in Bankruptcy Gives Rise to Tax Lien]
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.
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
. 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
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
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
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
in Bankruptcy as Judgment Creditor]
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
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
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,
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
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
law and that therefore the Gilbert decision is not apposite. But
the Supreme Court stated, 345
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.
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."
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.
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
under circumstances similar to those at bar.
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
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.
The claims were based on Federal Unemployment, Withholding, and Federal
Insurance Contribution Act (Social Security) Taxes.
The Internal Revenue Code of 1939 applies to all aspects of this case.
C. A. §7851(a)(6)(B).
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 . . .."
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."
For a further discussion of this problem see 4 Collier, Bankruptcy ¶67.24
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
upon all property and rights to property, whether real or personal,
belonging to such person." [Italics added.]
The statutory references are to sections of the Internal Revenue Code of
1954. See note 2, supra.
The District Director of Internal Revenue in his claim filed with the
Referee did not assert liens. He claimed only that the
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
and the applicable statutes give the claims lien status.
Section 67b. of the Bankruptcy Act, 11
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
to perfect its liens. Section 67b. provides that notwithstanding the
provisions of Section 60 of the Bankruptcy Act statutory liens for taxes
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
the word employed should have been the mandatory "shall." We
are unable to find any adequate support for this proposition in the
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
361 (1953) [53-1 USTC ¶9291].
The Referee has certified that "all debts entitled to priority
under Section 104(a), clauses (1) and (2), have been paid."
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.
Circuit Judge, dissenting:
would reverse the judgment of the District Court.
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.
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.
majority's holding seriously interferes with the
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."
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."
Myers v. Matley, supra, it was said (pp. 624, 625):
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)
Salkind v. Dubois, the writer of the majority opinion, there
speaking for this Court, said (p. 640):
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)
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
927, said (p. 231):
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)
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
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
C. A. are pertinent.
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".
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."
of Bankruptcy Act, as Amended]
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
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
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.
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
833 said (p. 678):
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. . .
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):
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)
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.
. . 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
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):
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
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."
In re Ripp, supra, the Seventh Circuit, with respect to Section
70c, as amended in 1952, said (p. 852):
Sec. 70 of the Bankruptcy Act, 11
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. . . .
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)
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
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
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.
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.
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.
says that the "language" used in United States v. Gilbert
361 (1953) [53-1 USTC ¶9291] "is decisive" and quotes in that
connection this statement (p. 364):
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."
statement quoted must be considered in the light of the two sentences
which preceded it. They read as follows:
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. . . ."
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".
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.
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".
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."
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.
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:
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 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)
the "Statement", the House Report, under the caption,
"Purposes Of The Bill" said in part:
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)
the "Committee Amendment" section of the House Report it is
. . . 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
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'
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.'
Congress intended to give the trustee the status of a 'judgment
creditor' is prefectly plain. . . ."
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.
Demand for Payment]
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.
3670 of the Internal Revenue Code of 1939 provides in part:
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
. . . ." (Italics supplied)
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.
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
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".
majority's disposition does violence to the distribution concept and
plan of the Bankruptcy Act.
was said in United States v. Sampsell, 153 F. 2d 731, (9 Cir.
1946) [46-1 USTC ¶9186], later reversed on other grounds,
v. Sampsell, supra, at page 735:
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."
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. . . .
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 re Lustron Corp., supra it was said (p. 794):
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)
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],
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):
its failure to comply with the requirements of the very act creating its
contends its lien is entitled to priority in this case.
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. . . .
is a well established doctrine that a clear, unambiguous statute must
be literally construed. . . ." (Italics supplied) 8
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.
that case the Commissioner had made an assessment for taxes due the
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
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
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
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
was entitled to priority simply as provided by Section 64. . . ."
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
and the State of
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)
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."
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.
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.
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.
sum of my view may be stated as follows:
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."
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.
Goggin v. California Labor Div., 336
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,
474, 479 (1913) where it was said:
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."
stated in Collier on Bankruptcy, 14th ed. (1958) Vol. 4, para. 67.26,
general rule in bankruptcy is that the filing of the petition freezes
the rights of all parties interested in the bankrupt estate."
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
of Claims in Bankruptcy]
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
istration and preferred wage claims in accordance with the provisions of
Section 64(a) pursuant to Section 67c of the Bankruptcy Act.
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. . . ."
64(a)(1) relates to expenses of
istration and Section 64(a)(2) relates to preferred wage claims.
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.
specifically so held in In re Pennsylvania Central Brewing Co.,
114 F. 2d 1010 (1940), cert. den. 312
685. Speaking for the Court, Chief Judge Biggs there said (p. 1012):
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
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
accord is the following statement in Plump, Federal Tax Collection and
Lien Problems (Second Installment), 13 Tax L. Rev. 459, 488 (1958):
against personal property, however, a federal tax lien not
enforced by seizure or sale before bankruptcy is subordinated to
istration expenses and preferred wage claims."
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
istration and preferred wage claims.
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
istration and preferred wage claims may be considered academic in view
of the circumstance here that the
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
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
is entitled to previal against the trustee and the Borough of
East Newark on the issues presented." (Italics supplied).
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.
remains this to be said.
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
that is so was settled in Missouri v. Ross, 299
72 (1936) where it was said (pp. 74-75):
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."
Collier on Bankruptcy para. 64.401 puts it:
Analysis of §64a(4).
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."
the reasons stated I would reverse the Order of the District Court and
remand with directions to affirm the Order of the Referee.
Judge Hastie joins in this dissent.
July 7, 1952
c 579, 66 Stat. 429. 11
C. A. §110(c).
The precessor of Section 70c of the 1952 Act.
Sitting by special designation.
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.
In Hoffman v. Cream-O-Products, which incidentally, construed
Section 70c prior to its 1950 amendment, the court said at page 650:
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 . . .."
As the majority put it:
second category consisted of claims in respect to which assessments had
been made prior to bankruptcy but as to which demands, if any, were made
after the adjudication."
The spokesman for the majority, Chief Judge Biggs, was a member of the
panel in this case.
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
9 The trustee also paid certain unemployment compensation
tax claims of the State of
See also California State Department of Employment v. United States,
210 F. 2d 242 (9th Cir. 1954) [54-1 USTC ¶9218].
¶9340]Ellis Campbell, Jr., and
Usry, District Directors, Internal Revenue Service, Appellants v. Lema
Parker Bagley, Appellee
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
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.
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,
, for appellee.
BROWN and WISDOM, Circuit Judges.
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
, just west of the Texas-Louisiana boundary. The next of the children is
John E., who lived in
, as did his mother.
is in Caddo Parish, which lies east of and adjoining
. 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
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.
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
, and partly in Union Parish,
. 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
. "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
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
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
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
May 19, 1958
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.
of Tangible Personalty]
matter we consider is the effect of the filing of the notice of lien in
, as to the tangible personal property which was then physically located
. The statute gives the Government a lien 1
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.--
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).
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:
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.
18, 22, 11
876, 35 L. Ed. 613.
discussing the situs of tangible personal property, the Supreme Court
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
, not in
. 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
473, 477, 45
603, 69 L. Ed. 1058. See City Bank Farmers Trust Co. v. Schnader,
29, 79 L. Ed. 228.
decision reflects and defines the departure from mobilia sequuntur
personam, the Court stating:
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.
312, 329, 52
174, 76 L. Ed. 313. Cf. Vogel v. New York Life Ins. Co., 5th
Cir., 1932, 55 F. 2d 205, cert. den. 287
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:
[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
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.
case involved diamonds. From "gold and jewels, which could be
easily carried from place to place, or secreted in spots known only to
stemmed "the maxim, mobilia sequuntur personam, by which
personal property was regarded as subject to the law of the owner's
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.
, supra; Vogel v. New York Life Insurance Co., 5th Cir., 1932, 55 F.
2d 205, cert. den. 287
9, 77 L. Ed. 525; 15 C. J. S. 928, Conflict of Laws §18 c. It follows
that the notice of lien filed in
, 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]
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
, 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,
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.
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:
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].
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.
We find no
error in the proceedings in the district court. Its judgment is
C. A. (I. R. C. 1954) §6321.
Pullman Car Co. v.
First National Bank v.
United States of America
, Appellant v. Elta Mae Christensen, etc., et al., Appellees
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.
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,
, for appellee.
STEPHENS and HAMLEY, Circuit Judges, and ROSS, District Judge.
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.
maxim, "The first in time is the first in right" has, in such
a case, a peculiarly salutary application.
Statement of the Case
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
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.
January 3, 1956
, Bertino "redeemed Certificate of Purchase No. 460 for the City of
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
a designation of homestead, not here in question, designating the
above-mentioned real property as her homestead.
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,"
Appeal was filed on
August 27, 1958
December 8, 1958
, an Assistant Attorney General of the
filed a "Statement of Point to be Relied Upon", as follows:
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
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
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.
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
had been recorded, and hence as liens against the mortgaged property
they were inferior to the appellant's tax liens.
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
The Appellee's Argument
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.
cases, the Federal courts must now apply state law in defining
state-created rights, obligations, and liabilities. Under
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
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.
The Relative Priority of a Federal Tax Lien Is Always a Federal Question
basic misconception of the instant controversy is clearly revealed at
the very outset of their brief, in which they assert:
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.)
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
In Bank of
, 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:
Supreme Court has repeatedly and emphatically stated that Federal tax
liens and the provisions for their collection are strictly Federal and
strictly statutory." 1
the Supreme Court has unequivocally stated that the relative priority of
Federal tax liens as against State liens is always a Federal question.
States v. Acri, 1955, 348
211, 213 [55-1 USTC ¶9138], Mr. Justice Minton used the following
relative priority of the lien of the
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
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
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
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
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 . . ."
of the Internal Revenue Code of 1939 reads as follows:
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
maxim to which we have referred, with reference to the very provision
with which we are here concerned--Section 3670--Mr. Justice Minton, in
v. New Britain, supra, 347
at pages 85-86, used the following language:
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
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.
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.
there were no findings that the decedent was insolvent at any time prior
to his death.
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:
syllabus of the opinion so sets forth.
II. In that
case, the Government, there the unsuccessful appellant, inferentially so
at page 47:
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
at page 53:
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.)
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'.)
was simply not a "Federal lien case."
The Bess Case
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.
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.
remanded, with directions.
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].
See also Bank of
, supra, 251 Fed. (2d) at pages 826-827.
United States of America
, Creditor, Appellant v. Arthur T. Wasserman et al., Trustees, et al.,
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
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
lien. Taxes which were a cost of preservation to the senior lienholders
should not be paid by a junior lienholder, here the
, as to the preservation of whose lien the payment of the taxes was
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,
(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,
MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.
of the Court
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.
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."
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
August 8, 1957
is approximately $12,889.46.
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
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
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
, but this contention is clearly without merit as the tax imposed by the
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
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.
Court in Swarts v. Hammer, 194
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
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
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
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
, 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
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.
The first mortgage was paid in the amount of $168,000 and the second
mortgage was allowed in the amount of $90,000.
In view of the fact that these taxes in question were validly assessed
(see Assessors of
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.
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
istration expenses set forth in §64(a)(1) of the Bankruptcy Act, 11 U.
S. C. §104. See
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.
, 178 Fed. (2d) 386 (5 Cir. 1949).
United States of America
, Appellant v. American National Bank of
and Title & Trust Company of
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.
Assistant United States Attorney, Jacksonville, Fla., Charles K. Rice,
Assistant Attorney General, Lee A. Jackson,
ert N. Anderson, David O. Walter, Department partment of Justice,
Washington, D. C., for appellant. W. Gregory Smith, Ray W. Richardson,
, for appellees.
TUTTLE and JONES, Circuit Judges.
Kimbel and his wife, Ida T. Kimbel, owned a residence in
. The title was held as an estate by the entireties. The
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
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:
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."
mortgage also contained a printed provision that:
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
, for the foreclosure of the mortgage. The
was made a party defendant pursuant to 28
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
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
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
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
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,
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
, 91 So. (2d) 649. See
v. Hargrave, 79
458, 84 So. 376; Stanley v. Powers, 123
359, 166 So. 843; Vaughn v. Mandis,
, 53 So. (2d) 704; Sheldon v. Waters, 5th Cir. 1948, 168 Fed.
(2d) 483; 5
L. Q. 592.
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
, 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.
101, 51 S. Ct. 58, 75 L. Ed. 239 [2 USTC ¶611]. The question as to
whether a lien for taxes owing to the
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."
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].
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.
589, 79 So. 202; Newman v. Equitable Life Assur. Soc., 119
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]
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
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
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
528, 114 So. 438, 440.
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
, 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:
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.
635, 7 S. E. 2d 259. See
County Bank v. Qualls, 220
499, 125 So. 615.
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
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
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,
case it was held:
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. * * *"
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
v. Thompson, 121 N. Y. 280, 24 N. E. 473."
Obligations Not Secured by Mortgage]
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
250, 172 Atl. 309. See Waterman v. Alden, 143
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
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,
, 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.
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
318, 258 N. W. 96. There was no compliance with the conditions of the
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,
, 81 So. 2d 486.
construction of a contract is a question of law. City of
v. Hall, 96
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.
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.
United States of America
, Appellant v. Erick R. Rasmuson and Oscar Rasmuson, d/b/a Rasmuson
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.
[1939 Code Sec. 3672(a)(1)--specifically covered in 1954 Code Sec.
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
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.
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.
GARDNER, Chief Judge, and JOHNSEN and VOGEL, Circuit Judges.
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.
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.
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.
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.
of Stockwell against which the Government claimed that its lien notice
was operative was a piece of real estate located in
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
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
statutes contain provision for an optional
system of title registration as to real estate. See
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.
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
statutes to be noted by the Register of Deeds or Registrar as a memorial
against the title on the registry for the property.
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
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.
question involved is not one of how to create a lien under
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
statutes for memorializing.
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 * * *".
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.
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.
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.
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".
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.
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
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.
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].
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.
United States of America
N. Beaver and Margaret F. Beaver His Wife, et al., Margiotti &
Casey, G. W. Musser and Francis J. Mottey, Appellants
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
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.
Casey, 720 Grant Bldg.,
, for appellants. George F. Lynch,
Dept. of Justice
25, D. C., for appellee.
Chief Judge and GOODRICH and HASTIE, Circuit Judges.
of the Court
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.
prior to the commencement of the action in the Court of Common Bleas of
Jefferson County Beaver had entered into two contracts with the
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
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.
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
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
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.
receivership arising from insolvency title to property vests in the
receiver. Porter v. Sabin, 149
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
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
1, 9, 38 Atl. 1075, 1078 (1898); Blum Bros. v. Girard Nat'l Bank,
148, 158, 93 Atl. 940, 943 (1915).
effect of an equity receivership is determined, in this case, by the law
, the priority to be awarded to
tax liens is purely a federal question. United States v. Acri,
211 (1955) [55-1 USTC ¶9138]; United States v. Security Trust,
47 (1950) [50-2 USTC ¶9492]; Illinois v. Campbell, 329
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
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
265 (1945) [45-2 USTC ¶9449].
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
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 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
"[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
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
might be paid in due course and according to law. The emphasis was upon
payment of the claims of the
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.
of the court below will be affirmed.
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
Section 3672(a)(1), 26
C. §3672(a)(1), provides:
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--
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. . . ."
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."
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."
¶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
Court of Appeals, 2nd Circuit, Docket No. 23920, 237 F2d 135,
, 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.
, 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.
Chief Judge, and HINCKS and WATERMAN, Circuit Judges.
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:
owed $39,627.75 in income, withholding, social security and unemployment
taxes, falling within three categories as follows:
on which tax assessments had been made and notices of lien filed prior
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
which was due but not assessed prior to bankruptcy.
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
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.
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].
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.
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
118 [49-1 USTC ¶9142].
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
218 [55-1 USTC ¶9137].
that as to this item of $4,932.27, the judgment below must be reversed.