchallenged. But we cannot not perceive how the trustee or the Borough could have appealed from the Referee's decision on the demand point since the order of the Referee was in their favor. We cannot tell on the instant record whether or not the issue of demand was argued before the trial judge on the hearing on the petition for review since we do not have the briefs or a record of the oral arguments before us. But in its opinion, 167 F. Supp. at p. 403, the court below stated that "Its [the United States'] lien is valid and is entitled to payment out of available proceeds prior to a distribution to priority claimants." The trial judge reversed the Referee on the issue of the status of the trustee as judgment creditor and remanded the cause for proceedings not inconsistent with his opinion. We are of the opinion that the issue of the demand by the United States for payment of the claims in category two was before the court below and was adjudicated in favor of the United States . It would therefore appear to be before this court for adjudication on this appeal.

We must therefore decide three questions: (1) was a demand made by the United States for payment of its claims in the second category in conformity with Section 3670 of the Internal Revenue Code of 1939; (2) if a demand was validly made, is the United States entitled to prevail as a lien claimant on the claims under the second category against the trustee and the Borough; and (3) is the United States entitled to prevail against the trustee and the Borough on its claims in the first category? The second and third questions will be determined by identical principles of law.+