Prior Law Page15

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 [Claim in Bankruptcy Gives Rise to Tax Lien]

As to question (1) as set out in the preceding paragraph, it is clear that assessments were made on the claims in the second category before bankruptcy but demands for payment, if any, were made after adjudication and then only by the filing of formal claims for payment by the Collector with the Referee in Bankruptcy. If such claims would otherwise meet the requirements of Section 3670 of the Internal Revenue Code do the intervening bankruptcy proceedings render inoperative the provisions of Section 3671 which ordinarily would confer lien status.

As we have stated Section 3670 provides that when a person liable to pay a tax neglects or refuses to pay it "after demand" a lien arises in favor of the United States . Section 3671 provides in pertinent part: "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the Collector. . . ." It is the contention of the United States that the filing of the claims with the Referee by the Collector were effective demands and that these demands relate back to the time of the assessment, admittedly prior to the adjudication. In respect to the filing of a claim in a bankruptcy proceeding as constituting an effective demand we find a helpful analogy in the decision of the Court of Appeals for the Seventh Circuit in United States v. Ettelson, 159 F. 2d 193, 196 (1947) [47-1 USTC ¶9137]. In that case a claim was filed with a Probate Court against the estate of the deceased taxpayer and this was treated by Circuit Judge (later Mr. Justice) Minton as the equivalent of the demand required by Section 3670. In the case at bar as in Ettelson, the demand for payment was made at the only place that it could be made, i.e., in the bankruptcy proceeding. ⁸ Compare, however, In re Crockett, 150 F. Supp. 352 (N. D. Cal. 1957) [57-1 USTC ¶9559], which holds by inference that a claim for taxes by the United States in a bankruptcy proceeding is not a demand within the meaning of Section 3670. See and compare also Sherman B. Ruth, Inc. v. O. S. V. The Marie and Winifred, 150 F. Supp. 630, 632 (D. Mass. 1957 [57-1 USTC ¶9665]; In re Holdsworth, 113 F. Supp. 878, 879 (D. N. J. 1953) [53-2 USTC ¶9589], and 9 Mertens, Law of Federal Income Taxation §54.40. We have carefully considered these authorities but we think that logic compels us to follow the holding of the Court of Appeals for the Seventh Circuit in Ettelson. It is clear that if bankruptcy had not intervened the United States would have had a valid lien if demand was made prior to the date when the assessment became unenforceable by reason of lapse of time and we can find no provision of the Bankruptcy Act which would prevent a lien arising in favor of the United States under Sections 3670 and 3671 because of a delayed demand by the District Director.

In view of the provisions of Section 3671 an inchoate lien seems to arise at the time of the assessment which is perfected by a demand and when the demand is made the lien relates back to the date of the assessment, in the case at bar to a time prior to bankruptcy. Plumb, Federal Tax Collection and Lien Problems (Second Installment), 13 Tax L. Rev. 459, 488 (1958) states: "Furthermore, even if notice and demand have not been made before bankruptcy, they may be made thereafter and will relate back to perfect the lien arising upon the prior assessment." See also Macatee, Inc. v. United States, 214 F. 2d 717, 719 (5 Cir. 1954) [54-2 USTC ¶9550]. ⁹

[Trustee in Bankruptcy as Judgment Creditor]

This brings us to the second and third questions posed above, which as we have said, are governed by identical principles of law. Is the trustee in bankruptcy a "judgment creditor" within the purview of Section 3672? Our ruling must turn in large part upon an interpretation of the decision in United States v. Gilbert Associates, supra. In the Gilbert case the Supreme Court was confronted with the problem of priority between a federal tax lien and a tax lien of the Township of Walpole, New Hampshire, assessed before the recording of the federal lien. The Supreme Court of New Hampshire held that under the law of that State the assessment of such a tax was in the nature of a judgment and that the Township was a judgment creditor within the meaning of Section 3672 of the 1939 Code. See Petition of Gilbert Associates, Inc., 97 N. H. 411, 90 A. 2d 499 (1952) [52-2 USTC ¶9473]. The Supreme Court of the United States disagreed, holding that judgment creditor status created by a fiat of state law was not within the meaning of the phrase "judgment creditor" as used in Section 3672. Cf. United States v. Acri, 348 U. S. 211 (1955) [55-1 USTC ¶9138]. Relying on the Gilbert decision, the Second and Ninth Circuits respectively held that a trustee in bankruptcy was not a "judgment creditor" under Section 3672. Brust v. Sturr, 237 F. 2d 135 (2 Cir. 1956) [56-2 USTC ¶9954]; ¹⁰ United States v. England, 226 F. 2d 205 (9 Cir. 1955) [55-2 USTC ¶9693].

The trustee in the instant case argues that the Supreme Court's decision in Gilbert was motivated by a desire to procure uniformity among the States in determining questions relating to priority of payment of lien claims and that the Supreme Court ruled as it did because it feared that if each State was left free to designate who was or who was not a "judgment creditor" under their respective laws there would be lack of uniformity. The trustee contends that under Section 70c of the Bankruptcy Act there is no danger of heterogeneity since we are construing federal and not State law and that therefore the Gilbert decision is not apposite. But the Supreme Court stated, 345 U. S. at p. 364, "In this instance, we think that Congress used the words 'judgment creditor' in §3672 in the usual, conventional sense of a judgment of a court of record since all states have such courts." This language is decisive. It is true that the authorities cited do not deal with the interrelationship of the Internal Revenue Code with the Bankruptcy Act but we fail to see how the term "judgment creditor" can be given separate, divisive meaning based on the circumstances of the individual case.

[Bankruptcy Act Provisions]

We must concede that strong authority takes a contrary position particularly in view of the amendments effect to Section 70c of the Bankruptcy Act in 1950 and 1952. See 64 Stat. 26 and 66 Stat. 429. Section 70c, 11 U. S. C. A. §110(c), as it now exists and as it existed at the time of the adjudication in the instant case provides: "The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as of such date with all the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists."

The legislative history indicates that it was the intention of Congress by the 1950 and 1952 amendments to expand the rights of a trustee in bankruptcy generally but the legislative history itself as well as the amendatory statutes leave in doubt the status of the trustee as a judgment creditor under the Internal Revenue Code. But see 4 Collier, Bankruptcy ¶70.49 n.3.

Moreover, there is presently pending in Congress a bill, H. R. 7242, which purports to remove and question as to the status of the trustee as a judgment creditor. See H. Rept. 745, 86th Cong., 1st Sess. p. 10. The report contains a lucid legislative history of Section 70c of the Bankruptcy Act. It is proposed by the bill to give the trustee the status of a creditor who has obtained a judgment against the bankrupt on the date of bankruptcy whether or not such creditor exists. We are of the opinion that the statute must be amended before a trustee in bankruptcy can prevail against the United States under circumstances similar to those at bar.

In the light of all the circumstances and the present state of the law we are constrained to agree with the judgment of the court below and we conclude, therefore, that the United States is entitled to prevail against the trustee and the Borough of East Newark on the issues presented. We do not find it necessary to pass on the issues which might have arisen under Section 67c, read in conjunction with Section 64a, clauses (1) and (2), of the Bankruptcy Act, 11 U. S. C. A. §§ 107(c) and 104(a), clauses (1) and (2), for no such issue is presented by the present record. ¹¹ Accordingly the judgment will be affirmed.

¹ The claims were based on Federal Unemployment, Withholding, and Federal Insurance Contribution Act (Social Security) Taxes.

² The Internal Revenue Code of 1939 applies to all aspects of this case. 26 U. S. C. A. §7851(a)(6)(B).

³ Section 3672(a) provides in part: ". . . [the] lien [imposed by section 3670] shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector . . .."

⁴ Section 70c, 11 U. S. C. A. §110(c), provides in part: "The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as of such date with all the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists."

⁵ For a further discussion of this problem see 4 Collier, Bankruptcy ¶67.24 n.6a.

⁶ Section 3670 provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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." [Italics added.]

⁷ The statutory references are to sections of the Internal Revenue Code of 1954. See note 2, supra.

⁸ The District Director of Internal Revenue in his claim filed with the Referee did not assert liens. He claimed only that the United States was entitled to priority of payment under Section 64 of the Bankruptcy Act. The fact that the District Director did not assert that the United States possessed liens is immaterial. If the claims fall within the purview of Sections 3670 and 3671 of the Internal Revenue Code, as we are of the opinion they do, the District Director is not required to assert a lien or liens. He has made claims on behalf of the United States and the applicable statutes give the claims lien status.

⁹ Section 67b. of the Bankruptcy Act, 11 U. S. C. A. §107(b), seems to contravene the contention of the Borough of East Newark and the trustee that the adjudication cut off the right of the United States to perfect its liens. Section 67b. provides that notwithstanding the provisions of Section 60 of the Bankruptcy Act statutory liens for taxes owing the United States may be valid against the trustee. The last sentence of Section 67b. states that where by the laws of the United States such liens are required to be perfected and arise but are not perfected before bankruptcy, "[T]hey may nevertheless be valid, if perfected within the time permitted by and in accordance with the requirements . . ." of the laws of the United States. The Borough of East Newark contends that the word "may" is permissive and that for the statute to effectively authorize the validation of the liens of the United States the word employed should have been the mandatory "shall." We are unable to find any adequate support for this proposition in the pertinent authorities.

¹⁰ Brust v. Sturr, 237 F. 2d 135 (2 Cir. 1956) [56-2 USTC ¶9954], seems to alter the position taken in United States v. Sands, 174 F. 2d 384 (2 Cir. 1949) [49-1 USTC ¶9264]. The later decision is in line with United States v. Gilbert Associates, 345 U. S. 361 (1953) [53-1 USTC ¶9291].

¹¹ The Referee has certified that "all debts entitled to priority under Section 104(a), clauses (1) and (2), have been paid."

In view of the state of the record the statement contained in the opinion, 167 F. Supp. at p. 403, "Its [the United States'] lien [sic] is valid and is entitled to payment out of available proceeds prior to a distribution to priority claimants.", cannot require revision for there are no outstanding claims falling within the category prescribed by clauses (1) and (2) of Section 64a.

[Dissenting Opinion]

KALODNER, Circuit Judge, dissenting:

I would reverse the judgment of the District Court.

Stripped down to its essence the majority's holding is that a trustee in bankruptcy does not have the status of a "judgment creditor" by virtue of the provisions of Section 70c of the Bankruptcy Act as amended in 1952. ¹ While the majority does not say so in so many words, that is the core of its holding that a trustee in bankruptcy is not a "judgment creditor" within the meaning of Section 3672 of the Internal Revenue Code of 1939.

In my view there just cannot be two varieties of a "judgment creditor" under separate federal statutes which relate to such creditors. A "judgment creditor" cannot be "fish" under one federal statute and "fowl" under another. Nor does a bankruptcy trustee have a dual personality--that of a "judgment creditor" in one room of the federal legislative structure and a total absence of it in another room of the same structure.

The majority's holding seriously interferes with the admin istration of the bankruptcy laws because it destroys the centuries-old concept of the common law and equitable jurisprudence which says that one who has levied attachment or execution is a judgment creditor and Section 70c specifically vests a bankruptcy trustee "with all the rights, remedies and powers of a creditor then holding a lien."

Further, it repeals by judicial fiat a federal statute--Section 70c--which in the plainest of terms vests a bankruptcy trustee with the status of a "judgment creditor." Moreover, it disregards the express ruling of the Supreme Court of the United States in Myers v. Matley, 318 U. S. 622 (1943), that a bankruptcy trustee is a "judgment creditor", and lastly, it is a reversal of this Court's holding in Salkind v. Dubois, 105 F. 2d 640 (1937) that the Bankruptcy Act makes the bankruptcy trustee a "judgment creditor."

In Myers v. Matley, supra, it was said (pp. 624, 625):

"The trustee, as to all property in possession and under the control of the bankrupt at the date of bankruptcy, is deemed vested, as of that date, with all the rights and remedies of a creditor then holding a lien on the property by legal or equitable proceedings, whether or not such a creditor actually exists." (Italics supplied)

In Salkind v. Dubois, the writer of the majority opinion, there speaking for this Court, said (p. 640):

"Pursuant to the provisions of section 47a(2) of the Bankruptcy Act, 11 U. S. C. A. §75(a)(2), ² a trustee is deemed vested with all the rights, remedies and powers of a creditor holding a lien by legal or equitable proceedings upon property coming into the custody of the bankruptcy court, and therefore the attempted reservation of property was void as against the trustee." (Italics supplied)

Another member of this Court, Judge Hastie, ³ speaking for the United States Court of Appeals for the Ninth Circuit, in Sampsell v. Straub, 194 F. 2d 228 (1952), cert. den. 343 U. S. 927, said (p. 231):

"Section 70, sub. c . . . is employed primarily to protect general creditors of the bankruptcy against secret liens. To this end the trustee is given all the rights which a creditor with a lien by legal or equitable proceedings would enjoy. The trustee unquestionably enjoys the rights of a creditor who has levied attachment or execution, on the bankrupt's property." (Italics supplied)

To the same effect see McKay v. Trusco Finance Co. of Montgomery, Alabama, 198 F. 2d 431 (5th Cir. 1952) which cited with approval Sampsell v. Straub, supra. In doing so, it stated (p. 433):

". . . It follows that under sec. 70, sub. c of the Bankruptcy Act, the trustee in this case was in the position of a judgment creditor with a lien as of the date of the bankruptcy. . . ." (Italics supplied)

It is true that the cases cited arose under the Bankruptcy Act prior to its 1950 and 1952 amendments but as the majority says "The legislative history indicates that it was the intention of Congress by the 1950 and 1952 amendments to expand the rights of a trustee in bankruptcy generally. . . ." In this connection the following excerpts from the "Historical Note" following Section 110, 11 U. S. C. A. are pertinent.

"1950 Amendment. Subd. (c) amended by Act March 18, 1950 , to place the trustee in bankruptcy in the position of a lien creditor with respect to all of the bankrupt's property".

* * *

"1952 Amendment . . . Subd(c) amended by Act July 7, 1952 , §23(e), to clarify the fact that a trustee has the rights of a lien creditor upon property in which the bankrupt has an interest or as to which the bankrupt may be the ostensible owner."

[Construction of Bankruptcy Act, as Amended]

Section 70c, although it does not, as amended in 1950 and 1952, use the term "judgment creditor" does spell out in the most definitive language possible the elements which make the bankruptcy trustee a "judgment creditor".

As amended in 1952 (in effect when the bankruptcy petition was filed in the instant case) Section 70c provides, in part:

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

The Section, as amended, has been construed, in cases arising under it, to give the trustee in bankruptcy the status of a judgment creditor in language almost identical with that used in Myers v. Matley, Sampsell v. Straub and Salkind v. Dubois, supra.

In discussing the amended Section this Court, speaking through our brother Hastie, in In re Consorto Const. Co., Inc., 212 F. 2d 676 (1954), cert. den. 348 U. S. 833 said (p. 678):

"The trustee's rights under this Section are not derivative. They are not rights of any existing creditor to which the trustee is subrogated but are independent rights, of such character as a described hypothetical creditor would have enjoyed, created by the Bankruptcy Act itself. . . ." ⁴

In United States v. Eiland, 223 F. 2d 118 (4th Cir. 1955) [55-1 USTC ¶9487] the late Chief Judge Parker stated with respect to the 1952 version of Section 70c (p. 123):

"The effect of the section as amended is to vest the trustee, not only with rights with respect to the bankrupt's property which creditors had acquired at the date of bankruptcy, but also with all rights which creditors might have acquired by legal or equitable process on that date. . . ." (Italics supplied)

In B. F. Avery and Sons Company v. Davis, 226 F. 2d 942, 945 (5th Cir. 1955), it was held that "the rights" of a bankruptcy trustee are those of a "judgment creditor", and in Brookhaven Bank & Trust Company v. Gwin, 253 F. 2d 17 (5th Cir. 1958), where the status of the bankruptcy trustee was at issue, it was said (p. 23):

". . . the 'strong-arm clause' of Section 70c . . . vested in the trustee all of the rights, remedies and powers of a creditor, whether existing or not, who held or who could have obtained a lien by legal or equitable proceedings."

The Seventh Circuit, in In Re Lustron Corp., 184 F. 2d 789 (1950) cert. den. 340 U. S. 946, construed Section 70c, as amended in 1950, to vest in a bankruptcy trustee the rights of a "judgment creditor armed with an execution", and in In re Ripp, 242 F. 2d 849 (1957) held Section 70c, as amended in 1952, to do likewise. In In re Lustron, supra, it was said (p. 793):

"Under the section [70c], as amended by the Act of March 18, 1950, the trustee is also vested, as of the date of bankruptcy, with all the rights, remedies and powers of a creditor holding a lien thereon, legal or equitable, whether or not such creditor exists, as to all property of the bankrupt, whether or not coming into possession or control of the court." In a footnote to that statement (Footnote 1) the Court said:

"The language of the amendment is all inclusive, thus embracing in the terms 'legal or equitable', a judgment creditor armed with an execution, specifically mentioned in the section prior to the amendment." (Italics supplied)

In In re Ripp, supra, the Seventh Circuit, with respect to Section 70c, as amended in 1952, said (p. 852):

"Under Sec. 70 of the Bankruptcy Act, 11 U. S. C. A. §110 . . . the trustee is vested . . . under subsection c, with 'all the rights, remedies, and powers of a creditor then holding a lien . . . whether or not such a creditor actually exists.' . . . From the time of the filing of the petition, the assets are in custodia legis and over them the bankruptcy court had exclusive jurisdiction and the sole light to determine the validity of any and all alleged liens thereon. . . .

"So here, when the trustee in bankruptcy was appointed, his title to all assets in the bankrupt's custody, possession or control passed to him; and, in addition, he was vested with all the rights of judgment creditors armed with execution liens. The court thereby obtained jurisdiction of the rem, exclusive custody over it." (Italics supplied)

The views expressed by the four circuits in the cases cited were subscribed to by the Second Circuit prior to Brust v. Sturr, 237 F. 2d 135 (1956) [56-2 USTC ¶9954] where it held that a trustee in bankruptcy is not a "judgment creditor" under Section 3672 of the 1939 Internal Revenue Code. Two years earlier, in Constance v. Harvey, 215 F. 2d 571 (1954), cert. den. 348 U. S. 913, the Second Circuit held a bankruptcy trustee to be a judgment creditor under Section 70c as amended in 1952, stating (p. 575):

". . . under §70, sub.c of the Bankruptcy Act the Trustee was entitled to be put in the position of an 'ideal' hypothetical creditor--Hoffman v. Cream-O-Products, 2 Cir., 180 F. 2d 649, certiorari denied 1950, 340, U. S. 815, 71 S. Ct. 44, 95 L. Ed. 599. . . ." ⁵

Earlier, in 1949, the Second Circuit, in United States v. Sands, 174 F. 2d 384 [49-1 USTC ¶9264], expressed a similar view with respect to Section 70c, as then constituted.

The text writers are in accord with the view that a bankruptcy trustee is a "judgment creditor" under Section 70c as amended in 1952: Collier on Bankruptcy, 14th ed. (1958) Vol. 4, par. 70.49, pages 1410 et seq.; Remington on Bankruptcy, 1957 ed., Vol. 3, pages 557, 558, 559; Seligson, Creditors' Rights (1957) 32 N. Y. U. L. R. 708, 31 J. of Nat'l Ass'n of Ref. 113.

The majority apparently has been impelled to its view that a bankruptcy trustee is not a "judgment creditor" under Section 70c, irrespective of the powers therein vested in him because the section has not appended the definitive label "judgment creditor" to the trustee's statutory vestments.

It says that the "language" used in United States v. Gilbert Associates, 345 U. S. 361 (1953) [53-1 USTC ¶9291] "is decisive" and quotes in that connection this statement (p. 364):

"In this instance, we think Congress used the words 'judgment creditor' in 3672 in the usual, conventional sense of a judgment of a court of record, since all states have such courts."

The statement quoted must be considered in the light of the two sentences which preceded it. They read as follows:

"A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a 'judgment creditor' should have the same application in all the states. . . ."

A reading of the Supreme Court's opinion in the Gilbert Associates case discloses that the reason for its decision was the Court's desire to assure uniformity in the collection of federal taxes and its apprehension that such uniformity would be imperiled if the various states or their subdivisions applied their own standards or criteria in determining what constitutes a "judgment creditor".

It became necessary for the Supreme Court to construe "judgment creditor" as used in Section 3672 because the statute did not define the terms or spell out its elements.

However, as it was earlier pointed out, Section 70c, as amended, clearly and concisely spells out in unmistakable language the elements which constitute the bankruptcy trustee a "judgment creditor".

The United States takes the position (in its brief) that the amended Section 70c makes a bankruptcy trustee a "constructive or statutory judgment creditor" but says that such a creditor "is not a creditor in the usual, conventional sense of a judgment of a court of record" and that "only the creditor in this conventional sense of a judgment of a court of record is within the meaning of" Section 3672. It adds the rather unique statement that "The terms of the Bankruptcy Act state that the trustee in bankruptcy does occupy the fictitious position of a judgment creditor." (Italics supplied)

All that need be said with respect to that contention is that if Section 70c makes a bankruptcy trustee a "statutory judgment creditor" such a status more than meets the requirement of a `judgment creditor' in the usual conventional sense of a judgment of a court of record" as specified in United States v. Gilbert Associates, supra.

[Committee Report]

Significant to this discussion is the following excerpt from the "Statement" in H. R. Rep. No. 1293, 81st Cong. 1st Sess. 4 (1949) in connection with the 1950 amendment to Section 70c:

"Traditionally, it is the primary office of the Bankruptcy Act to protect creditors, both secured and unsecured; to marshal the bankrupt's assets; and to distribute them among his creditors equitably and ratably, in accordance with their respective rights and interests. It follows from these broad general principles, as well as from the basic provisions of the Bankruptcy Act itself, that--

(A) a trustee in bankruptcy occupies the position of a 'universal' judgment or lien creditor, with all such a creditor's remedies (Bankruptcy Act, sec. 70. . . ." (Italics supplied)

Prefacing the "Statement", the House Report, under the caption, "Purposes Of The Bill" said in part:

"(b) Section 2 of the bill amends section 70c of the Bankruptcy Act, dealing with the general rights of a trustee in bankruptcy, and is essentially correlative to the amendment to section 60a, effected by section 1 of the bill. Under existing law, a trustee, as to all property in the possession or under the control of the bankrupt at the date of bankruptcy, is deemed vested, as of the date of bankruptcy, with all the rights of a creditor then holding a lien by legal or equitable proceedings, and, as to all other property, with the rights of a judgment creditor then holding an unsatisfied execution. In view of the amendment made to 60a as well as intrinsically, it is deemed wise to place the trustee in bankruptcy in the position of a lien creditor with respect to all of the bankrupt's property, and section 2 of the bill so amends section 70c. . . ." (Italics supplied)

In the "Committee Amendment" section of the House Report it is said:

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

The legislative history cited makes clear the Congressional intent to vest the bankruptcy trustee with all of the rights and remedies of a "judgment creditor" armed with execution liens as of the date of the bankruptcy. As was said by Professor Seligson in Creditors' Rights, supra:

"It is immaterial that the trustee is not described as a 'judgment creditor' in the statute if Congress intended to give him that status with all the rights, remedies and powers flowing therefrom. The trustee is the ideal judicial lien 'creditor' and he enjoys that status whether or not such a creditor exists. The greater includes the lesser. Hence, the ideal judicial lien creditor must necessarily be a 'judgment creditor.'

"That Congress intended to give the trustee the status of a 'judgment creditor' is prefectly plain. . . ."

For the reasons stated I would reverse the judgment of the District Court on the ground that it erred in holding that "A trustee in bankruptcy is not a judgment creditor within the purview" of Section 3672 of the Internal Revenue Code of 1939.

[Post-Bankruptcy Demand for Payment]

Apart from the foregoing, I further disagree with the majority's holding that the United States has a lien status with respect to the claims in the second category ⁶ even though no demand for payment had been made prior to bankruptcy.

Section 3670 of the Internal Revenue Code of 1939 provides in part:

"If any person liable to pay any tax neglects to or refuses to pay the same after demand, the amount . . . shall be in a lien in favor of the United States . . . ." (Italics supplied)

Cognizant of the statutory requirement that a "demand" for payment must be made in order to confer a lien status on the assessment on which it is based, the majority, despite the intervention of bankruptcy before any demand was made, holds that the mere filing of a "claim" subsequent thereto, with the Referee in Bankruptcy, satisfied the statutory "demand" requirement.

Says the majority:

"In view of the provisions of Section 3671 an inchoate lien seems to arise at the time of the assessment which is perfected by a demand and when the demand is made the lien relates back to the date of the assessment, in the case at bar to a time prior to bankruptcy." (Italics supplied)

The sum of the majority's position is that the courts may, via a "nunc pro tunc", "relate back" a post-bankruptcy "demand" to a pre-bankruptcy "demand".

I disagree.

The majority's disposition does violence to the distribution concept and plan of the Bankruptcy Act.

As was said in United States v. Sampsell, 153 F. 2d 731, (9 Cir. 1946) [46-1 USTC ¶9186], later reversed on other grounds, United States v. Sampsell, supra, at page 735:

"The Act was intended to set up a particular scheme of distribution not to be varied by exceptions found outside the Act, since to do so would interfere with a well-ordered and efficient working Act. . . . [T]he Bankruptcy Act has its own schedule of priorities intended to cover all situations within its terms and jurisdiction."

The Second Circuit expressed the same view in United States v. Sands, 174 F. 2d 384 (1949) [49-1 USTC ¶9264], where the impact of the Bankruptcy Act on the lien provisions of the Internal Revenue Code of 1939 was concerned. Said the Court (pp. 385-86):

". . . The Statutory provisions [Section 67 of the Bankruptcy Act] for the collection of unpaid taxes show a complete scheme for the protection of the government revenues of the very kind which the bankruptcy provision is designed to uphold, even though bankruptcy ensues. . . .

"Sec. 67, sub.b, of the Bankruptcy Act preserves certain statutory liens, including those for taxes and debts owing to the United States, even though arising or perfected while the debtor is involvent and within four months of bankruptcy; indeed, it goes further and allows the perfecting of such liens as have arisen, but have not been perfected, before bankruptcy. By §67, sub.c, however, such liens for taxes 'on personal property not accompanied by possession of such property' are postponed to the first two priorities of §64, sub.a, supra, even though valid under §67, sub.b, unless they have been enforced by sale before bankruptcy. . . ." (Italics supplied)

In In re Lustron Corp., supra it was said (p. 794):

"The various provisions of the Act reflect a well coordinated general plan for the accomplishment of equal distribution of the bankrupt's property amongst the bankrupt's creditors. The trustee, as the hand of the court, collects the assets, protects them, and brings them before the court for final distribution; he is trustee for all who have interests, according to those interests . . . Once a petition has been filed, the court's exclusive and paramount jurisdiction extends to all the bankrupt's property, except as otherwise provided in the Act. . . . Upon the filing of a petition the custody of the bankruptcy court attaches over all the property in its actual or constructive possession. . . ." (Italics supplied)

This Court has held with reference to another provision of the revenue laws--the predecessor to Section 3672 of the 1939 Internal Revenue Code--that it must be construed according to its terms. In United States v. Beaver Run Coal Co., 99 F. 2d 610 (1938) [38-2 USTC ¶9540], ⁷ where the United States had not filed notice of its lien in accordance with the requirements of the statute, we said with respect to the failure to do so (pp. 612-613):

"Notwithstanding its failure to comply with the requirements of the very act creating its lien, the United States contends its lien is entitled to priority in this case.

"This contention cannot be sustained. Whether a statute creating a lien is to be given a liberal or a strict construction, it is well established that "the character, operation and extent of the lien must be ascertained from the terms of the statute which creates and defines it, and the lien will extend only to persons or conditions provided for by statute, and then only where there has been at least a substantial compliance with all the statutory requirements.' . . . Positive legislative enactments prescribing conditions essential to the existence and preservation of a statutory lien cannot be disregarded. . . .

"It is a well established doctrine that a clear, unambiguous statute must be literally construed. . . ." (Italics supplied) ⁸

The majority's holding here that a "demand" made subsequent to bankruptcy "relates back to the date of assessment" and thus meets the requirements of Section 3670 which requires that a "demand" must be made in order for a tax lien to accure is in direct conflict with our express ruling in In re Lambertville Rubber Co., 111 F. 2d 45 (1940). We there held that there must be, ab initio, a compliance with the provisions of the revenue statutes creating tax liens in order for the latter to inure.

In that case the Commissioner had made an assessment for taxes due the United States but it was not received by the Collector of the district in which the taxpayer maintained its office or place of business. Later an involuntary petition in bankruptcy was filed against the taxpayer and a trustee was appointed. He paid the amount due the United States ⁹ and it later developed that the assets of the bankrupt estate were insufficient to meet expenses of admin istration. The court below refused to surcharge the trustee with the tax payment stated. We reversed. In doing so Chief Judge Biggs, speaking for the Court, stated (p. 48):

". . . Nor may it be contended that the claim of the United States was a lien upon the property of the debtor. R. S. §3186, May 29, 1928 , c. 852, Sec. 613, 45 Stat. 875, 26 U. S. C. A. Int. Rev. Code §3671, provides that the lien of a tax due the United States shall arise when the assessment list is received by the collector. The record of the case at bar is devoid of any evidence that an assessment list including this item of tax was ever received by the collector of the district in which the debtor maintained its office or place of business. It follows that the claim of the United States was entitled to priority simply as provided by Section 64. . . ."

With respect to the district court's citation of Section 67b of the Bankruptcy Act as permitting tax claims of the United States to be "perfected" after bankruptcy, it was said (p. 49):

". . . The District Court refused the surcharge because it was of the opinion that since the United States and the State of New Jersey could have perfected their liens their claims must be treated as if they had done so. We cannot approve such a principle. A tax lien is created by doing certain acts provided by statute. If those acts are not accomplished, no lien comes into being." (Italics supplied)

We adhered to the doctrine expressed in Freeman v. Mayer, 253 F. 2d 295 (1958) where we held that proceeds of collection of tax obligations by the Collector of Internal Revenue were subject to priorities of the Bankruptcy Act. In this case, following the filing of a bankruptcy petition, the Collector collected from certain of the bankrupt's creditors sums due the bankrupt at the time of bankruptcy "and not paid for at the time the Collector levied upon all of Brokol's [bankrupt's] personal property and closed its establishment." The question presented was "whether the taxing authorities may keep this money or whether they must surrender it to the trustee in bankruptcy." Our answer was that the trustee in bankruptcy, under Section 67, sub.c, of the Bankruptcy Act, was entitled to the funds so collected by the Collector because of his failure to give notice to the bankrupt's creditors from whom collection was made that "a levy is being made upon that which he [bankrupt] owes, or the service of appropriate notice upon the debtor purporting to appropriate the debt to the satisfaction of the tax lien."

The majority's holding in the instant case that "demand" made after bankruptcy may be antedated to such bankruptcy nullifies Section 64a(4) of the Bankruptcy Act. Under that Section, when bankruptcy proceedings have been instituted, tax claims of the United States which do not have a lien status at the time the bankruptcy petition is filed are not eligible to any recovery other than that granted by the Bankruptcy Act which specifies a fourth priority among general creditors after the payment of any liens which are valid against the trustee.

There the government's claims in the second category--assessments made prior to bankruptcy but as to which no "demand" was made prior to bankruptcy--did not have a lien status under the plain terms of Section 3670 of the Internal Revenue Code of 1939 which provide that in order to confer a lien status upon an assessment there must be a "demand" for payment of the assessment and a "neglect or refusal to pay" such assessment.

The majority, it may be noted parenthetically, has given no consideration to the statutory requirement of "neglect or refusal" to pay, and here it is obvious that since no "demand" was made for payment of the assessment prior to bankruptcy there was no "neglect or refusal" to pay on the part of the bankrupt taxpayer.

[Summary of Dissent]

The sum of my view may be stated as follows:

Section 3670 of the Internal Revenue Code of 1939 specifically provides that a lien for taxes accrues to the United States only after a "demand" for payment is made on the "person liable to pay" and he "neglects or refuses to pay", and further, that the lien when it accrues "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."; in the instant case there was no "demand" for payment on the taxpayer, the "person liable to pay", prior to bankruptcy, nor any neglect or refusal on his part to pay, and consequently a tax lien did not accrue against property "belonging" to him and on the filing of the petition in bankruptcy the exclusive custody of the bankruptcy court attached to all of the bankrupt taxpayer's property and it being in "custodia legis" the property no longer "belonged" to the bankrupt taxpayer and accordingly there could no longer be a compliance with the provision of Section 3670 that the tax lien accrued "upon all property . . . belonging to such person."

Otherwise stated, bankruptcy acts as a "cut-off" to the making of a "demand" for payment on the "person liable to pay"; or the accrual of a tax lien against property "belonging to such person", and further, since the terms of Section 3670 are "clear and unambiguous" and its provisions extend only to the "person liable to pay" and "property belonging" to him, the notice of claims filed with the Referee, even if they can be regarded as a "demand", could not retroactively accord the status of a tax lien to the assessment on which they were based.

In Goggin v. California Labor Div., 336 U. S. 118, 125-126 (1949) [49-1 USTC ¶9142] it was explicitly held that the government's rights against the bankrupt estate are "determined at the time of bankruptcy". In doing so it cited Everett v. Judson, 228 U. S. 474, 479 (1913) where it was said:

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

As stated in Collier on Bankruptcy, 14th ed. (1958) Vol. 4, para. 67.26, page 277:

"The general rule in bankruptcy is that the filing of the petition freezes the rights of all parties interested in the bankrupt estate."

United States v. Ettelson, 159 F. 2d 193 (7 Cir. 1947) [47-1 USTC ¶9137], cited by the majority, where a claim for unpaid taxes filed with a state Probate Court against the estate of a deceased taxpayer, was treated as the equivalent of the "demand" required by Section 3670, is totally inapposite. In that case bankruptcy had not intervened prior to the "demand".

[Priority of Claims in Bankruptcy]

Assuming that I am in error in my view that the United States, for the reasons aforementioned, did not have any lien status with respect to its claim in the second category, it seems to me incontrovertible that these claims, for a further reason, would be subordinated to expenses of admin istration and preferred wage claims in accordance with the provisions of Section 64(a) pursuant to Section 67c of the Bankruptcy Act.

Section 67c(1) provides that ". . . statutory liens, including liens for taxes or debts owing to the United States or to any State or subdivision thereof, on personal property not accompanied by possession of such property . . . shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 64. . . ." (Italics supplied).

Section 64(a)(1) relates to expenses of admin istration and Section 64(a)(2) relates to preferred wage claims.

In view of the fact that in the case at bar the schedules filed by the bankrupt disclosed that all its assets were "personal property" and the United States makes no contention that it had "possession" of such property at the time the bankruptcy petition was filed, the provisions of Section 67c(1) and Section 64(a)(1)(2) are applicable.

We specifically so held in In re Pennsylvania Central Brewing Co., 114 F. 2d 1010 (1940), cert. den. 312 U. S. 685. Speaking for the Court, Chief Judge Biggs there said (p. 1012):

"We are of the opinion that Congress has elected to treat personal property and real estate upon different bases. This is clearly one of the purposes of Section 67, sub. c. If there is a statutory lien upon personal property not accompanied by possession . . . such liens are postponed in payment to expenses of admin istration and wage claims. If however, the statutory lien is upon real estate, it is not postponed but is payable strictly pursuant to the provisions of Section 67, sub. b." ¹⁰ (Italics supplied)

In accord is the following statement in Plump, Federal Tax Collection and Lien Problems (Second Installment), 13 Tax L. Rev. 459, 488 (1958):

"As against personal property, however, a federal tax lien not enforced by seizure or sale before bankruptcy is subordinated to admin istration expenses and preferred wage claims."

What has been said on this score also applies to the claims of the United States in the first category, where assessment and demand were made prior to bankruptcy, since assuming arguendo, that these claims had a lien status as held by the majority, such lien merely attached to cpersonal property not accompanied by possession", and consequently must be subordinated to the payment of expenses of admin istration and preferred wage claims.

It is true that what has been said as to the subordination of the government's claims in the first and second categories to expenses of admin istration and preferred wage claims may be considered academic in view of the circumstance here that the admin istration expenses and preferred wage claims were actually paid prior to the government's claims, but the fact remains that the majority's opinion accorded to the government's claims a top priority over the expenses of admin istration and preferred wage claims, and its ruling in this respect may be cited as a precedent in other cases. That that is so is evident from the majority's holding "that the United States is entitled to previal against the trustee and the Borough of East Newark on the issues presented." (Italics supplied).

The District Court, as the majority points out, stated in its opinion, 167 F. Supp. at p. 403 that "Its [the United States'] lien is valid and is entitled to payment out of available proceeds prior to a distribution to priority claimants." Further, the District Court expressly stated: "The liens of the Government are valid as against the trustee in each case." (Italics supplied). The Order of the District Court, under appeal, is in consonance with its opinion, and the majority has expressly affirmed it.

There remains this to be said.

The majority's holding gives a priority to the government's tax claims in categories 1 and 2 over the tax claims of the Borough of East Newark. Since in my view both the government's claims and the Borough's tax claims come within the fourth priority as established by Section 64(a)(4) they must share pro rata in the funds available for distribution.

That that is so was settled in Missouri v. Ross, 299 U. S. 72 (1936) where it was said (pp. 74-75):

"The intention clearly was to put these various governmental units in respect of their taxes upon terms of equality with one another. Since Congress was at pains to set forth the order of priority in distinct paragraphs under separate numerals, we are unable to reach any other conclusion. If it had been intended to establish priorities as among the governmental units named in the order in which they appear in the 6th paragraph [now 64a(4)], the very structure of §64 b plainly suggests that each would have appeared under a separate numeral instead of all being grouped under a single numeral."

As Collier on Bankruptcy para. 64.401 puts it:

"General Analysis of §64a(4).

"All tax claims are placed on an equal footing within §64, and no preference may be given to federal over state taxes, or to state over municipal taxes; if the estate is insufficient to pay all taxes in full, a pro rata distribution is contemplated."

For the reasons stated I would reverse the Order of the District Court and remand with directions to affirm the Order of the Referee.

Circuit Judge Hastie joins in this dissent.

¹ Act of July 7, 1952 c 579, 66 Stat. 429. 11 U. S. C. A. §110(c).

² The precessor of Section 70c of the 1952 Act.

³ Sitting by special designation.

⁴ In Re Sayre Village Manor, 120 F. Supp. 215 (D. C. N. J. 1954) it was held that a bankruptcy trustee is a "judgment creditor holding a lien," under Section 70c as amended in 1952.

⁵ In Hoffman v. Cream-O-Products, which incidentally, construed Section 70c prior to its 1950 amendment, the court said at page 650:

"That section [70c], as has been repeatedly held, confers the status of an ideal lien creditor on the trustee, whether such a creditor exists or not . . .."

⁶ As the majority put it:

"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."

⁷ The spokesman for the majority, Chief Judge Biggs, was a member of the panel in this case.

⁸ To the same effect see Miller v. Bank of America, N. T. & S. A., 166 F. 2d 415, 417 (9 Cir. 1948) [48-1 USTC ¶9185] where it was held that Sections 3670 and the related Sections 3671 and 3672 are "clear and unambiguous" and must be "literally construed."

⁹ The trustee also paid certain unemployment compensation tax claims of the State of New Jersey .

¹⁰ See also California State Department of Employment v. United States, 210 F. 2d 242 (9th Cir. 1954) [54-1 USTC ¶9218].

 

 

[60-1 USTC ¶9340]Ellis Campbell, Jr., and Chester Usry, District Directors, Internal Revenue Service, Appellants v. Lema Parker Bagley, Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 17854, 276 F2d 28, 3/15/60, Aff'g District Court, 59-1 USTC ¶9384, 175 F. Supp. 120

[1954 Code Sec. 6323]

Priority of liens: Mortgagee-purchaser's lien recorded first: Situs of personal property: Mortgagee or purchaser.--A delinquent taxpayer's mother obtained and recorded in Louisiana a chattel mortgage upon well rigs owned by the taxpayer, who resided in Texas, and purchased the property through cancellation of the mortgage before the Government filed notice of its tax lien against the taxpayer in Louisiana, where the property was located. The mother had a valid title to the property and was entitled to an injunction restraining the Government from seizing and selling it for the son's unpaid taxes. The situs of tangible personal property not "immediately connected with the person of the owner" is the place where it is kept and used, and not necessarily the place where the owner is domiciled. The mother was a "mortgagee" and "purchaser" within the meaning of Sec. 6323, since, under Louisiana law, a mortgage given to secure an antecedent debt is valid and the transfer of mortgaged property by the owner in payment of the mortgage debt is a valid consideration.

Meyer Rothwacks, Rita E. Hauser, Fred E. Youngman, Lee A. Jackson, A. F. Prescott, Charles K. Rice, Assistant Attorney General, Department of Justice, Washington, D. C., and T. Fitzhugh Wilson, United States Attorney, Shreveport, La., for appellants. Malcolm E. Lafargue, Shreveport , La. , for appellee.

Before JONES, BROWN and WISDOM, Circuit Judges.

[Facts]

JONES, Circuit Judge:

In this case the appellants, one the District Director of the Internal Revenue Service of Texas and the other the District Director of the Internal Revenue Service of Louisiana, are claiming a lien, and a priority of lien, and the right to enforce a lien on personal property, incident to the collection of tax revenue owing to the United States. The appellee, Lema Parker Bagley, is a widow whose husband died in 1953. There are three Bagley children. C. H. Bagley is the oldest. At all times here material he lived at Waskom, in Harrison County , Texas , just west of the Texas-Louisiana boundary. The next of the children is John E., who lived in Shreveport , Louisiana , as did his mother. Shreveport is in Caddo Parish, which lies east of and adjoining Harrison County , Texas . The third son, Gary Bagley, was not a participant in the activities out of which this litigation arose. The appellee's husband had been in the oil well drilling business. At the time of his father's death, C. H. Bagley was living in Texas and was in the oil well servicing business. John Bagley took over the operation of the father's business. Mrs. Bagley was without business experience and John Bagley undertook the management of her business affairs. Neither John Bagley nor his mother had anything to do with the business of C. H. Bagley.

At various times in 1954 and 1955 Mrs. Bagley made loans to C. H. Bagley. These loans aggregated $19,500. C. H. Bagley then owned four drilling or well servicing rigs, all of which were mortgaged. In October of 1957, C. H. Bagley sold all of the well servicing rigs and equipment except that involved in this case and with a portion of the proceeds paid off the mortgage indebtedness on the rig and equipment here involved. On December 19, 1957 , C. H. Bagley executed a chattel mortgage in the amount of $20,000 to his mother. This mortgage was given at the request of John Bagley who gave a mortgage to his mother about the same time as security for loans made by her to him. The mortgage of C. H. Bagley to his mother covered the remaining drilling rig and equipment owned by him. The rig and equipment was then located partly in Winn Parish , Louisiana , and partly in Union Parish, Louisiana . The mortgage was recorded in Caddo Parish on January 2, 1958 , and in Winn Parish on April 17, 1958 . C. H. Bagley's insurance was cancelled. He found himself out of business. By arrangement with John Bagley who acted for the mother, C. H. Bagley gave a bill of sale, on April 22, 1958 , to his mother of the mortgaged rig and equipment, all of which was then in Winn Parish , Louisiana . "The sale of the rig and equipment" was, as stated in the district court's findings, "C. H. Bagley's method of repaying her what he had borrowed from her." C. H. Bagley has not attempted to use or exercise any control over the rig and equipment since the execution of the instrument of transfer. The bill of sale was recorded on April 22, 1958 , in Winn Parish, where all of the property described in the mortgage and the bill of sale was then physically present. The rig and equipment was then used for about a week by John Bagley.

C. H. Bagley was indebted to the United States for taxes, mostly withholding taxes. He had made an arrangement to work out his tax delinquency by installment payments. He failed to perform his agreement and the Internal Revenue Service filed a notice of lien in Harrison County , Texas , on January 24, 1958 , for withholding taxes owing by C. H. Bagley in an amount of somewhat in excess of forty-five hundred dollars. Another federal tax lien notice for the same items, and for some federal unemployment taxes amounting to about a hundred and fifty dollars was filed in Winn Parish , Louisiana , on May 19, 1958 . On May 6, 1958 , a notice of levy was served on John Bagley and he paid $250 rental to the Government agent. On June 27, 1958, the appellants, acting under a warrant of distraint, seized and took custody of the rig and equipment which was then in Winn Parish, Louisiana, for the delinquent taxes of C. H. Bagley. Such are the facts upon which our controversy is predicated. For the most part the facts are uncontroverted. To the extent of disagreement the findings of the district court, in all instances, are supported by substantial evidence. Mrs. Bagley brought suit against the District Directors to enjoin the sale of the rig and equipment and seeking to have the warrant of distraint quashed. The defendants moved to dismiss. They first asserted that the suit is one to restrain the collection of taxes and as such is prohibited by 26 U. S. C. A. (I. R. C. 1954) §7421(a). They next contended that as they neither resided in nor had been served within the jurisdiction of the court, there was no power to grant the relief sought. The motion was denied. The defendants answered, admitting, denying or averring lack of knowledge of the allegations of the complaint. As a second defense in their answer the appellants again set up the fact of their residence outside of the judicial district of the court and the absence of service upon them in the district, and again said that the court had no jurisdiction to enter an injunction against them. Trial was had, judgment was given for Mrs. Bagley enjoining the District Directors from selling the property, and cancelling the tax liens as to the drilling rig and equipment. The District Directors appeal.

[Situs of Tangible Personalty]

The first matter we consider is the effect of the filing of the notice of lien in Harrison County , Texas , as to the tangible personal property which was then physically located in Winn Parish , Louisiana . The statute gives the Government a lien ¹ and provides,

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

"(1) Under State or Territorial Laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; * * *" 26 U. S. C. A. (I. R. C. 1954) §6323(a)(1).

The Government's position is that the situs of tangible personal property is that of the domicile of the owner. Commenting upon such doctrine, the Supreme Court has said:

"No general principles of law are better settled, or more fundamental, than that the legislative power of every State extends to all property within its borders, and that only so far as the comity of that State allows can such property be affected by the law of any other State. The old rule, expressed in the maxim mobilia sequuntur personam, by which personal property was regarded as subject to the law of the owner's domicil, grew up in the Middle Ages, when movable property consisted chiefly of gold and jewels, which could be easily carried by the owner from place to place, or secreted in spots known only to himself. In modern times, since the great increase in amount and variety of personal property, not immediately connected with the person of the owner, that rule has yielded more and more to the lex situs, the law of the place where the property is kept and used. Green v. Van Buskirk, 5 Wall. 307, and 7 Wall. 139; Hervey v. Rhode Island Locomotive Works, 93 U. S. 664; Harkness v. Russell, 118 U. S. 663, 679; Walworth v. Harris, 129 U. S. 355; Story on Conflict of Laws, §550; Wharton on Conflict of Laws, §§ 297-311. As observed by Mr. Justice Story, in his commentaries just cited, 'although movables are for many purposes to be deemed to have no situs, except that of the domicil of the owner, yet this being but a legal fiction, it yields, whenever it is necessary for the purpose of justice that the actual situs of the thing should be examined. A nation within whose territory any personal property is actually situate has an entire dominion over it while therein, in point of sovereignty and jurisdiction, as it has over immovable property situate there.'" Pullman Car Co. v. Pennsylvania , 141 U. S. 18, 22, 11 S. Ct. 876, 35 L. Ed. 613.

Again, discussing the situs of tangible personal property, the Supreme Court said:

"We submit that it is the law that, while the transfer of intangible personalty can be taxed at the domicile of the owner, either inter vivos or upon death, that is true only because of the fiction mobilia sequuntur personam. Originally this theory applied to tangibles as well as to intangibles, but it has long since passed away as to anything except intangibles. This, because fiction, must yield to fact. These tangible articles, pictures, furniture, household stores, cows, horses, agricultural implements, have a real, physical existence and necessarily have a situs as surely as buildings and lands have. Their situs is in New York and Massachusetts , not in Pennsylvania . Therefore, this tax cannot be sustained upon authority of the maxim mobilia sequuntur personam, either under the decisions of this Court or under the decisions of the Supreme Court of Pennsylvania." Frick v. Pennsylvania , 268 U. S. 473, 477, 45 S. Ct. 603, 69 L. Ed. 1058. See City Bank Farmers Trust Co. v. Schnader, 293 U. S. 112, 55 S. Ct. 29, 79 L. Ed. 228.

Another decision reflects and defines the departure from mobilia sequuntur personam, the Court stating:

"This ancient maxim had its origin when personal property consisted, in the main, of articles appertaining to the person of the owner, such as gold, silver, jewels and apparel, and, less immediately, animals and products of the farm and shop. Such property was usually under the direct supervision of the owner and was often carried about by him on his journeys. Under these circumstances, the maxim furnished the natural and reasonable rule. In modern times, due to the vast increase in the extent and variety of tangible personal property not immediately connected with the person of the owner, the rule has gradually yielded to the law of the place where the property is kept and used. Pullman's Car Co. v. Pennsylvania, 141 U. S. 18, 22; Eidman v. Martinez, 184 U. S. 578, 581; Union Transit Co. v. Kentucky, supra, 206. But in respect of intangible property, the rule is still convenient and useful, if not always necessary; and it has been adhered to as peculiarly applicable to that class of property." First National Bank v. Maine , 284 U. S. 312, 329, 52 S. Ct. 174, 76 L. Ed. 313. Cf. Vogel v. New York Life Ins. Co., 5th Cir., 1932, 55 F. 2d 205, cert. den. 287 U. S. 604, 53 S. Ct. 9, 77 L. Ed. 525.

The law of the actual physical situs governs the capacity to convey and the validity of conveyances of tangible personal property. It fixes the nature of interests conveyed in tangibles. Restatement Conflict of Laws, §255-258. Cf. 70 Harv. L. Rev. 582-584. The District Directors quote to us statements of this Court in a prior decision where it was said:

"The [federal] statute, however, does not require a tax lien to be filed in every county to which personal property may be carried in order to be enforceable against a subsequent mortgagee or pledgee. The requirement that notice of lien be filed in the office in which the filing of such notice is authorized by the law of the state in which the property subject to the lien is situated is satisfied, so far as is pertinent here, when such notice is filed in the county of the taxpayer's domicile. See Investment & Securities Co. v. United States, 9 Cir., 140 F. 2d 894 [44-1 USTC ¶9210]. It is the transitory nature of personal property which requires the application of this rule. To hold otherwise, would be to overlook the practical necessities of the situation and would require the Collector to file tax liens in every jurisdiction to which the taxpayers may at any time remove the property. We do not think this result was intended by the statute, nor do the laws of Texas relating to the recording of liens against personal property require a different result." Grand Prairie State Bank v. United States, 5th Cir., 1953, 206 F. 2d 217 [53-2 USTC ¶9481]. See 13 Tax L. Rev. 459, 462.

This case involved diamonds. From "gold and jewels, which could be easily carried from place to place, or secreted in spots known only to himself", ² stemmed "the maxim, mobilia sequuntur personam, by which personal property was regarded as subject to the law of the owner's domicil." ³ Diamonds are of that kind of personal property "immediately connected with the person of the owner" which still may have a legal situs at the domicile of the owner. ⁴ The case of Investment & Securities Co. v. United States, 9th Cir., 1944, 140 F. 2d 894 [44-1 USTC ¶9210], which is cited in the Grand Prairie opinion, and Marteney v. United States, 10th Cir., 1957, 245 F. 2d 135 [57-1 USTC ¶9670], which cited Grand Prairie, dealt with intangible personal property. The situs of this type of property is, for most purposes, regarded as being at the domicile of the owner. First National Bank v. Maine , supra; Vogel v. New York Life Insurance Co., 5th Cir., 1932, 55 F. 2d 205, cert. den. 287 U. S. 604, 55 S. Ct. 9, 77 L. Ed. 525; 15 C. J. S. 928, Conflict of Laws §18 c. It follows that the notice of lien filed in Harrison County , Texas , was not a compliance with the requirement that the notice be filed in the State where the property here involved was situated.

[Validity of Title]

Having decided that the Texas filing of a notice of lien was ineffective to give it any validity against mortgagees or purchasers, we do not consider whether the recording of the Bagley mortgage in Caddo Parish gave it priority, since the mortgage was recorded in Winn Parish, and the bill of sale was also there recorded, before the Government's notice of lien was placed of record in that Parish. The District Directors urge that because the Bagley mortgage was given to secure a prior indebtedness, and the bill of sale was executed in satisfaction of the mortgage indebtedness, Mrs. Bagley was not a purchaser or mortgagee within the meaning of, or entitled to the protection of Section 6323. Whether a claimant has a valid mortgage or has acquired a valid title by purchase are questions to be betermined by the law of the state. United States v. Winnett, 9th Cir., 1947, 165 F. 2d 149 [48-1 USTC ¶9115]. Under the law of Louisiana , a pre-existing debt is sufficient consideration for the execution of a mortgage and a mortgage given to secure an antecedent debt is valid. So too, the transfer of mortgaged property by the owner as payment of the mortgage indebtedness is a valid consideration. These propositions are established by the Supreme Court of Louisiana in Provost v. Harrison, 205 La. 21, 16 So. 2d 892. The Government suggested that the transactions between C. H. Bagley and his mother were not bona fide. The district court held otherwise and its finding is sustained by the record.

The contention is made by the appellants that the district court did not have jurisdiction to grant the relief sought and that, since neither of the defendants had an official residence in the judicial district, they were improperly sued in that district. The district court properly resolved these issues against the appellants. As to the first proposition, this Court has recently said:

"There is no longer any doubt but that where a District Director of Internal Revenue has levied upon property belonging to one person in order to satisfy the tax liability of another, the true owner may obtain from the U. S. district court an injunction against the district director to prevent the sale of such property, and that, if the owner is not the taxpayer involved, such relief is not prohibited by 26 U. S. C. A. §7421." Maule Industries, Inc. v. Tomlinson, 5th Cir., 1957, 244 F. 2d 897 [57-1 USTC ¶9654].

Cited in support of this principle were Tomlinson v. Smith, 7th Cir., 1942, 128 F. 2d 808 [42-2 USTC ¶9540]; Raffaele v. Granger, 3rd Cir., 1952, 196 F. 2d 620 [52-1 USTC ¶9321]; and Holland v. Nix, 5th Cir., 1954, 214 F. 2d 317 [54-2 USTC ¶9462].

As to the second point, the venue for such a suit is properly laid in the district court serving the geographical area wherein the property is situated. Seattle Association of Credit Men v. United States, 9th Cir., 1957, 240 F. 2d 906 [57-1 USTC ¶9402]; Raffaele v. Granger, supra. The property which was the subject matter of the controversy was situated in Winn Parish in the Western District of Louisiana where the suit was brought.

[Decision]

We find no error in the proceedings in the district court. Its judgment is

AFFIRMED.

¹ 26 U. S. C. A. (I. R. C. 1954) §6321.

² Pullman Car Co. v. Pennsylvania , supra.

³ Id.

⁴ First National Bank v. Maine , supra.

 

 

[59-2 USTC ¶9621] United States of America , Appellant v. Elta Mae Christensen, etc., et al., Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 16,262, 269 F2d 624, 8/3/59, Vacating and remanding unreported decision of the District Court

[1939 Code Secs. 3670, 3671, and 3672--similar to 1954 Code Secs. 6321, 6322, and 6323(a)]

Priority of liens: Prior mortgagee's payment of local taxes after Federal tax lien filed.--Where the mortgagee of property of a delinquent taxpayer paid city and county taxes on the property six years after notices of Federal tax liens were filed, the District Court erred in awarding priority to the mortgagee for the local taxes paid over the Federal tax liens. The Federal tax liens were first in time.

Charles K. Rice, Assistant Attorney General, Carolyn R. Just, A. F. Prescott, Lee A. Jackson, Fred E. Youngman, Department of Justice, Washington, D. C., Jack D. H. Hays, United States Attorney, Ralph G. Smith, Jr., Assistant United States Attorney, Phoenix, Ariz., for appellant. Walter K. Tweedy, Phoenix , Ariz. , for appellee.

Before STEPHENS and HAMLEY, Circuit Judges, and ROSS, District Judge.

ROSS, District Judge:

The Federal sovereign is not to be frustrated in the collection of its revenue by the tax-priority laws of a half a hundred different States. Once a Federal tax lien has been duly recorded, it becomes senior in right to the claims of a prior mortgagee who has paid city or state taxes subsequently to the assessment of the Federal taxes and the filing of notices of liens therefor.

The ancient maxim, "The first in time is the first in right" has, in such a case, a peculiarly salutary application.

1. Statement of the Case

On December 12, 1955, the appellant filed a complaint in the United States District Court of Arizona for the collection of Federal income withholding taxes, Insurance Contributions Act taxes, Unemployment Act taxes, so-called cabaret taxes, and a coin-operated amusement and gaming device tax, together with penalties and interest, assessed against Elta Mae Wainscott Christensen (sometimes spelled in the records and briefs "Christenson") and C. W. Wainscott. The suit also sought to establish and foreclose the appellant's liens against certain real property owned by Elta Mae Christensen, hereinafter Elta Mae, for the satisfaction of such unpaid taxes. Other defendants were Leonard W. Christensen, Elta Mae's present husband; Felix Bertino, holder of a mortgage upon the real property; the State of Arizona; Maricopa County; Phoenix; certain Arizona tax officials; and Joseph P. Goldstein (sic), holder of a certificate of purchase for city taxes.

It is agreed that there is now due and owing from the appellees to the appellant Federal taxes aggregating $10,720.14. The last notices of liens covering the assessments of those taxes were filed on January 19, 1950 , three days after the Commissioner of Internal Revenue made the final assessment.

On November 22, 1943 , prior to the assessment of the above taxes Wainscott and Mrs. Christensen his former wife, executed their note in favor of Felix Bertino, for $4300, secured by a mortgage on the above-mentioned real property owned by Elta Mac. There was due and owing on the note the sum of $1,607.29, plus interest.

On January 3, 1956 , Bertino "redeemed Certificate of Purchase No. 460 for the City of Phoenix real property taxes in the sum of $196.40, and on the same date he paid delinquent taxes due on the property in the respective amounts of $223.63 and $116.73."

Some time in 1948 Elta Mae filed with the proper officials of Arizona a designation of homestead, not here in question, designating the above-mentioned real property as her homestead.

The District Court concluded, inter alia, that the appellant is entitled to have its lien against the property in issue foreclosed, notwithstanding taxpayer Christensen's claim of homestead; that Elsie Bertino, executrix of the estate of Felix Bertino, now deceased, has a valid mortgage upon the described premises that is prior and superior to the appellant's liens for Federal taxes; and that because of the above payments of taxes due on the property in the amount of $536.72, she has a valid lien upon the property in that amount, which is prior and superior to the appellant's lien for unpaid taxes.

On July 1, 1958, judgment was entered by the District Court, in favor generally of the appellant, but holding that Elsie Bertino, executrix of the estate of Felix Bertino, deceased, was "entitled to first satisfaction from the proceeds of the foreclosure sale, in the amount of $536.72, plus interest, . . . and the amount of $1,607.29, plus interest," etc.

Notice of Appeal was filed on August 27, 1958 .

On December 8, 1958 , an Assistant Attorney General of the United States filed a "Statement of Point to be Relied Upon", as follows:

"The District Court erred in holding and deciding that the claim of a prior mortgage, representing amounts paid as local taxes with respect to the mortgaged property subsequent to the assessment and filing of notices of federal tax liens, is entitled to priority over such federal tax liens."

This appeal is from that part of the judgment of the District Court awarding to the mortgagee a prior and superior lien for $536.72 paid as delinquent city and county taxes on the property after the Federal tax liens arose and were recorded.

2. The Appellant's Argument

In this suit to foreclose its tax liens on property subject to a prior mortgage, the court below entered judgment for the appellant for the full amount of its claim, but in addition to giving priority to the mortgage for the amount of his mortgage claim, with interest, the court below also gave priority to his claim for amounts paid as local taxes of the mortgagor assessed against the mortgaged property.

The local taxes assessed against the mortgaged property were the liability of the mortgagor, but were paid by the mortgagee under a provision of the mortgage agreement permitting him to make such payments and add the amounts paid, to the mortgage indebtedness. Such taxes became a lien upon the mortgaged property long after the tax liens of the United States had been recorded, and hence as liens against the mortgaged property they were inferior to the appellant's tax liens.

Since the Federal tax liens were prior and superior to the local tax liens, the mortgagee could not, upon the payment of such taxes, acquire any right to priority therefor under any theory of subrogation. His lien as a prior mortgagee, so far as the Federal tax liens were concerned, was limited to the amount of his lien as such mortgagee at the times the notices of Federal tax liens were filed. The Federal tax lien is paramount to any advances made subsequently to such notice.

Since the local tax liens were later in time and inferior in right to the tax liens of the appellant, and since they were paid by the mortgagee after the Federal tax liens had been recorded, the only basis on which priority for their payment could be awarded to the mortgagee would be by the doctrine of relation back. This doctrine, however, is not applicable in Federal tax cases, and cannot be availed of to defeat the priority of a Federal lien for taxes.

3. The Appellee's Argument

The mortgage is a contract between mortgagor and mortgaee as of the date of its execution. It was given to secure the mortgagee for moneys advanced in consideration of any and/or all of the rights and duties contained in the mortgage contract. The mortgage contract should not be broken down into separate parts.

The rights of the mortgagee to repayment for moneys advanced to pay delinquent taxes not paid by the mortgagor under the terms of the mortgage are inseparable from the lien of the original mortgage for repayment of principal and interest thereon.

In diversity cases, the Federal courts must now apply state law in defining state-created rights, obligations, and liabilities. Under Arizona law, the mortgagee, by paying delinquent taxes on the mortgaged property, not paid by the mortgagor, succeeded to the rights of the City and County. Under Arizona law, as well as under the terms of the mortgage agreement, the mortgagee acquired a further lien upon the mortgaged property that was paramount to all other claims against the mortgaged property, including that of the appellant. The money advanced by the mortgagee to pay the deliquent taxes that the mortgagor failed to pay, constituted a lien prior and superior to that of the appellant.

4. The Relative Priority of a Federal Tax Lien Is Always a Federal Question

The appellees' basic misconception of the instant controversy is clearly revealed at the very outset of their brief, in which they assert:

"That in diversity cases, the Federal Courts must now apply State law in defining State-created rights, obligations and liabilities. That under the laws of the State of Arizona, the mortgagee by paying delinquent taxes on the mortgaged property, not paid by the mortgagor, succeeded to the rights of the City and County and that under State law and the terms of the mortgage agreement, the mortgagee thereby acquired a further lien upon the mortgaged property, which was paramount to all other claims against the mortgaged property, including that of the United States." (Italics supplied.)

The above passage consists of a half-truth and a half-fallacy. We unreservedly agree with the appellees' statement that "in diversity cases, the Federal Courts must now apply State law in defining State-created rights, obligations and liabilities."

So much for the half-truth. We turn now to the fallacious half of the apppellees' statement: ". . . under State law . . . the mortgagee thereby acquired a further lien upon the mortgaged property, which was paramount to all other claims against the mortgaged property, including that of the United States ."

In Bank of Nevada v. United States , 9 Cir., 1957, 251 Fed. (2d) 820, 824 [58-1 USTC ¶9228], the late Judge Lemmon, of this Court, citing and quoting many cases, said:

"The Supreme Court has repeatedly and emphatically stated that Federal tax liens and the provisions for their collection are strictly Federal and strictly statutory." ¹

Furthermore, the Supreme Court has unequivocally stated that the relative priority of Federal tax liens as against State liens is always a Federal question.

In United States v. Acri, 1955, 348 U. S. 211, 213 [55-1 USTC ¶9138], Mr. Justice Minton used the following emphatic language:

"The relative priority of the lien of the United States for unpaid taxes is (citing cases) always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this Court. (Cases cited.)" (Italics supplied.)

5. Payment of State Taxes on Mortgaged Property by a Prior Mortgagee After Federal Tax Liens Are Recorded Does Not Give the Mortgagee a Lien for Such Local Taxes Superior to the Appellant's Prior Tax Liens

We have seen that the defendant Bertino on January 3, 1956 , redeemed a certificate of purchase for real property taxes and paid delinquent taxes due on the same property. That was almost exactly six years after the final notice of Federal tax assessment lien had been filed by the Collector of Internal Revenue at Phoenix .

Section 3671 of the Internal Revenue Code of 1939 provides that "the lien shall arise at the time the assessment list was received by the collector." Section 3672 states that "Such lien shall not be valid against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector." As we have seen, in the instant case the final notice was filed by the collector on January 19, 1950 .

Even more than a century and a quarter ago, the principle of "The first in time is the first in right" was believed by Chief Justice Marshall "to be universal." Rankin v. Scott, 1827, 25 U. S. 177, 179. The Chief Justice expressed the doctrine thus:

". . . a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds . . ."

Section 3670 of the Internal Revenue Code of 1939 reads as follows:

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

Expounding the maxim to which we have referred, with reference to the very provision with which we are here concerned--Section 3670--Mr. Justice Minton, in United States v. New Britain, supra, 347 U. S. at pages 85-86, used the following language:

"This principle is widely accepted and applied, in the absence of legislation to the contrary. (Authorities cited.) We think that Congress had this cardinal rule in mind when it enacted Section 3670, a schedule of priority not being set forth therein. Thus, the priority of each statutory lien contested here must depend on the time it attached to the property in question and became choate." (Italics supplied.)

In the instant case, the final lien "attached to the property in question and became choate" in January, 1950, whereas Felix Bertino, one of the original defendants, redeemed the certificate of purchase and paid the delinquent city and county taxes six years later. ²

6. The Stern and the Bess Cases, Heavily Relied Upon by the Appellees, in Reality Do Not Support Their Position

There has been considerable discussion in the briefs regarding two Supreme Court cases--Commissioner v. Stern, 357 U. S. 39 [58-2 USTC ¶9594], and United States v. Bess, 357 U. S. 51 [58-2 USTC ¶9595]. Both were insurance policy cases, and at the outset obviously not in point. But there are other distinguishing features.

(a) The Stern Case

The assets of the estate of the respondent's husband were insufficient to meet his liability for income tax deficiencies found to have been due before his death. The Commissioner proceeded under Section 311 of the Internal Revenue Code of 1939, which section is not involved in this case. The suit was against the respondent widow as the beneficiary of life insurance policies, which do not figure in the case at bar. The decedent had retained the right to change the beneficiaries and to draw down the cash surrender values. There were no findings that he had paid any of the premiums with intent to defraud his creditors.

Furthermore, there were no findings that the decedent was insolvent at any time prior to his death.

Finally and conclusively, no Federal tax lien had attached. While the opinion does not specifically so state, the absence of a Federal tax lien can be unmistakably inferred from the following statements:

I. The syllabus of the opinion so sets forth.

II. In that case, the Government, there the unsuccessful appellant, inferentially so says, 357 U. S. at page 47:

"The Government, however, argues in its brief, 'Just as in the situation where a tax lien has attached it is held that state law may not destroy that lien, so here,'" etc. (Italics supplied.)

III. In the companion Bess case, the Supreme Court gives us its own gloss of the Stern case, 357 U. S. at page 53:

"We held today in the Stern case that recovery of unpaid federal income taxes from a beneficiary of insurance, in the absence of a lien, can be sustained only to the extent that state law imposes such liability," etc. (Italics supplied.)

From the foregoing, we can see that the appellee is guilty of gross error when, on page 9 of its brief, it assets that in the Stern case the Supreme Court "cites for the first time in any Federal lien case, the decision of Erie R. Co. v. Tompkins." (Italics are the appellees'.)

Stern was simply not a "Federal lien case."

(b) The Bess Case

Why the appellee quotes the Bess case is not clear. Because the controversy there did concern itself with a Federal tax lien under Section 3670 of the Internal Revenue Code of 1939, the Supreme Court affirmed the judgment of the Court of Appeals for the Third Circuit, holding that the beneficiary of certain life insurance policies was liable for Federal income taxes to the extent of the total cash surrender value of the policies.

7. Conclusion

The Court below erred in awarding priority to the mortgagee for amounts paid as city and county taxes, over the appellant's tax liens. The judgment of the District Court is vacated, and the case is remanded to the Court below with directions to allow proper priority in the payment of the tax claims of the appellant.

Vacated and remanded, with directions.

¹ See also United States v. Security Trust and Savings Bank, 1950, 340 U. S. 47, 49 [50-2 USTC ¶9492]; United States v. City of New Britain, 1954, 347 U. S. 81, 84 [54-1 USTC ¶9191]; United States v. Bank of America, 265 Fed. (2d) 862, 866, decided by this Court on February 2, 1959 [59-1 USTC ¶9249], rehearing denied on May 1, 1959 [59-1 USTC ¶9463].

² See also Bank of Nevada v. United States , supra, 251 Fed. (2d) at pages 826-827.

 

 

[58-2 USTC ¶9718] United States of America , Creditor, Appellant v. Arthur T. Wasserman et al., Trustees, et al., Appellees

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 5336, 257 F2d 491, 7/18/58, Vacating and rem'g unreported District Court decision

[1954 Code Sec. 6323]

Lien for taxes: Validity against mortgagees: Bankruptcy: Payment of local taxes as expense of preservation.--In 1957 property was sold in bankruptcy proceedings. The United States had a lien on the property for taxes. The trustees in bankruptcy decided that city real estate taxes for 1957 be paid as an expense of preservation before the proceeds of the sale were applied in payment of lien claims. Held: the taxes should be allocated solely against the fund set aside for the payment of mortgages and not the United States lien. Taxes which were a cost of preservation to the senior lienholders should not be paid by a junior lienholder, here the United States , as to the preservation of whose lien the payment of the taxes was unnecessary.

George F. Lynch, Department of Justice, Washington, D. C. (Charles K. Rice, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, Department of Justice, Washington, D. C., Anthony Julian, United States Attorney, Charles F. Barrett, Edgar L. Kelley, Assistant United States Attorneys, Boston, Mass., were with him on brief), for appellant. Joseph Landis, Boston , Mass. (Arthur T. Wasserman and Wasserman & Salter, were with him on brief), for Arthur T. Wasserman et al., Trustees, appellees. William H. Kerr, Boston, Mass. (William L. Baxter, Corporation Counsel of the City of Boston, Boston, Mass., was with him on brief), for City of Boston, appellee.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

Opinion of the Court

HARTIGAN, Circuit Judge:

This is an appeal by the United States from an order of the United States District Court for the District of Massachusetts affirming an order of the Referee in Bankruptcy in the matter of Post Publishing Company, Bankrupt. The order in issue decreed that the City of Boston real estate taxes for the year 1957 on certain unimproved real estate located on Pearl Street in the City of Boston were to be paid out of the proceeds from the sale of said property before such proceeds were to be applied in payment of any other lien claims.

The property in question was subject to a first mortgage recorded on April 3, 1956 in the amount of $150,000, a second mortgage recorded on April 18, 1956 for $120,000, a third mortgage for $300,000 recorded on April 18, 1956, and a fourth mortgage recorded on July 11, 1956 for $250,000. There were additional liens of $16,371.16 and $19,415.29 for 1955 and 1956 Boston real estate taxes and a federal tax lien for $223,006.14 recorded on July 9, 1956, and a second federal tax lien for $66,575.76 recorded on August 8, 1956. On August 16, 1956 the Post Publishing Company filed a petition for reorganization under Chapter X of the Bankruptcy Act. On March 7, 1957 , no plan of reorganization having been proposed, the Post Publishing Company was adjudicated a bankrupt, and on April 11, 1957 the present trustees were duly elected and qualified. On April 3, 1957, after due notice and hearing and without objection by the appellant, the Referee in Bankruptcy authorized the sale of the Pearl Street real estate "* * * free and clear of all liens, mortgages, taxes, * * * and other encumbrances, of any nature, if any there be, said claims to the extent that they may hereafter be determined to be valid to attach to the proceeds of the sale" and it was further provided that "Real estate taxes for the year 1957 are to be apportioned as of the date of the delivery of the deed."

On August 9, 1957 the property was transferred to a purchaser who paid $475,000 for it plus a pro rata portion of the 1957 real estate taxes. The total 1957 real estate taxes were $21,216.20 and the pro rata portion of them attributable to the period from January 1, 1957 to August 8, 1957 is approximately $12,889.46.

Upon petition by the trustees to make payment out of the proceeds of the sale to the holders of the first and second mortgages in reduced amounts, ¹ it was decided by the referee on September 16, 1957 that the Boston real estate taxes for the year 1957 on the Pearl Street property be paid out of the proceeds from the sale of said property as an expense of preservation before such proceeds be applied in payment of any lien claims.

The United States has appealed from this order apparently for the reason that if the proceeds from the sale exceed the amount of the mortgage liens prior and superior to its tax lien, then the amount payable to it should not be reduced by the amount claimed by the City of Boston for 1957 taxes. It first contends that the lien of the federal government being first in time is superior to the claim for 1957 taxes made by the City of Boston , but this contention is clearly without merit as the tax imposed by the City of Boston was assessed and became due only after the commencement of bankruptcy proceedings. It is, therefore, as the trustees contend, either payable as an expense of admin istration or preservation of that part of the bankrupt's estate upon which the government's lien attached or it is not payable at all.

The Supreme Court in Swarts v. Hammer, 194 U. S. 441, 444 (1904), declared that even though the trustee in bankruptcy is vested with title to all the property of the bankrupt, "By the transfer to the trustee no mysterious or peculiar ownership or qualities are given to the property. It is dedicated, it is true, to the payment of the creditors of the bankrupt, but there is nothing in that to withdraw it from the necessity of protection by the State and municipality, or which should exempt it from obligations to either." It was held in that case that the trustee was obligated to pay local taxes assessed against the assets of the bankrupt estate during admin istration. See also Brown v. Collector of Taxes for Dist. of Col., 247 Fed. (2d) 786 (D. C. Cir. 1957). ²

In the instant case the bankrupt's property was subject to liens but the United States as lienholder agreed to the retention of possession of the property by the trustees for the purpose of sale free of liens. As the total amount of the purported liens far exceeded the value of the property as indicated by the actual selling price, there may be some question as to why the trustees undertook possession of the property. An answer might be supplied by the fact that only the City of Boston and the second mortgagee objected to the sale by the trustees free of liens (neither of whom sought review of the referee's order authorizing such sale) from which could be inferred that at least the other lienholders were under the impression that they would be benefited by a sale free of liens conducted by the trustees rather than undergo the possible complexities of their remedies under the state laws. It has been stated that when a lienholder consents to a sale free of liens the proceeds are chargeable with the actual costs of the sale plus costs reasonably incurred in the preservation of the property. Byrer v. Bushong, 108 Fed. (2d) 594 (4 Cir. 1940); Tawney v. Clemson, 81 Fed. (2d) 301 (4 Cir. 1936); 4 Collier on Bankruptcy (14th ed.) ¶70.99, pp. 1606-1608. Certainly there is no question that the payment of the 1957 taxes was to the benefit of the mortgagees of the Pearl Street property in that it preserved the value of their security from diminution by reason of unpaid Boston taxes, as their mortgages clearly were inferior to the taxes assessed by the City of Boston even though such taxes were assessed subsequent to the recording of the mortgages. ³ However, there is no benefit to the United States resulting from the payment of the 1957 taxes as the lien of the United States was intended to apply to any funds in excess of the amount necessary to pay prior lienholders only and was not to take into account any subsequent taxes which the state might declare to be superior to such prior liens. See United States v. New Britain , 347 U. S. 81 (1954) [54-1 USTC ¶9191]. Insofar as costs of preservation are concerned, federal liens are not analogous to mortgages held by private parties as the latter may by state law be rendered inferior to subsequent statutory liens for property taxes. See United States v. Greenville , 118 Fed. (2d) 963, 966 (4 Cir. 1941) [41-1 USTC ¶9381].

In this case we are concerned with the narrow problem of whether certain taxes, which are a cost of preservation to the senior lienholders, should be initially paid by a junior lienholder as to the preservation of whose lien the payment of these taxes is unnecessary. It is our conclusion that in view of the equitable nature of bankruptcy proceedings and the basic policy of protection of lienholders, the federal government's share of the proceeds should not be reduced because of the payment of the 1957 taxes which were of no benefit to it. Rather, the city taxes should be allocated solely against the fund set aside for the payment of mortgages.

The order of the district court is vacated and the case is remanded to that court for the entry of an order in conformity with this opinion.

¹ The first mortgage was paid in the amount of $168,000 and the second mortgage was allowed in the amount of $90,000.

² In view of the fact that these taxes in question were validly assessed (see Assessors of Boston v. John Hancock Mut. Life Ins. Co., 323 Mass. 242, 81 N. E. 2d 366 (1948)) and in light of the above settled principle that ordinarily the trustee shall pay those property taxes which are assessed on property while in his possession, we reject the argument of the trustees that the referee's order, which imposed liability upon the trustees for the 1957 taxes, was incorrect because such taxes were assessed to the Post Publishing Co. rather than to the trustees themselves.

³ Since the trustees presumably acted in the interests of the general creditors in taking possession of the mortgaged property, the amounts deducted from the proceeds paid to the mortgagees may be claims against the general estate, if any, entitled to the priority of admin istration expenses set forth in §64(a)(1) of the Bankruptcy Act, 11 U. S. C. §104. See Hammond v. Carthage Sulphite Pulp & Paper Co., 8 Fed. (2d) 35, 38 (2 Cir. 1925); MacGregor v. Johnson-Cowdin-Emmerich, Inc., 39 Fed. (2d) 574, 577 (2 Cir. 1930). This expense of preservation is not comparable with a cost of sale which the mortgagee would have had to pay in any event. Since the mortgagees did not join in this appeal challenging the correctness of the referee's order, this perhaps precludes the possibility that the particular provisions of the various mortgages involved may contain valid clauses adding costs of enforcement to the obligation of the debtor protected by the lien. See In re Street, 184 Fed. (2d) 710 (3 Cir. 1950), Oppenheimer v. Oldham , 178 Fed. (2d) 386 (5 Cir. 1949).

 

 

[58-2 USTC ¶9564] United States of America , Appellant v. American National Bank of Jacksonville and Title & Trust Company of Florida , Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16989, 255 F2d 504, 5/26/58, Reversing and remanding unreported District Court decision

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

Tax liens: Priority over mortgage: Estate by the entireties: Effect of dragnet clause.--A husband and his wife held title to Florida real property as an estate by the entireties. After liens were filed against the husband only for unpaid taxes, the husband and wife mortgaged the property to a bank. The mortgage, in addition to securing payment which loan evidenced by a note, contained a dragnet clause securing "all sums of money which may now be due or may hereafter become due to the mortgagee from the mortgagors." The court ruled that the government's lien for taxes owing by the husband did not attach to the property held by the entireties until the wife's death which occurred sometime after the execution of the mortgage. Therefore, the mortgage had a priority of lien over the government's tax lien. However, the dragnet clause of the mortgage did not secure other obligations to the bank for which the husband was personally liable. The other obligations included a pre-existing liability on a note of a partnership of which the husband was a member, a pre-existing liability as endorser of an individual's note, and a subsequent liability as an accommodation endorser of corporate notes. Accordingly, the bank's mortgage had priority over the government tax lien only to the extent of the note of the husband and wife, with interest, advances for taxes, and the costs, fees and charges of foreclosure.

Edith House, Assistant United States Attorney, Jacksonville, Fla., Charles K. Rice, Assistant Attorney General, Lee A. Jackson, Rob ert N. Anderson, David O. Walter, Department partment of Justice, Washington, D. C., for appellant. W. Gregory Smith, Ray W. Richardson, Jacksonville , Fla. , for appellees.

Before RIVES, TUTTLE and JONES, Circuit Judges.

[Facts]

JONES, Circuit Judge:

C. Albert Kimbel and his wife, Ida T. Kimbel, owned a residence in Jacksonville , Florida . The title was held as an estate by the entireties. The United States filed tax liens on various dates prior to June 18, 1953 , against C. Albert Kimbel for tax assessments aggregating about eleven thousand dollars. Thereafter further liens were filed on tax assessments of about twelve hundred dollars. None of these taxes was a liability of Mrs. Kimbel. On June 17, 1953 , Mr. and Mrs. Kimbel gave a mortgage on the residential property to The American National Bank of Jacksonville to secure a note signed by each of them payable to the Bank in the principal sum of $24,000. The mortgage was recorded June 18, 1953 . It authorized the mortgagee to advance funds for taxes and insurance premiums. It secured the payment of the principal and interest of the mortgage note, advances for taxes and insurance and, in the event of foreclosure, the costs of foreclosure including attorneys' fees. The mortgage, partly printed and partly typewritten, included among its provisions the following typed clause:

"The Mortgagors hereby agree that the lien of this mortgage shall, in addition to the note hereby secured, secure all sums of money which may now be due or may hereafter become due to the Mortgagee from the Mortgagors. This additional security provision shall remain in effect for so long as the promissory note hereby secured remains unpaid."

The mortgage also contained a printed provision that:

"It is understood that each of the words, note, mortgagor and mortgagee respectively, whether in the singular or plural anywhere in this mortgage, shall be singular if one only and shall be plural jointly and severally if more than one, * * *."

At the time the mortgage was given, the Bank held a collateral note made by Duval Electric Co. This note was dated February 13, 1953 . It is signed "Duval Electric Co. C. A. Kimbel, Pres." It pledged warehouse receipts covering electrical equipment and materials. The original principal amount was $7,903.07, which had been reduced to $5,869.66. At the time this note was given, Duval Electric Company was a partnership. There were three partners, C. Albert Kimbel and two others. The note was endorsed by C. A. Kimbel. At the time the mortgage was given, Mr. Kimbel had endorser liability on a note of T. H. Thompson discounted by the Bank which was payable to and endorsed by Duval Electric Co. in the amount of $600. Interest accrued on all of these obligations. Mrs. Kimbel was not personally liable for the payment of any of them. Mrs. Kimbel died on December 1, 1954 . The Bank instituted a suit in the Circuit Court for Duval County , Florida , for the foreclosure of the mortgage. The United States was made a party defendant pursuant to 28 U. S. C. A. §2410. Invoking 28 U. S. C. A. §1444, the United States removed the cause to the United States District Court for the Southern District of Florida.

[District Court's Decision]

Pending the foreclosure the property was in the custody of a court appointed receiver who collected rents. The property was sold by a special master at foreclosure sale for $35,000. The special master, undder order of the court, retained $14,000 to be disbursed upon a determination of lien priorities as between the Bank and the Government. Payment of the remaining funds was made to the Bank. The district court held, initially, that the Bank had a prior lien for the so-called primary obligations consisting of the principal balance of the $24,000 note, interest thereon, property taxes, abstract costs, and attorneys' fees and court costs in foreclosure. The district court also held, initially, that the claims of the United States became liens upon the property on the death of Mrs. Kimbel, that the mortgage did not secure the obligations for which Mrs. Kimbel was not liable, and that the United States should receive the proceeds to the extent of the excess over the primary obligations. Judgment was accordingly entered. On rehearing, it was determined that the mortgage was ambiguous. Parol evidence was received as to the intent of C. Albert Kimbel and Ida T. Kimbel in executing the mortgage with respect to securing the individual obligations of Mr. Kimbel. On this evidence the district court found that it was the intent of Mr. and Mrs. Kimbel that the mortgage should secure the individual obligations of C. Albert Kimbel to the Bank, both those existing at the time of and those incurred subsequent to the mortgage. So finding, the district court concluded that the Bank had a lien for all of the Kimbel obligations, several as well as joint, and irrespective of whether incurred prior or subsequent to the mortgage, and that the Bank's lien was, in its entirety, superior to the claims of the Government. As a result of these determinations an amended judgment was entered awarding all proceeds of the foreclosure sale to the Bank. From this judgment the United States has appealed.

[Tax Lien Did Not Attach to Estate by Entireties]

At the time the mortgage to the Bank was given the property was held by the Kimbels as an estate by the entireties. As was recently said by the Supreme Court of Florida,

"The required elements of unity of possession, interest and control peculiar to an estate by the entirety are so well known that an extensive discussion would not be justified. The estate is one peculiar to the relationship of husband and wife and is not available to people in any other relationship. Aside from unity of control, possibly the most important incidents of a tenancy by the entirety are that the survivor of the marriage, whether husband or wife, is entitled to the whole estate and that any property so held is not subject to execution to satisfy the debts of either of the parties individually." Winters v. Parks, Fla. , 91 So. (2d) 649. See Ohio Butterine Co. v. Hargrave, 79 Fla. 458, 84 So. 376; Stanley v. Powers, 123 Fla. 359, 166 So. 843; Vaughn v. Mandis, Fla. , 53 So. (2d) 704; Sheldon v. Waters, 5th Cir. 1948, 168 Fed. (2d) 483; 5 Miami L. Q. 592.

We do not question the rule that liens for Federal taxes and the manner of their enforcement are matters which are governed by the Federal law. Bank of Nevada , 9th Cir. 1957, 251 Fed. (2d) 820 [58-1 USTC ¶9228]. However, the rules of property and fixing the incidents of property ownership are rules of state law which the Federal courts will respect. Poe v. Seaborn, 282 U. S. 101, 51 S. Ct. 58, 75 L. Ed. 239 [2 USTC ¶611]. The question as to whether a lien for taxes owing to the United States by a husband attached to property held by the entireties was considered by the Eighth Circuit Court of Appeals. It said:

"* * * the individual interest of the husband or wife in an estate by the entirety is, like a rainbow in the sky or the morning fog rising from the valley, not such an estate as may be subjected to the grasp of an attaching creditor or which will permit the adherence thereto of a tax lien. We are not at liberty to change the nature of either." United States v. Hutcherson, 8th Cir. 1951, 188 Fed. (2d) 326 [51-1 USTC ¶9249], affirming Hutcherson v. United States, D. C. W. D. Mo. 1950, 92 Fed. Supp. 168 [50-2 USTC ¶9471]. See Raffaele v. Granger, 3rd Cir. 1952, 196 Fed. (2d) 620 [52-1 USTC ¶9321].

While refraining from concurrence in dicta regarding rainbows and fogs, we express our concurrence in the conclusions of the Hutcherson case regarding the attaching of a tax lien upon an estate by the entireties. Plumb, Federal Tax Collection and Lien Problems, 13 Tax Law Review, 247. The husband, C. Albert Kimbel, did not have any interest in the subject property during his wife's lifetime to which a lien for Federal taxes, owed by him but not by her, could attach. Upon Mrs. Kimbel's death the tax lien attached to the property as of the time of her death. Johnson v. Leavitt, 188 N. C. 682, 125 S. E. 490. Cf. Moralis v. Matheson, 75 Fla. 589, 79 So. 202; Newman v. Equitable Life Assur. Soc., 119 Fla. 641, 160 So. 475. The mortgage, executed by both Mr. and Mrs. Kimbel, had a priority of lien over the tax lien of the Government. The mortgage secured the principal and interest of the note which was specifically described in the mortgage, advances of the Bank for taxes on the mortgaged property and the costs and charges incident to foreclosure. Remaining for our consideration is the question whether the mortgage secured other obligations to the Bank for which C. Albert Kimbel was liable to the Bank.

[Effect of "Dragnet" Clause]

The mortgage provision which is to be construed is commonly known as a dragnet clause. It has been said that such clauses should be carefully scrutinized and strictly construed. First v. Byrne, 238 Iowa 712, 28 N. W. (2d) 509, 172 A. L. R. 1072. In construing such a clause in a collateral pledge agreement the Supreme Court of Florida used this language:

"What everybody knows the courts are assumed to know, and of such matters may take judicial cognizance. It is a matter of common knowledge that banking institutions, in transactions wherein they advance money with or without security, dictate the terms upon which such money will be loaned or advanced, and the borrower in such cases must agree to the terms and conditions stated and made by the bank in order to procure the loan. Therefore the court may legally presume that the bank dictated the terms and conditions under which the sum of $2,312 was procured by Aylin from the bank, and the terms and conditions under which the other notes were deposited by Aylin with the bank as collateral security. When this presumption is indulged in, as it was evidently indulged in by the chancellor, then the rule that one of the parties to a contract, having chosen the language applied and being responsible for any alleged uncertainty and ambiguity, must suffer the result of having such language construed against him, may be invoked." St. Lucie County Bank & Trust Co. v. Aylin, 94 Fla. 528, 114 So. 438, 440.

Here it is unnecessary to indulge in a presumption that the words of the dragnet clause are those of the bank. Its counsel testified that he had inserted the clause in the mortgage. Estates by the entireties have been regarded with tender solicitude by the Florida courts. Peterson v. Brotman , Fla. , 100 So. 2d 821.

It may well be that the mortgage would not have secured a note given to the Bank by Mr. Kimbel alone or by Mrs. Kimbel alone prior to the execution of the mortgage. The dragnet clause purports to secure sums due the Bank from the "mortgagors". We think the reasoning of the Supreme Court of Georgia is sound. It held:

"Since the 'grantor' consisted of the three individuals who executed the security deed, a note signed by only one of them for a debt of himself alone was not an indebtedness of the grantor within the meaning of the security deed." Americus Finance Co. v. Wilson , 189 Ga. 635, 7 S. E. 2d 259. See Monroe County Bank v. Qualls, 220 Ala. 499, 125 So. 615.

The only doubt which we have as to the applicability of the doctrine stated in the foregoing quotation to the case before us arises from the provision that "mortgagor" shall be "plural jointly and severally if more than one." Cf. Torrance v. Third National Bank, 3rd Cir. 1914, 210 Fed. 806; Heffner v. First National Bank, 311 Pa. 29, 166 A. 370, 87 A. L. R. 610. The obligations represented by the note of Duval Electric Co. and Thompson were owed to the Bank by C. Albert Kimbel only as a partner or as an endorser. They were not his liabilities in an individual and personal capacity. In construing the Florida statutes, where the context will permit, "the word 'person' includes * * * partnerships * * *." F. S. A. §1.01(3). It is unnecessary for our decision here that we determine whether a partnership is a true legal entity. See 40 Am. Jur. 137, Partnership §18. The Supreme Court has said, "The partnership is a distinct thing from the partners themselves and it would seem that debts of the firm are different in character from other joint debts of the partners." Forsyth v. Woods, 78 U. S. (11 Wall.) 484, 20 L. Ed. 207. So, a fortiori, debts of a partnership differ in character from the debts of a husband and wife or either of them. In an early, but frequently cited, New York case it was held:

"The plaintiff [bank] was dealing with him individually, and it was obtaining security for his individual and personal obligations, and a fair construction of the language shows that it was intended to secure such obligation, and such only. * * *"

"This mortgage must be regarded as a commercial instrument, executed in commercial transactions, and must be construed as ordinary commercial men would understand the language used; and we think that among business men a distinction is made between the firm, as an entity, and the members who compose it; and that this language would not be understood as broad enough to cover the indebtedness of a firm of which Thompson was a member, and for whose debts jointly with the other members of the firm he could be made responsible." Bank of Buffalo v. Thompson, 121 N. Y. 280, 24 N. E. 473."

[Partnership Obligations Not Secured by Mortgage]

We conclude that it was not the intent of the parties to regard the obligations of a partnership of which the husband was a member as obligations "due to the mortgagee from the mortgagors." If it was intended that the mortgage should secure the obligations of the partnership and the liabilities of C. Albert Kimbel as an endorser, language different from that which was used was required to declare such intent. Heffner v. First National Bank, supra; New Bethlehem Trust Co. v. Spindler, 315 Pa. 250, 172 Atl. 309. See Waterman v. Alden, 143 U. S. 196, 12 S. Ct. 435, 36 L. Ed. 123; In re Evans, 3rd Cir. 1917, 238 Fed. 543; Torrance v. Third National Bank, supra; Commissioner v. Lehman, 2nd, Cir. 1948, 165 Fed. (2d) 383 [48-1 USTC ¶9121]. That the rule here stated is the law of Florida is indicated by St. Lucie County Bank & Trust Co. v. Aylin, supra. The Bank's advances on the partnership paper were to and for the benefit of the partnership. Hence we need not consider whether a different rule would be applicable if the proceeds of the partnership paper had been received by Kimbel individually for his personal use. Cf. Silva v. Exchange Nat. Bank, Fla. , 56 So. 2d 332. The instrument before the court in the St. Lucie County Bank case, and in some of the other cases herein cited, was a pledge of personal property rather than a mortgage upon real estate, but there is no reason why the construction of a dragnet clause in one should be different when it is found in the other.

[Obligation As Endorser of Corporate Notes Not Secured by Mortgage]

C. A. Kimbel was an accommodation endorser upon eleven notes of Duval Electric Company, Inc., a corporation, to the Bank given subsequent to the execution and delivery of the mortgage. It follows, of course, that since the mortgage was not security for Kimbel's pre-existing liability on the note of the partnership and his obligation as an endorser, the subsequent notes of a corporation upon which he was an accommodation endorser were not secured. We think there are further reasons why these subsequent obligations were not secured by the mortgage. To hold that such obligations could be so secured would authorize a husband to so increase the extent of a mortgage lien upon an estate by the entireties without the wife's knowledge as to extinguish the remaining interest in the mortgaged property. Such a construction should not be adopted. First Bank & Trust Co. v. Welch, 219 Iowa 318, 258 N. W. 96. There was no compliance with the conditions of the Florida statute relating to mortgages securing future advances which requires a statement as to the maximum amount to be secured. F. S. A. §697.04. Downing v. First National Bank, Fla. , 81 So. 2d 486.

Ordinarily the construction of a contract is a question of law. City of Leesburg v. Hall, 96 Fla. 186, 117 So. 840. In applying to the dragnet clause of the mortgage the proper rules of construction we do not think there is any ambiguity in the language such as requires extrinsic evidence to ascertain its meaning. O'Brien v. Elder, 5th Cir. 1957, 250 Fed. (2d) 275.

[Decision]

Deciding, as we do, that the mortgage to the Bank had priority over the Government tax lien only to the extent of the note of both of the Kimbels, with interest, advances for taxes, and the costs, fees and charges of foreclosure, a different judgment must be entered. To that end, the judgment appealed from is Reversed and Remanded.

 

 

[58-1 USTC ¶9399] United States of America , Appellant v. Erick R. Rasmuson and Oscar Rasmuson, d/b/a Rasmuson Bros., Appellees

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 15,718, 253 F2d 944, 4/1/58, Reversing and remanding District Court, 56-2 USTC ¶9872, 143 F. Supp. 928

[1939 Code Sec. 3672(a)(1)--specifically covered in 1954 Code Sec. 6323(b)]

Tax lien: Filing of notice: State requirements.--The appeal Court, reversing the trial Court, held that the filing of a general notice of tax lien in the office of the local Register of Deeds, in Hennepin County, Minnesota, was a valid notice as against a subsequent judgment creditor, although containing no specific description of the particular real estate involved in these proceedings, which was registered under the Minnesota Torrens system of title registration. Under State law, notices of liens as to real estate so registered were ineffective unless containing a specific description of the real estate, so that such liens could be memorialized on the Torrens title certificate. Although the judgment creditor in these proceedings had complied with all such requirements, the appeal Court, nevertheless, declared the Government's prior lien superior on the ground that the States could not legislate as to the form or content of notices of Federal tax liens, but under 1939 Code Sec. 3672(a)(1) could merely indicate the State office in which such notices might be filed.

George F. Lynch, Department of Justice (Charles K. Rice, Assistant Attorney General, Ellis N. Slack, A. F. Prescott, Department of Justice, George E. MacKinnon, United States Attorney, Kenneth G. Owens, Assistant United States Attorney, were with him on brief), for appellant. Rodger L. Nordbye filed brief for appellee.

Before GARDNER, Chief Judge, and JOHNSEN and VOGEL, Circuit Judges.

JOHNSON, Circuit Judge:

The Government has appealed from a holding of the District Court, that a Notice of Tax Lien, against Louis Stockwell [56-2 USTC ¶9872], filed by the Collector of Internal Revenue, in the office of the Register of Deeds of Hennepin County, Minnesota, under amended §3672(a)(1) of the Internal Revenue Code of 1939, 26 U. S. C. A., was invalid as against appellees, judgment creditors of Stockwell.

Sections 3670 and 3671 of the 1939 Code give the Government a lien upon all property of a taxpayer for any taxes not paid on demand, from the time that the assessment list is received by the Collector.

Amended §3672(a)(1), as here pertinent, provides, however, that "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--(1) * * * In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; * * *". 56 State. 957.

In conformity to this right of designation, the Minnesota statutes had at the time involved granted authorization for filing notices of federal tax liens in that State as follows: "The filing and recording in the office of the register of deeds of any county in this state of notices of liens for taxes due the United States and discharges and releases of such liens is hereby authorized". Minn. St. Ann. §272.48.

The property of Stockwell against which the Government claimed that its lien notice was operative was a piece of real estate located in Hennepin County , Minnesota .

The Collector had made filing of the notice on December 2, 1952 , in the office of the Register of Deeds of Hennepin County. The notice was in general terms, asserting the existence of a lien in favor of the Government against all property of Stockwell for unpaid taxes in a certain amount. It was without any description of the real estate that is involved.

Appellees' judgment against Stockwell was recovered subsequent to December 2, 1952 . It had been duly docketed, and was made the subject of a Notice of Claim of Lien by appellees, describing the particular property, and filed in the office of the Register of Deeds on March 26, 1953 .

The Minnesota statutes contain provision for an optional Torrens system of title registration as to real estate. See Torrens Act , Ch. 508, Minn. St. Ann . The property that is involved had been so registered. A special records system is prescribed as to such lands, but, under the Act, "Registers of deeds shall be registrars of titles in their respective counties". M. S. A. §508.30.

The trial judge held that the Government's notice of lien was without validity, because it did not contain a description of the real estate and so was not entitled under the Torrens statutes to be noted by the Register of Deeds or Registrar as a memorial against the title on the registry for the property.

This holding followed a previous one by another judge of the same court, in United States v. Ryan, D. C. Minn., 124 Fed. Supp. 1 [54-2 USTC ¶9642], where it had been declared that, because of the prescriptions governing the memorializing of Torrens titles, "The mere filing of a notice, by debtor's name only, in the office of the register of deeds cannot, and does not, create a lien on registered land". 124 Fed. Supp. at p. 6.

But the question involved is not one of how to create a lien under Minnesota law. Sections 3670 and 3671 of the 1939 Code establish a federal lien "upon all property and rights to property, whether real or personal", belonging to a taxpayer, at the time that an assessment list against him is received by the Collector. On this language, a Torrens-title property, no less than anything else belonging to a taxpayer, is made subject to such a lien as against the taxpayer, without regard to the requirements of the Minnesota statutes for memorializing.

"Such lien" is, however, by §3672, not allowed operativeness against a mortgagee, pledgee, purchaser, or judgment creditor, "until notice thereof has been filed by the collector", in the office in which the state law has "authorized the filing of such notice". M. S. A. §272.48, above quoted, has granted authority for the "filing and recording in the office of the register of deeds * * * of notices of liens for taxes due the United States * * *".

Thus, filing of federal notices of liens in the offices of Registers of Deeds in Minnesota was authorized, and filing of the notice here involved in that office was made. The operativeness of the instrument as notice upon such filing would derive from §3672 of the 1939 Code and not from state law. This aspect is emphasized by the alternate provision of subparagraph (a)(2) of §3672 that, "whenever the State or Territory has not by law authorized the filing of such notice in an office within the State or Territory", notice of the federal lien may be given to mortgagees, pledgees, purchasers, or judgment creditors by the filing of such notice in the office of the Clerk of the United States District Court for the district in which the property is situated.

Hence, the efficacy of a filed notice of lien is in no way dependent upon state law, unless it can be said that Congress, in allowing a State, as a matter of local benefit or convenience, to make designation of a particular office for the filing of such notices, intended thereby to permit each State also to make prescriptions as to the form and content of the notice which the Government was filing.

There is nothing in the language of §3672, it seems to us, from which any such congressional intention can be inferred. And the legislative history out of which §3672 has emerged points directly to the contrary.

The first action taken by Congress in the field of allowing the States, if they so desired, to designate a local office for the filing of federal notices of tax liens was by the Act of March 4, 1913, Ch. 166, 37 Stat. 1016, which was virtually identical in its language to amended §3672 of the 1939 Code, except that it required the designation made to be of the States' offices of registrar or recorder of deeds.

In the Revenue Act of 1928, Ch. 852, 45 Stat. 791, 875, the prescription for the designation of a specific local office was removed and the language was broadened to provide for federal filing, "In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice".

This broadened language was held, in United States v. Maniaci, D. C., W. D. Mich., 36 Fed. Supp. 293 [39-1 USTC ¶9307], to have extended the right of a State, not merely to a naming of the particular office in which it might desire to have such federal notices filed, but also to an imposing of such conditions as it might see fit to require, in the way of form or content for such notices.

Thereafter, and doubtless because of the holding of this decision, Congress, by the Revenue Act of 1942, Ch. 619, 56 Stat. 798, 957, eliminated from the statute the words "In accordance with the law of the State", and provided simply for the filing of notice "In the office in which the filing of such notice is authorized by the law of the State or Territory * * * whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory".

In the House Report on this legislative measure, it was indicated that the purpose of the provision, under the language used, was to make it sufficient for such a notice to be filed in the place authorized by the State, "without regard to other general requirements with respect to recording prescribed by the law" of the State. H. Rep. No. 2333, 77th Cong., 2d Sess., p. 173.

Similarly, the Senate Committee Report noted that the provision in the bill was declaratory of the position which had been consistently taken by the Treasury Department, that the States were entitled merely to designate "the local office for the filing of the notice of the lien". S. Rep. No. 1631, 77th Cong., 2d Sess., p. 248.

Nor is it without significance, we think, that in the Int. Rev. Code of 1954, §6323, 26 U. S. C. A., the language of §3672, Code of 1939, has been retained, but that, in order to prevent it and its intent from being made the subject of any further misconstruction, such as in the Ryan case and in this case, Congress has added a subsection containing this specific declaration: "If the notice filed pursuant to subsection (a)(1) is in such form as would be valid if filed with the clerk of the United States district court pursuant to subsection (a)(2), such notice shall be valid notwithstanding any law of the State or Territory regarding the form or content of a notice of a lien".

On the basis of all of the foregoing, we believe that the trial court clearly erred in its construction of the language and intent of §3672, notwithstanding the support lent to such view by United States v. Ryan, D. C. Minn., 124 Fed. Supp. 1 [54-2 USTC ¶9642], and by Youngblood v. United States, 6 Cir., 114 Fed. (2d) 912 [44-1 USTC ¶9314].

It ought perhaps to be added that the trial judge, while following the Ryan and Youngblood cases, indicated that, except for these decisions, his inclination would be to hold that Congress had intended by the language of §3672 merely to allow the States to designate an appropriate office for filing tax lien notices, and not to authorize them to make any prescription as to the form or content of such notices.

Reversed and remanded.

 

 

[58-1 USTC ¶9282] United States of America v. Troy N. Beaver and Margaret F. Beaver His Wife, et al., Margiotti & Casey, G. W. Musser and Francis J. Mottey, Appellants

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 12,290, 252 F2d 486, 2/14/58, Affirming District Court, 57-1 USTC ¶9281

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

Lien for taxes: Priority over attorneys' liens.--A lien for taxes, which was filed before entry of judgment in temporary receivership proceedings against the taxpayer, was entitled to priority over the claims of attorneys who had represented the taxpayer and to whom the judgment awarded surplus funds received by a surety who had completed performance of contracts entered into by the taxpayer. Since this was not an insolvency receivership, the temporary receiver was merely a custodian, with the result that the taxpayer had a property right in the surplus due after the contracts were performed. The regulations requiring tax liens to be filed in bankrupty or receivership proceedings were not applicable.

Vincent M. Casey, 720 Grant Bldg., Pittsburgh 19, Pa. , for appellants. George F. Lynch, Dept. of Justice Washington 25, D. C., for appellee.

Before BIGGS, Chief Judge and GOODRICH and HASTIE, Circuit Judges.

Opinion of the Court

BIGGS, Chief Judge:

The issue presented for our decision is whether under the provisions of Sections 3670 and 3672 of the Internal Revenue Code of 1939, 26 U. S. C., the judgment claim of Messrs. Margiotti and Casey, attorneys for Troy N. Beaver, is entitled to priority of payment over claims asserted by the United States under federal tax liens.

There is no dispute as to the facts. On November 12, 1948 , a temporary receiver was appointed by the Court of Common Pleas of Jefferson County, Pennsylvania, for Troy N. Beaver trading and doing business as Troy N. Beaver Contracting Company. The receiver was appointed because O'Brien claimed to be a partner of Beaver and sought an accounting. Margiotti and Casey, members of the Allegheny County Bar, represented Beaver in this equity action, defending on the ground that O'Brien was not a partner.

Some time prior to the commencement of the action in the Court of Common Bleas of Jefferson County Beaver had entered into two contracts with the Commonwealth of Pennsylvania for the construction of two roads, one known as the "New Kensington Job" and the other as the "Shenandoah Job." Beaver's surety on his performance bond given to the Commonwealth of Pennsylvania was the United States Fidelity and Guaranty Company. Beaver was not able to complete the roads and the bonding company took over and finished the jobs. The receiver did not do any work or cause any work to be done on the jobs through his agents. This was so despite an order of April 9, 1949 entered by the Court of Common Pleas which authorized the receiver to employ labor and supervise the road-building in collaboration with the Pennsylvania Department of Highways.

On December 6, 1949, the Court of Common Pleas of Jefferson County held in substance that O'Brien was not a partner and indicated that it would discharge the receiver as soon as he could wind up receivership affairs. On March 23, 1950, the Court terminated the receivership and decreed that the funds, if any, due on the road construction jobs should be paid by the Commonwealth of Pennsylvania to the surety, United States Fidelity and Guaranty Company. The surety was ordered by the court to reimburse itself for moneys expended on labor and material in completing the jobs and to pay any credit balance to Casey and Margiotti. The surety realized a surplus of $9,498.40 and this is the fund which is the subject of the present litigation.

Prior to the entry of the decree on March 23, 1950 by the Court of Common Pleas of Jefferson County, the United States filed notices of liens for unpaid taxes due from Beaver with the Prothonotary of the Jefferson County Court. The lien if valid is sufficient to exhaust the fund in this case. ¹ The money due from the Commonwealth on the road construction jobs was paid directly to the surety by the Commonwealth and did not come into the hands of the receiver. The United States asserts that it is entitled to the fund since its tax lien preceded in time the judgment claim of Margiotti and Casey. The court below concluded that the taxpayer had a property right in the surplus fund, that since the tax liens were recorded prior to the date of the Jefferson County judgment, the lien of the United States entitled it to priority of payment over the attorneys' claim. The court entered judgment is favor of the United States in the sum of $9,498.40.--Fed. Supp.--(195) [57-1 USTC ¶9281]. The appeal followed.

Margiotti and Casey say that they are entitled to the fund on either of two alternate theories: that Beaver had no property right in the fund and therefore the liens of the United States for taxes against the taxpayer could not attach thereto, or that the fund was subject to their alleged prior lien, based upon the decree of the Court of Common Pleas of Jefferson County.

[Effect of Receivership]

In support of the first theory Margiotti and Casey contend that the appointment of the receiver transferred all right, title, and interest in Beaver's property to the receiver. They say that since the fund was no longer Beaver's, the tax liens against Beaver could not attach themselves to the fund. This theory fails to distinguish the difference between a receivership which arises from insolvency and one which is created temporarily by a court of equity under its general power to preserve the assets until the determination of a matter pending before it.

In receivership arising from insolvency title to property vests in the receiver. Porter v. Sabin, 149 U. S. 473 (1893). This is so because property of a debtor may be liquidated and distributed to his creditors. A temporary receiver, on the other hand, is but a mere custodian of property and title remains in the owner. National G. Credit Corp. v. Worth & Co., 274 Pa. 148, 117 Atl. 914 (1922); Tardy's Smith on Receivers (2d ed.) p. 14. There can be no doubt that Beaver retained and possessed a property right in any surplus due from the Commonwealth after the road contracts were fulfilled. Since this property right was not divested by the appointment of a receiver, the rights of creditors against the fund were not suspended. Cowan v. Plate Glass Co., 184 Pa. 1, 9, 38 Atl. 1075, 1078 (1898); Blum Bros. v. Girard Nat'l Bank, 248 Pa. 148, 158, 93 Atl. 940, 943 (1915).

Although the effect of an equity receivership is determined, in this case, by the law of Pennsylvania , the priority to be awarded to United States tax liens is purely a federal question. United States v. Acri, 348 U. S. 211 (1955) [55-1 USTC ¶9138]; United States v. Security Trust, 340 U. S. 47 (1950) [50-2 USTC ¶9492]; Illinois v. Campbell, 329 U. S. 362 (1946). Since the case of Rankin & Schatzell v. Scott, 25 U. S. 175, 179 (1827) wherein Mr. Chief Justice Marshall enunciated the principle "that a prior lien gives a prior claim, which is entitled to prior satisfaction out of the subject it binds," the federal rule has been that "the first in time is the first in right," United States v. New Britain , 347 U. S. 81, 85-86 (1954) [54-1 USTC ¶9138] and this is true whether or not the property be after acquired. Glass City Bank v. United States, 326 U. S. 265 (1945) [45-2 USTC ¶9449].

The Internal Revenue Code of 1939, Section 3670, states: "If any person liable to pay any tax neglects to pay the same after demand, the amount . . . 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." Section 3672 of the Internal Revenue Code of 1939, ² however, would make such a lien ineffective as against the order of March 23, 1950 of the Court of Common Pleas of Jefferson County directing the balance of the fund to be made over to Margiotti and Casey unless the tax liens were filed with the Prothonotary of the Court before the entry of the order of March 23, 1950. The record is clear that the tax liens were filed in the Prothonotary's office of Jefferson County prior to the order of the Court of Common Pleas of March 23, 1950 . Upon filing, the tax liens took priority over the claims of Margiotti and Casey.

But Margiotti and Casey make a further contention in this connection. They argue that the provisions of Section 39.274-1 of the Internal Revenue Regulations, 26 C. F. R. require the United States "[D]uring a bankruptcy proceeding, or in an equity proceeding" to file its claim in that proceeding if it desires to share in the property held by the receiver or trustee. In our opinion subsections (a) and (d) of Section 39.274-1 ³ are inapplicable under the circumstances at bar. The regulation prohibits the United States from distraining upon assets under the control of a bankruptcy or equity court. The regulation was intended to require a Director of Internal Revenue to file a claim in the bankruptcy or equity proceedings in order that obligations due the United States might be paid in due course and according to law. The emphasis was upon payment of the claims of the United States along with other claims due from bankruptcy or receivership assets to creditors. Liquidation and disbursement was looked to. In the case at bar, as we have shown, the title to Beaver's property never passed to the receiver who was temporary and a mere custodian. Nor was there any distraint or attempt by the Director of Internal Revenue to subject Beaver's assets to execution under the tax lien during the pendency of the receivership proceedings. It is obvious that this contention of Margiotti and Casey must fall.

The judgment of the court below will be affirmed.

¹ The notices of tax liens filed prior to March 23, 1950 , covered outstanding amounts of taxes in excess of $60,000. After the filing of the complaint herein by the United States in October 1952, payments totaling approximately $35,000 were received by the District Director and applied against Beaver's tax liability leaving outstanding under liens filed prior to March 23, 1950, a sum substantially in excess of the fund here involved. At the time of trial it was stipulated, in conformity with the facts set out in the complaint, that this balance was in the amount of $33,133.61, that it bore as assessment date of July 7, 1949 , and that notice thereof was filed in the Prothonotary's Office of Jefferson County, Pennsylvania, on August 25, 1949 .

² Section 3672(a)(1), 26 U. S. C. §3672(a)(1), provides:

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

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

3 Subsections (a) and (d) of Section 39.274-1, 26 C. F. R., provide as follows: "(a) During a bankruptcy proceeding, or an equity receivership proceeding in either a Federal or a State court, the assets of the taxpayer are in general under the control of the court in which such proceeding is pending, and the collection of taxes cannot be made by distraining upon such assets. However, any assets which under applicable provisions of law are not under the control of the court may be subject to distraint."

"(d) District directors of internal revenue should promptly after notice of outstanding liability against a taxpayer in any bankruptcy or receivership proceeding, and in any event within the time limited by the appropriate provisions of the Bankruptcy Act (11 U. S. C. A. §1 et seq.), and the orders of the court in which such proceeding is pending, file claim covering such liability in the court in which such proceeding is pending. Such claim should be filed whether the unpaid taxes involved have been assessed or not, except in cases where the departmental instructions direct otherwise; for example, where the payment of the taxes is secured by a sufficient bond. At the same time claim is filed with the bankruptcy or receivership court, the district director of internal revenue will send notice and demand for payment to the taxpayer together with a copy of such claim."

 

 

[56-2 USTC ¶9954]Joseph A. Brust, as Trustee in Bankruptcy of George Sokoloff, individually, and doing business as Concourse Music Company, Plaintiff-Appellee v. Walter R. Sturr, Collector of Internal Revenue for the 14th District of New York, Defendant-Appellant

(CA-2), U. S. Court of Appeals, 2nd Circuit, Docket No. 23920, 237 F2d 135, 9/25/56 , Reversing and remanding District Court, 55-1 USTC ¶9468 131 F. Supp. 136. 1955 CCH ¶9468

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

Collection: Federal tax liens: Validity against trustee in bankruptcy: Set-off.--Pursuant to warrants of distraint covering a tax indebtedness on which tax assessments had been made and notices of lien filed prior to bankruptcy, the Collector made levy on all the assets of taxpayer. After bankruptcy pursuant to stipulation with the trustee in bankruptcy, the Collector sold the assets realizing a surplus amount from the sale. The Collector properly contended that as to additional taxes due on assessment lists received by him prior to bankruptcy, he had an enforceable lien as of the date of bankruptcy and was entitled to retain the amount thereof as a secured creditor, even though no notice of lien had been filed and no demand made prior to bankruptcy. However, as to additional taxes which were due but not assessed prior to bankruptcy, the Collector improperly contended that Sec. 68(a) of the Bankruptcy Act allowed him to set off the surplus from the distraint sale against these unsecured claims.

Howard Shugerman, New York , N. Y., for plaintiff-appellee. Eliot H. Lumbard, Assistant United States Attorney, New York, N. Y. (Paul W. Williams, United States Attorney, New York, N. Y., on brief), for defendant-appellant.

Before CLARK, Chief Judge, and HINCKS and WATERMAN, Circuit Judges.

HINCKS, Circuit Judge:

This is an action brought by a trustee in bankruptcy against the Collector of Internal Revenue to require him to pay over the surplus of moneys in his hands derived from a sale of distrained property of the bankrupt. The facts have been stipulated and are as follows:

The bankrupt owed $39,627.75 in income, withholding, social security and unemployment taxes, falling within three categories as follows:

1. $12,805.34 on which tax assessments had been made and notices of lien filed prior to bankruptcy.

2. $4,932.27, the assessment lists of which had been received by the Collector, prior to bankruptcy. However, no demand for the payment of these taxes and no notice of lien to recover payment thereof had been filed prior to bankruptcy.

3. $21,890.14 which was due but not assessed prior to bankruptcy.

Pursuant to blanket warrants of distraint covering the tax indebtedness falling in category 1, the Collector prior to bankruptcy made levy on all the assets of the debtor and after bankruptcy, pursuant to stipulation with the trustee in bankruptcy, sold the same, realizing $25,553.81 from the sale.

The Collector by motion for summary judgment sought a judgment entitling him to retain the entire proceeds of the sale. The trustee, also by motion for summary judgment, although conceding that the Collector has a right to $12,805.34, which represents the amount of taxes falling in category 1, sought recovery of the remainder of the proceeds of the sale, thus leaving to the Collector only the right of an unsecured creditor to claim against the estate for unpaid taxes falling in categories 2 and 3 with such priority as the Bankruptcy Act accords to such claims.

The District Judge denied the defendant's motion and by granting the plaintiff's motion awarded the entire surplus of the proceeds in excess of $12,805.34 to the trustee. The Collector appeals from that judgment [55-1 USTC ¶9468].

The Collector contends that as to the taxes falling within category 2, he had an enforceable lien as of the date of bankruptcy and is entitled to retain $4,932.27 as a secured creditor. The trustee concedes that under Section 3671 of the Internal Revenue Code of 1939, 26 U. S. C. 3671, at least an imperfect and inchoate tax lien arose when the Collector received the assessment list, but because no notice of lien had been filed and no demand made prior to bankruptcy he contends that under Section 3672 of the Internal Revenue Code (1939), 26 U. S. C. 3672, the lien is invalid as to him.

[Government Lien Perfected by Possession]

We think that on this issue our former opinion in United States v. Sands, 174 Fed. (2d) 384 [49-1 USTC ¶9264], requires a holding adverse to the trustee. Here, as in that case, we hold that the Government's status as a lienor was perfected by a lawful acquisition of possession of the property on which the lien arose. Although in the case now before us there are obviously minor differences in the circumstances which gave rise to the acquisition of possession, none are significant: the basic principle of Sands is applicable. See also Goggin v. Division of Labor Law Enforcement of California, 336 U. S. 118 [49-1 USTC ¶9142].

Even without reliance on the Sands case as the basis of our holding as to this item, we may reach the same result by a different approach. As we observed in United States v. Kings County Iron Works, 224 Fed. (2d) 232, 237 [55-2 USTC ¶9536], "The mere attachment of the government's lien gives it a fully perfected claim superior to all except mortgagees, pledgees, purchasers, or judgment creditors of the taxpayer,"--classes excepted by §3672. And under the doctrine of United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291]--a case decided subsequent to our Sands decision--we think a trustee in bankruptcy is not a "judgment creditor" within the meaning of that section. See also United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137].

We conclude that as to this item of $4,932.27, the judgment below must be reversed.