¶9575]In the Matter of The Banner Brewing Company, a Corporation,
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
, attorney for trustee. Peter P. Gilbert, Assistant United States
, Arnold W. Lungerhausen, Deputy Collector of Internal Revenue, of
, of counsel, for petitioner.
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."
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
Did Not Comply with Bar Order]
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).
taken of the argument without further considering it, inasmuch as the
primary question appears to be whether or not the
is entitled to the entry of an order permitting it to file its late
claim and be heard on the merits thereof.
of the Bankruptcy Act of 1898, as amended (11
C. A. Sec. 104) provides that:
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).
of the Bar Order]
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
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
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.
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
, supra, page 529 of 279 F.; People v.
, 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.
Sovereign Rights Not Lost]
In the instant
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).
concludes that the entry of the so-called "bar order" in the
instant case permitted a continuing
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
to file its claim for taxes in accordance with its petition.
¶9128]Seaboard Surety Company v. The
the Court of Claims of the United States., No. 45519., 67 FSupp 969,
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.
Gallagher; M. Walton Hendry was on brief, for plaintiff. E.E. Ellison,
John F. Sonnett, Assistant Attorney General;
ert Burstein was on brief, for defendant.
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
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.
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
Findings of Fact
is and at all times here involved was a corporation organized under the
laws of the State of
with its principal place of business in
New York City
and engaged in the business of acting as surety.
Construction Company was at all times here involved a corporation
organized and existing under the laws of the State of
and engaged in the business of construction contracting.
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
, on the
and a detour at the turnout for the
of the All-American Canal System.
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
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
second, known as a payment bond, was conditioned:
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.
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.
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
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
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.
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.
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.
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
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
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.
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.
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.
Judge, delivered the opinion of the court:
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
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.
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.
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
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
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.
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.
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
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
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
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.
Of Tax Lien]
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.
ert Y. Brent, surviving Executor of
ert Brent, for the Use of the
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.
v. The State Bank of
, 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
v. The Farmers' Bank of
, 12 Peters 102;
253. The statute (3466, R.S.) giving the
priority creates no lien in favor of the
(George Beaston v. The Farmers' Bank of
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
istrative settlement finality, and, "whether the amount so [
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.
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.
, 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.
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.
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.
WHITAKER, Judge; and WHALEY, Chief Justice, concur.
took no part in the decision of this case.
¶9464]In the Matter of: Autorama Tool & Die Company, Bankrupt,
Henry Faulk, Appellant v.
United States of America
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.
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,
ert J. Grace, United States Attorney, Detroit, Mich., for appellee.
PHILLIPS, CELEBREZZE and PECK, Circuit Judges.
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
against the bankrupt for federal taxes.
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
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
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.
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.
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
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
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.
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.
of the Internal Revenue Code gives the
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
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
At the time
the tax lien in question arose,
law regarding the filing of notices of federal tax lien provided for the
filing of the notices with the
of Deeds in the county where the property subject to the lien was
filed its notices of lien with the clerk of the appropriate District
Court but not with the
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
in effect did not provide an office for the filing of notices of federal
tax lien. 7
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
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.
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.
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.
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.
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.
"§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).
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
C. §110(c)); See United States v. Speers [66-1 USTC ¶9101], 382
"§6323. Validity and priority against certain persons
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.
(f) Place for
filing notice; form.--
(1) Place for
filing.--The notice referred to in subsec-(a) shall be filed--
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
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)).
"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.)
enacted the Uniform Federal Tax Lien Registration Act on
August 11, 1956
, after the date of the bankruptcy. 6
Stat. Ann. §7.753 (1960 ed.)
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.
It should be noted that the Supreme Court held in 1961 that the State of
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],
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).
Glass City Bank v. United States [45-2 USTC ¶9449], 326
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
and Dissenting Opinion
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
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
I would affirm
the judgment of the District Court in all respects.
¶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
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.
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.
KALODNER, GANEY and SMITH, Circuit Judges.
of the Court
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,
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.
Pennsylvania Laundry Company, a
corporation having its principal place of business in
, was the holder of a mortgage on real property located in
. 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
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
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
509, 512, 513 (1960). Although some of the early
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
rule is stated in the leading case of Camden Trust Co. v. Handle,
26 A. 2d 865, 868 (Ct. Err. & App. 1942) as follows:
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
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.
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.
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).
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."
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
237, 240 (1960).
The notice of
tax lien was filed in
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
, 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
C. A. §6322 (1944). It became effective against any pledgee of
purchaser who acquired an interest after the notice had been filed. 26
C. A. 6323 (1954). Ibid.
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
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
The order of
the court below will be affirmed.
United States of America
, Appellant v. Walter E. Fulford, Trustee, etc., Re Mesa Steel Corp.,
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.
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.
MERRILL and BROWNING, Circuit Judges.
of the District Court is affirmed.
Title and Trust Company v. Stewart, [65-1 USTC ¶9206], 337 F. 2d
¶9431]Peninsula State Bank, Appellant v. Thompson-Copeland, Inc., et
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.
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,
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.
Chief Judge, RIVES, Circuit Judge, and DYER, District 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
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.
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.
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.
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.
of the priorities depends upon the proper construction of the Florida
Accounts Receivable Act, and particularly of Section 524.03, F. S. A.:
year period; renewal; affidavit of continuance
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.
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:
OF NOTICE OF ASSIGNMENT OF ACCOUNTS RECEIVABLE
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.
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."
524.04(4), also pertinent, provides:
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:
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.
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
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
United States of America
, Plaintiff-Appellee v. Parker House Sausage Company, an Illinois
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
Silver, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson,
Department of Justice, Washington, D. C. 20530, Lawrence Gubow, United
ert F. Ritzenhein, Assistant United States Attorney, 815 Federal Bldg.,
Detroit, Mich., for plaintiff-appellee. George E. Lee, 2230 First
, for defendant-appellant.
Chief Judge, and MILLER and EDWARDS, Circuit Judges.
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.
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
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
, and directed Parker House to do so.
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.
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
, from which this appeal was taken.
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
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.
, State of
, Appellant v.
United States of America
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
istration and preservation of the bankrupt's estate and should have
precedence over the claim of the Federal Government.
Dickerson, Gordon L. Hawkins,
, 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.
CHAMBERS and MERRILL, Circuit Judges, and BOWEN, District Judge.
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
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.
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.
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
istration and preservation accruing during the time that the trustee was
in possession. The fund was allocated to the
in the sum of $32,414.38 and to
in the sum of $19,585.62. Both parties petitioned the District Court for
the District Court held that the
was entitled to the entire amount of the fund. In our view, this ruling
claims are governed by §67 of the Bankruptcy Act, 11
C. §107. The tax claim of the
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
istration and preservation.
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
, 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.
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
, 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
tax lien a priority to which it is not entitled. The County contends
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.
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
United States of America
, Appellant v. V. F. Bond, Audrey A. Bond, et al., Appellees
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.
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.
SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.
question for decision is whether a tax lien of the
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.
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.
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.
listed various properties owned by the taxpayers, among them being the
Arlington Hotel, at
, the property and the proceeds of sale thereof involved in controversy
before this court. The
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
and a sale of the properties.
November 27, 1957
, the District Court found that the
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.
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
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.
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, * * *."
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.
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
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.
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
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
would affect any lien, general or specific, existing "when the
event took place which gave the
a claim of priority". In the instant case, even though the court
found insolvency of taxpayers, the
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)
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
361 (1953) [53-1 USTC ¶9291]; United States v. Waddill Co., 323
353 (1945) [45-1 USTC ¶9126]; United States v. Texas, 314
480 (1941) [42-1 USTC ¶9162]; New York v. Maclay, 288
290 (1933) [3 USTC ¶1044].
v. Security Trust & Sav. Bank, 340
47 (1950) [50-2 USTC ¶9492], extended the application of the choate
lien test to a statutory attachment lien on property in
law. No insolvency question was presented. The court said that in cases
involving federal priority under the insolvency statute, 31
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).
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.
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
state court gave priority to the City's liens, the mortgages, the
judgment lien and the federal tax liens in that order. The
appealed from the judgment insofar as the statutory liens of the City
were given priority over those of the
. 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
, 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.
, 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. * * *
the general statutory liens of the
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
' 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
. The statute creating the federal liens here involved, I. R. C., §3670,
C. A. §6321] does not in terms confer priority upon them.
the debtor is insolvent, Congress has expressly given priority to the
payment of indebtedness owing the
, whether secured by liens or ohterwise, by §3466 of the Revised
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. * * *
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
on page 86 of 347
, the court referred to the inchoate attachment lien involved in
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
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."
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
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."
case was remanded to the
court for a redetermination of the order of priority of the various
the instant case, Perpetual contends that the court, in
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.
with its prior position, the Supreme Court of the
, in three opinions by Mr. Justice Minton, held that federal tax liens
were entitled to priority over the following:
"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];
"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
"A landlord's distress lien obtained after the attachment of the
federal tax lien but before it was recorded, United States v. Scovil,
218 (1955) [55-1 USTC ¶9137]."
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.
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).
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.
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
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
v. Security Trust & Sav. Bank, supra, and
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,
and Harlan. It was their view that neither Security Trust nor
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
* * 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)."
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
, 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.
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.
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
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
, 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
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
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
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
. 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.
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
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
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
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.
Seaboard it was stated:
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. * * *"
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
from sale of seized property was unanticipated revenue, a windfall, not
to be credited as a payment on a fixed indebtedness.
is important to note the legislative purpose in enacting the statutes
involved in the case at bar and in the Seaboard case. As was
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
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
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
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
judgment of the District Court will be reversed and the case remanded
for further proceedings consistent with the views herein expressed.
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.
C. A. §6321. Lien for taxes
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."
C. A. §6322. Period of lien
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."
C. A. §6323. Validity against mortgagees, pledgees, purchasers, and
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--
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; * *
C. A. §191. Priority established
any person indebted to the United States is insolvent, or whenever the
estate of any deceased debtor, in the hands of the executors or
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."
"§3617. Remission or mitigation of forfeitures under liquor laws;
possession pending trial--(a) jurisdiction of court
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.
* * *
* * *
* * *"
Circuit Judge, dissenting:
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
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.
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.
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
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
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
only two cases in the Supreme Court is there any intimation that the
inchoate test has any place in the classification of preferred
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.
it may be said that
'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
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
, 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
, leads to the conclusion that the decision in
no way settles the question here.
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 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.
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
, 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
, 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
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.
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.
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.
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.
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
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.
the question is novel in this court, and, I believe, open in the Supreme
Court, there are analogies that bear mention.
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."
Court dealt with a similar problem when attorney's fees were incurred by
a mortgagee after forfeiture of the mortgaged vehicle to the
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."
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.
specific question has arisen in other courts.
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.
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.
26 USCA §6323(a).
United States v. City of New Britain, 347
81, 74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191].
United States v. Security Trust & Sav. Bank, 340
47, 71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492].
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.
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
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].
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
, but is enforceable by a civil action. See 26 USCA §7403.
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
at the expense of the mechanic, not that of the taxpayer.
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.
81, 74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191].
United States v. Ball Construction Co., 355
587, 78 S. Ct. 442, 2 L. Ed. 2d 510 [58-1 USTC ¶9327].
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].
United States v. Gilbert Associates, Inc., 345
361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291].
United States v. Security Trust & Sav. Bank, 340
47, 71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]; United States v.
City of New Britain, 347
81, 74 S. Ct. 367, 98 L. Ed. 520 [54-1 USTC ¶9191].
United States v. Gilbert Associates, Inc., 345
361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291].
v. Powers, 278
84, 73 L. Ed. 236.
United States v. Seaboard Citizens Nat. Bank of
, 4 Cir., 206 F. 2d 62.
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
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.
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
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].
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].
¶9446]In the Matter of Fidelity Tube Corporation, Bankrupt. Borough of
and Raymond J. Otis, as Trustee in Bankruptcy of Fidelity Tube
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.
Tumarkin, 9 Clinton Street, and James E. Masterson, 1180 Raymond
Boulevard, Newark 2, N. J., for appellants. Richard M.
erts, Department of Justice,
25, D. C., for appellee.
Chief Judge, and GOODRICH, MCLAUGHLIN, KALODNER, STALEY, HASTIE, FORMAN,
of the Court on Rehearing
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
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
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.
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
. The court below reversed the Referee. See 167 F. Supp. 402 (1958)
[59-1 USTC ¶9216]. The trustee has appealed.
Provisions for Tax Liens]
of the Internal Revenue Code of 1939 provides that the
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.
3672(a) provides for the filing of notice if liens are to be valid as
against mortgagees, pledgees, purchasers, or judgment creditors. 3
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
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
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
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
361 (1953) [53-1 USTC ¶9291], and other authorities required this
conflict to be resolved in favor of the
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
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.
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
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
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
for payment of the claims in category two was before the court below and
was adjudicated in favor of the
. It would therefore appear to be before this court for adjudication on
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